The Other End of Sunset

Wednesday, October 13, 2010

ZestCash launches!

The waiting is the hardest part
--Tom Petty

Hi there, my OtherEnders. I've been really busy launching my new company, and have had almost no time to write. I'm sorry for the huge lag! I'm very excited that my company -- ZestCash -- has finally launched! We have been working hard on the product for many months, and are officially in the market today.

Move the heart, switch the pace
Look for what seems out of place
-Peter Murphy

News flash: The economy is in bad shape. The past few years have taken a huge toll on the world's economies. In the US, the economic crisis was the most severe downturn since the Great Depression.

The scale of the economic devastation is hard to understand. It's just so immense.

In December, 2008, California's unemployment rate stood at 5.7%. By August of 2010, the CA rate had climbed to 12.4%.

In one month alone -- January of 2009 -- almost 800,000 jobs were lost across the United States. That's roughly the equivalent of every man, woman, and child in San Francisco losing their job. All at once -- in one month.

// Side note: I hope most of the children in SF don't have jobs anyway, but that's not relevant to my analogy. Work with me here? //

Hurricane Katrina destroyed about 275,000 houses in her swath of destruction across the US. Banks foreclosed on 10 times as many homes -- 3 million homes -- in 2009.

Although there are many, many other examples of hardships, even this few casts the crisis into high relief.

The crisis also caused a very large number of banks to fail. These failures sharply reduced the amount of credit available -- in June 2009, almost 33% of all credit in the US economy was frozen, unavailable. Most of this credit was used by business for a variety of purposes.

However, the credit crunch also hurt regular people's ability to get credit.

Everyone needs credit. We use credit when we buy lunch, make a monthly payment toward our car, or in any of hundreds of other common ways. Here in Hollywood, you can even pay your parking meter with a credit card. It's just part of life.

But it's not a way of life for many Americans. There's an entirely separate credit system for people with bad credit, or no credit. It's called the "alternative financial system" (AFS). The AFS serves people who don't have good relationships with banks. They may have no bank at all, or may have a limited bank relationship that doesn't offer credit.

These people are often referred to as "underbanked".

He said "Do you want to know the truth, son?
I'll tell you the truth!"
--Iron Maiden

Before the current credit crunch, many of the underbanked might have been able to get a subprime credit card, from companies like Capital One or Providian. They would have paid a higher interest rate than you or I likely pay, but they'd have had credit.

Not any longer -- the subprime credit card providers have experienced the same credit issues as the rest of the economy, and have sharply reduced the number of cards they issue.

Unfortunately, that has left the underbanked with only 2 sources of credit -- payday loans and pawn shops. According to the FDIC, almost 10% of American households have taken out a payday loan or visited a pawn shop in the past year alone. That is almost 30 million people -- about the entire population of Canada.

For those of you who haven't ever taken out a payday loan (congratulations!), the process is disturbingly simple. You walk into a payday loan store, and walk up to a person (who is likely behind bulletproof glass). You give that person a check, dated two weeks in the future, for the amount of the loan and the fees. Then, happy days, you walk out the door with the loan principal in your pocket, and a very expensive loan on your back.

Payday loan users aren't bad people. Quite the opposite. Most people who take out a payday loan make between $15,000 and $45,000 per year at a job. They are teachers, bus drivers, waitresses, and handymen. More than half are single heads of households with children to support.

According to the Consumer Federation of America, one of the biggest problems with payday loans is they have to be paid off in one lump sum, usually two weeks to 30 days after the loan is created.

And they are very expensive.

How expensive? Payday loan fees are about $20 per $100 borrowed. So, if a borrower takes out a $300 loan (the average amount), they will pay $60 in fees. And must pay back the entire $300 in 14 days.

This loan structure doesn't make a lot of sense to me. If you don't have the money now, are you likely to be able to pay it all back -- plus a ton of fees -- from your next (probably already stretched) paycheck?

