Lend Academy's Lending and Fintech Podcast

PODCAST TRANSCRIPTION SESSION NO. 208  –  MELISSA KOIDE

Welcome to the Lend Academy Podcast, Episode No. 208, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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

Peter Renton: Today on the show, I am delighted to welcome Melissa Koide, she is the CEO and Founder of FinRegLab. Now FinRegLab are a fascinating new organization, they are actually an independent non-profit innovation center and what that means is they’re analyzing, doing research on different topics and they’re taking that research and they’re trying to help inform public policy and really help drive the financial sector forward.

Their first big project was around cash flow data used in underwriting and I wanted to get Melissa on the show because they’ve just released their report, as you’re listening to this, and wanted to talk about what they found out. Firstly, what the questions they were asking, what they were looking for, what they actually found out and so we go into that in some depth. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Melissa!

Melissa Koide: Hi, Peter, it’s great to be with you.

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

Melissa: Sure, happy to do that. As I thought about the question, Peter, it’s like, gosh, I feel like I’m kind of boring, but maybe not (Peter laughs).

Peter: I don’t think so.

Melissa: Well, I basically have set up FinRegLab which is a non-profit research organization that was founded on the premise that independent rigorous research is really a primary ingredient in helping to develop market norms and policy solutions that are ultimately what I think we’re all after, right, which is enabling safe, certain innovation in financial services and I know that’s a priority for policy makers as well as the market more broadly.

But, I think, one of the sort of notable things about me and what I’ve done is this, if you will, policy entrepreneur is I definitely became an entrepreneur at the age of 47 which is apparently the average age of female entrepreneurs (Peter laughs) and I decided to establish FinRegLab after a number of tours, if you will, inside federal government and inside policy making halls, particularly of the US Treasury Department. I led the Office of Consumer Policy for four and a half years at the US Treasury in the Obama administration and part of my team’s responsibility, which actually you know well, Peter, and you came in and met with me, at least once…..

Peter: Yeah.

Melissa: …was really trying to develop the administration’s understanding of the real opportunities and benefits, as well as the risks of using data in the financial system and new types of data in the financial system and really understanding the opportunities and risks of new technology in the financial system. And what does this mean for consumers and what does it mean for retail financial services and small businesses and what’s the implication for making sure that people are protected in our financial system and these new interests into the financial system really are still maintaining safety and soundness of our overall financial system.

So, we heard from hundreds of people. I, my team, the Treasury Secretary, my colleagues or cause, the regulatory community, hundreds of people with lots of very thoughtful points of view, but all coming in the door really with an agenda which, if you will, an advocacy point of view. What we didn’t have was any independent resource that, frankly, wasn’t coming in the door with an advocacy agenda, but, instead, just coming in the door and saying, you know what, you have these particular policy questions or regulatory questions when it comes to using a certain type of data for a certain type of financial product or financial service and here’s what, empirically, that information will tell you.

So, it was the lack of that type of independent research that was apparent to me and, frankly, I think it’s quite apparent to regulators, legislators. So, that lack of that role was the kernel of an idea that I had while sitting at Treasury that when my time was over that I would try to, you know, sus out see if I could setup an organization that could go out and try to do some of that much needed research.

Peter: Okay, so then you obviously left Treasury when the new administration came in. How did you actually go about it like, I mean, who did you reach out to? I guess like who were the supporters, who were the people that are sort of working with FinRegLab to make it a reality?

Melissa: Yeah, that’s a fair question. Well, the first thing I did was, frankly, while no longer a government employee, I made the rounds to sit down with the folks and the regulatory agencies and, in particular, the parts of the regulatory agencies, both federal but also state, consumer protection as well as the prudentials, to really start to create a set of….. basically a list of questions that would help to inform the research agenda for this research organization.

At the same time, I knew how important it was to really structure FinRegLab as this honest broker, meaning an entity that really could engage industry because, ultimately, to do research of the type that we’re doing, we have to have the trust of industry and importantly, we also obviously have to have the trust of the policy maker community and that meant that it was standing up this organization as a not-for-profit organization and also raising money from the philanthropic community, from philanthropists who really also understand the need for this type of sophisticated research and evaluation.

So, we felt really fortunate, the Omidyar Network, they are now…they’ve renamed themselves Flourish, the Financial Services Division, came in in a really thoughtful way and I think really wanted to continue to support, if you will, entrepreneurs of the type that I was setting out to be, policy entrepreneurs, who were trying to think about how do we leverage the data and technology for good. So, they have come in, they basically said to me, you know, we believe in your mission, show us you can do it, show us that you can engage industry and get the regulators to the table and we’ve been able to do that, so it’s been a real “win win.”

Peter: Okay, so then you got set up and, you know, I imagine, many, maybe dozens of topics that you could choose to really dive into as your first research project, so I’m curious about why you decided to choose cash flow data in underwriting as the first sort of deep dive research topic.

Melissa: So, our true north, while mapping the organization, our true north is around financial health and financial inclusion and I think we all realize that access to affordable credit plays a really central role in helping consumers, but also small businesses in improving their financial health, managing short term financial gaps, unexpected expenses for small businesses, really enabling the small businesses to manage revenue gaps, but also build and grow.

But yet we do have millions of people across the country who lack access to affordable credit. We have over 15 million sole proprietors who you know, at some point in time, are going to need to be able to access affordable credit and so really honing in on where data could be advantageous for helping to evaluate some of these individuals as well as small businesses felt like a really meaningful opportunity to help sort of evolve our small business credit market for consumers and small businesses.

Peter: Did you have specific goals with the project, things that you really wanted to find out?

Melissa: Absolutely, we have up to 26 million Americans who are considered no file, right, they lack any traditional credit history to be evaluated under traditional means of credit underwriting. We also have another 90 million Americans in this country and there’s the CFPB data research who are considered to not have a sufficient traditional credit history.

So, right there, we’re looking at, you know, 40 to 50 million people in the US who, if we have other means and if data would provide other means for evaluating them, could potentially be provided access to affordable credit. So, it was with input from the regulators, it was with engagement from a number of the fintechs in the market that we decided to really hone in on this question of how might this new type of data, and it’s actually not all that new, it’s transaction activity data, how might information that you can glean from a bank account of a consumer or small business, how might that data help lenders evaluate credit risk of people who otherwise might be turned down or might be priced differently than they would have otherwise been evaluated under traditional means.

This was an area that was a priority for the regulators, in fact, one of the regulators of the Federal Reserve Board has talked about the potential value of cash flow data in underwriting and so that’s how we decided to hone in on this first research evaluation.

Peter: Right, right. So, I imagine, you need to gather data yourself from lenders so can you share like some of the companies that you went out to that provided data for this research.

Melissa: Absolutely, yeah, we are so pleased to have engaged six lenders who have shared information and data with us to do this independent evaluation. The companies who came to the table with us are companies that you probably have had on your podcast before, Peter, Petal is one the companies.

On the consumer side, we engaged Petal, Brigit, LendUp and Oportun and these are all really dedicated companies to serving market segments who are, generally, more non-traditional. In some cases, these are lenders who were serving Latino Hispanic populations and other cases either lenders who are really going after the thin file/no file population.

In the case of Brigit, they are offering an overdraft alternative, but each of these four companies in the consumer market are leveraging cash flow data to do an evaluation and make decisions about extending credit to those consumers.

We also wanted to evaluate cash flow variables and metrics in the small business context and so there we engaged the companies Kabbage and Accion and they’re serving very different small business populations. That’s actually, we think, quite helpful, I mean, it made the research a little more complicated looking at each of these companies and doing firm by firm evaluations of their cash flow data and metrics.

But on the other hand, the findings become all that more powerful because what you see then are consistent results across each of these different companies that are using these cash flow metrics. It’s telling you something, I think, really about the uniqueness and the power of the cash flow data in the credit evaluation.

Peter: Right, right, Okay, so then you got all this data in and you analyzed it, what did you find out?

Melissa: So, we wanted to evaluate across three questions, questions that, I think, we all realize are important for the market as well as for policy. We wanted to evaluate for just the first base question, is this data predictive or not. We also wanted to evaluate, is the data enabling these lenders to serve populations who otherwise might have been turned down under traditional credit evaluation.

And then from a very policy specific, but market important question, we wanted to evaluate fair lending implications of the use of this data. Each of these, we think, are pretty foundational. We, over the course of basically nine months, we brought in the data from each of the companies and I’m happy to share with you, Peter, and your listeners that our analysis definitively confirmed that these different types of cash flow data and metrics that these different companies are using to underwrite unsecured consumer and small business credit are actually being used. And we found in our independent evaluation compelling evidence indicating that the cash flow variables and scores are predictive of credit risk and loan performance across these heterogeneous sets of providers, the different populations they’re serving and the products that we studied.

Standing alone, this is, I think, really a couple of really important things and you’re going to see a lot of these in detail in the report itself, but, standing alone, the cash flow metrics generally performed as well as traditional credit scores so we were comparing them against FICO and other traditional credit-based scores. That finding suggests that the cash flow variables and scores can provide meaningful predictive power among populations and products that are similar to the products and the populations we evaluated in this research.

But another really important insight that we gained on the predictiveness question, our analysis also indicated that these cash flow data and the metrics provided different insights into the credit risk than what the FICO-based more traditional credit risk metrics would show you. And so when you get a chance to read through the report, we actually have a number of hit maps that are broken up which is done by participant and you will see the level of granularity that the cash flow is able to offer in terms of measuring or assessing credit risk which is actually different than what you can see according to the different FICO bands.

So I think that’s really, really kind of an important outcome or learning from the research that we’ve done.

Peter: And so what about the question about serving new populations, did you find that that was also able to be done?

Melissa: We did. This was actually one of the harder questions that we found. A harder question to evaluate from a quantitative assessment just simply because you have differences in things like how do you define income, but we, definitely, found evidence that participants in the study are serving borrowers who may have historically faced constraints in their ability to access credit.

We, basically, came up with our own method for evaluating whether or not the populations who were being studied were located in predominantly minority communities and we looked at and evaluated according to whether or not the populations were in minority communities or were 50% minority communities, 80% minority communities and you will see in the research there are definitely populations in these different demographic neighborhoods that are being served by these providers.

So, I think the other thing to keep in mind, two of the companies in the research are themselves CDFIs or community development financial institutions and that’s designated by the US Treasury Department to be serving low and moderate income communities and populations. So just by their mere designation as a CDFI we have strong confidence that they are serving underserved communities and populations.

Peter: Right, right. So you didn’t see disparate impacts that came out of this?

Melissa: So, great question. So, we were able to do a component of a disparate impact evaluation with four of the six companies who participated and what we found is that the degree to which the cash flow data was predictive of credit risk, meaning, how independent are these variables in assessing credit risk within sub-population groups or different demographic groups that those cash flow variables are independently evaluating risk.

And so, that’s a really important aspect of a desperate impact valuation and so we’re quite excited and quite pleased to find that rather than acting as a proxy for race or ethnicity or gender, the cash flow variables and the scores that these companies are using were providing independent, predictive value across our groups and so that’s a really encouraging finding.

Now we have to offer the caveats in a company who is evaluating themselves for fair lending questions and companies know they need to be doing this if they’re in the lending space. You know, we’ll go through a range of evaluative questions that they’ll be asking themselves, but this is, I think, one of the sort of core questions that are used in any disparate impact evaluation.

It was really encouraging to see that we were finding these variables and, again, these are inflow/outflow transactions, inflow/outflow indicators, indicators of monthly cushion, economic cushion. These variables that we evaluated are not proxying for protected classes.

Peter: Okay, so the report…and we’re recording this, I know, a week before the report comes out, but by the time this publishes it’ll have been out a few days and we’ll certainly link to the report in the show notes. So the report’s coming out, what do you want to do with this report now? How do you think this research should impact public policy, for example.

Melissa: Absolutely, that is the right question. So, make that up a little bit, part of the ambition of FinRegLab is to ask and refine in a timely fashion to some of these pressing opportunities for using technology and data and to be this, as you heard me say, this honest broker that is able to bring all the stakeholders to the table, both to look and learn, as we undertake this research endeavors. But there’s another really important piece of the work that we do and that is to put together, it’s a very non-sexy term, but, basically, policy working groups to come together reflecting the different important voices in any policy evolution.

So, clearly, market actors from the incumbent banks, to the fintechs, to the data aggregators, to the important voices of the consumers and the consumers’ perspectives so consumer advocates who are part of these conversations to, ultimately, look at what is existing law and what do the existing rules that exist that are relevant for a particular new use of data, what do they say about the existing use of data, where they’re stymieing the potential value of the use of data and what are the potential ways  in which policy and regulation, and eventually potentially laws, could evolve so that we are seeing the safe use of the data being brought into the financial system, and in this case, cash flow data being used in underwriting.

And so, over the past year, we held three policy working group sessions and we had the regulators sitting at the table with us as we, week-by-week, over two and a two and a half month-period, evaluated and considered what are the fair lending implications, what are the fair lending legal implications, what are the policy implications.

Another working group was very focused on the data flow and what do existing laws of Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, what do they say, where do they stymie the potential value and flow of data in these ways and then important question around…from the various roots of consumers-centric perspective, how does the consumer understand the use of the data, how do they give meaningful consent. If there is an adverse action notice required, how is that information conveyed to the consumer in a way that will be meaningful and potentially even actionable by the consumer.

So, this research has learned from, but also helped to inform what FinRegLab will produce in September which is a policy report that really evaluates existing laws that are in place right now and tease out different considerations to potential evolution of both our regulations and our policies in light of what this type of research shows us. And so, my hope is that this is something that will be widely read and considered by policy makers and the regulators as they themselves are having to think about these questions of alternative data.

I mean, your listeners probably are very familiar with the fact that the GAO has asked the regulators to express an opinion about alternative data and what that may mean. Next week, we’re going to have a congressional hearing that’s focused on alternative data and so we think we’re hitting a really important moment in the policy evolution process where we’re bringing facts to the table that get us beyond the different points of view in advocating of the different points of view.

Peter: Right, so I’m curious that….there are a couple of extra questions here to follow-up with that. As you were talking, I was wondering about privacy, it’s such a huge topic and I’m sure the legislators are going to be, you know, concerned about any negative impacts there because you’re diving into someone’s bank account for cash flow data that’s certainly…..maybe we just start with that, maybe you could comment on privacy implications here.

Melissa: Yeah, we are absolutely thinking about and writing about the privacy implications. For one, just starting with the basic premise that we’re talking about new data being used in underwriting, what is the understanding the consumers need to have in order to give meaningful consent to this type of information to be shared. That’s just sort of the first place to start.

Part of the work that we’re doing and that will come out in the September report is also about what do existing privacy protections say about this new type of data and how it’s being, with consumer consent, flowing from, you know, one bank account to a lender. The Gramm-Leach-Bliley Act speaks to this very specifically. I think there’s also a little bit of a risk that many of us in financial services, I think, are becoming acutely aware of which is how are we as a sector and how are we as policy makers and researchers really thinking through and helping to articulate where and how we define policy protections as it relates to the use of data in financial services and thinking about that carefully and to some extent separately from the bigger consumer data privacy efforts that are underway that we know. California Data Privacy is obviously one moving piece of policy that will have implications that some of these bigger consumer data privacy laws may have bearing on the use of data in the financial sector.

So, I think, there is a lot more work for those of us in financial services to do to make sure that we are able to articulate where data and even new data in the use of underwriting, identity, fraud mitigation, where these new type of data can really be advantageous for protecting consumers, protecting our financial system, also making it very transparent for consumers about the data that would be used, but making sure that we’re not in a way that ultimately harms the value of the data getting caught up in these broader consumer data privacy movements.

Peter: Right, right, okay. So then what about….did you notice in your findings, are there any negatives for this, I mean, we touched on privacy obviously, but is there anything else that you discovered that may negatively impact the consumer because of this new way of using data?

Melissa: There wasn’t anything in the research, frankly, that raised red flags for us. I think stepping back from the empirical work that we’ve done, I think we are all aware that we’ve got to really start to sort out and understand some of these expectations around privacy and how the financial sector is doing it right.

I do think that there are big questions that we’ve got to think about in terms of, you know, how are we allowing this sort of innovative use of data that many lenders, many fintech lenders, in particular, are employing in terms of creating their own metrics and which particular types of transaction data that they, you know, can put together that is very much sort of proprietary in their own secret sauce.

How are we allowing for that level of innovation and flexibility to continue to thrive while also counterbalancing that with, you know, it’s cash flow data and our research suggests that it can be so effective at serving so many millions of people, how do we balance the need for allowing for innovation with the potential around standardization. You know, UltraFICO, you and I have talked about this, Peter, is in many ways quite exciting, but it is definitely starting to create new norms and new standards in terms of the type of data that might be used.

So, I think it is an important question for the financial sector to figure out how do we sort of allow for the proprietary innovative approaches that industry may be taking that ultimately are allowing and enabling them to serve populations who may be harder to serve, but yet realizing there is real value in standards and norms and regulatory-recognized approaches to the data use. So, those are some of the questions that we will all be grappling with over the next half decade.

Peter: Right, right, for sure. So we’re almost out of time, but before I let you go I’d like to sort of turn the page and maybe you can give us some sense…you know, you’re putting this cash flow data work to bed, obviously you’ve got the policy report coming up, but what are you working on? What’s going to be the next project for FinRegLab

Melissa: We actually very intentionally decided to start with data and evaluate data, new types of data and underwriting under more traditional methods for evaluating. So, we retained Cross River Associates, many of your readers will know them well and probably have engaged them in order to do the evaluation of the cash flow data. If you think about our next areas of research, you know, we do continue to think about a lot of the questions that we, frankly, weren’t able to get after in this first go looking at cash flow. Price is important evaluating cash flow in a down cycle would be very important for policy makers and industry overall.

So, those are potential areas that we continue in the evaluation of the data. We are, though, quite interested in building some similar work, meaning, convening stakeholders to look at some of the questions that are arising in terms of the machine learning algorithms and techniques in evaluating data and underwriting. I think there’s a lot of potential, many of us are increasingly realizing how these machine learning techniques can improve in terms of accuracy, but yet we also have really important questions around, you know, how are risks related to bias being managed in these algorithms.

You know, explainability continues to be an important piece of this and so we are beginning to think about building out some work in that particular area, the techniques and the algorithms as opposed to just working with the data.

Peter: Right, right.

Melissa: But I would love to hear from your listeners once they’ve had the chance to hear this podcast where they think we should be spending our time and our resources.

Peter: Okay, we will challenge the listeners to give some feedback there. Anyway, we’re out of time, I really appreciate you coming on the show today, Melissa.

Melissa: Thank you, Peter, it’s really nice to talk to you and I appreciate your giving me the chance to share what we’ve done.

Peter: Okay.

Melissa: And our report will be out next Tuesday so that is July 23rd, so, hopefully, we’ll post with you all and get it out there.

Peter: Yeah, as I said, we’ll be having a link to it and this will actually be published after, obviously, the report comes out. Anyway, thanks again, Melissa, see you.

Melissa: Thank you, take care. Bye.

Peter: So I think it’s really important that the industry has an organization like FinRegLab that can do this independent work. I mean, cash flow data used in underwriting, there are many companies that are doing it, they have been doing it even for some time, but there has not been this independent analysis of this new, relatively new technique in underwriting. I think what lawmakers and legislators in Washington want to see, they want to see independent research, they don’t want to see a company coming and saying this is good, or even a trade organization coming and saying this is good because they all have ulterior motives.

What they want is empirical evidence, independent research and that’s what FinRegLab is able to provide. I’m very much looking forward to their next project and you heard the challenge to the listeners, if you have some ideas, please go to lendacademy com, go to the blog post for this podcast and put a comment in to say what you’re interested in FinRegLab studying.

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

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

PODCAST TRANSCRIPTION SESSION NO. 207  –  JOHN DANCU

Welcome to the Lend Academy Podcast, Episode No. 207. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation in financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I am delighted to welcome John Dancu, he is the CEO of IDology. Now IDology are a fascinating company, they have been around longer than just about anybody else in the identity verification space. So I wanted to get John on the show and talk about what the world was like when they started, this was like 15 years ago or thereabouts, so we talk about that, we talk about how it’s changed and how their product has evolved with it.

John talks about their friction free approach, in fact, we go into some depth on that, we talk about how they’re using machine learning and they also have an annual digital identity study which we discuss and then we talk about the fraudsters and how they’re getting better and how companies like IDology are really trying to stay one step ahead. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, John!

John Dancu: Thank you, Peter.

Peter: So I like to get these things started by focusing on your background, maybe you could tell the listeners what you did before you got to IDology, what sort of…what you did in your career.

John: Sure, so I’ve been an entrepreneur for a period of time. I started my career as an accountant and then also as an investment banker for roughly ten years which is a profession I really enjoyed and left banking to basically to start help companies raise capital and build them substantially. IDology is the longest one I’ve done, I’ve done four of them, and I’ve been at IDology for roughly 14 years, I would say I’m a classic entrepreneur.

Peter: Okay, so tell us sort of the story of IDology because, you know, you weren’t one of the founders, I believe, you came in as CEO in 2005, so what was it that you saw back then that really convinced you that this company had potential?

John: Sure, so when I found IDology, you know, it had a couple of employees and a V1 level product and what really excited me about it was…remember, this was 14 years ago.

Peter: Right.

John: So things have changed since then, but it’s a big market. At that point in time, consumer- not-present type transactions where you were conducting transactions where people didn’t see you, whether that be on a phone or on the Internet, were growing and growing rapidly and I saw that there was a really substantial opportunity relative to that market and the growth that it was going to have and the need for really a unique solution. I also believed that it was a market that was going to continue to grow and have continual wind behind our backs and that’s still the case today.

I mean, the market is still very vibrant and it’s really growing, but the other point that we saw was there were certain markets that were underserved and that was mostly kind of underbanked, thin file type individuals that wanted to conduct business on a consumer-not- present environment. The vendors that were out there in the market, at that point in time, didn’t really do a very good job of supporting on-boarding of those customers. So we felt that we could build a niche and that’s what we did and then, of course, we expanded the niche beyond that.

Peter: Sure, so it feels like in the ID verification space 15 years or 14 years is an eternity, tell us about what the product was like back when you first got involved and contrasting that with what you’re offering today.

John: Yeah, that’s a funny question because, I can remember, years ago I was working late nights and coming up with innovations that we just thought were the next best thing and now I look at those innovations and I kind of giggle about them because now they’ve just become requirements relative to the market, but the market has certainly grown dramatically, right, from a standpoint of needs for the market.

Our philosophy and…IDology is very much a product company that basically just happens to access data and help solve this identity issue. Our philosophy has always been to build, break and then build again, but one of the things that we realized about a decade ago was breached data really lent itself to what we call “perfect identities.” So a fraudster would come in and basically steal identities or purchase identities on the dark web and then have the ability to come in and basically mimic you, right, they’d have your name, your address, your social, your birth and be an impostor and basically utilize your identity.

One of the real innovations that IDology built back then was to address that issue and the way that we did it was we looked at…you know, not only do we have to consider that John’s data is correct, but is John really the correct person submitting the information on their computer or on their mobile phone. And that’s what’s really made IDology a very successful company is being able to solve those two problems as opposed to just saying, hey, your data matches.

Peter: Right, right. So when you first got involved in this company, I mean, data breaches were pretty rare from my understanding. Obviously, there were probably some, but now it feels like today everyone just assumes their identity is…their personal information is out there and available with, obviously, we had the Equifax breach a while back and there has been many, many other massive data breaches in recent years. It feels like that’s becoming more and more rapid so how should we think about, you know, identity verification then in the age of these massive data breaches?

John: Well, I think there were a lot of breaches back then, but they just weren’t as public and publicized and…

Peter: Okay.

John: …certainly since the regs have changed and so forth and the obligations of people for disclosure on that, it’s becoming pretty much a daily occurrence, right, relative to, there was one I think just yesterday on Quest Diagnostics. So the breaches have always been there, I just don’t think they’ve been as announced relative to it. But again, from our standpoint, the fact that data has been breached is something that you have to take into consideration when you let someone buy something on the Internet or whether you on-board it.

You need to take an approach that you’re protecting that consumer, right, you want to make sure that when you validate a transaction and an identity, that you’re validating the correct person and it’s really a duty of us and a duty of other companies out there to help protect consumers.

We just put out a consumer study and that was one of the things that consumers said to us is that they really expect companies to go above and beyond in protecting their identities so these breaches that basically, I think, created a requirement, a bar that basically we make sure that we’re doing proper identity verification on the people that we’re conducting business with.

Peter: Okay, we’ll get into the study in a little bit, but let’s just maybe switch to sort of talking about what is it you’re offering today? What is the product suite and who is the target market, tell us a bit about your offerings.

John: Sure so we sell to businesses, we’re a cloud-based solution that’s B2B. We solve a very horizontal problem of validating that someone is who they say they are in the consumer-not-present environment that lends itself to be heavy financial today because that’s where a significant part of those transactions are; health care, life insurance, gaming for lotteries and sports betting. There’s a whole listing of things that we basically do and sometimes we’re kind of quite surprised at use cases that come to us where people have needs, for instance, a good one is organ donation.

We wouldn’t think that we would be doing that, but we are validating people basically giving the permission to donate their organs on their licenses. But the product today is a very comprehensive solution, you asked the question before about, you know, what was it like back 14/15 years ago. Basically, what we’ve done is we’ve built a solution over time where based on our customers and their needs and the market that we’ve tried to address the issues that they have.

Really the issue that we’re addressing is validating an individual with nominal friction, with no friction and having confidence that they are who they say are and we do that through a product that we call “Expect ID” that has multiple ways of basically looking at your identity. We call it “smart layers,” right, when we think about validating someone. The more kind of layers that you go through gaining confidence on that identity, that their data matches, that there aren’t issues relative to the strength of their identity, doesn’t look like a breached identity, there’s proper addresses, their email looks appropriate, their phone hasn’t had recent changes.

These are all kind of smart layers that we’re looking at, in essence, and we’re correlating that data to make sure that we have confidence that the person that’s presenting their data is the right person, is the legitimate person. How we have really helped…how IDology has been successful in the market is we’re helping our customers basically on-board legitimate users. We happen to do that through identity verification, and the product is basically focused on trying to validate folks with no friction and then dynamically we’ll evaluate attributes on an identity.

If it sees inconsistencies, or you want a higher level of identity verification then we have means of basically stepping up that verification through asking a series of multiple choice questions what’s called knowledge based authentication, scanning your license, sending a secure link to your phone, etc. so it’s all under control by our clients/our customers. They basically can determine exactly how they want the process to go.

Peter: Okay, so I want to just delve into that a little bit because you said a couple of times there, you know, a no-friction solution. I’m just curious about…maybe you could take us through a use case where…you know, if it’s a financial transaction, maybe it’s an online lending platform, or an online bank, or someone and they’re using your product. I’m curious about how you’re able to have confidence that the identitiy is correct without having any friction, or maybe you could expand on…just expand on that.

John: Yeah, that’s part of the secret sauce, right, of how we do this, but in general, the way I would view it is the more unique data points that you can check on an identity, the higher confidence you have in that identity in conducting business with them and then it gets back to what I mentioned about smart layers, right.

Think about…we do a lot of compliance, right, it’s a fundamental part of our solution, making sure that financial institutions are meeting their KYC compliance from a regulatory standpoint, but that’s just one point and that’s a very small sliver of it. We also want to make sure we check the depths of that identity and the quality of that identity and you do that by looking at differing notes relative to that identity that gets created by algorithms that we have at looking at the information, and then by also looking at differing data points.

When you think about someone committing fraud, they can steal your identity because of all of this breached data, but that fraudster needs to have a phone, they need to have an email, they need to come from an IP address. By looking at what we call the vice location and activity-based attributes, we can gain confidence that that person that’s provided that information is really the correct person.

