It is with a lot of sadness and disappointment that I have to announce that Rainy Day is shutting down. We had incredibly high hopes for Rainy Day – to revolutionize short-term lending by providing a much better lending option to Americans most in need of one. Unfortunately, effective today, we are no longer able to provide that alternative.
However, before we turn off the lights, we’d like to see if we can make a final contribution or two towards a better lending alternative in America.
First, by sharing the most significant things we learned over the past two years. My hope is they may be useful to someone trying to create a better solution to the cash flow management issues that face millions of American families.
The second is a standing offer to provide more details on our operational experience, as well as all of the Rainy Day lending platform code for free, to anyone interested in providing a better lending option for Americans most in need. Please get in touch with us at firstname.lastname@example.org.
To our repaying customers: Thank you! I wish we could have done more for you.
What We Learned
We felt that there were two fundamental things that needed to be true for Rainy Day to be a success:
- Providing a much better loan (in some cases 0% APR and an average of less than 100% APR versus the industry average of 391% APR) would result in word-of-mouth/virality, and lower customer acquisition cost.
- The combination of a Grameen social network model, proprietary and third-party screening algorithms, and much better interest rates would lead to lower default rates than the industry average.
The basic deal we offered the American payday borrowers was simple: We’ll give you a dramatically lower rate if you help us cut costs by your repaying loan and spreading the word.
Of all of the products and services Bright Light has created over the past 10 years, Rainy Day has been by far the least viral. Several of our projects have received hundreds of press hits around the world and amazing virality. In contrast, Rainy Day received none. We put out numerous press releases, reached out to dozens of individual bloggers and reporters in the space, and no one was interested in talking about the problem with us or our potential solution to it.
We also received almost no viral growth from customers. At first, this was exceptionally puzzling because we’d immediately received notes from customers telling us how thankful they were for the service.
We eventually figured it out. Rainy Day seems to fall into a category similar to a great bankruptcy attorney or an amazing foot fungus medication. Even if you think the product is fantastic, and know that friends and family would benefit from it, it’s not a topic you’re excited to discuss.
Because of the large profits the biggest payday industry players make, they’re able to spend hundreds of millions of dollars a year acquiring new customers. This has pushed up the average price of acquiring a new customer to about $250. Some companies pay more than $500 per new customer. Despite our best efforts to find a cost-effective way to get the word out, without referrals we weren’t able to find an affordable way to reach new customers.
While it might have been possible for us to find a way to move forward without the virality it was a moot point because we got absolutely annihilated by default rates. Despite accepting less than 20% of applicants, all of whom passed multiple in-house and third-party screens, our default rates were staggering.
We knew industry default rates were high before starting Rainy Day – roughly 60-70% per year. What we didn’t know, because there wasn’t good public data, was that those numbers are brick and mortar specific. Online default rates are double that –120-140% per year – and those numbers are much lower than what a new entrant will see because they reflect a heavy weighting of repeat customers (repeat customers are much, much less likely to default). Our default rates were much worse at least in part, if not entirely, because virtually all of our customers were new customers.
In some of the lending cohorts (batches of loans all made within the same two week period) we saw default rates above 60%, meaning more than 3 out of 5 new customer loans were not repaid, and when you annualize those losses they are multiplied at least ten fold (because you are losing that amount every 2-3 weeks, so potentially 24 times a year). Even in our later lending cohorts of much less risky repeat borrowers default rates were far higher than the low-fee model could handle. No Rainy Day lending cohort was breakeven at our $1 a day rates.
In addition to all these challenges, the federal government’s handling of the payday industry has been a disaster. The poorly defined, “Choose Your Own Adventure” nature of the CFPB’s new proposed regulations earlier this year were convoluted, did little to address realities on the ground for millions of American families, and included large loopholes which virtually guarantee it will be business as usual for the large payday players.
Additionally, the unofficial administration policy of pressuring banks to deny bank services to short-term lenders (“Operation Choke Point”) has only made innovation in the space more difficult (we were denied an ACH account and bank account by more than 50 banks, credit unions, and financial services firms) and further entrenched the largest payday lenders who have the resources to secure bank accounts and access to money transmission.
Policy Suggestion Sidebar
We spent a lot of time thinking about potential policy solutions, and I can’t help myself from throwing at least one of them out here. If the Obama administration and the CFPB are genuinely interested in improving the lives of payday borrowers (which we believe they are) with some creativity and innovation, they have the ability to do so at virtually no cost.
Currently, a meaningful percentage, if not all, of most payday borrowers’ earned income tax credit goes to paying off the principle and accumulated interest of the previous year’s payday loans. We suggest that the CFPB works with the IRS to cut the middleman – the payday industry – out of the process.
If the federal government agreed to backstop a borrower’s losses with their earned-income tax credit for the following year, it would virtually eliminate the risk of default and would make it possible to provide short-term loans at a very reasonable interest rate (e.g. 15% APR as opposed to the current industry average of 391% APR). This would cover the cost of operations and provide a reasonable profit to private lenders/servicers.
I’m not generally a huge fan of government providing services widely available in the private sector. But, in this case the government is in a unique position to dramatically reduce the risk and, therefore, the cost of these loans, and have a very meaningful impact on millions of families’ lives as a result.
We truly hope there is some real innovation in this space soon, whether driven by government regulation or startups. So far everything we’ve seen that claims to provide a better alternative (e.g. LendUp) is primarily innovative marketing and technology. When you look at the terms of the loans, they are in the same 200-600% APR range as the traditional payday loan companies.
As the great three-part series by the Pew Charitable Trust on Payday Lending in America vividly illustrates, most of the borrowers in the space are in the heartbreakingly paradoxical situation of being unable to afford the terms of a payday loan, as well as unable not to regularly take one.
I have absolutely no doubt that we can solve this problem with smart government policy and true innovation, and it’s a problem that truly deserves our energy and attention.
Millions of working American families struggle each month just to pay the rent and put food on the table, with no buffer for unexpected bumps in the road. The payday loan status quo of high default rates and even higher interest rates is a terrible solution, but the only one available at the moment for millions of families. A real solution would have an immediate and very meaningful impact on tens of millions lives daily.
Let’s make it a priority to sort out a real solution now.
If you are working on a solution and think we can help in any way, please email us at email@example.com