By Gib Lopez, Co-Founder and COO and Camila Perez Aloi, Senior Risk Manager
When we started PayJoy five years ago, our theory was that we could unstick the credit ecosystem by providing customers with little or no access to credit with collateral in the form of smartphones and giving lenders the ability to effectively collect against overdue payments. That thesis has now been proven out in over 20 countries but faced an unprecedented test in the form of coronavirus and its impact on economies on incomes.
Fortunately, repayments powered by PayJoy have proven to be remarkably stable, with only slight repayment decreases from our pre-coronavirus levels. This pattern is consistent across mature and new cohorts as our smartphone locking technology continues to provide a powerful incentive to repay.
Before looking at our results, it’s important to acknowledge how fundamentally Covid-19 has changed consumers’ lives and the lending landscape. First, while this disease could infect anyone, it is hitting people with the least resources the hardest. These are the people that can’t take sick days, that can’t maintain distance from strangers or customers, that don’t have savings they can rely on, and can’t easily access formal credit. And while lenders have seen crises come and go, nothing really compares to what we’ve seen from the effects of the coronavirus.
Repayments have fallen off a cliff. The Economist reports that one India lender’s non-payment rates have gone from 5% to 90% in a matter of weeks. Forbes is calling this a crucible for fintechs that will force many to “partner or perish”. We’ve heard of others that have seen their repayments go to zero as customers hold on to every last dollar. Cash lenders and retailers that sell on credit will continue to struggle or go out of business entirely as long as Covid-19 keeps economies shut down and threatens to roar back in successive waves. Even those with deep pockets and sufficient funds will be forced to stop lending and sit on the sidelines.
However, across our own lending business and that of our partners, repayments have been strong with hardly a dip. When indexed to “perfect” repayment, the impact of coronavirus isn’t even noticeable. You can see this result in Fig. 1 below where we’ve tracked repayments for our last six cohorts grouped by month as compared to idealized repayments. Of course, over time, all of these lines trend downwards as more and more people cease to be perfect repayers. Without PayJoy, you could expect to see each cohort’s payments drop significantly when its Days on Book reached the first Covid-19 related impacts. At these rates, PayJoy earns a reasonable return sufficient to attract institutional capital.
Now, one way to achieve this result would be to let existing customers repay and then “improve” future cohorts by tightening credit policy just to very high quality or existing customers. Of course, we did make some changes to our credit policies but these have only decreased approvals by around 5%. But, generally speaking, PayJoy has continued lending to new customers with little (Fig. 2) or no credit (Fig. 3) and their repayment has done similarly well.
So what is the PayJoy recipe for success? There are four primary ingredients.
- We are bringing to bear a new, transformative technology in the PayJoy Lock that collateralizes a customer’s most valuable asset, their smartphone. This has the effect of both discouraging bad customers from taking a loan (knowing they won’t be able to use their device once they miss a payment) and encouraging good customers to stay current.
- We and our partners give customers the flexibility they need in the face of volatile cash flows. If they miss a payment, they no longer have use of their smartphone, but interest doesn’t pile up and they have a strong incentive to begin repayments. And of course we always allow use of the phone to contact emergency services and can extend grace periods.
- We leverage the breadth of our smartphone financing platform to collateralize a device, underwrite and identify customers, identify fraud signals in customers or the sales channel, and, where applicable, score customers based on the data on their current device.
- We treat our customers with respect. One of our core values is Transparency so the customer always knows what they are agreeing to, their total repayment amount, and how this differs from an ordinary purchase or cash loan. We also understand when and why customers are likely to miss payments and have based our offerings on that knowledge.
While the challenges posed by coronavirus are unprecedented, we’ve found that our approach can protect lenders from the worst effects. If you are interested to see how PayJoy could prevent lost revenue and profit for your credit purchases or on your loan portfolio, please contact us today at firstname.lastname@example.org to help us get billions worldwide access to credit.