PODCAST TRANSCRIPTION SESSION NO. 209  –  AL GOLDSTEIN

Welcome to the Lend Academy Podcast, Episode No. 209, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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

Peter Renton: Today on the show, I’m delighted to welcome Al Goldstein, he is the CEO & Chairman of Avant and the CEO & Chairman of Amount, their digital banking-as-a-service brand. I wanted to get Al back on the show, he was on four years ago, and a lot has changed since then and we wanted to talk about the new developments at Avant, talking about their new credit card and some of the new things that are coming down the pipe there which were fascinating.

We also talk about Amount because they already have signed up a few large banks for their banking-as-a-service platform and some of them are public like Regions Bank, HSBC and others and we talk about that in some depth, how they were able to get these banks over the finish line, who really are their competitors and what their vision is. It’s a fascinating look at where banking is going and Amount’s role in the future of banking. It really was a fascinating interview, I hope you enjoy the show.

Welcome back to the podcast, Al!

Al Goldstein: Yeah, thank you for having me back on, Peter, it’s been a while.

Peter: Yeah, it has. In fact, it was four years, the summer of 2015 when you were on and that was back in the go-go days of online lending and obviously, a lot has changed over the last few years, but why don’t we just get started maybe by telling the listeners how Avant has changed over the past four years.

Al: Yeah, I like how you say the go-go days, I’m not sure of we’ve ever stopped going. It feels like we are running a marathon here at sprint pace which is always fun and it’s been phenomenal and you and I get to spend time together all over the place so great to be here talking to you about Avant and Amount and our journey.

So, the last time we spoke, really we were talking about the Avant vision which we started this company about six and a half years ago to be the digital bank for non-prime, middle income consumers in the US. That’s still the vision, we’ve executed really well, the company is now profitable, we have multiple products. Credit cards is our latest product that we’ve now launched and are really scaling up nicely that will be a huge growth engine for Avant.

Over the next three to five years, we’re in the process of rolling out additional products, rolling out a secured personal loan product and then, ultimately, rolling out a full depository product so really completing that vision, that mission of being the full service digital bank for those middle income consumers.

Peter: I want to get into a lot of that stuff in a little bit, but before we actually dig into the details here, I’d like to ask you to reflect back. You know, this industry has gone through some challenges, I know Avant has had some challenges as have most companies in the online lending space over the last few years. Before we sort of get talking about what’s happening now, looking back, knowing what you know now, do you think…would you have done anything differently in building Avant over the last three or four years?

Al: Yeah, so that’s a great question and clearly the industry has faced its share of challenges,  the public companies haven’t fared nearly as well as I am sure they would have hoped, we scaled up very, very quickly when we started our business from zero to nearly a thousand people and we were trying to do a lot of things.

We also scaled down fairly quickly and fairly publicly as soon as the public markets melted down and I’ll tell you the reason we did that. We wanted to control our own destiny and we went from a thousand people back to about 500 and grew profitably from thereon. I mean, in hindsight, it would have been great never to have gone through that experience, never to have grown so quickly, only to realize that markets were going to change that dramatically and take it more linearly.

But the reality is I don’t know who could have predicted that and at the same time, I think, our DNA as a company is much stronger for having lived through that experience so I am very, very comfortable that if there’s another time when we face a similar challenge, we’re going to rise to the occasion which is really important in this world.

Peter: Right, right. Obviously, you’ve survived, you’ve come out stronger, it sounds like. So, now when you look at the lending landscape today, and it does look pretty different to what it was, you know, five/six years ago when you guys were getting started, so how do think online lenders like Avant have changed lending?

Al: Well, so I think you’re exactly right, the landscape is quite different, not only the fact that at some point there were probably 400 digital lending platforms of various forms in the US. I don’t know what the number today is, but it’s quite a bit smaller than that, probably sub-ten of any meaningful scale.

There are a lot of banks that are very active in the market who are looking to jump in and that’s something we saw starting three or four years ago which is a big reason that we really focused on creating a technology business to enable banks to operate. But the online lenders of today that are focused on delivering products to prime consumers, to high income consumers are really going to have to face the challenge of the large behemoth banks coming in and that’s something completely new.

Peter: Right, that makes sense. And so then with you guys…I want to talk about your banking-as-a-service offering in a little bit, but let’s just talk about the credit card because that’s new and, you know, you didn’t sort of make a really big splash about it when it came out, so just tell us what the thinking is there. Is it the same demographic you’re focusing on with the consumer loans, tell us a little bit more about the credit card.

Al: Yeah, our thesis continues to be that the middle income consumer in the US, and we define middle income as consumers between $40,000 and 100,000 of household income, depending on where they live. We believe that consumer is pretty heavily underserved by great financial products and to the extent that they have those products available to them, those products tend to be pretty fee-heavy, they are not very transparent, not very user-friendly.

So, the thesis for our credit card offering is to provide that kind of a product that’s really clean, transparent and easy to use to those middle income consumers and huge overlap between our personal loan borrowers and our credit card borrowers. The beauty of a credit card product, again, whether it’s a physical card or a virtual card, whether it’s plastic or a card that you can use via your mobile phone, via something like a Samsung Pay app or an ApplePay app, you’re using it every day.

It’s something that’s really transactional that you carry around versus a personal loan that you really use once in a while when you need it. So our whole goal is to make ourselves high utility, to create products that customers that we serve value every day.

