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Lend Academy's Lending and Fintech Podcast

The Lend Academy Podcast is the first and most popular podcast dedicated exclusively to lending and fintech. Peter Renton, Lend Academy founder and LendIt co-founder, interviews fintech leaders about what is happening in their business, the industry and their views on the future. Whether you are just finding out about fintech or have been involved in the industry for a decade you will learn something new here every week.

Podcast 271: Immad Akhund of Mercury

The CEO and Founder of Mercury talks about what is wrong with business banking today and how his company is creating a new banking experience for entrepreneurs

October 30, 2020 By Peter Renton Leave a Comment

Views: 169

There has been a great deal of innovation in digital banking for consumers with dozens of fintech companies providing digital bank (or bank-like) accounts that are so much better than what was available five or ten years ago. But the same cannot be said for small business bank accounts where there are very few offerings.

Our next guest on the Lend Academy Podcast recognized this problem several years ago and is addressing it head on. Immad Akhund is the CEO and founder of Mercury, a bank that has been created to serve startup businesses. The Mercury app has a user experience reminiscent of some of the best consumer banking apps but it is a full service bank account built on modern rails for startups.

In this podcast you will learn:

  • Where the idea for Mercury came from.
  • How he describes Mercury when talking to startups.
  • The set of banking functions that they offer today.
  • Immad’s thoughts on the recent moves by Intuit and Kabbage.
  • Who he views as their major competitor.
  • Details of their bank partnership with Evolve Bank & Trust.
  • Their approach to user experience and design.
  • How they are getting the word out about Mercury.
  • The challenges Immad is seeing from his startup customers.
  • The idea behind their Mercury Raise initiative.
  • How Immad thinks about offering a lending product.
  • The scale they are at today.
  • How he thinks about their product road map for next year.
  • The vision for Mercury.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech Digital, the new online community for financial services innovators.

Download a PDF of the transcription of Podcast 271 – Immad Akhund.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 271-IMMAD AKHUND

Welcome to the Lend Academy Podcast, Episode No. 271. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by LendIt Fintech Digital, the new online community for financial services innovators. Today’s challenges are extraordinary with the upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com

Peter Renton: Today on the show, I am delighted to welcome Immad Akhund, he is the CEO and Founder of Mercury. Now, Mercury is a super interesting company, they are basically a bank built for startups. You know, Immad saw this from personal experience that…..whereas the banking industry has made considerable strides on the consumer front, there is a lot of neo banks out there that got really great user experiences, compelling offerings, but the same hasn’t happened on the business side, particularly when it comes to startups.

There’s really not many digital first offerings when it comes to banking so Mercury, you know, is building that and we get into that in some depth. We talk about the banking landscape, the new offerings from Kabbage and Intuit and obviously you have Silicon Valley Bank in here that are also doing things, we talk about why Mercury is different. We also talk about a new initiative with Mercury Raise and what it’s doing there and then where he sees…..what is the vision for Mercury going forward. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Immad!

Immad Akhund: Yeah, thanks for having me.

Peter: My pleasure. So, I’d like to get this thing started by giving the listeners a little bit of background about yourself. I know you’ve had an interesting career, this is not your first rodeo, so why don’t you give the listeners some highlights before you started Mercury.

Immad: Sure. I’ve been doing startups, starting startups since 2006 so Mercury is actually my fourth company. The first one was in London, I grew up in London, then I moved to San Francisco to the YC Company back in 2007, that went okay, we did have an acquisition and then I did my third company which I spent most of my time from end of 2008 to 2016 when we sold it. It was a development tool around app tech and as for the idea for Mercury, I had….about 2013, when I was going halfway through that startup and I was just kind of very frustrated with the banking options we had as a startup and it just turned out like no one did it (laughs) from 2013 to when I started in 2017 which is good.

Peter: Right, right. So then, what was the it specifically that you were, you know, trying to solve there where you said that, obviously, large banks, actually most banks don’t really cater to startups, they cater to businesses, but what was it specifically that you were looking for?

Immad: Yeah. I mean, throughout that journey, from 2006 onwards, there was this whole kind of concept of consumerization of enterprise, right. Like in 2006, everything kind of stopped, right, like all the enterprise software were really……you know,1995, you couldn’t use that, it was all desktop apps, it was just a very frustrating experience and then over time, you know, payroll improved through Gusto and all of these providers. You know, communications improved like….Slack came out, I could see all of these things improving in my day-to-day entrepreneurial life, but the bank was basically exactly the same. Maybe they’ve launched their mobile app that kind of worked, but apart from that, there had been no innovation and it didn’t seem to be improving while at the same time on the consumer side, banking was improving.

I’m from the UK so, you know, I could see that Monzo was kind of burning up and on the business side that was Tide and Quanto so I could ….yeah, I felt like this way it was coming, kind of challenger banks or neo banks where all of these experiences around banking would also be kind of at the same level as experiences with everything else in running a business. The crazy thing to me was financing was just so important to a business, right, like that’s how you look and buy like looking at your revenue and your cost everyday almost. It’s just a major stress point and you’ve got this bank software where you could just like…really hate logging in, you can’t get any insight out of it.

We wanted to automate banks with our….we were basically at the end of the marketplace where we were paying our developers, 600 developers, we wanted to automate some of that and we ended up just literally spending three days at the end of the month like manually typing the numbers into the bank interface. Yeah, that was the only way to kind of do it then. So, those were some of my frustrations and, you know, no one else was improving it and so I thought I’d do it.

Peter: Right, right. Well, it’s not that simple an undertaking to start a bank, it’s a little bit more complex strictly from the regulatory side. I’d love to sort of get your sort of…..to take a step back and say…. when you are talking to startups today, how do you describe Mercury?

Immad: Yeah, good question. So, partly depends what stage it is, I think if you’re right at the start incorporating your company, you want to get a bank account going…..you know, no startup entrepreneur wants to go walk into a branch, sit there for three hours to set up a bank account, they want to get it from a computer that’s what they’re used to, you know, waiting on line takes time. We try to make it kind of seamless and easy as possible.

At the end of it, you get a bank account that’s kind of suitable for your startup, right, like if you’re a funded startup and you have $2 Million and you want to be able to pay out like $300K to an engineering team in Germany or wherever it is, we enable all of those things from day one. You don’t have to go back to the branch and say hey, why don’t I have…why wasn’t it enabled… and all those kinds of stuff so, you know, by being like made for funded startups and all startups, you know, especially funded startups, we make all of those kind of things seamless and easy.

And then for…here, established companies that want to consider switching, the sell is much more….have a really easy way to send money, takes like a few minutes, it’s seamless, you can search your transactions very easily, we give you virtual cards, we have an API…..you know, all of these things are kind of like this additive, improved experience where instead of thinking that oh, I have to do my bank thing, you know, I’m going to get locked out of my account, it’s going to be so painful, I have to call them up, all of this…these kind of things that go through the back of every entrepreneur’s mind when dealing with their bank. We just want it to be super seamless and easy to do.

Peter: Right, right. So, the core functions that you have….I mean, do you feel like your feature set is relatively complete or you’re going to be continuing to….obviously, I’m sure, you have a product pipeline, but I’m just thinking about…there are certain basics that every small business needs, I mean, do you see the basic feature set…are you missing anything now or you feel like it’s pretty complete for someone to get going?

Immad: Yeah. I mean there’s like core banking and that feature set is very complete we do. Yeah, you can send a check, you can ACH, you can send wires, you can send international wires, obviously, it’s a real bank account with a routing number so money goes through it. But, you know, I think the future of banks is not like there’s a bank account, with an account number, a routing number and you’re done; I think it’s building these kind of additional financial and business tools that really help you run your business in the long term. I think from that part we’re like 5% (cross talking) help entrepreneurs and we….building a bank, one of the tricky things, you have to build all of the features first then you can start innovating (Peter laughs) and we have like a pretty high standard for what we would consider shipping.

Yeah, even after we launched, I mean, April 2019, I don’t think we were 100% done with the features and those core features and we’ve kind of improved them a lot since. In terms of missing things, yeah, there’s a couple of things, I think like mainly cash and checks. If you’re dealing with a lot of cash then you need to go to a bank branch to deposit it, I don’t think…..like we’re really focused on kind of digital first businesses, that’s the term for it, like people that do all of their business online. You know it’s all bits, it’s a little harder if you’re dealing with cash and all, but those types of businesses, I don’t think Mercury is like 100% appropriate for.

Peter: Right, right, right, understood. So, it’s interesting there, you’re talking about using the bank account as a way to kind of provide more intelligence to an entrepreneur because there’s been some movements just recently this year in that area.

Obviously, we’ve got Kabbage who announced a bank account, we’ve got Intuit that announced at a similar time period earlier this year, I’m curious how you view those kinds of moves because these are obviously companies, particularly with Intuit, that have a lot of intelligence already on small business and probably many of your customers are also using QuickBooks to run the accounting side of their business, so what do you make of those moves?

Immad: Yes, I think the places we target and the startups, you know, you kind of want a bank that really like understands what you do and gives you all of these. It’s not just has the features like it’s a bank account with a debit card, you kind of want to be able to give customer service in a really like seamless way where if someone calls you and you know it’s a funded startup and they want to receive $5 Million from like a Series A investor, you don’t want to be like not understanding what they’re talking about which is what happens if you deal with a kind of non-startup bank, So, Intuit, especially, is like much more like a more broad SMB play.

Peter: Right.

Immad: And I think like the long tail of SMB, they can do a reasonable job, they already have the customer and they can give the basic bank accounts. I think where we’re going which is, you know, yes, we serve like smaller companies and as these companies scale we want to be with them. We want the smaller companies to feel like they, whenever you’re ready to scale Mercury is the bank for them. So, over time, we’ve built a bunch of features that are…yeah, if you are two-person company can also be useful like we have kind of a fairly rich user permission management and card management, APIs and all of these things so we want to….and we’re going to continue having those features that kind of scale with companies so that’s one aspect.

I think the other thing that’s kind of interesting about banking and like most fintechs, is a lot of the kind of nuances in customer service and compliance and board infrastructure, you really have to kind of understand your customers and be able to service them as quickly as they expect. And also, yeah, if you don’t have like a compliance or fraud infrastructure, it tends to happen that the compliance and fraud infrastructure kind of suits the lowest common denominator, right, whereas if you have a targeted kind of vertical industry you can really understand what the needs are for the startups and service them accordingly.

So, some examples of that is…I talked about limits earlier, we also deal with a few crypto startups who may have some specific needs that banks don’t want to work with normally. So, it’s a bunch of these things where, you know, because we understand our market, we cater to it and we continue building features for them.

Peter: Right, right. So, obviously you’ve got Silicon Valley Bank that has kind of the venture-backed businesses, you know, they have a pretty good market share, I believe, in that. Are you really going after their customers like trying to get them earlier or do you feel like they’ve been working in your space or not?

Immad: They’re, by far, the primary competitor, let’s say 50% of US startups probably choose SVB, you know, so those are the ones we’re going for. We do go, you know, earlier in the life cycle of a startup like we want to be there from day zero whereas I think SBV probably prefers like later stage companies to some extent. This kind of infrastructure makes it easier for them, but, you know, banking is very sticky getting there too early and kind of sticking with the customer and helping them in order to scale is I think a very good way to kind of……

Peter: I mean, no one really switches their bank unless they’ve got a real reason to be….because they’re dissatisfied. You know, once you get them, they’re not going to leave if they’re satisfied, it’s painful to switch. (laughs)

Immad: Painful and, you know, if we’re serving them directly there’s no reason to leave.

Peter: So, just on the regulatory side, you obviously don’t have a banking license. How are you delivering the actual bank accounts? I presume you’re partnering with an FDIC-insured bank, correct?

Immad: Yes, so we’ve partnered with a US bank called Evolve Bank & Trust, one of the main kind of fintech bank partners that we use nowadays and that’s something that’s a real enabler for kind of fintechs going after depository banking. Even in 2017, there was many less kind of bank options that were available to startups. Now, every like six months I’d say there’s one or two like extra banks that we partner with which is really cool, it’s enabling a lot of innovation.

Peter:  Right, right, yeah. Speaking of innovation, you know, when you look at your user experience I feel like …we’ve had this movement over the last several years for user experience on the phone on the consumer side has really gotten, I would say, very good, there’s gradations of good, but on the small business side it feels like user experience is not something that has been focused on. I look at your app and I’m looking at the way you have designed your website, it feels like a consumer offering, as far as user experience goes so tell us what’s your approach to user experience?

Immad: I mean, it starts mostly by having just like great design, we’re very thoughtful about it and, you know, we place our experience at the forefront of like what we do. It is a bank, obviously, but we want to deliver a great experience and, you know, I think having a culture of like really caring about that, iterating it, improving it over time. That’s kind of I think the core of it. There’s kind of two types of like, you know, on a high level, there’s kind of two types of startups and that happens even more so in fintech. You can have like one kind of core idea and that’s kind of the thing that a startup blossoms from, right, like if you take Robinhood it’s kind of free trading and that’s what the startup blossom is.

But then, there’s this other type of startup which is like, you know, active and current experience kind of sucks, I mean, we can improve it in lots of way which gives you a 10x improvement which is more like Zoom or….. there are other ways to communicate, but they were never great. But, Mercury in the second set of startup…the core thing we do is deliver this great experience that’s has to be end-to-end, seamless and, you know, really upgrade these things.

That’s the core of it, I think the original team, me and Jason, Max, my Co-Founders, we’re just also like, generally speaking, uncompromising when it comes to having to deal with bad experiences and wishing to optimize and improve these things. You know, Mercury is the biggest user of Mercury, by far, so all of our employees are in there, we are also probably the most user of Mercury accounts. So, yeah, we’re using all of the time so these things are frustrating us, they’re frustrating other customers so we can improve them over time.

Peter: Right, right, you eat your own cooking, that is good to see. So, one question, like you say you’re trying to get businesses at day zero, how do you reach those businesses? What are you doing to get the word out about Mercury?

Immad: Yeah, I think it can sound a little lame when people say this, really people just really love Mercury so (inaudible) everyone. I think that is like the core of kind of how we grow. It is tricky to get the business at the exact right point, but they’re thinking about a new bank, right, either they’re incorporating or maybe at some point later they think about like I want to switch banks.

So, it’s not, you know, some other business SaaS as things you can buy, you can try to win the customer at one point so, for us, you know, having those customers are real. I believe in making them not just slightly happy, but really happy and wanting them to the point where they want to share Mercury with their friends and other entrepreneurs. You know, entrepreneurs always have other entrepreneur friends who find it hard to kind of do this by themselves so that’s the core of it.

We also partner with incorporation tools, that’s kind of the second and if there was like one big channel for us, that’s one of the bigger channels that we work with like StripeAtlas, JumpStart, Cafe, there’s a bunch of these and new companies coming up that help people set up their business, sometimes kind of manage it later on as well and we tend to kind of be a really good bank partner for them because, you know, once again, you just set up your business online, from the incorporator’s perspective they don’t want to say to them hey, go to a bank branch instead of this (Peter laughs) like they already have customers they can deliver that experience from Mercury.

Peter: Yeah, right, right, fair enough, okay. So then, I’m curious like this has obviously been a unique year for everybody and certainly for startups. I’m seeing…. from people I’m talking to, there’s a lot more people starting businesses, but there’s also those that are just getting going, that are having challenges, maybe you could just spend a minute or two when…looking at your customer base, what are the biggest challenges that you’re seeing with startups this year?

Immad: Yeah. I think April, May and June were hard in startup-land, you know, there was some financing happening, but it was very like mostly internal investors investing in their portfolio. I think companies were not going to finance, there was a lot of uncertainty and then the market kind of bifurcated at that point between those things that….often things that touched at things like travel, also things like hiring, recruitment kind of really massively slowed down so those startups were really hurt.

But, on the other side like the startups that were kind of, you know, collaboration-focused, efficiency-focused, save money-focused….if you think about a lot of things that the startups are trying to do, they’ve actually aligned pretty well this pandemic, particularly. They were moving offline things online. It turned out that ……actually, the startup world kind of said, okay, at the end of it, it’s good for us as well since we kind of….other macro startup world does, it’s like impacts Mercury quite a bit.

That was one side of it, I mean, we do have also quite a few e-commerce companies that use us and that was kind of interesting to watch because in February, China was not like shipping things out because the factories have shut down and there was this major kind of supply issues, but even since then, especially in April, there’s been explosion in e-commerce and that’s kind of been sustained. We’ve seen that in our numbers, in terms of both people starting e-commerce companies also like existing companies we had.

Peter: Right, right. So then, are you seeing like for the brand new startups, have you seen an acceleration this year that was, you know, more than expected?

Immad: We were already like pretty strong growth trajectory, we are only a year and a half in, it’s hard to overlay our growth trajectory was on the underlying market. In the last three months, I would say mostly business as usual again, there’s more difficulty…..I think that sector that may have been hit the worse was people who don’t have too many connections to the Valley like to investors here. I think, you know, if you’re kind of completely out of the network, it’s a little hard to network your way in, there’s no interest in person meetings, there’s no networking events.

Peter: Right.

Immad: You know, a lot of these things that used to facilitate sometimes these initial introductions are gone so that’s probably the sector that’s like….the type of entrepreneur that’s been like most affected. But, on the other side, the surprising thing is like we’ve even seen an emergence in like more emerging kind of seed and pre-seed investors. Rolling funds are just kind of a….normal funds kind of acting so that slightly helped a little bit because there’s more options available to these early stage entrepreneurs.

Peter: Right. And speaking of which you just recently launched, I think it was just early this month, a new initiative called Mercury Raise which I thought was super interesting. Why don’t you tell us about that, what was behind the launch of this new product?

Immad: Yeah. So, the idea with Raise is we had a bunch of startups that started incorporation, they were with us from the start and one of the biggest requests they asked was since Mercury is highly networked and with an investor base like hey, can you introduce us to investors kind of thing. We do it like every now and then, but obviously we wanted to help in a broader way so we decided to launch Mercury Raise.

The idea isyou as an entrepreneur, when you’re ready to raise a seed round, you let us know, it’s a relatively simple form to fill in and then we collect it together basically ….you know, all the good kind of seed investors we can think of and once we launched it we had a bunch of other seed investors that kind of applied and wanted to be part of it.

So, we’re planning to run this, I don’t know, maybe once every two months or so, we haven’t figured out the schedule, but we collect together all these great startups, we send it to investors. If the investor wants to talk to one of them, we make an introduction. So, it’s, actually, relatively lightweight, but, you know, we’ve got this network and I think it’s fairly impactful.

So, we just did a round, we had 460 startups, about 70% of them were already Mercury customers, a few people. We also make it available to new people if they want to be part of it and, yes, we sent it all out, we’ve already made more than a hundred introductions to investors, there’s no… kind of looking through it, it was, obviously, a lot of startups for all the investors to look through.

So, we’re going to iterate that program and I’m really excited about it. We decided before we started Mercury, you know, we really want to be ….not just say we are helpful the kind of tangibles things for people, we can say we helped in driving, but I think it is intangible programs that deliver value, that’s what it’s about.

Peter: Right, right. So, it brings me to another question. You know, a lot of these startups once they get going, and obviously Silicon Valley Bank is renowned for this, is they also provide lending capital, is that on your roadmap? I mean, I presume you’re doing that now, but what are your thoughts about providing loans to Mercury customers?

Immad: Yeah. It’s not something we’re doing now, it’s definitely something we’re thinking about and there’s a couple of ways to do it. Right now, there’s more and more kind of options for lending that is like non-traditional, but kind of, yeah, maybe potentially more aligned with Mercury and our customers like it’s more automated, it’s faster, it’s a great kind of thing. I don’t want to name names, but like Clearbanc, a bunch of these kind of lending. You know, either we’ll do it kind of as like a platform or we work with these appropriate companies or we might do some of these things ourselves. So, it’s still early days as we are thinking about it.

Obviously, as we continue growing, it becomes more and more relevant when the companies get to later stages and also we have more companies that ask for these things. It’s definitely on the radar, yeah, we haven’t done anything yet. Some of our customers do get loans from these people and other even banks and, yeah, we help them where we can and allot the time even if we’re not the loan provider though, they’ll continue using us.

Peter: Well, as you say, there is a thriving fintech ecosystem on the lending side for small business. I mean, you mentioned some of the names, but there’s many, many others that I’m sure would love to partner with a company like yours to be the capital provider so I think that’ll be a “win win.” Okay, so then, you said you’ve been in business 18 months, can you give us some sense of the scale that you’re at today?

Immad: Yeah. We don’t release all of these numbers, but, you know, we have more than  10,000 businesses now using Mercury, still growing 10 to 15% a month so obviously that makes it so we have to think and grow our capability in terms of customer service and all of these backend so we are at the same pace and kind of scale with it.

Peter: So then, what about employees? You’re based in San Francisco, right?

Immad: Yeah, you know, nowadays (laughs). We have about 55 employees, I don’t people love this, but we can in the long term or the medium term we’re going to have a hybrid kind of  approach. We’ve three main offices in San Francisco, Portland, which is mostly all of our compliance and risk people and then Toronto where we have a few engineers and most of our support team, but, really I think we have people in 12 states now, altogether we have 55 employees.

Peter: Right, right. And so, you are going to be growing that like nationally, it sounds like. You’re not planning on keeping everyone, hiring engineers in the Bay Area?

Immad: Yeah. I think it depends partly on the role…with engineering, we’re super distributed, there’s very few engineers in San Francisco, with some other roles, for whatever reason, design BD, and a few other things, support as well, yeah, it’s mostly being kind of concentrated in one of these hubs and …I still like the idea of kind of serendipitous kind of collaboration that happens in person.

The other thing that we quite like is we don’t….one thing that people haven’t talked about too much is I really want the engineering team to be talking to the sales team, to be talking to the support team and like have this kind of cross-connections that I think are harder to organize in a distributed world. Yeah, I think if like people understand what everyone’s roles are like if someone gets stuck on something they can just ask someone about it and it doesn’t have to come through like a top down kind of management there.

I think that really makes for a good culture where things are efficient and people enjoy working there. So, I’m thinking about all of these things, you know, I don’t think anyone has great answers to all of them, but we’re open to both and we’re kind of doing both, basically.

Peter: Right, right. I know you touched on this earlier, but I’m curious about, you know, like a product roadmap, without giving away secrets, but where do you think you will be…like looking at 2021, are there certain milestones that you want to make sure that you have these particular features out next year?

Immad: Yeah. So, I mean, loosely speaking, I kind of think about that roadmap in three pieces like number one, what’s the additional financial services we can add on to a bank account. So, for example, we had our virtual cards in March, gave away the…..but, there’s more we’re adding. We should have a new announcement in November like a major kind of financial feature we’re adding.

And then part two is what are the business tools we can add on to top of the bank accounts, you know, we added an API in October and we’re improving it. We have to launch an Android app, I don’t know which kind of tier that falls into, we have an iOS for our in-house so we’re working on that, that’s going to be a pretty big thing for us. We really want to add more analytics we touched on to help you kind of understand your finances through your bank account, things like that, so that’s part two.

Part three is just kind of incrementally improving the things we have and, you know, we have, I think every company does, but we have like this freaking huge things that we want to do with like additional things. Some of them are small, particularly on our transactions, we want to give you more details like you attach invoices to the transaction, that kind of stuff and, yeah, some of them are a little bigger in terms of….we have a user permission system which we will continue enhancing, making it….. especially as people requested, to be just like, hey….. with ease of permission, people request like almost any feature you can think of, but I have to like, hey, I want to invite a user, but I only want them to do transactions up to $5,000 or something like that so those type of things and stuff. We have some of them, but we want to continue iterating and building them out.

Peter: So then, last question before I let you go. What’s your vision here, do you think one day that Mercury will have a banking license of itself and you’re going to have a national brand. Everyone knows you’re the small business startup bank. I mean, what is the vision for Mercury?

Immad: I think, yeah, looking at it like ten years out, I think it’s inevitable that kind of the top ten banks are going to be technology companies, whether it’s going to be existing banks learning and adapting to technology or completely new players like us kind of being there, so that’s inevitable. I think when that happens….you know, so far a lot of banks that existed is like, you know, regional banks, if that makes sense and the bank in Texas, whatever it is, I think the future is like these banks are going to be kind of verticalized players, it’s going to be people like Mercury that’s…..all of the US not just a particular industry within the US.

So, that’s the future and we want to be in this kind of …..on the business side, at least, we want to be the top kind of bank that serves all of these additional businesses which, again, I think the future is most businesses are going to be like digital first, if that makes sense. I mean, something like restaurants moving to POS systems and all these things digitized. So, yeah, we want to be there, not just be like there with basic bank services. I kind of re-imagine it to be some products, but focused technology companies that are doing those, what are all the things you can build to make this kind of experience around your finances is really great, really empowering the entrepreneur.

Peter: Right, right. Well, well, good luck, it sounds like it’s going to be….there’ll be better experiences from entrepreneurs going forward so that’s a real positive. Anyway, Immad, I really appreciate your coming on the show today.

Immad: Yeah, thanks for having me, Peter.

Peter: Okay, my pleasure, see you.

You know, talking with Immad, it kind of many times, during our conversation, quickly towards the end there in my mind, I was reminded of the podcast I did with Karen Mills back in 2019, Episode 190, we were actually doing a review of her book that she had written. Karen Mills was the former Head of the US Small Business Administration under President Obama and she writes in her book about Small Business Utopia and really talking about how fintech is coming along and providing all these things, all the information, all the sort of tools that a small business needs and as I was reconsidering that during Immad’s conversation, I felt like what’s been missing has really been a bank that was really engaged, really sort of thinking about how they can help small business in a digital way and bringing fintech to small business banking.

I feel like that’s what we’ve got here with Mercury, it’s super interesting. I agree with Immad when he says the biggest banks in the world in ten years time are really going to be tech-enables, tech-oriented banks. Obviously, some of the large banks are doing a pretty good job here, but, you know, where I really appreciate what Immad is doing is just re-thinking what a small business bank account means, what it should do, what a small business bank should do and I think that’s what Karen Mills was talking about in Small Business Utopia where I think Immad is building something that really has tremendous potential and is going to be a great asset for the entrepreneur and for small businesses going forward.

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 Digital, a new online community for financial services innovators. Today’s challenges are extraordinary with upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com.

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Podcast 270: Tim Flacke of Commonwealth

The Executive Director and Co-Founder of Commonwealth discusses creating real solutions to help low and middle income consumers improve their financial health, what is working and where we need to focus our efforts.

October 23, 2020 By Peter Renton Leave a Comment

Views: 112

The low and middle income consumer has been struggling for decades. And while the pandemic has made things a lot worse there is a great deal of work being done to try to improve their situation. One of the key pieces is savings, as a country we simply do not save enough.

Our next guest on the Lend Academy Podcast is working hard to help. Tim Flacke is the executive director and co-founder of Commonwealth, a non-profit dedicated to creating real solutions to some of the most challenging financial problems that we face as a nation. He explains why savings is the most important piece in helping the financially vulnerable feel more secure and actually start building wealth.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

In this podcast you will learn:

  • Why Tim and his co-founders started Commonwealth 20 years ago.
  • How he describes Commonwealth today and what they bring to the table.
  • The big regulatory success they had around savings initiatives.
  • What lower and moderate income populations need most.
  • Why employers are one of the keys to increasing savings rates.
  • What the CFPB has done around automatically enrolling people in emergency savings.
  • How they became part of the BlackRock Emergency Savings Initiative.
  • What they are doing with JPMorgan Chase.
  • Some of the work that fintech is doing to help lower and middle income consumers.
  • How Tim is thinking about the challenge of income volatility today.
  • How Commonwealth engages with fintech companies.
  • How they are working with regulators today.
  • Where their operational capital comes from.
  • How Tim thinks about the progress we have made in the past decade.
  • Where can we get to as a country when it comes to savings and having a healthy financial life.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech Digital, the new online community for financial services innovators.

Download a PDF of the transcription of Podcast 270 – Tim Flacke.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 270-TIM FLACKE

Welcome to the Lend Academy Podcast, Episode No. 270. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by LendIt Fintech Digital, the new online community for financial services innovators. Today’s challenges are extraordinary with the upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com

Peter Renton: Today on the show, I am delighted to welcome Tim Flacke, he is the Executive Director and Co-Founder of Commonwealth. Now, Commonwealth is a really interesting organization, they’re a non-profit focused on helping the financially vulnerable gain financial security and they do this in a number of different ways.

