Lend Academy's Lending and Fintech Podcast

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.

PODCAST TRANSCRIPTION SESSION NO. 198  –  CHARLIE DELINGPOLE

Welcome to the Lend Academy Podcast, Episode No. 198. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

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 Charlie Delingpole, he is the CEO and Founder of ComplyAdvantage. Now, ComplyAdvantage are a fascinating company, they are in the anti-money laundering space, or really the compliance space and they have developed new technology which allows them to connect with pretty much any financial institution and help them really manage their compliance risk when it comes to anti-money laundering.

So we talk about how they do that, how he was able to build new technology from scratch and how he’s able to manage really integrating with very archaic technology at banks, as well as with some of the newer fintech companies. We also talk about what’s wrong with compliance today and how we can really get to a point where we’re 10 times or even 50 times better at it than what we are today. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Charlie!

Charlie Delingpole: Great to be here, Peter.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself. You’ve had an interesting career, this is not your first foray in fintech so why don’t you give us a little bit of background about yourself.

Charlie: Yes, so I started my first company when I was 16, my second company was in the peer to peer lending space so I started MarketInvoice back in 2009. Back then, it wasn’t really fintech, it was just kind of invoice financing, but then very soon it was this maelstrom of sexiness which became fintech (Peter laughs). MarketInvoice was kind of a peer to peer invoice finance platform lending money to small companies, lent a few billion now, raised $35 million dollars from Santander and Barclays back in February. I started this company ComplyAdvantage about five years ago after MarketInvoice and we’re roughly 200 people and 450 clients and four offices around the world now.

Peter: Okay, so we had Anil on the show last year so I think the listeners are pretty well aware of what MarketInvoice is all about, I guess the question is why did you leave MarketInvoice which obviously has grown a lot since you left so what was the impetus to leave and deciding to start ComplyAdvantage?

Charlie: I think things were going very well at MarketInvoice, lots of opportunity elsewhere. Anil was doing a great job so I thought it best at that time to part ways and move on to something new and exciting.

Peter: Okay, so then what was the ‘a-ha’ moment or the idea that led to the founding of ComplyAdvantage, what was, you know, the germination of the company?

Charlie: So kind of the damascene moment, I think, was when I walked into a Somali remittance store in Mayfair in 2014. This company was based over at the Saudi Embassy, they had these big armed guards juxtaposed with these large trucks of cash moving money from from Somali and Afghan communities around London and just seeing the people there having to deal with processing huge amounts of payments which could be going to Al-Shabab, the Taliban, ISIS or could be going to your uncle and to see how terrible the software was and the data was and seeing how…for me, it was extremely obvious how terrible, also how consequential what they were doing was.

Therefore, at that point, I had no real choice other than…like I’m just going to have to go and build this business because I think given my experience in the past, given what I knew at MarketInvoice in regards to how difficult it was to onboard investors, how difficult it was to understand the risk of which companies to lend to, given what I knew about the market at JP Morgan, given I knew about the potential in terms of technology and data from my first company and from working on MarketInvoice, I saw an amazing opportunity to restructure and reinvent something which is obviously being done in a really archaic and terrible way.

Peter: So with that…it’s not only that, I mean one of the things about financial crime, I continue seeing this stat sort of bandied around, is that like we catch 1% or thereabouts of all of money laundering globally and we have these massive compliance organizations inside banks that don’t seem to do a very good job. So I guess maybe…before we get into ComplyAdvantage, why is it so hard, why is it so hard to catch money launderers?

Charlie: So to an extent, it’s an arms race and it transcends every geography, every industry, every client type and it’s the full spectrum of human behavior so it could be Trump who today cut down on Iranian sanctions with oil, the next day it could be human trafficking, it could be wildlife trafficking, it could be trying to defraud a peer to peer lending exchange, it could be money laundering.

And because money is so fungible and can be disguised and transmitted in so many different things and in different services, the nature of capital means it can morph and flow and therefore, it’s impossible to define and therefore it’s everywhere, as in you can disguise it in inflated invoices, you can do it with loans and, therefore, what you have is this impossible arms race between criminals, terrorists, money launderers and institutions who are the vectors and vehicles that they try to exploit.

Peter: Okay, so then maybe we can segue into ComplyAdvantage and maybe you can tell us exactly what your company does.

Charlie: So principally, what ComplyAdvantage does is help companies manage the risk around sanctions and money laundering. So on a very basic level it’s, am I allowed to lend money to this company? No, because they’re an Iranian general who’s funding the Iranian terrorist group, or no, because they’re the Venezuelan central government ambassador and therefore they’re prohibited from any kind of funds flowing to them. So, on the most basic level it’s, am I allowed to do business with this person?

Peter: So what you do then is you have…I imagine you just have a massive database, right, that’s constantly being updated, I imagine. I mean, so are you really just focused on the binary decision on is this person a good and reputable person so I guess that’s one part of the question. Two, is then…what is the secret sauce? I imagine a lot of people have databases of bad actors so what is your secret sauce?

Charlie: So the reason why everyone has failed in the past is because it’s a very, very challenging problem. So what you have now is hundreds of millions of dollars spent on manual labor and despite all of this expense, despite all this investment, despite all this technology being deployed, people still get fined billions of dollars. The terrorists and money launderers still win, right.

So for whatever reason in the past, no one has managed to solve this problem and so to me, it was trying to build a company that was capable of succeeding where everyone else has failed, right, and so that was principally looking at the industry, understanding who is doing what,  the way they were doing it, the different incentives to each party, the different structural legacy systems they’re stuck with and trying to invent a solution and that’s what we’ve built over the past five years.

So in summary, what we’ve done is what was seemingly impossible at the start which is build the entire system end-to-end which is the case management, the search algorithm, the API, the transaction monitoring, the payment analytics, the [inaudible] resolution and database. All of these things in a combined holistic system, we think, are now able to make a real dent in the challenge which has never been possible beforehand

Peter: So not only that, you’ve got to not just build it, you’ve got to interface with existing systems which, I imagine are all very different. I mean, obviously, you’ve got some of the core banking processes, there’ll be some similarities, but how are you able to interface with everyone from…you know, you’ve got a legacy bank running COBOL to a fintech company that’s five years old or less and running some of the latest Python technology, how do you manage both?

Charlie: So I think what people don’t often understand is that an API is the most important interface of all like while it’s very easy to build an astounding human interface in terms of the kind of web interface, in terms of catering to developers and the industrial process of managing millions of searches and the ability to get very high performance results from the API, being able to design that and have all the functionality around that, I think that’s a huge differentiator in terms of the way it’s constructed and the way it’s built, the way it’s maintained, the way it’s interfaced. And so we’ve invested huge amounts of resources into building what we think is the best API in the world and so all the clients we have integrate with the API.

Peter: So it doesn’t matter whether they’re running COBOL or whether they’re running Python, they will integrate…they will be able to get the same results from interfacing with you, regardless?

Charlie: Exactly, yes, exactly.

Peter: Okay, okay. So I’m curious then…you know, before you guys came along, what sort of compliance…I mean, banks…as you said they’ve invested billions of dollars into this, what have they been doing and why is it so inadequate?

Charlie: So a key dimension of what we’re doing is around all the data so what you have now is or in the time before we arrived was you had three or four main data providers and these data providers what they do is they really pride themselves on having 500 analysts and all these analysts kind of came from editorial backgrounds and they try and track…of the 7 billion people, they try and track and then maintain a database of say 5 million people they thought were high risk, right, so sanctions, political exposure, adverse media.

So what that means is if you have 500 analysts and they spend a few minutes every four years, they can spend therefore 10 minutes on each person every four years which means that the breadth and depth of the data is completely not very helpful.

Peter: (laughs) Right.

Charlie: Whereas for me, starting off from scratch, I felt the only way to solve that was to do it via an algorithm. Of course, when you start building these algorithms, at the start they aren’t particularly effective, you have to invest huge amounts of resources and time to get them up to the stage where they’re better and more effective than the human researchers.

If you can do that then that’s a huge inflection point and there are all sorts of other things you can do once that foundation infrastructure is built. So and then in terms of once you have that data then you can have the fusion between the data and the API and the search algorithm and the case management and so, architecturally, what you have is a step change in terms of what’s possible. So by rebuilding everything from scratch in-house in this kind of holistic system, we think we’re able to get much better results.

Peter: Okay, so I want to actually just…if you could just talk us through an example how it works in practice. So someone comes along to a bank, for example, they’ve got $100,000 that they want to deposit or they want to invest or whatever, the bank says, okay, we need to do our KYC and AML type test. So this person enters in a whole bunch of data, then they send it to you through the API, what is it that you do exactly and what do you send bank to them?

Charlie: So what we send back is profiles of people that we think match the entity that they’re trying to onboard and details of that person. So it could be Peter Renton, he’s involved in human trafficking, he launched an attack on Al Qaeda in (inaudible), all of these things about this person and they’ll say, okay, actually, different date of birth, different Peter Renton and therefore we’re going to remediate that profile as not being the correct match. The next match could be the correct Peter Renton in which case probably you don’t want to onboard him because he is a super high risk.

Peter: Right, okay. So is the output from your API really just a binary yes/no decision, or do you send back like a much more rich kind of dataset and then the people at the other side make the yes/no decision?

Charlie: What we send back is an entity profile so it could be a person or a company and they have to decide is that person or company the same as the one that they’re trying to onboard and they’re confronted with currently. So we don’t make the choices, it’s up to the lending company themselves to decide whether or not they want this person or company as a client.

Peter: Right, right, okay.

Charlie: The challenge becomes…if you’re on-boarding a million clients every year and if you already have a million clients that are already clients…because at any given point, a few of those could become terrorists, they could become money launderers, they could become subject to things like cuckoo smurfing, they could be taken over by criminal gangs, so you need to know when you’re maintaining your client base which of them become high risk…

Peter: Right.

Charlie: …because that could land you in jail and at the same time when you’re trying to grow the business and make money, you have this hidden risk which you’re not aware of. So it isn’t just the entity base risk profile, it’s also the kind of the transactional behavioral analysis.

So let’s say you have two different companies who are transacting with each other as counterparts via a system then you have to be able to understand that risk as well or if they start sending money to Iran, or they start transacting in Iraqi Dinars so there’s both the entity risk and then there’s the ongoing monitoring risk and then there’s the behavioral risk as well. So we’re trying to help companies understand all those different attack vectors.

Peter: Right. So I imagine you’ve got to be like Google in some ways, you’ve got to go out and just search the Internet for all these kinds of…I imagine you’ve got some pretty extensive different data sources. Someone may not be a money launderer today, they might be a completely law abiding citizen, they wouldn’t raise any red flags, and something happens and they get recruited by a terrorist organization or what have you and suddenly, they become one.

So how are you building…are you just going out…I imagine it’s all automated, but you’re just going out, your services are going out scouring the globe for new cases of people who’ve become bad actors?

Charlie: What you have absolutely is this trend whereby there’s this explosion of information and it could be in Swahili, it could be in Afghan, it could be in Russian and then you have…it could be Vladimir Putine in French, it could be Vladimir Putin in Cyrillic so you have all of these different people, all of these different sources, billions upon billions of new webpages, social media feeds, all of these different risks that suddenly appear and you have clients supplying to you from all over the world, from shell companies and so if you only have a team of say 50 people, how do you manage this enormous risk, right.

So what we’re trying to do is make this as efficient as possible. I think it’s going to be difficult to completely eliminate the risk, but the more data sources and the more ability to make simple what is inherently complex then the easier and lower risk it will be for different lending companies and the more likely it is that they can stay in business.

Peter: Sure, so I mean, there’s been a lot of talk this year…I’ve read many articles about like the trouble, I think it was in Estonia with the money laundering, I’m curious to get…what region, what parts of the world have the worst or have the most financial crime?

Charlie: So we have clients now in 45 countries and what’s fascinating to me like traveling around is how each different jurisdiction is completely different in terms of the risks exposed. So in our Singapore office, for instance, a big risk is the Chinese abscond, the Skynet risk, those people who have been tracked by the Chinese government and then go to Indonesia or Malaysia, so there’s a risk there.

In the Baltics we have a team focused on Latvia, Lithuania, Estonia and so the risk there is obviously all the Russian money coming in and then in South America it’s going to be different forms of drug gangs and so those aren’t necessarily siloed. So given the intensification of globalization, it could be the Mexican drug gang is working in league with a Russian money launderer who is then linked to a Chinese drug cartel…

Peter: Right.

Charlie: So I think as crime becomes more transnational and becomes more complex, the risks and consequences of criminal finances become all the more extreme. So it’s everywhere, it’s hyper local, but also global at the same time.

Peter: Right, right. So what geographies do you operate in? I know in talking to you today you’re in New York, but you’re obviously not American, I know you’re British, but what geographies do you actually operate in today?

Charlie: So we have three global hubs so New York, London and Singapore and the teams are kind of based out of there.

Peter: Okay, okay. You said you’ve got clients in 45 countries so I guess whatever country is closest that’s where…you’re managing everything out of those three offices.

Charlie: In terms of offering the best support and also in terms of understanding the local risks and also the local name matching requirements, the kind of languages, the data sources, each different regulation and regulator has different nuances which we have to understand and to operate in one country, you have to operate in the whole world because each local country will often need screening for global requirements. So it’s not good enough having local coverage, you have to be completely global from day one.

Peter: Wow! That’s a decent sized barrier to entry, I imagine, for a lot of people, a lot of companies.

Charlie: I think the barriers to entry in this business are I think huge and only getting larger in terms of reputation, in terms of adoption, in terms of data coverage, in terms of efficiency so I think clients are becoming more and more demanding as the risks and consequences become tougher and tougher.

That was partly why I raised this $30 million dollars from Index in December is because right now, we’re roughly 200 people, but I think we want to take our tech team and development team…like try and double that this year, if we can. This year there’s a range of things we need to do and a sheer number of breaches and data sources and efficiency and effectiveness to the algorithms that clients demand is just only going to increase as time goes on.

Peter: Right, right. We haven’t talked about it yet, but I imagine this is a big part of your technology and that is artificial intelligence, machine learning. You’re dealing with massive data sets so how are you using AI/ML in your business to help companies with all of this monitoring?

Charlie: So for me, the whole AI thing is kind of very overhyped, but I think if you really understand what it actually does in production and how you can actually use it, it is actually fairly simple. So I think in ten years, people won’t really talk about machine learning as a kind of amazing thing, it will just be something that everyone does in the same way that SQL was amazing 20 years ago, but now it’s something that feeds everything.

So I think in terms of how we actually use it. I guess there are different dimensions of machine learning in terms of supervised/unsupervised, natural language processing, entity resolution, anomaly detection like…all these things that are kind of tactical things which can help improve certain sub-sections of the platform, but to the extent…what we’ve basically built is this very broad system and you have to look at each different component of the system to understand in that specific juncture…can that be improved by a machine learning algorithm.  I think what we’ve done is use it in certain components, and I think probably had we not used that technology throughout our system, it probably wouldn’t work at all, right.

So I think the most basic one is a classifier so what we have is a database of like 5 million people and a key challenge is….is this person that we just isolated the same as an existing person, so you have to look through when you have a new name, is this person the same as another one of these 5 million entities, right, so that’s a binary classifier and the 22:19 more training we feed that, the more accurate that is, right.

So I can go through like entity resolution so if we have 5 million clients from a client then which of those existing clients is the same as the current ones. So all those things can be improved with technology and as Google, Facebook, Amazon release more and more algorithms, we think that our technology will only improve with time.

Peter: Right, right, okay. So who is your target customer? Is your target customer every financial institution on the planet, or is it large banks, I mean you’ve got…I imagine it’s a big problem for just about everybody, but who are you specifically targeting?

Charlie: So right now, we have like 400, 450 clients directly, but then part of them via reseller partners so lots of our clients will work through say like…for instance, Jumio announced they’re working with us so you can access our data via Jumio, right.

So yeah, I think we work with lots of lending companies, payment companies, banking companies, but then also high risk corporates too, right. I think, ultimately this will be relevant to all companies so one of our earliest clients was Fedex in Zimbabwe who had to understand if they were dealing with the Mugabe regime so I think companies all over the world are becoming more and more concerned with the integrity and fidelity of their counterparties and as the risks increase, we think all companies will care very deeply about this.

Peter: Right, so you are going beyond financial services. Obviously, you have Fedex, they’re not really a financial services firm, but that’s really interesting. That is a much bigger opportunity then.

Charlie: Exactly and I think, to an extent all of these categories like credit, fraud, identity. In a way those distinctions are relatively artificial in terms of fraud. Perhaps 20% of credit losses are because of fraud or perhaps lots of losses from fraud are because of identity issues. So I think, over time, all these markets will merge into one rather than being distinct categories.

Peter: Right, right, fair enough. So then can you give us the names of any of the clients you’re working with, I mean, are any of them publicly declaring that they’re partnering with you?

Charlie: I think on our website…I think we’ve got Santander and Visa/Earthport and Holvi, and I think we’ve got LendInvest on there so yeah, kind of a very broad range of banking, payments, fintech companies.

Peter: Right, right, okay. So then you’ve given us a sense of the number of clients. I’d be curious about…because some of these clients might have…you know, Santander obviously, millions and millions of clients, what is sort of the volume of inquiries that you get on a daily basis? Can you give us some sense of the scale that you’re dealing with right now?

Charlie:  I think it’s roughly 100 a second, in terms of like API load.

Peter: A hundred a second, okay, so what’s that…that’s 360,000 an hour then?

Charlie: Yeah, but I think also it’s the numbers again who are monitoring daily, right, so a lot of clients are very concerned about the ongoing risk and have daily alerts set up as well.

Peter: Right.

Charlie: So that’s kind a decent milli-number of search every night.

Peter: Right, okay. When I was doing some background on you guys and I see the name…is it Mimiro, is that how you say it, M-i-m-i-r-o?

Charlie: Yeah.

Peter: Is that a new brand or so what’s going on with ComplyAdvantage and Mimiro?

Charlie: We’re in the process of sorting out all of the trademarks so there was a slight hiccup with the trademark, with a small Norwegian farming company (Peter laughs), who might have registered the same trademark at the same time, a week before us, so yeah, we’re trying to sort that out.(cross talking)

Peter: The intention is to do a rebrand down the track then?

Charlie: Yeah, I think so, yeah.

Peter: Right, right. Okay, you mentioned Index Ventures and your Series B last year, I think it was just late last year, so I’m curious about the venture community, I mean, and obviously you’ve got some A-list backers. What do they see, tell us about that process and how you were able to land some of these top name VCs.

Charlie: So we raised very early on from Balderton, I think then we were kind of 15 people and we had Tim Bunting and Suranga came on board at a very early stage and they invested $7 million, I think it was like three years ago and that was really instrumental in terms of bringing on the right people who really understood both the technology and the market opportunity and they really encouraged us to invest extremely heavily in the platform and technology. We didn’t really kind of take the product to market for a long, long time until we felt it was of sufficient quality and caliber and I guess since then we’ve been doubling head count and tripling revenue since we launched into the market.

We were fortunate enough to bring Index and Jan Hammer on board in January. Jan, of course, has amazing pedigree having backed companies like Adyen and RobinHood, so the extent that everything that he has touched is going to turn to gold and he has an amazing understanding of teams and fintech. I think he really understands the potential for what the company can do and what we can build and I think, for me, it’s great to have that level of guidance and prescience around how to build a company, how to evolve the product, how to build a team and I think I’m fortunate to be able to work with that quality of investor and director.

