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Kabbage Launches Checking Accounts for Small Business

The new Kabbage Checking account pays 1.1% interest and has probably the richest feature set of any small business checking account today

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Views: 967

Many (perhaps most) small businesses are not well served by their bank. This was made clear during the Paycheck Protection Program where many big banks refused to work, at least initially, with some of their own small business customers because they were not big or profitable enough for the bank.

For the smallest of business, those with less than 25 employees, they were left waiting and wondering if they would receive a PPP loan at all. This led to some understandable frustration to say the least.

Today, into this mix, Kabbage has announced they have created a unique checking account targeted at small business. But this isn’t just any vanilla account that you could get at your local bank, they have some pretty compelling features.

Kabbage Checking will have a rich feature set for a small business bank account:

  • Earn 1.10% paid monthly on your account balance.
  • No minimum opening deposits.
  • The ability to deposit cash at one of 90,000 locations nationwide.
  • Free ATM access at one of 19,000 in-network ATMs nationwide.
  • Wallets: Create up to five Wallets to track savings goals or manage your cash flow.
  • Bill pay: Set up your vendors, organize your bills and issue payments electronically.
  • Kabbage Debit Mastercard
  • No overdraft fees.

I caught up with Kathryn Petralia, co-founder and President of Kabbage, yesterday to get some background on this new initiative. I asked her whether this was created in response to the pandemic and she said that it has been in the works for a long time and the launch was initially planned for earlier in the year. [Read more…]

Podcast 256: Lexi Reese of Gusto

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

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

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

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

In this podcast you will learn:

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

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

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

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 256-LEXI REESE

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

(music)

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

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

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

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

Welcome to the podcast, Lexi!

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

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

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

Peter: Really, that’s an interesting one.

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

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

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

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

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

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

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

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

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

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

Peter: Right.

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

Peter: Right.

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

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

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

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

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

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

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

Peter: Right:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Peter: Right.

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

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

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

Peter: Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

Lexi: Thanks, Peter.

Peter: Okay, see you.

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

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

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

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

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Podcast 253: Marwan Forzley of Veem

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

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Views: 159

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

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

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

In this podcast you will learn:

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

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

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

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 253-MARWAN FORZLEY

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

(music)

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

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

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

Welcome to the podcast, Marwan.

Marwan Forzley: Thank you and thanks for having me.

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

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

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

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

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

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

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

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

Peter: Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Peter: Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Peter: Right.

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

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

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

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

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

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

 

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

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

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

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

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

Peter: Right.

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

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

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

Peter: Okay.

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

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

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

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

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

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

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

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

Peter: Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Marwan: Thank you for having me.

Peter: Okay, my pleasure.

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

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

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

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

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

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With the PPP Fintech Comes of Age

Fintech lenders reacted quickly to the PPP and helped save millions of jobs

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For the general population fintech has mostly flown under the radar. When it has popped up into the conversation of the day it was often for negative reasons. But the Paycheck Protection Program (PPP) has given fintech a national voice like never before.

Exhibit A is this New York Times story from yesterday featuring Cross River Bank. While those of us in fintech have known Cross River for years as they have been an industry pioneer, particularly in consumer lending. What many people did not realize is that they are an SBA lender, doing a modest amount of lending each year. I have had several conversations with senior executives at Cross River over the last couple of months and pretty much the entire company dropped what they were doing and pivoted to focus on the PPP.

Cross River is unusual because, while a being a community bank, they are very much a fintech first. They took advantage of their positioning and were up and running with the SBA within 24 hours of the launch of the PPP and they started processing loans. They were the bank of choice for dozens of fintech lenders which is how they came to do so much volume. Cross River has ended up being the number four bank in the country (after JPMorgan Chase, Bank of America and Wells Fargo) in terms of number of PPP loans issued with 106,000 loans worth $4.7 billion (average loan size: $44,000) as of June 12.

Kabbage is another company that pivoted aggressively to focus on the PPP. The company shut down their regular lending program before the launch of the PPP and focused on helping small businesses get the money they needed for this program. While initially Kabbage was only able to act as an agent, partnering with Cross River Bank, by phase two they were approved by the SBA to lend directly and they ramped up the volume, referring borrowers to banks and also funding many loans themselves.

According to Kabbage as of today they have processed 168,000 applications worth $4.6 billion (average loan size: $27,000). Now, there was some overlap in the Kabbage and Cross River numbers (Kabbage indicated to me that CR represented around 20% of their volume) but Kabbage was the direct lender for over 50% of its PPP volume, a stunning achievement. Interestingly, most PPP borrowers had never done business with Kabbage before. Also, they were the first fintech lender to access the Fed’s lending facility which allowed them to ramp up volume. [Read more…]

Round Two of the PPP Opens Today Amid Huge Demand

Twelve days after round one of the PPP loan program ended round two will be opening to massive pent up demand

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Round two of the Paycheck Protection Program (PPP) opens this morning at 10:30am ET. If you thought round one was a little crazy wait until you see how wild the next couple of days are going to be.

Congress approved $484 billion in additional coronavirus relief that was signed into law by President Trump on Friday. Of this money $320 billion has been allocated to the PPP, of which $60 billion will be set aside for smaller lending institutions.

The Challenges of Round One of the PPP

When the PPP launched on April 3 very few lenders were ready and there were many problems, that was to be expected with such a new and massive program. Many small businesses were shutout because their bank couldn’t or wouldn’t accept their application. By the time they did it was too late. Another big problem was that hundreds of millions of dollars went to large companies, some of them public, that have access to other forms of capital. For millions of small businesses the PPP was their only option. There were several other problems, many of them detailed in this recent in depth piece in Business Insider.

So, now we move to round two. Some of these problems have been addressed with Congress allocating $60 billion of the $320 billion to two tiers of smaller lending institutions. There is $30 billion for banks with between $10 billion and $50 billion in assets and $30 billion for banks with less than $10 billion in assets (this latter category also includes CDFIs and credit unions). But there is no money earmarked for fintech lenders. Or even money targeted directly towards the smallest businesses.

How Fintech Lenders Could Have Been Central to Round Two of the PPP

[Read more…]

Podcast 244: Scott Stewart of the ILPA

The CEO of the Innovative Lending Platform Association talks small business lending, how fintech is helping with the PPP, what more the government should be doing and the silver lining in all of this

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Small business lenders have been in the spotlight this month as hundreds of billions of dollars in loans are distributed to needy American businesses. While fintech should have been front and center in this initiative it has found itself sitting on the sidelines. But with round two just signed into law today fintech has an opportunity to help now.

Our next guest on the Lend Academy Podcast is Scott Stewart, the CEO of the Innovative Lending Platform Association (ILPA). Many of the larger online small business lenders in the country are members and Scott has been extremely busy in recent weeks helping them navigate the many challenges of today. The Paycheck Protection Program (PPP) has been occupying most of his time lately. (Editor’s note: this episode was recorded on April 14, so does not include commentary on recent developments).

In this podcast you will learn:

  • How he first became aware of the ILPA and why he took the job.
  • The mission of the association.
  • Why the SMART Box has been a successful initiative for their members.
  • How California and New York are taking up transparency in small business lending.
  • How ILPA members are approaching the PPP.
  • Scott’s view of the application process for fintech lenders to apply as a PPP lender.
  • The constraints that fintech lenders have to deal with in originating PPP loans.
  • How much Scott is talking with leaders of other trade associations.
  • The initiatives that Scott is focused on right now.
  • How the financial crisis is impacting the financial health of ILPA members.
  • Why it is important for the government to get the origination fees to the lenders quickly.
  • Some of the long run impacts of this financial crisis on fintech.
  • What more the government should be doing right now to support small business.

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.

Download a PDF of the transcription of Podcast 244 – Scott Stewart.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 244–SCOTT STEWART

Welcome to the Lend Academy Podcast, Episode No. 244, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

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 our new dates of September 30 and October 1, at the Javits Center in New York. This year, with everything that’s been going on, there will be so much to talk about. It will likely be our most important show ever, so come and join us in New York to meet the people who matter, to learn from the experts, and get business done. LendIt Fintech, lending and banking connected. Sign up at today at lendit.com/usa

Peter Renton: Today on the show, I am delighted to welcome Scott Stewart, he is the CEO of the Innovative Lending Platform Association, also known as the ILPA. Now, they’re a trade organization that is focused on small business lending, they have some of the leading online small business lenders and the largest players in the country as members. I wanted to get Scott on the show because, obviously, small business lending is front and center of the entire economy right now.

We need to be getting the money out to the small businesses for the PPP, the Paycheck Protection Program, we talk about that in some depth. Scott talks about what his members are doing there, we don’t just talk about the PPP, we also talk about other initiatives they’ve been working on such as the SMART Box initiative, we talk about how they’re interacting with some of the other associations, what’s Scott’s view of how the PPP has been handled and what more the government can be doing and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Scott!

Scott Stewart: Thank you very much, Peter, great to be here.

Peter: Okay, my pleasure. So, I want to get this thing started, you know, to give the listeners a bit of background about yourself. You’ve had an interesting career, looks like in and around Washington, why don’t you tell us the highlights of your career to date.

Scott: Sure. I, actually, consider myself a recovering politician (Peter laughs) and somebody who worked for a long time in both politics and then in the energy sector, in oil and gas, and I think that, you know, I took a detour along the way, after the financial crisis, and actually joined the family business which was an insurance business. It turns out, I was really terrible at slinging property and casualty insurance policies, I was really, really bad at that so, my friends said to me, come back to Washington.

I had a good friend, Eric Hoplin of the Financial Services Roundtable and he said, it’s time for you to come back, I have a job for you, it’s not the right job, but it’s a place for you to get back here and start up again. And so, I became Director of Membership at the Financial Services Roundtable which was a trade association which represented all the CEOs of the largest financial services firms in the country, meaning the banks, the insurance companies and the asset managers, the card companies.

I did all sorts of things for them, including managing the completion of their massive new office build out, I did all the technology build for that and helped with the design of those things. I upgraded all of the stuff from gigantic desktop computers to Microsoft Surface Pro tablets so we could get everybody to be more secure, more efficient and more mobile, and along the way, I met some really interesting leaders.

I met a guy by the name of Steven (inaudible) who’s an international leader on Artificial Intelligence and emerging technologies and he introduced me to Klaus Schwab’s Fourth Industrial Revolution which completely opened up my whole view of the world. Alison Hawkins and I, she was the Director of Communications at the Financial Services Roundtable, she’s now with Wells Fargo, we cooked up a new fintech program for the Roundtable to explore a long term future at the confluence of finance innovation and technology.

