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Podcast 265: Sally Taylor of FICO

The Scores Vice President of FICO talks about measuring the resilience of consumers with the new FICO Resilience Index

September 18, 2020 By Peter Renton Leave a Comment

One of the challenges that has plagued consumer lenders over the years is that when times get difficult some consumers do much better than others. There are even large variances in people who have the exact same credit score. There are lots of ways to get a 680 credit score and these people will all behave in a similar way when economic conditions are benign but differently during a recession.

Our next guest on the Lend Academy Podcast has been thinking about this problem for a long time. Sally Taylor is the Scores Vice President at FICO and they recently launched the FICO Resilience Index (FRI) which addresses the problem directly. We talk about the FRI in some detail in this interview.

In this podcast you will learn:

Sally’s experience when FICO score were first introduced several decades ago.
How she thinks about credit scores today given the disruption of the pandemic.
Why FICO does not consider forbearance programs in calculating scores.
Why they developed the FRI.
How the index works and the outcome it is designed to predict.
The kinds of consumers who will have a low and high FRI.
What a high FRI number might mean.
How consumer lenders are actually using the FRI today.
The level of interest FICO is seeing from lenders for the FRI.
How Sally views those fintech lenders that say they go beyond the FICO score.
What she thinks about the huge popularity of data science today.
What Sally is working on today that is interesting and exciting.

[Editor’s note: as Sally said you can hear from FICO executive Dave Shellenberger at LendIt Fintech USA 2020 talking about the latest insights on consumers today.]

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech USA 2020. The world’s largest fintech event dedicated to lending and digital banking is going virtual in 2020.

Download a PDF of the transcription of Podcast 265 – Sally Taylor.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 265-SALLY TAYLOR

Welcome to the Lend Academy Podcast, Episode No. 265. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show ever. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa

Peter Renton: Today on the show, I’m delighted to welcome Sally Taylor, she is the Scores Vice-President at FICO. I wanted to get Sally on the show because there’s just a lot of activity happening in credit scores this year with the pandemic and the forbearance programs. Sally has decades of experience on credit scores so I wanted to really get her perspective on what this all means, what historical precedent we can look at when it comes to credit scores and she does give some really great ideas, great solutions there.

Also wanted to talk about the new product that FICO released earlier this year called the FICO Resilience Index. It’s very pertinent right now because what it really does is it helps lenders understand consumer sensitivity to economic stress and let’s face it, many consumers are under considerable stress today and this allows lenders to really continue to lend confident in the fact that the 680 FICO now is going to be a 680 FICO in six months time or in 12 months time.

So, we go into that in a lot of depth, talk about how it’s built and what it really means; we also talk about data science, in general. We also talk about what Sally is finding most interesting today. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Sally.

Sally Taylor: Thank you for having me, Peter.

Peter: My pleasure. So, I’d like to get this thing started by giving the listeners a little bit of background. I went to your LinkedIn profile and I see you have spent your entire career at FICO so, why don’t you tell us a little bit about how your career has progressed then.

Sally: Sure, sure. I am a veteran of over 30 years in the credit industry and the industry of analytics and data science. I started as a Data Scientist straight out of school with my Statistics degree in Berkeley and I was part of a original management team of the FICO scores, that would have been about 30 years ago.

We just celebrated the 30-year anniversary of the FICO scores and I led the product management to marketing teams so I was part of a lot of the adoption in the early years of designing and re-designing the FICO scores. And then, as you said, I’ve continued to work at FICO, I headed up product management for FICO scores for about ten years, I’ve done other things at FICO including managing other software products and so forth. About five years ago, returned to the Scores Team to head up the B2B Scores Team.

Peter: Okay. So then, how revolutionary was it? I imagine, we take it for granted now, because everyone knows about FICO scores, but how revolutionary was it at that time, did you know that you were going to be changing credit forever?

Sally: We knew we were going to be changing credit, but I don’t think we expected everything that came down after. So, we knew what was revolutionary is that by building a score, a credit score, to reducing the data at the CRA, we were building a model that leveraged the experience of all lenders, right. Whereas before that, it’s common and it’s still common, is that lenders have their own custom models, the proprietary models that they developed using their own historical experience.

What the FICO scores did was it allowed every lender, not just the large ones, because at that time it was mainly the large lenders that used analytics like credit scoring. It allowed even medium-sized lenders and small lenders to take advantage of the tool that allowed them to manage risk better, but also, you know, lend in a more fair way and make credit more fair and accessible.

Peter: Yeah and that certainly has done and I know that it’s been a……it’s got into the general population, I mean, most people now have some idea of what their credit score is. That certainly wasn’t the case even I think ten or 20 years ago. So, let’s just talk about the credit scores today because it feels like there’s been some ….this has been a challenging year, let me say, I mean, you’ve had a long career with FICO and I’m sure you’ve never seen a year like this before. So, tell us a little bit about how you are thinking about scores today given the unusual nature of what we’re going through.

Sally: Right. It’s still a little too early to know the full impact, right, of this economy and we’re still fairly early into it and when it comes to credit scores that are derived often using, you know, data at the CRA, there’s a lag before information hits the credit reports. So, we’re just starting to see some of the trends there in terms of accommodations and so forth, but I think it’s helpful to look back, since we’ve been doing FICO scores for 30 years, we have the experience of looking at FICO scores after the fact ….after the Great Recession, after natural disasters like Hurricane Harvey and we learned a few things from that.

One is that, you know, credit scores still rank order, so the point of a credit score is rank ordering, it’s not intended to be a point predictor of risk, it’s not….680 means, you know, exactly this default rate, but what happens is as the economy shifts, goes through cycles that relationship between the default rate and the score will shift over time. For example, in the Great Recession, it pretty much doubled across the board. Delinquency doubled across the board, whether they were high scoring or low scoring, but we still saw that the scores rank ordered, that the people who scored higher performed better than the ones who scored lower and so forth.

So, credit managers, especially those who’ve been through economic cycles, are fully aware of this pattern so they know that they need to monitor very carefully and really understand what’s happening in segments with this particular economic downturn, but, number one, scores still rank order, there will be shifts in the odd score. The other thing we’ve learned from the past economic impact is that overall score so shifts quite as much as people expect them to.

Peter: Right.

Sally: There will be some where their scores go lower because, you know, they were personally impacted, however, as an overall…..I mean, scores look at a lot more than just risk and delinquency, right, they look at the whole history, they look at balances, they look at how you manage your credit overall . So, it’s not as much of an impact as people think and we’ve seen that from the past.

Peter: Right. So then, right now, there’s all sorts of forbearance programs that are happening. Pretty much every single lender has had some kind of forbearance, some of them are running their course now, but given that they were not allowed to report the……you know, someone may have been delinquent but in a forbearance program so they were not reported to the bureau so their score was unchanged. They may have lost their job, they may have no savings, they may be living off credit cards, so how do you sort of factor-in the forbearance programs in the scores.

Sally: So, in terms of how the forbearance programs…..you know, how the score reads the forbearance programs, the scores are looking clearly at the status, the delinquency status and so forth. So if a lender is doing what they’re supposed to be doing, right, if they’re following say the CARES Act and other guidance, if they make an accommodation, they should report it as “paid as agreed.” So, they shouldn’t report it as delinquent, based on what the original agreement was, they should be based from what the accommodation is and so that should not impact the FICO score at all.

Even if they put in a code that indicates that there is a forbearance, the FICO score doesn’t look at that code and there’s a very good reason why it doesn’t look at that code. That code is, generally, only there during the time of the disaster, right, during the time of the event. And so, if we factor that information in then at some point that code’s going to come off and there’s going to be the huge shift in score if we were to actually, you know, look at that code or interpret that code to mean, you know, this person shouldn’t be delinquent even though it sounds very delinquent. So, it’s really important for lenders to actually report the status the way they have agreed in the accommodation.

Peter: Okay. So then, what do you think your take is on the overall health of the consumer today, I mean, we know the government programs gave run their course, it seems that there’s not much movement in Washington right now for a new stimulus package and we’re obviously less than two months from the election so that factors it all, but given the unemployment programs, the stimulus check, they’re now all in the past and more than a month has gone by since those have ended, what’s your take on the consumer today?

Sally: Right. Again, it’s too early for us to have a read, we just recently received snapshots of data that will show the very earliest reads of, you know, the amount that are under accommodation, so forth and we’re preparing that information actually to present later at LendIt. So, Dave Shellenberger from FICO is actually presenting on September 30th in the Consumer Lending Track and so he’ll be prepared to share what we’re seeing in the very early snapshots of how the FICO scores and the FRI scores that we’ll be talking about are performing.

Peter: Right. We look forward to that and thanks for the plug there. (laughs) Let’s talk about …….you just touched on it, I want to talk about the FICO Resilience Index. I’m sure when you were probably putting this together, you had no idea there was a pandemic that was going to hit and it was going to become a very important piece of information for lenders. So, maybe you can start by just talking the origins of the FICO Resilience Index.

Sally: Sure, sure. You’re right, we had no idea that around the time we were launching this we would be heading into a pandemic, however, we knew, as every credit risk manager knows, that there will be economic cycles that will pinch in you, ups and downs, you know, that lenders need to manage too. So, we’ve actually been working on various types of solutions related to managing through economic cycles for decades. So, this particular solution, the FICO Resilience Index, came about because credit managers, typically, even in a benign economy they have to factor-in the fact that at some point there will be an economic downturn.

So, you know, they actually price that risk in even when the economy is pretty good so what we have credit risk managers ask….we know that when the economy turns down there will be higher risk at every score band, right, just like what you said before in the Great Recession, it was about the double, the default rate in every score band.

Can you tell me which of the 680’s are the ones that are going to go bad and so we set out to answer exactly that question. We researched, can we tell from, you know, from a benign economy to a recession, can we tell the type of consumer that would perform very similarly in the two scenarios versus the ones that have performed very differently and be far more sensitive to being in a recession and that’s exactly what the FICO Resilience Index looks at.

Peter: Okay. So, maybe can we dig into that a little bit and talk about how because, as you say, not all 680’s are created equal and this is trying to address that very issues. So, what kinds of things are you looking at that really will give you that indicator?

Sally: So, what we’re seeing is….first of all, the FICO Resilience Index looks at the same underlying data as the FICO score. It looks at the information on the consumer’s credit report, it just looks at it differently and it’s designed differently, it’s designed to predict a different outcome, it’s designed to predict who’s likely to be very different in a recession than they are in a benign economy which we call sensitive to the economy as opposed to resilient to the financial stress. So, it looks at the credit report, it is used in conjunction with the FICO score because you still need the FICO score to tell you what range of risk is there.

But as you point out, if somebody is 680 ………there’s more than one path to 680, there are different ways that someone can be a 680 and what we see is the ones that are more resilient have more experience with credit, they aren’t taking up a lot of new credit, they might have some delinquencies. Delinquencies really doesn’t have as much of a play in the Resilience Index as it does in the FICO score so it’s really about how one manages credit that tells how resilient they will be in that downturn. So, the more sensitive ones will have a more newly opened trade, less a variety of credit just because they just have less experience on credit.