Peter: Okay, so then your clients then, I mean, don’t necessarily…your client’s clients, I guess, so your business clients who are offering this to consumers, or whatever,  the consumer may never know that there is really an identity verification going on because, obviously, there are some companies that are out there today that are making you get out your driver’s license, I had to do one the other day.

You take a photograph of your driver’s license, you take a selfie and, you know, you’re clear that there’s something serious going on there where they’re really checking you out. So what you’re saying is you can have a high degree of confidence and obviously, I imagine it’s up to your clients that you don’t need to go through that process, is that what you’re saying?

John: That’s correct and, you know, we’re doing it day in and day out. When you think about consumers, consumers don’t really care that the company has fraud, right, they want to have a really….because they’re legitimate, they’re not worried about the fact that ABC company may have fraud that they have to deal with…I’m legitimate, I want to on-board and I want to on-board quickly and easily.

Now clearly, if they go and read the terms of service, they would see that they’re subject to identity verification, but the process of being able to validate people on a frictionless basis is really important relative to the velocity and speed and making sure that consumers don’t fall off in the process which is a really, really big issue.

Peter: Right, right, for sure. And then what about when like…the world is switching to mobile and, I imagine, I don’t know what percent, but there are certainly many companies now have a majority of customers coming to them through mobile. Does that make it easier or harder for you to really do this frictionless verification?

John: Well, it’s a different form factor, right, so mobile does a couple of things. One is, there’s more transactions coming, right, because now I can basically conduct commerce anywhere and that’s good for our customers and that’s good for us. The second is I’ve got a different form factor that I’m doing this on and it’s a form factor that doesn’t really promote lengthy information so when people are on their phones, they want things to be clean and crisp and to be able to put in less information. When they do that, that means you have less data to basically validate people with.

So you have to look at different data points relative to that as opposed to if you’re on a laptop and you could ask for more information and people are willing to kind of type it in so, you know, there’s less data, there’s a different form factor, there’s also the ability to switch my phone quickly, right, that’s why we want to look at mobile SIM swaps and port changes, and things like that.

So I would say that it’s a different fraud problem than on your laptop and it has different complexities, but the fraudsters are committing fraud on phones, laptops and iPads and everything so for them they’re going to try to use the form factor that gives them the highest probability of being successful.

Peter:  So from what I hear you saying, you really rely so much on, it sounds like, on data sources so you’re pulling in a variety of different data sources. I know you’re probably not going to get into the secret sauce, but can you just give us some sense of the different data sources that you’re pulling in that gives you this confidence?

John: I mean, there are lots of sources that we pull in, some of these are referred to as public records, they’re not public per se, right, but they give you the ability to look at information relating to your driver’s license or your voting record or creditor information, utility bills and factors like that. So that’s the type of information that you can access relative to comparing data that exists in the public records compared to the data that you’ve submitted.

We’re also looking at mobile data, e-mail type data and IDology has something that’s really very unique and that is, we have the largest identity consortium in the US and with that, all of our customers are, in essence, contributing transaction data to consortium and that gives us the ability to enable our customers to basically see repeated activity across the network. So when someone is committing fraud, they may commit fraud in the pre-paid market and then go to the tax market and then move to the financial institution market.

By having velocity data, transaction activity that goes across all of our customers, we’re actually able to see that fraud move from entity to entity and this has been a very important part of the success of IDology. We treat data in a very confidential manner, you see data; I don’t really want to go into specifics on how velocity works, but we’re very cognizant of privacy issues there. Our customers tell us it’s the most powerful tool they have relative to catching fraudulent transactions and that’s our own consortium data.

Peter: Right. I know, I think I read something about that you’ve got a range of different companies, some of the other online lenders, so that consortium, that’s got to be billions of transactions that you’re getting access to, right?

John: Yes, it’s a lot.

Peter: Right, right. Okay, so then what about…you know, we haven’t talked yet about artificial intelligence or machine learning and that’s…you know, you’re dealing with massive amounts of data and clearly, that’s the situation where this comes in very handy. Can you just talk a little bit about how you’re using AI in your systems?

John: Sure, our velocity tool is somewhat machine learning-based. You ask people what machine learning means and you get lots of different definitions, but we’re definitely using transactions on an active basis that help make decisions right so the machine is, in essence, learning. We also do a fair amount of machine learning on our back end relative to reviewing transactions and that’s an important part of what we do so we’re doing a fair amount of AI after the transaction today with the viewpoint of proving it out, and we’ve had a lot of success with that.

Over time, we’ll be adding supplemental machine learning into the products so we think it’s an important area and we have lots of interesting data and lots of fraud that we can use to basically train the engine, but I think, what people sometimes forget about machine learning is you need to tell the machine what to do. It has to basically learn from factors that you see and we’re in the process of refining that today and we’re pretty excited about that. In the next year or so, you’ll see us move that into a product.

Peter: Okay, so then I’m interested about banks today and you know, banks have relied on the physical world to sort of verify customers. These banks are moving more and more to the online world, so where do you think banks still need to improve and…I’m talking mainly about those in the online world because that is where you operate, but where are the gaps today and where do they need to improve?

John: Yeah, the banks have lots of gaps (laughs) relative to doing truly online business so when you think about IDology, we’ve been digital since day one for close to 14 years and we’ve helped build these markets, the pre-paid market, the P2P market, the fintech market so we have a lot of expertise relative to doing digital transactions. When you talk with banking executives, I think the best quote I got from a very large bank was, digital to us is you apply on the web or your phone, we deny you and you go into a branch and show your license.

When you look at the large banks, some of them are making progress and we’re helping many of those. Most of them have systems that are nowhere near what a fintech company or an online bank that has been online from day one have and they really need to get there right. When you think about the big banks, they’ve given up markets, right, the pre-paid market they didn’t participate in, the P2P market they didn’t initially, then they got in through Zelle obviously getting good traction there now, but they have to address being truly digital.

I think they’ll get there, some of them are there and doing pretty well, but most still have a long way to go. They need to do kind of basic things of utilizing IDology, creating a whole stack of products that can basically help them being truly digital.

Peter: Sure, so then there are obviously other players other than IDology in this space, I actually had a couple of different players on this podcast so I’m curious about how you view yourself as differentiated from the other players in this space.

John: Sure, we’ve been doing this for a long time, we’ve been highly successful, if you looked at our customer base there would be a whole bunch of names there that you know very, very well, that are leaders in doing online type transactions and that’s really important relative to the consortium. We want to have strong players basically being part of that and, you know, we have a solution that is highly configurable, dynamic relative to the process of being able to decide how you want to do things.

That’s really important relative to also dealing with fraudsters because fraudsters are hourly deciding what their new attack vectors are going to be and how they can try to beat you. If you have a system that’s fixed and you can’t react to that, you’re not going to be successful. One of our competitive advantages in the marketplace is that our system has more configurations than stars in the galaxy, right, configuration options and when we see new attack vectors, we’re actually able to go in and on-demand change the rules and they automatically get deployed.

So it’s really very, very flexible and then you combine that with our consortium power that we have and I think the leading product in the market and continued innovation and that’s pretty much how we separate ourselves.

As I said, our goal of why we exist is we want to help companies drive legitimate customer acquisition and I think comparing us to competitors, you know, we on the margin, approve more people, approve more legitimate people, and that’s really what companies want. They want to be able to deal…make sure their marketing dollars and their time and effort is being used effectively to drive their revenue.

Peter: Right. Okay, so I want to switch gears now to the annual study you do. You have this Annual Consumer Digital Identity Study that came out just a few weeks ago, maybe you can just tell us what are some of the new findings that came out of the study this year?

John: Yeah, there was a couple that I thought were really interesting. One is that people consider phone and email now to be a significant parts of their identity. Historically, you ask people what’s the number one identity factor and they would say my social security number or my license or my date of birth, but this past year, your mobile phone number and your e-mail address also ranked very high relative to what people consider to be part of their identity. That makes sense, right, from a standpoint that they are…none of us let our phone get more than ten feet away from us.

The other factor that I think is also interesting is that…we talked a little bit about it, is that consumers don’t like friction and they want to make sure that their process is easy to apply and that it is also safe. They want to make sure that enterprises are, in essence, taking care of their identities and making sure that their identities are not being misused and I think that’s a reasonable expectation of consumers. They should have confidence that the people that are getting their identity information are using it safely.

The other one that I’ll mention briefly is that this is the first time where we’ve actually seen a higher level of transactions being completed on mobile devices as opposed to fixed devices like laptops and so forth. This is the year that it crossed and clearly that’s important relative to how we build our product and how our clients also build their product relative to ease of use and making it simple for people to basically conduct commerce on their phones.

Peter: Right, and it’s never going back, is it (laughs). I mean, there might be another form factor in a couple of decades or more, but it’s not going back to laptops or desktops, that’s for sure.

John: Yeah.

Peter: So we’re almost out of time, but just a couple more things here. I saw earlier this year you were acquired by a company called GBG, tell us a little bit about that and what changes that’s going to bring to IDology.

John: We’re really excited about that because we think it’s an excellent strategic combination. When you look at IDology, we’re clearly a dominant player in identity in the United States and have established a really significant position and a leading product. We’re not a data company, we’re a solution company.

When you look at GBG, they had nominal presence in the US. They basically had secured data sources in most of the world, I think in over 120 countries. When we go and talk to our larger customers, they want one provider, they want one vendor to basically service their ID requirements and fraud requirements in the US, in Europe, in Asia, and in Latin America, and that was really the driving force behind putting our two companies together is that we have the ability, given our strengths and given their strengths, to build a worldwide identity provider. That’s something that we’re really excited about and the world is in need of it and we want to provide it.

Peter: So I also want to ask about the fraudsters themselves because obviously, you’re getting better, the products are getting better, the technology is getting better, but so are the fraudsters. How do you stay one step ahead of them and do you think you will be able to, say one day, be so far ahead that identity fraud will be a thing of the past?

John: Well, I don’t think that’s going to happen (laughs). You think about how did people commit fraud in the 1800’s, you know, with a gun and they’re committing fraud now, they will figure out ways of how to commit fraud a hundred years from now. That was one of the reasons why I got involved in this business, the need for our solutions, I don’t think ever goes away. So why is that?

Fraudsters are conducting a fraud business, right, what they are really doing is they are…day in and day out, they’re trying to determine how they can beat companies for money. It’s a business for them so how do you counter that?

One, you have to think like one, right, you have to think about fraud…we go on the dark web and we read forums and we see what they’re doing, we look at our own data on an everyday basis to see new attack vectors that are happening and then we’re adjusting our product relative to that. So it’s an old thing, but it’s kind of a cat and mouse game relative to this.

What you need to be able to do relative to fraud is you need to be able to react to it and modify what you’re doing and then you also need to think ahead of building solutions that don’t give them opportunities to commit fraud. Of course, that’s what makes our business fun and challenging is that we’re doing that while we’re trying to provide a friction-free experience for the consumer because those people are legitimate and that’s how companies want to run their business. They want to run their business taking care of the people that want to conduct commerce with them that are legitimate and then on the side, we have to figure how to stop all of this fraud.

Peter: Okay then, so last question, what are you working on now at IDology, what’s exciting, I mean, what’s next for you guys?

John: Well, yeah, that’s a great question. So we’re constantly innovating and I think…clearly in the machine learning and artificial intelligence area, the items that we’re working on today, I’m really excited about that, that will make our solution that much stronger relative to giving more definitive decisions to people on transactions, right, that this is truly fraud, this is…for sure someone who is legitimate and so forth.

Again, adding another layer, right, relative to AI, I think is really important for that and then just what we talked about a few minutes ago, the worldwide approach that we have now given that we have access to data pretty much throughout the world solving the needs of our customers to be able to use the same system to validate somebody in the US, in India, in China, in Mexico, is I think just an exciting challenge for us and we’ll be spending a lot of time and effort on that.

Peter: Okay, we’ll have to leave it there. I very much appreciate you coming on the show today, John.

John: Oh my pleasure, thank you for the opportunity.

Peter: Okay, see you.

John: Bye.

Peter: You know, as I said we’ve had a few of these identity verification companies on the show in recent months and I’ve done that because I find this space personally fascinating and I think it is one of those areas that is so dynamic, there’s so much interesting work being done, work that is really making a huge difference into the success of fintech.

I think this is a piece that is so critical that we get right, so critical that we have robust systems in place because without it, I mean, really the online or the fintech space would just disintegrate because we have to be able to identify good people in as frictionless way as possible. That’s why I feel like this is a space that I think, obviously is going to be around probably forever, but certainly for a long, long time.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 206  –  RISHI KHOSLA

Welcome to the Lend Academy Podcast, Episode No. 206. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I’m delighted to welcome Rishi Khosla, he is the CEO and Co-Founder of OakNorth. Now OakNorth only started in 2015, so they’re just over four years old, but already they are the most valuable fintech company in the UK, they raised the largest ever funding round for a European fintech and they’ve been able to do this, they’ve been able to grow very rapidly, at the same time, in a profitable way.

They’re one of the few fintech companies that actually make a profit, but having said that, they are also expanding aggressively internationally and we talk about that in some depth in the show. They’re putting a lot of effort into the US market, we talk about the differences between the US and the UK, how they’re growing their US presence, how they are approaching their international expansion in a very different way than the way they approached the growth in the UK. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Rishi!

Rishi Kosla: Thank you.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself. I know OakNorth is not your first rodeo so why don’t you tell us a little bit about what you did before OakNorth.

Rishi: Sure. In 2002, my business partner and myself set up a company called Copal, it’s basically a financial research company, we set it up with a view of servicing major financial institutions, initially the large investment banks, then private equity funds, asset managers, etc. We actually made good on that vision so fast forward 12 years on we were a 3,000 person organization which we built using a total of $50,000 in terms of capital.

It was very capital efficient in terms of how we got there, our client base included pretty much all the top ten global investment banks, a number of major private equity firms and asset managers and then we sold that business to Moody’s Corporation and 3,000 people were distributed around I think it was 12 offices in [inaudible] countries.

Peter: Okay, so then you sold that. What was the impetus to start OakNorth, what did you see that really led you to attack this which is something that really hadn’t been done before in a digital way. So what was the opportunity you saw?

Rishi: Sure, so the real opportunity…the seed of the idea came through a particular experience that we had. Back in 2005, when we were building Copal, we went to a commercial bank for a line of credit because, as I said, we sort of used a total of $50,000 to build that business so we were balancing pretty finely from a working capital perspective so we went to a commercial bank. They told us very politely where to go and we went to another commercial bank and we had exactly the same experience.

A few months later, we went to an institutional desk at one of the large banks and that institutional desk gave us a credit facility which was for a hundred times the amount we were asking for from the commercial bank (Peter laughs) and they had no issue with it. And we were like, wow, this just shows something is broken somewhere and you could argue that the institutional desk was a little bit too aggressive, but the answer was surely somewhere in between rather than the answer the commercial banks gave us, ie of zero.

So that sort of caused the seed of the idea and as we played out the business of Copal and we were coming out towards exiting it, we kept on coming back to that particular issue we had and saying, you know, is this a structural problem, is it something which applies across markets, is it cycle related, etc. etc.

We became very convicted that, actually, there was a very strong opportunity because this is an underserved segment. It’s been underserved for very specific reasons and therefore, actually a very strong opportunity to build a business within and also building a business which fundamentally has a lot of net positives for communities within the markets that we would be playing in.

Because fundamentally, we’ll be helping put capital into the hands of companies which are growth companies, small, mid-sized businesses which tend to be the drivers of GDP and employment growth in many countries. So we felt like both from the perspective of solving a real problem, solving a problem which is actually a good problem to solve for countries and communities and also clearly building a good business, it sort of ticked the right boxes.

Peter: Before you launched, I mean, obviously you would have done some market research so you said you went out looking in like 2005, did you find out ten years later that it hadn’t changed at all? I’m just curious about the target market you’re after, these fast growth companies, they’re not really being served by the Funding Circles’ of the world because they need more capital than Funding Circle’s max, so what are their options today?

Rishi: Their options are to go into a commercial bank and get a very standardized loan package which is fundamentally based on backward looking data from the borrowers, from the value of the data you provide and backward looking analysis is great if you’re not a growth company because, you know, your next 12 months looks pretty similar to your last 12 months.

But if you’re a growth company, your next 12 months may look nothing like your previous and therefore, actually having a lending institution which is only going to look at your historics so it does not get you very far in terms of meeting your needs so it gets you with a very sub-optimal loan package.

Peter: Okay, so what are we talking about here? Can you tell us the range of loan sizes and the terms, the interest rates sort of thing you’re talking about and what’s the median?

Rishi: Sure I mean, so in terms of the range of loan sizes we’re talking about roughly from half a million up to…depends on which market, let’s say plus/minus $30 million. In the UK it would be plus that, in the US, it would probably be just a little minus that, in some Asian countries it may only be up to $5/10 million, in terms of where the unmet need is. Average term, roughly three years, average loan size $5/6 million, those type of numbers so within that type of range.

Peter: Okay, and what’s the typical interest rate?

Rishi: The typical interest rate is appropriate for the risk which we’re taking on.

Peter: Is there a range, obviously you’re not approving everybody, is there a range that you work within?

Rishi: Sure, I mean the range is anywhere from 4% to 8%, that type of range.

Peter: Okay, okay. And so I know that you’re not just doing loans, obviously, that’s kind of how you’ve built your business primarily to date, but I know you’ve really got two divisions of the company. Maybe my first question is, with this sort of software-as-a-service or banking-as-a-service type of product that you have, was that the intention…first, describe the product and was that the intention always from the get-go to have these two divisions?

Rishi: Sure, so the first thing I’d say is we don’t actually look at it as two divisions. What we were very clear on is that to provide this type of customized loan packages that we felt were needed within this market segment, you needed to be able to do much more detailed analysis on the particular companies that you were looking to lend to and that detailed analysis looks much more like what you would do on a large corporate loan, i.e. if you were doing a loan of a few hundred million.

And we knew how to do that pretty well from our last business because that’s the type of stuff we did day in, day out and we were clear that we needed to bring technology into the equation to be able to apply that same methodology down to smaller ticket sizes. So we actually started by actually saying, we need to build a platform which will enable us to take that corporate approach to be able to provide customized bespoke lending to smaller businesses and mid-sized businesses.

That’s where we started and we were very clear that we needed to prove the market opportunity as well as the functionality of that platform in one market and therefore, the bank is very much…in the UK, where we started actually building that proof and obviously have built a pretty strong loan book here in the UK on the back of it. But as a core theme, it is all about providing customized lending to small and mid-sized companies and globally, we’re doing that through obviously providing our platform to existing banks rather than creating our own bank in other markets.

Peter: Right.

Rishi: So we’ll continue to obviously build our own bank in the UK and continue to use that to test and evolve our own platform that fundamentally, as I like to say, we think of this as a horizontal play around solving this problem on a global basis, rather than a vertical play of building a bank in one country.

Peter: Right, right, got it. Okay, so then I want to just dig in a little bit into the technology you use because you’re making these decisions much more rapidly, I believe, obviously than a traditional bank so how are you using this technology? What’s sort of involved in the underwriting process and what have you automated? How does it work?

Rishi: Sure, here’s the fun part. So not only are we doing things quicker, but we’re doing things quicker on the basis of actually having done significantly more work so if you go back to what I said, most banks in this space actually take a backward looking view based purely on borrower data. Whereas, what we’re doing is we’re taking the borrower data, we’re obviously looking at historics, but then we’re using lots of different data sources to be able to create a forward looking view for that particular business. And that’s something which other lending institutions in this part of the market, i.e. small and medium-sized businesses, tend not to do.

So we’re doing significantly more work in much less time, and ultimately, that’s enabled through the platform. So what does the platform do? The platform effectively helps pull in both the borrowers’ data, but also locks up said third party data sources and when I say lock, on any particular case, it may be 5,10,15, 20, but if I look across the platform, it’s thousands of data sources which the platform will go out to across different cases.

So you pull in all of that data and then you use that data, fundamentally, to create benchmarks on a forward looking view so you can have conviction that your forward looking view has been stressed appropriately to be able then to formulate a loan package which is both appropriate for the borrower and more suitable for their business, but at the same time also clearly meets the risk appetite of the lending institution.

Peter: Right.

Rishi: So that at its core is what the platform does.

Peter: So these companies that are coming for a loan, obviously they have their own forward looking projections and I am sure you look at those, but from what I hear you saying, you’re saying you create your own based on the data that you’ve seen so obviously you’re not going to rely just on what they say and you’re creating your own forward looking projections, is that how it works?

Rishi: Exactly, so we take obviously what the borrower says, but then we formulate our own perspective.

Peter: Right, right. Okay, so back to the bank for a second, I mean, you’ve been famously quoted saying you’ve experienced zero defaults to date. The unfortunate thing about being famously quoted for that is there’s only one way to go from there (laughs) because you can’t do better than zero.

Rishi:  I one hundred percent agree (Peter laughs), and let’s be clear that there is only one way to go and it’s inevitable that you’ll go there, right?

Peter: Right.

Rishi: So I think what we’re very clear on is that we will perform, both in the current market environment but also in a downturn, at a level which is significantly better than the market in the segment that we play in. So we clearly, as a lending institution, at some point you’re going to have defaults, but we have a very strong conviction that the default rate that we will have and therefore, the loss ratio that we will have will be significantly below market.

Peter: Right, that’s fair enough, that’s fair enough. So one more question about the bank before we get on to your international expansion. Are you funding all of these loans through deposits in the UK, I mean, I know you’re offering some of the best deposit rates. You’ve got a deal with Monzo now I read about, is that how you’re funding the loan book?

Rishi: In the UK, that’s exactly right.

Peter: Right. Okay, so then let’s move along to…I know you’ve opened up a US office recently and obviously most of the listeners of this podcast are based in the US, although we do have a substantial international following, so you’re opening up in the US and I am curious about the…I get the problem is very, very similar.

I’ve heard that this segment of the market is very much underserved in this country as well, but isn’t the approach going to be very…I mean, every country is going to be different, I mean, the data sources are going to be different, I mean certainly the software is different, the accounting software or whatever, so how do you approach that with taking what the core of what you’ve built and applying it into a country that has…it’s got different infrastructure.

Rishi: So the first thing to note is that we’re already live in I think about eight different countries at least, so the challenge of being live in a new country with different data sources, etc. isn’t actually a big challenge for us. Some of the countries which we’re live in are significantly tougher countries than the US to get data. The US is relatively data rich and, I have to say, data quality is relatively strong.

Peter: Right.

Rishi: So the US, for us, is absolutely a core market that we’re looking to delve into. We’ve already started originating in the US as well as actually licensing our platform so we have clients who are live in the US on our platform today, we’re also originating loans for those clients so the client can choose just to take a platform, or they can take the platform and loans as well from us so we’re not putting those loans on our own balance sheet.

The amount of demand in the US for the type of lending we’re doing, I would say if anything, is stronger than even in the UK and I say that fundamentally because the US is a larger market and we’re just seeing larger volumes in a very short period of time than what we had seen on a comparative basis in the UK. So the transportability of the model is very high and actually our ability to execute it as I said, is much simpler in the US than some of the other markets where you have both language, data quality and data availability issues.

Peter: Right, right. So are you just focused on the US banks, is that the market you’re going after for this solution?

Rishi: So we’re licensing the platform to US banks, but we’re also offering the platform and loans to other institutional investors outside banks. So we’re both, fundamentally, appealing to banks and non-banks.

Peter: Okay, interesting. And so I haven’t heard an announcement so obviously there is nothing public yet, as far as who have signed up for your platform, is that correct?

Rishi: That is correct.

Peter: You can make an announcement right now, if you want. (laughs)

Rishi: I’m sure I can. (both laugh)

Peter: Okay.

Rishi: Thank you for that.

Peter: So then are you like …when you look at the US market, I mean, do you see this as…obviously the market is much bigger than the UK, we know that, but where are these people being served in the US right now? Is it still the same, are they going along to banks right now and having the same experience that a similar company in the UK would have?

Rishi: Exactly right. Regional banks and having the same experience.

Peter: Right, right, okay. So then the platform, the website anyway is oaknorth.ai and ai, it doesn’t stand for artificial intelligence from what I gather it stands for analytical intelligence. Is that the platform that you’re going out globally with for this offering?

Rishi: Exactly right, the reason is very specifically that we call it analytical intelligence, but clearly it is a play on artificial intelligence which obviously is already embedded within the platform, but fundamentally, it’s an analytical platform so that’s why…the origins of the name. Actually, we used an algorithm to come up with the name (Peter laughs) just for the fun of it.

Peter: Okay.

Rishi: So, yeah that is absolutely the platform which we’re referring to.

Peter: Okay, so what geographies are you live in today and what geographies are you expanding into?

Rishi: So in terms of where we’re live, obviously the US, obviously the UK, Germany, Austria, the Netherlands, Italy, Singapore, Taiwan, China; that’s where we’re live. And where are we expanding to, I mean, you know, I think that’s already a reasonable amount of breadth, I think what we’re looking to do is gain increased depth within each market. Yeah, I think we’ve got, again, our estimate of total loan stock in this space is around $7 trillion and we think the market is under penetrated so, you know, I think we’ve got a reasonable way to go.

Peter: Right, right, for sure. And the fact is there really is no global brand doing this right now. I mean, it feels like…

Rishi: Except for one.

Peter: (laughs) Right, right, there is one up and coming global brand, yes indeed. So your intention then is not to get a banking license in any of these countries, is that correct, and why not do that, why not get a banking license?

Rishi: That’s correct. Why not, because we fundamentally believe that working with existing lenders in existing markets is a much more scalable way for us to actually take our platform and propagate it across markets, rather than trying to build our own regulatory infrastructure in each of these countries and then dealing with, you know, the challenges of running multiple regulated entities.

And clearly, from a capital perspective, the amount of capital it would take to run a bank in each of these different markets would require us maybe tens of billions and, therefore, it’s just not the most efficient way to either bring in capital, use capital, also not the most efficient way to [inaudible].

Peter: Right, right. So this sort of SME growth business segment is obviously huge, but I noticed recently that you’ve also expanded your product offering in the UK to mortgages for the entrepreneurs, the business owners of these companies. So tell us a little bit about that product, was that driven by your customers, or why launch that product?

Rishi: If you look at what we’ve done within the core, it is very much about how do you create a tech platform to be able to provide customized lending into a segment which isn’t used to receiving customized lending.

Now when you look at what we’re doing in the mortgages space, we’re not doing standard mortgages. We’re doing complex mortgages where we need to be able to look beyond the types of basic parameters that a standard clearing bank would look at. Therefore, the approach which we take has (inaudible) and the underwriting is actually very similar for these types of assets as well as we do in our core.

Now clearly the end customer, instead of being a business in this scenario is a company, but it’s clearly one in the same in the way that a lot of these clients are going to be business owners and therefore, we’re servicing them on their personal requirements, rather than on their commercial requirements. So we felt like it very much leverages the core of our approach and our platform, number one.

Number two, although it’s not technically the same client segment, it’s technically the same client.

Peter: Right.

Rishi: Right, so therefore, it’s actually very much in keeping with the mission that we have.

Peter: So is that something that you intend to roll out across the other markets eventually?

Rishi: Exactly right.

Peter: Okay, so then like I’m just curious then, you’re live in the US and how many people do you have in your US office now?

Rishi: Plus/minus 20.

Peter: Okay, do you think that’s going to be your…what’s the plan for growing that? I was in your office just last month in London and it’s quite a sizable workforce there. Are you intending for the US to grow into that kind of size?

Rishi: Yeah, very much so, very much so.

Peter: Okay. So then talking about the funding round, there was a lot of noise or a lot of a…not noise, but publicity, shall we say, around the funding round that you did. It was the largest ever funding round for a European fintech, $440 million from SoftBank. I’m curious…obviously SoftBank, they’re relatively active in the fintech space, but how are they helping you, or are they helping you beyond just providing capital?

