PODCAST TRANSCRIPTION SESSION NO. 187 / NIMA GHAMSARI

Welcome to the Lend Academy Podcast, Episode No. 187. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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Today’s episode is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s going to be happening April 8th through 9th, at Moscone West in San Francisco. We’re going to be covering digital banking, blockchain, financial health and of course, online lending as well as other areas of fintech. There will be over 5,000 attendees, over 250 sponsors and registration is now open. Just go to lendit.com to register.

Peter Renton: Today on the show, I am delighted to welcome Nima Ghamsari, he is the CEO and Founder at Blend. Now Blend is a fascinating company, they are really a software company that has built a platform, a digital platform, for simplifying the mortgage process. They’ve been very successful, they’ve got banks, all the way up to the size of Wells Fargo, down to community banks on their platform and they’re able to bring the mortgage process interestingly into a mobile device where people can complete the entire process on their device.

So we talk about how they’ve done that, we talk about what’s preventing mortgages from being processed in a more efficient way, we talk about how they’re able to get a large bank like Wells Fargo on board and we talk about their marketplace. They have a new Blend marketplace, we talk about anti-fraud and the addition of a very high profile advisory board member that they recently added. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Nima!

Nima Ghamsari: Thanks for having me, Peter.

Peter: Okay, my pleasure. So I like to get these things started by giving the listeners a little bit of background about yourself. I’d like actually to start…tell us about your story and how you came to the US and also your professional background.

Nima: Sure, so I was born in Iran and my family immigrated here in the 80’s, came here, became academics. I grew up in the Midwest, in Ohio, and you know one of the things that I was very fortunate to see was the impact that buying a home can have and my parents, they got a mortgage 20 years ago with very little money down, there was almost no money in their savings to put any money down.

They were able to get that mortgage 20 years ago and now they’re able to retire as a result. That house is fully paid off, it’s an asset, they just sold off and now they’re able to retire. So I guess that’s kind of one of the things that made me passionate about this industry is seeing my family directly impacted by it and of course, there are millions of other stories like that.

Peter: So then did the idea for Blend…is this something that germinated in your childhood or is this something that, you know, I know you’ve got a computer science degree from Stanford, when did you first think about the idea that was behind Blend?

Nima: Well I think almost nobody leaves college and says, I want to go build a mortgage technology company (Peter laughs) because almost nobody in college has gotten a mortgage. So I definitely didn’t think…I was at Stanford, I was getting my computer science degree, you know, my sister had gone into financial services, on the trading side, just before the crisis and then in 2008, when I graduated, it was just before the crisis hit and I was considering between going to financial services and joining the company that she was or one of the other companies out there in New York or staying in tech.

It was a tough decision because I did really think that there was an opportunity on both sides, but ultimately I ended up staying in tech and saying, you know what, I got great advice from a fellow entrepreneur who turned to me and said, Nima, if you ever want to build anything great, you should probably stay around here and work in tech because you can’t build things in New York, you know caught in this web. So anyway, I ended up joining a tech company here, it was Palantir in 2008, it was a fantastic experience and right then the entire financial services ecosystem started to collapse.

You know, Lehman Brothers went out of business, Citi, all of the others started to go down so I obviously looked like a genius because I hadn’t made the decision to go out there just a few months earlier, I looked like I had predicted something (Peter laughs), but it really was just luck. I was passionate about technology and in this crisis, a big part of Palantir’s business right after the crisis was working with the financial services institutions on their mortgage books to help them find better alternatives to foreclosure so that was how I got introduced into this space.

Peter: Okay, so you were introduced to that and you saw obviously a lot of people lost their homes, then what did you actually do? When you started the company, what was sort of the idea that really drove you to go and do this yourself?

Nima: As we were working with the financial services institutions on their mortgage books, I saw that basically everything that was being done in that space was being done using 20, 30, 40-year old technology and it was all paper-based. It was really bad for consumers because when you’re doing a bunch of paper-based things, it’s not the modern experience that people are starting to expect, it’s bad for the lenders, it’s high cost.

It was something that they couldn’t sustain as the other parts of the ecosystem were becoming more digital and it was bad for the system as a whole because, you know, I think…not to say that the crisis was caused by a lack of technology, but technology creates transparency, especially around data, a set of documents would have made it so much harder to make mistakes or do all the things that ultimately led to a lot of loans not going through and being as successful as they were.

So I felt like there was a real opportunity and to the earlier point I made around why consumers or why college students don’t leave college and go into mortgage startups, I was in this unique position, in 2012, when I saw this big opportunity, this big gap and this big impact, I felt like nobody else was going to do it if I didn’t do it. I felt like I as a technologist who had seen this space and really understood this space to some extent would be able to go in and make a real impact by building a team and working with the ecosystem.

Peter: Okay, so let’s just step back for a second. Why don’t you just explain exactly what Blend does, give us sort of the elevator pitch.

Nima: Sure, so what Blend does is we…it starts with the consumer when they’re first getting ready to apply for their loan and instead of asking you for a bunch of documents, as a consumer we ask you to, if you want, to aggregate your data instead. The benefit of this data over documents for consumers means that things can be done in a few taps for a consumer and all the information that’s needed to underwrite you as a loan holder would be instantaneously collected by the lender using our software.

We partner with lenders, we’re not a lender ourselves, we offer software as a service to the lenders, it’s a white labeled solution or grey labeled powered by Blend and that technology then in real time evaluates the data, gives the consumer an approval and then gives them a one-stop shop shopping list of here’s the next seven or eight items you have to do to close this loan.

And that’s the idea, creating that one tap or close to one tap approval and then that one-stop shop for consumers. I think that’s where sort of consumer behavior is driving across all different industries, but financial services will be, you know, I think pretty much all like that in the next five or ten years.

Peter: I notice you said one tap and not one click, is this really optimized for mobile? Is that where most of the people are coming from?

Nima: Yeah, especially in certain segments most of the traffic comes from mobile these days. In fact, when we started the company, people thought mobile didn’t make any sense to focus on because it’s such an important lending decision and it’s such an important consumer life decision, but it doesn’t mean it has to be a high friction decision.

It should be a highly thought out process, there should be a lot of education there, but it doesn’t mean it should be a high friction process and so making it so it can be mobile friendly….you know, 56% of people on our platform who are aged 30 to 40 applies on their mobile device. It’s not much lower for the next age band and so…and similar, especially with low income households when we’re talking about accessibility of credit. They are three times as likely to use a mobile device as a high income household and it’s because mobile devices are ubiquitous now and being able to have a mobile first experience means that there are certain populations that were previously really difficult to get to, that now people can serve. Those people might not want to go into a branch and go and talk to a banker before they know what they can afford.

Peter: Right, right. So I just want to dig in a little bit to the process so all the listeners can understand and I can understand it. So you said you sort of aggregate data…when someone is applying for a loan on a Blend-powered product, what are you actually doing? Are you connecting bank accounts, how are you able to sort of aggregate the data?

Nima: We connect to bank accounts, we connect to the bureaus, we connect to payroll accounts, we connect to tax accounts, the IRS. Essentially the idea is, you know, the consumer shouldn’t be messing with the data, the lender shouldn’t be messing with the data. The data should be coming from a verified third party and if it’s machine readable instead of a document, we can evaluate it in real time.

So one example of this process would be in the old way, let’s say you’re applying for a mortgage at ABC Bank and you go through as a consumer and they ask you for a bank statement. Of course, they need to know that you have enough money to get the mortgage and so they ask you for the bank statement, you provide the bank statement. A couple of days later, maybe somebody reads that bank statement, flags a few different items on there, checks to make sure the total balance is enough.

