I think the small dollar loan space is fascinating. When done responsibly it is a difficult business to execute well given the small amount of revenue generated with each transaction. It requires automation, good underwriting and efficient marketing. One of the leaders in this space is LendUp.
The next guest on the Lend Academy Podcast is Anu Shultes, she is the CEO of LendUp, a position she has held for one year now. We have had the founder and former CEO of LendUp on the show a couple of times (see here and here) but I wanted to get Anu on the show to find out how her first year as CEO has gone and where LendUp is at today.
In this podcast you will learn:
- How her background was great preparation to become CEO of LendUp.
- What first attracted her to LendUp.
- Why they decided to spin off their credit card business a year ago.
- The changes Anu has made since becoming CEO of LendUp.
- What was behind their move from San Francisco to Oakland.
- The challenges of the state by state licensing model.
- The process for taking out a LendUp loan.
- The data they are you using to underwrite these loans.
- How their customers can progress to a cheaper loan.
- What percentage of customers come back from a second loan.
- When LendUp reports the loans to the credit bureaus.
- How they are engaging with both state and federal regulators.
- The metrics Anu looks at to determine success at LendUp.
- How they are funding their loans today.
- The goals for LendUp 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. 231–ANU SHULTES
Welcome to the Lend Academy Podcast, Episode No. 231, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.
Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.
Peter Renton: Today on the show, I am delighted to welcome Anu Shultes, she is the CEO of LendUp. Now, LendUp is a company that many of our regular listeners would know, they’re a short term lender and had their former CEO, Sasha Orloff, on the show a couple of times, but I wanted to get Anu on the show. She’s been on the job about a year and we talk about the big change that LendUp made a year ago where they split off the credit card business.
We talk about the reasoning behind that, we talk about the business today, who their core customer is, how they position their business, what about the process that they do and how they help borrowers sort of move up the credit spectrum. We talk about their underwriting model in some depth and how Anu feels about the engagement with regulators. We talk about the funding and what’s next for LendUp. It was a fascinating interview, I hope you enjoy the show.
Welcome to the podcast Anu!
Anu Shultes: Thank you, Peter, for having me.
Peter: Of course, my pleasure. So, I’d like to get this thing started by giving the listeners some background. You’ve had a pretty interesting career to date, so maybe you can give us some of the highlights before you got to LendUp.
Anu: Yeah, absolutely. So, I actually have a Computer Engineering degree from India and then I came, I immigrated to the US, came here for masters degree, I have a couple of masters degree, I have a Masters in Operations Research. I started my career actually is Providian, Providian Capital One, at that time, they were called a non-bank bank.
Anu: I spent almost nine years at Providian, I was very fortunate to start my career at Providian because it was basically run by engineers, it was a company full of engineers, it was a data-driven meritocracy and I really kind of cut my teeth on just understanding lending and kind of using the background to really ….how do you use data to make decisions that ultimately benefit the customer and the company, that’s where I learned. I always talk about this because people are always surprised. My very first project at Providian was to build an internal pre-screened score, so I built it from basically internal FICO scores, if you will. So, I actually come from a very technical background, but I deliberately managed my career as a combination of me making intensely managing my career as well as happenstance.
I’ve actually started in analytics and, you know, on the credit management side, moved into marketing and operations for Providian, so by the time I left nine years later, I was VP in charge of running operations for the US prime business. I know they were known more for their ….you know, more of a sub-prime credit, but their bread and butter was actually the super prime business.
Anu: Yeah. So, I left Providian on my own because my husband had a job in the East Coast. I moved and went to Ohio, got an MBA in Corporate Finance and ended up managing products for a super regional bank called National City, it doesn’t exist anymore, it’s now part of PNC. I managed the home equity line of credit portfolio.
I kind of continued to evolve my career, you know, my goal was to ultimately be a GM and one day be CEO, so I actively kind of said, okay, what are the areas that I need to, in my own way, master and so that’s kind of what I’ve done over the last 25 years. I would say the first half of my career was all about lending, credit cards, super prime, home equity line of credit, you know, understanding both the credit side as well as the profitability side of lending.
