Kevin Travers was a Reporter at deBanked.
Articles by Kevin Travers
Avant CEO: Colorado Decision Framework for Bank Fintech Partnerships
October 13, 2020
After three years of litigation, in August, the Colorado “true lender” case settled with an agreement between the fintech lenders, bank partners, and the state regulators. Along with lending restrictions above a 36% APR, the fintech lenders will have to maintain a state lending license and comply with other regulatory practices.
The decision has been called unfair regulation and a bad precedent for other similar regulatory disputes across the country.
But James Paris, the CEO of Avant, sees the decision as a victory for fintech lenders. Paris said the decision was an excellent framework for fintech/bank partnerships across the nation and a sign that regulators are finally taking the benefits of alternative finance seriously.
“For us, the case also involved being able to continue to provide these good credit products to deserving customers who maybe weren’t being served as well through some of the legacy providers,” Paris said.
Paris called back to the Madden vs. Midland Funding case in the US Court of Appeals Second Circuit decided in 2015. That case called into question if loans made in fintech bank partnerships in the state of New York were valid at the time of origination. Regulators charged that though national banks can create loans higher than state regulations allow, fintech partners buying those loans to take advantage of higher rates were skirting state regulations.
“The ruling was essentially that the loan would not continue to be valid,” Paris said. “Because the individual state in question, which was New York’s local usury law, would apply because it was no longer a national bank that held that loan after it had been sold.”
The decision called into question loans made in the fintech space. Paris said that the Colorado true lender Case was not about whether the banks were even making loans. Instead, fintech lenders were called the true originators and therefore didn’t have a license that allowed them to make loans at higher rates than the state allowed.
Paris said the decision showed confidence that fintech bank partnerships were not exporting rates, and that by limiting lending to under 36%, regulators were protecting bank fintech partnerships and consumers.
“All of the lending Avant does is under 36%, and that’s been the case for years,” Paris said. “In the space where we do play, from 9% to just under 35%, through our partnership with WebBank, we are confident in running a portfolio extremely focused on regulatory compliance.”
Colorado went from not allowing partnerships at all, to working with fintech companies to developing a set of terms that allowed partnerships to function, Paris said. He added that Avant’s products have always been to customers below nonprime credit, from 550 to 680 Fico scores, serviced by up to 36% APRs.
Paris said he does not know about customers outside of this range, or how they are affected by limiting APR to 36%, but he cited a study done by economist Dr. Michael Turner. Turner is the CEO and founder of the Policy and Economic Research Council (PERC), a non-profit research center.
The study compared lending after the Madden case in New York with how customers can be served after the Colorado true lender case. In the credit market Avant serves, Turner found that customers are better off with access to regulated fintech loans, as opposed to not having access at all.
The study looked at the average borrower credit score, APR, and loan size of Avant and WebBank borrowers, and found that if WebBank loans through Avant were prohibited, borrowers would be forced to access other means of credit, through much higher rates.
“Should WebBank loans be prohibited in Colorado, then we can reasonably expect that some non-trivial portion of the WebBank loan borrower population, as well as prospective future borrowers, will be forced to meet their credit needs with higher cost products,” Turner wrote. “This outcome is financially detrimental for this borrower population, most of whom have no access to more affordable mainstream alternatives.”
Given this data, Paris is happy to comply with the regulation. Without the framework Colorado has provided, Paris said borrowers would be worse off. Paris hopes that this decision will precede other state frameworks because what fintech bank partnerships need the most are consistent regulatory practices.
“I’m hopeful that to the extent there are ongoing concerns around bank models across other states, that this type of safe harbor model that Colorado helped develop is something that others could look to as a precedent or a model. Because I think the more that we can have consistency across the relevant jurisdictions, the better.”
DailyPay Allows Early Paychecks, Sees Adoption Rise in Pandemic Era
October 9, 2020
Americans are worried about paying their bills. DailyPay, a payment flexibility platform, gives businesses the ability to let workers access their paycheck early. For customers using the platform— no more waiting for payday.
