Arjan Schütte: A different point of view in the ‘gray world’ of low-income consumer finance
Among the members of a committee that advises the Consumer Financial Protection Bureau on consumer issues, there are a handful of professional consumer advocates, an academic and executives from a few financial firms.
And then there’s Arjan Schütte.
He’s the founder and managing partner of Hollywood’s Core Innovation Capital, a venture capital firm that invests in financial technology companies with the goal of making financial services less expensive and easier to access for lower-income and average Americans — while also making solid returns for his investors.
That makes Schütte, 46, something of a man in the middle among the advisers to the CFPB, a federal agency created after the financial crisis that made headlines this month with its biggest-ever enforcement action: a $100-million fine levied against Wells Fargo & Co. over its fake-accounts scandal.
Like committee members from Citibank and lender Oportun, Schütte is in the business of making money. But like representatives from the California Reinvestment Coalition, the National Consumer Law Center and other advocacy groups, he also has a social mission in mind.
Bridging that gap is familiar territory for Schütte, who has invested in companies that serve the same market as payday lenders but at lower rates, while also penning a recent op-ed arguing that Google’s ban on payday loan ads was bad policy.
Schütte spoke with The Times about his investment philosophy, his dual role as advocate and investor and what advice he hopes to offer the CFPB over the next three years. Here is an excerpt of that conversation.
How did you intend to navigate your role as a man in the middle on the committee?
Companies are going to represent their best interests. Advocates will represent theirs. I’d like to think my voice is a mix and one that can perhaps provide a different point of view in how we think about consumer advocacy.
Some advocacy groups argue that any loan with a rate higher than 36% is bad. You have invested in firms that lend at rates higher than that, and in your op-ed argued that Google’s ban on ads for those loans will hurt well-intentioned lenders. Why stand up for such expensive financial products?
I don’t believe in rate caps. I try to see things in a nuanced way. It’s a gray world. I was tremendously excited that Google would bother and that they went to the effort to do this. But I was disappointed that they drew such a hard line, which makes it really difficult for innovators to get there. The practical reality of subprime consumer lending is it’s really hard to do a loan at 36%. Those who do it are saying no to a lot of people.
You also said you’d like to see Google separate good lenders from bad ones. Isn’t looking at the rates charged a simple, effective way to do that?
The efficacy, the goodness, the fairness of credit isn’t primarily wrapped up in the annual percentage rate. It’s primarily wrapped up in the structure of the loan, which is a more complicated thing to talk about. The cost of rolling over a payday loan five times is much more economically devastating than the $20 you spend to get the first $100. Everyone can afford the $20, but it’s when that turns into $100 or $120 to get $100 that things get [messed] up. We look very carefully at product structure, making sure there are clear disclosures, flexible terms and that consumers have the ability to repay.
What’s your general take on the CFPB and what it has done in its first five years?
Overwhelmingly, the CFPB’s existence is good and has been good for consumers. And of course there are plenty of examples of unintended consequences of good intentions. In some cases, much to my delight, CFPB has recognized that and has been willing to change their position once they realize they’ve made a mistake.
Now that you’ll be advising the CFPB, is there anything specific you’d like the bureau to do?
If there’s one thing I wish I could do there, it would be to 10x Project Catalyst. It’s part of CFPB that works with innovators and entrepreneurs to give them tools and safe harbors. They’ll allow innovators to pursue new ideas. Catalyst has a one-man team who makes regular visits to Silicon Valley and has office hours. They should have 10 more.
When Core started out, you talked a lot about the “underbanked” — people who don’t have or are not well served by banks. But now you talk more about “everyday Americans.” What’s behind that shift?
I’ve been playing with words and trying to find what feels right — what suggests the right thing. It’s not just the underbanked who are vulnerable. It’s not just people who are homeless, but people who live in McMansions who are totally struggling as well.
What are some investments you’ve made that speak to that wider focus?
One is Mirador — it’s not even consumer finance. It’s small and mid-sized business finance. One big focus in our second fund is on how to generate more income for people. Small and mid-sized finance seemed like a powerful way to do so. And small and mid-sized business finance is kind of like subprime consumer finance. It’s very expensive.
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