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Jo Ann Barefoot explores how to create fair and inclusive consumer financial services through innovative ideas for industry and regulators

Barefoot Innovation Podcast

Filtering by Tag: Lending

Getting People on to the Credit Ladder: LendUp CEO Sasha Orloff

Jo Ann Barefoot

Today’s episode is about new ideas about a very old problem in consumer finance -- high-cost lending to high-risk borrowers. My guest is LendUp CEO Sasha Orloff, who is one of a new generation of fintech founders building alternatives to traditional payday lending.

In public policy, there has been a long-standing assumption, sometimes implicit and sometimes explicit, that widespread access to credit -- especially mortgages -- is a good thing. A host of government regulations, programs, and bank supervisory activities aim to promote more credit, because we’ve assumed that wider credit access is, broadly speaking, good.

Is it, though? Most people would agree that up to a point, it’s good, and beyond some point, it becomes bad. It definitely becomes bad at the point where the borrower can’t realistically repay the loan. It can also become bad if the pricing is so high that the person ends up worse off for borrowing, instead of better, especially if the borrower doesn’t understand the terms

We could do many episodes on the tough issues embedded in this question. One is whether it’s better to have high-cost loan options that are legal and subject to regulation, or to outlaw them, knowing that shutting down legal options will drive some desperate people to use illegal ones, which hurt them even more. Another is the philosophical question of how much the government should protect people from themselves. If the price of a high-cost loan is clear, and borrowers understand it, should the government respect their decision on whether to take it, or substitute its judgment for theirs and remove the option?

Again, public policy has been debating these issues for decades --  maybe centuries -- and still is, including through many of the initiatives taken to date by the CFPB.

In this podcast, we won’t tackle those questions, but will instead ask a very different one: What if we didn’t need to resolve them? What if, thanks to technology, we could solve the problems surrounding high-cost credit -- or a big chunk of them -- not through regulation, but in the marketplace.

LendUp.  Sasha Orloff founded LendUp to provide more affordable credit to the 50% of Americans with credit scores below 680. He had worked at a big bank, and at an NGO in the developing world, and had a brother in the technology world who kept telling him that better software could create better products. He finally founded LendUp, to build them.

LendUp offers credit products online -- which means it has, automatically, a lower cost structure than the traditional bank model of branches. As Sasha explains in our discussion, it has also designed its products to offer borrowers a gateway to better credit scores, credit options, and financial health.

LendUp is backed by major investors including Y-Combinator, Google Ventures, QED Investors, Startfund, Kleiner Perkins, A16Z seed fund, Thomvest Ventures, Kapor Capital, Bronze Investments, Founders Co-Op, Data Collective, Susa Ventures, and Radicle Impact.

Sasha and the firm have been featured in the Wall Street Journal, NYTimes, Financial Times, CNN, NBC, TechCrunch, Venturebeat, Inc, Wired, Bloomberg, Fortune, Dow Jones, American Banker, Marketplace and many others. He has presented at TEDx, and LendUp, and they won Finovate Best In Show. FastCompany named the firm as one of the World’s Top 10 Most Innovative Companies in Personal Finance, and it won runner up in Webbys for best website design. They have presented at LendIt, Emerge, Money20/20, The HubSF, NBC News, and Huffington Post Live, and participate in The Clinton Global Initiative on Financial Inclusion. Sasha also serves on the Consumer Lending Advisory Board for TransUnion (one of the three major credit bureaus)

A regulatory note.  After Sasha and I recorded this episode, the CFPB announced an enforcement action against LendUp. The order is, among other things, a warning flag for startups about the importance, and the great challenges, of maintaining complete regulatory compliance in the midst of rapid growth. The company has responded with a massive expansion of compliance staff. Following the announcement of consent order last fall, it issued this statement:

We started LendUp because the traditional banking system wasn’t working for more than half of Americans. From day one, we’ve committed ourselves to offering better, safer and more transparent credit products and to aligning the success of our business with the success of our customers.

We genuinely believed the product features that were identified by the CFPB and the California DBO– like optional expedited funding and a 30 cent per day discount for early repayment—were in the best interests of our customers. But we fell short in the execution and in meeting the expectations of our regulators.  We have since taken action to resolve every issue they’ve raised, including beginning to refund customers prior to entry of the Consent Order and Settlement Agreement.

