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Comment by rahimnathwani | Hacker News Reader

"banks are overlooking or turning away a large group of creditworthy customers, and so far it doesn't seem like that is happening."

Bank do refuse to lend to large segments of the population which can be lent to profitably.

In China, part of the reason is caps on loan interest rates.

But banks in developed countries, like the US and the UK, also fail to serve a large segment of the population. Those underserved by banks have limited options to get loans for emergencies etc., and difficulty building their credit history to gain access to cheaper credit in future.

If you're based in London and are a software engineer or data scientist interested in solving this problem, please email me (personal address in profile) and I can tell you about what we've built so far and what's ahead.

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In my opinion, if it only possible to lend to someone at usurious interest rates, we're trying to paper over more serious problems with lending (e.g., the person may need the money for some necessity of life but cannot really afford whatever it is)

I imagine that most (but not all) people reading this comment have savings that could cover either (i) an unexpected expense of $500, e.g. to repair the car they use to drive to work, or (ii) an unexpected one-off $500 drop in income, e.g. due to a gap between casual jobs.

But many people, even in rich countries like the US, don't have a buffer to deal with situations like these. To many of them, paying $100 interest so that they can get their car fixed today, and continue to go to work and earn a living, is a rational and reasonable decision when compared with the alternative (can't drive to work -> no income -> can't pay bills -> ...).

Right, so there is an example of a serious problem which I don't think is best addressed by predatory lending. Sending your child to work in a coal mine or selling them off to someone into slavery were also rational economic decisions but there is a reason that, as a society, we no longer tolerate these things.

I wish we, as a society (being the US) could agree on what is intolerable. It feels like a near majority is cynical that actually helping anyone will improve their lot, and that the only thing that works is a stick.

Yeah, I'm not even sure we can agree on the child labor one anymore.

> It feels like a near majority is cynical that actually helping anyone will improve their lot, and that the only thing that works is a stick.

I think it feels that way to those who think they know what helps and what doesn't. To me, it feels like a vast majority agree helping is good, but are cynical about the method and helpers. I think we can all agree that repeated failures and not learning from them is intolerable.

I'd agree with that - I appreciate the added granularity. I wonder sometimes, what if the problem is because we so disagree on the methods we can't get anything done, when either full bore one way or full bore the other would be a better outcome?

I'd be interested to learn more about what you're proposing (if this is possible).

I've thought for some time that this is one area where (as you say) there's a clear social need, and that the solution is for a non-profit lending organisation to offer the loans. As in, the lending company would, overall, aim to break even once the cost of operation, loan defaults, and profit from loans are taken into account.

It probably goes without saying that the loans would have a higher interest rate than those seen with longer-term standard loans, but I'd imagine they'd be orders of magnitude lower than some of the awful, predatory rates --many over 1000% APR-- that we typically see with UK 'payday' loans.

> It probably goes without saying that the loans would have a higher interest rate

I remember in the '90s all the fuss about "microcredit" in developing countries. Maybe it's time to have something like that in "developed" countries too?

Then again, maybe not

"Microcredit has been a disaster for the poorest in South Africa" https://www.theguardian.com/global-development-professionals...

"India's micro-finance suicide epidemic" https://www.bbc.com/news/world-south-asia-11997571

"Micro-credit schemes of trouble: Housewives turn ‘beggars and prostitutes’ to cope" https://punchng.com/micro-credit-schemes-of-trouble-housewiv...

I hate to go true scotsman, but I think the term microcredit in many of those scenarios has been diluted beyond recognition. The guy who dropped dead in your second source, had borrowed a fifth of the cost of building a house - that's not really microcredit by any real standard: it's not small and it's not really a productive investment. The rates and methods mentioned (weekly 10% repayments!) are usurious, and usury can be micro or macro but it's still usury, not credit.

The original microcredit vision was low rates, in strong collective settings, as an investment to support productive endeavours: giving people enough money to start a business, or supporting them in emergencies so that their situation wouldn't dramatically change (fix a broken car so you can keep working etc etc). It shouldn't be a way to support consumption. It's hard not to inject moralism in the process, but there must be criteria.

Then it seems microcredit has not yet been tried.

Anyway, even if we're specifically talking about micro-enterprise, there is a high rate of failure and then people having the loan as millstones around their necks, and there's questions about how good it really is to have a bunch of businesses of the sort that are financed by microcredit: https://governancexborders.com/2013/05/29/the-art-of-pointle...