You know, they first got on my radar with the BlackRock Savings initiative that was announced last year so we wanted to get Tim on the show for a while. We talk about that initiative in some depth and how it’s going to work and the impact that it might have, we talk about the challenges, the biggest challenges for this group for the lower and middle income consumers who are struggling with financial security and we talk about the role of government and some new initiative, new guidance that came out of the CFPB.

We talk about income volatility and the challenges there and we talk about how Commonwealth is looking to work with fintechs and how they do work and Tim sort of gives us his perspective on what’s happened over the last decade and why he is actually optimistic about the future. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Tim!

Tim Flacke: Hi, Peter, glad to be here.

Peter: Okay. So you’ve been doing this for a long time now, but maybe you could cast back, I don’t know, 18/20 years whenever it was, when you started. Tell us about what you were thinking about when you started Commonwealth.

Tim: Yeah, yeah. So, it feels like a long time ago, but really, the thing that brought the three of us who started the organization together was this idea that we have spent a lot of time in this country thinking about, you know, needing to keep roofs over our head and food on the table for everybody and that’s critical. We haven’t succeeded, but we all understand that thinking about how to solve really poverty of what had been …it’s kind of a new idea that inspired us was the sense that if you’re serious about lasting change in households, you really have to focus on what people own and their assets.

That idea just made a ton of sense to me and I ended up connecting with a Finance professor, Peter Tufano, who had relatively recently been tenured and a fair gentleman who had been both a community organizer and a banker throughout the 1980’s. We came together because we had thought this idea of helping low income, moderate income families build some assets and wealth deserved our attention, deserved some real effort.

You know, there are sort of three things that I look back and I see brought us together. One was as that point which was, you know, 1999/2000, it really felt like there were revolutions in technology that made new ideas possible. The thing I really remember was just this radical idea that the regular people, even low income people, could access the Internet and use technology for themselves and a lot of people thought that was not …..you know, it wasn’t clear that was really true.

The second thing was the sense that, you know, we needed some “ands” instead of some “ors” that we were serious about solving big problems, we needed to tap into technology firms and large financial service firms and also we had to go out to communities and talk direct to the consumers and the ability to kind of bridge that gap felt really powerful. So, I guess actually those are two things so, yeah, that was what brought us together.

Peter: Okay And so, maybe…you’ve obviously done a lot of things over the last 20 years, maybe you can talk about…firstly, maybe just talk about how you describe Commonwealth today, let’s just start off with that and then we can dig into some of the history.

Tim: Yeah. You know, we are structured as a Not-for Profit so for us it starts with the Mission and the Mission is financial security and opportunity for low and moderate income families, you know, really sort of hardworking people who don’t have a whole lot. So then the next question is that’s a big mission, what do you bring to it? I’d like to say we bring innovation and influence.

We’re in this really fortunate position that we get to look for challenges that families are facing and try to figure out solutions and do that with an emphasis on social impact first always knowing that we can’t figure out a way for it to be sustainable, we won’t really achieve anything. So, we still have that constraint, but that speaks to designing new product idea, sometimes new policy ideas trying to do it rooted really in the customer and that’s hardworking, often say single parent holding up a couple of jobs just trying to make it through the month.

And then the second side is influence. You know, when we do is innovation work and we come up with something and we have evidence, purely work, you know, people want it and when they use it, they’re better off and we think there’s some way that it can be delivered sustainably then our theory of how we make a difference in the world is to take that to market actors and policy makers who have a lot more reach than we do and say, here’s something to really look at and see what you can do with it.

Peter: Okay, okay. And so, then maybe let’s just….love it if you could focus on two or three things since you began, particularly maybe even the last ten years that you would say have been, you know, successful partnerships, ventures, projects, whatever you want to call it, what are some of the things you’ve done?

Tim: Yeah, I know, and thanks for the question. So, we believe that in many ways savings is really the single most important thing for households. You know, the problem is that none of us like to save and it’s not a fun thing. So, we begun a while ago really with this notion that if we can reward savings with chances to win prizes…that something as simple as that can really make a difference in making it possible for people to save so that’s a simple idea. It turns out it was illegal in this country, more or less, a decade ago so, you know, this is what we do.

We found a little hole, we were able to test that idea initially with credit unions in the state of Michigan. We built out a value of evidence that people would use it and a lot of them would never have had savings before and then we took that to policy makers in more than 30 states now and Congress and got a little bill from Congress and have cleared the way, sort of the legal pathway to allow this product idea. In parallel, we’ve seen an explosion of fintechs/startups that have seized on this idea, some depositories, especially credit unions.

We’re very excited that several years back now, Walmart incorporated a prize based savings feature under their MoneyCard which is their premiere pre-paid card so that would be an example. We’ve done a ton of work to link up tax time and the large tax refunds that come from the IRS to working families to make that possible that it can go into savings. We actually pioneered and the Obama administration introduced an option for families to have some of those refunds into savings bonds so that would be another thing.

More recently, very recently, we worked with an organization called The Workers Lab to test out what happens if you offer gig workers a chance for just emergency cash assistance. Let’s say something happens, we’ve got you, no questions asked up to a certain dollar amount. So, that was very recent, we have some literature about that on our site. Yeah, so, that’s just a quick tour of some things we’ve been up to.

Peter: Okay. So then, when you’re looking at your population, the lower and middle income people in this country, we always hear they don’t have very much savings, they’re struggling, particularly, they’ve been hit by the pandemic worse than other areas of the population so what is it…I mean, you talk about savings, but how can we change the…. that’s a big question, but what do they need most, I guess, is what I’m really trying to get at.

Tim: Yeah, I really appreciate that question, Peter. So, I’ll give you an unsatisfying answer which is, you know, low and moderate income people are a huge universe increasingly in this country so it varies a lot just like it does for any population so what are those cross cutting themes. Well, I guess, one thing is the amount of anxiety, financial anxiety, that most working people in this country live with is extremely extraordinary.

So, at a cross cutting level one of the few things that are going to bring down that temperature a little bit in these consumers’ lives …..so, I would say, yes, savings is the thing that we think about first and that having even a modest amount, you know, even a few hundred bucks set aside really makes a difference in how you feel when something unexpected happens. Well, you know, there clearly have to be other ways to bring down that temperature.

The second thing that feels cross cutting is that experience of living, you know, very much in the moment and the present and thinking about next week or sometimes, you know, this week and will the cash be there to cover the rent and this sort of thing. It tends to squeeze out the ability to kind of be hopeful about the longer term.

Peter: Right.

Tim: And so, you know, I think we really need to look for ways to make that hope real for people. What are the things they can do for themselves longer term and oftentimes and their kids. I guess the last kind of cross cutting thing I’d say is some of these start with simply seeing these customers, you know, really understanding that reality in whatever your business is, you know, whether it’s credit or insurance or what have you kind of go into extra measures to really understand what that experience of living very, very tight over long periods of time and then deciding on that basis.

Peter: Right, because, you know, I have a friend who is financially struggling and he said something to me many years ago that stuck with me. He said, if you have an unexpected expense come up, and I actually helped around a little bit, but she said, when you’re living tight and then something bad happens, he said, you can’t think about anything else, that’s just all you think about every minute of every day, how am I going to get out, how are we going to get out of this.

And it just struck me like so that’s all you think about and I think people like us who are comfortable and most of the listeners of the podcast are comfortable, I think we forget how hard it is when you are living paycheck to paycheck and then something bad happens. It’s good to remind ourselves from time to time.

So, I want to move on and talk about the CFPB because I think it was just this month I think it was, new guidelines from the CFPB encouraging automatic enrollment of employees in emergency savings programs and I think we’ve done 401(k)s and it has been a huge success. I think this is a really great move, but I guess it brings up a question that I want to ask you, are employers the key to increasing savings rates in this country.

Tim: I think they’re definitely one of the keys, absolutely, so why ….I mean, the first thing that I imagine many of your listeners know is that savings is not an obvious business case. The smaller the balances and the shorter durations, the tougher that business case gets. You know, in the extreme case someone who wants to be able to set aside $50 or $100 this month and then next month draws that $50 or $100 out and then the next week put it back. You know, how do you make money on that?

And so this is one of the geniuses of the workplace is the reason that an employer cares about the financial security and stability of their workers is they’re not trying to make money on a product level, you know, P&L, they’re really in it for other reasons. So, that’s one piece on why we think the workplace is really powerful.

A little bit more sort of, you know, operational, they’re right there at the moment of the income, right, so there’s just a ton of research and basic intuition that the ability to be right there at that moment of riding the waves and say, would you like to use split direct deposit and have a little bit of that paycheck go into a savings account. It’s the same rationale that gets money into retirement savings, that’s just very, very powerful.

And then the last point is that, you know, employers…..first we all read about the changing nature of work and all of that is happening for sure, but for people who work for firms or institutions today, you know, they’re used to getting benefits and some essentially financial advice, explicitly or implicitly, so to tap that infrastructure and that system around this issue is just so compelling. So, that’s a long way of saying, yes, we believe a lot in the power of the employer around financial security and savings.

You know, if I could maybe just flesh out what you’re alluding to from the CFPB, what they have done is provide a, it’s called a CAST, Compliance Assistance Sandbox Template, it’s a catchy title, but what it really must service is a guideline for safe harbor for firms that want to try this. As you said, automatically enrolling people into emergency savings and we have, right now, under something, hopefully, I have a chance to talk about, we are part of BlackRock’s Emergency Savings Initiative. What that means to this conversation is we have both our time and access to some of the best legal minds in the country that we can bring to firms that want to test this out.

Let’s say, I like to figure out, you know, what happens if we automatically enroll our workers into an emergency savings option obviously with opt out and so forth. You know, it doesn’t deliver the way it has in the retirement space and we see those as facts in terms of workers” productivity and just overall financial wellbeing. So, this is a….blatant advertisement, if that sounds like you and you work for a company, call us up because, right now, for a limited time we’re in a position to really offer a suite of resources that’s pretty extraordinary to help you out on that.

Peter: Right, right. I actually want to dig into that because, you know, I’ve seen the Commonwealth name here and there and then I saw the BlackRock Savings Initiative coming out. You know, obviously BlackRock, the world’s largest asset manager with…I don’t know how many trillions they’ve got now, but it’s many.

When they do something like this, they have the power to move the needle and I saw you guys and couple of names, I think it was….there was another organization that’s part of that as well, from memory, maybe you choose to say that, but maybe…how did you kind of get involved with this and what is Commonwealth specifically bringing to the table for the BlackRock Savings  Initiative?

Tim: Yeah. yeah. Like you, when we first learned that BlackRock was asking itself, and this is their social impact team, what could BlackRock really do that would be impactful and make sense, you know, for their firm given their capabilities and their reputation and the like. We were fortunate to get in conversation with them and we started talking about this importance and centrality of savings and, you know, through ongoing conversations with them and many other conversations I’m sure they had, they really came to see this as the issue just to dig into. So the Emergency Savings Initiative is Commonwealth and the Financial Health Network and the Common Cents Lab out of Duke and the three of us are anchoring this really ambitious effort to move the needle on emergency savings.

The way I think about this is really on the supply side so what does that mean? It means what is it that will make it possible for a large employer to offer its workforce a chance to build emergency savings. How do we make the retirement system which in many ways is just a fantastic piece of infrastructure and so well established, how do you make that work so that people who need to build up modest amounts of liquid savings can do so. How do we work with fintechs to make this more possible, you know, for those that are interested and inclined and so our work in that is just that, it’s to work with those partners.

My colleagues are working with UPS, for example, and some record keeping firms that I don’t think we can disclose right now to make this possible in a very large scale. And the legacy that I think we will leave is part demonstrating that this can work, that firms you would recognize the names of who have large numbers of workers or customers or stakeholders will do this, can do this and it achieves real impact so that’s what we’re up to and we’re super excited about.

Peter: And so is there a duration for this program, is there an end goal where you say right, we’re done, I mean, what’s the future of the program?

Tim: Yeah. So, we’re about midway through a three-year initiative so we have another…..through the end of 2021 and our focus right now is to open up really the channels, if you will, that I spoke about; large employers, retirement system, payroll companies, fintechs and then this automatic enrollment that I described. If we can show substantive progress of really marquee brands in each of those categories that’s really what we’re aiming for.

Peter: Right, right, okay. So then, I was also reading about another marquee brand that you’re working with, JPMorgan Chase, the country’s largest bank by assets so maybe you can share what you’re doing with JPMorgan.

Tim: Yeah. You know, actually we had a long relationship with JP Morgan Chase and proud of that and they are supporting us to work on what we call emerging technologies and, you know, this is just the basic storyline and I think we’ve all read that there are a handful of technologies that, you know, pretty indisputably are transforming the world around us and will for decades.

And so, we’re talking about Artificial Intelligence, machine learning, talking about distributed ledger and blockchain, things of that nature and so the work with Chase is taking just a piece of that, the AI piece, and saying how is this relevant to underserved consumers and what do we need to know for that revolutionary technology to produce good positive impact in the lives of low and moderate income people. And so, the work for us is some original consumer research with underserved customers; what do you know about these, what are your fears, what are your perceptions, what are your aspirations.

Crucially, are there use cases that by going in deep in underserved communities we might raise up that might otherwise be overlooked and then to take those insights and work arm in arm with fintechs who are excited to kind of act on them and see what we can learn from that process. At the end of it, we should have insights and guidance that, you know, as a not-for-profit we just put out into the world for public good that we hope and believe will shape and influence the development of these technologies.

Peter: Right, right So, let’s talk about technology for a minute and talk about the fintech space because, you know, from my perspective we’ve come a long way. I’ve been thinking in the last five years there are many…..just take overdrafts, for example, which is one of my pet peeves. I think it’s a horrible product and, you know, banks have made huge amounts of money over the years at the expense of pretty much exclusively the low and middle income consumer and we’ve got a bunch of fintechs now that are really addressing that problem head on.

Dave might have been the first one that really built their business to try and create a better product than an overdraft. There are now many, it’s almost becoming table stakes now for fintech…. if you’re trying to go after that population you need to have something like that. So, maybe ….I’d love to get….you don’t necessarily have to name names, but I’m sure you’re following these companies as well, what are some of the approaches, not necessarily just on overdrafts. but fintechs that you think are moving the needle. What are the approaches they’re using that really are helping lower and middle income consumers?

Tim: Yeah, I mean, that’s obviously an enormous question and so I’ll….there’s two that I wanted to mention. I mean, one, we have just seen that….the way you cast the question sort of between the banks and everybody else that in the middle there are these prepaid providers. You know, when we first started this work we were sort of this stepchild, you know, that we didn’t know what to do as an industry or something, but those prepaid cards have really graduated to the point where they’ve built a niche that is not otherwise built.

Peter: Right.

Tim: I mentioned we worked with Walmart, Green Dot around their MoneyCard….you know, I’m not advocating for that one as an example, but, you know, they have enormous scale and if you look at their customers that is clearly filling a need in a way that other products weren’t. Maybe you prefer don’t name names, but one that we’ve gotten to nail is MoCaFi which is a prepaid card that is probably black-owned and black-led and is specifically serving and aiming to serve black customers and bring a suite of products together on that platform. They’re, frankly, would be tough to get from other sources so I think there’s a lot there even if it doesn’t feel like the latest and the newest.

The second thing I want to mention is more far out there….you know, as I mentioned at the outset, really the big motivating idea for me personally and for us was what can we do to strengthen the family balance sheet, you know, get some assets. There’s an organization called Universal Basic Data Income (UBDI) and what they’re trying to do is figure out how the data that we all are generating, you know, we can own that data and monetize it at the individual level.

I think that’s, you know…..I love that, it’s a source of found money for households who really need it or use potentially  so very, very excited about that and, you know, there are some overlaps between this emerging tech concept I talked about and those sorts of individual enterprises that are asking where does the data come from and what can be done with it.

Peter: Right, right. I think that’s a great idea and I feel like….it’s interesting, I feel like this decade we’re going to make….I think we’ll have some changes when it comes to owning your own data and I’d love to see…..I think, eventually, you’re going to grant permission to anybody who wants to use your data. I don’t know how long it’s going to take, but there’s lots of companies out there that I know of that are really attacking this problem head on and I think it’s going to be interesting.

But, I want to switch gears a little bit and talk about something else we haven’t really discussed, but I feel like it’s a huge issue for so many people, and that is income volatility, where so many people don’t have a W2 income that is the same every single pay period. They’re the gig workers or they’re working part time jobs where the hours change a lot. So, when you look at those people, how are you thinking about them and how can we address this volatility problem of their income.

Tim: Yeah. I don’t have a grand solution for this one. I mean, the first thing I’ll say is, you know, at the risk of being a broken record, we do such a poor job on savings that if we can lift everybody up in having that baseline savings, I think that is probably the single biggest hedge on the volatility.

Peter: Yeah.

Tim: You know, I think the second thing to say is that in terms of the changing nature of work, you know, there’s clearly a need that nobody has quite figured out how to fill yet to replicate the stability of the infrastructure of that, you know, old school employer. You know, I predict that it will get filled at some point in some way, but we’re in a moment where we don’t have great answers to that although I’ve seen, I’m sure you have too, some startups and fintechs that are trying to plug that gap.

Peter: Yeah.

Tim:  You know, and then the third thing is I just think we have to at least keep in the conversation what are the limits of what private sector fintech can do and where is there a need for a broader government solution. You know, maybe it is around volatility, but increasingly that’s part of the political conversation and so it makes sense for us to keep that in mind too.

Peter: Yeah, for sure. So then, if there’s a fintech CEO listening to this and they’re interested in kind of a lot of things you’re talking about, how do you engage with fintechs, what’s the message that you want for them to know about Commonwealth?

Tim: Yeah. I mean, we’re an outside ally that can help you get where you want to go, I think it’s probably the quickest answer. What does that look like? Sometimes we do research together either with your existing customer base or a customer base you would like to serve and, you know, obviously we work out those details. We really like to test actual ideas in partnership and as I mentioned on the emerging tech work that we’re launching, we’re actually actively looking for partners who want to test things. We can often bring an outside additional resources so that it’s not a case of we all have to take off our roadmap to test something or even better, if it’s something’s already on your roadmap.

You know, in the long run we do just straight up advise fintechs in some cases, particularly on things we spend a good team of time on. I mentioned prize-linked savings as an example about the use of prizes to make savings fun and, you know for us, the first question is, is this our mission, is this about trying to make financial security and opportunity happen for low/ and moderate income people. If that test is met then really the sky’s the limit in terms of how we can work with fintechs.

Peter: Right, right, okay. What about the government? We’ve talked about the CFPB already and I’d love to sort of know….I mean, what are you working on right now with the regulators, what are some of the policy goals you have that you think would help this community?

Tim: Yeah. We have talked about one of them, you know, in a very sort of tactical level, right, we really believe this idea of automatic enrollment needs to be tested and, you know, a little more broadly that’s a comfortable place for us to be thinking about a very specific idea that can be advanced that has a policy dimension.

Having said that, you know, the second thing that really for 20 years has dogged us is that getting to a place for everybody has access, it’s really, really tough. You know, one click down, everybody having access to a savings opportunity. Even if we get all the employers, it’s tough and we know that….frankly, the Treasury Department has capabilities that nobody else has in that regard so it’s been a professional interest of ours, you know, is there a way to use some of that apparatus, the most unique capabilities to make sure everybody has a good place to save. So, that would be something that’s an evergreen interest of ours.

Peter: Okay, that makes sense. So then, how are you guys funded, what’s your source of operational capital?

Tim: Yeah, no, great question. You know, there is a little bit year to year, but actually three quarters of our revenue does come from philanthropy which is a very privileged place to be, but it allows us to kind of put the impact metrics higher up on the heirarchy and, you know, roughly a quarter comes from some part of our revenue, consulting, contracts and the like so that’s us.

Peter: Right. So then, we’re running out of time, but I want to get a couple of more things in here. I’m curious about…you know, you’ve been doing this a while and put the pandemic aside for a second because that’s really a, you know, unforeseeable event, but I’m just curious, if you look back at, let’s just say, the last decade, after the financial crisis we had that and we’ve been in this recovery for about a decade. Are you surprised we haven’t made more progress than we have when it comes to really the financial health of the lower and middle income consumer?

Tim: Yeah. I am surprised, but I think the key point there is it’s just to repeat it, we haven’t had progress that we should and that we need to. I guess, I’m leery of trying put a silver lining, you know, label on the events this year. I think they’re too painful and too horrific, but I do think it’s really brought home…..you know, just how many of us are pretty close to the edge and just can’t go on like this. So, I guess I prefer to think about that question, what does the next ten years look like.

Peter: Right.

Tim: You know, this is a turning point and ……you know, the other fact that I just want to  try to express is that everywhere I turn it’s so clear that people are desperate for institutions they can trust in and then ….you know, we have a lot at stake in that collectively and fintechs are not first order institutions that everybody thinks of in terms of shaping their sense of our society, but there are these examples of fintechs that transparently put out a business model that say, look, I only win if you win.

Peter: Right.

Tim: Right. (laughs) That feels pretty different and so I take a lot of optimism from those little signs of different ways of thinking, different ways of relating to customers, with empathy and really seeing where people are at and I think those are things that I take, you know, just I feel for what we can accomplish as a field, as an industry.

Peter: Right. So, just expanding on that as the last question here. I mean, obviously some of these is a political kind of conversation that I don’t really want to get into at all, but where would you like us to be, where do you think we can get to as a country over this decade when it comes to savings and having a healthy financial life for the vast majority of consumers?

Tim: Well, I’ll give you one answer. If we could preferably in the first part of the next decade (Peter laughs) come to a statement about what sort of outcome is acceptable for us as a society and a country around a whole bunch of metrics, but even in just in the personal finance space, you know, then I think we’ve set the terms of the conversation.

I just was recently reminded by getting some data……I don’t remember that precisely in Canada they have some miniscule fraction of population that’s not part of the banking system, right, and in this country it’s not a very new idea, but there’s a sizable fraction. You know, those are policy choices, right, but these things can be….they are choices we make. And so, I think we need to think about that instead of the hand wringing and, you know, there’s nothing to be done, it’s just the nature of markets or it’s just the nature of the world.

It’s actually, no, we probably do have choices to make about where the floor is, in terms of household financial well being and we get that nailed down the first part of the decade. I mean, you know this better than I do, there’s a world of innovators out there that will operate in the envelope once it’s established, but let’s try to get clear on what the outcome we want to achieve in the next ten years.

Peter: Yeah, that’s great, that’s a great place to end. I feel like we have the capacity to do this, we have the capacity to solve this problem as a nation. I applaud you for the work you guys are doing, I think it’s very important. We need organizations like you that are taking the lead here. Thanks very much for coming on the show today, Tim.

Tim: Oh, thank you so much for the chance, really appreciate it.

Peter: My pleasure. See you.

Tim: Great, bye.

Peter:  You know, Tim and I were chatting after we stopped the recording and we were just commenting that this country…we have it in us to solve this problem, to really vastly reduce the numbers of people who are, you know, financially vulnerable, but it’s going to take a multi-pronged approach. It’s going to take, I think, some regulatory initiatives, it’s going to take fintechs and banks really working together to create products that are “win-win.”

They should not be a financial product available today that is “win lose” and we certainly have many of those kinds of products, that needs to go and I think….you know, there’s plenty of fintechs, as we said on the show, that are addressing certain areas in a “win-win” way and I think we are really going to have to rely on the entrepreneurs because this has to be….well, government has a role here, I think the entrepreneurs are going really have to implement products, create products that actually help the lower and middle income consumer and deliver products that really improve their lives. I feel like that’s one of the reasons why I’m excited about fintech, I feel we have an obligation and an opportunity to change the world and I’m excited about what we can achieve this coming decade.

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 Digital, a new online community for financial services innovators. Today’s challenges are extraordinary with upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com.

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Filed Under: Lending and Fintech Podcast Tagged With: BlackRock, Commonwealth, financial health, financial inclusion, JPMorgan Chase

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Podcast 269: Arjun Kakkar of Ekata

The VP of Strategy & Operations of Ekata takes us on a deep dive into fraud detection and why companies need ever more sophisticated identity verification systems to beat the fraudsters.

October 16, 2020 By Peter Renton Leave a Comment

Views: 153

This year the world has moved online. But it is not just consumers that have made this move, it is the fraudsters as well. They have taken advantage of a dislocated business environment without historical precedent to wreak havoc. To fight these fraudsters you need ever more sophisticated tools.

Our next guest on the Lend Academy Podcast is Arjun Kakkar, the VP of Strategy and Operations at Ekata. Ekata is helping online lenders, banks and payments companies detect fraud and make more accurate risk decisions. They see billions of data points across the globe and this has helped them build one of the most sophisticated identity verification systems available today.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

In this podcast you will learn:

  • The two secret weapons that Ekata has today.
  • The biggest challenges in combating online fraud.
  • The two ways fraudsters are attacking new digital account openings.
  • How fraudsters create synthetic identities.
  • Why synthetic identities are harder to fight than stolen identities.
  • How Arjun recommends lending platforms balance friction and a good customer experience.
  • Why probabilistic risk assessment is an important tool.
  • An explanation of Ekata’s Identity Graph and its eight billion data elements.
  • Their Identity Network and how it provides more information about risk.
  • What their Network Score enables.
  • Why there has been a surge in recently created email addresses.
  • Who is winning in the arms race with fraudsters.
  • What is coming down the pike at Ekata.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech Digital, the new online community for financial services innovators.

Download a PDF of the transcription of Podcast 269 – Arjun Kakkar.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 269-ARJUN KAKKAR

Welcome to the Lend Academy Podcast, Episode No. 269. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by LendIt Fintech Digital, the new online community for financial services innovators. Today’s challenges are extraordinary with the upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com

Peter Renton: Today on the show, I am delighted to welcome Arjun Kakkar, he is the VP of Strategy & Operations at Ekata. Now, Ekata is a super interesting company, they’ve been around for quite a long time and they’ve really focused on combating online fraud. They’ve developed these series of tools to help do that which we delve into some depth. We focus specifically on account opening fraud in this episode, we talked about how fraudsters are approaching it, the different ways they do it and, obviously, the different ways to combat it, talking about how reducing friction can lead to false positives in that and how companies need to balance that out.

We talk about their Identity Graph and Identity Network which is their sort of secret sauce in really bringing in all the data of really billions and billions of data points coming together to give people a good indication on what is actually real identity and what isn’t. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Arjun!

Arjun Kakkar: Glad to be here.

Peter: Okay. So, I’d like to get this thing started by giving the listeners a little bit of background….you’ve had a pretty interesting career to date so maybe give us some of the highlights before you got to Ekata.

Arjun: Great, yeah. So, I think start from right now, of course, I lead Ekata’s Payments & Financial Services verticals, I’ve been in the company for over six years now. I started as the Head of Strategy and progressed on to become the VP of Strategy & Operations and in my current role, I finally progressed on to this and keeping worthy goals on the operations side.

Before Ekata, which was your question, I worked with Booz & Company and Booz Allen Hamilton for over six years and that was advising mostly Fortune 500 companies on problem solving and business strategies. Before that, before business school, I was Co-Founder of a startup and an engineer by training before that.

Peter: Right, right, okay, okay. So, maybe give the listeners a little bit of….describe Ekata for us. I know it was at one-stage in the past called White Pages Pro, I believe, so maybe explain a little bit about the history and how you describe it today.

Arjun: Sure, sure. So, Ekata today is …..I describe it as a company that provides global identity verification using APIs. We were a part of White Pages as a company before this and we were called White Pages Pro and we’ve been operating for over a decade. Throughout this time, we’ve been growing in double digit percentages, we have over 1,700 customers. We started White Pages Pro as a part of White Pages because we realized identity data and many people were coming to our consumer website looking for identity data or fraud detection. You know, it’s just one of those things you realize oh, there’s an opportunity here.

So, we started contacting these companies and you will be surprised, many huge companies out there that used to use our data on the consumer website and they became our first few customers. That was my point about double digit percentages, it started like, you know, a $100,000/$200,000 business to going over $50/$60 Million run rate now and still growing at double digits percentages. I like to think of Ekata as the value we provide, we create for our customers is…. the foundation of it lies in our identity data and there are two secret weapons that we have like two differentiators.

The first is our Engineering and Data Science team which are global teams, part of it is in Budapest, and these teams result in normalizing and keep the data quality high which is really required by identity data. It’s a very hard problem, it’s one of those problems, Peter, that, you know, on the surface looks like, oh, okay, I can do that, but once you go deeper, you need a big team working super hard.

