Shane Hadden spent more than a decade in New York City, figuring out ways for corporate clients of Credit Suisse to lower their borrowing costs. That work gave him some ideas about how to do the same for average consumers.
So, three years ago, the 43-year-old Danville native moved back to Central Kentucky with his wife and three young daughters to create Float Money LLC. After three years of development and testing, the Lexington-based company backed by local investors launches this month in Kentucky and two other states. Here is how it works:
Float members use the company's Web site to make purchases, either from online retailers such as Amazon or by buying gift cards to local merchants and chains such as Meijer, Macy's, Kmart, CVS and Speedway. Merchants pay a commission on those sales, which is how Float makes its money.
In return for their purchases, Float members build up a line of credit they can borrow from without any interest or fees, Hadden said. The more of their spending Float members do through the Web site, and the better their standard FICO credit score, the higher their line of credit grows over time. Credit lines range from a few hundred dollars to $20,000.
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The idea is to give consumers a no-cost borrowing alternative to credit cards. But people who use credit cards to earn rewards, such as airline points or cash back, can still use them to buy through Float.
Float members can draw on their credit line at any time for any purpose, essentially taking out 10-month personal loans that must be repaid at the rate of 10 percent per month, Hadden said.
Like any loan, repaying the line of credit is a legal obligation. But what happens if a loan isn't repaid on time? Credit that members earn with future purchases through Float goes to pay off their loan rather than increasing their line.
"Even if you owe money, you're still going to need to spend money on essentials," Hadden said. "Those future purchases are an asset you have, and we're unlocking it."
Float has signed more than 1,000 merchants so far to participate in the system, Hadden said. About 300 initial members have been testing the system since last November. Floatmoney.com is now accepting new members.
Hadden thinks Float will be popular, because a lot of people get in trouble with credit cards, whose high interest rates can rapidly compound debt on unpaid monthly balances. Americans now have more than $2.5 billion in outstanding consumer credit, about $866 million of which is with credit cards and other forms of revolving credit, according to Federal Reserve Bank of Philadelphia.
Hadden's concept isn't really new: It is essentially the old-fashioned kind of credit that small stores once gave regular customers, or the no-interest loans retailers still give customers to make major purchases, such as a new car, furniture or appliances.
What's different is that the Internet now provides a way to combine the buying power of huge numbers of customers. As Float adds members and merchants, it hopes to use that buying power to get higher commissions for itself and discounts for members.
Hadden said he isn't aware of any other companies with the same business model: the ability to create absolutely free, general-purpose credit in return for making everyday purchases.
Float isn't a bank; legally, it is a state-regulated finance company. The company plans to expand nationwide as it is licensed and recruits local retailers in each state. In addition to Kentucky and neighboring Ohio, Float is launching in Massachusetts because its own lender, Developer Finance Corp., is based there.
Given the size of the consumer credit market, Hadden is optimistic about Float's long-term growth potential. He plans to keep the business based in Lexington.
Hadden said the company's other investors include: W.T. Young LLC; Cheddars restaurant owner Lee Greer; Internet entrepreneur and West Sixth Brewing partner Ben Self; and Donald Mullineaux, a longtime banking and finance professor at the University of Kentucky.
"I thought it was a novel idea that addresses a significant need," Mullineaux said, noting that credit card interest rates are very high even though bank rates are at historic lows. "When I first heard about it, my initial response was, 'What's the catch?' There's not one."