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Your kid sister and younger cousin are unbanked and using alternative financial services June 6, 2012

Posted by jeremyliew in financial services, unbanked.
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If you think it is the fringes of society that are underbanked, you’re wrong. As USA Today notes:

Nearly half of young adult households, those ages 15 to 34, are considered under-banked, according to a survey by the Federal Deposit Insurance Corporation in 2009, the latest year for which there is data.

Why is that? It’s the great recession of course, plus the rising cost of college. As the NY Times notes:

With more than $1 trillion in student loans outstanding in this country, crippling debt is no longer confined to dropouts from for-profit colleges or graduate students who owe on many years of education, some of the overextended debtors in years past. As prices soar, a college degree statistically remains a good lifetime investment, but it often comes with an unprecedented financial burden.

About two-thirds of bachelor’s degree recipients borrow money to attend college, either from the government or private lenders, according to a Department of Education survey of 2007-8 graduates; the total number of borrowers is most likely higher since the survey does not track borrowing from family members.

The problem is even more pronounced for teens. As Christian Science Monitor notes:

The Great Recession can explain some of the decline in job opportunities for young people. During the mid-2000s, the overall teenage unemployment rate ranged between 14 and 18 percent. Then, the downturn hit and teen unemployment began to rise, peaking at 27 percent in October 2009 (overall unemployment peaked three months later at 10.6 percent). Since then, the recovery has created more than 1 million new jobs for adults and brought the unemployment rate down to 8.2 percent. But there’s been no recovery for teens. For the past 41 months, the national average unemployment rate for teens has remained above 20 percent – a postwar record.

Think Finance recently did a survey of just these Millenials (18-34 year olds) to find out how they are dealing with their financial situation. The answer is that they are turning to alternative financial products, ranging from prepaid debit cards to check cashing to emergency loans, and this behavior is typically uncorrelated, or positively correlated, with income. For example, people making $50-75k were 50% MORE likely to borrow from a payday lender or installment lender than those making less than $25K. From their press release:

The survey found that several alternative financial products were used at similar rates regardless of income level, debunking the myth that only the poorest rely on alternative financial services. Millennial respondents with annual incomes significantly higher than the national median of $39,945 (U.S. Dept. of Commerce, Bureau of Economic Analysis) reported using alternative financial services at rates similar to peers who earn well below the national median. Products and services used at similar rates by Millennials at both the higher and lower ends of the income range include:

  • Prepaid debit cards – 51 percent of those making less than $25,000 in annual income reported using prepaid debit cards within the last year. The percentage was the same for those who earned $50,000-$74,999.
  • Check cashing services – 34 percent of respondents who earn less than $25,000 reported using check cashing services, while almost as many in the $50,000 – $74,999 range (29 percent) turned to check cashers.
  • Rent-to-own stores – 15 percent of respondents making less than $25,000 and 17 percent of those who earn $50,000-$74,999 reported using rent-to-own stores.
  • Pawn shops – 29 percent of respondents who earn less than $25,000 reported using pawn shops compared to 21 percent of respondents making $50,000 – $74,999.

Surprisingly, some of the alternative products that showed significant differences in usage across income level were more heavily used by mid – high income respondents than low income respondents. These products include:

  • Emergency cash products – Usage of payday loans, cash advance and other emergency cash products was higher among people making $50,000-$74,999 (22 percent) than those who earn less than $25,000 (15 percent).
  • Overdraft protection – 58 percent of respondents making $50,000-$74,999 reported using overdraft protection compared with 31 percent making less than $25,000.
  • Bank direct deposit advance – 37 percent of respondents who earn $50,000-$74,999 reported using bank direct deposit advance compared with 22 percent of respondents who earn less than $25,000.
  • Money transfer service – 39 percent of respondents who earn $50,000-$74,999 used money transfer services within the last year compared with 29 percent of those who earn less than $25,000.

“Stereotypes that paint users of alternative financial products as poor and uninformed are simply not accurate,” said Ken Rees, CEO of Think Finance. “This study confirms that young people across the spectrum have a need for the convenience, utility and flexibility that alternative financial services provide.”