Peter: Right, okay. So, I presume you back-tested, like the 2008/09 recession data so you can see that this……obviously, you have all the data, I imagine, going back decades so when you have a recession….you said that with the data that’s still out, we will know in a couple of years or even next year much more information about this current recession, but let’s just go back to 2008/09 so when you pull the information through the Resilience Index, what’s the difference? Is it a 680 going down to a 610 or a 680 going down to a 675, is that kind of…what’s sort of the level of outcomes that the Resilience Index would give you?

Sally: That’s a great question. So, the Resilience Index, first of all, it scales from one to 99. It just didn’t keep it so it doesn’t look anything like a FICO score and it’s also the reverse in terms of scale so lower is better. So, one is the most resilient score you can get and a 99 is the most sensitive score you can get. What we do is we look at it in conjunction with the FICO scores, we look at it within small bands of the FICO score and so, it’s exactly as you say. What we see is in a benign economy, we actually don’t see any difference within a FICO score band based on the Resilience Index because what the Resilience Index is measuring is latent risk, it doesn’t manifest itself, it doesn’t show up until there’s a recession.

Peter: Right.

Sally: So, if you look in a good economy, you’re going to see that the rank ordering of those FICO scores and then within the FICO score bands, you’re not going to see any rank ordering of the FRI, but when you go into recession, again, you’ll see the rank ordering of the FICO scores. So, within the FICO score band, you’ll see a rank ordering of the FRI where, depending on how extreme the recession is, to your point, the differences could be…like say the most sensitive person could be like a 60-point/80-point difference in what their FICO score would indicate.

So, the odds of repayment are significantly higher to the tune of what would be like a 60 or 80- point FICO score. We actually have benchmarking reports that come out of the overall data so lenders can actually see what we mean. What happens in the benchmarking reports are set to the Great Recession just to give a test, what we tested and validated on other economic kind of more minor downturns and you still see that ring quartering of the FRI, it’s just not as dramatic as you saw with the Great Recession.

Peter: Right.

Sally: To your point, now that we are currently in a recession and not sure how long it’s going to last, this is a time for lenders to, you know, actually monitor what’s happening in this particular recession to see how dramatic the difference is compared to say other recessions or the Great Recession.

Peter: Right, right. So, let’s talk about that, let’s talk about the lenders because, I imagine, a lot of lenders….you know, a lot of them sort of really scaled back their lending at the start of this, but now they want to start ramping up, but they’re hesitant and they’re conservative and you know, they might have a credit box that goes down to 660 or whatever, but are you seeing them saying sure, we’ll lend at 660, we want to lend at 660 with a resilience of like one to five or one to ten. Maybe just take a step back and say, what feedback are you receiving, how are people using it, what are the lenders doing?

Sally: Yeah. So, the interest from lenders has been phenomenal. Even in a good economy, as we spoke about, we have to price for risk and now that we’re in this situation that we’re in now as lenders do pull back and contract, what the FICO Resilience Index can allow them to do is to keep credit flowing better than they otherwise would have, So, you know, if they’re pulling back from say a 640 to say a 700, what the Resilience Index allows them to do is to say…well, maybe between the 640 and 700, I can still retain or continue to approve those most resilient in that band so they don’t have to contract credit as much as they otherwise would have done so that’s really the way the lenders are looking at it.

Whenever there’s a new tool in the market, lenders….they test it, right, they’re analysts, they’re data scientists, they’re not going to completely use it without testing it first, validating it, really understanding how, you know, what the patterns looks like and maybe starting to test in small percentages of the population just to see what happens so, that’s the mode that lenders are in now. We have hundreds of lenders who are taking the scores both in archive reports as well as ongoing to monitor and, you know, it’s a time where they can really look to see how it impacts from the early results that they’re seeing through the recession.

Peter: Right. So, are you getting far more interest than you expected when you first put this out there because I can’t imagine anyone not wanting to use this at this particular time unless you’ve really got a reason specifically that you just want to maintain super prime whatever, but even then, you could use it. So, are you seeing more interest than expected?

Sally: Absolutely, absolutely. And the Resilience Index is really ….we don’t view it as a recession only product because you can actually manage your portfolio in a benign economy so that you can weather the next recession better. We’ve shown in our validations that even though that ranking with the FRI doesn’t show up until you’re in a recession, you can still predict it well before the recession. So, you can look at FRI scores, you know, years before, a few years before and then look at the performance once the economy turns down and see that it rank orders even though you would not have seen it before in a short period of time just because it was a benign economy.

So we don’t view it as just a recession only product, but absolutely…..especially in our whole use case of …well, maybe we don’t have to contract as much as we do or maybe as things start to look better we can be a little bit more aggressive with the more resilient ones. They’re looking at it both in terms of, you know, managing that contraction as well as starting to open up again.

Peter: Yeah, right, right, I get that, that makes sense. So then, one thing I’m curious about though is, you know, you’ve got the three credit reporting agencies that…you know, different lenders use different sub-sets of those, how does the FICO Resilience Score….are you onboard with all three agencies. The FICO score is…..you know, my FICO score is slightly different at Experian, as it is at TransUnion, as it is at Equifax, but can you explain just how it’s interfacing with the agencies?

Sally: Sure. We will be at all three agencies in the near future. So, it’s already available at Equifax, at Experian and will be available at all three. We do recommend that it falls alongside the FICO score so where you get your FICO score, you get your FRI score and that way scoring the same information, it’s just looking at it from the two different perspectives.

Peter: Okay, okay, that makes sense. So then, there’s been some talk in the industry over the last few years….I remember, we had a session at LendIt many years ago that refuted this, but I’d love to get your take on it. When you hear fintech lenders saying, we go beyond the FICO score, firstly, what are you think, how do you kind of react to that, what does that fintech lender not understand about the FICO score?

Sally: Sure, yeah. So, the FICO scores were never intended to be used as a sole determination of risk. You know, even 30 years ago, every lender would ask information, what we call application information, right, that the consumer would fill out in addition to pulling a credit report and the FICO score was designed to very conveniently be available on that credit report and did not replace those broader models, usually custom models, that look across the board. So, it was never intended to be, you know, solely looked at.

Having said that, I think what a lot of the fintechs are saying is, you know, there’s technology available that gives lenders access to data that…..you know, they don’t necessarily have to ask for, it’s not their proprietary data that they know about the customer, but they can get alternative data, maybe consumer permission data where consumers put in the credentials to their checking and savings accounts and we could use that information as well and we’re absolutely in agreement.

In fact in 2016, we launched the FICO Score XD which in partnership with Equifax and Lexus Nexus look at information off of Equifax NCTUE database which looks at how you manage your telco bills and utility bills as well as information from Lexus Nexus properly typed as information there.

So, that was aimed at that 53 million consumers that are not represented at the major credit bureaus in the US because they don’t have a history of credit. So, we’re in absolute agreement that in order to expand and give lenders the ability to give access to credit to more people that we need to look at more information so the XD scored that in 2016 and in 2018, we launched the UltraFICO score.

The UltraFICO Score is, you know….think of it more like a second chance score, right. Somebody applies for credit and their FICO score…..either they don’t have one or perhaps they are, you know, a little bit low, they’re below their threshold…the Ultra FICO score allows the lender to offer up the ability for that consumer to pull in their cash flow data from their checking and savings accounts and evaluates that in addition to what’s in their credit report so, they have other ways of showing their financial responsibility. So, financial inclusion is really important, it’s very important to us. We launched in 2016 the FICO Financial Inclusion initiative to really test out the various types of alternate data that can be used to make credit more accessible to more people.

Peter: Okay, that makes sense. So, before I let you go, a couple more questions I’m curious about. Like when you started in the space, data science wasn’t really a thing, it wasn’t a term and now…..

Sally: Right, it wasn’t.

Peter: (laughs)…….and now everyone….

Sally: I was called a Programmer Manager….Program Manager was my title. (laughs)

Peter: Now, you’d be a data scientist and people now like to tout how they use Artificial Intelligence and machine learning and they have a large team of data scientists that are building proprietary models that are the most advanced that have ever been created. But, I’d love to get your take on what you think about that whole thing, but then, seriously, about……you know, FICO has been doing machine learning for decades, right, so tell us a little bit about how you do things internally and how you feel about the latest craze. (laughs)

Sally: (laughs) So, overall, it’s great, right. I mean, you’re talking to the pioneers, you know, we are the pioneers who believe that we can make much better business decisions if you use modeling and use predictive modeling, mathematical optimization and other aspects of what we call decision science which is the discipline around improving your decisions over time for better business results and better results for the ecosystem and for consumers and everyone alike.

So, it’s great that that’s catching on, it’s great that that’s catching on not just in credit where it’s caught on for decades, but in many other fields so we’re quite happy about that. Some of the hype sometimes……we think that’s kind of funny because, you’re right, Artificial Intelligence has been around for a while, machine learning has been around for a while and there are a lot of people that are just newly discovering it. If there are great new techniques, I think probably the bigger impacts have been just the increased computing power, right, as well as more digitized data, those things really transform. As you have more digitized data available to you, that’s really what transforms the ability to use these models and help them make better decisions over time. So, it’s been great to be at this perch watching all of this happen.

There’s a little bit of…..you know, Artificial Intelligence as kind of the method of the algorithm versus,,,,you know, we use for something like FICO scores we use a method that is highly, highly explainable. We know Artificial Intelligence is getting more and more towards explainable, but it’s not quite where our needs are. For something like a FICO score where consumers monitor their FICO scores as frequently as once a month, you know, often and we need to be able to explain why the score changed the way it did, we stick to the very highly explainable method, but there are other things we do at FICO like detecting fraud and so forth where we’ve been more like neural networks and other types of methods from the very beginning.

So, it’s important to bring the right tool to the right circumstances, but all of that should be available and even with the FICO scores, we use plenty of machine learning and AI as part of our research, the way we kind of look through the data and try to identify patterns and test new concepts and see what works. We use it all of the time, but then the final model that is actually programmed at the credit bureaus is a very explainable model because that’s what we need for this particular instance.

Peter: Okay. So then, last question. Without giving away any secrets, what are you working on today that is interesting and exciting?

Sally: So, you know, a lot of what we’re doing is in the US, but we’re also international and one thing that we can do internationally is, you know, sometimes we tested data sources, for example, internationally that would be harder to do in the US, it’s more regulated and just more developed in terms of what lenders do.

So, for example, we’re working with a telco company right now in Sub-Saharan Africa to offer micro loans through their payments system. This is a country where not only do you have people who are not represented at the credit bureau, they’re completely unbanked and they just use cash, but more and more they use their cell phones to transact for mobile payment system. This partner actually has a platform where they invite lenders to offer micro loans through that payment system and now FICO score along with it so that lenders can gauge that risk, if that’s the risk, and open up to that particular market.

