ZestFinance, a company founded by former Google CIO and VP of engineering Douglas Merrill to legitimize the payday loan industry using machine learning and large-scale big data analysis, has raised $20 million in Series C financing led by Peter Thiel with Northgate Capital, Matrix Partners, Kensington Capital Holdings, Eastward Capital Partners and Lightspeed Venture Partners also participating in the round. This brings the company’s total funding to nearly $100 million.
For background, ZestFinance takes an entirely different approach to underwriting by combining Google-style machine-learning techniques and data analysis with traditional credit scoring. As a result, the company can help financial service providers better understand credit risk in their own businesses and better understand the creditworthiness of their borrowers. The ZestFinance decisioning infrastructure can run dozens of models in parallel, returning loan decision results within seconds.
While traditional lenders determine credit-worthiness based on 10-15 pieces of data, ZestFinance uses tens of thousands of data points and machine-based algorithms to better assess credit risk. Last year, the startup debuted a new underwriting model that provides a more accurate depiction of a person’s ability to pay back loans.
This new model not only increased the quality of underwriting analysis but was also able to give more loans to people. In fact, the approval rate has doubled. For example, in the case of bankruptcy (a strong signal used in underwriting decisions), a traditional underwriting model can quickly calculate the number of years since a person filed bankruptcy, but wouldn’t know that people are only allowed to declare bankruptcy once every seven years. So, ZestFinance is making its algorithms smarter to be able to determine variables like this.
“Getting credit into the hands of more people is one of the financial service industry’s biggest hurdles. We’ve found that big data done right — machine learning, combined with human inference — can solve this problem,” says Merrill.
Merrill explains further that having Thiel as an investor makes a lot of sense because the PayPal founder transformed the online money transfer and payments space, and disrupted the data-mining space for many financial institutions with Palantir. “I feel like we’ve done the same thing in underwriting, and that’s why Peter is interested in us,” he says.
Since the company’s inception, ZestFinance has increased net repayment by 90 percent over industry scores and more than doubled the number of underbanked Americans the company serves.
It’s no secret that one of the major areas where large-scale data mining is going to be hugely disruptive is in the financial services industry. It’s unclear yet whether some of the incumbents (i.e. large financial institutions) will start adopting some of ZestFinance’s models in underwriting, but the company is certainly an interesting acquisition target for any of the giants.
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