Former Google Exec Jumps Into Payday Lending with ZestCash A former Google executive has moved from the world of Internet searches to the world of high-interest, short-term lending. He says his operation,, offers an innovative way to help the poorest borrowers avoid financial emergencies. But is this just a slick veneer putting a shine on the classic payday lending business?

One-time Google Chief Information Officer Douglas Merrill founded online-only lender ZestCash, which uses some fairly high-level Google-esque algorithms to assess its borrowers' creditworthiness. And the site certainly looks better than your typical payday lender. Those sketchy outfits usually operate out of rundown storefronts in lower-income neighborhoods, offering quick cash infusions at jacked-up interest rates to people with nowhere else to turn.

But friendly looking ZestCash does essentially the same thing: Its loans ring up at triple-digit interest rates. For example, a three-month $800 loan will cost nearly $550 in interest and fees at the 412% interest rate that ZestCash charges.

The site is one of a number of new businesses popping up to cater to a growing segment of Americans: The poor and credit-challenged who don't -- or can't -- use a bank. As high unemployment and falling wages continue to push more Americans into poverty, financial innovators like Merrill are on the lookout for new ways to milk profits out of this demographic.

Firmly on the 'Loan Shark' End of the Spectrum

Merrill says that his new model for assessing a borrower's creditworthiness and setting installment payments means he can offer lower rates than standard payday operators. But when one is talking in either case about interest rates of more than 400%, the degree of difference is arguably meaningless. The Center for Responsible Lending, a national policy advisory nonprofit for lending issues, defines any operation charging more than 36% interest -- a rate cap that 17 states have put in place -- as a loan shark, regardless of the secret formula it uses to underwrite its high-risk loans.

ZestCash says its rates are up to 50% lower than other payday lenders -- but some of that nuance is hard to calculate, and depends the ability of the borrower to repay the loan on its due date. If you can't make the weekly $101 payment, add a $35 ZestCast late fee to your balance. If the payment bounces, that's $35 plus a possible overdraft fee of up to $35 from your bank. And if you can't pay $101 this week, what are the chances you'll be able to afford $237 next week?

This is hardly better than online quick-cash lender,, which offers a 14-day payday loan for $800 in the state of Utah, with a $200 fee, for a total of $1,000 due after two weeks. But if you can't repay the money then and have to roll over the loan, an annual interest rate of more than 650% kicks in. Multiply that by six payday periods -- or the equivalent of three months (and there is no maximum term length in Utah) -- and that $800 could cost at least $1,789.63 on the principal alone, not including interest on the $200 fee or other rollover fees. did not respond to a call for comment.

Currently ZestCash is available to residents in Missouri, Utah, Idaho and South Dakota, which do not have maximum interest rates for payday loans. Four more states will be added to the roster soon, the company said.

Your Profile Includes Everything They Can Glean (and That's Plenty)

Using a formula similar to the one Google uses to rate the quality of a website, ZestCash determines a borrower's credit worthiness based on thousands of factors from cell phone behavior to an in-person interview to your Internet trail. ("Almost everyone has one," Merrill says.) They don't use a more traditional credit scoring mechanism, like a FICO score, because it is too narrow -- and if you're getting a quick loan, chances are your credit score doesn't really mean much.

But, for example, a phone number coupled with third-party data can say more about a borrower than bankruptcy, says Merrill. Using related data points -- such as how often a borrower switched phone providers, the frequency of switching, the type of provider -- and in addition to other variables plus some fancy math, ZestCash says it can determine more accurately whether a borrower is a good loan risk.

"Many of the [people without bank accounts] have prepaid cell phones," Merrill says, explaining that continuity of month-to-month plans are a good signifier of baseline financial stability. "Not having a cell phone is a negative signal because it signals that you don't even care enough to have connectivity."

Mathematically Strong, Ethically Shaky

Care enough? Or can't afford it? It's the use of factors like that one that has some critics say saying these kind of underwriting formulas are akin to economic profiling.

"What if there was a correlation between eating at McDonald's and not paying back debt?" asks Deborah Thorne, a professor at Ohio University who specializes in debt and bankruptcy issues. One of the problems with tying cell phone patterns, for example, to credit worthiness is that it unfairly targets the poorest as a justification to charge exorbitant rates, she says. In other words, super-strength math can quickly turn into fuzzy ethics.

Merrill argues the industry charges sky-high interest rates to compensate for its average 44% default rate, and that his company's default rate is already lower than that, though he didn't specify a percentage.

Using a borrower's data trail to gauge creditworthiness breaks new ground in the evolving realm of privacy. Increasingly, transaction data is being used by third-party clients to direct targeted ads. Harvesting transactional information -- like cell phone behavior -- to predict repayment odds could be the next frontier for evaluating borrowers with otherwise spotty financial pasts.