So, that’s very exciting because we’re talking kind of micro loans and that’s a blurry line between, you know, consumers who are actually getting a small loan for their livelihood, right. They purchase some fruit in the morning and they sell the fruit juice in the afternoon type of situation so that’s very exciting. We found that telco data that can be accessed in multiple ways is very predictive of risk and so we look for those opportunities in many countries.

Peter: Right, interesting, really fascinating. Sally, I could talk to you for a lot longer, but we’ll have to leave it there. I really appreciate your coming on the show today.

Sally: Thank you very much.

Peter: Okay, see you.

It’s safe to say that consumer lending has gone through a very tumultuous period, certainly the most tumultuous period since 2008/2009 crisis and probably the most on-record for these lenders. What you hear from the chief risk officers, from the CEOs of these lending platforms is that they’re all starting to ramp-up, some have ramped-up to pre-pandemic levels already, most are still not quite there yet and they all talk about a conservative approach to their underwriting as they ramp-up.

What the FICO Resilience Index does is it gives these lenders the confidence that the borrowers who are coming to their platform are going to be resilient even if we have a deeper recession, a longer recession than what anyone expects. These people will be able to pay back their loans as they are demonstrated to be resilient in difficult times. It’s a credit to the industry, it’s great timing that this has been made available this year.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected.Sign up today at lendit.com/usa.

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Was SoFi Stadium Worth the Money?

The new SoFi Stadium in Los Angeles opened this past weekend and it is a big deal for SoFi

September 17, 2020 By Peter Renton Leave a Comment

Last Sunday night the world saw SoFi Stadium in all its glory for the first time. Well, that’s not exactly right because there were no fans in the stadium, but the TV coverage showed off the new stadium brilliantly.

When we first learned that SoFi had acquired the naming rights for the new NFL stadium I was somewhat dubious that this was good value for money. It was initially reported that SoFi would pay $30 million per year and it now appears that the terms are $20 million per year over 20 years, still a huge amount of money for a young company.

But as Anthony Noto, CEO of SoFi, said on CNBC last week that he wants to make SoFi a household name and that this stadium sponsorship will go a long way towards achieving that goal.

As I watched the Rams-Cowboys match last Sunday night I heard veteran sports commentator Al Michaels wax poetic about the SoFi Stadium calling it the most impressive stadium in the world. The SoFi brand was everywhere and the overhead pictures of the stadium with a massive SoFi logo on the roof, were spectacular. Any true football fan (of which there are many millions) now knows the SoFi name. And there will be tens of millions more when the stadium hosts the Superbowl at the end of the 2021 season. Not to mention the 2023 College Football National Championship AND the 2028 Olympics.

So, while I was initially doubtful about this move for SoFi I have come around to being fully on board. When you think about it, naming rights for a stadium makes more sense for a company like SoFi than it does for an already well-established brand. I would argue that the exposure they received last Sunday night alone was worth many millions of dollars as their name and logo was on display for a good chunk of the evening with 19 million people watching. And to be associated with such a modern, cutting edge stadium aligns well with the SoFi brand.

I know SoFi had big plans in place for the fans attending games this season but that will have to wait. But given the serious exposure their brand will get every week during the football season (the LA Rams share the stadium with the LA Chargers) you might even argue they are getting decent value for the $20 million they will spend this year.

It will be interesting to see how long it takes SoFi to truly become a household name. And if they do indeed make this happen and become a mainstream finance brand this stadium will have likely played a significant role.

You can hear the SoFi CEO on the virtual keynote stage at LendIt Fintech USA 2020 in two weeks where he will likely be asked questions about the stadium deal.

Should the UK’s Loan Guarantee Scheme, a Lifeline to Fintech, Be Extended?

Innovate Finance chief says there is “nervousness that we’re not ready” for guarantees to end

September 14, 2020 By admin Leave a Comment

[Editor’s note: This is a guest post from Ryan Weeks, formerly with Dow Jones and AltFi, covering fintech. This is part one of a four part series he is writing for us on the UK fintech market in the run-up to LendIt Fintech Europe.]

Soon after the UK went into lockdown in March, chancellor Rishi Sunak unveiled his £350bn emergency rescue package for British businesses.

This unprecedented intervention laid the foundation for a handful of government guaranteed lending schemes that have completely changed the fintech lending landscape over the past six months.

The three marquee schemes are the Coronavirus Business Interruption Loan Scheme (CBILS), which offers an 80% guarantee for loans of up to £5m; the Coronavirus Large Business Interruption Loan Scheme (CLBILS), for bigger businesses wanting to borrow up to £200m, again with an 80% guarantee; and the Bounce Back Loan Scheme (BBLS), which offers a 100% guarantee for loans of up to £50,000 for micro-businesses.

The usage of these initiatives alone shows how valuable they have been to UK businesses. As of 16 August, £13.68bn had been distributed under CBILS, and another £3.5bn through CLBILS.

BBLS, despite launching later, became an overnight sensation; more than £8bn had been approved by the time the government issued its first update on the scheme on 10 May. The latest figures show that a grand total of £35.47bn has been lent out through BBLS.

The advent of lockdown in the UK was, to quote one executive at a corporate advisory firm who wished to remain anonymous, “close to disastrous” for fintech lenders. He said that fee income for the big platform lenders in the months of April, May and June was “close to zero”.

[Read more…]

Podcast 264: Brian Dammeir of Adyen

The president of Adyen's North American operation discusses the impact of the pandemic on payments, why fraud may not be increasing overall and what payments trends will play out this decade

September 11, 2020 By Peter Renton Leave a Comment

We have seen big changes in the payments landscape this year. Technologies such as contactless payments have seen five years of growth in just the last six months. Companies that didn’t have a large digital footprint before the pandemic suddenly realized they had to adapt, and fast. This is where today’s guest comes in.

Our guest on the Lend Academy Podcast this week is Brian Dammeir, the President – North America for Adyen. Adyen is the payments leader in Europe where it is publicly traded and has a market cap north of $40 billion. While it started in Europe it is a global payments company and is getting real traction with established American brands. And the pandemic has accelerated this traction.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

In this podcast you will learn:

The history of Adyen and how they are different.
How Adyen makes money exactly.
How they are approaching the U.S. market.
Some of the big brands they are working with in the U.S.
Why it is critical for merchants to be able to work across channels seamlessly.
The highlights of their financial results in the first half of this year.
The type of merchant they are focused on.
Why some companies have been successful and others have struggled during the pandemic.
How they have handled those companies who needed integrated payments immediately.
How Adyen interfaces with the Chinese payments giants Alipay and WeChat Pay.
What Brian thinks about the future of QR-codes for payments in the U.S.
Why Adyen is agnostic about the movement towards buy now pay later.
How Adyen has been combatting fraud as more commerce goes digital.
How big their U.S. operations is.
The payments trends that Brian is paying attention to for this coming decade.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech USA 2020. The world’s largest fintech event dedicated to lending and digital banking is going virtual in 2020.

Download a PDF of the transcription of Podcast 264 – Brian Dammeir.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 264-BRIAN DAMMEIR

Welcome to the Lend Academy Podcast, Episode No. 264. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Peter Renton: Today’s episode is sponsored by Lendit Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show ever. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa

Today on the show, I am delighted to welcome Brian Dammeir, he is the President of North America for Adyen. Now, Adyen are a European-based company, they’re very big in Europe, they’re a public company and they’re starting to get some traction here in the US. I also wanted to get Brian on the show just to introduce us to Adyen, talk a little bit about what they do and what makes them unique.

Obviously, we talk about the challenges of the pandemic, what he sees as sort of the differences between the winners and the losers and how they’ve been able to adapt to becoming successful during the pandemic. We talk about anti-fraud, we talk about buy-now-pay-later and he ends with a really interesting perspective on what we can expect to see in the future of payments. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Brian!

Brian Dammeir: Thanks for having me, Peter.

Peter: My pleasure. So, I’d like to get this thing started by giving the listeners a little bit of background about yourself so why don’t you just give us some of the highlights of your career today, particularly before Adyen.

Brian: Yeah, absolutely. I calmly say that no one gets a degree in fintech servicing the (cross talking) industry.

Peter: Not yet (laughs).

Brian: Yeah, absolutely. I come from a product background, specifically in fraud prevention, that’s how I got into the general fintech and payments realm. So, prior to my six-year tenure at Adyen, I was at Google and Airbnb focusing on fraud prevention mostly on the product side and then, actually, when I came to Adyen I came onboard as our first product manager when we were just a couple of hundred people back in the day. Spent the last four or five years focusing on our product organization, diversifying our product portfolio, how we productize things going out into market and then early this year, I transitioned to leading the North American operations.

Peter: Right, right. So, why don’t you tell the listeners a little bit more about what Adyen does because while it’s very well known in Europe and it’s not quite that way yet here in the US so, just give us a little bit of background about the company itself.

Brian: Yeah, it’s a great question. We’ve been around for over a decade and we’re a company that was founded by payments people. They had payments companies before and they learned a lot during the 90’s going into the dot com boom and into the 2000’s about some of the common pitfalls that payments technology platforms were making. So, you know, from day one, we went into the industry with a really novel approach which is to have one single platform across all channels in as many geographies as possible.

So, in short, we’re a payments technology company that empowers other companies to reach their consumers across a really diverse set of payment methods. We offer hundreds of them as well as geographies, as well as channels all in one platform and this is a really important distinction because most payments companies have multiple platforms. So, if you want to do in-store payments you’re working with one platform, online payments you’re working with another so with one integration, one set of contracts and one relationship, we can unlock many, many countries for the merchants that we service.

Peter: Okay, okay. And so, what is the geographic footprint then right now?

Brian: Yeah. So, honestly, we operate all over the world from Europe to APAC, Australia, South America so, honestly, the countries in which we do acquiring is over 50 and we do sort of core acquiring connected directly to Visa and MasterCard in over ten regions. So, generally speaking, you know, wherever the merchant wants to go to process payments, we’re, generally, able to help to help them out there.

Peter: Right, okay. Maybe explain exactly how you guys make money, is this….you make money on the transactions like a processor or is there a SAS component, what is the model?

Brian: Yeah. We operate under a per transaction fee and we operate under a really transparent model where the fees….they’re associated with the payment method or the network in question, whether that’s Visa, MasterCard or otherwise, those fees are transparent and generally pass through and then there is a known component to Adyen’s cost of operating with our platform per transaction.

Peter: Right, right, okay. So then, I said in Europe you’re a really big player, your name has been around for many years as really one of the leaders in the space, how are you approaching the US market where it’s competitive, obviously there are other big names here, what is your approach?

