Bloomberg News

Wal-Mart Customers Access Loans With Progress Financial

July 03, 2013

Progress Financial founder James Gutierrez

Progress Financial founder James Gutierrez said, “We had always hoped there would be some relationship with retail." Photographer: Patrick Fallon/Bloomberg

Wal-Mart Stores Inc. (WMT) has long faced opposition to its attempts to break into the lending business. So the retailer’s founding family has found another way to get credit to many of its customers -- Progress Financial Corp.

One of a growing number of financial institutions serving Hispanic customers who don’t have bank accounts, Progress Financial is run by a former Wal-Mart executive. A Wal-Mart director sits on the lender’s board, and the Walton family’s venture capital firm is its largest shareholder.

During the past decade, Bentonville, Arkansas-based Wal-Mart has expanded its offering of financial services to customers yet has been unable to get a bank charter amid resistance from U.S. lenders and unions. With Progress Financial, the world’s largest retailer can put money in the hands of a key group of customers, if only indirectly, through a network of more than 80 branches. Those branches make loans of as much as $3,500 and are located a short drive from Wal-Mart stores where the money can be spent using purchase cards.

“We had always hoped there would be some relationship with retail,” said James Gutierrez, who founded Menlo Park, California-based Progress Financial in 2005 and was chief executive officer until last year. “Wal-Mart is the low-price leader and that appeals to a certain demographic. There’s a lot of overlap.”

The Waltons’ VC firm, Madrone Capital Partners, “saw we could build a relationship with these customers,” Gutierrez said in a June 26 telephone interview. Gutierrez now is a partner at Insikt Ventures, a San Francisco-based VC that has invested in lending companies, including one that also caters to customers who don’t use traditional banks. Gutierrez said he remains the biggest non-VC shareholder in Progress Financial.

Purchase Card

Borrowers can opt to receive their $500 to $3,500 loans on purchase cards, which can be used like debit cards at stores. They can make loan payments weekly or bi-weekly at the lender’s own branches or at retailers including Wal-Mart, 7-Eleven Inc. and CVS Caremark Corp. (CVS)

Sandra Perdomo, a 38-year-old San Francisco resident, spent about $300 of her Progress Financial loan on a variety of items at Wal-Mart, she said during a visit to her local branch on July 1. Victor Morales, a 30-year-old resident of Los Angeles who borrowed $1,800, said he uses his loan “like a debit card.”

“They give me the money when I need it,” he said during a visit to his local branch in Los Angeles on July 1.

Closely held Progress Financial isn’t a bank and can’t take deposits. So it has borrowed at high interest rates from hedge funds to make loans, Gutierrez said. The lender also has raised venture capital, including from the Waltons’ Menlo Park, California-based Madrone, which has invested tens of millions of dollars in it, public filings show.

Growth Opportunity

“As we got larger, they saw a growth opportunity and decided to put more in,” Gutierrez said.

Last year, Madrone, which typically invests in alternative energy technologies, significantly boosted its ownership in Progress Financial, he said. In April of last year, two weeks after announcing Gutierrez’s departure, the lender announced that Raul Vazquez, previously Wal-Mart’s executive vice president of global e-commerce, would be the new CEO.

Wal-Mart accepts Progress Financial purchase cards and allows borrowers to make loan payments at its stores, though the retailer currently has no direct relationship with the lender, said Dave Tovar, a Wal-Mart spokesman.

Madrone Investment

Madrone’s investment in Progress Financial and Wal-Mart director Aida Alvarez’s place on the lender’s board are “separate and apart from Wal-Mart,” Tovar said.

Madrone didn’t return messages seeking comment, including one left with partner and Progress Financial board member Tom Patterson. Vazquez, through a spokesman, declined to comment.

Wal-Mart rose 0.1 percent to $74.76 at the close in New York. The shares have gained 9.6 percent this year, compared with a 13 percent increase for the Standard & Poor’s 500 Index.

Operating in an already tight credit market, Progress Financial is part of a startup industry targeting what it estimates to be 23 million U.S. Hispanics unable to get traditional loans because they have limited or non-existent credit histories.

Making loans under the brand Progreso Financiero, the lender is regulated by the states where it operates -- California, Texas and Illinois. It has more than 250,000 customers and has said it plans to have 1 million by the middle of next year.

Average APR

Progress Financial, which has yet to report a profit, charges an average APR at or below 36 percent, according to its website. While higher than rates at traditional banks, 36 percent APR on small-dollar loans is a generally accepted rate cap among consumer advocates.

The rate, they say, is low enough to be affordable to borrowers while high enough to allow lenders to profit. That balance now is being debated in California, where a bill before the legislature would raise the maximum annual interest rate caps on smaller loans.

