ZestCash, a company founded by former Google CIO and VP of engineering Douglas Merrill to legitimize the payday loan industry, has raised $73 million round of funding. The company raised $23 million in an equity round led by Matrix Partners. Existing investors Lightspeed Venture Partners, GRP Partners, Flybridge Capital Partners, and Lighthouse Capital Partners also fully participated in the round. The company also raised a separate $50 million line of debt financing from Victory Park Capital to fund its loan portfolio.
ZestCash takes an entirely different approach to underwriting by combining Google-style machine learning techniques and data analysis, combined with traditional credit scoring. As a result, the company can offer credit to many people who historically would have been turned away.
Payday loans are common amongst consumers who don’t have the credit to take out a standard loan through a bank. Payday loans shops allow users to pay a fee to borrow a certain amount of money. For example, a consumer will on average pay $60 to borrow $300 for 14 days. After 2 weeks, the borrower must pay the entire loan and fee back in one payment. If the borrower cannot pay the loan back, then he or she can get an extension but will need to pay another $60 for the additional time.
ZestCash says that the average payday loan gets rolled over 6 times, which means the average borrower pays $420 in fees to borrow $300 in principal. In 2010, 30 million Americans took out a payday loan. ZestCash basically offers a better alternative for those who are forced to take out these immediate loans. With ZestCash, borrowers pick how much money they want to borrow and for how long. As they pick their loan terms, the company clearly displays their weekly payment, allowing users to adjust the terms to arrive at a payment that is manageable for them. Instead of paying the money back in one big balloon payment, borrowers can pay back their loans in small chunks over time.
The company allows users to borrow between $300 and $800 and ic currently available in four states— Utah, Idaho, Missouri and South Dakota. In terms of payments, ZestCash auto debits people’s accounts on the dates their payments are scheduled for. And while most payday loans are processed through brick and mortar shops, ZestCash operates solely online. When someone signs up for a loan they also get a full payment schedule of when every payment will come out of their account, and can pay back the loan between three and eight months. The startup also promises flexibility when dealing with individual borrowers and late payments.
Since its launch in 2009, ZestCash has grown its staff to more than 75 people and has loaned millions of dollars to thousands of customers. For example, Stan, a ZestCash customer needed help paying the insurance deductible for his newborn child to be in the neonatal intensive care unit in a hospital. He took out a several hundred dollar loan to pay for the health care immediately and then paid off the loan in a matter of months.
“We believe all data should be credit data,” says Douglas Merrill, Founder and CEO of ZestCash. “By using ‘big data’ analytical techniques we are able to offer a fair, lower cost alternative to people who do not have access to traditional credit.”
He tells us in an interview that more than two-thirds of the company’s customers come back for a loan. “The data-based underwriting is not like anyone else’s,” Merrill says. “We’re here to make sure customers who may have good credit by non-traditional metrics can get good, fair loans.”
Shawn Budde, Co-Founder and Chief Risk Officer of ZestCash, says that “we’ve reached the natural limit of what traditional underwriting tools are capable of. The machine learning-based underwriting techniques ZestCash is developing will completely change the way lenders view and use data.”
Matrix Partners’ Dana Stalder, who was the former CTO of PayPal, is particularly bullish on ZestCash and its potential. ZestCash is a multi-billion dollar opportunity, he told me in an interview. “ZestCash will disrupt the financial services industry by offering new services to millions of unbanked consumers. The opportunity is analogous to my experience at PayPal in the sense that both PayPal and ZestCash have figured out a way to provide more cost-effective services to customers through the novel application of analytics and technology.”
Stalder says that one challenge that ZestCash faces, which is similar to an issue PayPal faced during its initial growth stage, is the fact that credit industry is an appropriately, highly-regulated industry. Because of this, the company needs to deal with launching in each state individually, on a state-by-state basis.
The new funding will be used towards further innovations in underwriting, expansion into additional states, and company growth.