PODCAST TRANSCRIPTION SESSION NO. 151/MATTHIAS SETZER

Welcome to the Lend Academy podcast, Episode No. 151. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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Today’s show is sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s coming up on the 19th and 20th of November in London at the Business Design Centre. We have recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I’m delighted to welcome Matthias Setzer, he is the Chief Commercial Officer for PayU and Naspers Fintech. PayU is part of the Naspers Group and they are a very interesting company.  They’ve been around for quite a while and they have really strong footholds in many, many countries around the world and I’ve focused on payments, but they’re moving into other areas, in particular credit.

We talk about that in some depth, we also talk about their work in India, how PayU has really built a sizable Indian business and how the sort of the credit business really fits in well with the payments business that they’ve done there. We talk about artificial intelligence, we talk about how they expand in new countries and much more. I hope you enjoy the show!

Welcome to the podcast, Matthias!

Matthias Setzer: Thanks for having me, it’s a big honor and pleasure.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself, what you’ve done in your career, where you’re from, that kind of thing.

Matthias: Right, my names Matthias, I’m the Chief Commercial Officer for PayU, that’s a global role, basically responsible for our main market. I’m doing also all the sales, I’m doing the key accounting partnerships, marketing, PR and a few other things for the company. I’m also part of Naspers Fintech, that’s the investment part of the group.

Before joining PayU, about a year and a half ago, a little over a year and a half now, I was working for a company called PayPal, in the payment space as well so I’m 15 years in payments, now. I like payments, I always wanted to stay there and I’m just a big fan. I like the segue between nobody has any tolerance for losing a payment, it has to be super detailed, it’s very, very high trust.

At the same time, it’s driven by technology through innovation every other day and driven in the Internet/the online space in particular; I like this very much. I touch on a number of credit topics every place of my career so I also had a lot of exposure of those things and I’m happy to talk about that later.

Before working for PayPal…I spent 12 years at PayPal, full declaration, so almost spent full cycle from just joining off to the acquisition of eBay then just after the spin off, I went another year post the IPO. Before that, I worked for a company called Bertelsmann, it’s a media company in Europe, you may know it, it has assets like Random House in the US; BMG or Bertelsmann Music Group actually own some things like European TV stations.

My background is business, went to business school, graduated with a masters in finance and operations and lived in places like London for a while, I also spent time and studied in Japan, for example, and in Sweden.  So payments guy, online guy, commercial person with a background in payments, credit and all sorts of technologies around the investment fields.

Peter: And currently you live in Berlin, is that correct?

Matthias: That’s correct, yeah, that’s where my family is, even for my teen kids they are joking that I am cloud-based (Peter laughs). There is occasional travel happening.

Peter: (laughs) Right, right, I know we’re talking to you today while you’re in London, I know that. So that’s a…..

Matthias: And I just flew in from San Francisco to be honest and I’ll be in Colombia next week so it’s a global role and it’s also still an interesting observation that still things need to happen personal and local.

Peter: Right, okay so I want to talk a little bit about PayU and Naspers. These are pretty well known companies I know in Europe and around the world, but some Americans may not be as familiar with them so why don’t you give us a little bit of a history of the business and what PayU actually does.

Matthias: Very quickly on Naspers and also in terms of the global story, I have to focus a little more about PayU, if it’s a more Naspers topic we need to refer to them. The short summary is Naspers is one of the world’s biggest tech investors, it is originally a South African media company about 103/104 years old, it’s stock market listed now in Joburg and has a proxy listing in London. It’s a very sizable operation too with large media assets and has a number of investments around the planet from classifieds to foods to actually payments.

PayU is the payments part of Naspers and we are about 15 years old, we are a growth market specialist, that means we have our main businesses in very interesting markets from India to South Africa to Turkey, Russia, Poland is in there. We also have several markets across Latin America, Brazil, Mexico, Colombia, Peru, Chile and so on, Argentina, so we are in currently 17 markets and basically a payment company that operates as a gateway, as a payments service provider, but I would always like to describe us also as a “deep payment service provider” because we’re doing things like building our own credit products.

For example, we have self-developed credit offerings in markets like India or like Colombia; we’re also providing a number of risk and other services, of course, and we recently added some significant investments in particular consumer credit. We have plans to go beyond that, that includes other areas of credit like merchant credit and ultimately (inaudible), what is actually the definition of a digital bank or a consumer bank, what does the bank looks like in the future and if you are a payment company or a credit company shouldn’t you have a say in the way how digital bank looks like in the future. That will be a short summary for you so in the global scale, mid- sized, original and growth markets is a very large space.

Peter: Okay, so then after, you know, you said 12 years at PayPal, you said you joined PayU about a year and a half ago, what was the reason? Why did you decide to join or what did you see that was interesting?

Matthias: A number of things. I had a great time, as you can tell, at PayPal. After spending 12 years there, you have no excuses, you have to like it and I did, I’m still very happy I spent the time there, learned a lot. At the same time, I was very tempted by this opportunity, it was a very interesting role. Personally, I’m one of four people running the company and that is a very wonderful thing to develop and now there is no more excuses so when I’m not happy about fast decision making in the executive level, well that’s actually me (Peter laughs) so there’s a very personal (Matthias laughs)…..yeah, you run out of excuses…..that’s a very good development.

PayU has a unique talent, right, the thing I like about it…..I was doing a lot of work for PayPal in the market like Germany and PayPal is heavily localized in Germany or the UK, for example, but if you look at global markets around the planet PayU is very specific because it has a lot of local infrastructure. We are in every market, we are a local payment company. There is not a single payment method missing…depending on the market, we even have local service on the ground.

For example regulatory reasons, we have local offices, we have local licenses, we have full connectivity, there’s no proxy in between, no aggregator in between, so PayU is a super hyper local payment company and at the same time, it has a global footprint, it has global scale and it has a global infrastructure as well. And you multiply this…being with Naspers Fintech, there is an element of equity, an element of investment; we are growth market investors.

From that angle, it was a super interesting combination to say, hey, you have a super strong local footprint, local expertise to scale and you scale it globally and when I was offered this position it was predominantly about cross border trade, now it’s also about all the local payments and the local markets and everything. I found this incredibly tempting to combine that with my knowledge and expertise and also learn a lot of new things because certainly doing business in markets like Brazil or India, the learning curve is very steep, to say the least.

