There are almost 100 million Americans with subprime credit scores but who have turned themselves around, maintain a steady cash flow, and still pay a higher interest rate. So how does a lender address this market in a climate of over-reliance on FICO scores? One company found the solution in an adaptive-risk pricing model.
The Ascendance of a Consumer Loan ‘RateRewards Program’
Ascend Consumer Finance is a state-licensed lender that uses an online branch-based approach like the majority of other online lenders, but it focuses on consumers who come under the non-prime or close non-prime segment (FICO scores are less than the national median average). Ascend’s target market is consumers with FICO scores ranging from 580 to 660. This sweet spot was chosen because models based on FICO start underpricing or overpricing consumers in this range.
FICO model works well for consumers who have FICO scores more or less than the Ascend target range, which is the reason Lending Club and Prosper have been successful in the prime segment. Since existing players were pricing the 580-660 segment on an unsound model, this presented a unique opportunity for Ascend. Current pricing models were not able to predict consumers who would move up to the prime category. Instead, Lending Club and Prosper cherry-picked those consumers leaving a hole for other lenders.
Though the industry has witnessed a huge surge in technology use and alternative data, until now, no one has been able to use the data to solve the sub-prime problem.
Ascend learned from other risk-based industries like auto insurance where lenders use real-time data and technology to continuously re-assess and re-price risk. This kind of arrangement is beneficial for both parties (borrowers and lenders). Lenders pass on some of the economic benefits to borrowers in the form of lower premiums, which incentivizes the borrower and increases the lender’s profits.
Progressive Corporation is one of the leaders in the insurance space for developing this technology. Ascend based its risk-pricing model – a “RateRewards Program” for the consumer loan market – on Progressive’s method.
Ascend’s Unique Underwriting Standards
Under Rate Reward Program, loans are underwritten using standard metrics. Therefore, the data itself cannot be the secret sauce. Rather, Ascend focuses on checking certain parameters in real time for evaluating whether borrowers are improving their credit-worthiness.
- Is the borrower decreasing overall debt level? (i.e. are they consolidating debt or stacking loans?)
- Is the borrower limiting credit card usage? (Showcases financial discipline.)
- Is the borrower building an emergency savings account?
- Is the borrower willing to pledge auto title? (Represents higher security.)
The borrower has the opportunity to follow all the parameters or none. The rate reward program costs 200 basis points more than the ordinary loan at the start. But allowing Ascend to monitor the consumer on these four parameters will help the borrower reduce his APR by 50%. The average APR ranges from 25% to 36%. The APR remains constant during the loan term to avoid confusion and the customer is awarded in the form of a cashback.
Considering the complex structuring of its business model, it took Ascend almost a year to win over regulators. The team worked with consumer advocates, regulators, and lawyers to ensure compliance at all levels. Unlike other companies, it does not charge penalties and is trying to inculcate good habits among borrowers by rewarding them for paying their debts on time.
Another thing that tilted the balance in Ascend’s favor was that most players in the industry focus on improving their profitability rather than rewarding customers for good credit behavior. The reverse practice makes Ascend a breath of fresh air in the alternative lending industry.
Who is Ascend?
Headquartered in Los Angeles, Ascend Consumer Finance was founded by Steve Carlson, Scott Crawford, and Stewart Sui in January 2015. The company garnered an initial seed investment of $1.5 million funded by Birchmere Ventures, OCA ventures, and Mucker Capital. In a recent funding round, Ascend managed to raise $11 million in convertible notes and debt from existing investors and Cendana Capital, Financial Solution Lab, Partech Ventures, and Tekton ventures. Licensed in eight states, that number is expected to go up to 14 by the end of this year.
Carlson, CEO, is a consumer finance and technology expert passionate about improving the financial lives of Americans by using real-time data to support lending. His CV boasts of stints at Intuit as head of marketing and business development and HSBC as senior vice president. He was also a member of the CFPB consumer advisory board. Crawford, VP of product, has 10 years professional experience in business development and strategy. He founded SavvyMoney Inc., an industry online debt reduction subscription program. Prior to that he was at director of HSBC’s product management, development, and customer insight division. Sui, VP of risk management, was VP of International Analytics at TransUnion and director of the global risk and analytics division at HSBC. The business side is staffed with experienced bankers from HSBC and other financial institutions with a cumulative experience of over 200 years in non-prime lending.
Ascend has raised $5 million in equity and more than $10 million in debt. Its balance sheet consists of 85% origination loans with 15-20% sold through investment banks. The company does not release default rates. Considering Piper Jaffray has launched the syndication of its next credit facility, it is safe to say the company must have great performance metrics. The company’s reward system has brought a new pivot in the industry, which was being overrun by “me-too” lending start-ups.
Written with Heena Dhir.