When Daniel Carter went through a divorce a few years ago, the financial toll it took lowered his credit score. Carter, who is general manager of a restaurant in Norwalk, Connecticut, needed a loan to meet day-to-day expenses but could not find a lender that would help him.
In a Google search, he found SoLo Funds, a Los Angeles-based fintech that lets users make small online loans to one another.
On SoLo's platform, getting a loan was easy, as was paying it back, Carter said.
"There are no big fees, no hidden fees, no hidden charges," Carter said. "It was simple."
Soon afterward, Carter had a stroke, and needed money for his medical bills. Again, he turned to SoLo Funds.
"It was so nice to have that, because I was scared," Carter recalled. "I was like, how am I going to pay for my medicine? Because medicine is very expensive. SoLo had no hidden fees, no hidden charges. It was reliable."
Over the course of a few years, Carter took out 15 loans from SoLo of $200 to $300 each. He does not remember ever being asked to pay tips or donations. SoLo Funds helped him through a tough time, he says.
These loans are no longer an option for Carter. Over a year ago, Connecticut banking regulators forced the company to cease and desist, over concerns that SoLo did not have lending and collections licenses and that it was forcing borrowers to pay tips and donations that, calculated as annual percentage rate, exceeded the state's 36% interest rate cap for small lenders.
Carter's credit score and cash flow have since improved, but if he had to, he would use SoLo again.
"I would pass the word on, too, in Connecticut, because some people I know have hardships and need money," he said. "I wish there was a place I could send them to, but there's nothing I could do because the places out here, you have to give your liver, your blood."
The demand for small, quick loans is high across the country, according to Alphonso David, CEO of the Global Black Economic Forum.
"People that are living in underserved communities do not have the financial resources from institutions in order to sustain themselves," he said.
Acute awareness of this need drove Rodney Williams and Travis Holoway to create SoLo Funds.
"As African Americans, you tend to take on the burden of your family, meaning, your friends and family will ask you for money," Williams said. "It's pretty consistent. It's to pay for a bill, utilities, someone has a surgery, someone's going to school, you name it. It was a burden that we initially just thought it was our friends and family. But when we double clicked on the problem, it wasn't just our friends and family, it was the majority of Americans. It was everyday Americans."
A new lending model
SoLo Funds' platform lets people lend to other people. Borrowers can pay an optional tip to the lending member of up to 12% of the loan amount and an optional donation to SoLo itself of up to 9%. The median funding time is less than 15 minutes, and the average total cost a borrower pays over a 12-month period is 13.4% of the borrowed amount, the company says. It reports a 93% repayment rate and a 6.8% default rate.
The company, which was founded in 2018 and is the only Black-owned fintech Certified Benefit Corporation in the U.S. (which means it's a nonprofit), now has one million registered users and has funded 800,000 loans for a total of $200 million. SoLo says 82% of members are from underserved zip codes. More than half (60%) are women; 59% identify as minority.
SoLo recently commissioned a report called Cash Poor, based on research conducted by Opinium and London's Centre for Business and Economics, and authored by Professor Melody Harvey from the University of Wisconsin-Madison.
The report found that 47% of people living paycheck to paycheck use a subprime credit card to meet an unplanned expense. About 38% borrow from friends or family. About a fifth (21%) sell possessions, 14% use payday loans and 12% get a personal loan through a mobile app, from a fintech or a bank.
The most expensive option, according to the report, is subprime cards, which have average fees adding up to 41% of the principal borrowed. The total cost ranges from 8% to 76% of the borrowed amount, the study found. Next most expensive are payday loans, with fees of up to 48%. In this analysis, SoLo Funds was found to have a maximum expense of 36% of the principal.
"So many people in this country are living paycheck to paycheck, and you have subprime credit cards, you have payday loans that have been authorized by legislative bodies around the country," said David at the Global Black Economic Forum. "And they are allowed in most cases to charge exorbitant interest rates. Subprime credit cards are four to five times more expensive [than some fintech loans] and they have been legitimized by legislatures and the financial services sector. And the collateral consequences for minority communities are significant."
Some state regulators have argued that the tips and donations that fintechs like SoLo Funds suggest can exceed the states' 36% caps on annual percentage rate.
Consumer advocates have hurled similar accusations against SoLo Funds and other fintech small-dollar lenders.
"Payday lenders like SoLo Funds have fought the APR for years because they don't want to face the triple-digit cost of their loans," said Lauren Saunders, associate director of the National Consumer Law Center. "As the consent decrees in D.C., California and Connecticut against SoLo Funds show, their loans have exceeded 500% APR and even have reached four-digit rates."
The short-term nature of SoLo Funds' loans gives them a high annual percentage rate, she said.
"I think that issue is a strawman, if you will," David said. "All you have to do is look to see which [type of loan] is more expensive" – subprime credit cards, according to the report.
Regulators are "getting lost in the minutia of which approach is better as opposed to actually looking at the impact," David said. "They have legitimized subprime credit cards that are charging primarily poor and Black and brown people significant interest rates. And then if there's another product in the market that is charging them less, they're criticizing that product, even though it costs four to five times less. So where are your priorities?"
David would like to see regulators rethink the way they look at all credit options for cash-strapped people and "try to regulate them in a way where they're not overcharging underserved communities."
The wealth gap in America is greater today than it's been in the last 30 or 40 years, Williams points out.
Michigan State University Federal Credit Union and Nymbus teamed up to design a package of business banking tools with an eye toward credit unions, which historically have tread lightly into this space.
