What do you get when you cross an expert in risk structuring for banks with an underserved demand for low-cost unsecured consumer loans?
Throw in a strategy that leverages everyday purchases to help consumers earn interest-free credit and the answer is Float Money.
As Shane Hadden, CEO of Float Money explained, his model resembles the sort of relationship that big banks have with their corporate clients. Financial institutions are willing to provide less expensive loans to businesses, he said, because they know they will get business coming back to them in the form of M&A business, for example.
“Consumers have the same buying power,” Shane said. “But they can’t get the same benefits.”
Float Money can be used to shop at 1,000 merchants from Amazon.com to Winetasting.com. Money spent shopping through Float Money builds up credit that customers can borrow against, interest-free.
We talked with Shane Hadden about Float Money’s unique business model, and how he thinks no interest, no fee lending can ultimately provide banks with a new kind of credit experience to offer to their customers.
Finovate: What has Float Money been up to since presenting your online lending and marketing platform, Float, at FinovateFall 2013?
Shane Hadden: We have been busy developing a new, safer, smarter type of credit experience for consumers.
Finovate: In a world of historically low interest rates at the macro level, consumers can still have to deal with double-digit interest rate charges every day borrowing. How important is it that your innovation forsakes “interest” all together?
Shane: Interest is not the only way to pay for credit. It is the most common way, and unfortunately the most dangerous to the borrower.
When traditional interest is charged, the borrower retains much of the risk of late payment as interest compounds. By not charging interest, Float retains this risk, making our loans safer to the borrower. In lieu of interest, we get paid with consumer loyalty. No commitments. No hidden fees. No risk of escalating interest.
We make very attractive all-in yields by betting that our customers will be loyal and spend through us after the loan is made. By taking this risk, we can offer the safest, best loans on the market.
If we charged interest our loans would not necessarily be more profitable, they would just be less safe for the borrower.
Finovate: Can you tell us a little bit about the idea of launch Float?
Shane: Yes, June 2006. Reading a NY Times article on Prosper, I thought, yes – that’s it. I need to build a non-bank lending company to offer better loans. I was at CS at the time structuring regulatory capital trades for banks and saw very clearly that banks could not meet the need for low-rate consumer credit.
We didn’t follow the peer-to-peer model like Prosper, but rather set off to build a large, relationship-based, non-bank lender funded opportunistically in the capital markets with the flexibility to meet consumers’ needs for better loans.
Finovate: In what ways does a shopper who uses Float improve their credit score while doing so?
Shane: We report the open line and usage. We report to TransUnion now and will be adding others soon, so a person with a low FICO or no credit history can start to develop positive history with Float.
Finovate: How active to you have to be on the acquisition side, in terms of getting new merchants on board for customers to “Float Shop” through?
Shane: We can offer most stores now using standard gift card and online affiliate networks. Over time we will optimize the benefits to our merchant partners and consumers with tailored merchant relationships. Note that Float is a unique marketing partner for merchants – not only do we have enormous consumer data, we also have very loyal customers with a source of liquidity and a recurring purchasing pattern.
For these reasons, we can offer tremendous value to both merchant and consumer.
Finovate: What kind of lending/borrowing metrics can you provide us with? Are a purely lending platform, how has Float performed?
Shane: We can’t give performance details yet, but they look good. Let me point out three credit risk mitigates that are unique to Float.
First, Float loans are unequivocally the best unsecured loans available. You can’t beat no interest and no fees. Because of this, we are the lender of “first resort” rather than the lender of “last resort”, which creates positive selection bias.
Second, Float is not easy credit. A borrower has to spend something first in order to get the loan. For this reason, Float is only for people who are planners and serious about improving their financial health.
Third, unlike other lenders, we don’t push our loans since borrowing represents a cost to us. We only promote our loans as a financial health tool to use sparingly as needed to bridge a budget gap or repay high-interest debt.
Finovate: Your background is in working with some significant and sizable banks and financial institutions like Credit Suisse. What in your experience most informs the work you do in building Float Money?
Shane: Many things. My background is in originating and distributing structured risk. At CS I structured many large transactions in which credit was just one of multiple, correlated risk factors.
Float’s basic model is similar in that the risk we take is a combination of credit risk and consumer loyalty risk. I also have a lot of experience in shifting risk out of banks for regulatory capital relief. This insight into banks’ risk appetite is critical for Float as we seek to partner with banks to offer a new credit experience to their customers and a new asset class in which to invest.
Lastly, in investment banking you often see large corporations borrowing cheaply because the bank expects M&A and capital markets rev
enue, so it is willing to lose money on the loan. Consumers have this same buying power, but can’t get the benefit of it through low rates because traditional lenders don’t sell consumer products. Stores lend at low rates, but not all of them, and those that do don’t make cash loans. To bridge this gap between lenders and stores, we created Float as a new type of company – part lender, part marketing company.
Finovate: In terms of what is happening under the hood what kind of technological innovations are making Float Money happen? What kind of challenge is developing a compelling and easy to navigate UI?
Shane: Float is a financial innovation, enabled by technology. Because we offer the best loans on the market we can create a unique, lifetime credit experience built around a single, integrated platform of planning, saving, spending, borrowing and paying. Yes, the primary challenge is in creating a compelling UI so that our customers can get the most out of this new experience and so that we can effectively communicate our new value proposition. The market is crowded with lenders spending up to $500 or more per new customer acquisition, so a smart UI is critical. An improved UI and shopping functionality is our top priority this year.
Finovate: What can we expect to see from Float Money over the next 3-6 months?
Shane: The launch of a transformative new credit product for consumers. We are developing a platform to “wrap” consumers with safe, interest-free credit. Imagine never having to worry about overdraft fees, late fees, or high-interest short-term loans.
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This post is part of our live coverage of FinovateFall 2013.