The second half of my career, starting in 2007, has been all about underserved. I had a little detour when I worked at Home Shopping Network in Florida, but came back to California in 2007, actually joined this company called AccountNow that did prepaid cards for the underserved. It was a small company, but we were the third leading online prepaid company behind Green Dot in that span.
The industry itself was very nascent, I think Green Dot was only three years old and so it was a great opportunity for me to really jump in and make some substantial progress on how do we pin this customer, how do we provide value to this customer, but in that process, I actually ended up spending time with customers in person and it really hit me hard on….so many people even if they have a decent income, $40,000/$50,000, struggle on a day to day basis even with just access to financial tools. So, it really changed my opinion, my personal view on how I want to spend my career and what are the things I want to do.
So, it was a great opportunity because it was founded by ex-Providian folks and I didn’t have to prove myself when I came in the door, but also gave me the freedom to kind of explore….how do you delineate this customer, how do you provide products for them that make them feel dignified, give them access that we all take for granted and spent most of my time, if not all, on building products for the underserved and then really focused on financial inclusion.
Peter: Okay. So, what specifically attracted you to LendUp? It seems that you’ve been there for two and a half years now, what was the thing that first attracted you?
Anu: Yeah. So, I had, you know, worked for a financial services business for another company called Black Hawk and then I kind of stepped away from it because they didn’t want to focus on financial inclusion and I was just doing a startup with someone I knew on gifting. I just kind of fell into it, but my heart had been in financial inclusion.
So, when I got a call from LendUp, you know, it was through a recruiter, he didn’t even know what position it was for, he just said, hey, are you interested in LendUp and I kind of said yes, even before (laughs)…so, I came in and talked to Sasha and his COO and they were saying, hey, we have this great business, we have a credit card business, but we really need somebody. We’re very focused on credit cards and we need somebody to come in and, you know, really take on the loans business. It has been our bread and butter, but we need somebody who really understands fundamentals of running a business to come and manage it.
For me, it was sort of a no brainer, right, because I’ve been…for me mission is ….the mission of what brought me here and I 100% believe that the loans business, in general, within LendUp was delivering on that mission and I did not, you know, hesitate at all to give up my COO at the company to come in and be a GM and focus on the product that I felt like truly makes a difference.
Peter: Sure, and obviously, regular listeners know Sasha, Sasha Orloff, he’s been on the show a couple of times actually, over the years. So, I want to get back to the point where….this was about a year ago now when you became CEO and LendUp split in two and sold off the credit card business. Can you just, maybe give the thought process behind the splitting off of the businesses in two and then why focus just on the loans.
Anu: You know, we obviously have loans that has been around longer than cards at LendUp and Sasha and his stepbrother, Jacob, created loans first and, you know, we had products in the market that truly delivers on the mission and then, of course, they started the card business. If you think about it fundamentally, they are two different businesses, right. So, small dollar loans is a very capital efficient business, it’s definitely high interest rates, so investors kind of look at it in a certain way.
Credit cards, on the other hand, is a very capital-intensive business and the investors that are attracted to it are different. The LendUp credit cards was sub 36% interest rate, but very, very capital intensive, so when I think about, you know, sub-model, we basically had a bi-model company. We had two businesses with the same mission, but going about it entirely differently. So, I think the outcome of having two companies focused on the same mission, but both basically attracting a different group of investors is probably the best outcome we could have had. The reality would be the one company and be the larger company, I’m sure Sasha would say that was his vision.
His vision was to create a lot of, you know, a lot of products and an equal system of products. The reality is the loans and cards are fundamentally different products and attractive to investors.
Peter: Right, yeah, that makes sense, okay. So then, let’s fast forward to today, when you’re just telling people who haven’t heard of LendUp before, how do you describe LendUp today?
Anu: So, I describe LendUp as a mission-driven company focused on helping customers get on a path to better financial health. We are focused primarily on underserved customers, we are here to help them with the income volatility that they face every month, help educate them on how to get on a better path and ultimately, help them improve their, you know, credit score.
