
ZestCash is Not Good. - jfager
http://jasonfager.com/934-zestcash-is-not-good/
======
patio11
I'm really sorry that Prosper didn't prosper, because I thought that P2P
lending would be an excellent alternative to payday loans. It made huge sense
to me that if one person in a community has money and one person in a
community needs money, then if they trust each other, one guy pays a modest
APR and everyone walks away happy.

As it turns out, Prosper couldn't beat the payday loan companies because the
people who need payday loans are atrocious credit risks and they collectively
relieved us lenders of hundreds of millions (cough, not a typo) before we
wised up about this.

~~~
patio11
Incidentally, if someone wants to brave formidable regulatory barriers, beat
Paypalian levels of fraud, and spend their days dealing with the problems of
the underclass, this is a multibillion dollar opportunity and you'd create
more wealth for the poor than anyone since Walton.

~~~
scottkrager
Lending Club? (I've invested in both Prosper and Lending Club)

------
CoryOndrejka
From details on ZestCash's website, there are four fairly substantial ways in
which they are different than payday loans, which the original author seemed
to dismiss.

First, ZestCash is charging a substantially lower APR than payday loan shops
(280% versus 480%).

Second, ZestCash allows partial repayment. This is critical, as requiring full
repayment is a major factor in forcing payday loan customers to rollover their
loans, incurring additional fees and leading to additional loans. Partial
repayment is far more likely to result in a customer who can actually pay off
their loan and is not trapped in a cycle of debt.

Third, ZestCash further increases the chances of repayment by allowing
flexibility in both amount and length of the loan.

Fourth, as the Center for Responsible lending points out, most payday loan
employees are minimum wage and not trained to help customers in any way.
Anyone approved at ZestCash gets a personal representative who will work with
the customer 1-on-1 for the life of the loan.

Time will tell whether the ZestCash team is able to generate positive change
for the underbanked -- full disclosure, I've worked with Douglas and think
he's very sharp -- but I certainly think their story is a lot more balanced
than the original article would suggest.

~~~
jfager
I do dismiss those.

 _First, ZestCash is charging a substantially lower APR than payday loan shops
(280% versus 480%)._

You're cherry picking one of their lowest rates and putting it against the
assumption that someone's going to roll a payday loan 7 times. If you actually
click through and read the CRL report they're quoting, you'll notice that
they're misusing the statistics. ZestCash claims that the CRL reports that 80%
of payday loans are rollovers, but when you click on that link, the CRL page
you're taken to doesn't give that statistic anywhere. I've only skimmed the
full report, but I haven't been able to find where they're getting that number
from. I'm left highly dubious of the claim that the average payday loan is
rolled over 7 times, though, given that the report _does_ explicitly state
that the average number of transactions _per borrower who takes out more than
one payday loan_ per year is only 9 (and 20% of people who take out payday
loans only take out 1 per year, and aren't counted in that group).

 _Second, ZestCash allows partial repayment. This is critical, as requiring
full repayment is a major factor in forcing payday loan customers to rollover
their loans, incurring additional fees and leading to additional loans.
Partial repayment is far more likely to result in a customer who can actually
pay off their loan and is not trapped in a cycle of debt._

But they also require a minimum of a two month term, and I can't find any
indication on the site that they let you pay off the loan early to avoid
additional interest accrual.

 _Third, ZestCash further increases the chances of repayment by allowing
flexibility in both amount and length of the loan._

That's what they claim. Hard to state it as fact just yet. And if the chances
of repayment are increasing, shouldn't the APR be going down? The
justification for such high rates is supposedly that these are such high-risk
loans.

 _Anyone approved at ZestCash gets a personal representative who will work
with the customer 1-on-1 for the life of the loan_

A part of what makes me so mad about this site is that they're posturing
themselves as a caring, responsible alternative that's going to hold your hand
through this process. If you care and are responsible, you're not going to
charge such usurious rates. Period.

~~~
mst
> If you care and are responsible, you're not going to charge such usurious
> rates. Period.

So you'd prefer that economically viable rates are only offered by people who
are irresponsible and/or uncaring.

