Kleiner Perkins, Andreessen Horowitz and Google Ventures Fund Payday Loan Alternative LendUp
Two half-brothers from Oakland, Calif. — one who worked at Grameen Bank and Citigroup, the other at Yahoo and Zynga — have teamed their banking and Web application expertise to make a more friendly version of payday loans.
And they’ve raised some high-class money to get it started.
LendUp, which launches today in California, will make loans of up to $250 for 30 days to people with poor credit.
LendUp has raised an undisclosed amount of seed funding from Kleiner Perkins Caufield & Byers, Andreessen Horowitz, Google Ventures, Thomvest Ventures, Kapor Capital, Bronze Investments, Founders Co-op, Data Collective, Y Combinator, the Start Fund and others, including debt that the company will use to fund its customers’ loans.
LendUp is less shy about sharing its loan pricing for its own customers: Basically, borrowers will be charged interest of 15 percent of the loan amount, minus a small discount for paying early.
The average default rate for credit cards is 7 percent to 12 percent, says LendUp CEO Sasha Orloff (he’s the banking brother), and LendUp expects it will see rates higher than that.
But the company says its secret sauce — besides a friendly, modern Web site and in-house customer service — is the way it calculates risk based on personal data, and the way it will stick with a person over time to graduate them to safer loans. To start with, LendUp expects to approve 15 percent of applicants.
Credit card companies and banks are the original data miners, so it’s not necessarily clear to me that LendUp will have an advantage there. The stepbrothers did some hand-wavey stuff when we got to this part of the interview at their office in San Francisco’s Union Square.
But beyond data, the site also uses “gamification” — challenges and rewards, courtesy of Jacob Rosenberg, the brother who was at Zynga — to try to level up loan recipients over time.
The stepbrothers contended that it’s that long-term relationship that will make LendUp a good business. Over time, borrowers can get better loans and build their own credit.
They face competition from existing payday lenders, as well as start-ups BillFloat and ZestCash — though those companies help pay bills and make lower-risk installment loans, so they’re not exactly the same thing.
How big is the market opportunity for this? It’s not at all tiny. In the U.S., 15 million people take out “small-dollar credit” products, with $44 billion in payday loans expected in 2012, according to the Center for Financial Services Innovation and the Center for Responsible Lending.