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Podcast 287: Brad Paterson of Splitit

The CEO of Splitit talks buy now pay later and why a complimentary offering that uses existing credit is needed

February 26, 2021 By Peter Renton Leave a Comment

Views: 365

The Buy Now Pay Later (BNPL) space is probably the hottest vertical in all of fintech. Consumers like the flexibility of paying for their purchases over time and it was why some of the leading companies in the space attract such incredibly high valuations. Now, most of the BNPL players are focused on extending new credit to consumers but there is one company taking a different approach.

Our next guest on the Lend Academy Podcast is Brad Paterson, the CEO of Splitit. Calling themselves the “responsible buy now pay later option”, Splitit allows consumers to use their existing credit card and split their payments into a number of installments. They are not issuing new credit but rather allowing a consumer to use the available balance on an existing credit card as an installment payment tool.

In this podcast you will learn:

  • What attracted Brad to the opportunity at Splitit.
  • The origins of the company.
  • How their product works.
  • The geographies where they operate today.
  • An explanation of the risk they are taking.
  • How they on-board new merchants.
  • Details of their partnership with Stripe.
  • The average lift in conversions their merchants enjoy.
  • How Brad views the other Buy Now Pay Later players.
  • The sweet spot for purchase size using Splitit.
  • Why they are primarily B-to-B but have a direct to consumer presence.
  • Why they decided to go public in Australia (ASX: SPT).
  • Why it was important to get a funding line from Goldman Sachs.
  • What technologies Brad is paying close attention to.
  • What is it about Buy Now Pay Later and Australia.
  • What is on tap for Splitit this year.

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

Download a PDF of the transcription of Podcast 287 – Brad Paterson.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 287-BRAD PATERSON

Welcome to the Lend Academy Podcast, Episode No. 287, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

Now before we get started today, I just want to give everybody a heads up. We are rebranding the podcast, this is going to be the last episode of the Lend Academy Podcast and we’ll be re-launching the podcast as Fintech One-on-One which is really a better description of what we do here. So, I wanted to give you all a heads up that the next episode you’ll see, it will be a new…there will be graphics, there will be a new name. You should be able to get it just in your regular feed, like you always have before, but we’ll have a new name so I want to give everybody a heads up on that one.

(music)

Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. LendIt’s flagship event is happening online this year on April 27th to 29th with the possibility of an exclusive VIP in-person component. The verdict is in on LendIt’s 2020 event that was held online with many people saying it was the best virtual event they’d ever attended. LendIt is setting the bar even higher in 2021, so join the fintech community at LendIt Fintech USA where you will meet the people who matter, learn from the experts and get business done. Sign up today at lendit.com/usa

Peter Renton: Today on the show, I am delighted to welcome Brad Paterson, he is the CEO of Splitit. Now, Splitit is in the very heart Buy Now Pay Later space, but they have a different approach to the other players. They allow a consumer to use their existing credit on their credit card to make installment payments on a purchase.

We go into obviously that in some depth, exactly how it works, you know, we talk about what’s involved on the merchant side, we talk about the risks involved, how they’re able to do this technically and we talk about the fact why they’ve become a public company, the recent news that they have a $150 Million facility with Goldman Sachs. Brad gives us what he thinks…interesting technologies for the future of payments and much more. It was a fascinating episode, hope you enjoy the show.

Welcome to the podcast, Brad!

Brad Paterson: Thank you for having me, Peter, great to be here.

Peter: Great to have you. I know, you talk funny just like I do, so why don’t you give the listeners a little bit of background about how ended up coming to this country and just the highlights of your career to date because I know you’ve been at some of the biggest names in finance so tell us some highlights.

Brad: Sure, happy to. Yes, I’m from Australia, I grew up just north of Sydney on the beaches. I left actually Australia when I was 25, over 20 years ago, spent a lot of time living in Asia, out of Singapore, moving back, but during that time met my wife who is from the States. She grew up in California and about five years ago, she wanted to move home. I was lucky enough to be working with Intuit at that time. Most people know this as QuickBooks or TurboTax and they asked me to move over here to run part of the business over here.

So, combination of family and work brought me to the States five years ago, I love it here, it’s fantastic, a lot of Australians here, a lot of innovation in California. Before that, 20 plus years in financial services, fintech we call it now or in payments. Lucky enough to cut my teeth at Visa in payments and them moved across to PayPal, helped start PayPal in Australia and then across Asia Pacific, spent seven or eight years there after five or six years at Visa and then moved into Intuit where I lead the QuickBooks Business and, again, built that from scratch, you know, in Asia-Pacific starting with Australia then across Asia before moving to the States so a good…I mean, cutting my teeth at Visa was brilliant to learn the payment system and then a lot of building businesses after that.

Peter: Right, right, yeah. I mean, that’s sort of a great background for a Buy Now Pay Later CEO because you’ve hit certainly some of the innovative companies in the space, but maybe you could sort of…with that background, what made you decide to take a job at Splitit after working with some of these big names.

Brad: A couple of things, I love the product, I love it, it was different, we see ourselves as complimentary the space. It’s not a popular view, but Buy Now Pay Later product is essentially a new form of credit card, they’re financing the transactions at the point of sale. I think it’s incredibly innovative, it drives financial inclusion when done the right way and it’s expanding the people that can participate which is fantastic, it’s essentially a new credit card, though. What I love about this model is it’s the same mindset applied to a credit card because it lets you use your existing balance in a credit card to pay over time and it was different.

The benefit, as I inspected that a little and speaking to a number of merchants and consumers, the benefit was real and it reminded me of my early days at PayPal. This was like a really powerful benefit that people could articulate with the merchant. The product worked, it just needed to scale and I think given the business model running in partnership with credit cards just allowed it to scale. It was a playbook we knew well from previous payments landscapes which was really bad execution, building the foundations to allow us to grow, but executing with a really strong bet on micro plans. Those two things, strong benefits and a playbook, are new so it was like coaching the right team so that was something that excited me.

Peter: And so, did Splitit actually start in Australia or did it start in the US?

Brad: It started in Israel funded by some Israelis.

Peter: Really, interesting.

Brad: We’re complicated, we are founded in Israel, listed on the Australian Stock Exchange and headquartered out of New York, it’s a complicated relationship. Actually, installment payments or Buy Now Pay Later is ground into everything you do in Israel. You can buy even groceries for $15 in the last few weeks, you have to split that.

Peter: Interesting.

Brad: You can put that in three installments or $5 or I’m exaggerating, but, generally, you are asked at the point of sale, would you like to split it, would you like to pay in installments? So, it was born there, the founders had a vision, how do we take that not only to the rest of the world, but to e-commerce and it only works as a bilateral payment relationship so taking that beyond that, making it agnostic and then taking that around the world.

So, the founders worked on this for five years to build the architecture of the product, get the payments in place and listing on the Australian Stock Exchange was natural given the success of some companies down there and building a Buy Now Pay Later company. The investment market understood this product a lot better back then.

Peter: Right, right. Yeah, Australia really leads the world, it seems, in this nascent industry, but fast-growing industry. So then, can you just delve into the product, I know you described it a little briefly there, but I’d like to delve into it a little bit, exactly what it is, what’s the tech behind it and how it works.

Brad: Absolutely. In the simplest form, we’re allowing people to pay over time in installments using the balance they have available in their credit card. So, let’s imagine you’re going to buy a bicycle for $800, you can purchase that bicycle now for $800 and you have to pay that off in 30 days time before you’re charged interest on your credit card to pay if you have the balance of $800.

Or, what we allow you to do is we say, let’s say you want to pay that over time, ten installments of $80, we’ll place a hold of $800 on your card so you don’t over extend yourself and builds back to the card $80 every month. So, you only have to repay the $80 before you pay interest or fees, we’re not extending credit to you, there’s a financial institution that’s behind that credit card which decides which credit you can have. We are placing a hold and we refresh that hold every month. So, it’s allowing people to purchase what they need, what they want it now, but without over extending themselves so there’s new debt or no new credit at the point of sale.

Peter: Right. But, they do have to have that space on their card to be able to put a hold on, otherwise, you decline them, right?

Brad: Well, we don’t decline them, the issuing bank declines them, but, yes and I think that’s what makes us very different. We’re not extending credit to people, we’re actually checking to make sure you have the credit and allowing you to use our technology to split that over time.