Brian: Yeah. We’re, generally, operating in North America in two ways. One is to be the global enabler for American companies, right, so whether that’s a Microsoft or an Uber or Spotify, you know, they’re based in North America and obviously we help them here, but they need to operate payments in dozens and dozens of countries and we’re, generally, one of the players of choice to do that. But, we also have an extremely strong focus on our North American proposition itself or domestic proposition. We work with really, really localized brands like e-Bay, Subway and Nike to bring payments into this market.

Now, commonly, North America and the US, in particular, has seen a sort of a static market mode of payments perspective, it’s always been credit cards, will always be credit cards, but one thing that we can’t discount is A) the proliferation of new payment methods in North America, whether you’re talking wallets or installment buy-now-pay-later options or what not, but really importantly, there’s that demand to have a one-platform player who can offer unified commerce.

So, it doesn’t matter if you’re doing in-store/online, we’re able to offer one holistic view of the customer. What we’re finding is there’s a really strong demand for that in North America, especially under COVID where more and more consumers are floating between channels where they used to be an in-store person and now they’re an online person and of course, you have a grain between those channels. We’re finding that we’re getting significant tailwinds with that segment of merchants looking for a solution like that here.

Peter: So then, how does it work exactly, like if you’re…so these companies, they’ve had online presence for a long time, most companies have had an online presence, many of them have a physical presence and you said there’s often two different systems so what’s the difference between….when you’re going to a company that’s got two different systems…tell us, what you were saying is there’s a difference even from the consumer experience.

Brian: Absolutely. So, let’s take for a second the example of a quick service restaurant and let’s say that they traditionally just had a counter. You’d go up to the counter and you would pay cash or card, what not, you know quick service restaurants have changed tremendously in the last five years. Not only do they have kiosks, but they also have in-app Order Ahead and, of course, there’s costs in marketing money going into all those channels.

Now, let’s say you had three different processes for those different channels; someone for the counter, someone for the kiosk and someone for the in app experience, that merchant is unable to actually see that consumers….they float between those channels because there’ll be different tokenization technologies and they can’t even measure the cannibalization.

But, importantly to your question, Peter, they then can’t track them as the same person and then reward them with loyalty so what we’re finding as the advantage of our platform is, you know, you can dip your card in a terminal and then put it in the app later and merchants are able to recognize that and they’re actually able to do things like card-linked loyalty to the consumer and reward them for that loyalty between channels or to variably as passively understand that data, therefore, understand where their consumers are going between channels.

This has been supremely important during COVID as merchants have been trying to understand, you know, where have my consumers been going, did they drop off or did they just simply move to digital channels.

Peter: I totally get that, that sounds like a pretty compelling proposition. It might not have been a big deal back a year or two ago, but I can see how that would be really a….you’ve got to be able to know when your customers are floating between channels. That’s just, I would say, table stakes, I mean, these days.

Brian: Absolutely.

Peter: Yeah, yeah, okay. So then, I know that you guys are a public company and you came out with your results early this month, a couple of weeks ago, whatever, so why don’t you just, before you go any further at least, give us some highlights of what’s been happening at Adyen as a global company.

Brian: Yeah. We announced our results and despite COVID-19 and its impact on retailers and the travel sector, we had an extremely strong H1. So, we processed over $150 Billion across our platform at a 23% year-over-year growth rate, we saw net revenues across our whole platform grow 27% with North America, in particular, being at a 58% growth rate in that revenues. So, well it is a challenging time, what we’re finding is that there are tailwinds towards these digital channels so when we saw, for example, retail shutdown like a lot of stores were closed prior to a few weeks or a few months, depending on the geography, we saw digital channels significantly uptick.

But, what we’re actually finding, as retail is reopening, some of that e-commerce volume sticking around and what that’s telling us is that consumers that might have been in the past hesitant to interact with the digital channel seem to be very, very comfortable with it. And because we tend to work with our merchants on digital enablement, this is having a really good impact not only on our merchants but on our platform as well even during this challenging time.

Peter: Right, right. So, are you more focused then on the corporate customer that’s looking to be……you said you were focused just here in North America, but is there….I mean, looking at your product suite, is this something that….are you targeting smaller companies or is this really for the larger corporate multi-channel type company?

Brian: Yeah, our focus tends to be enterprise. That being said, we’re also focusing on our mid-market segment, that’s been a focus of our company for the last year or two primarily in Europe. That being said, we have efforts globally around that, but then what I wouldn’t discount is our focus on platforms and marketplaces.

We have a proposition called Adyen for Platforms which allows platforms to enable payments from many smaller sellers on their platform. So, our general strategy when it comes to smaller merchants is to do that via our platform partners. They tend to have that relationship with the end merchant and we empower them with our technology in the back end. This is similar to, for example, for eBay and GoFundMe, for example.

Peter: Right, right, got it, okay, okay, So then, you mentioned that you had a pretty strong first half, like what are you seeing as far as…….you know, you’ve got a great insight into a large amount of commerce and there’s been some really big winners and there’s been some losers as well. I’d love to sort of get your insight into what kind is determining who is successful, who isn’t successful because there are examples of companies that are surprisingly successful in this environment so I’d love to get your insight on that.

Brian: Yeah. When we boil it down, what we’ve noticed is that merchants tend to fit into one or two camps. They were either digitally oriented going into COVID or they weren’t and that’s not to say that they were entirely digital. There are plenty of merchants that started with an in-store experience, but then they started to grow out, reached digital channels. The fact of the matter is that merchants that had reached digital channels recouped 40% of their losses compared to single channel merchants or merchants that had a really immature digital channel and I’ll just give an anecdote, right.

I was on a road trip some months ago and this was sort of peak COVID times where everybody was socially distancing. I was camping, for the record, and we stopped on the side of the highway and it was one of those highway stops that has sort of six chain restaurants, we’re not going to name names, of course, but three of them were open and three of them were closed. Three of them already had curbside pickup, online, in app Order Ahead and they’ve been doing it for a couple of years, had become a trend in their industry and they were clearly on the forefront of that.

Three of them did not yet have that and, therefore, they were shuttered, the lights were off and I think that is the sort of perfect encapsulation of what happened going into COVID-19, but it’s not all dire because the merchants that weathered the storm and did not have those channels are now exploring how to make that happen very quickly. The ones who did have that are now putting more focus and investment on that because as I noted previously, we’re noticing that that digital volume that spiked when those in-store channels went down are sticking around.

So, there’s a whole new set of consumers and demographics interacting with these channels so what we’d like to say actually here is that we skipped five years in the industry. Everybody was….all the trends line towards digital enablement have just been fast forwarded across all consumer demographics and in the end, that’s likely good for the consumer. Of course it’s been a very challenging year for both consumers, of course, and merchants.

Peter: Right, right, it makes sense. I know that here, you know, I have a Chipotle right by my house and right by my office and they never closed down. They might have closed down for a week or two, I don’t know because I wasn’t going out for a while there, but when I went back…and they have a really strong app and a really good experience in payments, it’s a positive experience.

I see they’re in with a whole bunch of other major chains and they were getting all the business for a while because it was the only one open and again, they’ve already gone down the digital enabling path. I don’t know what their hit was, how much volume that went down, but if you didn’t have the whole app ordering and you could just come and pick it up, that was a major negative. So, I imagine then, you probably had companies coming to you in the last six months who said, we need integration and we need it like in two days, how have you been handling that kind of situation?

Brian: Yeah, that has happened quite a bit where you get a phone call in the middle of the night, we need to be live in a week, you know. (Peter laughs) And because we have one platform, the advantage of that is that, you know, we have one set of consolidated APIs and a really rich set of open source libraries that allow merchants to put the Javascript on their page and they’re up and running. Now, that works for most merchants, but some merchants need it to be even quicker and we’ve had a solution for some time which is called Pay by Link where systematically via API you just request a link, we send it to the merchant, they give it to the consumer and it goes to a payments page that we host on our side.

And what we found, especially in retail, there is very, very quick demand needed around this Pay by Link solutions because it required little to know development effort on the side of the merchant. We went so far as to also integrate that into our terminals and into the in-store experience because some merchants wanted to offer a completely touch free experience, even if you don’t have contactless cards or wallets so what we did is we presented QR codes on our terminals.

That and with the phone goes to a Pay by Link session, the consumer pays in an e-commerce flow on their phone, but then it loops back to the terminal to the point of sale so, you’re bringing a quasi e-commerce experience into the retail arena. So, we found that there’s been significant uptake in these Pay by Link solutions as a quick way of getting started with these channels and then we anticipate those merchants will then go into more and more native experiences as they invest in that channel.

Peter: Right, right, I didn’t realize that. I don’t know how well you know Alipay and Ant Group, they are filing to go public. We got a little bit of insight into their financials which is pretty impressive and it’s all QR-based. I’ve been to China many times and I can’t get an Alipay account, you need a Chinese bank account, but everything is QR code-based. Is that a technology, do you think it is going to take off here in the US?

Brian: In short, I think so. We’ve embracing QR codes for a long time. We partnered with Alipay and WeChat Pay and we’re actually one of the predominant solution providers who offers that natively on a terminal all over the world.

Peter: Interesting.

Brian: Your high-end retail merchants leverage our solutions not only for standard payments e-commerce, but we’ve actually had a generic QR code framework for sometime on our platform via our terminals. Now, the speculation is will more and more payment methods in North America embrace QR codes. You see the beginnings of that, for example, with PayPal. For example, we have buy-now-pay-later payment methods like Afterpay and Affirm. I would anticipate that this will begin more and more of a trend that obviously China and Asia Pacific, in general, kicked off sometime ago with QR code payments.

Peter: Right, right, that’s amazing, you see Ant Group they did like $16 Trillion worth of volume which is staggering globally. I see Alipay signs in airports in this country so there’s a lot of times that you guys helping sort of enable that technology?

Brian: Oftentimes, we are, yes, and the main proposition that we offer is, you know, you have a Chinese consumer who’s coming through your store and you can either have Alipay re-check her or not. Generally, they’ll have a TransUnion pay card in their wallet that they can still pay via sort of a traditional method, but they very much prefer this. And studies have shown that the consumer is more likely to buy if you give those options and there’s a lot of cold marketing opportunities with both Alipay and WeChat that members can take advantage of as well.

Peter: Right, right. So, you mentioned buy-now-pay-later a couple of times now. I want to kind of touch on that because it seems to me that, you know, I’ve been following Affirm and following up to pay……I’m originally from Australia and not to pay is…it’s hard to stake how big it is down there, hard to overstate because they are everywhere and it’s now a verb in Australia to ask to pay something. Now, you said you’re sort of agnostic to the payment method, buy-now-pay-later is a little different than just a……like where do you stand and how do you feel about the buy-now-pay-later movement, it seems to be getting more and more traction.

Brian: Yeah. Well, I would note what you just said which is we are agnostic to payment methods, we offer hundreds of them and the reason we do is that payments is a highly cultural thing; different cultures pay in different ways. You go to Germany and cash is king, you go to Australia and to your point, Afterpay has been there so long, it’s a verb. Now, generally speaking, the American consumer has had really good access to credit via credit cards.