So what happens in two weeks, when the borrower doesn't have the $300 (plus $60 in fees, remember)? Usually, the payday loan company will "roll over" the loan. In exchange for another $60 in fees, they will let the borrower have another two weeks to pay off the loan.

The average payday loan is rolled over more than 6 times. That means the average payday loan borrower is paying more in fees -- as much as $420 -- than the principal of the loan -- $300.

And this is only over a period of a few months.

I later learned that consumer protection organizations, such the Center for Responsible Lending, were concerned with same issue, labeling it the debt trap, and that several authors had described how the problem has devastated many families.

I think there's a better way to provide needed credit to people with bad credit. That better way should be a loan that borrowers can actually pay back to help improve their lives, not ruin them. This is the kind of loan that ZestCash offers.

We are not a payday loan provider.

We offer short-term installment loans that are paid back in small chunks over time. We think this is a more realistic way to pay down credit debt. Especially for people who don't have extra cash to spare.

Working on mysteries
without any clues
-Bob Seger

If you have a job, a banking account, and a heartbeat, you can get a payday loan by walking into any of the thousands of payday loan stores in the US. (As a matter of fact, there are more payday loan stores than McDonald's locations).

However, people sometimes ask for loans that they can't pay back. Although it seems counter-intuitive, this is bad for the borrower. If you take out a loan you can't pay back, you just trap yourself further in debt.

Part of offering a better credit product to borrowers is helping them make sure they don't take out loans they can't repay. This process of deciding which loans to give, and how much to lend, is called "underwriting".

The current state of the art in underwriting uses a simple math function across a few variables purchased from a data provider (like a credit bureau). If an applicant is missing some of the data, or has a bad score on some of the variables, that person can't get a loan.

And ends up at a payday loan shop.

As it stands today, good people are being denied credit because old world processes don't take advantage of today's data-rich environment.

We are using a fundamentally different underwriting method. We think that all data can be credit data. Why use a few bits and bobs when you can use massive amounts of data from the Internet, alternative data sources and, of course, the applicant? Generally, more data yields better decisions.

But it would also be wrong to cast aside the decades of underwriting experience that have gotten the credit market as far as its come to date. Capital One is the best in the world at classic underwriting. My cofounder, Shawn Budde, was the head of Capital One's subprime credit business. He has forgotten more about underwriting than most banks have ever known. It's fun to work with brainiacs.

We are going to use the best of both worlds -- massive data analysis AND classic underwriting -- to make better underwriting decisions. Better underwriting decisions mean more people get loans that fit their situation, giving them the credit they need without trapping them in debt hell.

Something's in the air tonight
The sky's alight with a burning light
You can mark my words
something's about to break
-Mat Kearney

I really meant what I said about brainiacs. The Zesters are a fun crew.

Our general counsel (Laura Gowen) worked on the largest credit-related antitrust suit the US has ever seen. And volunteered as counsel for death row inmates. And gets super annoyed when I interrupt her. And looks just like Hilary Ware (something only the Google folks can appreciate).

Kasia Chmielinski and Sonya Boralv are both ex-Googlers. They both started their Google careers in headquarters (in Mountain View) and then moved to London. Kasia went to Harvard and studied physics; Sonya went to a school where people mostly study beer bongs...

We are crammed into a little office over a coffee shop on Sunset Boulevard. We argue about music, sit on exercise balls, and have a resident brown dog sleeping on our couch....

If any of this floats your boat, we are hiring brilliant people. Namely engineers, product managers and machine learning types. We'd love to hear from you...

I've been working on ZestCash for a long time now. I think the team has come up with a great product and we're all really excited about it.

I'm sitting at my desk, looking out the window, watching the chaos and the pathos that is Hollywood, and the mystery food that comes from the fast food restaurant across the street.

And I can see the payday loan store down the block.

Here's hoping that fewer people have to walk in there in the future...