Peter: It’s interesting because all the other Buy Now Pay Later players, you know, have a different approach, it seems, they’re not using existing credit cards. So then, where are you operating, tell me what geographies you’re actually operating in today.

Brad: We are headquartered out of New York, the US is our headquarters, it’s where we’re focused on winning and where most of our team are based. Our technology is out of Israel and then we have offices in Australia, in the UK as well.

Peter: As far as the market, are you going….is it just primarily in the US right now?

Brad: Wherever a Visa or Mastercard is accepted or wherever a Visa or Mastercard is held, you can use Splitit. So, we have merchants in over 30 countries, we have shoppers in over 100 countries.

Pete: Visa and Mastercard are in every country in the world, right.

Brad: Exactly. That’s what makes us different is wherever there’s a credit card used or accepted, we’re relevant. I think we’re focused in terms of where we put most of our time and effort is into North America and the UK and Australia, but we can be used and we do serve people all around the world.

Peter: So, how does it work then if…..so you’re saying you can use it anywhere Visa or Mastercard are used, obviously, you have merchants. I’ve seen some of the merchants where it’s a sleek, it’s a nice interface where you can just…….. it gives you the option to pay in full or pay with Splitit, I imagine…what happens if you come to a merchant that …..they’re trying to buy something where the merchant isn’t with Splitit, how does that work?

Brad: The merchant needs to accept Splitit so what we’re doing is we’re building out again an acceptance business and then educating consumers of what we do so they choose us when they see the brand and they understand that. So, we’re building out an acceptance business, they need to accept that, there’s a number of different ways that can happen.

Payment gateways are working with us to distribute our product and install that into merchants, we’re selling directly into merchants, we have a lot of demand coming in as well. So, really what our job is to build that acceptance and educate consumers to understand that so when they see our brand, they understand what that does because we’re so different.

Peter: Right. So, do you do any underwriting at that time because, obviously, you’re not taking credit risk because the amount is on the card. I imagine, the merchant wants their money so you’re fronting the money, I take it, and then there is some risk obviously that that person is going to close down their credit card or just not pay. What is the risk here you’re actually taking?

Brad: It’s minimal and it’s one of the things that makes our model unique. We’re a technology layer, we’re not essentially issuing credit or collecting the credit, we’re a technology layer that it allows us to happen on an existing card system. What does that mean? So, yes, you’re right, retail or merchant businesses want cash now, not all of them though, We have two models, do you have the cash now or do you want it over time, there’s a fee if you want it over time versus wanting that now, we enable both models, we underwrite the merchants as they come in to make sure, just standard underwriting in terms of credit worthiness because we’re extending you the money now, making sure the products are delivered on time, etc., relatively light touch though given our model.

On consumers, we don’t underwrite at all because we are not actually issuing credit to consumers. The risk, we guarantee the funds to the retailer and to the merchant. So, if you are a retailer, you want to receive your funds, we guarantee you’ll get that over time, we’ll take care of collecting that from the consumer. The way we do that is we almost guarantee that money through the hold on the card. If the funds are available, we know that’s there and every month we’ll go and get it back to the card for a monthly installment.

Peter: So, what happens if the consumer tries to cancel their credit card during that payment period?

Brad: It’s no different to any pending authorization that you have on your card today, I mean, that it’s held there and that’s been approved, that’s something that you owe, but it’s not billed to the card immediately.

Peter: Right, okay, okay. So, you are fronting the money, but, I imagine…..so your losses, I mean, can you tell me like are the losses very close to zero?

Brad: Yeah. It’s very close to zero, we say it’s negligible, we don’t report it because….we actually didn’t report it because there is really nothing there. We now say it’s negligible because there are sometimes those authorizations fall over or different nuance things that happen that are very complicated and nuanced payment systems, but it’s close to zero, it’s in the single digit most of the time.

Peter: Right, right. So then, your big challenge is to bring in, you know, thousands, tens of thousands, hundreds of thousands of merchants, I guess.

Brad: Correct.

Peter: Explain sort of the on-boarding process that you go through with the merchants.

Brad: Essentially, we’re connecting from merchants’ payment gateway. Where the merchant is sending us the transaction, we’re putting that trust system which allows that to be turned into an installment transaction versus a binary one and send that back to the gateway into the payment system. So, we sit between the merchant and the payment gateway, we’re integrated and over supported by over 90 payment gateways around the world, but every merchant that we integrate with, they need to set up a new merchant ID with that gateway account, etc. etc. that integrate our APIs.

So, we are improving the on-boarding process now through a partnership with Stripe which means this can be done now in hours. Before, it was taking merchants weeks or months to work with the other payment gateways to get the startup. So, there are a number of payment gateways that will do this in hours or days, there are others where it can take weeks or months because there are different systems that people operate in different ways.

We’re now bringing this down to be in a much quicker space, we have a lot of work to do, we’re not satisfied with how long it takes to on-board on to Splitit, we’re not satisfied with how simple it is. This is one of our big focuses which we continue to innovate to bring that down to ……I can be accepting installment payments in minutes.

Peter: Right. I’d love to see what kind of difference….obviously, you’re working with a number of merchants already, what’s the difference when someone starts adding this. I’m sure you do have stats on what the lift is for their revenue, do you have some sort of averages there you could share?

Brad: We do have a number of case studies on our website. It’s consistently suggesting that conversion rights with Splitit for retailers is nearly double. Some people will say it’s triple, some people will say maybe it’s one and a half, but on average, it’s about double the conversion rate. The reason is we’re allowing you to use the credit you have, we’re allowing you to one….. there’s only one step of friction in the checkout process which is choose the number of installments, that’s it.

There’s no application, there’s no entering personal details, there’s no fear of impacting the credit score because I already have the credit so it’s incredibly simple. You X, the approval rates are over 80%, the same as the credit card if you have the balances approved. So, we’re actually helping retailers sell more by converting existing browsers into buyers, that’s leading to conversion rates of 2 to 3X improvement over the standard. They’re translating that into 20 to 30 slight increase in sales, either though a much higher average order value or a much higher conversion rate.

Peter: And are you seeing…is this happening…are most people buying through a mobile or is it a desktop browser, I mean, what’s the sort of usage on the consumer side?

Brad: It’s predominantly mobile, as you would expect, a lot more browsing on mobile to maybe completion, but pandemic changed this, we actually saw sort of shift back to the desktop.

Peter: Right.

Brad: We actually spend a lot of time sitting in front of a desktop at home, maybe not always, and least in front of a laptop if not an iMac or something similar. But, I expect that would shift back to mobile in time, I think there will be an even bigger shift back to mobile as we start to see the convergence of contactless and cloud-based checkout in the future. But, at the moment, it’s still predominantly mobile, but it shifted back to desktop in the last twelve months.

Peter: Right, right, okay. When I was doing a little bit of research for this, I was browsing a number of different websites. I was surprised when I came across one that offered yours and one or the other Buy Now Pay Later type offerings which…..

Brad: Absolutely.

Peter:….so, do you see yourself as complimentary or how do you view the other Buy Now Pay Later players?

Brad: We do, we absolutely are complimentary. We’re often asked, how do you compete against some other names in the industry? We don’t, we’re complimentary. We don’t offer exclusive terms in our contract because we don’t believe that we’re competing with those companies. And the reason is, our customers told us this, there are consumers and shoppers with a credit card that don’t want to go into more debt, they want to use that existing credit they have more effectively and there are people that need new credit or they need to confine that transaction for a neighbor or what they have at that moment in time. Those are complimentary needs, they are not mutually exclusive.

So, we position ourselves as complimentary, we can plan about our partners carefully, Purple Mattresses, great product, great brand. They accept Spliit and Defer Buy Now Pay Later type transactions, they position us prudently, next to each other, side by side to see the difference between the two systems incredibly well as well which is through your credit card application. If If you have the balance sheet, you can do it today and the other is financing, apply for financing, pay it over time and the need to start with no interest rate which is new credit to you.

Some of them said publicly that both of products are improving conversion rates and we’re doing it in different ways, but both are needed because these are two different types of consumers that they’re serving and two different types of needs. Serving just one is forcing people that want to pay over time into accepting or having to get new debt or if you’re only accepting Splitit, you’re only serving people that have the credit available. So, we see them both as complimentary needed at the checkout.