We’ve also made significant investments to build out our legal and compliance operations. In this respect, we are a different company today, with a completely new legal and compliance team that is larger now than our entire company when we started these exams. Importantly, those teams are brought in at the beginning of the development lifecycle for every new product and feature.

We are proud of the progress we’ve made to expand access to credit, lower borrowing costs and provide credit-building opportunities to our customers. LendUp has:

  • Graduated more than 20,000 borrowers to the highest rungs of the LendUp Ladder in more than 11 states

  • Saved Californians alone more than $18M in 2016 (and an estimated $40M to date nationwide)

  • Delivered over 800,000 free credit education classes; and

  • Helped LendUp customers improve their credit scores: according to TransUnion data, 66% of LendUp customers showed a credit score increase – more than those in the control group using similar types of products from other lenders.

We are eager to keep building on this track record, and look forward to continuing our work to put our customers on paths to better financial health.

I have found Sasha to be one of the most thoughtful people in fintech. I think you’ll be fascinated by his overview of the shrinking of the American middle class, the impact of the smartphone revolution; innovation models fort startups versus banks; how making financial education interesting; and how to redesign regulation for the 21st century,

The loans at Lendup cost less than traditional payday options, but more than loans to prime customers, because the borrowers are simply higher risk. If lenders can’t charge enough to cover that risk, they won’t serve these customers. If they can, though, and if they can leverage technology to gain efficiency and underwriting accuracy, and if they can enable high-risk borrowers to build and repair credit records, and if they can educate people about managing their finances, and can also make a great return on capital and then truly scale up…. then seemingly unsolvable problems can, maybe, begin to.get solved.

More links:

More for our listeners:

I'll hope to see you at "LendIt in New York in February, SXSW in March, FinXTech Summit in April and of course CFSI’s Emerge in June.

Remember to review Barefoot Innovation on iTunes, and please sign up to get emails on new podcasts and my newsletter and blog posts at jsbarefoot.com.  My latest post argues for some healthy regulatory disruption as a new administration takes office. Go there too to send in your “buck a show” to keep Barefoot Innovation going. Please also join my Facebook fan page, and follow me on twitter.

Support the Podcast

And watch for the next podcast, because we’re going to turn to innovation in small business lending. My guest will be Karen Mills, the former Administrator of the SBA and at Harvard Business School, where she has just issued an updated study on small business lending This one is focused mainly on fintech. We had a fascinating conversation. See you then!



FINANCIAL INCLUSION: RAUL VAZQUEZ OF OPORTUN

Jo Ann Barefoot

In addition to our podcast, please take a look at Raul's keynote at the EMERGE Forum.

I am constantly amazed by the fascinating and unpredictable course of our conversations on Barefoot Innovation - and what a fun one I had with Raul Vazquez, CEO of Oportun. I always like to ask my guests to tell us how they, themselves, keep up with technology. With Raul, I asked this just as I thought we were wrapping up, and the question launched us on a whole new conversation. He's definitely my first guest to bring up potential uses of virtual reality in financial services, not to mention the first to describe virtually interacting with bison.  He thinks we're heading to a "transformative" ability for "anyone, regardless of their incomes" to be able to immerse themselves in a virtual world to try out products and experiences.

As sometimes happens as I get to know great innovators, this is a second podcast with the same company -- click here to listen to our prior discussion with Luz Urrutia, Global Head of Retail. Oportun is based in Silicon Valley and was formerly called Progresso Financiero. It leverages advanced data analytics and technology to provide affordable, credit-building loans to U.S. Hispanics and others with limited or no credit history. The company's proprietary platform risk-scores loan applicants, calculates each one's ability to repay, approves the loans it believes can be paid back, and sets loan amounts and terms to fit individual budgets. Customer accounts are also reported to credit bureaus to help establish credit history. The goal is to combine a highly personal experience with back-office efficiency. Between 2006 and 2015, Oportun helped more than 689,000 customers, disbursing more than $2.2 billion through more than 1.3 million small dollar loans.

Raul joined Oportun in 2012 after nine years in senior leadership roles at Walmart, including as EVP and President of Walmart West, President and CEO of Walmart.com, and EVP of Global eCommerce for developed markets. He also serves on the Board of Directors of Staples, Inc. and is a member of the Federal Reserve Board's Community Advisory Council. He's a graduate of Stanford University with BS and MS degrees in industrial engineering, and also earned an MBA at the University of Pennsylvania.