I fail to see how that would be an improvement.

~~~
jfager
_So you'd prefer that economically viable rates are only offered by people who
are irresponsible and/or uncaring._

No. I'm saying that only irresponsible and/or uncaring people offer those
rates, that the act of charging those rates demonstrates you to be
irresponsible or uncaring.

------
ataggart
> ...ZestCash’s own rates, which run between 242% and 462% APR (not a typo)...

Yeah, and a 5% APR on a 30 year mortgage would look ridiculously large if you
quoted it as an MPR (Millenium Percentage Rate).

The only utility of using a standard such as the APR is to compare loans with
_the same term_. Quoting a one week, single payment period loan in terms of an
APR leads readers to compare its magnitude with that of other much longer term
loans; this is a wholly disingenuous attempt to appeal to emotion over basic
mathematical reasoning.

~~~
_delirium
Basic mathematical reasoning actually pushes in the opposite direction: that
one should generally prefer to maximize long-run return (or minimize long-run
interest payments), so the lengths are only relevant insofar as they change
the risk. That does change things, but doesn't make them completely
incomparable, and APR is as good a standard measure as any.

If you look at most "normal" debt markets, debts of quite different terms
compare on reasonably similar APR scales: a 1-month piece of corporate paper
and a 30-year government bond all fall within a few percentage points APR
spread. It's not like nobody's ever thought of the idea of an APR curve
before!

------
ashleyw
APR is pretty irrelevant for payday loans. If my math is correct, even at the
highest quoted 462% APR, a £100 loan for 10-days would have a fee of ~£5.
Compared to ~£16 for the rest of the payday industry, that's not too bad.

In reality they're an awful source of funds if you've got other options, but
that's the point, they're for people who can't get a traditional loan, and
whom are most likely high-risk.

~~~
mynameishere
Even 1 day paper uses annual rates.

<http://www.federalreserve.gov/releases/cp/>

When your cost of money is 30000 basis points, it just means that you're
shifting default risk from the landlord/doctor/drug dealer to a speculator,
aka "loanshark". That's why it's not so predatory as it seems. Would you
rather people shaft the dentist or some asshole?

~~~
mdda
I work in the (junk) bond markets. There's a clear distinction between Yield-
to-Call paper (which is priced so that different bonds are priced based on the
yields they offer) and paper that trades on a 'price basis' (i.e. recovery
rates in default are a very major consideration).

For the 'price based' bonds, the APR (or IRR) is a nonsense measure : because
it is only considering the best outcome (payback at maturity). Most people
don't understand that the high IRRs exist partly because people are bundling
the price-effect of the downside case into the single 'yield' number of the
best case.

I don't want to defend payday loans really - just point out that Treasury
Bonds and (say) Lehman bonds are two very different animals.

------
timinman
Early in my marriage, when I had a couple kids and 2 student loans to pay, I
was having trouble stretching between pay-checks and used payday loans several
times. They are a nightmare, because you are stealing from next month and you
have nothing to show for the money spent on fees. It's a black hole when you
have limited resources. Saying that, banks are as bad or worse with their
$20-$30 per transaction 'convenience' overdraft fees, which, if you lose
track, can pile up on one and two dollar debit card purchase.

I don't know if I'd go so far to say they don't exist, but I do have a lot of
sympathy for the borrowers.

------
lionhearted
> The Center for Responsible Lending, which is frequently mentioned on
> ZestCash’s website at the time of this writing, supports a 36% annual
> interest rate cap.

I used to think this way until I met a guy who was doing research into opening
a payday loan shop. Taking a bit of risk and being blunt, I said to him, "Hey
dude, you know, I like finance. I get finance, it's good. I'm not a person who
just bashes finance because I'm ignorant... but c'mon, aren't payday loans,
like, totally fucking evil?"

He took it in a good spirit and answered. Here's his take:

The first thing he said is that payday loan shops don't charge a huge APR,
they charge a flat fee for getting a payday loan, often $20 or $40 on a $500
loan.

That's 5% to 10% of the loan amount, however, if you average that to APR you
get a crazy %, something in the low thousands, like 1000% or so.

So I said, "Well, dude, yeah, 1000% is evil. Right?"

He says, and I'll never forget this, "What do you think the default rate is on
a payday loan?"

I said, "Well, jeez, I dunno..."

He said, "Okay. It's _really_ high. Many of them don't get paid back. And it's
a shitty business to be in, nobody likes selling payday loans. The price of a
payday loan is what it is considering the default rate and the unenjoyableness
of the business. If someone found a better system or enjoyed it, they could
get in with lower rates. Traditionally banks don't want anything to do with
it, since it's such a high risk and unpleasant business."

I said, "But... isn't that taking advantage of people?"

