PODCAST TRANSCRIPTION SESSION NO. 231–ANU SHULTES

Welcome to the Lend Academy Podcast, Episode No. 231, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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

Peter Renton: Today on the show, I am delighted to welcome Anu Shultes, she is the CEO of LendUp. Now, LendUp is a company that many of our regular listeners would know, they’re a short term lender and had their former CEO, Sasha Orloff, on the show a couple of times, but I wanted to get Anu on the show. She’s been on the job about a year and we talk about the big change that LendUp made a year ago where they split off the credit card business.

We talk about the reasoning behind that, we talk about the business today, who their core customer is, how they position their business, what about the process that they do and how they help borrowers sort of move up the credit spectrum. We talk about their underwriting model in some depth and how Anu feels about the engagement with regulators. We talk about the funding and what’s next for LendUp. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast Anu!

Anu Shultes: Thank you, Peter, for having me.

Peter: Of course, my pleasure. So, I’d like to get this thing started by giving the listeners some background. You’ve had a pretty interesting career to date, so maybe you can give us some of the highlights before you got to LendUp.

Anu:  Yeah, absolutely. So, I actually have a Computer Engineering degree from India and then I came, I immigrated to the US, came here for masters degree, I have a couple of masters degree, I have a Masters in Operations Research. I started my career actually is Providian, Providian Capital One, at that time, they were called a non-bank bank.

Peter: Right.

Anu: I spent almost nine years at Providian, I was very fortunate to start my career at Providian because it was basically run by engineers, it was a company full of engineers, it was a data-driven meritocracy and I really kind of cut my teeth on just understanding lending and kind of using the background to really ….how do you use data to make decisions that ultimately benefit the customer and the company, that’s where I learned. I always talk about this because people are always surprised. My very first project at Providian was to build an internal pre-screened score, so I built it from basically internal FICO scores, if you will. So, I actually come from a very technical background, but I deliberately managed my career as a combination of me making intensely managing my career as well as happenstance.

I’ve actually started in analytics and, you know, on the credit management side, moved into marketing and operations for Providian, so by the time I left nine years later, I was VP in charge of running operations for the US prime business. I know they were known more for their ….you know, more of a sub-prime credit, but their bread and butter was actually the super prime business.

Peter: Interesting.

Anu: Yeah. So, I left Providian on my own because my husband had a job in the East Coast. I moved and went to Ohio, got an MBA in Corporate Finance and ended up managing products for a super regional bank called National City, it doesn’t exist anymore, it’s now part of PNC. I managed the home equity line of credit portfolio.

I kind of continued to evolve my career, you know, my goal was to ultimately be a GM and one day be CEO, so I actively kind of said, okay, what are the areas that I need to, in my own way, master and so that’s kind of what I’ve done over the last 25 years. I would say the first half of my career was all about lending, credit cards, super prime, home equity line of credit, you know, understanding both the credit side as well as the profitability side of lending.

The second half of my career, starting in 2007, has been all about underserved. I had a little detour when I worked at Home Shopping Network in Florida, but came back to California in 2007, actually joined this company called AccountNow that did prepaid cards for the underserved. It was a small company, but we were the third leading online prepaid company behind Green Dot in that span.

The industry itself was very nascent, I think Green Dot was only three years old and so it was a great opportunity for me to really jump in and make some substantial progress on how do we pin this customer, how do we provide value to this customer, but in that process, I actually ended up spending time with customers in person and it really hit me hard on….so many people even if they have a decent income, $40,000/$50,000, struggle on a day to day basis even with just access to financial tools. So, it really changed my opinion, my personal view on how I want to spend my career and what are the things I want to do.

So, it was a great opportunity because it was founded by ex-Providian folks and I didn’t have to prove myself when I came in the door, but also gave me the freedom to kind of explore….how do you delineate this customer, how do you provide products for them that make them feel dignified, give them access that we all take for granted and spent most of my time, if not all, on building products for the underserved and then really focused on financial inclusion.

Peter: Okay. So, what specifically attracted you to LendUp? It seems that you’ve been there for two and a half years now, what was the thing that first attracted you?

Anu: Yeah. So, I had, you know, worked for a financial services business for another company called Black Hawk and then I kind of stepped away from it because they didn’t want to focus on financial inclusion and I was just doing a startup with someone I knew on gifting. I just kind of fell into it, but my heart had been in financial inclusion.

So, when I got a call from LendUp, you know, it was through a recruiter, he didn’t even know what position it was for, he just said, hey, are you interested in LendUp and I kind of said yes, even before (laughs)…so, I came in and talked to Sasha and his COO and they were saying, hey, we have this great business, we have a credit card business, but we really need somebody. We’re very focused on credit cards and we need somebody to come in and, you know, really take on the loans business. It has been our bread and butter, but we need somebody who really understands fundamentals of running a business to come and manage it.

For me, it was sort of a no brainer, right, because I’ve been…for me mission is ….the mission of what brought me here and I 100% believe that the loans business, in general, within LendUp was delivering on that mission and I did not, you know, hesitate at all to give up my COO at the company to come in and be a GM and focus on the product that I felt like truly makes a difference.

Peter: Sure, and obviously, regular listeners know Sasha, Sasha Orloff, he’s been on the show a couple of times actually, over the years. So, I want to get back to the point where….this was about a year ago now when you became CEO and LendUp split in two and sold off the credit card business. Can you just, maybe give the thought process behind the splitting off of the businesses in two and then why focus just on the loans.

Anu: You know, we obviously have loans that has been around longer than cards at LendUp and Sasha and his stepbrother, Jacob, created loans first and, you know, we had products in the market that truly delivers on the mission and then, of course, they started the card business. If you think about it fundamentally, they are two different businesses, right. So, small dollar loans is a very capital efficient business, it’s definitely high interest rates, so investors kind of look at it in a certain way.

