PODCAST TRANSCRIPTION SESSION NO. 200  –  LUVLEEN SIDHU

Welcome to the Lend Academy Podcast, Episode No. 200. Yes, we have hit the double century mark! This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I am delighted to welcome Luvleen Sidhu, she is the Co-Founder and President of BankMobile. She’s also the reigning LendIt Fintech Woman of the Year winner and I wanted to get her on the show to talk about some of the interesting work that they’re doing at BankMobile, it’s quite a fascinating company.

We talk about their consumer offerings and who they’re targeted to, and we talk about their banking-as-a-service offering and their first big client, T-Mobile, which is super interesting, we delve into that in some depth. We also talk about the whole landscape of digital banking in this country and we talk about their partnership with Upstart, which has them offering consumer loans as well. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Luvleen!

Luvleen Sidhu: Thank you, really happy to be here.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself and actually what you did before BankMobile.

Luvleen: Sure, so before BankMobile, I graduated from Harvard in 2008 and I joined Lehman Brothers and we had six weeks of training prior to my first day on the job. My first day on the job ended up being September 15th, the day of the Lehman bankruptcy…

Peter: Wow!

Luvleen: …so it was a very, very interesting start to my career (Peter laughs) and I remember, you know, people walking out with boxes and there I was sort of walking in. I remember calling HR and I was like, hey, should we even come in today and it was very eerie and they were just like, of course, you know, business as usual. So I did start my career at Lehman, my part of the business became Neuberger Berman and I worked in the hedge fund of funds group on the investing side.

After that, I spent one year at our parent company, Customers Bank, which is a community bank based in Pennsylvania and got my hands into banking and soon after that, left for Wharton, where I went to business school. Interned between my two years at Booz & Company in their financial services industry vertical where I helped a well known financial institution launch their direct digital bank, and it was really through my time at Customers Bank, also coming from a banking family, and my role in helping sort of consult this financial institution to get into the digital banking space that really led me to where I am today.

Peter: Okay, so then while you grew up in banking, you haven’t had a long career in banking, what was sort of the trigger that made you decide to start BankMobile?

Luvleen: Sure, well I think it’s the combination of personal experience and then just understanding of macro trends and really what was happening. From a personal experience standpoint, my father is a veteran banker, that’s what I meant by I grew up in a banking family, and he helped build a bank called Sovereign Bank, which has now been bought by Santander.

I remember the first time when I entered college, I went in to open my own bank account and it was during that experience where it took me about 15/20 minutes to open this account and there was definitely nothing inspiring or, you know, positive that I remember from the experience. It was rather dull, didn’t really understand what I was doing, the benefits of, you know, working with this financial institution or how they could really help partner with me to really help me understand financial management and where I was in the stage of life and grow with me.

And so I think it was my first sort of insight into my own experience with banking that left a mark for sure, and then in addition to that, you know, being able to work at Booz with a direct bank being launched and helping, you know, consult another company get into that space helped me really understand the macro trends that were occurring at the time and how the macro environment was really ripe for disruption in this space. So if you look at consumers, you know, they are interacting with their bank or mobile devices 20 to 30 times a month, but only walking into a bank branch on average one time a year.

We’re also seeing, you know, Americans, a third of them, living paycheck to paycheck. Almost 50% of Americans don’t have enough to pay for a $400 emergency, if that ever happens, and these same Americans are being charged $34 billion a year in just overdraft fees. So there’s one angle where it’s like, hey, we weren’t delivering banking in the channels where people wanted to consume, and two, you know, people are looking for an affordable banking solution that’s not so fee driven since they’re already in sort of a financial fragile state.

Peter: Right, right.

Luvleen:  And so, I think, understanding consumer needs and behavior shifting, it was really just understanding that a new way of doing banking to meet those needs, it was a great opportunity for that.

Peter: Right. You know, starting a bank is not a trivial exercise, it’s not like starting a tech company where you can get a couple of friends to come over and hang out in your basement for a year or two and just away you go. You know, starting a bank has a pretty major barrier to entry on the regulatory side so I’m curious, do you…where are you at now, I know you said you’ve been incubated inside Customers Bank, so do you have your own banking license, are you using their license, I mean, what’s the relationship between the two organizations?

Luvleen: Yeah, so today, we are a division of Customers Bank and Customers Bank is where I also did …[inaudible]… and I already knew that they were looking at sort of expanding from just commercial banking to retail banking and the time that I was there, we were very interested in the models like Simple, the bank Simple, that had launched at that time already. So I think the idea was already brewing within Customers Bank of how do we take advantage of this new trend, this new digital mobile first trend that is just starting.

And so after I graduated from business school, Customers Bank was really looking to take action and move forward on that thesis and so I joined the bank and they really gave us a couple of mandates. It was great because they sort of incubated us and kept us separate from the rest of the bank so we could really innovate and develop, you know, the best strategy going forward.

But it was how can we create a better product than exists today, how can we make it more affordable, how can we make it easier to use with a great user experience and can we create an income and revenue model that is at least equal to traditional banks, if not better and lastly, assume that branches are illegal and how would you still create this product and this distribution channel to acquire through this new mode of banking. And so it was really with those pillars in mind that we got together and really defined and started BankMobile.

Peter: Okay, so let’s go and actually talk about your offerings because, you know, you are a digital bank and there are others obviously doing the same thing. You know, there’s a lot of different types of products that you can offer, so why don’t you just take us through your core offerings.

Luvleen: Sure, I think firstly I’d like to just start with like what are consumers looking for and that maybe sort of answers some of the product question.

Peter: Okay.

Luvleen: I think what consumers are looking for…one, it’s simple. Sometimes we talk about, you know, what is the most innovative product that we can do to really change the face of banking, the way banking is consumed and experienced and I think that’s a great aspirational goal and that we are moving towards that aspirational goal as an industry, but there are small things that are still so broken, from being able to open an account with 5/6 clicks.

And so both in our BankMobile Vibe product and the T-Mobile MONEY product that we just launched with T-Mobile, you know, we’re able to open an account within a few clicks and that’s a great on-boarding account opening process and what consumers are looking for, instead of that 15 to 20-minute one that I described to you back in college.

Two, you know people are looking to be able to earn money on their money and so with the big banks, on average, spending no more than eight basis points on interest on checking accounts, we are launching soon for our BankMobile Vibe product 3% on balances up to a thousand and through our partnership with T-Mobile, we’re offering 4% on balances up to $3,000 and 1% thereafter. So it’s really about creating a model where people are actually earning money on their money which is something that the big banks have really ignored in doing.

Another thing that consumers are looking for is not to be fee’d to death. You know, I mentioned the $34 billion in just overdraft fees. You know, we’ve found a way to really create a low cost banking product and through our partnership with T-Mobile, for example, there’s absolutely no fees on the account and we even allow T-Mobile wireless customers that have T-Mobile MONEY to overdraft up to $50 per calendar month, as long as they pay that back within the calendar month. And so it’s really about giving people the opportunity to bank without fees and not penalizing them and really giving them the opportunity to access money if they need it in a short timeframe.

And then lastly, it’s really about broader access to your money and so, you know, this model that a lot of the big banks have where they own their ATMs, you know, that sounds pretty old school to me. Moving towards more of the Uber model, the Airbnb model where it’s not about ownership, but really providing access to replace ownership is what we’re doing with ATM access. So instead of having to own all of these ATMs, we offer our customers access to a whole network of ATMs, 55,000, which is three times more than Bank of America’s ATM network. So it’s really about providing access to people easily for people to access their money.

So those are some of the pain points that we’re solving for.

And then it’s also about growing with the customer and the needs that they have as they move from one life stage to the other. So we have a big business in sort of banking students and when students graduate, a lot of them are looking to build credit and to be able to access credit and so on top of our checking and savings accounts which we offer to them as students, you know, we also have built out personal loans, credit cards and are offering student refinance in the next two months.

We’re rolling that product out and we’ll continue to sort of roll out more credit products that help our customers build credit and really sort of move on their goals by helping them build a strong financial foundation.

Peter: Yeah, yeah, okay. So then is your target market…I mean, your name is BankMobile, I presume you’re targeting a younger demographic. As you said, you’ve got the things for students so who exactly is your target market?

