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It’s Here: Artificial Intelligence Changes MCA Broker’s Business, Improves Bank Underwriting and Debt CollectionNovember 22, 2016
In this age of man versus the machine, the case for artificial intelligence and machine learning does not need many vociferous advocates.
Some predict that revenues from fintech startups using AI and predictive models is set to jump by 960 percent or to $17 billion by 2021. We might be closer to that number than we think, considering 140+ AI startups raised a total of $958M in funding in Q3’16, alone.
While healthcare, cybersecurity and advertising are frontiers of AI innovation, the growth and momentum of big data in finance (spurred by online lending) is fast bringing fintech to the forefront. In lending, specifically, data has become the new currency. It’s not so much that lenders didn’t use data for decision making earlier, but the data available then, wasn’t as rich or as extensive. A loan approval decision that just required a decent FICO score and assessment of character has expanded to include data points like a business’ social media presence, reviews, and owners’ background history.
Today, artificial intelligence in fintech has grown to tackle cybersecurity threats, act as a personal assistant, track credit scores and perform sentiment analysis to predict risk — making automated underwriting just the tip of the iceberg for what artificial intelligence and machine learning can do for the financial services industry. deBanked spoke to three fintech upstarts that have taken AI beyond underwriting.
When Roman Vinfield started his ISO, Assure Funding in early 2015 with 16 openers, five chasers and three closers, little did he know that a business intelligence software would replace 85 percent of his staff for the same productivity. He stumbled onto Conversica, a AI-powered virtual sales assistant and was convinced to give it a try.
“I hadn’t heard anything like an artificial-intelligence sales assistant,” said Vinfield. “The results we got within a month of using it were unbelievable.” Within the first month, Vinfield made $35,000 in revenues by spending just $4,000 and eventually reduced his staff of 24 to 4 people. He was so sold on its potential for the merchant cash advance industry that after prolonged negotiations, he secured the rights to be the exclusive reseller of the software, and called it AI Assist. The software is now used by leading MCA companies like Yellowstone, Bizbloom and GRP Funding.
While Conversica’s clientele includes auto and tech giants like Oracle, Fiat, Chrysler and IBM, for the financial services industry, it’s marketed and sold to MCA and lending companies through AI Assist. It integrates easily with CRM software like Salesforce and creates a virtual sales assistant avatar that tracks old leads and reestablishes engagement. In the lead generation race, where a 3-5 percent response rate could be considered good, the response rate for Conversica has been 38 percent.
Designed to be akin to a human sales assistant, Conversica’s technology can determine a lead’s interest based on the response and set up a conversation with the sales department to follow up. “Your Conversica virtual assistant is an extremely consistent, personable and tireless worker. She doesn’t get sick and never needs a break. She never gets discouraged, and she improves with each engagement,” says the AI Assist website.
Personal chat assistants for money management and sales is one of the popular modes of AI implementation in fintech, given it’s scalability in lending for functions like debt collection. One company that does this, is True Accord. True Accord, similar to AI Assist uses automation software to schedule and send messages to customers by the company’s “Automated Staff”
The San Francisco-based company was founded by Ohad Samet who has over 11 years of machine learning experience in finance. The idea came to Samet while he was working as a chief risk officer at payments and e-commerce company Klarna, underwriting loans worth $2 billion. “While working at Klarna, I realized how big a piece debt collection is and I did not like the way it was done,” said Samet. “I needed machine learning to change it.”
Samet founded True Accord in 2013 to develop a debt collection AI assistant and today the company works with leading banks, credit card companies and food delivery services and has collected over half a billion dollars. It establishes targeted communication with the customer less frequently than traditional collection agencies and allows customers to pay their dues over mobile, which accounts for 35 percent of collections for the company.
“We humans don’t want to accept it but the reality is that, when it comes to scale, machines make better decisions than humans,” said Samet. “Machines are consistent, they are not tired, not angry, don’t fight with the significant other and all of this makes for better accuracy, better cost structure and better returns of scale.” While this might be true, building an efficient, compatible and compliant model is harder than it might seem.
Since AI tools do not come in a one-size-fits-all package, its application can be as varied as the range of companies that use it. Building an AI framework that aligns with a company’s targets while being compliant to regulatory mandates can be an uphill task.
Recognizing this opportunity, James.Finance, a Portugal-based startup is using artificial intelligence to help financial institutions like banks build their own credit scoring models. Founder and CEO Pedro Fonseca, describes James as a “narrow AI” for a specific purpose of guiding risk officers to build machine learning models that follow regulatory compliance.
The startup works with consulting agencies or partners to reach out to banks. It offers a trial run of the software, which it calls a ‘jumpstart,’ where a risk officer is provided with James’ technology and in 24 hours, he or she will have to beat it with their in-house AI software.