Credit cards, on the other hand, is a very capital-intensive business and the investors that are attracted to it are different. The LendUp credit cards was sub 36% interest rate, but very, very capital intensive, so when I think about, you know, sub-model, we basically had a bi-model company. We had two businesses with the same mission, but going about it entirely differently. So, I think the outcome of having two companies focused on the same mission, but both basically attracting a different group of investors is probably the best outcome we could have had. The reality would be the one company and be the larger company, I’m sure Sasha would say that was his vision.

His vision was to create a lot of, you know, a lot of products and an equal system of products. The reality is the loans and cards are fundamentally different products and attractive to investors.

Peter: Right, yeah, that makes sense, okay. So then, let’s fast forward to today, when you’re just telling people who haven’t heard of LendUp before, how do you describe LendUp today?

Anu: So, I describe LendUp as a mission-driven company focused on helping customers get on a path to better financial health. We are focused primarily on underserved customers, we are here to help them with the income volatility that they face every month, help educate them on how to get on a better path and ultimately, help them improve their, you know, credit score.

But, our mission is really to help them get on a path to better financial health and that’s pretty much what we do, everything related. Every decision I make and almost every person we hire into the company, we always revolve around the mission on is this the right thing for this consumer?

Peter: Sure. So, it’s been a year since you took over as CEO and you came in, you’ve been with the company a little bit by that stage, so I’m interested to…maybe you could tell the listeners what changes you’ve made over the past 12 months at LendUp.

Anu: Yeah, absolutely. So, you know, obviously I had an interesting part getting here. I came in as GM heads down and I focused on how to make the loans business, you know, profitable, how do I extend on the successes that Sasha and Jake had created, how do I get more value out of the business.

So, when I took over as CEO, I was not expecting that to happen when I came to LendUp that, you know, it was a long term goal of being a CEO, that’s not something that I had thought was going to happen in the near future. So, when I took over, I kind of went back to the basics on what’s important to the LendUp customer and what’s important to the LendUp employee, including myself. So, we kind of focused on community culture and then really forging the path for the future of LendUp.

What I mean by that is first thing I did, I know it was cost driven, but also thought through….we actually moved from San Francisco to Oakland and it may seem like is it really that big a change? It is, especially for our core employees, who most of them lived in San Francisco, it was a big change. You would think it’s not that big a change because it’s only like 10 miles east of San Francisco, but it brings us closer to some of our early stage investors, our core customers, as in, you know, Oakland has more of our customers than San Francisco. But also, I felt that picking a community where we can really start spending time with community leaders and make a difference beyond just our products was important to me.

But, to be clear, it was actually cost-driven, it was a decision driven by cost. Second is culture, right. For me, personally, it’s a focus on people so that includes our customers and as well as our employees so my focus on people who come here and join the company, especially in Silicon Valley, to seclude people in a very competitive job market to get people to come in to a mission-driven company takes, you know, takes a lot of…they take a leap of faith on the mission is more important to them than perhaps being in a fast growth unicorn ready company.

And so we focused on how do we create products that fundamentally help us deliver on the mission, both to our current customers or also broadly. Today, I’m not so sure where…we are, obviously, state by state business and we are only in a minority of states in the US. So, I’m always thinking about how do I extend my reach in the US, but also within the states we’re in, how do I expand my reach with the customers and provide them just more than one thing, right.

What we do well, what we already do well and, obviously you’re very familiar with the LendUp products, is we focus on giving them a small dollar loan, but it’s backed by financial education, we kind of hold their hand and get them up our LendUp ladder with higher amounts and lower rates ultimately culminating in the installment loan that can be credit supporting and help them improve their credit score.

But, I really want to also….I’ve been thinking about what does the future look like, that’s the obvious thought and this brings us very often to what is the path for the future of LendUp. We know, you know, pay day lending, but if you want to call us that, or not, as far as regulators are considered, if you work as a pay day lender, it is not…you know, one of our investors and board director would say it’s not a standard type of term, right, pay day lending.

Peter: Right.

Anu: So, definitely the hesitation about, hey, are you guys….you know, are you guys doing right by the customer, are you predatory. And then you have competitors and I know you’ve had many of them on your podcast like dave.com where they’re offering over draft, but it is in the end of the day that is selling the same name. So, thinking through, how do we extend our set of products, also look at various competition as…..it’s not coming from other companies like us, it’s coming from company that are approaching it differently, whether it’s Dave.com, or Earnin, or Even…right, more of a big advance to employer. So, looking at all that, what is the right set of products that we should be focused on.

So, 2019 has been about, you know, kind of resetting, right, because we went from two businesses to one, we focused on a mission and the culture and getting the right people on the door and also setting us up for the future. So, what does 2020 and beyond look like in terms of the type of products we should be investing in.

Peter: Right. So, does that mean that …..you talked about some of those companies that offer, you know, like an earned wage access-type product? Does that mean there’s a possibility down the road for LendUp?

Anu: It could be the art…..you know, the reason…like I don’t have a firm answer for you, but what I can tell is that being in a state by state licensing model is….on one hand, it’s, you know, a competitive advantage, or it’s like a barrier to entry for new companies who want to do that; on the other hand, it’s limiting in that, you know, getting into different states with licenses is not only is a laborious process, but you start to look at the, you know….you have to look at diminishing return if you get into the smaller states, or difference on the regulation that differs state by state.

And then I’m also looking at…you have all these competitors coming in, kind of from a different angle, and you have the third thing in the marketplace where I think a lot of consumers are getting very comfortable with the subscription model, right. People seem to be wanting Spotify, or for….you know, even for financial products, or non-financial products. The concept of paying $5 to 10 for a service every month, people seem to be okay with it, right. So, I definitely see like it’s something that I cannot ignore when I’m looking at a set or products.