Luvleen: I think when we first started, we wanted to go after those who were suffering the most from the banking system, you know, those who I described that really were looking for an affordable alternative and usually those that had the most limited access to financial services were being hurt the most with the fees, etc. And so when we first started with a direct-to- consumer strategy, we definitely appealed to that demographic.

I think that continues to be a portion of our demographic, but then we expanded into students and these are low to middle income sort of Americans that are either going to two-year community colleges or four-year traditional schools, starting out their career, lower balances, don’t know much about financial and money management and so that has become a sweet spot for us to really help youth start their financial services journey with us and then grow with us through the different products and services that we offer through your lifecycle.

You know, with T-Mobile MONEY it’s really anybody, anybody that’s looking for a better banking experience. So the beauty about banking is that anyone can be a customer and everyone needs a bank account. So even though we focus on niches that really need a better experience, we are definitely expanding beyond that through the different channels and distribution models that we enter into and really view that anybody can be a customer of BankMobile.

Peter: Right, right. We’ll talk about the T-Mobile thing in a bit, but I want just dig in a little bit here. I’m on your website and you actually…when you go to bankmobile.com, you can’t open an account from that page, you’ve got this sub-brand, I guess, BankMobile Vibe and BankMobile Vibe Up, so tell us a little bit about what the thinking is there. I click on BankMobile Vibe Up and I go to a different website where I can open an account, where I can join a waitlist, it looks like there, so just tell us a little bit about the branding there.

Luvleen: Sure, so BankMobile had historically started as a direct-to-consumer strategy and we have pivoted since then to banking-as-a-service where we really partner with institutions, with companies, etc. that have a captive audience and feel that through our product they can serve and solve for even more pain points in their customer base and create, in turn, more engagement, more loyalty with their customers.

And so when you see BankMobile Vibe, that is our student account and we basically serve 800 campuses across the country and help solve the pain point for them which is sending payments between the school and the students. In return, these students get to choose, do they want these payments from the school through ACH into an existing account or opening a BankMobile account and through these distribution partners at 800 campuses, one in every three college student sees our brand and has the option to open an account with us.

So that’s maybe an indirect way of saying it’s actually a closed loop account, BankMobile Vibe, where if you go to one of those 800 campuses that we have partnerships with, you are able to open a BankMobile Vibe account, but it is not an open market direct-to-consumer account at this time. And then same with T-Mobile MONEY, you know, we are the support and the bank behind it, but you can be a non-T-Mobile customer and have different perks or you can be a T-Mobile customer and have enhanced perks and that can be opened through the iOS store or visiting sort of T-Mobile retail outlets.

Peter: Right, is the plan with Vibe Up product to…I mean, is this just really focused on a similar demographic with the students? I’m just trying to get a handle on…it sounds like there’s a waitlist for that product, are you still going to have like a direct-to-consumer product that’s not T-Mobile that anyone can open?

Luvleen: Yes, so it’s definitely something that we’re pursuing and open to…you’re absolutely right, BankMobile Vibe Up is the pursuit of doing that, although that account, even though it will be an open market account, it will be much more geared to the student demographic still and schools outside of those 800 campuses that we currently have relationships with. So it sort of broadens our breadth and depth of penetrating the student market outside of, you know, marketshare that we already have with just a slightly different product that’s open market.

But in terms of a broad based, direct-to-consumer play, you know, that’s something that I think is very difficult and that’s why we’ve pivoted to a B2B2C model which really helps us with high volume customer acquisition at very low cost, but we’re always working at figuring out and innovating and seeing what business model could help crack the code for a very successful, profitable, high-growth, direct-to-consumer strategy and that’s something that we would always be open to reengaging with and implementing at the right time.

Peter: Right, so your direct-to-consumer strategy right now is the student population, that’s the focus, it sounds like.

Luvleen: Yeah.

Peter: So I went back and listened to your interview with my colleague, Todd Anderson, at LendIt and one thing that caught my attention in that interview, I mean, many things did, but this one particular piece you said that you’re acquiring customers at $10 a pop for customer acquisition cost, is that just from the network effect of the student population? I mean, how are you able to have such ridiculously low customer acquisition cost?

Luvleen: Yeah exactly, so it’s a different model. So you could think of sort of traditional banks partnering with colleges and universities by potentially paying millions to really be the sponsor on campus, to have the ATMs on campus, to have a branch on campus and our model is different.

We’re in the business of solving pain points and this situation, what is the pain point that colleges and universities are dealing with and there is a lot of overhead, compliance headaches, etc. with schools having to deal with sending payments to students, especially in the form of financial aid refunds or if someone drops a credit on campus and is owed money or if they’re working on campus and they need to be paid, etc.

And so we help ease that burden and the schools pay us a subscription fee for our service in easing that burden and helping take care of that for them from a technology standpoint as well as from a compliance standpoint.

In return, it really gave us access to the student demographic that is getting payments from the school, and again, it’s a very neutral process where students have an equal opportunity of using an existing bank or getting a paper check or opening a BankMobile account. So in essence, our customer acquisition cost is $10 to almost you could say zero, somewhere in that range, because the schools actually pay us and we get access to the students.

Peter: Right, right, okay, that makes sense. So I want to talk about T-Mobile, you know, that was a pretty significant news that was shared recently and maybe we could start off with how did this come about because you are…you’re still a very young organization and T-Mobile is a massive global telecommunications company, how did you first get together?

Luvleen: Sure, so there’s a little bit in terms of…I just want to put it out there that our relationship obviously is public at this point, but very T-Mobile specific questions, you know, are best geared towards them and we are sensitive to the fact that they’re a public company and it’s important for us to respect some privacy there.

So they were looking at getting back into financial services, it’s something that they had done before in the form of prepaid cards which is a very different product for a very different demographic and is very differently integrated into the T-Mobile experience, meaning a prepaid card is usually just on the racks in the stores and so it’s a very different acquisition model.

And so they were looking at…that model didn’t work for them the way that they had hoped for, and so they were looking at another way to get into financial services that focused more on a broad-based customer base because they really view anyone can be a T-Mobile MONEY customer and that the focus, you know, ended up being more on checking accounts.

With our technology, with our experience in the student space, with our vision and mission being very aligned, you know, we’re both very customer-centric companies that have really set out to disrupt a broken industry, each of ours being quite broken in it’s own unique ways and so I think there was a lot of chemistry from all different regards for us to launch this together.

Peter: Plus you have Mobile, you both have Mobile in your name, that must have helped as well. (Luvleen laughs).

Luvleen: That’s a good point.

Peter: So when someone opens up a T-Mobile MONEY account through the T-Mobile MONEY website, what actually happens is…is the bank of record with that account, is that BankMobile or Customers Bank or what actually happens on the backend when someone opens an account?

Luvleen: Yeah, so the T-Mobile MONEY account is FDIC-insured through BankMobile which is a division of Customers Bank. There is a really robust on-boarding process that, you know, was built out to be able to onboard customers that are digitally opening an account versus the branch-based model where you see someone come into the bank branch.

What’s interesting is in the T-Mobile model, you can go to a retail outlet and learn about the account and get a link to open the account which is more of a handholding sort of process, but you can also do it on your own iOS, Google Store, etc. and, you know, the bank handles all the compliance that’s related to opening an account.

Peter: That’s just truly fascinating. I’m just wondering if…we’re entering a world where like if you look at the Fortune 500 companies and particularly those that are consumer-based companies. I’d be interested to get your perspective, are we entering a world where there’s going to be like one day we may be able to have a General Electric mobile money account or a checking account, I mean, what is your sense about some of these really big brands…I’m not really talking about the tech companies here, sort of the other brands that have a consumer presence, do you think that we’re going to see a lot of similar sort of things to what T-Mobile has done?

Luvleen: I think that it is a very strong possibility and obviously, we’re believers in that model. We’ve seen Apple/Marcus most recently, they’ve started with a credit card, but they are very well positioned to expand that relationship into a banking model. There has been rumors for a long time now about Amazon and another bank and then obviously there’s T-Mobile/BankMobile and I think that you have to look at what are the ingredients for success in these sort of partnerships.

I think that if there’s alignment in sort of vision and mission the way that I described T-Mobile being an un-carrier and fixing a broken industry and BankMobile being the same, that seems very authentically aligned, even to consumers perceiving this product being offered by the company.

And so I think that there has to be some synergy with what that current business does, what it stands for, the way customers interact with that company, where the bank account or the financial services is just a augmentation of the relationship and it helps better that relationship, makes it easier, solves another pain point, you know, I think that there’s a handful of really good use cases where we might see more of this.

