The initial promise of P2P lending when Prosper launched back in 2006 was that it would be a more social way to lend money. We would borrow money from a group of people we are connected with and pay back this loan more diligently because of that connection. Unfortunately, the reality was different than the promise. The financial crisis hit and the connections proved more tenuous than expected.
Today, a new kind of lending platform is bringing this social promise back. But it is applying more rigor to the way social signals are used in underwriting and pricing. Introducing Vouch, a new lending startup founded by former PayPal and Prosper executives that bills itself as the social network for credit. It has raised a $3 million initial funding round and started making loans in November last year. Recently I chatted with CEO and Co-founder Yee Lee to discuss how Vouch works and why he thinks it will be successful.
How the Vouch System Works
Borrowers apply for a loan either on Vouch’s site or through their mobile app. Then the borrower can invite friends and family to “vouch” for them. These people are then invited by Vouch to fill out a short survey and asked if they would be willing to contribute if the borrower becomes unable to make the payments on their loan.
Vouch looks at a number of factors to determine what interest rate it offers a borrower. It looks at standard financial data as well as the data they obtain from the social network. This includes how “vouchers” answered survey questions, how quickly they responded to a request to vouch for a friend, response rates for vouch requests, the overall size of someone’s network, how many vouchers took the extra step to also sponsor a loan, and much more.
Currently, Vouch is still in its beta phase but it has already made hundreds of loans using this system. The range of loan sizes is $1,000 to $15,000 but the average falls at the lower end of that spectrum at around $1,500. Loan terms are for 1, 2 or 3 years with the average coming in at 18 months. Interest rates range from 5% to 30% annually.
Vouch makes money in a similar way to Lending Club and Prosper, although we should point out that Vouch is a balance sheet lender not a marketplace. They collect interest and fees from origination of loans. Origination fees are only 2% today, but could range between 1% and 5% of each loan.
Targeting a Wider Range of Borrowers
Vouch has found several different demographics attracted to its service. Younger borrowers who have difficulty obtaining a loan from other sources; immigrants, who are new to credit in the United States; and debt consolidators, who are generally refinancing high-rate credit card debt. Vouch is able to lend money to borrowers down to a 600 FICO score and their intention is to eventually take that cutoff down below 600. Borrowers with FICO scores in the high 700’s have also been able to obtain better terms through Vouch. They are partnering with Cross River Bank to issue the loans.
You may dismiss this idea as doomed to failure given the experience of Prosper 1.0. But the team at Vouch, particularly given some of these people are former Prosper employees, are acutely aware of Prosper’s failed experiment from its early days.
There are some key differences. Vouch is pricing each loan and not relying on the “wisdom” of the crowd to set interest rates. Their Chief Risk Officer is an executive with decades of experience doing traditional consumer underwriting, so they know what they are getting into when targeting a subprime borrower.
Yee believes that Vouch can underwrite this population successfully because it is not just looking at the financial data of the individual. It is all about the personal network of each borrower. People are able to get better rates on loans and lower monthly payments by having their personal network vouch for them. Vouch has applied for a patent on this new underwriting system and Yee is convinced this is a better way to underwrite the subprime market.
What About Investors?
Right now Vouch is loaning money off their own balance sheet and they have no plans to open a marketplace any time soon. So, investors are out of luck at least for now. While Yee wouldn’t rule out opening a marketplace for investors some time in the future he said it is not on their road map today.
I decided to profile Vouch not because it presented any opportunity for investors but because they have such a unique way of underwriting. If they become successful no doubt other platforms will incorporate some of their ideas or work with Vouch to power alternative underwriting algorithms. Who knows, in a few years time maybe most platforms will use a borrower’s social network to factor in underwriting decisions.
Over to you, Lend Academy readers. What do you think? No doubt some of you have strong opinions on why this will or will not work.
