When it comes to places Americans can get a loan, there are the big banks and the government on one end of the spectrum and payday lenders at the other end. Plenty of people could use loans somewhere in the middle, and Raj Date wants to serve them. After spending time on Wall Street and then at the Consumer Financial Protection Bureau in its infancy, he has struck out on his own. Date is the founder of Fenway Summer, which is trying to provide loans to customers it considers underserved. Date spoke to Vox about trying to find new ways to do student, mortgage, and credit card lending.
DK: Maybe let's start with a rundown of what Fenway Summer does. What makes your firm unique?
RD: It seemed to me when I left the government two years ago — the nature of that role is that, when you leave you really kind of have a fresh start. Because when you go into the government in a role like that, you shed all your private-sector entanglements, and then when you leave, you really can kind of decide what you want to do from scratch.
It seemed to me at that time that it was a special moment in US financial services services, and maybe global financial services, because there had been demonstrable unmet needs for real-life people and real-life small businesses out there. There's sort of this ambient background state of annoyingly unmet market needs that would, from time to time, be punctuated by out-and-out market collapse — the bubble in real estate lending and the financial crisis being the most painful and obvious example of that.
I thought there was a special opportunity to help remake some important ways in which consumer financial services get done in the US. [We wanted to] build a firm that's flexible enough to be able to participate in moving the world from here to there flexibly.
Specifically in three cases, we thought there was a great market strategy to solve real customer needs out there, but we didn't see any existing team or firm that was doing it. So in those cases — one of them in mortgage, one in credit card, one in student lending — we either sponsored or cosponsored a startup, we recruited the executive team, we helped cobble together the corporate strategy, we seeded the initial capital, and then we kind of pushed.
And those three businesses we helped to launch are in various stages of existence. Our mortgage company has been up and running for four, five, six months now; our student lender that we cosponsored has been in the market for a little more than a month now; and our credit card firm will launch toward the end of the quarter, sometime this spring.
DK: You said you want a firm that can move from "here to there" flexibly. What are the "here" and "there"?
RD: The "here" is the way in which traditional financial services are delivered. So, for example, the amount of revolving credit that is extended to overdraft customers and to payday loan customers. For the majority of customers who use overdraft and payday, that's actually a pretty inefficient way to secure credit for very real-life demonstrable needs.
And in the future, by virtue of advances in both distribution efficiency [and] analytics technology, that can be done better. That's the underlying premise of our credit card business. We're finding those payday and overdraft customers who are using those products to basically solve intermittent cash flow crunches, and we're going to be able to give them a product that gives them more utility and at a dramatically better cost.
DK: Isn't that a tough balance to strike? In the case of non-qualified mortgages or subprime credit card users, is it tougher to say, "Yes, this person is likely to pay me back"?
RD: That really is the core of credit intermediation. What's the sine qua non of a financial system that works? It's to serve as an effective and efficient intermediary of payment processes, and it's to serve as an efficient arbiter of credit risk. And credit is a risk. If you want to lend to actual individuals in the US, you have to have a certain risk appetite. And you try to be right as often as you can, but you have to be able to price for those occasions where you're going to be wrong.
DK: How alone are you in this space? Who are your biggest competitors?
RD: In general we're trying to solve problems that are not solved well by the marketplace as a whole. So although, for example, our mortgage company certainly provides GSE-eligible loans — after all, it's 85% of the market — over time, you wouldn't expect us to be dramatically better than our biggest rivals. And you have to realize that we are what, one-millionth the size of Wells Fargo. And the world probably doesn't need another commodity provider of GSE loans.
We deliver good service to our customers, et cetera, but the fact of the matter is we're going to be really distinctive in our ability to deliver loans that other people find too difficult to do. And sometimes it's an advantage to be really focused on a particular set of needs.
DK: You said the marketplace just hadn't solved this yet. Why hadn't that happened?
