PODCAST TRANSCRIPTION SESSION NO. 168 / MATT HUMPHREY

Welcome to the Lend Academy podcast, Episode No. 168. 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 USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

Peter Renton: Today on the show, I’m delighted to welcome Matt Humphrey, he is the CEO and Co-Founder of LendingHome. Now LendingHome are a fascinating company, they have in a very short amount of time become the largest fix & flip lender. They’ve done over $3 billion as of this recording and we talk about how they were able to do that, how they were able to go into this space that was really dominated by, you know, small hard money lenders and create an online process that’s efficient.

We talk quite a bit about the technology they’ve been able to develop, we talk a lot about how they differentiate themselves from the other players in this space, we talk about the loans themselves, we talk about the investing side of the business and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Matt!

Matt Humphrey: Thanks for having me, Peter.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself. Maybe you can tell us what you did before you started LendingHome.

Matt: Sure, so I guess you can say I’m a multi-time tech entrepreneur. This is depending on how you count, I think company number 8 (Peter laughs) since 2004, every time in different spaces, everything from 3D virtual world to content delivery to social games, e-commerce, lending and more. You know, I’m classically trained as an engineer, I love attacking problems no matter where they may be where tech can really truly create an advantage; that was my upbringing.

I was Carnegie Mellon computer science…long story short, actually started there when I was 13 years old, I was that guy and basically finished my core computer science requirements by 18 and then I didn’t have a minor so I went and got an MBA, caught the startup bug and then started building companies.

So I moved out west from Pittsburgh where I grew up and went to school in 2007, and then built a variety of things from there. So my last company was a company called HomeRun, it was an e-commerce platform that we built back in 2010 and actually we sold it for a very strong outcome only about 18 months after founding and we basically powered an e-commerce platform where we sold things to consumers and we also powered rewards and loyalty and commerce solutions for large card companies and banks like JP Morgan Chase and American Express and others. So next up after that, after selling it and working with the acquirer for a number of years, started LendingHome.

Peter: It sounds like…looking at your LinkedIn profile, LendingHome is your longest running startup, it sounds like. It’s where you’ve spent the most time in your career, just on pure timewise.

Matt: Well for some of those early ones I’ve got to admit it wasn’t a high bar to spend more than, you know, 12 to 18 months. (Peter laughs) I really think that I took a philosophy of just start things, learn, rapid pace, rapid prototype, get products to market and if we’re going to succeed, great and if we’re going to fail, let’s fail fast, learn and iterate. And so, you know, through those early days of some faster start and stops, learned a lot I think, you know, a lot of life lessons as an entrepreneur.

HomeRun was a good three year and change run and LendingHome has been now between four and five years. You know, I have to say though, it is…I am more proud of what we’ve built here than probably all of the past 7+ combined. Just in the scale and scope of what we’re taking on, the technology that we brought to market and we’ve built a real business which is cool and exciting.

Peter: Right, right. So let’s just talk about the early days at LendingHome, what were you thinking when you thought you needed to start an online mortgage origination platform? What was the problem you were trying to solve?

Matt: Yeah, so going back to middle of 2013, I, having sold HomeRun in 2011, I actually was angel investing in a lot of technology startups and caught the bug to also want to think about investing in real estate and it didn’t seem like there was a simple, scalable, online, transparent way for investors to access investments in real estate or specifically mortgage, and I was intrigued when other companies like LendingClub, Prosper and beyond had brought such a straightforward way for an individual investor to invest in personal loans that didn’t exist in mortgage.

So I was actually looking at it from more of that side and actually got approached to be an LP in a few private mortgage funds covering areas of lending and credit for homes where banks did not so the fix & flip space that we now find ourselves in…single family rental, foreign nationals, those that are self-employed; lots of verticals that banks didn’t cover. So I actually took a step back and said, would I rather be an LP in a few of these funds or can we actually build technology to do this even better.

And then you combine that with some of my close friends and family, even ones with great credit that were having just the hardest time even refinancing loans with their existing bank, taking months if not quarters, asking them multiple times for their documents over and over again and consistently getting surprised in the process. So it led me to be pretty introspective and say, whoa, if this asset class of mortgage is so big and both the borrowers and investors have trouble accessing it in a simple, fast, reliable way, what if we did it better with tech and that’s how LendingHome was born.

Peter: Right, right. Obviously, you started just a few years ago and you’ve built it up into a pretty sizable scale. I saw just recently your press release that came out, you crossed $3 billion in total originations, so can you just give us some context to that, like how many homes is that, how many loans have you done, that kind of thing.

Matt: For sure. So yes, about a month ago, we reported that we had crossed about $3 billion in cumulative originations. Each billion has come considerably faster than the last; it was around 30 months for the first billion, 11 for the next and then about eight for the third and so we’re very excited that the business is accelerating and growing so quickly.

You know, that breaks down if you just do some simple math, the average mortgage in the US is slightly over $200K and so it should be no surprise that that actually equates to…now, as of the day of this call we’re over 15,000 individual homes that we’ve lent to so that’s about $200,000 and a little bit per loan. We have focused our tech, our process, how we go to market to be able to lend to the average homeowner across the US.

Whereas, I think there’s lots of platforms that are focused on small balance commercial or office buildings or hotels, we’re focusing on those single family homes, townhomes, condos in the Phoenix, Arizonas’, the Las Vegas, Nevadas’. The repeatable part of this asset class is that standard average home across the US so it’s been great and I think as we focused, the majority of that volume has been focused towards the asset class of fix & flip where our borrowers are buying, oftentimes rehabilitating and reselling homes in their area.

We think this is awesome because this is how communities all across the country stay fresh with this type of financing to enable older, more rundown homes to become new, fresh, come back on market and to be available for homeowners to buy. So that’s what we’ve done and at the same time, not only have we helped to rehabilitate the housing stock, we’ve actually had a lot of borrowers that have gone from hobbyists of this to actually building businesses, turning homes of the sort so it’s been really rewarding to see.

Peter: Right, so let’s just touch on that a bit because how much of your business is this sort of one person doing it as a hobby versus someone who has taken out five loans every year kind of thing. What is the typical borrower, like who are they?

Matt: Yeah, so that’s a great question. Across the US, when we look at all of the data that we keep a pretty close eye on, we see that about half of this market for buying, rehabilitating and reselling homes and the financing thereof occurs to folks that are more of repeat borrowers and that’s what we say internally. Just as a note that somebody is doing multiple loans in a given year or two year span. Sometimes they’ve made this their job, sometimes this has literally become their livelihood and they build strong businesses on this and our lending and our loans enable them to do so.

About half of the space is your one-off or two-off borrower that maybe this is a hobby and so what we’ve seen is we’ve actually seen our business grow on both sides. About three quarters of our business today is more of the what we would call pro or repeat audience that has done this many times and about a quarter of it is that one-off individual loan to a borrower that may be more one and done, more of the hobbyist, but we’ve seen strong growth across both and now across well over half of the states in the US that we’re actively licensed and lending into.

Peter: Okay, so then I saw, I think it was last year you announced you were going to get into traditional mortgages. I haven’t heard you mention that yet, is that sort of initiative on hold or are you in a pilot phase, where are you at with that?

Matt: Yeah over the last year we basically have been in a protractive pilot phase. You know, we decided earlier this year to really double down and focus on the bridge loans and the fix & flip, bridge is our internal term for fix & flip because we’ve gone from zero to number one in that market and we’ve really decided to double down there. So earlier this year, we paused the originations of the 30-year mortgages to focus on that bridge space.

We still have the technology platform built, we’re still actually making progress in that space, just with rates going up in Q1/Q2 and how much volume in business there is on the bridge side where the average traditional mortgage company is losing money today. Even if we could do better with tech, we still have such margins, such scale potential and so many customers coming to us asking for help on the bridge side, we decided to kind of truly double down our focus there.

Peter: Okay, okay, that makes sense, So then what about…this is a primarily or has been traditionally an offline process, very paper-based and it sounds like you’re often working with just individuals, tell us about how you’ve sort of implemented technology to make this process more efficient. What have you done to really make this a repeatable process?

Matt: Yeah, so we have a little bit of a running joke internally of fintech companies, sometimes they’re more “fin fin” or more “tech tech.” I think we’ve struck a really nice balance of both the fin and the tech. Look, technology is at our core and we say, at the end of the day, we win on service, you know, we’re here to be a customer company that wins on service, enabled and growing through technology and that is our ethos and that’s our essence and that is our edge.

So we internally break down how the tech can add advantage into three camps. We say experience, platform and marketplace, and I’ll start with the first, so experience. Can somebody who has never gotten a mortgage before find out about us, walk up and answer a few simple questions, see if they qualify, select the perfect product for them and then finish their application in just minutes where it could take days or weeks with a traditional paper-based lender.

There’s a lot of technology that has to be built to acquire those customers, to make sure we’re asking the right questions, to really run our credit engine in real time to be able to, frankly, decision customers literally as they’re on our website answering questions without a human ever having to step in.

