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

Podcast 257: Jacob Haar of Community Investment Management

The Co-Founder and Managing Partner of Community Investment Management talks impact investing and the role it can play during the crisis

July 24, 2020 By Peter Renton Leave a Comment

There are many areas of finance that are really stepping up during the crisis. We have talked at length about the fintech lenders that helped drive billions of dollars to small businesses through the PPP. In this episode we talk about impact investors and the outsized role they can play today.

Our next guest on the Lend Academy Podcast is Jacob Haar, the Managing Partner and Co-Founder of Community Investment Management (CIM). He was last on the show back in 2015 and obviously a lot has changed since then. CIM is launching a new initiative with some of their impact investors to try to really make a difference for those small businesses that might have fallen through the cracks.

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

In this podcast you will learn:

The investment thesis of CIM.
The three things that fintech has brought to the table during the crisis.
Why there is a major role for impact investors in times like these.
The new initiative that CIM is rolling out in response to this crisis.
How they intend to work with the small businesses falling through the cracks.
How they are trying to predict small business outcomes in this uncertain environment.
Where the idea came from to start this new initiative.
How they will roll out the program.
What we can be doing as an industry to tackle racial inequality.
What CIM is doing in the student loans area.
Jacob’s thoughts on small dollar credit and the solutions that exist today.
How they measure whether or not CIM has made an impact.

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

Download a PDF of the transcription of Podcast 257 – Jacob Haar.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 257-JACOB HAAR

Welcome to the Lend Academy Podcast, Episode No. 257. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

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

Peter Renton: Today on the show, I am delighted to welcome back Jacob Haar, he is the Managing Partner and Co-Founder of Community Investment Management. Now, CIM is an interesting company, they are an impact investor and they’ve been investing in the fintech space for many, many years.

I wanted to get Jacob on the show because they have an interesting new program that they’re just announcing and it’s really to help the small businesses struggling in the crisis, we go into that in some depth and Jacob’s thoughts on how we really need to focus on that last 15/30/45 days of a business much more than what happened last year and he talks about the importance of that in some depth as well. We cover racial inequality in this episode and what we can do about that, he talks about some of the student lending initiatives they’ve undertaken and small dollar credit as well. It was a fascinating interview, I hope you enjoy the show.

Welcome back to the podcast, Jacob!

Jacob Haar: Thank you for having me, Peter.

Peter: My pleasure, So, it’s been several years since you’ve been on show so maybe you could give the listeners just some background about CIM and what’s really changed in the last five years overall with your company.

Jacob: Sure. Community Investment Management is a institutional impact investment manager. We manage money for investors that are interested in not only achieving financial returns, but also in generating positive social and economic change. So, for us, the nexus of our investment thesis is around innovation lending and how that can better reach and support low income and underserved communities, whether those are small businesses where a lot of our focus has been or low income households, underserved students and looking at a range of innovations that helps to understand them better, reach them better and lower the cost of delivering the services to them to support them to improve their financial situation.

Peter: I know you’ve done a lot of work in the digital lending space, let’s just maybe dig straight into it as far as the crisis we’ve been experiencing here globally. I’d love to get your thoughts on how you feel like fintech has responded and what you’re seeing out there.

Jacob: Well, I think fintech has been tested, first of all, by the profound implications that COVID-19 has had on our economy and on the country and there’s been some tough moments out there for sure. Just like any industry that really has come into being in the last decade, this is the crisis and, in fact, stress tests that model and not everyone will survive, not everyone will be able to thrive. But, at the same time, what it also is, this is an opportunity to not only demonstrate the viability of this model and of different groups and approaches, but also be a part of the solution.

And so, as tough as it is, I think this is the moment for fintech to both show the value that it has in reaching customers, in providing productive capital to those customers, to reaching them in a time of crisis with speed, with a purely digital delivery mechanism which in the unique situation in COVID calls for that model exactly. And those banks and other lenders that were not able to use those digital channels to deliver, they are doing it now or at least are trying and certainly that’s what’s important.

But also, the third and I think most profound piece that fintech is bringing to the equation is the ability to look at real-time as digital data. We’re in a moment, right now, where whether you’re a small business or a low income household, your track record over the last three years or five years, it may not be very indicative of your current situation and what is going to be going on in the coming days.

And so, the ability for fintech to dive deep into the data and to understand what’s going on with you, not just from looking at your last three years of tax returns or even the last three account statements that you may have from the last three months, but actually to look at the last 15/30/45 days of transaction activity to try to build a picture of your existing financial situation and then to be able to actually interact with you, lend to you, support you with that real-time data where the others without that information have to sit on the sidelines. So, I think that’s a key element of where fintech can step up and although it is a period of profound challenge for anyone that’s in the lending business, it also is the moment for fintech to shine.

Peter: I completely agree. I feel like we are being tested like never before and there has been…you know, we’ve already seen it with like the PPP and some of the fintech companies that have really led the way, I mean, have just done a phenomenal job in saving hundreds of thousands of jobs bringing in hundreds of thousands of loans to these small businesses and that’s not something that’s like a traditional bank is kind of built for to use that kind of speed and for that volume.

So, anyway, I want to switch gears a little bit and talk about the role if impact investors because here we are in a really unique situation, there’s a lot of investors that are on the sidelines, there are some investors that are sort of bottom feeding and looking for bargains, looking for portfolios that are marked down considerably, what do you see as the role of impact investors in times like these?

Jacob: Having run an impact investment firm through 2008, there’s a lot of parallels to what we see today where this is not exactly to your point, this is not the moment where impact investors will take their eye off of what they’ve been investing in for the last few years to focus instead on dislocated opportunities in other spaces. In fact, this is the time for impact investors to double down and start to provide funding not only on what they’ve been doing consistently, but in the absence of all those other funders to support what we generally refer to as the real economy, the people who are out there working the jobs that are the small businesses, they are the backbone of this country.

Impact investors will not be able to meet all of that need, but they can be there at that critical moment and that’s something that…it’s important to remember that because they see it not only as the best risk adjusted opportunity to allocate to the underserved and to the broad economy, it is, in fact, their mission to do so. And so we are not going elsewhere, we’re, in fact, saying this is the moment for us to use all the tools at our disposal to support the community in it’s time of need and we also believe there’s great financial long term reasons in order to do that.

I think we’re going to come out of this crisis stronger as a country and certainly with some great tools as everything from digital adaption…..I mean, what is happening both with online education with virtual work, here we are over Zoom, right, with all of these different innovations that we’re seeing that previously had barriers to the larger community adopting them is that this is this moment of very rapid adoption where we will not see lending be the same. I mean, I think this is a one-way street where the question is not fintech being a critical part of the lending ecosystem going forward, it’s how will fintech now also serve the lenders that previously were not using these same channels and innovations and methodologies.

In fact, that’s something that I think we’re seeing in fintech, right. I think we’re seeing a lot of the different providers out there now partnering with banks on an accelerated rate because many lenders realize that the only way to interact with a lot of their customers is going to be relying on many of these innovative models that were a much smaller fraction of the market previously.

Peter: Right, right, that makes sense. So, I want to talk about this new program. I mean, we’re recording this just after the July 4th weekend and it’s going to be published later this month, but I believe you’ve got a new program you’re rolling out and love to sort of hear some of the details on that.

Jacob: Yeah. So when initially COVID-19 hit, we started thinking a lot about this theme that we’ve just been talking about, about how fintech needs to be part of the solution. In fact, we are sitting in this industry on the tools to fund small businesses at a great time of need. So, what CIM did, together with some of our core impact investors, is we put together a new program specifically to provide a small business financial first responder capital for those businesses that need capital in the face of what’s going on with COVID and relying on digital channels and speed and also that real-time date that I was just mentioning to reach some of the most underserved.

Part of this program is meant to come after the PPP Program and to go to borrowers, small business borrowers, that were not able to get access to the PPP Program, of which there are still many.

Peter: Right, right, for sure, okay. So then, how are you deciding…I know that when we chatted initially about this a few weeks ago when you first told me about it, I think it’s super interesting, can you maybe tell us some of the platforms you’re working with where you’ll be making these investments?

Jacob: Yeah. So, we’re starting off with a couple of different platforms and the first one is Camino Financial which I think has built themselves to specifically serve the underserved small business community in the Latinx market. And we’re partnering in your home state, you’re sitting there in Denver today and we’re partnering actually to roll out this program in Colorado first.

That’s a function of starting with a specific geography where we have strong impact investor support in wanting to affect their community and thinking about how do we work with Camino to use real-time data as well as the pre-COVID data to deliver with speed and a fully digital experience to Latinx small business owners including many micro enterprises that may only have a few employees and are taking quite small loans.

What is great about this program is if you look at what has been done historically, a large portion of the borrowers that are getting capital through Camino, and we expect this to be true also in Colorado, are undocumented and they were not eligible to get PPP loans. And so, we think about who’s falling between the cracks, who’s actually out there in small businesses coming to work everyday and not able to get the support that they need to continue to function in challenging market conditions and that population ranks high on our list.

So, I think we’re really excited about the impact that that’s generating and in the coming weeks, we’re going to be rolling additional partnerships with other small business lenders to reach underserved small businesses as part of this COVID response in Colorado and we’ll see where it goes from there. I think we are expecting to go outside of Colorado to other states as well, but we’re going to start in Colorado to build this out, to make this a reality for small business owners.

Peter: Interesting. You know, we had Sean Salas, the CEO of Camino, on the podcast. It was a great…..he’s a very passionate guy, it was a great episode. I’ll link it on the show notes here, it was just a few weeks ago and they really are doing a tremendous job for the Latinx community. But, I want to sort of talk about like how are you using the data, you talked about sort of real-time data, what are you bringing….obviously, Camino has their own underwriting models, they have been using their own models for a long time and you talk about bringing in real-time data, what are you adding to the equation, I guess, is what my question is using Camino as the example?

Jacob: Yeah. And really, this is drilling into how are we able to predict small business outcomes based on a changing and uncertain environment? And so, first and foremost, I think we all need to recognize that we’re looking at a period of great uncertainty so we do not know what the future will bring, of course. But, the idea is to build the best and understanding that we could possibly have of where that business is today. Are they open, is there revenue, what do their expenses look like, are they making payroll, are they paying rent?

All of these factors which you may not be able to evaluate looking at what they were doing in April or in March. I mean, Colorado, for example, many businesses are now open that were not open 60 days ago and so it’s building a picture by looking at transaction data, but also recognizing that the next 60 days may not necessarily look like the past 60 days.

Peter: Right.

Jacob: And so, I think we all need to stay humble about what information we have and what information we don’t have, but we need to arm ourselves for the best possible information which means being able to look in real-time at transaction activity and to assess from that where are these businesses in the last two weeks, four weeks, etc. and use that to be able to try to figure out whether we can extend credit to them, how much credit we can extend to them and also to build up a track record over time as you see their behavior.

So, it’s not just about giving a loan, it’s about tracking how they’re doing very closely for the coming weeks, in the coming months. It reminds me of how I got my started lending personally which was doing micro finance and lending to refugees, running micro enterprises in Azerbaijan. When they came into our doors as a brick and mortar micro finance lender, we had no information about them, zero.

So, we had to look at what’s the reality of your business, what sort of cash flow do you have today, but then also we would start by giving them a small loan and as they build up a track record with us, increase that loan size over time and it’s the classic Grameen Bank micro finance group lending model where you bring folks in without credit history and you allow them to build a credit history with you as you track them very closely.

Now, it’s being done with digital channels, with real access to data and the ability to lower operating cost so you can bring cost down significantly from what that traditional brick and mortar micro finance model are doing. But, cash flow-based underwriting for small business lending is paramount in my experience and has been, whether it’s a brick and mortar model for micro finance or SME lending in emerging markets or whether you’re doing fintech in the US.

There’s been some great work that we’ve seen for both consumer lending as well as small business lending where you can see the cash flow-based underwriting is one of the most powerful ways to lend to people on their potential to create, as opposed to just looking backwards at the assets they have and what they’ve done over the past few years which can hold people back.

Peter: Yeah, for sure, I know. We’ve had Melissa from FinRegLab on, they’ve done some really great work there and I think….it’s funny because cash flow underwriting has been around for a little while and there are certainly some companies that have been using it for years, but never really got into the mainstream. We’ve been talking about that at LendIt for many years, but it feels like now everyone is saying this is absolutely essential. I mean, you can’t make a consumer loan, you can’t make a small business loan unless you have access to that cash flow.

In most instance, when you’re talking about….not every business, obviously, but most businesses and most consumers, their financial situation is very different today than it was in January so if you’re not looking at the last three months, it feels like to me you are flying blind. So then, starting this new program I’m curious about the genesis of it… like you talk about some of the piece you’ve worked with, I know, were really impact investment focused, like did this impetus come from you, from them or where did this all come from?

Jacob: I think when COVID hit in mid-March, we started thinking about, of course, our portfolio, our team, but then, very quickly started looking at what was going on in main street in the United States and realizing that this is a critical moment for fintech to be part of the solution. And so, while we were seeing the PPP Program starting to take shape, we at CIM wanted to use the tools at our disposal to be part of meeting the need of these small businesses to keep the economy moving and to allow them to make it through this.

And we had a couple of investors, impact investors, that we’ve worked with for many years and hold in high regard, we started having very frank conversations about what the market needs and how can we potentially step up to essentially run into a crisis in a way where we’re well informed and able to support the small businesses through this. And so, I’d say that’s something where impact investors can really make a big difference. They can look at it holistically and say, we don’t need to essentially charge a price that is so high that it determines a more negative outcome as a result of doing this.

But, in fact, we can come in with market-based principles, yes, but also an approach that allows small businesses to succeed by giving them capital which is priced productively. It does not necessarily extract in her durability to understand this and that’s the challenge with credit in a crisis. The credit is essential to keeping small businesses and to keeping our economy moving, but at the same time, the risk, the premium that is associated with that capital can also be quite damaging for businesses when they are already under pressure.

And so, I think, impact investors, you know, they come in with long term perspectives of understanding that if you are committed to a sector over a long term period of time, that support will really allow everyone to benefit. We’ve seen that, like I mentioned, through the 2008 financial crisis globally. There were many impact investors that stepped up from micro finance institutions and small, medium enterprise lenders and we’re seeing that now with fintech, both here in the US and abroad.

Peter: So then, is this something…..you say you’re only out in Colorado and is this something you’re intending to roll out nationwide. I know you said you’ve got other platforms that you’re planning on rolling this out with…I’m trying to get a sense of how big you want this to be. Obviously, given the fact that we live in uncertain times, we really don’t know even if everything goes perfectly as far as underwriting, and really hitting everything exactly the way it should there could be another nationwide shutdown, we really don’t know. So, how are you rolling out the program?

Jacob: So, we’re starting in Colorado and want to put tens of millions of dollars into Colorado to support small businesses with this specific program. I think we will not go national overnight, we are certainly rolling it out wanting to see how the program is implemented and also what happens with the country. I mean, there’s a lot of unknowns so we’re going to need much more than just impact investors or fintech stepping up.

I mean, there’s the PPP Program and we’ve seen what everyone from Cross River Bank to Funding Circle and other lenders in the space have done to implement the PPP Program and make that effective. We just saw a few days ago here that the PPP Program was extended until early August, but it’s unclear what else the government will do to step up to help the economy and meet the need. Certainly also, we’re going to need significant philanthropy so that’s different from say impact investing, right. Impact investing is using the capital markets in order to generate positive impact within the community, but philanthropy is actually looking at donations, grants and different types of philanthropy which will end up supporting various programs.

And so, I think we need all of these different tools in our toolbox, we need the capital markets and private investors, we need government stimulants and we need philanthropy. And so, I think we’re taking one day at a time and trying to focus in on supporting as many businesses as we can with our partners in our core market and then we’ll take it from there. But, meanwhile, the flagship work that we do in fintech is also accelerating and we’re seeing, in fact, new partnerships that are getting struck, portfolios that are growing and a lot of fintechs are stepping up right now in order to provide capital where others are retracting from the market.

And so, I think we’re going to see the core strategy where we’ve put over $1Billion into the hands of small businesses and underserved communities out there over the last five years, that work is accelerating and continuing. We also are seeing the special COVID-type initiative and, in fact, our work is growing and entering even overseas which we’ve been focused on in the past for many years, but we’re seeing fintech acceleration, particularly in light of what’s going on with COVID as a critical next step. In fact, towards that, we’ve opened up an office in Berlin and are expanding our work outside of the US to many emerging markets where we see great needs as well.

Peter: Sure, sure, okay. So, another question I’m curious to get your thoughts on, I want to talk about racial inequality, we don’t very much cover that on the show and it’s clear to me when….obviously, we run a fintech conference and see the make-up of our event and it really isn’t very racially diverse, it’s not even gender diverse for that matter, but I’d love to kind of…..you know, what do you think we should be doing….let’s just take the racial inequality first, what should we be doing as an industry to really tackle a problem? When you look at fintech, it’s…I don’t know, is it 95% white, it feels that way sometimes, what do you think we should be doing?

Jacob: Firstly, I think we need to be encouraging, especially at this current time, black-run companies to be out there serving the communities. They specifically understand better than anyone else out there in the market and there are certain lenders that, you know, are led by black CEOs, founded by black founders and it is harder for them to raise capital. I mean, there have been some great studies that have looked at not only hiring, but also venture pitches where there is significant systemic bias in the way that capital is being allocated.

So, I think it’s a very complex question and certainly not one that I have all the answers to, but we agree with you, Peter, you and I really recognize this is a shortcoming. It’s true in financial services and it’s true in technology and so you combine the two and the fintech and it’s a perfect storm.

Peter: Right.

Jacob: It’s a perfect storm for gender and it’s a perfect storm for racial justice and for diversity and I think we all need to look at ourselves in the mirror and ask, how can we be part of the solution. It’s not enough to just go about business as usual. So, I think impact investing has gone on a journey on this as well where I think a decade ago, five years ago even, we would look and see that we have been providing affordable financial services to many members of the black community, to many women and that’s been something that we’ve been focused on trying to ensure that we continue to provide affordable financial services and access to underserved communities that suffer bias.

But, I think that in more recent years, and particularly let’s take this moment of the Black Lives Matter protest to recognize the systemic racism that is there and think creatively about how we can be part of the solution. And so, I look, for example, at our portfolio, at Kim Folsom who founded and is running Founders First that is specifically out there to provide revenue-based financing, revenue-based loans to underserved founders so those are founders of color, those are black founders, those are women-led businesses, those are businesses in low income areas and we need to….you know, there are many different founders that are out there that we need to not only support, we need to provide funding too.

If you’re a VC, look at your portfolio companies, if you’re a lender like CIM, see what credit facilities you can provide to companies that need some extra support. So, I think we all have a role to play to do our part and at the same time, we at CIM, we’re humbled, we also come up short and we want to do our best to make it better so that the next time we meet at LendIt, we’ll see much more diversity within the ranks of fintech.

Peter: Right, right. And, obviously, we’re working on that as well. We have a couple of programs we’re working on behind the scenes and we hope to roll out and share when the time is right. So, I want to talk about student loans because the primary focus has been small business and that’s what the new initiative is about, but what are doing in the student loans area?

Jacob: So, we’ve focused in student lending on two strategies to date. The first is on lending to primarily graduate school, to fund graduate school education for immigrants and we’ve done that by partnering with Empower and providing funding for many students who are new Americans, immigrants, but also some docket students in the US as well to attend primarily graduate school, there’s a small number of undergraduates as well to seek particularly STEM degrees. This is a factor that is underserved, they’re not able to get federal student loans and so believe that there’s a great opportunity to serve them better so they can achieve the same type of graduate education and career advancement as others and that’s opening up the market.

You know, when you’re an international student and you get into a great graduate program, you either have to be independently wealthy or you have to be just at the upper echelon where you will get a full merit-based scholarship. And what we’re doing is we are leaving a lot of talent out of that graduate pool where they have shown that they are qualified to attend that program and pursue that education and they can either add to the economy here in the US or go back to their home country and do great things. And so for us, there’s significant impact and also a compelling opportunity to extend this inefficient financial services that are not reaching them, to extend efficient financing to them so that they don’t have to rely to home country financing.

The other area that we focused on has been in workforce training, particularly in the area of technology. So, we work with a school called Kenzie Academy which providing high quality technology training to underserved communities, they’re based in Indianapolis and they have a focus on the heartland. They also are making significant inroads into communities of color, with women, in areas…….we aren’t just talking about in technology where you don’t see a lot of black faces, you don’t see a lot of women that are part of that.

Kenzie has done a great job of getting their new classes and cohorts are extremely diverse, both in terms of gender, in terms of racial diversity and we’re really excited to support them and doing it with an income share agreement type of program so that the school is successful only when their students are successful. And that is so key because we see a great need to align school success with student success and there is a key role that impact investors and all investors when structured well can link those two outcomes.

Peter: Right, right. Okay, we’re running out of time, but there’s a couple of things I really want to get to. We haven’t really talked much about small dollar credit, particularly for low income communities. It’s a topic that’s near and dear to my heart because I feel like it has such a role to play, it can ruin lives and it can also make lives so much better. What’s your sort of thoughts on that, maybe as an asset class and as something that…..is this something you’re looking to put your resources in as well?

Jacob: Yeah. Like you, Peter, we really believe that small dollar credit is necessary to support communities that are living on the edge, I mean, and it doesn’t necessarily take a lot of credit to make such a difference. But, I also think that, historically, there has been a lowest common denominator type of small dollar credit model and what’s so promising about fintech is it’s ability to really understand and differentiate customers better so that we can offer much more affordable products, in terms of how those are structured and we see that.

We see, for example, overdraft fees and how much the large banks are making on the part of the US economy that is living on the edge. There’s not a lot of savings and they’re taking valuable money out of their pocket every month in the form of overdraft fees and there are some great solutions to solve for that using technology. I think we also see different communities getting specific solutions so whether that’s Oportun or Aura providing it to the Latinx community, or some really innovative companies that are working on addresses for low income households across the country.

This is an area where we can’t be lazy, we can’t just say, look the price is expensive because the risk is high, we have to do better, I think, at understanding our customer, segmenting our customers and providing them with the type of financial services that can be rational, profitable products, but only because we have a certain type of insight into what’s going on with that underlying customer and it’s an area of profound inefficiency and therefore, opportunity. And so, this is exactly where fintech can come in and make a difference,

Peter: Yeah, yeah, for sure, for sure. So, last question, this sort of dovetails to what you just said there, how do you know, at the end of the day, whether the work you have done has really made a difference?

Jacob: I think we look at impact on three different levels, Peter. The first is tracking metrics around who has gotten our money so we can look at, specifically, the small businesses, the low income households, the students that have received money from the fundings which we have done of our different fintech partners. But, in some ways that is the smallest difference that we are making and how we think about impact because the step above that, if you were to go a bit further out, is to look at what we are doing to try to support, scale and demonstrate different products.

Those could be products that we have funded or that competitors have funded, but, essentially to show that there is, in fact, great opportunity and need among deserving borrowers so that ultimately that attracts different investors and competitors to look at this as innovative models that need to be scaled and will make it into the financial mainstream and that’s a greater measure of success. And whether that’s our individual dollars or whether we’re just seeing a model get traction that previously didn’t have traction, that’s important.

But, the third and biggest, almost 30,000 foot-way, is creating an enabling environment and thinking about everything from regulation to allowing for innovation. And that’s both some of the work we’ve done with the Responsible Business Lending Coalition with Small Business Borrower Bill of Rights, it’s work that we’re doing with income-shared agreements to make sure that income-shared agreements are ultimately in the students’ best interests and we will create all the space for innovation to flourish, but also real alignment around its set of standards and principles.

And, I think this is an area where fintech has done well, but we need to do better which is engaging with regulators to not only push for the opportunity to do things better, but also to push for new protections to come into place for particularly vulnerable and underserved communities and it’s by doing both, by clearing a path for a better future, but also on realizing that we need to engage with government and regulators to put guard rails in place, to protect the interest of small businesses and consumers that are being served with these innovative new approaches,

Peter: Well, it’s fascinating, we’ll have to leave it there though, Jacob. I wish you all the best and I appreciate all the work you’ve done and it’s always good to chat with you.

Jacob: You too, thank you, Peter.

Peter: Okay, see you.

You know, credit is going to be so important for small businesses, I think, until we get back to normal and credit is always important even in good times. When things are tough, credit is going to be critical for small business survival that’s why we have the PPP. So, I really applaud, Jacob, and his team working with Camino Financial to get this program, pilot program set up. Hopefully, it’s something that can be rolled out across the country because the difference between a business staying in business seeing through to times that are going to be better is really whether or not they can get a loan for government programs that aren’t going to be there once the PPP is over then it’s going to be private institutions only that really pick up the slack. So, I think we need much more than what Jacob is doing, what they’re doing is a great start.

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

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

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

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Podcast 256: Lexi Reese of Gusto

The COO of Gusto discusses how they were able to pivot so quickly to offer Paycheck Protection Program loans and scale it to almost $2 billion

July 17, 2020 By Peter Renton Leave a Comment

Today, it is becoming relatively easy for non-financial services firms to add financial products as a new offering for their customers. We call this embedded finance where the product is embedded into a company’s full suite of offerings. We have seen this happen rapidly at scale with the Paycheck Protection Program (PPP).

Our next guest on the Lend Academy Podcast is Lexi Reese, the Chief Operating Officer of Gusto. Gusto provides cloud-based payroll and benefits solutions for small businesses and they are growing rapidly. They are not a fintech company but they were able to work with fintech lenders to quickly implement a PPP solution that provided nearly $2 billion in approved loans. How they did this is a fascinating story.

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

In this podcast you will learn:

How Lexi’s daughters’ lemonade stand led to her taking a job at Gusto.
How her background at Google has helped Gusto.
What Gusto did to help small businesses with the Paycheck Protection Program.
The fintech and banking partners they used for the PPP.
How Gusto is helping small businesses in the forgiveness process of the PPP.
How they are keeping up with the changes in the PPP.
Their latest data on the health of small business.
How Lexi thinks about lending to small businesses beyond the PPP.
What else Gusto has done to help small businesses during the crisis.
The types of questions small business owners are asking today.
How the pandemic has impacted Gusto internally.
Lexi’s view of the future of small business in this country.
What she is most excited about going forward.

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

Download a PDF of the transcription of Podcast 256 – Lexi Reese.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 256-LEXI REESE

Welcome to the Lend Academy Podcast, Episode No. 256. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Peter Renton: Today on the show, I am delighted to welcome Lexi Reese, she is the Chief Operating Officer of Gusto. Now, Gusto is a super interesting company, they describe themselves as an all-in-one people platform for payroll benefits and HR. So, you might be wondering why I have a payroll-type company on Lend Academy Podcast because they have become heavily involved with the Paycheck Protection Program helping out their 100,000 plus small business customers and so, it was a really interesting story.

I’ve seen them in the press quite a bit so I wanted to get Lexi on the show just to talk a lot about…..not just about the PPP, but obviously what their company does and how they’re supporting small businesses and what they’ve seen. They’ve got a great…having really a payroll company, you get great insight into what is actually happening and Lexi shares some really interesting statistics about what’s happening in the small business universe.

We talk about how they’re going from the lending side of PPP, to the forgiveness side, we talk about how else they’re helping their small business customers navigate the crisis and we talk about how they’ve been impacted and what’s exciting for Lexi right now. It was a fascinating interview, we hope you enjoy the show.

Welcome to the podcast, Lexi!

Lexi Reese: Thank you, Peter. Thanks for having me.

Peter: My pleasure. So, I’d like to get this thing started by giving the listeners a little bit of background. You’ve had an interesting career to date so why don’t you give us some of the highlights before you got to Gusto.

Lexi: Yeah. Well, getting to Gusto is directly connected to my daughter’s lemonade stand.

Peter: Really, that’s an interesting one.

Lexi: Will start from the beginning which is, I think, work needs to have meaning and if you’re lucky enough to have a choice, you should do it in service of others. I started my career in documentary film making in Nicaragua telling the story of girls forced into prostitution to help their families make ends meet. Afterwards, I worked with Accion International which is a micro finance organization to help those same families receive financing to help them call themselves out of poverty.

Business had been off my radar until a great mentor at Accion said, if you pursue business, you’ll have the ability, Lexi, to make a powerful difference for real people. I went to business school and afterwards worked at both Amex and Google and in small business initiatives which really showed me how small business ownership helps people own their own futures and it can change generational wealth and outcomes.

I joined Gusto because that feeling is in hyper drive, we exist to make a difference in the life spans of small businesses and help them be successful, especially right now when they’re in the fight of their lives. So, we’re doing everything in our power through our product and our policy to help small businesses survive this current crisis. The connection to the lemonade stand, I can go into if you want, but…..

Peter: Yeah. I think it sounds really fascinating so why don’t you just touch on that now.

Lexi: Yeah. I think, back to the first time when my family met Josh, leaving Google was a family decision and Josh as the CEO of Gusto, and he came with his wife to meet my family and my daughters had a lemonade stand outside and I had Josh pitch them on why they should use Gusto. I told them that Josh run a lemonade stand of his own, he had sold a lot of lemonade so that somehow clicked for them. I don’t know that he made the sale, (Peter laughs) but he made enough of an impression that… here I am.

Peter: So, it’s really quite a transition going from one of the largest, most successful companies on earth to a startup, going from Google to Gusto. So, I’m curious about the…I mean, you touched on it a little bit, but what were you doing at Google that sort of has prepared you to help you with Gusto.

Lexi: Yeah. I think when I joined the Small Business Team at Google in the late 2000’s, I was really inspired by the mission of Google creating access to the world’s information and Gusto’s mission is similarly exciting to me, create a world where work empowers better lives. Gusto is a people platform that enables currently over 100,000 small businesses nationwide to onboard, pay, insure and offer benefits to their teams. I think, in ordinary times, we’re doing the bulk of what a human resources department or people team would do, from payroll, to insurance, to benefits administration.

This, of course, aren’t ordinary times and I know we’ll get into how Gusto has been helping in the last four months and since COVID really began to take hold, but I think that we want to help people save and prepare for a better future for themselves and their families and creating a scaled program that is creating an excellent service to enable people to foster humanity at work…feels like one of the most exciting things to be doing right now.