I won't forget his second quote either - "People only go get a payday loan
when, for whatever reason, they can't get money _anywhere_ else. If payday
loan places didn't exist, there'd be no emergency credit for people. Mind you,
these are the worst borrowers. These are people with no savings who no one
trusts enough to lend them 500 bucks for two weeks. Do people abuse it to go
drinking a week early? Yeah, sure, _like anything else_. People abuse eating
fast food, drinking too much, tobacco, all sorts of things. I don't approve of
that. But for other people, a payday loan is a lifeline. If you regulate it so
you can only charge $5 for a $500 loan, there won't be payday loan shops any
more. They won't exist. And that'll be bad for people who desperately need
credit and can't get it elsewhere. The people that complain about this aren't
doing anything to help people, they're not opening a shop to compete with more
fair rates, because they'd go out of business. They just like to talk about
how unfair it is, but haven't thought about what to do after they drive all
these shops out of business with their regulation."

He explained some valid reasons for people to get a payday loan - car breaks
down and they need to replace it, emergency expenses... he said under those
conditions, it can make sense to get a payday loan. And with the huge default
rates, the payday shops need to charge a large amount to stay in business.
Later he went on to say that people really like making money by lending, so if
they thought they could beat a CD or bond rate by lending for low amounts at
payday shops, they would. The reason it doesn't happen is because of the
default rate and how unpleasant the business is. (No prestige, in fact it's
anti-prestigious, and not fun working conditions either)

Changed my view on the industry. Still don't like the business, would never go
near it personally. But it puts it into context some.

~~~
patio11
Payday loans probably are superior to some I-can't-believe-it-isn't-credit
options in terms of APR: for example, if you're about to miss a utility
payment, get the power turned off, and get hit with a $50 fee for getting it
turned back on again N days later, then a payday loan strictly dominates the
implicit APR of getting credit extended by your utility company _and_ the
lights stay on _and_ you suffer no social embarrassment. You could come up
with similar examples for automobile breakdowns (best alternative to getting a
loan: losing your job), bouncing rent checks, paying overdraft fees at a real
financial institution, etc etc.

I still would go back to cleaning oil pipes with a toothbrush prior to working
for them, though, regardless of how much money they were prepared to throw at
me. Like Thomas mentions below, they are a loathsome industry.

I strongly believe there is an opportunity here: just like FICO and credit
cards made short-term loans effectively free for much of the middle class or
like how competition and technology has brought the price of remittances to
Mexico to below the cost of a Big Mac, I think there is some combination of
technology and innovative products which should bring the cost of short-term
loans down by more than an order of magnitude for the poor. Maybe it resembles
a credit union account. Maybe it is something weird, like cell phone companies
moving further into the consumer credit space. (It might not be obvious, but
cell phone contracts are economically equivalent to an extension of credit,
and they're made to work profitably among populations that no sane financial
institution would touch.) But we can do this better.

~~~
tptacek
You cleaned oil pipes with a toothbrush?

~~~
patio11
Yeah, when I was a high school student, to save up money for college I got a
job under the table from my sister's friend's father. His business was in
processing scrap components (everything from buttons for factory machines to
the aforementioned oil pipes) and reselling them. This involved a lot of
manual labor sorting e.g. a pile of 10,000 switches into functioning and
broken ones, then sorting by color, or in cleaning oil pipes using a
toothbrush and some solvent (motor oil, as I recall).

I learned an important lesson from that job: when someone tells you he doesn't
want to have you on the books because of "OSHA and the IRS and all that rot",
that is a leading indicator you can use for "not someone you want to work for"
prior to getting a 20 lb oil pipe thrown at your head close enough to move
your hair.

~~~
andrewljohnson
I think crappy jobs correlate with awesome people. Lots of successful people I
know washed dishes, cleaned pipes, did construction, or something equally
"blue-collar." It builds character and makes you yearn for a better life.

~~~
jarek
How many people you don't know washed dishes or cleaned pipes all their life
and never went beyond that, though?

~~~
andrewljohnson
Billions? What does that have to do with anything?

~~~
plorkyeran
It suggests that the awesome people with backgrounds in crappy jobs got out of
the crappy jobs because they're awesome, rather than being awesome because
they did crappy jobs.

~~~
andrewljohnson
If you only look at the set of people who work in white collar jobs, I would
wager those who previously had blue-collar jobs exhibit some positive
characteristics.