Then as they flag they go back to you a couple of days later with, hey, here’s the items that I need from you, Peter, in order to finish this loan. And they send you an e-sign or worse an actual physically signed document that they need from you and then you do the work on that, you send it back to them a couple of days later and this is why the mortgage process becomes so frustrating. There are hundreds of examples of these things.

With Blend, the alternative, you know, the new age way of doing this is…not everyone is forced to aggregate their data, but the ones that want to can, but the new age way of doing this is a consumer shows up, they connect their accounts for their bank account, for instance. We, in real time, verify the assets that are in the accounts to make sure they’re enough. In addition to, we extract income streams that are in that asset statement and we verify with the consumer in real time and then we also look for things that might be the anomalies that a bank might look for a week or two weeks later.

So for instance, you’re not supposed to have large deposits in your bank account that are loans from friends and count that towards your down payment. Another loan that counts for the down payment, kind of increases the amount that you’re being loaned so it needs to be accounted for properly. So if we flag those things in real time, instead of an underwriter finding it in a week, two weeks later, we can have a consumer explain it in real time, we can have the underwriting team get a certified document that tracks who and when that was found, where and when that was found, who signed for it, etc. and have that filed over in the right folder behind the scenes.

There’s no loss of information and there’s a full audit trail. So creating that one tap consumer aggregation and then one tap of all the anomalies that need to be tracked in a mortgage process in real time in our system is part of the intelligence that we hope to bring to the process more broadly.

Peter: Okay, so what about, like the documents that often times, you know, you have to go through anti-fraud, there are certain things that the process requires, is that all like a mobile experience, like can you take a photo of your driver’s license and send that in or how does it work?

Nima: Yeah, so we have a whole marketplace of providers that provide things like identity verification to ensure that the person who says that they’re this person is actually that person and that’s mobile friendly, we have the ability to take photos and grab a driver’s license and then scan that in, we have the ability to…and by creating this more marketplace approach, we enable these third party providers who are providing these services to integrate against a standardized platform that’s being used by a huge amount of the industry and then have that technology innovation happen much faster.

Peter: So then…I mean, it’s still…you know, when you talk to people today buying a house, most people are still having this sort of 6 to 8-week nightmare that’s sort of extremely stressful. How long do you think it’s going to be before that nightmare is over for the vast majority of consumers and they’re going to be in a more, you know, digital stream where maybe you can close in less than month, how long do you think it’ll be before that happens?

Nima: So I think the key inflection point for when mortgages become…the timeline compresses greatly, there’s probably two that are top of mind for me. The first one is when there’s enough adoption of this data instead of documents because then the information around assets, income, credit, employment are evaluated in real time and we see that compressing the timeline up to 20 days with some of our customers, we’re doing this in real time, what they call instant decision and that’s huge and that’s a big, big part of it.

And then the other part on the collateral is how do we get smarter and smarter about how we evaluate the value of collateral such that, you know, an appraisal that typically took seven to ten days to get back, we can have back sooner. How do we get a better marketplace for that, how do we find better information for the…maybe we don’t need an appraisal on some smaller number of cases and over time make that more of a digital process. So I think there’s two major bullets and if we can solve both here at Blend we can cut the time down to the minimum required by law.

Peter: Right, which I think is what, seven days, ten days, it’s pretty short, isn’t it?

Nima: You can have a mortgage in ten days, yeah.

Peter: Ten days, yeah, that will be nice. Can you tell us some examples of who are some of the banks or non-banks, for that matter that you’re working with today?

Nima: We did about $230 billion in mortgage applications last year. We work with banks ranging from small credit unions to some of the biggest banks in the world, Wells Fargo uses us, US Bank, down to small, you know, sort of credit unions and independent mortgage banks. We aim to be a system that’s sort of able to serve the entire ecosystem.

Peter: I imagine it’s a pretty different…I mean, a small community bank or credit union is going to be different to Wells Fargo. I imagine when you’re implementing this process…so just talk about Wells Fargo for a second, I mean, if I go and apply for a loan at Wells Fargo today, will that be using Blend technology or is it just a subset of what they’re doing?

Nima: If you go and apply on their website, you would be using Blend.

Peter: Okay, I guess, if you’re applying in a branch in person that’s probably their old system, I take it.

Nima: It sort of depends by channel how it’s being used.

Peter: So what was it like, I mean, how did you get a bank like Wells Fargo to get over the line and say, right, we need your technology. I mean, they could have built it themselves clearly. I’m sure this wasn’t an easy exercise for you so just tell me a bit about that process.

Nima: So I think there was a big shift that happened in banks and I don’t know exactly why or the exact moment it happened, but sometime in the last seven or ten years, there’s been a greater desire within the banking ecosystem of wanting to partner with financial services technology companies like ours, and I think part of the reason is because the rate of change of consumer behavior has gotten so great that speed has become king.

So if we can divvy up the work, you do this part, I do this part, then we can necessarily be faster than the alternative. And so I think that there’s been a great shift towards the partnership model which is very appreciated from I think both sides of the equation. I don’t want to have to go and build a lender and I don’t think, you know, as a bank you want to necessarily have to build all of your own technology anymore. There are parts that are really worth using out of the box and those are the parts that we aim to build and make available to the marketplace.

And so a lot of it has been first aligning on that, you know, here is what it takes to partner, here’s what a good division of responsibility is and here’s how we can get to our end goal the fastest together and aligning on speed of execution, aligning on iteration, aligning on not heavy customization because customization becomes a bit of a depreciating asset where now you have something that is being used that is no longer being supported because it’s custom by definition and so how you continue to grow when that’s the case.

So there are a lot of things that need to be philosophically aligned on to partner with a financial service institution or vice-versa for a financial services institution to partner with a fintech, but getting aligned on those things first and upfront has been critically important because without that alignment, I think we would have ended up sort of dying of indigestion as a small company.

Peter: Right, right. Do you think in ten years time, this is sort of going back to the question I asked before, but do you think in ten years time it will be impossible to walk into a branch and take out a loan, or do you think that that’s really going…taking out a mortgage loan, do you think that’s going to take a lot longer then ten years for that to disappear?

Nima: You know, Peter, I would say that that’s probably not the goal, right, if you go into the Apple Store, there’s this Genius Bar, there’s people who are helping you, there’s great ability to understand the products better. And granted these are physical products versus digital products, but I think that the physical retail world in some ways is just changing.

It’s becoming, I think, more consumer first and finding those really…I guess, if I can back up a second, the thing that I am focused on is there’s a really large spectrum of consumer behavior, many of whom want to talk to a human and want to talk to a human in their way of talking to a human, whether it’s in person or over the phone or on an online chat. I don’t think that that’s going to change, whether you’re buying an iPhone or you’re getting a mortgage, or buying a home, or whatever it is, I think that spectrum is going to exist forever, maybe not forever, but for a long, long time and we want to be the ones to enable that spectrum of behavior to be satisfied by the institution’s user software.

Peter: Yeah, yeah, fair enough. So I want to talk a bit about some of the things that has happened at Blend in recent months. You launched the Blend Marketplace last year, so why don’t you explain what that initiative is and what you’re trying to achieve and the traction that you’re getting.

Nima: One of the things that we have realized as we’ve gotten a lot of penetration into the financial institutions has been that we do a lot of volume, it was a lot of money, a lot of time it took to get those financial institutions on our system and continue to grow them. We realized that we, as the technology company, can no longer keep up with the demand of things that want to be built against our system.

We were getting approached by partners constantly saying, hey, can you integrate this thing, can you integrate this signing technology, can you integrate this closing technology, can you integrate this data source, can you integrate this credit provider and there’s so much that’s happening in this world now, there’s so much innovation that’s happening.

