PODCAST TRANSCRIPTION SESSION NO. 201  –  JARED KAPLAN

Welcome to the Lend Academy Podcast, Episode No. 201. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I’m delighted to welcome Jared Kaplan, he is the CEO of OppLoans. Now OppLoans are an interesting company, they’ve been around for quite some time, but they’re getting some serious traction these days so I wanted to get Jared on the show to talk about the products he offers, the type of loans they do, the type of customer that comes to them, it’s a really interesting customer profile.

We talk about their approach to technology and underwriting and their, I think, unique approach to customer service which has really helped them seriously scale their business. And we talk about how they’re funding their loans and what is coming down the pipe for OppLoans. It was a fascinating interview, I hope you enjoy the show,

Welcome to the podcast, Jared!

Jared Kaplan: Hey, Peter, thanks so much for having us, we’re really looking forward to telling our story.

Peter: Okay, so you know, I like to get these things started by giving the listeners a little bit of background about yourself so why don’t you tell us what you did before you got to OppLoans.

Jared: I started my career at Goldman Sachs in New York, and after a couple of years there, I went into the private equity investing world at a New York company where I ended up leading their financial services investing thesis.

I spent a bunch of time in insurance while I was there and in late 2011, co-founded an insurance business called Insureon that was based here in Chicago and Insureon was the first online property and casualty insurance broker to freelance businesses. It was my first foray into the operating world and had the pleasure of running many different parts of that business. We were the fastest growing online insurance brokerage in property and casualty.

About four years in, in 2015, I was approached by the Schwartz family here in Chicago and the Schwartz family is a prominent family here, Ted Schwartz had built a business called APAC Customer Services which was a well renowned customer service business/customer call center business that he took public and sold to JP Morgan’s private equity firm in 2011. His son Todd founded OppLoans on the premise that after the Great Recession, there was large dislocation of credit for non-traditional borrowers and Todd installed this fabulous credit model and customer service model, but was looking for a CEO to scale the business. We had about 15 employees at the time and that’s when they approached me to take the reins and grow the business.

Peter: Okay, so then what was it about OppLoans that really…it’s a bit different to the insurance business, obviously with some similarities, but what was it about OppLoans that really sparked your interest?

Jared: So I was intrigued with the platform because there was actually a number of analogies with what we had built out at Insureon that I thought were transferrable. At the time we had no marketing, no proprietary technology, we had not built out a leadership team. The Insureon journey was all about doing those things and also delivering profitable business to our insurance carrier partners while as a lending business it’s important to deliver profitable business as well and so the culmination of those things made it seem like we could pull a couple of levers early on to really change the trajectory of the business, but where I had to do the most research was on the actual customer philosophy and what we were selling to folks, what we were providing to folks.

I did not understand the space at all, it was foreign to me and I went back to my investing roots and I said to the Schwartzs, I appreciate everything you’re saying, but let me figure out what the customer is saying here because that will tell me whether it’s an interesting opportunity or not. And I spent a couple of hours listening to calls and I was floored. I’d say half the calls people were in tears, we had saved them so much money, we had treated them like a real person, we had taken the time to explain to them what the product was, we were highly transparent.

It was really unbelievably heartwarming and it proved to me there was a huge value creation opportunity here and then I went home and did some work on the macro realities of our country and the fact that more than half the country lives paycheck to paycheck, has very few options and certainly very few options that look to rehab and graduate customers out of this product. So I thought it was a very, very interesting opportunity and jumped at it.

Peter: So did it concern you at all, or did you…you obviously…the payday lending industry has a terrible reputation and, you know, while this isn’t payday lending, it’s certainly not low interest lending either so did it concern you, or what were your concerns about the reputation that this kind of thing, this kind of lending has?

Jared: I think the most interesting observation first was that the customer base was the median US customer, I mean, it was not a low income customer, actually it was not a customer that necessarily should be in the market of last resort in this space which are using your bank overdraft line or taking out a payday loan. So the fact that this customer made median US income, they were employed, they had a bank account, that was fascinating to me.

I also saw there was a number of different advantages that we could launch, that would highly differentiate the company. So I think the industry as a whole, that the non-prime space has gotten a really bad name for itself because of two reasons. One, you take advantage of desperate people, and two, you trap them in a cycle of debt.

The OppLoans model, I think, attacks both of those from a very positive perspective. The first thing we do is when someone finds us online, we actually do the diligence search on their behalf so to the extent there’s a better, cheaper product out there, we will show the customer that product and we will say, hey, we’re not the best option for you, it’s very akin to the Progressive insurance model.

Peter: Right.

Jared: You can imagine that creates a tremendous amount of goodwill and customer referral business because someone whose car broke down yesterday needs the cash and found us because we’re the easiest to find. We may be showing them a much better option for them to deal with that short term emergency expense.

The second thing is the product is designed to rehab you and to ultimately graduate you out so if you’re in the product for more than 18 months we failed you and we’re constantly looking at ways to evolve the product and reward customers and partner with other lenders so that once they have proven their, not only willingness, but their ability to repay, we can pass them along and say, thank you so much for the business, we’ve now paved the path for you for a more sustainable long-term financing solution.

Peter: Right, right. So then I’m curious just to get your opinion on the whole payday lending industry because…obviously, it sounds like your customer is not necessarily one that’s going to that industry, but what do you do…I’m sure there’s customers you get that just simply don’t fit your credit box and payday may be their only option so what do you do for those people? I mean, the whole cycle, the negative cycle that payday gets people stuck into…I mean, how are we supposed to deal with those kinds of people?

Jared: Yeah, I think there’s a large percentage of customers who don’t qualify for our product, we don’t think they have the ability to repay, we’re not the right product for them, there’s a lot more that we can do down the line to continue to offer solutions to those folks. The approach we’ve taken here as we’ve built the company…there’s some really interesting third parties out there, companies like SpringFour companies like Steady that can provide pathways to other financing sources and/or supplemental income.

I actually think there is a robust place for other lenders that don’t look like us who cater more toward a low income customer and there’s going to be a maturation in that industry as well to kind of tease out the better actors versus the not so good actors. But just like we’re providing a short-term pathway to deal with the situation and hopefully graduate to a near-prime lender, I think you can see the same processes work as you move down through the credit spectrum.

So we actually believe there is a wholehearted place for even high cost lenders than us as long as those two staples can be addressed; you’re not taking advantage of someone in a desperate situation, and two, you’re providing them an opportunity to improve not only their product but their credit profile longer term.

Peter: Right, right, okay, that makes sense. So let’s dig into what you’re actually offering. Can you tell us about your loan products, the interest rate, loan size, loan term, that sort of thing?

Jared: Yeah, so we’re in about 40 states today, about half of those states we’re directly lending and in another half of those states, we are an outsourced service provider to a Utah bank and the products differ slightly along those lines, but a general rule is we’re offering about a $1,500 loan, it’s about 12 months long and the APR’s are just over 100%.

Peter: Okay, and then so when you have a bank partner, what’s the difference between the two programs then, I mean, apart from the fact you’ve got a bank partner that’s originating the loan, I presume, but are they really two separate products or not?

Jared: Yeah, they are really two separate products. The bank partnership came along, we had been approached…I think the bank saw that there was this very interesting opportunity in a number of geographies across the country where the customers’ only option was a much higher cost, shorter duration loan and they had an appetite to go and originate in those states and to provide a product that was longer term, lower cost and longer duration.

And so that has worked very, very well and in the states where we’re able to directly lend we have a little bit of a different product, just depending on what those state’s rules and regulations look like. So we’re offering actually many different products as you look through all of those maturations, but the end result is to provide a graduation path, a sustainable product to a customer who is in need and that has obviously been received very, very well in the marketplace.

Peter: Right, right. So then what do you say…people look at the APR and they just go, oh, I’m sure…we know about it, there’s people running for president today, there’s people in Congress today who want to make these kinds of loans illegal and they see an APR of triple digits and they think, oh my God, this must be bad, it’s outrageous, we should shut these companies down that do this. What is your response to those people?

Jared: Well, I tell people my job is very easy because I tell people don’t believe a word I say, go online and see what the customers say.

Peter: Right.

Jared: They tell our story. The Better Business Bureau, Google, LendingTree, CreditKarma, you name the social media platform…I just tell people, search for us and the testimonials are so unbelievable I think it shows the value that we’re providing to the marketplace. Now I do think it’s our duty, as we continue to get better, to reduce APRs and to continue to drive the best products to the marketplace so I think we’re very, very committed to doing that. But our customers view us as a very, very cost effective product today versus their other alternatives.