I’m pleased to report that actually about 80% of our customers are submitting loans, loan inquiries and then their full applications before they ever talk to a human on LendingHome’s side and that’s validation to us that…you know, where other lenders have to talk to maybe 10 or 20 customers for every one that closes, we do much better than that and we put the power and control in the customers’ hands so they can run their process the way they want to. So that’s part of how we’re differentiating on the experience side.

When it comes to platform, the average…I don’t know if you track this stat, it’s truthfully a little bit crazy. The average cost to close a residential mortgage loan has gone up just about every quarter for the last 20 and is now around $9,000 a loan.

Peter: Wow!

Matt: So if we pause on that for a second. Average loan in the US is $200,000, average cost to close it $9,000. That borrower is charged about 4.5% in higher fees, rates, hidden charges by traditional lenders just to pay their expenses, to pay their bills, that’s before their profit. That’s actually why in Q1, the Mortgage Bankers Association released the stat that the average independent mortgage company was losing money per transaction, that’s crazy.

And so we’ve been able to actually create, through significant amount of automation of the underwriting process, we’ve been able to create a process that we make thousands of dollars per transaction and have a really, really, really good business on a per unit basis, make strong margins. That then puts both money in our pockets that we can reinvest back into more tech to keep accelerating that lead, or it actually allows us to charge less fees to our borrowers and save them money.

Peter: Right:

Matt: So that platform is all about automation of the process, pulling in data automatically and not having to have 20 or 30 humans triple, quadruple, quintuple checking each other. That’s our edge with tech.

And the third is marketplace. You know, we have a wide array of investors who buy our loans and so our marketplace allows us to find, within days of closing that mortgage, allows us to find the perfect place to sell that loan, whether that’s large institutions and banks, whether that’s a credit fund that we’ve launched, whether that’s our peer-to-peer platform. And so that efficiency lets us not have to accrue loans for months or quarters or years, but actually sell them off within days of close and it lets us be hyper efficient with our capital. So really tech, it’s from end-to-end experience, platform, marketplace and that’s what we build every single day here at LendingHome.

Peter: I’m curious about mobile because…what percentage are coming to your site through the mobile device and how are you optimizing for that?

Matt: Yeah, I believe the last time we checked new customers that were coming at the top of the funnel was about 50/50…

Peter: Wow!

Matt: …which even let’s say four years ago when we started lending, those numbers have increased steadily. You might think, hey, this is a mortgage, this is the most important financial transaction that most customers are ever going to make and it’s stressful and people are dug in for a hard process, but people are still…they want to inquire on the phone, they want to see if they qualify. That’s where they’re figuring out the first steps of the process.

Basically, we haven’t launched an app as you would traditionally think of an iPhone app or an Android app. What we’ve done is every part of our site from learning about us, to seeing if they qualify to that entire experience with their application, when they’re on their phone it’s optimized for mobile so they can go through the entire experience right there and even with some of their documents.

For instance, if they’re going through their application on their phone, they can take a picture of them, have them in their photo album and seamlessly upload them right through their mobile web browser right into our hands so we can verify those docs. So we don’t have apps, so to speak, but we take advantage of it and it’s super important, it’s a high percentage today.

Peter: Right, right, makes sense. So now you’ve got the scale, you’ve got the technology, but is there…like when you look at the marketplace there’s obviously many people doing fix & flips, there’s many successful offline lenders that are doing fix & flips and you now have, you know, quite a few in the online space. So how do you differentiate yourself, is it really your tech and your scale or is there something else?

Matt: Yeah, so when we look at the competition, I would say there’s a number of ways we look different and there’s a number of ways that we have an edge. So I would say that the first is compared to most of our more offline or traditional counterparts, borrowers think of us as effectively having a national presence, right. We don’t have to have local sales people in every city that we operate in, borrowers literally anywhere can walk up and apply for a loan at any given time and we do most of our customer acquisition through online channels and so this actually just vastly reduces the overhead and the physical people in each location that we need to scale our business. So that’s thing one.

I would say thing two is really, really driving down those operational costs, right. You know, when a borrower is let’s say on their second, third, fourth, fifth loan that application is only taking minutes, we’re able to approve within days and sometimes those borrowers are able to close the same week. That’s really impressive level of service, but even though they might, you know, be traditionally going to their local country club lender who makes the process really easy for them because it’s done over a handshake, they get the certainty and scale of working with a national scale player like us, but they get that same efficiency.

We even have some of our largest borrowers that used to have in-house staff just to manage disparate loan processes with lots of different lenders that were using paper and faxes etc. and when they found LendingHome they realized, wow, I don’t even need that, all of my information is saved, this is super easy and especially once I’m repeating, it’s a breeze and so I think the service aspect is hugely important to it.

And I would say between the operational automation that drives down our costs and our low cost of capital out in the capital markets because we’ve had such strong loan performance…you know, this is not 2013/2014 all over again where the country club loan is at 12 to 15% and 2 to 5 points. This is, you know, 9/10% and maybe 1.5, 2 points up front and rates and fees and terms that really work for borrowers and really perform for our investors.

So cost of capital, cost of operation, national scale presence and tech-enabled service. Multiple things in there that we think our competition is not set up to really compete with.

Peter: Right, right, okay. So I just want to ask again about the loans themselves. You mentioned you’re 9/10% or whatever, but what is the range of the loans that you offer and then let’s talk about LTV and the length of the loan term. Just tell us about the loans.

Matt: Yeah, so the loans are going to end up being…most of these bridge loans are one year loans so this is generally the right duration to cover the acquisition of the property, the rehabilitation and the resale. Oftentimes, the loans tend to last between seven and ten months. The borrowers can actually pay them off with no pre-payment penalty, but they’re one year base loans to begin with.

We lend anywhere between as low as $75,000 and as high as $2 million, they’re interest only and the ranges of those rates will be anywhere from 7.5% on the low end up to 12 or 13% on the high end and so they are compared to some of the anecdotes that I just gave you of where the market has been…they’re nicely and competitively priced to borrowers.

Now you also touched upon restrictions like LTV and leverage and things of that sort. You know, we take a view, and this is informed by now having 15,000 units and lots of credit cycles to look at of full repayment of loans where we want to make sure that both…given their level of experience, does the borrower have enough skin in the game upfront and do they have enough cushion on the backend with what this home is going to be worth when they go to resell it.

The typical loan for us will look like let’s say between 80 to 90% of the purchase price of the home, but then we also want to check to make sure that it’s maybe 65 to 75% of the after-repair value. So if we’re going to disburse some money upfront to help them buy the home and then give them some of the dollars to rehab the home itself, we want to make sure that those combined proceeds are still only let’s say, at most, three quarters of the value of the home when they go to resell that.

That’s going to give us comfort that the upfront loan as well as all the way through that project we have significant coverage were anything to go wrong and look, a very small percentage of the time things do, but we’ve had fantastic performance because I think we’ve kept our parameters really thoughtful and make our borrowers…we make loans that perform.

Peter: Right, when they do go wrong obviously, you really have this asset backing the loan like how…maybe just give us some idea, any principal loss or how has this played out. Obviously this is a one year loan, you’ve been doing this for four and a half years, you’ve had many cycles of the loan book and what have you seen when it comes to those non-performing loans?

Matt: Yeah, so high level stats to start you out there, we’ve returned about $1.6 billion in principal to investors and about $133 million of interest so we’ve had about $1.8 billion overall in full repayment. Again, as you mentioned, we’ve seen…not our first rodeo doing this and we start to get a pretty good feel for how these loans work and perform. Basically, when we feel that even a loan is at risk of potentially not repaying or the home not being resold, we actually proactively are reaching out to that borrower well before maturity.

We realized early on that we could originate amazing loans and have this great platform and help borrowers on the front end, but if we didn’t actually also launch a servicing platform, we weren’t going to be truly best in class and win this space and that’s our goal.

So a couple of years ago, we actually brought servicing in-house which allows us to do these proactive reach outs like, you know, at month 9, 10, 11 reaching out to the borrowers. If they need, let’s say an extension, but the home is listed, it’s just not fully sold yet, we can make those within certain bounds and then should the borrower actually not pay and not be able to exit the loan, our data and analytics team, in concert with our risk teams are running all the analysis of the market, the home, the state it’s in, other purchase and sales that have occurred recently to give us the best analytics of what to do with it.

That investor who technically holds the risk is generally coming back to us saying, hey, what do you recommend we do with this asset and in almost every case, we’re able to get full principal and interest repaid. We don’t talk specifics on those credit performance numbers, but our investors have been extremely pleased with that performance to date and it’s exciting to see.

Peter: Okay, so on the investor side then…my understanding is you fund these loans off your own balance sheet and then sort of sell them to the marketplace just for the ease of use for the user experience more than anything I guess, but tell us about the typical investors you have. I know you started off you were 100% institutional and you opened up to retail, it was one or two years ago now so tell us a little bit about that. What’s the breakdown between the two and the kinds of investors you have.

Matt: Yeah, so three main camps of our investors we would say are marketplace platform or basically, the p2p platform; second is our institutional investors and third is we actually launched a second iteration in October 2017, was when we announced it, of a mortgage opportunity fund, it’s a credit fund that we actually launched and managed in-house dedicated to buying our loans.

