Articles by Srividya Kalyanaraman
Without admitting or denying any of the CFPB’s findings, Wells Fargo has consented to a $3.6 million fine over alleged unfair penalties imposed on certain student borrowers. They must pay another $410,000 to cover consumer injuries.
The South Dakota-based Education Financial Services is a division of Wells Fargo that lends to approximately 1.3 million consumers in all 50 states.
“If a borrower made a payment that was not enough to cover the total amount due for all loans in an account, the bank divided that payment across the loans in a way that maximized late fees rather than satisfying payments for some of the loans,” CFPB said in a statement.
The bank also misled borrowers on partial payments, charged certain consumers late fees for payments made on the last day of the grace period and also failed to correct inaccurate information on credit reports of borrowers.
Reuters quoted a Wells Fargo spokesperson saying that the settlement revolves around procedures that were retired or improved many years ago and impacts a small number of customers.
The bureau also required the bank to provide consumers with disclosures explaining how the bank applies and allocates payments and correct inaccurate information on borrower credit reports.
Updated: Goldman Sachs’ online lending venture Marcus launched on Thursday.
The investment bank had earlier planned to call it ‘Mosaic’ and its aimed at borrowers with high credit scores (above 660) looking to consolidate debt.
Notably, it’s invite-only for now, meaning the only people who can apply are those who receive a special code from them in the mail. Might that potentially be Lending Club’s customers?
The bank is coming out swinging by promoting their no-late-fee, no-origination-fee, no-fee-of-any-kind-outside-of-interest-charges platform, something no marketplace lender can compete with.
Goldman has been laying the groundwork for Marcus since the beginning of the year. The bank made several key hires for the project including former Consumer Financial Protection Bureau attorney, Mitch Hochberg who was roped in to head compliance for the unit. The venture will be lead by Harit Talwar, former head of card services at Discover Financial and executives from American Express and Lending Club.
As deBanked commented earlier, Goldman’s foray in the crowded online lending universe could be too little, too late with a me-too product. It’s quickly-processed consumer loans might have to compete not only with incumbents like Lending Club, Prosper Loans and Avant but also with other bigger banks like Discover and Chase.
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.
Avant lost 30 percent of its staff to the voluntary severance program it offered its employees last month , and CEO Al Goldstein’s wife and chief compliance officer, Anna Fridman is said to retire at the end of the quarter.
The Chicago-based subprime lender has had a spate of troubles recently, jeopardizing investor confidence in the company. The 30 percent staff cut was originally going to be 40 percent and the company had planned to cut two thirds of their loan volume. They also pulled back on their auto refinancing plans.
But things are getting better..or are not as bad as they sound. Avant has been making progress on some fronts — it closed a $255 million asset-backed securitization led by JP Morgan and Credit Suisse as well as renewed a $392 million warehouse facility with the banks and plans to start charging fees on its loans to keep its investors from going astray.
Avant’s model, as The Wall Street Journal noted was built on selling loans at a premium to the investors and not charging fees to the borrower. And as investors retreated, Avant decided to pivot too. The lender said it plans to charge an “administration fee,” competitively priced at 1.75 percent to 3.75 percent of the loan amount. The company hopes to keep its investors roped in by making loans cheaper for them.
Will it work? There’s only one way to find out.
Online small business loan marketplace, Bizfi said that it originated over $144 million in Q2 this year, a 25 percent increase compared to $116 million in Q2 last year. The New York-based company has facilitated financing for more than 3,580 small businesses through its platform.
The company forged many partnerships to expand its customer base and access to small businesses. In March of this year, Bizfi announced a partnership with Western Independent Bankers (WIB), a trade association with community and regional banks across the Western United States and in July, it joined hands with the National Directory of Registered Tax Return Preparers & Professionals (PTIN).
Bizfi also secured a $20 million investment from New York-based investment manager Metropolitan Equity Partners in June this year, supplementing the $65 million infusion in December last year to expand and optimize its funding programs and develop an effective marketing campaign to advertise those better.
In other news, small business lender CAN Capital and Entrepreneur Media launched the funding center offering funding products that include term loans — available from $2,500 up to $150,000 for a single location with range of terms from 3 to 36 months. Trak loans which are working capital loans available from $2,500 up to $150,000 and installment Loans provide funding from $50,000 to $100,000 with 2, 3, and 4 year terms and have fixed monthly payments.
The majority (52.5 percent) of employees in the banking and insurance industries are women — if this sounds strange, that’s because it is, considering only 1.4 percent eventually go on to become CEOs. While the male dominance is not apparent at the mid-management executive level, the sex ratio is rather skewed on top. Needless to say?
deBanked grabbed the opportunity to speak to three women in the alternative business financing industry, charting their journey, reliving their experience, knowledge and the lessons that got them to where they are. Here are excerpts from the interviews.
Back to Roots
For some, their careers are not a deliberate choice, but a serendipitous stumble.
Heather Francis, CEO of Florida-based Elevate Funding, who went to college to become a healthcare professional entered finance by happenstance. “I went to school for health promotion and education at the University of Florida and graduated in 2007,” said Francis, who comes from a family of entrepreneurs and is a fifth generation Floridian. “I found that the position I was looking for was not a necessity for companies, it was a luxury like setting up gyms, that people were not willing to pay for at that time.”
Francis landed her first job in finance with a private equity firm called Strategic Funding in Gainesville, Florida where she set up the firm’s merchant cash advance business. After spending seven years there, in 2014, she set up Elevate Funding which in a short span of 16 months has made over 1,000 advances to businesses.
