BRIAN KENNY: March 24, 2023 is going to be a big day in Sweden because that is the date that Sweden will become the first cashless society in the world. On that day, you will need either a credit card or a digital wallet to pay for your pickled herring. Coins and bank notes will become collectibles. Those who advocate for a cashless society, tout benefits like convenience, security, and accountability, but there are also risks like identity theft and online fraud to consider. And there’s another profoundly troubling downside. In a cashless society, people without credit would be left behind. In America that’s about 26 million people. Add in those whose credit reports are too limited or out of date to be scored and the number goes up to 45 million, most of whom are on the wrong side of the economic divide. Today on Cold Call, we’ve invited Professor Emily Williams to discuss the case entitled, Esusu: Solving Homelessness Backwards. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents Network. Emily Williams’s research focuses on financial intermediation and the financial services offered to the under-banked. Emily, thanks for joining me today.
EMILY WILLIAMS: Thank you so much for having me. I’m very excited to be here.
BRIAN KENNY: This is a great case. I think people will be, I guess, properly troubled by hearing it. But at the same time, there’s some optimism that comes out of this case by what Esusu is doing to solve this problem that I teased a little bit in the introduction about all of these folks who are credit invisible and really being locked out of the system that most of us take for granted. So, thanks for writing it and thanks for coming on to discuss it. Let me just start by asking you to tell us what the central issue is in the case and what your cold call is when you discuss the case in class?
EMILY WILLIAMS: The case really allows students to learn about financial inclusion and the extent to which the current financial system within the United States is limited in its ability to provide services to actually a pretty large segment of the population in the US. That in itself, can be pretty surprising to people. We don’t really think of the US as having these types of problems with the provisional financial services. And the case also provides a really nice setting to sort of analyze how to successfully scale a business, that has a really specific social mission. And the way that I think I like to start this class is by asking the question, have you ever felt invisible in the eyes of traditional financial institutions? And it’s a really interesting question or an interesting way to start the class actually, especially when we have such a diverse student body. We have many people who come from different countries who come to study here and they find it really difficult to get up and running, get a bank account, rent an apartment, things like that. And so actually this kind of kicks off a pretty vibrant conversation about the experiences that even some of our students have gone through.
BRIAN KENNY: I’m sure it does. And I think even people who are born in this country, I think of my own children and how much guidance they needed to get started. I can’t imagine what it would be like if they were on the financial margins and maybe not qualifying for the very things that you need to get the credit to enter society in this way. I talked a little bit in the introduction about your areas of scholarship and it seems pretty evident as to why this case sparked interest for you. I’m wondering how you heard about Esusu, and how it sort of speaks to some of the questions that you think about as a scholar.
EMILY WILLIAMS: So, my research, as you mentioned, focuses on the provision of financial services to the typically financially excluded people in the United States. And my research is focused on trying to understand why this happens and what are the consequences. And so just in my general reading around and reading about companies sort of in this space, I came across Esusu, which is an amazing example of a company whose founders clearly saw the problem of financial inclusion, had actually experienced it, firsthand. And then they’d found what I thought were really creative solutions to make, what I think are a game changing progress that others before them had not been able to. So, it was really clear to me that Esusu was going to make significant impact in this space, and I actually came across them in their early days when they were quite small. But I just loved everything about the company and then reached out to the founders and connected.
BRIAN KENNY: We’ve been doing a lot more cases on Cold Call recently about firms that are doing things with a social good in mind. So, it’s sort of business and the role that they play in society. Talk a little bit more about what it means to be financially invisible and what that looks like in the United States. I know they’re focused on the US in particular.
EMILY WILLIAMS: I’m going to start with explaining what a credit score is. So, a credit score is a proxy for an individual’s sort of financial health. And it’s supposed to estimate the likelihood that that individual is going to be able to repay a loan for example. These credit scores are a central feature of the US financial system. Your credit score, your credit history is going to determine your ability to get a mortgage, a credit card, it’s going to determine the cost of these loans, it’s going to determine whether you can open a bank account, things like your ability to rent an apartment, and it can also impact your ability to get a job. Credit scores and credit histories in the United States play a huge role in people’s day-to-day lives, much more than you would actually imagine. According to FICO, which is the Fair Isaac Corporation, which is a leading provider of credit scores, 28 million Americans have files with insufficient data to generate credit scores and 25 million Americans actually have no credit file at all. And these people are called the credit invisible. So, they either have thin credit files or no credit history at all.
