Lend Academy's Lending and Fintech Podcast

PODCAST TRANSCRIPTION SESSION NO. 231–ANU SHULTES

Welcome to the Lend Academy Podcast, Episode No. 231, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Anu Shultes, she is the CEO of LendUp. Now, LendUp is a company that many of our regular listeners would know, they’re a short term lender and had their former CEO, Sasha Orloff, on the show a couple of times, but I wanted to get Anu on the show. She’s been on the job about a year and we talk about the big change that LendUp made a year ago where they split off the credit card business.

We talk about the reasoning behind that, we talk about the business today, who their core customer is, how they position their business, what about the process that they do and how they help borrowers sort of move up the credit spectrum. We talk about their underwriting model in some depth and how Anu feels about the engagement with regulators. We talk about the funding and what’s next for LendUp. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast Anu!

Anu Shultes: Thank you, Peter, for having me.

Peter: Of course, my pleasure. So, I’d like to get this thing started by giving the listeners some background. You’ve had a pretty interesting career to date, so maybe you can give us some of the highlights before you got to LendUp.

Anu:  Yeah, absolutely. So, I actually have a Computer Engineering degree from India and then I came, I immigrated to the US, came here for masters degree, I have a couple of masters degree, I have a Masters in Operations Research. I started my career actually is Providian, Providian Capital One, at that time, they were called a non-bank bank.

Peter: Right.

Anu: I spent almost nine years at Providian, I was very fortunate to start my career at Providian because it was basically run by engineers, it was a company full of engineers, it was a data-driven meritocracy and I really kind of cut my teeth on just understanding lending and kind of using the background to really ….how do you use data to make decisions that ultimately benefit the customer and the company, that’s where I learned. I always talk about this because people are always surprised. My very first project at Providian was to build an internal pre-screened score, so I built it from basically internal FICO scores, if you will. So, I actually come from a very technical background, but I deliberately managed my career as a combination of me making intensely managing my career as well as happenstance.

I’ve actually started in analytics and, you know, on the credit management side, moved into marketing and operations for Providian, so by the time I left nine years later, I was VP in charge of running operations for the US prime business. I know they were known more for their ….you know, more of a sub-prime credit, but their bread and butter was actually the super prime business.

Peter: Interesting.

Anu: Yeah. So, I left Providian on my own because my husband had a job in the East Coast. I moved and went to Ohio, got an MBA in Corporate Finance and ended up managing products for a super regional bank called National City, it doesn’t exist anymore, it’s now part of PNC. I managed the home equity line of credit portfolio.

I kind of continued to evolve my career, you know, my goal was to ultimately be a GM and one day be CEO, so I actively kind of said, okay, what are the areas that I need to, in my own way, master and so that’s kind of what I’ve done over the last 25 years. I would say the first half of my career was all about lending, credit cards, super prime, home equity line of credit, you know, understanding both the credit side as well as the profitability side of lending.

The second half of my career, starting in 2007, has been all about underserved. I had a little detour when I worked at Home Shopping Network in Florida, but came back to California in 2007, actually joined this company called AccountNow that did prepaid cards for the underserved. It was a small company, but we were the third leading online prepaid company behind Green Dot in that span.

The industry itself was very nascent, I think Green Dot was only three years old and so it was a great opportunity for me to really jump in and make some substantial progress on how do we pin this customer, how do we provide value to this customer, but in that process, I actually ended up spending time with customers in person and it really hit me hard on….so many people even if they have a decent income, $40,000/$50,000, struggle on a day to day basis even with just access to financial tools. So, it really changed my opinion, my personal view on how I want to spend my career and what are the things I want to do.

So, it was a great opportunity because it was founded by ex-Providian folks and I didn’t have to prove myself when I came in the door, but also gave me the freedom to kind of explore….how do you delineate this customer, how do you provide products for them that make them feel dignified, give them access that we all take for granted and spent most of my time, if not all, on building products for the underserved and then really focused on financial inclusion.

Peter: Okay. So, what specifically attracted you to LendUp? It seems that you’ve been there for two and a half years now, what was the thing that first attracted you?

Anu: Yeah. So, I had, you know, worked for a financial services business for another company called Black Hawk and then I kind of stepped away from it because they didn’t want to focus on financial inclusion and I was just doing a startup with someone I knew on gifting. I just kind of fell into it, but my heart had been in financial inclusion.

So, when I got a call from LendUp, you know, it was through a recruiter, he didn’t even know what position it was for, he just said, hey, are you interested in LendUp and I kind of said yes, even before (laughs)…so, I came in and talked to Sasha and his COO and they were saying, hey, we have this great business, we have a credit card business, but we really need somebody. We’re very focused on credit cards and we need somebody to come in and, you know, really take on the loans business. It has been our bread and butter, but we need somebody who really understands fundamentals of running a business to come and manage it.

For me, it was sort of a no brainer, right, because I’ve been…for me mission is ….the mission of what brought me here and I 100% believe that the loans business, in general, within LendUp was delivering on that mission and I did not, you know, hesitate at all to give up my COO at the company to come in and be a GM and focus on the product that I felt like truly makes a difference.

Peter: Sure, and obviously, regular listeners know Sasha, Sasha Orloff, he’s been on the show a couple of times actually, over the years. So, I want to get back to the point where….this was about a year ago now when you became CEO and LendUp split in two and sold off the credit card business. Can you just, maybe give the thought process behind the splitting off of the businesses in two and then why focus just on the loans.

Anu: You know, we obviously have loans that has been around longer than cards at LendUp and Sasha and his stepbrother, Jacob, created loans first and, you know, we had products in the market that truly delivers on the mission and then, of course, they started the card business. If you think about it fundamentally, they are two different businesses, right. So, small dollar loans is a very capital efficient business, it’s definitely high interest rates, so investors kind of look at it in a certain way.

Credit cards, on the other hand, is a very capital-intensive business and the investors that are attracted to it are different. The LendUp credit cards was sub 36% interest rate, but very, very capital intensive, so when I think about, you know, sub-model, we basically had a bi-model company. We had two businesses with the same mission, but going about it entirely differently. So, I think the outcome of having two companies focused on the same mission, but both basically attracting a different group of investors is probably the best outcome we could have had. The reality would be the one company and be the larger company, I’m sure Sasha would say that was his vision.

His vision was to create a lot of, you know, a lot of products and an equal system of products. The reality is the loans and cards are fundamentally different products and attractive to investors.

Peter: Right, yeah, that makes sense, okay. So then, let’s fast forward to today, when you’re just telling people who haven’t heard of LendUp before, how do you describe LendUp today?

Anu: So, I describe LendUp as a mission-driven company focused on helping customers get on a path to better financial health. We are focused primarily on underserved customers, we are here to help them with the income volatility that they face every month, help educate them on how to get on a better path and ultimately, help them improve their, you know, credit score.

But, our mission is really to help them get on a path to better financial health and that’s pretty much what we do, everything related. Every decision I make and almost every person we hire into the company, we always revolve around the mission on is this the right thing for this consumer?

Peter: Sure. So, it’s been a year since you took over as CEO and you came in, you’ve been with the company a little bit by that stage, so I’m interested to…maybe you could tell the listeners what changes you’ve made over the past 12 months at LendUp.

Anu: Yeah, absolutely. So, you know, obviously I had an interesting part getting here. I came in as GM heads down and I focused on how to make the loans business, you know, profitable, how do I extend on the successes that Sasha and Jake had created, how do I get more value out of the business.

So, when I took over as CEO, I was not expecting that to happen when I came to LendUp that, you know, it was a long term goal of being a CEO, that’s not something that I had thought was going to happen in the near future. So, when I took over, I kind of went back to the basics on what’s important to the LendUp customer and what’s important to the LendUp employee, including myself. So, we kind of focused on community culture and then really forging the path for the future of LendUp.

What I mean by that is first thing I did, I know it was cost driven, but also thought through….we actually moved from San Francisco to Oakland and it may seem like is it really that big a change? It is, especially for our core employees, who most of them lived in San Francisco, it was a big change. You would think it’s not that big a change because it’s only like 10 miles east of San Francisco, but it brings us closer to some of our early stage investors, our core customers, as in, you know, Oakland has more of our customers than San Francisco. But also, I felt that picking a community where we can really start spending time with community leaders and make a difference beyond just our products was important to me.

But, to be clear, it was actually cost-driven, it was a decision driven by cost. Second is culture, right. For me, personally, it’s a focus on people so that includes our customers and as well as our employees so my focus on people who come here and join the company, especially in Silicon Valley, to seclude people in a very competitive job market to get people to come in to a mission-driven company takes, you know, takes a lot of…they take a leap of faith on the mission is more important to them than perhaps being in a fast growth unicorn ready company.

And so we focused on how do we create products that fundamentally help us deliver on the mission, both to our current customers or also broadly. Today, I’m not so sure where…we are, obviously, state by state business and we are only in a minority of states in the US. So, I’m always thinking about how do I extend my reach in the US, but also within the states we’re in, how do I expand my reach with the customers and provide them just more than one thing, right.

What we do well, what we already do well and, obviously you’re very familiar with the LendUp products, is we focus on giving them a small dollar loan, but it’s backed by financial education, we kind of hold their hand and get them up our LendUp ladder with higher amounts and lower rates ultimately culminating in the installment loan that can be credit supporting and help them improve their credit score.

But, I really want to also….I’ve been thinking about what does the future look like, that’s the obvious thought and this brings us very often to what is the path for the future of LendUp. We know, you know, pay day lending, but if you want to call us that, or not, as far as regulators are considered, if you work as a pay day lender, it is not…you know, one of our investors and board director would say it’s not a standard type of term, right, pay day lending.

Peter: Right.

Anu: So, definitely the hesitation about, hey, are you guys….you know, are you guys doing right by the customer, are you predatory. And then you have competitors and I know you’ve had many of them on your podcast like dave.com where they’re offering over draft, but it is in the end of the day that is selling the same name. So, thinking through, how do we extend our set of products, also look at various competition as…..it’s not coming from other companies like us, it’s coming from company that are approaching it differently, whether it’s Dave.com, or Earnin, or Even…right, more of a big advance to employer. So, looking at all that, what is the right set of products that we should be focused on.

So, 2019 has been about, you know, kind of resetting, right, because we went from two businesses to one, we focused on a mission and the culture and getting the right people on the door and also setting us up for the future. So, what does 2020 and beyond look like in terms of the type of products we should be investing in.

Peter: Right. So, does that mean that …..you talked about some of those companies that offer, you know, like an earned wage access-type product? Does that mean there’s a possibility down the road for LendUp?

Anu: It could be the art…..you know, the reason…like I don’t have a firm answer for you, but what I can tell is that being in a state by state licensing model is….on one hand, it’s, you know, a competitive advantage, or it’s like a barrier to entry for new companies who want to do that; on the other hand, it’s limiting in that, you know, getting into different states with licenses is not only is a laborious process, but you start to look at the, you know….you have to look at diminishing return if you get into the smaller states, or difference on the regulation that differs state by state.

And then I’m also looking at…you have all these competitors coming in, kind of from a different angle, and you have the third thing in the marketplace where I think a lot of consumers are getting very comfortable with the subscription model, right. People seem to be wanting Spotify, or for….you know, even for financial products, or non-financial products. The concept of paying $5 to 10 for a service every month, people seem to be okay with it, right. So, I definitely see like it’s something that I cannot ignore when I’m looking at a set or products.

But, at the same time, I also feel like what we do today, Peter, no one asked me to do, like no one is giving a super underserved customer the services. I know you’ll fully get into it later, but our customers have a 550 VantageScore, right. They don’t really have that many options and a lot of them don’t have money in savings. I know most Americans don’t have $400 in savings, but our customers, 85% of them report that they have income volatility, so we are like the stopgap. right.

Peter: Right.

Anu: So, no one else is doing a $300 loan, our competitors are doing $500 or more, or $1,500, right, and overdraft, is usually around $100. So, I m very aware of the fact that we can look at all these other models and they might be more attractive, or they seem like there’s a lot of traction. The regulatory issues are still unclear where that might go, so the kind of products we have no one else is doing.

So, what I’m thinking through is…is there a way I can extend a set of products we have to offer to the space, does that mean I have to go to a subscription model that would…..would that be easier, right, and so what does that mean for the underwriting because most over drafts when we do $100 is a lot easier to take that risk than to say $300. So, that’s all that I would say, it’s all in the, you know, all of our thought process. Myself and my executive team are very deep in the thought process on how do we extend our products to the maximum number of customers possible?

Peter: Right, right. So, maybe we could just take a step back and talk about the experience of the borrowers that are coming to LendUp. Can you just sort of describe the process… particularly, I’m talking about new customers that you don’t know, what’s the process like when they take out a loan?

Anu: So, you know, they are 100% digital, so customers find us online, either through our online marketing, or though our affiliates, and they can actually apply for …it may take a few minutes, they can apply for the loan, they can select the terms they want to pay. The entry level products is up to 30, or 35-day loan, it’s a single payment. It’s, 100% online is, you know, instant decisioning. We have a proprietary underwriting models with alternative data sources and they know immediately what they qualify for and how quickly they can get it.

Peter: Okay, it sounds like….I’m on the website right now and the range I see is $100 to $255 so that’s the typical range that everyone gets?

Anu: Yeah, $255 is the California limit, it’s slightly different by state. You know, the system is automatically based on what state you are in. If you are [inaudible] in the state, they’ll allow you the maximum, they will give you a range, the maximum set by the state and then you can set the amount and the actual term lendee will pay back.

Peter: Right, right. So, then what data are you using for these people to underwrite? You know, they’re coming to you digitally, these are sub prime borrowers with low credit scores, how do you decide whether or not to extend the loan?

Anu: So, we have actually over the last seven years, since LendUp was created, honed in on our core competencies and our secret sauce is the underwriting model so this ultimate credit data scores, you know, our ultimate credit bureau data and build our own underwriting model that provides instant decisioning. So, you know, most companies… there is FactorTrust, Clarity and, of course, all of these have been scooped up by the three major credit bureaus, so now, they’re already part of the larger credit bureaus, but our bread and butter would be the ultimate data.

So, the inquiry data, there’s the ability to pay, but, as you can imagine, our customers represent a very small band of FICO. FICO, by itself, is not predictive in helping us underwrite, you know, decide who will pay us back and who will not.

Peter: Right, right. So then, when you talk about alternative data, can you give us some examples of the different types of data that you use?

Anu: So, you know, I think the inquiries for…let’s say, for example, Factor Trust it’s now owned by Transunion, they track inquiry data not just for mainstream because our customers basically don’t have credit cards, 98% of our customers do not have a credit card, they track, for example, inquiries for other products. It could be payday loans, you know, it could be rent payments, so it’s basically……you know, this industry has evolved and has all these different data sources outside of what might be the mainstream FICO that’s set into our model.

Peter: Right, okay. So then, what are you doing…I mean, how do people move up the LendUp ladder? Obviously, they pay on time, I mean, someone who comes in and takes out a $250 loan and pays it off on time and they come back to you a month later, or two months later, are they going to get a better deal? Just explain the process of moving up the ladder.

Anu: Yeah, our core premise is that, you know, we are here to help the customer, so we kind of encourage them to take the courses on line that teach more how to manage their credit. The core premise is you take a loan from us, you pay it back. If you’re not able to pay it back, all you have to do is call us and we will help you with adjusting your payment date and we don’t charge additional fees for that. And then, once you’ve fully paid off the first one, you can take another loan.

We differentiate ourselves from a typical pay day lender in that there’s no rollover, so if you’re not able to pay back, we’ll work with you until you can pay us back and work with you to pay us back, but until you pay us back, you cannot apply for another loan. On the flip side, once you have paid us back, it’s a very quick…..you know, you come back and you apply again so customers actually love it. We have…. 95% of our customers come back.

We have a very strong brand equity with our customers because they know we are a trusted source, that we look out for them. As they stay with us and we gather… their behavior with our account actually gets fed back into the model and that drives our pricing decisions. And so, as they stay with us longer, they can qualify for slightly larger amounts and slightly lower rates. It’s actually driven by the customer so there’s no timeline in which you automatically qualify. It kind of depends on how many loans you’ve taken with us, how have you behaved with us, but, typically, once you qualify with us, the chances that you will qualify again are very high.

Peter: And so, just to be clear then, if you keep paying off on time, do you eventually qualify for an installment loan rather than a single payment loan?

Anu: That’s right. So, it’s typically…I would say it takes over 12 months, but you can eventually qualify for an installment loan, and even that, you start out smaller. You might start out with a $500 loan which is two, or three payments before we ultimately…..our maximum loan is a $1,000 loan and our maximum term is 12 months.

And then, at the top of the ladder…..you know, we’re also trying to think past the ladder concept, but the goal is really to progress the customer so whether they call it a ladder, not, we’re progressing them on their credit journey, if you will. They have a choice there to take a credit reporting loan, or not because we want to make sure the customer is ready and once they pick an installment loan and they pick the credit supporting option, we’re obliged to report their behavior to the credit bureaus. So, we want to make sure that they are consciously making that choice to pick that loan,

Peter: Right, right, okay, that makes sense. So, you’ve touched on this, but I want to just get your feedback on the regulatory activity that’s been happening. The small dollar loan space has been in the news, in the state of California quite a lot. There’s been talk, they continuously talk in Washington about it, so how are you engaging with the regulators?

Anu: You know, I would say that …on one hand, I want to just start by saying, I’m very pro-regulation because, fundamentally, I’m pro-consumers. I feel like regulation is there for a reason, at the same time, I’m also focused on the regulatory innovation. So to that, we actually are very actively engaged with both state and federal regulators.

On the state side, I know there’s been a lot of activity in California, recently in the December timeframe. A lot of that actually…..because we are so focused on the small dollar like $300 to 1,000, we’re not as impacted by a lot of the changes because it’s a small dollar loan…..have always been heavily regulated by California like they have very strict terms on the maximum we can charge for an installment loan based on the term and so that’s already been in place. The newer regulations actually impact our competitors who’ve been focused on the larger amounts like $2,500 and more. And so, that’s going to also …..you know, one of the things I wanted to call out is that when I think about ….you asked me earlier, how do you represent LendUp.

One of the things that stands out to me is that there are very few companies out there that are in the same space are offering super small dollar loans that we are doing. So, we are already in a super regulated space so this is something that we have gotten really good at, but I have a very strong senior executive team….you know, my head of compliance is a former regulator with 30 years experience in the space and my chief legal officer is also a very seasoned legal officer so we actively engaged both in DC as well as locally.

Peter: Okay. And then, I’m just curious about what metrics can you share. Obviously, you’ve got the repayment rate of the loans as a key metric, what are the metrics that you look at to determine success at LendUp?

Anu: The for profit company, I’m going to have to focus on at a high level, right, profit & loss, net income, but from a customer-centric perspective, we do look at how many customers are we serving, what is the retention rate month over month, or not even month over month, how many times……if a customer walks in the door and qualifies for the first loan, how long do they stay with us, their lifetime with us we look at, are we helping them, are we actually delivering our mission on a positive, better financial health, we look at, are we improving their credit scores?

We find that, you know, over two years, 62% of our customers do get some improvement, I should qualify, 62% of the customers are qualified for our larger loans actually, either credit scores go by 50 points or more. So, we call them the social impact metrics, we have our business metrics, we have I would say like the P&L metrics, we have the business healthy metrics in terms of customer retention, what is the cost to acquire a customer thing, but there’s also a set of social impact metrics we track. We can really say, you know, results show that we are doing our job we set out to do.

Peter: Right, right. Okay, we’re almost out of time, but just a couple more questions before I let you go. Let’s talk briefly about the funding of these loans. Obviously, these are short term loans and they’re paid off in full, not as capital intensive as you mentioned earlier as a credit card, but still requires significant capital to run your business, can you just tell the listeners how you’re funding the loans today?

Anu: Yeah. So, our funding is primarily debt with a little bit of equity, so we do have a line of credit to fund the loans and as part of that, we’re required to put up a small percentage equity. You’re actually right, so very capital efficient business with a very visibly sized line of credit. For instance, transactions, we have given out more than $2 Billion in loans. So small dollar, short terms loans, we can do a lot with a little bit of capital.

Peter: Right, right.

Anu: We do carry them in our balance sheet.

Peter: Sure. And then, we’re here recording this in early January, what are your goals for LendUp in 2020?

Anu: So, you know, one of the things I want to…I think I covered a little bit of this before. I think 2019 was really kind of getting the right team in place, you know, I’m very proud of the senior executive team that we’ve been able to put together. It’s a very diverse and deeply experienced team, so, for me, 2020 is about evolving LendUp into the next decade. So, how do we extend on our successes, how do we take them, you know, deep passion that I have and my team to really help the customer and extend the product set beyond what we are doing.

And so, the focus definitely is how can we become a national, how can we be available nationally and what are the set of products that we should be looking at to fundamentally help this customer. Financial health by itself is top of mind for us, but it’s so complex. I think it takes more than…it takes a village, right, to help this customer. And so, I’m very aware that this is not a journey that LendUp can do alone, so we definitely are looking at what partnerships will help us get better. We already work closely with Financial Health Network and the Aspen Institute.

We have a partnership with Earn to provide savings products, but, definitely top of mind is if you want to deliver on our mission, it’s going to take more than just the set of products we have. We have to navigate the regulatory environment as they shift for the new entrants as well, and then to expand the reach, we have to look at partnerships that will take us into more than where we are.

Peter: Okay, that’s fascinating and we wish you all the best, Anu, and thank you very much for coming on the show today.

Anu: Thank you so much, it’s been a pleasure to talk to you and I, definitely, am a big fan of your podcast, but also the LendIt Conference. So, I’m really excited to have this conversation with you.

Peter: Okay, fantastic. We’ll hopefully see you there and thanks again, Anu. See you.

Anu: Thank you.

Peter: You know, being in the small dollar loan space and operating in an honorable way, in a way that has the customers’ best interest at heart….it’s not an easy place, it’s not an easy business to execute and it’s also not easy to have your customers be delighted. You go on to LendUp’s home page, you see that their Trust Pilot score is 4.8 out of 5 stars and that’s with 2,300 reviews. That’s very, very difficult to game the system with that sort of thing.

Clearly, their customers are delighted with them and LendUp are helping them improve their financial wellbeing. I think that, you know, rather than talk about blunt instruments like interest rate caps, or other regulatory methods that are designed to help the underserved, we really should be looking at outcomes. That’s what a Trust Pilot score like that tells me is that the outcomes here are mostly positive. I applaud Anu and the team at LendUp for continuing to blaze a trail there.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 230–MARK RUDDOCK

Welcome to the Lend Academy Podcast, Episode No. 230, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Mark Ruddock, he is the CEO of BFS Capital. Now, BFS Capital has actually been around for quite sometime, since the early 2000s, they’re a small business lender. Mark has been at the helm just for over a year. So, I wanted to get him on to talk about the changes that he’s made, he’s certainly down a lot of changes and we get into those in some depth.

We talk about their approach to underwriting, their partnerships with brokers, we talk about the impact…you know, the PayPals, Amazons and Squares of the world. We talk about how they want to approach new audiences and just his views on the future of small business lending. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Mark!

Mark Ruddock: It’s great to be here.

Peter: Okay. So, I’d like to get this thing started by giving the listeners some background about yourself. You’ve had an interesting career, a global career, it seems, so why don’t you give the listeners some of the highlights of what you’ve done to date?

Mark: Sure. I guess you’d call me a geek by training so I have a Comp-Sci degree and that’s really the landscape where I’ve done an awful lot of work across my career, even though it really has been more on leadership, I think, than in the trenches of tech. The experience really has spanned both range of different sectors and also very different company sizes.

So, from a sectoral perspective, I’ve worked in enterprise software largely with a financial services focus. I’ve worked in mobile applications and most recently, spent the last seven years really focusing on online consumer financial services and across that career have worked in everything from, you know, 5-person startups, to companies of half a billion dollars of revenue with 3,500 employees spanning 17 countries.

So, from a leadership perspective, it’s been a really interesting career, actually. I’ve had the pleasure of working with my teams in multiple countries across multiple product lines and I’ve been involved in sectors that are undergoing pretty interesting transformations and that’s really what’s drawn me to a lot of these opportunities.

Peter: And you’re originally from Canada, is that right?

Mark: I’m actually not. I am Jamaican by birth.

Peter: (laughs) I wouldn’t have guessed that.

Mark: No, I’m actually third generation Jamaican by birth, if you can believe it, grew up a little bit in Jamaica, then went to live in England, then went to live to Canada. I guess it was sort of early middle school kind of area and I’ve really spent though the bulk of my time in Canada.

The last couple of years, my wife and I, were actually living in Berlin which was a fascinating experience in it’s own right, a tremendous startup town and a very vibrant and interesting city. So, it’s been a kind of fascinating way to grow up in the sense that I’ve been exposed to a number of different kinds of cultures and a number of different sorts of places, a really very rich upbringing.

Peter: Right, right, okay. So then, what was it that attracted you to BFS Capital?

Mark: Maybe I can answer that question by sort of starting at a bit of a macro level. So, having spent the last seven years in online consumer financial services, I was really living a pretty fundamental transformation of what’s happening in that sector as a combination of, you know, the kind of millennial effect, if you want to call it, was driving a demand for new kinds of products and user experience and so on. But, the rise of alternate data and data science was transforming underwriting to a degree to which, you know, we were able to offer automated and customized solutions.

The customers were really interesting and really exciting and this kind of switched to an in-hand mobile first experience. All of these were really, I think, shaping the foundations of what was, historically, a pretty static kind of consumer financial services space. And the more I thought about it as I was sort of coming to the end of the commitment I had made for finance, in particular, the more I began to wonder to what extent these changes were going to show up in the small business financial services area. And I developed a thesis that many of the sort of the shifts that we had seen in the consumer financial area were going to show up in business banking in very many respects.

The question, therefore, became what is an interesting point of inflection for SME financial services and, if so, were they interesting potential companies around which we could kind of re-imagine the space. And it was pure serendipity, actually, that I came across BFS and as I got to know the venture capitalists behind the firm and some of the founding team here, I guess those two perspectives came together and it really appeared that this company was very much a diamond in the rough in the sense that it had this tremendous experience in understanding the needs of small businesses, but it was still somewhat of a mechanical turf of a business.

But, if you sort of looked at the aspirations of the team here and of the private equity folks behind the company, you got the sense that they were really hungry to make this change happen, so it became a very interesting vehicle within which to do that.

I liked these particular moments in time because when you take a look at a shift, let’s say in the combination of consumer, or customer demand, technology enablement, all of these things, they fundamentally shake up sectors and they challenge the incumbents and they open up new wide space for challenges and they operate in a way that can shift enterprise value quite rapidly to those players who can kind of seize the opportunity. I think that to me is a stage in my career was really what excited me about coming here.

Peter: Right.

Mark: You know, and as a CEO, right, you always enter these things with a very hopeful and ambitious focus and once you get on the ground, you try to figure out what have I actually got. Actually, it’s been a fascinating year here as a result of that.

Peter: Okay. So, I think small business lending has had an interesting inflection point. There has been so much change in the last couple of years with new players which we’ll talk about in a little bit. But, maybe before that, for those who don’t know, why don’t you just describe the BFS Capital business, what sort of products you offer, the size of the company, that sort of thing.

Mark: Yeah, so BFS is focused on small business working capital primarily. So, we provide loans from about $5,000 to about $500,000 spanning six to 18 months. It’s primarily working capital term loans so we do significantly less than 20% now MCAs. The business originates, on average, about $300 Million a year in loans, it’s approaching $100 Million in revenue and it is profitable. So, it’s a very interesting asset in it’s own right.

It operates today across Canada, the US and the UK. I would say that the US, obviously, is the primary focus of the business and the UK and Canada are much more nascent businesses for us. I would call them “hobbies” potentially at this stage, but obviously the intent is to much more aggressively grow our international footprint, but starting with those two countries, in particular.

Peter: Okay. So then, you took on the job, it was I think November 2018, I believe, and as we’re recording this just before Christmas, you’re over a year on the job. Maybe just take us through, what are some of the changes you’ve made in your first year as CEO?

Mark: Yeah. So, I think, the primary focus when I got here was to get some clarity around what our strategy was going to be and then what it was we needed to do to effectively execute on that strategy. What I found was really a company that had deep IT in terms of understanding the customer base, but nominal IT, in terms of any technology underpinning.