But, our mission is really to help them get on a path to better financial health and that’s pretty much what we do, everything related. Every decision I make and almost every person we hire into the company, we always revolve around the mission on is this the right thing for this consumer?
Peter: Sure. So, it’s been a year since you took over as CEO and you came in, you’ve been with the company a little bit by that stage, so I’m interested to…maybe you could tell the listeners what changes you’ve made over the past 12 months at LendUp.
Anu: Yeah, absolutely. So, you know, obviously I had an interesting part getting here. I came in as GM heads down and I focused on how to make the loans business, you know, profitable, how do I extend on the successes that Sasha and Jake had created, how do I get more value out of the business.
So, when I took over as CEO, I was not expecting that to happen when I came to LendUp that, you know, it was a long term goal of being a CEO, that’s not something that I had thought was going to happen in the near future. So, when I took over, I kind of went back to the basics on what’s important to the LendUp customer and what’s important to the LendUp employee, including myself. So, we kind of focused on community culture and then really forging the path for the future of LendUp.
What I mean by that is first thing I did, I know it was cost driven, but also thought through….we actually moved from San Francisco to Oakland and it may seem like is it really that big a change? It is, especially for our core employees, who most of them lived in San Francisco, it was a big change. You would think it’s not that big a change because it’s only like 10 miles east of San Francisco, but it brings us closer to some of our early stage investors, our core customers, as in, you know, Oakland has more of our customers than San Francisco. But also, I felt that picking a community where we can really start spending time with community leaders and make a difference beyond just our products was important to me.
But, to be clear, it was actually cost-driven, it was a decision driven by cost. Second is culture, right. For me, personally, it’s a focus on people so that includes our customers and as well as our employees so my focus on people who come here and join the company, especially in Silicon Valley, to seclude people in a very competitive job market to get people to come in to a mission-driven company takes, you know, takes a lot of…they take a leap of faith on the mission is more important to them than perhaps being in a fast growth unicorn ready company.
And so we focused on how do we create products that fundamentally help us deliver on the mission, both to our current customers or also broadly. Today, I’m not so sure where…we are, obviously, state by state business and we are only in a minority of states in the US. So, I’m always thinking about how do I extend my reach in the US, but also within the states we’re in, how do I expand my reach with the customers and provide them just more than one thing, right.
What we do well, what we already do well and, obviously you’re very familiar with the LendUp products, is we focus on giving them a small dollar loan, but it’s backed by financial education, we kind of hold their hand and get them up our LendUp ladder with higher amounts and lower rates ultimately culminating in the installment loan that can be credit supporting and help them improve their credit score.
But, I really want to also….I’ve been thinking about what does the future look like, that’s the obvious thought and this brings us very often to what is the path for the future of LendUp. We know, you know, pay day lending, but if you want to call us that, or not, as far as regulators are considered, if you work as a pay day lender, it is not…you know, one of our investors and board director would say it’s not a standard type of term, right, pay day lending.
Anu: So, definitely the hesitation about, hey, are you guys….you know, are you guys doing right by the customer, are you predatory. And then you have competitors and I know you’ve had many of them on your podcast like dave.com where they’re offering over draft, but it is in the end of the day that is selling the same name. So, thinking through, how do we extend our set of products, also look at various competition as…..it’s not coming from other companies like us, it’s coming from company that are approaching it differently, whether it’s Dave.com, or Earnin, or Even…right, more of a big advance to employer. So, looking at all that, what is the right set of products that we should be focused on.
So, 2019 has been about, you know, kind of resetting, right, because we went from two businesses to one, we focused on a mission and the culture and getting the right people on the door and also setting us up for the future. So, what does 2020 and beyond look like in terms of the type of products we should be investing in.
Peter: Right. So, does that mean that …..you talked about some of those companies that offer, you know, like an earned wage access-type product? Does that mean there’s a possibility down the road for LendUp?
Anu: It could be the art…..you know, the reason…like I don’t have a firm answer for you, but what I can tell is that being in a state by state licensing model is….on one hand, it’s, you know, a competitive advantage, or it’s like a barrier to entry for new companies who want to do that; on the other hand, it’s limiting in that, you know, getting into different states with licenses is not only is a laborious process, but you start to look at the, you know….you have to look at diminishing return if you get into the smaller states, or difference on the regulation that differs state by state.
