Using data-crunching skills polished at Google, Merrill says ZestFinance analyzes 70,000 variables to create a finely tuned risk profile of every borrower that goes far beyond the bounds of traditional credit scoring. The more accurately a lender can assess a borrower’s risk of default, the more accurately a lender can price a loan. Just going by a person’s income minus expenses, the calculus most often used to determine credit-worthiness, is hardly enough to predict whether a person will pay back a loan, he says.
“Our finding, much like in Google search quality, is that there’s actually hundreds of small signals, if you know where to find them,” Merrill says.
For instance, he says, many subprime borrowers also use prepaid cellphones. If they let the account lapse, they lose their phone number. Would-be borrowers who don’t make keeping a consistent phone number a priority send a “huge negative signal.” It’s not about ability to pay, he says. It’s about willingness to pay. By examining factors that don’t play into standard credit scoring — and are therefore ignored by traditional banks — Merrill says ZestFinance can help bring the “underbanked” back into the financial mainstream.
Currently ZestFinance licenses its technology to SpotLoan, an online lender that offers loans of $300 to $800 at rates it advertises as about 50 percent less than those of standard payday loans. On a recent visit to the site, the standard annual percentage rate (APR) for a loan issued to a California resident was 330 percent — $471 for a $300 loan paid back over three months, the smallest, shortest-term loan the site offered.
By comparison, standard payday loans available online offered APRs of about 460 percent, though the term was just 14 days. The rates on 30-day loans ran a little less than half that. Either way, a $200 loan ends up costing about $235 in financing if paid back on time via the old-school payday lenders.
Merrill acknowledges that ZestFinance-powered loans still aren’t cheap.
“We are an expensive loan compared to credit cards or what you can get from your family,” he says. “The problem is not everyone can get credit cards, or can borrow money from their family.”