DailyPay has offered flexible payment since being founded in 2015. Recently, Fortune 500 companies have begun to slowly offer services like it. Last month, Square allowed a select few businesses to let employees cash out using their payment platform, but Vice President of Public Policy Matt Kopko said DailyPay stands apart, offering a payday loan-and-overdraft-killer for just $2-$3.
“We’ve created this industry that’s called the on-demand pay industry,” Kopko said, “which is essentially a technology that allows workers to get paid whenever they want without having to disrupt the employer’s payroll schedule.”
The system works as an employer-sponsored benefit; with business permission, the service collects time clock data, payroll data, and accounting data. DailyPay uses that data to estimate how much money a worker can collect after every shift, or in some cases, every hour worked Kopko said. If a worker is getting paid $2,000 a week, but after withholding gets a $1,300 direct deposit, DailyPay will be able to calculate it.
“So our technology essentially integrates all those systems, allows you to monitor your balance on a constant basis,” Kopko said. “To say: ‘Well, my work yesterday actually accumulated net of all my tax withholdings $123’ and then it’s essentially an ATM for your paycheck.”
Kopko said the product is geared toward the two out of three people in America that are only paid once or twice a month. If the first of the month comes around, but it’s a week to payday, that’s when an employee needs DailyPay- to pay rent when they have no other option.
With pandemic unemployment and state closures, the team at DailyPay has seen an increased interest in the platform. At the beginning of the shutdowns in March, DailyPay saw a 400% increase in users in just three days.
Without using a service like DailyPay, the way these consumers make payments is through overdraft on bank accounts or payday lending, Kopko said. Surveys of DailyPay customers show one in four overdraft two to four times a month. After using the service, that number went down from 25% to 5%. Kopko shared that after using DailyPay, the number of customers relying on overdraft went down 40%.
“We’ve estimated that [customer] financial savings are approximately $1,200 a year,” Kopko said. “It’s not just about a tool for convenience; it’s about putting hundreds of dollars back into people’s pockets, the most vulnerable among them.”
Overdrafts have long been used as evidence toward claims that traditional banking harbors abusive, predatory practices toward the lowest-income working families. In 2017, the CFPB found that nearly 80% of overdrafts originated from the lowest 8% of account holders. That year Americans paid $34 billion in overdraft fees, according to MarketWatch.
Kopko said the platform is not just good for consumers, but businesses as well. He said DailyPay stats show an average of 40% increase in employee retention.
“For employees, we’re seeing tons of financial benefits, and for the employers, we’re seeing financial benefits,” Kopko said. “And it’s all because essentially we created the ability to have new control over your pay.”
Square, Stripe, Intuit, Shopify, Talked SMB Lending at LendIt Fintech 2020
October 8, 2020
The LendIt Fintech digital conference last week was a sign of the times. This year, millions of average businesses and consumers have had to go virtual: they had no choice. 2020 has been a year of struggle and survival, and a time of great fintech adoption.
Some firms have been more successful than others. Going full digital, LendIt introduced virtual networking at the conference- the first day alone saw 2,171 meetings. Zoom meetings and virtual greetings took the place of handshakes and elevator pitches that would regularly accompany the convention.
On day three, LendIt hosted a panel of SMB lending leaders from Stripe, Shopify, Square, and Quickbooks Capital. Bryan Lee, Senior Director of Financial Services for Salesforce, served as moderator and he focused the discussion on “How the leading fintech brands are adapting.”
THE PIVOT
Lee began the talk by asking Eddie Serrill, Business Lead from Stripe Capital, about how the industry has pivoted.
Serrill talked about how Stripe was powering online interactions and saw an influx of traditionally offline businesses switching over to their platforms. Stripe also saw an increased demand for online purchases and payment.
“We’ve been trying to find that right balance between supporting users that have been doing incredibly well,” Serrill said. “While trying to support our users who are seeing a bit of a setback.”
Stripe introduced a lending product in September of last year and now SMBs can borrow from Stripe and pay back by diverting a percentage of their sales, much like the other panelists’ companies offer.
Jessica Jiang, Head of Capital Markets at Square Capital, talked about how her firm adjusted. Square reacted to fill the niche of their underserved customers by introducing a main street lending fund, serving industries hard hit by the pandemic, Jiang said. Small buinesess that relied on in-person action like coffee shops and retail community businesses were given preferential lending options.
