PODCAST TRANSCRIPTION SESSION NO. 223 –  STEVE HOKE

Welcome to the Lend Academy Podcast, Episode No. 223, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Steve Hoke, he is the General Manager of Mortgage and Commercial Lending at Finastra. Now, Finastra has only been around a couple of years, but the companies that formed Finastra have both been around for decades, or in the case of D+H over a century. But, Finastra is really supplying the banks with critical software around their business, they have over 9,000 customers.

I wanted to get Steve on the show to talk about the changes that are happening in both mortgage lending and in commercial lending, we go into some detail about both of those and we talk about what banks want, what the banks’ customers want when it comes to, a digital experience, when it comes to more efficiencies in this process.

Steve also looks into his crystal bowl and tells us where this is all going, what kind of end game is going to happen in the mortgage lending and commercial lending space when it comes to digitization. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Steve!

Steve Hoke: Hey, thanks for having me, it’s great to be here.

Peter: Okay, so I’d like to get this thing started by giving the listeners a little bit of background. You’ve had a pretty interesting career to date, if you could maybe touch on some of the highlights before Finastra.

Steve: Yeah, so I’ve been in the financial services space for …going on 20 plus years. I don’t want to get too high in those numbers, but over 20 years of experience in financial services, done a lot in the last 15 years, in and around the lending space, particularly working closely in the credit union space. I am now with Finastra, I’ve been with Finastra for about three years and I’m Manager of Mortgage and Commercial Lending businesses.

Peter: Okay. So, tell us a little bit about Finastra because it’s not a brand that’s been around that long. I know there was a merger and you had D+H, I believe, beforehand. So, why don’t you just tell us a little bit about how Finastra came to be.

Steve: Sure. So, I’ve been ….like you said, I’ve been with the company for a little over three years now and about six months into my employment with D+H, we were a publicly traded company that was acquired by a private equity firm based in Texas called Vista Partners. Vista owned another company in their portfolio called Misys which was headquartered in London and had very complimentary products serving very complimentary geographies, but not overlapping. So, they primarily served European, Asian and African markets and D+H was largely focused in the North American market.

So, Vista saw an opportunity to put these two companies together and create a global brand around this company called Finastra. So, we’re about 10,000 employees, about $2 Billion in revenue and clients all over the world.

Peter: Okay, and what is the breadth of products that you guys offer?

Steve: When you look at all the functions of a financial institution, a bank, credit union, we offer a full range of products. So, in the North American markets, you know, we have lending products, core banking, digital, mine banking assets, we do large syndicated commercial lending, we have treasury and capital management products, investment products, payment products, so really the full gamut of things that a financial services firm would need from a provider like Finastra.

Peter: Right, right, okay. So, you’re running the Mortgage and Commercial Lending products, just tell us a little bit about your domain, specifically.

Steve: Yeah. So, Finastra has a number of different lines of businesses typically centered around those products somewhat uniquely in the North American market. We have a segment of our business that we call the North American Community Market segment. So, we’re focused in on banks and credit unions, to assets typically around, you know, call it $10/20/30 Billion is kind of our sweet spot, $30 Billion and below and we serve those institutions with a number of products.

So, that could be a core banking system, our flagship product there is Phoenix; we have, as I said earlier, a digital banking product, Malauzai, that we acquired into the Finastra family a little over a year ago, so providing online banking tools for banks and credit unions that attach to the core banking solution.

And then on the lending side, we have a full suite of lending products, so we have a Point of Sale solution called Mortgagebot POS, so when you go to a bank or credit union website and apply for a mortgage that front end application is provided by a third party. We’re proud to hold 1,400 clients, customers of our Mortgagebot Point of Sale platform that’s been in the market for 20 plus years, and then we also behind that have Mortgagebot, loan origination system which is the LOS, the workflow tool that the financial institution uses to close and fund a mortgage.

And then, when you go across the different loan types, so consumer lending, we have the equivalent kind of solutions online, loan applications for a car loan, credit card, and a consumer loan origination system behind that. We have a commercial loan origination system called CreditQuest, and then we, of course, wrap all that in our compliance products that we have and market them. The flagship there is LaserPro, our compliant loan document solution.

Peter: Okay, so then I wanted to dig into some depth into the mortgage lending systems and the commercial lending side, but before I do that, maybe we could just step back for a second. Tell us your perspective on how lending is changing. Obviously, you say been in financial services for two decades ago, it was very different to what it is like today. How much of what you’re really focused on now is sort of a digital experience for the consumer and how is that changing?

Steve: Yeah, I’ll even step back just a little bit and talk about the overall digital journey for financial institutions and it’s evolved a lot over the last 15/20 years. So, you know, they rightfully started their journey with simple transactions that were high volume, repeatable, and so think about the digital banking experience.

I want to login, I want to see my checking, or savings account and I want to, maybe, transfer some money. Institutions have to do that all day long and consumers were looking for digital tools to do that, so they opened up the digital banking environment to do that. And then, they moved up to slightly more complicated transactions, but still high volume, so we saw where they started on the lending side was consumer transactions.

Think credit card, we get a lot of credit card transactions, those are fairly straightforward types of loan transactions and you do those at scale and you do those quickly. So, we saw the kind of a next logical place was credit cards, then consumer lending, and you get into car loans, still high volume. It’s a little bit more complicated, a little more work to process that loan type, but slowly that will down line into a digital experience, and now, I think, you’re seeing a broader embrace of mortgage and then, I think, the really complicated still transaction where there’s lower volume is the commercial loan transaction.

So, it’s definitely been a journey and, I think, they’ve approached it in a real logical way in terms of where can we have the most banks for our book, simple, straightforward, high volume transactions that may have been moving through the suite of their solutions over time.

Peter: Okay, so let’s talk about…..a complicated transaction is a residential mortgage, it’s usually the biggest transaction anyone ever does in their lives. It’s been a few years since I’ve done one, but I’ve had friends who recently moved, it was surprising to me to learn that their experience…..sure, they’re sending PDF’s, instead of having to do signatures.

They did have a closing document where they actually had to sign…. this closing session, they had to sign their name a hundred times. So, it’s still, today…towards the end of 2019, we’re still at a……in a mortgage experience, it’s evolving, but it still seems rooted in the 20th century, as far as user experience goes, so why do you think it’s been so slow to really fully move to a digital experience?

Steve: Well, as we talk about it. It’s a complicated transaction and it’s complicated because you have so many different parties involved in a transaction. It’s not just a straightforward transaction between a borrower and the financial institution, you have to include appraisal companies, you have to include mortgage service providers to get, you know, MI or flood, and then you have closing companies and different interested parties, real estate agents. There are a lot of people involved so you have a lot of complexity in that regard and then the data complexity as well is high on a mortgage transaction.

You know, think about all the information that you need to know about that borrower in order to comfortably make a good decision that’s good for the financial institution and, frankly, good for the borrower as well to make sure that, hey, as a financial institution I am doing a responsible thing and getting the right kind of loan product for the borrower, so I need the right kind of information or help them make a good decision and for the borrower to feel good about their transaction.

So, I think, at its root, it’s a complicated transaction, but you look at it, you’re right, you’re leaning on all conventions to collect that data and you see steps towards progress though. So, Fannie and Freddie, they want certainty solution where if a borrower is able to electronically verify their employment history through services like the work number, they can easily collect that data and pass it along to Fannie or Freddie and at that point, no further information is needed to validate the employment history. You don’t need to submit the last three W-2’s.

So, there are pieces of that puzzle that are becoming more straightforward and easier to collect that data about a borrower so that you don’t have the burden of scanning and uploading all those electronic documents. But, because of all the parties involved and all the data requirements that each one has that could put it in process, it’s going to take time to chip away and continue  to find the little pockets of efficiency that you can add into the transaction.

Peter: Right. So, you think…..are we still in the first inning when it comes to…..if it’s a nine inning game here for the game, the end point being a complete digital process for the majority of borrowers, what inning are we in?

Steve: Yeah, I would say we’re certainly, you know, in the first couple of innings. I might go a little further than the first inning, I might say the second, or top of the third. It’s getting better, but there’s still a lot of, you know, there’s complexity and there’s comfort too. The borrower has to be comfortable sharing information in different ways as well, and so one of the ways that you can collect income and assets to access the information about the borrowers for them to give you their logins, the passwords to their banks accounts, or accounts that they hold in other institutions during the application process.

So, borrowers sitting there, staring at their screen saying, do I trust this institution enough and are they going to be able to be responsible with my login and password to go to scrape the information out and complete this profile of my assets that I have that I am applying towards this loan. And so, part of it is complex and part of it is this comfort and people getting more comfortable with digital tools.

