Welcome to the newest innovation sector: alternative subprime lending.
Fort Worth, Texas-based Elevate appears to be leading the charge in this new sector, announcing today that its total loan originations has hit $442 million.
Elevate launched in 2014 and offers three products: RISE, a personal loan, Elastic, a paycheck advance, and Sunny, a personal loan for U.K. customers. The company will revise its risk-based pricing model in May.
The most common reasons for needing a short-term personal loan are auto repairs and medical expenses– “Those two cases make up two-thirds of our loans,” Elevate CEO Ken Rees told Bank Innovation.
The company currently offers rates starting a third lower than the standard payday loan — which commonly charge APRs well above 100% — down to as low as 36%. Payday loans are in the crosshairs of regulators and have even taken a beating in popular culture, being held up for scorn on a recent episode of the satirical HBO show Last Week Tonight with John Oliver.
Backed by capital from Sequoia Capital and Technology Crossover Ventures, Elevate is making money — “Margins are where we want them to be,” Rees said — and has a social mission, as well. That mission is to help customers today and to help them in the long term.
“People needing payday loans are in financial trouble,” Rees said. “And we have to recognize that people in financial trouble do not get out of it right away.”
Instead, these customers are starting a journey, hopefully toward financial wellness and closer to a prime credit rating, and Elevate wants to be their partner on the journey. It does this by trying to do everything differently than payday lenders. Transparency is paramount, with notifications coming before payments are due, allowing grace periods for payments, and not charging late fees. This is possible, Rees said, because costs are lower without brick-and-mortar locations. The company has 50 employees in its risk department, including 15 PhDs, and what Rees calls “the most sophisticated scoring in the space.”
Its proprietary scoring, which includes factors the bureaus ignore, such as social media connections, also carefully follows regulatory guidelines. The company works with consumer groups and the Consumer Financial Protection Bureau, Rees said, and works to provide financial education and help consumers build a better credit history, two efforts seldom seen in the payday space. Elevate’s customers can also see their rates go down as they build a payment history with the company, a feature of its scoring model that will be a part of the May update.
“75% of our customers look at their accounts daily,” Rees said, noting that subprime customers are not irresponsible or uncaring — they are just facing difficulties, and Elevate wants to help them, as much as possible, climb out of that hole. All lenders, of course, want borrowers to pay their loans back, but the new breed of lenders is leveraging technology to make that simpler and less painful. Technology allows for more sophisticated scoring as well as better access to accounts and ways to pay for customers.
Rees says the CFPB is doing the right thing going after abuses in the lending space, but also believes regulators must do more to help the bureaus get up to speed with today’s borrowers. The traditional models and scores work for prime customers, he said, but leave many potential borrowers out in the cold. The bureaus and Fair Isaac Corp., the credit scoring company, need to recognize this and include more data inputs to more accurately score subprime borrowers.
Millennials loom large at Elevate, as might be expected. More than half of the company’s loans are originated on mobile devices, and social media profiles are an important piece of its model. And that’s an example of how the traditional credit companies are falling behind.
“You can’t decline a customer because he has no social media history,” Rees said. But in terms of verifying identity, not having any social media history is a major red flag, Rees said.
There is a fundamental optimism to Elevate’s outlook. Customers want to do better, they want to do the right thing, and if companies can help them, they will move up the credit scale, which makes everyone happy.
“Technology is playing an important part in helping understand some very misunderstood markets,” Rees said.
Learn about alternative lending at Bank Innovation 2015 on March 2-3 in Seattle. Request your invitation here.Like This Post