But, at the same time, I also feel like what we do today, Peter, no one asked me to do, like no one is giving a super underserved customer the services. I know you’ll fully get into it later, but our customers have a 550 VantageScore, right. They don’t really have that many options and a lot of them don’t have money in savings. I know most Americans don’t have $400 in savings, but our customers, 85% of them report that they have income volatility, so we are like the stopgap. right.

Peter: Right.

Anu: So, no one else is doing a $300 loan, our competitors are doing $500 or more, or $1,500, right, and overdraft, is usually around $100. So, I m very aware of the fact that we can look at all these other models and they might be more attractive, or they seem like there’s a lot of traction. The regulatory issues are still unclear where that might go, so the kind of products we have no one else is doing.

So, what I’m thinking through is…is there a way I can extend a set of products we have to offer to the space, does that mean I have to go to a subscription model that would…..would that be easier, right, and so what does that mean for the underwriting because most over drafts when we do $100 is a lot easier to take that risk than to say $300. So, that’s all that I would say, it’s all in the, you know, all of our thought process. Myself and my executive team are very deep in the thought process on how do we extend our products to the maximum number of customers possible?

Peter: Right, right. So, maybe we could just take a step back and talk about the experience of the borrowers that are coming to LendUp. Can you just sort of describe the process… particularly, I’m talking about new customers that you don’t know, what’s the process like when they take out a loan?

Anu: So, you know, they are 100% digital, so customers find us online, either through our online marketing, or though our affiliates, and they can actually apply for …it may take a few minutes, they can apply for the loan, they can select the terms they want to pay. The entry level products is up to 30, or 35-day loan, it’s a single payment. It’s, 100% online is, you know, instant decisioning. We have a proprietary underwriting models with alternative data sources and they know immediately what they qualify for and how quickly they can get it.

Peter: Okay, it sounds like….I’m on the website right now and the range I see is $100 to $255 so that’s the typical range that everyone gets?

Anu: Yeah, $255 is the California limit, it’s slightly different by state. You know, the system is automatically based on what state you are in. If you are [inaudible] in the state, they’ll allow you the maximum, they will give you a range, the maximum set by the state and then you can set the amount and the actual term lendee will pay back.

Peter: Right, right. So, then what data are you using for these people to underwrite? You know, they’re coming to you digitally, these are sub prime borrowers with low credit scores, how do you decide whether or not to extend the loan?

Anu: So, we have actually over the last seven years, since LendUp was created, honed in on our core competencies and our secret sauce is the underwriting model so this ultimate credit data scores, you know, our ultimate credit bureau data and build our own underwriting model that provides instant decisioning. So, you know, most companies… there is FactorTrust, Clarity and, of course, all of these have been scooped up by the three major credit bureaus, so now, they’re already part of the larger credit bureaus, but our bread and butter would be the ultimate data.

So, the inquiry data, there’s the ability to pay, but, as you can imagine, our customers represent a very small band of FICO. FICO, by itself, is not predictive in helping us underwrite, you know, decide who will pay us back and who will not.

Peter: Right, right. So then, when you talk about alternative data, can you give us some examples of the different types of data that you use?

Anu: So, you know, I think the inquiries for…let’s say, for example, Factor Trust it’s now owned by Transunion, they track inquiry data not just for mainstream because our customers basically don’t have credit cards, 98% of our customers do not have a credit card, they track, for example, inquiries for other products. It could be payday loans, you know, it could be rent payments, so it’s basically……you know, this industry has evolved and has all these different data sources outside of what might be the mainstream FICO that’s set into our model.

Peter: Right, okay. So then, what are you doing…I mean, how do people move up the LendUp ladder? Obviously, they pay on time, I mean, someone who comes in and takes out a $250 loan and pays it off on time and they come back to you a month later, or two months later, are they going to get a better deal? Just explain the process of moving up the ladder.

Anu: Yeah, our core premise is that, you know, we are here to help the customer, so we kind of encourage them to take the courses on line that teach more how to manage their credit. The core premise is you take a loan from us, you pay it back. If you’re not able to pay it back, all you have to do is call us and we will help you with adjusting your payment date and we don’t charge additional fees for that. And then, once you’ve fully paid off the first one, you can take another loan.

We differentiate ourselves from a typical pay day lender in that there’s no rollover, so if you’re not able to pay back, we’ll work with you until you can pay us back and work with you to pay us back, but until you pay us back, you cannot apply for another loan. On the flip side, once you have paid us back, it’s a very quick…..you know, you come back and you apply again so customers actually love it. We have…. 95% of our customers come back.

We have a very strong brand equity with our customers because they know we are a trusted source, that we look out for them. As they stay with us and we gather… their behavior with our account actually gets fed back into the model and that drives our pricing decisions. And so, as they stay with us longer, they can qualify for slightly larger amounts and slightly lower rates. It’s actually driven by the customer so there’s no timeline in which you automatically qualify. It kind of depends on how many loans you’ve taken with us, how have you behaved with us, but, typically, once you qualify with us, the chances that you will qualify again are very high.

Peter: And so, just to be clear then, if you keep paying off on time, do you eventually qualify for an installment loan rather than a single payment loan?

Anu: That’s right. So, it’s typically…I would say it takes over 12 months, but you can eventually qualify for an installment loan, and even that, you start out smaller. You might start out with a $500 loan which is two, or three payments before we ultimately…..our maximum loan is a $1,000 loan and our maximum term is 12 months.

And then, at the top of the ladder…..you know, we’re also trying to think past the ladder concept, but the goal is really to progress the customer so whether they call it a ladder, not, we’re progressing them on their credit journey, if you will. They have a choice there to take a credit reporting loan, or not because we want to make sure the customer is ready and once they pick an installment loan and they pick the credit supporting option, we’re obliged to report their behavior to the credit bureaus. So, we want to make sure that they are consciously making that choice to pick that loan,

Peter: Right, right, okay, that makes sense. So, you’ve touched on this, but I want to just get your feedback on the regulatory activity that’s been happening. The small dollar loan space has been in the news, in the state of California quite a lot. There’s been talk, they continuously talk in Washington about it, so how are you engaging with the regulators?