BRIAN KENNY: Yeah. So, the implications of a low credit score are pretty severe. I mean, you really are locked out of almost all the basic sorts of things, including home owning, housing that people need. You have to have a credit score to get those things. So, let’s talk a little bit more about Esusu’s origins. How did they come to be? And what problem were they trying to solve? What were the founders trying to do?
EMILY WILLIAMS: Just to kind of circle back on the implications of having a low credit score, which really motivates the drive behind founding Esusu. So, having a low credit score or no credit score, it’s going to impact your day-to-day life in many ways, in the ways that I just described. But there’s also a really important Catch-22 problem that arises from having a low or no credit score. So, people who don’t have access to formal financial services, we really don’t have any formal record of their economic activity. And that means there’s a lack of hard data for these people, which means that they then rely on informal sources, which then further reinforces this kind of lack of formal record and further shuts them out from accessing formal financial services. Abbey Wemimo and Samir Goel, the founders of Esusu, they recognized this. And so, their goal was to break this Catch-22 cycle and sort of how to do that. Why hasn’t it been done before? They met in 2014 at a Clinton Global Initiative conference, both Abbey and Samir came from immigrant families, both had firsthand experienced with financial exclusion in the United States and how crippling it can be. And so, they bonded over their shared journeys and values and they became good friends. And from that point, Esusu was born.
BRIAN KENNY: So, the case introduces this concept of rotational savings, rotational loans. I wasn’t familiar with that. It’s an interesting concept and this is what they were basing their approach on. So, what does that look like?
EMILY WILLIAMS: They started out with this rotational savings product. So, in a rotational savings program, participants pull together capital and they take turns in using the capital as a loan. And it’s a program that is used frequently in developing countries. So rotational savings have the benefit of providing both access to funding and encouraging incentives to save. And actually “Esusu” is a word that originates from Nigeria and means a form of corporation where individuals come together as a society to contribute for their mutual benefit. And that’s exactly what a rotational savings program really is.
BRIAN KENNY: I was curious because the idea of just going out and starting a financial services institution is pretty daunting. How do you even get started in that? How did they get the capital that they needed to begin the whole process?
EMILY WILLIAMS: Right. So yes, there’s the capital part, which was incredibly challenging for them. And then there was also other challenges that arise from being an entrepreneur in the financial services space. So, some of their biggest challenges were things like security and compliance. So, complying with regulations and building an infrastructure that could capture and process data at scale, meet the requirements of all of the credit bureaus, which are pretty intense. They were only a small company to start with and this infrastructure required significant upfront investments. So, they started off raising capital, I think was a big part of their early days. They received capital from Sinai Ventures in 2018, they raised money from other prestigious investors like Acumen, American, and Kleiner Perkins. And then they used these funds initially to support the infrastructure that would enable Esusu to scale up. The founders explained to us how challenging it was in the beginning. They said it hasn’t always been easy for them, even though they see success now. They explained how they felt like they didn’t look like typical Silicon Valley entrepreneurs, even though they had a plethora of experiences working on Wall Street and in technology, they weren’t initially given the benefit of the doubt when raising funds and it was incredibly painful for them to even get a fighting chance. They said that they ended up speaking with 300 investors initially with no luck. And this just really speaks to the determination of these two. They just kept on going. They really gave it their all because they believed so passionately about the mission of the company and they never gave up.
BRIAN KENNY: Who was their competitive set if you looked across the landscape? I mean, who were they competing with in trying to tap into this particular audience?
EMILY WILLIAMS: They’re competing with traditional banks; they’re competing with fintech companies, neobanks. All of these organizations that are established big, have all of the regulations in line, all of their ducks in a row in that sense. And so, entering into this space is very challenging because competition can be incredibly fierce and these different types of organizations can potentially step in and create the same product probably relatively quickly. And so, you really have to move fast. And so, scaling up fast is important in this space.