I didn’t want to be the bottleneck and I didn’t want to have our team build everything anymore for the things that…and I realized partnership was the best strategy, similar to what I had talked to the banks about, similar for us was how do we create a better set of partnerships and how do we enable our partners to do the things that they do best which is innovate and not be bottlenecked by us on our roadmap and our product roadmap.

So we created this marketplace to enable precisely that, the ability for a third party who is interested in integrating with Blend an open set of APIs in around certain parts of the process where they can build essentially an app and make it available to our customer base in a standardized way. And hopefully that means that they’re going to get in more doors, they’re going to work with more lenders and also for us, it means our customers are going to get more value. For our customers it means their customers, the consumers, are happier because the process is more connected and simpler.

Peter: So can you give us some examples of the type of companies that are in the marketplace?

Nima: Sure, so we have a number of CRMs that connect to Blend. You know, a lot of different banks use different ways of managing their customer relationships and so information asymmetry is not a good thing, you want to have the same information in both systems. The CRMs are connected to our marketplace and the data in one shows up in the the other and vice-versa, as an example.

Also, some of the lead gen providers, the online marketplaces that point out to or link out to our lenders from their online search tools like LendingTree, they connect to Blend. Credit providers, there’s so many different credit agencies out there, we want to be able to support them for our customer base; they’re connected in our marketplace as well.

Peter: Okay, okay, but interestingly you also launched I was reading an insurance agency last year, it’s interesting that you chose to…I’m curious to know why you chose to do that as opposed to just adding them into your marketplace and connecting there, and is this a standalone business or are you really just…is this really to be offering insurance inside the Blend software?

Nima: Well that is actually done through partnerships as well, the insurance marketplace was done through partnership as well, Peter, where we partner with a number of carriers and we show them as a marketplace to the consumers at the right point of the process. We do not do this as a standalone, we only do this as part of the mortgage process because we want to streamline the mortgage process for our customers and their customers and we are sort of…the mechanics of being able to create a marketplace like that is we have to become a licensed agency and so we did that.

And then we created the partnerships, got them in the marketplace. Now a consumer can go in and in a couple of taps, get a full quote for insurance from a number of carriers and create kind of the best possible experience for them.

Peter: Right, okay, okay, that makes sense, that makes sense. So I want to talk about anti-fraud for a minute because, you know, in the financial crisis anyone…you could lie, they even called them liar loans I think, you could sort of lie on your application about how much money you earned and that sort of thing. I’m not so much talking about fraud insofar as someone is trying to really steal money, but they’re trying to get a mortgage that they really don’t qualify for. So how are you combating that today with your software?

Nima: I think to the credit of the system that’s in place now, it is very, very difficult to get a loan that you’re not qualified for because there’s so many requirements around verifying assets, income, credit, etc. that are required to be done now which were not necessarily required to be done before. The problem that’s created is that’s created a lot of overhead, I shouldn’t just say overhead, a lot of human capital…using technology powering that for most lenders and so what that means as a lender is, mostly before it was you would collect a bunch of documents and read through it and then flag things and go back and forth, the process I mentioned earlier. The problem with that approach is there’s still some possibility of fraud because those can be altered.

So if somebody doesn’t catch something in reading through the documents or catch an inconsistency between your pay stub and your bank statement, you know, maybe there’s a possibility that there’s still some fraud. Now what we do is we go and we get the data from the source and it’s not altered by the consumer or the lender, it’s purely a third party that shows up in Blend and it can’t be changed and I think that’s a huge benefit because not only is it cheaper and a better experience, but because it can’t be changed, we can be really sure the data is the data that should be used to underwrite that loan.

Peter: Okay, okay. So I want to talk about a big name that I read that’s joined your advisory board Jack Lew, who’s the former Treasury Secretary, certainly a very significant name in the world of finance, how did you get him interested into joining a company like yours?

Nima: I think we had a shared belief that after the crisis, things could be better. He had a very different view, obviously, we came from different perspectives where he has a very policy perspective on things and I have a very technology perspective and I was introduced to him through an investor and we talked about some of these things and it just felt like a really good fit and something that he could help us to accelerate, in terms of understanding how to fit in with some of the aspects of other constituents in the industry, policy, etc. So we had a common, I guess, vision for how things could be and were able to come to an understanding that it would be good to work together.

Peter: I’m curious about the policy piece.  Is he helping you navigate that world because certainly there’s a lot of…I mean, Washington has still…there’s Dodd-Frank and all sorts of other things in place that are impacting the mortgage industry, so is he helping you navigate that world or is there something specific that he’s working on?

Nima: I guess from a high level perspective Blend as a company has been paying attention to compliance and policy since we were founded because mortgage is such a regulated space…

Peter: Sure.

Nima: ….and (inaudible) we’ve reached volume where we have to and our customers won’t even use our product if we don’t. Where he’s really helpful with us right now is we have a few kind of special projects that we’re working on that will be incredibly impactful, technology projects that will be incredibly impactful if successful and are also, I guess, somewhat complicated from a policy perspective in a good way, right. These are things that will be really, really good for consumers and really good for all sorts of constituents in the industry, but we had to find a way to navigate all that and that’s where he’s been really valuable.

Peter: Right, right, got it. Okay, so I think you mentioned this earlier, but I’d love to know…tease a little bit out about the scale you’re at today, how many employees you have, I mean, how many mortgage applications you’re processing. I’m curious even about what percentage of US mortgages are going through Blend’s systems now. Do you have some of that info?

Nima: Yeah, we did about $230 billion last year, I think we’ll do a multiple of that this year because we have a number of customers who are scaling up mortgage applications. Our customers represent more than 25% of the mortgage market, we had our best…you know, despite I think there’s some macro things, interest rates, things like that, that are in flux, and despite that we had our best volume weeks ever in the first couple of weeks of this year already which is fantastic to see our lenders thriving in a difficult environment. We have 350 employees spread from the West Coast to the East Coast, mostly in San Francisco, although we have a pretty big New York presence, and we’re growing pretty quickly and hopefully we can find a way to continue to scale and grow our impact at the pace that we have up till now.

Peter: So are you looking beyond mortgages? There’s obviously lots of other verticals, I mean, mortgages are the biggest, but there’s clearly other places that could use some improvements in how loans are processed. So are you looking at other verticals?

Nima: As we’ve started to work with and become the trusted partner to these banks, I’ve actually started to hear that there’s a lot of applicability to the things that we do around data verification, understanding the consumer’s credit in real time that would apply to other aspects of consumer finance, other aspects of consumer lending and so we’ve started to understand and get a perspective that our product and platform could be valuable in those areas and started to expand.

We launched home equity last year, we’ve launched some other products end of last year as well, and we’re hoping to continue to expand. I think there’s a lot of overlap between underwriting a consumer in one tap for a mortgage and all the other products and we think we can serve the institutions across all their needs.

Peter: Sure because I mean in some ways the mortgage loan is the most complicated. It would be easier, I imagine, even to do an auto loan or home equity obviously is still very, very much a real estate product, but I could see many different ways.

Anyway, we’re just about out of time, so last question, I’m curious about what are you most excited about for this year, what’s on tap for Blend in 2019?

Nima: What I’m most excited for Blend in 2019 is we are going to have the first one tap consumer approval for a mortgage and that’s a full verified approval, I believe in 2019 which will be a fantastic moment for hopefully the whole industry.

I’m also excited to…you know, as we’ve gotten deeper into the process we’re going to have our first end-to-end workflow done in Blend, meaning every aspect of, not necessarily the back office aspects which are handled by loan origination systems, but everything that the consumer has to do all done in one system. There’s a lot of moving pieces from the application to approval to, you know, the loan estimate, to the appraisal and title and insurance, to the closing disclosure to the closing itself. There’s a lot of components to that and getting that all together has pretty much never been done before for consumers and so we’re excited that that’s going to happen. We think it’s going to happen this year.