Peter: Sure, so we’re almost out of time, just a couple of more questions. You said it’s an arms race between the bad guys and the people like yourself. Do you think, are we ever going to get to where we’re capturing 10%, 20%, God forbid 50% of all of these people, or do you think it’s such an arms race that it’s going to be hard to really get, you know, 50 times better than what we’re doing today?

Charlie: I think and I hope that what we’re building, I mean, what we’ve built today is a very small portion of what we want to build in the future and I think we can do…I think with the right technology, we can solve this problem. I think the way it’s done now is crazy, right, and I think, hopefully, with our roadmap and with our investment we should be able to make a huge dent and I think, hopefully, we should be able to stop a much greater proportion of it. I don’t think it can get much worse than it is today.

Peter: So you think that long, long term. As you were just talking, it reminded me of like spam with e-mail like 20 plus years ago where it was such a problem and now, spam has pretty much…I mean, there is still some that gets through, but it’s very much a solved problem. Do you really think that we’re going to have…that AML will be a solved problem in the next several decades?

Charlie: I think we should be able to eliminate it from quite a few different areas. Part of the reason fintech exists and why alternative lenders exist is because the big banks have done not a great job at their core business and a lot for their core systems just aren’t functional. So I think, hopefully, with the right investment, the right technology…I think versus…currently, it’s a drop in the ocean in terms of what’s actually stopped, I think we’ll be able to make huge strides going forward in completely eliminating money laundering and terrorist financing from huge swaths of the economy.

Peter: Okay, very interesting. Last question then, what’s next for ComplyAdvantage, what’s on your roadmap say for the next 12 to 18 months?

Charlie: So I think, it has been since day one just relentless, aggressive investment and improvement in the core systems. I think the incumbents haven’t managed to find a solution to the problem and they haven’t invested and they haven’t solved the problem.

Given what we’re doing and given the rate of improvement, we think every day we can make huge strides and the compounding effect of those will be huge. Hopefully, we can continue our current level investment and improvement and we think we’re going to make a huge dent in a massive problem and improve both society and the economy for everyone else.

Peter: Right. Well on that note, we’ll have to leave it there. I wish you the best of luck, it’s certainly a needed service.

Charlie: We definitely need it. (Peter laughs)

Peter: Great. Well, thanks, Charlie, I appreciate you coming on the show,

Charlie: Grateful, Peter.

Peter: See you.

Charlie: Bye.

Peter: Well that was fascinating, you know, you can hear it in Charlie’s voice how enthusiastic he is about solving this problem. As he just pointed out there towards the end, I mean, the reality is the existing financial institutions have done a poor job, they’ve done a very poor job at really mitigating money laundering despite all of the billions of dollars and tens of thousands of people that are involved in this, the results just aren’t that great. I think we need a new approach, something like what Charlie’s company is doing is so desperately needed so that we can, hopefully, down the road, maybe several decades down the road where money laundering becomes a much smaller business than it is today.

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. 197/EMMALYN SHAW

Welcome to the Lend Academy Podcast, Episode No. 197. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

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 Emmalyn Shaw, she is the Managing Partner at Flourish. Now Flourish is a new brand, but it is an existing organization that has quite some history. It is being spun out of the Omidyar Network and it already has, even though it’s a new brand, it has already 40 portfolio companies, all of which received investments from the Omidyar Network.

Anyway, I wanted to get Emmalyn on the show to talk about Flourish and why they decided to make this move at this time and start a new brand and what are some of the things that they’re looking for and adding to their portfolio, how Emmalyn views the state of fintech today and where are the valuations frothy and where is there still value and what does it take to get on her radar. 

We also talk about sort of the research that they continue to fund and I also ask her about working with Pierre Omidyar. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Emmalyn!

Emmalyn Shaw: Thank you so much for having me.

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

Emmalyn: Wonderful, well thank you so much. My name is Emmalyn Shaw, I co-manage Flourish and I lead the US investments, specifically focused on promoting financial health and economic opportunity. I have about 20 years of investing experience in technology, both early stage and growth, across a number of different sectors and really pride myself in working very closely with entrepreneurs and helping them scale businesses.

Prior to that, I was in investment banking and also worked at a fintech so had quite a long arc of exposure around technology and really had a passion for wanting to marry real financial business models with impact.

I attended Wharton Business School, MBA from Berkeley, summa cum laude, Phi Beta Kappa, my academic experience, but really wanted to take both the academic training, but more importantly, the investment and technology exposure to apply towards what we really think about as, you know, an innovative way of investing in fintech companies.

Peter: Sure, so I want to talk about the thinking behind sort of this rebrand or spin-off. You know, most of the listeners will have heard of the Omidyar Network, particularly those in the impact investing space, but what was the decision…why decide to spin-off into a new entity with a new name? What was the thinking behind that?

Emmalyn: As you’re familiar with, you know, Omidyar has been around in impact investing broadly and over the past ten years had spent quite a bit of time focused specifically on at that time what was called financial inclusion and the effort there and we built an incredible portfolio.

It was really an opportunity to then operate in this more entrepreneurial setting, in a skunkworks setting, to focus and double down on not just financial inclusion, but financial health broadly and providing a separate name and a fund gave us that opportunity to be very clear in our narrative, to be able to be very responsive and skunkworks-like in a dedicated $500 million fund, $200 million of which comes from our existing portfolio of 40 portfolio companies and ten ecosystem investments and $300 million which was new capital to be deployed against this mission of achieving financial health on a global basis.

Peter: Okay, so then how is that different to the mission…Omidyar Network’s overall mission, I mean, just maybe tease that out a little bit for us.

Emmalyn: Yes, I think historically, Omidyar is known and they proved this model of impact investing and was really focused on a dual checkbook of providing for-profit businesses with equity dollars as well as nonprofit through grants. I think the distinction that we were trying to provide for Flourish is to still use a portion of both equity as well as grants towards this mission, but much more specific to financial services.

So in this case, where 85% of our equity dollars go towards for-profit companies and 15% go towards really ecosystem investing around supporting everything from entities like CFSI who provide real rich research against the health of the financial consumer today as well as partnering with folks in creating regulatory sandbox technology in order for us to really understand how technology can change and actually improve regulatory decisions. So I think this breakdown of 85/15 is different than I would characterize the traditional Omidyar Network use of for-profit/non-profit capital.

Peter: Okay, okay, that makes sense. So let’s then talk about the portfolio. I’m on your website right now and you’ve got, which I will obviously link to in the show notes, but you have an interesting mix. There’s certainly a lot of pretty big names in here now, well known names, anyway, I should say, so maybe you could just…I don’t want you to run through every single one, but just maybe takes us through some of the highlights of the portfolio companies you have right now.

Emmalyn: Yes, thank you, I appreciate you recognizing our portfolio. We’re very excited about the importance of the impact that they’ve made broadly on the sector. You know, given my focus specifically on the US and given your focus as well in terms of kind of the areas that you specialize in, I would say if you look specifically at that market, we focus again on the 70% of US Americans who live paycheck to paycheck, majority of whom where a $500 emergency would put them in a very dangerous position as it relates to their own financial position and economic health.

As a result, we’ve really thought about how do we invest in technology that either allows folks to earn more income in order to change that dynamic to either spend differently, manage expenses, access credit differently and improve savings and I think along those lines there have been a number of companies that embody that mission.

The first of which would be Chime, you know, as a challenger bank, one of the most successful to date and certainly the largest in the US. They’ve really provided what we characterize as a win-win for consumers in that they are leveraging the rails, they are a digital only bank, there are no fees for the consumer, they’re aligned in terms of as a consumer spends and engages with their direct deposit account Chime also is able to generate revenue so they’re very aligned in terms of the fees and how they make money and I believe that that has been instrumental in terms of the trust that they have engendered and the growth rate that they have experienced. They’ve also as a result of their offering, been able to realize and motivate some actual savings and be able to measure that savings and to us that’s a real embodiment of a very commercial business from a financial services perspective that also creates massive impact and is able to address a market that honestly typically does not have very rich financial services, right the [inaudible] market.

Many of whom don’t have a high enough income stream to justify being part of a large bank and if they did, they’re often…the fees are so difficult for them, principally around overdraft fees and the like. They’re not able to really take advantage of a full financial banking solution so this has really been transformative on a number of fronts.

Peter: Right.

Emmalyn: Steady is another one that we’re very excited about. They really are providing what we characterize as the income generation side of the house. They are providing a marketplace for the hourly worker, whether it be gig or otherwise, and to provide a portfolio of work. I think in a world of 1099 where that market is only growing substantially, it’s a real opportunity for folks to choose among the best type of job opportunity for this consumer, and ultimately over time provides necessary upscaling to allow them to actually generate more hourly work at a higher pay than they would otherwise have. So there’s been a real obvious ROI in a short period of time that they’ve been able to identify some true savings.

Again, we’re very in the early stages of managing the closed loop of incremental earnings, but in this very early stage have already been able to see folks earn upwards of a $167 and then some within a month of joining Steady and getting on that platform and we’re still in the very early stages of really increasing that revenue opportunity over time so very excited about what we’re seeing there.

Peter: Right.

Emmalyn: And then I would say the last which is also an interesting example of a very commercial opportunity, but really impactful is really around on the technology innovation with a company called Propel that’s actually providing technology services and ultimately, financial services for the food stamp recipient.

In that case, again, really meeting a consumer where their greatest need is, it’s providing a very easy way for them to check their food stamp levels and then ultimately to be able to find ways to save, manage how they’re using that food stamp distribution and then ultimately provide very rich financial services on the backend, very similar to kind of Green Dot-esque that we’re familiar with in other markets.

I think what we’re seeing there is, again, across all three of these companies, because the need is so important, the customer acquisition costs are actually quite impressive and really afford for powerful unit economics and ultimately scale for the business.

Peter: Right.

Emmalyn: So those are just three that I’d highlight that I’m particularly excited about, of which there are many.

Peter: Sure, sure, there are many others that I know are also fantastic companies in your portfolio. So what about for new opportunities? I’m sure you’re getting a lot that come across your desk, but how does someone, they’re listening to this and they think, well, I fit in the wheelhouse for Flourish, what’s the best way for them to get on your radar?

Emmalyn: As you know, we look for transformative ideas and we look for ideas that are principally focused on improving financial health. We try to be everywhere that consumers, specifically if there’s any conferences that are around financial heath, we try to be front and center to make sure folks are aware of our mandate and what we care about.

We’ve also leveraged our rich, very rich and deep source of leads through our own investments and CEOs and management teams and that has been a really powerful way to both find new mission-based entrepreneurs that share our objectives.

We also believe that at the end of the day, we may not actually always be the right fit as an investor for some of these entrepreneurs, but we want to serve and leverage our broad ecosystem, both within our own fund, but in Omidyar at large to make sure we help continue to foster the advancement.

I think what we’re finding is more broadly across financial services, people are coming to us, 80% of which are very much in our sweet spot, 20% that may not be…but we’re really going out of our way to continue to support in order to continue to prime the pump and make sure that they are aware of how we can provide value over time. Those tenets have been particularly effective, but we will continue to be very vocal in terms of this mandate and I think that has drawn a number of interesting companies our way.

Peter: Right, so your focus really is on early stage rounds or what sort of stage do you invest in?

Emmalyn: Yes, our principal focus is seed and Series A and we will entertain opportunistic B’s, but again, I think the most important…we are fortunate that we have a single LP in Pierre and Pam Omidyar, they are very patient capital. We don’t, unlike other funds, having been part of other funds in my career, we don’t have ownership restrictions and so it’s really, our focus is making sure we’re going to back the right types of investments that satisfy both our impact mission and our financial return expectations and because of that, we’re able to play across a continuum.

Peter: Got it, got it. So I know that…you said your particular geographic focus is the US, but obviously, you look at your portfolio of companies and they’re from many different geographies. At Flourish, what are the geographies you’re operating in?

Emmalyn: Yes, thank you for asking, so our fund, I would say, our emerging markets are India, Africa, Latin America and other parts of Southeast Asia and then the other half of our fund is really focused on the US.

Peter: Okay, got it. So one thing that I’d like to ask you about is it seems to me like…for example, we just came off LendIt a couple of weeks ago and I know you spoke there, I look at the interest in financial inclusion…we’ve had a financial inclusion track now for three years at LendIt and every year it gets more crowded and it’s more popular and it feels like when you’re just reading the press there’s much more talk now about financial health and financial inclusion, in general. I’d be curious to get your take on it. Why do you think it’s becoming a more important part of the conversation in fintech these days?

Emmalyn: You know, I would say that…as I mentioned earlier, our focus originally was on financial inclusion and it was really….with a focus in emerging markets, in particular, and I would say that while it still remains a focus, there has been some success in terms of including on a emerging market basis, more. I think that progress has been applauded by many.

Is it over? By no means, is there still very much a need and effort to continue to include the  financial consumer, absolutely, but I think what we’re finding, and this is a global phenomenon, is they may be included, they need to be provided rich services, but within that construct they’re actually failing, meaning, they’re barely able to sustain.

In the US, in particular again as I mentioned before, there’s still…70% of US Americans are living paycheck to paycheck so this is very much a middle class problem as well. And so then the question becomes, is it really an inclusion issue or is it a health issue and what do we need to do differently from the financial services perspective to make sure people are thriving, right, that folks aren’t over extended and that they can actually take advantage of these financial services in a meaningful way?

So I think that’s what’s driving so much innovation from maybe what we’d characterize as commercial entrepreneurs because I think they recognize that, you know, in the absence, innovating in financial services at the expense of and not ultimately driving financial health doesn’t end up being a win-win for anyone, let alone being able to scale a viable commercial business.

Peter: Right.

Emmalyn: And so we’re finding there a huge shift towards understanding that base and really providing them the means to become more financially healthy while being able to engage in rich financial services and transactions and I think that’s what’s driving a lot of that, the focus more broadly and not just in the US, but globally.

Peter: Right, I completely agree and I feel like we’re at this…it’s an interesting time right now, there’s becoming more awareness, I think, in the general population about…there’s a call for more transparency, the popularity of companies like Chime and Stash and many others that are getting really serious, serious traction…people don’t want to pay fees, they want something that’s simple, that is a win for them and not just a win for the financial institution, it’s a really interesting inflection point. I think the younger generation are driving this and I think there’s so much entrepreneurial activity happening that it’s quite an exciting time.

But I want to move on and actually ask a related question to this. You know, we’ve been tracking all the major funding rounds in fintech globally, since the beginning of the year, we’ve been tracking it very closely and obviously, one of your portfolio companies, Chime, had a huge round. There are many others that have had massive rounds at unicorn status, as far as the valuations go, how do you feel about that as far as…do you think the valuations in fintech are getting a little bit ahead of themselves or do you feel like there’s still good value if you know where to look?

Emmalyn: Yeah, I think we’re still having, again, I’ve been in venture for 20 years now, I think we’re in the very front end of parts of segments being somewhat more frothy than others. I think, broadly across fintech there’s still a lot of opportunities, particularly around financial health where they’re very much in line and you’re seeing kind of more traditional metrics being applied.

There are frothy areas, for sure, you’re seeing that in the bitcoin, the crypto currency world is certainly seeing that to some extent, one would argue the challenger banks. I think what we’re noticing and what is symptomatic at least of the challenger banks in my mind is a couple of things.

You mentioned earlier about where we’re seeing millennials go and this need for kind of alignment. There’s a massive distrust among traditional financial institutions, in particular among incumbents, especially among the millennial generation, but I think more broadly and this is a result of some of the hidden fees, some of the uncertainty around a lack of transparency, shall we say, for current financial services.

I think as a result it’s such massive market and the idea of really disrupting a market like that, I think, is incredibly compelling and part of what you’re seeing is a frothiness built into what could that really look like if there’s true disruption in that market. Now you could say, well, yeah, but you look at the numbers and the penetration is pretty low so does that really warrant these unicorn levels?

I think there’s some validity there. I will say though, like anything, once you’re getting scale and once you have real data, especially with the digital whales, the upside is quite high and the ability to then to kind of scale and provide really meaningful rich services and de minimis churn, I think, ends up becoming a very compelling value proposition, the valuations of which become highly justified.

So I think we’re kind of in that precipice where it’s certainly frothy, but I’m not losing sleep at this point. I feel like in an industry that needs to be disrupted there’s some celebration among the very few who have been able to show some real penetration thus far.

Peter: Right, right, for sure. So, you know, one of the things that…I had Jennifer Tescher on a few months ago and I asked her this same question and I’d be curious to get your take. There’s a lot of companies that are out there doing great things and I think there’s…I mean, a lot are still sub-scale, but some are getting some serious scale, but it feels like all of these advances in fintech have not really impacted the overall financial well-being of the population in this country.

It feels like we’re still about where we were five or ten years ago. How are we going to change that? I mean, are you optimistic about the potential impact that some of these companies can really have where suddenly, it’s not 70% of the population that can’t handle a medical emergency, it’s 30% of the population. Are we ever going to get there, or how do you think we are going to actually really see the impact of all these advances?

Emmalyn: I think you’re asking such an important question. I mean, I think the whole reason we’ve constructed this fund and our focus is exactly on that in really helping to see and expecting that these investments we’re making as well as our partnerships that we’re doing globally will really help bring down that number.

You know, one thing that’s worthy of pointing out is in the financial industry where it’s regulated, innovation is one key tenet to improving that number, but as importantly and I’m glad you brought up Jen Tescher, particularly with CFSI, the ecosystem is just as important, right. The ecosystem like CFSI who’s managing, who’s capturing financial diaries, who’s really monitoring what the financial health pulse is and folks like Melissa Koide and others who are driving the FinRegLab and this idea of how do we create innovation with a sandbox so that regulators can determine, should we be using alternative data as a means of issuing credit and what kind of signals do we learn when we start using some of these alternative data sources.

I think in the absence of if you’re only doing technology and innovation and investing in that, that will move the needle only so far. We need to have both efforts, we need to be able to shift policy and influence regulation in order to really make sufficient change and I think only then those two working in tandem will really afore for the type of change that I think we all want to see and I am hopeful. For sure, we do this every day with the hope that our investments and our strategy and the impact that we’re seeing on an individual consumer level will ultimately influence that number overall.

We’re in the beginnings of really trying to define and measure the type of impact to savings rates, in particular, as an example, and the financial snapshot of the consumer and using technology like AI and others to provide much richer, decisions among the LMI [lower middle income] base to make the right financial decision and to help them think about the trade-offs that they make across their expenditures, across how they save, across how they generate new income streams.

To me, with that innovation will yield, it’s in our hope, a very different snapshot 10/15 years from now and that is certainly our long term goal and that’s why we invest the way we do, both for profit as well as non-profits.

Peter: I hope you’re right, I hope you’re right. Speaking of which, I want to touch on…I mean you guys funded this research for the US Financial Diaries, you mentioned it just a couple of minutes ago, is that the sort of thing with your 15% of your money going sort of more to grant type things, is that the kind of work you’re going to continue to be supporting?

Emmalyn: Absolutely, as I mentioned before, I think it’s so instrumental to creating the type of change we need to see. We will not be in a position…so much of this needs to be…the consumer has to acknowledge and see the value in living a more financially healthy life and so there needs to be ways to measure what that looks like, there needs to be ways to influence the outcome of how they view their own financial situation and as I said before, we need to have policy shifts in order to maybe change some of the systems that are in place that prohibit them from being financially stable.

All of those really come in the form of our 15% of grant dollars that we’re very specifically focused on, again, not just in the US, but globally and that will continue to be very much an important part of our mandate going forward.

