Blog - Lend Academy

Podcast 305: Brendan Coughlin of Citizens Bank

The Head of Consumer Bank at Citizens talks fintech partnerships, the future of branches, buy now pay later, building an in-house digital bank and more

July 2, 2021 By Peter Renton Leave a Comment

I have been following Citizens Bank for many years as they built this robust online lending operation across multiple verticals. They have also launched an in-house digital bank called Citizens Access and they have a groundbreaking partnership with Apple which has, in many ways, changed the iPhone buying experience. They are a top 25 bank that has the mindset of a fintech.

Our next guest on the Fintech One•On•One podcast is Brendan Coughlin. He is the Head of Consumer Banking at Citizens Bank. He has been at the bank for 17 years and has worked in pretty much every consumer division and he now runs the entire consumer business for Citizens.

In this podcast you will learn:

The different roles that Brendan has had at Citizens.
The geographic footprint of the bank and the size they are at today.
How the shift to digital banking last year impacted the bank.
How they are integrating the in-person with the digital experience.
Why Citizens decided to acquire HSBC’s east coast branch network.
The two-fold role of branches going forward.
A description of Citizens Access, their in-house digital bank.
What Citizens’ customers want when it comes to a mobile-first bank.
How Brendan views fintech’s impact on banking.
His views on BNPL and why the sector is suddenly so hot.
How their partnership with Apple changed the iPhone buying experience.
The different flavors of fintech partnerships they have today.
The drivers of growth for Citizens going forward.

This episode of the Fintech One on One Podcast is brought to you by LendIt Fintech Nexus, an in-person event focused exclusively on face-to-face meetings happening in Miami on September 1-2.

Download a PDF of the transcription of Podcast 305 – Brendan Coughlin.

Click to Read Podcast Transcription (Full Text Version) Below

Welcome to the FinTech One-on-One podcast, episode No. 305. This is your host, Peter Renton, chairman and co-founder of LendIt Fintech.

(music)

Before we start this episode, I want to tell you about a brand new event from LendIt Fintech: Fintech Nexus, the Dealmakers Summit will be the first major in-person fintech event of the past 18 months. A hand-curated audience of venture capitalists, bankers, fintechs, and debt investors will be meeting face-to-face at an event 100% focused on doing deals. It will be happening in Miami on September 1st and 2nd. You can apply to join and find out more at lendit.com.

Peter Renton: Today on the show I’m delighted to welcome Brendan Coughlin. He is the head of consumer banking at Citizens Bank. Now, Citizens Bank is a pretty large bank. They’re top 25, $185 billion in assets, and Brendan runs the entire consumer side of their business. I wanted to get Brendan on the show because I think Citizens have done some really interesting things lately. They have a stand-alone digital bank called Citizens Access, which we’ll get into in some depth. Now they just recently acquired branches of HSBC – their East Coast branches – so we talk about that and we talk about how digital is going to interface with the branch, and what the role of each of those things are. We talk about omni-channel banking, where you can go into any channel and have a similar experience. We talk about their Buy Now, Pay Later offering, which is actually pretty famous. We talk about the deal they have with Apple for financing iPhones, which has been in place for actually some time. And he talks about why the BNPL is so hot these days. It was a fascinating interview. I hope you enjoy the show.

Welcome to the podcast, Brendan.

Brendan Coughlin: Thanks for having me.

Peter: My pleasure. So let’s get started maybe with giving the listeners a little bit of background about what you’ve done, particularly, before you got to Citizens and what you’ve been doing since you got there.

Brendan: Yeah. Sounds good. Well, my entire career’s been in banking. I started my career at Fleet Bank an old bank that got bought by Bank of America. I was there for three or four years doing a variety of roles. I started in one of the traditional bank and training programs actually. And not many of those exist anymore, but it was really a fascinating experience and yeah, stayed with Bank of America for about a year and then came over to Citizens.

And I’ve been doing just about every job you could possibly do at Citizens in the consumer bank. I’ve been here for 17 years. It’s been quite a long run. Started in marketing, did a variety of different product management, marketing jobs, business development, wealth management, deposit products, lending products. And then I started the student loan business here at Citizens, my first general manager role, and then did a sequence of lending business general managers jobs, including running indirect auto business, I started our personal loan and unsecured lending business, including our Citizens Pay, the Buy Now, Pay Later business, I ran the home equity lending business for Citizens. And now I run the entirety of the consumer bank here at Citizens.

Peter: Okay. Well, so that’s pretty broad experience there. It sounds like you’ve touched all the different roles there and Citizens is a pretty large bank. Why don’t you tell us about the geographic footprint and the size of the bank today?

Brendan: Yeah, so we’re about 185 billion in size. We’ve been on a rapid growth tear since we went public. We were owned by the World Bank in Scotland for years and years, we left through our IPO seven years ago, and since then we’ve really been on a mission to grow the bank, improve our financial performance and position ourselves to compete in the US. So, our business is pretty close to 50-50 consumer and commercial banking. And I run the entirety of the consumer business, which has all the things I just mentioned, plus wealth management, small business banking, the branches, all the distribution for the organization, our national digital bank. And we’ve got a national footprint digitally. Most of our lending businesses are national, but we’ve actually got quite a bit of scale. We’ve got six and a half million customers across the US. And in what I would describe as our regional banking footprint, which is 11 states predominantly in New England, mid-Atlantic and the Midwest, we’ve got about three and a half million customers in those markets. We’ve got about a thousand branches across those 11 states, about a hundred billion in deposits in a consumer franchise, 70 billion in loans. Those are consumer stats.

Peter: Right. Okay. So then let’s talk about the shift to digital. Obviously, you guys have had digital offerings, as you say for quite some time. So, you probably were able to weather the storm better than most, but tell us a little bit about how the shift to digital last year happened and how it impacted the bank.

Brendan: Yeah, we’ve been on a long journey of investing in our digital capabilities, both in the traditional sense with mobile banking and online banking, but also in some of our lending businesses, which are predominantly digital only; in some cases in student lending and Citizens Pay and personal lending.

So. We’ve been at the digital mission for a while. It’s been a principle transformation tenant of the bank. And prior to COVID, we were beginning to lean in even harder to position the bank for a digital first organization. I am a big believer of the omni-channel experience and the combination of human and digital, and despite a lot of compartmentalized success by some fintechs in monolines. To get primary banking relationships, I’m not sure I believe yet it will happen at scale without an full omni-channel distribution model. Having said that, the mobile-first strategy is certainly what is required to compete, looking forward.

And so my belief on what happened through covid, so we’ve seen dramatic acceleration in digital adoption, across all segments of the bank, from fluency, to old to young, everybody is swimming up to digital, out of the obvious forcing function of what the COVID backdrop did for the US and consumers. And it’s really accelerating what might’ve been a five to seven year journey of moving financial services to a digital first industry, probably pulled that into two years instead of five to seven years. And so all the things that were underway and already happening are now happening much, much faster. We’ve seen a 25-30% increase at all of our key digital metrics that we see across the bank from sales to digital engagement, to digital banking, to money movement. All of that is now happening at scale. And, having said that, as the backdrop, the health backdrop starts to improve in the US, we’ve also now started to see a rebound in our branch banking and our in-person visits. So, we’re really seeing transactional banking migrate very, very fast to digital and advisory-based, and complex transactions still being tethered in a human interaction, whether that’s face-to-face physically or over the phone or virtually with the customer.

Peter: So, how do you balance that – with the digital experience and the in-branch experience? How are you balancing it and how do you make it seamless for the customer? Can they start something in digital and go into the branch or vice versa? How are you integrating the two?

Brendan: Yeah. I would say the whole industry is on this journey, or if you’re not, you should be on this journey to make this more seamless. And most traditional banks grew up with very different experiences and all the channels, and there wasn’t a lot of integration. I would say, banks were more multi-channel than omni-channel, meaning you could bank in the various different channels, but they didn’t really talk to each other or work with one another. And that’s the effort underway. We’re no exception. We’ve got work to do there as well, but to really build that mobile-first strategy, that then translates into that same experience all the way through all the channels.

So, we’ve made investments, so when you’re at the call center you’re actually using the same platform that a branch person is using so you see the same data, the same information about the customer, the same capabilities. When you update something in the call center. That you see it real-time in mobile, you see it real-time in the branches. So, we’ve made a lot of investments that way. We have work to be done still. And at the same time, most banks have a technology architecture that’s grounded in very old systems, mainframe-based monolithic systems that really built to be GL-financial reporting engines versus customer experience-led technology architecture.

So, our national expansion with Citizens Access and all of our lending businesses that we’ve been very public about, the dual objective is get more revenue streams, participate digitally in a national way, but also begin to build that tech architecture of the future, which is cloud-based microservice API driven. And can ultimately then go replace our core regional banks’ technology architecture with a very modern omni-channel. Everything works the same way in each channel. So, we’ve got multiple paths underway to ensure that that happens and it’s a very seamless, integrated channel experience.

It’s not just technology though. People play a big role too. So we’ve gone through a massive transformation of people in our branches, moving from transactional bankers to advisory-based bankers. We’ve upskilled 7,000 or 8,000 people over the course of the last 18 months, we’ve changed job families, reduced the amount of tellers we’ve had, we’ve increased the amount of bankers we’ve got, and we’re really trying to bring in a much higher quality level of advisor at the branch. So, when customers do come in, it’s not once a week anymore like it used to be every Thursday to deposit your check. It’s two or three times a year. I mean, that experience will be world-class when it does happen.

Peter: Right, right. That makes sense. So, clearly you’re committed to the branch and I read recently that you’ve acquired HSBC’s branch network – their east coast branches – I know it wasn’t a huge number, but tell us what was attractive about that and how you see the future of branches.

Brendan: Yeah, I would say it was a very attractive transaction to Citizens from a number of levels. I’d say financially, as well as from a strategic and distribution standpoint. Financially, it’s hard to get into…the key markets we bought ourselves into there were New York Metro, Washington DC, and Southern Florida, Miami: three of the most attractive markets in the US. And we also bought HSBC’s direct business, the digital customer base from HSBC Direct. So a four-pronged purchase. And typically getting into those markets requires an acquisition that has a very sizable premium to get into the market. And given the state of multiple large regional banks already tied up in M&A, combined with the big nationals already in Manhattan principally, combined with the profile of the customer base that HSBC was selling, we got it for a very affordable premium of 2% deposit premium. Typically those deals trade for 5-6% deposit premium. So, financially it was a very low-risk, high-reward transaction for the bank. It got us a lot of deposits, lower cost deposits that will help us manage our deposit betas as rates inevitably start ticking back up.

Now strategically, getting into those three markets is very important. It’s a big fill in deal for us. We’re very strong in the Northeast, but Manhattan was a very obvious hole in our distribution, very strong upstate New York, and we had businesses in Manhattan, but not necessarily a full service retail bank. And so getting those 80 branches from HSBC that was heavy loaded in Manhattan, but also had 10 or 12 in Washington, DC and five or six in [Miami] really starts to position us as an East Coast horse and fills in some key distribution, and starts to extend us further south.

And then in Florida, we already have an expansion underway to service our snowbird population. And we had opened two wealth centers, West Palm and Naples. This helps us to expand our distribution, really cover existing customers and start to find new revenue pools. So we view it as a low risk financial transaction with a lot of upside to position the franchise going forward and tying into my comments about omni-channel strategy, it will certainly require an exceptional mobile-first experience. It sits on top of this, but leveraging these points of presence as an advisory-based center to get really deep relationships … is really what we’re after.

Peter: Right. Right. And so what do you see then as the role of the branch? I mean, you talked about doing more complex transactions, but is it about deposit gathering? I mean people might see a branch opening up an account because they know they can go to a branch, but they might not intend to go there on a regular basis. But what do you see as the role of the branch?

Brendan: Well, I would say it’s two-fold. One is, really it’s not a transactional center anymore for us, it’s an advisory center. And so you see the role of brick and mortar and organizations that do this well, you’ve got a much thinner network, but when you come in the quality of people and the level of advice is significant and very sophisticated.

And so we rebuilt all of our branches to have smaller square footage. You don’t need these big monolithic, ginormous marble pillar branches anymore. You need something that’s intimate, has privacy and office space for a financial advisor or a mortgage loan officer to talk to a customer. And what we’re seeing is customers are coming in for those life events.

Help me think about how to get my kids to school, help me plan for retirement. Help me think about refinancing my mortgage. So the role of the branch for me principally is deepening. So it’s an advisory center, we get a customer to bank with us. They are the places they want to go.

Matter of fact, we saw a customer research paper the other day, which is a little counterintuitive, but under 40 customers, actually view the branch, as importantly as the over 60 population does in terms of how they do their banking. They just use it very, very differently. They don’t want to be there every day or every week, but they feel much better about the brand and the bank knowing they have access to it in those moments that matter.

So it’s the moments that matter distribution part of our footprint. Now I think if you don’t have it, what we’re seeing in the market and Citizens is in this space too, we have a number of fintechs within a big regional bank in monoline digital lending businesses. I think organizations have been very successful on those life-event transactional products.

A student loan, a mortgage, Buy Now, Pay Later, high-yield savings. But not many have brought it all together. And typically that is also the role of physical presence, is to allow your capabilities that are fragmented and monoline to bring it together under the umbrella of a brand and a customer relationship to support those very slick, singular customer experiences that organizations offer.

Peter: Yeah, that makes sense. So then I want to talk about Citizens Access. I mean, maybe you could describe it. Is this a standalone digital bank that you talked about? New technology, no legacy technology in there, but maybe you can just spend a few minutes describing it.

Brendan: Yeah, so Citizens Access really is in its current state, a direct bank. It’s traditional, it’s almost a separate entity from Citizens Bank in that it’s not interoperable at all. It’s not a separate entity, but it’s a separate customer experience. And it provides high-yield savings and high-yield CDs to the digital savvy customer that doesn’t see the value in brick and mortar for that particular part of their financial lives. And they value the higher rates that we don’t pay a lot of fixed costs when we roll it back into interest rates. So in its current form, that’s what it is. And it’s been very, very successful for us.

We’ve been very public about our national aspirations and so what we’re doing with Citizens Access is, at the same time I’ve got Citizens Access – which is our deposit platform – we’ve got a number of national businesses that are also digital: student lending – which is a cornerstone business for this franchise – Citizens Pay, national mortgage business, national auto business, a national cards business.

So, our national strategy aims at taking Citizens Access as the port, chassis and platform, and folding in all of our other national businesses under a single umbrella that we’ll aim to target nationally and digitally, the young professional segments for a period of time. So there’s an integration strategy that we’re well underway to replatform all the technology integrated in a very interoperable way and go to market nationally as one force, one bank with all these capabilities that combine and provide for an exceptional service for young professionals.

From there, we don’t expect Citizens Access and our whole national strategy to be a separate and independent entity forever more. The idea is that our regional bank and our national bank come together as a singular mobile-first bank with all of these integrated capabilities and we lever the investments we’re making in Citizens Access on technology to then go get placed in our traditional regional banking franchise over time.

And so that’s the journey that we’re on to create a national mobile-first bank.

Peter: Interesting. Interesting. So then, when you talk to your customers, is that what they want? I’m thinking about from a digital perspective, the customers that are coming to Citizens today, they might come to Citizens Access because you’ve got a good rate on a savings account. And do they want to manage this all in one place, all on a mobile phone, or what do they want?

Brendan: Yeah, they do. And one of the things, a risk with the pace and speed of digitization for all banks in my view is not providing sustaining advice for the customer, and we believe a principal reason that we exist is to be a financial advisor and provide that advice through a customer’s life’s journey.

And when you have single model line digital experiences, they’re very fragmented and it’s hard to pull up and see the bigger picture of how do you actually advise your customer base on those integrated experiences? Okay refinance your student loan, save some money, get that free, now position yourself to buy a home faster than you normally would. How do we help you get into home ownership at a faster clip by connecting those two things together, et cetera.

So, we believe that customers still very much want an integrated simple singular place to do their banking with the advisory company that they really trust and value. And that’s why we’re connecting all these things together and integrating the value proposition in a digital-first way.

What they want from us is exceptionally frictionless, simple banking. No hoops, no asterisks, just simple banking, but they also want a comprehensive bank where we can provide most of their financial life needs through one place, and then we’re starting to think about wealth management too. We’ve got a big investment in what we call Specify, which is a digital first robo-advising platform. How do we now marry that with Citizens Access on the positive …. where should you mix your portfolio? How much should be liquid in deposits? How much should be tied up in equities? How do you think about that? How do you integrate those digital experiences together? There’s a lot of power in the integration of that.