Peter: Yeah, yeah, and that’s an interesting point. I mean, you say you’re hyper local, you have offices on the ground…..I mean, the payments infrastructure in different countries, like you’ve got Russia, you’ve got India, Brazil, they’re all very, very different and you’ve got Africa where there’s a whole …different types of……

Matthias: We do business in Nigeria.

Peter: Yeah, so how do you approach going into a new market. I mean, you’ve got a really…start from scratch, I imagine.

Matthias: Yeah, well the interesting thing is if you look at PayU’s history, the company is almost a conglomerate of go to market variations so we have every example in the book, basically. The original investment thesis and build up was hey, let’s build an emerging markets payment company and people ventured out and bought the first payment companies in Latin America. Those are our oldest partners, they’re about 15 years old in terms of corporate history so there was an acquisition element. You could go into market by acquiring, we do this sometimes.

There is another element in that the group owns big assets. For example, Naspers was the owner of a company called Allegro in Poland. Allegro had a payment part called PayU, that’s where the name’s coming from. Allegro has been sold, the marketplace has been sold, but the payment company is still there and it is our asset and we kept that part. For branding reasons, we chose it later on, it’s a different reason, but….payment asset I always say like “inherent.”

Our situation at PayU India was coming out of a Naspers -incubator. This was an entrepreneur venture and there were two entrepreneurs; one of them stayed with us, Shailaz Nag, and the COO of the group today in India and they were just incubating this six years ago. What we did a year and a half ago in India…PayU was number one already in terms of online payments, we had a very nice market development and a good market share. We bought number two in India and so we have some sort of incubation organic growth, if you want, and we are adding an equity element to that.

We are now in the process in Africa, we can’t disclose the name yet, but there is one market where we just went in organically. We set up an office, we hired people, we talked to regulators, we filed the application, we are hopefully very, very, very shortly away from getting the license; orally they told us we’ll get it they said this week we will get it. Connectivity has been built with our own engineering, we’re connected to local payment merchants and yeah, as soon as we get the stamp, we’re going to start running those operations and make an announcement that we are in another market in Africa.

Peter: Okay.

Matthias: So short answer is that we’re doing everything, we’re doing all means of expansion. We are not very agnostic or very limited. Yes, the company still keeps actually growing and venturing into new markets absolutely.

Peter: I cannot have some sort of an interview with you and not ask about Tencent because it’s a very famous investment, you guys invested in Tencent back in 2001 when it was still a pretty small Chinese company and now it’s a behemoth, it’s one of the largest companies in the world and their WeChat app is ubiquitous. I mean, I go to China quite a bit and everyone…you don’t swap email addresses, you swap WeChat IDs, as in you do it all on your phone and they really have a very strong presence, they dominate the market in China in many ways. So does PayU use any of that knowledge or do you have a footprint in China?

Matthias: I can’t comment about Tencent and Naspers, deep apologies for that. This is something you would need to ask them directly. That’s something I can’t do.

PayU uses partnerships in China and we’re also very happy that there is TenPay which is a big footprint in China. Our current focus, to be very honest because this is theirs, this is a big piece of infrastructure….. our current focus, I believe there is more development needed and more interest right now and opportunity even is actually India.

Peter: Yes.

Matthias: And that’s’ where we…I mean the day only has 24 hours, you cannot do so many things at the same time. We have a strong belief and currently would call it PayU’s number one priority is India. In India, we are a very substantial player. Like I said, we already made acquisitions, we keep developing products, we are for build out on all payment matters including UPI, we will have local connections directly to the issuers and things like that so we enhance even the network infrastructure and other things.

We have launched our own credit product, we have launched with Kreditech, a sister company, a credit product we have invested in heavily. Now India is big fun. I would say, for arguments sake, even on that one to give you the second part of the answer beyond China, I’m spending a lot of time at the moment in Brazil. It is one of the world’s largest economies, it is one of the world’s largest countries in population, number five actually, and we are curious. Are we under- leveraged there, should we do more, what is the right way to Brazil? It is complicated, sounds easy, but should we do more? Clearly, India is the number one for us.

Peter: Yeah, it makes sense to me. India has got tremendous opportunity, I mean, we get more and more people coming from India to our LendIt events. In fact, my business partner, at this very moment, is in India this week speaking at a conference where we see India as really…….it’s almost like….. reminds me of where China was five years ago, it’s very exciting and India is going to be such…..

Matthias: Exactly. Maybe even ten years ago.

Peter: Maybe ten years ago, exactly, but there’s a lot of excitement about what India can become and it’s also a lot more open.

Matthias: Let me ask you, Peter, what about LendIt India?

Peter: (laughs) I get asked that question probably every other week usually by an Indian. Part of the reason that my partner’s there this week is that it’s something that we are thinking about for the future. It won’t happen immediately, but that will be our next country.

Matthias: Let us know, we’ll be happy to send speakers and people on that one. It’s going to be interesting market for sure. Sorry, I had to ask the question now that you mentioned it you’re your partner was there. I didn’t want  to turn the interview around but it was too tempting…

Peter: Right, right, anyway, I want to get back. You mentioned Kreditech and I know that you guys invested 110 Million Euros in Kreditech and I want to talk about why you did that and how are you using that partnership?

Matthias: Absolutely, the equivalent of that 110 Million Euros back then was roughly $120 Million to translate that. Kreditech is a leading alternative lender, it’s leading because it has a very state-of-the-art platform in terms of its technology and it comes to that, but also because it has a multi-country footprint. There’s not many companies that can actually, and have proven in our life, with a very advanced technology in the lending space are in multiple markets successfully. We started with Kreditech, I can share that, in a commercial test in Poland where we have also some very strong online bank and without any data integration.

Just for the first normal product, their conversion was just sky high, significantly better than any other player and that gave us the idea, hey, oh, wow, this is not just some………you know, everybody talks about machine learning, artificial intelligence and every startup that has an Excel sheet claims it does. At the same time, it’s not magic, right, it is a set of statistical tools that are about 20 years old/25 years old when they were actually developed in universities and now we have the computing power to deploy them.