That being said, there’s an untapped consumer who doesn’t have access to credit, who needs facilitation of credit in different ways and I think installments in North America is really tapping into that consumer base and you see multiple players from Affirm to Afterpay to PayBright to others really taking advantage of that. From our standpoint, our platform can take on an unlimited number of payment methods so as soon as there is the consumer demand and the merchant demand, we integrate that into our platform, we offer it with one integration to our merchants.

So, we already offer several buy-now-pay-later payment method options across geographies including Afterpay in Australia as well as Europe, Onay (?) in Europe, PayBright, Klarna, so on and so forth, and we’re invested in others into the near future

Peter: Okay. So then, so the merchant, if they are a, as you say…… you know, you could use Klarna as an example, they were the ones who started this whole movement many, many years ago and they’re really strong in Europe so if you’ve got a company that wants to offer buy-now- pay-later solution, they are an Adyen customer, they could just turn on and you can link them up with Klarna and then suddenly it’s available to them, is that…..you know, I’m making it simple, but is that almost as simple as it is?

Brian: It is and that’s why merchants work with us because we do that across hundreds of payment methods across many different geographies and we offer that one point of integration and contracting to do that. From an integration standpoint then, you just need to make sure the front-enders enabling that payment method on your website and then you’re good to go. It’s that sort of ease of turning new things on as the trends change and that’s sort of subscription to ongoing innovation, we call it, with our merchants, that’s what they’re signing up for by working with Adyen.

Peter: Interesting, very interesting, okay. So, you mentioned that you have a background in fraud or anti-fraud, I guess I should say (laughs), I’d love to sort of get your perspective on how that kind of landscape has changed this year. You know, you hear anecdotally about there’s certainly been increases in fraud attempts, what has been your experience at Adyen and how are your combating different forms of fraud?

Brian: Yeah. The nature of e-commerce is that there’s more to consider around fraud. Now, I’m not so sure if I would quantify the last year as more fraud attempts, but rather I would say digital channels are suddenly more important and the nature of the digital channel is that you need to do more around fraud prevention. You know, we don’t have the same protections we have in store like Chip and Pin and all these different things so, there’s simply more to consider there and merchants that previously might have had, I don’t know, 3% of their overall revenue in their digital channels are now seeing 20/40+% so the fraud that they see in those channels has compounding as well.

Peter: Got it.

Brian: And I think, you know, there’s been a lot of change in the prevention industry over the last years. I think the predominant trends would be around continued focus on machine learning and less of a focus on throwing human beings at the problem which is the way the industry did things 10/15 years ago. Adyen itself, we have a native fraud prevention engine built into our platform, we can take all the data points across our entire platform, track not only good users, but also fraudsters, understand their behaviors, run that through our machine learning models and offer that in our one integration to our merchants.

So, instead of having to go out and find a third party risk system, integrate into it, you can get it with your payment processor with the Adyen solution. And, indeed to your point earlier, we’re finding that there’s more and more attention being given to digital fraud by our merchants and, therefore, there’s more and more of the need for a solution like RevenueProtect which is ours.

Peter: Right, right. So, are you saying then that fraud hasn’t necessarily increased, it just moved online….overall fraud, are you saying it hasn’t really increased this year?

Brian: I don’t know if I would be so bold to say, but I’m sure it’s a factor of both. I think the main thing that’s reckoning in the industry though is, you know, losses, fraud losses, that could depend on a small minor channel over here, your digital channel, we’re okay. Now, if that channel is suddenly a third of your business as a company, you know, you’re always going to have a certain amount of fraud in that channel and suddenly there’s a magnifying glass on that.

That’s probably the biggest trend this year that we’re seeing with our merchants. There’s the macro level of trends, however, of fraud will always be an issue and there’s different types of fraud and techniques going on around the world and there’s just simply fraudsters in many geographies that are going to continue other attacks on consumers and non-merchants and that’s never going to go away.

Peter: Right, right, understood. So then, can you give us a sense….I don’t know how much you share publicly, but can you give us a sense of how big the US operation is. You talk about the whole thing, do you break that out at all?

Brian: Yeah. I mean, we break that out in terms of our net revenue, right. So, 18% of our net revenue is North America and now, our San Francisco office is our second biggest office in the company and we just broke through the 200-employee mark in North America out of our roughly 1,500 employees in Adyen overall. So, like I said before, whether it’s our domestic proposition working with merchants like Nike and Subway or North American merchants that we’re servicing around the world like your Microsofts and Spotifys and Ubers, North America serves central to our vision and central to our expansion strategy.

Peter: Right, right. And, obviously, it sounds like you’ve got a lot of room to grow here given that the US is still the biggest autonomous market in the world.

Brian: Absolutely.

Peter: China is catching up, but still….anyway, before I let you go, I’d love to sort of some sense of….it feels to me like payments, the way we pay for things is sort of…..2020 we are going to look back as this real inflection point, I mean, are there other kinds of developments that are coming down the track? We touched on QR codes, but I’d love to sort of get…for example, Uber made payments invisible like you don’t even know…. you don’t pay, you just sort of get charged. I mean, what are some of the trends that you’re seeing in the payment space you’re thinking down the road?

Brian: Yeah, it’s a great question. We call what you just talked about the Uberification of payments,

Peter: Right.

Brian: Uber really set a new expectation for consumers, especially in North America, that payments could just be this thing in the background. We know as payments experts that that’s done via tokenization, various different technologies. I would take that one step further though and express that the biggest trend we’re going to see going forward is a melding of the difference between channels, of what is e-commerce and what is online. Take for example your example of the Uberification of payments, but apply it to a normal in-store experience, right.

For example, you have something like the Amazon Go experience. I think we’re going to have more and more experiences like that where it doesn’t matter what the payment method is, there’s always going to be broad variations of that. Is it a credit card, is it a wallet, is it installments, is it this and there’s going to continue to be a proliferation of that, instead of holding in, but I think the trend that’s going to happen is…there used to be this feeling that there is a stark difference between, okay, I’m online right now and I’m in-store.

If I’m in the parking lot of a restaurant and ordering an app, what is that channel. (Peter laughs) It’s not really e-commerce or it’s not really in-store. If you go one step further and we’re empowering merchants for these sorts of flows eliminate the steps altogether, just identify who they are and collect their funds in the background without those explicit payment experiences. I think there’s more and more trends towards reducing the experience, whether that’s Tap N Pay which takes just doing that to the extreme which is the Amazon Go or the Uber experience which is that it’s totally in the background.

I think that’s going to be the trend that’s going to really be the hallmark of the next decade and if merchants are working with a platform like Adyen, that’s singular in its nature across all channels and one integration, they’re going to be able to adapt that change in a seamless way, but without interruptions to their consumers. It’s sort of our core thesis that we present to our merchant base.

Peter: Right, right. Well, it’s going to be interesting because I feel like we’ve compressed five years into six months and it can’t to continue. I imagine the next five years are going to happen in the next six months, but I can see that there’s a lot of exciting technology out there that really will make payments just fade further into the background as we go forward so, interesting times ahead. Thanks, anyway, thank you very much, Brian, I really appreciate coming on the show today,

Brian: It was my pleasure, thanks, Peter.

Peter: Okay, see you.

You know, I think the point of sales space has really been one of the most interesting, I’d say even the hottest part of fintech, you know, buy-now-pay-later is certainly very hot, but really, what’s enabling these all…companies like Adyen… the consumer wants choices, the merchants that provide them with the biggest choices, the most choices, are going to really have an upper hand.

Integrating with buy-now-pay-later, I can see them integrating with other kinds of lending products and you’re going to have this kind of suite of options. Suddenly, your credit card, which has been ubiquitous in this country for decades, is going to be one of many options at the point of sale. As Brian said, Adyen is agnostic to the payment method and if that happens to be an installment loan over two years, I’m sure that’ll be fine to make that happen too, but whatever it is, I think this decade we’re going to see tremendous innovation when it comes to payments at the point of sale, online, in person and it’s going to be exciting to watch.

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

Today’s episode was sponsored by Lendit Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa.

You can subscribe to the Lend Academy Podcast via iTunes or Stitcher. To listen to this podcast episode there is an audio player directly below or you can download the MP3 file here.

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What to Expect at LendIt Fintech USA Virtual

LendIt Fintech will host the biggest virtual fintech show of 2020 at the end of this month

September 9, 2020 By Peter Renton Leave a Comment

LendIt Fintech USA is coming up fast and I wanted to share what we have in store for you this year. We embraced the move to digital early on and have completely reimagined the event experience for the virtual world. This will not just be a bunch of boring Zoom presentations. We have hired an Emmy Award-winning production crew to help us bring you a first-class experience on top of the A-Grade content and networking opportunities you’ve come to expect.

The world of financial services has been turned upside down by the pandemic. Fintech has been front and center as the financial services industry has responded quickly to these changes. But the changes have only just begun and we all need to gather at this critical juncture to learn, collaborate and do business. This is why I believe that this will likely be our most important event ever.

So, what can you expect at LendIt Fintech USA 2020? Here is a run down of the different components of the show.

Networking

We know that many of you attend LendIt Fintech to meet with the people who matter to your business. This is where we have put in the most effort, making this virtual event better than any in-person event we’ve ever produced.

One-on-One meetings. Pre-schedule one-on-one meetings and view the complete attendee list using Brella’s world-class networking technology.
Overtime. Participate in lively discussions with your peers during Overtime at the conclusion of each track. Originally pioneered at LendIt Fintech Digital, Overtime has been a real hit for our community because of its authentic interface.
Networking Roulette. Let our algorithm match you for a series of spontaneous one-on-one meetings to close the day. This is serious fun for novice and expert networkers alike.
Women in Fintech Power Hour. Connect with impressive and interesting women during the lunch break on Day One. One of our most anticipated networking events of the year, just for you.

Solutions

Find the answers to your latest challenges in our Solutions Showcase featuring over 150 sponsors and exhibitors with great ideas to propel your business. At each virtual booth you can gather product information, chat with company reps, engage in in-depth discussions, view videos and more.

We also have a fun competition for attendees where you can become a LendIt Fintech All-Star. The most engaged attendees can win a new iPhone 12 Pro, Airpods and free memberships to LendIt Fintech Digital.