Peter: Sure, sure that makes sense. Obviously, with today’s generation that’s becoming primary home buyers in the next decade, we’re going to see a lot more comfort from that end, I would expect. So, what is Finastra’s…..do you have a digital end-to-end solution that you can revive to community banks and what have you, and credit unions….what exactly is your offering?

Steve: Yeah. So, I kind of touched on the overall tool set that we offer at the top. So, we have our online application and you think that’s a fairly straightforward thing…oh, I just fill out a form and I submit it, but there’s still a lot inside that application. So, we have things like I talked about, the ability to do….the day one certainty pieces with the income and asset verification. So, we can collect that information up front and no further documentation is required.

Inside our Point of Sale solution, we can also offer the three-day disclosures and so when somebody fills out an application, selects the product and things like that, they can see all information and get the disclosures supporting of that so that it does not have to go back to the financial institution for review and then approval and then sending out disclosures. The system can automatically generate those upfront disclosures that are necessary.

And then, we also have the loan origination system behind the scene so all that data that’s collected is integrated into the loan origination system so it all passes. If a credit report is pulled in during the Point of Sale process, the complete credit report is passed over to the LOS. Any documents or images that might be uploaded by the borrower as part of the transaction so you choose and attach forms….if those things are still being required, those things can all be automatically transmitted and indexed in the loan origination system so the processor can quickly see that those are there and note that those conditions have been satisfied.

And, we also have the ability to do the document packages on the back end through partners like DocMagic and DocMagic is given extent for them to the E-Close space with some of their capabilities, so there’s a lot that we provide in-house and where we go beyond. We have partners who we rely on and help kind of build some of those gaps. So, we can take it where different municipalities allow things like e-notaries, we can enable e-notaries to get the signing event completed for mortgage. So, there is a lot that we can do with the digital mortgage experience from the products and solutions and integrations that we have at Finastra.

Peter: Right, okay. So then, when you’re talking with your customers, what are they really asking for that you don’t have right now. What are the, you know, is it more…digital user experience is faster processing, a more flexible origination, I mean, what are the things that the banks out there really want today?

Steve: Yeah. So, with the Great Recession and fallout from that, there was, obviously, a lot of forced correction on the regulatory environment and, so there was a point where institutions were extremely focused on making sure that process was compliant. That was their first concern and we’ve done a great job, I think, at Finastra delivering on commitment to compliance and delivering compliance solutions. And, I think our clients had started to internalize the compliance requirements in today’s environment and, now, they’re turning to what is a very tight margin environment on their loan, so what they’re lending at and what they’re managing on these particular loans.

The margins are very tight so they’re looking for efficiency in the process. We’re going to squeeze out, you know, automated step in the process so that they can continue to drive down the time of funding, reduce the number of days in the cycle and drive out people having to handle data, or documents, or information and letting the system automate those steps.

So, we’re working closer with clients to talk about how can we drive efficiency in the process, what kind of things can we do to, you know, have those integrations to enable some of those digital processes, or how can we automate the work flow to make that process as straightforward as possible for the maximum number of situations that they might encounter.

Peter: Okay, so then, I’m assuming you keep up to date with all the fintech players in the space. We’ve had people from…..we had the CEOs of Blend and Better, we haven’t had Roostify yet, but we will…..like those sort of companies, these are focused just on typically the residential mortgage market for providing full banks to help make it more efficient. How do you view those companies, like do you see them as competitors? Obviously, you’re a much bigger organization than any of those companies I’ve mentioned, but just a bit curious to see what your take is on those new players.

Steve: Yeah. You know, I think for a lot of entrants in the market, that Point of Sale experience is the easier place to start. You know, you can build a solution and scale it and I think Blend, Roostify and others have good products. Where we’re focused is on that vertical integration, the Point of Sale solution, and the loan origination system. Those providers, no disrespect to them, they do what they do well, but they rely on the LOS and a number of different integration solutions in order to make happen what they deliver.

We can integrate the Point of Sale solution with other LOS’s, but I think we offer the best experience, most compelling experiences where we’re vertically integrated between the POS and the LOS together, where we can really make sure the data flows as seamlessly as possible that, you know, things around status notifications, status finding conditions on the loan, that kind of thing we do really well and that we’re controlling kind of the full stock of the experience. So, things like the 3-day disclosures at the end of the application, we’re able to do that because of the data that we have in both systems and that for us is a competitive advantage.

Peter: So then, as you look at your product roadmap and I don’t know how far you go out, but I’m wondering, where are we going here? Do you think in ten years time people buying a home will be all done on a mobile phone? It will be very, very fast. Do you think there will still be some kind of blend of maybe mobile with, you know, maybe even a physical branch visit, or a video conference call, that sort of thing, where do you see this market going?

Steve: Yeah. I think that, you know, when you say ten years out, it’s too tricky to project out. You see all this kind of incremental year over year improvement and ten years later, you look backward, you’re like, wow, the world is really different. I think from a consumer/borrower perspective, I think that the ability to leverage different sources of data to streamline the application process is going to change a lot.

So, like I said earlier, we’re just starting to see some of that, but really creative uses and sources of data to simplify the application process so that you can take something that may be a 10/15-minute activity down to less than a minute activity to say I want to apply for a mortgage and the system just knows where to go because it knows enough about who you are to go grab that data and complete the application, or submit the data on your behalf.

You know, certainly, on the processing side of it, I think there’s going to be a lot of drive to apply1 Artificial Intelligence, machine learning to try and drive scenarios and performance and efficiency to the process. So, they know that these conditions have happened, you know, a hundred thousand other times and they see it again, the system knows how to automate certain steps and make certain requests of other systems for information and you try and drive efficiency together with the process. So, I think, automating business rules and logic-driven kind of decisions are going to be really central to the processing of a mortgage to simply the experience and drive down that cycle time as fast as possible.

And lastly, I think, you know, those third party sources that I talked about, you know, something like an appraisal could change dramatically over the next ten years, in terms of how you value a whole…..are there sources of data and information that exist that don’t require somebody to go out and physically appraise the property because you can tap into other data sources in order to do that. So, I think, there’s a lot of disruption that could happen over the next ten years in the process.

Peter: Right, okay, that makes sense. So, I want to switch gears to commercial lending because I know this is your other area and it’s an area that I find fascinating, Obviously, there are some overlap, I mean, process-wise. A lot of times, a commercial loan has collateral, often a physical property backing the loan, but, you know, it’s another area that’s complicated, it’s been slow to move to digital, but there seems to be progress being made. Why don’t you just give us the lay of the land in commercial lending today when it comes to applying digital user experience to it.

Steve: Yeah, I would say, you know, you use your baseball analogy, I would definitely say we may just have started the first inning on commercial lending. It’s so critical that so many community banks and credit unions in our markets that we serve…..there are so many community banks who are built on commercial lending, you know, relationship-based lending with the entities out there, local markets and those are long entrenched established relationships and migrating those things online and changing those relationships to be electronic relationships has been a slow moving process.

So, there are tools that enable a commercial entity to go apply online, you know, it’s a basic loan request that you can attach documents that might support it, but, you know, there’s still so much due diligence and unpacking of entity information, things like that. It’s still fairly complicated for a brand new commercial relationship to be a completely digital one because of the complexity of those homes.

From a back office processing, you still have, you know, your classic credit committees and people doing the credit memos, the underwriting process. You know, there is so much that makes each loan unique, the financial circumstances of that that it’s harder to automate the processing of those loans because the information varies from borrower to borrower so dramatically and the type of loan product that may be presented varies and the risk associated with those things. It’s a really different beast than something like a mortgage.

Peter: Sure, sure, that makes sense. So then, like your customers, the community banks and some of the larger banks, I mean, are you really focused on sort of what I would call the middle market, $500,000 to $50 Million loans, is that sort of the core? Do your systems also help them with doing small business loans, what’s sort of the range?

Steve: Yeah. You know, there is a continuum from the individual who’s applying and using their personal credit as the leverage for that particular loan, and then you have those where you have multi-party entities. Which system and where they go for those kind of things does get a little grey sometimes.

Sometimes, financial institutions want to do some of those smaller individual proprietor loans on their consumer system, sometimes they end up in the commercial system, but when you’re talking about true commercial lending, as you described it, that middle market kind of thing, that’s where our product, CreditQuest, is really well tuned, kind of those multi-party entity kind of commercial loan relationships.

Certainly, we can do the smaller ones, but it really goes down to the institution of preference. Do they view that as a consumer loan that happens to be funding a business transaction, or do they want to kind of treat that as a commercial even at the smallest level, so there’s a lot of variation on how our financial institution clients approach those types of loans.

Peter: Right, right. I’ll ask sort of a similar question that I asked about mortgage lending is, what do your bank customers want to hear because, I imagine, everyone, every loan is so bespoke because every business looks very different. Is it really more of data gathering, is it loan origination kind of ….what do they really want today to help them improve their efficiency in this process?