So it’s neither magic nor is it something that’s secret about it. Actually, this stuff works and we saw it work then we developed the first investment thesis and looked at them, talked to them, they liked us with our joint vision/joint plans and it came out and actually said, hey, the biggest thing we could do is take your technology and combine it with our knowledge and expertise and insights into the market and take you guys to India.

At the same time, India is not an easy market as you know, I mean, it’s a very complicated market, a difficult one. Companies may not be successful when entering India, it’s no shame many companies failed for the first or second or third round; you may need five or ten of them, to be fair. So we actually said, no, that’s not going to work with 5 Million so that’s why we put in India 110 Million Euros/$120 Million check and said, hey, this is a significant development and investment needed to scale the company, it’s people and assets and everything else and make sure we go to India together.

This has been accomplished. We did this, we announced this in March of this year, we now have the first merchant live, we’ve seen the first transactions and the first results are actually quite encouraging.

Peter: What product are you doing there? You have a consumer lending offering that you’re powering in India?

Matthias: Yes, and the main task of the main product which is obviously interesting for PayU even more so is basically a Buy Now Pay Later at the online point of sale. So you buy goods, you put them in the shopping basket and then instead of using a new card payment or local card or a bank payment in India, you basically get a loan to get the payment done.

Peter: Right, right. So they’re doing the underwriting and that’s all their expertise. We know Kreditech pretty well, they’ve spoken at LendIt several times and you’re providing more of the payment infrastructure, is that how it works?

Matthias: Yeah, and there’s a very commercial argument to that, right. We’re also the distribution network because we have a very, very large merchant footprint.  The footprints in terms of number of merchants in India is in the hundreds of thousands. We’re a very sizable payment company there and we have also from the very smallest to the very largest merchant, we have Flipkart. We’re processing the first transactions for Amazon and others so major airlines….. there’s not many companies in India of name and size that don’t process with PayU and it goes all the way down to the smallest merchants.

Like I said we have a few hundred thousand merchants in the portfolio so we are simply…the logic was also discussed, a good project and a good distribution partner. Now you multiply this and say, hey, we also have some expertise in the controlled, facilitated and also legal way; you can check data at the right point because our payment data coming from a shopping basket provided by the merchant, with the consumer’s consent of course, allows you to score and gives the consumer actually good credit offering. The more data you get in there and so consumer has an incentive to give you the right data.

You can give them a good interest rate and a good score and do that and the consumer has a good shopping experience and can check out with a good loan. This combination made a lot of sense. Then I would argue, if you look beyond that, of course, there’s a lot of logistical help; hiring the first country manager, finding offices like they could obviously be starting in our office and things like that so there’s a lot of help on the ground, what are the first contacts to regulators. PayU is a very local company, like I said before, we are hyper local. PayU India is an Indian company, full stop. It’s not a Naspers company that has a few people speaking in Hindi, it’s an Indian company that has a few people speaking English.

Peter: Right.

Matthias: And this is terrifying all those Indians who speak English very well, but it’s the other way around. Kreditech also has a local partner that knows the market inside out and I think this is a value that goes beyond just the pure academic source of distribution arrangement for an equity deal or data sharing which is the obvious one than you would think, but the local expertise is probably the one that is the secret sauce in that one and that makes the difference.

Peter: Right, yeah. So it’s interesting to me…so you mentioned you’ve got hundreds of thousands of merchants in India, but Kreditech are the consumer lender, are you also going to look at companies like Square, like iZettle in Europe? They’re providing capital to small businesses as well, is that going to be part of your offering or are you’re doing that now even?

Matthias: We have partnerships now, but not as how we wanted to. This is big interest, yes, and we are basically looking into the market in all sorts of dimensions from doing something ourselves using some of our own licenses and infrastructure, we’re looking at commercial partnerships. We are considering using equity, in investments wherever appropriate so this is an angle which we currently look at and we’ve done that before.

The other side of it is we started consumer credit for the simple reason we believe that consumer credit is even harder, it’s more regulated, it’s more cumbersome and you can only do so many things during a day. I mean, I’m talking to one of the best credit experts in the planet…you tell me what is the right credit. We figured we started with consumer and that’s one done and then go to the next round and do the merchant working capital/merchant lending space as well.

That was our decision, whether it’s the smartest one, you tell me, but consumer credit is quite challenging, it’s a long term thing, it’s complicated, you should take it seriously, we build our own credit units, we invest capital, we take a long term view, we take a multi-year view so that’s what we’re doing right now and then working capital is the next step.

Peter: Right, right.

Matthias: What do you think, right credit or……

Peter: Well, I think……I mean, I don’t know whether consumer is more difficult than small business. I would say in some ways they’re very, very different. What you can’t do is go and offer a small business lending operation thinking you’re going to leverage all your knowledge in consumer; it’s a lot more difficult than that. But I saw last year, I think it was, I saw a headline that you guys are partnering with iwoca in the UK, what is that partnership about?

Matthias: Well iwoca was in Poland and iwoca is no longer in Poland so that gives you the stock of the partnership……

Peter: Okay. (laughs)

Matthias: We’re looking at new partnerships because iwoca left Poland and that didn’t go very far from that angle. We would like to do more and we’re looking into certain geographies and several geographies so nothing to announce yet, but that’s an active interest to find partners in the space and then we take it further.

Peter: Right, right, got it. So then you mentioned AI, machine learning, are you really……I mean, you’ve obviously developed expertise, I imagine, internally, but then you have Kreditech who have been doing this for many years and have obviously tremendous expertise so how are you using it in your credit business? Is it really just leveraging Kreditech’s technology or you’re doing it yourself?

Matthias: No, there’s a little more to that and I would mention two other names, actually three names, but two of them in particular. So we have three more investments in credit companies in the consumer lending space; one is Creditas in Brazil speaking to our second priority market, and then two more in India, one is Zest and the other one is PaySense and also those companies have particular angles in terms of artificial intelligence and machine learning.

They’re tackling different segments and it’s very complimentary to the Kreditech offering and from that angle this is the way to go in complicated markets like India. You need a decent amount of machine learning expertise and knowledge to do that. Certainly Kreditech is at a different scale. It’s pretty large for a fintech startup and they have a sizable loan book and expertise on that which is one reason why we like them so much, there is already some scale.