The world is very interesting, how we grew up, right, you’ve got this 36% line in the sand and we wrote a whole white paper on how you got to 36%. There are two things that are very interesting with that whole dialogue. One is there are not great economic analysis that suggest that’s the right line and the other piece is apples to apples across products, everyone calculates APRs differently so your bank overdraft APR, your credit card APR versus that installment loan APR. No one has really done the work to show apples to apples what the true cost of credit is across the spectrum.

And I will say for the customer we are trying to be the best option for them when you are turned down by the traditional marketplace and I think where we’re at today from a price point perspective, we are the best option and over time, we should be able to reduce those APRs as our acquisition and our credit and our servicing and our cost of financing gets better and better.

Peter: Right, and the fact that you said when you’re not the best option, I mean, I’d be curious to know how often that happens, is it 1% of borrowers where you recommend them to somebody else. I mean, tell us a little bit about that particular piece because I think it’s a way to kind of, you know, get credibility…you’re obviously not trying to trap people into some sort of cycle, but tell us a little bit about that program.

Jared: Yeah, so I think customer acquisition, in general, is a huge unique part of our business. Most companies in this space are heavily relying on direct mail or a third party affiliate to drive traffic, we actually have turned the acquisition model inside out so the majority of our traffic, the vast majority of our traffic is what I call organic so it’s either through search engine optimization on Google or through customer referrals or it’s through e-mail marketing and that generates a lot of activity at the top of the funnel.

About 10% of the time, we’re able, today, to refer you to an Avant, or a LendingClub or a Prosper or another near-prime lender that can offer a cheaper product than we’re able to offer and I would imagine that’s going to increase over time as we build more direct relationships with lenders as folks view us as a brand standard for the right type of customer. We hope to drive a lot more…what we call “turn-up business” to other parties because if you can qualify for a cheaper product elsewhere, you shouldn’t be in our product.

Peter: Right.

Jared: Now that means 90% of the people are still lacking other alternatives out there and for those folks we want to get the ones that have the ability and the willingness to repay into our product and then we want to rehab them and graduate them over time to those same near-prime lenders.

Peter: Right, right, okay, got it. So then I’d like to spend a little bit of time getting to know who the borrowers are exactly. I mean, you mentioned these are people with a bank account, with income, but maybe you could paint a picture for us with maybe some examples, but who are these people and what is their financial situation like?

Jared: Yeah, if you took the US Census data and you pick out the median US consumer, that is who our customer is. They’re educated, they’re making $50,000 a year, they have a job, they have a bank account, but they have no savings and their car breaks down or something unexpected medically happens and they just do not have an option for a couple of grand to finance that emergency expense. So that is our most typical consumer and it looks like your everyday American.

Peter: Okay, so then is there a use case, is it medical, is it car, I mean, what is the primary use case for the funds?

Jared: Yeah, if a car breaks down, auto repair or unexpected medical are our two top reasons that drive someone to search online and then, you know, we rank very well so they’ll find us online, then they’ll see our customer service rankings which are incredibly high and they’ll say, that’s interesting, and the next thing they typically do is call us.

I think the other trick to this model is you have to use technology to enable human customer service not replace human customer service. We’ve been able to do that very effectively, is create a human customer service for a customer who is in need and then build trust and make sure we give them the best price for their risk profile.

Peter: Right, I see your phone number is at the bottom of your homepage there, I mean, like are you open 24/7, I mean, how do you deal with…these people are not obviously just applying during business hours.

Jared: Yeah, we’re always expanding hours, I think we’re open until midnight most days, now during the week, certainly we’re open to midnight, we’re open until the early evening on the weekends…

Peter: Okay.

Jared: …at some point here we’ll be a 24/7 business and we want to do business with the customer when they want to do business in the medium that they want to do business, right. We want them to be able to go through the whole process without talking to someone if that’s what they choose or if they need someone to hold their hand, we’re going do that as well.

You know, there are lots of folks who will look at a business and think it has to be 100% automated end to end to really build scale and profitability. We look at it very different, we actually think the investment in our people on top of an incredibly efficient technology platform. Although it probably costs a little bit more up front, it pays for itself in dividends by being able to create a very efficient conversion funnel.

Peter: Right, right, So then I’m curious about…are you making money on…I mean, is there an origination fee that you’re charging, is that part of the APR calculation there, I mean, what are the ways you make money?

Jared: It’s an interest model…we essentially have no fees across the board and that is by design. The customer wants a simple product, they want to be able to understand the product. A plain vanilla 12-month installment loan that amortizes over the life of the loan where every payment is also repaying principal, the ability to pre-pay at anytime without penalty, we report to the three credit bureaus. It’s structured in such a way that’s incredibly easy to understand, where the money is being made on people repaying the loan and when they’re ready they can get out of it with no strings attached, that is the goal.

Peter: Is it monthly payment, weekly, what is the repayment schedule?

Jared: We offer several different payment schedules. Most typically, it’s a bi-weekly or monthly payment.

Peter: Right, okay. Let’s talk about underwriting because this is really the critical piece. I mean, you said you’ve got a lot of people at the top of the funnel which is great, but how are you underwriting them? Obviously, you can’t spend two hours on the phone with someone if you’re going to lend them $1,000, I expect. Tell us a little bit about the technology you’re using to underwrite.

Jared: Yes, so it starts with an incredible team of data scientists that have the benefit of lots of data to make sure we’re getting the right borrower into the equation. We’re not using traditional credit scores as a linchpin of the underwriting model, we’re using alternative data, some from third parties, some internally sourced and a proprietary model that has constantly been improved over time as we’ve gotten more and more data to get to the right person.

The best analogy I give folks is we run it like a fantasy sports team and that’s across the business. When you walk into our office, we’ve got a 100 flat screen TVs and they’re all tracking a certain area of the business in real time with unbelievable granularity that we can drill down.

From a credit perspective, we are very, very sophisticated in understanding what is changing on a credit perspective on a minute-by-minute basis. So if some area looks hotter than another, we can drill down and figure out if changes need to be made before we have a bigger issue.

I think another core point of the underwriting perspective is to make sure you’re always A/B testing, you’re figuring out if there are new ways to approve more customers at same or better credit. We just rolled out our latest iteration of a credit model here recently that enables us to approve more at same or better losses and I think we’re just scratching the surface in being able to increase availability of credit to this customer base.

Peter: Okay, so then are you…I mean, is this an automated process where you’re not having a human being review each file, or is there some that gets kicked out to a human underwriter. How does it work?

Jared: Yeah, I think part of the secret sauce is being able to use technology to very quickly understand the attributes that are key for customers’ ability to repay and willingness to repay right so that would be income accuracy, consistency of income, validating employment, validating identification.

We have some unbelievable proprietary technology that, for example, can take bank data and very quickly evaluate these items. If it’s not clear whether it passes muster, we then have a follow-up process that allows us to quickly vet whether the customer has the income and the consistency of income, for example, to be able to repay the loan so it’s a balance, right.

I think in this day and age every company needs some element of AI and machine learning to build their business. Every company also has to be wary that you may hit on disparate impact and that these models are being run compliantly and so we have balance between technology and manual processing in everything we do and throughout the way, we’ve been able to still create a very, very efficient business that can scale.

Peter: So then if someone comes along to your site today and fills out an application, how quickly do they get their money on average?

Jared: They’ll get money next business day.

Peter: Next business day.

Jared: If they’re approved today.

Peter: Okay.

Jared: And we’re moving…I think same day funding is going to be a staple here very, very quickly so we’re working across the business to move more to a same day model. I think within a year, all the customers will be same day.

Peter: So are ACH-ing this money to them, or they all have a bank account right so what’s the method to get them their funds?

Jared: Yeah, today we’re dispersing money through ACH.

Peter: So then can you give us some sense of the volume, the loan volume you’re doing today, I mean, these are relatively small loans. It says on your website that you have 100,000 plus happy customers so give us sense of the volume you’re at.

Jared: Yeah, I think the best way to think about it, across the different products and different delivery models, we’re doing a couple of thousand loans a day.

Peter: Okay, okay, that makes sense. And then loan performance, I mean, this is going to be…obviously it’s probably the most important issue that you face is being able to get a return on your money with good loan performance, what can you tell us about losses and performance?