So today, the platform looks about 15% peer-to-peer; about 30% towards the fund and about 55% institutional and that’s a good balance of where we actually enjoy keeping that mix with all of those channels growing proportionally as we scale. And so going one by one there, the marketplace platform is essentially any accredited peer-to-peer investor can walk up, can prove they’re accredited, can connect their bank account and launch assets on to our platform and then either select individual loans they would like to invest in or use our simple auto invest algorithm that dials up or down their risk reward ratio that they want to get them the return that they’d like.

So at this point, hundreds of millions of capital on that platform and we’re seeing great retention that…you know, some investors as soon as they start to get those first repayments, they put in more and many at that 6, 9, 12-month mark when those first loans start to fully repay, they get it, they see the fruits of our great credit work and they re-up with a sizable reinvestment. So that platform is growing and we’re very excited about it.

The fund which was again a dedicated opportunity fund for mortgage was launched in October 2017, we raised about $100 million of equity and we have a credit facility against it of up to $300 million of debt and so that fund earns our LPs in that fund strong returns north of 10% and can hold up to $400 million in assets at any given time.

And then the last is institutions and I think you hit the nail on the head there. When we started, we were pretty much asking just about anybody who will buy our loans. You know, if you go all the way back to 2014, starting off much more in fast money: hedge funds, private equity, folks that really needed a north of 10% unlevered return and as we’ve proven that credit and proven that scale, we’ve really normalized this asset class and we’ve been able to expand that to asset managers, specialty mortgage funds and in conversations with pensions and insurers now to even broaden that mix further. So diversified channels, diversified investor base and very exciting overall.

Peter: Right, okay, we’re just about out of time, but I can hear the passion in your voice and you really are excited about what you’re doing here so what is your vision, what is the future for LendingHome? Are you going to be the largest mortgage lender in the country, or what are your plans?

Matt: Yeah, so in the near term we are focused heads down growing and scaling the business. If you just look at our first product in fix & flip, we’ve become number one in that market from a standing start in between three and four years and we can have just on that first product, we can have a highly profitable, highly scalable business and the near term focus is to go even deeper towards that.

I think as we do that we’re going to continue building out the best mortgage platform in the world and that could be a platform that supports, you know, bridge loans, loans of adjacent products or all the way to 30-year mortgages and that platform is diverse enough to really allow us to go into any market that we want to, when we want to go into it and be truly the best way to get that mortgage product.

And last, you know, it really comes down to just that, what is the right expansion of our products over time where we can scale and be one of the most significant mortgage players in the country.

So if you’ve got that experience, that platform, that marketplace and you really unlock the business with winning on service, there’s not a lot we can’t do so focused on that and you know, as we look out to other lenders that we have admiration for like the GreenSky’s of the world who went public earlier this year, the Funding Circle’s of the world who are going to go public, folks that can leverage tech, efficiently use capital and help customers where banks aren’t or partner with banks to do that, can build multi-billion dollar businesses and that’s what we’re excited to do.

Peter: Alright, well good luck to you, Matt, we’ll have to leave it there. I really appreciate you coming on the show today.

Matt: Thank you so much, always a pleasure.

Peter: Okay, thanks, see you.

Matt: Bye.

Peter: You know, it’s interesting to me that LendingHome has decided to double down on one product, the fix & flip product. Obviously, they announced mortgage as we talked about, but they haven’t really done much with it. They’re doubling down on fix & flip and in some ways it goes against conventional wisdom in the fintech space today that companies need to offer multiple products.

So I think clearly, it’s not a one size fits all mentality for having a diversified product, they’ve decided that they can really build a profitable business in this single vertical and I think part of the reason is they have these borrowers that come and do two, three, four, five, six loans a year so the customer acquisition cost, it’s not like a personal loan where someone might do them once every two or three years. They are able to generate this repeat business in a much quicker fashion so maybe that’s it. I think there’s a lot to be said for focusing on one product if you can build a profitable business around it and it sounds like that’s what they’re doing.

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

Today’s show is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

PODCAST TRANSCRIPTION SESSION NO. 167 / CHARLES ANDERSON

Welcome to the Lend Academy podcast, Episode No. 167. 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 USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

Peter Renton: Today on the show, I am delighted to welcome Charles Anderson, he is the CEO and Founder of Currency. Now Currency is a fascinating company, they are actually the world’s first fintech platform focused on the equipment finance space. It’s a really fascinating space because it’s so big, it’s much, much bigger than I expected it would be and it is very much a paper-based traditional kind of way of doing business and Currency is out to try and digitize this and they’ve been going for a few years now.

We talk with Charles about who are the major players, what’s the state of the equipment finance industry today and what are the big pain points and what is Currency doing to solve those pain points. We talk a little bit about data analytics and what they’re doing and the organization, CEMC, that Charles recently helped found and we talk about his vision for the future of his company. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Charles!

Charles Anderson: Thank you, happy to be here, it’s an honor.

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

Charles: Sure, so originally from the Bay area, I went to undergrad at San Diego State, always had a deep passion for specialty finance and with how I grew up an important part of my story is I saw at an early age the importance of timely access to capital which is to me more important than access to capital. I mean, it’s more important to have a dollar when you need it than a dollar when you don’t need it and so that’s always kind of shaped my world view.

Out of undergrad, I jumped into the mortgage industry, an interesting period of time in 2004/2005. So I was in the mortgage industry, I worked for a large bank for a while and then left and started my own mortgage company that eventually I decided to slow down/wind down because I had an opportunity to go to business school at Stanford. Out of Stanford Business School, I launched an investment vehicle called a Search Fund and really that was kind of my stepping stone into Currency. Not well known, but I actually tried to purchase Currency from the founder of the business back in 2011 and ended up coming on as partner instead and that’s my, I guess quick Cliff Notes version of how I ended up down in LA with Currency.

Peter: Okay, so tell us a little bit about that. I actually didn’t know there was a founder before you of the business so tell us a little bit about the story about how you got started and how that business began.

Charles: Well it’s a critical part of the Currency story and the way I explain the business is we actually started as a finance company, as a fin before we became fintech, and so the roots of the business go back to 2001, actually, through predecessor businesses, and the early days of Currency we were known by a different name, a company called CapNet actually, a different business entirely, but that business was really an equipment finance brokerage where there were four guys in a building that were originating small balance equipment transactions and selling them to banks.

This was early 2000’s and technology wasn’t what it was today. Most of the business was done over fax and mail, actually the business was done over mail when I joined in 2011/2012. And so the business was a nice little cottage business, they were taking advantage of an opportunity in the market which was banks needed assets, assets generating yield and so these four guys in the room were finding businesses that needed to finance equipment and then finding banks.

This is an important part of the story because we actually still have a lot of those banking relationships that we set up 15+ years ago now and that’s really what helped us get through the financial crisis in a lot of ways, was those deep embedded banking relationships. And so in 2005, when Blake Johnson, who I call the founder of the business joined…he helped to drive scale to the organization and so Blake grew the business really from four employees to about 60/70 employees and north of a $100 million in originations at the time, grew the business until about 2009. In 2009, the company took a material step back to right size the organization because nobody knew how bad the financial crisis was going to get.

Peter: Right.

Charles: And so in 2009/2010/2011, banks were still buying paper, but with banks going out of business overnight, you never knew when your liquidity and funding was going to shut off so Blake actually really wound down the company, started a new business known as IMCA Capital and that business was really about four people when I joined. So I was the fifth employee of Currency in 2012 and the business that I joined was very similar to the business that was originally founded in 2001.

Peter: Okay, so then what changed and how did you pivot to where you are today?

Charles: So the first chapter, when I joined the business, was to really understand…okay, what went wrong? And you could say, well things didn’t go wrong. but we weren’t as an organization where we wanted to be so I dug into the business and dug into the portfolio and one of the conclusions which was incredibly insightful was there were two things that were very special about the company.

One was the data set around how to acquire customer, marketing and the other was the banking relationships, both I knew from my experiences with specialty finance that were almost impossible to replicate. It would take a decade and a financial crisis to recreate that so that was pretty special because now you know how to acquire a customer and you know your lifetime value, another way to say it.

So one of the first things I did was I dug into the portfolio and I was pleasantly surprised to find out that, and this was through the guidance of Blake Johnson, the founder of course, pleasantly surprised to find out that had we done the exact same thing, in the exact same way, in the exact same point in the cycle, with the exact same loss curves and so on and so on, we would have gotten through the financial crisis actually incredibly well because it’s those who continue to lend into the financial crisis with the right data infrastructure and so on, checks and balances, those are the ones who make it through and grab market share and scale while others are retreating and so it was a big aha moment.

So version one of Currency was let’s build a technology forward balance sheet lender. We’re at the right point in the cycle, 2012 now, we’re at the right point in the cycle, there’s a lack of liquidity in funding and actually back when you and I met there was a lack of liquidity in funding for small businesses. Let’s be the first technology forward equipment finance company in this $1.1 trillion finance market, $1.7 trillion purchase market.