Peter: Right, right, interesting. So then, is it primarily big ticket items, I mean, are these $500 – $1,000 items because you don’t need to split a $20 item, I imagine, where are you targeting your offering?

Brad: Great question. Wherever a credit card that can be accepted we are used. We see transactions from $60 up to $60,000.

Peter: Wow!

Brad: The benefit of our model is if you have big available balance in your credit card, you can split it. So, I’ve seen jewelry purchased for $50,000/$60,000 into three installments, these are people that don’t need to do that, but are choosing to do that. We’ve seen $60 shoes being split into six installments at $10, these people want to or need to do that. Now, where to focus, I’ll tell you one of the first things we did when I joined was look for product market fit and the product market fit was really any transaction over $300, we started to add a lot more value.

We’re gravitating close to higher than that, we will serve anywhere, but we have the most value over $300 up to $1,000 and a lot of our peer companies are complimentary. They start to max out at $1,000 in terms of the credit they will issue you for that transaction so that’s where it’s complimentary, but we drive a lot more benefit $300 and above.

Peter: It’s interesting because obviously the whole, you know, credit card game now, there are so many rewards that people are focused on and you’re not giving up your rewards even though you might not want to pay that off, you can still do ….really, I can see how this is…..so you’re paying the exact same amount, right, whether you put it over six….like you get to choose how many installments or how does it work there?

Brad: You do, there’s a different cost of funds, there are no different fees to the retailer, depending on how many installments they offer, so it’s up to the retailer. They can offer up to 12 and an exception of up to 24 or 36 months, there’s a different cost associated, it’s up to the retailer. So, that would go to a business case that says, I only need to offer three and I’m driving conversion or now I actually need to offer 12 installments to improve conversion which comes at this cost.

Most people would do this, we’ll run them a pretty simple ROI and so the improvement in conversion outweighs the higher cost of 12 installments versus three, but every individual business is different, it goes to their margins, what they need to achieve in terms of conversion improvements to justify that cost.

Peter: Right, right. So, you’re really more of a B2B player, right, I mean, obviously….do you have a consumer facing offering at all. I mean, I don’t think I saw an app, how do you interface with consumers as opposed to businesses?

Brad: Yeah, you’re right. We don’t have an app yet, we are predominantly B2B. What is consumer facing is our brand. Consumers need to understand who we are and what we do and payments is very much a trust business. If I trust you to process my payments and my money, you need to overcome that hurdle, otherwise, you won’t be successful so we’ve made great leaps and strides in that space in the last 12 months and part of us…. while we’re doing that it’s putting more of our efforts into educating consumers, building trust and helping them to be comfortable, but this is a way for you to shop with confidence and in a responsible way.

So, we’ll continue to do that, we will not be issuing credit to consumers, that’s not what we’re here for, that’s not in our founding principles, that’s not something that we will invest in to do that directly. But, we will invest more and more in terms of giving consumers greater utility and flexibility as to how they use Splitit, whether it’s in mobile or in other ways as to how they do that. You’re right, we are B2B, we need to be accepted; if we’re not accepted, we’re not relevant, it’s not issuing credit and pushing you to place this, to use this elsewhere, that’s a different model, again, which makes us different to others in the industry.

Peter: Yes. I imagine, people might be up to check out pay, huh, that’s cool, like six installments, 12 installments, I’ve never heard of this company so they probably will browse or type in Splitit and see what happens. I mean, you probably have that a lot where….you know, it seems reasonable, let me give it a try. The thing is, once someone’s done it once…I mean, do you allow…I imagine, consumers will then say, I want to do this at other places that I spend money on a lot. Do you have like a consumer evangelist to sort of help drive the B2B?

Brad: We are, we can say yes, but we’re building that out now. So, we’re building out a marketing team, anyone in marketing that’s interested in joining a great innovative company, give me a yell, but we’re going to get that team now, we’re doing a little bit of that now and more so this year. This is the new pillar in our strategy to really invest in 2021 and beyond.

Peter: Right, right, okay.

Brad: Maybe you’re right, the number one thing I hear, I used to hear this at PayPal, believe it or not back in 2005, who is PayPal? I mean, you couldn’t pass the barbecue test let alone have consumers to have confidence in purchasing unless they used you on e-Bay, fast forward 15 years, you can’t imagine that being the case, we’re in a similar journey. At Splitit, what do you do? We do a little research and we build confidence, but we are hearing it more and more often. We have an NPS greater than 65 and the people that know what we do and have used us love it. The question is, why can’t I do this everywhere?

Peter: It just makes a lot of sense that this should be available, I mean, what is the competitive moat you’re building, is it because…I’m just curious because it’s a simple idea, it’s amazing the idea wasn’t around ten years ago, but it wasn’t. So, what’s the competitive moat you’re building?

Brad: First and foremost which we don’t rely on, it is credit where we started, is our patents. We have patents that run through to 2032. It’s the IP that the founders protected early and makes it a scalable model that is low risk. Secondly, is tech, you need to connect to all these different payment gateways or build your own payment gateway and that’s not easy so you need to build that and have that.

We’ve spent five years doing this, seven years doing this. And then it’s acceptance and understanding, everything I just said about trust and acceptance, that takes time to boot out as well. So, we are on that last mile of this now or going at that moat and this is really where we’re investing and accelerating growth in terms of that acceptance and understanding.

Peter: Right. So, I’m curious about……you are a public company listed on the Australian Stock Exchange and I will share the symbol for everyone if they can go in the show notes, why did you decide to go public, one and why did you decide to go public in Australia?

Brad: I’ll tell you about the story that I heard and try to make sense and then we’ll talk about Australia. Reason to go public was we’re always looking to raise money to help grow the business and you get them in the private markets or the public markets and I think given the work of that some of peer companies formed, especially Afterpay building out a lot of products  in Australia, it helps the investment market there understand the Buy Now Pay Later space well in advance of other parts of the world. So, it was just seen that the market understood that, investors understood that were more willing to invest in a company in this space. The fact that we were doing it differently, now we have to educate why we were different to other people. That’s why we went public, that comes with a number of opportunities and a number of challenges in doing so.

Why Australia? We can talk a bit more about why Buy Now Pay Later in Australia, but the ASX is where, I think, it was forged that industry and the innovation out of Australia in the space is second to none.

Peter: Yeah, it’s really interesting. You know, like you’ve got, Afterpay’s worth more than US$30 Billion, you’ve got Affirm that’s close to that, you’ve got Klarna, I just read this morning that it’s going to raise money at a round close to $30 BIllion so you’ve got these monster evaluations……is that helping Splitit or because you’re obviously…..you say you’re complimentary, but you still do it at the point of sale so it feels like the Buy Now Pay Later space, it’s the hottest space in all of fintech. So, is it helping you guys, do you think?

Brad: It doesn’t hurt, I think it doesn’t hurt at all, I think we need to be clear. We have some work to do so everybody understands that we’re a complimentary option in the space, number one. So, both known and understood and we continue to do that for the investment community here in the States, Australia and abroad. Number one, yeah, it definitely helps. I think longer term, will all of those parties…..there’s a battleground for consumer financing to issue consumers new credit.

Peter: Right.

Brad: We are not in that battleground, we’re not there. There is battleground there and I think people are backing different horses as to who’s going to win that race. We feel that we’re running a race alongside them that creates great momentum for us to capitalize on, but we’re not going to sit on our laurels and just wait for that to happen. We’re going to grow with a different model.

Peter: Speaking of which, I was just reading recently you signed a $150 Million facility with Goldman Sachs, I presume that’s to help fund the business as far as paying off merchants, that sort of thing, but maybe explain what that money is actually used for and was it important to get like a blue chip name like Goldman Sachs. I don’t think there’s any bigger name in finance than Goldman Sachs. Was that important to get them on board?

Brad: Yeah. So, the $150 Million facility is solely used for advancing funds to their merchants so they can have the cash now and we’ll collect it over time. So, the more we grow, the more that we need to do. That turns into essentially $600 Million plus per annum because the book turns over about four times a year and that’s a three-year agreement so you’re simply looking at $1.82 Billion worth of funds we can advance to merchants over three years.

That’s a very important stage about growth, as we’re growing we want to make sure that’s there so that’s not slowing us down. Earlier in the year, we had exploded on the growth and we didn’t have that there. We fixed that with bridge facilities, now we’ve really moved to partner with a blue chip company such as Goldman Sachs that can provide that.

