What if you need money fast before your next paycheck? What if you have bad credit and can’t get a loan from a bank? You’d likely turn to what is known as a payday lender for a short-term loan.

You would not be alone. A 2016 Pew Charitable Trusts report found that 12 million Americans take out payday loans each year and spend $9 billion on loan fees. The average payday loan borrower is in debt for five months of the year, taking out eight loans of $375 each and spending $520 on interest.

According to the federal Consumer Financial Protection Bureau, a payday loan is a short-term loan of generally $500 or less due on a person’s next payday. Depending on individual state laws, these loans may be available through storefront lenders or online.

But these loans come at a high cost. Many state laws set a maximum amount for payday loan fees ranging from $10 to $30 for every $100 borrowed, according to the CFPB. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate of almost 400 percent. By comparison, APRs on credit cards can range from about 12 percent to about 30 percent.

Blockchain provides the incentive for banks to lend to those who don’t have credit scores.

Meje Tuyo thinks the payday loan industry is ripe for disruption and he wants to do it using blockchain technology. Specifically, Tuyo wants to deliver more equitable access to loans through Owo, a startup venture set to debut this fall. The company’s name means “money” in the West African language of Yoruba.

Tuyo, a native of Nigeria, is looking to, at first, address the challenges of African Americans, a population that relies more on payday loans than other groups. Another study from the Pew Charitable Trusts from 2012 found that 12 percent of African-Americans had taken out payday loans, compared with 4 percent of whites and 6 percent of Hispanics.

“The focus is to use blockchain to address some fundamental economic issues for, largely, African Americans,” Tuyo, the CEO of Owo, tells ThirtyK. “That pain point usually starts with economics, currency and access to capital.

Smart Contracts

The company plans to launch an app called Pazima, which will allow consumers to request loans that will be automatically repaid when they receive their paychecks.

Blockchain provides the incentive for banks to lend to those who don’t have credit scores, Tuyo says. That’s because loan repayment will be triggered through smart contracts running on the Ethereum platform that trigger automatically when certain programmed conditions are met.

For example, a paycheck deposit could trigger an automatic withdrawal of the loan repayment as long as that trigger is programmed into the contract. Interest rates will vary depending on the bank, according to Tuyo, but will be dramatically lower than those 400 percent payday loan ratesParticipating banks will be able to program their own underwriting rules. For example, a bank could require a borrower be employed for at least six months.

Tuyo says the company is in talks with a number of banks including OneUnited Bank, the largest African-American-owned bank in the U.S. Owo is internally funded for now and is hoping to close a seed round of financing by the end of June.
Easy to Build Credit

Owo is not the only technology company offering services aimed at helping consumers avoid the traditional payday loan industry. Earnin, an app, allows workers to make limited withdrawals from their wages before payday. And SoLo is a peer-to-peer lending platform that allows people to borrow from or lend to anyone in the country using a mobile device.

The advantage of Owo, Tuyo says, is that it essentially plays matchmaker between banks and customers who don’t have a FICO credit score. Banks win by gaining new customers. Consumers win by being able to build their credit. The foundations on which blockchain is built, transparency and immutability, are invaluable in establishing a “different kind of financial reputation” for economically underserved individuals, Tuyo says. “Their income, payments made to the bank, are recorded in the ledger, and simply by connecting to the blockchain banks can see all that information and make a fair assessment of that individual.”

Tuyo says he is in talks with companies such as Walmart to include Owo as an employee benefit. A Walmart spokesperson was not able to confirm if Walmart is in talks with Tuyo about Owo.

“Payday loan sharks make a ton of money on the backs of people who just don’t have it,” Tuyo says. Our goal is to disrupt this industry and to deliver economic equity to the people who need it most.

Poornima Apte
Poornima Apte's work has appeared in Vox, Ozy and AAA Horizons. She writes regularly on technology issues.