I don't think that the set of all people who have had or currently have a
blue-collar job is particularly relevant to the argument, other than as a
backdrop for speculation.

------
mattmaroon
It's easy to think payday loan shops are evil until you know someone who owns
one. The people running them typically aren't getting rich off of it. A high
percentage of loans don't get paid back. Fraud, forgery, and outright armed
robbery are a constant threat. Your employees (who have to be willing to work
in a place that will be robbed, at gunpoint, on a monthly basis) aren't much
more savory than the customers, and theft amongst them is rampant.

Shit happens, and a lot of time when it happens to poor people, they have no
alternative. It's sad that society is structured in such a way that they are
forced to turn to a source of credit that charges them so much, but the payday
loans do provide a valuable service.

~~~
jfager
In this particular case, we're talking about an online service, so no
unscrupulous employees to get ripped off by or physical dangers to navigate.
They also claim to be using advanced models for approving borrowers, and
putting in place a bunch of methods to ensure higher payback. All of that
implies lower risk, so why aren't the rates themselves significantly lower?

------
abthomson
It's not clear why the author decided to compare a ZestCash loan with credit
cart debt when they're clearly different products. And while ZestCash's rates
of 242% to 462% are high, they are, under certain circumstances, competitive.
For example, in Washington state, MoneyMart charges in the 300s.

Source:[http://www.moneymart.com/MM/_includes/templates/StateRates.a...](http://www.moneymart.com/MM/_includes/templates/StateRates.asp?pdf=WA_CTP&state=Washington&st=Money+Mart)

~~~
jfager
The point about credit cards was made because it's advice given to middle
class consumers. I assume if 30% is too high for people with money, it's even
more so for people without. From the perspective of the business making the
loans, of course they're different models. I don't see that as the most
important perspective, though.

And the fact that ZestCash is competitive with other usurious lending
companies really does nothing to improve my opinion of them.

------
GICodeWarrior
It is pretty crazy how many media outlets will publish articles written by
companies without even fact-checking them.

~~~
NathanKP
For them it doesn't pay to fact check. In the media business it is all about
getting a breaking story out there quickly, and if they waste time fact-
checking they are losing readers who are getting the story elsewhere. Clearly
this isn't good, but it is the price that we pay for demanding fast, instant
news.

~~~
icefox
At the same time it seems like those who would actually fact check would have
a story that no one else has.

------
twidlit
This is what was lost when blogs overwhelmed journalism. Fact-checking,
accountability and misaligned curation but I am hopeful blogs will evolve over
time to incorporate them back.

~~~
Cushman
They already have. You're reading the fact checking right now.

News corporations may be more consistent, but do you really think they're more
trustworthy?

~~~
amadiver
Who's watching the watchmen? How do you know that this blog has their facts
straight? Have you read any rebuttals to this post? (Already, certain issues
that seemed outrageous have been deflated by other commenters.)

*For the record, I feel like being "evil" means to prey on human weakness, for which it seems like the site in question and PayDay loans generally fit that bill.

~~~
Cushman
_Who's watching the watchmen? How do you know that this blog has their facts
straight? Have you read any rebuttals to this post?_

I can't answer those questions any better than you already have:

 _(Already, certain issues that seemed outrageous have been deflated by other
commenters.)_

~~~
amadiver
I liked this answer enough to upvote it, but my honest question (the parent)
has been downvoted. Could someone share some insight why? I switched from
Reddit to HN because I thought this community was less prone to stuff like
that, but maybe I'm being too sensitive?

------
tlb
I gather that the default rate for payday loans is several percent per month,
so you'd lose money charging 30% APR (2.2% / month).

Can anyone point to a good article on how the industry works and who their
customers are?

~~~
gatsby
Here are a few articles I've read that you might find interesting. The first
is NPR's brief look into the payday loan business as a whole and the second
demonstrates the wild rate at which these loans are being issued (£1.2 billion
issued in 2009 and estimates of £3.5 billion by 2014).

[http://www.npr.org/templates/story/story.php?storyId=1272205...](http://www.npr.org/templates/story/story.php?storyId=127220540&ps=rs)

[http://www.google.com/hostednews/ukpress/article/ALeqM5h5YQz...](http://www.google.com/hostednews/ukpress/article/ALeqM5h5YQzdFD_fFbk8hxhJYGlOaTb1ig?docId=N0234131286895626812A)

------
dennisgorelik
The main reason why society does not like pay day loans, is that there is more
harm than good in lending money to people who cannot reliably pay back. If you
don't have $500 to repair your car and do not have good credit history -- then
probably you would be better off without car, because you won't be able to
take proper care of that car anyway. And without payday loan it's harder to
get drunk/drugged, so society benefits from not having payday loans.

On the other hand it does not make sense to criminalize payday loans, because
as gcheong mentioned -- the alternative is broken kneecaps by loansharks.

The result: payday loans are neither prohibited, nor supported by government,
and are booed by society.