It was important for a couple of reasons, one, I think that the partnership with the company like Goldman enables us to grow in many different levels beyond the credit facility not just there, I think they’re bringing a level of expertise into the space which will help us become enterprise-grade versus where we’re at today and evolve that quickly over time.

And, finally, they’re investing heavily in the space, I’m saying that they will provide and will fund a number of facilities, they’re investing in the space and I think that’s a vote of confidence in our business that they see us fund the suppliers in the space that will be here for sometime and will grow and they can benefit from as well.

Peter: Right, right, okay. We’re almost out of time, but I want to get to a couple of more things before I let you go. I’m interested in getting your thoughts…I mean, you’ve been around the payment space for a long time and we’ve seen this huge growth of Buy Now Pay Later, you’ve seen the pandemic has caused a switch to debit. Credit cards are down, you know, the total transactions down for the first time in a long time. What technologies are you paying close attention to? What do you think is going to, you know, rule the future of payments?

Brad: There’s two different views. One is not new and one is quite hot, one that’s certain is mobile, we’re really looking at how will…the way you use your device to pay, how will that change and I think what we’re seeing is just going to be a convergence dramatically now (as shops reopen people will re-enter the economy outside of e-commerce, cloud-based checkout, cloud-based payments driven by your mobile and consumers initiating those transactions more than a retailer initiating those I think has changed forever, we’re going to see a lot of evolution there.

That’s exciting for us because that allows us to become an e-commerce brand in-store quickly and much more easily without investing in infrastructure to do so. So, we’re watching that closely, we’re doing a number of tests with different partners in the space.

The other area on the complete other end of the scale is blockchain, how do we use blockchain technology, not necessarily crypto, blockchain technology to help us expand forms of payment. We are operating on credit cards, but can you use that to operate with debit cards, with other local payment options around the world, how can you scale crypto quickly globally with blockchain technology and what you couldn’t by using traditional payment means.

So, does that mean that we’re looking at the early stages and we’re looking at very closely and then, of course, we’re looking at machine learning as to how you really turn your data into an asset that you can use to build better product for your customers.

Peter: Yeah, interesting, interesting. So, what is it about Australia and Buy Now Pay Later? Is it just because Afterpay started there or is there something else going on in Australia?

Brad: Nick and Anthony have built a brilliant product but innovation in Australia, in fintech has been around…it predates me and I have been around for a long time, but…you would know this, Peter, but some of your listeners may not. There’s a great point of sale debit network in Australia called EFTPOS and most transactions in Australia will happen on that network. It’s a PIN-based debit transaction not a point of sale and then they were one of the first countries to move to chip and then to contactless. I think it’s 20 million people versus 300, there’s four banks versus 400 and it’s a relatively small ecosystem, but it’s vibrant.

The economy is vibrant and it promotes innovation where you have a vibrant economy, you have small number of people or a small number of players, they can do that. It makes it all so hard, it makes it hard because a small number of players can sometimes control it, but there is an Australian mentality of I think to battle against the odds and to find a way to challenge the establishment. I think that serves as an innovation so I think all those things come together in the fintech space which drive a lot of innovation. I think there’s a lot of great company stories out of Australia, but I think it all stems back to some of those points.

Peter: Right, right, fair enough. So, last question then, what’s on tap for Splitit this year, what are you focusing on right now?

Brad: Serving our customers, we’re really focused on acceptance, more people accepting the product, I think really leaning into more product innovation now, leaning into our consumers into other areas which we will release later in the year or as time goes on. I think being clear that there’s another way to pay, I think we have a lot of work to educate, we’re not well known and we’re starting to hit the inflection point where that is changing.

People are increasingly knowing us and I think the repeat use and the NPS is showing that there’s……we need to accepted in more places because the demand is there. So, our job is not just to accelerate that, but to really educate the industry, whether it’s retailers or consumers, there’s another way, you don’t just need to go into new credit to make these purchases over time.

Peter: Okay, we’ll have to leave it there, Brad, it’s really fascinating. It’s a great product, you certainly got a huge opportunity ahead of you, so best of luck.

Brad: Thanks for having us on, Peter.

Peter: No worries, see you.

Brad: Bye.

Peter: It’s amazing, this is a pretty simple idea, amazing it hasn’t been done before, but Splitit has taken the reins of this and really the timing is great. Brad and I were talking after we stopped recording and we were saying, oftentimes, it’s a timing issue. Someone might have had this idea 20 years ago, but it would have been really hard to implement.

Today, we have the technology, we have the ease of use of checkout, people are used to now having multiple options to checkout. You know, there’s Amazon Pay, there’re PayPal, there’s other Buy Now Pay Later so they’re more open I think to doing something like this. This is an idea that is going to have traction, whether Splitit wins this race, someone is going to be able to dominate the sort of paying installments with your credit card space. Splitit, obviously, have a head start and have a great shot at really becoming the default here.

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. LendIt’s flagship event is happening online this year on April 27th to 29th with the possibility of an exclusive VIP in-person component. The verdict is in on LendIt’s 2020 event that was held online with many people saying it was the best virtual event they’d ever attended. LendIt is setting the bar even higher in 2021, so join the fintech community at LendIt Fintech USA where you will meet the people who matter, learn from the experts and get business done. Sign up today at lendit.com/usa.

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Filed Under: Fintech One-on-One Podcast Tagged With: Australia, buy now pay later, credit cards, point of sale, Splitit

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Podcast 278: James Paris of Avant

The CEO of Avant discusses the rise of their credit card business, the impact of the pandemic. the Colorado decision and more

December 18, 2020 By Peter Renton Leave a Comment

Views: 344

The rallying cry of the online lending industry has been to eliminate high cost credit card debt. And while tens of billions of dollars of revolving credit has been refinanced with lower cost personal loans we are starting to see some companies branch out into credit cards. Avant is one such company.

Our next guest on the Lend Academy Podcast is James Paris, the CEO of Avant, a position he has held for about a year now. Avant have two main offerings: a personal loan and a credit card with the latter being the fastest growing part of their business.

In this podcast you will learn:

  • How James describes Avant today and a little history of the company.
  • How the idea for their sister company, Amount, developed.
  • The slightly different customer profile for their loan and card products.
  • The impact of the pandemic on their business.
  • How they approach the capital markets side of their business today.
  • The financing structure they have in place for the credit card business.
  • What the impact of the Colorado decision will have on Avant and the industry.
  • How True Lender might play out on the national stage.
  • How they think about financial health and improving the lives of their customers.
  • What James and the Avant team are focused on for 2021.

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 278 – James Paris.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 278-JAMES PARIS

Welcome to the Lend Academy Podcast, Episode No. 278, 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 am delighted to welcome James Paris, he is the CEO Of Avant. Now, Avant has been around for a long time, we’ve had Al Goldstein, the previous CEO and one of the co-founders on the show a couple of times, but James has been in the job for about a year now so I wanted to bring him on just to get an update on the business, what they’re doing. They’ve expanded into some new areas, credit cards, we go into that in some depth, we talk about the impact of the pandemic, we talk about the capital market side of the business, also the Colorado decision early this year that have affirmed the bank partnership model that was really important, we talk about the financial health of their customers and much more. It was a fascinating interview, we hope you enjoy the show.

Welcome to the podcast, James!

James Paris: Peter, thank you, great to be here today.

Peter: Okay, my pleasure. So, you know, I’d like to get this thing started by giving the listeners a bit of background. You’ve got an interesting career to date, why don’t you give the listeners some of the highlights before Avant.

James; Yeah, absolutely. So, maybe I’ll start sort of how I got to Avant kind of in the shortest possible way which is that I knew the one of the original founders and CEO, Al Goldstein, for I guess probably 15 years at the point in time when I joined the company because for me, anyway, life came full circle. Al started out working for me in our Analyst Program at Deutsche Bank when he graduated University of Illinois and I had the pleasure of going back to work for him in the summer of 2015 at Avant.

So, I had been an attorney, I had been doing investment banking and specifically a lot of work around capital markets and funding transactions. So, when I originally came to Avant it was to help the business set up around capital and funding, including the equity raise that we did in the fall of 2015 and then putting together the programs that the company uses with credit facilities and securitizations and loan sales and then sort of went a handful of other directions after that around kind of broader strategic things we were working on.

