The New York Times
By: Quentin Hardy
July 5, 2012
ZestCash, founded in 2006, had a winning idea, in principle. It made loans to borrowers with poor credit scores by using complex data analysis to better determine their credit quality. But now it has decided to move out of the business of making loans and instead concentrate on selling its analysis to other lenders serving poorer and marginal borrowers.
"Our mission was to use big data to save the under-banked billions of dollars in high fees," said Douglas Merrill, a former senior executive at Google who was a co-founder of ZestCash. "We think that will work better if we get our technology into the hands of established providers."
Mr. Merrill said his company, which has been renamed ZestFinance, has already licensed its technology to Spotloan, a nationwide subprime lender. ZestFinance is also in discussions with two large credit card companies, and with several nonprofits interested in delivering financial services to the under-banked, he said.
Mr. Merrill declined to name these companies and nonprofits. His co-founder, Shawn Budde, was previously with Capital One, where he managed the subprime credit card portfolio.
ZestCash's idea was to serve the millions of working people in America with limited access to good credit. While some are risky bets for a loan, others are poor in data like long-established work records, or a history of paying conventional credit card loans. When they need money fast, a common recourse is the payday lenders often found in strip malls, who give cash but charge triple-digit annual percentage rates.
Some say these lenders are predatory; they counter that they need to charge high interest to cover their risk. Unlike most payday lenders, ZestCash structured its loans for full repayment of principal and interest before it would grant someone another loan.
ZestCash aimed to move beyond the 40-year-old system of credit scoring by introducing new variables. For example, paying half of one's income in an expensive city like San Francisco might be a sign of conventional spending, while paying the same amount in cheaper Fresno could indicate profligacy. Giving up a prepaid cellphone, often the phone of necessity for the poor or credit-risky, meant losing a phone number, which indicates a willingness to lose social connections. That was a warning sign. Careful reading of ZestCash's terms and conditions, which the company could watch by tracking cookies, meant that someone was taking a loan seriously, not just rushing to get the money. That was a positive sign.
Regulation and marketing expenses seem to have played a role in the failure of the company's business model. Acting as an online alternative to traditional payday lenders, ZestCash spent years getting licenses in just a few states, including Utah and Missouri. While payday lenders charged higher interest rates than ZestCash, they also have locations everywhere, promoting awareness. ZestCash had to pay more for marketing to compete.
Spotloan, the first customer of ZestFinance, is owned by the Turtle Mountain band of Chippewa Indians, in Belcourt, N.D. As a Native American corporation, the company is subject to different regulation than ZestCash was, and may be able to roll out the technology quicker.
Mr. Merrill said conventional credit card companies were looking at his technology both for new ways of spotting risks and as a means to broaden their client bases. "All the lenders are data poor," he said. "We hope we can make them data rich, insight rich."