Peter: So then are you…obviously, you’ve got a massive customer base now that have taken out personal loans, but are you marketing the credit card yet beyond your customer base?

Al: No, so today we are marketing our personal loans and credit cards to new customers and offering the opportunity for them to move across to additional products. So, a card customer can then apply for a loan and a loan customer can apply for a card and I think that’s really the long term value proposition, is providing the product the customer needs and wants at the time that they need and want it.

Peter: Right, right. And so, are you partnering with WebBank on both of those initiatives?

Al: So, WebBank is the originator of both the personal loan product and the credit card products that are marketed by Avant. We are the servicer, we are the ones interacting with the customers day to day.

Peter: Right, right, sure. Okay, so then when we last chatted you…I remember you saying the same vision that you just articulated, but back then your interest rates went beyond 36 APR. I just checked on your website, I see that 36 is your…you are below 36 now on all of your loans. Why did you decide to do that and to sort of come down below that level?

Al: Yeah, so Avant’s products, credit products, have been below 36% for over three years at this point, maybe shortly after we spoke and that was really part of the original vision. I think the whole idea to start broader was to really expand our availability of data so ultimately we could provide credit to the most number of consumers because it really is a data game.

The more information that we have to make decisions, the better quality decisions we can make so we can offer a lower cost product to the customers that are going to ultimately perform well, we could say no to the customers that are ultimately not going to be able to repay their loans or their credit card advances.

In the US, 36% has been an accepted level by the banks, by the various banking regulators and that’s our view. We want to provide mainstream products for the middle income consumers that deserve them.

Peter: Right, right, okay. And so then, like what is your lowest rate? I mean, I imagine you won’t turn someone down if they are a super prime credit will you, or I mean, are you pricing for the full spectrum of customers?

Al: So again, I think this is where the vision for what we do at Avant and at Amount which is our tech business makes a ton of sense when you look at it holistically because Avant’s focus is really providing value to those middle income consumers and we offer rates down to 9% at our lowest level on the personal loan product.

But really our partners, our bank partners, through the Amount tech platform are focused on prime consumer credit and their rates go down to as low as 3% with no fees.  They hold those loans on their balance sheet, they expand their product mix to suit their customers and really, that’s the holistic offering. We think our bank partners are the ones that are best suited to really provide great products to the prime, super prime consumer segment. The beauty of Avant is customers that don’t fit that segment will still get a great product.

Peter: Right, right. So, are you actively referring on to banks yet today, or is this just something you’re planning on?

Al: No, we’re actively working with our partners to make sure that the customers that want a loan option get the broadest possible option.

Peter: Right, right. Okay, and so where are you at today as far as loan volume goes at Avant? Can you give us some sort of sense of the scale you guys are at?

Al: Yes, so at Avant, between personal loans and cards, we have originated over one million transactions to date since inception, about six years/six and a half years, which we’re really, really excited about that milestone, are originating north of a billion dollars in personal loans, scaling up credit card very, very nicely…and our personal loan data is public because of our various securitizations.

The performance has been really, really strong. I think that’s what has set us apart in the capital markets and we plan to continue to make sure that’s the case. We’ve taken it a little bit slower in credit card to make sure that we come out of the gates with strong credit card performance, but the goal is to originate over 200,000 credit cards this year and to scale up from there, so we’re really excited about that progress.

Peter: Okay, so when you said a billion dollars, that’s a billion dollars annually? Is that what you’re talking about for the personal loans?

Al: Correct.

Peter: Okay, so let’s move on to Amount and you know, I appreciate when we email backed and forth earlier this week and you made a clarification for me which I think is really important that the listeners understand and you said that Amount is a tech platform and Avant is one of the customers of Amount and obviously you’ve got other banks which we’ll get into in a little bit. So, I guess, the first question on Amount is why did you decide to launch the new brand and not just keep it under Avant?

Al: Yeah, that’s a great question and originally, you may know we started this tech business calling it “Powered by Avant” and the reality is that was when we were first testing it out really trying to make sure that it made sense for our partners and that the market was really big.

But, two or three years ago, we really came to believe that the opportunity to build a standalone technology business was gigantic; very different than Avant’s vision, very different than Avant’s goals in terms of serving partners, serving banks as its first priority where Avant’s vision is to serve consumers.

And just to avoid any sort of confusion because if one of our banks has a product and Amount is its provider of technology, its vendor, we want to make sure that they’re not even afraid of the fact that one of their customers could confuse their tech provider with Avant, the consumer brand…

Peter: Right.

Al: …so number one, and they’re just two different businesses. They have different risk profiles and different fundamental goals so the more and more we invest and think about these businesses, we think of them as two different businesses completely.

Peter: Okay, so then who is the target market for Amount, I mean, I know you have signed up Regions Bank and HSBC and a couple of others, I think, so who is the target market exactly?

Al: So if you think about what Amount is today, we started really providing technology around personal loans because that’s what we know really, really well and helping banks with the experience, with understanding how to deal with fraud, with understanding how to digitally host their credit policies and service loans.

We’ve really expanded that vision, the vision for Amount is to be the company that helps banks digitize financial services and notice I say financial services, not only credit, because our vision expands to account origination around deposit accounts, definitely around credit card accounts, around lending in various forms. And so our vision is we want to be the tech partner to large financial institutions that enables them to go digital so a la what Goldman Sachs has done with Marcus, building the digital bank from scratch, that’s what we’re helping our bank partners do.

