Lend Academy's Lending and Fintech Podcast

 

PODCAST TRANSCRIPTION SESSION NO. 169/JENNIFER TESCHER

Welcome to the Lend Academy podcast, Episode No. 169. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s show is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

Peter Renton: Today on the show, I’m delighted to welcome Jennifer Tescher, she is the President and CEO of the Center for Financial Services Innovation, otherwise known as CFSI. Now the focus of this organization is really about improving financial health, we talk about that in great detail in this podcast, we talk about how, firstly, they initially got started really focusing on access to financial services and now, a few years ago, they switched to financial health.

We talk about how is the financial health of Americans today, what are biggest challenges facing them, what are the fintech companies doing to actually address these needs, and we talk about the different components of their organization as well as her vision for the future. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Jennifer!

Jennifer Tescher: Thanks Peter for inviting me.

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

Jennifer: Sure, running an organization like CFSI and being deeply engaged in financial services is about the last thing on earth I imagined I’d be doing. I expected to be a journalist, a newspaper reporter, in fact I have an undergraduate and a graduate degree in journalism and was a reporter 20 plus years ago and realized that what really motivated me wasn’t just writing about the issues, but doing something about them.

And so I went and got a public policy degree and tried to think about what was the one root cause I could work on, the one thing I could focus my attention on that was going to really help improve life for low and moderate income people and somewhere along the way I ended up at a community development bank. Actually, the very first community development bank in this country, ShoreBank, and worked there in a number of different parts of the institution and in a number of different capacities and CFSI was really born out of that institution and that experience.

So I’ve worked in a bank, I would never consider myself a banker, (Peter laughs) but I know enough to be dangerous and I think that a lot of my journalism skills still hold me in good stead today. I ask a lot of questions, I am a generalist, I know a little about a lot of different things and I can communicate effectively and I think that, frankly, anybody should have those skills to be successful today.

Peter: Right, sure. So then what was the actual impetus to the founding of CFSI. I mean, it’s going back a few years now, but can you remember just to share with the listeners what you were thinking when you decided to go off on this adventure of creating a new organization?

Jennifer: Yes, because it wasn’t actually my idea (laughs). I was at this point working in the consulting arm of ShoreBank and had been hired by the Ford Foundation. The internet had just been invented by Al Gore, they say, (Peter laughs) and Ford had just commissioned a paper that said, wow, the internet represents a huge opportunity to reach and serve low and moderate income people with financial services, with bank accounts, in ways that we hadn’t been able to think about before, and boy, Jennifer, we want to do something about this opportunity. We want to deploy our capital against the opportunity, but we have no idea what that looks like on the ground so help us develop our strategy.

And I went off and came back and said, well, you should create a center to do the following things and they said that’s a great idea, here, here’s a check, why don’t you go do that. So that was really how CFSI was born, that was back in 2003, right before…I remember it because it literally right before I gave birth to my first child…

Peter: Oh, boy.

Jennifer: …like in the weeks before (Peter laughs) and when I came back, I had just birthed one baby and I had to now birth another and I had a commitment for three years worth of funding and the money for the first 18 months in hand and it wasn’t even a legal entity at the beginning. It was really a project housed out of ShoreBank and once we saw that there was traction, we went ahead setting up a, you know, a legitimate separate organization.

Peter: Okay, are you set up as a 501(c)(3), are you a non-profit?

Jennifer: We are, we are.

Peter: Okay, so then what was the mission then…you said you had this check from the Ford Foundation, but what was the mission that you were trying to accomplish back then and how has that evolved over time?

Jennifer: Yeah, so back then we were founded to answer the question of…how can changes in technology in the financial services industry really benefit those who need it most. And we became quickly known as the un and underbanked people because we were the ones who put those words and that issue on the map. Back then, this is the early to mid 2000’s, the federal government had just decided it wanted to try to pay everyone’s federal benefits electronically only to realize that 10 million people, benefit recipients didn’t have a bank account and that was sort of fresh in people’s conscience.

If you went to a banking conference back then, you would see a bar chart showing the cost of a teller transaction and a smaller bar for the cost of an ATM transaction and an even smaller bar for the cost of an online banking transaction. So it was both a moment of understanding that there were a lot of people who lacked access, basic access to banking and back then it really was still just banking.

We didn’t have so many of the new competitors that we have today and there was this understanding that somehow technology was going to both dramatically reduce the cost to serve these consumers and that it was going to enable us to reach them where they were in a more effective way. So that’s where we started and, you know, fast forward ten years, and we’re at our ten-year anniversary. This was around 2014, and we were taking stock and a lot had changed in that period of time.

Peter: Sure.

Jennifer: The iPhone was invented in 2007, like we were well ahead of our time from a fintech perspective, fintech wasn’t even a word when we launched in 2004. So the iPhone had been invented and in a way the notion of access being the problem went away, right, because if you have a phone and in this country a pre-paid card…you know, access became almost ubiquitous, particularly to the payment system.

And we had a financial crisis which made it clear that even if you had a bank account or say a mortgage, if you were well banked, it didn’t necessarily mean that you were immune from financial challenge. And then we had a Great Recession which laid bare this idea that really this wasn’t just a niche problem of the un and underbanked; this was a problem for the majority of Americans who were financially struggling and we just didn’t see it because of the over indebtedness that had built up over the previous couple of decades.

And so we said to ourselves, what are we doing, you know, what is our purpose, what are we trying to accomplish and right around this time, we came out of the field with data from our Financial Diaries Project where we followed over 200 families for a year documenting every dollar that flowed in and out of their households and the decisions that they were making and the context in which they were making it.

And my colleague, Rachel Schneider, who co-authored that study used to say, you know, when you sit down with somebody and you ask them to talk about their financial lives they really just start talking about their lives because those two things are so intertwined. It became very clear to us that what we were really wanting to do was help improve people’s lives by helping improve their financial lives and that that was really about ultimately improving peoples’ financial health.

And so over the last four or five years, we shifted the frame of our work from being about access and the un and underbanked to really being about financial health for all, especially those who don’t have it and we’ve spent a lot of time building a financial health methodology, a framework, a measurement methodology and it’s been exciting to see the traction of that over the last few years.

Peter: So is the implication in that access to financial services has now been solved, because obviously we still hear about people who are unbanked so where do you sit on that question today?

Jennifer: So I should first say that we really focus our work in the United States.

Peter: Right.

Jennifer: So obviously there are still billions of people around the globe who lack access although as you know that gap has been dramatically narrowed over time. The other thing I would say is I don’t think we’ve ever had as much low or no cost access ever to basic transaction and payment accounts.

Peter: Right.

Jennifer: I think credit access is still an issue, but I also think that we’re seeing all kinds of interesting innovations around how to attack that challenge. I mean, look, US banks, just earlier this week rolled out a new small dollar credit product which isn’t going to solve every need and every problem, but when did you think a top ten bank was going to say that they were going to charge 70+% APR and make a loan that’s just three months long and make loans to people much further down the credit spectrum than they would ever make in any other kind of loan product.

That to me suggests that there’s significant change there so my take on the topic is that there are still some people in this country who do not have a bank account. At least half, if not more of them, have had one in the past and they’re just churning through the system. And so we’re talking about a very small number of people who actually are completely without access and then I think some of those people likely have far bigger challenges; homelessness, poverty, other kinds of issues that I would submit are far more important than having a bank account.

Peter: Right, right. Okay, so then let’s talk about financial health for a minute. You look at the country today and you know, we’ve come through the financial crisis and the economy is chugging along, unemployment is low, but yet you still hear that the average person has very little in emergency savings, so what’s your take on the financial health of Americans today?

Jennifer: So in about a couple of months, we will release data from our newest national study, the product of our new US financial health pulse. We’re actually going to be producing, on an annual basis now, a national benchmark around financial health and we’re just out of the field with that work and just as you say, the headlines suggest we’re in an incredibly rosy time in the recovery and boy, doesn’t it all look great, but as we learned from the US Financial Diaries work, numbers that are focused on annuals and averages really mask what’s going on with people day-to-day at the micro level.

The problem is the macro level data that we use to gauge the health of the country is not terribly effective at gauging sort of the micro economic health of households and families and so, yeah, a lot of people are working, but they are working multiple jobs, they’re not being paid very well in those jobs. A huge percentage of this country are, you know, making less than $12 an hour and if you do the math that’s, you know, about $30,000 a year. So we look at the stock market gains, but you know, an increasingly smaller percentage of Americans actually own any stock in the first place, so they’re not necessarily benefitting from those gains.

And so I know it’s not a popular message, but I think it’s an important message that people are still really struggling, they’re also struggling under mountains of student loan debt and they’re really struggling with health care expenses and medical debt. So you know, the things that we think are the most important, basic expenses, getting healthcare, sending your kids to college, frankly, renting an apartment or buying a house are all incredibly expensive and people’s wages and working conditions haven’t kept up.

Peter: Interesting, interesting. So you’ve had a great view here on the evolution of fintech starting in 2004 and really you can see that there’s been an explosion in, I would say, innovation over the last…it seems like it is exponential over the last several years, but it sounds like there’s still a lot of work to be done and I’m curious to get your thoughts on what should fintech companies be doing to really address the needs of these middle class Americans that you talk about.

Jennifer: Great question. I agree with you that there’s been tremendous innovation, but only some of it has really been aimed either at solving consumer financial health challenges at large or on reaching and working with consumers whose financial health is most challenged. And so, you know, doing a fintech business, as you know, is very different than a lot of other businesses. You can’t sit in a room all weekend and code something and stick it up on the internet and be ready to go. It’s much more complicated, it takes much longer, there are more rules to follow and if you’re going to spend all that time and effort, you might as well spend it on something that’s actually going to matter, that’s really going to move the needle.

So I think there are tons of interesting sort of day-to-day financial challenges that folks face that are worthy of fintech focus where technology can really make a big difference. I think one of those arenas is decision making, optimizing decision making for people. People’s financial lives are incredibly complicated, they have multiple streams of income, those streams are not always predictable, both in their timing and their amount, they’re juggling multiple types of bills payable at different times and they have very little cushion, they have very little slack. And so the decisions that they make about their cash flow are extremely critical because small mistakes that many of us take for granted are catastrophic for them. So I’m really excited about a lot of the tools I’m seeing that are attempting to solve for those kinds of challenges.

Technology should make it easier to help people make these decisions. It’s not easy because people’s lives are complicated, but you know, I think a lot of progress is being made there, as an example.

I think the other thing I’m seeing that I’m excited about is innovations being delivered through the workplace, both because it’s a really sort of momentous time to be engaging with somebody, it’s where they’re receiving their paycheck, it’s often where they’re receiving benefits. It’s a place where they’re used to having to make those kinds of decisions and I’m excited about it because I see employers increasingly interested in the broader financial health of their employees, not just their physical health, but also their financial health.

And so we’re seeing innovation from fintechs, but we’re also seeing innovations from incumbents on the retirement side because their plan sponsor, employers are saying my employees need more than just a retirement calculator, and they need more help on more topics than just retirement, how about like today. So I’m very excited about all the energy in that space.

Peter: Right, right. You know it’s interesting, I had the CEO of Credit Karma, Ken Lin, on just a few episodes ago and he talked about this concept of autonomous finance where…you know, when you think about it…a lot of this stuff, it’s highly complex, but there’s a lot of data out there and he used the example of, you know, you’ve got a car loan or a personal loan or a credit card, whatever and there’s a deal out there that you will qualify for that is going to save you $100 a month. That’s super meaningful and he says we should be in a world where that information gets to the consumer and say, hey, do want to save $100 a month, I’ve pre-filled out this application for you, you just have to okay it and boom, you’re saving $100 a month.

So that’s the sort of thing that I get excited about because, as you say, and I’ve written about this several times where I feel like the promise of fintech isn’t necessarily to save the upper middle class a little bit of money on their credit card bill or their credit card debt, but it’s really to move the needle for people who really need it.

It feels like to me and you’ve been in this for a long time and I feel like it’s only really been in the last year or two that fintech companies are really now focusing on this massive middle class or lower middle class, shall we say, and doing and creating products specifically for them. It has to be done by the for profit sector, I mean, I love the work you’re doing, but to move the needle for millions and millions of people there has to be a profit incentive. Would you agree with that?

Jennifer: Oh entirely, and we happen to be a non-profit, but our entire sort of theory of how we’re trying to make change in the world is by helping providers understand that there’s a business opportunity to be had in promoting the financial health of your customers, and frankly, making money as a result of improving their financial health as opposed to in spite of your customers’ financial health.

I mean, that’s really an important lesson from the financial crisis that in the short run there may be more money to be made by working against the better interests of your customers, but that’s not a long term recipe for success and it’s certainly not how you build trust, especially in the digital age and the social media age so I think this is true both for fintechs, but also very much for incumbents.

You know, I mentioned earlier that when we started back in 2004, this was largely about banks, I mean, the only kind of non-banks that were in this space in a serious way were starting to innovate were H&R Block and Walmart. In fact, back in the day, we used to hold them up to try to scare the banks and say, you really should be focusing on this because there’s other people who are looking to eat your lunch.

And so because we’ve seen this evolution for such a long period of time, we were pretty early in talking about the idea that it’s not who’s going to win, fintech or incumbents. It’s the mash-up between them that’s where the most interesting things are happening and I think that’s now sort of the…it’s more of an agreed upon idea. So as much as I want to do everything I can to help the startups that are in our portfolio through our Financial Solutions Lab be successful on their own terms…for some of them, frankly, for many of them, the ultimate success is going to be them being bought by or them partnering with an incumbent.

Peter: Right, that makes sense. So you just touched on it, but I want to get an overall view of your organization and you just talked about the Financial Solutions Lab, you do research as well so can you just take us through the different components of CFSI real quick?

Jennifer: Absolutely. So our goal is to improve financial health in America and we do that by working with providers to help them build strategies, businesses, products that will make them money while they are improving the financial health of their customers and so we work with providers in a variety of ways.

The primary way is through our financial health network. We have, I think, 160+ members at this point, very diverse, most of the largest brands in financial services, a range of credit unions, mostly the biggest credit unions, vendors, technology partners, fintech companies, some non-profit providers notably in the credit counseling arena, as an example, some of the largest providers in that arena. And we bring those network members together, both to engage with each other and I like to describe it as a snow globe, right, put all of these different people and different institutions together, shake it up and see what comes out the other end; that’s where the interesting stuff happens.

The other thing that we do with this network is we provide them a lot of information and research. We have deep expertise and research on consumer behavior, consumer preference and then we do a bunch of research on specific opportunity areas. We recently just put out a paper on insurance ownership in America, we’re about to put out something on retirement so we’ve done product specific work, we’ve done sector specific work.

We also have a consulting business so we do proprietary work for companies who need a partner alongside to roll up their sleeves and help with product or business development, strategy development, understanding their customers, understanding the competition.

And then, finally, we try to seed innovation in the marketplace and we do that in a variety of ways. We do that through our Financial Solutions Lab which is a partnership with J.P. Morgan Chase, we essentially run an accelerator for early stage fintech companies that are focused on solving financial health challenges. We’re on our fourth cohort now, we have 30 some odd companies in our portfolio and we’re also, you know, doing a lot of work with incumbents and others to help them innovate within their four walls. So that’s really sort of CFSI as a whole.

We often get asked about if we play a policy role. We do have a new Vice President of Innovation and Policy, Garry Reeder, and we do have a presence in Washington, we spend a lot of time talking with regulators and policy makers helping them understand the real financial lives of Americans, but we are not primarily a policy think tank. We’re focused on policy from the perspective of making sure that there’s a supportive environment and ecosystem in which financial services providers can innovate.

Peter: Okay, that’s quite a lot. So then how do you measure your impact?

Jennifer: That is a great question and it continues to change as our model evolves. So we are just now coming to the end of a four year plan and our goals from that plan were to grow our network so reach more providers and make sure that that it is a diverse group of providers. You know, one could say that choosing to pay money to be part of a financial health network demonstrates that the idea of financial health is gaining traction.

Remember, a few years ago we didn’t have a network at all, we worked with a handful of companies, but we weren’t formally engaged with companies as members and today we have over 160 in just a few years. We measure how engaged those companies are in developing new products, services, policies that we think are meant to promote financial health so we track and monitor that.

We also, through our Compass Principles, track and monitor quality in the marketplace because it’s always good to have more, but not if it’s not high quality. So we’re also, you know, benchmarking quality in a variety of places in the industry and monitoring whether quality is ever improving.

And then, finally, we’re really focused on influencing both the broader industry and the broader zeitgeist, but also the firms we work with by encouraging them to measure the financial health of their customers and start to use that data as a KPI for how they run their business. Back when we started this, financial health barely existed, we didn’t even have a measurement system and we set a goal of having 25% of our network members actively measuring and I’m really excited to say that we actually hit that goal.

So we’re working with, at this point, about 40 companies and organizations who in some cases are using our methodology and in some cases using their own to measure and track the financial health of their customers and understand what moves the needle year-on-year.

We’re actually at the point where we’ve got a few companies who are now either in their second or third year of starting to measure so they have some year-on-year data. If you couple that with this new financial health pulse which is going to give us regular national benchmarking data and we also have a new sentiment survey.

We’ve surveyed 650 financial services executives about their sentiments around financial health and it’s importance as a strategy and a business priority. We’re going to have a whole set of new tools to be measuring industry engagement on this topic. And ultimately, we think we should be able to measure year-on-year change in financial health among Americans.

Peter: Interesting. So I’m curious, how big is your organization? I know you’re based in Chicago, I believe you have a number of offices around the country, I mean, how many people work at CFSI?

Jennifer: We’re a group of about 55 and we have offices in Chicago, New York, DC and San Francisco and it’s just a terrific group of people, very varied backgrounds; some people out of industry or out of business; others out of non-profit or out of international development, but all really passionate, motivated, innovative and really comfortable, you know, pushing the boundaries.

Peter: Right.

Jennifer: Most of what we’re doing we’re inventing every day and what’s really exciting is to be working, not just with other innovators who are used to doing something new every day, but really having some success in convincing incumbents in a very conservative industry to actually start to think differently about the business they’re in. So there’s tons more work for us to do, but I’m really excited about the traction.

Peter: Right. So it sounds like you’ve got a lot of revenue generators, but given that you’re a non-profit, I imagine you’re still getting donations as well. What is the split between donations or grants that you receive versus your revenue generating activities?

Jennifer: Yeah, it’s about half and half, maybe slightly more grants, it goes in waves and I think it’s also intentional in the sense that one of the reasons why we’ve been successful is that we’re viewed as having independence. Even though we work with industry and individual companies, we ultimately are in this to improve things for consumers.

Peter: Right.

Jennifer: And so having outside grant funding, and not just from corporate donors, but also from private foundations, enables us to control our agenda, particularly on issues or products or policies where we need to actually drum up interest or help set a new point of view before we can convince others to pay for it if you will, and see it as being in their interest.

So for instance, this national US financial health pulse I mentioned, this national data collection is a very significant and expensive undertaking and we have support from Omidyar Network, MetLife Foundation and AARP, but over the course of time we expect to be able to monetize it sufficiently so that it becomes sustainable and isn’t going to need grant funding forever.

So that’s how we tend to think about our grant funding, it’s either sort of capital to take on new things that market isn’t ready to pay for yet, or to take on issues and topics that we want to have independence around.

Peter: Okay, so we’re just about out of time, where are you taking this, what’s your vision for the future of CFSI?

Jennifer: So I think our vision is to really equip financial services providers with the tools, technology and infrastructure that they need to execute on financial health strategies. We’ve done a tremendous amount of work to raise awareness, to get people interested, to help them understand the idea, to even help them begin to understand sort of the baseline of where they’re starting from, in terms of the financial health of their own customers. And now, everyone wants to know how do I do that?

And so I think an important role that CFSI can play is really bringing data, analytics and benchmarking to bear because as this becomes a more standard way of operating, right, there’s going need to be more information about how one compares to others and what strategies work. I think there’s some other work that we need to cause to happen outside of our four walls, right.

A lot of financial institutions are now looking for technology partners who can offer the platforms and infrastructure that they need, either to offer their customers a financial health experience directly, or to provide advice in a different form or fashion and so we really want to help create a more robust marketplace of vendors and partners who can provide the kinds of financial health solutions that providers are going to be looking for, they are already looking for it.

So as an example, a couple of years ago we worked closely with Envestnet Yodlee to help them build their new Fin Health Check app and so banks, on a white label basis, can leverage this tool if they want to enable their customers to generate a financial health score and then to provide them with some advice about improving it and we’re starting to see others try similar things in the marketplace.

I think there’s room for more of that and other kinds of platforms that will also enable firms to aggregate the data that they have on their customers to paint a better picture so it’s not just serving your customers, but using transactional data to help give them a picture. So I think that through our innovation work, we’re really excited about trying to help fill in that marketplace because ultimately, what we really want is financial services companies to see themselves as being in the financial health business.

That’s what their customers want from them and that net promoter score is a very valuable KPI for making sure that that the experience they have is pleasant and positive, but our research shows that plenty of people have pleasant and positive experiences, but still feel very negatively about their financial condition.

Peter: Right.

Jennifer: So we want to see more firms using financial health as a way to measure their own impact as an enterprise. I would say that’s probably our ultimate goal.

Peter: Right. Well that is a noble goal and one that I will also try and work towards personally. I feel like improving financial health really is the promise of fintech and I feel like we are nowhere near realizing that promise. It’s organizations like yours that are really helping to drive this forward. I really appreciate you being on the show today, Jen.

Jennifer: Thank you for having me, I really enjoyed the discussion.

Peter: Okay, see you.

Jennifer: Alright, take care. Bye.

Peter: Many companies in this space are focused directly on improving financial health and I think there are many companies doing tremendous work here, but I also think there are those that should be doing better, that really should be focused on really improving the health of their customers more so than what they are. I think it’s a trend that I see moving in this direction.

I think with technology, with artificial intelligence, with all kinds of other tools, we now have the capability to profitably serve a much bigger population than was possible just a few years ago. I really commend the work CFSI is doing and I think more companies should be really turning their attention towards directly improving the financial health of their customers. I think we’re moving in that direction. I hope that we will see tremendous gains over the coming years.

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

Today’s show was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th through 9th, 2019, at Moscone West in San Francisco. Registration is now open and we’re also taking speaker applications. You can find out more by going to lendit.com/usa.

 

PODCAST TRANSCRIPTION SESSION NO. 168 / MATT HUMPHREY

Welcome to the Lend Academy podcast, Episode No. 168. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s show is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

Peter Renton: Today on the show, I’m delighted to welcome Matt Humphrey, he is the CEO and Co-Founder of LendingHome. Now LendingHome are a fascinating company, they have in a very short amount of time become the largest fix & flip lender. They’ve done over $3 billion as of this recording and we talk about how they were able to do that, how they were able to go into this space that was really dominated by, you know, small hard money lenders and create an online process that’s efficient.

We talk quite a bit about the technology they’ve been able to develop, we talk a lot about how they differentiate themselves from the other players in this space, we talk about the loans themselves, we talk about the investing side of the business and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Matt!

Matt Humphrey: Thanks for having me, Peter.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself. Maybe you can tell us what you did before you started LendingHome.

Matt: Sure, so I guess you can say I’m a multi-time tech entrepreneur. This is depending on how you count, I think company number 8 (Peter laughs) since 2004, every time in different spaces, everything from 3D virtual world to content delivery to social games, e-commerce, lending and more. You know, I’m classically trained as an engineer, I love attacking problems no matter where they may be where tech can really truly create an advantage; that was my upbringing.

I was Carnegie Mellon computer science…long story short, actually started there when I was 13 years old, I was that guy and basically finished my core computer science requirements by 18 and then I didn’t have a minor so I went and got an MBA, caught the startup bug and then started building companies.

So I moved out west from Pittsburgh where I grew up and went to school in 2007, and then built a variety of things from there. So my last company was a company called HomeRun, it was an e-commerce platform that we built back in 2010 and actually we sold it for a very strong outcome only about 18 months after founding and we basically powered an e-commerce platform where we sold things to consumers and we also powered rewards and loyalty and commerce solutions for large card companies and banks like JP Morgan Chase and American Express and others. So next up after that, after selling it and working with the acquirer for a number of years, started LendingHome.

Peter: It sounds like…looking at your LinkedIn profile, LendingHome is your longest running startup, it sounds like. It’s where you’ve spent the most time in your career, just on pure timewise.

Matt: Well for some of those early ones I’ve got to admit it wasn’t a high bar to spend more than, you know, 12 to 18 months. (Peter laughs) I really think that I took a philosophy of just start things, learn, rapid pace, rapid prototype, get products to market and if we’re going to succeed, great and if we’re going to fail, let’s fail fast, learn and iterate. And so, you know, through those early days of some faster start and stops, learned a lot I think, you know, a lot of life lessons as an entrepreneur.

HomeRun was a good three year and change run and LendingHome has been now between four and five years. You know, I have to say though, it is…I am more proud of what we’ve built here than probably all of the past 7+ combined. Just in the scale and scope of what we’re taking on, the technology that we brought to market and we’ve built a real business which is cool and exciting.

Peter: Right, right. So let’s just talk about the early days at LendingHome, what were you thinking when you thought you needed to start an online mortgage origination platform? What was the problem you were trying to solve?

Matt: Yeah, so going back to middle of 2013, I, having sold HomeRun in 2011, I actually was angel investing in a lot of technology startups and caught the bug to also want to think about investing in real estate and it didn’t seem like there was a simple, scalable, online, transparent way for investors to access investments in real estate or specifically mortgage, and I was intrigued when other companies like LendingClub, Prosper and beyond had brought such a straightforward way for an individual investor to invest in personal loans that didn’t exist in mortgage.

So I was actually looking at it from more of that side and actually got approached to be an LP in a few private mortgage funds covering areas of lending and credit for homes where banks did not so the fix & flip space that we now find ourselves in…single family rental, foreign nationals, those that are self-employed; lots of verticals that banks didn’t cover. So I actually took a step back and said, would I rather be an LP in a few of these funds or can we actually build technology to do this even better.

And then you combine that with some of my close friends and family, even ones with great credit that were having just the hardest time even refinancing loans with their existing bank, taking months if not quarters, asking them multiple times for their documents over and over again and consistently getting surprised in the process. So it led me to be pretty introspective and say, whoa, if this asset class of mortgage is so big and both the borrowers and investors have trouble accessing it in a simple, fast, reliable way, what if we did it better with tech and that’s how LendingHome was born.

Peter: Right, right. Obviously, you started just a few years ago and you’ve built it up into a pretty sizable scale. I saw just recently your press release that came out, you crossed $3 billion in total originations, so can you just give us some context to that, like how many homes is that, how many loans have you done, that kind of thing.

Matt: For sure. So yes, about a month ago, we reported that we had crossed about $3 billion in cumulative originations. Each billion has come considerably faster than the last; it was around 30 months for the first billion, 11 for the next and then about eight for the third and so we’re very excited that the business is accelerating and growing so quickly.

You know, that breaks down if you just do some simple math, the average mortgage in the US is slightly over $200K and so it should be no surprise that that actually equates to…now, as of the day of this call we’re over 15,000 individual homes that we’ve lent to so that’s about $200,000 and a little bit per loan. We have focused our tech, our process, how we go to market to be able to lend to the average homeowner across the US.

Whereas, I think there’s lots of platforms that are focused on small balance commercial or office buildings or hotels, we’re focusing on those single family homes, townhomes, condos in the Phoenix, Arizonas’, the Las Vegas, Nevadas’. The repeatable part of this asset class is that standard average home across the US so it’s been great and I think as we focused, the majority of that volume has been focused towards the asset class of fix & flip where our borrowers are buying, oftentimes rehabilitating and reselling homes in their area.

We think this is awesome because this is how communities all across the country stay fresh with this type of financing to enable older, more rundown homes to become new, fresh, come back on market and to be available for homeowners to buy. So that’s what we’ve done and at the same time, not only have we helped to rehabilitate the housing stock, we’ve actually had a lot of borrowers that have gone from hobbyists of this to actually building businesses, turning homes of the sort so it’s been really rewarding to see.

Peter: Right, so let’s just touch on that a bit because how much of your business is this sort of one person doing it as a hobby versus someone who has taken out five loans every year kind of thing. What is the typical borrower, like who are they?

Matt: Yeah, so that’s a great question. Across the US, when we look at all of the data that we keep a pretty close eye on, we see that about half of this market for buying, rehabilitating and reselling homes and the financing thereof occurs to folks that are more of repeat borrowers and that’s what we say internally. Just as a note that somebody is doing multiple loans in a given year or two year span. Sometimes they’ve made this their job, sometimes this has literally become their livelihood and they build strong businesses on this and our lending and our loans enable them to do so.

About half of the space is your one-off or two-off borrower that maybe this is a hobby and so what we’ve seen is we’ve actually seen our business grow on both sides. About three quarters of our business today is more of the what we would call pro or repeat audience that has done this many times and about a quarter of it is that one-off individual loan to a borrower that may be more one and done, more of the hobbyist, but we’ve seen strong growth across both and now across well over half of the states in the US that we’re actively licensed and lending into.

