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Innovating with Liability Management. Jonathan Zinman Professor of Economics, Dartmouth College Scientific Director, US Household Finance Initiative. PopTech. September 17, 2013. Innovating with Liability Management. Consumer pain point (general): How do I find the best loan for me?

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Poptech

Innovating with Liability Management

Jonathan Zinman

Professor of Economics, Dartmouth College

Scientific Director,

US Household Finance Initiative

PopTech

September 17, 2013


Poptech

Innovating with Liability Management

  • Consumer pain point (general):

  • How do I find the best loan for me?

  • Whom can I trust to help me?

  • Design strategy:

  • Make loan shopping easy

  • Offer solutions at the right time

  • Build trust with a credible business model (fee-for-service)

  • Business case could work because:

  • Huge asset management industry

  • But debt is where the money is for most consumers

    • Hundreds of basis points on trillion of dollars

  • Two ideas along these lines…

www.poverty-action.org/ushouseholdfinance


Is there really money to be made

Is There Really Money to Be Made?

  • Focus just on overpaying. Take a household that:

    • Has $10k in credit card debt and pays +500bp

    • Has $20k in student loans and pays +200bp

    • Has $20k in auto loans and pays +100bp

    • Has $200k in mortgage and pays +100bp

  • This household is paying >$3,000 in excess interest per year

    • Annuity value of $15,000-$100,000, depending on discount rate

    • Could get just a piece of this-- e.g., just auto loans– and be viable


Poptech

Liability Management Segment 1:

Auto-Pilot Refis

  • Consumer pain point: When should I refinance?

  • How do I find the best loan for me?

  • How do I get the timing right?

  • Whom can I trust to help me?

  • Product innovation: Putrefis on autopilot

  • Allow borrower to set a refinancing rule at origination

    • Like a limit order in asset management

  • Delegate mechanics to liability manager

    • Manager shops and negotiates on borrower’s behalf

    • Manager handles paperwork

      • Maybe even signing off under power-of-attorney

  • Business case could work because:

    • Paying for value; only pay if the transaction will save me money

    • Liquidity not an issue: fee can come from loan proceeds

www.poverty-action.org/ushouseholdfinance


Liability management segment 2 personal loan shopping

Liability Management Segment 2:Personal Loan Shopping

  • Consumer pain point: how do I find the best loan/card for me?

  • Product innovations (viz limitations with existing shopping engines):

  • Improve personalization (key for risk-based pricing)

  • Expand coverage: a single site/app/service rarely credibly covers all (low-cost) providers in the market

  • Improve credibility: move away from kickback/eyeball business model…

www.poverty-action.org/ushouseholdfinance


Making liability management work will borrowers pay how

Making Liability Management Work:Will Borrowers Pay? How?

  • “People won’t pay out-of-pocket for value-added financial services… they expect freebies”

    • But people do pay out of pocket for credit report management, identity theft protection, tax prep, etc.

    • People will pay when they are liquid, and feel like they’re getting value (tipping the teller at the check-cashing window)

  • Pricing Models that have worked in other contexts

  • Upfront lump-sum

    • Natural for cash-out refinancing?

    • Otherwise paid by credit card?

  • Monthly subscription

    • Teaser?

  • Periodic “debt under management” fees

  • www.poverty-action.org/ushouseholdfinance


    Pricing liability management unlocking borrower willingness to pay

    Pricing Liability Management:Unlocking Borrower Willingness-to-pay

    • Behavioral research offers some insights…

      • Willingness-to-pay depends a lot on framing, timing

      • E.g., on marketing and choice architecture

        • Content

        • Timing of offer

        • Ease of take-up (on-ramping)

      • Effectiveness can vary across contexts

      • So R&D needed to successfully apply these insights to autopilot refis

        • To liability management more broadly

        • To financial product development even more broadly

    www.poverty-action.org/ushouseholdfinance


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