FTTea with Cokie: Please Tip Me For My Thoughts

Hi y’all, Cokie here. 

Happy Valentine’s Day! Hope y’all are feeling romantic. I sure am. There’s nothing quite like spending endless time with your significant other in 450 square feet! (Just kidding, hi Lorenzo!!!)

With all the kerfuffle about Buy Now Pay Later (BNPL) companies (i.e., a litany of fabulous reports from various authors, Affirm’s IPO, Klarna’s Super Bowl commercial, etc.), I’d like to take a look at an equally divisive sector: payday lending. 

This week, SoLo Funds announced that they raised $10M from ACME Capital, Impact America Fund, Techstars, Endeavor Catalyst, CEAS Investment, and others who funded their previous round. SoLo Funds is a community platform which connects willing lenders with those who need to borrow. Borrowers set the terms themselves, so of course an APR model wouldn’t work here. Instead, borrowers offer a “tip” to their lenders and provide an expected date to pay it back. For instance: if I needed to borrow $100 and I wanted to tip 10%, I’d add $10 to my repayment. 

This model is pretty interesting! However, SoLo Funds doesn’t explain what happens if the borrower defaults… so…? I imagine that’s what the $10M in funding will cover. 

Tipping models are highkey sexy right now, eh? Better watch your back or I’m gonna start asking for tips. I have to wonder what regulators will want to do about this one, because if you talk to those in DC, they aren’t big fans of this tipping phenomenon. But perhaps it is more honest and transparent than the myriad of financial acronyms to which they have become so accustomed. In short, I anticipate significant financial regulation over the next few years in this area, especially around consumer protection. 

I often gravitate towards projects with community at their core, so obviously I’m into this. It’s managed to take the shame out of charity and incentivize helping people. For me, this is a natural progression from the BNPL model, which helps people spread out payments over time on retail purchases (famously great for Peloton, infamously dubious for mascara). Both are creative solutions to America’s tenuous relationship with debt. While BNPL makes the unaffordable affordable, this kind of lending disarms the traditional payday lender. 

The thing that gets me the most though is that these products shouldn’t have to exist in the first place. I’m thankful for companies that are trying to improve detrimental services, but it seems we keep glazing over the root of most of the problems we aim to solve. 

For instance, according to this helpful summary by Credit Summit, 12M Americans seek payday loans each year. There are 14,348 payday loan storefronts in America (for reference, there are only 14,027 McDonalds’). The average annual income for borrowers is $30K, with predominantly Millenial and Gen Z customers. 70% of borrowers use payday loans for anticipated recurring expenses, like rent and utilities. The average loan size is $375, while the average APR is 396%. Only 14% of borrowers can actually afford to pay back their loans. These numbers were both shocking and appalling to me. 

So again, while these products can be great and help with the cause, they aren’t going to solve the bigger issues of unemployment, debt, minimum wage, and financial education. And that’s the tea. 

Peek Behind the Paywall

Earlier this week, you heard from FTT Experts Michael Jenkins and Charley Ma. Michael had a great piece on Plaid and how its efforts to expand in Europe are going. Then Charley wrote about the key events from the second half of 2020, and what they tell us about fintech in 2021. 

And tomorrow, Julie is writing about the influencer economy. You might be asking why since that’s not fintech, but several startups in our space are starting to use influencers as a big marketing channel. Current, Betterment, Public, Robinhood and others are all wading into this market in some shape or form. Tune in Sunday to hear more about how it all happens and if it's actually working.