During Thursday’s morning session at the Emerge Forum, presented by the Center for Financial Services Innovation and the American Banker, Raul Vasquez, chief executive of Oportun, and Ron Shevlin, research director at Cornerstone Advisors and writer of the popular Snarketing blog, took the stage first. Vasquez on finding opportunities in the underserved Hispanic market; Shevlin, in discussing the future of competition at banks and credit unions.
Putting The Oportun In Opportunity
Oportun, formerly known as Progresso Financiero, is a California-based company that, per its website, provides “credit-building, affordable loans that help the Hispanic community build a better future.”
There are approximately 54 million Hispanics in the United States, and according to recent FDIC data cited by Vasquez, 46% are under- and unbanked, roughly 25 million individuals. These are the individuals to whom Oportun has lent roughly $1.5 billion in unsecured installment loans.
“We recognize we aren’t curing cancer,” Vasquez says. “We aren’t firemen or policemen. That’s not what we do. But people frequently find themselves in a situation where there’s a pressing financial need or they have an opportunity to take a step forward in their lives. We think helping them move ahead is worthwhile work. In that little piece of someone’s life we can make a difference.”
In the company’s nearly 10 years of existence, Vasquez says, they have learned many lessons. He presented four of the most significant.
1. Have A Deep Understanding Of Your Customer
Hispanics in the United States earn $27,000 in median annual income and, according to HUD, approximately 90% live in low-to-moderate-income communities. This is Oportun’s customer, an individual with little room for error and susceptible to income spikes and dips. Additionally, knowing that a majority of those in the community are low income means there is no opportunity for them to ask for loans from friends and neighbors. It’s critical information for any lender to have.
“You need in-depth knowledge before you even start to design a solution,” Vasquez says. “How does someone live? What are their aspirations? What got them in this situation?”
2. Put The Customer First
While Oportun is a for-profit business and therefore must not say “yes” to everyone, they are “mission-driven” to help Hispanics in the United States who lack meaningful wealth or assets. The company, Vasquez says, makes decisions that are in the long-term interest of its consumers.
“Sometimes it’s the right decision to say no to someone,” he says, “especially if they are already stretched out.”
To that end, it offers unsecured installment loans with income-based underwriting guidelines and reporting to credit bureaus to help build long-term financial stability. Payments and rates are fixed, there are no pre-payment penalties, and there is a 7-14 day grace period for late payments. Loans come as checks or prepaid debit cards and the company accepts cash payments. The company offers these features because it’s what it’s customer-base wants.
“We have to meet the customer where they are and in the avenue they are comfortable dealing with,” Vasquez says.
3. Create Financial Sustainability
With 25 million underserved Hispanics in the United States, the 52,000 that Oportun has served remains just a drop in the bucket of the total population in need of banking services. And while it’s important for the company to reach this untapped base of consumers, it also must think about its own long-term financial sustainability.
Vasquez says the company achieves this though a balance of financial strength and commitment to mission. As a metaphor, he visualizes this balance as a bicycle. The front wheel is mission — it is what comes first and helps steer the business — and the back is financial strength, because it really drives the company forward. But the two wheels need to work together for the entire machine to work and to continue to keep Oportun financially sustainable even when dealing with low-income customers.
4. Embrace Technology
New technology and software has led to a transformation in business operations in virtually every industry. For Oportun, technology has allowed it to become more efficient — an important development considering the high-costs on loans to low-income borrowers.
Virtually all parts of Oportun’s system were built in-house, and it rolls out software improvements about once every three weeks, according to Vasquez. It developed its own loan origination system, risk engine, and servicing and collections. It’s currently developing an online and mobile platform to serve consumers more conveniently.
The New Basis Of Competition
Lest anyone doubt the credibility of Ron Shevlin, he would like you to know one thing about him: Lindsay Lohan follows him on Twitter (it’s true). I imagine this is because he knows what he’s talking about.
And what he’s talking about is the future of competing for new customers and members at banks and credit unions. Whereas in the early decades of the 20th century these institutions competed on location, and after the rise of credit worthiness following World War II led to competition on rates and fees, today and into the future, “Financial health will become the basis of competition in retail banking,” he says.
He defines financial health in three ways:
It has to do with financial behavior and not financial literacy; learning and doing are different
It is account independent, meaning individuals are increasingly making different choices with how they manage their finances and therefore it’s no longer black and white to describe someone without a bank account as underbanked.
It is quantifiable. A FICO score, he says, is not sufficient. There needs to be a more encompassing financial performance score, what he calls a “FinScore,” that will more accurately quantify the impact of financial decisions and show how different decisions help and hurt consumers
Shevlin envisions the banks and credit unions of the future to look more like the HMOs of financial services. HMOs do not provide healthcare, rather they integrate different health plans and help consumers improve their physical health. Banks need to help integrate consumers with different technologies and improve the financial health of consumers.
“The winners will be those institutions that become an integral part of their consumers lives wherever they are,” Shevlin says.