“And we are consistently able to beat the models,” said Fonseca. The company won the startup pitch at Money 20/20 in Copenhagen earlier this year after receiving an uproarious response in Europe. Fonseca wants to divert his attention to the US’s fragmented banking market, which is dotted with smaller banks and credit unions. “The US is a perfect target for us. We are looking to work with local consultancies that know the problems of a bank intimately.”
As these entrepreneurs vouch for it, the current state of AI use in fintech is just the tip of the iceberg. And anything man can do, machines can do faster and better, right?
It’s hard to forget the firsts, especially first deals — they set precedents, lay down the groundwork for policies and establish a starting point for legacy.
For funders and lenders, their first deal can be significant in establishing client relations, setting priorities for credit policies and as we found out, teaching them valuable lessons.
First Steps..Baby Steps
John D’Amico’s first bet was a small cafe in Carmel, Indiana that his company GRP Funding advanced $25,000 to, eight years ago. Reviewed on credit card sales, GRP looked at the business’ cash flow and deemed it a good risk to take, D’Amico recollected.
“That business model seems so far and long ago,” he said. “OnDeck was not a company at that point and loan products were not talked about. It was only advances.”
Would he still feel confident doing the same deal today? “Yes, that deal is still there to be had today. But you want to make sure that you’re not stacked.”
#LifeLessons: Don’t get comfortable, stay updated with the times and evolve and keep the credit risk policies fresh.
Small Can Be Significant
The first check, Jersey City-based World Business Leaders cut was for $7,000, back in 2011.
Chief revenue officer, Alex Gemici recalled that it was an African arts store run by a woman in Virginia Beach who paid back the loan in full and came back three months later for an additional loan of $12,000.
“We believed her story and went by our lending policy and the deal fit the bill.”
#LifeLessons: We could make a big difference even with a small loan.
Not All Firsts Are Good
But not everyone has a smooth start. For New York City-based company, Cardinal Equity, the first deal was a bump on the road.
The auto dealership in New Jersey that it advanced $250,000 to in 2011 defaulted on the second renewal. Although Arty Bujan, managing member at Cardinal Equity still thinks auto dealerships are a “nightmare,” his company still funds them but with very strict scrutiny, looking for ones with a steady revenue stream and a good amount of time in the business.
#LifeLessons: There’s always risk
By hiring an executive director, the Small Business Finance Association hopes to achieve at least two goals – taking a step toward becoming a full-service trade group and providing a public voice for the alternative finance industry.
Stephen Denis, formerly deputy staff director of the U.S. House Committee on Small Business, went to work in the new role in mid-December, setting up shop with his cell phone and laptop in a Washington, DC, area coffee emporium. He’s the SBFA’s first full-time employee.
Hiring Denis, who also has association experience, represents “the next evolution” of the trade group, according to David Goldin, SBFA president and Capify’s founder, president and CEO.
The SBFA, which got its start in 2008 as the North American Merchant Advance Association, changed its name last year because members have added small-business loans to the their merchant cash advance offerings. Although the trade group’s not exactly new, it has plenty of room to grow and its leadership and members seem open to change.
“The goal is to start from scratch and take a look at everything the association is doing,” Denis told deBanked, “and to really build this out to a robust group that represents the interests of small businesses.”
Denis appears optimistic about pursuing that goal. He’s a native of the Boston area and a Harvard University graduate whose first job out of school was as an aide to Republican Sen. John E. Sununu of New Hampshire. After three years in that position, he took a job for two years with a UK-based trade association, traveling frequently to London to inform the group of Congressional action in the United States.
From there, Denis went on to become director of government affairs and economic development for the Cincinnati Business Committee, a regional association that included Fortune 500 companies among its members. After two years in that role, Denis joined the staff of Rep. Steve Chabot, R-Ohio, moving back to Washington and serving as the congressman’s deputy chief of staff during a five-year stint that ended when he joined the SBFA.
While working for Chabot, Denis also became deputy staff director of the House Committee for Small Business, the No. 2 position there, and he has held that job for the last three years. The committee’s tasks include learning as much as they can about small business, including financing, and using the information to advise members of the House on policy initiatives.
The experience Denis has amassed in government should serve the association well because his duties include briefing federal legislators and regulators on how the alternative-finance business works. With Denis as spokesperson, the industry can speak to government with a single voice, Goldin asserted.
“We are going to be aggressive in our outreach to legislators and regulators as well as be active reaching out to local, state governments,” Denis said. The SBFA will “work with other trade groups and small business groups to promote our mission to ensure small businesses have alternative finance options available to them.”