I think we’re looking at ten plus years into the future, what is our world going to look like in terms of Artificial Intelligence, block chain technologies, big data and so on and we began to think about that in a way that culminated into the Fintech Ideas Festival which we hosted in San Francisco in 2017. It was a small, small event, 110 CEOs out of 200 participants that included Satya Nadella from Microsoft, Ginni Rometty from IBM, Brian Moynihan from Bank of America, Ajaypal Banga from Mastercard, Dan Schulman from PayPal, Michael Tipsord from State Farm. Along with a whole bunch of what are now my members which is…..Carl Fairbank from Breakout, Rob Frohwein from Kabbage, Jim Salters from The Business Backer and we had a global array of experts on financial technology.

We had them sit into curated small group conversation to talk through what our long term future is going to look like when we start taking this magic elixir of Artificial Intelligence and block chain and big data and many other things and putting it all together in terms of financial services and I think I got noticed along the way. Rob Frohwein from Kabbage actually said it was the greatest event of its kind that he had ever attended. Now, I personally think that LendIt, on the larger side of things, is the greatest event of its kind, but for the small scale and CEO-exclusive focus, it was an amazing experience and I was really lucky to be a part of it, and I got noticed at ILPA.

Peter: Right, right, okay. Thank you for that plug there. So, why did you decide to take the job there. You know, the ILPA sort of was a pretty fledgling organization when you joined, so what was the impetus to take the role on of CEO?

Scott: You know, I was really ready for a new challenge. I had built something pretty important that I thought Financial Services Roundtable and Kabbage and OnDeck had….I knew a bunch of the leaders there pretty well and they approached me and said, look, we’re ready to formalize this organization, the Innovative Lending Platform Association, into a real trade association. We need someone to build it and to harness the power of the members together and I think that I’ve been pretty successful in that. I started with seven members, we now have twelve and we represent, I think, some of the bigger brands in the online small business lending space.

Peter: So then, what’s the mission of the association exactly?

Scott: You know, our members are completely united to a commitment to the health and success of America’s small businesses and we are dedicated to advancing the best practices and standards that support responsible innovation and access to capital for small businesses. So, what does that mean in reality?

It means that we are committed to disclosing the terms of all of our lending agreements to the small business borrowers so they fully understand what they’re taking out, in terms of their access to capital and credit, and we’re interested in serving them. If you take a look at what happened after the financial crisis, banks and financial institutions of all kinds really fled this marketplace for small business lending and we’ve been there, we’ve been there to help them from the very beginning.

Peter: Okay. So maybe, one of the initiatives that the ILPA put out fairly early on, I think it was probably after you got there, I’m guessing, was the SMART Box initiative which I know you just sort of referenced there like the importance of transparency and some of those concepts are being taken up by the states, so maybe just give a little background about that, that specific initiative and how it was successful.

Scott: Sure, sure. It, actually, started before I came on board, it started in 2016. A couple of the original members of ILPA got together, I think it was Kabbage and OnDeck and a couple of others came together, and decided that it was the right time to have some self-regulation in the industry and they came up with this concept called the SMART Box which is straightforward metrics around rate and total cost and it’s a single-page form that comes as part of all the loan documents for our members that shows total cost of capital, APR, monthly cost and cents on a dollar along with any potential pre-payment penalties.

It has been remarkably successful and a lot of folks that have been looking at it, I think, are….they’re concerned about certain aspects of it, but I think it’s become a real selling point for our members to say, look, we’re showing you absolutely every detail in a single, easy to get at TILA-like format and you can see what’s happened recently in the states. You’ve got…. California passed 1235 a couple of years ago and then the California DBO came out and looked at…if imitation is a serious form of flattery, we ought to be very flattered because the form that they came up with to capture all of their disclosures is a box, looks pretty much exactly like the SMART Box. (laughs)

Peter: Right.

Scott: So, we ought to be pretty flattered about that. We’ve been carrying that message to New York as well, we have model disclosure legislation that’s going to be introduced in both the Assembly and the Senate there that will really codify these disclosures to really give small business borrowers confidence in understanding what they’re taking out, in terms of their access to capital and credit.

Peter: Right, that makes sense. So, given your situation, given the position of the ILPA mission to help small business and…. obviously today, probably as never before, at least in our lifetime, have small businesses been suffering like they are right now…..no, I should preface this by saying we’re recording this on April 14th, it’s going to be published on April 24th and ten days right now feels like an eternity, so we need to keep that in mind when they listen to this that this is April 14th, but I wanted to maybe get your perspective on the PPP.

Some of your members have been very active, I know, OnDeck just came out yesterday, they’re starting to offer PPP loans, Kabbage, Lendio. Brock Blake has been one of the real champions from the get go of the whole program, he has been very active. Maybe of you can just describe how ILPA and your members are approaching the PPP.

Scott:  Sure, sure, and I appreciate you mentioning a couple of our members there, Brock Blake of Lendio, fantastic CEO of an amazing company and certainly, Kabbage, OnDeck, Fundbox, BlueVine, BFS are critical brands that can be moving capital very, very quickly along with the Innova small business brands, and The Business Backer and Headway Capital, BreakOut, Mulligan Funding and 6th Avenue, they can all be moving capital very, very quickly. We were involved in the development of the CARES Act, we are paying attention to it and working on it, we’ve been working with the Charter Department on the SBA on the program.

From my perspective, I can’t say the design is exactly what we would have wanted, however….I mean, think about the challenge that the Congress dumped at the doorstep of the SBA. Last year, SBA did a quiet $20 Billion in loans over the course of the year. Then Congress said, well deliver $349 Billion in loans in just a couple of months, there are no additional resources and do your best. That’s a really, really, really tall order and it’s difficult to imagine what they could have done perhaps differently. I think all of our members are very likely, if they haven’t already, they are very likely to be applying to become direct lenders through the PPP program.

I think it is important for SBA to entertain those applications very, very quickly and to authorize those small business lenders to move into the system. It’s a difficult process, though, if you look at the way that they have initially designed it. You go through the 7 (a) standard process which includes a trip through E-Tran, I don’t know if you know how that process works, but you have an application that comes from a borrower into your system, you create an alternative application called the Lender Application that you send to the SBA through this E-Tran system, you get into the queue.

At the end of that queue, at the end of that glorious rainbow there is a human which is…..you know, unfortunately, these people have to be working like mad trying to turn around these government guarantee numbers and then send them back to the lender and then the lender disburses the funds to the borrower at a manual and very slow process that is very, very difficult to manage. There are a series of things that I think they could probably have done differently. If you want me to go into that, I certainly can.

Peter: Yeah, let’s just hold that for a second.

Scott: Sure.

Peter: I think you mentioned that most of your members are going to be applying. So, the application process itself…..I guess let’s just start there because….this only came out, I think it was Wednesday night, I believe, of last week, so it’s been out like five and a half days, the actual way to apply. I know that some of your members have been applying, others have already set up bank partnerships to actually originate loans right now. Hopefully, by the time our listeners listen to this in ten days time, there will be dozens of fintech lenders that will have been approved. That remains to be seen, but I guess….what’s your view on the application process itself, how should that have been handled differently?

Scott: You know, we don’t know how they’re looking at each application and I think that part of the concern….I, actually, was detailed to FIMA during the Katrina and Rita disasters years ago, the hurricanes, and this is, I think, an interesting analogy, but I was detailed to the team that was trying to get debit cards into the hands of those victims that were affected in the Gulf Coast.

Lots of people in the team were consumed with the concern that there was going to be waste, fraud and abuse in the system. I think the same thing is really going on here with potential for additional lenders such as online and alternative lenders to enter the PPP system. There is a concern that there is going to be this kind of bad actor that is able to get through. I think that’s possible, but at this point, who cares.

Peter: Right.

Scott: I mean, like the house is on fire, the world is on fire, we have got to get these dollars into the hands of the small businesses. Here’s what I would recommend and this is just not my members, this just got off at the top of my head, just approve everybody to become an additional lender as, you know, they come in the door with a very short and very sweet contract that says, if you lied to us in your application, or if you abuse this system then your entire c-suite goes to prison (Peter laughs).

That should pretty quickly weed out the really bad actors, right, so you’re going to have a lot less waste, fraud and abuse and get these actual good actors, like our members from the Innovative Lending Platform Association, into the mix to be able to lend at speed to really small businesses that the banks are not equipped to lend to.

Because of what happened after the financial crisis, they really left this entire marketplace behind, either due to regulation, or to their risk committees, they’re not in a place where they’re lending $10,000 to local businesses any longer. They’re just…it’s not their bailiwick and so, we’re there and we’re absolutely ready to get going, they just have to let us in the door.

Peter: Yeah, and I feel like that’s what…..I mean, it’s a shame really that this wasn’t really done ahead of time. As soon as the CARES Act passed, I would have liked to have seen the SBA and Treasury get together and say, right, who is best equipped to move this quickly? Well, you’ve got a whole bunch of really established online lenders that do things in an automated way, many of them do things in a 100% automated way so, let’s just get them involved right off the bat. So, when it kicked off on Friday, April 3rd, we could have had all of these online lenders be approved because I think there’s been so much panic and distress go on Twitter and look at the hashtag #ppploans, particularly on April 3rd, 4th, 5th and 6th, that opening few days.

I mean, people were just beside themselves because, you know, Bank of America was saying, you have to have a loan with them to be able to apply….I mean, the other big banks just said, no, we’re not ready and you see that there’s already billions and billions being processed, oh, my god, we’re going to miss out. The small business owners are freaking out and I think the online lenders could have really done a service for the whole country, if they were up and running by then, but…..

Scott: They certainly could have, but, you’re right, you’re absolutely right, they certainly could have, but let’s give SBA two seconds of coverage here. I mean, considering the magnitude of the challenge, they did what they knew which is, okay, let’s ramp up what we know how to do and we’ll get to the fintechs eventually. It’s unfortunate they didn’t do it right upfront, but, you know, they kind of have like three people running around over there, they’re trying to figure out how to make this happen. To move $349 Billion out the door really, really quickly, it’s tough, and the SBA should have used us by…..do I really lay huge blame at their feet, I don’t think I can.

Peter: Right. I understand, I mean, they’ve got a tiny budget, they’re one of the smallest budgets of any of the government department so they had a monumental task to do. To be honest, they’re not doing a terrible job, money is flowing. I’ve been paying attention the last few days and there is money flowing and there’s a website that I saw on Twitter yesterday about status, you could put in the status of your PPP and it seems like the average time to get funds is 6.8 days, I believe, from actual sending of the application, so, money is flowing which is good.

Now, on that point, I’m just….I mean, if you talk to your members because a lot of these…I mean, your members don’t have access to unlimited capital and they’re not a Bank of America, or a Chase, so is that something that you’re hearing as a constraint there where these members can’t…..like if Kabbage and OnDeck both wanted to put through $25 Billion in PPP loans, they wouldn’t be able to, right. What are you hearing on the constraint on that side?