Peter: Okay, so then I saw, I think it was last year you announced you were going to get into traditional mortgages. I haven’t heard you mention that yet, is that sort of initiative on hold or are you in a pilot phase, where are you at with that?

Matt: Yeah over the last year we basically have been in a protractive pilot phase. You know, we decided earlier this year to really double down and focus on the bridge loans and the fix & flip, bridge is our internal term for fix & flip because we’ve gone from zero to number one in that market and we’ve really decided to double down there. So earlier this year, we paused the originations of the 30-year mortgages to focus on that bridge space.

We still have the technology platform built, we’re still actually making progress in that space, just with rates going up in Q1/Q2 and how much volume in business there is on the bridge side where the average traditional mortgage company is losing money today. Even if we could do better with tech, we still have such margins, such scale potential and so many customers coming to us asking for help on the bridge side, we decided to kind of truly double down our focus there.

Peter: Okay, okay, that makes sense, So then what about…this is a primarily or has been traditionally an offline process, very paper-based and it sounds like you’re often working with just individuals, tell us about how you’ve sort of implemented technology to make this process more efficient. What have you done to really make this a repeatable process?

Matt: Yeah, so we have a little bit of a running joke internally of fintech companies, sometimes they’re more “fin fin” or more “tech tech.” I think we’ve struck a really nice balance of both the fin and the tech. Look, technology is at our core and we say, at the end of the day, we win on service, you know, we’re here to be a customer company that wins on service, enabled and growing through technology and that is our ethos and that’s our essence and that is our edge.

So we internally break down how the tech can add advantage into three camps. We say experience, platform and marketplace, and I’ll start with the first, so experience. Can somebody who has never gotten a mortgage before find out about us, walk up and answer a few simple questions, see if they qualify, select the perfect product for them and then finish their application in just minutes where it could take days or weeks with a traditional paper-based lender.

There’s a lot of technology that has to be built to acquire those customers, to make sure we’re asking the right questions, to really run our credit engine in real time to be able to, frankly, decision customers literally as they’re on our website answering questions without a human ever having to step in.

I’m pleased to report that actually about 80% of our customers are submitting loans, loan inquiries and then their full applications before they ever talk to a human on LendingHome’s side and that’s validation to us that…you know, where other lenders have to talk to maybe 10 or 20 customers for every one that closes, we do much better than that and we put the power and control in the customers’ hands so they can run their process the way they want to. So that’s part of how we’re differentiating on the experience side.

When it comes to platform, the average…I don’t know if you track this stat, it’s truthfully a little bit crazy. The average cost to close a residential mortgage loan has gone up just about every quarter for the last 20 and is now around $9,000 a loan.

Peter: Wow!

Matt: So if we pause on that for a second. Average loan in the US is $200,000, average cost to close it $9,000. That borrower is charged about 4.5% in higher fees, rates, hidden charges by traditional lenders just to pay their expenses, to pay their bills, that’s before their profit. That’s actually why in Q1, the Mortgage Bankers Association released the stat that the average independent mortgage company was losing money per transaction, that’s crazy.

And so we’ve been able to actually create, through significant amount of automation of the underwriting process, we’ve been able to create a process that we make thousands of dollars per transaction and have a really, really, really good business on a per unit basis, make strong margins. That then puts both money in our pockets that we can reinvest back into more tech to keep accelerating that lead, or it actually allows us to charge less fees to our borrowers and save them money.

Peter: Right:

Matt: So that platform is all about automation of the process, pulling in data automatically and not having to have 20 or 30 humans triple, quadruple, quintuple checking each other. That’s our edge with tech.

And the third is marketplace. You know, we have a wide array of investors who buy our loans and so our marketplace allows us to find, within days of closing that mortgage, allows us to find the perfect place to sell that loan, whether that’s large institutions and banks, whether that’s a credit fund that we’ve launched, whether that’s our peer-to-peer platform. And so that efficiency lets us not have to accrue loans for months or quarters or years, but actually sell them off within days of close and it lets us be hyper efficient with our capital. So really tech, it’s from end-to-end experience, platform, marketplace and that’s what we build every single day here at LendingHome.

Peter: I’m curious about mobile because…what percentage are coming to your site through the mobile device and how are you optimizing for that?

Matt: Yeah, I believe the last time we checked new customers that were coming at the top of the funnel was about 50/50…

Peter: Wow!

Matt: …which even let’s say four years ago when we started lending, those numbers have increased steadily. You might think, hey, this is a mortgage, this is the most important financial transaction that most customers are ever going to make and it’s stressful and people are dug in for a hard process, but people are still…they want to inquire on the phone, they want to see if they qualify. That’s where they’re figuring out the first steps of the process.

Basically, we haven’t launched an app as you would traditionally think of an iPhone app or an Android app. What we’ve done is every part of our site from learning about us, to seeing if they qualify to that entire experience with their application, when they’re on their phone it’s optimized for mobile so they can go through the entire experience right there and even with some of their documents.

For instance, if they’re going through their application on their phone, they can take a picture of them, have them in their photo album and seamlessly upload them right through their mobile web browser right into our hands so we can verify those docs. So we don’t have apps, so to speak, but we take advantage of it and it’s super important, it’s a high percentage today.

Peter: Right, right, makes sense. So now you’ve got the scale, you’ve got the technology, but is there…like when you look at the marketplace there’s obviously many people doing fix & flips, there’s many successful offline lenders that are doing fix & flips and you now have, you know, quite a few in the online space. So how do you differentiate yourself, is it really your tech and your scale or is there something else?

Matt: Yeah, so when we look at the competition, I would say there’s a number of ways we look different and there’s a number of ways that we have an edge. So I would say that the first is compared to most of our more offline or traditional counterparts, borrowers think of us as effectively having a national presence, right. We don’t have to have local sales people in every city that we operate in, borrowers literally anywhere can walk up and apply for a loan at any given time and we do most of our customer acquisition through online channels and so this actually just vastly reduces the overhead and the physical people in each location that we need to scale our business. So that’s thing one.

I would say thing two is really, really driving down those operational costs, right. You know, when a borrower is let’s say on their second, third, fourth, fifth loan that application is only taking minutes, we’re able to approve within days and sometimes those borrowers are able to close the same week. That’s really impressive level of service, but even though they might, you know, be traditionally going to their local country club lender who makes the process really easy for them because it’s done over a handshake, they get the certainty and scale of working with a national scale player like us, but they get that same efficiency.

We even have some of our largest borrowers that used to have in-house staff just to manage disparate loan processes with lots of different lenders that were using paper and faxes etc. and when they found LendingHome they realized, wow, I don’t even need that, all of my information is saved, this is super easy and especially once I’m repeating, it’s a breeze and so I think the service aspect is hugely important to it.

And I would say between the operational automation that drives down our costs and our low cost of capital out in the capital markets because we’ve had such strong loan performance…you know, this is not 2013/2014 all over again where the country club loan is at 12 to 15% and 2 to 5 points. This is, you know, 9/10% and maybe 1.5, 2 points up front and rates and fees and terms that really work for borrowers and really perform for our investors.

So cost of capital, cost of operation, national scale presence and tech-enabled service. Multiple things in there that we think our competition is not set up to really compete with.

Peter: Right, right, okay. So I just want to ask again about the loans themselves. You mentioned you’re 9/10% or whatever, but what is the range of the loans that you offer and then let’s talk about LTV and the length of the loan term. Just tell us about the loans.

Matt: Yeah, so the loans are going to end up being…most of these bridge loans are one year loans so this is generally the right duration to cover the acquisition of the property, the rehabilitation and the resale. Oftentimes, the loans tend to last between seven and ten months. The borrowers can actually pay them off with no pre-payment penalty, but they’re one year base loans to begin with.

We lend anywhere between as low as $75,000 and as high as $2 million, they’re interest only and the ranges of those rates will be anywhere from 7.5% on the low end up to 12 or 13% on the high end and so they are compared to some of the anecdotes that I just gave you of where the market has been…they’re nicely and competitively priced to borrowers.

Now you also touched upon restrictions like LTV and leverage and things of that sort. You know, we take a view, and this is informed by now having 15,000 units and lots of credit cycles to look at of full repayment of loans where we want to make sure that both…given their level of experience, does the borrower have enough skin in the game upfront and do they have enough cushion on the backend with what this home is going to be worth when they go to resell it.

The typical loan for us will look like let’s say between 80 to 90% of the purchase price of the home, but then we also want to check to make sure that it’s maybe 65 to 75% of the after-repair value. So if we’re going to disburse some money upfront to help them buy the home and then give them some of the dollars to rehab the home itself, we want to make sure that those combined proceeds are still only let’s say, at most, three quarters of the value of the home when they go to resell that.

That’s going to give us comfort that the upfront loan as well as all the way through that project we have significant coverage were anything to go wrong and look, a very small percentage of the time things do, but we’ve had fantastic performance because I think we’ve kept our parameters really thoughtful and make our borrowers…we make loans that perform.

Peter: Right, when they do go wrong obviously, you really have this asset backing the loan like how…maybe just give us some idea, any principal loss or how has this played out. Obviously this is a one year loan, you’ve been doing this for four and a half years, you’ve had many cycles of the loan book and what have you seen when it comes to those non-performing loans?

Matt: Yeah, so high level stats to start you out there, we’ve returned about $1.6 billion in principal to investors and about $133 million of interest so we’ve had about $1.8 billion overall in full repayment. Again, as you mentioned, we’ve seen…not our first rodeo doing this and we start to get a pretty good feel for how these loans work and perform. Basically, when we feel that even a loan is at risk of potentially not repaying or the home not being resold, we actually proactively are reaching out to that borrower well before maturity.

We realized early on that we could originate amazing loans and have this great platform and help borrowers on the front end, but if we didn’t actually also launch a servicing platform, we weren’t going to be truly best in class and win this space and that’s our goal.

So a couple of years ago, we actually brought servicing in-house which allows us to do these proactive reach outs like, you know, at month 9, 10, 11 reaching out to the borrowers. If they need, let’s say an extension, but the home is listed, it’s just not fully sold yet, we can make those within certain bounds and then should the borrower actually not pay and not be able to exit the loan, our data and analytics team, in concert with our risk teams are running all the analysis of the market, the home, the state it’s in, other purchase and sales that have occurred recently to give us the best analytics of what to do with it.

That investor who technically holds the risk is generally coming back to us saying, hey, what do you recommend we do with this asset and in almost every case, we’re able to get full principal and interest repaid. We don’t talk specifics on those credit performance numbers, but our investors have been extremely pleased with that performance to date and it’s exciting to see.

Peter: Okay, so on the investor side then…my understanding is you fund these loans off your own balance sheet and then sort of sell them to the marketplace just for the ease of use for the user experience more than anything I guess, but tell us about the typical investors you have. I know you started off you were 100% institutional and you opened up to retail, it was one or two years ago now so tell us a little bit about that. What’s the breakdown between the two and the kinds of investors you have.

Matt: Yeah, so three main camps of our investors we would say are marketplace platform or basically, the p2p platform; second is our institutional investors and third is we actually launched a second iteration in October 2017, was when we announced it, of a mortgage opportunity fund, it’s a credit fund that we actually launched and managed in-house dedicated to buying our loans.

So today, the platform looks about 15% peer-to-peer; about 30% towards the fund and about 55% institutional and that’s a good balance of where we actually enjoy keeping that mix with all of those channels growing proportionally as we scale. And so going one by one there, the marketplace platform is essentially any accredited peer-to-peer investor can walk up, can prove they’re accredited, can connect their bank account and launch assets on to our platform and then either select individual loans they would like to invest in or use our simple auto invest algorithm that dials up or down their risk reward ratio that they want to get them the return that they’d like.

So at this point, hundreds of millions of capital on that platform and we’re seeing great retention that…you know, some investors as soon as they start to get those first repayments, they put in more and many at that 6, 9, 12-month mark when those first loans start to fully repay, they get it, they see the fruits of our great credit work and they re-up with a sizable reinvestment. So that platform is growing and we’re very excited about it.

The fund which was again a dedicated opportunity fund for mortgage was launched in October 2017, we raised about $100 million of equity and we have a credit facility against it of up to $300 million of debt and so that fund earns our LPs in that fund strong returns north of 10% and can hold up to $400 million in assets at any given time.

And then the last is institutions and I think you hit the nail on the head there. When we started, we were pretty much asking just about anybody who will buy our loans. You know, if you go all the way back to 2014, starting off much more in fast money: hedge funds, private equity, folks that really needed a north of 10% unlevered return and as we’ve proven that credit and proven that scale, we’ve really normalized this asset class and we’ve been able to expand that to asset managers, specialty mortgage funds and in conversations with pensions and insurers now to even broaden that mix further. So diversified channels, diversified investor base and very exciting overall.

Peter: Right, okay, we’re just about out of time, but I can hear the passion in your voice and you really are excited about what you’re doing here so what is your vision, what is the future for LendingHome? Are you going to be the largest mortgage lender in the country, or what are your plans?

Matt: Yeah, so in the near term we are focused heads down growing and scaling the business. If you just look at our first product in fix & flip, we’ve become number one in that market from a standing start in between three and four years and we can have just on that first product, we can have a highly profitable, highly scalable business and the near term focus is to go even deeper towards that.

I think as we do that we’re going to continue building out the best mortgage platform in the world and that could be a platform that supports, you know, bridge loans, loans of adjacent products or all the way to 30-year mortgages and that platform is diverse enough to really allow us to go into any market that we want to, when we want to go into it and be truly the best way to get that mortgage product.

And last, you know, it really comes down to just that, what is the right expansion of our products over time where we can scale and be one of the most significant mortgage players in the country.

So if you’ve got that experience, that platform, that marketplace and you really unlock the business with winning on service, there’s not a lot we can’t do so focused on that and you know, as we look out to other lenders that we have admiration for like the GreenSky’s of the world who went public earlier this year, the Funding Circle’s of the world who are going to go public, folks that can leverage tech, efficiently use capital and help customers where banks aren’t or partner with banks to do that, can build multi-billion dollar businesses and that’s what we’re excited to do.

Peter: Alright, well good luck to you, Matt, we’ll have to leave it there. I really appreciate you coming on the show today.

Matt: Thank you so much, always a pleasure.

Peter: Okay, thanks, see you.

Matt: Bye.

Peter: You know, it’s interesting to me that LendingHome has decided to double down on one product, the fix & flip product. Obviously, they announced mortgage as we talked about, but they haven’t really done much with it. They’re doubling down on fix & flip and in some ways it goes against conventional wisdom in the fintech space today that companies need to offer multiple products.

So I think clearly, it’s not a one size fits all mentality for having a diversified product, they’ve decided that they can really build a profitable business in this single vertical and I think part of the reason is they have these borrowers that come and do two, three, four, five, six loans a year so the customer acquisition cost, it’s not like a personal loan where someone might do them once every two or three years. They are able to generate this repeat business in a much quicker fashion so maybe that’s it. I think there’s a lot to be said for focusing on one product if you can build a profitable business around it and it sounds like that’s what they’re doing.

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

Today’s show is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

 

PODCAST TRANSCRIPTION SESSION NO. 167 / CHARLES ANDERSON

Welcome to the Lend Academy podcast, Episode No. 167. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s show is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

Peter Renton: Today on the show, I am delighted to welcome Charles Anderson, he is the CEO and Founder of Currency. Now Currency is a fascinating company, they are actually the world’s first fintech platform focused on the equipment finance space. It’s a really fascinating space because it’s so big, it’s much, much bigger than I expected it would be and it is very much a paper-based traditional kind of way of doing business and Currency is out to try and digitize this and they’ve been going for a few years now.

We talk with Charles about who are the major players, what’s the state of the equipment finance industry today and what are the big pain points and what is Currency doing to solve those pain points. We talk a little bit about data analytics and what they’re doing and the organization, CEMC, that Charles recently helped found and we talk about his vision for the future of his company. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Charles!

Charles Anderson: Thank you, happy to be here, it’s an honor.

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

Charles: Sure, so originally from the Bay area, I went to undergrad at San Diego State, always had a deep passion for specialty finance and with how I grew up an important part of my story is I saw at an early age the importance of timely access to capital which is to me more important than access to capital. I mean, it’s more important to have a dollar when you need it than a dollar when you don’t need it and so that’s always kind of shaped my world view.

Out of undergrad, I jumped into the mortgage industry, an interesting period of time in 2004/2005. So I was in the mortgage industry, I worked for a large bank for a while and then left and started my own mortgage company that eventually I decided to slow down/wind down because I had an opportunity to go to business school at Stanford. Out of Stanford Business School, I launched an investment vehicle called a Search Fund and really that was kind of my stepping stone into Currency. Not well known, but I actually tried to purchase Currency from the founder of the business back in 2011 and ended up coming on as partner instead and that’s my, I guess quick Cliff Notes version of how I ended up down in LA with Currency.

Peter: Okay, so tell us a little bit about that. I actually didn’t know there was a founder before you of the business so tell us a little bit about the story about how you got started and how that business began.

Charles: Well it’s a critical part of the Currency story and the way I explain the business is we actually started as a finance company, as a fin before we became fintech, and so the roots of the business go back to 2001, actually, through predecessor businesses, and the early days of Currency we were known by a different name, a company called CapNet actually, a different business entirely, but that business was really an equipment finance brokerage where there were four guys in a building that were originating small balance equipment transactions and selling them to banks.

This was early 2000’s and technology wasn’t what it was today. Most of the business was done over fax and mail, actually the business was done over mail when I joined in 2011/2012. And so the business was a nice little cottage business, they were taking advantage of an opportunity in the market which was banks needed assets, assets generating yield and so these four guys in the room were finding businesses that needed to finance equipment and then finding banks.

This is an important part of the story because we actually still have a lot of those banking relationships that we set up 15+ years ago now and that’s really what helped us get through the financial crisis in a lot of ways, was those deep embedded banking relationships. And so in 2005, when Blake Johnson, who I call the founder of the business joined…he helped to drive scale to the organization and so Blake grew the business really from four employees to about 60/70 employees and north of a $100 million in originations at the time, grew the business until about 2009. In 2009, the company took a material step back to right size the organization because nobody knew how bad the financial crisis was going to get.

Peter: Right.

Charles: And so in 2009/2010/2011, banks were still buying paper, but with banks going out of business overnight, you never knew when your liquidity and funding was going to shut off so Blake actually really wound down the company, started a new business known as IMCA Capital and that business was really about four people when I joined. So I was the fifth employee of Currency in 2012 and the business that I joined was very similar to the business that was originally founded in 2001.

Peter: Okay, so then what changed and how did you pivot to where you are today?

Charles: So the first chapter, when I joined the business, was to really understand…okay, what went wrong? And you could say, well things didn’t go wrong. but we weren’t as an organization where we wanted to be so I dug into the business and dug into the portfolio and one of the conclusions which was incredibly insightful was there were two things that were very special about the company.

One was the data set around how to acquire customer, marketing and the other was the banking relationships, both I knew from my experiences with specialty finance that were almost impossible to replicate. It would take a decade and a financial crisis to recreate that so that was pretty special because now you know how to acquire a customer and you know your lifetime value, another way to say it.

So one of the first things I did was I dug into the portfolio and I was pleasantly surprised to find out that, and this was through the guidance of Blake Johnson, the founder of course, pleasantly surprised to find out that had we done the exact same thing, in the exact same way, in the exact same point in the cycle, with the exact same loss curves and so on and so on, we would have gotten through the financial crisis actually incredibly well because it’s those who continue to lend into the financial crisis with the right data infrastructure and so on, checks and balances, those are the ones who make it through and grab market share and scale while others are retreating and so it was a big aha moment.

So version one of Currency was let’s build a technology forward balance sheet lender. We’re at the right point in the cycle, 2012 now, we’re at the right point in the cycle, there’s a lack of liquidity in funding and actually back when you and I met there was a lack of liquidity in funding for small businesses. Let’s be the first technology forward equipment finance company in this $1.1 trillion finance market, $1.7 trillion purchase market.

So that’s what we did, we went out and found one equity investor, a high net worth individual who was going to step in and really fund the business and help us execute on that strategy. We were at the finish line with a very well known, large US bank who was going to provide us a with a sizable credit facility and literally with signature pages in my inbox, it was a very stressful time in my life, we decided that the right thing to do was to not close that transaction.

Peter: Wow!

Charles: This is early 2012, we would have been the only ones in our market with our strategy, with our timing, with our momentum, with our data, with our bank relationships and we could have really done something pretty remarkable. The reason why is that our investor had some personal things going on and we collectively decided it was in all of our best interest to unwind the company and return his capital.

He ended up making a very good double digit unlevered return on his money so it was a good outcome for him, it was a bumpy but great outcome for us as well because it was that moment, which is why it’s an important part of our story, where we were forced to think very carefully about our value proposition in the market. And the conclusion to our value proposition gets to a lot of how we built the business today which is why I went through that background, which is you have to understand why customers pay you revenue. If you don’t know the answer to that question then you’re just waiting for someone else to come in, for Amazon to come in and take your lunch, basically.

Peter: Right.

Charles: And so as we surveyed our customers, what we found was that there was this massive secular shift for the first time in our market with people buying equipment on the internet which sounds crazy. That wasn’t obvious, but this was 2014, not that long ago, but for the first time people were starting to buy equipment online and so we said, okay, if that’s true how are we going to win in that market and we concluded that we thought there were three ways to compete in specialty finance.

We think you can compete with your credit guidelines, meaning I can do deals you can’t do because I have more data than you. You can compete with your interest rates, I can outprice the market so I can cherry pick the best deals that I want and I’ll have a lower loss rate than anyone else, or you can compete with your customer experience or how you acquire your customers.

Of those three, the only one that we felt like we had a sustainable competitive advantage with would be how we acquire and process and deliver customer experience. So that kind of led to the next iteration of the business that I would be happy to get into, but that was how we kind of went from concept through near death experience through a forced recognition or discovery of our value proposition to our first digital integration at the point of sale which was eBay back in 2014.

Peter: Okay, so you sort of rebirthed the business as really an online specialty finance company. How did you get eBay on board and how did you get going again?

Charles: So we surveyed our customers and it was hard, it was really hard, but we surveyed our customers and they were the ones that helped us to figure out we start our quest for equipment on eBay, they were the ones that say we start our investigation and search for what we want to buy on eBay because if you think about it, where else do you find a repository of endless types of equipment and there’s really not a lot of other sources.

There’s a lot more now than there were five years ago/four years ago, but at that time there was almost nothing and so we said, wow, we wholeheartedly believe that financing follows purchases and if that’s true and if the world is moving from a physical purchase to a digital purchase, which is hard to disagree with that, and if mobile is starting to just now enter into our market, then we said we need to be the first ones to build a digital financing experience which implies credit decisioning, which implies credit risk, which implies a lot of things at the point of sale.

So the value proposition was to eBay, we know you sell equipment and if you sell equipment, financing has to happen as we know, 60 to 70% of the equipment that’s purchased in the US is financed. How can you sell equipment, physical equipment digitally if you don’t have a digital financing experience? They said, that’s great, but you are a subprime lender with subprime cost of capital, how are you going to service our…because we weren’t private equity backed, we didn’t have any institutional capital, we were a bootstrapped business. It was a fair question.

So they said, how are you going to be able to service our A paper through and basically B paper customers if you are a C priced lender? And so fortunately, because of those early lender relationships we had, those bank relations we had back to 2001, largely, we were able to say, what if we told you we don’t want to build a balance sheet, that’s not our end game because that’s not how we think we can compete in the long run.

However, we also told you we have data that no one else has on non-prime customers which allows us, when necessary, to fund those other people probably can’t or maybe won’t. And we also have banking relationships in place to allow us to deliver a digital financing experience and lay off the A paper and super prime customers to banks of the cheapest cost of capital and the most credit expertise who can hold those assets to maturity.

Peter: Right.

Charles: So such a valuable lesson for us and it stepped us into, call it chapter two of the business which was on demand competitive financing at the digital point of sale.

Peter: Okay, so before we get into that, I actually want to take a step back and just talk about the equipment finance industry because I know it’s a large industry, but a lot of people don’t  really know much about it. Maybe you could just tell us some of the…what is the size of the equipment finance industry, who are the biggest players, so to speak?

Charles: The industry is very, very large and let’s just talk about the US because the numbers around the world are less clear, but according to the Equipment Leasing and Financing Association, which is really the leading industry for all of this information, they outsource and do research studies every single year. According to them, there’s $1.7 trillion of equipment purchased in the US alone every single year and of that $1.7 trillion, $1.1 of that is financed.

What’s interesting is it’s a massive…my friends tease me because I call it a “1 T market”, which I appreciate, (laughs)…it’s a massive industry and what you’ll find is a lot of shadow banking happens in this market and a lot of the financing, if you look at the financial crisis, equipment financing was one of the best performing portfolios on return on equity risk adjusted basis by comparison to Treasuries, it was second to Treasuries.

So if you ask that question, who’s participating in this market, it’s everybody. The largest household names that you would hear would be Bank of America Leasing is huge, Wells Fargo Leasing is huge, BMO Harris, I mean, GE Capital was the largest for a long time. So either through direct financing with vendor relationships or through purchasing of portfolios or through syndication or one way or another, it’s the who’s who which is another way of saying, it’s you and I…it’s our dollars that are sitting at the banks that are flowing through to middle America or to these large corporations to finance the purchase of equipment which is so fascinating to me once I realized that.

Peter: Right, and there’s also the captive finance companies because…just as a little aside for the listeners, in my previous life, I actually ran a printing business and we would buy half a million dollar printing presses and these were digital presses that we bought through HP and we would finance through HP. Actually, the first one we did was through Wells Fargo who was the company who had the relationship with the predecessor to the HP press, but anyway, we would do that and it was…all this ran through HP, it was all seamless.

So I’ve been on the other side of the equation purchasing this equipment and you know, luckily we had a good business, we had a lot of good cash flow and we were able to obtain this financing pretty cheaply and pretty easily. So I imagine those captive finance companies are a decent part of the market.

Charles: Well they are but what’s fascinating is if you dig into the captive finance companies and I won’t mention any names here, but some of the largest ones that you would hear of and possibly even in HP, but typically what you find is either a large bank providing the funding for them or a large bank purchasing assets from them eventually.

So it’s fascinating that eventually it usually…the two end games for equipment financing is either securitization which means that the money is being dumped to insurance companies most of the time, some of it is banks but largely insurance companies, or it’s one of these large banks generating spread on the assets because it’s such a mature, since the 70’s, it’s such a mature cottage industry, it’s probably the largest cottage industry because it’s still done physically, it’s still not quite a digital experience. So, the efficiency that you picked up in other markets haven’t yet showed up here.

Peter: Right, so let’s talk about that because, you know, as you say you’ve got these people on eBay that are starting to look for equipment online, wanting an online experience, but equipment by its very nature is physical and so what is the process like with the big incumbents, what is the process like to finance a piece of equipment?

Charles: Clunky, clunky at best. (laughs) If you walk through the user experience it starts with how do you figure out what you want to buy? Well today, you’re probably going to start on Google, five years ago, you were probably going to talk to one of your friends in the industry and say, hey, I want to buy this piece of equipment, where do I go and he’ll probably give you a recommendation or they will probably open up…But still most of the transactions today, most customers figure out what they want to buy today through physical printed publications, almost like a physical Craigslist, for example.

Once you figure out what you want to buy then starts the negotiation with the vendor and you might find one or two different sellers of the equipment and there’s no standardization around pricing so you don’t really know if you’re getting a good deal. Let’s say you want to buy used instead of new it gets even exponentially more complicated, but the useful life of these assets can be very long, even though the economic life may only be five years, you might be able lease it for 15, 20 years, we see that all of the time even in trucking, for example.

And so once you figure out what you want to buy…why this industry, I believe, is still so fragmented and so large is one of the hardest problems to solve is you have to coordinate the movement of money from Point A to Point B, at a different point in time when you move a physical good from Point B to Point A. Meaning if you’re going to buy a large piece of construction equipment or a printing press, for example, if you’re going to buy a printing press someone has to pay for the manufacturing of that printing press. Once it’s manufactured, there’s cash that had to be spent to put that together and so the next question is, will that vendor, that seller of the printing press be comfortable shipping you the printing press without you paying them? Probably not.

Peter: Right, the answer is no most of the time. (laughs)

Charles: So when you think about the mechanics of that, it’s not like you put a printing press in your back seat and drive it home. Then it becomes exponentially more complicated and then you start to understand why there’s so much margin in this industry, frankly, and why it hasn’t gone through a major revolution. It’s already working really well, it’s clunky, but people are making really good money and the rate of purchases isn’t frequent enough in your life for you to care about the pain, it’s kind of like going to the dentist. It’s not fun, but if you only do it twice a year, you can stomach it.

Peter: Right, right. Okay, so I want to talk about what Currency offers. On your website when you talk about the different solutions you guys offer, you have the Currency API, Lending Services and Currency Pay so why don’t you just talk us through, let’s just start with the Currency API. What is that and how does it work?