Content

We have completely retooled our agenda in the last three months and I can confidently say it is our best and most relevant ever. Learn what some of the biggest names in the industry are thinking about today and how they are taking their companies forward. While I think every session is going to be great, here are some of the highlights I am most looking forward to:

Stephanie Cohen – Chief Strategy Officer at Goldman Sachs
A leader at one of the biggest names in finance, Stephanie will share the Goldman philosophy of when to buy, build or invest when it comes to new initiatives. She will talk about their approach to diversity and their takeaways from dealing with the pandemic.
Anthony Noto – CEO of SoFi
With competition heating up from banks and other fintechs, the CEO of SoFi will share his vision for where fintech is going and how SoFi will maintain its leadership position in the industry.
Zach Perret – CEO of Plaid
Plaid has been at the epicenter of fintech for years and has been an enabling force for banks and fintechs this year as the world has shifted dramatically to digital. But we are just seeing the tip of the iceberg and Plaid has a vision of moving fintech beyond financial services.
Angela Strange – General Partner at Andreessen Horowitz
The world’s three billion underbanked people have been largely ignored during the first phase of fintech but there are many companies getting traction today with creative products addressing this population. Angela will be talking with fellow VC luminary Matt Harris of Bain Capital Ventures about real solutions for the underbanked.
Steve McLaughlin – CEO of FT Partners
Many of the most important fundraising and acquisition deals in fintech go through the doors of FT Partners. Steve will share how to position your company for M&A today, what has changed and what steps entrepreneurs can take to maximize their chances for financial success.

Discounted Pricing Ends Friday

Discounted pricing for LendIt Fintech USA 2020 ends at midnight on Friday. After that the full retail price will be in force. But don’t forget that Lend Academy readers always receive special treatment, so you can use the code LENDACADEMYVIP to receive 15% off the already discounted price. So register now.

See you online

The reality is that there are many advantages to attending a virtual event, not the least of which is cost. You can experience the best of what has made LendIt events so popular, all from the comfort of your home office. Want to learn more? Here’s a quick tour of what we have in store for you at the largest virtual fintech event of 2020.

I look forward to seeing you online at the end of this month.

Nat Hoopes Leaving the Marketplace Lending Association

The first Executive Director of the Marketplace Lending Association is leaving to become Head of Public Policy at Upstart

September 8, 2020 By Peter Renton Leave a Comment

When LendingClub, Prosper and Funding Circle founded the Marketplace Lending Association (MLA) back in 2016 they knew they needed an ambitious and hard-working executive director to grow the organization. This was a total startup association and it had to scale to include a broad cross section of the industry if it was to be effective.

They chose Nat Hoopes, who was then executive director of the Financial Services Forum, to take the helm and he grabbed the bull by the horns. Keep in mind this was back in the summer of 2016 during the most tumultuous time in the industry’s history. He grew the association from its initial three members to 37 members today including nearly every major lending platform in the industry. Believe me, that was no easy task [Full disclosure: LendIt Fintech has been an active supporter and associate member of MLA since 2017].

Today, it was announced that Nat will be leaving the MLA to pursue a new position at Upstart as VP and Head of Public Policy and Regulatory Affairs. He is handing the reins to Trish Horowitz, who has been his indispensable co-worker and COO for the past two years. But no offense to Trish, who has done a fantastic job, this will leave a big hole in the work of the association.

I can understand the timing of the decision. The MLA has had some big wins recently and has checked off many of the goals it had. Here are some of the recent highlights: [Read more…]

Podcast 263: Sergio Furio of Creditas

The CEO and Founder of Creditas talks innovation in consumer lending, the importance of being close to the customer and why he is looking beyond finance to expand his business.

September 4, 2020 By Peter Renton Leave a Comment

We have seen many companies in fintech branch out into adjacent areas of finance as they add product lines to bring more opportunities for their customers. But rarely, if ever, have we seen fintech companies look outside of finance completely when adding to their product mix.

Our next guest on the Lend Academy Podcast is Sergio Furio, the CEO and Founder of Creditas. Based in Brazil, Creditas has quickly become one of the leading non-bank consumer lenders in Latin America. But Sergio’s vision goes beyond lending and beyond finance. He wants to help his customers in a variety of ways, even helping them buy physical products. It will be fascinating to watch as this company matures.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

In this podcast you will learn:

What attracted Sergio to the Brazilian market.
The three phases in the history of Creditas.
Why they decided to expand beyond financial products.
The types of loans they offer for their different products.
How they have automated most of the loan approvals.
The kinds of data they use as inputs into their underwriting.
Why they had to build a title insurance company in house.
The scale that Creditas is at today.
How the pandemic has impacted Creditas.
The two concerns they had with their loan portfolio.
Why securitization markets remained open to Creditas throughout the crisis.
How Sergio views Nubank, Mercado Libre and the competitive environment in Brazil.
How the large banks have reacted to fintech companies.
What the financing journey has been like for Creditas.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech LatAm 2020. Latin America’s largest fintech event dedicated to lending and digital banking is going virtual in 2020.

Download a PDF of the transcription of Podcast 263 – Sergio Furio.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 263-SERGIO FURIO

Welcome to the Lend Academy Podcast, Episode No. 263. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by Lendit Fintech LatAm, the region’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online on December 8th and 9^th. Pandemic or not, LatAm is still the hottest region for fintech in the world and LendIt Fintech LatAm features all the leading players in the region. So, join the LatAm fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/latam

Peter Renton: Today on the show, we are going back to Latin America to interview the CEO of one of, I think, the most interesting companies in that region or maybe even in the world, as far as fintech goes. I’m delighted to welcome Sergio Furio, he is the CEO and Founder of Creditas. Now, Creditas are based in Brazil, they are a consumer lender, but they’re much more than that, as we’ll find out in this episode. While I see their entry point as lending, they have big, big plans beyond that which we get into in some depth.

We talk about the different offerings, we talk about the environment in Brazil, we talk about how banks are innovating there, we talk about the big companies in Brazil like Mercado Libre and Neubank that also have lending operations and how Creditas differentiates themselves. We talk about their fund raising process and how that’s changed dramatically since Sergio started back in 2012 and what the future holds. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Sergio!

Sergio Furio: Yeah, thank you very much, Peter, and I’m glad to be here with you.

Peter: Okay. So, let’s get started by giving the listeners some background because you do have an interesting background. I mean, you’re running a Brazilian company, but you’re not Brazilian, you’re not even Portuguese, I believe. So, tell us a little bit about your background and how you made your way to Brazil.

Sergio: Yeah. So, I’m originally Spanish, graduated in 2000 in Business, not a millennial anymore, unfortunately (Peter laughs) and spent my initial years in investment banking working with large companies, capital markets and stuff like. That was like in the good 2000s where you actually had like very wide margins when you were doing like the CMM in Europe.

By 2005, I decided I was ready to move on and do something more of a generalistic approach to business and I got into strategy consulting with BCG. I spent there like seven/eight years and because of my background, I specialized in retail banking. So, I left….you know, I went through ten soft strategic plans and technology transformation projects and operational excellence, you know, all those things were so popular in the early 2000s.

By 2008, I made a move from Europe to the US, I landed in New York, I think it was like a month after Lehmann collapsed so very interesting times, you can imagine. Actually, in Europe, the collapse of the retail banking space had happened probably six/nine months before that because of the real estate crisis and so on so 2008 was like an amazing moment in my life probably. So, got into the States and I took over a project that was to advise one of the retail banks in the US, an international player, one of the large ones, and I led for them the technology transformation. It took me four years, the so-called technology transformation.

I think that that was the crucial moment in my life, it was 2011, four years after getting to the US. I also realized that that project……it was supposed to be the cutting edge of technology, it was not like four years old and we were like delivering the code at that point. If you think about the way the project had been planned and designed, it was 2007 and we kicked it off in 2008. Remember that the iPhone came up in 2007 so you can imagine that there was not like a single line of code about mobile, everything was about like paperless branch and zero back office and all of those things.

By 2011, that was not the reality anymore, we were already like seeing that the industry was moving or was meant to move in a different direction, right. So, I think that desperation, I said, okay, I need to do something else and I had a friend who just became an entrepreneur, got involved with him, invested in him and I ended up saying, I really want to do this. Obviously, I had spent my whole life in banking so I had to do something related to banking, fintech was not the thing at that point, remember. It was like the early days, but it was not even the term.

So, I said, okay, I want to do something, but this is New York, there are like …plenty of people are like super smart, they have like banking background, technology background, what is my differential? At that point, it’s when I met my wife, there’s always a love story in the middle (Peter laughs) and my wife is Brazilian, we used to work together. Obviously, there are several more reasons that we will talk in a second about it, besides Sylvia, but definitely that was like the tipping point. You know, the industry is moving too slow and there’s like a huge opportunity right now in technology to disrupt these markets and I want to do something there and then I connected the dots with Brazil and then we will talk about that, if you want.

Peter: Right, right. So, you moved from New York to Brazil, I take it. Maybe just describe….this was quite a few years ago, right, you’re talking like 2012 thereabouts, so what were the lending options for consumers in Brazil in 2012?

Sergio: So, that was actually what attracted me from the early stories that my wife was telling me…she was saying, no, in Brazil people pay like 200% for a personal loan. I said, yeah, no way. I’m curious in nature and sort of analytical, if you want, so I decided to start searching and using Google Translator, I did not speak Portuguese at that point. So, I was using Google Translator and translating the web of the Central Bank of Brazil and downloading reports and stuff and things over a couple of weeks and I said, oh my God, it’s actually happening.

So, what I saw was an economy with a huge potential, 200 million people, very high margins on the banking side, 30% spread, 30% spread, 35 to 40% APRs, 30% spread, it was not the funding cost, but it was something that I was usually told. It was not the delinquency rates that were at that point at 4%/5% or something, it was just pure spread, that was okay. So, why is it that this happens, why is it that banks need to charge that much and then I got, and this was still far from the distance, right, so still haven’t put myself in Brazil so this was like pre-2012.

While I was doing some quick math, I saw that the distribution channel was a problem, the number of branches compared to the size of the loan book of the banks was not simply making sense. I did like the math and said, okay, one branch, how much in loans do they hold with households, with consumers and my reference was the US and it’s probably like $150 Million per branch. I got into Brazil and it was $50 Million per branch, ten times less, so ten times less so then the math really made a lot of sense.

Okay, so these guys have such a low productivity in the branch network that they need to inflate the price so that they get the margin to compensate for the fixed cost and that’s why spreads were are at 30% instead of like 3%, it was like very, very, very obvious. They looked like they need it, there was like no way for Brazilians to get into a website or an app or something at that point in 2012 and get financial products so you actually needed to have retail branches. It was almost like a social responsibility of the banking industry to have branches so that the middle class could get into the branch and get financial services.

Peter: Okay, okay. So then, when you started , maybe you can……what kind of loan offering did you begin with and then how has that evolved over time?

Sergio: So, I’d like to talk about Creditas in three phases, right. The number one was bootstrapping. I was a first time entrepreneur and difficult to convince anyone to give me a check, only my friends wanted to do that and I did not want to go through the pain of losing their money. (Peter laughs) I said, no worries, I will take my last bonus and I will invest into this business. It was not much money so, I said okay, this was going to be a nimble venture and I’m going to play it by myself, I’m going to hire four developers, two journalists and first step is going to be building just like a marketplace of financial products, 1.0 of fintech, right.