"and that the solution is for a non-profit lending organisation to offer the loans"

As I said above, the major issues are (i) effective underwriting, and (ii) efficient operations.

The better you can distinguish good customers from bad (better data and better models), the less money you lose to people that don't pay back. The better your tools to serve customers, the more customers you can serve without needing to increase the size of your team.

By reducing costs, you can charge less, get more customers etc.

A non-profit would face exactly those same two challenges, just to break even. Not needing to make a profit would have a much much smaller impact on its ability to reduce prices, than the two factors I mention.

This exists. It's called a credit union. They're successful and widely used globally, and have 101 million members in the US alone. Source - https://en.wikipedia.org/wiki/Credit_union

> the solution is for a non-profit lending organisation to offer the loans

In the US we have Credit Unions, which are exactly this.

> I imagine that most (but not all) people reading this comment have savings that could cover either (i) an unexpected expense of $500, e.g. to repair the car they use to drive to work, or (ii) an unexpected one-off $500 drop in income, e.g. due to a gap between casual jobs.

And, even if they were short cash for some reason,they have both access to zero-cost (or negative cost, given rewards) short-term loans [0] and sufficient income after essential expenses to pay it off without resorting to loans with interest.

[0] e.g., currently zero-balance credit cards as long as paid off within the next billing cycle.

> Bank do refuse to lend to large segments of the population which can be lent to profitably.

Why do they refuse to lend if it is profitable?

Because of risk. Just because there's 10k people out there that can afford to borrow and repay, doesn't mean you set 100k loans hoping you got some of them.

That's the point the parent is making. If the risk profile is as you say, that isn't a profitable segment for the banks. The question being asked is: why would the risk profile be any different for peer to peer lenders than it is for the banks? If it isn't profitable for the banks, and the risk profile isn't different for the peer to peer lenders, then it won't be profitable for them either.

The profit made by the bank needs to also cover the cost of employees, bureaucracy, huge buildings, etc. For a peer-to-peer lender, even tiny profit is enough.

As an example, imagine that you lend someone $100, and there is a 50% chance they will pay you back, and in that case they will pay you $210. And all this costs you is a mouse click. Some individual would click "yes". In their free time.

Now in the bank, there is an employee doing this as a part of their paid job. They have a manager, that manager also has a manager, plus you need to pay the janitor, etc. You also need to pay diversity training for all of them. And all financial transactions they do must follow all kinds of regulations, which regularly change. Simply, the overhead is not worth it.

$100 > $210 is an ridiculously high interest rate. In a world today where borrowing cost for a lot of people are ~10% APR.

But I do see mobile payment and mobile borrowing could be mounted together.

See points above. Banks, being an integral part of the financial system, are only allowed to take on so much risk. Third party companies have no such restrictions. But they can’t issue loans because they are not a bank. So what happens is a bank issues a loan according to criteria the bank and the third party agree to. Then the bank sells it the next day to the third party. That way the bank is more insulated from risk because they aren’t holding the loan.

> they can’t issue loans because they are not a bank

I have to think there is some misunderstanding here - lots of nonbank companies issue loans. Ford Motor Credit is not a bank.

The thing that banks are uniquely allowed to do is to take deposits, and lend out that money.

Also, they need to "predict" whether the loan would be profitable as they have not loaned the money yet. The decision largely depends on the precision of their prediction

In the US, a major portion of it is that banks are limited in the data they use. For example, certain lenders highly restricted in how they can use zip code in any automatic algorithm. So they stick to manual processes (which are only profitable on large loan sizes) or very simple automated algorithms.

Non-bank smaller lenders often have many fewer regulations, allowing them to make more targeted automated algorithms, which means they can serve people banks can't.

Are there documented cases of non-bank lenders redlining?

> > Bank do refuse to lend to large segments of the population which can be lent to profitably.

> Why do they refuse to lend if it is profitable?

Good question.

Note I didn't say it is profitable for the banks to lend to those segments. I said those segments can be lent to profitably.

In order to profitably lend to customers who banks turn away (mostly those with a 'bad' credit history based on credit bureau data, or those with little/no data at the credit bureau), you need:

1) Effective credit underwriting (i.e. accurate models/processes to decide whether to accept a particular application, and how much to lend to that applicant at this time), and

2) Efficient processes of acquiring, onboarding and servicing customers.