So that’s what we did, we went out and found one equity investor, a high net worth individual who was going to step in and really fund the business and help us execute on that strategy. We were at the finish line with a very well known, large US bank who was going to provide us a with a sizable credit facility and literally with signature pages in my inbox, it was a very stressful time in my life, we decided that the right thing to do was to not close that transaction.

Peter: Wow!

Charles: This is early 2012, we would have been the only ones in our market with our strategy, with our timing, with our momentum, with our data, with our bank relationships and we could have really done something pretty remarkable. The reason why is that our investor had some personal things going on and we collectively decided it was in all of our best interest to unwind the company and return his capital.

He ended up making a very good double digit unlevered return on his money so it was a good outcome for him, it was a bumpy but great outcome for us as well because it was that moment, which is why it’s an important part of our story, where we were forced to think very carefully about our value proposition in the market. And the conclusion to our value proposition gets to a lot of how we built the business today which is why I went through that background, which is you have to understand why customers pay you revenue. If you don’t know the answer to that question then you’re just waiting for someone else to come in, for Amazon to come in and take your lunch, basically.

Peter: Right.

Charles: And so as we surveyed our customers, what we found was that there was this massive secular shift for the first time in our market with people buying equipment on the internet which sounds crazy. That wasn’t obvious, but this was 2014, not that long ago, but for the first time people were starting to buy equipment online and so we said, okay, if that’s true how are we going to win in that market and we concluded that we thought there were three ways to compete in specialty finance.

We think you can compete with your credit guidelines, meaning I can do deals you can’t do because I have more data than you. You can compete with your interest rates, I can outprice the market so I can cherry pick the best deals that I want and I’ll have a lower loss rate than anyone else, or you can compete with your customer experience or how you acquire your customers.

Of those three, the only one that we felt like we had a sustainable competitive advantage with would be how we acquire and process and deliver customer experience. So that kind of led to the next iteration of the business that I would be happy to get into, but that was how we kind of went from concept through near death experience through a forced recognition or discovery of our value proposition to our first digital integration at the point of sale which was eBay back in 2014.

Peter: Okay, so you sort of rebirthed the business as really an online specialty finance company. How did you get eBay on board and how did you get going again?

Charles: So we surveyed our customers and it was hard, it was really hard, but we surveyed our customers and they were the ones that helped us to figure out we start our quest for equipment on eBay, they were the ones that say we start our investigation and search for what we want to buy on eBay because if you think about it, where else do you find a repository of endless types of equipment and there’s really not a lot of other sources.

There’s a lot more now than there were five years ago/four years ago, but at that time there was almost nothing and so we said, wow, we wholeheartedly believe that financing follows purchases and if that’s true and if the world is moving from a physical purchase to a digital purchase, which is hard to disagree with that, and if mobile is starting to just now enter into our market, then we said we need to be the first ones to build a digital financing experience which implies credit decisioning, which implies credit risk, which implies a lot of things at the point of sale.

So the value proposition was to eBay, we know you sell equipment and if you sell equipment, financing has to happen as we know, 60 to 70% of the equipment that’s purchased in the US is financed. How can you sell equipment, physical equipment digitally if you don’t have a digital financing experience? They said, that’s great, but you are a subprime lender with subprime cost of capital, how are you going to service our…because we weren’t private equity backed, we didn’t have any institutional capital, we were a bootstrapped business. It was a fair question.

So they said, how are you going to be able to service our A paper through and basically B paper customers if you are a C priced lender? And so fortunately, because of those early lender relationships we had, those bank relations we had back to 2001, largely, we were able to say, what if we told you we don’t want to build a balance sheet, that’s not our end game because that’s not how we think we can compete in the long run.

However, we also told you we have data that no one else has on non-prime customers which allows us, when necessary, to fund those other people probably can’t or maybe won’t. And we also have banking relationships in place to allow us to deliver a digital financing experience and lay off the A paper and super prime customers to banks of the cheapest cost of capital and the most credit expertise who can hold those assets to maturity.

Peter: Right.

Charles: So such a valuable lesson for us and it stepped us into, call it chapter two of the business which was on demand competitive financing at the digital point of sale.

Peter: Okay, so before we get into that, I actually want to take a step back and just talk about the equipment finance industry because I know it’s a large industry, but a lot of people don’t  really know much about it. Maybe you could just tell us some of the…what is the size of the equipment finance industry, who are the biggest players, so to speak?

Charles: The industry is very, very large and let’s just talk about the US because the numbers around the world are less clear, but according to the Equipment Leasing and Financing Association, which is really the leading industry for all of this information, they outsource and do research studies every single year. According to them, there’s $1.7 trillion of equipment purchased in the US alone every single year and of that $1.7 trillion, $1.1 of that is financed.

What’s interesting is it’s a massive…my friends tease me because I call it a “1 T market”, which I appreciate, (laughs)…it’s a massive industry and what you’ll find is a lot of shadow banking happens in this market and a lot of the financing, if you look at the financial crisis, equipment financing was one of the best performing portfolios on return on equity risk adjusted basis by comparison to Treasuries, it was second to Treasuries.

So if you ask that question, who’s participating in this market, it’s everybody. The largest household names that you would hear would be Bank of America Leasing is huge, Wells Fargo Leasing is huge, BMO Harris, I mean, GE Capital was the largest for a long time. So either through direct financing with vendor relationships or through purchasing of portfolios or through syndication or one way or another, it’s the who’s who which is another way of saying, it’s you and I…it’s our dollars that are sitting at the banks that are flowing through to middle America or to these large corporations to finance the purchase of equipment which is so fascinating to me once I realized that.

Peter: Right, and there’s also the captive finance companies because…just as a little aside for the listeners, in my previous life, I actually ran a printing business and we would buy half a million dollar printing presses and these were digital presses that we bought through HP and we would finance through HP. Actually, the first one we did was through Wells Fargo who was the company who had the relationship with the predecessor to the HP press, but anyway, we would do that and it was…all this ran through HP, it was all seamless.

So I’ve been on the other side of the equation purchasing this equipment and you know, luckily we had a good business, we had a lot of good cash flow and we were able to obtain this financing pretty cheaply and pretty easily. So I imagine those captive finance companies are a decent part of the market.

Charles: Well they are but what’s fascinating is if you dig into the captive finance companies and I won’t mention any names here, but some of the largest ones that you would hear of and possibly even in HP, but typically what you find is either a large bank providing the funding for them or a large bank purchasing assets from them eventually.

So it’s fascinating that eventually it usually…the two end games for equipment financing is either securitization which means that the money is being dumped to insurance companies most of the time, some of it is banks but largely insurance companies, or it’s one of these large banks generating spread on the assets because it’s such a mature, since the 70’s, it’s such a mature cottage industry, it’s probably the largest cottage industry because it’s still done physically, it’s still not quite a digital experience. So, the efficiency that you picked up in other markets haven’t yet showed up here.

Peter: Right, so let’s talk about that because, you know, as you say you’ve got these people on eBay that are starting to look for equipment online, wanting an online experience, but equipment by its very nature is physical and so what is the process like with the big incumbents, what is the process like to finance a piece of equipment?

Charles: Clunky, clunky at best. (laughs) If you walk through the user experience it starts with how do you figure out what you want to buy? Well today, you’re probably going to start on Google, five years ago, you were probably going to talk to one of your friends in the industry and say, hey, I want to buy this piece of equipment, where do I go and he’ll probably give you a recommendation or they will probably open up…But still most of the transactions today, most customers figure out what they want to buy today through physical printed publications, almost like a physical Craigslist, for example.

Once you figure out what you want to buy then starts the negotiation with the vendor and you might find one or two different sellers of the equipment and there’s no standardization around pricing so you don’t really know if you’re getting a good deal. Let’s say you want to buy used instead of new it gets even exponentially more complicated, but the useful life of these assets can be very long, even though the economic life may only be five years, you might be able lease it for 15, 20 years, we see that all of the time even in trucking, for example.

And so once you figure out what you want to buy…why this industry, I believe, is still so fragmented and so large is one of the hardest problems to solve is you have to coordinate the movement of money from Point A to Point B, at a different point in time when you move a physical good from Point B to Point A. Meaning if you’re going to buy a large piece of construction equipment or a printing press, for example, if you’re going to buy a printing press someone has to pay for the manufacturing of that printing press. Once it’s manufactured, there’s cash that had to be spent to put that together and so the next question is, will that vendor, that seller of the printing press be comfortable shipping you the printing press without you paying them? Probably not.

Peter: Right, the answer is no most of the time. (laughs)

Charles: So when you think about the mechanics of that, it’s not like you put a printing press in your back seat and drive it home. Then it becomes exponentially more complicated and then you start to understand why there’s so much margin in this industry, frankly, and why it hasn’t gone through a major revolution. It’s already working really well, it’s clunky, but people are making really good money and the rate of purchases isn’t frequent enough in your life for you to care about the pain, it’s kind of like going to the dentist. It’s not fun, but if you only do it twice a year, you can stomach it.

Peter: Right, right. Okay, so I want to talk about what Currency offers. On your website when you talk about the different solutions you guys offer, you have the Currency API, Lending Services and Currency Pay so why don’t you just talk us through, let’s just start with the Currency API. What is that and how does it work?