Peter: Okay, so then the second part of this question is, you know, who are you focusing on for your banking-as-a-service service, what segments of the business world are you focused on?

Luvleen: Yeah, so for us that’s part of our strategy and it’s something that we talk about less, but I think that there is…you know, you’ve seen us already act in telecom and higher ed, you know, are very unique spaces to play in. We’ve seen technology already play out with Apple and an e-commerce potentially if Amazon enters this space. So those are some big bucket areas where I think that, you know, this use case of banking-as-a-service and partnering retail with banking could potentially make sense.

Peter: Okay, so do you see your future…I mean, there’s two real offerings you’ve got here, you have retail, the retail bank offerings, and the banking-as-a-service, do you see both as equally important for your future, or it’s really banking-as-a-service where you’re going to really place your bets?

Luvleen: Well interestingly enough, even though it seems like our direct-to-consumer play is the student business, I really view both of them as banking-as-a-service and we just happen to be able to use our brand in the student market up front and center, but it’s a very similar model where we’ve partnered with institutions, higher ed institutions, and we are using sort of their distribution model and channel to be able to touch customers, to be able to acquire customers and that’s the same model that exists in other white label partnerships that we would pursue.

And so I think that the answer is B2B2C is where we see momentum and where we see high growth opportunities, but as I said before, I’m really excited about the opportunity of direct-to-consumer. I think the code hasn’t been cracked yet where you make that model highly profitable from a challenger bank standpoint and, you know, if we figure out the secret sauce that is definitely an area that I hope that we would re-enter into.

Peter: Right, right. Okay, so we’re running out of time, but there’s a couple of more questions I really want to get to.

Firstly is the partnership with Upstart which is interesting because Upstart is sort of providing this lending-as-a-service and they’re providing it to you. I see it on your website here where you can go and take out a personal loan and Upstart is powering that service. Maybe just tell us a little bit about why you chose Upstart and what your goals are with that kind of offering.

Luvleen: Sure, so I think that I’ve always believed and BankMobile has believed that we don’t need to reinvent the wheel, that there is an ecosystem of really strong impressive fintech companies that are out there when we are launching new products, new services, etc. that we can tap into that ecosystem and be able to work together to achieve our goals mutually.

And I think what was appealing about Upstart is that, you know, I like the founding team, they come from a Google background, many of them, and they are very smart, they’re analytical, they’ve built a strong model that is more forward looking, that uses artificial intelligence and machine learning to really create an alternative lending model.

We didn’t want to start from scratch and build things from scratch to be able to create the best user experience for on-boarding an application. They take our underwriting criteria into consideration and layer it in with their underwriting that has a lot of AI and unique sort of dimensions to it and they help service the account and so they’re a great partner to really help us launch quickly when we wanted to launch our first credit product which is personal loans.

Peter: Okay, so last question then, what are you working on now, what’s interesting over the next 12 months, what are some of the things that you’re looking at?

Luvleen: Yeah, so I think that we want to continue to expand on banking-as-a-service and finding another really right partnership for us to continue this model with.

Two is definitely executing well on the T-Mobile partnership. You know, we have a huge opportunity there to really change the way that banking is consumed and the way that banking is done with consumers in terms of really being in the consumers’ favor and I think that I want to focus on creating the most opportunity there.

And I’d say third is…one thing in the back of my mind has always been with AI and these emerging technologies. We want to focus on personal financial management and sort of the  advice aspect and I think that there’s a multitude of PFMs’ out there, people have scratched the surface of it, you know, there’s rounding up somewhere, there’s save to spend somewhere else, you know, there’s aggregating different accounts somewhere else and I think bringing it all together and using the technology that’s out there now to simplify that experience, make it really value additive to make it more proactive advice rather than reactive.

It’s just high level sort of thinking but it’s definitely something that we want to explore further and see if we could be the innovators that actually are able to succeed in that space.

Peter: Okay, well it sounds fascinating and I wish you all the best and I very much appreciate you coming on the show today, Luvleen

Luvleen: Thank you so much.

Peter: Okay, see you.

You know, I thought it was really interesting that Luvleen used this sort of banking-as-a-service concept as a way to describe both what they’re doing with T-Mobile and what they’re doing with their own sort of student led offerings. This whole concept of banking-as-a-service is, I think, very interesting, it really is something that I think has a lot of legs, it could take off into many offerings, we’re probably going to see something come out from some of the major tech companies very soon.

As Luvleen mentioned, the Goldman and Apple combo…but what’s to stop some of these other companies offering a similar product. T-Mobile, if you’ve got a consumer facing product, I see it as a way to sort of maintain engagement with your brand and really increase engagement with your brand. It will be interesting to see how it all plays out, that’s for sure.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 199  –  BERNARDO MARTINEZ

Welcome to the Lend Academy Podcast, Episode No. 199. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation in financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I’m delighted to welcome Bernardo Martinez. He is the Head of Funding Circle’s US operations, he’s officially the Managing Director of Funding Circle US. We wanted to get Bernardo on the show because he’s been in the job now a little bit over a year, he took over from Sam Hodges, I think it was April of 2018, and I wanted to get him on the show to talk about a variety of things.

We actually…we do cover a lot of territory in this interview, we talk about the lessons he’s learned, what he brought over from PayPal, we talk about why banks aren’t lending to small business, we talk about who he sees as his main competitors, the competitive landscape in the US. We talk about his recent op-ed in American Banker discussing the SBA Guarantee Program, we talk about the Canada expansion, what he’s doing on the regulatory front and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Bernardo!

Bernardo Martinez: Thank you, glad to be here.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself so why don’t you tell…I know you’re originally not from here, so tell us a little bit about your background, how you came to be in America and what you’ve done in your career to date.

Bernardo: Yeah, thanks Peter, I’ve been actually in the United State since 1997, I moved from Venezuela to do my graduate degree at Duke University and after that I spent most of my time in the financial services industry working in areas like Bank of America, actually went abroad to work in a local bank in the Caribbean managing American Express as an international operator and prior to joining Funding Circle, I spent almost three years actually working with PayPal managing the US Business Lending Division for them.

Peter: Okay so then, what are some of the…you know, PayPal Working Capital, it’s got some decent scale these days, I know you were sort of in charge of building that up so I’m curious about what are some of the lessons you learned at PayPal that you’ve really brought over to Funding Circle.

Bernardo: Since I joined PayPal, back then, I think the one thing that I was able to learn a lot was how important the customer experience is as part of the lending process and how you can actually create a true conversion as you create a transparent product and an easy process. So I think that’s the biggest learning that I took from PayPal and that’s one of the things that I’m very focused on since I came to Funding Circle a year or so ago, trying to replicate some of those learnings and trying to put it here in practice and basically bring the product up to par and improve upon what we’ve got today.

Peter: Right, right. Okay, so you’ve been a bit over a year in the job, I know you replaced Sam Hodges who we had on the podcast a few years ago, so tell us about how the year has been, maybe start with what’s been the biggest challenge for you over the past year.

Bernardo: As you would imagine, coming from a different type of lending environment of short term lending, I moved to Funding Circle which is more of a long term lending sort of provider so I spent the last year really learning our processes and understanding our weaknesses and opportunities and I would say one the biggest things I’ve learned is we have a tremendous opportunity to focus on partnerships.

I feel pretty good that after that first year we’re starting to see a lot of that focus on partnerships. It came to fruition, as you know, we signed at the beginning of the year, with Stripe, a partnership and most recently, we did a partnership with LendingClub. I feel pretty good the first year of learnings here have resulted in a good outcome that started this year.

Peter: Right. Okay, so we will talk about some of those partnerships in a little bit, but before we do that, I actually want to get to sort of the details of your loan offerings, just so everyone is clear, I know these are longer term loans, but why don’t you give the listeners…what are the range of interest rates, loan sizes, loan terms, that sort of thing?

Bernardo: You think about us, we are offering installment term loan products that have monthly payments, it basically goes from $25,000 to $500,000, from six months up to five years. On average, our loan size is $130,000 and actually our average APR is around the low teens so it’s a little different from what you see in the industry today with some of the alternative lenders.