RD: A lot of these things are historical. Markets, over time, are efficient if and only if the the institutions and structures that grew up within them enable that efficiency. And let's take some examples of the places we're focused. So student lending, for example. The way that student lending evolved in the US, the vast majority of originators of student loans originated paper that was going to be guaranteed by the government. As a result, you didn't really have a credit culture develop in student lending.
A subprime credit card is a little different. It's sort of breathtaking to see how much subprime capacity came out of the market between, say, 2006 and today. And in my opinion, that's why payday lending volumes between the start of the recession and the peak of the recession were flat to, even, up.
Just think about that. Usually, payday lending volumes should go down in a giant recession, not up. And the reason is you need a job to get a payday loan. And if unemployment doubles, payday lending should come down — but it didn't. They were remarkably resilient. I think a big part of the reason is I think a lot of the capacity for subprime credit card borrowing had been exiting out of the marketplace.
And so the reason why so much of the existing industry fled the subprime customer in the US had to do with ancillary reasons. For example, the Credit Card Act — which I think was actually a quite good and solid piece of legislation — did in fact lower revenue margins across the business.
At roughly the same time you had an accounting change [in credit card securitization] ... oh, and by the way, the mortgage business completely fell out of bed.
If you're running a big bank credit card issuer and it's the year 2008 or 2009, well, gosh — I have a business that suddenly generates less revenue than it used to. It serves customers that actually tend not to be core bank customers. It's way more capital intensive than i thought it was. And by the way, I need more capital because my mortgage business is bleeding.
Naturally, they almost all simultaneously stopped serving this customer and moved up-market. The unfortunate thing about that is we're talking about three or four deciles of the American population who really have actual credit needs that can be relatively efficiently serviced through this exact product. And that created a hole in the marketplace, and one that we've been able to put together a team and a structure to really get after and solve.
In a business like financial services, you absolutely need sensible regulations ... but just as important or more important, I think, is that within the context of a regulated industry, you have to have players who are trying to do the right thing, who have a certain cheerful ruthlessness to them.
And by that I mean when you find a market that is being ill-served, or products that don't seem quite right, you figure out something that's better and you are absolutely ruthless in rolling them out and trying to drive worse products out.
DK: Is there anything you learned at CFPB that you think is particularly useful in your new job?
RD: A few things. The first, which is probably the hardest to intuit from the outside, is getting a comfort level with the notion of starting up a new enterprise. [The CFPB] was a difficult thing to pull off operationally ... and we did it. And I think — either rightly or wrongly — that has given me a sense of confidence about the art of the possible, about devising and rolling out new enterprises.
The second is that I will admit that I was, prior to the CFPB, a lot more familiar with actual customer needs as represented through the icy veneer of an Excel spreadsheet, rather than actually getting out and talking to real-life human beings with real-life problems and real-life triumphs and real-life failures. And that's something that — frankly, it was that kind of cultural attribute that [Elizabeth Warren] really brought to the place. This notion that if you want to be serving the American people, you probably should spend some time with them.
The third aspect that was striking was, I got to know businesses that I otherwise would not have known at all. My confidence that we can take [market] share from the overdraft and the payday businesses from a well-constructed credit card offering is at least in part grounded in the fact that I got to know the overdraft business reasonably well over the years.
DK: On a different note, you're on the board at peer-to-peer lender Prosper. P2P isn't super popular just yet in the sense that they're not mainstream, but clearly you're hopeful about it. What do you think is the future of P2P lending?
RD: I think when you look at the growth rates of Lending Club and Prosper it's hard to argue that they're not catching on. It's been really, really remarkable progress and it's been terrific to be around.
But when you think about what it takes to deliver, create, and fund quality credit that actually makes someone's life better, you've got to have an efficient way to distribute the product; you have to have an efficient way to make decisions about individual loans; you have to have an efficient way to fund the loan; and you have to have an efficient way to service the loan.
At every single one of those pieces there are reasons to believe the technology, whether it's analytic technology or mobile distribution, can make things both better from a customer point of view and cheaper. When you can use technology to make something simultaneously better and cheaper, it could be that you've got something going.
This interview has been edited for length and clarity.