Taking a Fresh Look at Scoring the Underbanked

ZestCash Inc. says it's the Google of alternative lending, based on the way it calculates underwriting for loans to risky borrowers; its rival BillFloat says it's the Facebook of alternative lending, because it knows its customers.

There is some brinkmanship in those statements, as well as some tongue-in-cheek, but the founders of both companies have hit upon something important: It's technology that propels these new alternative lenders, just as it did decades ago when Fair Isaac Corp. created its FICO score to rank prime and super prime borrowers.

Both alternative payment companies rely on non-traditional streams of consumer data, whether that's rental information, or information from cell phone bills, car payments, or mortgages.

"[It] is significantly cheaper for us to score consumers than it is when using FICO and the bureaus," Ryan Gilbert, chief executive and co-founder of BillFloat, says in an email.

But their concept is hardly novel.

Fair Isaac also offers the FICO Expansion Score, for thin and no-file consumers. The Minneapolis company did not make anyone available to comment for this story, but reports suggest there has been scant take-up of the product meant to provide information on the 60 million or so consumers who fall into the unbanked or underbanked category.

A July 20 article in The Washington Post about the rise and fall of alternative scoring provider Pay Rent Build Credit Inc. sheds some light on why that is.

PRBC was founded by Michael Nathans in 2002 and led by Corey Stone, who recently joined the nascent Consumer Financial Protection Bureau as a senior official overseeing credit reporting.

PRBC's original mission was to create something similar to the FICO score for the millions of consumers who don't qualify for a FICO score.

In 2006, the Post reported, Stone introduced the novel concept of using consumer information from phone bills, utilities and prepaid cards to help create an alternative score. PRBC's concept also flourished for a while with money from the likes of the Ford Foundation and the Center for Financial Services Innovation. According to the Post, Fair Isaac agreed to use PRBC's data in the scoring of its subprime product.

Then the 2008 financial crisis hit, and lenders were unwilling to loan to the disenfranchised, no matter what the data. So PRBC's concept foundered and the same year, PRBC sold itself to MicroBilt Corp., which specializes in debt collections information. MicroBilt saw that the information could be used for other purposes, the article said. However, MicroBilt filed for bankruptcy protection this year.

So why does this new batch of companies, which have goals as lofty as those PRBC had, think they can succeed where others have failed? Let's start with the millions of dollars flowing from venture capital firms.

As reported in American Banker Thursday, ZestCash, co-founded by former Google CIO Douglas Merrill, raked in $11 million in series A investment from a syndicate led by LightSpeed Venture Partners, as well as $8 million for a debt line from Lighthouse Capital Partners. Competitor BillFloat has attracted $16 million from First Round Capital, Paypal Inc. and Venrock Management V LLC. Others, such as Pawngo and Wonga, have received millions as well.

These companies also say they have skin in their own game.

"What sets us apart is that we built our platform for our own internal purposes, to grow BillFloat and service our customers," Gilbert says. "Most vendors are selling their services and don't have their own funds at risk."

Because of the long, entrenched recession, enough consumers have joined the ranks of the underbanked to create a legitimate market.

And these alternative lending companies are banking on it.