Peter: Right, right, for sure. It’s interesting because you said you’ve got 100,000 businesses, you’ve got probably a unique window into employment data, maybe….we’re recording this in late June, June 29th to be exact so, we’re going to find out more about the June unemployment numbers in a few days, but what are you seeing as far as the employment data with the small businesses that are at Gusto?

Lexi: Yeah, happy to answer that. I would say….I mentioned these aren’t ordinary times for Gusto, which I think is primarily known for payroll and health insurance, but in March when COVID struck, we had to go further to help businesses navigate what was happening. So, we shipped about 40 new features within the first two weeks of COVID, including building a resource hub that simplified legislation state by state and then built features that streamlined everything related to the Payroll Protection Plan which is the $650 Billion allocated to go through the Small Business Administration dedicated to help small businesses in a cash crunch keep people on the payroll.

Peter: Right.

Lexi: So, that has become really a lending launch pad that has enabled us to provide nearly $2 Billion in approved lending for small businesses, both our existing customers and small business prospects.

Peter: Right.

Lexi: So, the window that we have is inclusive of the window of the PPP lending which I can talk about.

Peter: Sure, sure. So, obviously the regular listeners know the PPP really well, we’ve been following it super closely over the last several months. So, maybe…I’d love to hear your approach….you’re,obviously not a lender, that’s not in your core business, but how did you approach it? Did you set up like a portal….obviously, you’re got a lot of payroll data and as the Payroll Protection Program so obviously, you were well positioned to help small businesses, how did you actually approach it? What did you do exactly?

Lexi: Yeah. So, we knew that a major component of the process for folks to get approved was to calculate monthly payroll costs which is tough and time consuming to do on your own, so we streamlined that into a one click process so that small business owners had what they needed and could just jump to the front of the line with either their existing bank or alternative lenders and get first in line for that PPP loan.

So, one of my favorite stories about this is a customer called Melissa Wirt, so Melissa owns an apparel company for nursing moms called Latched Mama and she told us that her lender made the PPP applications available right in the middle of bath time which is no small feat for Melissa because she has five children and that’s pretty much the most chaotic time of day. But, because Gusto had streamlined so much of the paperwork for her, she could literally handle that time and send in her PPP application that evening and she was approved that same day.

So, that’s the product ties in a version of what we did for small business customers, but we’re also in a small business resource hub. We had much of our legal team making sense of the legislation that we tried to write in really expert but warm and approachable ways for small businesses to find what resources were available to them, not just the PPP, but state local industry resources that were available to them to help them navigate this as well.

Peter: Right, right. And so, I presume…I think, I read it was Cross River Bank you’re using? I think….I remember, I read somewhere that some of the partner banks you were using…just tell us a little bit about those relationships and who you were using.

Lexi: Yeah. So, we found that fintechs and regional banks as well as CDFI’s have really filled the gap and been truly, extraordinarily effective partners in serving small businesses, so we partnered with fintechs like Fundera, Lendio and Cross River Bank, which as you know, is a community bank that thinks like a fintech,

Peter: Right:

Lexi: And we’ve heard so many stories from small business owners who were left out of the PPP funding and then were approved in no time through our partnership with Cross River Bank and these stories are just incredible.

One, in particular, is Yellow Owl Workshop in San Francisco. They create hand printed cards and gifts and the founder, Christine Schmidt, she had tried everything, she did everything that was asked of her and was hours away from laying off her entire workforce when the funds came through from Cross River. She told us she had been…I think her quote was “a sea of tears for weeks” and, suddenly, there she was crying happy tears. So, these partnerships have been incredible and we’ve been happy to be able to offer them through our platform.

Peter: Yeah, it’s so important. I feel like that’s…..you know, this is really life and death for many of these small businesses and it’s been great that you were able to do that and move so quickly to help because I’m sure through your quick actions and actions of others, we’ve literally saved hundreds of thousands of small businesses from going out, from going under.

So, I want to talk about the next stage because the PPP by the time this published, the PPP…well, you know this exactly, they could be extended. It’s ending tomorrow, as we’re recording this, so the next stage is forgiveness and again, this is very much about payroll data. I’m curious about what you’re doing there exactly to help your customers who have got a PPP loan apply for forgiveness.

Lexi: Yeah. I think you know it well, Peter, I think your listeners know too, but time matters, people do not have….small businesses, generally, do not have cash on hand beyond a month or two months and we can go back to your question about the data we collect and I’ll answer that fully, but there’s a ton of paperwork that goes into securing a PPP loan, but the same amount, if not more, is true when you’re trying to have those loans forgiven.

So, to get the forgiveness, you have to spend 60% of your loan amount on maintaining payroll and we’ve created a Loan Forgiveness Tracker which complies with the legislation as we know it today and compiles payroll expenses so that small businesses can stay on track and apply for forgiveness with the same ease as that PPP lending launch pad that I described earlier.

Peter: Right, right. So, I’m curious because, you know, the PPP Program was very much targeted at a variety of small businesses and the Forgiveness Program, it keeps changing so I presume….I don’t know what the last changes were, within the last two or three weeks, I think, when they’ve announced a different….like the 60% you talked about. That wasn’t the case when it first came out so, I imagine, you’re tracking these changes because there may will be more, I mean, there may well be new, either a renewal of the PPP or extension or a change in the forgiveness laws. So, how are you sort of keeping on top of all those changes?

Lexi: I think the only thing that is certain is that there will be changes (both laugh) so we have effectively made it our own initiative that comprises members of our legal team, members of our content team, members of our credit team and members of our sales advisors and customers support advisors team to be our COVID-related experts.

These folks are charged with staying one step ahead of what’s happening and then productizing it wherever possible to make it easy for customers to know what to do before they need to read anything, but also putting in our contents, again, not just for our customers and that’s what I think is really…..the important piece is to remember that a lot of the problems with PPP were because it assumed that you had access to one of the major banks.

But, if you look at, for example, the BIPOC population, Black, Indigenous, People of Color, because of systemic inequities in our banking system, a lot of people who this program was designed ostensibly to serve, were left out completely. And so, we’re really interested because it aligns with Gusto’s mission to ensure that our customers and non-customers know here’s the aid that’s available, your task to access it, here’s the follow up needed to stay compliant and that is motivating to everybody who works at Gusto.

Peter: Right, right. I just want to get back to the data that I asked a little earlier, can you give us some sense of how these small businesses are doing with the PPP loan. As you mentioned not everyone got one, but just give us some sense of the state of small business from your perspective.

Lexi: Yeah. Our perspective to make sure everybody knows what the context is, it’s specific to small businesses with 100 employees or less, it’s largely what we tag in our payroll data as a leading indicator of what we think is to come in an economic crisis like COVID kicked off and for context in March, our data showed a 1000% increase in small business layoffs. It was absolutely March madness, April showed the layoffs cooling a bit, but we moved into furloughs, furloughs became the vocab word that suddenly everybody and their mother knew.

And then, our latest data in May showed small business headcount is actually increasing, but headcount overall is down since the crisis started and hiring is being driven, specifically by re-hiring, so that 22% of all hires were re-hires from people that had been paid off. The industries where we saw the highest growth levels were those that you would imagine might be re-opening in the context of phase two or phase three cities re-opening.

So these are facilities, food & beverage, transportation, construction and then we also showed that hiring and re-hiring were nearly twice as high for companies that reported receiving the PPP loan. So, you asked about that compared to those that did not so, 34% versus 18% if you didn’t have a PPP loan. So, businesses that received loans were more than twice as likely to re-hire than businesses that did not which just, again, speaks to how do we get lending to people that are most in need that keep our communities vibrant and are commonly strong.

Peter: Right, right. So, I’m curious, from your perspective….you know, the PPP, I think it’s been a pretty successful program. Certainly, there have been challenges which we’re not going to get into here, but it points to a larger issue and that is the need for capital for small businesses. So, given that you’ve really……you said you’ve done almost $2 Billion in loans, that’s a decent sized lending operation in normal times so, are you thinking of expanding into business lending beyond the PPP to help your clients?

Lexi: Yeah. Well first, I would just say and, again, I think it’s a larger conversation, but among those people that did apply for PPP aid, only 12% reported receiving the funds. So, I think, whether it was a successful program, it was certainly a great start to address the needs of these businesses, but I think it’s still very early days in these. In terms of Gusto getting into this business, we feel really good about making sure that we take the data that we have which is so imperative to every lender and making that accessible to small businesses so they can go to their lender of choice.

We’re not a lender, but we’re always looking for ways to get small businesses access to the capital that they need so we think that this partnership that has been accelerated with fintechs has been a strong example of how can we work together as an industry to get relief funds into the hands of small businesses and their employees without any lag time.

Peter: Right, right, okay. So, beyond the PPP…..I know you touched on it a little, but I’d love to kind of tease it out a bit more about what else you’ve been doing to help small businesses navigate….this is probably the worst iconic crisis of their existence.

Lexi: Yeah. When Gusto is working well, we love when people almost anthropomorphize the service and so someone said to me, we hired Gusto and when you hire Gusto you have, effectively, 1,100 people working on your behalf to understand what you need to know, anything that’s related to onboarding, paying and insuring your teams. We’re excited to just keep the services that we’ve created and taking feedback from our customers who said, for example, you know, this is great that you have the federal guide, but what about a state-by-state hub for small businesses to get up to speed on the latest state and local information so we’ve been updating that ever since, we’re excited for that to continue.

One thing that was really exciting that we’ve been working on for a while, but we updated and changed in response to COVID was a new suite of tools for hiring and onboarding employees. So, given that many businesses are still working from home or just really constrained conditions and understanding the fact that it takes most small businesses 10 to 12 hours to onboard a new employee, we created this suite of tools to make it easy to automatically send customized offer letters, to e-sign key documents, to set up software for new employees provisioning everything an employees needs on day one. So as soon as Lend Academy gets on Gusto, you’re going to experience this feeling. (Peter laughs)

Peter: Okay, okay. So, I’m curious about like what about the other questions small business owners are asking you, I mean, right now….like you offer a range of different services for them, are there certain themes that are coming out beyond what we’ve already talked about that small business owners are seeking answers to?

Lexi: So, we are getting a lot of questions around state compliance, meaning what is legally required and how do I deal with these shifting guidelines from, again, federal, state and government authorities so, generally, that’s one line of questioning. We have a lot of questions from small business owners who have to make the economic decision in terms of being a very real team decision of whether to cut hours or reduce staff, but how do they do that while fighting to keep healthcare benefits going for their workers in the midst of the health crisis.

Peter: Right.

Lexi: Huge theme and, right now, we’re getting questions about the potential for a next round of federal aid, what will it look it, when might it be available and again, we have a team working with lawmakers to keep aid coming for small businesses, particularly for Black, Indigenous and People of Color and other unrepresented groups.

Peter: So, I’m curious about how the crisis has impacted your company, specifically. You’re in California, I believe, I presume….is everyone still working from home at Gusto and how else are you being impacted?

Lexi: Yeah. To serve the 100,000 plus customers we have, we have home bases in San Francisco, New York and Denver and we have about 1,100 Gustees, I think I mentioned, who are primarily working from home and given how critical the services we provide are, well, that’s a change in environment. That was a change we were prepared for because we had to plan for any contingency so that we could keep the support on for our customers.

Peter: Right.

Lexi: So, we are, I think, weathering that well. Anybody who’s been on five months of Zoom (Peter laughs) would say, you know, there are some adjustments.

Peter: Yes, yes, I understand. I know you’re on a Zoom call right now and I appreciate you keeping it up. Okay, so then, are you guys marketing right now. I mean, this is a tough time for small businesses, but, also the other thing is small businesses are looking to save money which was what I was saying before we started which is how we’re really looking into Gusto as a potential for our company. So, how do you sort of juxtapose that into your marketing programs.

Lexi: Really honestly, Peter, one of the reasons that I joined is there is no cognitive dissonance between selling and marketing and servicing. The way that Gusto works, we’re a subscription business, if you hire us to onboard payments and insure your teams and you have a great experience, you can continue your subscription service, no lock-ins, no lack of transparency.

Generally speaking, Gusto, relative to any other business I’ve worked with, generates most of it’s new customers through word-of-mouth from its existing customers. So, it’s not new for us to say, scale an extraordinary service that people love programmatically to save as much time and money for our customers as possible, that’s always been a theme. Doing it now with a sense of renewed urgency and understanding and empathy for what businesses are going through, but that is priority number one and, again, that is a very deep part of our growth strategy.

But, as part of our mission, we also want small businesses everywhere nationwide to know that Gusto exists and to provide them the support that they needed. I think in COVID, by all means, we have been marketing our services because if you were not on a cloud-based payroll provider prior to COVID, your ability to access and understand the legislation and the federal loans available to you and participate in that was extremely compromised.

So, we don’t think we can create a world where work empowers better lives for everyone, everywhere if we don’t continue to let people who are used to older systems or different ways of doing things know that we exist. We have a very big partnership with the accounting community who has become, as you can imagine, and probably experience ever more important advisers to customers who are looking for support in navigating this.

Peter: Right, right. I’ve certainly seen the Gusto name out there quite a bit during this crisis. I feel like I’ve seen some pretty high profile articles that I read with your names so, clearly, the message is getting out. So, before we wrap up, just a couple of things, I’d love to get your perspective…..and you seem like you’re a fairly optimistic person, but I’d love to get your perspective on how you’re looking at small business and the future of small business in this country.

Lexi: Yeah, thank you for saying that. It’s not just my feeling, it’s the study that we’ve had on small businesses throughout many crises going back to 2008 and beyond and I think you will get how many companies are forming and what’s happening to those companies once they are formed. I think every expert will tell you this is not like any other crisis we’ve seen because you didn’t have a shelter in place order combined with the consummate health and economic restrictions and everything that’s happening in our world so this is by no means different.

But, I think you can also say, do you imagine a world where small businesses are not a meaningful part of our economy and our lives and the answer is no. So, I think where we land is we plan for the worst and hope for the best as it relates to new companies starting in smaller numbers than they have. Of course, we’ve already seen some businesses having to make difficult choices about going out of business, but where we see on balance is also businesses starting in the context of helping to serve needs that emerge because of the current context that we’re in and also, businesses transforming their business model.

Example is a business called Snap Bar in Seattle that was an events-based marketing company that has now become, effectively, a virtual gift company that sources from small businesses and has transformed its business model and its go-to-market motions and has been really successful doing it. I think that we’re under no illusions that this is over or that it’s not going to be difficult, but I think we remain bullish that small business owners, the people that depend on them are resilient. We also remain sober in the reality that small business is often the option for many business owners who are left out of other alternatives of participating in our economy.

Peter: Right, right. I’ve been a small business owner my entire career pretty much and my father was a small business owner before so your words resonate with me. So, last question then, what are you working on right now that’s most exciting for you and for Gusto going forward?

Lexi: I think that….jeez, what’s not exciting, Peter (Peter laughs). I think that we’re really excited about the onboarding and hiring tools that we have, that we just launched in……literally, four days in the market. So, we’re excited about some expanded opportunities we’ll give to folks to participate in health insurance and then we’re always thinking about how do we help people save for a prosperous future and there are some exciting developments coming on that side as well.

Peter: Interesting. Well, Lexi, we’ll have to leave it there. I really appreciate you coming on the show today.

Lexi: Thanks, Peter.

Peter: Okay, see you.

You know, I think Gusto is a great example of this new trend we’re seeing that’s been called embedded finance where you basically take one financial function and embed it into your company and they did that with the PPP. Obviously, they’re not a lender, they talked about Cross River Bank who handled most of their loan volume, but they would have plugged that in pretty quickly and easily. There’s other things that they can do and we talked while off the air about this new trend and how companies like Gusto are able to access different types of financial products that they would not have been able to just a few years ago. So, they didn’t share any secrets about what’s coming down the pipe, I think we’re going to see companies like Gusto offer a broader suite of financial products and that is courtesy of this trend we’re calling embedded finance.

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

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Podcast 255: Vishal Garg of Better

The CEO and founder of Better.com discusses the state of the mortgage market, why Better has thrived during the crisis, what will it take for 100% digital closings, his thoughts on the IPO market and more

July 10, 2020 By Peter Renton Leave a Comment

The mortgage industry has been through a lot this year. From a liquidity crunch to booming demand to record low rates along with mandatory work from home orders and digital closings. Many mortgage lenders have struggled to adapt to this new normal amid record loan demand.

Our next guest on the Lend Academy Podcast is Vishal Garg, the CEO and founder of Better.com (we last had Vishal on the show back in 2018). Better has met these challenges head on and has flourished as you will discover in this episode.

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

In this podcast you will learn:

The crazy ups and downs in the mortgage market over the past few months.
How Better has been able to navigate the crisis and keep lending when others couldn’t.
The astounding number of people Better has hired in the last three months.
The increase in customer demand they have seen and the level of originations they are doing.
How dominant the 30-year fixed rate mortgage is at Better.
An explanation of their unique business model and how they make money.
Why consumers get a lower rate at Better than even many of the largest banks.
How they have adjusted their underwriting given the changes in the market.
Better’s philosophy for user experience in trying to add value throughout the application process.
How their investors have adjusted their credit box.
How Vishal thinks about their B2B platform and third party partnerships as growth areas.
What he learned as CEO of a lending platform in the last financial crisis.
Where we are on the path to a digital closing of a real estate transaction.
Vishal’s thoughts on the IPO market and what going public would mean.
What is most exciting for Vishal over the next 12 months.

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

Download a PDF of the transcription of Podcast 255 – Vishal Garg.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 255-VISHAL GARG

Welcome to the Lend Academy Podcast, Episode No. 255. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Peter Renton: Today on the show, I am delighted to welcome back Vishal Garg, he is the CEO and Founder of Better.com. Now, we last had Vishal on the show about two and a half years ago and, obviously, a lot has changed since then at Better, a lot has changed really in the last three or four months. I wanted to get him back on the show….they’ve been in the press quite a bit talking about how they’ve been hiring like crazy, things that have been growing like gangbusters and we talk about that, we talk about the reasons behind that and the broader mortgage market, in general.

We talk about how their underwriting has changed based on the current environment, we talk about the technology they’re using to be able to do underwriting and loans applications so quickly, we talk about lessons he’d learned from the previous financial crisis, what he’s excited about in the future and what his thoughts are on a future IPO. It was a fascinating interview, hope you enjoy the show.

Welcome back to the podcast, Vishal!

Vishal Garg: Hey, Peter, how are you? Thank you for having me back.

Peter: Okay, you’re welcome. So, first question I want to ask is where are you today? You’re outside, it looks like. I know you’re based in New York so let us know where you are.

Vishal: Well, Peter, I didn’t know that this was going to be a video podcast and so I was going to do an audio podcast. I have been using COVID as an excuse to start to get out more and travel and walk around the city so my wife and I have a regularly scheduled walk and so I said, oh, you know, I’m going to have this breakaway and do this podcast so, now that it’s on video.

So, we are actually….I’m in the Meatpacking District, as you can see, it’s totally empty, there’s a restaurant that’s opened up so I’m frequenting it. It’s a Mediterranean restaurant and they were kind enough to offer me a table and a place to video, so here we are. COVID is the era of improvisation.

Peter: It is indeed, it is indeed. Speaking of which, let’s just ….why don’t we get started by ……obviously, you guys have been impacted dramatically, as has everybody. Obviously, the impact on Better seems to have been mainly positive, but before we even get into that, let’s just take a step back and look at the mortgage market over the last three months. I mean, just tell us what the state of the mortgage market is and what’s changed.

Vishal: The mortgage market is gone from near death to bursting with activity over the course of the past three to four months since COVID struck. So, in the beginning, COVID struck and the Administration unveiled the capacity for consumers to get a forbearance for up to 12 months and, you know, laid that out in law which I think was just awesome. But, what that meant is that mortgage servicers and mortgage investors were inundated with calls for forbearances because the level of unemployment and the ferociousness with which it hit was just completely unanticipated and in mortgageland, servicers are expected to advance principal and interest and taxes and other things to the investors while consumers might be on forbearance.

So, suddenly, you saw major firms like Quicken, United Wholesale Mortgage, loanDepot suddenly stop originating because they did not have liquidity available to be able to service the consumers who wanted to have a forbearance in place. People who were buying mortgages didn’t want to buy mortgages that were being originated by the market because they were unsure what percentage of people will apply for forbearance. People were thinking it might be 20/25% so, to be out principal and interest on a loan in which, you know, for a year on 25% of your production, that is just billions and billions and billions of dollars and these are not companies that have been well capitalized to do that. And so, fundamentally, it just put a grinding halt to it.

At the same time, interest rates started coming down and COVID started to have a real impact in people not being able to go to the office and so, many, many, many large chunks of the mortgage market was just taken out of commission. At the same time, consumers’ capacity and willingness to refinance their mortgages…they’re sitting at home themselves like working from home, they all want to refinance their mortgages and bring their monthly cost down.

So, it’s just created this triple whammy where liquidity dried up, the consumers’ need for mortgage was greater than ever before and the traditional industry players sitting in their bank branches or the mortgage broker branches all around the country were unable to go to the office and log on to their mainframe system. And so, it’s been absolutely the perfect storm and, you know, the mortgage market is only now really recovering from that.

Peter: Right, right. And so, for your company, specifically…..I mean, I’ve read articles saying that you’ve been hiring like crazy, why don’t you just take us through the specific impact on you guys.

Vishal: What was interesting was, you know, so much of what we do was validated in the past three months. People have been saying, well, I heard everyone else is a digital mortgage company too, everyone else is, you know, doing this other stuff with home finance, people have platforms and, you know, we have been saying, that’s lipstick on a very, very old pig (Peter laughs), but it’s very hard to prove it until things like these happen.

So, one, COVID happened, the forbearance rate on our mortgages that our consumers have taken, we’d always thought, oh, if we give people a better mortgage they’ll be able to better afford it. And, yes, they were able to better afford it and so the forbearance rate on our mortgages was 1/8 that of the traditional conforming loan forbearance rate.

Peter: Wow!

Vishal: And so, it was less than 1% compared to 8% for the average Fannie Mae direct originator. So, that gave us market access to liquidity when almost no one else had it so literally, it was like the top three mortgage originators in the country had access to liquidity and us and that allowed us to stay, keep the lights on and continue to satisfy customer demand.

Two, we actually have a really amazing workforce now, you know, it was 1,500 people before COVID started, it’s 2,700 people now and because this platform is entirely built from scratch, the first new loan origination system for the mortgage industry, the 15 Trillion industry built from scratch in the past 25 years, everything is capable of being done in a browser window or your mobile, including all the work that our own team does. So, we were able to adapt to work from home really quickly and we were able to keep everything going.

And then, the third thing is through this, we’ve learned that we can actually onboard and teach people how to become experts in mortgage really fast on our machine, something that’s not possible actually on your traditional mortgage software system where you have to learn seven different systems, all the hot keys, literally a servicing system that charges per key stroke so people learn all sorts of control, F9 like type a key stroke just to learn how to like use it. We’ve been able to do that so we’ve been able to rise to the occasion and meet our customers’ demand which has been really gratifying and fulfilling for our team as they’re all working from home, other than the people who are most necessary like on the closing team to be able to close home mortgages.

Peter: Right, right. So, how much of an increase in demand have you seen?

Vishal: Since COVID started, we have seen a 3x increase in demand. Since last year, we’ve seen an 8x increase in demand and growth. I think the last time I spoke to you was about two years ago, we are 15 times bigger than we were two years ago. You know, I get the question a lot, how do you know it’s a tech company? Well, you know, it’s a tech company when you can scale 15x in two years.

Peter: Right.

Vishal: We’re not even a tech company, we’re a growth company, that’s really what we are and we can satisfy our customers’ demand, but customer demand has been through the roof and we are just working very, very hard. Our teams are working 24/7 to be able to satisfy that customer demand.

Peter: I’m curious about….you know, you’re getting a lot of inbounds, what about conversions? Are you finding that people are just out there just shopping around, are you finding conversions maintaining what they were before?

Vishal: Interestingly, we are at 40% organic traffic now, 40% from zero two years ago. So, part of that is people are just getting to know us better, but more and more people…I think 18% of users type in Better.com and they’re starting to search on Better when they are looking for a refinance rather than search on other platforms that have traditionally been places where they’ve searched because they know that we have the better price guarantee, we can deliver.

Maybe they’d consider the refinance six months ago, nine months ago, hadn’t gone through with it, now rates are really, really tempting and then conversion has held still. This month, we’re going to fund about $1.8 Billion of mortgages. We are at north of a $20 Billion a year origination rate and the percentage of people going and visiting the site and actually following through into applications and locking continues to grow.

Peter: Okay, okay, interesting. What type of loans are consumers trying to lock in today? Are they locking in, you know, like a 30-year fixed, 15-year fixed, are they doing like 7-year arms, I mean, what are they doing?

Vishal: For all the product differentiation that the rest of the industry talks about and the need to have all these different complicated products, we have like the world’s largest product catalogue of US mortgage products across our 32 investors, but 90% of people go for a 30-year fixed rate mortgage because, fundamentally, consumers are seeking the benefit of longer amortization which lowers their monthly payment which allows them to live….you know, save money and live a better life with all of the other money that they can use.

Fundamentally, the usability of the asset is a long-dated asset, it’s not a car that’s going to go away in five years, seven years, ten years. It’s going away….the house is going to be there for 30 years or longer so it makes sense to borrow money to match. We’ve seen people….on the other side, we’ve seen a demand for cash out refinancing so people are consolidating all their other loans, their car loans, their personal installment loans, their credit card loans and leveraging the value of their homes to be able to do that.

So, we’re seeing demand for that and most surprisingly, we are continuing to see month-on-month growth so we had a pause in March/April for COVID, like the depth of COVID and now, we’re starting to see massive uptake in demand to buy a home, first time home buyers, 40% higher for first time home buyers coming on to the platform. The average age of someone getting a pre-approval on Better has gone from 40 years old to 36 years old in the space of three months and all of that is just indicative that COVID has surfaced this long hidden desire. We thought, you know, the millennial generation, the Airbnb generation, they want experiences not assets. Well, fundamentally, you know, I think now they’re staying at home, they’ve gone to the suburbs, they’re living with family and the hidden expression of desire, the object of desire to own your own home is manifesting itself in a way that we thought was going to take a lot longer.

Peter: Right, right, okay. So, before we go any further, I do want to get you to describe your business model because it’s somewhat unique and the fact that you don’t charge fees, no commissions. Why don’t you just describe how Better makes money.

Vishal: Sure. So, our business model is actually very similar to the business model of companies like Amazon or Kayak or Alibaba is that we are actually a multi-sided marketplace. So, consumers log on to the website, they don’t get charged any commissions or any fees, we don’t have any commissioned employees, you know. So, you get on to the site, you can find your rate in three seconds, you can get approved in three minutes, you can lock your rate and know what your cost of housing is going to be for the next 30 years in 15 minutes and then you can fulfill the rest of the process entirely online.

If you want to talk to someone, there’s someone sitting and waiting to be able to talk to all the time, you have a dedicated loan expert. But, separately, you can also just go through the process entirely by yourself and you’re able to do that with certainty, with speed and backed by the Better price guarantee which means that we will match anyone else’s price out there in the market and then beat it and give you something extra. That provides consumer certainty that they’re not going….they can rest easy on price and focus on process and savings and know that they’re going to be able to close on their new home.

So, we think what we’ve done is taking the most stressful element of the home ownership experience which is how to pay for it and how to like translate a $300,000 house, which very few of us have $300,000 walking around, right, that’s a lot more commas and zeroes than most of us are used to, and turn that into what we can actually digest which is $1,520 a month and that’s our unique, unique value proposition. We turn $300,000 or $400,000 or $700,000 into an affordable monthly payment. That’s what I think consumers can understand.

And because of the way we do it, by getting rid of the commissions, by automating the process, by taking things like homeowners’ insurance and title insurance and putting it all in one seamless, fast, easy flow guaranteed by the Better price guarantee, what we’re able to do is help them basically afford a better house, in a better school district with a shorter commute to work and, therefore, live a better life. I think that’s the consumers’ value proposition on the front end.

On the back end, the way we do it is we built a matching engine that takes consumer attributes, property attributes and matches it with investor criteria. We have 32 investors on our platform that make up about 80% of the value of all mortgages originated in the country. What we’ve done is eight of the ten largest banks are there, many of the largest insurance companies…these are end investors in mortgages and what they’re able to do is buy a cash flow stream with more detail and more data off the Better platform, they submit pricing and requirements to them.

We’ve built a rules engine that’s not like one lender, one warehouse line, one set of underwriting criteria. We take all of their criteria and we are able to match them effectively like a massive, awesome, recursive like VLOOKUP table, right, for all the Excel like, you know, aficionados here. And by doing that, we’re able to give a consumer the best price that they qualify for across the entire range of products that they could possibly qualify for, whether it’s non-QM or jumbo or prime or conforming or Fannie or whatever it is instantly. I think that’s what’s so powerful is that the back end….at the front end we’re basically Charles Schwab e-trade for mortgage and at the back end, we’re basically NASDAQ for mortgage.

Peter: Right. So, you’re making money on selling of these loans, right, that’s the revenue stream.

Vishal: Investors pay us a premium for the stream of cash flows that a Better mortgage produces and that premium is, effectively, not even paid for by the consumer because the consumer is getting a lower rate than they can get anywhere else. It’s being paid for by the commission sales people that we’ve cut out of the picture, it’s paid for by the automation that we’ve done to reduce the cost of like data verification and underwriting and then it’s paid for by the surplus spread that we’re earning the investor by getting the consumer a better house that they can better afford which then leaves the out performs.

Peter: Right, right. One thing I’ve always wondered about your model and I’d love to hear you explain it. You said you got eight of the top ten largest banks all of whom, I imagine, are also providing mortgages direct to their customers. Why do they buy your mortgage at a mark up what they are doing themselves. You know, they’re obviously competing with themselves in some fashion so explain that sort of dichotomy.

Vishal: Yeah, and it’s getting even weirder now because two years ago, we didn’t have a B2B platform. Now, we basically have like Amazon, AWS/third party seller marketplace where for Ally, for American Express, for Northwest and Mutual Pro, a whole bunch of very large consumer brands that are financial services companies, we are their mortgage partner.