When a bank lends 10k at 8% for 3 years to a low risk customer, they'll make over 1k in interest over the life of the loan. So they can afford to have inefficient operations/systems.

When you lend 500 to a customer who is likely to pay back, e.g. 600 over the next 6 months, there's only 100 in risk-adjusted margin there, to cover all your costs of underwriting the loan, following up on missed payments etc.

I feel like the Market Segment is so small, and your costs will be so high, and it requires so much expertise and oversight/monitoring that it won't be worth it.

"Worth it" is subjective; it doesn't necessarily have to be about turning a big profit. In fact if it's a nonprofit, then the goal could be to just help under-served communities, and it seems like it could have a positive enough impact to attract some angel investors

Most places cap interest at 25-35%, that’s too low for high default customers.

Banks are limited in the total amount they can by regulatory controls to prevent uncontrolled expansion of the money supply.

For the same reason Google shutters profitable projects, or why oil drilling companies often pack up but sell the rights to someone else to pull out the dregs, or why Annhauser doesn't make high quality craft brews.

They aren't profitable enough for an organization of that size.

Markets get segmented into tiers. With banks that might create a situation where the easiest lending targets get processed by the highest volume, lowest cost institutions, and the small valuable cases become boutique.

The problem with that is, unlike other boutique areas, the wealthier person can spend a little more for a limited run high quality good. But here the boutique has to sell to the poorest groups, so it's hard to compensate the provider through pricing for the lower efficiencies of being smaller. It might shut down services that the industry would provide if less consolidated.

I'm not defending this, just presenting one possible way this could be playing out even with everyone acting more or less rationally.

I tried Affirm (https://www.affirm.com/) -- I missed one payment because of a bad check from my employer and I was barred from the service permanently. Even though only a week went by between payments, and I payed off all of my loans as soon as I got paid.

Seems like it's clearly spelled out in their FAQs:

Q: Do I have a credit limit with Affirm?

A: Unlike a credit card, Affirm is not a revolving line of credit. While customers can take out multiple Affirm loans at once, each Affirm loan application is evaluated separately as a closed-end transaction. An application from a returning customer may be denied, however, if that customer has failed to repay other Affirm loans on time or if the customer shows excessive borrowing behavior.

That’s a very fancy appeal to advocate for usury.

The credit building is a little much... not sure what >30% interest builds.

Non-bank lenders have plenty of other motivations besides usury.

- Many immigrant populations thrive because more established members of the community invest in and loan to their peers (especially family members). They may not have twenty years of credit history and market research, but they have close-knit ties that go back generations and a person's reputation as leverage.

- A Planet Money episode after Hurricane Sandy mentioned studies that proved a small business was more likely to survive a natural disaster if it worked closely with other businesses. The conclusion was that businesses would provide informal loans to one another to keep everyone afloat until the insurance claims could be processed (which could take months)

I believe Grameen Bank deployed in Bangladesh [1] is an innovative and effective example of one way to solve some of these problems.

[1] = https://en.wikipedia.org/wiki/Grameen_Bank

One problem is that the populations that are underserved by banks are over-exploited by those options made available to them;

"Cant get a loan due to less-than-perfect credit? Then pay 4,000% interest!"

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The finance charge ranges from $15 to $30 to borrow $100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs. Rates are higher in states that do not cap the maximum cost.

https://paydayloaninfo.org/facts

"The finance charge ranges from $15 to $30 to borrow $100."

For context, US banks typically charge this $15 to $30 in overdraft fees, for payments of less than $50. For example, see the table and note immediately below it here:

https://www.alaskausa.org/overdraft/optin.asp

>Bank do refuse to lend to large segments of the population which can be lent to profitably.

>In China, part of the reason is caps on loan interest rates.

How exactly is that the reason? I thought about it, and guessed that you may mean that it is because lenders cannot charge high interest rates to those segments, but if they are a risk anyway (guessing because poor or have unpredictable income), why would banks want to lend to them? I mean, even if banks were allowed to charge higher interest, the borrowers could default on the principal or the interest, right? [Not a financial expert here.]

Because the risk of default is not binary, it's on a sliding scale. If the banks are not allowed to charge enough interest to cover the risk of default, the loan will not be made.

Got it now, thanks. Like actuarial principles for insurance, I guess.

In the USA we get http://www.avant.com

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