Peter: Right, right, okay. So then I’ve got an unusual question, it’s something that I’ve always been curious about. I mean we’ve had connections with the Omidyar Network for many years, we’ve had several people speak at our events over the years and obviously, I never see Pierre Omidyar out in public speaking at events, he keeps a very low profile, but I’m just wondering, how involved is he in the business, in your business and what is he like to work with?

Emmalyn: I feel so fortunate to work with such a visionary, he has such a true passion for creating impact and such a maniacal technology sense about him. He is quite shy, actually, so he’s not going to be the kind of person to be out there in front of folks and actively beating his chest and I find that actually quite refreshing.

As an individual, he serves on our board, he’s got such a great sense of technology and innovation and always one to push and ask and question kind of the strategy, but in a way that really is collaborative. I find him to be one…we joke that when we’re talking about some of the technology innovation that we’ve seen thus far, in particular around blockchain and others and he said, well, you know, I’ve built a cryptocurrency and I broke it a couple of times and I decided…and I found that to be…I could see the holes and I was a bit concerned by the technology and the potential risk there, by virtue of my own, having built and hacked into a system.

It occurred to me that he’s not sitting idle, he’s still very much coding, (Peter laughs) he’s still very much playing with technology in a pretty meaningful way and it’s a testament to the kind of a man he is, he’s just so curious. He’s also very involved on the technical side, but I would say overall, just a wonderful executive with such a true passion for impact, but he’s also so present in the business discussions and trade-offs and I can’t imagine a more astute and thoughtful board member, to be honest.

Peter: Okay, that’s interesting. So we’re almost out of time. I want to finish with…you’ve just established Flourish, Flourish Ventures is a brand new brand, what is your vision, what are your plans? Just take us maybe through the next 12 months. We all saw the news about the $300 million you’ve got over the next five years to invest, but let’s just, you know, how do you intend to kind of grow and evolve over the next 12 months?

Emmalyn: You know, I see this as an opportunity for us truly, as mentioned earlier, to really double down. You know, in our mind we have 18 global team members and as I mentioned before, over 40 portfolio companies and ten ecosystem investments, those we will continue to see grow, impact, create some real change.

I think in addition, we’re planning on actively leveraging again our focus, 50% of which will be in the US, but the other 50% will be in the emerging markets that I listed before all around active financial health investments.

One thing that we didn’t touch upon, but I’d love to maybe expand a bit further is kind of in addition to our investment folks within our team of 18, 6 of whom are really focused on really providing a rich portfolio support so marketing, HR, finance, impact and legal. We’ve been really fortunate to be able to bring that level of support, some of which internally, but most of it is to our portfolio companies in a really meaningful way.

So what I’d love to see is be able to watch some of our existing portfolio really be able prove out and be able to report out some of these more meaningful metrics that we were talking about earlier, not just in terms of financial success which we’re seeing quite a bit of, but also the impact success that really couples why we believe that these are the right types of vehicles to be investing in long term.

I’d like to see more of that come through our new portfolio companies as well as our existing and be able to really propagate that more broadly to the marketplace and that’s another way of impacting influence that we were discussing earlier, but those are some of the objectives that I’d like to see us achieve over the next year.

Peter: Okay, well on that note, we’ll have to leave it there. I really appreciate you coming on the show today, Emmalyn.

Emmalyn: Thank you so much for having me, it’s really been a pleasure.

Peter: Okay, see you.

Emmalyn: Take care.

Peter: I really appreciate that Flourish is focused more broadly on financial health. It really is, I think, an urgent need in this country and around the world. For all of the money in developed countries like the US, we still are not very financially healthy, we should be, and it is through the efforts of companies like Flourish that fund an ecosystem of companies that really can make a difference and some of her portfolio companies are already reaching significant scale. It’s when some of these companies get to massive scale, get to the scales of tens of millions of customers, that’s when we’re going to see, I think, a real impact, a real change in everyday people’s lives.

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. 196/TIM CHEN

Welcome to the Lend Academy Podcast, Episode No. 196. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Peter Renton: Today on the show, I’m delighted to welcome Tim Chen, he is the CEO and Founder of NerdWallet. Now NerdWallet has become a bit of a juggernaut in recent years where they have massive amounts of information on anything to do with consumer finance and they really are becoming one of the most trusted brands in consumer finance.

I wanted to get Tim on the show to talk about the background of NerdWallet, what it does, how it works with many of the fintech players today, the impact of fintechs have on consumers and what else is needed to really help consumers make good financial choices. We also go into some depth about their model and about how they have the wall between editorial and any revenue kind of opportunities, we talk about that in some depth as well, and he talks about his vision for the future of consumer finance. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Tim!

Tim Chen: Thanks for having me.

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 just share some of the things you did actually before you started NerdWallet.

Tim: Sure, my career is one of Wall Street and Main Street really. So I started off life as an equity analyst on the sell side and then on the buy side at a hedge fund investing in public companies. I think this is a pretty unique background in the sense that it really gave me a view into the competing interest of say like business profits versus consumer welfare. So in a way learned at the time was there was a lot of industries where consumers reigned supreme and businesses compete purely based on price, but then there’s also other industries where businesses have moats that allow them to really avoid competition and make big and sustainable profits over time.

So I spent most of my time actually trying to like dissect and understand those situations and we would tend to investment in businesses that were misunderstood, in one direction or another, and were therefore mispriced. I see certain industries…you know, at the time I really noted certain industries that were really great businesses at the expense of consumer welfare so things like education, health care and financial services and, you know, in the back of my mind the entrepreneur in me always had the ambition to make a difference in one of those areas and that was kind of where the seed was planted.

So I was fired in 2008 from my job when the recession hit which was a complete shock at the time, but it was also incredibly liberating having a year/two years to really focus on pursuing my dream at that point and that’s really where I got started. You know, during that time, one door closed and another one opened. My sister randomly called me one day and asked me for help finding a credit card and I said, sure, let me Google that for you.

I thought I’d get back to her with a response in 30 seconds, but I really found a bunch of marketing materials rather than analysis that I thought was helpful so I created a spreadsheet and that spreadsheet turned into NerdWallet. It got forwarded around to a few friends, quickly realized that, you know, this problem with shopping for credit cards really applied to all financial products in the sense that there is not a great source where you can equally compare all your different options so that’s really where NerdWallet started.

Peter: Okay, okay. So then so you started off was it purely just a….when you launched, was it just a credit card comparison site? Was that how it launched or what, tell us a little bit about those early days.

Tim: Sure, you know, that’s exactly right. It really was a spreadsheet that I transcribed into a web app where you could, you know, kind of talk about two or three important pertinent questions about yourself and then we’d give you the short list of things that match your needs. You know, in our consumer research we started to find consumers didn’t want all the information, they wanted to be understood and they wanted the few options that mattered.

So in the example with credit cards, people are typically either trying to establish credit, lower their interest payments or earn more rewards so it’s kind of important to know where they’re starting from and then we might ask a follow up question and maybe another one after that.

Peter: Right, you go on to the site today and you…it’s quite impressive actually the breadth of information that you guys provide…so when did you start to move just beyond the credit cards? When did you decide that you were going to cover everything pretty much?

Tim: Right, we really had to focus on credit cards for the first three years to find our footing, and then we really started expanding after that, but knew from the start that this was a big problem in all verticals. Today we cover, you know, 10 plus verticals, basically any popular consumer finance product we try to give great analysis and help you shop it easily.

Peter: Right, right. So when you’re describing your company today, I mean, how do you describe it, because you sort of…you are doing a lot of different things here so tell us what you say.

Tim: Yeah, we help consumers make smart money moves and there’s two big problems that consumers face today. The first is it’s really hard to shop. Consumers leave about $55 billion a year on the table by not having the best financial products and there’s a lot of reasons for that, but we try to remove as much friction as possible from that process.

The other big challenge consumers face is that money is just so complicated that they don’t even know when they should be making smart money moves.

So for example, you know, if you sign up for a great financial adviser or just have a friend who’s really into this stuff, they might let you know, hey, tax time is coming, put money on an IRA or gosh, you’re probably overpaying for that mortgage or that auto insurance policy so these things aren’t things that you actually think to do, but when you start building a relationship with us, when you tell us more about yourself, we’ll start proactively letting you know that it’s time to think about these things in a just in time fashion.

Peter: Right, right, okay. So then obviously there are other companies offering services like this, Credit Karma comes to mind, we had Ken Lin on the show last year and there’s also…Bankrate for simple comparison shopping so how do you differentiate yourself from the others in this space?

Tim: Yeah, so we like to think that we have, you know, next level consumer trust. We believe we’re the most trusted brand out there when it comes to financial shopping and education. You know, over 100 million people a year come and get help from us every year and I think the reason that we’ve achieved these things is because our entire ethos is centered around that first  spreadsheet I was just mentioning, we don’t market to our consumers, we give them useful information and I think they can really feel that.

So we’ve maintained an editorial independence over the years and it’s very apparent. So, for example, I was in a meeting yesterday with a potential partner and we let them know that our editorial team needs to vet them before we can consider adding their product to our site. We’ve turned down partnerships before when we don’t feel like they, you know, aren’t consumer friendly or are one of the better products in the category and so that’s a big part of what we do and also the thing about segments.

You know, there’s different needs for different types of people and one way I think about the American consumer is that about half of them are paycheck to paycheck and the other half have financial choice, right, and these are two very different mindsets. I mean, we spend so much time doing consumer research and sitting in people’s living rooms and trying to understand their needs.

The paycheck to paycheck half really cares about will I qualify, what’s my credit limit, how can I get to that next paycheck. The people with choice have a completely different set of concerns, they have too many choices, they have, you know, ten different financial apps, they’re trying to figure out how to plan with this extra money, how much do I put away, how do I create a plan that will get me to retirement.

And so if you think about the behavior between these two different groups, they gravitate towards different financial solutions and I would say that NerdWallet does cover/span both groups, but a lot of the most complex decisions actually come when you have choice. That’s really when you say, well gosh, I know I can qualify for a lot of great mortgages, where do I go, how do I actually find the best options out there. That’s why you would proactively go to a site like NerdWallet at that point.

Tim: You see a lot of fintech innovation also on the paycheck to paycheck side. You see things like, you know, the solutions I find exciting are things like, get my paycheck early, micro investing, save the change, free credit score. Things like this are really helpful to try to make things a little bit better, but they answer different consumer needs.

Peter: Right, that’s interesting. You’ve had this company now, you know, for about ten years and when you started the word fintech didn’t exist and now it’s pretty commonplace. You’ve seen sort of the evolution of the products that you’re recommending.

I’m curious to see, you know, where is the innovation happening that is most impactful. I mean, you mentioned a couple of them there, but when you’re looking at sort of the different segments that you cover and I see them on your website right here, the top of your home page there, where do you think in the broad categories that’s most exciting as far as fintech innovation?

Tim: Yeah, so I think that segment framework is an important way to think about this. If you look at the $55 billion that Americans are wasting every year by not shopping for financial products, I think that really is more weighted towards consumers with choice and the reason is because they are the ones that have substantial deposits earning 0% interest at a money center bank, right. They’re the consumers that have, you know, the largest loans and things like that, that they should probably think about optimizing their insurance policies, etc. and so innovation there is really giving consumers easier comparison, better choice, better rates.

And then if you look at the paycheck to paycheck side, I also think the innovation there is very important as well. It’s not as big from a dollar impact perspective, but it maybe means a lot more to those consumers. And so I think things like early paycheck are great, you know, you can get a couple of hundred extra bucks. Instead of going to the payday lender, you can go through one of these great services that gives you your paycheck early.

I do think that fintech is more  of a Band-aid in those situations than an ultimate solution in the sense that fundamentally, the consumer has a revenue issue and they have an expense issue and this may give them an extra couple of hundred dollars of float, but it’s not going to solve their core problems, but it’s a good attempt nonetheless.

Peter: Okay, so I want to sort of dig in a little bit here into your website. You have a massive amount of content. When I started sort of tooling around this over the last couple of days, it was really staggering to me how much you’ve written about all the different financial products and the different categories. So I guess, I mean, the first question is around, you know, I’d be curious ….credit cards is on the left, on the top left of your site, is that where you still get the most traffic and the most interest in the credit card category?

Tim: Yeah, so we’re actually quite diverse right now. Our biggest category, in terms of traffic I believe is still credit cards, but it’s less than 20% of our overall traffic.

Peter: Interesting.

Tim: You know, people have pretty diverse financial needs and the source of that complexity comes from our tax code, from the fact that there’s over 10,000 banks and credit unions out there with different products. These things are really complicated so actually the more financial choice you have, the more complex your money management problem becomes. That’s a big part of why there’s so much content, we don’t write it just to write content, we’re trying to cover all the areas that someone may care about.

Peter: Right, right. And you also have…I noticed many of your products or I would even say, most it seems like, have a NerdWallet rating and you mentioned you have to get your people in there before you can take on a partner, but what goes into that NerdWallet rating?

Tim: Sure, so these ratings are different by vertical and they’re driven by our editorial team which is completely independent from our business. If you take the example of personal loans, some of the things that they care about include things like origination and late payment fees, impact on credit scores, transparency of loan terms, repayment options, customer support and, you know, if the lender has faced government scrutiny from regulators in the past five years, we might factor that in as well.

So there’s kind of like a broad swath of factors that matter and you’d see a completely different set of factors on credit cards, for example, so we try to really tailor it to what consumers need. The consumer insight here is really that, you know, consumers are overwhelmed with choice, they need that proxy for trust that can help them understand where the red flags are, where the pros and cons are and so that can help them shortcut their decision and that’s what we provide.

Peter: Right, right. And so I’m looking at the personal loan category right now and I’ve actually got it up with debt consolidation loans and you’ve got many of the companies that the listeners would know well like SoFi, like LightStream, Marcus, Best Egg, Avant, Upstart, Prosper, etc. so I’m curious about a couple of things here.

What does it take to get included in here because you don’t have everybody, there’s certainly some companies that I thought you would have had that you didn’t, and others that are a little bit  of a surprise that you do have, so what does it take to get in a list in a particular category?

Tim: Yeah, that’s driven by the editorial team so, you know…I know, for example, that they place extra scrutiny on 36%+ lenders and things of that nature. I’m not super in the weeds in terms of how they make all of these determinations, but it’s really driven by some of those factors I discussed.

Peter: Right, right. And then I am curious about the business model then, I mean, obviously you can go and you can check your rate and you can stay on NerdWallet while you’re putting in all of this information, is your revenue model purely based then on a successful application or a successful kind of conversion shall we say at these companies, or just tell us a little bit about how it works.

Tim: Yeah, that’s partially right. In most cases, we’re a matchmaker so we get paid when a customer either opens or funds an account, depending on the vertical, and yeah, I think that’s a win-win for the consumer and the bank. You know, both people are getting either a great product or a great customer that really understands the product that they’re about originate. For example, we hear on the credit card side that because consumers understand the product they’re getting into, these things are more likely to remain top of wallet for them and have a longer life span. So I’m really happy about the work we do there.

Peter: Okay, so then is it possible then…do you have a revenue partnership with every single product that you endorse here, or are there some that you recommend that you don’t have a revenue partnership with. You said there’s a wall between editorial and the business side so I’m just curious about how that particular piece works.

Tim: Yeah, we do recommend products that we do not have a partnership with. I think most partners or most financial institutions at this point that we think are great, we do have a commercial partnership with, but there are definitely exceptions.

Peter: And then obviously someone comes in and you said yourself that if you don’t like the product, whoever it is, you’re not going to put it on. I imagine there would be some pressure…I mean, you’ve got potentially…if you have a large customer that you know that you could send thousands and thousands of people to, how do you decide…like the editorial comes in and I’m just curious, to say right, we’re happy to forego that million dollars in revenue that we’re going to get this year because we don’t feel like it’s a good fit, I mean, how do those conversations go?

Tim: (laughs) So there is a healthy internal tension there. You know, the only reason that we…I guess there’s an interesting nuance here. The only reason we even have the optionality of doing this is because most of our customers come organically. We’re not paying for these customers and as a result, we have a lot of flexibility of being consumer friendly and consumer first in terms of how we make these recommendations.

So there’s definitely huge pockets where we are under-monetizing and, you know, it caries a lot by vertical. I would say that in an area like personal loans, we do tend to think that because there are so many partners that have great products, we will integrate with as many of them as possible to provide as much choice as possible. There are certain areas where the editorial team might feel strongly that we shouldn’t be promoting certain types of products and that may be either baseline interest rates or terms or just like a history of issues that consumers have run into.

Peter: Right, I notice here you don’t have payday loans, for example. You have bad credit loans, but they’re still sub 36% on your site so obviously that’s a category that you’ve decided not to pursue, right?

Tim: Correct, yes.

Peter: Okay, okay, interesting. So I want to go back to something you said earlier. I’m just curious, you said that there was this statistic you quoted, I think it was $55 billion that consumers are wasting on bad financial choices. How did you get that number and what does that actually…I mean, where does that come from?

Tim: Yeah, so our editorial team did some analysis on that so just to give you an example, right. I think $19 billion of that comes from deposits that are in accounts that are not earning the highest yield you could get. There’s a big business around money center banks collecting deposits and the rates are much lower than what you would get through an online high-yield savings account so that alone accounts for $19 billion a year.

Peter: Right, right, that makes sense. It’s amazing to me that people will still put money in their local bank that’s paying 0.1% when you can get 20 or 30 times that elsewhere. Okay, like today, I’m interested in the fact that there’s so much more happening online today so you’ve got a lot more…it’s possible for you now to have all of these online savings accounts which I guess there were to some extent when you first launched, but certainly a lot more choice now.

As you see a lot of this move towards digital and move towards mobile, how is that impacting your offerings? I presume it makes it easier to provide a lot more choice for consumers, but just curious to get your take on the sort of movement where all the major banks, not only that, there’s a lot more to digital banks coming to the fore…how is that impacting you guys?

Tim: Yeah, we think that the entrance of all these new fintech or digital banks is great for the consumer. It increases choice, they tend to be, you know, very digitally enabled banks and that makes integrations with us extremely easy. You know, we’re seeing consumers really gravitate towards them. I think what you’re looking at a couple of years down the road, is this increasing convergence towards one place to manage your money and that’s really what NerdWallet is building.

Imagine you login to this one place and there’s increasing digital integration with all these banks and services, you can get loans or deposits that are best for you when you need them, we’ll proactively make recommendations when you should be thinking about things that you wouldn’t even think to think about. I think it’s inevitable that we head in that direction, we’re already racing there, and maybe a third of the way there.

Peter: Okay, that makes sense. So then you said earlier that you don’t really pay for your customers who come to your site, or pay for your visitors, I mean, is that purely because the vast majority are coming either from the search engines or from word-of-mouth. I mean, what do you do proactively to try and reach new users?

Tim: You know, search engines and word-of-mouth are huge and the flip side of that is we invest almost everything we make back into building great products. We have a huge number of product, engineering, design, user research and content folks who are constantly trying to figure out how to improve our product and I think that really drives a lot of that word-of-mouth. There’s always the other organic traffic channels, we are starting to pick up and do brand advertising, TV, out of home and digital as well, but the thing that’s making that a lot more efficient for us is the fact that customers trust our brand so much and we’re so pervasive in organic areas as well.

Peter: Right, that makes sense, that makes sense. So then can you give us a sense of the scale you guys are at, I mean, how many people are registered on NerdWallet or give us some sense of that.