To your point, we have about ten partners today, not all are public. TD Bank is another one of our partners that’s public, HSBC Bank, you mentioned Regions Bank, Banco Popular through their brand Eloan, etc. and we’re really, really excited. We now have partners that are using our technology beyond just personal loans, expanding that to other products and we’re now really catering to, I would say, banks above $50 billion of assets.

That’s the market that we’re going after today, but the long term vision is to expand products that really are useful for smaller banks as well.

Peter: So it sounds like you’re going to go head-to-head with companies like Fiserv and Jack Henry, is that the case?

Al: It’s actually not, just from the standpoint that I admire those companies, I think they’ve done phenomenally well, but their DNA is really around the payments and deposits universe and really focused on providing the core banking system for the large banks. That’s not what our goal is.

Our goal is to be the digital origination platform that integrates with all those different core banking platforms, but enabling these financial institutions to go digital in a native way, to be able to originate credit, to originate deposit accounts online seamlessly, integrate into their core servicing platforms which work really well, which are very proven and very, very hard to replace, but provides them with a modern user experience for their customers, for their bankers with great analytics that they just don’t have today.

Peter: Okay, okay, that makes sense. So, you just mentioned some of the banks you’ve signed, some of these are very large banks. What is the process like and…I mean, obviously, the timeline, I imagine, is measured in years, from first contact to public announcement, so tell us a little bit about the timeline and how the process works.

Al: Yeah, no, you hit the nail on the head, unfortunately bank timelines tend to be pretty long. It makes sense if you think about the regulatory environment in which banks operate and they need to be sure that their partners are going to be able to comply with those rules and the process takes a long time.

Having said that, we’ve now been in the business for four years plus where we launched Regions Bank in 2016 and we launched one bank in 2017 and another bank in 2018 and we’ve launched four banks so far this year. So, we’re really accelerating that timeline and part of that is it takes time to get that first product to market.

Our goal is once we launch a product with a bank, that’s really just the first of hopefully many products that we’re going to be able to help that bank launch. The product number two, three, four and five should be a lot simpler, a lot quicker, a lot easier just given that we, Amount, are hopefully at that point already a proven commodity, having shown that we know how to execute.

Peter: Right, but to date it’s really focused on the personal loan offerings, right, is there anything beyond that you’re offering today?

Al: No, we are. So, I would say the latest offering that we have is what we’re calling our “Amount 360” platform which is a cross product verification platform that we’re now selling across personal loans, credit cards, deposit account opening, all sorts of unsecured loans to help financial institutions with fraud, with identity, with income and bank account verification to create a seamless experience for customers.

Peter: Okay, so that could be even on-boarding a deposit account, or it could be on-boarding a credit card potentially….

Al: Correct.

Peter: Okay, okay.

Al: And we’re already doing that, by the way, with some very large banks, it is just we haven’t been able to share that publicly.

Peter: Right, right. So, when you’re talking to these banks, what is the biggest challenge to get them over the line, are they looking to say, right, we can just build what you’re offering. I’m sure many of the banks could, they have the capacity to build the technology that you guys are offering, but is that sort of…are you competing against that, or are you competing against other competitors, or are you competing against inertia? I mean, what is sort of the challenge with the banks?

Al: Yeah, I feel like it’s one of those questions where you just say D, all of the above (laughs), but the reality is there are not a lot of competitors like Amount that have reached critical mass. There are some great companies like nCino and Blend that are attacking different parts of the ecosystem and I think that’s great because the market is gigantic, as you said, these banks are very, very large.

Some banks want to build things themselves that tends to be only the largest banks that have giant technology budgets and it takes them a really long time. I personally think our target market is the regional and super regional banks. Today, I would say $50 billion to $500 billion is the target market because banks north of $500 billion, the largest banks, tend to want to build and control everything…

Peter: Right.

Al: …but the banks that are just a little bit smaller and you just look at the example. Even someone as big as a Suntrust and a BB&T decided to merge and the number one reason why they have publicly stated that they merged is to be able to have a larger technology budget to compete with the largest banks.

Our product and I think some of the products of a few of our newer competitors allow these regional/super regional banks to leapfrog, to really bypass the billions of dollars of tech investment and years in order to get digital products to market and ideally, pick up marketshare.

Peter: Right.

Al: So that’s really where we are today. We’re actively working on products to be able to sell products to smaller banks, call it the next leg down being the $10 billion to $50 billion banks. That are less customized, that are more off the shelf, that are easier to implement and use, but provide their customers with the same level of experience that the larger banks can provide.

Peter: Right, right. And so, one thing that we’ve noticed at LendIt is that we’ve had a lot more bankers coming to our event every year and this past year, we noticed there’s a lot more senior bankers in attendance. So, it feels to me like the bankers are very aware now of their own challenges. How were the conversations, you said you started this three or four years ago talking to banks, is it an easier conversation today because banks are more open, how has it changed over the last few years?

Al: Well I think, you’re exactly right, inertia, and you mentioned that earlier, was something that a lot of banks were probably facing five to ten years ago because they saw digitization happening on the horizon, they saw what I’m calling the “Amazon effect” start to really materialize where customers are demanding the product they want when they want it, virtually in real-time, but they didn’t see their competition doing it I would say over the last three to five years.

And also, digital lenders have come in, but also banks have come in. Banks like Goldman Sachs have pushed the envelope with Marcus. I think it’s raised the stakes and today, bank CEOs and bank product heads are more focused on the fact that they need to bring products to market and that’s what we get excited about is working with champions at these banks that have timelines and have specific product goals. We have not had a lot of success going and convincing someone at a bank to do something they don’t already feel like they need to do.

