Keep Payday Lending Safe, Legal, and Rare

Keep Payday Lending Safe, Legal, and Rare

Nothing seems to get bankers, consumer advocates, and government regulators so riled up as payday lending. The short-term non-bank loans taken out by millions of consumers a year are the focus of government studies and consumer reporting. But clearly, there’s a demand, and if we are creating personalized banking experiences for each and every consumer, there must be room here somewhere. It’s easy to dismiss this financial vehicle as predatory and harmful, but it opens up the question: what should these borrowers do? When you start to look at the data, you find that the story isn’t so simple and the pejoratives used to describe the industry and its customers don’t quite fit. I’ve completed an initial analysis on the data reported by the Consumer Financial Protection Bureau (CFPB) in the United States and have drawn some conclusions about the behavior of the typical payday loan borrower. From those conclusions, we see what these borrowers need and we have an glimpse into how to provide it. Keep Payday Lending Safe It’s clear there’s a need for short-term borrowing – either as an emergency funding source or because of poor cash-flow management practices. The trick is to provide for short-term financing without trapping consumers in a never-ending downward predatory spiral. The way to do that is to finally admit to ourselves one simple truth: these are not short-term loans. At least not the 14-day or 30-day ones that people think they are. Data collected and reported by the CFPB in their report, CFPB Data Point: Payday Lending, shows that the typical payday loan borrower “rolls over” their loan multiple times...
3 Reasons for Price Optimization in Banking Besides Profit Improvement

3 Reasons for Price Optimization in Banking Besides Profit Improvement

Anyone who has been following bank price optimization technology since 2003 knows that the science was originally deployed to squeeze out additional profitability in portfolios that wouldn’t otherwise been seen. The idea was to use price sensitivity of customers to split them into sensitive and insensitive customers and trade off. Raise prices on the insensitive customers and gain profit. Lower prices on sensitive customers and gain volume. The loss of volume in the first group is offset by the gain in the second group. Profit increases overall. Seems like a great idea, right? Well, just using price sensitivity to arbitrarily increase profits hasn’t been a great motivator for the technology. Banks are worried about a lot of other things: regulatory pressure, customer engagement, share of wallet, etc. In fact, a recent survey of US community bankers by KPMG showed 57% of revenue-growth initiatives are around operational areas like cost reduction, divestitures, operational improvement, and M&A. Only 13% of initiatives are around business model changes, like price optimization. So, is price optimization dead? No. Think about what price optimization is. It’s using statistics to predict how your customers will behave when you change price – and then leveraging that information to be profitable. Basically, it’s what you should be doing anyways. But you still have to come up with a business case for the technology. I’d like to give you three reasons that correlate to three of Jim Marous’ top 10 retail banking trends. You can see the full list here. 1. Increased Competition (#3 on Jim’s Top 10 List) When competitors change their prices, the relevant question is: “now...
The “F” in PFM Should Stand for “Fail”: 3 Ideas on How to Fix PFM

The “F” in PFM Should Stand for “Fail”: 3 Ideas on How to Fix PFM

If any technology deserves the award for “most missing its potential”, it’s Personal Financial Management (PFM) software. Many analysts and consultants have talked about the abysmally low adoption rates for PFM (here, here, and here.) Research by Javelin points us in the direction as to why there’s a problem. We’re not giving consumers what they want. Consumers tell us that they want all their account information in one place – even from other banks. They also want alerts and help with shopping and card reward usage. Basically, they want help making decisions. That’s why PFM fails today. It provides lots of information, but no help making decisions. Mark Schwanhausser, director of multichannel financial services at Javelin Strategy & Research puts it this way: PFM will appeal to a mass audience of online and smartphone-toting consumers seeking help with immediate, on-the-go, everyday financial tasks and decision-making. It is only a matter of time before PFM will be virtually ubiquitous, offered not only by FIs but also by billers, mobile carriers, insurers, retailers – anywhere consumers make financial decisions. The PFM of the future Mr. Schwanhausser describes here is what I called Decision-Oriented PFM. I describe it in my book, Seven Billion Banks. Very few PFM tools are integrated into the mobile experience. Instead they sit on the desktop version of the online banking application – when they’re available at all. The concept that consumers want alerts to help with decision making is consistent with the mobile strategy I laid out in an earlier article. Those push alerts are extremely critical not just for adoption, but for the actual value created...
Nobel Prize Worthy Lending

Nobel Prize Worthy Lending

In the wake of Nobel prize winners Al Roth and Lloyd Shapley, it’s worth analyzing the matching algorithms to see their application to banking. I’ll walk through the basics of the matching algorithm here, but Alex Tabarrok provides a much better and more thorough primer here. The Basics The Nobel prize winning algorithm deals with matching. For example, men and women to get married or transplant recipients. Essentially, the algorithm allows one group to select its ideal match, allow the other group to reject or retain the offer, then rejected first group members make their offer to their second choice, which in turn rejects or retains the offer. This continues until there are no more offers. The reason the algorithm is good is because it “converges.” That means there is actually a solution in the vast majority of cases. But, it also has this great property that there are no pairs that would rather be together but are not. There may be disappointed first parties and disappointed second parties, but no mutually disappointed pairs. In my case, I want to discuss the algorithm for lenders and borrowers. The big problem we have in both consumer and commercial lending right now is a mismatch. Banks want to lend to those businesses that need the lending least of all. But of course, banks want to lend to someone, because if they don’t, they don’t make money. On the flip side, borrowers would like the best choice – and given the fear that banks may be left out – borrowers may benefit from bank offers that otherwise wouldn’t be made. Of course, banks don’t just make one loan. Fortunately, Roth has extended...
Non-Bank Business Lines of Credit Change the Risk Formulas

Non-Bank Business Lines of Credit Change the Risk Formulas

Google just recently announced the launch of a small business credit card that only allows for purchases of AdWords campaigns. Along the same lines, Amazon just recently announced it will be offering credit for its online sellers to invest in inventory sold via Amazon. In Google’s case, they’ve opted to use an issuer, Barclaycard, to process through the MasterCardnetwork. In Amazon’s case, they’re going it alone. In both cases, the question is: will this be a threat to traditional card issuers or other commercial lenders. So far, the conventional wisdom is “no.” I disagree. I think the fact that these lines of credit are issued by companies that directly benefit due to the growth will in fact change the landscape. When you look at traditional risk metrics for a line of credit, you are mostly interested in the net interest margin: what you charge minus what you lose minus what it costs you to find the account. (Yes, I’m oversimplifying.) But in the case of Amazon and Google, there’s another component of the profit equation: what you earn from the additional business. This additional profitability component could make all the difference in the world for small business owners. It could tip the scale from “too much risk” to “let’s take the risk.” I know there’s a similarity between retail cards used at, say, Sears or JCPenney’s, and that those retailers finally opted to go with issuers instead of self-funding in most cases. These credit lines drive growth in businesses where retail cards simply fund expenses. That’s why an “HP line of credit”, though it exists, isn’t game changing. HP doesn’t earn...