Product Lead at Shopify, Richard Shaw, said that this year his firm learned to be prepared for anything. Everything that Shopify was potentially going to do or planning on implementing in the coming years suddenly became a here-and-now necessity.
“We tore up our existing plans,” Shaw said. “It was like the commerce world of 2030 turned up in 2020. You need to do ten years of work, but you need to do it today.”
Shopify, the Canadian e-commerce giant has doubled in value this year. The firm launched Shopify Capital in the US and Canada in 2016 and has originated $1.2 billion in funding to small businesses since that time.
Luke Voiles, the VP of Intuits QuickBooks Capital, talked about how his team handled pandemic conservatively.
“Five years of digital shift has happened instantaneously due to COVID,” Voiles said. “Intuit is pretty recession-resistant in the sense that you have to do taxes, you have to do your accounting, and the shift to digital helps a lot.”
Business lending was different, Voiles said, as soon as his team saw COVID coming, they battened down the hatches, slowed lending, and pivoted to facilitating PPP.
PPP
Voiles said the craziest thing he has seen in his career was what Quickbooks did to deploy PPP aid.
Within about two weeks, almost 500 people from across Intuit came together to shift all the data they carried on customers to aid applications.
“We were uniquely positioned to help solve and deploy that capital,” Voiles said. “We have a payroll business where 1.4 billion business use us, we have a tax business where we have Schedule C tax filings, and we have a lending business. We were able to pivot and put the pieces together quickly.”
QuickBooks Capital deployed $1.2 billion to 31,000 business in a process that Voiles said was 90% automated. Now customers are awaiting other rounds of government aid.
Square’s Jiang said the initial shutdown weeks in March and April saw hundreds of Square team members working on PPP facilitation through the night and weekends. As the funds dried up those first two weeks, it was clear to Jiang the program was favoring larger firms and higher loan amounts, leaving out small businesses.
“That’s typical of investment bankers, but not very typical of tech,” Jiang said. “PPP is a perfect example of how small businesses are continuing to be underserved by banks.”
THE SHAKEOUT AND THE FUTURE
2020 has been a major shock to the lending marketplace. Voiles from Quickbooks said the amount of work it took to make it through the first wave was a significant shakeout.
“You’ve seen what’s happening with Kabbage and OnDeck and other transactions with people getting sold; there is a shakeout happening in the space,” Voiles said. “The bigger players will make it through and will continue to help small businesses get access to capital that they need.”
When asked about the future roadmap of QuickBooks Capital, Voiles said it wasn’t just about automating banking. Using Intuit’s resources to build an automated system is only half of the picture- the firm believes in an expert-driven platform. After the automated process, customers will be able to talk to an expert to review the data, and “check their work.” Voiles said Quickbooks wants to offer a service that is equivalent to the replacement of a CFO.
“These small businesses that have less than ten employees, they can’t afford to hire a pro,” Voiles said. “They need automated support to show them the dashboard and picture of what their business is.”
Pointing to Stripe’s online infrastructure, Serrill exemplified what successful lenders will offer next year: a platform that combines many needs of SMBs in one place.
“I think it’s really about linking all of this data, making it super intuitive and anticipating the need for their users, so they don’t need a team of business school grads to manage their finances,” Serrill said. “So they can get back to building the core of their business, not figuring out whether they have enough cash flow tomorrow.”
Jiang said the future of small business would be written in data, contactless payments, and digital banking. She sees consolidation in the Fintech space and has a positive outlook on bank-fintech partnerships.
The FDIC granted Square a conditional approval for the issuance of an Industrial Loan Company ILC in March this year. Jiang outlined plans on launching an online SMB lending and banking service next year called Square Financial Services if the conditional charter remains in place.
For Shopify’s future, Shaw was excited to look forward to the launching of Shopify balance- a cash flow management system, and Shopify installment payments. He reiterated that the success of Shopify’s lending division was due in part because making loans was not the entire business.
“Shopify Capital is one piece of a wider ecosystem,” Shaw said. “All these things together are more powerful than individual parts.”