Peter: Right.

Al: But working with product heads, whether it’s a personal loan product or credit card product or student loan product or whatever it may be, that have goals and business initiatives that they need to fulfill, those are the customers we want to work with because we think we can add a lot of value for them.

Peter: So when you’re talking to them do you get ever…I mean, because a lot of these banks have significant branch networks, particularly some of the regionals are very committed to these branch networks and they’re not actually reducing that much in the way…the number of branches, are they committed to 100% online or mobile, obviously digital, or is there…do you have to sort of incorporate how they’re going to be using this in the branches to kind of make it a person-to-person experience as well as digital?

Al: Well, so for Amount, the goal is to create the omni-channel experience. So, in an ideal state, we value branches. A lot of banks have very strong branch networks and they are shrinking a little bit, but I think, largely, it’s the type of branches that are being swapped over and they’re becoming more urban.

Our goal is to create the same experience for customers, whether they are a brand new customer to a bank, they’re in footprint, they’re out of footprint, they’re an existing customer, they’re going into the branch. So, we’re not always starting there, whether it’s a personal product or everywhere else because we have to work our way in. Integrating into bank existing processes and systems is complicated, it’s going to take more time, but that’s the end goal, is to create the most seamless unified experience that we possibly can for our partners.

Peter: Right. So, is the way into these banks still today the personal loan market? The things you’ve released publicly has all been related around personal loans, is that still the way in to most of these banks?

Al: I would say I think it depends on the bank and our Amount 360 product which we used to call Amount Verify. I think we’ve put that out publicly at one of the conferences and that’s very exciting. I think it’s unique, it’s something where we may be the best…we think we’re one of the best in the world in really providing that seamless experience for banks to handle fraud and handle the customer on-boarding process across products.

And so that, we think, is a great way to get started that is in some ways easier to integrate with because it’s more back-end facing versus front-end facing, it can integrate into the front-end experience and help banks scale their personal loan product, etc., but we’re going to continue to build these more modular products that are easier to plug into, that ultimately, over time end up in big relationships. That’s the goal.

Peter: Right, right, okay. So, you know, I want to actually go back…you’ve mentioned deposits a couple of times and you even talked about, you know, you said you want Avant to become the digital bank for the middle class. You haven’t talked publicly about deposits at Avant as far as Avant offering them to their customers, where’s that on your product roadmap, or can you sort of give us some sense of when you want to have a complete offering beyond loans and credit cards?

Al: We have a few additional products that we’d like to launch to really complete the credit offering but by the end of 2020. We want to make sure that we have a complete bank offering, including deposits for customers. So, it’s something we wanted to do for a long time, we all have to prioritize and we have to stay focused, but we think that our customers today want a clean, transparent deposit account offering and that’s the goal…would be to help them achieve that.

Peter: So, are you going to achieve that through a charter of your own of some kind, or through a partnership?

Al: I would say both. We’re interested in a charter, we’ve said that, I’ve said that publicly. At the same time, we acknowledge the fact that there still haven’t been really charters granted to any of our peers and so we continue to be interested in that process, but in the meantime, we’d love to partner to provide great products to our customers.

Peter: Right, right, okay. So, we’re running out of time, but before we go a couple of more things. I’m curious about…you personally, you’ve talked about a lot of initiatives, you’ve got a lot on your plate, I mean, how are you spending your time between Avant and Amount these days?

Al: Yeah, so I’ve been spending more of my time on Amount for the last three years and really that’s just the function of the people that we have. We have some great people at all levels of our company and I really pride myself on the fact that I do very few things well (Peter laughs), but I’ve been pretty successful at trying to surround myself with really smart, hungry people that like to fight. We like the idea of creating value and we understand that it’s going to be difficult and challenging so we have great people like that throughout the organization.

We have great people like Adam Hughes, who’s our President, who’s really been driving the Avant business from the very beginning, we have James Paris who has been helping me run the Amount tech business, who has been with us really for four or five years, we have some great folks throughout the organization.

So, we try to continue to be selective, we have a lot of interests, but we really focus on prioritizing what’s really important and making sure our partners…If I put my Amount hat on, our core goal is that our partners, be it Avant, be it the banks, are happy, they get what they signed up for.

Peter: Right, right, that makes sense. So, do you spend any time on Spring Labs? I know they’ve been sort of been incubated by you guys, are you an advisor, or are you completely separate from Spring Labs?

Al: So, Spring Labs is a really exciting company, I think you’ve met some of the folks there and we really seeded the company here at Avant and the goal of Spring is to be a decentralized credit and identity bureau and network that is much safer, much more secure that addresses really some of the same needs that our partners at Amount, our bank partners have, in terms of being able to share information, share their views on customers without sharing underlying data and putting that at risk.

We seeded it, it’s got a phenomenal team that we know very, very well. So, Avant has an interest in that company and I’m on the board, but really representing Avant’s interest and really, I would say, Amount’s interest, and helping to make the Spring Labs product available to our bank partners.

Peter: Okay, I’m a big supporter of Spring Labs. I think that kind of offering is so desperately needed today and I hope to get Adam on the show at some point. I’ve chatted with him about it, I’ve got to go follow up with him. Anyway, before you go, what’s coming down the pipe the next 12 months, what can you share about what you’re working on right now?