Jared: These businesses, it’s very interesting because the growth part of these businesses…I don’t want to say it’s easy, right, but growth in these spaces is, especially when you look at what the landscape looks like and the reality of savings in the country, the growth part is less important than making sure you can create a profitable business where folks are repaying you. So the only way you can do that is by managing your credit losses, right.

By far, it’s the biggest line item for expenses in your P&L and we are as maniacal about credit as we are customer service and so the model has been built to generate well above average losses than what you can see out there publicly.

So I think we feel very strongly that our loans perform meaningfully better than what is typically found in this space, and again, that’s also terrific because it’s a virtuous cycle, the lower the losses over time, the more we can give back to the customer in terms of APR reduction. So it is the gift that keeps on giving and how we think about building the business long term.

Peter: Right, right. So do your customers come back multiple times, I mean, is this…you talked about in 18 months you want them out of your program, but what is the sort of the repeat rate of your customers?

Jared: Yeah, we find that 90% of the customers are in the product less than 18 months. The refinance piece of this business is always a very hot ticket item and there’s two parts of that that we think through. One is we’re a little bit more conservative up front. So for instance the customer may want $2,000/$2,500 and based on either our underwriting model or the bank’s underwriting model, maybe the customer gets $1,500 up front and once they perform for a bit of time, they may be eligible for refinancing and they can top that up.

It’s better for the customer because they’ll end up paying less in interest by taking the money out in two tranches and it’s good for the company, for our company because then we’re ensuring we’re getting the right borrowers up front. So that’s one driver of refinance activity.

I think the second piece of it is building these graduation partnerships that we’ve talked about and we’re in a number of dialogues whereby just based upon the fact that the customer has performed in our product, a near-prime lender is willing to take them back at a substantially lower cost.

And I think our goal is to get all the customers out by the 18-month mark and graduate them to another lender. Now they have to do their job too because we need this marketplace developed so we can make good on 100% of our customers and in the interim, we’re looking at ways of rewarding customers who have been in the product and still want to refinance because there’s not another option out there for them.

But wholeheartedly, I think in this space you need to make sure that the customer…it’s a short term product for the customer and once they’ve proven the ability to repay, the’ve improved their credit and you can get them out of the product to a more traditional form of financing. That’s critical to the longevity of this marketplace.

Peter: Right, right. So you don’t have any plans then to go up market yourself like up the credit spectrum? You know, you’ve obviously got a lot of customers who are potentially graduating to…you mentioned LendingClub, Avant, Prosper, whatever. Why not have another product that is closer…like a more near-prime product?

Jared: Yeah, I think it’s a possibility long term. I think today we have a tremendous amount of low hanging fruit to continue to deliver an unbelievable experience to our core customer, whether in this product or ancillary products. As the business gets larger and our cost of capital decreases, I think it would be prudent for us to look at some of these additional credit extensions to higher levels of the credit spectrum.

But we also love the fact that we can partner with these high quality businesses that are currently offering those products and potentially even develop two-way relationships where we can take some of their business in the near term and prove the credit worthiness so we can pass that business back to that lender over time. I think that’s a very interesting model for us and we’ve been able to hammer out several high quality agreements on that front which is a benefit to both companies.

Peter: Right, right, okay. So I know we’re running out of time, but I have a couple more things I want to get to. Firstly, how are you funding these loans, where does the money come from, who are your sort of outside investors who provide this capital?

Jared: So the Schwartz Capital guys are the majority owners of the firm from an equity basis, but we’ve been able to fund the business with operating cash flow to date from an equity perspective largely driven by the high quality relationships we have with a number of third party lenders.

I’d say our cap structure is relatively complicated…we have several partners who we have grown with over time and the key to these businesses is to continue to build credibility by doing what you’re going to say and the lenders reward you with lower cost of capital and more flexibility in their cash flow.

So we have hundreds of millions of dollars of debt capacity at, I think, industry best cost of capital with flexibility in how we use that cash and that has really provided the funding capacity for our growth over the last couple of years.

Peter: Right, okay. So I saw that you were named a Glassdoor Top CEO in 2018, so I’m sure that’s something you’re quite proud of, but tell us about your approach to company culture.

Jared: We define culture as the excitement of the workforce on a Sunday night and how they feel about going to work on Monday morning (Peter laughs) and it’s really how we built the business. I don’t think it’s mutually exclusive to build a very high performing culture, but also a best place to work so that is embedded in how we have developed the company.

For us, the happier the employees you have, the better customer service they deliver. Customer service is this huge advantage that we have, those customer service rankings online drive a tremendous amount of our business so we care about that. And I think we are always looking at how we can provide the best atmosphere to our employee base, right, and that is recognizing top performers, giving them opportunities to improve their education to move up through the organization and to provide a real growth path in a general workplace where we care about people and they can go and advance their careers.

At the end of the day, it’s feeling good about what you do everyday. So the fact that our customers, a couple of thousand times a day, are having these tremendous experiences of people that need the product, I think that creates a really solid place to work. And then it’s always about the team, so the fact that our senior executive team, I’d put them up against any Fortune 100 company, they are outstanding and that runs the gambit throughout the organization. We just have exceptional talent that works really, really hard, but treats people with unbelievable respect, recognizes top talent and that’s why we’ve been able to build a great place to work.

Peter: Okay, so last question then. What’s on the horizon for OppLoans, what are you working on that’s exciting for you?

Jared: We view this as a platform, a financial services platform that’s got tremendous extendibility to other products and to other types of customers. I think you’re seeing lots of interesting things in the online lending space whether that’s through point-of-sale, whether that’s through some of these salary linked models, where you’re able to offer much lower costs of credit through employers, where the repayment mechanism is through payroll deduction.

I think there are other financial services products, right, that we could certainly extend this to, whether that’s near-prime credit, prime credit, mortgages. We view this as a platform that will be the leading consumer financing platform globally, for not only our customer segment, but across customer segments because we can deliver the product incredibly efficiently with unbelievable customer service so we are at a very early part of our journey and we look forward to building this out for years to come, not just here in the United States, but across the globe.

Peter: Okay, Jared, we’ll have to leave it there. I wish you the best of luck. Thank you very much for coming on the show today.

Jared: Thank you so much, Peter, we appreciate it.

Peter: Okay, see you.

Jared: Bye.

Peter:  Well no one could accuse Jared and OppLoans of thinking small, they clearly have grand plans. I think it’s particularly interesting, the concept they have about referring those customers up the credit spectrum chain, shall we say, into a cheaper product. I think that’s something that I would like to see more companies do and I think it really does speak to the kind of company that they are.

As I said, some people are going to see the headline rates and just dismiss them as a company that’s not doing the right thing for customers. Clearly, that’s not the case. You look at their ratings on a lot of these independent sites, their customers are clearly delighted with what they get from OppLoans so they’re certainly a company to watch and I’ll be paying attention as they continue to scale their business.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 200  –  LUVLEEN SIDHU

Welcome to the Lend Academy Podcast, Episode No. 200. Yes, we have hit the double century mark! This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I am delighted to welcome Luvleen Sidhu, she is the Co-Founder and President of BankMobile. She’s also the reigning LendIt Fintech Woman of the Year winner and I wanted to get her on the show to talk about some of the interesting work that they’re doing at BankMobile, it’s quite a fascinating company.

We talk about their consumer offerings and who they’re targeted to, and we talk about their banking-as-a-service offering and their first big client, T-Mobile, which is super interesting, we delve into that in some depth. We also talk about the whole landscape of digital banking in this country and we talk about their partnership with Upstart, which has them offering consumer loans as well. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Luvleen!

Luvleen Sidhu: Thank you, really happy to be here.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself and actually what you did before BankMobile.

Luvleen: Sure, so before BankMobile, I graduated from Harvard in 2008 and I joined Lehman Brothers and we had six weeks of training prior to my first day on the job. My first day on the job ended up being September 15th, the day of the Lehman bankruptcy…

Peter: Wow!

Luvleen: …so it was a very, very interesting start to my career (Peter laughs) and I remember, you know, people walking out with boxes and there I was sort of walking in. I remember calling HR and I was like, hey, should we even come in today and it was very eerie and they were just like, of course, you know, business as usual. So I did start my career at Lehman, my part of the business became Neuberger Berman and I worked in the hedge fund of funds group on the investing side.

After that, I spent one year at our parent company, Customers Bank, which is a community bank based in Pennsylvania and got my hands into banking and soon after that, left for Wharton, where I went to business school. Interned between my two years at Booz & Company in their financial services industry vertical where I helped a well known financial institution launch their direct digital bank, and it was really through my time at Customers Bank, also coming from a banking family, and my role in helping sort of consult this financial institution to get into the digital banking space that really led me to where I am today.

