A forward-looking company is radically changing the rules of the game in the financial industry.
This is the view advanced by Lenddo, a social enterprise started in 2011 with the goal of economically empowering the middle class in developing countries. Founded by Jeff Stewart and Richard Eldridge, two businessmen who formerly worked in the financial and technology industries, Lenddo is based in Hong Kong and has a data science team in New York City. Despite a small staff of only 66, the company has grown to more than 380,000 members in the Philippines, Colombia and Mexico in the past two years.
This extraordinary success is due to the company’s innovative online model. Instead of lending to the very poor using traditional screening methods, Lenddo lends to the middle class and uses social networking sites to screen and select loan applicants. Much is anticipated from Lenddo’s model, which could force the financial industry to adopt a new, social-based approach to lending.
In September, Eldridge, Lenddo’s global chief operating officer, was invited to represent the company at the World Economic Forum’s Annual Meeting of the New Champions in Dalian, China. There, the forum named Lenddo one of its 36 Technology Pioneers for 2014.
At the forum, Eldridge explained that the idea for Lenddo came after living for 15 years in developing countries, where he identified a trend in the financial industry’s dealings with emerging markets. “There were microfinance companies servicing the bottom of the pyramid,” he says, while the pyramid’s top was already being served by traditional financial services. But, he adds, “the middle class was often under-banked and sometimes unbanked” in developing countries, since it did not have access to a full range of financial services.
In trying to get this access, members of the middle class in developing countries face two main challenges, Eldridge says. First is financial education. They have “no [financial] education, and if they have access to education, most of them feel it is not relevant to them in their country and it is not delivered in a way that [the middle class] likes.” (Instead, it is delivered in long, complicated texts.)
Second, Eldridge found out that “most middle class [people] have either no credit rating or are ‘thin file’ clients,” so traditional financial institutions find it hard to work with them. “If [young people in the middle class] live at home with their parents, still have a prepaid cellphone and pay everything by cash, they do not have a comprehensive financial history,” Eldridge says. Thus, traditional financial institutions decide they cannot serve them.
This led to the idea for Lenddo, in 2010. “My co-founder [Stewart] and I decided to use technology and the power of social media and big data” to build an online platform for the middle class, Eldridge says. The original concept was very simple, based on the idea that middle-class people are online, mobile and heavy users of social media. Thus, their social reputation becomes increasingly important.
On this platform, “people could connect and join for free easily and get free financial education,” Eldridge says. Originally launched in the Philippines, the company has now grown in Colombia as well as Mexico, and it is expanding to other developing countries.
Growth through accessibility, ease of use
“People do not want to go to a bank branch anymore and fill out paperwork to get a loan,” says Stewart, Lenddo’s CEO. If traditional banks do not change this model, he insists, “they are going to go out of business.” Based on this idea, Lenddo uses social websites such as Facebook, LinkedIn and Twitter instead of conventional screening to rate its clients’ creditworthiness. This allows the company to lend to its applicants within one business day, if their information is valid and they are considered trustworthy borrowers. That is, if they are very likely to repay.
Lenddo’s screening and revision of loan applications is done entirely online. Eldridge explains that all Lenddo members are given a “LenddoScore” (from 0 to 1,000), which measures creditworthiness, when they join. Applicants need to connect accounts such as those for Facebook or Gmail to their profiles, and then Lenddo uses a standard social media authentication process to collect the new member’s profile information (without collecting any user names or passwords).
“The data collected is then consumed by algorithms produced by data scientists,” Eldridge adds. Approximately 70 composite variables are used to determine an applicant’s LenddoScore, such as to whom the applicant is connected, what words the applicant is using online and what websites the applicant visits. For example, the score increases with the number of reputable connections the applicant has, or if the applicant behaves well on social websites such as Facebook or Twitter.
An applicant’s LenddoScore moves “on a regular basis; it depends on you, your behavior and your network,” Eldridge says. He adds, “At the moment, we are not able to serve anyone with a score that is less than 300.” But Lenddo also has “people up in the 900s. They have very good networks, they probably had credit before us, and they repaid on time.”
Lenddo’s average clients are usually between 23 and 35, and they typically are employed as waiters in restaurants or work in call centers or insurance companies. “Now we’re also looking at the informally employed sector,” Eldridge says. “They have social media accounts, and they are very active with that,” and thus are a good match for Lenddo.
Lenddo’s loan statistics are about average for the industry. “Our average loan right now is just over $400 [U.S.],” and “the average duration is about nine months,” Stewart says. Eldridge adds that the company’s average interest rate differs by country, but “in the Philippines it goes from 35 to 80 percent,” depending on a person’s LenddoScore. The other option for Lenddo’s clients is informal borrowing, with interest rates that can reach between 150 and 200 percent. Eldridge assures that the company has “very high repayment rates,” although Lenddo does not disclose the exact rates.
After clients repay loans from Lenddo, more than 60 percent receive a second loan. Although it is still difficult for middle-class people to move on into more formal credit, Lenddo is “looking at options in the future for our clients to use their score for other purposes,” Eldridge says. For example, a LenddoScore could be used when applying for another type of credit or for employment purposes. But for now, Eldridge says, many people in emerging markets still “do not understand that their credit scores today might influence their interest rates for a loan 10 years from now.”
Expansion to other financial sectors
“We already have a product to be released for micro-insurance,” Eldridge says. “We also want to launch a product on savings and investments,” but this is taking some time, he says, because “it has some regulatory issues in some countries.” As with its current loan services, Lenddo plans to launch these new services entirely online. “We ultimately want all our members to have access to a full range of financial services,” Eldridge says.
He notes that Lenddo is hoping to expand to other countries, in Asia and South America, and it is evaluating Africa as well. Social-based lending is growing quickly, and the traditional banks will have to adapt if they do not want to go out of business, the two founders believe.
Having raised $8 million (U.S.), Lenddo seems poised to quickly become one of the main players in this new financial industry. The company’s very fast growth, from zero to more than 380,000 members in two years, is one of many measures of its positive impact. The World Economic Forum’s award to Lenddo as a Technology Pioneer for the year to come is just another indication of the company’s success and the promise of social-based lending.