Scott: The liquidity problem is significant, and on the 6.8 days to get the funding, that is light years slower than what our members could be doing. Our members could certainly be underwriting and moving loans within, you know, hours, 24 hours, but there is a constraint that is very, very serious which is this liquidity question because our members don’t have unlimited access to billions and billions of dollars to lend to this program and hold these loans for the eight weeks that the SBA says we need to hang on to them for.

The Treasury and the Federal Reserve have announced a system, at least we have a term sheet on what it’s going to look like as an offtake as a secondary market that they’re going to create, a special purpose vehicle. Take these off the hands of the banks and of the fintechs and I think that’s critically important. We’ve been hearing rumors that this is going to be a 5-day offtake period which may end up being too slow, you know, okay, our members will make whatever they can make in terms of loans within a few hours and then wait for five days, offload them all and do it again. That seems to be too slow.

You would think that there is going to have to probably be some sort of interim step where they can offload this into a facility either run by……we’ve been hearing rumors that Goldman, Bank of America and a few others are giving the other to try to create an immediate term secondary market where we can drop them into that sort of a process, they can hold them for the five days and then move them into the Treasury facility, the Fed facility. I think that, one way or another, in real-time, the Federal government is going to have to take these loans off of our hands, there’s no other choice.

It’s not just us, you look at what all of the banks have been saying, they don’t have unlimited liquidity to be pouring out these loans on behalf of the government. They want to do it, they want to help, they can help as much as possible, but they’ve got to find a way to put this on to the Federal government’s books sooner than later.

Peter: Yes, it would great if that happens within 24 hours and who knows, by the time we publish it may have happened. Another question I’ve got is there are other, obviously, organizations out there, there’s the Marketplace Lending Association, there’s the Small Business Finance Association and others, how much are you interfacing with the leaderships of those organizations and providing a united front in Washington right now?

Scott: You know, I know the majority of these fintech trade leaders pretty well and we really do our best to find areas of common ground because we have such this great membership in different focuses, but we found a great way to collaborate on things like the Madden versus Midland fix and the valid when made problem. The entire working group worked pretty well together on legislation, and then on the FixIt, the OCC and the FDIC from a regulatory perspective.

But, if you look at how diverse the membership is….you have Stephen Denis with the Small Business Finance Association primarily focused on merchant cash advance providers, you’ve got Nat Hoopes with the Marketplace Lenders Association focused on consumer lenders, Brian Peters with Financial Innovation Now on the larger tech players, Scott Talbott over at the Electronic Transactions Association with their diverse membership, including banks and card companies.

Then you’ve got the US Chamber of Commerce, Tom Sullivan and (inaudible), now it’s Julie Stitzel and I communicate with these folks as often as I can and we work together. We try to drive at least a united front on things like we’ve mentioned already which is liquidity challenges and the access to the PPP program, I think we’re all on the same page there. They should let us in the door as soon as they possibly can to offer these PPP loans and they should fix the liquidity question in the background using a Special Purpose Vehicle through the Federal Reserve.

Peter: How much of your time, right now, is spent really on the PPP-type initiatives, is this like 100% of your focus, 50%, what are you focused on right now?

Scott: I would say working on this specific program really consumes an awful lot of my time, but there are quite a few things that are coming soon that we ought to be thinking about, the main street Special Purpose Vehicle which may be a way for my members and small businesses, potentially, to get access to some capital to prop them up and keep them lending. I think that’s certainly a process that I’ll be focusing on and thinking about, the Phase 4 when Congress comes together and thinks about either Phase 3.5, or Phase 4, what is that going to look like.

We think that sometime in the next week or so, Congress is going to add a whole bunch more in terms of dollars into the PPP program. They’re talking about somewhere around $250 Billion more to the program now, unclear whether that’s going to be enough by the time they get around to it, but I think those are some of the areas…..for the moment, I think it’s important for all of us to be focused on this catastrophe and preparing for, you know, what our world is going to look like afterwards.

Peter: Right, right, for sure. You just mentioned something there I want to touch on and that is the health of small business lenders in general. I mean, many of the fintech companies have stopped lending, there’s been some layoffs that we’ve read about, how are you positioned as an organization to help your members, you know, through this because let’s face it, there’s not many small business loans happening right now beyond the PPP. So, how is that going to affect your members, you know, the health, the financial health of your members?

Scott: I think this is truly a black swan event, unlike anything that we’ve ever seen in our lifetime, so I think all of our members, along with smart companies everywhere were really prepared for a major national terrorist attack, a natural disaster, a major swift downturn in the economy, but I don’t think anyone prepared for a global shutdown of the entire global economy in real-time immediately and revenues go to zero. I think that was a very…. certainly for my members, a major shock to the system.

I think they’re muddling through, it’s difficult, I think that my members, some of the largest players in the space, and so I think they have some of the resources to be able to withstand a shock like this, but I think that they need to get access to capital and maybe that’ll be through the main street facility that’ll be coming maybe in the next few weeks. I think a lifeline for them would be if they’re able to lend through the PPP and give them that small sliver to keep on going and I think it’s in the Federal government’s interest to want that to be the case because you want innovation to be progressing when this is all said and done. You want the innovative companies to be still there, still working and still lending.

Peter: Right, right. Have you heard how quickly….like the origination fee now is 5% for sub-350 and 3% and 1% up to $10 Million, but have you heard how quickly this money, the origination fees are going to flow in to the lenders?

Scott: I have not and I certainly wish I had a good answer to that (Peter laughs). If I had a good answer to that, that would be stupendous. I think the government’s going to have to figure a way to get those fees to my members and to the banks relatively quickly in order to keep them alive and afloat……..

Peter: Right, right, for sure.

Scott:….so they can keep lending.

Peter: Okay. So then, we’re almost out of time, but a couple more questions before you go. I’d like you to sort of step back for a second and think about the impact this crisis is going to have, particularly, I’m interested in the impact on the small business lending landscape over the medium to long term. What do you think is going to change?

Scott: I think, to begin with, small businesses around the country are completely devastated and it’s going to take some time to unwind these extraordinary actions taken by the Federal government. You know, if you look at the CARES Act, the PPP program, the Treasury and the Federal Reserve Special Purpose Vehicle, we are really…..hopefully, short term, quasi nationalizing America’s small business economy and we hope that is a short term effort which is critically required.

I think on the small business lending side of things from a fintech perspective, I think that in the long run this is going to completely expose manual paper-based underwriting as completely antiquated. The fact that at the end of the E-Tran rainbow, the SBA is a human is unfair to the small business borrower. These things should be done in an automated way and much more rapidly. If you look at the systems that financial institutions are using currently, if you have ever taken out a mortgage…I actually applied for a mortgage with the bank I had been with for 20 years and they asked me to print out my last several months of bank statements and send it to them. I mean, this is completely bananas and I think those kinds of things are going to go by the wayside and that’s going to change pretty dramatically on the small business lending side as well.

That’s not to say that fintechs are going to be replacing, or supplanting the banks, banks are critical to this ecosystem and I think that you’re going to need….you’re always going to need a safe place to put your money. Over the next several years, you’re going to see this, I think, great resurgence and an acceleration of innovation between banks and fintechs and there’s going to be a cooperation and a collaboration that we really never dreamed of before. The real winners are going to be the small business borrower and innovation is absolutely going to be accelerating.

Peter: I really hope that’s the case. I completely agree that this needs to happen and I hope this crisis provides an impetus for that. Last question, I’m just curious if there’s anything else that you think the government should be doing to help small business beyond what they’re doing right now with the PPP?

Scott: Sure. I think that they have got to, in a word, pull down the barriers to capital access and innovation. Take down barriers that are up currently and let innovation flourish. For example, we saw the real-time effects of the Madden decision increase bankruptcies and decrease access to capital and the effects it has made, we call it the development of capital desert in certain places.

We should have fintech charters as Congressman Patrick McHenry recommends, we should have innovation offices in every financial agency and then we should see the proliferation of fintech sandboxes around the country, both the state and federal level, with the government figuring out how to shoulder the short term liability cost associated with limited testing of new products.

Look, I think it’s time to let the industry alongside traditional financial institutions price risk and move capital in real-time. I think it’s time to harness the forces that are re-shaping our civilization today, and that’s the Internet of Things, big data and machine learning on the way toward Artificial Intelligence, all enabled by block chain technologies. When you take that magic elixir of forces and you put them together, harnessing them with financial institutions and small business lenders such as our members, you’re going to see an unimaginable change in the way that people access financial services.

If you look at some of the leaders in the space, somebody by the name of …….one of our great members Bill Phelan of PayNet, one of the leading figure in the space, describe us as on the road to one click credit. When you start thinking about your accounting system offering you an alert that says, look, in about three months, we’re going to have a cash concern and so here are three, or four different ways that you can find access to capital and credit.

Beyond that, one step beyond that, you look at what Peter Domingos from the University of Washington thinks is going to happen, one of the globe-leading thinkers on Artificial Intelligence, through his book “The Master Algorithm.” He actually thinks that at some point your algorithm is going to know you so well that those decisions of small business borrowers will not even be offered to you, they will simply appear. It will price and select the access to capital and credit and it will appear in your box. I think that’s our longer term hopeful future beyond what this crisis is and hopefully, that’s something that financial institutions and fintechs can work on together.

Peter: Well, that would be fantastic, a fantastic future, I hope we get there soon. Anyway, Scott, I really appreciate you taking the time today, you’ve got very important work to do right now and I appreciate taking time out of your day to talk to us.

Scott: Thank you, Peter, really enjoyed it.

Peter: Okay, see you.

We can trace the rise of fintech certainly in the small business lending space to the financial crisis of 2008/2009 when banks pulled back from small business lending they let a lot of their long term customers down and people were ripe for alternatives and we had entrepreneurs, at that time, creating new companies, new ways of doing things. So, I often wonder, this is a more significant crisis, I would argue, than the Great Recession and we are going to have enterprising entrepreneurs all over the this country that are going to create new businesses born out of this crisis.

And, you know, we also have the entrepreneurial spirit of those companies that are already in existence and there’s going to be a lot of new developments like Scott just talked about there from some of the incumbents. Once we get through this and it’s going to be tough to get through this, but once we do, we are going to see, I believe, a rise of fintech 3.0 where we’re going to have many new companies, many new ideas and I think the small business lending landscape, in fact I would argue, the entire financial landscape will look remarkably different then.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on our new dates of September 30 and October 1st at the Javits Center in New York. This year, with everything that’s been going on, there will be so much to talk about. It will likely be our most important show ever. Come and join us in New York to meet the people who matter, to learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa.

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Podcast 243: Jared Hecht of Fundera

The CEO and Co-Founder of Fundera talks about the Paycheck Protection Program and the impact it is having on small business lending

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Every small business lender in the country has been focused on one thing only this month: the Paycheck Protection Program. The PPP was designed to be the savior of many small businesses but unfortunately the rollout has been anything but smooth. And we learned just yesterday the $350 billion has now gone with no more money expected in the short term.