And then I’m also looking at…you have all these competitors coming in, kind of from a different angle, and you have the third thing in the marketplace where I think a lot of consumers are getting very comfortable with the subscription model, right. People seem to be wanting Spotify, or for….you know, even for financial products, or non-financial products. The concept of paying $5 to 10 for a service every month, people seem to be okay with it, right. So, I definitely see like it’s something that I cannot ignore when I’m looking at a set or products.
But, at the same time, I also feel like what we do today, Peter, no one asked me to do, like no one is giving a super underserved customer the services. I know you’ll fully get into it later, but our customers have a 550 VantageScore, right. They don’t really have that many options and a lot of them don’t have money in savings. I know most Americans don’t have $400 in savings, but our customers, 85% of them report that they have income volatility, so we are like the stopgap. right.
Anu: So, no one else is doing a $300 loan, our competitors are doing $500 or more, or $1,500, right, and overdraft, is usually around $100. So, I m very aware of the fact that we can look at all these other models and they might be more attractive, or they seem like there’s a lot of traction. The regulatory issues are still unclear where that might go, so the kind of products we have no one else is doing.
So, what I’m thinking through is…is there a way I can extend a set of products we have to offer to the space, does that mean I have to go to a subscription model that would…..would that be easier, right, and so what does that mean for the underwriting because most over drafts when we do $100 is a lot easier to take that risk than to say $300. So, that’s all that I would say, it’s all in the, you know, all of our thought process. Myself and my executive team are very deep in the thought process on how do we extend our products to the maximum number of customers possible?
Peter: Right, right. So, maybe we could just take a step back and talk about the experience of the borrowers that are coming to LendUp. Can you just sort of describe the process… particularly, I’m talking about new customers that you don’t know, what’s the process like when they take out a loan?
Anu: So, you know, they are 100% digital, so customers find us online, either through our online marketing, or though our affiliates, and they can actually apply for …it may take a few minutes, they can apply for the loan, they can select the terms they want to pay. The entry level products is up to 30, or 35-day loan, it’s a single payment. It’s, 100% online is, you know, instant decisioning. We have a proprietary underwriting models with alternative data sources and they know immediately what they qualify for and how quickly they can get it.
Peter: Okay, it sounds like….I’m on the website right now and the range I see is $100 to $255 so that’s the typical range that everyone gets?
Anu: Yeah, $255 is the California limit, it’s slightly different by state. You know, the system is automatically based on what state you are in. If you are [inaudible] in the state, they’ll allow you the maximum, they will give you a range, the maximum set by the state and then you can set the amount and the actual term lendee will pay back.
Peter: Right, right. So, then what data are you using for these people to underwrite? You know, they’re coming to you digitally, these are sub prime borrowers with low credit scores, how do you decide whether or not to extend the loan?
Anu: So, we have actually over the last seven years, since LendUp was created, honed in on our core competencies and our secret sauce is the underwriting model so this ultimate credit data scores, you know, our ultimate credit bureau data and build our own underwriting model that provides instant decisioning. So, you know, most companies… there is FactorTrust, Clarity and, of course, all of these have been scooped up by the three major credit bureaus, so now, they’re already part of the larger credit bureaus, but our bread and butter would be the ultimate data.
So, the inquiry data, there’s the ability to pay, but, as you can imagine, our customers represent a very small band of FICO. FICO, by itself, is not predictive in helping us underwrite, you know, decide who will pay us back and who will not.
Peter: Right, right. So then, when you talk about alternative data, can you give us some examples of the different types of data that you use?
Anu: So, you know, I think the inquiries for…let’s say, for example, Factor Trust it’s now owned by Transunion, they track inquiry data not just for mainstream because our customers basically don’t have credit cards, 98% of our customers do not have a credit card, they track, for example, inquiries for other products. It could be payday loans, you know, it could be rent payments, so it’s basically……you know, this industry has evolved and has all these different data sources outside of what might be the mainstream FICO that’s set into our model.