Charles: So it all connects back to our conclusion we came up with with that story I shared about how we were overworked, underpaid and definitely underfunded back in 2013/2014, and so it forced us to really own our value proposition and figure out why do customers pay us. And the conclusion was we help customers figure out the answers to two questions which are, what do you want to buy and how do you want to pay, what do you want to buy and how do you want to pay?

And what’s fascinating about this market is similar to the mortgage industry in the 90’s and if you follow the story of the LendingTree business model, we’re following a very similar trajectory where they started as a lead gen company. But none of the banks had call centers so they didn’t know what to do with the leads and they became a lender, then they became a whole loan sale provider, then they became just a technology platform and there were lots of fits and starts in there, but what we found was there’s three components to our business built by the assumption that in the long run our best value proposition is delivering a wonderful experience for the customer, the customer being the buyer and seller of the equipment and also the lender, we have three customers, or the lender/investor.

And so if that’s true, we need to be able to provide services for all three. Answering the questions what do you want to buy and how do you want to pay for it…so what do you want to buy is figuring out what type of equipment do you want to buy, from which vendor, how do you know that vendor? Is that a credible vendor, is that a good vendor, is that a bad vendor, what’s the reputation of that. So it’s a very consultative approach for that.

But the next question is, how do you want to pay…through debit/credit, ACH, wire transfer or through financing? Well we grew up in the financing word so we were forced to develop an expertise around the shipping, delivery, installation which is a whole other conversation we won’t even have time to get into today, but it was a lot easier for us to step into the payment side of the equation because we’d already solved the financing side which happened 60/70% of the time.

But, what we realized is starting in 2014, we made this bet that transactions were moving from physical to digital. We had to be the first ones to deliver a digital experience. There’s so many lenders….I use the word lenders on purpose, some are banks, some are alternative finance companies who have not yet made that same decision that we made which was we’re betting the future on this being digital, and this being mobile, and this being voice to text that we started renting…actually, to say it differently, people were already coming to us saying can we borrow, can we rent your technology to take our process and make it digital.

And so that’s Currency API, it’s alternative finance companies and banks coming to us and so recently…really proud of this, there was a community bank in the Midwest that is now renting/using our technology, they’re renting our technology from us and they’ve been able to displace a very large bulge bracket bank from a vendor relationship because now they can compete with the timing and the processing and they have a desire to fund in their local market. So if there’s a transaction in this local market because of our technology platform…we took them from physical, paper, Excel best case scenario to now an entirely digital… from application to funding process.

Peter: Okay, so that’s a lending as a service type product, so are you also doing the underwriting, are they using your underwriting tools or is it really just the technology itself?

Charles: Let me qualify that a little bit. Going back to the view that long term…. We think it is really hard to say your competitive advantage is I can out underwrite you because that’s so nuanced for different reasons.

So rather than take that stance…now we do have a lending component to our business because we’ve been forced to because we lived through the financial crisis and we understand that, and we know our credit box which we feel good about which as we mentioned is valuable for a lot of our partners. But for banks such as the one I mentioned earlier, what we do is we actually take their credit model and we code it into our technology and we take their credit appetite and we put it into our system…

Peter: Okay.

Charles: …and we say if a deal falls into this rubric, then deliver this approved application to the lender and ask them to say, do I want it, yes or no?

Peter: Okay, so you said you also have your own balance sheet that you’re lending out as well? Did I hear you right, you are providing actual loans off your own balance sheet?

Charles: We are, we are doing that as well.

Peter: Okay, okay, and then what about Currency Pay, what is that exactly?

Charles: Currency Pay is helping people move money from Point A to Point B. There’s not a lot of solutions for we’ll call it high ticket items, high ticket being qualified as more than $2,000. There’s not a lot of solutions in the digital environment being able to pay for something over $2,000. It’s possible…

Peter: I mean, obviously credit cards you can…I found out our American Express limit is $50,000 right now. There obviously are…I mean, credit cards do that, so say more.

Charles: So you are in the super elite portion of the market if you have an Amex balance that gets you up to $50,000. So I’ll share this story, I don’t mind this being on the record. A few years ago, and I’ve had…thanks to business school and other things I’ve had lots of debt we’ll say that I’ve had on my personal credit that I’ve borrowed and repaid over the years and a few years ago I went through the PayPal credit process. I mean, I’ve paid over six figures of debt on my credit report over the last 15 years.

I’ve been a business owner for over 12/15 years as well so I went through the PayPal credit process and despite my, which I’m very proud of, very high credit score and very deep credit background, I was only approved for $1,300. I’m saying this…like with a college degree, with a masters degree, with being a business owner for more than a decade, with having a very deep credit profile, with understanding the credit markets more than the average person, if I only got approved for $1,300 what’s the average business owner probably…the average small business owner is probably only going to get approved for, it’s probably not much more than that.

There are those businesses that do have six figure balances with American Express and that’s not the market that we’re going after directly, but for the mom and pop restaurant owner, business owner, truck driver, that’s probably not an option for them. So for everybody else, now that behavior is shifting so let me give you these metrics, it is pretty fascinating. If you add in eBay and a couple of other partners in the eBay category and you take all of their volume and you can qualify this with some of the Ritchie Brothers data as well, they are the largest auctioneer. Our best guess is that according to measurable data, there’s no more than $10, maybe $12 billion of equipment sold electronically in the US every year.

Peter: Out of the $1.7 trillion total.

Charles: Correct. Take that number and multiply it times five, take it to $50 billion, $50 billion out of $1.7 trillion. So the secular bet that we’re making is people are going to have to figure out how do you move money from Point A to Point B at a different point in time when you move an asset from Point B to Point A and that’s sometimes going to be financing, sometimes it’s going to be ACH, debit or it’ll be credit or it’ll be a wire, but you can’t do that unless you can also manage the logistics and create trust amongst three mistrusting parties; the finance provider, the seller and the buyer.

Peter: Right, no, that makes sense, I see. You know, $50 billion is 3% of the market I guess of $1.7 trillion and eventually…I mean, I imagine, eventually it’s going to be 100%. I mean, I don’t know if there’s going to be in ten years time, things that are not happening digitally, maybe there is, maybe it’ll take decades to get it to 100%, but certainly you’re going to get a lot more than 1 or 2%. It’s completely inevitable, I don’t think anyone could really argue against that. It sounds like what you guys are doing is facilitating the acceleration of that.

So then I want to talk a little bit about the data analytics, technology…it’s a unique…this is not really just like a small business loan because a small business loan, you’ve got a small business, you’ve got a lender. Here you’ve really got…like you said you’ve got three parties and you’ve got the piece of equipment as well itself which is really a fourth entity even though it’s inanimate, but it is part of the thinking, so how do you gather all of the data to make an informed decision there?

Charles: Well to take your question one step further, I think about what do you do with the data once you have it and how do you translate it into value and for who. So what we’re trying to do is to be able to empower transactions at the point of sale for A to D credit and every type of asset purchase online. That’s our end game and so all of our view on data is filtered around that because what we found is and we went down the path of saying, well we can build a better credit model.

What we found is that if we put our name to our credit model and then we market that credit model to the capital markets and they use our credit models to make credit decisions, then it works until it doesn’t or it works until it potentially doesn’t with how fickle things are today and so we said, well we don’t want to put our stamp on saying we can do credit better than anyone else. There’s other people doing that and we commend them for being able to do that but that’s not the bet we’re making.

What we want to be able to do is build an end-to-end equipment purchasing financing exchange and be able to use all of the data that we’re gathering to help people optimize unit economics on the equipment that they’re using because if people can use their equipment to generate more revenue, more often, then that makes the entire ecosystem work better. Does that make sense?

Peter: Right, I get that, I get that. Okay, so we’re running out of time and I want to get to a couple of more things here. Firstly, I want to talk…I’m actually looking at your face right now on your website and my face is on there too (laughs), that’s interesting. So the CEMC, the Commercial Equipment Marketplace Council, that you founded just a couple of years ago, I believe, so tell us a little bit about this organization and why you founded it.

Charles: Sure, the purpose of the CEMC is to bring together the best and the brightest from the fintech world and the equipment finance world and bring them together. We believe what you just said, it’s inevitable that technology changes how things are being done in this market and we’re already seeing it today.

We’re seeing it in a very quick clip, it’s accelerating, the rate of change here. So when we were first having these conversations in 2011/2012, we were told point blank by multiple people, you’re going to go out of business for using DocuSign. You’re crazy, electronic signatures are never going to hold up in court, you’re going to go out of business. The whole world is now moving towards DocuSign and the equipment finance industry is just now adopting it at a pretty quick pace.

So we said, well okay, we want a vibrant market with lots of competition because that will speed innovation up and our end game is to really build a new ecosystem, a new exchange where we can help facilitate these transactions across all sorts of credit parties, all sorts of investors, all sorts of sellers of equipment and we want to be the hub that empowers these transactions. If that’s true then we need to bring together all of our partners and if we’re not trying to compete on cost of capital, we’re not trying to compete on credit guidelines, we don’t want to be a balance sheet lender in the long run.

That’s a temporary step for us to get to the next lily pad and so for us we want to pull together everyone who touches the value chain of figuring out what do you want to buy, how do you want to pay, get them all in a room, deliver a world class experience and force the conversation to think about what is artificial intelligence going to do to our market, how is talk to text going to change things. What if you had a blank sheet of paper and you didn’t care about the math, what would be the next product that you would invent for the customer?

Probably something around shared economy, probably something around Internet of Things connected back…I mean, John Deere is doing a lot of this stuff, I didn’t know that before. We had them come to our conference and talk about it. And so the purpose of CEMC is to drive that conversation forward to bring technology to our market at the cost probably, frankly, of margin, at the cost of margin short term, but long term, by rearchitecting this industry to have it be oriented in the way that it should be going to build long term sustainable value.

Peter: I should just mention as well, I spoke at your event last year which is why it’s on the website here. It was a great event, opened my eyes, I had never talked to many people in the equipment finance space and it really was quite fascinating. Anyway we’re out of time, but before we go just maybe a few thoughts on what your vision is for Currency.

Charles: Oh man, my hope is when I look back on my career that, you know, call it 20/30/40 years from today, that I can look back on this market and feel very good that I left a lasting impact on how people buy and sell equipment, and I helped to eliminate fraud, I helped people to optimize their usage of their equipment. That would be success for me and fortunately, I get to work with a lot of my best friends and I think this problem is really hard and really interesting, it’s not going to be solved overnight, but if we could pull all those things off and enjoy the process along the way that would be my vision for myself and for Currency over the next couple of decades here.

Peter: Okay, we’ll have to leave it there. Good luck with that, Charles, that certainly is a noble mission and I appreciate you coming on the show today.

Charles: Right on, thank you, Peter, it’s been a pleasure to do this with you today. I’m honored.

Peter: Okay, catch you later. Bye.

Charles: Take care.

Peter: It is truly fascinating to me that an industry the size of equipment financing, he said $1.1 trillion financed each year, I mean, that’s one of the biggest verticals we have and yet it is still not being dominated by fintech players. There really is a traditional finance industry that operates pretty much the same way they did a decade ago. As I said, it’s inevitable that this will be moved online. Everything else is moving online and companies like Currency are really accelerating this process.

I think, you know, there were times when I was out at his event and spoke to some of these lenders and they are traditional folks and have done things the same way for sometimes decades and they just now are starting to think, well we should learn about how we can really digitize what we’re doing. I think they’re a decade behind some of the other verticals, but as I said, it’s inevitable that they will catch up and this will be… a digital experience will be commonplace here in the not too distant future.

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

Today’s show was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th thru 9th, 2019, at Moscone West in San Francisco. Registration is now open and we’re also taking speaker applications. You can find out more by going to lendit.com/usa.

PODCAST TRANSCRIPTION SESSION NO. 166 / KEN LIN

Welcome to the Lend Academy podcast, Episode No. 166. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s show is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

Peter Renton: We have a special guest on today’s show, I am delighted to welcome the CEO and Co-Founder of Credit Karma, Ken Lin. Now most people know Credit Karma, they really are the leaders in consumer financial information and I wanted to get Ken on the show really to talk about how they’re integrating today with the lending platforms, the credit cards platforms and how deep that integration is going.

We also talk about customer acquisition costs and how a company can go about lowering that all important number. Ken introduces us to the concept of autonomous finance which I find particularly fascinating. We talk about international expansion, we talk about the recent acquisition they did and much more. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Ken!

Ken Lin: Great to be here.

Peter: Okay, so I’d like to get this thing started by giving the listeners a little bit of background about yourself. Obviously, Credit Karma’s a pretty high profile company, but not everyone would know about your background so tell us a little bit about what you did before you started Credit Karma.

Ken: Sure, so my first job out of school was actually with the card issuers, that was in the late 90’s and Partners 1st was my first job and there I actually worked on the underwriting and the marketing/acquisition side of the business so really cut my teeth in understanding financial services space.  I think in the late 90’s, credit cards were probably one of the most sophisticated marketing channels out there so we did a lot of direct mail, we did a lot of one-to-one marketing and targeting.

Went to a couple of tech companies, really enjoyed that experience, but ultimately came back to finance in the form of new products which helped consumers save for their children’s education as well as E-Loan which had a business in mortgage, personal lending and auto finance. The combination of those experiences is in a little bit of consulting work that I was doing with Prosper at that time in the lending and credit card business. That’s basically been about, you know, 15/20 years worth of digital marketing and financial services.

Peter: Right, right. So then let’s just talk about that. What did you see….you said you worked with Prosper, what did you see was missing, what was the idea that led you to start Credit Karma?

Ken: Yeah, so I had left E-Loan when I was working specifically with Prosper and the thing that helped me was….you know, so Prosper was obviously, at that time, a P2P lending company, known as alt lending now, but while we were doing a lot of digital marketing what struck me was, you know, basically two thirds of the marketing dollars were going… being spent inefficiently so, you know, the final one third of consumers with low credit scores Prosper really couldn’t underwrite. You can’t get anyone to give loans at that credit range and at the highest end of the spectrum what you found is that those consumers could go to their credit unions or their banks and get…equivalent or sometimes better rates.

So as a result really is the people in the middle that was the sweet spot of lending and the other sort of the high credit and the low credit ended up being inefficient and given that we were using a lot of search, given that we were using a lot of display and digital in general, there was no means by which you could actually define that right target demographic.

I remember back in my credit card days at Partners 1st in the late 90s, we would have probably just done a credit pre-screen and eliminated all of the high credit people and all the low credit people in looking for the right kind of consumers. And that was the aha moment for me at Credit Karma. You know, it is kind of funny… subsequently a lot of the out lenders, went back to direct mail because of that dynamic, that ability to target exactly the customers that you wanted.

So we went on a parallel task to try and figure out how to build that in the digital ecosystem and that ultimately was the impetus for Credit Karma, the idea that there was a platform that could actually screen the right lenders for every consumer. That would be a compelling user experience and one that…you know, this was in 2006/2007, and the Internet had come so far, but one of the fundamental things was financial services still didn’t exist and we thought we could build that with Credit Karma.

Peter: Right, so when did you sort of realize…..because, I mean, obviously now you’ve got tens of millions of users and everyone knows you, but, obviously you started from scratch and….when did you realize that you had a business that really had a lot of potential? What was sort of the tipping point for you?

Ken: Oh, gosh (laughs), I always forget a little bit about the big progress when you look at it on a day-to-day basis because we’ve been doing this for about 11 years.

Peter: Right.

Ken: When we probably got to a little north of 10 million users and we’re still really growing exponentially on a month-to-month basis, I think there’s a real sense that there was a lot more than a credit scoring aspect of this. There’s a real need for consumers to understand more about the options that are available to them so finding out your credit score is one aspect of yhy people use Credit Karma. We realized along the way that everyone who is using Credit Karma was in market for financial services, not everyone, but a meaningful percentage.

Another meaningful percentage of our users really needed and were looking for independent advisors in the space in the sense that banks are great about sharing their products, but they’re always going to promote their own products. So we found the confluence of these two items being the key driver of adoption and re-engagement over time. I think the third dimension that we really observed was that people were coming back in an inordinate amount, more than we would have anticipated from a month-to-month basis.

We realize more and more that as we build out these products that consumers were really looking for, again, this advisory or independent role when they tie into their finances because Google didn’t have enough context and most of the blogs and most of the other financial services site tended to be so generic that they were not necessarily applicable and finance is one of those categories unless it speaks directly to you and at the time there weren’t many, it just didn’t have the appeal.

One of the things that we gravitated towards very early because we know the consumers’ financial profile….writing content, writing products and features that were bespoke and I think when we did that we thought saw this level of engagement that we haven’t seen before, but I think that was the driver and the encouragement for us to build out new features that were along that vein.

Peter: Right, right. I personally have had a Credit Karma account since 2011 and now I log in every month because I just want to make that everything is still okay. I want to see if there’s anything on my credit report or anything that looks a little off and I think that’s one of the great tools that Credit Karma has provided for many years, but I’m curious about…..right now, so you just mentioned that you’re sort of going beyond just the credit score so when you describe Credit Karma today what are the kind of verticals, what are the kind of businesses that you’re really in?

Ken: Yeah, so it started with the credit score, the monitoring, you know, I think we added other features like Protection, Dark Web, Direct Dispute. I think there are a lot of consumer-oriented features, but really I think from a business perspective we started with helping consumers find the right credit card, based on the credit profile all the back to 2008. We launched personal loans, I think probably in 2009 or 2010, and now were on the journey of auto loans and mortgages and the realization here is that all of these verticals work for us because consumers are looking for someone to help them navigate the complexity of their financial services life.

Peter: Right.

Ken: And when you look at the consumer Internet space, you know, Google can only do so much, right, and when you look at the overall platforms most of them have a unidimensional view on your financial life and most of the time when they have that view, they’re mostly promoting their own products. I think with Credit Karma we have a point of view that, you know, the players and the Internet are not addressing this fundamental need for consumers to understand their finances.

So for us, we think about everything on the asset side of the consumers’ balance sheet, everything on the liability side of the consumers’ balance sheet and then insurance as sort of the hedge between the two…those are the areas where consumers struggle from and those are the areas that Credit Karma will continue to build products, will continue to build a brand. There’s a fundamental view that we can help consumers get a better experience and the best outcomes.

Peter: Right, right. So then is credit cards still your number one vertical today or how does it sort of break down as to what…..on the revenue side maybe, what are the core business units you look at?

Ken: Yeah, on the side of our verticals they are relative to the number of years that we’ve been in them. You know, credit cards, personal loans, auto loans and now mortgages, right, what we try to do is we try to build an ecosystem within each one of those and those all take time. But, at the end of the day, we think that all of those are important aspects of consumers’ financial life. And I think, credit cards specifically is one where it’s not a considered purchase, right, there is always an opportunity to find a better credit card, so to speak, no matter what you have in your wallet. Something comes along and you have a credit profile for it, it is easy to switch.

Whereas, you know, I guess the mortgage rate is, or an auto loan rate is so if I’m not in the market for a car, I’m not going to buy a home or a car. So I think those are the differentials in the space. At the end of the day, we think about the fact that, you know, there’s about $13 Trillion worth of consumer debt just in the United States alone and there’s an opportunity for us to help consumers find the very best option whenever they are in market and really that’s the brand and the products that we’re establishing at Credit Karma.

Peter: Right, right, got it. So then can you just explain to the listeners how exactly you make money because i know you have these recommendations that…what is the business model exactly?

Ken: Yeah, so at Credit Karma, we’ve been around for 11 years and in those 11 years we’ve never charged a single one of our members. Our business model is pretty straightforward, we spend a lot of money buying data on behalf of our members. Our goal is to educate our membership base, build tools off of that data so they understand how the financial services systems work.

Now from a revenue generating perspective…once we have a consumer financial profile, we can obviously see how much debt they have and at times how much assets. So for example, we see a little bit more than $4 Trillion worth of consumer debt today. Now to give you a very simple  example, we saw consumers who had an auto loan that they took out last year and maybe they’re paying 16% on that auto loan.

When that consumer is paying 16%, we could say to that consumer….well, based on your credit profile, we think you’re over paying for that auto loan. Here are some partners you would consider and before we actually show those partners, we’re actually using our cloud computing infrastructure and AI, to determine the probability of approval for the loan that we’re going to show them. We only show them the high probability ones, we won’t show them the completely not qualified for so a 16% loan can be refinanced at let’s say 11%,10.5% and 9%.

We’ll share the math with the consumer, we’ll try to streamline the process and if that consumer decides to refinance that auto loan with Credit Karma, you know, they’ll save let’s say $75 a month for the next 40 months, our banking partners will get a new customer and that customer acquisition cost might come from Facebook or Google or television today and in exchange they’ll pay us a couple of hundred dollars for that new customer. So everyone’s kind of a winner in that situation, maybe with the exception of the original lender who is charging the consumer too much. So that’s how we create our revenue streams, it’s always free to the consumer.

Generally speaking, we are being paid by the financial services company only when they book a new loan. We think that’s important because we focus a lot on quality, we actually don’t want consumers applying for products that they are not qualified for, we don’t want consumers looking at loans that ultimately aren’t going to be issued in the form of credit limits or interest rates.

Peter: Right, got it. So I want to dig into that a little bit because …..I’m actually on your site right now, on the Personal Loan section and it says I’ve got seven offers from Marcus, Prosper, Upstart, Citizens One, etc. and it says on each one of these…you’re pre-qualified. Now it says, our partners says you’re pre-qualified. What does that actually mean and is that like a 90% certainty that I’m going to be qualified or what do you really mean when you say you’re pre-qualified for a loan?

Ken: Yeah, so that 90% is generally the standard that we like to work from. Now that will vary a little bit, depending on the partner and depending on some of the interaction, but that’s exactly right. What we’re doing is we’re actually looking at credit requirements of our partners and then matching that up against the credit quality of each individual consumer. Now there’re going to be some things like credit score drift, there’s going to be some things like income and ability to pay qualification.

You know, every once in a while you get a lunge in OFAC or some sort of anti money laundering of regulatory constraint, but the idea is that we’re going to get closer and closer to 100% and that’s our internal goal at Credit Karma. We believe that this industry has been in this situation for too long and the situation being where consumers don’t have a certainty of approval, they don’t have the transparency of pricing and these forms are just way too long, in terms of the number (of questions) they’re being asked.

So we as a platform, as a business are focused on fixing these three key tenets of lending so we want to make sure over time that every offer at Credit Karma is pre-qualified or pre-approved that it’s going to 100%. We want every consumer to know what the rate is going to be, what the credit limit is going to be in advance before hitting the Apply button and when that consumer hits that Apply button we want that form to be one question, two questions or ideally, one or two consents. I think that’s where the sector can go and we are building out all these technology pieces and integration with many financial services companies, you know, as we think are qualified and want to innovate in the space.

Peter: Right. So then how deeply do you get into that, like there’s …..let’s just take Prosper for an example here. It says I’m pre-qualified for a $10,000 loan, 6.95%, 36 months, I mean, are you they giving you their credit model or are they just giving you….I mean, what is the level of integration that you would have say with a Prosper where you know that I’m pre-qualified? I’m taking that it’s more than just my credit score, right? I mean, how does that work as far as integration goes?

Ken: Yeah, so it varies by partner but you’re exactly right, there’s a lot deeper than credit score and I think that’s one of some amount of difference of Credit Karma relative to other players in the space that, you know, might have a similar model as ours. We are getting to the nuance of each credit lending decision so (inaudible), it is no surprise to some of your listeners that credit decisions are based by dozens, I mean, at times hundreds of credit variables.

Peter: Right.

Ken: And for a lot of our partners, we’re actually on that level, we’re actually looking at each of the potential dozens and/or hundreds of credit variables to determine eligibility and that’s how we actually can get the pricing. So you picked up an interesting note which is a lot of the times the direct mail for alt lending, you know, it will say you’re pre-qualified for a loan up to $35,000 and it doesn’t describe the APR.

Well we’re talking about the specific dollar amount and the specific APR because we’re actually looking at all of those variables of credit. There’s something again that is….I think it’s dysfunction in the space and the lack of innovation in financial services, we can actually bridge a lot of that on the Credit Karma platform.

Peter: Right, got it. And then as far as…..going back from the platform perspective, customer acquisition cost has been a hot topic for many years. It’s obviously a very competitive space, the personal loans space today, it wasn’t so much, you know, when you guys got started, but it certainly is today and I’m curious about…..you know, you’ve got a great window onto this. How can platforms reduce their customer acquisition cost when they’re working with Credit Karma?

Ken: Yeah, I think there’s a few ways, right. I think the first one is credit quality obviously. So for example, if you’re approving 25% of the loans that are coming through and you’re paying on cost per application, well, if you get to 100% you’re obviously reducing your cost per acquisition by, you know, 75% or more (garbled).

Getting the right customer credit quality is one area that we can really gain efficiency and it’s no different than the idea that we started from when we started Credit Karma, the story I shared about Prosper being 2/3 of their dollars are being inefficient. So, I think that’s certainly one. I think, two, is actually reducing the friction of application itself. I think that when we look at the space, you know, more and more applications are mobile oriented, we see 80% of our traffic coming from the mobile demographic and when you’re asking consumers to fill out 40 questions, 50 questions through their phone, you get a lot of fall off.

Peter: Right.

Ken: I think enabling technology can prove that. You know, we have what we call “Quick Apply” which is the ability to fill out that application, giving Credit Karma permission to fill-out that application on your behalf and then for an implementation and we see meaningful improvements there and then I think the last piece is a lot about transparency.

I think consumers really dislike the notion that…well I’m going to apply for a product, you won’t actually tell me the specifics of the product until I spend all that time. I mean, imagine if you were to walk into a store, let’s say at a big box retailer and they didn’t tell you the price of the item that you’re interested in and so you filled out 30/40 questions, like it just doesn’t make any sense.

Peter: Right.

Ken: I think more that lenders can improve and innovate and disrupt. I think the better off they will be in terms of acquiring high quality customers that are fundamentally at a much lower price point than they have historically spent on an additional platform or online.

Peter: Right, right. That actually segues nicely into my question I wanted to ask you about this concept of autonomous finance. I was actually in Dublin recently early in the summer and when you were giving a presentation and you introduced this concept of autonomous finance which I thought was fascinating. So tell us what you mean by that and why it’s important.

Ken: Right, when you look at consumer finance, I think there’s a confluence of technology, of data, of trust. That’s going to allow us for the next five years to have consumers put real trust in a technology, in a machine learning algorithm that helps to ultimately optimize every aspect of their financial lives.

I think we use autonomous finance as the driving…..when you think about driving there’s a lot of nuance that comes into play, there’s a lot of moral dilemmas that I think people don’t really talk about because the finance is actually not that complicated in the sense that you’re not running over anyone.

Peter: Right.

Ken: Lowering your borrowing cost is actually quite an objective function and optimizing the interest on your asset is also a relatively objective function We are currently in a spot where, you know, machine learning, where big data and trust allows all those things to play. So for us, autonomous finance is a notion that in five years we believe 10% of the population will completely trust the platform to determine what credit cards they should have in their wallet, where their savings account should be and how much to put away for their retirement, based on a very clear set of objectives.

You know, I think banks and financial services companies and fintech companies are finally coming around to that idea. You know, one, we think it’s hot but, two, what we see in our data is that particularly around the younger generation consumers they have a lot of stress and anxiety around finances, they don’t trust the big banks enough, but they do trust technology companies and they do trust compute and AI.

So I think that’s where all these thesis come together and for us autonomous finance is this notion that in five years time a machine can help you determine….. most aspects of your financial life in a way that is meaningfully better and less stressful than the one that we see today.

Peter: Right, now that makes perfect sense because, I mean, really the information is out there. If you’ve got a home mortgage, an auto loan or a credit card or whatever it is and the information is out there, you know that there is a credit card you could be approved for or a personal loan you could be approved for that’s literally going to save you hundreds of dollars a month and I can totally get that this is where we’re going by having someone optimize your life.

So you know, you know when you have the information that there is no better deal out there, you have the best deal and when another better deal comes along or you’ve paid off something and you want to do something else, I really get that. I feel like we should be there now and I know we’re not.

Companies like yours are really leading the way in trying to get us there, but I think that’s going to be tremendously useful to the consumer and I think……I guess the issue is, you touched on it, there’s got to be a level of trust that what you’re doing is you’re not sharing data that other people are going to get and they going to spam you, what have you. I guess is that really why we’re not there today, I mean, like you said in five years time. What is stopping us from being there this year?

Ken: Yeah, that’s a great question. I think that it probably comes in a few flavors. You hit on one which is trust, right. I think that consumers have (inaudible) platform believe that it’s going to do the right thing. I mean, this is where we think a lot and spend a lot of time around independence of our offers and making sure that we have a North Star around the consumer experience and I think it makes sense.

If you’re cynical from a financial perspective, from a business model perspective, it makes sense to align with the long term journey of the consumers, I think that’s certainly one aspect. I think another one is scale. What’s really challenging in financial services is because the large incumbents are so large, you actually have to have meaningful scale to change the paradigm.

Peter: Right.

