Making online loans to strangers makes sense: Lenddo’s Jeff Stewart | Guardian of sustainable business
So Here’s the deal: You’re a lender. You see millions of bright, hard-working people joining the middle classes in developing countries. They want credit, but they can’t get it. So you send them money over the internet. You have never met them. They have never met you and never will. And, on the other side of the world, they send the money back to you – with interest.
Does that sound crazy to you? It’s mad. Yet this is exactly what the online loan provider, Lendo, fact. Since 2011, it has accumulated around 10,000 loans and 500,000 members worldwide. E-lending is also heading to Mexico and Colombia, with plans for 35 other emerging markets to follow shortly.
Lenddo was born out of an obvious gap in the market, says Jeff Stewart, the company’s co-founder and serial entrepreneur, who was recently named a top market leader. Goal Economy 100 listing. Along with business partner Richard Eldridge, New York-based Stewart runs a handful of internet-based businesses around the world.
“Our employees kept coming to us and asking for loans, which made no sense to us,” he recalls. Despite stable jobs, solid qualifications and rising wages, most local banks have ignored them as too small or too risky. “I couldn’t think of a better group to loan to,” Stewart says. “So we thought, ‘Why can’t we solve this problem with software?’
His initial research led him to “stumble upon” the work of Nobel laureate and microfinance pioneer Muhammad Yunus. He was immediately struck by the high repayment rates (less than 5% of Yunus’ Grameen Bank loans go into default), as well as the social lending approach that microfinance is based on. “Essentially, you’re involving the community in the demand generation, the underwriting process, and the redemption process,” says Stewart.
Stewart became convinced that the same model could work just as well online. With microfinance, individuals are encouraged to form loan groups with friends and neighbors. Each then presents itself as a guarantee for the other. Lenddo works the same way, only groups derive from your online connections rather than in person. Using a set of super-smart algorithms, it can sift through your social network data to determine your creditworthiness – essentially replicating the work of a microfinance loan officer who arrives in your village with an assessment form and a pen.
Loans from Lenddo average around $450, with a monthly interest rate of 2-4%. They target middle income people rather than really poor people. To get one, someone within your online social network must act as your arbiter. If that person is deemed sane and gives you a sound recommendation, your chances of getting a loan increase. Getting a loan increases the likelihood of friends getting one too. And so Lenddo’s client list is growing (at a staggering rate of 10% per month, according to Stewart).
Also in the mix comes large amounts of additional data that Lenddo collects from your social networks. What are the career profiles of your Facebook friends? What products or restaurants do you (and your friends) tweet about? Such profiling reflects some of the basic tenets of epidemiology and behavioral science, says Stewart: “If you hang out with people who make a lot of money and pay their bills, you’re statistically more likely to do that.”
Of course, you need the right algorithms to do it well. Stewart is confident on this point. Lenddo has a “team of doctors” on the case (the list includes a math Olympian from India). More importantly, two years of refund receipts give Lenddo the kind of database needed to fine-tune its software. “In the tests we’ve done, our estimate of disposable income is often more accurate than their detailed personal analyzes and guesswork,” says Stewart.
The profiling power at this scale is incredible. But it’s also a bit scary. Forget NASA spying: Lenddo can openly examine every nook and cranny of your online life. Stewart insists the company has strict privacy measures in place and all of its customers are fully aware of how things work.
For now, at least, most Lenddo borrowers seem only too happy to trade their personal data for credit. Stewart cites the experience of Omidyar Network, one of Lenddo’s early backers. The investor asked a successful loan applicant if he was comfortable with Lenddo being able to see the emails he sent to his girlfriend. “Look, they’re lending me money,” was the reply. “They can come to my house and meet her if they want.” It is highly unlikely that borrowers would be so cavalier about their privacy if credit were more readily available – a point Stewart is quick to concede.
Questions could also be asked about the risk of social blackball. What prevents a perfectly bankable individual from being refused a loan because a Facebook friend has a criminal record, for example? Stewart is quick to counter: people will have contacts that “are not perfect” in their social networks; that’s to be expected, he said. But also, if they’re bright and enterprising, you’d expect them to have friends from the college tech club, for example. “It’s how connected you are to the whole community that matters,” says Stewart.
Today’s global megatrends are certainly pointing in the right direction for Lenddo, who was recently named “technology pioneerby the World Economic Forum. The “global middle class” is expected to swell five billion people by 2030; smartphones are ready to take off in developing countries; while Facebook and others show few signs of slowing down. Additionally, at Stewart, Lenddo has a leader with insane levels of ambition: “We don’t see why this can’t be one of the most important companies, ever.”
Correction: This article was updated on March 19 to indicate that since 2011, Lenddo has granted 10,000 loans and 500,000 members worldwide, not 500,000 loans in the Philippines.