We’ve made no secret of our disdain for the deceptive practices employed by bad actors within the payday sector. We’ve also had misgivings over the stratospheric rates that subprime borrowers face in order to access credit. Over time, we hope that financial literacy, private sector innovation and common sense regulation transform the environment for lower credit borrowers and lead to the extinction of predatory practices. That’s why we were happy to connect with LendUp’s co-founder and CEO Sasha Orloff and Jotaka Eaddy, the company’s vice president of policy, strategic engagement and impact. Orloff, Eaddy and the rest of the LendUp team are clearly mission-driven professionals who want to put borrowers on the pathway to better financial health. It’s not an easy job, but the company is making solid progress thanks to its broadened offering of products and education initiatives. In the wide-ranging interview to follow, The FR’s Gregg Schoenberg learned more about the company’s plans in 2018 and how its proprietary technology is helping to transform the financial lives for its targeted customer base, which, we learned, is about half of the nation.

The Financial Revolutionist: Sasha and Jotaka, it’s great to see you again. Sasha, I know you started the company in 2011 with your step brother, Jake. When did you start making loans?

Sasha Orloff:    Thanks Gregg. We recently hit our six-year anniversary of our first loan. Although Jake and I “started” the company in 2011, LendUp was really born after coming out of Y Combinator’s Winter 2012 class.

FR:    Congratulations on the anniversary. Jotaka, when did you join?

Jotaka Eaddy:    I joined a little over two years ago.

FR:    Of all the things you could have done when you chose to leave the NAACP, what led you to fintech?

JE:    To be candid, I was very reluctant to go into the private sector, and particularly tech. But I had spent a long time as an advisor to Ben Jealous (former NAACP president), and he helped convince me of the importance of going into tech as a way to drive impact.

FR:    And how did you come to join LendUp?

JE:    We met through Ben, and keep in mind that I spent a lot of my time at the NAACP focused on trying to get rid of predatory lenders. But once I dug in and really understood the work that LendUp was doing and the impact that it was having, it became clear to me that LendUp was approaching the subprime market in a completely different way. It was and continues to be the best market-based solution that could help solve the financial problems facing millions of Americans.

FR:     Is access to credit a civil rights issue that needs more attention?

JE:    Absolutely. It’s just that some of the blatant racism that's confronting our nation these days takes center stage on TV and social media. But historically, race has played a major role in accessing credit and how people are marginalized when trying to access it. Plus, when you look at the predatory products across this country, they are heavily marketed to poor communities. So yes, safe access to credit is an important issue for me — and should be for everyone — and LendUp is on the right side of it.

FR:    Has working at a highly visible start-up backed my major institutional investors constrained you in any way?

JE:    No, not really. I’m totally comfortable in being able to speak my mind here, and the company’s culture and values fully support having open dialogues.

Subprime Nation

FR:    So what precisely is the issue that your team of nearly 250 professionals at LendUp is taking on?

SO:    56% of this country has a subprime credit score. That's just a fact.

FR:    Is it really that high?

SO:    Yes. Half of our country have subprime scores — and they’ve been treated in an awfully demeaning way. It’s just not okay to say that the majority of our country can’t gain access to credit because of a number assigned to you by a third party. And you, as an individual, have little insight into how that number is determined. That’s got to change.

FR:    And how many states are you currently in?

SO:    We issue credit cards in all 50 states and have loan licenses in 24 states.

FR:    And can you provide some clarity on who your customers are?

SO:    It looks very similar to the general makeup of the United States. It's predominantly women, but by a slim margin. It ranges from the boomer rebuilding their credit post-bankruptcy to the millennial just starting out, from white to blue collar, coast to coast.

FR:    I’m a little surprised by that diversity.

SO:    Yes, one of the most common misperceptions about people with subprime credit scores is that it’s an immigrant-based constituency. But the truth is that we’re serving a broad population. It's the small business owner. It's the gig economy worker. It's your Uber or Lyft driver. It's your nurse or teacher or an hourly worker at any retailer, large or small. It’s every race and ethnicity.

Credit Cards

FR:    Today, I’d say you’re better known in the western states, where the short-term lending rules are different than on the East Coast. But in getting to know the company, it sounds like you’re making a big push into credit cards. When do you think LendUp will start to be recognized more for its card products?

SO:    That perception will change this year!  

FR:    Why?

SO:    Because more people will start to hear everywhere about the first ever venture-backed, innovative credit cards coming to market. We’ve reimagined what “credit card” means, and you’ll see that our new offerings will be challenging the credit card industry to get better, just like we challenged the payday lenders to get better.

FR:    So ahead of these announcements, can you give me a picture of your initial traction in credit cards?

