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As the payday lending business contracts under heavy regulation, the key to surviving is a good hook. That's especially true online, where consumers in increasing numbers are going in search of small-dollar, short-term loans.
January 5 -
The underbanked have traditionally been under-served when facing short-term cash flow crunches. The choices are not just limited they're often prohibitively expensive and inconvenient. APRs at payday loan centers can easily initiate an unstoppable debt spiral for many consumers.
June 10
A new business model that undercuts payday loans on price just got a much higher profile.
BillFloat Inc., a provider of short-term loans, announced a deal Tuesday with the bill-payment provider Online Resources Corp. that could expand BillFloat's customer base exponentially.
BillFloat casts its short-term loan product as a more consumer-friendly alternative to payday loans. Its loans are meant to help pay specific bills online and are sent directly to the biller once approved.
BillFloat serves more than 16,000 consumers today. Through Online Resources, the San Francisco startup has the potential to serve millions.
"The partnership allows us to work with more billers, and it lets us develop relationships with more direct billers," said Ryan Gilbert, a founder of BillFloat and its chief executive.
Gilbert said the relationship will also let BillFloat integrate into premium online bill-payment services that Online Resources offers banks, such as expedited payments.
It also gives BillFloat access to another payment network. Previously it used only MasterCard Inc.'s Remote Payment and Presentment Service network.
In a survey Aite Group LLC conducted of more than 1,000 consumers in December, it found 4.5% had taken out a payday loan in the previous 12 months, either in a store or online.
Gwenn Bezard, research director at Aite, said that nearly half of payday loans are taken out to pay bills, such as for utilities.
"BillFloat is a compelling proposition to consumers, giving them access to convenient, cheaper short-term loan products," Bezard said.
The BillFloat service is also important to billers, Bezard said. It could spare them the cost of shutting and reopening accounts, as well as the expense of credit collection agencies and other administrative costs for customers who fail to pay, or who are late paying their bills.
For its part, Online Resources said the partnership with BillFloat lets it round out its payment offerings.
"We thought this fit in very nicely with our product suite for the extension of short-term credit to consumers that is automated," said Robert Craig, executive vice president of e-commerce services.
BillFloat is a cash-flow management tool that strapped consumers can use for bridge loans for recurring bills such as those for insurance, mortgages and cable. At a biller's site, customers apply for the loan by selecting BillFloat as a payment option.
BillFloat then uses proprietary credit analysis technology to gauge the creditworthiness of its borrowers. Gilbert said the technology examines as many as 180 external data points that build a picture of a consumer's cash flow, ability and propensity to repay before granting a loan.
The loans are capped at $225, and the average loans are between $110 and $140, Gilbert said. Consumers are charged $4.99 to $14.99 (depending on the biller's criteria) and a monthly interest rate of 3% or an annual percentage rate of 36%.
Payday loans' APRs, by contrast, can be as high as 400%, in addition to a multitude of fees.
The PayPal Inc. unit of eBay is a venture capital investor in BillFloat; it has a double-digit stake of less than 19.9% in the company, Gilbert said.
Industry observers described BillFloat as the alternative-loan version of PayPal's Bill Me Later instant credit system.
Bill Me Later lets consumers pay for things online by applying for instant credit at checkout. Consumers are billed later for the goods and services they purchase.
One analyst had some doubts that BillFloat would be able to make money in the long term under its current model.
David Burtzlaff, a consumer finance research analyst for the Dallas investment bank Stephens Inc., said an APR of 36% was perhaps too low to compete in payday lending, where default rates can be up to 5% in the brick-and-mortar world, and up to 10% for online transactions.
Burtzlaff acknowledged, however, that regulatory pressures on bank revenue "may push [consumers] down to alternative financial services, because they can't be serviced by a bank, or the banks have decided they don't want them."
