Backed is a new marketplace lending platform that launched in September 2015. Although there are many other young companies in the industry, we were intrigued by Backed’s approach to underwriting a niche demographic. They recently closed a seed round totaling $1.5 million from iAngels and Cyhawk Ventures. We had the chance to talk to George Popescu, CEO of Backed and Gilad Woltsovitch, Co-CEO and Head of Product at Backed to learn more about their product offering.
Backed hopes to serve millennials, which typically have a thin credit file and lack access to affordable credit. Gilad and George mentioned that in general someone under the age of thirty is not less reliable or more risky than someone over thirty. Over 63% of millennials don’t have a major credit card and 26% of young adults still live at home which makes it hard to underwrite an individual alone. This is where being ‘Backed’ comes in, which is the term they have coined. This is similar to having a co-signer on a loan, but there are some distinct differences.
When a borrower signs up for a loan they can opt to get ‘backed’, usually by a parent or a sibling. Backed will underwrite both parties in the loan and the credit score is combined with the other individual backing the loan. The borrower benefits by receiving a lower rate for their loan and builds their credit in a responsible way. The backers receive simultaneous communications as the borrowers, which means they are immediately notified of a missed payment. This is different from traditional loans with co-signers where the co-signer is not notified of any trouble until the loan has defaulted, after fees have already accrued and the credit score has already been damaged. This helps reduce the risk for the co-signers. In addition, the backer can also choose to make payments for the borrower.
When we talked to George and Gilad they stated that they are targeting individuals who have been out of college for a few years and are typically between the ages of 23-27. Although it is still early, they expect an average interest rate of 10%. Loans are currently only available in New York, New Jersey, Arkansas, West Virginia and Florida, but they are hoping to launch in Q3 2016 with a charter bank similar to what other marketplace lenders have done to expand to other states. Based on a study Backed conducted, they estimate that 30% of their loan applications will have a backer.
Backed is currently focusing on marketing to drive loan volume. One unique borrower acquisition channel they are utilizing is through flyers with real estate agents. Since many of their borrowers may be looking to rent their first apartment, they may be looking for a loan to cover some of the up front expenses like furnishing their apartment.
George and Gilad also talked about their interesting approach to alternative data with regards to the origination fee. They currently allow users to add social accounts and banking data when they signup for a loan. Depending on how much information the borrower connects, Backed will discount the origination fee up to 50%. As Backed is able to build their loan book, they will implement these new data sources into the underwriting process to better predict the risk of each borrower. They currently underwrite on 15 parameters, half of which are taken from the application and the rest based on credit variables of the borrowers.
Looking to the future Backed also may take their model to employers. Perhaps one day we will see employers back their employee’s loans in a similar way that a borrower currently gets backed by a sibling or parent. Backed is well funded and their approach to underwriting millennials is truly unique. With their latest round of funding, they are one to keep an eye on as they ramp up their marketing efforts.