Rishi: Sure, so a couple of things. First of all, you’re right about the $440 million round, SoftBank was the primary investor, but Clermont Group was the secondary investor so it was a combination of the two of them.

To answer your question on SoftBank, SoftBank are helping us and actually I have to say that they’re proving to be a very strong partner for us and they’re helping us in a multitude of ways. One is removing the constraints from your thinking about capital so effectively saying capital isn’t a constraint; how fast can you go, how large can you go whilst still obviously maintaining some level of prudence one needs to to make sure we don’t go off the rails, right, that’s number one.

Number two, they are directly helping in terms of bringing in talent and identifying actually where we may need talent as we scale which is proving very useful.

The third aspect is, you know, they know a few banks who could be clients and they’re being helpful in that regard so fundamentally, strategically, channel acquisition and actually from a client perspective, on all areas they are being helpful and therefore for us are proving to be a very strong partner.

Peter: Right, right. We’re almost out of time, but I want to get a couple of more questions in. You mentioned China and…China is notoriously difficult to crack. I spend a lot of time in China personally with our event, we have a conference in Shanghai. How are you approaching that market, I mean, do you have like….are you partnering with a local business, are you setting up from scratch? How are you attacking the Chinese market?

Rishi: So the first thing to note is in our previous business we did operate in China, we had about 300 people in Beijing.

Peter: Okay.

Rishi: So we’ve operated there and that was an independent operation, i.e. standalone, and therefore operating in China isn’t new to us. We have a small team in China today and we intend to, again, build that, not necessarily at a very high growth rate today, but build it and put all the right foundations in place.

The market which we’re obviously looking at scaling quickly is the US market and what we want to do is take our time in creating the right foundations in China because we do understand how much tougher it is to actually build and penetrate so that’s our approach to China.

Peter:  Right, okay. So you know, I’m thinking as you’re talking, you’ve got a lot on your plate. Like this is the last question then, so tell us how you spend your time? Do you spend half your time focused on the US market, are you focusing on building the team, maintaining the culture; how do you spend your time?

Rishi: All of the above so obviously the US is a key focus. I am the CEO of the regulated bank in the UK so clearly, that continues to be my main focus, but bringing in the right talent across the business in the right places is fundamentally the only way that one can scale. Therefore, that’s inevitably a meaningful focus for us and then, you know, there’s 24 hours in a day and seven days in a week so you can actually stretch the week pretty effectively.

Peter: Okay, well on that note, we’ll have to leave it there, Rishi, I wish you all the best. You’ve built a fantastic business in a short amount of time and I can see that you’re only just getting started. Thanks for coming on the show.

Rishi: Thank you so much, appreciate it.

Peter: Okay, see you.

Rishi: Bye.

Peter: This whole banking-as-a-service segment is truly fascinating to me. It’s one that is really still in it’s infancy. While we’ve seen some companies in the consumer lending space, even in the small business space move beyond their own offering and offering it to other companies in the space, we’ve never seen anyone like OakNorth that are just going out across the globe fairly aggressively, taking their core technology, not just expanding it to one other country, but to multiple other countries at the same time.

If they can pull this off and they certainly have the resources to do it, they’re extremely well funded so if they can execute this, they will be the dominant brand in this space and it’s going to be fascinating to see how all this plays out.

Rishi is actually going to be a keynote speaker at our LendIt Fintech Europe event in September so you can find out more and listen to him at that event.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 205  –  ALEX LINTNER

Welcome to the Lend Academy Podcast, Episode No. 205. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I am delighted to welcome Alex Lintner, he is the Group President at Experian. Now I wanted to get Alex on the show because Experian has released a number of new products in recent times and I wanted to sort of delve into some depth into these.

We talk about the new Experian Boost product, we talked about their acquisition of Clarity Services, we talk about UltraFICO and how Experian is working to really include more and more people in the credit system and their approach to alternative data and machine learning and how they’re really leveraging everything they can to bring more consumers so you can accurately score as many people in this country as possible and globally, for that matter. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Alex!

Alex Lintner: It’s my pleasure, Peter, thank you for having me.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background…I know you’re not from this country, same as me, so maybe you can tell us a little bit about how to came to this country and what you’ve done in your career before you got to Experian.

Alex: Yeah, I’m German born and raised and I got to this country by having the privilege of doing my undergrad and graduate schooling here. After that, I started…I did go back to Germany, but started working for US corporations. I worked for a consultancy that was then purchased by Ernst & Young and then migrated eventually to BCG, the Boston Consulting Group who transferred me to their San Francisco office and as is not untypical of consultants, one of my clients eventually decided to hire me and that was a company called Intuit in Silicon Valley.

After my career as a consultant, I had nine very fruitful years working with Intuit and being part of a journey that I still consider one of the most exciting ones that I’ve had in my professional career.

Peter: Okay, okay. So then what was it that led you to Experian, what was sort of the opportunity, and why did you join the company?

Alex: Well if you think about what Intuit does, they are the makers of QuickBooks, which is a small business accounting software suite and the makers of TurboTax which helps individuals file their income taxes. So I really was in a fintech company, one of the largest, you know, if you will, and Experian called me proactively and really said, well, we’re looking for somebody who sort of understands the sector and has a strong background in technology.

I benefited sort of from the halo effect that during the time while I was at Intuit, we went through a technology transition that I played an active role in and that experience was attractive to Experian who was seeking to themselves evolve and become a leader in the space of delivering data with the most secure and tech-forward technology available. So I now play the role of leading part of that effort and here I am being part of America’s largest credit bureau.

Peter: Okay, so then what exactly are your responsibilities at Experian, what are you focused on?

Alex: I am Group President for Consumer Information Services here, I am operationally responsible for the credit bureau here in the US and recently, also responsible for all of our credit bureaus around the world in terms of knowledge sharing, best practice sharing etc., etc.. So operationally, you should look at me as, you know, the business lead for everything that the US Experian Credit Bureau does.

Peter: Okay, okay. So one of the things that Experian Credit Bureau did recently was, you know, acquire Clarity Services. Actually, I heard you say that it has been a very successful acquisition and obviously, we’ve heard you say many times and others at Experian are interested in expanding the credit box. We’ll talk about Experian Boost in a little bit, but firstly, I want to talk about that acquisition and what have you gained from the acquisition of Clarity Services.

Alex: Yeah, the acquisition of Clarity allowed us to bring credit prediction to consumers who were viewed as unscorable by sort of the traditional credit bureau operations so us and our competition. Clarity Services has files on 62 million people who are thin file or no file and on people who are, you know, near prime and prime and super prime, but who engage in short term lending.

It’s interesting, in the US people think about short term lending as sort of being a type of lending that’s definitely not part of mainstream lending. I would agree with that, but the myth is that they are at the fringe of the population, they live paycheck to paycheck or something like that. That is actually a misnomer, that is not correct.

To give you an idea, one in five Americans gets a hit on the Clarity data, or to tell you the same story in a different way, if you look at the past four years, 100 of the 247 million adult Americans, so people 18 years or older, have actually, at some point, taken out a short term loan of one type or the other, the loan type that’s traditionally not covered by the credit bureaus, but when you get to 100 million people that’s active there, we believe, with our mission of being the consumers’ bureau covering everybody, so we acquired Clarity in order to capture the activity in that type of lending.

Peter: Right, right. So I’m curious…I mean, I don’t know if you know the answer to this, but is there….what was the overlap between Experian’s database, because obviously there were 62 million people at Clarity, some of those would have been already scored by you, but…was there very little overlap? Can you tell us some sense of that?

Alex: Yeah I do have the answer to that question, there was definitely overlap. So, the way you should think about it is the 62 million people who are captured by Clarity, of the 100 million total engaged in short term lending in the last four years, about 60% of them are overlapping with a traditional file. So they were…we already knew the name and there was at least one tradeline.

Peter: Okay.

Alex: …most of those would be thin file. The other 40% are names where we obviously knew the name, the address, date of birth, the kind of stuff that we get from public records, there was no tradeline and Clarity sort of provides the only tradeline at the time. That’s how you should look at it.

Peter: Right, right, okay, got it. Another initiative, I know you talked about this at LendIt earlier this year, Experian Boost is another kind of initiative you to have to really help bring more people into the credit system. Can you just explain what it is and how it works?

Alex: It’d be my pleasure, Peter. Both of these initiatives that you are asking about are basically under the umbrella of, you know, our alternative data initiative. Let me say a few things about that before I answer your immediate question.

The reason why we’re passionate about and determined that we are going to be the lead in alternative data is because we have learned that lending history, which is the traditional data  that credit bureaus use, is certainly a proven method to predict a consumer’s/an applicant’s likely ability when it comes to taking out a certain type of loan. But sometimes there isn’t enough data for all people.

In order to address people who may not have a lending history or not sufficient lending history, let me give you some examples, so it could be the super wealthy, those could be people who just turned 18 years old, those could be immigrants, those could be [inaudible] where it was a single income household taking the spouse’s name who didn’t have the income.

It could be heirs who, you know, live off the wealth of somebody who had passed away but who in the past didn’t handle financial dealings so there are populations that could be very similar to me, Peter and not people living on the fringe for whom lending history data is not available. And then we turn to what we call in this country alternative data. By the way, around the world, we refer to alternative data as data…

Peter: Right (laughs).

Alex: …because very few people in emerging markets actually have a real lending history.

So if you look at the fastest growing part of the world, the Asia Pacific markets, 5% of people there have any lending history, 95% need to be scored in other ways. So we have asked ourselves, how can we add data about people to our file if they’re comfortable with us having that to allow us to correctly and accurately represent their credit reputation. Could they pay back the type of loan they’re applying for, what type of risk do they represent because we do stand for fair lending, we want to help the lender and we want to help the consumer.

So, Boost is the outcome of more than three years of effort that we had here at Experian to find a way to incorporate consumers’ bill payment history; bill payments about utilities, mobile phones, cable bills, etc. into their credit report. The most popular scores out there like FICO, that was always foreseen [inaudible] that those would be part…we just had trouble having the utility companies and the mobile phone companies and the cable companies report that data. They didn’t.

So we have opened the door for consumers by allowing them to contribute that data and virtually all consumers have utility payments, mobile phone payments, many of us have cable TV payments and it has not been factored into the credit score. We’re thrilled that we have found a way to do that with Experian Boost and it basically works by consumers giving us their online banking credentials. Through that, we get access to the bank’s last statement for that consumer and then we have what is called a categorization engine that identifies those type of payments and then they get incorporated into the existing scores.

This is, you know, risk-free because there is no impact to the consumer, if they so choose. So we show the consumer their current score, then we look if there is a tradeline that we could add to their file. If there is, we tell them what are the tradelines, we show them what the tradelines would do to their score and then they can choose whether to add the tradeline or not. And we are delighted to say that after, you know, what is now ten weeks or something like that…we have 700,000 people…

Peter: Wow!

Alex: …who have signed up for Boost, just to tell you from my own history, Mint which is an Intuit product and this is the most popular personal financial management software in the US with now 24 million users. It took Mint one year to get to a million users, we are ten weeks in, we’re at 700,000 so the velocity of adoption here is fantastic.

Peter: And so then what is a typical…you’ve got that 700,000, what is the average or typical increase in score that they’re seeing?

Alex: Yeah, so let me give you a couple of statistics. About 70% of all consumers do get a boost to their scores so their score increases. The average increase that people get is 13 points and coincidentally, 13% of the people who do get an increase jump risk bands.

Peter: Right.

Alex: So, you know, obviously this skews heavily to the no file and thin file. These consumers benefit the most because if you jump a risk band that makes you eligible for a certain type of loan, or if you were already eligible, it will qualify you for lower interest.

Peter: Right, right, okay, got it. So that’s super interesting. One thing I heard you say at LendIt as well is the consumer can opt out at anytime, right, so you opt in for this. Say someone decides for whatever reason they’re not comfortable anymore, they can just log in and opt out, is that how it works?

Alex: Absolutely, it is consumer permissioned and consumer permissioned means exactly what you have just said which is, you, the consumer, are in control. You can opt in and use it and if you don’t want to use it anymore, you do opt out.

You know, of course, we do encourage people to stay “boostable”, if you will, because if they keep Experian Boost activated, consumers can build a stronger payment history over time which would be to their benefit and we encourage it, but if they elect not to, they are 100% in control and can opt out at anytime.

Peter: Right, right. Okay, so I want to talk also about a new score that you are involved with and that’s UltraFICO. I want to be clear and we talked about this again at LendIt in depth, but how does that interface? What is UltraFICO, tell us that, and how is it different to Experian Boost?

Alex: Yeah, so up to now a positive behavior from consumers in terms of meeting their monthly financial obligations in relation to their income was hard for an underbanked consumer to demonstrate. The UltraFICO score is essentially a new score that incorporates transactional data from consumers’ checking, savings and money markets accounts, thus providing the opportunity for an underbanked consumer to access credit.

UltraFICO as opposed to Boost, which I talked about earlier, they will have attributes created around cash flow of the consumers whereas Boost incorporates the utility, mobile phone and cable bills. This does a cash flow analysis and then comes up with a totally new score. We estimate that that score will apply to about 15 million consumers that were previously unscorable which, you know, us and FICO together we hope that millions of households will have the opportunity to gain access to mainstream banking products which is, you know, a less expensive alternative financial product than the means that they turn to today and our collaborations with FICO and also with Finicity, who is the company that provides the account aggregation technology that’s required to make this possible.

Peter: Right, right. And so I know it’s pretty new in the game, do you have pilot lenders out there using UltraFICO today? Is there anything you can share on that?

Alex: No, UltraFICO is going to launch this summer so, Peter, we’re probably…I would say six weeks too early to give you data on that, but if we chat again in a couple of months then I’m happy to share.

Peter: Okay, fair enough. So something else, while we’re talking about scoring here…this was done a little while ago and you introduced the Clear Early Risk Score. We actually wrote about it on Lend Academy and I think that was about 18 months ago now, can you explain what that is and how does that fit in with other things like UltraFICO?

Alex: Right, so earlier we spoke about Clarity data, the Clear Early Risk Score builds Clarity data and it allows lenders to gain a previously unavailable view of a consumer loan and payment activity spanning both the mainstream and alternative financing spaces. Thereby it provides the most comprehensive consumer insight in the industry whilst providing financial access to more consumers, as I explained earlier.

Peter: Right.

Alex: The score has some unique analytics inside and applies those to leverage both Experian’s national credit bureau data and Clarity Services specialty data. It predicts the consumers’ credit worthiness over a 12-month period, it focuses in particular, at scoring risk of the first payment default and why that’s important, in short term lending, the loans are not installment loans, they are single payment loans so you think about a title loan or something like that.

You know, people borrow a certain amount of money and then agree to pay it back at a certain time; our own definition is shorter than 12 months usually so sometimes they pay it back next week, sometimes in two months, sometimes in a year, depends on the type of loan, and it’s a single payment, not an installment. This score predicts, if they were to take that type of loan, what would be the propensity to fail that payment as agreed upon. That’s the Clear Early Risk Score.

Peter: Okay, okay. So then the companies that are doing these single payment loans, they’re reporting the data into Clarity, is that how it works?

Alex: Yes, that is how it works.

Peter: Okay, okay, interesting. What about rental payments? We haven’t talked about that yet and obviously, you know a good chunk of the country doesn’t have a mortgage and they’re renting. To me, that’s something that would be also a highly predictive data point. What are you working on and how are you working with rental payment data?

Alex: Yeah, so a subject close to my heart exactly for the reason that you have just named…if you don’t have a mortgage, your rent is often your largest payment every month. We have an asset here at Experian that’s called RentBureau which we launched in 2010.

Just a little bit of context, nearly a third of all Americans are renters and Experian RentBureau has data on more than 20 million residents. That’s a great asset, to be frank, I’d like it to be even larger and it is a positive rental payment reported by all those landlords who are added to the Experian credit database.

It’s very helpful to 60% of consumers, those who are in the near prime segment, in particular. When they make those payments, it helps them qualify for a mortgage, or it helps them get to a new risk band. Rental payment we attempted to also get those through account aggregation so, you know, give us your online banking credentials and we can look and through a categorization find them, but we have learned some very interesting things that kept us from doing that.

What we’ve learned is essentially, somewhere around 45% of all rental units in the country are owned by institutional renters, large landlords who have sometimes millions, or sometimes only in parenthesis, tens of rental units. We would recognize those because they have a corporate name. The other 55% of all rental units are owned by people, people like you and me, so if a payment goes to Peter Renton or Alex Lintner, it is hard for us to recognize that it’s a rent payment.

Peter: Right.

Alex: Therefore, the categorization engine technology doesn’t work, like it would work when you pay to a company, a utility company, your mobile phone company, etc., etc. So we are still dependent on the reporting of renters and we work with our partners to grow that stake, our plan is to double it in the next three years and we’ll see whether we achieve that.

Peter: Okay. So I want to talk about privacy for a minute because, obviously, it’s a real concern with credit bureau data and even, I am sure, some of the customer contributed data that we’ve already talked about. What is your approach to privacy and how do you make your customers comfortable with that?

Alex: To state the obvious, I’m a consumer too…

Peter: Right (laughs)

Alex: …I am concerned about my own privacy and I respect that our clients and our end-users are concerned about their privacy, they should be and we want to help them with that concern. Having said that, our mindset is that for consumers contributing data, it’s not such a new thing. If you think about data that we contribute to social media, we contribute all kinds of data so why not make a contribution, something that helps boost your credit score.

That’s why we like account aggregation technology, the consumer permits us to do that, they can choose when they want to do it, they can choose when they don’t want to do it which is privacy. I choose what I do when I want to do it and I only show the people who I want to show. Hopefully we earn their trust, we do everything that we can to keep the data safe, we do everything that we can to make the experience, you know, frictionless so it’s easy for them to do that, and we do everything we can to present them with that opportunity at the time that’s most opportune for them.

For example, when they apply for a loan, or for example, when we know they have slipped credit bands and, you know, are working themselves out of a tough situation so Experian feels responsible for this data that was contributed. We will never charge for it, it’s under control of the consumer, available at all times and it’s free and we, nevertheless, but we don’t make money on it, we give it the same security treatment as we do with all our large data furnishers, the lenders in the country.

Peter: Sure, sure. So then you’re working with massive datasets at Experian, you’ve got billions of data points, millions of daily transactions and you know, it screams out for the use of machine learning and artificial intelligence because the datasets are so large, so maybe could you just comment on how you’re using machine learning in the development of some of these new scores?

Alex: Yeah, so we have an Extended View score here at Experian that we’ve had for a while that was generated using machine learning. You know, machine learning is one of those things that not many people understand so let me tell you a little anecdote that helps illustrate how we think about machine learning.

I have a parent of a very dear friend who was diagnosed with brain cancer, actually, and I asked her…I’m sorry to hear about your diagnosis, what are you going to do? Her answer was interesting to me, her answer was, I’m going to a doctor who is an oncologist, who uses machine learning. Why machine learning? She goes, well it’s very simple, this person is a mathematician, so she said, well, the average oncologist with over 10-years of experience gets the diagnosis right in 97.3%. The average oncologist with ten years experience who leverages machine learning gets the diagnosis right 99.8%. Alex, if you had brain cancer, what would you do?

Peter: Right, right.

Alex: Obviously we all know the answer. The point of the story is that the human thought leadership in putting together a score doesn’t get lost, but we have such vast amounts of data available today for a certain type of scenarios, for certain segments of the population, would there be other data elements that better describe the individual so that the individual gets reflected to the potential lender in a fair and accurate manner. That’s what we aim for.

If we think back about our own founding days, we were founded by a man called Si Ramo, the story that I tell about Si Ramo is very simple. He was a pharmacist in Nottingham, England who had a big heart, he gave pharmaceuticals to people who couldn’t pay for them immediately, he kept manual books, who did he give pharmaceuticals to so that they pay him back at some point.

He became the most popular pharmacist and keeping manual books didn’t do it anymore so he created a scoring system so he knew who he would get his money back, who to do that for so he could get his money back and who not to do that for, where he would likely not see his money. That evolved into the credit system.

Si Ramo initially knew people, he asked, well, who is your mom and dad, where do you work, and so he knew the local community understood the individual. What we do now with artificial intelligence…when we look across 147 million American adults we want to make sure that we, as Experian, represent the individual as who they are so that the lender understands the person sitting across from them is not some anonymous individual, it’s a real human being.

And that is what machine learning can help with so to give it more “gestalt”, I can use one German word (Peter laughs), more “gestalt” of who is sitting across from them and what should I take into consideration as I consider whether I give a loan and if so, at what interest rate which represents the risk the applicant represents.

Peter: Right, right. Okay, we’re running out of time, but I’ve got a couple more questions that I really want to get your thoughts on. First one is just the state of the American consumer because you obviously have great insight into that and, you know, we’ve been on this economic expansion for a long, long time and the consumer still seems to be doing pretty well, but there’s definitely been talk in the media over the last couple of months that maybe delinquencies are ticking up in certain segments so what’s your take on the American consumer today?

Alex: Peter, we just published our latest State of Credit Report, as we call it, it was released a little more than a week ago, and it takes a 10-year look back at consumer credit behaviors from Q2 2008 until Q2 2018. If you remember, Q2 2008 was the year when we headed into the financial crisis. If you take a look at this past decade, the report shows that over the past ten years we’ve seen a decrease in delinquencies.

My interpretation of that is we also see the average debt load for the consumer increasing, but delinquency is decreasing which means that I believe consumers are using credit more responsibly and that is reflected in their credit scores. The average score now is 680 on the Vantage scale and that’s a prime score so I think that’s good news for the American consumer.

Peter: Okay, so last question then. We’ve talked a lot about the thin file consumer and I’d like to get an idea of your goals there and what’s it going to take to get these tens of millions of people who are still unscorable, what’s it going to take to get that much closer to zero?

Alex: Yeah, we talked about it briefly when we touched on the topic of alternative data. Our goal is, you know, we regard ourselves as the consumers’ bureau, is to determine the credit worthiness of any consumer seeking access to credit. To move those tens of millions of people into mainstream credits will take innovation and alternative data is one of the ways which we can do that.

We spoke about Experian Boost where we get certain type of bills included and we spoke about UltraFICO which looks at the cash flow of the consumer, but we’re not done. Those are not the only things that we’re going to do. Improving access to credit is part of our fundamental mission and our innovation aims at finding more ways, more alternative data to continue to improve the financial health of consumers around the globe. That’s all of our charter and I think if we talk again in six months, in addition to Boost and UltraFICO, you’ll hear more news about how that can be accomplished.

Peter: Okay, it’s a great mission and I really appreciate you coming on the show today, Alex.

Alex: It’s my privilege, thank you very much for having me.

Peter: Okay, see you.

Alex: Take care.

Peter: One of the things that I’ve talked a lot about on the show over the years and particularly, in recent times, is just the importance of bringing more data to bear, bringing more consumers who are unscored or who have a thin file into the credit system where they can…the bottom line is they can save money. I’ve said before, it’s expensive to be poor and you may have not much money, but you’re always making your payments on time and you have a very low credit score, but you would be a good credit risk for some of these products.

What Experian has been working on, I think, is fantastic in bringing more data to bear to give a more accurate picture of those consumers in the thin file type population. I really hope that we can continue to expand that and it’s going to make a huge difference for those people who can suddenly obtain less expensive credit than what they have been used to.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 204  –  HUSAYN KASSAI

Welcome to the Lend Academy Podcast, Episode No. 204. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I am delighted to welcome Husayn Kassai, he is the CEO and Co-Founder of Onfido. Now Onfido are a fascinating company, they have become almost the standard now in identity verification for the fintech space. Certainly in the UK and Europe, they are used extensively and becoming more so in the US, but anyway, I wanted to get Husayn on the show because they are really doing interesting work.

I wanted to talk about how their system works, what’s wrong with identity today, why the current system is so flawed, we talk about the challenge of user experience and reducing friction, we talk about how banks are using this, we talk about artificial intelligence, and how that is playing a major role in improving these models, and we talk about what it would take to actually have a perfect world with very little identity theft. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Husayn!

Husayn Kassai: It’s great to be on.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself and…you know, you haven’t had a long and storied career because, as we were just chatting before we hit record, Onfido was your very first job out of college. So maybe just tell us a little bit about why you decided to do that instead of going and getting a job and what are some of the things you studied in college that you felt prepared yourself for this.

Husayn: Of course, so in my last year at university, I was fortunate enough to be the President of the Oxford Entrepreneurs Student Society and during that whole year, I got to see very many startups coming and pitching and presenting and asking for funding so I got to learn quite a bit during that process. We had a clear metric…my Co-Founder later also was the Vice-President of Oxford Entrepreneurs at the time and we had a metric around wanting to see how many successful spinouts we can have.

Despite us doing a lot of activities and trying very hard, towards the end of the year we still only had maybe one or two actual startups spin out and do it full-time. So we had learned so much and we genuinely felt that there is a big need to solve this identity problem that we felt that we should do it ourselves because the norm is you kind of have to conform to expectations, you know, you go and earn a salary, you have a to get a mortgage, you have to tick these boxes. We had experience and we saw that counter to what the expectations are, doing a startup is never necessarily, there’s never an ideal time for it. The ideal time is when you see a real problem and you feel like you can work to solve that so we felt it was the right time and that’s why we went straight into getting the company going.

Peter: So then what was the thing you saw that led you to the idea that became Onfido?

Husayn: So fundamentally, it’s about building trust and Onfido in Latin is a mix between fido which is “trust” and confido which is “confidence” and we saw that the way that identify verification process was carried out was essentially what we had deemed as broken.

We have our different stories as co-founders, but when I turned ten, my parents moved from Iran to the UK and I remember quite well that it took them a few months to be able to open a bank account in their own name surely because they weren’t registered on the credit bureau. Growing up, I found out that credit bureaus essentially had a log of everyone’s date of birth, name and address and it excludes half the world of the adult population who are underbanked, unbanked and are therefore not on the credit bureau so it has an exclusion and access problem.

On the other hand, you have a security problem whereby almost all of that data is already breached and in the dark web anyway so a bad actor can just steal your date of birth, name and address and open an account so you don’t get security and this kind of loss of currency. So given that it was excluding a lot of people and also not offering security. We felt sure there was a much better way as the world is moving online for businesses to be able to verify their customers in a user-friendly way, but also secure and to give access to as many people as possible. That was the initial mission which we’ve been working on now for seven years.

Peter: So tell us a little bit about those early days. I’d be curious to sort of get your take on did you have a particular product in mind when you launched, were you trying to sort of redo the entire process? What were the early days like?

Husayn: So when we looked at how are you able to prove someone’s legal identity, we first distinguished how we are going to focus on your legal identity. So we could see how Facebook has standardized the way everyone shares their social identity, your likes and preferences and so on and how LinkedIn has solved the problem of everyone who ever wants to with an account be able to share their professional identity, your academic career or job career and so on.

So our focus was on your legal identity, that is your date of birth, name and address so that you’re compliant if you want to carry out some financial transactions, sign up to a lending platform or similar and then at the same time if there is a breach and a bad actor is found, then law enforcement can be told precisely who they are so that was our focus around legal identity.

Our third co-founder, Ruhul, is our technical co-founder. His university thesis was using computer vision and machine learning to spot wildlife in 25,000 photos of the jungle so this pattern recognition research that he did, we felt very well mapped on to government ID checks. So when you want to open a bank account, for instance, you go in person and there is a bank clerk and an individual that asks to see your passport or driving license and deems it to potentially fraudulent or not and then compares your face to the photo on that.

With our technical co-founder’s research, we could see that we could bring that bit and make it digital and bring it online so not only is it more secure, but it’s actually a lot more convenient too. So that was the first version of the software and naturally, we’ve been improving it ever since.