Peter: Right, sure.

Arjun: And the foundation of that is it…we build risk signals and scores using machine learning such that our customers can make better risk decisions. You know, those engineering teams are a part of our power.

The second piece of major differentiators….now, as I mentioned, we have over 1,700 customers globally and this includes banks, fintechs, merchants, payments providers and they all are using us using APIs so, you know, they’re paying our service on locating the data and now our customers on the backbone of our network, they further contribute value back to our customers. We can talk more about our network later. That is truly a differentiation because only we have our network and, you know, the risk signals coming out of it are really valuable.

Peter: Yeah. I do want to dig into that, but before we do, I want to just ask sort of a broader question. I’m talking about online fraud because, obviously, it’s a major problem globally. Maybe we could just touch on what are the biggest challenges today in combating online fraud?

Arjun: Absolutely. So, it’s helpful to think of it from the broader trends that impact the (inaudible). If you look back at the trends related or the mega trends related to fraud, the fraudsters are getting access to a lot of identity data, what lives in the dark web. I’m sure, Peter, your identity, my identity are all stolen and out there being from multiple databases and over 80% of stolen identity, stolen records online are actually identity records. So, that’s a big risk, right, like the have the data.

The second major broad trend is that online banking and commerce is taking share from physical banking and commerce and we all know that, also today, right.

Peter: Particularly this year, yes.

Arjun: Exactly. Essentially, the next result of these things is that the fraud industry is growing, you know, if there’s somebody doing an analysis of the fraud industry (laughs) like, you know fraudsters having their conference are like our industry is growing and the biggest challenge out there to fight fraud is to get access to good data so you know, fraudsters are getting identity data. We need like….the good side needs access to good identity data to fight fraud and not just identity data, other data elements too, but that’s the foundation of it.

Peter: Right, right, okay, okay. So, let’s maybe just start to dig in because one of the big challenges obviously is when a new customer comes along, they want to open an account, it could be anything, it could be a savings account or it could be getting a loan, it could be, you know, even just trying to… something so there’s this account opening moment that happens. Maybe you can ….this is obviously a really key point for you guys and I know for the fraudsters so let’s start off with say how are fraudsters thinking about that particular moment, the moment of account opening.

Arjun: So, it’s helpful to…if I may step back and also give some context on the account opening perspective, right.

Peter: Sure.

Arjun: Particularly, you and I touched upon the whole COVID thing. I mentioned that online banking and commerce is taking share, but further there is this crazy surge right now. So, for example, in banks I think there is data of just post-COVID, the number of new account registrations doubled and nothing surprising, right, you would expect that. What is interesting is that about 40% of people doing that now like using online banking said that we won’t go back to the branch.

Peter: Right.

Arjun: So, it’s kind of ….it’s not just a temporary thing, it’s quite a shift. If you look at e-commerce, you know, about 15% of commerce is e-commerce, was e-commerce in 2019 and within two months it became 30%.

Peter: Right.

Arjun: (laughs) How much of that 30% will go back? Will it go back to 15? It might go back to 20/25, but still it’s like a massive short. What usually would increase by 2% each year, now it’s up to much bigger. You put that together, one thing that stands out is new account opening, right, and why new account opening, because it’s not just an increase in transaction volume. Many people were not buying grocery, opening accounts or grocery shopping…..people who did not have online bank accounts are opening new bank accounts. The challenge in new account opening, particularly what’s very hard, is that you do not have any historical data to go by.

Usually, if you are on a bank account, your normal behavior over there, they know your behavior and there’s a change or anomaly in the behavior, they can detect that. Same with e-commerce companies that you see, it’s normal shopping behavior and then there’s some change, but that’s not the case here, right, like new account opening, you need access to better data. So, zeroing in on your question how do the fraudsters think about it.

They do it in two possible ways, they do it using stolen identities, which we talked a bit about, and then they do it using synthetic identities and what are these things? Firstly, stolen identity fraud is essentially a fraudster stealing your identity, Peter, and saying that I’m going to……they’ll get your identity data from the dark web and they’ll start impersonating you on any online transaction. They would usually move very fast because they want to do everything quickly and buy the products or transfer money from your accounts. They do it in multiple locations because the data is gathered from the dark web so multiple fraudsters may be trying to defraud you and before you realize that they want to do things very fast there’s a certain behavior that you should know off of stolen identity fraud.

One interesting thing to note there is that if I’m a fraudster and I steal your identity, I’d still want the product delivered to my address or my email or my phone numbers, some delivery location, I have to change, tweak one little thing. That’s the kind of thing that good data has to catch.

Synthetic identity, this one is very interesting because the fraudster behaves differently here. They will start by making a Frankenstein identity that is attached to a real, but somewhat of a less used government identifier or something like a Social Security number so they take an SSN or they might even sometimes create a random SSN and they will attach synthetic identity to that like all made up identity elements. So, they’ll have your address with somebody else’s phone number and somebody else’s email or they might even not be real.

The interesting thing with these people is that they will start applying for credit and start building a history, It requires a lot of patience do that, they are very patient people because there’s a big prize at the end of it. So, once the credit score rises over a time period, even years, they will secure larger credit extensions and finally, they’ll do what is called “busting out.” So, they’ll bust out, in other words, they’ll just max out on the credit and vanish. You can imagine like the first one is like very transactional fast, a steal and get a product or transfer some money and go away, This other one is this very patient, build something like almost from the foundation and then bust out with like tens of thousands of dollars.

Peter: Right. So, it sounds like with synthetic identity, it must be….I imagine they’re both challenging, but the thing about synthetic identity is that I always think….it’s operating in a normal way, like you said they’re opening a bank account, they’re funding it, they’re taking out a loan, they’re paying it back so this look real. So, is synthetic identity actually harder to kind of fight against than stolen identities?

Arjun: Absolutely. It’s a very hard problem to solve. Some of the things that make it hard, first of all, detection and labeling is very hard. So, every time I talk to folks about synthetic identity in the market, I ask for like hey, can you give us outcome data because, you know, that’s how you usually test and some of them do, but they are always questioning even themselves because nobody is complaining about them, very rarely complaining about it and it looks so credible.

Peter: Right.

Arjun: How do you figure that out like and if you do…..one of the important things and anything related to machine learning, anything related to rule writing, pattern recognition, you need outcome data. You need to see like okay, whether this is a fraud, fraudulent synthetic identity or not so that’s hard.

Another interesting thing about it is since the fraudsters are looking for the big prize and are longer term thinkers, if you will, many of them will pretend to be just false positives even if you catch them. So, you catch them and you say like hey, you are a fraudster and they say, no, why do you say that, I’m not and how do you prove that, right. This is all online, right, so they are very sophisticated, there are like real crime rings doing this.

To figure it out, the magic of having a web structure, something like what Ekata has of different identity elements tying together helps find data inconsistencies. So, if you are joining up a Frankenstein identity, there is a database of say the truth, you should be able to compare against the truth and find inconsistencies and see whether something is fraudulent or not. You know, that inconsistency thing you might recognize, Peter, it’s like …..it is true even for stolen identities because people are changing one address or one email or usually something like that, but, particularly, a very strong indicator for synthetic identity fraud, it’s one of the best ways to catch it.

Peter: Right, right, interesting, interesting, okay. So then, the challenge that often platforms have, particularly lending platforms, shall we say is that ….you know, there’s always this kind of battle or balance, you’ve got to struggle between increasing more friction and encouraging more signups. You want more friction to reduce fraud, but you put too much friction and no one signs up so how do you recommend that online platforms balance this friction and sort of the openness of encouraging signups.

Arjun: Yeah. One of the pet things I always talk about is customer insult. Part of our customer insult is like you catch one element of fraud like you were to catch one fraudster, how many good customers are you declining, right. We’ve done estimates on this and across industries it is a very big delta. So, if you have to save a certain dollar value related to fraud like $100, it’s usually a 10X factor of how much you’re losing on revenue because of things like false declines or friction. As they add up….the problem is hundreds of billions of dollars costing as cost to the industry.

To your question on how do you think about that?  Most of the people who are sophisticated have started thinking of it as a two-step process and I’m simplifying it, of course. The identity verification process should be two steps, the first one being passive probabilistic method so you know, you are not trying to ask right away, Peter, show me your ID when you join like we won’t do that right away. But, based on your behavior, the elements of data I have collected, I do probabilistic risk assessment not a definite risk assessment. We can talk more about that. Add friction for only the bad customers, like the riskier customers so just eliminate friction for people you think are trustworthy and we’re going to push it low risk and that’s pretty much the insult.

The second step is you do put more friction for people you feel who are risky and on that point, I think, it’s worth talking about this thing that I told you about, probabilistic risk assessment because, generally, you know, if you go online on banking, lending, things like that people think…I should say people think because the industry has wizened up over time on it. But, you almost always try to look for a definite answer, is this truly Peter, right, who’s coming online and you can never get a definite answer so that’s the historical school of thought that always tries to get definite answers.

It includes, you know, using government issues, static identifiers such as government issues, photo IDs or social security numbers and things like that, age, you know, things that are somewhat immutable, right, like static identifiers. You cannot change your age, of course it increments by one each year, you cannot try to change that. Social security takes a very ….it’s a crazy hard process to change it, but you can change your phone number, you can change your email, those are dynamic identifiers. You know, these kinds of identifiers are usually country specific and credit bureau-driven so you cannot get a global solution. There are those elements like that and there are, of course, the problem of they’ve always been through some form of data breaches.

On the other hand, probabilistic risk assessment, you can think about dynamic identity elements, things like name, email, phone, IP address, all of these things. You know, it’s not like your IP changes quite regularly, your address changes, at least every few years. Your device ID changes a lot, your email, you might use multiple emails, these are dynamic identifiers and using these for risk assessment for the frictionless side….when a customer comes in and you have these identity elements, can I use these identity elements to see what’s the risk and to do that you can apply good data science behind it.

You will never say this is surely the answer, there is never a definite answer, but you’ll get a probabilistic answer of like okay, I’m confident enough to let this person go forward and that’s the key of it, that’s the kind of thing that Ekata enables. Things that I’m telling you, Peter, this is becoming accepted standards in the industry, right. There’s something that regulations might require you to do, but these are things you do on top of that to make sure that your customers have a good customer experience.

Peter: Right, right, okay. So, I want to talk now about the Network that you just touched on earlier and the Identity Graph. Maybe you can explain what they are and how these help identify fraudulent account openings.

Arjun: Yeah. So, in the early introduction to Ekata I mentioned about our super powers (laughs), this is like our ingenuous build. The Identity Graph and the Identity Network are two distinct data assets. The Identity Graph is essentially built from over a hundred data sources globally and this is licensed data. We take care of compliance to global security regulations, we have a data sourcing team that’s very …you know, especially things like GDPR, there are so many regulations around the world, it’s a hard thing to do so we’ve made a discipline of that.

Our Graph, essentially, help validate linkages between identity elements and we have over 8 billion identity elements globally and the linkages could be between things like emails, phones, addresses and they are linked to names off of each other. You can think of it an as interconnected graph, right, Peter, like if you cohabitate with someone, you will be linked to them through your address, for example, and the graph goes very deep. It also gives you what we call metadata or like additional information related to any element so for example, with the phone you’ll get information like phone carrier or line type or email, you can get email validity and other such signal and these are all risk signals because we focus on risk signal. That’s our Identity Graph, again, like based on source data.

Our Identity Network is the other super power I talked about like the part about our customer access and it essentially derives insights from billions of anonymized customer queries and it finds usage patterns between these queries. So, you know, all our customers use our APIs so they ping on to our servers and we anonymize those queries and we look for patterns that will find anything that’s abnormal or assess the risk or other things that are related to usage patterns that will give us more information about risk. There is no question about this, this is only unique to Ekata because, you know, these customers calling identity elements is very unique to us.

These two combined together….I always think the biggest value…I mean, these are individual assets, the biggest value comes in the combination of these. So, if you put these linkages, the additional meta data I talked about and usage patterns from the Identity Network. It becomes very powerful because it becomes harder and harder for a fraudster to penetrate like they can make up a part of your profile, but they cannot make all of these up, you know, there’s some signal that will give you away.

Peter: Right, right, okay. So what you’re doing is you’re getting….like in real-time, obviously, probably many, many time everyday you’re monitoring transactions, real transactions around the world and then…I imagine, I mean, as you’re building up I can see how it would get…it build on itself, right, because the more data you get, the more accurate it is, the more data and it’s just kind of …people continually feed into it to bring it more data….

Arjun: Flywheel effect, right.

Peter: Yeah, exactly. Let’s talk about the network score. I noticed that you released this network score earlier this year, maybe explain exactly what it is and how this is useful.

Arjun: Yeah. I will talk about the Network Score, it’s a part of our Identity Network. So, you know, the Identity Network that I just described gets all of these signals from the network. What we decided was to simplify it for our customers, not all of our customers have machine learning shops, but we do. So, we can build a score that indicates the risk in our network using a single score so we put our machine learning team. You know, we have a machine learning team because we are already building other scores, for example, based on our Identity Graph. We build this new one from the Network’s site particularly because there was a lot demand from the market that we want to use something related to your Network.

So, what the team did was using our customers’ outcome data….so we have multiple customers that give us outcome data which we use for modeling, we found what is the…we built our machine learning models to give out a Network Score that helps them and then we test it back with them.  And we realized…. this is a very interesting thing we realized, Peter, that the Network Score is powerful by itself like the Network Score tells you the risk online based on behavioral patterns or based on usage patterns, but it’s particularly helpful when it is combined with the Identity Graph because when you put them together, it is the additional data of somewhat orthogonal data sets like this is reality sitting here and this is behavior and you combine the two.

There’s an interesting study that ….one of our customers. they actually found that by combining the two they were able to find about 20% of the transactions that they were declining were actually false declines. These were good customers they were declining and these are the customers which have got low risk in our scores related to the Graph, our confidence score, and low risk related to Network Score so that’s what our Network Score enables.

Now, I wanted to add an additional point there that what we are doing now is a lot of network-related innovation so we first release the Network Score. We are releasing a additional attributes related to the Network. I’ll give you one example which offer network attribute that is always there with us and which is one of our most powerful signals, its our email first seen. Now, the way we think about email first seen is like when did you create your primary email, Peter?

Peter: Sixteen years ago.

Arjun: There you go (laughs), yeah, that’s me too. As soon as Gmail came…..

Peter: As soon as Gmail came out exactly, I registered my name@gmail.com.

Arjun: Yeah, yeah, same, my last name because it needed six characters, Arjun wouldn’t do. So, anyway, I got that and I retained that ever since. What’s interesting to know is that 90%+ of consumers retain the same email for over three years and only 3% of users use emails that were created in less than a year back. What’s interesting in online transactions is the spike in the number of recently created emails, why is that? It’s fraud, because the fraudsters are creating these email IDs to get delivery of things or take over accounts or things like that. That is the key that……you know, we give the signal based on our Network and other sources of email first seen which is one of the most predictive signals.

You’d take…. they think of another signal like when did….if you put your phone number and email together on a website or in a banking app and during account opening Ekata can check in our Network that these two are seen together recently. Now, there is a risk signal associated with that and we discover this all the time, Peter. I don’t want to speak too much more of it because I don’t want to reveal too many secrets, but we see this all the time based on our experimentation, our data science team on new signals and we are starting to expose these signals to our customers and new APIs such as our account opening API that’s coming up.

Peter: Right, okay. So, we’re going overtime here, but just before I let you go, one more question. You touched on it just there, but maybe expand on how do you see this going down the track. I mean, like it seems like it’s a constant battle with the fraudsters. They’re innovating just like you guys are so what’s coming down the track that we can…..without giving away too many secrets, that we can expect from Ekata.

Arjun: I can tell you one thing that is….on the surface it’s seems like the fraudsters are winning, right, like they are a growing industry…just like…and that’s unfortunate, of course, just like online commerce and online banking are growing industries, if you actually drill down deeper, you go one level deeper and you see how much fraud you have per unit volume, it’s actually flattened and it’s going down a bit.

Peter: Really, interesting.

Arjun: Which is a good feeling and it makes me feel like we are winning, It’s still there, it’s still a growing industry, but per unit I think we started to slow them down a bit. The part to keep in mind there is that, you know, this year, we don’t have data for this year yet. This year, the fraudsters would be winning.

Peter: Right.

Arjun: There will be two things that will be happening. One is either the fraudsters will be winning because we have not seen ….you know, machine learning requires previous data for analysis, we don’t have previous data so fraudsters are either winning or we are causing a lot more false declines like declining good customers. So, what Ekata would do, Ekata is…we realize that we are in the space wherein we are market leaders globally, but we are not done yet, there is so much we need to do to keep improving. The examples of stuff, like I told you on Network, are focused on Network to give something truly unique to every customer that they can learn from our customer network or the risk detection.

The second thing is our global expansion, you know, we have got offices in Budapest, in Amsterdam and Singapore now and we are continuing to grow in other geographies and expanding on those markets. Throughout this thing, our focus is on providing high efficacy risk signals so we will just continue in that direction. I think it’s a long path, we think long term and we can easily see our path out for a decade.

Peter: Right. You have job security there because I’m sure there’s…fraudsters are going to keep battling against you. So anyway, Arjun, I really appreciate your coming on the show today. It was a really fascinating conversation.

Arjun: I enjoyed it a lot, Peter, thanks for all of those questions.

Peter: Okay, see you.

Arjun: See you.

Peter: You know, I was just chatting with Arjun there after we stopped recording and he made a comment that …he said, these fraudsters are smart. I mean, they have all the latest tools, the latest technology, smart people working for them so we certainly can’t underestimate them and, you know, makes sense that this year, with the increase in online behavior and sudden changes in behavior, that fraudsters are taking advantage and they have really made some gains this year.

We need to be doing everything we can to really create an accurate picture of each person coming through our website or our mobile app and making sure that they are who they say they are. That’s obviously what Ekata are doing, really, you know, helping give companies more confidence that help them manage their risk in this way.

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 Digital, a new online community for financial services innovators. Today’s challenges are extraordinary with upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com.

You can subscribe to the Lend Academy Podcast via iTunes or Stitcher. To listen to this podcast episode there is an audio player directly below or you can download the MP3 file here.

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Podcast 268: Matt Potere of Sunlight Financial

October 9, 2020 By Peter Renton Leave a Comment

Views: 315

The point of sale financing space is one of the hottest niches in all of fintech. While most of the attention has gone to the retail “buy now pay later” space what is growing almost as fast is the solar financing sector. With only 2% of homes currently having solar panels and with the cost continuing to go down this is clearly going to be a growth industry this decade.

At the intersection of these two trends we find the next guest on the Lend Academy Podcast. Matt Potere is the CEO of Sunlight Financial, a leader in the financing space for residential solar. Matt explains why solar financing is hot today and why it is the best asset class he has seen in his career.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

 

In this podcast you will learn:

  • What Sunlight Financial does exactly.
  • Why the point of sale lending space has exploded in popularity recently.
  • Why solar financing is exploding today.
  • How Sunlight Financial’s loan process works.
  • How these asset-backed loans are structured.
  • Why solar is the best credit quality of any asset class Matt has seen.
  • What is in it for the solar contractor in using Sunlight Financial.
  • Who is funding these solar loans.
  • Their approach to underwriting.
  • How the pandemic has impacted their growth this year.
  • How their credit quality has held up this year.
  • How Sunlight is getting the word out.
  • The geographic footprint they operate in.
  • The scale that Sunlight Financial is at today.
  • Why they have expanded into home improvement financing.
  • Matt’s plans for the future of Sunlight Financial.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech Digital, the new online community for financial services innovators.

Download a PDF of the transcription of Podcast 268 – Matt Potere.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 268-MATT POTERE

Welcome to the Lend Academy Podcast, Episode No. 268. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by LendIt Fintech Digital, the new online community for financial services innovators. Today’s challenges are extraordinary with the upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com

Peter Renton: Today on the show, I am delighted to welcome Matt Potere, he is the CEO of Sunlight Financial. Now, they’re a really interesting company and as the name suggests, they are focused on solar financing although they do more than that now which we get into. It’s interesting to me because they’re focused on the point of sale space, they’re focused on renewable energy. These are two really major growth areas of the economy right now and we talk about what that means for Sunlight Financial and they runway that they have.

We talk about how they underwrite their loans and obviously the loan terms and the different ways that they’re able to, you know, justify to the consumer. This is actually…..you know, consumers can take out these loans and actually be better off financially even if they just didn’t install solar so that’s an interesting proposition in and of itself. We talk about their capital providers and how they’re funding these loans, the technology they’re using, the underwriting process and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Matt!

Matt Potere: Hey, Peter, thanks for having me.

Peter: My pleasure. So, I’d like to get this thing started by giving the listeners a little bit of background. You’ve had a pretty interesting career working at some of the largest financial institutions in the country so why don’t you give us just some of the highlights of what you did before Sunlight Financial.

Matt: Yeah. So, I have always been an entrepreneur at heart, actually started my first business when I was five years old reselling my parents groceries to the neighbors door-to-door (Peter laughs). So, it was a terrific business and had great margins, unfortunately, my total addressable market was six houses so it really never scaled beyond that. I’ve always had this entrepreneurial bug; I had landscaping businesses, I sold t-shirts in college and then after college, I joined the MBNA, the old monoline credit card issuer and I learned all about consumer finance.

And even more important, I think then the consumer finance background and the experience it gave me was I learned how important a really strong culture is. MBNA was just a terrific place to work and to learn how to really treat customers and teammates in a way that differentiates the company. So, it was a wildly successful company and was really impactful to me and how I viewed the role of a company in society. And then since then, I’ve been a lender in just about every consumer credit asset class from mortgage to home equity, to auto, I spent some time in small business lending at big companies and at small companies and tried to take that background to Sunlight and it’s helped influence how we approach the business.

Peter: Okay, okay. So then, maybe we should just…..for those people who don’t know, maybe we should give the listeners a little bit of background about Sunlight Financial, how do you describe it, what does it do exactly?

Matt: So, we are a point of sale finance platform and we provide financing to homeowners when they want to go solar, they want to put rooftop solar on their homes or make improvements to their homes and we do that through our network of contractor partners. We have about a thousand solar installers and home improvement contractors that we work with and it’s very typical whether we work is if you’re thinking of going solar and for instance you had Tesla come out to your home and they explain to you all the benefits of going solar for you personally, once you decide that you’re ready to move forward, Tesla or the solar installer will introduce you to Sunlight and we will provide the financing. We make it a really streamlined, simple process for the homeowner and for the sales person in the home,

Peter: Okay. Well, we’ll dig into that in a little bit, but before….I want to take a step back for a second because the point of sale lending space is hot today. I mean, you’ve got… on the consumer side especially, you’ve got all these buy now pay later, I mean, we’re seeing massive funding rounds, massive valuations so there’s an acknowledgment, I think, that this point of sale lending is really being disrupted by tech, I mean, the tech players are really making a big impact here. So, maybe, I’d love you to sort of ……..just take us through some of the history of that, this segment, and why you think it has exploded in popularity recently.

Matt: Yeah. We definitely think this is a long term secular trend, but if you step back point of sale lending has been important for as long as there have been merchants. Store owners used to provide credit to their customers and then in the 1960’s credit cards came along and point of sale financing was through a credit card that allowed customers to buy something now and pay for that at a future income and allow merchants to sell more. That’s the fundamental value proposition.

Over the last 15 or so years, as you mentioned, technology has gotten a lot better and so that that’s allowed is point of sales platforms provide financing much more simply, much more streamlined and tailored to specific industries and there’s a lot of value to that. It means that the credit products align better to what customers are trying to buy, it means that customers get a better experience than they would otherwise get, it means sales people are merchants, can sell more than they otherwise could.

And then from a credit standpoint, when you sell something in a specific industry to a specific consumer purpose, you get credit performance that looks more similar and so you have less subsidy of high credit quality borrowers to lower credit quality borrowers and that allows for better pricing. And so this technology allows us to bring much more specific tailored financing in these specific industries.

Peter: Okay, okay. So, it’s interesting…..you’ve obviously seen your name, Sunlight Financial….I know you’ve moved…sounds like beyond just solar, but, you know, renewable energy is big business these days and, you know, I just see some people in my neighborhood putting solar panels up and it’s another growth industry. So, you’ve targeted on this, I mean, I guess maybe why focus on solar and just tell us a little bit about the state of that, the solar financing market.

Matt: Yeah. So, we stood at the intersection of two really rapidly growing trends so the point of sale lending that we talked about and then the boom in residential solar. So, just a little bit of context, solar’s growing about 10% a year and has been for the last ten years, actually, in the last couple of years it’s been even more rapid than that and so it’s growing really fast, but it’s still pretty early days. Less than 2% of US households have solar on their roofs, there’s a lot of runway here. When you often think about somebody going solar, in the past you would think about somebody who is really focused on the environmental benefits and those environmental benefits are very true, but we are past the early adoptor stage.

It’s no longer the tie-dye shirt and Birkenstock sandals who wants to go solar because it feels good. It still has all those benefits, but now it’s got real economic value to consumers. And so the fundamental value pitch to a consumer is you can go solar now with no money out-of-pocket and save money that first month and save significant money over the life of the solar system and that’s driven tremendous growth in solar as this economic benefit has kicked in and it’s great for the industry because that’s how you get mass adoption. So, we’ve seen great growth and we expect that to continue to be the case.

Peter: Right, right. So, I know you touched on it, I want to dig into how the process works and, you know, like you said you said you partnered with over a thousand solar installers and contractors, you know, let’s just say you talked about the example of, you know, sounds like you’re working with Tesla as well. Someone wants to put solar on their house, they go online and they do some research and the price is going to be whatever, depending on the size of the house, obviously, but it’s, you know it’s more than $10,000 typically and most people don’t have that kind of money just sitting around so tell us a little bit about how the loan process works.

Matt: Yeah. So, that sale often happens literally at the kitchen table. Customer decides to go solar, they go online or a sales person knocks on their door, one of their neighbors refers the homeowner, sales person explains to the customer and tailors the system, gives them a sense of what the system will look like on their home, how much power it will produce and gives them a sense for their saving, both in their first month and over the life of the system.

A typical solar system is in the neighborhood of  $30,000 for the typical household so it’s a fairly large ticket from a point of sale perspective and our loans provide 100% financing of the $30,000, we offer a loan tenors from ten years to 25 years and the interest rates are very attractive for homeowners. Customers pay anywhere in the 2 to 6% APR so the rates are really attractive and, as I mentioned earlier, the fundamental value proposition to the homeowner is you can buy the system, $30,000 system, you own it and increases the value of your home. You put no money down to own it and over time, the cost that you’re paying for the loan, in this case the financing, plus whatever residual utility bill you have is less in most cases than your prior utility bill.

And what we’ve seen as a long term trend in the US is the cost of power has continued to increase and so not only are you saving money in the first month, but over time as the cost of power continues to increase, you save more and more money every month. A typical customer can save over the life of their solar system can save $30,000, $40,000, $50,000 so it’s significant savings. There’s a terrific value prop and again, you do that without putting any money out.

Peter: Right, right. I don’t know, it was on NPR, I remember, it was an interview with some guy in New York, I think it was on Long Island, and he was the epitome of a non-environmentalist and he drove like a Hummer, I think, and he said, yes, I’m doing this for the money, that’s the only reason I’m doing it. The environmental benefit I couldn’t care less about.

So, interesting that it’s got to this stage now because I actually put solar panels on my first house back in 2006 and, unfortunately, we moved and we are thinking about doing it again in the new house, but, back then…I mean, there was a lot of government incentives, but it wasn’t that efficient. I mean, we didn’t save, we were doing it, we were one of like…..we were doing it for the environmental reason not for the financial reason, but it feels like now it’s completely changed.

Matt: Yeah. We, obviously, love the environmental benefit, but consumers can do it because it feels good in their heart and it feels good in their pocket and that’s how you get massive option.

Peter: So then, tell me about….like you said this loan, I didn’t realize your interest rates are so low so are you taking interest….like is this an asset-backed loan, like are you taking a security interest in the solar panels themselves, I mean, how else are you able to get those interest rates so low?

Matt: So, the way the loans are structured is the loans are secured against the panels themselves, not against the home so if you were to pull the title you would see that there is a lien on the panels for that particular home, but, fundamentally, it has a great value proposition to the homeowner. And so if the homeowner has a good reason to continue to make payments versus…they only have a $100 that month, you can pay your solar loan and continue to save money or, you know, you can spend it some other way.