Steve: Yeah, I think it does come down to the borrower interaction and so having good online tools to be able to apply for a loan and then be able to share the financial data with the financial institution, so being able to extract data out of an accounting system, pass that information to the FI and be able to load that then into their commercial loan origination system and just make that process easier.

You know, even the covenants associated with the loan want that on the books. Annually, they may be required to share that information, how do they gather that information kind of quickly, seamlessly and as painlessly as possible for the borrowers to complete that request. So, it’s really around, I think, the borrower experience that our clients are telling us. That’s what they’re looking for us to provide solutions.

Peter: Right, right, okay, fair enough. I want to switch gears a little bit. I was listening to a podcast where you were being interviewed a few months ago, where you were talking about the importance of maintaining a physical presence. We’ve just been talking about digital this entire interview, so far, and you will make the argument that physical presence is still so important. So, given that we know we’re all moving towards a more digital world, what’s the argument then for your customers maintaining, you know, the banks maintaining a physical presence in their communities.

Steve: Well, you know, I often talk about this because people so often look at “traditional businesses” as a traditional retailer, or a traditional financial institution, they talk about the age of digital and the marks of digital and everything is going online, but, I think, it’s often under reported, the view that digital is also going more traditional.

My example I like to use is Warby Parker. Warby Parker started as an online glasses retailer, you go to their website, you order five pairs of frames, they send them to your house, you try them on, you pick the frames you like, send it back and some number of days later, they send you a pair of glasses and it’s done.

That sounds great, right, but Warby Parker has realized that, I think, they’ve reached a certain amount of organic volume online and if they want to continue to scale and grow, they’ve got to get out into the communities where people are shopping and offering those solutions to people in a traditional retail environment.

And so, I was just talking about this when I was down in Chicago a few weeks ago, and within a seven-mile radius there were like four/five Warby Parker glasses retail stores. And so, there’s this convention, or these beliefs that everything is going to go digital and that retail is entirely doomed. I don’t buy into that narrative that everything is a completely digital experience, I think there has to be a good balance between both.

People are always going to want that convenience of being able to go somewhere and get a great service experience and that’s why I think….I don’t think that it will always be at a scale and the answer for financial institutions to grow is always to open another branch. They can be more strategic about where they have branches, but I think branches and a physical presence are a great asset to serve the local community, to have the relationships and to be able to provide a great experience that represents the brand of that financial institution.

You know, I think that quick loans are out there…..you know, could open up rocket mortgage stores just because, I think, it’s a way for them to continue to try and get share of those transactions via the online environment. So, it wouldn’t surprise me to see non-traditional financial institutions have a physical presence somewhere in the next five or ten years because they need to scale.

Peter: Yeah, yeah, right, fair enough. So, conversely, you spend most of your day talking about digital tools, I imagine, and you’ve said that the banks, they are commercializing, they want a better digital experience, same with consumers in the mortgage space. So, when there isn’t this physical face-to-face transaction, or face-to-face interactions to close a deal or whatever, when it’s purely digital then what do you say to your customers about how they can really ….maybe not mimic, but, certainly, move towards a more personal, less kind of purely digital experience when you’re operating just in the digital environment?

Steve: Yeah, a digital transaction…even if you never talk to someone, or never experience that in an institution, it’s still a manifestation, or a representation of what that brand of that institution is all about. I took out a car loan recently with my daughter and it was an entirely digital transaction from kind of beginning to end, but it still made me have an association/affiliation and a fondness for the institution that I was borrowing from, that’s where I have my checking/savings account and it was a great experience being able to do those things digitally.

It made me feel like, hey, this institution has figured out this part of the process and gave me confidence in the institution. So, something that is seen as inhuman created a more human feeling about the institution because of the positive digital experience I had.

Peter: Right, right, okay. So, we’re almost out of time, but before I let you go, one last question. You’ve been in this business for a while now, you’ve talked about it, it’s hard to sort of think about what happens in ten years time, or look at how far we’ve gone in the last ten years, but when do you think it will be 100% digital experience, potentially with maybe an option to have some kind of physical kind of interaction, any kind of transaction, whether it’s a complicated commercial transaction, or applying for a mortgage. When do you think that’s going to be 100% digital?

Steve: I don’t know that it ever will be and, you know, part of it, especially when you talk about something like a mortgage, and you said it at the top. It’s a scary transaction because it’s probably the largest financial transaction many people would make in their lives, right. We’ve seen data and studies that show that repeat home buyers, or people who have purchased a home multiple times want fast, digital experiences.

People who are first time home buyers, you know, at our time that happens to be millennials now, still want to have the comfort of being able to talk to someone who understands, and I think there’s always space for that kind of conversation to be not a digital one. I believe that much of it that can be done digitally will be done digitally.

So, I’m not trying to advocate that everybody should go and open a blockbuster store, right, I think that a lot of things are going to be digital, but I just think that the ability to have a human interaction to get that comfort on a transaction, or to ask a benign question and just know that you’ve got an answer that you feel good about always leaves a little space for a non-digital experience. But, certainly, the pain of getting the data exchange and the nuts and bolts of the transaction as quickly as it can get there, that’s what consumers want.

Peter: Right, right. Well, you make some very good points there, Steve. It really is interesting, it’s going to be interesting to see how it plays out, but, as you say, it’s not so much……a first time home buyer is going to want to have….they want someone to talk to, whereas, someone who’s doing it for the fourth time, just let me get this done over with. Yeah, that makes sense.

Okay, anyway, I really appreciate your coming on the show today, Steve, thanks a lot.

Steve: Thank you, it’s been my pleasure.

Peter: Okay, see you.

Steve: Bye.

Peter: You know, I think Steve makes a very good point there towards the end where he talks about …..that some people, even people who’ll spend their entire day on their phones and they’re used to digital experience in pretty much everything, you know, they’re going to buy their first house and take a loan out several times larger than their annual income.

They’re going to be a little bit tentative about that, they’re going to want someone often to hold their hand, whereas, maybe someone who has done it three, or four times will be satisfied with a 100% digital experience from start to finish, make it as efficient and quick as possible.

So, there clearly is room for this non-digital, or maybe it’s just a more sort of interactive experience when it comes to taking out a mortgage and taking out a large commercial loan for that matter. So, it’s not all just about how can we digitize, how can we make this a better digital experience; it’s about looking at the overall experience, what the customer wants and how to deliver on exactly that.

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, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 222 –  JAMIE WARDER

Welcome to the Lend Academy Podcast, Episode No. 222, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Jamie Warder, he is the Head of Digital at KeyBank. Now, KeyBank is a super regional, most people know them, they’re actually one of the largest super regionals in the country and they’ve been making little waves in the fintech space doing some M&A, and wanted to get Jamie on the show to talk about all these.

Firstly, he’ll give us some background, he talks about exactly what the Head of Digital does, what they’re responsible for, talk about their approach to M&A, we do a deep dive into two of the M&A deals they’ve done over the last year or so. We talk a lot about financial wellness and how that’s a really big priority for KeyBank and we talk about speed and user experience and what their approach to really incorporating a lot of the expertise and knowledge of these fintechs have into the bank. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Jamie!

Jamie Warder: Peter, thanks for having me, I look forward to our discussion today.

Peter: Me too, okay, so let’s get started. I like to kick these things off with giving the listeners a little bit of background about yourself. I mean, you’ve been a banker, it seems, for quite some time, for most of your career, it looks like, why don’t you give us some of the highlights of what you’ve done today.

Jamie: Sure. Well, even before banking, I actually got started as an officer in the United States military, spent five years as an Army Officer and it’s funny how often my army days end up shaping who I am these days. But, after a little bit of time in the Army, a little bit of business school and a little bit of strategic consulting, where I ended up doing a lot of healthcare as opposed to financial services, I did move into banking.

I guess that’s been about 15 years ago and have had the opportunity to just serve in a variety of roles and serve a variety of great institutions, National City, P&C, Capital One, USAA, KeyBank and currently here at KeyBank. My experience has been in most aspects of banking so, you know, general P&L most recently over the last half decade or so, but before that channel and product roles along the way.

Peter: Okay. So then, I think everyone here would have heard of KeyBank, some may not know a lot about the bank, so why don’t just give us a little bit of headline background like how old is the bank, where you operate, that sort of thing.

Jamie: Sure. So, Key is about a 150-year old super regional. Like many super regionals, we’ve grown up over the years through both organic growth and acquisition. Our footprint is an interesting one, it runs, I’d like to say, across the north although it’s a little broader than that, but five time zones from Alaska all the way to Portland, Maine. I like it because we have some very robust mature market like Albany and Buffalo and Pittsburgh and Chicago.