Tim: Sure, we serve over 100 million people a year, in terms of registered members, we’re at a few million now and yeah, both numbers are growing quickly. Our goal is really to become the de facto destination for making smart money moves and I think we’re well on our way there. This is really just within the United States where we’re solely focused today.

Peter: Does that mean you’re not looking internationally in the short to medium term?

Tim: Yeah, that’s right. You know, we think that there’s a long way to go between the current state of, you know, basically doing all of your money stuff in one place and where it’s going to be in three to five years. We think we can make a lot of that progress in the US. There’s a lot of things to figure out still…I mean, there’s a lot of marketplaces where the shopping experience still isn’t where we think it will go. Mortgages come to mind, that’s still very complicated and complex and we think there’s a lot of work to be done there.

Peter: Right. Yeah, on mortgages, obviously there are some of the newer fintech players that are coming in that are trying to make a difference there and there is a lot of friction so what you’re saying is…I mean, I guess how closely embedded are you with these companies, like mortgages or even personal loans or what have you where you’re really trying to work with them to improve the funnel, improve conversions and improve the user experience because it seems like there’s…some of these companies really just refine the user experience down to a very limited amount of moves on the users’ behalf. So how integrated are you into the needs of your partners there?

Tim: We’re working with the major players there. I’d characterize jt really as being in the first or second inning so we’ve got a long way to go, but I think there’s the will on both sides that continue to push those integrations so I think it’s just a matter of time.

Peter: Right, right. So then are you looking to replace like Mint as well? You said you want to be the one-stop shop where someone manages their entire financial life so are you looking to really work on the expense side as well as the lending and investing side?

Tim: Yeah, that’s exactly right. So I think about the different pieces of what you just described is you know, there’s shopping, there has to be a marketplace for all the financial products out there so that the consumer really has choice, right. The other piece is not just choice, but convenience so can we help consumers see all their stuff in one place, help them budget, help them move money around, pay bills, do what they need to do. So that all has to happen under one umbrella.

Peter: Right, right. So what about…we haven’t talked about mobile, I just want to touch on that really quickly. Are you primarily finding people coming to you on mobile now or is still kind of desktop, web-based, how are people interacting with you?

Tim: Yeah, we crossed over into the majority mobile maybe a few years ago, but desktop is still a hugely important. I mean, we actually find that the time of day people are most engaged is, you know, in the middle of the work day during the work-week. I think that’s sometimes when you think they go and check in on your money, so yeah, desktop is hugely important for us as well, it kind of varies by vertical. You know, things that you couldn’t imagine doing on your phone five/seven years ago are now majority mobile like say credit cards, but there are still things like mortgages that you really want to be sitting at a computer to do.

Peter: Yeah, at least today, let’s hope it won’t be that way much longer, but…anyway, we’re almost out of time, so you’ve painted a bit of a future where NerdWallet could sort of be the hub of someone’s financial life. So I’m curious…let’s just take a shorter term approach like what are you doing over the next 12 months to try…what are you focusing on to really move the needle in that direction?

Tim: Yeah, it’s really some of the things I mentioned. It’s really driven by choice and convenience so we think we have a long way to go, in terms of improving our marketplaces to make them really easy for consumers. On the convenience side, we’re investing in our member experience. I’m trying to figure out…you know, from a consumer perspective how to make it obvious when they should be making smart money moves and then trying to take the friction out of making some of those smart money moves.

Peter: Okay, well it’s a fascinating space and it’s amazing how far we’ve come, but as you say, it’s still in the first or second inning so I think in a few years down the track we’ll look back at today and think we were quite rudimentary, but…anyway, I really appreciate you coming on the show today, Tim, thanks a lot.

Tim: Thanks for having me, Peter.

Peter: See you.

You know, it really is interesting to me this whole idea of this personal financial hub where we all go to manage our financial lives. Now banks are vying hard to maintain this sort of dominion over the consumer and have them be the financial hub. But then you’ve got others that are out there like SoFi in the fintech space or Personal Capital that are also trying to do this and then you’ve got the sort of third party companies like NerdWallet or Credit Karma that are seeking to kind of become this hub.

It’s going to be interesting, it’s going to be great for the consumer and I think there’ll be more than one winner here obviously, but there’s going to be…in the near future, you’re going to be able to have companies like NerdWallet that will be able to not just be your personal financial hub, but proactively make sure that your finances are being managed optimally and I think that’s going to be great for the consumer.

Anyway on that note, I will sign off. I very much appreciate your listening and before I go just one more thing, I really would appreciate it if you would go to Apple Podcasts or Stitcher and give a short review to the Lend Academy podcast. It helps other people discover the show. So on that note, I will sign off. Thank you for listening and I will catch you next time. Bye.

PODCAST TRANSCRIPTION SESSION NO. 195/JERRY NEMORIN

Welcome to the Lend Academy Podcast, Episode No. 195. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

 (music)

Peter Renton: So welcome to a special LendIt Fintech edition of the Lend Academy podcast. We are here live at LendIt Fintech USA 2019 and I am joined by Jerry Nemorin from LendStreet, he is the CEO and Co-Founder of LendStreet.

Wecome to the podcast, Jerry.

Jerry Nemorin: Thank you for having me.

Peter: Okay, so let’s just get started, we’ve known each other now for many years, you’re a bit of a venture into the fintech space these days. Why don’t you give us a little bit of background (Peter laughs)…give us a little bit of background about yourself and sort of how the arch of your career has gone.

Jerry: Well, personally, I’m originally from Haiti, I grew up in Haiti and moved to the States when I was very young and studied at the University of Florida, studied finance at the University of Florida and then did my MBA at the University of Virginia, the newly minted national champions. Finance was something for me, it was always a subject that I was really passionate about and interested in.

After the credit crisis, I was working at Bank of America Merrill Lynch in their Leveraged Financial Sponsors Group and the idea for LendStreet really stemmed from the things we were doing on Wall Street helping major businesses restructure their debt and giving them a path to being financially viable and sustainable. As a very early lender on Prosper, I thought the idea of creating a debt restructuring platform that not only allowed the consumer to get a pathway to financial health, but also give the creditor a way to recover more capital which didn’t exist then.

I mean, you and I had this conversation before where, you know, we started off with Prosper and Lending Club focusing primarily on debt consolidation, but there were really no sophisticated debt restructuring platform that was focused on the consumers that when they experience a financial shock, how do you help them rebuild, how do you help them get back on path and that didn’t exist at that time.

Peter: Right, right. So then, you know, you started this company and it was many years ago now and you’re stuck at it which many wouldn’t…..tell us how it’s going because we first met, I think, it was like 2013 at a meet-up here in San Francisco and you know, you’ve stuck at it so tell us a little bit about those early days and how the journey has been.

Jerry: Yeah, you know, I think you’re right, many wouldn’t have stuck through it, but for me it’s as personal as it is professional.

Peter: Right.

Jerry: I think most entrepreneurs will tell you, you don’t do it, you don’t take the risk of being an entrepreneur for the sake of really hitting it big as we know the odds are against you, right, nine out of ten companies will fail.

Peter: Right.

Jerry: But for me, this was a product that I believed really truly needs to exist. You know, it’s easy for consumers when they’re financially healthy, there are so many products out there that we’re trying to give, you know….and, quite frankly, our industry have helped increase access, but we haven’t had a product that actually think about the holistic health of the system, not just the consumer, but how we’re impacting the financial system.

Are we adding more risk, are we, you know, are we making it safer, are we helping reduce the cost of capital broadly? So to me this was a product that my family could have used back in the days and so deeply believe that it needs to exist, no matter what I have to make sure that I gave myself a chance to see it through.

So starting off was really difficult. Imagine telling investors that you want to create a product that helps people in financial distress, who are delinquent, who are distressed and you’re going to give them a loan so they can pay off their debt so it’s just an oxymoron in many ways.

Peter: Right, right.

Jerry: You know, selling innovation is hard, right, selling innovation to people who cannot empathize with the problem is even harder and so our journey was much, much harder than most. We had to prove a lot more to make sure that the thesis that we had which is that consumers who are financially distressed, if you’re able to right size their debt, get them into a payment plan that makes sense, they will perform and perform like they were prime or near-prime at that and that was always the thesis.

If you can match the capacity with the intent, you can make it happen so it took us a bit to get off because that was something that not most people would really identify with, but we’re able to show the data, it came now to the numbers.

Peter: Right.

Jerry: We’re able to show the data, prove out that, you know, there was a group of clients, if you take the winds of consumers are inherently good, they want to make payments, these are lives……

Peter: Sure.

Jerry: …..they’re our lives, but if you take the notion that people are inherently good and they want to make good on their debt, that when they experience a financial shock it’s a matter of bridging that capacity with the intent, that we’d create a product that truly, you know, make a significant impact in the lives of these individuals, but also create a product that helps creditors improve their recovery. Ideally, by improving the recovery for creditors, you ultimately make the system safer and you make the system less passive and that’s been sort of the focus with LendStreet and that’s what we’ve been trying to do.

Peter: Right. So early days, I want to go back, we talked about this a while ago and a couple of years ago, I think, but when you were talking about those early days you first raised money and you loaned that money out and you basically….I remember you said at that time, if I’m proven wrong and this doesn’t work then I close up shop and go home. So you lent out that first cohort, so tell us a little bit that and how they performed.

Jerry: Yeah, so we raised capital, really friends and family, and just to prove out that at the end of the day the thesis was they would be paid. If they didn’t pay within a structure that was market-based, not just that they’ll be paying, but for me it had to be a market-based solution. So for the risk that, you know, that we were taking, that we were recovering a certain amount of capital and a profit, that would make sense to attract additional capital to scale because I don’t think you can do real social impact without market-based solutions.

Peter: Sure.

Jerry: And so the first cohort we did and performed incredibly well, we actually supplied ourselves, we had less than 5% default from that first cohort, that scale certainly didn’t hold up that way, but it was a metric. The thing that we were measuring is if we’re able to lend to those consumers, will they repay, and that was a question we’ve got consistently, you know, through the process. Will they repay, will they repay their debt?

Our belief was that these are consumers, we call them recovering prime, so these are consumers who, historically, have been bad credit, experienced a financial shock and, you know, they’ve proven in the past their ability and willingness to pay. It’s a matter of in this moment they can no longer make those same level of payments and so if we can restructure that debt and restructure the payment to what they can actually afford, will they be paid? That was the big pieces, that was the, you know, I’d like to believe it’s the billion dollar thesis that I had (Peter laughs.)

Peter: Maybe one day.

Jerry: Maybe one day, right, but that thing just didn’t play out, it played out where, you know, we had…..the default rates that we had were controlled enough, were low enough that we could create a product that could be scaled and could attract, you know, capital, given the rate of returns.

Peter: Yes, so you’ve got sort of mid-single digit to pulverize to a population that looks at first glance like they did subprime, definitely subprime.

Jerry: Yeah, that’s exactly right.

Peter: So then, maybe I want to sort of talk a little bit about how your product works, but before we get to that maybe you could explain a little bit about the debt settlement industry. It certainly hasn’t got a great reputation in some areas, some of it is, I think, earned, that reputation, but, obviously, there’s good and bad players. Tell us a little bit about your approach to the debt settlement space.

Jerry: Yeah, so prior to starting LendStreet, I didn’t have a consumer background, nor did I have a debt settlement background. The concept for LendStreet was based on a project that I worked on in banking where in 2008/2009, world was coming to an end and market was crashing and we covered private equity-owned companies so naturally, they are heavily indebted.

One of the companies we covered came to us and said, hey, you know, we’d like to figure out how do we take advantage of this market dislocation? We believe in our ability to be sustainable, to be viable going forward, but we think the market is in a different place and we’d like to take advantage of it. So the MD that I worked with at that time said, look, why don’t you get capital from your private equity sponsor, take that capital, buy back your own debt and effectively, de-lever the company significantly, I think de-lever it by a turn or a turn and a half.

And so what that did for that company was that it lowered their debt, it lowered their interest servicing so it created cash flow for that company, made it more viable, more sustainable and, oh by the way, created equity, right, equity value for the private equity.

So it was a “win win win” idea and I watched that and I said, well, if we can do that for major businesses and as a lender on Prosper at that time, I was lending $25 at a pop at Prosper, I might be one of the few people who didn’t lose money, didn’t make any money, but I didn’t lose any money (Peter laughs), this was 2008.

I thought, if you look at the loans that are being originated on Prosper, a lot of it was to consumers who were looking for debt consolidation and were 560/580 at that time, you know, 80% of the loans were at 580 at that time. And so I thought, if we could create a product, similar to what we just did for this major business which is a debt restructuring platform that focuses on helping consumers who have this delinquent debt, help them negotiate it with their creditors, give them the loan to pay off that debt so the creditor, at this point, is able to recover more capital, the consumer gets a new loan that can help them rebuild their credit and our investors get a rate of return that is market, that makes sense for the risk that they’re taking. So that was sort of the aha moment, this can be a “win win win” business model.

Peter: Right.

Jerry: And so started doing research into what is out there, does this exist, who else is out there doing it, what are the options that are available to consumers when they face these financial difficulties. And so during my research, you know, I read about credit counseling, I read about debt settlement and I read about bankruptcy and this was 2008 and so prior to 2008, debt settlement was able to get paid their fee even when they hadn’t delivered the service.

So, naturally, you have an industry that attracts a lot of people who necessarily didn’t have the best intentions, in terms of serving the customer, right. And so debt settlement had a really, really bad….if you look back 2007/2006/2005 research on debt settlement, it had a really, really bad reputation. There are some reputable folks doing it, but, you know, like any other industry, it only takes one to spoil it.

Peter: Right, right.

Jerry: And so I thought, you know, debt settlement is a needed product. Let’s be honest, consumers face financial difficulties, they need a solution that helps them get back on path and debt settlement allows them to do that without having to do the legal bankruptcy process.

Peter: Right.

Jerry: Unfortunately, though, it didn’t have the scrupulous actors that was necessary to make this a significant industry and a significant business. So what does debt settlement do? The typical debt settlement…..in the past, they used to get their fees up front so they didn’t have (inaudible) sent in to deliver the service. In 2008, the FTC passed a new regulation that they can only get paid when they deliver the service now.

And so the way the debt settlement model works is that consumers will enroll, they’ll start making payments into a saving account so that they can eventually settle their debt. On average, it’s about $25,000 to $30,000 of unsecured debt across six creditors and so they’re making these monthly payments into the savings account so that they can save enough to eventually settle them one at a time.

Peter: Right.

Jerry: And so I thought, here you have a consumer who’s demonstrated a willingness, because they could have easily just walked away from this debt, but demonstrated a willingness to pay and, oh by the way, you also have demonstrated the capacity to pay because they’re making these monthly payments into these savings accounts.

I thought, if we want to solve this debt settlement issue which is a lack of trust amongst the creditors, a lack of trust to the consumers because the service was not necessarily being delivered and certainly a lack of trust among regulators. The only way you do that is to create a product that actually is a “win win win” value proposition across the board and so that gave rise to LendStreet.

Peter: So maybe talk us through an example of a customer you have, I mean, is it credit card debt they’re doing, is it personal loan debts or is it a combo so tell us about that and then how the process works with you guys.

Jerry: Yeah, so it’s typically a combination. Our average consumer will come in with about $30,000 of debt, $25,000 to $30,000. It’s across multiple credit cards and some unsecured installment. The way the process will work is we partner with settlement companies. The customer would have been in their program, they’ve already made several payments, they will reach out to this customer and say, hey, you’ve been in our program, rather than, you know, make these monthly payments over 48 months and still getting collection calls and potentially lawsuit threats, because you’ve demonstrated the ability and willingness to pay, we can potentially get you a loan to pay off your debt, just to negotiate and to do all of them at once.

And so the customer then says, sure, you mean, I can go from being in this program for 48 months, getting collection calls, lawsuit threats and so forth to now getting a consolidation loan that is less than what I originally owed, but at an interest rate……our interest rates are 14.95 to 18.95…at an interest rate that is not….I think it’s reflective of who they are, but it’s not reflective of the credit score because, you know…….

Peter: Right.

Jerry:….it’s less than (cross talking), 560 FICO, they’re in the subprime and so they would expect 22 to 30% interest rate so we’re pricing them where we believe they are as an individual, not where they are as a credit score person.

Peter: Right.

Jerry: So that’s the loan product. So the consumer submits an application, we underwrite them, we approve them, the settlement companies go out and do the negotiation, we fund the settlement and the customer now has one loan, all of their accounts are settled, the delinquent ones are settled, we pay it off and they’re making one payment to us, we report to the bureaus so it helps them rebuild their credit and so forth.

Peter: So when they come to you, has the debt been already negotiated (cross talking).

Jerry: No, it’s delinquent at that time, it’s delinquent, it’s not negotiated yet so we have to do an estimation of what that settlement will be and we’re providing them a loan, a line of credit that allows then to go out and do the negotiation and draw on it.

Peter: Okay, so one of the knocks you will hear in the industry is that some of the platforms, the Lending Clubs and Prospers and Marlettes, whatever, they don’t want their debts to be settled….they want their debts to paid in full, they don’t want it to be settled down. What are your conversations like when you talk to those….to organizations like that, how does that go, what do you tell them?

Jerry: I’m no different, I want my debt to be paid (laughs) because we’re lending, right, so for me, we’re taking risk in lending to these consumers. So, similarly, we make sure we’re looking for consumers that truly have a hardship and what I think the industry….we’ve had these conversations for months with folks in the industry is, I’m not here to help anyone defraud the creditors.

Peter: Right.

Jerry: I don’t believe that’s the right solution. In our average, each guy, right, when you look at our customers, some of our customers who have 75% DTI. These are consumers…..yeah, they can’t live on that, there is no question about it, they can’t, it’s not sustainable. And so, you know, the way….obviously whenever you lend you’re going to have delinquencies, you’re going to have defaults.

Unfortunately, what we’ve seen in the past, and I’m not saying that….you know, they don’t have good reasons to be mad about the settlement companies and things like that, but I think there’s a belief that some companies are particularly targeting their customers. I don’t know if that’s the case, I think what happened is customers who are going into consolidation loans were really trying to outrun a situation.

Peter: Right.

Jerry: Right, the problem is that trying to outrun a situation did not necessarily resolve that situation.

Peter: No, it just delays it.

Jerry: It just delays it.

Peter: Right.

Jerry: And that’s what we were seeing. These consumers, you know, with 50,60,75 DTI, you know, they get a loan, either they pay off that original credit card or they don’t, right, but even if they pay it off they now have access to this credit card where they go back and swipe.

Peter: Right.

Jerry: And, unfortunately, for the majority, I mean, our customers are middle income so these aren’t the high earners or anything of that nature. So I do agree with the industry that there has to be a come upon agreement that says, these are the parameters. If the consumers look like this and they come to you, let’s work out a way that’ll work to make sure that this customer gets back on path……

Peter: Right.

Jerry: ….and vice versa. I think for settlement companies, if this customer looks this, we’re not going to service them because, you know, they have the means, they have the ability to pay……

Peter: Right.

Jerry: …..you know, they don’t need our service, right. And I think that’s where both industries need to acknowledge, the need for each other and the need to balance the service that each one of them provide such that it’s a healthy and viable ecosystem.

Peter: Right, right, now that makes sense. So maybe you could tell us a little bit about what happens when, you know, your customers come into your program and I presume they continue to make payments on the loan, what happens to their credit score?

