Lend Academy's Lending and Fintech Podcast

 

PODCAST TRANSCRIPTION SESSION NO. 185 / JEFFREY MEILER

Welcome to the Lend Academy Podcast, Episode No. 185. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s podcast is sponsored by Experian’s Clarity Services. They are the leading sub-prime consumer credit reporting agency providing innovative risk management solutions to address the full consumer credit life cycle. Clarity leverages the combined power of the largest and most comprehensive alternative credit data source with traditional bureau data to provide a more complete view of a consumer’s financial behavior. Clarity is committed to providing products that address rapidly changing market conditions. You can learn more by visiting clarityservices.com/solutions

Peter Renton: Today on the show, I’m delighted to welcome Jeffrey Meiler, he is the CEO and Founder of Marlette Funding, also known these days as Best Egg which is their consumer facing brand. So I wanted to get Jeffrey on the show because we’ve never had him on before and Marlette has become one of the true leaders in the online lending space.

As you’ll see in this episode, they’ve really done things that no other platform has done and they have built themselves a very strong brand in the industry. So we talk about their loan performance, we talk about profitability, we talk about Jeffrey’s perspective on the entire online lending space, we talk about the investor side of the business and what’s in store for 2019. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Jeffrey.

Jeffrey Meiler: Hey, thank you, Peter.

Peter: So I like to get these things started by giving the listeners a little bit of background and some context. You’ve had a pretty interesting career to date, Jeffrey, so why don’t you go through and give us some of the highlights.

Jeffrey: Sure, I’d be happy to. My background, and importantly the background of my colleagues at Marlette, is a bit unique in the online lending space. Myself, my leadership team and actually the overwhelming majority of the folks at Marlette have backgrounds in consumer finance and banking so in the context of the online lending industry, we’re a bit more fin than tech-weighted from an experience standpoint.

Now I specifically have 25 years of consumer finance and banking experience with seven years actually spent in the UK and Europe, but the majority of the time in the US with the focus really on unsecured consumer lending. In fact, as you may know, many of us at Marlette worked together in the US credit card industry. If you look at my leadership team, six of the nine people have known and worked with me for over 14 years. If you look at the broader strategy staff, about 60% of us have worked together previously.

Peter: Wow!

Jeffrey: Yeah, it’s pretty unique.

Peter: So was that primarily at Barclaycard or is that what the majority…

Jeffrey: Yes, it is. Let me give you more color to that. What is really unique is, yes, it’s at one issuer and what is special and has been unique for us is the nature of our shared experience. We collectively, had the experience of building a US card business from a billion dollars to $12 billion from a portfolio standpoint in five years, making it a top ten card issuer and the team, the team that is at Marlette, built the prospect database, the credit models, the value propositions that enabled the success of that credit card business. As you can imagine, that was great context for what we’ve done at Marlette.

Peter: Yeah, right, for sure, for sure. So then let’s go back just a few years to the founding of Marlette. What was it that you saw and why did you decide to start an online lender?

Jeffrey: Hey, that’s a great question. We incorporated in August of 2013 and then launched in the middle of March in 2014 and there were really two things that really informed our thinking about starting Marlette. The first was we clearly saw that consumers were not being served and appreciated the size of the total addressable market. That was the first thing.

The second thing was we saw an opportunity to take a different approach than the current incumbents, more fin than tech, more focus on credit and capital markets than on growth in isolation, better alignment and attention across the capital stack and more focus on building a resilient personal loan business that reflected our recession tested team’s experience in the credit card industry.

Peter: Okay, okay. So then before we move on, I’ve got a strange question for you. You know, I noticed that your email address changed recently from Marlette Funding to bestegg.com. What is your company name, what are you going by these days?

Jeffrey: Great question. The company is still named Marlette Funding, but our lending platform and what consumers recognize is Best Egg and we found, to your good point, that many of our corporate relationships were not connecting these two brands. So over the past two years, we’ve made a concerted effort to increase awareness and the connection between the two brands and that’s, hence, why we made the email addy change to try to connect the two brands so that there isn’t that confusion out there, but a fair question.

Peter: So the Marlette brand isn’t going away, you’re just sort of aligning more with the Best Egg brand?

Jeffrey: I would preclude us embracing more and more, as time went on, the Best Egg brand.

Peter: Okay, where did that name come from? What’s the origin of Best Egg?

Jeffrey: Sure, sure. So the origin was really part and parcel of the thinking about the customer that we wanted to serve and when we really analyzed who we were going to be working with, who we were going to be helping here, it was typically a consumer that is 46 years old, is an individual that has liabilities that exceed assets and they’re carrying, typically, $15,000 plus in credit card debt and they’re looking to make a change. The theme for a lot of these people as we talk to these consumers was the desire, the aspiration to have a nest egg. So it was a bit of a play on words, well, you know, you don’t have a nest egg, get a loan from Best Egg…

Peter: Right.

Jeffrey: …and start on your path.

Peter: Got it, that makes sense, that makes sense. So then you’ve talked a little but about this, but I want to delve into it a little bit more. Like the background at Barclaycard, you know, Barclaycard obviously…Barclays is a very well established, dare I say old, British bank that goes back centuries, how’d your time there influence what you’ve been doing over the last…particularly when it comes to how you sort of built a successful company. How have your learnings at Barclaycard helped you do that?

Jeffrey: I think that’s a great question and to your point, Barclays is a couple hundred year old institution and to have folks come from there and go and do a startup, it isn’t necessarily the logical expectation, but the thing that was unique was Barclays had purchased a startup in the US, something called Juniper, and that was the entity that I referenced earlier that the team grew rapidly. So really Marlette is leveraging that specific experience.

It also, though from a 200-year old bank perspective, I think there are some things we borrowed from there also. I think the compliance discipline, the credit practices were things that we took from Barclays and embedded in Marlette very early on and both of those specific things had a level of maturity that exceeded the maturity of the company itself.

Peter: Right, got it, okay. So then now when you look at the competitive landscape today and you see there’s more personal loan offerings for consumers than there probably has ever been, certainly in the last couple of decades, I’m just curious about when you’re looking at the landscape and you’ve obviously got all of the other online lenders today, you’ve got banks coming in as well, how are you differentiating Best Egg from the other offerings that are out there?

Jeffrey: Hey, that’s a super relevant question. As you know, Peter, the most successful players in the online lending space are those that deliver a fast frictionless customer experience and we spend an inordinate amount of time, energy in focusing on that.

In the context of 2018 specifically, we introduced new funnels from a customer standpoint, one that is focused on a better experience for those people using a desktop and one is focused specifically on those customers that are using a mobile device. Those efforts in 2018 resulted in us having a net promoter score of 68, an A+ rating with the Better Business Bureau and a 9.5 out of 10 TrustScore from TrustPilot. I think that that’s going to be the key, that focus on the customer is going to be the key to differentiate and win in this space and I think that segmentation and personalization is something that, specifically in 2019, we’re going to make a lot of strides in.

Peter: Okay, we’ll delve into that a little bit more in just a bit, but I want to talk a little bit about your 2018 and the scale you guys are at. I know you just recently crossed another milestone so tell us, how big is your loan book today?

Jeffrey: So to your point about milestones, as we came to the close of 2018, we crossed the $7 billion mark, so in less than five years we have originated $7 billion. As far as the outstanding book, the outstanding portfolio is about half of the total originations so circa $3.5 billion.

Peter: Okay, so then when you look back at 2018 then, we are recording this in the middle of January, so you might not have closed out your books yet, but I’m sure you’ve got a very good idea of how it went. Tell us a little bit about…I’m interested in profitability, in growth and that kind of thing.

Jeffrey: Happy to share and to your point it’s unaudited financial results at this point, but happy to share those. So 2018, is the second consecutive year that the company has achieved GAAP profit in the double digit millions and year-on-year we had about a 60% increase in profits. Q4 specifically, Q4 of 2018 marked the seventh straight quarter that net income has been positive on a GAAP basis. Now turning to loan originations, 2018 was robust for us also, originations increased 27% year-on-year.

Peter: Okay, okay, that’s a pretty impressive performance. I want to get back to the profitability, it’s great you’ve got seven consecutive quarters of profitability. You know, when we look at many other companies in this space and it’s definitely been a knock on the space for the last few years where there has been a lot of venture capital money being thrown at the online lending space and profitability has proven elusive for many players.

Obviously we don’t have publicly available books for everybody, but there are for a few players so I’m curious, what’s your take on that? Obviously, you monitor your competition closely, I’m sure, why is it so hard for many companies to make money?

Jeffrey: Hey, that’s another good question. I think new business paradigms that are challenging well entrenched incumbents, in this case the banks, always struggle to be profitable. Now, specifically, if we look at the online lending industry, I think that near term profitability is also linked to where you are positioned on the fintech continuum.

Before 2016, I think it was generally more acceptable for the incumbents to pursue growth versus profitability in isolation. This is more commonly accepted in the tech space. For example, how many years did Amazon lose money.

Peter: Right.

Jeffrey: IPO was in 1997 and in 2009, they were still in the red. What happens in our industry is in 2016, it became abundantly clear that tech was important in delivering a frictionless customer experience, but credit performance, access to capital and profitability were more important and the pendulum had swung to fin versus tech.

Peter: Right, right.

Jeffrey: And I think those players that were more skewed to fin, like Marlette, had an easier time migrating to profitability and acclimating to the new consensus sentiment about the nature of the online lending industry.

Peter: So is that something that you consciously made the decision of? Obviously, we know 2016 was a difficult year for many companies in this space. I wouldn’t say funding dried up completely, but it certainly was a lot more difficult. So was that a conscious decision back then to say, right, we need to batten down the hatches and focus on profitability?

Jeffrey: Yes I would say, in general, we were always skewed, from an orientation standpoint, to be more fin than tech, but post 2016, it became clear that we couldn’t wait to get to profitability and at the end of the first quarter of 2017, the last quarter that we lost money, we narrowed the commercial agenda and became a lot more focused on profitability.

Peter: Got it, okay. So let’s talk a little bit about credit performance. You’ve already mentioned that several times and I want to know what color you can give us on the credit performance of your loan book.

Jeffrey:  So I, as you would expect, would say we have really a unique performance from a credit perspective. We have been really, really consistent in what we’ve delivered for investors and for the company. I really think it comes down to this orientation that is more fin-grounded than tech-grounded and let me explain what I mean by that.

For us, on a quarterly basis, job one was always to originate loans that would serve us well and our investors through a recession and we specifically, on a quarterly basis, target a specific loss coverage ratio and because we target that, we have more predictable and consistent results. In contrast, in contrast, others in the space, especially pre-2017, thought of themselves as a marketplace.

Job number one was balancing supply and demand for their loans. When demand for loans was high, interest rates to consumers went down and underwriting softened. That approach leads to more volatility and less consistency and I think that, in a large part, that’s been the biggest difference. It starts philosophically for how we see the nature of the business that we’re in.

Peter: Yeah, that makes sense, that makes sense. So I’m curious about how you view…when you look at your business overall, you have really maintained a focus on one product to date, the personal loan, and you’ve seen others who have branched out into different verticals or just sort of adjacent products, shall we say, and I’m curious about how you view that. Are you comfortable being a monoline business for the foreseeable future, or how do you think about adding a new product vertical to your business?

Jeffrey: Yeah, another great question. Yeah, to date we have been totally focused on building a profitable resilient personal loan business. Having accomplished that though, in 2019 we will start to take steps to broaden our product pallet and leverage the platform and the infrastructure that we have built. As you would expect, the first steps are likely, you know, close cousins to the personal loan business, but see over the medium term that we’ll go further afield from that, but absolutely, Peter, I think that the time has come for Marlette to diversify.

Peter: Well you know you guys seem to have a lot of experience in the credit card business. I wouldn’t guess, of course, what your next product would be, but certainly I know that you guys must have…that would be a logical step.

Jeffrey: I can’t comment, but to your point we love credit cards.

Peter: I know, I know. Right, okay. Anyway, so it’s interesting that you guys are based in Wilmington, Delaware. I don’t know if there’s any other fintech companies in Wilmington, Delaware, there certainly aren’t many. I don’t know of any other in the online lending business. Now Delaware is obviously a very…a lot of places have their official headquarters there for various reasons that the government has set up…the state government of Delaware has really promoted that, but I’m curious about…do you think that Wilmington, Delaware, being located there is an advantage or a disadvantage to you when it comes to attracting talent to Marlette?

Jeffrey: We think it’s a huge advantage to be in Wilmington and to your point, I don’t know if people broadly appreciate that this greater Wilmington area has the greatest number of people probably in the United States with unsecured credit experience and being in the middle of that has been super helpful for us in scaling the business. I referenced earlier that, you know, 60% of the strategy staff worked with us previously. Even outside of that, the people we’ve hired have experience in unsecured credit.

Now having said that, we are a fintech player and believe in hiring the right and best people and have tools that enable us to have people work remotely also, if that’s something that is important to them, but being in Wilmington has really enabled us to flourish.

Peter: Interesting, interesting. I imagine that all of the unsecured credit people is because the credit card companies set up shop there, is that one of the primary reasons?

Jeffrey: Yes, in Wilmington there’s essentially two industries, pharma and credit cards, financial services and to your point, a number of players are headquartered in the area.

Peter: Right, right, for sure. Okay, so I want to switch to the other side of your business, the investor side, and I’m curious about the investor mix today and what kinds of investors are buying loans and is that changing at all?

Jeffrey: Yes, that has changed greatly over the five year period that we’ve been in business. In the very early days, we were funded 100% from hedge fund money, that’s not the case today. I wouldn’t quote specific mix percentages, but would say that as we’ve built a track record and shown consistency, we’ve been successful in migrating, over time, to buyers, loan buyers, whole loan buyers, with lower and lower costs of capital and that has been really helpful and fruitful and has been, you know, a part of our migration to profitability.

Peter: Right, that makes sense. So then on that, we did have a couple of years ago, we had your Head of Capital Markets, Karan and Josh Tonderys on the show and we talked quite a lot about securitization and I won’t go into too much depth, but maybe…I will link to that show in the show notes, but you have become quite a prolific securitization issuer, your deals seem to attract a lot of attention so maybe you could just give us an update on that and do you plan to sort of keep this similar rhythm in 2019 that you’ve established?

Jeffrey: Yeah Karan, who you referenced, has done a great job in developing our securitization program and our deals have been well received. In 2018 specifically, we did $1.7 billion in transactions bringing the total Marlette issuance to date to $2.9 billion. Furthermore, in 2018, a number of the tranches from 2016, 2017 and 2018 received rating upgrades from Kroll. As we look to 2019, market conditions permitting, we’ll continue to be a serial issuer of securitizations.

Peter: Right, right, okay. We’re running out of time, but last question on 2019, the future, you’ve already touched on some of these things, but I’m curious about what you’re excited about when you look ahead to this year. What are some of the things that you want to accomplish?

Jeffrey: To your point, Peter, we’ve touched on some of this, but as we enter 2019, it’s really going to be about capitalizing on the robust and balanced performance that sets the stage for continued growth and product expansion. As you would expect, we closely monitor all conditions that may impact the business and are prepared to recalibrate, if necessary, but right now, right now, we remain optimistic that we can continue to expand our business at pace, both within personal loans and outside of personal loans.

Peter: Okay, well on that note, we will leave it there. I really appreciate you coming on the show today, Jeffrey, and best of luck to you in 2019.

Jaffrey: Hey, thank you, Peter.

Peter: Okay, see you.

You know, the online lending industry is certainly maturing and I think Jeffrey sort of brings on some of those points there where, you know, they’re a profitable business, seven quarters in a row, I think that’s extremely important. Gone are the days if you look back to 2015 when money was just being thrown around, anyone could raise capital and there was certainly no focus on profitability or very little focus on profitability back then.

Today, this feels like a different time, 2019, you know, if you’re not profitable, or at least have a really easy or strong pathway to profitability, you are in serious trouble. I think companies like Marlette are showing the way where you can make money in this industry, even as a monoline company. They have proven that it’s certainly doable and I think the rest of the industry needs to take note of that. I’d like to think that by the end of 2019, the vast majority of companies in the industry will be profitable.

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 Experian’s Clarity Services. Clarity’s suite of FCRA-regulated reports and predictive scores yield significant insight into a consumer’s financial behavior throughout the alternative financial services industry. Clarity delivers data-driven risk management solutions that address prospecting, credit evaluation, fraud detection, portfolio management and collections. You can learn more by visiting clarityservices.com/solutions.

 

PODCAST TRANSCRIPTION SESSION NO. 184 / BRIAN HAMILTON

Welcome to the Lend Academy Podcast, Episode No. 184. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s podcast is sponsored by Experian’s Clarity Services. They are the leading sub-prime consumer credit reporting agency providing innovative risk management solutions to address the full consumer credit life cycle. Clarity leverages the combined power of the largest and most comprehensive alternative credit data source with traditional bureau data to provide a more complete view of the consumers’ financial behavior. Clarity is committed to providing products that address rapidly changing market conditions. You can learn more by visiting clarityservices.com/solutions.

Peter Renton: Today on the show, I’m delighted to welcome Brian Hamilton, he is the Vice-President of Innovation at CU Direct. Now I’ve known Brian for a few years, he’s been around the fintech space for quite some time, but he’s really been focused, for the last like 16 months or so, on innovation in the credit union space, he actually has a lot of credit union experience.

So we go in this episode, we talk a lot about how credit unions are innovating today, what they need to be doing, we talk about what CU Direct is doing and the different things that Brian’s working on in his innovation lab and we talk about what’s coming down the pipe and what interesting technologies Brian thinks will be impacting the future of credit unions. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Brian!

Brian Hamilton: Thank you, Peter, 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, a bit of context to the conversation. You’ve had a pretty interesting career so why don’t you give the listeners some of the details about your background.

Brian: Sure, sure. So my current position and title….I work with CU Direct, which I will explain a bit about, and I am the Head of Innovation and Insights for them, but I don’t actually have the resume you would expect in somebody for my role. I actually have 25 years of lending operations background so underwriting, processing, funding, anything that goes into a lending portfolio management, but along the way, I’ve had a penchant for the application of new technology, emerging technologies to improve those experiences through efficiencies, quality, customer experience, etc.

I started out with a finance company back in the early 90’s, was there a few years and then I went to what we might call a fintech now. Back in the late 90’s, the company I was with was a startup that started one of the first online loan applications and loan-by-phone applications, 24/7 call centers for consumer loans. It was back in the day when nobody thought of putting personal information in a computer and getting an answer back. (Peter laughs) That company did really well, was also modified by an online… Digital Insights, a platform for online banking and into it in touch by now, was there and ultimately found myself in the credit union space and then I kind of dabbled a couple of times to play in the fintech space on the side.

Peter: Right, right. Okay, so then it looks like you’ve been at CU Direct for a bit over a year now, what was it that attracted you to this position and this organization?

Brian: Sure, so, you know, I’ve been working with credit unions in some form or fashion for over 15 years and I really genuinely love what the credit union movement is about. My personal values and credit union values collectively are very closely aligned and the challenge in that space or in our space collectively has sometimes been the adoption of emerging technologies, kind of new experiences, everything that kind of the space that you’re more familiar with, in the fintech space really represents, right, user center design thinking, things like that.

So CU Direct is a CUSO, which is a credit union service organization, so we are a for profit technology company, but we’re owned by about 200 credit unions and we go as credit unions go. So CU Direct really allows someone, you know, that’s got this penchant for emerging technology and experiential design to still serve the credit union movement and be a part of the credit union movement while working in a particular company that operates much more like a technology company.

Peter: Okay, got it. So what is your role exactly there? You said you’re the Vice-President of Innovation, that can mean different things to different people so what is it you actually do?

Brian: It sure can, it sure can. Lots of innovation labs fail because they don’t actually develop anything and so at CU Direct, specifically, we define innovation in a couple of ways. One is that it’s not just the creation of nascent ideas, ideas are easy, it’s really about taking ideas and then vetting them with our market and our constituents to figure out what solution sets can we develop that can actually be adopted.

So in really large organizations, this might be part of a product organization and we have a pretty robust product team and product organization, but it actually can work independently for exploration purposes. And then as the innovation team….as we find ideas that can be viable solution sets that our clients and membership will adopt, those get handed off in a soft hand off and a transition to our product team.

So we spend about 60% of our time in what people might call iterative innovation, things like it’s existing technology, it’s existing marketplaces, but maybe we’re stitching it down together in ways that others haven’t seen and we need to be able to get those to market within 12 to 18 months.

The rest of my time is spent on things that are maybe a couple of years out so the adoption of AI and machine learning applications that are emerging technologies and solutions, but it’s going to take us a year to really iron out the wrinkles and figure out what those practical use cases that we can monetize are, that’s kind of our horizon too. And then I’m working with others in the industry on things like blockchain solutions so we know it’s real, we know it’s a thing, we know there’s value, but we don’t know exactly what that looks like yet. The innovation in CU Direct works on those on behalf of our constituents in the credit union space.

Peter: Right, got it. So what about CU Direct itself, what are the product offerings that you guys have. I know you’ve got a big auto lending business, but why don’t you just run us through the broad offerings of what you do.

Brian: Sure, so when CU Direct started about 24 years ago, it was actually a very simple challenge we were trying to solve. It was founded by a credit union in Northern California that wanted its members….that when they went to an auto dealership to be able to sign the papers at the auto dealership and leave without having to come back to the credit union and so that product is what’s known in the marketplace as CUDL and that’s simply connectivity between the 14,000 dealerships we have across the country and our 1,100 credit unions.

So the dealership can put an application in, get a decision back, draw the documents, documents go to the credit union, they can fund the loan, dealer gets their money, member has their car and the member never has to go back to the credit union. It’s a very simple kind of concept, that’s our core product and was for many years. Since then, we’ve evolved to have solutions around just about everything around the lending lifecycle other than collections or core service processing, you know, payment transactions.

So we’ve got a digital marketing solutions suite; we’ve got a full direct consumer loan suite, personal loans, credit cards, home equity loans, etc.; a full loan origination system, everything from finance to backend processing; we’ve got a business intelligence or lending portfolio management suite; we’ve got professional services; we’ve got some credit insurance products and a number of other emerging products that we’re working on. So we pretty much wrap the full cycle and in 2019, we’re launching a mortgage product that we’ve heavily invested in.

Peter: Interesting, and when you say CUDL, we should point that out at C-U-D-L, right, that’s the product.

Brian: Correct, CUDL is a product of CU Direct.

Peter: Yes, so what sort of volumes are you putting through…let me just clarify, you’re really providing the software that connects the credit union with the auto dealer, right, you’re not doing any sort of marketplace type operation, as far as sourcing deals for credit unions, you’re just providing the plumbing, right?

Brian: That’s an excellent question, Peter, so a little bit of both. We are not originating the loans, we are not an originator, we are a platform. In some cases, it’s as simple as providing the technology to connect the dealers to the lenders. In other instances, we do have kind of indirect sourcing channels so we have an auto finding service, for example, so credit union members can go online, find a vehicle they want and then in doing so we connect them directly through the financing so before they even go to the dealer, the financing is already taken care of.

Peter: Right, right, and you also have….you know, I was looking around on your website and it seems like you’ve got an online lending program called Lending 360, tell us a little bit about that.

Brian: Sure, so Lending 360 is really a core lending product for credit unions. So credit unions have their indirect loan platform which is what they use on the auto dealership and then they’ve got their direct loan platform which is what they use for all other channels.

So when a member goes online, calls the call center, goes into a branch….this is the system by which they take the application in. We have a very robust decision engine that helps them automate those decisions, it’s a work flow engine so it takes them all the way through the process, all the way through funding their loans and then pushing that data into their core system for servicing.

Peter: So can a credit union member go online to their credit union and do everything 100% online?

Brian: Absolutely.

Peter: Okay, and so does this roll out to ….you said you’ve got 1,100 credit unions, do they all have access to this?

Brian: They all have access to that, but the 1,100 credit unions don’t all match that solution so we’ve got about 150 credit unions that use that solution. Our 1,100 clients use one of our products in some form or fashion.

Peter: Right, right, okay, got it, got it. I’m curious, because credit unions….obviously, they’re very community-focused, they’re very…almost by definition, they’re a community-focused organization, but there are some large credit unions, but most credit unions are fairly small.

They’ve always competed with banks, that’s been a competitive…..for decades and I’m curious about now how they view….obviously, fintech companies now coming in encroaching on their business to some extent, I mean, how are credit unions responding to sort of this….you know, it’s a rapidly changing world, banks are encroaching more and more, fintechs are encroaching more and more, how are they responding?

Brian: Sure, I think that response, Peter, and this isn’t maybe even unique in the banking space or to the banking space. If you and I look at how LendIt has evolved from when I first attended, say 2013, 2014, 2015 to last year’s LendIt Conference, we saw a very different dynamic, right, when it came to how fintech viewed traditional financial institutions or vice versa and credit unions are kind of following that path.

There were several fintechs say at the last large Credit Lending Union Conference and so the fintechs have moved from the disruptive to the partnership kind of model and credit unions are seeing that. There’s been an interesting sea change in the credit union space, even as recently as the last two to three years, and as leadership now is kind of evolving and changing they recognize the need to improve experience, right, and to not confuse personal experience with personalized or curated experience, which can be enabled by technology.

The fintechs, in general, kind of a fintech ecosystem does a really good job of that and there are some real success stories now about credit unions actually partnering with fintechs to kind of create that “win win win” paradigm, right, for credit unions to buy a solution set that they can’t develop internally. A win for the fintech so they have access to lower cost of capital and easier scale, and most importantly, a win for credit union members which is really what we care the most about. So we’re starting to see that more and more often and even at our own conference we’re inviting fintechs to the space to be a part of that conversation.

Peter: Right, right, that makes sense So with your services then a credit union can today have all these online offerings, right, can have offerings for their members where they don’t necessarily have to come into a branch. I guess what’s behind my question is are they still focused on serving customers in a branch, or they’re more focused on digital now, what’s their kind of balance?

Brian: Yeah, there certainly is a shift to the digital space, right, and CU Direct is heavily involved in that. If you look at our website today, you might not see that in our product offerings, but that absolutely is everything that, at this moment, is under development and design at CU Direct to enable the digital marketplace and to make that experience at the credit union level equal to or better than the experience that a member may go through if they go outside of the credit union space.

Also, that’s very credit union specific and that’s one thing that’s unique to credit unions and others. You’re absolutely right that there’s that kind of community focus; there’s also what we call the SEG focus, which is the Select Employee Group and that’s kind of employer-centric. Some credit unions, they sit in the lobby of all the employers……

Peter: Right.

Brian:…and in those instances having the digital space is an important aspect of that, but may not be absolutely critical because if it’s convenient and if it’s when and where the members want it, they’re not pressing for that. I think we believe, as everybody does though, that even in those instances digital offerings are going to become much more relevant. So even those members that work there on site can still log on at 11:00 pm on a Saturday and apply from their mobile phone for a loan application and get a decision and fund that loan all at the same time without leaving the convenience of wherever they are. And those are the solutions we’re chasing to have on behalf on our credit unions.

Peter: So you’re chasing down, it that possible today with your offerings and many of the credit unions like can someone actually sit and take a loan out at 11:00 pm on a Saturday night?

Brian: Absolutely.

Peter: Okay.

Brian: In some instances, the credit unions will use our solutions all the way through. In other instances, maybe they’ve got their own mobile application or they’re using another third party for that experience and they connect through our API’s to our system. One of the things that we’re big on is not forcing somebody to stay in our ecosystem end-to-end and to give credit unions flexibility in the solutions that they chased out and so re-architecting our platform with very flexible API’s so that credit unions can create that experience they feel is best for their members. Hopefully, it’s ours, but it can involve others.

Peter: Right, right. Okay, so then I’m curious about the innovation center, whatever you want to call it, inside CU Direct. What are you trying to accomplish, you said you sort of removed somewhat from the day-to-day, you get to focus part of your time on new projects so can you maybe just run us through some of the things that are coming down that might be coming 12 to 18 months down the road.