What we’re doing ourselves is also…for example, take LazyPay in India, that’s a product we developed ourselves. The name LazyPay is actually the original internal code name. For some funny reason, it stuck. The product hypothesis was hey, this is for small amounts. Imagine an Uber ride, imagine a food delivery and you couldn’t be bothered to really typing in a complicated credit card number, doing a complicated wallet transaction or redirect with bank payment, blah, blah, blah….it’s actually so simple you want a one click payment.

I just want a sandwich, I just want this quick ride, amount less than $50 in equivalent of the currency, the Indian rupee, and so we developed it ourselves as a very simple basically one click payment or even for subscription so you can use it for subscription as well and then the consumer just pays with it and we collect the money later. So it’s a Buy Now Pay Later credit product, but it’s for convenience and that uses artificial intelligence and machine learning to solve the risk and assess the consumer and all of that.

The second example I’m giving is a product called Fifiya, that’s a more classic Buy Now Pay Later product in Colombia, again, for normal shopping e-commerce amounts, not for the convenience side but like regular amounts, a couple of hundred or maybe $1,000 equivalent. It’s Colombia so it’s not the highest amount, but those are the products where we’re deploying those statistical methods to assess consumer risk.

Those machines run independently and the teams are also…..obviously, they talk to each other, right, there is exchange of knowledge to some extent, but it is basically three teams running those three different initiatives because ……also, the other truth of it is a lot of these markets, specific models, specific consumer behavior, specific….and you can’t just pretend that…because you did the business successfully in Poland, India is just the same thing with a different currency or if you did it in India why not just export it to Colombia, it’s just Spanish and Colombian pesos instead, whatever the Polish Zloty.

And so from that angle, we run those. The fourth area which just for argument’s sake, we also deploy machine learning, artificial intelligence in our risk infrastructures. Those statistical tools become very handy.

Peter: Right, right. So it’s interesting to me, one of the things we’ve seen over the last couple of years is a coming together of payments businesses and credit businesses. They really used to be fairly separate, I mean, PayPal was actually one of the first, they bought Bill Me Later so they were one of the first to sort of do it, but there seems like now that they…..just in last 12 months there’s been a lot more activity. So how do you view these two distinct industries in some ways that…..you’re involved in both of them, how do you see this evolving?

Matthias: It’s a very interesting question, some of which require a philosophical argument with (inaudible) fire, some of it is probably very data driven and very factually driven. Now the first argument is we combine it and we keep it separate in that sense because we also have great respect for credit businesses as much as we do for payment businesses, but we know they are distinct and different in the way you assess risk, you manage cohorts, you deal with regulations and other things.

The time horizon to develop in those markets are very different in credit compared to payments. So we are consciously aware, that’s one reason why we have added some two credit experts like David [Lin] and others to the team and working with companies like Kreditech who are 100% credit experts because it is not the same as payments….

Peter: Right.

Matthias:…..it is completely not the same, I would completely argue. However, at the same time, like we said before, there’s a number of very natural synergies and one I think the actual one is data. Again, in the controls, in the way that the consumers are consenting, payments data has a valuable input into the credit scoring side like what kind of stuff are you buying, what context are you buying it with, etc. We may have known the consumer before, we may have payment history and things like that. If the consumer opens up the payment history it gives a lot of insight into the credit score so there is a lot of very factual synergies that help the credit score a lot. Then you can issue the credit and manage it the way a credit should be managed in a diligent, responsible way so there’s a lot of those synergies.

The second one, I would say, is a little bit on the ……the second argument is a little bit on the higher level, you could argue. In the global trends you can see it, not necessarily always locally, but payments become more and more commodities. It becomes more a scale game, cost going down which is nice and wonderful. We are actually supporting that because it gives scale and it gives efficiency and everything else, so you actually wander down the cost curve a little bit and the price curve.

Credit is an industry where you still have a higher potential for monetization and from that angle it is a natural way for payment companies to go into another market and venture there and actually sustain the business over the long run. Ultimately, it would even link to what I said in the very beginning that could lead to us becoming a consumer bank, one way or the other, where payment is an underlying commoditized safe product.

Credit is one where we’re doing a lot of interesting things; maybe there is an investment part coming at some point and let’s see what the other consumer offerings could be, but that’s how we see the hypothesis over the mid and long term where markets develop.

Peter: Yeah, that makes sense. We’re almost out of time, just one last question. As you’re sort of looking over the next like 12 to 18 months, what are the biggest growth drivers you see for PayU in the short to medium term?

Matthias: Well we are super happy with our market positioning and the markets wherein…..again, like in India. The Indian e-commerce is booming and you are in a growth rate between 50 and 100% per segment. We keep on growing faster than the market so we are extremely happy with our market development there. It’s at a point where you shouldn’t overheat it, we’re running a licensed payments and credit operation so we need to be diligent with the process.

Well I wouldn’t be looking for more growth in certain markets, to be honest. It’s a challenge to my investors, but we also need to manage the business in a sound way. Other areas of growth, why not expand the credit footprint. There are a couple of geographies where you can use the technology and the day has only 24 hours and India keeps us busy for now, but as we said before, we have mid-term plans to bring our credit offerings to other markets like Brazil or Mexico, there’s an interest, why not? We can do that.

We keep expanding into new geographies, generally a theme. Obviously, also some of the interest, strength in the network of countries we have. There’s a few future things, I mean, I’m not sure if it’s a big growth driver yet, but we have our first investment in blockchain companies like we are investigating blockchain technologies. We may have the first technology application later this year and that’s what we are looking into right now.

There is another way……because I think it could help us on the efficiency side of the scaling part actually, there’s some real applications for blockchain and from that angle I think there is another wave of growth coming. On top of it is everything we do in normal business development in other areas. Of course, all those things together keeps us pretty busy and we’re very happy with the development.

Peter: Okay, Matthias, we’ll have to leave it there. It’s a fascinating business you have got and I can see tremendous things ahead for you guys. I really appreciate you coming on the show today.

Matthias: Thanks for taking the time. I appreciate the questions, they were super interesting. Glad meeting you, Peter. Hope we meet soon and talk soon, thank you.

Peter: Okay, thanks, Matthias.

Matthias: Ciao, Peter.

