FICO is falling out of fashion. Last year Social Finance, or SoFi, started using its own proprietary underwriting score in place of FICO when evaluating applications for its student loan, personal loan, and mortgage products. As the company’s CEO told the Wall Street Journal at the time, “We just don’t think the score itself is a real driver to credit performance.”
It was a bold move for a young company with little performance history, but SoFi is not alone: Affirm, Avant, and Earnest have all distanced themselves from traditional credit scores.
And now they’re joined by Float, a Los Angeles-based lending startup, whose founders also say they have no plans to use FICO. The platform is launching today, and a look at its business model reveals why it thinks it can survive without it. Float is an app designed for lending small amounts of cash to customers in a pinch. If you’re facing the possibility of an overdraft, for example, a Float credit line, ranging from $50 to $1,000, can help you stay in the black. As with a classic American Express charge card, repayment is due in full the following month. Float also levies a flat 5% transfer fee.
Everything about the product is designed to appeal to millennials, who have become notorious for their aversion to the trickster fine print associated with banks and credit cards. One-third of millennials have never bothered to apply for a credit card, and the percentage of Americans under 35 with credit card debt is at its lowest level in more than 25 years, according to the Federal Reserve. A recent study found that millennials use cash and debit cards at far higher rates than older Americans. Over time, those preferences will become a self-fulfilling prophecy, as millennials without credit histories will struggle to get credit.
For Float cofounders Kevin Bass and Max Klein, that changing behavior presents an opportunity. “People need or want credit in that moment. We’re the fastest on the market,” says Klein, Float’s CEO. “We also give the customer the flexibility to use this line of credit for whatever they wish.”
Instead of pulling a FICO score, Float looks at two years’ worth of transaction history in an applicant’s bank account. “It’s a more inclusive credit system,” says Bass, who serves as president.
It’s also cheaper: Pulling credit reports adds enormous expense to the underwriting process.
Since June, when Float launched in beta, the company has been testing its model and refining its criteria. “The more times that your transactions have the word ‘cash,’ that’s predictive of a poor borrower,” says Klein. “It’s the little things like that we’re looking at.”
Float has also noticed that customers who arrive via Instagram are better borrowers than those who arrive via Facebook. “Everything is being computed and inputted into our score,” Klein adds.
Right now, the average credit line hovers around $280. More than 90% of customers return for additional credit the following month. During beta, both approvals and delinquencies were high, but in the coming months, Klein and Bass hope to cut their delinquency rate in half as they grow outside of California and Utah, where their operations have been based. “We want a lot of people in the platform now, we want the data,” Klein explains.
Today, they announced $3 million in seed financing, which will help support that expansion. Their backers include Camp One Ventures, FundersClub, and 500 Startups.
Bryan Bradford, an individual investor, also participated in the round. “The problem with a lot of lending businesses, generally, is that the people who start them are folks like us with good educations, high incomes, in that bubble,” he says. “Most of America, the great majority, is in a very different financial situation. They need quick access to cash for situations that come up.”
Of course, serving prime borrowers is good for business. SoFi and its ilk know that well, and make no apologies for it. (Despite growing criticism: “Even Good-Guy Student Loan Startups Still Favor the Rich,” a BuzzFeed headline proclaimed this past week.) Float is tackling a huge market, but it is also a market that the online lending industry’s early movers have chosen to avoid.
As for FICO, not everyone is ready to sound its death knell.
“Will it be replaced? I don’t think anytime soon,” says Lend Academy’s Ryan Lichtenwald. Companies that securitize their loans, in particular, often need FICO scores for the benefit of their investors, who use the score to normalize loan performance across wide portfolios. “But millennials don’t have a lot of credit history and it’s interesting to see these companies do more with data,” Lichtenwald adds. “Whether it proves to be effective over the long-term remains to be seen.”
Kenneth Lin, CEO of Credit Karma, has turned credit scores and reports into a business worth over $3.5 billion. He’s not worried, even if FICO itself loses some of its power: “Over time the credit report will have more and more dominance and the score will fade away,” Lin says, particularly as the data that goes into underwriting becomes more complex. Regardless, consumers will still have to monitor their credit histories. “Credit is the best predictor of risk.”