Anu: You know, I would say that …on one hand, I want to just start by saying, I’m very pro-regulation because, fundamentally, I’m pro-consumers. I feel like regulation is there for a reason, at the same time, I’m also focused on the regulatory innovation. So to that, we actually are very actively engaged with both state and federal regulators.

On the state side, I know there’s been a lot of activity in California, recently in the December timeframe. A lot of that actually…..because we are so focused on the small dollar like $300 to 1,000, we’re not as impacted by a lot of the changes because it’s a small dollar loan…..have always been heavily regulated by California like they have very strict terms on the maximum we can charge for an installment loan based on the term and so that’s already been in place. The newer regulations actually impact our competitors who’ve been focused on the larger amounts like $2,500 and more. And so, that’s going to also …..you know, one of the things I wanted to call out is that when I think about ….you asked me earlier, how do you represent LendUp.

One of the things that stands out to me is that there are very few companies out there that are in the same space are offering super small dollar loans that we are doing. So, we are already in a super regulated space so this is something that we have gotten really good at, but I have a very strong senior executive team….you know, my head of compliance is a former regulator with 30 years experience in the space and my chief legal officer is also a very seasoned legal officer so we actively engaged both in DC as well as locally.

Peter: Okay. And then, I’m just curious about what metrics can you share. Obviously, you’ve got the repayment rate of the loans as a key metric, what are the metrics that you look at to determine success at LendUp?

Anu: The for profit company, I’m going to have to focus on at a high level, right, profit & loss, net income, but from a customer-centric perspective, we do look at how many customers are we serving, what is the retention rate month over month, or not even month over month, how many times……if a customer walks in the door and qualifies for the first loan, how long do they stay with us, their lifetime with us we look at, are we helping them, are we actually delivering our mission on a positive, better financial health, we look at, are we improving their credit scores?

We find that, you know, over two years, 62% of our customers do get some improvement, I should qualify, 62% of the customers are qualified for our larger loans actually, either credit scores go by 50 points or more. So, we call them the social impact metrics, we have our business metrics, we have I would say like the P&L metrics, we have the business healthy metrics in terms of customer retention, what is the cost to acquire a customer thing, but there’s also a set of social impact metrics we track. We can really say, you know, results show that we are doing our job we set out to do.

Peter: Right, right. Okay, we’re almost out of time, but just a couple more questions before I let you go. Let’s talk briefly about the funding of these loans. Obviously, these are short term loans and they’re paid off in full, not as capital intensive as you mentioned earlier as a credit card, but still requires significant capital to run your business, can you just tell the listeners how you’re funding the loans today?

Anu: Yeah. So, our funding is primarily debt with a little bit of equity, so we do have a line of credit to fund the loans and as part of that, we’re required to put up a small percentage equity. You’re actually right, so very capital efficient business with a very visibly sized line of credit. For instance, transactions, we have given out more than $2 Billion in loans. So small dollar, short terms loans, we can do a lot with a little bit of capital.

Peter: Right, right.

Anu: We do carry them in our balance sheet.

Peter: Sure. And then, we’re here recording this in early January, what are your goals for LendUp in 2020?

Anu: So, you know, one of the things I want to…I think I covered a little bit of this before. I think 2019 was really kind of getting the right team in place, you know, I’m very proud of the senior executive team that we’ve been able to put together. It’s a very diverse and deeply experienced team, so, for me, 2020 is about evolving LendUp into the next decade. So, how do we extend on our successes, how do we take them, you know, deep passion that I have and my team to really help the customer and extend the product set beyond what we are doing.

And so, the focus definitely is how can we become a national, how can we be available nationally and what are the set of products that we should be looking at to fundamentally help this customer. Financial health by itself is top of mind for us, but it’s so complex. I think it takes more than…it takes a village, right, to help this customer. And so, I’m very aware that this is not a journey that LendUp can do alone, so we definitely are looking at what partnerships will help us get better. We already work closely with Financial Health Network and the Aspen Institute.

We have a partnership with Earn to provide savings products, but, definitely top of mind is if you want to deliver on our mission, it’s going to take more than just the set of products we have. We have to navigate the regulatory environment as they shift for the new entrants as well, and then to expand the reach, we have to look at partnerships that will take us into more than where we are.

Peter: Okay, that’s fascinating and we wish you all the best, Anu, and thank you very much for coming on the show today.

Anu: Thank you so much, it’s been a pleasure to talk to you and I, definitely, am a big fan of your podcast, but also the LendIt Conference. So, I’m really excited to have this conversation with you.

Peter: Okay, fantastic. We’ll hopefully see you there and thanks again, Anu. See you.

Anu: Thank you.

Peter: You know, being in the small dollar loan space and operating in an honorable way, in a way that has the customers’ best interest at heart….it’s not an easy place, it’s not an easy business to execute and it’s also not easy to have your customers be delighted. You go on to LendUp’s home page, you see that their Trust Pilot score is 4.8 out of 5 stars and that’s with 2,300 reviews. That’s very, very difficult to game the system with that sort of thing.

Clearly, their customers are delighted with them and LendUp are helping them improve their financial wellbeing. I think that, you know, rather than talk about blunt instruments like interest rate caps, or other regulatory methods that are designed to help the underserved, we really should be looking at outcomes. That’s what a Trust Pilot score like that tells me is that the outcomes here are mostly positive. I applaud Anu and the team at LendUp for continuing to blaze a trail there.