Peter: Okay, so then while you grew up in banking, you haven’t had a long career in banking, what was sort of the trigger that made you decide to start BankMobile?

Luvleen: Sure, well I think it’s the combination of personal experience and then just understanding of macro trends and really what was happening. From a personal experience standpoint, my father is a veteran banker, that’s what I meant by I grew up in a banking family, and he helped build a bank called Sovereign Bank, which has now been bought by Santander.

I remember the first time when I entered college, I went in to open my own bank account and it was during that experience where it took me about 15/20 minutes to open this account and there was definitely nothing inspiring or, you know, positive that I remember from the experience. It was rather dull, didn’t really understand what I was doing, the benefits of, you know, working with this financial institution or how they could really help partner with me to really help me understand financial management and where I was in the stage of life and grow with me.

And so I think it was my first sort of insight into my own experience with banking that left a mark for sure, and then in addition to that, you know, being able to work at Booz with a direct bank being launched and helping, you know, consult another company get into that space helped me really understand the macro trends that were occurring at the time and how the macro environment was really ripe for disruption in this space. So if you look at consumers, you know, they are interacting with their bank or mobile devices 20 to 30 times a month, but only walking into a bank branch on average one time a year.

We’re also seeing, you know, Americans, a third of them, living paycheck to paycheck. Almost 50% of Americans don’t have enough to pay for a $400 emergency, if that ever happens, and these same Americans are being charged $34 billion a year in just overdraft fees. So there’s one angle where it’s like, hey, we weren’t delivering banking in the channels where people wanted to consume, and two, you know, people are looking for an affordable banking solution that’s not so fee driven since they’re already in sort of a financial fragile state.

Peter: Right, right.

Luvleen:  And so, I think, understanding consumer needs and behavior shifting, it was really just understanding that a new way of doing banking to meet those needs, it was a great opportunity for that.

Peter: Right. You know, starting a bank is not a trivial exercise, it’s not like starting a tech company where you can get a couple of friends to come over and hang out in your basement for a year or two and just away you go. You know, starting a bank has a pretty major barrier to entry on the regulatory side so I’m curious, do you…where are you at now, I know you said you’ve been incubated inside Customers Bank, so do you have your own banking license, are you using their license, I mean, what’s the relationship between the two organizations?

Luvleen: Yeah, so today, we are a division of Customers Bank and Customers Bank is where I also did …[inaudible]… and I already knew that they were looking at sort of expanding from just commercial banking to retail banking and the time that I was there, we were very interested in the models like Simple, the bank Simple, that had launched at that time already. So I think the idea was already brewing within Customers Bank of how do we take advantage of this new trend, this new digital mobile first trend that is just starting.

And so after I graduated from business school, Customers Bank was really looking to take action and move forward on that thesis and so I joined the bank and they really gave us a couple of mandates. It was great because they sort of incubated us and kept us separate from the rest of the bank so we could really innovate and develop, you know, the best strategy going forward.

But it was how can we create a better product than exists today, how can we make it more affordable, how can we make it easier to use with a great user experience and can we create an income and revenue model that is at least equal to traditional banks, if not better and lastly, assume that branches are illegal and how would you still create this product and this distribution channel to acquire through this new mode of banking. And so it was really with those pillars in mind that we got together and really defined and started BankMobile.

Peter: Okay, so let’s go and actually talk about your offerings because, you know, you are a digital bank and there are others obviously doing the same thing. You know, there’s a lot of different types of products that you can offer, so why don’t you just take us through your core offerings.

Luvleen: Sure, I think firstly I’d like to just start with like what are consumers looking for and that maybe sort of answers some of the product question.

Peter: Okay.

Luvleen: I think what consumers are looking for…one, it’s simple. Sometimes we talk about, you know, what is the most innovative product that we can do to really change the face of banking, the way banking is consumed and experienced and I think that’s a great aspirational goal and that we are moving towards that aspirational goal as an industry, but there are small things that are still so broken, from being able to open an account with 5/6 clicks.

And so both in our BankMobile Vibe product and the T-Mobile MONEY product that we just launched with T-Mobile, you know, we’re able to open an account within a few clicks and that’s a great on-boarding account opening process and what consumers are looking for, instead of that 15 to 20-minute one that I described to you back in college.

Two, you know people are looking to be able to earn money on their money and so with the big banks, on average, spending no more than eight basis points on interest on checking accounts, we are launching soon for our BankMobile Vibe product 3% on balances up to a thousand and through our partnership with T-Mobile, we’re offering 4% on balances up to $3,000 and 1% thereafter. So it’s really about creating a model where people are actually earning money on their money which is something that the big banks have really ignored in doing.

Another thing that consumers are looking for is not to be fee’d to death. You know, I mentioned the $34 billion in just overdraft fees. You know, we’ve found a way to really create a low cost banking product and through our partnership with T-Mobile, for example, there’s absolutely no fees on the account and we even allow T-Mobile wireless customers that have T-Mobile MONEY to overdraft up to $50 per calendar month, as long as they pay that back within the calendar month. And so it’s really about giving people the opportunity to bank without fees and not penalizing them and really giving them the opportunity to access money if they need it in a short timeframe.

And then lastly, it’s really about broader access to your money and so, you know, this model that a lot of the big banks have where they own their ATMs, you know, that sounds pretty old school to me. Moving towards more of the Uber model, the Airbnb model where it’s not about ownership, but really providing access to replace ownership is what we’re doing with ATM access. So instead of having to own all of these ATMs, we offer our customers access to a whole network of ATMs, 55,000, which is three times more than Bank of America’s ATM network. So it’s really about providing access to people easily for people to access their money.

So those are some of the pain points that we’re solving for.

And then it’s also about growing with the customer and the needs that they have as they move from one life stage to the other. So we have a big business in sort of banking students and when students graduate, a lot of them are looking to build credit and to be able to access credit and so on top of our checking and savings accounts which we offer to them as students, you know, we also have built out personal loans, credit cards and are offering student refinance in the next two months.

We’re rolling that product out and we’ll continue to sort of roll out more credit products that help our customers build credit and really sort of move on their goals by helping them build a strong financial foundation.

Peter: Yeah, yeah, okay. So then is your target market…I mean, your name is BankMobile, I presume you’re targeting a younger demographic. As you said, you’ve got the things for students so who exactly is your target market?

Luvleen: I think when we first started, we wanted to go after those who were suffering the most from the banking system, you know, those who I described that really were looking for an affordable alternative and usually those that had the most limited access to financial services were being hurt the most with the fees, etc. And so when we first started with a direct-to- consumer strategy, we definitely appealed to that demographic.

I think that continues to be a portion of our demographic, but then we expanded into students and these are low to middle income sort of Americans that are either going to two-year community colleges or four-year traditional schools, starting out their career, lower balances, don’t know much about financial and money management and so that has become a sweet spot for us to really help youth start their financial services journey with us and then grow with us through the different products and services that we offer through your lifecycle.

You know, with T-Mobile MONEY it’s really anybody, anybody that’s looking for a better banking experience. So the beauty about banking is that anyone can be a customer and everyone needs a bank account. So even though we focus on niches that really need a better experience, we are definitely expanding beyond that through the different channels and distribution models that we enter into and really view that anybody can be a customer of BankMobile.

Peter: Right, right. We’ll talk about the T-Mobile thing in a bit, but I want just dig in a little bit here. I’m on your website and you actually…when you go to bankmobile.com, you can’t open an account from that page, you’ve got this sub-brand, I guess, BankMobile Vibe and BankMobile Vibe Up, so tell us a little bit about what the thinking is there. I click on BankMobile Vibe Up and I go to a different website where I can open an account, where I can join a waitlist, it looks like there, so just tell us a little bit about the branding there.

Luvleen: Sure, so BankMobile had historically started as a direct-to-consumer strategy and we have pivoted since then to banking-as-a-service where we really partner with institutions, with companies, etc. that have a captive audience and feel that through our product they can serve and solve for even more pain points in their customer base and create, in turn, more engagement, more loyalty with their customers.

And so when you see BankMobile Vibe, that is our student account and we basically serve 800 campuses across the country and help solve the pain point for them which is sending payments between the school and the students. In return, these students get to choose, do they want these payments from the school through ACH into an existing account or opening a BankMobile account and through these distribution partners at 800 campuses, one in every three college student sees our brand and has the option to open an account with us.

