Google Invests in Payday Lender but Could Have to Ban Its Ads
May 19 2016 - 5:59AM
Dow Jones News
By AnnaMaria Andriotis and Telis Demos
Google announced this month it would ban payday-loan ads.
One wrinkle: It is an investor in a payday lender.
GV, the venture-capital investment arm of Google's parent
company, Alphabet Inc., has been investing in online lender LendUp
since before the startup launched in 2012. The company provided
capital for every equity round LendUp has since done.
Last week, Google announced it was banning payday-loan ads from
its site in response to growing consumer-advocate concerns about
the lending practice. The Consumer Financial Protection Bureau is
also expected to release proposed rules for the payday-loan
industry this spring that could wipe out a large share of that
industry.
San Francisco-based LendUp is among the most well-funded lenders
in recent years, having raised $150 million in debt and equity
earlier this year despite a broad pullback in new money for
financial-technology startups. Its other backers include Andreessen
Horowitz, Kleiner Perkins Caufield & Byers and QED
Investors.
The Silicon-Valley backed firm specializes in mostly high-cost
loans geared to borrowers who can't get financing from banks. The
lender says it is an alternative to payday loans, because it
doesn't charge early-payment penalties or roll over loans when
borrowers don't pay it back, practices common in the payday
industry.
But like a traditional payday lender, it specializes in
short-term, small-dollar loans with annual percentage rates
generally in the triple digits that can run higher than 600%.
Borrowers' repayment periods can be seven to 45 days, depending in
part on their state. So it will be affected by the ad ban, LendUp
acknowledges.
"We do worry about how this will play out and think it paints
with too broad a brush," said Sasha Orloff, LendUp chief executive.
LendUp, the moniker used by Flurish Inc., said the Google ad ban
could make it harder for the company to market its loans and that
the firm will have to change its strategy for attracting new
customers.
The lender wasn't involved in Google's decision, which takes
effect July 13. The ad ban also affects traditional payday lenders
including tribal lenders tied to Native American reservations that
can skirt state laws and are frequent advertisers on Google.
LendUp's marketing team has spoken with Google to understand how
the payday-loan ad ban would be implemented. It expressed concerns
to Google that certain payday lenders might find ways around the
ban.
"Even though we were surprised by the announcement and would
take a different approach, LendUp and Google agree on a fundamental
fact: The current payday-loan industry is bad for Americans," Mr.
Orloff writes in a coming blog post that was reviewed by The Wall
Street Journal. "Google is applying pressure from the outside, and
we applaud them. LendUp is trying to change the system from the
inside."
In its May 11 announcement, Google cited research that showed
payday loans "can result in unaffordable payment and high default
rates for users." It also explained its decision by noting that
"ads for financial services are a particular area of vigilance
given how core they are to people's livelihood and well being."
Google didn't consult GV when considering its ad move but did
consult industry officials broadly, according to a person familiar
with the company's thinking. The policy won't affect search
results, only paid ads, and won't apply to all LendUp products, for
instance, some of its longer-term financing options.
LendUp distinguishes itself from payday lenders in part by
lowering the interest rates it charges repeat customers. The lender
also offers longer-term financing, referred to as installment
loans, and more recently rolled out a credit card for some of its
more qualified borrowers.
Google's move will also affect other companies that offer
short-term loans. Online lender Elevate Credit Inc., based in Fort
Worth, Texas, also charges triple-digit interest rates on some
short-term loans, which are primarily marketed to consumers who
can't get loans from banks.
"Unfortunately, Google's decision just makes it harder for
consumers to evaluate the available options and select the product
that is right for them," said Elevate CEO Ken Rees. Elevate said
its products are distinct from typical payday loans, for several
reasons, including that it reports to credit bureaus and eliminates
many fees, including for late payment.
(END) Dow Jones Newswires
May 19, 2016 05:44 ET (09:44 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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