The scenario where someone uses a check's "float" to purchase something before the have the funds is still more common than many people think, according to the founders of Float, a startup that sends emergency "credit" to a consumer's debit card.
"Float is the 'America' that people don't think about that much," said Bryan Bradford, an independent financial technology investor that just made an undisclosed investment in Float, which launched Thursday. "People don't plan and they need to make a purchase 'right now' sometimes."
But it's not a payday lender, explains Kevin Bass, Float's co-founder and president. The company's other co-founder, Max Klein, serves as CEO.
Float, a Los Angeles-based vendor that's debuting initially in California and Utah with plans to be licensed nationally by the end of 2017, makes small loans of generally between $50 and $1,000, charging 5% on transfers of $50 or more and $2.50 for transfers under $50. The loans must be paid by the 21st of the following calendar month. The company isn't aimed at the unbanked, since users must have a checking account to obtain funds; the pricing differentiates it from payday lenders, which have come under fire by organizations such as the Consumer Financial Protection Bureau for charging fees of up to $30 for every $100 borrowed.
"We want to reach consumers who often times have issues accessing traditional credit because of a lack of history, but at the same time overdraft a lot," Bass said.
There may be a burgeoning market for Float. Writing in PaymentsSource, Harry Langenberg, cofounder of SuperMoney, a card comparison site, contends the growth of contract workers has made the relationship between payroll deposits and payments hard to manage for more people. Coupled with mobile apps and improved data management, this creates both a market for lower fee alternative short-term lenders to bridge the payment/payroll gap, and the ability of startups to lend at a lower cost with less risk.
Float considers itself a partner to banks, and intends to offer its service to banks on a white label basis. The startup does not use FICO scores to make credit decisions, instead relying on transactional data from the consumer and other public sources that give Float a sense of the borrower's creditworthiness. Approval takes a few minutes after a user applies via mobile app.
While banks rely on overdraft fees as a source of income, Bass argues that a service like Float is a chance for banks to extend goodwill to consumers by offering a lower-fee alternative to overdraft.
Float's model is a less stressful, more economical way for consumers to manage monthly payments and budgets when there are unexpected expenses, said Bradford, who has also invested in Ripple Labs, Octane Lending, Pay By Group, True Link Financial and other financial services startups. The product is a particularly good fit for young people, who often have a bank account but don't have a credit card, instead primarily using a debit card, Bradford said.
"Installment loans are a great product and have been around for years, but the plan for that product is to pay it off for a longer period of time," Bradford said. "It's a different product for a different personality type. [Float] is for an unexpected payment or series of payments."
The product is also aimed at people who spend beyond their account, but want to avoid overdraft fees that can be up to $40 per transaction.
"Average Americans overdraft millions of times a week in total," Bradford said. "It's become a very important source of short term funds for a lot of people."
"Startups like this provide a useful service to banks," said Rick Oglesby, president of AZ Payments Group. "They try out new and different things that more conservative companies can't justify. The things that work become acquisition opportunities for larger companies and the things that don't work just go away."
That doesn't mean that banks can get complacent, however. "They must keep a close eye on emerging technologies, products, and companies and make quick and decisive moves to acquire or match when disruptive solutions gain some traction," Oglesby said.