Peter: It’s really interesting to me this convergence of payments and credit. As I said, PayPal have been doing this for a long time, Square and other payments companies have been offering credit for some time now. We also see companies like Kabbage getting into the payments business so there seems to be a blurring of the lines and I think no one represents that blurring of the lines better than PayU and the work they’re doing with Kreditech and others.

As Matthias said, it’s all about the data. If you have payments data that is such a great springboard into credit and I would even argue vice versa. So I think we’re going to see more and more of this blurring of the lines between these two, what have been distinct, industries.

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

Today’s show was sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s happening November 19th and 20th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 150/FREDERIC NZE

Welcome to the sesquicentenary episode of the Lend Academy podcast. Yes, we are at episode 150. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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Support for Lend Academy comes from Wunder Capital, the easiest way to invest in large scale solar energy projects across the US. With Wunder, you can earn up to 7.5% annually while helping to finance renewable energy projects. Wunder Capital, where impact investing meets capitalism.

Peter Renton: Today on the show, I am delighted to welcome Frederic Nze. He is the CEO and Founder of Oakam. Oakam is an interesting company, they are based in the UK, they are a microlender, but they’re doing it all pretty much on the mobile phone these days. So we talk about how they got started, they have been around for over a decade, we talk about how they are underwriting these customers that are applying for loans, these reasonably high risk customers that are applying for loans on mobile phones and we talk about their unique psychometric testing that they use to help them underwrite. That’s really a fascinating piece that we delve into in some detail. We talk about loan performance, we talk about who is funding the loans and much more. I hope you enjoy the show!

Welcome to the podcast. Frederic!

Frederic Nze: Thank you, Peter, happy to be on the show with you today.

Peter: Great, happy to have you. I like to start these things off by giving the listeners a little bit of background about yourself, what you’ve done in your career to date.

Frederic: Sure, so if I go back all the way back to the beginning.  My background has been in the decision science, not in the financial services sector so I started in the defense sector in France working for a company called (inaudible). It was the second wave of AI development across the industry so before the last year I worked there, I was involved in developing an electronic co-pilot for a fighter jet and so that was the early days of looking at how data can be used to replace human decisioning.

On the back of that, I joined American Express first in France and then in the UK, and after that in the US where I was working on fraud prevention software, everything to do with lending, with consumers and SMEs. Finally, the last part to move away from decision science into how…joined General Electric, GE Capital, where I worked on the development of their lending business outside of the US so in emerging markets mostly and the integration of businesses we were acquiring into the GE Capital stable.

That was the (inaudible) part of my career, I came back to the UK and did a last stance with Barclays where I was heading the consumer lending business here and this is where probably the final encounter that has become Oakam started and I decided to jump from large corporates to go for a startup so I created the first startup Euristix which was a big data consultancy and on the back of it I created Oakam so this is my second startup.

Peter: Okay, so what led then to the creation of Oakam? What was the thing that you saw that really was a catalyst for starting the company?

Frederic: The main one was probably…I had worked in my career on how to improve, you know, decisioning in risk so credit decisions. When I worked at GE outside mature markets in places like Brazil and other places, I encountered consumers that were completely off the grid so I encountered consumers that were difficult to KYC to prove their identity or their address, who most of the time didn’t have payslips and all the time didn’t have a credit history.

So it was an interesting thing coming from a model which was building data by FICO score and Experian credit bureaus, a little bit of a circle model where you have to be in the model to able to progress in the model, to go to a place where you didn’t have a starting point. If you have no credit history, how can you have a score and vice versa.

So I returned to the UK and realized the way (inaudible) was coming and the issue this created for the banks, I thought it was an interesting opportunity to attack…that gave me also the link back to home. I’m originally from Central Africa, in Congo, and I always wanted to find some part of the financial services where I could find a link back to home so being able to open a business in Sub-Saharan Africa and being able to have an impact in areas where the percentage of unbanked and underbanked was significant.

Peter: Okay, so then maybe you could step back and tell us about Oakam. What exactly you offer, what are the products you offer and where you operate?

Frederic: Sure, for most people listening to the show we are from a product perspective, a very typical microlender so we lend to the bottom of the pyramid. So in the UK, we lend to mostly the bottom two deciles of income, but we go as far as the fourth decile and to migrants so people who haven’t got any credit history. Most customers want small loans, that’s the definition of the microlending spectrum, so we generally offer loans that will start at $150 and we can go all the way to $7,500 for terms that will be mostly six months going all the way to three years.

So if you look at that as a percentage, the loan as a percentage of income, it is very similar to what you would see in Mexico, in Uganda or India so we are a very typical microlender when it comes to the amount and terms, we’re very atypical in the way we approach it.

Microlending has been a dominant model across the world, you know, in the UK it is a doorstep lending model where you have someone with cash knocking on peoples’ doors, making a face-to-face human underwriting decision and collecting as well as disbursing the cash. What we’ve done is we gradually looked at how we could challenge every piece of that model and move it to a smartphone. So we are a smartphone based digital microlender.

Peter: I just want to step back. Do people still today knock on peoples’ doors and offer them microloans, is that still happening in 2018?

Frederic: Actually, there’s a lot…it was a surprise when I was thinking of setting up Oakam, Originally, I thought we will deal mostly with migrants coming to the UK, helping them build credit history and move to the mainstream. As we were doing that we had consumers knocking on our doors saying why are you helping Polish or Nigerian customers and you’re not helping the UK born. I assumed that they had everything they needed with credit and they have very little choice.

The market here, the doorstep market, is quite a significant market, very concentrated, the leader in the market has close to 80% market share, the second one is around 10% of the market share and we’re just behind that. So you know, in about a year’s time we should be number two in this market. Number one and number two have been operating for more than a 130 years with a business model that hasn’t changed much.

What is interesting is that sector is a little bit of what you had at the end of the Industrial Revolution where people were paid weekly as banks were not offering consumer lending and what you have is you have people coming to your home and selling you anything on the knock. So you had traders who would come to peoples’ homes and sell garments on a weekly collect. Some of that has led to the creation of the catalogue business in the UK, very successful, and they have translated to digital businesses so most of the old catalogue businesses in the UK are not completely digital, but the doorstep lender, two years ago, still had something close to 13,000 agents in the UK.