Peter: Right, right, okay. So then, you’ve been in Avant…. you’ve sort of been in several different roles there over the years and I know you were also with a sister company, Amount, but why don’t you tell us….how do you describe Avant today?

James: Yeah. I mean, happy to do that, I think it’s a great question and maybe I’ll touch a little bit on Amount too and give a little bit of history as well for folks. So, Avant was founded about seven and a half years ago, almost eight years ago now really with the mission of trying to supply responsible, transparent credit products to the near-prime, middle class consumer in the US. And, you know, this was back in sort of the early part of 2013, the financial crisis was still, you know, relatively close in historical proximity and what we were finding was just that banks that have traditionally been able to support these customer categories really were not. While we started to see others making inroads around prime consumers, we didn’t see as much in the near prime space, in particular.

We like that because we thought that although the banks had a big problem with technology in terms of their ability to deliver things digitally, ultimately, they would be able to close that gap. We had a really tough time competing with their cost of capital even if we had great technology because it would be hard for us to compete with them around rates on credit products so, hence, our focus on the near-prime category. We also ….a little bit different from some others, we’re focused on building our own balance sheet because we thought that would provide a lot of stability and consistency in times of either capital market disruption or broader economic disruption.

Well, certainly, we’ve seen quite a bit of….you know, in 2020, with COVID and, again, that’s the strategy that we thought the near-prime space supported well because there’s a bit more yield in that category with extra spread to fund yourself in the whole sub-capital markets. Along the way, as we were thinking about how to best serve customers in that category, we started to work and approach banks with the idea of partnering in different ways so that we could serve their near-prime customers because, of course, banks, you know, may have deposit customers ranging sort of the full gamut of the credit spectrum as opposed to just the prime and super prime that they wanted to lend to. So, when we were kind of engaged in a lot of those discussions, what we discovered was really the banks did want to be able to deliver that experience and those options to customers, but they wanted to be able to do it themselves.

That was really where the idea behind the Amount business started to take form which was the technology that we had developed within Avant which was really leading in terms of a number of things, not just underwriting but also around fraud prevention, account verification, all of the things that are required to be done from a legal and regulatory standpoint. We had, effectively, automated with proprietary technology that you could use across different categories of both products and for different categories of consumers. There was nothing that was sort of, you know, required the technology be applied in this near-prime category, it would effectively work across the board. And so, we started to build partnerships where we were putting together digital lending credit platforms on a customized basis for banks, a number of which can be publicly announced when Amount was still within the company, within Avant.

And then at the beginning of 2020, on January 1st, we spun Amount out as a separate business so Amount is a supplier to Avant of some of our back end core technology, the same way that they are for a number of banks like TD, PNC, Banco Popular, Regions Bank and a handful of others that have not been publicly announced yet. And so, you know, Avant today, back to the original question, so Amount is…..you know, we thought that in pursuing that strategy we’d give both businesses the opportunity to sort of achieve their potential because there’s different considerations for both of the businesses so split them apart.

Today, Avant is really the consumer-facing credit business where we have a unsecure personal loan product which was sort of the original flagship product. We now have a second flagship product which looks like it’s trending to be actually even quite a bit bigger than the loan product, which is our credit card product, where we’ve been in the market for nearly three years now and have over 300,000 active credit card customers on the platform.

Recently, we launched an auto product where we’re offering loans secured by consumers’ automobiles and we have a longer term strategy there of building that into kind of a multi-pronged auto product platform. In addition to that, we’re making big investments in Point of Sale technology and product as well in partnership with Amount who’s doing that with a number of other institutions as well.

So, a lot going on, but, effectively, we’re the consumer-facing digital bank although we don’t have deposits yet, that’s another thing we’re thinking hard about really for that near prime category. Just to kind of round out the summary, you know, we’ve done I think $7 or 8 Billion of unsecured personal loans. As I said, we have over 300,000 credit card customers, I think we’ll originate about 240,000/250,000 in 2020 and aiming toward an increment of 400,000 for next year in 2021 and we’ve very excited about that growth, still very excited about our lending business as well. It is also growing, but not at the rate that the car business is.

Peter: Sure, sure. So, is the customer profile pretty similar for the cards and the loans?

James: Well, it’s a little bit different, that’s intentional. So, for the loan product, the weighted average FICO which is, although we don’t use it in underwriting, is a good reference point that everybody’s familiar with is about 650 and the weighted average for the card product is about 625. So, it’s a slightly down market from the loan product and that was intentional because we saw an opportunity in the market where between kind of existing providers that sort of dabble in the near space as well as prime kind of pulling back. And then another group that’s quite a bit further down the spectrum into the sub-prime category, we saw a lot of white space between those two products and so have positioned our product in that white space seeing a lot of growth and adaption and really excited about the direction where that’s going.

In fact, this spring, kind of late Q1 early Q2, we feel like we got enough data and information that we’ll be able to start cross selling the products effectively in both directions where a credit card customer that’s, you know, maybe more than an emerging upwardly trending credit profile where we’ve got great data and their history with us with the credit card would be eligible for the loan products and vice versa. So, we’re quite excited about the opportunity for cross selling the products and give our customers more of what they need.

Peter: Right, right, okay. Maybe we can just talk about 2020 for a while and just give us some perspective about how….what the arc of your experience has been, obviously, from pre-COVID, through COVID to today, just give us a bit of a rundown, both on the cards and the loan product, how has demand been, how has performance been, that sort of thing.

James: Yeah, sure. I’ll just take them… start with loan and then talk about credit cards and then maybe a little bit on the overall business as well because, I think, like so many others we’ve been affected in a lot of ways beyond just sort of products and performance. But, on the loan side, demand was hit really hard out of the gates when COVID sort of first started to, you know, reveal how significant it was going to be back in early to mid-March where, you know, effectively as everyone knows, the country pretty rapidly started shutting down and, you know, people, consumers were really hunkered down. So, you know, for several months we saw savings rates much higher than what we would typically see and spending way, way down and that also translated because I think, in effect, if the consumer level….people’s individual balance sheets, if you will, kind of got stronger because of that savings and spending dynamic.

The demand for loans fell pretty significantly, you know, our use case for why consumers borrow from us tends to range into a lot of different categories. It’s not necessarily as simple as straight consolidation for customers in the near-prime category so some of its access to credit, some of its unexpected expenses that might be material, some of it, you know, may be more discretionary in nature so certainly we saw demand fall significantly for our near-prime category. It probably fell 70-ish% kind of out of the gates and we’ve seen that recover over the course of the summer and into the fall, but it’s still, at least for us, remains fairly subdued. I’d say it’s down at least 30/40% for our category of borrowers. So, we did a number of things along the way, both as it relates to tightening standards in the early days from an underwriting standpoint, all of which we’ve since effectively unwound and that’s really due to performance which I’ll touch on in a minute.

The other thing that we did very aggressively, very quickly was around making a variety of effectively treatments available to borrowers who were dealing with the hardships, including a newer option which became a primary option where we were able to customize a plan for a borrower based on sort of a specific hit to income level that they saw themselves affected with. And so, a number of things on the operational front that we did in order to sort of make borrowers very aware that they had options out there if they were dealing with any issues. And I think similar to many others in the lending space, you know, what we’ve seen since then has been extremely good delinquency performance and extremely good performance of borrowers that did take some form of treatment or plan, whether that was a forbearance plan or whether that ultimately was a more significant payment plan that resulted in the reduction of payments for them as a result of their hardship. So, we’ve seen this really, really strong adherence to these plans as well as very strong underlying delinquency performance for really the entire loan book.

So, as a result of that, the delinquency levels are really as low as they’ve been in years although, I think, we’re starting to see with some of the broader economic data that I think the whole market’s focused on that, you know, perhaps that will change as we get into 2021. I think a lot of that is going to depend on stimulus programs as well as the pace at which the various states and local areas open up and, you know, sort of ….I think, right now, with last week’s job report, we were at something like 6.7% unemployment, still somewhere in the neighborhood of 10 million or so jobs lower than where we were in February before the pandemic hit. So, I think there some big questions about how that last, you know, few hundred basis points of full employment, you know, how long it takes to get there and how that plays out, but we saw really strong performance on the loan front.