Brian: Yeah, absolutely, I’ll give you an example of one that’s already in play today based on previous 12-month cycle. So first to clarify, you know, for the listeners why is it a little bit different than a wholly owned innovation center say within a major bank. It’s really that credit unions have a unique business model in that we both compete with each other internally, but we also collaborate a great deal, much more of collaborative than competition, frankly.

Our owners collectively got together and said, you know, we all want to be innovative, we all want to spend time on kind of exploration and understanding emerging technology and testing emerging technology, but independently, even the larger credit unions struggle to allocate those resources internally and exclusively. So we pool our collective resources and they look to us as a CUSO and said, hey, you guys go chase this down and we’ll fund it.

So in March 2017, we launched the lab exclusively for that reason, but we innovate through collaboration. So I just came from a trip earlier this week where I went and visited credit unions in Utah and actually sat down with their processors and their managers and talked through challenges and watched them. Now we’re tasked with coming back and figuring out what solutions should we develop in the innovation center at CU Direct that are going to reduce the friction in their process tenfold.

An example of that would be in 2017, we brought together many credit unions, we had a 2-day ideation session and we spun up 39 ideas of different things that could help the credit union space. We pared that down to about 18 ideas that we built up full business models and business plans for and then pared that down to seven ideas that we would actually work on. Of those seven ideas, five of those were in flight today.

One of them, as an example, is in beta, a little loan processing unit that we have where we take OCR (optical character recognition) and ADR (automatic document recognition) and those are old technologies, but by themselves they’re kind of dumb. So an OCR engine, if it pops at a dollar sign was a five, it would always think a dollar sign is a five, but when you layer on a machine learning application and you tell that OCR engine with machine learning that that’s a dollar sign then it learns that. And so this is not a very sexy example, but it’s really relevant in the credit union space and all processing spaces.

When somebody gets the backend of a loan, they’ve a person that sits there and compares the loan documents with what’s on the system. It manually goes through and that’s what we call stare and prepare before they fund that loan, but we’ve essentially automated that entire process. We created the ability to identify documents, sort documents, read documents and apply business rules to automate a lot of that document file preparation, file package preparation and then all of the QC and QA that goes along with that to fund the loan. Those are the types of solutions that we chase down.

Next year, we’ve acquired an AI engine that we’re using and applying that to decisions that our credit unions make to help them understand correlations between credit or application attributes and decisions that they may not be able to make themselves. We’re all familiar with scoring models, but sometimes populations of consumers are unique, especially in the credit union space and so can we layer an AI engine on top of an individual credit union’s decision attributes, go back and work with their decisions and help them understand how they can automate decisions for their own unique membership.

Peter: Yeah, that’s a really interesting point because, as you say, there’s something that binds together all the members of the credit union, whether they may just be an employee of a company. Obviously, that’s sort of the most common type so it’s interesting that they probably have some things in common that if you go out to the general population, you wouldn’t see that.

So it’s like you need to take that into account in the underwriting model. The underwriting model can be more efficient, can be more predictive with that information so that’s a really interesting example.

Brian: Absolutely.

Peter: How big is your team, the lab, like how many engineers you’re having, I mean, what’s the sort of scale of your organization?

Brian: Sure, so these are kind of ballpark numbers, but CU Direct has about 400 employees total. In that context, we’ve got about 60 engineers, 30 in product so about a fourth of the work force is involved in technology solution development in some form or fashion. Actually probably the largest constituent is, of course, our sales force so we’ve got a very large national sales and account management force and then we’ve got customer care, our own call center.

We have a business unit that does loan processing on behalf of credit unions so small credit unions struggle to scale even if they can’t make the loans, you know, it’s a big sum of cost to have processors and underwriters in-house so we provide some of that service on an outsourced service basis and then all of the other administrative staff.

The innovation team is actually really small, it’s two of us, it’s myself and then we’ve got a customer insights person that does a lot of market research and a lot of kind of anthropological analysis relative to what the market needs might be and then we really do the rest through collaboration. So there’s developers that work with us on a project basis, there’s a product manager that works with us on a product basis and our credit unions actually do a lot of the heavy lifting for us. We’ll pick a project, we’ll get some of our credit unions involved and we’ll share that workload together.

Peter: Interesting, interesting. So then I know you talked a little bit about AI and you did mention blockchain, but is there anything that you’re developing using blockchain technology or is that still in the sort of wait and see type thing?

Brian: Sure, so CU Direct isn’t developing that ourselves, but great example, kind of hot collaboration works in the market space. There’s company called CULedger which is a collective of credit unions that are developing a blockchain solution, culedger.com, and we are one of the owners of CULedger so I serve as kind of a point person at CULedger. As you know, there are lots of different applications of this, the first solution at CULedger is chasing down kind of an identification model using block technology.

Peter: Interesting. And then I’m also interested in….I mean, there has been some examples of credit unions investing in the marketplace lending space, are you…I mean, you’ve been around the space for a while, do you see that happening more and more or how do you sort of view the marketplace lending space from your perch?

Brian: Yeah, absolutely that’s an opportunity for credit unions. One example of that is Happy Money, works a lot with credit unions. As a matter of fact, I don’t know if they use any funding that’s not credit unions’ and what that does for the credit unions involved is it gives them that level of sophistication and experience that that type of a company brings to the table. It gives them the new member, but then they don’t have the burden of developing the science behind that underwriting, developing that experience to acquire the member or the loan or even the servicing on the backend.

In other cases, it’s more a matter of working either with a company like CU Direct or another fintech to just maybe use the front end digital point of sale, you know, solution, or maybe a sub-set of a solution set. But the marketplace lending, you know, for some of the traditional lenders that you and I know of that go out and source the loans, originate the loans and bring them to an organization, there’s a lot of opportunity there and like I said, we’re starting to see those fintechs pop up at traditional credit union conferences and we have very low cost of funds so it aligns nicely with the values that a lot of the fintechs are aspiring to.

Peter: Right, right. So switching gears a little bit, the credit union model is not unique to this country, there are credit union type organizations all over the world and I’m curious about….are you paying attention to what’s happening in other countries. If so, what are some of the things you’re learning?

Brian: Not only are we paying attention, we’re involved. So there’s a credit union organization called the World Council of Credit Unions and it’s a cooperative, collective model. We are partners in that model and even just as recently as, I think, two weeks ago, there was a contingency from Latin America and South America that was on an educational trip throughout California.

They visited large credit unions, small credit unions and CU Direct and so we hosted them and helped them understand both, you know, how credit unions work in the US, what a CUSO model like ourselves is like, a little bit about innovation and financial technology and the applications of that and then, of course, they reciprocate and we learn from what they’re doing as well. We attend those conferences every year.

Peter: So is there anything that you see that’s interesting in other countries that you don’t see here?

Brian: Yeah, and not a surprise to you, it’s the same things that we see in the financial technology sector for modeling the usage of data and the use of kind of connectivity and outreach and processes that may be restricted here due to compliance, or maybe we have to understand what’s happening more, but especially around the use of alternative data and how that’s used in both sourcing borrowers and underwriting borrowers. That’s something we certainly keep an eye on and how we need to adopt that and amend that to bring value to our credit unions.

Peter: Right, right, got it. We’re almost out of time, but just a couple more questions here. Everything’s moving digital and everything in finance is slowly moving into the digital realm and I’m curious to get your take….you know, here you are working in an innovation lab for credit unions so how do you see the credit union space evolving in the coming years?

Brian: Rapidly (Peter laughs). The whole digital tag is interesting to me, right, just as the innovation tag is, just as the blockchain tag is, it’s almost cliché and what I’m finding that I really dig into the space is sometimes it’s digital maybe on the front end, but then it’s all smokes and mirrors because once a loan application or a borrower gets into the pipe then it’s just a bunch of hamsters running really fast on the back end doing the same manual stuff they’ve always done.

So CU Direct is really chasing that down right now and we are chasing down how we make a digital experience all the way through, both from the customer or member’s perspective and the back office.

Peter: Right, right.

Brian: How do we digitize that process, how do we bring operational efficiencies to our credit unions. That is our primary focus in 2019 and that’s the solution that you’ll see emerge from us in 2019 and so we’re big on digital, but maybe not in the spaces in the way that everybody else perceives digital. But I think our credit unions, the ones I’m talking to, are very excited about this. They are all in and helping us develop it and we’ll see some solutions roll out in 2019 on that product.

Peter: Okay, interesting. This is the last question, so in all the different areas of fintech and areas of technology that you’re looking at, what do you think is most exciting and what do you think has got the most potential to transform the credit union experience?

Brian: It might not be the answer you would imagine because it’s not about a specific solution, it’s not about a specific experience, it’s not about say, you know, the super cool front end digital point of sale, it’s not about an underwriting score or algorithm. Really, I think, what it’s about is the ability with technology today to actually de-couple and de-construct the monolithl that we’ve worked with before.

So I think this applies to all traditional financial institutions, not just credit unions, but we have built systems that have made it very difficult to pivot or to adapt new solutions because it’s just this big huge model of the programming that is terribly complex. And if we can break all of that down and really leverage, you know, the kind of micro services that are available through really sophisticated API layers that simplify the process of somebody to be able to kind of plug-in and unplug any part of the solution set as they go along, that to me is the most exciting opportunity for credit unions. They’re able to then control their experience and pick from so many more options and frankly, partner with fintechs. It’s a lot simpler if we can bring a new architecture to that.

Peter: Right, right, that makes perfect sense to me. Okay on that note, we’ll have to leave it there, I really appreciate you coming on the show today, Brian.

Brian: My pleasure, Peter, thank you.

Peter: Okay, see you.

Brian: Bye.

Peter: You know, I think Brian makes a very good point there towards the end about the fact that many banks have legacy technology that is really hampering them and we don’t want to repeat that process going forward. We really want to be able to plug-in different pieces of technology.

It’s interesting, I think about Ant Financial and what they’re doing in China with technology in there, they are re-writing their entire code base every……I think it’s every four years or so they basically throw out the old and rewrite it. Maybe we don’t need to go quite to that extent, but  legacy technology of tomorrow is today’s cutting edge technology, we need to make sure there is a way for us to update our systems and not cause the same problem all over again in a couple of decades time.

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

Today’s episode was sponsored by Experian’s Clarity Services. Clarity’s suite of FCRA-regulated reports and predictive scores yield significant insight into a consumer’s financial behavior throughout the alternative financial services industry. Clarity delivers data-driven risk management solutions that address prospecting, credit evaluation, fraud detection, portfolio management and collections. You can learn more by visiting clarityservices.com/solutions.

 

PODCAST TRANSCRIPTION SESSION NO. 183 / ADAM ROSEMAN

Welcome to the Lend Academy Podcast, Episode No. 183. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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Today’s podcast is sponsored by Experian’s Clarity Services. They are the leading sub-prime consumer credit reporting agency providing innovative risk management solutions to address the full consumer credit life cycle. Clarity leverages the combined power of the largest and most comprehensive alternative credit data source with traditional bureau data to provide a more complete view of the consumers’ financial behavior. Clarity is committed to providing products that address rapidly changing market conditions. You can learn more by visiting clarityservices.com/solutions

Peter Renton: Today on the show, I’m delighted to welcome Adam Roseman, he is the CEO and Co-Founder of Steady. Now Steady is an interesting company, they’re a different type of fintech company, they are going after a niche that is really unoccupied right now and that is, going after those people who have two or three jobs and helping them maximize their income.

They do this in some very sophisticated ways which we get into in some depth. We also talk about the demographic that they’re serving, how the sort of shifts in society are really driving demand for what they do. We talk about the engagements that Steady’s had, so far, we talk about the interesting relationship they have with a certain famous basketball player and we talk about the different ideas and the vision that Adam has for the future of Steady. It was a fascinating interview, I hope you enjoy the show.

Peter: Welcome to the podcast, Adam.

Adam Roseman: Thank you very much, Peter, appreciate the opportunity to be here.

Peter: Okay, my pleasure. So I’d like to get this thing started by giving the listeners a little bit of context, a little bit of background about yourself. Why don’t you tell us what you did before you started Steady.

Adam: Sure, I started my career as a M&A banker, specifically focused on the technology and consumer sectors, ended up parlaying that experience into starting a business with my current partner, Michael Loeb, that focused on supporting job growth in emerging economies so specifically double bottom line business around investing in local entrepreneurs in developing markets. Did that for eight or nine years and was excited to then jump into the Internet business with Michael Loeb.

Peter: Okay, so then Steady is a pretty unique business, we’ll get to the details in a second, but what was the idea that led to the founding of Steady?

Adam: Yeah, so it actually goes back quite a bit. You know, I grew up in a single parent home with my Mom and my younger sister. My Mom, very hard working individual, was a teacher, always struggling to make ends meet and take care of my sister and I, finding ways to make extra income, going back 30 years now. You know, you fast forward to a couple of years ago just ahead of the founding of Steady and my father, who I did not grow up with, retired and did not have sufficient retirement income.

He’d been a restaurant manager his whole life, no college education and ended up working in retail and wasn’t finding sufficient hours to work in retail and ended up putting together effectively an income portfolio that consisted of multiple jobs in order to complete an entire income picture for him. You know, I started getting into this particular dynamic of what my father was experiencing and looking at financial help for low to moderate income Americans and then digging into work force data and became very fascinated with this sort of “underemployment” dynamic that was happening, specifically, if you look at all recessions dating back to 1991, every recession has led to very significant permanent job loss in that.

It’s published by Alan Krueger from Harvard that 94% of new job growth in the US from 2001 to 2015 consisted of non-permanent, temporary, part-time works and so we have a dynamic now as technology continues to progress that workers, specifically those that are low income, not high on the pay scale, aren’t necessarily unskilled, but whose skills are not valued high economically, are in a position now where with the advancement of technology and business is able to match labor supply with demand.

They’re significantly disadvantaged and so the sort of direction of work going forward into this sort of broadly defined future of work involved a situation where people are working more than one job so much so that in 2016, published statistics from the National Bureau of Economic Research showed that 43% of Americans in the workforce already had more than one source of income. This is quickly becoming the new normal and not the exception, so I was very fascinated with that concept.

Peter: Right, and then why don’t we segue now into explaining exactly what Steady does.

Adam: Yeah, Steady’s belief is that the most important financial decision an individual can make is how they invest their time in the way that they work. Today, specifically, if you are not a highly skilled individual who has this particular type of job in mind that aligns with those skills that’s going to pay you well, it’s very difficult to figure out what is going to be the best fit for you, especially if you’re having to work multiple jobs.

So Steady’s business model is built around specifically helping individuals that are low to moderate pay scale, figure out what are the right income opportunities for them today, predominantly in the contrast of skill and filling income gaps. As we carry forward, we focus on helping them broadly define their income portfolio so once they fill those gaps and stabilize themselves, figuring out how then are they going to move up the income ladder, again, in a scenario where they have multiple part-time jobs in most instances.

So just to give you an example of this is part of the Steady solution is we have an Income Tracker that will heavily encourage individuals to tie-into which enables us to do a much better job of delivering and curating the right work opportunities for them because we can see their transactional data and see how they’ve been earning and build up the net worth of all the users on the platform looking at their various different interests, qualifications, geographies, etc. to understand sort of an income source so how is someone earning versus how they should be earning. The average individual on the Steady platform when they first sign up for our system we’re able to see about 35% month-over-month income volatility for these individuals, so the number’s are just staggering.

Peter: That’s amazing. So I just want to touch on the Income Tracker because that’s super interesting…how are you connecting to get the data for your Income Tracker?

Adam: Sure, so today we use, you know, the typical data aggregators, we’re in the process of consistently evolving which ones we’re using and multiple of them focusing on the income side of the equation, PFM tools sort of broadly speaking today predominantly focused on expenses and where can you save and how can you better allocate funds for cheaper solutions.

Our focus is entirely on the other side of the equation which is the income side of the equation so once they connect their accounts and we’re working heavily to try to get a connection of not just traditional accounts that you’d be able to connect through data aggregators, but the types of accounts where people would be receiving funds such as peer-to-peer platforms as well. We’re working on getting those integrated so that we can have the broadest sense of income possible, especially for workers who perhaps are 1099 in doing side jobs where not everything is necessarily flown into a single account.

Peter: Right, because you’re going to have obviously their income, but there’s also going to be things like gifts from some people, their might be a loan from a platform, there’s often lots of things that are on that income side of their account. So are you pulling in all that data?

Adam: Yeah, so we pull on that data, but we do a couple of things. One is that our data team is focused on cleaning the transaction streams and getting better and better over time in identifying what is income and what is not. When we have a question, because we’re never going to be 100% perfect, we always give the individual the details and they’re able to go in and edit quickly, to wipe out to the extent that if they see any income event that doesn’t belong or if they need to ask something, perhaps they’ve paid in cash and didn’t deposit. They do have the ability to do that, but, obviously, at the same time we’re trying to limit the number of required options by the user, so we’ll get better and better over time.

Peter: Right, right. Okay, so then you talk about the 43% of Americans that have a second job and I imagine there’s a bunch more that would probably like a second job if they had an easy way to kind of do it. This 43%, is that your target market or who is your target market?

Adam: Yeah, I mean, that’s the majority of our target market, but you’re right, there are individuals that don’t realize how….it was easily discoverable that they could pick up some extra funds, for example. You know, a huge audience of Americans today are perhaps generating enough income from their primary job to make ends meet, but who are not building up retirement savings.

So it was easy for them to figure out, okay, here’s I can work three to four to five extra hours a week in the side job rather than watching a football game and start putting money and having it swept into a savings account to build my retirement. You know, there’s a whole sub-set of that remaining 57% that we think is target, but of that 43%, very representative of America, with the exception of the gender breakdown, so the median study user today or worker is 39 years old, with about $55,000 of household income and 58% of those individuals today on the platform are female.

Peter: Interesting, more women than men, huh.

Adam: That’s right.

Peter: Why do think that is?

Adam: Yeah, I think there are a couple of reasons. One is that within a household environment oftentimes, according to studies, when the going gets tough oftentimes you’ll find the woman being the one who is taking more initiative, especially during sort of extra time so that’s the factor that’s at play…..we also see a factor at play of women who perhaps left the workforce, at least on a full time contract, and now are looking to help earn some extra income. Perhaps they have a family and now they want either to step back into the market, or one job is not cutting it anymore, you know, within the household. So there’s a couple of things at play, but I think those are the two primary ones, at least from what we’ve seen through our user discovery.

Peter: Right, right. Okay, I downloaded your app, I logged in and registered and everything. I’m looking at jobs from my local area and it’s quite amazing. I didn’t count them,  but there’s probably about 50 different jobs, everything from Airbnb to Upwork, you’ve got a whole bunch of…..tutoring, dog sitting, all kinds of different things. So how do you get these jobs into your app and what’s sort of the process you go about vetting the different opportunities?

Adam: Yeah, so I think, Peter, we’re in an interesting time here because you’re viewing the app today. Within a week from now, in fact, less than that, because we’ve already submitted to the Apple Store, there’s a very significant advancement happening within our app. We’re going from direct relationships with about 130 work-from-home jobs to over 1.2 million new jobs that are being fed into the system that are part-time and shift work from a variety of different sources.

So we have direct relationships with a small percentage of the businesses that will now be in the app, but the majority of those are from partnerships with a variety of different trade organizations and other sources of jobs, some of which are sort of I think company confidential, they’re not going to go into too much detail. Our goal is to have in the system, you know, every part-time shift jobs that exist today we would like to have in our system, given that we’re not focused on monetizing it.

As we carry forward, we’ll eventually get the full-time work as well for those folks who would qualify for and could get into a full-time job, but when we do that, we want to do it right. So, right now, again, in the concept to fill-in an income gap, if we want ensure that we have every part-time shift that’s available online is being pinned through our platform. The important thing for us is to curate the right opportunity so in terms of everything from survey data which our surveys being significantly expanded to Click Data to the Income Tracker data.

All of that is being taken into consideration in terms of as we build the business going forward, in terms of curating those work opportunities so think of a Netflix-like algorithm where we’re able to see, okay, Peter, you might be in …..let’s say you’re in Kansas City, you’re earning X dollars an hour; Nancy is also in Kansas City, she’s earning Y dollars an hour, she has very similar skill set to you, very similar work history, similar availability, you know, here’s what we’re seeing that other people like Nancy are doing that you are not to earn more. As a result, here’s the types of work that you should be looking at.

Peter:  That’s fascinating, that’s fascinating. So I’m thinking about this, there’s obviously been a demographic shift that’s been talked about a lot over the last decade, shall we say, into more of the gig economy, people call it….like it seems like, I don’t know if it’s going to be permanent, but there’s certainly people, like you say, that have two/three jobs and none of them are full-time, but it’s sort of become their normal way of living. Do you feel like this is where we’re moving to, like to the workforce of tomorrow may end up with people choosing a career of multiple part-time jobs.

Adam: Yeah, I think part of the problem today….let me start up by saying, I am not a supporter or a fan of the gig economy, okay. I would much rather have a world where everyone has a full-time W2 job, that single job is satisfying their financial requirements, providing a living wage and a series of benefits. The fact of the matter is unfortunately, we’re in a new reality and that world is not coming back, at least not during the course of my work career, and so from our perspective, yes, we are living in a new world.

We are living in a world where the income gap is widening, where we’re going through, right now, the longest period, as we all know, of economic expansion that any of us have seen and the strongest job market that any of us have seen, supposedly at least from an unemployment statistics perspective, and yet we’re still acquiring users at almost nothing and at significant scale.

My fear is what is to come, right, when we all know that a contraction will come; we don’t know when it will come, but it will come, and when it comes now after this extended period of expansion….you know, the progression of technology  over the last decade since the last expansion has been tremendous, especially when you look at work force solutions, you look at automation.

And so despite the fact that 43% of Americans with more than one source of income today, I’ve no doubt that’s going to be over a 50% number once we come out of the next recession, whenever that is. And so, yes, I think we’re absolutely living in a new world and there’s not many people, at least, who are reasonably well educated at the top, that would disagree with that.

Peter: Right, right, Okay, so I just want to be clear what you do. Obviously, you’ve got the job market, marketplace I guess you would call it, it’s about to greatly expand. I should point out to the listeners, we’re recording this in mid-December, this will not be published until January, but obviously, when people download in January it will look a little bit different. So you’ve got the job market, you’ve got the Income Tracker; how else are your engaging with your customers?

Adam: Yeah, so we have a content initiative that’s being rolled our pretty broadly in terms consistent with our mission of delivering more income, so that may be suggestions to individuals on…..for example, targeting five different groups of individuals on how they can potentially upscale, obtain additional qualifications to move up the income ladder, you know, ways to do better in job interviews, things that will hopefully help them climb the income ladder over time and get themselves to full employment and in the employment scenario, once they get in front of the employer on a job interview hopefully they do well.

So a variety of different contents, content that’s also addressing various different pain points that these workers also have, so things like taxes when you’re a 1099 worker, things like health insurance, things like other forms of financial services. You know, as we carry forward, we believe that there is going to be a significant play for us to improve the lives of our users when it comes to sustainable forms of credit.

For example, today if you are applying for a home loan with Fannie Mae or Freddie Mac, you have to provide W2 income during the verification process to qualify for a home loan. There’s a bill that is being put in front of the Senate now focused on enabling them to lend to individuals who are using 1099 income for verification. Once that bill hopefully passes, you’re still going to be faced with two challenges; the first is going to be actually verifying those multiple 1099 income sources, and the second is going to be the volatility component that I talked about earlier.

So to the extent that we’re able to help smooth out volatility through the sort of core Steady solution combined with the data set that we have where we’re aggregating those income sources, we believe that our data could be very helpful in terms of people that should be creditworthy and should be underwritable actually getting into forms of credit with this new Steady data.

I’m sure you probably saw today the announcement with Experian’s new data partnership around bank accounts and specifically looking at utility bill payments and other indicators for underwriting credit. So this whole new world of individuals based on the changing nature of work, you know, dramatically impacts as well today their ability to qualify for traditional financial services.

Peter: Right, right. Okay, so you said you’re not making money from the jobs, what is your revenue model today and how is that going to evolve going forward?

Adam: Yeah, so our revenue model today intentionally is to minimist and the main reason for that is that we believe that the power of this platform upscale, the network effects again of this business are dramatic as we add in scale users and the data acquisition that we are deriving from each of these individuals is very unique in terms of the combination of work data and income data and transactional data.

Also, there are activities within the app and outside the app, and other forms of re-engagement and so for us, our folks, this is very much on for the foreseeable future doubling down on acquisition, doubling down on data acquisition and retention and re-engagement and getting to the point where we are able to clearly demonstrate to a user that we are helping to increase their income.

We have an OKR structure in place with our most important O, objective for 2019, being around helping to being able to clearly measure and deliver $100 million of additional earnings in individual’s bank accounts and utilizing our Income Trackers as score cards for that so to the extent that we are able to do that we believe that a variety, a multitude of revenue model opportunities will open up for us.

Peter: Right, okay. So I want to switch gears a bit and talk about basketball, (laughs) you know where I’m going with this. We met at Money 20/20 and Shaquille O’Neal, the basketball legend was there and I was able to shake his hand, thank you for the invitation. So Shaquille O’Neal is involved in your business, firstly, how is he involved and how did you meet Shaq and what’s the story there?

Adam: Yeah, so in my prior life, there was a media component in the business, you know, in emerging markets, emerging Asian, in particular, and I had the ability to work with Shaquille on a number of different projects that he was doing in Asia so I had a good amount of interaction with him, got to be very friendly with his business partners. When I was starting Steady, they reached out to me just to catch up, understand why I was doing that since we had built up a relationship, you know, visited with them, shared the story of the business, they put Shaquille on Facetime.

In about three minutes into the conversation with Shaquille, he paused for a minute, he’s like, you know, I get it. I grew up in a household where I had a single mother who was remarried and she had to find multiple sources of income so did my stepfather, in a variety of scenarios….you know, I needed a very big pair of jeans (Peter laughs), since I was 7 feet tall, they were expensive and they had to get me custom clothing. I saw how hard it was and I saw their struggle and this was pre-Shaq, this was Shaquille days. So, he’s still looking at family and friends, he sees the struggles that people are facing so I think very in touch with the reality of the world and he tries very hard to continue to be despite his financial success and celebrity.

At that point in time, I did not…I literally did not anticipate that he would have any involvement in this business and he asked me the question….Adam, can I be involved? What can I do and I don’t want a dollar from you, I want to own a little bit of equity, I want to do a lot of work for you, but I don’t want to take a dollar from you because I want every dollar that goes into this business to be invested on helping people and, hopefully, I can contribute to building awareness and building credibility with the users and, hopefully down the road, I have some success in doing that through my equity position in the company. So that was it.

Peter: So then how are you using Shaq today to get the word out, obviously, someone that hundreds of millions of people know pretty…certainly know his face and know of him, how are you using him?

Adam: So, Shaquille, as you probably know, he is a very likeable individual so he has a number of brand partnerships. We’re the only one that has this contract today where he’s not getting paid, it’s an endorsement where he has a vested interest in the business and he’s delivering services to grow the business because he believes the business can be worth something someday and he does make the equation. It’s the first business ……he did that actually with Google and the second was Ring, so we got a pretty high bar (laughs) in his mind to achieve and that delivers positive added pressure to us to create a positive outcome.

So I think from Shaquille’s perspective, he certainly brings credibility, especially early on in the business’s development because, you know, a lot of low to moderate income individuals who interact via digital platforms are always looking for red flags, right, is this real, is there an ulterior motive? There absolutely is not, we are a very mission-driven organization, but having Shaquille there helps to lower that question factor a little bit because people don’t believe, at least the majority of them, you always have naysayers, but at least the majority of them don’t believe that Shaquille is going to risk his reputation on something that is shady per se. So it provides a little bit of that trust factor; it’s hard to get early on in a business’ s development till you build a brand.