That value proposition to the homeowner has allowed credit quality to be terrific. I mentioned all the asset classes I’ve been a lender in and this is the best credit quality I have seen across any of those asset classes. So, it is truly a high-end borrower who performs very well from a credit perspective.

Peter: Right. So, that’s how you’re able to get the rates so low because you’ve got a high-end borrower. Obviously, these are homeowners, right, so they already have……

Matt: Right, by definition.

Peter: …..by definition so they’ve really already passed that hurdle, interesting. So then, let’s switch gears a little bit and talk about the solar installers, the merchants that you’re using because obviously they….you know, you’re not the only solar financing company in the country. So, what’s the benefit to them of using Sunlight Financial?

Matt: So, fundamentally, what they want is to sell more solar and they want to give their customers that terrific experience. that’s their goal and so we wake up everyday to help them do that. As part of that kitchen table sale, if you think about what solar’s doing, they spend about an hour explaining to their customer why going solar is beneficial to them and then they trust Sunlight to hand……they hand that customer off to Sunlight, they trust us to handle them with care and to help facilitate that sale and so we make that process very simple.

First, we have a wide range of products for them, a wide range of interest rates and loan tenors so that they can compete in the various markets that they compete in. Our technology platform, which we call Orange, it’s our proprietary technology, makes the process really simple. So, it’s 100% digital process, there’s never been a piece of paper in this business since we founded it and it’s completely streamlined. So, if for some reason the customer needs to send us something, they scan and upload it.

Our installers and our partners can access the portal through a mobile app or they can go online and access it and we also give installers a view into the pipeline of all of their deals. And so, not only do we make it a simple experience at the front of the process, but when it’s time for them to get paid our portal helps facilitate a very fast payment because they’re managed in cash, but we want to make sure that they get paid quickly. And so, that end-to-end experience plus all of the sales tools that we give them helps them sell more solar and helps give their customers a great experience.

Peter: Okay, okay. So then, let’s just talk about the ….like the payment you just said there, who are the capital providers here, I mean, do you work with a range of different banks, I mean, where does the capital come from?

Matt: Yeah. So, we have a network of partners, banks, credit unions and other institutional capital who buy these loans so we originate them on their behalf and from their perspective they get access to a terrific loan, terrific asset class at a great risk-adjusted return and they get to grow without spending any marketing dollars. The other thing they get by partnering with Sunlight is, you know, talked a little bit about my background and our team has a very strong credit and risk background.

So, our capital providers know that they can trust us to ensure that we’re helping them originate loans in a way that’s compliant and originating high quality credit. And so, we’ve seen a tremendous amount of demand from banks and credit unions and those other institutional capital providers who really want these loans. What’s also interesting is since pandemic, we actually seen that interest increase.

Now, if you’re a bank or credit union, you probably have more deposits now than you did pre-pandemic. You know, their balance sheets are very strong and they can’t put that to work through autos which would be a traditional way. The mortgage market has grown a lot, but they’re looking for ways to be able to get….and yields are very low so looking for ways to get an attractive asset with good risk-adjusted returns so we’ve seen a tremendous amount of demand from our capital providers over the last six months and really even before that.

Peter: Okay, okay. So then, let’s talk about underwriting, I want to get into that for a little bit and you mentioned that this is the best quality credit that you’ve seen in your career, how are you underwriting these customers? What data do you use, what are you doing to kind of ensure that these loans are paid?

Matt: Yeah. So, the lesson learned from the financial crisis was… if we think about what happened there, lenders wanted a really simple experience for their customers because the mortgage experience was awful. And so, what they did to make that experience better was they just eliminated steps (Peter and Matt laugh).

Peter: Eliminated underwriting, yes.

Matt: That, unfortunately, created another problem that we all know about. So, our approach at Sunlight is we want that terrific experience and so what we’ve done is we’ve automated the process from the back end, we don’t push the burden to the solar installer and we don’t push it to the homeowner. We put the burden on our own technology and so when a customer applies, we do an instant credit check, we do an instant fraud check, we’re validating title, we’re validating the reasonableness of the income and we’re doing that all in the background so when the customer gets approved, it wasn’t fast because we skipped steps, it was fast because we automated them. And the result, as I mentioned, has been terrific, terrific credit quality and we are very mindful of making sure that we’re originating high quality loans.

Peter: So then, what data are you using then, I mean, obviously you’ve got income data and obviously you’re pulling credit reports, I imagine, on these, is there anything else that you’re doing to kind of make sure that these are good?

Matt: Yeah. So, we’re using a traditional approach like…from my days at MBNA, they’re credit card lenders, so we have application data, we’re looking at the credit report and we’re using this aggregated trade line data. So, we’re not a FICO lender, we’re looking at each of those trades and our proprietary models look at the combinations of those trades to help identify high credit quality borrowers.

Peter: Right, right, okay.

Matt: And then, as you mentioned before, we have a really strong positive select in the customer that are applying.

Peter: Yeah. So, what kind of percentage do you approve? I imagine it’s probably higher than you would get in most asset classes.

Matt: Yeah, it’s significantly higher than you’d expect so anywhere from 60 to 75% of borrowers get approved so it’s a pretty significant approval rating. It’s remarkable when you look at those types of approval rates and the credit quality that we get, it is truly remarkable.

Peter: So, what about when things have gone south, do you show up one day and just take off the panels, is that how it works?

Matt: So, first step, of course, is we’re trying to work with…….

Peter: It’s not the first step…

Matt: Yes, yes, the first step is work with the customer and the second step is they are making payments and so reminding customers and working with our capital providers to ensure that our capital providers are reminding customers that continuing to make repayments, in many cases, saves you money. And so very often, as we’ve had those conversations or our capital providers have had those conversations with customers and they’re reminded of, wow, that $100 payment is actually saving me money each month, that’s enough to kind of change the perspective of who gets paid.

Additionally, if the customer doesn’t make payments over time, we have the ability to turn the system off so those savings go away. I mean, then we do have a lien on the equipment so it shows as a lien if they want to refi their home and they want to sell their home, panels need to be paid off first and, of course, they can always be repossessed as well.

Peter: That sounds like that’s the last resort for your guys.

Matt: That’s right, that’s right.

Peter: Okay, okay. And then, you know, I’m curious about…..this year you’ve had….you mentioned that people are still making payments, I mean, how has the pandemic impacted your loan book?

Matt: Yeah. So, I think about it from two perspectives. The first is what did it do to sales and the second is what did it do to credit quality. On the sales side, March and April were slow, they were slow across the industry, down 35/40%. Since then, we’ve seen an incredible….across the industry and for Sunlight in particular, we’ve seen incredible growth. June, July and August had record level of sales and we attribute that to the fact that customers, one….in a pandemic we have very little control of your life.

This is one thing you can control, you control how you produce power so give them some control. We’re seeing customers make home improvement consistently across the US and so this is another type of home improvement that kind of fits that broader theme. And so, we’ve seen a tremendous amount of interest and, of course, it’s an opportunity to save money. So, from the sales perspective, we are growing year over year at record levels month over month, we’re very fortunate on that side.

The other side is, we’re in the business of originating them, working with our partners who originate high quality loans and we always expected that the credit quality would be good through a cycle. I’ve lived through multiple credit cycles, the cycle we were in we’ve been saying for a long time is the best credit cycle we or our parents or our grandparents had ever lived through. We totally understood that and so we underwrote loans expecting that the economy would change and the credit’s held up very, very well.

When you look at customers who ask for some relief on their payments, it’s like a quarter of what we’re seeing the rates for other assets, you know, a quarter of what we’re seeing forbearance rates in mortgages. So, significantly lower forbearance rates, delinquency rates are actually down a little bit, loss rates are actually down a little bit so the credit quality has held up really strong. So, if you’re one of our capital providers and you’re looking for how to deploy capital, the asset’s performing really well, you can grow your book with no marketing dollars and you get a nice risk-adjusted return.

Peter: Okay. So then, how are you getting the word out, I mean, are you ……your customers really, the contractor or the installer, the solar company, I guess, I mean, what are you doing to market to these people and how do you get the word out?

Matt: Yeah. So, it’s interesting…in our business the sale happens after the sale, you know, signing up one of our partners to offer our loans and to use our platform, that takes some time to …it’s the B2B sales and enterprises….it takes some time to explain who we are and what we do, but that’s just the start of the relationship. It’s beyond anything else, it’s a matter of trust, that sales person needs to trust. After spending an hour convincing that customer they want to go solar that they should hand them over to Sunlight and so you build that trust one customer at a time.

Our platform, as I mentioned, it makes it really simple, but at the end of the day, it’s making sure we make that experience a really strong one and we’re not perfect and so if we make a mistake, we own it and we fix it. That goes a long way and it helped us build a reputation as a true partner for our installers and our contractors.

Peter: So then, are you operating nationwide or what’s your geographic footprint?

Matt: We are wherever solar installers are and so we can be nationwide. Today, we’re helping consolidate loans in about 40 states, I think we’ve done a loan in almost every state now. There are maybe one or two that we haven’t, we’ve even done a couple of loans in Alaska which you wouldn’t think of as a solar hotbed.

Peter: (laughs) Well, it’s certainly dark there a lot of the year.

Matt: Six months of the year.

Peter: They do get a lot of sun in the summer, I guess. There is that (laughs)

Matt: That’s true.

Peter: Okay. So then, what about the scale of your business overall, I mean, was it 2014/2015 that you guys got started?

Matt: That’s right.

Peter: How has it grown and what scale are you guys at today?

Matt: Yeah. So, as you mentioned, founded about five years ago, we’ve originated almost $3 Billion in loans, we’ll originate $1 Billion this year alone. So, we’ve seen a really strong growth as we look out the next couple of years, we expect that growth trend to continue. We have offices co-headquartered in New York and Charlotte, we have just under 200 people, 200 teammates working at the company.

Peter: Okay, okay. I’m on your website on my other screen here and you talk about home improvement, is this like something that you’re just getting into as I guess someone who has put solar panels on their house or is this a completely new line of business. I mean, how does that work?

Matt: Yeah. So, we always thought of solar as a type of home improvement. We really thought about ourselves building this point of sale finance platform so we like to do one thing at a time and do it really well. We’ve started and focused entirely on solar. Last year, we built a foundation for home improvement vertical and really what pushed us into that was many of our solar installers also have home improvement businesses, roofing or windows, and they wanted a similar experience for the home improvement, similar experience with similar products for their home improvement divisions. And so, we built a platform, built a foundation last year and this year we’re scaling it so it’s still relatively early days, but so far, so good, the feedback has been terrific at the market.

Peter: Right. So, you’re using your same technology and are you….so this is going to be sort of the next step, it sounds like. You’re going to be focusing on like a stand alone….I mean, I guess they go with each other, but having a new division that is really focused just on the home improvement space.

Matt: That’s right, that’s right. There is some crossover with our solar installers, as I mentioned, but this is a home improvement, focusing on our home improvement vertical.

Peter: Right, right, okay, okay, that’s interesting. And then….I mean, I look at this and there’s obviously….I mean, are you competing now, are you trying to compete with like the GreenSkys of the world, I mean, who do you see as the market here or the competitor?

Matt: Sure, yeah. So, the contractors we partner with and the products that we offer do compete with the Green Skies of the World, that’s right, and that’s a pretty typical competitor for us.

Peter: Right, right, okay. You’ve got this really interesting platform, there are a lot of ways you can take this because you’ve got the technology platform. Like I’ll leave it open-ended, maybe we can end with this, where are you taking this, is this going to be…I’ll just leave it open-ended, where are you taking this company?

Matt: Yeah. So, I should say we always describe Sunlight as a 100-year company, we take a very long view on what we’re building now and how we develop partnerships. And so, we want to do one thing and do it well and continue to add on to it. You’re right though, the technology platform that we have works very well in solar, it scaled to home improvement and there are a number of other point of sale finance opportunities that we think we could extend the platform.

We went from solar to home improvement with a pretty small capital investment because of the way that we architected the platform and the contractor feedback has been terrific and they’re really pleased with the experience we’re able to give with our digital platform. And so, we’re in two verticals now, I think if you look at a couple of years, you’ll see us in some others, but we’re not quite ready to jump into that next one just yet.

Peter: Okay. Well, it’s a fascinating story. I certainly wish you all the best Matt, it’s been great having you on the show today, thanks so much.

Matt: Thanks for having me, Peter, it was great speaking with you.

Peter: Okay, see you.

What seems to be getting most of the press these days is sort of lower ticket point of sale, the highly automated…..you know, the retail point of sale for the consumer, but this is an area where obviously has tremendous growth potential and Sunlight Financial have an opportunity here to really become a major player. We talked about GreenSky, public company doing many billions of dollars in loans and Sunlight Financial, obviously a lot smaller, but in an area that has I think tremendous, tremendous potential.

When you combine that with the runway of solar where 2% of the population or 2% of the houses have solar, that’s obviously going to go to 10, 20 even 30% here in this decade. So, they’ve got a lot of runway, they’ve got a tech-enabled solution and it’s really that kind of got a formula that is going to see them become a much, much bigger company than they are 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 episode was sponsored by LendIt Fintech Digital, a new online community for financial services innovators. Today’s challenges are extraordinary with upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com.

You can subscribe to the Lend Academy Podcast via iTunes or Stitcher. To listen to this podcast episode there is an audio player directly below or you can download the MP3 file here.

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Filed Under: Lending and Fintech Podcast Tagged With: Point of Sale Finance, solar, solar financing, Sunlight Financial

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Podcast 267: Allen Shayanfekr of Sharestates

The CEO of Sharestates talks about navigating the pandemic, booming borrower demand, delinquencies and what's next for his company

October 2, 2020 By Peter Renton Leave a Comment

Views: 95

The pandemic has touched all niches within lending but there has been a wide disparity on the impact on individual platforms. In the fix and flip lending space originations went to virtually zero fairly quickly and have been slowly climbing the last several months.

Our next guest on the Lend Academy Podcast is Allen Shayanfekr, the CEO and co-founder of Sharestates (we last had Allen on the show back in 2016). They have done better than most, laying off only a small percentage of their staff and continuing to lend throughout. While they are not back near pre-pandemic levels yet the loan numbers are improving every month.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

In this podcast you will learn:

  • What makes Sharestates a unique platform.
  • How they were able to adapt well to remote work.
  • The impact the pandemic had on their investor community.
  • The kinds of investors that continued to attract.
  • How demand for loans has fluctuated this year.
  • How capital has been flowing back into the space.
  • Where pricing is today versus pre-COVID.
  • How Allen is managing the staffing levels at Sharestates.
  • The state of the real estate market outside of residential mortgages.
  • How they are working with their delinquent borrowers.
  • The levels of losses that Allen is expecting on their portfolio.
  • The impact the pandemic will have on the fix and flip niche.
  • Their goals and new initiatives for the next year.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech Digital, the new online community for financial services innovators.

Download a PDF of the transcription of Podcast 267 – Allen Shayanfekr.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 267-ALLEN SHAYANFEKR

Welcome to the Lend Academy Podcast, Episode No. 267. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by LendIt Fintech Digital, the new online community for financial services innovators. Today’s challenges are extraordinary with the upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com

Peter Renton: Today on the show, I am delighted to welcome back Allen Shayanfekr, he is the CEO and Co-Founder of Sharestates. Now, Sharestates is a real estate platform, they’ve been around for a few years. I last interviewed Allen back in 2016 and I wanted to get him back on because obviously a lot has changed since then and I wanted to sort of see how Sharestates has handled the changes this year.

They’ve done a pretty good job, I think, in really navigating the storm, we talk about that in some depth, we talk about how they adjusted their staffing, how they adjusted their marketing and how the investors have performed and which types of investors have really stayed the course. We talk about their loan portfolio and what’s happening there, the impact on their borrowers, we talk about sourcing deals and what he is excited for about what’s coming down the track. So, it was a fascinating interview, I hope you enjoy the show.

Peter: Welcome back to the podcast, Allen!

Allen Shayanfekr: Thank you, Peter, thanks for having me.

Peter: Of course. So, it’s been four years since we last chatted on the show and I know a lot has happened, but maybe before we get started, for those listeners who don’t know Sharestates, why don’t you just share how you describe the company today.

Allen: Sure. So, Sharestates is a business purpose mortgage loan marketplace platform so we, essentially, have created a marketplace for borrowers and real estate speculators. They fill online, submit loan applications, handle their loan application and loan sourcing needs digitally. Once that loan is actually underwritten and closed by our system, we then make that loan available via our investor marketplace to both whole loans institutional investors as well as individual retail investors and smaller institutions for syndicated investments.

Peter: Right, okay. And what geographic footprint are you working in today?

Allen: We have lent in a total of about 34 or 35 states with a heavier concentration in the northeast, New York, New Jersey and the metro markets.

Peter: Right, right, okay. So then, maybe you can just take us through the developments in the company. I want to sort of get to this in two segments….so we chatted four years ago, obviously I’ll link to that in the show notes, take us through sort of the developments of Sharestates through the beginning of this year.

Allen: Sure. So, when we first launched this business, we came up with a slightly different angle than everybody else, you know, we were not finance guys, we were not technology guys, we came from a real estate background and more specifically, a title insurance background. So, going back to 2015 when we first launched, we had a pretty robust database, speculators and developers that we used essentially as a springboard to launch the business, which enabled us to do a couple of things really quickly and enabled us to get to profitability relatively quickly and which kept us from having to go down the VC route of raising capitals to grow the business, allowed us to control and run the business the way we want to which was fantastic over the last five years.

We were able to scale that business to about $2.5 Billion in origination volume through the beginning of 2020. Pre-COVID, we had gone up to just about $100 Million a month in origination volume, we had grown the team north of a hundred people, we built a ton of technology that pretty much supports our entire business from A to Z which has helped us to scale the business without having to have three or four times the staff and we’ve been able to do that all profitably just constantly reinvesting, growing the brand and growing the technology and our network.

Peter: Okay, great. So then, obviously things changed early this year. I was listening to an interview you did recently where you shared that you actually had kind of business continuity plans and you actually have drafted up some of the documentation which you said at that time you thought was not going to be useful at all and ended up pretty useful in hindsight so tell us a little bit about that.

Allen: Yeah. It was definitely an interesting transition going from a very office-oriented workspace to pretty much having everybody through today even continuing to work at home. So, part of this technology that we built was….we, essentially, have two different departments that handle all of our technology and IT.

So, we’ve got one group of developers that’s comprised of about 29 or 30 developers that are actually building our Sharestates software so that’s everything that you see from our online portals, the vendor portals for title companies, appraisers, brokers, investors, etc. all the way through our borrower portals and all of our backend systems and that’s all basically cloud-based which enables us to really be able to work from anywhere.

And we have a separate external group that handles pretty much all of our computer, IT and office needs so making sure that all of our laptops and hardware are secure, that we’re using VPN access and dual factor authentication to log-in to our tools and things like that just……….you know, not just making security a very big focal point of this all work from home concept. But, the beauty of all these is that everything that we have implemented over the last five years enabled us to transition to a work from home environment relatively quickly and easily.

So, at this point, you know, we have, give or take, 100 people working remotely able to interact with each other and slowly do their day-to-day jobs just through our online proprietary systems. Everybody’s tied into each other, there’s work flows, there’s communication happening through the system, notifications and pretty much everything anybody needs to help move those files along from applications close and then through post-closing and servicing pretty efficiently.

Peter: Okay. So then, let’s just take us through the developments from earlier this year. You know, the pandemic hit and you know, sort of every one closed their office, but you’re in the real estate space, there’s sort of a drying up of capital and I imagine you guys were pretty impacted by that. So, tell us a little bit about how you were impacted and how you handled sort of that initial shock.

Allen: Yeah. So, I think it’s important to differentiate the different types of lenders that exist out there and kind of the pros and cons of each. You have people that are kind of playing in the same sand box of our product types so loans access anywhere from $100,000 up to, you know ballpark $7.5 Million covering residential, multi-family and mixed use asset classes and we’re all kind of set up a little bit differently.

So, you’ve got some groups that are purely captive financing so they’ve got funds, they’ve got direct capital that they control, that they lend out so they are, essentially, the originator and the investor in one. Those businesses are great because they really do have full control over their capital stack. The limitations with that type of a structure tend to be that you don’t have the same level of scalability, meaning you don’t have as much capital available to you as you do under a structure like ours, we’re dealing with dozens of investors so we’re never really limited by how much cash we’re managing.

Then you’ve got companies that are more like mortgage banker-type setups or, you know, originate to sell type structures like Sharestates which, again, also has pros and cons so the pro being that we’ve got dozens institutional investors, we’ve got our syndication platform with hundreds, really at this point thousands of active investors, and that creates diversification of capital sources. You know, we can do hundreds of millions if not billions of dollars on an annualized basis without having to go out and actually raise more capital. It’s much easier to onboard in an existing investor and grow your investor base than have to go out and set up a whole new structure than to actually raise capital.

And then within that, you kind of have a subset of originators that are really kind of just selling to one or two counter parties, maybe three counter parties. They might have a right of first refusal or some strategic investment by the counter party that they’re selling loans to which, again, kind of takes you back to limiting capital sources and in some cases could limit your flexibility or what we saw earlier this year, have an originator that’s really beholden to a single investor and that investor decides to post pause or shut down their business is shutting down with them for however long that may be.

We kind of sit somewhere in the middle so we don’t have direct capital that we control for the purpose of balance sheeting loans long term. We do have a balance sheet that’s in the tens of millions, we do have warehouse loans that collect north of a $100 Million in actual balance sheet capital. And then we also have a very robust list of investors that we sell those loans on a forward flow basis. What that allows us to do is kind of get the scalability piece while still having control and capital that we have discretion with and then at the same time, you know, for example in COVID where many of those investors had to temporarily press pause and focus on asset management, because we have diversified those capital sources, we did not go completely dry.

We, definitely felt it, we saw different types of investors react in different ways. The thesis that we have kind of grown our business on was if you diversify capital sources, you should be able to survive a downturn because the likelihood of everybody turning off at the same time, you know, is more remote than if you’re beholden to one or two investors. That’s basically what happened. You know, probably about a 60 to 70% decrease in all raw capital availability from our institutional partner, but the syndication side of the platform and the smaller unleveraged institutions continued to actually invest through the COVID pandemic supporting existing loans, funding draws and even funding transactions.

Peter: Yeah, that’s interesting to me. Obviously, you’ve got individuals that are making their own decisions and that have been with you for a while, in many cases…..what you’re saying is those people really stayed with you and skeptical and just re-investing its returns, I would say, quickly so was that group much more sticky than the institutional group?

Allen: Yeah. So, what I would say is the smaller institutions, the fractional investors and the high net worth credit investors were actually stickier than the larger institutions.

Peter: Right.

Allen: I learned through this experience that it’s not a relationship that’s controlling that, it’s the capital structure and capital sources that’s controlling that. So, what I mean by that is everybody thinks that you get into that with larger institutions and that means scalability. That’s true with us, but it’s not sticky capital and it doesn’t matter what that relationship looks like, you can be best friends with the portfolio manager that’s in-charge of the day-to-day and you know, what loans they’re buying, what they’re investing in, but at the end of the day, the overall fund or institutional organization has other levers and limitations that they need to be concerned with.

So, these larger institutions, by and large, have leverage, they go to Goldman Sachs or Morgan Stanley or Credit Suisse, other leverage providers. They have warehouse lines, they’re levered up five to one, six to one, four to one, whatever their leverage is, and their ability to invest is directly tied to their cash availability from their warehouse leverage when they could be reliant on securitization as an exit.

When those things kind of floats up in March/April where you had warehouse lenders doing margin calls, you know, you could have repo facilities where they’re technically non-committed lines and they just freeze the lines so you can’t draw on it anymore or, you know, the securitization market blew up then ……those institutional investors are, basically stuck, they can’t do anything, it’s not their fault, it’s just the nature of their capital structure. Whereas the smaller, un-levered institutions that are investing what I call pure equity or, you know, individual investors that might be investing $5,000/10,000/15,000/20,000 a deal, that’s their capital, they have discretion, they’re not relying on leverage and they could continue to invest.

Peter: Right, right. So, what about the other side of the marketplace for borrowers who, you know… Did demand kind of continue throughout, I mean, how did the demand for deals kind of change over the course of the pandemic?

Allen: Yeah. So, again, break that into two buckets so you’ve got like your (garbled) which is a guy who’s got a day job and might do one or two fix & flip projects or one real estate a year  even that often and then, separately, you have your seasoned speculators/developers that are doing half a dozen/a dozen projects a year. We saw the less experienced hobby developers slow down for fear, we saw the more seasoned speculators/developers actually dive in deeper because they see this as an opportunity. If they see people that might be out of a job that might be looking to sell their home, you know, stress situations that are an opportunity for them to make money.

Second to that, the overall pie size of the lender community shrunk overnight drastically, I mean, I don’t have any way to quantify that, but, you know, this is just a random number, but I would say probably 90% of lenders just kind of shut down overnight, not permanently, but temporarily, to see what the market was going to do as a result of, you know, that institutional capital issue. That, for us, made the pie smaller, but we were one of the few lenders that was still active.

So, our borrower demand was just exploding, far beyond what we could even facilitate. So, there was a ton of borrower demand, much less supply and demand, right, kind of borrower demand, less investor demand which also make the loan programs a little wacky, sort of the investors that were still active in the space wanted super low leverage, secure product, at 50 LTV and higher coupons which also just made it a little difficult to do business so if some loans were happening, some deals were happening, but the volume of those transactions dropped significantly.

Peter: Right, okay, that makes sense. So then, where do we stand today, do you feel like this is kind of worked through, are you getting back close to your $100 Million a month run rate or are you still a long way away? We’re recording this in the middle of September, how has demand been this month?

Allen: So, things happened slowly coming back, everybody kind of cuts the world into pre-COVID/post-COVID, we’re not post-COVID yet and we’re still here. I think what’s subsided is the panic and the fear over what the market’s going to do which is typically what causes these downward spirals. That fear has subsided. I think people have come to terms with what’s happening in the world, people’s lives have changed, they’ve adjusted how they do business. We’re in a post-COVID era, but still very much a part of our lives.

That being said, because the panic has subsided, capital has been flowing back into the space very quickly, the securitization markets are back, warehouse lenders are back so we’re starting to see that demand really ramp-up and ramp-up pretty quickly. From a credit perspective, because all that capital is flowing back into the space and because we actually have a shortage of product, meaning loans, and the space as a result of everybody temporarily pushing pause over the last four/five/six months, it’s actually pretty much had a direct opposite effect. It’s from where it was pre-COVID even though we’re still in COVID.

So, what I mean by that is LTVs are pretty much back where they were, you know, borrower experience requirements, FICO requirements, pretty much anything related to credit underwriting is back to where it was pre-COVID, as far as we are concerned. There are some lenders out there that were higher on loans to cost and things like that that may not be fully back to where they were, but we were ballpark, you know, five to ten points lower than competition anyway. So, as far as our business is concerned, we’re pretty much back to where we were, from a credit perspective.

From a pricing perspective, I’d say that loans are still pricing probably 50 to 150 basis points higher than we were pre-COVID, but I think very quickly compressed back down to where we were pre-COVID by like January/February. And then from a volume perspective, we just started taking applications, formally taking applications in July so what we did in April, May and June was focused very much on asset management focusing on funding draws and supporting borrowers that we were already in bed with so that loan activity that we did do was really for existing borrowers that we continue to support.

Going into July, we opened that back to taking applications, not just from existing borrowers, but from new borrowers and of course, there’s roughly a 30-day ramp so that led us into August where we closed about $10 Million in volume, September, we’re looking at probably doing about $20 to 25 Million in volume.  My goal by the end of the year is to be back up to somewhere $60 to 70 Million in volume. I think somewhere towards the end of Q1 or early Q2, we’ll be back up to $100 Million in volume, but we have to kind of tippy-toe back into that because, you know, as I mentioned, we’re still in COVID era and we don’t know what’s going to happen and we’re also in an election cycle so there’s a lot of unknowns.

Peter: Right, right. There is a lot of unknowns and we don’t know about stimulus and all that sort of thing. So, I’m curious about, you know, what you did internally staffing-wise because obviously you went down pretty dramatically in originations and maybe just tell us how you managed the staff and like what sort of furloughing you did. I was listening to this interview where that said you really…..you shifted a whole bunch of people and you said you didn’t have to lay off that many so tell us about that.