So that’s maybe an indirect way of saying it’s actually a closed loop account, BankMobile Vibe, where if you go to one of those 800 campuses that we have partnerships with, you are able to open a BankMobile Vibe account, but it is not an open market direct-to-consumer account at this time. And then same with T-Mobile MONEY, you know, we are the support and the bank behind it, but you can be a non-T-Mobile customer and have different perks or you can be a T-Mobile customer and have enhanced perks and that can be opened through the iOS store or visiting sort of T-Mobile retail outlets.

Peter: Right, is the plan with Vibe Up product to…I mean, is this just really focused on a similar demographic with the students? I’m just trying to get a handle on…it sounds like there’s a waitlist for that product, are you still going to have like a direct-to-consumer product that’s not T-Mobile that anyone can open?

Luvleen: Yes, so it’s definitely something that we’re pursuing and open to…you’re absolutely right, BankMobile Vibe Up is the pursuit of doing that, although that account, even though it will be an open market account, it will be much more geared to the student demographic still and schools outside of those 800 campuses that we currently have relationships with. So it sort of broadens our breadth and depth of penetrating the student market outside of, you know, marketshare that we already have with just a slightly different product that’s open market.

But in terms of a broad based, direct-to-consumer play, you know, that’s something that I think is very difficult and that’s why we’ve pivoted to a B2B2C model which really helps us with high volume customer acquisition at very low cost, but we’re always working at figuring out and innovating and seeing what business model could help crack the code for a very successful, profitable, high-growth, direct-to-consumer strategy and that’s something that we would always be open to reengaging with and implementing at the right time.

Peter: Right, so your direct-to-consumer strategy right now is the student population, that’s the focus, it sounds like.

Luvleen: Yeah.

Peter: So I went back and listened to your interview with my colleague, Todd Anderson, at LendIt and one thing that caught my attention in that interview, I mean, many things did, but this one particular piece you said that you’re acquiring customers at $10 a pop for customer acquisition cost, is that just from the network effect of the student population? I mean, how are you able to have such ridiculously low customer acquisition cost?

Luvleen: Yeah exactly, so it’s a different model. So you could think of sort of traditional banks partnering with colleges and universities by potentially paying millions to really be the sponsor on campus, to have the ATMs on campus, to have a branch on campus and our model is different.

We’re in the business of solving pain points and this situation, what is the pain point that colleges and universities are dealing with and there is a lot of overhead, compliance headaches, etc. with schools having to deal with sending payments to students, especially in the form of financial aid refunds or if someone drops a credit on campus and is owed money or if they’re working on campus and they need to be paid, etc.

And so we help ease that burden and the schools pay us a subscription fee for our service in easing that burden and helping take care of that for them from a technology standpoint as well as from a compliance standpoint.

In return, it really gave us access to the student demographic that is getting payments from the school, and again, it’s a very neutral process where students have an equal opportunity of using an existing bank or getting a paper check or opening a BankMobile account. So in essence, our customer acquisition cost is $10 to almost you could say zero, somewhere in that range, because the schools actually pay us and we get access to the students.

Peter: Right, right, okay, that makes sense. So I want to talk about T-Mobile, you know, that was a pretty significant news that was shared recently and maybe we could start off with how did this come about because you are…you’re still a very young organization and T-Mobile is a massive global telecommunications company, how did you first get together?

Luvleen: Sure, so there’s a little bit in terms of…I just want to put it out there that our relationship obviously is public at this point, but very T-Mobile specific questions, you know, are best geared towards them and we are sensitive to the fact that they’re a public company and it’s important for us to respect some privacy there.

So they were looking at getting back into financial services, it’s something that they had done before in the form of prepaid cards which is a very different product for a very different demographic and is very differently integrated into the T-Mobile experience, meaning a prepaid card is usually just on the racks in the stores and so it’s a very different acquisition model.

And so they were looking at…that model didn’t work for them the way that they had hoped for, and so they were looking at another way to get into financial services that focused more on a broad-based customer base because they really view anyone can be a T-Mobile MONEY customer and that the focus, you know, ended up being more on checking accounts.

With our technology, with our experience in the student space, with our vision and mission being very aligned, you know, we’re both very customer-centric companies that have really set out to disrupt a broken industry, each of ours being quite broken in it’s own unique ways and so I think there was a lot of chemistry from all different regards for us to launch this together.

Peter: Plus you have Mobile, you both have Mobile in your name, that must have helped as well. (Luvleen laughs).

Luvleen: That’s a good point.

Peter: So when someone opens up a T-Mobile MONEY account through the T-Mobile MONEY website, what actually happens is…is the bank of record with that account, is that BankMobile or Customers Bank or what actually happens on the backend when someone opens an account?

Luvleen: Yeah, so the T-Mobile MONEY account is FDIC-insured through BankMobile which is a division of Customers Bank. There is a really robust on-boarding process that, you know, was built out to be able to onboard customers that are digitally opening an account versus the branch-based model where you see someone come into the bank branch.

What’s interesting is in the T-Mobile model, you can go to a retail outlet and learn about the account and get a link to open the account which is more of a handholding sort of process, but you can also do it on your own iOS, Google Store, etc. and, you know, the bank handles all the compliance that’s related to opening an account.

Peter: That’s just truly fascinating. I’m just wondering if…we’re entering a world where like if you look at the Fortune 500 companies and particularly those that are consumer-based companies. I’d be interested to get your perspective, are we entering a world where there’s going to be like one day we may be able to have a General Electric mobile money account or a checking account, I mean, what is your sense about some of these really big brands…I’m not really talking about the tech companies here, sort of the other brands that have a consumer presence, do you think that we’re going to see a lot of similar sort of things to what T-Mobile has done?

Luvleen: I think that it is a very strong possibility and obviously, we’re believers in that model. We’ve seen Apple/Marcus most recently, they’ve started with a credit card, but they are very well positioned to expand that relationship into a banking model. There has been rumors for a long time now about Amazon and another bank and then obviously there’s T-Mobile/BankMobile and I think that you have to look at what are the ingredients for success in these sort of partnerships.

I think that if there’s alignment in sort of vision and mission the way that I described T-Mobile being an un-carrier and fixing a broken industry and BankMobile being the same, that seems very authentically aligned, even to consumers perceiving this product being offered by the company.

And so I think that there has to be some synergy with what that current business does, what it stands for, the way customers interact with that company, where the bank account or the financial services is just a augmentation of the relationship and it helps better that relationship, makes it easier, solves another pain point, you know, I think that there’s a handful of really good use cases where we might see more of this.

Peter: Okay, so then the second part of this question is, you know, who are you focusing on for your banking-as-a-service service, what segments of the business world are you focused on?

Luvleen: Yeah, so for us that’s part of our strategy and it’s something that we talk about less, but I think that there is…you know, you’ve seen us already act in telecom and higher ed, you know, are very unique spaces to play in. We’ve seen technology already play out with Apple and an e-commerce potentially if Amazon enters this space. So those are some big bucket areas where I think that, you know, this use case of banking-as-a-service and partnering retail with banking could potentially make sense.

Peter: Okay, so do you see your future…I mean, there’s two real offerings you’ve got here, you have retail, the retail bank offerings, and the banking-as-a-service, do you see both as equally important for your future, or it’s really banking-as-a-service where you’re going to really place your bets?

Luvleen: Well interestingly enough, even though it seems like our direct-to-consumer play is the student business, I really view both of them as banking-as-a-service and we just happen to be able to use our brand in the student market up front and center, but it’s a very similar model where we’ve partnered with institutions, higher ed institutions, and we are using sort of their distribution model and channel to be able to touch customers, to be able to acquire customers and that’s the same model that exists in other white label partnerships that we would pursue.

And so I think that the answer is B2B2C is where we see momentum and where we see high growth opportunities, but as I said before, I’m really excited about the opportunity of direct-to-consumer. I think the code hasn’t been cracked yet where you make that model highly profitable from a challenger bank standpoint and, you know, if we figure out the secret sauce that is definitely an area that I hope that we would re-enter into.

Peter: Right, right. Okay, so we’re running out of time, but there’s a couple of more questions I really want to get to.

Firstly is the partnership with Upstart which is interesting because Upstart is sort of providing this lending-as-a-service and they’re providing it to you. I see it on your website here where you can go and take out a personal loan and Upstart is powering that service. Maybe just tell us a little bit about why you chose Upstart and what your goals are with that kind of offering.