The second component is it is helpful in the B2B community so, you know, Shaquille is a very fun-loving and outgoing individual who a lot of people want to meet so using him both in media, which we’ll be doing a lot of, you know, starting next year…..in addition to a B2B environment, things like Money 20/20 that you mentioned are geat.

I think he ….a big portion of what he’s doing for us is to bring awareness to the problem so when we have him in front of the media talk about the challenges of Americans today, talk about how this is like something that appears in most Americans minds to just be kind of it is what it is, but this is, perhaps, one of the biggest economic challenges that the world has potentially ever faced.

What we’re going to see over the course of the next 20 years with automation and what that does to workforce transformation…so bringing awareness to that because we are so far behind in so many different ways.

And then, lastly, you know, I think events so having Shaquille at events, specifically user-oriented consumer events, this can create awareness and a PR lift where we’ll be using him.

Sorry, Peter, I forgot the most important thing that I should have said first, what we view Shaquille for the most during the first sort of nine or ten months that he’s been working with us is around sitting with the users. So we do focus group after focus group after focus group around the country sitting with individuals, sometimes one-on-one, sometimes in a room of four, six, eight people who are from all walks of life who are having income challenges, either they’re temporary shocked income or some unexpected expense or people who are consistently struggling. Every now and then, we bring Shaquille and he’ll show up in the room and help moderate.

We’ve done a number of those and when people first walk in the room, you know….when he first walked in the room, they’re shocked, but there is not one session we’ve had him in thus far that he and someone else in the room are not in tears in a corner together, you know, around some topics that’s been challenging by the end of that discussion. Typically, it’s the single mother who is given the history of him and the fact that his mom was a teenage mother, so, yeah, that’s the most important thing that we do is absolutely have him actually sit with users.

Peter: Right, right, got it. So then can you give us some idea of the traction you’re getting today, I mean, how many people have signed up?

Adam: Yeah, so we feel good about where we’re at. We only started our beta in April this year 2018), our public launch in the beginning of August with our MVP and the traction has blown us away. You know, it’s a positive from a business perspective, we’ve seen how much of a challenge there is for so many Americans today. In December, we’re blowing past 400,000 app downloads, you know, we’ll finish off this month with around 320,000-ish full registrations, we’re seeing very active re-engagements, you know, high retention.

What we’re seeing for most of these individuals on the platform is that, you know, job search when you have an income, challenge job search is perpetual and when you have an income portfolio it’s not like for a lot of us that, you know, we might need to search or think about what’s next for every one, two, five years. For them, it’s constant because there is never enough and they’re never satisfied. In the Income Tracker, there are those that are using the Income Tracker, their usage of the app is much, much higher.

So we have a number of even more kinds of features all tied to income that we’re rolling our in the new year, continuing to enhance and improve the curation technology with a lot of major curation technology milestones that are going to happen in Q1 and Q2. We’re up to 40 plus team members today and most of that in dev and product and we’re feeling really good about the path that we’re on. You know, it’s a long way to go, but in January, our first month, where we have more than 100,000 downloads in a single month so, yeah, long way to go, but a better start than we could have hoped for.

Peter: Right, right, yeah, that sounds good. Okay, we’re almost out of time, just a couple more questions, if I may. It seems to me that you really created a new niche here, you know, like this is something that….you see so many companies focusing on the expense side of the equation or the lending side of the equation; you’re really focusing on the income side, so who do you see as your competitors?

Adam: Yeah, so I think you’re right, we are sort of trodding down a new path so in terms of direct competition of people doing exactly what we’re doing today, there’s no one yet, at least that we’re aware, there will be, but there’s no one yet. In terms of those that we’re fighting for eyeballs with, first off, where other people go to look for jobs today, they’re going to Indeed, they’re going to Monster, they’re going to ZipRecruiter, they’re going to Snagajob, some of them are using Google, but that process is a traditional search process so you have to know what you are looking for, you have to type something into a search bar, you have to hope that the 10,000 results that come up in front of you, that a few of those are going to fit, you’re going to fill out a long application and hopefully get a call back.

But, you know, the business model of all of those companies that I just mentioned is client-sized, specifically on the corporate side of the equation so whoever is posting the job listing is the one that’s paying and as a result they’re going to optimize the experience for the business, not for the worker. So we believe that that process is fundamentally broken, but we absolutely compete with them for eyeballs around job seekers.

The other side of the equation is sort of around the financial tools, I mean, a little bit Mint, right, and other PFM tools that show income, but I also think that, you know, companies like those can be great collaborative partners for us because we have that particular focus on one specific element of the equation which is income which can lead to a lot of other things over time. So I would say today, we’re sort of a hybrid and we’re competing a little bit against those sides of the equation for eyeballs.

Peter: Okay, so last question, you’ve touched on some of these things already, but I’m curious about how you view your company in the long term. So what are some of the things….when you sort of talk to investors, you know, talk to other people, what do you say….where’s Steady going to be in five or ten years time?

Adam: Yeah, what I’d say is this, if you are not a highly skilled worker that’s doing one particular item over the course of your career…so if you’re not a data scientist, if you’re not a developer, if you’re not a college professor, because I think even teachers….there’s a ton of teachers on our platform, so if you’re not in a highly paid, highly skilled work environment, Steady is the place that you go to earn and to….your primary source or path to go to earn and prop your income.

Hopefully, to get into the point as well, we’re helping in some aspect in the financial services world, but to the extent that we are in a position where we have millions of users on our platform, okay, and where we have all the transactional data, all of their work data so everything that would see in a CV, a ton of other micro interactions that are happening with the user. We’re going to be in a position where we’re going to be able to curate work opportunities night and day better than anyone else and there will be no reason for them to go anywhere else.

The other thing that happens once you get to that point is we do build a sense of community, right, so the way of the 20th century union, unfortunately or fortunately, whatever side of the equation you’re on is going by the wayside, but in this sense you build a platform with a tremendous amount of data that you have and you have the ability to effect change that can help that element of the population. So a lot of initiatives around advocacy, other type of things that we can do that will become more and more powerful as our platform that are certainly on the horizon.

Peter: Right, well it’s a fascinating idea and I certainly wish you all the best, Adam. Thanks for coming on the show.

Adam: Thank you so much, Peter, appreciate the opportunity.

Peter: My pleasure, see you.

Adam: Bye.

Peter: It’s interesting to me because it really is a pretty simple idea, what Adam and the team are doing, but it’s interesting that no one has focused on this community of people this way, and, clearly, they have some pretty significant needs. You know, it strikes me that we all have 168 hours in a week and how we spend that dictates kind of how much we are able to earn and what I love about what Steady is doing is that they give people ideas for maximizing their earnings.

Say you’re willing to work a second job for ten hours a week, a lot of people don’t give that much thought and might just say, oh, I’ll just go and drive for Uber or Lyft or something and that will suffice, but what Steady is saying, let’s think about that, let’s try and maximize those ten hours to the utmost. You know, if they end up getting traction this is going to be a very interesting segment and I imagine there will be a lot of companies wanting to partner with Steady to get access to these kinds of people.

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 Experian’s Clarity Services. Clarity’s suite of FCRA-regulated reports and predictive scores yield significant insight into a consumer’s financial behavior throughout the alternative financial services industry. Clarity delivers data-driven risk management solutions that address prospecting, credit evaluation, fraud detection, portfolio management and collections. You can learn more by visiting clarityservices.com/solutions.

 

PODCAST TRANSCRIPTION SESSION NO. 182 / DAVE GIROUARD

Welcome to the Lend Academy Podcast, Episode No. 182. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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Today’s podcast is sponsored by Experian’s Clarity Services. They are the leading sub-prime consumer credit reporting agency providing innovative risk management solutions to address the full consumer credit life cycle. Clarity leverages the combined power of the largest and most comprehensive alternative credit data source with traditional bureau data to provide a more complete view of the consumers’ credit behavior. Clarity is committed to providing products that address rapidly changing market conditions. You can learn more by visiting clarityservices.com/solutions.

Peter Renton: Today on the show, I’m delighted to welcome Dave Girouard, he is CEO and Co-Founder of Upstart. Now Upstart have been around for several years, we actually had Dave on the show back in 2014, just over four years ago and I wanted to get him back on because Upstart has been making some really impressive progress.

They’re now a profitable company, they have taken on several bank partners which we talk about in some depth. Their bank partnership model is somewhat unique and we talk about the No-Action letter with the CFPB, we talk about their approach to underwriting and automated underwriting and Dave gives us his perspective on the competitive landscape in the personal loan market and we talk about what’s in store for 2019. It was a fascinating episode, hope you enjoy the show.

Welcome back to the podcast, Dave!

Dave Girouard: Great to be here, Peter.

Peter: So people know about Upstart pretty well, you’ve been around for some time and you’ve been on the show, it was four years ago, but you’ve been on the show before, maybe we get this started by just telling us a little bit about your year. I mean, we’re recording this in late December and just give us a little bit about…how has 2018 been for Upstart?

Dave: Yeah, 2018 has been a great year for us, a lot of focus on the fundamentals of the business and you know, for us that kind of always starts with the performance of the credit and with all of the sort of unique approach we take to credit, we’ve definitely moved the ball forward pretty significantly on that front and have been super happy with our credit performance. It means unit economics, you know, so we’re actually generating new profits from loans and that’s also moved forward quite quickly and then, of course, after that growth.

So we’ve doubled in size roughly during 2018, a little bit more than that; we’ve also crossed into being a profitable company. So Q3 of 2018 was our first fully profitable quarter from a gap and a cash perspective and we’re hopeful of the 4th quarter, which is not quite over yet, will be the same. So we’ve kind of reached critical mass, but the growth level’s great and we’re kind of launching a lot of new initiatives, working with bank partners, we’re going to open a second office for R&D so it’s just a lot of things like that going on, but, generally, for us it’s just trying to shore up and strengthen the business. I feel like 2018 was a great year for that.

Peter: Right, yeah, that’s great. So I’m curious, you stuck to your knitting here, your unsecured consumer loans…that’s what you’ve been doing from day one and you’ve seen many others in the industry launch new products in different verticals and you’ve decided to stick with the unsecured consumer loans, at least for now anyway. So how do you view some of your competitors doing different things? Do you feel like the monoline business that you have is still the way to go?

Dave: Yeah, well I think nobody necessarily wants to be a monoline business forever, but I guess our viewpoint has always been you want to expand from a position of strength where really you have incredibly successful monoline that provides the foundation or the launch pad to do something bigger. And we’ve been very….you know, I just say conservative in that decision making process because first of all, it’s a very small market share and in unsecured personal there’s so much room to grow without moving.

So, obviously, as we just think about what’s the best path forward, it’s obviously easier to add more features and capabilities. We had a trap of borrowers in the product wherein….but, having said that…and I should also add, I mean, there are a lot of companies that have announced products. There’s not a huge track record of companies moving beyond their original product and seeing great success. I mean, certainly, SoFi did super well starting in student loans, launching their personal loans later, that’s probably a notable success, but, you know, for the most part, despite a lot of efforts to expand, it’s not been easy for a lot of the players in the market to do that, so we’re cautious about it.

Because we have a model of partnering with banks, we’re also potentially going…we’ll have products that we work with bank partners on that may or may not end up being in our consumer business; we’re in the testing process with credit cards with a bank partner. So we do see our platform as an origination platform that will certainly work across various consumer products, some may or may not be part of our consumer offering, but we are already, you know, into a second product and would expect to probably be into a third product during 2019 as well. But, I think, it’s fair to say, we’ve stuck to our knitting and really wanted to make sure we have our core product working really well.

Peter: Right, right, fair enough. You just mentioned your bank partners and there’s only been one publicly announced deal and when we chatted a few weeks back, you said you actually have signed five different banks but only one is actually publicly available, as far as announcements go. So why don’t you just tell us a little bit about the BankMobile deal and you announced the deal, I think it was about a year ago, and why don’t you give us an update on that particular partnership.

Dave: Yeah, so that’s been a great partnership for us to help launch the business. They’ve been a great partner, they actually kind of have two distinct banks. BankMobile is a consumer mobile-only brand and then they also have the kind of parent bank, if you will, called Customers Bank and they actually both have programs with Upstart. So it’s been a great, you know, founding bank partner for us. We are beginning to refer people who come to Upstart to a loan to our bank partners so in addition to seeing the Upstart loan, Upstart-branded loan, that people have seen for several years now, they’re beginning to see loans from bank partners like Customers Bank or BankMobile.

That’s a model we’re really excited about and have worked on with this particular partner so they’ve been great, and, of course, getting the first one off the ground, it wasn’t without, you know, a few stumbles here and there. But, generally, it’s been a good partnership and we value them very highly and you just have to also give some kudos to anyone who’s willing to be first, you know, it’s a brave new world how fintechs and banks are working together.

In the early days, you want the banks that like being first because, frankly, most are going to say, you know, who else is doing this so getting that first few going really is the big challenge. As I said, we actually have signed five other banks, in addition to the Customers Bank or BankMobile partnership, so we expect to be rolling them out during 2019, but we’re taking it very cautiously. It is, of course…banks are very conservative institutions, rightly so, and so we absolutely want to make sure these partnerships go right.

Peter: Right, so tell us…I want to delve in a little bit into the….you just talked about the BankMobile branded offering, tell us a little bit more about that and how it works and the offering that you’re providing for your customers. I mean, are you sending people who just come to Upstart through a different funnel or offering or how does it work?

Dave: Well, let’s just say piece number one of our bank partner model is really a white labeled application that includes the entire origination process with all the embedded machine learning models around fraud and credit scoring, automation, etc. in a white label fashion, but where the bank can really control and determine their own credit policy so what type of products they want to offer in terms of fees, rates, durations, what their credit box looks like. So it’s really intended to be the banks’ policy, the banks’ product; we’re really just providing a lot of the plumbing and the pricing engine and the fraud engine, etc. within that. That’s the sort of white label product.

Part Two really is we can help those banks acquire customers. We have a model that tends to be leaning heavily toward millennial age borrowers, it’s a great demographic. We’ve done a lot of acquisition through various channels to upstart.com and now we can begin to actually direct some of that traffic to our bank partners who, I think, value that demographic and it just sort of completes the equation for us. So the white label product really is….you know, essentially, you think of it as their channels, their distribution, but additionally, through our kind of referral platform we can bring customers to them.

Peter: So you’re bringing customers to them. So you’ve got BankMobile, do they have a consumer loan offering that people going their site, or are you just sort of referring people that come to Upstart?

Dave: It’s really both. Yes, you can go to BankMobile and get a loan from BankMobile. It’s an Upstart-powered loan and you see our logo at the bottom of the page, it’s a very familiar experience if you know us, but it’s their channel, it’s their customer, etc., but we can also refer people from our website to bank partners and that’s increasing. That’s probably….you know, as of last month, somewhere between 5 and 10% of our loans that originated via upstart.com actually went to bank partners, rather than to the original Upstart-branded loan that we’ve had for four years now.

Peter:  Right, right, got it. So let’s talk about your loan book, I know you’ve already mentioned that you’re pretty happy with the way losses have been trending, maybe you could give us a little more color on that and what’s the size of your loan book these days?

Dave: We’ve been originating since May 2014 so I guess that puts about 4.5 years, it’s all unsecured personal loans, all US-based business and it’s about $2.8 billion in loans thus far. You know, they’re, unsurprisingly, probably about $12,000 on average or something in that range so, you know, it’s maybe $230,000 in total in the loans. We’ve been nationally 3-year and 5-year, we have a small test in 7-year.

The majority of our book is actually 5-year, so that’s kind of, roughly speaking, what it looks like. Our borrowers tend to be younger than you see in a lot of other platforms, the average borrower being probably 28 or 29 years old, in that range, and I think our credit model and our platform itself sort of have an advantage in that demographic which tends to just…..it doesn’t necessarily mean we target them per se, but we have a competitive advantage due the nature of the underwriting model that attracts that demographic.

Peter: Okay, we’ll get into that in a little bit. So just on that, do you think that’s the reason that you’re attracting those people? Is that really because they get a better deal, or others find it difficult to underwrite, I’m just trying to get a…what is different at Upstart that seems to skew to a younger demographic than say at Lending Club or Prosper or SoFi?

Dave: Sure, well we have a lot of information we use in our model and what we’re known for from a very early days was using education-related data, highest degree of education obtained at schools somebody went to, the area of study, things about their work experience, the industry they’re in, the company they work for and that’s kind of a small part. But, on a relative basis, the credit data which is absolutely part of our model…in fact, we use full files from two different credit bureaus in our core model, but on a relative basis, it weighs less, it’s less strong in the model than it would be for almost any other lender.

And that kind of means we’re un-correlated to how others underwrite oftentimes and for a certain demographic, you know, well educated, younger, with a thinner credit file, very often they’ll find Upstart understands them better, can underwrite them better and therefore, will offer them a better rate. And that’s the heart of our model, it’s just knowing more about the borrower, not necessarily just this demographic, not just about education, but having a more complete 360-degree view of the borrower allows us, in our view, to generate some advantages in underwriting

Peter: Okay, so then…I know you guys were pioneers when it comes to AI and machine learning. When you’re creating your model….the model that you have in existence today, I presume that’s all built around that kind of technology, I guess, so tell us how it’s changed because one thing about machine learning is it’s best when it works with huge amounts of data and when you’re getting started it’s hard to have huge amounts of data, so tell us how that’s evolved over time.

Dave: Yeah, that’s absolutely true. You know, when you begin to use these technologies in the earlier stages, I mean, at the beginning you have no data, you’re really using third party proxy data to build Version 1 of your model and, of course, any lender has to do that to get started. Beyond that, you begin to generate performance data and, of course, you need a significant amount of it and seasoned loan, etc. I would say, generally, that we feel like our model really found its footing in terms of just really reaching critical mass of data and really learning super quickly in the last year.

You know, we have thousands of payment transactions happening everyday now and the model is learning super quickly. That’s sort of the core of the machine learning model is every time a payment transaction happens, whether that’s an on time payment a delinquency, a pre-payment, etc., the model just gets a tiny bit smarter. Now as that data accrues, the model is getting smarter, you can begin to introduce more sophisticated techniques that really weren’t feasible, you know, when you had half the number or tenth the number of transactions to model or to train on.

So what we’ve really seen over time is we went from a fairly simple model to one that’s more sophisticated and over time we just see opportunities to create even a tighter fit in the model by upgrading various aspects of it. It’s not a singular model, it’s really an ensemble of different models that come together to create one unified model. There just continues to be more opportunities.

Just to give you a single example, I mean, we’re working on right now…every lender has a timing curve they associate with their models for, your know, for their 3-year product, for their 5-year product, where there’s an opportunity to actually build a completely custom timing curve for every single loan and create a lot more accuracy in doing that. That’s a fairly far reaching concept, the idea of having a custom timing curve per loan, but we have fairly strong evidence that it will create a much more accurate model and these are the kind of things that get our data science team excited.

Peter: Interesting, really interesting. So then how are now approaching automation because you’ve built this great model and you were formerly with Google and many others from Upstart have come from Google with obviously…very strong on the technology side. Automation is something that I know is….no one’s really been able to crack it in the consumer space and I’m curious about what your approach is to automating your underwriting and what percentage of your loans have a human involved or what percentage is it completely automated?

Dave: Sure, so on the sort of rate decisioning, the offer of credit or the decline, that has been always, since the beginning, a 100% automated so there is no human intervention involved in deciding whether we can offer somebody a loan and what size loan, etc., or whether there is an adverse action notice and we need to decline them so that process is always been 100% automated. The interesting part comes….you know, when someone’s approved for a loan and they decide to move forward, what is the sort of steps that have to happen between then and when they can receive the funds and this is where…..we’re not, of course, alone in this, every lender wants to make that as smooth as possible.

In our first couple of years, our rule is very simple, we verify 100% of everything and that means we have to make sure of the identity of the person is true and accurate, we have to make sure their income statement is accurate; in our case, the educational background they stated is accurate. And so we quickly began to bring in automated ways to do that behind the scenes, but they never had full coverage, so, invariably, almost everybody would have to upload two or three documents. We had a phone call with every single borrower which was just a verification call as a sort of belts and suspenders check on everything.

We did this for the first…oh, I don’t know how many, but two to three years of origination and then at some point, the degree of automation now became such that we’re very close to people that had almost everything entirely verified before they even took a step. It was done behind the scenes in a few seconds so we decided to build models that would say, okay, if we know these nine things about this borrower, what’s the likelihood that that tenth thing is true and if it is or isn’t true, how much does it matter? So those two questions which are sort of intuitively interesting questions, you can build really sophisticated models around.

So at the end of 2016, about exactly two years ago, we began to have a model that would say, can we instantly approve this person right now? So think of it as you request your rate, you like this rate so you say you want to move forward, you give us your social security number, you connect your bank account and this will say, great, you’re approved, accept right now. So that sort of in-session instant approval for us didn’t exist until December 2016, so exactly two years ago and to a very small test for very small loans, we began to AB test that and the obvious thing is we knew they would convert better. What wasn’t as clear was how would the credit perform so we really started it at a small scale and then extremely slowly rolled it out as the models have improved.

If you fast forward to today, about 2/3 of our loans, not quite, between 60 and 65% of our loans this month are approved in-session immediately without the borrower doing any sort of upload or phone call or anything and that’s up from 0% two years ago. The good thing about that is those loans convert about twice as much because basically when you can make it super easy, you don’t give them a lot of reasons to shop elsewhere. It’s a very positive effect. Lo and behold, the credit actually performs equally good as well.

So we’ve been able to do that while at the same time keeping fraud rates at super low rates. Our fraud rates are in the range of 20 basis points, if you include it all sort of what we call first payment defaults. So very low fraud rates, very high conversion rates and, of course, it does save money on the cost of originating a loan. So all of those are obviously great things, it’s just part of being a data science and technology-centric platform.

Peter: So the early AB tests that you did, has the credit always performed roughly equivalently or did you have to tweak some things initially?

Dave: I mean, sometimes there’s very subtle small differences, nothing that caused us to go backwards in any sense, but if we would see things that are in the order of like five basis points or something, we would learn something or the model would see a trend that would allow it to….you know, generally speaking, we would observe, upgrade the model, observe some more and then sort of basically loosen the reins a bit over time. So I think if we had just turned it on full blast the first month, frankly, would have been irresponsible and God knows what would have happened…

Peter: (laughs) Right.

Dave: …so we very purposely were putting the scientific method to practice to figure out how to make sure these models were sound and that could…of course, when we started these were loans that we were balance sheeting ourselves so we, of course, weren’t putting our loan buyers at risk in the early days. That’s generally the way we roll is we want to test things quickly, we like to be able to do some of that on our own dime and then bring it along as an advance for our loan buyers and then eventually, to our bank partners, which hopefully benefit from all this downstream.

Peter: So then when do you think…or do you have a goal to be 100% automated at some point?

Dave: No, we don’t anticipate being 100% automated, there’ll always be…first of all, there are just always bad guys out there and so some fraction of your traffic is just always going to be, generally, people trying to fool you one way or another. So where it ends is not totally clear, right, we feel pretty confident even by the end of 2019 we should be at about 75%. I think we intuitively believe, just based on the experience of seeing what sort of fraud rates really are out there that, you know, it probably won’t get higher than 90%, but we think we have a very clear shot to 75% this year and then how much it takes to close the rest of that gap is not entirely clear to us. There is still for us a long way to go.

Peter: Right, right, Okay, I want to just talk briefly about the No-Action letter that the CFPB issued. It’s over a year now, back in 2017, and this was the first time they’ve done a No-Action letter and I know that you guys have always been pushing the envelope on using alternative data and different kinds of things we’ve already talked about, so from a commercial perspective, what impact has that had on your business, the fact that you have received this No-Action letter?

Dave: Well, I think, obviously, for somebody like us whose sort of main reason for being, if you will, is to further the notion of machine learning, credit use of alternative data, it’s really what’s special and unique about Upstart, making sure you’re doing it within the law, is very central to our existence. Our view, generally, is the types of technologies we’re building will be used in a decade across all flavors of lending, not just unsecured personal but cards and mortgages and business lending and real estate lending, etc. So it’s just fairly obvious to us that ultimately computers are going to do this better than the human can and there’s enormous winds across almost any type of credit business in the use of these technologies.

Having said that, you know, it’s really hard for regulators to keep up with that and we wanted to really be out there first and say, at least in the U.S., the pre-eminent regulator with respect to consumer protection, the CFPB was really there. We kind of opened the kimono and said, what we’re doing is number one, very good for consumers. We’re making credit, more affordable credit available to more people, we’re actually lowering rates and having higher approval rates than a traditional credit model would for any demographic you can name.

And so we felt very good about what we’re doing and, fortunately, found in the CFPB, who has a new name, by the way, now (laughs), but, in any case we found them to be receptive to the idea. You know, they also wanted to learn and see where the new world of lending was going and that was 2-1/2, maybe almost 3 years ago now that we’ve began with them.

So for us it really says, look, this stuff is not scary or wrong or illegal; it actually improves access to consumer credit and the regulators have looked carefully at it and we’ve come to an agreement with the regulators about how to build these models properly and how to monitor  them and report on them to make sure they don’t end up in violation of fair lending laws.

So it was really important for that reason, it gave comfort to our loan buyers, to people that would buy bonds in our securitizations and, ultimately, to our bank partners who were all going to be looking towards these types of models. So we’d like to think we did the industry some good because we certainly won’t be the only type of lending platform using these types of models and breaking some ground, paving a bit of road with regulators, I think, is hopefully helpful for a lot of others.

Peter: So then do you have ongoing contact with the CFPB? Is there like a regular reporting, monthly/quarterly reporting type thing that you’re doing?

Dave: Yeah, it’s a little more machine to machine, if you will, in the sense of our system has to generate a report that is dropped to CFPB quarterly. So we do that for reporting requirement, we have to run certain tests, a waterfall of test to ensure that our model’s compliant. So it’s sort of a standardized process at this point, if you will, so we’re friendly with them.

I wouldn’t say we’re sort of actively trying to dig to the next level of anything, but we have an agreement with them that obligates Upstart to report to them regularly. We’re also beginning to do that on behalf of bank partners so if we’re helping them originate credit using our system, they want to have the same sort of coverage so that’s another aspect to what we’re doing.

Peter: Right, right, got it. So I read recently you opened up a new office in Columbus, Ohio. Obviously, there’s many Bay-area companies doing this these days, going out to less expensive locales. I’m curious, why did you choose Columbus and what’s the office actually going to be doing?

Dave: Sure, let me first just say, as a University of Michigan graduate, it’s about the last place I would have started (Peter laughs) and I think when we announced it my Michigan friends thought it must have been some sort of cruel joke or something or that I was taken hostage or something of that nature, so, yeah, I had resisted this a long time.

When I was leading quite a large team at Google, I had teams in many parts of the country, as well as, frankly, the world and I kind of knew the tax you pay in having engineering teams, software development teams, etc. in various parts of the world trying to coordinate. It’s not trivial, so I really avoided it for a long time here and finally realized, you know, growing to seize the opportunity in front of us here in the Bay Area is just really going to be difficult.

It’s just so much competition for so few software engineers and data scientists, so we finally sort of came to the conclusion several months ago that it was time. We really needed to look beyond the Bay Area, there’s so much talent out there that for many good reasons don’t want to live in the Bay Area. So we began to really think about where there was sort of a mismatch of available talent, but without the Facebooks and the Googles and the Ubers hoovering up every really strong data scientists or engineers because that was really what we wanted to avoid, just heading out to another market where the competition may not be the scale of Silicon Valley, but felt the same and Columbus really fit the bill for us.

I mean, enormous amount of talent there, it’s actually the second largest city in the Midwest after Chicago, a huge and talented university there, as much as I hate to admit that (Peter laughs) and just a place where we can have data science and engineering as well as operations, there is a huge wealth of financial services talent in that area for lots of reasons, also banks there, a lot of our bank partners we’re talking to and working with are in Ohio.

Probably the clincher for us was I got a guy named Grant Schneider who was one of our first and most talented data scientist, actually has spent the prior ten years of his life in Columbus and did want to move back to the Midwest with his wife and his young family.