~~~
sneak
Without that car, that person can't get to work. Loans are a valuable service
to people all across the wealth spectrum.

------
mahmud
Even VentureBeat did a positive "review":

<http://venturebeat.com/2010/10/12/douglas-merrill-zestcash/>

------
olegkikin
They offer $500 for 6 months with $33.5 weekly payments.

So you will end up paying 33.5 * 52 / 2 = $871 ($145.16 per month).

Isn't it cheaper to get something like this on Prosper or Lendingtree?

~~~
jakewalker
The people who get these will never qualify for a loan on Prosper or Lending
Tree due to low credit ratings, etc.

------
andrewljohnson
I hate to see entrepreneurs acting like predators. I like to think we are in
it for noble reasons - advancement of humanity, crucial innovation - you know,
changing the world. But cold hard cash rules for many.

It makes a certain kind of sense that a guy who left Google for BMG would be
capable of such a scummy company.

~~~
gcheong
Easy to say it's predatory but I'm not convinced. These are high risk loans so
who's to say that the interest rates and fees charged aren't reflective of
that risk? On the other hand I am willing to entertain the idea that if the
people who most often used these places don't have access to these loans at
all maybe they would be better off.

~~~
andrewljohnson
Who's to say crack isn't fun for some people? You're still a criminal and a
drag on society if you sell it.

It's not that I don't think the rates reflect the risk... it's that I think
these rich bastards are saddling poor people with loans, and they expect a
good portion of them to drown in the loans.

They charge these rates so they can recover vast losses... in the end, the
honest people get screwed and even the dishonest borrowers get buried in a tar
pit of debt.

~~~
gcheong
Your analogy with drug dealing is quite apt. Because what happens when people
can't get what they want through legal channels? Black market. Loansharking.
Broken kneecaps. Payday loans may seem to reflect the worst of our society but
in actuality they are a step up from other alternatives.

~~~
tptacek
Your argument is that loansharking would be just as prevalent as payday loans,
once payday loans are outlawed? You can get a payday loan within walking
distance of most every block in the city of Chicago. You can't even legally
_be_ a loan shark.

~~~
gcheong
I don't know if it would be just as prevalent, maybe not but I don't think the
criminals are going to pass up a proven market opportunity so I think
loansharking would increase from where it is now. I do think that for the
people who use payday loans today, if they didn't have the option legally,
then life for them could be worse overall either by having to deal with
loansharks and/or because they end up in some pit that could have been avoided
if they had the legal loan option.

------
known
In India Micro-finance companies are collecting _52%_ interest.
[http://business.rediff.com/slide-show/2010/oct/14/slide-
show...](http://business.rediff.com/slide-show/2010/oct/14/slide-show-1-mfis-
come-under-the-lens-as-30-suicides-rock-andhra.htm)

------
known
Govt regulate these loans unless they are willing to share the risks &
responsibilities.

------
vaksel
i know we are not supposed to judge a book by it's cover, but man does the
ZestCash CEO look like a snake oil salesman:
[http://gigaom.com/2010/10/12/zestcash-judges-
creditworthines...](http://gigaom.com/2010/10/12/zestcash-judges-
creditworthiness-with-data-analysis/)

also you know it's a scam, when the site's page rank, alexa rank and compete
rank are set to private.

~~~
wilschroter
I know Doug Merrill personally and he's one the smartest, most forthright guys
you'll ever meet. You're dead wrong to judge him otherwise on his picture or
anything else.

~~~
danielnicollet
his alexa rank is not "set to private". what are you talking about???
<http://www.alexa.com/siteinfo/zestcash.com#> didn't check the rest.

~~~
vaksel
I use a special plugin that tells me all those numbers automaticlaly...maybe
it considers an alexa rank of 4,343,216 too high to fit in the space.

but that number is horrendous...it's like 10 hits a month

~~~
phpnode
If it's a new site, what the hell do you expect? No wonder there's no pagerank
or alexa rank yet, it's too early.

