Give credit to the poor
Marla Blow | Photo by Jared Soares
Marla Blow’s career at the newly formed Federal Bureau for Financial Consumer Protection was going very well in 2014 when she decided to try something she knew was extremely difficult.
“I keep getting people to do the double-take thing by saying, ‘I didn’t know you could just go out there and start a credit card company. How is it going? », Said Stroke, CEO of FS Card and a member of the board of directors of the company.
This happened, she says, after an 18-month “Herculean” effort to convince investors to accept the idea of offering unsecured credit cards to high-risk people long exiled from the credit world. traditional.
But from his seat at the government agency, Blow saw a need waiting to be met. “I was one of the people who helped build the CFPB, and part of our responsibility was to look at all parts of the population, not just the wider middle,” says Blow, who studied finance at the Wharton School at the University of Pennsylvania before winning it. MBA at Stanford Graduate School of Business in 1999. “I’ve seen the major credit card providers pull away from this customer base and leave them on the sidelines.”
After seven years in various positions at Capital One and a stint as Deputy Director of Card and Payments Markets at CFPB, she partnered with Republic Bank & Trust to launch FS Card and its inaugural product, the Build Card. Launched in late 2015, the technology-powered card offers a line of credit of around $ 500 at interest rates about 10 points above the 18% average for a traditional credit card.
“But that’s a tenth the price of a payday loan,” says Blow. “It is a game changer for the customers we serve.”
She says FS Card ended 2016 with about $ 8 million in outstanding credit on 15,000 accounts, and now has about 105,000 accounts and $ 50 million in outstanding credit.
Who is your typical customer?
The typical user profile is consistent with the distribution of credit scores in this country. People with lower credit scores tend to be renters rather than owners, tend to have incomes below $ 40,000 per year, and tend to be people of color. We focus on offering traditional credit – an unsecured revolving MasterCard – to this underserved group of customers.
Why attack this group?
These are the people who might otherwise be looking for a payday loan or an auto loan or using a pawnshop – customers who cannot access traditional credit. We offer our cardholders a return to the mainstream of finance with a structure consistent with that of a traditional credit card customer.
When did you realize that it was possible to promote this type of financial inclusion?
I keep getting people to do the double-take thing by saying, ‘I didn’t know you could just go out there and start a credit card company. How is it going?
This happened when I was at CFPB. I think it’s important that people have a fair chance. I wondered if technology could now make it possible to take the tools that work for a large part of the population and make them work for even more people, to meet their borrowing and liquidity needs in a practical way. and flexible. I was deeply concerned that this would not happen and wanted to create a vehicle that enabled this customer to deal with daily expenses such as gasoline and groceries, as well as perform digital transactions and online, so that I feel good about using it myself or that I feel good about having my mom use. I wanted to create parity for this population.
You said you “create a ramp” for these customers. How? ‘Or’ What?
Alternative products – payday loans and auto title loans, that sort of thing – have historically not been reported to mainstream credit bureaus like TransUnion, Equifax, and Experian. While if you get our card use it wisely and make your payments on time, this is reported monthly and demonstrates your creditworthiness. It puts our clients in a position to receive offers of other types of credit to follow behind this one.
Starting a credit card company seems daunting. What was the biggest challenge?
There’s a ton of infrastructure and service capabilities that need to be in place before you can issue a credit card, and you need to partner with a bank to gain access to the Visa and MasterCard rails. So that required us to spend about a year and a half building infrastructure, contracting with a bank, finding a service contract, and setting up procedures for answering phone calls, sending statements, and accepting payments. payments. All of this had to be in place, at a cost of millions of dollars, before the number one card could ever be issued. In a world where entrepreneurs discover minimum viable products and repeat themselves quickly, we had to set the stage for it in great detail before we could determine if it was even going to work.
It seems a tough sell to convince startup investors to sign up.
(Laughs) That’s the understatement of all time. It was extremely difficult. The first dollars at the door came from investors who bet completely on me. It’s not something venture capitalists are excited about. It takes a big initial investment, then huge investments afterwards before scaling up. It was just pushing that rock uphill and talking and talking to people. I spoke to over 200 different investors to try to convince them to get involved. It is not a space that lends itself to entrepreneurship in a very ready way.
But that said, if you can do it and get into the business, there are opportunities to innovate in product delivery, customer communication, using technologies such as artificial intelligence and machine learning in our subscription engines. So there are many fun and interesting ways to be a part of this space. We were able to pave this way despite the challenges.
With your AI tools, what data are you looking for?
One of the things that excites me is bringing in data from alternative credit bureaus that captures factors like their rental history and cell phone usage to help us predict why things might be different now. ‘to come up. A lot of data consistent with the overall changes in people’s lives can demonstrate their creditworthiness even if they have faced financial problems in the past. For example, someone may have seen an increase in their working hours, which may appear first by increasing payments on their prepaid cell phone. These things don’t make their way into traditional credit bureaus, but we’ve trained our engine to assess what’s changed. Then we can follow suit and change the direction of the customer’s credit life.
You also use a “chatbot” to communicate with users. How do you cross the line between helping and harassing?
It’s incredibly tricky, but our incentives are aligned with the incentives of our customers. We apply behavioral economics principles to define when, what and how to send messages to our customers. We are cautious because the result of the disaster is that people are getting so many messages from their credit card company that they are opting out. We try to create messages that determine the behavior that is most important to us: making payments on time, ideally beyond the minimum payment, and urging people not to maximize the card every month. We try to keep messages positive, in a measured and spaced way, by giving them the information they need at the times that matter.
“Thank you for your payment, you are on your way to obtaining credit!” This is the kind of thing chatbots allow us to do, and it works better than “Hey, your payment was due three days ago.” You congratulate them and celebrate their victories for things that are compatible with good management of their credit. It turns out to be incredibly powerful.
Are there other ways to offset the higher risk?
We start with a small loan. The current average line of credit is $ 3,000 to $ 5,000. We offer a $ 500 line of credit. That’s enough to help someone get through the end of the month, order pizza for their family, and refuel. We cannot take great risks. For our customers who use the card well, we grow with them and increase the line of credit to $ 750 and then to $ 1,000. We hope to eventually evolve these people to better products. We are introducing a new card that has more of these features, but at the moment we are a single product company.
What would you like to know at Stanford GSB that you know now?
The importance of perseverance. It made the difference for me. This desire to have 200 conversations just to get the capital to start the business, to spend a year and a half listening to opponents, knowing that it will be hard and that we will have to push against a lot of resistance. I believe in what we do here at FS Card, and I would have spoken to 200 other people if that was what it took to build the business.