How Digital Disbursements Tools Are Changing Low-Dollar Lending

As Americans increasingly turn to their mobile devices to instantly pay through peer-to-peer (P2P) services like Venmo and Zelle, the act of writing a check or heading to the ATM for quick cash is becoming a thing of the past. This technology is also changing how consumers lend and borrow money, according to Travis Holoway, founder of short-term lending exchange platform SoLo Funds, particularly when it comes to low-dollar or short-term loans.

In a recent interview with PYMNTS, Holoway explained that he’s watched firsthand as the market for short-term and low-dollar lending opportunities — powered by P2P payments — developed. It’s the market SoLo Funds is hoping to serve, offering an alternative to more traditional options like payday loans, which can leave consumers in more difficult financial predicaments than before.

“Technology like Venmo and Cash App have made it really easy for people to ask for money because it’s no longer this convoluted process,” Holoway said. “I just assumed there had to be someone using the same technology for lending, but when I looked for that solution, I couldn’t find it. What we’re trying to do is bring that technology to lending.”

P2P Payments To Power Loans

Under SoLo’s business model, which launched earlier this year, consumers willing to offer interest-free loans of up to $1,000 are matched with those in need of financial assistance. Borrowers are paid via ACH transfers and receive their funds within three to five days.

That time frame has served the company well so far, Holoway said, because most of those requesting loans have anticipated a financial shortfall and have taken steps to prepare for when their savings run dry. However, it has proven too long for many other potential borrowers, particularly those experiencing unforeseen financial challenges like car troubles, health issues or a sudden change in employment.

SoLo recently added the ability to deliver funds via Same Day ACH, a change made in hopes of better serving those who had not saved for a financial calamity and cannot afford to wait.

“That will dramatically expedite our transaction time, which is important, because the biggest pain point for us so far has been the time lag,” Holoway explained. “Speed is key, especially within this demographic, because they often need their money right now.”

Loans issued through the platform last for no more than 30 days, he added. Upon completion of that period, funds are automatically withdrawn from the recipient’s account and returned to the lender, ensuring most loans are paid back. This has helped SoLo achieve a default rate of just 3 percent.

Automatic term enforcement also helps the company serve an important sector of the short-term lending market: those who are lending money to friends, family or someone with whom they have a personal relationship. Since the loan terms are automatically enforced, there’s no reminding the borrower that they need to pay back the lender — and little chance of them pulling a disappearing act.

If borrowers do not have the funds to pay their lenders back, lenders have a choice to either give them more time or send them to collections, Holoway explained. This provides a chance of avoiding the vicious lending and collections cycle that often plagues payday loan recipients.

Using Digital Tools To Improve Financial Health

P2P technology isn’t alone in changing the lending industry, however. Holoway noted that millennials’ purchasing habits and behaviors are very different from those of previous generations, meaning legacy lending risk evaluations do not accurately reflect their financial health.

“We believe that the FICO score is broken — and that a lot of outdated metrics are being used to determine how credit-worthy people are — and it’s really no longer valid,” he said.

In fact, certain metrics are no longer reliable because consumers’ behaviors have changed in recent years.

“Mortgage history is no longer useful,” Holoway said. “Car loan or payment history is no longer useful, because people are sharing bikes and scooters right out on the street, and taking Uber and Lyft. They’re not even using credit cards in the way that prior generations have.”

Regardless of their financial status, SoLo borrowers are not subjected to a traditional FICO credit score review before receiving funds, he explained. The company instead uses a proprietary combination of cash flow and social data to determine what it calls a SoLo Score. This score is better suited to SoLo’s needs because it evaluates a modern consumer’s actual ability to pay back a short-term loan.

Going forward, Holoway and his team are working to expand the use of the SoLo Score to more traditional lending avenues. The company plans to partner with banks and financial institutions (FIs) to not only use SoLo Scores, but employ other digital disbursement tools to help consumers who need short-term financial assistance to quickly access funds — without a larger, future financial pinch.

“The ultimate goal for SoLo is to eventually be a path toward upward financial mobility for our buyers,” Holoway said. “Our goal is to be able to eventually use that data to take a user to a major bank and be able to vouch for [him] and prove that [he’s] credit-worthy.”

Venmo, Zelle and their ilk have already changed the ways consumers borrow money from and repay each other. As P2P disbursement solutions continue to evolve, it may not be long before they also change the short-term lending game.

About The Tracker

The Disbursements Tracker, powered by Ingo Money, is the go-to resource for staying up to date on a month-by-month basis on the trends and changes in the digital disbursement space.