So, lead generation, partnering with banks, trying to crack the code on why was it that banks didn’t have, at that point, entry to the lending products, they didn’t. The only way of getting a loan in 2012 was by you walking into a branch and applying for a loan. So we said, okay, why don’t we just like take that experience, move it into a website and start by playing with them. So, we did that for a couple of years and then it started like taking off, it actually made sense, it was like very obvious that that had to happen.

We got some venture money, I think it was like $3 Million at that point in 2014 or so and we said, okay, let’s continue doing this. By the end of 2015, we had two products in our platform, it was a variety of a home equity loan and a variety of an auto equity loan what would be like in the States a title loan for your car. I’m saying a variety because the mortgage market in Brazil is totally under penetrated. The residential real estate market has a loan to value of 6% so 94% is pure equity. I said, hey, why is this happening, why is it that people are owners of the apartments and they don’t get money from them and cancel the personal loans that they are holding and their revolving credit cards.

What I realized very quickly was that the regulation for mortgages was very new, that was something I didn’t know when I got to Brazil. It was just like at that point six/seven years old, no more than that. Banks were turning their back on the mortgage market because they were like drug addicts with the personal loans had 120% APR, there was like so much margin in that that they were neglecting that.

So we said, okay, let’s create a mortgage because the property is unleveraged, they own it outright and let’s say provide that with that mortgage liquidity to the individual so they can then cancel the personal loan, the revolving credit card and so on. So, we did that in 2015/2016 with both the home equity product that we call and the auto equity product extracting value from the car, right, so delivering the loan not to buy the car, but to just cancel the personal loan that they had that was super expensive.

By 2016, we realized that the marketplace model connecting to seven/eight consumer finance companies and mortgage companies and the like, it was nuts, it was like extremely difficult at that point. Too much complexity, the user experience was not good, we were not being paid enough, we were not being recognized by the banks on the value that we were providing, we were doing the whole transaction, very complex in Brazil this type of thing and also, they really didn’t want to innovate.

So we said, okay, this is the moment of truth and that’s when we became a direct lender on a securitization model. We were like finding the customer, producing the loan, booking the loan in a similar model as the US players did in that phase and just taking the money, securitize it to institutional investors and then eventually also retail investors so that opened up that second phase, 2016 to 2019.

By 2019, so like a year ago, we said, okay, this broke actually, it was like amazing so we cut on the marketplace. We are now like a pure lender based on securitizations of both institutional investors and retail investors, but the platform was not complete. We want to be deeper into the relationship with the customer. We started a new phase that coincides with our last equity round, that was $230 Million round in mid-2019 and we said, okay, let’s complete the platform. That implied a bunch of things that we did over the last 12 months which has been like, you know, in seven years, two products and in just one year we launched five different products in different verticals.

So, we launched auto financing, we launched payroll loans in partnership with the employer, we launched salary advance and then we launched a new vertical that we called Consumer Solutions which is our incursion outside of fintech and into regular consumer products. So, we launched a store, an e-commerce platform and in that store our customers they go, they buy an iPhone. We call it iPhone for Life, it’s like a similar product in the US, but the way which the customer pays the iPhone is instead of with a credit card, they use the salary themselves so they sign a contract with us.

We already have a partnership with the employer and then the customer pays over 24 months in fixed installments. After 24 months, we collect the iPhone back and we deliver a new iPhone to the customers who continue paying directly from their salary. You know, like a lot of innovation there if you think about it, especially in a country where you don’t have credit history and then getting the collateral.

You see that everything in Creditas is about collaterals, right, everything is about collateral because you don’t have credit history. So, distinguishing between someone that is going to pay you back and someone that doesn’t is the centerpiece of what Creditas is today. And, the last thing that we actually announced a couple of weeks ago was the launching of Creditas Home which is home solutions. We realized that people get their home equity loan from us, it’s either to renovate the apartment or because they want to anticipate the sale of the apartment because they are upgrading to another apartment, those type of things, we said okay.

If we really want to be in the center of the relationship with the customer, we need to do those things by ourselves and we started doing home renovation. We, obviously, don’t go with the bricks and the mortar, but we coordinate a process, we have the architects that actually support the customer and take out the pain from the shoulders of the customer. We feel that that is really the way that banking is going to evolve over time, is being much closer to the solution so that we can actually add more value to the customer.

Peter: Interesting. So, you are moving really….you’ve been a fintech company this whole time, but you’re moving really to outside of finance, it sounds like. Do you see that as a big part of your future then to have like one part of the company as fintech and the other part of the company as a broad range of services.

Sergio: Absolutely. Sometimes when we think about banks, I have the feeling that we are still like a…same discussion five or ten years ago in most of the verticals. The process is on paper so when it’s moved to digital then we need to automate it, then we need to put data science and it’s going to be like an amazing thing. The problem with that mentality is that you are entering into a negative cycle in which you are commoditizing yourself. You are solving it, everyone else in the industry is solving the same problem and you know what, software works.

Actually, it solves the problem of financing and it reduces the cost, it creates efficiency, it reduces the prices. So, I could see very clearly like, you know, five/ten years down the road, these products being pure commodities and who is the customer and what do the customer want. In reality, the customer does not want a loan, they want what they can buy with that loan for the loan that they can source so that’s why we really feel that’s the strategy moving forward for us.

Peter: Interesting, interesting. I would say there’s not many companies doing that anywhere in the world that I know of. Maybe this is fintech 3.0 or 4.0 whatever, but, right now, this is a fintech podcast, we’re going to focus more on the financial side. So, you still have the home equity loan, right, so maybe just take us through kind of the user experience. Actually, I’m on your website on my other screen here and it’s been translated for me, but I can see that everything….you know, it looks like you can go through this process on your website, but maybe tell us a little bit about the user experience, how long it takes and how the terms of the loans are, that sort of thing.

Sergio: Perfect. So, in terms of the loan types and the terms, obviously very different products in our portfolio and I’ going to start with the top of the pyramid, that’s the home loan. On average, that’s going to be like a $60,000 loan on a property, average is three times that so the average loan to value of our loan is 30% so that’s a property of $200,000 which is the average property of the urban population in Brazil. Obviously, like in the US, that will be probably three times that or four times that, you need to adjust for the difference in geography.

The second product, that’s the auto, that will be like $6,000 on a $20,000 car and then the payroll which is like a $2,000 product, a salary advance, that will be like $500. In terms of the APRs, home equity would come at an average 12% per year, the auto and the payroll will go at probably 30% and the salary advance, we give it away for free, it’s an engagement product, we don’t want to make money with that. So, all the employees that we are partnering with the employer, they get like two times per year, they can do a salary advance for free and we use that as a way of engaging the customer. If they need money later, more like a long-term need then they have direct access without marketing cost to our platform obviously.

So now, moving to the user experience, again very different, payroll, salary advance and auto, that’s fully digital and fully automated. Auto, you have just like 5% of the process that we have some human intervention today and that has obviously……we have come like a long way for the last four years. Just like a year ago, automation was like that in auto, it was like at 45%, now you’re at like 95% so it’s like a very small piece. Actually, it’s like in the…when the customer does the remote appraisal, they do it in the app, they download the app, they take the picture in certain pieces of the car so that we can validate the status of the car, that there’s no fraud on it and all that stuff. Some of the portions of that appraisal we still have like humans checking that. OCR is still like doing some good things in taking the plate and those things, but some others are not. So, that’s one side, right, it’s automation.

The other one is data, right, and the way that we price the loan. We price the loan real-time, we set the rate real-time when the customer gets into us even if you have like a collateral. We do that by taking that appraisal and identifying the liquidity of that property, depending on the default, the moment the customer is going to default, what’s the depreciation, the projected depreciation of the car, how long is it going to take us to actually sell the car. That gets into the LGV and that becomes ultimately the pricing, right. So, we do like….in cars we still do like fully leased out contracts, fully lien placements, there’s like a lien on that property.

So, the beauty in Brazil….that’s one of the few countries that actually have like digital liens, you can do it like real-time with the Central Bureau that actually coordinates all the liens on the car properties.

Salary advance and payroll…. you know, in Latin America and in emerging markets, in general, people are huge fans of WhatsApp and the customers in payroll and salary advance, 90% of them, it’s a bot in WhatsApp, they just do the validation in real-time, same day they get the liquidity that they want. In auto equity, in the car product, the record….we actually bidded like last month, it was like four hours from customer visit to money on the account, four hours and you’re like…again, you’re like doing a remote appraisal, the customer that you did not know before, nobody told you, you have not been in contact with that customer before. They’re placing the lien and delivering a loan that is typically like five/six times the salary of that person, the monthly salary of that person.

Now, in home equity different scenario, still scratching the surface, if you want. In Brazil you still need to go to the notary. I was listening, I think it was like a couple of weeks ago, you’re speaking with Vishal from Better and he was like reflecting on the digital notarization of the contract. In the US, it is still a point of tension, same happens with Brazil like a lot of advocacy…..I think that the pandemic is helping us in convincing the regulators actually to create a Federal regulation on that, but still not there. And then there’s like an additional complexity in home equity that we face.

Actually, this is on the back, the customer does not see it so from a customer perspective, it’s a beautiful process, but in the back….in Brazil, you don’t have title insurance. My friend, Vishal, when he wants to do like a mortgage, he just gets like a title insurance and that’s it, pays like a couple of thousand dollars for that and end of the story, okay, we don’t have that here. So, that creates a complexity that you need to build a title insurance company inside Creditas to actually validate that the property is owned by that customer, number one. Number two, and this is like a specific case of home equity, is that if the customer/if the borrower has liabilities, personal liabilities, they could have an impact on the real estate property.

Peter: Sure, yeah.

Sergio: And then, therefore, you need to validate 85 different points of risks, including whether the customer is paying the condo or has paid like the real estate taxes or are there any fines or is he like an entrepreneur that has some labor claims and all that stuff. Obviously, data plays like a critical role there to anticipate what is the chance of that customer having one of those issues and then focusing relentlessly on solving that issue,

Peter: Okay. So, that’s quite amazing, what you’ve built there. I mean, how big is your company, how many employees do you have?

Sergio: Today, we are at 1,500 employees doubling over the last 12 months. We have remained stable over the pandemic so we managed to take certain measures and avoid laying off people and staff, but from a size perspective, 1,500 people. We are running our portfolio of roughly a couple of hundred million dollars and revenues of $60 Million,

Peter: Okay, okay. So, you are a pretty decent size. So, let’s talk about the pandemic because…..I mean, Brazil has been hit recently hard, I hear it in the news in the US, how has Ceditas been impacted? Obviously, you’re working from home, you also told me earlier that all of your employees are working from home, but how has that affected the business itself?

Sergio: We actually returned the two offices that we had so we are now like a company without an office (Peter laughs). The workplace, people at Creditas, are scratching their heads and thinking how the future’s going to look like and how we’re going to be operating in the future. So, that’s quite an interesting time over the next six months. On the business side, in March, it was a shock, right, so okay, this is coming and we had like two concerns. One was the credit portfolio risk, the other one the credit so risk so it’s credit and liquidity.