"That means all of the regulation that is supposed to create inclusive services does not work," he said. "The entire system, including current regulation, is designed for people with money. And it's heavily weighted on historical products. What regulation tries to do today is take something that was created 50 years ago when they didn't appreciate every single American."
Because SoLo Funds is a B Corp, it makes less money than other lenders do, by design, Williams said.
"We operate at a very slim margin," he said. "We are by far the most affordable option to borrow in the United States. We don't sell data. We don't have accruing interest, we don't have compounding late fees. We don't have these things that would make this an extremely profitable business to do. Most of the large VCs have told us that we need to charge more money."
And while regulators calculate SoLo's tips and donations as part of an APR, they do not typically count the late fees, annual fees, origination fees or transaction fees of subprime credit cards as part of their APR.
"That's how they create debt traps. And that's how these things get really expensive," Williams said. "Politicians and legislators do not know that most people in this [cash poor] category do not pay credit cards on time. So that means they're getting a late fee every month that hurts them. And that is currently not calculated in APR."
If the CFPB and other regulators want to be fair, they need to include all fees in the total cost of credit, Williams said.
"If you were to look at the max cost that a borrower would pay on SoLo over a 12-month time period, it would be 36%," he said. "That means literally the max that a consumer would ever pay over a 12-month time period on a $100 loan would be $36. There's no funny math there. The minimum is $0. The average is $13.40. That's extremely affordable to the demographic.
"As a Black African American leader in finance, I expect the world to think that we're doing something wrong when in reality we're not," Williams said. "The regulators are doing wrong things. Legislators are wrong right now. Consumer protection agencies are not motivated to create solutions. They're motivated to create headlines and to penalize."
From Pampers to peer-to-peer lending
Long before Rodney Williams co-founded SoLo Funds, he was a brand manager for Pampers at Procter and Gamble. He was the first marketer to co-write patents for the company. In 2013, he was an Ad Age 40 under 40 award recipient.
He led the digital and social strategy for the diaper brand.
"Back in those days, and still to this day, the first thing that a new mom does when she realizes she's pregnant is go online and they ask questions," Williams said. "So that was the best time that you could actually communicate with them."
That digital marketing experience led Williams to co-found a financial technology company called LISNR that uses an advanced ultrasonic communication method for mobile payments. The idea was to make it easier for consumers to pay for things.
"If you think about near-field communication like ApplePay, it's only ever going to be accessible to a consumer who can afford a phone with near-field communication," Williams said. "So it will naturally exclude a large amount of the population. I was trying to create a better universal way to pay for things and to authenticate." The technology is used in the U.S., Africa and Southeast Asia.
Williams and his SoLo Funds co-founder Travis Holoway met when they were 19 and became best friends. Williams was the best man at Holoway's wedding and is the godfather to his son.
When Williams was at LISNR and Holoway was a financial advisor at Northwestern Mutual, they started talking about the need for something like SoLo Funds. In 2015, they began meeting after work at Holoway's office in New York City.
"We were trying to put this thing together, and from 2015 to 2017, for two years, all we did was take notes and come up with ideas," Williams said. "We would meet with folks and talk to lawyers."
In 2017, Holoway decided to leave Northwestern Mutual and try to launch this new company. He participated in three accelerators, making his way across the country, from Lumos in Columbus to Hillman in Cincinnati to Techstars in Kansas City. Eventually, Holoway and Williams were able to raise capital, move to Los Angeles and launch SoLo Funds in April 2018.
One reason they settled in L.A. was because the founders were admirers of Tala, another online lender to low-income people. Other fintechs in the city trying to reach the underserved included Zest Finance, Acorn, Dave and Albert. Another reason was because they were gaining more traction with Los Angeles-based investors than with Midwest based investors.
The core premise of SoLo Funds was to let people lend money to other people they don't know.
"We felt that there was a better trust for allowing people to interact with each other and let people hold each other accountable, and that we really needed to remove the institution from the agenda," Williams said. "That was where we kept landing on peer to peer."
Williams and Holoway grew up in communities that didn't trust banks and still don't trust banks, he said. Williams grew up in Baltimore; his parents were immigrants from Jamaica. His mother runs a daycare center in Baltimore. Banks have never helped her, he said.
"They've never given her loans when she needed them," he said. "They've charged her overdrafts and put her in debt traps. My mom is a successful small-business owner. She just had inconsistent cash flows, which would create certain issues. She can't get a loan."
Holoway's father worked for 35 years at General Motors. When Holoway was working at Northwestern Mutual, he could only call on people who had reached a certain net worth and had a certain number of assets. Though his father had consistent income for his entire life, he never had the assets to be eligible for the investment opportunities that Holoway was offering.
"He had $50,000 in his bank account, that wasn't enough," Williams said. "His $50,000 was sitting in an account at Bank of America and had never grown."
Holoway thought that if he could connect people who had some money in the bank, like his father, to entrepreneurs like Williams' mother who needed her cash flow stabilized at times, he could help both parties.
"The business model has nothing to do with tips or donations," Williams said. "The business model is people helping people, and that's what we're trying to preserve."
In the poorest neighborhoods, "there are stories of college educated, working people trying to make ends meet, but the economy is not showing up for them," Williams said. "The financial service products are not showing for them, and they feel left out. So what happens is they start to push out and they resort to really bad behavior. They resort to drugs, they resort to alcohol, they resort to crime. They resort to making really, really, really, really, really, really bad decisions."