Until now, too many players from the alternative finance industry have been vying for lawmakers’ attention, Goldin said. To make matters worse, some of those seeking to influence government in hearings on Capitol Hill are brokers instead of lenders and thus may not have a perfect understanding of risk and other aspects of the business, he maintained.
“We’re hearing that there are people trying to be the voice of small-business finance that either don’t have a lot of years of experience or they’re not telling the whole story,” Goldin said. “We want to make sure the industry’s represented properly.”
Denis can draw attention away from the “noise” created by unqualified voices and focus on information that Congress needs to make reasonable decisions about the alternative finance business, Goldin maintained.
Besides getting the word out in Washington, the SBFA hopes to convey its message to the general public on “the benefits of alternative financing,” Goldin said. At the same time the group can help make small business owners aware of the finance options, Denis added.
Asked whether hiring Denis marks the beginning of an effort to lobby members of Congress for legislation the association deems favorable to the industry, Goldin said only that additional announcements will be forthcoming.
Meanwhile, updated “best practices” guidelines might be in the offing to help industry players navigate the business ethically and efficiently, Goldin said. A set of six best practices the association released in 2011 included clear disclosure of fees, clear disclosure of recourse, sensitivity to a merchants’ cash flow, making sure advances aren’t presented as loans and paying off outstanding balances on previous advances.
Addressing other possible steps in the association’s growth, Goldin said the group doesn’t plan to publish an industry trade magazine or newsletter. However, a trade show or conference might make sense, he noted.
Denis said he and the board had not discussed the possibility of a test, credential or accreditation to certify the expertise of qualified members of the industry. However, associations often establish and monitor such standards, so it would be reasonable for the SBFA to do so, he added.
The association might establish a Washington office, Goldin said. “We’ll look to Steve for his thoughts and guidance on that,” he observed. Denis seems amenable to the idea. “Down the road, we would love to open an office and hire more people,” he said.
In Goldin’s view, all of those moves might help the rest of the world comprehend the industry. Understanding the industry requires taking into account the cost of dealing with risk and business operations, he said.
Placing a $20,000 merchant cash advance, for example, requires a customer-acquisition effort that costs about $3,000 and a write-off of losses and overhead of about $4,000, Goldin said. That’s a total of $27,000 even without the cost of capital, he maintained.
“Most people don’t understand the economics of our business,” Goldin continued. The majority of placements are for less than $25,000, he said, characterizing them as “almost a loss leader when you factor in the acquisition costs.”
While spreading that type of information on the industry’s inner workings, Denis will also conduct the day-to-day for the not-for-profit’s affairs. The association’s board of directors will continue to set policy and objectives.
Members elect the board members to two-year terms. Current board members are Goldin; Jeremy Brown of Rapid Advance, who’s also serving as the group’s vice president; John D’Amico, GRP Funding; Stephen Sheinbaum, Bizfi; and John Snead, Merchants Capital Access.
Member companies include Bizfi, BFS Capital, Capify, Credibly, Elevate Funding, Fora Financial, GRP Funding, Merchant Capital Source, Merchants Capital Access (MCA), Nextwave Funding, NLYH Group LLC, North American Bancard, Principis Capital, Rapid Advance, Strategic Funding Source and Swift Capital.
Companies pay $3,000 in monthly dues, which Denis characterizes as inexpensive for a DC-based trade association.
Membership could spread to other types of businesses, Denis said. “I’d like to expand the tent to other industries,” he noted. “The association is trying to represent the interests of small business and make sure they have every finance option available to them.”
But a key purpose of the trade association is to provide a forum for members to come together as an industry, Denis said. “We’re thinking big,” he admitted. “We hope that all members of the marketplace will want to become a part of it.”
grp funding is collecting daily "bfs recvbls ach" -- (just received recent statements from my client i funded with grp), i was under the assumption that bfs and grp are t...
$78k total monthly deposits with 98% of it being cc sales? if they're only looking for $30k, this shouldn't be more than a 5-6 month deal at an 8% hol...
grp funding--- same as bfs, hunter caroline-- aggressive funder, kalamata capital-- larger size deals, max advance--- pioneer in the industry, national funding--- 1st position lender upsell up to 20 pts, pearl capital--- awesome stacker, pledgecap-- tangible goods lender- (lender takes possession of items or items put up for collateral), premier capital funding--- great funder,upsell up to 15 points with weekly payments beats everest and knight offers 9 out of 10 times, principis capital--- selective funder, quarterspot-- most occasion funder will offer 200% of receivables as long as no more than 3 nsf's in 3 month time frame on statements, rapidadvance-- pioneer , snap advances--- great 1st position offers out to 18 months if merchant qualifies, sos capital--- great stacker , strategic funding source-- pioneer 1st position funder, wall str...