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Mexico: Business loans verified via Facebook?

If you have no credit score but you have more than 150 Facebook friends you might still qualify for a personal or business loan in Mexico, where a handful of startup companies are breaking into the business and personal loan market by offering cheaper, faster, and easier to get credits than traditional financial institutions.

This model has evolved in developing countries where traditional financial institutions have been slow to expand credit to a growing middle class, and in some cases failed to offer basic banking services in certain regions. Mexican online entrepreneurs seem to be leading the way in Latin America. The business model appears to be going so well that local banks and venture capital in the US are trying to jump on board.

Prestadero, Credilikeme, Kubo.financiero, Kuesky, ElmejorTrato, Kredito24 are some of the companies that during the last two years have been competing for a share of the $15 billion market with one of the most profitable interest rates for microcredits in the world.

Most of these companies are intermediaries using the person-to-person loan (P2PL) model born in Britain 10 years ago with Zopa and Funding Circle. The novelty with this generation of microcredit focused electronic lenders is the way they determine risk.

When, Armando Kuroda, funder of Credilikeme built his model in 2011, he believed that one could better identify a 20 year-old through his uploads on Facebook than through his voter ID. So, most of these companies rely more on the client’s social reputation and network than on his credit history. They are a solution for students, people without credit history and anyone without the means to prove that they will be able to pay back the loan.

Just last month, Credilikeme received 1000 loan requests, showing a substantial demand for the service, although the approval rate can sometimes be as low as 6-10% as Kuroda explained to IDG Connect.

Although each app has its quirks it mainly work this way: You have more than 150 Facebook friends, you have some of them “like” (endorse) your loan request and if nobody complains about you returning a damaged tool or an empty gas tank when you borrowed their truck, or some other negative anecdote, you are all set to get a deposit into your account.  You can get a response as fast as within two hours like that offered by Kueski, an app that lends students up to 5000 Mexican pesos ($343 USD), or even in 15 minutes as promised by Kredito24 which lends up to 3000 Mexican pesos ($205 USD).

Is it all about trust? No, says Gerardo Obregon, founder of Prestadero, a website that recently passed the milestone of 40,000 approved loans. Obregon explains they have come up with an algorithm to determine whether endorsements on Facebook come from actual people and that their relationship with the potential client is real. Also an extremely bad credit score can affect the possibilities of getting the credit approved.

Interest rates depend on the client’s online reputation. Once they build trust they are compensated with lower interest rates, longer payoff time and access to higher amounts. But the general rule is that interest and commission fees run much lower than in any financial institution. This is something that Mexicans can easily find out by using another startup website called Elmejortrato (the best deal), which helps users find the best lender by entering the amount and the time frame.

Although these companies have rapidly spread in Latin America, they seem to have ideal conditions for success in Mexico. More than half of the Mexican GDP comes from small and mid-sized entrepreneurs, many of whom rely on small loans to start their businesses but don’t have access to traditional banking, as found by the World Bank in a 2014 study. This is a problem that the McKinsey Global Institute says accounts for three-quarters of the estimated $60 billion credit gap in Mexican businesses.

The 27.5% of the adult population with access to formal credits face the highest interest rates in the region, an average of 63.1% versus 28.3% in the rest of Latin America and the Caribbean, according to a Financial Inclusion report by the IMF, a profit margin that the average small entrepreneur can’t afford.

With interest rates between 10 to 60 points lower than those offered by the banks, these startups have a strong motivation to multiply, because they can still make good profit while helping a group of the population that otherwise could not start or improve their businesses, consolidate their debt or recover from a bad credit score.

Culture and social media penetration have also been fueling the electronic microcredit market. More Mexicans prefer to borrow money from a relative or a friend than from the bank, as found in a study by the National Bank and Brokers Commission (CNBV by its acronym in Spanish). The electronic loans that use social media capitalize on this tradition in a universe of Mexico’s nearly 50 million active Facebook users, according to Facebook’s director for Mexico and Central America, Jorge Ruiz Escamilla.

The success of this model and the size of the market for the service have drawn attention and venture capital from local financial institutions and Silicon Valley investors. Kueski, for instance obtained $1.3 MM from CrunchFund, Core Ventures Group and The Sobrato Family Holdings among other organizations that had never before lent money to entrepreneurs in Latin America.

“I have never seen such an intelligent team in Latin America before. Their sophistication level caught my attention, and I am very exited with the opportunity to build an alternative, better way to evaluate credit risk in developing countries such us Mexico where loans are much needed,” said Patrick Gallagher, a funder and partner at CrunchFund.

Back in Mexico, some brick-and-mortar financial institutions are trying to reduce the gap between their vertical way of doing business and this new model. Some have even courted these entrepreneurs with venture capital. In turn, some of these young pioneers are flirting with the idea of becoming banks.

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Ligimat Perez

Bilingual freelance journalist based in Los Angeles following a career in journalism in Latin America for CNN, Venevision and the United Nations.

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