Ken: For example, you can’t get a large bank to integrate with you unless you have literally tens of millions of customers because, at the end of the day, it’s a relatively insignificant amount if you have less given that there’s always a crunch for more resources and more development cycles at each bank. They’re not going to prioritize those types of projects. And last, I think, data is a big player in the space. It is not enough that you know that there’s a lower mortgage rate, you actually have to go and have all the data elements determine eligibilities, all the data pieces to actually facilitate and generate.

For example, in mortgages, well, it’s not good enough to know that I can go and lower my monthly mortgage payment by $150 because the consumer…. there’s actually quite a bit of friction in achieving that…I know I’m going to have to go find my tax filing, I know I’m going to have to go and pull out my W2, I know I’m going to have to get a bank statement, I know that somebody’s going to put me through, you know, a loan underwriting with stitch from Freddie and Fannie.

I think those are areas that we’re spending a lot of time investing in because we know that the information and knowledge is not enough; you actually have to simplify the process to a point where you can have a simple app calling a ride share. That, I think, will change and fundamentally transform the industry.

I think you need all three of those and I think it takes time to accumulate the trust, the data and the integration with the financial services. That’s really the long answer to why we don’t have it today, but we certainly see it on the horizon given sort of the emergence of fintech, given the change in attitude from consumers.

Peter: Right, okay. So I want to take us on a little bit of a tangent. You’ve mentioned mortgages a bit and news just came out just last week…we’re recording this in mid-August and you acquired the mortgage platform Approved. Can you tell us what that means, why you did that and a bit of the story behind that purchase.

Ken: Sure, so Approved is a digital mortgage, let’s say, documentation, loan origination systems platform, if you will, and we think there’s a really interesting synergies in the description I described. We know there’s a lot of documents that need to be collected as part of the mortgage underwrite, we know there’s a lot of pieces of information to determine your eligibility and provide, you know, certainty and complicity. What we love about Approved is that they were on the way to building a lot of these products.

Moreover, there’s a great team over there, that came from (Redfin?) that has a lot of experience in the space. When you look at those two things together with Credit Karma’s ambition to help consumers across every aspect of their financial life, it just makes sense. There’s almost a trillion dollars or a little more than a trillion dollars in mortgage origination each year and, you know, for anyone who’s gone through that experience, it is tedious, it is emotional and it’s stressful and, you know, we think as a platform we can solve a lot of these things.

So our future statement might be if you did your taxes on Credit Karma, that probably means we have your W2, that probably means we have might have access to your bank account to determine whether your deposit or your down payment is in reason, that probably means that we have good insight into your credit, probably means we have good insight into your cash flow. Well, all of a sudden, you know, 80/90% of the work of underwriting a mortgage is actually within our platform.

You have to give us permission, you have to let us know that you’re in market. We can solve a lot of the things that drives the most amount of stress and, at the end of the day, we can get you a better loan product, a better lower cost mortgage. So that’s where we see the model going in the mortgage space, but it’s true of every one of our verticals and how we think about the opportunity which is, you know, a meaningful percentage of Americans are stressed about their financial lives and we, as a platform, as a company, can help reduce that stress by providing more simple experiences, more transparent pricing and processes that are second to none.

Peter: Right, got it. So we’re coming towards the end, but I have a few more questions I really want to get to. Firstly, what is the scale you’re at, like how many users do you have? It keeps growing so we’d like to get an up-to-date number.

Ken: Yeah, so we’re a little more than 80 million consumers now in the US and in Canada. We’ve done a little bit more than, let’s see, 2 billion credit reports and scores and we’re able to track trillions of dollars worth of consumer debt so quite a bit of scale here. We continue to add new pieces of information so …you know, recently we added DMV information, household car information with VINs to help consumers with auto finance. The goal here is to continue to educate consumers at scale around the key aspect of their financial life so we continue to add, you know, new data to help with that.

Peter: Right. So you mentioned Canada, is that the only country you’ve expanded to beyond the United States?

Ken: You know, we’re basically in North America today, but we think that finance is as stressful across the world so we continue to look for opportunities outside of North America.

Peter: Right, right. Okay, I’m sure you’re sick of answering this question, but I have to ask it because I know people would want to know an answer. Where are you at with IPO plans?

Ken: (laughs) Sure, we think of an IPO as much more of a tool in a tool belt against the goal of helping consumers, you know, make financial progress than the end goal. I mean, I think if it was our end goal we could have gone public, you know, probably a couple of three years ago, but we really think about investing in the long term so things like tax, like mortgage.

You know, we really think that this is the way to build a robust platform and the more that you can do that in a private market to really invest, I think you take some of the friction points off, necessarily focusing so much on profitability, but, you know, we have a long term vision and we’re very much pursuing that long term vision in the private markets and….you know, along the way we try to take us down the better hygiene and better practices in the public market, in terms of the way that we close and making sure there’s a strong Compliance Department and so on. But, at the end the day, we’ll go at some point, but it’s not our end goal.

Peter: Okay, so last question then. What are you working on today that you are most excited about?

Ken: Well there’s lots of projects that we haven’t announced so I won’t get into too many of those, but, you know, I think the thing that really is the most exciting is really the continuous engagement that we see at Credit Karma. It seems like every new product that we’ve put out continues to drive more and more users, and today we have something like 40 million unique members on Credit Karma each month which makes us one of the largest, if not the largest, sort of financial services sites in the United States.

So we think that is a really big opportunity and sort of gets us thinking about all the things that we could be doing, but everything that we focus on is around making financial progress possible for our members, with those three pillars of making things certain, making them transparent and making them easy. So we have a lot of projects along those lines and you’ll see more and more of those roll out later on this year.

Peter: Okay, I’m looking forward to that. We’ll have to leave it there, I really appreciate your coming on the show today, Ken,

Ken: My pleasure, thanks for having me.

Peter: Okay, see you.

Ken: Alright, bye.

Peter: I want to get back and talk a little bit about that autonomous finance idea that Ken introduced and it really is fascinating to me because, as I said, the information is out there. We should be able to optimize our financial life in many ways really, and not just from a lending perspective. You know, credit cards, you should be able to optimize for investing as well and for taxes and all that kind of thing.

So I think companies like Credit Karma are really giving us the possibility of having this become a reality where we can know that the mortgage that we’ve got, the personal loan that we’ve got, the credit card that we’ve got; that is the absolute best deal for us and I think we’re not there yet. Ken said it’s going to take five years maybe, but it’s certainly going to be in the near future where we can feel confident that we have really the best deals that we can possibly get.

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

Today’s show was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th thru 9th, 2019, at Moscone West in San Francisco. Registration is now open and we’re also taking speaker applications. You can find out more by going to lendit.com/usa.

PODCAST TRANSCRIPTION SESSION NO. 165 / JOE TOMS

Welcome to the Lend Academy podcast, Episode No. 165. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

Today’s show is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

(music)

Peter Renton: Today on the show, I’m delighted to welcome, Joe Toms, he is the President of Freedom Financial Asset Management. Now I’ve known Joe a long time, he’s one of the first people I met in this industry back when he was at LendingClub back in 2010. Full disclosure, Joe is also an advisor to Cardinal Rose Group which is the parent company of Lend Academy and LendIt so we’ve had a relationship in that capacity for many years as well, but I wanted to get Joe on the show.

Freedom Financial has been around for quite some time and Joe really has headed up the Freedom Financial Asset Management, sort of their lending arm, but they also have Freedom Debt Relief; we get into the details. Joe actually explains in some detail all of the different pieces of the company, the history. He also talks about the challenges they’ve had with the actions from the FDIC and the CFPB. We talk about that in some depth as well and we also talk about the investment side of the business and how that’s been going. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Joe!

Joe Toms: Thank you, Peter, glad to be here.

Peter: So I like to get these things started by giving the listeners a little bit of background about yourself. You have a very interesting background in many ways because you’ve been in this industry longer than just about anybody so why don’t you give us some background about what you’ve done, so far.

Joe: Sure, so I started my career in the early 1980’s in the asset management business, specifically with a firm called Fisher Investments run by a guy named Ken Fisher. Many of you probably see Ken Fisher’s ads all the time and we started back in the day when it was Ken, myself and a couple of other people and about $5 million under management and basically from that point built a pretty good sized institutional money management firm.

I spent my career from essentially the early 1980’s all the way up to 2010 in the asset management business running money for large institutional accounts and fixed income, equities alternative investments and purely by happenstance, happened to be introduced by a mutual friend in 2010 to Renaud Laplanche, obviously the Founder and the original CEO of LendingClub and had the opportunity to hear what was a fabulous story and it really intrigued me. Long story made short, ultimately ended up joining LendingClub, worked with Renaud for about a year, then went to Prosper, worked there for close to two years before joining Freedom in 2013.

So career really focused on asset management thinking about long term trends, thinking about how you invest capital in different asset classes, how you assess risk, how you assess return, how you assess opportunity and then applying all of that, if you will, to the unsecured consumer lending space led by the fintech companies, LendingClub and Prosper, now Freedom.

Peter: Sure, interesting. Just as an aside, I think the very first thing I ever listened to in this industry when I started to get more interested in it was it was a webinar that you were on when you were at LendingClub. I think it was back in 2010 and it was…I can’t remember who else was on it, but it was eye opening to me learning about sort of what the investment strategies you guys were talking about back then. I’m sure it has been fascinating for you to watch it go from this tiny little organization or tiny little industry, for that matter, into where it is today.

Joe: It’s been an amazing story, an amazing journey, I don’t think…you know, I think it’s still early innings, Peter, I think it’s probably third inning, second inning, maybe fourth inning, but it certainly isn’t the ninth.

Peter: Right, right, for sure. So then what attracted you to Freedom? You’ve done stints at LendingClub and Prosper and then Freedom is a little bit different to those two companies so what really attracted you to take up this role at Freedom?

Joe: Yeah, so I want to step back for a second and describe sort of a scenario or some examples and then I think by doing that, that’ll answer the question in a more direct way. So one of the things that we used to always challenge our equity teams and analysts to do is to try to understand what makes great companies. Obviously great companies come from a couple of things. They produce a product or a service or whatever it may be that consumers or customers, whether they be companies or individuals, clearly need.

They obviously have great strategy so they have great products, great strategy and great execution, but there’s another part of it that’s not as clear until you really spend time studying companies over the last…literally over the last hundred years and that is that they’re typically in front of a major secular wave of change. That secular wave allows them to basically use their superior product, strategy and execution, but also lets them make mistakes because everybody makes mistakes, but the power of the wave carries them further and let me give you some examples.

Think about McDonalds, so Ray Kroc sits there and understands that the interstate development, a highway interstate development of the 1950’s means people are going to be driving from Des Moines to Chicago, from Chicago to Detroit and that they’re going to be hungry and there’s going to be a whole interstate process where there’s a bunch of exits and if he could put quality food at those exits then he had a real opportunity to grow. Of course, we know the story of McDonalds, it was a very successful growth company.

Boeing with air travel, same kind of concept…okay, people are going to spend more time traveling both domestically, but internationally and they need high quality planes. Think about General Electric and the whole industrial revolution. Even though General Electric has clearly had problems recently, it rode a major secular wave in the industrialization of the United States.

Most recently, we see things like Facebook, Google, slightly different reasons, but same basic concept. So when I thought about that in the context of this business and you think about what is really happening with the consumer today, what you come to understand is that the consumer, if you look at their balance sheet, it tells a different story than what might be apparent. Some people understand this, but here’s what I’m trying to say…if you look at the consumer balance sheet since the 1950’s, even post 2008, it’s become extremely leveraged and so when you think about the solution to leverage, lending can not be the sole answer to helping.

In other words, some people can and should take on debt of different types or even potentially more debt, but other consumers should not take on any more debt. In fact, they need to restructure their balance sheets and get themselves back to a position where they can be financially more secure and LendingClub and Prosper were great ways to revolutionize and lower the cost of capital to people who needed more debt or could consolidate debt, but it was half, if you will, the solution.

The other half was how do you fix consumers who are over levered, have too much debt, how do you bring them back to a healthy condition and if you study that…as I said, the macro data literally, I would argue to you, out of a hundred consumers, literally close to 70% of them shouldn’t take on any more debt. They need to find different restructurings or lowering their cost of debt, however you would like to say it and so the appeal to me about Freedom was it was both sides of that line.

It could take consumers and then say, if you can afford to take on debt and should take on debt or consolidate debt, we can do that. If you are in a position where actually you just fundamentally have too much debt, you’re unhealthy now, we can help you become more healthy and get you back in the financial mainstream. So I believe that’s going to be a major secular wave over the next decade of which I will translate into the terms financial wellness.

How do you get a consumer into a better position, how do you make them more financially well and that requires sort of, if you will, a number of different techniques and the beauty I think of the Freedom companies, and we’ll talk more about this in a minute, is they have the ability to do multiple things to help a consumer return to health.

Peter: Right, right. Okay, so let’s dig into that. I want to talk a little bit about the company and maybe you could explain some of the history behind the company and I know there’s three divisions to your company so tell us a little bit about that.

Joe: Yeah, so let’s start at the high level, tell you sort of who we are in terms of the divisions and I’ll tell you a story of how we sort of got here.

So the Freedom Financial Network is, in essence, exactly that. It’s a network of companies that are designed to help consumers get back to financial health. The company’s three divisions are Freedom Debt Relief which is a debt settlement company and I’m sure we’ll talk more about that in a minute. That was actually the starter and I’ll come back and explain the history behind that. Freedom Financial Asset Management which is the lending division, which is the division I run and then Bills.com which is a small consumer lead gen company that really focuses on prime consumers and mortgages.

The company was started back in 2002 by Brad Stroh and Andrew Housser who were graduate classmates at Stanford and if you recall back in 2002, it was post recession and the internet bubble had burst. As Andrew and Brad like to say, if they had been only there two or three years earlier graduating they could have put out a PowerPoint and raised $30 million and started some great company, but in 2002, there was no chance of that and they will also tell you that was the greatest thing in the world that have ever happened to them and I’ll explain why in a minute.

What they realized is as they looked around saying what are we going to do and obviously, because of the recession, because of the internet collapse, the opportunity set was different, they realized they had to fundamentally land on principles that they would live with for the rest of their life. The first thing that they realized is that really was represented by what we use still today in the company, what we call “the heart and the dollar sign.”

The heart is the notion that we need to do something that we feel good about, that we know our customers feel good about and that because we feel good about it and our customers do, we can show up at work every day with a smile and excitement to go do what we need to do that day.

The second is the dollar sign, we have to be able to make money at it because ultimately, this is a capitalistic society, companies thrive on those that are profitable and successful and that the combination of being successful and profitable with loving what you do is a pretty powerful combination.

So they kept hunting around trying to figure out what they were going to do, lo and behold this opportunity landed on them in a way that they didn’t anticipate. Andrew had a friend at Stanford Graduate Business School who managed somehow to get himself over his head in debt, about $30,000 of debt and the fellow was a bright guy, but he got himself in some trouble and he couldn’t pay the $30,000 in debt. He was getting harassed and told, you know, you’re going to owe us all of this money and he finally turned around and said, can I negotiate and they said, yes.

And the net net of that was he ended up settling for a significant amount less than $30,000 and for Andrew as describes that moment, the light bulb went off. It’s like, oh my God, this guy is a smart guy, he still got himself into trouble, but he was able enough to sort of do this on his own. How many American consumers, A) even knew that opportunity existed, B) would even know how to go about and do it and C) if you looked at the data, the data we talked about earlier, all showed, if you will, up to the right growth charts of excess of debt for each individual consumer. He said this is going to be likely a major problem for consumers.

And so he and Brad said, wow, this could really be a powerful idea and they literally, in Andrew’s apartment, sat there and threw together a website. Andrew personally built the website, they happened to have a friend that was at the time working at Google AdWords and he said, look, here, put on an ad here and see what happens. So it’s Sunday night, they created an ad saying we can help you with your debt problems, they turned on the switch and as Andrew said, he woke up the next morning with hundreds of emails in his email box.

So they started reading through the emails and the emails were all signs of real desperation from consumers saying, oh my God, I can’t pay my bills, I’m really afraid I’m going to lose my house and I’m going to lose my family, all the kinds of hardships that you’d expect from people who have too much debt. So they called these people trying to understand what they were doing or what kind of service they could hold and literally they tell the story of people saying, look, anything, can you please just help me out, I’ll send you a check today, please just help me, you seem like smart guys, I need help.

And they realized at that point that that was really a substantive and real opportunity and thus Freedom Debt Relief was born in 2002. Now that company grew from 2002 and in 2006, Bills.com was added. That thought process there was to add a lead generation, consumer education site focused mostly on mortgage because obviously mortgage is a big percentage of the consumer landscape. Then in 2013, we added the lending division, Freedom Financial Asset Management, to complete this picture of a more holistic approach to financial wellness.

So today when you think about the company, Freedom Financial Network, and what we are today, we see ourselves and where we’re going as really a financial wellness company. What we want to be able to do is have any consumer come to us and say, here, take my health check, financial health check, i.e. credit, how much debt you own, your credit statistics, your income, your personal situation, and allow us to design, if you will, the best solutions to get you to a more stable financial position and it’s something that we sort of think in the terms of the big picture…you know, I know, if you turn on the television you see all of these advertisements for retirement and retirement savings or retirement advice.

When are you going to retire, whether it’s Prudential, T. Rowe Price, you know, you go through the list, a plethora of ads associated with helping you with your retirement, but here’s the weird part. If you actually study the data, the average American consumer does not have an asset problem, they have a debt problem and yet how many times do you see advertisements that say, hey, we’re advertising to you as a consumer to help you better manage your liabilities side of your balance sheet or your debt side of your balance sheet and the answer is we don’t believe that exists.

Really what the company aspires to be is that liability coach, to be that company that is in essence a holistic debt solution, a company that allows consumers to better manage their liability side of their balance sheet which we feel, mostly if it’s true, most consumers need more than anything else.

Peter: Right, right. Okay, so I do want to talk about the debt settlement side just for a little bit then we’ll get to the asset management a little bit later. I understand how the debt settlement process works, but what I’d like to know is if someone comes to you and you can see they’re over their head, they can’t even meet the minimum monthly payments on their credit cards or if it’s a personal loan, they can’t meet the payments there. I’d like to know your process, how do you make money from those people and then how do those people then interface with the Freedom Financial Asset Management which is really a lending business. How do those things all fit together?

Joe: Yeah, good question and there’s some complexity there and a couple of things so first off, the words debt settlement mean a lot of things to a lot of different people. What I mean by that is  not very many people understand it’s role even though…it’s still a reasonably new industry, first off. It really didn’t start to take off and become a major part of the ecosystem or a larger part of the ecosystem until the last decade.

So back in 2002, literally mom and pops, little companies around, not very much going on and today, still in the scheme of the large financial system, a small portion of it, but it has grown considerably and I think it’s reflective of the problems consumers have by the way. So the way debt settlement works is in essence a couple of different things.

First off, distressed consumers are always looking for anything and everything to help them and their most typical response, the average consumer like literally 85% of them, will say I need more debt. That’s just sort of the response consumers have. I’ve got to get more money or get another loan, I’ve got to bridge my financial hardships to get to the next step in my life.

What happens for a lot of those consumers is they start getting turned down because as you fully understand, their balance sheets are too levered, they can’t get any more money and now they’re stuck in a position. I can’t get any more money, I’m in an untenable position and I know it and now I’ve got to go do something about it.

There are a couple of different paths people take. A large percentage of consumers still take the path of sort of burying their head in the sand and hope they’re going to get through to the other end somehow, some way, in essence, a prayer. But there are other consumers who actually understand that their problem isn’t untenable and they have to do something about it and they proactively begin to look for options that they may be able to consider. They range from bankruptcy to credit counseling to potentially debt settlement so think about the trade offs in a number of different ways.

First off, bankruptcy is if you will, the nuclear option, it has a very long term impact on your credit history, seven years minimum, it has the stigma of bankruptcy which as we know in society isn’t seen in a positive light and it’s inherently unpalatable to many people. Now add to the fact that many people can’t qualify for bankruptcy in relation to certain states because they have too many assets, too high income so the combination of all of those events make bankruptcy often impossible even for a distressed consumer to go to.

The other example was credit counseling which is lowering of interest rate, not reduction of liabilities which then results in a form of almost long term servitude, if you will, where the consumer is going to have to pay that debt over instead of five years, twenty years and that’s often very painful for a consumer too because they fundamentally…while they don’t have such a large impact on their credit score necessarily, they do end up putting themselves into a position where their cash flows will be dedicated to paying debt for an incredibly long period of time. Then there’s debt settlement which sits in between both of these.

Consumers who come into debt settlement are looking for an opportunity and what debt settlement provides to them is the opportunity to lower their total liability amount, not through simple magic. They’re going to have to go through some real hard work to do it which means they’re going to have their credit scores impacted, they’re going to have, you know, a tough time of making sure they can meet those payments to the debt settlement program to reduce their total outstanding debt.

But at the end of the day, if a debt settlement works as it should, a consumer will come in with call it a $100 of debt and they’ll leave, including fees from people like ourselves, somewhere between 68 to 70% or $68 to $70 per $100 and be able to afford that going forward.

Now a couple of important points here, consumers who come into our program, and consumers who are often looking at debt settlement are being proactive, meaning that they understand they have a problem. Most of the consumers that come into our program aren’t already at the doors of bankruptcy, they can see, they’ve had a financial hardship; they’ve lost their job, they’ve had a divorce, they’ve had a medical event, they’ve had a combination thereof. They’re actively understanding and looking at their situation and they’re saying, wow, this math doesn’t work, I have to do something.

And so the typical consumer that comes into the Freedom Debt Relief program is a consumer who has got $30,000 of unsecured debt which by definition means and usually six to eight different trade lines which by definition means they had to be a prime consumer at some point. In other words, they’ve got money from CapOne, they’ve got money from B of A, they’ve got money from a MPL so, in essence, in total they were a prime consumer.

And what now has happened, because of one of these financial hardships, is they’re in a position they can’t afford to pay all of their debts so they may be delinquent on one, delinquent on three, delinquent on all of them. But they’re stepping forward under the premise that they understand they can’t pay all of those debts and they need to have a proactive way to deal with it.

Bankruptcy is not appealing for the reasons we talked about or not available. Credit counseling doesn’t solve the problem, it keeps them sick, if you will, for an extended period of time and they understand that that’s not going to work and debt settlement therefore makes the most sense. Does that answer the question?

Peter: Yeah, but I also want to know then once you settle the debt with…I mean, I know it could be a credit card company, it could be a LendingClub, Prosper or another marketplace lender. So you settle the debt for whatever it is, I don’t know what the average is, you tell me, but however many cents on a dollar it is and then they move over to the FreedomPlus or the Freedom Financial Asset Management side to take out another loan? I mean, what is the interface between those two?

Joe: Yeah, there’s a couple of different, let’s talk about that whole path. So what happens when a consumer comes in is first off, we do financial suitability, okay. Of the clients who come into Freedom Debt Relief essentially 10% of them…a hundred come and say, I want to get into your program; we only take ten of them. Why don’t we take the rest? Because some of them are financially healthy enough that they don’t need to come into the program.

Others are so financially distressed, we can’t help them. They don’t have any income in which to generate to be able to settle debts. Others are better served by credit counseling because that’s what they want, I mean, going into Freedom Debt Relief or going into debt settlement is a little akin to going to boot camp so it’s not easy. You are in a tough position, it’s like if you’re…you know, using an example of being out of shape and you need to get into shape and you really want to get in shape, you’ve got to go work out a lot to get there so it’s not going to be a simple and easy process.

But the reality is the consumer is in a tough position and anybody who’s in any tough position understands fundamentally that to get out of a tough situation requires work. So when they come into debt settlement they have that option. They have to understand that and so we take literally ten out a hundred consumers that come to us and they go through a financial suitability assessment which looks to see what their hardship is, make sure that that they can afford the program because ultimately, if you’re going to settle on average with fees included, 70% of your outstanding 100% of debt, you’ve got to pay that 70% somehow.

So you have to have the income in which to be able to do that. So when they come in and they go through that process it’s typically a two to four-year process, depending on their cash flow, their income, etc. and at the end of the four years if they’re successful in the program, they’ll graduate in essence debt free. Now in the Freedom Financial Asset Management division, we lend two different types of products. One is called Consolidation Plus and one is called FreedomPlus.

FreedomPlus is a product that’s not aimed at the debt settlement consumers, it’s aimed at the general population who is now looking to consolidate their debt into one fixed rate and one payment and we’ll come back and describe that a little bit more. You can see that as a classic competitor to a Prosper, LendingClub, SoFi, Avant, Marlette. A subset of the FDR consumers will be potentially eligible for a Consolidation Plus loan so the Consolidation Plus loan is a loan directed at FDR consumers who fit it.

Ultimately, only about 15% fit that and that is offered to the 15% that we believe and can identify, have an opportunity to more rapidly get through the program. We in essence help them go faster through the program by giving them option A/option B. So once they’re identified, we look at that consumer and say, look, you’re doing great in the FDR program, if you stay in the program you’re going to be debt free two to four years down the road.

But in your case, we believe, based on your financial stability that you’ve now started to establish as you’re starting to get in the FDR program, we can lend to you a loan, the C Plus loan, that will help facilitate the time you will need to be in the FDR program or I should say accelerate, allowing you as a consumer to emerge out of the program much faster.

Peter: Okay.

Joe: Now there’s a downside to it and we explain that. The explanation to the consumer is quite clear which is you’ll get speed and out of the program and if you pay your loan consistently you will actually re-enter the financial mainstream much faster and the data around Consolidation Plus is very clear. Clients who pay the loan consistently have a remarkable FICO rebound that gets them back into the mainstream and allows them to access lower cost capital, very attractive, but the downside is it costs you more because you are paying interest on the loan and then it becomes a consumer choice.

Peter: Right.

Joe: And the consumer can say, stay in the program because that’s the lower cost and I will go through the boot camp for an extra year or two, or no, I prefer to pay a higher price to get back into the mainstream, but it’s worth it to me because I’ll be back in the financial mainstream in a much faster time frame.

Peter: Right, right, got it. Okay, I want to switch gears a little bit and talk about some of the painful things. I’m sure they’re painful for you that you’ve endured over the last year and that is the FDIC. There was a settlement with you and Cross River Bank and the FDIC that became public earlier this year. There’s also a lawsuit from the CFPB against you guys, against Freedom Debt Relief so I want to address this head on. Maybe you can start off with the FDIC because that’s all public knowledge and it looks like there’s a settlement that has been reached so why did you have to settle with the FDIC?

Joe: Yeah, absolutely, we’re more than happy to discuss it because it’s important that, you know, we do discuss this.

So first off, we absolutely want to do the best we can for consumers and I just want to re-emphasize that up one side, down the other. The FDIC action occurred in a review of CRB which is as you know, Cross River Bank is very active in the MPL space and we work with Cross River Bank and in the review of complaint calls at CRB, specifically with respect to our Consolidation Plus program, a number of clients complained about the process of what is referred to as client coaching.

For the sake of the audience who will be listening to us, what is client coaching? When a client becomes an FDR client they have, as I mentioned earlier, typically six to eight different creditor relationships and as we go through the process of settling the debts we try to do the best we can to identify the creditors that’ll settle the earliest and we work directly with the creditors to get a good settlement for the client.

There were times and places, different creditors and it changes, depending on the delinquency status, depending on the creditor, depending on the internal people running the collections departments of whether they will or won’t discuss with us the opportunity to settle. In some cases, they’ll say no, we won’t talk to FDR, we’ll only talk to the consumer and so we then engage the consumer to talk to the creditor, we help them, we script them, we talk to them about the things they need to say and what to do and we make sure we support them.

And when they make a settlement, we ensure that the settlement sticks and follow up in terms of the ability to, in essence, make sure the outcome is successful and that’s what’s called client coaching. Now we disclose that, it’s in our scripts, it’s in our contracts, it’s not something we’d love to do, it’s not something necessarily clients love to do, but here are a couple of points.

First off, any settlement that a client has in Freedom Debt Relief, they are the ones who authorized the final settlement so if we get a settlement with Chase or with some other creditor at whatever price we get it, we have to go back to the client and say to the client, hey, is this acceptable to you and the client will then sign off on it. If it isn’t acceptable to them, we go back to the well and do that again and that’s true for the client coaching part of it.

The FDIC came and said, we don’t like client coaching because we don’t think clients like that. Now we could debate that, we think you need to disclose it more than you do. Now the reality is we always want to get better, we believe we did disclose it, but we are more than happy to disclose it even more so and I should mention too a couple of other facts.

It applied to less than 3% of our population, we have no FDIC or CFPB complaints whatsoever from any clients about that and when we do NPS scoring, which is Net Promoter Scoring which you’re probably familiar with, the clients in client coaching actually gave us close to…I think it’s a 70 NPS, very satisfied and then, finally, the actual results of client coached accounts were better than the average FDR account.

All that said, we absolutely heard what the FDIC said, we have made strong efforts to improve all of our disclosures around that practice to ensure that there’s no misunderstanding by clients that that exists. Today, in terms of FDR, our client coaching, because we’ve developed other ways to deal with those situations where creditors won’t deal with us directly is essentially, no longer exists in our practices.