Peter: Right, right. And then what about the other side of the business, I’ve spoken with Samir Desai many times and he’s spoken at LendIt saying he’s very much a proponent of the pure marketplace so I’d love to get some sort of some sense of the investors that you’re dealing with. I mean, you don’t have to name names obviously, but like what are the types of investors that you have in your platform today, are you still doing the fractional loans to individuals. Just tell us about the investor side.

Bernardo: Yeah, from an investor perspective, we are primarily an institutional investor and what I mean by institutional there are twofold. One is our asset managers as well as sort of banks so those are the majority of our funding today. As you know, last year we signed a deal with Alcentra for $1 billion and purchase over three years and also we have been working with INTRUST since actually a year and a half ago, doing the same thing on the institutional side.

To your question about fractional, we do have fractional today, it’s not something we are growing at this point, but we’re investing some time to think through how we can make it bigger in the foreseeable future.

Peter: Right, right. Okay, so then I was reading…I think it was last week or the week before, you released a report with Oxford Economics talking about, you know, basically small business lending, the state of small business lending basically and I was struck by the fact that small business lending is just 0.7% of bank balance sheets, that’s…I mean obviously, they’re smaller loan sizes, but…let’s talk about banks. I know you’re partnering with banks on a lot of your initiatives, but are you finding that your customers no longer consider banks a viable lending option?

Bernardo: What we’re finding is in our service is like 72% of our customers actually came to us first because they found us to have a great process and a great product for them and the ones who didn’t come first to us, they kind of found that the bank process are not up to speed to what the market is offering so they spend almost eight hours just completing the application without really knowing what the end decision will be. So I think that small businesses, in general, are starting to move toward alternatives beyond banks to really facilitate their capital access and we are pretty happy to see that our borrowers are starting to see us as a great choice.

Peter: Right, so you said your borrowers are going to you first, how are they finding out about you? I mean, I know you’ve got some recognition obviously, everyone in fintech knows you, but the average borrower, I imagine, still has…isn’t aware of Funding Circle, the majority of them, I imagine, so how are you getting the word out, how is it that such a large percentage come to you before a bank?

Bernardo: A few things, I think number one, as you know, we have done…the way we approach our marketing is twofold. Number one, we use direct marketing as an approach and we do direct mail… print in order to reach out to customers. So some of them are going directly through as a response of our direct marketing processes.

In addition to that, we have done partnerships with LendingClub, but also with portals like Credit Karma, NerdWallet and Fundera that actually aggregate a lot of offerings. We compete in those lead aggregators marketplaces and customers see us there and basically come to us directly. Again, I think that two prong approach help us get the word out and enable those customers to access us directly.

Peter: I’m sure there’s a subset of your customer base that would have received a bank loan had they decided to go down that route. Do you have some sense of…I mean, obviously you’re going to be more expensive than a bank, I imagine, for most of those, but how do your interest rates compare to what the banks are charging today?

Bernardo: I would not consider ourselves more expensive. I think we’re affordable and we’re close to a bank. I think the main difference is actually how long is the process going to take and how transparent and easy the process is when you compare us to banks. So we feel that for like the best rate, you know, best risk rate, we’re pretty competitive with banks and the reality is we can basically finish a loan from start to finish between five to seven days, while a bank may not be able to respond within that time frame.

So I feel pretty good that what we offer our customers is affordable, it’s transparent and is the right…it fits what they’re trying to do and the majority of the banks, at the end of day, we know they’re very focused on their existing customers and they don’t necessarily actually have the right processes for those customers so I think we [inaudible] in that regard.

Peter: Right, right. Okay, and so there are obviously others that are out there in the marketplace apart from banks. I mean, I’m just curious when you’re competing for customers. It’s interesting that now that LendingClub is not originating loans themselves, it feels like there’s not that many offering term loans, but you obviously have…you know, PayPal has got a large and growing business, Square is as well although they’re sort of for micro businesses.

Then you’ve got OnDeck and Kabbage, I’m sure there’s some overlap there but maybe you can tell us…you know, when you’re in the market I’m sure you’re talking to your customers and asking them who else they’re considering, I mean, who are the names that come up, are they some of the companies that I mentioned, do you still consider those direct competitors or not?

Bernardo: At the end of the day when I look at the marketplace, I thinks there’s three main competitors in our market. I mean, banks are certainly one, as you said, and in banks I actually think there are two components, sort of the big banks and the regionals and community banks. So those are sort of the ones that we compete with.

I would say community banks are the ones we see most of the time. When it comes to sort of the non-bank players, I think there are two categories and you kind of mentioned sort of a captive network which are really the PayPals’, the Squares’ of the world and I think what’s different about us and why we’re winning in certain cases for customers is they are really focused on the short term and they are really…in a way, they’re offering a very specific use case which is inventory financing for the most part.

In our case, as our loans have so much range from six months to 5 years, they can use it for multiple use cases, not only for inventory financing, but they can use it for debt consolidation or capital expansion. So we’re winning in the sense that our product has more flexibility and at the end of the day, that’s more important so that’s one way how we’re kind of winning against sort of the captive networks in that process.

When you look to the alternative lenders, you know, in general speaking terms, they also focus on short term and they tend to have a higher rate, interest rate, compared to ours. So we feel that we have a better product and therefore, we are able to sustain not only the multiple use cases that we offer, but also a better rate for them so that’s how we’re winning in those spaces as well.

So we feel pretty good with our positioning and we’re starting to make good traction. As you saw lately, we released our stats and we actually have done more than $2.2 billion in originations and we have served more than 13,000 customers since we started.

Peter: Right, which I know. I think you mentioned as well, it’s more than the vast majority of banks are doing so you certainly have reached some significant scale there.

I want to actually switch gears a little bit, I was fascinated to read your op-ed from earlier this year in American Banker, it’s been something that’s been really on my mind as well and just to summarize for those who don’t know, you had this op-ed…basically it was talking about the SBA, the Small Business Administration, and how…you know, they have this loan guarantee program that’s really important, that has really led to a significant number of banks actually offering small business loans. They have not expanded it with very few exceptions to the broader fintechs like yourself so I’m curious if you had any feedback from that, from the SBA, I mean, what are your conversations like there? Are we going to see an SBA-backed Funding Circle loan anytime soon?

Bernardo: We’re working with the regulators in that regard, we haven’t had specific feedback but there’s a lot going on?, so we feel pretty good about that. The really important part of this type of program is we have done this in other countries so we have programs like these in the UK, Germany and the European market, we feel pretty good that we can actually enable governments to impact directly small businesses when times are tough and I think our platform is unique in that regard that we can do that.

So we are trying to basically to partner with the SBA or any other government agency to help set up portals like the ones we have done in other countries because we feel that it’s an important part of our mission in our platform. So yeah, nothing to share at this point, but I think there is a lot of dialogue going on in terms of what we can do and how we can do it. I’m pretty hopeful that we can do something

Peter: Right, so on that, I know your operation really well and I know in the UK you’ve got the British Business Bank that actually invests directly in the loans and I think the European Investment Bank is doing it in Germany, I believe or it might be Germany and in the Netherlands, maybe you can correct me there, but these initiatives are actually government funds going directly into the loans themselves as an investor on the platform which is different obviously to what the SBA does. Are you saying that you’re also talking…I mean, I don’t know in the US any government investing directly in any platform, are you having those conversations as well?

Bernardo: No, I don’t think we’re not having those conversations yet, but I think what we’re trying to tell the regulators or trying to start having those dialogues is about how we can basically, either leverage the [inaudible] structure that they have in place and how we can work through it. We don’t have to mimic necessarily what we have done in the European markets, but definitely, we would like to have…being a partner of the government to help the small businesses in the market and I think that’s what we’re trying to work through it.

Peter: Right, right. Okay, so I want to talk about partnerships and let’s start off with the LendingClub one because that’s been in the news fairly recently and I wrote a piece about it. We had a conversation before that was announced and…you know, maybe tell us a little bit about the background of how that came together and just how you decided…obviously it’s a pretty…it’s a nice borrower stream for your guys, I imagine, but just tell us a little bit about how that process came together.

Bernardo: One of the things that I like about the LendingClub partnership is that if you go back into how the industry was kind of formed, you know, we have been working with LendingClub since the inception kind of advocating in the policy forums around transparency, responsible business lending and we have been working since the beginning of that, in those two topics, and I think when the opportunity came…it was pretty good to see how we can, both of us, including Opportunity Fund as well can partner together to really put our policy, sort of thought process into action with the partnerships.

