Silicon Valley is teaching American retail banks a lesson in risk management that can save billions of dollars in otherwise lost revenue - reward education.
LendUp, an innovative and socially responsible startup, is reinventing small unsecured loans by rewarding customers who complete education modules with lower interest rates and larger loan amounts. LendUp found that borrowers who completed at least one of their free education modules were 80% more likely to repay. LendUp also found that repayment rates continue to rise as borrowers complete more education modules, suggesting that borrowers can apply and build on knowledge gained through a bank sponsored education program.
LendUp's robust credit education modules focus on changing the way borrowers value, spend, and, ultimately, repay their loans. The courses span from understanding credit scores to learning basic financial competencies and fostering positive saving habits. LendUp's education modules are built into its gamification platform, whereby customers earn points and receive added benefits as they climb up the LendUp Ladder towards financial independence.
LendUp's emphasis on helping borrowers repay loans through a transparent lending model and incentivized education is challenging the dysfunctional predatory lending methods that sank American credit markets in 2008. LendUp is proving to big banks that empowering borrowers is a more stable model than littering them with debt.
Incentivized education is used all around the world including in developing countries, but American banks have inexplicably failed to take notice. The Grameen Bank, founded by Nobel Peace Prize recipient Muhammad Yunus, achieves a near 95% loan repayment rate despite lending to borrowers with zero credit history because of its emphasis on education. Sasha Orloff, LendUp's CEO, worked replicating the Grameen model in developing countries around the world and learned that education could turn at-risk borrowers into responsible ones.
LendUp is proving that education is a low-cost and high reward investment. Internet sites like YouTube and Vimeo have greatly reduced the costs of creating and distributing content. And yet, American banks float billions of dollars in unpaid loans every year and ignore investing in proven educational programs.
Though recent positive signs in the economy have allowed JP Morgan Chase and Citigroup to decrease their reserves for projected unpaid loans (or loan loss reserves), banks can implement education as an internal mechanism for strengthening repayment rates - making banks less vulnerable to economic fluctuations.
Projecting LendUp's results onto the Federal Reserve's reported $1.959 trillion in total outstanding non-revolving loans in 2012, along with a 1.82% industry average delinquency rate (according to American Bankers Association), we can estimate that education modules can generate $7.1 billion in aggregate savable loans when adopted by all banks in the US. LendUp Analyst Mitchell LaPoff said that, "Incentivized education is a scalable solution - image how much money banks could make by increasing repayment rates by even a small percentage."
Ultimately, everyone would benefit if banks invested in the proven, profit driving force of incentivized education - borrowers would learn how to better manage credit, and banks would profit on otherwise unpaid loans. Even in finance, innovation can begin on the startup level, and through repeated success and adoption, improve an entire industry. American retail banks can use a little help right now, and incentivized education would mark a significant step in the right direction.