Can Technology Be More Than Automation?
In yet another Lending Club exposé, Bloomberg revealed the identity of the man who allegedly first discovered suspicious Lending Club loans that would later be confirmed connected to disgraced CEO Renaud Laplanche in a post-resignation audit. Brian Sims, a retail investor in Lending Club loans used a specially designed algorithm to spot patterns such as multiple loans made to a single borrower at different interest rates. No easy task considering Lending Club takes great strides to protect borrower identity.
And this truly is the argument both for and against technology. Irrespective of what side of the debate you’re on, it’s hard to argue its indispensability in day to day business. It’s the one thing CEOs think long and hard about and rightly so — automation makes or breaks the size and scale of a business, vastly improves productivity and narrows if not eliminates the margin for human error (up for debate).
So, at deBanked we were curious to discover how small business financing companies use technology in their companies, what processes are automated and which side of the man vs machine debate they fall on.
Boston-based Forward Financing that makes merchant cash advances, working capital finance and small business loans up to $300,000 started investing in proprietary software right from the beginning, four years ago. It uses Salesforce for customer relations and basic reporting.
Its underwriting tool, channels leads and performs varying levels of automation to underwrite files quicker. The app pulls data from a number of different sources like credit bureaus, public record databases, social media and Google APIs before it goes to an underwriter. “Our goal over the next 3-4 months is to automate a percentage of all the deals that comes through the system,” said CEO Justin Bakes.
The company also has a banking application, a portal where customers log in with their bank details, with read-only access to their bank accounts to identify and analyze transactions which are then used to underwrite. Separately, it also has a portfolio management system that manages all the funding, transactions and all the collections.
While Bakes started investing in technology early on, it wasn’t until a year and a half ago that he tried automated underwriting. “Some hear the word automation and think they are going to lose their jobs,” said Patrick Hereford, Director of Technology at Forward Financing. “I can understand that automation can reduce jobs, but here, they found that they could underwrite more deals faster and with more accuracy.”
Hereford was hired in October last year from the TV show America’s Test Kitchen where he was working as a software engineer. Hereford makes a case for automated underwriting with proof — “We went from spending 20 minutes per file to six minutes per file,” he said. “We were expecting 50 percent efficiency in underwriting but we got more and increased productivity.”
The company hired full-time engineering staff last year to move all their tech support and development in house. “A majority of our new hires and investments have been in technology. The tech team has grown the most over the last year,” said Bakes. He noted that the company has spent over a million dollars in building proprietary software alone and 20 percent of its selling, general and administrative (SG&A) is allocated to technology development.
“There is no doubt that we are a financing company but we are a tech-minded financing company. To be a true industry leader, you have to automate a certain amount. Our philosophy is we plan to keep improving our technology and the ability to approve faster than anyone else,” Bakes said.
Forward Financing is among other companies moving in that direction. California-based lender National Funding who has deployed $1.5 billion to small businesses over the last 17 years is also preparing for a technology overhaul, trying to get access to data pools to automate underwriting. “We need to be tech driven, as deals get smaller, we need to automate them to make it affordable,” National Funding CEO Dave Gilbert told deBanked earlier.
And five-year-old Pearl Capital is on a similar journey. The company grew its tech team from two to twelve people over a year and a half ago including data analysts and statisticians and is making significant investments in scoring technology, portfolio management and risk assessment. “We had a human model running successfully for years and they produce good results but move to machine is additive and supplemental,” said CEO Sol Lax. “Data and tech add a lot more texture and nuance to the market, it’s like the weather radar, you have visibility and can price accordingly.”
But technology doesn’t have to necessarily mean automating underwriting. In fact, there is a strong bastion of people actively resisting it. Isaac Stern, CEO of New York-based Yellowstone Capital is one of them. “I am going to get my underwriters as much information as possible – background check, credit check to make good decisions but that does not mean I am going to let a computer decide whether to fund or not.”
That doesn’t mean Stern doesn’t care about efficiency. In fact, Yellowstone has invested over a million dollars over the last year in ramping up technology. It hired AIG’s chief data scientist and has improved data mining with access to over 140 data points including SIC codes, credit scores and loan history. The company uses an application called Clear®, a Thomson Reuters product, through which it can conduct background checks as well as review business history and public records.
No matter what camp you belong to, there are strong arguments to be made for each side and it really comes down to the philosophy of the matter. But in a crowded lending market, does it make sense to grab every opportunity to scale better?
“Different people have different thoughts on whether this is frankenstein going off the rails or not and whether that will blow up or not,” said Lax. “But the barrier to entry is low as a funder, and the spend on tech can be small yet profitable.”
There are many alternative finance companies who believe that staying in the game requires some change in incumbent models to boost efficiency and speed that’s driven by auto approvals and declines. But there are also some like Stern who treat technology as an aid rather than an aim.
Perhaps time will tell which system is better.Last modified: April 20, 2019
Srividya's work has appeared in publications like Money magazine, Advertising Age, FirstPost and The Economic Times. She has also dabbled in business intelligence solutions, and holds a Masters degree in Business and Economic Reporting from NYU.