Compliments of DM Confidential
The past three weeks have had more than just the financial markets on edge. They have caused the whole world to take notice. Included in that group are those in the mortgage lead generation market. After years of prosperity, that world experienced a jitter earlier in the year and currently faces an environment not yet seen since its inception. The stock market may have recovered a decent percentage of what it lost earlier throughout the month, the same does not hold true for the mortgage market. Subprime lending has undergone a shift that no quick recovery in stock prices can counteract. No longer will consumers with poor credit have access to funds as easily as they once did. Rationality and caution has replaced the not quite irrational exuberance we saw for five if not more years.
By now, especially as the overall industry starts to contract, we start to realize the uniqueness of the past few years mortgage lead generation market. Who would have thought that mortgage, namely refinance, could act like a run of network ad? Yet, if you think about those companies that leveraged the previously booming mortgage market, they acted less like vertical specific marketers and more like one that looks simply to cast a wide net. Very few other verticals could run across such a wide swath of inventory and do well. It almost makes sense that the incentive promotion gift card offers would work on untargeted spots like email, but mortgage? Yet, it’s these untargeted spots that performed best for those buying media. More than one mortgage lead generator’s fortunes were made or lost by figuring out Yahoo and/or MSN. These spots will continue to work for a select few, but they will no longer become the sure fire way to get volume.
The dramatic change in lending, which stems from an overall tightening in the credit markets, has meant that while the same number of people might fill out a refinance form, fewer will qualify and have access to funds. And, it’s this exact topic that we have addressed in various iterations the past two weeks, including last weeks graphical representation of the interaction between demand for borrowing money and lenders’ appetite and ability to give. Overshadowed by the market turmoil of the past few weeks, though, we see a different type of credit crunch immerging. This one also involves subprime borrowers, and in many ways it parallels the mortgage market, in that a group of borrowers accustomed to obtaining funds no longer can. Again, similar to the mortgage market, there still exists a very large pool of people desiring access to these funds. The biggest differences between this subprime market and that impacting the mortgage one comes in the form of the reasons for its change. This one, too, has relatively lax standards for accepting new customers, but the broader markets desire to securitize these loans plays only an ancillary role rather than a primary one. The illustration of this change comes in a potentially unlikely place – the paydayloan market.
The payday loan market has long, if not always, catered to the subprime market. The mortgage market on the other hand accommodated the subprime market because they could. Only recently has the mortgage lead generation market had to deal with that which the payday loan lead generation market has long struggled, ineligible borrowers. Mortgage lead generators might think how unfair it is that fewer and fewer of their leads can qualify as sold leads, but almost all other major verticals have to contend with not only a decent percentage of un-sellable leads, they typically can sell a lead only once. Instead of setting back subprime focused verticals such as payday loans, the combination of not converting all leads into a sold lead and any sold lead being bought only one time has led to innovation, i.e., ways to maximize the value of the data they do capture. This innovation and desire to make the most of an interested consumer brings us to the heart of a recent shift that, like mortgage, has impacted those attracting subprime borrowers, one that didn’t start out directly related to payday loans but whose rise and fall can be best explained through the lens of the payday loan vertical. We’re talking about none other than the credit card industry, but not the cards that you probably have in your wallet. Some of these cards might carry the same Visa and MasterCard logos, but they act anything like the “priceless” promotions. These cards, targeted towards with poor credit or no credit at all, carry a definite price, both to set up and in terms of what they can do.
The marketing of subprime credit cards has gone on in scale, albeit rather quietly for years. My first recollection of these cards comes in 2002 not long after the collapse of Providian and their NextCard division which made, and lost, a fortune doing, of all things, the same thing that the current mortgage market has done, extending credit to high risk customers with little or no stated income. Unlike that ambitious, and now defunct, venture these cards didn’t take the same level of risk; their customers had to pay often heavy fees in order to obtain the cards. Their growth, while ongoing for years, certainly shot up in conjunction to the ever increasing number of subprime mortgage borrowers who needed additional funds to cover their credit driven, and now debt ridden, lifestyles. These consumers who found themselves in ever need for money didn’t turn at first to these credit cards, they turned first to the more obvious choice, payday loans.
As mentioned, not everyone who applies for a payday loan will get one. In fact, often only two-thirds of those applying will turn into a sold lead / funded loan. In the mortgage market, they call this 15% to 30% unsold; companies in the mortgage space have done so well that they didn’t focus heavily on the unsold, they didn’t need to. Not so in the payday space, where they call them declines. Instead of going to a trash bin like they often do in mortgage for other companies to mine, in payday loans, they aggressively try to monetize these declines (as some have already paid the affiliates). That they do so, and quite effectively, sets them apart from many other offers. As we look to understand how credit cards came to play a large role in this, it first helps to understand the difference between a payday loan offer and almost any other type of lead. With a payday loan applicant you, more often than not, have an incredibly motivated consumer. They didn’t click on some dancing alien suggesting they click to calculate a new rate. They came to the site because they needed a specific amount of money, and they need it right now. This means they will fill out a form that resembles what they call in the mortgage space a full ten-oh-three. Payday loan providers don’t collect just basic demographic information and property details; they collect the most personal of information, social security numbers and banking information. Even if a consumer won’t qualify for a payday loan, they fill out this information, and that sets the stage for what some have called the dirty little secret in payday loans. To understand, think of the incentive promotion space.