Peter: Wow, that’s quite amazing.

Frederic: Yes, so it is a big surprise, yes and super high maintenance.

Peter: (laughs) Yes, that’s a costly way to go and find customers, particularly when it comes to small dollar loans. So maybe…I mean you talked about migrants, you talked about people in the UK, can you maybe give us some perspective on the typical Oakam customer, tell us a little bit about them.

Frederic: So now it’s probably around two thirds/one third, so one third of our customers will be thin file so what I mean by that is people who have been in the United Kingdom for anywhere from less than a year to six months plus, to three years. It’s very difficult to apply for most financial products, even having a contract, a mobile phone contract, pay as you go, if you have less than three years of proven addresses here. The reality is that a lot of the migrants when they come here the first year because they’re not too sure how successful their migration process would be, they are sharing a flat with five others and they have no utility bill, no way to prove their address so that extends a little bit further down.

So we have people who have been in the UK five years, they still have a very thin file. For them everything is about creating a credit footprint and being able…when they feel comfortable that this has become their home, that they can move their family and access a loan for the deposit on the house, then a car loan, then for some a SME loan, then mortgages so they want to get on the bureau and they use Oakam to get access to the mainstream.

The other part is the low income UK consumer who are excluded, not because they haven’t got a bank account, but because they are permanently low income so they don’t have enough work trajectory and what they need is the flexibility of being able to borrow frequently small amounts.

So this is your typical small dollar loan that you see in the US with a big difference between a small dollar loan in the US is very oriented to single payment like payday loans where here we have a thriving microlending sector going from the not for profit all the way to the doorstep that’s listed on the stock market and very profitable.

Peter: So then these people are sort of…I think the biggest challenge you have and obviously you’ve cracked it to some extent, at least, is finding these customers because you can’t just get a file from the credit bureaus and go market to these people, so how do you find these customers?

Frederic: So we started the business by doing a lot of community marketing so if you think of our business because we are attacking a dominant player that has very long term relationships with customers, we started by territory. We looked at people that were underserved so if you take anybody who’s from a community where credit is not widely distributed, but also not widely marketed, it is actually very cheap to go on TV programs watched by a certain community.

So you have a lot of communities in the US, you have a Korean community, they have their own TV channel and they’re not getting as targeted as the mainstream so you end up advertising at a fraction of the cost that you would have to get the same eyeballs if you were doing it on a mainstream channel. So what we found is community marketing has been number one for us.

Then because distribution is very tightly linked, referrals has been a very good source of customers and also a source of good customers so referrals that has helped us in risk underwriting. So you know that it’s very difficult for you, as a Congan for example, to apply for a loan, you get a good service with Oakam so next time somebody in your family wants to apply, you recommend Oakam. So we found this is our second source.

Now for the fourth, what our competitors are doing, we’re doing mainstream TV, but we’re going very far with it. We say, if you’re dealing with Company ABC, you can save money by moving to us so we are now frontally attacking the doorstep lenders.

Peter: Got it, okay.

Frederic: So majority of our advertising is TV, community channels and mainstream channels, a little bit of social media and then historically, we have guerilla marketing, you know, sort of go back five years ago, we were advertising in community centers, we were doing training for people from certain communities, once they apply for a job, helping them to do a CV, we were very into churches, we were doing like, you know, field marketing. We stopped doing that. We have created a brand and a reputation and we don’t need to do that as much.

Peter: Right, got it. Okay, so then when these customers are actually applying for a loan is this….you mentioned smartphones, I mean, like what percentage of the customers are coming in and applying for the loan on their phone?

Frederic: This is the biggest shift we’ve seen over the last five years. Even four years ago, we had something like 40% of our applications were coming from people walking into a store on the back of a TV ad or something. Then we have something like the other 60 were coming on the web or either calling us, but it was coming from the web using a combination of desktop from an internet cafe, for example, tablets or phones. This year we have 95% of the customers are coming from mobile phones, 92% and then the rest is like mostly tablets and 4% only are walking into a store.

Peter: So how do they walk into a store, do you have physical locations around the UK?

Frederic: Yeah, we have physical locations, but we have scaled much more aggressively on the smartphone and mobile apps than we have on retail. We have used retail to gain the knowledge about underwriting and to develop our psychometric underwriting and now that we have the data on how to do that, we’re now doing everything automatically through the smartphone.

Peter: Right, right. Okay, so let’s talk about that, how you are underwriting these loans. As you’ve said yourself, there’s not a whole lot of data available on a lot of these people. What are some of the tools you’re using to kind of predict risk when you don’t have the data you want?

Frederic: If you think the traditional the credit model was…you look at somebody with collateral capital, credit capacity and character and in our situation customers don’t have collateral, they don’t have collateral capital and they don’t have credit history so we’re left with character and capacity.

So when we started it was very much about first, I’m going to establish your ability to repay so if you want our version one of Oakam which was very much time-intensive, you know, interview to understand your existing budget because people have uncertain incomes. For instance, they are an Uber driver and they don’t know how much they earn in two weeks so we try to set their capacity to service the loan and the second piece was, as I said, the character.

It was very interesting when we…we were doing mostly data analysis about our underwriters. In our first model…we thought you know what, I already know how Peter is deciding that Courtney is a good risk, but what I want to do is how do I find more Peters so we were looking at all our underwriters and we were classifying them with how well the customers they were recruiting would pay. So our first level of underwriting was how do I select people who are very good decision makers when they’re in their community, you know, facing people.

Then we started to interview the best underwriters, we said okay, you’re the experts. It’s a bit like you’re a pilot, I’m going to look at how you react in different situations so I can program the simulator. So we went to all the Peters who had very low loss rates and said, what do you do when you’re in front of a consumer and they told us they have their own heuristics.

They were saying, you know, if I have an appointment at 10:00, that says they rise early, that’s a good point, I see what brands they have and where they do their shopping, if they go to like super discount grocery stores that’s positive so they were looking at signs of being thrifty, signs of being organized, if they were coming in and had a very clear view of their budget. So in their heads they start to pick the characteristics that were very positive and so we asked them to capture this in a little text at the end of each decision.