Our next guest on the Lend Academy Podcast is Jared Hecht, the CEO of Fundera (he was last on the show way back in 2014). He has pivoted his small business financing operation this month to be completely focused on the PPP. He described how he has done that in today’s episode. (Editor’s note: this was recorded on April 9, so keep that in mind as you are listening or reading the transcript).

In this podcast you will learn:

  • What the last few weeks have been like for Fundera.
  • How he has able to scale up a PPP lending program so quickly.
  • The lenders that Fundera is working with on the PPP.
  • Why it is difficult to get insight into how the funding of these loans is going.
  • Why the SBA E-Tran system is such a bottleneck for this program.
  • What the SBA should have done differently here.
  • How small business owners will view fintechs and banks when this is all said and done.
  • Why this is a unique opportunity for community banks.
  • How much extra cash Jared thinks the PPP really needs.
  • How he is keeping up with this fast moving situation.
  • The impact of the PPP on the small business lending landscape in the near term.

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.

Download a PDF of the transcription of Podcast 243 – Jared Hecht.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 243–JARED HECHT

Welcome to the Lend Academy Podcast, Episode No. 243, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

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 our new dates of September 30 and October 1, at the Javits Center in New York. This year, with everything that’s been going on, there will be so much to talk about. It will likely be our most important show ever, so come and join us in New York to meet the people who matter, to learn from the experts, and get business done. LendIt Fintech, lending and banking connected. Sign up at today at lendit.com/usa

Peter Renton: Today on the show, I am delighted to welcome back Jared Hecht, he is the CEO and Co-Founder of Fundera. Now, Fundera is a marketplace, a small business finance and they are the epicenter of the small business world right now as pretty much every small business owner in America wants to get access to the Paycheck Protection Program, also known as the PPP, and Jared has sort of turned his business on a dime in the last couple of weeks to really build a conduit between the small business owners and the providers of finance, and he’s really becoming a real resource for small business owners.

So, I wanted to get him on the show, obviously, to talk about the PPP, talk about what exactly Fundera is doing, talk about how he thinks the program is going, where he’s sending the applications that he’s getting, talk about fintech and as we’re recording this, it was just last night that the SBA sent out applications to fintech lenders to be approved so, we talk about that in some depth. And we talk about the boons of community banks at this time and as far as the program goes, how much we think we’re going to need. He also talks about what are some of the outcomes that we’re going to see that’s really going to come out of this crisis. It was a fascinating interview. I hope you enjoy the show.

Welcome back to the podcast, Jared!

Jared Hecht: Thanks so much for having me, Peter.

Peter: My pleasure. I know it’s a very, very busy time, so I appreciate your taking the time out. So, why don’t we get started just by telling the listeners what the last month….particularly, the last two weeks, what that’s been like for you and Fundera.

Jared: It’s been chaotic, is one word that, I think, happily describes things and also transformative and in many ways empowering and inspiring, so a blend of all these strange emotions and sentiments.

 

Peter: Right.

Jared: You know, chaotic, largely because we work from a world at Fundera where as a marketplace first, small business financial solutions, we work with a lot of online lenders, and most of those online lenders have either paused lending to new customers, and frankly, even to existing customers, or they’ve reduced their credit box anywhere from 75 to 90%, so activity of most online lenders has decreased rapidly.

Fortunately, at Fundera, we’ve spent the past two years developing a really robust program working with banks, both banks to provide term loans and lines of credit through Fundera and banks who are SBA lenders with both of our own 7 (a) practice and how and that’s still going strong, like 7 (a) SBA Lending is mostly developed and I’m pretty happy fortunate for that. We’ve also been able to use all of our knowledge from SBA and leverage it to spin off a process for PPP lending.

So, chaotic, largely, because part of our business has been temporarily paused and that is the business that we do with online lenders and been highly re-focused on how do we help small business owners navigate all these complexity when it comes to new government policy and government lending while all of these policy is brand new and everybody at Fundera, all of the banks, all of the online lenders, all the large fintech players are trying to figure out how to do it and work on this in real-time.

Peter: Right.

Jared: And, last but not least, you know, inspiring, largely because then small businesses are getting covered right now. It’s unlike anything I’ve ever witnessed, most likely anything anybody has ever witnessed in our generation where, you know, were you to walk outside and do not walk outside right now, (laughs) but we’re into walk outside.

You’d seldom see a small business that was open and we feel like at Fundera, you know, you have the….all of our health care workers literally on the front line saving lives right now, saving lives. At Fundera, it really feels like while we may not be working in hospitals, while we are all working remotely, or from home, it does feel like we are the front line saving the lives of small business and that is extremely….that’s just a rallying cry behind that and naturally, inspiring.

Peter: Right. That’s exactly why I wanted to get you on the show because I feel like this really is…..it’s so critically important for not just fintech, but for the whole country that we get this money out to small businesses as quickly and efficiently as we can. You know, I’m on your website right now and the front and center of your Home Page is “Get Access to the SBA PPP with One Easy Application.” So, maybe just take us through how you’re able to build this application and what you’re doing with this PPP Program.

Jared: Yeah. So, what we’re primarily doing at Fundera is trying to educate small business owners on all the newfound options that they have that are available to them, and those are options that range from things like the SBA Disaster Loan Assistance Program to Federal State and City Level Grant Center are now available and being distributed by both federal government, state government and city government all to the way what does PPP mean, how do I apply for PPP, whether it’s through Fundera, or what’s my best course of action, should I think about going to my bank, or community bank and what are the tips and tricks for that, and last but not least, how do I think about SBA 7(a) that’s on the table which for small business owners in the audience out there are very much it.

So, we’ve really tried to re-arrange the company around those programs. It’s fascinating because over the course of two to three weeks, the primary small business lender is now the government, whether it’s at the state level, or the federal level, that is the primary small business lender. So, one of the things that we’ve done is we’ve signed up the PPP application and we’re working with all of our banks that we had initially worked with that did 7(a) lending through Fundera and helping them stand up their PPP program and helping our customers access those funds and apply for those funds.

Frankly, it’s been enormously challenging because as I alliterated to before, everyone is literally figuring us out in real-time and the past week and a half was kind of updating all the guidance that everyone’s received from the Treasury and the SBA. People have been amending their applications and at Fundera we have to really map our applications and our processes to that of all of our lenders and as those fluctuate, or change, or as kind of the underwriting requirements or document requirements change, we have to reflect that with our customers as well.

It’s been hard, it sounds kind of easy, but it’s actually been really hard and we’ve also had to work with all of our partners as they figure out how to navigate E-Tran, what are the issues when that becomes overloaded, how can they better automate their systems to deal with all these unprecedented events. So, we’re all scrambling to figure it out in real-time and try and help as many small businesses that we can. I kind of just shake my head, laugh a little bit whenever I hear people say hey, we got this 100%, you know, we’re totally dialed-in, that’s just not true (laughs), but it’s an adventure, man, and it’s kind of one time where everybody is bonding together and figuring this out together.

Peter: Right, for sure. I should mention too, we’re recording this on April 9th because I know this is a very fast moving situation. It will be published on April 17th, but……

Jared: Oh, my gosh!

Peter: Yes.

Jared: It’s going to be like getting in a time machine by then. (Peter laughs).

Peter: It will be, it will be. But, I want to talk about ….just last night, because you mentioned you were working with banks, the reason you’re working with banks is it’s only the approved SBA lenders that have been able to do this program and many of the fintech lenders that you work with and that we know very well have really been shut out of the program. But, last night, they finally came out with an application for these lenders to apply to the SBA to get approved, I guess, I’d be curious about …..I wrote an article this morning about many of the fintechs are going to apply. So, do you think next week you’ll be working with fintechs like you’re working with banks, or do you think this is going to take longer?

Jared: You know, at this point, just given all the curve balls that have been thrown throughout this entire process, like what’s the point of predicting what’s actually going to happen. You know, I would very much like for it to be the case tonight, or tomorrow. We’ve, obviously, been communicating with all these companies since this all began, everyone’s been preparing to be both a lender, but many of them are already an agent mainly because they have to be, right, like they need to find a way to steer their customer base to this lending solution to help them and also to protect themselves. So, it’s kind of…..for me, it’s a guess, maybe the end of next week, I hope the end of next week.

That said, we’re communicating with all of them and we plan on working with a select few of them to really help them get it off the ground. I think we have kind of the luxury of already working with a couple of banks and really understanding what this process looks like so we can truly help some of these online lenders get through some of the initial hurdles understanding the thought.

Peter: Right, right. And so, today, we’ve been five business days this program has been live, I know that many bankers worked over the weekend as well, I’m sure you did, but are you processing PPP loans today that are successfully being submitted to the SBA and being approved?

Jared: That is an excellent, excellent question and that way as an agent visibility as of today, is very, very low. What I can tell you is this, approximately 36 hours ago, we started submitting the first application, the first package application, 36 hours ago, or 48 hours ago, to one and half of our banking partners, testing things with one of our banking partners. We’re really beginning to submit meaningful flow to another banking partner, they work with a couple of other people, including their own depository customers, so it’s been a little bit difficult to get insight into have they actually been funded yet.

What we do know is that the bank has funded some loans, but we do know that some of the customers have been submitted to E-Tran. That’s good, so this process is beginning to work, but, largely, because this program is so incredibly new…..like, normally, when we were working with a lender two, or three weeks ago, you have complete visibility into what happens to an application the second you submit it.

There are tools that you can see, you have API connection where all this information is automatically fed back to you. Right now, people are literally still getting this system up and running like you could ask questions from some of our partner banks, you can ask questions from large national banks right now like hey, when a customer submits an application, what type of communication do you have with them. Are you informing them of where their application is in the process, whether it is with underwriting, whether it’s already processed, like you would just get kind of a bunch of confused looks back at you like we really just started with the application processing volume, we don’t know yet how to communicate with customers after the fact.

So, I’ve got to say, all these is being done in real-time, now, I hope, by the time that April 17th rolls around and people are listening to this, we are living in a much different world where all of these processes are thought through, flushed out and there’s no uncertainty, or questions about, hey, where do I stand in this pipeline, of where do I stand in this queue. But, right now, we’re just doing our best to make sure that applications are being submitted and confirming that the bank has it and will be processing them.

Peter: Right. I also heard that there’s been some challenges with E-Tran. I read in American Banker, I think yesterday it was, where Amazon has been tasked with upgrading….obviously, E-Tran has been overwhelmed, it’s not used to getting anywhere close, it’s probably a hundred X, or even a thousand X more volume than they’re used to.

Jared: Yeah, I think it’s right somewhere between 10 to a 100,000 X.