SO:    There's a huge demand for a transparent, very easy to use, simple credit card, and we've continued to see word-of-mouth recommendations and demand that exceeds our expectations. Since launch, we have issued hundreds of thousands of cards with credit lines ranging from $300 to $2,000. We’re already top of our category on sites like Credit Karma — with a near 5/5, far above the rest —  and we’re just getting started.

Customer Origination

FR:    Let’s talk about how you’ve originated customers so far. I take it you’re mobile-first, if not mobile-only?

JE:    Yes; 98% of our customers come to us on a mobile phone.

FR:    Let’s say two people have a 600 FICO score. One person has a smartphone and the other person doesn't. Is that an indicator of credit worthiness?    

SO:    Interesting question, but it doesn't come into our underwriting at all.

FR:    Are you worried that there’s a certain portion of the market you're not addressing because they can't afford a smartphone?

SO:    I would challenge you to find somebody who doesn't have a smartphone today. According to Pew, 95% of Americans own a cell phone of some kind, and more than three out of four have a smartphone.

JE:    And if you look at recent studies by the FDIC, there’s growing use of smartphones and mobile phones for financial services, particularly for underbanked people in the country.

Flexibility with Customers

FR:    So given that you are trying to meet the needs of the underbanked, I want to get a sense of your loan servicing strategy, because it sounds like a shortcut to understanding the LendUp ethos. I take it it’s fully managed in-house?

SO.    Yes. We manage our own servicing, because if a customer’s credit score is lowered, nobody wins, as we don't charge accruing interest. And most people can pay; they just might not be able to pay at that moment or in the full amount.

FR:    And you’re confident most of your borrowers can pay?

SO:    Yes. Our customers have jobs, they have incomes, and they have proved they have an ability to pay; they're just illiquid on a more frequent basis than many other people. Just letting them pick the second half of the month or letting them choose the day that they want to repay is incredibly helpful, because most bills are due the first of the month.

FR:    At some point, though, do you turn over collections to a third party?

SO:    No, we don’t, because third party collectors aren’t incentivized in the same way we are. They just want to collect as much money as possible. We want to get customers back in good standing, and in order to do that, we need to be flexible while controlling the process and educating them.

Income Volatility

FR:    Can you talk more about how that flexibility plays into the income volatility initiative that you’ve undertaken?

SO:    Before I do, for context it might be helpful to understand that our goal exclusively is to build products for people who have volatile income and low credit scores, and to improve their financial health. We started by building an alternative to payday lending because it was the worst product that we could find in the market, so it was the best place to start. But we’ve never seen ourselves as a payday lending company, or a payday alternative company, or a credit card company, or a financial education company. Rather, we’re building a savings and lending destination for the people who’ve been shut out or mistreated by mainstream banking.

FR:    And at the heart of this broken system is income volatility?

SO:    Yes. And after reading research done by the Aspen Institute and thinking about the kinds of questions our customers ask us, I said to Jotaka, “You have to meet Joanna Smith-Ramani [Managing Director at the Aspen Institute Financial Security Program] for coffee. I don't know what's going to happen, but I’m confident something great will come out of it.

FR:    How long was that coffee?

JE:    Several hours (laughs). Look, I’m from rural South Carolina, and income volatility impacts my very close family members. I hear it all time. "I was sick, so I didn't get paid this week,” or “My check is lower this time." So it's very real to me.

FR:    But this is clearly a challenge affecting people all over.

JE:    Yes; so we agreed with Aspen to launch a conversation, but also to drive commitment. And not just on the coasts, but with stakeholders in the communities and the places where our customers live.

FR:    And by stakeholders, you mean?

JE:    In places like St. Louis, Columbia, South Carolina and Oakland, we’ve brought together non-profits, banks, financial institutions, unions and large employers to raise awareness and drive action and commitments — like employer commitment towards more predictable hours in the workplace. And also to build new partnerships and programs between local organizations, employers, and government and national companies like us. It’s called Finance Forward.

Education

FR:    Let’s turn to education, because it’s deep in your company DNA. You have this concept called the LendUp Ladder, which among other things rewards borrowers with lower rates when they complete online courses. This is great stuff, but you’re a for-profit business, so I’m wondering, can you measure the ROI of your education courses?

SO:    The education is impactful both from our credit risk perspective and a referral perspective. It also gives more insight into the customer and helps us come up with new products or features that could be beneficial to them, like one-on-one credit counseling.

JE:    And we have a team that's dedicated to the measurement of our impact and improving our impact.

FR:    Yes, I get that, but can you tie this education to lower default rates or any other financial metrics?

SO:    Well, Gregg, that’s kind of tapping into the secret sauce of what we're doing.  But I would say that banks separate their education from their core product because many credit line businesses earn 30-35% of their total profit from  penalty fees.

We also partner with a number of organizations that provide additional benefits for our customers and deepen our relationships with them. As an example, we partner with a B-corp called SpringFour, which helps our customers identify opportunities to save on local expenses like utilities. After being introduced to SpringFour, 42% of our customers said they feel more positive about LendUp.

