ZestFinance raises $20 million from Thiel Capital

SAN FRANCISCO (Reuters) - ZestFinance, a company that licenses out its technology to minimize the risks in making loans, is getting a cash infusion from an entrepreneur who figured out how to make money transfers on the Internet: PayPal’s Peter Thiel.

Thiel Capital is leading a $20 million investment round in ZestFinance, joined by Northgate Capital and existing investors Lightspeed Venture Partners, Matrix Partners, Kensington Capital Holdings, and Eastward Capital Partners. Thiel Capital will take a board observer seat; its founder co-founded Ebay's EBAY.O PayPal.

Since its last financing round in January 2012, ZestFinance has changed focus from making loans itself to licensing out its technology. The company uses sophisticated algorithms and far more data points than traditional lenders to suss out good credit risks.

“Everyone thinks underwriting was solved in the 1970s by Fair Isaac,” said ZestFinance Chief Executive and co-founder Douglas Merrill, talking about the company that provides FICO credit scores. “But it wasn’t.”

One customer is Spotloan, a subprime lender owned by the Turtle Mountain Band of Chippewa Indians in Belcourt, North Dakota, which uses ZestFinance technology to make loans at rates it says are about half those charged by payday-loan lenders.

ZestFinance is exploring working with insurance companies, credit-card lenders, and others, said co-founder and Chief Operating Officer Shawn Budde, to help evaluate borrowers of all different income groups. Budde was previously manager of the subprime credit-card portfolio at Capital One COF.N.

The company last raised $23 million in equity in January 2012. Including the latest round, ZestFinance will have raised a total of $55 million in equity.

Reporting by Sarah McBride; Editing by Phil Berlowitz