Peter: Okay, okay. (laughs) So, there’s not many systems that can do 100,000 X volume without having some challenges, but I know it went down on Monday for several hours, but, from what I’ve been hearing, it seems like it’s doing a little better. I mean, have you heard of E-Tran being down recently?

Jared: I heard that it was down for a little while yesterday. I mean, E-Tran is fickle, man, it’s fickle, very few people know anything about it, so it kind of comes as a shock to all the banks when they’re trying to become a SBA-approved lender and they pan out and navigate how to use this software. It’s going to catch a lot of the online lenders off guard, like a lot of online lenders are used to like, cool, we can just like plug into this system for this API and all is entirely automated.

A majority of banks when they try and pull PLC which is what you do with your E-Tran software which is effectively like the gateway to the SBA ledger, right…….by the way, can we talk about applications of blockchain? At some point in time, this whole thing should be run on a blockchain, but when you use this interface, you are effectively keying-in, or retyping in the information from an application into this web application and you can’t get it wrong.

It can take anywhere from five minutes to 20, or 25 minutes if you have that many fields and it can be quite frustrating. And also, if like you are working with a small business owner that has submitted their application to a batch of different people for PPP, and one of those other lenders kind of got there before you and run into each time before you, you might spend ten minutes only to realize that that customer can no longer be your customer because another bank has processed the application on their behalf. And then, I’m going to nerd out for a second, Peter, and you can just delete it,

Peter: That’s okay. (laughs)

Jared: Right. There are kind of …no, I wouldn’t call them hacks, but some software providers with some banks have figured out that they can batch submit applications through E-Tran by using XML, but there’s also complications there where anything, or one of the applications have an error, the whole batch of 20, 30, or 40 applications automatically fail and you have to figure out where that came from. All this said, it is very, very difficult to automate and scale this part of the process today. Some banks have figured it out, most of them will not figure it out and there is rumor that one national bank has actually figured out how to circumvent E-Tran entirely and get to the…..

Peter: Wow!

Jared: …yes, and get to the underlying database, as far as we’re, you know, kind of like this new age of PPP conspiracy theories, but that’s one of the more interesting ones I’ve heard lately.

Peter: So, given the SBA is at….I mean, obviously, it would have been great if they’ve upgraded everything two years ago, but given where they’re at technologically….I mean, if you look back over the last two weeks, it certainly has not been a smooth rollout, what do you think the SBA did wrong and what should they be doing differently even today?

Jared: (laughs) Let me preface with whatever I’m saying here, by just saying like the people at the SBA, happened less than two to three weeks, they are working round the clock trying to save small business and what they are doing is just extraordinarily admirable right now. The circumstances are unprecedented and we really just do have to remember and recognize that human beings are doing the best that they possibly can right now to save the day and I commend everybody there for doing exactly that.

I can only imagine that the challenge that they’ve been encountering are unfathomably difficult, but to answer your question, my general take is the SBA probably, you know, right when some of these conversations began to happen around Federal stimulus sort of became obvious as this happened. It should have been contracting with services like Box, Amazon to build this application, or at least to build new applications on top of what they have built, or fix some of the underlying infrastructure and prepare to scale.

I mean, when you hear about what’s happening with the SBA’s Powered Loan Disaster System, people are submitting their applications directly to the SBA and they’re not hearing back period,  they’re just not hearing back; no confirmation email, no update as to what’s happening for small businesses. They were told that in two to three days, they’d have $10,000 deposited to their bank account and there’s nothing, nothing.

I’ve put a poll on Twitter if there’s anybody who would apply for that either heard back, or had actually received something and approximately, like 1.5% of people had, so it’s just kind of wild. So, I think, dialing in like that program, in particular, would have been important. It was very apparent that this was going to be a national disaster, not a localized disaster like a hurricane, so thinking through it like, hey, is this system actually ready to help small business across the country would have been important.

And then, working with banks is like what could the SBA have done differently, like it’s really difficult to anticipate this kind of thing, but, that said, like it is primarily the Federal government’s job to anticipate this type of thing. So, solving for E-Tran app would have been one like providing an API, or working on the underlying structure of the database accessibility for banks, or lenders to write to that and pull PLC faster is something that they should have done years ago, not in the moment, or after effect. But, it’s hard, you know, like you’re dealing with the federal government, it’s really difficult to write good software and good programs and what are you going to do in that scenario.

So listen, it’s easy to sit here and kind of armchair quarterback what should have happened over the course of the past couple of years. It all feels painstakingly obvious today, but, I think, what matters now is you have extraordinarily hardworking, mission-driven people, many of whom, you know, have grown up throughout the course of their career at the SBA getting to work for small business right now and burning the midnight oil to make this happen. I think we can kind of reflect on this more appropriately after the fact and obviously things will change many months from now when these programs are done with and things return, hopefully, to some semblance of normalcy, but until then, I think the best thing that we can do is just be as supportive as possible and helpful as possible during this process.

Peter: Yeah. So, I’ve been reading what you write on Twitter and it’s super helpful having people like yourself out there sharing in real-time what’s been happening. A couple of days ago, you wrote about community banks and how they were really going to be critical to getting this money out, then last night, I see….obviously, we had the licensing came out last night, the application for fintechs came out and you wrote about how fintechs could really be also a huge conduit for helping get this money out.

So, when it’s all said and done, do you feel like the typical small business owner, who I know you….obviously, you know these people well and you communicate with them everyday, I mean, do you think….how do you think they’re going to view fintech and how do you think they’re going to view big banks, community banks after all this is all said and done?

Jared: I think, most will be relatively okay so long as they get the capital they’ve applied for. What I mean by that is, you know, as frustrated as people are today with a well, which has to deal with this cap, which is not a self-imposed cap, it’s federally imposed cap, or how they feel about Chase because Chase hasn’t communicated with them and they’ve submitted the application that have gone deep into the ether and they have no idea where they are, or the early B of A customers who were locked out because they didn’t have a business credit card along with them, I generally think like this thing is….while they will be remembered, they won’t be remembered as viciously as they currently are felt today so long as these customers get their financing and do so in a reasonable timely fashion.

That said, I mean, it’s pure vitriol for the big banks right now along with their customer base who either does not know the status of their application, or has not been able to apply for an application. It doesn’t take much digging, or any digging, for that matter to experience and see  it first hand and that’s unfortunate. But, I have heard some big banks are actually doing extraordinarily well here, I don’t have proof of it, but one the things I’ve heard of B of A is actually doing an exceptional job when it comes to processing stuff very quickly.

Peter: Yeah.

Jared: There’s more stuff we can talk about later, but anyway, I do think that it behooves small business owners, and we’ve been telling everyone of our customers to make sure, check-in with their bank, if their bank is actually providing PPP financing, to make sure that they’re talking to their bank currently, they can actually apply. But even then, like I got an email from my sister-in-law today who’s a dentist in Columbus, Ohio and she applied for PPP financing with her bank, Huntington, on Friday, but today, got an email saying they are temporarily pausing any new applications simply to deal and process the backlog that they currently have.

They can’t accept any new applications because that’s how big their backlog is and just dealing with that operational overhead is extraordinarily cumbersome. It doesn’t mean that they will never get any new applications again, it just means that they have to get through with what they currently have.

So, we’ve been advising a lot of those customers to come to Fundera, see how we can help, but also to check-in with their community bank. I’ve talked to roughly 150 banks over the course of the past two weeks and one common thing we’ve seen amongst community banks who are taking this seriously is that they’re really leaning into this and they’re really using it as an opportunity to acquire more customers within their geographical footprint saying things like, hey, we are currently only lending to depository customers, but if you want to apply for a PPP loan with us, we are happy to deposit it into an account in our bank that you will move your deposit into.

And, a lot of our customers when they hear that and they have zero idea where they stand with their current bank, whether it’s a national bank, or a large regional bank, they find that enticing and they’re pursuing that and we strongly encourage it, for now, so long as the customers are in need of capital. So, you know, I think what we might see, when all is said and done here, is a very real appreciation, specifically amongst small business owners for their community bank and this notion that in times of need, it’s really does behoove a the small business owner to have a banker, or a financial adviser that they think of as a true partner, that they can turn to to help through all these decisions and they just get more of that locally.

Peter: Right.

Jared: In a community branch, the community bank, whose purpose is to serve them, than you do at a national level. Not to say, like national banks aren’t good, like they provide so many services that a community bank could never provide, but in time like this, it kind of makes sense.

Peter: Yeah. You kind of want to just talk to somebody. That’s the challenge that a lot of these big banks have and I really feel like, yeah, you’re spot on there. I mean, fintech hasn’t had a chance yet and it’s about to get a chance, obviously, if the approvals come through for their applications to become lenders, but if you do the math here and you look at….I heard yesterday there was over $100 Billion that’s already been applied for and there’s obviously still many, many small businesses who haven’t been able to get their application in. If you do the math, it looks like we’re going to run out of the regional 350 this month, in April.

I even heard people saying by the end of next week it might be out and then, obviously, we’ve talked about Treasury Secretary Mnuchin has come out and said he wants another 250, they’re currently squabbling in Congress about that, but there’s no question there’ll be more, I think, coming out of Congress very soon. I mean, do you think….what’s your sense, I mean, if you look at it are there 10 million businesses, they’re going to want an average of $300,000, that’s like $3 Trillion, but it’s certainly (Jared laughs), you know, the numbers start to get very, very large. I guess the question is, how much will satisfy the small businesses of America right now, do you guess?

Jared: Well, I think there’s no satisfying the small businesses of America right now. The 350 needs to be, at least, doubled and when you think about that doubling, that doubling is on a temporary basis, right, the CARES Act out for small business, specifically and PPP, via program that’ll last through June.

What happens if this notion of social distancing and quarantining continues and bleeds into Q3, then you have a program that probably needs north of $700 Billion, arguably closer to a Trillion dollars in order just to make it through Q2 and when I say make it through Q2, I mean bare bones make it through Q2 while there will still be like pretty significant mortality rate amongst small businesses.

Peter: Right.

Jared: If this extends into Q3, you’re going to need more, so the short answer is there needs to be significantly more capital, anywhere between two to three X than what’s originally been allocated and that’s just to make it through the 2nd Quarter.

Peter: Yeah, that makes sense. So, question, I mean, this is really a fast moving story, you’re running a very important business that’s sort of helping the small businesses, how are you keeping up personally with everything, with what you’ve got to do, changes you need to make connecting with banks, I mean, how are you keeping up?

Jared: Like how am I doing, my mental state? (laughs)

Peter: Yeah, like how are you keeping up with the knowledge that you’ve got to actually absorb to make your business serve the customers efficiently.