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

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

PODCAST TRANSCRIPTION SESSION NO. 230–MARK RUDDOCK

Welcome to the Lend Academy Podcast, Episode No. 230, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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

Peter Renton: Today on the show, I am delighted to welcome Mark Ruddock, he is the CEO of BFS Capital. Now, BFS Capital has actually been around for quite sometime, since the early 2000s, they’re a small business lender. Mark has been at the helm just for over a year. So, I wanted to get him on to talk about the changes that he’s made, he’s certainly down a lot of changes and we get into those in some depth.

We talk about their approach to underwriting, their partnerships with brokers, we talk about the impact…you know, the PayPals, Amazons and Squares of the world. We talk about how they want to approach new audiences and just his views on the future of small business lending. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Mark!

Mark Ruddock: It’s great to be here.

Peter: Okay. So, I’d like to get this thing started by giving the listeners some background about yourself. You’ve had an interesting career, a global career, it seems, so why don’t you give the listeners some of the highlights of what you’ve done to date?

Mark: Sure. I guess you’d call me a geek by training so I have a Comp-Sci degree and that’s really the landscape where I’ve done an awful lot of work across my career, even though it really has been more on leadership, I think, than in the trenches of tech. The experience really has spanned both range of different sectors and also very different company sizes.

So, from a sectoral perspective, I’ve worked in enterprise software largely with a financial services focus. I’ve worked in mobile applications and most recently, spent the last seven years really focusing on online consumer financial services and across that career have worked in everything from, you know, 5-person startups, to companies of half a billion dollars of revenue with 3,500 employees spanning 17 countries.

So, from a leadership perspective, it’s been a really interesting career, actually. I’ve had the pleasure of working with my teams in multiple countries across multiple product lines and I’ve been involved in sectors that are undergoing pretty interesting transformations and that’s really what’s drawn me to a lot of these opportunities.

Peter: And you’re originally from Canada, is that right?

Mark: I’m actually not. I am Jamaican by birth.

Peter: (laughs) I wouldn’t have guessed that.

Mark: No, I’m actually third generation Jamaican by birth, if you can believe it, grew up a little bit in Jamaica, then went to live in England, then went to live to Canada. I guess it was sort of early middle school kind of area and I’ve really spent though the bulk of my time in Canada.

The last couple of years, my wife and I, were actually living in Berlin which was a fascinating experience in it’s own right, a tremendous startup town and a very vibrant and interesting city. So, it’s been a kind of fascinating way to grow up in the sense that I’ve been exposed to a number of different kinds of cultures and a number of different sorts of places, a really very rich upbringing.

Peter: Right, right, okay. So then, what was it that attracted you to BFS Capital?

Mark: Maybe I can answer that question by sort of starting at a bit of a macro level. So, having spent the last seven years in online consumer financial services, I was really living a pretty fundamental transformation of what’s happening in that sector as a combination of, you know, the kind of millennial effect, if you want to call it, was driving a demand for new kinds of products and user experience and so on. But, the rise of alternate data and data science was transforming underwriting to a degree to which, you know, we were able to offer automated and customized solutions.

The customers were really interesting and really exciting and this kind of switched to an in-hand mobile first experience. All of these were really, I think, shaping the foundations of what was, historically, a pretty static kind of consumer financial services space. And the more I thought about it as I was sort of coming to the end of the commitment I had made for finance, in particular, the more I began to wonder to what extent these changes were going to show up in the small business financial services area. And I developed a thesis that many of the sort of the shifts that we had seen in the consumer financial area were going to show up in business banking in very many respects.

The question, therefore, became what is an interesting point of inflection for SME financial services and, if so, were they interesting potential companies around which we could kind of re-imagine the space. And it was pure serendipity, actually, that I came across BFS and as I got to know the venture capitalists behind the firm and some of the founding team here, I guess those two perspectives came together and it really appeared that this company was very much a diamond in the rough in the sense that it had this tremendous experience in understanding the needs of small businesses, but it was still somewhat of a mechanical turf of a business.

But, if you sort of looked at the aspirations of the team here and of the private equity folks behind the company, you got the sense that they were really hungry to make this change happen, so it became a very interesting vehicle within which to do that.

I liked these particular moments in time because when you take a look at a shift, let’s say in the combination of consumer, or customer demand, technology enablement, all of these things, they fundamentally shake up sectors and they challenge the incumbents and they open up new wide space for challenges and they operate in a way that can shift enterprise value quite rapidly to those players who can kind of seize the opportunity. I think that to me is a stage in my career was really what excited me about coming here.

Peter: Right.

Mark: You know, and as a CEO, right, you always enter these things with a very hopeful and ambitious focus and once you get on the ground, you try to figure out what have I actually got. Actually, it’s been a fascinating year here as a result of that.

Peter: Okay. So, I think small business lending has had an interesting inflection point. There has been so much change in the last couple of years with new players which we’ll talk about in a little bit. But, maybe before that, for those who don’t know, why don’t you just describe the BFS Capital business, what sort of products you offer, the size of the company, that sort of thing.

Mark: Yeah, so BFS is focused on small business working capital primarily. So, we provide loans from about $5,000 to about $500,000 spanning six to 18 months. It’s primarily working capital term loans so we do significantly less than 20% now MCAs. The business originates, on average, about $300 Million a year in loans, it’s approaching $100 Million in revenue and it is profitable. So, it’s a very interesting asset in it’s own right.

It operates today across Canada, the US and the UK. I would say that the US, obviously, is the primary focus of the business and the UK and Canada are much more nascent businesses for us. I would call them “hobbies” potentially at this stage, but obviously the intent is to much more aggressively grow our international footprint, but starting with those two countries, in particular.

Peter: Okay. So then, you took on the job, it was I think November 2018, I believe, and as we’re recording this just before Christmas, you’re over a year on the job. Maybe just take us through, what are some of the changes you’ve made in your first year as CEO?