Peter: That is fascinating, fascinating indeed. Well I wish you the best of luck and I really appreciate you coming on the show today, Nima.

Nima: Yeah, thank you so much, Peter.

Peter: Okay, see you.

You know, Blend are doing some really amazing work, there’s no question about that. It’s interesting what Nima said about the bank branch question I asked, whether it would be possible to take out a mortgage in a bank branch and I think sometimes, most of us in fintech, myself certainly included, we tend to forget that people still want face-to-face interactions and doing it online is not the right way, not the preferred way for everybody to operate.

Even though it may be more efficient, even though it certainly will be more convenient, people like person to person contact and I think it’s something to keep in mind as we build all of these wonderful automated systems that the human touch, the personal contact is something that is still very much treasured by a good percentage of the population.

Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.

Today’s episode was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s happening April 8th through 9th, at Moscone West in San Francisco. It’s going to be the largest fintech event held in the Bay Area in 2019. We’ll be covering online lending, blockchain, digital banking and much more. You can find out all about it and register at lendit.com.

 

PODCAST TRANSCRIPTION SESSION NO. 186 / SUSAN EHRLICH

Welcome to the Lend Academy Podcast, Episode No. 186. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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Today’s podcast is sponsored by Experian’s Clarity Services. They are the leading sub-prime consumer credit reporting agency providing innovative risk management solutions to address the full consumer credit life cycle. Clarity leverages the combined power of the largest and most comprehensive alternative credit data source with traditional bureau data to provide a more complete view of a consumer’s financial behavior. Clarity is committed to providing products that address rapidly changing market conditions. You can learn more by visiting clarityservices.com/solutions

Peter Renton: Today on the show, I am delighted to welcome Susan Ehrlich, she is the CEO of Earnest. Now Earnest is an interesting company, they are one of the largest student loan refinancing companies. In fact, Susan shares in the show that they’re now number two, as far as loan volume goes, and they also do personal loans, they’ve been around for many years.

They were bought by Navient, the large student loan servicing company back in 2017 so we wanted to talk a little bit about that, talk about how much she interfaces with Navient; we talk about the student loan crisis and what Susan thinks about that. We obviously talk about the products that they offer, their approach to underwriting, acquisition channels and cross-selling and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Susan!

Susan Ehrlich: Thank you, thanks for having me.

Peter: Sure, so I like to get these things started by giving the listeners a little bit of background about yourself. You’ve had an interesting career to date and why don’t you share some of the highlights with the listeners.

Susan: Yeah, of course. You know, I think my career so far has really had three chapters. I began my career in traditional banking and then I shifted over to retail and most recently, I’m now in the financial technology space. So I really feel like I’ve been a part of that transformation that both banking and retail have been impacted by from bricks and mortar to digital.

My career started with Citibank in New York City, followed by Providian in San Francisco. These were kind of the “go go” days of credit card marketing where credit cards were democratizing access to credit, credit scores were race and gender blind and we were able to expand access to credit for people who hadn’t had that before. I really loved the left brain/right brain aspects of direct marketing, that combination of the analytical underwriting and pricing and the qualitative marketing and communication.

In the second part of my career, I moved over to retail finance, chose the exact wrong time to be doing that. It was in the midst of the financial crisis so you had retailers losing sales as the economy was tanking and banks pulling back on credit so it was an insanely tough place to be. I was working with Sears and Kmart at the time and we actually dipped into an old playbook and brought back layaway and Christmas club and installment loans at point of sale and turned layaway from kind of a consumer accommodation that we used to do ad hoc in store into a billion dollar business for Sears and Kmart in the middle of the financial crisis.

From there, I kind of shifted from…I took that brick and mortar retail to online retail step and moved over to Amazon, spent about a year and a half there and with that Amazon tech experience in my background moved over to fintech and spent some time at Lending Club, at Simple, before now joining Earnest.

Peter: Sure, so then what was it that…why did you take the job at Earnest? I’m curious to sort of get your perspective on why, moving to Earnest.

Susan: Sure, that’s a great question. You know, because before Earnest I was at Simple, I was learning a new craft as the chief financial officer at Simple, a role I had not held previously at any company I’d worked for before. I was enjoying the foodie culture in Portland and perfectly comfortable when I was contacted by a recruiter about the opportunity at Earnest. I had known Earnest already, I had met the founders, we had on and off talked about partnering opportunities and so when I was approached about the opportunity I knew more about the company than most people would.

I was very impressed with the underwriting, with the brand they had built and the customer experience they had created. I’d also been following the explosion in the student debt market, I was an advisor to Gradifi and I really believed in the mission that Earnest was focused on to help clients get a better deal. But I’d also be remiss if I didn’t say that the opportunity to lead a company as CEO and the chance to move to one of my favorite cities, San Francisco, were also draws, for sure.

Peter: Right, right. So let’s talk a little bit about Earnest and the product suite that you have. I mean, I know that Earnest began refinancing student loans, but what is the mix of products today?

Susan: Yeah, you know, interestingly, Earnest launched its first product with a personal loan in 2014.

Peter: I didn’t know that.

Susan: Yeah, it was Louis and Ben, the founders, used Boston as a test market since there was a high concentration of young professionals. They were really focused initially on super prime personal loan and it wasn’t until the following year, in 2015, when the company raised their Series A that they announced the launch of student loan refinancing.

Peter: Okay.

Susan: So it was actually the second product that the company had and along the way we’ve tested additional areas. We have a handful of auto loans, we were in the mortgage business last year, we’ve now exited that space. We’re focused today in installment lending with a strong focus on students. We are continuing to evolve our student loan refi product and we’re adding a student loan in 2019.

Peter: Okay, okay, so for existing students not graduates.

Susan: Correct, that’s right.

Peter: Got it, got it. So, you know, most people know…I’ll just to refresh everybody’s memory that Navient, the very large student loan servicer, acquired Earnest in 2017 so you’ve obviously come along after the acquisition. I’m curious about…obviously, you were comfortable with the structure of the company taking the job as CEO, but is Earnest really…is it hands-off when it comes to Navient or how much do you actually interface with the mother ship, shall we say?

Susan: Yeah, you know, this past year has been one where we’ve really tried to explore a bit how that relationship should work. We are a wholly-owned subsidiary so we operate fairly independently, we maintain our own brand, identity and marketing and you can see that in how we go to market and we staff and train our own employees, our own client happiness team, our own credit, product and engineering teams. Where we’ve most benefitted from the acquisition and the integration with Navient has really been with respect to access to capital.

You know, in Earnest’s old days, as with many fintechs, that steady access to capital is a huge challenge and it causes a lot of volatility in how companies operate. And so now that we’ve got that steady source and supply that Navient helps to provide us, we’ve really been able to grow from 5th to 2nd, in terms of market volume, in student loan refi and just continue on a very steady growth path which has been great.

Peter: Okay.

Susan: I think in return, you know, in terms of…that’s kind of what Navient has provided for us. I think, in return, we’ve really helped to showcase for them how to take a more user-centered approach to product design and to thinking about the client. We run a usability lab as part of Earnest’s standard business as usual operations. It’s run by our product, design and customer research teams and it’s been the most frequently visited part of Earnest from Navient. So I think that it’s early days, but I think that…you know, we look forward to continuing to impact their thinking about client and client experience and we thank them for their assistance in helping us access the capital markets.