Peter: Right, okay. So then, what are you doing…I mean, how do people move up the LendUp ladder? Obviously, they pay on time, I mean, someone who comes in and takes out a $250 loan and pays it off on time and they come back to you a month later, or two months later, are they going to get a better deal? Just explain the process of moving up the ladder.
Anu: Yeah, our core premise is that, you know, we are here to help the customer, so we kind of encourage them to take the courses on line that teach more how to manage their credit. The core premise is you take a loan from us, you pay it back. If you’re not able to pay it back, all you have to do is call us and we will help you with adjusting your payment date and we don’t charge additional fees for that. And then, once you’ve fully paid off the first one, you can take another loan.
We differentiate ourselves from a typical pay day lender in that there’s no rollover, so if you’re not able to pay back, we’ll work with you until you can pay us back and work with you to pay us back, but until you pay us back, you cannot apply for another loan. On the flip side, once you have paid us back, it’s a very quick…..you know, you come back and you apply again so customers actually love it. We have…. 95% of our customers come back.
We have a very strong brand equity with our customers because they know we are a trusted source, that we look out for them. As they stay with us and we gather… their behavior with our account actually gets fed back into the model and that drives our pricing decisions. And so, as they stay with us longer, they can qualify for slightly larger amounts and slightly lower rates. It’s actually driven by the customer so there’s no timeline in which you automatically qualify. It kind of depends on how many loans you’ve taken with us, how have you behaved with us, but, typically, once you qualify with us, the chances that you will qualify again are very high.
Peter: And so, just to be clear then, if you keep paying off on time, do you eventually qualify for an installment loan rather than a single payment loan?
Anu: That’s right. So, it’s typically…I would say it takes over 12 months, but you can eventually qualify for an installment loan, and even that, you start out smaller. You might start out with a $500 loan which is two, or three payments before we ultimately…..our maximum loan is a $1,000 loan and our maximum term is 12 months.
And then, at the top of the ladder…..you know, we’re also trying to think past the ladder concept, but the goal is really to progress the customer so whether they call it a ladder, not, we’re progressing them on their credit journey, if you will. They have a choice there to take a credit reporting loan, or not because we want to make sure the customer is ready and once they pick an installment loan and they pick the credit supporting option, we’re obliged to report their behavior to the credit bureaus. So, we want to make sure that they are consciously making that choice to pick that loan,
Peter: Right, right, okay, that makes sense. So, you’ve touched on this, but I want to just get your feedback on the regulatory activity that’s been happening. The small dollar loan space has been in the news, in the state of California quite a lot. There’s been talk, they continuously talk in Washington about it, so how are you engaging with the regulators?
Anu: You know, I would say that …on one hand, I want to just start by saying, I’m very pro-regulation because, fundamentally, I’m pro-consumers. I feel like regulation is there for a reason, at the same time, I’m also focused on the regulatory innovation. So to that, we actually are very actively engaged with both state and federal regulators.
On the state side, I know there’s been a lot of activity in California, recently in the December timeframe. A lot of that actually…..because we are so focused on the small dollar like $300 to 1,000, we’re not as impacted by a lot of the changes because it’s a small dollar loan…..have always been heavily regulated by California like they have very strict terms on the maximum we can charge for an installment loan based on the term and so that’s already been in place. The newer regulations actually impact our competitors who’ve been focused on the larger amounts like $2,500 and more. And so, that’s going to also …..you know, one of the things I wanted to call out is that when I think about ….you asked me earlier, how do you represent LendUp.
One of the things that stands out to me is that there are very few companies out there that are in the same space are offering super small dollar loans that we are doing. So, we are already in a super regulated space so this is something that we have gotten really good at, but I have a very strong senior executive team….you know, my head of compliance is a former regulator with 30 years experience in the space and my chief legal officer is also a very seasoned legal officer so we actively engaged both in DC as well as locally.
Peter: Okay. And then, I’m just curious about what metrics can you share. Obviously, you’ve got the repayment rate of the loans as a key metric, what are the metrics that you look at to determine success at LendUp?