Allen: Yeah. So, we had pre-COVID 135 people on staff. We ended up letting go approximately 25 people, it’s not an easy decision at all and it’s something that we really tried to hold off on doing for several months.  We didn’t do it as quickly as some other companies did, meaning generally not lending companies, but eventually we had to make that difficult decision. So, as far as the rest of the staff, what we tried to do is we tried to save as many jobs as possible and just transitioned them to different departments.

So, we’re going into a cycle where asset management, loan servicing, you know, foreclosure workouts, potentially forbearances, etc. have become part of our day-to-day so we took people from our processing and underwriting departments, we took people from our sales departments, we moved them into more customer service oriented roles making sure that they could properly communicate to our investors, to our borrowers, answer incoming calls, things like that which worked great. Now, we’re basically unwinding that and moving people back to their departments that they were initially in as we start to recover our business back.

Peter: Okay, okay, that’s good, that’s essentially good. So then, interesting about the performance of your loans because, you know, real estate has been interesting because real estate has been booming, in general, there hasn’t been much of a downturn, obviously rates have been down particularly in the home mortgage market and prices have either maintained or gone up so I’m really curious about the impact on your loan portfolio. Did you find that there was a significant impact, a small impact or no impact?

Allen: It was definitely a significant impact, it was more short lived in nature, but there was definitely a significant impact. There’s a lot of misinformation out there over how things are performing. So, the residential market is strong, yes.

Peter: Right.

Allen: What many people don’t realize though is that it’s not just about selling assets, many of these developers have real estate portfolios with renters that they’re collecting rent and that cash flow is what’s supporting their debt service on what I call their offline assets or their main construction assets and their cash flow has been impacted. So, if you look this is more of a local issue rather than a national issue because every state, county is handling it slightly differently, but kind of two things really….one thing really caused a problem and that was a ban or a moratorium on evictions.

You’ll see many articles that say that rental collections have been fantastic, more than 90% and misinformation….the misconception is that that’s really specific so like Class A higher end product. Class B and Class C which is more affordable living or single family home that’s renting for a couple of thousand dollars a month, $1,500 a month, that’s been impacted very heavily. The collection rate there……I mean, I’ve read kind of conflicting things, but I’ve seen anywhere from 50 to 70% collections, I mean, landlords are down 30 to 50%. If they have any commercial units, obviously the commercial market was impacted very hard.

I have several friends who are commercial landlords that have office space and retail space that’s taken a massive hit which is all cyclical, it’s all tied together. So, the short answer is that those rental collections dropping made it difficult for many borrowers to meet their deadlines so we did see a spike in delinquencies between April, May, June and even into July.

We’ve seen that subsiding since July so borrowers have been able to catch up with payments, other borrowers have been successful in executing some forbearances with which took a few a few months or two months of back payments added it to the payoff while reinstating the loan for go forward payments and workouts, situations like that. Thankfully, we haven’t taken a loss on anything and a result of that, we’ve been able to work through that and the performance has come back, thankfully, in a great way and my expectation is that by the end of October, we’ll be back to where we were pre-COVID in terms of collection so we should have…….

Peter: Really?

Allen: …..north of 95% collection rate. Yeah.

Peter: Okay, okay. I imagine there will be some that….you know, I’m just thinking about, the one great thing about what you do is you have an asset and you’ve got LTVs that are reasonable so are you finding that you’re having to foreclose on some of the borrowers that you’ve had?

Allen: Definitely. So, some borrowers work with you, some borrowers think you’re their enemy, less inclined to work with you so we will definitely have a subset of borrowers, probably less than 3% of the delinquencies that we’re seeing that will actually end up in foreclosure and stay in foreclosure. There are some borrowers that will start the foreclosure process with, just keep in mind again, locally there are moratoriums on foreclosures in many jurisdictions so we’re forced to work out and play nice with which we want to do anyway, but at the same time we have to protect our investors.

So, where we can, we’re starting those foreclosure actions to apply pressure to the borrowers that are less inclined to work with us. The expectation is that many of those, as we have seen historically, will come out of foreclosure and roll back to a performing status or some sort of a resolution that’s selling the property, doing it even before the foreclosure, whatever shake or form that may take and we’re expecting anywhere from a 2 to 3% of the delinquencies to actually really formally stay in foreclosure and go for foreclosure which have varied collection time frames, depending on what state you’re in, geographical location areas, etc.

Peter: But, would your expectation be then for no principal loss in those foreclosure proceedings?

Allen: Generally, when we stress test our portfolio that’s the expectation, it doesn’t always work out that way. So, we’ve been in business for five and a half years now, we’ve, of course, had losses. I think on a portfolio measure we’ve had about 50 basis points loss factor while delivering north of 10.5% average return so net effective 10% return on the portfolio. You’re going to have losses, it’s an inevitable part of our business, but you also have to look out what’s driving those losses sometimes.

So, we’ve had scenarios, for example, where we build leads that we would be fully made whole on the underlying transactions, but we’re looking at a 2, 2.5, 3 or 4 foreclosure timeline. There are investors on the other side who says, I’d rather take 90 cents on the dollar today than have to wait two or three years and carry this loan as a default on our book, you know, that balancing act. We’re sometimes forced into situations where we do have to take a worst deal, but that’s our job as servicer in that instance to listen to our investors. So, some like 50 basis point loss, for example, actually a lot of it can be attributed to kind of those investor forced sale scenarios.

Peter: Right, right, okay, that makes sense. So then, when you’re sourcing new deals today, are you……you said you’re back working with new borrowers, I mean, is the way you’re trying to source deals….has that changed since from what you were doing pre-COVID?

Allen: No, not really. We’ve never really done a whole lot of online marketing and advertising, most of our origination volume was coming the old-fashioned way (garbled) stuff which obviously you can’t do right now.

Peter: I’m aware. (laughs)

Allen: Yeah. So, we are…I think it’s a lot of phase where there is more limited capital than there is for our demand because still a lot of lenders still haven’t come back to the space so we’re actually seeing borrowers naturally find us or same brokers come to us with deals as well. So, we probably have more deals than we know at this point so we’re not really doing a lot of outbound marketing for borrowers.

Peter: Right, right, okay, that makes sense. So then, I’m curious about your take on this little niche of the industry that we’re in where you’ve got a marketplace, you’re doing the commercial fix & flip type loans, what do you think the impact of the pandemic is going to have on this sort of niche in the industry?

Allen: Long term, not much. I think in the short term, it’s what we’ve been describing. There’s going to be shortage of capital for a period of time, they’re going to see wider pricing as a result of that, but my expectation is that assuming we don’t end up in another massive shutdown of the economy that we’ll eventually rollback to where we were pre-COVID, I don’t think that change is going to take more than six months, eight months.

Peter: Right, right, okay. So, we’re almost out of time so last question then. You know, as you look to 2021, I’m sure most of us are looking forward to a new year, to have 2020 behind us, what are you excited about, what are your goals for the business towards the next year.

Allen: Yeah. So, we have a couple of exciting initiatives. So, aside from continuing to grow our core business, we have plans to launch an NPL, non-performing loan marketplace, recognizing that, you know, that there will be defaults that will happen as a result of the COVID pandemic, there will be a need for certain lenders and aggregators to have to offer those. So, we’re actually targeting, I think, November or December for the launch of our NPL marketplace, it’s really built as a full end-to-end automated service for buyers and sellers to interact through an organized platform, streamline the process for selling the non-performing loan and hopefully get better execution for the seller and then separately from that, we’re also starting a business purpose loan servicing platform.

One of the things that we’ve learned in being in this business and really in the investor non-QM business for the 30-year mortgage product is that many of the loan servicers that are out there are servicing consumer mortgage purpose loans as well so they’re kind of shackled and limited in how they service business purpose loans because their policies and procedures are set up in light of CFPB regulations, consumer regulations, etc. and that does not make for a great servicing platform per se for business purpose loans. So, we have that as an offshoot as well which we’re excited about launching. Those are two kind of new sister platforms to Sharestates that hopefully will make a big splash.

Peter: Very interesting. Well, good luck with that, Allen, it’s been great to chat with you again and best of luck as we all navigate the pandemic.

Allen: Thank you so much, appreciate it, Peter.

Peter: Okay, my pleasure. See you.

You know, it’s not surprising to me that companies like Sharestates really were impacted by the pandemic, I mean, everyone has been across the lending space, in one way or another. But, you know, with real estate that I think is different when you’re investing in consumer loans or investing in small business loans is certainly…..I find this personally is that it’s definitely more of a sense of security investing as an individual because you know you have that asset that’s really backing the loan that can be foreclosed on.

And as I said, that really is a huge protection that’s why I continue to like the real estate asset class, in particular, this fix & flip asset class because I think you’re getting, Allen said you are getting 10% net returns there which is hard to get anywhere these days. Certainly, I don’t expect that that would maybe maintain that level all the way through here, but given the fact that they can foreclose these properties it may be a multi-year process, but your principal is obviously more protected than it would be in other kinds of investing.

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 Digital, the new online community for financial services innovators. Today’s challenges are extraordinary with upheaval affecting all areas of finance. More than ever before, we need to come together as an industry to learn from each other and make sense of this new world. Join LendIt Fintech Digital to connect and learn all year long from your peers and from the fintech experts. Sign up today at digital.lendit.com.

You can subscribe to the Lend Academy Podcast via iTunes or Stitcher. To listen to this podcast episode there is an audio player directly below or you can download the MP3 file here.

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Filed Under: Lending and Fintech Podcast Tagged With: fix and flip, real estate, Sharestates

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Podcast 266: Prashant Fuloria of Fundbox

The CEO of Fundbox talks PPP, small business underwriting, the business graph, delinquencies, QuickBooks integration and more

September 25, 2020 By Peter Renton Leave a Comment

Views: 413

The pandemic has had more impact on small business lending than probably any other vertical. While the PPP enabled many lenders to continue to lend and therefore stay in business that is now history. What the pandemic also did was that it demonstrated how robust lenders underwriting models were. This crisis has not effected all lenders equally with some lenders coming through this period in decent shape.

Our next guest on the Lend Academy Podcast is Prashant Fuloria, the CEO of Fundbox. They have always been a very data-science focused lender that put a huge amount of effort into not just data analysis but data gathering as well. As Prashant shares on this show the crisis has validated their approach.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

In this podcast you will learn:

  • How Prashant really began his fintech career at Google and then Facebook.
  • The three things that struck Prashant when he was introduced to Fundbox.
  • Background on his partnership with Eyal Shinar and why Prashant became CEO.
  • How Fundbox is addressing the $3.1 trillion receivables problem in the U.S.
  • Why they decided to originate PPP loans themselves rather than act as an agent.
  • Who is the typical Fundbox customer.
  • The Fundbox approach to underwriting and what makes them unique.
  • Why the business graph they have built is so important.
  • How delinquencies have trended this year.
  • Why demand has started to come back recently.
  • How Fundbox thinks about open banking and why they are a pioneer here.
  • How their integration with QuickBooks works.
  • Prashant’s vision for the future of Fundbox.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech USA 2020. The world’s largest fintech event dedicated to lending and digital banking is going virtual in 2020.

Download a PDF of the transcription of Podcast 266 – Prashant Fuloria.

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PODCAST TRANSCRIPTION SESSION NO. 266-PRASHANT FULORIA

Welcome to the Lend Academy Podcast, Episode No. 266. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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Today’s episode is sponsored by Lendit Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show ever. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa

Peter Renton: Today on the show, I am delighted to welcome Prashant Fuloria, he is the CEO of Fundbox and he only recently became CEO, he was formerly COO, but I wanted to get Prashant on the show because I think Fundbox is one of the most interesting companies in the small business space and wanted to talk about their approach to underwriting which I think is unique and data analysis and how that has really helped them in good stead during the pandemic.

We talk about that as well as far as the impact of the pandemic, their PPP Program, we also talk about open banking which they have talked about a lot over the years. The integration with QuickBooks is something that is also, I think, pretty unique and we talk about Prashant’s vision for the future of Fundbox. It was a fascinating interview, we hope you enjoy the show.

Welcome to the podcast, Prashant!

Prashant Fuloria: Thanks, Peter, it’s always good to catch up and I think it’s been a while since we got together.

Peter: It has been a while. I know my trips to San Francisco are no longer happening ever since early his year. Anyway, let’s get started, I want to actually ask you about your interesting collection of guitars behind you there. So, are you a guitar aficionado, tell us a little bit of the story about that.

Prashant: I am a recovering guitar-a-holic, I guess, have been sort of playing jazz, a little bit of rock & roll, I guess, for longer than I’d like to admit. (Peter laughs) While growing up in India, I ended up playing in what became India’s largest selling rock band. Unfortunately, I had left to come to the US before the debut album was released (Peter laughs) and the rest is history for the rest of the band but not for me.

But that said, I do love playing guitar and …I don’t really have like a gigantic collection, but it’s sort of a….think of it as a working man’s guitar collection which gives me enough sort of variety in terms of tone and sound that I need to play, you know, virtually any kind of music so, that’s how I roll.

Peter: So, in another life you might have been a rock star and not a fintech entrepreneur.

Prashant: Yeah. I still hang out with a bunch of other tech execs and play in a band called Coverflow at tech conferences and things like that, but, of course, COVID has definitely, like a lot of other things, has impacted our style, it skimmed our style a little bit, but now I’m glad to be able to play the guitar. As you can see, I have……I go out sometimes these days in the Bay Area given all that’s happening with the wildfires so I have sort of unplugged sort of (inaudible).

Peter: Exactly, indeed. So, I want to talk a little bit about your background here, you’ve had a very interesting background working at some of the largest tech companies in the world. So, why don’t you give the listeners some of the highlights of your career before Fundbox?

Prashant: Sure, sure. I think of myself as a sort of tech executive by profession and a product manager at heart and maybe a perpetual student through all this time to learn things. So, I grew up as a product manager in the early days of Google so I was part of the AdWords Team and the AdWords Team was very, very small and built out a very large part of AdWords business infrastructure. Also along the way at Google, I did dabble in fintech, it wasn’t really called fintech at that time.

I built out Google’s Global Billing and Payment platform just so that we could power the ads business and also the countries around the world. This was at a time when global payment networks weren’t really a thing so how do you go and collect money in China or distribute money to publishers in Brazil. It was like a really big deal for Google because of our global ambitions and sort of I built that out and, eventually, when I left Google I was running all of Google’s products for the APAC region so spent a lot of time in Japan, China, Korea, India, Southeast Asia, Australia and New Zealand, all those markets and I left Google to go to Facebook.

Once again, I ended up at a tech company that was very young and in sort of the early days. For the first couple of years at Facebook, I run the ads product at Facebook, you know, a lot more controversial product these days as it turns out and then for the next couple of years I did the same thing, I run the payments platform so I built out the payments platform at Facebook as well. So, I know enough to be dangerous in payments, having done that at two different tech companies, but I also think the world’s come a long way over the last ten years in terms of payment rails and global payment, you know, global payment as well.

After Facebook, having enjoyed and learned from the search wave and the social wave, I thought about the mobile wave and ended up joining a start up called Flurry which was actually at that time the world’s largest mobile analytics platform embedded in over two billion devices, monthly active devices. And so, we were seeing data about the mobile revolution really from all over the world, from the western world to India, to China, to Latin America and so on. Yahoo acquired Flurry and then for a while I was at Yahoo, once again ran the ads there so a little bit of a pattern.

By the time I left Yahoo, I was frankly tired of doing ads and advertising and marketing systems and solutions and things like that and was thinking about what to do next and I got introduced to Eyal and right when I saw Fundbox I think three things just hit me like a ton of bricks.

One was, well, the mission of the company to serve small businesses is something that I could relate to and just felt very real so I was like well, if I’m going to get up in the morning and go to work, I might was well do that or something that’s interesting and motivating.

The second was a really good team that…..a small team at that time, we were much smaller than we are today, but just really smart folks that worked really, really well.

The third was the technology because even at that time that we were very early stage, I could feel the team had built in just three short years some very cool and differentiated technology and the tech team was, you know, at the same level or better than any team that I’ve worked with at Facebook or Google and so I was very, very impressed. Came on board and, you know, here I am four years later partnering with Eyal, who’s the Founder, until recently the CEO and just helping Fundbox grow and helping the rest of our customers.

Peter: Okay. So then, maybe you could just tell the listeners who don’t know Fundbox really well, how do you describe it today?

Prashant: Fundbox is a fintech company that is focused on helping small businesses and empowering the small business economy through innovative credit and payment solutions. That’s what we do and we work with small businesses today in the US, but we do have global aspirations, but the small businesses are across a broad spectrum of industries and segments and we help them by providing them access to working capital and other tools that help them with their financial agility and peace of mind and ability to succeed and grow.

Peter: And you mentioned Eyal, just recently he was CEO until a short time ago so just tell us a little bit about that transition….you were COO, tell us a little bit about what was behind the thinking there of you becoming CEO and Eyal stepping back a little bit?

Prashant: Oh, sorry to let you down, Peter, and your viewers as well, but the transition was like it was a non-event. (laughs) Eyal and I had been, you know working together very closely for the last four years and a year ago, we decided to make a transition, it was very smooth and very gradual. I was managing the core business and a large part of the company before so it was very smooth and Eyal is still very involved with the company as the Executive Chairman.

He and I talk every day and, frankly, the only meal that I’ve eaten outside of my home ground today is a meal with Eyal. So, you know, we’re working very closely together and he and I are sort of focused on two different things. He is thinking about the company’s strategy, longer term, capital markets, strategic investors, strategic partners, things like that and I’m a lot more focused on like running the company. So, it’s been a great partnership and I hope and expect it’s going to continue for a very long time.

Peter: Okay, fair enough. So, you know, I went back and looked at my notes in some of the meetings that I’ve had with you over the last couple of years and you said this several times, you talked about the $3.1 trillion problem in the United States of money that’s locked in receivables. So, maybe you can just tell the listeners a little bit about how Fundbox is addressing that problem directly.

Prashant: Yeah, happy to do that, So, just by way of context that $3.1 Trillion represents all the money that’s owed to a company/to a business in the B2B space at any given time and about a third of that is money that’s owed to small business. So, it’s a lot of money, you know, a trillion dollars is very, very significant compared to other big numbers like total consumer debt or total mortgage amounts and so on in the country. The challenge with this money that’s owed to small businesses is the opportunity cost, the economy is not operating efficiently.

Think about all the investment decisions and the operating decisions companies could make better if they were to simply get access to that capital or have more confidence in that capital showing up. The problem is more pronounced for small businesses and it’s a third of that number and it’s a number that’s rapidly growing so I think that over the course of the last year, the amount that’s owed to small businesses has almost doubled. So, it’s a very, very significant impact on small businesses that sort of been made worse or exacerbated over the last year, actually over the last six months.

So, with that problem in mind, you know, we’re working to address that problem, to solve that problem, you know, primarily through credit and that’s sort of what we’re primarily focused on. So, we’ve got sort of a few different flavors of our credit products and through COVID and through the pandemic and the downturn, we did not stop originating, we’ve not stopped serving our customers and we believe it’s an important way for us to make a dent in this huge problem. We’ve even continued acquiring new customers during this time and this access to credit has been incredibly important for them, as you can imagine, through all the ups and downs, a lot of downs in there over the last few months.

The other thing that we’ve done which is, of course, more of a one-time thing is that we’ve also obviously acted as a lender in the PPP Program. So, through August, we worked with the Small Business Administration and the Treasury to be able to originate loans to our customers, but also other SMBs and rather than acting as an affiliate….so there are a lot of folks who essentially bought traffic and acted as an agent, pushing that traffic to a bank to be able to actually originate, we decided to go all in and originate ourselves.

And we did that because we wanted to deliver a better customer experience to the tens of thousands of people that came to us looking for credit and who we serve. By sort of managing the whole experience, we were able to describe just more customer delight than in getting someone in and then moving them over to some other institution. And so, you know, if you just take a look at what the impact has been, apart from the obvious financial impact of the company, it was sort of very profitable for us and, you know, we did very well with that.

I think more than that, we’ve built up an incredible amount of goodwill in the SMB community by helping and if you just look at our, you know, Trust Pilot reviews and how glowing they are, it’s a matter of great pride for us, we’re very, very happy about that. And I think that’s sort of another way in which we’ve helped and we’re going to continue looking for ways in which we can help with this $3.1 Trillion problem of which over a third is related to SMBs not getting paid for something that they have done, a product they have delivered or served.

Peter: Okay. So then, maybe you can just tell us a little bit about who you are serving and you talk about small business, obviously, there’s many verticals. Are you like broadly across all verticals, who’s a typical customer of Fundbox?

Prashant: So, our customer base is very broad. So, in terms of geography, of course, we’re focused on the US today, but the heat map of our customers looks pretty much like the heat map of small business activity in the United States. In terms of verticals, we’re not concentrated or over concentrated in any one particular vertical or segment. We serve, you know, professional services or scientific and technical services on the one hand all the way to retail, you know, B2C to manufacturing, to B2B wholesale, to construction, to just about any industry segment and that is because our aspirations are very broad and we want to be able to serve a broad set of customers.

In terms of size, we typically serve customers that are on the smaller end of SMB and as you mentioned, Peter, SMB is…….from definition, SMB will take you all the way to a company that has up to 500 employees. Our customers tend to be on the smaller side so ranging all the way from a sole proprietor to someone who has 10, 15, 20, maybe up to 50, but not much more than that by employees, generating as few as, as little as $100,000 in annual revenue to maybe $2 Million but not $50 Million or a few million dollars and in our kind of median revenues roughly in the $700,000 a year range. So, that’s roughly the size of the customer and we’ve focused on this for a reason, sort of two reasons which actually dovetail together very well.

One is that this is highly underserved so the smaller end of SMBs is the place where there’s the most amount of pain for reasons we can get into, but just the mechanics of assessing risk and underwriting becomes very, very challenging using conventional techniques and the payoff is smaller because it’s a small customer. They’re not asking you for a million dollar product, they’re asking you for $25,000 in a line of credit, right, and so that’s one part, it’s highly underserved.

Actually, by serving smaller customers, we’re also….that’s a place where technology and automation and machine learning can display more actively because there’s scale there. So, this is sort of a place where there’s actually like sort of a happy combination of both a strong market need which has not been addressed and the opportunity for us to just use our approach, it’s really much more of a technology-based approach to be able to serve customers that scale.

Peter: Okay. So, I want to talk about that approach, particularly the approach to underwriting because I’ve talked to a lot over the years and you always talk about data analysis, data science and machine learning and really what you said is a unique approach to how you address underwriting. So, maybe ….can you give us a little bit of color there on what makes Fundbox unique.

Prashant: Yeah, happy to do that. Before I say anything, I want to caveat this by saying that almost whatever I say can be said by almost anybody, right, and, ultimately, the proof of the pudding is in the eating and the performance, but here’s how we think about what we’ve done.

Over the past seven years and even around, we made a lot of deep investments in capital, in people, in our focus and energy for long term superior performance and we’ve built a significantly better sort of data and credit machine which is coming to bear and showing results now and which we talk about. A few things that are pretty important for us….number one is we’ve made a huge investment in data and I’m going to give you a couple of flavors on that. When you think about data, you think about making predictions so the first is really around the labels that you can use, the outcomes that you can train your machine learning models on, right.

And what we’ve done is every time we encounter a new data set, we’re pretty aggressive in how we on-board customers and let them get access to credit and see what happens because it’s only by having a pretty broad aperture and letting a lot of customers come in can you collect enough defaults to train a machine learning model well.

So, we’ve not been shy about saying, let’s take some risks in terms of the customers you bring on in the early days of any segment, whether the segment is a part of the market or a data source that we’re anchoring on and let’s not be shy about making dollar investments in those. So, in other words, losses which help train our models do come at a dollar cost because you’re losing principal and that’s a big deal, but we’ve been very explicit about making good investments within the company with our investors and so on, so that’s a big thing.

Another flavor of data investment is spending a lot of time in engineering the features, or think of it as a variable typical into models, so we access a number of data sources. You know, many of them, actually most of them, are not proprietary. We get access to bank account data, frankly, anybody can access bank account data, it’s getting more and more open. We’ll talk about open banking hopefully later in this thing, but we access accounting software data, that’s available to everybody too, but what you do with the data you have access to, how much time do you spend trying to understand and develop features from all the thousands of data points and how you look at the power of each of these features is like a really big deal.

This is something that we’ve been working on ever since the company started such that we have a very significant edge over anybody else when it comes to even extracting features from generally available data sources. So, I think the combination of one having a large body of default that we can train our models on, which is awesome, and then the other one, spending a lot of time on future engineering. These are investments that no one can replicate in six months or a year or maybe even two, this takes time to build out and we’ve done it.

I think the other thing that we’ve done…..you know, there’s a lot of things….one thing in particular which I think is pretty unique about Fundbox is that we’ve been investing in something and this is proprietary that we call the business crash. So, when a customer comes to us and connects their accounting software or connects their bank account, what we’re able to do is to understand a lot about the customer, but not about them as an island. We think about them and their interactions with the other businesses that they work with, this is more important than the B2B context, but imagine if every customer that came to Fundbox brought along some information about between one to 200 other businesses around them, these could be suppliers, it could be customers and so on.

And so by putting all of these in the graph……we built put a graph of businesses in the US and their interactions with each other and, of course, the graph is not perfect, you don’t have every single small business or large business in the US and we don’t have every transaction, but we do have a lot of it so that we can derive features from this graph that can help us explain or predict the risk of the business based on the company they feed, based on the businesses around them, that’s a pretty big thing.

And, along the way, there’s also like a whole bunch of statistical techniques about how we approach sampling, how we structure our models, how we create human readable ways to explain the results of our models to customers, all of that we’ve started to develop. It is a significant investment and I’ll tell you this, Peter, going through all of these over the last almost four years, you always ask yourself the question…everybody is saying the same thing so is it really worth it, is what we’re doing worth it? And then in a few short months, you get the answer.

Peter: Right.

Prashant: When the environment goes from being benign to being what we’re in right now and the light bulb went off in my head and I was like, wow, this actually was worth it, the approach actually made sense, but, you know, it’s hard and it’s easy to get. It’s easy to doubt when everybody’s saying, you know, almost exactly the same thing. What I just told you over the last two/three minutes could have been said by anybody, it’s easy to say, it’s hard to do and the proof is in the actual performance.

Peter: Right. So, let’s talk about that then. I mean, we’ve gone through a very rough six months, obviously, you had the PPP which has sort of helped prop up many small businesses, but tell us a little bit about what you’ve seen loan performance-wise, you know, from the start of the year.

Prashant: Yeah, yeah. So, I think that we’ve had very strong performance with our loans as measured on any metric, so let’s take delinquencies, right. So, when COVID hit our delinquencies have been in the lower single digit percentages, right. When COVID hit, we saw a temporary spike, we saw delinquencies rise from low single digits to high single digits, never hit double digits at all in terms of percentages. And, that happened for like a few weeks and then they dropped so within five to six weeks we were back at pre-COVID levels and for the last two months, they’ve been at significantly below pre-COVID level.

So, while we did have some sleepless nights, worried like everybody else was like is this the end of us, what’s going to happen, we saw things play out in a way that really gave us a lot of confidence into sort of our approach which is our delinquencies never even ever got to double digit percentages. Now, if you compare this with sort of the story at almost virtually every independent fintech credit platform, the story was more delinquencies rising in the 30 to 40% at the peak and remaining there for a longer time.

So, when we looked at the portfolio performance of either publicly traded companies, some of which were in the news for getting acquired, right, or some of our larger peers in the private sector that also were in news were getting acquired, we’re talking about delinquencies in the 40% range. And if you think about a 40% delinquency rate versus a 8% delinquency rate…..we’re not just talking about, you know, just a few percentages, we’re talking about a 5X difference in performance and it was so significant that we really had to look at it over and over again.

Are we making a mistake here like can it be real and it is real, it was a very significant difference and that’s when over time the investment in the approach just seemed to be so real and so much grounded in the reality of actual business performance. You know, there’s sort of this joke that floats around which is ..if it’s written in, you know, in Python, it’s machine learning; if it’s in a PowerPoint slide, it’s AI. You know, there’s a lot of PowerPoint slides floating around and it is good to see something real, you know, deliver performance for a change.

Peter: Yeah, for sure, for sure. So then, what about demand, we’re now more than a month away from the end of the PPP, are you seeing demand come back strongly? Tell us about how that has flowed over the last few months.

Prashant: So, demand has been growing as the stimulus funds are running out and we see all these because they’re connected to the bank accounts of our customers and obviously, be part of the PPP Program as well and so, we’re seeing demand come back. I think there’s definitely a need for credit given the macro environment that’s out there for sure. There’s also a need for credit given that supply has dried out.

