Count Gilad Woltsovitch among those entrepreneurs whose personal experience played a critical role in the formulation of his company.
Mr. Woltsovitch is co-CEO and head of product at Backed, a platform providing young borrowers with accessible and affordable loan products which help them build both their financial independence and their credit score.
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A further 19 million adults could not be effectively scored by current models, either because they have an insufficient history or because they displayed little recent activity. To generate a history, you need activity. To be active you need a history.
Combined, those totals represent nearly one in five American adults.
“Back then there was no difference between people with poor credit and those with a thin file,” Mr. Woltsovitch explained.
One group with a limited credit history which provides a unique opportunity are college graduates and they are Backed’s focus, Mr. Woltsovitch said.
He learned 60 percent of millennial college graduates receive some sort of financial aid from their parents, including allowing them to live at home. That is common because some are not aware of other options while those who are seldom qualify for any reasonable one.
Handouts, while understandable, do not foster independence. In solving a short-term solution they create a longer term problem.
Millennials gravitate to mom and pop because they are dependable, unlike those early jobs, which may be short-term, low-paying, or otherwise less than ideal. Yes they may have money now but is less certain.
Backed allows for co-signers like other lending options but in the event the borrower misses a payment, the co-signer gets 15 days notice to assist before default.
“Normally, the co-signer is notified after default when it is too late and two credit scores are damaged,” Mr. Woltsovitch explained. “Then you are responsible for the full debt plus penalties and interest all at once.”
Think of a Backed loan as a middle ground between financial dependence and dire financial consequences. Break glass only in an emergency, with no fees or penalties for doing so.
Mr. Woltsovitch said Backed had an impressively short time to market, thanks in part to regulators understanding the seriousness of the problem Backed addresses.
“Regulators are trying to find solutions. College graduates are soon going to be the largest base in the country and regulators are well aware of the problem their delayed entry into the economy will cause.”
Backed does provide loans without a “backer.” Borrowers with a minimum FICO score of 660 can qualify on their own.
Borrowers can also get a progressive loan which can reduce their rate by as much as 12 percent by providing the names of “vouchers,” people who will attest to their trustworthiness, and the backers, who agree to cover loan repayment.
Like many platforms, Backed relies heavily on the collection and interpretation if big data, Mr. Woltsovitch said. Unlike many, they partnered with a data-mining pioneer.
Dr. Jacob Zahavi built AMOS, one of the first commercial data mining systems. Active in business as Chief Analytics Officer for DMWay, a firm which builds state-of-the-art and fully automated platforms for developing predictive models more effective than those built by humans alone, Dr. Zahavi has been a professor at Tel Aviv University for 40 years.
Backed took the trove of publicly available data from Lending Club and reversed engineered it, creating a machine learning algorithm. Data from credit bureaus and other sources was added and they trained the model to operate as if hundreds of thousands of real loans had performed over three years.
Backed also adds to its database by encouraging borrowers to complete short quizzes in exchange for a reduced origination fee.
“The more data we have the better the model is,” Mr. Woltsovitch explained.
As the economy heads toward the down part of the cycle, the industry must prepare itself for the different environment, Mr. Woltsovitch advised. Many platforms may discover they were operating under a positive selection bias during healthy times. Left undiscovered, platforms simply add to the biases the longer times are good.
The problem is only discovered when times are less good. Unemployment rises and defaults might too.
“Until we experience it in real time no one will know how to model it,” Mr. Woltsovitch said.
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