Peter: Right. Right. So, then I’m curious about when you’re looking at the fintechs and you see there really isn’t a fintech yet that has everything that you just described under one roof, that’s offering it digitally and that really could be a one stop … There are some that are working towards it, but there’s no one really doing it. But, I’m curious about when you look at the fintech space, some of them are very good at acquiring customers. They’ve got, 10 million or more, some of these, the biggest ones. So, I’d love to know, when you look at the digital neobanks – not that any of them have banking licenses of their own yet – what impact do you think they’re having on a company like Citizens?

Brendan: I think the acceleration of fintech was actually quite a positive development for this industry, and there’s nothing special about a fintech to me other than they’re exceptional at customer experience design and digital banking. And that’s what traditional banks should be great at as well. Now, they haven’t always demonstrated that historically, but that’s what they need to do if they want to be positioned as a modern financial services company looking forward. We find that the fintechs are raising the bar on the industry, and then in some cases, teaching the industry what a great customer experience looks like. I would try to convince you to say that at Citizens we’ve got fintechs within the organization, so we’ve got that culture and mindset here ourselves. But we also partner with … we’ve got 25 fintech partnerships at the bank. Fintechs came out hot, seven, eight years ago trying to take over the world and disintermediate banks. And I think most of them quickly realized there’s a lot of power in partnership here versus just standalone competing.

But, nonetheless, where we see capabilities that we like that we don’t think we need to build ourselves and can rent, borrow or partner, we will do that and bring it into the portfolio, the breadth of our offerings. Your point around customer acquisition … There are a handful of fintechs that are very, very good at customer acquisition.

And some of them have a path to profitability and for some of them, the path to profitability is quite questionable. And so the big question in my mind is how do you lever that customer acquisition and the excitement and energy and the valuations that come with scale to actually a sustaining business model over time that leads to long-term profitability. And banks have been historically pretty good at customer acquisition, too.

Fintechs have a knack to simplify the value propositions too. And I think over the years, traditional banks haven’t done as good of a job of stepping up to the plate for that level of simplification of the business model. So, in a lot of ways, it’s a forcing function for the industry to move down the path of simple banking and digital banking, which I actually quite like.

Peter: Right, right, right. Okay. I want to switch gears a little bit and talk about one of your offerings you’ve mentioned a couple of times: a Buy Now, Pay Later. I mean, you’ve been., really I would say, a trailblazer in some of this, and you’ve worked with the likes of Apple and Microsoft. But I’d love to get your perspective as someone who’s really been heavily involved in this and suddenly you’ve seen in the last 18 months, this explosion in popularity and the valuations that some of these companies are now public. Why do you think Buy Now, Pay Later is suddenly so hot?

Brendan: Well, look, there’s a lot to this industry. First of all, I would say not all things Buy Now, Pay Later are made the same and there’s quote, unquote, Buy Now, Pay Later that’s been appended to the back of the credit card value proposition. And some of those organizations have had some credit issues with that because they haven’t designed their customer experience in a way to get positive select. Then, you have Buy Now, Pay Later that’s more point-of-sale financing, which is an integrated part of a purchase path for a customer to a product and service.

We love that part of the business, and that’s the part of the business that we’re in. I would say, when we got into the business, really we saw a trend in consumers where coming off the financial crisis they were saying: Hey, look, credit cards traditionally just aren’t structured in a very responsible way for me. You pay interest over a really extended period of time and I want to be able to finance purchases in a way where I can … into my budget and I know I’m not getting overextended.

And so we saw that trend and we said, let’s really get on that, and then you look at how merchants in the past that offered financing and, to be candid with you, I was a little disgusted with it in parts to say, deferred interests, a lot of asterisks and trap doors in the way the product was constructed, that allowed for some of these issuers to make a lot of money on this and allowed for the merchant to just offer financing without necessarily…really reviewing financing as a revenue stream by itself versus value prop, and so this disruption right here …

So, we came in with a really responsibly structured product. We started, to your point with Apple, that was our first foray into Buy Now, Pay Later. And we partnered with them. We found that obviously one of the biggest companies in the world that was very forward leaning with us to say, look, if we can do this right, we can not only provide great financing, we can actually transform the value proposition for you all Apple in the way you sell your iPhone. Then at the time, the carriers were still offering those two-year contracts where you paid $199 for your phone dramatically discounted, and buying your phone wasn’t as digital, where you’re sleeping out in front of the Apple store, getting all excited about this those days.

And the iPhone upgrade program not only offered financing, but it fundamentally transformed the way Apple sold their iPhone, and made the carriers change their business model too. And now we’ve got customers on a one-year purchase cycle instead of a two-year purchase cycle with Apple, which is quite helpful for them.

But, they were savvy enough to say, this is a top of funnel decision for us, not a bottom of funnel. What I mean by that is, you’re restructuring the way you sell the phone versus offering financing after the customer’s made their purchase decision, and as a result, it’s really been exploding with growth. And, also, we offered at 0% interest. And so, you don’t get the customer that desperately needs credit in for the program, you’re getting any consumer that has an affinity to Apple sees value in the program. So, we really built off of that and then partnered with Microsoft for their all access Xbox program, which is going incredibly well. We just announced the partnership with BJ’s Wholesale Club to do the same in their clubs.

Well, we’ve got about 25 partnerships now. We actually partner with Affirm and Peloton helping to put some of those loans on our balance sheet to facilitate that program. So we’ve got a great offering and we think that banks actually have a very distinctive advantage here and in particular Citizens, because we don’t rely on the capital markets to run our program.

We balance sheet all of our loans, which allows for a lot more creativity and innovation on how we structure the product. So, as an example, with XBox and Apple, it’s essentially a line of credit that constantly gets replenished. You buy a phone, you buy an XBox, you pay it off and you get another one. We’re putting you on this VIP program to stay very engaged with that brand.

That’s a hard product construct for the capital markets, where you don’t know if that line’s going to get reused or not reused, it’s an open-ended structure. So, it provides for a lot of innovation. So we’re very, very excited about this program.

I’d also say, just from a financial perspective, our credit card business is relatively under-sized. And so, we don’t sit around fearful all that much, that we’re going to cannibalize our own business. And so we’re a full-go on this business and really trying to make a splash on the market that we can start to disrupt part of the credit card processes.

Peter: Right. Right. So, we’re almost out of time, but a couple of things I really want to get to here:

You mentioned you’ve got 25 fintech partnerships. I mean, you mentioned Affirm, but I’m curious, can you maybe delve into one or two of those partnerships and describe what you’re looking for and how the fintechs are helping you?

Brendan: Yeah, so we have a handful on, I would say, sort of loan arrangements where we’re essentially providing access to capital.

So, Affirm’s one, SoFi’s one, where it’s a great, healthy partnership. We’re frenemies, competing with both of them in some capacity and also helping them and helping ourselves by growing loans and providing capital to customers. So, we have that flavor of fintech partnership.

And, then I’d say we’ve got a flavor of fintech partnership where it’s a great offering for our customers, but it’s not necessarily a place where Citizens believes we need to place our bets to be the most distinctive. So we’re okay renting. And one of those would be our partnership with SigFig around robo advisory. We’re a full bank, we’ve got a big wealth management company, but we don’t feel the need to go it alone and build our own robo-advisory platform. We’ll rent that from a partner that’s done a great job already. And it’s okay if it’s not distinctive and a couple banks rent it, it’s a great capability to bring for our customers. So, we’ve got a few that are in that flavor.

And then we have a handful that I would say are enabling in nature. So it’s a great experience-enabler to create frictionless, more digital straight-through processing. So, Plaid would be a great example of that, where we partner with them. To say, okay, help us get more seamless access to the customer’s data so we can cut the corner on underwriting on a mortgage or home equity and scrape in their income that exists at a different bank. And we don’t have to ask the customer for paperwork.

So it’s a win-win, we have a lower cost to originate and the customer gets a much better digital experience. And so, we look for those opportunities where a fintech can help us accelerate things that we would already do even if sometimes their services are distributed in multiple banks, that’s okay if it’s part of the journey we’re already on.

And there’s some spots where we say, look, there are fintechs out there. They’re very good at this, but we want to be good at it and we need to sustain a differentiated investment there, not just rent somebody else’s platform. And so in some cases we’ve made decisions to go it alone versus rent or partner.

Peter: Right. That makes sense. Okay. So, last question then: when you’re looking at growing Citizens, you’ve talked about a few things already, but what’s really going to be some of the drivers of growth for you guys going forward?

Brendan: Yeah, I’d say a handful of things. So, we’ve articulated our strategy of the three pillars and end-to-end digitization of the bank, our national banking platform getting access to new revenue streams.

We talked about that, about bringing together all of our national capabilities and then customer deepening, which really targets the mass affluent segment. We believe there’s a huge opportunity for us there to grow.

When I look at our lending book, we’ve got one of the most diversified lending businesses in the whole US, including – put ourselves up against all the big money center banks – in our offering, we have Citizens Pay, our card business, home equity, mortgage, student lending … we almost don’t have a hole in our lending offering.

We’re really leaning into Citizens Pay and student lending as a differentiated offering for us to get outsized growth for our peers, and you’re starting to hear other CEOs and heads of consumers saying it’s been a really challenging market for loan growth.

We’re not seeing the same thing because of our differentiated offerings that our digital experience, we’re really leaning into that quite heavily.

I’d say the last thing is our wealth business. We really are growing across the board in all of our businesses, but in terms of really outsized, distinctive growth, we really would like to reposition our wealth growth business for a lot more scale. And we think we’ve got a real beat on that. We’ve hired a new executive who’s very talented and industry backed to really take that business to the next level for us.

Peter: Ok. We’ll have to leave it there, Brendan. I really appreciate you coming on the show today.

Brendan: Thanks very much for having me.

Peter: One of the most interesting things I thought Brendan shared there was, he talked about the under 40 set. That’s really the millennials that they want to have a branch available, and I think that’s the demographic that all of the fintechs are going after and doing actually pretty well with.

But, I think, as he says, that when you’ve got everything integrates together, you’ve still got a physical footprint where you can go like once a year or even every other year, but you know it’s there. I think that’s clearly something that has universal appeal and something that the fintechs, the digital-only banks are going to have to deal with, because I know that still to this day there are some services that these digital banks still do not offer that you can get at a traditional bank and until they can offer absolutely everything – even the use cases that might only happen every couple of years – I could see that the consumers are going to still want to have one of these more traditional banks on their side.

So, just super interesting what Citizens is doing. I mean, the Apple partnership itself is groundbreaking and fascinating, but I think Citizens seem to be punching above their weight as far as size goes. And they’re really a bank that is one to watch.

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

Bye.

Before we go, I want to remind you about the brand new event from LendIt Fintech: Fintech Nexus, the Dealmakers Summit will be the first major in-person fintech event of the past 18 months. A hand-curated audience of venture capitalists, bankers, fintechs, and debt investors will be meeting face-to-face at an event 100% focused on doing deals. It’ll be happening in Miami on September 1st and 2nd. You can apply to join and find out more at lendit.com.

You can subscribe to the Fintech One on One Podcast via Apple Podcasts or Spotify. To listen to this podcast episode there is an audio player directly below or you can download the MP3 file here.

Podcast: Play in new window | Download | Embed

Subscribe: Apple Podcasts | Android | RSS

We Have Reached a Tipping Point on Overdraft Fees

Banks are starting to feel the pressure on overdraft fees (from fintech and Capitol Hill) and are making real changes

July 1, 2021 By Peter Renton Leave a Comment

Overdraft fees have suddenly become a hot topic in banking circles. And it is about time. A couple of years ago I wrote this piece arguing that overdraft fees were going away. But for more than 18 months nothing much happened.

Aaron Klein, a senior fellow at the Brookings Institution (he will be on my podcast in a couple of weeks), released this important paper earlier this year calling out the banks who had made overdraft fees a core part of their business strategy. He studied overdraft revenue at all banks with more than $2 billion in assets and found that several generated the majority of their profits from overdraft fees.

Clearly, for these banks overdrafts were not an ancillary product but the core of their banking business. It is unfortunate to me that bank regulators seem to think this is acceptable but that is a topic for another time. Suffice it to say there are several small to medium sized banks focused on milking overdraft fees to the detriment of their customer base.

The big banks don’t get a free pass here either. The CEOs of the four largest banks testified on Capitol Hill a few weeks ago and were excoriated by Senator Elizabeth Warren for their use of overdraft fees. To be fair, while their absolute numbers show significant overdraft fees, as a percentage of their total revenue it is in the low single digits.

Some Banks Are Making Changes

This year, we are finally seeing some movement here. Bank after bank has announced, just in the past few weeks, that they will be taking some kind of action on overdrafts. Here is a breakdown of the movement here: [Read more…]

PitchIt Podcast #10: Max Rofagha of Finimize

Finimize Founder & CEO discusses the retail investor age, empowering users to become their own financial advisors and the importance of community.

June 29, 2021 By Todd Anderson Leave a Comment

In episode ten of PitchIt: the fintech startups podcast we talk with Finimize Founder & CEO Max Rofagha.

Retail investors have captured the attention of financial institutions, media outlets and fintechs alike. Finimize aims to empower everyone to become their own financial advisor. Providing the information and tools you need to invest with confidence. With this massive influx of retail investors, more people than ever before are in need of quality, digestible financial information.

Finimize break down information into digestible bites for the users to consumer and understand. The Finimize community also play a key role in educating the retail investor, community members often help each other understand investments. Retail investors have made similar pushes in the past, but the fintech tools allow these investors to have more staying power than previous periods.

I really enjoyed the conversation as we delve into the financial education gap, investment trends in crypto, DeFi and traditional financial markets, the biggest financial community in the world and tennis.. I hope you enjoy the show.

In this podcast you will learn:

Max’s personal story of investing his savings
What the retail investor really looks like
How users consume information
The retail investor has staying power
Finimize is not the place to push Doge Coin
Community really matters
There is a massive acceleration in market awareness
It’s all about delivering the right content, at the right time, through the right medium
Retail investors as a group hold power
Max recommends “Deep Work” by Cal Newport
And more…

Download a PDF of the transcription of Podcast No. 10 Max Rofagha

Click to Read Podcast Transcription (Full Text Version) Below

PITCHIT FINTECH STARTUPS PODCAST NO. 10–MAX ROFAGHA

Welcome to PitchIt, the fintech startups podcast, one founder, one startup, one investor at a time. I’m your host, Todd Anderson, Chief Product Officer, LendIt Fintech.

(music)

Todd Anderson: On Episode 10, we talk with Max Rofagha of Finimize. Finimize are on a mission to empower everyone to become their own financial advisor. They provide the information and tools needed to invest with confidence and with the massive, massive influx of retail investors during the pandemic, people need information more now than they ever have before when it comes to what to do with that savings that you’ve been able to put together.

Finimize is helping to educate that retail investor to become their own financial advisor rather than just handing over their money to either a person that works for a firm or one of these Robo Advisors. And so, Max and I talk about that investor education gap, that massive influx of retail investors and, you know, how information is being consumed today when it comes to investor news and information like that. So, you know, we had a lot of fun in our conversation, I hope you all enjoy the show.

(music)

Welcome to the podcast, Max, how are you?

Max Rofagha: Great, thanks for having me.

Todd: Of course, of course. So, I’d like to start these things with just a little introduction, if you can tell the audience a little bit about yourself, kind of your background and where you’ve been before starting Finimize and, you know, on this journey which you’re currently on to tell the audience a little bit about yourself.

Max: Sure. So, my name is Max, I’m the Founder of Finimize. I’ve always been an entrepreneur, I’ve only really ever had a real job one year in my life and funny enough tried to recruit my boss to start a company with me so I feel like I just have entrepreneurship…..it’s just part of my personality. I grew up in Berlin and studied International Relations and Economics in the UK and in the US. Before I started Finimize, I built one of the largest e-commerce businesses in Central Europe and then sold it to one of the largest media houses in Europe and started Finimize very much out of a personal experience, personal journey that I’m happy to dive into, if you’re interested], and I’ve been doing this now since the end of 2016.

Todd: Alright. Tell us a little bit about that personal journey and kind of how you came to start Finimize, you know, tell the audience a little bit about Finimize and kind of why launch when you did.

Max: So, the background story is I was in my mid-20’s, I took to heart what everybody was saying, you know, as you approach 30, you need to build up some savings. I was like, awesome let’s do that, set up an automation where every month my salary would transfer a little bit of that on to a savings account, did that for multiple months. A year later, I looked at my savings account and realized oh wow, great, I actually got savings now, that’s cool and the follow up question was what would I do with those savings. I went to go see a financial advisor who’s a lovely lady, but the problem was that the moment I walked through the door, I noticed that she had laid out all of her brochures on to the table already and I noticed that each brochure had their logo on it and it became apparent very quickly this is a sales pitch for their financial products rather than her genuinely trying to help me.

