Can this tiny startup be the definitive lender for the world’s emerging middle class? by Jessi Hempel @FortuneMagazine March 18, 2014, 7:34 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — A big challenge for people in an emerging middle class who are struggling to find avenues to credit is that they rarely have formal credit histories. They do, however, have social networks — rich communities of family members and friends who can vouch for their character and credibility. And increasingly, as smartphones open up the Internet’s opportunities to growing numbers of people, they have online social networks that mirror their communities. Enter Lenddo, a financial technology startup that calculates the risk of making loans to people in the Philippines, Colombia and Mexico based on social data. “Social network use in our demographic in the Philippines is heavier than in Northern California,” says Jeff Stewart, the site’s CEO and co-founder. Lenddo is betting that the digital exhaust of loan candidates offers better evidence that they can repay a loan than what’s provided by a traditional credit score — especially for people just entering the middle class, a group Stewart estimates to include 1.2 billion people. Their behavior on these networks, as well as the ties they have to others, provides a rich source of data about their character. The Hong Kong-based company has $14 million in capital from Accel Partners and others, and also owns the institutions in each country that fulfill the loans. MORE: Banks may be lending too much Stewart and his co-founder, COO Richard Eldridge, started the company in January 2011 after they realized that employees living abroad at a former tech company weren’t able to access loans easily. To seed the model, they relied on principles of microfinance pioneered by Muhammad Yunus of Grameen Bank. Lenddo members are able to vouch for each other’s character when they apply for a loan, and then they lean on their peers to repay loans. If someone fails to repay, his social connections see their credit fall. If he pays on time, all the connections in his network will see their credit scores improve. Lenddo loan recipients, however, make roughly ten times what microfinance borrowers make. The typical loan recipient might be an employee at a call center in the Philippines, making $450 each month, and whose parents made just $55 monthly. A typical loan is for around one month’s pay, and loan recipients are encouraged through Lenddo’s marketing materials to use the loans for education or health issues. Default rates match those seen in the microcredit sector, though Stewart points out the transaction costs are lower. The company has made tens of thousands of loans to date, and has plans to launch soon in 20 more countries — including Indonesia, Brazil, Russia, and China — where an emerging middle class is both healthy and lacking access to credit.