So, literally, their customers are actually coming to us and getting a mortgage powered by Better, but, you know, like the way that mortgages work is most banks, whether you look at Wells Fargo, Chase, Citi, their branches don’t produce enough mortgages for their investment box. They actually need like …..Wells Fargo let’s say has a Trillion dollar mortgage book, about $150 Billion is paying off per year and the branches are only producing $60 Billion of mortgages so those 42,000 loan officers and mortgage brokers that Wells Fargo has aren’t producing enough mortgages so they’ve got to go find $60/80 Billion of mortgages.

What’s more, the average bank spends $15,000 to make a mortgage between the commissions, the people, the process, the paperwork, the fax machine, all that stuff, all the old systems and so if they have a choice of paying $15,000 to make a mortgage the old fashioned way, or they have a choice of paying $10,000 to Better to get a better mortgage with a better consumer who can afford a house better and live a better life, they are choosing to buy mortgages on Better.com.

So, we don’t compete with the banking system for their customers and, you know, it’s reverse in some cases like you go to some of our bigger partners like banks, you can get a cheaper mortgage as a Wells Fargo or a Citibank or Chase customer on Better.com funded by Chase, Citi, Wells then you can…at Chase, Citi, Wells.

Peter: Yeah, that’s kind of funny isn’t it? (laughing) Yeah, okay, I get it, I get it now. Now, I do want to talk a little bit about how the underwriting is changing because obviously we’ve got ….there’s a lot of unemployment happening, people that did have a job when they might have started to fill up a mortgage application no longer have a job, I mean, how are you managing that? Are you doing more when it comes to employment verification or other forms of underwriting.

Vishal: The employment verification that we have traditionally done, because it’s API-driven, has always been nearly real-time. So, when your mortgage broker is asking you to fax pay stubs, yes, those are dated, right, because you need to get the physical pay stub and fax it to them or take a picture and email it to them. We’re getting it directly off the API’s so for us to accommodate some of the changes that Fannie Mae has put in place which is to effectively get employment verification right before you close, for us that’s like an API call.

For others, it’s a really Herculean task which is why we’re able to continue to close whereas others have had to literally shut down because they’ve got to shut down the assembly line so like put the process in and then re-tool it and take it out there and then cost a lot of money. The other thing that has changed in small businesses…. Fannie Mae and the FHA have changed their guidelines around small businesses and now they’re asking people, consumers specifically, to provide a year-to-date financial statement so P&L and things like that so, that’s been a pretty huge change.

The mortgage industry software in the industry is not built to underwrite small business income and so like your traditional systems, for them that main frame system to actually go and be able to like effectively integrate Quickbooks into that system, that’s just like a Herculean task for them. It will take them a year, two years so, they’re basically saying, no, they are not underwriting small businesses or for getting a mortgage. Now, imagine you’re a small business owner, you have a nice business and, actually, you want to get cash out of your home to go and to continue to keep that business going or to re-start that business.

We are, fundamentally, not serving the American public by …..look how broken the mortgage industry is with that. And so, we’re able to continue to do that because we were able to integrate a P&L statement and a template for all of our consumers who are small business owners in a day. So, in a certain way……you know, one of the CEOs of a big mortgage bank said this to me, we are able to short the past.

The banks are long the past, the mortgage brokers are long the past and we are able to short the past and the banks and the mortgage brokers are short volatility and we are long volatility. So, volatility is good for us because if rules change, we can move and create and change our rules engine. To change them, they have to change 42,000 employees, underwriting guideline book, it’s just totally different.

Peter: Yeah, yeah, that makes sense. So, before I talked to you, I went back and I went through Better.com and I went into the refinance application and it really was quite impressive to me because I timed it and I spent just over two minutes to basically …..I kind of knew what I was doing, of course, and I had everything ready. It was just over two minutes to go through from start to finish through your process. I did not lock in a rate though because I am actually not looking to refinance, but I wanted to see how it works. So, explain the…I’d love to hear a little on it, I know you touched on it, but talk about the tech that you’re able to put in so someone can go from start to finish, almost finish in two minutes.

Vishal: So, I think there’s a couple of principles that we’ve always thought about, right, and it’s always been a consumer first, consumer focus company. So, the first thing is, how do you get the consumer something of value every single time you ask them to do something. So, when I ask you to fill out a page on a form, what value am I returning back to you, right, and so you might have seen we are flow, we are returning value and providing information and guidance through the flow.

We’re asking you what you’re paying and I think we can still be 10x better about it, but like literally through that entire process we are engaged in transparency and communication with the consumer as to what is happening. That is how, over time, we can possibly displace the traditional mortgage loan broker. The traditional mortgage broker, for all their flaws, has empathy, understands the situation, you know, humans are very good at that, our software system takes that data. What the software system is able to do that any person is not is that immediately starts getting data so when you put in your address, we immediately know a lot about your property, it’s automatically through API going and figuring that out.

When you enter in what the value of your property is, it’s automatically checking whether actually that’s a reasonable value for your property or not and if it’s a flag, it’s not stopping you and saying, hey, you’re lying about the value of your home, it’s actually saying, well, let’s check this, it might be flag a little later in the process and we’re going to have a communication about it. So, we’ve had to not just build an API layer, which a lot of people have been doing or aggregating…so we started in like 2015/2016 aggregating the API’s, then we started figuring out what is data that is not required but helpful.

Then we started figuring out how to order the data around and what we do that, you know, is so that we reduce the number of branches of dependencies and branches of dependencies for a consumer or for a consumer type and stuff like that. And then from there, how do we get the customer in and out on a refi because refi….you know, the consumer already has a mortgage, they are looking for savings, how do we identify that savings amount for them as quickly as possible and give them certainty that they can qualify for it. So, like on refi we think about, you know, “add a click, kill a kitten”, and you know, you can see that it’s like streamline in and out, really helpful for a consumer to be able to see that.

I think there’s more we could do like in terms of surfacing other options, maybe you have other debts that you should be consolidating, maybe there are other things that you should be doing. But I think, you know, the technology behind it and all at the same time, it’s pinging, each unit of data that’s collected from you, it’s pinging the back end engine and fulfilling criteria for 32 investors and saying there’s a check box in that VLOOKUP table equals true for these investors and we’re matching you with a group of investors and then their bids, and then their bids, and then their bids.

Peter: So, are there any of the group….like how wide is that credit box today? Are you finding that’s there more that simply don’t match those 32 investors that maybe would have matched six months ago?

Vishal: So, the non-QM marketplace has shut down a lot and we’ve worked with some community banks and some CDFI’s to continue to provide funding for that product and we’ve actually entered into two financing agreements; one with one of the largest life insurance companies in the country, one with a major, you know, top five bank to be able to continue to finance those because they know that the process is much less error-prone and much less prone to fraud and moral hazard with better than it is in a traditional real-world context.

But, that’s really where we’ve seen shrinkage in the market is in non-QM, then also in the jumbo marketplace. So, we were never actively doing $5/10 Million loans for people, but generally, it’s become much harder to get a mortgage on anything that cost more than $3 Million.

Peter: Right, right, that makes sense. So then, I’m curious about the……you’ve talked about sort of this “powered by Better” product where you’re powering the mortgage origination systems for a lot of these banks, do you see….I mean, when you’re looking at the opportunity in front of you, do you see that as the bigger opportunity or is it just growing your traditional business that’s farming out to 32 investors?

Vishal: I think Better will take 5, 10, 15 years to become a household name and I think, fundamentally, our goal is to give consumers a better life and a better mortgage and a better homeowner insurance policy, life insurance policy, title policy, connecting with a better realtor, allow them to do all these things. The power of multiple brands will always be greater than the power of one singular brand and through the power of multiple brands, through our partnerships with Ally and American Express we’re able to reach consumers that are not necessarily going to go with the new fintech, right, we’re able to do all that.

To give you some context, 68% of the products that Amazon sells are from third party sellers and those tend to be the most stable and margin-lucrative products that are sold. What they get the benefit of is the customer base Amazon has compiled and also all of their fulfillment technology. So, we think, again, you know, we’re going to continue build products, but we think our B2B platform and our third party partnerships are going to be an enormous part of our growth going forward.

Peter: Right, right.

Vishal: I wouldn’t be surprised it it’s 70/80% of our business going forward.

Peter: Okay, we’re running out of time, but there’s several questions I really want to get to.

Vishal: Totally, should I shorten up the questions?

Peter: Yeah. You’re one of the few entrepreneurs that actually was running a company …in the last financial crisis running a lender, a different vertical, obviously, you were with MyRichUncle, it was student loans, but I’d love to hear what you learned from that experience with the last financial crisis that you can take and make and implement into Better in this financial crisis.

Vishal: I would say never get high on your own supply. MyRichUncle was winning, it was winning, it was winning. I even remember like our delinquency rates were 50% better than like Sally Mae’s and the competition and a lot of our competitors went out of business in 2007, early 2008 and we were continuing to win. I thought we would just win and we would make it, but our financing partners didn’t make it. Merrill and Lehmann didn’t make it and so we went down with them so, fundamentally, that’s why we created a marketplace.

It’s not enough to have two warehouse lines, three warehouse lines, five warehouse lines, five partners. We really actually need to come out and find capital, we actually need to create a full, whole loan marketplace and…..you know, that’s the last thing any of these investors were buying yield one, they wanted to take up all the loans. No, we’ve created that true marketplace and I think that desire and that willingness to work so hard in this dark corner that we actually created where we were getting no credit for at Better for a long time, I think that was the hard stuff. I think my experience from MyRichUncle helped me do that.

I think the second thing is liquidity. We just simply ran out of money because our investors stopped funding us and so, what we’ve tried to do this time is we have just had the best financing partners and have continued to be very liquid. You know, we went into COVID with over $250 Million of liquidity and that just allowed us to be bold when others were fearful.

Peter: Right, right, okay, that makes sense. I want to talk about electronic closings because it’s something that’s been on the Holy Grail for real estate, everyone in the real estate ecosystem for a while, but suddenly, we have been forced to have electronic closings. Are you conducting 100% electronic closings end-to-end today and do you see that as sort of the way….when is it going to become standard, I guess, is my question.

Vishal: So, in certain states today, it’s still not possible to do remote notarization. Why? Because there are constituents, local, statewide constituents, that want to have a physical notary present, a physical title agent present and maybe the future is coming fast and COVID has accelerated the future. There are all these very large incumbents, almost operating, you know, operating as someone who wants only….this is a very tribal business, right, like the local lender is key, the real estate agent is key, the local title agent is key.

What COVID has rendered that locality, local proximity nearly useless and so the industry is forced to adopt the future. There are 12 states that still don’t allow remote notarization. We are working with regulators in those states to kind of do that. As much as we can do e-online and e- closing we are doing, but I would tell you, we are very long from 100%.

Peter: Right, right, okay. So, you have been also pretty vocal about saying…..it was last year, so before the crisis you were saying that you wanted to do an IPO sooner rather than later and, obviously, things have changed since you made that comment. So, are your plans on hold, do you still want to be conducting an IPO in the near future or has it sort of been pushed out aways?

Vishal: Well, I’m not allowed to speak about our plans, but all I can say is the future is coming faster (Peter laughs) and I have always held a personal belief that there is a social contract between America’s household brands and the consumer and that the consumer should have the ability to own a stake in the company whose products they use. I use Apple products, I get to buy shares of Apple stock, I understand the product, I understand the company and it creates loyalty.

I think this last ten years of startups have bred this complacency about staying private and, effectively, making a few rich at the expense of the many. So, most of these companies should have gone public when they had the chance. If you think about the big fintechs that have succeeded like Square went public, had a rocky ride, but, I mean, look at that valuation today and then look at all these other guys that…..you know, being public is a good thing. Having your consumers be able to taste the soup and to participate in it is a good thing. So, I firmly believe that and I think, actually, the benefits of being public are better than ever before.

The venture capital community has three to five years of mistakes that they’ve made in the past three to five years of over valuing companies that are going to be paid for by the founders that they’re going to be investing in the next three to five years. (Peter laughs) So, you know, the cost of capital used to be cheaper in the private markets, I think the public markets are going to be far cheaper in the next decade.

Peter: Right, right, that makes sense, okay. So, last question then, what are you excited about most when you’re looking at what Better’s got on top for the next 12 months? What’s the most exciting for you?

Vishal: The ability to transform home ownership for a new generation, one that isn’t used to doing it the old way. I think, you know, millennial home ownership rates are at 35%, whereas like traditionally, most populations as they’ve entered this age have had 75% home ownership, right. The idea that our generation and below, we can double the rate of home ownership, double like make the place that they call home really a lot better, that’s super exciting.

Peter: Okay, Vishal, we’ll have to leave it there. It’s always great chatting with you, thanks for coming on the show.

Vishal: Thank you, Peter, for having me, always a pleasure to chat with you.

Peter: Okay. See you.

You know, it seems to me the mortgage industry is still clinging desperately to the 20th century as many companies are still trying to do things exactly the same way they’ve always done them. Now, with the pandemic it’s not been possible to do that, but as Vishal has shared, there’s some things that, from a regulatory perspective, you simply can’t do digitally and that, I believe, is going to change.

I feel like one thing the pandemic has taught us is that …if it is possible to do something online, then it will be moved online and I think there’s certainly customer demand to do that. There’s no reason why we can’t have an end-to-end digital mortgage closing process for almost all mortgages today. I feel like people may have thought we were five years away from that, my opinion is we’re going to see this move a lot quicker than it has in the past.

Anyway, before I sign off, I just want to remind everybody, if you listen to the show regularly, thank you and I’d really appreciate it if you would leave a review, a 5-star review would be great, but leave an honest review on Apple Podcast, Stitcher, Spotify, whoever you listen to the show, I would very much appreciate it.

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

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Podcast 254: Clay Wilkes of Galileo

The CEO and Founder of Galileo Financial Technologies talks powering digital banking, embedded finance and what the SoFi acquisition means for the future of fintech

July 2, 2020 By Peter Renton Leave a Comment

In fintech today there is one company powering payments behind the scenes that few people had heard of until this past year. But they are the backbone behind 95% of digital banking activity today in this country.

Our next guest on the Lend Academy Podcast is Clay Wilkes, the CEO of Galileo Financial Technologies. Through their APIs Galileo is powering not just payment processing but digital banking, the gig economy, investing and lending today. Theirs was already a fascinating story and then they were acquired by SoFi just a few weeks ago.

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

In this podcast you will learn:

The problem that Galileo was trying to solve when they started.
The companies that are Galileo clients today.
How they have been able to take advantage of the explosion in fintech in the last five years.
How they are working to create a reliable and scalable backbone with close to 100% uptime.
How the changing consumer behavior in the last 3-4 months has impacted Galileo.
What Galileo Instant is and the use cases for it.
The trend of embedded finance and how financial functions are moving to all companies.
The history of their partnership with SoFi.
Why the SoFi acquisition is mostly about lending.
The timing of when the deal came together.
Why he looks at Amazon as a model for how Galileo can work,
How SoFi’s competitors, who are Galileo clients, have greeted this deal.
Why the opportunity for international expansion is so great.
Galileo’s focus for the next 12 months.

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

Download a PDF of the transcription of Podcast 254 – Clay Wilkes.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 254-CLAY WILKES

Welcome to the Lend Academy Podcast, Episode No. 254. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

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

Peter Renton: Today on the show, I’m delighted to welcome Clay Wilkes, he is the CEO and Founder of Galileo Financial Technologies. Now, Galileo is a fascinating company, they’ve been around since the early 2000’s, they’ve kind of aged in the last few years and they are powering some of the biggest names in fintech, you know, companies like Chime, SoFi, BlueVine, Current Aspiration and many more.

According to Clay, they do like….. 95% of fintech companies are using Galileo in some way and what they’ve created is a very simple API-driven system where any company can add a payments functionality very quickly and easily, you don’t even have to be a fintech company or a bank. They’ve worked out a way to do this in a really streamlined fashion, we talk about that in some depth and how they were able to do that.

We also talk about, of course, the acquisition by SoFi, that has been in the news a few weeks back and we go into some depth about the thinking behind that and what this might mean for SoFi and for Galileo going forward. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Clay!

Clay Wilkes: Thanks so much, Peter, nice to be here, thanks for having me.

Peter: Of course, my pleasure. So, I know you’ve been working at Galileo for many, many years, but I’d like to, at least, give the listeners some background about yourself, sort of what you did before that time and maybe even leading into why you decided to start Galileo.

Clay: Yeah. My background is in operating systems and technology, communications. I had taken a prior company public, been retired for about six years before starting Galileo and that was 20 years ago so, that’s my background as in technology. Galileo really started to solve a problem that I saw in financial systems and transformation that I felt like was badly needed to match the Internet age. In the last, you know, call it five to seven years, we’ve really seen a boom in fintech and Galileo has been in an integrated position to benefit from that.

Peter: Okay, okay. So then, when you started it…..because, obviously, 18 years is an eternity in fintech, I mean, fintech didn’t really exist as a term. Obviously, it was companies like PayPal and a handful of others that were trying to do some things in financial technology, but why don’t you just take us back to that time, what was the problem you were trying to solve when you started?

Clay: What we saw was systems that were, you know, large, rigid, monolithic, difficult to work with, not that really API-based at all, not created in a way that would be flexible, scalable, architected in a way that can solve many diverse problems, just not well suited to solving that problems that we felt like needed to be solved in payments. Many of the card platforms were architected to handle the inputs and outputs of a card transaction, we don’t do that. We organize information very similar to the way it might occur, for example, on the file system on your computer, or something such as that just happens to be financial information.

Peter: Okay, So, maybe you could just sort of fast forward us through the last 18 years really quickly in just a minute or so, and talk about how the company has evolved really up until this year.

Clay: You know, if you go back in payments and banking, what you find is credit initially starting in the general store, then into gas stations and department stores, eventually banks, Visa, Bank of America had an idea that they could invite other banks to extend the brand, get merchants on board. That really was all focused on credit, consumer credit, in particular, and revolving credit, bank-issued. Sometime after that, debit came along, again, it was a bank product, access to your DDA funds so you had traditional credit, traditional debit and anything that wasn’t that was sort of thrown into this other bucket and that bucket was about the same time that Galileo started and came about.

So, that was the problem that we were trying to solve….was many different business applications and diverse types of situations. So, it’s our ability to be able to solve that has lent itself to being able to be kind of in the right place at the right time for fintech. Now, we see companies like TransferWise, Chime, Aspiration, Greenlight, Robinhood, Monzo, SoFi, Revolut, Remitly, Paysafe, just to name a few.

You know, Galileo clients by one count, recent count, Galileo was powering 95% of all digital banking in North America. We have five out of the top five UK firms as clients….the top application in Canada is on our platform, the number one in the US, number one in Mexico, we’ve just been in Latin America for two months, but of the top 20 down there, we’ve already signed five. I think we must sign all 20 as clients so, you know, Galileo has done extremely well in API-based payments and banking.

Peter: Yeah. So, that is a pretty impressive track record. You know, it’s interesting because a lot of the companies that you mentioned there and the ones you’re powering, they didn’t exist certainly ten years ago and some of them didn’t exist five years ago. I’m curious about the…..you’ve had this front row seat to this explosion in fintech where you’ve been able to see, basically, a banking industry or a …. there’s been new products that have come out in financial services consistently over the last, I guess, 50 years, but really we have this kind of explosion in the last five years where things are really changing.

I’d love to kind of get your take on how you sort of …….. you had your business for about 18 years or so, but in the last five years things have really taken off, give us your take on how that’s happened and how you’ve been able to take advantage of that.

Clay: Yeah. Somebody mentioned to me that we were an overnight success 18 years in the making so it’s been a ride, it’s been interesting to watch. My own personal belief about this is that we’re still in the early days of fintech. So, a lot of people are thinking, wow, you’ve seen a lot of progress in the last five years and that’s true, we really have, but my own personal belief is that we’re going to see a lot of change in the next five years.

And so, we saw this with the Internet, you know, the Internet exploded, took off, it’s a big deal and Internet 2.0 kind of came along and we saw a bunch of new leaders emerge. In my personal belief, we’re going to see that again in the world of fintech over the next five to ten years, there’s still a lot of stories to be told. I think they have companies like Jio in India and, you know, this global phenomenon that are…..TikTok, just a lot of the world that are still yet to be defined so, I believe, we’re still very early.

We are going to see a response focused largely on consumer by the incumbents, I believe that way it’s coming. Galileo has already seen it, many of them are reaching out to Galileo to trans-solve these types of problems. We’re also going to see and have seen that we’re going to see much more of the emergence of Big Tech in the world of payments. So, we’re by no means done, in fact, we’re just, just, just barely beginning.

Peter: Right. On that, we feel like we’ve only just begun, but there are certainly some digital banks that have reached really impressive scale, several million customers here in the US, same internationally… I mean, you look at Latin America, you’ve got Neobank with more than ten million, I don’t know what the latest is, it’s way more than ten million, I think, as far as customers there.

So, as we grow, I mean, there’s going to be…..and as these companies mature, we have the need for really bank-like reliability, bank-like dependability where you go to the ATM or you load up your mobile app and it always is working, it’s 100% of the time. So, what are you doing at Galileo to really ensure that you can provide that kind of …..the level of uptime, that dependability that some of the largest banks have really made us all accustomed to.

Clay: Well, that’s a great question. There’s a lot that we’re doing there. I want to take this slight exception with your point which is the big banks have made us accustomed to. Actually, you know, if you look back over 2019, Wells Fargo had an outage that lasted ten days, Bank of America had an outage that affected 60 million customers, Capital One had an outage that affected 106 million customers. So, the big banks aren’t immune from this, you know, Amazon, the king of data centers, had an outage that have affected 2.3 million businesses, I’ve personally, been stranded by Delta Airlines three times and not for flight shortages, but for IT outages and Apple who spends trillions or billions, at least, on IT infrastructure has outages almost continually.

So, outages are a phenomenon and the same that goes along with technology despite some of their biggest and best and most diligent efforts on the part of the big banks and other technology firms and Galileo is a part of that. Despite that, I agree with the thesis which is Galileo has done and is doing a lot and we’ve had a very, very good track record related to uptime, fortunately. One of the things that Galileo play was the incident in October and one of the things we’ve done since then, just to give you a sense, we had a project after that called 10X and what 10X enabled us to do was to scale to ten times our largest client.

So, in short, what this was essentially 140 million active accounts representing somewhere in the order of 10 billion transactions and rating scale of about 5,000 transactions per second. So, we’re doing all that we can to ensure there that we’ve got massive scale and capability. The good news is that the architecture is fully horizontally scalable, you know, very much like any well architected cloud-based solution today.

Peter: Right, right. And so, given the changing environment here over the last three months where there’s been certainly lots of pockets of activity that has scaled dramatically, we’re seeing digital banks adding new customers, banks adding new deposits at record rates, how has this changing consumer behavior really impacted Galileo? Have you been ramping up along with this increase in demand?

Clay: Galileo is seeing a massive growth since the beginning of the pandemic, just as an example. I think about the infrastructure we’re using right now, Zoom, and the growth that they have gone through and the growth at Amazon. Quite honestly, we always hear that Amazon was built for the pandemic, and fortunately, for many of us it was in place, but I would say that’s true, digital banking as well. Our clients have seen just incredible growth over the last three months.

Just to give you a sense of that, for existing business, Galileo is up month over year…..last month, 165% which is just absolutely incredible growth. So, we’re doing all that we can and fortunately things are working extremely well right now and the growth has been incredible. We’ve got clients that are adding, in some cases, 50,000 new accounts a day, many of them have got a waiting list of over a million/a million and a half accounts that are waiting to get on. It’s really a function of card production not a function of scalability press so there’s a lot that is going on. Many of these companies like a Chime, a Robinhood, we just saw recent numbers coming out on Current, you know, these companies, Dave.com, they’ve all scaled incredibly well. Galileo’s powering all of that.

Peter: Right, okay. So, one of things that….. I presume you might have seen the column by Matt Harris last year about embedded finance because as you’re talking and as I look at Galileo, I feel like, you know, you’re really part of this movement toward embedded finance where….you know, maybe we’ll step back and talk about Galileo Instant which from my understanding of it is sort of a way….it’s like a plug and play for different kinds of financial services and it seems like this is a trend that’s really going to get…it’s getting going and it’s got legs, as far as I see. We’d love to sort of get your….firstly, explain what Galileo Instant is and then talk maybe more broadly about the trends toward embedded finance.

Clay: Galileo has got an incredible platform for it’s digital banks that we’ve been talking about here this morning. If you look at those digital banks and new digital banks coming along that wants to go, like great consumer experience, they’ve got some ideas around what they feel that data will like, Galileo tries to provide the services that would enable all of that, but the process to do it is expensive and it takes time.

So, you know, for example, you would have needed to raise several million dollars, you need to know something about banking, and about fraud and about disputes, compliance & regulation, all of the rest of it. It’s expensive and it’s not easy, it’s difficult to get into, but there are many businesses that just simply want to make a payment, they don’t want to be a payments company, they just want to make a payment. So, that’s that thing that we’re trying to do with Galileo Instant. It’s a product that we announced late last year, we’ve been in beta over the last several months, the product is going live this month and we’ve had 450 companies with inbound interest to sign up for and gain access to the API’s that power Galileo Instant.

To answer your question, the problem that Galileo Instant is trying to solve here is …..you know, I have a client, excuse me, a neighbor that is a ….he owns a steel manufacturing company that uses welders to assemble the steel, 10,000 welders and he asked me, do you have a product that will allow me to pay my welders by the weld. I said, wait, you give me about two months, the answer to that is, yes, and so that’s one application. Google has 23 million YouTube influencers that need to be paid every month so if you think about that and that particular portion of Google, I could imagine, doesn’t necessarily want to be a payments company although Google itself might be, they just simply want to make a payment.

So, whether you’re talking about a welding company or Google, we see thousands of these applications and we’ve done some engineering and recent testing around what does it take to get into this type of business and we’ve reduced it from many, many months, you know, the sales process could be months, the integration could be months, the marketing ramp behind all of that on the part of our client can be many months. So, you can see one of these digital banks take anywhere from 12 to 24 months to really get started and begin to market their product.

Whereas, on Galileo Instant we’ve reduced that to a number of minutes. So, somebody can come to the Galileo Instant product and gain access to it’s all API-driven and within a matter of minutes we’ve eliminated all of the friction that goes into needing to make a payment and you can begin to do it. You can do it in a co-branded way so Google could do it, co-brand with YouTube, etc. and it’s pretty powerful. We’ve seen this on the acquiring side, but not really much innovation here at all on the issuing side so I’m pretty excited about it. These are the types of products that I was talking about, I mentioned it earlier, around Fintech 2.0. We still have got a lot of headroom, another 20 years work, at least.

Peter: Right. So, you think then that we’re going to…..the companies you just mentioned there, the welder, Google, these are not financial firms, but, obviously every single company on the planet has a financial function because, otherwise, they’re just there by definition….

Clay: Right.

Peter: ….so you think what you’re going to see is, you know, a range of companies, it sounds like from what you’re saying, even down to the reasonably small companies that can offer their sort of co-branded financial services, is that what where we’re moving?

Clay: Yeah. We’ve seen….in a law firm that needs to pay folks that are running satchels around town, bicycles….we’ve seen a restaurant firm that is paying millions of restaurant workers and they want to do it on an inter-roll that doesn’t necessarily match to what is available and traditional applications. Again, it’s not easy to find these types of applications or enabling technologies, and to my knowledge they’re not out there today at all so I can see this range in from big to small.

Peter: So, I want to talk about SoFi. Obviously, we know the company really well, we had Anthony Noto on the show last year and you have a partnership with them for quite some time. If you could give some sense of the history of your partnership with SoFi and when you sort of started to think that it could be more than just a commercial relationship.

Clay: You know, my first meeting with Anthony Noto, I was impressed with him, he’s a great leader, he’s got incredible skills, he’s an analyst, but as a CEO, he is driven, he’s great, he’s smart, he’s quick on his feet, he’s great in front of a group of analysts. So, if you’ve had him on the show you’ve seen probably some of those skills come through. You know, he and I hit it off, we share a vision. SoFi is in my view, has been fairly quiet although they raised an incredible amount of money. They, at one point, have raised more money than all of the fintechs combined, you know, $2.5 Billion so, very, very impressive.

On the lending side, they have products available through consumer packaged type of approach and the idea was, could we take those products, wrap Galileo’s enterprise grade API’s around them and make them available out to our clients where we’ve done really well with the clients on that debit and banking side and provide these lending products in such a way that it’s easy to integrate, easy to gain access. That’s an exciting opportunity. I think this gives Galileo, you know, several years, a three-year or a five-year head start over anybody that’s even thinking about doing anything similar. It takes a long time to build what SoFi has built, it’s a really incredible business and very capital intensive.

Peter: Yeah, I know and I think…..I mean, it’s been running for years and, obviously, Anthony hasn’t been there since the beginning, but SoFi had built up a machine, particularly when it comes to consumer lending, student loans, student loans re-financing.

Clay: Home mortgages.

Peter: They invented student loan re-financing, basically, and they’re a very impressive company. What you just said there sound like….what you’re saying is that a company like Chime, a company like Dave, a company like Revolut may offer lending and it could be powered by SoFi, is that kind of what you’re saying?

Clay: Right. So, the lending products….the way that I think about SoFi is really as a,,,,yes, they’ve got a great consumer frontend and a great consumer experience. Galileo powers SoFi Money side of that, but they really have….on the backend they have this…I refer to it as a digital securitization pipeline and it’s an incredible business. Anybody that wants to try and rebuild or compete, as you say, has got a lot of work to do to put all of that in place. What we want to do is make that available through our API’s.

Peter: Right, right. That could be super interesting because, as you say, SoFi….I mean, when you look at sort of the securitization volume in the consumer loan space, in the student loan space, they really have dominated that and it’s been really interesting, it will be interesting to see how that really expands. So, I take it then from what you’re saying, you didn’t run like a full-like acquisition process where you wanted to hear from a bunch of different potential acquirors, is this something that you really just…you started talking with Anthony and the team at SoFi and wow, we really should so something more together.