Jerry: Yeah, so what we’re seeing now is that consumers who have been in our program, typically their credit scores improve by 80 points within 12 months and over 100 points within 18 months and that’s largely….my belief is that that’s largely due to the fact that we’re able to clean up their credit. So first and foremost, they no longer have the delinquencies showing up in their credit report; secondly, they have a lower amount of debt.

We’ve been able to restructure their debt such that their DTI’s now are below the 70’s, it’s now closer to a 45/50% and so we’ve made them better customers, better credit profile and that’s what’s allowed them to become…..and they’re making monthly payments and those payments are being reported back to the bureaus which we know is a key component of credit scores.

So I think that’s why we see the benefit and one anecdotal thing too, what we’re seeing is these are consumers again on average 50 plus years old and so a good chunk of them have homes so they’ll go out and refi their homes, take capital, pay off our loan and for us, that’s an exciting moment. We were able to take this customer who was on the point of financial distress, help them rebuild their credit and now they’re making savvy financial decisions to improve their financial health long term.

Peter: You mentioned your pricing, you said like 14.95 to 18.95, so how do you decide who gets what price? Is there a risk-based pricing component to this or not?

Jerry: There isn’t, we’re flat fee, we’re state-by-state so some of that is driven by state regulation. We have to be mindful of APR caps in certain states, origination caps in certain states and so forth.

Peter: So, basically, someone comes into your program it’s a binary decision, you either get a loan… (cross talking)

Jerry: That’s right.

Peter: Okay, okay, that makes sense. So then what is your revenue model then? Are you taking origination fee, are you taking, you know, a fee on the backend, how do you get paid?

Jerry: Yeah, it’s a combination. You know, we get a portion of the debt settlement fee for helping accelerate their revenue because normally they would have monetized that customer over 36/48/60 months and we’re helping accelerate that to 6 to 9 months. So in some ways, if you think about it, it’s almost factoring their fees and we’re taking the dropout, delinquency default rate, you know, default risk.

Peter: So you’re taking on the risk?

Jerry: We’re taking the default risk so, you know, they give us a portion of their fee as a result of providing that service. We get an origination fee for the consumer and on loans that are on our balance sheet, we get a sliver of the entry spread and those that we sell we get a sliver of the servicing fee.

Peter: Right, right, okay. Okay then, so give us a sense of the scale you’re at today, how many loans are you doing?

Jerry: Well, first, I think this is an industry where we’re talking about the 71 million consumers and $680 Billion of distressed that are in the US so what we’ve done is not even remotely close to scale. I wouldn’t even call it scale, I don’t even think about……we are not even a pin drop in this problem because when we think about it, the thing that I’m most proud of is our entry into the space have created multiple new companies that are doing similar things to us.

Unfortunately, we have more competitors than we would like, but that’s business. Whenever there’s a good product, good service, you know, a need for it, there’s going to be competitors. We’re excited about the fact that what we’ve seen is settlement entities have grown, the debt settlement space itself has grown significantly.

We’re starting to see delinquencies rise in the credit card space so we know that means there’s going to be a significant amount of defaults and delinquencies so we’ve been building ourselves for scale, for true scale. I think what we’ve done today has been great and we’ve made an impact, but we’re not even close to what I would call real scale.

Peter: Right, right. I know you raised a Series A last year and also significant debt capital from really some of the marquee names in the financial health space so tell us a little bit about who’s backing you and about that process.

Jerry: Yeah, you know, our Mission is to deliver financial health and our Vision is to create a just financial system so we want to be the catalyst, we want to be the…..you know, the way I think about it, we want to be the lab that creates the solutions that help consumers get access to products that were previously inaccessible.

We want to create solutions that help consumers improve their financial health, get them back on path, we want to be, in a way, the think tank where we can come up with the better solutions, where there’s non-transparency, we want to improve transparency; where there’s predatory pricing, we want to eliminate the predatory pricing, or not eliminate, but at least create a better product that gives the consumer a different choice.

Peter: Right.

Jerry: And so as a result, we’ve been able to, you know, attract some of the more mission-aligned, but also mindful of the need for market-based solutions to attack these problems. So we have Prudential as one of our investors, we have Radicle Impact, Candide which is a combination of some of the Pritzker family funding, we’ve got CFSI which is a big backer of ours, we’re part of the JP Morgan Chase/CFSI Fin Lab.

So, you know, yeah, we’ve been fortunate enough that people who are recognizing that what we’re doing is adding significant value not only to the consumers, but also creating real value economically that this is a viable business and deserves to be funded and given a path to scale.

Peter: Right, right. So we’re almost out of time, but maybe just a couple of more questions before you go. So are you open to outside investors, or just using your funding line that you’ve got, or……

Jerry: Yeah, we’re using what we have, but we’re in the business of renting money (laughs). Unfortunately, you’re always raising when you’re in our business so you’re always talking to more folks, you’re always creating a pipeline, you’re always making sure you know what’s out there, what the pricing is and then what are the opportunities going forward. I mean, it wouldn’t be prudent of me to not have those conversations and always be talking to various investors because as we scale, we need more access to more capital because that is effectively our product.

Peter: Right, right. Okay so then give us a sort of look down the road, where are you hoping to go like 12 months/24 months down the road, what are hoping the future holds for LendStreet?

Jerry: Yeah, 12 months, I’m hoping we do several things. One is that we finally get the lenders to recognize the need for such a product and the ability for our product to provide a quicker recovery, a much better recovery than the typical process which is charge off the debt, package it together and sell it off.  So, ideally, we get a few major creditors to be partners such that we can help restructure the consumers who are currently in a delinquency mode. So that’s one piece.

On the consumer side, you know, while we created a product that’s incredibly consumer-friendly, we haven’t done nearly enough to create the engagement that we want and to create the impact that we want which is ultimately being able to take the consumer from a point of financial distress and giving them a path to being financially secure and not ever be needing our solution. So we need to do a whole lot more work in that area to create better engagement, better tools, better solutions for the consumers.

And then, lastly, I think, you know, what we’ve been doing for the last few years has been building for scale and so now to actually go out and scale this business in the way that we know we can and knowing the needs that’s out there,

Peter: Right. Okay, on that note, we’ll have to leave it there. Thank you very much, Jerry, it was great to have you on the show.

Jerry: Likewise, thank you, thanks for having me. Are you open for questions?

Peter: Sure. (cross talking)

Jerry: Anybody who’d like to ask questions, just raise your hand, please.

Question 1: Jerry, congrats for building a fantastic business, it’s doing good for consumers so congratulations. But you’re in the industry, obviously, that’s kind of have somewhat of a sullied reputation, you’re one of the sort of shining stars there.

Talk to us a little bit about sort of your strategy or techniques or ways that you envision down the road helping giving buoyancy to the industry and maybe engaging the regulators to, you know, bring to light some of the positives that you’re doing so people can see exactly that the model that you have is really designed to help consumers, you know, and do some good in the industry.

Jerry: Absolutely. So the question is, you know, obviously we’ve built something that’s been impactful, but how do you both engage regulators to make sure that they understand what you’ve built and how it’s impacting the consumers as well as building a broader, you know, rent amongst consumers or, you know, people in the industry to understand our business, understand what we’re doing.

You know, I think it comes down to one thing. First and foremost is creating a product that actually delivers a service at a price point that makes sense and that’s been our focus. First and foremost, our product has to be good and we’ve done that. It’s consumer-friendly and at the heart of what we’ve done and everything we’re doing is the consumers and that’s all we think about.

How does it impact their cash flow, how does it make sure that they’re actually getting better. And so I think, because that’s been part of our DNA from day one, it’s allowed us to have many conversations with the CFPB, it’s allowed us to have conversations amongst the regulators and we’re open book because we’re very much aligned with their vision of a better financial system that service the broader population.

And so we’ve been able to have those conversations and continue to have those conversations, but to your point, you know, we have to do a better job as an organization to start tooting our own horn a little bit, we don’t do that as well and really get our story out there and let people know what we’re doing and how we’re doing it and the impact we’re having among consumers.

Peter: Okay, thank you very much. Thanks again, Jerry.

Jerry: Thank you, thanks, Peter.

Peter: See you.

PODCAST TRANSCRIPTION SESSION NO. 194 / LENDIT FINTECH USA 2019 PREVIEW SHOW (WITH TODD ANDERSON AND RYAN LICHTENWALD)

Welcome to the Lend Academy Podcast, Episode No. 194. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s going to be happening April 8th thru 9th, at Moscone West in San Francisco. We’re going to be covering digital banking, Blockchain, financial health and, of course, online lending, as well as other areas of fintech. There will be over 5,000 attendees, over 250 sponsors and registration is now open. Just go to lendit.com to register.

Peter Renton: We’re doing something a little bit different on the show today, this is annual LendIt Fintech USA Preview Show. I’m bringing on by colleagues, Todd Anderson and Ryan Lichtenwald. these are the people who also bring you LendIt News.

The three of us are focusing on producing the agenda for LendIt, we also write news articles and features on lendacademy.com, but today, we are talking all about LendIt where we’re going to firstly start with the trends in the industry and then go through how to get the most out of the show, what are some of the features of the show so if you’re coming to LendIt, this will make your experience much more efficient by getting a good flavor for the show to help you navigate what is really a whirlwind couple of days. I hope you enjoy the show.

Welcome back to the podcast, Todd and Ryan.

Todd Anderson: Thanks for having us, Peter.

Ryan Lichtenwald: Thanks, Peter.

Peter: Okay, of course. So this is a LendIt Preview episode, but before we get right into the nitty-gritty of the event, I wanted to take a step back and maybe talk about what are some of the trends we’re seeing in the broader fintech space today. Maybe I’ll start off with you, Todd, what are you seeing?

Todd: Thanks, Peter, I think, overall, I’d say the biggest trend has to do with the banking market in a couple of different areas. So I think, first, when you look at bank partnership thinking of just a few short years ago, there was a lot of talk amongst banks and fintechs as if they were competitors with one another and I think that’s really been the biggest shift. Now you talk to banks and fintechs and both see each other as partners and so I think really that shift that’s happened the last couple of years has really changed the market.

So you’re seeing bank partnership deals for lending, bank partnership deals for investing, bank partnership deals for other areas in fintech; for AI in conversational bots or potentially fraud-related technologies to help catch anti-money laundering or have to comply with the Bank Secrecy Act. So I think, overall, bank partnerships have really shifted into this place where it’s a bigger, better, safer environment where banks and fintechs are really playing with each other, you know, pretty much consistently and there’s a lot less talk about animosity.

The one area, though, where there’s still, I’d say, a bit of competition moving to that second big area of banking is the growth of these digital banks. First, you’ve seen a big growth in some of the firms in Europe like OakNorth who just raised a significant round, hundreds of millions of dollars. You have Monzo, N26 who’s soon going to be launching in the US as well as Revolut, who’s launched internationally is looking at the US. So I think where there’s still that competitive juices flowing is probably more in digital banking so the fintechs are trying to become banks or alternative to banks with either cross-border payments that are very cheap or checking or current accounts as many people are calling them these days.

And so I think those offerings put a little of that competitive edge to a limit, but I think when you look at banking overall, the market really shifted in the last couple of years to see a lot more collaboration and a lot more deals getting done between banks and fintechs than you might have seen a few years ago.

And then one more area, I’d say, is Blockchain. While there’s been a lot of talk of the crypto space, especially going from where it was in the end of 2017 to where it is now, I think the big thing you’ve seen recently is that financial firms are really starting to put some of these projects into production. Firms like Fidelity are coming up with COfTI solutions  so I think you’re really started to see banks, in particular big multinational banks, look at Blockchain solutions so they can see how they can save money and also deal with many of the different parties such as the supply chain finance or syndicated lending that it’s easier to handle those types of transactions when you’re on the Blockchain. So I think you’re seeing a few different trends and so I think it’s been an interesting, I’d say, 18 months and those are just some of the things that I’ve seen.

Peter: Right, right. Okay then, so what about you, Ryan, what are you seeing, what sticks out for you these days?

Ryan: I think the number one thing to me is just the amount of capital coming into fintech so coming into 2019, you know, everyone was reflecting on 2018 and it ended up being the largest year for fintech funding. And so coming into 2019, only just a few months in here now, but, collectively as a team have noticed all these fintech funding rounds, massive funding rounds and I think that’s one of the big trends today.

We created this pulse and decided to start tracking some of these large funding rounds and I was just looking back and we’re just focused on rounds that are $10 Million plus globally. Now just looking at our list and as we’re recording this on March 28th, we almost have 50 firms that have raised over $10 Million, many names that folks are familiar with. Some of these are large rounds for, I guess, you can call them later stage fintechs, still some new names in there. For me, that’s the number one trend that I’ve been seeing.

Peter: Right, right and it’s fascinating to see, particularly in the digital banking space that Todd was talking about, I mean, some of the rounds are monstrously large. It almost feels to me….like we go back to early 2015 in the lending space where there was just capital being thrown around. I wouldn’t say willy-nilly, but if you had a half decent idea and a half decent team you got money thrown at you. I don’t know if it’s quite the same, but, boy, in the digital banking space we are really….just that there’s so much capital being attracted because there’s plenty of good companies in the US, in Europe and all over the place actually that are attracting these amounts of capital.

I don’t want to neglect the lending space because I feel like the lending space is no longer the flavor of the month that’s been so for some time, but there’s still good companies as to attracting capital and there’s plenty of innovation that’s happening. I think you really are seeing, particularly on the underwriting side, fraud detection, there’s a lot happening in the lending space when it comes to bringing a better user experience to the customers. You’ve got companies that are now adding multiple products into their offerings and we are certainly seeing some interesting innovations happening there as well.

So anyway, let’s talk about the event itself. We’re recording this 11 days before we kick it off. Maybe, Todd, I can start with you, just tell us a little bit about the structure of the event, what people can expect.

Todd: Sure, so what you’ll see this year at the Moscone West Center in San Francisco is the event, from the majority, takes place on Level 1 and Level 2. So if you look at Level 1, you have the Expo Floor. On the Expo Floor, you’ll have food and beverage, you’ll have all of our sponsors, who without them we probably could not do this event, and so the Expo Floor is where a lot of the commotion will be going on, a lot of meetings, you’ll have the Brella networking area, you’ll have food and beverage so the first floor will be very, very exciting and a lot happening during the course of the event.

When you look at the second floor, that’s what we call the Content Floor. On the second floor, we’ll have our Keynote Hall, as well as our six simultaneous tracks that will occur after the Keynote Hall and we’ll also have some private lunch areas, but really, the second level you’re looking at it and it’s all content.

The third level, which we still have part of this year, is really focused on some private parties, some meeting rooms, but really, when you’re coming to the event, you’re looking at Level 1 and Level 2, that’s where the event is going to be happening this year so Expo Hall Level 1, Content Level 2.

Moving on to the Awards Show which is something that we’re going to have for the 3rd year in a row, the Awards Show is going to be on the night of April 9th and this is our 3rd Annual LendIt Fintech Awards. It’s going to be taking place at the Julia Morgan Ballroom, and this is also in San Francisco. The Awards Show brings together over 400 fintech influencers and innovators and they’re celebrating more than 20 awards of the biggest names in fintech. So this year we’ll be very excited to have the Awards Show again and so when coming to the event, think Expo Hall, Content and Awards Show or three of the most important things to know when coming to LendIt Fintech USA.

Peter: Unfortunately, the Awards are sold out so if you’re listening to this and you haven’t got a ticket, I’m sorry, you can find out what happened after the event. Okay, so let’s move on to some of the other things that we have going on. Ryan, why don’t you tell us about some of the things that you’re focusing on.

Ryan: Sure, happy to. So if you’ve already been to LendIt before, you’re familiar with our On-Floor Theater in the middle of the Expo Hall. This is the Innovation Zone and there’s a few types of content taking place here right in the middle of the Expo Floor, kind of all around the sponsors, all of the networking so we’ll have a few different companies presenting company demos. These are short, 10-minute demos that will take place on Day 1 for companies to really showcase all the things that they’re working on, some interesting innovations, etc.

Moving into the afternoons on both days, we’re actually going to feature some podcasts, including the Lend Academy podcast that you can listen to Peter record a couple of shows live. We also have the rebank podcast as well as the Wharton Fintech podcast, which I’m really excited to have them.

And taking place on Day 2, we will have our annual PitchIt competition so this is where startups compete and we’ll have VC’s judging them and so excited to see what happens there on our PitchIt at LendIt stage.

Moving on to more on the networking side of things, so last year we had two mobile apps, this year we are moving to just one to avoid some confusion and kind of streamline the networking process at LendIt so everyone who is attending to download Brella. Within Brella, you’ll get a join code that will have them e-mailed to you, you can join Brella and this basically will give you all the information that you need about the event so this includes the agenda and more importantly, our one-to-one meeting tool and so you can view all the attendees, what types of folks you may want to be meeting with and set up short meetings with them right on the Expo Floor, there’s an area dedicated to that.

Peter: Okay, okay. I want to highlight the Women in Fintech initiative that we have. This is the 3rd year we’ve really focused on this and we’ll have a 3rd Annual Women in Fintech luncheon sponsored by Deloitte on April 8th. New this year, we have a Speed Networking Program, we have Women in Fintech Mentoring Program and also culminates in the Fintech Women of the Year which will be announced at the Awards Show on the evening of April 9th, as mentioned.

I want to just re-emphasize that at the Expo Hall we have over 200 exhibitors down there and I highly recommend everybody spend a little bit of time down there. We’ve got some of the leading companies in the industry providing all kinds of different services and I encourage everybody to at least spend a little bit of time wandering around getting to know what are the latest offerings in the fintech space. I often find that I’m like a kid in a candy store when I’m walking through the Expo Hall.

Of course, like we have every year, we also have plenty of media there, there will be some of the media that will be actually interviewing different speakers. There’ll also be plenty of media there just covering the event and I highly recommend you basically find out what’s going on and you should all check it out.

So then let’s move on to the nitty-gritty here, let’s move on to the agenda itself and just so everybody knows, Todd, Ryan and myself put together pretty much the entire agenda and we’ve all taken various different pieces. Maybe, Todd, I can start with you and you can talk through some of the structure of the agenda.

Todd: Sure, so as we talked about before, there is content mainly on Level 2, but there is a piece on Level 1 so in coming to the event the content is structured really in a couple of different ways.

First and foremost is our Keynote Hall, this is going to be on Level 2, it’s our biggest stage that features the biggest names and so each day, both on April 8th and April 9th, we start off at the Keynote Hall and nothing, no other content goes against it. So these are the biggest names in fintech who get the stage to themselves, talk about the hottest topics, fireside chats, presentations so this is really where the highlight of our content starts.

After each Keynote Hall session ends in the morning that’s where we move to our tracks. So our tracks, there’s six simultaneous rooms, it’s right across the hall from the Keynote Hall so you can’t miss it. We put most of the content on Level 2 to make it easy to transition from the Keynote to the tracks and so after the Keynote Hall ends in the morning, you can go ahead to the tracks.

Additionally, down on the Expo Floor, as Ryan was talking about, we have our Innovation Zone. This will feature podcasts, this will feature demos and on Day 2 will also feature PitchIt. So in total, when looking at the structure of the agenda, there’s eight simultaneous tracks or rooms; Keynotes which will kick off each day and they go, first and foremost, by themselves, then we’ll go to tracks and Innovation Zone, then we go to lunch.

Coming back from lunch, the structure stays the same; we do keynotes by themselves and then move on to the tracks in the Innovation Zone. So the majority of the content starts on Level 2 with the Innovation Zone on Level 1 supplementing it, but, overall, that’s how the content is structured at LendIt.