On the credit card front, it’s a little bit of different story from the standpoint that while we did see a little bit of a dip in demand for the first few weeks after COVID hit, it resumed pretty quickly. And so, we did see our level of issuance drop for a couple of months, but based on what we were seeing in terms of performance and all the indicators that we look at, we felt pretty good about the credit profiles and so we leaned in a little bit more on the credit cards side and had several months of record issuance and we were able to nearly make up what our original goal for the year had been which was 250,000 cards. I think we’ll wind up being just a little bit short of that, but a lot of that sort of backend waited after we sort of stepped on the gas on the credit card side.

So, similarly, performance has really, really been strong, delinquencies are very, very low, I’d say card utilization is also a little bit lower which means that average balances, relative to size of lines, has come down from what we would typically see. But, that’s also just very consistent with kind of a healthy individual balance sheet at the consumer level, meaning that they pay down debt levels of their own, including with the card product. So, we see a really, really healthy consumer, in general, and hope that that can continue, but, again, a lot of the broader national policies and state level policies are going to have a huge impact on how things play out in the broader economy and that’ll affect our business, you know, as well, obviously.

Peter: Yeah, yeah, understood, understood. So, maybe we can talk about the capital markets side of business which I know you’re very familiar with having that role previously. Who are you mainly using to fund the loans and the credit lines? I saw recently you extended your warehouse lines with JP Morgan and Waterfall, tell us a little bit about how that side of the business is going right now.

James: Yeah, sure. We have a few different credit facilities with different providers without necessarily naming them. I would say, we’ve got, you know, a mix of big banks and bankruptcy remote facilities, we’ve also got one with a large insurance company. All of our primary facilities we extended, effectively, during the pandemic, extended out the maturities and one of the cases we significantly increased the size and the facility because it’s primarily financing the credit card business which, as I’ve mentioned, has been expanding very rapidly. So, we’ve been very pleased with our lenders and with the processes around extension and expansion there and we’ve been watching the capital markets very closely.

I think, clearly, there was a lot of disruption back in the spring and then, you know, as additional data became available across I think many, many lenders in different categories and, you know, the data sort of spoke for itself. I think the strength that we’re seeing in the consumer is something that’s been broadly seen. We’ve seen a pretty significant recovery in the capital markets so, you know, deals are getting done in our space, we have not done one recently in terms of the capital markets.

We did one back in late February/early March, sort of right as things were getting pretty wacky and because of our substantial balance sheet capital ourselves, cash and the facilities we have, we’ve got quite a bit of flexibility about when we come to market so we’re sort of evaluating timing. I doubt we’ll do something before the end of the year, but look to do something early in 2021, but the markets feel fine if we wanted to do something. We feel like the terms will be fine right now, it’s just not the right time for us.

Peter: Right. What about the credit card side, are you going to go out and do a securitization there?

James: Yeah, I think we will. We haven’t exactly nailed down the timing of one that will take place, but we’ve been contemplating that for many years. So, the financing structure that we have in place essentially contemplates that a typical kind of master trust structure that you often see in credit cards securitization in terms of being, you know, set up in a way to facilitate moving in that direction so that’s something that I think we want to get a little bit more scale in the business, but It’s something that I would expect . We’ll probably do our maiden offering in 2021.

Peter: Right, right, okay. I want to switch gears a little bit and talk about the decision that happened in Colorado earlier this year that was…..you guys were part of that. Basically, the state of Colorado affirmed the banking partnership model. The OCC has since issued a final rule on True Lender so, maybe we can just start off with asking how has this impacted business since then?

James: Sure. I think it’s a pretty big decision and fairly far reaching from the standpoint that the Colorado case or cases which involved both ourselves and Marlette in sort of independent cases, but effectively we were being worked through the system jointly which meant that we were coordinating to the extent that we could on some of the defense issues because it was the first time that a state had really alleged this True Lender issue in any cases that involved lenders that exclusively lent below 36%.

You know, historically, there had been a handful of these cases which all sort of revolved around deep, deep sub-prime lenders and I think largely players that were perceived to be weak on regulatory considerations or maybe not great actors, that kind of thing. You know, the doctrine around True Lender was probably extended a little bit because of some of those considerations, but it had never really been applied in a case like ours where we worked incredibly closely with our issuing bank partner around the bank’s policies and the practices and services that we perform and it’s highly structured and monitored which I think is fundamentally different than some of these other cases.

So, in any event, what happened was that the state of Colorado ultimately agreed with us as after I think about three and a half years proceeding with the litigation, we finally got into you know, very, I guess, deep aspects of the discovery there, including depositions and I think as Colorado better understood our business, I think they were in a position to support it from the standpoint of help to craft a safe harbor that they thought would protect consumers even in cases where it’s above the state of Colorado’s usury limits because they saw real benefits and they saw appropriate governance and controls on institutions involved, both the bank and a fintech like ourselves.

So, in fact, we actually had a study that demonstrated that consumers in New York, for example, where the Madden case had been decided and where a lot of fintech lenders pulled out after that decision that consumers in the state of New York were, essentially, forced to adapt or accept inferior credit products that were higher rate relative than what they were able to get when that market was available to them. I think Colorado found that to be pretty persuasive as well.

So, ultimately, really what they saw was that I think what we’re doing, if done properly, is good for consumers because it’s creating liquidity in these credit markets for middle class consumers that might have a harder time accessing it otherwise. So, that’s, I think, why they were focused on it and why it’s important is that it could be a roadmap that potentially other states could look to as well. It’s much more detailed than the OCC’s version of the final rule on True Lender, not to say that one’s better or worse. I think the OCC’s is far more simpler, but the standard that we agreed to with Colorado is one that we feel very comfortable about working within and one that we would happy to adopt more broadly as well.

It’s, frankly, very close to what we had been doing historically. So, there’s been a lot of uncertainty over the industry around these issues, both Madden and True Lender, and different times affecting sort of the liquidity within the industry from the standpoint of capital markets and lending. So, bringing clarity on that issue would be really helpful and important, we’ll see if other states adopt it over time, but it’s a good step in that direction for sure.

Peter: Yeah, yeah. We should point out too that the state of Colorado….I live in Colorado so I know it pretty well. You know, the Attorney General and the Governor of Colorado are both Democrats and, obviously, we’ve got a new Democrat administration in Washington ….sometimes I feel like this is a great case because…. there is a criticism of the bank partnership model because it’s a way to circumvent, it’s a way to kind of charge high interest. I guess, I’m curious about how you think about it playing out on the national states given that….there is, definitely, a small position to it and not everyone agreed with what Colorado decided.

James: Yeah, that’s true. I think that there’s a lot more to come on these issues, I think it will be very interesting to see how the new administration chooses to handle it and sort of what happens from the standpoint of who’s put in-charge of some of regulators like the OCC where I think we’ve probably seen the most innovation coming most recently. I think it’s possible even that some of the rule making that’s been done more recently could come back under review potentially which is another reason why I think the state decision to the extent….the OCC, you know, effectively pulls back on any of the guidance they’ve done within this area.

The state case in Colorado could be very helpful as something to point to and you’re right about Colorado having a Democratic administration of it’s own and I think it goes to the point that I was trying to make earlier that these products can be very helpful for the consumers and that there’s really good data and information that demonstrates that. So, I think when you see the overall effect and the intention of the parties around this, you just got to make sure that there is appropriate governance and controls and that it’s been done in an appropriate way from a regulatory standpoint that there is a way to have everybody win here is a good thing. And, I think that’s what got recognized in Colorado. So, we’re hopeful that that could be a roadmap.

Peter: Right, right, okay. I just want to pick up on one thing you said there. There’s a lot of a knock on this whole model, the consumers are harmed and that this is not good for the consumer. You just said that you’ve got data that demonstrates that that’s not the case, what kind of data do you have and are you sort of benchmarking the typical consumer as far as credit score or credit health, what do you have?

James: Well, specifically, what I was referring to is a study that was conducted by an economist named Michael Turner who’s based in Columbia University. What he studied was this impact from Madden that happened in New York state versus what was happening in Colorado during the same timeframe and just a relative differences in access to credit sort of in those different states based on the prevailing sort of legal regime at that time where in New York these types of fintech partnerships were no longer occurring, but they had before. So, you have a pretty distinct data set where you could look at what was happening when that product was available, what was happening after it have been taken away.