Kapitus CEO Speaks on Success of Rating Reaffirmation
October 6, 2020
When lending companies faced the tightest squeeze on capital since the great recession, many ran into trouble. Kapitus, having survived 08′, met 20′ with the same discipline that helped them navigate the pandemic.
“Our whole industry was put on a credit watch downgrade, and it’s very exciting that we were upgraded, reaffirmed to the original rating,” Kapitus CEO and founder Andy Reiser said. “Most of the companies, our peers defaulted and went into what’s called rapid amortization and did not make it through to keep their securitization.”
Reiser was happy to report that Kapitus received a rating affirmation from Kroll Bond Rating Agency (KBRA) on Friday. KBRA has removed the Kapitus securities from a Watch Downgrade.
Back in March, the businesses that Kapitus and their competitors funded across the country, faced state mandated shutdowns. Many customers were suddenly unable to make the loan, MCA, or equipment payments that they had been able to make for years.
For lenders that bundled and securitized the loans they made, the value of those loans was called into question.
On March 30, KBRA placed the ratings of 29 securitizations representing $2.1 billion from 10 SMB lending firms on a “Watch Downgrade” due to the economic downturn.
To overcome the warning, Kapitus reigned in and focused on helping their customers. Reiser cited the addition of Jeff Newman from Citigroup to manage the risk team as an example of how the firm has been focused on funding responsibly for years.
“We focused on strong business practices and keeping the portfolio strong, and it paid off,” Reiser said. “We never stopped, we were not lending at the same velocity that we did pre COVID, but we never had a day that we didn’t fund a new deal.”
Reiser said that during the pandemic’s height, the team took a lot of long nights working on new products. One was a “step renewal” that allowed clients to pay installments and build up to the full payment, to make sure they were not overwhelmed. Kapitus also offered extended periods for their healthcare loans, up to 36 months, Reiser said.
For companies like Kapitus, a questionable rating could lead to a rapid amortization event: a sudden call to liquefy the bonds and give back investor money. For some, an event like this will spell the end: most firms don’t keep hundreds of millions or even billions on hand to give back principals in a moment’s notice.
Reiser said out of the ten securities on credit watch, only one other was reaffirmed, due to a renegotiation of terms that bond investors had to agree on. Kapitus made no negation but was reaffirmed due to the success of their business practice, Reiser said.
The securitization was initially issued for $105 million in June 2018, and expanded to $160 million last December, in three classes with a senior class rating of “A.”
Reiser believes that the pandemic, like the ’08 recessions, will see some consolidation and strong companies prospering in a displaced environment.
“I think COVID will teach a lot of other players that were very aggressive in coming down to this market that it’s not so easy,” Reiser said. “I think some of the banks and the alternative lenders that were more eager to come into this market may not be so aggressive at least for a while.”
CredoLab Lands $7M Funding, Bringing the “Gini” to US, Elsewhere
October 2, 2020
Chief Product Officer Michele Tucci said the platform uses 50,000 data points of mobile phone activity to predict a prospective borrower’s debt capabilities. CredoLab serves the 1.7 billion “credit-invisible” customers across the globe that may have some credit history, but not enough for a score, let alone a prime score.
“We do this in real-time: in less than a second a lender anywhere in the world, receives a credit score from Credolab,” Tucci said. “We don’t know the identity of the user; it’s only known to the bank or the lender, not to Credolab.”
CredoLab anonymously collects thousands of mobile data points, uses that data to create behavioral models, and then derives a credit score. The data can be anything- from the type of apps a user downloads, to the number of calendar events created- even the amount of texts the user sends. Is the user a gambler, a gamer, does the user use a work email during the week, and how many calendar events they schedule- all go into the predictive model.
“Some of these micro behavioral patterns could be the type of files being downloaded. Is it mostly music, or is it PDFs- or the percentage of photos taken in the week prior to the loan application that are selfies,” Tucci said. “So these are all indications that we collect and find a correlation we compare and analyze about 1.3 million micro behavioral patterns.”
Tucci said the CredoLab platform offers unmatched speed and predictability for customers’ future credit habits. He said Credolab helps lenders save money because they can better predict how their borrowers will act. Borrowers benefit by the program: Tucci argued that if lenders can better expect how they will be repaid, they tend to lend more.