Al: Yeah, we’ve talked about a lot of stuff. So, I’m really focused on our collective vision of these two businesses, two separate companies driving value on the Amount side. We have a number of banks that we’re in the process of helping to launch and helping to extend them into different products and verticals, so really excited about really building beyond just personal loans as we’ve talked about, really putting out that Amount 360 product and making our product available to a larger array of banks, not only the largest banks and that’s a big push, that’s a ton to do.

On the Avant side, we want to continue to scale our existing products and you’re going to see us launch a couple of new products as we’ve talked about. Secured lending and deposits is definitely on the horizon.

Peter: Okay, well that’s exciting. It’s impressive what you’ve been able to achieve, Al, and your team there. I really appreciate you coming on the show today.

Al: Thank you so much, Peter.

Peter: Okay, see you.

Al: Bye.

Peter: After hanging up the phone with Al, I was struck by really how much we have matured as an industry. You know, we really began as this peer-to-peer lending, online lending offering and people dismissed us and then we had a few hiccups and challenges and scandals along the way and people dismissed us even more. Now, it feels like companies like Avant are changing the banking world.

We are going to be completely embedded in the future of financial services through initiatives like what Avant and what Amount is actually doing and I can really see a day where, you know, the digital footprints that really had their roots in the online lending space are going to be prevalent in all of banking and all of the different areas of banking and really all the different online offerings, consumer facing offerings. I feel like the online lending industry really began all this and now it’s branching out into all areas of banking.

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

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

PODCAST TRANSCRIPTION SESSION NO. 208  –  MELISSA KOIDE

Welcome to the Lend Academy Podcast, Episode No. 208, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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

Peter Renton: Today on the show, I am delighted to welcome Melissa Koide, she is the CEO and Founder of FinRegLab. Now FinRegLab are a fascinating new organization, they are actually an independent non-profit innovation center and what that means is they’re analyzing, doing research on different topics and they’re taking that research and they’re trying to help inform public policy and really help drive the financial sector forward.

Their first big project was around cash flow data used in underwriting and I wanted to get Melissa on the show because they’ve just released their report, as you’re listening to this, and wanted to talk about what they found out. Firstly, what the questions they were asking, what they were looking for, what they actually found out and so we go into that in some depth. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Melissa!

Melissa Koide: Hi, Peter, it’s great to be with you.

Peter: Okay, so I’d like to get this thing started by giving the listeners a little bit of background about yourself so maybe you can tell us what you’ve done in your career before FinRegLab.

Melissa: Sure, happy to do that. As I thought about the question, Peter, it’s like, gosh, I feel like I’m kind of boring, but maybe not (Peter laughs).

Peter: I don’t think so.

Melissa: Well, I basically have set up FinRegLab which is a non-profit research organization that was founded on the premise that independent rigorous research is really a primary ingredient in helping to develop market norms and policy solutions that are ultimately what I think we’re all after, right, which is enabling safe, certain innovation in financial services and I know that’s a priority for policy makers as well as the market more broadly.

But, I think, one of the sort of notable things about me and what I’ve done is this, if you will, policy entrepreneur is I definitely became an entrepreneur at the age of 47 which is apparently the average age of female entrepreneurs (Peter laughs) and I decided to establish FinRegLab after a number of tours, if you will, inside federal government and inside policy making halls, particularly of the US Treasury Department. I led the Office of Consumer Policy for four and a half years at the US Treasury in the Obama administration and part of my team’s responsibility, which actually you know well, Peter, and you came in and met with me, at least once…..

Peter: Yeah.

Melissa: …was really trying to develop the administration’s understanding of the real opportunities and benefits, as well as the risks of using data in the financial system and new types of data in the financial system and really understanding the opportunities and risks of new technology in the financial system. And what does this mean for consumers and what does it mean for retail financial services and small businesses and what’s the implication for making sure that people are protected in our financial system and these new interests into the financial system really are still maintaining safety and soundness of our overall financial system.

So, we heard from hundreds of people. I, my team, the Treasury Secretary, my colleagues or cause, the regulatory community, hundreds of people with lots of very thoughtful points of view, but all coming in the door really with an agenda which, if you will, an advocacy point of view. What we didn’t have was any independent resource that, frankly, wasn’t coming in the door with an advocacy agenda, but, instead, just coming in the door and saying, you know what, you have these particular policy questions or regulatory questions when it comes to using a certain type of data for a certain type of financial product or financial service and here’s what, empirically, that information will tell you.

So, it was the lack of that type of independent research that was apparent to me and, frankly, I think it’s quite apparent to regulators, legislators. So, that lack of that role was the kernel of an idea that I had while sitting at Treasury that when my time was over that I would try to, you know, sus out see if I could setup an organization that could go out and try to do some of that much needed research.

Peter: Okay, so then you obviously left Treasury when the new administration came in. How did you actually go about it like, I mean, who did you reach out to? I guess like who were the supporters, who were the people that are sort of working with FinRegLab to make it a reality?

Melissa: Yeah, that’s a fair question. Well, the first thing I did was, frankly, while no longer a government employee, I made the rounds to sit down with the folks and the regulatory agencies and, in particular, the parts of the regulatory agencies, both federal but also state, consumer protection as well as the prudentials, to really start to create a set of….. basically a list of questions that would help to inform the research agenda for this research organization.

