MENLO PARK, Calif. — Payday loans are costly, habit-forming and often bad for consumers' financial health. Still, they've proven hard for other lenders to compete against.

Today, one of the largest-scale challenges to the industry is being mounted by Progress Financial Corp., which markets its small-dollar installment loans to Hispanic consumers. The company, which operates under the name Progreso Financiero, runs 109 stores in California, Texas and Illinois.

About two-thirds of the company's unsecured installment loans last year had annual percentage rates of 30%-39.99%, while most of the rest carried APRs of 40% or higher, according to a 2013 report filed with the California Department of Business Oversight. Those figures match up favorably to the payday loan industry, though direct comparisons are difficult because the products have different loan terms.

Since making its first loan in 2006, Progreso has lent out over $850 million. But it has yet to become profitable. In 2012, the firm lost $27.5 million, according to a report filed with the state of California.

In April of that year, Raul Vazquez, a former senior executive at Wal-Mart Stores (WMT), was hired as Progreso's new chief executive officer. Progreso's losses fell to $19 million last year, according to last year's California filing.

Progreso plans to continue growing, Vazquez said in a recent interview at the company's headquarters. “The vision that we have for the business is really to have the ability to reach the underserved Hispanic community anywhere in the U.S.,” he says.

Progreso has numerous connections to Wal-Mart, and those ties have sparked questions about whether Progreso figures into the retail giant's plans in the consumer financial services realm.

In addition to Vazquez's prior employment at the Bentonville, Ark.-based retailer, a venture capital firm affiliated with Wal-Mart's founding family, Madrone Capital Partners, is the largest investor in Progreso. A Wal-Mart director, Aida Alvarez, also sits on Progreso Financiero's board, according to Progreso's website. The close proximity between some Walmart stores and Progreso locations has also attracted media scrutiny.

Vazquez spoke to American Banker about the Wal-Mart connections, Progreso's strategic plans and the expertise required to lend successfully in Hispanic communities.

Following is an edited transcript of the interview.

When a customer walks into a Progreso store, what credit options do they have?

Instead of having four or five things that we're having to explain, and then having the customer think about it, we basically have one product. It's a consumer installment loan. It ranges from about $500 to about $4,000, and the length of the loan tends to be between six and 24 months.

Our whole product and our whole process is constructed to make sure that the customer absolutely understands what they're getting into, understands the benefit of working with us and building a credit score.

We give people a schedule of all of the payments. When someone comes in to make a payment, we ask them to go ahead and circle the next payment due date. We send out reminders before the payment goes out to try to just make sure that everyone stays on the path. It lowers our cost, it leads to a good credit score for them, and it helps teach the basics of how you manage credit.

How does your approval process work?

Our toolset and our focus as a business has very much been the thin-file or no-file customer. If they went to a Wells Fargo (WFC), if they went to a Bank of America (BAC), even with the best intent a lot of mainstream institutions can't help them because there's no FICO score.

Initially we just run a quick credit check. Because if it's someone that had credit in the past and for whatever reason just got in trouble, that's not what our toolset is meant to do.

If it turns out that we believe we can help the customer, we ask for a lot of information. We ask for proof of income. We ask for proof of residency. We ask a couple of other questions that give us a sense of: What is your willingness to pay?

We ask for your expenses. And then behind the scenes, we go and check a bunch of different places for expenses. And we try to calculate cash flow. And based on your cash flow, and based on what the model tells us about your stability, from a residential perspective, your income stability, and then your willingness to pay, we figure out a loan that feels like the right loan amount.

One of our tenets is: do not lend money to someone that is going to be in a worse-off position after you give them money than before they came to you.

You have largely a bricks-and-mortar business. Are you looking at the online channel?

We developed kind of a proof of concept internally that we're starting to play with. That's going to become a beta soon, where we can then start to probably share it internally with some of our employees in some of our locations, and try to get more feedback.

Do you see big efficiency gains in the online channel?

Yes and no. I think the efficiency you get is in leveraging some of your processes, and in overall having more volume. That helps you reduce your unit costs for everything.

But some of the costs just shift.  You don't have store labor, you don't have a store location, but now you have a higher cost-to-acquire, and you've got technology infrastructure that needs to be built in a slightly different way to accommodate that new channel.

We're going to try to figure out: how do you combine all of our customer touch points? So that instead having to acquire customers by having a bunch of ad words, we leverage the high word-of-mouth that we have today.

But I'll tell you, as an organization we're very excited about it, because our customers come in the stores with smartphones. So we know it's only a question of time before customers are looking for the same degree of convenience, the same degree of service, that can be provided with a phone.

Your stores are in many of the same neighborhoods as payday loan stores, and many of your customers might be payday loan customers were it not for the presence of your store. What elements are necessary to make small-dollar lending work in these communities?

Many of our customers are people that work a full-time job, maybe even two jobs, live paycheck to paycheck, in some cases may not have a car, and are really reliant on public transportation to get around. So having convenient locations is absolutely critical. Two-thirds of our locations are within Hispanic grocery stores.

A second one is availability. So we have stores that tend to open later in the day, and they're open well into the evening. It's not your traditional banker hours. Our stores are open Saturdays, and they're open Sundays.

The other thing that we would highlight: familiarity with the customer. So we hire from the community. We hire people that are fully fluent in Spanish. We hire people that have a very good sense of the cultural nuance of our customer.

Recently there was a proposal from U.S. Postal Service's inspector general that the Post Office get into small-dollar lending. Do you have thoughts on that idea?

There are so many people who could use help — help building a credit score, help in terms of how do you make your paycheck stretch a little bit further, help in terms of the real life-improving elements of credit when it's given to you in a responsible fashion.

If the Post Office thinks that they could help, we would welcome the involvement of other people. It is going to be hard, right? This is arguably the hardest thing I've ever done in my career.

I think as the Post Office goes into this, there's both the regulatory and compliance elements that they're going to have to become experts at. There's the credit risk model. How do you deal with customers invariably being late, when that's not necessarily a set of skills that you've developed?

I want to ask you about Wal-Mart. Obviously you're operating separate businesses, but are there synergies there that are beneficial to Progreso?

It's all coincidence. Honestly all coincidence. So the investment is from a firm that is, it's the Walton money, but it's not the Wal-Mart Foundation. I had never even met the partner for that until I got to know Progreso. I didn't even know about Progreso until I kind of heard about it here in [Silicon Valley], and that there might be an opportunity.

In terms of proximities to Walmart, it would be interesting to run any analysis by 'X business' and its proximity to Walmart, simply because the footprint of Wal-Mart means right that a large percentage of whatever you choose is going to be near Walmarts. But none of our retail strategy is driven by, 'OK, is there a Walmart nearby? And if so, that's going to be a good location for us.'

I understand why people look at all these things and say, there must be something there, but there's not. I haven't had any meetings with Wal-Mart about Progreso. There's just nothing there.

You're in California, Texas and Illinois. Are you looking at other states?

We are. One of the things that we want to try to do is: we always want to make sure that we've got the licenses so that we can grow into the next states, and then really let the growth rate of the business and our own internal capability dictate the timing.

We started in California and Texas because 50% of the Hispanic population is there.  Florida is probably the next state that we would go into, either towards the end of this year or early next year.  And then over time, we want to try to go into other states like New York that also have large Hispanic populations, and where we think customers would benefit from our products.

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