Is Mark Zuckerberg Your Hidden Banker?
How Lenddo is harnessing social media to assess credit worthiness
PHOTO CREDIT: Getty Images
How do you lend to somebody who doesn’t have a credit history?
It is uneconomical for financial institutions to conduct due diligence on such loan applicants because the amounts are too low and the potential default rate is high.
Hence, it is cheaper for banks to ignore them.
Enter a financial disruptor like Singapore-based Lenddo.
Founded in 2011 in the Philippines by Jeffrey Stewart and Richard Eldridge, it is a credit-scoring and identity-verification company that uses non-traditional data—from social media, e-mail, and mobile phones—to determine the identity and credit worthiness of an individual.
The light bulb moment for Stewart and Eldridge, both in their 40s, came in 2010 when they were operating a business process outsourcing (BPO) company in the Philippines. The two were baffled that their employees were constantly asking for salary advances when these skilled workers had stable jobs and should have access to some form of credit.
For a year, they did research and found that there was no credit bureau in the Philippines that enabled people to join the financial ecosystem. Credit institutions, in turn, were unable to tap into the emerging middle class market.
“As we dug into the problem, we realized that this was an enormous problem in the Philippines and in much of the world,” Stewart says. “Our goal is to help a billion people get access to financial services.”
This audacious goal hinges on the idea that if loan applicants can be given a credit score even without traditional documents, more banks and lending institutions could lend to them. And by allowing more people to borrow from formal financial institutions, they get to build their credit history over time—thus eventually gaining access to reliable and affordable loans. As many emerging markets like the Philippines lack a national ID system and a fully operational credit bureau, these fintech disruptors enable lenders to assess individual character and risk.
Florentin Lenoir, marketing and business development director at Lenddo, explains their algorithm is based on patterns of behavior that indicate correlation with repayment. Certain behavior, such as sending messages late at night or being inconsistent when filling up online application forms, may be indicative of poor credit risk.
Lenoir says they were able to collect up to 12,000 data sets and define some 300 variables that enabled them to define a correlation between certain behavior and repayment.
“In a broader perspective, there is nothing that you can actually do [to increase your credit score] because it is a matter of behavior. So unless you change your behavior and you start being more responsible, then it is unlikely that your scores will change,” Lenoir said in a 2016 interview with Inc. Southeast Asia.
Lenddo works with three broad categories: banks, telecom providers, and non-bank financial institutions, which include other fintech start-ups. The technology is embedded onto the partner’s platform, and Lenddo can then collect and process data that loan applicants willingly share, such as their Facebook and e-mail accounts.
“Lenddo sought to bring an innovative, technical solution to the market that leveraged on one thing that Southeast Asian consumers had in spades: social media data,” says Justin Hall, principal at Singapore-based venture capital firm Golden Gate Ventures—one of Lenddo’s investors.
Thanks to its algorithms, Lenddo could determine consumer credit risk in a cheap, quick, and accurate way. So the cost to assess and issue loans and credit cards falls dramatically, Hall explains. “This represented a paradigm shift in banking,” he says.
For Claudia Ayaquil, head of commercial lending at Philippine-based fintech start-up Fuse Lending, if a disruptor can match demand and supply well enough that it lowers acquisition costs for lenders, it’s worth watching.
“If a credit scorer can confidently identify strong payment indicators without relying on traditional documents, that adds value,” Ayaquil says.
Lenddo has raised $14 million in three rounds of funding from investors, such as Kickstart Ventures, Golden Gate Ventures, and AT Capital, according to 2016 data from Crunchbase.
Now headquartered in Singapore, Lenddo is present in 10 markets that are “material and growing,” according to Stewart, and include Mexico, India, Indonesia, Korea, Brazil, and Nigeria.
As for future plans, Stewart says, “We would like that five years from now, if you’re getting a consumer or micro business loan, our algorithms, our technology is making that better and faster.” Just don’t hit the send button on that e-mail after midnight!