Jared: You know, I think at the start of all of these, the general strategy was for everybody to go wide and talk to as many people as they possibly could and then you kind of hone in on who you’re really going to work with through thick and thin throughout all of these and who do you generally feel like is not full of shit and knows what they are talking about and then you go deep with the selection of the people. So, I think we’ve held together a really great network of people who are very attuned with what’s happening, both in the policy level, at the operational level, who to work with at the SBA, online lenders and banks and then just think about the free  information.

Here, like in this world, people aren’t competing with one another with the exception of, I think, banks and fintechs who will be competing with one another very shortly, but people are really trying to collaborate here and make sure that small business is successful because that’s ultimately the most important thing to all these businesses, just to make sure small businesses stay afloat. So, the short answer is, find good and trusted people and share information freely amongst them together.

Peter: Right, right, okay, that makes sense. So then, I’m curious about….we’re almost out of time, but I want to get to a couple of more things and…..

Jared: Sure, I’ll answer fast.

Peter: (laughs) Okay. So, firstly, do you know of any small business anywhere in the country, or have you heard of one, second hand even, that have received their PPP money yet?

Jared: Yes.

Peter: You do, okay, that’s good, that’s good.

Jared: It is good.

Peter: Yes, yes.

Jared: Absolutely perfect, that means it’s working.

Peter: Okay, okay. I haven’t heard of any yet, so I think that bodes well. So, maybe we can just finish up with a question, I mean, I’ve been a small business owner my whole career, my father was a small business owner, I grew up in a household that valued that. I mean, your life is all about the small business owner, so I feel personally very motivated to do everything that I can to help everybody along.

But, I’m just curious to see what…..when we look back at this next year, let’s just assume we get back by the end of Q2, social distancing is…..you know, restaurants have opened up, movie theaters have opened up and there is still social distancing happening, but the lifeblood of the country is coming back, what impact do you see this having on the small business lending landscape long term because a lot of these lenders, as you say, they’ve shut up shop temporarily, but I feel like we had a really robust small business lending environment coming into this crisis and I’m concerned we won’t have one coming out. I’d love to get your thoughts on that.

Jared: I think the SBA is going to be the only game in town throughout the 3rd quarter of this year. We’ll see banks start to participate ….and I’m talking about small business, right, I’m talking about mainstream mom & pop shop here, they will be the only game in town throughout the 3rd quarter of this year, banks will begin to participate in a non-SBA capacity maybe at the very end of the 3rd quarter. In all likelihood, some online lenders like alternative lenders begin to participate in the 4th quarter of this year.

There will be some larger fintechs, I would predict, that have balance sheet capacity that will continue to lend lightly throughout all this, will impact towards the end of the year. I would consider those to be companies like Quickbooks and PayPal where losses might feel like rounding errors and they’re just going to do everything they possibly can to support their versions because they are just remarkably customer-centric organizations and they, fortunately, have the capability to be able to do that. But, that’s my general prediction, we’re set back a couple of years here in terms of like progress that non-bank lenders have made.

Now, there is this thing that can happen which I think likely will happen, for what it’s worth, which is that now that online lenders can apply for eligibility to this PPP loan, their customers will be remarkably happy with the experience that they have through them, and as a result, the QuickBooks, the Squares, the PayPals, the Stripes of the world, and as a result the likelihood that they will be eligible for their own bank charter as opposed to having to kind of piggyback off other banks to originate loans and like they can actually create their own depository institutions will become significantly be more likely.

And that in and of itself may open up an entirely new universe on what type of companies can actually start a bank because everyone is thinking about, hey, wouldn’t it be neat to actually open up a bank account with Square as a small business owner, or PayPal, or QuickBooks. The answer is probably, yeah, it would be very, very neat and I think the likelihood of that happening much faster than it has today is significantly higher as we exit this period.

Peter: Interesting. I hadn’t even thought of that. That is a great way to finish. I really appreciate you taking the time out today, Jared. I know you’ve got a lot on your plate and thanks for talking with me today.

Jared: Of course, thanks for having me, Peter.

Peter: Okay, see you.

Jared: Bye.

Peter: You know, it’s interesting what Jared ended with there and I think there’s going to be some….we’re going to see some drastic changes, long terms changes that come out of this and one of them will be that some of the large fintechs find it easier to get a banking license. But, there’s also going to be others and I think……he mentioned community banks and I wanted to share our story here at LendIt also because we’ve been impacted. We’ve had to postpone our event and we’ve applied for the PPP.

We obviously wanted to apply with a fintech, but until last night, there wasn’t any way and even as we’re recording this, there’s still no way to apply directly with a fintech and we bank with a top four bank which has not been all that easy to work with, so we decided over the weekend that we would go with one of the community banks here in Denver and they’ve been very easy to work with, personal service, they got our application in.

Now, we haven’t heard back yet from the SBA, I know that’s been challenging, but it has been a great experience and I think, as Jared said, this could be a re-birth for community banks, particularly in small business as they decide that there really is an advantage in having someone you can actually talk to, sit down with and discuss your business needs.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on our new dates of September 30 and October 1st at the Javits Center in New York. This year, with everything that’s been going on, there will be so much to talk about. It will likely be our most important show ever. Come and join us in New York to meet the people who matter, to learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa.

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

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All of the Fintechs Involved in PPP Loans

We share all of the fintech lenders who are currently involved in the Paycheck Protection Program

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It has been an interesting to say the least as we have watched everything play out with the Paycheck Protection Program loan process. Fintechs were eager to help small businesses with the $349 billion initially allocated to small businesses but initially there wasn’t clarity on when it might be possible. For many who wanted to be among the first to apply, going through a bank was the only option as LendIt Fintech experienced firsthand. As we stand today there are now many fintechs, both lenders and banks involved in the process although the initial $349 billion allocated to the PPP has run out, according to Senator Rubio this morning. It is expected that Congress will appropriate additional funds soon.

Approvals started with small business lenders like Kabbage, made possible through an unnamed bank partner. Then this week we saw lenders get approved on a standalone basis. Other fintechs have taken an entirely different route. StreetShares had originally planned to offer SBA loans but then opted to instead partner with Fiserv. They are providing to them a secure portal for bankers to review and prepare documents while also providing application processing and eligibility checks.

If you’re looking for a full list of PPP lenders, Gusto has created this helpful Google sheet which continues to be updated with the status of each lender.

We will continue to update the list below as more fintechs get approved.

Approved Fintech PPP Lenders

PayPal
Quickbooks
Square
OnDeck
Funding Circle
Kabbage
Bluevine
Credibly
Fundbox

Fintechs Working with Partner Banks for PPP Loans

Fundera
Lendio
Brex
Nav
SmartBiz
Biz2Credit

Fintech banks processing applications

Cross River Bank
Celtic Bank
Radius Bank
Sunrise Banks

It is difficult to overstate the importance of the PPP for the health of American small business. For many, it will have come too late but for millions of small businesses this money will allow them to stay in business and keep paying their employees. Congress needs to set aside its differences and provide more money for this program immediately. There is still a huge number of small businesses that need this money.

A Firsthand Account of a Paycheck Protection Program Loan Application

We provide some background on LendIt's application for the PPP and the thought processes involved

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Like millions of other businesses here at LendIt Fintech we have been impacted dramatically by the coronavirus. We have had to postpone our flagship USA event by almost five months and we have switched to offering digital content. So, while I have been covering the Paycheck Protection Program (PPP) for the industry, I have also been paying close attention to how our own company should navigate this new program.

We have a business banking relationship with a top 10 bank that goes back to our founding back in 2013. When the PPP launched on April 3 they were dragging their feet and provided no guidance that day at all. Also, we were not confident they could handle the massive rush from their many small business customers.

I would have liked to have applied with a fintech lender but when I spoke to several of them right as the PPP was about to launch none were confident they could issue PPP loans in a timely manner. And it was only the middle of last week that fintech lenders could even apply to become part of this program. So, we looked at other options.

Our Denver attorney mentioned that he was getting his PPP loan through a small, local community bank. I connected with a banker there on April 4 (a Saturday), the day after the PPP went live, and by Sunday we had submitted our PPP loan application. They had some follow-up questions on our application that we promptly responded to and by Thursday we had been approved by the bank.

But the most important step comes next, where the bank has to input our data into the SBA E-Tran system. This has been a bottleneck for many banks due to the number of loans trying to get into that system. One fintech leader told me that the volume at E-Tran is somewhere close to 100,000 times their normal volume so there have understandably been some hiccups.

We were informed by our banker that we were in line at E-Trans on Friday morning and by Friday afternoon we were approved with an SBA loan number. That was four days ago and while we have not yet received our money our banker said it should be in our account by the end of the week. Now, we have opened a new business account with this community bank so the money will be deposited there. Hence their motivation to serve new customers like us.

[Update 4/20/20: we received our PPP loan money ten days after being approved.]

Our regular big bank has still been dragging its feet and in fact we have received three emails from them over the last week urging us to apply elsewhere for a PPP loan. So, we are happy we took the initiative here and went with a local community bank. As I said, I would have liked to have applied for this loan through a fintech lender but we couldn’t risk waiting for one of them to be approved.

With Congress still squabbling about how to increase the amount of funding to the PPP and concerns that the initial $349 billion will run out as soon as this week it has been important to move quickly.

Now, none of us know what the future holds but, like millions of other small businesses, this money will help us weather the next few months until the economy can be safely reopened, and we can return to a new normal.

Podcast 242: Ram Ahluwalia of PeerIQ

The CEO and co-founder of PeerIQ shares his thoughts on the lending market, securitization, managing risk today, the PPP and more

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These are challenging times, particularly for lenders. There are no risk models that can predict what might happen not just over the next year but even over the next month. While every lending verticals is being impacted the effects are not being felt uniformly.

The next guest on the Lend Academy Podcast is Ram Ahluwalia, the CEO and co-founder of PeerIQ. He was last on the show back in 2016 but I wanted to get him back on because he has sits at an interesting vantage point, talking with both investors and lending platforms. And being a data and analytics company means that investors rely on PeerIQ to make sense of all the available data.

In this podcast you will learn:

  • What the last few weeks have been like for Ram and his team.
  • What Ram is hearing from PeerIQ’s investor clients.
  • How they are helping their clients model risk today.
  • Why Ram thinks consumers will do better than many are expecting.
  • Some of the different data points that he is tracking.
  • The impact on consumer and student lending of a closed securitization market.
  • Why banks and credit unions have become critical for lending platforms.
  • What Ram is seeing from the ratings agencies.
  • His views on the Paycheck Protection Program (PPP).
  • Why the partner funding banks are best positioned to help.
  • Who will be the primary funder of these PPP loans.
  • Why TALF is so important to help unclog some of the credit markets.
  • Why a central bank digital currency should not be a priority right now.
  • What some of the longer term impacts of this economic crisis will be.

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.

