As the next billion people continue to come online, Premal Shah, a former principal product manager at PayPal and president and co-founder of the microfinance platform, paints a financial future where everyone has fair access to financial services and opportunity around the world by revisiting an old notion: trust.
While the Facebooks, Googles and mobile phone providers of the world are all working to bring Internet access to the most remote corners of the world, PayPal and Kiva have been facilitating perhaps the most powerful connections—people supporting people through the crowdlending nonprofit and digital payments system. As the next billion people continue to come online, Premal Shah, a former principal product manager at PayPal and president and co-founder of the microfinance platform, paints a financial future where everyone has fair access to financial services and opportunity around the world by revisiting an old notion: trust.
“When I was just one year old, me and my family immigrated from India,” Premal Shah, president and co-founder of Kiva recalls. “I was growing up in Minnesota and got to go back to India when I was five to visit my grandparents and family. One of the things that immediately struck me as we traveled through India was just the level of poverty and destitution that kids my age, and their families endure. I didn’t have words for it then but realized that literally where you’re born and who you are born to determines so much. This was something I wanted to do something about.”
Shah may not have known just then what that something was, but those childhood trips back to India combined with his undergrad years at Stanford followed by several years working at PayPal later unlocked a solution.
“PayPal really got its traction where it allows complete strangers to send money to each other to buy things. This required a level of trust,” he says. “If you can buy from a complete stranger on the internet, why can’t you invest in a complete stranger, particularly across wealth and geographic divides?”
While in college, Shah’s introduction to microfinance as a “bottoms-up” rather than a top-down way for the working poor to access resources in a sustainable, scalable way was eye-opening. “It reframes those people who are living in conditions of poverty from being someone you should feel sorry for to thinking wow, there’s a lot of entrepreneurial activity out there and a lot of people doing really incredible things but what’s lacking is the resources. You don’t have to rely on donations, we can actually do more affordable loans and ensure that people have access to these resources to get ahead and manage their lives.”
[quote position="full" is_quote="true"]If you can buy from a complete stranger on the internet, why can’t you invest in a complete stranger, particularly across wealth and geographic divides?[/quote]
This reasoning and the shared inception among leadership at PayPal who were keen to connect and empower people around the world helped shape Kiva into what it is today.
“I think it’s amazing that technology can not only connect us in new ways, but if it can help establish trust between two people, so much good and opportunity can flourish,” says Shah.
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As a woman in India, if you should become a widow, you may be socially ostracized or shunned by neighbors who fear your apparent bad omen, shutting you out from the rest of the world. For some women, sate—or the act of self-immolation—seems better than living as a social pariah.
Jhuni, the 33-year old widow and mother of three children was known as a highly skilled tailor in her town in India. “Through our local partners, she was able to access an affordable Kiva loan to buy a sewing machine,” says Shah. “She was able to start her own business, people started to come to her home to do business, and she now trains someone else in the craft. She’s moved from being someone who was socially ostracized to someone who in many ways is a social entrepreneur.”
Jhuni is a 33-year-old widow in India, where they are considered to be a bad omen. What stood between her and a growing business was just $500.
Stories like this are plenty on the Kiva platform. Jhuni, who received her loan in 2012, is one of the many human beings whose story has been rewritten thanks to the power of digital payments. Whether in India, Kenya, or the United States for that matter, digital payments are unlocking lending happening around the world.
As Kiva moves into its next decade of microfinance and crowdfunding, there are looming challenges for fair access to capital and financial security. From connectivity in general to expanding mobile payments to remote places on the planet and ultimately, risk, the global marketplace is changing while some historic practices of the banking industry are not.
“If we fast forward several decades from now, everybody on the planet will be connected through some device,” Premal predicts. “Everyone on the planet will be connected through payment networks like PayPal and we’ll be able to send money back and forth with each other. However, enabling transactions isn’t enough when it comes to lending money to everyone on the planet, everyone is going to have to qualify for different amounts based on how we understand their credit worthiness or risk.”
[quote position="full" is_quote="true"]We can actually do more affordable loans and ensure that people have access to these resources to get ahead and manage their lives.[/quote]
In the United States, creditworthiness is determined by a number of factors: length of credit history, total amount of revolving credit, debt, cash flow, and repayment history. As Shah describes it, there is an opportunity to redefine creditworthiness by assessing new factors, based on the troves of data being collected on platforms like PayPal and Kiva.
“We need new ways of not only making sure that payments reach everyone but we need new ways of appraising risk around creditworthiness,” he says. “The combination of the two will greatly expand access to the 2 billion people who lack total financial service access today on the planet, and it will expand access even here in the United States.”
“In many of the markets that Kiva works in, there are no credit bureaus. I think there’s an opportunity to leapfrog credit bureaus and look at new sources of data that might come right off the mobile phone itself. So we might look at the number of contacts you have in your address book, the number of payments you’re making using mobile payments for everyday purchases. We may be able to look at essentially what your friends believe about your business idea by whether or not they’re willing to invest a small amount of money first. And if you’re able to get say 10 friends to invest in you first, that should signal some kind of trust, much like the eBay feedback or reputation system have signaled trust to the world,” says Shah.
[quote position="full" is_quote="true"]It’s amazing that technology can not only connect us in new ways, but if it can help establish trust between two people.[/quote]
This new way to define trust through “social underwriting” is what Kiva is experimenting with among small business borrowers here in the U.S. Kiva’s U.S. lending program aims to reach those small business owners who are financially excluded and socially impactful with 0% interest, no fee crowdfunded loans. The challenge has been how to balance this goal among borrowers with low credit scores, cash flows and collateral that automatically exclude them from traditional loans. “Social underwriting” requires that borrowers recruit 10 to 15 friends and family to crowdfund a small portion of their loan request. If the people that know a borrower best are lending to him or her, then the rest of the internet can put trust in that borrower too. Once the private lenders are recruited, Kiva unlocks the remainder of the loan to be crowdfunded by its 1.5 million citizen lenders from around the world. Kiva’s character-based program may prove the credit bureau model of the future, if there is even a credit bureau at all. The end goal: putting people back at the center of banking instead of algorithms, by using new types of data to more efficiently assess risk.
“There are so many things that happen informally,” Shah says, “and if we can capture what happens informally and package that well, it can unlock a lot more formal access to finance.”
As the world moves toward a more mobile connected future, and social networks like LinkedIn and Facebook continue to expand, there is an opportunity to unlock fair access for people worldwide.
Says Shah: “The next phase is going to be everyone with a bank branch in their pocket. They’re going to be able to borrow and save and get insurance and send money to someone right from their phone or through some extremely easy-to-carry device that’s easy to use, in their language, and because these services that are going to be able to reach people digitally, and new data sources will be considered in evaluating risks, we’ll be able to lower the interest rates and the costs of these programs so that more and more people can be financially included.”
This article is part of our series celebrating 10 years of collaboration between PayPal and Kiva. Help kick off the next decade of impact. Make a loan today at Kiva.org and the first 10,000 lenders through 10/10/16 will receive a $25 Kiva credit, provided by PayPal, to lend again. Terms and conditions apply.
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