‘Our four prong product strategy is a decade long vision’: OppFi’s Jared Kaplan

OppFi's business

We are a financial technology platform that powers banks to provide credit access to the everyday consumer in this country. And we are building the premier digital financial services destination for this everyday consumer.

Taking OppFi public

We're in the middle of the de-SPACing process, on top of managing a rapidly growing profitable business and hiring a bunch of people and all the complexities of running a day to day business with the additional reality of taking the company public. So it's been a crazy couple of months, but a lot of fun. And we're really excited about the future.

Going the SPAC route

Before the pandemic, early 2020, the business was really executing on all facets. We started to look at the traditional IPO path. And we got some inbounds from the SPAC world. I was definitely not an expert. I had heard of SPACs in prior lives. But as we started to dig in, the pandemic hit. It's a shame my CFO didn't have the pandemic in the budget for 2020...

So, we dusted off the recession playbook. The business was founded in 2012 and we had never been through a cycle. Everyone had always asked us how the business would perform during a cycle. And we would point to all this historical data, but we didn't have any data ourselves. So we went into business stabilization mode -- it took a good four months to figure out exactly what we had. And we were in very good shape. And it played out very counter intuitively than we had thought it would play out -- consumer credit was a lot stronger than in a typical cycle. But coming out the other side, we started to pick our heads up again. The SPAC world was just on ultra drive if you were a financial technology company growing rapidly and profitable. So we started to explore that more seriously and met with many of the players.

And when we looked at it versus a traditional IPO path, we came to three different decision points. One was we thought it'd be more expeditious -- just a faster, more efficient process. It was one thing I got wrong: I think it is faster to get to a public announcement, though. The awkward or unique thing about the SPAC process is, unlike a traditional IPO, where you go on the road and you close it two weeks later -- here, you announce it, and it's four, five, or six months later before you close it. And so it just creates a lot more time between when you're out there in the public and when you actually get a close, which I think is a distraction. But I think the other two pieces of the decision making process we got right, which is we were really able to tell the story. Historically, the company had been called OppLoans and was focused on a monoline credit access product. We had begun to transform the company to a well rounded digital financial services platform called OppFi. And the SPAC process allowed us to tell that story and also accelerated the rebranding of the company.

SPONSORED

And then the third and most important piece was the partnership with our SPAC sponsor, FG New America. It's led by Joe Moglia, who's the former CEO and chairman of Ameritrade. He's also the ex head football coach of Coastal Carolina football, which was a tremendous athletic leadership story. And we were very intrigued to partner with Joe and his team. They have a terrific team. We felt they gave us the guidance and the credibility to be a successful public company, especially in this space, where amplifying our voice is going to be so crucial to getting to the right answer for the customer. Partnering with someone like Joe, who is on CNBC and has tremendous respect and credibility with the public markets, I think was the differentiating factor. And so we ended up going with those guys and it's been terrific. They've been outstanding to work with and looking forward to getting this thing closed in the next couple of weeks and then put our heads down and execute.

Rebranding OppLoans to OppFi

There are 150 million everyday consumers out there with less than $1,000 in savings. And 60 million of them are completely locked out of the credit system. And historically, when their car broke down, or when they had to go to a doctor for something unexpected medically, and they didn't have the savings, the only options for credit were payday loans and other types like that. Our business was initially focused on that 60 million and powering banks, mostly community banks, to provide a product to this consumer that is lower cost, longer term, higher dollar amount, and structured in a way that should rebuild credit. We built a fantastic business on that go to market strategy with these incredible Zappos-like customer reviews in a space that has not been known for that historically.

Half of our customers bank at the largest banks in the country. They walk in the bank and they get laughed out of the bank. Now they go online, they're denied multiple times by other platforms. Our bank partners can say yes, and so that gratefulness and loyalty is the first step in what should be a very long customer journey where we're not only facilitating credit access, but we're graduating these customers through credit. We're ultimately allowing them to build savings and then finally, build wealth. And so it's a four prong strategy, the decade long vision. It's a lot of work in front of us. But that's what we're motivated by and ambitious to do every day. And so the OppLoans moniker, which was very adept and appropriate for the credit access piece, does not describe the full mission that we're trying to execute now -- therefore, the transformation to OppFi.

The OppFi new product pipeline

It is early in our transformation. We've got two additional products that we're introducing. We've got a product called SalaryTap, which is an installment loan that's repaid through payroll deduction. And that's an important repayment mechanism, because it's highly secured. It allows you to expand your traditional market and go to customers who don't make as much income as the OppLoans customer does. The loss rate is so much lower when you receive your repayment through payroll deduction. So that's a very important next step in providing more access.