We also have some hyper growth markets like Seattle and Portland and Salt Lake and Denver and Boulder. So, it’s a really neat mixture of those hyper growth markets, but also some strong robust markets. These days, it’s about 13 in almost any measure you look at, so whether assets or deposits, we serve everything from consumers to small businesses, middle market up to institutions, large institutions, Fortune 100 institutions, so the full gamut and we do everything from payments, lending, deposits, capital markets or perspective for those different customer bases, Peter.

Peter: Your official title is Head of Digital at KeyBank and I believe this is a new position. You moved into that from the Business Banking area, why don’t you tell us a little bit about what you mean when you say Head of Digital.

Jamie: Yeah. So, you’re right, Peter, this is a new role for Key. So, the Head of Digital as we reorganized recently, six or seven months ago, we thought there was a need to really bring together our digital capabilities from across the enterprise.

You start to think about those holistically and, again, from an enterprise perspective, everything from servicing to originations, from our consumer clients to our middle market all the way to our institutional clients, but really think of those things holistically. I want to say there’s kind of two spectrums in digital, you know, one spectrum would say, well, digital is anytime you’re using software or data to enable the business. Well, I think that’s everything in every way.

Peter: Exactly. (laughs)

Jaime: So, that’s a super liberal version of what digital is. There’s also a very, very narrow definition of what digital is which says, well, there were browser tablet for servicing and originations, and as we thought about this role, we really thought about it, somewhere in between. It’s almost thinking about where strategically is it most important for us to think about how we bring software data to enable the business, but there is a heavy emphasis on those areas where our clients, or our colleagues who are working with clients are kind of working with digital capability.

So, you know, I see that my job and my team’s job to really think about where the leverage point is for digital and how do we influence those important leverage points for Key.

Peter: Okay. So, there’s still quite a bit in play there, I mean, you came from the business banking side of things, so does this include small business, does it include consumer, you talk about the mobile app, you talk about Zelle, those sort of things, maybe what does that exclude, I guess, might be more important than what it includes.

Jamie: Yeah. No, it includes all of those things. We really think about all of our different clientele and Key proudly serves 3 million consumers, but we proudly also serve 250,000 small and medium businesses and a number of really large institutionals, so that includes all of those clients. It includes…..you know, when they’re servicing their accounts, so if they’re logging in and authenticating and they want to do things like check their positions, or move money, or techniques and sign their accounts, it includes thing like you said, money movement so the bill pays them a Zelle and all of those things.

What it doesn’t include….the one thing that we don’t include in the organization formally, but I would tell you we have a very, very strong partnership would be on unauthenticated, so key.com and some of our unauthenticated. We just think that there’s a better synergy with marketing there, so we work very closely with marketing, but they run those unauthenticated channels.

But, generally, if you are logging in and we have a lot of influence because we’re sharing the underlying services on those systems that our colleagues use and those colleagues who are direct client-based. So, if you think about it, our branch colleagues and the technologies that they use, our relationship managers, the service and sales officers and the technologies that they use.

Peter: Right, right, okay. So, I want to talk a little bit about how technology has kind of shaped your thinking because you’ve been around banking, you said, for almost 15 years and fintech wasn’t really a thing 15 years ago, that term didn’t exist. It’s now used with abandon today and considered….it’s sort of an all encompassing term for technology’s impact on finance. But, I’m curious sort of when you look at like the fintech players which are those players that are sort of natively digital online, how do you sort of think about those players and what’s the impact it’s had on a bank like KeyBank.

Jamie: Yeah. It’s a great and important question. You know, I actually think if we go all the way back and probably back before my time in banking, Peter, you know, digital found some it’s early roots in banking. I think if you go back to some early use cases you were probably talking about the travel industry where, you know, people could begin to book hotels and airfare online, but a very close follower to that was the ability to see your accounts online, BillPay came along, so I think some of those early use cases were digital.

We didn’t call it digital back then, but those were early use cases of using the Internet for things that people could do every single day. I think, you know, there was probably, and this is my take on the whole thing, there are probably a 15-year roll or so where, you know, those were some of the killer apps, BillPay and online banking, and, you know, at some point maybe, I don’t know what the exact timeline would be, about five or ten years ago, probably starting with PayPal, I think there was this next evolution of fintechs and I think it became easier to start putting things together.

We started to see fintech players really focus on a particular area, be it in payments, or deposits, or investing, or lending, and they did it, I would say, the right way. They thought from customers back, they designed from an experience perspective, they picked, you know, these slivers of capability and did them extremely well, they did that thinking digital first, not necessarily branch, or call center first, and as you and I know, on the last decade we’ve just seen an enormous number of those really shape and change the industry.

So, I want to say fintech, although it’s new, I think it’s actually re-surging, you know, I think it’s been around for a long time, I think we can learn a lot from the fintechs. You know, I think they teach us things like build with design in mind, I think they teach us things like we’re backwards from the experience, make it easy, make it fast, make it transparent like all of these things are in the digital make of DNA.

I think banks are reminding themselves of those things that they probably thought about 20, or, 30, or 40 years ago in an analogue version in their physical footprints, or their context and their footprint. You know, I think our digital fintechs are thinking about those truly in a digital way.

Peter: Right, right, that makes sense. So, I want to switch gears a little bit and talk about M&A and you guys have been moderately active in that space. There are a couple of acquisitions that I sort of want to sort of dig into here. Before that, do you have like an M&A strategy that the bank kind of adheres to, mainly talking about, obviously, fintech M&A. Is there something that you have sort of a real kind of overall strategy that we can dig into some of the acquisitions you’ve actually made?

Jamie: Sure. So, even before M&A, I actually….I’d like to talk about three areas in fintech broadly, and it’s really the way we think about it here, Peter, along the spectrum and we have good examples of each.

So, first, and probably the most common, is where we just partner with fintechs, so one is Zelle. I guess we can call it Zelle a fintech at this point, but, you know, we didn’t acquire Zelle, we don’t have an equity partnership with Zelle, but we partner with them because they have a great capability that gives our customers something that they want and need, and we partnered with them as a way, you know, to bring fintechs to our customers.

So on one end of the spectrum it’s just good old fashioned partnership, you know, supplier/vendor relationships. If you move over on the spectrum and something that we do quite often. As a matter of fact, we have an entire team that constantly evaluating these and finding the opportunity, but we’ll actually invest in fintech.

So, you know, we continue to be independent. Before we buy equity in them, we find this to be a great way to help them shape their roadmaps and help really make sure that there’s good synergy. We can usually help them with a client base and distribution and they can help us by pushing our thinking on great design and great capability, so we’ve recently, over the last couple of years, we have half dozen examples. SnapSheet2 has a great insurance product for some of our insurance clients; InstaMed which helps some of our providers, doctors, dentists, ambulatory clinics with billing.

We partnered with those two fintechs and invested in them. And then, finally, as you mentioned, the M&A and we certainly have some of those examples. You have read about HelloWallet, Bolstr and most recently, Laurel Road, but we do that as well, all out acquisition. So, we are constantly searching and all in the name of bringing our customers the best capabilities and the best products out there. We’re searching with who can we partner with, who can we invest in, and in cases, where can we acquire outright.

Peter: Right, right. So, let’s dig into the latter one you mentioned, the Laurel Road. I think many listeners would know that name, we had Gary Lieberman on the show a couple of years ago and he was the Founder and CEO.

Jamie: Yeah, I am not nearly as articulate…let’s just put it in the right perspective.

Peter: (laughs) I don’t know about that. Anyway, so maybe….first, Laurel Road, obviously, focused on student loans re-refinancing. They became one of the major players in the nation in that space, but what was it that attracted you to the company initially.

Jamie: Yeah. Well, you mentioned one which is Laurel Road is just a terrific company. As we looked at them, we saw, one, a digital first company that it created a very nice consumer lending platform. As you mentioned, the third or fourth largest graduate loan re-finance program, student lending, re-finance in general, so we thought, one, as a source of just high quality consumer loans done the right way, done with credit in mind and making sure we’re originating very credit worthy customers, an experience, you know, that has Disney-like net promoter scores, so just a really terrific experience.

So, we liked, one, the consumer lending growth. They also have built over the last several years just really good digital capabilities, not just around student loan, but also around mortgage and real estate lending and we saw that as an opportunity to use some of their technology and design and be able to import that into our large and growing mortgage and home equity business, so we really liked the lending.

You know, the core business that Laurel Road is bringing along, we liked the technology around real estate lending, but, third, we’re still figuring out exactly what and how we use these going forward, but what Laurel Road really represents is thousands of customers who come and use Laurel Road are very satisfied with the experience. And, you know, our millennials, they are, generally, on a more affluent side because a good portion of them are graduates and have graduated from graduate programs rather, so we really like the fact that it’s also a source of household growth for Key.