I knew, straight off the bat, that’s not what I’m looking for, that’s not the right solution for me and I went back home and I just tried to inform and educate myself as much as I could online and I found it really difficult to wrap my head around stuff, stuff that was valuable, that was trustworthy, etc. and just brought my head around it. In the evenings when I would meet friends of mine who were working in finance, I would just bombard them with all the questions that I had from my self-education throughout the day. At the same time, I kept bumping into people who were on the same boat as I was so they had some savings, they didn’t really know what to do with them or they didn’t have, like me, a community around them of people who could help empower them, help really shape their investment decision based on their own experiences.

And that really was the genesis of Finimize where I started to embark on this mission to help empower people to become their own financial advisors and the sort of underlying insight there is at the end of the day, we’re talking about information, we’re talking about bits and bites, ultimately, right. What’s happened is that there’s information asymmetry where the finance professionals have all the knowledge and they’re keeping up a lot of boundaries and the end consumer doesn’t get access. And if the history of the internet past taught us anything it is that information symmetries are not sustainable and they will be eradicated and we want to be at the forefront of that leveling the playing field movement whereby we take the information, we wrap it in a way that everybody understands it and we put it into the hands of the end-consumer whereby empowering them to make the right decisions themselves.

Todd: What was the bigger issue, was it that the information you were finding wasn’t really consumable in that it wasn’t written for say the everyday person, it was scattered and it was hard to grasp something that might speak to you, was it too jargony like inside baseball like hey, a seasoned finance advisor can understand this, but me that has a few thousand dollars that wants to put it to work to make a little more money on that, it doesn’t necessarily speak to who I am.

Max: Two things. Number one, quick anecdote, at the beginning of that year, I set two new year’s resolutions for myself. Number one, I wanted to run a marathon; number two, I wanted to read one of the major finance publications every single day. I ended up running two marathons first time in my life and I stopped reading these publications three months into the year. I think that’s quite telling because what happens is that A) it’s a massive time sink, it takes a huge amount of time to actually read it; number two, how do you even filter out what’s important, what’s not important unless you read back-to-back, nobody has time for that.

Number three is, if you actually understand what they’re talking about, if you do, and I studied Economics, I wasn’t a total layman to all the stuff, then you often are left with the question, great, cool that inflation might go up, but why the hell do I care and nobody explains that to you. On the other side, you have free resources out there, but the free resources tend to be Google searches that are completely optimized for SEO and you’ve got to ask yourself, why are they giving you this for free, who’s writing this. At the end of the day, these sites, typically, are affiliate businesses so that, again, they’re trying to sell you something. So, there was not one high quality independent solution out there and that’s exactly what Finimize is.

Todd: In your opinion, where’s the biggest investor education gap today? You know, the last year we’ve seen just a huge influx of people first jumping into the markets, maybe people who had savings, maybe people who got this extra government capital and said, hey, you know, I’m not going to pay down debt but I will put it a little bit to work, I’m going to start playing in, whether crypto or the regular markets. Where is that, the biggest investor gap today with the everyday retail trader?

Max: I think it’s interesting like there’s a ….when I started the company, I’ll just describe the experience, I think last year, this year we’ve seen something very similar where there’s been a massive, on the one side there’s been a massive broadening of access for the retail investors through fractional shares, through zero commissions, etc. That’s a lot more investors than ever to enter the market. I believe in the US, last year alone, 10 million retail investors entered the market. Charles Schwab in their Q1 announced that they had more new accounts in Q1 only of this year, than all of last year so there’s a massive acceleration I think.

So, number one is broadening access and I think this is phase one of the democratization of financial markets that everybody talks about. I think phase two is going to be all around broadening access to investment information because what you’re seeing now is okay great, phase one has happened/is happening, more people are gaining access, where do they get the information from. Alright, on the one side, there’s prohibitively expensive solutions out there, you’re going to be spending hundreds if not thousands a month so that’s why people are turning to free resources again and this time it’s TikTok. You obviously see pseudo finance gurus sitting out there who will tell you what to do with your stimulus check.

Todd: You have no idea who those people really are.

Max: I mean, they tend to be kids, nothing wrong with kids, but like who have just gotten $500 and putting it into some alt coin and I’m sure there’s some fantastic success stories there, we’ve seen it in our own community so you can’t argue with success, but you also have to distinguish between luck. Another thing is obviously Reddit, etc. Fintwitter so all of these free resources coming up because there is a vacuum in the market for high quality independent investing information and I think that’s really where the biggest gap is, just getting access to high quality information.

Todd: Tell the audience exactly what Finimize offers, you know, to its users and its community.

Max: So, we offer…broadly, what we’re doing is we’re building the financial information platform and community for the modern investor. The modern investor is someone who doesn’t have much time on their hands, as I experienced myself, and wants actionable insights and is very, very community-driven. So, 90% of our community members consult their peers before they make an investment decision and I think that’s just a paradigm shift, that’s here to stay, it’s an interesting new attribute of the retail investor.

What we do basically is number one, we provide daily investing insights available through our free newsletter, but also available through our mobile apps, in our app can also have it in an audio. We keep you up-to-date on what’s happening in the financial markets, we have a team of analysts who produce all these content, they’re all ex-Goldman, ex-Fidelity, they come from a whole range of the top tier financial institutions and they can also look into markets, into trends, into companies and really try to get you key insights from all the research that they do and then we also have educational content. So, if you want to how to build a portfolio on how to….you know, what’s DeFi, we also have content on that. In the second piece, in the second pillar of our proposition is our community.

So, we have the largest financial community in the world. Last year, we connected 30,000 people at our meet ups, this year, we’re connecting probably 60,000 people which makes us the largest financial gathering, by far, by far and this is all organized by our community. In these meet ups, what happens is that they identify topics that’s of interest that could be …..right now, obviously, like a lot of crypto topics are really interesting, it could also be sustainable investing, it could be vegan stocks whatever they’re interested in and I typically get an expert that they can learn from and then they can learn from each other and connect with each other and let them really create this holistic user experience.

Todd: The last year we saw millions of new people, obviously, entering this space, are we kind of entering a new era of the retail trader is finally here, like we’ve seen some fads in the past, it’s kind of up down, up down. We’ve had, more than ever before, come online and are interested in markets, all different types of markets. Are we finally entering that era of retail traders and this trend has staying power or when we’re all back to semi-normal some of these stuff will fade back again?

Max: I think it’s probably a bit of both. Number One, this trend of the democratization of financial markets through the broadening of access to platforms and information, I think that’s here to stay. There is no reason why all of a sudden we go back, alright, we’re not going to have fractional shares anymore, there’s no reason for that so I think the access point is going to stay. I think the big question is like how many of the people who are in the markets today are going to stick around then things go downward, which they will at some stage. But, I think the interesting thing is ….I’ve seen like a super comprehensive report on that bit, it’s certainly something that I’ve seen in multiple research reports and we’ve seen also in our own user base, the media has a lot of narrative around the kids who we were just talking about, the kids’ stimulus check $500 puts it on Dogecoin, that’s not what we’re seeing for the new retail investors.

The new retail investor is on average 35 years old, they just now have enough money to actually put it into the markets and the broadened access has allowed them to do so more easily than before. So, these are not kids who are betting their savings on this, these are adults who are for the first time investing in the markets which I think, overall, is a positive trend, that’s what we’ve all been rooting for for years, it’s happening now and now it’s a question of actually making sure that they do so in a sustainable manner, the proof is in the pudding.

Todd: How potentially detrimental though are those type of stories by say the mainstream media that are giving either a wrong interpretation of what the new retail investor is and, you know, does that then have a kind of cascading effect long term that it stops people from entering the market in the first place.

Max: That’s a good question. I mean, at the end of the say, media is also business, right, so they’re going to publish the headlines and the stories that get clicks. Again, I think I would just point to the research that we’ve seen other institutions do which paints a slightly different story. Let me answer your question specifically, I don’t really see that being a deterrent, I think, if anything, it’s interesting because it makes finance pop culture topic. When we started Finimize, our question from a branding point of view is always like what do we need to do to have people talk about finance and investing at the pub and guess what, 2021 people are talking about finance and investing at the pub.

Todd: I think that on the one side you’re right, it helps from the aspect of it just broadens the reach of what’s going on. Even if the stories are not necessarily the reality, it, at least, puts it out there that more people are seeing it because on the back side of it, they’re going to go talk to their friends about it, they’re going to go on Twitter or whatever resources and people begin to educate themselves so I think it could have two effects at the same time.

What about the platforms of the world, the Robinhoods, these other platforms, how much do you think they should, you know, take the onus on educating investors. We’ve seen some issues in the US with Robinhood, specifically, about the way that they have gamified their app and, you know, they’ve allowed leverage and there’s been some incidents. They had one particular case with a young man that took his own life, but how much of this onus is on them?

Max: I know the cousin of that kid, he was a financial advisor, he spoke with us, with our audience.

Todd: Wow!

Max: Sorry to interrupt you, to answer your question, to answer your question, I think that’s a really complicated question because on the one side, obviously, you want to say, hey, you guys are selling access or you’re giving access, it’s also your responsibility to make sure that that access is used responsibly. I guess you could make the argument that there needs to be Chinese walls here because what we’re seeing is….I’m not going to name any names, but there are certain brokers that are claiming now to do education and information, etc. and then you look at it and it’s like options are dangerous, but they’re not super dangerous and so click here, just trade options and then, it’s like branded as an education portal.

Personally, I think that there’s a bit of an issue with investor platforms who make their money by you investing, providing information because at the end of the day, they’re not a charity, they’re a business so they want to make money, so the content that they’re going to feed to you is going to be to make more business. And I think we’ve seen a lot of examples. And I think we’ve seen a lot of examples like that where the information and the educational content that is put out there is questionable, that’s all I would say right now.

Todd: I think we might end up getting to the point where say you sign in on the platform and you essentially need to sign some documentation that you understand the risks.

Max: The question is, what does that do, you know, it’s like the whole thing is like…..

Todd: It creates a drop, it creates a barrier, it drops the number of people who want to get into the market, it’s a fine line.

Max: It reminds me of…I’m sure you’ve heard of it, this thing in Europe, GDPR.

Todd: Yeah.

Max: Like, you know, okay, great, everybody just ticks a box, but I think reality is nobody really understands what they do with your data. So, I think that’s likely to happen, that scenario so…

Todd: Moving more specifically to some of the stuff that’s going on, you know, with markets, how is kind of the dynamic of….you know, there’s crypto, there’s DeFi, there’s NFTs, there’s traditional markets. I think, from my point of view, the crypto. DeFi, NFT space has not done a great job in and of itself in being consumer friendly and talking in terms that is easily digestible, the traditional markets is a little bit better at it, but how as someone who provides content to users and has a community, how do you see that dynamic at play of the crypto ecosystem world versus the traditional world and kind of ensuring that people are beginning to understand both.

Max: What we’ve seen in our community is in December of last year, we hosted a meet up on what is block chain, very basic. This year, we’ve hosted meet ups around DeFi, around NFTs, around specific old coins. What we’re seeing is a massive acceleration and the awareness and knowledge on this modern and new forms of finance and I think that’s interesting. I think it’s definitely getting more into the mainstream awareness and I think what’s happening is there is a lot more education, a lot more information as the sector matures so that more people can wrap their heads around it. I agree it’s so very, very cryptic and there’s obviously still a lot of noise in certain spaces.

I think what’s interesting about NFTs is this whole thesis that NFTs are….they look like a toy today, but they’re going to be ….what looks like a toy today can be a really powerful technology in five years, I could definitely see that with NFTs, I think it’s one of those technologies where there’s something interesting there, the use case hasn’t been found yet, which I guess is sort of traditionally not how you build products, but there’s something interesting there and something that I’m definitely watching very closely because I think something’s going to happen there. It might be this year, it might be in the next five years, I don’t know, nobody knows.

Todd: Back to the education part, how has the evolution of how people consume information here is …..it seems to me we’re evolving more to, you know, whether it’s short video clips, short audio clips like the consumer is taking in more of a multi-media approach versus the I’m going to read through booklets and pamphlets, is that trend something that you’re seeing? Secondly, how do you kind of balance creating a video or something that’s catchy and interesting to look at, but at the same time educational?

Max: That’s what we specialize in, is synthesizing substance with simplicity and yeah, I think that’s the modern consumption behavior, right. People, they want to perhaps consume content passively while they’re cooking, while they’re showering, while they’re going for a run, while on their commute. etc. and so I think what we need to do is create content in a way, whether it’s…..that could be the medium, video, audio, whatever, you need to pick everything very, very thoughtfully in order to cater to these new consumer behaviors, right. And, I think a lot of the stuff that’s driving this consumer behavior are these new social media networks, right, where it takes you maybe 15 seconds to look at a TikTok video, okay, so like all of a sudden, like 15 seconds is the benchmark for attention span.

That’s all about delivering the right content at the right time in the right medium which is a very generic answer, but that is, at the end of the day, the recipe. You just have to have a really, really, really, really clear understanding of where do you fit in with your consumer. For example, newsletters tend to be morning products, people open it, they get to their desk or they roll out of bed or whatever they do and they read their newsletters so you know, alright, I now have a morning product. Audio products tend to be in the gym or it’s my morning commute or evening commute, alright, so that’s the setting. And then you can start to optimize the products, the media products for that use case so it’s very use case-dependent, I would say.

Todd: Is there ever a concern that…… you know, you mentioned that the 15 seconds, the attention span, is there too short a time to put educational….like is there a kind of a sweet spot, you know, how much can really be put into 15 seconds or do you not have to think of it, everything doesn’t go on 15 seconds, you know, this bite 15 seconds and then, you know, it’s this bite 15 seconds.

Max: Yeah. I think what you’re seeing…..when people will say that they start doing bite-size content, it’s to cater to these reduced attention spans, but, typically, the way they work is you start off with a bite and then if the reader or listener or viewer is interested in finding out more, you provide it immediately, click here to go deeper. But, I think what you want to do is you want to give the takeaways, the insights, the juicy stuff, straight at the top and that’s how you can make educational content and if the user is interested in finding out more, tell them where they can find out more and they will then self-select into finding out more.

Todd: Is there ever a concern, you know, the community aspect that you were talking about before that the community is, I don’t know, going down that path that’s either not the best path or it’s too crypto-focused, you know, they kind of may be a clique of people get together and it’s, pushing Doge Coin or something along those lines. How do you guard against maybe or do you not guard against in terms of that community helping each other-type out atmosphere?

Max: Yeah. I think that’s a very good question and I think the way to answer that is through the spectrum when it comes to communities. There’s communities that are super open like a Reddit and then there’s communities that are super closed like a members’ club, like a Soho House or something, like they don’t want everybody there. I think we kind of sit in the middle, probably more towards the open side than the closed side, but the way that we really think that we create value is we’re an open community, everybody’s welcome to join, but there are certain rules, guidelines that you need to abide by if you want to be part of the community.

For example, we’re not a community that’s about pumping up a stock like some sub-writers do. I don’t have a judgment on whether that’s good or bad, the fact is, there is a place where you can do that, it’s called Reddit so please go and do it there. If you want to have a conversation about trading, we’re also not the right place for you, if you want to talk about investing, then we’re the right place for you and we have community managers who whenever we get a new community member, they’ll on-board them and that have very, very clear guidelines on what we are about…and also to protect other members, you know. They’re coming to us with a certain expectation and if someone comes in and says hey, I’m going to pump in Dogecoin today that also reflects badly on us as a brand. So, we’re very, very conscious of that and we have very clear guidelines and rules that we enforce,

Todd: It happened in January, the clash of retail, the pumping of stocks, then institutional and this perception that some of the stuff is rigged and, you know, certainly some of the past actions by institutions certainly can point to it being rigged, how does that aspect hurt a potential burgeoning retail investor community thinking hey, maybe I’ve done a little bit of investing, I’ve had some success, but then at any point if the institutions are kind of getting their lunch handed to them them kind of change the rules. How does that make me as a retail investor think that the market is ultimately fair so at one time it’s getting democratized, but can these big powerful institutions change the rules.

Max: Yeah. I mean, I think I remember at that time it was a super controversial topic or discussion that was happening around, you know, what’s the role of the hedge funds and is this whole game rigged. I don’t know, I feel like all sides have a valid point, I can see from those people who are saying, you know, why, all of a sudden, can I not sell something or buy something that seems pretty messed up, but I can also see from the institutions like the brokers or whatever they have certain parameters that they need to abide by in order for them to, as a regulated entity, continue to do business. I think, at the end of the day, it came down to probably a textbook example of horrible public affairs/public relations management where it wasn’t communicated well, things were done without explaining why they were done that caused mistrust.