Then the OppFi credit card launches in the second half of this year. And that's our first graduation product for someone that's performed in a higher cost installment loan to graduate to traditional mainstream credit. Beyond that, we have plans to plug mobile banking in to our access products to create a uniform banking experience that incentivizes and educates the customer on how to build savings. Longer term, if we're successful in that, we'd love to get them their first mortgage and to allow them to invest.

The target consumer

I think one thing that's not understood with the platform is this is not a low income consumer that we are typically working with -- it really is the median US consumer. It's someone making $50,000; they have a job; they have a bank account. We see a number of customers making six figures, but the reality of the country is that savings is hard because income has been flat for decades. And your traditional cost of living has been increasing. Housing and childcare and education and health care have all been going up. So it's not necessarily a low income consumer that struggles -- it's actually the vast majority of people.

Partnering with banks

Our banking partners see this widely underserved marketplace, but they lacked the in-house expertise to acquire new customers, to use alternative data to underwrite and to service their loans themselves. They really weren't underwriting the population because the population is traditionally viewed as not creditworthy because of their credit scores. When we first interact with our customers, they tend to have less than 620 FICO scores. If you're below 620, you're abandoned. In fact, half of our customers have less than a 550 FICO score. Now, all the underwriting algorithms that we suggest to the banks don't include any traditional credit scoring -- it's all about using alternative data to determine the ability and willingness to repay.

So they haven't been able to underwrite the customer effectively, because they don't have to do that. But unlike your big bulge bracket banks, they have an appetite to figure it out with us, because they see that it's a way for them to compete. The regional and community banks say, Well, this is a hugely underserved marketplace. If I partner with a financial technology company, we can build our business in a differentiated manner. And so that's where the partnerships come into play. But they do rely on us for all the acquisition.

Customer acquisition

We have approached distribution the opposite way that most in the space historically had approached it. Traditionally, this has been a very heavy direct mail space. The company was founded by a family in Chicago, the Schwartz family. It was a storied family -- they had built a big call center business called APAC. The family patriarch Ted Schwartz took the company public and he sold it to JP Morgan's private equity group. His son Todd Schwartz brilliantly saw after the Great Recession, all this capital dried up from mainstream America, and there was a better product out there that could be created. I remember when he hired me, and they had installed this terrific credit and customer service philosophy. We were talking about the customer acquisition front and how we were going to step on the gas of growth. They were doing a majority of direct mail and I was like, I can't do direct mail. We're a 100% digital company -- that's old school. From a competitive perspective, we just always felt that anyone can mail the mailbox.

And so I said let's build our acquisition funnel on other techniques. So it starts with search engine optimization, customer referrals, and email marketing, which all are essentially free from a variable cost perspective. And then beyond that, we work with over 50 strategic marketing partners, the LendingTrees and the Credit Karmas of the world that are in and around this customer. They want to cross sell a lending solution. But instead of having the customer go through the application process on their site, they're able to refer those customers to our site. So they see our banks' brands and that allows us to create a strong relationship. 80% of the business is through SEO, email marketing, and customer referrals with strategic marketing partners, and less than 20% is direct mail. That allows us to keep a very strong customer acquisition cost, which is important to making sure that banks can keep their costs down on the product.

Our customer acquisition costs are about $200 per customer. It's probably 50% to 100% more for a traditional direct mail customer.

Scaling marketing

We're testing new things all the time. You have to stay on top of that every quarter. There are new techniques how you can get in front of this customer. Ultimately, as we build up the other products, we make sure we can cross sell. So we feel very good about the growth of it. You're at a very interesting inflection point, as far as how people are looking for credit access. And the stigma of walking into a brick and mortar store is probably as great as it's ever been. 80% of the customers we see are on their mobile phone. And so our growth has been driven by creating a better product. This is a much better solution for a large percentage of the population that was traditionally in a market of last resort. And we are taking share from the traditional brick and mortar providers that can't provide an anonymous -- in the sense that no one can see them walk into the store -- online, customer application process.

Differentiation versus other platforms

There are some fantastic financial technology companies that have come or are coming to the public markets: Dave, Upstart, MoneyLion, Affirm, Catapult, SoFi. We were really trying to build the SoFi for everyday consumers -- it's a really good way to think about it. SoFi has done a great job for the HENRYs -- the high earners, not yet rich yet -- but no one's really done the end to end vision for the everyday consumer. I always joke with my CFO: SoFi put their name on that beautiful building in Los Angeles -- I'm trying to put our name on Wrigley Field. He says we're not ready to spend the money yet. So that's fine. I understand. We've been GAAP profitable since 2015.