To me, that was actually a formula for success at Google, not that you just pick the city and try to whip it into an office, but that you actually had a leader who was ready to go transfer the culture, make it a success and we have that in Grant. So when we put it all together, for us, Columbus made a lot of sense so we’re going to be up and running there in just a few weeks and have our first handful of employees there even before end of January. So it’s a good start and our hope is it’s going to help us build this team faster and pursue a lot of the opportunities we see in front of us.

Peter: Right, you probably have a bunch of Ohio State fans, I imagine, that’ll be coming to join your firm, that won’t bother you? (laughs)

Dave: You know, sometimes you just have to swallow the pill, but, in any case, I’ve made my peace. I did promise that if I ever go to a game in the horseshoe, I will be wearing Maize and Blue so that I will certainly hold true to.

Peter: (laughs) Okay, okay, we’re running out of time, just a couple of more things before we go. I’d like to get your take on the competitive landscape today when you’re talking about personal loans and….obviously, we’ve seen banks enter the space, even Marcus in the space; we’ve also seen some of the online lenders fall by the wayside, so when you’re looking at…what is your perspective now on the competition that we have between…obviously, you’re working with bank partners, but you’re obviously aware that banks are competing as well, so how do you view the space, who has an edge and what’s your perspective?

Dave: Sure, so I guess my overarching statement would be….you know, it’s a conclusion we came to a couple of years ago…was that banks will, for as long as any of us will be around, will continue to dominate consumer lending in the United States. There will always be non-bank parts of the market, but generally speaking, there are advantages with respect to cost of funding, permanence of funding, etc. are so significant that for us the choice was either number one, become a bank, or number two, partner with banks and we chose the latter. So that’s my first statement, we are big believers that banks can and will be around.

There may be a lot of changes in market share, some banks may not change with the times and not do as well as others, there may be completely new banks formed out of nothing and certainly some are trying to do that and that can all be true. But, generally speaking, it will be banks who dominate consumer lending.

Number two, you know, with respect to more competition, there are certainly no shortage of it and we know a whole bunch of banks are going to launch consumer lending programs in 2019. I generally think that if you have the same credit model, the same distribution, roughly the same funnel as everybody else, it’s going to be pretty damn hard for anybody, including any bank, to do anything meaningful in this market. It’s become obvious to us that you need to have an edge, you need to have something about your business that is completely distinct that you can build on and accrue value to over time.

You know, for us it’s automation in the credit model, in the machine learning, and, you know, others have different approaches and some are really experts in capital markets for example, but generally speaking, if you don’t have an edge, you can put a program out there, but it just may be not very impactful to you. So our view, generally, is …I don’t worry about, you know, the number of competitors out there; what I worry about is anybody getting ahead of us in the areas that we consider vitally important?

For us, again, the automation, the modeling, and we don’t see that so we feel good about that position, but I think everybody in this industry, bank or non-bank, have to took at themselves and say, you know, what’s the podium we’re going to stand on, what’s going to make us very different from the 50 others in this industry? If you don’t have a good answer to that question, you know, I think it’s only a matter of time before you got to give up, but everybody has to be honest with themselves and say, what can we do that’s unique and different?  We feel good about that.

Peter: Right, good points, good points. So last question then, what are you looking forward to in 2019? What does 2019 hold for Upstart?

Dave: Well, certainly, the area that we haven’t done nearly as well as I would have liked is building our team. I mean, our headcount plans for 2018, we frankly came woefully short of …which is it partly the inspiration, if not all the inspiration for the Columbus, Ohio office.

So, first of all, we really have to be better at building and growing the team faster and we’re really focused on that. There’s just so many things, we have such a backlog of opportunities, of things we want to do if we only had another 20 or 30 data scientists or another 30 or 40 software engineers, etc. so that’s really the number one focus for us and I feel really good about that one.

So I think making our first bank partners successful is enormously important to us and we’re pretty much going to put everything we have to behind making sure those that take the risk with us, that are early players in this round of partnerships, that they don’t burn their fingers, that they aren’t made to look bad. So that’s going to be hugely important for us in 2019 and getting other products out there. We have been, as you rightly noted, very monoline-focused, but there’s certainly more we can and should do and I think 2019 will be a big year for that.

Peter: Okay, we’ll have to leave to there on that note. I appreciate your coming on the show today, Dave.

Dave: Peter, it was great to speak with you.

Peter: Okay, see you.

Dave: Bye.

Peter: You know, the personal loan market, I would say, is more competitive today than it’s ever been. Dave and I were just chatting after I hit the record button to stop recording that, he said that if banks are going to come into the space and they create an online funnel for their loans and if it’s like 10 or 15% more friction than one of the top platforms, they’re going to get very little business because there are so many good options out there now for people.

I think what the online lenders have taught people is that we want efficient funnels, we want things to happen quickly and we want it to be easy and if it’s not that way …these days you’ve got very little chance of becoming a successful operation. I think, along with that, you need to do all the other things right, as far as customer acquisition and many other things, it is not a simple business and it is very competitive and you need to have something unique, as Dave said, about what differentiates you from everybody else.

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 Experian’s Clarity Services. Clarity’s suite of FCRA-regulated reports and predictive scores yield significant insight into a consumer’s financial behavior throughout the alternative financial services industry. Clarity delivers data-driven risk management solutions that address prospecting, credit evaluation, fraud detection, portfolio management and collections. You can learn more by visiting clarityservices.com/solutions.

 

PODCAST TRANSCRIPTION SESSION NO. 181 / JAMES GARVEY

Happy New Year, everybody and welcome to the Lend Academy Podcast, Episode No. 181. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s podcast is sponsored by Experian Clarity Services. They are the leading sub-prime consumer credit reporting agency providing innovative risk management solutions to address the full consumer credit life cycle. Clarity leverages the combined power of the largest and most comprehensive alternative credit data source with traditional bureau data to provide a more complete view of the consumers’ financial behavior. Clarity is committed to providing products that address rapidly changing market conditions. You can learn more by visiting clarityservices.com/solutions

Peter Renton: Today on the show, I am delighted to welcome James Garvey, he is the CEO and Co-Founder of Self Lender. Now Self Lender is a fascinating company, they are doing something really unique in the lending space insofar as they’ve created a product that helps people with no credit score, or poor credit score, helps them build their credit fairly quickly and fairly painlessly. They do this through a unique product that they’ve partnered with a bank to produce. We go into the mechanics of this in some detail.

We also go into really who their target market is and the needs of this market, we talk about how they’re able to find customers. We talk about the stats behind the increases in the credit score from their customer base, we talk about the future products that they’re coming out with and we talk about what the future holds. It was a fascinating interview, hope you enjoy the show.

Peter Renton: Welcome to the podcast, James!

James Garvey: Great to be here, Peter.

Peter: Okay, so I’d like to get this thing started by giving the listeners a little bit of context, a little bit of background about yourself and what you did before you started Self Lender.

James: Yeah, so I’m a software engineer by trade and I spent most of my career working in online direct marketing. I’ve had two companies that I’ve started and co-founded and then ended up selling and both helped large companies and are now at scale. So, you know, I come from the space from a totally different angle.

Peter: Interesting, so then what was the idea, what was the germination of Self Lender?

James: So I got married and my wife and I, we decided to take a couple of months off and we were in Argentina and I thought I’d set up my credit card on auto pay. Two months into my billing cycle, I realized that I made a mistake and that wasn’t scalable on auto pay and I hurt my credit score. I was trying to understand how this credit really worked, you know, how does it actually work in the U.S. I’m not from a financial services background so I just started digging in, doing research and the more I read, the more I realized that I know nothing about payments or credit bureaus or anything, and that’s when I discovered it hurt so many people that either don’t have a credit score or are below credit score.

So I’m trying to understand how do people solve this problem today and what I’d find out is secured credit cards are, you know, typically the way that somebody’s going to solve that problem if they can’t get approved for a normal credit card. So, you know, you go to a big bank, you deposit $500 and they give you a credit card that’s secured by this money and that the challenge is number one, you have to have that $500 which is a hard problem that lots of people have and number two, if you need that money back then you have to close down the credit card.

So it’s a complicated problem and there’s really not a lot of good solutions for building credit for people that are either new to credit or people that are rebuilding and so I saw some credit unions doing something interesting. Some of the credit unions that I looked at are….when you walk in the credit union, you make a $500 deposit, you can make your $500 loan that’s backed by the deposit.

Now that’s not going to solve the first challenge of coming up with the money, but it does solve the problem of, okay, while you’ve got these installments, you have a start date, you’ve a stop date, you have equal payments…that makes sense, but the problem with that model is you have to have the money.

So the idea for Self Lender was what if I could partner with a bank and basically make you a loan where you have to put the money into a brand new CD, so it’s basically like a small $500 loan, a 12-month installment loan at roughly 10 to 12% interest, where that money goes into a $500, 12-month CD that pays you a tenth of a percent of interest. So the idea is that we’re lending you money, you have to save it and the beautiful thing is your start date or stop date, that equal payment, it feels really like a savings plan that builds credit and not like a CD-secured installment loan which is really difficult to save.

Peter: Right, right, I get it. So let’s just dig into the process there for a second. So someone comes along to Self Lender’s website and I see build credit while you save, and you get started and you basically choose how much or whatever. You said you create a CD, a savings product so someone says…..let’s just take that example, so the $500 example you just gave, what do you actually do? That money is deposited with a bank account before anything else happens? Tell us about the sequence of events.

James: Yeah, so what happens is behind the scene we have a couple of bank partners and the action is number one, we’re going to lend you $500 as a 12-month installment loan and the lender is our bank partner, they’re the true lenders, and then the money of the loan proceeds are immediately deposited into a freshly created FDIC-insured CD in the customer’s name. So in the loan documents there’s Truth in Lending and Truth in Savings, it’s from our bank partner to the customer.

So Self Lender is the technology arm, Self Lender is the servicer and we are also the system of record so we’re behind the scene, there isn’t a Fiserv behind the scene, we actually build our own core processor.

Peter: Okay, so then someone comes along, the $500…the bank loans them the money, but they don’t send them the money, they open up a CD in their name and so then the person is paying back monthly. Are they paying back the bank monthly, how does that work?

James: Yeah, that’s right. So what’s happening is the customer is making a payment on a fixed schedule that they agree upon when they get started and those payments are being serviced by Self Lender. So Self Lender behind the scenes ….you know, we are creating the (inaudible) file that gets uploaded to the (inaudible) reserve. We don’t move the money, but we do move the data and so the money is being pulled from the customer’s account either through ACH or through a debit card.

What happens is as the customer repays the loan, they’re paying down the loan, but yet the CD is slightly growing over time and so at the end the customer has paid off the entire loan and then simultaneously, the CD a unlocks and then the customer gets the money either via ACH or through check.

Peter: Okay, at the end of the loan term is there a rollover or can they choose to take the money back? What happens after the period’s over?

James: So when we first got started, you know, we created the experience to really have a start date and stop date and it really is like you pay it off, you get the money, end of story. That’s how it is today and it’s not a great experience that way and so that’s going to be changing in the future, but as of today, you get the money, congratulations, your credit score is probably up and we give the customers their credit score on a monthly basis so they can actually track that over time. So they are getting some education stuff, but they’re not getting the other financial products other than our flagship product.

Peter: Okay, so I’m curious…you said you’ve got a couple of bank partners. I imagine this is somewhat of a creative idea that….it’s not like everyone else is doing this, you’re the first one that I’ve seen that has this approach so how did those conversations go? How are you able to get those banks on board?

James: Yeah, I’ll tell you it was really hard. (Peter laughs) When I got started, I met with 60 banks.

Peter: 60, six zero?

James: 60, yeah, six zero, and it was really tough because if you don’t speak the language that they want to hear, nobody’s going to take you seriously. And so when we first got started, I found a tiny bank based in Austin, Texas that was willing to work with us and so what I did was, my wife and I….from San Francisco to Austin so we could be physically close to the bank as we’re building everything out, and it was incredibly valuable for us. It would have been a lot harder if we hadn’t done that.

So once you get your first bank partner, it’s a lot easier to get the second and third and fourth and so on, but the first one was extremely tough. In our case, as you said, like there’s no capital at risk here, but you do have operational risk, strategic risk, compliance risk, reputational risk, you know, it keeps going on and on.

So one of the things that we did early on, which is kind of rare for most startups, is we became SSAE 16 SOC 1 compliant which is called SAS-70. It’s a set of controls that allows you to prove to third parties that you do what you say you will do; yes you have encryption, yes you did background checks, you have a written process and procedure for banks, that kind of thing and that was really helpful as we were getting started. If we hadn’t done that I think it would have been really tough

Peter: Okay, okay. So then let’s talk about the customers that come to you. You’ve starting to get some traction and I’m curious to know like who are these people? Are these all millennials, are they immigrants, like I presume many of them either have no credit score or obviously have a low credit score, but tell us a little bit more about the people who are coming.

James: Yeah, so today, most of our customers are people that are rebuilding, you know, only a fraction of them are people that are establishing credit for the first time. We have customers in all 50 states, we have concentration around the normal states that you’d expect and what we’ve seen is about 70% of our customers are typically below 35, so we have a lot of younger people that have either established credit or are trying to rebuild with Self Lender.

What we’ve also seen, which is kind of interesting, is based on the Facebook data that we have, we’re estimating 70% of our customers are women. We have a lot of customers that are African American and Latino background as well so it’s a really fascinating customer mix and what’s great about what we’re doing is we didn’t have a chief marketing officer, we didn’t have a marketing team until about six months ago.

So we have just naturally been able to attract a really great pool of customers that are all over the U.S. The thing that’s fascinating is, you know, our customers, most of them are not prime customers, but they don’t have a subprime mindset, you know, they’re coming to Self Lender, they’re making their payments and they’re doing this in order to build credit and save money which is kind of an interesting thing because you have to match with some self selection going on here.

Peter: Right, I was thinking that because the mere fact that they’ve landed on your website means that they’re interested in building their credit score. They’re not just a random person who may or may not care about their credit score.

James: Exactly.

Peter: So then on that, do you….I presume you say you do AML and anti-fraud checks and what have you, but can anyone sign up? Do you do any underwriting on the individuals who are signing up?

James: Yeah, so prior to the customer being able to apply, they have to go through the normal knowledge-based authentication, ask us the questions about their (inaudible) wallets, KYC, AML, but after that, you have to be 18, you have to have a social security number which means you’re either a citizen, a US resident or a non-resident alien. The one piece of underwriting we do though is our bank partners have wanted to do check systems and so the check systems underwriting that we do is ….have you committed fraud, basically; have you been reported as committing fraud, so it’s a very low percentage of people that are rejected. The very, very vast majority of applications are approved.

Peter: It’s good to hear. You’re one of the very few people we have had on here that can say that because obviously most lenders reject a large percentage. So then you said you’ve only been marketing for six months or so, but how have you been finding these customers, I mean, have you just relied on word-of-mouth and PR, tell us a little bit about the strategy to build your customer base?

James: We’ve relied mostly on word-of-mouth so we do all of our customer service in-house, we track net promoter score on a very, very regular basis and typically on that net promoter score on a weekly basis is in the 75 range so it’s really high and that’s the net promoter score, but between -100/+100 just to clarify. The customers have been really good at telling their friends about it and primarily because if you’re trying to build credit and you get rejected, it sucks, and there’s not that many options out there. I think that’s why the word-of-mouth has been so popular.

Peter: But you wouldn’t get repeat customers right, as you said most people, they take their money, I mean, do you get many people going through the whole thing again?

James: Yeah, we have some, you know, the repeat rate is not very high and it’s about 15% so it’s something that we understand. This is the problem with our model because we have to be able to graduate the customer into another product, something that can keep them longer term so, yeah.

Peter: Right, right, okay. And what stats can you provide about how much is this actually really making a difference? Say it’s a 12-month term and the person comes in with like a 500 credit score, how much difference do you make? What do they end up after the end of the 12-months with?

James: Yeah, so the one thing I want to say first is the data is reported as it happens so when a customer stops paying, as an example…you know, the payments are being reported to the credit bureaus as delinquent and so we do have customers that are delinquent as well as people paying on time so when customers are paying on time and they’re paying their other bills on time, the way we’re able to track that is we give our customers credit monitoring for free.

So when there’s new delinquency, new bankruptcy, new public record, you know, we’re able to track that and so that’s one of the reasons why we can say, well, if you use Self Lender and you pay Self Lender on time and you pay your other bills on time, we’re seeing an average impact of zero to 670, if you’re starting from no score. If you’re starting from a low score, we’ve seen about 45-point improvement and that’s typically in the 6 to 12-month time frame. But just to say it out loud, I’m telling you this on your podcast, you can look on our website, we don’t market it that way, because there’s some compliance challenges in doing that.

Peter: Sure.

James: We don’t want to be deceptive. At the end of the day, if you pay your bills on time and you’re paying the bill that’s reported to the credit bureaus, well, you’re probably going to have a better credit score at some point, like it’s a pretty simple concept there.

Peter: Right. So then it’s interesting to me that people would be delinquent because they’ve got cash waiting for them at the end of the cycle so can you share what sort of percentage you’re getting that are delinquent?

James: Yeah, it’s about 7%.

Peter: Okay.

James: So it’s not super high. One of the things we do is we have auto pay, you can make your payments anytime, make one-time payments and so we do have about 60 notifications that happen over the customers’ lifetime. You know, at scale, you’re going to have people that sign up and they make mistakes. It happens.

Peter: Sure, I know. That’s lower than I expected it would be, to be honest, because when you’re dealing with a population…..if they were taking out from some of the subprime lenders, they have delinquency rates in the 20’s, 25% or even more in some instances so that’s really more of a …..not a prime consumer delinquency, but like a mid-prime, near-prime consumer. I think that’s not a bad effort really. So then what’s your business model, how are you actually making money?

James: Yeah, the way we’re making money is firstly, we had to raise a bunch of venture capital so that we could build all this tech behind the scenes. You know, most banks are paying their software vendors about $100 a year in software to originate and service checking accounts, just from the software standpoint, not for marketing. That’s really expensive, like if you’re a bank you’d rather have one customer with a million dollars than a thousand with a thousand dollars any day, so we built our own tech underneath that originates and services these CD-secured loans.

Our cost to service is extremely low and our business model is pretty simple. These CD-secured loans on the loan side, is about a 10 to 12% interest rate and what we do is we work with our bank partners and we do a revenue share. So what that means is the customer has to actually pay for us to make money or for a banks to make money so it’s kind of a cool and fair arrangement where we all win; the customer wins, banks win, Self Lender wins.

Peter: Interesting, okay. So then I’m curious about…I read an article about you guys recently that talked about…you’re going to be launching a credit card in 2019. So it’s a natural product, I guess, but also is one that is fraught with more challenges, so tell us a little bit about what you’re planning there and how that’s going to work.

James: Yeah, so what we’re going to launch is a credit card that’s being secured by part of the customer’s deposit. So, basically, you join Self Lender and after say six months, you’ve been paying $50 a month and your CD is worth $500, but your loan balance is about half of that so you’ve got at least $250 of equity in your account is the way to think about it. So the cool thing about what we’re doing is we can give the customer a credit card where the credit limit is being secured by a piece of their collateral so it’s a natural graduation.

The customer wants…they’ve asked for it and it gives them some access to real liquidity that’s in their hands that they can use and we also have this relationship with the customer such that they have now a revolving relationship with us. If we do it right, we keep the customer engaged for the next decade. Now there are limits on this, of course, it is a secured credit card, but once we’ve built a pretty robust secured credit card program, we just have to raise more capital and bring in some super intelligent people to help us on that side of the business.

But, you know, we can build a big business even without unsecured credit and that’s what we’re really excited about. Our customers…many of them are not going to be able to be eligible for an unsecured credit card within the first year and so they are eligible for this product and that’s really why we’re graduating them into secured credit cards.

Peter: Okay, so in that situation too I can see that they’re making their payments on their Self Lender loan and their equity is increasing each time so their credit limit can easily increase. So, I guess, then at the end of the 12-month/6-month, whatever it is, at the end of the time period where they would typically get back that money, is that being held then at the bank and they say, right, you did $500 and now you’ve paid that all back, you’ve got your credit card, you’ve got your $500 credit limit, tell me a little bit about what are the plans once they’ve finished up their term?

James: Yeah, so we’re using all the same tech behind the scenes and it gives us the ability to say, okay, we’re going to do a secured credit card that has a minimum $100 line of credit. So if the customer wants to reduce that credit line, they can and still keep the card open. So that’s one of the core features that our card has and so that flexibility is what our customers have asked for and we think that’s going to be the really cool feature that they want, but it’s going to take us years to be able to figure out, okay, well, how do you think of those secured cards and turn them into unsecured. You know, it’s a lot more complicated than what we’re doing today because there’s no credit risk.

Peter: Right, right. So they can take a portion of the money back and keep the portion that will then be used so they can have a line of credit.

James: That’s right.

Peter: Okay, so than I’m curious…one other thing I read recently about you guys was around CRA, the Community Reinvestment Act, and how banks are…banks have requirements where they have to be CRA compliant, they have to be loaning money to underprivileged or to parts of society that are not very well served and it seems like you have a core customer base that falls…I would imagine completely within that community.

James: That’s right.

Peter: I’ve heard you’re talking with banks about this, I mean, how are going to sort of use your unique community because you have probably a very unique customer base in many ways, how are you going to use that to help banks meet their CRA requirements?

James: Yeah, this is the thing to understand. So our customers are low to moderate income, they are absolutely the kind of customers that will qualify for CRA credit. The challenge for banks though is many, many banks have a very small serviceable geographic region and I think that’s one of the reasons why the CRA, the people in Congress are talking about, or at least American Banker, are they’re talking about reforming CRA.

I think it’d be great if it could have a much larger distribution, but our customers are exactly right, you hit it the nail on the head here, these are people that are underserved, people that are low to moderate income and should absolutely be able to qualify for that. Now we’ve worked with one bank in a very small area to give them some data reports that we presume were offloaded to their regulators for CRA.

We haven’t heard back on the status of that, but we assume that they should be able to get the credit. At the end of the day though, the regulators have their own discretion on how that should be administered so we hope that there’s going to be some exciting changes in CRA in 2019 and hopefully we can play a small part in that.

Peter: Yeah, it seems to me everyone agrees that the CRA was written in the 70’s, didn’t even imagine the Internet would exist.

James: Correct.

Peter: So it’s in desperate need of updating and I think there’s general agreement that it should be updated, just how exactly it’s going to be updated, we’ll wait and see on that. Anyway, we’re almost out of time, but I wanted to get a couple of more questions in here. I am curious about the scale you’re at. When did you write your first Self Lender loan and how many have you done, what scale are you at today?

James: Yeah, the first one was about three years ago and I always put a caveat…you know, from the first year of the business, we only did about a thousand customers. You know, we were trying to make sure that everything is correct, you know, when you’re computing interest, when you’re computing fees, you’re responsible for a lot of the stuff behind the scenes we were talking about, banks want to be confident that we are doing what we say we’re doing. So we are doing today about …I will say, in 2018, we’ve originated over $100 million of these secured loans and we’re doing about half a million dollars today of new originations. So our expectation is in 2019, we will, at least, double that number so that would be about $200 million and $250 million. In total, though, we’ve originated about $150 million.

Peter: Okay, okay. So that equates then to well into the six figures, as far as number of customers, I imagine, right?

James: Yeah, about 200,000 customers.

Peter: 200,000, okay, okay, cool. Okay, so then we’ve touched on this and this is my last question, we touched on it to some extent. There’s a lot of ways you can take this, but I’m very curious to get, what is your vision for the future of Self Lender? What do you want to be in ten years time?

James: Yeah, yeah. So, you know, Capital One got started doing secured credit cards and what I want for Self Lender is to become the on ramp for responsible credit. We want to be able to be the biggest player and just affordable credit for people that are everyday Americans. We’re not going to serve the best customers in the market, we’re not going to serve the worst. We’re going to serve just no class Americans that just need affordable and responsible credit. In ten years, we’re going to have a company that’s got a lot of customers and hopefully, we’ll IPO at some point, that’s my boyhood dream. (Peter and James laugh). We’ll see.

Peter: Okay, on that note we’ll leave it there. Good luck with that, James, it’s certainly a noble cause that you have there, wish you all the best. Thanks for coming on the show.

James: Thanks, Peter.

Peter: See you.

James: Bye.

Peter: What I love about Self Lender is that they solve the Catch 22 that many people starting out struggle with where to be able to obtain credit you need decent credit. It’s a chicken and egg problem, whereas what Self Lender does is they solve that directly and they solve it in a way that’s creative and that really helps the consumer.

It’s really a “win win” for everybody involved and I think whether they get to national scale like James hopes, I really don’t know, but what I do know is that services like this are desperately needed. We need people to be able to get started in a responsible way and rebuild their credit in a responsible way and I think the service that Self Lender provides really does help do that. It does a lot to help promote financial inclusion in this country.

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 Experian Clarity Services. Clarity’s suite of FCRA-regulated reports and predictive scores yield significant insight into a consumer’s financial behavior throughout the alternative financial services industry. Clarity delivers data-driven risk management solutions that address prospecting, credit evaluation, fraud detection, portfolio management and collections. You can learn more by visiting clarityservices.com/solutions.

 

PODCAST TRANSCRIPTION SESSION NO. 180 / KEVIN TWEDDLE

Welcome to the Lend Academy Podcast, Episode No. 180. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

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

Peter Renton: Today on the show, we are talking about community banking. I’m delighted to welcome Kevin Tweddle, he is the Group EVP, Executive Vice-President, for Innovation and Financial Technology at the ICBA, the Independent Community Bankers of America. So I wanted to get Kevin on the show because you’re seeing more and more community banks doing interesting things in fintech that certainly…. the challenges they face in really integrating with fintech.

So I wanted to talk about these challenges and we also talk about a lot about the different partnerships that are happening today, particularly in the marketplace lending space. We talk about the attitude of community banks and how it’s changed when it comes to fintech and we talk about the changes needed for CRA, we talk about the fintech charter, really interesting that they’ve started a fintech accelerator so we talk about that and much more. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Kevin!

Kevin Tweddle: Thanks, Peter, happy to be with you today.

Peter: Okay, so I’d like get this thing started by giving the listeners a little bit of context and some background about yourself, so why don’t you describe what you’ve done, particularly before you started at ICBA.

Kevin: Sure, it’s always interesting to start with folks that are involved in innovation so my story is a little bit different than most. I’m a CPA so I started as a CPA, I worked in public accounting for about a decade starting out doing a variety of companies, but mostly, certainly, as you see banks and did M&A work, audit work primarily so started there.

After public accounting, went on to become the CFO of the largest correspondent bank in the US at that time, was called the Bankers Bank, and really got a nice opportunity. Two of those years, I was the CIO so really de facto COO for that institution for about five years. After that, went to a fintech startup called Bank Intelligence, so they provided pure analysis and market analytics primarily for community banks. We were extremely successful for a few years and we were acquired by Fiserv in 2007 and stayed on at Fiserv for about another decade and kind of worked in the analytics division within their banking group there for about a dozen years. Did a short stint with a company called Novantas in New York City and then joined ICBA in June of 2016.

Peter: Okay, so you’ve been at ICBA for a little while now, you have an interesting role there, but before we get into that, I want to just talk about the Independent Community Bankers Association, so obviously you’re focused on community banks, but what does ICBA do exactly and what’s your mandate?

Kevin: Yeah, so ICBA really…..it stands for the Independent Community Bankers of America so really our mission is we’re the nation’s voice for community banks, we’re 100% laser focused on community banks, really our mission is just to create and promote an environment where community banks flourish.

We do this really in a three-pronged approach; we do this through advocacy so on behalf of our community banks, education – providing education for all things for community banks and certainly in my role on the innovation side, you know, really bringing together those educational aspects, the partnerships necessary to help those community banks flourish.

Peter: Okay, so then how many members do you have, how many community banks are part of your organization?

