Turns Out, Lions and Bears are Big Time Predators
Plus, Cash App is going all in on a 260% interest rate lending model
Short-term loans are big business and can mean big money, even more so if they are offered in a cool, fintech-y way. I’ve written about the predatory practices of companies like the Dave App and MoneyLion.
As noted in those stories, both of these fintech lenders (and to be clear, MoneyLion is moving far beyond lending), offer small-dollar, short-term loans that carry APRs in the triple digits.
Turns out, that generates a ton of revenue.
As Jason Mikula of Fintech Business Weekly notes:
The rest of Dave’s revenue is “Service based,” which is primarily composed of “optional” tips and express funding fees. Dave reported $43 million of such revenue in Q2, up 25% from the $34.4 million it did in the same quarter last year. Service based revenue made up about 94% of Dave’s revenue.
Dave has narrowed its revenue target from its previous $200-$230 million to $200-$215 million for FY2022.
Meanwhile, over at MoneyLion:
Similar to Dave, 97% of MoneyLion’s revenue is classified as coming from “service and subscription” revenue. The category includes the $19.99 per month fee for MoneyLion’s “Credit Builder Plus” membership as well as expedited funding fees and “tips” from its Instacash Advance product.
At least MoneyLion has slightly increased its revenue forecast for 2022, now targeting $330-$340 million in adjusted revenue vs. its $325–335 million forecast from last quarter.
So, there you have it. Hundreds of millions in annual revenue generated from “fees and tips” that essentially work out to extremely high (triple digit) interest rates.
Turns out, making small loans with short terms at triple digit APRs works out to huge income.
Cash App’s Lending Madness
The ubiquitous Cash App has been quietly moving into the small-dollar lending business and is now reporting 1 million active loans a month.
Jason Mikula at Fintech Business Weekly reports on the Cash App credit offering and offers insight into APR and the possibility of more credit offerings by the company.
Mikula cites the quarterly report which indicates:
The product offers customers up to $600 that can be paid back in scheduled installments or as a percentage of what they receive into Cash App. This product has reached meaningful scale while also achieving strong economics: In June, there were more than 1 million monthly actives using Cash App Borrow. We have been focused on driving profitable unit economics, enabled by our discipline around risk management.
A small-dollar loan offered at a seemingly reasonable flat fee of 5% of principal certainly expands access to short-term credit.
Users already have Cash App on their phones, can have both direct deposits and peer-to-peer payments used to repay the loans, and the app is linked to bank accounts, giving the company another avenue to ensure repayment/avoid default.
However, as Mikula also notes, the APR of these short-term loans can reach into the triple digits:
While the term of the loan can be as long as a month, it’s likely many loans are for shorter durations than that — meaning, when calculated on an APR basis, they would reach triple digits. A loan repaid in one week would carry a 260% APR.
With such explosive growth since their launch some 2 years ago, it seems unlikely that Cash App loans are going away. However, it is certainly possible that regulators will take note of the interest rate and ask Cash App to make adjustments to their pricing platform.
One more note — these small dollar loans may well be just the beginning of credit products offered through the app:
Finally, it’s worth noting Block’s choice of the words “our first credit product,” which suggests it has designs on more credit products in the future. One can imagine various types of revolving credit products tied together with buy now, pay later functionality, Cash App’s peer-to-peer functionality, and its Cash Card (debit card).
Here’s more on Buy Now, Pay Later — which seems a logical next step in the Cash App evolution.