So now you have the three of the major players that have been advocating for transparency and really pushing a lot of legislation around that…to be a responsible lender, to kind of offering a small business loan in what we truly believe is the most transparent, the most robust lending that we can offer to small business owners in America so it’s fascinating how we move from policy to actually action so I’m pretty excited about that and I think the partnership will be a great success for all of the parties involved.

Peter: So I know it has only been a couple of week, I mean, I believe I think you went live, we’re recording this in May 6th and I think it was just a couple of weeks ago that you went live, but are there any initial thoughts on the traction the partnership is getting?

Bernardo: I would say things are working well, I mean, we will not disclose any numbers, but I think in general the partnership is tracking expectations.

Peter: Right, right. Okay, so something that is curious to me and it’s actually not unique to the US, I mean, you guys have done extremely well in small business lending in multiple geographies now, obviously the two biggest are the UK and the US and it’s interesting to me that in the UK no other company has got significant scale when it comes to small business lending, online originators of small business loans and the same now, particularly with LendingClub sort of now moving to being a partner of yours rather than a competitor. No one in the US is really getting scale in the online space when it comes to small business lending, term loans I’m talking about obviously, why do you think that is?

Bernardo: At the end of the day, small business is a very different segment and I think that’s one of the reasons why banks have struggled in the past. At the end, the key of this segment  really requires a lot of focus so when platforms or companies decided to enter the segment as a secondary item with a more broader strategy, it’s hard to make it work and I think that’s what…you know, we have decided a while ago that we want to focus on this segment alone and that’s where we’re putting our effort and energy so I think that’s why we have been successful, is the focus that we have had and we will continue to have in the future. It’s going to be the key differentiator for us from the rest.

Peter: Right, right. Okay, I noticed another thing you announced recently was expansion to an additional country, going to Canada. Now I’m curious about this because obviously Canada, directly north of the border here, but has a banking system probably more similar to the UK than it does to the US. So how involved is the US operation going to be in building that business or is it really going to be run out of the UK?

Bernardo: Well I think at the end of the day, we actually have somebody dedicated to the Canada business based in Toronto so at this point we decided to enter earlier in the year and I think we’ll see operations up and running in the second part of the year. We have somebody dedicated, the person came from the UK, but at the end of the day, we’re really focused on trying to build the Canada business from there.

Peter: So what you’re saying is you’re really building it internally. It’s not like…there’s no US resources going into building that Canada business.

Bernardo: We always have subject matter in the US that are helping them, but at the end of the day, it’s a Canada led organization at this point.

Peter: Right, right. Okay, and speaking of geography, you guys expanded recently to the city where I live, Denver, Colorado, and you were kind enough to invite me to your opening party last year. You know, there’s been a lot of talk in San Francisco really just in the last few months, you’ve seen a lot of people talking about companies leaving.

In the fintech space, there’s a lot, I would even say most of the companies now that have scale have operations elsewhere beyond just the Bay Area and you decided on Denver. Maybe you can give us an update, I think the office…must be about a year since you opened that office now, tell us a little bit about, you know, who are you hiring in Denver, what’s going on in that office?

Bernardo: Denver actually opened in August 2018 last year, so we’re pretty excited about our Denver operations. I mean, we have had success hiring people and have a great team there so currently we’re around 60+ number of people, predominantly, basically in sales and operations roles that we are focusing on there and I think we’re feeling pretty good.

I think what is important for us is we’re really committed to San Francisco long term, we truly believe that we’re getting a lot of good talent as well here, different talents in different parts of the organization, but we feel that we’re going to need presence in both places to be successful in the United States. So, you know, we feel that the decision we made last year was the right one and we feel pretty committed to that strategy at this point.

Peter: So you’re going to be growing the San Francisco office as well as the Denver office, is that fair to say?

Bernardo: It’s fair to say, yes.

Peter: Okay, so I want to talk a little bit about government relations. We were both in DC a few weeks ago for the Marketplace Lending Association event and as you pointed out, you’ve worked closely… the founders of that organization were LendingClub, Prosper and Funding Circle, so I’m curious about what the level of engagement is with DC these days. Are you still talking directly with regulators, are you sort of leaving it to the MLA, I mean, what’s your approach in DC these days?

Bernardo: Well we always leverage our associations to have a conversation on the specifics at the industry level, and we also have direct conversation for topics that are outside of the sort of scope of the MLA. As you know, in the MLA there’s a lot of consumer sort of companies and not necessarily small business so we definitely have certain issues that are not necessarily relevant for the MLA.

We have two communication processes. One, through the MLA when it is necessary and some that are directed…that are trying to address our voices. One important part for us is that we also have a lot of dialogue at the state level. As you know, we’re a little bit different than other platforms that kind of use a bank charter. We actually have our state license model so have dialogue at the state level as well and that’s a lot of our focus these days is really having that dialogue at the state level.

Peter: Right, right. It’s interesting because you talk to politicians, there’s not many issues that are bipartisan, it seems like these days, but helping small business is one of them. Everyone at least wants to talk about doing the right thing for small business owners so are you finding that these conversations actually progress into…and you feel like your opinion is heard both at the state level and the federal level?

Bernardo: I think you are right. I think the reality is everyone wants to help small business owners succeed in the marketplace. I think we feel pretty good that every time we are trying to get our message across the different state or federal agents and regulators, we feel pretty good about it and how receptive they are of what we’re doing and what we’re trying to achieve. I think they are pretty open, as you said, they are very focused in trying to help their constituency so we feel we have the right message for them and we feel that we can make traction.

Peter: Right, and so you guys…there was a change in California, it was SB-1235, it came in around transparency because we have…there’s the Truth in Lending Act that mandates a certain format of the way when you’re taking out a consumer loan. There is no equivalent on the small business side, but SB-1235 is mandating that, will you support it? Were you part of the conversations when that was sort of getting passed?

Bernardo:  Yeah, we actually were one of the leaders behind that with LendingClub and Opportunity Fund as well. So this is a perfect example Peter, as I mentioned. This was something that we wanted to do because we felt it was right to have a framework that was about transparency and responsible lending and we kind of partnered with the regulators and they were waiting for us to come to the table and that’s how things got passed.

Peter: Well, it hasn’t been implemented yet, right, you’re not actually having to…there’s no sort of equivalent form that has been mandated yet, is that correct?

Bernardo: The legislation was passed and now it’s being finalized with certain specifics around it, but sort of the ground principles were set, but I think at the end of the day…that’s a good effort in how you can work with the regulators at the state level to kind of frame a good policy around transparency.

Peter: Right, right. So then that’s sort of one win, but what are some of the other areas…when you are talking with regulators today, what are some of the changes you’d like to see that would make a difference for Funding Circle?

Bernardo: Well I think that the more that we can go to a sort of a federal type of commercial Truth in Lending as we did in California, the better it will be for us because that would create a national framework that is similar across all the states and every time you have a national framework it enables you to have simpler operations and it’s easier to execute. It will also be more transparent, easier to communicate with customers so that’s one item that we’re kind of very focused on.

In addition to that, we’re kind of very vigilant on the CRA reform and we’re also kind of participating around the IRS modernization which we feel is very important as we continue to provide lending to our customers because the easier we can get access to their data, you know, the easier for us to provide them processes and customer experience that makes it easier for them to get their loan. So those are some of the topics that we have top of mind.

Peter: Yeah, the IRS issue, I think your predecessor, Sam Hodges, wrote an op-ed on that many, many years ago and I know that others have mentioned that having sort of API access to IRS data would be a big thing. There’s been movement on it in Washington, but nothing has actually happened yet, unfortunately.

Anyway, we’re almost out of time, but there’s a couple of more things I want to chat with you about. Firstly, so you look at your business today, you’re a two-sided marketplace, you’ve got your borrowers and your investors, are they perfectly in balance today, is one side constraining growth over the other or where are you at?

Bernardo: I think with any marketplace, they are always balancing, and even if you look at banks, it’s actually the same. I think at this point what we’re trying to really get to is really the right balance from a growth perspective and risk/reward from investors and I think right now, we’re at a good balance at this point of our journey. I mean, we’ll continue to, depending on the market, adjust those expectations, but we feel pretty good we have struck a good balance at this point.