Peter: Okay, so I want to step back for a second and just talk about student loans. Obviously, this is a big part of what you guys do and much has been written about the student loan crisis. I’m not sure what the exact number these days, $1.5 trillion outstanding, I know that defaults are going up. When you look at this country today and the student loan massive debt that many, many young people are taking on early in their lives, what do you think is needed to really end the crisis or to change things up?

Susan:  Yeah, it’s definitely a challenge of our time and I don’t think there’s anyone in the country who wouldn’t agree it’s an issue for our younger generation where the burden is falling most heavily. You know, when I look at the big picture, I kind of break this into two parts. There’s originations, the new student loans that customers are taking on and then there’s the existing loans and I think, you know, as a nation, we’re starting to rethink the origination part.

I think there are times when student loans are appropriate, but there are clearly degrees where it’s not worth taking a huge loan for and I think people are beginning to look at the cost benefit of education in a more sensible way and I think that’s a good thing. Personally, and to be clear, I’m speaking not for Earnest or for Navient, but I actually think universities should have more skin in the game than they do today. I think, you know, from my experience here at Earnest, I can see that graduation rates are a key determinant in whether a student loan gets repaid.

Peter: Sure.

Susan: And if a student is getting accepted by a school and they’re taking out a loan for their tuition and fees, but they don’t graduate with a degree, that’s commonly the reason they are unable to repay the loan so I personally think universities and colleges should take more responsibility for that. They should be willing to guarantee a student loan. I think that, you know, taking a page out of my retailer history and playbook, I think that would really be standing behind their students and would be a money back guarantee. I think it would be a real game changer and I’d like to see colleges and universities considering that.

Peter: Yeah, I couldn’t agree more. I feel like we’re going to move to that direction, something has to give. I mean, the top schools are going to continue to attract many, many students…as you say, not all of them are going to graduate and if you’re going to Harvard and you’re paying whatever it is, $60,000/$70,000 a year, you’re there for two years and you don’t graduate, you drop out, something happens, I mean, that’s a really bad outcome for that person potentially.

I feel like we’ve got so much data now available, look at the data that we use in credit, in personal loans, small business loans, what have you, there is so much data available and yet I feel like the universities…we should be using the data. There is information on graduation rates, but I’d like to see it, what is the graduation rate by major, what is the starting salary by major…

Susan: Agreed.

Peter: …all of that sort of information should be available so when kids go off to college, they are armed with full knowledge of what they’re getting into….

Susan: I agree.

Peter: …and I love the idea of having universities actually guarantee the loan, at least a portion of it. That would change everything I think overnight…I think it would.

Susan: And I think it’s, you know, a guarantee always sits in the background, right,  it doesn’t have to be activated…

Peter: Sure.

Susan: …unless you’re in a situation where something has turned out not the way you expected. So I think it would be very easy to implement, easy for a university to do, but I do agree with you. I think more transparency and information so that a student, with their parents, can make a better decision up front and I think a university really standing behind their commitment to graduate that student would be a very important signal to send. In an era where universities are going to continue to compete more and more for students, I think that could be a really powerful message to send.

Peter: Sure. Moving along, you know, you operate obviously in a very competitive market, the online lending space is much more competitive today than it was five years ago and I’m curious about…maybe we can take the student loan product and the personal loan product, I mean, they’re obviously two quite different markets, how do you differentiate yourself with the other student loan refinancing companies and the other personal loan providers?

Susan: Yeah, you know, in the product categories that we’re competing, they’re largely driven by price, but we are differentiating in a couple of regards. The first is we focus on a very high touch, very human interaction. Our in-house customer service team we call, client happiness, and we’re very committed to making sure that we’re…folks have contact with us, it is very intuitive, it’s very clear they’re getting the information that they need to make the decisions that they need to. We’re also very committed to leveraging technology to create a digital experience that makes it very easy and intuitive for a customer to understand our product and for our client happiness team members to service that client when they need it.

And I’m really proud of the fact that we are the only lender that offers precision pricing. This is something that’s in our student loan refinance product and what precision pricing is it enables a client to set the exact monthly payment they want. In student loan refinance, it’s more traditional for the lenders to force clients to choose from a few options, a 5-year term, a 10-year term. At Earnest, by using precision pricing and working back from what the client is looking for, we let the client set the monthly payment amount that they want to pay, the exact amount to the penny.

From that, we work back to what the loan term and price for that loan would be and the result of that is, you know, you may not have a 10-year loan, you may have an 11-year loan, but it’s going to enable you to pay exactly the thousand dollars a month that you want to be paying to pay back your loan and we’re going to set that interest rate at the lowest possible rate that matches that monthly payment. So the client gets the exact amount they’re looking for, it reduces for Navient and our securitization and investors any pre-payment risks so it’s a win-win and we’re the exclusive provider of that and we get a lot of good positive customer feedback for it.

Peter: Interesting, it makes sense. There’s no reason why the term of the loan shouldn’t be an output rather than an input. I know Marcus did this when they launched in personal loans, that was one of their unique offerings. They did it in the personal loan space and I feel like….because so many people, they know they can afford whatever it is, $500 a month, $700 a month, and that’s what they can afford. Obviously, they want to pay the least amount over time, but if you give them something that’s $900 a month and they can only afford $500 a month, yet it’s the lowest rate, that’s still not going to be a good outcome. So I think that’s what makes the most sense.

Susan: I agree, in this day and age too, you know, I think banks worked back from what did the market want, what were investors interested in and so they map to 5-year, 10-year, 15-year. In this day and age, you can generate the loan agreement real time and, again, by being able to give clients exactly what they’re looking for, you know, they’re comfortable with and committed to making that payment consistently. It puts control in the client’s hands and it ultimately creates a better experience for everybody.

Peter: So right now, that’s just in your student loan refinancing product, it’s not in the personal loan?

Susan: It is, that’s correct.

Peter: Okay, so are you doing like…for the personal loans, are you doing a lot of cross-selling with personal loans, are customers coming from other channels? Maybe let’s firstly answer how much are you doing cross-selling with your large student loan database?

Susan: You know, cross-sell hasn’t really been an emphasis for us now just because we’re seeing more opportunity with organic growth and we really are putting a very heavy emphasis on student loan refinance. We’ve just seen more opportunity in the market there for us and we’re going to stay committed there and I think we’ll be, as I mentioned doubling down on both student loan refinance and looking at in-school student loans in 2019.

Peter: Okay, so then how are you finding your customers, what are the main channels that you’re using?

Susan: A wide range of channels as all lenders typically do, but you know, our main and defensible channel is really word-of-mouth and existing client referrals which has allowed us to compete really effectively and to reach the number two market position in 2018 without a 9-figure marketing budget so we’re really pleased and proud with that result.

Peter: Right, okay. And then so let’s talk about underwriting for a little bit. I’m curious about what your approach is here, the technology you use, the data sources you’re using. Can you give us a little bit of color on that?

Susan: Yeah, I think, you know certainly in the early days of fintech there was a lot of talk about new data sources and new credit models and I think from our experience it turns out that it’s perhaps not as complicated as people thought. You know, the most important indicator is income and beyond that debt to income so that’s really where we’ve been focused on how we evaluate free cash flow and to help make sure that we’re putting customers in loans that they can afford and with precision pricing payments that they can comfortably repay.

You know, a big part of our process has been making it simpler and faster for us to get the information we need to confirm income and validate that and move people through as automated a process as we can. The faster we can get them to a credit decision, the more quickly they can begin saving money.

Peter: Right, right, okay. So something else, I’m looking at your LinkedIn profile, I’m curious about…you were very much involved with the Center for Financial Services Innovation, it looks like you were Chairman of the Board there for many years and we’ve had Jennifer Tescher on the show here, I’m curious about how your time there, how that sort of informs what you’re doing at Earnest because obviously the CFSI is very much about financial inclusion and building, creating products that are win-win and helpful for the underserved and what not. Tell us a little bit about your time there and how it applies to your time at Earnest.

