A fintech’s bait for banking’s big fish

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Self Lender, a fintech designed to help consumers build their credit, is launching a secured credit card next year in the hopes of attracting big-bank partners that can use it to comply with the Community Reinvestment Act.

The fintech currently offers customers a small loan that's held in a bank account and reports payments made on a monthly schedule by the customer to credit bureaus in an effort to help them establish a credit history. It plans to allow customers who pay off their loans to apply for a credit card, using their certificates of deposit as collateral.

“It’s a perfect way for the customer to start building credit with the credit builder account,” said James Garvey, Self Lender's CEO.

The fintech, which says it has mostly low- to moderate-income customers, has been growing fast. It quadrupled its number of customers to 175,000 during the past year, holding $140 million in CD-secured loans. On average it has helped consumers without credit raise their VantageScore 3.0 credit scores dramatically, from zero to 670 in six months to a year, according to Garvey.

Garvey said the secured credit card, which Self Lender expects to launch in 2019, could be attractive from a CRA point of view for potential big-bank partners.

“If our bank partners are looking at [our customers] from a CRA perspective, they would qualify for community risk," he said. "It’s so geographically driven, so that hasn’t worked with community banks. But if you have a nationwide footprint, it’s an opportunity to tap that.”

The Austin, Tex., company already works with the $1 billion-asset Sunrise Bank in St. Paul, Minn., and the $253 million-asset Lead Bank in Kansas City, Mo. It recently received $10 million in Series B funding, led by the Bay Area venture capital firm Altos Ventures, with additional participation from Silverton Partners and Accion Venture Lab, among others.

Anthony Lee, managing director at Altos, said Self Lender's bank partnerships were part of the draw.

“Everybody has skin in the game and their ability to work with these banks and do so in a compliant and regulatory way is critical and not just something that engineers at Google could do overnight,” Lee said.

Self Lender makes money through a one-time administrative fee, and its bank partners also pay the company for customers acquired. Once it launches the secured credit card, the company will also make money off of interest income and interchange fees through the card.

Lead Bank has 43,000 active account holders initiated through Self Lender, said Josh Rowland, the bank’s chief executive. That number grows at a rate of about 250 a day. The outstanding loan balance for Lead Bank is $26.1 million.

“There’s a greater awareness among consumers about better ways to develop a credit history than simply trying to earn that score through a risky product credit card,” Rowland said. “People are at the mercy of forces beyond their control with respect to financial health. A lot of that is attributable to the deficiency in the credit markets to provide sensible products without subscribing harm.”

Most of Self Lender’s marketing up to this point has been through customer referrals and ads through Facebook and Google. In June, the company brought on a chief marketing officer, Brett Billick, formerly an investment banker at Goldman Sachs.

“We’re going to use the funds to massively scale marketing and operations,” Garvey said. “Brett is expanding his digital channel capabilities.”

The fintech is also looking to use the funds to hire a chief financial officer, chief customer officer and a vice president of customer service.

The partnership will allow the banks to make high returns, Garvey said.

“When you’re not a bank, your sources of capital are going to be much more expensive,” he said. "We have been able to build a pretty robust and exciting company using our bank partners and relying on their regulatory and capital backgrounds.”

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Credit reporting Fintech Consumer lending Credit scores Credit quality