The crown jewel is our decision engine. We talk about 1.7 million homes that we've now facilitated and the fact that we have over 14 million repayment events, over 7 billion data points, which we're using best in class AI machine learning to continuously improve the algorithms, so that we can encourage our bank partners to open the credit box.

The difference between us and others is that we're focused on a slightly less traditionally viewed credit worthy customer. So they're typically a high 600 FICO customer and we are mid five hundreds. And then after the bank originates a loan, we've historically decided to hold most of the economics on balance sheet versus them, who have sold many of theirs to third parties and institutional investors. Our point of view is just from a profitability and cash flow perspective, we earn double the unit economics when you hold the receivables. And so ultimately, it comes down to credit risk one way or the other. If you sell the loan and the credit doesn't perform, no one wants to buy it again. If you hold the receivable and the credit performs, then you generate more cash flow. And we can use that cash flow to build other products in the platform in the future. And my guess is as we move into some longer term, 10 year products, we'll do some more of the selling of receivables.

The third difference, when I talk about Catapult, they're focused on the point of sale space. So they're financing durable goods at the point of sale for a very similar customer. We haven't gotten directly to the point of sale yet. It's obviously a hot segment of the marketplace. That offline credit card we're issuing is going to be instant issuance, wherever you are. And so it's our first indirect way of getting into the point of sale. I think longer term will look to enter that marketplace, although it's a slightly different need for the customer. Most of the time today our customers are looking for us to help them with something unexpected that is more emergent in nature rather than durable goods. So it's a very interesting landscape. I think everyone's chasing it from different angles.

I even look in the credit access space. You've got Square that's piloting a small dollar loan through Cash App. You've got Chime and the other neobanks trying to figure out lending to this market. There's a race to round out the product suite. But I think our platform approach and our history of execution gives us a great chance to be in the hunt. It's a massive market.

Cost of financial services

I think that the Biden administration actually provides an opportunity for us in that there should be more regulation and legislation as it relates to ensuring access with the appropriate consumer protection. I think, sometimes, especially in the headlines, there's a thought that credit access is really available, and that many of these consumers just don't know where to look to get the best product in line with their risk profile. We actually have the data that shows that access doesn't exist for this customer. So as part of the process, we ask the customer if they've originated to us from a non choice platform. So if they come to us via SEO, or a customer referral, email marketing, or direct mail, we will say, Hey, would you like us to do a web search on your behalf? And most of the time (80% to 90%), they say yes. And only 1% of the time are we able to find them sub 36% APR for what's considered near prime credit. So everyday, we're trying to do this and we can't do it. There's like 20 near prime lenders on the platform and only 1% of time today does a customer close a loan with one of those partners.

It just shows that for this risk population, access doesn't exist. And so if access doesn't exist in that sub 36% population, what's the right answer for the customer? Our point of view with our bank partners has been to facilitate a credit product that is certainly higher costs in the near prime world, but much better than those markets of last resort and structured in a way that's meant to rebuild finances. There are no fees. There's no origination fees, there's no prepayment penalties. There's no late fees, there are no NSF fees. We help the banks report to the three credit bureaus. When you're delinquent, we don't chase you. We call you up and we ask how you're doing. We're not litigating to collect. There's a huge focus on ability to repay as part of the underwriting algorithms. And that ends up resulting is fantastic customer reviews online. I always tell people, do not believe in what I say -- go see what they say.

So when we think about regulation and the new administration, it's all about using our data to educate and to get to the right answer so that customers have access, but that are also appropriately protected. And much like the Credit Card Act helped create a clear sandbox for credit card companies, we think the same thing should exist in the small dollar space. And that is a much better way to ensure access with protection than rate caps conversations. From our point of view, if you cap rates, the demand doesn't change. There is insatiable demand for access products. So trying to create a rate cap that takes the demand away doesn't solve the problem In reality, customers go to the unregulated markets. The tribal markets are a huge, legitimate sovereign lending business out there for the Native American tribes. We think it's much better to approach it through more regulation. And like in any great industry, whether it was Airbnb or Uber, I think this is one of those industries where there's lots of different opinions. We have to look at the data and the realities and then come up with a solution together that I think accomplishes all goals.