Susan: Yeah, absolutely. I’m really pleased and proud of the work that Jen and the team at CFSI have had over time. You know, I, like Jen am very committed to a mission of inclusion and making a meaningful difference in people’s financial lives and, you know, I think that really played a part in my coming to Earnest seeing an opportunity to take what the company was doing and really extend further the reach and opportunity in the area of student loan refinance.

I’ll give you an example, when I got to Earnest this past summer in July, we had a group of MBA students who were interning with Earnest and one of the projects that we had asked them to take on was to calculate how much we’ve saved our clients since the company got started five years ago.

At that point we had refinanced about $3 billion of student loans and when we calculated the savings, we had generated just over $400 million in total interest expense saved and that’s a consumer benefit that was not available before the advent of student loan refi and talk about a disruptive force for good, an opportunity to improve consumer health which is very much the focus that CFSI has these days.

So on an individual level, that client who’s refinancing, shortening their loan term, speeding up their pay down is saving $31,000 over the life of their loan. That’s a life changing amount of money and something that we’re really proud to play our part in helping to improve consumer financial health. If you have the opportunity to refinance, you should take advantage of it. There’s meaningful money that can be saved up toward buying a house, paying for a car, taking a vacation, you know, it’s life changing.

Peter: Right, I completely agree. It’s like getting a tax cut in some ways where you suddenly have more money every month and given how much burden so many people are under and anything that you can do to ease that burden is certainly worthwhile, a worthwhile cause.

Susan: Sure. In the Bay Area, $31,000 might not add up to a lot of money, but it’s a down payment on a house, it’s the price of a car. I think it changes the trajectory of people’s lives and we’re just proud to be able to play a part in that and put the client at the center of what we’re doing. We’re very mission-driven.

Peter: So do you think that…I imagine most graduates now…obviously, student loan refinancing didn’t exist ten years ago, you know, for many reasons, but do you think that most or what percentage of graduates do you think now…like some of these graduates obviously have federal student loans. I know I’ve had one of my colleagues here at work has got a very low interest rate and tried to refinance and it just wasn’t worth it, but those that have private student loans. Some of them are, 8, 10, 12%, do you think…what percentage of them are still out there, do you think, that have not been refinanced?

Susan: Yeah, there’s…you know, as you mentioned earlier, the volume of existing student loans that are out there is in the order of $1.5 trillion. We’ve made a dent in that universe, we’re a little up over $4 billion in student loans refinanced. Obviously, SoFi is a bigger player in this category than we are, but collectively, you know, we’ve only made a tiny dent in the opportunity that’s there. Variable rate loans will continue to see rates increased on those as rates rise and continue to rise so I think, you know, students will continue to graduate with student debt to be paid back.

And so, I think, we expect to continue to see the market remain sizable and growing into the near future and anything that we can do to help improve the financial circumstances for our clients by looking into and refinancing is worth doing. It’s very easy to come online and do a rate check to see what the benefit can be, it’s a 2-minute exercise and I think anybody who has graduated from school and has a job should do themselves the favor of just checking and making sure there isn’t a better deal out there.

Peter: Right, right, for sure. So I want to talk a little bit about the funding of these loans. I’m particularly interested in the context of what you said earlier where you have these loan terms that are an output rather than an input to closing a deal. So how are you funding these loans, is it all on balance sheet, are you doing securitizations, what is the mechanism you’re using?

Susan: Yeah, we’re leveraging the access that we have now through Navient to a strong balance sheet and so we fund our loans on balance sheet and then on a periodic basis, we’re executing asset-backed securitizations to improve our liquidity and reduce the balance sheet stress.

Peter: So how does it work when you’ve got all these sort of like 11-year loan terms? Are you sort of packaging them all up into one group that is all the same loan term or how is it working?

Susan: Yeah, you know, as they structure the securitizations, it’s going to be a mix of payments and repayment terms and schedules and so that’s just in the pool and factored into the cash flows.

Peter: Right, right. Okay, so we’re just about out of time, but last question. We’re recording this in early January of 2019, and I’m curious about what your….as you’re looking ahead to this year, what are you most excited about for Earnest in 2019?

Susan: Yeah, thanks for the opportunity to share. So first off, we’re very excited about the new product launch that will be coming in the first half of this year so please stay tuned for that. We’re also looking forward to getting bi-weekly payments back as an option in our student loan refi business. We think that’s going to be another key differentiator.

And you know, we’re certainly actively hiring so we’re looking for key members of our teams in the area of engineering, product, marketing and risk so if there are listeners out there who are interested in and intrigued by what they’ve heard, I’d love to hear from them. And you know, we’re looking forward to just continuing to do what we’ve been doing and proving to be really good at which is helping clients save money by refinancing their student loans.

Peter: Okay, well on that note, we will have to end it there. I very much appreciate you coming on the show today, Susan.

Susan: Thanks so much, Peter, appreciate you having me.

Peter: Okay, see you.

Susan: Bye now.

Peter: One of these days, I would like to think that the total outstanding student loan balance will start to fall. It’s been going up, I remember when it crossed $1 trillion, it wasn’t that long ago and now it’s up around the $1.5 trillion mark and I would like to think that one day it will actually go back down below $1 trillion. Certainly companies like Earnest are helping to make these loans more affordable for people after they graduate and even when they’re in school.

I also think that the idea that Susan had about having schools guarantee some of these loans, I think that’s super interesting and one thing that we’re going to be covering at LendIt in April. I think this whole idea about schools having skin in the game, really having some sort of incentive in the outcomes beyond just, oh look at our graduation rates or whatever. I feel like this is where we can really move the needle and I feel like going to school in ten years time is going to be very different. The application process will be very different to what it is like today as I think more of this sort of results-based orientation for students will certainly take center stage.

Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.

Today’s episode was sponsored by Experian’s Clarity Services. Clarity’s suite of FCRA-regulated reports and predictive scores yield significant insight into a consumer’s financial behavior throughout the alternative financial services industry. Clarity delivers data-driven risk management solutions that address prospecting, credit evaluation, fraud detection, portfolio management and collections. You can learn more by visiting clarityservices.com/solutions.

 

PODCAST TRANSCRIPTION SESSION NO. 185 / JEFFREY MEILER

Welcome to the Lend Academy Podcast, Episode No. 185. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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Today’s podcast is sponsored by Experian’s Clarity Services. They are the leading sub-prime consumer credit reporting agency providing innovative risk management solutions to address the full consumer credit life cycle. Clarity leverages the combined power of the largest and most comprehensive alternative credit data source with traditional bureau data to provide a more complete view of a consumer’s financial behavior. Clarity is committed to providing products that address rapidly changing market conditions. You can learn more by visiting clarityservices.com/solutions

Peter Renton: Today on the show, I’m delighted to welcome Jeffrey Meiler, he is the CEO and Founder of Marlette Funding, also known these days as Best Egg which is their consumer facing brand. So I wanted to get Jeffrey on the show because we’ve never had him on before and Marlette has become one of the true leaders in the online lending space.

As you’ll see in this episode, they’ve really done things that no other platform has done and they have built themselves a very strong brand in the industry. So we talk about their loan performance, we talk about profitability, we talk about Jeffrey’s perspective on the entire online lending space, we talk about the investor side of the business and what’s in store for 2019. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Jeffrey.

Jeffrey Meiler: Hey, thank you, Peter.

Peter: So I like to get these things started by giving the listeners a little bit of background and some context. You’ve had a pretty interesting career to date, Jeffrey, so why don’t you go through and give us some of the highlights.