Peter: Okay, great. And then, of course, we have all the different tracks. We’re covering…….I can’t remember how many topics we’re covering, I don’t know whether you guys remember that at the top of your head, but there’s a lot of different topics.

Certainly where we are strongest and where we will continue to really lead the industry is in the lending content and we have a dedicated consumer lending track, small business lending track, we have a track focused just on financial inclusion again, we’re covering policy and regulation and a lot more, but that’s part of what I’ve been focusing on developing personally over the last like six months. Ryan, why don’t you tell us about some of the things that you’ve been focusing on?

Ryan: Sure, so first off, we have the paperless mortgages and real estate innovations sessions. This really focuses on both the bank partnership angle with mortgages, we’re going to talk about, you know, making home purchases and selling. There’s some really interesting platforms that have huge traction here. We’re going to talk about bank connectivity and how that improves the mortgage process, tokenized real estate, non-bank lending and, of course, the hillock (?).

We also have the credit and underwriting track, here we’ll talk about some of our topics around customer acquisition, automated loan underwriting, kind of go into depth on identity and sort of those topics, including AI, some of the benefits there and also dig into kind of what the credit market is looking like today.

And then, finally, the session, the last track that I worked on was niche lending and here we’re just covering a wide variety of verticals so we’re going to cover the gig economy, we’re going to cover some of the opportunities in the Hispanic market and some of the lenders there; we’re going to talk about auto finance and we’re also going to cover patient lending. So those are some of the topics that we’re covering in that track.

Peter: Okay, Todd, what have you been working on?

Todd: So to go back to some of the stuff I was mentioning in our top stories, I’ve really been focused on bank partnerships, digital banking and, you know, one thing that you’ll see this year, before getting into some of the specifics of the tracks I worked on, is you’ll see more banks on the agenda than you’ve ever seen before.

There’ll be banks in not only the digital banking and community banks and credit union tracks, but you’ll also see banks in our lending track, you’ll see banks on our international track, you’ll see banks on our credit track, our real estate track so really what we’ve seen the shift has been that banks are working with fintechs a lot more. And so we’re covering bank partnerships on our digital banking innovation and partnership tracks, we’re covering bank partnerships from a couple of different angles, how companies can launch products quickly, how there’s various bank partnerships from chat, to AI, to lending so we’re really taking a look at how banks and fintech are really working together in a really in-depth way.

For the first time this year, we’re also going to be featuring a track of community banks and credit unions. The main difference between those two tracks is community banks and credit unions, they have to operate differently, they’re not able to do proof of concepts that cost billions of dollars; they need to be smart, they need to be strategic so we’re covering that angle for those types of banks and credit unions that come to the show.

So if you’re a little bit bigger of a bank, you would go the digital banking and innovation partnership track, if you’re on the smaller scale or if you’re a credit union, you would go to the community banking credit union track. So we’re really trying to specify different types of content for the different attendees that join us.

We’ll also be covering Blockchain, as we have the last few years, and we put a little bit of a different spin on this year. We have really focused on Blockchain for financial services so what we like to call Enterprise Blockchain. Talking about payments, talking about supply chain…is Blockchain really ready to move to production in terms of scale in financial services.

We’ll be talking about providences, Blockchain from Figure Technologies and so we’re really looking at Blockchain from the enterprise side and then, last but not least, of course, is the international track where we cover different markets around the world; Latin America, the Middle East, China so we really want to hit on various different areas of the world and that’s something that has always been core to LendIt is that this is our global event.

Peter: Right, right, and I also do want to mention a couple of other topics that we will be covering. You know, there’s been a bit of a merging of the sort of the payment space and the lending space with payment providers going to the lending space and lending providers going to the payment space so we are going to be covering some payments innovation and, of course, as we do every year, we have an investing track which is focused on all the investors in the space, whether you’re a VC investor or a debt investor or hedge fund, what have you, we’ve got a whole range of different topics focused just on that audience.

Anyway, I want to move on and talk about keynotes because that’s…obviously we’ve got some really big names on the stage this year, many new names to LendIt and wanted to just talk about that briefly. Maybe, Todd, start with you and talk about who are the keynotes that you’re most interested in this year.

Todd: Sure, there were a few that really caught my eye. I’d say first is having Sallie Krawcheck join us this year. Sallie’s, obviously, well known in the banking community, she also started her firm, Ellevest, and she’s going to be talking about how financial services firms, banks or fintechs, are really missing out on a potential opportunity of not targeting women investors. These, by some estimates, over 700 billion on the sidelines that could be put into different parts of the financial system, if financial firms were just more targeted towards products that would be speaking to women investors. So she’s going to be talking about that which I think will be a fascinating discussion as well as Green Dot and Stash.

This is the first year that we have Green Dot on the agenda. The partnership between them and Stash is very interesting, they just recently released more information about the partnership so I think what you’ll see is that the Keynote Stage features some innovation in a variety of different ways and those are just two of the many keynotes that really stood out to me.

Peter: Ryan, what about you, what stood out for you?

Ryan: Yeah, so I’m really excited to hear from Boe Hartman, who’s the Head of Consumer Technology and a Co-CIO at Goldman Sachs Bank. You know, my perspective is Marcus has really moved from kind of being a new entrant to being kind of one of the leaders in consumer finance so very interested to hear what they have to say and some of the things that they’re working on.

Secondly, I would have to say Mike Cagney from Figure. I think getting beyond all the capital that they raised, this is a company that is still relatively new, but is originating all of their home equity lines of credit on the Blockchain and they’ve done so at incredible speed and it’s just…..really impressive to me is that they’ve gone from idea to execution. I’ve already received a mailer from them which is kind of funny, but, yeah, I just think it’s going to be very interesting to hear what Mike has to say. They’re really differentiated from a lot of other players in the space.

Peter: Right, right, for sure. Well there are so many great ones here. I want to give a plug to our Opening Keynote which is …we have the CEO of Discover, Roger Hochschild, and Douglas Merrill, CEO of Zest Finance. I think this has been a really important partnership that was announced just a couple of weeks ago and we will have them on stage together talking about how…you know how a pretty significant bank is using machine learning to really totally revamp how they are sort of expanding their credit box and I think it’s going to be fascinating to see and hear what they talk about.

Of course, we have some of the lending leaders; we’ve got Max Levchin from Affirm, Ron Frohwein from Kabbage, you know, Renaud Laplanche from Upgrade, all giving keynotes.

We have Karen Mills talking about small business lending, in fact, she has just written a book. I’ll be interviewing her on stage and she obviously was a guest on the podcast just pretty recently.

We’ve got FICO and Experian on stage together for the first time at LendIt talking about consumer permission data and we’ve got Yihan Fang from Yirendai. I’m fascinated to hear what she has to say, there’s a lot going on in China right now and it will be interesting to hear her thoughts about what’s going on there.

I’m really excited about the keynote program, I think we’ve got a fantastic line-up and I’m just as excited as anybody else to hear what they will have to say. So we’re just about running out of time here, but before we sign off, let’s talk about something that I think most people come to these events to do and that is to network and I think it is extremely important and maybe, Ryan, you can tell us a little bit about how people can network, how people can get the most out of the event when it comes to networking.

Ryan: Yeah, so if you haven’t already and you’re coming to LendIt, I highly recommend you get on your phone right now and go to the App Store and download Brella. As I mentioned earlier, that’s our app for one-on-one meetings and it is sponsored by Marqeta this year.

What they’ve done is they’ve created this very simplistic way of scheduling one-on-one meetings with folks who have joined Brella and so you can schedule it with your calendar and just set-up the short little meetings which tend to be great. The way it works is you’re assigned a table and there’s an area at our Expo Floor that has numbers on them so you know where to meet. It makes the networking process extremely easy and efficient so you kind of get the most  out of networking at LendIt so highly recommend that.

In addition, I will also just mention that on our website we also have our company list and attendee list so you can always view that to see some of the folks that are attending. And then moving on to some of our networking events so we have our Art of Innovation Happy Hour that’s taking place on April 8th at the end of the first day.

We also have our Wine Tour which unfortunately now is sold out, but that’s the first time doing that this year so kind of interested to hear how that works and some of the more unique opportunities. And then, of course, we also have outside parties that are organized by other sponsors or companies that are kind of having an event outside of LendIt to draw kind of all the folks coming to LendIt Fintech.

Peter: Okay, well we’re pretty much out of time so maybe…we’ve been working very hard for the past several months and let’s just finish off by sharing, what are your guys planning on doing right after LendIt.

Todd: I would say, I probably would sleep a little bit, but, overall, I do have a 5-month old so I will be spending plenty of time with him and if the weather gets nice, maybe I’ll begin to play some golf. I know I’ll be watching the Masters since it’s the week after LendIt or just at the end of the week that LendIt happens. So those are just the couple of things I’ll be doing once we finish.

Peter: Yes, that has been great news for the last two years. I have not been able to watch much of the Masters because it’s been on the weekend before LendIt and we’ve been working so hard so I’m very much looking forward to seeing that and watching the Masters as well. Anyway, Ryan, what about you, what are you up to?

Ryan: Yeah, so I’m actually coming back for a few days back to Wisconsin and then we head out to Puerto Rico to seek warmer climate and kind of relax after LendIt. So that’s our plan.

Peter: Good for you. Well, I’m actually staying in the Bay Area, I’m heading down to Half Moon Bay. My wife is coming out and I will be closing my laptop and sort of enjoying just all the natural beauty of that part of the world. Anyway, so I think it’s going to be a fantastic show, this is our 7th annual and I think it’s going to be the best one we’ve ever had. So really want to thank you guys for coming on and giving everybody some help with the LendIt Preview Show, thanks very much, guys.

Todd: Thanks, Peter.

Ryan: Thanks for having me.

Peter: Okay, see you.

Well there you have it. I hope to see many Lend Academy podcast listeners at the show. If you do listen to the show, please come up and say hi, I’d love to have a quick chat, and if you are still on the fence, time is running out, but if you’re still on the fence as you’re listening to this, tickets will be available right up to the morning of April 8th so you will be able to buy tickets at the door and I hope to see many of you in San Francisco.

We will be off next week, I’m taking the week off. There will be no podcast next week, we’ll be back in two weeks and hope you have a great show. Thanks, bye.

Today’s episode was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s happening April 8th thru 9th, at Moscone West in San Francisco. It’s going to be the largest fintech event held in the Bay Area in 2019. We’ll be covering online lending, Blockchain, digital banking and much more. You can find out all about it and register at lendit.com.

PODCAST TRANSCRIPTION SESSION NO. 193 / ANTHONY NOTO

Welcome to the Lend Academy Podcast, Episode No. 193. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s going to be happening April 8th thru 9th, at Moscone West in San Francisco. We’re going to be covering digital banking, blockchain, financial health and, of course, online lending, as well as other areas of fintech. There will be over 5,000 attendees, over 250 sponsors and registration is now open. Just go to lendit.com to register.

Peter Renton: Today on the show, I’m delighted to welcome Anthony Noto, he is the CEO of SoFi. Now I think pretty much every listener has heard of SoFi, they really are one of the highest profile companies in all of fintech, they seem to have more news than pretty much any other company, I see them in the news pretty much every week, it seems like, these days and they’re really pushing the envelope.

They’re moving from just focusing on the lending side of the business to a really fully diversified financial services company. Now I wanted to get Anthony on the show, he’s been in the job now for over a year and I wanted to talk about, you know, how the last year has been, where the focus is today, what are some of the things that he’s excited about, what are some of the things they’re working on and we go through all the various different pieces of the SoFi business. It was a fascinating interview. I hope you enjoy the show.

Welcome to the podcast, Anthony!

Anthony Noto: Thank you for having me.

Peter: Okay, so I’d like to get this thing started by giving the listeners a little bit of background about yourself. You’ve certainly had an interesting career with some pretty high profile positions so why don’t you give us some of the highlights.

Anthony: I’ve been fortunate to be part of some great organizations with, you know, phenomenal cultures and really well known brands or products. I spent just about four years at Twitter prior to coming to SoFi first as a Chief Financial Officer and then as the Chief Operating Officer. We accomplished a lot of great things at Twitter and really restructured them and turned around the company and really proud of what the team was able to accomplish there and be a part of that team.

Prior to being at Twitter, I spent two different distinct tours at Goldman Sachs, four years from 2010 to 2014 in banking as the Head of Global Technology Media & Telecom Banking and the first nine years in banking, 1999 to 2007, as an Equity Research Analyst focused on technology and media companies, initially just on the Internet and then adding entertainment companies and then distribution companies like Satellite and Cable.

In between those two experiences, I was fortunate to spend three years at the National Football League as the Chief Financial Officer.

Peter: Okay, so you’ve been at SoFi now for just a bit over a year and I’m curious to sort of get your take on how it’s been and how has SoFi changed over the last 12 months.

Anthony: Sure, I’m really proud of the fact that we’ve made, since we spoke last year, and where we are now and having a couple of important things that tied back to our 2018 priorities and what we’re focused on in 2019, if I could. The number one priority when I arrived at the company was to ensure that we stabilized the core lending products in anticipation of an interest rate environment that would be quite (garbled) over the coming years and we focused on per loan economics, variable profitability so that the loans can be durable as interest rates increase and the economy slowed.

We meaningfully improved the approval and economics on a variable profit basis over the course of the year focusing on better efficient pricing, a tighter credit model focus and then really fine tuning our marketing initiatives to ensure that we’re getting high quality credit, but also managing customer acquisition cost.

On the operation side, there is an opportunity, not just to drive up efficiency in our operational co-spaces, but also to improve the value to our members that were applying for loans and shortening the time to fund and really drive meaningful increases in time to fund across personal loans and student loans in the order of magnitude on personal loans of 50% and about 30% on student loans.

In addition to that, we made a really tough decision to pull back a little bit on our home loan business or mortgage business as the experience that we were operating under wasn’t up to what we thought was adequate for our members, and so we’ve made a number of different decisions that put us in a great position now in 2019 to really step on the gas and double that business. So that was the number one priority and I feel like the team had to cover up the ball.

Number two was really accelerating our path to providing a border array of products. Our Mission is to help people achieve financial independence and realize their ambitions and we think in order to do that, we have to help our members, current members and new members, get their money right across borrowing, saving, spending, investing and protecting.

We’ve primarily been a lending business up until the point when I arrived in March and I really wanted to ensure that by the end of the year we are in a position to be able to offer SoFi Money which is now available to everyone to help on spending, saving and paying and also launch SoFi Invest which delivers on the investing component of getting your money right and they were also able to integrate in on the insurance side and to protect some partners. So we now have SoFi Money that’s available to everyone through the mobile application. SoFi Invest is available to everyone through the mobile application, in addition to insurance.

The team did a phenomenal job of not just building the right roadmaps to get us to this point, but actually, you know, building the code, deploying it and really building an integrated mobile experience. Our mobile application has been re-launched, the rating had been a 2.8 in the IOS Store when I started; it’s now a healthy 4.9 and 5.0 scale in the IOS Store. The mobile app is ranked in the top 80 under finance category and in the Google Play Store it’s ranked on the top 60.

We’re really proud of that and we’re seeing meaningful downloads per day organically on the mobile application which is helping fuel the demand for SoFi Money and SoFi Invest and ironically, even for our loan business so we’re really excited about that. And then our third priority, just to hit on very quickly, was to build the foundation of what the membership experience will be like and to build the principles of what we mean by member experience and we were able to do that in the first half of our position and we will start to see that unfold in the mobile app throughout the year, as well as behind the scenes in how we approach pricing, customer service, member events and member services & benefits.

The last thing, which, you know, was probably the most critical to the company’s long term success was working out our culture and making sure this was the place that people really wanted to work. We feel passionate about our Mission, we established 11 Core Values, they’ve been shared throughout the company, they’re integrated into our day-to-day functions and business, as well as evaluation of talent and retention of talent and promotions and we just scratched the service on the possibilities, but I’m really proud of what we have accomplished on the cultural side as well.

Peter: Okay, okay. So there’s a lot there to unpack and I want to actually spend a little bit of time on the different segments here. Starting off with student loans, because that’s really still been….I imagine it’s still sort of the biggest part of your business, but you guys invented student loan re-financing and, you know, you guys are, by far, the largest In think in the entire country, banks and non-banks, as far as everybody goes. Is this still the main engine of your growth as far as revenue goes and if so, like how do you continue to grow, you know, to what’s becoming a fairly mature segment.

Anthony: Yeah, I’d made a couple of points. We are more diversified on student loan re-financing from a member activity standpoint. It’s going to be the case that will have more members and SoFi Money and more members in SoFi Invest and SoFi Advice than we have them either student loan re-financing or personal loan re-financing. We’re not there yet, but by the end of the year we’re going to be pretty diversified across all over those different products.

Quite frankly, I anticipate that we’ll be relatively even across all those products by the end of the year and as 2020 unfolds, it’s likely going to be the case that we’ll see SoFi Money and SoFi investing larger than the number of members in student loan re-financing as well as personal loan financing. But, today, student loan re-financing is still a significant percentage of our overall revenue. I was referring before to the number of members that we have and that and personal loans are the two biggest drivers of revenue in totality. They’re both expected to grow quite meaningfully in 2019.

We expect to see an acceleration in our revenue growth given that we focused on quality in 2018 over quantity to ensure that our loans are durable. Now that we have that right quality measured by variable profitability and return on equity, we can really step on the gas within the credit and quality box that we’ve created. So, we expect decent growth from both those businesses today and an acceleration overall in revenue because of the opportunity we have to grow each of those businesses.

Peter: Right, and then you said….you mentioned before with mortgages, obviously mortgages….the loan sizes are much larger, is this something you’re also going to be trying to grow significantly in 2019?

Anthony: We think we have an opportunity to double the loan volume within home loans or mortgages and that will be a nice increase in revenue relative to 2018. Our members really want to have a relationship with us beyond one product; we’re seeing the cross buying already happen. On average, it’s been the case historically that about 40 to 50% overall mortgages are actually taken out by existing members. We’re seeing some really interesting trends of cross buying in our other products that we’re excited about and I think we’ll create a competitive advantage for us over time.

Peter: Okay, so let’s switch to SoFi Money and full disclosure, actually, I am a SoFi Money customer, I joined the waiting list as soon as I could and I opened my account, I think it was in January and I do….I think you’ve done a really nice job there and having a pretty compelling offering.

But, what I do want to know is like obviously this is a product that is competitive out there, but you’ve got a lot of competitors as well. Two questions, one, how are you actually going to make money on this product because you are giving very high interest rates and you’re can’t hold deposits yourself, as least as of yet. I guess maybe we’ll start there, how are you planning on making money on this product?

Anthony: Yeah, I’d make a couple of points. First, I’d say we’re looking at all of our products holistically, our products are member relationship and how those relationships translate into our overall business model and putting revenue and cost. So there’s an inter-relationship between all of our products that we’ll focus on over the long term.

But just to answer your specific question, SoFi Money, there are two primary revenue streams that we generate from SoFi Money today and there could be more in the future. The first primary revenue stream is the interest that we make on your deposits through a partnership that we have and that’s pretty common of both existing banks and new bank competitors, and the second revenue stream we generate is an exchange rate on your debit transactions. We do not charge any other fees from an account fee standpoint. ATM’s are rebated so you have complete access to your money to spend where you want and to be able to spend as much as you want.

