For ZestFinance, big data comes with big responsibility

ZestCash, the startup co-founded by former Google CIO and VP of Engineering Douglas Merrill to provide short-term loans to the underserved, has changed its name to ZestFinance and its business model, as well. As reported by Quentin Hardy Wednesday morning on the New York Times‘ Bits blog, the company is switching from being a provider of loans itself into being an underwriter that uses its analytics engine to serve existing lenders. Becoming a data analytics platform seems like a good business move, but my concern with ZestFinance is whether its new customers will live up to the company’s original high-minded goals.
Merrill and former Capital One executive Shawn Budde launched ZestCash in 2006 2010  (it was founded in 2008) with the idea of using troves of personal data from the web and elsewhere to provide short-term loans to individuals underserved by traditional lenders. You can say what you want about ZestCash’s actual practices — it has been called out in the past for being little more than an online payday loan business, equally as predatory as its brick-and-mortar counterparts — but what made ZestCash a darling of the tech community was its use of thousands of variables not related to traditional credit scores to determine credit risk. According to its founders, it was big data for a bigger cause (below you can see Merrill discussing ZestCash with Ryan Kim at our Structure: Data event).

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The shift in business is probably a good idea — at least in theory. As Hardy’s article notes, ZestCash was having a hard time obtaining state licenses to operate, and also had an uphill battle in gaining mindshare against payday loan lenders that have physical locations spread across nearly every city in the country. Informing payday loan customers that ZestCash existed in the first place was likely hard enough, but nothing compared with getting them to use the service.
Hence ZestFinance, a move that wisely fuses the growing trends of data platforms and analytic services. It’s one thing to have the data (or, in ZestFinance’s case, know where to find it) that can benefit another company, but it’s yet another to have the data-science chops to actually analyze it in a useful manner. ZestFinance has both and so, it seems, is poised for success if it can amass a pool of loan-provider customers that see the value in assessing risk based on actual data points and algorithms rather than relying on an exclusionary FICO process or a hit-or-miss paycheck analysis. In the end, better assessment of risk could lead to products that benefit both lenders and borrowers.

However, if ZestFinance was indeed founded with a noble goal in mind, its shift into an underwriting service would seem to increase the chances of it becoming an enabler of ever-more-predatory lending practices as it deals with a customer base of payday lenders and credit-card companies. There’s a classic fear, for example, that as soon as insurance companies are able to start collecting and analyzing our web footprints, they’ll start to use them against us by denying coverage or jacking up rates. Landlords in large cities are already running complex analyses to ensure they’re charging as much as the market will allow for their rental properties, potentially leaving existing tenants and all but the highest-paid apartment hunters out in the cold.
No one at ZestFinance was available for a comment today, but I intend to speak with the company soon to discuss its new business model. Big data is a powerful tool and ZestFinance certainly knows how to harness it, but it’s easy to see how things could go wrong when applying those techniques in a field already teetering on the edge of what many consider ethical.