Want to Lend to Low-Income, High-Risk Borrowers? See What This Fintech Does
By Steve Cocheo, Senior Executive Editor at The Financial Brand
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Executive Summary
- As it trims operations that pulled down results, fintech lender Oportun leans into lending technology that helps parse risk among low- to moderate-income clientele.
- The company has grown more conservative in credit appetite, given concerns about the potential impact of tariffs and more on its blue-collar customer base.
- A relatively new angle in its credit analysis is a service from Plaid that enables it to track nontraditional credit forms, such as buy now, pay later, by observing their impact on deposit flows.
Oportun, a consumer finance fintech, has carved out a sweet spot among people earning on average $50,000 a year, many of them blue-collar workers who often aren’t ready for bank credit, but who want to avoid costly forms of borrowing such as payday loans.
This segment has been holding up fairly well in a changing economy — the potential impact of tariffs on these workers has been a concern — though the company has tuned its credit box to be somewhat more conservative. This includes a move to court more repeat business, in part by making more loans that are smaller.
Raul Vazquez, CEO since 2012, says multiple economic factors drive the caution. For example, he cites research by Goldman Sachs analysts that suggests that businesses only passed on a third of the price impact of tariffs in the first half of the year, and that more pass-along will be coming in the second half.
Another factor: The resumption of student loan payments has been eroding many consumers’ financial position. While this doesn’t directly involve most Oportun borrowers, says Vazquez, he worries that it will have a trickle-down effect on other parts of the economy as the borrowers reduce spending — and that influence could hit Oportun’s blue-collar clients.
All this reflects a more cautious credit stance for the company, which has been in the midst of an effort to slim down drastically, exiting lines of business added to become a one-stop shop for its market segment. In late 2024, for example, Oportun sold off its credit card portfolio.
Concurrent reductions in staff have sharpened the company’s focus on its roots. All told, about half the company’s workforce were let go as it exited four business lines, cutting about $200 million in annual expenses.
From its beginnings in 2005, most of Oportun’s target prospects have thin files at the credit bureaus. As such, these borrowers generally pay higher rates, much like the high end of credit card rates. The core business, on the credit side, consists of unsecured personal loans. In the second quarter the average loan size was about $3,000 and the average term was 25 months, carrying a weighted average annual percentage rate of 35.8%. The typical customer is borrowing for a pressing financial need, such as a security deposit on an apartment or an urgent car repair.
A small portion of the loan portfolio, which the company is working to grow, consists of loans secured by borrowers’ cars. The average loan size in the second quarter was about $6,300, with an average term of 34 months at a weighted average APR of 35.1%.
How Oportun Leans into AI and Nontraditional Credit Data
Opportun’s business flow relies on three channels — physical offices in some states, a phone center that takes applications, and a mobile app and online interface for borrowing. Customer contact is available both in English and Spanish. The common funnel is the company’s automated underwriting process.
“We think of all of those channels as nodes on a network that bring data into our centralized platform,” says Vazquez. He adds that the credit decisions rendered by the credit platform stand — “There’s no one in our company who’s got the title of ‘underwriter’.”
A keystone of the company’s process is income verification, but there’s much more to it today.
The process illustrates how consumer lenders can lean into machine learning and other forms of artificial intelligence in ways that banks and credit unions can learn from. The company’s credit process is also an illustration of why a clear solution to the bank-fintech data-sharing controversy, currently the subject of new regulatory drafting by the Consumer Financial Protection Bureau, is so important to the nonbanks who rely on banking data.
The automated credit process has multiple legs. The first is the bureau credit score — Oportun uses VantageScore, a joint venture of the three main consumer credit bureaus. The second entails tapping credit file data held in the credit bureaus, from which Oportun derives its own proprietary credit score.
That’s pretty basic, but from this point on Oportun’s process departs from the traditional. The third leg is the company’s “alternative credit score.”
