Challenger bank Dave plans upgrades to cash advance underwriting model
Neobank Dave seems to be making progress on his journey to profitability, in part through its ExtraCash short-term loan product. It increased its cash advance limit to $500, increased its membership by 36% in the last 12 months, and continued its march toward a target profit margin of 44%. The company is also working on a major upgrade to the AI algorithms it uses to underwrite the short-term loans it provides through its feature called ExtraCash.
While Dave’s unit’s economy continues to improve, it was still operating at a loss last quarter, according to financial statements released Thursday by the company. Its net income beat analysts’ expectations, but it also had higher-than-expected operating expenses. The company reaffirmed its goal of achieving $200 million to $215 million in operating revenue for the year and a variable profit margin of 40% to 44%.
Jeffries analysts rated Dave as “on hold” Thursday after the earnings call. On Friday, the stock was up 20% from the previous day’s close, at $0.36 per share. John Hecht, equity analyst for Jeffries who covers Dave, said the company plans to issue a reverse stock split between 1 for 5 and 1 for 50, and the company plans to issue more shares.
While Dave markets ExtraCash as a way to help customers between paychecks, it’s also a customer acquisition bet and a source of revenue. Dave allows customers to choose between receiving ExtraCash advances at no cost by taking them through ACH, or with a fee by taking them through an instant deposit to an external or Dave account. Dave then deducts the loan amount from the user’s next paycheck.
Another source of revenue is the debit card interchange fees he earns when users use their Dave debit card. The company also makes money through a $5 monthly service called Dave Credit Builder. Consumers pay the fee for Dave to share their ExtraCash repayment history with Equifax, which should improve their credit score.
CEO Jason Wilk said Thursday that the debit card is what keeps Dave loyal. So while the card was originally an optional product feature when users signed up in 2020, every new account now comes with a debit card.
“Our updated strategy to launch this product has been to offer Dave cardholders instant and cheaper access to extra cash, which has already proven to be an effective way to boost first-time use of the card, a leading indicator of a longer-term direct access deposit relationship,” Wilk said during the company’s earnings call on Thursday.
By the end of September, Dave’s 7.8 million members had collectively spent $197 million with their Dave debit cards and taken out $757 million in ExtraCash loans. The company also recently take a step exceeding $5 billion in total in such advances since its founding.
Much of Dave’s success, Wilk said, has to do with the underwriting model he uses, which is fed with transaction data from customers’ external bank accounts to determine their ability to repay an advance within days.
The company is working on a “next-generation ExtraCash underwriting model,” according to CFO Kyle Beilman. Beilman didn’t provide details on what would change with the new model, but said the company is currently testing it.
Dave has also spent the last three months beefing up his fraud checks on ExtraCash, according to Beilman. So far, the results of reduced fraud and underwriting improvements have been lower delinquency rates in each quarter of this year compared to the same quarter last year.
In March, the news has fallen that Dave had partnered with cryptocurrency exchange FTX and taken a $100 million investment from the company caused the company’s share price to drop 14%. To date, Dave has not announced any additional features resulting from the agreement.
“Dave has not announced an official crypto launch and we will continue to monitor the industry’s reaction to the current crypto environment,” Wilk said on Friday, after the filing was announced.
Regarding the longer-term headwinds his business and the economy as a whole may face, Wilk said Dave can sustain the successes he’s had with his cash advances even in a recession or decline in employment, as more people may seek advances to keep them afloat between paychecks.
“We are very confident that this product performs very well and has a strong need in just about every environment except a high stimulus environment,” Wilk said. “This is where we have seen demand fall in 2020 and 2021 as the government has stepped in to cover many short-term cash needs for our members.”
Except when consumers receive a large amount of stimulus money, Wilk said, “customers will still need access to a small amount of cash between paychecks to cover things like gas, groceries and food”.