The payday loan market has long, if
not always, catered to the subprime market. The mortgage market on the
other hand accommodated the subprime market because they could. Only
recently has the mortgage lead generation market had to deal with that
which the payday loan lead generation market has long struggled,
ineligible borrowers. Mortgage lead generators might think how unfair
it is that fewer and fewer of their leads can qualify as sold leads,
but almost all other major verticals have to contend with not only a
decent percentage of un-sellable leads, they typically can sell a lead
only once. Instead of setting back subprime focused verticals such as
payday loans, the combination of not converting all leads into a sold
lead and any sold lead being bought only one time has led to
innovation, i.e., ways to maximize the value of the data they do
capture. This innovation and desire to make the most of an interested
consumer brings us to the heart of a recent shift that, like mortgage,
has impacted those attracting subprime borrowers, one that didn’t start
out directly related to payday loans but whose rise and fall can be
best explained through the lens of the payday loan vertical. We’re
talking about none other than the credit card industry, but not the
cards that you probably have in your wallet. Some of these cards might
carry the same Visa and MasterCard logos, but they act anything like
the "priceless" promotions. These cards, targeted towards with poor
credit or no credit at all, carry a definite price, both to set up and
in terms of what they can do.
The marketing of subprime credit cards
has gone on in scale, albeit rather quietly for years. My first
recollection of these cards comes in 2002 not long after the collapse
of Providian and their NextCard division which made, and lost, a
fortune doing, of all things, the same thing that the current mortgage
market has done, extending credit to high risk customers with little or
no stated income. Unlike that ambitious, and now defunct, venture these
cards didn’t take the same level of risk; their customers had to pay
often heavy fees in order to obtain the cards. Their growth, while
ongoing for years, certainly shot up in conjunction to the ever
increasing number of subprime mortgage borrowers who needed additional
funds to cover their credit driven, and now debt ridden, lifestyles.
These consumers who found themselves in ever need for money didn’t turn
at first to these credit cards, they turned first to the more obvious
choice, payday loans.
As mentioned, not everyone who applies
for a payday loan will get one. In fact, often only two-thirds of those
applying will turn into a sold lead / funded loan. In the mortgage
market, they call this 15% to 30% unsold; companies in the mortgage
space have done so well that they didn’t focus heavily on the unsold,
they didn’t need to. Not so in the payday space, where they call them
declines. Instead of going to a trash bin like they often do in
mortgage for other companies to mine, in payday loans, they
aggressively try to monetize these declines (as some have already paid
the affiliates). That they do so, and quite effectively, sets them
apart from many other offers. As we look to understand how credit cards
came to play a large role in this, it first helps to understand the
difference between a payday loan offer and almost any other type of
lead. With a payday loan applicant you, more often than not, have an
incredibly motivated consumer. They didn’t click on some dancing alien
suggesting they click to calculate a new rate. They came to the site
because they needed a specific amount of money, and they need it right
now. This means they will fill out a form that resembles what they call
in the mortgage space a full ten-oh-three. Payday loan providers don’t
collect just basic demographic information and property details; they
collect the most personal of information, social security numbers and
banking information. Even if a consumer won’t qualify for a payday
loan, they fill out this information, and that sets the stage for what
some have called the dirty little secret in payday loans. To
understand, think of the incentive promotion space.
In the incentive promotion space,
users first come to a site in anticipation that they will receive an
item of value, from a restaurant gift card to high end electronics, or
even a lawn tractor. The first step of the process asks the user to
enter their email address with the next page asking for the shipping
address, only the shipping details apply for a limited number of
people, namely the miniscule fraction that will complete the process
successfully. The postal information plays less a role in the original
product fulfillment and almost everything to do with the various offers
shown during the survey portion. By already having the postal
information, the incentive promotion people can make it that much
easier for a user to accidentally or otherwise sign up for an auto loan
among other things. And, it’s the same thing that happens with payday
loan providers, but in a more significant fashion. When a user fills
out all of their information to try and receive a payday loan, they hit
submit expecting the next screen to show their match. The vast majority
don’t realize that after completing the form the next step occurs,
behind the scene, with the lead generation taking their data to various
buyers, seeing which if any will want the lead.
The submission of a payday loan brings
us to the pros and cons of this business. Those filling out the form
tend not to fall into the window shopping category that plagues other
verticals where people often have a minor interest and just want more
information, not to take action. The downside with such motivated, or
as one company appropriately calls "desperate" consumers comes from the
fact that your form is too commonly not the first form. These users,
especially in search, will have filled out site after site to, in their
eyes, increase the likelihood of obtaining the loan. An aside here
comes from how this behavior negatively impacts their chances. Unlike
mortage or education where filling out more than one form happens
often, but tends to mean just more phone calls for the
form-fillerouter, in the payday space, each successfull completion of a
form results in a credit inquiry. In this case, the credit inquiry
happens at one of two specialized agencies that do not report up to the
Experian, TransUnion, and Equifaxes thus impacting their FICO score,
namely Teletracks, owned by LeadClick parent and DPburea.