Jeffrey: Sure, I’d be happy to. My background, and importantly the background of my colleagues at Marlette, is a bit unique in the online lending space. Myself, my leadership team and actually the overwhelming majority of the folks at Marlette have backgrounds in consumer finance and banking so in the context of the online lending industry, we’re a bit more fin than tech-weighted from an experience standpoint.

Now I specifically have 25 years of consumer finance and banking experience with seven years actually spent in the UK and Europe, but the majority of the time in the US with the focus really on unsecured consumer lending. In fact, as you may know, many of us at Marlette worked together in the US credit card industry. If you look at my leadership team, six of the nine people have known and worked with me for over 14 years. If you look at the broader strategy staff, about 60% of us have worked together previously.

Peter: Wow!

Jeffrey: Yeah, it’s pretty unique.

Peter: So was that primarily at Barclaycard or is that what the majority…

Jeffrey: Yes, it is. Let me give you more color to that. What is really unique is, yes, it’s at one issuer and what is special and has been unique for us is the nature of our shared experience. We collectively, had the experience of building a US card business from a billion dollars to $12 billion from a portfolio standpoint in five years, making it a top ten card issuer and the team, the team that is at Marlette, built the prospect database, the credit models, the value propositions that enabled the success of that credit card business. As you can imagine, that was great context for what we’ve done at Marlette.

Peter: Yeah, right, for sure, for sure. So then let’s go back just a few years to the founding of Marlette. What was it that you saw and why did you decide to start an online lender?

Jeffrey: Hey, that’s a great question. We incorporated in August of 2013 and then launched in the middle of March in 2014 and there were really two things that really informed our thinking about starting Marlette. The first was we clearly saw that consumers were not being served and appreciated the size of the total addressable market. That was the first thing.

The second thing was we saw an opportunity to take a different approach than the current incumbents, more fin than tech, more focus on credit and capital markets than on growth in isolation, better alignment and attention across the capital stack and more focus on building a resilient personal loan business that reflected our recession tested team’s experience in the credit card industry.

Peter: Okay, okay. So then before we move on, I’ve got a strange question for you. You know, I noticed that your email address changed recently from Marlette Funding to bestegg.com. What is your company name, what are you going by these days?

Jeffrey: Great question. The company is still named Marlette Funding, but our lending platform and what consumers recognize is Best Egg and we found, to your good point, that many of our corporate relationships were not connecting these two brands. So over the past two years, we’ve made a concerted effort to increase awareness and the connection between the two brands and that’s, hence, why we made the email addy change to try to connect the two brands so that there isn’t that confusion out there, but a fair question.

Peter: So the Marlette brand isn’t going away, you’re just sort of aligning more with the Best Egg brand?

Jeffrey: I would preclude us embracing more and more, as time went on, the Best Egg brand.

Peter: Okay, where did that name come from? What’s the origin of Best Egg?

Jeffrey: Sure, sure. So the origin was really part and parcel of the thinking about the customer that we wanted to serve and when we really analyzed who we were going to be working with, who we were going to be helping here, it was typically a consumer that is 46 years old, is an individual that has liabilities that exceed assets and they’re carrying, typically, $15,000 plus in credit card debt and they’re looking to make a change. The theme for a lot of these people as we talk to these consumers was the desire, the aspiration to have a nest egg. So it was a bit of a play on words, well, you know, you don’t have a nest egg, get a loan from Best Egg…

Peter: Right.

Jeffrey: …and start on your path.

Peter: Got it, that makes sense, that makes sense. So then you’ve talked a little but about this, but I want to delve into it a little bit more. Like the background at Barclaycard, you know, Barclaycard obviously…Barclays is a very well established, dare I say old, British bank that goes back centuries, how’d your time there influence what you’ve been doing over the last…particularly when it comes to how you sort of built a successful company. How have your learnings at Barclaycard helped you do that?

Jeffrey: I think that’s a great question and to your point, Barclays is a couple hundred year old institution and to have folks come from there and go and do a startup, it isn’t necessarily the logical expectation, but the thing that was unique was Barclays had purchased a startup in the US, something called Juniper, and that was the entity that I referenced earlier that the team grew rapidly. So really Marlette is leveraging that specific experience.

It also, though from a 200-year old bank perspective, I think there are some things we borrowed from there also. I think the compliance discipline, the credit practices were things that we took from Barclays and embedded in Marlette very early on and both of those specific things had a level of maturity that exceeded the maturity of the company itself.

Peter: Right, got it, okay. So then now when you look at the competitive landscape today and you see there’s more personal loan offerings for consumers than there probably has ever been, certainly in the last couple of decades, I’m just curious about when you’re looking at the landscape and you’ve obviously got all of the other online lenders today, you’ve got banks coming in as well, how are you differentiating Best Egg from the other offerings that are out there?

Jeffrey: Hey, that’s a super relevant question. As you know, Peter, the most successful players in the online lending space are those that deliver a fast frictionless customer experience and we spend an inordinate amount of time, energy in focusing on that.

In the context of 2018 specifically, we introduced new funnels from a customer standpoint, one that is focused on a better experience for those people using a desktop and one is focused specifically on those customers that are using a mobile device. Those efforts in 2018 resulted in us having a net promoter score of 68, an A+ rating with the Better Business Bureau and a 9.5 out of 10 TrustScore from TrustPilot. I think that that’s going to be the key, that focus on the customer is going to be the key to differentiate and win in this space and I think that segmentation and personalization is something that, specifically in 2019, we’re going to make a lot of strides in.

Peter: Okay, we’ll delve into that a little bit more in just a bit, but I want to talk a little bit about your 2018 and the scale you guys are at. I know you just recently crossed another milestone so tell us, how big is your loan book today?

Jeffrey: So to your point about milestones, as we came to the close of 2018, we crossed the $7 billion mark, so in less than five years we have originated $7 billion. As far as the outstanding book, the outstanding portfolio is about half of the total originations so circa $3.5 billion.

Peter: Okay, so then when you look back at 2018 then, we are recording this in the middle of January, so you might not have closed out your books yet, but I’m sure you’ve got a very good idea of how it went. Tell us a little bit about…I’m interested in profitability, in growth and that kind of thing.

Jeffrey: Happy to share and to your point it’s unaudited financial results at this point, but happy to share those. So 2018, is the second consecutive year that the company has achieved GAAP profit in the double digit millions and year-on-year we had about a 60% increase in profits. Q4 specifically, Q4 of 2018 marked the seventh straight quarter that net income has been positive on a GAAP basis. Now turning to loan originations, 2018 was robust for us also, originations increased 27% year-on-year.

Peter: Okay, okay, that’s a pretty impressive performance. I want to get back to the profitability, it’s great you’ve got seven consecutive quarters of profitability. You know, when we look at many other companies in this space and it’s definitely been a knock on the space for the last few years where there has been a lot of venture capital money being thrown at the online lending space and profitability has proven elusive for many players.

Obviously we don’t have publicly available books for everybody, but there are for a few players so I’m curious, what’s your take on that? Obviously, you monitor your competition closely, I’m sure, why is it so hard for many companies to make money?

Jeffrey: Hey, that’s another good question. I think new business paradigms that are challenging well entrenched incumbents, in this case the banks, always struggle to be profitable. Now, specifically, if we look at the online lending industry, I think that near term profitability is also linked to where you are positioned on the fintech continuum.

Before 2016, I think it was generally more acceptable for the incumbents to pursue growth versus profitability in isolation. This is more commonly accepted in the tech space. For example, how many years did Amazon lose money.

Peter: Right.

Jeffrey: IPO was in 1997 and in 2009, they were still in the red. What happens in our industry is in 2016, it became abundantly clear that tech was important in delivering a frictionless customer experience, but credit performance, access to capital and profitability were more important and the pendulum had swung to fin versus tech.