Peter: Okay, just on that…I mean, the economy is still doing great, everyone keeps talking about the fact that there’s going to be a recession, at some point and there will be at some point. Although we could be like Australia where I think they’ve gone 28 years without a recession so it’s always possible that it is a long ways off, but are you adjusting anything for where we are in the economic cycle?

Bernardo: I think what we typically do, we have a robust risk process in terms of monitoring and stress testing our portfolios and I think we have shared with you and others how we have done that. When we see and observe something that goes outside our risk appetite, we tend to adjust, but generally speaking we haven’t done anything right now that is cyclical in nature. We have been adjusting things that are not performing as we expected, as you normally would do in any lending product, if you see a cohort that is not performing as expected, you calibrate as you see fit, but from a recession perspective, we are not at this point worried about it but we will continue to monitor our portfolios on an ongoing basis.

Peter: Okay, so last question then. So what are you working on today that’s most exciting for you?

Bernardo: I’ll come back to the topic about partnership. We’re really focused on our growth strategy on partnerships so I am spending a lot of my time thinking through what other types of partners do we want to work with and how we can accelerate those conversations in order to make those partners a reality. That’s one of the key things that I’m working on today and I feel that we’re making a lot of traction as we have seen in the last quarter and I hope we’ll see more news in the foreseeable future around this partnership strategy that we have embarked on since I came in.

Peter: Okay, well I look forward to hearing more news on that and on that note, we’ll have to leave it there. Thank you very much for coming on the show, Bernardo.

Bernardo: Thank you Peter for your time, I appreciate it.

Peter: Okay, see you.

Bernardo: Thanks.

Peter: You know one thing I appreciate about Funding Circle is that they really have maintained this laser-like focus on one product. They operate in multiple geographies, but they operate with this one product, term loans to small businesses, and there’s obviously a lot of adjacent products they could go into and they have chosen not to. I mean, they did have property loans in the UK for a little while, but they have since gotten out of that business and they’ve maintained this focus and they’ve reached significant scale now in multiple geographies and really, they are one of the very few fintech companies, particularly on the lending side, to do that.

I think my sense is this kind of lending is difficult, these are 3/4/5-year loans to small businesses that’s a very heterogenous group, there’s not a lot that these companies have in common and I think it’s difficult to underwrite these things. Obviously, banks have been doing it for decades, with the SBA’s help. I wonder how much they would lend if they didn’t have SBA guarantees in place. Funding Circle has done obviously without that and they continue to build their business in a significant way in multiple geographies.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation in financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 198  –  CHARLIE DELINGPOLE

Welcome to the Lend Academy Podcast, Episode No. 198. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation in financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I’m delighted to welcome Charlie Delingpole, he is the CEO and Founder of ComplyAdvantage. Now, ComplyAdvantage are a fascinating company, they are in the anti-money laundering space, or really the compliance space and they have developed new technology which allows them to connect with pretty much any financial institution and help them really manage their compliance risk when it comes to anti-money laundering.

So we talk about how they do that, how he was able to build new technology from scratch and how he’s able to manage really integrating with very archaic technology at banks, as well as with some of the newer fintech companies. We also talk about what’s wrong with compliance today and how we can really get to a point where we’re 10 times or even 50 times better at it than what we are today. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Charlie!

Charlie Delingpole: Great to be here, Peter.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself. You’ve had an interesting career, this is not your first foray in fintech so why don’t you give us a little bit of background about yourself.

Charlie: Yes, so I started my first company when I was 16, my second company was in the peer to peer lending space so I started MarketInvoice back in 2009. Back then, it wasn’t really fintech, it was just kind of invoice financing, but then very soon it was this maelstrom of sexiness which became fintech (Peter laughs). MarketInvoice was kind of a peer to peer invoice finance platform lending money to small companies, lent a few billion now, raised $35 million dollars from Santander and Barclays back in February. I started this company ComplyAdvantage about five years ago after MarketInvoice and we’re roughly 200 people and 450 clients and four offices around the world now.

Peter: Okay, so we had Anil on the show last year so I think the listeners are pretty well aware of what MarketInvoice is all about, I guess the question is why did you leave MarketInvoice which obviously has grown a lot since you left so what was the impetus to leave and deciding to start ComplyAdvantage?

Charlie: I think things were going very well at MarketInvoice, lots of opportunity elsewhere. Anil was doing a great job so I thought it best at that time to part ways and move on to something new and exciting.

Peter: Okay, so then what was the ‘a-ha’ moment or the idea that led to the founding of ComplyAdvantage, what was, you know, the germination of the company?

Charlie: So kind of the damascene moment, I think, was when I walked into a Somali remittance store in Mayfair in 2014. This company was based over at the Saudi Embassy, they had these big armed guards juxtaposed with these large trucks of cash moving money from from Somali and Afghan communities around London and just seeing the people there having to deal with processing huge amounts of payments which could be going to Al-Shabab, the Taliban, ISIS or could be going to your uncle and to see how terrible the software was and the data was and seeing how…for me, it was extremely obvious how terrible, also how consequential what they were doing was.

Therefore, at that point, I had no real choice other than…like I’m just going to have to go and build this business because I think given my experience in the past, given what I knew at MarketInvoice in regards to how difficult it was to onboard investors, how difficult it was to understand the risk of which companies to lend to, given what I knew about the market at JP Morgan, given I knew about the potential in terms of technology and data from my first company and from working on MarketInvoice, I saw an amazing opportunity to restructure and reinvent something which is obviously being done in a really archaic and terrible way.

Peter: So with that…it’s not only that, I mean one of the things about financial crime, I continue seeing this stat sort of bandied around, is that like we catch 1% or thereabouts of all of money laundering globally and we have these massive compliance organizations inside banks that don’t seem to do a very good job. So I guess maybe…before we get into ComplyAdvantage, why is it so hard, why is it so hard to catch money launderers?

Charlie: So to an extent, it’s an arms race and it transcends every geography, every industry, every client type and it’s the full spectrum of human behavior so it could be Trump who today cut down on Iranian sanctions with oil, the next day it could be human trafficking, it could be wildlife trafficking, it could be trying to defraud a peer to peer lending exchange, it could be money laundering.

And because money is so fungible and can be disguised and transmitted in so many different things and in different services, the nature of capital means it can morph and flow and therefore, it’s impossible to define and therefore it’s everywhere, as in you can disguise it in inflated invoices, you can do it with loans and, therefore, what you have is this impossible arms race between criminals, terrorists, money launderers and institutions who are the vectors and vehicles that they try to exploit.

Peter: Okay, so then maybe we can segue into ComplyAdvantage and maybe you can tell us exactly what your company does.

Charlie: So principally, what ComplyAdvantage does is help companies manage the risk around sanctions and money laundering. So on a very basic level it’s, am I allowed to lend money to this company? No, because they’re an Iranian general who’s funding the Iranian terrorist group, or no, because they’re the Venezuelan central government ambassador and therefore they’re prohibited from any kind of funds flowing to them. So, on the most basic level it’s, am I allowed to do business with this person?

Peter: So what you do then is you have…I imagine you just have a massive database, right, that’s constantly being updated, I imagine. I mean, so are you really just focused on the binary decision on is this person a good and reputable person so I guess that’s one part of the question. Two, is then…what is the secret sauce? I imagine a lot of people have databases of bad actors so what is your secret sauce?

Charlie: So the reason why everyone has failed in the past is because it’s a very, very challenging problem. So what you have now is hundreds of millions of dollars spent on manual labor and despite all of this expense, despite all this investment, despite all this technology being deployed, people still get fined billions of dollars. The terrorists and money launderers still win, right.

So for whatever reason in the past, no one has managed to solve this problem and so to me, it was trying to build a company that was capable of succeeding where everyone else has failed, right, and so that was principally looking at the industry, understanding who is doing what,  the way they were doing it, the different incentives to each party, the different structural legacy systems they’re stuck with and trying to invent a solution and that’s what we’ve built over the past five years.

So in summary, what we’ve done is what was seemingly impossible at the start which is build the entire system end-to-end which is the case management, the search algorithm, the API, the transaction monitoring, the payment analytics, the [inaudible] resolution and database. All of these things in a combined holistic system, we think, are now able to make a real dent in the challenge which has never been possible beforehand

Peter: So not only that, you’ve got to not just build it, you’ve got to interface with existing systems which, I imagine are all very different. I mean, obviously, you’ve got some of the core banking processes, there’ll be some similarities, but how are you able to interface with everyone from…you know, you’ve got a legacy bank running COBOL to a fintech company that’s five years old or less and running some of the latest Python technology, how do you manage both?