So, we very quickly set about a twin track strategy here at BFS, but the first track was really getting the core business into a place where being technology-enabled, or more technology-enabled. It would achieve some sort of competitive advantage and that was not a trivial undertaking.

We began in the sort of early part of the spring to identify a new technology stack that included a new loan management system, a new risk engine that could allow us to scale to, you know, a deeper, broader pool of data and to more modern underwriting techniques and an underlying kind of CRM around which we could build a customer life cycle holistically of the customer.

And we chose Provenir as the risk engine which is a fairly well known platform now, I think it’s being used by a number of pretty interesting organizations around the world. We chose Salesforce as our underlying CRM, we chose a young company actually out of New York called LendingFront which has an interesting heritage in the sense that it was founded by some of the early team from OnDeck.

We felt that given what we were trying to achieve here that was the right kind of platform mix. So, track number one really became…beginning, of course, with kind of transforming this business from a little bit of a mechanical turf really to a digital and highly scalable lender. As part of that, we have obviously been beefing up our technology core team, we hired a great new CTO earlier this year and we have begun to test the new platform now.

In fact by the next, I would say, four weeks, or so, all of our North American loans will be moving to the new platform. Not only does it allow us to automate more of the process here and to underwrite much more quickly and much earlier in the process than historically that we’ve been able to ….but, it gives us the capability to transform the relationship we have with our partners so that from being really a bit of more asynchronous human-to-human type of relationship, it’s a much more API-driven relationship going forward. So, that was all track one and I think to me that in effect just table stakes.

Track Two was about going back to the place we started our conversation which is what does this point of inflection mean for SME financial services and how could BFS re-imagine part of that future and what role could we play in being a part of that future. And so we began about five/six months ago to look at if we were going to start from scratch, what might the next generation of SME financial products look like and could we actually credibly build some of them. That’s the process that’s now well underway.

In fact, as I think as you may have noticed, we have opened a new data science and tech hub in Toronto where we’re going to be building that new generation and we have not announced yet, but we have opened the second hub now in Omaha where a lot of the core technology transformation will be done. So, that’s really been a huge part of my focus over the last year. Around that, you can imagine really what the rest was.

The rest was trying to get an assessment of what resources we had, in terms of, you know, our management team, our mid-level management, our skill set and so on and identify places where we’re going to transform from being a much more human-powered organization to being a much more digital organization, where were the gaps and, you know, how were we going to kind of change them over.

And so, the other thing, I think, that we, as team, have been working on is re-skilling and up-skilling the teams. The management team level, you probably noticed, is that we’ve hired a new COO. He and I worked together before doing some high scale online algorithmic lending. And, there will be another announcement coming out in the early part of January, not a name I can mention, but we found a wonderful new chief marketing office and our current chief marketing officer is going to transition over to become our Chief People Officer. I asked her to make that change because she is extraordinarily skilled in that area and as you can imagine, as we transform this company, it has enormous impact on the people here.

Peter: Sure.

Mark: But, our employer brand and everything we’re doing about attracting the best and the brightest in the world is going to have to be driven by someone who’s sole purpose is to do that and Sherry is really just naturally talented in that area, so, a lot of stuff going on.

I think the last thing that we’ve done as we sort of clarified our strategy around where we go over the long term….as I went back and asked two questions. One was, you know, the core business today…. is very much an indirect merchant business. We go to, you know, business with a number of partners, mostly brokers, but that landscape is evolving obviously and it’s getting broader and more interesting.

And so, you know, I asked the question, how well are we doing in this space today and it turns out that we weren’t doing particularly well. I think our lack of automation, at times, had caused us to often get a little breathy about sending out offers before they were fully underwritten because we felt the pressure to do so and as a result…..you know, we occasionally left our partners at the altar, right, where when we finally underwrote the deal, we realized that we couldn’t do the deal and that leads to a very bad customer experience.

So, over the time we lasted awhile, we’ve been turning that around completely and winning back the trust of that particular community and we’re giving them some amazing tools now with the new platform that give them complete transparency. They can see all of their…..the life cycle of their leads, from leads to loans so even lifetime customer value.

The second thing was really trying to figure out where the arch of this business was going and  one of the things that I took out of the customer kind of consumer space that I’ve been working over that lasted awhile is the importance of kind of understanding the regulatory arc and understanding where it was that a truly sustainable business could exist.

As I took a look at the small business lending sector, I looked at kind of the potential regulatory arc that we were going to be facing, not only in the United States, but, frankly, around the world. I think we began to realize that what we needed to do was an organization was move up the credit curb a little bit and look at being able to thrive in a world of the lower APR types of products.

So, as a result of that, we really have began to tighten our lending criteria and also broaden our products offering in a way that makes it inherent much more appealing to those customers with more optionality, those customers who have choice, and a lot of what you started to see coming out of the new brand. You know, the waiving of upfront fees is really just the beginning of that story, the beginning of trying to create a compelling and differentiated brand in the sector backed up by tighter underwriting criteria at the backend. So, it’s been literally 12-1/2 months at this stage, maybe almost 13, and it has been a full year, (Peter laughs) pretty exciting.

Peter: Right, okay. So, there’s quite a bit to unpack there, but I just…maybe we’ll start with underwriting, you mentioned that several times. You talked about how you’re bringing more automation, more of an API-based approach, rather than a human-to-human approach, tell us a little bit about that process…like how automated is it today, what data sources are you pulling from these, what new things you’ve implemented there.

Mark: Yeah, it’s a good question. So, you know, the frame of reference I have is the world I just came out of. So, the company I was running prior to arriving at BFS, we were making about 22,500 lending decisions a days and we were issuing about 16,500 loans today and not a single human being touched that entire process, it was completely algorithmic. So, I sort of set that as the North Star benchmark, right.

Now, small business underwriting is far more complicated, complicated because there is a discontinuity of the underlying data that you bury off and need to take a look at. Some data sources that we will need to adjudicate certain kinds of loan are simply not available digitally by API today. So, there’s always going to be a need for a subset of your underwriting to be a human-powered kind of algorithm, right.

The question, though, is how do you marry the technology in the humans in a way that creates the most efficient process you can and how do you build the underlying decisioning technology stock so that as new data sources become available you can leverage them very quickly and automate more and more of the process.

And so, I think, number one is we see this very much as a hybrid where in some cases the machine can make all of the decision, but in most cases, the machine can make most of the decision and we might need a secondary check, you know, from a human underwriter who is able to kind of look for the nuance, right.

The second thing is that, you know, we need to evolve our thinking and our capability by continuously challenging ourselves to look at new data sources and then to back off to see if they are predictive. I think so much of being able to unlock a new range of financial products and services for the digitally native generation is going to be about a frictionless experience, and to some extent about immediacy. I think that’s the big challenge for people in the small business lending space.

These are very difficult companies to adjudicate sometimes, but yet the long arc has to be this kind of North Star, right, full automation eventually. So, what data sources do we look at? Well, we look at a combination of, both, the kind of credit information and other things we can acquire on the owners and the officers of the business, we look at the business itself, all of it’s kind of credit history. Increasingly, we look, obviously, at bank transactional data, but going forward, I think our philosophy is to look as broadly as we can at complimentary data that might come from sources as diverse as Plaid accounting systems, all the way through to social sentiment, right.

If you are trying to figure out if you should lend to a B2C company, a restaurant for example, it’s really helpful to understand the arch of, you know, what is the kind of customer feedback been over time, is it getting better, is it getting worse, are more customers, you know, writing reviews versus less. We think that there’s a really interesting play in looking more broadly than kind of historical credit measures.

So, part of what our team in Toronto was doing now is it’s building the kinds of algorithms to go and get that data back test it against, you know, the world that we’ve seen up to date because we have significant many, many years of outcomes, right, and try to understand the predictability of that information. So, I would say it’s a never-ending journey really for our risk team and I don’t think it is going to end anytime soon.

Peter: Right. (laughs) Yes, that’s for sure.

Mark: You can never be good enough at underwriting, right?

Peter: No, there’s always room for improvement, it’ll never end, the room for improvement, that is. So, you talked about….you’re primarily working with brokers for customer acquisition, you did touch on this, about improving the experience for them, so I guess maybe one of the big challenges, I think, for any lender, whether small business, consumer, what have you, is the cost of acquisition. You’re putting all this effort in, how are you kind of controlling that particular metric?

Mark: Yeah, it’s a good question. Maybe, I should step back and say we actually look at two fundamental metrics in concert. We certainly look at the cost of acquisition, but we look at it in a context of customer left hand value.

Peter: Sure.

Mark: And you can’t really just look at one without the other. So, on the cost of acquisition side, I think this is a really interesting topic, actually. So, today, we are a little fooled because, you know, our brokerage model, that drives much of this industry, is a model where the commissions are, in effect, paid by the customer, the end customer. And so, you don’t really ever get hit with cost of acquisition, you don’t think of it that often, or, historically, haven’t thought of it that often, obviously, as a company.

Now, as you do more direct customer acquisition, as you do more digital acquisition, as you go out and try to convert customers, you really now have to start to look not only at performance-based marketing, which can have very high costs, but broad-based multi-channel marketing which can also have cost. I believe, by the way, that if you are going to, over time, attract the truly discerning customers, you need to also have a brand and that requires that you must spend on brand and on brand awareness.

All of that has to be overall cost of acquisition and the secret really is to grind that down over time with both a high degree of excellence in your kind of performance marketing area, but also looking at more serendipity in terms of being able to raise you profile through third party content, through PR amplification and so on. So, one of the reasons why we are spending so much time and focus on really re-imagining our marketing organization under the leadership of a new CMO is that we believe that’s going to be pretty important going forward.

And there’s a third pillar here which I find particularly fascinating and I think about this a lot because one of the ways in which we built Viigo very, very successfully….Viigo was a mobile software company that was my second real kind of area focused after enterprise software, Viigo was very quickly known as one of the most highly downloaded Blackberry apps of all time before it was acquired by Blackberry in about 2010/2011. Viigo spent almost nothing on marketing, but it was able to go to market through a wonderful kind of cross section of rationally aligned partners who were as eager to tell the Viigo story as we were.

We didn’t have to pay for any of that and so the question we’ve been asking ourselves a lot is how do we unlock access to dump trucks to customers, as I like to call them, without actually having to buy them one dump truck at a time. In other words, can we find partnerships where there is this rational sort of self interest alignment, where as we are successful, they are successful and vice versa and, ultimately, therefore, bring down the overall cost of acquisition. I think that’s where we’re spending a lot of our focus right now and that’s one of the reasons why we’re kind of thinking about our tech stock in such a way as to enable that and make it possible, right.

And, you know, I think you’re right to point out to me that there are some companies that are really doing that well today, companies, you know, that have their own ecosystems like Stripe and Square and to some extent PayPal and Shopify who have not only captive ecosystems of customers which effectively they can get for free, but then they have all these proprietary data on top of it that they can use to pre-score and to judge those customers’ credit worthiness. I think it’s a very powerful competitive advantage and I think the question we’re asking ourselves is, are there analogues that we can take advantage of as we scale out our indirect merchant business.

Peter: Right, that’s right, that’s super interesting. So then, that brings up another question that is…..you know, some of your competitors have gone out and created a suite of services, Software-as-a-Service, basically, for banks which obviously is a way to get a massive chunk of customers on-boarded. You’re putting all this effort into tech and I’ve been thinking about this for the last ten minutes, thinking is that what you’re thinking of as far as going out to the traditional kind of lenders, or are you thinking about acquiring what you call dump trucks full of customers in completely unrelated areas

Mark: That’s a very good question. So, I think the question we’re really answering is that we’re considering a Credit-as-a-Service business and if so, are we going to focus on kind of  the banking sector, or in other sectors. I think my personal view is that I don’t think the banking sector represents a long term sustainable strategy for Credit-as-a-Service and I’ll tell you why.

You know, for a long time there’s been this discontinuity of capability between the banks and this kind of rapid rise of digitalization in financial services. Most banks are actually catching up pretty quickly now and while they may dabble by using other people’s products and technology stock, I don’t think they will do that sustainably. They’d much rather own their own stock, notwithstanding the fact that there’s a large portion of community banks, for example, that would much rather take software and deploy it than not. I think, you know, that space is being relatively well served today and it doesn’t feel like white space to me.

Peter: Right.

Mark: Our focus is on a slightly different type of potential partner. I don’t want to go into it into too much detail, but let me just say this. If you take a look at the Shopifys and the Squares and the Stripes and the PayPals and so on, you know, you can imagine that there is a long tail peer group of many of those companies that are now looking jealously at their peers and saying, wouldn’t it be nice to increase the average revenue per customer by being able to unlock credit to those customers.

I do, because we could monetize that on our own, or because it would enable those customers to buy more of our stuff which, frankly, is going to generate greater margin for us. And I think the answer is probably, yes, and I think that if we are going to scale our indirect to merchant business aggressively over the next few years…in fact, if anyone is going to do that, that is likely to be the vector that they’re going to have to pursue.

So, are we investing in building robust APIs that enable us to provide credit via API, for example, in other words, us to be the Stripe of credit, for example. I would say, yes, that is an interesting potential area of interest for us, but I would not underestimate the degree of difficulty in, you know, taking an alt lender and turning them, in effect, into a software company which is what that would require, and so, we’re not rushing down that road.

I think we see an evolution of our current broker base to a much more digital broker and, you know, comparison site base to some selective deep strategic partners with whom we will have deeply digital connections as being kind of the first wave of that. I think beyond that to the long tail of e-commerce and payment service providers and cloud accounting vendors and all of that stuff, that’s a much more difficult place to go play, but it’s certainly interesting.

Peter: Right, right, No, it is interesting. I like the fact you’re not actually….you’re trying to sort of blaze new ground, it sounds like, because there’s certainly lots of…..you know, there’s lots of people trying to provide Credit-as-a-Service to banks and ….I love the fact that there’s so many companies approaching this from very different angles and the winner is the small business owner.

Having been a small business owner my entire career and my Dad was a small business owner, getting credit has been very difficult for every business I’ve had. It’s been a challenge and I feel like we are just now getting to the point where it’s becoming easier, I feel like, and I think it’s only going to become more so in the coming decade.

Anyway, we’re almost out of time and we’ve covered a lot of territory here, why don’t you just maybe take a step back and share with the listeners what’s on top……this will be published in early 2020, what’s on tap for BFS next year?

Mark: I think the two strategies, or two tracks of strategies that I talked about will become a lot more evident as the year progresses. So, in the early part of 2020, you’re going to see from BFS really the more public launch of our new platform and what that means, in particular to digitally connected partners and the way in which we want to transform the reality for our partners today. I think we understand what it is they need us to be for them which is, you know, a place to very rapidly and very efficiently help them convert leads to loans, right.

I think the second thrust is going to be the continued evolution of our brand and our product offering. I think the removal of upfront fees, as I said earlier, was really just the beginning of taking a point of view that will be around a differentiated product offering and I hate to go to market as a company with an undifferentiated product. That’s a really hard way to make a living, so I would expect to see some evolution there.

I think the most exciting thing, though, that we have coming out of the business in 2020 will be the launch of our new product and it will be a fundamentally different product from anything you have seen from BFS in the past and it will have a very different go to market strategy behind it. That product should be visible as we move into the second half of the year and I think that that’s the product that’s exciting our Board and our investors and really even the core team here.

And so, you know, 2019, for me, was a bit of kind of an iceberg year where we had to sort of do quite a lot of heavy lifting below the surface. Not all of that heavy lifting is yet finished, there’s more to do, but it’s certainly moving along. I think 2020 is the year where….I’m hoping that BFS’ brand profile raises significantly and becomes, you know, I think synonymous with some forward looking thinking, some imaginative thing, some breakthrough thinking in the space.

You are quite correct, I think the winner in all of these is the small business owner. I think you’re going to see data and algorithms unlock access to credit earlier in their life cycle than we have to start we’ve been able to before. I think you’re going to start to see a broader range of products and services that are much more on their terms and not on the lenders’ terms so more granularity, more control, you know, left kind of fuss, more transparency, all of that stuff.

And I think, at the end of the day, you know, all of us kind of understand the economic impact we have as businesses because we provide really smart entrepreneurs with the capital necessary, frankly, the power of the economy. I think the next two, or three years, it’s going to be pretty exciting in small business financial services.

Peter: I completely agree and I’m excited to hear what you’ve got on top for half of next year. We’ll have to leave it there, though, Mark. I really appreciate your coming on the show.

Mark: Thank you so much, really it’s been a pleasure.

Peter: Okay, see you.

You know, Mark and I were just chatting after we stopped recording there and he was talking about where the US is compared to Europe and other parts of the world like China, and really the US, actually, has some catching up to do and a lot of it, obviously, has to do with the old rails that we have in place in the financial system.

We are making moves and I think the next decade is going to be super interesting insofar as the immediacy of data, the immediacy of movement of money. This is all going to have a tremendous impact on small business lending and BFS are setting themselves up to be one of the leaders in this change.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 229 –  SUSAN FRENCH

Welcome to the Lend Academy Podcast, Episode No. 229, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I’m delighted to welcome Susan French, she is the SVP and Head of Product at BBVA Open Platform. Now, BBVA, obviously, is a well known, very large international bank, Open Platform is their new Banking-as-a-Service offering. BBVA is a real trailblazer here in offering…. they’re the largest bank offering a Banking-as-a-Service type product.

I wanted to get Susan on just to talk about sort of the genesis of Open Platform, what it is exactly, who the clients are, the types of different clients they’re targeting and how they differentiate themselves from others offering Banking-as-a-Service. And then we spend some time at the end discussing trends for 2020 and it was interesting.

It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Susan!

Susan French: Thank you.

Peter: Okay, I’d like to get this thing started by giving the listeners a little bit of background, you’ve had quite an interesting career at some of the major companies in finance. So, why don’t you give the listeners just a little bit of background, particularly what you did before you came to BBVA.

Susan: Sure. Immediately, before I came to BBVA, I was at Visa, I was there for twelve years and had a variety of roles. Started out as a product manager in the Disputes Area, eventually became Head of Enterprise Architecture and had what Visa called Research and Central Technology which was their CTO office. The last thing I did at Visa was to create and launch the Visa Developer Center which was Visa’s program to expose its services externally to the world through APIs and other services like it.

Before Visa, I ran my own independent consulting company for a number of years working with fintechs and web design firms. Before that, worked with a large IT consulting company and ran a division that created and delivered software for banks they can use for their credit operations, so application processing, credit bureau interfaces, behavioral scoring, collections recoveries. I’ve been working in the financial services business for a long time.

Peter: Right, right, okay. So then, what was it that made you decide to go join BBVA?

Susan: BBVA was doing some very interesting things, the genesis of Banking-as-a-Service. BBVA is the only bank of our size in the US that has opened APIs for Banking-as-a-Service. That was a nascent project at that time that I first started talking with BBVA and it was just such an interesting concept to be at the ground floor of buildings, be of service and seeing it grow, and evangelizing it. It was a great opportunity.

Peter: Yeah, okay. So then, you arrived at BBVA, it sounds like, before Open Platform existed, right. So, tell us about the genesis of BBVA Open Platform and why the bank wanted to do this.

Susan: The very beginning days of Open Platform was actually a development work that was needed to integrate Simple and BBVA bought Simple. At the time that BBVA acquired them, they were connected to a different bank so a set of integration APIs had to be built in order to enable Simple to integrate with BBVA core banking system. That kind of happened before my time.

But when I came along, BBVA had discovered, as a result of the experience with Simple, that there was a much bigger world of opportunity out there by generalizing and extending the services that were built to support Simple into a much broader Banking-as-a-Service platform.

When I joined, BBVA was just the beginning of that process where we started with the kernel of what was created for Simple and then expanded it and added new features and services built out of robust, scalable platform, both for technology and for compliance and regulatory monitoring and created an actual Banking-as-a-Service business. And that was the opportunity that I came to BBVA to do and what we’ve been working on since the two years that I joined.

Peter: Right. So, is Open Platform really just focused on the US? I mean, obviously, BBVA is a Spanish bank with operations in many, many countries. So, what’s the geographic footprint for Open Platform?

Susan: For Open Platform, we’re right now geographically just in the US. We are working to expand our ability to support cross border payments. That’s something we’re going to work on probably the first half of next year, but right now our focus is in the US for our specific platform.

As you probably know, BBVA and the other geographies in Mexico with a partnership announced between Bank Homer and Uber and the number of the activities in BBVA Spain. There are similar activities going on in most of BBVA’s major geographies, but, for right now, our focus is in the US. We think there is a sea of opportunity to support this service in the US before we have to worry about internationalizing.

Peter: Sure, sure. So, let’s dig into Open Platform for a minute. Why don’t you tell us the different types of services, the different types of Banking-as-a-Service, I guess, offerings you have.

Susan: Sure. There are fundamentally five services we currently offer on the platform. The first is consumer KYC, so it’s a set of APIs and tools that enable our clients to perform bank grade KYC and a deeper view on their consumer customers. We have a similar set of APIs for business customers so Business KYB. All of that is digital, so our clients who are using those services can perform KYC and onboard their customers to our platform digitally.

We have services related to the opening of BBVA accounts, so all of those can be done digitally and instantly; similarly, issuing debit cards associated with those accounts. Probably our biggest and most generative services is what we call Move Money which is our on-demand payment services. It has a single API that allows our clients to move money from one account to another via a variety of different payment methods, depending on what makes sense.

So, we support payments via ACH debits and credits, same day and regular, via card-based push and pull so CardPull and CardPush. We have an agreement with a bill payment provider that enables us to support electronic bills payments and what we call PayAnyone. It is a service that allows our clients to electronically generate a check, paper check, and mail it to anybody who needs to be paid for anything that is required.

We’re looking at adding other payment options in the future, so both domestic and international wires, we’re looking at other real time payments rails to see how those can be integrated. What’s beautiful about the service is that a single integration to the Move Money API would enable a client to take advantage of any of those payment options as their option, depending on whether the source and the destination account is a bank account, a debit card, or a bill payment payee. They don’t need to build a separate integration to use different forms of payment.

The last piece is our Real Time Notification Service. So, we provide a whole set of real time notifications around every major event that occurs on the platform that a client can subscribe to and receive in real time.

Peter: Right, okay. So, that’s a pretty broad set of services. Maybe we can talk about ……I’d love to hear about some of the early clients. I think it was about a year ago you guys launched from memory, so tell us when you launched and maybe talk us through some of the different types of clients that you’re working with and even a couple of examples, if you could.

Susan: Sure. We had an early data at the beginning of last year with a couple of select clients to kind of shake down the service, but we launched BBVA Open Platform publicly in October of last year, so we’ve been in production live for roughly about 14 months. We have a variety of clients on our platform, we have a couple of examples, oh, in fact, generally, about who would be interested in Banking-as-a-Service because that’s often a question we get, great, but who needs the stuff. We’re here to think of our market as being divided up into five broad categories.

The first and kind of most obvious is digital banks, so if you want to launch a digital bank in the US and you don’t want to get your own banking charter then you need a bank partner to work with like us. We can provide you with the ability to onboard customers, open accounts, issue cards and make payments. So, there are a couple of digital banks who are existing clients, Simple being one of them; Azlo which is another BBVA found entity is a small business bank that sits on our platform, and we’ve recently launched a digital bank called Wise which is a small business bank as well on our platform

Second category is what I would call Service Economy, or Gig Economy businesses. So, anybody who needs to pay contractors, pay independent workers, you know, think, dog walkers, drivers, delivery people, you know, anyone who is in a sort of non-traditional payroll category may see ability to embed within their apps the ability to pay those people. So, there’s a large economy associated with that.

We have a project going with Uber in Mexico that enables Uber drivers there to get paid through an integration between Bank Homer (?) and Uber. We don’t do that in the US yet, but you can envision similar kinds of projects with clients in that industry. The second and third group is what we would call the Ecosystem Marketplaces where there’s a need for affiliated parties to be able to collaborate together in an ecosystem that allows them to perform their business and at the same time pay and be paid.

One of our current clients is a company called Tuvoli and they operate a marketplace for private jet aircraft charters where they bring together brokers who book trips on behalf of their customers, so people, or businesses and an ecosystem of providers, pilot, aircraft, fuel, caterers, hotels that have to deliver a booked charter and through Tuvoli’s marketplace environment, the broker and the providers collaborate with each other around booking trips, scheduling them and then reserving them and when the trip is completed they use our Banking-as-a-Service capabilities to pay and be paid.

Peter: Interesting.

Susan:  Now, a couple of other prospects that are similar ecosystems, one is around an ecosystem for residential construction, put everything together a collection of builders alongside who are building residential homes and on the other side, the suppliers and contractors and materials providers that need to get paid as part of that process. So, I think there’s a number of opportunities there.

The fourth category is kind of traditional disbursements. Enterprises of all kinds are realizing, especially in a B to C environment that more and more consumers want to receive payments electronically, or instantly and so there’s that category of enterprise disbursement use cases for ….take insurance companies, merchant rebates, suppliers settlement, purchase settlement where businesses want to operate from paper check disbursements to electronic payments, or from slower electronic payments to faster electronic payments.

They want to be able to integrate that directly into their claims system, or into their rebate system rather than having to, you know, go to some payables, or ERP system on the side in order to generate those reimbursements.

Peter: Right, right.

Susan: Now, last one is kind of financial wellness, there’s a whole group of emerging fintechs around helping consumers mostly how to manage their financial lives, whether it’s automated savings programs, Robo advising programs, financial budgeting. So, a couple of our clients fall in that category.

Digit is one of our largest clients and they have an automated savings program where they enable their consumers to connect their external bank accounts to their Digit account, set savings goals. Digit monitors their spending and income and finds opportunities when it’s safe to tighten up small bits, save them toward a goal. One of those goals could be paying a bill, or paying their credit card debt which is a particular program that they’re running with BBVA.

Another client is a company called Catch and they describe themselves as a portable benefits platform for self-employed people. So, self-employed people don’t have an employer to give them benefits like health insurance, IRAs, investing advice, the ability to save for their “time off” and so Catch is building a platform based on our platform that enable self-employed people to create banks accounts and to use those to take advantage of these benefit services that Catch offers.

It’s kind of a pretty broad swath to go through who our target markets are and who some of our current clients are.

Peter: Yes, interesting, So, you know, there’s a mix there, but it seems to be mainly startups you’re working with. I guess that’s probably not unusual because they’re the ones that have kind of a lot of the needs for these new services, but are you equally focused on more established companies, even large companies?

Susan: Oh, absolutely. I think your observation is spot on. In our initial days, our initial focus was building and testing with small and medium sized fintech companies who are obvious targets for these, but also adaptable and amenable and helped us, you know, to find the features of the platform and shake out its operations.

But now, we are very much engaging with larger and enterprise clients who have the similar need. Some whether it is a large fintech that wants to build banking services into their environment, or wants to be a bank, or whether it’s a large enterprise that wants to add electronic payments, or instant payments and disbursements to their environment. They’re equally likely targets of opportunity for a service like ours.

Peter: And so, is the goal to sort of bring, or is the primary goal to bring new customers to the bank, or is this really a….like are you kind of a standalone division within BBVA that is really independent of that other goal?

Susan: We’re actually both. We are an independent venture of the bank, we have a profit and loss goal revenue target just like other ventures as a bank do, but one of the reasons why the bank has been willing to create us and invest in us is that we do bring customers to the bank that the bank may not otherwise get.

If you think about how BBVA US could build its customer base, that’s sort of traditional advertising, marketing, direct mail certainly generates a certain amount of new customer origination every year. But, if you think about it, the network effect of bringing customers to the bank through third party relationships….. if we have ten or 20 or 50 of these third party relationships that could be supported by our platform and each of them bring 50,000,100,000, 200,000 customers with them, it’s an opportunity for BBVA to add customers, add deposits and add revenues that greatly eclipses what could be done through traditional customer acquisition channels for a bank.

Peter: Right, sure, sure. So, BBVA has been, pretty famously, one of the more innovative big banks globally and I know about the BBVA Innovation Centers around the world, of course there’s BBVA Ventures, the venture capital arm, I mean, how does Open Platform interface with these innovation centers, particularly with BBVA Ventures?