Clay: Right. It was more that latter. There was, definitely, not a process that we ran, timing of the deal was interesting, it all happened from mid-March on, think back to mid-March we were accelerating in the deepest financial trough we’ve been in, even deeper than the changes immediately preceding the Great Depression. You know, 35% correction in whatever it was, 28 days, beat the Great Depression by two days, in terms of that acceleration, that deceleration, I should say. So, that was kind of the backdrop to all of these.

It takes tremendous fortitude on the part really of Anthony and that board to finish the deal. Forbes wrote it up as the first all-virtual deal in history, all of the diligence was done virtually because of the pandemic so there’s a lot of notoriety to it in that regard, but, yeah, we were just feeling like we had a shared mission and a shared opportunity here and I’m a big believer in that.

There’s a role model for this in the industry, you know, you look at Amazon, they’ve got this great consumer business, right, and AWS is just a tremendous infrastructure business, but one of AWS’ biggest clients is actually Netflix which is a big competitor to Amazon on the video on demand side. So, that interesting dynamic is there and we believe will play out and play out well and the receptivity to the combination of SoFi and Galileo has been tremendous. Our clients all greeted this with eagerness because it really provides them opportunity.

Peter: So even though, you know SoFi has a number of different products which are directly competitive with many of your clients….obviously, you talked about the Amazon, Netflix example which are obviously directly competitive, so just like that….there hasn’t been anyone who’s sort of getting nervous about what’s this going to mean for us when you’re owned by SoFi….it sounds like what you’re saying is there’s no one that’s expressed some hesitation with continuing to do business with you guys?

Clay: Yeah, largely what we’re seeing is meeting the deal with, you know, open arms, embracing the opportunity. Galileo is committed to be in an independent business, we’re ring-fencing the data and data sharing, you know, we’re doing that not only from a policy perspective, it’s actually….we’re putting in place the things that are needed to make sure that our clients…..protecting our clients’ information, our client information roadmap, strategies, etc. is key to what we do.

We already power…I mentioned a few of our clients, but we power competitors today, if you will. So, we’re not in the business of sharing that information between one client and other clients, that doesn’t serve our or their purpose. SoFi is really no different, we’ll, as I’ve said earlier, make available these products and that’s the overall strategy, but having Galileo remain independent, serving the broader financial services industry, serving fintech specifically is absolutely the directive and the mission.

Peter: Right, right. So, because obviously SoFi has a range of different products, but is this…..what your clients are most interested in, is it the lending access to sort of the lending machine that SoFi has done, or is there something more?

Clay: Well, we’ve got a number of products that are on the roadmap if you think about the SoFi Invest product which is a fee-free fractional share kind of capability of market. You know, Galileo….we intend to make that product available also through our API’s. Our expansion, we haven’t talked much our expansion into Latin America, we’re also expanding into Asia Pacific.

We recently purchased a broker dealer there and we will drive, we will power the cash management solution for that, but, in the meanwhile, we’ll also go into Hong Kong and provide capabilities to the other 160 fintechs that are there. We’re moving into Singapore and into Japan as well and we’ve had a lot of inbound interest from that region over the last several months and really since the announcement of the SoFi acquisition, so there’s a lot that we’re doing there and it isn’t limited to US lending. We’re seeing opportunity that’s more global and more expansive than that.

Peter: Right. For sure. And so, it sounds like from what you’re saying, in a lot of these regions there really isn’t a Galileo equivalent, is that what you’re finding when you go around the world?

Clay: Yeah, very true. We’ve seen this in Latin America and our move into Latin America. You mentioned Neobank earlier, they had to solve the problem themselves, but as they look to expand outside of Brazil they’re looking beyond that. Same thing with Uala as they’ve looked to expand in Mexico and Colombia, beyond Argentina. If you look at Asia Pacific, there’s really no capability there. That’s true, let’s be honest, despite the success in the UK, I mean look at the infrastructure providers there, they’re somewhat limited as well. So, there really is a global opportunity to take these services international.

Peter: Okay. So, last question as we wrap up, you talked about international, you talked about Galileo Instant, what’s sort of the focus for the next 12 months? Maybe just answer that question open-ended.

Clay: Yeah. I think it’s two of three things. So, it’s focusing on the integration of the lending products, API-based, (garbled) lending products, it’s continuing the expansion into Latin America, we’ve identified beyond Mexico, we’ve identified six countries, we’re moving very quickly right now into Brazil and Colombia, but, right behind that, we’ll be in four of these top countries in Latin America.

We’re also expanding into Asia Pacific now, as I mentioned earlier, Hong Kong, Japan and Singapore. So, that’s a big part of what we’re doing over the next 12 months. In the meanwhile, Galileo Instant will have launched and we’ve had a lot of interest and excitement around that. Lots of clients have actually already integrated to it and a big launch will come here in the next, call it 30 days, and it’s going to be exciting to watch that product begin to emerge as a kind of new way of doing business in fintech.

Peter: Well, that’ll be interesting to see, we’ll be following along. Clay, I very much appreciate your coming on the show today.

Clay: Peter, thanks for having me. I really appreciate it.

Peter: Okay, see you.

Clay: Thank you.

Peter: One of the trends that I think is probably the most fascinating right now, and that is this movement towards embedded finance which is…. I mentioned that Matt Harris, Bain Capital had those two articles about it late last year and I find it fascinating because really what it comes down to is that Galileo Instant is going to help facilitate this. Any company can offer financial services and any company can offer really pretty customized, exactly to their needs like whether it’s 10,000 welders that want to be paid by the weld or whether it’s some sort of a bank that has a very specific need.

A lot of these things can now happen and so we’re going to see fintech continue to expand out into non-finance companies. I think that’s going to be the most interesting thing of all where finance will become invisible and I think that’s really where we’re going, it’s going to be all happening this decade. I think it’s going to be very exciting and Galileo is certainly going to be a company that is going to help facilitate all that.

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

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

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

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Podcast 253: Marwan Forzley of Veem

The CEO and Founder of Veem talks payments, replacing bank wires, business lending, the Paycheck Protection Program and more

June 26, 2020 By Peter Renton Leave a Comment

Historically, sending wires is one of the more painful tasks that any business has to do. It has usually involved going to a physical bank branch, filling out paper forms and waiting while the banker processes the wire. Not surprisingly, fintech has attacked this inefficient process.

Our next guest on the Lend Academy Podcast is Marwan Forzley, the CEO and Founder of Veem. Veem has created a web-based wire replacement that is inexpensive and simple. They have also added lending into the mix and even helped their clients with the Paycheck Protection program.

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

In this podcast you will learn:

An explanation of what Veem does.
The typical use cases for Veem.
How they have been impacted for the covid-19 crisis.
How their technology works.
How Veem is different to Transferwise.
Why it is easier to grow a business when it is a two-sided marketplace.
Why there is a benefit to the receiver of a Veem payment.
Their typical transaction size.
Why they decided to create a working capital product.
The details of their Paycheck Protection Program offering.
The partner banks they worked with on the PPP.
The five different methods they have to move money from point A to point B.
How they use cryptocurrency as a transportation mechanism.
How Veem makes money.
The scale of Veem.
How they market their service.
What Marwan is focused on for the next 12 months.

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

Download a PDF of the transcription of Podcast 253 – Marwan Forzley.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 253-MARWAN FORZLEY

Welcome to the Lend Academy Podcast, Episode No. 253. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Peter Renton: Today on the show, I am delighted to welcome Marwan Forzley, he is the CEO and Founder of Veem. Now, Veem is an interesting company, they have focused on business-to-business payments, or as he likes to say Venmo for businesses and they’ve got a very technology-centric approach and we get into that in some detail. We go through an example how it works, we talk about the use cases, but the company also does more than just payments.

They have started up a working capital product, they’re also involved in the Paycheck Protection Program which we also talk about, we talk about the blockchain technology…the five different rails they have to actually send payments. I thought that was fascinating and we talk about what’s next for the company. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Marwan.

Marwan Forzley: Thank you and thanks for having me.

Peter: Okay. So, I’d like to get this things started by giving some background. I know this is not your first rodeo so, why don’t you give the listeners a little bit of background about what you did before Veem.

Marwan: Thank you, I started Veem back in 2014. I used to run e-commerce for Western Union. I got into Western Union through an acquisition of a company called eBillme which I founded and sold to them. Prior to that, I was in another startup that ended up with Nokia so I spent my career back and forth between startups and very large companies.

Peter: (laughs) And now, you’re back in a startup again.

Marwan: Yeah, it’s addictive, I guess.

Peter: Right, right. So then maybe….let’s just take a step back and talk about Veem and how do you describe it, what do you guys do?

Marwan: We make it really simple for businesses to pay and get paid around the world. It’s a wire replacement service, simplest way to describe it is it’s like Venmo for businesses globally. So, for example, you’re in California, you want to send money to a company in China, you log-in, all you need to do is enter the email address of the receiver in China (inaudible) and that’s it, the receiver gets a message…hey, you’re getting paid, this is the US dollar amount, shows your local currency. When you accept the payment, we pick up money from one country, deposit money in another country.

Peter: They have to link their bank account, I imagine, right, to get their money.

Marwan: Yeah, you link up your bank account on both ends, on the sending side and the receiving side.

Peter: Right.

Marwan: Essentially, we do this in 110 countries, 50 plus currencies, we have about 200,000 businesses that sign up to use Veem.

Peter: Okay, okay. So, I did say, it’s a wire a replacement then there’s a huge variety of companies that would use wires so, is your target market like anybody could send anything internationally, is that….who is your target market?

Marwan: Actually, domestically, I mean, we have quite a lot of customers that use us in the US to move money from California to New York, for example. Instead of using a check or bank wire, they use us because it’s a lot simpler than wire. So, they take off use cases customers have, they use us to pay suppliers, they use us to pay labor like contractor payments, they use us to move money within their own bank accounts and sometimes they use us to collect money from buyers that they have around the world. That’s the various use cases we’ve seen with Veem.

Peter: Okay. So, you said you’ve got 200,000 businesses, I can see that you could scale that…you look at Venmo or PayPal, I mean, PayPal has like a couple of hundred million businesses I think….not businesses, a couple of hundred million accounts so you’ve certainly got a lot of runway, I imagine, that you can do it.

So, I’m curious about the fact that we’ve had this sudden economic downturn, has this really impacted you guys as well because we’ve got….you know, there’s just less commerce happening, obviously, less international commerce as well. So, how have you been impacted over the last few weeks?

Marwan: The business has had amazing performance for the past three months, during COVID, on all measures really, you know, accounts, revenue, volume and I would describe it as follows.

COVID created two different worlds, one world is doing quite well and the other is struggling and it’s going to take some time for it to recover. It all boils down to the formula itself, like six feet apart, and so if you’re required……anything that requires physical exchanges of goods or services, that world is going to take some time.

So, that’s like physical retail and travel and all the things where you really depend on people next to each other to exchange the goods or require the service. In my world, I have a lot of e-commerce merchants, a lot of online businesses, a lot of supply chain and that world benefited actually from the disruption because the sales shifted online. So, what happens is their businesses picked up and we’ve benefited from that.

So, again, it depends on what segment you’re in, but you know, e-commerce has done phenomenally well this past quarter. I’m not alone, I mean, PayPal had the same guidance, Adyen, Shopify, Amazon and all these businesses, they’re all on the high end at the moment with the public markets so that’s the broader phenomena that’s going on.

Peter: Right, right, okay. So, that’s really interesting and I imagine, that…..I mean, I’d love to sort of talk about the interface and how…..because obviously everyone has got their accounting system, mostly small businesses are going to have Quickbooks or NetSuite, or Xero, or something like that, how does that actually work? Can you do this from inside these accounting suites, or do you need to go out to Veem and do interface, tell us how the tech works.

Marwan: Yes, we’re plugged into various accounting packages, Quickbooks, Xero, NetSuite and we’re plugged into Magento, Zapier, other systems as well. So, we’ve always had this belief that we should go to you and live in the context of the environment that you work with as opposed to the other way around.

So, for example, if you’re within that suite and you have a bill that you need to pay, the bill shows up, Veem has a button on the bill that essentially connects Veem as one of the applications to your environment. So, you click on it and we take the data from NetSuite, we pas it to Veem through the API and then we send the payment out to their recipient. So, that’s an example of a model where you do it from the context you’re in, from the environment you’re in within NetSuite when the bill shows up, you do it on that bill.

And then the nice thing about that model is when the payment is completed, all the status of the transaction is reported back to NetSuite so, it closes it out for you. So, instead of manually marking it, you know, that this transaction has been paid, or this invoice has been completed, you can synchronize it, just the data, it’s coming back to Veem, we send it back to NetSuite. That’s an example of how it all works. Does that make sense?

Peter: Yeah, yeah. So, you know, we have to send the occasional international payments and what we’ve been using is Transferwise, so maybe….why are you guys better, what’s the difference between Veem and Transferwise?

Marwan: So, transfer wires seems to be more consumer than business. We tailor more to the business environment and business environments require integrations into accounting systems, payment approvals, account approvals, you have accountants managing different accounts so the entire software allows for that configuration to happen.

You can do single transactions, you can do mass where you upload a file and it sends it to a whole bunch of customers. And also, the way we work, we have both the sender and the receiver so what happens…basically, you can use the system to either send, or request money, it’s bi-directional. So, Transferwise is a remittance model where you send money, there’s no request capabilities…I mean, there is, but it’s not a model where you have the receiver on the platform that’s invoicing or requesting, it’s mainly send.

Peter: Right.

Marwan: So, these are all examples of differences between the Transferwise system and the Veem system. Our model is also dependent on an email, that’s all you need to send money. Their model is a bit heavier on the user experience in that you need to get the receiver’s bank account information and bank details before you send money out.

Peter: Yeah, yeah, got it. When we chatted recently, you were talking about how, you know, you have a two-sided marketplace and all these others have a one sided marketplace because, I imagine, when someone sends a payment to another company, you suddenly have the possibility of having this company or they’re going to have to actually accept the money they have to release create the account, right, so you suddenly have a new user you can market to. Is that kind of how you’ve grown the business?

Marwan: Yes, that is correct and that’s because there’s also value to the receiver. So, one of the things that happens in bank wire is when you send the money, first of all, you as the sender, you have to get a whole bunch of information on the receiver; the receiver’s name, address, business name and address, currency for Swift code, intermediary banking code. Then you have to do it before cut-off time and then when you send the payment you really don’t know what happens to that payment until the receiver tells you, hey, I got your money.

And then it’s equally painful to the receiver because the receiver doesn’t know when they’re going to get paid so what happens is they’re going to go check the bank account all the time to make sure that there is money. When the money shows up in the bank account, you really don’t know sometimes what’s going to happen, like how do I take that money and figure out which money belongs to what invoice because the statement details when the money is deposited in the bank….there isn’t that much information given to you that this money belongs to that invoice.

And so, what we do at Veem is we add benefit to the receiver so the receiver then is able to track the transaction so they see money coming to them, they watch it come to them. We also give them preferential pricing on foreign exchange and then they can reconcile it so they know what money belongs to what invoice and they get the data and the payment together. So, when you receive the payment, you’re receiving the payment along with the details of the payment, invoice, contract, whatever it is that needs to be passed from the sender to the receiver because, generally, when you’re doing bank wire, you have three different systems that are siloed. You have the information, the data itself, the invoice that goes back and forth between sender and receiver on email, or other systems.

There’s the payment itself that happens on banks and there’s the accounting systems where you close things, you reconcile them. So, what we’re doing here is we’re marrying these three things together so that you can originate from your accounting system. The payment and the data come together, they go together; the receiver picks it up, they know which payment belong to what invoice, they’re able to track the transaction and get better exchange rates.

Peter: Right, got it. And so, you’re talking businesses here…I mean, a lot of businesses send very large payments around….I mean, given the fact that you’re a completely, you know, online play, how much can you go up to, what’s sort of a typical transaction size?

Marwan: You know, a typical transaction is wire replacement so it’s somewhere between, you know, $5,000 to $10,000 is the bulk of the payments. We’ve handled transactions as lows as like $500, sometimes $100 for like expense payments or commissions and we’ve had transactions that are very large like a few million, $5 Million, $6 Million that are, you know, for container payments, for large shipments so it varies quite a bit. There isn’t a limit, but what happens is the more….the bigger the amount, the more KYC and KYB required.

Peter: Right, right, understood. So, you don’t just do payments, I know you also have a working capital product for loans so, tell us why do you create that product and tell us a little bit about it.

Marwan: Yeah, one of the things that we noticed when we were talking to customers is that working capital is a pain point to them because that’s another silent process because, generally, they have payments somewhere and then they go apply for working capital loans or credit lines somewhere else, generally, with lenders or banks. A good chunk of that data required to approve a loan is actually payment data and KYC data which we’ve already got on you so, what we’re trying to do is basically take your KYC history on Veem, your payment history and, essentially, automate underwriting decisions, but in the context of the transaction.

So, for example, if I have an invoice that I need to pay…a good example of that, I have the invoice, it’s $10,000, I can either pay it now in full, or I can pay it in six monthly installments. Essentially, what we do is we take that data, we pass it through partners, they underwrite it and, essentially, you get to pay on installments.

The flip side of that, for example, another use case, when the invoice was created, you can also have the invoice paid on the spot which is a factoring type product and then we can have the lender underwrite it. So, our role is….in our case, we’re handling the customer, we have the customers on the platform and we work with partners to underwrite, we originate, essentially, the loans to the various parties we work with.

Peter: Right, right. And is this….I mean, obviously, the lending business is a monstrously big market, you’re really focusing on your existing customers, it sounds like, or is this something that you’re going to scale up at some point?

Marwan: We think of it more like payments is a really good way to establish a relationship with the business, with the customer. If you accomplish the most important task which is earning their trust, once you move their money, they basically trust you. With that, we start providing them other things that can benefit them. It only makes sense when the data and the payments are all integrated together….

Peter: Right.

Marwan: …so it helps you do something within that you cannot do it somewhere else. If you do it somewhere else, you do it with a restriction. So, we’re not necessarily like going into lending on our own, we’re more like up-selling to accounts that have a payment relationship with Veem. We’re, basically, using that data to help you with lending decisions. A good example of that, or a good analogy will be Square, Square started with payments and, of course, they have capital and capital is, you know, it’s a good chunky business for Square so, that’s a good example or a good analogy.

Peter: Right, right, got it. You know, I’m on your website on my other screen here and I also noticed you’ve got a Paycheck Protection Program offering here. So, tell us a little bit about that, you know, I wouldn’t have thought logically you guys would be heavily involved in that, but tell us about why you created that program.

Marwan: So, the beginning of COVID, we started talking to customers and they were asking us more questions about the Veem capital product because there was a big chunk in lending needs because of the market, except that a lot of the lenders started having issues because of the market. So, at the same time, the SBA started the program with the PPP project. What’s interesting about that whole setting, you know, what’s required for PPP was basically authentication of accounts so you can KYC and KYB the customer, you can collect data to pass to SBA and you’ve got to essentially manage the work flow.

So, interestingly enough, that’s we do with payments so we take KYC and KYB history on you to get you to use a system to pay that’s why we have to KYC you and then we’re managing the work flow to pay or request the payments, it’s actually a work flow. And we’re very used to collecting documents from you to then essentially use that data to process the payments. So, it was not necessarily a big, you know, procedure that required a very different set of expertise to go, you know, do a PPP Program.

So, what we ended up doing was we essentially took the initial data from the customer, passed it to the banks and the bank was actually the one underwriting and managing the interactions with SBA. So, just to be clear, we’re not a lender, we’re simply, you know, like an agent that passed the information to their partners and then they underwrite the loan.

Peter: Yeah. I read somewhere, I think Cross River Bank was one of the banks you guys were working with, is that the primary one you work with, or you have a whole range of them?

Marwan: That was the primary….we had other ones, but Cross River was the main one we worked with for the PPP Program.

Peter: Right, right. I’m actually going to get those guys on the show here in a little bit, an amazing job with so many people from the PPP. So then, we touched on the technology, but I wanted to…..I know that this is a blockchain-based system, or crypto currency type. The core of what you guys are doing is based on that so maybe…..no, you don’t mention it, I mean, there’s one little link to blockchain on your website, I can’t find it pretty much anywhere else so tell us about…..you’ve been around for a long time and obviously, post-Bitcoin, but still….tell us a little bit about your kind of experience with blockchain.

Marwan: Yeah. So, we’re quite versed in blockchain matters and crypto matters, we’ve been using that technology since we started, since 2015. We used it to do a synthetic cross from one currency to another so the way the system works is essentially, for every transaction there’s a buffer that routes between different rails, we call that multi-rail.

So, we have five different methods of moving money from point A to point B, we have our own bank accounts which is the default method, we use cards, we can move money to real time to an account associated with your debit card, we work with third party payment providers, we have blockchain and we have Swift as well for very large transactions along different currencies.

So, in the context of blockchain, we basically scan the various cryptos, figure out which one is the best to work with, which ends up being…like the bulk of Bitcoin, that’s where the volume is. So, what we do is we go from US dollar to Bitcoin to Bitcoin to pesos, for example, so if I’m sending money to Mexico that’s what’s happening. So, Bitcoin becomes a way to cross from US dollar to pesos. Now, we don’t really watch the Bitcoin price and we don’t carry inventory, we go in and out.

Peter: Right.

Marwan: We do it so that, regardless of what the price of the currency, we use it as a transportation mechanism to take US dollars and convert it into pesos on the other end. The system is agnostic to all the rails and actually the system is agnostic to any of the cryptos. It simply stands for whoever has the most volume and just picks it up. In practice, like the bulk of the volume is on Bitcoin so that’s what ends up happening.

Peter: So, does that mean the bulk of the payments you’re processing internationally goes through Bitcoin?

Marwan: No, no. So, Bitcoin is one of them like crypto is one of the rails, we have five different ones.

Peter: Okay.

Marwan: Within crypto, the bulk of it is like, I mean, all of it is Bitcoin. So, the process on Bitcoin…..just to be clear, I am not holding Bitcoin.

Peter: Yeah, I realize that, yeah. So, when you say you’re agnostic on the channel to actually transmit this money, what’s the deciding factor? Is it just purely a cost play that…what the…..

Marwan: No, no. The inputs to the model is basically the size of the transaction, currency per country and then when do you need it by, what time do you want the transaction to land on the receiving end. And so, it goes from anywhere from real-time to same day to next day and sometimes, depending on the country if it’s really long tail, can go longer. So, these are the inputs. Now, what you get from crypto that’s different than others in that the transactions…I can cross from…once I have US dollars and I want to covert to pesos, that cross is basically near real-time because I’m going in and out.

The other thing is, because it happens on the blockchain, I can track the payment. I can Google Map my payment, again, I know exactly where the payment is at. And also, there’s no banking hours, you can do transactions in the middle of the night and you can tell the customer, hey, your money is in the country when the banks open, you can have it. At least, you know, the customer knows and so, it derives benefits that are different than what you typically get from the other systems.

Peter: Right, right, okay, that makes sense.

Marwan: And we don’t……and just to answer your question though, we used to have it more prominent on our communication, except that when we’re dealing with customers…..like one thing that we learned doing this is that customers don’t really care about payments.

Peter: Right, (laughs) they just want the money.

Marwan: Yeah, they just want to ship their T-shirts or boxes or whatever they’re doing, that’s fundamentally what they want. The last thing on their minds is actually how payments work.

Peter: Right.

Marwan: And so, we kind of simplify the communication. We basically explain how we send the payment, when do you need it by, for instance, the mechanics of actually how it works.

Peter: Right, right, okay. So then, what’s your business model? How are you making money?

Marwan: So, we make money in a variety of ways so, foreign exchange is one of them. When you cross currencies from US dollars to Euro to Pound to RMB, we make money on foreign exchange. We also make money on fees for domestic payments and for payments that originate in US dollars and stay in US dollars internationally so, same currency transactions. Domestically, it’s a dollar per transaction and cost for US dollars is $20 per transaction. We also make money on origination fees to lending partners for bringing transactions when a customer wants to underwrite their invoices so we make money that way.

Peter: Right, right, okay. So, basically, if I’m sending money out of the country, I’m paying $20 and I’m sending money inside the country it’s $1.

Marwan: If you’re sending money internationally, it’s free. The receiver decides which way to take the money. If they decide to keep it in US dollars, we charge the receiver $20.00. If they choose to take in local currency, there is no extra charge, that’s it. So, it’s the sender…..unless you’re sending domestically, the sender is free all the time.

Peter: Right, got it, okay. Thank you for the clarification. So, can you give us a sense of what scale you’re at, I mean, how many transactions you’re doing a day. Just give us some sense on the scale.

Marwan: We have about just over 200,000 businesses, it doubles pretty much like every year, the system doubles in size. So, it gives you an idea of the scale of it and a good chunk of the reason why it doubles is because of the way it propagates because every time there is a sender, there’s also a receiver and sometimes the sender becomes the receiver and the receiver becomes the sender, On it’s own, actually, it does propagate and so, roughly every 12 months the number of accounts double in size.

Peter: Right, okay. How do you market, are you really relying on this sort of network effect to grow, or do you have really a targeted marketing programs you’re running?

Marwan: So, a good chunk of the accounts come from the network, from our customers. That’s actually the majority of the accounts, then there’s ….the new ones tend to be…online is the biggest channel, we get them through the web, we have a sales team as well for the larger accounts and we get a bunch of accounts from partners, Quickbooks, Xero, NetSuite, like from the various partnership channels, But, the majority of accounts come from customers who are happy using the system, they introduce us to other customers who then themselves like it and bring it forward to other customers. That’s the larger portion of how the system grows.

Peter: Right. And to be clear, it’s a web-based system, right. Is there a Veem app, or is it all just web-based?

Marwan: It’s web-based, but it’s adaptive to mobile phones so the language that we write in, all the screens are adaptable to whatever device you have. It’s not a native app where you download it, but it has a pretty optimized experience to your mobile phone.

Peter: Right, right, okay. So, last question then. You’ve a really interesting company here and obviously this can become…I mean, the potential is massive, when look at say the next 12 months, what are you focused on?

Marwan: So, we’re looking at more countries, more currencies, more integrations. Customers love integrations so like all the work we’re doing with Quickbooks and Xero, we have a list of packages that customers that want us to integrate into. We’re definitely interested in partnerships, in general, know how to distribute the product, but also add value to the experience of lending, in particular, is of interest to us.

We have a particular view that, you know, payments and lending are tied, they need each other. So, in general, when you’re servicing the customers and the thing that they need us as payments is lending and when they go to ask for any of the lending products, you need payments as a history so that you know whether you can actually underwrite or not because that’s where you get the historical value of the account. So, these products are tied together and so, we are definitely interested in working with partners to figure out how do we best optimize that experience to the user.

Peter: Right, right, okay. Well, best of luck, Marwan, it’s been fascinating chatting with you today. Thanks for coming on the show.

Marwan: Thank you for having me.

Peter: Okay, my pleasure.

You know, I completely agree with Marwan when he said there that payments and lending are inextricably linked. You’re talking about the two largest verticals in fintech, payments and lending, and they’re not really staying as separate verticals anymore. I mean, we’re seeing that with Square, with Square Capital. I mean, PayPal has a very large lending operation now and on the other side you see Kabbage getting into payments, Fundbox is getting into payments.

So, we’re seeing this blurring of the lines and that combined with this trend towards embedded finance is where you’re going to see even non-financial companies offering payments capabilities, offering lending capabilities and we’re seeing that already with companies like Shopify. It’s going to be super interesting to see how this trend continues and Veem is well positioned here. I mean, they’re really building their business with payments, but lending is going to provide a good source of revenue, it sounds like, going forward.

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

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Podcast 252: Sean Salas of Camino Financial

The CEO and Co-Founder of Camino Financial discusses the challenges facing the Latinx small business community today and what his company is doing to help

June 19, 2020 By Peter Renton Leave a Comment

Small business owners have always struggled to get access to capital. And while fintech has made a big difference, for many in the Latinx community it remains a serious struggle. This struggle is something the next guest on the Lend Academy Podcast knows all too well.

Sean Salas is the CEO and Co-Founder of Camino Financial, a fintech lender pioneering access to affordable capital for underbanked Latinx small businesses. He shares the background on his fascinating personal story of how his family had to move back to Mexico when he was 12 because of his mother’s failed business. For Sean, this is a personal mission and one that he is serving with great passion.

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

In this podcast you will learn:

Why he decided at the age of 12 he would become an entrepreneur one day.
The size of the under-banked Latinx small business market.
The typical terms of the loans they offer.
What Camino Financial does better than anyone else.
A profile of their typical small business borrower.
The industries they serve.
The types of data they use to underwrite these loans.
What surrogate income underwriting means and how they use it.
Why they have a digital-only approach to this market.
How they pivoted to offering PPP loans and other government assistance.
The geographic footprint for Camino Financial.
How the Latinx community are coping in the current crisis.
How Camino Financial are funding their loans.
The volume of lending they are doing outside the PPP.
The three stages of the post-COVID world.
Their plans to become a Community Development Financial Institution.

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

Download a PDF of the transcription of Podcast 252 – Sean Salas.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 252-SEAN SALAS

Welcome to the Lend Academy Podcast, Episode No. 252, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

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

Peter Renton: Today on the show, I’m delighted to welcome Sean Salas, he is the CEO and Co-Founder of Camino Financial. Now, Camino Financial is a really interesting company, they are small business lender focused on the Latinx community and as you’ll hear in this interview, this is more than just a business to Sean and brother, his twin brother and Co-Founder, Kenny.

This is their life’s work and you can hear the passion in his voice where he wants to do everything he can to help Latinx small business owners and we go into some detail about how he’s doing that. We talk about the impact of the current economic crisis, we talk about how they’re funding these loans and the typical terms that the loans have and the typical small business owner that comes to Camino for a loan. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Sean!

Sean Salas: Thank you for having me, Peter.

Peter: My pleasure. So, I like to get these things started with a new guest by giving the listeners a little bit of background. So, maybe you can tell us what you did before you started Camino.

