Disrupting short-term credit: An interview with Tony Huang, CEO of Possible Finance
Fintech Explorer Issue 4
This week, I was fortunate to interview Tony Huang, the CEO of consumer lending startup Possible Finance. Tony is a good friend from college, and his company is one of the best examples of how fintech can make meaningful improvements upon old financial services model (in this case, payday lenders).
In this interview, we discuss Possible Finance’s origin story, what they do today, how they differentiate vs. competitors, their recent fundraise, and their transition to a distributed work environment. Thank you to Tony for taking the time to speak with me, and I hope you all find this interview interesting and educational.
This interview has been edited and condensed for clarity.
Tony, tell us a little bit about your professional background and why you founded Possible Finance?
Tony Huang: After college, I joined a civic technology company that was working on body cameras for cops, which is where I met my co-founders, Tyler and Prasad. Collectively, we spent 26 years building and making body cameras a reality. And the reason we were so passionate about doing that was the societal impact we were having. You know, when we first started, police chiefs were telling us to get out of their offices. If you've ever seen police body camera footage on the nightly news on YouTube, on Facebook, then you've seen my team's work. We’re really proud of the impact we had on American society, particularly on lower-income minority communities and creating greater transparency within law enforcement.
By the end of 2017, we felt like from a technology perspective, we had achieved a lot and wanted to start something new. We were looking for ideas that could have just as big of a societal impact as body cameras did on lower-income minority communities here in the US. And we quickly honed in on the day-to-day challenges that lower income Americans have - the more we learned about the space, the more we realized that there's a whole different financial system for lower-income Americans. Bank branches don't really exist in those communities. There are more payday lenders than there are Starbucks stores in this country. And it just became apparent that there was a large pain point that we can help solve through technology. That’s why we started Possible Finance.
Great, thanks for sharing that story! Could you tell us a little bit about what Possible Finance does today?
Tony Huang: Possible Finance’s mission is to make financial services fairer and more affordable for lower-income Americans. 91 million Americans have a credit score that's 600 or below, and therefore they have no real access to traditional financial services. Instead, they rely on alternative finance products that are much more expensive and predatory. These products collectively cost about $106 billion in fees for lower income Americans each year.
What Possible Finance currently does is we provide a short-term installment loan. Our loans are on average $200 that a customer can repay over their next (on average) four paychecks. That’s making it more affordable than single-payment loans while allowing customers to build credit history, which is so important in the US, because not having a good credit score really hinders your ability to attain the American dream.
For our customers, many of whom have never been taught credit at home, or who went through rough life experiences such as a divorce, they're in a catch-22 where they don't have good credit and therefore, they can't get approved for anything that lowers costs, and because of that, they have to rely on payday loans. But no matter how many times they repay a payday loan, they can't build credit history, since payday loans don't report to the credit bureaus. So they're kind of stuck. And we provide them an incredible ability to get approved for a loan, even though there's no existing credit history or low credit history. We report on-time payments to all three major credit bureaus and are aimed towards consumers who have low credit scores. Our customers with the lowest credit scores see their credit scores increase on average by 70 points within a few months with Possible Finance.
70 points. Awesome. Now, I know you told me in the past that to come up with the idea for Possible Finance, you did a lot of customer research, and I'm sure as you have built the business, you've discovered things that surprised you about your member population. I was wondering if you could tell us anything interesting or surprising you've learned about the industry or your members through the business?
Tony Huang: Yeah, one thing that though we learned that surprises us is that lower income individuals who live paycheck to paycheck are oftentimes very savvy and sophisticated with their money and are completely rational in the financial decisions that they make. They may be paying more for something like check cashing. But that allows them to get access to their money two days early, and that means all the difference in the world to them in that situation. It’s a completely rational decision to pay 3% in fees, just to get your money earlier, compared to depositing a check at a bank and not having access to it for many days.
Another thing that surprised us was that we originally contemplated all these features to help our customers delay payments to us if there was no money in their bank accounts. We initially we sent text messages to our customers and said, “Hey, we noticed you don't have money in your account. Don't worry about paying us back for now. We can postpone your payment to another day.” But we got this flurry of angry customers saying “No, no, we agreed for you to pull funds on this day, I know I don't have money in my account. But it's going to be there. And I need you to pull money when I get paid.” Our customers are very particular about their finances and very much on top of them.
Very cool. Thanks for sharing that. Nice. Building on the last question, I know in the past, you've told me you've held a few member events where you meet your customers in person. Tell us a little bit about that and what it was like to meet your customers?
Tony Huang: Yeah, we hosted a customer appreciation event in downtown Seattle in the first year of our business, and it was the first opportunity for us to meet our actual customers in person. We only had about 10 employees at the time.