At the same time, I knew how important it was to really structure FinRegLab as this honest broker, meaning an entity that really could engage industry because, ultimately, to do research of the type that we’re doing, we have to have the trust of industry and importantly, we also obviously have to have the trust of the policy maker community and that meant that it was standing up this organization as a not-for-profit organization and also raising money from the philanthropic community, from philanthropists who really also understand the need for this type of sophisticated research and evaluation.

So, we felt really fortunate, the Omidyar Network, they are now…they’ve renamed themselves Flourish, the Financial Services Division, came in in a really thoughtful way and I think really wanted to continue to support, if you will, entrepreneurs of the type that I was setting out to be, policy entrepreneurs, who were trying to think about how do we leverage the data and technology for good. So, they have come in, they basically said to me, you know, we believe in your mission, show us you can do it, show us that you can engage industry and get the regulators to the table and we’ve been able to do that, so it’s been a real “win win.”

Peter: Okay, so then you got set up and, you know, I imagine, many, maybe dozens of topics that you could choose to really dive into as your first research project, so I’m curious about why you decided to choose cash flow data in underwriting as the first sort of deep dive research topic.

Melissa: So, our true north, while mapping the organization, our true north is around financial health and financial inclusion and I think we all realize that access to affordable credit plays a really central role in helping consumers, but also small businesses in improving their financial health, managing short term financial gaps, unexpected expenses for small businesses, really enabling the small businesses to manage revenue gaps, but also build and grow.

But yet we do have millions of people across the country who lack access to affordable credit. We have over 15 million sole proprietors who you know, at some point in time, are going to need to be able to access affordable credit and so really honing in on where data could be advantageous for helping to evaluate some of these individuals as well as small businesses felt like a really meaningful opportunity to help sort of evolve our small business credit market for consumers and small businesses.

Peter: Did you have specific goals with the project, things that you really wanted to find out?

Melissa: Absolutely, we have up to 26 million Americans who are considered no file, right, they lack any traditional credit history to be evaluated under traditional means of credit underwriting. We also have another 90 million Americans in this country and there’s the CFPB data research who are considered to not have a sufficient traditional credit history.

So, right there, we’re looking at, you know, 40 to 50 million people in the US who, if we have other means and if data would provide other means for evaluating them, could potentially be provided access to affordable credit. So, it was with input from the regulators, it was with engagement from a number of the fintechs in the market that we decided to really hone in on this question of how might this new type of data, and it’s actually not all that new, it’s transaction activity data, how might information that you can glean from a bank account of a consumer or small business, how might that data help lenders evaluate credit risk of people who otherwise might be turned down or might be priced differently than they would have otherwise been evaluated under traditional means.

This was an area that was a priority for the regulators, in fact, one of the regulators of the Federal Reserve Board has talked about the potential value of cash flow data in underwriting and so that’s how we decided to hone in on this first research evaluation.

Peter: Right, right. So, I imagine, you need to gather data yourself from lenders so can you share like some of the companies that you went out to that provided data for this research.

Melissa: Absolutely, yeah, we are so pleased to have engaged six lenders who have shared information and data with us to do this independent evaluation. The companies who came to the table with us are companies that you probably have had on your podcast before, Peter, Petal is one the companies.

On the consumer side, we engaged Petal, Brigit, LendUp and Oportun and these are all really dedicated companies to serving market segments who are, generally, more non-traditional. In some cases, these are lenders who were serving Latino Hispanic populations and other cases either lenders who are really going after the thin file/no file population.

In the case of Brigit, they are offering an overdraft alternative, but each of these four companies in the consumer market are leveraging cash flow data to do an evaluation and make decisions about extending credit to those consumers.

We also wanted to evaluate cash flow variables and metrics in the small business context and so there we engaged the companies Kabbage and Accion and they’re serving very different small business populations. That’s actually, we think, quite helpful, I mean, it made the research a little more complicated looking at each of these companies and doing firm by firm evaluations of their cash flow data and metrics.

But on the other hand, the findings become all that more powerful because what you see then are consistent results across each of these different companies that are using these cash flow metrics. It’s telling you something, I think, really about the uniqueness and the power of the cash flow data in the credit evaluation.

Peter: Right, right, Okay, so then you got all this data in and you analyzed it, what did you find out?

Melissa: So, we wanted to evaluate across three questions, questions that, I think, we all realize are important for the market as well as for policy. We wanted to evaluate for just the first base question, is this data predictive or not. We also wanted to evaluate, is the data enabling these lenders to serve populations who otherwise might have been turned down under traditional credit evaluation.

And then from a very policy specific, but market important question, we wanted to evaluate fair lending implications of the use of this data. Each of these, we think, are pretty foundational. We, over the course of basically nine months, we brought in the data from each of the companies and I’m happy to share with you, Peter, and your listeners that our analysis definitively confirmed that these different types of cash flow data and metrics that these different companies are using to underwrite unsecured consumer and small business credit are actually being used. And we found in our independent evaluation compelling evidence indicating that the cash flow variables and scores are predictive of credit risk and loan performance across these heterogeneous sets of providers, the different populations they’re serving and the products that we studied.

Standing alone, this is, I think, really a couple of really important things and you’re going to see a lot of these in detail in the report itself, but, standing alone, the cash flow metrics generally performed as well as traditional credit scores so we were comparing them against FICO and other traditional credit-based scores. That finding suggests that the cash flow variables and scores can provide meaningful predictive power among populations and products that are similar to the products and the populations we evaluated in this research.