Luvleen: Sure, so I think that I’ve always believed and BankMobile has believed that we don’t need to reinvent the wheel, that there is an ecosystem of really strong impressive fintech companies that are out there when we are launching new products, new services, etc. that we can tap into that ecosystem and be able to work together to achieve our goals mutually.

And I think what was appealing about Upstart is that, you know, I like the founding team, they come from a Google background, many of them, and they are very smart, they’re analytical, they’ve built a strong model that is more forward looking, that uses artificial intelligence and machine learning to really create an alternative lending model.

We didn’t want to start from scratch and build things from scratch to be able to create the best user experience for on-boarding an application. They take our underwriting criteria into consideration and layer it in with their underwriting that has a lot of AI and unique sort of dimensions to it and they help service the account and so they’re a great partner to really help us launch quickly when we wanted to launch our first credit product which is personal loans.

Peter: Okay, so last question then, what are you working on now, what’s interesting over the next 12 months, what are some of the things that you’re looking at?

Luvleen: Yeah, so I think that we want to continue to expand on banking-as-a-service and finding another really right partnership for us to continue this model with.

Two is definitely executing well on the T-Mobile partnership. You know, we have a huge opportunity there to really change the way that banking is consumed and the way that banking is done with consumers in terms of really being in the consumers’ favor and I think that I want to focus on creating the most opportunity there.

And I’d say third is…one thing in the back of my mind has always been with AI and these emerging technologies. We want to focus on personal financial management and sort of the  advice aspect and I think that there’s a multitude of PFMs’ out there, people have scratched the surface of it, you know, there’s rounding up somewhere, there’s save to spend somewhere else, you know, there’s aggregating different accounts somewhere else and I think bringing it all together and using the technology that’s out there now to simplify that experience, make it really value additive to make it more proactive advice rather than reactive.

It’s just high level sort of thinking but it’s definitely something that we want to explore further and see if we could be the innovators that actually are able to succeed in that space.

Peter: Okay, well it sounds fascinating and I wish you all the best and I very much appreciate you coming on the show today, Luvleen

Luvleen: Thank you so much.

Peter: Okay, see you.

You know, I thought it was really interesting that Luvleen used this sort of banking-as-a-service concept as a way to describe both what they’re doing with T-Mobile and what they’re doing with their own sort of student led offerings. This whole concept of banking-as-a-service is, I think, very interesting, it really is something that I think has a lot of legs, it could take off into many offerings, we’re probably going to see something come out from some of the major tech companies very soon.

As Luvleen mentioned, the Goldman and Apple combo…but what’s to stop some of these other companies offering a similar product. T-Mobile, if you’ve got a consumer facing product, I see it as a way to sort of maintain engagement with your brand and really increase engagement with your brand. It will be interesting to see how it all plays out, that’s for sure.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 199  –  BERNARDO MARTINEZ

Welcome to the Lend Academy Podcast, Episode No. 199. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation in financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I’m delighted to welcome Bernardo Martinez. He is the Head of Funding Circle’s US operations, he’s officially the Managing Director of Funding Circle US. We wanted to get Bernardo on the show because he’s been in the job now a little bit over a year, he took over from Sam Hodges, I think it was April of 2018, and I wanted to get him on the show to talk about a variety of things.

We actually…we do cover a lot of territory in this interview, we talk about the lessons he’s learned, what he brought over from PayPal, we talk about why banks aren’t lending to small business, we talk about who he sees as his main competitors, the competitive landscape in the US. We talk about his recent op-ed in American Banker discussing the SBA Guarantee Program, we talk about the Canada expansion, what he’s doing on the regulatory front and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Bernardo!

Bernardo Martinez: Thank you, glad to be here.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself so why don’t you tell…I know you’re originally not from here, so tell us a little bit about your background, how you came to be in America and what you’ve done in your career to date.

Bernardo: Yeah, thanks Peter, I’ve been actually in the United State since 1997, I moved from Venezuela to do my graduate degree at Duke University and after that I spent most of my time in the financial services industry working in areas like Bank of America, actually went abroad to work in a local bank in the Caribbean managing American Express as an international operator and prior to joining Funding Circle, I spent almost three years actually working with PayPal managing the US Business Lending Division for them.

Peter: Okay so then, what are some of the…you know, PayPal Working Capital, it’s got some decent scale these days, I know you were sort of in charge of building that up so I’m curious about what are some of the lessons you learned at PayPal that you’ve really brought over to Funding Circle.

Bernardo: Since I joined PayPal, back then, I think the one thing that I was able to learn a lot was how important the customer experience is as part of the lending process and how you can actually create a true conversion as you create a transparent product and an easy process. So I think that’s the biggest learning that I took from PayPal and that’s one of the things that I’m very focused on since I came to Funding Circle a year or so ago, trying to replicate some of those learnings and trying to put it here in practice and basically bring the product up to par and improve upon what we’ve got today.

Peter: Right, right. Okay, so you’ve been a bit over a year in the job, I know you replaced Sam Hodges who we had on the podcast a few years ago, so tell us about how the year has been, maybe start with what’s been the biggest challenge for you over the past year.

Bernardo: As you would imagine, coming from a different type of lending environment of short term lending, I moved to Funding Circle which is more of a long term lending sort of provider so I spent the last year really learning our processes and understanding our weaknesses and opportunities and I would say one the biggest things I’ve learned is we have a tremendous opportunity to focus on partnerships.

I feel pretty good that after that first year we’re starting to see a lot of that focus on partnerships. It came to fruition, as you know, we signed at the beginning of the year, with Stripe, a partnership and most recently, we did a partnership with LendingClub. I feel pretty good the first year of learnings here have resulted in a good outcome that started this year.

Peter: Right. Okay, so we will talk about some of those partnerships in a little bit, but before we do that, I actually want to get to sort of the details of your loan offerings, just so everyone is clear, I know these are longer term loans, but why don’t you give the listeners…what are the range of interest rates, loan sizes, loan terms, that sort of thing?

Bernardo: You think about us, we are offering installment term loan products that have monthly payments, it basically goes from $25,000 to $500,000, from six months up to five years. On average, our loan size is $130,000 and actually our average APR is around the low teens so it’s a little different from what you see in the industry today with some of the alternative lenders.

Peter: Right, right. And then what about the other side of the business, I’ve spoken with Samir Desai many times and he’s spoken at LendIt saying he’s very much a proponent of the pure marketplace so I’d love to get some sort of some sense of the investors that you’re dealing with. I mean, you don’t have to name names obviously, but like what are the types of investors that you have in your platform today, are you still doing the fractional loans to individuals. Just tell us about the investor side.

Bernardo: Yeah, from an investor perspective, we are primarily an institutional investor and what I mean by institutional there are twofold. One is our asset managers as well as sort of banks so those are the majority of our funding today. As you know, last year we signed a deal with Alcentra for $1 billion and purchase over three years and also we have been working with INTRUST since actually a year and a half ago, doing the same thing on the institutional side.

To your question about fractional, we do have fractional today, it’s not something we are growing at this point, but we’re investing some time to think through how we can make it bigger in the foreseeable future.

Peter: Right, right. Okay, so then I was reading…I think it was last week or the week before, you released a report with Oxford Economics talking about, you know, basically small business lending, the state of small business lending basically and I was struck by the fact that small business lending is just 0.7% of bank balance sheets, that’s…I mean obviously, they’re smaller loan sizes, but…let’s talk about banks. I know you’re partnering with banks on a lot of your initiatives, but are you finding that your customers no longer consider banks a viable lending option?

Bernardo: What we’re finding is in our service is like 72% of our customers actually came to us first because they found us to have a great process and a great product for them and the ones who didn’t come first to us, they kind of found that the bank process are not up to speed to what the market is offering so they spend almost eight hours just completing the application without really knowing what the end decision will be. So I think that small businesses, in general, are starting to move toward alternatives beyond banks to really facilitate their capital access and we are pretty happy to see that our borrowers are starting to see us as a great choice.

Peter: Right, so you said your borrowers are going to you first, how are they finding out about you? I mean, I know you’ve got some recognition obviously, everyone in fintech knows you, but the average borrower, I imagine, still has…isn’t aware of Funding Circle, the majority of them, I imagine, so how are you getting the word out, how is it that such a large percentage come to you before a bank?

Bernardo: A few things, I think number one, as you know, we have done…the way we approach our marketing is twofold. Number one, we use direct marketing as an approach and we do direct mail… print in order to reach out to customers. So some of them are going directly through as a response of our direct marketing processes.

