With great risk comes an even greater need for a measured approach. Jeff Zhou and his team at Fig Loans are taking on a risky set of sub-prime borrowers with an approach that is highly measured, and controlled with the hopes of reducing financial stress for millions of Americans with a business model that proves doing the right thing for sub-prime borrowers is possible.
For too long the approach to serving sub-prime borrowers has been to just clobber them with fees and tools to keep them in debt. What more loyal a customer base than a group of people who literally are stuck using your service, right? Wrong.
Jeff and his team have a unique approach where they actually thrive as a business by helping to improve your financial well-being. Though novel, it’s an approach that can make an immense amount of sense. If you want to understand better how they are looking to achieve this lofty goal, check out our terrific discussion below.
CL: From the looks of it you are a pretty smart guy with degrees from both MIT and Penn, and time spent working at BCG. In all seriousness, that is an incredible background. So why did you leave the big name workplace to go and start up Fig Loans?
JZ: I think it can be tied back to my high school experience. I'm originally from Buffalo, New York. But I got lucky and ended up going to a boarding school called Phillips Andover Academy, which in many ways changed the trajectory of my life. As a normal kid, I felt like an underdog given an extraordinary opportunity.
Our customers are underdogs when it comes to credit and are falling through the cracks of traditional credit scoring today because of an established system that works against them. There's not very many supporting resources for people that fall through the cracks when they really just need an opportunity to turn things around.
CL: For those that don't know can you define Fig Loans as a business?
JZ: Fig Loans builds a bridge between bad and good credit. For customers who have bad credit today, they're in a catch-22 where they need to build credit to get credit but nobody will give them credit because they have bad credit.
CL: One of the highlights called out on your website is that payments work in the same way as that of home loans. So, how do typical payday loans get paid and how does this work to improve the payment experience for consumers?
JZ: The traditional payday loan is a balloon payment loan. It's a 2-week loan, for a small amount in the $200-$500 range with the entire principal and interest due 2 weeks later. In a typical example, I take out a $400 payday loan today and then, two Wednesdays from now, I owe about $480 on that $400 loan. If I don’t have $400 today, what are the chances that I can somehow magically come up with $480 extra dollars in two weeks?
CL: How quickly can an individual actually receive the funds after getting approved for a Fig Loan, since it's not a brick and mortar option like a payday loan center?
JZ: We send the funds through Automated Clearing House (ACH) and can deliver the funds as soon as the next morning. Our process is similar to when you get a direct deposit.
CL: Fig Loans provides loans between $300 and $500 dollars. Is that because this is what most people desire from a payday loan provider, or is this a way to reduce risk of any one consumer on the platform?
JZ: A combination of both. Predominantly because it’s the average size of a payday loan. When we were designing the product we worked with financial coaches from family services and that’s the average loan size they were seeing.
CL: What is the feedback that you are hearing from your consumers about what they like about Fig Loans?
JZ: The consistent feedback we hear is that we bring a lot of the same qualities you would offer a friend if you lent them money. For instance, most lenders will charge late fees even if you are a day late and now you are stuck with a $20 late fee. Part of the Fig model is we recognize life doesn’t run on a strict schedule, and so we provide flexible payment rescheduling free of charge. We recognize that strict charges like late fees end up costing borrowers more and put them in a worse position, which is the opposite of what we look to accomplish.
CL: Would you ever consider providing tools to help individuals learn how to save better as well?
JZ: That's where we're headed. We're going to launch a credit builder loan in July that is actually called a "savings secured installment loan". It functions like a savings tool where the loan principal is stored in a secure account for the benefit of the customer and after they've made all their payments that principal is released to them. It’s a combination savings mechanism and credit builder.
The best way to describe it is as a reverse loan. In traditional loans, I would give you the principal of the loan and then you would make payments back to me over the tenure of the loan. In the reverse loan, you make the payments, I use that to build your credit history, and then I give you the principal back. For people who don't need the money today, it allows us to remove the credit risk from the loan and offer a significantly cheaper product to build credit and savings.
CL: It’s essentially a way to forecast their future cash flow needs, while teaching customers to save while building credit?
JZ: Pretty much. And it's better because for many of our customers, they're often taking out loans just to build their credit history. We're funding a totally different type of customer that shouldn’t have to pay for the risk from other people defaulting. This option allows us to get around the default risk and provide our customers with a much more affordable product that builds their credit.
CL: This credit building product feels like a needed offering in the market for many individuals. Are there any other instances where companies are offering this type of product?
JZ: A similar product is offered by many credit unions and non-profits that we work with. The biggest challenges with current offerings is reaching customers at the right time when they should be using the product.
A lot of this is about getting the customer to the product at the right time, which is why we think it is a good pairing with the Fig Loan. We’re saying, “We are glad you found us when you were going through a financial shock. Now that we’ve helped you through that let’s help prevent this from happening again.” One way to do that is to transition them into a credit building product when they are stable again, saying, “You can continue to make the same payments you were making except this time you are actually saving and building credit to be prepared for a future unexpected event.”
So much of this is around timing and pain point. The analogy I can give you is it’s like moving. You don't think about moving until it happens and then the bookend 6 weeks around the move feels like the worst thing in the world. Thinking about your credit score is pretty similar. But if you get out ahead of it and help guide people to build their credit and save with an affordable product, you’ve managed to make the process much less painful for the inevitable future curveball.
CL: I like the approach to this new offering. I think in most instances these payday loans are used as a cash flow management tool since 60% of Americans don't even have $400 to be able to cover an emergency expense. With such an interesting offering, what do loan volumes currently look like?