Charles: So it all connects back to our conclusion we came up with with that story I shared about how we were overworked, underpaid and definitely underfunded back in 2013/2014, and so it forced us to really own our value proposition and figure out why do customers pay us. And the conclusion was we help customers figure out the answers to two questions which are, what do you want to buy and how do you want to pay, what do you want to buy and how do you want to pay?

And what’s fascinating about this market is similar to the mortgage industry in the 90’s and if you follow the story of the LendingTree business model, we’re following a very similar trajectory where they started as a lead gen company. But none of the banks had call centers so they didn’t know what to do with the leads and they became a lender, then they became a whole loan sale provider, then they became just a technology platform and there were lots of fits and starts in there, but what we found was there’s three components to our business built by the assumption that in the long run our best value proposition is delivering a wonderful experience for the customer, the customer being the buyer and seller of the equipment and also the lender, we have three customers, or the lender/investor.

And so if that’s true, we need to be able to provide services for all three. Answering the questions what do you want to buy and how do you want to pay for it…so what do you want to buy is figuring out what type of equipment do you want to buy, from which vendor, how do you know that vendor? Is that a credible vendor, is that a good vendor, is that a bad vendor, what’s the reputation of that. So it’s a very consultative approach for that.

But the next question is, how do you want to pay…through debit/credit, ACH, wire transfer or through financing? Well we grew up in the financing word so we were forced to develop an expertise around the shipping, delivery, installation which is a whole other conversation we won’t even have time to get into today, but it was a lot easier for us to step into the payment side of the equation because we’d already solved the financing side which happened 60/70% of the time.

But, what we realized is starting in 2014, we made this bet that transactions were moving from physical to digital. We had to be the first ones to deliver a digital experience. There’s so many lenders….I use the word lenders on purpose, some are banks, some are alternative finance companies who have not yet made that same decision that we made which was we’re betting the future on this being digital, and this being mobile, and this being voice to text that we started renting…actually, to say it differently, people were already coming to us saying can we borrow, can we rent your technology to take our process and make it digital.

And so that’s Currency API, it’s alternative finance companies and banks coming to us and so recently…really proud of this, there was a community bank in the Midwest that is now renting/using our technology, they’re renting our technology from us and they’ve been able to displace a very large bulge bracket bank from a vendor relationship because now they can compete with the timing and the processing and they have a desire to fund in their local market. So if there’s a transaction in this local market because of our technology platform…we took them from physical, paper, Excel best case scenario to now an entirely digital… from application to funding process.

Peter: Okay, so that’s a lending as a service type product, so are you also doing the underwriting, are they using your underwriting tools or is it really just the technology itself?

Charles: Let me qualify that a little bit. Going back to the view that long term…. We think it is really hard to say your competitive advantage is I can out underwrite you because that’s so nuanced for different reasons.

So rather than take that stance…now we do have a lending component to our business because we’ve been forced to because we lived through the financial crisis and we understand that, and we know our credit box which we feel good about which as we mentioned is valuable for a lot of our partners. But for banks such as the one I mentioned earlier, what we do is we actually take their credit model and we code it into our technology and we take their credit appetite and we put it into our system…

Peter: Okay.

Charles: …and we say if a deal falls into this rubric, then deliver this approved application to the lender and ask them to say, do I want it, yes or no?

Peter: Okay, so you said you also have your own balance sheet that you’re lending out as well? Did I hear you right, you are providing actual loans off your own balance sheet?

Charles: We are, we are doing that as well.

Peter: Okay, okay, and then what about Currency Pay, what is that exactly?

Charles: Currency Pay is helping people move money from Point A to Point B. There’s not a lot of solutions for we’ll call it high ticket items, high ticket being qualified as more than $2,000. There’s not a lot of solutions in the digital environment being able to pay for something over $2,000. It’s possible…

Peter: I mean, obviously credit cards you can…I found out our American Express limit is $50,000 right now. There obviously are…I mean, credit cards do that, so say more.

Charles: So you are in the super elite portion of the market if you have an Amex balance that gets you up to $50,000. So I’ll share this story, I don’t mind this being on the record. A few years ago, and I’ve had…thanks to business school and other things I’ve had lots of debt we’ll say that I’ve had on my personal credit that I’ve borrowed and repaid over the years and a few years ago I went through the PayPal credit process. I mean, I’ve paid over six figures of debt on my credit report over the last 15 years.

I’ve been a business owner for over 12/15 years as well so I went through the PayPal credit process and despite my, which I’m very proud of, very high credit score and very deep credit background, I was only approved for $1,300. I’m saying this…like with a college degree, with a masters degree, with being a business owner for more than a decade, with having a very deep credit profile, with understanding the credit markets more than the average person, if I only got approved for $1,300 what’s the average business owner probably…the average small business owner is probably only going to get approved for, it’s probably not much more than that.

There are those businesses that do have six figure balances with American Express and that’s not the market that we’re going after directly, but for the mom and pop restaurant owner, business owner, truck driver, that’s probably not an option for them. So for everybody else, now that behavior is shifting so let me give you these metrics, it is pretty fascinating. If you add in eBay and a couple of other partners in the eBay category and you take all of their volume and you can qualify this with some of the Ritchie Brothers data as well, they are the largest auctioneer. Our best guess is that according to measurable data, there’s no more than $10, maybe $12 billion of equipment sold electronically in the US every year.

Peter: Out of the $1.7 trillion total.

Charles: Correct. Take that number and multiply it times five, take it to $50 billion, $50 billion out of $1.7 trillion. So the secular bet that we’re making is people are going to have to figure out how do you move money from Point A to Point B at a different point in time when you move an asset from Point B to Point A and that’s sometimes going to be financing, sometimes it’s going to be ACH, debit or it’ll be credit or it’ll be a wire, but you can’t do that unless you can also manage the logistics and create trust amongst three mistrusting parties; the finance provider, the seller and the buyer.

Peter: Right, no, that makes sense, I see. You know, $50 billion is 3% of the market I guess of $1.7 trillion and eventually…I mean, I imagine, eventually it’s going to be 100%. I mean, I don’t know if there’s going to be in ten years time, things that are not happening digitally, maybe there is, maybe it’ll take decades to get it to 100%, but certainly you’re going to get a lot more than 1 or 2%. It’s completely inevitable, I don’t think anyone could really argue against that. It sounds like what you guys are doing is facilitating the acceleration of that.

So then I want to talk a little bit about the data analytics, technology…it’s a unique…this is not really just like a small business loan because a small business loan, you’ve got a small business, you’ve got a lender. Here you’ve really got…like you said you’ve got three parties and you’ve got the piece of equipment as well itself which is really a fourth entity even though it’s inanimate, but it is part of the thinking, so how do you gather all of the data to make an informed decision there?

Charles: Well to take your question one step further, I think about what do you do with the data once you have it and how do you translate it into value and for who. So what we’re trying to do is to be able to empower transactions at the point of sale for A to D credit and every type of asset purchase online. That’s our end game and so all of our view on data is filtered around that because what we found is and we went down the path of saying, well we can build a better credit model.

What we found is that if we put our name to our credit model and then we market that credit model to the capital markets and they use our credit models to make credit decisions, then it works until it doesn’t or it works until it potentially doesn’t with how fickle things are today and so we said, well we don’t want to put our stamp on saying we can do credit better than anyone else. There’s other people doing that and we commend them for being able to do that but that’s not the bet we’re making.

What we want to be able to do is build an end-to-end equipment purchasing financing exchange and be able to use all of the data that we’re gathering to help people optimize unit economics on the equipment that they’re using because if people can use their equipment to generate more revenue, more often, then that makes the entire ecosystem work better. Does that make sense?

Peter: Right, I get that, I get that. Okay, so we’re running out of time and I want to get to a couple of more things here. Firstly, I want to talk…I’m actually looking at your face right now on your website and my face is on there too (laughs), that’s interesting. So the CEMC, the Commercial Equipment Marketplace Council, that you founded just a couple of years ago, I believe, so tell us a little bit about this organization and why you founded it.

Charles: Sure, the purpose of the CEMC is to bring together the best and the brightest from the fintech world and the equipment finance world and bring them together. We believe what you just said, it’s inevitable that technology changes how things are being done in this market and we’re already seeing it today.

We’re seeing it in a very quick clip, it’s accelerating, the rate of change here. So when we were first having these conversations in 2011/2012, we were told point blank by multiple people, you’re going to go out of business for using DocuSign. You’re crazy, electronic signatures are never going to hold up in court, you’re going to go out of business. The whole world is now moving towards DocuSign and the equipment finance industry is just now adopting it at a pretty quick pace.

So we said, well okay, we want a vibrant market with lots of competition because that will speed innovation up and our end game is to really build a new ecosystem, a new exchange where we can help facilitate these transactions across all sorts of credit parties, all sorts of investors, all sorts of sellers of equipment and we want to be the hub that empowers these transactions. If that’s true then we need to bring together all of our partners and if we’re not trying to compete on cost of capital, we’re not trying to compete on credit guidelines, we don’t want to be a balance sheet lender in the long run.

