In that bygone age when internet connections screamed through modems, Fry’s Electronics was Disneyland for techies. It wasn’t just a store to buy a mouse, it was where customers journeyed through jungles and starfields to find one. Some say its quirky themed outlets extended its shelf life; others argue those same expensive gimmicks sped its demise at the hands of online rivals. Regardless, by 2021, Fry’s was closing its 31 stores, sealing off its San Jose, California Mayan-themed outlet, powering down its mock International Space Station in Houston and draining the waters of its Atlantis in San Marcos, California.
What’s left of Fry’s requires a magnifying glass to see, buried as it is in the fine print of consumer loans with some especially aggressive terms. In Salt Lake City, thanks to Utah’s chill attitude towards lending, Fry’s has transformed itself into First Electronic Bank. Once the custodian of Fry’s Electronics customer purchases via store cards, First Electronic now allows lenders in states where interest rates are capped to use the relatively lax laws of Utah to charge consumers as much as 180% for loans. In doing so, it finds itself in the crosshairs of consumer advocates who describe it as a “rent-a-bank” that plays a critical role in the spread of triple-digit interest rates across the country.
Fry’s Electronics first popped up in Sunnyvale, California, the heart of Silicon Valley, in 1985, the brainchild of three Fry brothers — John, Randy and David — and John’s former girlfriend Kathyrn Kolder. It quickly became the West Coast’s temple for the computer obsessed. The gimmick of fashioning stores after a Mayan temple or the lost city of Atlantis, coupled with low prices, was a recipe for success. At its peak, Fry’s ran 34 retail outlets and reached $2 billion in annual sales before the digital shopping wave finally got the best of it in 2021.
The company launched First Electronic Bank in the dial-up days of 1999. William Fry (who goes by Randy) remains a director at the bank. Today, it’s a clever pivot that keeps the Fry’s name hidden, but in a business that some say can lean toward the shady.
In an email to Forbes, First Electronic chief legal officer Mark Matheson disputed that “FEB” was a rent-a-bank. “That term suggests that a bank is allowing a third party to offer a program without oversight,” Matheson wrote. “This could not be further from the truth for FEB. The programs offered by FEB are FEB programs with credit originated by FEB utilizing fintech service providers that have expertise in various financial services programs. There are hundreds of regulators (examiners, case managers, etc.) across multiple agencies ensuring that bank programs meet regulatory oversight expectations.”
Enabling fintech lenders to charge consumers interest rates of as much as 180% may be lucrative, and it may not sound alarms for regulators, but it’s not exactly the kind of thing to boast about at dinner parties.
“Most states have usury caps and don’t allow these high rates,” Nadine Chabrier, a senior policy counsel at the Center for Responsible Lending, a North Carolina-based nonprofit, told Forbes. “The lenders get around this by using rent-a-banks like First Electronic.”
Despite being a private entity, First Electronic discloses its numbers to the FDIC, and those figures tell a tale of impressive growth. From a modest outfit with $53 million in the kitty back in 2019, its assets ballooned to $191 million by the end of 2022.
First Electronic’s net income also rocketed from $1.7 million in 2020 to $10.6 million in 2021. The man behind the growth is Derek Higginbotham, who took over as CEO in October 2020, according to his LinkedIn profile. Higginbotham came to First Electronic from Applied Data Finance, the company behind Personify, a payday lender known for issuing steep interest rate loans in various states through First Electronic. Since Higginbotham took the reins of First Electronic, net income more than doubled to $25.8 million in 2022, and by mid-2023 it was on pace for $28 million.
“Over a decade ago, FEB started developing strategic partnerships working with non-bank, fintech service providers to build national lending programs,” First Electronics’ Matheson told Forbes. “The asset and revenue growth we have seen corresponds with that business line and those programs beginning to hit scale.”
For banks like First Electronic, the loans aren’t just profitable, they’re also surprisingly free of stress, says CRL’s Chabrier. “The non-bank lenders find the borrowers, handle the consumer interactions and the processing of the loans, and most everything else,” Chabrier told Forbes. “It’s a great deal for the banks because they get a cut of the profits while the non-bank lenders hold all the risk.”
First Electronic’s FDIC filings corroborate Chabrier’s characterization. Since 2020, it’s reported a mere $4,000 in loans gone bad, called charge-offs, all in 2021. Net charge-offs give the public a peek into the solidity of a bank’s lending game. High numbers can spell trouble, hinting at shaky loans or rough economic times for borrowers.
The same isn’t true for borrowers of First Electronic-backed loans. OppFi, one of First Electronic’s clients and a publicly traded company, wrote off $159 million in bad loans just in the first nine months of this year, according to its filings. Typically, about half of the money OppFi lends doesn’t come back, with net charge-off rates hovering around 50% on a quarterly basis. To put that in perspective, the default rates in 2008 on subprime mortgages, which nearly cratered the global financial system, were, at their worst, 22%.
Personify and OppFi haven’t escaped scrutiny. In a March 2022 blog post, the National Consumer Law Center, a Boston-based nonprofit dedicated to ending exploitative practices and aiding financially distressed families, spotlighted First Electronic. The organization included the bank in a “High-Cost Rent-a-Bank Loan Watch List,” alongside four other FDIC-supervised banks. The post criticized the arrangements as forms of “money laundering” for high-cost lenders, questioning the legality of rent-a-bank schemes.
To First Electronic, however, Personify or OppFi aren’t predatory lenders. They’re fintech partners in an underserved market making loans available to individuals with little or no credit history, a segment traditional banks often bypass. Of course, lending to this higher-risk group comes with a catch: significantly higher interest rates are part of the deal. But this creates a catch-22. While it’s understood that higher risks necessitate higher interest rates (perhaps the most basic tenet of finance), it’s a harsh reality that those struggling the most, and least likely to afford steep rates, are the ones who have no option but to pay them.
“Not only are they not predatory, they represent a much-needed servicing solution to the growing demand from millions of Americans who do not have access to lending from traditional banks, but want a trusted financing partner,” Matheson told Forbes. “These programs help consumers who require access to credit and want to use a regulated financing partner with a transparent and responsible payment structure. The cost of lending in certain markets is higher than others, and that translates to higher cost of credit.”
How high is high? The National Consumer Law Center pointed out that OppFi, through partners like First Electronic, was issuing loans ranging from $500 to $4,000 at a 160% annual percentage rate. These loans were being doled out in states where such rates are forbidden for loans of that size. Meanwhile, at Personify, the stakes were even higher. Loans could climb to $10,000, with APRs peaking at 179.99%.
That means that a customer borrowing $10,000 at 180% interest who pays it back over two years would be shelling out $1,547 a month. By the end of the two years, that adds up to $27,120 just in interest, or nearly triple the original loan amount.
“In the old days, banks originated and then sold the loans to non-bank lenders,” Lauren Saunders, the National Consumer Law Center’s associate director, told Forbes. “These days they have a more complicated arrangement to make it look like the bank retains the loan to avoid usury caps. Anyway you want to cut it, loans in the 100%-to-200% price range are purely predatory products which take advantage of people who are struggling.”