Mark: Yeah. So, I think, the primary focus when I got here was to get some clarity around what our strategy was going to be and then what it was we needed to do to effectively execute on that strategy. What I found was really a company that had deep IT in terms of understanding the customer base, but nominal IT, in terms of any technology underpinning.

So, we very quickly set about a twin track strategy here at BFS, but the first track was really getting the core business into a place where being technology-enabled, or more technology-enabled. It would achieve some sort of competitive advantage and that was not a trivial undertaking.

We began in the sort of early part of the spring to identify a new technology stack that included a new loan management system, a new risk engine that could allow us to scale to, you know, a deeper, broader pool of data and to more modern underwriting techniques and an underlying kind of CRM around which we could build a customer life cycle holistically of the customer.

And we chose Provenir as the risk engine which is a fairly well known platform now, I think it’s being used by a number of pretty interesting organizations around the world. We chose Salesforce as our underlying CRM, we chose a young company actually out of New York called LendingFront which has an interesting heritage in the sense that it was founded by some of the early team from OnDeck.

We felt that given what we were trying to achieve here that was the right kind of platform mix. So, track number one really became…beginning, of course, with kind of transforming this business from a little bit of a mechanical turf really to a digital and highly scalable lender. As part of that, we have obviously been beefing up our technology core team, we hired a great new CTO earlier this year and we have begun to test the new platform now.

In fact by the next, I would say, four weeks, or so, all of our North American loans will be moving to the new platform. Not only does it allow us to automate more of the process here and to underwrite much more quickly and much earlier in the process than historically that we’ve been able to ….but, it gives us the capability to transform the relationship we have with our partners so that from being really a bit of more asynchronous human-to-human type of relationship, it’s a much more API-driven relationship going forward. So, that was all track one and I think to me that in effect just table stakes.

Track Two was about going back to the place we started our conversation which is what does this point of inflection mean for SME financial services and how could BFS re-imagine part of that future and what role could we play in being a part of that future. And so we began about five/six months ago to look at if we were going to start from scratch, what might the next generation of SME financial products look like and could we actually credibly build some of them. That’s the process that’s now well underway.

In fact, as I think as you may have noticed, we have opened a new data science and tech hub in Toronto where we’re going to be building that new generation and we have not announced yet, but we have opened the second hub now in Omaha where a lot of the core technology transformation will be done. So, that’s really been a huge part of my focus over the last year. Around that, you can imagine really what the rest was.

The rest was trying to get an assessment of what resources we had, in terms of, you know, our management team, our mid-level management, our skill set and so on and identify places where we’re going to transform from being a much more human-powered organization to being a much more digital organization, where were the gaps and, you know, how were we going to kind of change them over.

And so, the other thing, I think, that we, as team, have been working on is re-skilling and up-skilling the teams. The management team level, you probably noticed, is that we’ve hired a new COO. He and I worked together before doing some high scale online algorithmic lending. And, there will be another announcement coming out in the early part of January, not a name I can mention, but we found a wonderful new chief marketing office and our current chief marketing officer is going to transition over to become our Chief People Officer. I asked her to make that change because she is extraordinarily skilled in that area and as you can imagine, as we transform this company, it has enormous impact on the people here.

Peter: Sure.

Mark: But, our employer brand and everything we’re doing about attracting the best and the brightest in the world is going to have to be driven by someone who’s sole purpose is to do that and Sherry is really just naturally talented in that area, so, a lot of stuff going on.

I think the last thing that we’ve done as we sort of clarified our strategy around where we go over the long term….as I went back and asked two questions. One was, you know, the core business today…. is very much an indirect merchant business. We go to, you know, business with a number of partners, mostly brokers, but that landscape is evolving obviously and it’s getting broader and more interesting.

And so, you know, I asked the question, how well are we doing in this space today and it turns out that we weren’t doing particularly well. I think our lack of automation, at times, had caused us to often get a little breathy about sending out offers before they were fully underwritten because we felt the pressure to do so and as a result…..you know, we occasionally left our partners at the altar, right, where when we finally underwrote the deal, we realized that we couldn’t do the deal and that leads to a very bad customer experience.

So, over the time we lasted awhile, we’ve been turning that around completely and winning back the trust of that particular community and we’re giving them some amazing tools now with the new platform that give them complete transparency. They can see all of their…..the life cycle of their leads, from leads to loans so even lifetime customer value.

The second thing was really trying to figure out where the arch of this business was going and  one of the things that I took out of the customer kind of consumer space that I’ve been working over that lasted awhile is the importance of kind of understanding the regulatory arc and understanding where it was that a truly sustainable business could exist.

As I took a look at the small business lending sector, I looked at kind of the potential regulatory arc that we were going to be facing, not only in the United States, but, frankly, around the world. I think we began to realize that what we needed to do was an organization was move up the credit curb a little bit and look at being able to thrive in a world of the lower APR types of products.

So, as a result of that, we really have began to tighten our lending criteria and also broaden our products offering in a way that makes it inherent much more appealing to those customers with more optionality, those customers who have choice, and a lot of what you started to see coming out of the new brand. You know, the waiving of upfront fees is really just the beginning of that story, the beginning of trying to create a compelling and differentiated brand in the sector backed up by tighter underwriting criteria at the backend. So, it’s been literally 12-1/2 months at this stage, maybe almost 13, and it has been a full year, (Peter laughs) pretty exciting.

Peter: Right, okay. So, there’s quite a bit to unpack there, but I just…maybe we’ll start with underwriting, you mentioned that several times. You talked about how you’re bringing more automation, more of an API-based approach, rather than a human-to-human approach, tell us a little bit about that process…like how automated is it today, what data sources are you pulling from these, what new things you’ve implemented there.

Mark: Yeah, it’s a good question. So, you know, the frame of reference I have is the world I just came out of. So, the company I was running prior to arriving at BFS, we were making about 22,500 lending decisions a days and we were issuing about 16,500 loans today and not a single human being touched that entire process, it was completely algorithmic. So, I sort of set that as the North Star benchmark, right.