“This allows us to score people who don’t have a bureau credit score and who may not even have any data on file at the credit bureaus,” says Vazquez. “Putting the whole jigsaw puzzle together is valuable for us.”
The alternative credit score draws on more than two dozen data sources that haven’t traditionally gone into consumer credit evaluation.
One is consumers’ record in paying their rent, data more and more lenders draw on. Vazquez says this is a strong factor to include, because the company has found that people who pay their rent regularly will tend to pay their Oportun loan installments as well.
A more atypical factor is the consumer’s cell phone status.
“I’ve never changed my cell phone number,” says Vazquez, explaining that this is common for many people who may switch carriers for better pricing, but who are able to carry their numbers from one provider to another.
There’s a potential “tell” in cell phone service. While consumers may have a stable history of where they live and may have the same stability in terms of where they are employed, something that may indicate a potential credit risk is a new cell phone number.
“If we pull their cell phone and find that the number has only existed for the last six to nine months, that can be an indication that someone ran up a big bill and just walked away from it, getting a new number rather than paying the bill,” says Vazquez.
“That can be a signal regarding willingness to pay that could give us pause,” he continues, “if they have shown stability in residence and work, but has adopted a new number recently.”
Read more:
Watching Nontraditional Borrowing by the Deposit Shadow It Casts
To these three, Oportun has added a fourth filter, what it calls the “bank transaction model.” This is a look at a consumer’s deposit behavior that provides a proxy for credit usage that isn’t currently showing up consistently in traditional credit reports. This relies on Consumer Report, which tracks a consumer’s cashflow data in their deposit accounts. Consumer Report is provided to Oportun via Plaid Check, a consumer reporting agency that is part of Plaid.
The reports — which require consumer permission to be used —show inflows and outflows from deposit accounts. Some of the data obtained serve as a check on income verification, but there’s more to it.
As inflation became a constant factor in consumer spending, the company became concerned about behavior that escaped the usual filters. Vazquez explains that Oportun realized that consumers with extra cash flow, even just a bit of a cushion, could represent better lending risks.
Deposit flows can expose earned wage access services and buy now, pay later plans. While the actual credit isn’t reflected in the reports, what is indicated is the stream of payments going to the credit providers.
“These can be really helpful signals,” says Vazquez. “If we see that someone is using buy now, pay later a lot and has tapped several earned wage access services, it gives us a sense of someone who is living at the very edge of their financial means — or even living beyond their means.”
Using this system, Oportun is granting fewer than 50% of the credit requests it obtains. The company favors repeat business, citing, in analyst meetings, better credit performance among that population versus newcomers. Borrowers can only have one Oportun loan outstanding at a time.
“Delinquency is not a profit center for us,” says Vazquez, pointing to lenders who tend to roll over consumer debt. “Our most profitable loan is one that gets paid off early or on time.”
Older loans, the “back book,” have had an 18% charge-off rate, but newer credits, the “front book,” have shown improved results, at an 11.6% rate. In the second quarter the company had its third consecutive quarter of profitability on a generally accepted accounting procedures (GAAP) basis.
Read more: How Credit Reporting Models Are Failing Modern Lending
Moving Forward with Funding Opportunities
As a nonbank, and not a depository institution, Oportun does not portfolio its loans long-term.
The company relies on warehouse lines of credit initially. Later, loans are put into asset-backed securities sold to banks and other investors. Some whole-loan sales are also executed. Three or four securitizations are put together each year, depending on the market’s strength and appetite. Vazquez says the company generally sets up the securitizations to be revolving deals, so fresh loans get poured into the top as paid loans drain out the bottom.
Oportun is finding the balance between lending to existing and new customers. Vazquez noted to investors this summer that new customers, which are good for the long term, create some short-term pressures due to higher losses. However, he says, as new customers become repeat borrowers, that adds to the company’s future profit potential.
Read more: The Midcap Banking Crisis: Why Retail Deposits Are the Key to Survival
