Possible Finance is doing what I previously thought was impossible. They are helping people on the lower end of the credit spectrum — those with little to no credit history — gain access to credit and improve their financial future without being predatory. Possible Finance is accomplishing this as a mission-driven company that leverages machine learning to do good while building a profitable business.
The mission of Possible Finance is to improve the financial well-being of people that typically fall outside the scope of traditional financial services. They are starting with affordable short-term loans because this product is needed most by so many people. As they build deep and trusted relationships with their customers, they will be able to leverage data and build out other tools and non-loan products that can further improve individual financial wellness.
While one can argue that all debt is bad, the reality is that people at every level of the credit spectrum need access to short-term loans from time to time. These loans provide a cushion to get through the financial bumps in life. According to the Federal Reserve, about 46% of Americans report they don’t have enough to cover a $400 emergency expense.¹
Existing short-term credit options are almost entirely single payment products.These products are expensive, don’t build credit history, damage credit history because they pull a credit report, and become debt traps for borrowers who cannot pay them back. The better solution is an installment loan product with a manageable rate that helps build credit history so that the borrower will have even better credit options in the future. Possible Finance provides this solution.
For perspective, two pervasive types of single payment loan options are payday loans and bank overdraft fees. It is helpful to understand how both work in order to fully appreciate the alternative provided by Possible Finance.
Payday loans: The average payday loan is $375. It comes due in 2 weeks, and the borrower must pay an average fee of $55 PLUS the total amount of the loan in full at their next pay-cycle. On average, this payback is 36% of the borrower’s next paycheck. The borrower’s options are to payback the loan in full, take out another loan, or pay another $55 to keep the loan out for another two weeks.The typical borrower keeps the loan out for five months and pays an average of $520 in fees on top of the $375 they originally borrowed. Of those borrowers who eventually pay off the loan, 41% report that they pay it off with some type of windfall — a tax refund, help from a relative, a second job, etc. In each two-week cycle, three percent of borrowers charge off, or default on the loan. To do so, they either do not deposit money into their bank account or they close their bank account altogether. However, lenders can be very aggressive and sue for wage garnishment and other recourse. Now the borrower has even bigger problems.
Bank overdraft fee: Perhaps an even more egregious product is the bank overdraft fee. Bank overdraft fees account for 62% of all spending by underserved consumers on single payment credit products.² Of the people who overdraft, one-third report they did so primarily as a way to borrow money, and the median that shortfall borrowers are trying to bridge is $24 for three days. Keep in mind that bank overdraft fees can be the only option people have who have little to no credit history, as they cannot even qualify for a payday loan. Whether an overdraft amount is $1 or $1000, the average overdraft fee is $34. Typically, if an account is not positive within 5 to 7 days, the account holder gets hit with another $34 fee. While overdraft fees are “technically” not a loan, if you were to consider overdraft fees in a lending context, the calculation would be as follows: if you were to take out a $24 standard loan and pay an additional $34 to borrow the funds for three days, this loan would have a 17,000% APR.⁵ In total, Americans spend $24.5 billion dollars a year on bank overdraft fees.²
Possible Finance is solving this gap in consumer funding in a thoughtful way. I led the Series A investment in Possible Finance for 5 reasons:
- Possible Finance is an installment product and NOT a single payment product. The Pew Charitable Trust has recommended that small loans be repayable in affordable installments, and has found that borrowers fare better when the loans have their costs spread evenly over the loan’s life, rather than front-loaded via an origination fee. Possible Finance took these recommendations to heart, and has set up all of their loans to be repaid in installments, with no origination fees or prepayment penalties. In contrast, Pew also found that the average payday loan takes up 36% of a borrower’s next paycheck, which most borrowers can’t afford. Possible Finance steers clear of debt trap loans like these, and instead lets borrowers pay back loans in installments over at least eight weeks. And, Possible Finance will not loan more money until the first loan is paid in full.
- Possible Finance improves credit ratings. Because Possible Finance has an installment product, they are able to report payment information back to all three primary credit bureaus (Equifax, Experian and TransUnion). This is important because when customers pay back the loan, they build their credit history. They are then able to get access to even better financial products and interest rates in the future. In contrast, single payment products cannot be reported to bureaus and do not improve credit history.
- Possible Finance does not pull a credit bureau to underwrite the loan. This is important because pulling credit bureaus negatively affects a consumer’s credit score. Instead, Possible Finance uses machine learning and bank data to decide who to loan money to and how much. By using this approach, Possible can loan to individuals who have no credit history or limited credit history and can help them build their credit score. Again, this is good because it helps people get access to even lower rates in the future. In contrast, most single payment products pull credit reports.
- Possible Finance meets ALL state by state regulatory lending requirements and interest rate caps. Unlike many other companies in the short-term lending space, Possible Finance registers and gains approval to operate in every state they are doing business in. In contrast, there are some companies that provide short-term loans, but claim that they are a tip or a service fee because this allows them to get around state licenses and rate limits. Possible Finance works collaboratively with regulators. In fact, Possible Finance recently collaborated with the Pew Charitable Trust to pen a comment letter to the CFPB in support of 2017 rules to reform short term lending. The letter urges the CFPB to keep in place the 2017 rules which greatly increased consumer protection against harmful practices in short-term lending.
- Possible Finance is incredibly user friendly. Consumers can borrow up to $500, without a credit check, and have access to funds within 5 minutes. Additionally, Possible Finance will allow borrowers to delay payments, without hurting their credit score, up to the maximum time period allowed by the credit bureaus, with no fee or penalty.
Possible Finance is helping more than 94 million Americans who are non-prime but pay an unfair $97 billion per year for short-term credit products that are expensive and unsustainable “band-aid” solutions that drive them further into debt. Possible Finance is reversing the detrimental debt cycle by helping these small-loan payments actually build credit reported to all major bureaus.
Beyond improving the financial well-beings of thousands already to date, Possible Finance is also building a differentiated proprietary dataset, analyzing over 35 million lines of bank data to date using machine learning to reduce both risk and cost. This data will only become more beneficial over time as more data is aggregated, and this will allow them to expand their suite of financial products and services for years to come.
At Canvas, we take pride in working closely with our founders to help them make their vision a reality. I’m excited to see Possible Finance continue to build and deliver a service that I used to believe was impossible!
You can read more about this announcement on Techcrunch and Geekwire.