Peter: Okay, interesting. So then what is it that is specifically wrong today, is it just merely the fact that your data is out there to be stolen, is it the fact that really we’re looking at, you know, a system that…it’s all about these legacy products like a driver’s license or a passport, is it merely the fact that these things are so easily stolen, is that the biggest problem?

Husayn: So there are a few and identity fraud, as you say, is a big one so in the US, for instance, it’s the largest crime and the fastest growing crime across all of fraud, specifically online frauds. The common denominator is identity theft because a fraudster does not want to get caught so the first thing that they do is impersonate someone else, or come up with a fictitious identity so that they’re able to commit a bad act.

It is a large and growing problem because 2 to 5% of the world GDP is laundered money, that’s between $800 billion and $2 trillion which are United Nations figures so it’s a real shame that less than 1% of that is actually caught because money laundering is used for human trafficking, drug trafficking, terrorist financing and so on so not only is identity theft problem a large one, it is getting worse. When you consider the reason why it’s so bad and getting worse is because the current systems in place to address it aren’t fit for purpose.

On the one hand, you have the option of going face-to-face in a bank branch and being verified, but as we know, that’s not accessible to everyone and most consumers now prefer to do things digitally and online and there is a big convenience factor that is the driver. But on the other end of the spectrum and the other approach is to verify people online and online verification, historically, has been predicated on using credit bureaus and that credit bureau model is just a centralized database, but because it’s leaked or because it’s been breached, that data is accessible to bad actors and hence, it has lost its currency.

So there are one or two other sort of smaller alternatives, using social media which has a privacy issue and sort of is not seen as the right thing, nor should it be, or using knowledge based questions such as, you know, what’s the third character in your last utility bill for instance, which again has a lot of friction because users aren’t necessarily accustomed nor used to storing or saving or looking up utility bills.

So our approach, which was from the outset focused on a user showing their government ID, either a photo or a recording of their face, was designed so that we could do a very good job of determining if it’s fraudulent or not because we run our machine learning models on whether that government ID is fake and then secondly, whether the person showing that ID is the owner of that by taking a photo of their face and comparing it with that. So that’s our problem, is identity theft, the current solutions are in our view, are not fit for purpose. Third, is that the world is moving online and businesses no longer see their customers face-to-face, and hence they need to have this in place.

Peter: Right.

Husayn: So we have four building blocks that we focus on which is fundamentally to help the 98% easily access services; second is to get very good at determining which 2% are the bad actors and they are two sides of the same coin; the better you become at detecting fakes, the more easily you can onboard that 98%. Third is to uphold privacy, and fourth is to make it as frictionless as possible so it is an easy and friendly user experience. That’s been our chief focus to solve this identity problem.

Peter: So then take us through a typical example of how your product is implemented. I know you’ve got several clients in the fintech space and the banking space, but let’s just go and take us through…someone is opening up a new account, let’s take LendInvest, for example. I listened to a podcast where you were on with I think it was Christian Faes of LendInvest so I’m an investor, I go on to LendInvest, I open an account and then what happens as far as the verification, what are you doing?

Husayn: So as part of the registration process at LendInvest, you either, on the portal or on the app, at some stage, probably stage two or three after you’ve entered the fact that you’re interested in taking out a product and so on…that’s the point at which our SDK kicks in. Essentially, it’s an experience where you are then asked to take a photo of your government ID, it can be a driver’s license, passport or similar and then once that is done the next stage is to take a photo or a short recording of yourself.

Once you click you’re ready then you hold the phone or it can be your webcam on your computer for instance and you’re asked to read three randomly generated numbers so for instance you would read 2,5,6 or whatever the numbers happen to be and you’re then asked to carry out a task. It can be turn your head to the left, turn your head to the right or something simple and then you click submit and that’s it.

We then take it from there and then the checks are processed and the results are sent via API to the team at LendInvest, but behind the scenes what’s happening is when we have a photo of your ID like your driving license, we have seen tens of millions so we know what patterns to expect, we know what fonts, characters and if it has been digitally tempered with and so on and so forth.

So the machine learning models can determine whether it seems fraudulent or not and secondly, the photo on your driving license is compared to the face that you took either a photo or a video of and we can sort of determine if you’re the same person or not so that LendInvest would know that, not only has a person been verified, part of their KYC or Know Your Customer checks, but the person presenting the details are who they claim to be and the actual owner of the identity.

Peter: Right, right. So then how confident are you…is it 99.9% confident that the person who owns the ID is the person, particularly if you’re doing a video, I imagine video, particularly if you ask them to do a task, I mean, I can’t imagine that that could be hacked very easily, so how confident are you that you’ve got the right answer whether this person is who they say they are?

Husayn: So in some ways we’re kind of like an anti-virus software where there will be sophisticated fakes that cheat the system. So what we’re able to do is two things; one is to say we are significantly better than manual, human teams doing it, either comparing templates or in person and secondly we’re better than any other digital offering.

The reason for that is because of the machine learning models whereby as an ID comes through if it’s fine then it gets processed, but if we suspect that it might be fraudulent..for example, a password image might be stained. Now when it’s stained we have fraud experts that double check and when the fraud expert double checks, they’ll be better able to determine is it stained because it was accidentally put into a washing machine or does this look like a sophisticated fake pattern or anomaly that we’ve seen in the past and therefore, it is scored accordingly.

So a client typically, let’s say LendInvest would get 90% coming back as fine and then about 5% would be classed as consider. So either it’s because it’s a black and white document or it’s expired or a number of different reasons and their team will double check and every business has its own threshold as to what they would or wouldn’t accept, but these are triggers for them to be able to double down and focus on the 5% to be able to automate the 95%. And then 5% are typically rejected, either the person has not been able to effectively upload or they’ve stopped the process or something similar.

Once businesses integrate us and they compare their metrics prior to them integrating us, they can see the fraud rates going down sometimes in a pretty substantial way. So Zoomcar, for instance, which is the largest peer-to-peer car rental service in India, their car theft halved once they integrated us. So some of those 5% that drop off, they can do so as a result of legitimate reasons, but some may be bad actors that is because they don’t want to expose themselves or because they know there’s no way to cheat the system then they essentially self select out.

Peter: Interesting, interesting. So then…I keep thinking about, you described that process and…how do you think about the friction? There really is friction between a good user experience, a seamless user experience and going through this identity verification because the person sitting at the computer…I know I’m a good guy, I shouldn’t have to go through all this rigmarole, particularly if you’re not all that adept at using your cellphone. How do you approach that?

Husayn: Most people tend to expect to have to go through some sort of compliance check, especially if they’re asking a financial service, particularly if it’s lending, so part of it is because it’s integrity in the system…if it’s very easy for people to come and borrow money, we’re doing very little checks then naturally, you might get the impression that it’s easy equally for bad actors and therefore, the platform can not sustain itself.

The best thing with the wave of fintechs that we’ve seen is fundamentally…I mean, lending has happened for hundreds if not thousands of years which as you know better than I for example, but more recently what the fintechs have been able to do very well is put the customer experience at the heart of everything that they do and as a result, they are able to operate digitally or fully online and as a result, we from the outside have had to adapt and focus and partner because we also were aiming to make this as easy and frictionless a process as possible.

And so when it comes to showing your ID and a photo of your face, the good fortune is that smartphones and other technologies have now in many ways normalized it, especially taking a sort of a selfie or a photo we often…more and more of us are now using it just to unlock our phone. So because it’s been normalized and because more and more consumers are seeing this repeatedly every time they’re using one of the large fintechs or rental car services or online communities they’re seeing us so it’s in many ways normalizing. Does that help answer the question?

Peter: Yeah, that makes sense. So how long does it take typically, what’s the average user time like they get into your system, they’ve got their driver’s license, they’ve taken a photo, a selfie, is this a 30-second process, a 90-second process? What’s the average kind of time it takes?

Husayn: So from our side, as technology goes, if there are no issues with the ID or the selfie match, then it is typically sub 20 seconds so less than 20 seconds. If there is something that needs to be double checked, the average is two minutes so that’s when a fraud expert for instance needs to double check something, the average return is two minutes.

Peter: So in those situations you’ve got a human standing by going through this in a manual process, is that correct?

Husayn: Correct, so hundreds of fraud experts when they need to double check something, but this is the time it takes on our side. You have to remember that, depending on the business, they have additional checks, additional processes…

Peter: Sure.

Husayn:  Sometimes it might take up to 24 hours before reaching a conclusion, but in other use cases if it’s a home sharing platform or if it is a travel platform then you kind of want to know within 30 or 40 seconds. So speed matters a lot specifically in those examples.

Peter: Right, right. Okay, so you mentioned machine learning a couple of times already, I think, can you explain…is the machine learning really in the recognition of the face itself? How are you using the technology?

Husayn: So in a number of ways, neural networks in particular, it is at different layers. So one is the classification of the documents so is it a passport, is it a driving license is it…for example, a California driving license and so on. Second is extraction of the characters; third is determining a range of different fraudulent patterns; font, style, it can be image tampering, it could be copy/paste and so on and so forth, but when we release a new model then as the results come through, we typically have to have humans double checking to annotate and correct, for instance, and that is what trains it. So it’s human-assisted machine learning, especially for the fraudulent patterns or fraudulent factors.

And then there are the examples, as we talked previously about, the very sophisticated fakes that if they happen to be able to cheat our system then our client, two weeks or four weeks later, when someone hasn’t paid their credit card or whatever it may be will flag to us that, for instance, this fake has cheated our system.

What they like the most is we use those samples to build the next version so that you can essentially fool us once, but it’s going to be increasingly hard for you to fool us again. What businesses, in particular, care about is those sophisticated fakes. That is our pace of innovation and pace of improvement that really has helped set us apart and we’ve only been able to achieve that fundamentally as a result of our machine learning approach.

Peter: That’s interesting. So you’ve got humans that are really helping the model improve and then is the model improving by itself anyway as well?

Husayn: So there are different models for different functions…when it comes to where human assistance is particularly useful is on the fraud factors and so when an ID comes through, if it needs to be double checked or if their thresholds haven’t been met, humans are double checking and we have internal feedback loops.

Those internal feedback loops with our own team help significantly improve accuracy on the models because they are kind of eliminating the false positives and then we have external feedback loops with clients. Where again if we happen to have missed a sophisticated fake, they then flag it to us and then we use those samples to build future versions. So when it comes to what sets us apart which is fundamentally our fraud detection capabilities being so strong, that is the result of, in large parts, feedback loops both internally with our fraud experts, but also externally with clients.

Peter: Interesting, interesting. It seems like it’s a bit of an arms race in some ways, or is it? Maybe you can answer that question because the fraudsters have access to the latest technology as well and they can hire people who are really smart as well, so do you find it an arms race, or do you feel like they won’t go to your clients, they might go to somebody else who has less sophisticated type of, you know, type of fraud detection?

Husayn: Yeah, it is actually an arms race, but it is one that we are now able to effectively sort of counter. So in some ways, before us, the way I look at it is like they were armed with tanks and the solutions offered were knives at best because you don’t need to be a sophisticated fraudster to just guess or steal someone’s date of birth, name and address to be able to cheat and open an account.

But now, you have to show an ID and show your face and you have to make sure that all the fake techniques that capture all the attack vectors are prevented and so on and so forth. So what fraudsters, what they want to do the most is the sophisticated fraudsters want to commit fraud at scale so they want to cheat hundreds or impersonate a hundred people every day, for instance, and they are extremely sophisticated so they have…you can you imagine the super sophisticated ones often work out of office blocks, they have performance related pay, sick pay and everything else, very sophisticated machinery, very sophisticated techniques. But what they want to do more than anything else is actually to be able to cheat systems at scale, as I mentioned.

So what we do, especially with clients that you use our liveness check for instance, is you have to do a 10-second recording, you know, read three randomly generated numbers and do a task and so on. Now that isn’t very scalable, first of all, you can’t cheat that by doing or pretending to be someone else or holding up a photo, or something similar because it’s a challenge and it’s been designed to prevent that, for instance, and secondly, as a bad actor looking to cheat a platform, why would you go through one that is A. very time consuming and B. super difficult to cheat as opposed to many other alternatives that are much easier to cheat.

That’s in many ways, why we’ve become the platform sitting behind a lot of the fintech community. All the communities are going online, including some of the mainstream banks. That’s because by us sitting in the middle of all these different businesses, our models are learning from all the data and all the attack vectors that are sort of looking to be broken across all these different businesses. All models get stronger and all clients benefit as a result of a bad actor trying to cheat one system and therefore, we learn that pattern. So if that bad actor has sold a hundred fake IDs, we would catch the other 99 coming through other clients’ for instance.

Peter: Right, right. When you’re going into banks today, are you…this might be their first facial recognition or any kind of thing…it wasn’t very long ago, you would open up a bank account or you even get a bank loan and there was nothing automated at the bank, it was all a manual process, so are you going into banks and this is their first foray into your kind of product and you’re sort of starting from scratch, or are you going in and replacing what’s existing?

Husayn: It’s a good question, in many ways both. So three or four years ago, the mainstream banks would talk to us, but we didn’t feel as though they took the wave of the neo online challenger banks too seriously.

Peter: Right.

Husayn: In some ways some of the early assumptions were, you know, this is a new wave, it’s a bit of a fad and how can you have a purely online bank. Surely, you’re going to get all the fraudsters disproportionately and therefore the model is going to crack or break. What everyone has been able to witness, especially in the last two or three years, is that these online banks not only have they been able to prove that they’re scalable in on-boarding very many customers very rapidly, but more importantly, they don’t have any excessive or any out of the norm fraud exposure than the mainstream banks.

So when these mainstream banks looked under the hood and saw that technology such as us in identity verification or (inaudible) for behavioral stuff or iovation or I guess, ComplyAdvantage for watchlist searches and different types of machine technologies being put together, assembled to help with the on-boarding compliance process, they’ve started to adopt since. And to your question as to whether is it new for them or not, what the mainstream banks are now doing and have been doing for a few years now is either they are buying an online bank or spinning up a completely different online bank division and for that it has been designed to be sort of new age and tech.

Once that model is proven out, it is reverted back to the bank. So if most of the mainstream banks…their tech stack is not necessarily equipped to be able to do work in an agile way, the way you’d expect a fintech or a neo bank would, but they are all moving in that direction and that’s why we are partner with the Salesforce Financial Services Cloud, or equally BBVA might be one of the exceptions where as a bank it is public knowledge that their whole tech stack has been improved end-to-end to ensure that they’re able to plug in the latest technology, specifically if it’s machine learning and API-based.

Peter: Right, right, okay, fair enough. So I’m curious about the fact that…you know, you’re based in San Francisco, but your company is based in London. Tell us a little bit about where do you operate and why are you here and not in London, tell us a little bit about the structure of your company.

Husayn: Yeah of course. So, we’re 240 people, the growth in sales in our largest market, our fastest growing market is in the US, hence, why I’m based here, but our engineering base and the technology side is predominantly in London, but also we have a team in Lisbon as well. So we have 7 offices in total, we have three or so colleagues in Paris, three in Delhi and also two in Singapore.

To your question of why I’m based in the States in particular, in large part because in Europe or at least western Europe, we are pretty much the leading provider in many ways. In the US, we are known in the community, but not as well known as we will be hopefully over the coming years so that’s essentially why I’m here. As you can imagine, it’s in many ways, a much larger market too.

Peter: Right, right, okay, fair enough. So I was reading recently about this Global Financial Innovation Network, GFIN, that cross border regulatory sandbox initiative. The FCA in the UK was one of the real driving forces behind this because this is a global problem that obviously knows no borders. I mean, the people hacking into these systems could be in Russia, they could be India, they could be in, you know, in Chile, we have no idea where these people are.

I’m curious about the fact that you’ve got all these different countries, there’s certain best practices with fraud so maybe, with anti-fraud, I should say, so from a regulatory perspective how important is it for an initiative like this to kind of come together and really combat fraud in a global way?

Husayn: There is a big need and the regulators can play a big role so we’ve been very fortunate in that, having the majority of our product and technology team based in London with the Financial Conduct Authority and their sandbox approach and how they have both competition and innovation as their focus area. They’ve been able to help us and companies in a similar space as us work hard to get the right balance between using the latest technologies and achieving really strong outcomes and results. So we were part of the first FCA sandbox, for instance, and it was sort of announced a few weeks ago we’re part of the current batch again so cohort 5.

With GFIN, GFIN is essentially, like you said, a similar setup to the FCA sandbox, but it’s across multiple jurisdictions so we’re part of the current GFIN batch too. It’s the first time it’s being done. So we’re continuously communicating and engaged with the regulators because we want to help as many countries as possible enable an online digital ecosystem, but underpinned by strong fraud prevention techniques because more and more countries, not necessarily emerging, even to develops like BaFin, for instance, in Berlin and in Germany. They’re looking at London and they’re looking at Paris and New York and they can see the progress that fintechs have made that has been far more than what they’ve been able to achieve.

Peter: Right.

Husayn: One of the underlying reasons which is in Germany the regulation is still a little bit outdated, it requires like a video Skype call for instance for you to be able to sign up to a fintech whereas digital technologies can be used in most other jurisdictions. So we’re continuously engaging and developing both learning and teaching, or sharing at least, and these sandboxes are the perfect forum to help facilitate that because the regulators are very much interested and very much want to learn, again, not just across the range of..not just the fintechs, but the platforms that are enablers to these fintechs.

Peter: Right, right, okay, makes sense. So I’d love to get your perspective on something. It’s an issued that I’ve been thinking about for a long time…you know, obviously the Equifax hack a couple of years now and the whole idea of having your identity or details about your identity stored in a central database is…it already seems old fashioned, but we haven’t really yet come up with a better way to store this data. How would you recommend we store identity data?

Husayn: So the first is to recognize how important and how sensitive it is and secondly, as you mentioned, it’s how it currently operates which is not fit for purpose. So essentially, for the current model it’s predominantly centered around credit bureaus’ centralized leaking database. The antithesis or the solution or the counter to that would be the opposite which is a much more decentralized solution where the consumers own and control their legal identity.

So there are different models and we are partners to quite a few of the different technology solutions looking to solve this identity problem essentially calling it a portable identity or decentralized identity. Some are using blockchain, others are not, so different approaches, there is a wave of activity now that has been initiated and that is making progress.

The fundamental objectives are first of all, for the user to own and control their legal identity and share that with the businesses that they choose to so the actual way that’s stored. There are different models and different options, again, the consumer could choose. One would be your smartphone, for instance, in a secure way, an alternative would be your local bank or the bank that you trust with your finances. They could be a custodian of your legal identity, a third could be AWS, Azure or a cloud service, for instance.

So there are a number of ways and naturally, if it’s in one place, you control and you are able to manage, it’s going to be far superior and far more secure than what we have currently. What we have currently is you want to sign up to your local gym, you want to sign up to supermarket’s loyalty program or anything, any account that you want to open, you have to share so much data.

That exponentially increases the likelihood of one of those businesses getting breached and therefore your data leaking on the dark web and therefore, bad actors being able to very easily use that data to open accounts in your name. So we have no doubt that the future is going to be much more of a decentralized trust and a network in the sense of portable identity and because we believe in it, we’re actually very involved in helping different platforms looking to solve that problem.

Peter: Right, right. So we’re almost out of time, but a couple of things I want to get to. You know, I think about this, do you think that in the future, in the distant future, do you feel like identity theft is going to be just a solved problem where it’ll be so rare as to be very unusual because tools like yours get so sophisticated, or do you think we’re always going to be challenged by this?

Husayn: I think that there will be…I can’t say it can’t get worse because it’s actually getting worse, (Peter laughs) but there is now effective technology out there to address it. So it’s going to be…you’re probably going to see two camps; those who are deploying effective technology and therefore are able to be protected and those who are not which increasingly are going to find it difficult, both costly and so on, to continue. This is ripe for there to be a network of trust built that gets stronger, the more data there is and therefore is able to offer all the benefits because of different drivers there is increasing regulation around privacy and around security, there is consumer demand for personalization and efficiency.

There is a growing…I guess, the power of machine learning only in the last five/six years has really been able to show itself and all the benefits that it brings and so on and so forth. So the answer to your question is that we are going to very much solve this identity problem, but it’s going to take some time, but we’re definitely on the right path.

Peter: Right, right. Okay, last question then, what are you working on right now, what are some of the things that you’re excited about that might be coming down the track?

Husayn: So in some ways, I’m kind of interested anything with similar use cases, or interesting patterns in different geographies. So one of the companies I am following closely…one of our partners is Tala, for instance, in emerging markets like the Philippines, Indonesia and elsewhere, they’re able to do micro loans so $20, $50 lending and they are able to do so because it’s all online and they’ve been able to reduce the on-boarding cost to a few dollars as opposed to tens of dollars if they were required to see everyone face-to-face.

On the other end of the world you have…if you look at Southeast Asia, examples of MoneyMatch or similar ones that are doing very, very cool stuff. So across the board the fintech wave in many ways is still the first wave and it’s catching on in different parts of the world so it’s very interesting and exciting to see that.

Secondly, back here in the States it is, and sort of the UK, we’re running some pilots on portable identity so the topic we were just discussing. Ultimately, it’s going to be the user that owns and controls their legal identity and they’re able to decide which businesses they want to take that to so that’s going to be pretty exciting to see it progress.

Peter: Okay, yes, it’s going to be fascinating to see it. I find this whole topic just so interesting that we are here in this process of moving to a completely different way of doing things. Anyway, Husayn, we’ll have to leave it there. I very much appreciate you coming on the show today.

Husayn: Likewise, thank you for the time.

Peter: Okay, see you.

Husayn: Bye for now.

Peter: You know I was reflecting on this after I hung up the phone with Husayn and, you know, I’ve recently opened up a couple of new accounts, I’m not going to name names, but sometimes the systems to open these accounts even with fintech players, they’re not as sophisticated as I expect, particularly when it comes to identity verification. I’m sometimes now expecting to have a video or sophisticated photo verification done with ID and oftentimes, that’s not the case.

I think in Europe it’s probably more so, but here in the US I think we still have a long way to go before we get an identity verification system that everybody uses and I think companies like Onfido are really going to help drive this change where they have the easy to use systems that catch so much when it comes to the bad actors.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 203  –  VIOLA LLEWELLYN

Welcome to the Lend Academy Podcast, Episode No. 203. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe

Peter Renton: Today on the show, I am delighted to welcome Viola Llewellyn, she is the Co-Founder and President of Ovamba. Now Ovamba have been around for several years and they’ve had a couple of pivots and now they’ve focused in on the African market, in particular Cameroon and now the Ivory Coast or Côte d’Ivoire, and they are really focusing on trade finance.

We talk about that in some detail, we talk about why they decided to pivot into that area, how their solution works, who’s investing with them, how they’re underwriting these transactions and they also give us a sense of the scale they’re at and what’s in store for the future. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Viola!

Viola Llewellyn: Thank you, Peter, it’s so good to be chatting with you.

Peter: Likewise, likewise. So I like to get these things started by giving the listeners a little bit of a background about yourself so why don’t you tell us what you’ve done in your career. You’ve have had quite an interesting journey, it seems, but what you have done in your career before Ovamba.

Viola: Before Ovamba became what is, I actually had been in the alternative finance sector working for something that had a hideous name of the Death Bond (Peter laughs). I used to work in life settlements back in the, I would say the mid-naughties, I was headhunted by an individual who asked me to help set up a company that would buy and sell life insurance policies of individuals that wanted to liquidate them and we would securitize them and sell them.

It was an exciting time until we ran into the most frightening relationship and that was when we partnered with Lehman Brothers and Bear Stearns at the same time, which literally wiped out all the value of our investment in one fell swoop and that was of course, 2008.

Peter: Right, right. Okay, so then tell us about the germination or how did Ovamba kind of get going. What were the ideas that were running through your head when you started?

Viola: Well, I actually can blame you for that, Peter (Peter laughs).

Peter: Really, okay.

Viola: Yes, I could partially blame you…do you remember way back when you launched the first LendIt Conference in New York.

Peter: I do.

Viola: Yeah, we were one of the 230 companies in the room that day and we had only just formed the company a couple of months before because we had seen a lot of the information that was coming out and seen the response to the JOBS Act and crowdfunding and peer-to-peer lending and what went on to become marketplace lending.

We found out there was an association, the LendIt association. We were looking at all the businesses that were performing there and decided wow, if they can do this knowing full well that the African history of capital and money lending is very ancient, we saw a natural synergy between what we saw in some of the platforms that you guys were connecting and the African tradition of informal lending using social credit based on ethnic, tribal and other social elements. We felt we would be the first people to digitize this and we’ll go off to market and that’s how that came to be.

Peter: Interesting, so maybe we should talk a bit…because obviously you have a British accent, you live in America, I believe you’re in Maryland today, right?

Viola: I’m in Maryland today.

Peter: Okay, so then tell us a little bit about your connection with Africa and how you ended up here in the US.

Viola: My parents were originally from Cameroon and I was born and raised in the UK until I took a very long vacation in 1992 to America, to Maryland, and I never left.

Peter: Huh.

Viola: So I’m still on the 27th year…for the last 27 years I’ve lived here. When my business partner, Marvin Cole, who is of Jamaican ancestry but raised in Detroit, we had been doing a number of I would say strange business structures, they’re not really strange. We did a lot of consulting, advisory work, we kept thinking something’s going to happen on the African continent and we want to be part of that.

Peter: Right.

Viola: What we did not realize at the time was if you really want to shift markets, build economies, you have to be able to solve the problems of business. It’s not enough to keep doing the age-old I’m doing business with a business, with a government, or I’m just trying to help connect people on a consultancy level; that actually doesn’t move the needle.

When Marvin said to me, let’s see, what year was this, around about 2010. Hey I’m trying to build an investment platform for Africa, I told him he was an idiot, (Peter laughs) there’s no way he should do this. I’ve lived there, I lived there from the age of 12 to 16, I said the place is a dusty mismanaged place and there’s just no way and he said but that is exactly why we should.

Anybody who can solve the problem will build a legacy business, develop and deliver investor returns and will just do so well and they’ll solve a problem. I said, okay, let me go see my mom and dad who I never visit, I always pay for them to come and see me, and this is important to understand Peter for people listening to this podcast.

The diaspora of Africa falls into two categories; those that want to do something and go home and those that stay in the Western world and forget where they came from because it’s just too overwhelming. I belong to the overwhelming category and it took a foreigner, an outsider, to tell me your continent is worth saving and if we don’t have more people who think this way then we stay in a very post colonial silo where business never takes off the ground.

So went to Cameroon, came back, looked at him and I said, I get it and I sold my house, I gave up everything, I threw all of my husbands 401k into building a series of businesses hoping to find the right solution and I’ve never regretted it.

Peter: That’s fascinating, fascinating. So let’s just talk a little bit about Africa because I think…I know that you operate, I believe, maybe you tell us. I know you started in Cameroon, I think you’re in Côte d’Ivoire, Ivory Coast for the westerners, are they the two countries you operate in today?

Viola: Those are the two countries that we’re operating in today, but the beauty of Africa that many people don’t realize, is just as we are now in a potentially post Brexit world in the UK… before there was Brexit you had great hospitality, passportability of business solutions, banks and everything else throughout Europe, right, so you would look at it as an addressable market.

Well we have the same advantages on the continent so by being in Cameroon, we’re in a 6-country cluster known as the CEMAC region, it’s got one currency, one business law, one central bank. Everything you do in one place, you can service the rest of it so it’s a great place to build a hub which is what we did for our extended beta and then we went over to Ivory Coast, again, one currency permanently pegged to the Euro just like our Cameroonian CFA, they have a West African CFA.