The important thing about our product is that we’re giving you a really high interest rate at 2.25% and no requirements on direct deposit or advance minimums and you have access to that cash when you need it, where you need it to be able to pay, whether it’s person-to-person payments, Bill Pay electronically, Bill Pay…we’ll send a check for you, you can transfer money in and out of the account to your other accounts and you have the functionality of a debit card, ATM card and, of course, the integration with Apple Pay and Samsung and Google Pay. So we’re trying to give you the best of both worlds as it relates to how to manage your money and spending, saving and paying.

Peter: Okay, okay, that makes sense. So when I…I opened up my SoFi Money account which I have right now and you can see you’re pushing other products here. Right underneath it is SoFi Invest and I want to get to that in a second….like obviously the student loan product/personal loan product, they’re fairly high margin products and you talked about it yourself and you already said that you expect large numbers of people signing up here, do you expect significant cross sell between SoFi Money and then your loan products?

Anthony: Yes, absolutely, we’re already observing…today, we’re not trying to bring any new product marketing in the app to a SoFi Money member or SoFi Invest member and people are using the application assigned for those products by using those products. They’re becoming aware of other products and then they’re using a second product. So it’s very small numbers in total, but the observation on a percentage basis is much better than we thought it would be and it’s very encouraging.

So our strategy is to really put the member at the center of what we’re building and deliver to them the best borrowing or saving or spending or investing or protecting experience that we can. Our hope is that as we do that and they become comfortable with the brand and they trust the brand, they’ll be aware of the other services that we’re offering across those five activities and then they’ll consider those brands when they’re making that choice and they’re really signs that that’s working.

Peter: Okay, so then with SoFi Invest….actually, I can see there’s a button on your Home Page with SoFi Invest so it’s clearly something you’re also pushing hard and it seems like…..you know, you’ve launched a brokerage business. I mean, I feel like in the last month there’s been news coming out of your page almost every week pretty much where you’ve got the brokerage business, you’re talking about zero fee ETF’s, you’re talking about crypto trading in partnering with Coinbase.

So maybe let’s take a step back and say, what is SoFi Invest kind of ….what are you trying to achieve? Are you trying to be the one-stop shop so no one ever has to go to Schwab or Fidelity or Vanguard, whatever, what are you trying to achieve with SoFi Invest?

 

Anthony: Yeah, so I tie it back to our overall job to be done and then our Mission. When I mention job to be done, I’m really applying to our differentiation the concept that Clayton Christensen used in his book, Competing Against Luck, in that we ask ourselves, why will a member hire us versus others and we think our job to be done in that hiring decision by a member is to help them get their money right. If we help them get their money right they’ll reach financial independence and realize their ambitions.

In order to help them get their money right, we’re focused on all the activities that you do with the money as opposed to products or businesses and those activities are borrowing, saving, investing, spending and protecting. So our initiative behind SoFi Invest is to help people invest better and get the money right because they’re investing better in addition to their other activities. We think about within that category of SoFi Invest we want to offer a fast, easy to use solution; the fastest place to open an account, the fastest place to fund, the fastest place to buy a stock or an ETF or to invest in a Robo strategy, the fastest place to sell, the fastest place to do research; always accessible, always convenient.

Second is selection and so we’re focused not on just offering Robo advisory strategies, but also offering single stocks, ETF’s and our own ETF’s, for that matter, to fill-in a void where our direct target of millennials and Gen Z may have an area or pick an interest that’s not been met by this selection that’s being offered by others across the investing universe. So the first is fast; the second is selection; the third is content and the fourth is convenience.

As we release the content which are broad strategies; everything from education to helping for planning and so we do provide on the platform, on the mobile app articles and blogs about investing, about dollar cost averaging and to educate our members. In addition to that, within the app, you can click on the Membership tab which is right on the Home toolbar in the bottom next to the Home tab and choose to sign-up for a certified financial planning session with one of our certified financial planners.

You can schedule that right in the app and use your phone to conduct that conversation and so it’s not just the products that we’re offering in a fast way, but also supplementing the content across the spectrum of everything from quotes and news about companies, the news about business, to regional content to also live on planners.

And then last, convenience, we want people to be able to access their accounts from any device at any time. There are a number of other convenience factors that we’ll add-in over time in addition to the other four differentiators that I mentioned.

Peter: Right, right. So I want to switch gears a little bit and talk about regulation, you know, you guys…it was before your time at SoFi, but you had an ILC application out there which you guys pulled and clearly, you’re sort of ….you are entering into so many different areas of financial services and I’m sure it would be nice to have access to the banking system directly. So where are you at with bank charters today?

 

Anthony: Sure, 2019, and we have five priorities. The first is to build a mobile first/member first experience and drive the penetration of SoFi Money, SoFi Invest and SoFi Advice. Our second key priority in 2019 is to build out a membership experience more broadly and more overtly to members as they come on the platform. Our third is to continue to drive efficiency and effectiveness of our lending platform and as we relate to that, we will evaluate different ways to lower our cost of funding and financing.

We’re really fortunate today in that we have a three-layered approach to financing the loans. We have our own capital which is, as it has been publicly reported, $2 Billion of equity has been raised. In addition to that, we have partnerships with a number of banks, over 20 banks that provide us nearly $6 Billion of warehouse facilities and we also have a very important unsecured line of credit that’s over $500 Million. There is an opportunity for us to lower our cost of funding by building a deposit business and having the company as a whole being an IDI, insured deposit institution.

There are a couple of paths to go down to relate to that. we’ve evaluating those paths, whether it’s national banking charter or an ILC and the team is in the process of really thinking through all the strategic implications of either one. We haven’t made any decisions either on either one or actually going forward to try to become an IDI type of company, but it’s clearly an opportunity for us to meaningfully lower our cost of funding by 50%.

Peter: Sure, sure. Okay so then, when you look at the broader market today you’ve got all these different….you know, challenger banks, neo banks I guess you call them, like Chime, Stash, Varo and many others coming; Europeans coming, Revolut, Monzo and N26 and then you’ve also got the big banks. Many of them are putting out digital offerings directly to sort of the target market of millennials and Gen Z. So who do you see as your main competitor today and how are you differentiating?

Anthony: Yeah, I don’t think about it in that construct. I think about it in the construct of who provides better borrowing, who provides competitive abilities to spend to be able to invest, to be able to protect. So we think about those activities because those activities are trying to help our members do better and, as you can imagine, there’s a long list of companies under each one of those five activities. So there’s no one competitor, it’s we’re competing against that activity which is offered not just by traditional banks, also fintech companies and then what I’d say is increasingly and probably non-fintech companies.

Peter: Okay, okay. So basically then if you look at obviously the SoFi Invest, you’ve got to make something really compelling because you’ve got people offering free stock trading now, there’s free mutual funds, I know you guys have the free ETF’s so we’re looking at that specifically then and it’s a very sophisticated space already with many homely entrenched players.

I mean, like the zero fee ETF, you know, got a lot of publicity, I’m just curious about how you sort of make a dent in the millions and millions of customers out there. As you know, it’s not easy to get people to switch, are you focused primarily then, with this particular product, on people starting like an investment program for the very first time, are you trying to get people to switch, or both?

Anthony: They are core target and I use the word core purposely. Our core target for SoFi Invest is a new or beginning investor. And our goal, our goal is to help educate them on the benefits of investing to get their money right, our goal is to help educate them on how to actually invest and to, over time, become more confident in what they’re investing in and what they expect from a performance and a risk standpoint.

One of the reasons why we’re offering, you know, we’re in the path of offering stocks and fractional shares and one of the reasons why we’re offering unique ETF’s and one of the reasons what we’re not charging for trades or charging on the ETF’s that we’ve announced and also offering Robo advisory is to make sure that as we start to drive a connectivity point between us and a potential investor, new or beginning, that they have the broad selection they would consider.

Some want to buy stocks, some would prefer to start with the Robo account, some would prefer to buy a small amount of something that they already buy as a consumer, but actually the cost of one share is too high relative to what they would like to pay. As an example, Amazon is a company that has stock priced for one share is a really meaningful amount of investment and so being able to buy that in a fractional share is unique.

So we want to help these new and beginning investors, take the money that’s sitting in their cash account or their money account that’s not earning interest, that’s not really compounding over time and solely educate them on buying things that they like and being confident in what investing really means and taking them from some that’s very familiar like in the case of a consumer that spends a lot of money on an Amazon and having them become an owner of one of those companies that they spend a lot of money on and then over time as they get confident and understand what investing means, bringing them along the path of a more diversified portfolio and at a risk adjusted return that meets their individual long term financial goals.

The fact that we have stocks or we have fractional shares, we have ETF’s, we’ll soon have our own ETF’s and we have Robo and there’s no charging for trading or commissions is actually very unique, reduces the friction and gives them the assortment they would consider across the range of things that they would do first.

Peter: Okay, so I want to get back to the lending business for a second and talk about securitization. You know, I went back and looked at some of the numbers from PeerIQ last year and you guys were more than 50% of the total volume that went through in the online lending space in the securitization markets in the….you know, talking about consumers and student loans. So do you still look at securitization as really the absolutely critical funding source as you thought when you look at expanding and increasing the volume of the loans you put through?

 

Anthony: You know, we’re evaluating the varied different types of financing sources for the loans. You know, we obviously cannot use SoFi Money deposits or SoFi Invest deposits for financing source without a bank license at SoFi, either an ILC or a national charter so at some point, if we have an IDI organizational structure and a charter we could consider that, but until we do, it’s really not even a question.

Peter: Okay, okay, fair enough. So then you haven’t mentioned it…I presume this is not on the horizon, but I know the listeners will want me to ask this question, IPO plans for 2019, anything, where are you at with potential future IPO?

Anthony: It’s not a priority and we have no plans as it relates to that.

Peter: Okay, okay, fair enough. So then I feel like you’ve got so much that you’re trying to do here, you know, it feels to me, the news comes out all the time, I’m curious to see….like as you’re managing the different areas of your business, I mean, where do you spend your time personally? Are you really…..and obviously you’ve got a strong investment background with Goldman Sachs, obviously you spent time at Twitter, but like what areas of the business are you most connected to right now?

Anthony: I don’t think I would highlight one area as it relates to the businesses or being more connected than the others. They’re all in different stages of business formation so I’m spending  equal parts on all the five different areas that I mentioned. Outside of the day-to-day running of those businesses, I’m spending a significant amount of my time on recruiting great talent. We’re hiring a significant number of people in 2019 and one of the major areas of focus within is we’re re-hiring these great product engineering and design people.

We’ve launched a lot in a year and we have very ambitious clients that continue to shift more and more innovation every week and so that’s the area of the company that I’m most focused on, attracting and retaining great talent. I‘d say the second area outside of the businesses and attracting and retaining great talent is on partnerships. We teach you partnerships as they can accelerate the path for and making sure that we have the right top-to-top relationships with key partners, both current partners and future partners.

And then, last, really focused on building out the best culture in the world, our goal is to have the best culture in the world and we do not believe it takes any special type of innovation or technology or access to capital to get there. It really requires leadership, alignment and accountability and we’re committed to having the best culture in the world and making sure those three things are true and so I spend a lot of time on that as well.

Peter: Okay, so then where are you hiring people? I mean, I know you’ve got the San Francisco office, Healdsburg, I think there’s something in Montana, I think from memory, or Idaho, where are you hiring people today?

Anthony: Yeah, geographically, we’re hiring from all of our current locations across the eight different cities that we have physical locations in, we’ve had a small office in Seattle in addition to what we have already. As it relates to people, we’ve been really fortunate to be able to hire really experienced people from leading technology companies in the United States and the leading financial companies. I’ve been quite pleased with our ability to attract some people that have achieved significant things from the consumer Internet and technology world, in addition to getting some really experienced executives from the traditional financial world.

Rich Garside is the Head of Global Operations, thirty plus-year veteran from Citi; Assaf Ronen is our Head of Product who came from Amazon where he was a key leader driving the growth of Alexa Shopping; Tony Donohoe who came from Expedia as the Head of the Expedia brand CTO, he is our CTO; Michelle Gill is our CFO who was a Partner at Goldman Sachs and then was an investor in Structured Products at TPG.

We’ve also been able to hire great business unit leaders in each one of our business units from the walks of the financial services industry so I have been really pleased with our ability to find really talented experienced people across the big diverse area of industries.

Peter: Okay, okay, we’re almost out of time, but what is the total head count today?

Anthony: We’re about 1,400 people.

Peter: Okay, okay. Two more questions before I go, one real quick, are the challenges of SoFi had in 2017, do you feel like….obviously, it’s well behind you now, are you still asked about that when you’re talking to new hires, when you’re talking to reporters or do you feel like it’s now ancient history?

Anthony: I’m definitely not asked about that. I’m more asked about how do you build a culture, are you committed to build any culture, what’s the mission of the company, is the company, as whole, passionate about that mission, where do you want to take the business over the next five to ten years as opposed to the next year.

I would say those are the three biggest focus areas for the people we’re trying to hire, generally, and then when we get into specific cross functional areas and expertise like technology, there’s definitely a focus on innovation and using new technologies and how to think about the impacts of those technologies over the long term.

And then on the financial side, without a doubt, there’s questions about regulation and our ability to operate in a regulatory environment and as a regulated entity, which we already are, given that we have loan licenses by state, in addition to really understanding the amount of impact there’s in the business because of regulation, all of which we think is reasonable and has allowed us to operate at a really high pace of growth.

Peter: Okay, so last question, I’m sure you’re going to tell me anything that hasn’t been announced yet, but what part of your business should we expect the most future announcements this year? Where are you really focusing on innovating the most?

Anthony: I tie back to our priorities so number one is continue to innovate on being a mobile member first company with leading products in SoFi Money, SoFi Invest and SoFi Advice and so that’s the number one priority and I would put that at the top of the list, but right behind it is building out the member experience in a transparent and more over way to the outside world. Third is our focus on ensuring that we continue to drive really fast, efficient and effective lending with our existing and new members. So those would be the three key business focus areas.

Peter: Okay, Anthony, let’s leave it there. I appreciate your coming on the show today.

Anthony: Thank you very much for having me, really appreciate it.

Peter: Okay, see you.

SoFi is such a fascinating case study to me, you know, starting out as really a monoline lender in student loan re-financing and not just going into other areas of lending, but other completely different areas of finance. You know, I always thought that the secret to SoFi success was the fact that they were able to execute so well, particularly on the lending side of the business.

After talking with Anthony, you can really see sort of that military background which he didn’t talk about, but you see that sort of no nonsense execution type mentality that Anthony is bringing to the table here. I think it is going to be one of the most fascinating things to watch over the next few years…is to see how SoFi evolves, can they be a success in all these different areas of their company. I’m certainly not betting against them, it’s going to be interesting and I will be following along like everybody else.

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

Today’s episode was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s happening April 8th thru 9th, at Moscone West in San Francisco. It’s going to be the largest fintech event held in the Bay Area in 2019. We’ll be covering online lending, blockchain, digital banking and much more. You can find out all about it and register at lendit.com.

PODCAST TRANSCRIPTION SESSION NO. 192 / DOUGLAS MERRILL

Welcome to the Lend Academy Podcast, Episode No. 192. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music))

Today’s episode is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s going to be happening April 8th through 9th, at Moscone West in San Francisco. We’re going to be covering digital banking, blockchain, financial health and of course, online lending, as well as other areas of fintech. There will be over 5,000 attendees, over 250 sponsors and registration is now open. Just go to lendit.com to register.

Peter Renton: Today on the show, I am delighted to welcome Douglas Merrill, he is the CEO and Founder of ZestFinance. Now ZestFinance has been around for a few years now and in that time they have really built a reputation as one of the world leaders when it comes to the development and deployment of AI tools in the credit and underwriting space and their ZAML software, which we talk about, has really created some breakthroughs around explainable AI.

We go into that in some depth, we talk about some of the implementations that they’ve done, we talk about the data that goes into some of these models which makes it more predictive and we also talk about Douglas’ relationship with regulators and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Douglas!

Douglas Merrill: Thanks so much for having me.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself. You have had an interesting career so could you give us some of the highlights.

Douglas: Yeah, I think most people would describe me as having a somewhat random career. (Peter laughs)  I’ve got a PhD from Princeton, Princeton gave me a PhD in AI a long time ago, then I worked at a place called the RAND Corporation which is a think tank in Santa Monica, California where I did a lot of fun work, but notably it’s on the beach so you could walk out the back door and go on to the sand to go swimming and I spent a lot of time that I should have been in meetings out that door. (Peter laughs)

Peter: That must have been fun.

Douglas: Yeah, it was great fun, it just maybe wasn’t great for my productivity.

Peter: Right.

Douglas: Ultimately, I ended up at Google where I was Chief Information Officer for several years, but probably my most random job in my background was I was the Head of EMI Records, which was the fourth largest record company in the world when I was there. It has since gone bankrupt, but it went bankrupt well after I left; I want to make sure that’s very clear. (Peter laughs) After EMI, I founded Zest, I’ve had a fun career doing all kinds of interesting things with all kinds of smart and fun people.

Peter: Then so tell us a little bit about ZestFinance and…maybe start with how you got the idea for the company.

Douglas: I founded Zest in about 2009 or so, with a mission to make fair and transparent credit available to everyone. The operating idea was credit underwriting was a (inaudible) of modern life and yet about 80 million Americans either have no relationship with a bank or a poor relationship with a bank, 800 million Chinese are in the same situation, the numbers are similar for the EU and even more so for Africa, and I was interested in a world where so much has changed in the last couple of years in technology, particularly. How is it the case that underwriting hasn’t changed since 1950?

Before 1950, to get a loan you basically would go to a bank and you’d sit across the big mahogany table from a man and they were always men and they were always men wearing blue suits and red ties and you say, hey, I want a loan. And that man would say, oh, you know what, my kids played basketball with your kids, you’re a good person, I’ll give you a loan. That worked great unless your kids didn’t play basketball with his kids in which case you didn’t get a loan, that’s kind of unfair. Two gentlemen, one named Fair and one named Isaac, whose names later came together as Fair Isaac had a brilliant idea of using logistic regression and credit bureaus to come with a standardized credit score and that just changed the world.

I think it’s one of the most important innovations of the 20th century and credit availability went up markedly, losses went down markedly. It created this amazing, amazing positive outcome and I think everyone should thank FICO for the structure of the world today, but FICO has some weaknesses and the primary weakness is in the math itself. Logistic regression works well if you have every piece of data that you need and it’s all correct. In the event you have missing data or it’s incorrect, logistic regression fails in a kind of unpredictable manner.

I believed when I founded Zest that the primary reason that 80 million Americans were having trouble getting credit is that in many cases, on their credit bureau, the information was either missing, this is sometimes called a thin file problem, or there were errors. And so some number of them were actually good credit, they just didn’t have good FICO scores and we could use the math that we built at Google to do a better job of finding that and that turns out to be true.

In the last ten years, our clients have used our software to make material improvements in credit availability. This is not a ding against FICO, I still think FICO is the most important company in credit today, but I also think that lenders have more options because of machine learning.

Peter: Okay, so then…I guess you started obviously doing this. This was before really anyone was really talking about, you know, machine learning and certainly it wasn’t top of mind of many people in the credit space. So how did you kind of start the company? I think I read somewhere that you actually made loans yourself initially so tell us a little bit about those early days.

Douglas: Yeah I mean, I think people who came out of the machine learning companies, you know, places like Google or Amazon, would have recognized my company as another ML company so I feel like I came out with the notion that I wanted to build an ML company in credit. However, I needed to demonstrate to the world that that made sense so the way we did that is for a couple of years we actually made loans using our algorithmic structures and our tools and, you know, they worked pretty well and then we ultimately stopped but the problem with being a lender is it’s capital inefficient, it takes a lot of capital and the capital is expensive.