I think that, at the end of the day, it comes down to that more than anything else, communication is key and I think there was this whole, I guess, explosive environment anyway because people were home, everybody was a little bit annoyed anyway with working from home so this was sort of the spark that led to the explosion. But,, again, I can see both sides, I think you also always have to ask yourself, when people make commentary what incentive or what agenda are they themselves pursuing. A lot of these famous people, these billionaire guys on Twitter, some of them were a bit more sort of skeptical of what’s happening and said it’s rigged, you know, you’ve got to ask yourself, what’s your agenda, man, like why are you pushing this narrative. So, at the end of the day, it’s perspective and it’s also communication.

Todd: I would think, ultimately, in the end the bigger the retail investor community, the more powerful as a whole it is and the less likely something of “rigging” can happen because they become a powerful entity unto itself the more people that are involved in the game because if that 10 million that jumped into market in the US were to leave, that’s a pretty big vacuum for institutions to then fill. So, at least, that’s what I think, the sustainability of the retail investor gives them more power over the long term.

Max: Yeah, 100%, I agree. I think it’s good that more retail investors are in the market to balance the dynamics 100%. I think whether there’s a great conspiracy happening, again, I think comes down to communication.

Todd: I want to shift a little bit, just the kind of more about….how big is Finimize these days in terms of a company?

Max: In terms of headcount?

Todd: Yeah, yeah.

Max: We’re pretty small, we keep thing lean, we’re close to 30 people.

Todd: In terms of the last year, do you guys have offices, how has kind of the pandemic impacted the team and growing that team, you know, the sitting at home all the time constantly on Zoom exhausts people, how do you kind of, you know, help your team get through that and not just burn each other out, essentially.

Max: Yes. So, we work fully remote right now. I personally think ended up working way better than anybody would have expected. In the beginning, we tried a lot of different things because for us it was also really important that we don’t …..our culture is really strong and I think that was a really, really solid foundation for us to go remote so we’re a bit concerned and worried that if we all go remote all of a sudden we’re going to lose that. And so, we tried things like twice a week let’s have a virtual lunch or let’s have drinks on Fridays. We still do virtual lunch, but, you know, some people join in, other people don’t, drinks is just awkward sitting in front of your computer having a beer,

Todd: (laughs) It is.

Max: And, you know, people also not being in front of their screen, they want to maybe go for a walk over the lunch period or something. So, overall, definitely there’s such a thing as Zoom fatigue, but we try to keep it minimal and I think, so far, it’s worked pretty well. We’re getting an office for people to go in if they want to and then kind of taking things one day at a time to see how things unfold. Do they actually like going back, you know, I think people also really appreciate not having to go on a commute everyday, sucks energy and time out of your life. So, I think we’re still figuring out what the best consolation is, but I think remote is one of those things that’s just here to stay.

Todd: From other founders I’ve talked to, one of the biggest benefits of the remote working is you can pretty much find talent anywhere in that.

Max: Exactly.

Todd: Zero room to….you know, I mean, I’m in New York , I need to find talent in this kind of X mile radius, I’m assuming that is the case for you guys as well.

Max: Yeah. I think we were previously very focused because of this idea that we wanted to build a really strong team culture that it was important to be in the office which I think now we’ve definitely loosened up on that constraint and I’ve already hire people remote so …….

Todd: Is it harder to kind of get that culture through the sell-on by hiring them remote?

Max: You know, it’s different, it’s different if you do like welcome coffees with other people on the team and you don’t meet in person, but you just turn on your screen. And it’s one of those serendipitous moments, right, like I’m standing next to you at the coffee machine, oh, I’m about to go grab lunch, do you want to come with me then you start chatting while you walk. Stuff like that just doesn’t happen, all of a sudden, everything has to be very structured, very planned, very scheduled. So, I think those are the downsides to this remote set-up which I guess a lot of people or a lot of companies are solving that by doing company retreats. It seems like a reasonable thing to do.

Todd: So, we have a few minutes left here, I tend to try some elements of fun for each episode. Do you have a favorite book and then the last book you read. If you’re not a big reader then whatever information medium you use in terms of consuming information you can go with that.

Max: So the question is which book or which medium do I like the best.

Todd: Well, if you read, I would go with book, if you don’t read then whatever the medium is, go with that.

Max: So, one of the things that I’ve started doing during the lockdown was to read more books so there’s a lot more that I’ll pick from. Probably the best book that I’ve read in a while has been “Deep Work” by Cal Newport, I believe his name is. It’s all about how do you do deep work so like the kind of work where your brain is fully focused, you’re in full creativity mode and you have zero distractions. So, he talks a lot about how to structure your day, how to use social media, how to manage your phone.

Very specific example, one of my habits has always been I open my computer, I have my e-mail client open and then you kind of always just see the notifications going up and he was like that’s a no no. And so, now, every morning and in the evenings I have like a specific slot where I try to do email and for the rest of the day, I try to shut my email client. So, little things like that have helped me and the book doesn’t do a greater job than I just did, but it explains all these different things. So, that will probably the book that I will pick out that I thought was really, really good lately.

Todd: Are you a sports fan and is there a favorite team that you root for?

Max: As a German, I’m a soccer fan, probably the low average of the average German in terms of how much I care about it, but, right now, there’s the Euro Cup, Germany is playing today so I follow that. Outside of the Euro Cup, I will probably say I follow tennis and Formula One the most.

Todd: You are my fourth guest who has mentioned tennis as one of their favoite sports. Right now, it’s the leading sport amongst the guests.

Max: Okay.

Todd: Final question is, biggest inspiration in life.

Max: I tried to be really, really curious and get inspiration on a continuous basis by just leaning into conversations, leaning into learning new things, whether that’s in the professional world or whether that’s outside the professional world. I personally find that as the most inspiring thing that you can be on this continuous learning journey. Learning about new things is always super interesting, it shapes your thinking, it shapes your creativity and I would say that’s my continuous source of inspiration.

Todd: With that, we’re going to have to leave it there, Max. I really greatly appreciate you coming on the show. I wish you and the team continued success and you know, maybe we’ll get you back here again sometime in the future.

Max: Absolutely, yeah, thanks for having me.

Todd: Of course.

(music)

Thank you for listening to the latest episode of PitchIt, the fintech startups podcast. I encourage you to take a few minutes to write a review or rate the episode. Ratings and reviews both help us to improve the show for future episodes. If you’re interested in learning more or would like to be considered for a future episode, please reach out anytime to todd@lendt.com and until next time.

(music)

You can subscribe to the PitchIt: the fintech startups podcast via Apple or Spotify. To listen to this podcast episode there is an audio player directly below or you can download the MP3 file here.

Podcast (pitchit): Play in new window | Download | Embed

Subscribe: Android | RSS

Podcast 304: Kirill Bensonoff of New Silver

The Co-Founder and Head of Product at New Silver provides insight into the first real estate deal conducted via decentralized finance

June 25, 2021 By Peter Renton Leave a Comment

One of the main use cases for decentralized finance (DeFi) has been lending. This typically involves crypto investors using their holdings as collateral to take out a loan to (often) invest in more crypto. This is all done programmatically via smart contracts but it has all seemed far removed from traditional finance. But in April, we had the world’s first real estate transaction conducted via DeFi.

Our next guest on the Fintech One•On•One podcast is Kirill Bensonoff, the co-founder and head of product at New Silver. He was the driving force behind this transaction and, as you will learn in this episode, is 100% committed to bringing more real estate transactions to DeFi. He sees many advantages which he discusses in some depth on this show.

In this podcast you will learn:

The story behind the founding of New Silver.
The different loan products they offer.
How they have funded these loans historically.
The funny story of how Kirill first bought bitcoin in 2013.
How he first became interested in DeFi.
A short primer on MakerDAO and Dai.
Why he decided to fund their loans through DeFi.
The mechanism for putting their loans on Tinlake from Centrifuge.
Why they have reduced their APR for Tinlake investors.
The number and terms of the loans inside New Silver Series 2.
How the cash flows will work.
How the secondary market works for investors wanting to sell.
The economics for New Silver.
Why the automation possibilities with DeFi are very attractive.
What the long game is for New Silver and DeFi.
The different projects where Kirill is an angel investor.

This episode of the Fintech One on One Podcast is brought to you by LendIt Fintech Nexus, an in-person event focused exclusively on face-to-face meetings happening in Miami on September 1-2.

Download a PDF of the transcription of Podcast 304 – Kirill Bensonoff.

Click to Read Podcast Transcription (Full Text Version) Below

FINTECH ONE-ON-ONE PODCAST 304-KIRILL BENSONOFF

Welcome to the Fintech One-on-One Podcast, Episode No. 304. This is your host, Peter Renton, Chairman and Co-Founder of LendIt Fintech.

(music)

Before we start this episode, I want to tell you about a brand new event from LendIt Fintech, Fintech Nexus, the Dealmaker Summit will be the first major in-person fintech event of the past 18 months, a hand-curated audience of venture capitalists, bankers, fintechs and debt investors will be meeting face-to-face at an event 100% focused on doing deals. It will be happening in Miami on September 1st and 2nd. You can apply to join and find out more at lendit.com

Peter Renton: Today on the show, I am delighted to welcome Kirill Bensonoff, he is the Co-Founder and Head of Product at New Silver. Now, New Silver is a really interesting company, they’re a tech-forward fix & flip lender, they also have other lending products, but we’re really focusing on the fix & flip space, we’re focusing on that combined with Decentralized Finance because they did the world’s first DeFi real estate transaction earlier this year.

So, I wanted to get Kirill on the show to talk about why go into DeFi, why be a trailblazer here and how the mechanism works, how investors were able to participate, how they are able to really close millions of dollars in financing through DeFi. So, we talk about how that works and he also provides what he thinks the future holds for DeFi and for New Silver. It was a fascinating interview, we hope you enjoy the show.

Welcome to the podcast, Kirill!

Kirill Bensonoff: Hey, Peter, thanks for having me.

Peter: My pleasure. So, let’s get started with a little bit of background. I mean, you’ve been an entrepreneur for a while, sounds like you’ve done a few different things, why don’t you give us some of the highlights to date?

Kirill: Oh, yeah. I’ve done a few different things, that’s for sure. So, like you said, I started my first company while I was in college, it was web hosting company that kind of got me started as an entrepreneur. I came to this country as a teenage immigrant with my parents and certainly I always was interested in doing my own thing so that kind of lead the spark. And then post-college I had an IT services company that focused on money services, we’re one of the first money services company in the area. And then, under that we spun out a software company that was just really young software startup that was acquired fairly early on.

We had a couple of other things in between and what I’ve been involved with now is New Silver. New Silver is a loan originator in the fix & flip space, tech-forward loan originator and we’re doing a bunch of interesting things I think to make the lending process faster, easier and less costly for everyone.

Peter: Right. So, what was sort of the genesis behind New Silver? Can you tell us what you saw and why it started out.

Kirill: Absolutely. So, I became familiar with fix & flip investing some years ago through a friend of mine and I kind of always liked it. I mean, there is a great yield and secure and buy real assets, it brings value to real estate entrepreneurs who basically own very small businesses and individuals who come from trades, who come from various backgrounds and who can essentially earn a very, very nice income if they put their minds to it. So, I was very intrigued by what was going on there and I was looking into it and I looked at the technology initially and I thought that the technology behind the lenders today was a little bit dated, a little bit ….subpar to what I’ve seen in the consumer lending world.

By the way, I had no experience in fintech, with little experience in fintech and no experience in lending prior to New Silver, no formal experience. So, we positioned initially as a potential technology startup, but then, you know, for various reasons we thought that we could do a lot more being the lenders ourselves. There’s a lot of very interesting things there so we decided to build the product, test the product and lend our own capital.

Peter: Maybe you could tell us a little bit about the….breaking down the different type of loans you do, what are the loan terms, that sort of thing.

Kirill: Sure, absolutely. So, our bread and butter is the fix & flip loan. It’s basically bridge loan that’s usually 12 months in duration, but it can go up to 24 months and the purpose of the loan is for someone to buy a property, typically a residential in a one to four family, but we do larger as well that is in some condition that needs a rehab essentially we acquire the property, rehab the property and resell it so we do a majority there. We lend for new fix & flip projects, we do refinances and we lend it for ground up construction which is very similar except that either they’re buying land or they already own land or they’re going to essentially demolish the house and build a new structure.

And then, we also do a 30-year rent loan, this is what is called in the industry a DSCR loan, it’s kind of similar to what a bank would do for an investment property except the difference is that it’s an asset-based loan so we don’t really look at what the income, what the losses are in the individual or the company. We just look at the asset, make sure that the value is there, make sure it’s profitable. That we could do in conjunction with a partner typically, so, yeah, those are the four products that we have.

Peter: Right. How have you funded these loans historically?

Kirill: Yes. I mean, when we started the business, we learned that there was a lot of interesting dynamics. So, we raised a little bit of capital, our own money, a little bit of friends and family types of capital and we would essentially fund the loan with the capital and then we develop a few partnerships and then we would sell the loan off to one of these partners. There are a number of companies out there that were aggregators essentially and buying up loans from originators like us and then they need to securitize and we’re doing something else with them with a bigger volume. So, that was our model from the beginning.

Peter: Right, okay. We’re going to get into the new model here in a little bit, but before we do that I do want to just sort of get a little bit of your background. I know you’ve been interested in crypto for some time so why don’t you just tell us a little about what your interest is there, how long you’ve been following the crypto space and that sort of thing.

Kirill: Yeah. So, learned about cryptocurrencies I think back in 2013 and actually bought Bitcoin, I remember, in …..I live in Massachusetts and I went to Cambridge. I think it was a student from MIT that I met. We met online on a platform for these types of transactions, we met in person basically and I bought, I can’t remember, one or two Bitcoin out of this person and he transferred it to me in my wallet, I brought cash. (Peter laughs) So, that was my first Bitcoin transaction. We met in a bar and it was a little bit of a strange transaction, but, you know, it worked and I was really interested in where this is all going so I continued to pay attention.

I wasn’t really a big investor in crypto at that time, I mean, there wasn’t really much available other than Bitcoin and then other things coming out as well. I’ve always kind of read news and kept an eye on it. I thought that there were some interesting dynamics there. And then 2017 or so, myself and a partner, we tried to do a startup in the crypto space which didn’t work out, unfortunately, but that kind of gave me I guess a closer hands-on view at the positives and the negatives that go on in the space. So, I kind of continued on from there, but after that we started New Silver and really I continue to be interested in cryptocurrency, but New Silver was not a crypto currency related business at that time. I mean, it’s still really isn’t, but we introduced some components which I’m sure we’ll talk about.

Peter: Right, right. I do want to get into that, but maybe we can start that process by talking about Decentralized Finance or DeFi because this is really what we’re really talking about here, sort of DeFi for real world assets/ Did you sort of first hear about DeFi and think aha, we can take advantage. How did sort of the genesis come around with sort of the DeFi world and the hard money lending world.

Kirill: Yeah. I thought…. there wasn’t that specific thought, but when I learned about DeFi I thought that at some point this is going to encompass other assets, the real-world assets, non-crypto assets and this was, way before, maybe 2017 or so, but I always thought that this was potentially a way to do some interesting financing. You know, I knew some folks in the industry and I met some folks at MakerDAO around that time and we started talking about what can be done and their interest in exploring so that kind of sort of started the conversation way back then.

Peter: Right, right. Maybe you could explain to the audience what exactly MakerDAO is and also it’s token, Dai, which is part of, you know how you’re gathering investment capital, but explain what MakerDAO is.

Kirill: Sure. MakerDAO, DAO stands for Decentralized Autonomous Organization, so it’s really not a company or an entity of any sort. They did have a foundation, but they, I believe, have dissolved it recently so it’s really a truly decentralized entity that at its core what it does is it takes in….the way they started out is they would take Ether as collateral and they would lock it into what they call a vault and out of that collateral they would issue a stable coin called Dai. A stable coin has two or probably more flavors, the most common flavor today is collateral-backed stable coin like USDC or Tether or USDT or a number of others and what they do is they essentially take in collateral in Fiat currency, US dollars or what have you and then issue a one-to-one stable coin backed by that collateral.

So, in theory, if you have one USDC, you can go to Circle and then trade that one USDC for $1 so that keeps it on par with dollars. Now, Dai and MakerDAO are, I believe, super innovative and I think what they’ve done is as close to genius as it gets, in my opinion, so they’ve developed an algorithmic non-collateral-based stable coin. They take collateral and then they issue Dai, that’s like 50% or some amount of loan to value and then they get paid interest rate, small interest rate because of the whole ecosystem that exists.

