Small business lending is going through some rapid changes right now. Tech companies like PayPal and Square are becoming huge players in the space and new entrants like Stripe, Shopify and Toast are looking to help finance their huge customer bases. The market is becoming more challenging for the first generation of alternative lenders to grow.
Our next guest on the Lend Academy Podcast is Mark Ruddock, the CEO of BFS Capital. Mark has been CEO for a little over a year and he is working hard to position BFS with a truly differentiated offering.
In this podcast you will learn:
- What attracted Mark to BFS Capital.
- Details of their lending products.
- The geographic footprint for BFS.
- The changes Mark has made in his first year as CEO.
- Where BFS had room for improvement.
- The changes that BFS has made in their underwriting.
- The two fundamental metrics they look at for every customer.
- Why Mark is bearish on the rise of banking as a service for credit.
- Mark’s view of the Paypals and Shopifys of the world.
- The kinds of partners BFS is considering to grow.
- What is on tap for BFS in 2020.
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.Click to Read Podcast Transcription (Full Text Version) Below
PODCAST TRANSCRIPTION SESSION NO. 230–MARK RUDDOCK
Welcome to the Lend Academy Podcast, Episode No. 230, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.
Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.
Peter Renton: Today on the show, I am delighted to welcome Mark Ruddock, he is the CEO of BFS Capital. Now, BFS Capital has actually been around for quite sometime, since the early 2000s, they’re a small business lender. Mark has been at the helm just for over a year. So, I wanted to get him on to talk about the changes that he’s made, he’s certainly down a lot of changes and we get into those in some depth.
We talk about their approach to underwriting, their partnerships with brokers, we talk about the impact…you know, the PayPals, Amazons and Squares of the world. We talk about how they want to approach new audiences and just his views on the future of small business lending. It was a fascinating interview, hope you enjoy the show.
Welcome to the podcast, Mark!
Mark Ruddock: It’s great to be here.
Peter: Okay. So, I’d like to get this thing started by giving the listeners some background about yourself. You’ve had an interesting career, a global career, it seems, so why don’t you give the listeners some of the highlights of what you’ve done to date?
Mark: Sure. I guess you’d call me a geek by training so I have a Comp-Sci degree and that’s really the landscape where I’ve done an awful lot of work across my career, even though it really has been more on leadership, I think, than in the trenches of tech. The experience really has spanned both range of different sectors and also very different company sizes.
So, from a sectoral perspective, I’ve worked in enterprise software largely with a financial services focus. I’ve worked in mobile applications and most recently, spent the last seven years really focusing on online consumer financial services and across that career have worked in everything from, you know, 5-person startups, to companies of half a billion dollars of revenue with 3,500 employees spanning 17 countries.
So, from a leadership perspective, it’s been a really interesting career, actually. I’ve had the pleasure of working with my teams in multiple countries across multiple product lines and I’ve been involved in sectors that are undergoing pretty interesting transformations and that’s really what’s drawn me to a lot of these opportunities.
Peter: And you’re originally from Canada, is that right?
Mark: I’m actually not. I am Jamaican by birth.
Peter: (laughs) I wouldn’t have guessed that.
Mark: No, I’m actually third generation Jamaican by birth, if you can believe it, grew up a little bit in Jamaica, then went to live in England, then went to live to Canada. I guess it was sort of early middle school kind of area and I’ve really spent though the bulk of my time in Canada.
The last couple of years, my wife and I, were actually living in Berlin which was a fascinating experience in it’s own right, a tremendous startup town and a very vibrant and interesting city. So, it’s been a kind of fascinating way to grow up in the sense that I’ve been exposed to a number of different kinds of cultures and a number of different sorts of places, a really very rich upbringing.
Peter: Right, right, okay. So then, what was it that attracted you to BFS Capital?
Mark: Maybe I can answer that question by sort of starting at a bit of a macro level. So, having spent the last seven years in online consumer financial services, I was really living a pretty fundamental transformation of what’s happening in that sector as a combination of, you know, the kind of millennial effect, if you want to call it, was driving a demand for new kinds of products and user experience and so on. But, the rise of alternate data and data science was transforming underwriting to a degree to which, you know, we were able to offer automated and customized solutions.