Now, small business underwriting is far more complicated, complicated because there is a discontinuity of the underlying data that you bury off and need to take a look at. Some data sources that we will need to adjudicate certain kinds of loan are simply not available digitally by API today. So, there’s always going to be a need for a subset of your underwriting to be a human-powered kind of algorithm, right.

The question, though, is how do you marry the technology in the humans in a way that creates the most efficient process you can and how do you build the underlying decisioning technology stock so that as new data sources become available you can leverage them very quickly and automate more and more of the process.

And so, I think, number one is we see this very much as a hybrid where in some cases the machine can make all of the decision, but in most cases, the machine can make most of the decision and we might need a secondary check, you know, from a human underwriter who is able to kind of look for the nuance, right.

The second thing is that, you know, we need to evolve our thinking and our capability by continuously challenging ourselves to look at new data sources and then to back off to see if they are predictive. I think so much of being able to unlock a new range of financial products and services for the digitally native generation is going to be about a frictionless experience, and to some extent about immediacy. I think that’s the big challenge for people in the small business lending space.

These are very difficult companies to adjudicate sometimes, but yet the long arc has to be this kind of North Star, right, full automation eventually. So, what data sources do we look at? Well, we look at a combination of, both, the kind of credit information and other things we can acquire on the owners and the officers of the business, we look at the business itself, all of it’s kind of credit history. Increasingly, we look, obviously, at bank transactional data, but going forward, I think our philosophy is to look as broadly as we can at complimentary data that might come from sources as diverse as Plaid accounting systems, all the way through to social sentiment, right.

If you are trying to figure out if you should lend to a B2C company, a restaurant for example, it’s really helpful to understand the arch of, you know, what is the kind of customer feedback been over time, is it getting better, is it getting worse, are more customers, you know, writing reviews versus less. We think that there’s a really interesting play in looking more broadly than kind of historical credit measures.

So, part of what our team in Toronto was doing now is it’s building the kinds of algorithms to go and get that data back test it against, you know, the world that we’ve seen up to date because we have significant many, many years of outcomes, right, and try to understand the predictability of that information. So, I would say it’s a never-ending journey really for our risk team and I don’t think it is going to end anytime soon.

Peter: Right. (laughs) Yes, that’s for sure.

Mark: You can never be good enough at underwriting, right?

Peter: No, there’s always room for improvement, it’ll never end, the room for improvement, that is. So, you talked about….you’re primarily working with brokers for customer acquisition, you did touch on this, about improving the experience for them, so I guess maybe one of the big challenges, I think, for any lender, whether small business, consumer, what have you, is the cost of acquisition. You’re putting all this effort in, how are you kind of controlling that particular metric?

Mark: Yeah, it’s a good question. Maybe, I should step back and say we actually look at two fundamental metrics in concert. We certainly look at the cost of acquisition, but we look at it in a context of customer left hand value.

Peter: Sure.

Mark: And you can’t really just look at one without the other. So, on the cost of acquisition side, I think this is a really interesting topic, actually. So, today, we are a little fooled because, you know, our brokerage model, that drives much of this industry, is a model where the commissions are, in effect, paid by the customer, the end customer. And so, you don’t really ever get hit with cost of acquisition, you don’t think of it that often, or, historically, haven’t thought of it that often, obviously, as a company.

Now, as you do more direct customer acquisition, as you do more digital acquisition, as you go out and try to convert customers, you really now have to start to look not only at performance-based marketing, which can have very high costs, but broad-based multi-channel marketing which can also have cost. I believe, by the way, that if you are going to, over time, attract the truly discerning customers, you need to also have a brand and that requires that you must spend on brand and on brand awareness.

All of that has to be overall cost of acquisition and the secret really is to grind that down over time with both a high degree of excellence in your kind of performance marketing area, but also looking at more serendipity in terms of being able to raise you profile through third party content, through PR amplification and so on. So, one of the reasons why we are spending so much time and focus on really re-imagining our marketing organization under the leadership of a new CMO is that we believe that’s going to be pretty important going forward.

And there’s a third pillar here which I find particularly fascinating and I think about this a lot because one of the ways in which we built Viigo very, very successfully….Viigo was a mobile software company that was my second real kind of area focused after enterprise software, Viigo was very quickly known as one of the most highly downloaded Blackberry apps of all time before it was acquired by Blackberry in about 2010/2011. Viigo spent almost nothing on marketing, but it was able to go to market through a wonderful kind of cross section of rationally aligned partners who were as eager to tell the Viigo story as we were.

We didn’t have to pay for any of that and so the question we’ve been asking ourselves a lot is how do we unlock access to dump trucks to customers, as I like to call them, without actually having to buy them one dump truck at a time. In other words, can we find partnerships where there is this rational sort of self interest alignment, where as we are successful, they are successful and vice versa and, ultimately, therefore, bring down the overall cost of acquisition. I think that’s where we’re spending a lot of our focus right now and that’s one of the reasons why we’re kind of thinking about our tech stock in such a way as to enable that and make it possible, right.

And, you know, I think you’re right to point out to me that there are some companies that are really doing that well today, companies, you know, that have their own ecosystems like Stripe and Square and to some extent PayPal and Shopify who have not only captive ecosystems of customers which effectively they can get for free, but then they have all these proprietary data on top of it that they can use to pre-score and to judge those customers’ credit worthiness. I think it’s a very powerful competitive advantage and I think the question we’re asking ourselves is, are there analogues that we can take advantage of as we scale out our indirect merchant business.