JZ: We are still in the early days of Fig Loans. We started presenting the idea to about 80 financial coaches in March of 2015 and moved down to Texas to start the company that summer. In October of 2015 we began lending, and are now seeing 300 to 400 applications a week. Fig Loans is still relatively small but we are excited about the momentum and the product offering we are building.
CL: Are these inquiries being driven by your relationships with financial coaches or is it coming through online advertising channels?
JZ: It's actually a mix of many channels. We still see traffic from our non-profit partners and work with channels partners like financial health apps that people are using to manage their finances. We also do more traditional advertising as well.
What we are really proud of is that we are doing a good job serving those customers who come to us that really need help, and we treat them the way that they should be treated. They're getting ushered out of banks and getting told they can’t do things, but the real issue is that they need someone to work with them.
CL: Overall, how have default rates trended over the past year as you have built out the platform and your data sets?
JZ: On the issue of default rates, as a number, it's a little tough. When you start, you have very little data and you're paying a price to learn. We’ve done a number of loans where they are borderline cases, and it’s just as much about learning as it is trying to help somebody. Over the past year our default rates have gone down drastically, but there is obviously still a lot more we can do to improve.
Part of what distinguishes us from our competitors is that we spend a lot more energy on our underwriting. We focus on finding borrowers who have the ability to pay back the loan and can afford the debt they are taking on. We don’t want the loan to be detrimental to their financial health. Whereas payday lenders often stand to benefit more from keeping customers trapped in debt because then they are paying all of these exorbitant fees. Our model wouldn't work if people were defaulting on their debt.
CL: Currently, Fig Loans is in Texas. What other markets are you considering for expansion moving forward?
JZ: We're looking at Florida or California next, because they’re the next largest markets for our products.
CL: What are some of the challenges of growing this business responsibly, with such a challenging population to serve with debt?
JZ: The biggest will always be identifying good customers and making sure we’re helping them. The second is on the business side, forming the necessary partnerships to drive efficiency and help us overcome the challenges of being a small dollar lender that is trying to do the right thing. We've been really fortunate that we've had great partners along the way that give us the credibility we need to succeed. Whether it's Village Capital, Techstars or TransUnion, all of them provide amazing resources and capabilities to help us grow. Even our non-profit partners have been hugely helpful in this process.
But, it's always been an uphill battle, because a lot of the people feel that any loan over 36% APR is something they won’t touch. But, when you present the economics to them they're like "Yeah, I get it. I don't have a solution for that cohort of people, but I still refuse to get involved.”
CL: Have you seen any appetite from customers to be able to have more than one Fig Loan at a time, and since payday loans are often used to reduce fin-stress, is there going to be an ability to provide more than one at a time?
JZ: That’s something we have thought a lot about, and we will eventually offer larger loans over longer durations. We have the license to do that but we are being careful and taking measured steps because larger loans can carry more risk.
But as a policy we do not extend multiple loans to a customer. That’s part of our commitment to being a socially responsible lender. We recognize by taking out multiple loans you can easily get trapped in a cycle of debt without understanding the consequences. A lot of times we will fully review an individual’s application including banks statements and say, “Hey you have a number of payday loans here and we have nonprofit partners with loan refinancing that can enable you to get more affordable products to alleviate the debt burden you currently have.”
CL: Fig Loans has received investment from Access Ventures, that's investing in some high impact organizations. Can you talk a bit about how that came together and what you like about working with the team there?
JZ: We were originally connected through one of our equity investors. Part of the interest from Access Ventures was because of the alignment in business model and customer financial health. One thing about the Fig Loans business model that we have not touched upon yet is how we’ll refer customers to local community banks who offer more affordable loans and credit cards.
As just Fig Loans, we need to make money from our customers through the interest they pay back on a loan. But by acting as a bridge from bad to good credit, our monetary success comes from getting our customers to a better credit situation because we get paid on referrals to more traditional prime credit products. This creates a unique alignment between business model and customer financial health, which isn't present in the traditional lending model where you're solely taking money from the customer.
The Minute Rundown with Jeffrey Zhou
CL: If you could provide one tip to someone considering starting up, what would it be and why?
JZ: I would say that there's always a way to figure it out. And I think the reason behind that is John and I have worked through issues that have appeared game ending at the outset and yet every time we have found a way to work around it. Whether that has been expanding the pie by seeing it from a different perspective or wrapping our heads around the fact that we are inherently building a path that is different from the traditional corporate mindset.
CL: Since you went to school at MIT, what do you miss most about living in Boston?
JZ: I do miss Boston, I would have to say that I love how small the city is. I didn’t appreciate that when I was there, but I love that you can walk everywhere and it feels like a hometown even though you are living in a city!
CL: If you could model yourself after one founder, who would it be and why?
Pierre Omidyar! He bootstrapped eBay and then created Omidyar Network – probably the coolest impact investor / foundation hybrid ever. The structure and mission blend perfectly which allows Omidyar Network to solve problems from both sides by delivering resources to complementary businesses and non-profit organizations.
Aligning business models with good outcomes for customers is how you build long term sustainable businesses. By slowly growing Fig Loans and taking in the learnings Fig is positioning itself to be able to be the best lender and credit builder for the sub-prime community.
The biggest reason why so many of the banks failed when serving sub-prime borrowers in the mid-2000s is because they simply were setting up customers for failure. That is not a way to win with long term profits. By Fig aligning the business model to literally make money by helping their customers to achieve good financial outcomes they have figured out a way to help manage the cash flows of their customers while maintaining low default rates.
I’m excited by the value proposition and positioning of Fig Loans and look forward to seeing their expansion. Thanks Jeff and team for the truly Simple.Innovative.Change