Charlie: So I think what people don’t often understand is that an API is the most important interface of all like while it’s very easy to build an astounding human interface in terms of the kind of web interface, in terms of catering to developers and the industrial process of managing millions of searches and the ability to get very high performance results from the API, being able to design that and have all the functionality around that, I think that’s a huge differentiator in terms of the way it’s constructed and the way it’s built, the way it’s maintained, the way it’s interfaced. And so we’ve invested huge amounts of resources into building what we think is the best API in the world and so all the clients we have integrate with the API.

Peter: So it doesn’t matter whether they’re running COBOL or whether they’re running Python, they will integrate…they will be able to get the same results from interfacing with you, regardless?

Charlie: Exactly, yes, exactly.

Peter: Okay, okay. So I’m curious then…you know, before you guys came along, what sort of compliance…I mean, banks…as you said they’ve invested billions of dollars into this, what have they been doing and why is it so inadequate?

Charlie: So a key dimension of what we’re doing is around all the data so what you have now is or in the time before we arrived was you had three or four main data providers and these data providers what they do is they really pride themselves on having 500 analysts and all these analysts kind of came from editorial backgrounds and they try and track…of the 7 billion people, they try and track and then maintain a database of say 5 million people they thought were high risk, right, so sanctions, political exposure, adverse media.

So what that means is if you have 500 analysts and they spend a few minutes every four years, they can spend therefore 10 minutes on each person every four years which means that the breadth and depth of the data is completely not very helpful.

Peter: (laughs) Right.

Charlie: Whereas for me, starting off from scratch, I felt the only way to solve that was to do it via an algorithm. Of course, when you start building these algorithms, at the start they aren’t particularly effective, you have to invest huge amounts of resources and time to get them up to the stage where they’re better and more effective than the human researchers.

If you can do that then that’s a huge inflection point and there are all sorts of other things you can do once that foundation infrastructure is built. So and then in terms of once you have that data then you can have the fusion between the data and the API and the search algorithm and the case management and so, architecturally, what you have is a step change in terms of what’s possible. So by rebuilding everything from scratch in-house in this kind of holistic system, we think we’re able to get much better results.

Peter: Okay, so I want to actually just…if you could just talk us through an example how it works in practice. So someone comes along to a bank, for example, they’ve got $100,000 that they want to deposit or they want to invest or whatever, the bank says, okay, we need to do our KYC and AML type test. So this person enters in a whole bunch of data, then they send it to you through the API, what is it that you do exactly and what do you send bank to them?

Charlie: So what we send back is profiles of people that we think match the entity that they’re trying to onboard and details of that person. So it could be Peter Renton, he’s involved in human trafficking, he launched an attack on Al Qaeda in (inaudible), all of these things about this person and they’ll say, okay, actually, different date of birth, different Peter Renton and therefore we’re going to remediate that profile as not being the correct match. The next match could be the correct Peter Renton in which case probably you don’t want to onboard him because he is a super high risk.

Peter: Right, okay. So is the output from your API really just a binary yes/no decision, or do you send back like a much more rich kind of dataset and then the people at the other side make the yes/no decision?

Charlie: What we send back is an entity profile so it could be a person or a company and they have to decide is that person or company the same as the one that they’re trying to onboard and they’re confronted with currently. So we don’t make the choices, it’s up to the lending company themselves to decide whether or not they want this person or company as a client.

Peter: Right, right, okay.

Charlie: The challenge becomes…if you’re on-boarding a million clients every year and if you already have a million clients that are already clients…because at any given point, a few of those could become terrorists, they could become money launderers, they could become subject to things like cuckoo smurfing, they could be taken over by criminal gangs, so you need to know when you’re maintaining your client base which of them become high risk…

Peter: Right.

Charlie: …because that could land you in jail and at the same time when you’re trying to grow the business and make money, you have this hidden risk which you’re not aware of. So it isn’t just the entity base risk profile, it’s also the kind of the transactional behavioral analysis.

So let’s say you have two different companies who are transacting with each other as counterparts via a system then you have to be able to understand that risk as well or if they start sending money to Iran, or they start transacting in Iraqi Dinars so there’s both the entity risk and then there’s the ongoing monitoring risk and then there’s the behavioral risk as well. So we’re trying to help companies understand all those different attack vectors.

Peter: Right. So I imagine you’ve got to be like Google in some ways, you’ve got to go out and just search the Internet for all these kinds of…I imagine you’ve got some pretty extensive different data sources. Someone may not be a money launderer today, they might be a completely law abiding citizen, they wouldn’t raise any red flags, and something happens and they get recruited by a terrorist organization or what have you and suddenly, they become one.

So how are you building…are you just going out…I imagine it’s all automated, but you’re just going out, your services are going out scouring the globe for new cases of people who’ve become bad actors?

Charlie: What you have absolutely is this trend whereby there’s this explosion of information and it could be in Swahili, it could be in Afghan, it could be in Russian and then you have…it could be Vladimir Putine in French, it could be Vladimir Putin in Cyrillic so you have all of these different people, all of these different sources, billions upon billions of new webpages, social media feeds, all of these different risks that suddenly appear and you have clients supplying to you from all over the world, from shell companies and so if you only have a team of say 50 people, how do you manage this enormous risk, right.

So what we’re trying to do is make this as efficient as possible. I think it’s going to be difficult to completely eliminate the risk, but the more data sources and the more ability to make simple what is inherently complex then the easier and lower risk it will be for different lending companies and the more likely it is that they can stay in business.

Peter: Sure, so I mean, there’s been a lot of talk this year…I’ve read many articles about like the trouble, I think it was in Estonia with the money laundering, I’m curious to get…what region, what parts of the world have the worst or have the most financial crime?

Charlie: So we have clients now in 45 countries and what’s fascinating to me like traveling around is how each different jurisdiction is completely different in terms of the risks exposed. So in our Singapore office, for instance, a big risk is the Chinese abscond, the Skynet risk, those people who have been tracked by the Chinese government and then go to Indonesia or Malaysia, so there’s a risk there.

In the Baltics we have a team focused on Latvia, Lithuania, Estonia and so the risk there is obviously all the Russian money coming in and then in South America it’s going to be different forms of drug gangs and so those aren’t necessarily siloed. So given the intensification of globalization, it could be the Mexican drug gang is working in league with a Russian money launderer who is then linked to a Chinese drug cartel…

Peter: Right.

Charlie: So I think as crime becomes more transnational and becomes more complex, the risks and consequences of criminal finances become all the more extreme. So it’s everywhere, it’s hyper local, but also global at the same time.

Peter: Right, right. So what geographies do you operate in? I know in talking to you today you’re in New York, but you’re obviously not American, I know you’re British, but what geographies do you actually operate in today?

Charlie: So we have three global hubs so New York, London and Singapore and the teams are kind of based out of there.

Peter: Okay, okay. You said you’ve got clients in 45 countries so I guess whatever country is closest that’s where…you’re managing everything out of those three offices.

Charlie: In terms of offering the best support and also in terms of understanding the local risks and also the local name matching requirements, the kind of languages, the data sources, each different regulation and regulator has different nuances which we have to understand and to operate in one country, you have to operate in the whole world because each local country will often need screening for global requirements. So it’s not good enough having local coverage, you have to be completely global from day one.

Peter: Wow! That’s a decent sized barrier to entry, I imagine, for a lot of people, a lot of companies.

Charlie: I think the barriers to entry in this business are I think huge and only getting larger in terms of reputation, in terms of adoption, in terms of data coverage, in terms of efficiency so I think clients are becoming more and more demanding as the risks and consequences become tougher and tougher.

That was partly why I raised this $30 million dollars from Index in December is because right now, we’re roughly 200 people, but I think we want to take our tech team and development team…like try and double that this year, if we can. This year there’s a range of things we need to do and a sheer number of breaches and data sources and efficiency and effectiveness to the algorithms that clients demand is just only going to increase as time goes on.

Peter: Right, right. We haven’t talked about it yet, but I imagine this is a big part of your technology and that is artificial intelligence, machine learning. You’re dealing with massive data sets so how are you using AI/ML in your business to help companies with all of this monitoring?