Dartmouth economist Jonathan Zinman suggests it's often not APR or how their credit risk is evaluated that is as important for consumers, but rather the economic outcome of the loan. "Is it an investment? Are borrowers taking this loan to prevent job loss or income loss?"

Catherine New can be reached at

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As the owner of a payday loan store in the state of Nevada let me please explain how our loans work. If you borrow $300 for a 2 week period the interest is $45. This is a 15% interest rate! Nevada law says that a person can only "roll" the loan 6 weeks total and then pay off.
Interest has been around since the beginning of time, with high risk borrowers always paying more for money, for anything they buy or borrow. This is nothing new. Why are payday companies the only ones with the title of "loan sharks"? This is very unfair, as I said all high risk borrowers pay high rates, and for good reason. They are the most likely to default on a loan. Who makes up for the default? All other borrowers. If everyone that took out a loan with us payed it back we could charge 7% and make money. This is far from the case however. I think the loan sharks are the people who come through our door and instead of robbing us with a gun use one of our pens. Sign a loan agreement and never return. They had no intention of ever repaying us.

January 19 2012 at 3:17 PM Report abuse rate up rate down Reply
Lisa McGreevy

The Online Lenders Alliance (OLA) appreciates the opportunity to respond to Ms. New’s article. OLA, which supports all business models that use legal, fair and transparent means to provide access to credit in times of need, has established best practices and a code of conduct under which each member company must comply. We and our members take these standards seriously.

Interestingly, the article criticizes a new entrant into the online lending business – one that is bringing innovation and new ideas to help serve a growing sector who, in the current economy, need short term loans.

Like many before her, Ms. New writes about the fees charged to customers as an annual percentage rate (APR). Annualized interest rates are good at comparing long-term financial products but they are misleading when evaluating short-term loans, particularly when these loans are often for only a week or two.

Most of our customers use these short-term loans to avoid more expensive alternatives like an overdraft fee or bounced check. Annualizing those fees with an APR model makes for scary and sensational numbers too, but it’s still an inappropriate measurement. Short-term lenders who are members of the OLA present clear and transparent lending terms and fees to its customers. We also endorse and respect only legal, respectful and fair collection practices.

Online lending has been the fastest growing segment of the short-term credit market for many years principally due to the consumer demand and increased convenience. We welcome Mr. Merrill into the industry precisely because this is an underserved community, and we will continue to advocate on behalf of lenders and borrowers so that millions of Americans can access this valuable service in the safety and security and privacy of their own homes.

To learn more about OLA’s best practices, including tools for consumers to help manage their finances and avoid fraudulent practices by unscrupulous lenders, I encourage readers to visit our website,

November 14 2011 at 6:56 PM Report abuse rate up rate down Reply

Americans love to borrow. They will pay back if you lend to families with young girls and boys then hold the girls and boys as collateral. That includes wives. Providing they are above the legal age, collateral can be photos or the streets. If we don't they will continue to go on a rampage invading and killing others then over spending.

November 11 2011 at 3:04 AM Report abuse rate up rate down Reply

You, say that "ZestCash says its rates are up to 50% lower than other payday lenders -- but some of that nuance is hard to calculate." It actually seems like you're just too lazy to do it. At ZestCash you say you would pay $550 in interest and fees and at Checkngo you would pay $1,789 - i assume that includes paying back the $800 you borrowed, so the interest and all is $989. So, $989 Checkngo - $550 ZestCash is a savings of $439. That's real money and about 44% savings.

November 10 2011 at 4:06 PM Report abuse rate up rate down Reply

this kind of a lousy economy needs more people like this who imagine doing all of this stuff

November 10 2011 at 3:38 PM Report abuse rate up rate down Reply


November 10 2011 at 12:46 AM Report abuse +1 rate up rate down Reply

He is nothing but a scumbag piece of crap.

November 09 2011 at 9:12 PM Report abuse +1 rate up rate down Reply

Build more prisons. Crush the economically disadvantaged into debt which they cannot ever hope to pay off. Come up with legislatively mandated sentencing for debt related defaults and infractions and then hire out the inmates to private companies via prison industries that have contracts with the States.

How long until "financial innovators like Merrill are on the lookout for new ways to milk profits out of this demographic" ?

November 09 2011 at 8:04 PM Report abuse rate up rate down Reply

Well if the bank for these quick loans are located in Delaware you will pay as high as 300% interest plus don't be late the charges mount quickly and you will end up paying back, for a small load, 3 or 4 times of what you borrowed. Does the Governemnt care NOPE, as most of them get money for theise slime bags!!! Nothing will ever change untill we the people make big changes in our Local, State and Federal Government houses!!!

November 09 2011 at 6:39 PM Report abuse +1 rate up rate down Reply
Timothy Hedrick

This needs to be illegal or regulated down to a reasonable interest level for high-risk borrowers. It's nothing but another name for indentured servitude of the uneducated or imprudent.

November 09 2011 at 5:47 PM Report abuse rate up rate down Reply