Can a Payday Lending Start-Up Use Facebook to Create a Modern Community Bank?

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Social media and big data are being used in an innovative new payday loan banking model that’s more Silicon Valley than Wall Street. Most interestingly, the operation seems to have more in common with old-fashioned hometown lenders than today’s giant banks or typical payday loan outfits.

When people get nostalgic about community banking, they evoke a time when your bank really knew who you were. The manager knew your name and the tellers would ask how your kids were doing or wish you happy birthday. With the ascent of megabanks and the growth of online and mobile banking, the idea of a hometown bank where your community ties mattered more than a bunch of cold calculations became as rare as cars with tail fins.

The company that wants to reverse this trend is a start-up payday lender. What’s even more improbable than that is how they plan to do it: By using your Facebook and Twitter accounts as factors to determine your creditworthiness., which launched last month, says it’s not like other payday lenders. Yes, the fees it charges — a little over $30 to borrow $200 for two weeks — are similar to what its competitors charge. This adds up to an annualized APR of just under 400%. And while its model doesn’t allow payday loan customers to dig themselves in deeper by immediately rolling that debt over into a new loan, it will let a customer take out another loan just four days later, which means “no rollovers” is pretty much just semantics.

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But CEO Sasha Orloff says LendUp’s big goal is to wean serial borrowers off short-term, high-rate loans by offering repeat borrowers who are in good standing the option of an installment loan instead. It already has transitioned some customers from payday loans to installment loans, which start at a maximum of $500 for a three-month term. Borrowers pay a 5% application fee and have a monthly interest rate of 2%, and they can earn discounts for paying off their loans early or for completing online credit education courses.

Orloff says he wants to work with credit bureaus so that Lendup can report on-time payments and help customers establish or rebuild a credit history. He says LendUp executives are working with Experian so the bureau will accept its borrower information. “It’s our primary goal. I’m doing everything I possibly can to help make this happen,” he says. “I’ve had meetings with three major banks and credit unions to see if there’s a way to expedite getting people into the financial sector.”

LendUp has some big money and some serious tech chops in its corner. The company is funded by big venture capital groups including Y Combinator and Google Ventures. Orloff comes with a background in banking (he worked at Citi), while his co-founder and step-brother, Jacob Rosenberg, has stints at Yahoo! and Zynga, where he was CTO of Platform, under his belt.

There are other elements that make LendUp skew more Silicon Valley than Wall Street. Chief among them is its use of big data in its underwriting process. Payday loan borrowers generally resort to high-cost loans because they don’t have enough of a good credit history to qualify for anything better. LendUp is trying to solve that problem by creating its own litmus test for risk that throws the net much wider than what’s covered by conventional credit bureaus.

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The most interesting of these is definitely the site’s use of social media. LendUp’s algorithms take a peek at the Facebook or Twitter profiles of borrowers who opt in. One’s social media activity can be used as a barometer of one’s creditworthiness.

Orloff is quick to say LendUp doesn’t look at pictures or at what people have “liked,” since that could reveal racial, political, religious or other leanings that could lead to charges of discrimination if applicants are turned down.

So what does Lendup look at? Some of it is verification of information the borrower provides on their application; if things like your current city of residence doesn’t match up with information you’ve provided or LendUp has acquired from another channel, that could be a red flag, as could frequent changes to your contact info. This falls into what Orloff calls validation; he says the site might eventually use social media data to cross-check the information borrowers provide about their education or employment histories.

What’s more intriguing is how LendUp evaluates relationships. “What we’re looking at is the strength of your ability and your willingness to have longer-term cohesive social interactions,” Orloff says. For instance, LendUp’s algorithm weighs details like how long you’ve had your account, how many friends you have, and how far away they are physically. “If you have a very strong, close geographic network, that’s helpful to you” because it shows the lender that you have a support network. The site also looks at how often you write about your friends and how often they communicate with you. Again, according to Orloff, the theory is that a thriving online social life is an indicator of stability, which somehow translates into a greater likelihood of paying off one’s debts.

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Maybe there’s something to it. Back in the day, a bank manager would know this kind of stuff about customers too — how long they’ve lived in town, where they work, who their friends, cousins, parents, and even grandparents were. Today, that’s no longer the case. LendUp is exploring whether or not cutting-edge data-gathering and analytics tools can reach across the Internet and replicate the way old-school bankers used to consider customers’ community ties when doing business with them.

“What we’re trying to do is use this as a testing ground to see if there is information out there that can be valuable to people who are usually priced out of the market,” Orloff says.