Peter: Right.

Douglas: The reason that banks make loans is they have very cheap capital so I didn’t really want to do that long term. I did it long enough to demonstrate our tools and then we ended up serving a couple of clients who themselves made loans and we did that in a fairly bespoke manner for quite a while and then when we moved to our broader product which was the same across the broader market and you can kind of see the trend there as the financial world caught up with, oh, I understand machine learning, I understand how these tools might work, we progressively got more and more towards the SaaS model that I actually wanted to start when I founded Zest.

Peter: Okay, so then, I’m just still curious about those early days, I mean, how were you able to convince other lenders that your solution was better than what they were currently doing?

Douglas: Ultimately, that’s just math. So you give me a sample of loans that you’ve made, whether it was a good loan or a bad loan, and we’ll build a model for that. And then you give us a set of loans and you don’t flag them, so you don’t tell me whether they’re good or bad, and I just predict whether they’re good or bad and then you go count…

Peter: Right.

Douglas: …tell me how many the model was right with, how many was it wrong with, ultimately that’s just math and it’s pretty well understood math. Our tools, we do that computation automatically, we do a bunch of economic parsing automatically so you can say, oh, if we had done this model we would have saved $100 million in losses, or would have gained $40 million because of increased approval rates. Those things are just math.

I think harder than that is getting people to sort of think through, wow, you’re going to use 500 variables instead of 20, we all understand 20 variables; 500 variables, hey that’s a little scary. It just turns out to really help in those cases where you have thin files or you have erroneous data. Having more signals, more variables helps reduce the impact of those incorrect things.

Peter: So then let’s talk about that for a second. What are some of the data points that you’re using today, or maybe even back then, what were the data points that you used, I mean, maybe just give me some examples. I know it’s not just one data point, there’s hundreds, as you say, but what are some of the examples of that that you found really helped lift the performance of the model?

Douglas: So one of the things which is true when you have 500 signals is that really, really good signals, still don’t matter all that much because every signal is worth, you know, 1/5 of 1% so a great signal is worth a very small amount. Early on, we discovered that people who put their name in in all uppercase were substantially riskier than people who put their name in correct case. So for example, if I put my name capital D O U G L A S, I’m much higher risk than if I put capital D lowercase… o u g l a s, I just misspelled my own name which is fairly funny (Peter laughs).

So if I fix that, I don’t exactly know why that’s true. I can make up a story that oh, maybe people who are putting their name in proper are better rule followers but your applying kind of post hoc reasoning to something you don’t know why it is, but that’s a real signal in a real model. Similarly, one of our recent clients discovered that if you put in the company name that you work for, including the company type so instead of putting in ZestFinance, you put in ZestFinance, Inc., you’re a higher risk. So being more correct in the company name increases your risk, well, why is that? Well, you don’t really know, but maybe that increases the likelihood that you’re a bot because no human uses “, Inc.”

Peter: Right, right, yeah, that makes sense and as you say, it’s not like someone…obviously there are many, many good people will actually put that in like that, but it’s just, as you say, it’s one of 500 signals. If the other 499 signals or 498 signals are good, it won’t make any difference, right.

Douglas: That’s correct because you end up adding them all up so if that one is a little bit wrong, well, alright the others are probably a little bit right and ultimately, it gets zeroed out in some sense.

Peter: So then one of the big things today that is talked about a lot when it comes to AI is this thing about explainability and you know it’s something that I know has made many banks and actually many lenders, in general, reticent to embrace this fully because you’ve got to be able to provide a reason to the borrower why he was declined. So tell us about a little bit about the advances that you guys have made in explainability.

Douglas: So first of all, it’s a valid worry because the banks in the US are required to give adverse action notices. If they decline you, they have to tell you here are the top five reasons why we declined you and it turns out that process is not ideal, but it’s still required. Also, you’re required to periodically demonstrate that you don’t have a disparate impact problem where you don’t tend to give loans more to men than women or any other of the protected classes.

Doing those things requires understanding what’s in your model. Understanding what’s inside that logistic regression model is trivial, you just read the coefficients. Understanding what’s inside a score picker machine or a massive gradient boosting machine, those are hard so we really did need some big improvements in understanding how to describe what’s in the model. There have been over the last few years, some improvements.

For example, there’s some really simple technique called permutation impact where you just bury stuff and see what happens; it’s like when you bury one thing and it doesn’t matter, it’s probably not important. That turns out to be a pretty, you know, gross view of the model, it doesn’t have much kind of fine grain and it’s pretty hard just to run against big models, but that was a really big step forward where someone realized, oh, let me just pull on some strings and see what happened, good insight.

I think that increasingly the world is demanding a much finer grain understanding of what’s in a model because we’re increasingly caring about implicit bias and other topics around there where you could, from a potentially regulatory problem and from a moral problem, back into something where you might be disadvantaging groups that you don’t want to do and that requires a more fine grained approach. Arguably, a much more fine grained approach, and there’s some other things to it as well, but ultimately, you need to be able to use a tool better, you need to look across the table at your financial services client and and say, yes, I guarantee you will understand what’s in your model, you’ll understand how it works and that will be able to work within a real-time.

Let me give you an example about what I mean by real-time. So there were two amazing basketball players kind of in the 1980’s, one named Michael Jordan and one named Scottie Pippin, they played for the Chicago Bulls together. When they played with the Bulls together, they won, I think, six league championships, I think Michael Jordan got three or four MVP’s, he was the shooting lead for many years, he was just a star on those teams. So I often like to ask the people I’m speaking to, for a show of hands, who is the better player, Michael Jordan or Scottie Pippin, nobody ever chooses Scottie. That poor guy gets no respect. But if you look at what happens after they’ve played together it’s kind of interesting.

So after they play together, Michael Jordan goes to Washington Wizards and proceeds to have two massively losing seasons where nothing good happens to the poor guy and he retires. Scottie Pippin goes to the Trailblazers where he proceeds to have three seasons where they make it to the finals every year, they don’t win, but they make it a long way, Pippin’s got an MVP, Pippin has a great career.

Now you’ve got to ask the question, oh, hang on, who’s better, is it Scottie Pippin or Michael Jordan? It made a lot of sense in one context, the answer was obvious when they were together. In the other context when they’re apart, the answer is also obvious, but they’re different and really thinking through in a complicated machine learning model how to handle that difference is the core of the explainability problem.

Peter: Okay, so I guess say more on that like put it into a credit example. A customer can send an adverse action letter to their borrower declining them, how does that sort of translate?

Douglas: So today when banks send adverse action letters or send these decline notices they more or less take the reasons from one of the credit bureaus and they just sort of package them up into a physical letter and send it off. Some banks do a much more thoughtful job of this, but some banks, if they’re a little bit rote or whatever, that credit bureau said, I’m just going to pass on. In machine learning, it’s hard to figure out what those things should be, right, you’ve got 500 signals and they’re all relatively unimportant. How do you find the five that are most important?

So that involves using the permutation impact idea, taking 500 signals and randomly permute them against each other which requires something like 500 factorial computations which is a number larger than the number of atoms in the universe. It’s a very hard problem to solve that way. Then you look at the ones that bubble to the top that say, oh, if this number had been higher or that number had been lower, your score would have been high enough that we would have granted your loan and then you’ve got the five approval reasons. The problem with that approach is that you don’t have enough time to have more computations than there are atoms in the universe…

Peter: Right:

Douglas: That’s just hard and where I come from just hard is the problem you don’t want to solve. So there are optimizations, as you can do, that yield both fine-grained, better fine-grained solutions and are more computationally trackable, but that’s a silly thing for a problem of how do you understand high level interactions between signals, between variables to know which of the five that are more important.

It always comes back to the same question, but if you look at variables alone, i.e. you look at Scottie and Michael together, you see one picture of the world. If you look at variables together, like maybe not just signal one, but signal one and 100 together, you get a different picture, i.e. when Scottie and Michael played apart. Our position is you have to compute and use as many different, conjoined probabilities or if you will combinations, as you can, to try and make the best possible list to borrowers of what they need to improve to get a loan in the future.

Peter: Okay, so something that you would do is say, right, you don’t just improve these one/two things, you maybe improve these six or eight things because they’re in combination. I guess maybe we can…maybe that is part of what you’re offering and I want to get into this in a little bit, your Zest Automated Machine Learning product, but is it part of the output or part of the offering to be able to create these adverse action letters that make more sense or that make sense based on what the borrower wants to actually hear?

Douglas: Yeah, that’s a great question. Maybe just for clarity, I’ll take a step back and say what do the demo tools actually offer and once I get you that maybe it’ll be a little bit easier to talk about…

Peter: Yeah, sure.

Douglas: So there are basically three kinds of steps in modeling. There is the actual math itself, there is convincing yourself and those around you that the math is actually correct and there is putting it into production where it lives for however long you are comfortable with it living. You can get from Zest, if you want, a modeling environment in which you build models, but you can also use your own modeling environment or any number of other tools out there.

We do sell some AI little probes, little kinds of measuring things that pay attention to your model build and we use that AI to help you do something which is super hard which is convincing regulators of what you’re doing and why you’re doing it. After that process we build a model for you, an AI model to look at your AI model, they help you understand and build the model that for any individual applicant will yield the adverse action letters. You’ve got this AI running to look at AI and the AI and the AI that is looking, is what you ask for help when you deny an applicant. And then we built a bunch of technology when you put your model into production to use other kinds of AI to notice if your model is consistent and [inaudible].

One of the things which is true about many large machine learning models in production is that they’re a little bit kitschy, their answers switch a little bit and sometimes kind of for no reason they go running for a cliff and throw themselves off (Peter laughs) and people who haven’t read a lot on machine learning models might sometimes forget that and your model runs off a cliff and crashes to the rocks below and you’re still counting on it giving you loans.

Our clients get a set of tools that maybe can’t prevent the model from trying to throw itself off a cliff, but they tell you, hey, something bad is happening, stop making loans before the model goes south. And also allows you to track things like monthly economic impact and return, lots of sort of useful stuff to the business folks so ultimately, what we’re trying to do is build ML-based tools that are invisible generally, they’re sort of half in the background, but yield all this stuff that business and audit and regulators can use to run the business and not care anymore that the technology underneath has changed.

Peter: Right, right, got it. Okay, so let’s talk a bit about business cases. It would be great to hear maybe a couple of examples of…there was a big name that came out, I think it was just a few days ago, with you guys in the Wall Street Journal, but just maybe take us through a couple of examples of implementations that you’ve done with names we’d recognize.

Douglas: Sure, so I think the Wall Street Journal, a while ago, outed Synchrony as a client of ours, so that’s an old one from like 18 months ago, 24 months ago and in that they described a very large amount on the order of several tens of millions of savings so that’s like a name you’d recognize and it’s the same process, right, the model was really good, their models were amazingly good and then this kind of monitoring stuff that we did.

The announcement you were referring to a few days ago was with Discover, obviously again, an amazingly talented organization. We’re super proud to be their partner and they’re using our tools to basically, their goal was to get a handle on increasing losses and our tools have helped them get a handle on that and also helped them interact with the regulators on that point and they’re in production or moving to production to do the same thing, around like is my model okay, is it healthy, etc.

So you get this case where they’re obviously quite talented modelers. The business case they were focused on was, hang on, we’re seeing some…a little bit erratic increase in losses, certainly not disastrous, but not the trend you like. So they built models on our tools, we helped them build the regulatory and audit documents for those models. When I say we, I say like this AI, which was monitoring their model build, built these things for audit and regulatory and then the model is in production with our other AI kind of bounding it to keep it away from the cliff and the rocks below.

Peter: Okay, so then when you’re going into these companies, is it…someone like Discover, do they already have like AI models in place, or they’re just sort of using…I imagine there’s still plenty of financial institutions using sort of more of a linear regression type models even today, I would suspect, so what is the process like when you go in and I presume you can work with someone who’s got a very advanced model and somebody who’s got a very rudimentary model, is that correct?

Douglas: That’s true, and lots of financial institutions still use a linear regression or logistic regression, some actually just use a score from a credit bureau so that’s sort of like the minimalist approach. We find that across the spectrum, from there all the way up to financial institutions that are actually working on machine learning themselves that the tools that we provide add a lot of value; we’re just describing them in a different way. So if you’re a financial institution that’s just using a score, you don’t have a lot of data lying around because you’re just using a score and so we might not be able to build a model or you might not be able to build a model day 1 because, you don’t have the data.

You might need to do what’s called a retro and get data from a credit bureau, or you might need to do a testing plan to generate some future loans and allow a model to be built so that might be a different process. If you are using a logistic regression you’ve got data lying around and some companies that use logistic regression for underwriting also have other interesting data like…maybe they have phone call data, maybe they have collections data that isn’t currently being used in their underwriting because it’s very hard to use that data in underwriting. But, machine learning models and the models that people build with our tools can use that kind of data.

So for those folks who might say, yup, give us your underwriting data and oh by the way, let’s get some of this data from underwriting, excuse me, from collections, let’s get some over here from call data and let’s use all of that stuff to build a model,  which gives us much more information, much more signals; the models are better.

Finally, the organizations that are building their models today, often have really, really great sets of data and sometimes they’ve got data lying around that isn’t used, etc. and where our tools add value. It’s helping them get that out of the research lab through the regulatory folks and in the production. So if you think about it we’re sort of adding three different kinds of value which map roughly to the three parts of our software.

Peter: Okay, so then just on that, someone comes to you and they’re just using a FICO score and that’s pretty much it…so you don’t have like an off the shelf model that you can provide them or do you? You said they need to go out and sort of get data from credit bureaus, whatever, so you can build the model. So you don’t have something off the shelf that you can just provide them?

Douglas: No, we don’t provide generic scores, it’s one of the powers of places like FICO that they have these really pretty generic scores. We don’t have generic scores or generic models, what we have are the tools to help financial institutions move into the machine learning future. Where presumably they’re going to use scores from great places, but they’re also going to have more complicated models around those scores.

Peter: So then are you finding more and more institutions already have decent machine learning models in place that you can certainly improve upon, but they’re already doing things reasonably well, or in the financial space are people still pretty backward for the most part?

Douglas: I think almost all banks have at least one person or one group doing research on machine learning, but they’re mostly focused on the math today so getting from that research to production is quite hard. That said, a huge number of financial institutions have, high quality fraud institutions notably like FICO’s Falcon which are machine learning products, they just don’t look like it to the banks. So in the underwriting space there has been not a lot of progress in figuring out how to get the mathematics from the laboratory all the way into production.

Peter: Right, right, that makes sense. So you see a lot of partnerships now that are going on between banks and fintech platforms, whether you’ve got Avant or Amount now doing…they’ve announced a couple of decent sized banks that they’re working with…there’s obviously Upstart and others that are coming in as well. How do you sort of play into this shift that we’re seeing between fintechs and banks, the partnership model that we’re seeing?

Douglas: I think it’s important to differentiate kind of a white label kind of approach with a tools based approach so you look at what some of the great partnerships have been. Both Avant and Upstart are really great companies, Upstart founded by Dave Girouard, who I was privileged to work with at Google for many years. So those guys tend to focus more on a white label approach that says, hey, come over here, write me a check and I will put up an underwriting engine for you and that serves certain kinds of needs extremely well, that’s not what we do.

What we do is give you the tools to build your own models so in some sense, if you want to think about it in, you know, aphorism terms, a white label partnership is I’m giving you a fish. What we do is we’re teaching you how to fish. Each one has really big advantages and really big disadvantages. We’ve proposed that we want to create organizations, develop an organization, grow from a handle on the side of a financial institution and the easiest way to do that is to actually provide tools. Now we have to provide training and support and a bunch of other stuff as well which is the downside, but that’s why we’ve chosen the way we’ve done deals so our partnerships don’t look like the kind of white label deals that you’ve seen a lot in the press.

Peter: Right, right, got it. So we’re almost out of time, but a couple of things I want to hit on before I let you go. I’m curious about how you interface with the regulators. You know, there was certainly…a lot of attention was paid when Upstart got their no-action letter from the CFPB because that sort of was the first movement by a regulator saying that, hey, this is…we’re interested in actually, you know, exploring and accepting some of these new changes, but some of the things that you’re talking about…I’m curious, it seems like it’s beyond some of the things that the no-action letter talked about so tell us about your relationship with regulators, how you’re engaging with them.

Douglas: So we spend a lot of time with the regulators because ultimately, our clients need assurance that the regulators understand and I’ve done things like…I’ve done machine learning training for all of the members of the CFPB, I did ML training for the examiners of the OCC, same in the Fed, same in the FDIC so I spend a lot of time with the regulators. In fact, we drafted a set of, you know, addenda to the FAQ used by the examiners of all three of the major bureaus to sort of make it a little bit more possible for them to ask the right questions about machine learning and get the right answers.

The short answer is everyone believes that ML is the future, and everyone we’ve talked to believe that ML could be the present, but they don’t view themselves as the (inaudible). There are some things that we have to work through. My perspective is that people who say that the regulators are inherently blocky and they’re really retrograde actually aren’t spending any time talking to them. There are amazing folks who are working at the regulatory agencies because they believe serving the US government is an honor and that protecting consumers is an important moral duty. These folks are not trying to take us back to the 70’s, they’re hoping to prevent 2008 again. So my experience has been actually quite positive and quite frequent, I’m in DC a lot.

Peter: Right, right. Okay, so last question then, I’m really curious about where you think this is going, I mean, obviously, things have changed a lot in the last five years and I think in the next five years, I imagine, it’s going to change even faster so take us through where…how good can these models get? Where will Zest be and sort of your abilities be in five years time?

Douglas: Five years to a startup is an infinite window (Peter laughs) so it’s quite hard to predict five years in advance. I think it is hugely indicative that Discover went out with their press release saying, hey we’re partnering with Zest. I’d say that the classic big monster dominant quality institutions are starting to pay attention and I expect more of those and for various reasons I expect there will be more of those.

So I think the next thing that happens is how does mass adoption happen, mass adoption for scores took about 20 years. I don’t think it’s going to take that long for machine learning because the process of actually adding the systems and the skills is easier now than it was then so some amount farther. My hope is just that in five years I have a pool table at my office that works (Peter laughs) so that’s my big goal. (Peter laughs)

Peter: Okay, well on that note, we’ll leave it there, Douglas. I really appreciate you coming on the show today.

Douglas: Hey, thanks so much for having me.

Peter: Okay, see you.

You know, I think most people in credit today recognize the importance of AI tools and how it can really help increase loan performance, it can help expand the credit box and, you know, can bring credit to more creditworthy individuals. It’s a testimony, I think, to the work that Douglas and his team have done at Zest Finance that they were able to bring in such large financial institutions such as Discover.

A quick plug, if I may, we have the CEO of Discover and Douglas on stage at LendIt Fintech USA in a couple of weeks. If you’re listening to this after April 9th, you’ll be able to watch the video on our website, it’s going to be one of our featured keynotes of the entire event.

Regardless, I think, more and more of these large financial institutions are going to be deploying these sophisticated AI tools and I think that will be a great thing as we continue to expand access to credit to the underserved.

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

Today’s episode was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s happening April 8th through 9th, at Moscone West in San Francisco. It’s going to be the largest fintech event held in the Bay Area in 2019. We’ll be covering online lending, blockchain, digital banking and much more. You can find out all about it and register at lendit.com.