Download a PDF of the transcription of Podcast 242 – Ram Ahluwalia.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 242–RAM AHLUWALIA

Welcome to the Lend Academy Podcast, Episode No. 242, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

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 our new dates of September 30 and October 1, at the Javits Center in New York. This year, with everything that’s been going on, there will be so much to talk about. It will likely be our most important show ever, so come and join us in New York to meet the people who matter, to learn from the experts, and get business done. LendIt Fintech, lending and banking connected. Sign up at today at lendit.com/usa.

Peter Renton: Today on the show, I am delighted to welcome back, Ram Ahluwalia, he is the CEO and Founder of PeerIQ. Now, PeerIQ has an interesting space in the industry, they’re really at the epicenter. They’re talking with investors all the time, talking to platforms all the time. So, I wanted to get Ram on the show because we’re going through unusual times and I wanted to hear the perspectives he’s seeing from both sides.

We talk about his investor clients and what they’re seeing, what they’re doing, how they’re assessing risk today in a very unusual environment, talk about how the consumer lenders are responding, the small business lenders. We talk about the securitization markets and how that shut down and we talk quite a bit about the PPP, the Paycheck Protection Program, that has just come into place and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome back to the podcast, Ram!

Ram Ahluwalia: Thanks for having me, Peter.

Peter: My pleasure. Okay, so we should give the listeners some context. We’re recording this on April 3rd and we’re in a very fast moving world right now. So, as you’re listening this, keep that in context. So, maybe let’s start, Ram, by just …..maybe share with the listeners what the past couple of weeks have been like for you personally and what they’ve been like for PeerIQ.

Ram: Sure. The last four to five weeks have been extraordinary, I’m sure, as it had been for your listeners also. Personally, my wife, who’s a software engineer at Bloomberg, we’re both working from home, day cares shut off so we’re doing what we can to shuttle our little guy back and forth and get work done and also lead four organizations.

From the company perspective, the first week of March, we had a call over the weekend when we saw corona virus cases were growing, you know, in New York City at that time, the case count was very low, but it was clear that this was an exponential, you know, the parts of the world such as Italy and the view was we’re all going to be working from home virtually at some point, the question is when.

This is a freight train you’d rather get out of the way and anticipate and have some semblance of control rather than be forced inevitably through, you know, an appropriate government policy. So, to that end we implemented virtual work from home training, we adopted a set of best practices and tools, codified that in a document. We had optional work from home the first two weeks; within three days, everyone was working from home except for one super trooper holding the fort.

So, the second component of that was customer reassurance as well, so this was really going to mid-March. So, once we were effectively executing remotely which….you know, it’s difficult to have a data analytics business, but I think we maintained our productivity levels. We focused on customer reassurance letting them know that we’re here to help them and serve them. Fortunately, we had our first year of cash flow positivity last year, which was great, and doing the best we can to help them man that risk. I think the one area of that’s been disappointing has been recruiting, of all things.

We had two candidates, one from a top four consultancy, the other from a blue chip credit card company in New York, you can probably guess, and both of them said, look, they just want to kind of stay where they are and not take the risk of moving to a startup. So, that’s been our experience.

Peter: Right, right, okay, makes sense. So, you’re at an interesting position here being a data analytics company and the data that is coming out has been, I’m sure, just kind of unprecedented, but before we get to that, I’d be curious to hear about……you know, you work with a lot of investors, a lot of large investors, I’ve spoken to several over the past week, what are you hearing from your investor clients?

Ram: Sure. So, investors are finding that financing loan purchases is difficult, so in a CUSIP market….and you’ve seen this roll down back to the originators, right. In a CUSIP market, it’s very difficult to roll over your positions. CUSIPs are financed through overnight repo and also haircuts are increasing, so, you know, it’s simplistic but it’s a fair analogy, you can start thinking like a margin call. You need the ability to fund your CUSIPs, otherwise, you’re not going to be able to extend and buy new loans, so credit facilities, in some cases, have been tapped out, or canceled citing the material adverse conditions. Investors are enjoying incentives so some lenders are sharing in the origination fee with investors or selling loans below par so they can capture some kind of revenue.

There’s, obviously, a big uptick in the need for data and analytics, we’re in the risk off world…. this is a risk management problem now so doing what we can to help them. On the lenders’ side, lenders are raising rates. You saw a few days ago, Lending Club has raised rates … everyone has to in order to make this an attractive product for investors. Lenders have cut back [originations]….in general terms, they’ve cut back substantially, some of the large lenders definitely in the double-digit range, 40/50%, some other lenders I have seen 90%.

I haven’t seen lenders fully shut off, there’s definitely been tightening in underwriting by industry type. I think most of that tightening goes back to capital availability, more than anything else. There’s also concerns that lenders have that consumers, in this barrage of information, might choose not to pay their consumer loans confusing mortgage forbearance, for example, with the need for them to continue to pay their consumer loans. There are some bright spots. One lender has had a record origination month. Last month, they financed products, I can’t name the product they financed, but it’s a niche seller and the type of product that people buy during times of stress, not toilet paper (Peter laughs).

Peter: Right, right, okay. So then, one of the things that’s really interesting about today is that…. there’s a quote from Jared Hecht, who’s going to be on the podcast next week, he was quoted in The Wall Street Journal earlier this week basically saying, “no one knows how to underwrite risk in today’s climate.” So, what are you seeing and what…..like you’re a data analytics company, I feel like this is unprecedented, but how do you help your clients model risk today?

Ram: Yeah, it’s absolutely unprecedented. We saw that in the last two weeks, we lost 10 million jobs behind a plane right sticking up. We probably have another 10 to 15 million more jobs that will be lost, so yes. That said, I think there’s a split between small business and consumer risk. Small business not an understatement, they will experience substantial losses, particularly those sectors that are most exposed to the crisis, travel, retail and so forth.

Consumer, I think, will actually be better than most believe due to the tremendous policy response that we’re seeing. There will be losses that take place, some of that will be attributed to the lack of planning and orderly distribution of benefits, you know, websites being done for unemployment insurance, so some of the challenges even in the PPP program which will impact employment levels.

So, on the consumer side, I think you can still go out there and underwrite; small business, though, is no question is extraordinarily challenging. From the consumer perspective, you can use the loan level data, you can map that to geographic state-by-state unemployment benefits which matters, you can lay around the federal benefits, you can identify where there’s been mortgage payment, or debt relief. So, you can do the math at that level and I think do a robust bottoms up assessment.

Peter: Okay. So, what about other data points? I’m curious…maybe some of the things that you haven’t mentioned yet that could be a good indicator of risk right now?

Ram: Sure. Now, this is primarily a health issue that has become an economic issue, so certainly the hospitalization rates for coronavirus cases is a good metric to look at, it’s not biased from the dispersion and testing that we’re experiencing, so that’s number one.

Second, weekly unemployment claims is a very good one, generally, that’s a lagging indicator. In March 2009, was the highest monthly of job loss, it is also the first month that started the recovery, but this is an unusual time period where leading and coincident indicators are, generally, on top of each other, so that’s a good one.

In terms of real time data, obviously looking at real time delinquencies on risk platforms such as ours, looking at delinquencies through service reports. If you have more exposure to non-prime risk, I would recommend looking at the Monthly Remit Report from OneMain which has been around for over a hundred years to get a good sense about how that population is performing.

If you have prime credit risk, I would look at data from the credit card in master trust/ABS programs, and then I would also focus on just asking questions around market functioning because some of the challenge of the past four weeks is that certain markets has stopped functioning normally; the repo market, the municipal bond market, the risk of mapping rollover investment grade debt. Fortunately, there’s been so much action and firepower that the Fed and Treasury have taken in that. I think most of these has actually been addressed, but it’s something to keep an eye on.

Peter: Sure, okay. So then, one of the markets that’s also closed off is the ABS markets, no one can get a securitization closed right now. What impact is that going to have particularly on the consumer and student lenders?

Ram: Well, it means less ability to originate because the channel that can deliver scale funding securitization is shut off, so you have to find other pillars of capital to lean on, it’s extraordinarily challenging. Securitization relies on a gain on sale model and right now, lenders are selling loans at below par, so some lenders are in a negative unit economics position. You know, warehouse lines are pricing wide, sometimes securitization markets…..you know, in Q1 2016, we saw certain lenders go to securitization markets any way, just so they could clear out the facilities and originate loans and capture origination fee.

This market shut down so fast and swiftly they were unable to do that, so it means higher rates for consumers, higher rates for small business. I think the other takeaway is that it’s abundantly clear that fintechs and non-banks need to find a distribution channel through banks, absolutely clear to have to be the case. Yes, there’s a very important role for institutional investors and providers of term capital like private equity, someone who used to take on the first loss position and enable credit extension to riskier and underserved credit segments, but the primary challenge that there’s no clear ability for fintechs to distribute loans from the banking sector.

Peter: Right, right. On that, I was actually speaking with someone at one of the consumer lenders earlier this week and they said, yes, the institutional investor channel is, basically, closed. There’s really very little money coming, but he said, the banks and credit unions are continuing to invest. Is that what you’re seeing across the industry?

Ram: Yes, institutional investors have a couple of different stripes. Some are committed to the category so they will re-invest principal and interest and they’ll take advantage of these incentives. I would also say that there are some players that are now really in a beautiful spot. For example, like Cross River Bank where they are a commercial bank and they’re also a partner-funding bank and, therefore, they may be able to benefit from somebody’s programs that are launching and help provide liquidity in different kinds of ways, but, yes.

Overall, if you’re an investor and you’re looking across capital markets on a relative value basis, why wouldn’t I buy a bond that has a comparable coupon after you adjust for losses, but also have assets and have recourse to the entire company’s balance sheet? So, investors are behaving rationally and there’s a main lesson and what we learned in this crisis is that when losses are going up and unemployment is increasing, the only mechanic to enable markets to clear is for loans to trade below par, or for lenders to give up a portion of the origination fee and that’s not a sustainable business model.

So, you have to open up distribution to banks. Banks and credit unions, they recognize they don’t have technology, they recognize they don’t have a first class customer experience, they also have access, particularly the smaller credit unions and smaller banks here I think it is most relevant for trillions in deposits.

Peter: Right, right, okay. So, I want to get back to the securitization because I’ve been seeing some ratings agencies emailing this week talking about potential downgrades on some of the existing transactions that are out there. What are you seeing on that front?

Ram: Yes, Kroll put ten small business ABS deals on Negative Ratings Watch, they’re the most active ratings agency in the marketplace lending space. They have not put any MPL bonds on downgrade, or negative ratings watch yet. The ratings agencies are going to wait to look at what the April Remit Reports look like and they’ll take action from there, and then we’ll see, I mean, it’s just going back to the policy response.