Charlie: So for me, the whole AI thing is kind of very overhyped, but I think if you really understand what it actually does in production and how you can actually use it, it is actually fairly simple. So I think in ten years, people won’t really talk about machine learning as a kind of amazing thing, it will just be something that everyone does in the same way that SQL was amazing 20 years ago, but now it’s something that feeds everything.

So I think in terms of how we actually use it. I guess there are different dimensions of machine learning in terms of supervised/unsupervised, natural language processing, entity resolution, anomaly detection like…all these things that are kind of tactical things which can help improve certain sub-sections of the platform, but to the extent…what we’ve basically built is this very broad system and you have to look at each different component of the system to understand in that specific juncture…can that be improved by a machine learning algorithm.  I think what we’ve done is use it in certain components, and I think probably had we not used that technology throughout our system, it probably wouldn’t work at all, right.

So I think the most basic one is a classifier so what we have is a database of like 5 million people and a key challenge is….is this person that we just isolated the same as an existing person, so you have to look through when you have a new name, is this person the same as another one of these 5 million entities, right, so that’s a binary classifier and the 22:19 more training we feed that, the more accurate that is, right.

So I can go through like entity resolution so if we have 5 million clients from a client then which of those existing clients is the same as the current ones. So all those things can be improved with technology and as Google, Facebook, Amazon release more and more algorithms, we think that our technology will only improve with time.

Peter: Right, right, okay. So who is your target customer? Is your target customer every financial institution on the planet, or is it large banks, I mean you’ve got…I imagine it’s a big problem for just about everybody, but who are you specifically targeting?

Charlie: So right now, we have like 400, 450 clients directly, but then part of them via reseller partners so lots of our clients will work through say like…for instance, Jumio announced they’re working with us so you can access our data via Jumio, right.

So yeah, I think we work with lots of lending companies, payment companies, banking companies, but then also high risk corporates too, right. I think, ultimately this will be relevant to all companies so one of our earliest clients was Fedex in Zimbabwe who had to understand if they were dealing with the Mugabe regime so I think companies all over the world are becoming more and more concerned with the integrity and fidelity of their counterparties and as the risks increase, we think all companies will care very deeply about this.

Peter: Right, so you are going beyond financial services. Obviously, you have Fedex, they’re not really a financial services firm, but that’s really interesting. That is a much bigger opportunity then.

Charlie: Exactly and I think, to an extent all of these categories like credit, fraud, identity. In a way those distinctions are relatively artificial in terms of fraud. Perhaps 20% of credit losses are because of fraud or perhaps lots of losses from fraud are because of identity issues. So I think, over time, all these markets will merge into one rather than being distinct categories.

Peter: Right, right, fair enough. So then can you give us the names of any of the clients you’re working with, I mean, are any of them publicly declaring that they’re partnering with you?

Charlie: I think on our website…I think we’ve got Santander and Visa/Earthport and Holvi, and I think we’ve got LendInvest on there so yeah, kind of a very broad range of banking, payments, fintech companies.

Peter: Right, right, okay. So then you’ve given us a sense of the number of clients. I’d be curious about…because some of these clients might have…you know, Santander obviously, millions and millions of clients, what is sort of the volume of inquiries that you get on a daily basis? Can you give us some sense of the scale that you’re dealing with right now?

Charlie:  I think it’s roughly 100 a second, in terms of like API load.

Peter: A hundred a second, okay, so what’s that…that’s 360,000 an hour then?

Charlie: Yeah, but I think also it’s the numbers again who are monitoring daily, right, so a lot of clients are very concerned about the ongoing risk and have daily alerts set up as well.

Peter: Right.

Charlie: So that’s kind a decent milli-number of search every night.

Peter: Right, okay. When I was doing some background on you guys and I see the name…is it Mimiro, is that how you say it, M-i-m-i-r-o?

Charlie: Yeah.

Peter: Is that a new brand or so what’s going on with ComplyAdvantage and Mimiro?

Charlie: We’re in the process of sorting out all of the trademarks so there was a slight hiccup with the trademark, with a small Norwegian farming company (Peter laughs), who might have registered the same trademark at the same time, a week before us, so yeah, we’re trying to sort that out.(cross talking)

Peter: The intention is to do a rebrand down the track then?

Charlie: Yeah, I think so, yeah.

Peter: Right, right. Okay, you mentioned Index Ventures and your Series B last year, I think it was just late last year, so I’m curious about the venture community, I mean, and obviously you’ve got some A-list backers. What do they see, tell us about that process and how you were able to land some of these top name VCs.

Charlie: So we raised very early on from Balderton, I think then we were kind of 15 people and we had Tim Bunting and Suranga came on board at a very early stage and they invested $7 million, I think it was like three years ago and that was really instrumental in terms of bringing on the right people who really understood both the technology and the market opportunity and they really encouraged us to invest extremely heavily in the platform and technology. We didn’t really kind of take the product to market for a long, long time until we felt it was of sufficient quality and caliber and I guess since then we’ve been doubling head count and tripling revenue since we launched into the market.

We were fortunate enough to bring Index and Jan Hammer on board in January. Jan, of course, has amazing pedigree having backed companies like Adyen and RobinHood, so the extent that everything that he has touched is going to turn to gold and he has an amazing understanding of teams and fintech. I think he really understands the potential for what the company can do and what we can build and I think, for me, it’s great to have that level of guidance and prescience around how to build a company, how to evolve the product, how to build a team and I think I’m fortunate to be able to work with that quality of investor and director.

Peter: Sure, so we’re almost out of time, just a couple of more questions. You said it’s an arms race between the bad guys and the people like yourself. Do you think, are we ever going to get to where we’re capturing 10%, 20%, God forbid 50% of all of these people, or do you think it’s such an arms race that it’s going to be hard to really get, you know, 50 times better than what we’re doing today?

Charlie: I think and I hope that what we’re building, I mean, what we’ve built today is a very small portion of what we want to build in the future and I think we can do…I think with the right technology, we can solve this problem. I think the way it’s done now is crazy, right, and I think, hopefully, with our roadmap and with our investment we should be able to make a huge dent and I think, hopefully, we should be able to stop a much greater proportion of it. I don’t think it can get much worse than it is today.

Peter: So you think that long, long term. As you were just talking, it reminded me of like spam with e-mail like 20 plus years ago where it was such a problem and now, spam has pretty much…I mean, there is still some that gets through, but it’s very much a solved problem. Do you really think that we’re going to have…that AML will be a solved problem in the next several decades?

Charlie: I think we should be able to eliminate it from quite a few different areas. Part of the reason fintech exists and why alternative lenders exist is because the big banks have done not a great job at their core business and a lot for their core systems just aren’t functional. So I think, hopefully, with the right investment, the right technology…I think versus…currently, it’s a drop in the ocean in terms of what’s actually stopped, I think we’ll be able to make huge strides going forward in completely eliminating money laundering and terrorist financing from huge swaths of the economy.

Peter: Okay, very interesting. Last question then, what’s next for ComplyAdvantage, what’s on your roadmap say for the next 12 to 18 months?

Charlie: So I think, it has been since day one just relentless, aggressive investment and improvement in the core systems. I think the incumbents haven’t managed to find a solution to the problem and they haven’t invested and they haven’t solved the problem.

Given what we’re doing and given the rate of improvement, we think every day we can make huge strides and the compounding effect of those will be huge. Hopefully, we can continue our current level investment and improvement and we think we’re going to make a huge dent in a massive problem and improve both society and the economy for everyone else.

Peter: Right. Well on that note, we’ll have to leave it there. I wish you the best of luck, it’s certainly a needed service.

Charlie: We definitely need it. (Peter laughs)

Peter: Great. Well, thanks, Charlie, I appreciate you coming on the show,

Charlie: Grateful, Peter.

Peter: See you.

Charlie: Bye.

Peter: Well that was fascinating, you know, you can hear it in Charlie’s voice how enthusiastic he is about solving this problem. As he just pointed out there towards the end, I mean, the reality is the existing financial institutions have done a poor job, they’ve done a very poor job at really mitigating money laundering despite all of the billions of dollars and tens of thousands of people that are involved in this, the results just aren’t that great. I think we need a new approach, something like what Charlie’s company is doing is so desperately needed so that we can, hopefully, down the road, maybe several decades down the road where money laundering becomes a much smaller business than it is today.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.