Vouch Bringing Social Lending to the Borrower Experience

Vouch Financial

The initial promise of P2P lending when Prosper launched back in 2006 was that it would be a more social way to lend money. We would borrow money from a group of people we are connected with and pay back this loan more diligently because of that connection. Unfortunately, the reality was different than the promise. The financial crisis hit and the connections proved more tenuous than expected.

Today, a new kind of lending platform is bringing this social promise back. But it is applying more rigor to the way social signals are used in underwriting and pricing. Introducing Vouch, a new lending startup founded by former PayPal and Prosper executives that bills itself as the social network for credit. It has raised a $3 million initial funding round and started making loans in November last year. Recently I chatted with CEO and Co-founder Yee Lee to discuss how Vouch works and why he thinks it will be successful.

How the Vouch System Works

Borrowers apply for a loan either on Vouch’s site or through their mobile app. Then the borrower can invite friends and family to “vouch” for them. These people are then invited by Vouch to fill out a short survey and asked if they would be willing to contribute if the borrower becomes unable to make the payments on their loan.

Vouch looks at a number of factors to determine what interest rate it offers a borrower. It looks at standard financial data as well as the data they obtain from the social network. This includes how “vouchers” answered survey questions, how quickly they responded to a request to vouch for a friend, response rates for vouch requests, the overall size of someone’s network, how many vouchers took the extra step to also sponsor a loan, and much more.

Currently, Vouch is still in its beta phase but it has already made hundreds of loans using this system. The range of loan sizes is $1,000 to $15,000 but the average falls at the lower end of that spectrum at around $1,500. Loan terms are for 1, 2 or 3 years with the average coming in at 18 months. Interest rates range from 5% to 30% annually.

Vouch makes money in a similar way to Lending Club and Prosper, although we should point out that Vouch is a balance sheet lender not a marketplace. They collect interest and fees from origination of loans. Origination fees are only 2% today, but could range between 1% and 5% of each loan.

Targeting a Wider Range of Borrowers

Vouch has found several different demographics attracted to its service. Younger borrowers who have difficulty obtaining a loan from other sources; immigrants, who are new to credit in the United States; and debt consolidators, who are generally refinancing high-rate credit card debt. Vouch is able to lend money to borrowers down to a 600 FICO score and their intention is to eventually take that cutoff down below 600. Borrowers with FICO scores in the high 700’s have also been able to obtain better terms through Vouch. They are partnering with Cross River Bank to issue the loans.

You may dismiss this idea as doomed to failure given the experience of Prosper 1.0. But the team at Vouch, particularly given some of these people are former Prosper employees, are acutely aware of Prosper’s failed experiment from its early days.

There are some key differences. Vouch is pricing each loan and not relying on the “wisdom” of the crowd to set interest rates. Their Chief Risk Officer is an executive with decades of experience doing traditional consumer underwriting, so they know what they are getting into when targeting a subprime borrower.

Yee believes that Vouch can underwrite this population successfully because it is not just looking at the financial data of the individual. It is all about the personal network of each borrower. People are able to get better rates on loans and lower monthly payments by having their personal network vouch for them. Vouch has applied for a patent on this new underwriting system and Yee is convinced this is a better way to underwrite the subprime market.

What About Investors?

Right now Vouch is loaning money off their own balance sheet and they have no plans to open a marketplace any time soon. So, investors are out of luck at least for now. While Yee wouldn’t rule out opening a marketplace for investors some time in the future he said it is not on their road map today.

I decided to profile Vouch not because it presented any opportunity for investors but because they have such a unique way of underwriting. If they become successful no doubt other platforms will incorporate some of their ideas or work with Vouch to power alternative underwriting algorithms. Who knows, in a few years time maybe most platforms will use a borrower’s social network to factor in underwriting decisions.

Over to you, Lend Academy readers. What do you think? No doubt some of you have strong opinions on why this will or will not work.

Subscribe
Notify of
6 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Sarfaraz Sadruddin
Mar. 13, 2015 1:43 pm

Great article,

Let me preface by saying what I am about to say is not an advertisement. That being said, I have been very interested in the Vouch model.

What I can say is that we use “vouch” model at reamerge.com as well. The way we have found success is using “vouch” model as an adjunct to reduce risk. This is nothing more than “guarantors” on a basic level combined with affinity model. Unfortunately wider application is extremely difficult and only time data can tell their success. It has taken us 7-8 years of prior lending to develop the niches where a vouch based model can be implemented with successes on top of “regular” underwriting. So for example if they were lending to internet startups, then people vouching for them are also other tech entrepreneurs and the quality of vouch is likely higher. That is a simplification but our data and regression analysis reveal this to be true.

I believe this can be successful if they simultaneously update their underwriting and keep on learning and modifying (“Machine Learning”).

Still at least we have found it better as an adjunct then primary means of underwriting.

Good read.

Sarfaraz Sadruddin
Mar. 16, 2015 10:06 am
Reply to  Peter Renton

Absolutely. Obviously its more nuanced than what I mentioned – will hopefully expound more at Lendit in NY. As an aside, the power really comes from the awesome graph/network connections that develop and their potency within the underwriting model.

Jacob
Mar. 14, 2015 8:51 am

This is a cool idea. So does that mean that the individuals who are asked to “vouch” for a borrower are being asked to pony up some of their own cash to fund the loan? In other words, are they being asked to put their money where their mouth is? In my mind that would tell me a lot more than sending out vouch requests and having them come back positive.

If the individuals vouching for a borrower are willing to “put their money where their mouth is”, then I think the vouch concept is robust. It also ensures more skin in the game, so to speak. The reason I think this is because if the borrower thinks about defaulting, it’s not a group of nameless, faceless investors that they are negatively impacting, it is their close associates.

Personally, I would like to see a marketplace lending platform that guaranteed a specific rate if one’s personal return isn’t at least as high as X%. For example, maybe a lending platform will guarantee to return investors the 10-year treasury yield if they don’t at least earn over that % and they meet a set criteria, such as investment amount and diversification. I’ve heard of something like this for one of the platforms in the UK, but I can’t recall which platform it is. Zopa maybe?

Prescott
Mar. 14, 2015 9:41 pm
Reply to  Jacob

> So does that mean that the individuals who are asked to “vouch” for a borrower are being asked to pony up some of their own cash to fund the loan? In other words, are they being asked to put their money where their mouth is?

No, they are being asked to vouch for that borrower in case of default. So no money up front, and ideally you’re vouching for a good guy, and never have to put any money up.

If the voucher is good quality (ambiguous atm), and a borrower gets enough vouchers (for example, they want 2K, and they got vouchers to vouch for 1K), then Vouch will give you a lower interest rate to compensate that their risk is lowered due to the quality and quantity of vouches

Jacob
Mar. 14, 2015 10:29 pm
Reply to  Prescott

Thanks for the clarification!