Sean: Yeah. Before I started Camino Financial, my twin brother and I…..I can never introduce myself without introducing my twin, we’ve been partners in life on the day we were born and right before starting Camino Financial, we were both getting our MBAs at Harvard Business School. We used that opportunity to incubate what is Camino Financial and before that, we were pretty much cutting our teeth on Wall Street in investment banking and private equity.

Both of us worked for two of the largest minority-managed funds where they focused on investing in minority entrepreneurs, or communities with a high concentration of minorities. So, that’s really where we got our backbone, so to speak, in business and really helped us propel what Camino Financial is today.

Peter: Okay. So then, it sounds like you incubated…you had the idea while you were at Harvard, maybe tell us, where did the idea come from originally for the company?

Sean: Yeah. No, our story really stems back from our upbringing. Both of us are sons of an entrepreneur from Mexico that came to the United States in pursuit of the American Dream and I know that sounds very cheesy, but quite frankly, that’s the story of many immigrants that come to the United States. And so, like an immigrant with very big dreams, my Mom came to the US and she saw entrepreneurship as the only avenue, given her limited educational background, to generate real wealth for herself, her family and her community. She opened over 30 restaurants here in Southern California.

Peter: Wow!

Sean: Yeah, while pretty much raising six children so, super Mom all at once, and so we grew up in that environment. Unfortunately, my mom did lose her business, it was like a house of cards that came crashing down after 25 years of very hard work. Kenny and I were 12 years old at that point in time and my Mom was devastated. So she decided, guess what. I’m going to remarry, move back to Mexico with my two youngest sons and restart my life and that’s actually what happened. You know, for a 12-year old kid moving back to Mexico, that was pretty traumatic in its moment, but quite frankly was a blessing in disguise. We grew up in Mexico from 12 to 20 years old, something that I think does reflect, in the cultural and nuance of how Camino Financial does work today with our members.

We came back to the US and re-pursued that American Dream, once again the cheesiness, but we got to re-live that immigrant story, coming back to the United States while we were citizens and we are citizens, you know, in a way feeling what it means to come to a country in pursuit of something bigger than what you can achieve in any other place in the world. And so, that, effectively, laid the ground work for what we ended up doing, you know, going to UC Berkeley than Wall Street, as I mentioned, and then incubating Camino Financial at Harvard Business School.

Peter: So, is it fair to say then that the idea really germinated well before you even came back to the US?

Sean: Yes. I mean, it’s so funny, my Mom wanted us to be Mexican Mexicans and I considered myself a Mexican American. She really wanted to keep us in Mexico, but when you’re a 12-year old kid and you see your Mom lose her business, there is anger that is born deep within you and I’ll never forget the day that we pulled out of our home in Hidden Hills. We were born in a way with that silver spoon and it was taken away from us and the entrepreneur in me was born that day, there’s no question.

So, it was born many years before Camino Financial became a thing and we called it Camino. It wasn’t a light bulb moment where I was in a cold shower and oh, all of a sudden, I need to help, Latino businesses but it’s ingrained in my DNA, so to speak. Now, that said, I do think there were very….working on Wall Street, specifically in private equity and working for a fund that had an orientation towards investing in minority entrepreneurs which is always, as I mentioned, a theme in my life.

I felt that private equity as an investment vehicle is (inaudible) to invest in Latino-owned businesses, in particular, probable because while this market is big, the average size of a Latino-owned business, measured by our research, is about right in the range of $200,000 in revenue per year. That’s one third of the size of non Latino-owned businesses and in private equity we wouldn’t invest in businesses that generated less than $7 Million in EBITDA, or profit cash flow. And so, private equity, of course, was catering to those very few businesses that are very large and made it, but the great majority, call it 97% plus of all Latino-owned businesses generate less that $1 Million in revenue and skewed towards that $200,000 range.

Peter: Okay. So then, El Camino means the way, right, is that the translation?

Sean: El Camino means the way and so we called…..so, what we’re doing at Camino Financial is simple. We’re a fintech platform pioneering affordable credit to under-banked Latinx businesses which we quantify to be a $50 Billion untapped credit in this market. Now, the reason why we use the word Camino deliberately is because we get it, not all businesses are going to get the optimal interest rate they want, right.

They’re going to be charged in the high 20’s, low 30’s with our core product and so, what we want to do is help them build a path to more money over a longer term and at a lower cost. And so, in order to create that path, we need to pair capital with an educational experience that enables them to formalize their business, develop a credit history and, quite frankly, get the paperwork in order so that they can then qualify for a lower interest rate loan.

Peter: Right. So, let’s maybe dig into that for a little bit. So, tell us about the loan product, what’s the range of interest rates, what’s the typical loan size, loan term, that sort of thing.

Sean: So, our core product is a micro loan, it’s a loan between $5,000 to 75,000. The annual interest rates are between 25.5 to 40% and the term, we start at 24 months which is very unusual for our industry, as you know, and we go up to 36 months, there is no pre-payment penalty so, we’ve been able to benchmark our data. And so, our average APR is 33.5% to make it comparable with other products at a 24-month term. The average APR that we’ve been seeing by competitors is in the range of 41.4% at 11-month term and with daily or weekly payments.

So, the net result of our product compared to benchmark….the result is in the 50% lower monthly payment with a Camino Financial loan opting being equal on the loan that we’re giving to the borrower so, we’re really giving our borrowers a lot of cash flow relief. Fundamentally, what we’re doing versus anyone else…we can talk about tech and AI, but, fundamentally, what we’re doing better than any (garbled) is we’re giving our members the benefit of the doubt. If you don’t mind, I’d like to tell you a little bit about our members and how they look like.

Peter: Sure.

Sean: So, we’re talking about members…25% of them don’t have credit history, immediate account balance is $2,300 in their account at point of financing and our average ticket size is $18,000 and there’s a very large amount, I can’t specify the percentage for purposes of their own security, are undocumented here in the United States. So, when you even look at those terms and parlay that with the credit profile of our members that are truly thin file, cash-based micro enterprises, not even small businesses, you’re going to call that a micro enterprise when you’re generating around between $200,000 to 300,000 in revenue per year, right.

So, these are micro enterprises and you give these terms to them, it’s like God-sent, they’re more than grateful and quite frankly, that’s just the starting point once again. Our view is that while we think we’re competitive day one relative to benchmarks, we think that we need to facilitate that camino, that path to more money at lower interest rates and over a longer term.

Peter: Okay, So then, tell us a little bit more about the borrowers themselves like what sort of businesses are they, what industries do they operate in?

Sean: Yeah. So, the big industries are construction, that’s about 26% of our business; retail, 10% of the business; transportation, 10.4% of our business; restaurants and bars, about 9.6%; and then the rest is distributed to what we call, probably defined, professional services…when I say the rest, I mean, the next big chunk is professional services and they’re your janitors, your landscapers that are serving the market.

Peter: Okay. So, I’m curious about this, particularly you say you’ve got some undocumented workers….I mean, a lot of them don’t have a credit history so, what data do you use to underwrite these people. I imagine, you just can’t say yes to everybody ……

Sean: No, we can’t.

Peter: …so, how are you…….maybe we’ll just start with that, what data are you using when there is very little data available?

Sean: Yeah. So, one thing worth noting is I do want to challenge the notion in the market that there is limited to no data available. These businesses do have bank accounts.

Peter: Right.

Sean: Seventy five percent of them, of our borrowers, is actually a bigger proportion for the primary market, but our actual borrowers can actually get loans, 75% do have credit history, maybe thin file, right, and so we can do a lot like other industry leaders with bank data. Now, there’s nuance to that have data, let’s go back to the day transaction data. I mentioned that the minimum account balance of borrowers at point of financing is $2,300, I told you the frequency of transactions in that bank account may be a lot lower and a lot of other alternative lenders are comfortable lending to because they also want to see that transaction frequency, but there is data there, right.

Once again, after the credit….you know, not to forget about the credit score, we don’t look at the credit score, but looking at the credit file, although thin, there is data there. We can look at credit utilization, we can look at credit history and we can look at types of credit, etc. So, I think there is data there, not to mention you can get really fancy and look at the metadata of your application, evaluate the user journey, usually, that’s better to use not so much for the credit decision, but for fraud detection, and so, therefore, there is data available.

I don’t want to give the notion that, you know, because our audience are people that are actively investing, or alternative lenders themselves, they get it and I don’t want to give them the notion that the data sets are fundamentally different. Now, I do think, given our specialization in the market, given the fundamental benefit of the doubt that we’re giving in our market……I think how we cut the data enables us to risk rank our model for the thin file, cash-based micro enterprises.

And it’s not Latino-focused, one, we can’t nor do we want to ever discriminate from that ethnic or culture standpoint, but it’s worth noting that thin file, cash-based micro enterprises, there’s nuance to that. And so, by specializing we’re able to look at the data sets, I would say 80% of them are probably similar to that of other alternative lenders, right, and then we derive, given our specialization, some risk ranking criteria that helps us derive a credit decision.

Now, I will tell you something that we do that others don’t do, Peter, is that given the cash-based nature of our business, we have to do something that’s very prominent in emerging markets, but for X or Y reason, I don’t hear it, or I rarely ever hear it here in the United States. This is a methodology called surrogate income underwriting. Now, surrogate income underwriting means you basically need to look at data sets and certain data points and derive from them what real cash is flowing through the business and the household.

So, for instance, let me give you an example. I can’t predict what Warren Buffet’s net worth is based on the car that he drives, I think he drives a Cadillac, but when we’re talking about evaluating credit for businesses at the base of the pyramid, right, you can, with a high degree of certainty predict what the real cash flow is based on using different data points because the disposable income is so limited for this demographic that you can make some really smart guesses. Based on that, not only can you make a credit decision, but more importantly, you can actually better understand what the capacity for repayment is for that given borrower.

That’s probably one of the trickiest parts of this demographic, but we’ve been able to get really good at that and once again, this is nothing new, it’s just very prominent in emerging markets where you have an absence of that trackable cash flow data that we’re used to having here in the United States.

Peter: Okay. So, I guess what you’re saying is one of the data points is what type of car they drive and how much that’s worth and, obviously, a lot of these cars will have a car payment you can….I imagine, you can pull data on that information. But, I’m just curious about that, I mean, you say, that like the surrogate data is really….you’re just trying to look for data anywhere you can get it, it sounds like what you’re saying.

Sean: Absolutely, given our specialized view on this demographic, we’re just going to use that data direct, probably different conclusions, of different…..we’re going to find that data maybe in different ways and other alternative lenders are using it.

Peter: Right, right, okay. And so, how are these people coming to you, is this all 100%….like, I imagine, there’s…I presume you have an app, or is it all on the web, or do people come and see you in person, I mean, how do the people fill out applications?

Sean: Our application is 100% online and 100% tech-enabled. Now, we just hit our sixth-year anniversary about a week ago and, Peter, there were so many people who have been lending into this market for many years before we started that would laugh us out of a room when we told them we were doing a digital-first, digital-only approach with our market…that they needed to see you, they needed to touch you and in the absence of that act, you would be able to earn their trust. Forget about the transaction fees, we can take that part out, but the trust element is a critical piece of the puzzle in acquiring this market at a low cost to make the unit economics work because, as I mentioned, our average loan is $15,000.

Other alternative lenders are about $25,000 to 30,000 so we have to work with roughly half of what they’re working with, in terms of their earnings at least on day one. And so, what that means is we had to go tech first, we had to be tech-only and what we found is that….we were even pleasantly surprised ourselves that this market really has embraced a tech-enabled process, as long as we pair that with a very trustworthy brand.

So, I’m always a little embarrassed to tell people this, but came the idea to have our own mini series on Discovery Channel en Espanol called emprendedores which means entrepreneurs in Spanish. We have created one of the largest bilingual content databases in the United States and so if you Google prestamos para pequenas empresas which is small business loans in Spanish anywhere in the United States, we’re going to be the number one ranked website there.

We’re also rigging for other different terms that have nothing to do with credit, but has everything to do with helping businesses grow and be bigger and better than themselves. So, predominantly, we saw an opportunity very early, and not only be tech-first, tech-only, but also build our go-to-market strategy around that. And then, embellish that with the brand and authority that gives people the trust that they need because if they don’t trust you, I can tell you right now, they don’t trust you, they’re not going to transact online.

Peter: Right, right. So, you’re based in Los Angeles so, obviously, you’re lending in California. Where else are you lending in this country?

Sean: So, we lend nationwide with the exception of New Jersey, North Carolina, Hawaii and Puerto Rico, but other than those states, we lend nationwide. Now, not surprisingly, the three largest states that count for 55% of our volume are California, Texas and Florida in that order. And so, those are very prominent states with a high concentration of Latinx businesses, but, at the same time, it’s worth noting that there are a lot of other businesses out there, 45% of businesses out there are also looking for loans outside of those three core states and they’re fairly, you know, evenly distributed.

I would say probably New York is a distant fourth place, but still worth noting, Illinois as well, but at the same time, when you look at rest of the nation, you’re pleasantly surprised to see the distribution. In fact, it’s worth noting a little bit of a plug on our research report, we release a quarterly Latinx small business survey based on the application data that designates an ethnicity so, we can’t include the non-designated application data, but with the designated application data we have about 27,000 applications.

We use that data to show the world where our businesses are distributed, what the average FICOs are, what the average revenue is, what are the trends in that data and you can see that geographic footprint in that report.

Peter: Right. I’ve looked at those reports. I think you do an excellent job, really provides a great service, I think, to the industry. So, I want to talk a little bit about the current state of play because you’ve been reading a lot in the press how…you know, we know small businesses are suffering.

They say it’s been black and Hispanic businesses that are suffering more, those own owned businesses are suffering more than others so, maybe you can give us a very good insight into the Latinx community. Why don’t you tell us a little bit about how they are coping, how they’ve coped over the last three months.

Sean: Yeah. So, just to show you some stats, research states that about 91% Latinx businesses won’t be able to access the relief fund that are made available by the government. Forbes also had an article that noted that over 50% of black and Latinx businesses expect to close their doors if the current environment withstands for the next six months. And so, yes, we were very early in raising the flag to the industry and to the government that black and Latinx businesses are being left behind, not only in small businesses, but also in healthcare and in systemic injustice.

So, this is a very polarizing moment for these minority communities and the call to action needs to be made. We need to not only acknowledge that and put data around the market so people learn about it, but we also need to create nuanced and specifically designed products and services around these markets so that we can reverse this trend.

And so, to answer your question directly, yes, we are seeing our businesses hurt. I’m proud to tell you that our very quick response to this was leveraging that large content database and that team behind it and completely re-positioning Camino Financial and it’s blog around a COVID hub, COVID and other relief resources hub because it’s worth noting, as I mentioned, that many of our members are undocumented so we need to think broadly in terms of what those resources are, whether it’s direct access to funds or other forms of relief, that enable them to grow their business. So, that’s a narrative that we’re hearing a lot and I will underscore that narrative.

Now, I do want to mention, Peter, that we also don’t hear the second narrative as often. That second narrative is a narrative that black and brown business owners are resilient, they are as resilient as any other market here in the United States. Let me explain why. The reason why they’re resilient and, yes, we just went through, before pre-COVID, an 11-year expansion market, but the reality is that many of these businesses, these underserved businesses have been living through many micro recessions in their own growth. Well over 80% of them operate in to low to moderate income areas, socio economic disparity gap has only amplified itself in these last 11 years pre-COVID, this is all pre-COVID.

And so, they know how to live in a recession-like environment. In fact, they don’t just operate at a business level, they operate at a household level, and so the household could subsidize volatility cash flow of the business by, whether it’s the wife, whether it’s the kid now working for the business, but finding supplemental forms of income to subsidize the business at different points in times. The flexibility of these businesses, given how small they are to reinvent themselves and recover from these very difficult points in time.

And so, I will note that while we are seeing a market that has, predictively and unfortunately, was very predictable, and I have a lot of articles on this subject well before people started throwing about these numbers about 91% of Latinos and 95% of black aren’t going to get the PPP funding and 50% will close their doors if this continues. Well before that, I was predicting that they were going to be left behind, but, despite that, I think in many ways, they also expect that and adjust accordingly. It’s worth noting that because….I know one logical question is, how many of your borrowers did get PPP, how many of them got EIDL funding.

So, you know, when we talk about that I can tell you that, yes, many did not and I’m proud to tell you, we’re actually actively putting our own research together to show you how creating that content hub, creating that direct channel communication with the market enables you to over invest in a substantial way in terms of those that do qualify for PPP funding, actually getting PPP funding.

Anecdotally I can tell you, many of our members did get PPP or EIDL funding and we’re going to put some research out there to demonstrate how some of even the soft touches of education really made a world of difference, not just around the PPP funding design which does need some work, but also just being a real distribution channel content and capital to enable them to take advantage of resources that exist.

Peter: Right, right. I’m looking at your website on my other screen here and right, front and center, you talk about the Paycheck Protection Program, you talk about other relief programs, you’ve got a whole section here. So, you quoted this 91% number, I imagine, your customers, percentage will be much lower, those that are going to partake…by definition, I imagine, they’re more educated and they trust you and they’re going to look at what you’ve done.

Sean: That’s exactly right. And so, we’ll be releasing more information on that in the coming weeks, but I can tell you anecdotally, based on the data that I’m looking at, that that number is going to be a lot lower than what the market benchmarks are, 91% for Latinx is not receiving PPP funding.

Peter: Yeah, yeah, okay. We’re almost out of time, but a couple of more things I want to get to. So, let’s talk about the other side of the equation here. I read something about Goldman Sachs, how are you funding your loans, where is the capital coming from for these businesses.

Sean: Yeah. You probably won’t be surprised, but we actually got our money from Mexico (both laugh). We needed to get money from investors that are equally willing to take that leap of faith in the market so we found that in Mexico. So, Credito Real is a publicly traded company in Mexico, it has a $2 Billion balance sheet lending business, multinational, with assets not only in Mexico, but in Central America and in the United States across different lending verticals, including auto financing, payroll financing and now small businesses.

So, starting at the end of 2018/2019, they partnered with us and we’ve really been able to fly since they were a critical part of our ability to really prove out the investment thesis in this market. And so to date, we’ve lent over $60 Million in loans and we’re barely getting started. You know, pre-COVID, we were on track to do in the range of $100 Million this year and, you know, very much like any other of these businesses, we…..the market is big, $50 Billion so we still consider that to be very small, but, in the scheme of things, we are the largest Latinx-focused lender in the United States and we are barely getting started.

Peter: So then, I’m curious about….I imagine the loan volume is going down with PPP, with the crisis, but you’ve maintained a certain level of lending throughout, I imagine.

Sean: Yes, we have, but like the benchmarks that I’ve been hearing, volumes are down between 50 and 80% and we’re within that range. We lend to businesses that are earning and we really need to recognize our (inaudible), you know, our private business is designed to expand a company that was growing. These businesses don’t need growth capital, they need repeat capital and they need recovery capital which is at below market rates.

That’s not sustainable for the long run, but finding new ways of changing our capital structure and the participants in that capital structure so that we can give better terms in the market even beyond relief and we could qualify that as recovering. So, we’re actively working on that because the last thing we want to do is put our businesses at risk, especially during these times. Everyday, all day we’re always about, you know, underwriting the loan for mutual benefit and so we need to be very thoughtful and careful about how we deploy capital during these times.

Peter: Right, right, okay. So then, as we look forward to, hopefully, coming out of this crisis sometime in the near future, when you look at what’s on top for Camino, what’s coming up for you, guys, what are you excited about?

Sean: What I’m excited about and if you don’t mind, I’m going to share a very brief framework. The framework of our strategic thinking is that post-COVID’s in three stages, the three R’s. The first R is Relief, the second R is Recovery and the third R is Reinvention. And so, as we think about Relief, you know, in our case it’s been a content play…predominantly, some fintechs have been able to be PPP lenders themselves if they have sufficient scale to be able to do it cost effectively. In our case, we did a predominantly content play.

The second one is Recovery, right, Recovery is really how can we design our products for below market return. So, work with different philantrophists, work with different players in the space that want to help this market and then design our products around that Recovery/Rebuild Capital, I’d like to call it that. So, right now, we’re right in that stage so, we’re actively talking about launching a Recovery Fund….actually, where you live, Peter, there’s a….. (laughs) I’ll let you know as soon as we get that going……

Peter: Okay.

Sean:….and so, to really enable Latinx businesses, particularly the undocumented, that haven’t been able to even get access to a loan and let alone recovery.

And then the third stage is the Reinvention stage, this is the part that gets us all really excited. I can tell you that Reinvention is just going to amplify things that we’ve been identifying for a very long time, the use of tech and AI in order to not only automate our processes, but to make better, smarter credit and fraud models, the need for transparency in the process giving our borrowers the best market terms available, the importance in hybrid of a marvelous UX, UI, but one that super serves specific market niches.

The fourth element that I’ll talk to you about in the Reinvention Stage is really coalescing our stakeholders, not just the alternative lenders, right, but the government, private investors and in my case, organizations called CDFI’s, Community Development Financial Institutions. I think it has been noted in PPP 2.0 there had been dedicated allocations to CDFI’s to lend into the underserved markets that we’re talking about, but there’s been a lot of under investment in these markets. The adoption to technology has been slow, with the exception of a few CDFI’s out there.

Quite frankly, it’s been hard for us to become a CDFI ourselves. I hope to announce in the next few months we too will be a CDFI. And then, how can private investors participate in this process, right, as it relates to creating tax incentives in order to decrease the cost of capital, how do banks play a role, how do we modernize CRA, the Community Reinvestment Act, which is really designed for small businesses in the 90’s, you know, really anchored around businesses between branches in order to (inaudible), but, quite frankly, they’ve been closing branches and even banks are just going south. How do we modernize that?

So, that’s going to be an area of our focus at Camino Financial and, you know, I do think there is a silver lining here. I even think the Black Lives Matter protest have really raised a lot of awareness on the need and disenfranchisement of Latin and brown communities and I think there are the best…..alternative lenders are the vessels in which we can enact that change, but we also still need to work with the government, we need to work with banks, we need to work with private investors to make sure that we construct through this capital and deploy this capital in very efficient means that are nuanced for this market.

Peter: Right. We’ll have to leave it there, Sean, best of luck. I’ll be following along with your progress closely and I wish you all the best as you grow your business.

Sean: Thank you so much, thank you for having me.

Peter: My pleasure, see you.

Now, these are challenging times for any small business lender, certainly, Camino Financial will be no different and I do appreciate the fact that, you know, Sean is already talking about the recovery phase of this crisis. He did mention how Latinx business owners have been impacted in a dramatic way during the crisis, but he is looking at the recovery phase and the fact that he is so ingrained in the community, it seems to me that he’s got such close ties with many of his borrowers.

Those are the sort of things that are really going to hold him in good stead, hold Camino Financial in good stead as they emerge from this. I think, it’s companies like those that really maintain a connection with their customers and the borrowers really appreciate the extra efforts they’ve done. I think they are the companies are going to come through this crisis as well.

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

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

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Podcast 251: Rohit Arora of Biz2Credit

The CEO and Co-Founder of Biz2Credit talks small business lending, the PPP, loan approval rates, partnering with banks, M&A and more

June 12, 2020 By Peter Renton Leave a Comment

The small business lending space continues to focus on the Paycheck Protection Program. But as this program winds down, it is legislated to end on June 30, what happens next for the small business lenders?

Our next guest on the Lend Academy Podcast is a fintech industry veteran. Rohit Arora is the CEO and Co-Founder of Biz2Credit, a small business lending platform that has been around since 2007 (he has been on the show twice before). While his company has been very much focused on the Paycheck Protection Program (PPP) Rohit is looking at what comes next for small business lending both from a fintech and bank perspective.

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

In this podcast you will learn:

How Biz2Credit has adapted to the pandemic.
Their experience with the PPP loan program.
Why there is still demand from small businesses for the PPP.
The lending they are doing outside the PPP.
What is happening with non-PPP lending approval rates.
How Rohit sees the non-bank small business lending space changing.
The trends Biz2Credit is seeing with their own borrowers regarding loan payments.
How far the cost of borrower acquisition has dropped.
A description of their Biz2x lending-as-a-service platform.
How their conversations with banks have changed in the last two months.
Why they gave their Accelerate SBA program away for free.
How the PPP program will impact SBA 7(a) lending programs in the future.
The biggest change that Rohit hopes will happen as a result of this crisis.
The scale that Biz2Credit is at today.
Rohit’s thoughts toward M&A in the industry right now.

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

Download a PDF of the transcription of Podcast 251 – Rohit Arora.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 251-ROHIT ARORA

Welcome to the Lend Academy Podcast, Episode No. 251, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Peter Renton: Today on the show, I am delighted to welcome back Rohit Arora, he is the CEO and Co-Founder of Biz2Credit. Now, Biz2Credit is one of the old guard of online lending, they’ve been around for many, many years. This is actually the third time I’ve had Rohit on the show and I wanted to get him back on because, obviously, small business lending is front and center these days with the PPP and the struggle for small business.

I wanted to see what Biz2Credit has been up to there, he has very interesting things to say on that. He also talks about the future of small business lending as we know and he thinks there is going to be a lot of changes happening there, we talk about his Biz2X product which is sort of a banking-as-a-service type product, we talk about the SBA and the need for the SBA to approve more fintech lenders and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome back to the podcast, Rohit!

Rohit Arora: Yeah. Thanks for the invitation.

Peter: My pleasure. Just for those who probably might not be aware exactly what Biz2Credit does, what don’t you give us just a brief description of your company.

Rohit: Yeah. Biz2Credit is a fintech lending player, we’ve been around for 12 years, this is our second recession that we are seeing, very different from the first one. I think there has been great learnings and also, what we foresee is the world’s going to change very dramatically after this crisis.

Peter: Right, right, indeed. So then, maybe let’s just start with that, how have you adapted to the challenge? I can see you’re not in your office at work, I know you’re based in New York so, just tell us a little bit how Biz2Credit’s adapted over the last couple of months.

Rohit: Yeah. So, I think the biggest, you know, adjustment has been working remotely. We are having a digital player from our inception, but still working so remote. For everyone, it has been a great discovery and a great learning process personally. I think from a consumer side, or from a customer side, what we have seen is a tremendous adaption of digital tools and self-service, you know, mindset which wasn’t there earlier. And, we have seen that happening with our partners also, like Paychex and some of our other critical partners.

You know, the level and amount of collaboration has increased tremendously as two to three months time and I think there is more appreciation about doing things in a more digital and a more streamlined manner so, I think that has all been a positive. I think the negatives has always been that, you know, in an office you have better collaboration, you can exchange more ideas, you can do more stuff and we were really set up for that, you know.

We got a great place in One Penn Plaza last year, invested a lot of money on the offices hoping that it might help us grow our business even faster, foster more innovation so, I think that part, one is going to miss is if one is not able to go back to offices.

Peter: Right, right, understood, understood. So, let’s get right into it and talk about the PPP. I mean, you’re a small business lender and that’s been sort of dominating the conversation here for the last couple of months so, why don’t you just tell us about your experience with it and what’s happening today.

Rohit: Yeah. So, the PPP Program, I think it’s a very interesting program, it started so suddenly, it was not really well thought of, initially, a lot of confusion, over, I think, three/four weeks then it got better. So, initially, we were referring a lot of customers, thousands of customers to our banking partners and then sometime during the last week of April/early May, we got our own license to be a PPP lender. We also are one of the first fintech players to get the Fed facility also, you know, pretty quickly we offered that. So what we have seen is three things, three distinct factors.

One is, especially amongst small business owners, you know, how quickly they adapted to being offline, from an offline mindset to being 100% online mindset. That was, I would say, a major discovery that even we had…… people who are looking for a lot of handholding in this instance. They very quickly moved to become a fully digital kind of thing…you know, I would say digital, very savvy so, that was a very interesting stuff.

The other thing we also saw is banks…how far behind we are still on the digital journey. We have worked with a lot of banks, the banks were deploying like thousands and thousands of people just to process these applications and I think, eventually, they did a good job. But, you know, the whole process has been very painful and I foresee that process is going to be very painful for them when the forgiveness program starts because they are still not really ready from a digital aspect.

So, I think that has been a big challenge with all the banks that have worked in this program. We worked with quite a few banks and one big challenge was, you know, how do you integrate into something like SBA E-Tran. SBA E-Tran, in itself, is an old system and banks have no idea. Until we didn’t become a lender ourselves, you know, we had no access to that system for the platform. So, we saw those challenges very closely and the level of documentation and still the hoops and loops the business owners had to go through to get their initial money, it was pretty painful, actually.

I think things are streamlined, I think the challenge of the PPP Program has been that the vehicle designed initially…. everybody was expecting a quick recovery, everybody thought that end of April, or early May economies will re-open, that hasn’t happened. I think the recent changes are trying to address that issue that is why the PPP Program has become very slow right now, compared to where was even a month back, and, I think, people still need a lot of money. When I’m talking to business owners, small businesses, I think, the COVID crisis has been a crisis which has hit small businesses disproportionately hard, actually.

Peter: Yeah.

Rohit: And, we haven’t really seen the pain because of two reasons. One is, you know, large amounts of money have come in the PPP Program and even a larger amount of money has come in the Unemployment Program for the workers. I think we’ll start seeing the actual pain sometime in July as the economy reopens and the government money starts to dry up.

I think that’s where we see a lot of bankruptcies and we see a lot of pain in the economy. So, I think, that’s where, you know, more money is required and I think the government has to make changes in the PPP Program so that all the money that they’ve allocated actually gets loaned out, or is given out. That’s very important because right now, one thing they have to keep in mind, that’s the only program in town, you know material program in town for small businesses.

Peter: Right.

Rohit: There’s nothing else available right now.

Peter: And so then, are you continuing to lend today in the PPP Program, or is it pretty much dried up?

Rohit: We are, we have continued lending. So, one of the things that we have seen is that the larger of the small businesses got money from their banks, but the actual small businesses actually couldn’t get money from the banks so, we are still continuing the program. The program has like sort of stabilized, it’s not growing, but also has not decreased, the demand has not decreased, actually.

My view is that once these changes were made and passed by the Congress and gets passed by the Senate, once that happens and as the economy starts reopening, I think people will need more money and reopen their business, but they have a lot of accumulated rent right now, they have a lot of accumulated bills that they have to pay. They’re not paying it right now because, obviously, they are not open. Now once that starts happening, I think, you know, the PPP money will run out very quickly. Actually, there will be need for even more money because every other program, meaningful programs in small business lending is, right now, shut down.