If a potential lender sees that a
person has had their credit pulled quite frequently, they will often
shy away from them as their algorithms will believe that person at
higher risk for paying back the loan. Additionally, lenders will reject
a lead when the user does not receive their paycheck via direct
deposit. The terms of a payday loan allow the lender to initiate a
transfer out of the recipient’s account, but without direct deposit,
they do not have a good gauge of whether that check went to the
person’s account, hence they can get their $550 on the $500 five days
later, or if the person simply cashed their check and went to the
track. Additionally, a buyer will decline a lead if the user has too
many payday loans ongoing. They don’t mind lending to those with poor
credit, but they don’t want to lose all their money doing it. For the
estimated 15% to 30% of declines, people who really want money, almost
no offer works better than a card offering them the chance to charge
stuff. And, given that the payday loan providers already have collected
so much personal information, the exact information excluding perhaps
one field needed for a subprime card product, you can see how payday
loan lead generators began to promote credit cards for subprime users
to their declines.
When it comes to credit cards aimed at
subprime consumers, three main types exist. The first are very similar
to cards issued to prime consumers in that they too are unsecured
credit cards, i.e. you don’t have to put anything down. Unsecured cards
targeted at subprime consumers do require a set up fee and have low
limits, generally no more than $300. They look, feel, and act like a
standard Visa / MC and are backed by a bank. One of the biggest is
Imagine Gold Card run by publicly traded Compucredit and distributed
online via MediaWhiz’s Monetizeit division. The second type are secured
cards or pre-paid credit cards. These too have set up fees and they
offer no credit limit. Like a pre-paid phone card, you get to spend
only what you put in there. It’s no different than buying a pre-paid
Visa card, except that these cards find you at the right time. For
better or worse, life often requires having some form of credit card,
e.g. booking something online. One of the more successful ones was
Everprivatecard.com. Third we have merchant cards. These can come in
both unsecured and pre-paid, but they are not credit cards. They allow
you to spend money at a limited number of stores. Several companies
offer these including Edebitpay.
Each of the three types, while different,
all play a role in helping payday loan lead generators monetize their
declines. As important, they make up a fairly significant piece of the
entire subprime consumer monetization. It’s not a secret that card
offers exist in the flow, but it’s not wildly publicized either, until
recently that is. An almost perfect storm hit the marketing of subprime
credit cards. Two of the top performing offers were pulled at roughly
the same time, the unsecured Imagine Gold Card and the extremely
well-marketed, debatable in value, Everprivatecard, which unlike other
credit card offers allowed for it to be almost an opt-out, not opt-in.
As for the Imagine Gold Card, they did nothing wrong, but looking into
their SEC Filings it seems as though they couldn’t raise as much as
they planned, given the current lending environment so they had to cut
back on new acquisitions.The third company mentioned above, Edebitpay
also ran into some issues but of the more severe variety. They found
themselves the subject of an FTC investigation and had their offices
raided and business shut down at the beginning of the August (back up now). A check of their better business bureau
ranking sheds additional light. The company currently has an F rating,
not an easy task considering the BBB has 11 gradients starting at AAA
going to F. Just check out a recent review corrected for spelling and
languague, "fraudulent lying pieces of s***, poor excuse for human
being, that's what I think of this company and all their lying
employees, with their crappy customer services."
The timing of the credit card pull out
and its subsequent effect on pricing of payday loans (off by 15% to
20% at one point but coming back now in the end of September) might seem connected to the broader events as a whole. In the case
of one major player that holds true, but for now, both the payday loan
space and card space remain strong. If anything, this recent change
highlights the interconnectedness between various offers – the benefits
and the risks. As one online payday loan generator put it, "No one’s
having a happy August," and joked, "Now, we actually have to work."
There is some truth in those jokes, but as we spoke, what came through
was not frustration but opportunity. Every offer, every vertical runs
into bumps, and this one which has impacted just about every major
online payday loan offer, means no one has a definitive advantage. It’s
also a lesson about making money too easily and not offering value to
the consumer, as was the case with Edebitpay. It’s one thing to simply
collect data, but another completely when you bill customers money,
often money they don’t have. The cards will rebound rather quickly, and
payday loans will continue to thrive. In the interim, we can probably
expect others who have now realized the value of squeezing out every
last penny to do so more aggressively in other areas.