We need to figure out is there a way for us to really….you know, can those customers do more, do those customers want to do more with us. So, just to summarize, a great lending business, some terrific technology that we think is leverageable and then, finally, a set of clients who would introduce things to KeyBank and we think we can do more. We have given some of the services that Key has.

Peter: Right, right. So then, I’m curious, I know it’s only been a few, like six months, since the acquisition closed, so it’s not that much time. If you go to laurelroad.com today, it’s the same experience, or a similar experience that it was a year ago, so Key hasn’t taken over the brand. You do make it clear that this is a brand of KeyBank. Is the plan to keep this as a standalone brand, or eventually fold it in and have …..this will be a KeyBank student loan re-finance?

Jamie: Yeah, we really like the brand that Laurel Road has created and they’ve created a brand specifically with the healthcare industry through partnerships with, you know, some of the largest healthcare associations. So, we really like the Laurel Road brand and for that reason we want to build on that brand and right now, there are no…..never say never, but, right now, there are no plans for us to change the Laurel Road brand, we will leave it as an independent brand.

We’ll think about how we grow and expand the capabilities of that brand. We’re not going to hide, like you said, Peter, that Laurel Road is a division of KeyBank, it is, but if you’re deep into your statement, you’re going to see KeyBank written all over them, but, right now, plan is for Laurel Road to continue to be an independent brand.

Peter: Okay, okay, interesting. So, let’s maybe talk about one more that you’ve done and that’s Bolstr. Bolstr may not be quite as well known, but they were a small business lending platform. I think this was done…might have been done I think last year, from memory.

Jamie: Right.

Peter: Tell us a little bit about that acquisition and how….firstly, what attracted you and how you’re kind of using that kind of intellectual property and brand that you’ve acquired them.

Jamie: Yeah. So, Bolstr had, as you mentioned, some really unique capabilities around small business lending and, you know, the ability for a small and medium enterprise to go through an application process, know exactly where they are in that application process, be able to submit documents pulled from external data, e-sign, you know, all of those capabilities, it’s not easy, again, in true fintech form.

We really liked the technology and it was area to us that filled the gap, not only for the small business experience, but also some of the underlying services that we think and are leveraging more broadly for other kind of commercial banking applications. So, this one was a little more….we didn’t keep the Bolstr brand in this case, it was a little more of a technology and talent opportunity for us and we have integrated that in, we have pilots out in market today, so clients are able to do, you know, small business loans at their place of business in 15 or 20 minutes.

You know, we’re getting approvals done within the day, we’re getting funded loans within days, so, again, all on the journey to make things faster, easier and more customer-centric. We saw Bolstr as a way to accelerate us on that front in the small business space.

Peter: Right, right, okay. So then, is this going with your SBA loans, or is this just sort of more of the other kinds of loans you do?

Jamie: Yeah, this is both. So, one of the things we really liked about Bolstr was the ability for us to customize the flow of the application based on what we were learning about you. So, as the borrowers are providing more information, we can then customize the flow, and if it makes sense, the customer may want to consider an SBA loan and, you know, we can start to present those options. And, if they tell us something like, hey, I’m a non-profit, we know we can’t do SBA loans for non-profits then we can send them down the conventional path.

But, building that logic in, building kind of the brain and advice of a relationship manager, or a good branch associate into the technology was important to us. So, it’s not just capturing information, but it’s actually providing, you know, advice and insight along the way. Bolstr’s done a nice job at kind of building that into their product and we’re carrying that forward for our customers here at Key.

Peter: Right, right, okay. So then, going forward, I mean, I’m curious to get your take on….you know, super regionals like yourself, do you think that this is going to be a big driver of M&A in fintech? I know you can’t think for banks, but I’m just curious about…..are we going to see a flurry of activity over the next couple of years, what’s your take?

Jamie: My take is what we’ve been seeing over the last several years which is banks partnering…..so, I think about, you know, Chase, although I don’t want to talk about other banks, but Chase just…they got started in their small business lending through a great partnership with OnDeck. We can look at where there’s been acquisition, we just talked about a couple at Key, but, you know from reading the papers, these are happening literally everyday, and I do think that middle category we talked about which is equity investments to help drive the roadmap.

I don’t see that slowing down. As a matter of fact, in a world where our customers are telling us they want to do more with us digitally, matched with the world where fintechs are thinking about how do we do, you know, the things that we do every day better, faster, more digitally, I think those are natural marriages, Peter. So, I don’t expect it to slow down, if anything, I expect it to speed up.

Peter: Yeah, it’s really interesting to me to see through the…..you talked about the equity investments and when you see these deals, there’s been a lot of deals this year, some large deals, in fact, so often there is a bank that’s….they want to be leading the deal, but they’re involved. It seems to me that banks are becoming really big suppliers of capital for a lot of these fintech firms which, I think, is super interesting.

Jamie: Indeed. I think they see it as a part of how do they evolve, how do they accelerate, how do they, you know, quickly get capability that would take them a lot longer to build in-house. I think we’re all becoming comfortable with that, you know, I think the regulators are becoming more comfortable with that and getting experience on how these types of partnerships work.

Peter: Sure. So, I’m particularly curious about ….you know, you talked a few times here about the technology, the hiring of the technology expertise and one of the things that sets these online lenders apart is the speed that they’ve been able to …speed of approvals, the speed of the application process.

You said you got the small business process done in 15 or 20 minutes which I think is great, but is that…..what I’m really getting at is the sort of the focus on speed really permeating throughout the bank? I mean, the millennials, they don’t want to sit around and wait, they get very impatient with any sort of slow process, maybe you could talk a little bit about the speed aspect.

Jamie: Yeah, this is just something that I think, again, the fintechs have probably really figured out as their designing experience is in their talking to customers about the experience that  customers are looking for. You’re right, customers…..you and I and all of our friends and family, they don’t want to spend a lot of time doing this stuff.

They want it to be fast, they want it to be easy, more and more they want it to be done on their phone and make a decide where they want to do it, so, I think, you know, if these fintechs have been designing their solutions and products they’ve really been thinking how do we make it fast, transparent and easy, and that’s just part of the principles of priorities that they put into their design and, you know, by doing that, I think, they’re teaching us, banks, how much work it is to do.

You might say, well, gosh, the banks should do the same thing. In one way, I think, the fintechs have an advantage because they’re typically picking certain use cases, so they’re not trying to (garbled) every use case, they’re picking a narrow use case, they’re getting very good at that narrow use case and designing it, you know, in a digital first way. So, I think it’s important, I think they’re teaching us that, and, I think, more and more speed up to be a design principle that we’re all thinking about.

Peter: Right, right, okay. We’re almost out of time, a couple of things that I really want to get to. I want to talk about financial wellness. You mentioned HelloWallet before and you guys have an entire financial wellness section of your website, and, I mean, that’s something that I’m personally pretty passionate about, how we need to be doing more to really help the masses and the population that are not doing all that well financially. So, maybe you can talk a little bit about the approach, you know, from a digital perspective, what’s driving the financial wellness movement at Key.

Jamie: Yeah, well, important to know, financial wellness is the absolute core of our strategy and I’m certainly not sharing any secrets. As you said it, it’s on our website, we talk about it, we’re proud to talk about it, and what do we mean by financial wellness? We want to help you understand your current position and financially well are you and then we really want to be able to help you become more financially well and that could be, you know, that could be across the spectrum.

So, it could be someone who’s struggling, it could be that individual who is saving for their retirement, it could be the small business who’s trying to figure out how to, you know, finance the next piece of equipment. So, this concept of we want to help you understand how we are doing, but that’ll also give you hints and advice and feedback on how to become more financially well, and we want to do that across the board. We want to do that if you stop in and have a wellness review with one of our bankers, but we also…if you’re not going to do that, if you’re going to be at home, we want to be able to do that digitally as well and just leave it up to our customers.

So, in every touch point, we are looking for ways, Peter, where we can help clients understand their position and help them do better. So, HelloWallet, if you think about what HelloWallet was doing, it allowed you to aggregate all your accounts, whether they were with Key or not, it provided with a financial wellness score which gave you a good indication of how are you doing versus others like you.

It gave hints and tips and not just around spending and saving and things that we thought could make you more financially well. Those are the things we’re integrating into all of our digital capabilities, those are the things that are integrated into all of our human touch points. You know, if you’re talking to someone from KeyBank, they’re going to be talking to you about your financial wellness. So, it starts with strategy, translates then to both our digital and non-digital properties, and is all around kind of a higher mission of helping our clients do better financially.

Peter: Right, right. I think that’s super important because, you know, everyone has a banking relationship, not everyone, most people have a banking relationship and if you’re not getting them there, I feel like that’s the touch point that people need to be to be able to get the information and the education about how to improve their financial lives, so that’s great.