So, with some of the players not being in the market anymore……in fact, I think we were perhaps….. we were almost sure we’re the only independent fintech to not stop originating, everybody else and even some of the larger platform players did so there’s this sort of imbalance between demand and supply so we’re seeing demand coming in. I think this is where we talked about for the focus and I think the biggest opportunity we see for us right now is we’ve proven that our technology worked, we’ve got a very strong sort of momentum in terms of customer goodwill and really how do we make use of that and place it in the market. It’s something that we are working very hard on right now.

Peter: Yeah, okay. So, I do want to talk about open banking. You mentioned it a few minutes ago and I feel like you guys have in some ways have become a de facto pioneer in open banking in the US. We, obviously, in Europe it’s mandated regulation, open banking is required by all large banks, but how do you view your approach to open banking?

Prashant: Yeah. I think, Peter, we’ve been talking about open banking for more years than we should have been, I think, because it has not moved perhaps as fast as we would like in the US and so on, but I think of open banking very much as an engineer might think about technology platforms, right. You want to be able to put together different technologies, different services to ultimately do what you want and so very, very literally the idea of owning your data as a consumer or as a small business and being able to do what you want to do with it enabled through technology and through permissions it is sort of really very important.

I think if we just take it a little bit more broadly, I do think this is where fintech, more broadly, is headed which is that fintech will succeed if and when it is able to re-imagine and re-package sort of a financial service in a way that makes sense for the customer by taking what’s there, whether it’s data from a bank account or data from your credit card or your accounting software or something else, and putting them together ultimately to serve the customer. That’s the single most important thing, how do you serve the customer well by putting together all the data and the technology that you have.

I mean, we think about open banking from the perspective of customers coming to us and saying, look, I have a bank account, I want you to be able to look at it because I’m looking for working capital or I have a set of invoices lying in my QuickBooks and I want you to take a look at it because I would like to be able to advance working capital against those invoices. It’s all of these things and so the general idea that one, the customer is in charge, right, and they are coming to us and saying, I’ve got this and I’ve got that and I don’t want to have to upload a PDF file because that’s just too much of a waste of my time. I want to be able to authorize you when I want to look at data and just help you help me serve me better. That is….in my mind, this is my romantic idea of open banking which is the customers get what they want, the way they want and the APIs and the permission and so on are able to make that happen.

So, we’ve been pushing that obviously and our customers benefit from it and there’s also a change in sort of customer expectations, right, around all of the stuff. So, four years ago when I joined Fundbox, sometimes we would lose customers who would look at our POs and say, this is a scam, like I cannot believe that you are connecting to my accounting software and within a minute giving me credit, like there’s something not right here in this picture, it’s too easy.

And now, four years later, people are saying, yeah, that’s the way it should be, it should be easy, it shouldn’t be hard and I’ll tell you what, in a couple of years people will be demanding it and if it takes you more than a minute to figure this stuff out, like they’ll be upset and that’s good, that’s good. Customers are getting what they want and what they need so, yes, it’s a journey, it’s not been easy, but we’re every step forward. Every bank that integrates better, every software, SAS platform that lets customers share their data, we believe it’s another step, It’s just opening up all of these deep assets that actually belong to the customer and driving better sort of financial services through technology.

Peter: Right, right. So, we’re running out of time, but a couple of more things I really want to get to. You mentioned QuickBooks several times and I know you’re pulling QuickBooks data, but I think I read somewhere as well that Fundbox is now available inside QuickBooks. Tell us a little bit about that.

Prashant: Yeah. So, we’re embedded inside of QuickBooks, I think we’re perhaps the only fintech player to be natively integrated inside of QuickBooks. We love working with the QuickBooks team and we’ve been doing this now for four years. If you are in your QuickBooks product, you might see a call to action again. Invoices aren’t getting working capital and then you engage with that, it’s a QuickBooks-branded experience powered by Fundbox, but it’s very native to the flow and what’s beautiful about that experience and we’re excited about it and so is the QuickBooks team is that for the customer it’s like I click a button, I authorize Fundbox to take a look at my QuickBooks data. But, frankly, it’s single sign-on, there’s no log-in that I’m creating, I don’t have to do anything else.

All my QuickBooks data is there and Fundbox just verifies with me like are you, you know, who you say you are, probably for regulatory purposes, but it’s a minute and I’m in and I have access to credit so, it’s been working very well. We also have QuickBooks customers who come to us outside of the experience and there we are using the QuickBooks API just like anybody else because QuickBooks is also a platform, an open platform, which is great, more power to them for doing that. And so, we work sort of in both ways in this sort of broader way, but also a very important part of our partnership is more embedded in the nature that we have.

Peter: Right, right, okay. So last question then, what’s your vision for the future of Fundbox? I feel like you can take this in a number of different ways, but I’d love to get your perspective on where this is going?

Prashant: So, going back to a point I made earlier, I think we want to serve the small business owner, we want to serve the small business and we believe that despite all the advancements we made as an industry over the last decade, the SMB is still very underserved at a broader level. Today, Fundbox has been able to re-imagine credit for the SMB by using technology, by re-thinking certain things like for example, we actually understand what you mean by your invoices whereas a traditional bank might not because we see the invoice data, we understand the counter party on the invoice because of our business graph, all of those things, but that’s sort of one part of your existence.

In general, I’d say SMBs are underserved and generally have been failed by the existing system on multiple fronts, sometimes in credit, sometimes other services. And so, we’re really focused on thinking about how we can take all these building blocks that you’ve got by way of technology and so forth and re-imagine other experiences for small businesses to really give them the tools they need to succeed, the financial agility, the peace of mind. And so, we’re very focused, I think, on two things.

One is, you know, the credit products that we have today serve a need, the technology is proven, we’ve created great customer delight and momentum, we want to be able to do a lot more of that and so that’s like a really big thing for us.

The second is, you know, we want to be able to serve these customer more broadly, we see time and time again from our customer feedback, from what we hear and it totally somehow….you know, they’re currently being served or underserved by banks and traditional financial institutions and there’s a huge, huge opportunity.

So, that’s what we’re working on and, obviously, no one wanted COVID to happen and, you know, there are so many challenges in the world today, but I think the silver lining for us is that we’ve been able to prove the validity of our approach to like a terrible downturn in the economy and we want to be able to sort of scale up how we serve customers, both in terms of the number of customers we serve, but also in the way we serve them.

Peter: Okay. Well, good luck with that, Prashant, it’s always great to chat with you. I really appreciate your coming on the show today.

Prashant: Thank you.

Peter: Okay.

Prashant: Thank you so much, Peter. Take care.

Peter: Okay, bye.

You know, I want to go back and talk about that business graph that Prashant was mentioning. I think it’s hard to overstate how big of a deal this is, I think, for small business lending in general because as we move forward …..I mean, the data is only going to get more rich and Fundbox has said they’ve already got connections to not all, but most of the small businesses in this country. And as that graph grows wider and deeper, I think you’re going to see ….it’s going to be a very powerful tool for those that have access to it because you’re going to be able to see problems in industries as they’re just getting started because so many businesses are interconnected in doing with business with each other, supplier or customer relationships.

I think this is really one of the most exciting things about small business lending that we’re going to see really kick up this decade. You’re going to have so much more data at your disposal and as those companies that can really pass that data, interpret the data into really helping to make many meaningful decisions that are going to have a distinct advantage.

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, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa.

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Filed Under: Lending and Fintech Podcast Tagged With: credit and underwriting, Fundbox, small business lending

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LendIt Fintech USA 2020 Preview

The annual LendIt Fintech USA preview show provides a guide to attendees to make the most of the event this year

September 23, 2020 By Peter Renton Leave a Comment

Views: 85

Every year in the lead up to our biggest show we provide a deep dive into what to expect with our LendIt Fintech USA preview show. I chat with my colleagues Bo Brustkern, CEO, and Todd Anderson, Chief Product Officer of LendIt Fintech about all the components of the eighth annual event which also happens to be our first ever virtual show.

The best way to consume this content is to watch the video on YouTube

In this podcast you will learn:

  • How LendIt Fintech USA 2020 is different from other virtual events.
  • How we adjusted the content to make it easier to consume online.
  • Descriptions of the various networking opportunities for attendees.
  • How you can become a LendIt Fintech All-Star.
  • A breakdown of all the content tracks.
  • Highlights of some of the keynote sessions.
  • The advantages of virtual events over physical in-person events.

You can play the audio for this podcast in the audio player directly below or you can download the MP3 file here.

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Filed Under: Lending and Fintech Podcast Tagged With: LendIt Fintech USA 2020

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Podcast 265: Sally Taylor of FICO

The Scores Vice President of FICO talks about measuring the resilience of consumers with the new FICO Resilience Index

September 18, 2020 By Peter Renton Leave a Comment

Views: 241

One of the challenges that has plagued consumer lenders over the years is that when times get difficult some consumers do much better than others. There are even large variances in people who have the exact same credit score. There are lots of ways to get a 680 credit score and these people will all behave in a similar way when economic conditions are benign but differently during a recession.

Our next guest on the Lend Academy Podcast has been thinking about this problem for a long time. Sally Taylor is the Scores Vice President at FICO and they recently launched the FICO Resilience Index (FRI) which addresses the problem directly. We talk about the FRI in some detail in this interview.

In this podcast you will learn:

  • Sally’s experience when FICO score were first introduced several decades ago.
  • How she thinks about credit scores today given the disruption of the pandemic.
  • Why FICO does not consider forbearance programs in calculating scores.
  • Why they developed the FRI.
  • How the index works and the outcome it is designed to predict.
  • The kinds of consumers who will have a low and high FRI.
  • What a high FRI number might mean.
  • How consumer lenders are actually using the FRI today.
  • The level of interest FICO is seeing from lenders for the FRI.
  • How Sally views those fintech lenders that say they go beyond the FICO score.
  • What she thinks about the huge popularity of data science today.
  • What Sally is working on today that is interesting and exciting.

[Editor’s note: as Sally said you can hear from FICO executive Dave Shellenberger at LendIt Fintech USA 2020 talking about the latest insights on consumers today.]

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech USA 2020. The world’s largest fintech event dedicated to lending and digital banking is going virtual in 2020.

Download a PDF of the transcription of Podcast 265 – Sally Taylor.

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PODCAST TRANSCRIPTION SESSION NO. 265-SALLY TAYLOR

Welcome to the Lend Academy Podcast, Episode No. 265. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show ever. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa

Peter Renton: Today on the show, I’m delighted to welcome Sally Taylor, she is the Scores Vice-President at FICO. I wanted to get Sally on the show because there’s just a lot of activity happening in credit scores this year with the pandemic and the forbearance programs. Sally has decades of experience on credit scores so I wanted to really get her perspective on what this all means, what historical precedent we can look at when it comes to credit scores and she does give some really great ideas, great solutions there.

Also wanted to talk about the new product that FICO released earlier this year called the FICO Resilience Index. It’s very pertinent right now because what it really does is it helps lenders understand consumer sensitivity to economic stress and let’s face it, many consumers are under considerable stress today and this allows lenders to really continue to lend confident in the fact that the 680 FICO now is going to be a 680 FICO in six months time or in 12 months time.

So, we go into that in a lot of depth, talk about how it’s built and what it really means; we also talk about data science, in general. We also talk about what Sally is finding most interesting today. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Sally.

Sally Taylor: Thank you for having me, Peter.

Peter: My pleasure. So, I’d like to get this thing started by giving the listeners a little bit of background. I went to your LinkedIn profile and I see you have spent your entire career at FICO so, why don’t you tell us a little bit about how your career has progressed then.

Sally: Sure, sure. I am a veteran of over 30 years in the credit industry and the industry of analytics and data science. I started as a Data Scientist straight out of school with my Statistics degree in Berkeley and I was part of a original management team of the FICO scores, that would have been about 30 years ago.

We just celebrated the 30-year anniversary of the FICO scores and I led the product management to marketing teams so I was part of a lot of the adoption in the early years of designing and re-designing the FICO scores. And then, as you said, I’ve continued to work at FICO, I headed up product management for FICO scores for about ten years, I’ve done other things at FICO including managing other software products and so forth. About five years ago, returned to the Scores Team to head up the B2B Scores Team.

Peter: Okay. So then, how revolutionary was it? I imagine, we take it for granted now, because everyone knows about FICO scores, but how revolutionary was it at that time, did you know that you were going to be changing credit forever?

Sally: We knew we were going to be changing credit, but I don’t think we expected everything that came down after. So, we knew what was revolutionary is that by building a score, a credit score, to reducing the data at the CRA, we were building a model that leveraged the experience of all lenders, right. Whereas before that, it’s common and it’s still common, is that lenders have their own custom models, the proprietary models that they developed using their own historical experience.

What the FICO scores did was it allowed every lender, not just the large ones, because at that time it was mainly the large lenders that used analytics like credit scoring. It allowed even medium-sized lenders and small lenders to take advantage of the tool that allowed them to manage risk better, but also, you know, lend in a more fair way and make credit more fair and accessible.

Peter: Yeah and that certainly has done and I know that it’s been a……it’s got into the general population, I mean, most people now have some idea of what their credit score is. That certainly wasn’t the case even I think ten or 20 years ago. So, let’s just talk about the credit scores today because it feels like there’s been some ….this has been a challenging year, let me say, I mean, you’ve had a long career with FICO and I’m sure you’ve never seen a year like this before. So, tell us a little bit about how you are thinking about scores today given the unusual nature of what we’re going through.

Sally: Right. It’s still a little too early to know the full impact, right, of this economy and we’re still fairly early into it and when it comes to credit scores that are derived often using, you know, data at the CRA, there’s a lag before information hits the credit reports. So, we’re just starting to see some of the trends there in terms of accommodations and so forth, but I think it’s helpful to look back, since we’ve been doing FICO scores for 30 years, we have the experience of looking at FICO scores after the fact ….after the Great Recession, after natural disasters like Hurricane Harvey and we learned a few things from that.

One is that, you know, credit scores still rank order, so the point of a credit score is rank ordering, it’s not intended to be a point predictor of risk, it’s not….680 means, you know, exactly this default rate, but what happens is as the economy shifts, goes through cycles that relationship between the default rate and the score will shift over time. For example, in the Great Recession, it pretty much doubled across the board. Delinquency doubled across the board, whether they were high scoring or low scoring, but we still saw that the scores rank ordered, that the people who scored higher performed better than the ones who scored lower and so forth.

So, credit managers, especially those who’ve been through economic cycles, are fully aware of this pattern so they know that they need to monitor very carefully and really understand what’s happening in segments with this particular economic downturn, but, number one, scores still rank order, there will be shifts in the odd score. The other thing we’ve learned from the past economic impact is that overall score so shifts quite as much as people expect them to.

Peter: Right.

Sally: There will be some where their scores go lower because, you know, they were personally impacted, however, as an overall…..I mean, scores look at a lot more than just risk and delinquency, right, they look at the whole history, they look at balances, they look at how you manage your credit overall . So, it’s not as much of an impact as people think and we’ve seen that from the past.

Peter: Right. So then, right now, there’s all sorts of forbearance programs that are happening. Pretty much every single lender has had some kind of forbearance, some of them are running their course now, but given that they were not allowed to report the……you know, someone may have been delinquent but in a forbearance program so they were not reported to the bureau so their score was unchanged. They may have lost their job, they may have no savings, they may be living off credit cards, so how do you sort of factor-in the forbearance programs in the scores.

Sally: So, in terms of how the forbearance programs…..you know, how the score reads the forbearance programs, the scores are looking clearly at the status, the delinquency status and so forth. So if a lender is doing what they’re supposed to be doing, right, if they’re following say the CARES Act and other guidance, if they make an accommodation, they should report it as “paid as agreed.” So, they shouldn’t report it as delinquent, based on what the original agreement was, they should be based from what the accommodation is and so that should not impact the FICO score at all.

Even if they put in a code that indicates that there is a forbearance, the FICO score doesn’t look at that code and there’s a very good reason why it doesn’t look at that code. That code is, generally, only there during the time of the disaster, right, during the time of the event. And so, if we factor that information in then at some point that code’s going to come off and there’s going to be the huge shift in score if we were to actually, you know, look at that code or interpret that code to mean, you know, this person shouldn’t be delinquent even though it sounds very delinquent. So, it’s really important for lenders to actually report the status the way they have agreed in the accommodation.

 

Peter: Okay. So then, what do you think your take is on the overall health of the consumer today, I mean, we know the government programs gave run their course, it seems that there’s not much movement in Washington right now for a new stimulus package and we’re obviously less than two months from the election so that factors it all, but given the unemployment programs, the stimulus check, they’re now all in the past and more than a month has gone by since those have ended, what’s your take on the consumer today?

Sally: Right. Again, it’s too early for us to have a read, we just recently received snapshots of data that will show the very earliest reads of, you know, the amount that are under accommodation, so forth and we’re preparing that information actually to present later at LendIt. So, Dave Shellenberger from FICO is actually presenting on September 30th in the Consumer Lending Track and so he’ll be prepared to share what we’re seeing in the very early snapshots of how the FICO scores and the FRI scores that we’ll be talking about are performing.

Peter: Right. We look forward to that and thanks for the plug there. (laughs) Let’s talk about …….you just touched on it, I want to talk about the FICO Resilience Index. I’m sure when you were probably putting this together, you had no idea there was a pandemic that was going to hit and it was going to become a very important piece of information for lenders. So, maybe you can start by just talking the origins of the FICO Resilience Index.

Sally: Sure, sure. You’re right, we had no idea that around the time we were launching this we would be heading into a pandemic, however, we knew, as every credit risk manager knows, that there will be economic cycles that will pinch in you, ups and downs, you know, that lenders need to manage too. So, we’ve actually been working on various types of solutions related to managing through economic cycles for decades. So, this particular solution, the FICO Resilience Index, came about because credit managers, typically, even in a benign economy they have to factor-in the fact that at some point there will be an economic downturn.

So, you know, they actually price that risk in even when the economy is pretty good so what we have credit risk managers ask….we know that when the economy turns down there will be higher risk at every score band, right, just like what you said before in the Great Recession, it was about the double, the default rate in every score band.

Can you tell me which of the 680’s are the ones that are going to go bad and so we set out to answer exactly that question. We researched, can we tell from, you know, from a benign  economy to a recession, can we tell the type of consumer that would perform very similarly in the two scenarios versus the ones that have performed very differently and be far more sensitive to being in a recession and that’s exactly what the FICO Resilience Index looks at.

Peter: Okay. So, maybe can we dig into that a little bit and talk about how because, as you say, not all 680’s are created equal and this is trying to address that very issues. So, what kinds of things are you looking at that really will give you that indicator?

 

Sally: So, what we’re seeing is….first of all, the FICO Resilience Index looks at the same underlying data as the FICO score. It looks at the information on the consumer’s credit report, it just looks at it differently and it’s designed differently, it’s designed to predict a different outcome, it’s designed to predict who’s likely to be very different in a recession than they are in a benign economy which we call sensitive to the economy as opposed to resilient to the financial stress. So, it looks at the credit report, it is used in conjunction with the FICO score because you still need the FICO score to tell you what range of risk is there.

But as you point out, if somebody is 680 ………there’s more than one path to 680, there are different ways that someone can be a 680 and what we see is the ones that are more resilient have more experience with credit, they aren’t taking up a lot of new credit, they might have some delinquencies. Delinquencies really doesn’t have as much of a play in the Resilience Index as it does in the FICO score so it’s really about how one manages credit that tells how resilient they will be in that downturn. So, the more sensitive ones will have a more newly opened trade, less a variety of credit just because they just have less experience on credit.

Peter: Right, okay. So, I presume you back-tested, like the 2008/09 recession data so you can see that this……obviously, you have all the data, I imagine, going back decades so when you have a recession….you said that with the data that’s still out, we will know in a couple of years or even next year much more information about this current recession, but let’s just go back to 2008/09 so when you pull the information through the Resilience Index, what’s the difference? Is it a 680 going down to a 610 or a 680 going down to a 675, is that kind of…what’s sort of the level of outcomes that the Resilience Index would give you?

Sally: That’s a great question. So, the Resilience Index, first of all, it scales from one to 99. It just didn’t keep it so it doesn’t look anything like a FICO score and it’s also the reverse in terms of scale so lower is better. So, one is the most resilient score you can get and a 99 is the most sensitive score you can get. What we do is we look at it in conjunction with the FICO scores, we look at it within small bands of the FICO score and so, it’s exactly as you say. What we see is in a benign economy, we actually don’t see any difference within a FICO score band based on the Resilience Index because what the Resilience Index is measuring is latent risk, it doesn’t manifest itself, it doesn’t show up until there’s a recession.

Peter: Right.

Sally: So, if you look in a good economy, you’re going to see that the rank ordering of those FICO scores and then within the FICO score bands, you’re not going to see any rank ordering of the FRI, but when you go into recession, again, you’ll see the rank ordering of the FICO scores. So, within the FICO score band, you’ll see a rank ordering of the FRI where, depending on how extreme the recession is, to your point, the differences could be…like say the most sensitive person could be like a 60-point/80-point difference in what their FICO score would indicate.

 

So, the odds of repayment are significantly higher to the tune of what would be like a 60 or 80- point FICO score. We actually have benchmarking reports that come out of the overall data so lenders can actually see what we mean. What happens in the benchmarking reports are set to the Great Recession just to give a test, what we tested and validated on other economic kind of more minor downturns and you still see that ring quartering of the FRI, it’s just not as dramatic as you saw with the Great Recession.

Peter: Right.

Sally: To your point, now that we are currently in a recession and not sure how long it’s going to last, this is a time for lenders to, you know, actually monitor what’s happening in this particular recession to see how dramatic the difference is compared to say other recessions or the Great Recession.

Peter: Right, right. So, let’s talk about that, let’s talk about the lenders because, I imagine, a lot of lenders….you know, a lot of them sort of really scaled back their lending at the start of this, but now they want to start ramping up, but they’re hesitant and they’re conservative and you know, they might have a credit box that goes down to 660 or whatever, but are you seeing them saying sure, we’ll lend at 660, we want to lend at 660 with a resilience of like one to five or one to ten. Maybe just take a step back and say, what feedback are you receiving, how are people using it, what are the lenders doing?

Sally: Yeah. So, the interest from lenders has been phenomenal. Even in a good economy, as we spoke about, we have to price for risk and now that we’re in this situation that we’re in now as lenders do pull back and contract, what the FICO Resilience Index can allow them to do is to keep credit flowing better than they otherwise would have, So, you know, if they’re pulling back from say a 640 to say a 700, what the Resilience Index allows them to do is to say…well, maybe between the 640 and 700, I can still retain or continue to approve those most resilient in that band so they don’t have to contract credit as much as they otherwise would have done so that’s really the way the lenders are looking at it.

Whenever there’s a new tool in the market, lenders….they test it, right,  they’re analysts, they’re data scientists, they’re not going to completely use it without testing it first, validating it, really understanding how, you know, what the patterns looks like and maybe starting to test in small percentages of the population just to see what happens so, that’s the mode that lenders are in now. We have hundreds of lenders who are taking the scores both in archive reports as well as ongoing to monitor and, you know, it’s a time where they can really look to see how it impacts from the early results that they’re seeing through the recession.

Peter: Right. So, are you getting far more interest than you expected when you first put this out there because I can’t imagine anyone not wanting to use this at this particular time unless you’ve really got a reason specifically that you just want to maintain super prime whatever, but even then, you could use it. So, are you seeing more interest than expected?

Sally: Absolutely, absolutely. And the Resilience Index is really ….we don’t view it as a recession only product because you can actually manage your portfolio in a benign economy so that you can weather the next recession better. We’ve shown in our validations that even though that ranking with the FRI doesn’t show up until you’re in a recession, you can still predict it well before the recession. So, you can look at FRI scores, you know, years before, a few years before and then look at the performance once the economy turns down and see that it rank orders even though you would not have seen it before in a short period of time just because it was a benign economy.

So we don’t view it as just a recession only product, but absolutely…..especially in our whole use case of …well, maybe we don’t have to contract as much as we do or maybe as things start to look better we can be a little bit more aggressive with the more resilient ones. They’re looking at it both in terms of, you know, managing that contraction as well as starting to open up again.

Peter: Yeah, right, right, I get that, that makes sense. So then, one thing I’m curious about though is, you know, you’ve got the three credit reporting agencies that…you know, different lenders use different sub-sets of those, how does the FICO Resilience Score….are you onboard with all three agencies. The FICO score is…..you know, my FICO score is slightly different at Experian, as it is at TransUnion, as it is at Equifax, but can you explain just how it’s interfacing with the agencies?

Sally: Sure. We will be at all three agencies in the near future. So, it’s already available at Equifax, at Experian and will be available at all three. We do recommend that it falls alongside the FICO score so where you get your FICO score, you get your FRI score and that way scoring the same information, it’s just looking at it from the two different perspectives.

Peter: Okay, okay, that makes sense. So then, there’s been some talk in the industry over the last few years….I remember, we had a session at LendIt many years ago that refuted this, but I’d love to get your take on it. When you hear fintech lenders saying, we go beyond the FICO score, firstly, what are you think, how do you kind of react to that, what does that fintech lender not understand about the FICO score?

Sally: Sure, yeah. So, the FICO scores were never intended to be used as a sole determination of risk. You know, even 30 years ago, every lender would ask information, what we call application information, right, that the consumer would fill out in addition to pulling a credit report and the FICO score was designed to very conveniently be available on that credit report and did not replace those broader models, usually custom models, that look across the board. So, it was never intended to be, you know, solely looked at.

Having said that, I think what a lot of the fintechs are saying is, you know, there’s technology available that gives lenders access to data that…..you know, they don’t necessarily have to ask for, it’s not their proprietary data that they know about the customer, but they can get alternative data, maybe consumer permission data where consumers put in the credentials to their checking and savings accounts and we could use that information as well and we’re absolutely in agreement.

In fact in 2016, we launched the FICO Score XD which in partnership with Equifax and Lexus Nexus look at information off of Equifax NCTUE database which looks at how you manage your telco bills and utility bills as well as information from Lexus Nexus properly typed as information there.

So, that was aimed at that 53 million consumers that are not represented at the major credit bureaus in the US because they don’t have a history of credit. So, we’re in absolute agreement that in order to expand and give lenders the ability to give access to credit to more people that we need to look at more information so the XD scored that in 2016 and in 2018, we launched the UltraFICO score.

The UltraFICO Score is, you know….think of it more like a second chance score, right. Somebody applies for credit and their FICO score…..either they don’t have one or perhaps they are, you know, a little bit low, they’re below their threshold…the Ultra FICO score allows the lender to offer up the ability for that consumer to pull in their cash flow data from their checking and savings accounts and evaluates that in addition to what’s in their credit report so, they have other ways of showing their financial responsibility. So, financial inclusion is really important, it’s very important to us. We launched in 2016 the FICO Financial Inclusion initiative to really test out the various types of alternate data that can be used to make credit more accessible to more people.

Peter: Okay, that makes sense. So, before I let you go, a couple more questions I’m curious about. Like when you started in the space, data science wasn’t really a thing, it wasn’t a term and now…..

Sally: Right, it wasn’t.

Peter: (laughs)…….and now everyone….

Sally: I was called a Programmer Manager….Program Manager was my title. (laughs)

Peter: Now, you’d be a data scientist and people now like to tout how they use Artificial Intelligence and machine learning and they have a large team of data scientists that are building proprietary models that are the most advanced that have ever been created. But, I’d love to get your take on what you think about that whole thing, but then, seriously, about……you know, FICO has been doing machine learning for decades, right, so tell us a little bit about how you do things internally and how you feel about the latest craze. (laughs)

Sally: (laughs) So, overall, it’s great, right. I mean, you’re talking to the pioneers, you know, we are the pioneers who believe that we can make much better business decisions if you use modeling and use predictive modeling, mathematical optimization and other aspects of what we call decision science which is the discipline around improving your decisions over time for better business results and better results for the ecosystem and for consumers and everyone alike.

So, it’s great that that’s catching on, it’s great that that’s catching on not just in credit where it’s caught on for decades, but in many other fields so we’re quite happy about that. Some of the hype sometimes……we think that’s kind of funny because, you’re right, Artificial Intelligence has been around for a while, machine learning has been around for a while and there are a lot of people that are just newly discovering it. If there are great new techniques, I think probably the bigger impacts have been just the increased computing power, right, as well as more digitized data, those things really transform. As you have more digitized data available to you, that’s really what transforms the ability to use these models and help them make better decisions over time. So, it’s been great to be at this perch watching all of this happen.