The customers were really interesting and really exciting and this kind of switched to an in-hand mobile first experience. All of these were really, I think, shaping the foundations of what was, historically, a pretty static kind of consumer financial services space. And the more I thought about it as I was sort of coming to the end of the commitment I had made for finance, in particular, the more I began to wonder to what extent these changes were going to show up in the small business financial services area. And I developed a thesis that many of the sort of the shifts that we had seen in the consumer financial area were going to show up in business banking in very many respects.
The question, therefore, became what is an interesting point of inflection for SME financial services and, if so, were they interesting potential companies around which we could kind of re-imagine the space. And it was pure serendipity, actually, that I came across BFS and as I got to know the venture capitalists behind the firm and some of the founding team here, I guess those two perspectives came together and it really appeared that this company was very much a diamond in the rough in the sense that it had this tremendous experience in understanding the needs of small businesses, but it was still somewhat of a mechanical turf of a business.
But, if you sort of looked at the aspirations of the team here and of the private equity folks behind the company, you got the sense that they were really hungry to make this change happen, so it became a very interesting vehicle within which to do that.
I liked these particular moments in time because when you take a look at a shift, let’s say in the combination of consumer, or customer demand, technology enablement, all of these things, they fundamentally shake up sectors and they challenge the incumbents and they open up new wide space for challenges and they operate in a way that can shift enterprise value quite rapidly to those players who can kind of seize the opportunity. I think that to me is a stage in my career was really what excited me about coming here.
Mark: You know, and as a CEO, right, you always enter these things with a very hopeful and ambitious focus and once you get on the ground, you try to figure out what have I actually got. Actually, it’s been a fascinating year here as a result of that.
Peter: Okay. So, I think small business lending has had an interesting inflection point. There has been so much change in the last couple of years with new players which we’ll talk about in a little bit. But, maybe before that, for those who don’t know, why don’t you just describe the BFS Capital business, what sort of products you offer, the size of the company, that sort of thing.
Mark: Yeah, so BFS is focused on small business working capital primarily. So, we provide loans from about $5,000 to about $500,000 spanning six to 18 months. It’s primarily working capital term loans so we do significantly less than 20% now MCAs. The business originates, on average, about $300 Million a year in loans, it’s approaching $100 Million in revenue and it is profitable. So, it’s a very interesting asset in it’s own right.
It operates today across Canada, the US and the UK. I would say that the US, obviously, is the primary focus of the business and the UK and Canada are much more nascent businesses for us. I would call them “hobbies” potentially at this stage, but obviously the intent is to much more aggressively grow our international footprint, but starting with those two countries, in particular.
Peter: Okay. So then, you took on the job, it was I think November 2018, I believe, and as we’re recording this just before Christmas, you’re over a year on the job. Maybe just take us through, what are some of the changes you’ve made in your first year as CEO?
Mark: Yeah. So, I think, the primary focus when I got here was to get some clarity around what our strategy was going to be and then what it was we needed to do to effectively execute on that strategy. What I found was really a company that had deep IT in terms of understanding the customer base, but nominal IT, in terms of any technology underpinning.
So, we very quickly set about a twin track strategy here at BFS, but the first track was really getting the core business into a place where being technology-enabled, or more technology-enabled. It would achieve some sort of competitive advantage and that was not a trivial undertaking.
We began in the sort of early part of the spring to identify a new technology stack that included a new loan management system, a new risk engine that could allow us to scale to, you know, a deeper, broader pool of data and to more modern underwriting techniques and an underlying kind of CRM around which we could build a customer life cycle holistically of the customer.
And we chose Provenir as the risk engine which is a fairly well known platform now, I think it’s being used by a number of pretty interesting organizations around the world. We chose Salesforce as our underlying CRM, we chose a young company actually out of New York called LendingFront which has an interesting heritage in the sense that it was founded by some of the early team from OnDeck.
We felt that given what we were trying to achieve here that was the right kind of platform mix. So, track number one really became…beginning, of course, with kind of transforming this business from a little bit of a mechanical turf really to a digital and highly scalable lender. As part of that, we have obviously been beefing up our technology core team, we hired a great new CTO earlier this year and we have begun to test the new platform now.