In the incentive promotion space, users first come to a site in anticipation that they will receive an item of value, from a restaurant gift card to high end electronics, or even a lawn tractor. The first step of the process asks the user to enter their email address with the next page asking for the shipping address, only the shipping details apply for a limited number of people, namely the miniscule fraction that will complete the process successfully. The postal information plays less a role in the original product fulfillment and almost everything to do with the various offers shown during the survey portion. By already having the postal information, the incentive promotion people can make it that much easier for a user to accidentally or otherwise sign up for an auto loan among other things. And, it’s the same thing that happens with payday loan providers, but in a more significant fashion. When a user fills out all of their information to try and receive a payday loan, they hit submit expecting the next screen to show their match. The vast majority don’t realize that after completing the form the next step occurs, behind the scene, with the lead generation taking their data to various buyers, seeing which if any will want the lead.
The submission of a payday loan brings us to the pros and cons of this business. Those filling out the form tend not to fall into the window shopping category that plagues other verticals where people often have a minor interest and just want more information, not to take action. The downside with such motivated, or as one company appropriately calls “desperate” consumers comes from the fact that your form is too commonly not the first form. These users, especially in search, will have filled out site after site to, in their eyes, increase the likelihood of obtaining the loan. An aside here comes from how this behavior negatively impacts their chances. Unlike mortage or education where filling out more than one form happens often, but tends to mean just more phone calls for the form-fillerouter, in the payday space, each successfull completion of a form results in a credit inquiry. In this case, the credit inquiry happens at one of two specialized agencies that do not report up to the Experian, TransUnion, and Equifaxes thus impacting their FICO score, namely Teletracks, owned by LeadClick parent and DPburea.
If a potential lender sees that a person has had their credit pulled quite frequently, they will often shy away from them as their algorithms will believe that person at higher risk for paying back the loan. Additionally, lenders will reject a lead when the user does not receive their paycheck via direct deposit. The terms of a payday loan allow the lender to initiate a transfer out of the recipient’s account, but without direct deposit, they do not have a good gauge of whether that check went to the person’s account, hence they can get their $550 on the $500 five days later, or if the person simply cashed their check and went to the track. Additionally, a buyer will decline a lead if the user has too many payday loans ongoing. They don’t mind lending to those with poor credit, but they don’t want to lose all their money doing it. For the estimated 15% to 30% of declines, people who really want money, almost no offer works better than a card offering them the chance to charge stuff. And, given that the payday loan providers already have collected so much personal information, the exact information excluding perhaps one field needed for a subprime card product, you can see how payday loan lead generators began to promote credit cards for subprime users to their declines.
When it comes to credit cards aimed at subprime consumers, three main types exist. The first are very similar to cards issued to prime consumers in that they too are unsecured credit cards, i.e. you don’t have to put anything down. Unsecured cards targeted at subprime consumers do require a set up fee and have low limits, generally no more than $300. They look, feel, and act like a standard Visa / MC and are backed by a bank. One of the biggest is Imagine Gold Card run by publicly traded Compucredit and distributed online via MediaWhiz’s Monetizeit division. The second type are secured cards or pre-paid credit cards. These too have set up fees and they offer no credit limit. Like a pre-paid phone card, you get to spend only what you put in there. It’s no different than buying a pre-paid Visa card, except that these cards find you at the right time. For better or worse, life often requires having some form of credit card, e.g. booking something online. One of the more successful ones was Everprivatecard.com. Third we have merchant cards. These can come in both unsecured and pre-paid, but they are not credit cards. They allow you to spend money at a limited number of stores. Several companies offer these including Edebitpay.
Each of the three types, while different, all play a role in helping payday loan lead generators monetize their declines. As important, they make up a fairly significant piece of the entire subprime consumer monetization. It’s not a secret that card offers exist in the flow, but it’s not wildly publicized either, until recently that is. An almost perfect storm hit the marketing of subprime credit cards. Two of the top performing offers were pulled at roughly the same time, the unsecured Imagine Gold Card and the extremely well-marketed, debatable in value, Everprivatecard, which unlike other credit card offers allowed for it to be almost an opt-out, not opt-in. As for the Imagine Gold Card, they did nothing wrong, but looking into their SEC Filings it seems as though they couldn’t raise as much as they planned, given the current lending environment so they had to cut back on new acquisitions.The third company mentioned above, Edebitpay also ran into some issues but of the more severe variety. They found themselves the subject of an FTC investigation and had their offices raided and business shut down at the beginning of the month. A check of their better business bureau ranking sheds additional light. The company currently has an F rating, not an easy task considering the BBB has 11 gradients starting at AAA going to F. Just check out a recent review corrected for spelling and languague, “fraudulent lying pieces of s***, poor excuse for human being, that’s what I think of this company and all their lying employees, with their crappy customer services.”
The timing of the credit card pull out and its subsequent effect on pricing of payday loans (now off by 15% to 20%) might seem connected to the broader events as a whole. In the case of one major player that holds true, but for now, both the payday loan space and card space remain strong. If anything, this recent change highlights the interconnectedness between various offers – the benefits and the risks. As one online payday loan generator put it, “No one’s having a happy August,” and joked, “Now, we actually have to work.” There is some truth in those jokes, but as we spoke, what came through was not frustration but opportunity. Every offer, every vertical runs into bumps, and this one which has impacted just about every major online payday loan offer, means no one has a definitive advantage. It’s also a lesson about making money too easily and not offering value to the consumer, as was the case with Edebitpay. It’s one thing to simply collect data, but another completely when you bill customers money, often money they don’t have. The cards will rebound rather quickly, and payday loans will continue to thrive. In the interim, we can probably expect others who have now realized the value of squeezing out every last penny to do so more aggressively in other areas