That’s a temporary step for us to get to the next lily pad and so for us we want to pull together everyone who touches the value chain of figuring out what do you want to buy, how do you want to pay, get them all in a room, deliver a world class experience and force the conversation to think about what is artificial intelligence going to do to our market, how is talk to text going to change things. What if you had a blank sheet of paper and you didn’t care about the math, what would be the next product that you would invent for the customer?

Probably something around shared economy, probably something around Internet of Things connected back…I mean, John Deere is doing a lot of this stuff, I didn’t know that before. We had them come to our conference and talk about it. And so the purpose of CEMC is to drive that conversation forward to bring technology to our market at the cost probably, frankly, of margin, at the cost of margin short term, but long term, by rearchitecting this industry to have it be oriented in the way that it should be going to build long term sustainable value.

Peter: I should just mention as well, I spoke at your event last year which is why it’s on the website here. It was a great event, opened my eyes, I had never talked to many people in the equipment finance space and it really was quite fascinating. Anyway we’re out of time, but before we go just maybe a few thoughts on what your vision is for Currency.

Charles: Oh man, my hope is when I look back on my career that, you know, call it 20/30/40 years from today, that I can look back on this market and feel very good that I left a lasting impact on how people buy and sell equipment, and I helped to eliminate fraud, I helped people to optimize their usage of their equipment. That would be success for me and fortunately, I get to work with a lot of my best friends and I think this problem is really hard and really interesting, it’s not going to be solved overnight, but if we could pull all those things off and enjoy the process along the way that would be my vision for myself and for Currency over the next couple of decades here.

Peter: Okay, we’ll have to leave it there. Good luck with that, Charles, that certainly is a noble mission and I appreciate you coming on the show today.

Charles: Right on, thank you, Peter, it’s been a pleasure to do this with you today. I’m honored.

Peter: Okay, catch you later. Bye.

Charles: Take care.

Peter: It is truly fascinating to me that an industry the size of equipment financing, he said $1.1 trillion financed each year, I mean, that’s one of the biggest verticals we have and yet it is still not being dominated by fintech players. There really is a traditional finance industry that operates pretty much the same way they did a decade ago. As I said, it’s inevitable that this will be moved online. Everything else is moving online and companies like Currency are really accelerating this process.

I think, you know, there were times when I was out at his event and spoke to some of these lenders and they are traditional folks and have done things the same way for sometimes decades and they just now are starting to think, well we should learn about how we can really digitize what we’re doing. I think they’re a decade behind some of the other verticals, but as I said, it’s inevitable that they will catch up and this will be… a digital experience will be commonplace here in the not too distant future.

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 USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th thru 9th, 2019, at Moscone West in San Francisco. Registration is now open and we’re also taking speaker applications. You can find out more by going to lendit.com/usa.

PODCAST TRANSCRIPTION SESSION NO. 166 / KEN LIN

Welcome to the Lend Academy podcast, Episode No. 166. 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 USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

Peter Renton: We have a special guest on today’s show, I am delighted to welcome the CEO and Co-Founder of Credit Karma, Ken Lin. Now most people know Credit Karma, they really are the leaders in consumer financial information and I wanted to get Ken on the show really to talk about how they’re integrating today with the lending platforms, the credit cards platforms and how deep that integration is going.

We also talk about customer acquisition costs and how a company can go about lowering that all important number. Ken introduces us to the concept of autonomous finance which I find particularly fascinating. We talk about international expansion, we talk about the recent acquisition they did and much more. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Ken!

Ken Lin: Great to be here.

Peter: Okay, so I’d like to get this thing started by giving the listeners a little bit of background about yourself. Obviously, Credit Karma’s a pretty high profile company, but not everyone would know about your background so tell us a little bit about what you did before you started Credit Karma.

Ken: Sure, so my first job out of school was actually with the card issuers, that was in the late 90’s and Partners 1st was my first job and there I actually worked on the underwriting and the marketing/acquisition side of the business so really cut my teeth in understanding financial services space.  I think in the late 90’s, credit cards were probably one of the most sophisticated marketing channels out there so we did a lot of direct mail, we did a lot of one-to-one marketing and targeting.

Went to a couple of tech companies, really enjoyed that experience, but ultimately came back to finance in the form of new products which helped consumers save for their children’s education as well as E-Loan which had a business in mortgage, personal lending and auto finance. The combination of those experiences is in a little bit of consulting work that I was doing with Prosper at that time in the lending and credit card business. That’s basically been about, you know, 15/20 years worth of digital marketing and financial services.

Peter: Right, right. So then let’s just talk about that. What did you see….you said you worked with Prosper, what did you see was missing, what was the idea that led you to start Credit Karma?

Ken: Yeah, so I had left E-Loan when I was working specifically with Prosper and the thing that helped me was….you know, so Prosper was obviously, at that time, a P2P lending company, known as alt lending now, but while we were doing a lot of digital marketing what struck me was, you know, basically two thirds of the marketing dollars were going… being spent inefficiently so, you know, the final one third of consumers with low credit scores Prosper really couldn’t underwrite. You can’t get anyone to give loans at that credit range and at the highest end of the spectrum what you found is that those consumers could go to their credit unions or their banks and get…equivalent or sometimes better rates.

So as a result really is the people in the middle that was the sweet spot of lending and the other sort of the high credit and the low credit ended up being inefficient and given that we were using a lot of search, given that we were using a lot of display and digital in general, there was no means by which you could actually define that right target demographic.

I remember back in my credit card days at Partners 1st in the late 90s, we would have probably just done a credit pre-screen and eliminated all of the high credit people and all the low credit people in looking for the right kind of consumers. And that was the aha moment for me at Credit Karma. You know, it is kind of funny… subsequently a lot of the out lenders, went back to direct mail because of that dynamic, that ability to target exactly the customers that you wanted.

So we went on a parallel task to try and figure out how to build that in the digital ecosystem and that ultimately was the impetus for Credit Karma, the idea that there was a platform that could actually screen the right lenders for every consumer. That would be a compelling user experience and one that…you know, this was in 2006/2007, and the Internet had come so far, but one of the fundamental things was financial services still didn’t exist and we thought we could build that with Credit Karma.

Peter: Right, so when did you sort of realize…..because, I mean, obviously now you’ve got tens of millions of users and everyone knows you, but, obviously you started from scratch and….when did you realize that you had a business that really had a lot of potential? What was sort of the tipping point for you?

Ken: Oh, gosh (laughs), I always forget a little bit about the big progress when you look at it on a day-to-day basis because we’ve been doing this for about 11 years.

Peter: Right.

Ken: When we probably got to a little north of 10 million users and we’re still really growing exponentially on a month-to-month basis, I think there’s a real sense that there was a lot more than a credit scoring aspect of this. There’s a real need for consumers to understand more about the options that are available to them so finding out your credit score is one aspect of yhy people use Credit Karma. We realized along the way that everyone who is using Credit Karma was in market for financial services, not everyone, but a meaningful percentage.

Another meaningful percentage of our users really needed and were looking for independent advisors in the space in the sense that banks are great about sharing their products, but they’re always going to promote their own products. So we found the confluence of these two items being the key driver of adoption and re-engagement over time. I think the third dimension that we really observed was that people were coming back in an inordinate amount, more than we would have anticipated from a month-to-month basis.

We realize more and more that as we build out these products that consumers were really looking for, again, this advisory or independent role when they tie into their finances because Google didn’t have enough context and most of the blogs and most of the other financial services site tended to be so generic that they were not necessarily applicable and finance is one of those categories unless it speaks directly to you and at the time there weren’t many, it just didn’t have the appeal.

One of the things that we gravitated towards very early because we know the consumers’ financial profile….writing content, writing products and features that were bespoke and I think when we did that we thought saw this level of engagement that we haven’t seen before, but I think that was the driver and the encouragement for us to build out new features that were along that vein.

Peter: Right, right. I personally have had a Credit Karma account since 2011 and now I log in every month because I just want to make that everything is still okay. I want to see if there’s anything on my credit report or anything that looks a little off and I think that’s one of the great tools that Credit Karma has provided for many years, but I’m curious about…..right now, so you just mentioned that you’re sort of going beyond just the credit score so when you describe Credit Karma today what are the kind of verticals, what are the kind of businesses that you’re really in?

Ken: Yeah, so it started with the credit score, the monitoring, you know, I think we added other features like Protection, Dark Web, Direct Dispute. I think there are a lot of consumer-oriented features, but really I think from a business perspective we started with helping consumers find the right credit card, based on the credit profile all the back to 2008. We launched personal loans, I think probably in 2009 or 2010, and now were on the journey of auto loans and mortgages and the realization here is that all of these verticals work for us because consumers are looking for someone to help them navigate the complexity of their financial services life.

Peter: Right.

Ken: And when you look at the consumer Internet space, you know, Google can only do so much, right, and when you look at the overall platforms most of them have a unidimensional view on your financial life and most of the time when they have that view, they’re mostly promoting their own products. I think with Credit Karma we have a point of view that, you know, the players and the Internet are not addressing this fundamental need for consumers to understand their finances.