This is one of those fun episodes where we could have kept talking for hours if we hadn't run out of time. So...enjoy my conversation with Raul Vazquez!

To learn more about Oportun Financial, click here.

Click here to Opor-tune in to Raul's presentation at last year's EMERGE conference about Oportun's four key learnings so far.

To register for this year's indispensable Emerge in June in New Orleans, click here.

And here's my favorite Wired article on voice technology: "We're on the Brink of a Revolution in Crazy-Smart Digital Assistants"


A note on the podcasts - A buck a show!

I've decided to distill a lesson from the popular podcast series Hardcore History, by emulating their habit of asking everyone to send them "a buck a show." Some years ago, the show's host Dan Carlin realized the podcast was taking over his life - much as Barefoot Innovatoin has been doing with mine! He hit on the idea of asking listeners for "a buck a show," and eventually reached the point where he can devote himself to producing the series. Barefoot Innovation is produced part-time by me and two young, very talented helpers. One of them has a day job and the other is a full-time graduate student. If all our listeners will chip in a buck a show, we'll be able to expand our interviews, accelerate our pace (believe it or not, we currently run at a four- to five-month backlog from recording date to posting!), and be able to do some fun new things we have in mind for you. We'll appreciate any and all help to keep the show going, and growing!

And remember to post a review on ITunes.

Support the Podcast


A note on my Regulation Innovation videos and the most important writing I've ever done

Also click here to watch the new Regulation Innovation videos we've posted and read the new articles. These are currently a free sample but will soon become limited to subscribers. Every month, I'm creating a short video briefing and then backing it up with a deep article that shares what I've been learning about financial innovation, and also shares my hard-earned secrets about how I've been learning it. The articles are rich with links to resources -- everything from news reports and white papers to statistical trends to my very favorite Ted Talks.

My goal is to use this pairing of videos and deep articles to repackage my consulting advice, so it can reach a wide audience affordably. In essence, I'm searching the fintech world and curating the best insights for you. As a series, it's a journey through this changing landscape, finding the keys to thriving on disruption with me as your guide.

I've done a huge amount of writing over the years - I've published hundreds of articles. These are the most important, valuable writings I've ever done. Again, these are currently free - I hope everyone will try them out.
 


Upcoming shows

We have terrific shows come up - the amazing Blythe Masters, the very innovative founders of Bee, and much more.  Join me then!



Increasing Economic Opportunity for the Underserved - Luz Urrutia, Global Head of Retail at Oportun

Jo Ann Barefoot

Luz Urrutia, the global head of retail at Oportun, has been carrying the same credit card in her wallet for 30 years. Having moved from her native Venezuela to the U.S. to study finance at Georgia State University, Luz was thrilled when she landed her first job in the banking industry – only to have her credit card application rejected by the same bank where she worked! Having little or no credit can make adjusting to life in a new country extremely onerous. In our conversation, Luz points out that anything from getting a job to renting an apartment and hooking up utilities is often impossible without a FICO score.

Currently, almost half of the Hispanic community in the U.S. is underserved. Luz decided years ago to help the 25 million individuals who represent the un- and under-banked in her community by offering responsible credit-building and affordable loans. Before moving to California to broaden her mission, Luz co-founded and served as President and Chief Operating Office for El Banco de Nuestra Comunidad in Atlanta. Since then, her career has been characterized by a relentless drive to use technology and creative techniques to “score the unscorable” and serve those overlooked by traditional financial institutions.

Oportun, formerly Progreso Financiero, was founded in 2005 with the same goal of empowering underserved Hispanic consumers. Its proprietary technology platform scores applicants, even those who do not have credit, and enables Oportun to provide a highly personal experience with back-office efficiency. Headquartered in Redwood City, CA, the customer experience at Oportun is designed with the Hispanic customer in mind. This experience is disseminated through a network of more than 160 stores in five states, often conveniently co-located with or near Hispanic grocery stores, are open 7 days a week into the evening, and staffed by team members who speak Spanish.

In recognition of Oportun’s goals of increasing economic opportunity for its clients, promoting community development, and serving low-income or underserved communities, Oportun was certified by the United States Department of Treasury as a Community Development Financial Institution in November 2009 and re-certified in October 2013.

