October 12, 2010

Former management consultant to banks Ken Rees, now CEO of Think Finance, has strong criticism about how the way banks serve the cash-strapped (with predatory checking accounts) but understanding of the business realities behind this (they can't charge enough to make these customers profitable). His answer: separate websites through which banks offer online-only products created for the economically disadvantaged.

In research it conducted last year, the FDIC determined that 25.6 percent of U.S. households, close to 30 million, are either unbanked or underbanked. Approximately 60 million adults are in these households. "Unbanked" means not having a traditional checking or savings account. "Underbanked" households have a checking or savings account but rely on alternative financial services such as non-bank money orders, non-bank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year.

"The reason consumers choose alternative financial services products is not because they're too dumb to figure out that there's a high APR associated with those products, but because compared to the alternatives the're a lot cheaper," Rees asserts. "A traditional checking account for millions of Americans is a predatory product," he says referring to overdraft fees that for some come to more than $1,500 a year. "Traditional bank products are great for people who have significant balances and don't run their checking account near the edge, don't live paycheck to paycheck," he observes. "But for the expanding percent of Americans who are squeezed and don't have significant reserves, traditional checking accounts can be a bad solution. That's why people have had to go outside the banking system."

Rees believes banks would like to serve the underbanked, but don't have great products for them. "Banks have been talking about trying to serve the underbanked for years and years," he says. "They keep scratching their heads over it. The FDIC's small loan pilot that ended earlier this year was an unmitigated failure because banks were unable to make money on the customers."

When he was a management consultant, Rees conducted customer profitability studies at large banks that typically found half the customers were unprofitable because they didn't have sufficient deposits and they often used branch services. "You almost can't fee those people enough to make it work out," he says.

Think Finance provides an online banking platform intended to enable banks to serve those customers profitably. The company also offers an underwriting engine, credit scores for the unbanked (based on the million customers to whom it has extended credit) and marketing help. "Waiting for customers to come into branches, which is the typical bank approach, is not going to work," he notes. Think Finance helps attract customers to its bank partners' sites through search engine marketing, TV ads and direct mail.

The unbanked/underbanked accounts Think Finance facilitates operate independently from a bank's core banking system. "It needs to be a separate line of business; those traditional bank accounts and platforms are exactly what killed bank innovation for years," Rees says. "We run outside of all that."

Is it safe to assume that the unbanked have computers and internet access? "Yes, that's one of the big myths about the underbanked," Rees says. "The truth is the digital divide is gone in all segments of the country now." Among Think Finance's customer base, 60+% have Facebook accounts and more than 40% have smart phones. "Our customers, like everyone else, are demanding more convenience, more use of technology, more internet services, and they're pushing us to do more with mobile messaging."

In bank products, the underbanked seek a simple transaction account with no hidden fees or penalty payments; access to emergency credit and a savings account that helps them save; and financial literacy and budgeting tools, Rees says. Think Finance is working on products to meet these needs.

So far, the company an installment loan with one bank called ThinkCash that's meant to bridge the gap between payday loans and mainstream forms of credit. The problem with payday loans, according to Rees, is that "they're essentially a dead end product; consumers can make successful payments every month and never see a reduction in their rates and just as bad, never see that successful payment history reflected in their credit history." For customers of ThinkCash, the interest rate drops with each loan they pay off successfully, so by the fourth loan the APR is 36%, a target range for consumer advocates. Although 36% sounds high, Rees says this rate is "lean" for such a low-dollar-value (the average loan is between $600 and $700), short-term product.

Think Finance's scoring engine helps provide an instant loan decision for the customer, with the help of third party credit information, and the customer is typically funded by ACH. The originating bank manages the rules and leverages Think Finance's scorecards. The bank's risk management team meets with Think Finance staff weekly to discuss loan performance.

Think Finance's newest product, which Rees expects will drive growth in coming years, is called Elastic. The company offers it with Urban Trust Bank, which is owned by billionaire Robert L. Johnson. Elastic combines a low-cost prepaid debit card with a line of credit of up to $700. Think Finance receives a share of revenue produced from the products it designs, which Rees describes as "instantly profitable."

By the end of the year, in time for a 2011 rollout, Think Finance plans to introduce a savings account, a financial literacy campaign and budgeting tools. It has already begun piloting text messaging payment reminders and next year it expects to have smart phone applications.

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