Peter: Okay, so then is the CFPB action…I think it’s still a pending lawsuit so I don’t know much more you can say about it, but at least, is it about the same thing or is it something different?

Joe: Essentially, it’s the same thing, the meat of it is the same thing. It’s a relationship to practices in respect to FDR and practices that they perceive consumers didn’t fully understand and we’re eager…now I can’t talk a lot about it because, as you mentioned, we’re still in litigation with the CFPB over this, but all I can say is we are eager to work with the CFPB to ensure that we protect consumers and disclose things in 100% transparent ways and if we’re not doing as good as we should, we’re more than happy to make sure that we do.

Because at the end of the day, you know, back to the notion that we talked about earlier, we’re here to help consumers, we believe our franchise has done a phenomenal job at that, we have, again, very high NPS scores, our business has done incredibly well, our consumers appear to be very happy and if we can get better, we will.

Peter: Okay, we’re almost out of time, but I want to get to the Freedom Financial Asset Management and I’m just curious, has this negative publicity impacted demand for your loans? I mean, clearly you’ve got the FreedomPlus product, I saw there was a securitization earlier this year, so tell us a little bit about the investor demand for the loans you’re issuing.

Joe:  Yeah, the good news there is, no, it hasn’t. I think people who take the time to examine the facts around what we just discussed, they again come clearly to the view that the company has clearly been transparent, is always willing to get better, but has clearly been transparent and clearly doing good things for consumers and I think people who spend the time and effort digging into the facts around that come to that conclusion. The result is we are probably three to four times oversubscribed for our loans, whether it be in the securitization process, I think we are almost three times oversubscribed for our securitization first deal.

On the whole loan or our fund buying, we’re about four times oversubscribed so from the standpoint of impact from an investor demand there hasn’t been any. In fact, we continue to see strong interest in our loans primarily because the performance of the underwriting has been very strong. We’re really, really a big believer that part of the key things in lending is…you know, in essence, responsible lending, making sure that your clients pay you back and we do very rigorous research around that, rigorous underwriting around that and the result of that has been both good performance and good investor demand.

Peter: Okay, last question then. So what does the future hold for you guys? This obviously, you’ll get past the CFPB thing eventually, but what does the future hold?

Joe: You know, that’s a great question and I think the answer is the future holds, I hope, we’re going to find out in hopefully two to three years we’ll be talking and you’ll say, God, that turned out to be prescient or not, but I think we’re at the precipice of completing this notion of a financial wellness company.

So in essence, we worked initially just as Freedom Debt Relief then we added Bills consumer lead gen, now we have added lending and now what we’re trying to do is stitch those together into this holistic debt solution company, because again, I think the complexity of the world isn’t as simple as saying every problem needs a square peg. Sometimes it needs a square peg, sometimes it needs a round peg, sometimes it needs a half square, half round, if you will, peg and what we’re trying to do is stitch together that in a very comprehensive and complete way.

So if we think about the future, we believe and we hope, and we will see if this turns out to be the case, that our ability to offer that to consumers will allow us to, in essence, become what I would call a financial wellness company or a holistic debt solution company. Now we’ll be able to help consumers of all stripes get themselves into a better place or be more financially well. There’s a bunch of things we’re working on, including new products, strategic partnerships, things of that sort that I think indicate there’s some real hope for that so we’ll see. Now we’ve got to play it out.

Peter: Okay, well we’ll have to leave it there. Appreciate you coming on the show today, Joe.

Joe: Thank you Peter, as usual, good to talk to you and we’ll talk soon.

Peter: Okay, great, see you.

You know, it’s an interesting idea that Joe just brings up there about having someone really there to help consumers with the liability side of their balance sheet. We’re always trying to work on building up their assets and clearly consumers need help there because they do get themselves in trouble and obviously, bankruptcy is a last resort, but that does happen to many, many people every year and clearly, if they had taken action before it got too late they may have been able to avert that sort of thing.

That’s where companies like Freedom Debt Relief can help with consumers. It’s somewhat controversial, I know, because a lot of these companies would much rather have full payment than a partial payment, but we also should point out that a partial payment is far better than no payment at all and that’s what happens in bankruptcy.

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

Today’s show was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th through 9th, 2019, at Moscone West in San Francisco. Registration is now open and we’re also taking speaker applications. You can find out more by going to lendit.com/usa.

PODCAST TRANSCRIPTION SESSION NO. 164 / MICHAEL SCHLEIN

Welcome to the Lend Academy podcast, Episode No. 164. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Support for Lend Academy comes from Wunder Capital, the easiest way to invest in large scale solar energy projects across the US. With Wunder, you can earn up to 7.5% annually while helping to finance renewable energy projects. Get started at wundercapital.com/lendacademy. Wunder Capital, where impact investing meets capitalism.

Peter Renton: We have a special guest on today’s show. I’m delighted to welcome Michael Schlein, he is the President and CEO of Accion. Accion has been around for several decades, many of us have heard of them, but I think there’s not that many people that really understand all of the different facets of what they do; I know, I didn’t.

So I wanted to get Michael on the show just to go through all the different pieces and we talk about that in some depth. We also talk about the work they’re doing in the US, we talk about the work they’re doing internationally, what the impact of mobile phones is having on the work they’re doing and we also talk about government, what governments need to do and what really needs to happen to move the needle for financial inclusion. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Michael.

Michael Schlein: I’m delighted to be here.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself. You’ve had an interesting career to date so why don’t you touch on some of the highlights for the listeners.

MIchael: Sure, I went to MIT grad and undergrad and then went into investment banking for a couple of years doing public finance at what was a small investment bank called Smith Barney and then I left to go to politics and government for a dozen years. I worked as a finance director for a presidential campaign and then I got involved in New York City government where I worked in the last year of the Koch administration and four years of the Dinkins administration where I ended up being Chief of Staff to the Deputy Mayor for Finance and Economic Development.

And then I went into the federal government and became Chief of Staff at the United States Securities and Exchange Commission where I had the chance to work with Arthur Levitt in the Clinton years and then I came back to New York and went back to what was still a small investment bank called Smith Barney, (Peter laughs) right at the time that Smith Barney…shortly after that, I went to work to work for Jamie Dimon and Sandy Weill. Shortly after I came back we acquired Salomon Brothers and our parent, Travelers Company. Travelers bought Citigroup, Citibank and Citigroup was created and so I quickly became part of the Citigroup empire and had a great run for a dozen years or so where I had the chance to run internal and external communications, philanthropy, government relations, branding, something called business practices, human resources. And then my last role at Citi was I managed the network of the 100 Chief Country Officers around the world which was really quite an extraordinary opportunity.

During those years, I was asked to serve on the board of Accion and at a moment in time when Obama got elected, my predecessor as the CEO of Accion went into the Obama administration. Maria Otero became Deputy Secretary of State. One thing led to another and I was selected to become the CEO of Accion which is where I’ve been now for the last…just short of a decade.

Peter: Well that is an interesting career, so far. You’ve worked with some of the biggest names in finance, it seems, over the last couple of decades.

Michael: Yes, I really have had…I do view it as a great fortune to have worked very closely with Jamie Dimon, Bob Rubin, Sandy Weill, John Reed, Ajay Banga, Chuck Prince and of course, Mayor Dinkins, Mayor Koch so I feel like I had the chance to work with some really great visionary leaders, managers and you know, along the way you learn things and you see things you admire. Also at a place like Citigroup, I saw some great managers and I saw some managers that were not so great. You learn along the way and, of course, later when you’re in charge you get a chance to say, okay, what kind of manager do you want to be.

Peter: Right, right. Okay, so let’s turn our attention to Accion. Your organization has been around for decades so maybe just give us a little bit of the history and the mission of what Accion is trying to accomplish.

Michael: Well first, let me go to the mission. We’re trying to create a financially inclusive world. What does that mean? That means where everyone, everyone has the financial tools they need to manage their day to day lives, protect themselves in a crisis and take advantage of opportunities when they come around.

Most of your listeners can take for granted, as do I, we take for granted a global financial system that works pretty well where we all have credit cards in our pockets and ATM cards and ATMs on every corner and appropriately priced insurance and you can get a loan to buy a home or to finance your education or to build your business. And think about this one, for the most part you get your income on a monthly basis and your bills come due on a monthly basis and all of that is very, very convenient and you can and you should take that for granted.

But for three billion people, three billion people, they have none of that and the global financial system for them is a complete failure. They are invisible to it and it may as well not exist, they don’t see it, it does not recognize them and we need to change that and their lives are so much harder because of that.

So for example, a typical person living in poverty would be a woman farmer let’s say in rural India, she gets paid one time a year, maybe twice, but usually one time a year at the time of the harvest and she has to make that money work all year long and yet she lacks a safe place to save. Just think about that phrase, a safe place to save. Again, we take that for granted, but she doesn’t have that. She can’t get insurance so she’s subject to droughts and floods and natural disasters, no one would lend to her and, you know, her life is so much harder because of all that and we, today, have the tools to change that.

So let me tell you a little bit more of the history of Accion. We started in 1961, largely as a private sector Peace Corps which was quite extraordinary because the Peace Corps had not yet been created. In fact, our founder went on to run the Peace Corps later in the 1970s in the NIxon administration. We spent about a dozen years doing community development first in Venezuela, and then throughout Latin America. In the early 70s, 1972, we said our clients need more than community development, they need capital so we started experimenting, making very small loans to the poor.

We were doing it in Brazil, Dr. Muhammad Yunus was doing it in Bangladesh, others were doing it in Southeast Asia and we all discovered that the poor could repay small loans 97% of the time, a statistic that has really held up over decades. And so Accion built a string of non-profits in almost every Latin American country to make small loans to the poor and we helped them grow and we helped them raise money and we helped them build their methodology and get to greater scale. In 1992, in what was a controversial event then and now, sort of obvious in retrospect, Accion helped create the world’s first for-profit bank for the poor, BancoSol in Bolivia.

Up until 1992, around the whole world, microcredit, microfinance was done by non-profits and after 1992, this commercial model really took off because once you could tap the capital markets, you could tap the equity markets, you could tap the debt markets, you could hire talent in a different way, you were regulated in a different way. Later on, BancoSol and others could take deposits and so basically, BancoSol had been doing very well as a non-profit, but it took off and could reach much greater scale and have much greater impact.

So we, Accion, went back to all those non-profits that we have created and recreated them as for-profits and brought in capital and so we became an early equity investor in and then helped to build some of the truly great microfinance institutions first in Latin America and then around the world.

We helped to build, in addition to BancoSol in Bolivia, MiBanco in Peru, Compartamos in Mexico and then we expanded through ten countries in Africa, India, China, the Philippines, most recently Myanmar and we even have some toes on the ground in Cuba to see if and when the regulations change. So we’ve really become a global player all around this vision of trying to create a financially inclusive world.

Peter: Right, right. Okay, so I want to just sort of tease that out a little bit because when we were chatting before we hit record here, I often find it hard to visualize or to sort of conceptualize everything that you guys do because you have multiple different divisions and there seems to be crossover in multiple countries so maybe if you could take us through the different parts of your organization.

Michael: Absolutely. So the first part I’ll start with is called Accion Venture Labs. We over the last…I’ve described the history of starting in microfinance, but really over the last decade or so, like everyone else, the fintech revolution has truly transformed almost every aspect of our lives and certainly has transformed every aspect of financial services and we’re living in this incredible golden age of innovation.

It has profound impact or has potentially profound impact in how we can meet the financial needs of the poor because all of a sudden data, data analytics, mobile phones, the Internet of Things, blockchain, machine to machine technology; all of them have the ability to completely change how we meet the financial needs of people who have up till now have been left out. Distances that used to be seen as insurmountable, now there is no distance in the world that is insurmountable.

Transaction sizes that used to be seen as too small to be commercially viable…today, there is no transaction size that is too small to be commercially viable and data and data analytics is allowing us to see people who used to be completely invisible. You need to know your customer in order to lend to them appropriately. Data is allowing us to see people and small mom and pop businesses who used to be invisible so it’s a very exciting time in this space so we are now probably the leading fintech venture capital investor for inclusion; Accion Venture Labs is seed level, and we probably have the largest portfolio in the world of seed investments for inclusion and it’s a very, very exciting time. I’ll describe some of those…I’ll come back and describe some of the trends that we’re seeing in our portfolio.

The second part of our work is at the early and growth stage. We were investing on our own balance sheet, but now we’ve created the world’s first global fintech fund for the underserved, it’s called the Accion Frontier Inclusion Fund and it’s managed by Quona Capital. This is the early and growth stage so it’s much larger initial investments and of course, much larger follow-ons and we’ve been thrilled by the support we’ve gotten from blue chip investors and it’s a $140 million fund that is now very far along and we’re beginning to think about a second fund. And again, it’s all based on this thesis of you can have an enormous social impact and great financial returns and you don’t have to trade those off.

I should say, you know, the world of impact investing…if you’re focused on water or education or the environment there may be real trade-offs between impact and returns, but I believe, and it’s our experience, in the world of financial inclusion there are no trade-offs. The companies that we’re partnering with, the companies that we’re seeing, the companies that we’re investing in…they’re early stage companies, they have great risks, but if they succeed they’re going to have tremendous social impact and great returns so that’s what we’re trying to show.

We’ve shown that in microfinance, we’re trying to show that in the fintech world and that’s how we’re going to…if this fund is successful in that respect, that’s how you draw capital into this part of the market and that is how you will change the world for billions of people, if you can harness the capital markets when you’re talking about something as big as 3 billion people being excluded. The way to deal with that is to harness something as big as the capital markets, that’s our challenge.

All the philanthropy in the world is insufficient to the task of creating a financial inclusive world. There’s a good part of our work that requires philanthropic subsidies. We are a non-profit, but our goal is to create and find and support institutions that will get to scale and sustainability and profitability that will meet the needs of the poor.

Just to round it out, we also have a very extensive portfolio of regulated, licensed, deposit taking institutions around the world, banks and microfinance institutions, again, serving the base of the pyramid and we also run a group of advisors called the Global Advisory Solutions which is very much like Bain and McKinsey type consultants that go into financial institutions to help them specifically figure out how to harness technology to focus on the 3 billion people who have been excluded, that’s our specialty.

And the last thing I’ll mention is our Center for Financial Inclusion which is…we sponsored it, but it’s really become an industrywide think tank on policy issues around financial inclusion. The Center for Financial Inclusion also has created The Smart Campaign which is the world’s first global consumer protection campaign for the poor which is now the industry standard for consumer protection at the base of the pyramid and CFI also puts out a steady stream of really high quality research on the cutting edge issues, what are the challenges and what are the solutions to the obstacles that face us on our path to creating a financially inclusive world.

That’s a lot, I’m happy to talk about any of that in more depth, but that sort of gives you the lay of the land of what we’re trying to do and how it all fits together.

Peter: Right, and what I’ll do is you shared with me a few slides that sort of graphically display this, particularly where the regions are and some of the names so I will share that in the show notes for everybody who can…it’s easier when you can actually see a graphic of the different companies and the different regions, the different parts of Accion so I will share that.

So I want to maybe just take a step back and you know, I feel like…you said there’s 3 billion people who are still excluded, I know the World Bank does their Global Findex Report which I know CFI…your Center for Financial Inclusion had some commentary on, but I want to get your take on…you’ve been doing this job since 2009, the Findex database has been around since I think 2011, so you’ve seen in the last eight/nine years, there’s been a lot of developments in fintech. I mean, fintech wasn’t a term in 2009 and now it’s a really thriving industry so how have you seen this state of financial inclusion develop over the last eight or nine years since you’ve been in charge of Accion?

Michael: So let me start with the Findex because the Findex really…this is the World Bank and the Gates Foundation, every three years now publishes the most definitive source of data on…it’s the report card for all of us who are in this movement and it’s a great wealth of resources.

In the first Findex in 2011, they’ve said that 2.5 billion people were completely excluded. In 2014, that number was 2 billion and now in 2017, that number has been reduced to 1.7 billion and that’s completely excluded, zero access to financial…so we’re making some progress although that pace of progress is slowing. When I talk about 3 billion, I am not only talking about the people that are unserved, I am also talking about the people who are underserved and poorly served and just inadequately served. And so when you really look at the problem, size of the problem it’s more like 3 billion, but the Findex said that 1.7 billion have zero connection to the financial system.

So we’re seeing progress being that more and more people are getting access, but the pace of that progress has slowed in the last three years compared to the three years prior to that. But much more troubling is we’ve seen the growth of inactive accounts, dormant accounts and that raises a flag and says, are the products that we’re providing, are they actually useful to people and are they helpful to people because in many cases what does a dormant account mean to someone at the base of the pyramid?

It largely means that the government paid you some sort of welfare benefit or agricultural subsidy through an account and you took it out in cash and you never went back to that account so you don’t even know that you have an account. So that account means nothing to you because you took the cash out and you’re living in a cash world. That is not the progress that we’re looking for; we’re really looking for people…again, go back to, you know, with all of us on this podcast may take for granted, your financial life is way more complex than that and living in a cash world really hurts you. If you live in a cash world, you are never developing a credit history.

If you make regular payments in cash, it doesn’t count, you need a digital trail to develop a credit history and become more credit worthy. So the other thing that was very troubling in the Findex is if you look in the aggregate data, savings all around the world, but especially in the emerging markets, was decreasing over the last three years. People are saving less, especially in China which I would like to understand more, but the Chinese rate of savings, and it used to be extraordinarily high, but it has now come down significantly, plus credit, borrowing is also largely flat across the world and probably the most disturbing part of the Findex is something that they call resilience.

The question is, can you, in an emergency, come up with about one month’s income. In a crisis, can you come up with one month’s income and fewer people said yes to that in the last three years than in the three years prior to that so think about what that means. People are less resilient today than they were three years ago so as much as we’re making progress with digital technologies and we’re opening up accounts even if some of them are not being used, the truth is people living in emerging markets are less resilient today than they were before and if there’s a single measure for what we’re trying to do, we’re trying to make people more resilient.

So I found the Findex to be very, very troubling and therefore our work is more urgent than it ever was. We need to develop the products and services that are truly useful and truly beneficial to our target markets. That’s what we’re trying to do, again, through fintech and through institutions that are serving this portion of the market.

Peter: Right, that’s really interesting because I feel like, as you say, you can’t force someone to use a digital account. There’s got to be a real benefit for them to go back and keep it. So I want to just maybe talk a little bit about the move to mobile. Obviously, we’ve seen the movement in Kenya with the growth of M-Pesa and not necessarily even on smartphones.

I was talking to someone at the United Nations Secretary General’s office the other day and he was talking about the potential of a $20 smartphone. That’s a phone that can browse the web and do…probably not as fully featured as an iPhone, but something that is more than just a feature phone that’s been really popular throughout the world and that potential being a game changer.

While $20 is still a lot for a big chunk of the world, it is much more affordable than any other smartphones that are around so I wanted to sort of get your sense on is that something that is really going to move the needle in your opinion. Eventually, I don’t know whether it’s going to be ten years, but we’re going to have the vast majority, 90+% of adults in the world, are going to have access to a phone, probably a smartphone if you take it out ten years, so what’s that going to do and how do you think about inclusion when you think about the mobile technology?

Michael: It’s a great question and you’re absolutely right. The single biggest change in the last decade has been the adoption of cell phones and you’re right, the trend to watch is increasingly that smartphone. When I talk about 3 billion people, something like 80% of them today, now have cell phones so that’s very, very powerful. And over time, as we see with $20 smartphones, we’re seeing the rates of adoption of smartphones increase so it’s not just mobile phones, but it’s internet access and generally connectivity and then it’s the data that is produced by all of that because that really allows us to understand our clients and their needs so much better than before.

So if you look across our work, across our portfolios, we’re seeing spectacular innovation in harnessing mobile phones and data to meet the financial needs of the poor. It’s a very, very exciting time. You know, we’re seeing companies that are using the data from mobile phones to assess your credit worthiness. Basically, how you use your phone can determine if you’re more likely or not to repay a loan.

I was with one of the CEOs of one of our companies and I said, how much do you know about me, based on how I use my prepaid cell phone? If that’s the only source of information, how much do you know about me? And the answer (laughs) is we can know a lot about you. If you have an average monthly spend on your cell phone and you top up a lot relative to that, that’s very, very different than if you top up a little bit.

If you top up on the same day every month that’s completely different than if you top up randomly. If you let your cell phone run out of money and you have a gap in service, it’s completely different than if you always top up your phone before you run out. If you regularly use a dozen cell phone towers, it’s different than if you regularly use three cell phone towers. If you regularly call a dozen people, it’s completely different than if you regularly call three people.

All of that data is available and on that you can build algorithms and you can say, okay, I’m going to make this loan or I’m not going to make this loan, or I’m going to make this loan at this rate and so that’s very, very exciting.

I should also add that the same technology is also working for small mom and pop shops which have also been invisible and hard to lend to. If a small mom and pop shop, which is the bulk of the world in terms of entrepreneurship, if you can get a small mom and pop shop to move from cash to digital you can start to see the flows in and out of that shop and then you can see if that shop is credit worthy. That is really, really exciting.

And then there are now companies, and we have many in our portfolio that are doing just that and they can lend faster, better, cheaper, safer than banks and banks really haven’t touched this part of the market so it’s a very innovative time.

Peter: Right, right. I have had several companies actually in your portfolio and others who are directly trying to solve this problem when it comes to lending. There’s tremendous innovation I think happening throughout the world for that matter. I also had Gina Harman from Accion.

Michael: Yeah.

Peter: I don’t you actually own that business, but it’s Accion in the US and it’s focusing on some of the small US micro businesses that need capital and that was…

Michael: Yes.

Peter: …fascinating to see because I feel like this problem…like you’re focusing on the globe, but I feel like in the US we have our own challenges as well and clearly there’s a lot of people…

Michael: There’s no question.

Peter: …that are unserved here in this country.

Michael: I mean, half of working Americans live paycheck to paycheck and also struggle to get, you know, a few hundred dollars in the course of an emergency. You know, the number of unbanked and underbanked people, especially immigrants, homemakers, students and the poor, you know, really…it’s hard to understand in the United States, but there are tens of millions of people who are left out and poorly served by the financial system.

Gina runs the Accion Network in the United States which is the largest microfinance network in the United States and it is different because it’s a non-profit network. Everything else that I’ve described are for-profit companies where we have equity investments and partnerships with, but our structure in the US for a variety of reasons is a non-profit structure, but the needs are enormous.

Peter: Okay, I want to get to the crux of the matter, if we can. We’re running out of time, but I want to get to…when you’re traveling around the world, I know you speak with governments and foundations having operations all over the world and private sector companies obviously as well, so what are like some of the key things that governments…you know governments really, I think are the key in many ways, what are some of the things that governments and the private sector can do to bring more people into the financial system?

Michael: Well let me take those one at a time.

The role of government is enormously important, especially when you’re talking about the financial tools because it’s a highly regulated area. We, through our Center for Financial Inclusion, partner with the Economist Intelligence Unit. Every two years we do a ranking of governments around the world and how they regulate this area of financial inclusion. We name and shame and we say who’s the best and who’s not the best and more importantly, it’s a blueprint to say what do you need to do to improve how you regulate financial inclusion.

It’s really a powerful mirror of what’s going on around the world, but this shouldn’t be…this may be obvious, but the single most important thing that a government can do around financial inclusion is have a financial inclusion plan. That seems so obvious, but it really makes a difference.

The second you say, as a country, that we’re going to have a plan, all of a sudden people start thinking about it, all of a sudden people start rallying around it. There’s usually a lot of thought that goes into it and so we’ve seen more than a hundred countries have adopted national financial inclusion plans and it’s hard to think of this in the United States because we don’t really talk that much about it, but almost all of the developing world has cabinet level ministers whose job is solely financial inclusion.

So that’s one thing, but also, national IDs, credit bureaus are all important things that governments can mandate and the government itself is a source of payments, G2P, government to person payments, whether they’re social welfare payments or agricultural subsidies. If governments say we’re going to pay all those digitally, that helps to build the rails that many of the companies that we’re investing in are going to ride on. That’s sort of the railroads and the infrastructure of digital payments and the governments can be big actors in doing that.

We’re also seeing some experimentation where it’s become a trend to have regulatory sandboxes to work with, some of these fintech companies to come up with new ways.

I was recently in Mozambique and I visited the Mozambique regulator who’s really actively trying to improve the regulation and experiment. It’s not that easy for regulators to experiment so I applaud that when we see it.

The last thing I’ll mention on the role of government, just as another idea, several Latin American countries, Mexico, Chile, Brazil and Peru, have recently in the last two or three years, required digital receipts and digital invoices for every company, including those small mom and pop shops. And the goal of the government is obviously to increase tax collection and try to formalize these large informal sectors and get people to pay their taxes, but that digital trail is a huge source of data and we have companies….one of the great companies in our portfolio is called Konfio and it’s in Mexico and it specifically uses this and other sources of data.

But it uses this source of data to assess the credit worthiness of small mom and pop shops and so, again, it can lend faster and more cheaply and we’re seeing models like that around the world so there’s much that government can do.

Peter: Okay, so finally before I let you go, obviously you’ve got a lot of initiatives here, you talked about a range of different things, but what are you working on right now that you’re most excited about?

Michael: Oh, well generally, I do think fintech is…you know, it’s interesting, I don’t know what it was like to run an organization like Accion, you know, 15 years ago and I don’t know what it’s like 15 years from now, back then it was all microfinance and who knows, maybe 15 years from now it will all sort itself out and we’ll say this works and this doesn’t work. But right now, we’re living in this incredible time where we don’t know what’s going to work and what’s not going to work and we, as a non-profit, but as a non-profit impact investor, we’re willing to invest early and experiment.

You know, there are many companies in our portfolios and some of whom may stumble, some of them may have challenges, they’re early stage, but some of them I think could really change the world. So I think we’re just living in a very, very exciting period right now and Accion, to some degree, is sort of perfectly suited to the moment where we have decades of history working with the base of the pyramid. We have a decade of real involvement in the fintech world and we’re set up, you know, in a way to invest early and take chances that we otherwise wouldn’t be.

The other thing that’s really exciting about this period right now is I speak to a lot of business schools and it feels like a third of the graduating students in business school today want to be social entrepreneurs. Now that’s a phrase that didn’t exist when I went to school (laughs) and that is so exciting. What does that mean? They want to make the world a better place, but they want to do it in a commercial manner, they want to do it in a way that can be scalable, sustainable and profitable and really, everything that we do is all about social entrepreneurship and so I’m very optimistic that the future looks bright. (laughs)

There’s many things I can point to where things are not so great today, but the future looks bright because I think people are coming out of business school saying, how can we harness business and harness the capital markets to make the world a better place and that gives me a great hope for the future.

Peter: Well that’s a good place to end it on then. I really appreciate you coming on the show today, Michael.

Michael: It was my great pleasure, happy to do it.

Peter: Thanks a lot, see you.

Michael: Take care, thanks.

Peter: You know as Michael said, I think that all the philanthropy in the world is not going to solve the financial inclusion challenge, it’s really going to have to come from the for-profit sector, We’re seeing that today, there’s some great companies that are making money that are solving big problems around the world and I think that’s why it’s so exciting today.

I think we have access to data that we’ve never had before, we have access to computing power and artificial intelligence that we’ve never had before. Bringing all this together and we can solve big problems and I think, as Michael said, it’s a very exciting time to be in this industry and I think we’re going to see some serious inroads to really bringing the world into the financial system coming up here over the next 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 Wunder Capital. What if you could help businesses across the US go solar while earning up to 7.5% annually. Since 2015, individuals have invested tens of millions of dollars using Wunder Capital’s solar investment platform. These individuals have helped to finance nearly 200 large-scale solar energy projects across the US.

Alongside individual investors, Wunder also works with financial institutions like a prominent Wall Street hedge fund that recently invested over $100 million with Wunder. If you’re interested in helping businesses go solar while earning up to 7.5% annually, go to wundercapital.com/lendacademy. Wunder Capital, where impact investing meets capitalism.

PODCAST TRANSCRIPTION SESSION NO. 163 / ANGELA CERESNIE

Welcome to the Lend Academy podcast, Episode No. 163. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s show is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019, at Moscone West In San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

Peter Renton: Today on the show, I am delighted to welcome Angela Ceresnie. Angela is the CEO of Climb Credit, but many people would know of her from her time at Orchard where she was one of the co-founders, but she’s actually been at Climb Credit for a couple of years now and recently became CEO. So I wanted to get her on the show to talk about Climb Credit, they’re a fascinating company.

They believe that education is an investment and should be treated that way and I completely agree. So we talk about their mission and how they’re really working to help students obtain degrees. We go into some depth about how they approve schools on to their platform, how they approve students to get a loan. We talk about the problem with the whole student loan system overall and why it needs to move more towards this sort of idea of education as an investment with an ROI. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Angela.

Angela Ceresnie: Thank you, thank you, excited to be here.

Peter: So I like to get these things started by giving the listeners a little bit of background. I know many people know you in this industry, but still it would be good to get a background about yourself and what you’ve done before Climb Credit.