In fact by the next, I would say, four weeks, or so, all of our North American loans will be moving to the new platform. Not only does it allow us to automate more of the process here and to underwrite much more quickly and much earlier in the process than historically that we’ve been able to ….but, it gives us the capability to transform the relationship we have with our partners so that from being really a bit of more asynchronous human-to-human type of relationship, it’s a much more API-driven relationship going forward. So, that was all track one and I think to me that in effect just table stakes.
Track Two was about going back to the place we started our conversation which is what does this point of inflection mean for SME financial services and how could BFS re-imagine part of that future and what role could we play in being a part of that future. And so we began about five/six months ago to look at if we were going to start from scratch, what might the next generation of SME financial products look like and could we actually credibly build some of them. That’s the process that’s now well underway.
In fact, as I think as you may have noticed, we have opened a new data science and tech hub in Toronto where we’re going to be building that new generation and we have not announced yet, but we have opened the second hub now in Omaha where a lot of the core technology transformation will be done. So, that’s really been a huge part of my focus over the last year. Around that, you can imagine really what the rest was.
The rest was trying to get an assessment of what resources we had, in terms of, you know, our management team, our mid-level management, our skill set and so on and identify places where we’re going to transform from being a much more human-powered organization to being a much more digital organization, where were the gaps and, you know, how were we going to kind of change them over.
And so, the other thing, I think, that we, as team, have been working on is re-skilling and up-skilling the teams. The management team level, you probably noticed, is that we’ve hired a new COO. He and I worked together before doing some high scale online algorithmic lending. And, there will be another announcement coming out in the early part of January, not a name I can mention, but we found a wonderful new chief marketing office and our current chief marketing officer is going to transition over to become our Chief People Officer. I asked her to make that change because she is extraordinarily skilled in that area and as you can imagine, as we transform this company, it has enormous impact on the people here.
Mark: But, our employer brand and everything we’re doing about attracting the best and the brightest in the world is going to have to be driven by someone who’s sole purpose is to do that and Sherry is really just naturally talented in that area, so, a lot of stuff going on.
I think the last thing that we’ve done as we sort of clarified our strategy around where we go over the long term….as I went back and asked two questions. One was, you know, the core business today…. is very much an indirect merchant business. We go to, you know, business with a number of partners, mostly brokers, but that landscape is evolving obviously and it’s getting broader and more interesting.
And so, you know, I asked the question, how well are we doing in this space today and it turns out that we weren’t doing particularly well. I think our lack of automation, at times, had caused us to often get a little breathy about sending out offers before they were fully underwritten because we felt the pressure to do so and as a result…..you know, we occasionally left our partners at the altar, right, where when we finally underwrote the deal, we realized that we couldn’t do the deal and that leads to a very bad customer experience.
So, over the time we lasted awhile, we’ve been turning that around completely and winning back the trust of that particular community and we’re giving them some amazing tools now with the new platform that give them complete transparency. They can see all of their…..the life cycle of their leads, from leads to loans so even lifetime customer value.
The second thing was really trying to figure out where the arch of this business was going and one of the things that I took out of the customer kind of consumer space that I’ve been working over that lasted awhile is the importance of kind of understanding the regulatory arc and understanding where it was that a truly sustainable business could exist.
As I took a look at the small business lending sector, I looked at kind of the potential regulatory arc that we were going to be facing, not only in the United States, but, frankly, around the world. I think we began to realize that what we needed to do was an organization was move up the credit curb a little bit and look at being able to thrive in a world of the lower APR types of products.
So, as a result of that, we really have began to tighten our lending criteria and also broaden our products offering in a way that makes it inherent much more appealing to those customers with more optionality, those customers who have choice, and a lot of what you started to see coming out of the new brand. You know, the waiving of upfront fees is really just the beginning of that story, the beginning of trying to create a compelling and differentiated brand in the sector backed up by tighter underwriting criteria at the backend. So, it’s been literally 12-1/2 months at this stage, maybe almost 13, and it has been a full year, (Peter laughs) pretty exciting.
