Good news for middle-class Americans with imperfect credit: ZestFinance, a 6-year-old Los Angeles technology startup, wants to fund "near prime" customers, who are actually not as risky as traditional wisdom holds, says founder and CEO Douglas Merrill. 

On Wednesday, ZestFinance launched its new "Basix Loans" feature, which targets underserved American consumers by reassessing their credit risk and then, if they're deemed eligible, offering them loans on the spot. Merrill was inspired to start the company when he noticed how many people were being unfairly denied loans based on their inability to access credit--his own sister-in-law, Vick, included. 

"She's a single mother of three who has a full-time job and is a full-time student," Merrill tells Inc. by phone. "She's one of 25 million Americans who have no access to credit." He adds that payday lenders can also charge mammoth fees, which makes borrowing even short-term cash a serious and lasting headache.

So, in 2009, Merrill decided to launch his own startup, which would apply artificial intelligence principles--which he'd honed during his time spent working for a military think tank--to better analyze credit risk. Merrill, it's worth noting, was no stranger to high-stakes tech: He'd also previously served as Google's CIO and vice president of engineering, where he was personally responsible for leading its IPO in 2004. 

"I really wanted to transform financial services in a way that hadn't been done in a long time, in the same way that Google transformed that experience on the Web," he says.

Enter: Basix Loans, which parses as much as 50,000 data points to determine true credit risk for any prospective borrower. Where traditional banks only consider around 10 to 20 data points--such as the number of credit cards a user possesses, and how quickly and effectively they can pay off their debts--Basix will look at "subtle" patterns, such as cell phone payment history, how much research someone does on the site before application, how they fill out a form, as well as where various credit signals "fail to align" and how. The company charges a 26 to 36 percent annual interest rate on loans typically between $3,000 and $5,000 dollars. Borrowers get three years to pay back ZestFinance in monthly installments, with a 15-day grace period each time. 

The hope, says Merrill, is that Basix will bolster users' credit over time, since the company reports payment performance to credit reporting agencies. At present, Basix has rolled out to Alabama, Georgia, Missouri, New Mexico, and Utah, though it will soon be made available nationwide. The company plans to license its service to other financial technology businesses.  

If this sounds like payday lending to you, think again, says Merrill--ZestFinance is a horse of a different color. "Payday loans are nothing like Basix. [Those] are short term, they're small dollars, they're paid back over a few months, and their interest rates are more like 500 percent," he explains. 

Also unlike some payday lenders, Basix boasts an easy-to-use web platform. Prospective borrowers fill out two pages (it takes around five minutes,) and they then receive a loan offer (or refusal) within 15 seconds. If accepted, the loan will appear in the user's bank account the next morning.

When asked if he felt that Max Levchin's student lending startup, Affirm, was a fair comparison to make to ZestFinance, Merrill was quick to point out that the former "serves up a higher credit market." Still, in many ways, it's hard to see the difference: Affirm, which similarly charges steep interest rates, serves those who are often turned away from risk-averse student lenders. 

Despite the glossy veneer of using smart data analysis to offer up more loans, ZestFinance and its ilk have their skeptics. "All lenders, including payday lenders, should be required to fully consider a borrower's ability to repay a loan, in full and on time, without additional borrowing," says Tom Feltner, the Director of Financial Services at the Consumer Federation of America. "It's not enough to mine data and better predict whether a lender can successfully collect payments from a borrowers bank account--we need [to set] higher standards for borrower success and ensure that repayment doesn't result in simply forgoing other necessities to make payments."

Still, ZestFinance is doing well for itself so far: The company pulled in nearly $90 million in revenue in 2014, and projects 50-70 percent growth in 2015. It's raised $112 million over three funding rounds, from investors such as Peter Thiel, Northgate Capital, and Matrix Partners, as venture capitalists grow increasingly hungry for a stake in the data-saturated lending sector.

Published on: Jul 15, 2015