There’s a lot of things I don’t know, I don’t put myself out as a MakerDAO expert, but they built up a fairly large ecosystem and they’ve done a fair amount of collateral, it’s in the tens of millions, I haven’t looked recently, and I think there’s like 4 Billion Dai out there and because of the arbitragers and other folks involved and the trust that’s placed in this organization, Dai mimics or stays close to being one-to-one with the US dollar. They’ve lost this peg to the dollar a couple of times in these super liquid events that took place over the years, but it quickly recovered and they’ve handled all the issues very, very well so it’s one of the largest market cap stable coins and it’s not backed by Fiat currency.

Peter: Right, right. So then, why did you decide to sort of go this route where you can, you know, you’re really putting….we’ll get into the details in a sec, but what was in it for you? Why did you decide to go to all this work and all this trouble to fund these loans through DeFi?

Kirill: That’s a great question. I think the short answer is because I believe that’s the future, in some way or another, I don’t know if it’ll be Dai or it’ll be something else, but I believe that…..not that, again, not that Fiat and the sort of traditional financing will go away. I do think that the two are merging, are going to continue merged, but I thought that it took us a lot of work and it still continues to be a ton of work to, you know, utilize this ecosystem, it’s not as easy in a lot of ways compared to what we had done before. It may not be as easy as it would be to go to like a bank or a fund and get financing and funds are in your bank because we work with Fiat currency with our borrowers.

But, what I envision happening at some point, and maybe sooner than later, is that A) this is going to allow us to do a lot more automation, right, so, hopefully soon we’ll be able to originate a loan and then essentially you’ll place the collateral and get the loan from Tinlake, from MakerDAO, in essence, and potentially other investors very, very quickly.

I also envision the transparency of the whole process will greatly be improved by being on the blockchain so in the not too distant future you will be able to open….so our loans are basically an NFT (Non-Fungible Token), they are blockchain assets in the form of NFT. You’ll be able to look at this NFT and maybe learn about how this loan is performing, maybe learn about, you know, what the yield has been, what it’s going to be, etc. etc. and maybe this loan can be transferred to another party or a third party. So, I do believe this is going to make everything a lot faster, a lot more transparent and eventually it’ll be more convenient for everyone.

Peter: Right, right. That is a potential. So, let’s talk about sort of the mechanisms that you funded these loans. I have a MetaMask wallet and I’m on Centrifuge right now and I’m actually looking at your….New Silver 2 deal here so maybe explain, you decided to put this on Centrifuge and I’ll link to all these in the show notes, but just explain the mechanism of how, what’s sort of the pool, what was involved in the pool and how it sort got on the Centrifuge and got funded.

Kirill: So, the Centrifuge folks are a group of very smart people and they’ve developed the software that basically, you know, seeks to bring real world assets to the blockchain and so they’ve developed a product called Tinlake which enables their asset originators, we’re one of them, to take a loan that we had closed in the real world and turn that into an NFT, turn that into a blockchain asset, that NFT. And there’s the legal side, you know, the traditional legal side to it as well, it’s not just blockchain at this time, but perhaps eventually it will be.

This NFT represents the collateral, represents a loan which then gets locked into Tinlake and then out of that equal either people or entities, again, entities loosely, but MakerDAO Decentralized Entity, perhaps others in the future can participate and essentially invest Dai. There’s a couple of different ways to invest, they have a senior tranche called Drop so that the senior tranche has more protection, more funds in front of it and it pays a fixed interest rate and then there is a junior tranche called Tin which is a separate tranche, much riskier investment and that pays a variable interest rate.

So, people can go to Tinlake and if they choose to invest, they can invest into one of these tranches, they invest in a whole pool not on a particular loan and there’s the whole bunch of other stuff there, but at the end of the day, we pledge the collateral as the asset originator and then we can get a loan from Tinlake which can consist of the MakerDAO funds plus some funds that individual investors can contribute.

Peter: Right, right. I’m looking at it right now and this was an offering that seemed like it was 5 Million Dai, 5,000 Dai which is basically $5,000 minimum investment and I noticed that you reduced the APR, it was I think at 5% and now it’s at 4% so tell us a little bit about what happened there.

Kirill: Yeah. I think the reason for that is there’s quite a lot of demand, I mean, right now, the pool is closed, it’s oversubscribed so we’re not taking on new investors right this moment. There’s so much demand out there and the reason for that is that we want to be able to reduce the rates that we originate at, that we offered to our borrowers so, basically, bringing forward the best borrowers to increase origination volumes and, you know, in turn lock the collateral into Tinlake and have a little bit of room to play with there.

You know, reducing the Drop rate helps that a little bit, I don’t think this is going to be a permanent reduction by any means. On top of the interest rate, Centrifuge also has reward tokens that they pay out to all of the investors that invest in either tranche and, you know, they reward everyone for participating in the ecosystem.

Peter: Right, right. So, if this offering is closed…..we’re recording this on June 8th, this is going to be published on June 18th and so you said there is going to be another series that you’re going to put on Centrifuge?

Kirill: It may be another series or maybe the same series the we just open up, but we will expect to open the pool up in the next couple of weeks again. You know, we’re going to be working with MakerDAO, hopefully, soon to increase the debt ceiling. Right now, we have 5 Million that MakerDAO has essentially capped the maximum line of credit, if you want to call it that, so we hope to….as over time as we originate and as the relationship gets stronger, we hope to ask the community for an increase.

Peter: Right, okay. And then, inside the pool it says like there’s 28 different assets, average financing amount 232,000 Dai ($232,000) and average maturity at 12.4, I mean, is this sort of a pretty typical fix & flip type loans you’ve got in here?

Kirill: Exactly, yeah. We focus on sort of the middle-of-the road fix & flip projects, we try not to go too high or too low, the overall fees are serious that people need places to live in. Right now, there is a short supply of housing stock,, but even if there is not, the housing stock in a lot of areas in outdated and has been built, you know, hundred plus years ago in many areas. So, the fix & flip community has a huge part to play in revamping these homes and making them livable and at the same time earning an income while doing that.

Peter: Right.

Kirill: So, those are the typical loans, correct.

Peter: Okay, So then, can you explain how the cash flow works. I know there’s other platforms out there that probably several listeners have invested in, we recently just had LendingHome on the show and with those investments you typically often get like a small interest payment every month and then the balloon when the maturity comes in. How do the cash flows work in this system.

Kirill: Yeah. It’s a little bit different because when Centrifuge built the system, they I think tried to, you know, get as close to Decentralized Finance as possible. It’s not always possible with these real world assets, but the way that it would work is if an investor invested the capital, whether if it’s in senior tranche, Drop, they could then ….there’s not a steady payment per se, but Drop, they invest in…let’s say they buy 5,000 Drop and it’s one Dai each and they keep it there for, I don’t know, X amount of months so this Drop will appreciate in value. So, it’s more of a net asset value calculation, right, so that when they redeem……because Drop is basically a token so everybody would need to have a Metamask or some kind of a wallet to do this transaction, and then obviously Dai, so, you know, I can actually walk through the whole process.

So, if you have wallet like Metamask you’d want to seed it with some Dai and then if you go to Tinlake you can essentially buy Drop tokens and then Dai would go to Tinlake and then you would get the Drop token into your wallet and then if you come back let’s say some number of months later, the Drop should appreciate as the net asset value changes based on the fixed interest rates. So, a year from now, it should cost a dollar + 4% so $1.04, I mean, it’s not a simple appreciation so it’ll probably be a little more than that, but, you know, based on the interest rate it would appreciate so when you redeem it you get more Dai back. That’s the idea.

Peter: Yeah. Actually, as we’ve been talking here, I’ve been looking and the Dai has been appreciating in real time in your Drop tranche.

Kirill: That’s right, that’s right. That’s another nice thing about it, it’s actually real-time, it’s basically built to calculate up to, I think it’s, you know, some number of seconds that it changes.

Peter: So, can investors of these tokens…..are you locked-in until maturity, can you sort of sell these tokens at any time or how does that work?

Kirill: You can sell them at any time, but, of course, there should be enough capital to pull out your investment so it depends on what’s available in Tinlake, it depends on like is the maker line open, you know, Drop investors may be able to pull out of there. Yeah, it depends on those factors so I think for the junior tranche the expectation is that they will hold the investment for a little bit longer, but for senior, for the Drop tokens which is what the majority of people are investing in, they can buy and sell fairly frequently. We’ve already seen many of both transactions take place.

Peter: Okay, okay, that’s interesting. So, this is all run by Centrifuge, but I should actually note to the listeners….know that Jason Jones, one of the Co-Founders of LendIt Fintech, he is very involved in Centrifuge and he’s the one that introduced us, Kirill, so I want to give him a shout out.

Kirill: Yeah, hey Jason.

Peter: So, Centrifuge, I’m just trying to sort of put it into traditional asset sort of world where people can understand. This is this on the Centrifuge platform, Tinlake, and are they kind of like the asset manager, what would you call Centrifuge with using an example from traditional finance.

Kirill: I don’t know, actually, I’m not a finance guy, but they are the technology that enables the securitization, if you will. That’s probably as close to that as anything else.

Peter: Yes, but obviously has a lot in common with traditional securitization, you’ve got a junior tranche and a senior tranche. Junior tranche is potentially higher risk and higher reward which is obviously very similar to traditional securitization. Okay, so then, what are the economics for New Silver here, how are you getting paid?

Kirill: Sure. I mean, so when we originate a loan there is an origination fee typically, we keep the origination fee and then when we finance the loan with Tinlake there’s typically a spread that we also keep. So, it’s pretty similar to…that’s essentially how we work with our previous partners so when people do the loan aggregation, loan buyers, they buy the note, they typically buy with a yield spread, a cash that either they pay upfront or they pay as they get paid. In this model here we have a yield spread and basically we earn it as the borrower pays us and then we pay Tinlake.

Peter: Right. So, is your intention to have your cost of capital here be lower than your cost of capital elsewhere so you can really pass on better rates?

Kirill: That’s the goal, but like I said, I think cost of capital, it would certainly be nice to have the cheapest cost of capital out there, but whether or not this is feasible, I don’t know. I think, it’s not much less than it would be with the partners that we’ve worked with before, however, I do think it could be increased further over time, but also the fact that we can automate because we’re building tech-forward . I think for us to be able to automate a lot of these transactions, I mean, we don’t need to have a capital market per se, we don’t need all these people doing manual tasks, that’s huge.

Peter: No, I can see that, that would be huge. Remember, when this came out, I think it was in April, if I remember rightly, I watched a video on CoinDesk and they had the MakerDAO guy on saying this was the world’s first ever real estate transaction conducted through DeFi and they were making quite a big deal out of it.

So, I guess you are a pioneer here, but what is the long game when it comes to DeFi and New Silver? Do you hope to be able to…you talk about automation which obviously is going to be a great benefit because this is all DeFi, all happens without human intervention, but is your goal to have, you know, all of your loans be funded through a DeFi platform in the long run?

Kirill: Yeah, absolutely. We’re all in on DeFi and Tinlake, Maker. I would love to, you know, be able to originate loans and make them as transparent as possible so that everyone knows exactly what the status of each loan is, each project, etc. and we’re working towards that now, you know, that all of our loans go to DeFi.

Peter: Right, okay. Before we close, I do want to just ask you about your angel investments because I’ve seen that you’re quite a prolific angel investor. So, maybe you could just tell us what kind of projects that you’re interested in funding?

Kirill: Absolutely. So, I mean, yeah, I look at different types of projects. To be honest, I started out thinking more about enterprise IT and SaaS when I was in that game and knew a lot about it, knew just the updated state of affairs in that marketplace and I still do to some degree, but, honestly, lately I’ve been looking at fintech a lot more.

I am one of the founding members of an angel group called ChainReaction which started out in Boston, but I think we have members from a bunch of different areas now. As a group of investors we get, you know, three to five companies pitching after processing all the pitches every month and then we can make investments individually or as a group, however…so, I’m fairly active there, you know, have a network of people trying to pitch to me all the time. I don’t have too much time for it, to be honest, but interesting projects come up so it’s a lot of fun.

Peter: Right, for sure. Okay, we’ll have to leave it there, Kirill, I really appreciate you coming on the show. Best of luck with the future of New Silver and DeFi.

Kirill: Awesome, Peter, thanks for having me.

Peter: Okay, see you.

In some ways, I’m reminded of the early days of peer-to-peer lending, sort of the example here of DeFi just really getting going in the space, but peer-to-peer lending, there were some early adaptors like myself who were willing to risk their money in something that did not have a long track record, it was all pretty new and clearly, DeFi is still pretty new, particularly DeFi for real world assets, like we have here, is brand new.

As Kirill said, this is was an oversubscribed offering, people are willing to give this a try and who knows, we could very well have this be a major part of finance in the long term and has to start somewhere and really it’s starting right here with New Silver and Centrifuge and that is something that I’ll be paying attention to closely. I might actually try and participate in a future offering that they have and we will be bringing you more and paying attention to this new trend as time goes on.

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

Before we go, I want to remind you about the brand new event from LendIt Fintech, Fintech Nexus, the Dealmaker Summit will be the first major in-person fintech event of the past 18 months. A hand-curated audience of venture capitalists, bankers, fintechs and debt investors will be meeting face-to-face at an event 100% focused on doing deals. It will be happening in Miami on September 1st and 2nd, you can apply to join and find out more at lendit.com.

You can subscribe to the Fintech One on One Podcast via Apple Podcasts or Spotify. To listen to this podcast episode there is an audio player directly below or you can download the MP3 file here.

Podcast: Play in new window | Download | Embed

Subscribe: Apple Podcasts | Android | RSS

Pioneering Data Analytics Firm PeerIQ Acquired by Cross River

The leading fintech bank expands it capabilities with the acquisition of data and analytics firm PeerIQ

June 23, 2021 By Peter Renton Leave a Comment

I first met Ram Ahluwalia, the CEO and co-founder of PeerIQ, back in 2013 when he was working at a family office focused on alternative investments and structured credit. We shared a love of peer to peer lending and we had a lively discussion on the state of the industry. Since then Ram was a regular at LendIt events even before he started PeerIQ in 2015.

It has been exciting to watch him grow PeerIQ into one of the leading data and analytics firms in the fintech lending space serving institutional loan buyers which, more recently, have also included community banks. They have been focused primarily on the consumer loan space.

I caught up with Ram this morning as the news was breaking and the first thing he said was that PeerIQ and Cross River have been partners since 2018. Early that year the two companies announced a new partnership where PeerIQ would combine its risk management platform, data-verification tools as well as its deep borrower data sets with Cross River’s capital, technology and regulatory compliance tools. Clearly that partnership has gone well.

Ram said that talks with Cross River actually started pre-covid and really began organically in conversations he had with Cross River CEO Gilles Gade. Ram pointed out that Cross River has a unique place in fintech as “they are often the first stop for a fintech looking to offer lending or payments access.” He also said that, “PeerIQ will be able augment Cross River’s already impressive banking-as-a-service toolkit.”

PeerIQ has built up a roster of community bank clients in recent years and when I asked Ram about those relationships he was quick to point out that all their data firewalls will remain in place allowing them to service their customers and safeguard borrower data as before. Also, all their clients received a heads up on this news before it hit today.

The deal actually closed in Q1 but they had to wait for regulatory approval from the Federal Reserve before it could be fully consummated. Officially, PeerIQ will be wholly owned by CRB Group, Inc., the parent company of Cross River and thus will be a sister company, or affiliate, of the bank. Ram would not disclose terms of the deal other than to say it involved cash and stock.

Here is a statement from Gilles Gade from the press release:

Cross River is constantly adapting to the evolving landscape of financial services with an insatiable thirst to innovate. PeerIQ has established itself as a leader in capital markets innovation and our newly expanded offerings will make us even more compelling.

My Take

So the consolidation in the fintech space continues. While we don’t know whether this was a good deal for PeerIQ investors we do know that Cross River is becoming a fintech rocket ship these days and hitching your company to the leading fintech bank in the country is likely a smart move. As Gilles said in one of the articles I read this morning, this is just the beginning for them, there will be more acquisitions to come. And probably an IPO is not too far off although there was no mention of that with this news.

From PeerIQ’s perspective they will now potentially get in the door with new lending originators that inevitably find their way to Cross River. This will also help Cross River in their risk management of these new originators as well as with their long list of existing lending clients.

The movement towards banking-as-a-service or embedded finance is a secular trend that will dominate finance this decade. The combined companies now have more tools to help them lead the industry as this trend accelerates. Personal loans as an asset class will continue to grow as more banks see the wisdom in adding this high yield asset to their portfolios.