BRIAN KENNY: What did that look like for them in terms of how big did they get eventually in terms of employees and things like that?
EMILY WILLIAMS: When I first became aware of Esusu, I believe that they had around 30 employees and now they are, I think they’re looking to reach around 300 employees over the next couple of years. So really astronomical growth.
BRIAN KENNY: So, I know they encountered some challenges as they went through this. I’m curious to know, particularly as they started out in the B2C space, trying to go direct to consumer with their product offerings, that was an eye-opening thing for them. What was that about?
EMILY WILLIAMS: Abby and Samir, they started out with this rotational savings product, and it seems like a really sensible route to go. You get to encourage savings. So, the people who use the product, they’re going to save more. The payments to the rotational savings group are going to get reported to credit bureaus so your credit score improves. But after connecting with their customers, they realized that the savings part was not really what their customers were excited about, I guess, or what they were really looking for. What they really wanted was access to credit. And so, that’s one thing. And then the other part is that the founders realized that customer acquisition costs were very high with this B2C approach. So the rotational savings program worked by acquiring groups of savers within groups of say 10, and acquiring customers like this was incredibly costly. And that in order to make this profitable, they were going to have to maintain some crazily high retention rate, something like 90%. And so, while the product seemed helpful, it didn’t seem as though the founders were going to have that large impact and reach scale in the ways that they wanted to with just the rotational savings product.
BRIAN KENNY: Yeah. It works best when you have a lot of people doing it.
EMILY WILLIAMS: Right. Exactly. So, the real challenge was how do we reach largest segments of these credit invisibles? How do we reach larger segments of the population and how do we do it in a way that is cost effective?
BRIAN KENNY: There must have been a huge educational component to it as well, as you’re trying to tap into this group of people who haven’t really had a lot of experience in the financial services space.
EMILY WILLIAMS: I think what they found was that people really didn’t need any help with savings, it’s that they kind of knew how to save and the savings wasn’t the problem. It’s that they really needed access to credit and the thing that was preventing them was their credit scoring because they were trapped in this Catch-22, this circular situation that I mentioned. And if you think about it, so for example, you think about your income and what you spend your income on, for lower income people in the United States, first of all, people have very little disposable income and they have a limited ability to save. And a very large fraction of your expenditures is actually going to come from say, your rental payments or paying your bills. And so, this is something that Esusu quickly noticed because through the rotational savings product, they had access to people’s bank accounts and people’s cash flows. And it became clear that rent payments were actually a really large fraction of total expenditures. For the lowest income quintile within the United States, I think around greater than 50% of all income is spent on rent. And 60% of people within this bracket, within this income bracket are renters. And so, this is really a turning point for Esusu because it became clear to them that they would want to potentially leverage this existing data, leverage existing structures and build from that to help people improve their financial lives by reporting rent payments to credit bureaus.
BRIAN KENNY: And was that a shift for credit bureaus though? Were rent payments always seen as something that would count towards the credit score?
EMILY WILLIAMS: So, regulators had been talking about this for a long time. The conversations started around 2013 I believe. It had been clear for a while that reporting rent payments to credit bureaus would be a really good thing for lower income people, particularly in these credit invisibles. However, everyone was talking about it and no one was doing anything about it. And I think the reason is because the infrastructure and the investment required to do this is actually pretty immense. So, it sounds like a really simple thing to just report rental payments to credit bureaus. However, it’s a lot more complicated than you imagine.
BRIAN KENNY: So, what does that mean for the founders of Esusu? How do they take that on? That’s a big one.
EMILY WILLIAMS: The problem is that rental payments are disparate across many different landlords and systems in the United States. And so, the challenge was they had to develop a product that could capture and process such a data set, transform the data into a very specific format that the credit bureaus would accept, whilst meeting a very stringent set of regulations. And they wanted to do this in a way that benefited both landlords and tenants at the same time and that created no additional work for the landlords. Otherwise they had no hope of signing up landlords. So, their challenge was to create this seamless product to collect and transform this fragmented data and report it to credit bureaus.
