Behind OppFi’s approach to reaching the credit underserved

The products can come with a high cost, but the company suggests they’re an on-ramp into a credit system that leaves out many consumers.

OppFi (formerly OppLoans), a Chicago-based loan servicer that partners with banks to offer small-dollar loans to credit-challenged customers, is at the center of a debate around how best to reach customers with low credit scores.

OppFi seeks to bring low-credit-score customers into the financial system. Their products, however, aren’t cheap. Loans typically range between $500 and $4,000, and some of them carry APRs that go into triple-digit percentages. This is partly because the company needs to price the product to fit a customer’s risk profile and generate a viable economic return. OppFi’s partner banks can also export interest rates from their home states to other states and offer loans priced high enough that they would exceed allowable APR caps under state laws.

The OppFi model has generated criticism from some consumer advocates, including the Attorney General for Washington, D.C., who recently sued the company, arguing that OppFi, and not the banks with which it partners, is the “true lender” operating without a license violating D.C. ‘s 24% APR limit. (More on that in this deep dive).

OppFi says it’s extending credit to customers who fall outside of the prime credit category. It notes that its customers can improve their credit scores over time, qualify for lower-fee products and improve their overall financial health over time.

It says it disagrees with the D.C. Attorney General’s claims, claiming the allegations are “lacking any merit, and fail to account for well-established and longstanding federal banking and lending laws,” a company spokesperson told FinLedger.

OppFi will soon go public through a merger with FG New America Acquisition Corp., a special-purpose acquisition company led by former TD Ameritrade chairman and CEO Joe Moglia. The $800 million deal is expected to close later this year.

At this year’s Lendit Fintech USA virtual conference that wrapped up this week, I spoke with OppFi CEO Jared Kaplan on how he sees the evolution of OppFi’s product offerings. The content has been lightly edited for clarity.

What are the goals of OppFi’s products?

We’re building a digital financial services destination for the everyday consumer. That journey starts with credit access, and our financial technology platform powers banks to provide access to this customer segment — and we define the segment as the 150 million consumers in the country that have less than $1,000 savings. It’s amazing how many there are, and a subset of that population of 60 million are completely locked out from mainstream credit. We’ve been able to develop some really interesting decisioning technology that can determine creditworthiness, regardless of what your traditional credit score is.

There are a lot of companies trying to serve this “credit challenged” category. What sets you apart?

There’s two major pillars that differentiate us [in] how we go to market. One is that decisioning technology. We have facilitated over a million loans today. That’s over 14 million repayment events. We get about 500 attributes per repayment events so that’s 7 billion data points that we have at our disposal to continuously improve how we determine creditworthiness and that is ultimately driven by someone’s ability and willingness to repay.

Number two is our servicing philosophy. We are incredibly high tech, and our technology platform allows us to do business with consumers the way they want. Many want to go straight through [online], which is great, but we haven’t shied away from putting the phone number on the website either.

OppFi professes financial inclusion in its mission, but it partners with banks to export interest rates from one state to another, sometimes with triple-digit APRs. How do you square up the high cost of these products with the financial health mission?

The bank partnership model is not unique to the OppFi platform. Many of the best financial technology players out there today have partnered with banks as part of their offerings – everyone from the Affirms to the Upstarts of the world. Banks have not done a great job tapping into this underserved market – in fact, half of the customers on our platform bank with the largest banks, but they don’t have credit access from those banks.

You have smaller banks, community banks [and] regional banks, which have recognized this massive opportunity, but they lacked the expertise in-house to pursue those markets. So they hire companies like us to do their acquisition, to help them with underwriting algorithms based upon alternative data, and to service [the offerings] so that they can tap into these marketplaces.

But what about the high cost?

The rates that are charged, the way the products are designed are solely at the banks’ determinations. We obviously have lots of thoughts, as it relates to that [and] we make a number of suggestions, but [the banks] hold the pen at the end of the day. They are beholden to their regulators both at the federal and state level, and the hill to climb to get these partnerships up and running is quite high.

They are higher cost (products) — no question about it — but they are designed to be much lower cost than what I would declare as the markets of last resort. When we look at the 60 million [people] that lack complete access [to credit] and the 150 million that have limited access, traditionally, the only option has been these markets of last resort like payday loans or auto title loans, or using bank overdraft fees. The Fed came up with a great study last year that showed that triple-digit APRs are required in most cases to make money on small-dollar [loan] products.

Not all greater than 36% [APR] products are created equal and for whatever reason, [36%] has become the line in the sand. But the products that banks offer on our platform are structured in a way that should rebuild financial health. They all amortize, so principal is repaid, as the loan is repaid. There are no fees, there are no origination fees, no prepayment penalties, no late fees, no NSF fees [and] we help the banks report to the three credit bureaus. We have ability to repay is paramount as part of the underwriting decision when customers have difficulty paying. We’re not selling debt to third parties to collect; we’re not litigating to collect.

We work with a number of aggregators, and there’s about 20-plus sub-36% [APR] lending platforms who have first dibs on [OppFi] applications if there is an appetite there to underwrite the customer. But that only happens about 10% of the time.

How are you measuring the impact of customers’ improved financial health over time?

We’re developing a rubric that we’re going to publish that shows our progress on about five dimensions of whether we are improving someone’s financial health.

It starts with access– enabling the best available product, and talking about how often we’re successful in that process, not just for new loans but for customers who had a previous loan and maybe are looking for another loan, or looking to refinance their loan.

Number two is our ability to graduate consumers to more mainstream products. We recently launched a product called Salary Tap that’s an installment loan that is offered for about 30% APR, but is repaid through payroll deduction. We are [also] launching an OppFi credit card in the second half of this year.

The third is can you actually improve someone’s credit score? We hope to report on that over time.

The fourth piece is once you’ve proven access, graduation [to other products], and credit score improvement, can you actually help someone build savings?

The longer-term aspiration is can we build wealth – can we get you your first home [and] can we help you invest?

That is a hard hill to climb, but it’s paramount. We’re in a world where financial success can’t be mutually exclusive to the financial health success of your customers, and we’re going to do what we say and then report on it publicly, so everyone can judge how we’re doing.

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