What was very clear was, essentially, people within narrow credit score bands, you would see the cost of credit increase pretty materially for that credit band after that service with fintech being partnerships went away. And so, I think, that study is publicly available, was filed as part of the court case and it’s pretty powerful in terms of what it shows, it’s very clear and Dr. Turner is a very well-regarded independent economist, so I think that was pretty persuasive for Colorado.

In terms of what we do specifically, it’s been a little while since I’ve looked at the data closely myself, but I know, historically, we have seen peoples’ credit scores increasing over time as they’re consistently making payments on our products. Certainly, part of what we try to do as a business is to continue to provide better products, lower cost products to customers when they’ve demonstrated the wherewithal that they should be eligible for that.

So, what that translates to in practice is that we’re actually expending our credit card offering in terms of a range of card products, including one we have not launched yet, but which will have things like promotional periods with no interest, with rewards and cash back. They are more consistent with the higher credit spectrum than where we’re at today with our card product, it’s kind of around 625 FICO.

Similarly, on the loan side, you know, we have an active refinancing program where we…for customers that have demonstrated strong payment history, we’re refinancing customers into lower rate loans on a proactive offering basis. So, things like that which….you know, small steps along the way, but make a big difference in people’s lives. So, I think we’ll continue to do those things and we’re excited about the opportunities we think we have in the auto space to do some more things.

Peter: Okay. So, last question just on that. I mean, as we turn the page to 2021, what are the main opportunities you ate looking for? You mentioned auto, where do you see Avant moving in 2021.

James: Sure. There’s a few things that we’re most focused on. I’ve mentioned a couple of these, but….number one is continue to grow the credit card business. As I said, we’re looking to do about 400,000 cards next year, a big part of that is going to be expanding into some new spaces from a customer standpoint. So, I mentioned moving up market with rewards and promotional offers. I think we’ll also experiment a little bit further down the credit spectrum as well and we’re looking at doing more underwriting in both loan and credit card for thin file customers.

So, I’d say number one is continue to push and grow the credit card business. Number two, I mentioned, we’re going to be launching cross sell capability between those two products to where we’re able to offer, you know, the other product, a loan to a card customer, a card to a loan customer. That’s coming early in 2021 and then really making significant progress both on our auto product suite where ultimately we think it is a big opportunity in refinancing auto loans direct to consumer.

Also, Point of Sale is a big push for next year. So, we have a lot on our plates, there’s a lot that we want to get done, but we’re very excited about how the company is positioned. I think just on that point, Avant has been profitable now for a few years, kind of hovering right around break even and a lot of that being a function of growth because we do have our own balance sheet and some of the accounting around that. So, the company is in a good position from a capital and liquidity standpoint. We’re still very cautious on the broader economy in what’s happening at the consumer level. So, we’re carefully watching that, but assuming things continue to play out pretty well, we’re excited to see some pretty meaningful growth in both our card and loan business next year based on all these investments.

Peter: Okay, James, it’s really fascinating chatting with you. Best of luck for next year and thanks for coming on the show.

James: Peter, it was my pleasure, thanks for having me.

Peter: Okay, see you.

James: Alright, take care.

Peter: Avant is, I think, a great example of a company that started in unsecured consumer loans and has expanded out into other areas. We talked about credit cards, they’re becoming a decent-sized credit card provider, auto loans, obviously, James has talked about. What they’re doing is they’ve got a certain customer they’re trying to serve them in multiple ways and serving them with multiple financial products like traditional financial institutions.

I wrote about this a few weeks back where I really see a blurring of the lines between traditional financial institutions and fintechs that really…..it already started to happen, obviously, but fintechs are becoming diversified financial institutions and banks are becoming far more tech-enabled. James even teased that there might be bank offerings down the road, we didn’t get a chance to chat about that, but that makes my point, they have their market, they’ve got multiple products and they really want to be able to serve this customer really well. I think that’s what’s successful fintechs will be doing this decade.

Anyway, before I sign off, I just want to wish everybody a Merry Christmas, Happy Hanukkah, however you celebrate the holidays. This is our last one before Christmas, thank you all so much, wishing you a safe and happy holiday season,

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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Filed Under: Fintech One-on-One Podcast Tagged With: Amount, Avant, Colorado, credit cards, Personal Loans

Views: 344

New Upgrade Card Could be a Game Changer

A new kind of card launches today from Upgrade combining the best features of personal loans with the utility of a credit card

October 10, 2019 By Peter Renton 1 Comment

Views: 7,408

When Renaud Laplanche started Upgrade in 2017 there were high expectations that the fintech pioneer would be breaking new ground with his second startup. After leading LendingClub from inception through IPO to the leading personal loan provider in the country everyone wondered what he had up his sleeve with Upgrade.

At his LendIt Fintech USA keynote in 2018 Renaud first teased us with his idea of the revolving personal line of credit. And he then confirmed earlier this year in his 2019 LendIt keynote that an Upgrade card was coming. Today is the day, the Upgrade Card has officially launched and it could be a game changer for the industry.

I caught up with Renaud earlier this week to discuss this new card and what it means for Upgrade and for the future of credit cards. He first pointed out that the concept of minimum monthly payment, that is a feature for most credit cards, is such a bad idea for consumers. It is detrimental to consumers’ financial health because it can take decades to pay off a credit card balance and result in a total payment often more than double the original amount.

He argues that this kind of credit card is fundamentally flawed and that a new approach is needed. He said:

I am genuinely more excited about this product than when I first launched online personal loans over a decade ago. We have refinanced tens of billions of dollars in credit card debt but still the overall outstanding balance keeps increasing. It feels good to get to the heart of the problem and create a more responsible card.

How Upgrade Card Works

You can think of Upgrade Card as a cross between a traditional credit card and an installment loan. Once they pass underwriting a customer is approved for a credit limit as you would expect. The difference is how the outstanding balance is paid back. Also, to be clear Upgrade is not calling this a credit card, it is simply Upgrade Card because they want to position it as a better alternative (an upgrade if you will) to a credit card.

[Read more…]

Filed Under: Announcements, Fintech Tagged With: credit cards, Renaud Laplanche, Upgrade, Upgrade Card

Views: 7,408

The Superior User Experience of the New Apple Card

I share my experience applying for the new Apple Card and where I think it breaks new ground

August 26, 2019 By Peter Renton Leave a Comment

Views: 781

I just signed up for the Apple Card. I have been fascinated by this partnership between Apple and Goldman Sachs ever since we learned about it last year. So, when it went live earlier this month I knew I had to get it.

While I may not be a true Apple fanboy I use many of their products including a Mac, iPad and iPhone. The Apple Card is designed to work seamlessly with the iPhone, in fact you must have an iPhone 6 or later to be able to apply for the Apple Card. There is no web-based application, you have to do it from inside the Wallet app.

I like to play the mileage and points game so I have several Chase and Amex credit cards and I regularly (2-3 times a year) apply for new cards. It never ceases to amaze me that, despite all the credit cards these companies issue, the online application process always feels clunky and unfriendly. They could and should make it much more simple.

The Card Application Process Felt Like Visiting the Future

This is what Apple has done. The user experience in the application process is simply superb. They have clearly thought long and hard about ways to reduce friction, especially considering you are applying on your phone. Here are some screenshots of the process: [Read more…]

Filed Under: Fintech Tagged With: Apple, Apple Card, credit cards, Goldman Sachs, Marcus

Views: 781

LendUp Splitting Personal Loans and Credit Card Businesses

LendUp will house the company's personal loan business while a new company, Mission Lane will focus on the credit card business.

January 10, 2019 By Ryan Lichtenwald 2 Comments

Views: 1,388

One of the companies the LendIt Fintech team has always held in high regard is LendUp. They are tackling a difficult problem, access to credit for the underserved, by leveraging the latest technology. This involves a whole different set of challenges than serving the prime and super prime market. They have offered short term loans and more recently a credit card for the non-prime market.

Today, LendUp announced that they are splitting the business in two. LendUp will focus on the company’s more established and profitable personal loan business which also includes consumer education. A new company has been formed called Mission Lane which will hold the credit card business, and that business’ portfolio, IP, and technology platform. The credit card business includes the popular Arrow and L cards. These cards have received high accolades from customers compared to other subprime credit cards which often are coupled with high fees.