Congratulations to all involved. It is going to fun to see how this unfolds.

PitchIt Podcast #9: Justin Wickett of Informed.IQ

Informed.IQ Co-Founder & CEO discusses the benefits of using AI in consumer lending and where we are on the AI path in finance today.

June 22, 2021 By Todd Anderson Leave a Comment

In episode nine of PitchIt: the fintech startups podcast we talk with Informed.IQ Co-Founder & CEO Justin Wickett.

Artificial intelligence or AI has quickly become one of the most popular buzzwords in all of fintech. Companies constantly highlight their use of AI, but there are only a few that are using AI in a practical way. Informed.IQ is one of those companies. Informed.IQ unlocks the information trapped in loan applications and eliminates manual reviews via AI and machine learning.

The company works with financial institutions of all sizes to help them make the lending process more efficient and reliable. I really enjoyed the conversation as we delve into the benefits of AI, the differences between AI and robotic process automation or RPA and some career advice for aspiring fintech entrepreneurs. I hope you enjoy the show.

In this podcast you will learn:

How AI is helping lenders of all sizes
How AI is different from RPA
AI is still in its infancy
Complex scenarios still involve human intervention
AI should not be generalized
A new credit score is needed
True income is not being realized today
15 – 20 percent of applications had falsified documents accompanying them during 2020
Covid was an accelerator for Informed
Read “Power Up: How Smart Women Win in the New Economy” by Magdalena Yesil, Informed’s Co-Founder
Justin’s parents did a good job raising him
And more…

Download a PDF of the transcription of Podcast No. 9 Justin Wickett

Click to Read Podcast Transcription (Full Text Version) Below

PITCHIT FINTECH STARTUPS PODCAST NO. 9–JUSTIN WICKETT

Welcome to PitchIt, the fintech startups podcast, one founder, one startup, one investor at a time. I’m your host, Todd Anderson, Chief Product Officer, LendIt Fintech.

(music)

Todd Anderson: On Episode 9, we talk with Justin Wickett of the Informed.IQ. Informed’s mission is to unlock the information trapped in loan applications and eliminate manual reviews of applications via AI and machine learning to enable touchless funding. You know, AI’s kind of been one of those most used buzzwords in fintech and, you know, I think Informed’s practical application of the technology is really helping to prove it out for most of the lenders that they work with.

Justine and I discussed how Informed’s not only helping lenders, but it’s also helping to catch fraudsters, the differences between AI and Robotic Process Automation or RPA and he also offers a career advice for those interested in getting into the fintech space. We had a lot of fun on the episode and I hope you all enjoy the show.

(music)

Todd: Welcome to the podcast, Justin, how are you?

Justin Wickett: I’m great, Todd, thank you so much for having me on this podcast.

Todd: Yeah, of course. So, first I’d like to, you know, just kind of kick off with telling the listeners a little bit about yourself, your professional background, kind of what brought you to where you are today at Informed.

Justin: Yeah. So, I’m Justin Wickett, I am CEO and Co-Founder of Informed.IQ. Informed is a software company that automates the consumer loan verification process for lenders using AI. Before I started this company, I was doing product management over at Credit Karma, did that for several years working on the auto refinance product over at Credit Karma as well as also their auto insurance product line.

Before that, I was doing product management at Lyft, the ride-sharing company in the very early days, really focused on consumer acquisition to passenger acquisition, passenger engagement and before that was at Zynga, the social gaming company. I have a background in Computer Science myself.

Todd: And so, what kind of brought you to the moment of starting Informed, what’s the founder story there. It sounds like you’ve worked for a variety of companies, have you always had kind of the bug to eventually start something for yourself, you and the Co-Founders.

Justin: Actually, I have. In college, dabbled in several entrepreneurial ideas, I’ve been busy in the early days of Twitter, had a Co-Founder and I over to talk about Twitter polling and search on Twitter, that was back when Twitter didn’t have a search engine, if you can imagine that. So, it’s always been in my blood, I’m blessed with incredible parents who have entrepreneurial background themselves. I started Informed based on some observations and learnings that I had during my time at Lyft and Credit Karma.

At Lyft, I got to watch so many drivers trying to sign up to drive on the Lyft platform and they didn’t have cars that could qualify. I watched these folks go out and I tried to obtain financing to purchase cars so that they could drive on the Lyft platform. Through that, that experience, I just saw how many documents would have to be exchanged as folks tried to prove out their income, prove out their residence, insurance situation, I watched the inherent bias in that process, just the lack of transparency.

When I shifted on over to Credit Karma that became even more just obvious, not just in the auto lending space but also for unsecured personal loans or other financial products seeing how financial institutions struggled with lack of software, these manual repetitious tasks to verify applicant information, I knew that there had to be a better way.

Todd: And so, if you could just give the listeners kind of an overview of kind of exactly the products that Informed offers and kind of what your ultimate customer that you guys target and work with.

Justin: Yeah. So, we sell to national financial institutions, those who are using our Software as a Service today, banks including Ally Bank, Westlake Financial, they’re leveraging this AI to fund the loans in real-time with greater accuracy when applicants cannot be verified through traditional data sources like Equifax’s the work number.

Today, when you go to get financing you oftentimes fill out a credit application and you make certain representations, you put down your name, your Social Security number so you represent who you are, you represent how much income you make, you represent where you live and for a small ticket loan maybe there’s no verifications required or minimal verifications required. But, as you begin to finance a vehicle or a home, property or assets there are a lot more verifications required associated with that loan and that’s in part for regulatory reasons.

The regulators want to make sure that financial institutions are not overextending credit, extending credit in manners that are predatory to folks that have no means of repaying those loans. Banks also have a real interest in ensuring that they’re able to get paid back and their fiduciary responsibility associated with managing their assets under management.

Todd: And so, you know, obviously anyone who’s in fintech today has heard of AI or, you know, it’s become quite the buzzword. I don’t know if it’s leading or at least up there with blockchain as buzzwords that everyone uses. As someone who runs a company using AI, you know, kind of where are we today and kind of the use of AI in finance and then how does that term and RPA, you know, the differences between the two, just kind of curious for the listeners to better understand as someone who uses this technology, where do you think we are today?

Justin: Yeah. I think the word is in its infancy. AI is really just getting started and there are so many applications for AI within a financial institution. We’ve chosen to focus on a very specific use case around loan origination, I mean, AI being deployed across financial institutions in the form of chat bots, in the form of fraud detection, underwriting, there is so much use of AI opportunities to automate. There is also a lot of functions within financial institutions that fit in the automation or are not quite yet ready to be automated, but our AI, in particular, is used to analyze credit applications and verify all supporting documents in an application file or loan jacket.

So, think of the promissory notes or retail installment sales contracts or title documents and appraisal guides as well as consumer permission data like sources like Plaid and Finicity, all that needs to be analyzed. The way I think about AI versus Robotic Process Automation or RPA is RPA is much more focused on automating a workflow, a process and it is stateless. By that, what I mean is it’s just repeating that process over and over again without any additional intelligence.

Todd: Got you.

Justin: AI introduces the intelligence that enables the predictions to actually be make. So, I think Gen One was really RPA being deployed across financial institutions, now what we’re really seeing is AI being infused into that RPA process to make intelligent predictions around say which documents are fraudulent, whether an applicant is really earning the income that they claim to earn, those are applications on AI.

Todd: So, in terms of where AI might be going and how much of our future could be automated, is there a fear that all of a sudden there’s this Robotic Age in a sense, not necessarily robots, but a lot of the things that potentially humans or some of the human intervention does today that there could be this massive wave of people then being let go…..I know I’ve heard the arguments of AI is it allows people to focus on higher end tasks, but over time, AI gets better, it gets smarter and do we then reach some sort of inflection point?

Justin: I think we’re a very long way away from that. I do think that AI today is enabling for folks to focus on higher order functions within financial institutions. For example, Informed automate each month the verification of over 100,000 applicants turning documents in data into decisions in seconds based on the financial institutions’ policies and procedures.

That work is very repetitious, laborious, manual task that a human just struggles with and it’s not fun to have to look through a hundred different bank statements each day trying to tally up all of the line item deposits so being able to free staff up at the financial institution to do a better job of providing customer service, doing a better job of interfacing with customers and bringing more loans in-house, driving conversion for the financial institution is incredible.

What Informed does is we automate the repetitious tasks, some tasks require a manual exception handling. The AI has not yet been trained to solve every single problem. There are so many sub-forms of income that an applicant might be claiming. So, for about 10% of the credit applications coming in and application files, Informed will require a manual review and there’s that manual exception handling process to handle particularly challenging situations such as say an applicant that is claiming income from multiple different sources on their bank statements.

Maybe they’re earning royalties and they also have others forms of income like some kind of child support court order where that child is turning 18 very soon so complex scenarios that require true human in the loop intervention is I think where we’re going to best serve folks that need help. When I call my bank, I oftentimes find myself sitting on hold for a very long time and I just wished the financial institutions did have more trained folks focused on serving the customers, focusing on these higher order initiatives. So, I think that’s very much what AI is enabling for today in financial institutions.

Todd: How much better is …a way from it’s use and application in fintech or financial services today, how much better is AI gotten the last few years, In guess, in terms of where the tech itself is going. Is it kind of getting better year by year, is it making jumps, leaps and bounds every year? Can you give the listeners a sense of how much smarter is it getting on kind of a year-over-year basis?

Justin: I think that the key to success with AI is focusing on very narrowly defined problem areas and doing an incredibly good job with that. I think that AI can’t be generalized, AI from company A is very different than AI from company B. The AI solutions that we see banks like Ally or CapitalOne and others in the market adopting are narrowly targeted, focused on a particular use case and can perform that use case with exceptional accuracy and speed and they require that the AI is proven through this model risk management processes to ascertain bias and precision and the stability of the models and measure the models’ drift.

So, AI I think is becoming much more targeted, it’s much more challenging to enter the market with an AI solution without having this massive trained data set that you can measure performance on. So, that’s the trend in the industry that we feel relates to AI and Informed’s been really riding that trend in the context of the consumer loan verification process for lenders.

Todd: You touched on it a few minutes ago, how much can AI and some of the stuff that you guys are doing increase access to financial services for people who might be shut out say by traditional FICO or something like that. You mentioned the Equifax work number, how much can it democratize beyond just say the prime, super prime, near prime type borrower?

Justin: Well, I think that’s really our opportunity, that’s what drew me to this problem and what motivates my team every single day. When I was at Lyft, I witnessed folks who were trying to apply to be drivers and keep in mind, Lyft employs more drivers than Fedex does on the road. I watched these individuals try to get access to credit and on their bank statements…when they submitted their bank statements to lenders, to car dealers, those banks statements had a bunch of ATM cash deposits on them and lenders, in some cases, didn’t treat that as income.

In other cases, they did treat it as income, sometimes the bank statements reflected deposits from Cash App or Venmo and oftentimes lenders would get that data, be it Plaid or Finicity, but they wouldn’t know whether or not that’s actually true recurring income and we realized that there really needed to be an AI solution to more accurately determine what is real recurring income so that we could democratize access to credit and remove bias from the loan origination process. So, there was a huge opportunity staring at us and as we begun to talk to more and more lenders, we realized that they really struggled with implementing their written policies and procedures, what they were representing to the rating agencies, to their regulators. If you talk to five different loan processors, they will give you five different answers as to what deposits actually are to be considered as real income.

So, we saw a huge opportunity to automate that process and ensure that ….say the hairdresser who is applying for a loan to buy a car and get to work, while they’ve got earnings on their pay stub, some of those earnings weren’t being considered…maybe some double time pay or some overtime pay, wasn’t being considered in certain cases or different regular pay line items weren’t being considered and in other cases if they were giving haircuts outside of their hair salon, the income that they were earning via Venmo, via Cash App, that too wasn’t being considered. We just saw that there was a better opportunity to enable for financial institutions to better recognize what is true income, leveraging this contributory data set across the industry.

Todd: It also plays to the shift in employment, generally, that people are now choosing a lifestyle and then finding work to fit a certain lifestyle versus I’m going to be in a 9 to 5, now I have to see the life around 9 to 5. That kind of equation has shifted and I think even more so in the pandemic where remote work has now become a thing that everyone’s essentially been forced to do that’s kind of thrown a lot of models on their heads.

Justin: Yeah. We really see that in the data when we analyze the 25+ million records that we have upon file this contributory database that we maintain for the industry. It really stands out to us, especially accelerated by the pandemic where consumers are having to work multiple jobs, folks are driving for Uber and Lyft and PostMates or renting their bedroom on Airbnb. People are earning income through more channels than ever before and financial institutions are really struggling to quantify which earnings they should be considering as true income and to comply with the Equal Credit Opportunity Act, to comply with Fair Lending laws. That is paramount for a regulated financial institution entity.

Todd: Do we need a…kind of an abstract question, but do we need kind of a new version of a FICO or credit score?

Justin: I think so. I think that there is apparent need for rethinking access to credit to ensure that more Americans are able to tap into the financial system. I think that FICO is limiting in many regards, same with also the VantageScore, there’s a huge opportunity to rethink access to credit in this country and we’re starting to see that trend ourselves with the lenders that we serve.

Todd: Do you guys…..just back to some of the stuff that you guys do, do you plans to kind of move beyond lending? What about small business lending, you know, have you I guess thought of that. To me, on the surface it seems like some of the stuff can be applied to small business lending. Obviously, data sources and stuff would need to apply to what the businesses do, but just kind of curious if you guys have thought about that.

Justin: Yeah, we have. We’re not quite there yet, but we’re on a journey to get there that’s why we recently raised $20 Million from some great firms, Nyca of New York, US Venture Partners, venture capital firms and for us, a lot of the small business lending is actually to individuals, individual principle and there is a lot of need to analyze documents like tax returns with Schedule C’s and bank statements. So, we do do some of that today, but there’s obviously a huge opportunity there. The models that we built, that we spend years training up to declassify, to extract, to compare information and this contributory data set that we’re maintaining for the industry also has applicability in other areas like health and human services.

We’ve actually been contacted by numerous government state agencies, Administering the Medicaid Program or supplemental nutrition assistance programs. Over 25% of the US population takes advantage of government-subsidized health care or these benefit programs and just like a bank who has to process a credit application, these data agencies have to process applications for these benefits and review all of the pay stubs and Social Security income award letters and military leave and earnings statements and the VA award letters. There’s so much documentation and data that needs to be analyzed that we can leverage this data processing pipeline we’ve created to bring more efficiencies and automate a lot that workflow.

Todd: Outside of some of the stuff we were talking about in terms of the credit scoring and stuff like that the last year, did you guys see any, I guess, you know, the fraud element. You know, there’s a lot of government capital coming into people, kind of how did you guys see a lot of that stuff, just kind of curious to hear how that worked the last year, especially with all the different data sources that you guys have. I mean, I’ve heard from others that there was basically billions taken out of either people’s pockets and stuff like that because there had to be so much money thrown out to people so quickly that it was kind of…..it got to a point where, you know, fraud was an accepted piece of it though in reality it didn’t necessarily have to be that way.

Justin: Yeah, yeah. During the pandemic, we have had more and more financial institutions that never before reaching out to inform wanting to leverage the AI models that we’ve been training up to identify a lot of the fraudulent pay stubs or fake bank statements. If you do a Google search right now actually for fake pay stubs generator, there’s hundreds of thousands of (cross talking) that come back that let you create fake pay stubs, fake bank statements and it’s impossible for the staff of banks to be trained up on every single template out there on the dark web so……

Todd: You know, some of the theory behind that is they’re just going after some of the small ticket loans and banking on verification not really being that strong.

Justin: All of the above, we certainly see that. We are used by some of the biggest auto lenders in the country to identify fake documentation and abnormal income that applicants represent and we see it all the time. Normally, pre-pandemic, it was about 1% of the loan volume flowing through had these falsified documents in it. During the pandemic, for online lenders, that jumped up to 15/20+% of applications had these falsified documents accompanying them. So, it was incredible and I think that there is a very real need as financial institutions move online and neobanks process more and more online applications to be very vigilant and aware of Leverage AI to identify these known fraudulent patterns.

Todd: I saw recently that you guys were accepted into the FIS Fintech Accelerator Program, you know, can you tell us a little bit kind of how that went. What does getting into something like that mean for you, the firm, your employees?

Justin: Yeah. I think FIS….saw that we were literally saving up banks millions of dollars each month by helping them identify things like fake pay stubs, fake bank statements and FIS and the Venture Center saw real opportunity to select and partner with Informed and help Informed present its solutions to the community banks, the regional banks spread all across the United States to empower them with the same AI and machine learning tool sets that banks like Ally and Westlake Financial and others have access to.

