Startup Mines Consumer Data to Vet Loan Applicants

ZestCash Inc., a lending startup co-founded by a former Google executive, uses technology it likens to Google's search analytics to perform loan underwriting for the underbanked, ranking hundreds of pieces of consumer information.

Douglas Merrill, Google Inc.'s former chief information officer, co-founded the alternative lender ZestCash, of Los Angeles, which went live in October 2010. Rather than rely on a traditional credit score, which depends on credit information that is not normally relevant to the underbanked, Merrill says the company uses proprietary technology to search hundreds of pieces of consumer information, including rent and prepaid phone payments. It also looks at traditional items like bankruptcy filings and credit cards.

Consumers are then ranked for credit-worthiness, and ZestCash makes its decision.

"The underbanked have very little data in their credit bureau files, so a FICO can't work," Merrill says.

The difficulty in underwriting small loans to the underbanked has been used as a justification for the huge interest and fees charged to such borrowers. Banks used to be involved in this space, calling their loans "industrial loans," to bypass state usury laws, says Steve Ledford, a partner with Novantas LLC of New York. But they largely abandoned the space in the 1980s because the loans were so difficult to underwrite.

Payday lenders then moved in to occupy the niche.

"ZestCash is competing to fulfill the same market demand," Ledford says.

ZestCash announced Thursday that it has received $11 million in funding from a syndicate of investors including LightSpeed Venture Partners, GRP Partners, and Flybridge Capital Partners. Merrill says the company plans to use the money to expand its operations. ZestCash, which claims several thousand customers currently, makes loans in only four states: Idaho, Missouri, South Dakota and Utah.

Consumers who take out payday loans roll those loans over an average of ten times, amassing fees and interest rate of 400% or more, according to the Center for Responsible Lending. Those loans can frequently wind up costing many times their original value, and they may never be paid off, experts say.

ZestCash charges fees that are half those of traditional payday lenders. Merrill says he hit upon the idea for the company after examining the situation of his sister-in-law, who is underbanked. She is in school, has three children and needed money to change the tires on her car. She might have turned to a payday lender without access to family resources, Merrill says.

"The under-banked have no relationship with a bank, or they may have one that does not provide credit," he says. "These folks have no option to use credit or a credit card to manage when something goes wrong, and so they will turn to payday loans."

ZestCash lets consumers borrow up to $800, but the loan must be repaid within six months.

After the initial online application, Merrill says a relationship officer calls the prospective customer and conducts another 10 minute interview. Customers are counseled on the phone to pursue other, less expensive alternatives, such as borrowing from family and friends. The relationship manager, who becomes the single point of contact over the life of the loan, also provides the customer with a phone number and email, so consumers can communicate with the manager if they are in danger of missing a payment or need their payments lowered.

"These things create a bond," Merrill says.

Though it says it undercuts payday lenders, ZestCash's fees are enormous. There is an origination fee of $15 for every $50 consumers borrow. On top of that, consumers must pay an annual percentage rate of 180% and late fees of $35. They also agree to bi-monthly payments of interest and principal.