Analysis Featured

The Answer to Predatory Lending and Outrageous Credit Lines

Float Finance credit lines

Nowadays, securing a credit line from a bank or other financial institution is a herculean task. It gets doubly difficult considering the majority of Millennials and Generation X are becoming credit “reluctant” and thus have no credit score to offer. The below image showcases how young adults entering into the financial world are faring against their elders.

Float Finance credit lines

There is a huge untapped credit market which needs to be covered. To cater to the needs of the young generations and digital-first customer base, many fintech companies are reaching out through mobile applications. Now, with a simple tap on the phone, anyone from anywhere can get credit. One company that provides instant credit without hidden charges through its mobile app is Float Finance.

How Float Rode In On the FinTech Wave

Float Finance is headquartered in Los Angeles, California. The company raised $1 million through convertible notes issued to three investors — Camp One Ventures, Funders Club, and Plug & Play – in its seed round of funding. While incorporated in 2015, Float Finance launched its operations in 2016 only after intensive testing of its product. It opened its first office in Utah last September. Tasting instant success in the first couple of months, Float expanded its operations and opened another office in California. The company raised $3 million to augment those operations in its latest funding round, receiving backing from Camp One Ventures, Funders Club, and the 500 Startups Accelerator. The company was nominated for LendIt industry award in the “emerging consumer lending platform” category for demonstrating its potential to influence the consumer lending space.

Float’s founders, President Kevin Bass & CEO Max Klein, were frustrated with their constant denial of credit. They started Float in response to the predatory lending practices they were approved for. The company is also backed by an experienced team with experience in banking and behavioral finance. One team member handled subprime lending at Capital One for a number of years while another member was risk manager at Bank Leumi, the second largest bank in Israel. Before starting Float, Bass co-founded FNDRS.com and FanSee.me. Klein was a freelance product consultant and founder of premium lifestyle portal Cachet LA.

Undercutting Banks by Surfing Borrower’s Fees

Float’s entire operations rely on a mobile app that provides credit without any hassles. The basic requirements are a smartphone and a supported bank account.

Instead of using FICO, the company relies on transactional data from user bank accounts. Float’s algorithms looks at two years of transaction data. The sign-up process takes only 180 seconds. After approval, the user can use funds with any existing debit card. The model functions like an American Express charge card in that the amount borrowed is due in full in succeeding months. If the consumer delays payment, a $20 late fee is assessed.

Funds borrowed do not carry interest charges, but a one-off 5% upfront transfer fee is charged on any funds drawn from the credit line. For example, if a consumer borrows $100, then they pay back $105. If the transfer is under $50, the fee is $2.50, which is far more fair than an overdraft fee where a transaction of $24 carries a fee of $35. On top of that, if the loan is outstanding for three additional days, a new fee is levied. That makes a borrower’s annualized rate enormous.

Float’s default rate is in the high teens. In order to be profitable, however, it needs to maintain default numbers at 10% to 12%. The average credit is around $300 and it has a cost of acquisition at only $10 per customer. The low CAC is made possible by the founders’ experience at previous companies they owned and experience of their marketing team. They hope to reduce their delinquency rate by half as they expand their operations out of their base locations. Float targets users via Facebook and Instagram-like social media channels exclusively.

The risk model is based on alternative data sources like credit card payments and other loan payments along with data usually issued by FICO-like sources such as bankruptcies, criminal records, etc. Based on these factors, Float computes a credit score and uses it to allocate the credit line accordingly. What makes the company different is that it provides credit without considering the FICO and the time frame within which it provides access to that credit.

The company is on the verge of touching 700 monthly active users. In recent months, Float secured more data in order to add more users to its platform and to arrange a larger debt facility.

Looking Forward To a Tsunami of Success

Since fintech startup companies dealing with credit lending are bound by the regulations of federal law, this industry faces many regulatory challenges like privacy and data protection, consumer protection, etc. In order to comply with federal laws, Float has devised various security measures like limiting access to user’s information to its employees, computer safeguards, and other procedural safeguards. As the data acquired by the company is mainly based on age and location criteria, which are not used for credit decisions, it doesn’t face any major regulatory issues.

Float Finance has been able to create a niche for itself with cost effective services that gives it a competitive edge. With Millennials set to increase commercial dominance, the company is expected to grow.

Author:

Written by Heena Dhir.

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