ZestCash Claims Bringing Big Data to Consumer Lending Will Revolutionize the Industry

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ZestCash, an online lending service for lower-income borrowers, has begun using a new big data-driven decision-making method that it claims will allow it to lend to 25 percent more people and improve repayment rates by 20 percent.

Using the new framework, ZestCash obtains data on loan applicants from alternative creditors, such as cell phone carriers and payday lenders. It bundles the bits of information into likely relationships and runs it through a number of different models to ensure more robust results. It then recombines the results to determine how risky a given applicant is, determining whether to lend to that person, how much and at what rate.

Shawn Budde, the company's chief operating officer and former head of subprime credit cards at U.S. bank Capital One, described the new model as a sea change.

More accurate predictions about who will repay loans will allow ZestCash to be able to lend to more people, the company said, including some who may have been forced to resort to payday loans simply because the conventional model couldn't obtain enough information about them.

Few have found ways to innovate the FICO credit scoring method by which most major creditors determine who is likely to repay a loan, Budde said. As a result, lenders usually delight in boosting lending and repayment rates by single digits.

"We've seen incremental improvements in how underwriting is done, but really the fundamental underpinnings of how credit models work are roughly 40 years old," Budde said.

Budde and co-founder Douglas Merrill believe their company's updated decision-making process, called Hollerith ("after a long-dead statistician," Budde said) will be the wave of the next 40 years.

Budde and Merrill, a former chief information officer at Google, see themselves as bringing big data to the lending industry.

"All that math, which is really cool, hasn't been applied to the credit space by anybody else up to this point," Budde said.

But for now, ZestCash hopes to use Hollerith to help keep more lower-income Americans from getting trapped in the vicious cycle of debt payday loans can facilitate.

How does ZestCash stack up to payday lenders? A typical loan through ZestCash, according to its website, comes with an effective annual percentage rate of 330 percent. The average payday loan's effective APR is 400 percent, according to the Center for Responsible Lending.

ZestCash also says that by charging interest rates instead of loan rollover fees like many payday lenders, it encourages its borrowers to get out of debt.

The company is currently licensed to lend in just five states, but the company's co-founders say they expect to continue to expand as they clear regulatory hurdles.

Cameron Scott covers search, web services and privacy for The IDG News Service. Follow Cameron on Twitter at CScott_IDG.

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