FR:    What you just said about penalties being a major driver of total profit for some credit businesses is just a terrible state of affairs.

SO;    Agreed. As a financial institution, you're not incentivized to change if you have an incumbent legacy fee structure. For us, having education embedded into the LendUp experience de-risks people, because it enables them to better understand how the systems work and encourages them to optimize for credit score improvements.

FR:    So as to avoid penalty fees?

SO:    Yes. We want to make money in ways we think are pro-consumer and fair, such as interest revenue, interchange fees with banks, and in some cases, annual fees. We believe aligning consumer and company interests in a transparent way is one of our primary advantages in the industry.

Regulatory Changes

FR:    You’re both aware that the CFPB has delayed implementing the payday rule, and there other initiatives afoot to roll back protections and regulations. I’ve said before, I think you are the good guys in a rough neighborhood. But how will you respond to regulatory changes that can unshackle some bad actors and maybe revive debt traps and other deceptive practices?

SO:    Look, there has been a major awakening in our nation. I give Trump some credit for opening the eyes of people in places like D.C., New York and California — three places I’ve lived — who thought, "Oh, the world's great, the economy is booming. The American Dream is alive and well." The reality is that this has not been the case for millions of Americans — nearly 56%. Trump made people say, "Holy shit, it's actually not." His election made people start to rethink things and it challenged assumptions, especially around financial wellbeing.

FR:    I agree with your assessment that Trump’s victory woke people up, but on the topic of deregulation...

The technology running many banks was built 30 years ago, in Cobalt-based mainframes. They aren't geared for real-time adaptability, and there’s nothing that deregulation can do about that. Adapting to how customers need financial services today requires new technology, which is where we come in.

JE:    But to your question, Gregg, yes, I think some of those consumer protections now at risk are really important. So speaking personally and on behalf of a mission-driven company, there’s been disappointment at the possibility of not incorporating any new consumer protections, which are long overdue. Because we have been very engaged in the debate and put in a lot of time in Washington to communicate our position on the importance of balanced regulation.

FR:    So how might LendUp respond to the changes in consumer protections?

JE:     I think we’re all in a wait-and-see mode until we see the next phase of leadership at the CFPB. Don’t forget that Director Mick Mulvaney is a temporary director; he won't be permanent, so we expect there to be more changes once a permanent director is in place.

Community Bank Competition

FR:    The definition of job permanence in this administration has taken on new meaning, but let’s move on to competition from traditional financial institutions. I bring that up in light of a recent report by Pew urging more community banks and credit unions to boost installment loan lending as a way to counter income volatility. Is that a competitive threat?

SO:    Personally, I don't look at it as competitive. Maybe some community banks will share our conclusions on where the world is going and look to build their own solution. Good for them. But if they ever have struggles, or challenges, or their technology doesn't work, they'll say, "Why don't we just go to LendUp and partner with them, because then we can reach more people with better options?" We already have three bank partners — two for our Visa L and Arrow credit cards, and one that is licensing our educational videos for its international customers. I see more banks wanting to work with us in the future, not fewer.

FR:    Because they’re not technology companies at heart.

SO:    Right. We've had a lot of community banks who have tried to do it in the past. Many have the heart, and the will, and the money, and the customers. They just don't have the know-how or team to build a technology solution like we have, which is very hard.

FR:    Are you are now licensing educational videos to institutions as part of your business model, or is that something you’re doing to build goodwill?

JE:    Yes on both counts. We launched our educational videos as a mechanism to provide our customers and consumers at large with embedded personal finance information that would help empower people to make better financial decisions.  To date, more than 1.7 million courses have been taken. We firmly believe that a more educated consumer is better equipped to improve their financial health. Our videos are free and visible to anyone on our website and through some of our partnerships. We were recently approached by a financial institution to license our videos, for a fee, for specific use with their consumer base. As we continue to expand our educational courses and tools, we will engage in new partnerships to expand the reach and impact of our educational courses.   

FR:    So to wrap up, I want to ask you: Are you worried that if LendUp does its job right, you’ll be losing customers to more traditional financial institutions as they become easier to serve?

SO:    Well, I think the first thing to keep in mind is that our credit card business takes what we have been doing in a niche, state-by-state industry and brings us to a national stage. And now, that business will be 80% to 90% of our total revenue pretty soon. But philosophically, if we get lots of customers in that great situation over time, I feel pretty confident that we will have our choice of bank partnership options where they’ll say, "You've done all the hard work. We'll gladly take them and pay you a referral fee.” To me, that's a win. We’ll still have the rest of the country to handle.

FR:    Yes, I agree that would be a nice situation. Jotaka, Sasha, many thanks for your time.

JE/SO: Thank you, too.

This Interview has been edited for content, length and clarity.