It’s been fast and swift, the mechanics have been a bit disorderly, but the policy response should enable the vast majority of consumers, both W2 and 1099 to bridge through at least the next ten weeks and then we’ll re-assess at that point in time by the policy makers and they should have made it clear that this is an installment approach to the crisis. So, it’s not clear that there are consumer MPL bonds will experience the kinds of losses we saw in 2008, even though the unemployment rate and the number of job losses will likely cause that.

Peter: Yeah, because if we can get the stimulus out, I guess, there will be….people will have some money. I mean, there’s been talk about a fourth package coming out and let’s just talk a little bit about that. Today, this is the launch, official launch of the Paycheck Protection Program and we’re recording this sort of halfway through the day and it hasn’t gone smoothly.

Right now, there’s some loans that appear to be going through….. like Bank of America is one of the big banks and they have strings attached to their loans. Originally, I thought when this was coming up, I thought this was going to be fintechs’ time to really shine, but I’m unaware of any fintech that has been approved yet and that this part of this. So, what are you hearing about the PPP?

Ram: Yeah, you’ve got a good write-up on it this morning. I think there are a couple of opportunities and challenges. So, the SBA’s Lending Program last year was about $23 Billion in size. For this program to be effective, the fintechs are essential to help to originate loans and the provider of capital is the major issue. That provider of capital, as we discussed earlier, has to be the banks in order to make the economics work. You saw that Treasury Secretary Mnuchin upped the interest rate on this PPP loans to 1%, which I thought was a good move. I would actually suggest they go a bit higher than 1.5% so that you can motivate banks to profitably fund these loans and hit their ROE objectives, that’s one challenge.

The second is it’s not clear who will bear the responsibility for rep and warranty violations, or fraud claims. On the one hand, the policy makers have aired on the side of maximizing response and trying to move as fast as they can. At the same time, banks are held to a high standard so they care about Know Your Customer rules, Anti-Money Laundering rules, Bank Secrecy Act rules, so they need some type of guideline, or safe harbor and without that, I don’t think you’re going to get much uptake. From the big banks that I’ve recently pooled, most will initially focus on their customer bases today.

I think it’s a huge opportunity for fintechs, except fintechs need to be thoughtful about their origination process, meaning we’ll look back at this a year, two years from now and we’ll measure what were the fraud rates. If fintechs apply a set of standards that banks hold themselves accountable to, except they do it better, faster and cheaper, then we’ll be building the case for regulators that this temporary channel that is linking fintechs to the banking sector should become a more permanent channel. But, you’re right, there are definitely key issues to work through, it looks like there are a bit around and, hopefully, next week we will start seeing loans printed.

Peter: Yeah, yeah, that’s the point. Here at LendIt, we’re applying and we’ve been in touch with our banker there saying Monday we should be able to apply. You know, I spoke with a couple of fintech companies this week, actually spoke to several and one said that they really want to be on board, they’re applying to be approved, even though it will be a loss making product most likely, but they want to be part of the solution.

Another said, they can’t make it work, it’s just where it is right now, the economics are just simply not viable, so I think maybe we’ll see some changes down the road. But, the thing that we haven’t seen yet is….I mean, I feel like we’re still in the early innings here, we’re going to have…once we get every bank out there that’s open then we’re going to see how long this is going to take, are people really going to be approved instantly. I mean, our banker said you can only apply online which I think is good and it’s a pretty simple form and given that we have an existing relationship with them, that’s the most we would like to do, we have to go to our existing bank.

So, I mean, at least fintechs are out in the cold a little bit, but I feel like…..I mean, maybe it’s always possible there will be a second round here, although we are re-jigging all the rules because I feel like…..I originally thought, this was fintech’s time to shine, but it may not be. I know it’s hard to stare in a crystal bowl at a time like this, but how do you think the small business lenders on the fintech side are going to be able to get involved?

Ram: Most of them have expressed interest, at least from what I was formally told. The economics on the origination fee, as you know, were up to 5% with a loan interest rate at 1%, there’s definitely a workable business model there and there are definitely very prominent small business originators that are focused on developing an origination machine around that.

I think the regulators are improvising swiftly, so if we’re seeing that the take up on the PPP program is falling short of the goals again, that had cost $347 Billion range, you’re going to see more permissiveness. And so, I do think that, actually, it’s a good opportunity for the fintechs, probably the fintechs that are linked, or partnered with some partner funding banks.

Peter: Right.

Ram: They are in the best position because, you know, if you’re Cross River, you have oversight over compliance, customer disclosures and you yourself are held to bank standards, so that intermediation function, that stamp of approval function could be an important conduit to help the small business fintech originators deliver loans into the banking sector.

Peter: Right, right, yeah. I certainly hope that we’re able to come in here. Pretty much every fintech lender, not everyone, but on the small business side has a banking relationship. They might have a banking relationship, but the cost of capital is going to be greater than 1% in a lot of these situations.

Ram: Right.

Peter: I mean, origination fee is enough that you can…..that provides some cash flow up front, but do you see any outside investors, other than banks, are going to take up this proposition?

Ram: No, it has to be the banks, it has to be the banks in order to make the economics work and the supply of capital. So, you know, the fintechs will focus on origination and servicing and then selling the asset to some banking institution and potentially sharing the economics through multiple different ways to motivate the banks to buy these loans. So, those pipes need to be built, they need to get worked out, there are a lot of issues around that, we touched on some of that earlier.

If you’re a bank buying loans from a thinly capitalized fintech and you’re buying tens of billions of loans, but the fintech has maybe tens of millions in equity capital then how do you enforce your reps and warranties that there are applications down the road that do not conform with the policy and the PPP, right, for instance. So, those are some of the challenges, but there’s no question, you need to have distribution built up for banks. The fintech market does not have the balance sheet to absorb these.

Peter: Right.

Ram: And also, the mechanic around the loan forgiveness needs to be spelled out so banks can plan and the mechanic on how banks can, you know, put that risk to some other buyer needs to be clarified as well, presumably the Treasury.

Peter: Yeah. So, another thing that …….speaking of Treasury, I wanted to talk about another piece that came out. I think it was actually not this week, but last week, was the Fed re-established the Term Asset-Backed Securities Loan Facility, TALF it’s called, and basically they started in 2008 in the financial crisis and they did not include personal loans…obviously, student loans, auto loans and credit cards, that sort of thing, what are your thoughts on TALF and can we get this changed to include consumer loans?

Ram: It’s an extraordinary program, it was very effective in 2008. Essentially, what TALF enables you to do is unclog funding markets for high quality assets. As a participant in the TALF program, you can borrow at the same rates, essentially, at the Federal government without recourse, so it’s an extraordinary program. So, the challenge we talked about earlier around the CUSIP market and the credit facility market could potentially be addressed with the TALF program. Now, TALF in the 08 market was coped to focus on investment rate and rated securities. Yeah, personal loans in a loan format obviously don’t meet those criteria so we need to think about how to make that work.

One way to do that would be to have, essentially, a credit facility that’s provided by the Federal Reserve and have all of those collateral rules that govern the haircut and the dance rate (?). It’s much in the same way that investment banks provide funding to fintechs. In fact, I think the proper way to do it is to enable the investment banks to fund via their primary dealer credit facilities to the Federal Reserve. That’s the cleanest way to do it because you also have all the machinery allowed monitoring and the contracts and the due diligence in place to….but, I think that’s the way to make it come together.

Peter: Right, okay. We’re running out of time, but a couple more things I really want to get to. There was some interesting talk, an earlier version of the CARES Act had a digital wallet of sorts, a Fed account they called it, where basically money could be distributed to people without bank accounts and you could have a direct account with the Federal Reserve. Do you think we’re closer to a Central Bank digital currency now than we were a month ago?

Ram: Absolutely not, I think that’s a zero, right. The Central Bank and policymakers are putting out fires to design and deploy a central digitized currency, it requires a lot of thoughtfulness and planning and comment period. It also disintermediates the banks that would object to that, doesn’t mean that that’s not a good idea. I don’t think it’s a priority for anyone to focus on that at this point in time.

Peter: Right, right. This is something that if you had it already, you would certainly take advantage of it, but, yeah, this is probably not the time. (laughs)

Ram: It’s new, it’s novel, it’s interesting. People have a couple of extra hours work from home, they can kind of write about it and kind of do the simulation of what would have happened if we had this, but if you look at the digital currencies out there, they’re not doing too well either, although this is serving a different kind of purpose. I think a better response is what you saw from Chime where they’re enabling rapid account opening and then enabling the efficient disbursement of these direct payouts and funds to, you know, impact individuals. That’s a far more practical industry response.

Peter: Yeah, yeah, I completely agree. Okay, so then, at the risk of….you know, obviously, being out of date by the time this publishes (laughs), what are some of your closing thoughts here about where this is going and how we are all going to come out the other side.

Ram: Sure, sure. So, I think the mantra here is don’t let a good crisis to waste. There are three things here.

One is the acceleration of digital, it’s happening. In some cases, it’s happening by law, as you pointed out, regarding the applications for several of these programs, so that’s a great…..that’s a long term trend in the favor of fintechs.

Second is service, service, service your customers, engage with them, don’t take loan payments for granted. Customers are getting a deluge of information, you need to engage and service them.

Third is hold yourself to a higher standard, so if you have the opportunity to originate loans and sell them to a bank and capture an origination fee, aim for the same kinds of standards that banks hold themselves to, in terms of fraud and any money laundering and Know Your Customer because if you can do that, you can win the long game of opening a more permanent, reliable channel to distribute loans in the banking sector which is a natural marriage.

Peter: Okay, we’re going to have to leave it there, Ram. I really appreciate your coming on the show today.

Ram: Thank you, Peter, have a good one. Take care.

Peter: See you.

One of the things I think is interesting, and Ram touched on this, that is the difference between the small business lenders and the consumer lenders. Now, many small business lenders have just stopped lending completely, so many small businesses are dormant, just not operating right now with no revenue coming in and it is just very, very difficult to underwrite small businesses.

Whereas, consumers, none of the consumer lending platforms, none that I know of anyway, have completely shut down, they’re lending, I would say many, or I’d say most have tightened their credit box, some considerably, but it just points to, I think, the different kind of perspectives we have in the consumer is while many of them are losing their jobs, many of them also have savings, particularly the more prime consumers.

So, you’re probably not going to see as big of a shock on the consumer side as you are on the small business side, particularly until we start to see the Paycheck Protection Plan, the PPP, until we start to see those funds flowing readily to all the struggling small businesses.

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

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on our new dates of September 30 and October 1st at the Javits Center in New York. This year, with everything that’s been going on, there will be so much to talk about. It will likely be our most important show ever. Come and join us in New York to meet the people who matter, to learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa.

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LendIt Fintech News, Powered by Lend Academy, has been bringing you all the news and information about fintech and online lending since 2010 when it was founded by Peter Renton. We not only have the industry’s most active news site, but also the largest investor forum and the first and most popular podcast.

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