But another really important insight that we gained on the predictiveness question, our analysis also indicated that these cash flow data and the metrics provided different insights into the credit risk than what the FICO-based more traditional credit risk metrics would show you. And so when you get a chance to read through the report, we actually have a number of hit maps that are broken up which is done by participant and you will see the level of granularity that the cash flow is able to offer in terms of measuring or assessing credit risk which is actually different than what you can see according to the different FICO bands.

So I think that’s really, really kind of an important outcome or learning from the research that we’ve done.

Peter: And so what about the question about serving new populations, did you find that that was also able to be done?

Melissa: We did. This was actually one of the harder questions that we found. A harder question to evaluate from a quantitative assessment just simply because you have differences in things like how do you define income, but we, definitely, found evidence that participants in the study are serving borrowers who may have historically faced constraints in their ability to access credit.

We, basically, came up with our own method for evaluating whether or not the populations who were being studied were located in predominantly minority communities and we looked at and evaluated according to whether or not the populations were in minority communities or were 50% minority communities, 80% minority communities and you will see in the research there are definitely populations in these different demographic neighborhoods that are being served by these providers.

So, I think the other thing to keep in mind, two of the companies in the research are themselves CDFIs or community development financial institutions and that’s designated by the US Treasury Department to be serving low and moderate income communities and populations. So just by their mere designation as a CDFI we have strong confidence that they are serving underserved communities and populations.

Peter: Right, right. So you didn’t see disparate impacts that came out of this?

Melissa: So, great question. So, we were able to do a component of a disparate impact evaluation with four of the six companies who participated and what we found is that the degree to which the cash flow data was predictive of credit risk, meaning, how independent are these variables in assessing credit risk within sub-population groups or different demographic groups that those cash flow variables are independently evaluating risk.

And so, that’s a really important aspect of a desperate impact valuation and so we’re quite excited and quite pleased to find that rather than acting as a proxy for race or ethnicity or gender, the cash flow variables and the scores that these companies are using were providing independent, predictive value across our groups and so that’s a really encouraging finding.

Now we have to offer the caveats in a company who is evaluating themselves for fair lending questions and companies know they need to be doing this if they’re in the lending space. You know, we’ll go through a range of evaluative questions that they’ll be asking themselves, but this is, I think, one of the sort of core questions that are used in any disparate impact evaluation.

It was really encouraging to see that we were finding these variables and, again, these are inflow/outflow transactions, inflow/outflow indicators, indicators of monthly cushion, economic cushion. These variables that we evaluated are not proxying for protected classes.

Peter: Okay, so the report…and we’re recording this, I know, a week before the report comes out, but by the time this publishes it’ll have been out a few days and we’ll certainly link to the report in the show notes. So the report’s coming out, what do you want to do with this report now? How do you think this research should impact public policy, for example.

Melissa: Absolutely, that is the right question. So, make that up a little bit, part of the ambition of FinRegLab is to ask and refine in a timely fashion to some of these pressing opportunities for using technology and data and to be this, as you heard me say, this honest broker that is able to bring all the stakeholders to the table, both to look and learn, as we undertake this research endeavors. But there’s another really important piece of the work that we do and that is to put together, it’s a very non-sexy term, but, basically, policy working groups to come together reflecting the different important voices in any policy evolution.

So, clearly, market actors from the incumbent banks, to the fintechs, to the data aggregators, to the important voices of the consumers and the consumers’ perspectives so consumer advocates who are part of these conversations to, ultimately, look at what is existing law and what do the existing rules that exist that are relevant for a particular new use of data, what do they say about the existing use of data, where they’re stymieing the potential value of the use of data and what are the potential ways  in which policy and regulation, and eventually potentially laws, could evolve so that we are seeing the safe use of the data being brought into the financial system, and in this case, cash flow data being used in underwriting.

And so, over the past year, we held three policy working group sessions and we had the regulators sitting at the table with us as we, week-by-week, over two and a two and a half month-period, evaluated and considered what are the fair lending implications, what are the fair lending legal implications, what are the policy implications.

Another working group was very focused on the data flow and what do existing laws of Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, what do they say, where do they stymie the potential value and flow of data in these ways and then important question around…from the various roots of consumers-centric perspective, how does the consumer understand the use of the data, how do they give meaningful consent. If there is an adverse action notice required, how is that information conveyed to the consumer in a way that will be meaningful and potentially even actionable by the consumer.

So, this research has learned from, but also helped to inform what FinRegLab will produce in September which is a policy report that really evaluates existing laws that are in place right now and tease out different considerations to potential evolution of both our regulations and our policies in light of what this type of research shows us. And so, my hope is that this is something that will be widely read and considered by policy makers and the regulators as they themselves are having to think about these questions of alternative data.

I mean, your listeners probably are very familiar with the fact that the GAO has asked the regulators to express an opinion about alternative data and what that may mean. Next week, we’re going to have a congressional hearing that’s focused on alternative data and so we think we’re hitting a really important moment in the policy evolution process where we’re bringing facts to the table that get us beyond the different points of view in advocating of the different points of view.

Peter: Right, so I’m curious that….there are a couple of extra questions here to follow-up with that. As you were talking, I was wondering about privacy, it’s such a huge topic and I’m sure the legislators are going to be, you know, concerned about any negative impacts there because you’re diving into someone’s bank account for cash flow data that’s certainly…..maybe we just start with that, maybe you could comment on privacy implications here.

Melissa: Yeah, we are absolutely thinking about and writing about the privacy implications. For one, just starting with the basic premise that we’re talking about new data being used in underwriting, what is the understanding the consumers need to have in order to give meaningful consent to this type of information to be shared. That’s just sort of the first place to start.