So, the FIS Fintech Accelerator is a very prestigious program that we’re delighted to be part of. There were over a thousand different companies that applied, only ten were selected, we’re thrilled to be one of those ten and to be able to work closely with FIS and leverage their capabilities to serve the community banks and regional banks across the United States has been a privilege.

Todd: I want shift a little bit kind of how you, the team have been, you coping the last year and then we’ll get into a couple of other things about kind of career advice and the fund raise, but kind of the last year, how has it been, you, on the team? Are you guys fully remote, do you have plans to kind of do hybrid, go back to the office? You know, I’ve heard interviewing founders, there’s a variety of different models kind of creeping up now that people have started to get a little bit back to normal, how’s everything been for you and the team?

Justin: Yeah. It’s been incredibly productive for our team, we’re blessed in that software engineers, we can work very effectively in a remote environment. That’s not so much the case for our customers, our banks realized that their staff who previously were having to manually look at documents on desktop computers in the corporate office no longer could access these sensitive information and banks had to issue laptops to their staff.

You can imagine some bank employee looking at your tax returns, your pay stubs, your bank statements in their living room with a let’s say roommate walking by sneaking a peek. Banks realized that they really needed to leverage AI to automate this function to minimize the number of humans required in the loop here to review this kind of sensitive information. So, we have worked very well remotely, we have plans to go back into an office environment, we will continue to work remotely developing these machine learning models. For Informed, COVID has been a real accelerator, it really drove the adoption of more and more AI because of some of these reasons we just mentioned.

Todd: At any point in your journey, have you gotten close to saying I’m not sure this is going to work, you know, maybe this was a good idea, but might be too hard or have you been kind of driven. You know, we see this solution working and we need to stick to it.

Justin: No, quite the opposite. We kept hearing from our banks about this problem, this was being asked of us, hey, can you help us with this huge problem that we have analyzing all of these data that we’re getting from these applicants across the United States. Initially, I mean, it’s a daunting problem, how can you process millions upon millions of documents, but we’ve got a great team of software engineers, we really put our nose to the grindstone, we wanted to do the best job possible because what’s at stake here is some Americans access to credit and ultimately the calculation of income is so important for debt to income, payment to income calculations, part of an underwriting process.

It literally is a determining factor for what kind of interest rate you’re going to get so we saw this opportunity, our banks kept begging us to invest in it to help them with it and really aggregate data across the entire lending ecosystem. They wanted to be able to ensure that they were harnessing best practices, say a new fraudulent pay stub template emerge that another bank was getting hit hard with, they wanted to make sure that if all of a sudden they started getting a flood of applications with that kind of falsified documentation that they would be able to take advantage of it.

So, this has been, at every turn along the way, clear to us that we need to be doubling down on this opportunity, otherwise, someone else will do it. If we don’t serve these financial institutions, there will be another faster startup that emerges that does a better job of bringing more efficiencies to these financial institutions.

Todd: You mentioned before the recent fundraise, you know, how did that go for you guys, obviously, you’ve got some great names to come on board. You know, for the startup listening and, you know, this appearance that raising money today is easy, you hear stories in TechCrunch, Business Insider, all these stuff, tell us a little bit about how that went. Obviously, it’s not as easy as it appears even as….you know, we’re in the frothiest of times, how did that go for you and the team?

Justin. Yeah. For every company that gets funding there’s probably 50 that don’t. It is always a challenge, it always is a distraction taking you away from serving your customers. I think what investors saw in Informed is the massive financial institutions that we serve today has a real success metric and our ability to deliver real return on investment to these financial institutions that really transformed a process for the banks enabled for greater transparency to a consumer’s financial options in real-time so that is what drew great firms to invest in Informed.

Our process was relatively quick, actually we’re oversubscribed, we ended up having to turn some capital away, but that’s not always the case. Fundraising is incredibly challenging and daunting and any founder that goes through it and is successful is a true testimony to what their team has created. I think that…..yeah, so many companies fail in that process.

Todd: For the listeners, do you have any career advice and kind of those that are looking to get into either project, product management, fintech, it’s a real exciting time to get into the space, there’s probably more options now than ever before with remote work being, you know, still something that’s going to happen, at least in the foreseeable future and so talent can be acquired almost anywhere now. So, what’s some of your advice for any of those listening that are looking to get into the space?

Justin: Yeah. I think that coming by really great talent is so challenging for companies. Informed is hiring across the board, we are going to more than double the size of our staff this year and, again, in 2022 so we are actively hiring all across the board. I think that for someone who wants to get into product management or break into fintech, joining a company that already has product market fit, that already has customers that can actually provide you with very clear requirements is a true gift and shouldn’t at all be underestimated. We’re so fortunate at Informed to have that.

What drew me to Credit Karma was, again, the ability to work very closely with financial institutions and really listen and observe the workflows that they had in place and gather requirements, gather an understanding of how software can be used to better serve consumers applying for credit. Getting a loan sucks, it’s a horrific process and if you can study that process because they don’t teach it in school, if you can actually study the process by observing what lenders, big and small, are doing today, I think that you have the opportunity to someday start a company on your own because you’ve got that deep solid understanding that few people actually have.

Todd: You know, we’re getting towards the end of our time here. I usually end it with some fun. Curious, do you have a favorite book and the last book you read. If you don’t consume information by reading then choose the medium of your choice.

Justin: Yeah. I do actually have a favorite book and it actually happens to be the last book that I read. It’s my Co-Founder’s book, Magdalena Yesil published a book recently called “Power Up: How Smart Women Win in the New Economy.” Magdalena is a serial entrepreneur……

Todd: She’s great.

Justin: …..her fourth company so that book is a joy for me to read and oftentimes, find myself, looking back. Not only does it have great advice for women really kick starting their career, but also for men. I’ve truly enjoyed that book and it is one that I always go back to.

Todd: Are you a sports fan and if you are, do you have a favorite sport and teams that you root for?

Justin: Oh, man, I think that the easy answer there is Duke basketball. I went to Duke University…..

Todd: There you go.

Justin:…..and I got a chance to watch Coach K coach, he’s an incredible leader and Duke has always done incredibly well with basketball and I’m thrilled that they’ve got Jon Scheyer coming in as their new coach.

Todd: Yeah. I’ve heard big news of Coach K announcing that, big news.

Justin: Yeah, I kind of right after Roy Williams.

Todd: Last question, biggest inspiration in life.

Justin: I’m so blessed to have folks that have mentored me, who have invested time in me. I would say that both my parents are my biggest inspiration, but I wouldn’t be where I’m at today if it wasn’t for elementary school teachers and middle school teachers that took time to coach me, to give me feedback and invest in me along the way. So, yeah, truly so many folks that I would love to thank, my parents, in particular, I think, Mom, Dad, you did a good job raising me.

Todd: With that we’ll end it. Justin, I want to thank you for coming on the podcast, thought it was a of fun. Wish you and the Informed team continued success and we’ll get you back sometime in the future.

Justin: Hey, Todd, thank you so much for taking the time.

Todd: Of course.

(music)

If you’re interested in learning more or would like to be considered for a future episode, please reach out anytime to todd@lendit.com and until next time.

(music)

You can subscribe to the PitchIt: the fintech startups podcast via Apple or Spotify. To listen to this podcast episode there is an audio player directly below or you can download the MP3 file here.

Podcast (pitchit): Play in new window | Download | Embed

Subscribe: Android | RSS

Podcast 303: Steve Muszynski of Splash Financial

The founder and CEO of Splash Financial talks about the next generation of loan marketplaces and bringing new banks and credit unions on board

June 18, 2021 By Peter Renton Leave a Comment

Marketplaces are dominating so many areas of business these days. There are Airbnb, Uber, eBay, Etsy and of course the biggest marketplace of them all: Amazon. There are also lending marketplaces, some of which have existed for a long time, and are doing large loan volumes. But there is a new type of marketplace coming on the scene, what I call an “intelligent marketplace” that is more sophisticated on the back end and provides a far better user experience.

Our next guest on the Fintech One•On•One podcast is Steve Muszynski, the founder and CEO of Splash Financial. Steve and his team are building a new kind of intelligent marketplace for lending, focused on student loan refi right now, but expanding into other areas.

In this podcast you will learn:

Where the idea for Splash Financial came from.
The different iterations they went through.
How Splash is different from the other student loan marketplaces.
The different credit requirements of banks and credit unions.
The breadth of schools they worth with today.
The mix of lenders partners they have on board.
Details of their two types of partner programs.
Names of some the banks and credit unions using Splash.
The typical loan terms they are offering.
How they approach underwriting and their movement towards an automated process.
How they work with small community banks and credit unions that have little tech expertise.
The two different ways they make money.
Details on their Series B investment they just announced yesterday.
The scale they are at today.
How they have been able to grow the company with a remote workforce.
What Steve and the team is focused on over the next six to twelve months.

This episode of the Fintech One on One Podcast is brought to you by LendIt Fintech Nexus, an in-person event focused exclusively on face-to-face meetings happening in Miami on September 1-2.

Download a PDF of the transcription of Podcast 303 – Steve Muszynski.

Click to Read Podcast Transcription (Full Text Version) Below

Welcome to the Fintech One-on-One Podcast, Episode No. 303. This is your host, Peter Renton, Chairman and Co-Founder of LendIt Fintech.

(music)

Peter Renton: Today on the show, I’m delighted to welcome Steve Muszynski, he is the CEO and Founder of Splash Financial. Now, Splash is a really interesting company, they have created a loan marketplace unlike pretty much anything that’s out there. They are focused on the student loan refi market right now and they work with banks and credit unions and they integrate tightly with these lenders in an interesting way which we get into in some depth. We also talk about their underwriting and how they’re applying automation to be able to automate many loans, we talk about the different ways they work with these community banks, we talk about their big funding round that they just closed and much more. It was a fascinating interview, we hope you enjoy the show.

Welcome to the podcast, Steve!

Steve Muszynski: Thanks, Peter, really excited to share our story.

Peter: Okay. Well, let’s get started by just giving some background to the listeners. Why don’t you give them some of the highlights of what you did before Splash.

Steve: Yeah. So, I am proof point that you don’t have to have experience in the space to start a company. So, yeah, I graduated from Ohio State in 2011 from their Honors Business Program and I went to work for GE in their Financial Management Program which is training business line CFOs to run different components so I was in the energy sector.

When I went to Ohio State, I had a student loan, my parents took out a loan for me, a lot of my friends had some loan debt and it really was around the concept of the government was charging people 7/8/9% in interest rates on their loans. The idea for Splash was trying to figure out a way to privatize a portion of the market to help people not have to get stuck in so much debt, but I knew nothing about the space so diving in, you know, definitely was a challenge.

Peter: So, obviously, when you started doing your research, you would have found companies like SoFi, they have already been doing this, they really started the refinancing movement certainly in the last decade so what was it that sort of…..tell us about what you wanted to do seeing that there were others out there, what did you want to do differently?

Steve: Yeah. This was 2013, so that time SoFi was not really doing refinancing, SoFi was still running their model of connecting alumni at colleges to undergraduates to finance their social financial loan which was the name SoFi. Because after Splash and at that time it was actually a company called Lendulink and eventually it migrated into Splash, was trying to help parents save more for their child’s college education and so trying to help people not have to take out this much debt.

We were utilizing deposit data that they would save in banks and credit unions to create better analytics around a student loan so if they needed to borrow for the child instead of going to the government’s Parent PLUS Loan Program, they could take out a loan with their private bank or credit union that would leverage their deposit history and know that they were a good risk to lend to. In theory, that would allow the private lenders to offer a better rate than the government.

Peter: Right, right. So, you started doing that, but when did you…..tell us a little bit about the history then of Splash. When you pivoted, I know it used to be called GradSchoolLoans, I think, and you’re focusing on like medical students, but tell us a little bit about the history there.

Steve: So, we went through a couple of paths with the company and the initial concept holds a lot of merit. There are some challenges with the model that you learn when you’re a first time founder and I think a lot of times you really need to be willing to pivot and be open to market feedback and it was very challenging since one of the issues with the original product was that banks and credit unions need to reserve capital the minute that they approve someone for a loan. So, if you’re a parent and you’re saving for your child and your child is in sophomore/junior year high school and the bank says great, you’re going to be approved for this loan so you know that you don’t have to go to the government anymore.

The minute that happens, even if you don’t end up taking that loan in the future, the bank needs to reserve capital against it. And so, the unit economics just did not work on that part and as we were working on it we realized that SoFi had navigated to the student loan refi space which was a very hot sector. We saw an opportunity to help a lot of my friends that were in medical school, had just graduated and started residency. The unique element of these professionals, these doctors is that they don’t make very much money, but they have a ton of debt. They might make $60,000 and have $250,000 in debt. At this time, SoFi actually did not have a product for medical residents and fellows so Splash was one of the first companies to launch a product to help these doctors refinance their student loans to further payment while they’re in training.

Three months after launching that, SoFi rolled out a competitor product and so this was actually really a good thing for us because it helped us really take a look in the mirror and think about the bigger picture of why do we exist as a company and what value are we trying to bring into the world and this was how we really came up with the evolution of Splash, this was back in 2017 and this really started the ideation phase of where we’re today. We wanted to marry banks and credit union capital..

The community banks and credit unions are not necessarily the top tier banks that have all the technology as a major investment, but the ones that are unable participate in the digital infrastructure and digital ecosystem. Let’s try to marry those financial institutions with the traditional marketplace model in order to help consumers win and gain access to lower rates, better experience and so that’s what we were really set up to do in 2017.

I think we’ve succeeded in a large degree at this point and we’re always trying to push the envelope, but we’ve definitely allowed for billions of loans to be financed by lenders that consumers wouldn’t have known existed without Splash. That via our automated lending platform has helped make the process incredibly easy for consumers, it helps banks and credit unions gain access to new customers and I think it’s really been a win for everyone, but it’s definitely been a non-linear journey in trying to figure out product market fit.

Peter: Right, right, understood, understood. So, maybe you can describe the marketplace a bit more detailed and also tell us how you’re different from other student loan marketplaces. We know certainly there are others out there so tell us a little bit about that.

Steve: Yeah. So, we loved the marketplace model, I think the companies out there are doing a great job, there’s been a lot of innovation over the last few years that allows consumers to follow one format and access to a network of lenders with a soft credit pull and get real offers. I think that’s a major evolution since the click outs where you have to land on a page, click on an offer, go through a hard pull, go back to the page, you do the same thing ten times over. And so, the unique element of Splash is we do that too.

You come to Splash, you fill a form, gain access to a network of lenders with real offers, but we go a step further and owning more of the tech process and really working maniacally to add more lenders into the market that don’t exist today and that’s I think is where there’s a clear differentiation. A lot of marketplaces are repurposing existing offers from…it could be a lender, it could be from a bank that has a savings account or a credit card or whatever it might be, but they’re repurposing offers. At Splash, we build the technology to allow banks and credit unions to launch a product and that allows for us to have a better access to credit, better ability to approve people and traditionally lower rates.

Peter: Okay. So then, how does it work because most…..I imagine every bank and credit union is going to be slightly different with what they want. Some of them are going to have a pretty similar credit box, I would think, but how is it with having, you know, a dozen or more banks and credit unions….I mean, how is it helpful, I mean, are they all different or tell us a little bit about the requirements that your investors have.

Steve: Yeah. They actually are all different, everyone looks at credit a little differently and while it may be nuanced or slight, every differential allows for a better ability to approve or price. So, we have some partners that are willing to go lower on FICO depending on other criteria, we have other lenders that are willing to go higher on debt to income based on certain criteria. It could be degree, it could be, you know, major …many different credit aspects, but when you add up all these different ones, you are able to approve more people.

There are lenders in the markets, not just on Splash, but everywhere that have very small…school lists and so the consumer doesn’t know this. You might be sitting there with an 825 FICO and you go to one particular lender and you might get denied because the school that you graduated from is not a school that they accept. And so, when you just look at things like that by going to a marketplace like Splash has, you can just gain access to many different credit boxes, pricing guides and things like that. So, I would say they do price differently to provide coverage to more consumers.

Peter: Okay. So then, do you work with any school if someone is going to a four-year school, I mean, what are the limitations there?

Steve: We work with any school, so as long as you’ve graduated and we’re working on expanding our model today to allow for refinancing if you haven’t graduated. That’s something that we really find important to provide greater access to credit because that’s one of the things that we really care about as a company, but today, you have to have graduated from your degree. It could be a two-year program, it could be a four-year program so, you know, it doesn’t even necessarily only have to be a four-year.