So for us, we think about everything on the asset side of the consumers’ balance sheet, everything on the liability side of the consumers’ balance sheet and then insurance as sort of the hedge between the two…those are the areas where consumers struggle from and those are the areas that Credit Karma will continue to build products, will continue to build a brand. There’s a fundamental view that we can help consumers get a better experience and the best outcomes.

Peter: Right, right. So then is credit cards still your number one vertical today or how does it sort of break down as to what…..on the revenue side maybe, what are the core business units you look at?

Ken: Yeah, on the side of our verticals they are relative to the number of years that we’ve been in them. You know, credit cards, personal loans, auto loans and now mortgages, right, what we try to do is we try to build an ecosystem within each one of those and those all take time. But, at the end of the day, we think that all of those are important aspects of consumers’ financial life. And I think, credit cards specifically is one where it’s not a considered purchase, right, there is always an opportunity to find a better credit card, so to speak, no matter what you have in your wallet. Something comes along and you have a credit profile for it, it is easy to switch.

Whereas, you know, I guess the mortgage rate is, or an auto loan rate is so if I’m not in the market for a car, I’m not going to buy a home or a car. So I think those are the differentials in the space. At the end of the day, we think about the fact that, you know, there’s about $13 Trillion worth of consumer debt just in the United States alone and there’s an opportunity for us to help consumers find the very best option whenever they are in market and really that’s the brand and the products that we’re establishing at Credit Karma.

Peter: Right, right, got it. So then can you just explain to the listeners how exactly you make money because i know you have these recommendations that…what is the business model exactly?

Ken: Yeah, so at Credit Karma, we’ve been around for 11 years and in those 11 years we’ve never charged a single one of our members. Our business model is pretty straightforward, we spend a lot of money buying data on behalf of our members. Our goal is to educate our membership base, build tools off of that data so they understand how the financial services systems work.

Now from a revenue generating perspective…once we have a consumer financial profile, we can obviously see how much debt they have and at times how much assets. So for example, we see a little bit more than $4 Trillion worth of consumer debt today. Now to give you a very simple  example, we saw consumers who had an auto loan that they took out last year and maybe they’re paying 16% on that auto loan.

When that consumer is paying 16%, we could say to that consumer….well, based on your credit profile, we think you’re over paying for that auto loan. Here are some partners you would consider and before we actually show those partners, we’re actually using our cloud computing infrastructure and AI, to determine the probability of approval for the loan that we’re going to show them. We only show them the high probability ones, we won’t show them the completely not qualified for so a 16% loan can be refinanced at let’s say 11%,10.5% and 9%.

We’ll share the math with the consumer, we’ll try to streamline the process and if that consumer decides to refinance that auto loan with Credit Karma, you know, they’ll save let’s say $75 a month for the next 40 months, our banking partners will get a new customer and that customer acquisition cost might come from Facebook or Google or television today and in exchange they’ll pay us a couple of hundred dollars for that new customer. So everyone’s kind of a winner in that situation, maybe with the exception of the original lender who is charging the consumer too much. So that’s how we create our revenue streams, it’s always free to the consumer.

Generally speaking, we are being paid by the financial services company only when they book a new loan. We think that’s important because we focus a lot on quality, we actually don’t want consumers applying for products that they are not qualified for, we don’t want consumers looking at loans that ultimately aren’t going to be issued in the form of credit limits or interest rates.

Peter: Right, got it. So I want to dig into that a little bit because …..I’m actually on your site right now, on the Personal Loan section and it says I’ve got seven offers from Marcus, Prosper, Upstart, Citizens One, etc. and it says on each one of these…you’re pre-qualified. Now it says, our partners says you’re pre-qualified. What does that actually mean and is that like a 90% certainty that I’m going to be qualified or what do you really mean when you say you’re pre-qualified for a loan?

Ken: Yeah, so that 90% is generally the standard that we like to work from. Now that will vary a little bit, depending on the partner and depending on some of the interaction, but that’s exactly right. What we’re doing is we’re actually looking at credit requirements of our partners and then matching that up against the credit quality of each individual consumer. Now there’re going to be some things like credit score drift, there’s going to be some things like income and ability to pay qualification.

You know, every once in a while you get a lunge in OFAC or some sort of anti money laundering of regulatory constraint, but the idea is that we’re going to get closer and closer to 100% and that’s our internal goal at Credit Karma. We believe that this industry has been in this situation for too long and the situation being where consumers don’t have a certainty of approval, they don’t have the transparency of pricing and these forms are just way too long, in terms of the number (of questions) they’re being asked.

So we as a platform, as a business are focused on fixing these three key tenets of lending so we want to make sure over time that every offer at Credit Karma is pre-qualified or pre-approved that it’s going to 100%. We want every consumer to know what the rate is going to be, what the credit limit is going to be in advance before hitting the Apply button and when that consumer hits that Apply button we want that form to be one question, two questions or ideally, one or two consents. I think that’s where the sector can go and we are building out all these technology pieces and integration with many financial services companies, you know, as we think are qualified and want to innovate in the space.

Peter: Right. So then how deeply do you get into that, like there’s …..let’s just take Prosper for an example here. It says I’m pre-qualified for a $10,000 loan, 6.95%, 36 months, I mean, are you they giving you their credit model or are they just giving you….I mean, what is the level of integration that you would have say with a Prosper where you know that I’m pre-qualified? I’m taking that it’s more than just my credit score, right? I mean, how does that work as far as integration goes?

Ken: Yeah, so it varies by partner but you’re exactly right, there’s a lot deeper than credit score and I think that’s one of some amount of difference of Credit Karma relative to other players in the space that, you know, might have a similar model as ours. We are getting to the nuance of each credit lending decision so (inaudible), it is no surprise to some of your listeners that credit decisions are based by dozens, I mean, at times hundreds of credit variables.

Peter: Right.

Ken: And for a lot of our partners, we’re actually on that level, we’re actually looking at each of the potential dozens and/or hundreds of credit variables to determine eligibility and that’s how we actually can get the pricing. So you picked up an interesting note which is a lot of the times the direct mail for alt lending, you know, it will say you’re pre-qualified for a loan up to $35,000 and it doesn’t describe the APR.

Well we’re talking about the specific dollar amount and the specific APR because we’re actually looking at all of those variables of credit. There’s something again that is….I think it’s dysfunction in the space and the lack of innovation in financial services, we can actually bridge a lot of that on the Credit Karma platform.

Peter: Right, got it. And then as far as…..going back from the platform perspective, customer acquisition cost has been a hot topic for many years. It’s obviously a very competitive space, the personal loans space today, it wasn’t so much, you know, when you guys got started, but it certainly is today and I’m curious about…..you know, you’ve got a great window onto this. How can platforms reduce their customer acquisition cost when they’re working with Credit Karma?

Ken: Yeah, I think there’s a few ways, right. I think the first one is credit quality obviously. So for example, if you’re approving 25% of the loans that are coming through and you’re paying on cost per application, well, if you get to 100% you’re obviously reducing your cost per acquisition by, you know, 75% or more (garbled).

Getting the right customer credit quality is one area that we can really gain efficiency and it’s no different than the idea that we started from when we started Credit Karma, the story I shared about Prosper being 2/3 of their dollars are being inefficient. So, I think that’s certainly one. I think, two, is actually reducing the friction of application itself. I think that when we look at the space, you know, more and more applications are mobile oriented, we see 80% of our traffic coming from the mobile demographic and when you’re asking consumers to fill out 40 questions, 50 questions through their phone, you get a lot of fall off.

Peter: Right.

Ken: I think enabling technology can prove that. You know, we have what we call “Quick Apply” which is the ability to fill out that application, giving Credit Karma permission to fill-out that application on your behalf and then for an implementation and we see meaningful improvements there and then I think the last piece is a lot about transparency.

I think consumers really dislike the notion that…well I’m going to apply for a product, you won’t actually tell me the specifics of the product until I spend all that time. I mean, imagine if you were to walk into a store, let’s say at a big box retailer and they didn’t tell you the price of the item that you’re interested in and so you filled out 30/40 questions, like it just doesn’t make any sense.

Peter: Right.

Ken: I think more that lenders can improve and innovate and disrupt. I think the better off they will be in terms of acquiring high quality customers that are fundamentally at a much lower price point than they have historically spent on an additional platform or online.

Peter: Right, right. That actually segues nicely into my question I wanted to ask you about this concept of autonomous finance. I was actually in Dublin recently early in the summer and when you were giving a presentation and you introduced this concept of autonomous finance which I thought was fascinating. So tell us what you mean by that and why it’s important.

Ken: Right, when you look at consumer finance, I think there’s a confluence of technology, of data, of trust. That’s going to allow us for the next five years to have consumers put real trust in a technology, in a machine learning algorithm that helps to ultimately optimize every aspect of their financial lives.

I think we use autonomous finance as the driving…..when you think about driving there’s a lot of nuance that comes into play, there’s a lot of moral dilemmas that I think people don’t really talk about because the finance is actually not that complicated in the sense that you’re not running over anyone.

