Loans Incentivizing Achievement Rather than Dependency
At age 22, recent George Washington University grad Julia Kurnia co-founded the world’s first microfinance organization built entirely from crowdfunding capital sourced over the internet, using funds raised from Kiva.org in Senegal, West Africa. She spent the next four years managing U.S. government grants to small businesses in Africa, gaining first-hand experience in the traditional system of development aid and its inherent corruption and inefficiencies while witnessing the internet revolution’s transforming possibilities for connecting people in the world’s poorest countries with needed global resources.
In 2009 Kurnia founded Zidisha, entering the multi-billion-dollar microfinance industry by starting an online community which bypassed expensive local organizations to allow people worldwide to lend small amounts to each other over the internet. Zidisha asserts itself as the “world’s first person-to-person lending platform to connect lenders and borrowers across international borders without going through intermediary banks.” The platform has overcome insurmountable barriers of geography, wealth and circumstance, according to Kurnia.
Kurnia’s candor inspires and instigates change. The Indonesian martial arts black belt (one of the few in the US) and mother of two eloquently addressed the potential disadvantages of being a female founder in a startup as part of the YC Female Founder interview series:
“I think people usually take women less seriously, often unconsciously. Size, having a deep voice, cultural associations– all these things make it easier for men to project strength and influence people than women.”
“In addition, I think it’s harder for women with family responsibilities to travel and have demanding careers than men. This is partially cultural: in most parts of the world, it is much more acceptable for men to delegate childcare and housework to their wives in order to develop their careers than vice versa. I think part of it is also inherent, in that babies and very young children tend to fare best when cared for personally by their mothers. Probably the biggest disadvantage, though, is the difficulty in finding a cofounder. Cofounders usually have a close social relationship and spend a great deal of time together. Since I am married, I wouldn’t work this closely with a male cofounder, and the population of potential female cofounders, especially technical ones like Zidisha needs, is very small.”
In a recent article, New York Times‘ reporter Claire Cain Miller addresses what entrepreneurial women risk in the Silicon Valley (and elsewhere), “In parenthood, too, there is a double standard. Mothers are penalized in pay and promotions because employers assume they will be less committed to work, research shows, while fathers get raises because employers think they will be extra committed to breadwinning…People in Silicon Valley say new motherhood is particularly difficult, because competition moves at hyper speed.”
I had the opportunity to connect with Kurnia via email and learn more about her pioneering work with Zidisha, its plight against corruption, difference from Kiva, comparatively low fees, Y Combinator payoff and balancing motherhood and entrepreneurship. Our interview follows:
Erin: What led to you to founding Zidisha in 2009?
Julia Kurnia: I have always felt that the international wealth divide was a defining challenge for my generation – like civil rights had been for my parents’ generation. When I was in grad school Tom Friedman published The World Is Flat, about how to create a direct lenders [Bridge payday] – and it really struck a chord. The internet was freeing more and more people from the constraints of physical location. Could it also free those most handicapped by their location – people who happened to have been born in the world’s poorest places?
In 2006 I went to Senegal to help a small microfinance organization raise lending capital from Kiva, a crowdfunding platform that connects lending institutions in developing countries with individual lenders in wealthy countries. I discovered there was a vast unmet desire in wealthy countries to help individuals in developing countries on a personal level.
But the Kiva system had a major flaw: the local microfinance organizations were charging exorbitant interest to the end borrowers to cover their operating expenses – 35% was the average interest, but some charged 80% or more. Even my own microfinance organization, which was partially volunteer-run and tried to be as frugal as possible, wasn’t able to get our overhead costs below around 30% of the value of the loans we were making. To be solvent without donation subsidies, we would have had to charge interest rates so high that they would consume most of the profit borrowers were earning from the loans. In 2006 this problem was not easily solvable: local institutions had to liaise with Kiva lenders on the borrowers’ behalf because ordinary people in developing countries still lacked access to the internet.
After grad school I spent several years working for the US government, managing foreign aid grants to small businesses in Africa. During those years the cost of internet in developing countries plummeted, and it became common for even the poorest young adults to use Facebook and email from cheap cybercafes. These advances made it at least technically feasible to bypass the inefficient local lending institutions that were taking such a large cut of the borrowers’ earnings, and connect lenders with borrowers directly. Nobody was trying it, though, so in 2009 I went to Kenya to pilot the idea that became Zidisha.
To this day, we are the only direct person-to-person lending platform to connect lenders and borrowers across international borders, without any intermediaries. Removing the local bank intermediaries reduced the cost to borrowers substantially – from the 30% – 40% that is typical of Kiva and developing country microloans in general, to just 5%. (Zidisha borrowers pay a service fee of 5% of each loan, and those who opt to start with higher credit limits pay a lifetime membership fee of $10 – $12 when they first join. There is no interest.)
Erin: Why microfinance? Why fintech? Why go global?
Julia: Microfinance loans have several advantages over donations. For one thing, once repaid they can be recycled to fund many more life-improving investments: $100 put into a Zidisha lending account, for example, funds on average $250 worth of loan projects per year. Also, they incentivize achievement rather than dependency.
Going global lets us arbitrage the difference in purchasing power between wealthy and developing countries. $100 is about what it costs to go out to dinner in New York. But in Nairobi, that’s enough money for a jobless youth to launch a restaurant. A global community makes it easier for people with ordinary income to practice transformative philanthropy.
Erin: Describe your role as a Portfolio Analyst for the US African Development Foundation during which you helped develop and oversee a portfolio of $10 million worth of U.S. government grants to small businesses in West Africa and its influence in your founding Zidisha.