Peter: Right, right. So, that brings my next point. In my next question. Are you doing any other lending outside the PPP?

Rohit: We are doing a small …….I think, unlike a lot of other players, we haven’t totally shut down our traditional lending programs, but, obviously, like everybody else, we have to be very cautious. You know, we only into essential services businesses, we are only lending to businesses which are, you know…….in states which have reopened, like in New York, everything is still shut down so, lending money to a retail business in New York does not make any sense. So, I think we are trying to see the investor appetite to start coming back so, that’s the good news.

I think what is going to really happen is that over the next four weeks are very critical because as we reopen the markets and the economy, whether the infection will go up, or will remain the same, really, really the sentiment in the market and also, you know, whether investors will want to come back. The good news is that interest rates are at a historic low, a lot of investors will invest money right now. We are getting calls from very large asset managers who want to be fully ready to lend money when things come back, but, at the same point of time, there’s a lot of caution right now when, you know, people don’t want to jump the gun too much, but really, as soon the economy fully reopens.

Peter: Yeah, that makes sense, that makes sense. So, I get your emails and you’re often….you’re tracking approval rates and that’s something that you’ve been doing for many years now. I’d be curious to get….if you could share with the audience what’s been happening with approval rates, I mean, obviously, there’s not a whole lot of lending happening beyond the PPP, but how were approval rates trending in 2020?

Rohit: So, non-PPP approval rates are at a historic low right now, they’re even worst than the….you know, like we started our approval rate tracking in 2011 and there were soft……today, what has also happened, unlike in 2011 or just after the last crisis, is even the alternative lending has dried up, more or less. So, I think that’s a double whammy because not only banks are not…..because banks have suspended all kinds of other lending programs, even 7(a) right now is on hold so 7(a), we are expecting it to start coming back sometime in June because in this country, you know, small banks, small to mid-sized banks are very active as SBA 7(a) lenders.

They got very busy in the PPP Program so they also have not done…like very little lending in 7(a). I am hoping they will start coming back because government has made the SBA 7(a) Program a lot more attractive for borrowers, as well as for banks. I don’t see, except for 7(a) Program, normal lending coming back till the time that the economy has reopened.

Alternative lending, I think there is a lot of hunger among the investors, but a lot of the players, the larger players in the space, have already stopped lending and are facing a lot of their own challenges because they are lot of these balance sheet risks and they are having even defaults right now. I think, for them, it’s very tough for them to emerge out of that, you know, in their former after. I think a lot of them will be probably shriveled, or they won’t be able to restart lending anytime soon. Interesting to see that bank lending is going to rebound alternative lending, in large forms and a lot of them are suffering. While big asset managers are now looking at the space, but, in my view, next two to three months are going to be pretty challenging in the approval rates and in the lending space world.

Peter: Right. I mean, obviously we know that many of the non-bank lenders have been shut down now for some time, but there are some, like yourself, that are still lending. So, what you’re seeing, like for approval rates, are approval rates even worse for non-bank lenders than for banks, right now?

Rohit: Oh yeah, yeah. So, on a percentage level actually, non-bank lenders are performing a lot worse than even banks today because what has happened is for a lot of them, their own credit facilities have been frozen, or the securitization market is done with and there’s a lot more caution on that side so, obviously, their approval rates are very, very low.

The other thing that has also happened is a lot of good businesses who would traditionally borrow from alternative lenders have got PPP money. They’re not coming into the market to borrow money right now for the next few months because they have PPP money and they want first to ensure that they spend that so, a lot of the people who will come into the market right now to borrow are the weakest of the businesses, or in the sectors which have gotten impacted the most where you cannot do that kind of lending.

So, that’s another reason why, you know, the approval rates have gone down because prior to the crisis in the last two/three years, you know, a lot of good, mainstream businesses had made a migration towards alternative lenders. They were the ones who were powering a lot of these alternative lending boom and once they’ve got the PPP money and there’s very little economic activity, they have no reason to borrow money right now because they have no place to invest and get the return on their money. So, that’s the other reason why the approval rates in the alternative lending space are a lot less than with banks.

Peter: Right, right, okay, that makes sense. So, you’ve been around in this space for longer than just about anybody, the small business lending space, so how do you think this is going to change the small business lending landscape, particularly I’m talking about the non-bank lenders. How do you see it changing, you know, in the medium to long term?

Rohit: So, I see three very distinct, you know, trends happening. One is…..I’ve always been a proponent of very good risk management, even during good times, so one we have been sharing with the market has been that the defaults on our platform have never exceeded more than 3.5%, compared to what publicly traded folks where the default rates were in double digits.

So, one thing I’ve always said and stressed has been that, you know, you need to be good at risk management, you need to be good at collecting money back during good times because if you don’t do that, it will come and haunt you back during bad times. So, we have seen a rise in the modifications, we have seen the rise in people wanting to reduce their payments on our platform very significantly, but we didn’t see defaults. And, there were a few reasons behind that one…one was, obviously, a lot of these merchants, or these customers, you know, we work with them directly because we don’t accept anything through brokers.

Peter: Sure.

Rohit: The second thing was that we were in constant touch with them even prior to the crisis all the time so, like I think that helped us because we have been using all of these tools on cash flow and helping them with that. So, that’s one very distinct trend that if you don’t invest in risk management, you don’t invest in your back office, you don’t invest in, you know, ways how you will not just lend money, but how you will get your money back. That trend is over now where alternative lenders can just get a lot of capital out there and they can just keep lending money so, I think that’s changing dramatically.

The second trend which is….we’re very much focused on the first trend, and I think that has changed because alternative lending in the visible is not hot anymore and it has not been hot for the last three/four years, some of the performance in the public markets and other things. I think the challenge for a lot of these players in the fintech lending space has been that they have been running businesses where the unit economics were very negative, actually, and that is coming home now. So, that’s like creating a lot of these problems among a lot of players because they’ve run out of equity, you know.

So all the money even if they have it on the balance sheet is just credit lines and all that and for them to raise any more equity capital in the market right now, especially if you are an alternative lender, whether you are fintech, non-fintech, it doesn’t matter, it’s next to impossible, right now, or the next six months. It’s not going to happen. So, I think people who don’t have much equity, or who have been running business at a loss, you know, are seeing a lot of trouble and pain, right now. So, we are seeing a lot of consolidation in the market. A very interesting, you know, figure we are seeing is that, you know, as we are going back into the market for our digital originations, we are seeing costs of acquisitions have dropped by 80/85%.

Peter: Wow, 80/85%!

Rohit: Exactly, but a lot of people cannot even have money to, you know, do any lending and if they can do lending, they don’t want to acquire any customers so that has happened. I think the third big trend that is going to happen now is that, you know, the fintech players and equity banks, in my view, the partnerships are going to get strengthened. So, I think I’ve been propagating that, you know, not only will banks go digital and they haven’t really done it. It’s not a question of banks going digital, I think the convergence will speed up dramatically and that’s going to happen because of, you know, more than one third of the branches will just shut down.

You know, I can already see that in Manhattan. You know, Manhattan is an overbanked island out there, but I can already see a lot of branches actually shut down permanently. There are notices out there that they’re shutting down these branches forever, actually already. I can see that happening across the country and I can also see that the fixed costs have to go down tremendously.

I think for fintechs also, it becomes very imperative that they’re not the new thing in the marketplace so, the days when they can go and raise any kind of VC money or equity money is gone. So, the consolidation is happening, you know, good fintechs will still be able to raise a lot of money, but I think that will be far and few, and I think that’s where it will become very important for fintechs to start behaving more like banks in the financial metrics and banks to start behaving more like fintechs in their innovation.

Peter: Right, right. I think that banks got a wake up call with the PPP because a lot of them were not really ready, particularly smaller banks and I know a lot of them partnered with others. We will probably segue way into sort of you Biz2X product which is your banking product. Why don’t you firstly just describe exactly what that is.

Rohit: So, two years back, we were getting a lot of inquiries from banks and non-banks…..you know, as a company we have built our own platforms and in those platforms, over the years, we got all the global package and all that stuff. So, banks were coming to us and we said, why don’t we offer that as a platform with a data science play. And then, we formed another entity, Biz2X, and we started offering it so now, we have clients like HSBC, Banco Popular, Customers Bank and some other banks out there. We thought, you know, that could be a very good business.

Obviously, last two years has been, you know, not that easy because we got full traction but still, banks have been very slow, as you know, they are not easy, they are animals who give red, in a way. But, I think all the investments that we have now made in Biz2X platform…we are offering it as a platform and a data planning credit play…you know, it is actually very interesting now because what that is starting to do finally is that, you know, in the PPP program we saw all of our interest from banks who partnered with us and used our digital technologies which we give for free. We didn’t want to charge anything for that, but at the same point of time, we are starting to see a lot of inquiries coming in.

Banks are worried because if the next wave of the crisis comes in, the COVID crisis, that’s going to be very bad. And even if it doesn’t come in, you know, they have realized that the customers have become digital-ready and they cannot afford to have any branches because branches have been really ineffective during this crisis, you know, more or less. So, they’re saying, how do we go digital and the conversations I am having with my banking partners and all the other banks in the last few weeks, now we’ll have to see how it translates into reality.

But, the conversations we’re having is digital is not an option for us, digital is the only option, you know, kind of stuff. Right now, it will all depend on what banks do because a lot of them have a certain habit of ….let’s say this virus vanishes in the next two weeks time, let’s say, I think banks have a habit of just going back and reverting, but, I don’t think so that will happen 100% because the customers have gotten so used to analog, you know how people are, not willing to go out and going to the branch anymore, they’re scared.

Peter: That’s going to take some time, that’s not going to change until we have a vaccine that’s broadly available which could be a year or more so, who knows. So, I feel like they’re going to be forced their hand. So, are you expecting that….you know, you said you’ve talking to banks, now you’ve got a few big banks on board, are you expecting the next 12 months to sort of accelerate a lot of the conversations you’re having?

Rohit: Yeah. So, I think one good thing with the PPP Program, banks realize the value of digital platforms.

Peter: Right.

Rohit: They also realize how old their existing LOS systems and LMS systems are and they really struggled with that. You know, I know banks, large banks, I’ve talked with them they can’t even do an SBA E-Tran integration and the reason was it was difficult. Their own backend systems are so antiquated that, you know, they don’t even support API’s, so sorry we can’t do it. They were manually typing everything into SBA E-Tran. So, I think that’s going to happen.

I think the other thing that’s going to happen, in my view, in the US is that there’s going to be tremendous amount of consolidation in the banking space because, I think, right now, the government’s stimulus money has delayed the pain, but this pain is going to come, bankruptcies are going to come among businesses, loan delinquencies are going to go up quite a bit because the economy has got a real shock and that shock has not really been transmitted.

The government has really tried to block that shock for the time being, but it’s going to eventually come. That clearly means that’s there’s going to be a tremendous amount of consolidation in the banking industry, that means they have to invest more money in technology, they will have to de-leverage their branch network pretty quickly. That also means they will have to find ways and means to serve the customers in a more remote fashion, they’re not really used to it today.

Peter: Right, right. I see that’s one of the big trends that’s really going to change. So, I know you touched on it, but I just want to talk about your Accelerate SBA Program that you provided for banks. I mean, maybe just describe it and how you’ve implemented that program so quickly.

Rohit: Yeah. So, one of the things we did was that, you know, we figured out ….we were already working with payroll companies so, we figured out during this program that payroll data bas become the most valuable piece of data extending the PPP Program. So, we actually went ahead and developed full fledged API’s with Paychex, ADP’s and also other forms and also partnered with Plaid also and then we rolled out a cloud-based platform.

In the SBA Accelerate Program, we can give it for free, you know, during this program because we thought there’s no point in charging for this kind of a product, or a service. Some banks adopted it, some banks really liked it, but couldn’t adopt it because they have their own challenges, you know, in the space. But, I think what it has done is that it has helped them to understand what digital really means, or how to do things in a smarter and a better fashion, and also at greater agility and speed that a fintech will bring, or a cloud offering will bring in. I think that has been an eye-opener for a lot of banks. I think, for us also, the key thing is that banks are still going to be banks, they will still take the time for …..because a lot of them were not able to use the platform not because they didn’t like it.

There’s this whole process of on-boarding someone, even for a free platform takes some time. So, I think they are also starting to realize and a lot of these banks are now very keen to take advantage of the SBA 7(a) programs and they are coming back to us and saying, okay, you know, this is good, can we leverage you for that, or can we leverage you for our other products. So, with some banks…you know, we are talking to launch some merchant financing products once the crisis ends, but there is going to be a tremendous need for working capital, especially on the retail businesses because they have been hit the hardest.

Peter: So, do you think then, down the road, the SBA 7(a) Program, which is probably the most popular program there, is that going to become much more digitized given that these banks….every 7(a) lender pretty much has been a PPP lender so they’ve had to move much, much quicker than they have in the past. Do you think then when they go back to…when 7(a) lending really kicks in again, do you think they’re going to take some of those learnings from the PPP and really make a much more streamlined process?

Rohit: I think that’s a good question. What the government is doing and they do it after every recession is they try to make the 7(a) Program a lot more attractive for both borrowers as well for the lenders for a certain period of time. It’s only for a certain period of time so it’s like six months to a year and the Trump administration has done it until the end of this year. So, my view on that is that, yes, some of the banks will eventually take advantage of it, some of the banks will want to go digital.

I think part of the challenge also is SBA, SBA itself is so antiquated as an agency. For them to go …….part of it is, you know, do they really want to go digital, but I think quite a few banks really want to digitize their work flow and want to digitize their on-boarding processes because you also need to do a lot of monitoring for these SBA loans. So, in my view, quite a few banks will do it, some banks will just go back to their old ways actually and do what they’re doing, but I think the guys who are going to survive and try will have to do something. They cannot hope, you know, that the world will just revert back to the mean, that’s not going to happen.

Peter: Right.

Rohit: Customers are not going to want to meet a relationship manager, they don’t want to come to a branch anymore. So, I think the customers have gotten more demanding than even the banks today.

Peter: Right, right, and that’s certainly going to be driving….I think the banks’ behavior will be driven by their customers and they’ll say, no, we want a digital solution here, we want it to be quicker and easier so we don’t have to go into a branch.

Rohit: I think the biggest change can happen if…..like the PPP Program, we have the Treasury allowing fintechs to come directly. If SBA and the Treasury allow some of these fintech players, to also become direct SBA 7(a) lenders then there will be a huge paradigm shift in the market. A lot of these traditional lenders will be massively forced to introduce something very quickly.

Peter: Right. That is very true because I know…..like Funding Circle, for example, they’ve been trying to be an SBA lender for a couple of years now and, hopefully, that will be one of the outcomes here.

Rohit: That’s what I am hoping also exactly because that will be the biggest change in the market, because my fear, otherwise, is that banks are talking about going digital, but I know, in general, their habits are very hard to change. They are actually going back to the same thing or do some half digitization, or something. Some banks will do it, but a lot of them might not just, you know, pay much attention to it once this crisis ends.

Peter: Right, right. Well, I certainly hope that most of the fintechs end up being approved here. So, we’re almost out of time, just a couple of questions. I’d love to get a sense…..it’s been several years you were last on the show so, tell us, even before the crisis maybe, the last three months have not been very typical, the last two months especially, what scale are you guys at today? How big is Biz2Credit when it comes to like originations, things like that.

Rohit: So, in terms of origination, we were tracking this year, prior to the crisis, of doing between $600 to 700 Million in origination. You know, we have been, I would say, more of a patient player than trying to do billions of dollars and then what the consequences are. You know, my take on that is that once the markets come back, we should be able to, if not this year, but by early next year, get those numbers, or even exceed those numbers because the demand is going to come back very strong whenever it comes back and the competition has actually reduced.

So, from that side, you know $600 to 700 Million, we have also invested a lot of money in our technology and data science so we are up now to 350 people as a company, grown very profitably over the years and so, we have good liquidity right now. Last year, we raised $52 Million from Silicon Valley Bank and more so, the idea has been now we are investing very heavily on the technology and data science side. We just hired a few people because the good news now is that there’s a lot of very high quality talent really available, we are doing that. Also, we have become more comfortable in hiring remotely which, obviously, we were not that comfortable earlier (Peter laughs).

Peter: I don’t anyone was comfortable really before this crisis.

Rohit: Exactly. So, I think that has helped us also as a company to grow. I foresee that, you know, if we keep growing in a disciplined manner, Biz2Credit, I think we were among one of the bigger players, but not among the biggest, you know, earlier.

Peter: Right.

Rohit: I think in the next year, or two, we could be one of the largest players and a very large player on the Biz2X side also because I strongly feel there’s a convergence happening between the technology, data science and the credit markets and the whole behavior. Both of the customers and the lenders will see a paradigm shift. I think we are moving towards finally ….it can happen in the US by the fall to see open banking and this whole other stuff will start coming in because of this crisis.

Peter: Right, right. Okay, sounds like you’re looking to sort of expand market share, are you going to look at, potentially, any M&A with some of your distressed competitors, is that something that’s on your radar?

Rohit: We are, actually, getting a lot off inquiries right now, as we speak, from some of the distressed players. Yeah, we are looking at some of them very closely. Obviously, it’s a little bit tricky because portfolios are not performing well and we have to be very careful.

Peter: Right.

Rohit: But, at the same point of time, the are receiving a lot of inquiries and we are looking at a few of them because I strongly feel that, you know, we were very patient earlier and we are growing in a very disciplined manner. Now, it’s our time to, you know, start growing still in a very disciplined manner, but at a much faster pace.

Peter: Right, right, okay. So, we’ll have to leave it there, Rohit, good luck. I very much appreciate your coming on the show today.

Rohit: Thank you for your time.

Peter: Okay, see you.

Now, digital initiatives are front and center of every bank. I’m, actually, even a bit more bullish than Rohit there. I, actually, think when not really going to go back at all to end-to-end, particularly when it comes to small business. I think we’ve seen here that most small businesses want digital tools, they want to be able to do this without going into their branch and I think they have now gotten used to doing it. I mean, the PPP was a real crash course for many banks who didn’t have front end tools and a lot of the service providers for them have stepped up and, obviously, Biz2Credit being one of them stepped up to help the banks really process PPP loans.

I think once customers sort of get used to this digital service, I just don’t see it going back. In small business lending, it think it’s going to pretty much go to an all-digital solution. Once we have, you know, small business lending back up and running, I think you’re going to see the 7(a) loans and the SBA and obviously you have all the non-bank lenders who are already, most of them end-to-end digital. I think it will be a good thing for small businesses and for small business lending.

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

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Podcast 250: Jacob Corlyon and Alistair Canal of Capital Collection Management

The CEO and President of Global Sales for Capital Collection Management discuss new approaches to collections during this crisis

June 5, 2020 By Peter Renton Leave a Comment

It is often said in the lending business that it is easy to loan money out, the difficult part of trying to get it back. And in challenging times, like we are living in now, that job becomes even more difficult. So, I thought it was time we talked about strategies for collecting money in tough economic conditions.

Our next guests on the Lend Academy Podcast are Jake Corlyon and Alistair Canal of Capital Collection Management (CCM). They are a collection agency serving fintech lenders, banks and credit unions with a new kind of approach.

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

In this podcast you will learn:

How CCM is different to the typical collection agency.
What it means to have an empathetic, people-centric approach to collections.
How they are using tech and AI in their business.
The types of verticals where they operate.
The impact of the economic crisis on their business in the last three months.
How consumers have been behaving when it comes to their debts recently.
How they treat those people who were already under duress before the crisis.
The differences in B2B and B2C clients.
Their advice for lenders today in dealing with new borrowers.
How to prepare your business if the economy gets much worse.
The ideal time to hand off collections to an agency.
What is on tap for CCM for the rest of this year and beyond.

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

Download a PDF of the transcription of Podcast 250 – Capital Collection Management.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 250-JACOB CORLYON & ALISTAIR CANAL

Welcome to the Lend Academy Podcast, Episode No. 250, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Peter Renton: Today on the show, we are talking about collections with Capital Collection Management. I’m delighted to welcome Jacob Corlyon, he is the Co-Founder and CEO and Alistair Canal, he is the President of Global Sales. Now, CCM haven’t been around that long, but they’ve already developed quite a reputation in the fintech and banking space. They have, I would say, a fairly unique approach in this industry, insofar as they use an empathetic and people-centered approach combined with technology to really become a more effective collections partner and we go into that in some depth.

We also talk about how they’ve changed their business in response to the economic crisis and the fact that we have tens of millions of people who are struggling, not that they haven’t struggled before. We talk about what’s next for CCM and how they’re really going to, you know, grow in such an environment. It was a fascinating interview, I hope you enjoy the show.

Welcome to podcast Jake and Al.

Jacob Corlyon: Glad to be here, Peter.

Alistair Canal: Yes, happy to be here, thank you.

Peter: Okay. So, let’s just get started with some background, maybe we could start with you first, Jake, and just tell us a little background about yourself and what you’ve done in your career to date.

Jake: Sure. So, my name is Jacob Corlyon, the Co-Founder and CEO of Capital Collection Management, been in the collections industry for 12 years now. I currently serve as the President of the New York State Collectors Association. Before my time here at CCM, I was in- house collections for a large fintech called Bankers Healthcare Group for many years so, very happy to be here with you guys on the podcast today,

Peter: Okay, thanks. And, Al?

Al: Yes, Alistair Canal here, President of Revenue and Chanels at CCM. For about 15 years, I was in the financial services space working for organizations, not just analog, in general, then Bankers Healthcare Group which as Jake said the fintech he referenced there. And then from there, I went to Promontory Financial Group and did some time at Live Oak Bank (garbled) quite a great pride in there to have worked for these companies. I’m delighted to be here with CCM working alongside with Jake here and excited to be on this podcast.

Peter: Okay, likewise. So, maybe just give us some background about CCM, explain what it does and maybe a little bit of the history of the company.

Al: CCM is a unique organization in many ways, in all wonderful ways and I will have to say, simply put, CCM provides peace of mind, Peter, for the organizations who retain us to work with their clients. You know, there’s a lot of ups and downs in the revenue life cycle so, you’ve got organizations that aren’t built and poised to handle those type of tasks so we can man and provide a really boutique and refined service for them which is first and third party. So, first party is an effort that is more of a softer approach that helps the clients kind of take on and collect on debt that perhaps is not collected at a certain time.

Then we come in as third party and act as CCM. The first party will come in as XYZ Corporation representing that as their company and third party will come in as CCM (garbled) more supportive and more collection activities at that point. What makes us really unique, and we’re so proud of this, is the culture that Jake’s built here for the last seven years is really one that’s people first, an empathetic approach, an approach that is really human, let’s talk human to our debtors and support our clients very well.

In doing that, we get a lot of engagement and a lot of people who are receptive to that type of approach and, more importantly, our clients feel really good because we’re protecting the brand while providing them a really good service that we feel is unparalleled out there in the industry to date. So, that coupled with the nationwide litigation services we provide, right. We are licensed in all 50 states, all states and that’s wonderful, not too many groups are and two, we provide a nationwide litigation service so we can better litigate in all of the jurisdictions throughout the country and it’s proprietary network that Jake and the team have created.

And then lastly, we occasionally look at organizations that says, you know, I don’t want to look at these debts in my books anymore, I’ve had it for a long time, can you consider buying this debt from us. So, we will do that as well so the sooner that (inaudible) factor that we offer is that, you know, first the third party, nationwide litigation and, lastly, some debt resolutions for them as well. And there’s other SRA items that we provide as a service for the auto finance bankruptcy solutions and things like that. Simply stated, that’s kind of what we’re doing. I’ll let Jake talk about the history of the company since he’s the Founder of the company.

Peter: Okay, Jake?

Jake: Yeah, that sounds great. So, we were founded in 2013 and our goal was really to change the face of the industry. So, for far too long, you know, the collections space and the collections industry really had a black model. We believe that our people, you know, coming with that people first approach, very customer-centric, I know it’s cliche, but we believe that a debtor should be treated with empathy and really provided with a concierge experience.

So, we get them back on track and have them continue to be a valuable customer to our clients and our business model was built on the premise that we should re-think, re-imagine and recover an industry that is vital to our economy. That’s kind of our premise and our calling to really why we created this company. Now, today, when you look at where we started it was really fintech focused and now, as Alistair alluded to, we’re in multiple industries, we’re continuing to branch out and find new industries that we can get into and help.

Peter: Okay. Let’s just dig in a little bit, I want to talk the process because, you know, when you think about collections, collection agencies, you think about people in a call center dialing customers, demanding cash. Obviously, it’s not a very pleasant experience all around…so, I mean, you’ve talked about sort of empathy and building a people-centric approach, how does that actually work in practice?

Al: You want to take that one, Jake?

Jake: Sure, go ahead.

Al: So, that’s a great question and I think Jake and I both agree, there is a bit of a notion out there, sort of an image, sort of a stigma, if you will, with respect to how the industry at large practices what they do and that’s one of the opportunities of working with us because of the way we built our company, the way we practice. It’s a mindset that we have in our organization and the mindset is one, again, you’re going to hear a lot about people first, empathetic approach and that unique kind of notion that we look for.

But, it really is the model and the philosophy and the principles that Jake and the team have put together that empower our team. We call them account representatives, or relationship representatives, not collectors because they are trained to engage, to listen, to have that ear that says, we get it, we get it. People have had challenging times, well I have. I think anyone who says they haven’t is perhaps not speaking the truth.

At the end of the day, the model that we have is one that is not…let’s send them a stack of letters that perhaps have very firm language and make people kind of shudder in their boots a little bit when they get that, they’ll be acting from a fear position versus, okay, I trust this person, I do have an obligation, they’re communicating with me in a very good manner and they want to help me succeed, they want to help me get healthier financially. So, the way we kind of …the way I think of it is when our representatives are on the phone, I often hear them say not these words, but, you know, tell me your story so we can really help you, right, a more successful ending financially and that’s really what they do. It’s not being done out there, the old style, the old model is not working. So, that coupled with people, technology and our philosophies is paramount.

One more thing I’ll add to that, I think it makes a big difference with us is, there’s a ton of attrition in the space. If you asked anybody who is familiar with the space will say there’s a lot of turnover with the people, the collectors and those who do this task for a living. With us, it’s virtually non-existent, our people like enabling others, that’s the culture that Jake has built and I think is a testament to what our thought processes are, how we treat our clients and the debtor as well because they’re both very important, they’re both very important to us. Does that make sense, Peter, I hope.

Peter: Yeah, yeah. So maybe we can expand on that a little bit and dig into the technology side because, I mean, obviously, I know that Jake when I was doing…I did a bit of research, I read how much you believe in using technology to help drive your business. So, maybe tell us a little bit how you’re using tech, I have read you are using AI as well, so maybe give us a little bit of color there.

Jake: Sure. So, technology is really paramount to our success. When you look at the industry as a whole, you know, there’s not a lot of agencies that are picking up…..you know, they way they’re using this great technology, trying to stay at bleeding edge, cutting edge of technology development and we really, you know, try to focus on that because we believe that we’re bringing out technology, we’re going to be able to drive and build efficiencies within the process to be able to do more with less people, to be able to provide a better service and more of that concierge experience for not only our clients, but our clients’ clients, the debtors that we’re talking to, whether that’s a business, or a consumer.

And, our technology platform allows us to leverage a machine learning engine and Artificial Intelligence to really give it, you know, a lot of the information that a human would have to remember. We feel that by doing that it’s going to do a couple of things for us. One is reduce human error which is going to ultimately boost our overall compliance as a company because when you look at the collections space, especially on the third party side, there’s a lot of compliance around, you know, what we need to do, it varies by state, you know, you have federal statutes.

So, it’s a lot for a collector to know as they’re working a national portfolio. So, what we’ve done is build all of that knowledge into our collections platform so that if for some reason a collector over here on the East Coast were to call somebody on the West Coast and it’s 8:00 in the morning over there, and it’s obviously earlier than 8:00 in the morning in California, our system just won’t let them make that phone call. If you don’t have a robust technology platform that allows you to really build on the compliance pieces, you know, that human error, they working through a queue and they’re trying to get as many contacts in a day as possible to help as many people.

So, you know, we feel that using our machine learning engine and using our AI, which I’ll kind of speak to a little bit in a second, is really giving us a leg up on the compliance side of things.

Then you look at…..you know, we’re using an omni channel communications method so we’ve got the standard phone calls, we’ve got the letters, we have SMS capabilities, we have email capabilities, we can virtually drop voicemails, you know, we have an AI chatbot.

So, again, that’s where we’ve taken that AI to the next steps so we have the ability to now have a 24/7, 365-collection life cycle where if you don’t have some sort of AI leverage within your platform, you’re not going to be able to offer that. And, we find that in today’s day and age, it’s somewhat core, especially when you have the younger generation now that’s going to be going into that will have issues and will need to talk to somebody.

They’re used to more self-service, they’re used to going to an online portal more talking through a virtual chat to really self-service their own needs on their own time. So, we’ve built all the knowledge again with all of our client parameters into our machine learning engine so that in giving that AI the knowledge to honestly do everything a collector could do, except engage in a human type of transaction.

But, if somebody wanted to not to talk to somebody they can come right into our web portal, or through our chatbot and go back and forth negotiating, you know, payment plan arrangement, or negotiating a lump sum settlement and the system can do that. It’s not everything that can stand up the documentation. So, we really put a lot of effort into our technology and a lot of capital into building, you know, really state-of-the-art solution with our vendor partners.

Peter: So, maybe just a quick clarification. I’m curious about….does your technology then…do you know that people are going to respond…. somebody will respond better to a phone call, somebody will respond better to an email, somebody will respond better to an SMS, you know, the time of day, people respond. Is that all kind of part of what you’re offering?

Jake: Yeah. So, we can extract all that data, which we do, to create, you know, collections models and things of that nature. So, we can take that data out of the system and pull that back into strategy.

Peter: Okay, okay. So then, you mentioned that you started in fintech and maybe tell us what industries you’re operating in, maybe beyond fintech.

