Fast Talk: How A Former Google Exec Plans To Transform Loans

Meet Douglas Merrill, Google's former Chief Information Officer, whose loan-giving startup ZestCash makes FICO scores seem straight outta the Stone Age. "All data is credit data," he says—and the insight is helping America's "underbanked" legions.

A few years ago, Douglas Merrill became convinced that good people were being denied credit, just because loaners weren’t sifting through enough data. So Merrill, once Google’s Chief Information Officer (and one of our Fast 50 in 2008), joined forces with Shawn Budde, formerly of Capital One, to create their data/banking mash-up ZestCash. The company wants to do nothing less than transform underwriting. Fast Company talked with Merrill about vampires, the Oedipal complex, and FICO scores.

You’ve written about how we have “an alternative financial system” in this country, that’s not particularly pretty. What is that financial system, for those who might not be familiar with it?

There’s a large percentage of the U.S. population—estimates vary widely, somewhere between 60-100 million people—who have no healthy relationship with a bank. They may have a credit card, but either it’s not useful to them, or they can’t use it. These are referred to as the underbanked, or unbanked. Everyone needs credit, for when things go wrong. A lot of people don’t have any savings at all. As a result, this group of high-cost lenders has appeared, called payday loan companies. Forty million Americans took out a payday loan last year, and for those payday loans, they paid about a total of 10 billion dollars in fees—just fees, not the principal.

How’d you first encounter this system?

My wife’s sister Vic is a single mother of three, a full-time student, and full-time employee: She’s Superwoman. She had a flat tire, but she didn’t have the money [to fix it]. She called me and I wrote her a check. I asked her, “Vic, if I hadn’t answered the phone, what would you have done?” She said, “I’d have gotten another payday loan.” So I looked up what payday loan was. It turns out there are 25,000 payday loan stores in this country, more than McDonald's and Starbucks combined. If you’re not paying attention you don’t see them. What interested me the most was the high cost of payday loan options. The reason for the high cost is that nobody in the payday loan space can figure out if I, as a borrower, am going to pay. That’s called underwriting. [ZestCash] figured out how to apply the best of traditional underwriting (that’s what Capital One brought) and the best of data analysis (that’s what I brought) to figure out who’s likely to pay back a loan. As a result we can offer product that’s about 50% the cost of payday loan.

You’ve said that good people are being denied credit because old processes don’t take advantage of today’s data-rich environment. What do you mean when you write, “all data is credit data”?

Credit underwriting hasn’t really changed in 40 years. It uses a particular mathematical function called a logistic regression, and about five to 10 pieces of data. FICO revolutionized this in the '70s, and it was a transformative innovation. But there haven’t been big innovations since then. We’re proposing the next big innovation: Use hundreds or thousands of data points, much like how we used data at Google to rank search results.

What’s an example of the kinds of data you use?

It turns out if you look at our site, at the educational material—if you take look and surf around the site—you are more likely to pay the loan back than if you don’t. It’s an itty bitty signal—not 50% better, just a little better. But take a lot of things that are a little better, and you get something that’s a lot better.

So essentially you’re giving Fast Company readers a tiny discount, now that they know this.

Your readers will know something about how we think about data. We don’t give a lot of examples for exactly that reason.

How’s it going so far?

It’s hard to imagine a better job than the one I have. You get to work on a cool, hard math problem and at the same time be helping people. Our customers saved half a million dollars in December alone. We’ll hit our 10,000th unique customer in the next month or so, and have loaned out several million dollars already. So there’s a huge amount of growth. But I guess everyone says that.

It seems that you have a lot of hobbies [inset]. Which is most relevant to ZestCash?

My hobbies are things like riding motorcycles and reading dumb books. At one point I gave an employee an old Kindle, and she went and counted the number of vampire books on there. It was in the double digits, which is quite embarrassing.

Maybe vampires represent your fear and hatred of predatory lenders.

I never thought of it that way. But not all vampire novels have vampires as the bad guys. You’d think I’d have Reflections on the Revolution in France instead of some random vampire novel. If you read my resume without knowing me, you might get the sense that I’m really serious. I like tattoos, I have long hair, I like telling jokes.

Know any good jokes about FICO credit scoring?

Sadly, I have no FICO jokes. I like it when ZestCash is compared to FICO, because FICO changed the world.

But do you have an Oedipal relationship with FICO? You love them, but you kind of secretly want to kill them?

I’m fairly confident that FICO isn’t my parent. I’m able to see farther because I stand on shoulders of giants. I believe ultimately our way of doing math and analysis will become the dominant way in underwriting, and we will save the underbanked billions of dollars.

This interview has been condensed and edited. For more from the Fast Talk interview series, click here.

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[Images: Flickr user swanksalot]

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3 Comments

  • Joe Putman

    , the rate is 339% if you were to keep it out for a year, which the company doesn't even allow so you would never pay 339% of interest, you would go into default long before that. Many payday loans are 800 - 1200%, so 339% does represent changing the industry.

    You probably think of that rate and assume the company is making a huge pile of $$$ on you. This isn't true. Payday lenders often don't even get one payment out of 25% of the people "borrowing" the money. Of the other 75%, many of them will default and not pay back all of the principal. The lender has to charge a high enough rate of interest and fees to offset these people who are basically stealing the money. Then the lender has to offset the high cost of collections since many of the loans that are eventually collected take many follow up calls and special arrangements made to help the borrower get it paid off.

    If you didn't want to lose money, but had three friends ask to borrow
    $300 and you knew that one of them was unlikely to give it back to you
    (though you can't tell which), you would have to charge each of them
    $150 interest in order to just break even (and you have no marketing
    cost or loan servicing costs!).

    That is the position a high risk lender is in. Most of these lenders earn a rate of return on their investment that is in line with other financial businesses over the long run. The high loan costs are due to the risk involved with lending to people who have repeatedly borrowed money and not paid it back or slow paid over and over again so that they have sub 500 FICO scores.

    ZestCash's website says that you can borrow $500 for five months of $49 payments. If you have low income and bad credit and your car breaks down, you can't walk into a bank and borrow the $500. You will lose your job if you can't make the repair.  I would rather take the loan and keep my job. If I would like to pull a couple of extra shifts and pay the loan off early I may only be out a couple hundred dollars, but at least I still have my job.

  • james W.

    Talk about Predatory Lending. What they are doing is illegal in some states. No wonder they are only approved in only 4 states.   Fast Company should not be highlighting companies like this

  • brad h

    Are you kidding me that these guys are going to change payday loans?  I just checked out their site and they're charging a 30% "origination fee" plus exhorbitant interest.  For a 3 months loan of $300, my effective APR was 419%!  Doesn't sound like anyone changing an industry, just someone trying to get their slice of the pie.