In addition to that, we have done partnerships with LendingClub, but also with portals like Credit Karma, NerdWallet and Fundera that actually aggregate a lot of offerings. We compete in those lead aggregators marketplaces and customers see us there and basically come to us directly. Again, I think that two prong approach help us get the word out and enable those customers to access us directly.

Peter: I’m sure there’s a subset of your customer base that would have received a bank loan had they decided to go down that route. Do you have some sense of…I mean, obviously you’re going to be more expensive than a bank, I imagine, for most of those, but how do your interest rates compare to what the banks are charging today?

Bernardo: I would not consider ourselves more expensive. I think we’re affordable and we’re close to a bank. I think the main difference is actually how long is the process going to take and how transparent and easy the process is when you compare us to banks. So we feel that for like the best rate, you know, best risk rate, we’re pretty competitive with banks and the reality is we can basically finish a loan from start to finish between five to seven days, while a bank may not be able to respond within that time frame.

So I feel pretty good that what we offer our customers is affordable, it’s transparent and is the right…it fits what they’re trying to do and the majority of the banks, at the end of day, we know they’re very focused on their existing customers and they don’t necessarily actually have the right processes for those customers so I think we [inaudible] in that regard.

Peter: Right, right. Okay, and so there are obviously others that are out there in the marketplace apart from banks. I mean, I’m just curious when you’re competing for customers. It’s interesting that now that LendingClub is not originating loans themselves, it feels like there’s not that many offering term loans, but you obviously have…you know, PayPal has got a large and growing business, Square is as well although they’re sort of for micro businesses.

Then you’ve got OnDeck and Kabbage, I’m sure there’s some overlap there but maybe you can tell us…you know, when you’re in the market I’m sure you’re talking to your customers and asking them who else they’re considering, I mean, who are the names that come up, are they some of the companies that I mentioned, do you still consider those direct competitors or not?

Bernardo: At the end of the day when I look at the marketplace, I thinks there’s three main competitors in our market. I mean, banks are certainly one, as you said, and in banks I actually think there are two components, sort of the big banks and the regionals and community banks. So those are sort of the ones that we compete with.

I would say community banks are the ones we see most of the time. When it comes to sort of the non-bank players, I think there are two categories and you kind of mentioned sort of a captive network which are really the PayPals’, the Squares’ of the world and I think what’s different about us and why we’re winning in certain cases for customers is they are really focused on the short term and they are really…in a way, they’re offering a very specific use case which is inventory financing for the most part.

In our case, as our loans have so much range from six months to 5 years, they can use it for multiple use cases, not only for inventory financing, but they can use it for debt consolidation or capital expansion. So we’re winning in the sense that our product has more flexibility and at the end of the day, that’s more important so that’s one way how we’re kind of winning against sort of the captive networks in that process.

When you look to the alternative lenders, you know, in general speaking terms, they also focus on short term and they tend to have a higher rate, interest rate, compared to ours. So we feel that we have a better product and therefore, we are able to sustain not only the multiple use cases that we offer, but also a better rate for them so that’s how we’re winning in those spaces as well.

So we feel pretty good with our positioning and we’re starting to make good traction. As you saw lately, we released our stats and we actually have done more than $2.2 billion in originations and we have served more than 13,000 customers since we started.

Peter: Right, which I know. I think you mentioned as well, it’s more than the vast majority of banks are doing so you certainly have reached some significant scale there.

I want to actually switch gears a little bit, I was fascinated to read your op-ed from earlier this year in American Banker, it’s been something that’s been really on my mind as well and just to summarize for those who don’t know, you had this op-ed…basically it was talking about the SBA, the Small Business Administration, and how…you know, they have this loan guarantee program that’s really important, that has really led to a significant number of banks actually offering small business loans. They have not expanded it with very few exceptions to the broader fintechs like yourself so I’m curious if you had any feedback from that, from the SBA, I mean, what are your conversations like there? Are we going to see an SBA-backed Funding Circle loan anytime soon?

Bernardo: We’re working with the regulators in that regard, we haven’t had specific feedback but there’s a lot going on?, so we feel pretty good about that. The really important part of this type of program is we have done this in other countries so we have programs like these in the UK, Germany and the European market, we feel pretty good that we can actually enable governments to impact directly small businesses when times are tough and I think our platform is unique in that regard that we can do that.

So we are trying to basically to partner with the SBA or any other government agency to help set up portals like the ones we have done in other countries because we feel that it’s an important part of our mission in our platform. So yeah, nothing to share at this point, but I think there is a lot of dialogue going on in terms of what we can do and how we can do it. I’m pretty hopeful that we can do something

Peter: Right, so on that, I know your operation really well and I know in the UK you’ve got the British Business Bank that actually invests directly in the loans and I think the European Investment Bank is doing it in Germany, I believe or it might be Germany and in the Netherlands, maybe you can correct me there, but these initiatives are actually government funds going directly into the loans themselves as an investor on the platform which is different obviously to what the SBA does. Are you saying that you’re also talking…I mean, I don’t know in the US any government investing directly in any platform, are you having those conversations as well?

Bernardo: No, I don’t think we’re not having those conversations yet, but I think what we’re trying to tell the regulators or trying to start having those dialogues is about how we can basically, either leverage the [inaudible] structure that they have in place and how we can work through it. We don’t have to mimic necessarily what we have done in the European markets, but definitely, we would like to have…being a partner of the government to help the small businesses in the market and I think that’s what we’re trying to work through it.

Peter: Right, right. Okay, so I want to talk about partnerships and let’s start off with the LendingClub one because that’s been in the news fairly recently and I wrote a piece about it. We had a conversation before that was announced and…you know, maybe tell us a little bit about the background of how that came together and just how you decided…obviously it’s a pretty…it’s a nice borrower stream for your guys, I imagine, but just tell us a little bit about how that process came together.

Bernardo: One of the things that I like about the LendingClub partnership is that if you go back into how the industry was kind of formed, you know, we have been working with LendingClub since the inception kind of advocating in the policy forums around transparency, responsible business lending and we have been working since the beginning of that, in those two topics, and I think when the opportunity came…it was pretty good to see how we can, both of us, including Opportunity Fund as well can partner together to really put our policy, sort of thought process into action with the partnerships.

So now you have the three of the major players that have been advocating for transparency and really pushing a lot of legislation around that…to be a responsible lender, to kind of offering a small business loan in what we truly believe is the most transparent, the most robust lending that we can offer to small business owners in America so it’s fascinating how we move from policy to actually action so I’m pretty excited about that and I think the partnership will be a great success for all of the parties involved.

Peter: So I know it has only been a couple of week, I mean, I believe I think you went live, we’re recording this in May 6th and I think it was just a couple of weeks ago that you went live, but are there any initial thoughts on the traction the partnership is getting?

Bernardo: I would say things are working well, I mean, we will not disclose any numbers, but I think in general the partnership is tracking expectations.

Peter: Right, right. Okay, so something that is curious to me and it’s actually not unique to the US, I mean, you guys have done extremely well in small business lending in multiple geographies now, obviously the two biggest are the UK and the US and it’s interesting to me that in the UK no other company has got significant scale when it comes to small business lending, online originators of small business loans and the same now, particularly with LendingClub sort of now moving to being a partner of yours rather than a competitor. No one in the US is really getting scale in the online space when it comes to small business lending, term loans I’m talking about obviously, why do you think that is?

Bernardo: At the end of the day, small business is a very different segment and I think that’s one of the reasons why banks have struggled in the past. At the end, the key of this segment  really requires a lot of focus so when platforms or companies decided to enter the segment as a secondary item with a more broader strategy, it’s hard to make it work and I think that’s what…you know, we have decided a while ago that we want to focus on this segment alone and that’s where we’re putting our effort and energy so I think that’s why we have been successful, is the focus that we have had and we will continue to have in the future. It’s going to be the key differentiator for us from the rest.

Peter: Right, right. Okay, I noticed another thing you announced recently was expansion to an additional country, going to Canada. Now I’m curious about this because obviously Canada, directly north of the border here, but has a banking system probably more similar to the UK than it does to the US. So how involved is the US operation going to be in building that business or is it really going to be run out of the UK?

Bernardo: Well I think at the end of the day, we actually have somebody dedicated to the Canada business based in Toronto so at this point we decided to enter earlier in the year and I think we’ll see operations up and running in the second part of the year. We have somebody dedicated, the person came from the UK, but at the end of the day, we’re really focused on trying to build the Canada business from there.

