Using P2P Lending to Replace Payday Loans

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With Americans increasingly turning to their mobile devices to instantly pay via peer-to-peer (P2P) services like Venmo and Cell, writing a check or going to an ATM for quick cash is a thing of the past. This technology is also changing the way consumers lend and borrow, according to Travis Holoway, founder of the short-term loan exchange platform SoLo Fundespecially when it comes to low dollar or short term loans.

In a recent interview with PYMNTS, Holoway stated that he had seen firsthand how the market for short-term and low-dollar credit options – powered by P2P payments – was doing. It’s the market SoLo Funds wants to serve and offers an alternative to more traditional options like Payday loanwhich can put consumers in more difficult financial straits than before.

“Technologies like Venmo and Cash App have made it really easy for people to ask for money because it’s no longer that complicated process,” said Holoway. “I just assumed there had to be someone using the same technology for lending, but when I looked for this solution, I couldn’t find it. We’re trying to incorporate this technology into lending. “

P2P payments for power loans

SoLo’s business model, launched earlier this year, will match consumers willing to offer interest-free loans of up to $ 1,000 with those in need of financial assistance. Borrowers are paid via ACH transfer and receive their funds within three to five days.

That timeframe has served the company well so far, Holoway said, as most loan applicants anticipated a financial squeeze and took steps to prepare when their savings ran out. However, it has proven to be too long for many other potential borrowers, especially those facing unforeseen financial challenges like car problems, health problems, or a sudden change of job.

SoLo recently added the ability to deliver funds through Same Day ACH, a change in hopes to better serve those who haven’t saved up for financial disaster and can’t afford to wait.

“This will drastically speed up our transaction time, which is important because the biggest pain point for us so far has been the time lag,” explained Holoway. “Speed ​​is the key, especially in this section of the population because they often need their money right now.”

Loans issued through the platform do not last longer than 30 days, he added. After this period, the funds are automatically withdrawn from the recipient’s account and returned to the lender to ensure that most loans are paid back. SoLo achieved a failure rate of only 3 percent.

Automatic term enforcement also helps the company service an important sector of the short-term loan market: those who lend money to friends, family, or someone they have a personal relationship with. Since the loan terms are automatically enforced, the borrower is not reminded to repay the lender – and there is little chance they will commit an act of doom.

When borrowers don’t have the funds to repay their lenders, lenders have a choice of either giving them more time or sending them to collections, Holoway explained. This provides an opportunity to avoid the vicious lending and debt collection cycle that often plagues payday loan recipients.

Using digital tools to improve financial health

P2P technology isn’t the only one transforming the lending industry, however. Holoway found that Millennials’ buying habits and behavior are very different from those of previous generations, meaning that legacy loan risk ratings do not accurately reflect their financial health.

“We believe the FICO score is broken – and that many outdated metrics are used to determine how creditworthy people are – and it really is no longer valid,” he said.

In fact, certain metrics are no longer reliable as consumer behavior has changed in recent years.

“The mortgage history is no longer useful,” said Holoway. “Car loan or payment history doesn’t make sense anymore because people share bikes and scooters right on the street and take Uber and Lyft. They don’t even use credit cards like previous generations. “

Regardless of their financial status, SoLo borrowers do not undergo traditional FICO credit ratings before receiving funds, he explained. Instead, the company uses a proprietary combination of cash flow and social data to determine what is known as a SoLo score. This score is better suited to SoLo’s needs as it assesses a modern consumer’s actual ability to repay a short term loan.

In the future, Holoway and his team are working to expand the use of the SoLo Score to more traditional credit channels. The company plans to work with banks and financial institutions (FIs) to not only use SoLo Scores, but also use other digital payout tools to help consumers in need of short-term financial assistance quickly access funds – without a larger, future one financial distress.

“SoLo’s ultimate goal is to ultimately provide our buyers with a path toward higher financial mobility,” said Holoway. “Our goal is to eventually use this data to direct a user to a large bank and be able to vouch for themselves [him] and prove it [he’s] creditworthy. “

Venmo, Cell, and their ilk have already changed the way consumers borrow and repay each other. With P2P withdrawal solutions constantly evolving, it may not be long before they change the game of short-term lending as well.

Via the tracker

the Payouts Tracker ™, supported by Ingo money, is the first port of call to stay up to date with trends and changes in the digital payout space month after month.

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NEW PYMNTS DATA: TODAY’S SELF-SERVICE TRIP – SEPTEMBER 2021

Above: Eighty percent of consumers are interested in non-traditional checkout options like self-service, but only 35 percent have been able to use them for their recent purchases. Today’s Self-Service Shopping Journey, a collaboration between PYMNTS and Toshiba, analyzed over 2,500 responses to learn how merchants can address availability and perception issues to meet demand for self-service kiosks.



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