BRIAN KENNY: What’s the business model for that side of the business? How would that work?
EMILY WILLIAMS: Esusu collects rental reporting data and also other data on the tenants and provides a service to the landlords whereby the landlords can understand risk characteristics of the tenants. And also there’s evidence that reporting rental payments to credit bureaus makes it more likely that the tenant is actually going to pay their rent on time. So improves their likelihood of paying rent on time. And so, this is sort of value maximizing for the landlord themselves. So, the landlord pays a fee of around a couple of dollars a month per tenant. And in the meantime, Esusu is reporting the rental payments of the tenants to the credit bureaus, which improves the credit scores of the tenants. And in terms of customer acquisition costs in this scenario, Esusu has focuses on signing up landlords with potentially tens of thousands or hundreds of thousands of units. And so, the customer acquisition costs become very, very small. And so, this is a really clever way to scale the business in a profitable way, and to really have that big impact.
BRIAN KENNY: Yeah. So, we’re not thinking about the sort of onesie twosie small apartment building owner. They’re going after the corporate landlords.
EMILY WILLIAMS: I think they go after both, but I think having the ability to go after the big ones and kind of spread those costs around really benefits them.
BRIAN KENNY: And does this approach then give them the credibility they would need with the rating agencies to be able to now include rental payments as part of the score?
EMILY WILLIAMS: Absolutely. Yeah. So, I think their rapid growth, the number of units that they signed up in such a short space of time, gave them a huge amount of credibility. But again, they have to meet all of these really stringent requirements for the credit bureaus. And so that was really important for them. And I think they were able to successfully do that.
BRIAN KENNY: So, that’s really huge because that gets them so much closer to their goal of helping people improve their credit scores so that then they can get access to the financial system that they were locked out of.
EMILY WILLIAMS: Absolutely. Absolutely.
BRIAN KENNY: How does this pitch then now sound to investors? I’m wondering because now investors aren’t necessarily thinking about people who are on the economic margins, but now they’re looking at landlords who obviously have lots of assets that they can leverage. So, does this become an easier pitch to make now to the investment community?
EMILY WILLIAMS: I think so. And I think the investment community can really get on board with this. It’s clear the potential for scale and impact with Esusu Rent.
BRIAN KENNY: So, now back to the central question, they’ve got a decision to make, and the decision is I don’t want to oversimplify this, they’re literally choosing between sticking with this rental approach at the expense of the rotational savings. Are they going to leave one behind or …?
EMILY WILLIAMS: Yeah. So, I think it was a real turning point for the company. They have the rotational savings product, it was relatively successful, but they can see ahead and are wondering how they’re going to really scale that, how to get those customer acquisition costs down. And then they have this other potential route, which is to focus their efforts on Esusu Rent, which requires a huge amount of capital, which is really difficult to get and a lot of investment in infrastructure. So, a pretty risky path. And they had to make that decision. Do they go down that path or not?
BRIAN KENNY: That’s a cliffhanger right there, Emily. So, maybe there’ll be a B case on this one. It’s a really great case. And I love the way it’s sort of the way that they found the path, an unexpected path, to achieving the goal that they had set out to do. So, all of that is wonderful. Before I let you go, can I ask one more question, which is simply if you want the listeners to remember one thing about this case, what would it be?
EMILY WILLIAMS: So, I think that Esusu is a wonderful example of a successful for-profit company with an incredibly important social focus. And I hope that this case inspires listeners to think creatively about social issues that they see kind of in their day-to-day lives and to think about how businesses can possibly be used to, or business generally can be used to possibly solve these social problems in a way that is mutually beneficial for many, many stakeholders.
BRIAN KENNY: Emily, thanks for joining me on Cold Call.
EMILY WILLIAMS: Thanks so much for having me.
BRIAN KENNY: If you enjoy Cold Call you might also like our other podcasts: After Hours, Climate Rising, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. Be sure to rate and review us on any podcast platform where you listen. If you have any suggestions or just want to say hello, we want to hear from you. Email us at [email protected] again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School, brought to you by the HBR Presents network.