Kevin: So really we represent certainly the interest of over 5,000, but about two thirds of all the banks in the US are members of the ICBA.

Peter: That’s a pretty good strike right there.

Kevin: It’s fully geographic really across the US, you know, pretty widespread.

Peter: Right, right, okay, So then you joined, it sounds like the ICBA with the idea of kind of bringing together a vision around fintech and helping community banks….you know, with the very fast changing world that we live in today, so maybe tell us a little bit then about what your role is, particularly how you view what you’re doing in the context of obviously what’s going on in fintech.

Kevin: Absolutely, you know, as I said, the focus for me is a new role, as you mentioned, for the ICBA. Really, we’re focusing on three areas, naturally, education, particularly for the community banking sector and really educating them in terms of innovation, what are the possibilities regarding fintech partnerships or things of that nature.

So doing that with (inaudible) media and publications and just interacting within the industry as well; industry conferences, working with the regulatory bodies really on that focus of education, certainly communication so really getting feedback from our community bankers, understanding their needs and their challenges, where they need the most help so to better frame where the opportunities lie and then certainly, partnerships.

So we have at ICBA corporate member programs, preferred providers, but really want to laser focus in on the fintech side, you know, what are the best fintech opportunities for our community banks. You know, Peter, that’s actually just kind of a dual thing, it’s not just for the community banks, it’s also for fintechs and really educating fintechs on why working in the community banking industry could be very fruitful for them and very fulfilling for them.

So educating not just the banks, but also some of the fintechs, particularly the earlier stage fintechs that may not know much about the community banking industry or used to going after the largest of banks. We’ve had a lot of successful fintechs within our corporate membership group and preferred providers that have been very successful working with community banks.

Peter: So I’m curious to know, what’s the attitude of your members…. I imagine if you’re interfacing they’re going to be more open to innovation, but I’m just curious about just the rank and file members. They know that technology is changing ever more rapidly, how do they feel about these changes and is there much more openness like today than there was maybe two or three years ago, what is the attitude?

Kevin: Absolutely, Peter, I think it’s changed really dramatically over say the last five years. If you asked community bankers five years ago what they thought of fintech, that would be viewed as an industry that was competing with them and they look at it was competitors. Five years later, it’s really the complete opposite. I think community banks are becoming now more eager to partner with fintechs. Now, think again, that’s a two-way street as well. I think fintechs are, you know, much more eager to partner with community banks. It’s just a natural partnership given the strengths and weaknesses of each.

I think from a banking perspective, they’re just….you know, innovation is not necessarily a core competence element, things of that nature, running a development shop. It’s obviously something that a fintech does extremely well, but on the fintech side they are great on the development innovation side, but they don’t know much about banking or really the regulatory system……

Peter: Right.

Kevin: ….particularly in the US. So really given those strengths and weaknesses, it’s just really built for a natural partnership and I really see the beginnings of that. I think it’s really going to be flourishing several years here, for both fintechs and community banks as we look forward.

Peter: Sure. I was toying around on your website and saw that you released a fintech strategy roadmap earlier year so I’m curious about….maybe you can just tell the listeners what sort of …encapsulate sort of the some of the strategy pieces in that and what are the biggest opportunities for community banks.

Kevin: Yeah, so we wanted to start….you know, obviously it’s part of our educational process, is to really out a white paper out there and, you know, what is the road map. So many of our community banks were going, Kevin, where do we start? So we felt that the white paper was going to give an overview of what the role of the community bank is, what the role of the fintech is, talk about a lot of the considerations.

You know, as a community bank, how should they kind of organize for this innovation, how should the board be involved, what are some of the risk considerations. Particularly, we spent a lot of time on the white paper on kind of the risk analysis, really a nice guideline for them….you know, if they’re just starting this process to say, alright, this needs to be how we need to go about it and get the management team together at the bank and start putting the framework together so they can start looking to partner with some of these fintech companies.

Peter: Right, right, sure. So I want to talk about a specific kind of partnership just for a minute and that’s the marketplace lending space. There was actually big news at the very, very first LendIt event in 2013. It was announced we had two community banks who were coming on to the Lending Club platform investing in loans. Since then, there’s obviously been a variety of banks across many different platforms, including some community bank consortiums as well, so what is your view on marketplace lending? Obviously, there is a history already in this space, but is this one of the ways that you’re talking to your members about partnering with fintechs?

Kevin: It is. As you kind of alluded to there, Peter, this is probably one of the most mature areas of fintech. It was probably…if we look back, probably the earliest and one of the first areas of focus in fintech overall. Really, in line with the comments I’ve said, you know, I think a lot of…particularly community banks are looking at marketplace lenders say today almost as part of a loan diversification strategy, as much as anything. That’s one manner in which they want to look at it, also to create a more efficient loan platform for whatever type of lending that they may do in particular.

As you know, this whole marketplace lending area is not just about small business and commercial lending. There’s a variety of different….you know, construction lending and a variety of different areas and we’re seeing that expand exponentially there, but it’s really about partnership. One thing, Peter, that’s a little bit of a distinction if you look at just kind of the pure marketplace lender, kind of the non-bank folks, is they definitely will take more risk than your average community bank so you’re saying, why aren’t community banks really getting into this as much at this point. It’s just really about risk tolerance as much as anything.

Peter: Right, and even the banks that are participating are participating at the lower risk end of the spectrum, there’s actually none I know of that would go all the way down to the subprime.

Kevin: Exactly. In that sense, Peter, it’s been really good for the marketplace because, you know, it’s really serving a wider diversity of consumers, businesses out there where banks would typically not lend to someone that maybe a higher risk than they would have a tolerance for. You know, the marketplace lenders or the non-bank lenders can step in and have opportunities for those who wouldn’t qualify otherwise.

Peter: Right.

Kevin: So I think it’s good for the overall consumer and business, but I think we’ll see, you know, just as a matter of risk tolerance, but I think we’re going to see more and more partnerships between community banks and marketplace lenders going forward. It’s taking awhile, but I think we’re starting to get there.

Peter: Right, right, that makes sense, I’d agree with that. So then what about other areas of fintech? What are some of the other areas where community banks are looking to partner with fintechs?

Kevin: Yeah, and I think just some of the biggest areas are…..you know, I was reading your graphic the other day, I think 72% of all of fintechs are in the payments and lending business. So, you know, obviously we talked about lending already being the more mature, I think payments, now that we’re moving closer to real-time payments and faster payments, I think there’s a lot of unique opportunities there and a lot of early stage fintechs really providing solutions in that area so I think that’s going to be an interesting dynamic to watch in the whole P2P space, in particular.

So I think that’s certainly an area…….you know, we talk about data and analytics a lot, but to me, there’s not been a whole lot done there. So particularly at the community bank level, I don’t think the solution set has been as robust. I expect that to improve dramatically over the next five years.

So I think we’re going to see a lot more really better use cases in that area where …you know, the community banks are looking just like any business report thing, how can they use these information like data and analytics to grow revenue, to become more efficient, to mitigate risk or really provide a better customer experience or better understanding of their customer base. So as long as fintech is meeting one or more of those four needs, I think the community banks are going to get more and more involved in it.

Peter: Okay, so I want to switch gears a little bit and talk about the Community Reinvestment Act. This has been somewhat of a hot topic this year and there’s been a lot of talk about the need for modernizing acts written in the 70’s….didn’t contemplate a digital world where there’s apps on phones and that’s how many, many people interact with their bank. I’m curious from your perspective, from the community bankers, what do they want to see, how do they want to see the CRA modernized?

Kevin: Yeah, I think we certainly agree that it does need to be modernized and there’s, you know, a number of things that are in consideration so we’ve been very active on the comments that we’ve been providing to the regulators, but just some of the key areas that we’re looking at relative to that, we think that the bank really needs to define the market area. I just don’t know if that can be fully metric-based.

You know, I know they’re looking at maybe is there a metric that we can judge CRA on, but I think that’s an ongoing discussion that can be pretty difficult to do, but I just think the bank needs to be involved in defining its area and rather than the regulators defining it for them and again, trying to do it in a more systematic way. I think we’re all trying to do that and just, you know, trying to find a way to prevent any inconsistencies or a gaming of the system, if you will.

I think that’s the concern about having maybe a one metric approach is that there’ll always be a way to get around that or game the system on that, but we just want to create something that’s consistent, something that’s driven by the institution into something that creates more consistency and more transparency to help the examination process. So I think we’re marching forward in that direction with some of our comments and we’re pretty confident that’s not, you know, we’ll get something, a much more modernized and useful version of CRA going forward. Certainly much needed.

Peter: Right, for sure. And then what about the fintech charter? The OCC has set a new…you know, the OCC is quite bullish on this and I hear it’s going to be fairly soon where we’re going to see the first application supposedly that they’re going to come through, what’s the official stance of the ICBA on that?

Kevin: You know, that one’s pretty simple for us, I mean, it’s really all about a level playing field. So, you know, our take is really…if there’s a fintech that wants to be a bank then go ahead and get a banking charter.

Peter: Right.

Kevin: You know, there’s no need for a special purpose charter or very much like the ILC… you can just go ahead and get an OCC charter. I think that’s the way to do it. We’re not against fintechs getting in the space, we just want to make sure whether it’s a fintech or whoever it is, it’s just a level playing field just like any other financial institution has to or any other bank has to go through.

Peter: Okay, fair enough. So it’s obvious that banking has moved away from a branch-centric model where, particularly in urban areas, where it’s a lot more of a digital experience. You know, people are interacting on their phone more often than they’re going to their branch. But I’m curious because community banks are obviously…there’s a wide variety of bank CEOs and different types of banks and I read about them in American Banker and elsewhere that there are some that are just doing a phenomenal job in innovating with this sort of in mind. Maybe you can give a couple of examples of community banks that are really preparing themselves for the next decade and really making a big push in the digital experience.

Kevin: Yeah, in just one base, I would say on the digital experience, I would say, community banking is really about relationship banking and even….you may want to take that as far as niche banking. So the most successful community banks out there have done that well and I view that as we become ….new innovations come out, we’ve got more digital solutions out there…I think, community banking will remain kind of that, I guess high tech/high touch banking out there. I think using technology to help deepen already strong relationships and enhance the types of relationships that are within their niche and their communities and the relationships that they’ve built with their community banks. So I think that’s kind of where that’s headed.

Just some good examples relative to the digital side. There’s a bank up at Wisconsin called River Valley Bank and several years ago now, they actually formed a separately branded, I guess you’d call it their own challenger bank, if you will, kind of an online digital bank, and they separately branded it. It’s just an interesting example, and they’ve been very successful with that in just having their own community bank brand at River Valley and then having, you know, an incredible bank as their online bank, kind of a more national deposit-taking entity primarily.

So I just think that’s a sign of a bank doing something innovative, not an easy thing to do, but I’m hearing more and more banks kind of looking at that type of approach and trying to figure out a way to do that. So I just think, you know, the local community can still have that local community feel, but there may be some things, whether it’s deposit-taking or lending niches out there that you can maybe take on a broader scale outside of your initial communities and something that you can replicate and do well, I guess, in a larger geographic area.

Peter: Right, yeah, I see it from my perspective, I mean, community banks, their strength is their connection to the local communities, but it also can be their weakness if, you know, something happens, where there’s one major employer that is at a town. I feel like these towns don’t want to lose their bank and they can certainly broaden and diversify nationwide. I mean, there are other examples I know of as well, of community banks that have some kind of national online presence and to me it makes a lot of sense and I think…….

Kevin: You look at, Peter, to someone like a Live Oak bank where they are very local in the Wilmington, North Carolina area, but, they have national niche lending markets for doctors and dentists, for pharmacies, things of that nature. They just choose niches and take that nationwide, but they’re still very active in their local community in Wilmington.

Peter: Right.

Kevin: So there’s another example, but a little different, that they’re kind of taking the lending on the national side and doing more from that perspective.

Peter: Right, they also spun out a technology company out of that bank, if I’m not mistaken.

Kevin: They have, they spun out nCino which I would argue is probably one of the most successful bank technology or solutions spin-offs in history. It’s not just a spin-off, it’s a very successful one and it just shows…you know, I think that’s another thing relative to fintech. We’re seeing a lot more banks maybe looking to do something like that. You’ve got an NBKC bank in Kansas City, just kind of forming accelerators and, you know, it’s really taken on the persona of the institution.

They want a bank… technology companies and the principles of technology companies and make that their niche and their marketplace. So it’s really….there are several other banks across the country that are starting to look at that and I think it’s just an interesting new development out there and I think we’ll be seeing more and more of that.

Peter: Right, right, sure. So speaking of accelerators, you recently started your own accelerator. I was reading the news fairly recently and you’ve decided to set up in Arkansas which wasn’t the first place I thought of when I was thinking about a fintech accelerator, so why don’t you tell us a little bit about the thinking, firstly, on the whole idea of starting a fintech accelerator and then secondly, why Arkansas?

Kevin: Sure, sure, absolutely. So we looked at…one of the things we’re talking with our community banks is how can we, an association that serves community banks, how can we help our community bank membership. Many of our community banks don’t have the resources to do what they would like to from an innovation perspective and obviously, there’s a lot of incubators, innovations labs and these accelerators. We kind of studied that marketplace and said, you know what, if we were involved in an accelerator we can take maybe some of these earlier stage fintechs and get community banks more involved directly.

You know, many of them are involved today, with their core processors which is, again, good relationship, they’re working with their core processors, but just beyond that maybe there are some options that community banks can look at going back to relationships and solve their very specific needs. We looked at the accelerator as way to do that and there’s a lot of accelerators already our there, but we spend (garbled) as an association to make sure it’s an accelerator and focused on community banks’ specific needs. So we’re talking with our membership in real-time, here’s some solutions that, you know, problems that we would like to solve and then start looking for folks that will develop those tech solutions for them. So that’s a unique thing that we can do and also, again, as an association the folks that we have involved in our accelerator can be quite unique as well.

We’ve got very strong relationships with the regulatory authorities, we’ve got, you know, strong relationships with the core processors that we’d love to have them involved in this process so we can bring in a unique group of folks. If I were a fintech starting all over again, I’d want to go through our process because you look at the kind of folks that we can bring to the table as an association and also, you know, you have two thirds of the banks in the US that…..potential go-to-market partners that we’re going to be involved with.

Obviously, we’ll be investing in these companies as well so we’ll have input and certainly want them to be successful if they come through our program with the venture center. So that’s kind of why we did the accelerators, you know, how in the world did you end up in Little Rock, Arkansas. Well, as we study folks….again, we don’t have the folks that could run an accelerator here internally so we’re looking to partner with someone to help run our accelerator program. That’s how we ended up in Little Rock.

We’re partnering with The Venture Center in Little Rock because we felt they were the most experienced out there as it comes to accelerators. They work very closely with one of the core processors, with FIS and they’ve been doing this now for four years so I think their experience was a big part of that.

Another big part is they really understood community banking and understood community bank needs which is really important to us as part of that process. Again, they just have tremendous expertise, I think their leadership is excellent, their team is excellent. We got very comfortable with them and I think some of those factors…really that’s how we landed there in Little Rock.

Peter: Okay, so then have you sort of selected your first cohort yet? I know this is fairly recent, I’m just thinking about…if there’s someone listening who runs a fintech and this might be attractive to them, what’s the process for applying and are you looking for…..obviously, looking for companies working with community banks, but is there other things specifically you’re looking for?

Kevin: Yeah, it’s a great question. So really, we’re in process…we announced this on October 31^st, on Halloween, (Peter laughs), I don’t know if that’s a good or bad omen, but that’s how it turned out. We’ve received, Peter, in our first….a little over a month, we received just under 200 applications, so we’re real excited about that and really our first year, that was well beyond our expectation so that’s exciting. We’re trying to narrow that down, we’d like to ideally end up with about 10 candidates.

Our accelerator process would start on January 7th and will run through the end of March and at the end of that program the candidates will actually get an opportunity to present their wares at our annual conference, where we’ll likely have probably 1,200/1,300 bankers there to present.

So it’s a wonderful opportunity and as you mentioned…I mentioned some of the unique traits, about what makes this unique. I think as an association doing this, we just, again, have that broad outreach and we can really bring in some, you know, really good subject matter expertise for the fintechs.

The other unique thing that we offer, even post accelerator, is just a go to market opportunity. You know, we’ve got banks involved in the selection, we have a selection committee made up of community bankers that are going to help ensure that the fintechs that we’re selecting are community bank-focused and solving problems that they have. But also, once we run through the accelerator, we want to bring in a number of our banks throughout that process so they can listen to it, identify, see if this is something they would want and potential subsequent users of these solutions after the accelerator.

It’s kind of unique if you come out of the program as a fintech in our accelerator program. It’s really truly what is meant to be as an accelerator, it really accelerates the growth of that fintech, not just by honing their solution with the subject matter expertise, and identifying partnerships really within from other entities, maybe core processors or others, getting in front of the regulators so they’re aware of what they’re doing and then just have that go-to-market, building their brand in a short period of time. The hardest part of a fintech is really getting started, getting those first 10, 15, 20 clients and then things grow dramatically from there. We’ll give them the best chance in our program.

Peter: Right, right, okay. So we’re just about out of time, I’m afraid, but before I let you go, one last question here. Obviously, you’re bullish, I’m sure, on the future for community banks. I mean, not everybody is, so what do you think it’s going to look like in five or ten years time? What will be different in the future when it comes to community banking?

Kevin: You know, I think it’s going to be this high….community bank is really becoming this high tech, high touch experience. I think the relationships were made very strong for these community banks, whether it be their niche, their communities in surrounding markets there. You know, I think the way the technological advances and the digital movement is really just going to help them enhance those relationships, so I think that’s going to continue as well.

You’ve seen the way these things have evolved, the community bank versus the larger bank or non-bank, you know, that competition’s been around for centuries and the same advantages are there, I think the community banks have the ability of being nimble and more creative and innovative in a faster way than some of the larger entities have been able to do it. They don’t have like B of A, a $12 billion technology budget, which is probably more than all the community banks combined, frankly, but just the ability of being nimble. I don’t see there’s anything earth shattering in the industry that changes the advantage one way or the other, I mean, banking is still going to be banking.

There will still be a need for deposits, a need for loans, things of that nature and that will continue. I’m bullish on the community banks because I think the strength of their relationships is going to help them as the consumers and businesses go through the changes, the rapid pace of change in this digital transformation.

So, you know, one of the things I’ve talked about Peter before is…can you fully digitize trust? It’s an interesting debate in question. I argue it with my kids all the time just to get their perspective which is quite different from me. But I just think everybody’s on a different spectrum from zero to 100, right; maybe there’s someone who is fully comfortable with a full digital experience without talking to a human being or anything, others on the opposite end, but most of them are going to fall somewhere in between.

So I think that’s going to be the interesting thing to watch as this digital transformation continues and the rapid pace of change continues. I think the dynamics of banking are going to remain the same, in terms of making loans, taking in deposits, generating fee income revenue streams that are beneficial to consumers and businesses. I just like the strength of the community bank relationship and their ability to be nimble. That’s going to really translate to their success in the future.

Peter: Okay, that is quite likely. I think it’s a fascinating space and one that I’ll be watching closely. I really appreciate you coming on the show today, Kevin.

Kevin: Great, I appreciate your time, Peter. Happy to talk to you about community banking. I can do it anytime.

Peter: Okay, see you later.

You know, it’s an interesting thing that Kevin talked about trust there. That really is the, I think, one of the core benefits or the core offerings of community banks and the fact that they’re part of their community, people can actually sit down and talk with someone face to face. Now, not everyone wants to do that so it’s important that they have digital offerings as well, but having that kind of nexus in the community where they are trusted, they are visible.

I think, community banks are going to be around for a long, long time, decades, centuries. If the banking system keeps chugging along the way it is, I think you’re going to see community banks just remain a very important part of this, but it’s going to look different, as Kevin said, and I think those companies, those banks that are forward thinking I think will be rewarded in the long run.

Anyway on that note, I will sign off, but before I do, I want to wish everybody all the very best this holiday season. This is our last recording of 2018, we will be back with you next year with some great guests. I very much appreciate you listening, not just to this episode, but throughout the year and I wish you all the best for the holiday season and for 2019. I’ll catch you next time. Bye.

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

 

PODCAST TRANSCRIPTION SESSION NO. 179 / LOWELL PUTNAM

Welcome to the Lend Academy Podcast, Episode No. 179. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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

Peter Renton: Today on the show, I’m delighted to welcome Lowell Putnam, he is the CEO and Co-Founder of Quovo. Now Quovo are a fascinating company, you may not have heard of them, but I can almost guarantee that you have used their products in some shape or form because what they are…they are a data aggregator, data connector, shall we say. They really enable consumers to share their financial data and they work with companies like Betterment and SoFi, Wealthfront and others.

I talked with Lowell a lot about how their system works, what they actually do, how they’re able to connect with 14,000 different financial institutions. We dig into their lending offerings because it’s a vertical that they’re making a lot of headway in today. We also talk about open banking and GDPR and others. It was a fascinating interview, I hope you enjoy the show.

Peter Renton: Welcome to the podcast, Lowell!

Lowell Putnam: Thanks for having me.

Peter: Okay, so let’s get this started by just giving the listeners a little bit of background about  yourself and what you actually did before you started Quovo.

Lowell: Sure, so I worked in investment banking at Lehman Brothers actually for as long as anyone did, through 2008, the bankruptcy, and then at Barclays after that. I worked in their Financial Institutions Group, specializing actually in consumer lending. And so when I started Quovo several years later, it was primarily focused in the wealth management space, and not the lending space, but over time since Quovo began, we’ve actually gotten more and more business from the lending space for a number of reasons we can discuss. But, it’s ironic that nowadays I’m actually coming back around closer and closer to my very first job 13 years ago which was in structured finance, credit card lending, auto lending. It’s fun to be back full circle where I started.

Peter: Okay, so then what was the idea that inspired you to start Quovo?

Lowell: So the original idea behind Quovo was wealth-focused and investment-focused. The idea was that there really wasn’t any transparency into the “how am I doing” question that a lot of us have when we look at our finances and I thought that the area with the least transparency and most difficult to answer to get was related to investments, where a lot of people have a lot of their assets. In many cases, it was what they were relying on for retirement and it’s very hard to know how well prepared people are when they have complicated financial lives.

So the initial point of Quovo, and a bunch of that technology is still unused today, is to aggregate brokerage accounts, wealth management accounts or in one case, IRAs, which is a really complicated data set, compared to TDA or checking account so multi-position, multi-currency. We had to solve a lot of these problems early on which, when you fast forward now into a much broader set of accounts that we cover, has served us very well.

So over time, our customers began very  wealth and investment-focused and then as we’ve seen through the explosion of fintech over the past several years, the lines have blurred between wealth and lending and insurance and banking. There’s been a re-bundling of so many product types that we’ve been pulled by the market out of just aggregating investment accounts.

Today, actually, the overwhelming majority of accounts in our system are bank accounts and credit card accounts; the everyday accounts people use to run their lives. So today, our product set is much more diverse and handles account verification, account authentication as well as aggregation and value added insights on top of the data.

Peter: Right, okay. So maybe you could talk about how your product works exactly because, you know, I’ve seen some of these aggregations, you’ve got Mint and others that are doing different things in aggregation and, you know, it’s feels like to me complex because you’re dealing with different companies with very different ways of doing things and you’ve got to try and present everything in a coherent way.

You’ve got to connect to all these companies and I imagine it’s very different types of connections and different levels of skills involved in actually dealing with a company like yours. So maybe just talk a little bit about how you’re able to kind of pull these all together.

Lowell: Sure, so Quovo really is the guts, we’re the picks and shovels in the infrastructure underlying applications like Mint.com, Betterment, Wealthfront, SoFi, Robinhood…all of these fintechs as well as enterprises, like large banks and wealth managers and insurance companies…so we’re the underlying pipes and connectivity layer that allows consumers to link their accounts into a third party application.

So to do that, we have, to your point, retrieve data from your bank account, wherever that is, and then normalize it so that we can then distribute it back out to the app in a way that the app does not have to tell the difference between a Bank of America versus a Chase account or a  Fidelity or E-Trade accounts. We give them a clean, vanilla, normalized data model that they then can then use to put into whatever their product is for you, be it better wealth management or faster loan underwriting or ACH-ing money back and forth between accounts.

They know that the Quovo API is a single normalized data model for those. So the three pieces of our stack are the collection piece where we go and retrieve data from institutions, usually using credentials or other customer authentication methods where the customer authenticates the way they do with their institution and then we retrieve data back.

Then we have a massive normalization engine that makes sure the data looks apples to apples across different institutions. And then we have a deployment layer which is our API or we have some front end tools or flat files to get that data and send it out to the application who’s actually our customer.

Peter: So, on your website you say you have access to 14,000 institutions…obviously, sometimes when you sign up for a new service and it says “link your bank account” and it’s got many, many different bank accounts there, is that the technology that you’re talking about there, or when you say access, what does that actually mean?

Lowell: That’s exactly right. So when you sign up for a new service that says link your bank account to fund or to access data, that’s us. So while we don’t have 14,000 unique connections because some of our connections were able to do double duty or triple duty based on the back end systems of the institution, we do have thousands of individual retrieval methods that have to run every night to get access to 14,000 to 15,000 total institutions.

Those have to be monitored and repaired and tweaked and so there’s a big piece of our business which is watching ourselves to make sure that our connection to bank X is still strong and the data that’s coming in is accurate and the normalization that we put on top of it is still being properly done.

Peter: I’ll tell you, it sounds like an engineering nightmare (laughs).

Lowell: It is (laughs). It’s a different kind of business, honestly. It’s interesting especially when you’re raising money or when growing the business, it looks very different under the hood than most technology companies out there because we’re the hub that sits in-between thousands and thousands of different nodes that are individual institutions and apps. And so building a hub, an infrastructure hub, is a totally different set of skills than an app itself.

Peter: Right.

Lowell: So we don’t think about customer funnels per se, we don’t think as much about user experience with the exception of how people authenticate their accounts and making sure that they can identify institutions accurately. Really for us, we think about monitoring, maintenance, up time. It is more like a utility business in a lot of ways, for the KPI’s that we have results too.

Peter: Right, right. And then before I move on, one other piece….because I’m on Mint pretty regularly, you know, I have my wealth management thing that actually aggregates as well and the thing that’s frustrating is that the connections break sometimes. Why does that happen….because I haven’t changed my password or whatever, but somehow the connections break, why does that happen?

Lowell: Well, depending on how we’re retrieving data from the institution, if they change their API or they change the service that provides data to us, and they usually do it without any notice, and so there’s this catch up that we play having to, like I said before, monitor these connections and then make updates on the fly as the institutions change. So we’re in this constant evolution mode of tracking changes as they happen at the institution and so a breakage or a temporary outage from an institution is the name of the game.

However, if we we’re able to monitor institutions properly and quickly then that outage is so fast and so small that you don’t notice it because we’re able to re-establish connectivity. The worst possible outcome is when someone has to re-credential or re-authenticate a connection that hasn’t actually changed and that’s something that we’re trying to avoid at all cost.

Peter: Right, right, yeah, got it. So let’s move along to …I’m curious about data security because that’s got to be just a huge piece of what you’re doing.  I mean, we’re recording this in late November and just found out about the Starwood data security breach, you know, 500 million people have had their data exposed. So tell us what’s your approach to data security because people are giving you their log in information…

Lowell: Absolutely, our business is really unique from a security standpoint because we are asking for your sensitive information in order to go retrieve more sensitive information.

Peter: (laughs) Right.

Lowell: It’s a big piece of our business. So security, I think a huge advantage to being built in 2013 through 2018 means that we’re allowed to have security dyed-in-the-wool. It’s so many systems out there added security on top of existing applications because they date back to pre-cloud era, I mean, some of the stuff…green screen still being used by a lot of large companies out there means that security is something that they have to inject rather than put into the foundation and build on top of it. So we’ve been very lucky that to be built when we were built.