Peter: Right, that’s right, that’s super interesting. So then, that brings up another question that is…..you know, some of your competitors have gone out and created a suite of services, Software-as-a-Service, basically, for banks which obviously is a way to get a massive chunk of customers on-boarded. You’re putting all this effort into tech and I’ve been thinking about this for the last ten minutes, thinking is that what you’re thinking of as far as going out to the traditional kind of lenders, or are you thinking about acquiring what you call dump trucks full of customers in completely unrelated areas

Mark: That’s a very good question. So, I think the question we’re really answering is that we’re considering a Credit-as-a-Service business and if so, are we going to focus on kind of  the banking sector, or in other sectors. I think my personal view is that I don’t think the banking sector represents a long term sustainable strategy for Credit-as-a-Service and I’ll tell you why.

You know, for a long time there’s been this discontinuity of capability between the banks and this kind of rapid rise of digitalization in financial services. Most banks are actually catching up pretty quickly now and while they may dabble by using other people’s products and technology stock, I don’t think they will do that sustainably. They’d much rather own their own stock, notwithstanding the fact that there’s a large portion of community banks, for example, that would much rather take software and deploy it than not. I think, you know, that space is being relatively well served today and it doesn’t feel like white space to me.

Peter: Right.

Mark: Our focus is on a slightly different type of potential partner. I don’t want to go into it into too much detail, but let me just say this. If you take a look at the Shopifys and the Squares and the Stripes and the PayPals and so on, you know, you can imagine that there is a long tail peer group of many of those companies that are now looking jealously at their peers and saying, wouldn’t it be nice to increase the average revenue per customer by being able to unlock credit to those customers.

I do, because we could monetize that on our own, or because it would enable those customers to buy more of our stuff which, frankly, is going to generate greater margin for us. And I think the answer is probably, yes, and I think that if we are going to scale our indirect to merchant business aggressively over the next few years…in fact, if anyone is going to do that, that is likely to be the vector that they’re going to have to pursue.

So, are we investing in building robust APIs that enable us to provide credit via API, for example, in other words, us to be the Stripe of credit, for example. I would say, yes, that is an interesting potential area of interest for us, but I would not underestimate the degree of difficulty in, you know, taking an alt lender and turning them, in effect, into a software company which is what that would require, and so, we’re not rushing down that road.

I think we see an evolution of our current broker base to a much more digital broker and, you know, comparison site base to some selective deep strategic partners with whom we will have deeply digital connections as being kind of the first wave of that. I think beyond that to the long tail of e-commerce and payment service providers and cloud accounting vendors and all of that stuff, that’s a much more difficult place to go play, but it’s certainly interesting.

Peter: Right, right, No, it is interesting. I like the fact you’re not actually….you’re trying to sort of blaze new ground, it sounds like, because there’s certainly lots of…..you know, there’s lots of people trying to provide Credit-as-a-Service to banks and ….I love the fact that there’s so many companies approaching this from very different angles and the winner is the small business owner.

Having been a small business owner my entire career and my Dad was a small business owner, getting credit has been very difficult for every business I’ve had. It’s been a challenge and I feel like we are just now getting to the point where it’s becoming easier, I feel like, and I think it’s only going to become more so in the coming decade.

Anyway, we’re almost out of time and we’ve covered a lot of territory here, why don’t you just maybe take a step back and share with the listeners what’s on top……this will be published in early 2020, what’s on tap for BFS next year?

Mark: I think the two strategies, or two tracks of strategies that I talked about will become a lot more evident as the year progresses. So, in the early part of 2020, you’re going to see from BFS really the more public launch of our new platform and what that means, in particular to digitally connected partners and the way in which we want to transform the reality for our partners today. I think we understand what it is they need us to be for them which is, you know, a place to very rapidly and very efficiently help them convert leads to loans, right.

I think the second thrust is going to be the continued evolution of our brand and our product offering. I think the removal of upfront fees, as I said earlier, was really just the beginning of taking a point of view that will be around a differentiated product offering and I hate to go to market as a company with an undifferentiated product. That’s a really hard way to make a living, so I would expect to see some evolution there.

I think the most exciting thing, though, that we have coming out of the business in 2020 will be the launch of our new product and it will be a fundamentally different product from anything you have seen from BFS in the past and it will have a very different go to market strategy behind it. That product should be visible as we move into the second half of the year and I think that that’s the product that’s exciting our Board and our investors and really even the core team here.

And so, you know, 2019, for me, was a bit of kind of an iceberg year where we had to sort of do quite a lot of heavy lifting below the surface. Not all of that heavy lifting is yet finished, there’s more to do, but it’s certainly moving along. I think 2020 is the year where….I’m hoping that BFS’ brand profile raises significantly and becomes, you know, I think synonymous with some forward looking thinking, some imaginative thing, some breakthrough thinking in the space.

You are quite correct, I think the winner in all of these is the small business owner. I think you’re going to see data and algorithms unlock access to credit earlier in their life cycle than we have to start we’ve been able to before. I think you’re going to start to see a broader range of products and services that are much more on their terms and not on the lenders’ terms so more granularity, more control, you know, left kind of fuss, more transparency, all of that stuff.

And I think, at the end of the day, you know, all of us kind of understand the economic impact we have as businesses because we provide really smart entrepreneurs with the capital necessary, frankly, the power of the economy. I think the next two, or three years, it’s going to be pretty exciting in small business financial services.

Peter: I completely agree and I’m excited to hear what you’ve got on top for half of next year. We’ll have to leave it there, though, Mark. I really appreciate your coming on the show.

Mark: Thank you so much, really it’s been a pleasure.

Peter: Okay, see you.

You know, Mark and I were just chatting after we stopped recording there and he was talking about where the US is compared to Europe and other parts of the world like China, and really the US, actually, has some catching up to do and a lot of it, obviously, has to do with the old rails that we have in place in the financial system.

We are making moves and I think the next decade is going to be super interesting insofar as the immediacy of data, the immediacy of movement of money. This is all going to have a tremendous impact on small business lending and BFS are setting themselves up to be one of the leaders in this change.

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

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