Susan: What we are, as I mentioned earlier, we are an actual independent venture and we exist within a business line in BBVA called New Digital Businesses which has a couple of different functions. One is to incubate and create new digital businesses. There are several of them that share the same floor with us including Simple and Azlo the Open Platform which is the computer enabling platforms for that, as well as a business on its own right and then Total, propel and Visa Ventures for both investing at various levels of investment in other third party businesses.

Peter: Right.

Susan: So, we pay service at platforms for both incubating new businesses and for providing services as needed to the companies that BBVA Ventures invest in. We have less of a direct relationship with BBVA’s innovation centers only because the US has been a little bit slower to build innovation center capabilities than Spain, for example.

Peter: Right.

Susan: So, out of the innovation center activities, hackathons and the other innovation programs that the global bank operates are more Spain-focused right now than they are in the US, but I would expect that as the US builds out its own innovation center, we will be very much connected to that as well.

Peter: Okay. So then, there are sort of other companies in this space that are offering this Banking-as-a-Service, particularly some of them might be offering one, or two of the capabilities that you guys offer, how do you differentiate what Open Platforms offer compared to other Banking-as-a-Service providers?

Susan: I think there’s a couple of differentiators. If you look at most of the other Banking-as-a-Service providers who provide white label Banking-as-a-Service, you typically find that there is a partnership between a technology platform provider and a sponsor bank. And so, an enterprise that wants to integrate Banking-as-a-Service from one of them typically has to work with two parties.

Peter: Right.

Susan: They have to work with their technology provider and they have to work with whomever the sponsor bank is. Whereas, with BBVA they get all, both of those rolled into one. So, when they work with BBVA, we are both the sponsor bank and the technology platform which makes integration more straightforward, which gives them a closer relationship from a compliance and regulatory support point of view than they might otherwise get and a more seamless integration from their front end through our API platform to the bank’s core.

Peter: Okay, that makes sense.

Susan: Now, there are other competitors who are similarly structured, who are both the bank and the technology platform and there are, obviously, all the big guys, you know, Chase, B of A, Wells Fargo, are building API platforms of their own. However, they’ve been primarily focused on those API platforms positioned as an alternative delivery channel of services to their existing clients rather than as a white-labeled service like we do. Will they wake up one day and discover the opportunity that we see? Probably. But, right now, both of them are focused on providing API-based integration as another way for their existing clients to access existing services.

Peter: Right. By the time they wake up, you’ll have a large and very well-established offering, so they’ll be playing catch up. (laughs)

Okay, so in the remaining time we have, I want to switch gears. Here we are at the end of the decade, we’re recording this just a few days before Christmas and this will be published early in the new year, but as we look forward to the new year, you’re in a very interesting position here at BBVA, you had your time at Visa and really interesting to hear your perspective on some of the fintech trends. What do you see, at least some of the main themes that you expect to be front of mind for the industry next year.

Susan: Obviously, I think Banking-as-a-Service (Peter laughs) will continue to grow and become more and more prominent in the affairs of companies in the US. I think we’re just scratching the surface of the number of use cases that can be supported by Banking-as-a-Service and I think to the extent that enterprises of all sizes adopted consumers and businesses.

Customers will see future improvements in the level of servicing commitments they get from customers because now payments are becoming more invisible, or more automatic and banking opportunities exist for a wide variety of technology companies to offer, So, obviously, if we are counting on that from the point of view of BBVA’s continuing investing in Open Platforms, but we also think that as a general trend that will see more and more of it coming in the new year.

Peter: Sure, sure. So, what are some the other trends then?

Susan: I think that we will see some continued growth in the US government’s focus on faster payments. I think like most of my colleagues in the industry, I’d like to see it happen faster than I think it’s actually going to. I mean, now is a great directional statement, but it’s like more years away from being reality than I think we would like and so I think we, US financial institutions, are a little bit behind the curve compared to many other countries in the world that have been able to build truly ubiquitous real time payments. So, I hope to see an acceleration of that focus in the new year.

I think it’s going to be interesting to see what happens with some of the Big Techs and their sort of banking and payment-related activity. We have seen Google announcement, we have seen what Apple Pay and Goldman are doing, we’ve seen Amazon sort of get in and then get out of offering checking accounts. It will be interesting to see sort of who advances farther in developing digital banking and payment services for consumers and businesses.

The small fintechs that seem to be driving most of the innovation today, or the bigger technology firms will finally sort of figure out how they’re going to tackle this market and then be able to put their obviously massive investment and brand weight behind it.

I would love to see and hope to see continued growth and ubiquitous mobile payments and contactless. We’ve seen a lot of improvement in penetration in the US over the last year, I’d love to see it happen faster. I think mobile payments, not necessarily mobile banking, but mobile payments has a huge outside opportunity that I hope will accelerate significantly in the coming year.

Peter: Okay, we’re almost out of time, but I would like to get your take on the digital banking space because it’s been one of the things for 2019, is this incredibly rapid growth and big funding rounds that we’ve seen from these digital banks.

I mean, you’ve got Chime and Dave that now have many, many millions of customers and adding them in very rapid rates, in Brazil, you’ve got Nubank, in the UK, you’ve got Revolut and Monzo and Starling Bank, N26 in Europe as well. It seems to me that these digital banks are adding customers faster than some of the biggest banks in the world can add them. So, what’s your take looking at it from your perspective on what the prospects are of these digital banks.

Susan: It’s a very interesting question and I agree with you, new digital banks are popping up everywhere and some of those, the big established digital banking names in Europe, particularly N26, Monzo and Revolut have announced their plans to move to the US and tackle the US market. And, as you noticed, some of the digital banks like Chime have entered the unicorn territory now in terms of their value.

I think a couple of things, most of them are announcing, as you noted, very rapid growth in the number of customers, what they don’t talk about the number of active customers. Our own experience has been that there’s a lot of experimentation by consumers. They find out for these accounts because they want to see what the experience is like, is this a more intuitive, more pleasant, more engaging experience than the last one I tried? but they don’t necessarily deposit money and they don’t necessarily transact.

I think we’re going to see a lot of churn for a while until the ones that have the most compelling value proposition and ones that are able to build an engaging experience that keeps the same consumer coming back all the time will emerge, and some of the others will tend to fall by the wayside.

The challenge for these digital banks is, how do I build competitive differentiation? how many no- fee checking accounts can you offer (Peter laughs), or they have to find something else that creates that compelling value proposition, or an engaging enough experience that people stick with you rather than the others. The ease of establishing an account with a digital bank is a double-edged sword, it’s really easy to apply and really easy and frictionless to become a customer, but then it’s easy to do the same thing with the next bank that comes along.

Peter: Yup, yup, that makes sense. Last question then, I’m just curious about ….as you look ahead personally to 2020, what are you working on that you’re most excited about for next year?

Susan: Two things, one is just scaling the platform and as we talked about earlier, sort of working with larger companies that have more complex needs and much larger scale for us to see double, triple, quadruple the scale of clients and transactions that we’re processing.

The other thing that we’re focusing on is just adding more options to the platform. Right now, we can digitally open checking accounts, but, you know, we’d love to be able to add the ability to digitally open other kinds of accounts and expand that service for our clients. We’re always looking to adding more ways to pay.

Peter: Right.

Susan:  So, whether it’s adding RCT integration, or adding Zelle, or adding other suppliers, or whatever the next option is, the more opportunities we can provide our clients to use whatever payment rails makes sense for their customer using the single integration we provide and that just adds that much more value to our platform.

Peter: Right, right, it sure does. Ok, we’ll have to leave it there, Susan, I really appreciate your coming on the show today.

Susan: Oh, you’re welcome, thank you for the opportunity to chat, I really appreciate it.

Peter: Okay, see you.

Susan: Bye.

Peter: You know, I think BBVA are in the right place at the right time with their Open Platform offering. Banking-as-a-Service is going to be a huge trend of the 2020s. We talked about Embedded Finance which is really what this is. I think the reality is every single company on the planet has a financial function and that is really underutilized.

What Banking-as-a-Service does, what Embedded Finance does is getting more and more granular as time goes on and companies are going to be able to offer small, medium, large companies a range of financial services that could have only been offered by banks in the past. I think it’s super exciting and it really feels like to me as a complete rewiring of the financial system and it’s going to happen in this decade.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 228 –  ANDREW DIX

Happy New Year, everybody and welcome to the first episode of 2020, Episode 228, of the Lend Academy Podcast. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Andrew Dix, he is the Founder and CEO of Crowded Media Group which is the publisher of Crowdfund Insider. Now, Andrew’s been covering the space for many, many years and I wanted to get him on the show to give a little bit of a retrospective of the first show of 2020 and also looking ahead at the coming year and the coming decade.

We touch on many interesting topics here, we talk about equity crowdfunding and the challenges that it’s faced, we talk about digital banking, we talk about Big Tech and Embedded Finance and crypto and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Andrew!

Andrew Dix: Good to talk to you, Peter.

Peter: Okay. So, let’s get started by giving the listeners a little bit of background about yourself. We all know… everyone reads Crowdfund Insider, but why don’t you tell us a little bit about what you did before you started that.

Andrew: Yeah. That’s actually an excellent question because I have kind of what I think is a good background to be covering fintech. Back in my youth which was some decades ago (Peter laughs), actually worked in Washington DC and I was in the political and policy realm and I’ve always had an interest in policy, in general. So, I was in DC for a while, that kind of exposed me to the workings of legislation and politics and that is, of course, a very important aspect of fintech because financial services is a highly regulated industry, so that helped.

And then I worked in the media. I was in traditional media working in a small closely held company that owned print, it owned broadcast and at one point in time had television and I ended up doing running the digital operations. So, at that time media, specifically print, was going through it’s own digitization and it was really, really difficult to kind of watch what was happening with traditional media. I’m kind of a news and information junkie, I could see how the wheels were falling off and how the Internet was impacting traditional media and it was a bit of a struggle for me because I was engaged on the digital side and creating applications to manage news and working with the technology.

Meanwhile, it was kind of a circle the wagons approach with the traditional side, so that kind of gave me the perspective of digital media. At the same time, I always had an interest in playing it so my bachelors is in economics and when I had moved to the Cleveland area, which is where I’m located now, I took some classes in finance at Weatherhead because I’ve just always had a profound interest in finance.

So, I think in a different life, I probably would have been a banker (Peter laughs). In this life, I ended up being a kind of a news and media guy that had a deep interest in financial services and policy and that’s kind of how it all comes together in fintech, in covering fintech.

Peter: Right. So then, was there one particular thing that was the impetus to actually start Crowdfund Insider? Was there some particular aha moment?

Andrew: So, another good question. There was a period in the US….there was a discussion about the JOBS Act, the JOBS Act of 2012 and how this was going to transform capital formation. It had shifted from, you know, traditional capital formation to online capital formation, or crowdfunding.

I had a friend who was an investment banker and he said, hey, do you know about this. I’m like, yeah, kind of and he said, well, I’m kind of curious about this, this may be interesting. I said, well, you know, I know two events, I happen to know two events that are taking place where they’re going to discuss that piece of legislation. One was a law firm, a big corporate law firm in downtown Cleveland; another one had to do with a presentation, somebody from a second market which at that time was a platform I thought would get into the space, but did not.

So, I went to these two events and I realized that the platform side was going to be very crowded, very competitive, but I thought to myself, gee, this has been really an interesting subject area to cover from a news side and that was kind of the aha moment, the genesis.

I’ve always had a thesis that emerging sectors like these are opportunities for news. Now, I don’t consider it as a blog site, or blog, I consider it to be news because we cover news in a more traditional fashion. And so, that was kind of the moment where I said, you know, this something that I want to pursue because I had that whole digital background and it was really easy for me to, you know, get a site up and live quickly and start doing some coverage of the subject.

Peter: So, when did you go live exactly?

Andrew: I can’t remember the exact date, but it was after the JOBS Act of 2012 was signed into law and things take time, as we all know, when it comes to financial regulation. It was within months of that taking place and it took place in, I think, the summer of 2012, so it was either late 2012, or 2013. We started with the first domain which was crowdfundinsider.com and that really had to do with the fact that there was a lot of focus on facilitating capital formation and this act of legislation which was hugely bipartisan because that was the Obama administration and we got support from both the Republicans and the Democrats. It’s one of the standout acts of legislation that saw people from both sides of the aisle support and it was kind of an exciting period which obviously has taken a lot longer than most people expected.

Peter: Yeah, we’ll get into that in a little bit, but before I do so, I wanted to maybe touch on one question that I think many people have because a lot of people might not know your name, but a lot of people know your pseudonym. So, I want you to tell us about what your pseudonym is and why you decided to use a pseudonym in the first place.

Andrew: So, it’s another good question. So, when we started, I hired my first employee and most of it had to do with the content creation, that’s really what we needed somebody to do and that person did that. After running the platform for a while, we need to augment this, we need, you know, more content and in traditional media it’s very common to do a stock report. And so, what I would do is at night when I came home, I would do some stock reports which is pretty easy to do, but there was a following conversation about how Google liked to see by-lines, liked to see an individual’s name.

I was still in my day job at that time and I thought, well, okay, I’ll just do a pen name for this and I would just continue to do, you know, a couple of articles in the evening and just augment a little bit because this other person was doing a good amount of the content. So, that’s kind of how it came to be and once you go down that path, you know, it’s kind of difficult to put that genie back in the bottle, you know, how do you do that. And, I think that, over time, hopefully my prose has improved, but I do believe that I’m at a point where I’m probably the most prolific fintech writer in the world.

Peter: Yeah, I would agree with that. Just tell the listeners what your pseudonym is.

Andrew: My pen name is JD Alois and there is a reason for that name, but I’ve never shared it with anybody. Nobody knows why, but it’s a derivative of something and it actually has to do with, you know, part of my history and past experience. Anybody who can figure it out, I’ll give him a thousand dollars of free advertising. (Peter laughs)

Peter: Okay, that’s a challenge for everybody. So then, you started off covering the crowdfunding space and then the content has evolved over the years and you now cover a much broader sort of swath of content, So, tell us, has this been a conscious decision, or has this just evolved naturally? What’s been the evolution there?

Andrew: So, it was definitely a conscious decision. When we first started covering the ecosystem, we focused a lot of attention on the UK. The UK was first out of the gate and creating a regulatory environment that was robust and functional who worked on my capital formation and that was both debt and equity.

As you know well, peer-to-peer lending really got it’s start in the UK, they have the first really effective equity crowdfunding platforms, or investment crowdfunding platforms in the UK and so they had a head start on the US. I looked at the UK and said this was an opportunity to learn and see how they’re evolving because they’re ahead in the game. Over time, in the US, you have kind of the growth of the online lending sector and marketplace lending.

You have the Lending Club, you have Prosper, you have Funding Circle and these platforms became more prominent. And so, we started to get outreach from those platforms and we started to pay more attention to those platforms. There was a certain point in time and I said, there’s two sides of the coin. While equity can be kind of sexy, it’s kind of small. While debt is not necessarily as sexy, it’s huge, it’s enormous and that’s the way it’s been in public markets since I don’t know how long. I said, okay, it’s just part of that financial stack and really, in my opinion, online capital formation was the catalyst for all of fintech because I think it should have a lot of people that were young, you know, finance executives, or they’re going to Wharton or some place.

They’re looking at traditional finance and they’re looking at the way they have things have resulted in the past, or say, wait a minute, with technology I can do things differently, I can do things better. And so, first, you had online capital formation, debt and equity and then everything is saying, I can do this, I can do that. And then you just have this kind of creative boom of platforms, ideas, services, you know, from banking, to lending, to trading, to crypto and it’s really been amazing, the amount of creativity that I have seen and you have seen in the fintech sector for the full stock of financial services. So, that’s kind of the genesis of the site.

Peter: So, let’s get back to equity crowdfunding and as you say, it’s……I remember, I actually wrote about it as well in 2012, when Obama signed the JOBS Act and there was a lot of optimism and, you know, I think if we had said, let’s look ahead in seven plus years and no one will expect…it’s still a very small industry. Why do you think it hasn’t taken off in this country? Obviously, it’s taken off at the UK, Israel with OurCrowd, they’re very active, why has it not taken off in this country?

Andrew: Yeah, it’s got a multifaceted explanation there because as we know, regulations in the financial services industry is byzantine at best in the United States. You have to deal with 50 individual states and the new ones is dealing with state regulators, there are also around a dozen federal regulators that touch financial services. That’s hard. If you are a startup, an early stage company that wants a challenge in trans finance, there’s a significant hurdle that is costly to complete and that’s just part of the environment in the United States.

The rules that were created under the JOBS Act of 2012 were not the best. Now, I give a lot of credit to people that fought to get those rules done. In effect, you had three forms of investment crowdfunding had Reg D to succeed for credit investors, you have Reg + which requires $50 Million from both the creditors and non-accredited investors. We had Reg CF which initially integrates up to $1 Million via funding for all broker deals for both non-accredited and accredited investors, but in the infinite wisdom of our policy (inaudible) who always seem to air on the side of investor protection, the rules have been so stringent that they actually have put to the opposite side.

When you look at Reg CF, that regulation has been good, but it’s been a hobble by the strict regime. In fact, it’s kind of like …..it creates an environment of negative selection where some issuers and some platforms they do it because they can’t raise money anywhere else. That’s no what you want, you want, in my opinion, to have your smallest investors have access to the very best deals, that’s what you want to create, but that’s not what the regulations actually did. So, it’s been hobbled, it can only raise a million….$1.07 Million right now, there’s several aspects of the rules that really need to fixed.

Reg A + has been a bit of a disappointment because of deal quality, it’s been described as a mini IPO type structure. The cost to do a Reg A + is hundreds of thousands of dollars, depending on who you talk to. I think some of the issuers have not been that great. I think the clear winner in the full stack of crowdfunding exemptions is Reg D 506(c), basically, a Reg D that you can generally solicit or advertise. I am optimistic that some of these things can be fixed and can be changed.

I’m an Adviser to the Association of Online Investment Platforms (AOIP) and that’s one of the things that Dan Lucas is pursuing, is a regulatory fix for Reg CF. There are some people who like to see it raised to $20 Million, some people want to see it to $10 Million. I think the lowest amount that people are advocating for is $5 Million AOIP, the association, they have asked for a $10 Million cap and that would also kind of bring into line with what you’re seeing in the UK because under existing laws in the UK, there is a prospectus requirement once you raise 8 Million Euros or more. Creating a prospectus is a significant undertaking and what it does is it creates a bit of a speed bump, but under that amount you can raise as much as you want without a prospectus.

You can still crowdfund as much as you want, but you have that speed bump and that has seemed to have worked well in the UK. You regularly see issuers raise, you know, multi million pound offerings, you regularly see very high quality issuers raise money on these platforms where they are frequently doing side by sides with big VCs, a lot of the digital challenger banks which have achieved unicorn status.

I think just about all of them have, you know, pursued online capital formation like Monzo, or Revolut and they view it as a way to not only raise a little bit of money, but also to garner some earned promotion and to enlist the whole, you know, region of people that will advocate and utilize their services which is smart, if you think about it.

Peter: Right, right, yeah, I know. It’s really been, I think, one of the unique things about the UK fintech scene is that so many people now own slices of these neo banks and the challenger banks. They’ve seen the paper valuation of their investment increase dramatically which, obviously, helps future fundraising.

Anyway, I want to sort of move along here and just talk about…maybe we can start…we’re recording this a week before Christmas, but it’s going to be published first Friday in January, so it’s the first one of the new decade. First, maybe you could take a step back and look back to 2010s, a lot has happened in fintech in this last decade and fintech wasn’t really used as a term ten years ago. So, from your perspective…..you’ve been writing and covering the space for most of this decade, as you look back at the 2010s, where do you think the promise of fintech was realized and where did it fall short?

Andrew: Well, I think, the promise of fintech is ongoing and I think that really we’re talking about the digitization of finance, it’s really applying the Internet to financial services. One area where the Chinese got it right is what they call Internet Finance and similar to what happened in the newspaper industry where the Internet just totally disrupted them, that is happening and will continue to happen in the financial services industry at an accelerated pace. So, I think, that’s all good, but as we all know, innovation and change is never a straight line.

Everybody wants to see the hockey stick where you’re getting low and ends up usually successful, that’s not reality. Anybody really understands that it’s a roller coaster with many ups and many downs and many of these companies will end up failing which is fine, that’s part of the process. So, I look at….from the early part of the decade and I look at some of these things as platforms that only did these, or only did that, they tried to excel at these areas and at the time, I think, everybody, including myself, I thought this is great, it’s really going to change the world, but, I think, that, you know, maybe they overshot that hype a little bit.

Some of these platforms, they realize that doing this one thing really well is not necessarily the best path. I think what you’re seeing today and you’re going to continue to see is you’re going to continue to see these platforms that have some tractions in certain sectors either way and they’re going to continue to iterate and provide services and look at their consumers or customers and say, well, I’m already doing this, I can do this as well and I can drive incremental income and scale more effectively.

So, if you look at the equity side, you’re going to see platforms that do other things besides Reg D, Reg CF, Reg A +, but they’re also going to provide management services, they’re also going to provide advisory services, they’re also going to provide a whole host of investment banking type service, it’ll just be digital and that kind of makes sense. I think for platforms as they earn their stripes and they toughed it out wanting to survive, it’s going to make sense to do that. I think the same thing is going to happen on the lending side.

I think that if you look at a Lending Club, a publicly traded company, there’s a lot of debate as to whether they went public too soon. I think their idea about shifting into becoming a marketplace bank, provide additional banking services totally makes sense. They have the touch point of the consumer, they have the data, they have a lot of services they can already offer, to provide a few more services is not that much of a weep because it’s all digital, whether they’ll be successful or not, we’re going to find out.

I think that is kind of the pinnacle, or the transition that we are in now where the people, the platforms, they have captured certain amount of transactions, they have to continue to iterate to see how they remain competitive and to be able to compete, or partner with traditional finance. Taking that step further, I think these pieces about Big Tech and fintech is huge. So, I think, as we go into the 20’s, that is going to continue to gain more traction, it’s going to be bigger than what most traditional financial services firms think will be today.

Peter: Okay, okay. So, that’s interesting. You’ve already sort of started to answer my next question which is …as we look ahead to this decade you touched on Big Tech, what are some of the other key trends you see as really being a huge part of a fintech going forward?

Andrew: So, I believe that technology is at its best when it’s ubiquitous, it’s everywhere, but it doesn’t get in your way. It’s something that’s there when we need it, but, otherwise, it doesn’t bother you. I think that’s what you see happening for financial services. When I need to pay something, I point my phone at it, when I need to access credit, the credit is there, it’s working for me now. It doesn’t matter what platform I am on, I have access to it.

So, I no longer need to drive to my corner bank branch to do whatever I need to do with financial services, I’ll be able to access it anyway, anytime as long as I’m digitally connected. And, I think, that that is a theme and a transition that is multi-decade, it’s going to be, you know, years and years in the making, but it’s inevitable, right?

Peter: Yeah, that’s where we’re starting to talk about Embedded Finance which I think is a super interesting trend which we’ll be covering in depth at LendIt this year, I feel like it’s one of many. So, tell me about this thing, what do you think of the digital banking space in this country, specifically. You know, we’ve got some very fast growing operations here, we’ve got some of the Europeans arriving, none of them have worked out how to make money yet, so very few, I shouldn’t say none, a few of them have, how does the digital banking story play out this coming decade do you think?

Andrew: So, I think that traditional finance has always moaned and groaned about the regulatory environment to operate within the 50 states and across the country. I think, today, they’re looking at it as maybe something that’s a little bit better than bad because it’s created a bit of a moat for looming competition. One thing about traditional finance is it’s very effective with lobbying, they have a great voice in Capitol Hill and you can see that manifest itself from time to time in some of the things that happened inside the beltway.

I think that for traditional finance, the policy attempting to innovate and adapt and change by building their own platforms, acquiring platforms, or partnering with platforms which is absolutely what they need to do. For the emerging founders, the fintechs, again, because of the regulations, it’s been kind of a tough road to follow in the US because we have….. how many digital only banks have received a federal banking charter. Well, we have Varo lMoney which has a provisional charter, I believe, and they’re still waiting on that FDIC and that process is taking God knows how many years. It’s crazy, it’s taking so long.

Now, we have Marcus which bought a bank and that was probably a very smart move and we have a lot of other digital banks that have applied for, or are looking to apply for, or looking to finesse the regulations to offer bank-like services. I don’t think a regulatory environment was meant to make it so difficult. Do these entities need to be regulated? Absolutely, Yes, we have to have high standards as traditional finance? Absolutely. But should there be a path where these vigilant challenger banks to become regulated at the national level? That’s obvious. When you look at what happened in the UK and the number of challenger banks that have emerged and that are growing rapidly in leaps and bounds, that’s what should be happening in the United States.

Unfortunately, it’s been a bit of a slow go there that’s why you have banks like Revolut and Monzo coming into the United States to set up shop because they kind of cut their teeth in a different market and they’ve learned a lot of things. And they’re saying, well, I can just apply that here and I’ll do what everybody else is doing, I’ll use regulatory arbitrage and partner with a chartered bank to optimize services and then at some point in the future I’ll get a charter, maybe not. That’s kind of a convoluted process to do that. When you start, you should have a clear bright-lined path to be regulated at the federal level. So, I disagree with the regulatory approach.

I think that the OCC has made an attempt to pursue that path that you know as well as I do, legal challenge and battle from traditional finance in entrenched stakeholders has been enormous. I just wish that wasn’t the case. It’s also for legislators, you know, it’s not necessarily a priority for them, it’s not something that’s going to get them a lot of votes, it’s not something that they necessarily understand, you know, really well.

So, there’s not a whole lot of interest in fixing some of these issues which is unfortunate because in the end, the losers is always the consumer, right, because once you have more competition within the financial services industry, the people who will benefit are the consumers because class go down and the quality of services move up. And, if you are a congressman or senator that’s what you should want, you should be pursuing that, but, unfortunately, that’s not the case, outside a few exceptions, right.

Peter: Yeah, now that’s dead right. I feel like there isn’t enough push in Washington to change the status quo and I think it’s going to take a long time for that to happen, if ever, and it’s certainly going to hold innovation back.

Anyway, we’re almost out of time and there’s really a couple of things I wanted to get to. You know, we spent this entire interview, so far, and we haven’t talked about crypto. You’ve written about this a great deal, and blockchain, in general, but maybe just give us a minute, or so thoughts on the crypto space and what are the things you’re watching right now there.

Andrew: When bitcoin was kind of emerging, we really didn’t cover that, but then, all of a sudden, ethereum came along and ethereum enabled the smart contracts and ICOs and really we started covering it because people started sending us information about things we weren’t doing and I’m like, what is this, I don’t understand this. I mean, I need to spend some time researching this and you could see that it was a form of online capital formation that was kind of like, you know, cocaine-fueled crowdfunding offering that was highly illegal.

And so, you has this whole ecosystem develop where people would raise money and it was all speculative, it was breaking existing securities law and a lot of people predicted it was inevitable disruption which is what happened. One thing it did do was it showed how technology can help remove some of the friction in financial services if you do it in a regulated and in a compliant fashion.

So, I think, that ICOs will be kind of a footnote in history, it was a crazy, weird time and place with a lot of very interesting and colorful people, many of them doing things that they probably shouldn’t have been doing, but I also think that now you’re in this point where you have this transition to digital assets which in the United States means digital securities. I think the digitization of securities is coming, it’s just going to happen.

You know, I remember back in the day when I can call my broker and say, hey, send my certificate to me, I’ve got to hold on to my certificate, put it in the mail. Well, I really can’t do that anymore. There’s a lot of back office stuff that’s still kind of analog-ish that can be pulled out of the system to drive efficiencies. You look at Cagney’s new startup and I’ve heard him the other day where he is able to pull, I think, a hundred basis points out of a securitization process.

If you’re in traditional financial services, you’ll say, wow, that’s huge because at scale that makes me a lot of money. So, I think if you see that similar streamlining taking place in back office operations, it is really not that sexy, right. But, I think, that’s where we are now, people are just trying to figure it out, visual studies are going to happen, how that manifests itself, I don’t know, I just think it’s going to happen.