There’s a little bit of…..you know, Artificial Intelligence as kind of the method of the algorithm versus,,,,you know, we use for something like FICO scores we use a method that is highly, highly explainable. We know Artificial Intelligence is getting more and more towards explainable, but it’s not quite where our needs are. For something like a FICO score where consumers monitor their FICO scores as frequently as once a month, you know, often and we need to be able to explain why the score changed the way it did, we stick to the very highly explainable method, but there are other things we do at FICO like detecting fraud and so forth where we’ve been more like neural networks and other types of methods from the very beginning.

So, it’s important to bring the right tool to the right circumstances, but all of that should be available and even with the FICO scores, we use plenty of machine learning and AI as part of our research, the way we kind of look through the data and try to identify patterns and test new concepts and see what works. We use it all of the time, but then the final model that is actually programmed at the credit bureaus is a very explainable model because that’s what we need for this particular instance.

Peter: Okay. So then, last question. Without giving away any secrets, what are you working on today that is interesting and exciting?

Sally: So, you know, a lot of what we’re doing is in the US, but we’re also international and one thing that we can do internationally is, you know, sometimes we tested data sources, for example, internationally that would be harder to do in the US, it’s more regulated and just more developed in terms of what lenders do.

So, for example, we’re working with a telco company right now in Sub-Saharan Africa to offer micro loans through their payments system. This is a country where not only do you have people who are not represented at the credit bureau, they’re completely unbanked and they just use cash, but more and more they use their cell phones to transact for mobile payment system. This partner actually has a platform where they invite lenders to offer micro loans through that payment system and now FICO score along with it so that lenders can gauge that risk, if that’s the risk, and open up to that particular market.

So, that’s very exciting because we’re talking kind of micro loans and that’s a blurry line between, you know, consumers who are actually getting a small loan for their livelihood, right. They purchase some fruit in the morning and they sell the fruit juice in the afternoon type of situation so that’s very exciting. We found that telco data that can be accessed in multiple ways is very predictive of risk and so we look for those opportunities in many countries.

Peter: Right, interesting, really fascinating. Sally, I could talk to you for a lot longer, but we’ll have to leave it there. I really appreciate your coming on the show today.

Sally: Thank you very much.

Peter: Okay, see you.

It’s safe to say that consumer lending has gone through a very tumultuous period, certainly the most tumultuous period since 2008/2009 crisis and probably the most on-record for these lenders. What you hear from the chief risk officers, from the CEOs of these lending platforms is that they’re all starting to ramp-up, some have ramped-up to pre-pandemic levels already, most are still not quite there yet and they all talk about a conservative approach to their underwriting as they ramp-up.

What the FICO Resilience Index does is it gives these lenders the confidence that the borrowers who are coming to their platform are going to be resilient even if we have a deeper recession, a longer recession than what anyone expects. These people will be able to pay back their loans as they are demonstrated to be resilient in difficult times. It’s a credit to the industry, it’s great timing that this has been made available this year.

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, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected.Sign up today at lendit.com/usa.

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Podcast 264: Brian Dammeir of Adyen

The president of Adyen's North American operation discusses the impact of the pandemic on payments, why fraud may not be increasing overall and what payments trends will play out this decade

September 11, 2020 By Peter Renton Leave a Comment

Views: 625

We have seen big changes in the payments landscape this year. Technologies such as contactless payments have seen five years of growth in just the last six months. Companies that didn’t have a large digital footprint before the pandemic suddenly realized they had to adapt, and fast. This is where today’s guest comes in.

Our guest on the Lend Academy Podcast this week is Brian Dammeir, the President – North America for Adyen. Adyen is the payments leader in Europe where it is publicly traded and has a market cap north of $40 billion. While it started in Europe it is a global payments company and is getting real traction with established American brands. And the pandemic has accelerated this traction.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

In this podcast you will learn:

  • The history of Adyen and how they are different.
  • How Adyen makes money exactly.
  • How they are approaching the U.S. market.
  • Some of the big brands they are working with in the U.S.
  • Why it is critical for merchants to be able to work across channels seamlessly.
  • The highlights of their financial results in the first half of this year.
  • The type of merchant they are focused on.
  • Why some companies have been successful and others have struggled during the pandemic.
  • How they have handled those companies who needed integrated payments immediately.
  • How Adyen interfaces with the Chinese payments giants Alipay and WeChat Pay.
  • What Brian thinks about the future of QR-codes for payments in the U.S.
  • Why Adyen is agnostic about the movement towards buy now pay later.
  • How Adyen has been combatting fraud as more commerce goes digital.
  • How big their U.S. operations is.
  • The payments trends that Brian is paying attention to for this coming decade.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech USA 2020. The world’s largest fintech event dedicated to lending and digital banking is going virtual in 2020.

Download a PDF of the transcription of Podcast 264 – Brian Dammeir.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 264-BRIAN DAMMEIR

Welcome to the Lend Academy Podcast, Episode No. 264. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Peter Renton: Today’s episode is sponsored by Lendit Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show ever. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa

Today on the show, I am delighted to welcome Brian Dammeir, he is the President of North America for Adyen. Now, Adyen are a European-based company, they’re very big in Europe, they’re a public company and they’re starting to get some traction here in the US. I also wanted to get Brian on the show just to introduce us to Adyen, talk a little bit about what they do and what makes them unique.

Obviously, we talk about the challenges of the pandemic, what he sees as sort of the differences between the winners and the losers and how they’ve been able to adapt to becoming successful during the pandemic. We talk about anti-fraud, we talk about buy-now-pay-later and he ends with a really interesting perspective on what we can expect to see in the future of payments. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Brian!

Brian Dammeir: Thanks for having me, Peter.

Peter: My pleasure. So, I’d like to get this thing started by giving the listeners a little bit of background about yourself so why don’t you just give us some of the highlights of your career today, particularly before Adyen.

Brian: Yeah, absolutely. I calmly say that no one gets a degree in fintech servicing the (cross talking) industry.

Peter: Not yet (laughs).

Brian: Yeah, absolutely. I come from a product background, specifically in fraud prevention, that’s how I got into the general fintech and payments realm. So, prior to my six-year tenure at Adyen, I was at Google and Airbnb focusing on fraud prevention mostly on the product side and then, actually, when I came to Adyen I came onboard as our first product manager when we were just a couple of hundred people back in the day. Spent the last four or five years focusing on our product organization, diversifying our product portfolio, how we productize things going out into market and then early this year, I transitioned to leading the North American operations.

Peter: Right, right. So, why don’t you tell the listeners a little bit more about what Adyen does because while it’s very well known in Europe and it’s not quite that way yet here in the US so, just give us a little bit of background about the company itself.

Brian: Yeah, it’s a great question. We’ve been around for over a decade and we’re a company that was founded by payments people. They had payments companies before and they learned a lot during the 90’s going into the dot com boom and into the 2000’s about some of the common pitfalls that payments technology platforms were making. So, you know, from day one, we went into the industry with a really novel approach which is to have one single platform across all channels in as many geographies as possible.

So, in short, we’re a payments technology company that empowers other companies to reach their consumers across a really diverse set of payment methods. We offer hundreds of them as well as geographies, as well as channels all in one platform and this is a really important distinction because most payments companies have multiple platforms. So, if you want to do in-store payments you’re working with one platform, online payments you’re working with another so with one integration, one set of contracts and one relationship, we can unlock many, many countries for the merchants that we service.

Peter: Okay, okay. And so, what is the geographic footprint then right now?

Brian: Yeah. So, honestly, we operate all over the world from Europe to APAC, Australia, South America so, honestly, the countries in which we do acquiring is over 50 and we do sort of core acquiring connected directly to Visa and MasterCard in over ten regions. So, generally speaking, you know, wherever the merchant wants to go to process payments, we’re, generally, able to help to help them out there.

Peter: Right, okay. Maybe explain exactly how you guys make money, is this….you make money on the transactions like a processor or is there a SAS component, what is the model?

Brian: Yeah. We operate under a per transaction fee and we operate under a really transparent model where the fees….they’re associated with the payment method or the network in question, whether that’s Visa, MasterCard or otherwise, those fees are transparent and generally pass through and then there is a known component to Adyen’s cost of operating with our platform per transaction.

Peter: Right, right, okay. So then, I said in Europe you’re a really big player, your name has been around for many years as really one of the leaders in the space, how are you approaching the US market where it’s competitive, obviously there are other big names here, what is your approach?

Brian: Yeah. We’re, generally, operating in North America in two ways. One is to be the global enabler for American companies, right, so whether that’s a Microsoft or an Uber or Spotify, you know, they’re based in North America and obviously we help them here, but they need to operate payments in dozens and dozens of countries and we’re, generally, one of the players of choice to do that. But, we also have an extremely strong focus on our North American proposition itself or domestic proposition. We work with really, really localized brands like e-Bay, Subway and Nike to bring payments into this market.

Now, commonly, North America and the US, in particular, has seen a sort of a static market mode of payments perspective, it’s always been credit cards, will always be credit cards, but one thing that we can’t discount is A) the proliferation of new payment methods in North America, whether you’re talking wallets or installment buy-now-pay-later options or what not, but really importantly, there’s that demand to have a one-platform player who can offer unified commerce.

So, it doesn’t matter if you’re doing in-store/online, we’re able to offer one holistic view of the customer. What we’re finding is there’s a really strong demand for that in North America, especially under COVID where more and more consumers are floating between channels where they used to be an in-store person and now they’re an online person and of course, you have a grain between those channels. We’re finding that we’re getting significant tailwinds with that segment of merchants looking for a solution like that here.

Peter: So then, how does it work exactly, like if you’re…so these companies, they’ve had online presence for a long time, most companies have had an online presence, many of them have a physical presence and you said there’s often two different systems so what’s the difference between….when you’re going to a company that’s got two different systems…tell us, what you were saying is there’s a difference even from the consumer experience.

Brian: Absolutely. So, let’s take for a second the example of a quick service restaurant and let’s say that they traditionally just had a counter. You’d go up to the counter and you would pay cash or card, what not, you know quick service restaurants have changed tremendously in the last five years. Not only do they have kiosks, but they also have in-app Order Ahead and, of course, there’s costs in marketing money going into all those channels.

Now, let’s say you had three different processes for those different channels; someone for the counter, someone for the kiosk and someone for the in app experience, that merchant is unable to actually see that consumers….they float between those channels because there’ll be different tokenization technologies and they can’t even measure the cannibalization.

But, importantly to your question, Peter, they then can’t track them as the same person and then reward them with loyalty so what we’re finding as the advantage of our platform is, you know, you can dip your card in a terminal and then put it in the app later and merchants are able to recognize that and they’re actually able to do things like card-linked loyalty to the consumer and reward them for that loyalty between channels or to variably as passively understand that data, therefore, understand where their consumers are going between channels.

This has been supremely important during COVID as merchants have been trying to understand, you know, where have my consumers been going, did they drop off or did they just simply move to digital channels.

Peter: I totally get that, that sounds like a pretty compelling proposition. It might not have been a big deal back a year or two ago, but I can see how that would be really a….you’ve got to be able to know when your customers are floating between channels. That’s just, I would say, table stakes, I mean, these days.

Brian: Absolutely.

Peter: Yeah, yeah, okay. So then, I know that you guys are a public company and you came out with your results early this month, a couple of weeks ago, whatever, so why don’t you just, before you go any further at least, give us some highlights of what’s been happening at Adyen as a global company.

Brian: Yeah. We announced our results and despite COVID-19 and its impact on retailers and the travel sector, we had an extremely strong H1. So, we processed over $150 Billion across our platform at a 23% year-over-year growth rate, we saw net revenues across our whole platform grow 27% with North America, in particular, being at a 58% growth rate in that revenues. So, well it is a challenging time, what we’re finding is that there are tailwinds towards these digital channels so when we saw, for example, retail shutdown like a lot of stores were closed prior to a few weeks or a few months, depending on the geography, we saw digital channels significantly uptick.

But, what we’re actually finding, as retail is reopening, some of that e-commerce volume sticking around and what that’s telling us is that consumers that might have been in the past hesitant to interact with the digital channel seem to be very, very comfortable with it. And because we tend to work with our merchants on digital enablement, this is having a really good impact not only on our merchants but on our platform as well even during this challenging time.

Peter: Right, right. So, are you more focused then on the corporate customer that’s looking to be……you said you were focused just here in North America, but is there….I mean, looking at your product suite, is this something that….are you targeting smaller companies or is this really for the larger corporate multi-channel type company?

Brian: Yeah, our focus tends to be enterprise. That being said, we’re also focusing on our mid-market segment, that’s been a focus of our company for the last year or two primarily in Europe. That being said, we have efforts globally around that, but then what I wouldn’t discount is our focus on platforms and marketplaces.

We have a proposition called Adyen for Platforms which allows platforms to enable payments from many smaller sellers on their platform. So, our general strategy when it comes to smaller merchants is to do that via our platform partners. They tend to have that relationship with the end merchant and we empower them with our technology in the back end. This is similar to, for example, for eBay and GoFundMe, for example.

Peter: Right, right, got it, okay, okay, So then, you mentioned that you had a pretty strong first half, like what are you seeing as far as…….you know, you’ve got a great insight into a large amount of commerce and there’s been some really big winners and there’s been some losers as well. I’d love to sort of get your insight into what kind is determining who is successful, who isn’t successful because there are examples of companies that are surprisingly successful in this environment so I’d love to get your insight on that.

Brian: Yeah. When we boil it down, what we’ve noticed is that merchants tend to fit into one or two camps. They were either digitally oriented going into COVID or they weren’t and that’s not to say that they were entirely digital. There are plenty of merchants that started with an in-store experience, but then they started to grow out, reached digital channels. The fact of the matter is that merchants that had reached digital channels recouped 40% of their losses compared to single channel merchants or merchants that had a really immature digital channel and I’ll just give an anecdote, right.

I was on a road trip some months ago and this was sort of peak COVID times where everybody was socially distancing. I was camping, for the record, and we stopped on the side of the highway and it was one of those highway stops that has sort of six chain restaurants, we’re not going to name names, of course, but three of them were open and three of them were closed. Three of them already had curbside pickup, online, in app Order Ahead and they’ve been doing it for a couple of years, had become a trend in their industry and they were clearly on the forefront of that.

Three of them did not yet have that and, therefore, they were shuttered, the lights were off and I think that is the sort of perfect encapsulation of what happened going into COVID-19, but it’s not all dire because the merchants that weathered the storm and did not have those channels are now exploring how to make that happen very quickly. The ones who did have that are now putting more focus and investment on that because as I noted previously, we’re noticing that that digital volume that spiked when those in-store channels went down are sticking around.

So, there’s a whole new set of consumers and demographics interacting with these channels so what we’d like to say actually here is that we skipped five years in the industry. Everybody was….all the trends line towards digital enablement have just been fast forwarded across all consumer demographics and in the end, that’s likely good for the consumer. Of course it’s been a very challenging year for both consumers, of course, and merchants.

Peter: Right, right, it makes sense.  I know that here, you know, I have a Chipotle right by my house and right by my office and they never closed down. They might have closed down for a week or two, I don’t know because I wasn’t going out for a while there, but when I went back…and they have a really strong app and a really good experience in payments, it’s a positive experience.

I see they’re in with a whole bunch of other major chains and they were getting all the business for a while because it was the only one open and again, they’ve already gone down the digital enabling path. I don’t know what their hit was, how much volume that went down, but if you didn’t have the whole app ordering and you could just come and pick it up, that was a major negative. So, I imagine then, you probably had companies coming to you in the last six months who said, we need integration and we need it like in two days, how have you been handling that kind of situation?

Brian: Yeah, that has happened quite a bit where you get a phone call in the middle of the night, we need to be live in a week, you know. (Peter laughs) And because we have one platform, the advantage of that is that, you know, we have one set of consolidated APIs and a really rich set of open source libraries that allow merchants to put the Javascript on their page and they’re up and running. Now, that works for most merchants, but some merchants need it to be even quicker and we’ve had a solution for some time which is called Pay by Link where systematically via API you just request a link, we send it to the merchant, they give it to the consumer and it goes to a payments page that we host on our side.

And what we found, especially in retail, there is very, very quick demand needed around this Pay by Link solutions because it required little to know development effort on the side of the merchant. We went so far as to also integrate that into our terminals and into the in-store experience because some merchants wanted to offer a completely touch free experience, even if you don’t have contactless cards or wallets so what we did is we presented QR codes on our terminals.

That and with the phone goes to a Pay by Link session, the consumer pays in an e-commerce flow on their phone, but then it loops back to the terminal to the point of sale so, you’re bringing a quasi e-commerce experience into the retail arena. So, we found that there’s been significant uptake in these Pay by Link solutions as a quick way of getting started with these channels and then we anticipate those merchants will then go into more and more native experiences as they invest in that channel.

Peter: Right, right, I didn’t realize that. I don’t know how well you know Alipay and Ant Group, they are filing to go public. We got a little bit of insight into their financials which is pretty impressive and it’s all QR-based. I’ve been to China many times and I can’t get an Alipay account, you need a Chinese bank account, but everything is QR code-based. Is that a technology, do you think it is going to take off here in the US?

Brian: In short, I think so. We’ve embracing QR codes for a long time. We partnered with Alipay and WeChat Pay and we’re actually one of the predominant solution providers who offers that natively on a terminal all over the world.

Peter: Interesting.

Brian: Your high-end retail merchants leverage our solutions not only for standard payments e-commerce, but we’ve actually had a generic QR code framework for sometime on our platform via our terminals. Now, the speculation is will more and more payment methods in North America embrace QR codes. You see the beginnings of that, for example, with PayPal. For example, we have buy-now-pay-later payment methods like Afterpay and Affirm. I would anticipate that this will begin more and more of a trend that obviously China and Asia Pacific, in general, kicked off sometime ago with QR code payments.

Peter: Right, right, that’s amazing, you see Ant Group they did like $16 Trillion worth of volume which is staggering globally. I see Alipay signs in airports in this country so there’s a lot of times that you guys helping sort of enable that technology?

Brian: Oftentimes, we are, yes, and the main proposition that we offer is, you know, you have a Chinese consumer who’s coming through your store and you can either have Alipay re-check her or not. Generally, they’ll have a TransUnion pay card in their wallet that they can still pay via sort of a traditional method, but they very much prefer this. And studies have shown that the consumer is more likely to buy if you give those options and there’s a lot of cold marketing opportunities with both Alipay and WeChat that members can take advantage of as well.

Peter: Right, right. So, you mentioned buy-now-pay-later a couple of times now. I want to kind of touch on that because it seems to me that, you know, I’ve been following Affirm and following up to pay……I’m originally from Australia and not to pay is…it’s hard to stake how big it is down there, hard to overstate because they are everywhere and it’s now a verb in Australia to ask to pay something. Now, you said you’re sort of agnostic to the payment method, buy-now-pay-later is a little different than just a……like where do you stand and how do you feel about the buy-now-pay-later movement, it seems to be getting more and more traction.

Brian: Yeah. Well, I would note what you just said which is we are agnostic to payment methods, we offer hundreds of them and the reason we do is that payments is a highly cultural thing; different cultures pay in different ways. You go to Germany and cash is king, you go to Australia and to your point, Afterpay has been there so long, it’s a verb. Now, generally speaking, the American consumer has had really good access to credit via credit cards.

That being said, there’s an untapped consumer who doesn’t have access to credit, who needs facilitation of credit in different ways and I think installments in North America is really tapping into that consumer base and you see multiple players from Affirm to Afterpay to PayBright to others really taking advantage of that. From our standpoint, our platform can take on an unlimited number of payment methods so as soon as there is the consumer demand and the merchant demand, we integrate that into our platform, we offer it with one integration to our merchants.

So, we already offer several buy-now-pay-later payment method options across geographies including Afterpay in Australia as well as Europe, Onay (?) in Europe, PayBright, Klarna, so on and so forth, and we’re invested in others into the near future

Peter: Okay. So then, so the merchant, if they are a, as you say…… you know, you could use Klarna as an example, they were the ones who started this whole movement many, many years ago and they’re really strong in Europe so if you’ve got a company that wants to offer buy-now- pay-later solution, they are an Adyen customer, they could just turn on and you can link them up with Klarna and then suddenly it’s available to them, is that…..you know, I’m making it simple, but is that almost as simple as it is?

Brian: It is and that’s why merchants work with us because we do that across hundreds of payment methods across many different geographies and we offer that one point of integration and contracting to do that. From an integration standpoint then, you just need to make sure the front-enders enabling that payment method on your website and then you’re good to go. It’s that sort of ease of turning new things on as the trends change and that’s sort of subscription to ongoing innovation, we call it, with our merchants, that’s what they’re signing up for by working with Adyen.

Peter: Interesting, very interesting, okay. So, you mentioned that you have a background in fraud or anti-fraud, I guess I should say (laughs), I’d love to sort of get your perspective on how that kind of landscape has changed this year. You know, you hear anecdotally about there’s certainly been increases in fraud attempts, what has been your experience at Adyen and how are your combating different forms of fraud?

Brian: Yeah. The nature of e-commerce is that there’s more to consider around fraud. Now, I’m not so sure if I would quantify the last year as more fraud attempts, but rather I would say digital channels are suddenly more important and the nature of the digital channel is that you need to do more around fraud prevention. You know, we don’t have the same protections we have in store like Chip and Pin and all these different things so, there’s simply more to consider there and merchants that previously might have had, I don’t know, 3% of their overall revenue in their digital channels are now seeing 20/40+% so the fraud that they see in those channels has compounding as well.

Peter: Got it.

Brian: And I think, you know, there’s been a lot of change in the prevention industry over the last years. I think the predominant trends would be around continued focus on machine learning and less of a focus on throwing human beings at the problem which is the way the industry did things 10/15 years ago. Adyen itself, we have a native fraud prevention engine built into our platform, we can take all the data points across our entire platform, track not only good users, but also fraudsters, understand their behaviors, run that through our machine learning models and offer that in our one integration to our merchants.

So, instead of having to go out and find a third party risk system, integrate into it, you can get it with your payment processor with the Adyen solution. And, indeed to your point earlier, we’re finding that there’s more and more attention being given to digital fraud by our merchants and, therefore, there’s more and more of the need for a solution like RevenueProtect which is ours.

Peter: Right, right. So, are you saying then that fraud hasn’t necessarily increased, it just moved online….overall fraud, are you saying it hasn’t really increased this year?

Brian: I don’t know if I would be so bold to say, but I’m sure it’s a factor of both. I think the main thing that’s reckoning in the industry though is, you know, losses, fraud losses, that could depend on a small minor channel over here, your digital channel, we’re okay. Now, if that channel is suddenly a third of your business as a company, you know, you’re always going to have a certain amount of fraud in that channel and suddenly there’s a magnifying glass on that.

That’s probably the biggest trend this year that we’re seeing with our merchants. There’s the macro level of trends, however, of fraud will always be an issue and there’s different types of fraud and techniques going on around the world and there’s just simply fraudsters in many geographies that are going to continue other attacks on consumers and non-merchants and that’s never going to go away.

Peter: Right, right, understood. So then, can you give us a sense….I don’t know how much you share publicly, but can you give us a sense of how big the US operation is. You talk about the whole thing, do you break that out at all?

Brian: Yeah. I mean, we break that out in terms of our net revenue, right. So, 18% of our net revenue is North America and now, our San Francisco office is our second biggest office in the company and we just broke through the 200-employee mark in North America out of our roughly 1,500 employees in Adyen overall. So, like I said before, whether it’s our domestic proposition working with merchants like Nike and Subway or North American merchants that we’re servicing around the world like your Microsofts and Spotifys and Ubers, North America serves central to our vision and central to our expansion strategy.

Peter: Right, right. And, obviously, it sounds like you’ve got a lot of room to grow here given that the US is still the biggest autonomous market in the world.

Brian: Absolutely.

Peter: China is catching up, but still….anyway, before I let you go, I’d love to sort of some sense of….it feels to me like payments, the way we pay for things is sort of…..2020 we are going to look back as this real inflection point, I mean, are there other kinds of developments that are coming down the track? We touched on QR codes, but I’d love to sort of get…for example, Uber made payments invisible like you don’t even know…. you don’t pay, you just sort of get charged. I mean, what are some of the trends that you’re seeing in the payment space you’re thinking down the road?

Brian: Yeah, it’s a great question. We call what you just talked about the Uberification of payments,

Peter: Right.

Brian: Uber really set a new expectation for consumers, especially in North America, that payments could just be this thing in the background. We know as payments experts that that’s done via tokenization, various different technologies. I would take that one step further though and express that the biggest trend we’re going to see going forward is a melding of the difference between channels, of what is e-commerce and what is online. Take for example your example of the Uberification of payments, but apply it to a normal in-store experience, right.

For example, you have something like the Amazon Go experience. I think we’re going to have more and more experiences like that where it doesn’t matter what the payment method is, there’s always going to be broad variations of that. Is it a credit card, is it a wallet, is it installments, is it this and there’s going to continue to be a proliferation of that, instead of holding in, but I think the trend that’s going to happen is…there used to be this feeling that there is a stark difference between, okay, I’m online right now and I’m in-store.

If I’m in the parking lot of a restaurant and ordering an app, what is that channel. (Peter laughs) It’s not really e-commerce or it’s not really in-store. If you go one step further and we’re empowering merchants for these sorts of flows eliminate the steps altogether, just identify who they are and collect their funds in the background without those explicit payment experiences. I think there’s more and more trends towards reducing the experience, whether that’s Tap N Pay which takes just doing that to the extreme which is the Amazon Go or the Uber experience which is that it’s totally in the background.

I think that’s going to be the trend that’s going to really be the hallmark of the next decade and if merchants are working with a platform like Adyen, that’s singular in its nature across all channels and one integration, they’re going to be able to adapt that change in a seamless way, but without interruptions to their consumers. It’s sort of our core thesis that we present to our merchant base.

Peter: Right, right. Well, it’s going to be interesting because I feel like we’ve compressed five years into six months and it can’t to continue. I imagine the next five years are going to happen in the next six months, but I can see that there’s a lot of exciting technology out there that really will make payments just fade further into the background as we go forward so, interesting times ahead. Thanks, anyway, thank you very much, Brian, I really appreciate coming on the show today,

Brian: It was my pleasure, thanks, Peter.

Peter: Okay, see you.

You know, I think the point of sales space has really been one of the most interesting, I’d say even the hottest part of fintech, you know, buy-now-pay-later is certainly very hot, but really, what’s enabling these all…companies like Adyen… the consumer wants choices, the merchants that provide them with the biggest choices, the most choices, are going to really have an upper hand.

Integrating with buy-now-pay-later, I can see them integrating with other kinds of lending products and you’re going to have this kind of suite of options. Suddenly, your credit card, which has been ubiquitous in this country for decades, is going to be one of many options at the point of sale. As Brian said, Adyen is agnostic to the payment method and if that happens to be an installment loan over two years, I’m sure that’ll be fine to make that happen too, but whatever it is, I think this decade we’re going to see tremendous innovation when it comes to payments at the point of sale, online, in person and it’s going to be exciting to watch.

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

Today’s episode was sponsored by Lendit Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa.

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Podcast 263: Sergio Furio of Creditas

The CEO and Founder of Creditas talks innovation in consumer lending, the importance of being close to the customer and why he is looking beyond finance to expand his business.

September 4, 2020 By Peter Renton Leave a Comment

Views: 490

We have seen many companies in fintech branch out into adjacent areas of finance as they add product lines to bring more opportunities for their customers. But rarely, if ever, have we seen fintech companies look outside of finance completely when adding to their product mix.

Our next guest on the Lend Academy Podcast is Sergio Furio, the CEO and Founder of Creditas. Based in Brazil, Creditas has quickly become one of the leading non-bank consumer lenders in Latin America. But Sergio’s vision goes beyond lending and beyond finance. He wants to help his customers in a variety of ways, even helping them buy physical products. It will be fascinating to watch as this company matures.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

In this podcast you will learn:

  • What attracted Sergio to the Brazilian market.
  • The three phases in the history of Creditas.
  • Why they decided to expand beyond financial products.
  • The types of loans they offer for their different products.
  • How they have automated most of the loan approvals.
  • The kinds of data they use as inputs into their underwriting.
  • Why they had to build a title insurance company in house.
  • The scale that Creditas is at today.
  • How the pandemic has impacted Creditas.
  • The two concerns they had with their loan portfolio.
  • Why securitization markets remained open to Creditas throughout the crisis.
  • How Sergio views Nubank, Mercado Libre and the competitive environment in Brazil.
  • How the large banks have reacted to fintech companies.
  • What the financing journey has been like for Creditas.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech LatAm 2020. Latin America’s largest fintech event dedicated to lending and digital banking is going virtual in 2020.