All of the laws and regulations that we operate with are connected to both countries in a large harmonized cluster called OHADA so we have one law that governs everything and it makes scaling in Francophone Africa an absolute dream, but very few people know that. So we’ve taken advantage of that.

Peter: Right, I didn’t know that, so what are the other four countries in the region?

Viola: Nigeria, Ghana are the two non-French speaking entities in the region, and I’m trying to remember if they themselves are in OHADA and I don’t think that they are. They sit outside of it, but Ivory Coast, Mali, Senegal, Guinea, Cameroon, DRC, both of the Congos, Gabon, Equatorial Guinea, it’s about a 17-country cluster and it is a really great place to build a business.

In respect for Cameroon, it was the perfect place to build our own private sandbox and believe me, when we started out we didn’t have the sort of language to describe what we were doing. We just told people it’s a great petri dish, we’re building and testing ideas and innovation, both technology wise legally because Cameroon is Africa in miniature and it’s one of the most difficult countries to do business.

Everything that you test within Cameroon has an element of applicability elsewhere because it’s bilingual and we have French and English law running side by side, we have Christians and Muslims, 262 different tribes with distinct behaviors and reference points for understanding repayability which is how we began to create this unique proprietary process of measuring risk by African realities versus an outside opinion and it’s been a great place for us to test what we do and the regulator actually likes what we do. So we’ve broken a few barriers and have been first to market on a number of innovations.

Peter: Right, maybe we should get to that and talk a little bit about what your product is today and how it has evolved over time. I know you’ve gone through a couple of pivots so tell us what you offer today and how that has changed.

Viola: What we offer today is what we are calling “trade tech,” it’s not a term you hear very often in the light of fintech and what that actually means. We figured out that majority of the businesses in the markets that we operate in are looking for capital and for financial inclusion to participate in some sort of buying or selling activity, “trade”, and it’s the one area that many African banks just do not offer to SMEs.

They don’t understand those businesses, they don’t consider this to be a very good risk, they really only want to provide them with a deposit account and measuring risk is something that’s still not as mature as it should be. It’s only recently that we have found that many of the African banks want to contribute to the development of databases in order to get the information that they need, but when we came along, that didn’t exist, we actually had to build that ourselves.

So today, we have a trade finance product called Growth-As-A-Service and it actually has a chassis that is Islamic finance which is beautiful and elegant because it prevents us from being a bank, it is a fully structured process for owning an asset from the beginning to the end of a transaction so it’s really collateralized without having to pay additional collateral. It’s very streamline, it’s very lean in it’s structure and it keeps us from having to deal with going to the bank and going to court to enforce a lien when a customer doesn’t pay us back.

When we started, we thought that we were going to be an investment platform for the diaspora to put capital on our platform to fund businesses in their home region. Six/seven years ago, there’s no way that was going to work, it was ahead of it’s time, there was no way to do it, the SEC would have frowned on it, all of the litmus tests for an accredited investors would have been completely violated and just how do you build a platform with as many languages and risk profiles for that many people considering we’ve got 54 countries, 1.1 billion human beings and many of them informal, you can’t find them anyway so that idea had to be completely scrapped.

And then we thought, alright, let’s just partner with micro finance institutions and help them to do better lending to businesses that way we won’t have to buy a banking license. It’s a good idea in theory until you [inaudible] service, we’re talking 2014/2015, you find that many of these small micro finance institutions don’t even like to have that much technology because they don’t want that much clarity or trust-based business. They’ve been setup so that they can fund their own projects.

So there was no way we could scale when they take maybe two to four weeks to make a business decision and our technology took 60 seconds to do a prequalification. Now I will say this, hands in the air, one of our favorite platforms from back in the day was SocietyOne from Australia, remember them?

Peter: Oh, yeah, yeah, sure, they’re still going.

Viola: They’re brilliant. When we saw their first demo at one of your first events, Peter, at the speed and the elegance, we were so enamored and thought, imagine what this will do on the African continent. So we actually spoke to them, they gave us some great guidance, they built out our very first MVP. It went much further after we realized that micro finance isn’t really where it is at.

You can’t even deploy that much money to them because they’ve got treasury limits. We had to go back to the drawing board and change the questions we were asking from, how can we give businesses money to what do they want to do with it and that’s when everything changed. That’s where the biggest pivot before this recent one has occurred and GLI, Crowd Credit and all the other institutional investors came on board and things just took off.

Peter: Right, right. So then today you’re working…is it importers and exporters, they’re the primary target audience, is that correct?

Viola: That’s right, that is correct.

Peter: Okay, and so these are SMEs, African SMEs from Cameroon, Côte d’Ivoire then. What other options do they have if you say like the banks won’t lend to them, how are they obtaining capital to sort of build their business?

Viola: Brilliant question. Many of them are going to what we call “the grey market.” This is where they go to their informal family groups, social groups, ethnic groups who save money together every month and every month that they meet, they rotate who gets the pot of cash that they collected at the meeting. So you end up with these very long cycles of waiting for capital to do business which adds to the overall problem of the African SME which is cash flow management.

When we understood that, that’s when our innovation began to shift and change. The typical business will go to a bank or a micro finance institution because they just come back from an international location where they want to buy raw materials or they want to buy inventory to sell in their shop. By the time they get back from China, Tokyo, wherever, go to the bank, wait two to four weeks for a decision, get as much money as they can not taking into account the customs duty or customs clearance, find an expensive way to send that money to the supplier, wait for the supplier to send the goods to them. It could take as much as an additional 90 days.

In the meantime, their shop is sitting empty, they might even be getting some goods from a competitor just to look as if they’re still in place. Then they have to sell everything as quickly as they can, pay the bank back and do it all over again. Interrupting that cycle is a $330 billion credit gap opportunity and if you look at it from a trade standpoint as to how much money these businesses need for trade, it’s somewhere close to about $2.3 trillion.

So Ovamba interrupted that, disrupted it by finding investors who are willing to allow us to put as much as a half million Euro as a transaction amount to buy and import and use logistics for these customers to bring in goods that will match their ability to smooth out the cycle over three to six months period of time and make sure that they have more inventory before that cycle has ended.

That means that their bank, their capital in their bank is still sitting there, the goods have come in, but they never go through that 90-day drought again and we’re now assessing risk and evaluating service fees on the location of the inventory and the speed at which they can sell to their customer base which is now more loyal and more sticky. We also get to dive deep into their value chain, and their supply chain, when they bring their best retailers to be funded by us after we’ve already funded them on a wholesale basis.

Peter: Interesting.

Viola: It is a very ecosystem…yes, it’s a very strong ecosystem. Explaining this to investors has challenges and opportunities. Some investors view fintech as a traditional lending opportunity where you give money to customers, but we’ve resolved the fact that it’s very difficult to do unsecured lending and it’s even harder to do collateralized lending, very bulky, it’s very messy. But once they understand that we’re talking about trade and not loans those that get it, get it quick and they see the impact so that’s where we are.

Peter: Okay, so then let’s just…I want to unpack that a little bit. So let’s talk through an example and how…I’m curious about a number of things, the terms and the financing that you’re providing, who actually owns the goods as they’re in transit so maybe you can just talk us through an example.

Viola: Sure exactly. Peter, I love the way you’ve asked the questions because that really assigns some consideration to the risk areas of these types of transactions. First of all, the goods stay in the ownership of Ovamba and as long as they are in our ownership, the way our subscription agreements are written, the note participation flows the ownership and acts as the ownership to our investors. So we’re collecting on behalf of them and we’re liquidating on behalf of them and we’re managing the asset on behalf of them.

The goods stay in our physical and in our legal possession. The way they stay in our ownership physically…it’s very hard unless you’ve been to the continent. Some people have kind of an accidental view in their brains as to what it looks like, but customers who have never had the ability to have enough capital leftover from profits to build a warehouse, will have some sort of warehousing facility, but because they’re small it keeps their physical constraint to the point where they can never sell more goods to have enough revenue, profits and cash flow to expand so they stay small.

That’s another area that we’ve disrupted in the physicality of the geography by doing what Airbnb does; get all of the customers who have warehouses and act as if they’re apartments whereby we can utilize available space in the ecosystem because Ovamba has created a dashboard of where all the empty spaces are so we can provide warehousing support, both by stock controllers and physical space available, that we can rent on behalf of customers to manage the asset during the transaction.

That’s a great way of being as far away from banking as possible because as you know, banks can’t take assets on to their books, we’re an off-balance sheet trade and finance structure…what was the other part that you wanted know?

Peter: The terms of the transaction, let’s go through it.

Viola: Sure, six months usually and what we find is the transactions lasts about four months. Some customers, because Growth-As-A-Service is a la carte, they just want the purchase and the customs clearance and they might make a bullet payment and take all of the stuff away with them. Some customers want all of that plus logistics as in delivery to a specific location and they might pay that off over two/three month period as in they buy the goods back over that two/three month period, but six months is the limit, half a million euro is top end.

Portfolio averages about between 86,000 and 110,000 as a transaction amount and everything is fee-based. Ovamba earns an origination fee on all transactions and we can return to our investors anything between about 7 and 15% net of taxes on what is basically a full secured collateralized product and is short term.

Peter: So I imagine…I’m just thinking of the small business owner who’s doing this. They want to import some products, let’s say they’re selling it, I imagine many of them wouldn’t be able to afford to pay you back in full until they’ve got some revenue in themselves. Is that why you have this 6-month kind of term that’s set in place?

Viola: Yes, and that’s why the payments are linked to the sale and rotation of their inventory. So the faster and the quicker they sell, the faster and quicker they can buy the goods back. So customers can pay…we charge fees on a daily basis, we have some of our customers who pay every single week, we have some of our customers who are now learning how to get advanced orders for the goods that they’re bringing in and as soon as they get money, they come and pay and we will deliver on their behalf; almost like an Amazon fulfillment structure.

Peter: Right.

Viola: So it’s always a very big cash and carry that has been digitized for the African market as a way of gaining financial inclusion because what are they wanting to get included to…the opportunity to have money to do business. This is just another way of doing it in a derisked fashion and to teach them how to run their businesses better.

Peter: Right, right. Okay, that makes sense. So then how do you underwrite these businesses and these transactions. I imagine, as you say, it’s not like a loan, you’ve got a hard asset that you’re acquiring. How do you decide which businesses to go and which businesses to reject?

Viola: Great question. The algorithm that we’ve created and the machine learning has allowed us to make these massive improvements in how we do that from transaction to transaction. So we’re looking at their personal information, their family information, their business experience, the state of their current business, who their suppliers are is a big part of this and who their best customers are.

Some of the businesses that we deal with who are informal don’t even keep an account of books, but they’ve got a few pieces of paper that has got information about their receipts and we’ve created internal processes and the technology to be able to make sense of that and take a look at bank accounts. Peter, do you realize that in a lot of Cameroon and other countries, you can’t even build an API to the bank to get a direct feed so you have to be able to verify that this information is correct.

We are very good at catching when the information is not or it is not as authentic as it ought to be and start to come up with almost a debt to income ratio or how much do you really sell and how well is your business run, where is it located, how many people are buying from you, what is the seasonality of the assets that you’re asking us to buy. These are all the things that go into assessing what you call underwriting that we call risk management, risk measurement because underwriting is a credit activity.

We’re so, so careful with how we talk about our business because the banking regulator is so quick to jump on anybody who talks about charging interest or doing loans because that is the province of banking only, which we are not.

Peter: Right, right, I get it. I’m curious about how you are getting the funds to actually…who are the investors that you’re connecting with that are providing the capital for these transactions?

Viola: We’ve recently seen…and I just got back from Norway and Amsterdam and people who actually have heard of us who are crowdfunding platforms looking for places to place capital that are a differentiator from what they currently have and Africa does present some enormous opportunities in that respect if you can find a good and steady reliable operator, in this case let’s say Ovamba. We also have high net worth individuals and family offices.

The next group of people that we really have found a good way in which to connect, and it took us a long time to learn their language, are insurance companies and hedge funds. Hedge funds want to see volume, which is where we’re beginning to head so we are looking forward to engaging them. But the recent pivot I mentioned to you about is we now have actual banks on the continent that want to do a pilot trial with us by having our product, our technology and our innovation and ways in which we manage businesses in the bank to deliver as a trade finance solution to their deposit account holders. That’s going to be an excellent way for us to improve our volume, and our partnership and channels.

Peter: Interesting, you’ll have a software as a service division of your business, it sounds like.

Viola: And somebody today called it platform as a service and I thought, I like that.

Peter: Right.

Viola: I mean, the product actually has a trademark name of Growth-As-A-Service because what we are showing is the ability to take businesses from being able to absorb X amount to more and more and measuring the amount of inventory that they can churn out. But you’re right, Platform-as-a-Service or any of those names would make total sense in describing us.

Peter: Right, right. Okay, so you talked about scale, I mean, can you give us some sense of the scale you’re at today?

Viola: Yeah historically, in the numbers that we’ve recently put together when speaking to anybody who’s doing due diligence, what they will see is a recent announcement that’s slightly late, at the end of last year, we realized that we actually had processed more than a thousand transactions. And that is in light of how long our beta took for us to get to full productivity and we’ve been out of beta now for, end of this year it will be two years.

We have funded almost 370 companies, we have deployed about 23/24 million euros, we have a default rate that hovers between 6 and 8% and for us a default means late or slow to liquidate. It very rarely ever means loss of capital because the goods belong to us and all we need to do is sell them.

Let’s see, what other…in terms of scale, that is in Cameroon with a very…say less than 5% of those numbers belonging to Ivory Coast as we only just got into that country about a year and a half ago where we experimented with cocoa exports which will be good if we can partner with the kind of investor that likes soft commodity exportations, otherwise, their government is very keen to have us do exactly what we did in Cameroon and we’re in negotiations with a 6-branch bank that wants to have the Ovamba platform in their system.

The scale is growing, but one of the things that happens when we have these conversations, Peter, with western investors is they immediately compare us to the fintech platforms of East Africa, the M-Pesa’s of the world.

Peter: Right.

Viola: PayGo and all of these great companies. But what they don’t realize is these are smaller payment transactions at a high velocity number compared to us, whereas we are large-sized transactions with a very different cycle. At the risk of sounding incredibly cliche, we’re talking antelopes versus elephants, one is bigger, one runs faster (laughs) so it would be very unfair to compare us and we have a hard time at getting people to understand payments and trade are not the same market at all.

The hockey stick that we are looking for where you might see lots and lots of transactions doesn’t mean that they’re all quality transactions, whereas for us, we’ve been so excited a recent audit showed that all of our transactions are actually profitable so the model is tested and we’ve done it in a region where there’s been some civil unrest.

Peter: Right, right, yes indeed. Anyway, we’re just about out of time, but a couple of things I want to get to before I let you go.

Viola: Sure.

Peter: Last year, I remember this article, you were featured in Vanity Fair…

Viola: Oh, yeah.

 Peter: …as one of 26 black women who have raised at least $1 million in funding which is a very small number of people, so what do you think is needed? What is it like out there when you’re trying to raise the money, what is needed to sort of increase this sort of…dramatically increase this number from 26?

Viola: Well the number is now at 34 and maybe more than that and I think what needs to happen is these success models and understandings of how black people raise companies is sometimes different from the way a white male would. It’s a fundamental difference that many people are uncomfortable talking about.

The amount of time it takes for me to get somebody comfortable to invest in a black led tech company for the African market that does not have the same comfort value around it than, let’s say young, white Silicon Valley guys with a hoodie with a business plan that they might even get rewarded for failing at.

Whereas as one VC that said to us, you’ve got three or four black investment opportunities in your portfolio and one or two of them fail, what you end up saying is 50% of black businesses fail. That is not the way to look at it. Also, some of the tools for success that we bring to the table you don’t know how to calibrate for. It’s just a very…you have to evaluate and be willing to hear and learn a lot more.

The value that I deliver on a company with such a small funding footprint is huge, if you compare me against the next competitor that is remotely like me with more money to do better things faster on an operational level. So we take longer to grow because capital is so constrained, but you have to look at it in a variety of different ways. But, you’re right, a million is tiny and 26 women is miniscule.

Peter: Yes, yes, indeed. Hopefully, there will be much more of this going forward. I know that’s what the whole venture capital community needs, it needs a big shake up, it feels like, but that’s a topic for another day. So last question then…

Viola: Absolutely.

Peter: So what’s on your radar, what’s next for Ovamba?

Viola: The fact that we have launched what will probably be the African continent’s first licensed opportunity, we’re going to due diligence with individuals that want to buy the right to operate Ovamba almost on a franchised basis on the continent and our partnership with banks in this way is exciting.

We are so inundated now with the process of due diligence, the business model has been created, it’s been tested, it’s gone through everything and now we’re getting investors beginning to ask questions, how can I invest in Ovamba and that is going to be great. The only thing it means is we’ve got to raise the capital to get some of the best skills and intelligent, smart business operators and managers to help this business. So it’s a great place to be. It’s been a long journey, we are now six years, six years since we first encountered you in New York and we’re still here.

Peter: Yeah, it’s great to see. I think you’ve got a fascinating story, Viola, and I wish you all the best. You’ve taken on a big challenge and it sounds like you’re really getting some traction now so congratulations!

Viola: Thank you.

Peter: I appreciate you coming on the show today.

Viola: It’s been a pleasure, we appreciate it. Thank you so much and greetings from Marvin.

Peter: Yes, indeed, tell Marvin hi. Thanks, Viola, I’ll catch you later.

Viola: Have a great day, cheers!

Peter: Bye.

You know many western entrepreneurs ignore Africa and the reality is the opportunity there is immense as Viola just talked about 1.1 billion people, the number is growing rapidly, many of them…I would argue, most of them are underserved when it comes to financial services. There is tremendous opportunity for all kinds of different fintech companies to gain a foothold and to grow and companies like Ovamba are leading the way in a very targeted niche and there are certainly other examples of companies that are also starting to target it, but I think the opportunity there is immense and one that is only going to grow.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 202  –  GILES ANDREWS

Welcome to the Lend Academy Podcast, Episode No. 202. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: We have a fascinating guest on the show today. Giles Andrews has been around fintech since the very beginning, he was one of the co-founders of Zopa back in 2004, he was CEO for many years, led them through the financial crisis and beyond and he was Chairman of the Board until earlier this year. He is now a director there, but has chairman responsibilities at several companies, some of the leading brands in Europe, companies like MarketInvoice and Kreditech.

He is also Chairman of a company called Dynamic Credit, which is a very large lender in the Netherlands as well as Bethnal Green Ventures and he has other board responsibilities as well. But in this episode we dig into the origins of Zopa. We talk a lot about what the team was thinking back then and how that has evolved over time and Giles also gives us his perspective on the UK fintech scene today. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Giles!

Giles Andrews: Hi, Peter.

Peter: Great, so I like to get these things started…I know you’ve been in fintech now for just about longer than anybody, but I’d like to go back before that. Give us some background about what you did in your career before Zopa, if you can remember that far back.

Giles: I’m not that old, Peter, I can remember that far back (Peter laughs) and it had nothing to do with financial services or technology, yeah, very different. So when I left college, I actually went and worked in the motor industry which was fulfilling a childhood ambition really to mess about with cars. I mean, it got a bit more serious than that, but I think that was why I started there. I had this view that if you followed a passion you might end up doing it competently or even well and I got very lucky, I met some interesting people and started a business four/five years in, in my sort of mid-20’s.

If you remember this far back, this was the early 90’s, 91, 92. There was a very severe recession, particularly in the UK, but pretty globally as well, and car businesses were going bust left, right and center and we put together a team…we took control of a shell company that was listed on the London Stock Exchange and used that as a vehicle to build a dealer group, a sort of regional dealer group so not a national one, but one that covered probably about a quarter of the country, and built that up over the course of the 1990’s and sold it in the late 90’s. Timing was everything, we sort of got in at the bottom and managed to sell out reasonably near the peak, not the top, but sold out reasonably near the top. Had an absolute ball, really enjoyed it and I think scratched the itch…I then sort of decided I didn’t need to spend the rest of my life working with motor cars, but had a really good time on the way.

It’s something that I always say to people, young people, they’re terribly concerned about what they do for a living and what career they’ve taken. I think they tend to often pick very conventional safe choices that maybe their parents or their university career officers recommend.

Actually, if you go a bit more left field and just find something that you’re really passionate about, the chances are you will do it better and you might even stand out and with a bit of luck along the way, I think you can get a great training in business. At the end of the day when you start out, your first job, the work you’re doing is not that exciting on the whole, whatever it is, so at least if you’re doing it in an environment that stimulates you and you find exciting, you can put up with a bit more. No regrets, really enjoyed it.

Peter: So then how did you go from that to being a Co-Founder of Zopa? What was sort of the…what was the genesis of, you know, like the formation of the company?

Giles: Well I took myself off to business school so having had a great time in the motor industry, I suppose the one frustration was I hadn’t really used too much of my brain so I had a yearning to go back to doing a bit of studying and I took myself off to business school in France and also had a bit of a yearning to live in France for a year so that was good fun. One thing, I met some really interesting people, one of whom went on to become a Co-Founder of Zopa with me four/five years later or five or six years later, I should be precise.

But also, I think one of the great joys of business school is people are sort of at a crossroads in their career, it gives you a chance to think about what you want to do. I actually ended up, a few years later running a business of my own. I was doing some consultancy advice, sort of strategic consultancy advice into the motor industry which was obviously something I understood quite well and I think business school had given me the tools to take me to at least credibly present a consultancy service, but also doing a bit of angel investing and helping startups raise money. So that was my first introduction to the startup world, I wouldn’t say the fintech world because it didn’t exist and it wasn’t typically in financial services, they were traditional businesses, but they were coming out of the dot com era so there was technology involved.

I found the startup scene really interesting and made a few investments, did okay, decided that that wasn’t for me. I wasn’t going to become a lifelong investor, I didn’t have enough money to do it properly and in that period of helping startups raise money, I got a phone call from a guy called James Alexander who I’d been to INSEAD with who said he and a number of people had just left the digital bank, Egg, which was the first online bank in the UK, and they had a mad idea which had a working title of Rialto, which is a bridge in Venice linking two market squares and it was eBay for money.

It was this idea of peer-to-peer lending that I thought was just extraordinary so I joined that outfit in very early 2004, not yet called Zopa, and joined them actually to lead a project to help raise the first funding for the company. We hit the streets in London in mid-summer of 2004, at the time when the VC community was just beginning to wake up from the dot com crash and the better players still had some money. No one had raised any money for a while, but the better and bigger funds still had some funds leftover from the dot com boom days and were just beginning to think about deals.

Of course, what had happened…it’s terribly historic now, but what had happened in the dot com boom was huge amounts of capacity were being built up, which didn’t get used as everything crashed and burned, but leaving behind some infrastructure that allowed people to build what was then called web 2.0 businesses which was sort of collaborative businesses that depended on their users for content, YouTube, if you like, came out of that era and businesses which were more interactive. So there was a trend going on that consumers were beginning to adopt the Internet in a different way, it wasn’t just e-commerce, people were beginning to interact more deeply, you saw the beginnings of social networks.

The leading social network in the UK at the time was…Friends Reunited initially and then MySpace, then of course, Facebook, but people’s behavior was changing enabled by technology and the team had this radical thought of could you apply those changes to the world of financial services which if you think back to 2004 was a pretty staid affair.

The online banks had simply taken a green screen from a call center and stuck a web interface on it and called it an online business, but the online financial services world had no interaction with customers. These customers weren’t really involved, they were passive takers of a product and I think the radical thought that came before the business model of peer-to-peer lending was, can we look at financial services using this new enabling technology to build a business that customers are more involved in. From that thinking came the business model that we all know today as peer-to-peer lending.

Peter: Right, I know it’s fascinating to sort of listen to that because it really is…you thought of it before anybody else. I mean, others I know were thinking about it independently or elsewhere in the world but hadn’t launched anything, but it was interesting that you guys were the first. Did you have any idea…I mean, when you were first getting started I presume you just wanted to try and create a viable business. You weren’t thinking this was going to be the start of this massive worldwide movement. I mean, did you have any idea the impact of what you were doing?

Giles: Yes and no. So we certainly didn’t think in movements, no, but we did think we’d build a huge business because the arrogance of youth and the naiveté of the startup world, we just simply thought we had a better model and beyond the technology-enabled I talked about before…the actual business model, the financial linking of people who have some money to invest and people who want to borrow we thought was radically simple.

The simplicity would drive value and technology would help drive that value and also drive great service and we just thought this was better and we would probably be launching a bid for Barclays bank in few year’s time (Peter laughs) so we were hugely ambitious for the UK business, but we didn’t think that far beyond that. We did think we’d like to take the business to the States because the States is a huge market. At the time, there was no…Prosper came a whole year after we launched in the UK so there was no hint of anyone doing it in the US.

In fact our choice of our Series A investor which was then called Benchmark Capital and now renamed Balderton, but was Benchmark Capital then…at the time more closely linked to Benchmark in the US and they were the sort of granddaddies of peer-to-peer in a sense that they led the Series A financing of eBay. In the UK, Balderton or Benchmark UK backed one of the businesses that ended up becoming Betfair, they had backed Betfair so those were the roots that led to that particular choice of investor, but we were overwhelmed, none of us had ever really raised venture capital at that scale.

I had helped some startups raise angel money, none of us had ever raised venture capital at scale and we were overwhelmed by the response of London, the London community. We had lots of term sheets, lots of conversations going because it was a big idea and I think, you know, people bought into the enthusiasm, energy and ambition of the team.

Peter: Right, right. One more question before we move forward to today, but I’m curious about your decision to really focus on the prime borrowers back then because that actually…obviously no one knew there was a financial crisis coming. It served you very, very well and your counterpart in the US, Prosper, really decided that they would open it up for pretty much anybody. So what was the thinking behind the focus on prime borrowers?

Giles: Well, I think it was actually a very controversial decision at the time so pretty well everybody told us we were wrong. So anyone who wanted to log in some free consultancy or even board members or investors were saying, this subprime lending business has got much higher margins, surely you should do that and we had two reasons why we didn’t then, well three reasons actually.

The first one was that we believed quite strongly in this loss aversion theory. Behavioral economics tells you that we all are humans, you know, irrational humans tend to value losses in a much greater way than we value profit, we sort of bank our profits, but we get very excited about losing money. Given that we were going to be inviting people to lend on a website they’ve never heard of, money to strangers on the Internet, we figured that building trust would be kind of important so that was, I think, quite sensible, but perhaps pretty obvious.

I think the slightly less obvious strand from that is to say that people will get very, very excited when they lose money, excited in a negative way when they lose money and we just thought that offering people at the time, I think, a 6% gross return that would turn into a 5% net return with very low level of defaults would be a much more popular proposition than something that lends at 15% and had 8% defaults and a 7% net margin, even though the 7 is bigger than the 5 because people would get really, really angry about losing money.

Plus, operationally, as a startup we wanted to build the simplest business possible and if we lend money to prime consumers who on the whole repay, we don’t need to build a great collections function so that saves one thing to do because losses won’t come for 6, 9, 12 months, in any event, so that’s one less thing to worry about and it makes the business operationally more complex. Now if you look back at one of the biggest criticisms that Prosper had, one I think that we’ve proven right, people did get really upset when they lost money.

Two, the complaint was then directed at the company because the perception was the company was doing a bad job collecting the money. I used to read the chat forums on the Prosper site before they got removed. The angst was more around what’s this company doing about this, they’re not doing anything. On the Internet, I found the borrower, I know he lives at 23 Arcadia Avenue and I know he’s got a new car (Peter laughs), why isn’t Prosper going around and getting the money off him. Of course, you can’t do that, that’s not a practical suggestion, but I think the noise and the loss of goodwill was enormous because the perception was the business wasn’t in control and wasn’t acting on its customer’s best interest so we didn’t have any of that.