So the very first field that put in our database was encrypted in the database itself, which was someone’s user name and password. So we’ve had that as part of our DNA so we aren’t searching to see where we need to push security on to our system. In fact, the system was built with security first as part of it’s DNA.

I say that in light of the Starwood thing, the one thing that stood out to me reading the articles about it was why were they storing all this information together? When you think about information security, you think about the surface area of attack; where are the places that a bad actor has to go to get information and how do you make that as difficult as possible. And so it seems like it can be difficult to break into the Starwood system, but if someone goes in they have access to everything so data segregation is a key piece of security, not just encryption.

It actually is segregating the important data and tokenizing it so that a bad actor has to break into multiple places to get data to then piece together to then decrypt. So it means that it’s very, very difficult for a single mistake or for a single attack to lead to any useful information. So I think it’s worth thinking about the implications of an attack which is what type of data is released and is that data actionable and can the data be put together into identifying, okay, this is Lowell’s credit card.

Lowell’s credit card is significantly more dangerous than a credit card. If all you have is a credit card number, as dangerous as that is, that still isn’t sufficient to do a lot of damage. Most of the attacks that seem to be the most dangerous are ones where there’s been consolidated data and that’s something that any company can and that Quovo does a lot of, to separate out pieces of data from each other.

Peter: Right, right, that makes perfect sense. Okay, so I want to dig into the lending offerings. You said you’re getting quite a bit more into that side of the business and you already mentioned SoFi. What are you providing for lenders exactly?

Lowell: Lending is our fastest growing protocol, it’s fun having a service like ours because our capabilities can be utilized by multiple verticals. We don’t even know always how people are going to be using financial account data for interesting applications. What I like most about the lending space is that Quovo’s data set and connected accounts technology can be used throughout the entire life of a loan. So we have multiple touch points with the borrower and the lender where we can provide value.

And so it begins with the assessment of credit and underwriting itself and so that risk evaluation process, rather than relying on a credit bureau score, adding cash flow data into the equation is something that some verticals like small business lending have been doing for a very long time, but being able to make that cash flow data available for other lending verticals is really exciting. We’re seeing a lot of uptake from other people realizing that tracking spending patterns, income patterns and nuanced cash flow information is impossible if you make someone upload a statement and dig through the statements, but is really easy to do when you have a live link into somebody’s bank accounts which we can provide.

And so then post underwriting the actual origination or funding piece for a number of loans can use our account verification so that ACH doesn’t require something like a voided check is just set up directly with credentials and then obviously with an ongoing connectivity into the account, servicing is much more streamlined. And by servicing I don’t just mean taking the money back from the borrower; I also mean the ongoing evaluation of risk and borrower attributes that most servicers today don’t have the ability to do.

But I think it’s a really exciting piece of the lending space that there is a moment every month if you’re going to ACH money from someone’s account, where you’re re-underwriting them, right. Servicing is a re-underwriting business or re-risk assessment business every single month and so we can provide those exact same tools to help identify the attributes of a borrower that might be a signal towards the declining ability to pay, or the opposite, someone getting much more credit worthy in which case there are interesting things that a servicer lender can do with dynamic underwriting or dynamic servicing.

Peter: Interesting, so cash flow underwriting has been a hot topic in the consumer space. Small business lending has been going on a long, long time, but in the consumer space it’s really only the last year or two that it’s become kind of more top of mind. So I get that, it makes perfect sense, it’s a great way for lenders to get a better picture on their customers’ accounts.

So it’s curious to me…it seems like, from what you’re saying, you’re really embedding yourself in the risk department or in the underwriting department of the lenders because you’re not just providing technology, you said yourself, you’re sort of helping assess the risk. I mean, I imagine it’s different for different lenders, people are going to want to us just certain pieces. It sounds like you’ve got almost like an entire underwriting engine yourself, from what I’m reading between the lines, is that really what I’m saying? What are you saying?

Lowell:  No, so we don’t actually score or assess credit. We don’t say that this person is likely to repay in the future, but what we do provide is a suite of data points and each of those data points can be a really valuable input, as you said, to bring cash flow-based or metadata that sits on top of cash flow trends into an existing underwriting model.

So it’s as basic as saying, how many income streams are there in this person’s account? We can help identify and split those income streams, saying how predictable they are, how regular they are and what the average amount is versus breaking out expenses by category and periodicity and so we can give three, four, five, ten, twenty data points that can then be dropped into an underwriting model.

So while we don’t actually do credit assessment ourselves, we can give a company the two things that they need to enhance the model that they have, especially in a case of a dynamic loan  modification, the mortgage space or a revolving credit line, the ability to say, huh, is Lowell still the same kind of person he was a year ago when we first underwrote him? Oh, yeah, look, the income has actually increased over time and expenses by category look actually much healthier, free cash flow month over month looks higher than what it was is the kind of stuff you can take from those data points.

We also have a predictive end points, a predictive algorithm that estimates future balances in DDA accounts based on historical data of a modified Monte-Carlo algorithm and mainly for servicing purposes, makes it easier to predict the likelihood of a payment clearing or not clearing and reduce the risk of NSF fees on the customer from a servicing standpoint.

Peter: Okay, so what about like fraudulent applications, what’s the technology, I mean, how are you helping customers/lenders fight fraudulent applications. Tell us a little bit about that.

Lowell: So, that’s a great other use of these key data points. So the key data points that we can retrieve from an account can be used for fraud protection purposes. So while we don’t alert our customers for what we think that an account is fraudulent, we are able to provide a number of API end points, both reactively and proactively to our clients for triggers such as insufficient account history. If someone links an account and the income only goes back three months and there’s a single large deposit and fixed withdrawal, there’s something fishy there, right. Being able to identify fake accounts or fraudulent accounts is patterns-based, so we can provide that data very, very quickly back to the lender that there’s only been X made deposits or X made withdrawals from the account, which should be setting off red flags.

Also, we’re able to retrieve in real-time data on account ownership and while it’s never a perfect match between the name or names on an account and what someone may put on an application, it is helpful to know that an account that got linked doesn’t appear to have any relationship to the information that the borrower has put onto an application.

Peter: Sure, okay. So I’m curious about…like obviously you’ve got a very sophisticated approach and a perfect fit for a lot of the online lenders who obviously, their systems are going to be, I imagine, easier to integrate with than some of the traditional banks, but, you know, look at …there’s more and more traditional banks that are having pure online offerings now, so are you finding that you’re getting more demand these days from the traditional banking space?

Lowell: Yeah, so we’re seeing, and this a newer development, to your point, that we’re seeing over the past year a lot of lending divisions from large banks are more excited about digital offerings. I think that there’s an acceptance that digital doesn’t mean lightweight, digital means streamlined, so streamlined means more data can be collected faster from a customer. It’s not about sacrificing fidelity or the integrity of the information you’re getting from a borrower, you’re actually able to get more because of tools like ours.

And so by moving to more digital practices and bringing in connected account technology, underwriters can get a lot more information than they would have through a traditional process and obviously, have a much better customer experience. And when you think about…I just went through a very, very long mortgage process which was heavily paper-based. I had to re-submit new statements every time the closing dates slipped over a month end. If the underwriter had been using connected account technology, Quovo could have just gone in and grab new data about the account and even grab the statement, if the statement was that necessary.

We have found that as part of this evolution and this digital migration there is still comfort in being able to have statements and being able to have some of the older data points that may not be as relevant today, but still fit into the work flows that underwriting systems are used to having so the ability to retrieve electronic versions of statements and make those available, even just for audit purposes is a valuable piece of the puzzle.

Peter: Right. Okay, I want to switch gears a bit and talk internationally. I know that you have clients beyond the US border. I just read a couple of weeks ago that you have joined the UK’s open banking regime, so tell us a little bit about that and also this is a very …what you’re talking about, open banking is really what….for open banking to work it needs companies like Quovo, otherwise, it’s not going to happen. So why don’t you tell us about the new development that happened earlier this month in the UK.

Lowell: I believe that Quovo is the first aggregator that’s been approved as an AISP, Account Information Service Provider, so we are registered with the FCA in Great Britain to be able to access the open banking API’s that are mandated now across Europe as part of PSD 2 and the UK open banking directive. That sounds great (Peter laughs), but the reality….it sounds great, right, (laughs), it’s instantaneous access to anyone’s banking data properly authenticated.

In reality, the process, as anyone knows who has been following PSD 2 and open banking, has been excruciatingly slow for the banks to build and maintain these API’s so only a small number of banks have actually managed to get their API’s built and their reliability is still a little bit suspect because building an API is hard. Trust me, I know, that’s what we do, but it is really exciting to have access to the API’s that exist and I think as the first aggregator that’s now accepted into the ecosystem there, we can be an advocate for improving the speed of development of new API’s because I would love to move to a fully [inaudible] authentication process and a fully API-based process.

It is unlikely to happen here in the US because it’s very unlikely that there’s going to be a top down regulatory mandate for open banking, but I think that Europe is creating a great model. My fear is that if the pace doesn’t speed up there, there’s going to be a lot of frustration setting in because the long tail of institutions, which really are critical both here and abroad, haven’t gotten there yet in terms of API development so hopefully we can facilitate that

Peter: Right, we just came back from our LendIt Europe event just a few days ago and there was certainly a lot of talk about that. We had an open banking panel and open banking was talked about throughout the event. It’s been a year almost and people are a bit disappointed at the pace that’s happening, but I think there was a lot of enthusiasm among the LendIt community anyway, about the fact that it is going to happen, there are small steps being made and there’s commitment at the government levels. They’re going to see this through, but, as you say, it’s going slow. I’d love to see something similar in the US, but that’s pretty unlikely, at least in the short to medium term.

Lowell: Yeah, I’ve been very happy in the US that the innovation that’s exploding in the fintech space has created a customer demand for access to the data. Here in the States, you see customers demanding access to Venmo or Robinhood or Betterment and SoFi and so there’s pressure that’s been put bottoms up onto the banks to build these API’s.

Peter: Right.

Lowell: So the large banks are making good headway on these API’s granted not as a single unified consortium, but in some ways that might mean it will be done faster because they’re doing it with their own resources, building specs that they themselves can maintain. I’m actually reasonably bullish on the progress that’s been made this year in the US. I am concerned though that the long tail problem is even worst here than it is in Europe so we do need a solution to help the community banks, the credit unions and the small regional institutions.

Peter: Right, right, that makes sense. So then I also want to talk about GDPR which….we all went through this process early this year getting lots and lots of emails and having to approve everything. But the principles of, you know, data privacy and data protection, I mean…. they’re only going to become more important and we don’t really have GDPR in the US right now. But, during my research for this interview, I came across the Secure Open Data Access framework that you are co-founder of so tell us a little bit about that and how it relates to GDPR.

Lowell: Well it’s not quite as onerous as GDPR and is about a smaller data set which is the financial account data set, but aggregation and connected account services like ours have always relied on a consumer consent model, right, because we can only make a link if you have affirmatively consented to share credentials or other authentication data.

Peter: Sure:

Lowell: So all of our businesses have kind of grown up with a customer consent first process and so GDPR is very similar in a lot of ways. So it’s formalized, I guess what’s been a product necessity for our industry which is you need to have the consumer know what they’re doing, or else you can’t link an account. And so what we’re trying to do is take that consumer first approach which we’ve always had to some extent, just to make our product work, and formalize it a bit and try and elevate it to increase consumer control because among the different constituents in the ecosystem which is us, the aggregators, the apps, the FI’s, the regulators and the consumers themselves, the one thing that we can all agree on is that we want to put the customer first and putting controls around the customers to let them choose when data is retrieved, how it was retrieved and for what purpose is beneficial for everybody. More transparency and consumer control, I think, is the easiest way to get around what otherwise might be possible friction between different constituents.

Peter: Right, makes sense. We’re running out of time, but, I want to get a couple more questions in. Can you give us a sense of the scale you’re at today, I mean, like as far as number of employees, number of clients you have or just something to give us some sense of where you’re at.

Lowell: Sure, so we have about a hundred employees, we have several hundred customers that represent tens of thousands of agents and advisors out there and we have nearly 20 million consumer accounts on the platform.

Peter: Okay, so when you look at the…obviously, you’re not the only company doing this so how do you view the competitive landscape and what makes you guys different?

Lowell: Well, it’s interesting because aggregation isn’t a new product. There was a generation of aggregators built in the late 90’s/early 2000’s that even pre-date Mint by a number of years. It was only in recent years that both new fintech apps and large enterprises have decided to take advantage of our services, so there is a batch of companies that do similar services to ours that have been around for a while.

But, I think Quovo is quite different because we are new, our technology stack is brand new so scale isn’t something that adds expense, scale actually provides advantages for us. As our data set grows, we’re able to normalize with machine learning more effectively and so we’re excited for every new account to go under the system because it doesn’t change our margins at all. I think that’s one key differentiator.

Also, we’ve built our connections to banks recently so we’re using the newest technology and we have the most robust connections as a result. And I think we’re also a little bit different because we are really dedicated to a single source of revenue here which is services that help the end consumer.

We never re-sell data to third parties, we only build services and products here that ends up helping the end customer, which isn’t the same business model that everyone in our space has. Obviously, there’s a “value” when you have a huge amount of data sorted together, but our decision and our philosophical decision has been to use that data for the benefit of the consumer that has opted to share it with us. I think that’s the right way to build the business and hopefully, will be the right way to build a successful business.

Peter: Okay, so on that, what is your vision then for the future of Quovo?

Lowell: That’s a good question. (laughs) It changes month to month because I can’t predict half of the ways that our services had been used today. What’s really exciting for me is they continue towards all of the expansion we’ve seen from our business that new products, new technologies are using connected accounts of financial account data to benefit the customer in ways that I hadn’t predicted yet.

So payments, municipal finance, new lending products…these are all brand new verticals for us to explore so what I’m excited about is taking this core capability that we have. You have to be crazy to build from scratch (Peter laughs) which is connecting to thousands to thousands of institutions and seeing what the world does with it. How can we make our tool kit easy to use and beneficial, regardless of your business model and then have the next great developer, be that two guys and a dog in a garage, or actually be it an entrepreneurship team as a major institution using our tools to build something fantastic.

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

Lowell: Yeah, absolutely, thanks for having me.

Peter: Okay, see you.

Lowell: Take care.

Peter: You know, I think we’re moving to a world or perhaps we’re even there already, where consumers are demanding control over their own data, particularly their sensitive financial data. But at the same time, they want to connect with other institutions seamlessly, those institutions that they give permission to. They want to have a good seamless experience, so to make that happen you have to have companies like Quovo who are building the pipes in the background to connect and aggregate all of these data.

Companies like Quovo are only going to become more important as we move to a more and more digital world where we’re not going to be doing as much local branch banking. We’re going to be doing more and more on our phones and so the security, the privacy, the access, the aggregation…all of these issues are going to become more and more critical as time goes on and it’s great that companies like Quovo are addressing this head on.

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

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

 

PODCAST TRANSCRIPTION SESSION NO. 178/CHARLIE MOORE

Welcome to the Lend Academy Podcast, Episode No. 178. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

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

Peter Renton: Today on the show, I’m delighted to welcome Charlie Moore, he is the CEO and President of Global Debt Registry. Now GDR have been around for a while, particularly in the marketplace lending space, but their goals are much bigger than just this space. They really are looking to transform the structured credit markets and bringing more efficiency and transparency to these markets, so we go into that in some depth.

We talk about what their technology is, how it is actually going to change the securitization markets, we talk about what they were doing before they started…they incorporated blockchain and what was the aha moment for Charlie in really shifting the direction of his company. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Charlie!

Charlie Moore: Thanks for having me, Peter.

Peter: Okay, so I’d like to get this thing started by giving the listeners a little bit of background about yourself. Maybe you can just tell us what you’ve done in your career before you got to Global Debt Registry.

Charlie: Sure, so I’ve been involved in emerging technology and financial services for the last 20/25 years, running innovation and new ventures-type groups at Thomson Reuters here in New York and previously Barclays and Lloyds in the UK. Really been involved in the space ever since the first dot-com boom in the middle/late 90’s where I got caught up in the sort of potential opportunities, did my own startup and I’ve doing sort of new ventures be it with startups, standalone or within large corporations, financial institutions ever since.

Peter: So your accent….you’re from London originally, are you? Where are you from?

Charlie: Originally from London, yeah, I’ve been here 12 or so years, came over with Reuters, but also married to an American.

Peter: Right, right, as am I, yes, I understand. Okay, so then you joined Global Debt Registry a few years ago. Maybe we get started…why don’t you tell us….because Global Debt Registry has been around quite some time. I wasn’t aware of it myself till I started doing some research prior to this interview, how long they’ve been around, so maybe you can tell us a little bit about the history and how you got involved.

Charlie: Sure, so Global Debt Registry or GDR has been around eight to nine years, it started life in the non-performing accounts world, so the charged-off receivables, really focused on helping prove chain of title and asset integrity in that market which is, if you’re familiar with the charged-off world, that is in fact very messy in terms of keeping track of these charged-off accounts and record keeping isn’t as robust as it probably needs to be.

So I got involved about three or four years ago coming out of a large company at that time, really because I was seeing a lot more innovation in terms of financial technologies occurring in the small startup world, as opposed to the large corporate world and that generally continues to be the case.

Peter: Okay, so then you started off as like the Chief Commercial Officer it seems. I went back and looked at …actually watched your Finovate demo from 2014 so obviously, you’ve been there awhile. What did you see specifically about the opportunity at GDR?

Charlie: I saw a very large inefficient market, lacking any infrastructure or standards or way of keeping track of transactions, which having come from the capital markets world, focused a lot on the real-time trading activity and research distribution where everything is extremely well tracked and a lot of registry controls as well. I was surprised that there was this very large startup world lacking infrastructure, but over time it sort of was clear to us that really to address the asset integrity issues of performing accounts or non-performing accounts where you need to start with performing accounts and start further up the chain, and that a lot of the underlying issues and challenges and inefficiencies, they weren’t unique for sort of the debt sales market. It really was throughout the sort of the account life cycle so we started working with looking at performing accounts world and worked with the investors and the single lenders, and supporting particularly digital lending, and we can talk about the asset class in a bit more detail. But we started working with the participants in that ecosystem to generally improve the efficiency and the integrity of the underlying assets a few years back.

Peter: Okay, so then it strikes me as you’re talking then that this is really……the financial crisis was caused by part of what you’re talking about there, sort of the lack of integrity in the underlying loans. I mean, there are people we know today, probably tens of thousands of people whose loan documents just didn’t seem to exist anymore and so certainly there was a problem with integrity of data back then. Is this the problem that …is that the sort of idea that kind of germinated this whole problem?

Charlie: It’s clearly something that’s at the back of everybody’s mind. I think any technology is only as good as how it’s implemented by people. So we can talk about sort of power and value that blockchain generally brings to this party but it’s only as good as how an industry organizes itself and people choose to adopt and apply that technology. So it could change technology, improve the sort of immutability of record keeping and ensure that loan information wasn’t misrepresented or lost and that the underlying loan documents and records of ownership and economic interest and so on are much more robust absolutely, but only as applied appropriately and the right parties agree to how it should be done.

So clearly, there has been some improvements since 2008 in terms of improved investors’ transparency with Reg AB, but we’re still lacking a lot of the infrastructure really required to move the industry on which blockchain, we believe, derives all of that potential.

Peter: Right. So you’re already into blockchain a lot now, I’ll get into that in a bit, but I’m curious……because when I watched your finovate demo, obviously, you didn’t mention the word blockchain, it wasn’t mentioned back then. So when was it that you sort of changed your premise or how you were going to kind of solve the problem?

Charlie: Sure, so the business as a whole has been focused on what I would call asset integrity and there’s a number of elements to that in terms of different loan characteristics. I think my aha moment, and everybody has an aha moment, I was exposed to cryptocurrency fairly early on and I didn’t really get it and it was back in 2012/2013. It wasn’t until probably 2015, maybe early 2016, when I was actually watching a presentation from Leanne Kemp of Everledger who founded The Diamond Registry on the blockchain. He was talking about the provenance of things, of diamonds, and talking about keeping better quality records, of the quality of the stones, the cut and the color, etc., etc. as well as the ownership and chain of ownership ensuring that they were indeed diamonds and so on and refuting some of the reported costs around verifying those diamonds. I was sitting there listening to Leanne and I think, hang on a minute, these are all the things and underlying challenges that we have in the credit ecosystem in terms of keeping track of loans.

So that was around 2015 or 2016 which also coincided….at the end of 2016, the SFIG Trade Association put out a white paper with Deloitte that aligned very much to our business plan and the business status that we’ve put forward so that was good validation. I think over the last couple of years, sort of the evolution in terms of understanding of the opportunity and the application that is blockchain technology has evolved from beyond just sort of immutable, better quality record keeping through the shared system of record and a vehicle to ensure that everybody across the credit ecosystem is looking at the same loan data simultaneously and the current email Excel site model hasn’t got out of sync across services, back-up services, lend data agents, rating agencies, investors, senior lenders, etc.

And then most recently, the power and the opportunity of having everything on the blockchain is that the actual asset becomes a digital asset, a truly digital loan where it is native to the blockchain and can be very easily transacted with minimal additional friction and costs and time delays. So that’s been a journey. I think we’re all on something of a journey here and it’s all in the relatively early stages of it, but, you know, our understanding in terms of what’s required for that and what we need to be building to support the industry on that journey has evolved quite rapidly over the last couple of years on those lines.

Peter: So your solution today is a blockchain-based solution? Is that the only….why don’t you tell us a little bit about the solution itself and whether it’s 100% blockchain-based or what?

Charlie: Sure, so what we’ve been building is what we would describe as decentralized market infrastructure where the protocols for how loan characteristics should be recorded on the blockchain. It is a complex market and there are multiple characteristics that really make up a loan. The asset isn’t just the original source of loan documents that’s obviously critical in terms of ownership, but there’s a whole host of other data sets, loan characteristics that really should be recorded on that asset, including stuff like the verification activities and so on.

So what we’ve been building is the protocols for how that loan information should be recorded in such a way that the industry can realize maximum value around there, recognizing that it is a multifaceted approach. It’s going to take a number of years to get there and I think we’ll go through a hybrid period of what might be called asset-backed tokens or loan-backed tokens where the loan remains off chain and there is a token trait associated with that loan, but that’s down the road. There’s a number of steps before we get there.

The first step of phase one product has been around the casual pledge activity and recording immutable record, ensuring there is solely one record of a loan being pledged to a credit facility and why we started there was very much around establishing a minimum viable ecosystem. As you’re probably familiar, the ABS world is pretty concentrated, there’s ten or 11 banks that are underwriting and providing the warehouse facilities for three quarters of the market so establishing that minimum viable ecosystem is relatively straightforward and we’ve been working with those guys and partnered with IBM from a technology point of view in building the platform for recording all of these loan characteristics, culminating with the digital asset being on the blockchain, but starting with this relatively straightforward basis around the loans that are being placed as collateral to the investment banks or senior lenders.

Peter: Right, right, okay. So I want to talk about securitization. I don’t remember exactly when we met, but it’s been several years ago now. You’ve been around the marketplace lending space for a while, what was it about this market that was…because, obviously, a loan product…what you’re selling could apply to any loan, what was it about marketplace lending that attracted you to really focus there?

Charlie: Sure, so we started there and have in recent months sort of extended into other asset classes like student loans, cars, etc., but, we started there and we continue to put a lot of resource there for a couple of reasons.

Firstly, there’s a lot of innovators in that world, some pioneers who are pushing the boundaries. You know, we fully expect to the innovation around blockchain to come out of that world, they’re more open to new ideas and easier to work with and guys like Ron Suber and Mike Cagney pushing the envelope in terms of how things should be done.

Secondly, in terms of creating that minimum viable ecosystem, there is a nicely concentrated, relatively small asset class relative to credit cards and auto, etc. so really there are half a dozen marketplace lenders driving most of the volume and supported by half a dozen investment banks providing a lot of the initial capital and underwriting activities so it’s a pretty well contained type ecosystem that works together pretty nicely.

Peter: Right, right, okay. And so then you’ve expanded beyond that now and you started talking with some of the banks. Now, I imagine, you’ve got….that’s a challenging thing to do to talk to these banks because you’re asking them to really change the way they’re doing things. Obviously, they can recognize the benefit, but there’s also the pain involved of change in the way they do it so, I imagine, it’s going to be a very long lead time, but just tell us a little bit about how those conversations are going, so far.

Charlie: Sure, we’ve been working with majority of those big banks for some time now. So off the back of the earlier research and planning I was talking about, 2017, we ran multiple working groups with the big banks in terms of helping to understand those pain points and efficiency opportunities and really prioritize the roadmap and starting to introduce some of the concepts associated with the blockchain; how they might be able to help.

I think over the last 18 months, they’ve come a long way in terms of what ABS hasn’t to date embraced with blockchain. But in recent months, I think we’ve seen the needle move quite considerably. In the autumn, most of the big banks brought along their blockchain strategy people to ABS East which was very encouraging. While it wasn’t their first use cases, or POCs, within the banks, the majority of them now are actively engaged in terms of how can we take advantage of this technology to improve some of the inefficiencies of the ABS and MBS markets.

Peter: Right, right. So then when you look at securitization……I was at ABS East as well and I was struck by how little has changed in securitization, given the disruption that’s happened in so many other areas of sort of the broader financial ecosystem. The ABS market still seems to be doing things pretty much the same way they were doing them a decade ago, or even two decades ago, with slightly better technology.

So do you think…..you said that they’re getting proof of concepts going and some of the banks are embracing this, but I just wonder if….like securitization is a massive industry, multi-trillion dollars industry, as far as total volume goes. Is the problem big enough for them to really completely transform the way they do things, say over the next five years? Tell us…maybe you can basically say what’s fundamentally wrong with securitization today and how big is the pain point and then what you see as sort of where this is going to go in five years time. A lot of questions there, I know, so take your time. (laughs)

Charlie: I know, all good. I’m glad you sort of framed it in the five-year window because this is a multi-year journey, but winding back to, you know, what are the challenges, you’re right, the industry structure and the underlying process and how transactions occur hasn’t changed for decades. It’s slow, transactions are measured in weeks, sometimes months, it’s expensive, there’s multiple service providers generally doing a lot of the activities pretty manually, though siloed, so there’s no shared infrastructure, no shared system of record which in virtually every other asset class there is some system of records, shared infrastructure, keeping track of things and paper documents representing the underlying asset and solve the majority of use cases.

So that model and all of those inefficiencies which culminate in significant fees, which everybody has to bear some of those fees. That represents the opportunity, why the banks didn’t choose as its first use case. I think that they obviously started with a lot of trading and settlement use cases where there was low hanging fruit, or there certainly appeared to be low hanging fruit, in terms of trapped liquidity, of improvements there from the blockchain, but also because I think there were existing intermediaries that could help solve a lot of those instances, where there was a DTCC, or stock exchange, or there was a party that could help facilitate that. Now I actually think that many of those early POC’s struggled because of some of the performance and the scalability issues of the blockchain. Whereas ABS, despite the sort of data challenges that we have, is actually relatively low volume in terms of the volume of data and in terms of the volume of transactions, so in that regard the technology is fairly well suited to the ABS and MBS market, where their life challenges is more of a social construct and more how we as an industry organize ourselves in terms of the adoption of that technology.

So, you know, that’s a lot of what we’re doing…it’s around getting the right incentive structure and network effects and getting the right standards in place for the industry to be able to embrace this technology.

Peter: Okay, that makes sense. So could you give us some sense of the traction that you’re getting today. I don’t know if you could share names or lending platforms or banks you’re working with, just give us some sense of how you’re going.

Charlie: Sure, so in the context of recording the market position, we’ve got close to a million accounts, largely collateral associated with the digital lending market across the main seven or eight digital lenders, all of the guys you would expect. In the autumn, we extended coverage of collateral that we can record beyond the digital lending space into auto, cars, equipment, small business, student…really for the entire ABS desk.