Al: Absolutely. So, fintech is a big industry for us, right, it’s our largest account and customers bankers software group, (garbled) portfolio that we manage for them so we’re heavy into that space. Additionally, we’re into banks as well, right, so the financial services around banks, credit unions. Auto finances is a space for us as well, healthcare is a big space for us and there’s some secondary industries that we’re servicing like higher litigation. Shipping is becoming a nice one for us. Professional services is one where we’re finding some great successes so, there’s professional, legal, accounting and engineering, things of that nature. And, we’re always looking at sourcing new opportunities, for instances organizations that we’re meeting on a regular basis and fairly through the industries that exist out there are, what those needs are, what those needs (garbled) maintain that opportunity and keep growing.

Peter: Right, okay. So, why don’t we switch gears a little bit. We haven’t talked about the current environment yet and clearly, we know from reading the news that there are many millions, tens of millions of people who are struggling today that may not have been struggling three months ago. So, maybe… I’d be curious to know…let’s just start with how have you seen…what’s been the impact, so far, on the let’s just call it an economic crisis, I guess we can call it that, so what’s been the impact, so far, on the different business lines and how you’re operating as a business.

Jake: Yeah, that’s a great question. So, when you look at the economic current state of things with the COVID issues, you know, we’re really trying to stay in front of the game a little bit, So, as all of these started to happen, you know, we put a lot more focus on meeting with our clients and talking to them about what we want to be able to offer to you, you know, to their debtors and really kind of going down that path of, alright, we’re going to need to give people modifications on their current accounts or deferment options. What do those look like, what can we do, you know, what would you like to approve, one off bases, what can we just go ahead and do once we have somebody out there.

We want to really help these people and we understand that, you know, because our business model is really created on if we collect then we get paid based on a contingency fee, we really take a step back here, really try to help our clients and really try to help the end consumer business that owes our clients some money and say, alright, we’re going to take this approach, let’s talk about different options which is obviously pushing that payment out maybe at one, two, three, six months to where we would not necessarily generate any revenue off of that, a service, you know, to the economy and our clients to really be that ambassador in that brand, push for them.

So, that’s been a really big focus for us and we’ve seen a lot of people from out of our different business lines taking these deferment options, taking these loan modifications very well. We’ve also seen kind of the other side of the coin where people who are still working, or maybe they are a nurse practitioner or an MD that’s working more than ever in really hard hit areas, so they really kind of have more of an issue with timing to sit down and have some time to their self.

So, that’s kind of another avenue where we’ve helped in (garbled) auto pay, things of that nature so, we’re really trying to help on both sides of the coin there. Outside of that, we’ve seen still a lot of people have funds to make payments to our creditors and, again, to add to some of the more aged debt we’ve kind of a spike a little bit in offers for lump sum settlements in full coming through our doors that we’re able to review with our clients and get those accepted as well.

Peter: So, you think that’s kind of like the stimulus package, obviously, the stimulus check, most people have by now, and then you also got like the unemployment that’s coming in now. Some people are earning more than they earned in their job, I mean, has that been part of what of you’ve been seeing as far as driving that behavior?

Al: Yeah, I think that’s a big part of it. We really sat with our group of account executives and really coached them into not specifically asking for money that was in relation to the stimulus, or employment funds that they’re receiving. But, we’re finding that a lot of people……because that really weighs on somebody so, they’re in debt, especially if it’s old and it’s just sitting out there, when they get some additional cash that comes in, whether it’s through stimulus or through making some additional money that they normally didn’t because of the unemployment package, they’re really trying to get out there and settle and carry as much of the debt that they have whilst still maintaining their ability to pay and take care of their family.

Peter: Right, right, okay. So then, I’m curious about the people that were already….they’re already your clients before this crisis and so, they’re already having some problems, it might have been on unemployment even before. How do you treat those people because these are people that were under duress, they may be under more duress, or they may be under the same amount of duress…I’m curious about if there’s anything you’re doing for those kinds of people differently than what you would normally do.

Jake: Yes, So, you know, we really talk a lot about our people first approach and how we train our staff to engage with empathy though, you know, a lot about asking questions, active listening which is really where our technology helps us because it allows the collector to really focus on the human that’s on the other end of the line, really meeting their needs, figuring out what their finances look like today and creating an innovative solution for them with our clients’ needs in mind to give them some sort of relief, or some sort of help and get them back on track.

So, we found that people who are already in kind of their collection cycle and process before, there hasn’t really been a change in our engagement with them. It’s more along the lines of, you know, now we’re starting to get people who are coming back to us and trying to engage us in working something out.

Peter: Interesting, interesting. So, are you seeing differences between……I imagine you have some business-to-business type clients as well as just business-to-consumer, are you seeing differences in those two types of clients?

Jake: Yeah. So, the business-to-business clients, depending on what area they’re in, in terms of specialty, so there is a restaurant at this point in time and obviously those have been hit really hard and it’s something that ‘s probably going to be one of the last things to open coming out of this crisis in a full capacity….you know, the takeout business just isn’t really doing a lot for them to really make the money that they would from the sit-down service and the bar service that they would have before. So, we’re definitely seeing differences in businesses that are getting hit really hard.

We’re still engaging in the same way and trying to create a solution that solves that problem for them and getting someone back on track, or getting then on a program that will ultimately get them that contract. And then, you’re seeing on the consumer side, you know, there is a lot of relief on the consumer side when you’re talking about the….you know, some people are making more money, a law on unemployment than they were before so, you know, those consumers have some more money in their pockets and they’re looking to settle up some of their debt at a discount, or working on the payment arrangement now that they have some extra funds. So, you know, we’re definitely seeing a little bit of a difference in the behavior between the two.

Peter: Right, okay. So then, I’m curious about….like with the clients that you work with, particularly in the lending space, you know, obviously Bankers Healthcare Group and the banks and credit unions, these are all lenders, I mean, how should they be thinking about……what is your advice for them that they should be doing differently now when it comes to sort of the receivables that are….obviously, it’s been a challenging time and things are different, what’s your advice for the lenders at the start of this process, for the borrowers that have really…might just have recently taken out a loan?

Jake: Yeah, that’s a great question. It’s something that we’ve really been focusing on because part of our practice is to…..it’s really kind of looking at what our clients are doing internally, providing some best practices, or some coaching around, you know, what we see across all spaces to help our clients and, obviously, we’re really focused on the collection side of the piece. But, what we like to see is, and what we’re telling people, is they should be looking at their account receivable and their entire collections process like a profit center. So, especially at this point in time, your collections portfolio can really make or break you as a fintech, or as a lender.

So, we’re seeing record loan modifications in deferment packages that are coming out here from all these lending institutions. So, we’re suggesting that it’s very important that they really need to focus on the plan to bring those people back successfully from that if they’re out of deferment because that’s just a pool that’s sitting out there….that if they don’t have a good pulse on what’s happening with them how they’re going to bring them back to probably paying accounts again that could be really detrimental to their bottom line and potentially results in undercapitalization and possibly going out of business, depending on the size.

So, we really suggest focusing on that, focusing on gathering data from those accounts, developing collection KPI’s and dashboards is always a great best practice and then utilizing a strong collections agency partner, one that really melds well with their mission, vision, value and really an additional source because as we all know, a lot of lenders, a lot of banks, fintechs, whatever it might be, don’t necessarily have as many collections staff as they have, you know, lending officers, things of that nature. So, you know, you want to be able to use a strong agency partner as, at least, a backstop to help you.

Al: One thing I’ll add there, guys, that’s really important and it’s so simple. When you have these conversations with banks, fintechs, the chief credit guys at these organizations, you ask them, how often do you touch on your clients, how often do you communicate with them, do you have that partnership approach. So, if they are keeping it in-house they don’t probably need us, but it’s always a good thing for them, right. Communicate, communicate and over communicate, keep your fingers on the pulse of what the borrower is doing and when you do that, you’re likely be able to sort of pivot a little bit and prevent them from going down that road. Again, this is a challenging time…and sort of challenging circumstance for anybody. In general practices, communication is key, it makes a big difference.

Peter: Right, right. So right now, we’re still at the early stages of this crisis. I saw one of the fed rules of governors said that they expect 30% unemployment in the next quarter, that’s going to impact you guys because, right now, people still have stimulus money, unemployment money. If we get to 30% unemployment, how do you prepare for that?

Jake: Yeah. You know, as a lender or a fintech, somebody who’s a credit rancher, that person could be a business that extends credit to, you know, performance and invoice out. You know, I think, across the board, people need to realize and understand and take kind of a second look and evaluate their collections, their billing, their recovery strategies, you know, different options that they’re willing to do, people who are struggling, you know, whether that’s payment agreement options, or deferment options, again, looking at a strong agency partner. You know, we’re really here, we’re the backbone to help, guide these debtors whether they’re businesses or consumers, to get them back on a better financial path and really help them and spend the time that’s needed to help them.

You know, a lot of lending institutions, especially if they’re dealing with say…..maybe they’re doing a lot of PPP loans that’s going to take a lot of their staff’s time and they’re pulling people from multiple divisions to help with that. So, that’s another area where we can really help….is we’re focused, this is all we do. I think people need to me meeting with their leadership teams regularly to review the current state of their portfolio, you know, what’s the loss number for this month, what’s the migration look like from a first payment missed all the way to the whole cycle through charge off, then looking at what’s coming in on recoveries and then really mining data.

So, Alistair touched on that a little bit in the last point, but really, you need the data from these people, especially if they’re out there on a deferment plan, or if they’re just sitting in your accounts receivable right now. You know, maybe it’s a survey that you send out to get some additional information, additional insight that your leadership and business team need to really adjust models because lenders are going to continue to lend and do business so, you want to make sure you’re getting all of that actionable data from the ground to really be able to change and move your credit models and move your recovery and loss models and get everything in one really cohesive mindset so that the left hand knows what the right hand’s doing. It’s very important in this time more than ever, in my opinion, to really have that focus across the board.

Peter: Yeah, yeah. So, we’re almost out of time, but a couple of more things I really want to get to. I’m curious about the notion of when to bring in a third party like yourselves. Like a lot of lenders are listening to this, they probably have a system in place where maybe they hand off after 30 days late, maybe its after 15 days late, maybe it’s 60 days, what’s the advantage of handing off to you guys earlier rather than doing it in-house for a longer period of time?

Jake: Yeah, that’s a great question. It’s going to depend on the business and the business needs, but with our solutions we do provide that full cycle collections solution. We have the first party which is the collections in the name of the creditor, so that’s a great addition to maybe have a couple of staff members that are dedicated to collection, but you need a little bit more capacity, you need a little bit of an overflow value. We can come in and do that, or you can do the whole thing because, again, if you just want a group specialized that handles this, you know, that’s a great option.

A lot of people in lending organizations kind of wear multiple hats from what we’ve seen so, our firm and our belief that having a really focused group of people handling your collection is really the best bet. And then, in terms of that transition to….if you’re going to do your internal stuff yourself, getting it over to us sooner rather than later really does help in terms of your recovery percentages. The longer the debt sits out there uncollected, the more difficult it is, or the longer it will take for an agency, or anybody to really, you know, recover on that debt. So, we kind of see the sweet spot anywhere between 60 and 120 days is when we have a lot of clients that place that with our third party side of the business and, you know, again, we get much better results when we get it sooner.

And what’s very interesting too is when we have a client that utilize us in a third party capacity, what we tell them to do is ….you know, it’s another point of leverage so, really adjusting the scripts to your internal team, or adjusting your scripts to say a first party vendor and saying, hey, listen, I understand you’re going through some tough times, we’re trying to work something out with you here, but, unfortunately, at 90 days or at 60 days I’m going to have to place your account with our collections partner and you have to kind of talk with them and work something out further with them.

You know, we find that a lot of people will kind of say, okay, yes sounds good, I’ll take the deal at this point so, we find that point of leverage is really important and then, you know, obviously, we would engage at that point on the third party level and really come in there as more of a problem solver…hey, what’s going on here, I understand your situation, we’ve all been there, but let us really come with a solution that will work for you as well as our client. You know, we’re kind of more of the middle party really just trying to help both sides.

Peter: Okay. Finally then, what’s on tap for you, guys, when you look through the rest of this year and beyond, what are you planning for CCM?

Al: That’s a phenomenal question, glad you asked it, it excites me, right. So, had you asked me that question three months ago, I might have a different answer and I say that because when things (garbled) crisis like this occur, you really see what you’re made of. And what was amazing to me was seeing how this team hipped it up with a drop of a hat, there’s a story there.

Jake and I are coming back from California, from an auto finance show, I get a call from Jake basically saying, hey, go home, you’re working from home, this COVID thing is kind of blowing up and getting to be serious. I said, you got it so, we got home. That Friday, it was Thursday when I was driving and Jake said head home, that Friday morning, I had all my Its at my doorstep and my large screen at (garbled) the whole nine yards. IT was there to make sure I had everything I needed and then Monday, that following Monday we had a call. We had Zoom set up, we had Zoom meetings every single day and the third party collection manager said, you know, this has been the best Monday we had (Peter laughs).

So, when you think of that, an organization can literally pivot at a drop of the hat like we did, (garbled) organizational abilities of that team, the unified nature of that team from operations, to sales, to marketing, to Jake, to myself and so forth, etc., it really speaks volumes about what they can do for their clients and I was never more proud, and I think we all helped each other, how we literally just….business as usual, we got this, we got you, the client, debtor, we’re with you, we’re going to help you get through this.

So, when that happens, we really realized that there’s nothing we can’t do, if we can jointly navigate through this as well as we have, we are so well poised to succeed in this disruptive market place and really change the image, change the notion, change the ideals that are out there around this industry and they get more well received. That’s our goal, to really disrupt what’s happening out there. As far as numbers go, Peter, we’re tracked to increase our revenue 500% in 2020 above 2019….

Peter: Wow!

Al: ……..and that coupled with, you know, massive human capital and massive technology investment that Jake said. We’re excited now, we’re looking to shake things up out there. (Peter laughs) It’s good stuff, we’re really proud of (garbled)

Peter: Alright. Last word, Jake?

Jake: One hundred percent, couldn’t have said it any better. We’re very excited, we’re super excited getting out here and it’s really….kind of going back to what we touched on and kind of a company overview, we’re a whole notion going, you know, moving forward is forget everything you know about the collections industry. We’re re-thinking it, we’re re-imagining it and we’re recovering for the US, our clients and we’re recovering honestly the industry as a whole because it’s so vital to our nation’s economy to make sure that if credit is granted and extended, that that debt is then repaid.

Peter: Most definitely. Well, Jake, Alistair, I really appreciate you guys coming on the show. Thank you very much.

Alistair: We appreciate it, Peter.

Jake: Thank you, Peter.

Peter: Okay, see you.

You know, my father, before he became an entrepreneur, he was actually a credit manager for a construction company. It’s actually the first job I remember him having as a little kid and even back then he used to say that it was important to be firm, but gentle. I think that’s really what I’m hearing the CCM guys saying is that being an empathetic collection agency/collection partner and really having a people first approach.

It’s the right thing to do and it, actually, is effective. I mean, you’re firm, but gentle and you give people an opportunity to tell their story because there’s a lot of people struggling right now. I think, most people don’t want to be treated as an account number, I don’t think anyone does, they want to be heard and I think that’s the approach that CCM is taking, that’s probably why they’re growing so much and it is important that, I think, we maintain our humanity here. It sounds like, it’s also the most effective way to try and collect money.

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

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Podcast 249: Stephen Dash of Credible

The CEO and Founder of Credible talks about how his company has responded to the crisis, their acquisition by Fox, the impact of Covid-19 on the lending space and more

May 29, 2020 By Peter Renton Leave a Comment

In today’s world to build a success intermediary business you have to be able to add obvious value to the consumer. While some consumers are happy to shop around for the best deal many want someone else to do the legwork for them. And if that legwork guarantees them the best deal then you can build a successful business.

Our next guest on the Lend Academy Podcast is Stephen Dash. He is the founder and CEO of Credible (we last had Stephen on the podcast back in 2016). He has built, by many measures, the most success loan marketplace in this country. Fox Corporation certainly thought so when they acquired the company back in 2019.

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

In this podcast you will learn:

How Credible has reacted to the current crisis.
Why Stephen decided to take Credible public on the Australian Securities Exchange.
How the acquisition by Fox Corporation came about.
What Credible does that is unique in the industry.
What Fox found that was exciting about Credible.
Where they stand in the integration with Fox.
The impact of the crisis across their lending verticals.
Where Credible has seen pockets of increased lending volume lately.
The different reactions of banks, credit unions and non-bank lenders to the crisis.
How the end-to-end loan application works on Credible.
Their plans to expand beyond lending.
Where they are focused for the rest of this year.

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

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PODCAST TRANSCRIPTION SESSION NO. 249-STEPHEN DASH

Welcome to the Lend Academy Podcast, Episode No. 249, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Peter Renton: Today on the show, I am delighted to welcome back Stephen Dash, he is the CEO and Founder of Credible. Now, Credible is a really interesting company, they’re an online loan and marketplace in several different loan verticals and we get into all the details of that, of course. They’re also interesting because they did something that very few fintech companies do, actually went public on the Australian Stock Exchange back in 2017.

Stephen talks about why he did that, he’s a fellow Aussie just like me so, there’s certainly a connection there and he also sold his company in 2019 to Fox Corporation which was a very interesting move and so we go into some depth into the details of that transaction, why Credible did it, why Fox Corporation did it and what it means for the future.

We also talk, obviously, about the current situation today with, obviously, loan volume down in many verticals. Stephen goes through all the different verticals and so gives us an update on what’s happening and what his loan partners are doing. It was a fascinating interview, I hope you enjoy the show.

Welcome back to the podcast, Stephen!

Stephen Dash: Thanks for having me, Peter.

Peter: Of course. So, last time we chatted it was back in 2016 and quite a bit has happened since then, irregardless of what’s happened in the last two months. So, maybe we can get started by giving the listeners just a little bit of background about the last couple of months, what it’s been like for Credible. We’ll get into sort of the acquisition thing a bit later, but let’s just start there.

Stephen: Yeah. Well, like a lot people, it’s been a challenging couple of months in the operating environment, obviously, with shutdowns and all that kind of thing. The way we’ve dealt with that, the whole company started working from home in sort of mid-March, before the official shutdown started, and that was I guess a real benefit of being built on modern infrastructure.

We were able to very quickly mobilize the team to be working from home, we had all of the kind of core infrastructure in place to do so and so we implemented a couple of policies and procedures and a little bit of training for the team, but that was…..you know, looking back over the last few months, it’s been really quite seamless, that’s been good.

The second thing we did is we implemented….. we paid for everyone’s health insurance in the company for six months to take some pressure off a lot of the stresses that we knew that our team members and the families of our team members we fighting so, that was also very well received, but, it’s been a tough environment from a lender perspective. Our lenders have been under some pressure, particularly those that are funded through wholesale funding markets and ABS, etc.

So, we’ve been doing a lot of work with our lenders trying to help them through and where we can, you know, try to provide data insights and things like that, but it’s certainly been a different operating environment over the last couple of months, not just for us, but for everyone. We’re carrying through and very happy with how the team is working in this more difficult operating environment.

Peter: Right, right, okay. So then, I want to go back and start this sort of conversation back in 2017, right, when you did an IPO, an IPO in the Australian Stock Exchange, it’s not typical for a Silicon Valley-based, or California-based fintech. So, tell us a little bit about why you decided to go public, one, and then why you decided to go public in Australia.

Stephen: They are linked, I’ll say that, and also say that it’s becoming more popular. We were one of the first, we’re certainly one of the first, it’s becoming more popular as an alternative to growth stage capital, go public in Australia. Now, the ASX, the Australian Securities Exchange, is positioned as, or is positioning itself as a junior NASDAQ and I think I use those words where a growth stage company can go public much earlier than they would in the US or the NASDAQ, or the New York Exchange. And so, we basically lined-up our capital alternatives, our funding alternatives in really was private capital in the US, or would go public on the Australian Exchange. And, when you do the metrics of pros and cons, going public in Australia made sense for us and there are really three reasons.

The first, majority of our investors pre the IPO, so our seed investors, our Series A investors, our Series B investors, are all from Australia, or that part of Australia and Asia and so, we had a reason in that sense from an investor perspective and a following in the investment community Down Under made it attractive.

Second reason was ongoing access to capital. So, many people don’t know that in Australia, on the Australian Exchange, it’s very normal to raise capital on an ongoing basis in the secondary market and that’s a function, as you’d know, of having many mining companies and mining explorers listed on the Exchange down there. So, there’s a mechanism where you can raise up to 15% of your market cap per year and it’s actually waived at the moment. I think it is 25% through the crisis through, basically, placement of securities so it’s a low dock, quick process to raise additional capital. Ultimately, we never needed that, but that ability to raise capital…you know, of course things need to be going well and so on, but raise capital quickly was really appealing when I lined it up against private capital.

And then, the third reason, from a capital perspective that the ASX was attractive, is when you IPO, as you know, the capital stack falls away. So, all of the terms and things, the preference stack, etc. associated with any capital that sits ahead of common stock for the employees and myself falls away when you go public, whether you go public in Australia, or you go public in the US. So, when lined up against private capital, for us it made sense and it was an attractive alternative so we went down that path, we listed in December 2017.

Peter: Right. We should also point out what the Australian…..it’s unusual for smaller companies to list in the US, but it’s really very typical in Australia because it’s not the VC money that you get in Australia, companies tend to go public early on, Afterpay have been in public for a long time. Whereas, in the US, most of the companies are just staying private for a very long time.

Stephen: Yeah. Incidentally, we were the largest technology IPO in Australia in 2017, US$200 Million so…

Peter: Yeah, yeah, wouldn’t have made the top ten in the US.

Stephen: Not quite, and the costs are different as well. The cost of listing is different in Australia, it’s sort of set up for growth stage. The growth stage investment market is really a listed…a public market.

Peter: Right, right. So, I want to fast forward through to 2019. Yeah, you were a public company for a little while and then we all heard of it one day that Fox Corporation had agreed to acquire you guys. So, maybe start with telling us a little bit of the back story there. I mean, did you have connections at Fox, it did not seem like an obvious acquiror of someone like Credible.

Stephen: Yeah. So, the short back story is we were talking with Fox about a commercial partnership. For a lot of fintech companies, customer acquisition is the number one thing that keeps people up at night, like I’ve got a great product and they’re obviously all linked, but how do I acquire customers, how do I scale the business. And so, we’ve got hundreds of partners ranging from alumni associations for our student loan business, to financial aid officers, to online affiliates and publishers and content sites, and the media was a natural conversation as a category for us to have conversations with.

So, we started the conversation with Fox principally around the Fox Business and FTS, the local TV stations that are owned and operated by Fox Corporation, but, principally, Fox was looking to and is now in the process of implementing a strategy around Fox Business that’s focused on personal finance, among other things so, that’s where the conversation started. We pretty quickly realized, and this conversation started at the start of 2019, we pretty quickly realized that there was a bigger opportunity here.

I call it a one + one equals three, to basically join forces on building out an experience for a mass market where we could take what we do best at Credible which is provide an unbiased marketplace for lending products where a borrower can come in and in three minutes can understand what they’re eligible for from different lenders and they can execute that transaction all within our platform, take that technology which is unique and scale it through a mass market distribution platform which is what Fox has across business, news, sports, local TV. And so, it moved pretty quickly once we sort of saw all that opportunity and we were all very aligned on the size of the prize early and yet the transaction went through due diligence, we announced in August 2019 and we closed the transaction in October.

Another really important part of the transaction was the capital commitment to fund our operations. So, we had $75 Million commitment of capital from Fox in addition which as we build out our mortgage marketplace which is our newest marketplace, is important to scale that as we make some meaningful investments on the mortgage side which is a massive market as everyone knows, $1.6/1.7 Trillion a year of originations and a lot of opportunity to be doing that more efficiently.

So, that was a very big part of the transaction as well that we were able to secure ongoing funding. And really, the structure is we’ve gone private, but we are an independent entity with an independent board so we’re really a private company again with a major shareholder and we’re a business unit of Fox, obviously, but we are running the company independently. I’m still the CEO, the Executive Team is still the same and we’re executing against Fox, but we’re also executing against all our other, you know, non-Fox business as well.

Peter: That’s not impacting…….like I know, when I’m in the office in New York, it hasn’t… it hasn’t happened for a while now, but when we watched this off on TV, on CNBC, and I’ll tell you what, I see your face multiple times a day on CNBC advertising and I presume…..are all those relationships, like I presume Fox’s….you’re still running independently and there’s no input into how you are supposed to market yourself.

Stephen: Exactly, that’s exactly right. So, yeah, that’s a good example, you know, we’re on CNBC, we’re on Bloomberg, we’re on, you know, the Food Network, we’re on all sorts of channels from a linear advertising perspective. Obviously, we’ve built distribution with many partners, we’ve built distribution digitally with lots of affiliates, so, yeah, we’re independent. But, we do have a partnership with Fox which gives us an opportunity to access what is a very engaged, very large audience across all of their different business units and categories from sports to business, local news, etc.

And so it gives us just a broader platform for distribution, you know, which if you ask any fintech CEO, as I said, this is the major….. for most of them will be the major thing that they worry about, in terms of how to find customers, how to find new customers, how to build a brand so, our ability to partner with Fox on that side of things is a real benefit.

Peter: Yeah. I certainly get what’s in it for Credible and it’s still not as clear to me what’s in it for Fox. I know you probably can’t speak on behalf of them directly, but, obviously, you had conversations. What was exciting about Credible for them?

Stephen: So, for those who don’t know the kind of the nuance of what Credible does, that’s different, I think that’s an important place to start. So, the way you think about Credible is for a consumer, we’re not a lead gen site, although we might look like it from the outside, because we’re a comparison tool, we are not a lead gen site as we define it.

We provide a borrower in three minutes with accurate rates based on their customer situation, their credit history, their employment, the current loans that they have if they’re looking at a refi. We give the borrowers a dashboard of options in an impartial way and we don’t filter by whichever lender pays us the most, we filter by the lowest total cost.

So, it’s an impartial platform where a borrower can make that selection and like a lot of sort of lead gen platforms, typically the borrower would then click off and apply to the lender they selected and they’ll put more information, the same information again and now go and speak to the bank or the non-bank lender they’re working with. With Credible, you finish the process on Credible so, regardless of which lender you select, the check out process so, for mortgage that’s a significant part of the process, filling out the 1003 top loaning documents, signing the various disclaimers and disclosures, signing the promissory, that occurs on the Credible side.

So, we’re really the end-to-end marketplace from comparison to check out, that’s probably in an e-commerce sense is quite a bit to think about. With Fox, because that was understood, I think that was sort of the important moment where the clarity of where the synergy was clear because for a media company that’s…..for any media company as they think about where the opportunities are for them for growth, it’s about transforming a business into being……and this is not just a Fox thing. I mean, you’re seeing it with a lot of media companies, how they become more part of the transaction, how they play deeper in the value chain, and that is where there’s real opportunity to leverage the technology that we’ve built against a bigger audience.

So, their audience is highly engaged, it’s broad, it’s big and so how do they add value to that audience, you know, in a way that is doing the right thing by the customer. And so, when you understand the nuance of what Credible is and why it’s different, I think it makes a lot of sense for someone with an engaged audience to want to add value to that audience, to want to provide more value and that’s sort of where the conversation started.

For us with mortgage, there’s obviously a…..mortgage can be a very localized product, unlike an online personal loan, or unlike a credit card, really unlike a student loan, a mortgage is something that the local expertise can really help. So, local testimonials, local realtors and so that access into the local market through FTS, Fox TV Network, is another big benefit. You can take that same concept and you can add value to the geographic footprint.

Peter: Right, okay. So, said you closed in October last year, we’re recording this in late May so it’s more than six months, you know, what have you noticed? I mean, are you gathering a whole bunch of Fox subscribers, or Fox viewers into your company?

Stephen: First thing I’d say is it’s early on in the integration, in the partnership. We’ve done a lot of planning which has been good and we’re live on Fox Business, so you can go on to Fox Business and in the Personal Finance Section can find out a whole series of content that’s produced in partnership between Credible and Fox. There are integrations we just calculate as tools, etc. throughout the content, we’re now live on the local TV CMS on the digital side so, whether it’s KTVU in Auckland, or the Dallas Network in Texas, you can access Credible through the Fox digital properties today.

I would say we’ve been number one, and this is probably the most important part, very pleased with the fit between the audience and our products. We started in student loans, but we now have a student loan origination and refi product, we have personal loans product, we have a credit card product, we have a mortgage origination product and a mortgage refi product so we really have a broad array of products in the lending space. So, the important litmus test for us early on with the partnership was, is there a match with the audience?

That was always a risk and it’s very clear when you look at response rates and you look at approval rates. We’re seeing very high quality traffic and I think that speaks to the thesis of having a highly engaged audience and having a great product experience. So, the early signs are very positive and we really are just getting started, in terms of ….you know, we’ve been live for a few months now, but there’s certainly big ambition for…and there’ll be more things that you’ll see over time as we launch them, but more opportunities to, again, bring together audience plus a great product to make it available to more people.

Peter: Okay. So then, let’s switch gears to today’s world and…you know, we have basically loan volume down across the board, maybe with the exception of mortgage refi, I’d love to sort of …you know, given you’ve got great window into the different verticals, what are you seeing? Are you seeing any of the verticals you mentioned starting to tick back up yet, or what are you seeing?

Stephen: Yeah. Vertical by vertical, as you say, the different factors apply. So, I’ll start on student loans, still our biggest category. On student loans, obviously, the Federal loan interest waiver was announced and that runs for six months, so we’ve seen some impact from that. Ultimately, federal loans are not the majority of loans that are re-financed through the product lenders. They’re typically skewed towards product lines, they often are mixed, so that’s one factor that’s influencing that business, but for the most part, I’d say student refi has been pretty resilient.

Student loan origination, this is busy season coming up now, summertime, it’s been delayed as schools are deciding whether they’re going back to the classroom, there’s question marks on cost of tuition, there’s question marks on is it an online course this year, etc. etc. So, that’s in the state of flat at the moment, I would say, but our expectation is there’s a delay, but, ultimately, there’s still plenty of demand for college and, therefore, there’s plenty of demand for student loans to attend college and private student loans, in particular, to fund the gap in costs.