It was nothing to do with being really clever and foreseeing the subprime crash. I wish we could say it was, but it wasn’t. It was the conservatism based around thinking that we didn’t operationally want to deal with a lot of defaults and we didn’t want our new asset class, which depended completely on trust, to be blown up by the noise of losses occurring. And I think, lastly, and equally importantly, all of us were slightly averse to the idea of lending money to people who in many cases, couldn’t repay it, we just thought it was distasteful.

Peter: Right.

Giles:  And you know, none of us thought we’re building a business here to actually make people’s lives worse. I think subprime lending executed badly actually then really makes people’s lives worse rather than better. I think prime lending to finance people’s hopes, dreams and aspirations and projects to improve their life is much more socially beneficial.

Peter: Right, right. So then let’s fast forward a few years then, you actually became CEO of Zopa, you were CEO for many years, you bring in a Capital One executive, Jaidev, who we had on the show a couple of years ago. One thing I’m curious about, and I never heard the answer to this. When you brought Jaidev in obviously to a senior position, was it Jaidev that brought the idea that Zopa should become a bank one day or should have a banking division, or was that percolating before Jaidev’s arrival?

Giles: No, it wasn’t percolating before and it wasn’t his idea and it wasn’t my idea (Peter laughs). I think we all have to be very honest what are our ideas. I mean, Jaidev joined as COO in 2015 and with hindsight has turned into the most extraordinarily lucky and good hire, it’s all about hiring good people. There’s a lot of luck involved and you can put as much effort and energy into doing it well, but there’s still luck involved and there’s always been a great meeting of minds from when we first met, it’s true through today.

What we were looking for in hiring him was someone who had a background in bigger businesses where he understood the value and benefits and structure and a degree more formality because we were by then sort of 100 people and still running in that slightly chaotic startup style. I was getting frustrated as the CEO because doubling the headcount didn’t double the productivity of the business and therefore we were getting some diminishing returns from our investment.

I just thought I needed some help and he had a really interesting background because, as you know, he has a background steeped in credit risk management, but at Capital One they tend to make their risk analysts into marketing people as well so he understood both sides of the business. In fact, they sort of meet in the middle in Capital One so I think it’s a really interesting structure. But he also managed quite big divisions of the business so he’d run the collections practice which was hundreds of people and you know, with performance management and all that kind of stuff which was all new to us.

There was a great benefit in bringing that kind of skill and experience but we clearly wanted someone who had an entrepreneurial flair as well. That makes the population rather small and it’s probably not so difficult to hire people with the right level of operational experience, but hiring them with some entrepreneurial flair as well and that sort of startup culture as opposed to, you know, big company bureaucracy culture was the challenge and that’s where we got very lucky. So when he joined, he effectively took over managing pretty well all the internal functions of the business and I became much more externally focused.

After a year, we looked at each other and thought, actually, you know, you’re sort of running most of the company, why don’t you become the CEO and I become Chairman. At that point, what we did day to day didn’t change and I carried on managing some external relationships and he carried on managing the internal affairs of the company, but the promotion was really recognition for what a brilliant job he’d done and the fact that he had effectively taken over most of the management of the business. And then over time, I began to hand over some of those relationships and took a…more of a step back and became a more conventional non-executive.

Peter: Right, so you’ve got to answer my question though, so where did the idea come from for a bank?

Giles: Sorry (Peter laughs), sorry.

Peter: It’s okay.

Giles: Well, I actually can’t remember where it came from, I mean, actually I think it came out of board discussions so it shows the value of a good board. We were playing in an increasingly prime world where the headline price charged by prime lenders was on an ever downward trend and it’s becoming increasingly challenging to sort of meet the cost of that lending and offer a reasonable peer to peer return given the risk involved in peer to peer lending. So that is what sort of made us start to think about it, but we also had a keenness to expand the product set and this is perhaps where Jaidev’s experience was more relevant since he came out of Capital One’s credit card company so his DNA was credit cards.

He always wanted to try and find a way to introduce credit card lending into Zopa and he identified quite quickly that even before he joined we had built very capable risk management systems. He was quite impressed with what he found, very good data analytics and good user experience, we won some awards for the quality of our service on our personal loans so we had some building blocks that suggested we understood consumer credit, we understood how to price it and we understood how to present it to customers and sell it so it seemed natural to think what other consumer credit categories are there that are big, well obviously credit cards.

We struggled and struggled and struggled to work out a way to fund credit cards through peer-to-peer investing. Because a peer-to-peer investor understandably wanted a return on his or her money all the time and a credit card is a facility to do that. You’ve got to have the money available to lend and ultimately, we came to the conclusion that the best funding vehicle for a credit card business would be a bank funded by retail deposits. That was sort of the genesis of the idea. Once we had come up with the idea of the bank…obviously, Jaidev really latched on to it and ran with it because it became a solution to something that I think he’d always thought was something Zopa should ultimately move towards.

Peter: Yes.

Giles: Credit card lending rather than necessarily taking bank deposits.

Peter: Right, right. So maybe you can explain for our listeners exactly how Zopa is structured these days because you…I mean, you have the preliminary approval for a banking license, you still haven’t really started that up, but from my understanding the two entities are completely separate now with separate boards, separate CEOs, just explain exactly how it works these days.

Giles: So we always had one business so Zopa, actually had a holding company structure but that’s not really relevant to your listeners but we had one business and that was our peer-to-peer business so we had one board, one CEO and a set of shareholders that were interested in that one business. It became very clear that the regulators would want to see a separate business applying for a bank license and getting a bank license and being operated as a bank and as soon as you start separating it, you then enter into a sort of a challenging question of how do you manage the conflicts of interest between two different businesses.

You can do it while retaining the same business with sort of very detailed service agreements between different bits of the business, or you can choose to separate them for governance purposes and allow those two businesses to interact via complicated service arrangements and contracts and that’s what we decided to do. It satisfied the regulators need to see a bank that was separate and they didn’t want to see directors on that, they didn’t want to see shareholders on that bank board. They wanted to see a majority of independents plus management so it became quite clear quite quickly that I wouldn’t be the right chairman of that business so we went out and hired…I think I actually just spent most of the last couple of years hiring board members.

So we built a bank board which was independent, with a very capable chairman and now four independent directors, including him and that meant all of a sudden we couldn’t as shareholders in the holding company group manage the peer-to-peer business alongside that because that wouldn’t be appropriate governance having the bank reporting into the group, but the group directly operating a peer-to-peer business.

So therefore we created another board to steer and provide the governance framework for the peer-to-peer business and that’s the board that Christine Farnish who I know you’ve also interviewed, became the chair and that had to have a majority of independent directors so we hired three independent directors for that business and that left the group board effectively being replaced where shareholders sit and ultimately…where long term strategy is discussed but the actual operation of the businesses occurs at the subsidiary level and as you say we’ve got Jaidev as CEO of the bank and Natasha Wear the CEO of the peer to peer business.

Peter: Right, right. And so I know you stepped down as Chairman in February I believe…

Giles: That was the last bit of board building I did so having built the bank board and the peer to peer board and things like that, I thought what should the group board look like and what should the direction of travel of that look like. I think, ultimately, that will involve a smaller board with fewer investors on it, something the PRA would like to see. The regulators, I think, when there’s a dual board structure of a holding company and a bank, they obviously want to know that the right decisions are occurring in the right places and that the group board doesn’t meddle and doesn’t play too big a role in the management of the business and one way to satisfy them is to make that increasingly independent as well.

So that’s the next sort of journey we’re on and step one on that was to recruit an independent chairman of the group so we identified Gordon McCallum, hired him early on this year as the first fully independent director who sits on the group board, The chair of the bank and the chair of the peer-to-peer business also sit on the group board.

Peter: Right, and so you’re on the group board as well?

Giles: Yeah, yes, I am. I mean, I’m obviously a significant investor in the company and hopefully, my experience has some benefit which I can bring to that board, but I think the direction of travel was to create a more independent board and also to begin to position us, I know I don’t want to get ahead of myself here, but to begin to position the company on the journey towards potential IPO where you would require…and therefore you want to begin to build a team and it’s going to take at least a couple of years to do so, but you want to begin to position yourself for that process.

Peter: Right, okay so moving beyond Zopa, you’ve got many business interests these days beyond Zopa and I just want to run through a couple of these. There are several I’m sure listeners would be very interested in….the first one I want to talk about is MarketInvoice. I mean, we had Anil on the podcast last year and it’s a company that’s pretty well known around the world these days. So tell us why you chose MarketInvoice, and just an update on that company.

Giles: So MarkeInvoice is an invoice discounting platform, so it’s not a peer to peer lending business, but it uses money from a variety of sources, including individuals, high net worths, and some institutions so there is slightly sort of a peer-to-peer flavor to its funding. It doesn’t lend because it buys invoices at a discount to provide working capital, it’s not, strictly speaking, a lending business, but ultimately, you know, it’s a credit business in the sense that we have to make decisions as to which invoices are going to be repaid. So we provide working capital to SMEs.

I’ve known Anil and Ilya, his co-founder for many years through initially the Peer-to-Peer Finance Association and just generally the London fintech scene. I’ve always liked the guys and thought they had an interesting business. They took on some venture capital funding from an investor I know well, Northzone, and that often comes with the suggestion to start raising some independence and governance on the board. Therefore, I was sort of approached because I… from two different angles, I knew the founders and I knew one of the investors so I went to have a chat with them and liked what I saw.

I was interested in the thought that I could…MarketInvoice was in a stage of a journey that I had been through, made hundreds of mistakes, but hopefully learned from those mistakes and therefore would have something to bring in the scaling of another fintech business using technology and a different funding structure to provide value to a different set of customers, but many of the same principles and I’ve been chair there for about two and a half years and really enjoyed it and we’ve been quite successful in the last year raising substantial amounts of money now from Barclays and Santander, amongst others.

I think the Barclays partnership is probably the deepest bank/fintech partnership we’ve seen in the UK where actually the bank is saying we will introduce our customers to a fintech business to provide a service that we simply can’t provide. They’ve got lots of customers and we’ve got a service their customers would love. Often the challenge for fintech businesses is cost of acquisition and distribution.

Barclays has got a million SME customers so the challenge of course is then getting the huge business to work well with an agile staff and it’s very early days. We’re really encouraged by the volume of leads we’re getting from Barclays and the quality of the leads and the quality of engagement from their regional staff. So their regional managers, regional directors are the people who interact with their customers have engaged…now that we’ve sort of finished the national rollout, extraordinary deeply and it’s really exciting how that partnership is going.

Peter: I think it is, I always say it’s one of the most important partnerships in all of marketplace lending, you’ve got a very well established bank and it’s a deep partnership, as you say, and I think it’s going to be fascinating to see what comes of that.

So then I want to move on to Kreditech which is another one where you’re Chairman of the Board and it’s a different kind of organization although it’s been around the online lending space for many, many years. How did that come about because it’s a different company, it’s based in Germany and operates primarily, I believe, in developing countries. Tell us…

Giles: The biggest markets for Kreditech are probably London and Spain, we also have a business in Russia, we have a business most recently launched in India. The original thesis of Kreditech way back when was that it was going to operate in pretty well exclusively in the developing world and I think they found that very difficult and by the time I joined most of that had been closed or was in the process of being closed though I was approached by some of the investors.

So Kreditech had raised substantial amounts of money from the private equity community and in some ways, it was still a venture capital stage business, I mean, I think one of the differences being that venture backed businesses are inherently…have more execution risk associated with them and a different risk reward profile. Investors tend to come a bit later when there is a more proven business model and it is generating cash.

So in some ways, I hope they wouldn’t want me saying this, but I think some of the private equity investors invested a little bit too early and were caught up perhaps a little bit in their desire to participate in the fintech story without really understanding the maturity of the business. So I walked into actually quite a difficult situation and to me that was part of the challenge.

So I was keen to work with private equity investors, I think I know the venture community well, you know, raised quite a lot of venture capital from a number of people over the years and sit on a few of venture backed businesses’ boards, but I knew much less about the private equity world. The PE world is quite a closed shop, they’re sort of…as I made the decision to operate in a more portfolio way with doing more board type work than executive work I thought it would be interesting to try and find a private equity backed business. When I say it’s a closed shop I mean they’re typically, private equity boards are made up of ex CEOs and CFOs of private equity backed businesses who have done well.

I have never been private equity backed so therefore I wasn’t in that pool and I think the fact that it was…they acknowledged that one, it was probably an earlier stage business than they had thought it was when they invested in it and two, frankly it wasn’t doing very well and there were concerns around the management team, it’s often the case, but you know, there are some challenges. I think my background in having scaled a consumer lending business was helpful so I joined as a real challenge and it’s been a challenge. I’ve been there just over a year now.

We had to regrettably replace the management team, but brought in some really capable new executives who have turned the business around and re-platformed it. We launched it on a new technology platform top to bottom and the business has turned a corner which is really satisfying.

Peter: I’ve certainly noticed that there’s lots of new names there on the management team at Kreditech. Anyway, we’re running out of time and I do want get to a couple more things. I know you’ve got other board positions that we won’t have time to cover, I’m afraid, but I want to talk about UK fintech for a little bit because it really has been on a roll, particularly the last six to 12 months. There’s been lots of really big funding rounds, particularly in the sort of the challenger bank space. What’s your view on the sector? Do you feel like the valuations are getting ahead of themselves, or do you feel these companies are all going to do well and it’s going to be…these valuations are justified?

Giles: Well I’m going to disappoint you because I’m not going to talk about valuations, (Peter laughs), valuations are in the eye of the beholder. I don’t think it’s ever a good idea for anyone to comment on other people’s valuations. I’ll say that I think the market of investors places great value in businesses that consumers like that potentially could disrupt huge industries; banking is definitely one of them. There’s some logic to valuing a business which is acquiring customers at a great rate of knots, valuing that highly and valuing the fact that the customers recommended it to their friends and therefore marketing costs are very low.

They are all very good signs which I do support valuing businesses like that highly. I mean, do I think is there room for all of them, probably not. I mean, I don’t think there’s room for all of the incumbent banks either and I think there will be some challenging times for some of the very big banks, the ones that aren’t able to adapt to changing consumer behaviors, changing consumer needs and wants and I think the institutions that go on to be rather large institutions that go on to do well are the ones that…I don’t think they’ve got it today, but create some agility in what they do and adaptability in what they do.

I think that means pretty big investments in technology and I don’t mean putting lipstick on a pig and nice front-ends via API’s, I mean, actually some real engineering of back-end systems that allow agile product development. I think it has to go all the way through the company, you can’t just have a team of people who come up with fantastic user experiences at the front-end and depend by ancient creaky legacy systems, that are really hard to change and adapt.

So I think you’re going to have to see…I think all the big players have to adapt to that and some will not make that grade. So I think there will be, I hesitate to use the word, failure, but there will certainly be a diminishing of importance in some of the major institutions. Some of the startups of today will become household names and will go on to do extraordinarily well, probably not all of them. I certainly wouldn’t want to pick ones that I think are going to do well and the ones that aren’t.

Peter: Right, well apart from Zopa, of course (laughs).

Giles:  Apart from Zopa, of course. We’re in a completely unique position. We’re in a position where we have the agility in terms of our tech stack. We’ve built all the technology ourselves for the bank. If I think back to the quality of technology that we used when we built Zopa in the first place, we’ve always built our own technology or pretty well always since very early on and the quality of the technology we’re building today is absolutely leading in any sector, not just financial services whereas you couldn’t necessarily always say that about the past.

So we’re well positioned in terms of technology backbone and we have a product which customers love so we won all of these awards for customer service and have an NPS score well into the mid 70’s which is extraordinary in financial services…at scale, we’ve got half a million customers, this isn’t just a few people, yet we’ve also got a business so I think we can acquire customers in the same way as some of the other challengers, but we’ve also got a business that actually performs the bit of banking that tends to make money over the long run which is called lending.

Peter: Right.

Giles: So I think we’re in an extremely strong position to build a business that operates as an effective and profitable lender. We may well never have a current account therefore we may well never have tens of millions of customers, but certainly single digit millions of customers, and as of yet I think that makes us unique in the challenger sector.

Peter: Right, right. Well I’m afraid we’ve run out of time, Giles, I could chat with you for another hour, but we’re going to have to leave it there. I’ve always enjoyed chatting with you and I appreciate you coming on the show today.

Giles: Not at all, Peter, really great to speak to you.

Peter: Okay, thanks, see you.

Giles: Thanks, bye.

Peter: You know what Giles just said there about lending, I think is interesting. These digital banks that are getting funded, both in Europe and in the US, many of them actually don’t have any kind of lending operation, I mean, some do, but most of them do not. As Giles said, it’s a profitable business. You look at banking now and some of the largest banks are some of the most profitable businesses in the world….one of the reasons, that is, is because lending is a profitable business and I expect we will see many of these digital banks, the ones that really become profitable and successful will be those that have lending operations. That’s my theory, anyway.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 201  –  JARED KAPLAN

Welcome to the Lend Academy Podcast, Episode No. 201. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I’m delighted to welcome Jared Kaplan, he is the CEO of OppLoans. Now OppLoans are an interesting company, they’ve been around for quite some time, but they’re getting some serious traction these days so I wanted to get Jared on the show to talk about the products he offers, the type of loans they do, the type of customer that comes to them, it’s a really interesting customer profile.

We talk about their approach to technology and underwriting and their, I think, unique approach to customer service which has really helped them seriously scale their business. And we talk about how they’re funding their loans and what is coming down the pipe for OppLoans. It was a fascinating interview, I hope you enjoy the show,

Welcome to the podcast, Jared!

Jared Kaplan: Hey, Peter, thanks so much for having us, we’re really looking forward to telling our story.

Peter: Okay, so you know, I like to get these things started by giving the listeners a little bit of background about yourself so why don’t you tell us what you did before you got to OppLoans.

Jared: I started my career at Goldman Sachs in New York, and after a couple of years there, I went into the private equity investing world at a New York company where I ended up leading their financial services investing thesis.

I spent a bunch of time in insurance while I was there and in late 2011, co-founded an insurance business called Insureon that was based here in Chicago and Insureon was the first online property and casualty insurance broker to freelance businesses. It was my first foray into the operating world and had the pleasure of running many different parts of that business. We were the fastest growing online insurance brokerage in property and casualty.

About four years in, in 2015, I was approached by the Schwartz family here in Chicago and the Schwartz family is a prominent family here, Ted Schwartz had built a business called APAC Customer Services which was a well renowned customer service business/customer call center business that he took public and sold to JP Morgan’s private equity firm in 2011. His son Todd founded OppLoans on the premise that after the Great Recession, there was large dislocation of credit for non-traditional borrowers and Todd installed this fabulous credit model and customer service model, but was looking for a CEO to scale the business. We had about 15 employees at the time and that’s when they approached me to take the reins and grow the business.

Peter: Okay, so then what was it about OppLoans that really…it’s a bit different to the insurance business, obviously with some similarities, but what was it about OppLoans that really sparked your interest?

Jared: So I was intrigued with the platform because there was actually a number of analogies with what we had built out at Insureon that I thought were transferrable. At the time we had no marketing, no proprietary technology, we had not built out a leadership team. The Insureon journey was all about doing those things and also delivering profitable business to our insurance carrier partners while as a lending business it’s important to deliver profitable business as well and so the culmination of those things made it seem like we could pull a couple of levers early on to really change the trajectory of the business, but where I had to do the most research was on the actual customer philosophy and what we were selling to folks, what we were providing to folks.

I did not understand the space at all, it was foreign to me and I went back to my investing roots and I said to the Schwartzs, I appreciate everything you’re saying, but let me figure out what the customer is saying here because that will tell me whether it’s an interesting opportunity or not. And I spent a couple of hours listening to calls and I was floored. I’d say half the calls people were in tears, we had saved them so much money, we had treated them like a real person, we had taken the time to explain to them what the product was, we were highly transparent.

It was really unbelievably heartwarming and it proved to me there was a huge value creation opportunity here and then I went home and did some work on the macro realities of our country and the fact that more than half the country lives paycheck to paycheck, has very few options and certainly very few options that look to rehab and graduate customers out of this product. So I thought it was a very, very interesting opportunity and jumped at it.

Peter: So did it concern you at all, or did you…you obviously…the payday lending industry has a terrible reputation and, you know, while this isn’t payday lending, it’s certainly not low interest lending either so did it concern you, or what were your concerns about the reputation that this kind of thing, this kind of lending has?

Jared: I think the most interesting observation first was that the customer base was the median US customer, I mean, it was not a low income customer, actually it was not a customer that necessarily should be in the market of last resort in this space which are using your bank overdraft line or taking out a payday loan. So the fact that this customer made median US income, they were employed, they had a bank account, that was fascinating to me.

I also saw there was a number of different advantages that we could launch, that would highly differentiate the company. So I think the industry as a whole, that the non-prime space has gotten a really bad name for itself because of two reasons. One, you take advantage of desperate people, and two, you trap them in a cycle of debt.

The OppLoans model, I think, attacks both of those from a very positive perspective. The first thing we do is when someone finds us online, we actually do the diligence search on their behalf so to the extent there’s a better, cheaper product out there, we will show the customer that product and we will say, hey, we’re not the best option for you, it’s very akin to the Progressive insurance model.

Peter: Right.

Jared: You can imagine that creates a tremendous amount of goodwill and customer referral business because someone whose car broke down yesterday needs the cash and found us because we’re the easiest to find. We may be showing them a much better option for them to deal with that short term emergency expense.

The second thing is the product is designed to rehab you and to ultimately graduate you out so if you’re in the product for more than 18 months we failed you and we’re constantly looking at ways to evolve the product and reward customers and partner with other lenders so that once they have proven their, not only willingness, but their ability to repay, we can pass them along and say, thank you so much for the business, we’ve now paved the path for you for a more sustainable long-term financing solution.

Peter: Right, right. So then I’m curious just to get your opinion on the whole payday lending industry because…obviously, it sounds like your customer is not necessarily one that’s going to that industry, but what do you do…I’m sure there’s customers you get that just simply don’t fit your credit box and payday may be their only option so what do you do for those people? I mean, the whole cycle, the negative cycle that payday gets people stuck into…I mean, how are we supposed to deal with those kinds of people?

Jared: Yeah, I think there’s a large percentage of customers who don’t qualify for our product, we don’t think they have the ability to repay, we’re not the right product for them, there’s a lot more that we can do down the line to continue to offer solutions to those folks. The approach we’ve taken here as we’ve built the company…there’s some really interesting third parties out there, companies like SpringFour companies like Steady that can provide pathways to other financing sources and/or supplemental income.

I actually think there is a robust place for other lenders that don’t look like us who cater more toward a low income customer and there’s going to be a maturation in that industry as well to kind of tease out the better actors versus the not so good actors. But just like we’re providing a short-term pathway to deal with the situation and hopefully graduate to a near-prime lender, I think you can see the same processes work as you move down through the credit spectrum.

So we actually believe there is a wholehearted place for even high cost lenders than us as long as those two staples can be addressed; you’re not taking advantage of someone in a desperate situation, and two, you’re providing them an opportunity to improve not only their product but their credit profile longer term.

Peter: Right, right, okay, that makes sense. So let’s dig into what you’re actually offering. Can you tell us about your loan products, the interest rate, loan size, loan term, that sort of thing?

Jared: Yeah, so we’re in about 40 states today, about half of those states we’re directly lending and in another half of those states, we are an outsourced service provider to a Utah bank and the products differ slightly along those lines, but a general rule is we’re offering about a $1,500 loan, it’s about 12 months long and the APR’s are just over 100%.

Peter: Okay, and then so when you have a bank partner, what’s the difference between the two programs then, I mean, apart from the fact you’ve got a bank partner that’s originating the loan, I presume, but are they really two separate products or not?

Jared: Yeah, they are really two separate products. The bank partnership came along, we had been approached…I think the bank saw that there was this very interesting opportunity in a number of geographies across the country where the customers’ only option was a much higher cost, shorter duration loan and they had an appetite to go and originate in those states and to provide a product that was longer term, lower cost and longer duration.

And so that has worked very, very well and in the states where we’re able to directly lend we have a little bit of a different product, just depending on what those state’s rules and regulations look like. So we’re offering actually many different products as you look through all of those maturations, but the end result is to provide a graduation path, a sustainable product to a customer who is in need and that has obviously been received very, very well in the marketplace.

Peter: Right, right. So then what do you say…people look at the APR and they just go, oh, I’m sure…we know about it, there’s people running for president today, there’s people in Congress today who want to make these kinds of loans illegal and they see an APR of triple digits and they think, oh my God, this must be bad, it’s outrageous, we should shut these companies down that do this. What is your response to those people?

Jared: Well, I tell people my job is very easy because I tell people don’t believe a word I say, go online and see what the customers say.

Peter: Right.

Jared: They tell our story. The Better Business Bureau, Google, LendingTree, CreditKarma, you name the social media platform…I just tell people, search for us and the testimonials are so unbelievable I think it shows the value that we’re providing to the marketplace. Now I do think it’s our duty, as we continue to get better, to reduce APRs and to continue to drive the best products to the marketplace so I think we’re very, very committed to doing that. But our customers view us as a very, very cost effective product today versus their other alternatives.

The world is very interesting, how we grew up, right, you’ve got this 36% line in the sand and we wrote a whole white paper on how you got to 36%. There are two things that are very interesting with that whole dialogue. One is there are not great economic analysis that suggest that’s the right line and the other piece is apples to apples across products, everyone calculates APRs differently so your bank overdraft APR, your credit card APR versus that installment loan APR. No one has really done the work to show apples to apples what the true cost of credit is across the spectrum.

And I will say for the customer we are trying to be the best option for them when you are turned down by the traditional marketplace and I think where we’re at today from a price point perspective, we are the best option and over time, we should be able to reduce those APRs as our acquisition and our credit and our servicing and our cost of financing gets better and better.

Peter: Right, and the fact that you said when you’re not the best option, I mean, I’d be curious to know how often that happens, is it 1% of borrowers where you recommend them to somebody else. I mean, tell us a little bit about that particular piece because I think it’s a way to kind of, you know, get credibility…you’re obviously not trying to trap people into some sort of cycle, but tell us a little bit about that program.

Jared: Yeah, so I think customer acquisition, in general, is a huge unique part of our business. Most companies in this space are heavily relying on direct mail or a third party affiliate to drive traffic, we actually have turned the acquisition model inside out so the majority of our traffic, the vast majority of our traffic is what I call organic so it’s either through search engine optimization on Google or through customer referrals or it’s through e-mail marketing and that generates a lot of activity at the top of the funnel.

About 10% of the time, we’re able, today, to refer you to an Avant, or a LendingClub or a Prosper or another near-prime lender that can offer a cheaper product than we’re able to offer and I would imagine that’s going to increase over time as we build more direct relationships with lenders as folks view us as a brand standard for the right type of customer. We hope to drive a lot more…what we call “turn-up business” to other parties because if you can qualify for a cheaper product elsewhere, you shouldn’t be in our product.

Peter: Right.

Jared: Now that means 90% of the people are still lacking other alternatives out there and for those folks we want to get the ones that have the ability and the willingness to repay into our product and then we want to rehab them and graduate them over time to those same near-prime lenders.

Peter: Right, right, okay, got it. So then I’d like to spend a little bit of time getting to know who the borrowers are exactly. I mean, you mentioned these are people with a bank account, with income, but maybe you could paint a picture for us with maybe some examples, but who are these people and what is their financial situation like?

Jared: Yeah, if you took the US Census data and you pick out the median US consumer, that is who our customer is. They’re educated, they’re making $50,000 a year, they have a job, they have a bank account, but they have no savings and their car breaks down or something unexpected medically happens and they just do not have an option for a couple of grand to finance that emergency expense. So that is our most typical consumer and it looks like your everyday American.

Peter: Okay, so then is there a use case, is it medical, is it car, I mean, what is the primary use case for the funds?