Part of the work that we’re doing and that will come out in the September report is also about what do existing privacy protections say about this new type of data and how it’s being, with consumer consent, flowing from, you know, one bank account to a lender. The Gramm-Leach-Bliley Act speaks to this very specifically. I think there’s also a little bit of a risk that many of us in financial services, I think, are becoming acutely aware of which is how are we as a sector and how are we as policy makers and researchers really thinking through and helping to articulate where and how we define policy protections as it relates to the use of data in financial services and thinking about that carefully and to some extent separately from the bigger consumer data privacy efforts that are underway that we know. California Data Privacy is obviously one moving piece of policy that will have implications that some of these bigger consumer data privacy laws may have bearing on the use of data in the financial sector.

So, I think, there is a lot more work for those of us in financial services to do to make sure that we are able to articulate where data and even new data in the use of underwriting, identity, fraud mitigation, where these new type of data can really be advantageous for protecting consumers, protecting our financial system, also making it very transparent for consumers about the data that would be used, but making sure that we’re not in a way that ultimately harms the value of the data getting caught up in these broader consumer data privacy movements.

Peter: Right, right, okay. So then what about….did you notice in your findings, are there any negatives for this, I mean, we touched on privacy obviously, but is there anything else that you discovered that may negatively impact the consumer because of this new way of using data?

Melissa: There wasn’t anything in the research, frankly, that raised red flags for us. I think stepping back from the empirical work that we’ve done, I think we are all aware that we’ve got to really start to sort out and understand some of these expectations around privacy and how the financial sector is doing it right.

I do think that there are big questions that we’ve got to think about in terms of, you know, how are we allowing this sort of innovative use of data that many lenders, many fintech lenders, in particular, are employing in terms of creating their own metrics and which particular types of transaction data that they, you know, can put together that is very much sort of proprietary in their own secret sauce.

How are we allowing for that level of innovation and flexibility to continue to thrive while also counterbalancing that with, you know, it’s cash flow data and our research suggests that it can be so effective at serving so many millions of people, how do we balance the need for allowing for innovation with the potential around standardization. You know, UltraFICO, you and I have talked about this, Peter, is in many ways quite exciting, but it is definitely starting to create new norms and new standards in terms of the type of data that might be used.

So, I think it is an important question for the financial sector to figure out how do we sort of allow for the proprietary innovative approaches that industry may be taking that ultimately are allowing and enabling them to serve populations who may be harder to serve, but yet realizing there is real value in standards and norms and regulatory-recognized approaches to the data use. So, those are some of the questions that we will all be grappling with over the next half decade.

Peter: Right, right, for sure. So we’re almost out of time, but before I let you go I’d like to sort of turn the page and maybe you can give us some sense…you know, you’re putting this cash flow data work to bed, obviously you’ve got the policy report coming up, but what are you working on? What’s going to be the next project for FinRegLab

Melissa: We actually very intentionally decided to start with data and evaluate data, new types of data and underwriting under more traditional methods for evaluating. So, we retained Cross River Associates, many of your readers will know them well and probably have engaged them in order to do the evaluation of the cash flow data. If you think about our next areas of research, you know, we do continue to think about a lot of the questions that we, frankly, weren’t able to get after in this first go looking at cash flow. Price is important evaluating cash flow in a down cycle would be very important for policy makers and industry overall.

So, those are potential areas that we continue in the evaluation of the data. We are, though, quite interested in building some similar work, meaning, convening stakeholders to look at some of the questions that are arising in terms of the machine learning algorithms and techniques in evaluating data and underwriting. I think there’s a lot of potential, many of us are increasingly realizing how these machine learning techniques can improve in terms of accuracy, but yet we also have really important questions around, you know, how are risks related to bias being managed in these algorithms.

You know, explainability continues to be an important piece of this and so we are beginning to think about building out some work in that particular area, the techniques and the algorithms as opposed to just working with the data.

Peter: Right, right.

Melissa: But I would love to hear from your listeners once they’ve had the chance to hear this podcast where they think we should be spending our time and our resources.

Peter: Okay, we will challenge the listeners to give some feedback there. Anyway, we’re out of time, I really appreciate you coming on the show today, Melissa.

Melissa: Thank you, Peter, it’s really nice to talk to you and I appreciate your giving me the chance to share what we’ve done.

Peter: Okay.

Melissa: And our report will be out next Tuesday so that is July 23rd, so, hopefully, we’ll post with you all and get it out there.

Peter: Yeah, as I said, we’ll be having a link to it and this will actually be published after, obviously, the report comes out. Anyway, thanks again, Melissa, see you.

Melissa: Thank you, take care. Bye.

Peter: So I think it’s really important that the industry has an organization like FinRegLab that can do this independent work. I mean, cash flow data used in underwriting, there are many companies that are doing it, they have been doing it even for some time, but there has not been this independent analysis of this new, relatively new technique in underwriting. I think what lawmakers and legislators in Washington want to see, they want to see independent research, they don’t want to see a company coming and saying this is good, or even a trade organization coming and saying this is good because they all have ulterior motives.

What they want is empirical evidence, independent research and that’s what FinRegLab is able to provide. I’m very much looking forward to their next project and you heard the challenge to the listeners, if you have some ideas, please go to lendacademy com, go to the blog post for this podcast and put a comment in to say what you’re interested in FinRegLab studying.

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

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