When the Jenga tower of the American housing market toppled in 2008, subprime loans became a dirty concept. But the subprime lending sector was never just about risky mortgages. And the business of getting money to the less-than-middle class remains robust.
One of the newer entrants to that field is ZestCash, an online American start-up that aims to get small loans to borrowers with poor credit. Founded by Douglas Merrill, a former chief information officer at Google, ZestCash defines itself by what it claims not to be, a payday loan company. Payday loan merchants don’t usually discriminate. Built into their business model is the idea that many borrowers will default. ZestCash, which currently operates in four states but may expand in the new year, has a different model. They aim to judge potential customers by their online signatures. In the same way Amazon recommends books and Google orders search results, ZestCash computers can figure out if you’re a good bet to pay back your loan. Sonya Boralv, Merrill’s wife and the communications chief for the company, says even the amount of time a customer spends on the ZestCash website—testing different options, toying with different rates—can be a signal of how likely they are to default.
So far, according to the company, the model is working. ZestCash default rates are about half those in the payday loan market generally, says Boralv. Annualized, the company’s interest rates still far exceed those offered by credit cards or bank loans. But the lower default rate lets ZestCash offer better terms and a more forgiving structure than traditional payday loan houses. (Borrowers spread payments on loans over a set term.) Overall, the cost of a ZestCash loan can be as much as 50 per cent less than a similar payday loan, says Boralv.
As to how different ZestCash is, philosophically, from the payday loan market, well, that’s another question. “Having small loans and high interest and short terms, that makes a payday loan,” says Paige Marta Skiba, an economist and associate professor of law at Vanderbilt University. “So to me, it sounds like a payday loan.”