Julia: Working with USADF was an amazing experience: it gave me the chance to spend time in places most people never get the chance to visit – Liberia, Guinea, Niger – and to work with some of the region’s most outstanding entrepreneurs. I also experienced first-hand the pitfalls of traditional international development management, in which organizations set up local offices to help distribute donated resources. I learned that corruption is almost impossible to prevent with this kind of structure. That is one reason why Zidisha has no offices, loan officers or staff in borrowers’ countries.
Erin: What was your breakthrough moment for Zidisha?
Julia: The power of direct person-to-person lending became clear when we disbursed the first loan, via the M-PESA mobile phone-based payment transfer service. By that time, I was back in Washington DC. The loan recipient was a Masai nomad who lived in a settlement over a day’s journey from any bank, paved road or electric grid. Reaching him physically would have been extraordinarily expensive and time-consuming. But I was able to sit at a laptop in my DC apartment, and instantly transfer the cash to his mobile phone on the other side of the world. It was The World Is Flat in action: using technology to connect someone in one of the most remote places on Earth to international resources. Then, when our early loans were repaid despite the lack of a local presence, we knew Zidisha could work. Since then, we’ve been building on that initial leap of faith.
Erin: What impediments to your platform’s growth did and do you encounter? What have you learned from these more challenging experiences?
Julia: In the early days, we were obscure and had no outside funding. I kept my day job and developed Zidisha on evenings and weekends for the first few years, channeling most of my salary into developing the website and funding loans. We relied on PayPal to accept payments from lenders, and during the first year PayPal shut down our account and froze our funds several times, because their system thought we were violating their policy against using credit cards for lending. (We weren’t, but we were too small at the time to have a human at PayPal review our case.) The same thing happened with other credit card processing services we tried. Each time it happened, it would bring fundraising almost to a stop for a month or more. Growth was slow for the first few years. In retrospect, this was a good thing, because it gave us the time to learn and adapt our lending model before we started facilitating large volumes of loans.
Erin: Why did you join Y Combinator during winter 2014? Please share details about the YC experience affected Zidisha’s lending marketplace landscape by eliminating non-performing loans?
Julia: I joined Y Combinator primarily to access advice and new ideas. In 2014, growth had stalled because the human-intensive vetting process we relied on at the time to control credit risk could not scale into the tens of thousands of borrowers. Zidisha was a technology startup, but I didn’t know anything about technology startups: my background was in international development and microfinance.
The YC experience was transformative. We began using machine learning and other automated, scalable tools to manage credit risk, so that we could safely grow our lending volume while remaining low-cost for borrowers. Zidisha today has more in common with online marketplaces like eBay, than with traditional microfinance organizations.
I wasn’t a technical founder originally, and I had to hire contractors to build our website. Later, after going through Y Combinator, I learned how to program and today write much of our website code myself. All this helped our growth take off again. In the year after YC, we doubled our lending volume, while improving repayment rates and the user experience.
Erin: How do you vet your borrowers?
Julia: Our vetting process has evolved a great deal over the years – it originally involved a lot of scanned documents, and having US-based volunteers conduct reference checks via Skype. Today, it’s much more streamlined for the applicants: we ask them to link their Facebook account, and fill out a ten-minute application form in which they give the phone numbers of several references. Our website automatically checks the Facebook account and application data for factors that we’ve learned predict high credit risk, and if it passes that check, human volunteers check some elements, including responses to automated SMS questions sent to the applicant’s references.
Applicants who are admitted may then choose to begin borrowing with a low credit limit ($20 if invited by a Zidisha member in good standing, otherwise $10) and pay nothing except the 5% service fee per loan, or they may opt for a higher starting credit limit (up to $150) in return for making a deposit into a reserve fund, which is used to reimburse lenders for loans that go into arrears. With each on-time repayment, the credit limit increases – so most of the “vetting” is actually done by the applicant’s own track record.
Erin: What advice do you have for other fintech innovators and disruptors?
Julia: If you have an idea that calls to you, then don’t wait – try it. Launch the smallest, cheapest version of your product that will allow you to test its feasibility, and keep improving from there. Don’t wait for external funding or approval – that is usually not forthcoming until you have concrete results to show anyway. Make sure to learn from the experiences of similar solutions, but don’t limit yourself to them – this field is changing so quickly that what was impractical a short time ago might work today.
Erin: Where have you witnessed exciting and effective efforts toward establishing equal gender representation at all career levels?
Julia: I think we’re starting to see a sea change in gender representation at tech startups, a field where women are dramatically underrepresented. Last year I was fortunate to participate in Women Who Tech, a crowdfunding and pitch competition supported by Craig Newmark (of Criagslist and Craigconnects), and the number and calibre of female founders there were impressive.
Y Combinator has also done a great deal to encourage more women to found tech startups. YC cofounder Jessica Livingston hosts a high-profile Female Founders Conference annually, and last year YC launched femalefounderstories.com, a huge collection of interviews with female YC alumni. These have put more potential female founders in contact with real-life role models. The percentage of female founders that YC accepts is in line with the percentage of in the applicant pool, and both percentages have increased steadily in recent years. More of those female founders are serving as CEOs of their companies, as well.
Achieving equal gender representation will also require a better understanding of the realities unique to female founders, such as the fact that a woman’s childbearing age often coincides with the optimal time of life for starting a company. At the time I was accepted into Y Combinator, I had a two-year-old child and a husband whose work prevented him from going with us to California. I ended up relocating to Silicon Valley for three months alone with my two-year-old and caring for him while working on my startup at YC. I gave birth to my second child last month, and the pregnancy and newborn care has limited my ability to travel to fundraising meetings. In the tech startup world it’s become the norm for founders to spend almost every waking hour at work. I think if that expectations were relaxed and there were greater acceptance of remote teams and flexible schedules, more women would be encouraged to start companies.