May 7, 2015
By Joe Lonsdale
“The most valuable of all capital is that invested in human beings”
-Alfred Marshall, Principles of Economics (1890)
There are hundreds of millions of people around the globe who could safely repay loans but nonetheless do not have access to a line of credit. Financial institutions in developing economies are broken and inefficient, and hard-working people have not been given the chance to establish a credit history. The inability of middle-class people to receive loans in developing countries has had a stifling effect on economic growth and prosperity around the globe.
When I first met Matt Flannery, he was hard at work solving this problem. At the time, Matt was running Kiva, the world’s first peer-to-peer microfinance company. Kiva is a nonprofit organization that allows anyone in the world to make a small loan (usually around $25) to an entrepreneur of his choice in a developing economy. In just eight years, Matt and his team took Kiva to incredible heights, processing $600 million on the platform with a loan repayment rate of 98.73%.
I was inspired by what Matt was working on, and he was also interested in what my co-founders and I were doing at Palantir, and how modern data infrastructure systems and analytics could solve critical challenges across various industries. Matt realized that he could also leverage advancements in data analytics to change the microfinance landscape for the better. As the smartphone was spreading like wildfire across the developing world, Matt understood that he could use the latest Silicon Valley technology, apply what he’d learned at Kiva, and build something even more data-driven and transformative.
That is why Formation 8 is proud to lead the early-stage round at Matt’s new company Branch. Branch will apply cutting-edge machine learning to the data available on smart phones to safely open up lines of credit to millions of middle-class people in developing markets around the world.
Branch sits on top of mobile payment platforms to make loans and receive payments. Rather than put borrowers through an intense in-person application to receive a loan, Branch lets them prove themselves over their phone. It uses local data generated on the user’s smartphone to make an initial credit decision, taking in factors such as call history and social media presence. Once a borrower has been approved for a loan of between $20-1,000, Branch lets them prove their trustworthiness by tracking their repayment. If they repay the loan on time, the system will alter their risk profile, and they’ll get a better loan the next time. If they repay the second loan on time, they’ll get an even better loan the third time. Branch intends to build a “robot in the sky” that makes the decisions that microfinance loan officers used to make manually.
While there is admittedly some risk that borrowers default on their loan (as is the case with any crediting institution), Branch’s technology minimizes the risk of default. Machine learning is helpful to reduce fraud—Branch can combine several points of data to detect theft in ways that even traditional lending institutions cannot. As of May, Branch has already safely made over a thousand loans in Kenya.
Branch’s business is not possible in Western countries, where incumbent lending institutions have established a web of regulatory barriers to defend against new entrants. Around the world, however, the commoditization of lending represents a positive trend, as it allows more credit to flow to the parts of society that need it the most. A little cash in an inefficient economy can go a long way. Taxi drivers can buy gas so they can serve more customers; store owners can buy in bulk so they can improve their profit margins; families can afford to pay for a wedding in between harvests. $100 may not seem like a lot of money in the Western world, but it can make a huge difference to middle-class families in the world’s emerging markets. Overall, it’s a positive bet on humanity for the market system to use newly-available data to discerningly provide more credit.
We feel strongly that the Silicon Valley elite need a culture of duty. Top technologists have a tremendous capacity—and therefore a tremendous responsibility—to build things that make a positive impact on the world. We have a unique opportunity to solve some of the hardest challenges that humanity faces and create value that extends into all corners of the economy. Our thesis is that the greatest economic opportunities are often those that create the greatest amount of value for society. Branch is a company that shares our aspirations to improve the world through technology. We look forward to working with them to transform the microfinance industry and enhance the lives of millions of people around the globe.