So, we moved into a cash preservation mode, we have like plenty of cash in the bank, we’re lucky, but besides that, we did not like to get into a negative trap so we said, okay, what can we do. What we did was slowing down growth, we were growing 9% every month over the first quarter, right, every month, every 30 days 9% up and then we slowed that down in Q2 to 3% every month. With that reduction in the growth rate, then suddenly we started generating cash. It’s because you have this portfolio that is cash flow positive generating like a bunch of cash every single month. Our business is all about recurrence, we don’t consume capital, but we have the recurrence of the credit because we get a synthetic junior tranche like a success fee, if you want to put it that way.

So, we had all that cash coming and we were just containing the cost we’d use in the marketing expenditure so generated cash. In July, we started going back because we saw that the two concerns that we had, we were fine with them. So, credit risk…we have like some hiccups in March and April so people were like just holding on the payments because the big banks were saying, we’re going to hold payments for 60 days and the customer said, can you do that? I’m not a bank, I don’t have the resources to do that, I still need to continue paying the investors, I’m not sure how I’m going to be doing that, but we managed to convince them that it would be like better for them to pay.

By mid-April, it was already very clear that the delinquency wasn’t going to be a big problem. Today, we are at the same level as we were in February. So, essentially, we went through the crisis with no impact literally in losses. You know, at the end of the day, it’s the power of the collateral and having a low loan to value, right, like so much equity, the customer has so much equity, so much skin in the game that even if they get unemployed, what they would do was just sell the house, get the money, go to a rental area and then avoid actually the foreclosure of the apartment, right.

On the liquidity front, we had a concern of, are we going to be able to continue securitizing? In Q2, we did a record in securitizations so the markets were wide open, it was $300 Million realized in securitizations so almost like $100 Million. The markets were wide open for us because they would like to apply to quality so the investors that actually wanted to get exposure to credit risk, suddenly, they wanted to have collateralized loans, they wanted to have low loan to value, low volatility even though they were not being paid an amazing amount of money. That was what we actually experienced and now, we are back in hyper growth mode already starting in July. August is going to be an amazing month, September is going to be better than…probably the best month in the history of Creditas.

Peter: Wow! So, I want to talk about your competitive environment because you’ve got in Brazil probably the most successful…..Nubank, as you know very well, is the highest valuation of any fintech outside of China and you’ve got Mercado Libre which is the Amazon of Latin America that are getting into lending, Nubank is getting into lending so, what’s the competitive environment like and who do you see as your big competitors?

Sergio: Perfect. So, these two guys that you mentioned, they are like amazing, a lot of respect for those two guys, obviously, very different strategy than Creditas. What we do very fairly on Creditas….Creditas focuses on the….most of it are for the non-millennial guys, it’s someone that already owns an apartment and owns a car, they are in their mid-30s to mid-40s, that’s the range, 35 to 45, that’s what we target so, the guys are already making some decent salary. Our average customer is top 15% of the Brazilian population in terms of monthly income.

Now, if I turn into these two guys, so firstly, Mercado Libre, they are like actually an example, it’s very inspiring for us on the solution strategy that we talked about before. Mercado Libre was coming the other way around, they came from the e-commerce side and they said, hey, payments sucks, we need to solve that problem, they created Mercado Pago so payments.

And then they said, okay, so lending is bad for these SMEs that we work with, they built Mercado Credito which is the lending side of Mercado Libre and they are doing a terrific job. Think about it, they have all the data of transactionality of the merchants that are placed in the e-commerce, in the marketplace, they have like an amazing brand. I think great things are going to come from that business, it’s really amazing what they are building.

And then if you look into Nubank,…..so they managed to build an amazing business here, they started as a credit card company initially with a vision much larger, but they did very good in focusing on the credit card instead of the debit card that at that point was like the typical thing that everyone was trying to do, especially in Brazil, because credit risk is high. So they launched a credit card, obviously, they had a struggle to find what delinquency was going to be, how they could create the data algorithms and so on, but they did it and they grew like crazy. They did it by focusing on user experience, the millennials, millennials love that.

Nubank is a revolutionary, it’s against conformism and it’s a day-to-day product, right. Now, once they have that…on top of that, once they have that what they’re going to be putting is more and more products, right, to actually monetize those customers better because today is mostly a transactor business. And they launched their personal lending product, right, that was like a year ago. Obviously, the customer base that they have is slightly different than the one that we do, just like much younger, significantly higher defaults, but this is going to be Nubank’s place like pay for the next five years, pay for the next 50.

So, Nubank is how can we build a huge bank from scratch starting with the millennials and then going together with the millennials. Millennials become baby boomers (both laugh) eventually, they will get higher salaries, they will buy houses and cars and so on, so amazing strategy. You know, our competitor is none of the two, in reality they are like the traditional banks, the incumbents, those are the guys that have the customers that we want and that’s really where the money is.

And then the other competitor is poor lending products, in general. In Brazil, we could have like a lending size of 3X what we have today if you just change unsecure lending for secure lending, you can just do very easily without increase in debt service of the customer, you would just like triple/quadruple the amount of loans that you have in the economy so that’s really the challenge over the next decade.

Peter: So, that’s a good question. We are running out of time, but a couple of things I really want to get to. I mean, how are the banks reacting to companies like you and even to Nubank for that matter because you guys are really creating some decent scale. From what I understand, the banking system in Brazil is a bit of an oligopoly, they’re really old established banks, I mean, how are they reacting to fintech?

Sergio: It’s a classic….first slowly and then suddenly, right. So, I remember, 2014 to 2016, they were almost like ignoring and in 2016, they became very worried, this is actually going to happen, oh my God, we are naked so what are we going to do. They call this legacy and so a lot of concern. And then I see that from 2018 onwards, they are doing like a good job, they are like taking the platforms, isolating legacies, creating layers of APIs that actually allow them to be faster in developing products. If you perceive that the cycle of developing new stuff….it’s much longer than ours, obviously, but I think they are like adapting very well and they have like strong brands that they are trying to improve, but their brands are strong.

I think that more and more they are becoming more like fintechs, they start like calling them banktechs now, but it’s all about, you know, who is going to do it faster; the bank is going to adapt faster or the challenger is going to get to scale faster, right. So, that’s the game, right, they have a customer base, these guys have sometimes 40/50 million customers, very engaged where they have like salaries, they can plug new products and so on so I really do have a lot of respect for the banking industry, they are adjusting quickly, they have decent people running them and they are catching up.

Peter: Okay, okay. So I want to talk about financing. I mean, you started this business in 2012 where really no one in America was focused on Latin America at all and suddenly, we’ve come back. You’ve seen this evolution and it is fascinating to see this going from….. you can’t probably get a phone call or email returned but now, Latin America is one of the hot spots in the planet and you’ve got some of the marquee investors here, QED, who we know really well, SoftBank, obviously everyone knows, Kaszek. How has the fund raising process changed, how has that been for you over the years.

Sergio: It was a miserable experience (Peter laughs). You’re going to do what…you’re going to take off the banks, get out of this room. (laughs) That was basically it so nobody….I remember speaking with other folks like Nubank, as you mentioned, they were getting like the same type of reaction, that’s going to be impossible, you have no idea and especially we are foreigners. When we get there, these guys, they don’t know anything about the country, what are they saying so very painful at the beginning, especially if you are like a first time entrepreneur, you have no way of getting funded or very few of us.

Then by 2016, everything changed and it was like in part because, you know, the regulator openly said that they wanted fintech to succeed, they would like a defined and clear roadmaps so that fintechs could adapt to being regulated and all that stuff. At the same time, consumer penetration in smart phones skyrocketed in 2016/2017 so much more adoption of the consumer. And then, early cases, you know, Nubank, Creditas, Stones, Paz Seguros like created some critical mass so investors went all the way around. So, everyone then started saying, okay, so fintech is going to be like a big thing and likely a big thing, right.

And now, yes, as you’re saying, everyone is looking at Latin America, especially Brazil, and saying, yeah, there are so many cools things that are happening down here. This is not like a……sometimes, China looks like they’re far, far west and sort of an un-ruled type of geography, but when you get into Brazil it’s like hyper regulated type of region but still with very high margins. There are so many things that can be done in multiple verticals, obviously, competition is going to be heating up, but investors really see that these are legit companies, legit businesses really innovating and creating the future competitors for the banking industry.

Peter: Right, right, okay. So, last question, where are you taking Creditas, are you going to be a massive….it sounds like you’re going to be a Mercado Libre sort of operation, what’s your vision for it?

Sergio: Yeah. First, definitely not going to be competing with Mercado Libre. Think about it like Mercado Libre is all about small items in the day-to-day like an Amazon type of thing. Our strategy is very focused on the high-ticket transactions, right, so it’s your house, your car and your salary so those are the three core systems that we are building around it.

So, we are very passionate about that idea, we are seeing very good real results, a lot of customer engagement, a lot of repetition on the customer. So, suddenly, you take a real estate loan that’s typically, you know, once in your life and then you’re generating recurrence by plugging iPhones and then buy your car and then renovate your house and you go through the cycle of the customer so that vision of a platform for the customer is really compelling for us.

Now, from a growth perspective, we want to continue growing 3X every year, let’s say 2 to 3X over the next five years which is going to…..at the end of the day, what we are saying is we think that in five years, we can be a hundred times where we are today. When you look at the market size and when you look at how much we are innovating in unexplored territories, you would just be scratching the surface even at that point five years down the road.

So, at the end of the day, we think that the world needs to have a Creditas-type of company like someone that focuses on high ticket items that takes complexity across multiple ecosystems and provides that platform for their customers. Hopefully, the end-game is going to be not to have an end and to create a hundred years company.

Peter: Right. Good luck there, Sergio, it’s been fascinating chatting with you and hearing your story. I think you’ve got an amazing company there and best of luck to you.

Sergio: Thank you very much, Peter, and congratulations on your work.

Peter: Okay, thank you. See you.

As I said in the intro, I think they’re just a fascinating company, Creditas, and I think we can learn a lot. They really are, I think, pioneers in some ways and certainly in Brazil they’re pioneers, but even in fintech globally, there’s not many fintech companies that are thinking beyond financial services. Many of them are thinking about different verticals within that, but Creditas is really looking at their customer and thinking we want to serve them beyond financial services. I don’t know whether we’ll see that as a trend in other areas of the world or in other companies, but certainly one to watch and I’ll be following along with their progress very closely.

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

Today’s episode was sponsored by Lendit Fintech LatAm, the region’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online on December 8th and 9^th. Pandemic or not, LatAm is still the hottest region for fintech in the world and LendIt Fintech LatAm features all the leading players in the region. So, join the LatAm fintech community online this year where you will meet the people who matter, learn from the experts and get business done. . LendIt Fintech, lending and banking connected. Sign up today at lendit.com/latam.

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