Peter: Right, okay. So, there’s quite a bit to unpack there, but I just…maybe we’ll start with underwriting, you mentioned that several times. You talked about how you’re bringing more automation, more of an API-based approach, rather than a human-to-human approach, tell us a little bit about that process…like how automated is it today, what data sources are you pulling from these, what new things you’ve implemented there.
Mark: Yeah, it’s a good question. So, you know, the frame of reference I have is the world I just came out of. So, the company I was running prior to arriving at BFS, we were making about 22,500 lending decisions a days and we were issuing about 16,500 loans today and not a single human being touched that entire process, it was completely algorithmic. So, I sort of set that as the North Star benchmark, right.
Now, small business underwriting is far more complicated, complicated because there is a discontinuity of the underlying data that you bury off and need to take a look at. Some data sources that we will need to adjudicate certain kinds of loan are simply not available digitally by API today. So, there’s always going to be a need for a subset of your underwriting to be a human-powered kind of algorithm, right.
The question, though, is how do you marry the technology in the humans in a way that creates the most efficient process you can and how do you build the underlying decisioning technology stock so that as new data sources become available you can leverage them very quickly and automate more and more of the process.
And so, I think, number one is we see this very much as a hybrid where in some cases the machine can make all of the decision, but in most cases, the machine can make most of the decision and we might need a secondary check, you know, from a human underwriter who is able to kind of look for the nuance, right.
The second thing is that, you know, we need to evolve our thinking and our capability by continuously challenging ourselves to look at new data sources and then to back off to see if they are predictive. I think so much of being able to unlock a new range of financial products and services for the digitally native generation is going to be about a frictionless experience, and to some extent about immediacy. I think that’s the big challenge for people in the small business lending space.
These are very difficult companies to adjudicate sometimes, but yet the long arc has to be this kind of North Star, right, full automation eventually. So, what data sources do we look at? Well, we look at a combination of, both, the kind of credit information and other things we can acquire on the owners and the officers of the business, we look at the business itself, all of it’s kind of credit history. Increasingly, we look, obviously, at bank transactional data, but going forward, I think our philosophy is to look as broadly as we can at complimentary data that might come from sources as diverse as Plaid accounting systems, all the way through to social sentiment, right.
If you are trying to figure out if you should lend to a B2C company, a restaurant for example, it’s really helpful to understand the arch of, you know, what is the kind of customer feedback been over time, is it getting better, is it getting worse, are more customers, you know, writing reviews versus less. We think that there’s a really interesting play in looking more broadly than kind of historical credit measures.
So, part of what our team in Toronto was doing now is it’s building the kinds of algorithms to go and get that data back test it against, you know, the world that we’ve seen up to date because we have significant many, many years of outcomes, right, and try to understand the predictability of that information. So, I would say it’s a never-ending journey really for our risk team and I don’t think it is going to end anytime soon.
Peter: Right. (laughs) Yes, that’s for sure.
Mark: You can never be good enough at underwriting, right?
Peter: No, there’s always room for improvement, it’ll never end, the room for improvement, that is. So, you talked about….you’re primarily working with brokers for customer acquisition, you did touch on this, about improving the experience for them, so I guess maybe one of the big challenges, I think, for any lender, whether small business, consumer, what have you, is the cost of acquisition. You’re putting all this effort in, how are you kind of controlling that particular metric?
Mark: Yeah, it’s a good question. Maybe, I should step back and say we actually look at two fundamental metrics in concert. We certainly look at the cost of acquisition, but we look at it in a context of customer left hand value.
Mark: And you can’t really just look at one without the other. So, on the cost of acquisition side, I think this is a really interesting topic, actually. So, today, we are a little fooled because, you know, our brokerage model, that drives much of this industry, is a model where the commissions are, in effect, paid by the customer, the end customer. And so, you don’t really ever get hit with cost of acquisition, you don’t think of it that often, or, historically, haven’t thought of it that often, obviously, as a company.