The other thing that I think may be of interest is a sector I call “esoterics,” and that’s because, all of a sudden, the technology you can securitize things that really we were not able to do in the past. This was not cost effective to do in the past and I think you’ve seen a little bit of this where people are kind of dabbling in real estate transactions. You some real estate transactions this is going to be managed on distributed ledger technology.

I think people are going to start to experiment with other assets and other asset classes. When is it going be, I have no idea. We’re going through a concept of utility token as opposed to security. You know, the juries out in the United States, or some jurisdictions in Europe that have facilitated that and in other countries, it’s happening, I don’t know whether it’s going to continue to happen, or whether it’s going to go, but in the United States, pretty much, if you’re doing a digital asset, a security with a couple of exceptions.

Peter: Okay. So, last question. You know, we’re starting the year, we’ve talked about a lot of different things in this interview, what is the most interesting topic that you’re following most closely right now?

Andrew: So, beyond the regulatory stuff…I think I have a generic flaw because I actually enjoy reading about regulations (Peter laughs)….you can’t take me out in public, my wife knows. She gets scared when we go out, I start talking to people and they have no idea of what I’m talking about, but beyond that I go back to the Big Tech in fintech. I just see that the pace has already happened in China where you have Big Tech like Tencent and Alibaba, Alipay and what you’re seeing happen there…..I think they’re ahead of us in many respects, I think you’re going to continue to see that happen within the US and elsewhere.

Do I want Apple to be my bank? Absolutely. I trust them with all sorts of information that I wouldn’t trust with anybody else and I’m already using them to pay for things. Is it a leap for them to provide more financial services to me, not at all. Is it dicey for them to go down that path due to the convoluted regulatory environment which is really, you know, kind of Jurassic? Yes, but I think over time they are going to continue to go down that path alongside other Big Tech firms like, you know, Google, Amazon, Facebook. I’m not a huge fan of Facebook, but I figure you will continue to see here in the United States and I think you’re going to see it globally around the world and you’ve actually seen actual examples of that.

Peter: Okay, it would be interesting to see. On that note, we’ll have to leave it there. Andrew, I very much appreciate your coming on the show today.

Andrew: Excellent, it was good talking too.

Peter: Okay, see you.

Andrew: Bye, take care.

Peter: The continued encroachment of Big Tech into finance, the movement towards Embedded Finance, the crazy fast growth of the digital banks, these are all important trends, I think, we will continue to be paying attention to, continue to evolve our thinking on as this decade progresses and it’s going to be a very exciting time. One thing I’m certain, I obviously don’t know, I don’t have a crystal bowl, I don’t know how it’s going to play out, but one thing I am certain of is that finance in 2030 is going to look very different from finance in 2020.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 227 –  MIKE BUTLER

Welcome to the Lend Academy Podcast, Episode No. 227, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Mike Butler, he is the President and CEO of Radius Bank. Now, Radius Bank is a very interesting operation. When Mike joined as CEO back in 2008, they were a small community bank with a handful of branches; now, they are one of the leading digital only banks in the country and it’s really a fascinating story to unpack, how that has come to a reality.

So, we talk with Mike about the decision to become digital only, how he’s been able to sort of develop this with a pretty….without really an engineering team which is a fascinating all in of itself. We also talk about the partnerships, some of the recent ones they have penned and how they approach Banking-as-a-Services, in general, and we talk about Mike’s reports on the digital banking space that is all of a sudden very hot, one of the hottest areas of fintech. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Mike!

Mike Butler: Well, thanks for having me, Peter, much appreciated.

Peter: My pleasure. So, I’d like to get this thing started by giving the listeners some background. We know you’ve been with Radius Bank for many, many years, but what did you do before that?

Mike: I’m a pretty traditional banker, Peter. Out of college, joined a management training program with KeyCorp. We started out with $4 Billion, and when I left we were over $100 Billion, did a lot of different things while I was there, had the opportunity to participate in some M&A activity in a fairly big credit group and ran two lines of business before I left, and that was then, what was it, 2008, when I joined Radius Bank.

Peter: Okay. So, what was behind that decision then? Obviously, you’ve gone from a pretty decent sized bank into a very small community bank, what was the thinking behind that transition?

Mike: Well, I think, a couple of things. You know, one is probably….I easily would there was transition happening inside Key and there was a leadership change and obviously, there was going to be a new CEO for the next year ten years, or so, so it was a good time to pause and think.

I think there was a bit of an edge from my perspective to see if I could leverage some of the things I’ve tried to learn over my years and kind of see if I could find myself in a CEO role. You know, we all say that nobody really drives culture other than the CEO, so a chance for me to do that. So, I took the opportunity to look around and see what other opportunities there might be out there for me.

Peter: Okay. So, maybe you could just describe a little bit about Radius Bank and what it was like when you joined the bank in 2008.

Mike: Well, you know, Radius was a fairly traditional community bank, but one in which it was truly seeking kind of a strategic direction. That’s what was most intriguing to me. It had kind of just been a marginal performer and was looking for some leadership to come in and give it some direction.

As we talked, we talked a lot about what the future of the industry was going to be like and, you know, the role of branches and deposit gathering and I think it was an opportunity for me to kind of take that vision and try and execute it inside Radius Bank. But, we were a nine/seven-branch company, did a lot of commercial real estate very locally, you know a pretty traditional community bank.

Peter: So then, when you took over did you….I mean, you’re famously now…..I think it was 2012, or thereabouts, you can correct me if I’m wrong, where you decided that you would do away with branches you had. Was that you intention always going into this job, or was this something that sort of evolved over time?

Mike: Well, the intention was to, and as it is today, still remains is how you replace the branch network as a place to acquire and manage consumers and small business deposits. That was always the objective and I think……remember in 2008, there was some pretty significant economic downturn that was occurring.

So, what we did first was we stabilized the company and we started to implement some of the thoughts and ideas on how we might emerge as more of a virtual bank and that was in 2012 where we said, okay, we’re going to go there, we’re going to be all in on the concept of generating deposits and, you know, managing clients through a virtual network.

Peter: I mean, what was that decision like back then because really you were a bit of a groundbreaker. It’s not like many other community banks were treading down the same path, was it a really difficult thing to get by in from everybody?

Mike: Oh yeah, I mean, for sure, there’s no doubt about it. I think the….you know, what I like to say is there wasn’t really….I think everybody’s vision still was, you know, and still is today and it’s getting clearer and clearer that virtual or digital banking will become a much bigger part of the industry, less clear back in 2012, fewer people willing to take the gamble. So, I think, you know, you needed this kind of conviction to the vision and you needed some courage that you were going to be able to execute against that.

You have to start to surround yourself with people who had the same vision and courage to get that done and that’s a bit of a daunting task because, I think, as you know a lot of industries and sometimes more in banking is that people are a little bit more willing to hold on to the status quo than they are to kind of embrace the future which is okay. I get it, I’m not complaining, but what we had to do was start to transform the culture of the board and the organization kind of simultaneously.

You know, one of the things that I did make a fairly big decision on is by closing all the branches. We basically had no backdrop, there was no oh, let’s try this and if we can do some things virtually while simultaneously, you know, keeping the branches open. One of the things that I would say gave us what I thought was a cultural competitive advantage is the kind of bridge was gone behind you, there was only one place to move and that was forward.

Peter: Right.

Mike: So we were forced to kind of keep moving in that direction.

Peter: So then, like I imagine the culture is very, very different now than it was ten years ago, tell us a little bit about what it’s like today.

Mike: So, you know, right from the top we recapitalized in 2016 and we had the opportunity to bring in a new board. The new board contained some of our equity investors who are absolutely believers in the vision as well as people in the industry that are a part of this technological change versus some traditional bank boards and as importantly, the people that we brought in have a much….you know, we used to say in the industry that you should hire bankers first and you can kind of teach them stuff from there.

What we had said is, we’re going to hire non-bankers and we’re going to try and teach them what parts of the banking model we still need to keep. And that created this whole frost of every time you add a person to the team that has a different view about, or their view is about the future of digital banking not how to transform a branch, so a very big part of what we’ve been able to do is all of the people and the way we go about doing business inside the company. You know, we’d like to say that we’re much of a business than we are a bank, we’d like to say we’re much more of a technology company than we are even a business.

So, a very agile mindset that started with kind of the project management group where it usually starts, but we kind of like saw how cool this agile kind of environment worked and we all said to ourselves, we’re going to kind of embrace that in how we approach all of our business challenges day in and day out. We’ve kind of broken down traditional hierarchy inside the company and the bureaucracy sometimes that exists and we’ve gone to majority of cross functional teams and everybody has cross functional goals to kind of make sure we get projects done.

So, a whole bunch of really fun stuff and I think the culture of the company is also one in which we kind of say to ourselves we treat people like adults and a very open environment for people and we think that creates a very high performing work culture.

Peter: Sure. So, let’s talk about the bank itself. You know, we’re now looking at Radius Bank and reading about you over the years. You really have a couple of separate businesses, it feels like, or business lines, shall we say. I mean, you’ve got the traditional bank that still has the deposits and lending and you also have this sort of Banking-as-a-Service type operation, but rather than me describe it, why don’t you describe how the bank operates today different product lines.

Mike: Yeah, so, we’ve kind of started from the very start. Strategically, our mission was to be a kind of forward looking financial services company with a very sharp focus on deposit gathering liability side of the bank and focused on finding and sourcing deposits and managing deposits, or relationships under retail and small business side without a brand network driven by technology.

And also, we felt like and still feel like we have a competitive advantage over several organizations that do generate deposits digitally, the neo banks, because we’ve got a fairly sophisticated asset generating side to our balance sheet as well. And that’s driven by the same kind of culture that we talked about on the liability side in which we want to have very niche-like businesses which we can kind of provide a high degree of service to our clients, get paid accordingly, but those niches would be different than what you would generally see inside community banking.

We do equipment finance, we do SBA lending, we do some high net worth lending, so all of those would be designed to say, okay, you know, if you thought about kind of the technology, the fintech world and the emergence of specialty firms that offer some of these lending products, we tried to set up kind of like niche businesses in accordance with that as well.

And then along the way, we’ve developed this kind of what I call Banking-as-a-Service, but that really emanated from our commitment to our core business of deposit gathering absent to branches. So, we only do Banking-as-a-Service because we feel like we’re very good at gathering deposits and serving our clients from a technology perspective.

We’ve done that through partnerships with fintechs so we know how to work in the fintech environment and we’re fairly kind of optimistic about fintechs in general and that there will be and continue to be disruption and we think there’s ways for us to partner with that rather than ignore it and that’s where Banking-as-a-Service kind of evolved.

Peter: So, as I hear you talk, I would expect that you would have a large engineering team in-house to sort of help you with this, but I was, …..you know, at LendIt this year, I went back and re-listened to the session you did and you mentioned that you actually don’t have an engineering team at all. So, just tell us a little bit about that and how you can be an online bank and offering Banking-as-a-Service and not have a big engineering team.

Mike: Yeah. Well, I would say that some of my employees will probably take exception to not having a kind of engineer mindsets around here, so we’ve hired a whole bunch of ….that do have an engineer mindset, but we don’t really have our own engineering team and that was another decision we made a while ago. We felt if the disruption that was going to come from the fintech environment was real then that sector would have the best engineers and the best ability to deliver superior product service and we would build it in inside a financial services company.

So, we made this decision that we were going to partner rather than develop our own and that has served us really, really well because what you find is the fintechs that we’ve leveraged along the way to redo our technology stack have benefitted from our relationship nicely. We have this well, right, so we’ve also made strategic investments.

So, making a strategic investment in a fintech partner is also another way to kind of stay close to a partner without having an engineering team in and of itself inside the bank. So, we kind of have liked that model and we’ve done things with companies like MANTL and Narmi and Alloy who are experts in their field and we’ve put those companies together in our platform to create this outstanding experience.

Peter: Interesting, that’s super interesting, not a typical way to go about that. So then, like with the products you’re offering, you talked about equipment finance, SBA lending, I presume…actually, you can tell me, this has to be a digital experience because you don’t have a branch people to walk into, so are you plugging in other fintechs into helping you do those kinds of things as well?

Mike: We’re beginning to, but I would say that on the traditional lending side in places like equipment leasing and government guarantee through SBA lending, technology is less of a, what I would call, demand pull from the client’s perspective. It’s at a different place and it is on the consumer and small business front, so we started to take a look at those businesses, but most of our technology and our technology platform changes have been on the consumer deposit gathering side.

Peter: Right, right, got it. So then, I want to talk about some of the partnerships you’ve had recently. One of them was just last week, as we’re recording this. I read about you partnering with NerdWallet. We’ve had Tim Chen on the show earlier this year actually and really doing a phenomenal job in sort of the personal financial management and advice, that sort of thing, but they didn’t have a savings product until launching with you guys. So, maybe talk about that one, maybe talk about one, or two others, but how did that come about and what do you expect to get out of this NerdWallet relationship?

Mike: So, you know, our philosophy on partnerships is kind of simple and straightforward, but, you know, we choose partners that we think would benefit from a relationship with a financial services company like Radius and that their clients would benefit, right, so, there has to be a real partnership opportunity associated with it. We want to work with great companies that have this kind of high level of commitment for customer service that respect the regulatory environment and that whose business model we think can be disruptive down the road.

So, we talked to a lot of companies and NerdWallet is one that we’ve had a relationship with for years, a little bit more as an advertiser, but, over the years, we’ve developed this kind of mutual respect for each other and I think as part of NerdWallet’s…..I mean, NerdWallet has a wonderful brand, right, a great brand. And as they think about how they can expand the brand and what they do, they kind of came up with this concept of, gee, should we own a savings account, should we maybe own a checking account down the road and if so, we’d like to partner with a company like Radius that we know can deliver us that outstanding customer experience, so we did that.

And now, NerdWallet clients who follow that brand and have developed a deep respect for it can open up a NerdWallet savings account which is powered by Radius Bank. So, it’s a great opportunity for NerdWallet to provide a superior product to their client base and an opportunity for us to stake our savings account and supply it into the NerdWallet ecosystem.

Peter: Right, right. And so, was that the same thinking….obviously, that’s on the consumer side and we read early this year about Brex, your partnership there. They’ve now got a bank account offering for small businesses, a Brex Cash, I think, they call it. So, was the thinking behind that partnership similar to what you just said for NerdWallet?

Mike: Yeah, I think that Brex is another outstanding company leaders and brand that’s been built in a fairly short time with a outstanding product behind it. We felt very strongly that this was a marketplace, that small business marketplace, you heard me mention a couple of times where we want to be and we think technology will play a bigger and bigger role and the opportunity to see that Brex would be able to serve their clients in a much different way with a Brex Cash type account.

Experience could be as good as it is for our clients, and, yeah, what a great opportunity for us to partner with them. That’s, frankly….the Brex Cash account is going to evolve as 2020 rolls out into even a better product offering. There’s years ahead of great opportunities with Brex and Radius, for sure.

Peter: Right, right. Just on that, you go to your website and you look at personal loans, you’ve got credit cards, student loans, mortgages, etc. and you click on personal loans and it sounds like you’ve got a partnership with Credible there. You know, Stephen Dash has been on the show as well, we know Credible quite well, is the whole idea there again was to offer these solutions through this partnering.

Tell us…..the first time you actually got on my radar was when you had a partnership with Prosper many years ago for personal loans, but is the whole idea there to …..where you can’t kind of have your own product, or you don’t want to have your own product to partner with companies like Credible?

Mike: Yeah, I think you’ve said that right. Peter, I think the idea is we want to be honest where we’re really good, stay focused on where we’re really good and that, we believe, is in several of our products that we offer today on the loan side for more of the commercial relationship in these businesses, and consumer deposit gathering. That’s what we do really well and Credible and team do a really nice job on the loan refi and origination side.

And, again, we like to work with high quality companies that tend to operate in the same space that we operate in and that is, you know, a kind of broad segment of technofiles, people who like to do business on their devices. So, we kind of fell in love with those guys, they hit it off with us, and so we say, yeah, let’s get into our marketplace and find a way for us to kind of make our clients’ life a little bit better by saying, here’s a topnotch, high-end provider of a solution for one of my clients and I don’t have any problem with matching them up because they’re very good at what they do.

Peter: Right. So, tell us a little bit about that marketplace concept then that you’ve got because, obviously, you don’t just have Credible. I know you’ve got Lemonade and Ladder and Billshark, it’s on your website right now, so is the whole idea here really just to…tell us what the idea is with the marketplace?

Mike: Yeah, I mean, I think it goes back to the whole concept of what do you want your financial services company to do for you, right. So, we had this kind of comment/notion for the last five/six years, we need to improve the financial health of our customers, right. How can I make their lives better, how can I make, you know, personal finance, or business finance, or their business run better, and how can I help them every single day.

And so, the idea is that well, teasers, there are some really great fintechs out there that can help do that and maybe if we can take those select few that we think can make our clients day and finance better then let’s give them access to it in an easy place like our marketplace. So, it’s all about trying to improve the financial health, or ease of our clients.

Peter: Okay, that makes sense. So, I want to switch gears a little bit and talk about the digital banking space overall because during the last 12 to 18 months, there’s been a lot of movement here. You’re a pioneer now in the space and you see companies like Chime just this month raise a massive amount of money at a massive valuation and they’re attracting millions of people, what so you think….so, from your perspective, you’ve been doing this for many years and then suddenly you see all these challengers coming up with venture capital money being thrown around pretty openly. What’s your thoughts on all of that?

Mike: Yeah. Well, I think the first thing I would say is it continues to validate our vision and the hard work that we’ve put in to building the platform like we have. So, we’re excited to see smart investors invest in companies like Chime and Varo and others because it validates what we’ve been doing, so it’s all good. We’re really not a company that’s scared of competition, so I think it’s better to have people out there doing this. We would welcome anybody that compare our product set to either Chime, or Varo, we do it all the time to make sure we stay in an industry leading.

Competition is good, competition is healthy, so that’s all good, but we also feel like there’s some interesting differential that we draw and I would call it maybe, I hate to use the term, but maybe our maturity and where we are today and our work and that that is…..you know, there has to be a path to profitability, so I think that today, because we understand our balance sheet and we understand how to use our deposits, that we have a very clear path and we are a very profitable company.

We’re profitable, we’re very profitable, so we’ve been able to do that, build this industry leading platform and do it in a way that we have been able to be very profitable. I think those companies will get there and as they always do, or most of them do, but we feel like we’ve got a fairly good head start on that final part of it and that is at the end of the day, there has to be profitability.

Peter: Right, right. So, you think the fact that ……I imagine you’re not attracting millions of customers a year, new customers…..I mean, it sounds like what you’re saying is this is a good thing for the industry even though you can’t sort of keep up with these companies on a customer acquisition type operation, right?

Mike: Well, we could, but (Mike and Peter laugh) we need to……I think you need to…quality versus quantity is something that we have preached for the last two years. We think the quality of the client that we onboard is very, very important for us. We aren’t just chasing numbers. I think we’ve had a lot of learnings around that, so we like where we are and we like the quality of the clients that we continue to onboard.

Peter: So, beyond the partnerships you’ve already talked about, where do you actually find these quality clients?

Mike: Yeah, I think that’s the final frontier here for us and the whole world and that is kind of this, you know, we call it the digital marketing challenge. You know, finding clients to open checking accounts when you had to go to a branch and it was open from 9:00 to 3:00 and people waited in line to open up a checking account, well, those days are over and so the question is, where do you find these clients virtually and what type of marketing are you doing to be able to get that right client in the door, the quality client that you want, and that’s more than just search engine optimization and things like that.

They’re surely a part of it, but it is now becoming a much more, I guess, sophisticated environment that’s coming from other sectors that have been in the e-commerce world for much longer. I mean, we are neophytes as an industry in the e-commerce world of marketing, but we’re starting to see that kind of pick up some steam, and, frankly, that would be where our focus is over the next, you know, we think 12 to 18 months is kind of improving the effectiveness of our digital market.

Peter: Right, right, okay. So, do you think…..I’m talking of the community banking landscape where there still a lot of small community banks with, you know, a handful of branches. Many of them are struggling in the digital world. Do you still think there is a role for these small branch-based community banks well into the future?

Mike: Well, you know, I’m not sure I’m the astute visionary there to opine on that. I think everybody’s strategy is good and you can execute against it. I think it’s going to be a challenge for smaller branch-based community banks to grow, I think that’s just a natural. You don’t have to be an Einstein to figure that out, I think it’s going to be hard.

The natural demographics of it make it really challenging, you know, whether or not we need storefronts, in general, is probably more of a question of how e-commerce and other industries has evolved and what models work out there. But, I do think as we look at the changing demographics and the changing consumer behaviors and our ability to kind of deliver all of the products that you get from a branch, you know, via your device, I think it’s a hard road to be honest with you.

Peter: Right, right. Okay then, we’re running out of time. Last question, what are you working on, what does the future hold for Radius Bank?

Mike: Yeah, I think, for Radius there will be two things that I will tell you. One is we’re going to continue on this digital marketing kind of journey. I think you’ll hear more from us about some of the great stuff that we could do with that. We’re going to be a little bit more of pioneers in that and we are reading playbooks so that’s going to be interesting.

I think the second thing you’ll hear a lot more from us is on the SMB side, small business side, where, I think, we’ve launched out business account. We’re starting to market it much more effectively and I think in both partnerships and marketplace, you’ll hear more from us in that segment. We love that as a technology demand poll segment next, and we’ll continue to announce more partnerships. I think the fintech world is doing great, it’s changed, it’s been disruptive and we think there’s opportunities for us to participate even more.

Peter: Okay, well I look forward to it. It’s been a fascinating story watching this all unfold and how you’ve really….you sort of created a way for …not every community bank can do this, but, certainly, you’ve managed to come out the other side doing well. I appreciate your coming on the show today, Mike.

Mike: Thank you for all the nice things you’ve said, Peter.

Peter: Okay, my pleasure. See you later.

Mike: Okay.

Peter: You know, it’s interesting as we discussed, there’s so much money flowing into these digital banking startups beyond Chime and Varo, as we talked, there’s dozens, it seems like, of these new digital banks that are attracting capital. As Mike points out, the big differentiator that they have to hang their hat on is that they are profitable because many of these companies that are in this space are nowhere near profitability. Some have even said, one has famously said that profitability is not on their agenda anytime soon.

Bottom line is you can’t keep raising money forever. There are going to be, I’m convinced, many of these companies that are going to do very, very well and there’s going to be several that just flame out because they can’t get to profitability of pathway to profitability quickly enough. So, Radius is already there, obviously, they’re not resting on their laurels and they’re trying to keep growing, but they are, I think, a force to be reckoned with in the digital banking space.

Anyway on that note, before I sign off, I would like to say thank you to all the listeners, thank you to everybody who has listened to the podcast this year. I think we’ve had some fascinating guests, it’s been a really rewarding year from my perspective. I’d like to wish you all the best for the holidays and we’ll be back bigger and better than ever in the new year. Thank you very much for listening. Bye.

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 226 –  STEVE MCLAUGHLIN

Welcome to the Lend Academy Podcast, Episode No. 226, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, we have a special guest, someone who I would even say has become a bit of a legend in the fintech space. I’m delighted to welcome Steve McLaughlin, he is the Founder and CEO of FTPartners. Now, FTPartners is a boutique investment bank focused exclusively on the fintech space and it’s been around since 2002, so Steve was really thinking about fintech before any of us, pretty much.

I wanted to get Steve on the show, obviously, they’re in many of the big deals that happened in fintech facilitated by FTPartners so he’s got an incredible perspective on the industry. I want to talk about that, talk about the trends that he’s seeing, we talk about the research reports that come out on a regular basis from FTPartners. We talk about valuation and the sort of the different ways that the private markets and public markets look at that; we talk about SoftBank, we talk about M&A and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Steve!

Steve McLaughlin: Thanks for having me on, Peter. Looking forward to it.

Peter: My pleasure. Okay, so I would like to get this thing started is by giving the listeners some background. I know you’ve been doing FTPartners for many, many years, but just take us back to what you did before you started that and what you’ve done in your career to date.

Steve: Sure, I started at Goldman Sachs initially as a Summer Associate in 1994 then started full time in 1995 in New York City in Goldman’s Financial Institutions Group. This was, I guess, back when it was pre-public so a private company run by 118 partners at that time, but I got put into the Financial Services Group and that was 1995, during the pretty big boom in M&A and capital raising for our bank’s insurance company as brokers, asset managers. It was pretty much the busiest shop on the planet for all that kind of stuff, but as you can imagine, given it was 1995, we also saw the beginnings of everything around the Internet creeping into financial services.

So there was anything you could think of, dot com and financial services, mortgage.com, buying.com, insurance.com and bank.com, and banknet, you name it. That was kind of the company is in, so that’s what I started to focus on. It was an area of the world that mostly undiscovered because most of the companies had no….very low revenues back in the day, but that was back when we started seeing these first signs of Charles Schwab going online and saturating E-Trade and Meritrade and so on and so forth and all those stock exchanges getting electronified and digitized.

And so, I was in the middle of all that and was really one of the only people at Goldman buying loan on the street, focused on that area of fintech and that became 100% of what I was doing. I was either buying, or co-writing the fintech group toward the end of my tenure there before leaving in 2002 to start FTPartners.

Peter: Okay. So, then what was it….I mean, you were really ahead of your time in many ways because fintech wasn’t even a term back then, obviously, there was financial technology, but why decide back then…..what was the thinking behind starting your own firm back in 2002? This was, obviously, coming out of a recession, why do it then?

Steve: Sure, I saw just a huge, huge opportunity in fintech. Like you said, it wasn’t called fintech back then, we called it financial technology which is the name of the company, Financial Technology Partners, so from 2002 that’s been a monicker, but I just saw a tremendous amount of inefficiency in the system. Even today, the opportunity is way larger than what we’re seeing, you know, in the market and people think it’s large today.

So, you know, back then it was pretty clear to me, but it was also clear to me there weren’t any investment bankers that were that focused on it. Most were independents with key focus on the space and so, I thought that was a great combination of picking a great space that nobody was covering. The space is actually quite hard to cover because it covers a lot of different disciplines from, like I said, all the different pillars of financial services and all the different technology types, so it’s quite complicated.

You also got the big names, people coming out from a lot of different directions, in short, a tech company might have an insurance banker coming at it, you might have an IT services bank, you might an Internet banker, and on the research side, you know, there’s sort of a fight for the clients wanting to be covered from more of the tech side, but some of the companies can be pushed over into the financial services research coverage. So, there is a lot of their internal difficulty in terms of people organizing.

You still see it today, a lot of the big banks don’t really have a cohesive fintech group around the world and there actually isn’t a single investment bank that even have a single fintech group around the world. They’re fairly fragmented where people in Brazil aren’t talking to people in New York and not talking to people in London and certainly people in the tech group aren’t talking to people in the FIG groups of these firms, so it just creates a lot of, you know, disjointedness in the client coverage and the knowledge base.

So, I just saw a huge opportunity and really felt that for 18 years it still is not that large back then. So, we’re about 160 people today focused 100% on fintech. That compares to just a few people focused on the stage of any other given bank, including the big guys, so it’s an all out effort here.

Peter: Right, I know you have a global focus these days, so where are your offices located?

Steve: Yeah, we have our headquarters in San Francisco, then about five or seven years ago, we opened our New York office, and then we had a London office open up a couple of years ago so we’re spread in New York and London. San Francisco is probably 80 people today, New York probably 50 and London 30 up from zero a couple of years ago. And then we’re covering, like you said, the world, we have billion dollar deals and startups on really all kinds, other than Antarctica (Peter laughs)….yeah, seriously, we haven’t gone into Antarctica fintech yet, but we just announced a fairly large investment from a VC company called Interswitch which is one of the most viable companies in Africa now.

We’re working on a digital bank project in Southeast Asia, we’re starting a significant payments company in Australia in a couple of billion dollar range, and so, really….we’ve worked on the Interstone IPO last year in Brazil, so really you think you pick your continent where they’re doing things, so it’s exciting times, fintech knows no bounds, I guess.

Peter: Right, right. One thing that I’ve always appreciated, unlike many others as well, is your research report. You do this quarterly fintech research reports, you do have other industry reports and I just saw in my inbox this morning African Fintech Report. These are not just five to ten-page reports, these are hundred plus pages long. So, maybe you could talk a little bit about what goes into these and why kind of…..this is all for free, obviously, why go out and provide all these great intel?