Peter: Okay, so what’s it going to take…I mean, I think this is not going to be a quick process, but I also could see a time, maybe it’s five years, maybe it’s ten years, we’ll look back and think how the heck did we ever do it the old way. The thing that struck me, we are here in almost 2019 and we are talking about hundreds of millions, billions and billions of dollars in transactions where documents are based on paper and that to me….I mean, you’re talking about words, this is not like some really complex structural architectural type stuff that really is hard to put into paper, you create a PDF for a lot of this stuff, it’s not rocket science.

So it’s staggering to me that ….I went through the mortgage process two or three years ago with a financial institution that was totally paper-based, like 100%, they wanted me to fax things in and I said, I’m sorry, I don’t have a fax machine. I’m not going to get one. I ended up …anyway, that’s a whole other story, but my point is it’s amazing how broken it is, how backward not broken, how backward it is. So maybe take you can take us through, give us a picture of where you think it’s going to be, whether it’s five years time or ten years time, and maybe you could sort of …what efficiencies are we going to gain?

Charlie: Sure, so I think the end stage is all of these loans being represented natively on the blockchain, such that it is the sole representation of the loan, there is no paper copy, there is no PDF, it is solely on chain with all of the underlying characteristics, the verification or the service and payment data and there’s other characteristics that give that asset the sort of the certainty and the party in possession of that loan effectively has the ownership and it’s as easy to transact as a cryptocurrency, as a bitcoin and there are digital asset groups at banks and other places talking about credit as a digital asset, so that asset can be traded electronically in similar fashion to equity and FX.

I think the challenge there is less of a technical one and more of a regulatory one in terms of that the loan then becomes a security and the cost and reporting is associated with being a security, which at the end of it’s loan level will be challenging to bear that cost. But I would anticipate that when a loan is on the same lot….. that the ability to actually dice and slice, fractionalize and come up with new financial products in the structured credit space accordingly and leveraging smart contracts in terms of managing the payments associated with those, I think the way that loans are pooled has the potential to change dramatically. But, most importantly, the cost of actually funding and pulling together these transactions should lower dramatically and the actual time involved in doing so should be much, much, much faster. I expect they still will generally be pooled off and those additional loans are trust-provided through the rating agencies and other parties to the larger institutional investors. But, yeah, I think the way in which those transactions occur becomes vastly more efficient and there’s significant savings across the whole value chain.

Peter: Right, right. We all saw The Big Short or read the book, or both, where you’ve got Michael Burry there sitting at his computer looking at what’s actually inside some of these pools of loans and seeing that they’re going to be in trouble. It seems like to me when…obviously you’ve got the cost benefit and the transparency benefit as well, where you look at the financial crisis which, you know, had a lot to do with these mortgage-backed securities that where, you know, were way too…there’s many, many reasons which I’m not going to mention here, but my point is the securitization pools, these pool of loans, when you’ve got them on chain, I presume this is going to be a completely transparent to anybody. This is not going to be this kind of hidden layer that has been prevalent really till now.

Charlie: Blockchain clearly has the potential to improve transparency, but I would prefix that with the appropriate access controls. I think applied appropriately it would have helped considerably in the context of the financial loan crisis. As an underpinning technology and infrastructure, it would have enabled much easier reporting and transparency if the parties involved wanted to provide that transparency and could help ensure that information wasn’t misrepresented or if it was changed there was the immutable audit of any changes in the challenges around the core of verification (microphone noise) misrepresenting of income, that none of those would have been feasible, so it definitely would have had the potential as a technology to remove a lot of the risk in terms of sort of transparency with the relevant parties giving access to the other parties of that data, but it would certainly become a lot easier. I think a lot of the 2008 issues weren’t necessarily that people didn’t want to give access to that data, it was just very hard to actually get all of the relevant line data in front of the relevant investors. So I think as an underlying technology it would help to do that quite dramatically.

Peter: Right, right. Okay, we’re running out of time, but a couple of things I want to get to. You know, I published a piece recently on what Mike Cagney is doing with Figure and Provenance….. what you’re doing at GDR, how is it different and how is it similar to what the Provenance blockchain is trying to do?

Charlie: Sure, so Mike and the team are doing some great work over there and I think they share a lot of the same visions of Provenance longer term and they see some similar inefficiencies in terms of how credit is financed. We both chose to work with IBM Hyperledger, using some similar underlying technology. I think how we’re tackling the opportunity is somewhat different from how they’re tackling the opportunity, so we’re focused on working with the group of banks as our minimum viable ecosystem and going deep on a specific use case as part of that asset characterization.

The collateral pledge activity is our phase one whereas Provenance is going end-to-end in terms of the digital asset creation partnering up with colleagues in terms of demonstrating that minimum viable ecosystem. So they’re sort of tackling the opportunity in a somewhat different go-to-market way. We see this as a very much…a phased approach, multi-year to get into that sort of end state of the truly digital loans and a lot of that around creating standards and common ways to be reporting loan information on chain, getting the incentives model right in a sort of social construct are absolutely critical.

I think we’re taking a position that there still will be a requirement for many of those third party services that you see exhibiting around ABS East and elsewhere in terms of custody and trust services and legal and verification, etc. but they will evolve dramatically and can and will be a lot more efficient in this end state, but, I think, in general, the parties that we’re working with, they still want an independent third party to stand behind all of these activities to see them in a much more automated, efficient way.

They don’t want to hold keys to a set of digital loans in custody themselves, nor do they particularly want a startup doing that. They want a trusted custody provider, but it’s probably more like a Fidelity cryptocurrency custody service in a digital, traditional warehouse of paper loan documents, so we’re working with incumbents to bring them on that journey. Some of them, I’m sure, will embrace the technology and the journey and others not necessarily because to the incumbents it’s not just any technology, it’s a new business model and in many instances it’s probably a lower price point. An automated service should be a more profitable service for them.

Peter: Right, right, okay. So last question, we are recording this on the very last day of November, as you look to 2019, what are some of the goals that you want to achieve in 2019.

Charlie: My principal goal is demonstrating this minimum viable ecosystem working. We’ve already shown the technology works, we’ve already got a number of banks using it up and running, introduction with IBM. We wanted to demonstrate real value across significant proof of banks which, you know, as I say, the ABS market is principally ten or 11 banks so we want to get a significant proportion of those actively using it across multiple asset classes at scale and for us that is the meaning of the viable ecosystem, phase one, the platforms do other interesting stuff, phase two, three, four in the coming years.

Peter: Okay, best of luck with that Charlie, it’s been a pleasure chatting with you today. Thanks for coming on the show.

Charlie: As always, thanks, Peter. Cheers.

Peter: Okay, see you.

Charlie: Bye.

Peter: You know I look at the securitization markets and see processes that are unchanged for decades and extra costs and time in the system. It’s just inevitable that this is going to change, market forces are going to catch up and demand a cheaper and quicker way of doing things. So I think, whether it’s Global Debt Registry or Provenance or another system, I feel like it’s inevitable that we are going to have a blockchain-based securitization market. It may take five years, it may take ten years, but, eventually, securitization will be unrecognizable from the way it’s done today. I certainly think that will be a good thing. For most of the players involved, it certainly is going to be a more efficient system.

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

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

 

PODCAST TRANSCRIPTION SESSION NO. 177/RANIA SUCCAR

Welcome to the Lend Academy Podcast, Episode No. 177. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

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

Peter Renton: Today on the show, I am delighted to welcome Rania Succar. Her official title is Business Leader, QuickBooks Capital and Payments and that’s part of the Intuit organization. Now most people know about QuickBooks, it’s an accounting software that’s been around for many, many years; I’ve used it myself extensively.

Rania has come in to run their…originally, she came in just to run their lending operation, it’s a relatively new business for them, they launched it not that long ago and she was brought in to really build that up and make it a core piece of the Intuit business. So in this interview, we talk a lot about why she decided to come to Intuit from Google, is where she came from, what she saw was the opportunity, we talk about their approach to underwriting, how they’re able to underwrite these loans very quickly and efficiently, we talk about data and obviously the rich data sources that they have at Intuit.

We talk about funding of the loans, we talk about their new entry into…well their new addition of payments into the QuickBooks Capital umbrella and the thinking behind that. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Rania!

Rania Succar: Thank you, thanks for having me, Peter.

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

Rania: Absolutely. Well I joined Intuit three years ago to lead our QuickBooks Capital business and I’ve long been interested in economic development and creating jobs and driving economic productivity. I got to do a ton of that when I was at McKinsey early on in my career doing work with various governments. We did some labor market reforms, spent a lot of time thinking about the productivity of different sectors and became fascinated by all of that.

And then I got to spend some time in Silicon Valley with Google and saw the power of technology driven innovation and learned all about the concept of 10x change. If you weren’t driving 10x change with something it wasn’t big enough. And so about three years ago when I was looking for the next thing to do when I heard about the vision of Intuit and the work we wanted to do around small business lending and the leadership role that Intuit had when it came to powering the prosperity of small businesses, I was just blown away by the potential and the opportunity.

So to be able to come over here and play a really unique role in super charging the economy with products like QuickBooks Capital and do it by harnessing data-driven innovation and technology, that was super exciting to me. So those have been some of the themes that I’ve been involved in before Intuit. As I mentioned, I spent time at Google, I spent time at McKinsey and I started my career at Merrill Lynch on the investment banking side.

Peter: Okay, it’s certainly an interesting journey you’ve had so far. So then, you mentioned the potential of QuickBooks Capital, maybe we can just get started by talking a little about the product itself like what is QuickBooks Capital?

Rania: Yeah, QuickBooks Capital is focused on solving one of the biggest challenges that small businesses have and that’s access to capital. So at QuickBooks we are obsessed and we’re constantly thinking about how we change the trajectory of success for small businesses. We all know the statistics that more than 50% of small businesses go out of business in their first five years and most often that’s driven by cash flow challenges.

In fact, I think this week we’re about to release a study that we just did that shows some of the challenges that small businesses face when it comes to cash flow, but close to 70% of small businesses lose sleep at night because of cash flow problems and over 50% are leaving opportunities on the table because they can’t access cash flow and so cash flow is a huge problem.

Access to capital is a big driver of that and we’ve all read about it and understand that there’s a lot of market failures when it comes to small business lending because if you’ve been in business for less than two years, you have less than $100,000 of revenue, it’s nearly impossible for a traditional lender to underwrite a small business efficiently and profitably in a way that can actually get capital to the small businesses.

It’s even a challenge for alternative lenders who’ve been out there tapping into so much advanced data to do this. So despite all the innovation in the industry, especially with alternative lenders over the last ten years, there was still a huge problem that has left small businesses underserved and that’s the problem that QuickBooks Capital came in to work to solve.

Peter: Right, and so it’s primarily or I imagine it’s completely focused on QuickBooks customers, is that correct, the QuickBooks accounting software?

Rania: Today, yes, that’s what the offering is focused on today.

Peter: Right.

Rania: And so basically the way it works is small businesses who use QuickBooks are able to apply for a loan and tap into all the data that sits in QuickBooks. As you can imagine, there’s more financial data in QuickBooks that small businesses can use to apply for a loan than they could anywhere else. So it includes all of their transactional historical data, which is very interesting, but also all of the future forward looking data.

As you may know, over 240 million invoices are sent a year through QuickBooks and so when you can understand future profitability, historical profitability, when it can all be put in context to so many other small businesses because QuickBooks is the largest ecosystem for small businesses out there, that’s translated into being able to offer capital to small businesses who otherwise would never have the opportunity to get a loan. And if they did, the terms they can get through QuickBooks Capital are much better.

Peter: Yeah, right, that makes sense. You know, it’s interesting because….obviously, I’ve been following you guys for a while, I’ve used the QuickBooks Online product. In my old business I used it exclusively so I know the product from multiple perspectives, but it’s interesting because I actually went to visit the Intuit…I think it’s the headquarters in Mountain View, California back in 2015, really we were doing sort of a fact finding trip for LendIt, wanted to meet with some of the people there.

Back then, you had a partnership with OnDeck and a couple of others I think for lending, but I remember being in that meeting and coming out of it talking to my partner, Jason, who I was in the meeting with saying, wow, this company has so much potential and yet they weren’t really leveraging pretty much any of that potential. It seems like now…I mean, you started it seems like a few months or a year after when we had that meeting, but what we talked about is data.

I mean, QuickBooks has the richest database of I think just about anybody because you’ve got granular transactional level data, you see every single expense, every single receipt that comes in so I guess…I’m curious about, like when you started, because this didn’t exist, I mean, QuickBooks Capital wasn’t there when you started. Was that really part of what sort of attracted you? You saw what was there and what it could be because it’s certainly…I see where you are now from the way you were three and a half years ago when I was sitting in your offices in Mountain View and it’s dramatically different.

Rania: Yeah it is exciting, the trajectory we’re on has been incredible. I came from Google, as I mentioned, which was full of innovation and the things that we were pursuing were just beyond exciting. To come here, I have to say, I’m even more excited coming to work every day by what we’re working on and the potential of what we’re working on and so as a company, we have renewed our vision for what QuickBooks is over the past few years and QuickBooks Capital is at the heart of it, but it’s only one of the many things that we’re doing.

So we talk about smart money, smart decisions and smart connections and it’s all powered by data so a small business doesn’t use QuickBooks anymore just for accounting. QuickBooks is meant to help them become a smarter business owner to tip the odds in favor of small businesses, you know, to take away that lonely journey and to tap into all the data that sits in QuickBooks to help them, as I mentioned, with smarter money, smarter decisions, smarter connections.

So on smarter money, we’re tapping into big data, machine learning, artificial intelligence to do things for small businesses based on that data in the ecosystem that couldn’t happen elsewhere. So of course, it’s access to capital, but it’s also help getting paid faster, solving some of those accounts receivable challenges, again, through the power of big data and we can talk about some of the ways we’re doing that.

We’re also working on things on the smart money to help alleviate some of the major challenges when it comes to payroll. Within QuickBooks, we run payrolls for one in twelve employees in the country, we’re a top two payroll provider across the country. And so we’re in a position to launch things like same day payroll and next day payroll to not have small businesses…to allow them to hold on to their money longer as they do payroll. So that’s the smart money side of things.

The smart decision side of things is to tap into all of that data so that small businesses are powered with the insights that they need. We’re able for example to say, it looks like this is about to be a very busy seasonal period for you and we can see that down to the industry, down to the narrow geography and say, have you invested in the additional inventory you’re going to need to make that season a success? And we’re doing that through QuickBooks Assistant, for example, we’re using voice-powered artificial intelligence, etc.

On smart connections, we’re helping create the connections that small businesses need to be successful, whether it’s connecting accountants to small businesses, or small businesses to each other, or small businesses to the self-employed when they need to find work. So there’s many, many things involved in that vision. Some of those exist today, some of them will come online over time, but the opportunity that we see to transform the trajectory for small businesses is really exciting and compelling.

Peter: Sure, as a small business owner my entire career, it’s exciting now that…I feel like it’s a good time to be a small business owner because you have a lot more tools at your disposal and you obviously have access to capital in more efficient ways as well. So I want to go back to just talk about the actual product itself and maybe you can sort of give us some sense just of the type of loans these are, the lengths, how’s the repayment, and what’s the typical interest rate; just give us a range on the loans themselves.

Rania: The loans range anywhere from $1,500 term loan up to $100,000 and so we’re really focused, as I mentioned, on giving capital to the underserved small businesses. So we realized…you know, we started at a $5,000 amount, but we realized that sometimes even smaller amounts can make a big difference to small businesses so we’ve gone down and gone up. These are short-term working capital loans, they range from 3 to 12-month loan paybacks and we also have weekly and monthly payback.

The interest rates are extremely competitive. The important thing about the interest rate here is that we believe with the precision of our data, we’re able to understand risk better than other lenders out there. Again, we’ve talked about the extreme precision and the ability to price based on that and so small businesses will typically…we hear that they feel great about the interest rates, but the APRs range from 8% all the way up, you know, they’ll go into the mid-20’s, for example.

Peter: Right, right, okay, got it. I know you’ve got a massive customer base, what is the profile of a typical QuickBooks Capital customer when they’re taking out a loan?

Rania: It’s really exciting. One thing we’ve seen is that 46% of small businesses who are taking out these loans never applied for a loan before and we are incredibly excited by that statistic because it means that historically, these businesses that have needed capital had felt intimidated or daunted by the process of applying for capital. Whereas in QuickBooks, it’s so simple, it’s just there for them. They have a historical relationship, there’s deep trust with the brand that they go for it so that’s one thing that’s extremely positive for us.

And then the other statistic that’s very exciting is that 90% of people who’ve taken a loan from QuickBooks have used it for growth. So we featured a story of a small business at QuickBooks Connect last week where a business had one floor that they were using for the business, it was for various vendors to come in and sell their goods, like a market. They had one floor built out and they wanted to expand to the second floor, but to do that they needed to retrofit the second floor to fix all the HVAC and the heating and everything and the electrical work and they needed the funding to do that and they weren’t able to get a loan anywhere else.

Through QuickBooks they did it and they were able to double their business and grow their revenue substantially. We also have other businesses who’ve used the capital to expand into other parts of their business that helps them solve their seasonality problems so we’ve had businesses that…for example, there was a ski manufacturer that had just a winter business and with QuickBooks Capital was able to add a beer garden onto their shop and expand into a summer business and solve their seasonality problem.

So whether it’s to buy inventory for an upcoming season, or to buy inventory in bulk and get better rates, or to expand their business with some construction opportunities, we’ve seen these loans power different opportunities for small businesses and that gets us really excited.

Peter: Yeah, for sure. So then do you still have that marketplace…I know it was in existence back in 2015, partnering with companies like OnDeck and Fundbox, is that still in operation, or is everything done through QuickBooks Capital?

Rania: That’s still in operation. QuickBooks is an open platform and that’s core to our strategy. We believe that small businesses come to QuickBooks to run their business, for it to be the hub and center of their business and they connect several different apps and experiences that compliment their business end-to-end. So there’s many different reasons that a small business may need a loan.

QuickBooks Capital, our direct lending offering provides those short term working capital loans, but then they may need a secured loan or a longer term loan and so we believe that the marketplace can add quite an important compliment to what we’re doing and help small businesses solve all of their financing needs. So it still exists and it’s growing quite nicely and we’re excited to see the progress there as well.

Peter: Okay, so let’s talk about data for a little bit, we’ve already touched on it, but obviously you have the transaction level data from all of your customers, but can you tell us your approach when it comes making an underwriting decision? I mean, how do you process all that data and what about other data sources as well; maybe you can just run us through your approach to underwriting.

Rania: Absolutely. We have invested quite a bit in our underwriting models, our credit models, our real-time decision engines, all the infrastructure that can crunch so much of this data very rapidly for small businesses. We built our credit model on top of 27 billion data points and it’s growing constantly so when a small business applies, we’ll take into account all of the data we see in the ecosystem so certainly there is QuickBooks transactional data, their connected bank account data, we look at third party data as well and the richness of the QuickBooks data to give you a sense…

As you may know, we purchased TSheets last year so we can see all the time tracking data or we can see the payroll data which is of course one of the biggest expenses. Small businesses connect Bill Pay through QuickBooks, they’ve got payments providers and processors and of course we’ve got QuickBooks Payments which is one of the largest payments providers in the country. So we have all of that data and then we see future looking data from invoices and all of that so all of that is taken into account in the decision making.

Then of course we’ve built quite a bit of advanced machine learning to understand things like, as I described earlier, what does the seasonality look like of this business, is this business seeing low cash flow today but about to see really strong cash flow because they’re about to hit their strong seasonal period? That took quite a bit of advanced machine learning and modeling work, but that is a great way to look into the future cash flow of a small business.

And then we have done other things like understanding how likely is that invoice to be paid back, not only do we see future revenue, but because we see so much invoice data and understand the payers, how likely is that payer to pay back at all and if they are to pay back, when do we expect them to pay back. So this is very much based on what is the ability of that small business to pay back?

It’s not just a revenue-based model, we do really look at debt service coverage ratios, all of this in real-time to understand, can this business pay back that loan which is extremely important to us given the role we play with small businesses. We want to make sure that these loans are empowering small businesses to grow in strength and to succeed and so we work on pricing it right, making sure we’re lending that small business the amount that their business can sustain.

Peter: Is this a fully automated process? When a business is applying for a loan, obviously you’ve got all the analysis going on for the underwriting, but does a human sort of take a look at every loan, or is it fully automated?

Rania: It’s a mix. We are working to automate more and more and more of the process. When we started much of it was manual and we were reviewing everything so we could learn and make our models better and over time, more and more of it has become automated and different loans, different types of loans and different loan limits will have more automation versus more manual intervention, but as I mentioned, it’s a mix. But it’s very important to us to help small businesses get decisions in real-time and so the automation component is quite critical.

Peter: Right, right. So then, I think you launched…was it 2016 you actually launched? Maybe you could tell us when you launched and sort of what is the scale you’re at today, as far as loan volume goes.

Rania: We officially launched a year ago, we announced it last year at QuickBooks Connect, we were doing a small pilot before that, but the real launch was a year ago. At the end of our fiscal year, which was in July, we announced we’ve done $140 million of loan volume. We believe that that’s one of the fastest ramps of a small business lender out there and we’re continuing to see really strong growth, but that’s the timeline of when we launched and what’s been happening and it’s been fun.

There’s been so much innovation, it’s been incredibly fun to be part of this team to get, you know, all of the…Intuit does this quite well, but all the principles of fast and rapid developments and minimum viable product. We launched early, we saw how our customers reacted, we learned quickly from our customers and there’s been almost a new launch or a new innovation or a new feature that’s material every few weeks and every month. Rapidly innovating on the data and the background, pulling new sources of data constantly, innovating on the product itself, innovating on the customer experience so we really believe we’re just getting started and there’s so much more we’re doing and bringing to our customers.

Peter: And given these are fairly short term loans…I know you haven’t launched that long ago, you would have had some insight into your loan performance I imagine by now given the short term nature, what can you…I know you’re a public company and everything, what can you tell us about loan performance, so far?

Rania: What I can tell you is it’s doing better than we expected. We’ve been able to grow the base so much because our data has proven even more powerful than we expected in predicting risk. And so when we started, we hadn’t opened it up to businesses that were younger than two years and now we require something like six months of transactional data to be able to lend to a small business. And so that’s just demonstrating the power of the data and that the data is able to help us go into younger and younger populations and still see loan performance that we are seeing as better than peers in the industry so the data has been quite powerful.

Peter: Right, and obviously…I believe there is…maybe you can tell me a sense of like how many QuickBooks Online customers are there? I believe this is only available to the QuickBooks Online customer, you can correct me if I’m wrong, because when I did QuickBooks I started off actually on the offline product and I migrated to an online product, but I imagine there’s still people running the offline product.

Rania: That’s right.

Peter: Can you tell us, what are some of the metrics or the numbers on the different types of customers you have?

Rania: Yeah, there’s 3.4 million QuickBooks customers today and the growth is just tremendous, I mean, it’s pretty incredible to see this, but we added a million incremental QuickBooks customers just in the last year. I think the first ten years of QuickBooks, we added a million and in the last year, we added a million and we’re just seeing growth continue at the same pace if not accelerate. So there’s quite a big base of QuickBooks customers and as I mentioned, the ecosystem of everything else that small businesses are doing in QuickBooks makes this central to them.

So there’s the payroll side of the business, there’s the payment side of the business, there’s time tracking, there’s automated sales tax and then of course, there’s the apps ecosystem where small businesses are coming in and connecting up to 15 and sometimes more apps to their ecosystem, and then of course, the accountant community so all of that builds on itself, and then we have the self-employed side of the world.

QuickBooks made a big investment and a big bet around the self-employed four/five years ago and that’s been growing tremendously and we’re really innovating in that space for the self-employed and providing more value than perhaps any other player out there. Just a few weeks ago we announced that we’ve moved into the mid-market segment as well which we’re calling the QuickBooks Advanced Offering.

And so a small business can come in from the earliest days and they can stick with QuickBooks and grow over time. And that’s our vision for the lending side of things too; that they come in when they’re youngest and they can’t tap opportunities anywhere else and then QuickBooks Capital can grow with them and be a constant source of credit to tap into as they need to take advantage of the next opportunity they have in front of them.

Peter: Yeah that’s a really good idea because when we first started LendIt, we actually were on QuickBooks and then we hired a finance person and they said oh no, we’re too big for QuickBooks now, we need to move on to something else. Obviously, we let them run with it, but that’s good that you can see that a small business as it grows can stay with you.

Rania: Absolutely.

Peter: Okay. Then let’s talk about the funding of these loans. From my understanding, you are funding everything from your own balance sheet, obviously you can confirm if that’s correct and are you going to start looking for outside investors to fund these loans, or what’s your plans?

Rania: Absolutely. We did start funding all of these internally on our own balance sheet just to get things going and to start and make the R&D cycle very fast and rapid, and as we’ve mentioned, there is the intention to partner over time with other investors and that’s certainly the direction we plan to take.

Peter: Okay, but as of right now everything is being funded from your own balance sheet?

Rania: Yes.

Peter: Okay.

Rania: Again, with the intention of working with partners.

Peter: Right, right.

Rania: But in the early days, it was very important to move very quickly in this space.

Peter: Yeah, yeah, I understand. And you’re making money…I was just on your website before we started this call and the way you make money, it seems like…there is no origination fee, it looks like. There’s just…on your website you say, no origination fees, no pre-payment penalties, no surprises and it’s just interest that the company pays. Is that correct?

Rania: That’s right and the entire QuickBooks Capital offering is very much founded on transparency and being a white knight for small businesses and leading the way when it comes to regulatory matters and compliance, but really putting the customer first. And so this lack of surprises is a critical thing.

It’s amazing that most existing alternative lending offerings today have a pre-payment penalty. If you pay it early, or you keep it the entire time, you’re still going to pay that interest amount, you know, if the cost is 10% of the loan, that’s what you’re going to pay if you pay it back in one month or nine months and that’s an unfair burden for small businesses to have to shoulder, and so that was very important for us as we launched this.

One of the interesting statistics is that, and this is from the Federal Reserve, more than 50% of small businesses who take a loan, around 50% of small businesses who take a loan with an alternative lender today are dissatisfied with the experience and that’s often because of the incredibly high interest rates and often these surprises and pre-payment penalties. And so as we designed this putting our small businesses first, it was very important that we set QuickBooks Capital up differently.

Another thing is that we always disclose the APR and that is very rare too, you often don’t find that with some of these other offerings. They might say the cost to borrowing is 10%, but the APR could be well into the 30’s and as we all know, even in the high, well above 50%, and so that was a very important thing for us too that we would always show the APR on our website and always lead with that for the small business so their cost of borrowing might be less than 5%, for example, hypothetically, but the APR, we will always be very clear about that.

Peter: Right, I think we’re moving in that direction, I mean obviously there was the State of California, I believe, passed something for more transparency in small business lending.

Rania: Yeah.

Peter: There’s the Business Borrowers’ Bill of Rights and there’s other initiatives that…I mean, we have it in consumer lending where we have The Truth in Lending that really has been around now for decades and is sort of the bedrock of the consumer lending space whether you take a car loan, a student loan, a mortgage loan, you’ve got this one document that is consistent that shows everything pretty clearly and you don’t have that in small business so it’s a little crazy, I think, that there isn’t that same regulatory requirement for a small business owner.

Rania: That’s right, that’s right. We feel that way too.

Peter: And just on regulatory, you mentioned it, I know that you are a partner with Financial Innovation Now, you’ve got some of the biggest hitters in the country, it’s Amazon, Apple, Google, Intuit, PayPal and I even see Stripe is now a member, so tell us a little bit about why you are a founding member of this organization and talk about your engagement in Washington and what you’re trying to achieve with that engagement.

Rania: It builds on some of the discussion we were just having which is that there’s tremendous potential for technology and some of these fintech companies to add tremendous innovation and benefit to small businesses and to open up credit and capital to small businesses in a way that can change the trajectory and yet there’s opportunity for regulation and improved standards for the industry.

