SoLo Funds, a Los Angeles fintech that hosts a marketplace where people lend small amounts of money to one another, is moving forward as it works through legal issues. But leaders acknowledge that they won't be likely to make money from lending and will instead have to expand into credit cards and other services if the startup is to become profitable.
The company, which has picked up on an idea that LendingClub and Prosper abandoned several years ago, recently reached a milestone of $100 million in loans made through its platform. It has 700,000 users. It's also creating what it calls a "lending [distributed autonomous organization]" or co-op, an independent entity that will manage the person-to-person loans.
The company's leaders say SoLo has a unique model that is
Legal issues
In May,
The state regulator claimed that while SoLo asked consumers to pay voluntary "tips" for the small loans they received, it only approved loans for people who paid the tips. According to the order, 100% of SoLo's loans to Connecticut residents from June 2018 to August 2021 contained a tip to the lender or to SoLo itself and those tips were the equivalent of annual percentage rates ranging from 43% to 4,280%. The order also cited SoLo Funds for failure to disclose the tips and for not having lending and collections licenses in the state.
"We are working through that process," Rodney Williams, SoLo Funds' president and a co-founder, said of the Connecticut order in a recent interview. "What's most important is that we're truly doing something different and that's what this is all about. We are approaching this problem that Americans are facing in a very unique way. The truth of the story is that we're actually doing something pretty remarkable, that we're extremely proud of."
The tips and donations on SoLo loans are all optional and SoLo does not presently impact a user's credit score, he said.
"We did not want mandatory fees," Williams said. "We understand that this demographic has been taken advantage of and continually been told what to pay. They're told what to do. They're told where they can shop. And they're told where they can eat. We wanted to give them the same environment that they have when they go to a restaurant: they have a choice to pay extra [for a tip]. We felt like if we could give them the choice and autonomy and the control, we could ultimately teach them the cost of capital."
Customers are getting the funds to handle emergencies through SoLo's platform that they otherwise could only get through predatory payday lenders, Williams said, noting that SoLo's default rate is about 10%, a third of the rate of payday lenders.
SoLo Funds has requested a hearing on the cease-and-desist order; it's scheduled for December. SoLo will have the chance to present its case to a hearing officer, who will present a draft decision to the Connecticut banking commissioner, who will render a decision. If the commissioner upholds the cease-and-desist order, SoLo can take the case to a superior court.
If the two parties reach an agreement before the hearing, most likely SoLo Funds will need to agree to be licensed, make restitution to affected customers and pay a fine. It will also need to observe Connecticut's 36% annual percentage rate cap on small loans.
Critics say the company is not what it appears to be.
"Like many fintechs, SoLo Funds claims to be doing something unique, but they are really just engaging in an old business model of high-cost payday loans disguised as helping the community," said Lauren Saunders, associate director of the National Consumer Law Center. "These are high-cost balloon payment payday loans with all of the same problems of traditional payday loans, compounded by an evasive and potentially illegal business model of hiding interest in tips and failing to disclose the annual percentage rate."
How it works
Solo Funds' marketplace lets consumers make small loans of $50 to $100 to one another. Requests for loans include a proposed monetary tip to the individual who makes the loan of up to 12% of the loan amount and a "donation" to SoLo Funds itself of up to 9%. The funds are deposited in a checking account borrowers are required to open at SoLo's bank partner, Evolve Bank & Trust.
"We take all cease and desist orders seriously and evaluate their implications to our partners," Hank Word, president of open banking at Evolve Bank & Trust, said in a statement. "Solo has followed the order and no longer offers those services in Connecticut, as well as in other states. We continue to work with Solo and are monitoring the situation. This area of lending is complicated but it is important to note that Evolve is not a party to the loan and is not part of the services Evolve provides to Solo."
The average borrower makes a request and gets funded in less than 15 minutes, Williams said.
"It's literally Uber for loans," he said. "Regular people have stood up for each other and lent over $100 million. We believe that's a feat that has never been done in the U.S. Peer-to-peer models exist in other countries and do well in other countries like India. I do believe people want to help each other. People want to lend a hand. And this is an example of that."
Most — 82% — of the lenders on SoLo's platform live in underserved ZIP codes, Williams said.
"We are redistributing wealth back into these communities at scale," he said. "Every other lender, every other fintech, takes the money from the underserved and they don't reinvest it back into that community."
SoLo Funds has no mandatory fees, Williams said. The donations it receives don't cover the company's expenses for running anti-money-laundering checks and know-your-customer checks, for validating and onboarding borrowers, for connecting Plaid accounts and for moving money between borrowers and lenders through Visa debit.
SoLo Funds has raised $14 million in capital. Its path to profitability will come from offering services outside of lending and borrowing, Williams said.
The company is building a subscription-based credit builder product, for instance. It's planning to offer a "wallet" that will provide neobank services like debit cards and high-yield savings accounts.
The state of Connecticut recently handed the small-dollar marketplace loan provider a cease-and-desist order, but Rodney Williams says his company is getting much-needed emergency funds into marginalized communities at a low total cost, and that the rules need to be rewritten.
"Our goal is to make lending and borrowing better and make it more community driven at scale," Williams said. "We don't just want to do small-dollar loans. We want to do larger loans. We want to do installment loans. We want to do community-backed credit cards. We want to do community-backed auto loans. We want capital from regular people to make an impact on other regular people."
Some industry watchers say SoLo's idealism isn't enough.
"SoLo Funds should stop evading the law and should get state licenses and comply with federal and state lending laws," Saunders said.
Creating a lending co-op
SoLo's founders are in the process of creating a "lending DAO," which they also call a lending co-op. This will be licensed at the state level, they say.
In concept, the co-op will be akin to a credit union, Williams said. SoLo's lending members will opt in to it and select their preferences. The loans will be made using algorithms SoLo has developed. The co-op will have a board made up of members. It will be decentralized in the sense that there will be no traditional bank involved.
"It's a better experience for our lenders," Williams said. "If you think about our lenders today, they're picking and choosing who to lend to. Sometimes it could be a good choice. Sometimes it can be a bad choice. When you think of a co-op, not only will you be able to share in the losses, you'll be able to share in the potential return, which ultimately stabilizes the platform, stabilizes the yield and stabilizes the user experience. So it's a significant, better experience for our lending members. and for our borrowing members."
The SoLo Funds team is thinking about using a distributed ledger for this. "We're talking to a number of blockchain partners on how we're going to bring this to life," Williams said.
He was hesitant to divulge further plans.
"We're not done innovating," he said. "We have so much in our tank."