Jared: Yeah, if a car breaks down, auto repair or unexpected medical are our two top reasons that drive someone to search online and then, you know, we rank very well so they’ll find us online, then they’ll see our customer service rankings which are incredibly high and they’ll say, that’s interesting, and the next thing they typically do is call us.

I think the other trick to this model is you have to use technology to enable human customer service not replace human customer service. We’ve been able to do that very effectively, is create a human customer service for a customer who is in need and then build trust and make sure we give them the best price for their risk profile.

Peter: Right, I see your phone number is at the bottom of your homepage there, I mean, like are you open 24/7, I mean, how do you deal with…these people are not obviously just applying during business hours.

Jared: Yeah, we’re always expanding hours, I think we’re open until midnight most days, now during the week, certainly we’re open to midnight, we’re open until the early evening on the weekends…

Peter: Okay.

Jared: …at some point here we’ll be a 24/7 business and we want to do business with the customer when they want to do business in the medium that they want to do business, right. We want them to be able to go through the whole process without talking to someone if that’s what they choose or if they need someone to hold their hand, we’re going do that as well.

You know, there are lots of folks who will look at a business and think it has to be 100% automated end to end to really build scale and profitability. We look at it very different, we actually think the investment in our people on top of an incredibly efficient technology platform. Although it probably costs a little bit more up front, it pays for itself in dividends by being able to create a very efficient conversion funnel.

Peter: Right, right, So then I’m curious about…are you making money on…I mean, is there an origination fee that you’re charging, is that part of the APR calculation there, I mean, what are the ways you make money?

Jared: It’s an interest model…we essentially have no fees across the board and that is by design. The customer wants a simple product, they want to be able to understand the product. A plain vanilla 12-month installment loan that amortizes over the life of the loan where every payment is also repaying principal, the ability to pre-pay at anytime without penalty, we report to the three credit bureaus. It’s structured in such a way that’s incredibly easy to understand, where the money is being made on people repaying the loan and when they’re ready they can get out of it with no strings attached, that is the goal.

Peter: Is it monthly payment, weekly, what is the repayment schedule?

Jared: We offer several different payment schedules. Most typically, it’s a bi-weekly or monthly payment.

Peter: Right, okay. Let’s talk about underwriting because this is really the critical piece. I mean, you said you’ve got a lot of people at the top of the funnel which is great, but how are you underwriting them? Obviously, you can’t spend two hours on the phone with someone if you’re going to lend them $1,000, I expect. Tell us a little bit about the technology you’re using to underwrite.

Jared: Yes, so it starts with an incredible team of data scientists that have the benefit of lots of data to make sure we’re getting the right borrower into the equation. We’re not using traditional credit scores as a linchpin of the underwriting model, we’re using alternative data, some from third parties, some internally sourced and a proprietary model that has constantly been improved over time as we’ve gotten more and more data to get to the right person.

The best analogy I give folks is we run it like a fantasy sports team and that’s across the business. When you walk into our office, we’ve got a 100 flat screen TVs and they’re all tracking a certain area of the business in real time with unbelievable granularity that we can drill down.

From a credit perspective, we are very, very sophisticated in understanding what is changing on a credit perspective on a minute-by-minute basis. So if some area looks hotter than another, we can drill down and figure out if changes need to be made before we have a bigger issue.

I think another core point of the underwriting perspective is to make sure you’re always A/B testing, you’re figuring out if there are new ways to approve more customers at same or better credit. We just rolled out our latest iteration of a credit model here recently that enables us to approve more at same or better losses and I think we’re just scratching the surface in being able to increase availability of credit to this customer base.

Peter: Okay, so then are you…I mean, is this an automated process where you’re not having a human being review each file, or is there some that gets kicked out to a human underwriter. How does it work?

Jared: Yeah, I think part of the secret sauce is being able to use technology to very quickly understand the attributes that are key for customers’ ability to repay and willingness to repay right so that would be income accuracy, consistency of income, validating employment, validating identification.

We have some unbelievable proprietary technology that, for example, can take bank data and very quickly evaluate these items. If it’s not clear whether it passes muster, we then have a follow-up process that allows us to quickly vet whether the customer has the income and the consistency of income, for example, to be able to repay the loan so it’s a balance, right.

I think in this day and age every company needs some element of AI and machine learning to build their business. Every company also has to be wary that you may hit on disparate impact and that these models are being run compliantly and so we have balance between technology and manual processing in everything we do and throughout the way, we’ve been able to still create a very, very efficient business that can scale.

Peter: So then if someone comes along to your site today and fills out an application, how quickly do they get their money on average?

Jared: They’ll get money next business day.

Peter: Next business day.

Jared: If they’re approved today.

Peter: Okay.

Jared: And we’re moving…I think same day funding is going to be a staple here very, very quickly so we’re working across the business to move more to a same day model. I think within a year, all the customers will be same day.

Peter: So are ACH-ing this money to them, or they all have a bank account right so what’s the method to get them their funds?

Jared: Yeah, today we’re dispersing money through ACH.

Peter: So then can you give us some sense of the volume, the loan volume you’re doing today, I mean, these are relatively small loans. It says on your website that you have 100,000 plus happy customers so give us sense of the volume you’re at.

Jared: Yeah, I think the best way to think about it, across the different products and different delivery models, we’re doing a couple of thousand loans a day.

Peter: Okay, okay, that makes sense. And then loan performance, I mean, this is going to be…obviously it’s probably the most important issue that you face is being able to get a return on your money with good loan performance, what can you tell us about losses and performance?

Jared: These businesses, it’s very interesting because the growth part of these businesses…I don’t want to say it’s easy, right, but growth in these spaces is, especially when you look at what the landscape looks like and the reality of savings in the country, the growth part is less important than making sure you can create a profitable business where folks are repaying you. So the only way you can do that is by managing your credit losses, right.

By far, it’s the biggest line item for expenses in your P&L and we are as maniacal about credit as we are customer service and so the model has been built to generate well above average losses than what you can see out there publicly.

So I think we feel very strongly that our loans perform meaningfully better than what is typically found in this space, and again, that’s also terrific because it’s a virtuous cycle, the lower the losses over time, the more we can give back to the customer in terms of APR reduction. So it is the gift that keeps on giving and how we think about building the business long term.

Peter: Right, right. So do your customers come back multiple times, I mean, is this…you talked about in 18 months you want them out of your program, but what is the sort of the repeat rate of your customers?

Jared: Yeah, we find that 90% of the customers are in the product less than 18 months. The refinance piece of this business is always a very hot ticket item and there’s two parts of that that we think through. One is we’re a little bit more conservative up front. So for instance the customer may want $2,000/$2,500 and based on either our underwriting model or the bank’s underwriting model, maybe the customer gets $1,500 up front and once they perform for a bit of time, they may be eligible for refinancing and they can top that up.

It’s better for the customer because they’ll end up paying less in interest by taking the money out in two tranches and it’s good for the company, for our company because then we’re ensuring we’re getting the right borrowers up front. So that’s one driver of refinance activity.

I think the second piece of it is building these graduation partnerships that we’ve talked about and we’re in a number of dialogues whereby just based upon the fact that the customer has performed in our product, a near-prime lender is willing to take them back at a substantially lower cost.

And I think our goal is to get all the customers out by the 18-month mark and graduate them to another lender. Now they have to do their job too because we need this marketplace developed so we can make good on 100% of our customers and in the interim, we’re looking at ways of rewarding customers who have been in the product and still want to refinance because there’s not another option out there for them.

But wholeheartedly, I think in this space you need to make sure that the customer…it’s a short term product for the customer and once they’ve proven the ability to repay, the’ve improved their credit and you can get them out of the product to a more traditional form of financing. That’s critical to the longevity of this marketplace.

Peter: Right, right. So you don’t have any plans then to go up market yourself like up the credit spectrum? You know, you’ve obviously got a lot of customers who are potentially graduating to…you mentioned LendingClub, Avant, Prosper, whatever. Why not have another product that is closer…like a more near-prime product?

Jared: Yeah, I think it’s a possibility long term. I think today we have a tremendous amount of low hanging fruit to continue to deliver an unbelievable experience to our core customer, whether in this product or ancillary products. As the business gets larger and our cost of capital decreases, I think it would be prudent for us to look at some of these additional credit extensions to higher levels of the credit spectrum.

But we also love the fact that we can partner with these high quality businesses that are currently offering those products and potentially even develop two-way relationships where we can take some of their business in the near term and prove the credit worthiness so we can pass that business back to that lender over time. I think that’s a very interesting model for us and we’ve been able to hammer out several high quality agreements on that front which is a benefit to both companies.

Peter: Right, right, okay. So I know we’re running out of time, but I have a couple more things I want to get to. Firstly, how are you funding these loans, where does the money come from, who are your sort of outside investors who provide this capital?

Jared: So the Schwartz Capital guys are the majority owners of the firm from an equity basis, but we’ve been able to fund the business with operating cash flow to date from an equity perspective largely driven by the high quality relationships we have with a number of third party lenders.

I’d say our cap structure is relatively complicated…we have several partners who we have grown with over time and the key to these businesses is to continue to build credibility by doing what you’re going to say and the lenders reward you with lower cost of capital and more flexibility in their cash flow.

So we have hundreds of millions of dollars of debt capacity at, I think, industry best cost of capital with flexibility in how we use that cash and that has really provided the funding capacity for our growth over the last couple of years.

Peter: Right, okay. So I saw that you were named a Glassdoor Top CEO in 2018, so I’m sure that’s something you’re quite proud of, but tell us about your approach to company culture.

Jared: We define culture as the excitement of the workforce on a Sunday night and how they feel about going to work on Monday morning (Peter laughs) and it’s really how we built the business. I don’t think it’s mutually exclusive to build a very high performing culture, but also a best place to work so that is embedded in how we have developed the company.

For us, the happier the employees you have, the better customer service they deliver. Customer service is this huge advantage that we have, those customer service rankings online drive a tremendous amount of our business so we care about that. And I think we are always looking at how we can provide the best atmosphere to our employee base, right, and that is recognizing top performers, giving them opportunities to improve their education to move up through the organization and to provide a real growth path in a general workplace where we care about people and they can go and advance their careers.

At the end of the day, it’s feeling good about what you do everyday. So the fact that our customers, a couple of thousand times a day, are having these tremendous experiences of people that need the product, I think that creates a really solid place to work. And then it’s always about the team, so the fact that our senior executive team, I’d put them up against any Fortune 100 company, they are outstanding and that runs the gambit throughout the organization. We just have exceptional talent that works really, really hard, but treats people with unbelievable respect, recognizes top talent and that’s why we’ve been able to build a great place to work.

Peter: Okay, so last question then. What’s on the horizon for OppLoans, what are you working on that’s exciting for you?

Jared: We view this as a platform, a financial services platform that’s got tremendous extendibility to other products and to other types of customers. I think you’re seeing lots of interesting things in the online lending space whether that’s through point-of-sale, whether that’s through some of these salary linked models, where you’re able to offer much lower costs of credit through employers, where the repayment mechanism is through payroll deduction.

I think there are other financial services products, right, that we could certainly extend this to, whether that’s near-prime credit, prime credit, mortgages. We view this as a platform that will be the leading consumer financing platform globally, for not only our customer segment, but across customer segments because we can deliver the product incredibly efficiently with unbelievable customer service so we are at a very early part of our journey and we look forward to building this out for years to come, not just here in the United States, but across the globe.

Peter: Okay, Jared, we’ll have to leave it there. I wish you the best of luck. Thank you very much for coming on the show today.

Jared: Thank you so much, Peter, we appreciate it.

Peter: Okay, see you.

Jared: Bye.

Peter:  Well no one could accuse Jared and OppLoans of thinking small, they clearly have grand plans. I think it’s particularly interesting, the concept they have about referring those customers up the credit spectrum chain, shall we say, into a cheaper product. I think that’s something that I would like to see more companies do and I think it really does speak to the kind of company that they are.

As I said, some people are going to see the headline rates and just dismiss them as a company that’s not doing the right thing for customers. Clearly, that’s not the case. You look at their ratings on a lot of these independent sites, their customers are clearly delighted with what they get from OppLoans so they’re certainly a company to watch and I’ll be paying attention as they continue to scale their business.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 200  –  LUVLEEN SIDHU

Welcome to the Lend Academy Podcast, Episode No. 200. Yes, we have hit the double century mark! This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I am delighted to welcome Luvleen Sidhu, she is the Co-Founder and President of BankMobile. She’s also the reigning LendIt Fintech Woman of the Year winner and I wanted to get her on the show to talk about some of the interesting work that they’re doing at BankMobile, it’s quite a fascinating company.

We talk about their consumer offerings and who they’re targeted to, and we talk about their banking-as-a-service offering and their first big client, T-Mobile, which is super interesting, we delve into that in some depth. We also talk about the whole landscape of digital banking in this country and we talk about their partnership with Upstart, which has them offering consumer loans as well. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Luvleen!

Luvleen Sidhu: Thank you, really happy to be here.

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

Luvleen: Sure, so before BankMobile, I graduated from Harvard in 2008 and I joined Lehman Brothers and we had six weeks of training prior to my first day on the job. My first day on the job ended up being September 15th, the day of the Lehman bankruptcy…

Peter: Wow!

Luvleen: …so it was a very, very interesting start to my career (Peter laughs) and I remember, you know, people walking out with boxes and there I was sort of walking in. I remember calling HR and I was like, hey, should we even come in today and it was very eerie and they were just like, of course, you know, business as usual. So I did start my career at Lehman, my part of the business became Neuberger Berman and I worked in the hedge fund of funds group on the investing side.

After that, I spent one year at our parent company, Customers Bank, which is a community bank based in Pennsylvania and got my hands into banking and soon after that, left for Wharton, where I went to business school. Interned between my two years at Booz & Company in their financial services industry vertical where I helped a well known financial institution launch their direct digital bank, and it was really through my time at Customers Bank, also coming from a banking family, and my role in helping sort of consult this financial institution to get into the digital banking space that really led me to where I am today.

Peter: Okay, so then while you grew up in banking, you haven’t had a long career in banking, what was sort of the trigger that made you decide to start BankMobile?

Luvleen: Sure, well I think it’s the combination of personal experience and then just understanding of macro trends and really what was happening. From a personal experience standpoint, my father is a veteran banker, that’s what I meant by I grew up in a banking family, and he helped build a bank called Sovereign Bank, which has now been bought by Santander.

I remember the first time when I entered college, I went in to open my own bank account and it was during that experience where it took me about 15/20 minutes to open this account and there was definitely nothing inspiring or, you know, positive that I remember from the experience. It was rather dull, didn’t really understand what I was doing, the benefits of, you know, working with this financial institution or how they could really help partner with me to really help me understand financial management and where I was in the stage of life and grow with me.

And so I think it was my first sort of insight into my own experience with banking that left a mark for sure, and then in addition to that, you know, being able to work at Booz with a direct bank being launched and helping, you know, consult another company get into that space helped me really understand the macro trends that were occurring at the time and how the macro environment was really ripe for disruption in this space. So if you look at consumers, you know, they are interacting with their bank or mobile devices 20 to 30 times a month, but only walking into a bank branch on average one time a year.

We’re also seeing, you know, Americans, a third of them, living paycheck to paycheck. Almost 50% of Americans don’t have enough to pay for a $400 emergency, if that ever happens, and these same Americans are being charged $34 billion a year in just overdraft fees. So there’s one angle where it’s like, hey, we weren’t delivering banking in the channels where people wanted to consume, and two, you know, people are looking for an affordable banking solution that’s not so fee driven since they’re already in sort of a financial fragile state.

Peter: Right, right.

Luvleen:  And so, I think, understanding consumer needs and behavior shifting, it was really just understanding that a new way of doing banking to meet those needs, it was a great opportunity for that.

Peter: Right. You know, starting a bank is not a trivial exercise, it’s not like starting a tech company where you can get a couple of friends to come over and hang out in your basement for a year or two and just away you go. You know, starting a bank has a pretty major barrier to entry on the regulatory side so I’m curious, do you…where are you at now, I know you said you’ve been incubated inside Customers Bank, so do you have your own banking license, are you using their license, I mean, what’s the relationship between the two organizations?

Luvleen: Yeah, so today, we are a division of Customers Bank and Customers Bank is where I also did …[inaudible]… and I already knew that they were looking at sort of expanding from just commercial banking to retail banking and the time that I was there, we were very interested in the models like Simple, the bank Simple, that had launched at that time already. So I think the idea was already brewing within Customers Bank of how do we take advantage of this new trend, this new digital mobile first trend that is just starting.

And so after I graduated from business school, Customers Bank was really looking to take action and move forward on that thesis and so I joined the bank and they really gave us a couple of mandates. It was great because they sort of incubated us and kept us separate from the rest of the bank so we could really innovate and develop, you know, the best strategy going forward.

But it was how can we create a better product than exists today, how can we make it more affordable, how can we make it easier to use with a great user experience and can we create an income and revenue model that is at least equal to traditional banks, if not better and lastly, assume that branches are illegal and how would you still create this product and this distribution channel to acquire through this new mode of banking. And so it was really with those pillars in mind that we got together and really defined and started BankMobile.

Peter: Okay, so let’s go and actually talk about your offerings because, you know, you are a digital bank and there are others obviously doing the same thing. You know, there’s a lot of different types of products that you can offer, so why don’t you just take us through your core offerings.

Luvleen: Sure, I think firstly I’d like to just start with like what are consumers looking for and that maybe sort of answers some of the product question.

Peter: Okay.

Luvleen: I think what consumers are looking for…one, it’s simple. Sometimes we talk about, you know, what is the most innovative product that we can do to really change the face of banking, the way banking is consumed and experienced and I think that’s a great aspirational goal and that we are moving towards that aspirational goal as an industry, but there are small things that are still so broken, from being able to open an account with 5/6 clicks.

And so both in our BankMobile Vibe product and the T-Mobile MONEY product that we just launched with T-Mobile, you know, we’re able to open an account within a few clicks and that’s a great on-boarding account opening process and what consumers are looking for, instead of that 15 to 20-minute one that I described to you back in college.

Two, you know people are looking to be able to earn money on their money and so with the big banks, on average, spending no more than eight basis points on interest on checking accounts, we are launching soon for our BankMobile Vibe product 3% on balances up to a thousand and through our partnership with T-Mobile, we’re offering 4% on balances up to $3,000 and 1% thereafter. So it’s really about creating a model where people are actually earning money on their money which is something that the big banks have really ignored in doing.

Another thing that consumers are looking for is not to be fee’d to death. You know, I mentioned the $34 billion in just overdraft fees. You know, we’ve found a way to really create a low cost banking product and through our partnership with T-Mobile, for example, there’s absolutely no fees on the account and we even allow T-Mobile wireless customers that have T-Mobile MONEY to overdraft up to $50 per calendar month, as long as they pay that back within the calendar month. And so it’s really about giving people the opportunity to bank without fees and not penalizing them and really giving them the opportunity to access money if they need it in a short timeframe.

And then lastly, it’s really about broader access to your money and so, you know, this model that a lot of the big banks have where they own their ATMs, you know, that sounds pretty old school to me. Moving towards more of the Uber model, the Airbnb model where it’s not about ownership, but really providing access to replace ownership is what we’re doing with ATM access. So instead of having to own all of these ATMs, we offer our customers access to a whole network of ATMs, 55,000, which is three times more than Bank of America’s ATM network. So it’s really about providing access to people easily for people to access their money.

So those are some of the pain points that we’re solving for.

And then it’s also about growing with the customer and the needs that they have as they move from one life stage to the other. So we have a big business in sort of banking students and when students graduate, a lot of them are looking to build credit and to be able to access credit and so on top of our checking and savings accounts which we offer to them as students, you know, we also have built out personal loans, credit cards and are offering student refinance in the next two months.

We’re rolling that product out and we’ll continue to sort of roll out more credit products that help our customers build credit and really sort of move on their goals by helping them build a strong financial foundation.

Peter: Yeah, yeah, okay. So then is your target market…I mean, your name is BankMobile, I presume you’re targeting a younger demographic. As you said, you’ve got the things for students so who exactly is your target market?

Luvleen: I think when we first started, we wanted to go after those who were suffering the most from the banking system, you know, those who I described that really were looking for an affordable alternative and usually those that had the most limited access to financial services were being hurt the most with the fees, etc. And so when we first started with a direct-to- consumer strategy, we definitely appealed to that demographic.

I think that continues to be a portion of our demographic, but then we expanded into students and these are low to middle income sort of Americans that are either going to two-year community colleges or four-year traditional schools, starting out their career, lower balances, don’t know much about financial and money management and so that has become a sweet spot for us to really help youth start their financial services journey with us and then grow with us through the different products and services that we offer through your lifecycle.

You know, with T-Mobile MONEY it’s really anybody, anybody that’s looking for a better banking experience. So the beauty about banking is that anyone can be a customer and everyone needs a bank account. So even though we focus on niches that really need a better experience, we are definitely expanding beyond that through the different channels and distribution models that we enter into and really view that anybody can be a customer of BankMobile.

Peter: Right, right. We’ll talk about the T-Mobile thing in a bit, but I want just dig in a little bit here. I’m on your website and you actually…when you go to bankmobile.com, you can’t open an account from that page, you’ve got this sub-brand, I guess, BankMobile Vibe and BankMobile Vibe Up, so tell us a little bit about what the thinking is there. I click on BankMobile Vibe Up and I go to a different website where I can open an account, where I can join a waitlist, it looks like there, so just tell us a little bit about the branding there.

Luvleen: Sure, so BankMobile had historically started as a direct-to-consumer strategy and we have pivoted since then to banking-as-a-service where we really partner with institutions, with companies, etc. that have a captive audience and feel that through our product they can serve and solve for even more pain points in their customer base and create, in turn, more engagement, more loyalty with their customers.

And so when you see BankMobile Vibe, that is our student account and we basically serve 800 campuses across the country and help solve the pain point for them which is sending payments between the school and the students. In return, these students get to choose, do they want these payments from the school through ACH into an existing account or opening a BankMobile account and through these distribution partners at 800 campuses, one in every three college student sees our brand and has the option to open an account with us.

So that’s maybe an indirect way of saying it’s actually a closed loop account, BankMobile Vibe, where if you go to one of those 800 campuses that we have partnerships with, you are able to open a BankMobile Vibe account, but it is not an open market direct-to-consumer account at this time. And then same with T-Mobile MONEY, you know, we are the support and the bank behind it, but you can be a non-T-Mobile customer and have different perks or you can be a T-Mobile customer and have enhanced perks and that can be opened through the iOS store or visiting sort of T-Mobile retail outlets.

Peter: Right, is the plan with Vibe Up product to…I mean, is this just really focused on a similar demographic with the students? I’m just trying to get a handle on…it sounds like there’s a waitlist for that product, are you still going to have like a direct-to-consumer product that’s not T-Mobile that anyone can open?

Luvleen: Yes, so it’s definitely something that we’re pursuing and open to…you’re absolutely right, BankMobile Vibe Up is the pursuit of doing that, although that account, even though it will be an open market account, it will be much more geared to the student demographic still and schools outside of those 800 campuses that we currently have relationships with. So it sort of broadens our breadth and depth of penetrating the student market outside of, you know, marketshare that we already have with just a slightly different product that’s open market.

But in terms of a broad based, direct-to-consumer play, you know, that’s something that I think is very difficult and that’s why we’ve pivoted to a B2B2C model which really helps us with high volume customer acquisition at very low cost, but we’re always working at figuring out and innovating and seeing what business model could help crack the code for a very successful, profitable, high-growth, direct-to-consumer strategy and that’s something that we would always be open to reengaging with and implementing at the right time.

Peter: Right, so your direct-to-consumer strategy right now is the student population, that’s the focus, it sounds like.

Luvleen: Yeah.

Peter: So I went back and listened to your interview with my colleague, Todd Anderson, at LendIt and one thing that caught my attention in that interview, I mean, many things did, but this one particular piece you said that you’re acquiring customers at $10 a pop for customer acquisition cost, is that just from the network effect of the student population? I mean, how are you able to have such ridiculously low customer acquisition cost?

Luvleen: Yeah exactly, so it’s a different model. So you could think of sort of traditional banks partnering with colleges and universities by potentially paying millions to really be the sponsor on campus, to have the ATMs on campus, to have a branch on campus and our model is different.

We’re in the business of solving pain points and this situation, what is the pain point that colleges and universities are dealing with and there is a lot of overhead, compliance headaches, etc. with schools having to deal with sending payments to students, especially in the form of financial aid refunds or if someone drops a credit on campus and is owed money or if they’re working on campus and they need to be paid, etc.

And so we help ease that burden and the schools pay us a subscription fee for our service in easing that burden and helping take care of that for them from a technology standpoint as well as from a compliance standpoint.

In return, it really gave us access to the student demographic that is getting payments from the school, and again, it’s a very neutral process where students have an equal opportunity of using an existing bank or getting a paper check or opening a BankMobile account. So in essence, our customer acquisition cost is $10 to almost you could say zero, somewhere in that range, because the schools actually pay us and we get access to the students.

Peter: Right, right, okay, that makes sense. So I want to talk about T-Mobile, you know, that was a pretty significant news that was shared recently and maybe we could start off with how did this come about because you are…you’re still a very young organization and T-Mobile is a massive global telecommunications company, how did you first get together?

Luvleen: Sure, so there’s a little bit in terms of…I just want to put it out there that our relationship obviously is public at this point, but very T-Mobile specific questions, you know, are best geared towards them and we are sensitive to the fact that they’re a public company and it’s important for us to respect some privacy there.

So they were looking at getting back into financial services, it’s something that they had done before in the form of prepaid cards which is a very different product for a very different demographic and is very differently integrated into the T-Mobile experience, meaning a prepaid card is usually just on the racks in the stores and so it’s a very different acquisition model.

And so they were looking at…that model didn’t work for them the way that they had hoped for, and so they were looking at another way to get into financial services that focused more on a broad-based customer base because they really view anyone can be a T-Mobile MONEY customer and that the focus, you know, ended up being more on checking accounts.

With our technology, with our experience in the student space, with our vision and mission being very aligned, you know, we’re both very customer-centric companies that have really set out to disrupt a broken industry, each of ours being quite broken in it’s own unique ways and so I think there was a lot of chemistry from all different regards for us to launch this together.

Peter: Plus you have Mobile, you both have Mobile in your name, that must have helped as well. (Luvleen laughs).

Luvleen: That’s a good point.

Peter: So when someone opens up a T-Mobile MONEY account through the T-Mobile MONEY website, what actually happens is…is the bank of record with that account, is that BankMobile or Customers Bank or what actually happens on the backend when someone opens an account?

Luvleen: Yeah, so the T-Mobile MONEY account is FDIC-insured through BankMobile which is a division of Customers Bank. There is a really robust on-boarding process that, you know, was built out to be able to onboard customers that are digitally opening an account versus the branch-based model where you see someone come into the bank branch.

What’s interesting is in the T-Mobile model, you can go to a retail outlet and learn about the account and get a link to open the account which is more of a handholding sort of process, but you can also do it on your own iOS, Google Store, etc. and, you know, the bank handles all the compliance that’s related to opening an account.

Peter: That’s just truly fascinating. I’m just wondering if…we’re entering a world where like if you look at the Fortune 500 companies and particularly those that are consumer-based companies. I’d be interested to get your perspective, are we entering a world where there’s going to be like one day we may be able to have a General Electric mobile money account or a checking account, I mean, what is your sense about some of these really big brands…I’m not really talking about the tech companies here, sort of the other brands that have a consumer presence, do you think that we’re going to see a lot of similar sort of things to what T-Mobile has done?

