Think Finance wanted to give underbanked consumers access to credit when they needed it, while helping them avoid a bad cycle of debt.
To accomplish this, the online payday lender developed the Elastic card, a prepaid debit card with a line of credit of up to $500, that rewards consumers with rebates on fees for exhibiting good behavior, like making payments on time. That good behavior is then reported to the major credit bureaus, enabling customers to build up their credit profiles.
But the debit-credit combo hasn't been an easy sell to banks and regulators.
Elastic's issuer, Urban Trust Bank, recently dropped the card. The lender would not elaborate on its decision to end the partnership, but industry experts suspect it was in response to a similar product called iAdvance being pulled from the market by regulators this fall.
"What happened to iAdvance has had a dramatic chilling effect on the marketplace as it relates to small-dollar credit," said Jennifer Tescher, the director of the Center for Financial Services Innovation, a Chicago nonprofit. "Sometimes regulators make a ruling, and everyone understands a particular practice is no longer acceptable, but the chilling effect is more around a lack of clarity around what is acceptable. Is it the product structure? Is it the way the product was marketed? Is it something else?"
Kevin Dahlstrom, Think Finance's chief marketing officer, admitted that what happened to iAdvance hasn't helped the company's case.
"Something like that certainly doesn't give other banks warm fuzzies," he said. "I think it's fair to say that banks and service providers like ourselves are looking for clear guidance from regulators."
In October, Meta Financial Group disclosed that the Office of Thrift Supervision forced it to shut down its iAdvance loan program, which offered prepaid card users small, short-term loans. According to a regulatory filing, the OTS said it "engaged in unfair or deceptive acts or practices" in operating the program. That has made it difficult for companies like Think Finance to promote similar products.
Despite the uncertainty, Think Finance is determined to push on, and is working to find new partners willing to distribute the Elastic card. The company said it is in discussions with several banks, and expects a full-scale launch of Elastic products in 2011.
Think Finance isn't the only one interested in bringing a debit-credit product to market. The prepaid card issuers NetSpend Holdings Inc. and AccountNow Inc., which both offered iAdvance, also have said they will continue looking for ways to give consumers short-term credit options that regulators consider appropriate.
Analysts, however, aren't very upbeat on the prospects of such products passing muster anytime soon.
"It is becoming very clear that regulators of various sorts are going to be uncomfortable with microcredit products regardless of how they're being delivered," said Gil Luria, an analyst at Wedbush Securities in Los Angeles. "Their ability to offer these kinds of products is going to be restricted for the foreseeable future."
Beyond the OTS action, there is concern about how microcredit products will be handled by the new Consumer Financial Protection Bureau.
"I think there was a growing amount of innovation beginning to occur that's now on hold," Tescher said. "No one's quite clear yet what they're going to focus on and what their point of view will be."
Industry experts contend that the product concept in and of itself is not inherently bad, but it needs to be marketed in a way that consumers understand what they're getting.
"Most important is ensuring that consumers don't get trapped in a cycle of debt, that the length of time to repay is reasonable. And another is ensuring that consumers can only borrow what they can afford to repay," Tescher said. "Pricing is certainly an important element but it is not the only or even most important element. I think another important element is around marketing and making sure consumers understand what's being offered."
Think Finance says its customers are in control of the features they get with the Elastic card. "Elastic consists of several products which are independent from each other but work well together," Dahlstrom said. "These include a prepaid debit card, a small dollar line of credit, a savings program and financial education. When a customer opens an Elastic account, they have access to all of these products but may choose to use some and not use some."
There is no activation fee for the Elastic card, and a monthly maintenance fee of $4.95 is waived so long as customers upload a minimum of $500 a month to the card. Lines of credit of up to $500 are granted to qualifying consumers. There is a $2.50 charge for every $20 advance. Additional finance charges are based on the amount of the unpaid balance at the end of each billing cycle. For example, there is a $9 charge on unpaid balances of $100 or less. For balances exceeding $400, there is a $49 charge.
What is unique about the product is it rewards consumers for good credit behavior through rebates. Every Elastic customer is assigned an "Elastic score." Certain actions, like making a payment on time, will drive up a customer's score. (Similarly, a consumer who may be denied a line of credit up front can improve his or her score by signing up for direct deposit on the Elastic card, for example, and later be extended credit once a certain score is reached.)
Once a customer raises his or her score by 100 points, Think Finance will take 10% of the finance charges and automatically funnel it into a savings account. (So on a $20 fee, $2 would be placed into savings.) By exhibiting good behavior, customers can eventually have up to half of the fees they're charged directed to the savings account. After 60 days, consumers can draw on the savings account.
"It's a way to guarantee money will be put into savings," Dahlstrom said. "We recognize that products like Elastic are relatively expensive forms of credit. So it's important to provide customers a way to reduce the costs through good performance."
Think Finance said its bank partners will report the consumers' payment history on the Elastic line of credit to the major credit bureaus.
The Fort Worth, Texas, company, founded in 2001, still offers a traditional payday loan. When Think Finance's chief executive, Ken Rees, joined the company in 2004, he wanted to give consumers more options. A payday loan is "kind of a dead-end product for consumers," Rees said. "No matter how good [the customers] are, they are going to pay the same rate, and no matter how many payments they make, their credit score isn't going to be helped."
A third product called ThinkCash, a short-term installment loan, was launched in 2007 with First Bank of Delaware. Since the company's inception, more than $2.5 billion in credit has been issued to 1 million customers.