USA Today provides some additional color on how the convenience and flexibility of some of these alternative financial products is driving their usage:

For a generation that grew up accustomed to instant gratification, it makes sense that young adults use alternative financial services, even if they come with a higher price tag but make cash available immediately, says Joe Wilson, a wealth management adviser at financial services firm TIAA-CREF and a Millennial himself. “Most things are to us readily accessible and convenient,” the 32-year-old says.

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Ammy Orozco, 30, who works as an executive assistant at a Check Cashing USA branch in Miami, has a checking and savings account with Bank of America but often chooses to cash checks at work instead. She says she’d rather pay to cash a check immediately than pay for gas to drive to the bank. She has also taken out payday loans in emergencies. She’s tried to get a loan from the bank, but it was “stressful.”

“They wouldn’t confirm right away. … You’re there sitting and you need the money, and you’re like, … is this going to happen or not?”

It’s this big and growing market that gets me exciting about the innovations in financial services that are starting in the underbanked, and the disruption that big data and machine learning are driving that are creating better products for the underbanked. We are investors in Zestcash for this reason, and continue to be excited about more opportunities in this space in other products and geographies.

Follow our twitter account @lightspeedvp.com June 5, 2012

Posted by jeremyliew in twitter.
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Follow our twitter account @lightspeedvp to catch all of our blog posts, as well as other interesting news and perspectives.

Big Data + Machine Learning in Insurance June 4, 2012

Posted by jeremyliew in big data, financial services.
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I’ve posted in the past about how Big Data + Machine Learning is disrupting lending, and about how this disruption in financial services often comes from below, from startups targeting the unbanked. The Economist notes that big data + machine learning is changing underwriting at even big insurers:

At least two big American life insurers already waive medical exams for some prospective customers partly because marketing data suggest that they have healthy lifestyles, says Tim Hill of Milliman, a consultancy that advises insurers on data-mining software systems.

The software picks up clues that are unavailable in medical records. Recklessness in one part of someone’s life is a pretty good signal of risk appetite in others, for example. A prospective policyholder with numerous speeding tickets is more likely than a safer driver to end up with a sports injury. The software also detects obscure correlations. People who frequent ATMs so they can make cash payments tend to live longer than those who prefer writing cheques or paying with credit cards, it turns out. People with long commutes tend to die younger. Why this should be is not clear: some speculate that ATM users tend to be more spontaneous types, who like to have cash in their pocket and whose lifestyle may be more active; others hypothesise that sedentary commutes mean less time to do something healthy in the evening.

Interestingly, the advantage in using new sources of data to underwrite appears to lie more in cost reduction and speed to decision than accuracy:

But manual underwriting with medical tests can cost hundreds of dollars and, according to one estimate, drags on for an average of 42 days in America and Europe. That gives potential customers ample time to talk to a competitor or walk away. Automated underwriting can cost a tenth as much and be done once a human reviews the software’s recommendation.

Much of this is still in the anecdotal and experimental stage, but it is exciting to see that even big insurance companies can embrace new ideas.




Do Aspergers, ADD and dyslexia make you more likely to be an entrepreneur? June 3, 2012

Posted by jeremyliew in founders, startups.
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The Economist in it’s latest edition suggests that business needs people with Asperger’s syndrome, attention-deficit disorder and dyslexia:

 Julie Login of Cass Business School surveyed a group of entrepreneurs and found that 35% of them said that they suffered from dyslexia, compared with 10% of the population as a whole and 1% of professional managers. Prominent dyslexics include the founders of Ford, General Electric, IBM and IKEA, not to mention more recent successes such as Charles Schwab (the founder of a stockbroker), Richard Branson (the Virgin Group), John Chambers (Cisco) and Steve Jobs (Apple).

It also gives some data on ADD among entrepreneurs, and more anecdotal info on Aspergers among entrepreneurs, which I think would be the least controversial claim in the tech world. Which founders do you know that have Aspergers, ADD or dyslexia?