Where Customers Are Also Lenders: A Fintech’s Payday Alternative

Over the past year, a Los Angeles-based fintech has relied on the kindness of strangers to power a peer-to-peer mobile lending platform that it hopes will drive consumers away from high-interest payday loans while making them more creditworthy in the future.

SoLo Funds specializes in small loans with a cap of $1,000, allowing consumers to act as both lender and borrower. This is a market generally considered underserved as banks typically shy away from small loan amounts due to compliance issues. Travis Holoway, co-founder and CEO of SoLo, launched the company last year after seeing the relatively high fees and interest rates charged by many payday lenders.

“I quickly realized there needed to be more affordable access to small dollar loans,” Holoway said in a recent interview with American Banker.

Through the company’s website, SoLo users can apply to borrow money from others on the site. Those who lend money cannot charge interest, but can receive money in the form of tips. Borrowers also set the repayment date. If lenders are feeling particularly generous, they can waive the repayment requirement for a loan.

Borrowers have the option to tip a lender up to 10% for funds received, and also to donate to SoLo for providing the service. Holoway said 99% of users tip the lender while 97% donate.

“What we’ve realized is people on our platform don’t want handouts and I think that’s an unfair assessment of millennials and underbanked people,” he said. he declares. “I think we prove that daily on our platform.”

SoLo wants to provide a cheaper option to traditional payday lenders and serve as a way for financially underserved consumers to show their creditworthiness to traditional lenders, according to Holoway.

To that end, SoLo is in talks with one of the major credit bureaus to provide data on its users to show their ability to repay loans in full and on time. The fintech uses a proprietary credit scoring model for borrowers that lenders on the platform use to determine creditworthiness. SoLo calculates the score using a machine learning algorithm to analyze a borrower’s checking account data to find recurring payments like a cell phone bill, as well as direct deposit information.

Holoway said the goal of partnering with the credit bureau is for the bureau to eventually integrate that data into a traditional credit score. “We believe millennials and the underbanked community are more creditworthy than banks currently perceive,” Holoway said.

John Thompson, program director at the Center of Financial Services Innovation, said SoLo’s credit-scoring model could potentially help these borrowers access better credit over time. “If an organization like SoLo is able to grow sustainably and demonstrate positive outcomes for borrowers, that would be a point of proof from a market perspective,” he said.

To date, SoLo has facilitated over $2 million in loans to thousands of borrowers. When SoLo launched in June, the platform actually had more customers willing to lend than willing to borrow. Holoway said the fintech has ended the small amount of marketing it does through Google Ads and social media to attract lenders to the platform.

“We had an influx of lenders,” he said. “Lenders were coming into the market looking for borrowers and it was empty.”

When borrowers and lenders started balancing, SoLo found the average loan was $160. Holoway said that figure was skewed because the company had set a $200 cap on loans for the first six months. New SoLo users have an undisclosed cap and these borrowers must successfully repay their loans to increase their score and borrowing limit.

“On the other hand, we know that as we continue to mature as a business, our average loan size will likely increase to what is the average payday loan, which is $375. “, said Holoway.

He said default rates are minimal and says they are twice as good as companies like Lending Club and four times better than the payday loan industry.

Going forward, Holoway also wants SoLo to act as a sort of alternative credit bureau to banks to help them better understand financially underserved consumers.

“The data we collect on millennials and the underbanked is extremely valuable,” he said. “If we can provide this kind of data to help banks make more informed credit decisions in the future, everyone will win.”

At least one bank is intrigued.

“What they’re doing is admirable,” said Christopher Maher, president and CEO of OceanFirst Financial, a $7.5 billion asset in Toms River, NJ. “You have a growing population of people who haven’t been able to access traditional financial services and would like to.”

OceanFirst could theoretically offer smaller loans at a better rate than payday lenders. But Maher said that exposed the bank to criticism because interest rates would still be seen as high.

“There is a desire to be useful in this space, but there is an institutional concern,” he said. “If what we do is misunderstood, we run both reputational risk and compliance risk.”

Maher said he would welcome alternative borrower data to help banks make credit decisions about consumers who don’t have a strong credit profile, especially those who participate in the cash economy. OceanFirst recently launched a no-fee checking account called AmiGo that aims to appeal to these consumers and others who may be financially underserved.

“Until we can get them into a main checking account and you start to see evidence of how they manage their financial relationships, it’s going to be difficult to serve them effectively,” Maher said.

In the meantime, SoLo is forging ahead with app improvements based on user feedback. The fintech has added push payments to debit cards through partnerships with Mastercard and Visa. SoLo officially kicked off the Mastercard deal on Thursday.

“People on the platform were looking for the money as quickly as possible,” Holoway said of the push payments. “We knew if we wanted to disrupt the credit industry, we had to be faster.”

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