Peter: Right, right.

Jeffrey: And I think those players that were more skewed to fin, like Marlette, had an easier time migrating to profitability and acclimating to the new consensus sentiment about the nature of the online lending industry.

Peter: So is that something that you consciously made the decision of? Obviously, we know 2016 was a difficult year for many companies in this space. I wouldn’t say funding dried up completely, but it certainly was a lot more difficult. So was that a conscious decision back then to say, right, we need to batten down the hatches and focus on profitability?

Jeffrey: Yes I would say, in general, we were always skewed, from an orientation standpoint, to be more fin than tech, but post 2016, it became clear that we couldn’t wait to get to profitability and at the end of the first quarter of 2017, the last quarter that we lost money, we narrowed the commercial agenda and became a lot more focused on profitability.

Peter: Got it, okay. So let’s talk a little bit about credit performance. You’ve already mentioned that several times and I want to know what color you can give us on the credit performance of your loan book.

Jeffrey:  So I, as you would expect, would say we have really a unique performance from a credit perspective. We have been really, really consistent in what we’ve delivered for investors and for the company. I really think it comes down to this orientation that is more fin-grounded than tech-grounded and let me explain what I mean by that.

For us, on a quarterly basis, job one was always to originate loans that would serve us well and our investors through a recession and we specifically, on a quarterly basis, target a specific loss coverage ratio and because we target that, we have more predictable and consistent results. In contrast, in contrast, others in the space, especially pre-2017, thought of themselves as a marketplace.

Job number one was balancing supply and demand for their loans. When demand for loans was high, interest rates to consumers went down and underwriting softened. That approach leads to more volatility and less consistency and I think that, in a large part, that’s been the biggest difference. It starts philosophically for how we see the nature of the business that we’re in.

Peter: Yeah, that makes sense, that makes sense. So I’m curious about how you view…when you look at your business overall, you have really maintained a focus on one product to date, the personal loan, and you’ve seen others who have branched out into different verticals or just sort of adjacent products, shall we say, and I’m curious about how you view that. Are you comfortable being a monoline business for the foreseeable future, or how do you think about adding a new product vertical to your business?

Jeffrey: Yeah, another great question. Yeah, to date we have been totally focused on building a profitable resilient personal loan business. Having accomplished that though, in 2019 we will start to take steps to broaden our product pallet and leverage the platform and the infrastructure that we have built. As you would expect, the first steps are likely, you know, close cousins to the personal loan business, but see over the medium term that we’ll go further afield from that, but absolutely, Peter, I think that the time has come for Marlette to diversify.

Peter: Well you know you guys seem to have a lot of experience in the credit card business. I wouldn’t guess, of course, what your next product would be, but certainly I know that you guys must have…that would be a logical step.

Jeffrey: I can’t comment, but to your point we love credit cards.

Peter: I know, I know. Right, okay. Anyway, so it’s interesting that you guys are based in Wilmington, Delaware. I don’t know if there’s any other fintech companies in Wilmington, Delaware, there certainly aren’t many. I don’t know of any other in the online lending business. Now Delaware is obviously a very…a lot of places have their official headquarters there for various reasons that the government has set up…the state government of Delaware has really promoted that, but I’m curious about…do you think that Wilmington, Delaware, being located there is an advantage or a disadvantage to you when it comes to attracting talent to Marlette?

Jeffrey: We think it’s a huge advantage to be in Wilmington and to your point, I don’t know if people broadly appreciate that this greater Wilmington area has the greatest number of people probably in the United States with unsecured credit experience and being in the middle of that has been super helpful for us in scaling the business. I referenced earlier that, you know, 60% of the strategy staff worked with us previously. Even outside of that, the people we’ve hired have experience in unsecured credit.

Now having said that, we are a fintech player and believe in hiring the right and best people and have tools that enable us to have people work remotely also, if that’s something that is important to them, but being in Wilmington has really enabled us to flourish.

Peter: Interesting, interesting. I imagine that all of the unsecured credit people is because the credit card companies set up shop there, is that one of the primary reasons?

Jeffrey: Yes, in Wilmington there’s essentially two industries, pharma and credit cards, financial services and to your point, a number of players are headquartered in the area.

Peter: Right, right, for sure. Okay, so I want to switch to the other side of your business, the investor side, and I’m curious about the investor mix today and what kinds of investors are buying loans and is that changing at all?

Jeffrey: Yes, that has changed greatly over the five year period that we’ve been in business. In the very early days, we were funded 100% from hedge fund money, that’s not the case today. I wouldn’t quote specific mix percentages, but would say that as we’ve built a track record and shown consistency, we’ve been successful in migrating, over time, to buyers, loan buyers, whole loan buyers, with lower and lower costs of capital and that has been really helpful and fruitful and has been, you know, a part of our migration to profitability.

Peter: Right, that makes sense. So then on that, we did have a couple of years ago, we had your Head of Capital Markets, Karan and Josh Tonderys on the show and we talked quite a lot about securitization and I won’t go into too much depth, but maybe…I will link to that show in the show notes, but you have become quite a prolific securitization issuer, your deals seem to attract a lot of attention so maybe you could just give us an update on that and do you plan to sort of keep this similar rhythm in 2019 that you’ve established?

Jeffrey: Yeah Karan, who you referenced, has done a great job in developing our securitization program and our deals have been well received. In 2018 specifically, we did $1.7 billion in transactions bringing the total Marlette issuance to date to $2.9 billion. Furthermore, in 2018, a number of the tranches from 2016, 2017 and 2018 received rating upgrades from Kroll. As we look to 2019, market conditions permitting, we’ll continue to be a serial issuer of securitizations.

Peter: Right, right, okay. We’re running out of time, but last question on 2019, the future, you’ve already touched on some of these things, but I’m curious about what you’re excited about when you look ahead to this year. What are some of the things that you want to accomplish?

Jeffrey: To your point, Peter, we’ve touched on some of this, but as we enter 2019, it’s really going to be about capitalizing on the robust and balanced performance that sets the stage for continued growth and product expansion. As you would expect, we closely monitor all conditions that may impact the business and are prepared to recalibrate, if necessary, but right now, right now, we remain optimistic that we can continue to expand our business at pace, both within personal loans and outside of personal loans.

Peter: Okay, well on that note, we will leave it there. I really appreciate you coming on the show today, Jeffrey, and best of luck to you in 2019.

Jaffrey: Hey, thank you, Peter.

Peter: Okay, see you.

You know, the online lending industry is certainly maturing and I think Jeffrey sort of brings on some of those points there where, you know, they’re a profitable business, seven quarters in a row, I think that’s extremely important. Gone are the days if you look back to 2015 when money was just being thrown around, anyone could raise capital and there was certainly no focus on profitability or very little focus on profitability back then.

Today, this feels like a different time, 2019, you know, if you’re not profitable, or at least have a really easy or strong pathway to profitability, you are in serious trouble. I think companies like Marlette are showing the way where you can make money in this industry, even as a monoline company. They have proven that it’s certainly doable and I think the rest of the industry needs to take note of that. I’d like to think that by the end of 2019, the vast majority of companies in the industry will be profitable.

Anyway on that note, I will sign off. I very much appreciate you listening and I’ll catch you next time. Bye.

Today’s episode was sponsored by Experian’s Clarity Services. Clarity’s suite of FCRA-regulated reports and predictive scores yield significant insight into a consumer’s financial behavior throughout the alternative financial services industry. Clarity delivers data-driven risk management solutions that address prospecting, credit evaluation, fraud detection, portfolio management and collections. You can learn more by visiting clarityservices.com/solutions.