Summary:

ZestCash, a next generation loan-service for the underbanked led by former Google CIO Douglas Merrill, has raised $19 million to expand its data-driven approach to offering short-term loans. The company uses online data to help determine the credit worthiness of customers.

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ZestCash, a next-generation loan service for the underbanked, has raised $19 million, including an $8 million line of debt financing, to expand its data-driven approach to offering short-term loans. The company, led by former Google CIO Douglas Merrill, received $11 million in Series A funding from Lightspeed Venture Partners and GRP Partners with participation from Flybridge Capital Partners. Lighthouse Capital Partners has added $8 million in debt financing that will go toward offering more loans to customers.

The Los Angeles company uses online data to help determine the credit worthiness of customers, offering a more modern way of underwriting for the underbanked. Instead of relying on tools like FICO scores, which measure a limited amount of data based largely on previous credit history, ZestCash pulls in a wealth of data to help rank a person’s likelihood of defaulting. And that, in turn, allows ZestCash to offer short-term loans of up to $800 to more people with fees up to half that of traditional payday loans.

The approach goes back to Merrill’s days at Google, where the company uses its PageRank technology to help order search results. Merrill doesn’t divulge much about ZestCash’s technology and how it comes up with a credit score. But he said things like cell phone bill payments or the length of stay at a residence help provide a fuller picture about a person’s ability to pay off a loan.

ZestCash CEO Douglas Merrill

“FICO doesn’t work for the underbanked who don’t have a credit record,” Merrill said. “Why use a small amount of data to come up with credit score? Why not take hundreds of things available and use complicated math to design a score to identify who will pay back and who won’t?”

Since launching last fall, ZestCash has done “thousands” of loans and booked a few millions dollars in loans in four states: Missouri, Utah, Idaho and South Dakota. The company has achieved a default rate better than the major payday loan companies and doubled the amount of loans it offers each month. Merrill said 90 percent of the money goes toward life utilities and everyday needs like auto repair and medical care.

The company plans to use the money to expand to other states and ultimately go national. It is looking at partnering with a bank that has a license to offer loans nationwide.

ZestCash stands out because of its data-driven approach to an age-old business. And it’s also tackling what I think is a big opportunity in servicing the underbanked. I’ve written about services like PayNearMe (see disclosure below) and Boom, which bring payments to customers without bank accounts and credit cards. ZestCash said 20 percent of people don’t have access to credit. It’s a market that gets overlooked, but it’s still a major opportunity, something ZestCash and others are learning.

Disclosure: PayNearMe is backed by True Ventures, a venture capital firm that is an investor in the parent company of this blog, Giga Omni Media. Om Malik, the founder of Giga Omni Media, is also a venture partner at True.

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