If the bill passes, rate caps there would increase to 36 percent from 30 percent for loans of $1,000 or less and to 32 percent from 26 percent for loans greater than $1,000 and less than $2,500. Progress Financial spent $10,000 lobbying in support of the bill between January 1 and March 31 alone, according to a disclosure filed in that state.

California doesn’t limit what companies like Progress Financial can charge in interest on loans of $2,500 or more, a growing market for the lender, which has made loans with rates ranging from 20 percent to 69.9 percent in that state, according to the company’s most recent annual report.

Debt Concerns

Consumer advocates, such as Liana Molina of the San Francisco-based California Reinvestment Coalition, view Wal-Mart’s (WMT) ties to Progress Financial with caution.

’’We’re concerned about people getting into consumer debt that perhaps they shouldn’t,’’ she said. “It’s one thing to support entrepreneurs and small businesses. It’s another to provide a loan for someone who wants a big-screen TV.”

Brian Melzer, an assistant professor of finance at Northwestern University’s Kellogg School of Management in Evanston, Illinois, said he considers Progress Financial’s advertised interest rates a welcome alternative to payday lenders that charge triple-digit rates on loans to people who can’t afford to repay them.

“Progreso fills an important niche,” said Melzer, who has studied consumer lending. “They take people who banks won’t take risks on. They might well be good credit risks but they just don’t have the history.”

Venture Capital

Madrone, managed by Greg Penner, a Wal-Mart board member and son-in-law of Wal-Mart chairman Rob Walton, participated in multiple venture capital rounds between 2009 and 2011 during which Progress Financial raised more than $71 million, according to documents filed with the U.S. Securities and Exchange Commission.

Last year, Madrone “came in with significantly more,” Gutierrez said, declining to provide the specific amount or Madrone’s overall stake. Madrone is “by far the biggest shareholder,” he said.

In 2011, Wal-Mart director Alvarez became a Progress Financial board member. Then last year, as the lender’s board said it was gearing up to expand nationally, it hired Vazquez as CEO. In addition to Alvarez and Vazquez, Patterson, the Madrone partner, sits on Progress Financial’s eight-member board. And David Needham, a former Wal-Mart e-commerce vice president, is a vice president on the lender’s management team.

Shopping Center

Four-fifths of the 80 Progreso Financiero locations listed on the lender’s website are located within 5 miles of a Wal-Mart (WMT) store, including some in the same shopping center, according to a Bloomberg News analysis. Gutierrez said the lender opened branches in areas frequented by its target customers.

“In California and Texas, these people are getting access to credit,” said Melzer, the Kellogg professor. “A certain amount of that is going to be spent at Wal-Mart.”

Since it began lending in 2006, Progress Financial has loaned more than $550 million, Vazquez wrote in an April letter to a division of the U.S. Department of the Treasury.

Progress Financial has at least 74 licenses to operate branches in California and 28 in Texas, according to data from those states’ regulatory agencies. It has two licenses to operate branches in Chicago and applied for a third earlier this year, said Susan Hofer, a spokeswoman for the Illinois Department of Financial & Professional Regulation.

Small Loans

“It’s hard to make money on small loans unless you have scale,” said Gutierrez, whose says his model for Progress Financial was international microlending.

The lender had aimed to be profitable by the end of 2012, according to a study conducted by the Aspen Institute, a non-partisan policy group based in Washington. An annual report filed with the California Department of Corporations in March shows that Progress Financial’s net loss was more than $27.5 million last year. That loss came even as the lender generated more than $34.7 million in interest and fees on about 145,000 consumer loans, the report shows.

Gutierrez declined to comment on Progress Financial’s profitability because he’s no longer directly involved with the lender.

Designated a Community Development Financial Institution, or CDFI, by the U.S. Department of the Treasury, Progress Financial is eligible to receive federal tax credits and federally funded awards of as much as $2 million, according to the CDFI website. Progress Financial hasn’t received any such awards to date, and the CDFI declined to say whether the lender has applied.

Wal-Mart Forays

Banks and labor unions long have opposed Wal-Mart’s forays into financial services, including in 2005 when they opposed the retailer’s application to open a Utah-based industrial bank. Wal-Mart eventually dropped the application.

Since then, Wal-Mart has opened financial-service centers where customers can cash checks, pay bills and transfer money. The retailer also has offered prepaid debit cards, including Bluebird, a partnership with American Express Co. (AXP), and Green Dot Corp., which can be used on the Visa Inc. and Mastercard Inc. networks.

The Federal Advisory Council, a group of bankers, has opposed Wal-Mart’s prepaid card sales, saying the retailer is not subject to regulation. Its Bluebird and Green Dot cards are marketed as alternatives to traditional debit and checking accounts offered by banks.

To contact the reporter on this story: Renee Dudley in New York at rdudley6@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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