Can loan products be financially healthy?

In May we at indó launched our very own loan product. This was a happy moment since we’d been testing and iterating our lending products with customers since December and it felt great to open up shop. Building a credit product was a different experience from developing and launching other products like accounts, cards and savings. Loans introduce more risk, more third parties like credit agencies to collaborate with and potentially more difficult dialogues with customers that either can’t access the loans or can’t repay. So why did we so quickly after launching our bank start to offer loans?

• Credit is a solution to a basic and permanent customer need, to temporarily access more money than is available.
• Providing credit has always been the main revenue generator of banks. The quicker we can make this revenue stream available to indó the faster we can reach profitability.
• We saw the opportunity to make an indó product. Indó products are fair, transparent, financially healthy and fun. These are usually not the words people connect to loans.

Given the high interest rate environment in Iceland (CB rate 9.25%), loans are an expensive proposition for customers. One of the most expensive loans are overdraft loans, commonly priced by our competitors at 17%. Overdrafts are usually delivered in the form of a person's current account “going negative” when money in the account runs out and the customer keeps spending. Presenting the loan this way is perhaps mathematically logical, but seeing an ever growing minus can hardly be thought of as a pleasant experience. There’s a reason people prefer seeing their dentist than seeing their bank.?

Oral health aside, how did we go about creating a loan product that was fundamentally indó and not just incrementally better? We could think of our loan product as a single product that makes money available to customers, or three loan products that all behave slightly differently. It doesn’t really matter, but describing it in three bullets is an efficient way to communicate it:

• A revolving (can be repeatedly drawn and repaid) loan up to ISK 500k (c. EUR 3k) with a 6 month term and 16.5% interest rate
• A revolving loan that automatically decreases each month, also up to ISK 500k with a 6 month term and 14.5% interest rate
• An ISK 25k (EUR 175) loan made available 1 week prior to payday to those that using indó as their primary account. The loan is automatically repaid on the first bank day of the month and costs nothing

So far so good, but how is our loan product fair, transparent, financially healthy and fun??

Fair

• We price our overdraft lower than our competitors while still generating revenue for indó. We can do this since we operate indó as inexpensively as we can.
• People can freely modify what they need in terms of amounts, maturity and if they want to decrease their limit automatically or not. Sometimes doing this incurs a fee with our competitors. It's also nice for us since we don’t need to spend time approving or administrating things for users.
• If you only need a small amount just at the end of the month, it's free. It's not free for indó, but it's something we are happy to provide as a benefit to those using indó the most.

Transparent

• When setting up the loan, we show as many numbers as we can. This helps our users to understand the impact of taking the loan, such as that a smaller amount for a shorter time means the loan will be cheaper.
• We explicitly show the interest payments to create strong awareness of the cost of the loan.
• We are as specific as we can on why or why not people get a loan with us. Some of those factors people can impact but others they cannot (like the minimum age).?

Financially healthy

• We lower the cost of our overdrafts for those that opt into decreasing it automatically each month. Overdrafts are expensive loans and nobody that really doesn’t need them should have them. Our hope is that this helps people get out of maintaining an overdrawn balance.
• By offering a free alternative (the prepaid salary loan) the last week of the month, we hope some people can completely avoid taking an overdraft. If someone starts using an overdraft it's easy to just increase it and use it more.?
• Once people start using their overdraft, we change the homescreen interface to emphasise that people are now using borrowed money, and not their own money.?

Fun

• Money is known to be one of the most anxiety inducing things in people's lives. We designed our interface to avoid showing ever growing minuses, red balances and things that can increase anxiety about being in debt. At the same time we make it very clear when people have started spending their overdraft. Not sure this counts as fun but at least does not make opening the app terrifying when in overdraft…
• We enriched the setup process and the interface with light hearted illustrations to make taking and using the loan more pleasant.
• We celebrate repayment and decreasing limits, as getting out of debt should be made as fun and engaging as possible.?

Starting to lend from our own books just a year after launching the bank was a great team effort. It took cooperation across software development, design, marketing, customer service, risk management and product. Although I feel we’ve launched a Lovable Product, there is still much that can be improved. This train ain’t stopping here.?