Adsmarket (now called Matomy) founders Kfir Moyal and Assaf Ben Asher, together with partner Gilad Woltsovitch, are entering the online loans industry in the US. Backed, an online loans company founded by the three partners, is now going on a roadshow among investments institutions in Israel and overseas, after completing a pilot in six US states. The company is planning a financing round to raise tens of millions of dollars. One of the investors who has already promised to invest in the company is Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), which is expected to invest several million shekels in it. The planned financing round has two tracks: shares in the company itself and money for providing the loans.
Moyal (35) and Ben Asher (34) founded online advertising firm Adsmarket , which subsequently became Matomy and was later acquired by Ilan Shiloah. They then founded Cyhawk Ventures, which raised $10 million and serves as an incubator for startups. Woltsovitch (34), a childhood friend of Moyal, later joined them in managing the various products.
While the focus and experience of the fund's founders is in digital marketing and online advertising, the fintech revolution was beckoning, and they decided to found Backed, whose claim to fame is that it allows borrowers to bring a guarantor for the loan, thereby lowering the interest rate for borrowers with no credit rating.
There are currently 45 million US residents with no credit rating, or with a low rating because of limited information about their repayment capability.
"The non-banking credit market is based on the customers' credit rating, but the rating works like this: as long as you meet your obligations, your rating improves. When you start, however, before you have taken any loans, you have no credit rating, because there's nothing to base it on," Woltsovitch says, adding, "Following the 2008 crisis, the banks became more cautious, and virtually stopped granting loans to anyone without a credit rating. You are penalized in advance for not have acquired a record with loans."
The absence of a credit rating, however, affects other things besides the ability to get a loan. "I have personally experienced what it means to be without a credit rating," Woltsovitch says. "When I moved to the US, I had no credit rating, and when I wanted to rent an apartment, I had to pay six months' rent in advance. I couldn't get a credit card; I had to use cash."
Focus on the Y generation
Backed focuses on providing loans to the Y generation (18-35 age bracket) borrowers, who make up a third of the US population. "This generation was born into a more challenging world in its ability to generate a credit history," Moyal explains. "The millennium generation is economically supported by their parents. The parents, however, give fish instead of fishing rods; in other words, they give money instead of helping to build a credit rating that will enable their children to get loans by themselves later. We tried to devise an optimal mechanism for parents and children, in which parents can lend a credit rating instead of money."
"Globes: You didn't invent the guarantee, so what are you doing that is new?
Moyal: "We make the process of providing a guarantee accessible. Today, it's a bureaucratic process in which you have to go in person to the bank branch in order to identify the guarantor. It's a big bother for someone who's doing a favor, and people are deterred by it. We have completely digitalized the process."
Woltsovitch "In addition, today, in ordinary loans, a financial institution has no interest in getting the guarantor involved when a problem arises. The institution prefers the loan to be in default and accumulate interest on arrears, when it can also get more money, even though this also affects the guarantor's credit rating. With us, if any payment is late, even by one day, we immediately warn the borrower and the guarantor, and they have a 15-day grace period in which they only have to pay the missing amount, without interest on arrears or any effect on the credit rating. We didn't invent the grace period; what's new is that we enable the guarantor to come in before interest on arrears accumulates."
Backed was founded two years ago. As part of a pilot in the US last year, including in New York, Florida, and Arizona, among other places, several dozen loans were granted. The company grants loans up to $25,000; loan average $13,400. The loans are granted for 1-3 years. The main purpose of the loans is to reschedule an old loan, but loans are also granted for home renovations, and even for buying a home.
The interest on the loans is not cheap. The maximum rate is 15.99%, and according to Woltsovitch, the average interest rate is 11.6%, including the underwriting fee. In comparison, the average interest rate charged on credit card loans in Israel is 8%. "The interest rates are reasonable, in comparison with what prevails in the US market. In a lending club, for example, the interest rate reaches 35%, and companies granting loans for a few days charge annualized interest rates of over 100%," Woltsovitch says.
Like the potential return, however, the risk is also high. "When we started, we projected a default rate of over 4%. Now that we have improved our activity, we have reduced our projection to 3.3%," Woltsovitch explains. In Israel, incidentally, the default rate for banks and credit card companies on loans to households is 1-2%.
The company's underwriting model is based on traditional parameters, such as income, form of residence (renting or home ownership), use of the line of credit, etc. The company has devised a risk management model with Prof. Jacob Zahavi, who specializes in analysis and forecasting. Backed's risk manager worked nine years at Barclays in this field.
Now that the pilot has been completed, Moyal, Ben Asher, and Woltsovitch want to start substantial activity, and are planning to raise tens of millions of dollars for the purpose, so that they can grant loans totaling $30-50 million in the coming year. Investors can either buy shares in the company or provide money the loans. The loan amounts are divided into two tracks. In the first track, the lenders' return is guaranteed, and Backed bears the default risk itself. A 1% management fee is charged for this track, and the return offered is 5-10%. In the second track, Backed is only the conduit and agent for the loans, and the lenders receive the full return and bear all the risk. The management fee for this track is 0-1.5%.
What is your goal?
Woltsovitch "In the longer term, we want to reach hundreds of millions of dollars in a quarter. At the same time, the 'marriage' of finance and technology is problematic: technology is a terribly fast world, while in finances, it's necessary to grow slowly and accumulate credit. We saw that this caused a crisis in lending club companies. We want to make progress wisely, and start with a well-oiled system and model that is capable of calibrating itself."
Published by Globes [online], Israel Business News - www.globes-online.com - on March 5, 2017
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