Now, as you do more direct customer acquisition, as you do more digital acquisition, as you go out and try to convert customers, you really now have to start to look not only at performance-based marketing, which can have very high costs, but broad-based multi-channel marketing which can also have cost. I believe, by the way, that if you are going to, over time, attract the truly discerning customers, you need to also have a brand and that requires that you must spend on brand and on brand awareness.
All of that has to be overall cost of acquisition and the secret really is to grind that down over time with both a high degree of excellence in your kind of performance marketing area, but also looking at more serendipity in terms of being able to raise you profile through third party content, through PR amplification and so on. So, one of the reasons why we are spending so much time and focus on really re-imagining our marketing organization under the leadership of a new CMO is that we believe that’s going to be pretty important going forward.
And there’s a third pillar here which I find particularly fascinating and I think about this a lot because one of the ways in which we built Viigo very, very successfully….Viigo was a mobile software company that was my second real kind of area focused after enterprise software, Viigo was very quickly known as one of the most highly downloaded Blackberry apps of all time before it was acquired by Blackberry in about 2010/2011. Viigo spent almost nothing on marketing, but it was able to go to market through a wonderful kind of cross section of rationally aligned partners who were as eager to tell the Viigo story as we were.
We didn’t have to pay for any of that and so the question we’ve been asking ourselves a lot is how do we unlock access to dump trucks to customers, as I like to call them, without actually having to buy them one dump truck at a time. In other words, can we find partnerships where there is this rational sort of self interest alignment, where as we are successful, they are successful and vice versa and, ultimately, therefore, bring down the overall cost of acquisition. I think that’s where we’re spending a lot of our focus right now and that’s one of the reasons why we’re kind of thinking about our tech stock in such a way as to enable that and make it possible, right.
And, you know, I think you’re right to point out to me that there are some companies that are really doing that well today, companies, you know, that have their own ecosystems like Stripe and Square and to some extent PayPal and Shopify who have not only captive ecosystems of customers which effectively they can get for free, but then they have all these proprietary data on top of it that they can use to pre-score and to judge those customers’ credit worthiness. I think it’s a very powerful competitive advantage and I think the question we’re asking ourselves is, are there analogues that we can take advantage of as we scale out our indirect merchant business.
Peter: Right, that’s right, that’s super interesting. So then, that brings up another question that is…..you know, some of your competitors have gone out and created a suite of services, Software-as-a-Service, basically, for banks which obviously is a way to get a massive chunk of customers on-boarded. You’re putting all this effort into tech and I’ve been thinking about this for the last ten minutes, thinking is that what you’re thinking of as far as going out to the traditional kind of lenders, or are you thinking about acquiring what you call dump trucks full of customers in completely unrelated areas
Mark: That’s a very good question. So, I think the question we’re really answering is that we’re considering a Credit-as-a-Service business and if so, are we going to focus on kind of the banking sector, or in other sectors. I think my personal view is that I don’t think the banking sector represents a long term sustainable strategy for Credit-as-a-Service and I’ll tell you why.
You know, for a long time there’s been this discontinuity of capability between the banks and this kind of rapid rise of digitalization in financial services. Most banks are actually catching up pretty quickly now and while they may dabble by using other people’s products and technology stock, I don’t think they will do that sustainably. They’d much rather own their own stock, notwithstanding the fact that there’s a large portion of community banks, for example, that would much rather take software and deploy it than not. I think, you know, that space is being relatively well served today and it doesn’t feel like white space to me.
Mark: Our focus is on a slightly different type of potential partner. I don’t want to go into it into too much detail, but let me just say this. If you take a look at the Shopifys and the Squares and the Stripes and the PayPals and so on, you know, you can imagine that there is a long tail peer group of many of those companies that are now looking jealously at their peers and saying, wouldn’t it be nice to increase the average revenue per customer by being able to unlock credit to those customers.
I do, because we could monetize that on our own, or because it would enable those customers to buy more of our stuff which, frankly, is going to generate greater margin for us. And I think the answer is probably, yes, and I think that if we are going to scale our indirect to merchant business aggressively over the next few years…in fact, if anyone is going to do that, that is likely to be the vector that they’re going to have to pursue.
