Wednesday, February 15, 2017
How Float Is Tackling Millennials' Lack Of A Credit Score
Story by Benjamin F. Kuo
If you're just out of school, at your first job--and you didn't get a credit card in school--you might just have a real difficult time of getting that first credit card. That's the experience that Max Klein, the CEO of Float (www.hellofloat.com) had, and is now looking to fix, with a new fintech startup which hopes to make it easier for Millennials to start to establish their credit record. We caught up with Max to hear about the company, which just announced a $3M angel funding round last week.
What is Float?
Max Klein: We founded Float a little over two years ago, to solve a problem we were facing ourselves. I was a little late to get my first credit cards, and after a couple of tries at applying for a card, I found I kept on getting denied. I was scratching my head, because I didn't understand why I was getting denied, because I had a good income, education, and a bank account for over ten years. I signed up for Experian, and I then realized that over the course of the last three months I had been applying to credit cards, which had been causing my credit score to decline. Every time I was applying for a new credit card, it would ding my credit score a little bit. I was really frustrated, and I figured out that for me, and a majority of young Millennials, it was a double edged sword. In order to get credit, you need a credit history. In order to get a history, you have to get approved for a credit card. That's very difficult when you have no history.
My co-founder, Kevin, was a chronic overdrafter from his bank, which causes similar issues. We came together to form the company, to help the over 45 million millenials facing this problem today. That inability to access traditional credit has led them to one of the worst, small dollar products that exists, which is overdraft. Overdrafts generate roughly $17 billion a year for big banks, and the average fee is $35 on an average transaction of only $24.00. If you annualize that, it's over 10,000 percent APR. What we've developed as a solution is specifically built to help our Millenial audience avoid overdraft charges, and to start proactively building their credit. The way the product works, is it's a mobile application, which you download and connect to your bank account. In a matter of seconds, we compute a credit line for you, between $50 and $500, and you can immediately start drawing on that line of credit using your existing debit card. We charge flat fee of 5% you transfer, with billing cycles every 30 days.
It sounds like you must have to deal with a lot of regulations to create the service, how have you handled that?
Max Klein: Everything about fintech is very difficult, especially lending. We've had to navigate lots of regulatory and compliance hurdles, which is something that banks spend millions of dollars on their budget every year. The most difficult thing we've faced, is the capital requirements it takes to start a company like ours. Because we've developed a proprietary algorithm, built in-house, which doesn't use normal FICO scores, we have had to prove ourselves by lending out our own money. We've originated over $300,000 in loans using our own capital, in order to generate the data needed to go the traditional market, to raise capital, which we can then lend to our customer base. Really, that's been the most difficult part. 99 percent of lenders in the U.S. use just that one FICO score, and that one score only. It's difficult to get those guys to change, because it's such and old and regulated industry. What we've had to do, is prove out our model with our own capital, to show that it's actually working, and working well.
Did you guys have a background in finance, or how did you end up starting your own fintech company?
Max Klein: Interestingly enough, unlike most fintech startup founders, we do not. We're not bankers, and we're not from the finance industry. However, a lot of our key investors do. We view that as one of our key strengths. We've been able to come out at this problem, and look at this industry with fresh eyes. In doing so, we've created a completely new product, in a very old industry. We are one of the first companies to not use a traditional APR, and we charge just a flat, 5 percent fee for any transfer. We are one of the first to be mobile only, and directly push money to a user's debit card. We didn't want to get into the business of issuing new plastic. But, thankfully, we've been able to put together an amazing team, with individuals from the traditional financial sector. It's been great to be able to collaborate with them, in addition to lots of our young employees, who do not come from the banking world--the designers, creatives, and marketers--all working together with those who do come from the banking, finance, and credit world. I think that's why, in my mind, we're able to create such a compelling product, which is unique in the industry.
Tell us a bit about your funding and investors?
Max Klein: We have raised a $3M, angel funding round from Camp One Ventures, Funders Club, and we also participated in 500 Startups, and the Silicon Valley Bank and Mastercard Accelerator, Commerce Innovated. We also have raised capital from a lot of strategic angels with a lot of domain expertise.
So where are you now, and what are your next steps?
Max Klein: Right now, we are launching officially, and we are live in Utah and California. We will be looking to scale up our user base here over the next three to six months, and in six to 12 months we'll be looking to expand our geographic footprint, and roll out nationally.