Marla Blow’s career at the newly formed federal Consumer Financial Protection Bureau was rocking along just fine in 2014 when she decided to try something she knew would be extraordinarily difficult.
“I still get people doing the double-take thing, saying, ‘I didn’t know you could just go out and start a credit card company. How does that happen?’” says Blow, CEO of FS Card and a member of the company’s board of directors.
It happened, she says, after a “Herculean” 18-month effort to convince investors to buy into the idea of offering unsecured credit cards to high-risk people long exiled out of the mainstream credit world.
But from her seat at the government agency, Blow saw a need waiting to be met. “I was one of the people who helped build the CFPB, and part of our charge was looking at all parts of the population, not just the big middle,” says Blow, who studied finance at the University of Pennsylvania’s Wharton School before earning her MBA at Stanford Graduate School of Business in 1999. “I saw mainstream credit card providers pulling away from this customer base and leaving them on the sidelines.”
After seven years in various roles at Capital One, and a stint as assistant director of card and payment markets at CFPB, she partnered with Republic Bank & Trust to launch FS Card and its inaugural product, the Build Card. Launched in late 2015, the technology-fueled card offers a credit line of about $500 at interest rates about 10 points higher than the 18% average for a mainstream credit card.
“But it’s a tenth of a price of a payday loan,” Blow says. “That’s a game changer for the customers we serve.”
She says FS Card ended 2016 with about $8 million in credit outstanding across 15,000 accounts, and now has about 105,000 accounts and $50 million in outstanding credit.
Who is your typical customer?
The typical user profile is consistent with the distribution of credit scores in this country. People with lower credit scores tend to be renters rather than homeowners, tend to have incomes below $40,000 a year, and tend to be people of color. We focus on offering traditional credit — an unsecured revolving MasterCard — to this group of underserved customers.
Why go after this group?
These are people who might otherwise seek out a payday or auto-title loan or use a pawn shop — customers who are unable to access traditional credit. We offer our cardholders a path back into the financial mainstream with a structure that’s consistent with that of a traditional credit card customer.
When did you realize there was an opportunity in fostering this kind of financial inclusion?
This came about when I was at the CFPB. I believe it’s important for people to have a fair chance. I wondered if technology can now make it possible to take the tools that work for a broad swath of the population and make them work for even more people, to meet their borrowing and liquidity needs in a convenient and flexible way. I was deeply concerned that was not happening and wanted to create a vehicle that allows this customer to meet everyday expenses such as gas and groceries, as well as transact digitally and online, in a way that I would feel good using myself or feel good having my mother use. I wanted to create parity for this population.
You’ve said you’re “creating an on-ramp” for those customers. How so?
The alternative products — payday and auto-title loans, that sort of thing — have not historically been reported to the traditional credit bureaus such as TransUnion, Equifax, and Experian. Whereas if you get our card, use it wisely, and make your payments on time, that gets reported every month and demonstrates creditworthiness. It puts our customers in a position to receive offers of other kinds of credit to follow behind this one.
Starting a credit card company sounds daunting. What was the biggest challenge?
There’s a ton of infrastructure and service capability that has to be in place before you can issue a credit card, and you have to partner with a bank to access the Visa and MasterCard rails. So it required us to spend about a year and a half building infrastructure, contracting with a bank, finding a servicing agreement, and setting up procedures to field phone calls, send out statements, and accept payments. All of that had to be in place, at a cost of millions of dollars, before card number one could ever be issued. In a world where entrepreneurs learn about minimum viable products and iterating quickly, we had to set the stage for this in very solid detail before we could figure out if it was even going to work.
Seems like a hard sell to convince seed investors to sign on.
(Laughs) That’s the understatement of all time. It was extremely difficult. The first dollars in the door were from investors entirely betting on me. This is not something venture capitalists get excited about. It requires a big initial investment and then huge investment after that before getting to scale. It was just pure pushing that boulder uphill and talking and talking to people. I spoke to more than 200 different investors trying to convince them to get involved. It’s not a space that lends itself to entrepreneurship in a very ready fashion.
But that said, if you can get it done and get into the business, there are opportunities to innovate in delivering the product, in communicating with the customer, in using technology such as artificial intelligence and machine learning in our underwriting engines. So there’s a lot of fun and interesting ways to be a part of this space. We’ve been able to blaze this trail despite the challenges.
With your AI tools, what data are you looking for?
One of the things I’m excited about is bringing in data from alternative credit bureaus that capture factors such as their rental history and cell phone usage to help us predict why things might be different in the future. A lot of data that’s consistent with overall changes in people’s lives can demonstrate creditworthiness even if they have faced financial issues in the past. For example, someone might have seen an uptick in their work hours, which can show up first by them increasing the payments on their pre-paid cell phone. Those things don’t make their way into the mainstream credit bureaus, but we trained our engine to evaluate what has changed. Then we can follow suit and change the direction of the customer’s credit life.
You’re also using a “chatbot” to communicate with users. How do you walk the line between helping and nagging?
It’s incredibly tricky, but our incentives are aligned with our customers’ incentives. We apply behavioral economics principles to frame when, what, and how to message our customers. We’re careful, because the disaster outcome is people getting so much messaging from their credit card company that they opt out. We try to create messages that drive the behavior that’s most important to us — making payments on time, ideally in excess of the minimum payment, and urging people not to max out the card every month. We try to keep the messages positive, in a way that’s measured and spaced out, getting them the information they need at the moments that matter.
“Thank you for your payment, you are on your way to credit success!” That’s the kind of thing chatbots enable us to do, and that works better than, “Hey, your payment was due three days ago.” You congratulate them and celebrate their wins on things that are consistent with managing their credit well. That turns out to be incredibly powerful.
Any other ways you offset the higher risk?
We start with a small amount of credit. The mainstream average credit line is $3,000 to $5,000. We offer a $500 credit line. That’s enough to get someone through the end of the month, order some pizza for their family, and fill up their gas tank. We can’t take large risks. For our customers who use the card well, we grow with them and grow the credit line to $750, then to $1,000. We eventually hope to graduate those people into better products. We’re introducing a new card that has more of those features, but right now we’re a single-product company.
What do you wish you’d known back at Stanford GSB that you know now?
The importance of persistence. That has been the difference maker for me. That willingness to have 200 conversations just to get the capital to start the business, to spend a year and a half listening to the naysayers, knowing that it’s going to be hard and that you’re going to have to push against a lot of resistance. I believe in what we are doing here at FS Card, and I would have talked to another 200 people if that was what it took to build the business.