Kiva Zip's Innovative Approach to Lending

| 12/5/2014 10:39:00 AM

I was recently trying to get a mortgage for a house that my wife and I were looking at buying. After 30 minutes on the phone, answering questions about my income, assets and debts, I was declined for the mortgage. I asked if there was any room for flexibility, and the mortgage broker said something that really struck me: “Sorry sir. Everything in our industry is black and white.”

Jonny Price Kiva Zip Senior Director

At the end of a long, slouching call, that one sentence made me sit bolt upright, write it down, and now write a blog about it. Because at Kiva Zip, we’re trying to disrupt that paradigm, and this (lending) industry. We’re trying to inject shades of grey, or (even better) rich, vibrant colors into the process by which small business owners can access the capital they need to launch or grow their businesses.

There are a myriad of ways in which we are challenging the conventional “black and white” approach, but I’m going to highlight two – firstly, how we underwrite loans; and secondly, how we approach delinquent payments.

Character-Based Lending

When I was applying for the mortgage I mentioned above, I was underwritten on a purely financial basis. What was my credit score? How much money did I have in my bank account? How much did I earn last year? How much did my wife earn? What debts do I have? What is my net worth? At no point was I asked for character references. And the mortgage broker did not know me personally. It’s all about numbers and statistically-tested algorithms. I didn’t qualify for the mortgage because, on average, people in my financial standing would not be able to keep up with the payments in more than (e.g.) 10 percent of cases. Now don’t get me wrong, this numerical, financial approach is very useful. And it works. It’s why banks and lenders are able to maintain high repayment rates, and make money.

But it doesn’t paint a full picture. By failing to take into account the character of the borrower, or social data points (like the strength and extent of a borrower’s trust network) on an individual, case-by-case basis, this average-based approach misses out on nuance, and thereby disqualifies many would-be borrowers that deserve, and could pay back, a loan. At Kiva Zip, by focusing on these information gaps that exist in conventional, financial underwriting, we can introduce flexibility and “color” into our underwriting process, and help a lot more people think a “black and white” approach allows.

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