Angela: Yeah, great. So, yeah, I started my career at American Express and then at Citibank on the credit side so I managed Consumer Credit Risk and Analytics at Amex and then Small Business Risk and Analytics at Citibank and that was about nine years of experience just in terms of learning the basics of how credit markets work and specifically, how credit works for individuals, a great learning experience.

I left in 2012 to start a company called Orchard which obviously you know and I think many of your listeners probably know with several other co-founders leveraging a lot of the experience that I had from Amex and Citi on the credit side. So Orchard’s initial business model was providing active investors on Prosper and Lending Club tools to figure out which loans they should buy, actually to buy those loans and then manage their portfolios on the backend.

I was sort of part of the team that created the initial models that we would share with our investor clients. So that was just such a fabulous experience scaling a business, you know, bringing on institutional customers, building out a B2B sales team, building product and you know, kind of fighting for product market fit and understanding kind of the day-to-day of running a business and scaling.

In 2016, I joined Climb initially as the COO and now I’ve transitioned into the CEO role, but one of the great things about Climb, and we can get into the business here, but is that it enabled me to get back into the lending business directly so kind of back to my roots of actually making loans to people who need them.

Peter: Sure, we actually first met I think it was before Orchard, it was one of those meetups when there was like 25 people in the initial early meetups and I know you and Matt Burton spoke at the very first LendIt and we’ve sort of been following your career since then. But I’m curious about, what was specifically…you talked about getting back to your roots, you know, being actually a part of a lending platform and obviously there’s many of those out there, what specifically attracted you to Climb Credit?

Angela: Yeah, so there’s I’d say three kind of pillars of our business model that having existed from the beginning are kind of key to the success that we’ve seen to date. So we’re an education finance company and we partner with programs and then offer loans to their students and I’d say that the first and probably the most important part of the business is that we are a mission-based company and that we only partner with quality programs.

So our mission is to expand access to quality education and we do that by doing a fairly robust diligence of every school and program that we work with to ensure that the program is delivering results, quantifiable results, to the students who attend. That to me was kind of first and foremost great because if you’re going to be giving credit to people to go do something in their lives and as a credit provider you have some point of view and some level of, you know, sort of check that that thing that you’re enabling someone to do will have at least a reasonable chance of having a positive impact that’s really great.

Peter: Right, so I actually want to dig into that a little bit because you talked about…when you first said high quality program that feels like a pretty subjective assessment. But what it sounds like you’re saying this is quantifiable, the fact that the program is high quality is truly quantifiable. So what does that mean and how are you quantifying these programs that you decide to work with?

Angela: Yeah, so you’re absolutely right, quality is inherently subjective. So what we did was we created what we call our return on educational investment calculation and what we do is we essentially assess the actual impact to someone’s earning potential from attending a program versus not, by gathering data from that program and other data sources to understand kind of what happens historically.

First, you have sort of where most people who enter that program are starting from. So does a…as an example, a welding school in Ohio, are they typically taking people with a high school degree or do most people come in with a bachelors and based on that you kind of have an idea of where some people are coming from and then what’s the percentage of students who actually graduate, what percentage of those students actually get jobs upon graduation and how much money do those jobs typically get for people so that you kind of understand the upside, the potential upside.

And then the downside is that you have to pay for it, right, and you have to take time out of the workforce. And so we kind of compare that scenario to the scenario of essentially just keep going with wherever the person started with and don’t take time out of workforce and don’t pay for the program and we ensure that that differential is positive.

Peter: Sure, so are you just primarily working with vocational schools and things like coding bootcamps, and that sort of thing, not four-year degree programs?

Angela: Correct, so our target market is career and vocational schools and we really just I would say, we really define that as schools that lead directly to either a new career for somebody, or an enhanced earning ability in an existing career. So the first example might be a coding bootcamp, a truck driving school, a welding program, you know, kind of any number of programs where you can go in and essentially transform your earning potential.

Also we work with a number of programs, some IT programs, some online masters degrees that take people who are in existing careers and enable them to earn more. So one clear example of that is we work with a masters in education program, it takes working teachers and then those teachers once they get the masters degree, it costs about $8,000, they get an automatic pay bump in most school districts as a result.

Peter: Right, right, got it, that makes sense. I can see how this…you can gather in the data and really get a pretty accurate assessment, I imagine, on averages for salary bumps. It just becomes a mathematical equation for a lot of this sort of thing.

Angela: That’s right.

Peter: So I want to take a step back for a second, I mean, you’re addressing a certain part of the student loan problem, shall we say. I have conversations with people on a regular basis who are in the student loan business or who are graduates with huge student loan debts…I think it’s now like $1.5 or $1.4 trillion, what’s $100 billion…

Angela: That’s right.

Peter: …something like that, but it’s massive and I feel like it’s unsustainable. I’d like to get your take on what are the biggest challenges with higher education in general today, and what really needs to change?

Angela: Yeah, so I think that you know, we obviously do a lot of thinking about that and kind of considering that in our day-to-day business and some of the stats that I think are really astounding to me is one, 30% of graduating high school students don’t even go get a bachelors degree, okay, and 40% of the people who start a bachelors degree don’t finish in six years. So now there’s a lot of other problems in higher education and the way we finance things.

But to me, that is Climb’s addressable market and that’s the problem we’re trying to solve, which is that as of right now, for a vast majority or a very large percentage of our American public and young people, the current system of graduating high school and then going to like some system, some higher education, institution of higher education and just taking on whatever debt comes along with that isn’t working.

So what we’re trying to do here is create the right financial products so that the career training programs that do add a lot of value are far lower cost and therefore lower risk and can be a great alternative even in the short run for somebody who’s maybe not sure what they want to do to create the financial products that really enable and open up access to those programs, to that kind of education.

Peter: Just one more point on this before we move on to more practical matters. I know you have young kids, I have young kids and I think about what higher education is going to be like when they are…I have a nine and eleven-year old, so my eleven-year old is just about to go into sixth grade so it’s not that far, another few years before he has to decide, but I just wonder.

To me, you can’t keep going on like this, are we going to get to $2 trillion, $3 trillion, $4 trillion, $5 trillion in student loan debt, I mean that’s sort of…we didn’t cross $1 trillion that long ago and eventually, it feels like your approach at Climb Credit really should be applied to the entire education system.

I mean once you finish high school…for an example, one of my wife’s friends…my wife was in social work for a while and one of her friends went back to Denver University, an expensive private university for a masters that costs an absolute fortune and her pay was still going to be really mediocre at the end of it and to me it’s like there is just no ROI on getting a masters in social work, I hate to say that…just picking one piece as an example.

Angela: Right.

Peter: If it costs you $80,000 and you’re going to get a $5,000 a year bump in pay and then you’ve got to pay interest…

Angela: Doesn’t make any sense.

Peter: …you’ve got to pay interest on the loan, it doesn’t make any sense. It seems to me that I think we’re ripe for a transformation in higher education where it all goes down to what is the ROI. If there’s no ROI, I mean, you see it now already, some of the MBA schools have closed down because that’s a real ROI-oriented decision. I’d like to hear your thoughts on it.

Angela: Yeah so I think, you know, we see this all the time because as part of our business, as I mentioned, we diligence every school and we’ve seen schools where when we look at the data we say, listen, you’re actually getting people jobs, but for a $50,000/$60,000 tuition if that job is going to pay somebody $35,000 coming out, it doesn’t make any sense. And the reason that schools are typically able to get away with that is because the federal government funds it.

Peter: Right.

Angela: So you can go to…so I am going to pick on culinary schools. There are some great culinary schools out there, but (Peter laughs) you go to culinary school, it costs $50,000 something, right. You get a pretty big loan, you come out, you’re working in a kitchen, right, you’re not making a ton of money at first and the reason they can get away with that is because if you’re getting a federal loan going to that program, you can just defer it, you can defer it because you’re not making enough money.

So you just have no alignment of incentives because the school got all of their money upfront from the federal government, basically, right, so they get the $50,000 upfront so they don’t really care. And then the federal government is the federal government so they’re kind of like cool to defer because they’re not like beholden to, you know, make a return necessarily on that one loan so the person holding the bag is the student. Sure, that’s great that there are deferral options, but is that really the answer for someone to just essentially be unable to make a debt payment and then be living in kind of perpetual terror of the fact that that’s going to come due at some point.

At the end of the day, I think there needs to be a time for reckoning on the whole system. We’re starting in an area where, I think, we can make the most immediate impact because it’s the education that does pay for itself already. But my view is that, you know, as we become a larger and larger part of the education finance system that other schools will adjust their pricing and change the way that they think about the amount of money that students owe on the other end, not as how much can I get, but what’s the right cost.

Peter: Right, right, that makes sense, that makes sense, I think it’s inevitable. Eventually, whether it’s this decade or next decade, eventually, there’s going to be a reckoning where you’re just going to see schools not getting enrollment because the ROI is not there.

Angela: Yeah.

Peter: They’re just going to suddenly see their enrollments shrink and that’s the way…if you’re not providing an ROI, the whole purpose of getting a higher education is really to launch yourself into a career that provides you a decent income.

Anyway, let’s get back to the nitty gritty here. You’ve touched on this already, but I’d like to just delve into a little bit on how you go about approving a school. Does the school come to you, does a student come to you and say, I want to go to this school and you haven’t approved, how does the process work and what’s the data points that will cause the school to pass or fail your tests sort of thing?

Angela: Right, so we get in touch with schools both ways. So we have schools that come to us, we have schools that we reach out to, we have students who come to us, but then direct us to schools so it can vary and we have a team of people whose job is to talk to the schools and essentially explain Climb’s products, but then simultaneously better understand them and their data. But really, I mean, the crux of it is that ROI calculation that I talked about.

So we get from the school as much data as they’re willing to provide us on the types of students that they’re educating so the background of those students so we get a better idea of the starting point and then the graduation placement rates and typical salaries. And then we take that information that they give us; sometimes it’s kind of rolled up, sometimes it’s very granular, like student level info, you know, anonymized, and then we sort of tend to pressure check that against either other schools that we know that are either in the area or teaching similar vocations and public data that’s available.

So you know kind of one of the cool things about our model is that it’s always learning so as we work with…you know, once we’ve worked with three or four let’s say truck driving schools, that helps us underwrite the fifth which then helps us underwrite the sixth and the seventh and we kind of really can get an understanding of who’s doing a good job and who’s really getting the students the outcomes they want.

The great thing about that is that helps us in terms of from the capital markets side of things in funding our loans, have the data to be able to make sure everything is priced appropriately. In a market like the one we’re in there’s just not a lot of data out there on performance on loans, but also on performance of schools and so that becomes a very valuable kind of…I’d say like sort of network effect within our own business of more growth. The more business we do means like the smarter we can be at the next business that we do.

Peter: But I imagine some of these…you talk about salaries of graduates, I mean, some of that stuff would not be easy. If you can’t verify that I presume that’s a non-starter then right, well tell me this, where are the areas typically that happen that would prevent you from saying, we don’t have enough data to approve this program?

Angela: Yeah, so one thing is it depends a little bit on the type of job that schools are preparing students for. So some jobs have a wide variety of salary and potential outcome, right, so actually, I would say software development is one of those where there’s just a varying level of kind of software jobs that you can get.

But we have a pretty good understanding within each market of what like an entry level job is and so our assumption is that that’s where the students are going, right, unless they can provide us some data otherwise to show that they somehow get people mid-tier jobs or something.

But the main thing is, are the people getting jobs, right, and that data that is easier to get in some ways because a lot of schools do keep track of it. Once we start working with a school then we can start kind of getting that data ourselves because we start talking to the students and having interactions with the students and so we can sort of also collect that data.

Peter: Right.

Angela: But other industries it’s pretty tight, again, you know, to get to the truck driving analogy like most truck drivers’ starting salary I think is around $43,000 a year and that’s pretty tight. You’re not going to see someone come out and make as an entry level truck driver like $150,000 a year I don’t think.

Peter: (laughs) Right, right.

Angela: You might get there, you know, depending on how you…whatever, but there’s a pretty tight kind of market. What we want to do is unless a school can truly prove to us that they are like giving some outsized return to most of their students, we just want to make sure that what they’re doing makes sense for the baseline, right.

Peter: Right.

Angela: So if the baseline is $43,000, it needs to work at $43,000. If it doesn’t then I don’t really care that there’s the one outlier who was able to somehow to finagle some crazy salary.

Peter: Right.

Angela: So that’s sort of our approach, but then we continue to monitor it so we’re also very keenly aware that, you know, like you don’t want to be in the business of diligencing a partner one time and then assuming that everything stays the same. So we go back and ask schools for more data at least on an annual basis, particularly if we have some reason to believe that maybe things are changing.

If they add a new program, we re-diligence that program, we don’t just add it, you know, because we are already working with them. So we have some, I would say some kind of pretty, pretty good checks that kind of continue to trigger throughout the life cycle of the school.

Peter: Right, right, and so then what about the borrower themselves, like the truck driving example. You go to the truck driving school, someone comes along and says, I can’t afford to pay this, I need to finance it and they come to you; what’s the underwriting process there?

Angela: Right, so the kind of top line of that is actually one of the other key kind of pillars of Climb’s business that is probably one of the big reasons why I was excited about it and continue to be is that we are a point of sale business so 90% of our loan applicants come to us directly from schools.

So what’s good about that is as we know so well customer acquisition is a very complicated and expensive part of running a lending business and so if you have a distribution channel that is kind of embedded where you’re embedded in the workflow and kind of have a contractual obligation between the parties, it scales a lot easier. So just as kind of a side note that’s a part of the business that’s really great.

And the good news is what that means is that most students learn about us as they’re learning about the programs. So truck driving student shows up, they’re in the office of the financial aid officer learning about the program and what it could do for them and then at some point they inevitably say, how do I pay for it and then they’re…you know, we’re a point of sale wherever the school is, if the school is an in person school that has a financial aid counselor then we’re point of sale…there is a pamphlet sitting on their desk. If it’s an online program that has an online admissions app we’ll be a button in the admissions app and in some cases that they click that button, the Climb loan application is already filled out.

So we have that through an API connection with the school if they have that level of technology so we sort of play wherever the school is. Once the student comes in and applies, the loan application is quick, easy, automated and 96% of the time we offer an automatic decision to the student themselves within the application.

Now, who we approve depends a bit on the school and whatever loan program we’ve signed up with them because there’s another kind of important feature of our business which is that we have what we call a school guaranteed loan which essentially has the school participating in the risk of the loan alongside with Climb.

So our view is that the student is clearly taking a risk, right, they’re dropping out of the workforce to go into the school, paying money, getting a loan…you know, it’s not a huge loan like some people get, but let’s say $10,000 on average with the expectation that they’re going to be able to get a career on the other side. We as the lender are obviously taking a risk because we’re lending money and historically, in the example I gave at the beginning, schools just get all of the money upfront.

So by asking the school to take a risk share, we align incentives so that the school is then actually paying attention to whether or not students are able to pay, paying attention to the amount of money that people are borrowing as it relates to the amount of money that they’re going to make on the other end because if it is out of whack then people aren’t going to be able to pay.

Now the school has a financial incentive to care about that. So the way that works practically is that if a student, we basically advance some portion to the school based on the credit mix we expect to see at that school and based on kind of the school’s financial situation. So we create essentially a custom product for every school that we work with to make sure that they can approve as many students as they need to based on kind of their credit profile, but they’re still getting enough of that kind of upfront money to be able to run their day-to-day business.

Peter: And so do you work on the credit profile, like the credit model that you’re creating, are you working on that together with the school because…take the truck driving example, these might be pretty unsophisticated low wage people, they might have been doing some manual labor before and might not have very good credit. So how do you go about building that model?

Angela: So when we enter a new industry, we have kind of a base model that we use and when we go to enter a new industry, we kind of learn….you know, we learn usually pretty quickly what the credit makeup is going to be. A lot of schools kind of already know because they maybe had students on internal payment plans or other kind of, you know, less favorable to them, I would say, products and a lot of times less favorable to the students as well. So we’re able to figure it out pretty quickly, but we have sort of a base model that we sort of go with and then we can adjust over time.

Peter: Okay, and then what are we talking about as far as interest rates, loan term, amount, that sort of thing? I’m sure it’s a range, but can you give you give us some of that range?

Angela: Yeah, so our average interest rate is around 8.5%, Our average loan amount is a little over $10,000 and the average term is about 3.5 years. In terms of the term, we typically start with a low monthly payment like an interest only type payment while the student is in school and for a period of time after before finding a job and then we flip to principal and interest which is typically three years.

We do have loans that go all the way out to seven years and that just kind of depends on the program so for some of the Allied Health programs we work with, nursing programs, they tend to be a little bit longer, slightly more expensive, but obviously there’s better, you know, there’s pretty good salary outcomes and lots of jobs on the other side so we find that it’s slightly more affordable to go with the longer term loans.

Peter: Right, right, okay. How many states are you in and are you using an originating bank to partner with to issue these loans or are you doing it state by state, what’s the story there?

Angela: State by state and we are in all 50 states, plus DC and Puerto Rico.

Peter: Wow, someone’s been busy on the regulatory side in your company, okay. (Peter and Angela laugh)

Angela: That’s a lot of the work I did at Orchard was on that side. You know, I learned, and also working in banking, you learn a lot about that so as the COO here I kind of set up our licensing infrastructure. It’s not a negligible amount of work, but it’s great to have the flexibility and the actual assets yourself and to be able to keep all of the economics.

Peter: Sure, sure, that makes sense. So then when was the first loan issued and sort of give us some sense of the scale you’re at today.

Angela: Yeah, so our first loan was issued in 2014, we will pass $100 million in cumulative originations this year so growing pretty fast, all of that is through our network of over 70 schools now that we have and across about 30 different disciplines.

Peter: And so what about the other side of the equation, the funding side of your business, where are you obtaining your capital for these loans?

Angela: Yeah, so right now we have partnerships with various asset managers and funds where we sell essentially groups of loans from our individual schools to them for the cashflow.

Peter: Okay, so like a forward flow type agreement?

Angela: That’s right, that’s right, that’s right, and we did that intentionally because that has enabled us to, because we have that risk share structure with the banks that has enabled us to stay equity light so we didn’t need to raise kind of like expensive equity capital in the early days to then turnaround and lend out, we didn’t have to do that. So it’s been a good model for us in order to sort of be able to invest the equity capital more in scaling and building out the technology and the services for schools and students.

Peter: Right, right. We’re pretty much out of time, but before I let you go, I’m curious to know….I can see, I can hear it in your voice that this is something you believe in and you’re passionate about it so what is one project you’re working on right now that you’re most excited about?

Angela: Oh my goodness, that’s so hard to answer, but (Peter laughs) I would say…I’m going to give you two things.

Peter: That’s fine.

Angela: But I would say number one is on the sales side. I stay pretty tightly involved with the sales process and talking to schools that we are bringing on and then as we work with them. It’s amazing how great the schools are, it’s a totally underserved market, but they work so hard to try and do the right thing for their students, you really see it when you’re out there. You know, these schools are all over the country so I’m traveling sometimes to places I never would have traveled to when I was at Orchard, you know, Tulsa, Indianapolis, all over the place and you see these schools that are just totally transforming peoples’ lives.

So that’s not like a project, but that’s part of the job that I think is really fun, but the one project that’s been really interesting, and we’re just getting started to work on some corporate partnerships. What we’re finding is that in certain industries where there’s a really big skills gap, the corporations are so incentivized to have relationships with the educators so that they can get access to the students. And since we have a network of educators and have relationships with the students, there’s sort of interesting partnerships that we can do even as simple as partnering with an employer.

They then connect us to the schools that they work with and then we advertise their jobs to our students in the graduation email, even just something as basic as that, but I love the idea of really being part of the full cycle of employment because I think that’s, you know, at the end of the day, the problem that we’re really trying to solve is getting people jobs. If you can have access to the employer networks that’s eventually employing people, that just makes us stronger from a knowledge perspective, but also in terms of the services that we’re offering.

Peter: Right, right. Well indeed, it’s certainly a noble cause and I think that this is something that I think is desperately needed at all levels of higher education.

Angela: Agree.

Peter: I appreciate you coming on the show today, Angela, its great to chat with you.

Angela: Great, thank you, Peter.

Peter: Okay, see you.

Angela: Bye.

Peter: I just want to back to revisit what we were talking about earlier about the student loan problem and it’s interesting to see Climb Credit’s approach. I think, you know, the whole idea about school these days, getting a higher education degree and a lot of times there’s not a real data driven approach, not that that should be the only thing that comes into the equation, there’s obviously people, they’re going to be very passionate about certain things that may not be economically all that valuable, that’s totally fine, they can make that decision, but they should make that decision with their eyes wide open.

I’d like to see people who are really looking to improve their lives and wanting to see what…is this $100,000 in student debt going to be worth it and taking into account the profession, the school, and we really should have a complete data driven mindset here I think, and that’s to me the only way we’re going to solve the student loan problem is if people start really thinking about the fact…is this loan going to be worth it. It may not, it may be more worth it to go and do a different kind of vocation like the ones, the schools that Climb Credit work it.

Anyway, lots more to say there, but I think I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.

Today’s show was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th through 9th, 2019 at Moscone West in San Francisco. Registration is now open and we’re also taking speaker applications. You can find out more by going to lendit.com/usa.

PODCAST TRANSCRIPTION SESSION NO. 162 / SASHA ORLOFF

Welcome to the Lend Academy podcast, Episode No. 162. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s show is sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th and 9th, 2019 at Moscone West in San Francisco. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/usa.

Peter Renton: Today on the show, I am delighted to welcome back Sasha Orloff, he is the CEO and Co-Founder of LendUp. LendUp focuses on the subprime consumer or the non-prime consumer, if you will, and they provide a short term loan product and a credit card for this population. They actually have broader goals than just those two products which we get into in some depth.

We talk about the non-prime consumer and how they’re doing, how traditional financial institutions are not serving these people, what needs to change for them to move the needle for this population. We talk about the regulators and what needs to happen there, we talk about the new study they did with Experian where they’re able to take more data and show an increase in credit score for LendUp customers, and we talk about financial education and much more.

Anyway, I’m sitting here in my LendUp t-shirt, I promised Sasha I would tell him that I’m wearing it in celebration of recording this podcast show today. Anyway, it was a fascinating interview, I hope you enjoy the show.

Welcome back to the podcast, Sasha.

Sasha Orloff: Great to be here.

Peter: Okay, so I know we chatted, it was about just under three years ago, so a lot of people know about you and you have a fairly high profile in the fintech community, but for those who don’t, maybe just give a little bit of a brief description about LendUp and what your mission is.

Sasha: Yeah, so what we’re doing at LendUp is building the financial services destination for the half of America that’s been shut out. This is the emerging middle class that don’t receive the benefit of a lot of the fintech innovation that we’re seeing and are structurally locked out of most banking systems, especially credit, because of low credit scores or volatile income.

Peter: Okay, so obviously your name is LendUp and lending has been the core part of what you do, but you mentioned it wasn’t going to be just about lending, have you broadened your mission here?

Sasha: (laughs) Yeah, so there’s two fun parts to that answer.

The first is the frustration of just buying a domain name when you are a startup and LendUp was really the core of what the business was going to drive and be and it was six letters, two words and it was a domain that was available and there’s a really funny story behind all of that that I’m sure your listeners are not interested in, but it was fun anyway, I’ll tell you sometime over a beer.

Then there is the reality of the business so I think there’s two versions of LendUp. There is the LendUp that people know about from the press or from coming to your conference and listening to me on stage or various other channels and then there’s the LendUp behind the scenes that we haven’t really talked about a lot.

The vision was always about helping people improve their financial health and that is along the categories of saving, spending, borrowing and planning and so all of our vision is to help improve peoples’ financial health, but credit was the place where the industry makes money, it’s the hardest to do and there was the biggest opportunity.

So while we started with thinking about what was one of the worst financial products on the market which is payday loans and reinventing that and making it better, the next was transitioning to installment loans and helping graduate people to better products at lower rates and longer terms and then credit cards. We just started incubating secured cards and that will obviously be putting us on a path to helping people also save money and use their savings to improve their credit score.

All of this comes with like one fundamental challenge that we’re trying to solve which is, 56% of our country today have a subprime credit score and if you have a subprime credit score, you’re going to pay $250,000 more over your life in additional interest and fees and that’s a problem that’s solvable with technology, product innovation and the right team.

Peter: Right, right. I’ve heard it said quite frequently that it’s actually really expensive to be poor, it’s much cheaper to have wealth and that’s part of it because of all of the fees and everything. So I want to just talk about…you’ve been in this business now for several years so I’m curious about the state of your core audience, the sort of non-prime consumer. Are they doing any better today than they were when you started?

Sasha: I think there’s quite a bit of this population that is still fundamentally ignored. So we’re talking about the state of today, $250,000 in additional interest and fees, over half of America and when we start translating this into who our customers are, you think of it as your Lyft or Uber driver that took you to work, your Starbucks barista that gave you coffee this morning, the Amazon delivery driver that is delivering your packages while you’re at home, the real estate agent, the small entrepreneur, that construction worker; it’s everyday working America.

One of the sort of trends that we’re seeing now is with the rise of the gig economy and automation of payroll system that our country is becoming less stable, not more, and that makes it even more challenging for the traditional banking system to serve them effectively. But that’s where technology and mobile phones and rethinking products can actually help improve borrower’s lives and we’ve seen this by increasing peoples’ credit scores by hundreds of thousands of points, saving them hundreds of millions of dollars of unnecessary fees and delivering millions and millions of credit education courses. So we’re making a good dent for how short we’ve lived and existed as a company.

Peter: So I want to pick up on one point there, the education courses. I know, I’ve been to your website, I’ve seen some of the videos that you guys do because one of the challenges I always find and this is not just the non-prime population, it’s the prime population as well, a lot of people are just not interested in finance, they’re just not interested in learning. They want to be financially secure and financially healthy, but they’re not really interested in learning so how are you able to engage this population and help them learn?

Sasha: I think you’re saying that financial education isn’t fun and exciting (Peter laughs), I wholeheartedly disagree.

Peter: I’m sure it can be.

Sasha: We’re dealing with the reality that people are busy and they have busy lives, their jobs are demanding and requiring, their families are demanding and requiring, and so how do we fit this in. What the industry has traditionally done is they’ve separated financial education and literacy into other aspects in arm’s length and separately, a lot of the banking system and the financial system now wins when customers lose.

Peter: Right.

Sasha: And so when you cake these two things together by building all of our own technology, we can actually gamify good behaviors so we can use alerts, reminders, nudges and challenges to incentivize people to exhibit the key behaviors that will benefit them and benefit us….on time repayment, learning more about how the financial system works and keeping a budget and maintaining credit balances low so that they’re available when the unforeseen circumstances happen.

And so that’s the approach we have taken here at LendUp which is creating a business model where we only win when the customer wins and gamifying the experience so that we’re optimizing for peoples’ long term financial health.

Peter: Okay, so is your target customer then, I’m thinking about how you would gamify something to be very different to a 50-something than a 20-something year old. What is the core sort of audience that you’re going after or are you trying to do it for all audiences?

Sasha: Well let me give you two examples.

So we just completed this study on our loan structure/product structure with one of the major credit bureaus and I think the results are published on our blog and what it showed was the creation of the product structure can actually have a material positive impact on somebody’s credit score.

So I’ll give you three very specific examples.

By having the ability for consumers to have payment plans and continue to make positive payment history which is the number one factor in your credit score, 85% of our customers would have higher credit scores, 18% would have significantly higher credit scores. The percentage of people who have subprime credit scores through our product structure drops from 79 to 65% and the percent of thin file customers, the sort of people that are invisible to the traditional credit bureaus drops from 11 to 4%.

So when we start thinking about the implications of how you can gamify and create these product structures, you can get the same amount of returns to the business, actually higher returns and you can do it in a way which really makes the customer win. On the credit card side, you can think about a lot of the industry is motivated by having people rack up high balances that they revolve and make interest on.

And that’s also the second biggest factor in your credit score is the availability of credit that you have so we create challenges and nudges to actually help people maintain a budget and pay more than their minimum due or their full balance. Just against the way the industry thinks and makes money, but tangibly helps the customer build their credit score right now.

Peter: I completely agree. One of the things that I think the banks have got to realize is that if some of your main profit centers are when your customer is suffering that is something that is…that has to have a lifecycle in today’s age where things are more transparent. I think a lot of the fintech platforms that I speak with…it’s all about an alignment with the customer and so you don’t sort of celebrate when someone makes an overdraft or has a late fee or something.

I feel like that is something that has to change and I think it is great that companies like you are doing that. But I want to go back, the report you’re talking about I actually listened to a podcast with yourself and Jo Ann Barefoot and Alex Lintner from Experian talking about this research. I think it’s super interesting to me. Can you just give us an example?

You just mentioned how 86% increase their credit score and I can’t remember all of the other percentages you mentioned, but what specific data points are you talking about? Is this rent, is this utility bills, is it cell phone bills, I mean I know these are the sort of things that are still not in a traditional credit score which I think is crazy. That’s a whole topic for another podcast, but what are the data points that allow this population that you’re serving to increase their score?