Steve: Sure. Well, I think, like you said, it goes back to about 160 people focused on the space and there’s a significant number of these people that are in our research and business development group which is the core of the company where all the knowledge, you know, kind of pervades from, if you will. So, a lot of it is…….you know, we’re doing an enormous amount of independent proprietary research for ourselves, what’s going on in Africa fintech, hundreds and hundreds and hundreds of companies which were growing fast and was getting funding, what segment, you know, what’s going on in other emerging markets.

So, we’re doing a lot of it for ourselves and we’re taking a sliver of that to sort of…kind of polishing it out to the marketplace. So, there’s a lot more behind the scenes of what we’re publishing and so it’s a little bit of a teaser to, you know, what do we know. It’s also a little bit of a public service because it’s become quite popular and we’ve got millions of readers of our research, and we have only published something…. we can see it light up on the screen as it gets opened up and with that forwarded around all over the world.

So, part of it is we just become part of the ecosystem of what’s going on and sort of, you know, central source of knowledge in defining how the space is structured and who’s doing what around the world. There’s really nobody else out there that’s doing this the way we’re doing it. There are people that are trying to collect the data, or trying to create a three-page newsletter once a month, but in terms of the volume and number of people that we have dedicated to this….so, surely, I’ve heard of, but it’s actually a lot of fun. We get invited to speak to a lot of incredible board of directors and conferences and special think tank type groups, so we’ve got a great team that’s focused 24/7 on that, so it’s pretty exciting.

Peter: Okay, so let’s talk about some of the actual trends that we’re seeing today. I was looking through your last research report and you isolate several things, but one thing that….maybe get your take on right off the bat and that is…a lot of people talking about this lately with the big tech entering fintech. Obviously, we’ve got Google, Apple, Facebook, they’ve all been in the news in the last month or two doing new fintech initiatives. What do you expect to see from big tech going forward?

Steve: Sure. I think you’re going to see more and more convergence between sort of payments and financial technology and big tech. You saw PayPal make the acquisition of Honey the other day in the e-commerce space. You saw Google making the announcement of getting into checking additional banking; we’ve all seen Apple get into the space with Apple Pay and, of course, the Apple credit card. So, I think you’re going to see more and more of that.

You’ve also seen Amazon get involved with lending to its SMB’s and they’re all of them behind in the payments space, but catching up. And then, of course, you know, people like Grab in Southeast Asia and Uber here in the US getting more and more into financial services and I think what you’re seeing is more of a trend towards financial services in fintech, if you will, kind of pervading every single type of business.

So, the money flow is really what keeps businesses going, whether you’re spending money, making a payment, saving money, optimizing an expense, you name it, it is a part of …it’s just a big, big part of each and every business and all the that flows between customers. So, you’ll see more and more people get involved in it. I mean, I think there’s an opportunity more for the big, you know, if you will, e-commerce players to get in and disrupt the banks. I do think that’s possible.

Would you rather have a checking account with Amazon, or Wells Fargo, I think that’s debatable. Wells Fargo is certainly a very highly regulated bank, but it’s got its customer service issues whereas Amazon is charged with customer satisfaction. Well, I think, what a lot of what this is coming down to is data. He who has the most data on the consumer can probably be helping the consumer manage their finances better than others, so I think long term, it’s going to be a data play.

Peter: Right, right, got it. So then, I think that points to another….obviously, many companies that you’ve worked with directly that have a big role to play here, companies like Marqeta that have really created a  whole new kind of way of managing the payments infrastructure, you’ve got other companies like BlueVine on the small business side, I’m curious about the fact that there’s becoming this plug and play type aspect of fintech, it feels like, and I know that Matt Harris from Bain had a piece out recently talking about this, do you think that we’re going to see beyond just the big tech, but lots of the big brands come and have their own sort of fintech offering in the future?

Steve: You know, I think, like I said earlier and the report that you’re referring to Matt Harris put out there, huge Matt Harris fan, by the way, but in any event, yes, I think fintech is becoming a bit of the platform, right. There’s a view that there was the Internet, there was mobile, there’s the cloud and now, there’s sort of fintech, right, and so fintech being sort of the fourth, if you will, horizon of platforms in tech.

I do think there’s a possibility that it could put that….the world thinks about it that way and we’re seeing it embedded in all walks of life, you know, you look at what people like what Expensify is doing, or doing, what millions and millions of users…you know, using their expense account for now. I just read there launching a car platform and I’m sure we’ll eventually do payroll and billing and everything else. So, I think there’s this concept of getting in and lending which particular enterprise, or SMB and then being able to offer them more myriad of services around financial services, or financial transaction processing.

The other thing you’re seeing a bit more of and Expensify is probably not a bad example, are companies that are able to sort of extremely uniquely penetrate both the business ecosystem and the consumer ecosystem. That’s where we’re seeing some really, really breakout players like you pick Square, for example, they’re doing not only 25/30 million SMBs, but also going after and already have, call it 20 million consumers using their apps.

So, at the end of the day, they can bring those two constituencies together and kind of create a super business model around financial services. You see the same thing with Facebook where their consumers are going to do their businesses and basically creating this like cohesive ecosystem and I think financial services will help bring them glue together on that as well.

Peter: Right, okay. You haven’t really talked much about digital banks yet. That feels to me like it’s the hot sector globally, it feels like right now, where there’s lots of mega rounds happening, there’s a lot of customer acquisition happening, rapid growth…..when I look at it, I think back to the lending days.

The time when we first met in person was at LendIt 2015 in New York and that was sort of a conference where there was peak enthusiasm for the lending space and now it feels like peak enthusiasm for the digital banking space, but maybe what’s your perspective? I mean, a lot of these companies aren’t making money yet, what do you see playing out in the digital banking space?

Steve:  Sure. I think, you know, we like the online lending space too, but I always thought that the online lending space had issues, given the very nature of it being you’re lending money out, you hope you’ll get that money back. It tends to be a while of transaction where a few years later when the loan is paid off, the person’s going to shop around and get the cheapest loan from somebody else and people have not really, I think, done a great job in the online lending space, sort of providing a loan to someone to getting a broader customer relationship. I think there was some attempt to do that, but it largely failed.

So, on came the digital banks with the idea of, you know, if we can control your checking account, we can have an interaction with you every single day of the week with your spending card to debit or credit card and we can sort of collect all sorts of data and information and gets back to us the same before about the information game and data game. Once we start doing that, we’re on your checking account we can see when your paycheck is coming in and what your monthly and daily expenses are, what your rent looks like. If you lose your job, or you get a promotion, we can see that too from a digital bank.

And so, I think the idea is, you know, anchoring the client with a digital banking product and a checking product and a direct deposit product is a great banker, all of us would agree, it’s fairly rare if you do change your core checking account. With that being said, the hardest part to get…..I think, the idea is once you have that core checking account, you pull in all that data, it’s not so far at that point to start offering savings products, or the lending products, or expense management products, or financial advice products.

So, I think that’s where there’s a bit of a battleground, there is a branding battleground as well, and what the banks have anything thought of in terms of customer service, in terms of product offerings, and chances of digital offerings, it leaves a huge gap for some of the digital banks to come in and make hay. I think one of the things we’re seeing is very few of these have sort of gone cross border.

Revolut is a rare example of someone who has raised a significant amount of money and sort of, I would say, going for it, and a lot of these guys are talking about building a trillion dollar digital banking platform which is really exciting. We wish them all the luck in doing that, but, you know, you see a lot of other players that are more country specific and are focused on building…. call it a $20 Billion/$50 Billion/$100 Billion businesses in single geographies.

You know what, in the US it comes like Chime and Varo Money has a lot of money and one of my favorites being MoneyLion is sort of helping every man, or the working American. I think there’s a big dearth of financial products out there for the working American, or the working European, or what have you. Some of these are really, really helping consumers think about saving and spending and retirement, things like that. Digital banking is sort of moniker people use, but it’s more digital financial services, if you will, so it’s the better way to think about it.

Peter:  Yeah, for sure. And, you know, along with that….I mean, obviously, the valuations are…some of these companies are attracting really pretty high valuations. I know you’ve got Nubank in Brazil that are, I think, $10 Billion, and you’ve got many others.

At the same time, you’ve got…I mean, in the public markets a lot of these IPOs are struggling, Square is an exception, there are a couple of other exceptions, but when you’re sort of talking with these private companies and they’re getting these massive valuations, you also go and have taken several companies through IPO, do you see the fact…what do you tell people who are looking to go public as far as valuation goes? Do you think that this valuation feels like this bifurcation where you’ve got two completely separate realities, I mean, how do you see that sort of correcting itself, how do see it playing out?

Steve: Well, I think, you know, you have to think what’s going on in the public versus private markets. The private markets, first and foremost, most securities that are being sold are convertible preferred, so the downside protected, there’s sort of unlimited upside potential and, you know, the trade up there is not just that ….there’s no liquidity in that, you know, theoretically less liquidity in public markets so, common stock with no downside protection.

You think about the other distinction of private markets, you see all these rounds, it’s typically what the top one or two people in the world are willing to pay after having done a significant amount of due diligence and under pressure whereas in the public market you’re really only left with a 10K and some 10Qs and some research reports, limited amount of diligence you can do.

You know, it’s sort of the equilibrium of everyone who thinks it’s a buy and everyone who thinks it’s a sell as opposed to whoever is the best company in the world and with the highest price and that’s typically not the valuation for the public market. So, I think, one of the realities of all these private companies when they go to the public market is like it’s not about what you think one person would pay, you have to think of it as the entire universe to pay. That universe consists of a lot of skeptical research analysts whose careers are on the line and we’re going to be, you know, potentially more skeptical than someone who is highly optimistic and has a highly diversified portfolio and has downside protection.

So, I just think there’s a huge difference between public and private markets and I think the public markets are serving as the ultimate reconciler of valuation to some extent, but ….and we’ve also found public markets to be quite wrong about a lot of companies. You look at some of these companies, they’re a bit, you know, out of favor like Lending Club or what have you, I mean, what Microsoft, Amazon, Facebook all had moments when their stocks were down and dropped, you know, no one cared about them and continued innovating and then later on in life became massive companies.

So, I think, you can’t really count any of these companies out, but it’s what makes the world go round, supply and demand. I think you’re not seeing a lot of retail investors piling into these private deals, these are smart incredibly well diligencing companies that are making these big bets, they’re comfortable doing so. There will be winners, there will be losers and I don’t think anyone should be surprised. Occasionally someone wants to invest in a company, $3 Billion valuation might go public at $2 Billion, that’s just life and that’s just what’s going to happen once in a while, that’s why it’s called venture capital, so to speak.

So, some of those are going to go from $2 Billion to $20 Billion. Look at Square, came out of the gate, everyone follows, overvalued and stock suffered in the IPO moment in time and you could have bought it for ….anyone of us could have bought it for $9 a share and sold it for $100 and that was there for the taking for everyone in the space. So, you know, public markets could be a really good thing.

Peter: So, when you’re working with these CEOs do you encourage them to try and maximize the valuation, or is it just a case by case basis? Obviously, it has some downside if they are planning to go out in the public markets.

Steve: I’d say when we talk to clients, we let them sort of think about what’s important to them. We’re usually encouraging them to think about the quality of an investor, leaving money on the table in order to make sure you’re not overpricing your round. At the end of the day, the market’s the market and we are getting some big valuations, but you really don’t like it if I was too far ahead of yourself because it could become difficult to raise future capital.

But, yes, it’s all about what the client is willing to optimize and in a lot of these situations there is optimized valuation, but also we might not be in the same breath. Let’s say I want an investor that can support me through the IPO, I want an investor that could be good at the board room, I want an investor that’s going to be supportive of things when things aren’t perfect because they never are and that’s generally where they lean, is let’s go find the right fit of investors and valuation is one that takes a bit of a secondary back seat.

Peter: Right, right. So, I’d like to get your perspective on SoftBank because I just saw this morning there’s a new deal that they’ve invested in India and Paytm, I’m curious about what impact do you think…..you’re talking with SoftBank at our LatAm Conference which will be in the past by the time this is actually published, but I’m curious about what your take is on their impact on fintech.

Steve: Sure. I think SoftBank is, you know, still a force to be reckoned with despite some of the tricky stuff they had to deal with in terms of the WeWork situation and Uber and others, but at the end of the day, they’re a very, very large venture capital player taking very, very big risks, they are swinging for the fences and it is a portfolio so we can also look at mistakes that they’ve made.

They have made mistakes, certainly made those mistakes and they’ve publicized those mistakes, but, I think, at the end of the day, they have a chance to move some really big deals and take some big swings and they’re trying to do that all around the world. So, you know, I sort of commend them for their efforts in doing it, but, I think they’ve also missed a lot of great opportunities and if they tend to chase momentum there’s a lot of really good hidden things out there that they could be looking at.

But, you know, it is the Vision Fund and so when you do talk to them, and we have a kind of respect for all the guys and gals that we talk to there, look, it’s something that’s really, really game changing, but they don’t spend much time on it. Like I said, I commend them for that, but in terms of fintech, they’re in SoFi, Kabbage, one of our clients, and, you know, they’ve done a lot of great deals in the space as well, but I don’t think they’re having an overall impact on fintech, to be honest with you. There are in a couple of deals here and there, but have they changed the game, have they king made anybody which is a word we hear from time to time and we really haven’t met and seen that.

Paytm is doing quite well with a huge universal investors including Ant and others. I don’t think there’s any magic thing put in there. And then there’s plenty of competitors coming up on their heels in India as well. So, those things have a great place in this world and like anybody else, they’re going to take their lumps and venture capital gamers swing it to the fences and probably need to slow down, select their loans and figure out where to go from here.

Peter: Right, right. Anyway, we’re running out of time, but a couple of things I really want to get to. I want to talk about M&A because it seems surprising to me and I’d like to see if you’re surprised, the fact that traditional banks have not been very active in fintech M&A. Where do you think future M&A activities is going to come from?

Steve: Sure. I think the banks have been slow on M&A, but, I think, I see some signs or light there. I think the thing that has been most eye-opening to us is we actually worked on what is called Assurance IQ. We sold it to Prudential for $3.5 Billion, you know, Prudential being a 144-year old company buying a company that has only been around for three and a half years for $3.5 Billion.

You know, it’s actually pretty impressive that they had the foresight to do that. I think when Prudential looks at its business and sees the changes out there in AI and automation and online applications and what that means globally for insurance, I think they have the guts to go out and swing and actually take a chance on buying a very brave, well-heeled, smart acquisition with Assurance. It’s something that was probably the boldest move I’ve seen any financial services company make in the last 20 years. If you do the research, which we have, you just haven’t seen anything like that in 20 years.

You look at another deal we did, Allstate buying a company called SquareTrade. They saw the world of autonomous cars and saw that millennials were not buying automobiles as much, living at home longer and not buying home insurance. You know, this is to really get closer to the millennial universe and buy an electronics warranty company which Square Trade was. That was $1 Billion that time and it just worked out incredibly well for those guys.

That was the thing, going back to the Prudential deal, I think that comes with Prudential acquiring a company for $3.5 Billion, but I think the market realized that this was a smart move. The stock went up 5/10% and even greater to buy the company over the next couple of weeks and it’s been seen as a huge success. I think that transaction has hit a lot of CEOs’ radar screens, hey, it’s not just for the PayPals and the Amazons that can go up to  $3/4 Billion deals and have the stocks go up. We can do it too if we’re smart about it. I think (inaudible) CEO doing these deals, in part that was $1 Billion plus earn out for the management team There’s a recognition there that you can’t just sort of buy these companies and expect everyone to stick around, you have to think really hard about the team and what’s going to happen going forward. So, let’s give them an earn out, let’s keep them motivated for three to five years so there’s transition.

You look at another deal we just did in Europe where Santander bought 51% of an amazing company called Ebury, another client of ours. Again, these are big…..you look at Ebury and Santander, you look Square Trade getting bought by Allstate Insurance getting bought by Prudential and actually stacking it up. These are like three of almost the only transactions where major balance sheet businesses that have been around for almost 100 years plus or minus are making these kind of bets, but you’re seeing the stuff and you really haven’t seen this up until recently, so you could see a lot more of it.

 Peter: Interesting. So then, when you look across the sort of spectrum of fintech, this is the last question, what area do you think is most exciting? Where do you see the most growth coming from?

Steve: I’m probably most excited about……..I’m excited on all different spaces honestly, but I love what we talked about earlier, the Marqetas of the world, you know, the Plaids of the world, the Expensifys of the world, the ones that are really powering enterprises to do more around fintech. I also really like the B2B payment space, companies like AvidXchange, for example, you can’t take it to too many people that are in the business of getting rid of paper checks, right, and the B2B enterprise world and have a chance at leading the space there.

So, it just companies like that that are more in the B2B side of things where you’re seeing a lot of action right now and look, I love the digital banking space, I love what the Revolut N26, Chime, MoneyLion, Varo Money, I love what they’re doing. What is exciting to me isI really do think, at the end of the day, fintech is here to help consumers and help companies be more efficient which ultimately helps the end consumers as well. So, to me that’s what keeps us motivated to keep going and keep building our businesses. The fintech space is really, really helping people, at the end of the day, and that’s what it’s all about.

Peter: Okay, indeed. On that note, we’ll have to leave it there. I really appreciate your coming on the show today, Steve.

Steve: My pleasure, Peter, thank you and congrats on everything you’re doing at Lendit.

Peter: Okay, thanks, see you.

Steve: Bye.

Peter: That was really interesting, particularly, Steve was saying around M&A from traditional financial institutions. We keep wondering when the floodgates will open, well maybe 2020/2021. we’re going to see many, many more deals here. He’s obviously provided three examples there and, you know, I’ve heard of others that are sort of in the wings that are in the exploratory phase, so it’s going to be super interesting. I feel like the traditional financial institutions are not playing as big a role in M&A as anyone expected and that could be very much about to change.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 225 –  NOAH BRESLOW

Welcome to the Lend Academy Podcast, Episode No. 225, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I’m delighted to welcome back Noah Breslow, he is the CEO of OnDeck. This is actually his third appearance on the Lend Academy Podcast, he was on in 2014 and 2016. I wanted to get him back on because there’s a lot that’s happened in OnDeck’s world. They’ve become profitable, they’ve announced they’re going to apply for a bank charter, which we talk about in some depth.

We also talk about their lending business and how they’re growing that, how they’re competing against the likes of PayPal, Square, and Amazon and we talk about transparency and the Smart Box Initiative and we talk about ODX and the bank partnerships that they have. It was a fascinating interview, I hope you enjoy the show.

Welcome back to the podcast, Noah!

Noah Breslow: Hey, thanks so much, Peter, great to be here today.

Peter: Okay, so you have a distinct honor today. You are the very first person to appear on the Lend Academy podcast three times which, obviously, speaks to your longevity, for one thing. Before we get started, what do you think is the secret to your longevity in your job, given the fact that, obviously, many of your compatriots fintech CEOs have come and gone during your tenure. So, why do you think you’ve had such good longevity here?

Noah: Well, first of all, that’s really cool to know that, you know, I’m the first person to appear three times on the podcast. That’s a great honor, thank you for having us back. The longevity thing is interesting. One of my board members, I think, summed it up recently well, she said that I guess I’m adaptable (Peter laughs) and I think when you look back over the 12 years of OnDeck, you know, we’ve had to adapt.

When the company started back in 2006/2007, we immediately had kind of a huge economic recession, we had to adapt to that environment. Then kind of our hyper growth years, we sort of adapted into that model, raised a lot of capital, we were able to scale the business, as I’m sure we’ll get into, we went public and had to sort of adapt once again to becoming a profitable financial services companies as opposed to sort of a hyper growth privately held company.

Now, I think, we’re starting to reap some of the benefits to that decision to get profitable. Yes, I guess, on one level I’m adaptable. Two, it’s no secret, I love what I do. I mean, I love, love the folks at OnDeck and the team that we’ve built here loved the mission that we’re on. I love working on small business lending, I think it’s a really important thing to solve in the economy, and, yeah, I feel honored to have been able to serve this long and hopefully, we’ll get to continue to do so in the future.

Peter: Yes, yes, indeed. So, you just touched on it. For one thing, I want to get right off the butt here is next month, it’s five years since you went public. It hasn’t been all smooth sailing, but I just would like to get your perspective on, you know……taking back five years, knowing what you know now, would you have done anything differently back in 2014?

Noah: It’s a great question. I mean, internally when I ask myself periodically….and so, you know, hindsight is always 20/20, but I go back to a couple of things. One is, you know, some advice we got from someone in the industry before we went public which is that the category leaders, doesn’t matter what industry you’re in, generally go public eventually. And so, we always felt that OnDeck was being built to last versus being built to sell and we had several opportunities to sell the company when we were a private company and we passed on that because we really felt and believed in the long term vision of what we were doing.

So, I think if you believe you’re building a company for the long term and you believe you’re one of the leaders in your category, your going public is probably something that you eventually do. Of course, we’ve learned things in the last five years and I think chief among them are the way we position the company as we went public, so we went public with more of a technology positioning, but the at the end of the day, we’re a technology-driven business that has a financial services business model.

So, almost all of our income comes from lending and not just lending, but, you know, really spread lending, right, we retain the risk on our loans, we maintain a balance sheet, and so, I think, our positioning there and our valuation probably should have reflected the financial services nature of the business a bit more than it did. That was sort of really lesson one.

Lesson two, I think, is just sort of the stage of where the company was when we went public. We were still loss making when we went public and as we’ve learned, you know, once you get the company profitable, a lot more of your value as a company can be in your current year financial metrics as opposed to some long term point in the future where an analyst model is that you’ll turn profitable. And so, when you have that, it can lead to a lot of volatility in your projections and your stock price.

And so, that being said, we were able to raise over $200 Million for our balance sheet, you know, at an attractive price and we haven’t had to raise equity in five years, nor do we expect to in the future. In fact, we’re actually buying back our stock now, given our level of profitability. So, I think, ultimately, it made the company stronger, a better-run company, more disciplined, but, certainly, I don’t want to claim the last five years had been smooth sailing, they obviously haven’t and there’s something we can learn from that.

Peter: Right, right. Speaking of profitability, one of the knocks on the fintech/lending sector is there’s a lot of loss making companies out there. I know that you guys really switched focus on profitability, I know it might have been two years ago now, you’re certainly ahead of the game. So, what was the driving forces that kind of put you over the edge towards profitability?

Noah: Yeah, I think a couple of things. We didn’t change our capital market strategy in 2016 so let’s call it three years ago now. You know, we had gone from a hybrid model of selling some of our loans off balance sheet and holding a good amount of the loans as well to a model that we held all the loans and that was the first step, I think, in stabilizing the business model. We had been selling loans off balance sheet, they were gain on sale, you know, amounts that would change quarter to quarter, there was credit demand, there was a lot more volume quarter to quarter. That was sort of step one towards getting the company, I think, more stable.

Step two was in 2017, which, by far, has been the hardest year we’ve been through in 12 years of OnDeck which was we made a decision to restructure, we laid off a percentage of our staff and really reduced our expense base and we sort of set a goal in the beginning of 2017 to get profitable by the end of the year on a true gap profitability as well, not an adjusted EBITDA or non-gap metric and we achieved that. But, it wasn’t without cost, it was a painful process to go through, we learned a lot of lessons about the company, about leadership through that, but, I think, it was the right thing to do.

As a lending business, ultimately, you have to be profitable, you have to be growing book value, and your equity base, you know, quarter over quarter, and I will say, it’s really paying dividends now. Our cost of capital as a borrower in the capital market has come down partially because of that profitability. We made our first acquisition last year partially because that profitability allowed us to do that and I think you’ll see us make more moves over the coming year when we leverage the profitability we have in the business to expanding growth.

Peter: Right, right. So, I want to dig into your lending business for a little bit here. Maybe we just get started, I mean, you know, you have your term loans, you have your lines of credit, maybe you could just tell us what is the rough mix today between those two products?

Noah: Yeah, so the rough mix is, I think, 78% of our books is the term loan products there, about 22% of our book is the line of credit product.

Peter: And the term loan, what’s the sort of average of the term loan, how long do you go out on average?

Noah: On average, our term loans are, right now, hovering around 13-month of kind of a dollar weighted average, not a loan weighted average.

Peter: Right.

Noah: We go from three to 36 months in terms of range, but really, the majority of the OnDeck offers and what customers are looking for from us today are really between six and 24 months. That’s kind of the vast majority of the portfolio.

Peter: Right, right, Let’s talk about underwriting, how has your underwriting changed, or has it changed much this year. You’re tightening things up in preparation for maybe turning the credit cycle, where are you at with that?

Noah: Yeah, you know, this is all in our earnings called recourse, but we did make some changes earlier this year. So, we pulled back a bit, bit on some kind of signals we saw in our data early in the year. I would say that we were a little bit ahead of the curb on that in the sense that the Fed at that time…people thought the Fed was going be raising rates all year and it turns out now we’ve lowered rates several times this year.

So, I think, we did see some signals in the economy that eventually were picked up in other places, and what we’ve now been doing for the last sort of four/five months is really focusing on what we call our “offer quality initiative.” So, kind of focusing in on the top third of borrowers that we approve and basically offering them slightly better loan amounts, slightly longer terms, completely better pricing and I think on the margin, trying to increase our dollars in the portfolio from the top third of borrowers.

As a result of that, you know, the average FICO score in our portfolio has never been higher. We just had a securitization price last Friday and that securitization is the first actually Triple A-rated securitization in the online small business loan market. So, you know, the rating agency picked up both from the company’s profitability and we improved our quality in the portfolio and so, I think, it’s a great position for us to being kind of late in the cycle. We, obviously, are cognizant of where we are, we don’t know when the downturn will happen, but it definitely will and so, we think really focusing on our best borrowers is the right move right now.

Peter: Of course, you could be like Australia though. We could go 20, what is it 26 years, I think, since Australia’s had a recession, so you never can tell. (laughs)

Noah: That is true, that is true, and I won’t say….there’s a lot of political pressure on the Feds to keep rates low, to keep the economy growing. So, I think the critique of what we are doing is that if, in turn, the recession doesn’t happen for three more years, we’ll probably a little bit under investing in growth right now, but, obviously, you know, in a lending business we are planning for the long term here and we want to make sure if a recession does happen, we’re set up right.

Peter: Yeah, fair enough. In the last year, or two, we’ve seen a real surge in some interesting competitors in the space. We’ve got PayPal who are doing huge volumes now in small business lending, we’ve got Square that are also doing a lot, Amazon’s doing some. These are, obviously, big tech companies, deep pockets, and with all having some sort of proprietary access to proprietary data on the businesses that they underwrite. First, do you see these companies when you go head-to-head in the market and if so, how do you compete with those kinds of companies?

Noah: I think the answer to the second part of your question, in terms of do we see them, we absolutely do. I think, you know, not just PayPal, Square, Amazon, but we have some online lenders too that are getting bigger themselves, and so I think you see a classic kind of scenario where a market is maturing. So, going from call it 40, or 50, smaller players over time will consolidate down to six to ten kind of players that have scale and all of us will have different competitive advantages. I do think the arrival of the close mood players in our market……we call them close mood because they do have an existing merchant base and a data feed as you noted, is one of the most important development in the industry in the last couple of years.

And, you know, I think a couple of things that will play out here and we still think we’re well positioned to grow and win in this market, but we, obviously, have to be careful where and how we compete. So, I think, those players are generally much stronger, underwriting their own merchants and some of them don’t have the capability to underwrite merchants that are not on their platform. One of the advantages of the OnDeck approach, is we can underwrite any small business, regardless of who they process their payments with.

The other thing is we have a more holistic view of the business, so certainly, payment processing data is one, data source and having access to that helps. There are other ways to get access to that particular data sets, it’s not that impossible to get to one. Two, what we learned over the years is that no single data source carries the day, and so, when you see a business that has a diversity of revenue streams and maybe has a more complex balance sheet, maybe needs to borrow a little bit more capital, you know, that’s where OnDeck has a real edge.