Peter: Right.

Ken: Lowering your borrowing cost is actually quite an objective function and optimizing the interest on your asset is also a relatively objective function We are currently in a spot where, you know, machine learning, where big data and trust allows all those things to play. So for us, autonomous finance is a notion that in five years we believe 10% of the population will completely trust the platform to determine what credit cards they should have in their wallet, where their savings account should be and how much to put away for their retirement, based on a very clear set of objectives.

You know, I think banks and financial services companies and fintech companies are finally coming around to that idea. You know, one, we think it’s hot but, two, what we see in our data is that particularly around the younger generation consumers they have a lot of stress and anxiety around finances, they don’t trust the big banks enough, but they do trust technology companies and they do trust compute and AI.

So I think that’s where all these thesis come together and for us autonomous finance is this notion that in five years time a machine can help you determine….. most aspects of your financial life in a way that is meaningfully better and less stressful than the one that we see today.

Peter: Right, now that makes perfect sense because, I mean, really the information is out there. If you’ve got a home mortgage, an auto loan or a credit card or whatever it is and the information is out there, you know that there is a credit card you could be approved for or a personal loan you could be approved for that’s literally going to save you hundreds of dollars a month and I can totally get that this is where we’re going by having someone optimize your life.

So you know, you know when you have the information that there is no better deal out there, you have the best deal and when another better deal comes along or you’ve paid off something and you want to do something else, I really get that. I feel like we should be there now and I know we’re not.

Companies like yours are really leading the way in trying to get us there, but I think that’s going to be tremendously useful to the consumer and I think……I guess the issue is, you touched on it, there’s got to be a level of trust that what you’re doing is you’re not sharing data that other people are going to get and they going to spam you, what have you. I guess is that really why we’re not there today, I mean, like you said in five years time. What is stopping us from being there this year?

Ken: Yeah, that’s a great question. I think that it probably comes in a few flavors. You hit on one which is trust, right. I think that consumers have (inaudible) platform believe that it’s going to do the right thing. I mean, this is where we think a lot and spend a lot of time around independence of our offers and making sure that we have a North Star around the consumer experience and I think it makes sense.

If you’re cynical from a financial perspective, from a business model perspective, it makes sense to align with the long term journey of the consumers, I think that’s certainly one aspect. I think another one is scale. What’s really challenging in financial services is because the large incumbents are so large, you actually have to have meaningful scale to change the paradigm.

Peter: Right.

Ken: For example, you can’t get a large bank to integrate with you unless you have literally tens of millions of customers because, at the end of the day, it’s a relatively insignificant amount if you have less given that there’s always a crunch for more resources and more development cycles at each bank. They’re not going to prioritize those types of projects. And last, I think, data is a big player in the space. It is not enough that you know that there’s a lower mortgage rate, you actually have to go and have all the data elements determine eligibilities, all the data pieces to actually facilitate and generate.

For example, in mortgages, well, it’s not good enough to know that I can go and lower my monthly mortgage payment by $150 because the consumer…. there’s actually quite a bit of friction in achieving that…I know I’m going to have to go find my tax filing, I know I’m going to have to go and pull out my W2, I know I’m going to have to get a bank statement, I know that somebody’s going to put me through, you know, a loan underwriting with stitch from Freddie and Fannie.

I think those are areas that we’re spending a lot of time investing in because we know that the information and knowledge is not enough; you actually have to simplify the process to a point where you can have a simple app calling a ride share. That, I think, will change and fundamentally transform the industry.

I think you need all three of those and I think it takes time to accumulate the trust, the data and the integration with the financial services. That’s really the long answer to why we don’t have it today, but we certainly see it on the horizon given sort of the emergence of fintech, given the change in attitude from consumers.

Peter: Right, okay. So I want to take us on a little bit of a tangent. You’ve mentioned mortgages a bit and news just came out just last week…we’re recording this in mid-August and you acquired the mortgage platform Approved. Can you tell us what that means, why you did that and a bit of the story behind that purchase.

Ken: Sure, so Approved is a digital mortgage, let’s say, documentation, loan origination systems platform, if you will, and we think there’s a really interesting synergies in the description I described. We know there’s a lot of documents that need to be collected as part of the mortgage underwrite, we know there’s a lot of pieces of information to determine your eligibility and provide, you know, certainty and complicity. What we love about Approved is that they were on the way to building a lot of these products.

Moreover, there’s a great team over there, that came from (Redfin?) that has a lot of experience in the space. When you look at those two things together with Credit Karma’s ambition to help consumers across every aspect of their financial life, it just makes sense. There’s almost a trillion dollars or a little more than a trillion dollars in mortgage origination each year and, you know, for anyone who’s gone through that experience, it is tedious, it is emotional and it’s stressful and, you know, we think as a platform we can solve a lot of these things.

So our future statement might be if you did your taxes on Credit Karma, that probably means we have your W2, that probably means we have might have access to your bank account to determine whether your deposit or your down payment is in reason, that probably means that we have good insight into your credit, probably means we have good insight into your cash flow. Well, all of a sudden, you know, 80/90% of the work of underwriting a mortgage is actually within our platform.

You have to give us permission, you have to let us know that you’re in market. We can solve a lot of the things that drives the most amount of stress and, at the end of the day, we can get you a better loan product, a better lower cost mortgage. So that’s where we see the model going in the mortgage space, but it’s true of every one of our verticals and how we think about the opportunity which is, you know, a meaningful percentage of Americans are stressed about their financial lives and we, as a platform, as a company, can help reduce that stress by providing more simple experiences, more transparent pricing and processes that are second to none.

Peter: Right, got it. So we’re coming towards the end, but I have a few more questions I really want to get to. Firstly, what is the scale you’re at, like how many users do you have? It keeps growing so we’d like to get an up-to-date number.

Ken: Yeah, so we’re a little more than 80 million consumers now in the US and in Canada. We’ve done a little bit more than, let’s see, 2 billion credit reports and scores and we’re able to track trillions of dollars worth of consumer debt so quite a bit of scale here. We continue to add new pieces of information so …you know, recently we added DMV information, household car information with VINs to help consumers with auto finance. The goal here is to continue to educate consumers at scale around the key aspect of their financial life so we continue to add, you know, new data to help with that.

Peter: Right. So you mentioned Canada, is that the only country you’ve expanded to beyond the United States?

Ken: You know, we’re basically in North America today, but we think that finance is as stressful across the world so we continue to look for opportunities outside of North America.

Peter: Right, right. Okay, I’m sure you’re sick of answering this question, but I have to ask it because I know people would want to know an answer. Where are you at with IPO plans?

Ken: (laughs) Sure, we think of an IPO as much more of a tool in a tool belt against the goal of helping consumers, you know, make financial progress than the end goal. I mean, I think if it was our end goal we could have gone public, you know, probably a couple of three years ago, but we really think about investing in the long term so things like tax, like mortgage.

You know, we really think that this is the way to build a robust platform and the more that you can do that in a private market to really invest, I think you take some of the friction points off, necessarily focusing so much on profitability, but, you know, we have a long term vision and we’re very much pursuing that long term vision in the private markets and….you know, along the way we try to take us down the better hygiene and better practices in the public market, in terms of the way that we close and making sure there’s a strong Compliance Department and so on. But, at the end the day, we’ll go at some point, but it’s not our end goal.

Peter: Okay, so last question then. What are you working on today that you are most excited about?

Ken: Well there’s lots of projects that we haven’t announced so I won’t get into too many of those, but, you know, I think the thing that really is the most exciting is really the continuous engagement that we see at Credit Karma. It seems like every new product that we’ve put out continues to drive more and more users, and today we have something like 40 million unique members on Credit Karma each month which makes us one of the largest, if not the largest, sort of financial services sites in the United States.

So we think that is a really big opportunity and sort of gets us thinking about all the things that we could be doing, but everything that we focus on is around making financial progress possible for our members, with those three pillars of making things certain, making them transparent and making them easy. So we have a lot of projects along those lines and you’ll see more and more of those roll out later on this year.

Peter: Okay, I’m looking forward to that. We’ll have to leave it there, I really appreciate your coming on the show today, Ken,

Ken: My pleasure, thanks for having me.

Peter: Okay, see you.

Ken: Alright, bye.

Peter: I want to get back and talk a little bit about that autonomous finance idea that Ken introduced and it really is fascinating to me because, as I said, the information is out there. We should be able to optimize our financial life in many ways really, and not just from a lending perspective. You know, credit cards, you should be able to optimize for investing as well and for taxes and all that kind of thing.

So I think companies like Credit Karma are really giving us the possibility of having this become a reality where we can know that the mortgage that we’ve got, the personal loan that we’ve got, the credit card that we’ve got; that is the absolute best deal for us and I think we’re not there yet. Ken said it’s going to take five years maybe, but it’s certainly going to be in the near future where we can feel confident that we have really the best deals that we can possibly get.

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 USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th thru 9th, 2019, at Moscone West in San Francisco. Registration is now open and we’re also taking speaker applications. You can find out more by going to lendit.com/usa.