AMERICAN banks typically drum up new borrowers by bombarding anyone with a decent credit score with junk mail offering credit cards and ignoring everyone else. A host of new competitors, however, are much more imaginative about how they recruit new customers.
Take Kabbage, a startup based in Atlanta which began lending to small companies online in 2011. A third of their applicants did not qualify for business loans because they had not yet started operations, had insufficient revenue or no formal legal structure. Many of them, however, did qualify for personal loans. So in September Kabbage launched a subsidiary called Karrot to give personal loans of up to $30,000 at interest rates of 6% to 26%.
Karrot worries less about borrowers’ credit history—the conventional approach—than about their cash flow. Customers must allow Karrot to monitor their current accounts and other financial data, such as credit-card bills. A big decline in income prompts an inquiry about an extended payment plan (to pre-empt a default); an increase prompts an offer of more credit. The initial evaluation takes only four minutes. Growth has been impressive: Karrot expects to lend $1 billion this year. Its default rate is 5%.
Upstart, based in Palo Alto, is another firm learning to look beyond the credit record, in this case to borrowers’ educational history—an...Continue reading
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