Anyway, last question, just curious about what you’re working on now, what’s coming down the track. I know you’re a public company, you can’t tell me any secrets, but what’s coming down the track for you guys?

Jamie: You know, I’m not giving away any secrets, 91% of our interaction to a client is happening digitally these days. We want to make that experience great for them, so just giving our clients the ability to do more on their phone, to do more at their mobile browser tablets, we want to make it easy and fast for clients to do more business that they want to, you know, grow their relationship with Key, we want to make that easy and fast, so we’re really thinking about all of our products and originations, again, across consumers, small to medium enterprise and the largest institutions.

And, finally, as we talked about, we’re really looking for those ways to embed financial wellness through our capabilities and products. If a client doesn’t happen to interact with us in a face-to-face, we want to be able to still provide them financial wellness digitally. So, as I think about those different areas, as I think about, you know, a great servicing experience when our clients need to service their existing banking relationship, when I think about the origination experience and wanting to do more business with us and make it easy for them to do so and not just embedding financial wellness across the board, I think those are our priorities. You know, you find those in all of our public statements and it really is what we’re spending our time and focus on.

Peter: Okay, that sounds great. I really appreciate you coming on the show today, Jamie.

Jamie: Hey, thank you very much, Peter, and thanks to all for listening.

Peter: Okay, see you.

You know, I think banks like Key are going to play a bigger and bigger role in the future of fintech. We’ve already seen them do some pretty significant acquisitions, they’re clearly not finished, and, obviously, there’s new fintech companies being started all the time. There’s also more that are getting rapid scale and, you know, I think you’re going to see these banks….they’re going to jump in and be able to bring their resources to bear on taking sort of all the best practices and the positives and all the good that Jamie talked about in the interview, what fintech does really, really well and bring them into the bank and having them become really part of the bank DNA because that’s really, I think, what we’re getting at here.

Banks haven’t been known for their speed, for their user experience, and, I think, bankers like Jamie are very clear about that and wanting to change that narrative and I think it’s going to be interesting. I think we already are seeing it happen and I think it’s only going to become more so where banks are going to behave much more like fintechs going forward.

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, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 221 –  MARTINS SULTE

This episode, No. 221, of the Lend Academy podcast was recorded at LendIt Fintech Europe 2019. It was recorded live onstage, there is also an accompanying video, but we have what follows the audio from that conversation.

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Peter Renton: Okay, welcome everybody. We are here for a special LendIt Fintech Europe 2019 edition of the Lend Academy podcast, and it’s my pleasure to welcome Martins Sulte from Mintos to the show. Maybe we can get started, Martins, by….why don’t you just give us a little bit of background about yourself and what you’ve done so far in your career.

Martins Sulte: Sure. So, I’m originally from Latvia. Basically, my previous career before Mintos was mostly, if not like….everything was related to finance so I spent my time in investment banking for a good six years. Then after investment banking, I actually decided to pursue my MBA and did MBA at INSEAD in Singapore and in Paris, they have two campuses, and then after INSEAD basically decided to take a plunge in entrepreneurship and start Mintos, that’s very short.

Peter: Okay. So you went straight from university straight to your masters, right, and then straight into starting this company.

Martins:  After my MBA, yeah, so straight from MBA. And then before MBA, basically when I was looking for a loan to finance my studies was my first exposure to P2P.

Peter: Right:

Martins: I actually got the student loan from Prodigy Finance to fund my studies at INSEAD so there was some connection also already before INSEAD to the P2P concept.

Peter: Right, interesting, interesting. So, you came at it from the borrower side originally. So, what was the idea….were you looking to start like something in financial services, or what was the idea that really led to Mintos?

Martins: I think I was looking…after MBA, after my masters, I was looking what to do next and I knew already before INSEAD that I wanted to take a plunge in entrepreneurship and then after INSEAD I was just looking where could add the most value, what kind of interest me and then just combine the two things. So, I had my background in finance, so I spent like time in investment banking, did the CFA, studied undergrad in business and economics, had a kind of finance background and then just like my love for tech. So, I’m not like technical, I cannot actually write a code, but I’ve always been passionate about technology.

And then, I think, after INSEAD, just was looking at the space, what’s happening in financial technology, financial services and that coincided with the advent of peer-to-peer lending at that time which was like early 2014. I still remember coming actually to the first LendIt in 2014 in Europe and then that’s also, of course, other players kind of scaling up and was just looking at the space. I think what made me kind of thinking is the whole concept of having like very many different platforms, each of them kind of originating different loans and then as an investor if I want to invest, I have to go to each and every platform to get kind of exposure to this asset class.

That kind of didn’t make sense to me, I thought there should be a better way actually and that’s how the idea about Mintos came about as a marketplace for investments of loans where there are many different loan originators, and as an investor I can come to one marketplace and find a lot of different loans from many different loan originators.

Peter: Right, right. So then, your platform has become a bit of a phenomenon, I would say, in Europe where you are now originating. I’ve been following your history and just seeing how…..eventually, you started to keep growing and it seems like it’s taken off like a rocket ship. You’re doing more loans than like Zopa and Funding Circle combined, sort of thing.

So, tell us…maybe we just step back, I’m curious to maybe get a sense because you’re based in Latvia, right, so then what is it…I’m curious about what the environment is like in Latvia, like do you have all your developers there, is your whole team there, do you have other offices? Tell us a little bit about that.

Martins: Sure. So, basically, how you should look at that, Latvia is where are based out of so most of the team sits in Latvia and we have offices in Berlin, in Warsaw, in Vilnius, in addition to Latvia but most of the people sit in Latvia, but businesswise, like 95% of the business we do outside of Latvia. That’s basically…when I was looking to set up the company….so we had a clear choice, either to start in London, or start in Latvia.

But at that moment, it definitely felt and I think it was a good decision to start in Latvia because I had all the kind of network available, the capital there and just seemed right to start out of Latvia. Today, it’s definitely like a competitive advantage for us that we are based out of Latvia because the cost base for us is rather low, but it will allow you…..which we can build as the same what you can build from Western Europe.

Peter: That’s part of the Euro zone, is that right (cross talking)

Martins: It doesn’t matter these days where you start from and from day one, it was global ambition. So, my ambition was always, hey, that we’re going to build a global marketplace or then we just don’t do anything.

Peter: Right. So then maybe let us…..you aren’t just focused on Europe today, you’re focused….I saw an announcement, I think, yesterday that you’re starting out in Kenya, I think it was, and I know you’ve got Mexican platforms, so maybe……..how many platforms do you have and how many countries did that come from

Martins: Yeah. I’m just going to step back a bit and explain how we actually operate. The marketplace, it’s a two-sided marketplace. On one side, we have the loan supply and loan supply is brought to the marketplace by loan originators. Those are separate companies like they’ll be focused on alternative lending companies, all of them are balance sheet lenders, or used to be balance sheet lenders and they are using the Mintos marketplace basically to sell the loans they originate so that’s the loan supply side of the marketplace.

Another side of the marketplace is investors and on that side we have retail investors who are then coming to the marketplace and buying the loan parts of the loans which are originated by different lending companies. What it means, we as Mintos, we don’t touch the borrowers so we never see the borrowers so we don’t do the credit scoring of the borrowers, that’s done by the loan originators. If you look at the loan originators, we also call them lending companies, today we have 67 different lending companies from 31 different countries and that’s what we, I think, bring to the table for any investor is like unmatched supply of loans, right.

Investors can invest in different loan types, on consumer loans, on business loans, invoice financing, agricultural loans, car loans, you name it. It’s different countries so today, we have 31 different countries, anything from what you mentioned like Kenya, South Africa, Zambia, Botswana in Africa to Colombia and Mexico in Latin America and then Vietnam, Indonesia and the Philippines in Southeast Asia and then everything in between, in Europe, a lot of countries and also Central Asia, Kazakhstan and Armenia and those countries as well.

Peter: So then, given that, it’s such a broad spectrum of countries, how do you vet these companies. As I imagine, like anything, there’s going to be well established players who are very trustworthy, there will be others that are newer and it’s harder to know whether they’re trustworthy. So, what sort of process do you go through to allow like a lending originator on your platform?

Martins: So, basically, they’re going to go through the due diligence process with us and, obviously, there’s like different loan originators from our marketplace. There are players that have been around since actually 1999, they’ve been lending as a balance sheet lender for like 20 plus years, right. And then there are players which are now just popping up, especially in Southeast Asia where there’s a lot of activity which are just entering the market.

Irrespective of how much experience they have, the process is the same so what we’re going to look at is first and foremost, of course, the loan performance. So, we have to see that the loans are performing, that they understand how to originate like quality asset. That’s going to involve looking at the cohorts like the network, what they have, having minimum portfolios of loan book and so forth so there’s obviously some threshold there.