The team built the platform for the world’s risk managers, whom Tucci knows constantly worry about the health of their transactions.
“Our CEO and founder Peter Bartek has more than 20 years of experience managing risk,” Tucci said. “So he feels the pain of the CROs out there, and our solution is built to address the very specific needs of chief risk officers.”
To explain the CredoLab platform’s accuracy, Tucci used a data metric called the Gini coefficient, a number between 0 and 1 that identifies to which category a request belongs. In this case, the GINI is used to classify borrowers as creditworthy or unworthy based on their mobile data.
“Zero is like flipping a coin; you have a 50/50 chance of getting the decision right. Basically no predictability,” Tucci said. “A GINI of one is like my wife; she’s always right. You know exactly what outcome to expect every single time.”
CredoLab’s platform has a predictive power of 0.6. Tucci cited World Bank economist David Mckenzie, who found for each decimal increase in GINI, there is a 1% cost savings from a risk point of view.
Software That Automatically Fights For Bank Refunds Adds “PRO Index”
October 1, 2020
Harvest fills a unique role in the fintech world. The platform is an automatic banking advocation software that fights on behalf of users for the best deals possible.
Connect your bank information and the Harvest AI will fight late fees and overdraft fees. Customers are only charged a portion of funds returned, and if the program does not succeed at getting money back, it doesn’t cost the user a cent.
Automatically arguing for better deals, the platform last year saved customers a collective $2 million, and manages $500 million in debt to date.
The brainchild of CEO and founder Nami Baral, Harvest released a new “PRO Index” that builds a credit profile for each customer to pair with information from FICO scores. Harvest created the index to help lenders get better information and for customers to track their financial health. Baral hopes the data will help lenders find a reason to continue credit flowing to those who have hit hard times but still can make their payments.
“In the post-COVID recessionary environment, the creditworthiness of customers continues to plummet,” Baral said. “[Harvest] saw that traditional credit scores do not provide enough of a picture about a customer’s actual worthiness and potential.”
This announcement is not just a press release, but a continuation of the founding premise of Harvest: to help the average American overcome debt and build financial health.
Baral, a Nepali native, came to America during the last financial crisis on a scholarship to study ovarian cancer at Harvard medical school. Expecting the country to be a utopic economic powerhouse, Baral instead saw lost jobs, defaulting mortgages, and debt.
“In many ways, America is one of the most wonderful places in the world,” Baral said. “But at the time it was a complete departure from what I’d hoped the US to be, because what I saw was, people were losing their jobs, losing their homes in the financial crisis.”
She decided to work toward fixing the problems she saw, pivoting to study finance. Graduating with an applied math and economics degree, Baral then trained in investment banking. She worked on an auto-advocation software for a digital advertisement startup that was eventually bought by Twitter.
She had seen a company’s growth from IPO to merger and stayed at Twitter for four years. When she left, she began market research, talking to everyday Americans about what they needed to improve their finances.
“In those conversations with people from all over the US, Alaska, Oklahoma, San Francisco, New York everywhere,” Baral said, “I realized that the issues plaguing Americans in the last financial crisis had not gone away.”
Baral said these issues had intensified over this past decade. Incomes were volatile and stagnating, student loans had risen, and the people Baral talked too were getting more and more into debt.
“So I thought what the average American needs today is not another savings product, not yet another investment product,” Baral said. “But something that can help them reduce the debt that they have in their lives. That’s the genesis of Harvest.”
With the addition of the PRO Index, Baral is excited to offer another way Americans can maintain their financial health. She said that during the pandemic, every day could be a challenge for the average American, but the new platform can act as a barometer and compass.
“A lot can change between the time you extend a loan to the customer versus when they have to pay,” Baral said. “We call that Ability-to-pay as-a-service, and that’s where the PRO Index is used, determining: ‘is this customer still healthy? is my overall portfolio still healthy?'”
If the customer is no longer healthy, the info gathered to form the PRO Index, like transactional cash flow data, can supply lenders with information on improving their health. Baral says the platform encourages lenders to keep customers and shows borrowers how to improve their credit standing.