We can often out-lend those companies that you mentioned on sort of from a time basis, from an amount basis, from a speed basis as well clearly in the smaller end of the spectrum. So, if someone is looking to borrow $10,000 for their business…….you know, I think that sector is now quite competitive so the players you mentioned, from all the online lenders, the pure play online lenders go after and to some degree, consumer lenders are going after that space as well because the small business owners are consumers as well and can maybe borrow from a player like a Lending Club, or a SoFi, so forth. So, I think, that’s really it, the smaller end of the market is very competitive right now, but we still feel differentiated as the loan sizes get a bit bigger and the terms get a bit longer.

Peter: Right, right, okay. So, I want to just talk about transparency. I know you’re one of the founders of the Smart Box Initiative which gives comparison tools so lenders can see the different ways ….how much a loan is going to cost them. So, California has passed a law to mandate more disclosure and focusing a lot on APR, so what’s the impact of the California law on you guys and then are you seeing sort of traction with the Smart Box Initiative, what’s going on with transparency?

Noah: Yeah. So, transparency is incredibly important. You know, as online lending continues to grow, 32% of the small business owners tried an online loan in 2018, that’s up from like 15% or something in 2016. So, as the industry grows and goes from kind of alternative to mainstream, the focus on consumer protection and transparency is going to be front and center.

I do think we’re reasonably ahead of the curb when us and the other members of the ILPA, the Innovative Lending Platform Association, rolled out the Smart Box. I think that was like two, or three years ago now, so it’s been out there for a while and we were actually fairly involved in the drafting of the California bill so we worked with legislators to educate them on online lending, we showed them the Smart Box. The Smart Box is always disclosed APR and so we widely feel the Smart Box satisfied the requirements of the California bill, maybe made a couple of small adjustments, so I think that’s really our strategy.

I think you’ll see small business loan disclosure bills cropping up in a few other states. We have our eye on a few other states, they’re kind of in discussions, and our goal really is to come in to the state to educate on the economic impact, the positive economic impact of small online business lending and then offer up the Smart Box as a tool that could potentially be a….rather than inventing something from scratch, gives you a template to work off of. So, I’d say we’ve been pretty successful on that, so far, and you, know, in terms of Smart Box adaption, we continue to expand membership in the ILPA.

We’ve also got the Smart Box now in slightly localized forms, adapted in Australia…..speaking of Australia, so the top seven online small business lenders in Australia have now agreed to adapt the Smart Box and we’re working on a similar measure up in Canada where we have a business as well. So, the hope is to make it a de facto loan disclosure for the industry and I think regulators appreciate that and no doubt, it’s going to be a critical issue for the industry over the next couple of years as adaption continues to grow.

Peter: Right, right, okay. So, I want to switch gears a little bit and talk about bank charters. So, you know, you announced early this year that you were going to pursue a bank charter. So, why do that and why do it now?

Noah: The decision to pursue a bank charter was not one we take lightly and it was really done after several years of careful study because I think we had said even prior to the last couple of earnings call that we’ve been exploring different bank charter options. So, why now?

I think, you know, one is reaching a level of scale where we’re really a national business and sort of to give a long term regulatory structures for our industry. We think there are some advantages to being a nationally chartered bank, in terms of rate exportation would be one; in terms of consistency of laws, the application of laws across all 50 states kind of more generally than just rate too is another.

And then, you know, as you mentioned earlier, we’re probably late cycle, we don’t know when the next cycle will turn, but the stability of bank deposits as a funding source is not lost on us.

There’s a long history of monoline, or you, know, very limited number of product lenders turning into banks and rather than wait for an economic cycle to happen and turning into a bank on our back foot, we thought that the company was mature enough to go on our front foot.

The other part of the now, I guess, readiness of OnDeck to take on a bank charter….so, over the last couple of years, turning profitable obviously really improved the stability positioning of the company. All the compliance we’ve had to build out being a publicly traded company and also running our ODX business, I think, positions us well to interact with regulators, you know, in that new way.

And we’ve also updated our management team and board of directors with a number of folks who have substantial banking experience, so Ken Brause, our CFO who joined us from CIT who joined us. CIT, you know, bought a bank while he was at CIT and has, you know, 30 years of financial industry experience. We added two executives to our Board last year as well who have that experience.

So, I think, the now is partially a function of OnDeck being ready and partially a function of our scale and I think partially a function of wanting to make sure our business is stable and a reliable source of funding for our small business customers, regardless of where we are in the cycle.

Peter: Right. So, do you anticipate then being like a full service bank where you’ve got a whole range of different products? I mean, I presume you’re going to continue to maintain your small business focus, but are you looking at small business checking accounts, small business savings accounts, are you going to have a consumer element to deposit gathering? What’s the OnDeck bank going to look like?

Noah: Yeah. So, we’ve been a little bit tightlipped about this publicly until we’re more ready to announce kind of the methods and plans for obtaining a bank charter. But, what I can say is that’s all business focus absolutely, that’s our bread and butter, it’s our core customer. This is really about hearing from our customers that they don’t always feel well served by existing products that are out there in the market, and small business has always been a bit of the forgotten stepchild child between large commercial customers and the large scale of consumer banking, right.

And so, we think that a digitally integrated front end of that combined kind of checking, savings and lending and really timely lending options that can leverage some of the data that we’re able to share with our customers and know about their business, we can be a better partner to them.

So, you know, I think a little bit TBB on the consumer piece of this…I think by getting back to our strategic focus, it really is on doing the best we can for our small business customers who have been somewhat underserved. So, that’s the thinking for now and certainly as we get further down the road on this, we’ll talk more about what our plans are.

Peter: Sure, sure. And I know you can’t really share much, but can you at least share like is your timetable that you had laid out for this is….are you on track with that?

Noah: We are, but, again, I can’t say too much about the specifics. So, you know, suffice it to say, I think it was our 2nd quarter earnings call where we changed the public facing language around this from sort of exploring to pursuing. We felt we kind of had to do that given how far we were getting in the process and we want our investors and the community around OnDeck to not be surprised, you know, if we, in the next x number of quarters, make an announcement sort of more specific about what our plans are.

So, we felt that was the right kind of pre-signaling to do and we are on track for our timetable, so we wouldn’t know of that change in language if we felt like we were years away from detailing what our plans are, but we’re definitely not weeks away either. That’s probably measured in the order of months.

Peter: Right, right, okay. It’s not a quick process, we all know that. So then…..

Noah: That is true, not totally in our control either as others have learned, so I think we want to be respectful to the regulators and everyone else involved.

Peter: Right, right. Hopefully, it will go quicker than what Varo Money has experienced which is certainly a multi-year process, but….anyway, let’s talk about ODX for a second. Obviously, you made a big splash…I still maintain it was the biggest partnership in the history of fintech when you announced you were going to be Chase’s partner for online small business loans, maybe we can start off with that.

So, when you signed, I think it was 2015, four years ago right around now from memory, when you announced that deal, did you expect it was going to last for five/ten years? Did you feel like four years, or thereabouts was about right, I mean, what did you think back then?

Noah: Yeah, I think both back then and until relatively recently like as much as, you know, seven or eight months ago, we really thought it was a long term partnership, kind of been that five to ten-year time frame, we always knew that partnering with Chase….they are, you know, the biggest bank, they have the largest IT budget, and if anyone was going to try to build a solution themselves over time, it was probably them.

But, you know, I got asked the question similar to this a couple of weeks ago and someone said, did you feel used by the whole experience (both laugh)….. No, not at all. Even though I’m aware that’s happening, I would do it again, and the reasoning why is it actually knew there’s a better company not only for the ODX business, but in terms of even how we operate the company.

Chase had a very high standard for compliance and data security and business continuity and how they thought about their customers, and we built a successful program and I think we’re very proud of that. If you look at the loss rate, the volumes we achieved, we can’t discuss these things publicly, but, you know, Chase also said in their public remarks that OnDeck was a fantastic partner to work with and so we’re proud of what we did. I think we moved the ball forward in online small business lending, as you said, as a result of that partnership.

What happened, simply put, was there was a change in leadership at Chase, you know, earlier this year and kind of with that is a strategic review and I think Chase was at a point where they were either going to have to invest a lot of money over the next three to five years kind of deepening the relationship with OnDeck, extending it to more products. That was not a small investment on their side to make, and it felt like well, we’re Chase and a point of arrival for this even if it’s three to five years down the road, probably is eventually bringing it on to our system. So, we learned from that and I think Chase is one of the few banks in the country, I think, that can make that trade, just given the size of their technology investment and what we learned.

You know, we’ve announced several other banks, PNC, we have recently announced Investors Bank, we have some other banks who expect to sign between now and the end of the year, we may not announce them till next year, but what we’re learning is that not every bank is prepared to make that investment and many of the smaller banks may never be able to make that investment on their own and partnership really is the right strategy for them.

Peter: Right, do you think you need to be a top ten, top 25 bank to be able to really get something that is as good as an experience as an OnDeck customer gets with all of the effort that goes into that on many fronts, not just tech, it’s marketing and all kind of things. So, do you feel like….what size bank do you think you realistically can pull that off?

Noah: Yeah. So, I would say I don’t think it’s limited to the top ten, or 25, I mean, there’s kind of a sweet spot where you’re big enough to have a customer base and a sophistication level that would allow you….as you said, it’s not just implementing the technology, it’s absolutely about your credit modeling and your marketing strategy and how you approach your borrowers, but also…..you know, what we did learn, with the Investors Bank deal, in particular, is working with five of these smaller banks can go faster.

Peter: Right.

Noah: There are fewer committees to go through and fewer hoops to jump through to get approval for different projects and the integration can be smoother and so, we haven’t talked publicly about our timeline with Investors Bank, but suffice it to say…..but, I did say on our prior earnings call is that the fail cycle was faster there than we experienced at the larger banks and the time to implement will be dramatically, I think, smaller as well.

That’s what we’re learning, you know, so, top ten, top 25 banks still is a little restrictive, you know, top 100, top 200 banks feels like the sweeter spot maybe, overall, but you’re absolutely right, a very, very small community bank, we haven’t yet modularized the OnDeck technology and also there’s a business case issue. How much are you actually going to be able to invest at that size of an institution to make the business case close. So, expanding our universe though from the top ten to the top 100, or 200 will keep us busy for a few years (Peter laughs) and we’ll start with that.

Peter: Right, right, yes, no doubt, no doubt. So, obviously with Chase…I mean, the fact that you had that relationship must make always others….I mean, even the fact that Chase is going away, you pulled it off without any major hiccups, at least externally (laughs). We don’t hear anything, so, I imagine, that’s a …..I mean, if you’ve done it with Chase people will say, well, they can certainly have the capability of doing it with anybody. How much did that really….the Chase kind of partnership drive the rest of these discussions?

Noah: Yeah, I think, it was a big deal, you know, it’s sort of….one person referred to it as the good housekeeping seal of approval and I think that absolutely has had an effect on building the ODX business up and it’ still an asset today, even though Chase is no longer going to be working with us, we’re still working through a wind down period on the portfolio.

But, we also are very happy that our pipeline didn’t stop there when we made the announcement because that was obviously a source of concern, you know, what will happen to the banks that are exploring an ODX solution because it is a longer sales cycle and everyone, you know, stood firm and that was good to see as well. So, I think, that’s right, we did get a capability uplift from implementing the program with Chase and I think it is still serving us well, you know, going forward.

Peter: Right, right. Okay, we’re running out of time, but before I let you go….you know, you have a great window into the health of small businesses, even sector by sector, I’m curious to see, you know, you hear about…..listened to NPR the other day talking about CEO confidence levels are lower than they were a year ago, so I’m curious about what you’re seeing as far as the small business community are. Are you seeing any hints, any pockets of slowdown, or do you feel like people are still confident, still taking out loans to buy new equipment, to expand their business, I mean, what’s it like out there?

Noah: Yeah, that’s a great question and we have a lot of data coming in to inform our perspective on this and so we said….you know, previously, about 2019, earlier this year, we did see a little bit of weakness in transportation and manufacturing and I think a lot of that was related to some of the trade uncertainty that we’ve had, right, fewer imports at our ports lead to fewer goods shipped across the country and, you know, it really hit in the transportation space, some of the owner operators out there.

You know, the spot rates went down, manufacturing volumes declined a little bit as well and so that is….you know, they were exporting as well and those exports were being impacted by terrorists could be a challenge, so we did see some of that earlier in the year. You know, currently, I would say we are not sort of publicly talking about anything dramatic, we think the American consumer is still strong, but I think there’s a lot of data sources that backed that up.

But, to your point, the business climate and the business outlook is a little bit more conservative than it was last year. So, if you look at sort of the small business optimism index that, I think, it’s run out of the University of Michigan, you’ve got the CEO temperature gauge that you just mentioned, I think, you know, businesses are still optimistic about the future, but maybe a little bit less so than they were a year ago and that’s probably influencing demand for loans a little bit so, I think, that’s our read on it right now.

Just a little bit more caution, especially as we head into an election year in the US, obviously, a really different set of options in front of the American populace, in terms of voting. So, I think, you’re going to see some uncertainty lead up to the election and we actually saw that a little bit even in Australia where there was an election not too long ago and there was a little bit of a slowdown in business investment right up to that election because people don’t know who’s going to win and what their policies are going to be.

Peter: Right, right, got it. So, final question then, looking through into the future, what’s the long game for OnDeck? If we get back together, Noah, in three years time, what do you hope you will have achieved?

Noah: Yeah, it’s a great question. So, I do think as we talked about earlier, this OnDeck bank idea is pretty exciting and I do think it will take a couple of years to get there because as you noted there’s a number of applications going through the process now. It takes a while, but we, again, are in it for the long haul and so the idea of OnDeck’s bank being the digital bank for small business is very exciting.

We think we can spend the next five, or ten years really working on that vision, building it out and just creating a killer set of tools for our customers to manage their cash flow and when they have extra cash we can probably pay a more competitive rate than they’re getting today from their current bank, and when they’re in need of cash flow for the day-to-day expenses, we’ll have products for that, and then when they’re in need of cash, you know, for investments, we have term loan products today that deals with that.

We could also offer potentially SBA products over time, or secured lending products like equipment finance, or asset-backed lending over time as well. And so, my hope is three years from now, we have a wider, you know, maybe a much wider variety of products to serve our customers with.

Hopefully, we figured out how to navigate the overall bank charter process, and we’ve started to succeed in re-positioning ourselves in the market like, hey, you knew us as a leader in online lending, but now really know as more as a digital bank for small business and that would be a lot to get done in three years, but we’d be pretty excited if we did.

Peter: Okay, well good luck with that. I know it’s not going to be easy, but anyway, I really appreciate your coming on the show today, Noah.

Noah: Thanks so much, Peter, always a pleasure.

Peter: Okay, see you.

The lines continue to blur in fintech between lending, digital banking and savings and all these different silos of products are really…..the fintech companies are now becoming diversified financial institutions and, you know, this is going to be a long process as Noah mentioned.

Getting a bank license is not a trivial process, but looking down the track you can see that consumers and small businesses are really going to be well served, better served than they’ve ever been with these options of digitally native companies that are now well established in their sector and offering a full suite of banking services. It’s a really exciting time, I think, to be involved in finance.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 224 –  SAM GRAZIANO

Welcome to the Lend Academy Podcast, Episode No. 224, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging, and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Sam Graziano, he is the CEO and Co-Founder of Fundation. Now, Fundation has been around for many years, in fact, Sam was one of the speakers at the very first LendIt back in 2013, so he is somewhat of a pioneer in this space. I wanted to get Sam on the show to really talk about the small business lending space and how it’s changing, how his company has evolved.

They’ve pivoted a couple of times really from the way they first approached the space, and we talk about how they’re approaching bank partnerships. They’re one of the leading companies now providing white label solutions for banks in the small business space. We talk about the future of small business lending, we talk about……he provides his thoughts on Amazon, Square, and PayPal, and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast Sam!

Sam Graziano: Thanks for having me, Peter.

Peter: My pleasure. I’d like to get this thing started by giving the listeners some background about yourself, I know you’ve been doing Fundation for some time now, but maybe tell us sort of what your career background is.

Sam: Sure thing. So I actually spent about ten years on Wall Street, before starting Fundation, in a couple of different capacities. First, as an investment banker doing M&A, corporate finance for an array of different financial services companies in banking, lending, asset management, etc., and I got to sort of spend some time in that thing, doing some private equity work as well at one of my private prior firms that I was with. So, my whole career before Fundation was oriented around financial services companies across a bunch of the different verticals within financial services. So, you know, it was a pretty deep springboard for me to just go ahead and start Fundation.

 

Peter: Okay, so then what was the idea….did you have like an aha moment, or what was the driving force behind starting Fundation?

Sam: Yeah. So, actually, I started the company with a Co-Founder of mine, his name is Doug Gordon. He and I went to the same alma mater which was Bucknell University, me being many years ahead of him, met him at an alumni event, you know, he was talking about an idea oriented around crowd funding business loans. That was many years ago, so at that time the only sort of comparison was really Lending Club and Prosper which you, obviously, know those stories extremely well, to state the obvious.

I started following those companies at that time when I was a banker and I thought it was interesting, you know, what they were doing around bringing consumer loans online and sort of dividing them up in a neat syndication process, and I hadn’t seen anything like that being done in small business lending. So, I decided to start to work with him to help develop a thesis. You know, ultimately, the thesis became…..you know, we felt small business lending was underserved and I think that was in large partly driven by what the media was saying, what you can read from SBA, white papers, etc. etc., but the format we decided to try and initially build the business was not a true peer-to-peer format.

We have started like trying to just bring institutional capital to a platform because we sort of have the theory, from my experience, having worked with asset management companies and just sort of really scale capital supply. It was going to need to be institutional, I sort of felt the retail component wasn’t necessary, it’s really the core value prop of the business was going to be bringing a better suite of products to the market, you know, that good, be something better than just what we call the daily pay products around the market at that time, and serve the businesses that weren’t being served well and I guess what’s come to be known as a marketplace platform approach, but using predominantly institutional capital. But the story has changed dramatically since then and I’m sure that’s where we’ll spend a fair amount of time on today.

Peter: Yes, sure. So, maybe we can just get right into sort of the evolution of Fundation. You know, you started off obviously doing this direct to small businesses online, why don’t you tell us a little bit how that’s evolved and how your business evolved. I know we’re going to talk about bank partnerships quite a bit in this conversation, when did you first start that……thinking about being kind of the engine for banks to do this. Just tell us about the evolution.

Sam: Sure. The most fundamental point is we’re actually not in the direct marketing business at all today. You know, that was one of the cornerstones of how we got started which was we thought, you know, we were going to use various direct to customer marketing techniques, whether that was mail, digital, or otherwise, to drive people to our website and to provide them with a loan. We thought that would be a good business model and we, at least, made the determination that that wasn’t going to be the way we were going to be able to succeed.

I think what we had found was the sort of quality of the customer population that we were able to drive, or that we even thought we would ever be able to drive to our site was not going to fit very well with the sort of the type of products that we were looking to bring to market which was something in between where banks play in terms of term, in terms of cost and sort of where some of the well known companies in our space play in terms of term cost, etc. and sort of structure of these products. And, I think, those models can work very well, you know, if ……and I think there has been some scenarios where it does work very well for folks that have a wider buyboxs and then we dared and it’s where we had started.

And so, at the start of our journey I was thinking like, okay, well, this doesn’t seem like it’s going to work so well for us, at least, you know, what’s the right approach and we really started to think about origination channels. What we realized and I think what a lot of the industry across consumer, small business do realize is that one of the cornerstones of value creation in the market is your acquisition channels and direct is one. You can do that very well and develop a brand and that takes a lot of time and money, you know, that is one that can be very successful.

I do think there are some challenge to that one, long term which we can get you in a minute, and there are others which are, you know, things like what GreenSky has done which was develop your own dealer network and there’s a rise in variations of how to develop channels. We decided to take sort of more of an indirect approach which is through partnerships and that was sort of our first meaningful pivot which was around the acquisition channels that we were going to focus on.

The next meaningful pivot, which we will get to in a minute, is us as a solutions provider, providing our platform as a service to banks. So, we started on the path of, you know, developing channels that were not direct oriented. We do still work with brokers today to some degree, some of the marketplaces out there, but we developed some recently successful Point of Sale programs, we started working with banks actually as a referral channel.

In the recent years, we’ve started to focus on companies that we think will have dominant mindshare with customers and/or sort of be able to provide some form of capital to time of need, or time of purchase. That was sort of the first pivot for us as a business. Maybe I can just stop there, see if you have any questions before we get into the next pivot.

Peter: Yeah, yeah, sure. So, I’m curious about…..maybe you could give us an example of some of the partnerships that you’ve got. These are partners driving to…..this is almost like, I presume, acquisition channels because on your website, obviously, you still have Apply Now predominantly as a button on the top right of your home page, so you’re still getting customers going, flowing through directly with Fundation. It’s just that, I’m guessing, that they’re coming through these partners, maybe tell us like the Point of Sale one, or just give some examples of those.

Sam: Yeah, sure. So maybe I’ll just sort of talk about them categorically as opposed to specifically because, obviously, I want to keep some things close to the chest, but, yeah, we do have an Apply Now button on our website. In fact, we debated recently taking it off because, you know, we don’t invest in it, we need the traffic that’s showing up is purely organic, or word-of-mouth and it’s such a small piece of what we do that it’s just sort of there as a matter of convenience, I guess, for customers that do show up, but we’re not trying to drive anybody there, and so there are two different categories.

First is actually banks, we work with banks in a few different ways. You know, one, which is those that we offer a white labeled origination solution to help them originate for their own account, but what we do with those relationships is actually what we call Second Look which is……the first service we provide is allowing that bank to originate their products in their name, you know, at their co-structure and then on-boarding it into their systems, but using us as an origination capability through their channels.

The second service we provide to those same institutions is a Second Look which is to say, hey, if we said no to that customer, could Fundation have said yes. If the answer is yes, we give them a Fundation line of credit, or loan and that becomes an acquisition channel for our own balance sheet, on top of it being a services business that we’ve got.

We also have banks…..last year, our first bank partnership was with Regions Bank back in 2015 and that was not a private labeled platform solution, it was purely just an integrated referral program. Today and since then, every customer that opts in to a Second Look that comes to their retail network, or their business bankers and is declined by the bank systematically comes into our system every night, as well as customers that come to their website, you know, where the bank really hasn’t invested in their own online lending capability, that comes right to us.

And so, that was actually our first bank partnership which was, again, not a fee-for-service platform solution, it was an integrated sort of partnership around serving their customers that they were unable to, or were willing to serve on their own and that continues to be a pretty successful relationship for us and a good one, and it’s been in place for almost four years now.

We’ve also got banks that actually refer us to all of their customers below a certain amount, so we, you know, publicized the relationship with a bank called Provident Bank in New Jersey which is about a $10 Million bank and they’re a very good commercial bank, but really don’t have a capability, or necessarily, at the moment, necessarily care to of their own that they’ve manufactured to provide loans below $250,000. And so, all those customers that come to the bank seeking that kind of product, they just refer them directly to us where we give them a Fundation loan or line of credit, So, we work with the bank in a whole different bunch of ways and so those are sort of a few categories there.

We’ve also, as I mentioned, got some purchase finance, or Point of Sale programs. You know, we don’t really talk about them too much, I probably won’t go into too much detail here today on the podcast because we feel like we’ve developed some niches there that we think are really rewarding for us in terms of the customer profile, the risk adjusted return of those opportunities, but, you know, they’re very different from what another firm might be doing in the consumer space, you know, or what a fun box is…what it looks like in the B2B space.

It’s not e-commerce driven, right, it’s more sort of by appointment through companies that are providing a good, or a service, or a product of some kind to its SME and where a term loan, or a line of credit could help make that sale more likely, or more efficient.

Peter: Right.

Sam: And that’s been pretty successful for us and is a……probably a quarter of what we do in terms of putting assets on our own balance sheet. And then, we’ve been working with some of the marketplaces for a long time that are very well known in the SME space. We do have a small network of commercial loan brokers that we work with, you know, in recent years.

We really started to try and make a push into integrating our platform with …..lets just call them payment and/or other digital platforms that have SMEs that may need capital to facilitate a purchase, you know, and/or those institutions just have let’s say dominant mind share with SMEs and so I know….I think one of the things you wanted to talk about later on was this idea of just in time capital, or capital whenever needed for SMEs. We are a believer in that concept.

Give you an example, just in terms of a company that we publicized our relationship with which is a young company at this point, but, you know, we’ve got some high hopes for. It’s called Tango Trade and what Tango Trade does is they provide an escrow service to allow a US importer who is buying goods, or equipment from a foreign supplier to use a sort of escrow service provided by Tango Trade.

And so what do we do? We provide the funds that would go into that escrow account, right, and thereafter essentially be financing to facilitate that purchase by the US importer from that foreign supplier. So, it’s sort of a variation of a Point of Sale type of a situation…..

Peter: Right, got it.

Sam: ……and, you know, there are a lot of different scenarios like that. There are platforms that do all different types of things and I am a big believer in the convergence of payments and credit in a variety of different ways and that’s an example of one that we’re doing. So, maybe just stop there and see what……

Peter: Yes, yes. So, these different companies you’re working with here, do you treat each one individually? I’m actually looking right now at the page on Regions, send some of these loans to you, obviously, I’m not a Regions customer and I just went through their website. There’s a page on fundation.com, but it’s specifically created for Regions, is that how you do it? So, with every single partner you have, you just create a specific page on your website and they all go through, I imagine, a similar engine on the backend?

Sam: Actually, no.

Peter: Okay.

Sam: But, it’s a great question. So, we’ve tried to build our platform in a way where we can accommodate the customer use case based on how the partner wants us to interact with that customer, right. So, that could be a situation like Regions where if you go to regions.com, it will basically drive you to a co-branded online application experience. You know, with our private label partners and to sort of state the obvious, we developed a customer interaction layer and our customer interface and a banker interface that is sort of built to their liking.

Now they’re adopting many of the things we’ve done from one bank to another, but not always, and we’ll configure it exactly to sort of how they want the platform and us to interact with their customers and/or their employees. But, if you start going into some of these……..this is called platform opportunities, or partnerships where we are providing our products on a sort of on-platform experience of a third party. We recently developed a whole suite of API’s that basically allow a third party partner to manage the entirety of the customer experience on their platform, both from application to sort of underwriting process, to booking in their app there, even initiating draws on lines of credit through their platform.

We did that because, again, I am a believer and the rest of us here at Fundation are also believers that various types of platforms, whether they be payments platforms, or otherwise, you know, we’re going to have a lot eyeballs from SMEs in the future and have some pretty good mind share with those SMEs and introducing credit in various customer scenarios will make a lot of sense and build one that controls the customer experience. So, we need to give them API’s to be able to do that as opposed to having to force them into our platform, if you will.

Peter: Okay, okay, that makes sense. So, maybe just real quick, step back and talk about the types of loans. You mentioned term loans, lines of credit, is this sub-500,000, just tell us a little bit of the range of amounts, interest rates, that sort of thing.

Sam: Sure, and I’ll distinguish for a second between what’s on our balance sheet versus what we’re helping our bank clients originate. So, what ends up in our balance sheet is either term loan, so, you know, a fixed-rate installment loan which is very similar to how a traditional marketplace loan might look like, if you will, which is risk-based price, terms of one year to five years, but for us an average of around 27 months on origination and sort of an average of, I think, around $55,000 to $60,000 of origination with APR sort of in the mid-high teens on average.

Then we’ve got a line of credit product, our line of credit products is, by far, the highest growth product we’ve had since launching it, which we launched in 2015 or 2016, I believe. It’s been very high growth for us because of the channels that we operate in which, again…..I expect a fair amount of time the moment we get talking about the different types of bank relationships we have. You know, what we found there is the vast majority of the time customers that are pursuing credit from a bank, or looking for a line of credit, especially in the SME space, not necessarily in every category, but in the SME space, in particular.

In the early days, when we only had a loan, we were having a tough time with conversion, until we launched that line product and since then, it’s been a really successful product, in terms of driving conversion for customers coming to those channel. As we really got on our sea legs under us, with respect to managing credit risk for that product, you know, given it’s an evergreen product, it doesn’t have a maturity date. We functionally have to re-score the accounts every 90 days to sort of make sure we’re getting ahead of any degradation of portfolio.