The second approach, so Oakam version 2 is we start to do some text mining so we said, okay, we have a lot of instruction data and we’ve got to try to find what are the answers that consumers are needing to certain questions and can we put these questions online and see if we get the same final answers, then we can automate it. That was tricky because, as I mentioned earlier, we’re dealing with migrants, you also have the element of language. So we tried that and we stumbled across an approach that we’re using psychometrics through pictures.

So we approached 50 universities and we asked them to sign up with us, a three-year contract, where we do some R&D together, we’re supporting PHD students and we went about saying, these are the characteristics that we’re looking at, is there another way to find them by asking customers to play a game or to pick choices. So we put four pictures in front of people and say, when you’re stressed, what do you do, and we give a choice of like going outdoors and doing some exercise, going home and spending time with the family, going to the pub or the bar and drink and people have a short time to respond. What we found was that there was a very, very strong correlation to the choices they were making and certain characters that were linked to fraud and good payment behavior. So that’s version three of Oakam.

So we moved from getting experts to make decisions and experimenting so we were happy to take losses on people. It was very much, you’re the underwriter, you make the decision, we’re going to figure out how you pick it and see if we can automate it so we’re trying to train the machine, observing experts. Second, we use text mining and third, which is what we are at now, based on pictures, completely automated.

Peter: Right, so they’re doing this on the phone. You’ve got like a psychometric test that…

Frederic: Not on the phone, completely automated.

Peter: Right.

Frederic: The customer does it on the app or on the web.

Peter: How long does it take?

Frederic: Not very long, you know, when we started we needed 25 questions, to get a profile and now around 13/16 questions we can get a very excellent profile for what we’re looking for and because the questions are picture based the idea is the user experience is quite quick. We don’t want them to think too much that they’re trying to reverse engineer so it is very much what would you do and you have to click.

Then you get the next one and based on the first question you have, the second question might be slightly different so we have been able…but it’s like, you know, hundreds and hundreds of thousands of data points to see…first experiment how well they are paying, how much were we getting then we have a second experiment. We’ve been doing a lot of A/B tests for the last years to get where we are now and investing some R&D with academia.

Peter: Right, that’s really interesting. Are you using this really just to make a binary choice around fraud or are you using this also to put them on a risk spectrum? How are you using the results of this psychometric testing?

Frederic: We put them into a risk spectrum and it is a spectrum with two dimensions so I’ll give you a simple example. Let’s say that at the end of the questionnaire we’re comfortable with your risk profile in terms of you’re not a fraudster. Now we need to decide if we’re lending to you 10% of your monthly income or 15% of your monthly income, how much can you service. To do this, we’re looking at self-declared information. You’re saying, I think I can service the debt of $50 a month, but if we know that you have a tendency to be over enthusiastic and if you’re a risk taker, we know that you have higher chances to also do some occasional gambling.

So if you say you can service $50, we’re going to say actually to be safe $30. So we’re using psychometrics to rank people on the element of affordability, the element of what risk they will be exposed to in the future. If you have three kids, you’re a single man there will be more unexpected expenses and how you would react to this. For example, some customers we see are very resilient and they’re happy to shrink their budget when they have unexpected expenses; others will want to continue to keep up with the Joneses when there is a problem and end up in arrears. So that’s the types of things we pick up.

Peter: Right, so I’ve got to ask you about regulation now. I mean, I presume you’re regulated by the FCA, but some of the things that you’re talking about there, I’m just wondering how comfortable the regulators are around psychometric testing. So maybe you can just talk a little bit about how you’re regulated and how your relationship with the regulators is.

Frederic: So we are fully regulated by the FCA. The microlending sector is actually one that has more rules and regulations than the mainstream consumer lending on treating customers fairly so there’s some extra rules to make sure that customers are protected. So in a way that makes operating in microlending in the UK harder than operating microlending let’s say in Mexico or in India, but the favorable part of that is raising the barriers to entry in a sense.
Our experience of the regulators, I think the FCA is one of the most commercial regulators I came across in the different jurisdictions I’ve worked with and they are extremely data oriented so what we find is that they are happy to listen to an argument as long as you are fact based. So if you say that you can underwrite and have a little less fraud [inaudible] by not doing sort of an element of a fraud check but by using another method and alternative data. As long as it is evidenced by the outcome from the consumer, they are happy with it. So you have to engage and you have to demonstrate.

Occasionally, we have long letters and presentations, and things like that, but they’ve always been open to listen and very supportive. Also, they know that we are providing competition in a sector that they haven’t seen much for many, many years. The players, there hardly has been any new entrants. There are a few new entrants on the charity side, but for profits, we are the only new entrant you will find in the last 20 years.

Peter: Interesting.

Frederic: So they know that when you have one market, one of the elements is to protect the consumer, the other one is to encourage competition to make sure that the consumers are getting choices. Our main competitor has 80% share of the market and has been successful, they’re also supporting one of the agenda items of the FCA.

Peter: Right, got it. Okay, so I want to talk a little bit about loan performance. You’ve been around for more than a decade, I believe, so you’ve gone through many, many cycles of your loan book, so tell us something about loan performance and how this sort of new approach compares to what you were doing five years ago.

Frederic: Two dimensions on loan performance; one is how it has rolled over time and the relationships with the customer and the other dimension is how it varies across communities and channels. So what we have is…when we see a customer face-to-face versus when you see people online, face-to face provides a natural protection on fraud since fraudsters aren’t as comfortable sitting down and having a 20 minute conversation.

So we see that fraud attempts are significantly higher online so we needed to be more sophisticated at the start. When we moved the majority online, the fraud level went up. The first thing is there is the reason why this market hasn’t been cracked before through normal credit scores, online you have more fraud. So that’s the reason why we have to use alternative data. We’re now at a point where…if you think of ranking all our underwriters, psychometric methods is beating 80% of the underwriters we have, remember we still have 20% of human who can make better decisions than any scorecard or any psychometric we’ve been able to develop.

Peter: Interesting.

Frederic: What we found is…it’s sort of AI versus chess, or AI playing Go. There was a point when this was cracked and even the world champion and grandmaster were beaten, but today we’re still in the space where something that some of our underwriters, 20% of them, can do that enables them to grant a loan to more people than when we do it automatically online and still have a lower level of default than the machine generates.