And so we were a founding member of FIN, Financial Innovation Now, in order to help educate and inform the DC community about the potential benefits of data-driven innovation for small businesses, but also to share more about our perspective on standards we could set to ensure that we were protecting small businesses in all of this. So it’s to help create clarity about the potential benefits, but also to, you know as I mentioned, inform on some of the opportunities to improve the regulatory environment and to strengthen it.

Peter: Right, okay. Briefly, we are running out of time, but I wanted to just ask about payments because when we first chatted which was about a year ago now, it was just QuickBooks Capital. Now I see when you go to your LinkedIn profile you’ll see it’s QuickBooks Capital and Payments so it seems like you guys have brought payments under your roof. So tell us what was the thinking behind that and tell us how the payments and the capital pieces are connected.

Rania: Great. Well first just context on QuickBooks Payments. Not many people know this, but QuickBooks Payments is one of the largest payments facilitators in the country. We do about $50 billion annually of payments processing for small businesses across credit card and ACH and so it’s a key solution for small businesses who are looking to get paid.

But we thought it would be wonderful to bring the businesses together, QuickBooks Capital and Payments because it would help us solve the true big challenge of small businesses when it comes to both these areas which is cash flow, as we started talking about at the beginning of this discussion.

So our vision is, you know, if you’re a small business and many of the small businesses who are using QuickBooks are invoicers so they get paid later. More than 50% of small businesses get future payments rather than payments here and now and so for them they tend to have a big receivables challenge and that can be…you know, the typical business has over $55,000 of open receivables, and so that can be a big challenge for small businesses. So by bringing these pieces together, payments and capital, we can create a world where whenever you send out your invoices, you’ve got capital available there for you that you can tap into.

And so by bringing these together we can push product innovation that help small businesses no longer chase getting paid, no longer worry about cash so we are just beginning the journey on our side to create whole new categories of products here that can solve some of these challenges for small businesses and you’ll see more and more of that innovation on our part in the coming months and years.

Peter: Right, right, got it. So then speaking of the future, what is your vision? It feels like you’ve got a lot of open fields in front of you. You’re really expanding this space and you’re only just gotten started, I mean, what is your vision for the future of QuickBooks Capital and QuickBooks Payments?

Rania: Several things. There’s quite a bit that we’re innovating on. One thing that we didn’t spend a lot of time talking about is the work we’ve done on QuickBooks Capital around business credit scores. And so that’s one of the areas we’ve just announced this year and that we’ll continue to innovate on, but you know, more than 50% of small businesses don’t have a business credit score and we found a lot of hunger as we launched QuickBooks Capital for small businesses to take a loan just to start building credit because the capital product definitely helps them build credit by reporting back to commercial credit bureaus.

And so what we did, building on that insight, is we recently introduced a new credit score in QuickBooks with Dun & Bradstreet. So it’s the D&B credit score in QuickBooks that we’re offering for free for all small businesses which isn’t available in other places that they’re able to get so we’re working on strengthening education around business credit scores and helping small businesses build those out. That’s one area that we’ll continue to lean into over time.

You can also imagine a world where the QuickBooks Capital credit score becomes stronger and stronger and small businesses can take that with them so small businesses join QuickBooks can take that with them and use it to tap into new funding sources in other places as well so that’s one big theme.

Another theme is certainly around the cash flow side of things. We want to eliminate some of the pain that small businesses feel around cash flow so how do they tap into QuickBooks, see their available QuickBooks Capital balance, have it grow with them over time, just have it to draw down from anytime they need it for the various work that they do.

Also on the cash flow theme, we’re working to build out a cash flow forecaster that helps small businesses understand when it’s safe to spend and to help them make informed decisions around, you know, the season really looks good this season, make that extra investment in inventory, for example, or hire this extra worker. So there’s that piece, for sure.

And then, of course, continuing all the work that we’re doing around data innovation to continue to be able to offer more capital to small businesses and continue to offer better terms so there’s quite a bit of work around data innovation. Despite everything we’ve done in the past year, we know that we’re just getting started there.

Peter: Right, well, it’s exciting times and I really appreciate you coming on the show today, Rania.

Rania: Thanks for having me, Peter.

Peter: Okay, see you

Rania: Alright, bye.

Peter: As I said earlier, this is a really good time to be a small business owner. You have access to tools that simply weren’t available just a few years ago and it’s really interesting to me that there’s many companies competing to be that financial hub for the small business owner. Obviously, QuickBooks have a massive leg up because they have a relationship with millions and millions of small business owners already, interesting that they’re back growing fast again adding new customers, but the thing is, most small business owners don’t really want to sit around managing finances.

They want to run their business, they often have a passion for the industry that they’re in and they don’t want to sit around thinking about money and payments and getting a loan and that sort of thing. I feel like just like in the consumer space, I feel like in the small business space we’re not far away from really having tools that can anticipate your needs, that can really provide intelligence that is actionable, that is useful and business owners will be able to spend less time on the financial side of their business. It’s exciting times and I think we’re going to see it become ever more useful as time goes on.

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

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

PODCAST TRANSCRIPTION SESSION NO. 176/ANIL STOCKER

Welcome to the Lend Academy Podcast, Episode No. 176. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

Today’s show is sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s coming up very shortly on the 19th and 20th of November in London at the Business Design Centre. It’s not too late a get a ticket as we’re recording this. You can go to lendit.com to find out more.

Peter Renton: Today on the show, I’m delighted to welcome Anil Stocker, he is the CEO and Co-Founder of MarketInvoice. Now MarketInvoice has been around for quite a few years, they have really become the leader certainly in the UK, and potentially even globally, in online invoice finance space, but they certainly have aspirations far beyond that.

We get into that in some detail on the show, we talk about their approach to underwriting and we spend quite a bit of time going in depth on their new partnership with Barclays, fascinating conversation there about that, where they’ve got quite a deep partnership with Barclays providing invoice finance to the million small business customers that Barclays retail bank has in the UK. It was a fascinating conversation, I hope you enjoy the show.

Welcome to the podcast, Anil!

Anil Stocker: Hi, Peter.

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

Anil: Sure, so my name is Anil, and I came over to the UK, went to school and studied economics and actually met my future co-founders at university. I first started working in a big investment bank, I joined Lehman Brothers back in 2006 working in a private equity fund, investing in companies and that’s where I kind of got to grips a little bit with cash flow and financial requirements from growing businesses and then went to another kind of smaller private equity shop. Started in 2010, to kind of looked around and wanted to start a business and that’s when I kind of started to think about fintech and what I could do as an entrepreneur.

Peter: Okay, so what was sort of the catalyst, what was the idea that led to the founding of MarketInvoice?

Anil: Yeah, look it really came from spending a lot of time with small businesses. I think I had a bunch a ideas. One of them was to kind of start investing in small businesses in particular sectors here and I probably met about 50 businesses and they all kind of were telling me a little bit about their troubles of scaling, the need for cash, the difficulty of doing business with the banks if you were a small business.

So it was really kind of born out of that experience of talking to them and probing around what the problems were that I started to think about what I could do. What’s interesting is many of the businesses wanted access to capital, not necessarily equity investment. They wanted debt finance, they were struggling to understand invoice finance. They had ambitious plans and they wanted to grow, but they just felt frustrated that the lack of funding was holding them back.

At a kind of macro level finance I felt was on the precipice of change, the big banks were being distracted by other regulatory issues, and fixing themselves inside and I felt that technology would change finance just like it has changed many other sectors so that’s when we started writing the business plan of MarketInvoice and trying to make a difference.

Peter: So why specifically invoice finance, why did you start with that? I mean, you could have done…obviously, Funding Circle was already I think just getting going around that time. Why invoice financing, and why not just do regular loans or what was the reason?

Anil: Yeah, look invoice finance was a slightly less well understood segment of the market, it was very manual, there was a lot of paperwork that was quite complex to get set up so we just felt like the pain was being felt a lot by small businesses. We also figured that if we could make this easier to use, a lot of small businesses would find invoice finance extremely powerful because for many businesses their only assets that they have are their invoices, the work that they’ve completed and waiting to collect cash on.

And then from an investor perspective, because, you know, we wanted to do a marketplace where high net worth would fund these invoices, we felt that from an investor perspective it was quite nice to have knowledge that this company was going to receive cash in the future against an invoice so it is secured lending. So that enabled us to de-risk it somewhat from just an unsecured loan so we thought that could be a unique way for us to make a name for ourselves in this space.

Peter: Right. So when you sort of did your due diligence and looked around at the invoice finance space in the UK, I mean, what did see…I mean, who are the major players? Like in the US it’s a very fragmented market, what’s it like in the UK?

Anil: So in the UK, the big banks control the majority of the market, they have 60 to 70%, there  are also independent factoring companies that account for the rest. The big banks tend to focus more on the larger end of the market which leaves a little bit of a hole at the smaller end and some of the independent factoring companies approach that segment. That’s why we wanted to start at the smaller end and figure out a product that could be used by the smallest of businesses. We felt that if we helped the smallest of businesses as they grow they would come back to us and feel allegiance to us.

Peter: Right, right. And so maybe you can take us through the offerings. I see on your website here you can actually finance individual invoices, you can finance like all of your invoices, you can get funding against contracts, what have you. So tell us what you started with, what was the very first product and how has that evolved over time?

Anil: Our first product was the single invoice finance product. So let’s say you’re a media company, you’re doing work with Sony, you have a hundred thousand pound invoice, you’re waiting 90 days for it to get paid, the business could bring that invoice to MarketInvoice, you could apply online, get a decision within 24 hours and borrow let’s say 80% of that invoice face value up front. They still get the remaining payment at the end when they get paid so this kind of on demand, pay as we go, single invoice product was really perfect for small businesses that were looking to grow, that didn’t have a big enough overdraft, that couldn’t get any debt finance and this was a neat tool for them to top up the amount of money that they could loan with us.

What we found was that when a company starts to use us once, they would then use us repeatedly. So from there, we saw that many businesses were starting to use us repeatedly were growing, were getting larger, they started to have the need for a more permanent solution and that’s when we introduced the invoice finance subscription.

So we built some technology that integrates with a company’s accountancy platform, pulls data and gives them a permanent balance so they can download a certain amount of money against total stock and invoices. That also makes it more secure, makes it a lower APR product so it’s quite nice for businesses to start with single invoice and then graduate on to the subscription.

As we’ve been working and funding companies in different sectors, we also identified that some of the more newer industries like software companies, they had these contracts that were one year/two years in duration that would get a monthly payment so that’s when we developed our contract finance offering where they could accelerate payments of that contract up into one upfront payment. So let’s say you’re a company and you’ve got a database and you’re getting paid every month, you can take 12 months of those payments and get financed against that and that lends itself well to technology businesses.

Peter: So those three products…I mean, what is sort of the volume that you do…how is it sort of split between those three products?

Anil: So we’ve obviously had a lot more years of track record with the single invoice finance product so we’re probably about 60% still single invoice, about 40% subscription and we would count the contract finance within the subscription, but we expect the real vector of growth to come from the subscription finance product because those tend to be larger businesses that have a more permanent need for capital. So what it’s evolving into is that the single invoice is kind of the entry product and then companies graduate on to subscription.

Peter: Right, right, got it. So you must sort of have a pretty tight kind of connection to the accounting software for these small businesses, I expect, because I’m just wondering about… you can’t sort of email in a PDF of an invoice or maybe you can, I don’t know, you tell me, but it’s pretty easy obviously to create a fake invoice. How do you work with that, I mean, how do you sort of verify that everything is correct, do you have to interface into the accounting software for everybody even if it’s just a single invoice?

Anil: No, so if you’re using single invoice you can manually upload invoices and many companies do that. We are doing extensive checks on the borrowers as they apply to us so we look at the business, we calculate the credit score of the business, of the borrower, we take public information as well as financial information, we do fraud checks, we approve the borrower, we’re then performing the verification of invoices through various means. We’re able to verify that invoices have been received by end customers, we look at the quality of the end customers and we are then able to release funding on a risk-based approach so every transaction is placed into a different risk category and we have different advance rates and different fees. Now if you’re using the subscription product, you do need to integrate your accountancy package because that’s a tighter relationship…

Peter: Right.

Anil: These companies are drawing down funding, sometimes every day, every week, so one way that we monitor the business’s performance is through their banking data and their accountancy platform so that enables us to automate a lot of the work that was being done manually with manual reconciliations by banks.

Peter: Right, you’ve got an interesting product, it’s not like….with a small business loan you’re underwriting the borrower. Here, you underwrite the borrower, the vendor and the actual transaction itself because, obviously, there could be…someone could say that it’s…there could be a real invoice out there, but the amounts might be different. So you mentioned just briefly that you validate the transaction, but like how do you do that?

Anil: There’s a number of different ways. Obviously the first transaction is the riskiest one because the company doesn’t have a track record.

Peter: Right.

Anil: So we have various e-mail based ways, online…you know, some companies have online portals that they log into. For large transactions we might even do a telephone based verification as well so the first transaction is the riskiest, then as the company starts to build track record we see payments flowing into their bank account. We’re able to sort of derive patterns and understand what’s the funding need of this company and if there’s anything out of the ordinary we might re-verify so it’s really a risk-based approach we take.

Peter: Okay, fair enough. I know you guys have been around for a while now and you really are one of the leaders in this space, certainly in the online area. How are you finding new deals? Are you finding that you have…you get a lot of referrals, what are the typical sources to find new customers?

Anil: Businesses find us directly so we get a lot of organic referrals from entrepreneurs that have used us and talk about us, we’ve built a little bit of a brand here in the UK, we’ve done some advertising, we go to relevant events and kind of do customer case studies so companies hear about us and apply. We work with other referrals so we work with the accounting community, we work with financial brokers who pass us opportunities to look at to be funded. And now, we’re really trying to start to make deeper connections in certain industries where we know that the underlying customer base is very well suited to our product. And finally, strategic partnerships are a big area of interest for us right now, you know, partnering with banks, partnering with financial institutions, partnering with accountancy, software providers, that’s perhaps the next phase of how we can really scale this.

Peter: Right, right. And then what about moving on to the other side of the equation here on the investors. I know you guys are members of the P2PFA, you have a peer-to-peer element, I’m curious about…you said you started off with high net worth individuals, I presume you have institutions as well, I mean, how’s that mix? Tell us a little bit about the investor side.

Anil: Yes, we started off with high net worth investors, but as we’ve developed, we have moved that funding mix to be more coming from institutions and within those institutions we now have banks deploying funding on the platform, so we have three/four banks, they understand the asset class, they can give us more scalable lines, they have lower return expectations than the high net worth community. So we’ve now pivoted more to having 70% from institutions and 30% from high net worths so yeah, we see the future really coming and scaling through institutional arrangements.

Peter: Right, right, that makes sense. So then what are the interest rates here, like tell us a little bit about the interest rates you’re charging. Obviously, these are pretty short term, the durations, I imagine, 30, 45 days or something. What are the returns that you’re providing and what is the sort of the cost to the customer?

Anil: Yes, so as you say, it’s a great asset class for investors, it’s short durations, it’s secured and it’s yielding, blended across all of the products, probably 5 to 6%, between 4 and 6%, in terms of annual return. It depends a little bit on your mix so if you’re funding single invoices you might get slightly higher yield and if you’re funding the subscriptions which are a lower risk product then you will get slightly less than the range that I mentioned.

So you know, blended, we’re trying to get out 4 to 5% or so for investors which is really quite a good return given the short duration nature of the asset class. You know, funds are not locked up for many years, you know, investors can scale in and out, they can tweak their mandate to exclude certain sectors or certain geographies or they could put limits on total amounts that they would like to have deployed against a single borrower or even against a debtor, right, so if you want a max exposure to Amazon. It makes you not reach that, our system makes it very easy for you to control that. So it’s a pretty attractive proposition for investors.

Peter: Right, right. One of the great things about the UK platforms is you guys put a lot of information online for investors and I’m just on your statistics page right now and I see you’re just under 3 billion pounds of total originations as of this recording. I’m looking through and you’ve really had…2018, you’ve had a great year, so far, as far as loan volume goes, looks like you’re going to be close to double, probably more than double by the end of the year it looks like, so you’ve really ramped things up. I mean, what’s driving your growth this year?

Anil: So that’s really coming from our subscription product so, you know, companies that get on to the subscriptions, they really tend to stick around. When we look at the data from the banks,  invoice finance users stay for on average five years using this product. So when we get a customer and they start to use our subscription, start to download cash every month then it starts to layer. As we get more customers, we get more volume building so that’s why we’re quite excited at the moment that we can really scale this out and become a very big player in this market in the UK which is large. There’s like 20/25 billion outstanding in invoice finance in the UK, it’s one of the biggest markets in the world.

I guess the other reason is that people are gaining more awareness of invoice finance as a product. It used to be viewed as a kind of a niche product, it used to be viewed as like a funding product of last resort, but business owners now, especially the younger generation, really understand that they can unlock this cash on their invoices.

In a recessionary environment or in an uncertain environment, banks and other financial institutions are telling their customers more about asset-backed lending because they don’t want to be in the unsecured space, they want to be lending against assets such as invoices so there’s great awareness, the market is generally growing as well which is adding to it. When people start to shop around they will usually find us and so we’re getting a lot of interest right now.

Peter: Right, right, okay, makes sense. So I want to switch gears and talk a little bit about the big deal that you announced here with Barclays just a couple of months ago so the first question on it is when did you start talking to Barclays? It sounds like from what I’ve read, they approached you so tell us sort of how this all began.

Anil: Yes, so it’s interesting because Barclays here in the UK ring fenced part of their bank, so they separated out their corporate bank from their small business and retail bank. This retail bank called Barclays UK has about 1 million business customers that have bank accounts with them and their product team at Barclays reviewed their product set, reviewed the applications that they were getting and they did not have an invoice financing solution that was fit for purpose. They had an invoice finance product that was very well suited to large corporates, but nothing that really met the mark in terms of experience, speed and support for small businesses like businesses turning over less than 10 million.

And then they went on, I guess, this soul searching, should we build it ourselves, should we partner and I think they kind of realized that, hey, actually, we’re not just looking for bits of software, we’re actually looking for culture, DNA and innovation of trying to make our products more digital and that’s when they did a review of the market and they approached us and we sat down and spoke with them and it was one of these great meetings where we really had a meeting of the minds.

They liked our approach, we said that not only do we have technology, we also have great people who are on the phone helping customers, we have a great brand and so they were not looking…important, they were not just looking for like a software provider, they were looking for a true company they could partner with and for us to be a catalyst for change within their finance products which is why this is such an exciting partnership and they worked extremely fast for a bank.

I think we had an initial meeting, we had two or three months sizing up the opportunity and then when they said they want to go…it took about seven months from beginning to end to get the agreement signed and then we’ve already launched a pilot, already getting leads through the door and I’ve been really impressed with how they work.

I don’t think it’s just Barclays, I think many banks right now are thinking about their future, they’re thinking about their product set, how they’re going to compete, how they’re going to retain customers and it’s a very good time for fintech and banks to be talking.

Peter: Right, right. We’re seeing that globally, certainly in the US there’s a lot of activity between fintechs and banks and I think it’s only going to become more so. So that sounds like it was less than 12 months from first conversation to launch of the pilot, it sounds like.

Anil: Yeah, well I guess from first conversation to launch the pilot was about 12 months.

Peter: Okay.

Anil: From the time that they actually decided we want to do this, it was less than 12 months.

Peter: Right, so then just describe how it works exactly because I read that they’ve taken an equity piece in your company so I presume that’s like a separate piece because what you’re doing, it sounds like, is providing these million small business customers with an opportunity for them to finance their invoices, but did you create like a white label site that sits on Barclays.com, just tell us how it works.

Anil: So the proposition is completely co-branded so it’s not white labeled, it’s a partnership and how the partnership works is that Barclays has thousands of relationship managers and staff that handle queries around finance from their customers and we have been embarking on a program of training around how these relationship managers and call center staff can qualify opportunities for invoice finance.

They then push them into our system, they do this online through a portal and that comes into our system and our sales team or our business specialists get on the phone and explain our product in a little bit more detail and then they come through on to the online application form. So it’s kind of a hand-off from the Barclays point person to a MarketInvoice point person. That’s kind of stage one, that’s kind of the phase that we’re in, we’re also starting to do joint marketing in the next year to kind of educate the base on invoice finance and that this is now an option at Barclays.

We’re also going to be working on a digital journey so as businesses log into their business banking dashboard, they’ll see certain widgets and they’ll see a MarketInvoice widget which should outline how much funding they could potentially unlock by using MarketInvoice and then they would come through an entirely digital journey as well. So these things are all phased right because you want to get to market quickly…

Peter: Sure.

Anil: …you want to test and learn.

The second important piece of the partnership is next year that Barclays are doing a lot of work to rely on our credit models for underwriting. It’s the first time that they would ever do this, that they would rely on a third party credit model and then they would start to fund their customers coming through this origination channel so they would start to fund their own customers on the platform so it would turn into an origination and funding partnership with Barclays.

Peter: Interesting.

Anil: So it’s quite exciting.

Peter: Sure, that’s really interesting. So then when do you actually launch….you said you’re in pilot mode right now, is there going to be like an actual launch where you basically have…it’s all out there to….like is there going to be a big public launch when you sort of move on from the pilot phase?

Anil: Yes, so we announced the partnership in August in the Barclays quarterly results call. It was mentioned by Jes Staley, the CEO of Barclays, and we will then do another big push on the national launch so the pilot is a subset. There’s about 120 people that have been trained up in the pilot, they’re gathering great data, we’re getting our first customers through and then sometime in Q1, date to be confirmed we will do the national launch which we’ll scale up by ten times.

As you can imagine, there’s quite a lot of preparation work that needs to be done both on our side and their side so as soon as we can launch it we will, we’ll kind of do a big splash and tell the world that we’re now going to the national launch.

Peter: It sounds like from the way you’re talking, it really sounds like, you found this to be a good relationship where, as you said, there was a meeting of the minds and I’m just curious because there’s always talk about the culture clash between large banks and fintech companies that have been used to moving fast and being nimble. You can just walk into Canary Wharf and it’s a different feel than it is like walking into your offices so how has that been culturally? It sounds like…just tell me what’s it like, do you feel like you’ve had to really work to fit these cultures or has it been more natural?

Anil: That’s a great question, it’s something that we’ve been aware of and debated openly with Barclays since the beginning and the last thing they want to do is stifle us. They want us to challenge them, they want us to come up with ideas, they want us to kind of push the boundaries, but I think that this is only possible if really the senior people at the bank buy into that and really believe in the strategy of embracing partnering with fintechs and making things digital and improving the experience.

What’s quite unique, I think, at Barclays is that they’ve always been a brand that has wanted to adopt technology fast and be at the forefront of the tech revolution. I think they were the bank that rolled out the first ATM, the first credit card so, you know, they have right from the top great engagement from the top of Barclays, from the CEO of Barclays UK down and the core business people are all on top of it and know there will be bumps in the road, there’ll be instances where people at the bank will say that’s not possible, but so far they’ve been really good at like then saying, we have to make it work. Our experience so far has been great, they’re really putting actions behind their words and we’re making really fast progress.

So I’m not going to say that every bank will be like this, but if at the top the culture is one of, we want to embrace the change and we want to work with fintech partners as true equals and really do something new then I think a huge potential is possible. But I think, it’s also important for fintechs to realize that when they might be working on a project and if it is slowing down and the appetite is not there sometimes it’s better to disengage and not continue it because you don’t want to get bogged down in a relationship that’s not working.

Even though Barclays might well have an equity stake in MarketInvoice, it will not be a controlling stake, you know, we are an independent company, we have our own business, we have our own brand, we’re free to partner with lots of other strategic partners in the future. So we’re still going fast, we’re still nimble and we have a great partner with Barclays.

Peter: Right, so then I can imagine you’ve got a million customers, I mean a million potential customers there and I can see you will do like a billion pounds roughly in 2018. It doesn’t take long to sort of see how that could scale pretty dramatically with Barclays, but you don’t want to have like 75% of your business there so how are you managing that as you scale that up? I’m sure you’re very cognizant of the fact that you can’t have all your eggs in one basket, but just tell us how you’re thinking about that for 2019 and beyond.

Anil: Absolutely, we’re very excited about the work we’re doing with Barclays, but they’re not the only partner, right, we have lots of other types of partners that we can work with, be it accountancy or other software companies, other fintechs, other people who are coming on to the market and we also have our standalone business so we have to work hard on all aspects of our business.

Peter: Right.

Anil: It’s not just one partnership that we’re working on and that’s very much our focus in the next few years.

Peter: Sure, sure. So we’re almost out of time, but before I let you go I’ve got to ask you about…it’s on your website so clearly you’re not being coy about it, but there’s business loans it says available soon and funding up to 100,000 pounds, 12-month term. Obviously, you’ve put in our website so what is deal with business loans, are you launching that soon, or why have you got it there?

Anil: We’re currently testing out a loan proposition and again this is coming from our customers who….many of them have been using invoice finance, but also would like a loan and it really just makes a lot of sense for us to…you know, we know these companies very well, they have a long track record with us, we’re seeing their monthly payments in and out, we’re really the best place to offer them a loan.

Whereas in the past, we’ve had to coexist with other banks who might be giving them a loan or an overdraft, we’d like to more and more become a one-stop shop in trying to offer them all the products that they need to run their working capital.

You know, it’s not just loans that we’re interested in, we’re also potentially interested in trade finance, in asset finance; the products that companies need to grow as they evolve their businesses. So we’re gathering some data, we’re testing it out in 2018. In 2019, we’ll probably do a bit more of a sizable push on it and see how it gets taken up by the market.

Peter: It looks like you’re not going head-to-head necessarily with Funding Circle because these are shorter term loans. Is that the plan?

Anil: Yes, yes, obviously, there’s lots of providers out there, it’s not just Funding Circle, I mean there’s banks. We want to compete in the same space as banks and we’re very much focused on B2B businesses and trading business that get paid on terms so we know the verticals that we like, the companies that use invoice finance and it’s really a cross sell and a way of retaining customers for longer and helping them more on their journey.

Peter: Right, right. Okay, you’ve got a lot on your plate, but when you look to 2019, what are some of the things you’re excited about beyond sort of the Barclays partnership, obviously it’s going to take up a lot of your time personally, I imagine, but what else are you looking at for 2019?

Anil: 2019 is all about scaling up partnerships, working on some more, looking at our product mix and then behind the scene, a lot of tech and automation and data work to make our processes really tech-driven, really smooth, frictionless and automating some of the back end so it’s going to be a very busy year and we’re growing the team as well so we’re hiring and trying to bring in the best talent so, yes, we’ve got a lot of things on our plate.

Peter: Okay, well we’ll have to leave it there. Best of luck to you, Anil, I really appreciate you coming on the show today.

Anil: Thank you very much, Peter, thank you.

Peter: Okay, see you.

Anil: Bye.

Peter: You know, I think there have been so many important partnerships announced between banks and fintech platforms this year, really in the second half of this year it feels like, There’s been a real acceleration of that and I don’t know if any are more important than the ones between Barclays and MarketInvoice, Barclays have taken an equity stake.

Clearly they’re all in and I really appreciated Anil’s comments saying that this is coming from the top down at Barclays, you need to have that buy-in for these partnerships to be successful. They certainly have all of the ingredients to make this a really successful, long term partnership and could be very much something that the whole industry can learn from about how they’ve put this deal together.

Anyway on that note, I will sign off. The Lend Academy podcast is taking next week off for Thanksgiving, we’ll be back in two weeks. I very much appreciate your listening. And I’ll catch you next time. Bye.

Today’s show was sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s happening November 19th and 20th, just a few days away as we record this, at the Business Design Centre in London. Tickets are available at lendit.com/europe and you can also buy tickets at the door.

Anil will be on stage with the Head of Barclays Business Bank, Ian Rand, talking much more about this partnership. If you’re listening to this after November 20th, you can actually go to lendit.com/europe, click on the videos, the videos are uploaded within a week or two of the event and you’ll be able to watch the video of the conversation between Anil and Ian Rand from Barclays.