Peer-to-peer lending startup Ledge incorporates on millennial staples like social networking and open development to get on its feet while relying on a road paved by the financial services 'establishment' to go mainstream.
There's several generations of the payments industry at work. The Los Angeles-based Ledge operates a social lending service aimed largely at young people who often don't have traditional credit cards or bank relationships.
To enable funding, Ledge uses Venmo, a PayPal-owned social transaction platform powered by Braintree's open technology toolkit. And, as a final piece to its puzzle, Ledge recently won a Visa-sponsored startup contest at SXSW in Austin by pitching an integration of Visa Direct's digital transfer capabilities into Ledge's operation.
While the perception is that millennials either cannot qualify or simply do not want a traditional credit card or bank relationship, Ledge can still gain prominence with this crowd through Visa’s recognition.
"The Visa brand is everywhere in payments," said Adam Neff, Ledge's founder and CEO.
There is also value to working with Venmo, which gained popularity by offering an interface that more resembles a social networking app than a mobile banking app. Still, despite Venmo's strong following, Visa is still the dominant payment brand.
"Older folks can use their Visa account to lend money rather than having to set up a Venmo account," Neff said.
Ledge enables borrowers to receive loans from $50 to $5,000. A borrower creates a campaign on ledge with information such as why or she wants to borrow the money, amount, interest rate and the terms of repayment. Ledge restricts terms based on usury laws that govern interest rates for personal loans between individuals. The company also provides tools that enable borrowers to describe why the loan is important, add photos and share details on the campaign with friends.
"We specialize in smaller dollar short term loans, the loans that in general have terms that traditionally have been fairly predatory," Neff said.
Agreeable lenders make a pledge, which is a portion of the loan that a particular person would like to lend. When a campaign reaches its goal—a Ledge requirement—each pledge becomes a mini loan and is funded directly from lenders to the borrower via Venmo.
"The social tools allow for feedback between the borrowers and the lenders," Neff said.
Ledge differs from other marketplace lenders in several ways. Rivals such as Prosper and Lending Club launched 10 years ago with a similar person-to-person model before recasting themselves as matchmakers of borrowers and investors. The transformation came amid regulatory scrutiny of the largely unprecedented lending model.
At issue for Prosper and Lending Club, which originally viewed themselves as a way for borrowers to request loans to start a business or pay for a wedding, was the risk that lenders exposed themselves to. Currently, investors must meet suitability requirements; those without the proper amount in net income or assets are not allowed to become lenders.
Ledge addresses this concern by targeting a different market. In addition to managing usury compliance, Ledge also limits the number of loans and amount of lending each individual lender can perform in a year, which places the lenders below the "commercial lender" level for regulatory purposes, Neff said. Ledge also avoids other financial service regulations by not storing funds, and using third parties such as Venmo and Visa to power transfers.
"It's a perfect example of a company that is able to take the [application program interface] and enhance their product in a way they could not before," said Shiv Singh, senior vice president of digital and marketing transformation for Visa. "It's a validation of opening up the API."
Visa has opened Visa Direct's API to developers around the world—the startup contest in Austin drew about 400 companies. The card network also plans other events, including one that asks startups to use social media channels to engage users at Visa-sponsored events and another focused on startups that encourage consumers to load Visa cards onto digital payment platforms.
The Visa events demonstrate a maturing trend of established payment companies using developer contests to pick up new innovation where internal R&D leaves off, a strategy MasterCard and PayPal and other financial service companies have also used.
"Very few companies can consistently innovate by relying on internal inspiration only," said Zil Bareisis, a senior analyst at Celent. "[Developer events] push innovation to the boundaries and benefits from creating ideas from a much broader community."