Download a PDF of the transcription of Podcast 263 – Sergio Furio.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 263-SERGIO FURIO

Welcome to the Lend Academy Podcast, Episode No. 263. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by Lendit Fintech LatAm, the region’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online on December 8th and 9th. Pandemic or not, LatAm is still the hottest region for fintech in the world and LendIt Fintech LatAm features all the leading players in the region. So, join the LatAm fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/latam

Peter Renton: Today on the show, we are going back to Latin America to interview the CEO of one of, I think, the most interesting companies in that region or maybe even in the world, as far as fintech goes. I’m delighted to welcome Sergio Furio, he is the CEO and Founder of Creditas. Now, Creditas are based in Brazil, they are a consumer lender, but they’re much more than that, as we’ll find out in this episode. While I see their entry point as lending, they have big, big plans beyond that which we get into in some depth.

We talk about the different offerings, we talk about the environment in Brazil, we talk about how banks are innovating there, we talk about the big companies in Brazil like Mercado Libre and Neubank that also have lending operations and how Creditas differentiates themselves. We talk about their fund raising process and how that’s changed dramatically since Sergio started back in 2012 and what the future holds. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Sergio!

Sergio Furio: Yeah, thank you very much, Peter, and I’m glad to be here with you.

Peter: Okay. So, let’s get started by giving the listeners some background because you do have an interesting background. I mean, you’re running a Brazilian company, but you’re not Brazilian, you’re not even Portuguese, I believe. So, tell us a little bit about your background and how you made your way to Brazil.

Sergio: Yeah. So, I’m originally Spanish, graduated in 2000 in Business, not a millennial anymore, unfortunately (Peter laughs) and spent my initial years in investment banking working with large companies, capital markets and stuff like. That was like in the good 2000s where you actually had like very wide margins when you were doing like the CMM in Europe.

By 2005, I decided I was ready to move on and do something more of a generalistic approach to business and I got into strategy consulting with BCG. I spent there like seven/eight years and because of my background, I specialized in retail banking. So, I left….you know, I went through ten soft strategic plans and technology transformation projects and operational excellence, you know, all those things were so popular in the early 2000s.

By 2008, I made a move from Europe to the US, I landed in New York, I think it was like a month after Lehmann collapsed so very interesting times, you can imagine. Actually, in Europe, the collapse of the retail banking space had happened probably six/nine months before that because of the real estate crisis and so on so 2008 was like an amazing moment in my life probably. So, got into the States and I took over a project that was to advise one of the retail banks in the US, an international player, one of the large ones, and I led for them the technology transformation. It took me four years, the so-called technology transformation.

I think that that was the crucial moment in my life, it was 2011, four years after getting to the US. I also realized that that project……it was supposed to be the cutting edge of technology, it was not like four years old and we were like delivering the code at that point. If you think about the way the project had been planned and designed, it was 2007 and we kicked it off in 2008. Remember that the iPhone came up in 2007 so you can imagine that there was not like a single line of code about mobile, everything was about like paperless branch and zero back office and all of those things.

By 2011, that was not the reality anymore, we were already like seeing that the industry was moving or was meant to move in a different direction, right. So, I think that desperation, I said, okay, I need to do something else and I had a friend who just became an entrepreneur, got involved with him, invested in him and I ended up saying, I really want to do this. Obviously, I had spent my whole life in banking so I had to do something related to banking, fintech was not the thing at that point, remember. It was like the early days, but it was not even the term.

So, I said, okay, I want to do something, but this is New York, there are like …plenty of people are like super smart, they have like banking background, technology background, what is my differential? At that point, it’s when I met my wife, there’s always a love story in the middle (Peter laughs) and my wife is Brazilian, we used to work together. Obviously, there are several more reasons that we will talk in a second about it, besides Sylvia, but definitely that was like the tipping point. You know, the industry is moving too slow and there’s like a huge opportunity right now in technology to disrupt these markets and I want to do something there and then I connected the dots with Brazil and then we will talk about that, if you want.

Peter: Right, right. So, you moved from New York to Brazil, I take it. Maybe just describe….this was quite a few years ago, right, you’re talking like 2012 thereabouts, so what were the lending options for consumers in Brazil in 2012?

Sergio: So, that was actually what attracted me from the early stories that my wife was telling me…she was saying, no, in Brazil people pay like 200% for a personal loan. I said, yeah, no way. I’m curious in nature and sort of analytical, if you want, so I decided to start searching and using Google Translator, I did not speak Portuguese at that point. So, I was using Google Translator and translating the web of the Central Bank of Brazil and downloading reports and stuff and things over a couple of weeks and I said, oh my God, it’s actually happening.

So, what I saw was an economy with a huge potential, 200 million people, very high margins on the banking side, 30% spread, 30% spread, 35 to 40% APRs, 30% spread, it was not the funding cost, but it was something that I was usually told. It was not the delinquency rates that were at that point at 4%/5% or something, it was just pure spread, that was okay. So, why is it that this happens, why is it that banks need to charge that much and then I got, and this was still far from the distance, right, so still haven’t put myself in Brazil so this was like pre-2012.

While I was doing some quick math, I saw that the distribution channel was a problem, the number of branches compared to the size of the loan book of the banks was not simply making sense. I did like the math and said, okay, one branch, how much in loans do they hold with households, with consumers and my reference was the US and it’s probably like $150 Million per branch. I got into Brazil and it was $50 Million per branch, ten times less, so ten times less so then the math really made a lot of sense.

Okay, so these guys have such a low productivity in the branch network that they need to inflate the price so that they get the margin to compensate for the fixed cost and that’s why spreads were are at 30% instead of like 3%, it was like very, very, very obvious. They looked like they need it, there was like no way for Brazilians to get into a website or an app or something at that point in 2012 and get financial products so you actually needed to have retail branches. It was almost like a social responsibility of the banking industry to have branches so that the middle class could get into the branch and get financial services.

Peter: Okay, okay. So then, when you started , maybe you can……what kind of loan offering did you begin with and then how has that evolved over time?

Sergio: So, I’d like to talk about Creditas in three phases, right. The number one was bootstrapping. I was a first time entrepreneur and difficult to convince anyone to give me a check, only my friends wanted to do that and I did not want to go through the pain of losing their money. (Peter laughs) I said, no worries, I will take my last bonus and I will invest into this business. It was not much money so, I said okay, this was going to be a nimble venture and I’m going to play it by myself, I’m going to hire four developers, two journalists and first step is going to be building just like a marketplace of financial products, 1.0 of fintech, right.

So, lead generation, partnering with banks, trying to crack the code on why was it that banks didn’t have, at that point, entry to the lending products, they didn’t. The only way of getting a loan in 2012 was by you walking into a branch and applying for a loan. So we said, okay, why don’t we just like take that experience, move it into a website and start by playing with them. So, we did that for a couple of years and then it started like taking off, it actually made sense, it was  like very obvious that that had to happen.

We got some venture money, I think it was like $3 Million at that point in 2014 or so and we said, okay, let’s continue doing this. By the end of 2015, we had two products in our platform, it was a variety of a home equity loan and a variety of an auto equity loan what would be like in the States a title loan for your car. I’m saying a variety because the mortgage market in Brazil is totally under penetrated. The residential real estate market has a loan to value of 6% so 94% is pure equity. I said, hey, why is this happening, why is it that people are owners of the apartments and they don’t get money from them and cancel the personal loans that they are holding and their revolving credit cards.

What I realized very quickly was that the regulation for mortgages was very new, that was something I didn’t know when I got to Brazil. It was just like at that point six/seven years old, no more than that. Banks were turning their back on the mortgage market because they were like drug addicts with the personal loans had 120% APR, there was like so much margin in that that they were neglecting that.

So we said, okay, let’s create a mortgage because the property is unleveraged, they own it outright and let’s say provide that with that mortgage liquidity to the individual so they can then cancel the personal loan, the revolving credit card and so on. So, we did that in 2015/2016 with both the home equity product that we call and the auto equity product extracting value from the car, right, so delivering the loan not to buy the car, but to just cancel the personal loan that they had that was super expensive.

By 2016, we realized that the marketplace model connecting to seven/eight consumer finance companies and mortgage companies and the like, it was nuts, it was like extremely difficult at that point. Too much complexity, the user experience was not good, we were not being paid enough, we were not being recognized by the banks on the value that we were providing, we were doing the whole transaction, very complex in Brazil this type of thing and also, they really didn’t want to innovate.

So we said, okay, this is the moment of truth and that’s when we became a direct lender on a securitization model. We were like finding the customer, producing the loan, booking the loan in a similar model as the US players did in that phase and just taking the money, securitize it to institutional investors and then eventually also retail investors so that opened up that second phase, 2016 to 2019.

By 2019, so like a year ago, we said, okay, this broke actually, it was like amazing so we cut on the marketplace. We are now like a pure lender based on securitizations of both institutional investors and retail investors, but the platform was not complete. We want to be deeper into the relationship with the customer. We started a new phase that coincides with our last equity round, that was $230 Million round in mid-2019 and we said, okay, let’s complete the platform. That implied a bunch of things that we did over the last 12 months which has been like, you know, in seven years, two products and in just one year we launched five different products in different verticals.

So, we launched auto financing, we launched payroll loans in partnership with the employer, we launched salary advance and then we launched a new vertical that we called Consumer Solutions which is our incursion outside of fintech and into regular consumer products. So, we launched a store, an e-commerce platform and in that store our customers they go, they buy an iPhone. We call it iPhone for Life, it’s like a similar product in the US, but the way which the customer pays the iPhone is instead of with a credit card, they use the salary themselves so they sign a contract with us.

We already have a partnership with the employer and then the customer pays over 24 months in fixed installments. After 24 months, we collect the iPhone back and we deliver a new iPhone to the customers who continue paying directly from their salary. You know, like a lot of innovation there if you think about it, especially in a country where you don’t have credit history and then getting the collateral.

You see that everything in Creditas is about collaterals, right, everything is about collateral because you don’t have credit history. So, distinguishing between someone that is going to pay you back and someone that doesn’t is the centerpiece of what Creditas is today. And, the last thing that we actually announced a couple of weeks ago was the launching of Creditas Home which is home solutions. We realized that people get their home equity loan from us, it’s either to renovate the apartment or because they want to anticipate the sale of the apartment because they are upgrading to another apartment, those type of things, we said okay.

If we really want to be in the center of the relationship with the customer, we need to do those things by ourselves and we started doing home renovation. We, obviously, don’t go with the bricks and the mortar, but we coordinate a process, we have the architects that actually support the customer and take out the pain from the shoulders of the customer. We feel that that is really the way that banking is going to evolve over time, is being much closer to the solution so that we can actually add more value to the customer.

Peter: Interesting. So, you are moving really….you’ve been a fintech company this whole time, but you’re moving really to outside of finance, it sounds like. Do you see that as a big part of your future then to have like one part of the company as fintech and the other part of the company as a broad range of services.

Sergio: Absolutely. Sometimes when we think about banks, I have the feeling that we are still like a…same discussion five or ten years ago in most of the verticals. The process is on paper so when it’s moved to digital then we need to automate it, then we need to put data science and it’s going to be like an amazing thing. The problem with that mentality is that you are entering into a negative cycle in which you are commoditizing yourself. You are solving it, everyone else in the industry is solving the same problem and you know what, software works.

Actually, it solves the problem of financing and it reduces the cost, it creates efficiency, it reduces the prices. So, I could see very clearly like, you know, five/ten years down the road, these products being pure commodities and who is the customer and what do the customer want. In reality, the customer does not want a loan, they want what they can buy with that loan for the loan that they can source so that’s why we really feel that’s the strategy moving forward for us.

Peter: Interesting, interesting. I would say there’s not many companies doing that anywhere in the world that I know of. Maybe this is fintech 3.0 or 4.0 whatever, but, right now, this is a fintech podcast, we’re going to focus more on the financial side. So, you still have the home equity loan, right, so maybe just take us through kind of the user experience. Actually, I’m on your website on my other screen here and it’s been translated for me, but I can see that everything….you know, it looks like you can go through this process on your website, but maybe tell us a little bit about the user experience, how long it takes and how the terms of the loans are, that sort of thing.

Sergio: Perfect. So, in terms of the loan types and the terms, obviously very different products in our portfolio and I’ going to start with the top of the pyramid, that’s the home loan. On average, that’s going to be like a $60,000 loan on a property, average is three times that so the average loan to value of our loan is 30% so that’s a property of $200,000 which is the average property of the urban population in Brazil. Obviously, like in the US, that will be probably three times that or four times that, you need to adjust for the difference in geography.

The second product, that’s the auto, that will be like $6,000 on a $20,000 car and then the payroll which is like a $2,000 product, a salary advance, that will be like $500. In terms of the APRs, home equity would come at an average 12% per year, the auto and the payroll will go at probably 30% and the salary advance, we give it away for free, it’s an engagement product, we don’t want to make money with that. So, all the employees that we are partnering with the employer, they get like two times per year, they can do a salary advance for free and we use that as a way of engaging the customer. If they need money later, more like a long-term need then they have direct access without marketing cost to our platform obviously.

So now, moving to the user experience, again very different, payroll, salary advance and auto, that’s fully digital and fully automated. Auto, you have just like 5% of the process that we have some human intervention today and that has obviously……we have come like a long way for the last four years. Just like a year ago, automation was like that in auto, it was like at 45%, now you’re at like 95% so it’s like a very small piece. Actually, it’s like in the…when the customer does the remote appraisal, they do it in the app, they download the app, they take the picture in certain pieces of the car so that we can validate the status of the car, that there’s no fraud on it and all that stuff. Some of the portions of that appraisal we still have like humans checking that. OCR is still like doing some good things in taking the plate and those things, but some others are not. So, that’s one side, right, it’s automation.

The other one is data, right, and the way that we price the loan. We price the loan real-time, we set the rate real-time when the customer gets into us even if you have like a collateral. We do that by taking that appraisal and identifying the liquidity of that property, depending on the default, the moment the customer is going to default, what’s the depreciation, the projected depreciation of the car, how long is it going to take us to actually sell the car. That gets into the LGV and that becomes ultimately the pricing, right. So, we do like….in cars we still do like fully leased out contracts, fully lien placements, there’s like a lien on that property.

So, the beauty in Brazil….that’s one of the few countries that actually have like digital liens, you can do it like real-time with the Central Bureau that actually coordinates all the liens on the car properties.

Salary advance and payroll…. you know, in Latin America and in emerging markets, in general, people are huge fans of WhatsApp and the customers in payroll and salary advance, 90% of them, it’s a bot in WhatsApp, they just do the validation in real-time, same day they get the liquidity that they want. In auto equity, in the car product, the record….we actually bidded like last month, it was like four hours from customer visit to money on the account, four hours and you’re like…again, you’re like doing a remote appraisal, the customer that you did not know before, nobody told you, you have not been in contact with that customer before. They’re placing the lien and delivering a loan that is typically like five/six times the salary of that person, the monthly salary of that person.

Now, in home equity different scenario, still scratching the surface, if you want. In Brazil you still need to go to the notary. I was listening, I think it was like a couple of weeks ago, you’re speaking with Vishal from Better and he was like reflecting on the digital notarization of the contract. In the US, it is still a point of tension, same happens with Brazil like a lot of advocacy…..I think that the pandemic is helping us in convincing the regulators actually  to create a Federal regulation on that, but still not there. And then there’s like an additional complexity in home equity that we face.

Actually, this is on the back, the customer does not see it so from a customer perspective, it’s a beautiful process, but in the back….in Brazil, you don’t have title insurance. My friend, Vishal, when he wants to do like a mortgage, he just gets like a title insurance and that’s it, pays like a couple of thousand dollars for that and end of the story, okay, we don’t have that here. So, that creates a complexity that you need to build a title insurance company inside Creditas to actually validate that the property is owned by that customer, number one. Number two, and this is like a specific case of home equity, is that if the customer/if the borrower has liabilities, personal liabilities, they could have an impact on the real estate property.

Peter: Sure, yeah.

Sergio: And then, therefore, you need to validate 85 different points of risks, including whether the customer is paying the condo or has paid like the real estate taxes or are there any fines or is he like an entrepreneur that has some labor claims and all that stuff. Obviously, data plays like a critical role there to anticipate what is the chance of that customer having one of those issues and then focusing relentlessly on solving that issue,

Peter: Okay. So, that’s quite amazing, what you’ve built there. I mean, how big is your company, how many employees do you have?

Sergio: Today, we are at 1,500 employees doubling over the last 12 months. We have remained stable over the pandemic so we managed to take certain measures and avoid laying off people and staff, but from a size perspective, 1,500 people. We are running our portfolio of roughly a couple of hundred million dollars and revenues of $60 Million,

Peter: Okay, okay. So, you are a pretty decent size. So, let’s talk about the pandemic because…..I mean, Brazil has been hit recently hard, I hear it in the news in the US, how has Ceditas been impacted? Obviously, you’re working from home, you also told me earlier that all of your employees are working from home, but how has that affected the business itself?

Sergio: We actually returned the two offices that we had so we are now like a company without an office (Peter laughs). The workplace, people at Creditas, are scratching their heads and thinking how the future’s going to look like and how we’re going to be operating in the future. So, that’s quite an interesting time over the next six months. On the business side, in March, it was a shock, right, so okay, this is coming and we had like two concerns. One was the credit portfolio risk, the other one the credit so risk so it’s credit and liquidity.

So, we moved into a cash preservation mode, we have like plenty of cash in the bank, we’re lucky, but besides that, we did not like to get into a negative trap so we said, okay, what can we do. What we did was slowing down growth, we were growing 9% every month over the first quarter, right, every month, every 30 days 9% up and then we slowed that down in Q2 to 3% every month. With that reduction in the growth rate, then suddenly we started generating cash. It’s because you have this portfolio that is cash flow positive generating like a bunch of cash every single month. Our business is all about recurrence, we don’t consume capital, but we have the recurrence of the credit because we get a synthetic junior tranche like a success fee, if you want to put it that way.

So, we had all that cash coming and we were just containing the cost we’d use in the marketing expenditure so generated cash. In July, we started going back because we saw that the two concerns that we had, we were fine with them. So, credit risk…we have like some hiccups in March and April so people were like just holding on the payments because the big banks were saying, we’re going to hold payments for 60 days and the customer said, can you do that? I’m not a bank, I don’t have the resources to do that, I still need to continue paying the investors, I’m not sure how I’m going to be doing that, but we managed to convince them that it would be like better for them to pay.

By mid-April, it was already very clear that the delinquency wasn’t going to be a big problem. Today, we are at the same level as we were in February. So, essentially, we went through the crisis with no impact literally in losses.  You know, at the end of the day, it’s the power of the collateral and having a low loan to value, right, like so much equity, the customer has so much equity, so much skin in the game that even if they get unemployed, what they would do was just sell the house, get the money, go to a rental area and then avoid actually the foreclosure of the apartment, right.

On the liquidity front, we had a concern of, are we going to be able to continue securitizing? In Q2, we did a record in securitizations so the markets were wide open, it was $300 Million realized in securitizations so almost like $100 Million. The markets were wide open for us because they would like to apply to quality so the investors that actually wanted to get exposure to credit risk, suddenly, they wanted to have collateralized loans, they wanted to have low loan to value, low volatility even though they were not being paid an amazing amount of money. That was what we actually experienced and now, we are back in hyper growth mode already starting in July. August is going to be an amazing month, September is going to be better than…probably the best month in the history of Creditas.

Peter: Wow! So, I want to talk about your competitive environment because you’ve got in Brazil probably the most successful…..Nubank, as you know very well, is the highest valuation of any fintech outside of China and you’ve got Mercado Libre which is the Amazon of Latin America that are getting into lending, Nubank is getting into lending so, what’s the competitive environment like and who do you see as your big competitors?

Sergio: Perfect. So, these two guys that you mentioned, they are like amazing, a lot of respect for those two guys, obviously, very different strategy than Creditas. What we do very fairly on Creditas….Creditas focuses on the….most of it are for the non-millennial guys, it’s someone that already owns an apartment and owns a car, they are in their mid-30s to mid-40s, that’s the range, 35 to 45, that’s what we target so, the guys are already making some decent salary. Our average customer is top 15% of the Brazilian population in terms of monthly income.

Now, if I turn into these two guys, so firstly, Mercado Libre, they are like actually an example, it’s very inspiring for us on the solution strategy that we talked about before. Mercado Libre was coming the other way around, they came from the e-commerce side and they said, hey, payments sucks, we need to solve that problem, they created Mercado Pago so payments.

And then they said, okay, so lending is bad for these SMEs that we work with, they built Mercado Credito which is the lending side of Mercado Libre and they are doing a terrific job. Think about it, they have all the data of transactionality of the merchants that are placed in the e-commerce, in the marketplace, they have like an amazing brand. I think great things are going to come from that business, it’s really amazing what they are building.

And then if you look into Nubank,…..so they managed to build an amazing business here, they started as a credit card company initially with a vision much larger, but they did very good in focusing on the credit card instead of the debit card that at that point was like the typical thing that everyone was trying to do, especially in Brazil, because credit risk is high. So they launched a credit card, obviously, they had a struggle to find what delinquency was going to be, how they could create the data algorithms and so on, but they did it and they grew like crazy. They did it by focusing on user experience, the millennials, millennials love that.

Nubank is a revolutionary, it’s against conformism and it’s a day-to-day product, right. Now, once they have that…on top of that, once they have that what they’re going to be putting is more and more products, right, to actually monetize those customers better because today is mostly a transactor business. And they launched their personal lending product, right, that was like a year ago. Obviously, the customer base that they have is slightly different than the one that we do, just like much younger, significantly higher defaults, but this is going to be Nubank’s place like pay for the next five years, pay for the next 50.

So, Nubank is how can we build a huge bank from scratch starting with the millennials and then going together with the millennials. Millennials become baby boomers (both laugh) eventually, they will get higher salaries, they will buy houses and cars and so on, so amazing strategy. You know, our competitor is none of the two, in reality they are like the traditional banks, the incumbents, those are the guys that have the customers that we want and that’s really where the money is.

And then the other competitor is poor lending products, in general. In Brazil, we could have like a lending size of 3X what we have today if you just change unsecure lending for secure lending, you can just do very easily without increase in debt service of the customer, you would just like triple/quadruple the amount of loans that you have in the economy so that’s really the challenge over the next decade.

Peter: So, that’s a good question. We are running out of time, but a couple of things I really want to get to. I mean, how are the banks reacting to companies like you and even to Nubank for that matter because you guys are really creating some decent scale. From what I understand, the banking system in Brazil is a bit of an oligopoly, they’re really old established banks, I mean, how are they reacting to fintech?

Sergio: It’s a classic….first slowly and then suddenly, right. So, I remember, 2014 to 2016, they were almost like ignoring and in 2016, they became very worried, this is actually going to happen, oh my God, we are naked so what are we going to do. They call this legacy and so a lot of concern. And then I see that from 2018 onwards, they are doing like a good job, they are like taking the platforms, isolating legacies, creating layers of APIs that actually allow them to be faster in developing products. If you perceive that the cycle of developing new stuff….it’s much longer than ours, obviously, but I think they are like adapting very well and they have like strong brands that they are trying to improve, but their brands are strong.

I think that more and more they are becoming more like fintechs, they start like calling them banktechs now, but it’s all about, you know, who is going to do it faster; the bank is going to adapt faster or the challenger is going to get to scale faster, right. So, that’s the game, right, they have a customer base, these guys have sometimes 40/50 million customers, very engaged where they have like salaries, they can plug new products and so on so I really do have a lot of respect for the banking industry, they are adjusting quickly, they have decent people running them and they are catching up.

Peter: Okay, okay. So I want to talk about financing. I mean, you started this business in 2012 where really no one in America was focused on Latin America at all and suddenly, we’ve come back. You’ve seen this evolution and it is fascinating to see this going from….. you can’t probably get a phone call or email returned but now, Latin America is one of the hot spots in the planet and you’ve got some of the marquee investors here, QED, who we know really well, SoftBank, obviously everyone knows, Kaszek. How has the fund raising process changed, how has that been for you over the years.

Sergio: It was a miserable experience (Peter laughs). You’re going to do what…you’re going to take off the banks, get out of this room. (laughs) That was basically it so nobody….I remember speaking with other folks like Nubank, as you mentioned, they were getting like the same type of reaction, that’s going to be impossible, you have no idea and especially we are foreigners. When we get there, these guys, they don’t know anything about the country, what are they saying so very painful at the beginning, especially if you are like a first time entrepreneur, you have no way of getting funded or very few of us.

Then by 2016, everything changed and it was like in part because, you know, the regulator openly said that they wanted fintech to succeed, they would like a defined and clear roadmaps so that fintechs could adapt to being regulated and all that stuff. At the same time, consumer penetration in smart phones skyrocketed in 2016/2017 so much more adoption of the consumer.  And then, early cases, you know, Nubank, Creditas, Stones, Paz Seguros like created some critical mass so investors went all the way around. So, everyone then started saying, okay, so fintech is going to be like a big thing and likely a big thing, right.

And now, yes, as you’re saying, everyone is looking at Latin America, especially Brazil, and saying, yeah, there are so many cools things that are happening down here. This is not like a……sometimes, China looks like they’re far, far west and sort of an un-ruled type of geography, but when you get into Brazil it’s like hyper regulated type of region but still with very high margins. There are so many things that can be done in multiple verticals, obviously, competition is going to be heating up, but investors really see that these are legit companies, legit businesses really innovating and creating the future competitors for the banking industry.

Peter: Right, right, okay. So, last question, where are you taking Creditas, are you going to be a massive….it sounds like you’re going to be a Mercado Libre sort of operation, what’s your vision for it?

Sergio: Yeah. First, definitely not going to be competing with Mercado Libre. Think about it like Mercado Libre is all about small items in the day-to-day like an Amazon type of thing. Our strategy is very focused on the high-ticket transactions, right, so it’s your house, your car and your salary so those are the three core systems that we are building around it.

So, we are very passionate about that idea, we are seeing very good real results, a lot of customer engagement, a lot of repetition on the customer. So, suddenly, you take a real estate loan that’s typically, you know, once in your life and then you’re generating recurrence by plugging iPhones and then buy your car and then renovate your house and you go through the cycle of the customer so that vision of a platform for the customer is really compelling for us.

Now, from a growth perspective, we want to continue growing 3X every year, let’s say 2 to 3X over the next five years which is going to…..at the end of the day, what we are saying is we think that in five years, we can be a hundred times where we are today. When you look at the market size and when you look at how much we are innovating in unexplored territories, you would just be scratching the surface even at that point five years down the road.

So, at the end of the day, we think that the world needs to have a Creditas-type of company like someone that focuses on high ticket items that takes complexity across multiple ecosystems and provides that platform for their customers. Hopefully, the end-game is going to be not to have an end and to create a hundred years company.

Peter: Right. Good luck there, Sergio, it’s been fascinating chatting with you and hearing your story. I think you’ve got an amazing company there and best of luck to you.

Sergio: Thank you very much, Peter, and congratulations on your work.

Peter: Okay, thank you. See you.

As I said in the intro, I think they’re just a fascinating company, Creditas, and I think we can learn a lot. They really are, I think, pioneers in some ways and certainly in Brazil they’re pioneers, but even in fintech globally, there’s not many fintech companies that are thinking beyond financial services. Many of them are thinking about different verticals within that, but Creditas is really looking at their customer and thinking we want to serve them beyond financial services. I don’t know whether we’ll see that as a trend in other areas of the world or in other companies, but certainly one to watch and I’ll be following along with their progress very closely.

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 LatAm, the region’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online on December 8th and 9th. Pandemic or not, LatAm is still the hottest region for fintech in the world and LendIt Fintech LatAm features all the leading players in the region. So, join the LatAm fintech community online this year where you will meet the people who matter, learn from the experts and get business done. . LendIt Fintech, lending and banking connected. Sign up today at lendit.com/latam.

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Filed Under: Lending and Fintech Podcast Tagged With: consumer lending, Creditas, Latin America, Mercado Libre, Nubank

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