Lesa Mitchell stood in the teller line at her bank as a young man and his grandmother explained his plight.
His payday loan to cover a bus pass had ballooned out of control. He needed $200 to get out of a financial mess.
“I literally wrote him a check,” Mitchell said, and extracted a promise that he’d stay away from payday loans.
She also began a hunt for a viable alternative to high-cost short-term debt that can trap consumers who have even a small financial need.
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After weighing several candidates, Mitchell thinks she found the answer in SoLo Funds, a project she brought to the Techstars Kansas City Accelerator, which she leads as managing director.
SoLo Funds — which comes from social loans — is a peer-to-peer lending app co-founded by Travis Holoway, who grew up in Cleveland but came to Kansas City from Los Angeles. SoLo doesn’t make loans. It connects people who need a quick bit of cash with other people willing to provide it.
“He’s created something nobody’s done,” Mitchell said.
SoLo Funds debuted in April, launching in part with early financial backing. The site currently accepts donations from borrowers, and lenders soon will see a donation option, too.
So far, more than $200,000 has flowed through the app in small loans between individuals.
Holoway counts every loan as one more weight bearing down on payday lenders. Enough loans, he figures, will crush ‘em.
“We’ve already started. We’re already seeing it,” Holoway said.
He also knows there’s a lot of work to do and sees the intense, three-month Techstars program as a faster track to success. SoLo signed up along with nine other young businesses in this year’s Techstars program. Holoway hopes to make important connections, build his team and grow SoLo Funds to a larger scale.
Digital lending is a thread-worn idea. The fintech world is all over it, and through more than just online payday lenders.
Holoway says others have missed a critical market that he has targeted. Few digital debt solutions will mess with the small-dollar deals of $1,000 or less that SoLo handles. Or, they miss the potential crowd of small-dollar lenders, who might be lenders today and borrowers next month.
For example, another lending venture, SoFi Personal Loans, deals in loans of at least $5,000. Marcus, a lender run by Goldman Sachs, needs you to borrow at least $3,500.
Many online lenders are like Prosper in that they pool investors’ money to back the loans rather than arrange deals between individuals.
Others’ attempts have proven that dealing digitally in debt comes with no guarantee of success.
On SoLo’s app, borrowers sign up and say how much they want to borrow and why, perhaps an emergency car repair. The borrower says how much more they’ll repay and what date the money will return.
Lenders can review requests and agree to fund the loans they want.
SoLo Funds, working with a bank partner, transfers funds between the accounts as borrowers and lenders alike have to link a bank account to carry out the transaction. Repayment comes through a scheduled payment in the amount and on the date as agreed.
Finding lenders on SoLo hasn’t been difficult. They’ve stacked up on the app so fast that Holoway cut back marketing to lenders because all of the requests to borrow were being picked up as soon as they hit the app. It left the app looking empty.
One of Holoway’s missions at Techstars is to reach more potential borrowers, a task that is tougher than it might seem.
Mitchell said word of mouth might be the best approach, and already she’s introduced Holoway to a few key people in the Kansas City area. More introductions are coming, including at schools, where Mitchell said teachers often turn to payday lenders to buy supplies beyond what schools provide.
Still more introductions lie ahead, in St. Louis, Mississippi and the Rio Grande Vallley in Texas, Mitchell said, places where she’s developed contacts.
SoLo Funds has other work to do.
Currently, money flows from lenders to borrowers on the app through a bank that has partnered with SoLo Funds. It means transactions run through the financial system’s automated clearing house, or ACH, payments system. That takes a couple of days or more if a weekend intervenes.
Holoway is looking at a debit card function to solve that slowdown.
Borrowers on the app have their own work to do. One is to consider how much these loans cost.
Holoway said borrowers repay lenders and typically offer to send back a bit more. He calls it a tip, not interest. SoLo Funds won’t let borrowers offer greater than a 10 percent tip.
The tip amounts to a finance charge that consumers could compare to the typical costs in a payday loan.
An example that SoLo Funds offered in a video shows a woman seeking $265 and offering a repayment of $285, or a $20 tip. Holoway said loans through SoLo Funds cannot be shorter than seven days or longer than 30, though early repayment is always available with no added costs.
Assuming the borrower set the loan at 14 days, a simple calculation shows the loan carried an annualized interest rate of 197 percent. This is about half the typical annualized interest rate on payday loans, which the Federal Deposit Insurance Corp. said is about 400 percent in its guidance to banks considering similar kinds of personal loans.
Holoway said there are other tangible differences with SoLo Funds. About 8 percent of loans so far have been untipped. Lenders were willing to just lend a hand for a while, no charge.
Lenders also have been willing to forgive loans in some cases when the scheduled automatic repayment essentially bounced. Unpaid lenders also can send the debt to collections.
Another difference Holoway points out is that SoLo Funds works with an alternative collections company that replaces repeated phone calls for payment with emails and texts on a much less frequent basis.
SoLo Funds is looking beyond traditional measures of creditworthiness to consider other factors to create what they call a “social credit score.”
It’s an extension of the idea Holoway had of letting borrowers and lenders set their terms away from an industry that has had plenty of problems. Kansas City has been a hotbed of illegal payday loan activity.
Kansas City area businessmen and brothers Joel and Scott Tucker became the targets of federal actions for their activities in the payday loan industry.
Scott Tucker was ordered to pay the Federal Trade Commission nearly $1.3 billion in a civil case against him and was sentenced to more than 16 years in prison in connection with his $2 billion illegal payday lending operation. Joel Tucker was hit with a $4 million judgment in favor of the FTC and now faces criminal charges on 15 felony counts amid claims he lied to a bankruptcy judge.
Kansas City’s payday lending industry also has produced the bankruptcy of a Kansas City company that financed payday lenders, indictments against two American Indian tribes, a $613 million penalty against U.S. Bank, imprisonment of another Kansas City payday lender, a controversial decision by the Consumer Financial Protection Bureau and an episode on Netflix’s “Dirty Money” series.
SoLo Funds, however, wants to displace even legal payday lenders. Holoway’s hope is that borrowers on the app become lenders and graduate off of these short-term debts and into the financial mainstream.
SoLo’s app includes lessons in financial literacy on topics ranging from basic ideas, such as having emergency savings and credit cards, to longer goals for retirement and education.
Through its methods, SoLo Funds hopes to become a lead generator for banks, offering them customers who are ready to handle mortgages, car loans and other beneficial loans.
“That’s the end game for us,” Holoway said.