Money is the main reason 26 percent of American millennials boomerang back home to live with their baby boomer parents, and why so many other millennials rely on parental assistance long after college graduation.
About 63 percent of all millennials don’t have a major credit card and more than 86 percent of those seeking loans are declined or charged sky-high interest rates. That leaves millennials hard-pressed to build a credit history and declare financial independence from Mom and Dad.
The founders of the Israeli company Backed say they have a solution that benefits both generations.
By reinventing the co-signing process and using machine-learning algorithms cooked up in the company’s Tel Aviv R&D center, Backed’s online platform allows parents (“Backers”) to lend their credit history to their children in order to help them secure a loan at attractive rates.
Already up and running in New York, New Jersey, Florida, West Virginia and Arkansas — the five states that do not require a lender’s license — Backed recently raised $1.5 million in seed funding toward a national rollout by the end of 2016. Vice President and co-founder Gilad Woltsovitch explained how Backed will achieve that goal by partnering with federally insured banks in the other 45 states to administer the loans originated on the Backed website.
Woltsovitch said that taking co-signing risks out of the equation is among the unique aspects of Backed.
“Other lenders approve or decline, period. We’re the only ones that have a progressive loan application. You qualify if you have a Backer who qualifies, and you can optimize your [interest] rate by adding another Backer or connecting with other accounts. What’s also unusual is that we digitized the whole co-signing experience,” he said.
Backed’s novel risk model is another factor that differentiates it from competitors (such as Upstart) in the loans-for-millennials space.
“Ordinarily, co-signers are exposed to the risk of having to pay the whole amount if the loan defaults,” Woltsovitch said. “Traditionally, they are notified after the default when there are already accumulated fees and penalties, and by that time the child’s and parents’ credit scores are damaged.
“We offer Backers the opportunity to control the status of the loan. The moment there is a failed payment, both borrower and Backer are notified and have 15 days to pay the missing amount without any penalty. If there’s an ongoing problem, Backers can jump in and cover the missing amount before the credit bureau finds out about it.”
Like many Israeli startups, Backed has a personal backstory. In this case, it was Woltsovitch’s experience in the American credit market as a non-U.S. citizen.
Arriving in the United States in 2008 after earning his master’s degree in art sciences in Holland, Woltsovitch soon had a steady income and savings. Yet without any credit history, he was forced to pay a lot of money up front for an apartment and was subject to higher fees and rates on loans.
“That is how I encountered the problem with the credit system and how it’s challenging to kick-start your credit record,” he said.
That year, a worldwide financial crisis resulted in regulatory measures that severely limited access to unsecured loans and credit cards even for young adults with U.S. citizenship. In 2013, Woltsovitch and Israeli venture capitalist Kfir Moyal started the research that led to co-founding Backed in mid-2014.
“We saw a huge boom in online lending, but about 90 percent of applicants are rejected for credit,” Woltsovitch said. “Then we learned about peer-to-peer lending. We really like emerging industries and we wanted to see where there was space for optimization and improving conversion rates.
“That is where we came up with [the] idea of [a] parent lending kids their credit score rather than cash. We believe this solution helps both sides because it allows kids to build a credit history and relieves the financial burden on parents.”
With its headquarters in New York and its R&D in the WeWork co-working space in Tel Aviv, Backed plans to allocate about half its new cash infusion to further developing its product and employee base, and half to customer acquisition and revenue growth.
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