Peter: So what you’re saying is you’re really building it internally. It’s not like…there’s no US resources going into building that Canada business.

Bernardo: We always have subject matter in the US that are helping them, but at the end of the day, it’s a Canada led organization at this point.

Peter: Right, right. Okay, and speaking of geography, you guys expanded recently to the city where I live, Denver, Colorado, and you were kind enough to invite me to your opening party last year. You know, there’s been a lot of talk in San Francisco really just in the last few months, you’ve seen a lot of people talking about companies leaving.

In the fintech space, there’s a lot, I would even say most of the companies now that have scale have operations elsewhere beyond just the Bay Area and you decided on Denver. Maybe you can give us an update, I think the office…must be about a year since you opened that office now, tell us a little bit about, you know, who are you hiring in Denver, what’s going on in that office?

Bernardo: Denver actually opened in August 2018 last year, so we’re pretty excited about our Denver operations. I mean, we have had success hiring people and have a great team there so currently we’re around 60+ number of people, predominantly, basically in sales and operations roles that we are focusing on there and I think we’re feeling pretty good.

I think what is important for us is we’re really committed to San Francisco long term, we truly believe that we’re getting a lot of good talent as well here, different talents in different parts of the organization, but we feel that we’re going to need presence in both places to be successful in the United States. So, you know, we feel that the decision we made last year was the right one and we feel pretty committed to that strategy at this point.

Peter: So you’re going to be growing the San Francisco office as well as the Denver office, is that fair to say?

Bernardo: It’s fair to say, yes.

Peter: Okay, so I want to talk a little bit about government relations. We were both in DC a few weeks ago for the Marketplace Lending Association event and as you pointed out, you’ve worked closely… the founders of that organization were LendingClub, Prosper and Funding Circle, so I’m curious about what the level of engagement is with DC these days. Are you still talking directly with regulators, are you sort of leaving it to the MLA, I mean, what’s your approach in DC these days?

Bernardo: Well we always leverage our associations to have a conversation on the specifics at the industry level, and we also have direct conversation for topics that are outside of the sort of scope of the MLA. As you know, in the MLA there’s a lot of consumer sort of companies and not necessarily small business so we definitely have certain issues that are not necessarily relevant for the MLA.

We have two communication processes. One, through the MLA when it is necessary and some that are directed…that are trying to address our voices. One important part for us is that we also have a lot of dialogue at the state level. As you know, we’re a little bit different than other platforms that kind of use a bank charter. We actually have our state license model so have dialogue at the state level as well and that’s a lot of our focus these days is really having that dialogue at the state level.

Peter: Right, right. It’s interesting because you talk to politicians, there’s not many issues that are bipartisan, it seems like these days, but helping small business is one of them. Everyone at least wants to talk about doing the right thing for small business owners so are you finding that these conversations actually progress into…and you feel like your opinion is heard both at the state level and the federal level?

Bernardo: I think you are right. I think the reality is everyone wants to help small business owners succeed in the marketplace. I think we feel pretty good that every time we are trying to get our message across the different state or federal agents and regulators, we feel pretty good about it and how receptive they are of what we’re doing and what we’re trying to achieve. I think they are pretty open, as you said, they are very focused in trying to help their constituency so we feel we have the right message for them and we feel that we can make traction.

Peter: Right, and so you guys…there was a change in California, it was SB-1235, it came in around transparency because we have…there’s the Truth in Lending Act that mandates a certain format of the way when you’re taking out a consumer loan. There is no equivalent on the small business side, but SB-1235 is mandating that, will you support it? Were you part of the conversations when that was sort of getting passed?

Bernardo:  Yeah, we actually were one of the leaders behind that with LendingClub and Opportunity Fund as well. So this is a perfect example Peter, as I mentioned. This was something that we wanted to do because we felt it was right to have a framework that was about transparency and responsible lending and we kind of partnered with the regulators and they were waiting for us to come to the table and that’s how things got passed.

Peter: Well, it hasn’t been implemented yet, right, you’re not actually having to…there’s no sort of equivalent form that has been mandated yet, is that correct?

Bernardo: The legislation was passed and now it’s being finalized with certain specifics around it, but sort of the ground principles were set, but I think at the end of the day…that’s a good effort in how you can work with the regulators at the state level to kind of frame a good policy around transparency.

Peter: Right, right. So then that’s sort of one win, but what are some of the other areas…when you are talking with regulators today, what are some of the changes you’d like to see that would make a difference for Funding Circle?

Bernardo: Well I think that the more that we can go to a sort of a federal type of commercial Truth in Lending as we did in California, the better it will be for us because that would create a national framework that is similar across all the states and every time you have a national framework it enables you to have simpler operations and it’s easier to execute. It will also be more transparent, easier to communicate with customers so that’s one item that we’re kind of very focused on.

In addition to that, we’re kind of very vigilant on the CRA reform and we’re also kind of participating around the IRS modernization which we feel is very important as we continue to provide lending to our customers because the easier we can get access to their data, you know, the easier for us to provide them processes and customer experience that makes it easier for them to get their loan. So those are some of the topics that we have top of mind.

Peter: Yeah, the IRS issue, I think your predecessor, Sam Hodges, wrote an op-ed on that many, many years ago and I know that others have mentioned that having sort of API access to IRS data would be a big thing. There’s been movement on it in Washington, but nothing has actually happened yet, unfortunately.

Anyway, we’re almost out of time, but there’s a couple of more things I want to chat with you about. Firstly, so you look at your business today, you’re a two-sided marketplace, you’ve got your borrowers and your investors, are they perfectly in balance today, is one side constraining growth over the other or where are you at?

Bernardo: I think with any marketplace, they are always balancing, and even if you look at banks, it’s actually the same. I think at this point what we’re trying to really get to is really the right balance from a growth perspective and risk/reward from investors and I think right now, we’re at a good balance at this point of our journey. I mean, we’ll continue to, depending on the market, adjust those expectations, but we feel pretty good we have struck a good balance at this point.

Peter: Okay, just on that…I mean, the economy is still doing great, everyone keeps talking about the fact that there’s going to be a recession, at some point and there will be at some point. Although we could be like Australia where I think they’ve gone 28 years without a recession so it’s always possible that it is a long ways off, but are you adjusting anything for where we are in the economic cycle?

Bernardo: I think what we typically do, we have a robust risk process in terms of monitoring and stress testing our portfolios and I think we have shared with you and others how we have done that. When we see and observe something that goes outside our risk appetite, we tend to adjust, but generally speaking we haven’t done anything right now that is cyclical in nature. We have been adjusting things that are not performing as we expected, as you normally would do in any lending product, if you see a cohort that is not performing as expected, you calibrate as you see fit, but from a recession perspective, we are not at this point worried about it but we will continue to monitor our portfolios on an ongoing basis.

Peter: Okay, so last question then. So what are you working on today that’s most exciting for you?

Bernardo: I’ll come back to the topic about partnership. We’re really focused on our growth strategy on partnerships so I am spending a lot of my time thinking through what other types of partners do we want to work with and how we can accelerate those conversations in order to make those partners a reality. That’s one of the key things that I’m working on today and I feel that we’re making a lot of traction as we have seen in the last quarter and I hope we’ll see more news in the foreseeable future around this partnership strategy that we have embarked on since I came in.

Peter: Okay, well I look forward to hearing more news on that and on that note, we’ll have to leave it there. Thank you very much for coming on the show, Bernardo.

Bernardo: Thank you Peter for your time, I appreciate it.

Peter: Okay, see you.

Bernardo: Thanks.

Peter: You know one thing I appreciate about Funding Circle is that they really have maintained this laser-like focus on one product. They operate in multiple geographies, but they operate with this one product, term loans to small businesses, and there’s obviously a lot of adjacent products they could go into and they have chosen not to. I mean, they did have property loans in the UK for a little while, but they have since gotten out of that business and they’ve maintained this focus and they’ve reached significant scale now in multiple geographies and really, they are one of the very few fintech companies, particularly on the lending side, to do that.

I think my sense is this kind of lending is difficult, these are 3/4/5-year loans to small businesses that’s a very heterogenous group, there’s not a lot that these companies have in common and I think it’s difficult to underwrite these things. Obviously, banks have been doing it for decades, with the SBA’s help. I wonder how much they would lend if they didn’t have SBA guarantees in place. Funding Circle has done obviously without that and they continue to build their business in a significant way in multiple geographies.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation in financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.