Luvleen: I think that it is a very strong possibility and obviously, we’re believers in that model. We’ve seen Apple/Marcus most recently, they’ve started with a credit card, but they are very well positioned to expand that relationship into a banking model. There has been rumors for a long time now about Amazon and another bank and then obviously there’s T-Mobile/BankMobile and I think that you have to look at what are the ingredients for success in these sort of partnerships.

I think that if there’s alignment in sort of vision and mission the way that I described T-Mobile being an un-carrier and fixing a broken industry and BankMobile being the same, that seems very authentically aligned, even to consumers perceiving this product being offered by the company.

And so I think that there has to be some synergy with what that current business does, what it stands for, the way customers interact with that company, where the bank account or the financial services is just a augmentation of the relationship and it helps better that relationship, makes it easier, solves another pain point, you know, I think that there’s a handful of really good use cases where we might see more of this.

Peter: Okay, so then the second part of this question is, you know, who are you focusing on for your banking-as-a-service service, what segments of the business world are you focused on?

Luvleen: Yeah, so for us that’s part of our strategy and it’s something that we talk about less, but I think that there is…you know, you’ve seen us already act in telecom and higher ed, you know, are very unique spaces to play in. We’ve seen technology already play out with Apple and an e-commerce potentially if Amazon enters this space. So those are some big bucket areas where I think that, you know, this use case of banking-as-a-service and partnering retail with banking could potentially make sense.

Peter: Okay, so do you see your future…I mean, there’s two real offerings you’ve got here, you have retail, the retail bank offerings, and the banking-as-a-service, do you see both as equally important for your future, or it’s really banking-as-a-service where you’re going to really place your bets?

Luvleen: Well interestingly enough, even though it seems like our direct-to-consumer play is the student business, I really view both of them as banking-as-a-service and we just happen to be able to use our brand in the student market up front and center, but it’s a very similar model where we’ve partnered with institutions, higher ed institutions, and we are using sort of their distribution model and channel to be able to touch customers, to be able to acquire customers and that’s the same model that exists in other white label partnerships that we would pursue.

And so I think that the answer is B2B2C is where we see momentum and where we see high growth opportunities, but as I said before, I’m really excited about the opportunity of direct-to-consumer. I think the code hasn’t been cracked yet where you make that model highly profitable from a challenger bank standpoint and, you know, if we figure out the secret sauce that is definitely an area that I hope that we would re-enter into.

Peter: Right, right. Okay, so we’re running out of time, but there’s a couple of more questions I really want to get to.

Firstly is the partnership with Upstart which is interesting because Upstart is sort of providing this lending-as-a-service and they’re providing it to you. I see it on your website here where you can go and take out a personal loan and Upstart is powering that service. Maybe just tell us a little bit about why you chose Upstart and what your goals are with that kind of offering.

Luvleen: Sure, so I think that I’ve always believed and BankMobile has believed that we don’t need to reinvent the wheel, that there is an ecosystem of really strong impressive fintech companies that are out there when we are launching new products, new services, etc. that we can tap into that ecosystem and be able to work together to achieve our goals mutually.

And I think what was appealing about Upstart is that, you know, I like the founding team, they come from a Google background, many of them, and they are very smart, they’re analytical, they’ve built a strong model that is more forward looking, that uses artificial intelligence and machine learning to really create an alternative lending model.

We didn’t want to start from scratch and build things from scratch to be able to create the best user experience for on-boarding an application. They take our underwriting criteria into consideration and layer it in with their underwriting that has a lot of AI and unique sort of dimensions to it and they help service the account and so they’re a great partner to really help us launch quickly when we wanted to launch our first credit product which is personal loans.

Peter: Okay, so last question then, what are you working on now, what’s interesting over the next 12 months, what are some of the things that you’re looking at?

Luvleen: Yeah, so I think that we want to continue to expand on banking-as-a-service and finding another really right partnership for us to continue this model with.

Two is definitely executing well on the T-Mobile partnership. You know, we have a huge opportunity there to really change the way that banking is consumed and the way that banking is done with consumers in terms of really being in the consumers’ favor and I think that I want to focus on creating the most opportunity there.

And I’d say third is…one thing in the back of my mind has always been with AI and these emerging technologies. We want to focus on personal financial management and sort of the  advice aspect and I think that there’s a multitude of PFMs’ out there, people have scratched the surface of it, you know, there’s rounding up somewhere, there’s save to spend somewhere else, you know, there’s aggregating different accounts somewhere else and I think bringing it all together and using the technology that’s out there now to simplify that experience, make it really value additive to make it more proactive advice rather than reactive.

It’s just high level sort of thinking but it’s definitely something that we want to explore further and see if we could be the innovators that actually are able to succeed in that space.

Peter: Okay, well it sounds fascinating and I wish you all the best and I very much appreciate you coming on the show today, Luvleen

Luvleen: Thank you so much.

Peter: Okay, see you.

You know, I thought it was really interesting that Luvleen used this sort of banking-as-a-service concept as a way to describe both what they’re doing with T-Mobile and what they’re doing with their own sort of student led offerings. This whole concept of banking-as-a-service is, I think, very interesting, it really is something that I think has a lot of legs, it could take off into many offerings, we’re probably going to see something come out from some of the major tech companies very soon.

As Luvleen mentioned, the Goldman and Apple combo…but what’s to stop some of these other companies offering a similar product. T-Mobile, if you’ve got a consumer facing product, I see it as a way to sort of maintain engagement with your brand and really increase engagement with your brand. It will be interesting to see how it all plays out, that’s for sure.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation and financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.

PODCAST TRANSCRIPTION SESSION NO. 199  –  BERNARDO MARTINEZ

Welcome to the Lend Academy Podcast, Episode No. 199. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s show is sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation in financial services. It’s coming up on the 26th and 27th of September in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.

Peter Renton: Today on the show, I’m delighted to welcome Bernardo Martinez. He is the Head of Funding Circle’s US operations, he’s officially the Managing Director of Funding Circle US. We wanted to get Bernardo on the show because he’s been in the job now a little bit over a year, he took over from Sam Hodges, I think it was April of 2018, and I wanted to get him on the show to talk about a variety of things.

We actually…we do cover a lot of territory in this interview, we talk about the lessons he’s learned, what he brought over from PayPal, we talk about why banks aren’t lending to small business, we talk about who he sees as his main competitors, the competitive landscape in the US. We talk about his recent op-ed in American Banker discussing the SBA Guarantee Program, we talk about the Canada expansion, what he’s doing on the regulatory front and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Bernardo!

Bernardo Martinez: Thank you, glad to be here.

Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself so why don’t you tell…I know you’re originally not from here, so tell us a little bit about your background, how you came to be in America and what you’ve done in your career to date.

Bernardo: Yeah, thanks Peter, I’ve been actually in the United State since 1997, I moved from Venezuela to do my graduate degree at Duke University and after that I spent most of my time in the financial services industry working in areas like Bank of America, actually went abroad to work in a local bank in the Caribbean managing American Express as an international operator and prior to joining Funding Circle, I spent almost three years actually working with PayPal managing the US Business Lending Division for them.

Peter: Okay so then, what are some of the…you know, PayPal Working Capital, it’s got some decent scale these days, I know you were sort of in charge of building that up so I’m curious about what are some of the lessons you learned at PayPal that you’ve really brought over to Funding Circle.

Bernardo: Since I joined PayPal, back then, I think the one thing that I was able to learn a lot was how important the customer experience is as part of the lending process and how you can actually create a true conversion as you create a transparent product and an easy process. So I think that’s the biggest learning that I took from PayPal and that’s one of the things that I’m very focused on since I came to Funding Circle a year or so ago, trying to replicate some of those learnings and trying to put it here in practice and basically bring the product up to par and improve upon what we’ve got today.

Peter: Right, right. Okay, so you’ve been a bit over a year in the job, I know you replaced Sam Hodges who we had on the podcast a few years ago, so tell us about how the year has been, maybe start with what’s been the biggest challenge for you over the past year.

Bernardo: As you would imagine, coming from a different type of lending environment of short term lending, I moved to Funding Circle which is more of a long term lending sort of provider so I spent the last year really learning our processes and understanding our weaknesses and opportunities and I would say one the biggest things I’ve learned is we have a tremendous opportunity to focus on partnerships.

I feel pretty good that after that first year we’re starting to see a lot of that focus on partnerships. It came to fruition, as you know, we signed at the beginning of the year, with Stripe, a partnership and most recently, we did a partnership with LendingClub. I feel pretty good the first year of learnings here have resulted in a good outcome that started this year.

Peter: Right. Okay, so we will talk about some of those partnerships in a little bit, but before we do that, I actually want to get to sort of the details of your loan offerings, just so everyone is clear, I know these are longer term loans, but why don’t you give the listeners…what are the range of interest rates, loan sizes, loan terms, that sort of thing?

Bernardo: You think about us, we are offering installment term loan products that have monthly payments, it basically goes from $25,000 to $500,000, from six months up to five years. On average, our loan size is $130,000 and actually our average APR is around the low teens so it’s a little different from what you see in the industry today with some of the alternative lenders.

Peter: Right, right. And then what about the other side of the business, I’ve spoken with Samir Desai many times and he’s spoken at LendIt saying he’s very much a proponent of the pure marketplace so I’d love to get some sort of some sense of the investors that you’re dealing with. I mean, you don’t have to name names obviously, but like what are the types of investors that you have in your platform today, are you still doing the fractional loans to individuals. Just tell us about the investor side.

Bernardo: Yeah, from an investor perspective, we are primarily an institutional investor and what I mean by institutional there are twofold. One is our asset managers as well as sort of banks so those are the majority of our funding today. As you know, last year we signed a deal with Alcentra for $1 billion and purchase over three years and also we have been working with INTRUST since actually a year and a half ago, doing the same thing on the institutional side.

To your question about fractional, we do have fractional today, it’s not something we are growing at this point, but we’re investing some time to think through how we can make it bigger in the foreseeable future.

Peter: Right, right. Okay, so then I was reading…I think it was last week or the week before, you released a report with Oxford Economics talking about, you know, basically small business lending, the state of small business lending basically and I was struck by the fact that small business lending is just 0.7% of bank balance sheets, that’s…I mean obviously, they’re smaller loan sizes, but…let’s talk about banks. I know you’re partnering with banks on a lot of your initiatives, but are you finding that your customers no longer consider banks a viable lending option?

Bernardo: What we’re finding is in our service is like 72% of our customers actually came to us first because they found us to have a great process and a great product for them and the ones who didn’t come first to us, they kind of found that the bank process are not up to speed to what the market is offering so they spend almost eight hours just completing the application without really knowing what the end decision will be. So I think that small businesses, in general, are starting to move toward alternatives beyond banks to really facilitate their capital access and we are pretty happy to see that our borrowers are starting to see us as a great choice.

Peter: Right, so you said your borrowers are going to you first, how are they finding out about you? I mean, I know you’ve got some recognition obviously, everyone in fintech knows you, but the average borrower, I imagine, still has…isn’t aware of Funding Circle, the majority of them, I imagine, so how are you getting the word out, how is it that such a large percentage come to you before a bank?

Bernardo: A few things, I think number one, as you know, we have done…the way we approach our marketing is twofold. Number one, we use direct marketing as an approach and we do direct mail… print in order to reach out to customers. So some of them are going directly through as a response of our direct marketing processes.

In addition to that, we have done partnerships with LendingClub, but also with portals like Credit Karma, NerdWallet and Fundera that actually aggregate a lot of offerings. We compete in those lead aggregators marketplaces and customers see us there and basically come to us directly. Again, I think that two prong approach help us get the word out and enable those customers to access us directly.

Peter: I’m sure there’s a subset of your customer base that would have received a bank loan had they decided to go down that route. Do you have some sense of…I mean, obviously you’re going to be more expensive than a bank, I imagine, for most of those, but how do your interest rates compare to what the banks are charging today?

Bernardo: I would not consider ourselves more expensive. I think we’re affordable and we’re close to a bank. I think the main difference is actually how long is the process going to take and how transparent and easy the process is when you compare us to banks. So we feel that for like the best rate, you know, best risk rate, we’re pretty competitive with banks and the reality is we can basically finish a loan from start to finish between five to seven days, while a bank may not be able to respond within that time frame.

So I feel pretty good that what we offer our customers is affordable, it’s transparent and is the right…it fits what they’re trying to do and the majority of the banks, at the end of day, we know they’re very focused on their existing customers and they don’t necessarily actually have the right processes for those customers so I think we [inaudible] in that regard.

Peter: Right, right. Okay, and so there are obviously others that are out there in the marketplace apart from banks. I mean, I’m just curious when you’re competing for customers. It’s interesting that now that LendingClub is not originating loans themselves, it feels like there’s not that many offering term loans, but you obviously have…you know, PayPal has got a large and growing business, Square is as well although they’re sort of for micro businesses.

Then you’ve got OnDeck and Kabbage, I’m sure there’s some overlap there but maybe you can tell us…you know, when you’re in the market I’m sure you’re talking to your customers and asking them who else they’re considering, I mean, who are the names that come up, are they some of the companies that I mentioned, do you still consider those direct competitors or not?

Bernardo: At the end of the day when I look at the marketplace, I thinks there’s three main competitors in our market. I mean, banks are certainly one, as you said, and in banks I actually think there are two components, sort of the big banks and the regionals and community banks. So those are sort of the ones that we compete with.

I would say community banks are the ones we see most of the time. When it comes to sort of the non-bank players, I think there are two categories and you kind of mentioned sort of a captive network which are really the PayPals’, the Squares’ of the world and I think what’s different about us and why we’re winning in certain cases for customers is they are really focused on the short term and they are really…in a way, they’re offering a very specific use case which is inventory financing for the most part.

In our case, as our loans have so much range from six months to 5 years, they can use it for multiple use cases, not only for inventory financing, but they can use it for debt consolidation or capital expansion. So we’re winning in the sense that our product has more flexibility and at the end of the day, that’s more important so that’s one way how we’re kind of winning against sort of the captive networks in that process.

When you look to the alternative lenders, you know, in general speaking terms, they also focus on short term and they tend to have a higher rate, interest rate, compared to ours. So we feel that we have a better product and therefore, we are able to sustain not only the multiple use cases that we offer, but also a better rate for them so that’s how we’re winning in those spaces as well.

So we feel pretty good with our positioning and we’re starting to make good traction. As you saw lately, we released our stats and we actually have done more than $2.2 billion in originations and we have served more than 13,000 customers since we started.

Peter: Right, which I know. I think you mentioned as well, it’s more than the vast majority of banks are doing so you certainly have reached some significant scale there.

I want to actually switch gears a little bit, I was fascinated to read your op-ed from earlier this year in American Banker, it’s been something that’s been really on my mind as well and just to summarize for those who don’t know, you had this op-ed…basically it was talking about the SBA, the Small Business Administration, and how…you know, they have this loan guarantee program that’s really important, that has really led to a significant number of banks actually offering small business loans. They have not expanded it with very few exceptions to the broader fintechs like yourself so I’m curious if you had any feedback from that, from the SBA, I mean, what are your conversations like there? Are we going to see an SBA-backed Funding Circle loan anytime soon?

Bernardo: We’re working with the regulators in that regard, we haven’t had specific feedback but there’s a lot going on?, so we feel pretty good about that. The really important part of this type of program is we have done this in other countries so we have programs like these in the UK, Germany and the European market, we feel pretty good that we can actually enable governments to impact directly small businesses when times are tough and I think our platform is unique in that regard that we can do that.

So we are trying to basically to partner with the SBA or any other government agency to help set up portals like the ones we have done in other countries because we feel that it’s an important part of our mission in our platform. So yeah, nothing to share at this point, but I think there is a lot of dialogue going on in terms of what we can do and how we can do it. I’m pretty hopeful that we can do something

Peter: Right, so on that, I know your operation really well and I know in the UK you’ve got the British Business Bank that actually invests directly in the loans and I think the European Investment Bank is doing it in Germany, I believe or it might be Germany and in the Netherlands, maybe you can correct me there, but these initiatives are actually government funds going directly into the loans themselves as an investor on the platform which is different obviously to what the SBA does. Are you saying that you’re also talking…I mean, I don’t know in the US any government investing directly in any platform, are you having those conversations as well?

Bernardo: No, I don’t think we’re not having those conversations yet, but I think what we’re trying to tell the regulators or trying to start having those dialogues is about how we can basically, either leverage the [inaudible] structure that they have in place and how we can work through it. We don’t have to mimic necessarily what we have done in the European markets, but definitely, we would like to have…being a partner of the government to help the small businesses in the market and I think that’s what we’re trying to work through it.

Peter: Right, right. Okay, so I want to talk about partnerships and let’s start off with the LendingClub one because that’s been in the news fairly recently and I wrote a piece about it. We had a conversation before that was announced and…you know, maybe tell us a little bit about the background of how that came together and just how you decided…obviously it’s a pretty…it’s a nice borrower stream for your guys, I imagine, but just tell us a little bit about how that process came together.

Bernardo: One of the things that I like about the LendingClub partnership is that if you go back into how the industry was kind of formed, you know, we have been working with LendingClub since the inception kind of advocating in the policy forums around transparency, responsible business lending and we have been working since the beginning of that, in those two topics, and I think when the opportunity came…it was pretty good to see how we can, both of us, including Opportunity Fund as well can partner together to really put our policy, sort of thought process into action with the partnerships.

So now you have the three of the major players that have been advocating for transparency and really pushing a lot of legislation around that…to be a responsible lender, to kind of offering a small business loan in what we truly believe is the most transparent, the most robust lending that we can offer to small business owners in America so it’s fascinating how we move from policy to actually action so I’m pretty excited about that and I think the partnership will be a great success for all of the parties involved.

Peter: So I know it has only been a couple of week, I mean, I believe I think you went live, we’re recording this in May 6th and I think it was just a couple of weeks ago that you went live, but are there any initial thoughts on the traction the partnership is getting?

Bernardo: I would say things are working well, I mean, we will not disclose any numbers, but I think in general the partnership is tracking expectations.

Peter: Right, right. Okay, so something that is curious to me and it’s actually not unique to the US, I mean, you guys have done extremely well in small business lending in multiple geographies now, obviously the two biggest are the UK and the US and it’s interesting to me that in the UK no other company has got significant scale when it comes to small business lending, online originators of small business loans and the same now, particularly with LendingClub sort of now moving to being a partner of yours rather than a competitor. No one in the US is really getting scale in the online space when it comes to small business lending, term loans I’m talking about obviously, why do you think that is?

Bernardo: At the end of the day, small business is a very different segment and I think that’s one of the reasons why banks have struggled in the past. At the end, the key of this segment  really requires a lot of focus so when platforms or companies decided to enter the segment as a secondary item with a more broader strategy, it’s hard to make it work and I think that’s what…you know, we have decided a while ago that we want to focus on this segment alone and that’s where we’re putting our effort and energy so I think that’s why we have been successful, is the focus that we have had and we will continue to have in the future. It’s going to be the key differentiator for us from the rest.

Peter: Right, right. Okay, I noticed another thing you announced recently was expansion to an additional country, going to Canada. Now I’m curious about this because obviously Canada, directly north of the border here, but has a banking system probably more similar to the UK than it does to the US. So how involved is the US operation going to be in building that business or is it really going to be run out of the UK?

Bernardo: Well I think at the end of the day, we actually have somebody dedicated to the Canada business based in Toronto so at this point we decided to enter earlier in the year and I think we’ll see operations up and running in the second part of the year. We have somebody dedicated, the person came from the UK, but at the end of the day, we’re really focused on trying to build the Canada business from there.

Peter: So what you’re saying is you’re really building it internally. It’s not like…there’s no US resources going into building that Canada business.

Bernardo: We always have subject matter in the US that are helping them, but at the end of the day, it’s a Canada led organization at this point.

Peter: Right, right. Okay, and speaking of geography, you guys expanded recently to the city where I live, Denver, Colorado, and you were kind enough to invite me to your opening party last year. You know, there’s been a lot of talk in San Francisco really just in the last few months, you’ve seen a lot of people talking about companies leaving.

In the fintech space, there’s a lot, I would even say most of the companies now that have scale have operations elsewhere beyond just the Bay Area and you decided on Denver. Maybe you can give us an update, I think the office…must be about a year since you opened that office now, tell us a little bit about, you know, who are you hiring in Denver, what’s going on in that office?

Bernardo: Denver actually opened in August 2018 last year, so we’re pretty excited about our Denver operations. I mean, we have had success hiring people and have a great team there so currently we’re around 60+ number of people, predominantly, basically in sales and operations roles that we are focusing on there and I think we’re feeling pretty good.

I think what is important for us is we’re really committed to San Francisco long term, we truly believe that we’re getting a lot of good talent as well here, different talents in different parts of the organization, but we feel that we’re going to need presence in both places to be successful in the United States. So, you know, we feel that the decision we made last year was the right one and we feel pretty committed to that strategy at this point.

Peter: So you’re going to be growing the San Francisco office as well as the Denver office, is that fair to say?

Bernardo: It’s fair to say, yes.

Peter: Okay, so I want to talk a little bit about government relations. We were both in DC a few weeks ago for the Marketplace Lending Association event and as you pointed out, you’ve worked closely… the founders of that organization were LendingClub, Prosper and Funding Circle, so I’m curious about what the level of engagement is with DC these days. Are you still talking directly with regulators, are you sort of leaving it to the MLA, I mean, what’s your approach in DC these days?

Bernardo: Well we always leverage our associations to have a conversation on the specifics at the industry level, and we also have direct conversation for topics that are outside of the sort of scope of the MLA. As you know, in the MLA there’s a lot of consumer sort of companies and not necessarily small business so we definitely have certain issues that are not necessarily relevant for the MLA.

We have two communication processes. One, through the MLA when it is necessary and some that are directed…that are trying to address our voices. One important part for us is that we also have a lot of dialogue at the state level. As you know, we’re a little bit different than other platforms that kind of use a bank charter. We actually have our state license model so have dialogue at the state level as well and that’s a lot of our focus these days is really having that dialogue at the state level.

Peter: Right, right. It’s interesting because you talk to politicians, there’s not many issues that are bipartisan, it seems like these days, but helping small business is one of them. Everyone at least wants to talk about doing the right thing for small business owners so are you finding that these conversations actually progress into…and you feel like your opinion is heard both at the state level and the federal level?

Bernardo: I think you are right. I think the reality is everyone wants to help small business owners succeed in the marketplace. I think we feel pretty good that every time we are trying to get our message across the different state or federal agents and regulators, we feel pretty good about it and how receptive they are of what we’re doing and what we’re trying to achieve. I think they are pretty open, as you said, they are very focused in trying to help their constituency so we feel we have the right message for them and we feel that we can make traction.

Peter: Right, and so you guys…there was a change in California, it was SB-1235, it came in around transparency because we have…there’s the Truth in Lending Act that mandates a certain format of the way when you’re taking out a consumer loan. There is no equivalent on the small business side, but SB-1235 is mandating that, will you support it? Were you part of the conversations when that was sort of getting passed?

Bernardo:  Yeah, we actually were one of the leaders behind that with LendingClub and Opportunity Fund as well. So this is a perfect example Peter, as I mentioned. This was something that we wanted to do because we felt it was right to have a framework that was about transparency and responsible lending and we kind of partnered with the regulators and they were waiting for us to come to the table and that’s how things got passed.

Peter: Well, it hasn’t been implemented yet, right, you’re not actually having to…there’s no sort of equivalent form that has been mandated yet, is that correct?

Bernardo: The legislation was passed and now it’s being finalized with certain specifics around it, but sort of the ground principles were set, but I think at the end of the day…that’s a good effort in how you can work with the regulators at the state level to kind of frame a good policy around transparency.

Peter: Right, right. So then that’s sort of one win, but what are some of the other areas…when you are talking with regulators today, what are some of the changes you’d like to see that would make a difference for Funding Circle?

Bernardo: Well I think that the more that we can go to a sort of a federal type of commercial Truth in Lending as we did in California, the better it will be for us because that would create a national framework that is similar across all the states and every time you have a national framework it enables you to have simpler operations and it’s easier to execute. It will also be more transparent, easier to communicate with customers so that’s one item that we’re kind of very focused on.

In addition to that, we’re kind of very vigilant on the CRA reform and we’re also kind of participating around the IRS modernization which we feel is very important as we continue to provide lending to our customers because the easier we can get access to their data, you know, the easier for us to provide them processes and customer experience that makes it easier for them to get their loan. So those are some of the topics that we have top of mind.

Peter: Yeah, the IRS issue, I think your predecessor, Sam Hodges, wrote an op-ed on that many, many years ago and I know that others have mentioned that having sort of API access to IRS data would be a big thing. There’s been movement on it in Washington, but nothing has actually happened yet, unfortunately.

Anyway, we’re almost out of time, but there’s a couple of more things I want to chat with you about. Firstly, so you look at your business today, you’re a two-sided marketplace, you’ve got your borrowers and your investors, are they perfectly in balance today, is one side constraining growth over the other or where are you at?

Bernardo: I think with any marketplace, they are always balancing, and even if you look at banks, it’s actually the same. I think at this point what we’re trying to really get to is really the right balance from a growth perspective and risk/reward from investors and I think right now, we’re at a good balance at this point of our journey. I mean, we’ll continue to, depending on the market, adjust those expectations, but we feel pretty good we have struck a good balance at this point.

Peter: Okay, just on that…I mean, the economy is still doing great, everyone keeps talking about the fact that there’s going to be a recession, at some point and there will be at some point. Although we could be like Australia where I think they’ve gone 28 years without a recession so it’s always possible that it is a long ways off, but are you adjusting anything for where we are in the economic cycle?

Bernardo: I think what we typically do, we have a robust risk process in terms of monitoring and stress testing our portfolios and I think we have shared with you and others how we have done that. When we see and observe something that goes outside our risk appetite, we tend to adjust, but generally speaking we haven’t done anything right now that is cyclical in nature. We have been adjusting things that are not performing as we expected, as you normally would do in any lending product, if you see a cohort that is not performing as expected, you calibrate as you see fit, but from a recession perspective, we are not at this point worried about it but we will continue to monitor our portfolios on an ongoing basis.

Peter: Okay, so last question then. So what are you working on today that’s most exciting for you?

Bernardo: I’ll come back to the topic about partnership. We’re really focused on our growth strategy on partnerships so I am spending a lot of my time thinking through what other types of partners do we want to work with and how we can accelerate those conversations in order to make those partners a reality. That’s one of the key things that I’m working on today and I feel that we’re making a lot of traction as we have seen in the last quarter and I hope we’ll see more news in the foreseeable future around this partnership strategy that we have embarked on since I came in.

Peter: Okay, well I look forward to hearing more news on that and on that note, we’ll have to leave it there. Thank you very much for coming on the show, Bernardo.

Bernardo: Thank you Peter for your time, I appreciate it.

Peter: Okay, see you.

Bernardo: Thanks.

Peter: You know one thing I appreciate about Funding Circle is that they really have maintained this laser-like focus on one product. They operate in multiple geographies, but they operate with this one product, term loans to small businesses, and there’s obviously a lot of adjacent products they could go into and they have chosen not to. I mean, they did have property loans in the UK for a little while, but they have since gotten out of that business and they’ve maintained this focus and they’ve reached significant scale now in multiple geographies and really, they are one of the very few fintech companies, particularly on the lending side, to do that.

I think my sense is this kind of lending is difficult, these are 3/4/5-year loans to small businesses that’s a very heterogenous group, there’s not a lot that these companies have in common and I think it’s difficult to underwrite these things. Obviously, banks have been doing it for decades, with the SBA’s help. I wonder how much they would lend if they didn’t have SBA guarantees in place. Funding Circle has done obviously without that and they continue to build their business in a significant way in multiple geographies.

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

Today’s show was sponsored by LendIt Fintech Europe 2019, Europe’s leading event for innovation in financial services. It’s happening September 26th and 27th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.