But, it’s a great product, both to serve what I think most SMEs actually need, which is managing uneven cash flow, right, the differences between receivables and payables, right, inventory, all the different things that ….yes, some of them do end up getting a term loan, but I think when you look at the Fed study, the majority of customers want a line of credit of some sort. And so, it has been very successful for us and that’s sort of our higher growth product today, it’s about 40% of our portfolio and growing, you know, both given the channels that we operate in and just of sort of where customer demand is.

Peter: Right, right, okay. So, I want to move now to the banks, the bank partnerships. I know you’ve been signing up, I keep seeing new ones, it seems, on a regular basis where you’ve got new bank partners, or announcing. So, the first one, I think, I remember seeing, apart from the Regions which we’ve already talked about which is a little different…tell me about the white label product. I think the first one I saw was Citizens Bank, maybe you could talk us through that product and the types of banks you’re working with there.

Sam: Sure. Yes, you’re right, our version of …..you know, some of our competitors have come up with different brands, like OnDeck, I guess, call theirs ODX, as an example. We don’t sort of brand ourselves any differently in the market for that today, although there is maybe an argument that we should be, we launched our first partnership with Citizens Bank in late 2017. Citizens, I think, is the 12th largest bank by total deposit in the US, their footprint is sort of northeast, New England into the mid-west, into Michigan, down into Pennsylvania, and I think they’re about a $150 Billion institution.

So, that was our first relationship like that and our second, which we publicized, is Bank of the West, which is a subsidiary of BNP Paribas which we have launched earlier this year, January of this year. Eminently, I think, it’s next week, launching our next which is a top ten institution and then we’ve got two more top 50 banks. Surely, behind that, all of which will be live and up and running no later than February of this coming year.

So, we’ll have five of the top 50 and we’ve got a great pipeline behind that of doing this, and just to sort of hit on your key question of what we’re actually doing, these institutions are, essentially, or they are…excuse me for using the word essentially, they are outsourcing the credit delivery function for certain…of their SME credit products suite to us and we perform that service for them in a private label basis where we will do the application ingestion which will be suited to the channel.

So, we’ll give their dot com and online application experience for customers that self-serve, then we also offer the capability through their retail networks as well as their business bankers to the extent the bank has a business banking team to do sort of the application ingestion. We will then do all the decisioning, so we will be hosting the bank’s credit policy on our platform, we will do what we call BPO work, which is basically white labeled manpower to actually deal with customers to either complete applications, or to do the underwriting, to do the sort of loan closing work. And then, we hand the bank a product that they can onboard into their loan management, or loan offering systems and we do all the work from application ingestion through closing.

Now, we do that…again, they’re not required to use the Fundation product, they are using their own product. We are purely providing the types, the capability, the digitized experience, all that stuff for them to more efficiently, more seamlessly originate their own products to their customer base through their channels. It, typically, starts with us doing that for unsecured loans and lines of credit and then banks being unsecured may mean like have security interest against the business with no specific collateral. And then, with both of those companies that I mentioned that we’re live with, we’re also doing their business credit cards as well as the mother of similar ancillary products.

And then, what we’re doing now is we’re starting to move into secure products as well, whether it be equipment secured, owner occupied commercial real estate and/or SBA express products….yeah, because our objective is to help these clients of ours modernize the way they deliver all their small business credit products to give customers and bankers that sort of really simplified, unified experience and to be able to do that across an array of different products to sort of help them modernize.

Peter: Right.

Sam: And so, that’s what we do and, again, like I mentioned a while ago, one of the other things we also do with those relationships most often is, you know, also give them a Second Look which is …….the primary thing that we’re doing is trying to put assets on the books of the bank, but if the bank’s credit policy says no and ours says yes, there’s a chance to keep customers happy.

Peter: Right, right, got it. So then, is it fair to say the white label is focused just on the top 50 banks and sort of the second chance type program is for all the other banks? Is that sort of how you delineate it?

Sam: Well, I would say, you know, top 100 or so, I think what it comes down to is this, in order for us to implement a private labeled solution cost effectively for us, ourselves, and for the bank, there has to be the expectation that there is a meaningful volume to do, in terms of unit volume, right. And, you know, therefore, generally speaking, banks $10 Billion or so and higher would generally fall in that category.

Now, what’s interesting is not all banks are alike, right, like we’ve seen institutions that are on the smaller end of that scale, have the likelihood of driving up more volume than companies that are in the top 40 or so. You know, really, so it depends on what their historical orientation has been to small business. Do they, or do they not have a business line which is dedicated to small business, or not, right.

One of the things that is always bounced around the banking industry is where do small business fit in, is it within the consumer bank, is it within the commercial bank, or is it it’s own thing. You know, what we found is the companies that have the most success in small business is it’s own thing, but it may very well roll up into the consumer bank, or into the commercial bank.

But then, we’ve got, again, clients that say, hey, we’re not ready, or interested yet in a private label solution, like we’re really not looking to put these types of credit products on our balance sheet, but small business is very important to us because we’ve got a lot of deposit relationships in small business, so we want to keep these customers happy. And, therefore, that might be a situation where they decide to just refer those customers to us directly for loans, or maybe have a Second Look program, or something like that which is ….you know, that type of arrangement might come into play.

Peter: Right, right, okay. So I’m curious then, when you’re talking with these banks, especially the larger banks…..I imagine, if you launched in 2017, you started talking with Citizens a year, or two before that, is it easier to talk to banks today given that there’s much more awareness now of fintech than there was maybe three, or four years ago?

Sam: Without question, yeah, and so for us and a couple of…I mean, one is, obviously, we’ve got a pretty good resume at this point in the industry and we’ve spent a lot of time at, you know, a lot of the different events where we’ve gotten to know a lot of the leadership teams in small business banking across the banking industry, so we’re not like strangers when we’re having conversations with those. They typically know who we are and that’s been very helpful and our clients have been really good to us because they’ve been very happy with what we’ve done for them, you know. They’ve certainly been willing to talk to others on our behalf which goes a long way in the banking industry.

But, the other is, you know, yes, the idea of partnerships is out in the forefront, right, within the banking sector and in all incumbent financial services companies. I will go a little bit more simple which is I think that, you know, let’s just call them incumbent financial service players have to become fintech themselves, right, and I think they are and the way they’re getting there is different.

In some ways, you do see some companies successful changing their operating model to have what you would typically see in a fintech in terms of having in-house application development teams, product managers; product managers in the sense that we think about them as like what should a technology do, and you’re starting to see more of that adopting agile frameworks, in terms of the development that they do.

And, you know, again, it will depend on where the bank decides, or they want to develop that type of capability and to support which business lines. What we do, I think, is sort of give them that same capability over the same operating model, but through an outsourced arrangement which means we can give them the agility that they need to be able to compete in a sort of a modern digital era by virtue of the fact that they’re relying on us as a technology platform provider that generally supports just that business line.

That business line can have a high degree of influence and control over what they want to do next and how fast they want to do it, as opposed to the old operating model which is, I’ve got to go back to the mother ship and say, hey, does the IT department have any resources for me now, or in the next year, right, there you’re almost like a bargaining process. And, I think, the operating model is changing across the industry, both by virtue of the way, I think, banks are architecting their own internal teams, but also by working with companies like ours to sort of give them that capability and that agility, what they need.

Peter: Right, right, okay. So, I want to switch gears a little bit and talk about your thoughts on the big tech companies, PayPal, Huge, another slightly different target market, and, definitely, Square, as well, is also for much smaller business, but these companies, and Amazon also have their small business lending operation…….I mean, these are companies with massive customer bases, thoughts on how you compete with those companies. Are you concerned about them, what are your thoughts on that?

Sam: Yeah, I mean, some of them yes, and some of them no, in terms of being concerned. I think, while those are scary companies, companies across a lot of industries…..you know, take a company like Amazon, for example, Amazon does not work for every small business, right, they only work with folks that sell on Amazon.

Anyway, going back to what we were talking about a little while ago, you know, I am sort of a believer in this concept of capital becoming more ubiquitous, and the idea being that the platforms that have a lot of data, a lot of transactional information on SMEs, or consumers, or just have mind share, or the best position to give credit in various forms and Amazon is a variation of that, but for folks that sell on Amazon.

What’s interesting about Amazon is when you start to look at some of their history, when they try to do things that are very tangential to what they do, they haven’t always had success, right. So, it’s not like just because they’re Amazon, they can necessarily compete in every ecosystem, but, certainly, where they’ve got the right eyeball, the right information at their disposal, they’re going to be able to compete very well and extend a lot of credit to those customers.

 

Square, I think Square is an unbelievably impressive company and the reason I think they’re so impressive is because of what I think is happening in small business. I know, Karen Mills has talked about this quite a bit, you know, this idea of the platforms that provide an array of different services to an SME to help them sort of do what they do better. I think what’s happening in small business is more verticalized, right, because small business…it’s not the largest asset class from a lending perspective, but it’s pretty complicated because it’s so diverse, I mean, so heterogenous.

And, what you’ve seen in this market is in very specific sub-sectors, whether it’s restaurants, or let’s just call it contractors, what not, you’ve seen some of these vertical sort of software platforms emerge to solve the challenges of what it means to be a restaurant.

In restaurants as an example, take a company like Toast, or Square for restaurants, right, or Upserve, or Touch Bistro, right, what are these companies? They are……I call them business management software platforms, basically they provide a Point of Sale capability so the POS system, they help restaurants with staffing, with their menus, with their online order intake, so they’re building software that is specifically oriented around helping a restaurant be a restaurant.

You’re seeing Square does the same thing for restaurants, they’ve done that for retail companies and there are sort of many Squares out there. So, I think what you’re seeing, in a few of these verticals today and I think you’ll probably see some more of them over time. The idea of verticalization happening because in order to solve the meaningful pain points for small business, in particular for some of them, their needs are very specialized and, therefore, the software that they use also has to be reasonably specialized as well

Peter: Right.

Sam: So, I think that’s going to force banks to do, in particular, is to become platforms themselves, right. Historically, they are sort of enclosed loop which is the only product that a small business interacts with when they’re logged into a bank mobile application is the bank’s products. The banks often have referral programs with others, but they’re not often fully integrated. I think you’re going to see a paradigm shift in the future and not the distant future, in the near future where banks are going to become more open architecture, if you will.

Peter: Yeah, right, that’s going to be super interesting. Anyway, we’re pretty much out of time, but before I let you go, Sam, just one thing. Maybe you tell us, as look forward to 2020, what’s on the horizon, what’s next for Fundation?

Sam: Yeah, for us, we’ve got, like a said, a great pipeline of new clients that will be on-boarding into our white label origination platform solution so we look forward to publicizing those. We think sort of, you know, demonstrating that we’re the clear leader in that market and we’ve got some really exciting things happening in the lending partnership space as well, going back to what I said, integrating with different folks to really provide a great, you know, sort of on platform experience for SMEs.

So, for us, it’s not any major paradigm shifts for us, we continuing to just go down the road that we’ve been on for a while and I think we are going to be able to get to a level scale for our business that will allow us to demonstrate we’re one of the clear winners in the space for the long term.

Peter: Okay. Well, best of luck with that, Sam, you’ve got a fascinating company. Congratulations on the success you’ve had to date and thanks for coming on the show.

Sam: Thanks for having me, Peter.

Peter: Okay, see you.

One of the most interesting trends in small business today is this verticalization that we’re seeing happening and we’re creating these ecosystems around industry verticals. Sam touched on Toast which is in the restaurant space, there’s Shopify doing e-commerce and there’s MindBody Online in the wellness space, there’s many, many others. These companies have tremendous insight into their customers and I think all of these platforms are going to offer small business lending at some point, if they don’t already.

Many of the ones that I’ve mentioned do, but it’s going to be companies like Fundation that can really provide sort of the technology to making all these happen because each vertical is different and you get a lot more homogeneity inside one vertical. They’re easy to underwrite and think it just makes sense that these vertical plays are going to become more and more important to a small business.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 223 –  STEVE HOKE

Welcome to the Lend Academy Podcast, Episode No. 223, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Steve Hoke, he is the General Manager of Mortgage and Commercial Lending at Finastra. Now, Finastra has only been around a couple of years, but the companies that formed Finastra have both been around for decades, or in the case of D+H over a century. But, Finastra is really supplying the banks with critical software around their business, they have over 9,000 customers.

I wanted to get Steve on the show to talk about the changes that are happening in both mortgage lending and in commercial lending, we go into some detail about both of those and we talk about what banks want, what the banks’ customers want when it comes to, a digital experience, when it comes to more efficiencies in this process.

Steve also looks into his crystal bowl and tells us where this is all going, what kind of end game is going to happen in the mortgage lending and commercial lending space when it comes to digitization. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Steve!

Steve Hoke: Hey, thanks for having me, it’s great to be here.

Peter: Okay, so I’d like to get this thing started by giving the listeners a little bit of background. You’ve had a pretty interesting career to date, if you could maybe touch on some of the highlights before Finastra.

Steve: Yeah, so I’ve been in the financial services space for …going on 20 plus years. I don’t want to get too high in those numbers, but over 20 years of experience in financial services, done a lot in the last 15 years, in and around the lending space, particularly working closely in the credit union space. I am now with Finastra, I’ve been with Finastra for about three years and I’m Manager of Mortgage and Commercial Lending businesses.

Peter: Okay. So, tell us a little bit about Finastra because it’s not a brand that’s been around that long. I know there was a merger and you had D+H, I believe, beforehand. So, why don’t you just tell us a little bit about how Finastra came to be.

Steve: Sure. So, I’ve been ….like you said, I’ve been with the company for a little over three years now and about six months into my employment with D+H, we were a publicly traded company that was acquired by a private equity firm based in Texas called Vista Partners. Vista owned another company in their portfolio called Misys which was headquartered in London and had very complimentary products serving very complimentary geographies, but not overlapping. So, they primarily served European, Asian and African markets and D+H was largely focused in the North American market.

So, Vista saw an opportunity to put these two companies together and create a global brand around this company called Finastra. So, we’re about 10,000 employees, about $2 Billion in revenue and clients all over the world.

Peter: Okay, and what is the breadth of products that you guys offer?

Steve: When you look at all the functions of a financial institution, a bank, credit union, we offer a full range of products. So, in the North American markets, you know, we have lending products, core banking, digital, mine banking assets, we do large syndicated commercial lending, we have treasury and capital management products, investment products, payment products, so really the full gamut of things that a financial services firm would need from a provider like Finastra.

Peter: Right, right, okay. So, you’re running the Mortgage and Commercial Lending products, just tell us a little bit about your domain, specifically.

Steve: Yeah. So, Finastra has a number of different lines of businesses typically centered around those products somewhat uniquely in the North American market. We have a segment of our business that we call the North American Community Market segment. So, we’re focused in on banks and credit unions, to assets typically around, you know, call it $10/20/30 Billion is kind of our sweet spot, $30 Billion and below and we serve those institutions with a number of products.

So, that could be a core banking system, our flagship product there is Phoenix; we have, as I said earlier, a digital banking product, Malauzai, that we acquired into the Finastra family a little over a year ago, so providing online banking tools for banks and credit unions that attach to the core banking solution.

And then on the lending side, we have a full suite of lending products, so we have a Point of Sale solution called Mortgagebot POS, so when you go to a bank or credit union website and apply for a mortgage that front end application is provided by a third party. We’re proud to hold 1,400 clients, customers of our Mortgagebot Point of Sale platform that’s been in the market for 20 plus years, and then we also behind that have Mortgagebot, loan origination system which is the LOS, the workflow tool that the financial institution uses to close and fund a mortgage.

And then, when you go across the different loan types, so consumer lending, we have the equivalent kind of solutions online, loan applications for a car loan, credit card, and a consumer loan origination system behind that. We have a commercial loan origination system called CreditQuest, and then we, of course, wrap all that in our compliance products that we have and market them. The flagship there is LaserPro, our compliant loan document solution.

Peter: Okay, so then I wanted to dig into some depth into the mortgage lending systems and the commercial lending side, but before I do that, maybe we could just step back for a second. Tell us your perspective on how lending is changing. Obviously, you say been in financial services for two decades ago, it was very different to what it is like today. How much of what you’re really focused on now is sort of a digital experience for the consumer and how is that changing?

Steve: Yeah, I’ll even step back just a little bit and talk about the overall digital journey for financial institutions and it’s evolved a lot over the last 15/20 years. So, you know, they rightfully started their journey with simple transactions that were high volume, repeatable, and so think about the digital banking experience.

I want to login, I want to see my checking, or savings account and I want to, maybe, transfer some money. Institutions have to do that all day long and consumers were looking for digital tools to do that, so they opened up the digital banking environment to do that. And then, they moved up to slightly more complicated transactions, but still high volume, so we saw where they started on the lending side was consumer transactions.

Think credit card, we get a lot of credit card transactions, those are fairly straightforward types of loan transactions and you do those at scale and you do those quickly. So, we saw the kind of a next logical place was credit cards, then consumer lending, and you get into car loans, still high volume. It’s a little bit more complicated, a little more work to process that loan type, but slowly that will down line into a digital experience, and now, I think, you’re seeing a broader embrace of mortgage and then, I think, the really complicated still transaction where there’s lower volume is the commercial loan transaction.

So, it’s definitely been a journey and, I think, they’ve approached it in a real logical way in terms of where can we have the most banks for our book, simple, straightforward, high volume transactions that may have been moving through the suite of their solutions over time.

Peter: Okay, so let’s talk about…..a complicated transaction is a residential mortgage, it’s usually the biggest transaction anyone ever does in their lives. It’s been a few years since I’ve done one, but I’ve had friends who recently moved, it was surprising to me to learn that their experience…..sure, they’re sending PDF’s, instead of having to do signatures.

They did have a closing document where they actually had to sign…. this closing session, they had to sign their name a hundred times. So, it’s still, today…towards the end of 2019, we’re still at a……in a mortgage experience, it’s evolving, but it still seems rooted in the 20th century, as far as user experience goes, so why do you think it’s been so slow to really fully move to a digital experience?

Steve: Well, as we talk about it. It’s a complicated transaction and it’s complicated because you have so many different parties involved in a transaction. It’s not just a straightforward transaction between a borrower and the financial institution, you have to include appraisal companies, you have to include mortgage service providers to get, you know, MI or flood, and then you have closing companies and different interested parties, real estate agents. There are a lot of people involved so you have a lot of complexity in that regard and then the data complexity as well is high on a mortgage transaction.

You know, think about all the information that you need to know about that borrower in order to comfortably make a good decision that’s good for the financial institution and, frankly, good for the borrower as well to make sure that, hey, as a financial institution I am doing a responsible thing and getting the right kind of loan product for the borrower, so I need the right kind of information or help them make a good decision and for the borrower to feel good about their transaction.

So, I think, at its root, it’s a complicated transaction, but you look at it, you’re right, you’re leaning on all conventions to collect that data and you see steps towards progress though. So, Fannie and Freddie, they want certainty solution where if a borrower is able to electronically verify their employment history through services like the work number, they can easily collect that data and pass it along to Fannie or Freddie and at that point, no further information is needed to validate the employment history. You don’t need to submit the last three W-2’s.

So, there are pieces of that puzzle that are becoming more straightforward and easier to collect that data about a borrower so that you don’t have the burden of scanning and uploading all those electronic documents. But, because of all the parties involved and all the data requirements that each one has that could put it in process, it’s going to take time to chip away and continue  to find the little pockets of efficiency that you can add into the transaction.

Peter: Right. So, you think…..are we still in the first inning when it comes to…..if it’s a nine inning game here for the game, the end point being a complete digital process for the majority of borrowers, what inning are we in?

Steve: Yeah, I would say we’re certainly, you know, in the first couple of innings. I might go a little further than the first inning, I might say the second, or top of the third. It’s getting better, but there’s still a lot of, you know, there’s complexity and there’s comfort too. The borrower has to be comfortable sharing information in different ways as well, and so one of the ways that you can collect income and assets to access the information about the borrowers for them to give you their logins, the passwords to their banks accounts, or accounts that they hold in other institutions during the application process.

So, borrowers sitting there, staring at their screen saying, do I trust this institution enough and are they going to be able to be responsible with my login and password to go to scrape the information out and complete this profile of my assets that I have that I am applying towards this loan. And so, part of it is complex and part of it is this comfort and people getting more comfortable with digital tools.

Peter: Sure, sure that makes sense. Obviously, with today’s generation that’s becoming primary home buyers in the next decade, we’re going to see a lot more comfort from that end, I would expect. So, what is Finastra’s…..do you have a digital end-to-end solution that you can revive to community banks and what have you, and credit unions….what exactly is your offering?

Steve: Yeah. So, I kind of touched on the overall tool set that we offer at the top. So, we have our online application and you think that’s a fairly straightforward thing…oh, I just fill out a form and I submit it, but there’s still a lot inside that application. So, we have things like I talked about, the ability to do….the day one certainty pieces with the income and asset verification. So, we can collect that information up front and no further documentation is required.

Inside our Point of Sale solution, we can also offer the three-day disclosures and so when somebody fills out an application, selects the product and things like that, they can see all information and get the disclosures supporting of that so that it does not have to go back to the financial institution for review and then approval and then sending out disclosures. The system can automatically generate those upfront disclosures that are necessary.

And then, we also have the loan origination system behind the scene so all that data that’s collected is integrated into the loan origination system so it all passes. If a credit report is pulled in during the Point of Sale process, the complete credit report is passed over to the LOS. Any documents or images that might be uploaded by the borrower as part of the transaction so you choose and attach forms….if those things are still being required, those things can all be automatically transmitted and indexed in the loan origination system so the processor can quickly see that those are there and note that those conditions have been satisfied.

And, we also have the ability to do the document packages on the back end through partners like DocMagic and DocMagic is given extent for them to the E-Close space with some of their capabilities, so there’s a lot that we provide in-house and where we go beyond. We have partners who we rely on and help kind of build some of those gaps. So, we can take it where different municipalities allow things like e-notaries, we can enable e-notaries to get the signing event completed for mortgage. So, there is a lot that we can do with the digital mortgage experience from the products and solutions and integrations that we have at Finastra.

Peter: Right, okay. So then, when you’re talking with your customers, what are they really asking for that you don’t have right now. What are the, you know, is it more…digital user experience is faster processing, a more flexible origination, I mean, what are the things that the banks out there really want today?

Steve: Yeah. So, with the Great Recession and fallout from that, there was, obviously, a lot of forced correction on the regulatory environment and, so there was a point where institutions were extremely focused on making sure that process was compliant. That was their first concern and we’ve done a great job, I think, at Finastra delivering on commitment to compliance and delivering compliance solutions. And, I think our clients had started to internalize the compliance requirements in today’s environment and, now, they’re turning to what is a very tight margin environment on their loan, so what they’re lending at and what they’re managing on these particular loans.

The margins are very tight so they’re looking for efficiency in the process. We’re going to squeeze out, you know, automated step in the process so that they can continue to drive down the time of funding, reduce the number of days in the cycle and drive out people having to handle data, or documents, or information and letting the system automate those steps.

So, we’re working closer with clients to talk about how can we drive efficiency in the process, what kind of things can we do to, you know, have those integrations to enable some of those digital processes, or how can we automate the work flow to make that process as straightforward as possible for the maximum number of situations that they might encounter.

Peter: Okay, so then, I’m assuming you keep up to date with all the fintech players in the space. We’ve had people from…..we had the CEOs of Blend and Better, we haven’t had Roostify yet, but we will…..like those sort of companies, these are focused just on typically the residential mortgage market for providing full banks to help make it more efficient. How do you view those companies, like do you see them as competitors? Obviously, you’re a much bigger organization than any of those companies I’ve mentioned, but just a bit curious to see what your take is on those new players.

Steve: Yeah. You know, I think for a lot of entrants in the market, that Point of Sale experience is the easier place to start. You know, you can build a solution and scale it and I think Blend, Roostify and others have good products. Where we’re focused is on that vertical integration, the Point of Sale solution, and the loan origination system. Those providers, no disrespect to them, they do what they do well, but they rely on the LOS and a number of different integration solutions in order to make happen what they deliver.

We can integrate the Point of Sale solution with other LOS’s, but I think we offer the best experience, most compelling experiences where we’re vertically integrated between the POS and the LOS together, where we can really make sure the data flows as seamlessly as possible that, you know, things around status notifications, status finding conditions on the loan, that kind of thing we do really well and that we’re controlling kind of the full stock of the experience. So, things like the 3-day disclosures at the end of the application, we’re able to do that because of the data that we have in both systems and that for us is a competitive advantage.

Peter: So then, as you look at your product roadmap and I don’t know how far you go out, but I’m wondering, where are we going here? Do you think in ten years time people buying a home will be all done on a mobile phone? It will be very, very fast. Do you think there will still be some kind of blend of maybe mobile with, you know, maybe even a physical branch visit, or a video conference call, that sort of thing, where do you see this market going?

Steve: Yeah. I think that, you know, when you say ten years out, it’s too tricky to project out. You see all this kind of incremental year over year improvement and ten years later, you look backward, you’re like, wow, the world is really different. I think from a consumer/borrower perspective, I think that the ability to leverage different sources of data to streamline the application process is going to change a lot.

So, like I said earlier, we’re just starting to see some of that, but really creative uses and sources of data to simplify the application process so that you can take something that may be a 10/15-minute activity down to less than a minute activity to say I want to apply for a mortgage and the system just knows where to go because it knows enough about who you are to go grab that data and complete the application, or submit the data on your behalf.

You know, certainly, on the processing side of it, I think there’s going to be a lot of drive to apply1 Artificial Intelligence, machine learning to try and drive scenarios and performance and efficiency to the process. So, they know that these conditions have happened, you know, a hundred thousand other times and they see it again, the system knows how to automate certain steps and make certain requests of other systems for information and you try and drive efficiency together with the process. So, I think, automating business rules and logic-driven kind of decisions are going to be really central to the processing of a mortgage to simply the experience and drive down that cycle time as fast as possible.

And lastly, I think, you know, those third party sources that I talked about, you know, something like an appraisal could change dramatically over the next ten years, in terms of how you value a whole…..are there sources of data and information that exist that don’t require somebody to go out and physically appraise the property because you can tap into other data sources in order to do that. So, I think, there’s a lot of disruption that could happen over the next ten years in the process.

Peter: Right, okay, that makes sense. So, I want to switch gears to commercial lending because I know this is your other area and it’s an area that I find fascinating, Obviously, there are some overlap, I mean, process-wise. A lot of times, a commercial loan has collateral, often a physical property backing the loan, but, you know, it’s another area that’s complicated, it’s been slow to move to digital, but there seems to be progress being made. Why don’t you just give us the lay of the land in commercial lending today when it comes to applying digital user experience to it.

Steve: Yeah, I would say, you know, you use your baseball analogy, I would definitely say we may just have started the first inning on commercial lending. It’s so critical that so many community banks and credit unions in our markets that we serve…..there are so many community banks who are built on commercial lending, you know, relationship-based lending with the entities out there, local markets and those are long entrenched established relationships and migrating those things online and changing those relationships to be electronic relationships has been a slow moving process.

So, there are tools that enable a commercial entity to go apply online, you know, it’s a basic loan request that you can attach documents that might support it, but, you know, there’s still so much due diligence and unpacking of entity information, things like that. It’s still fairly complicated for a brand new commercial relationship to be a completely digital one because of the complexity of those homes.

From a back office processing, you still have, you know, your classic credit committees and people doing the credit memos, the underwriting process. You know, there is so much that makes each loan unique, the financial circumstances of that that it’s harder to automate the processing of those loans because the information varies from borrower to borrower so dramatically and the type of loan product that may be presented varies and the risk associated with those things. It’s a really different beast than something like a mortgage.

Peter: Sure, sure, that makes sense. So then, like your customers, the community banks and some of the larger banks, I mean, are you really focused on sort of what I would call the middle market, $500,000 to $50 Million loans, is that sort of the core? Do your systems also help them with doing small business loans, what’s sort of the range?

Steve: Yeah. You know, there is a continuum from the individual who’s applying and using their personal credit as the leverage for that particular loan, and then you have those where you have multi-party entities. Which system and where they go for those kind of things does get a little grey sometimes.

Sometimes, financial institutions want to do some of those smaller individual proprietor loans on their consumer system, sometimes they end up in the commercial system, but when you’re talking about true commercial lending, as you described it, that middle market kind of thing, that’s where our product, CreditQuest, is really well tuned, kind of those multi-party entity kind of commercial loan relationships.

