A new financial lexicon
We’re finding ourselves using three phrases a lot these days, and so we wanted to take a moment to articulate what we mean by them:
1) Social underwriting
A hundred years ago, underwriting was largely based on relationships – look at the example of George Bailey in It’s a Wonderful Life for a beautiful example. But over the last few decades, with the advent of technology and big data, conventional lenders’ underwriting decisions have come to be based almost exclusively on financial data – a borrower’s FICO score, the strength of their balance sheet or cashflow statement, etc. Financial underwriting clearly works – otherwise the finance industry wouldn’t employ it. But it doesn’t paint a full picture. Averages and algorithms can’t capture a person’s character, and so an information gap is created.
Social underwriting involves using social data to assess creditworthiness. Mohammed Yunus was an early pioneer of this concept in the field of microfinance, and there are many other exciting examples of companies looking to leverage social data to underwrite loans today. Lenddo.com uses borrowers’ Facebook networks to make credit decision; and Entrepreneurial Finance Lab gauges borrowers’ “entrepreneurial-ness” through psychometric testing.
In the Kiva Zip context, we think about social underwriting in three ways:
1) The deep relationship that exists between a borrower and a trustee
2) The decisions that our crowd of lenders make in determining who to lend to, based on their interactions with the borrower
3) A borrower’s ability to demonstrate their entrepreneurial “hustle” and trust network, by rallying 15 of their network to lend to them
In these three ways, we are trying to complement financial underwriting with social data. To look beyond the strength of a borrower’s credit score, to the strength of their character.
2) Social collateral
Conventional collateral takes the form of conventional assets – cars, houses, machines, etc. On Kiva Zip, we don’t take any collateral in the conventional sense of the word. But by requiring borrowers to invite 15 of their friends and family to lend to them, we take social collateral in the form of these relationships between borrowers and their social networks. We are securing Kiva Zip loans not with a Toyota, but with trust. Borrowers that default on their loans breach that trust, and lose that asset.
3) Social capital
When you take out a loan from a bank, you really only get one thing…money. Let’s call this “financial capital”. When a borrower takes out a loan on Kiva Zip, they not only get financial capital (and financial capital on very generous, 0% interest terms), but they also realize a number of other benefits, because the nature of crowdlending is that it connects borrowers potentially with hundreds of people.
Over the last two years, we have seen countless examples of these people (Kiva Zip lenders) supporting borrowers in a myriad of ways – becoming their customers, dispensing business advice, acting as their brand ambassadors by promoting their business on social media, etc. We believe that being an entrepreneur is one of the hardest jobs in the world, and oftentimes entrepreneurs struggle with a lack of confidence. Perhaps the most powerful way that the Kiva Zip model supports borrowers is by boosting this confidence. When 200 people say “I support you. I trust you. I believe in you. Go make this happen!”, that represents a huge emotional encouragement and psychological fillip.
Another benefit of social capital is that it is more patient and gracious than financial capital. When a bank loan enters delinquency, the borrower is met with late fees, accumulating interest payments, and very little flexibility. When Kiva Zip borrowers go delinquent on their loans, as long as there are valid reasons for the late payments (e.g. the borrower is taken seriously ill), in the vast majority of cases we have seen Kiva Zip lenders respond with generosity and understanding.
We believe that social capital is much richer and stronger than financial capital alone.
Where conventional lenders are stepping back from making loans, people like you and me are stepping up.
Where conventional loans are securitized by financial collateral, Kiva Zip loans are based on social collateral, in the form of bonds of trust between borrowers and lenders.
Where conventional loans are based on the money alone, Kiva Zip loans provide borrowers with customers, business advisers and brand ambassadors.
And where conventional delinquency is met with late fee penalties, delinquencies on Kiva Zip are met with an overwhelming outpouring of support.
This is what social capital means.