Using social networking to give the middle class access to credit

MANILA, Philippines—Today’s generation of young professionals have it good: They make enough money to attend concerts of international pop superstars like Katy Perry, to eat at decent restaurants and still have some cash left over to help out at home.

But for US-based technology/microfinance startup Lenddo, there remains one particular need of this emerging Filipino working middle class that remains ignored: access to credit.

The company, which is funded mainly by venture capitalists and other institutional investors abroad, believes that the only solution, like most things these days, has something to do with social networking.

“These are people who mostly still live with their parents. They have prepaid mobile phone accounts and don’t have credit cards but this does not mean they don’t have money,” Lenddo CEO Jeffrey Stewart says in a recent interview.

He says the country’s finance sector has created a unique gap in the market. At the very top of society, those with high income can almost always get loans from banks whenever they want.

Meanwhile, there are countless microfinance institutions that seek to cater to the needs of those at the bottom of the pyramid: farmers, fisherfolk and other rural individuals that need the extra cash to sustain their livelihoods or get out of poverty.

For the middle class, it’s an entirely different story.

“There’s very little about this group of people that banks can build on before they lend money because they don’t have any credit history,” he says. “We found that banks shy away from this sector.”

Stewart says Lenddo has found a way to assess the credit-worthiness of people that rely exclusively on cash to make most of their purchases, despite the availability of countless electronic payment channels.

At the start of last year, Lenddo established an online social networking site where users can log in using their existing accounts on Facebook or Twitter.

On the Lenddo network, members are able to link up with other users to establish a “Lenddo score,” which substitutes as a person’s credit score.

He says the Philippines was a natural first choice for Lenddo, given the country’s young, tech-savvy population.

Using complicated algorithms, Lenddo is able to calculate a person’s Lenddo score based on the quality of people who are on his or her network.

The network serves as a group of people willing to vouch for ability to pay loans. The more people you have, the higher your score.

The higher a person’s score, the better the chances that he or she will get a Lenddo loan, if needed.

If you have people on your network with a history of loan delinquency, your score goes down, affecting your access to credit from Lenddo.

Conversely, if your network is full of people who are faithful to their obligations, your score goes up, making it in your best interest to keep your bad friends out and good friends in.

“Mark Zuckerberg said every industry will be affected by social (networking). We’re bringing social to finance. We’re letting people use their social footprint to be empowered to gain access to financial services,” he says.

Stewart says Lenddo’s system brings the business of lending money to people back to its roots. Unlike banks that focus mainly on a person’s high income and credit history, the Lenddo network gives more importance to someone’s reputation in the community.

The company’s success in the Philippines in the last 12 months speaks for itself. Relying solely on word of mouth to get around, the Lenddo network now has tens of thousands of local members. Last year, the company said it disbursed loans to 2,500 of its members, with amounts averaging between P16,000 and P19,000.

“A hundred years ago, when someone needed to borrow money, his creditor would look into his standing in the community by talking to his neighbors and friends. We’re just returning to that,” Stewart says.

He adds the relationships of people within the same network were “very intimate because these are people vouching for someone’s credibility.”

“At first, people join not because they need the money but because they are vouching for one of their friends or relatives that want to borrow,” he says. By doing this, a person puts his own integrity on the line.

But Stewart says having a good Lenddo score would guarantee that you get a loan. The company only lends money, he says, to people with “life improving” expenses. These include medical loans, paying for tuition for post-graduate studies, getting a new apartment in the city to cut daily travel time and increase productivity, or startup capital for a new business.

Buying a new Macbook Pro to show off to your friends does not count, of course.

“And because we are improving the lives of our members, we found that our repayment rate is very high,” Stewart says. He says about 99 percent of borrowers make payments on time.

He adds because of this relatively easy access to credit, the country’s middle class is given a better opportunity to participate in the economy and contribute to growth.

Stewart says the Lenddo network does not only give people access to easy credit, but has also taught many Filipinos the basics of the finance industry, a lesson which they all can use for the rest of their lives.

The Lenddo network also shows how social networking can mean more to people than just an advertising revenue-funded channel where users can connect with their friends.

“Why are we taking our brightest minds to figure out the best way they can sell sugared water through ads on Facebook, when instead we can use their talent to help people access financial services?” he asks.

In the coming year, Stewart states the company would expand its operations to Colombia in South America.