So some of it is just the relationships they’ve built, if I meet you face-to-face and you think I was very friendly, it is no longer an impersonal loan. You feel like you borrowed money from Frederic and Frederic was there to help you at the time of distress which is very different from going online, there was nobody you talked to and you go through the process and the money went into your account. So there’s a psychological element that is very difficult to replicate online.

So we’re still trying different methods to see how we can pick up the last 20%, but the calculation of course was very simple. It’s very difficult to replicate 20% super performers so when you have to scale…last year our application volume went up by 300% we could not recruit fast enough people with that level of quality and expertise to follow the size of the business.

Peter: Right,

Frederic: So it was not a choice, we had to go more online and accept that we will face more fraud and we will not be able to beat the best performers so that’s the first thing. Online versus face-to-face. The other one is doing this model….you know, if you think of the fact that for our customers there’s a big transaction cost of actually applying. Most of our customers will tell you that the first thing they had was their fear of applying because most of the time they are declined. Once they’re declined, it makes the chance of being approved the next time even worse because you have an extra search on the bureau.

Every time you try and get declined, the next one you apply for you have a less chance to be approved. So our customers don’t want to apply to too many places at once. Having a reputation for being a business that is more flexible because we have a scorecard that takes into account other dimensions, not just what is on the credit bureau, has a benefit that people will try with you first because they have a high chance of getting through the door.

When they move with you, if they’re happy with the service there’s a high level of repeat so customers three months/six months later say, oh, I need another loan or I have another emergency and they will come. They know that now they have been good payers with us, not only the chance of being approved is significantly higher. You’re now in the 90% of being approved and also you can borrow at a cheaper rate and a higher amount. So that’s the main difference behind our business model.

We’ve created what we call the Oakam Ladder that gives you progressive pricing. Every single one of our customers start at a rate that is very similar to the competition, but after 12 months, the best payers can go as low as 75% cheaper than what the competition offers.

Peter: Interesting. Can we just touch on the rates for a second. I know that you are not competing obviously with the Zopas’ and RateSetters’ of the world, what are the rates that you charge typically?

Frederic: In the UK, we have what we call rate caps which is the maximum you can charge for a microloan is 0.8 per day and for a new customer that is a higher risk, our highest rate is 0.76 per day. After a year, the range in terms of annual rate will be between 36% to, from memory, 288% but the range is annual rates. Again, when you think of it customers in the mainstream lending would say 100%, that’s very high.

The reality for our customers is that it is a small loan, if you’re borrowing 200 pounds, the choice you have sometimes is borrowing or being faced with an insufficient charge on your bank or being disconnected from service on some other services like utilities so a lot of our customers actually make up the difference in cost, If I don’t pay my utility bill, they will charge me 30 pounds extra and if I borrow from you, you’re going to charge me 12 to 20 pounds so I’m actually saving money. So the way we look at it is the rate is in comparison with the charges they would have been charged otherwise.

Peter: Right, right. We’re almost out of time, but I’ve got a couple more questions I want to get in here. I want to talk about the funding side of your business. Obviously, you are providing capital to these customers, where are you getting your capital from? Who are the providers for you?

Frederic: We have an equity provider, Cabot Square Capital, a private equity based here in the UK, but they’re backed by (inaudible) LP, a US company so university endowments, etc. On the debt side, we are partners with Victory Park Capital, a Chicago based debt fund operating in the US together with a lot of tech lenders, fintech players, but also now more and more in Europe and emerging markets so these are the two capital providers we have.

Peter: Right, okay and so are you reporting the payments on your loans to the credit bureaus in the UK?

Frederic: Yeah, this is the most important thing we’ve done is from day one when we opened our business, we reported. Actually, we lobbied to make sure all the doorstep lenders would also report, because some of the large ones were not reporting which created a bit of a captive market. They were the only ones who knew how well people were paying and they were not sharing that information so we fully report and we use multiple bureaus.

Peter: Okay, so where are you taking this, what’s your goal here? It sounds like you’ve still got a lot runway ahead in this space, but are you looking internationally, are you looking at just focusing on the UK getting more market share there or adding new products? What does the future hold?

Frederic:  In the UK, there is a very exciting runway ahead of us because we…as I mentioned earlier, this market hasn’t seen many entrants and we’ve moved from attacking the territory. So if you think of it, when we started the business we only stayed with consumers that didn’t have another choice and over the last two years, we’ve been attacking the core of it so people who are actually borrowing from the doorstep established businesses and taking market from them, thanks to the pricing, the app, etc.

We are not a startup, but we are high growth and we do share for example, the last few months we’ve been growing month on month more than double digits. In February and March, we grew by 70% in one month. We’re really gathering a lot of market share, it’s working strongly. We have a few product expansions we are planning to launch in the UK, but a lot of our effort is to make the app go deeper in terms of what customers can do with mobile. So we’re not just about lending, we’re about nudging you know, the right financial behavior, distributing nudges of financial education, trying to get people to budget better.

So we’re trying to turn our mobile app into a platform where customers can access cheaper products, non-lending products. So we are looking at opening APIs to others, remittances, etc. to come and collaborate with us. That’s the plan for the UK and….because what we’ve been able to do is to look at how we underwrite in places where people have no footprints, we believe that the most exciting growth is in the area where credit bureaus have not established the dominant model, the FICO and Experian.

There’s a lot of places today in the world where you have large demographics, mostly underbanked with very strong smartphone penetration, where we can do what we’ve done in the UK and that’s what we are looking at now with our capital providers to see how we can replicate what we’ve done here in these other markets.

Peter: Okay, well, it’s fascinating. I wish you all the best, Frederic, and thanks for coming on the show today.

Frederic: Thank you very much for having me.

Peter: Okay, see you.

This whole idea of psychometric testing is really interesting to me, particularly when it is applied to underwriting. It means you can go into populations, you can go into markets where there is no financial data or even no data of any kind and you can still do fraud detection, you can do risk analysis, based on a simple test on a smartphone.

This will allow, I think, more and more people, the billions of people who are still underserved today…over the next ten years, I can see us bringing pretty much all of those people into sort of the mainstream financial system and that is going to be a huge opportunity. Companies like Oakam are at the cutting edge of that and there are obviously others around the world that are also working on this, but I find it personally fascinating that we can make these predictive decisions based on models built with this psychometric testing.

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

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