Anu: The for profit company, I’m going to have to focus on at a high level, right, profit & loss, net income, but from a customer-centric perspective, we do look at how many customers are we serving, what is the retention rate month over month, or not even month over month, how many times……if a customer walks in the door and qualifies for the first loan, how long do they stay with us, their lifetime with us we look at, are we helping them, are we actually delivering our mission on a positive, better financial health, we look at, are we improving their credit scores?
We find that, you know, over two years, 62% of our customers do get some improvement, I should qualify, 62% of the customers are qualified for our larger loans actually, either credit scores go by 50 points or more. So, we call them the social impact metrics, we have our business metrics, we have I would say like the P&L metrics, we have the business healthy metrics in terms of customer retention, what is the cost to acquire a customer thing, but there’s also a set of social impact metrics we track. We can really say, you know, results show that we are doing our job we set out to do.
Peter: Right, right. Okay, we’re almost out of time, but just a couple more questions before I let you go. Let’s talk briefly about the funding of these loans. Obviously, these are short term loans and they’re paid off in full, not as capital intensive as you mentioned earlier as a credit card, but still requires significant capital to run your business, can you just tell the listeners how you’re funding the loans today?
Anu: Yeah. So, our funding is primarily debt with a little bit of equity, so we do have a line of credit to fund the loans and as part of that, we’re required to put up a small percentage equity. You’re actually right, so very capital efficient business with a very visibly sized line of credit. For instance, transactions, we have given out more than $2 Billion in loans. So small dollar, short terms loans, we can do a lot with a little bit of capital.
Peter: Right, right.
Anu: We do carry them in our balance sheet.
Peter: Sure. And then, we’re here recording this in early January, what are your goals for LendUp in 2020?
Anu: So, you know, one of the things I want to…I think I covered a little bit of this before. I think 2019 was really kind of getting the right team in place, you know, I’m very proud of the senior executive team that we’ve been able to put together. It’s a very diverse and deeply experienced team, so, for me, 2020 is about evolving LendUp into the next decade. So, how do we extend on our successes, how do we take them, you know, deep passion that I have and my team to really help the customer and extend the product set beyond what we are doing.
And so, the focus definitely is how can we become a national, how can we be available nationally and what are the set of products that we should be looking at to fundamentally help this customer. Financial health by itself is top of mind for us, but it’s so complex. I think it takes more than…it takes a village, right, to help this customer. And so, I’m very aware that this is not a journey that LendUp can do alone, so we definitely are looking at what partnerships will help us get better. We already work closely with Financial Health Network and the Aspen Institute.
We have a partnership with Earn to provide savings products, but, definitely top of mind is if you want to deliver on our mission, it’s going to take more than just the set of products we have. We have to navigate the regulatory environment as they shift for the new entrants as well, and then to expand the reach, we have to look at partnerships that will take us into more than where we are.
Peter: Okay, that’s fascinating and we wish you all the best, Anu, and thank you very much for coming on the show today.
Anu: Thank you so much, it’s been a pleasure to talk to you and I, definitely, am a big fan of your podcast, but also the LendIt Conference. So, I’m really excited to have this conversation with you.
Peter: Okay, fantastic. We’ll hopefully see you there and thanks again, Anu. See you.
Anu: Thank you.
Peter: You know, being in the small dollar loan space and operating in an honorable way, in a way that has the customers’ best interest at heart….it’s not an easy place, it’s not an easy business to execute and it’s also not easy to have your customers be delighted. You go on to LendUp’s home page, you see that their Trust Pilot score is 4.8 out of 5 stars and that’s with 2,300 reviews. That’s very, very difficult to game the system with that sort of thing.
Clearly, their customers are delighted with them and LendUp are helping them improve their financial wellbeing. I think that, you know, rather than talk about blunt instruments like interest rate caps, or other regulatory methods that are designed to help the underserved, we really should be looking at outcomes. That’s what a Trust Pilot score like that tells me is that the outcomes here are mostly positive. I applaud Anu and the team at LendUp for continuing to blaze a trail there.
Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.
Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.