If the world were a more logical place, said Chris Walters, CTO and co-founder of Scratch, it would always be easy for a borrower to pay their debts as quickly and easily as possible. Everyone’s goals would be aligned, ensuring that funds are repaid on time and with minimal investment of time or energy.
But, Walters told us in a recent conversation, that world often isn’t a logical place, particularly when it comes to the mysterious world of paying debt. It was a reality that he and his co-founder, CEO Sameh Elamawy, were first tipped off to after talking to an Uber driver about how completely overwhelming it was to keep track of their debts, let alone pay them.
This was back when Elamawy was still a Pinterest engineer, but planted in his head was the simple truth around which Scratch was built: Loan servicing is a broken business, laden with perverse incentives, which needs a ground-up rebuilding.
The problem is misaligned financial interests: Loan servicers have no reason to want to help customers pay on time, because it is not good from a revenue perspective – despite the fact that it’s good for both lenders and borrowers. When consumers pay late, the servicers get to collect late fees from them, and can also charge lenders more for their services. Late customers are a much better revenue stream than punctual ones.
“It was actually a big surprise to us in the early days that loan servicing was still such a mess,” Walters said. “And the more we looked, the more we realized this ecosystem didn’t just need an add-on to work better – it needed a rebuild. And after really trying to take in the problem from the ground up, we realized that a lot of the opacity and costs that can harm borrowers can be powerfully mitigated with technology.”
Technology that Scratch has been working to develop in the form of a simple, consumer-facing web application for understanding, managing and paying back loans, and a lender-facing product geared around providing better portfolio insights.
After three years of being built, the product is finding traction. The firm has recently raised its first funding round of $17 million from investors that include Index Ventures, Ribbit Capital, Founders Fund, Nyca Partners and CFSI with JPMorgan Chase.
Analog and Inefficient
Because debt servicing firms don’t really have a strong incentive to modernize their operations or make it easier for customers to pay, the industry as of 2018 is “analog and inefficient,” according to Walters – and an incredibly poor fit with much of the FinTech developments that have gone on around it. Paperwork and call centers are the norm – and even interactions that should be simple, like changing the payment date on a loan, become a massive hassle.
Scratch’s technology is built on APIs that pull data directly from lenders in order to show a person’s payment obligations in an app. The user can see all of their loans in a single place, with a clear explanation of the borrowing terms and the total payment picture for the loan, factoring in interest.
And on the backend, the system automates processes like loan accounting, treasury management and reporting to remove the need for human intervention. The platform also provides real-time reporting on a lender’s overall portfolio performance.
“Overall, what we are hoping to do is help customers by giving them a lot more control in managing their debt, while at the same time making it much less expensive to the lenders who are putting out funds,” Walters said. “Our technology – and eliminating those backend costs – means we can do well in this segment and offer a scalable, profitable business plan while at the same time doing good for borrowers.”
And more than building new technology, Scratch is also trying to build out new incentives. It charges the same fee for delinquent loans, regardless of the length of the delinquency. And Scratch doesn’t always charge late fees – they use data to analyze the customer’s ability to make payments, and doesn’t add fees for customers who are failing to pay for lack of ability.
“We don’t see late fees as a builder of the bottom line for us – we reinvest those funds in borrower education and coaching, because our incentives are all built around borrowers that pay, not borrowers that don’t,” Walters noted.
As 2018 is heading into its back half, U.S. household debt is at an all-time high of $13 trillion, and 8 out of 10 Americans carry some type of debt, including mortgages, credit cards, student loans and auto loans. According to the latest edition of the PYMNTS Unifund Financial Invisibles report, more than a third of consumers report falling behind on bills, up 6 percent from this time last year. Debt management is a big issue in the United States – and by all accounts, it is on track to become an even bigger one.
Today, Scratch only works with student and personal loans, but plans to expand into mortgages and beyond in the not-too-distant future. And for consumers who are looking to try the service, there will still be a bit of a wait, as customers can’t sign on directly – the service is still by invite only.
But according to Walters, that will no longer be the case by the end of the year – and while they are still perfecting the service and planning out their next expansion, they are eager to be online with as many customers as possible, as quickly as possible.
“Consumers have every right to demand more from loan servicing, because at this point in history, there is almost no excuse for not offering it,” Walters said.
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