I spoke with Luz at the Center for Financial Services Innovation’s (CFSI) EMERGE conference in Austin, on whose board she has served since 2004 (full disclosure, I am also on the board). Luz has often been recognized for her commitment to improving the lives of underserved financial consumers, including being named as 2009’s Latina Business Woman of the Year and American Banker’s “Community Banker of the Year” in 2006. Perhaps the greatest reward for Luz, however, is the joy she feels pursuing her mission every day. In our interview you can gladden in her words imbued of passion and excitement (you’ll just have to trust that they were accompanied by a brilliant smile!).

I am happy to offer this episode of Barefoot Innovation as a pick-me-up for anyone who needs a reminder of the unique work being done throughout the industry to use innovation to enhance the lives of financial consumers, and what revolutionary breakthroughs a strong drive to help one’s community can render.

To learn more about Oportun Financial, click here.

You can subscribe to the podcast at iTunes HERE or open your favorite podcast app and search for Jo Ann Barefoot.




Steve Carlson, Founder & CEO of Ascend, Winner of the CFSI Financial Solutions Lab Competition

Jo Ann Barefoot

Episode 9 finds us at the 2015 EMERGE conference in Austin with the winners of the first Financial Solutions Lab competition.

The contest is a $30 million, five-year initiative funded by JPMorgan Chase and run by the Center for Financial Services Innovation, or CFSI, the conference sponsor (note -- I serve on CFSI's board). It challenges entrepreneurs to create solutions for the cash flow difficulties facing millions of American middle and lower income-households.

Two hundred ninety-eight innovators applied. Nine were chosen. And  -- drum roll - one was Steve Carlson of Ascend Consumer Finance, our guest for this episode.

Ascend was recognized for its unique approach to broadening credit access and affordability for non-prime borrowers.  The company wants to drive a new generation of lending with its Adaptive Risk Pricing tool, which actively monitors and rewards customers for positive financial actions throughout the span of their loan, sharply cutting interest costs.

I've known Ascend's Co-Founder and CEO Steve Carlson since we both joined the Consumer Advisory Board of the Consumer Financial Protection Bureau (CFPB) when it first was formed in 2012. Ascend has benefited - and so does our podcast - from Steve's double background in banking and technology. He has held senior executive roles at HSBC and Washington Mutual and advised global financial services firms as a co-founder of Sung Carlson Associates. He was also the head of marketing and business development at Intuit Financial Services (Mint.com and Quicken).

(A side-note on Intuit:  in the recording, Steve  relates its history and I ask if its founder, Scott Cook, got started by making calls from a phone book. Afterwards, I looked up the story and found it in The Lean Startup, by  Eric Ries (pages 88-89). He writes that in 1982 Cook "picked up two phone books: one for Palo Alto, California, where he was living at the time, and the other for Winnetka, Illinois." He randomly called people to gauge interest in his idea, and a company was born. For any listeners who haven't read The Lean Startup, do!)

In our conversation, Steve describes the impetus behind Ascend, their current status (including their partnership with Lending Tree), and why he believes banking should be a value-driven proposition. He thinks both consumers and the industry can benefit by improving the financial health of consumers. The company's pioneering product, RateRewards, enables borrowers to earn up to 50% off their interest expense by making responsible financial choices throughout the life of their loan. With Adaptive Risk Pricing, Ascend is able to offer loans at rates that reflect real-time performance instead of past behavior. This, Steve says, is reinventing "the whole concept of underwriting and risk assessment."

Indeed, many "non-prime borrowers" - a group that actually represents about a third of the U.S. population - are better candidates than their credit scores would indicate. One-time financial shocks and "thin" files can greatly diminish a consumer's chance of getting a reasonable rate on a loan, or even a loan at all at a traditional institution. Ascend is encouraging borrowers to bet on themselves and prove -- through their actions, rather than their credit history -- that they are creditworthy. As Steve says in the episode: "Everyone today [is] going to be in a different stage in terms of their financial health ... I might be in great shape today; tomorrow could be totally different."  Ascend is trying to make the road to financial wellness smoother -- something Steve says he feels good about.

This episode of Barefoot Innovation became a brainstorming session, as Steve and I tried to think through how innovators, banks and regulators can move toward better ideas for financial consumers -- including musings on how innovators should interact with the world of bank charters and regulation.

Enjoy it!  And check out more information on Ascend, and on the Innovation Lab winners.

You can subscribe to the podcast on iTunes HERE or by opening your favorite podcast app and searching for "Jo Ann Barefoot".