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TRANSCRIPT
FICO DOESN’T CONSIDER CHARACTER. WE THINK THAT’S A SHAME.
Phil Coggan, Economist On Planet Money
History is a battle between debtors and creditors.
Every so often, these two clash, there is a crisis and
the whole system is remade.
What is Equify.me?
Before there were FICO scores and credit tranches, character was used to evaluate credit worthiness. Character has been conspicuously absent from the lending process since we started to trust numbers more than we trust the people. We think it’s time to bring character back to consumer credit. Equify is a supplemental credit model that crowdsources information about a borrower’s character. Our proprietary algorithms combine traditional credit rating criteria, endorsement data and information from online social networks into a single score that offers insight into a borrower’s character. Borrowers get better rates. Lenders get better customers. Everybody wins.
[email protected] • (206) 786 - 7154
The borrowing and lending system in the U.S. is broken. Many lenders only look at
a borrower's capacity, collateral, and capital when assessing credit risk – a limited
view that does not adequately merit a borrower’s character. To make matters
worse, consumer credit models have not adjusted for recent macroeconomic
shocks. Lenders have been forced to refrain from lending to potentially creditwor-
thy people or ask them to pay interest rates that may not reflect their credit risk.
Microlending organizations the world over have proven there’s a better way – one
that embraces our humanity and considers character in the borrowing and lending
process.
Confidential - Do Not Redistribute
There used to be 5 C’s of credit...but what happened to character? Character is hard to define and even harder to quantify – however that doesn’t make it any less meaningful when evalu-ating a borrower’s default risk.
The process of borrowing and lending seems like it should be simple. Those with money to lend want to earn a financial return with reduced risk. Borrowers want
access to capital at a reasonable cost. But it’s not that easy.
demo.equify.me • (206) 786 - 7154
Over the past 60+ years, the FICO score has become the predominant method for evalu-ating default risk. The five dimensions of the FICO score have proven to be highly cor-related to a borrower’s probability of de-faulting on a loan. That said, there’s still room for improvement. Many have success-fully developed scorecards and models to supplement and outperform FICO...but char-acter is still conspicuously absent from the lending process.
Equify hasn’t given up on qualifying and quantifying character as a dimension of a borrower’s credit. Equify allows borrowers to collect endorsements in the process of completing a loan application and our credi-bility algorithm is used to assess the endors-er’s credibility. In the end, Equify provides lenders with a numerical score that offers in-sight into the borrower’s character that can be used as a supplement to traditional credit scores.
How it works
Confidential - Do Not Redistribute
Borrowing Inquiry
Borrower requests endorsements
Lender underwrites,
approves/funds loan
Lender offers checking/saving/
debit products. Funds deposited
in borrower account.
ACH to borrower
account
Equify exposes interest rate set
by lending partner.
Borrowers are offered incentives
to collect endorsements.
Borrower completes loan application
Equify’s target customers are members of communities of individuals with shared interests or characteristics. At launch we plan to attract the military community in Washington State. As borrowers request endorsements our offering will reach new communities such as alumni networks, church groups, and professional associations.
demo.equify.me • (206) 786 - 7154
Why military? Because these men and women have done so much for us...t’s time to return the favor.
Within this community, it is estimated that over 200,000 Servicemembers turn to payday lenders annually. The remaining 1.8 million use credit cards and traditional sources of unsecured debt (e.g., banks) to finance various aspects of their lives. They naturally belong to a tight-knit community that is well connected (physically and virtually). Additionally, this community places a high value on credibility while income and spending are highly visible to members of the community.
Endorsements serve a dual purpose. They offer insight about a borrower’s credit worthiness and they are the cornerstone of our customer acquisition strategy. When a military borrower requests endorsements, endorsers may be active duty military, veterans or family. Attraction theory suggests some portion of the endorsers will have
similar borrowing needs. As the second wave of customers request endorsements, awareness will spread further outside the military network – to friends in other cities, veteran’s professional networks, church groups, or college alumni networks.
In short, we’ve chosen the military because we want to give credit where credit is due:
Endorsements and credibility matter
Ideas diffuse quickly (~30% of active duty military are relocated every year)
Members of this community are relatively young and active users of online social networks
Salary and spending habits are visible to members of the community
Servicemembers frequently use payday loans/credit cards to bridge cash shortfalls and need an alternative
Borrowers get better rates. Lenders get better borrowers.
Using endorsements online is not a
new concept. Amazon.com uses
customer reviews to help shoppers
make informed buying decisions. Ebay
sellers readily collect feedback and
some sellers now have over 100,000
positive endorsements. Professionals
and job seekers
alike collect
endorsements on
LinkedIn in the
form of “recommendations” to elevate
their professional credibility.
In these instances an endorsement
takes information from people who
have unique, first hand knowledge of
the credibility of a
transacting party.
A third party
manages and
presents that
knowledge to a marketplace to
facilitate better decision making. In
each instance, a single endorsement
typically isn’t given much weight; but
many endorsements are often
considered trustworthy, reliable
sources of information.