So, are we investing in building robust APIs that enable us to provide credit via API, for example, in other words, us to be the Stripe of credit, for example. I would say, yes, that is an interesting potential area of interest for us, but I would not underestimate the degree of difficulty in, you know, taking an alt lender and turning them, in effect, into a software company which is what that would require, and so, we’re not rushing down that road.
I think we see an evolution of our current broker base to a much more digital broker and, you know, comparison site base to some selective deep strategic partners with whom we will have deeply digital connections as being kind of the first wave of that. I think beyond that to the long tail of e-commerce and payment service providers and cloud accounting vendors and all of that stuff, that’s a much more difficult place to go play, but it’s certainly interesting.
Peter: Right, right, No, it is interesting. I like the fact you’re not actually….you’re trying to sort of blaze new ground, it sounds like, because there’s certainly lots of…..you know, there’s lots of people trying to provide Credit-as-a-Service to banks and ….I love the fact that there’s so many companies approaching this from very different angles and the winner is the small business owner.
Having been a small business owner my entire career and my Dad was a small business owner, getting credit has been very difficult for every business I’ve had. It’s been a challenge and I feel like we are just now getting to the point where it’s becoming easier, I feel like, and I think it’s only going to become more so in the coming decade.
Anyway, we’re almost out of time and we’ve covered a lot of territory here, why don’t you just maybe take a step back and share with the listeners what’s on top……this will be published in early 2020, what’s on tap for BFS next year?
Mark: I think the two strategies, or two tracks of strategies that I talked about will become a lot more evident as the year progresses. So, in the early part of 2020, you’re going to see from BFS really the more public launch of our new platform and what that means, in particular to digitally connected partners and the way in which we want to transform the reality for our partners today. I think we understand what it is they need us to be for them which is, you know, a place to very rapidly and very efficiently help them convert leads to loans, right.
I think the second thrust is going to be the continued evolution of our brand and our product offering. I think the removal of upfront fees, as I said earlier, was really just the beginning of taking a point of view that will be around a differentiated product offering and I hate to go to market as a company with an undifferentiated product. That’s a really hard way to make a living, so I would expect to see some evolution there.
I think the most exciting thing, though, that we have coming out of the business in 2020 will be the launch of our new product and it will be a fundamentally different product from anything you have seen from BFS in the past and it will have a very different go to market strategy behind it. That product should be visible as we move into the second half of the year and I think that that’s the product that’s exciting our Board and our investors and really even the core team here.
And so, you know, 2019, for me, was a bit of kind of an iceberg year where we had to sort of do quite a lot of heavy lifting below the surface. Not all of that heavy lifting is yet finished, there’s more to do, but it’s certainly moving along. I think 2020 is the year where….I’m hoping that BFS’ brand profile raises significantly and becomes, you know, I think synonymous with some forward looking thinking, some imaginative thing, some breakthrough thinking in the space.
You are quite correct, I think the winner in all of these is the small business owner. I think you’re going to see data and algorithms unlock access to credit earlier in their life cycle than we have to start we’ve been able to before. I think you’re going to start to see a broader range of products and services that are much more on their terms and not on the lenders’ terms so more granularity, more control, you know, left kind of fuss, more transparency, all of that stuff.
And I think, at the end of the day, you know, all of us kind of understand the economic impact we have as businesses because we provide really smart entrepreneurs with the capital necessary, frankly, the power of the economy. I think the next two, or three years, it’s going to be pretty exciting in small business financial services.
Peter: I completely agree and I’m excited to hear what you’ve got on top for half of next year. We’ll have to leave it there, though, Mark. I really appreciate your coming on the show.
Mark: Thank you so much, really it’s been a pleasure.
Peter: Okay, see you.
You know, Mark and I were just chatting after we stopped recording there and he was talking about where the US is compared to Europe and other parts of the world like China, and really the US, actually, has some catching up to do and a lot of it, obviously, has to do with the old rails that we have in place in the financial system.
We are making moves and I think the next decade is going to be super interesting insofar as the immediacy of data, the immediacy of movement of money. This is all going to have a tremendous impact on small business lending and BFS are setting themselves up to be one of the leaders in this change.
Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.
Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.