Then we’re going to go and do our checks on management, for sure we’re going to do checks on the position in the market, we’re going to check regulatory environment, like a whole bunch of things basically before we are comfortable to connect our loan originators to our  marketplace. And that ends up, but, usually, we’re going to connect only the top players in the respective markets to Mintos marketplace. So, depending on the market, it’s going to either among the top five players, among the top ten, maybe top 20 players, depends on how big a market it is and those loans are the ones which we are working with today.

Peter: So, do your people actually physically go and visit these originators in their offices?

Martins: Yeah, yeah, for sure. So, basically, we have the whole sales team show up, that’s the first context. So, we travel a lot to all the countries then we have a risk team, a separate risk team. The only thing that they do is like getting all the loan originators and then following and monitoring them and, of course, like visiting them which is one part of kind of due diligence.

Like now, when we are already a established player, we also can do a lot of reference checks in the market, so if you know the market…..for instance, now we launched Kenya, another, we had already before so we can ask the market players as well like any reference about the players. So, there’s a lot of things which go in before we connect the loan originator to Mintos.

Peter: Right. So, once an originator joins your platform….and, obviously, they have a very good insight, a real time inside into how they’re doing, I mean, have you had instances where an originator comes on to your platform, have not performed like you would expect and you kicked them off?

Martins: Yeah.

Peter: That happens, so what are the parameters there, what would cause that?

Martins: Yeah, so those cases…..there are only very few of the loans which would want to be on the marketplace we accept.

Peter: Right.

Martins: So, in total, we have a relationship with like 1,000 loan originators across the globe. Of those, we have connected only 70, right.

Peter: Right:

Martins: So, maybe it’s still in the process, there’s plenty of those which we have sort of refused and just like a lot of players out there open to lending space. Those which have connected to Mintos and reached….either themselves have decided to stop using Mintos, or we have kind of mutually decided on that, the reason is usually either they are kind of too small, or the loan performance is not up to the kind of quality which we would want to see and originate.

Peter: Right, right, okay, it’s super fascinating, I think. Full disclosure, actually I signed up for an account at Mintos just a couple of weeks ago and I have transferred in $2,500 transferred into Euros so I could invest across the Euro zone and I noticed that you grade every loan, but, certainly, there’s a lot of loans that I graded. So, does that mean you’re adding on your underwriting, or what goes into that loan grade?

Martins: So, the loan grading and credit scoring is done by the loan originator, so each loan originator have their own approach how they actually look at the credit scoring and underwriting, and if they have a loan grade, those are shown on the marketplace for Mintos, so we don’t go into each and every borrower. So, in total investors have funded, so far, 3.5 Billion Euros worth of loans and if you translate to number of loans, it’s 16 million loans.

Peter: 16 million loans.

Martins: 16, 1-6 million loans.

Peter: Wow!

Martins: Some of them, of course, are very small so in Kenya the loan is about 50 Euros and is already considered like a pretty big loan, right. But, when we look at the grading of the specific borrower, that’s not what we touch, that’s what we leave to the loan originator. What we do though is, actually, we go in, we check that the loan originator understands what they do, they understand how to credit score, how to underwrite and how to credit score the borrower.

And then, basically, what we do to help investors make judgment because there’s a lot of kind of moments that we assign Mintos ratings to the loan originators. It shows them how good the quality loans they can originate, how financially stable they are and like general position in the marketplace, so that’s what we do. Based on supply side, we much, much more look at the kind of loan originator as a whole, instead of like a specific loan which is originated by them.

Peter: Okay, okay. So, I imagine, you’ve got these 70 plus originators, what are the different verticals that you’re offering? Obviously, you’ve got consumer, but maybe just run us through the different types of lenders that are coming.

Martins: Basically, you can think of it…..as long as it’s a loan, it can be funded in the marketplace. So, we have everything from very short term consumer loans, installment-based consumer loans, consumer loans which are basically car loans to buy a car, mortgage loans which are basically real estate, then we have on the small business loans invoice financing, we do have agricultural loans, we do have VAT loans.

As long as it’s a loan, it can be funded on the marketplace, and that’s what, I guess, we bring to the table. As an investor, I can’t come to Mintos…. like super diversified loan offerings and I can pick and choose subject to my preference, what I feel I would want to invest in, and we facilitate ten different currencies so, also, investors can come and invest in different currencies.

Peter: Right, right.

Martins: That’s also what is the kind of basically the value of building one marketplace for many, many different loans.

 

Peter: Right, right, yeah, that’s interesting. I notice….just to share with the listeners, I actually invested…I used your Auto Invest tool and I think within like two days it was all invested and it was across, I think, 35 originators and…I only did $2,500 which is like 2,200 or something Euros, but I was in well over 100 loans.

Martins: Investors can start small, the minimum they can invest….they are investing in fractions of loans so the minimum they can invest is 10 Euros, or the equivalent in any other currency which means that even if it’s a few hundreds, or a few thousands of Euros, you can build a pretty diversified portfolio. And the tools like Auto Invest, or Invest and Acess which is an even easier tool allows you to build a diversified portfolio pretty easily so you don’t have to go and pick and choose yourself manually.

Peter: Right, right. So, let’s talk about the investors, maybe you could give us a little bit of a profile. Who are the typical investors that is coming to Mintos?

Martins: So, when you said typical so perhaps you are at the stage when like typical is not a good way to look at it because it’s very diverse, but still if you look at the typical I would say that all of them are retail investors. We have only very few which we might call institutional investors so they are very small so we focus on retail investors.

So, your retail investors can be anybody who is investing, just maybe starting to invest, they’re investing like few tens of Euros up to people who are investing in like a couple of millions of Euros on Mintos. On average investors outstanding have invested…outstanding is about 5,000 Euros which is invested through us. They’re going to be your people in very late 20’s or early 30’s up to like mid-40’s, maybe 50’s.

Basically, they’re digitally savvy people which are starting to accumulate the capital and which are kind of comfortable with managing those digitally, so that’s basically how we see our clients. In total, we have today 190,000 retail investors, still growing around like 8/10% month over month, so I would say that it’s only like now kind of starting that we are really opening up the asset class to retail investors.

Peter: Right, and as far as geography…I mean, obviously, I’m based in the US and was able to invest. Tell us, where in the world can you invest?

Martins: It’s predominantly…..these days it’s from Europe because also the loan supplies are in Euros, we accept also investments from other countries, but then it depends where they have the kind of bank accounts, also from the US we can accept, but……

Peter: Do you have many US investors?

Martins: We are not focusing on these because there’s no US kind of denominated loans, so we’re not focusing on them.

 

Peter: Yeah, yeah, fair enough, and it doesn’t sound like you need to given the volume. We just heard earlier today, someone talked about the cost of acquiring retail investors here in the UK was quite cost prohibitive and so you see a lot of them have moved away from retail and doing more institutional.

Now, you have stayed with retail and you built a sizable business, what I’m really curious about is when you got started and you seem like you went over this hump and started to take off like a rocket ship….when you got started, I presume you were advertising for investors. Tell us how you’ve acquired investors and how that’s evolved.

Martins: It’s actually…initially, it was the other way around, so, initially we did…most investors came through word of mouth , either through referrals or through affiliate networks and so forth, so word of mouth was a big driver and only in the last, I would say, six months or so we have started to invest in investor acquisition. And, I think, actually, back to your point about like typical…good question, what is typical like P2P platform these days, but they definitely shifted from retail to institutional, but the problem was because the originations were going faster than actually they could acquire retail investors.

But, how we solved that is actually….basically, the problem was that it was very hard to get kind of a decent amount of retail investors. It sounds that there would be sufficient retail investors so that you can actually fund a lot of loans and that’s what we have solved today. Any loan originator which connects to Mintos, they get access to 190,000 investors from day one, so basically get like instant liquidity from day one and was kind of, I think, the problem for other players that they actually could not scale up the retail investors side, as far as they would actually originating.

Having said that, I still think that retail is like fantastic, retail investors is definitely fantastic and the funding source and that’s what we see, loan originators very much valuing today, but they actually can connect to us and they get access to 190,000 investors from day one.

Peter: So, you could almost become like the de facto retail arm for all these platforms.

Martins: That’s a very fair point, so what I see is that most of the loan originators build a very diversified funding source. They have warehouse lines, they have whatever direct funds investing, somebody maybe have a public fund or like directly institutional and they also want to have retail investors.

But, for them to build the retail investors side themselves as a platform…actually, in most of the cases, it doesn’t make sense and that was also the initial idea of Mintos that if you look at the loan originator side, it doesn’t make sense that you have your different platforms competing for the same investors and trying to get them on the platform and then as an investor they have to go and actually from one platform to another….and like many different platforms is kind of repeating the same things which doesn’t make sense. So, much better to just come to just one marketplace, see all the same loan originators and invest in one kind of gateway.