There’s more going on when an
endorsement is included in a
transaction. When a seller in a
marketplace opts into a system with
mechanisms to capture endorsements,
a social contract emerges that provides
pressure to meet or exceed buyers’
expectations. Amazon and Ebay sellers
go to great lengths to protect their
seller ratings. Equify borrowers are
expected to behave in a similar
manner.
Endorsements
have been used in
peer-to-peer
lending – and the results, though not
scientific, are very compelling. In 2008,
netbanker.com published information
indicating that borrowers in the
Prosper marketplace with one
endorsement
were 35% less
likely to default as
compared to
borrowers with
similar loans and no endorsements.
Further, borrowers with more than
one endorsement were 50% less likely
to default than borrowers with similar
loans.
We realize an endorsement alone
doesn’t mean much…but a credible
endorsement could be extraordinarily
meaningful when evaluating a
borrower’s credit worthiness.
NOT JUST ENDORSEMENTS
...CREDIBLE ENDORSEMENTS
Equify's Credibility Algorithm con-
siders the credibility of individual
endorsers through factors such as:
Number of endorsements given
– how frequently or rarely do
they endorse?
Relationship between the en-
dorser and the borrower – how
well do they know the borrow-
er?
Performance of other borrow-
ers endorsed – do they endorse
people who repay?
Connections in online social
networks – are they well con-
nected and interconnected?
Other qualifying questions
asked by Equify during the en-
dorsement process
Fraud detection flags (e.g., bor-
rowers and endorsers who
share an IP address or specific
cookies, endorsers making unu-
sually high numbers of endorse-
ments within/across communi-
ties )
What are endorsements?
*Endorsers are individuals who offer positive
information about a borrower and bid on a
borrower’s loan in the Prosper Marketplace.
http://www.netbanker.com/2008/02/
prosper_helps_borrowers_tap_the_value_of_
their_social_capital.html
THE EQUIFY SCORE
The Equify Score examines the endorser’s
credibility in an effort to better understand a
borrower’s character. Our algorithm is a learn-
ing algorithm that is reweighted monthly to
favor dimensions of the credibility algorithm
that show the greatest predictive value. Cer-
tain information is made available to our lend-
ing partners for use in evaluating a borrower’s
loan application including the Equify Score,
which combines information from the endors-
er’s social networks and information provided
by an endorser.
When evaluating an endorser’s
credibility, we examine the following:
The Relationship: How does the borrower know
the endorser? Family members and peers are
not considered as credible as supervisors.
Further, those who have known the endorser for
10 or more years are considered more
knowledgeable than endorsers that have known
the borrower for less than 1 year.
Employment Information: What is the
endorser’s profession? How large is the
endorser’s employer? What is the average
tenure at the endorser’s last three roles?
Overall and Shared Connectedness: How many
connections does the endorser have? How many
shared connections do the borrower and the
endorser have?
Endorsement Portfolio Performance: How do
endorsed borrowers perform on their loans after
loans are issued?
The Endorsement: The endorsement is not
binary. Each endorsement consists of five
questions. These questions, wording, and the
endorsement algorithm will evolve over time.
Below are questions that may be used at launch.
How do you know the borrower? (List)
How long have you known the borrower?
(Number)
Would you consider loaning money to the
borrower? (Binary)
Is there anything you’d like to tell us about the
borrower? (Free text)
Do you want to create an endorser profile?
(binary)
Equify plans to employ natural language analysis on
free text portions of the endorsement and the
borrowing request to identify words and phrases that
are correlated to an increased probability of default or
increased probability full repayment. The natural
language analysis will take time to evolve, but we are
currently exploring these relationships with data
made available from peer-to-peer lenders: Prosper
and Lending Club.
COMMUNITY
Credit risk assessment is back-
ward, not forward looking. Tra-
ditional lending systems in the
U.S. only look at a borrower's
history when assessing credit
risk. This limited view does not
adequately merit a borrower’s
character. Individuals with high
social equity and insight that
could positively influence bor-
rowers’ access to capital are
unable to activate the value of
their social equity for the bene-
fit of their community...until
now.
Lending partners pay Equify a 2% referral fee for each
loan and include the Equify Score in underwriting crite-
ria – where a positive Equify score lowers interest rates.
Lending partners pay Equify a 4% referral fee for each
loan and Equify offers 20bps rebates for each credible
endorsement. The referral fees and rebates for credible
endorsements are paid at the time the loan is funded.
Proposed Structure: Lending Partner Benefits
Offer good loans to good people
Engage an online audience at a critical moment
in their financial life cycle
Asset diversification with a high interest
personal loan portfolio
Align the lending institution with communities
and target customers
Low cost loan/customer acquisition with little
or no up-front costs to the lender*
demo.equify.me • [email protected] • (206) 786 - 7154
*Any unique customization of the Equify loan
application may result in a small engineering
cost.