Innovating with Liability Management: Making Borrowing Easier, Trustworthy, and Cost-Efficient

1. Innovating with Liability Management Jonathan Zinman Professor of Economics, Dartmouth College Scientific Director, US Household Finance Initiative PopTech September 17, 2013

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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