Lendup raised $50m after launching its own L-card , a credit card for the payday loan population.
Payday Loans originates $46bil per year. The industry has increased its revenue from 1.5 billion dollars in 2006 to more than 4 billion dollars in 2015 and now funds more than 10 million households across America. There are more than 20,600 payday loan locations in America. It has become so ubiquitous in American society that John Oliver, the famous TV satirist from HBO, did a whole segment on Payday Lenders. Though his characterization of the industry was not flattering, it has to be understood that payday lenders fill a very real need of everyday Americans.
Many online start-ups have emerged with massive equity funding from VC community and debt financing from hedge funds to loan to the sub-prime category. San Francisco based LendUP is one of the leaders of the segment with more than 214 million dollars in funding. It closed a 50 million dollar Series B from a group of investors led by Data collective and Susa Ventures in January 2016. Victory Park has pumped in around 150 million dollars in debt financing for the Y Combinator graduate. The company has been founded by Sasha Orloff, a former Citibanker and Jacob Rosenberg, lead developer at Zynga and Yahoo.
The question is why there is such a gold rush at the bottom of the pyramid. At least two other start-ups, Elevate and ZestFinance have raised similar amount of funding to capture the market. The market gap exists as Bank Lending is possible only with FICO score of 680 and above. The problem? Over 56% of US is below 680 and is therefore driven out of the formal lending economy. The start-ups are basically clamouring to get the so called lost Americans back into the formal market and are betting that their algorithms with thousands of quantitative & qualitative variables would be able to predict the behaviour of the customers correctly. The customer is better off as the Lendup APR starts from 29% but usually ranges from 291% to 1147% , as compared to average pay day loans starting from 460% and going to 1000% in normal course. The company has been started by the step brothers to fix the payday loan industry. Socially responsible lending is not just a tagline but the company ethos. They have aligned themselves with their customer and his success. They have introduced some innovative features which are designed to help their customers lower their APRs and to stop them for falling into the vicious debt traps via loan roll overs. The company has introduced a Lendup Ladder where the borrower can reduce his APR via attending courses on managing his/her finances and by paying on time. The company also does not do roll overs, which is a common feature of the brick and mortar payday lending establishments, instead it breaks down the loan in to instalments.
The company has launched its own credit card- “L Card” in October 2015. Though in Beta, it’s significant as the credit card market is 100 times bigger than the payday loans markets. Lendup is bringing its same motto of transparency to this market with no hidden fees and zero charges if the customer pays within the prescribed time period. The lender is trying to push its existing clientele up the ladder to L Card. The credit card also acts as its biggest differentiator as it gives its customer base access to a loan at zero percentage for 30 days. The segment they are targeting has never had the opportunity to be approved for a credit card from financial institutions. This approach also creates stickiness in terms of customers and repeat business. Many lenders have been unable to generate repeat business from borrowers. But with a credit card, the borrower is permanently attached to Lendup thus increasing repeat business exponentially. The credit card limit is up to 500$, around a typical size of payday loan. The APR is below 30%, which is extremely decent considering the payday loan rates.
The company has an employee base of 140 and looking to double headcount by end of 2016. The company has not yet explored securitization and is basically dependant on Victory Park Capital for debt financing. The industry is now facing a sustained headwind which was evident from the shelving of the 80 million dollar Elevate IPO in January. Though the company has reported that it is profitable on a unit economic basis, i.e. on per loan basis, the company has yet to experience a downturn or an extended period of rising interest rates. The company also courts negative press due to its 3 digits APR rates. Many activists have called it no better than its brick and mortar counterparts. Billfloat.com has a different model for payday loans by partnering with utility, cable and cell phone bill corporate. Instead of paying the borrower, BillFloat directly pays the companies for pending bills. It gives the borrower 30 days and charges less than 36% APR. It indicates that lenders need to be creative for the subprime market and therefore L-Card is going to be the most important bet for Lendup’s future.
Author : Heena Dhir and George Popescu