It was the most energizing thing we could have possibly done for our team. Our whole team came out of that event with so much more energy and passion for what we were doing because they got to meet the customers and hear firsthand the impact we were having on our customers. There was one person, Steve, who took an Uber from his house to the train station, took a train to Seattle, and then walked eight city blocks just to come to the event just so he could say thank you to the people who made Possible Finance. We had helped Steve in a few financial emergencies, and helped him rebuild his credit. And there were no other services that he's ever found that were able to help them like that. Hearing Steve’s story brought tears to my eyes.
Unfortunately, with COVID, we had to cancel all the customer events that we were planning for 2020. But our team takes a very customer-driven approach to developing new products. We're always talking to our customers. And they tell us how we can continue to improve.
On a different note, this is a policy question I was curious about, but did you see any impact of the CARES act on your business or your customers?
Tony Huang: With COVID, we were anticipating really unprecedented income loss – a Great Depression-era type of economic scenario. While that did become the case, we did not correctly anticipate the unprecedented government response to the pandemic. So early on, we were actually too conservative. Looking back, we pulled back on credit risk in anticipation for larger waves of defaults from our customers. The CARES Act has actually created a situation where many households have more savings than ever before. The short-term implications of the CARES Act were very well received by our customers. And just from our own data, you can see that it had a very positive effect on the lives of lower-income Americans.
Nice. Yeah, I'm a huge fan of the CARES act. I thought that's one of the best laws passed in a long time. So, you talked a little bit earlier about your comparison to payday lenders and how you're trying to fill in the space that they were serving. A lot of different companies have come out with short term lending products over the last few years. How does Possible Finance differentiate versus its competitors?
Tony Huang: There’s been a lot of FinTech players looking to disrupt the short-term lending space by going around federal and state regulations. And ultimately, we believe in building relationships with regulators and working within the existing regulatory framework to create change. We think that regulators play a really important role in protecting consumers in spaces such as healthcare and financial services, and we really respect that work that they do. That's a unique approach that we've taken compared to a number of our venture-backed competitors, who have taken this scale fast, launch first, ask for forgiveness later approach. Those products have caused a number of issues for consumers as well as regulators.
We have also taken a more long-term approach in the customer relationship. We never charge any additional fees for late payments or rescheduling because we care more about the customer succeeding than making a quick buck. We cap our fees at no more than 30% of principal borrowed. And for all of them, we allow for rescheduling and complete flexibility at the consumer’s fingertips. And all of these things are to help improve our customers’ long-term financial health, even if they may be at the detriment of the business and revenues in the short-term. We’ve taken a very long-term approach; we're building a trusted relationship with our customers.
To the extent you can, what can you share about your longer-term vision for Possible?
Tony Huang: I would say in the mid-term, we will be making our product available and to more people through getting regulatory approval or working to launch in new states. In the long-term we're not just a short-term loan company, we see ourselves as a technology company that tackles financial problems for lower-income consumers. We just happen to have started with the problem of short-term credit, because that's where we saw the largest need for our customers. And now that we've established a strong relationship with our customer base, we are able to introduce additional products and services that aren't just lending to our customers over time.
Congratulations on your recent fundraise. I saw it was just announced this past week. What's the plan for what you're going to do with the new funds? I know you raised both equity and debt.
Tony Huang: Thanks Ravi! The new funding was actually closed in Q2 of this year. We just got around to announcing it in October. The new funding has allowed us to double the size of our team during the pandemic, in order to serve as many customers as we possibly can, which we felt was incredibly important given that our products and services are needed more than ever before. These funds allow us to continue to grow at the same kind of velocity as we have been growing without compromising due to a lack of resources on either the debt or equity side. We’re very well positioned to continue our growth.
Okay, last question. And this is just something I think everyone is curious about right now. I saw in the news article about your raise that Possible has transitioned to remote-first. Can you tell us a little bit about why you did that and how it's going so far?
Tony Huang: The decision to transition to fully-distributed long-term was made because we have team members who live with elderly family members, or who have pre-existing health conditions, that would be at high risk for COVID. And it just did not feel like it's the right thing to do to ask these individuals to come back to the office while there are concerns with their health, or to leave them out of an experience of a culture that only focused on people in the office.
We wanted to offer a fair experience that wouldn't bias against those who didn't feel comfortable coming to the office. Also, our business is completely digital, and we have the flexibility to be just as productive while working remotely.
And, we’ve seen through an incredible period of growth in our business while everybody was working remote and that has demonstrated our ability to hire, build culture, and retain talent, all in a fully distributed fashion that ultimately gave us the confidence to continue doing so long-term. Today, we have team members from all across the world, and the advantage of being able to hire the best talent regardless of wherever they are will allow us to continue to grow. It's the best thing for our business in terms of growth.
Tony, thanks for your time today, and very exciting to hear about all the progress at Possible.