On the personal loan side, I would say that’s the hardest hit, in terms of impact, and I’m sure you’ve seen that with a lot of people in the fintech community, particularly wholesale-funded lenders have seen some challenges on the funding side. So, we’ve been working with our lending partners where we can to provide data, to be flexible and we’ve seen a reduction in volume, not surprisingly, in that category and so, we’re now seeing that we’ve sort of got through…..I think we’ve through the worst of it and we’re starting to see recovery in terms of capacity to lend and underwriting criteria normalizing.

Yes, some lenders, through that period, did expose some challenges for some of those lenders and we saw some lenders pull out of the market completely. For others, we saw some power through and pick up market share during that time so, every market lender reacted a little bit differently. One interesting anecdote is not on personal, but maybe a little bit on personal loans, more so on other categories. Because you’ve seen how Amazon has done very well through this crisis as there’s acceleration towards digital, as it pertains to e-commerce, we actually saw a similar thing on the lending side where we were increasing volume where branch network volume originated for some of our lenders was reducing.

So, we were able to help them plug that hole because branches were closed so, that was, I thought, a pretty interesting dynamic where even though funding capacity might not have increased, channel mix for a lender changed more towards digital than the branch network which is not every lender, but, certainly, bigger lenders and mid-sized lenders have a branch network. So, I thought that was an interesting dynamic.

On mortgage rates are low, the media would say this is time to refi, but lenders, they’re being more cautious, I would say, as it pertains to things like employment verification because we’ve seen record unemployment, how old….yes, that’s a pay stub for March, but how do we know you’re still employed today. So, lenders are certainly looking at those type of things very closely, but, generally speaking, mortgage refi volume is up a lot, mortgage purchase, given it’s spring home buying season now which is sort of the peak season for mortgage origination, that’s been delayed because you can’t inspect a home when you’re in lockdown. I expect that will bounce back, but we’re seeing a delay there.

Peter: Right. And so, you work, obviously, with non-banks, banks and credit unions, are you seeing differences between those kind of three, kind of broad categories in how they’ve reacted to this crisis?

Stephen: Yeah. Deposit-funded lenders are in a very strong position because they’ve got sticky deposits, that’s not a groundbreaking insight. We saw rates increase across the board in like the end of March, even though official interest rates came down. So, across all products, more or less saw an increase as people are just a little conservative about their underwriting and then very quickly, we saw adjustments. I think lenders’ first reaction was, we must be going into recession here, let’s increase rates, we just want to make sure that we glide up.

Once I look at the numbers and performance, etc., there were movements again so, everyone reacted a little bit differently, but I would say the deposit-funded lenders…..as you say, we work with everyone across the board, with different funding profiles, etc. Deposit-funded lenders were probably the most aggressive, in terms of picking up market share through the dislocation.

Peter: Right, right. And so, when you say you do things end-to-end on Credible, do you do that with every single lender because, I imagine, there’s going to be some that are going to be a little bit more reticent to give you access…the information needed to do end-to-end. So, how does it work?

Stephen: So, it differs by product category, it does not differ by lender so I’ll say for the most part. So, let me give you a couple of examples. So, for a more complex process on mortgage, student loans, they are more complex than say personal loans or credit cards. So, our credit card marketplace is not end-to-end because it’s a straightforward, very easy, quick off experience and applying for a credit card takes 25 seconds.

Personal loans falls somewhere between those two categories where on Credible you can compare how pre-qualified rights are described. We build integrations with our lending partners on personal loans where once you decide on the accurate, right loan from the dashboard, based on your personal situation, the accurate rates that are provided once you select your loan product, you finish the process from there with the lender directly and that’s a relatively straightforward process because it’s a personal loan.

For student loans, student loan refi, mortgage, mortgage refi, the end-to-end process occurs on the Credible side. So, we house the underwriting models of our lending partners, we collect the 1003 on mortgage, for example, we collect all documents so, mortgage is the most comprehensive end-to-end experience because it’s the most challenging. So, we’re able to provide a really slick user journey because we’re built on a, you know, modern infrastructure, modern technology, etc. and we do house the processing and underwriting models of our lending partners on our platform.

On student loans, there are some compliance and regulatory nuances that mean the very final signing of the promissory note and any documents, if required, a lot of lenders don’t require documents, that occurs on the lender’s side as well. So, it’s not specific to a lender, it’s specific to a category so we have consistency across lenders within the categories and that has not been an easy thing to build up over time. It’s not like we turned up and said, hey everyone, this is what we’re doing, it’s taken a long time to build, but we’re in a spot now where we’ve managed to build that over eight years.

What it means is for the consumer, you get that pure experience where your information is not sprayed out to multiple lenders. You can get accurate, pre-qualified rates based on your personal situation without that occurring and then you can complete the process, the check out process on Credible, on Credible’s modern infrastructure. So, that’s the core to our technology and how we’ve been successful.

Peter: Right, right. So, once I’ve checked out on Credible and you send that over to the lender….what you’re saying is it’s pretty much 100% guaranteed that you’re going to get the loan because you’re housing the underwriting model.

Stephen: Correct. The firm offer of credit is actually displayed on….take student loans, for example. You haven’t spoken to the lender, you haven’t been on the lender’s site, the firm offer of credit, the firm offer valid for 30 days is displayed on Credible. So, all you’re doing when you click off is you’re signing the…..let’s say they don’t require any additional documents, you’re signing a promissory note and it’s done so you get the binding offer inside the Credible experience.

Peter: Right. And you’re dictating….like, obviously, different borrowers want to optimize for different things, some will optimize on a monthly payment, some on lower interest rates so, you’re taking them into account and you say, here’s all the lenders, this one is best for you, based on what they want. Is that how it works?

Stephen: We don’t dictate which one is best for the consumer.

Peter: Ahhhh

Stephen: We let the consumer decide. It’s no different to go into Kayak or Expedia where some people care about not stopping, some people care about flying with a particular airline, you know, most people care about price so, similarly, once you land on the dashboard you can have confidence that these offers are not rate ranges, these are not marketed rates, these are not one-size-fits all.

These are rates and offers and terms that are specific to your situation so you can feel confident that it’s not a bait and switch situation, what you see is what you’re going to get and you can then filter. Our default filter is lowest total cost, but you can filter by lowest total payment. For mortgage, for example, you can filter by the term of the loan, you can filter by the type of the loan, whether it’s an ARM or not.

Peter: Right.

Stephen: And so, you’ve got all that filtering capability within the dashboard, but, ultimately, the borrower decides which one product they want.

Peter: Right. So, you’ve got a pretty good connection with your customers, much better than probably the lead-gen type company have because they are really sending them off in many ways, most of them. So, I’d be curious about……it seems to me you’ve got this engaged customer and you’ve got all the different lending pieces, it seems to me the other side of the balance sheet is ripe for the picking for you guys. I mean, do you think about savings, wealth management, you know, stock trading, any of those kind of things, is this on your roadmap?

Stephen: I think, eventually. I agree with you, it makes sense to move into other products particularly if we’ve built trust with our audience and I think those are very good signs that our customers trust what we’re doing because of the inherent promise of the product. We’re providing an independent platform and a very sleek, modern user experience.

Right now, we’re very focused on our current categories, mortgage, for example, has been live now for a little over 12 months, it’s where we’re very, very focused, it’s a huge market so we’re very focused there. I think, eventually, it makes sense for us to consider other product categories; insurance, wealth management, savings, payments, but for right now, we’re very focused on the loan categories that we’re operating in today.

Peter: Right, right. So then, last question, what are your plans for the rest of the year to get through this difficult time, what’s sort of in the near term future for Credible?

Stephen: Near term, again, mortgage is a big focus for us. So, we’re making a significant investment in our mortgage platform, we’re continuing to make a significant investment and what does that mean? It means that we are trying to make the experience even smoother for the borrower and make it even more efficient by eliminating redundancy in the experience so, big focus there.

Now, mortgage, unlike non-mortgage, so student loans, personal loans, etc. is…right now, the industry is more people intensive because there’s loan officers, there’s processors, there’s closers at lenders, etc. and so, what we’re really building is software to help out….we have loan officers on our staff, employees at Credible who are the loan officers, who run the process for our borrowers. We’re very focused on giving them tools to operate more efficiently so there’s a lot of under-the-hood, what we call back-up funnel and mid-funnel work and software that we’re building to make this process more and more efficient and, again, making this process efficient helps both sides of the marketplace.

It helps consumers because it makes it easier, less burdensome and saves them time. For lenders, it allows us to produce a mortgage more efficiently than perhaps some of their existing infrastructure or their existing branch network. And so, there’s really value on both sides by making the process more efficient. That’s really where we’re focused right now and we’re obviously, on our non-mortgage business. It continues to grow strongly and we continue to optimize and build distribution through that part of the business so, mortgage, non-mortgage.

And then, across the board, we’re always looking for distribution partners to continue to scale our platform and make Credible available to more and more people. We’ve got, I think, 350 partners across the range of Fox I mentioned as well as their employers and online affiliates and blogs. We, obviously, do a whole bunch of direct-to-consumer, Facebook, Google, TVC, etc. so, focused on continuing to scale platform as well.

Peter: Right. Okay, we’ll have to leave it there, Stephen, it’s always great to chat with you. Thanks so much for coming on the show.

Stephen: Thanks, Peter.

Peter: Okay, see you later.

So, it’s pretty obvious to me the value proposition for Credible, why they’ve been successful. Obviously, they needed to execute well and Stephen has certainly done that, but if you’re a borrower and you really want to make sure you’re getting the best rate, the best deal, you don’t want to go and input your data for four or five lenders. You want someone to, basically, take all your data and tell you which one’s best for you and, obviously, you can decide what’s most important to you, but it’s a real value add and I see…

You see it in the small business space… in the consumer space, there hasn’t been really a company like Credible that gets into this much depth into really where they house all of the underwriting models for all of their lenders in-house and really able to give people a fantastic user experience because they know when they go through the Credible process that they can be approved. So, this sort of intermediation with value add is certainly something that….you see it in the small business space, as I said, see it in the consumer space and Credible is really the poster child for that, I think.

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

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Podcast 248: Jon Barlow of Finitive

The founder and CEO of Finitive talks about the challenges non-bank lenders have in raising capital and how to make this process more efficient

May 22, 2020 By Peter Renton 1 Comment

Raising capital for non-bank lenders is a time-intensive endeavor and the same could be said for investors deploying capital on these platforms. It would be better if there was an intermediary between these two parties that could make this whole process more efficient. Our next guest on the Lend Academy Podcast recognized this problem and did something about it.

Jon Barlow is the Co-Founder and CEO of Finitive, a fintech platform providing institutional investors direct access to non-bank lenders. He is a pioneer in online lending, having founded and sold one of the first investment firms in the space, Eaglewood Capital (you can listen to my previous podcast with Jon here from back in 2016). He recognized the inefficiencies in the non-bank lender funding process and decided to launch Finitive.

In this podcast you will learn:

The problem he is trying to solve with Finitive.
How their platform works.
The kinds of non-bank lenders they are working with today.
Why a lender works with Finitive rather than running the process themselves.
The number of institutional investors they have on their platform.
The typical size of the deals they have done to date.
How the current crisis is impacting investor and lender behavior.
How investors are adjusting their interest across different asset classes.
The impact this crisis is going to have on non-banker lenders.
The amount of capital they have raised to date.
The money they have raised for Finitive’s operations.
What non-bank lenders can do to increase their likelihood of being funded today.
What the rest of year will look like for Finitive.

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

Download a PDF of the transcription of Podcast 248 – Jon Barlow.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 248-JON BARLOW

Welcome to the Lend Academy Podcast, Episode No. 248, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Peter Renton: Today on the show, I am delighted to welcome back Jon Barlow, he is the CEO and Founder of Finitive. Now, many people would know him as the CEO and Founder of Eaglewood Capital, a company he sold several years ago. They were a real pioneer in the online lending space, but his new venture was not that new anymore, it’s two and a half years old, but his new venture is all about connecting institutional investors of which he was one, obviously, with non-bank lenders and so, he’s done this.

He’s the first one to really bring a sophisticated intermediary tech-enabled platform to make it much easier for the platforms to raise money and make it much easier for institutional investors to deploy capital. Now, we go into some detail about how all these works and we talk about the impact of COVID-19 on his operations and on the non-bank lending sector, in general. He talks about the scale they’re at and gives his thoughts on what the future might hold for the non-bank lending sector. It was a fascinating interview, I hope you enjoy the show.

Welcome back to the podcast, Jon!

Jon Barlow: Thanks, Peter and it’s always great to speak with you.

Peter: Likewise. So, it’s been quite a few years since we last chatted here on the podcast and you were still at Eaglewood at that stage. Maybe you can just give the listeners a little bit of an update about what you’ve been doing since you left Eaglewood.

Jon: Sure. So, I sold Eaglewood in the summer of 2015, and after that I was an angel investor and was mostly providing early stage capital back into the fintech sector. I ended up joining eight fintech boards and all of the companies were either lending companies, or technology providers to lending companies.

A majority of the work that I did during that time centered around helping these companies build and improve their capital markets programs. I really enjoyed the time actually, I found it’s a lot easier to tell other people, you know, how to run their business than it is to actually run a business. So, I had a great time doing that, but eventually, I got a little bored watching the game from the sidelines and so, I decided to start my new company, Finitive.

Peter: Okay. So, what was sort of the impetus there, I mean, apart from being bored, what were you really trying to accomplish?

Jon: Just given my background, I’m very well acquainted with pain points and challenges that institutional investors and non-bank lenders alike face in closing credit facilities, institutional credit transactions and I just saw a systematic need for yield from the investment community and a systematic need for capital from the non-bank lending community. And yet, both sides were complaining that they weren’t getting enough transactions done and the problem, in my view, is really transaction costs.

It’s expensive closing transactions in this sector, certainly, in terms of money, but even more so when you consider the time involved, and I think time is actually the biggest transaction cost. These non-bank lenders and the investors who fund them have them in our standing converts, or even thousands of man hours from start to finish closing a single transaction and I don’t think it should take that long so I started Finitive to solve this problem.

Peter: Okay. Then why don’t you take us through how your platform works exactly and how you’ve been able to sort of take some of the time and costs of these still complex transactions?

Jon: Sure. So, our goal is to make institutional credit transactions fast and easy, similar to what the online lenders that we’ve covered for many years have done for consumers and small businesses over the past decade. I think the same can happen in a B2B, or an institutional context, and so, we’ve built a marketplace, Finitive, for institutional credit facilities in the non-bank lending sector. Our platform is free for investors, all of the investors who are on our platform are institutional, you have to have, at least, $50 Million of assets under management to get onto the platform.

Most of the investors are credit bonds, banks, insurance companies and we’ve got a number of other investor types as well. Through the platform, these investors can access highly, that is, data rooms provided by originators who are our clients. We are hired by originators, not by investors and we’ve got teams of people who vet and diligence each of these transactions from a, what we call, a buy-side perspectives so, we’ve got teams of people who use the institutional investors, used to be us, to stay on the buy-side and they build models, they build data rooms, they write investment committee memos, typically 50 to 100 pages in length and replicate what institutional investors are doing internally.

All of that information is easily accessed and downloadable in a very rapid manner by the institutional investor community so, our investors save a tremendous amount of time finding opportunities and then gathering the data that they need to perform due diligence on those opportunities. And so, we tell a lot of our non-bank lending prospective clients that by the time an investor starts talking to them, they will already be fairly well advanced through the due diligence process and it saves both sides a tremendous amount of time.

There’s some similarities between our platform and a crowdfunding platform, in terms of how the mechanics and the technology of the platform work, but we, obviously, serve a completely different audience than a crowdfunding platform, institutional investors on one side and non-bank lending and credit transactions on the other side. In terms of functionalities, there are a lot of similarities.

Peter: Yeah, yeah. So then, you made a name for yourself, obviously, in the online lending space working with the likes of Lending Club, Prosper and others, are those the types of platforms you’re working with? I presume you’re casting a broader net when it comes to originators than just the online consumer lending platforms that you worked with before?

Jon: Sure. So, I’ve believed for many years now that there is a big opportunity in what I call non-bank lending and online lending is a component, it’s an important component of the non-bank lending theme, but it’s the only component, nor is it even a majority. There are literally thousands of non-bank lenders around the world who need to access capital and some of them are visible lending platforms. I won’t name names, but names that are in the press often and names that emanate from Silicon Valley, or from Wall Street, you know, those are not necessarily our best clients.

We get a lot of clients who are more on the path, they have excellent credit, they represent excellent credit, investment potential, but they’re not terribly visible to Wall Street, or Silicon Valley and there are literally thousands of these. They’re in places like Kansas City, Missouri and Tampa, Florida and Detroit, Michigan and Toronto, Canada, etc. So, a lot of our clients are, you know, fairly well established, but less visible, specialty finance companies. Some are tech-enabled, some are not, but they’re around the world and they span a number of different asset classes.

Peter: Okay. So then, let’s talk about these originators, I mean, it’s not like you have a hundred competitors doing the exact same thing as you. I imagine, it’s a binary choice in a lot of ways, they either use you, or they do it themselves so, why do the platforms…..why would they rather work with you than just run the process themselves?

Jon: Yeah, that’s a great question. Every non-bank lender has a different story and they come to us for different reasons. Some simply want far more capital than they currently have available to them and we field these off them. We hear management teams talk about how they see just an amazing number of lending opportunities that they cannot capitalize on for lack of capital, so that’s one reason.

Others want to lower their cost of capital by having half a capital provider in place, but they like to lower their borrowing cost, or lower their interest rate, others want more flexible terms. So, we have seen lenders, non-bank lenders who have a capital provider in place, may even be a low cost capital provider, but that capital provider may not allow them to deal with everything that they want to do. In many cases, this relates to loan size so there are often restrictions around size of loans that you can originate.

We also see restrictions around credit quality and also the types of collateral that a capital provider will allow the non-bank lender to post for their credit facility. So, every story is different, but whatever the need is, a non-bank lender can typically benefit from tapping into a network that is far larger than their own network and that’s what Finitive allows them to do. Currently, we have a total of over 500 institutional investors formally signed up on the platform, we have several thousand, actually north of 30,000 institutional investors in our CRM system and several thousands that we have regular communications, or dialogue with who may not necessarily be signed up on the platform yet.

And so, a non-bank lender can instantly, securely, confidentially get in front of a very large universe of investors who specialize in these types of transactions and typically…..you know, when you increase your exposure, the probabilities are you’ll get more term sheets and more financing options and I go back to that list of you want more capital, you want more flexible capital, you want cheaper capital. But, the more capital sources you can connect with quickly, the more likely it is that your capital needs will be satisfied.

Peter: Yeah, that makes sense, that makes sense. So, what you’re doing is…is it all debt, are there any kind of…you know, obviously, some of these deals sometimes have equity kickers, I mean, is it pretty much all debt that you’re doing?

Jon: The majority of our transactions are all debt, we have had a couple of transactions that had debt plus warrants. We are approached frequently by non-bank lenders to help them raise equity capital and so far, we’ve primarily referred those groups to some other partners that we have who specialize in equity capital.

Peter: Okay, okay, that makes sense. So then, what’s the sweet spot for these deals? Are you talking like $50 Million, $100 Million, $200 Million, what are the sizes of the deals that you’re interested in?

Jon: Sure. Most of our transactions start at $50 Million and it works up from there. We had a couple of transactions in the half a billion to billion dollar range and those have been from the war zone and exciting to see close. For smaller deals, we also have a program that we call our Referral Program. So, we have some investors, generally, smaller funds, smaller banks who are interested in looking at smaller transactions off platform so, we have a number of referral partners that we send smaller deals to.

If we see a good transaction, we want to be helpful however we can and even if we don’t sponsor it directly on our platform, we’ll try to make a non-bank lender some sort of an introduction that could be helpful to them.

Peter: Right, okay.

Jon: But our typical size, I think our average deal size is probably in the $100 to 150 Million range, but we sponsor deals smaller than that, we sponsor deals larger than that so, it’s a fairly large range.

Peter: Right, okay. So, we’re recording this on May 12th and so we’re about two months into this economic dislocation caused by the corona virus, and I’m curious about the impact on your business and deal flow, specifically. I mean, have you seen….in recent weeks, has there been a dramatic decrease in the amount of deals that are getting done, or even trying to get done?

Jon: Sure. We’ve certainly seen a number of investors pull back on their activity, there’s no question about that. Investors are taking longer to perform due diligence, some investors are changing deal terms that may have been agreed to pre-COVID. So, we’ve seen some term sheets that were agreed to, prices pre-negotiated with higher interest rates and there again, there’s a pretty wide range that we’re seeing. But, generally speaking, if you look at a credit that’s already….that was negotiated pre-COVID, if I had to guess, an average I would say we see 40 to 50% wider spread than what we saw pre-COVID.

For example, someone had a LIBOR + 200 credit facility negotiated ten weeks ago, that’s probably a LIBOR + 300 credit facility in today’s environment. You know, I’m generalizing, but if I had to guess, on a number of deals, it’s 40 to 50% widening of spreads. So, spreads have widened, investors have slowed down, but they haven’t stopped and I think that’s where this is very different from the last financial crisis. We’ve, actually, continued to see new term sheets post-COVID presented to originators and in fact, we haven’t announced this yet, but last week, we actually closed a fairly sizeable deal and hope to announce that shortly.

This is a deal where client came to us in the middle of March, who engaged us and literally, within six weeks we had a multi hundred million dollar credit facility lined up and it was closed last week. So, we are seeing activity, we are seeing our user base grow on both sides of the platform. So, we had almost no interruption in terms of non-bank lenders and on the other side investors signing up on our site, it’s been fairly steady there.

On the non-bank lender side, an interesting trend that we’ve seen in the last eight weeks is we’ve seen a higher percentage of large well-capitalized non-bank lenders coming to our platform than we’ve ever seen in our history and we were founded about two and a half years ago, but we are seeing a number of very high quality groups coming to us searching for capital. So, even larger, established companies are having some struggles in this environment and companies that perhaps eight, ten, twelve weeks ago would have raised capital on their own, that’s been a very interesting trend that we’ve observed.

Peter: Right, and what about across asset classes? Are you seeing certain asset classes being stronger than others and investors more willing to put in to certain asset classes than others? I mean, how is that changing?

Jon: Sure, so it’s a great question. I think pre-COVID, you have a number of credit funds and other groups that traditionally focused on distressed credit opportunities who really had nothing to do, therefore, there’s very little distress in credit for many years. A number of those pockets of capital had to re-position themselves in order to stay in business and so, a lot of those groups were funding new originations, whether that was through home sale programs, or credit facilities to online lenders, or non-bank lenders, in one way or another, they were providing new capital for the sector and that segment of the investor base has really re-positioned that towards their core which is providing funding to distressed companies which comes at a significant premium, where those companies may have borrowed prior to the downturn and also purchasing secondary portfolios and other distressed assets so, I think distressed and secondary sales are a big theme.

Another theme that we’re observing, which may not come out as a surprise, is just to focus on highly secured opportunities with major focus on return of principal and safety of principal. So, those are the things we’ve seen, there’s a big move if you look at the banks, our platform….the banks are really focused on well capitalized borrowers. I think a lot of the marginal companies and, unfortunately, I don’t say this in any way of rejoicing, but, unfortunately, a lot of startups are just getting rationalized and, you know, won’t have access to credit for some time to come. There’s a big focus on the bank community on high quality, well-capitalized borrowers, we are also seeing certain asset classes, and I’ll give you one or two examples.

There are certain asset classes that have incredibly short duration, very short maturities and those asset classes are seeing a lot more interest from the investment community because the legacy problem pre covid through those assets and cleaned out portfolios. As an example, we have one group that we have worked with in buy here pay later space, physically buy now pay later. These are 30, 45, 60-day loans that are originated through online merchants to consumers and at this point, the majority of those loan portfolios have been originated with tighter underwriting standards post-COVID, higher FICO scores, better debt to income, whatever the metrics that you’re focused on as related to credit quality.

Credit quality has improved dramatically and so….you know, we are seeing some transactions, asset classes where an originator truly has a portfolio that is entirely underwritten post-COVID and also seeing some success.

Peter: Okay, okay, that’s good to hear. Good to hear that there’s a ….you know, there are deals getting done and there are still some bright spots, but I’d like to get…clearly, there’s going to be some shakeout in the non-bank lending sector and you’ve got obviously a pretty good window on that sector now. I mean, do you see many of these originators just not making it, how do you feel….obviously, you’ve done your due diligence on many of these, but how do you feel about the non-bank lending sector and the impacts that this crisis is going to have over the long term?

Jon: Yeah, that’s a great question. It’s unfortunate that we’re having these conversations right now and, unfortunately, if you think a number of non-bank lenders will close the doors, we’ve seen many groups that we speak with completely shut down their originations in recent weeks. A few have started back-up, others are still on hold and, you know, there’s essentially that chain reaction of defaults that maybe could stop at this point and I caveat that again by saying, I hope I am wrong, they have a number of borrowers, whether those are consumers, whether those are businesses, whether those are real estate owners, whether those are auto owners, or students. A number of borrowers have stopped paying their debts. I don’t think… this has all happened so suddenly, I don’t think we’ve had a chance yet to synthesize and process and quantify if we have this crisis on credit, but, certainly, delinquencies are going to go way up. That means that a number of non-bank lenders will, in turn, have difficulty paying their loans to their institutional investors and thus, this chain reaction unfolds and creates a lot of economic and personal and other types of damage.

So, I think the government has reacted as quickly and as aggressively as they’ve been able to, given the circumstances, but this chain reaction can be very difficult to stop once it’s set in motion. So, I am hopeful that I’m wrong, but certainly we are preparing our business for what I would call an L-shaped economic recovery as opposed to a V-shaped recovery. So, we will see a lot of consolidation on an on-bank lending sector and there will be a transition of asset ownership from well-capitalized groups, sorry from less well capitalized groups, the last well, the well-capitalized groups and this just has been a natural part of the credit cycle and it’s unfolding as we speak.

Peter: Yeah, yeah, it is indeed. Okay, we’re switching gears a little bit, maybe can you give us some sense…..you know, you said you’ve been in business two/two and a half years, but what kind of scale are you at today. Can you give us some sense of maybe total number of deals, amount of capital raised?

Jon: Sure. We have raised north of $2 Billion of committed capital across our clients, we had roughly 15 clients and that number is swelling pretty rapidly. We, actually, have more clients today in our pipeline than we’ve ever had in our history, but we’ve raised over $2 Billion across , call it a dozen plus clients over the past two years and you know, we’re looking at some of these numbers pretty significantly over the next year, or two.

Peter: Okay. So, what about your own capital needs to operate your company, have you gone out and raised money for Finitive?

Jon: We did. So, a little over a year ago, we raised close to $6 Million in a seed round, we’re actually self-funded for the first year, or so of our history, self-funded and funded with revenue. We were revenue positive from day one, but, last year, we did raise a round of venture capital from Atomic Labs. I’ve known the Founder of Atomic Labs, Jack Abraham, for many years, he was an investor in my first company and we’ve really enjoyed the relationship with Atomic.

And then last fall, we raised a round of venture debt from Silicon Valley Bank and that was a $2 Million credit line and they sent that past the partners as well. It is possible that we will go out at some point in the future and raise additional venture capital, but for now, that’s what we’ve put in place.

Peter: Right, right. Okay, we’re running out of a time, but a couple more things I really want to get to. One is, when you look at these non-bank originators and you said some of them are tech-enabled, some of them are not really, I mean, what should they do to improve….I’m thinking, operationally, what can they do to improve operationally that will increase their chances of obtaining funding.

Jon: Yeah, that’s a great question. One thing that we recommend to all of our non-bank lending clients as soon as we hire them is that they have a Field Exam performed. A Field Exam is sometimes described as a forensic audit and you can get a field examiner who will come and visit your office, that’s a little bit difficult these days, but they will perform a review of all your processes, your procedures, your risk management, your corporate governance, your adherence to your written underwriting standards and the list goes on and on.

I would recommend, even if you don’t have an institutional transaction that you’re contemplating in the near future, I’d recommend getting a field examiner into your office, get him to inspect your operations, inspect your internal controls, etc. and advise you on what changes you can make today so that when you’re ready for institutional capital, you can pass an inspection of that sort.

I would say 95% + of our investors will require a Field Exam and, if you’re not ready today to pass the Field Exam, you won’t be able to change your operations overnight. It can take weeks, if not months to make the changes required to pass one of those inspections. So, that’s probably the best advice I can give, to institutionalized their business.

Peter: Okay, that makes sense. Last question then, for your guys, sounds like, you’re not planning on major changes to your strategy going forward. I mean, are you looking at this year…..it sounds like you’re looking to still grow the business, I mean, maybe you can give us a sense of how you see the rest of the year planning out for Finitive.

Jon: Sure. As I mentioned, we have a very strong pipeline at the moment, we are working very hard to satisfy the clients in that pipeline and put the capital in place that they need to continue funding their operations. We do expect that to continue to grow, whether that is measured by capital commitments raised, number of clients, even our headcount, I think, we’re looking at expanding on the second half of this year. So, I wouldn’t exactly say it’s business as usual, this has been a very unusual time, but we continue to move forward and execute the business strategy that we had in place from day one.

Peter: Right. Okay, well best of luck, Jon, it was great chatting to you again and I really appreciate your coming on the show.

Jon: Thanks again for having me, we appreciate it.

Peter: You bet, see you.

You know, I agree with Jon there. I actually think 2020 is going to be remembered as the year where there was the culling of the heard in the non-bank lending space. There certainly are….across every asset class, there are companies that are struggling and companies that continue to do okay. Certainly, the well-capitalized ones, the ones that have really been able to generate profits, generate cash flow, are going to be in much better shape to weather this storm than those that really are still, you know, cash flow negative and trying to claw their way to profitability.

I think those kinds of companies….it’s going to be very difficult for them to survive the next 12 months and we’re going to see a lot of distressed sales of these platforms and there will be some that would just go completely out of business. It’s what we’re seeing, but I think, like anything, when these things happen, the strong will survive and I think the industry, as a whole, will be better for this in the long run.

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

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