Zest gives credit ratings a reboot


Burbank-based ZestFinance Inc. is back on track.

Fintech no longer lends to subprime borrowers. He left that company more than two years ago after uncovering a messy scheme involving payday loans where cash-strapped consumers were being charged double-digit interest rates on the loans.

Instead, the company focuses on developing credit underwriting standards and software to improve credit scoring methods for financial institutions that want to eliminate loan bias, a practice called debiasing.

“The idea of ​​one size fits all is over,” said Mike de Vere, managing director of ZestFinance. “It’s really a new era where you have bespoke models that are personalized for a bank.”

ZestFinance, doing business as Zest AI, offers software that has the potential to reduce lending disparities with respect to race, religion, gender, and marital status by processing massive amounts of information personal. The software has the added benefit of increasing installment loan application approval rates with fewer charge-offs.

The lenders have approved the company’s moves.

This summer, Zest AI received $18 million in strategic investments from VyStar Credit Union, based in Jacksonville, Florida; First National Bank of Omaha, based in Nebraska; and Northgate Capital, a return venture capitalist in the Bay Area, a London-based arm of Capital Partnership.

The latest funding round grants Zest AI a total of $33 million in venture capital investment since the start of its revamp in 2018.

The catalyst for the company’s comeback came from de Vere, who arrived at Zest AI in May 2018 as COO but quietly took over from Douglas Merrill in December 2019.

troubled past

Merrill, who previously worked as Google’s chief information officer, co-founded Zest AI in 2009 with former Sears executive Shawn Budde.

Merrill wanted to apply lessons learned from working with Google’s algorithms to the credit underwriting business. The company claimed it could use artificial intelligence to spot patterns in a borrower’s record that traditional lending models missed.

But he left the company in December 2019 after taking it into payday loans, charging high interest rates through one of his partners, BlueChip Financial, a company founded by the Turtle Mountain Band of Chippewa Indians in North Dakota.

Around the same time, the company began doing business as Zest AI to reflect its new management, although it was still registered as ZestFinance.

“Douglas leaving the company was really the inflection point for the organization,” de Vere said.

In September, ZestFinance settled all disputes regarding its ties with BlueChip Financial.

“Without any admission of wrongdoing, we have settled with the plaintiffs and severed all ties with the client involved (BlueChip Financial), as well as the payday loan industry. This chapter of our history is closed,” the company said in a statement.

At the start of the pandemic in March 2020, Zest AI laid off 15% of its workforce.
The fintech has moved from a business-to-consumer business with a lending component for subprime borrowers to a business-to-business model in which it offers credit scoring software to lenders.

Close the gap

Zest AI is working with many banks and credit unions on its new debiasing software.

“If I was going to ask your mother to describe you, she could easily describe you with 24 data points. Now, if I asked someone to describe you with 1,000 data points, that would clearly present a better picture of who you are, and that’s sort of a proxy for who you are as a lender,” de Vere said. “That’s only possible with machine learning.”

Jenny Vipperman, director of loans at VyStar Credit Union, which rolled out Zest AI’s credit underwriting software earlier this year, said her credit union was impressed with the results.

For credit card applications, VyStar sees 23% more protected minority groups getting approved for credit that was previously denied.

“And at the same time, we’re also getting better for the unprotected classes, typically your white males who don’t have a disability, by 19%,” Vipperman said. “Thus, credit approvals are improved across the board, but even more so for protected classes, demonstrating the fairness of closing the gap.”

Vipperman also said overdraft protection for checking accounts is approved for 35% more women and minorities and people with disabilities who will have access to funds when they need them. For car loans, those rates increase to 33% for protected classes, she said.

Now may be the time for Zest AI.

The federal government’s Consumer Financial Protection Bureau is writing guidelines to serve as benchmarks for lenders on how they should calculate credit scores designed to replace current FICO scores. Many observers have argued that FICO scores discriminate against minorities in credit applications.

The FICO model is used by most banks, credit unions, and lenders, and is based on consumer credit reports developed by major credit bureaus: Experian in Dublin, Equifax Inc. in Atlanta, and TransUnion in Chicago.

When banks look more broadly at a person’s finances, as well as their spending habits and preferences, as Zest AI does, they can make a better decision about who is likely to repay, de Vere said.

Credit unions such as Vystar and other locals are paying attention.

In April, nearly two dozen credit unions across the country banded together to form their own venture capital fund, called Curql Collective, which wants to invest heavily in fintechs like Zest AI.

The Des Moines-based firm unveiled its $150 million fund in April. Local members include Torrance-based Unify Financial Credit Union and Santa Ana-based SchoolsFirst Federal Credit Union.

“We would certainly support an investment by Curql in Zest,” said Gordon Howe, president and CEO of Unify Financial. “The Zest is why we participated in Curql, not just with an investment (of $3 million), but to gain access to these companies that are off the radar.”


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