Sasha: I think you’re right on point. There are so much data sources and payment records that are just not visible in the traditional credit bureaus and so we wanted to take something that would have been very non-controversial which is actual loans, actual trade lines and simulate what a credit score would look like. So we took our own credit scores and payment records on loans and use those to simulate the score with the help of Alex and his incredible team over there and we showed these positive results.

But it starts to open up what is really the more interesting question which was what are the data sources that are not available in the major credit bureaus that can have meaningful impact on helping people improve their credit score, improving financial inclusion and giving people credit for the things that they’re doing all the time. But because a bank can’t work with them, whether it’s lack of credit card, mortgage, car loan, a home loan, a home refinancing loan, they’re just not on the major bureaus and so this is the start of what we hope is a large movement of using data to improve financial inclusion.

Peter: So are you reporting the payment behavior of your customers to the major bureaus today?

Sasha: We report…so on our loans product there are four different levels and it’s different availability by state and local laws, but for the most part generically, there’s silver, gold, platinum and prime and so we worked hard with the bureaus to accept our platinum and our prime levels, but we’re still working with them on approving the silver and the gold levels of our ladder. The credit cards are all reported as with almost all credit cards that would.

Now we are keen on encouraging results with the acquisitions of like Clarity Services and so you start to see when you have people like Experian acquiring Clarity that they’re starting to take some of this other tradeline data and putting it alongside the major bureaus. Now it’s separate, but it’s now more readily available. I think those are all really exciting.

Peter: Right, right. So the Experian piece, was that taking your one payment product and putting that into their system? When you talked about the 86%…I’m just trying to be completely clear about what the lift was. Was that just on the platinum and gold, whatever it was, or what was the actual piece that created that lift?

Sasha: So it came down to two key takeaways.

The first is that more reported data, including the short-term data supplemented with the data that we already report, would have an even more positive effect on consumers.

The second was looking at structure of our product so in a lot of the non-bank lending, especially those geared towards sort of short-term lending or subprime lending, you see these product structures that have these kind of teaser rates or have these debt traps that spiral out of control.

Now LendUp doesn’t do any of that. You can’t borrow again until you repay your loan in full, there’s no accruing interest or fees or rollovers. And so by having payment flexibility, meaning when people are struggling you give them options on how to make successful payments. That also showed a tremendous impact on helping people improve their credit scores. When you think about it in the prime world, there’s a lot of flexibility. If you can’t make your credit card payment the day of your credit card payment or your mortgage payment, the day of your mortgage payment, it’s not instantly turned into this rollover/refinancing situation that’s reported as delinquent, you usually get options on how to bring your account current.

So we’re just bringing a lot of the same best in class practices to a market that just hasn’t seen it before and what the results are, turns out that you can dramatically improve people’s credit scores by doing it.

Peter: Right, right. Okay, I want to talk about your credit card. When we last spoke in 2015, you had just launched your credit card so you’ve obviously had quite a bit of history with that now, can you tell us how that’s been going, the sort of traction you’re getting and what is different with that product than your other loan products?

Sasha: The credit card shares a lot of the learnings that we’ve had from our millions and millions of loans that we’ve done on the platform. It’s a completely different product, it solves a different problem for a lot of the borrower, which is sort of everyday cash flow and payments capabilities and credit rebuilding so we decided that we were going to take a little bit of a long term approach to not just launching a credit card, but actually redefining how a credit card could work for the consumer.

And what happens is you get three things.

One, we’ve attracted an incredible team of people from the credit card industry who have always dreamed of building better models, building better product features and functionality from a de novo platform so I think that’s exciting. We’ve really staffed up the team.

Second is we’ve seen incredible growth so as soon as we sort of took the covers off we actually had to shut down our website and put up a waitlist because the demand far exceeded our financial ability to maintain them or our banks financial ability to maintain them. So hundreds of thousands of people on the waitlist that we’re eagerly starting to make roads to unlock.

The third is by really being thoughtful about the user experience. So knowing that it’s a profitable product really trying to make sure that we’re really solving a customer problem with the result what ended up happening was we’re the highest rated card in the non-prime segment on Credit Karma.

So we’ve actually been recognized as the cardholders’ choice with a near perfect score of 4.7 out of 5 in an industry that typically sees ratings of 2 sometimes down to 1 and so it’s been a really exciting launch.

Peter: That’s interesting to me. What are the typical credit limits on these cards and what makes them so popular?

Sasha: I think that what makes them popular are three things.

One, it’s just transparent so its cheaper than they can get, but it’s transparently cheaper. There aren’t these weird hidden fees like a fee to apply or a fee to call customer service or a fee to make a payment. It’s a straightforward, transparent, normal credit card, grace period and all.

The second piece is it’s built natively for mobile and so the experiences are designed not as a website that’s been shrunk down to a mobile app. It’s actually designed to have features and functionality native to mobile that make a really good user experience from alerts, reminders, nudges, budgeting, free credit score, education, all of the things that you would expect that don’t even yet exist in prime credit cards.

I think the third piece is you can see by using our card that it’s actually teaching you about how to improve your credit score. It doesn’t guarantee that you’re going to improve your credit score, but it gives you your free credit score. It gives you a lot more flexibility on making on-time payments, it gives you a lot more education about keeping your balances low which is the opposite of what most credit card companies, or all credit card companies, how they think about. And so you just get this really great positive feedback because it’s there to help you succeed, not for you to fail.

Peter: Right, what is the range of credit limits that you’re offering?

Sasha: Yeah sorry, the rates range from 19% to 29% APR, zero to $60 annual fee, but those are depending upon risk and credit lines from $300 to $2,500.

Peter: Okay, interesting. Are these like Visa cards, Mastercards, you must be partnering with a bank to issue these, I presume.

Sasha: Yeah, we have multiple bank partners that were just sort of very motivated and interested in building products for this customer segment so we worked with them to design products and come into market and they’re a nationally based Visa credit card.

Peter: Okay, cool. So then I want to switch gears a little bit and talk about regulation and I feel like…when you talk to people in Washington, they have a very negative view of the space you operate in. I mean, I know you’re fully aware of that, but there’s a lot of…anyone who’s charging…if you extrapolate out APRs or whatever, it can be quite challenging for them to understand the good you’re doing. So tell us about what are you doing to engage regulators and are you making inroads there?

Sasha: Yeah, so this is something that I think I’m seeing improvement in the relationships between banks, regulators and fintech which is really important because the current situation of our regulation is what’s causing this dichotomy, this exclusion out of the financial system. I don’t think anybody believes this is intentional, but the reality is 56% of our country have a subprime credit score and if you have a subprime credit score the banking system doesn’t work well for you.

And so the divide and the problem is, the divide between the banking sector and the non-banking sector traditionally has been really, really big for the subprime market so we’re not talking about great innovation like SoFi and Affirm and LendingClub and those types of players that are refinancing out debt for cheaper rates. We’re talking about access and availability for everyday working Americans.

The divide has been so great and so where we really fit in is this bridge between these two worlds; helping people get from low credit scores to high credit scores and while we don’t guarantee it we do everything in our technological power to design for it so that requires quite a few things. It requires investment in hiring people from the regulatory world, we have state examiners, people from the CFPB, Treasury, Federal Reserve on our staff so it helps them sort of understand and helps us understand their perspective and them understanding our perspective.

We have a very active government affairs led by Jotaka Eaddy in Washington DC who really spends a lot of time helping bridge discussions with regulators and advocates and key constituents and partners so that we’re actually engaging in dialogue on both sides about how do we upgrade these laws that were written in the 70s, the 80s and even 2008 to help make banking more inclusive.

And then the third is we have to actually proactively engage and take our experiences and help it in the community, whether that’s sharing best practices along compliance, regulation, product growth, controls, oversight, working with people like FinRegLab, applying for and opining on the OCC’s Fintech Charter and the CFPB’s sort of RFP with Project Catalyst.

So we think about this in three different approaches that it’s our responsibility to help drive the conversation because we have such a huge opportunity for financial inclusion and you typically don’t get that perspective so loud and clear in DC, San Francisco and New York. We’re trying to kind of bridge that narrative.

Peter: Right, because sometimes I think when I read what the regulators are saying, I sometimes feel like they want everyone to have like a prime credit score. They want everyone to get prime credit, they want people to get 10% on a 3-year loan, that’s what they want and they don’t want this 56% of the population or whatever, they say yep, you need to charge them the same.

I sometimes think there’s sort of this mismatch between what the regulators want and what is reality. I see all these talks about usury rates and all that sort of thing that they want everyone to have access to credit and they want everyone to have access to credit at like 10% and I feel like…obviously that’s just not economically possible. Do you feel like, is the conversation changing yet, I mean, I haven’t seen much evidence of that yet, but maybe, maybe I haven’t been listening closely enough.

Sasha: We all want the same thing, we want our entire country to be prime, we want people to have readily available credit to buy homes, start small businesses, have reliable cars to get to work. Credit creates advancement in wealth, credit creates availability and access and mobility that enable the American dream.

Now the problem that we’re facing today is over half of our country have a subprime credit score and the subprime credit score is a predictor of likelihood of default and so in order to make even just a break-even business…let’s pretend that we had one bank and it was evenly controlled across the entire country and everybody was able to be priced perfectly, people would have to price differently, otherwise you’re punishing responsible borrowers and rewarding bad borrowers.

Now the solution is you have to give people that first stepping stone to build and establish your credit score and we have to have a regulatory framework that doesn’t just enable that, it encourages that. And so it is entirely possible, it is entirely within our control, financial inclusion is totally possible, financial exclusion is a choice that we’re making. And so this is something and the only way to solve it is by letting people have that first step towards credit building. It’s like your first job; your first job out of college doesn’t pay Jamie Dimon’s salary (Peter laughs), but we’re America and everybody can get to Jamie Dimon’s salary, realistically, theoretically….

Peter: Theoretically.

Sasha: …you have to get that first job.

Peter: Right.

Sasha: That first job is not being CEO of the world’s largest bank, it’s being a teller and then working your way up to a manager, and then working your way up to district manager, and then working your way up and learning about operations and credit management and all of the different aspects of a business and showing success.

But if we’re in a society that says we are not going to let 56% of our country take that first job even if it’s not a high paying job, that’s effectively what we’re saying today. And so we need to change the dialogue and we believe that we’re in a position and you, with your podcast and your platform, to be able to help shift that narrative and show people that financial inclusion is something that’s solvable with technology, with data, with education and with a regulatory framework that encourages it.

Peter: Right, right. I’ve been preaching that as well, I feel like the promise of fintech isn’t to save people $100 a month on their student loan or whatever it is, the promise which…I’m not saying that’s not a noble cause, it is, that does help a vast number of people, but the real promise, I always say is to really use the technology to expand access and bring people who have been unbanked or underbanked into the system. I’m not going to rest until we’ve made inroads there and I feel like we’ve still got a lot to go.

Anyway, we’re almost out of time, but there’s a couple of more questions I really want to get to and firstly, you look around your space and obviously you’ve got the storefront lenders, the pawn shops and the payday lenders that are still in existence somehow. When you look around the space that you operate in…obviously there are some unscrupulous players, there are companies that are out there that aren’t as mission-driven as what you guys are, but what would you like to see? Maybe how are you different from the unscrupulous players and what would you like to see to sort of rout them all out or to make it impossible for them to do business?

Sasha: Well I mean, if you have an extra billion or $2 billion, I’m sure we can figure out something to do with it. (Peter laughs). There is I think equal culpability from the banking sector down to the payday sector of creating products and structures or maintaining legacy products and structures that are set up where the lender or the bank win when the customer loses.

The three most notable talked about examples are endless overdraft fees and reordering transactions to optimize for banks to collect as much overdraft fees as possible; reverse amortization loans with no income verification that put us into the Great Recession; payday lenders where the marketed convenience of a rollover creates an endless cycle of debt for people. So we all have culpability as a financial sector to the problems that we’re facing today. So your question is how do we solve it.

I think what we’re seeing is what fintech is really driving, the thing I’m most excited about, is they’re driving new experiences that are much more transparent than ever before and customers recognize and value that and you see fintech overtaking banking as the largest private lender/personal lender around and you’re going to start to see that in every industry that people that are solely focused on creating amazing experiences are going to win because customers now are having choices.

Peter: Right.

Sasha: I think, two, the regulatory environment of rethinking some of this old regulation is a discussion we haven’t had in a long time. We’ve been adding so much regulation that I think we’re now talking about what regulation makes sense and what doesn’t. We haven’t had that dialogue in a long time.

And third is, I think we’re rethinking the notion of what a bank means and so if there can be a fintech charter or we can start reissuing new bank charters and ILCs, you’re going to start to see the word bank can have a more broad meaning than I think it does when you think about the brick and mortar place on your corner that has 365 mediocre versions of everything that you want.

Peter: (laughs) Okay. So I want to move over to the other side of the balance sheet and I’d like to get an idea about, you know, how you’re funding your loans today, the bank partners you’re working with. Where’s the capital coming from today for you to fund all of your loans?

Sasha: Yeah, we have warehouse lines in place on the cards and separately on the loans businesses and so those are there. Our credit performance has been, for six years, just incredibly steady, we invest very heavily on the credit side. We have not had a shortage of people saying, can we fund your portfolio, can we fund your portfolio so that side there, there’s been a lot of structure and a lot of interest and we’re very well funded there.

Peter: Right. Okay, finally then, what are you working on today that you think is most exciting for LendUp?

Sasha: The thing that I’m most excited about is we’re really at an exciting stage of the company right now. We have proven that we can build industry defining products, both internally and as rated by the customer.

The second thing is we’ve proven that this can be profitable and I think we’ve earned enough trust now in the market to show that we’re really committed to building the consumer. So if you have product market fit and profit market fit, it starts to unlock some really exciting conversations.

So we have nothing to announce at this moment, but we promise we will let you and your listeners know that we some major partnerships that are in the works right now that I think will rethink how both the private market and the banking industry think about becoming relevant to their customer base.

Peter: Okay, well I look forward to hearing about that. Anyway, it’s always a pleasure talking with you, Sasha, thanks for coming on the show today.

Sasha: You as well Peter, good chat.

Peter: Okay, see you.

Sasha: Bye.

Peter: You know, I’m reminded of something that Scott Sanborn said sometime ago, the CEO of LendingClub, he said that credit is just a data problem. What companies like LendUp are doing, they are solving the data problem for a very difficult population to serve and they are doing this in a way that is really making a win-win environment. They are proving that you can do this at scale and actually build a profitable business.

So I feel like, as I said before, fintech needs to serve more than just prime consumers, it needs to serve the entire gamut, from the new immigrant to the person right out of college to the people who are really just entering the credit system for the first time and it needs to serve all of those people equally and I feel like we are nowhere near that now. I hope in the next few years we will make progress; I feel like progress is slowly being made, but I’d like to see it move faster as would Sasha, I’m sure.

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

Today’s show was sponsored by LendIt Fintech USA 2019, the world’s leading event in financial services innovation. It’s coming up on April 8th through 9th, 2019 at Moscone West in San Francisco. Registration is now open and we’re also taking speaker applications.  You can find out more by going to lendit.com/usa.

PODCAST TRANSCRIPTION SESSION NO. 161 / EVERETT SANDS

Welcome to the Lend Academy podcast, Episode No. 161. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s coming up on the 19th and 20th of November in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I’m delighted to welcome Everett Sands, he is the CEO and Founder of Lendistry. Lendistry is a small business lender, but they’re a bit different to most. What they are doing and what Everett has pursued is what he calls a hybrid approach between a community bank and an online lender, a fintech lender. It’s interesting because we go into this in some depth on the show where Lendistry employees will go and have face-to-face meetings with many of their borrowers.

At the same time, they’ve got an online approach, a tech heavy approach so we talk about that. We talk about the industries they serve, why they decided to get a CDFI certification, an interesting new partnership with the Federal Home Loan Bank of San Francisco, we talk about capital and much more. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Everett.

Everett Sands: Thank you, thank you, Peter, appreciate it.

Peter: So I like to get these things started by giving the listeners some background about yourself and tell us what you’ve done so far in your career before Lendistry.

Everett: Sure, sure. So as a kid, I grew up in Washington D.C., spent the majority of my time there, in high school, I ended up going to a school called St Paul’s which is in Concord, New Hampshire, spent some time in Japan as an exchange student and then I went on to Penn. As you may or may not know, most of those kids end up on Wall Street somewhere. I didn’t quite get to Wall Street.

I made a decision to go into the mortgage business so in financial services, but didn’t decide to go to New York, stayed in the Philadelphia area and then on to the DC/Baltimore area, started a mortgage company, we grew it to about 120 people, we were a top 10 lender and eventually sold that company to a community bank in Baltimore, Maryland. I became a vice president of lending there and helped that team grow and that bank grow by about 600%.

2008 happened and didn’t find myself out of a job, but definitely found myself in a scary scenario where the bank was a mutual bank and made a decision not to convert the stock which meant that if a subjective regulator came our way we might have to build up bigger loan loss reserve and/or if we had some bad loans go south that could be pretty risky. At the time, every bank that went south, the top leaders, would go under federal investigation. I was number three at the bank and I was not interested in going under federal regulation so I jumped over to Wells Fargo, joined their consumer lending team on the East Coast and then I got promoted to California, to the West Coast.

Peter: Okay, so then was it from Wells Fargo that you first got the idea for Lendistry?

Everett: I would say, yeah, definitely Wells Fargo cemented it. The idea came shortly before joining Wells where I started participating in loans with what at that time was called peer to peer lenders and it was kind of a friends and family/angel investors who would help companies to make sure they didn’t hit their concentration limits so we would represent the equity piece of the loan that they might have to put up in a traditional credit facility an advance rate structure and that started…I guess now it has been about nine years ago so that was before Wells.

And then when I got to Wells what was interesting is Wells taught me….well what I saw at Wells was I saw the bank purchasing loans from other banks and purchasing loans from other alternative lenders, that really piqued my curiosity. As my career at Wells went on, I really, really got to learn about the opportunity available to sell loans to banks and different things like that which I kind of knew was happening on the residential side of the world, I just didn’t realize how much it was happening on the small business side of the world.

Lendistry actually got started because I went to some of my friends who will remain nameless and I told them, hey, I think you guys could cut a deal with some of these banks and you could start selling loans to them and at the time they thought the banks were, you know, the worst thing ever.

Peter: Right.

Everett: They weren’t transparent, they weren’t fast enough and quite frankly, the fintech industry basically said the banks were bad and they were kind of in opposition to the banks. I would say to my friends, hey, but you know, I’m a banker and I’m a good guy and they would laugh and say, yeah, well you’re different. (Peter laughs)

So you know, as cliche as it might be, one time we were having a conversation and I said to them, I think you should partner with banks, I think there’s a real opportunity, there are some regulatory items that you could really help with and they basically said, if you think it’s such a great idea, why don’t you do it and that planted the seed that led to Lendistry.

Peter: Right, interesting. So then why don’t you step back and tell us about Lendistry. In our previous conversation you described it as a hybrid of a community bank and a fintech company, but you’re not a bank so tell us what you are and what products you have.

Everett: Yeah, so I think what led us to come up with this hybrid concept is that we’ve looked at kind of the two industries; one on the private side if you could imagine I’m participating in a loan to them and would really…the participation started because five years out of my twenty year career I was an underwriter so what I was trying to figure out was how did they take those 100 to 200 sheets of paper….my friends in these fintech companies, and how are they able to make a decision in such a short period of time. So what started out as curiosity led me to really be intrigued and what I felt was that the companies had two really good things.

Number one, they were able to filter the sales process and I thought, oh my gosh, if we didn’t have to pick up the phone and talk to everybody and go through kind of this brain damage of figuring out who’s the right and wrong customer for a variety of reasons, that would be great.

The second thing is what I would call a proactive approach to servicing which is where they really focused on taking a look at the borrower based on risk and credit profile and making a decision about how to collect from that borrower and what to monitor. I found that a lot of these systems that fintech companies were using were actually used in the bank, they were just utilized on the compliance side as opposed to the sales and marketing side so I thought that was really interesting.

When I looked at the fintech world I saw that there were three things that were kind of fundamental in banking that I thought they were missing. That was cost of acquisition, I thought it was just too high, cost of funds, I thought that was way too high and then the third thing was risk management.

So I said, well if we could take what’s great about what’s going on in the fintech world, and we could take what’s great about what’s going on in the banking world and if we could kind of mush them together it could be a really interesting company and that’s how Lendistry was started. So what we are, again, is kind of a hybrid of the best of both worlds and constantly improving on the different features and different things that we offer.

In terms of products, we offer really four main products. One is a bridge loan which is basically a loan to help people when they’re either going to get an SBA 504 loan or some type of real estate loan and the timing is off so they need some help in terms of financing it.

In the banking world, a lot of times that happens when you’re doing a construction of a property. In the modern kind of small business world, it just happens when costs are…maybe the business is going through a lot of growth or there’s something happening and they just need to kind of bridge it. That will eventually, and we’ve already started this process…that’s going to transform itself into a line of credit product which we’ve already started exploring and I can see big things for that.

The second thing we offer is a term loan. A term loan is usually five years or less. Most customers are coming in at around three to four years just based on credit profiles and essentially, that is a fixed rate product that allows the borrower to get generally working capital, expansion capital or business acquisition.

The third product is our SBA loan which is really similar to the term except the difference is that it goes out ten years and has a lower rate, generally. A lot of borrowers like that naturally for cash flow.

The fourth product which is probably the newer one is the commercial real estate. What we found is that a lot of these same businesses that were coming to us and couldn’t get financing for working capital expansion, debt consolidation were also having some similar issues in terms of purchasing or refinancing their property so we decided we would add that as another product to our list of products that we offer.

Peter: Okay, so on the SBA one, are you partnering with a bank on those SBA loans or do you have direct access to the SBA program?

Everett: So part of the hybrid concept for us was we would take a couple of years and we would look at different licenses that were out there. We looked at a SBIC, which is a Small Business Investment Company and that was an interesting license, but what we actually focused on was a CDFI, Community Development Financial Institution, and we liked that one because, quite frankly, it had more of a community feel. We felt that we were serving this underserved market, this market that was really a victim of lack of community banks. You know, there’s a lot of people out there that say big banks don’t lend.

As a banker, I would argue that you have it exactly wrong. The big banks were the secondary markets source to the community banks and 30 years ago, there were 18,000 community banks, now there’s arguably 6,000 of them depending on what marketing material you’re looking at. So that 67% gap or loss of banks is really what has caused this major vacuum. So we got the CDFI certification thinking about, okay, what we’re really going after is an underserved market and what that certification gave us was the opportunity to apply with the SBA to be a direct lender to them and we took that opportunity.

Peter: Okay, okay, that makes sense. I guess one thing that I’d like to take some time to explore is the typical kinds of customers that you’ve got. I mean, these small businesses, are these…you’re operating online, but you’re sort of trying to build a community feel kind of thing. Tell us the typical customers that come to Lendistry.

Everett: Sure, so most of the customers that come to us come by bank referrals. The banks are our clients, the customers are the small business owners and so the actual metrics of them are they’ve been in business for about three and a half years, their revenues have a tendency to be under $3 million, they’re typically looking for a loan amount size of a range of about $194,000. In terms of the community feel versus call it a national banking feel, our definition of community is just someone who’ll listen to you, hear you out and try to help you out.

And so we leverage the technology as an enabler to make the process smoother, faster, stronger, but at the same time there are triggers or different things that will let us know when there’s a customer we need to talk to. It could be them asking us a lot of questions, it could be us digging into their profile, it can even be a high growth scenario where we see a client that maybe made $150,000 one year then $800,000 and then $2.5 million and $3 million where we’re trying to figure out what’s going on there because part of the risk management that your taught at banks is to really understand exactly where this customer is going.

And that, again, goes to that product line where we said, you know, we need to evolve our bridge product really into a line of credit product because we’ve got some high growth companies out there that really are looking for a line of credit as opposed to just a term loan or some, you know, fixed loan amount.

Peter: Right, got it okay. So then I want to dig into underwriting just for a bit because, you know, you said, when we chatted before, that you have a portfolio management approach to underwriting and I wanted to find out firstly what you mean by that exactly and what is your approach to underwriting?

Everett: Sure, so in underwriting we look at three things. We look at the primary source of repayment which is cash flow of the business, the secondary source of repayment which is a personal guarantee and the third or tertiary source of repayment would be the collateral or maybe some type of federal or state guarantee. We’ve built the business around these three things knowing that any one of the three could be off. What I mean by portfolio management is you take a look at your risk factors, you take a look at how you could potentially lose money and you effectively build a moat around it.

Now that could be in the form of loan loss reserves, that could be in the form of government programs, that could be in the form of how you price a loan and I think that was kind of interesting to us because when we first got into the peer to peer fintech world it seemed like the focus was okay, I’m going to do risk-based pricing and I’m going to outrun my defaults. As a banker, we saw that that didn’t work two times in history; one in the subprime mortgage world and in the subprime auto loan world. So we said we don’t want to take that approach, we think we’ve already learned that lesson twice, let’s try a different approach to this.

Peter: Okay, so I’m curious…like on your website you really emphasize the banks, the banking partners and you even say join our banking partners by investing in our communities, you know, 6% net annualized yield, are you working with banks on both sides of the equation like are you working with banks to say here is an investment, are you working with banks to say we can take your turndown, the client that you can’t help, but we can help? Explain sort of the partnerships you’re having with banks.

Everett: Sure, I mean, the first thing we did was we said is it truly possible to disrupt the banks or is it truly possible to partner with the banks, which one has the best shelf life, for lack of a better term, where’s the biggest opportunity. And what we saw was that it appears that customers still, I forget the exact study, but one of the studies said 84% of customers are still going to banks.

And so what that meant to me is that it’s impossible to escape the banks. I definitely believe that people can disrupt the banks and companies can make things change, but I think at least in the US, there’s a long road before banks really get disrupted.

And so we said let’s just try to figure out the different angles where banks need help and so we saw that as a regulatory scenario and a yield scenario and so we really, really focus on what are the regulatory needs that a bank might be going through and how do we help with those, how do we make ourselves look as much like a bank as possible so that we can be a good partner to them.

And then we also have a team that, quite frankly, 70% of them have come from the banking world and I think that’s part of our unique sauce is that we spend more time looking like a bank, thinking like a bank than we do anything else. And so to answer your question, banks have turned around and said, okay, we don’t want to do this type of loan and it could be anything.

Peter: Right.

Everett: It could be credit profile, it could be operational efficiency, anything, would you be willing to do this for us. Sometimes the answer is no, a lot of the times the answer is yes. The other thing is they will say, well I’ve got this same thing as a peer to peer lender concept with a person, right, there’s a person who has their money in let’s call it a checking account or savings account, they’re not making any money and they decide, okay, I want to invest in loans.

Well banks invest in things too and they want opportunities to earn higher yields just like the peer to peer investor does. And so we focus on that knowing what they traditionally invest in and say, okay, we can give the same sense of security or the same optionality. Would you be willing to take that and a lot of times they say yes.

Peter: So then just to be clear on that, are you providing them with a way to offer business loans like lending as a service type thing or are you just taking their capital and investing it in your loans? What’s the level of depth of the partnership, I guess, is what I’m asking.

Everett: Yes, so capital for us comes in equity capital, it’s coming in debt capital, it’s coming in the ability to participate in loans so there’s a variety of different things that they’re looking at us as a source for them. Different banks want different things, regionally, size wise, etc., but we’re giving them all of the options.

Peter: So are you giving them an option to run a banking program under their own brand like an online offering? I know there’s other companies doing this as well, but is that part of what you’re offering or how integrated are you in the…like the experience of that bank’s customer. Can one of your partner banks make a loan to their clients under their own brand or do they refer them to you and then you take over?

Everett: Typically, it’s the latter where they’re referring it to us although we have definitely started to talk to a couple of banks that want to do the former. And so that’s really a compliance thing today which we believe we figured that out and we have a couple of banks that are now exploring it. So hopefully in the next 12 months you’ll see that come to light. I don’t necessarily know that it will be transparent when it comes to light, but it definitely will come to light.

Peter: Right, okay. So then just on your loan products, obviously you’ve got a few different loan products, is the term loan the most popular product, as far as demand, or which one is? I just want to dig in a little bit about these products.

Everett: Yes, I would say that SBA loan and the term loan go hand in hand. We cap our SBA loans at $250,000 so we’re generally looking…the program that we’re in is called SBA Community Advantage which is a $50,000 – $250,000 loan product so it’s looking for a specific type of customer.

The term loan goes up to $1 million so generally the reason why our customer would choose one or another just purely has to do with how much money they’re looking to borrow, but the two go hand in hand in terms of which ones are the top product at the time. I would also say that some are regional; Southern California has a tendency to have bigger borrowing amounts than Northern California unless we’re dealing with like San Francisco or the Bay Area.

Peter: Right, that makes sense. So then what are the range of interest rates that you’re charging? Obviously, SBA loans are probably going to be pretty low rates, but the term loans…can you just give us some sense of the range of interest rates?

