Oportun curbs new loans from borrowers amid record inflation

Consumer lending fintech Oportun continues to tighten credit standards, limit spending and focus on loyal borrowers as the economic environment strains the company’s target customer base.

Oportun, based in San Carlos, Calif., held back new customer acquisition and leveraged a new direct marketing program in an effort to cover delinquency rates amid record inflation and high unstable unemployment. Over the past few months, the community development financial institution has been laying the groundwork to offset the negative effects of a potentially recessionary environment, CEO Raul Vazquez said during the third quarter earnings call Monday evening.

“Starting in July, we launched a series of actions, including significantly tightening our underwriting standards to deal with the impact of inflation on our members,” Vazquez said. “I am pleased to report that these actions are having the desired effect. We continue to reduce our exposure to new borrowers and increase our proportional exposure to more profitable returning borrowers who have already successfully repaid at least one loan to Oportun. “

Oportun CEO Raul Vazquez said the company had tightened credit standards since July to account for record inflation.

Vazquez added that Oportun will also continue to expand its use of bank account data in loan underwriting decisions by giving more applicants the ability to share their data. Oportun is also deploying a new direct marketing strategy through which it will target more creditworthy consumers in its direct mail campaigns. . As of Tuesday afternoon, Oportun’s stock was up 27.5% on a day-over-day basis to $5.29. Shares of the company have fallen 74.4% since the start of the year.

The fintech was founded in 2005 to provide loans to low-to-moderate income people with little or no credit history.

Oportun reported net revenue of $147 million in the third quarter, compared to $140 million in the same period in 2021. The company also aims to keep expenses flat in the second half by reducing expenses. sales and marketing costs and limiting headcount growth.

“We are very committed to keeping spending as stable as possible, even as we approach 2023,” Vazquez said. “We recognize that over the past few years we have invested in the workforce as we developed our credit card product, as we developed the secured personal loan product, and then certainly as we made the acquisition of Digit. But we believe the organization is the right size today.”

Last year, the company quickly acquired new borrowers and expanded to 30 more states when it launched its partnership with Sioux Falls, South Dakota-based Pathward.

Oportun’s chief financial officer, Jonathan Coblentz, said his company expects an annualized net write-off rate of 11.9% in the fourth quarter, mainly due to loans made to new borrowers before the tightening began. credit standards.

In the first quarter of this year, new borrowers accounted for 51% of Oportun’s loans. When inflation started to rise, the company intentionally lowered that figure to 44% in the second quarter. In the third quarter, the new creations of borrowers from Oportun accounted for only 28% of its loans.

“(Returning borrowers) are the most profitable and proven part of the portfolio,” Vazquez said. “So we think it makes sense to really focus on that borrower today.”

Since the company began selectively adding new borrowers and focusing on loyal customers, early payment arrears, i.e. payments made one to seven days late, have dropped to 3% this quarter, compared to 3.3% in the previous quarter. First-time defaults hit less than 1%, matching pre-pandemic levels in 2019, as the company focused on “quality, not quantity of loans.”

Vazquez added that Oportun likely won’t try to resume acquiring new borrowers until inflation subsides, borrowers have more money after each paycheck and unemployment rates drop.

An analyst note from Keefe, Bruyette & Woods said Oportun had “ups and downs” in the third quarter, but the company’s efforts to mitigate macroeconomic challenges positioned the fintech for long-term stability.

An analyst note from JP Morgan said the company’s focus on an underserved consumer market with relatively more attractive interest rates compared to pawnshops and payday lenders sets it apart from traditional lenders. In the second quarter, Vazquez said Oportun would maintain its annual percentage ceiling rate of 36%.

“The quarter reflected Oportun’s continued market share expansion, albeit with positive delinquency trends showing the impact of tighter underwriting,” a memo said. Jefferies analyst. “We believe Oportun will be on a growth path as macro conditions stabilize and note that the company’s cost control has been strong. We continue to see Oportun well positioned for long-term growth and believe the shares are attractively valued.”

Last December, the company completed its nearly $213 million acquisition of San Francisco challenger bank Digit. Vazquez told American Banker at the time that the merger “creates a neo-banking platform which we don’t think matches anyone today.” Vazquez said on the call that Digit’s financial performance has “exceeded our expectations.” In August, the Consumer Financial Protection Bureau a fine of 2.7 million dollars to Digit for failing to prevent consumers from triggering overdraft charges on their bank accounts.

Oportun will begin testing its mobile application which brings together Digit’s savings, banking and investment products and Oportun credit products on a unified platform. The company has also expanded its lending-as-a-service capabilities and is expected to launch its previously announced partnership with Buy Now Pay Later platform Sezzle by the end of the year.

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