Capify CEO David Goldin on New $10 Million Equity Round
September 30, 2020
Capify, a leading international small business lending platform, announced a $10 million equity round this week from a new investment group with vast experience in the alternative lending industry.
“[investors were] diligent seeing Capify, the management team, and the opportunity,” Goldin said. “They thought it was a very good investment, particularly how Capify’s portfolio performed during the pandemic.”
Goldin said the capital is a great “restart of the engine” after the cautious approach the company took to lending at the height of the pandemic. The money is not an equity round from current investors, but rather new capital joining the team.
The funding will be directed toward ramping lending back up and extending business partnerships with firms that serve small businesses, as well as direct and indirect lenders.
“So, hindsight is actually better than 2020 vision; no one in our lifetime has experienced the pandemic,” Goldin said. “No one knew what to expect from a risk profile, so we took the conservative approach.”
That approach was to shut down new loans and focus on servicing its current customers. It was a difficult time for the alternative lending industry veteran, but now Goldin said he sees a great demand for capital.
“This was one of the toughest challenges that I’ve experienced ever as an entrepreneur,” Goldin said. “The result really speaks to Capify as a company. People are willing to make that investment, believing in opportunity ahead and not the current times or the past during the pandemic.”
Goldin said that Capify has always been known for its well-performing portfolio, one of the reasons that in 2019 the firm received a $95 million credit facility from Goldman Sachs’ Merchant Banking Division.
Goldin began working in the fintech industry before the word fintech was even coined; in the early 2000s, he started one of the first MCA companies. Amerimerchant started selling loans and MCAs internationally in the UK and Australia in 2008, then rebranded to Capify in 2015. After leaving the US market in 2017 gained Goldman’s attention last year.
“So now that we have the firepower, we believe there’ll be opportunities in these markets as demand picks up for small business lending,” Goldin said.
Prashant Fuloria Explains Why Fundbox Has Been Successful in 2020
September 28, 2020
When Prashant Fuloria joined Fundbox as Chief Operations Officer in 2016, the San Franciscan firm was a three-year-old startup with less than eighty employees. By the time Fuloria moved into the office of CEO this July, the small business credit and invoice financing company had grown exponentially, with more than $430 million in raised capital to date and triple the number of employees.
At the height of the pandemic, many firms halted funding or shuttered their doors for good. Meanwhile Fundbox kept lending, and outperformed the market, Fuloria said.
“It’s become very clear to us that we have greatly outperformed the market,” Fuloria said. “In terms of delivering value to customers, and also in terms of our business performance.”
In the toughest weeks of the pandemic, he said that Fundbox’s loan delinquency rose to 8-9%, up from a “low single-digit number” pre-pandemic. In comparison, the industry standard according to Fuloria, was a delinquency rate of 30-40%, including from larger firms and more traditional lenders like big banks.
“I think we’ve performed extremely well during COVID; the numbers just validate the investment we’ve made, especially in data,” Fuloria said. “That puts us in a very good position because a number of folks have exited the market and the need, the demand has not gone away.”
The number one thing you can do to perform well in a recession is to have a strong business going into it, Fuloria explained. Fundbox attributes part of its strength to its data. Nearly a fourth of Fundbox’s capital goes toward data assets, Fuloria said.
“If you add it all up, we’ve invested a little over $100 million in our data asset,” Fuloria said. “It’s a big investment for anybody- particularly a big investment for a mid-sized company.”
Fuloria said this money goes toward collecting customer information, which is processed by in-house tech and a talented team of engineers who can turn data into valuable information for serving SMBs.
“Small businesses,” Fuloria said, “they have the complexity of enterprises but the scale of consumers.”
Coming from twenty years of tech and product managerial experience at firms like Google, Facebook, and Yahoo, Fuloria knows a thing or two about scale. He said he found his roots at Google, working when it was just a small team- by the time he left six and a half years later, Google had 35,000 employees.
When it came to joining Fundbox in 2016, Fuloria said he was attracted by the company’s mission, the talented team there, and how in just three years, the small firm had demonstrated how it could help SMBs.
“Fundbox as a company said ‘We are a financial services platform that is powering the small business economy with new credit and payment solutions,'” Fuloria said. “And that mission was very strong: it made sense to me, and it resonated with me.”