Mission Lane is receiving a capital injection from Invus Opportunities and LL Funds LLC who are leading the investment along with participation from QED Investors. LendUp launched their card business more recently and the new capital structure will allow this segment of the business to grow. The companies will have separate technology platforms and it remains to be seen whether the customers of each will be cross marketed to.  Along with these changes is a shuffling of staff between the two businesses.

Here are a few of the major changes:

  • Anu Shultes, previously GM of LendUp will be appointed LendUp CEO.
  • Sasha Orloff, LendUp’s co-founder and CEO is stepping down, but will remain a board member of LendUp and will be involved in Mission Lane as an advisor.
  • Vijesh Iyer, previously LendUp’s COO has been named interim CEO of Mission Lane as they search for a permanent CEO
  • Other previous LendUp executives including LendUp co-founder Jake Rosenberg, Eric Nelson (operations) and Leonard Rosemen (data science) will also be joining Mission Lane.

While this news was just announced, the Mission Lane webpage gives us a glimpse of what the new brand will look like. We wish everyone from LendUp and the newly formed Mission Lane the best of luck as they move forward as separate entities.

Filed Under: Peer to Peer Lending Tagged With: credit cards, LendUp, Mission Lane, Subprime

Views: 1,388

Goldman Sachs Said to be Partnering With Apple on a New Credit Card

The new credit card will carry the Apple Pay brand and will be the first foray into credit cards for Marcus by Goldman Sachs

May 10, 2018 By Peter Renton 2 Comments

Views: 351

On stage last month at LendIt Fintech USA 2018 Omer Ismail, the Chief Commercial Officer for Marcus by Goldman Sachs, said that one of the new products his firm was looking at was credit cards. Not that surprising, really, for a company working hard to grow their consumer finance business.

Earlier today the Wall Street Journal broke the story that Goldman Sachs would be partnering with Apple on a new credit card. When I was thinking about potential ways Marcus would launch a credit card, a partnership with Apple was not what came to mind. It points to the many advantages that Marcus has over pretty much every other fintech company. They have the Goldman Sachs name behind them and have deep relationships with some of the largest companies on the planet. That opens doors that are simply not available to even the more established fintech platforms.

So how will this partnership work? I reached out to Goldman Sachs but not surprisingly they had no comment, so we will have to go with the information in the WSJ article:

The planned card would carry the Apple Pay brand and could launch early next year, people familiar with the matter said. Apple will replace its longstanding rewards-card partnership with Barclays, the people said.

Apple has had a card relationship with Barclays going back to 2005 so this is a significant move on Apple’s part as well. Given this is going to be an Apple Pay branded card Apple is clearly focused on building that part of the business. The WSJ states that the economics of any Apple Pay transaction would be significantly improved with this new Marcus card. [Read more…]

Filed Under: News Tagged With: Apple, credit cards, Goldman Sachs, Marcus

Views: 351

Upgrade Announces New Personal Credit Line Product at LendIt Fintech USA 2018

This first of its kind product combines the benefits of a personal loan with the ease and convenience of a credit card

April 10, 2018 By Peter Renton 2 Comments

Views: 219

While the personal loan has been around for centuries and the credit card has been around for decades they have never been combined into one product before. Until now. On stage at LendIt Fintech USA 2018 today Renaud Laplanche, the CEO and co-founder of Upgrade, will announce this groundbreaking new product.

I chatted with Renaud last week to get the latest news on Upgrade and to talk about this new product. He immediately wanted to start talking about financial health. As an industry we should be doing more to help the overall health of consumers and not just sell them a personal loan.

At Upgrade they are trying to do just that. They have released a broad suite of free tools to help consumers understand their credit health. They have credit monitoring tools like many other vendors but what Upgrade has done that is new is create a credit score simulator. This tool will show you a couple of dozen “what if” scenarios personalized to your own situation that are very practical and useful. There are also many articles and short videos to help people understand credit more. Having both credit monitoring and loans under one roof also provides benefits to users with a tighter integration between the two products.

There is more to discuss here but let’s get back to the focus of this article: Upgrade’s new Personal Credit Line.

How This Personal Credit Line Will Work

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: credit cards, personal credit line, Personal Loans, Renaud Laplanche, Upgrade

Views: 219

Is Marcus Going to Launch a Credit Card?

Goldman Sachs has acquired the talent from a recently defunct credit card startup

January 30, 2018 By Peter Renton 1 Comment

Views: 1,479

Ainsley Harris reported in Fast Company today that Goldman Sachs is acquiring the employees who built Final, a credit card startup based in Oakland. Final offered a unique kind of credit card, one that would create a different virtual card number for every merchant, thereby reducing the risk of credit card fraud. The company announced in December that they were shutting down.

According to Fast Company:

Goldman gains about a dozen engineers and product managers with experience building a consumer finance product from scratch. When they arrive at Goldman in the spring, they will join a growing roster of consumer-oriented employees, all part of the bank’s new Consumer and Commercial Banking division.

It has been a busy couple of years for Goldman Sachs when it comes to their consumer facing business. This latest deal follows a long list of acquisitions for Goldman recently:

  1. Acquisition of GE Capital Bank – this jumpstarted GS Bank giving it a huge deposit base.
  2. Acquisition of Honest Dollar – the digital retirement savings app was acquired in March 2016.
  3. Launch of Marcus with debt consolidation loans.
  4. Acquisition of Genesis Capital – not really consumer facing but could add a real estate development arm to the bank.
  5. Bond Street – employees of the online small business lender moved to Goldman Sachs.
  6. Addition of home improvement loans to the Marcus offerings.

Marcus to Offer a Full Suite of Banking Products?

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: credit cards, Goldman Sachs, Marcus

Views: 1,479

Are We Seeing the First Signs of the Next Recession?

Disclosures by Lending Club as well as many of the leading banks this month have indicated delinquencies are increasing.

October 21, 2016 By Peter Renton 4 Comments

Views: 10

Lending Club made news earlier this month when they announced they were increasing interest rates again. But what they also shared was that this was partly due to an increase in delinquencies in particular at the higher risk end of the credit spectrum.

Grades E, F and G at Lending Club are at the highest interest rates ever with the top rate for a G5 rated loan now at 30.99%. The interest rates on these higher risk loans have been steadily increasing for many years. I have a screenshot I took back in October 2010 when a G5 loan had an interest rate of 21.14%. Today, a loan with that interest rate would be rated D5 at Lending Club

So, does this mean that the G5-rated borrower of today is more risky than the G5 of 2010? Certainly the expected loss for the 2016 borrower is far more than this same person in 2010. But while interesting I don’t think this says much about the possibility of a recession in the near future. It simply means that Lending Club is targeting a higher risk borrower.

Having said that, the reality is that there has been higher than expected delinquencies in the higher risk portions of Lending Club’s portfolio. Here is a paragraph from their 8-K released last Friday:

Consistent with observations earlier this year, we have continued to observe higher delinquencies in populations characterized by high indebtedness, an increased propensity to accumulate debt, and lower credit scores. Although the trend can now be observed across grades, it is less notable in lower risk grades and more notable in higher risk grades, particularly grades E, F and G, which account for approximately 12% of platform volume. Higher delinquencies are more evident in 2015 and early 2016 vintages, which coincides with an uptick in consumer indebtedness in the U.S.

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: credit cards, Lending Club, loan losses, recession

Views: 10

Revolving Credit Card Debt Down But Interest Rates Now at Record Levels

September 26, 2011 By Peter Renton 14 Comments

Views: 1

There was good news last week for the nation’s credit card holders. The total revolving consumer credit card debt continues to fall along with default rates.

According to Forbes.com default rates were down at four (Discover, American Express, Chase, Bank of America) of the top six credit card issuers. Only Citigroup and Capital One saw increases. Is this because people are spending less? Quite possibly.

One reason consumers are able to keep up with their payments is that balances have dropped sharply since the height of the recession. Lower balances translate to lower minimum payments.

The Federal Reserve says that total revolving credit balances has dropped from $958 billion at the peak in 2008 down to $793 billion in July of this year. Charge-off rates have declined as well from a high of 10.96% in the second quarter of 2010 to just 5.6% in the second quarter of this year. [Read more…]

Filed Under: Peer to Peer Lending Tagged With: credit card debt, credit cards, interest rates, Lending Club, Prosper

Views: 1

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