Certainly, we can do the smaller ones, but it really goes down to the institution of preference. Do they view that as a consumer loan that happens to be funding a business transaction, or do they want to kind of treat that as a commercial even at the smallest level, so there’s a lot of variation on how our financial institution clients approach those types of loans.

Peter: Right, right. I’ll ask sort of a similar question that I asked about mortgage lending is, what do your bank customers want to hear because, I imagine, everyone, every loan is so bespoke because every business looks very different. Is it really more of data gathering, is it loan origination kind of ….what do they really want today to help them improve their efficiency in this process?

Steve: Yeah, I think it does come down to the borrower interaction and so having good online tools to be able to apply for a loan and then be able to share the financial data with the financial institution, so being able to extract data out of an accounting system, pass that information to the FI and be able to load that then into their commercial loan origination system and just make that process easier.

You know, even the covenants associated with the loan want that on the books. Annually, they may be required to share that information, how do they gather that information kind of quickly, seamlessly and as painlessly as possible for the borrowers to complete that request. So, it’s really around, I think, the borrower experience that our clients are telling us. That’s what they’re looking for us to provide solutions.

Peter: Right, right, okay, fair enough. I want to switch gears a little bit. I was listening to a podcast where you were being interviewed a few months ago, where you were talking about the importance of maintaining a physical presence. We’ve just been talking about digital this entire interview, so far, and you will make the argument that physical presence is still so important. So, given that we know we’re all moving towards a more digital world, what’s the argument then for your customers maintaining, you know, the banks maintaining a physical presence in their communities.

Steve: Well, you know, I often talk about this because people so often look at “traditional businesses” as a traditional retailer, or a traditional financial institution, they talk about the age of digital and the marks of digital and everything is going online, but, I think, it’s often under reported, the view that digital is also going more traditional.

My example I like to use is Warby Parker. Warby Parker started as an online glasses retailer, you go to their website, you order five pairs of frames, they send them to your house, you try them on, you pick the frames you like, send it back and some number of days later, they send you a pair of glasses and it’s done.

That sounds great, right, but Warby Parker has realized that, I think, they’ve reached a certain amount of organic volume online and if they want to continue to scale and grow, they’ve got to get out into the communities where people are shopping and offering those solutions to people in a traditional retail environment.

And so, I was just talking about this when I was down in Chicago a few weeks ago, and within a seven-mile radius there were like four/five Warby Parker glasses retail stores. And so, there’s this convention, or these beliefs that everything is going to go digital and that retail is entirely doomed. I don’t buy into that narrative that everything is a completely digital experience, I think there has to be a good balance between both.

People are always going to want that convenience of being able to go somewhere and get a great service experience and that’s why I think….I don’t think that it will always be at a scale and the answer for financial institutions to grow is always to open another branch. They can be more strategic about where they have branches, but I think branches and a physical presence are a great asset to serve the local community, to have the relationships and to be able to provide a great experience that represents the brand of that financial institution.

You know, I think that quick loans are out there…..you know, could open up rocket mortgage stores just because, I think, it’s a way for them to continue to try and get share of those transactions via the online environment. So, it wouldn’t surprise me to see non-traditional financial institutions have a physical presence somewhere in the next five or ten years because they need to scale.

Peter: Yeah, yeah, right, fair enough. So, conversely, you spend most of your day talking about digital tools, I imagine, and you’ve said that the banks, they are commercializing, they want a better digital experience, same with consumers in the mortgage space. So, when there isn’t this physical face-to-face transaction, or face-to-face interactions to close a deal or whatever, when it’s purely digital then what do you say to your customers about how they can really ….maybe not mimic, but, certainly, move towards a more personal, less kind of purely digital experience when you’re operating just in the digital environment?

Steve: Yeah, a digital transaction…even if you never talk to someone, or never experience that in an institution, it’s still a manifestation, or a representation of what that brand of that institution is all about. I took out a car loan recently with my daughter and it was an entirely digital transaction from kind of beginning to end, but it still made me have an association/affiliation and a fondness for the institution that I was borrowing from, that’s where I have my checking/savings account and it was a great experience being able to do those things digitally.

It made me feel like, hey, this institution has figured out this part of the process and gave me confidence in the institution. So, something that is seen as inhuman created a more human feeling about the institution because of the positive digital experience I had.

Peter: Right, right, okay. So, we’re almost out of time, but before I let you go, one last question. You’ve been in this business for a while now, you’ve talked about it, it’s hard to sort of think about what happens in ten years time, or look at how far we’ve gone in the last ten years, but when do you think it will be 100% digital experience, potentially with maybe an option to have some kind of physical kind of interaction, any kind of transaction, whether it’s a complicated commercial transaction, or applying for a mortgage. When do you think that’s going to be 100% digital?

Steve: I don’t know that it ever will be and, you know, part of it, especially when you talk about something like a mortgage, and you said it at the top. It’s a scary transaction because it’s probably the largest financial transaction many people would make in their lives, right. We’ve seen data and studies that show that repeat home buyers, or people who have purchased a home multiple times want fast, digital experiences.

People who are first time home buyers, you know, at our time that happens to be millennials now, still want to have the comfort of being able to talk to someone who understands, and I think there’s always space for that kind of conversation to be not a digital one. I believe that much of it that can be done digitally will be done digitally.

So, I’m not trying to advocate that everybody should go and open a blockbuster store, right, I think that a lot of things are going to be digital, but I just think that the ability to have a human interaction to get that comfort on a transaction, or to ask a benign question and just know that you’ve got an answer that you feel good about always leaves a little space for a non-digital experience. But, certainly, the pain of getting the data exchange and the nuts and bolts of the transaction as quickly as it can get there, that’s what consumers want.

Peter: Right, right. Well, you make some very good points there, Steve. It really is interesting, it’s going to be interesting to see how it plays out, but, as you say, it’s not so much……a first time home buyer is going to want to have….they want someone to talk to, whereas, someone who’s doing it for the fourth time, just let me get this done over with. Yeah, that makes sense.

Okay, anyway, I really appreciate your coming on the show today, Steve, thanks a lot.

Steve: Thank you, it’s been my pleasure.

Peter: Okay, see you.

Steve: Bye.

Peter: You know, I think Steve makes a very good point there towards the end where he talks about …..that some people, even people who’ll spend their entire day on their phones and they’re used to digital experience in pretty much everything, you know, they’re going to buy their first house and take a loan out several times larger than their annual income.

They’re going to be a little bit tentative about that, they’re going to want someone often to hold their hand, whereas, maybe someone who has done it three, or four times will be satisfied with a 100% digital experience from start to finish, make it as efficient and quick as possible.

So, there clearly is room for this non-digital, or maybe it’s just a more sort of interactive experience when it comes to taking out a mortgage and taking out a large commercial loan for that matter. So, it’s not all just about how can we digitize, how can we make this a better digital experience; it’s about looking at the overall experience, what the customer wants and how to deliver on exactly that.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 222 –  JAMIE WARDER

Welcome to the Lend Academy Podcast, Episode No. 222, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Jamie Warder, he is the Head of Digital at KeyBank. Now, KeyBank is a super regional, most people know them, they’re actually one of the largest super regionals in the country and they’ve been making little waves in the fintech space doing some M&A, and wanted to get Jamie on the show to talk about all these.

Firstly, he’ll give us some background, he talks about exactly what the Head of Digital does, what they’re responsible for, talk about their approach to M&A, we do a deep dive into two of the M&A deals they’ve done over the last year or so. We talk a lot about financial wellness and how that’s a really big priority for KeyBank and we talk about speed and user experience and what their approach to really incorporating a lot of the expertise and knowledge of these fintechs have into the bank. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Jamie!

Jamie Warder: Peter, thanks for having me, I look forward to our discussion today.

Peter: Me too, okay, so let’s get started. I like to kick these things off with giving the listeners a little bit of background about yourself. I mean, you’ve been a banker, it seems, for quite some time, for most of your career, it looks like, why don’t you give us some of the highlights of what you’ve done today.

Jamie: Sure. Well, even before banking, I actually got started as an officer in the United States military, spent five years as an Army Officer and it’s funny how often my army days end up shaping who I am these days. But, after a little bit of time in the Army, a little bit of business school and a little bit of strategic consulting, where I ended up doing a lot of healthcare as opposed to financial services, I did move into banking.

I guess that’s been about 15 years ago and have had the opportunity to just serve in a variety of roles and serve a variety of great institutions, National City, P&C, Capital One, USAA, KeyBank and currently here at KeyBank. My experience has been in most aspects of banking so, you know, general P&L most recently over the last half decade or so, but before that channel and product roles along the way.

Peter: Okay. So then, I think everyone here would have heard of KeyBank, some may not know a lot about the bank, so why don’t just give us a little bit of headline background like how old is the bank, where you operate, that sort of thing.

Jamie: Sure. So, Key is about a 150-year old super regional. Like many super regionals, we’ve grown up over the years through both organic growth and acquisition. Our footprint is an interesting one, it runs, I’d like to say, across the north although it’s a little broader than that, but five time zones from Alaska all the way to Portland, Maine. I like it because we have some very robust mature market like Albany and Buffalo and Pittsburgh and Chicago.

We also have some hyper growth markets like Seattle and Portland and Salt Lake and Denver and Boulder. So, it’s a really neat mixture of those hyper growth markets, but also some strong robust markets. These days, it’s about 13 in almost any measure you look at, so whether assets or deposits, we serve everything from consumers to small businesses, middle market up to institutions, large institutions, Fortune 100 institutions, so the full gamut and we do everything from payments, lending, deposits, capital markets or perspective for those different customer bases, Peter.

Peter: Your official title is Head of Digital at KeyBank and I believe this is a new position. You moved into that from the Business Banking area, why don’t you tell us a little bit about what you mean when you say Head of Digital.

Jamie: Yeah. So, you’re right, Peter, this is a new role for Key. So, the Head of Digital as we reorganized recently, six or seven months ago, we thought there was a need to really bring together our digital capabilities from across the enterprise.

You start to think about those holistically and, again, from an enterprise perspective, everything from servicing to originations, from our consumer clients to our middle market all the way to our institutional clients, but really think of those things holistically. I want to say there’s kind of two spectrums in digital, you know, one spectrum would say, well, digital is anytime you’re using software or data to enable the business. Well, I think that’s everything in every way.

Peter: Exactly. (laughs)

Jaime: So, that’s a super liberal version of what digital is. There’s also a very, very narrow definition of what digital is which says, well, there were browser tablet for servicing and originations, and as we thought about this role, we really thought about it, somewhere in between. It’s almost thinking about where strategically is it most important for us to think about how we bring software data to enable the business, but there is a heavy emphasis on those areas where our clients, or our colleagues who are working with clients are kind of working with digital capability.

So, you know, I see that my job and my team’s job to really think about where the leverage point is for digital and how do we influence those important leverage points for Key.

Peter: Okay. So, there’s still quite a bit in play there, I mean, you came from the business banking side of things, so does this include small business, does it include consumer, you talk about the mobile app, you talk about Zelle, those sort of things, maybe what does that exclude, I guess, might be more important than what it includes.

Jamie: Yeah. No, it includes all of those things. We really think about all of our different clientele and Key proudly serves 3 million consumers, but we proudly also serve 250,000 small and medium businesses and a number of really large institutionals, so that includes all of those clients. It includes…..you know, when they’re servicing their accounts, so if they’re logging in and authenticating and they want to do things like check their positions, or move money, or techniques and sign their accounts, it includes thing like you said, money movement so the bill pays them a Zelle and all of those things.

What it doesn’t include….the one thing that we don’t include in the organization formally, but I would tell you we have a very, very strong partnership would be on unauthenticated, so key.com and some of our unauthenticated. We just think that there’s a better synergy with marketing there, so we work very closely with marketing, but they run those unauthenticated channels.

But, generally, if you are logging in and we have a lot of influence because we’re sharing the underlying services on those systems that our colleagues use and those colleagues who are direct client-based. So, if you think about it, our branch colleagues and the technologies that they use, our relationship managers, the service and sales officers and the technologies that they use.

Peter: Right, right, okay. So, I want to talk a little bit about how technology has kind of shaped your thinking because you’ve been around banking, you said, for almost 15 years and fintech wasn’t really a thing 15 years ago, that term didn’t exist. It’s now used with abandon today and considered….it’s sort of an all encompassing term for technology’s impact on finance. But, I’m curious sort of when you look at like the fintech players which are those players that are sort of natively digital online, how do you sort of think about those players and what’s the impact it’s had on a bank like KeyBank.

Jamie: Yeah. It’s a great and important question. You know, I actually think if we go all the way back and probably back before my time in banking, Peter, you know, digital found some it’s early roots in banking. I think if you go back to some early use cases you were probably talking about the travel industry where, you know, people could begin to book hotels and airfare online, but a very close follower to that was the ability to see your accounts online, BillPay came along, so I think some of those early use cases were digital.

We didn’t call it digital back then, but those were early use cases of using the Internet for things that people could do every single day. I think, you know, there was probably, and this is my take on the whole thing, there are probably a 15-year roll or so where, you know, those were some of the killer apps, BillPay and online banking, and, you know, at some point maybe, I don’t know what the exact timeline would be, about five or ten years ago, probably starting with PayPal, I think there was this next evolution of fintechs and I think it became easier to start putting things together.

We started to see fintech players really focus on a particular area, be it in payments, or deposits, or investing, or lending, and they did it, I would say, the right way. They thought from customers back, they designed from an experience perspective, they picked, you know, these slivers of capability and did them extremely well, they did that thinking digital first, not necessarily branch, or call center first, and as you and I know, on the last decade we’ve just seen an enormous number of those really shape and change the industry.

So, I want to say fintech, although it’s new, I think it’s actually re-surging, you know, I think it’s been around for a long time, I think we can learn a lot from the fintechs. You know, I think they teach us things like build with design in mind, I think they teach us things like we’re backwards from the experience, make it easy, make it fast, make it transparent like all of these things are in the digital make of DNA.

I think banks are reminding themselves of those things that they probably thought about 20, or, 30, or 40 years ago in an analogue version in their physical footprints, or their context and their footprint. You know, I think our digital fintechs are thinking about those truly in a digital way.

Peter: Right, right, that makes sense. So, I want to switch gears a little bit and talk about M&A and you guys have been moderately active in that space. There are a couple of acquisitions that I sort of want to sort of dig into here. Before that, do you have like an M&A strategy that the bank kind of adheres to, mainly talking about, obviously, fintech M&A. Is there something that you have sort of a real kind of overall strategy that we can dig into some of the acquisitions you’ve actually made?

Jamie: Sure. So, even before M&A, I actually….I’d like to talk about three areas in fintech broadly, and it’s really the way we think about it here, Peter, along the spectrum and we have good examples of each.

So, first, and probably the most common, is where we just partner with fintechs, so one is Zelle. I guess we can call it Zelle a fintech at this point, but, you know, we didn’t acquire Zelle, we don’t have an equity partnership with Zelle, but we partner with them because they have a great capability that gives our customers something that they want and need, and we partnered with them as a way, you know, to bring fintechs to our customers.

So on one end of the spectrum it’s just good old fashioned partnership, you know, supplier/vendor relationships. If you move over on the spectrum and something that we do quite often. As a matter of fact, we have an entire team that constantly evaluating these and finding the opportunity, but we’ll actually invest in fintech.

So, you know, we continue to be independent. Before we buy equity in them, we find this to be a great way to help them shape their roadmaps and help really make sure that there’s good synergy. We can usually help them with a client base and distribution and they can help us by pushing our thinking on great design and great capability, so we’ve recently, over the last couple of years, we have half dozen examples. SnapSheet2 has a great insurance product for some of our insurance clients; InstaMed which helps some of our providers, doctors, dentists, ambulatory clinics with billing.

We partnered with those two fintechs and invested in them. And then, finally, as you mentioned, the M&A and we certainly have some of those examples. You have read about HelloWallet, Bolstr and most recently, Laurel Road, but we do that as well, all out acquisition. So, we are constantly searching and all in the name of bringing our customers the best capabilities and the best products out there. We’re searching with who can we partner with, who can we invest in, and in cases, where can we acquire outright.

Peter: Right, right. So, let’s dig into the latter one you mentioned, the Laurel Road. I think many listeners would know that name, we had Gary Lieberman on the show a couple of years ago and he was the Founder and CEO.

Jamie: Yeah, I am not nearly as articulate…let’s just put it in the right perspective.

Peter: (laughs) I don’t know about that. Anyway, so maybe….first, Laurel Road, obviously, focused on student loans re-refinancing. They became one of the major players in the nation in that space, but what was it that attracted you to the company initially.

Jamie: Yeah. Well, you mentioned one which is Laurel Road is just a terrific company. As we looked at them, we saw, one, a digital first company that it created a very nice consumer lending platform. As you mentioned, the third or fourth largest graduate loan re-finance program, student lending, re-finance in general, so we thought, one, as a source of just high quality consumer loans done the right way, done with credit in mind and making sure we’re originating very credit worthy customers, an experience, you know, that has Disney-like net promoter scores, so just a really terrific experience.

So, we liked, one, the consumer lending growth. They also have built over the last several years just really good digital capabilities, not just around student loan, but also around mortgage and real estate lending and we saw that as an opportunity to use some of their technology and design and be able to import that into our large and growing mortgage and home equity business, so we really liked the lending.

You know, the core business that Laurel Road is bringing along, we liked the technology around real estate lending, but, third, we’re still figuring out exactly what and how we use these going forward, but what Laurel Road really represents is thousands of customers who come and use Laurel Road are very satisfied with the experience. And, you know, our millennials, they are, generally, on a more affluent side because a good portion of them are graduates and have graduated from graduate programs rather, so we really like the fact that it’s also a source of household growth for Key.

We need to figure out is there a way for us to really….you know, can those customers do more, do those customers want to do more with us. So, just to summarize, a great lending business, some terrific technology that we think is leverageable and then, finally, a set of clients who would introduce things to KeyBank and we think we can do more. We have given some of the services that Key has.

Peter: Right, right. So then, I’m curious, I know it’s only been a few, like six months, since the acquisition closed, so it’s not that much time. If you go to laurelroad.com today, it’s the same experience, or a similar experience that it was a year ago, so Key hasn’t taken over the brand. You do make it clear that this is a brand of KeyBank. Is the plan to keep this as a standalone brand, or eventually fold it in and have …..this will be a KeyBank student loan re-finance?

Jamie: Yeah, we really like the brand that Laurel Road has created and they’ve created a brand specifically with the healthcare industry through partnerships with, you know, some of the largest healthcare associations. So, we really like the Laurel Road brand and for that reason we want to build on that brand and right now, there are no…..never say never, but, right now, there are no plans for us to change the Laurel Road brand, we will leave it as an independent brand.

We’ll think about how we grow and expand the capabilities of that brand. We’re not going to hide, like you said, Peter, that Laurel Road is a division of KeyBank, it is, but if you’re deep into your statement, you’re going to see KeyBank written all over them, but, right now, plan is for Laurel Road to continue to be an independent brand.

Peter: Okay, okay, interesting. So, let’s maybe talk about one more that you’ve done and that’s Bolstr. Bolstr may not be quite as well known, but they were a small business lending platform. I think this was done…might have been done I think last year, from memory.

Jamie: Right.

Peter: Tell us a little bit about that acquisition and how….firstly, what attracted you and how you’re kind of using that kind of intellectual property and brand that you’ve acquired them.

Jamie: Yeah. So, Bolstr had, as you mentioned, some really unique capabilities around small business lending and, you know, the ability for a small and medium enterprise to go through an application process, know exactly where they are in that application process, be able to submit documents pulled from external data, e-sign, you know, all of those capabilities, it’s not easy, again, in true fintech form.

We really liked the technology and it was area to us that filled the gap, not only for the small business experience, but also some of the underlying services that we think and are leveraging more broadly for other kind of commercial banking applications. So, this one was a little more….we didn’t keep the Bolstr brand in this case, it was a little more of a technology and talent opportunity for us and we have integrated that in, we have pilots out in market today, so clients are able to do, you know, small business loans at their place of business in 15 or 20 minutes.

You know, we’re getting approvals done within the day, we’re getting funded loans within days, so, again, all on the journey to make things faster, easier and more customer-centric. We saw Bolstr as a way to accelerate us on that front in the small business space.

Peter: Right, right, okay. So then, is this going with your SBA loans, or is this just sort of more of the other kinds of loans you do?

Jamie: Yeah, this is both. So, one of the things we really liked about Bolstr was the ability for us to customize the flow of the application based on what we were learning about you. So, as the borrowers are providing more information, we can then customize the flow, and if it makes sense, the customer may want to consider an SBA loan and, you know, we can start to present those options. And, if they tell us something like, hey, I’m a non-profit, we know we can’t do SBA loans for non-profits then we can send them down the conventional path.

But, building that logic in, building kind of the brain and advice of a relationship manager, or a good branch associate into the technology was important to us. So, it’s not just capturing information, but it’s actually providing, you know, advice and insight along the way. Bolstr’s done a nice job at kind of building that into their product and we’re carrying that forward for our customers here at Key.

Peter: Right, right, okay. So then, going forward, I mean, I’m curious to get your take on….you know, super regionals like yourself, do you think that this is going to be a big driver of M&A in fintech? I know you can’t think for banks, but I’m just curious about…..are we going to see a flurry of activity over the next couple of years, what’s your take?

Jamie: My take is what we’ve been seeing over the last several years which is banks partnering…..so, I think about, you know, Chase, although I don’t want to talk about other banks, but Chase just…they got started in their small business lending through a great partnership with OnDeck. We can look at where there’s been acquisition, we just talked about a couple at Key, but, you know from reading the papers, these are happening literally everyday, and I do think that middle category we talked about which is equity investments to help drive the roadmap.

I don’t see that slowing down. As a matter of fact, in a world where our customers are telling us they want to do more with us digitally, matched with the world where fintechs are thinking about how do we do, you know, the things that we do every day better, faster, more digitally, I think those are natural marriages, Peter. So, I don’t expect it to slow down, if anything, I expect it to speed up.

Peter: Yeah, it’s really interesting to me to see through the…..you talked about the equity investments and when you see these deals, there’s been a lot of deals this year, some large deals, in fact, so often there is a bank that’s….they want to be leading the deal, but they’re involved. It seems to me that banks are becoming really big suppliers of capital for a lot of these fintech firms which, I think, is super interesting.

Jamie: Indeed. I think they see it as a part of how do they evolve, how do they accelerate, how do they, you know, quickly get capability that would take them a lot longer to build in-house. I think we’re all becoming comfortable with that, you know, I think the regulators are becoming more comfortable with that and getting experience on how these types of partnerships work.

Peter: Sure. So, I’m particularly curious about ….you know, you talked a few times here about the technology, the hiring of the technology expertise and one of the things that sets these online lenders apart is the speed that they’ve been able to …speed of approvals, the speed of the application process.

You said you got the small business process done in 15 or 20 minutes which I think is great, but is that…..what I’m really getting at is the sort of the focus on speed really permeating throughout the bank? I mean, the millennials, they don’t want to sit around and wait, they get very impatient with any sort of slow process, maybe you could talk a little bit about the speed aspect.

Jamie: Yeah, this is just something that I think, again, the fintechs have probably really figured out as their designing experience is in their talking to customers about the experience that  customers are looking for. You’re right, customers…..you and I and all of our friends and family, they don’t want to spend a lot of time doing this stuff.

They want it to be fast, they want it to be easy, more and more they want it to be done on their phone and make a decide where they want to do it, so, I think, you know, if these fintechs have been designing their solutions and products they’ve really been thinking how do we make it fast, transparent and easy, and that’s just part of the principles of priorities that they put into their design and, you know, by doing that, I think, they’re teaching us, banks, how much work it is to do.

You might say, well, gosh, the banks should do the same thing. In one way, I think, the fintechs have an advantage because they’re typically picking certain use cases, so they’re not trying to (garbled) every use case, they’re picking a narrow use case, they’re getting very good at that narrow use case and designing it, you know, in a digital first way. So, I think it’s important, I think they’re teaching us that, and, I think, more and more speed up to be a design principle that we’re all thinking about.

Peter: Right, right, okay. We’re almost out of time, a couple of things that I really want to get to. I want to talk about financial wellness. You mentioned HelloWallet before and you guys have an entire financial wellness section of your website, and, I mean, that’s something that I’m personally pretty passionate about, how we need to be doing more to really help the masses and the population that are not doing all that well financially. So, maybe you can talk a little bit about the approach, you know, from a digital perspective, what’s driving the financial wellness movement at Key.

Jamie: Yeah, well, important to know, financial wellness is the absolute core of our strategy and I’m certainly not sharing any secrets. As you said it, it’s on our website, we talk about it, we’re proud to talk about it, and what do we mean by financial wellness? We want to help you understand your current position and financially well are you and then we really want to be able to help you become more financially well and that could be, you know, that could be across the spectrum.

So, it could be someone who’s struggling, it could be that individual who is saving for their retirement, it could be the small business who’s trying to figure out how to, you know, finance the next piece of equipment. So, this concept of we want to help you understand how we are doing, but that’ll also give you hints and advice and feedback on how to become more financially well, and we want to do that across the board. We want to do that if you stop in and have a wellness review with one of our bankers, but we also…if you’re not going to do that, if you’re going to be at home, we want to be able to do that digitally as well and just leave it up to our customers.

So, in every touch point, we are looking for ways, Peter, where we can help clients understand their position and help them do better. So, HelloWallet, if you think about what HelloWallet was doing, it allowed you to aggregate all your accounts, whether they were with Key or not, it provided with a financial wellness score which gave you a good indication of how are you doing versus others like you.

It gave hints and tips and not just around spending and saving and things that we thought could make you more financially well. Those are the things we’re integrating into all of our digital capabilities, those are the things that are integrated into all of our human touch points. You know, if you’re talking to someone from KeyBank, they’re going to be talking to you about your financial wellness. So, it starts with strategy, translates then to both our digital and non-digital properties, and is all around kind of a higher mission of helping our clients do better financially.

Peter: Right, right. I think that’s super important because, you know, everyone has a banking relationship, not everyone, most people have a banking relationship and if you’re not getting them there, I feel like that’s the touch point that people need to be to be able to get the information and the education about how to improve their financial lives, so that’s great.

Anyway, last question, just curious about what you’re working on now, what’s coming down the track. I know you’re a public company, you can’t tell me any secrets, but what’s coming down the track for you guys?

Jamie: You know, I’m not giving away any secrets, 91% of our interaction to a client is happening digitally these days. We want to make that experience great for them, so just giving our clients the ability to do more on their phone, to do more at their mobile browser tablets, we want to make it easy and fast for clients to do more business that they want to, you know, grow their relationship with Key, we want to make that easy and fast, so we’re really thinking about all of our products and originations, again, across consumers, small to medium enterprise and the largest institutions.

And, finally, as we talked about, we’re really looking for those ways to embed financial wellness through our capabilities and products. If a client doesn’t happen to interact with us in a face-to-face, we want to be able to still provide them financial wellness digitally. So, as I think about those different areas, as I think about, you know, a great servicing experience when our clients need to service their existing banking relationship, when I think about the origination experience and wanting to do more business with us and make it easy for them to do so and not just embedding financial wellness across the board, I think those are our priorities. You know, you find those in all of our public statements and it really is what we’re spending our time and focus on.

Peter: Okay, that sounds great. I really appreciate you coming on the show today, Jamie.

Jamie: Hey, thank you very much, Peter, and thanks to all for listening.

Peter: Okay, see you.

You know, I think banks like Key are going to play a bigger and bigger role in the future of fintech. We’ve already seen them do some pretty significant acquisitions, they’re clearly not finished, and, obviously, there’s new fintech companies being started all the time. There’s also more that are getting rapid scale and, you know, I think you’re going to see these banks….they’re going to jump in and be able to bring their resources to bear on taking sort of all the best practices and the positives and all the good that Jamie talked about in the interview, what fintech does really, really well and bring them into the bank and having them become really part of the bank DNA because that’s really, I think, what we’re getting at here.

Banks haven’t been known for their speed, for their user experience, and, I think, bankers like Jamie are very clear about that and wanting to change that narrative and I think it’s going to be interesting. I think we already are seeing it happen and I think it’s only going to become more so where banks are going to behave much more like fintechs going forward.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.