Peter: Right. So, how do you balance out the platform? Like any of the peer-to-peer companies, you’ve got your supply of investor capital, you’ve got your borrowers and you have a bit more control over it because don’t just rely on one source of borrowers, but still….I mean, do you find like….what do you have an excess of, is there excess investor money looking for capital, is every loan funded, or some of the loans are not getting funded, how’s the balance?

Martins: I would say, today, actually we would much rather call it as a marketplace for investments and loans because we technically are not p-to-p lenders. So, marketplace for investments and loans, but that’s still the same dynamics which is investor demand and loan supply and as a two-sided marketplace it’s never in balance.

Like today, if you would have asked like three months ago, I would say we lacked on the investor side, investor demand was behind, but, today, actually, loan supply is lagging behind. It’s never in balance all the time, it’s like a balancing act, but the good thing is that all the loans which come on the Mintos marketplace, they are pre-funded by the loan originators, they actually have issued the loan already. So, for them, it’s actually….they have other funding sources as well. If it doesn’t work on Mintos, they can fund it through their own balance sheet themselves so they are not kind of constrained on that side.

Most of the loans these days, actually, when they come on to Mintos…today, for sure, because the loan supply is lagging behind, they’re going to be funded instantly through Auto Invest or Invest and Access product. Most of the investors, actually, I think about 80% of loans get funded through Auto Invest which means that once it appears in the marketplace, it gets funded straightaway.

Peter: Right, right. So, do these platforms have to have like an API connection capability? I imagine, some of these platforms are offline, right, and they don’t really…..they wouldn’t have the capability to directly connect with you. Do you work with them to be able to build an API connection, how does it work?

Martins: So, we have API connections, so it works only through API connections because of the volume. Having them being offline, actually, doesn’t mean that they don’t have like back office digitally kind of developed. So, maybe they have offline operations where they acquire borrowers in an offline way, like the same as Oriente which was on stage just now. Basically, they have most of their borrower acquisitions offline, but as a bank everything is online, right, so everything is actually in their system so we just need API connection to their system.

Once the loan is originated, the borrower goes to the same, Oriente for instance, they take the loan at that moment that appears on their system, the API sends to Mintos marketplace and then it appears for Mintos investors to invest in and they can invest through automated tools and, basically, in many cases that can happen. Say you are seated in your home, with a few clicks you have set up your Auto Invest and when the loan is originated it gets funded like immediately.

Peter: Right, right. So then, what about the interest rates of these loans, and maybe you could talk about the interest rates of the loans. I know it’s got a very ….like a short term invoice financing loan is going to be different from a property-backed three-year loan, or 10-year loan, whatever. So, tell us about the range and the typical returns or the average returns maybe on the platform.

Martins: Average returns, so far, has been around 11% per annum net net for investors in Euro terms, in other currencies it could be higher and then when we look at the kind of borrower…….what borrowers like banks and industries is exactly what you said, it’s going to be a wide, wide range so there’s going to be from very high single digits with a very low default risk up for a very short period.

Short term loans, it could be like much higher interest than what the borrowers are paying, so it really depends on the loan product because we have so diverse offerings so there’s no like good average we could use. It depends on the product, country, loan originator, borrower segment and loan type.

Peter: So, how do you guys make money? Do you make it on both sides, do you take a fee for the platform and a fee from the investor, how do you make money?

Martins: We take a fee from the platform, and then we don’t charge anything to investors. On top of it, we provide some services, so, for instance, currency exchange. They we’re going to charge some fee, but the main revenue is from the fees in the platform for using the marketplace.

Peter: Right, right, okay. So then, I remember you spoke here last year and you talked about adding a debit card and a bank account, did that come to fruition over the last year, or where are you at with that?

Martins: It’s still in progress. Basically, it takes time to get the necessary license and permissions and these days when fintech is fairly kind of up and coming and growing….so, obviously, the regulators also have a lot of work on their table. So, basically, it just takes time for the regulators to look through the applications. As soon as we get the necessary permissions, we will be ready to launch both bank account for European-based investors and also Mintos card for investors.

Peter: And then what about the UK, I read somewhere that you were applying to get authorized in the UK, where are you at on that journey?

Martins: So, the UK for us is just another market. That’s one of the markets which we definitely see there is a potential. We actually applied for the necessary permissions already very early in our journey in 2016. It took a while for, actually, the FCA to review that, but this moment, basically…..at that moment we were perhaps a bit too early in our kind of effort in establishing an international kind of operation.

So, they kind of deemed that we don’t have like enough resources and, basically, said to come back later, right. At this moment, if you ask me, we have a lot of opportunities on the table. Well, I said, the UK is the best market to kind of focus on, there’s a lot of uncertainty out there.

Peter: Right, give it a year or so.

Martins: The FCA, the Brexit and all that, so we keep our eyes open and we definitely have the UK on our agenda, but it’s most likely not in the immediate future.

Peter: Right. So then, I’m curious about where you are on the profit journey. Are you making profits yet, or whereabouts are you?

Martins: We actually are. So, and that’s what I say, it’s been a competitive advantage being based out of Latvia. So, we’ve actually been profitable since early 2017, even with all the growth we have experienced, so now maybe, we are now kind of burning cash because we kind of have more people and expanding much more aggressively in geographies. But, we’ve been slightly profitable for the last few years and remain slightly profitable on a monthly basis.

Peter: Okay. So, we’re almost out of time, but I’m curious….I mean, you’ve got this amazing platform right now that feels like it’s already…..I see the list on p2p-banking.com and you’re always, by far, the…….I think you’ve outdone every single platform on there and wouldn’t come up close to what your total is each month.

So, where do you take this, do you want to be the sort of the way the world invests in lending, I mean, are you focusing on building what you’re already doing? I feel like you’ve got this incredible opportunity in front of you and I’d love to know where you would want to take it.

Martins: I think our vision really is to open up the new asset class to really open investments in loans, basically, loans as an investment for the retail investors, so that when people think where to invest, they can simply say I can invest in stocks, I can invest in real estate, commodities, I don’t know, maybe some in crypto, or somewhere else and then they think, well, I also can invest in loans.

And so, the retail investors actually have this opportunity on the table so that’s what we are working towards. The market is huge, they’re not only limited by alternative lending companies originating the loans, so already today, while we are still……I’m going to focus on the immediate future in the alternative lending space. There’s a lot of things happening, already today we have been talking with, for instance, telecom companies, like telecom companies in Africa or in Pakistan, they are one of the biggest originators of loans because they are the ones who have data which can actually credit score the borrower one way or the other.

So, that’s like clear, the originator as well for us, just an e-commerce company, it’s like e-commerce platforms, they are giving loans to the Americans in the e-commerce site and they also don’t want to keep the loans themselves on their balance sheet. So, for them, they also can serve as a kind of way to offload the loans and basically fund the loans, or the same banks actually.

There are plenty of banks which don’t want to keep small business loans on the balance sheet because they have to manage capital ratios, and, of course, they might want to offload them to the marketplace through the retail investors. So, basically, what I see us actually becoming is a place where retail investors can come and choose from many different loans, be it originated by an alternative lending company, or down the road, by some other players and become basically this marketplace for investments and loans globally.

Peter: Right, one more question I forgot to ask you earlier. How are you regulated, I mean, as I mentioned that’s a very important thing for….you know, investors want to feel like their money is safe. So, tell us how you’re regulated.

Martins: So, regulation is like two-fold, so we have to look at the side of loan origination so, basically, each and every loan originator they have their own permissions and licenses in their respective countries they operate in so that’s where the regulation comes in there. And then, on the other side, it depends on the kind of market we are operating, or we are kind of working in. In most of the countries, actually, in Europe, I would say the regulators are kind of forming their approach, there’s no kind of homogenous approach to how to regulate.

So, today, we are based out of Latvia, that’s where we are operating from so our service is not considered regulated service, basically, because what we do, we facilitate assignment of loans receivables from loan originators in masses so it’s deemed a regulated service today. Having said that, that’s definitely going to change and we are pushing for that to change.

Peter: Right.

Martins: Meanwhile, we are applying for electronic money institutional license and investment brokerage license just to have additional kind of certainty there. It’s still kind of a work in progress, I think, when it comes to the kind of regulating.

Peter: Okay. So, finally then, last question, how many people across the difference offices do you have, what’s the total workforce size?

Martins: Today, we are about 150 people, we’ve been scaling quite a bit, so we started the year with 60 people. Now, we are 150, most likely we’re going to end up the year with like 200/220 people and I think it’s only now the scaling part is starting for us.

Peter: Right. Well, you’ve created an amazing organization that is….it’s been fascinating to watch how you guys have grown. All the best and thank you very much for coming on the show.

Martins: Thank you, Peter.

Peter: Okay, see you.