Everett: Sure, the SBA generally is ranging somewhere in the range of about 8 to 10% right now with a ten year fix, that’s the majority of customers we’re getting so as you can imagine, from a cash flow perspective, that’s pretty cheap borrowing and that’s a fixed rate too as opposed to a variable which a lot of times when they’re going to other places they’re getting a variable rate for an SBA. We have started to consider the variable, but for right now, we’ve been doing fixed rates.

And then the term loan generally ranges somewhere in the range I’d say about 8 to 16% and that’s going to depend on credit profiles. Again, that’s up to five years. A majority of people are coming in right around three to four years and so one of the things we’re looking forward to as more banks invest, we’ll be taking those rates down further.

It’ll be interesting because it’ll contradict the interest rate movement which obviously prime and LIBOR are shifting upwards but because we’re generally borrowing from banks we’ve got a little bit lower cost of capital. So what we’ve been doing from a risk management perspective is we don’t put our bank capital into 100% of loans just to kind of spread our own risk management philosophy and spreading out the risk across our different bank partners.

Peter: Okay, so then let’s just talk about that for a minute. I mean, you said the majority of your capital comes from banks, how does it work? I guess how has it evolved over time too? You’re still a relatively new company, obviously you’ve got people, yourself included, people at Lendistry who have deep bank experience and deep bank connections so, you know, what I’m trying to get at is when you’re funding these loans are you sort of taking a marketplace approach or are you…or you just got the banks….the banks are providing a warehouse line, and you’re funding loans through that line.

Everett: Yeah, so I would share with you, Peter, that probably the majority of our funding comes from institutional investors today…

Peter: Okay.

Everett: …and banks are catching up quick, just to be clear. The answer to your question is I would say it’s part existing or permanent bank capital where they’ve either invested in a loan fund or they’re providing debt and then the other part is a marketplace where we have banks out there that are just saying, I’m looking for a loan placement here, or yield here or credit profile here, so to speak, and if it meets one of those criteria then that’s when we kind of turn into somewhat of a marketplace. Again, not quite transparent to the borrower because the servicing is retained, but that is how it works.

Peter: Okay, okay, that makes sense. Just going back to the community aspect, I mean, you’re an online lender, I guess how much of what you’re doing is in Southern California where you’re based and how much of it is in other states? Maybe tell us your geographic footprint and how you sort of…are you doing this face-to-face, how are you building the community in your business?

Everett: Yeah, so I guess it’s a little convoluted I guess is the best way to answer, but the answer to your question is we are a national lender, however, 90% of our business is in California. Now part of that is because that is what we’ve chosen to do, we’ve said let’s stay focused at home. We have a lot of different regulatory things that we wanted to put in place. You might have saw recently we got approved by Federal Home Loan Bank of San Francisco so there were certain things that we really wanted to focus on and concentrate on inside of California and quite frankly, it’s California, right.

So if there’s any economy, you know, you want to deal with, if you look at the states as an individual economies outside of New York, California, to me, is where you want to be. So it gives us such a broad bandwidth to really focus, fine-tune and do a lot of things that we wanted to do in terms of building the company. That being said, we call it the Big 6, which is New York, Miami, Atlanta, Houston or Dallas, depending on where you want to choose in Texas and Chicago in addition to Southern California which I will call the LA market. Those are the markets that we plan to really, really sink our teeth in and then we’ve got some sub-markets like Philadelphia, San Francisco and a couple of others that were, you know, close seconds, so to speak.

In terms of how we talk to our customers, we have a group of bankers who in our world we call relationship managers who literally pound the streets and they take a grassroot approach and so those are generally face-to-face. It’s really a center of influence business, it is a face-to-face, it’s going to different conferences and different things like that and that’s going to be a lot more interaction with the customers.

Then we’ve got another group that is really coming through SEO marketing, Google, different marketing things that we’re pushing out and those customers are coming online. At the end of the day, everybody ends up inside of our portal, but in terms of how we actually attract and talk to customers, we want to do a couple of different things.

I look at it from a leadership standpoint, you want to be regional just because markets change, economics change, environments change, God forbid, but California could have a major earthquake whereas Miami could have a hurricane, right, we saw that last year so part of that is risk management and part of that is where you want your deal flow to come in.

The other thing to me is your verticals and how you bring in customers. You should also have diversity in your different approaches and again, that’s something that I learned when I was at the banks and I think it’s extremely important. I think at Wells Fargo we did an amazing job of stuff like that and so that’s always kind of top of mind for me is that a singular source or a singular vertical, I think I can never see that inside of one of the companies I’m leading.

Peter: Right, right. So let me go back to the Federal Home Loan Bank of San Francisco. I saw the press release a few weeks ago now so firstly, maybe explain what the Federal Home Loan Bank of San Francisco is and what it means for your business to be a member.

Everett: Federal Home Loan Bank is what we call a banker’s bank, It’s a place where a bank goes when it needs to borrow money, or economics, it just makes sense to borrow money. Maybe that money is cheaper than another place that you could borrow from. What we liked about the Federal Home Loan Bank is a couple of things; number one, it has a community focus. You know, for all intents and purposes, it’s a community bank, right, or a co-op of community banks and so that was really important to us because it kind of met the same mission.

The second thing is it gave us the ability to look at different asset classes as we think about building out the scope of Lendistry, you’ve heard me talk about cost of funds, you’ve heard me talk about risk management and considering we’re in probably one of the best points in the economy, I think all of us who want to go beyond, you know, the next rough spot in the economy you want to look at asset diversification.

And so what this allows us to do is really, really sink our teeth into commercial real estate, have asset diversification, have leverage and also have a cheaper cost of funds. And so that’s why we’re excited about it and it just seemed like a natural move for us.

Peter: Right, right. Okay, so I want to talk just briefly….I see on your website here that you are a signatory of the Small Business Borrowers Bill of Rights. This is a guideline set by the Responsible Business Lending Coalition and I just wanted to get your perspective like why did you do that? What does it mean for your business to be part of this coalition?

Everett: I think one of the things that I would charge all lenders to be that consider themselves good guys, is number one, stake your claim that you’re a good guy. Number two, show up in a high quality way and I think this is part of us staking our claim like we recognize that there are businesses out there that are underserved, we want to make sure they don’t get taken advantage of and then we want to basically tell others about it and hopefully others will consider it. I think that’s what the Borrower Bill of Rights and those that are involved in the Borrower Bill of Rights, they represent that community for us that’s all thinking and have the same mindset and it just made perfect sense for us.

Peter: Right, right, okay, that makes sense, yeah. I’m a big fan of…you know, I always feel like small businesses especially, there’s protections in place for consumers, but I think for small businesses, there are fewer protections in place and I think it’s got to be a win-win situation. There are some organizations out there that…not that this is purely based on interest rate or anything like that, but I think there are some companies I feel like it isn’t as clear cut a win-win.

Anyway, we’re almost out of time. Okay before I let you go, a couple of more things. You talk about your partnership with The Center, it’s a non-profit so I want to just dig into that a little bit. Tell us briefly, what is The Center and why are you a partner with them?

Everett: Sure, so be ready, The Center is a nickname, the company has a long name. It’s called the Center for Strategic Economic Studies and Institutional Development.

Peter: Wow.

Everett: It was started in 1999 to help African Americans grow and build their small businesses. When you ask the question about us being involved in the community, it’s just a natural partnership for us and we leverage The Center, it’s members and it’s board members, it’s volunteers, etc. to help us kind of really reach into the community and that looks a couple of different ways.

One is face-to-face seminars where we generally have anywhere from 50 to 100 people, it’s small business coaching or sometimes there’s a customer that just doesn’t fit right or they really need some help and then we can leverage The Center which collaborates with other non-profits to bring them the resources.

And then, more importantly, recently it started building an online platform for customers to go online and learn different things and different educational things so it’s just very, very exciting to partner with them. Again, with 70% of our team being bankers, and a lot of them being community bankers, this is a part of the banking job that they’ve always wanted to do so we figured if we bring it in house and bring it really close to home, it makes it a hell of a lot easier.

Peter: Right, interesting, really interesting. Okay, so then last question, what’s your vision for Lendistry, where are you taking this?

Everett: So when I when I look at us as a hybrid of the fintech world and the community banking world, I’d also like us to be a gateway. I’d like for the banks that are out there that want to do more lending for them to be able to expand their small business lending or other departments and leverage Lendistry or maybe leverage one of our fintech partners.

On the flipside, I know there’s a lot of good fintech lenders out there who maybe need some help in the cost of funds and I’d love to be a gateway for them for the banks, so that’s number one. Second thing is naturally I’d love to keep growing our business and add additional products and additional offerings to our clients which are banks and our customers which, again, are the small business owners.

Down the road, we’re going to start looking at some other intricacies in terms of residential real estate and others things just as we kind of come full circle and take a holistic approach with this customer that we have all their financial information already, what other services can we offer to them.

Peter: Great, well I think that’s a noble mission and I wish you all the best. Thanks for coming on the podcast today, Everett.

Everett: Thank you so much, Peter, I really appreciate your time and the opportunity.

Peter: Okay, see you.

Everett: Thanks.

Peter: We all know about the reduction in the number of community banks nationwide, Everett just touched on it earlier, and really the community banks though they serve a wonderful purpose, a noble purpose and a useful purpose because they are connected to their local community. I often feel like that’s what’s missing in a lot of these nationwide online lenders, is a connection to the local community so it’s interesting to me that Everett sees this as…he is really a fintech company, he’s a non-bank lender, but he is very much focused on serving the local community and he’s doing that in a really interesting way.

I think it’s going to be interesting to see how they can scale this operation and whether they can truly reach a national scale, but the reality is this is the approach we need I think because people, particularly small businesses when they’re dealing with complex financial matters, they want to have a relationship. They want that relationship to be more than just a phone call or whatever and I think being in the local community, being able to serve it in a local way, I think that is a huge advantage and one that I wish Everett and the team at Lendistry all the best with.

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

Today’s show was sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s happening November 19th and 20th at the Business Design Centre in London.  Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 160 / CECILIA FREW

Welcome to the Lend Academy podcast, Episode No. 160. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s coming up on the 19th and 20th of November in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I am delighted to welcome Cecilia Frew, she is a Senior Vice-President and the Head of North America Push Payments for Visa Direct, which is obviously part of Visa. Now what Visa Direct does is they’re really bringing real-time disbursements to the lending space. This is something that hasn’t been possible really until very recently so I wanted to get Cecilia on the show to talk about how they’re doing that, what some of the use cases are and how the whole system works. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Cecilia!

Cecilia Frew: Thank you and thank you for having me.

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

Cecilia: Sure, of course. So Cecilia Frew, I manage our Visa Direct real-time push payment product for North America at Visa and I had been at Visa for about four years before leading the push payment effort…I was leading prepaid for the US. Before that, I was actually in banking for about eight years and did a whole bunch of different things ranging from corporate banking strategy and treasury management to small business debit card and consumer prepaid management. I also spent some time right after the financial crisis managing a distressed home equity portfolio which was pretty significant, about $18 billion in distressed assets, which was quite an interesting time to be in that field.

Peter: I’m sure.

Cecilia: Before that, was at McKinsey and Company, did my own consulting for a while and way before that was at Kodak, Eastman Kodak, if you remember them, doing sales. That was my very first job out of college, doing sales for Kodak.

Peter: Okay, that was probably while they were still going well…

Cecilia: Exactly.

Peter: …a better time than more recently. Anyway, so I want to just get straight into push payments and I’d like you to explain what it is and what it is that Visa Direct does because I know that it’s not obvious to many people. It wasn’t obvious to me until we started chatting so I’d like you to explain to everybody, what is push payments?

Cecilia: Yes, absolutely and it is counterintuitive so it does take a little bit of time to reacclimate your brain to basically what consists of a reversal of the flow in what we traditionally think of with the card networks. So the way I like to describe it is…so imagine you go into a store and you want to buy a sweater and you hand the merchant your card or you tap it or whatever happens nowadays in terms of the card technology, but essentially what’s going to happen is that merchant is going to take your card number and pull the funds from you.

If that is from a debit card, it’s going to come right out of your bank account and so in that regard it’s helpful to think of the debit card number as another access point to the bank account. Now imagine I change my mind, I take that same sweater back and I want to return it. Again, I hand the merchant my card, again he uses my card number, but this time he reverses the flow and pushes the money back to me. The money doesn’t sit on my debit card, it goes back into my bank account.

Peter: Right.

Cecilia: And so that’s why you’ll hear us refer to this as…a lot of times we’ll use the term push to debit, but what we really mean is push to bank account with your debit card. And so it’s that push, that credit back into the bank account, really that’s what we’re talking about. Now what’s interesting is that the merchandise return, which is what that is has been around for forever, but it is inherently linked to the purchase transaction and so a lot of the data resides in that purchase transaction.

So on it’s own, it can’t stand on it’s own, the data is not good enough, the tracking is not good enough because the purchase was the original transaction and so what we needed was an original credit transaction as opposed to that original debit transaction. So the original credit transaction you’ll often hear us call it an OCT is…think of it to some extent as a souped up merchandise return, that’s it.

You know, they use the card number, they push the money back into your bank account, but in the new transaction it’s a much more robust set of data around who’s sending the money, where the money is coming from, where the receiver is, that allows the bank issuers to risk rate and approve those transactions, and most importantly, to post them immediately, make the funds available immediately and so that is the big difference.

You guys probably all know if you’ve ever done a return with your debit card sometimes it kind of goes pending, it might not hit for a couple of days. That is not the case for an OCT or Visa Direct, the funds must be made available within 30 minutes, available meaning you can literally go to the ATM and get the cash out.

Peter: Okay, interesting. Is that the same technology that Venmo and Zelle are using or is that different?

Cecilia: That is exactly…so if you think about Venmo, in particular, let’s use them as an example. So Venmo traditionally, has been a…if you want to send…so let’s say I want to send money to you and what I would do is I would download the Venmo app, I would load my debit card and I would send it to you, you would get a text that says, so and so sent you money, come get it. At that point, Venmo would leave it in your Venmo account, right, and if you wanted the money actually in your bank account you would have to give them your routing and transit number and they would do a slow ACH to your bank.

So what Venmo did…this is probably about seven or eight months ago now, is they added Visa Direct as an option for instant cash out and for….you can still choose to do ACH slow and that’s free or we can use the same card that you already have in your Venmo account and deposit the money into your bank account instantly for a 25 cent fee, by the way. So there is a small fee, but pretty reasonable to have the money back into your bank account.

Peter: So this relies on an actual debit card…we all have a debit card, our ATM card is a debit card so that is what you’re using to really push the money directly to the bank account?

Cecilia: That’s it, that’s it, think about…like if I take my debit card to an ATM to make a deposit. So I’m a small business and I’ve got checks and cash I want to deposit, I put my card in and they’re going to use that debit card number to access my bank account and post that deposit. Same exact thing, same exact thing here.

Peter: Right, right. Okay, so then I know you were at LendIt speaking earlier this year about push payments and I will link to that session in the show notes, but if you could maybe articulate what the use cases of this technology is for the lending space.

Cecilia: Yes, absolutely. So I absolutely love how this has emerged as a leading use case actually for our Visa Direct push to card solution. So it’s interesting the evolution in the US…so first of all, the Visa Direct transaction, the OCT, has been around for quite a while, probably ten years or so now, and it got a little bit of traction in the rest of the world, but not in the US.

The reason is because it’s a new transaction, this souped up merchandise return, it required the issuers to do some technology builds and when it first came out there was not a lot of use cases, there wasn’t a lot of need and so not all the issuers actually did the implementation. And so it wasn’t until a couple of years ago where all of that changed with faster payments, P2P, in particular was a disruptor, so P2P was really our first use case but then very quickly we saw a desire for businesses to be able to want to disburse money instantly to either their customer of their small business partner.

A really good example of this would be Uber and Lyft so today if I’m an Uber driver I have the Uber driver app and in the old days it used to be I would have to wait until Tuesday to get an ACH for my prior week’s driving. Now what they say is you can still wait for that ACH or if you need some of that money, go ahead and for a small fee, I think it’s 50 cents, you can withdraw the money from your Uber account and have it immediately deposited. As you can imagine, for someone doing Uber or Lyft they’re trying to make ends meet, they’re trying to get some extra cash and so being able to access their money at night or on the weekends or on holidays was pretty important.

So we see a lot of what I think of as a faster settlement. You see what I mean by that, it’s their money, it’s at Uber, they don’t have it in their bank account and so what they’re really looking to do is use their debit card. Now in a lot of cases those are small businesses so that was kind of the first time where we’re like, you know, small businesses and cash flow…small businesses have debit cards and we can talk a little about the stats on that and so yeah, Uber, you get a mix of small businesses and just traditional consumers.

So then what happened is we started talking to lenders, small business lenders in particular, and what we would in the banking world would call alt lenders. OnDeck, in particular, who is now piloting on our system and what they said was okay, we now have the ability to take a small business customer and using all of their data they give us we can underwrite and that’s awesome, but it still takes days to get them the money.

Peter: Right.

Cecilia: You know, and so that’s actually not that helpful. So they said we want to add the ability to push the loan disbursement to the small business in real-time. Now imagine a scenario where I am a small business, it’s Saturday morning because that’s when I kind of do my financials because during the week it got crazy. Saturday morning with my cup of coffee and I’m doing my loan application to OnDeck. If they can say you’re approved and then they say, and by the way, we can get you the funds right now, just give us your small business debit card. I enter that and boom, the money is in my account. So you can see how absolutely powerful…

Peter: I just want to clarify, so that can happen outside of business hours, that can happen at anytime on the weekend or whatever, is it?

Cecilia: That is the most important part to this because unlike ACH or even same day ACH,  Visa is not batched.

Peter: Right.

Cecilia: In real-time, 24/7, 365 and so it doesn’t matter if it’s Labor Day, it doesn’t matter if it’s two in the morning, Visa is up and ready for business. So it was interesting…I don’t know, earlier in the week if you saw, there was an article by the Kabbage CEO where he did some work basically kind of investigating when people actually pulled their funds and I think it was something, it was either 20 or 30% of all their funds were being asked for to be distributed off hours, so whether that was at night or on weekends or holidays.

So even a same day ACH, which can be very useful, by the way, and by the way, sometimes these things can live next to each other, it doesn’t have to be either or, you know, you can offer choices depending on the scenario, but you can see how important it would be to give access to the money anytime and what a competitive differentiator that was going to be for Kabbage.

Peter: Right, right, that makes sense. I mean, for any of those online lenders particularly the ones that are automated. OnDeck does a lot of automation, Kabbage does a lot of automation, you know, to have that…the customer satisfaction for someone applying for a loan let’s say 10:00 am and by 10:30 the money is sitting in their account. That’s not what we’re used to.

Cecilia: Yeah, exactly and you know, one of the things when we’re talking to lenders about the service…there is an interesting nuance for lending which is the fees that are charged, either to the consumer or small business. So you know, there’s a lot of sensitivity, especially in the consumer space, around APRs. If you take every single fee and you add it into the APR all of it starts to look pretty bad. So we talked about Uber, we talked about Venmo, they’re each charging a small fee to the receiver of that money.

In the lending space, we don’t expect the lender to charge a fee and so instead that’s just an additional service that the lender provides and it’s in order to maintain the APRs where we need them. Now the good news is the economics of sending are completely different than a card transaction so you can think of it as, you know, it’s less than a dollar all in, including interchange so it’s very affordable. It’s not an ACH, you know an ACH might be 25 to 50 cents, but it’s getting there and for the additional customer benefit it’s probably very worth it.

Peter: Yeah, I mean, that’s very little to pay for…I mean, right now, it’s still…people aren’t expecting this so customer satisfaction must go through the roof I imagine for that so that’s really interesting. I want to ask about how the process works because I know when OnDeck sort of announced this product, this partnership with Visa Direct there was also Ingo Money involved and I’m not sure exactly how all the pieces fit. So can you explain to the listeners how the pieces fit in with OnDeck, Ingo Money and Visa Direct?

Cecilia: Yes, absolutely. So that’s a great question so thank you for asking it and giving me the chance to explain because I think there is some confusion on how all the pieces fit together. So if we step back and we ask, what is Visa, what role does Visa play in the payments ecosystem? We are a network, we’re a platform, we’re the rails that people use to create services for their customers.

And the best example of that is let’s say a merchant uses and acquires a processor to connect to Visa to do purchase transactions and so think about this as, in this case, OnDeck is acting as the merchant in our traditional 4-party model language and Ingo is the processor and so Ingo connects to us directly and then they go out and they work to create solutions, unique solutions for each of their customers and bring them onboard. So OnDeck doesn’t connect to us directly, they connect through a processor which is very similar to our traditional purchase model.

Peter: Right, okay, okay, now I understand, thank you. Okay, so then I’m curious about the whole piece around how this technology works and…you know, there’s so much talk about data privacy and identity verification and all this sort of thing, tell us about the steps that you guys take that will…I mean, obviously you’ve got someone who’s got a debit card, how are you verifying that they are who they say they are because I imagine that’s a…obviously, OnDeck will do their own piece, where does KYC and identity verification kind of fit in with all of this?

Cecilia: Yes, absolutely, so I would say there’s three elements here. The first one, which we don’t have to worry about really at all, is the original KYC that the bank who issued that bank account and that debit card did with the small business, and we can pretty much all rely that that business has had proper KYC and that debit card is legitimate. So what we do have to worry though about is one, compromising that small business’ information or their card number which we don’t want to do or two, preventing fraud.

So someone takes that small business card number and uses it to their advantage or, you know, a small business might…you know, let’s say the lender might want to push to one account, but the small business wants to push to a different account so we want to make sure that there’s no fraud or misuse in the system.

So on the piece around privacy and security, the great news is that Visa Direct runs on the exact same platform rules and operating regulations as all card transactions so the card and the client information all needs to be protected. There needs to be PCI compliance, you know, all of that good stuff around protecting the cardholder.

We are actually also working on tokenization so you’ll be able to tokenize if you want to hold the card and do repeat transactions, but you don’t want to hold the actual card number, you can tokenize it. So that is where, quite often, your processor comes in so Ingo, in this case, is helping ensure that there’s PCI compliance and all of that information is protected so that’s where the merchants or the OnDecks’ or lenders can rely on their partner to help.

And then on the second part around fraud…so this is something we are always working on. Visa, as you may know, has been developing fraud detection and risk tools for years and we have an unbelievable suite of products that can come into play from very simple AVS checks to more sophisticated 3D authentication or geolocation or alerts; there’s all kinds of services that you can overlay to make sure that the cardholder is who they say they are. And again, this is where your processor would come in and help layer in all of those solutions into their product for you.

Peter: Right, right. Okay, so you mentioned that there has been use cases in the small business lending space, I’m just wondering about consumer lending because to me it doesn’t sound like this is very expensive. I mean, in the whole scheme of things if a company is making say $500 in revenue from a particular loan, whether it’s a consumer loan or a small business loan, this extra 50 cents or a dollar, or whatever it is, it’s not a very big expense. It feels like to me everyone should use this, I mean, it’s like the whole ACH system is 40 plus years old and I think people would appreciate having this instant…getting their money instantly, so are you working with consumer lenders as well?

Cecilia: We are.

Peter: Okay.

Cecilia: Yeah, no, we absolutely are. So the value proposition is very similar for consumer lenders and the good news is consumers have a higher likelihood of actually having a debit card.

Peter: Right.

Cecilia: Small businesses, we did some research, I think it’s something like 70% of all small business owners do have a debit card and of those that don’t, another 80% would be willing to go get one for this purpose so that’s really good news and on the consumer side, you know, we’ve got great debit card penetration. The consumer always has their debit card in their pocket so yes, absolutely, we have a lot of interest from the consumer lenders.

The interesting part there is there’s just a very big network of lenders out there and so it takes time to reach them all, to help them understand what the value proposition is, that they should engage with us on this and so we’ve had lots of very positive feedback and I am quite certain in the upcoming months we will hear an announcement about a consumer lender using Visa Direct. (laughs)

Peter: Okay, we’ll wait for that. (Cecilia laughs) So like what are the limits here, I mean, you probably can’t move $1 million in this program, right. What is the maximum amount of money that you can move at one time?

Cecilia: Yes, absolutely. So this is a great question and one that I want everyone to be thinking about. So when I first took over Visa Direct here in the US/North America about three years ago, we had a single transaction limit of $2,500 which wasn’t very good. For P2P, maybe it’s okay because that was really the first use case contemplated, but we said, you know what, for these business disbursements or, you know, in this case lending, you need something more than that so we increased the transaction limit. We actually increased P2P as well so we increased P2P transaction limits to $10,000 and we increased a business disbursement to $50,000.

Peter: Okay.

Cecilia: Yeah, so it’s pretty big, it’s pretty big. Now one of the things that I always give the caveat on is that that’s the Visa system limit. We continue to work with the issuers in terms of…you know, they haven’t seen a lot of this yet. They’ve seen a lot of P2P, they’re all very comfortable with the transaction size which is typically smaller, but as we launch new use cases, in this case small business lending or insurance payouts that have a higher ticket, you can think of it as a higher dollar transaction, sometimes it gets caught up in the bank’s risk systems.

So we are working with our issuers very closely to help them understand what they’re getting and give them an understanding of, you know, please approve these transactions, don’t bounce them back because you don’t know what they are.

Peter: Right.

Cecilia: So there’s a bit of an education process for us, but it’s getting better every day.

Peter: So then are you just focused internally in North America? Obviously, Visa is probably in every country in the world, I’m guessing, so I’m interested about the applications of this for maybe cross border payments at some point so where does it stand? I mean, is this really a US product right now and where does it stand as far as cross border?

Cecilia: No, so cross border is absolutely a phenomenal opportunity and so and this is actually one of my favorites. So if you think about cross border and we think about it as cross border remittance which is, you know, P2P, that’s me sending money back to my Mom in my home country, or that’s a B2C disbursement, a business paying out maybe an app developer in another country. We think that this is a fabulous opportunity, we already see transactions going cross border and it’s a big push for us, for Visa globally. I think if you step back and you think about the global reach…so Visa has about 3 billion cards globally.

Peter: Wow, okay.

Cecilia: Right, I mean, so it’s an unbelievable amount of reach and if you think about the notion of being able to push money around the world in real-time, you know, traditionally we think of either like let’s say a global ACH or even a Swift or a correspondent banking, those can often take days and can get tied up and lost and it’s not always the easiest thing to keep track of.

But the transaction is the exact same around the world and it uses VisaNet around the world so there’s no complicated jumping around from bank to bank. It’s a very straightforward, reliable transaction so we’re very excited about it and there is some really great momentum in the cross border space as well.

Peter: Yeah, it sounds like that could be bigger than any of these use cases.

Cecilia: I know, right (laughs).

Peter: It’s still very frustrating, I mean, we are getting there. There are obviously lots of startups and there’s a whole lot of blockchain companies working on this, but you’ve got a huge advantage in having everything in place right now.

Cecilia: Yeah.

Peter: So last question before I let you go, how is this space evolving? I mean, obviously, you’ve sort of laid out a few different use cases here, but where would you like to see Visa Direct heading? You know, if we talk again in like five years time, is this going to be the ubiquitous payment method everyone is using, I mean, where do you see this going?

Cecilia: So I think, so I’m going to try and predict the future here, but I think this absolutely will be ubiquitous. I think everyone will understand it and it won’t be new, I won’t have to explain the you can push money into your bank account with your debit card. Everyone will know that, they will have experienced it firsthand which is awesome.

I do think that it will be an interconnected real-time network and I think that there will probably be even some interesting…if you think about…you know, there’s a lot of domestic real-time payment schemes in play, Zelle is a good example, we’re partnering with Zelle, they’re using Visa Direct to reach non-Zelle banks. I would imagine there will be a lot of partnerships in place with the local real-time payment schemes and it will just be part of the, you know, normal operating life.

If possible, what I’d love to see is…you know, we still have trillions of dollars of cash changing hands every day and businesses still write trillions of dollars of checks and there’s no reason for it. So I would love to, in five years time, be able to see that reduced by a significant amount and with the benefit to Visa, its partners and the consumers that are the beneficiaries of it.

Peter: Indeed, I’m sure you’re right there. I mean, checks are…it’s funny, you travel around the world and people are amazed that America still uses checks, because there’s many, many countries…in my home country in Australia, no one’s written a check that I know for the last decade or more, no one does it anymore and I think we’re moving that way.

Anyway, it’s been great chatting, Cecilia, I really appreciate your time today.

Cecilia: Yes, thank you very much.

Peter: Okay, see you.

Cecilia: Appreciate it, okay, take care.

Peter: Bye.

So it’s kind of crazy that here we are in 2018 that we’re still using batch processing to get money moved around. Clearly, those days are numbered, other countries have led the way as I talked about Australia, China, many other countries in the world, in Europe especially, they’re moving money around very quickly. The US needs this technology, we need to be able to have instant access to money and I think, obviously, it is going to happen. It’s inevitable, it’s going to happen in this country and I think companies like Visa have the power and the capability to really deliver on that real-time promise.

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

Today’s show was sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s happening November 19th and 20th at the Business Design Centre in London.  Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.