We even can do for profit schools which a lot of lenders shy away from. I think that there are some major challenges in higher education obviously in pushing people towards for profit schools and the amount of people that maybe don’t graduate and get stuck in a debt cycle. But, if you graduate from one of these programs why should you be stuck with a private loan that you took out originally that’s 11/12%. You know, it was really important to us to try to figure out some solutions helping these people refinance to a rate that could be 4% range as an example. So, that was important to us and so we have that option as well.

Peter: So, you’re focused on bringing in new lenders, I mean, do you also work with lenders? I imagine there are some that would have an existing program or do you really shy away from them, what’s the mix like there?

Steve: Yeah. We work with them as well. The way we think about it is trying to serve the consumers as best we can and a lot of marketplaces really shy away from bringing on some of the largest lenders due to the fees that these lenders might pay which is kind of ridiculous when you think about it. But, it makes sense from a business perspective, it’s kind of frustrating from a consumer perspective that you go to a place and you say, hey, I want access to the market and now you don’t gain access to the market because of a fee negotiation issue with the platform and the lender. So, we really try our best to bring on as many partners as possible and to make it work for everybody.

We kind of break our partners up into something we call an API Partner and a Full Platform partner. The Full Platform is going to be running on Splash’s loan origination system which we’re focused on automated loans trying to make loans without human intervention and doing it as quickly as possible. We have a very robust underwriting and credit team that works on behalf of our bank and credit union partners, but the API Partners are really the ones that you just mentioned.

If you have an existing product and you have the ability to pass over your rates, we will enter a consumer wanted information on Splash, we’ll send you information, you will send us back your rates and in many instances those will be the rates that are presented to the consumer and the consumer could possibly finish that application on that lender’s website. And so, we really try to marry the best of both worlds.

Peter: Okay. So then, are you able to…..I know that is the model most marketplaces go to, at some point in time, they hand it over to the lender’s website. Are you also able to sort of complete an application just on Splash and how does that work?

Steve: Yes. So, for people that are fully integrated into our full tech stack with our automated lending platform, we would do everything for them so it’s a complete service. We will even do a loan disbursement files onboard the loan on their servicing system. So, we do everything, we approve, right now, about 2/3 of our loans inside of 24 hours, we have a subset of that that are approved inside an hour and a subset of that are approved in just minutes. We’re working to approve loans instantly and so that’s the focus for this year, is to actually allow us to be able to approve loans in seconds for lenders that are fully embedded in our technology.

Peter: Right, right, got it. So, can you give us some names here. When I was doing some research here I noticed you had Penfed. There was some news out about them, they were a major partner of yours. It was a couple of years ago now that I saw it, but can you tell us some of the lenders who you’re working with?

Steve: Sure, yeah. So, Penfed has been a great partner of ours, First Tech Federal Credit Union, we work with Teachers Credit Federal Union, we also work with a few banks, Fulton Bank, Westfield Bank and we’re continuing to bring on additional lending partners that are in the pipeline, but, right now, we’re able to provide some amazing rates from these partners. The way that they think about it is, and this is I think important, bank and credit unions just have a capital advantage when you think of their cost of capital and community banks and credit unions, especially, are struggling to gain access to millennials and GenZ.

Peter: Right.

Steve: When you combine those two items and the overall fight right now for consumers when you’re looking at neobanks and fintechs and then you’re looking at the competition going on between them and banks and credit unions, a lot of these small institutions have been completely left out. And so, Splash, we kind of can act as that access point, the technology platform that bridges the gap and provides an access to these consumer segments and when you combine that with their cost of capital advantage they will offer incredibly low rates. And so, that’s where our focus is primarily as a company continuing to add on more of these partners and really being that access point that’s the fintech that’s working on behalf of the banks and credit unions to help them gain access and scale, that’s really where we want to play.

Peter: Right, right, okay, okay, that makes sense. So then, can we talk a little bit about the loans themselves. I mean, obviously, you work with a bunch of different lenders, everyone’s is going to have slightly different rates and credit box, like you said, but what’s the range what’s sort of the typical rate and loan term that you’re underwriting.

Steve: Yeah. So, the general range and obviously, this is specific to the month and time because it’s highly interest rates-sensitive, so rates right now are at all time lows, there’s been some mass competition that actually has a couple of components going on.

You have COVID and the mass reduction in interest rates that occurred as a result of that, that drove the LIBOR rate down and essentially cost of funds for many lenders are so low so rates are at an all time low. But, many people have seen rates kind of go up since then and in most asset classes when you look at mortgage and others, I mean, rates have picked up. Student loans refi have not and that’s because the government right now has a policy that has paused federal student loan payments and reduced interest rates to 0%, a bit of a payment holiday, due to the challenges that COVID has caused to wave the market, especially for people searching out their first time job. That’s set to expire at the end of September.

So, essentially, you have a massive TAM reduction where you might have $1.7 Trillion in student loans and maybe $500 Billion are really good credit so they would get a great rate at a refi company, but only $100 Billion of those are private student loans. So, if you think about it, the Total Addressable Market is 20% of the size so it’s a bit of a food fight right now with all lenders trying to gain access to the remaining customers that are looking to refinance. That’s driven some major rate compression so we’re seeing average rates in the threes right now, fixed, I mean, it is very low.

Peter: Just like a mortgage.

Steve: It is like a mortgage, we are seeing like the low rate fix for us right now is …..this is a point in time, this is May of 2021. Peter I don’t know how you want to deal with the time, you know.

Peter: It’s okay, May 2021, that’s fine.

Steve: Yes. So, this is May of 2021 so the low rate on our platform is 2.54% fixed, this is lower than a mortgage that you would get and that’s crazy because it’s unsecured consumer credit…the terms range on our platform from 5 years to 25 years in payback and, you know, you have many options in between those, but the rates are just incredibly low. That’s great, we get reviews all the time, people that say they dropped the rate from 10% to 3% or 11% to 4% and the amount of money and let’s call it a $100K loan is staggering.

Peter: Oh, yeah.

Steve: Like you can compound that and figure it on, you’re saving that person $30/40/50 maybe $100K beyond the loan term, that is a life changing amount of money. So, that’s why a marketplace…it is not just Splash, there are dozens of marketplaces I think out there as well are important to allow people to actually compare offers because, you know, that person might have gotten denied, but they just went to one lender and given up and saddled with this debt so that’s why marketplace is in general really important.

Peter: Yeah, yeah, for sure. So, I want to spend a second, if we could, on your underwriting. You mentioned that you’re trying to move towards, you know, instant underwriting, but maybe you could tell us a little bit about how your underwriting process works now, what kind of data you are using and how you’re trying to move towards automated.

Steve: Yeah. So, every lender has a different credit underwriting, right, so we essentially underwrite on behalf of them with many different data points. So, depending on the data points that they have, they could or could not allow for an automated writing process. We are trying to move as much to auto underwriting as possible, but, essentially, underwriting is a series of rules, right, so that you’re doing is whether a human deposit for the most part or whether a computer does it.

It’s just a checklist and a guidance making sure that things are done properly. So, as the technology has evolved and companies like Plaid and others have really provided greater access to what we call first party data or real-time data you can actually reduce fraud by tapping into some of the data system, not ask for a pay stub or not ask for a diploma which all it takes is some really good Photoshop skills to be able to fudge that, but working with backend data system or real-time info will allow for automation.

So, right now, our loans really have an auto assist, a lot of the backend is automated, we just have humans that double check everything until we can confirm that we feel confident in the models and the process that there’s not going to be a loan that slips through that really should have gotten a different rate or something like that. It is, obviously, on behalf of our lending partners, that’s pretty important. Right now, we have an auto assist for a lot on the backend, it actually is very automated.

Peter: Right. So, for those banks and credit unions that really….you have your loan origination system they’re using, I mean, I imagine then that you have their complete credit box, you have …like you’re doing…you’re not going back out to the lender for approval or do you know this is approved.

Steve: We know and that was a really important part of the model because there are systems that require you to go back out to the lender. A lot of these community banks or credit unions are…they don’t have tons of resources and so an instantaneous timeline is not realistic and so that was very important for us to try to continuously build the process where the lenders trust us to underwrite as a vendor, you know, and we are an extension of their in-house underwriting team.

Peter: Right.

Steve: And they trust us and give us the credit box.

Peter: That’s really interesting because then you could….you’re not sort of hamstrung or limited, shall we say, to the tech expertise of the community bank or credit union, also that they’re going to tag some, but you also have some so you don’t need to do like a full scale integration if you were to serve almost taking their underwriting team for the refi, for the student loans anyway and bring them over to you. So, I could see how your addressable market of possible community banks is probably pretty large, right.

Steve: Exactly and that’s the amazing part of what we’re doing. We believe that we’re taking offline traditional lenders and moving them into the digital age via our platform because you don’t have to invest the resources internally as a credit union or community bank where you have limited budget, you have limited bodies and this could go on a two-year roadmap, you know, if you didn’t have someone like Splash that could get live in 60 days. So, you know, this provides a tremendous opportunity to scale an asset category that you want to participate in.

Peter: Right, right, that makes sense. So then, what is your business model exactly. I mean, is this like a SaaS-type model where you’re doing like a monthly subscription or you’re taking underwriting fee or is there a combination? How does it work?

Steve: Yeah. We take a loan processing fee and then sort of a lead gen fee as you think about the two business models combined, you really have your lead gen and then you have your backend underwriting processing so we combine those two. There are elements of SaaS to it, but I tend to think of SaaS in a very specific way which is a perceived license for, you know, a monthly subscription fee or something like that and we really stayed away from those types of models because it allows…..the way we structure today has better alignment where we can grow on the frontend consumer acquisition side and grow our revenue as a company while also hitting what the banks and credit unions want. Whereas if you have a misalignment and you’re charging a perceived or a monthly subscription you’re going to start getting out of whack on the revenue model. So, that’s why we like sort of aligning what we are looking for.

Peter: So, even though you have your own ….like they’re running on your software their loan origination system it’s still on a per transaction basis?

Steve: Exactly.

Peter: Right, right, okay. So, I want to switch gears a minute here and talk about your fund raising that you’ve done. You closed a big Series B recently so why don’t you tell the listeners about that process.

Steve: Yeah. So, it actually was a unique process because of what was going on in the world with COVID. So, historically been used to traveling around and going to a lot of different meetings, but after this one you really just stock your schedule with a bunch of Zoom calls throughout the day and over a couple of weeks, but it’s a little bit north of $40 Million Series B. Our investors are great, some new investors that are …our group include a partner of DST Global, City Ventures, Detroit Venture Partners and a few others and then we just have great support from some of our existing investors as well who we’re lucky to have such as CMFG Venture, Future Ventures.

So, we’ve just been lucky over the years to find such great investors that are willing to support our vision and where we’re trying to take the company and then who also really share our corporate values, that’s been very important to us as well.

Peter: That’s great, congratulations. So, we’re almost out of time, but a couple of more things I want to get to. I’d love to get a sense of the scale you guys are at today, I mean, can you maybe give us some metrics there.

Steve: Yeah. So, at this point, we’re doing billions of loans, we are working on actually expanding out into new asset categories so it’s really important for us. If someone goes to Splash right now, they would see us as a student loan refi only company, but we are working on expanding on a couple of other products to further support our mission of enabling a faster and less expensive financial world that’s just not student loans. People have debt in a lot of different categories, people are struggling in a lot of different ways and our goal is to really help provide lower cost of capital with banks and credit unions, support and do it as quickly as possible. So, that’s really what we’re focused on.

Peter: What’s your headcount these days?

Steve: Headcount is we just cleared a hundred, we’ll probably be 180 or so by the end of the year. I think back to the days of early 2018 when we were five people or seven people and, you know, the scale is pretty immense at this point, but as we continue to scale the company, we have a lot of interest in talent. I know tons of people listen to this podcast so if you have any interest in Splash, we’re a completely remote company looking for amazing talent so definitely hit us up.

Peter: And so you’re based in Cleveland, right?

Steve: We’re based in Cleveland. Prior to the pandemic, we were hiring everybody in Cleveland and the pandemic has been terrible in so many ways, but I think it helped open up our eyes and the world’s eyes really to remote work and how you can just look at scaling the company with the vast people wherever they’re located versus a 15-mile vicinity of your headquarters.

Peter: Yeah. It’s limiting when you’ve got the whole nation out there even beyond the country. I mean, anyone with a good Internet connection, you know, it feels like that is ….I spoke to many CEOs in recent months and pretty much everyone now hires anywhere geographically as long as you can do that job. I think that’s a huge change from what we used to do.

Steve: You have to because ….I can tell you that we have engineers that were based in Cleveland poached from Facebook and Amazon, came in and are stealing our engineers, we’re grabbing, engineers from Amazon, Apple, Google, everyone’s competing for talent and if you keep with the old school of mindset of everyone needs to be located in one area some of the best companies in the world are going to grab your talent, you’re not going to be able to go outside of your vicinity and you’re going to be left with a reduced talent force, you know, you’re just going to struggle.

Peter: Right, right, that makes sense. Okay so last question, you sort of talked around a few things you want to have coming down the road, but as you look at over the next six or 12 months, what are you mainly focused on?

Steve: We’re focused on a few things. I think the first thing is speed so trying to do everything we can to make the processes as easy as possible for consumers and that involves automation, that involves removing unnecessary processes from a form so that is definitely core of what we’re focused on which is dramatically scaling up our engineering to focus on automation.

Second is expansion and trying to recognize that there’s a big opportunity on unsecured consumer credit as an example where a lot of community banks and credit unions are not really playing in the space. They have a product, but they’re not able to access digital marketplaces because of lack of technology and Splash solves that. And so, we’re going to be focused on continuing to support our customers and more customers that, you know, maybe don’t play in the student loan refi segment. Student refi is a very specific category, you have to have a student loan and right now, you have to have a private student loan which narrows that even further.

Peter: Right.

Steve: So, when you think about credit card debt which is just debilitating to a lot of people, I think there are ways to help people to shop and save for that product in better ways than maybe exists today and, you know, that’s an area that we’re definitely going to look at.

Peter: Okay, Steve, we’ll have to leave it there, really interesting chatting with you. Best of luck and thanks for coming on the show today.

Steve: Yeah. Thanks so much, Peter, really had a great time.

Peter: Okay, see you.

Steve: Thanks.

Peter: You know, I’m fascinated by this concept of “intelligent marketplaces”. While we’ve had marketplaces around for years, maybe even decades, they’ve been mostly, you know, lead-gen tool where they’ll pass or lead on to one of the lenders, but an intelligent loan marketplace, like what they’re building at Splash Financial, is really interesting because it provides a lot of value for the consumer.

They don’t have to go around and apply in different places and they know they can get a really good deal because they’re getting many, many lenders’ input to decide which one would have the best deal for them. So, I think Steve is right, there’s a long future for these kinds of marketplaces, it’s a “win win”, a win, in this case, for the banks and credit unions and a win for the consumers. So, would be very interested to see how the progress of Splash Financial takes place over the next few years.

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

You can subscribe to the Fintech One on One Podcast via Apple Podcasts or Spotify. To listen to this podcast episode there is an audio player directly below or you can download the MP3 file here.

Podcast: Play in new window | Download | Embed

Subscribe: Apple Podcasts | Android | RSS

« Previous Page

Top 10 Fintech News Stories for the Week Ending July 3, 2021

Podcast 305: Brendan Coughlin of Citizens Bank

The Head of Consumer Bank at Citizens talks fintech partnerships, the future of branches, buy now pay later, building an in-house digital bank and more

We Have Reached a Tipping Point on Overdraft Fees

Banks are starting to feel the pressure on overdraft fees (from fintech and Capitol Hill) and are making real changes

Some Banks Are Making Changes

PitchIt Podcast #10: Max Rofagha of Finimize

Finimize Founder & CEO discusses the retail investor age, empowering users to become their own financial advisors and the importance of community.

Top 10 Fintech News Stories for the Week Ending June 26, 2021

Podcast 304: Kirill Bensonoff of New Silver

The Co-Founder and Head of Product at New Silver provides insight into the first real estate deal conducted via decentralized finance

Pioneering Data Analytics Firm PeerIQ Acquired by Cross River

The leading fintech bank expands it capabilities with the acquisition of data and analytics firm PeerIQ

My Take

PitchIt Podcast #9: Justin Wickett of Informed.IQ

Informed.IQ Co-Founder & CEO discusses the benefits of using AI in consumer lending and where we are on the AI path in finance today.

Top 10 Fintech News Stories for the Week Ending June 19, 2021

Podcast 303: Steve Muszynski of Splash Financial

The founder and CEO of Splash Financial talks about the next generation of loan marketplaces and bringing new banks and credit unions on board

ABOUT LENDIT FINTECH NEWS

Recent Editorials