For the past year, a Los Angeles-based fintech has relied on the kindness of strangers to fuel a peer-to-peer mobile lending platform it hopes will steer consumers away from high-interest payday loans while making them more creditworthy in the future.
SoLo Funds specializes in small-dollar loans with a $1,000 cap, allowing consumers to act both as lender and borrower. It's a market generally viewed as underserved given that banks generally avoid small-dollar loans because of compliance concerns. Travis Holoway, SoLo’s co-founder and CEO, started the company last year after he saw 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 firm's website, SoLo users can request to borrow money from others on the site. Those who lend money cannot charge interest, but can collect money in the forms of tips. Borrowers also set the repayment date. If lenders are feeling particularly generous, they can waive the requirement for a loan to be paid back.
Borrowers have the ability to tip a lender up to 10% for funds received, and also make a donation to SoLo for providing the service. Holoway said 99% of users tip the lender while 97% make a donation.
“What we’ve realized is that people on our platform don’t want handouts and I think that’s an unfair assessment of millennials and the underbanked,” he said. “I think we’re proving that on our platform daily.”
SoLo wants to offer a cheaper option to traditional payday lenders as well as serve as a way for financially underserved consumers to show credit worthiness to traditional lenders, according to Holoway.
To that end, SoLo is in discussions with one of the major credit bureaus to provide data about 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 credit worthiness. SoLo calculates the score using a machine learning algorithm to analyze a borrower’s checking account data to find reoccurring payments like a cellphone bill, as well as direct deposit information.
Holoway said the goal for the credit bureau partnership is for the bureau to eventually factor in such data into a traditional credit score. "We think millennials and the underbanked community are more creditworthy than banks currently perceive them to be,” Holoway said.
John Thompson, chief program officer at the Center of Financial Services Innovation, said SoLo’s credit-scoring model could eventually help such borrowers with access to higher-quality credit over time. “If an organization such as SoLo is able to sustainably grow and demonstrate positives borrower outcomes, that would be a proof point from a market perspective,” he said.
To date, SoLo has facilitated more than $2 million in loans to thousands of borrowers. When SoLo launched in June, the platform actually had more customers wanting to lend than it did those looking to borrow. Holoway said the fintech stopped the small amount of marketing it was doing through Google Ads and social media to attract lenders to the platform.
“We had an influx of lenders,” he said. “Lenders would come into the marketplace to look for borrowers and it was empty.”
When borrowers and lenders began to even out, SoLo found that the average loan totaled $160. Holoway said that figure is skewed because the company placed a $200 cap on loans for the first six months. First-time SoLo users have an undisclosed cap and those borrowers must successfully repay their loans to increase their score and borrowing limit.
“On the flip side of that, we know as we continue to mature as a company, our average loan size will probably increase to what the average payday loan is, which is $375,” Holoway said.
He said default rates are minimal, and claims they are two times better than the likes of companies such as Lending Club, and four times better than the payday lending industry.
In the future, Holoway also wants SoLo to act as an alternative credit bureau of sorts to banks to help them get a better understanding of financially underserved consumers.
“The data we’re collecting on the millennials and the underbanked is extremely valuable,” he said. “If we can provide that type of data to help banks make better informed credit decisions in the future, everyone wins.”
At least one bank is intrigued.
“What they’re doing is admirable,” said Christopher Maher, the chairman and CEO of the $7.5 billion-asset OceanFirst Financial in Toms River, N.J. “You have a growing population of folks that have not been able to access traditional financial services and would like to.”
OceanFirst could theoretically offer smaller-dollar loans at a more cost-effective rate than payday lenders. But Maher said doing so opens up the bank to criticism because interest rates would still be considered high.
“There’s a desire to be helpful in this space, but there is institutional concern,” he said. “If what we do gets misunderstood, we face both reputational and compliance risk.”
Maher said he would welcome alternative borrower data to help banks make credit decisions on consumers who lack a robust credit profile, particularly for those who participate in the cash-based economy. OceanFirst recently launched a no-fee checking account called AmiGo that is intended to attract such consumers and others who might be financially underserved.
“Until we can get them into a core checking account and you start to see evidence of the way they’re handling their financial relationships, it’s going to be difficult to effectively service them,” Maher said.
Meantime, SoLo is moving 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 launched the Mastercard deal Thursday.
“People on the platform were looking for the money as quickly as possible,” Holoway said about push payments. “We knew that if we wanted to disrupt the lending industry, we had to be faster.”