For Kabbage Loans cofounder Kathryn Petralia too, fintech was a far cry from wanting to be an English professor. A graduate from Furman University, Petralia’s tryst with finance was when she got roped into a project, valuing companies using data compression tools. Riding on building her tech expertise, she founded her first company at 25 which made store catalogues digital. “I was a kid and did not know anything about marketing or sales, so I ended up selling the startup to the company which helped me build it.” The venture however gave her an in into finance and she went on to work for Revolution Money and eventually built Kabbage Loans.
But for Danille Rivelli, VP of Sales at United Capital Source, however, the jump wasn’t as big or unusual. Although finance was not originally on her mind as an art major, it was a natural path from what she began doing to acquire real-world work experience during school, selling mortgages. Rivelli changed her academic focus and went on to get a business degree from Briarcliff College, where she also played on the softball team.
“A year or two into college, I started doing mortgages, making 5 percent commissions. It was natural and it just kinda flowed,” said Rivelli whose first job out of college was on the sales floor at Merchant Cash Capital, now Bizfi. “I wanted to get out of mortgages and I was hooked when I saw the sales floor, it was fun and upbeat.” She was also one of the company’s youngest salespeople at the time.
Women Can Do No Wrong. Or Can They?
When we asked what women need to do differently at workplaces? The answer was quick, resounding and not surprisingly – be more assertive.
“Women think from the heart more than the mind,” said Rivelli. “I find myself in situations sometimes where I know that I should be ‘leaving the emotions out of it’ so that I’m not second-guessing myself as much.” But it’s what helps her build lasting relationships with clients. “I think most effective sales people will agree that the most important part of our job is listening. You want to really know and understand who your client is and what they’re looking for before you try to sell to them.”
According to Petralia, who thinks of herself as ‘one-of-the-guys,’ the problem lies in overplaying the differences between men and women. “I think we perpetuate the stereotype that men are supposed to behave a certain way and women aren’t. I notice that when men crack a joke or use a curse word, they immediately apologize to the women in the room. We are making that happen,” she said. Petralia’s strategy in such scenarios is to swing to the other side and initiate banter. “I am very comfortable with dirty jokes and f-bombs.”
“Men are really good at faking it ’til they make it. They position themselves as experts when they are not but women are unsure of jumping into the deep end when they are not sure they can swim and that’s a big part of what we have to overcome,” Petralia said.
Francis is on the same page, “Men have no problem tooting their horn, but women don’t do that. We cannot expect anyone to stand up for us. If you think you’re getting looked over for a promotion, walk up to your boss and say it,” she said. Francis talks about most of the struggle being personal rather than operational. “I will admit to us having a need to be right… right about decisions, right in arguments and right about where the furniture goes,” she says jokingly. “A lot of what led me to start Elevate was my belief in that you could service the risky credit market without taking advantage or putting insane demands on the performance of the portfolio and still be successful… having that theory validated and accepted and in the end, being right.”
What’s the hurdle, what’s the race?
And the assertiveness comes from one’s belief in their struggle and the value of that struggle. Petralia reminisces of a time when as a scrimping 25-year-old entrepreneur, she pitched a tent and stayed on a campsite in San Francisco while raising money for her startup. Two decades later, she runs a billion dollar lending company. Petralia recognizes that not all women have the same opportunities.
“When I was raising money for Kabbage, I realized that I had only been in one or two meetings where a woman wasn’t bringing me water,” said Petralia who believes that bringing diversity requires work and companies should set targets and find qualified diverse candidates.
Kabbage allows for 12 weeks of maternity leave but that pales in comparison with other countries, says Petralia. “The problem with women is, we have the babies. Women have to choose between their careers and personal life and we are not even close to making that situation better. The key time in their 30s when they are having kids, they come back to compete with younger people who are cheaper.”
The movement to make it better, according to her should begin with creating a system of incentives like better child care, easy commute to work etc. where women don’t have to choose between advancing their career and having a child.
And her other gripe is limp handshakes from men. “Shake women’s hands better. Men give this limp, deadfish like handshake at conferences to women and it’s the worst.”
According to Francis, equal footing comes from striving for professional equality and representation. She says being a woman opens many doors but that’s where it stops. “People will talk to you nicely if you’re a woman but they don’t think you are the person making the decision. You have the ability to start the conversation but no one thinks that you can finish it.”
And for Rivelli, that means giving it your all. “The point is to keep being so good that no one can ignore you,” she said.
Online lender OnDeck appointed Capital One Garage co-founder, Gagan Kanjila as vice president of Product to lead design, manage channels and spearhead business initiatives.
Kanjila joined Capital One in 2001 as program manager in the credit card collections department. Since then, he has built and ran the digital product for financial services, auto finance and home loans divisions. With 20 years of experience, Kanjlia launched the first savings product that earned airline miles, the mortgage industry’s first instantly-issued mobile prequalification and the country’s second largest digital-only bank.
“This newly created role on our senior management team reinforces our commitment to product and technology innovation as key drivers of our growth,” said CEO Noah Breslow in a statement. “In addition to leading the product team to optimize our customer experience and existing credit offerings, Gagan will spearhead new initiatives that build upon OnDeck’s expertise in using new data, analytics, and technology to transform small business lending.”
This comes at a time when the company is transitioning from a marketplace lender to a balance sheet lender. Earlier this week, (August 8th) the company reported a $17.9 million loss in its Q2 earnings but funded a record $590 million in loans. The move cost the company a fair share of its cash reserve — from $160 million on December 31, 2015 to only $78 million at the end of Q2. OnDeck CFO Howard Katzenberg said that this wasn’t a burn, but rather cash being invested into their loans, all part of their plan of moving away from the marketplace.
Utah-based marketplace Lendio said that it has help facilitate over $250 million in funding transactions on its platform to over 10,000 small businesses. $55 million was originated in Q2 alone.
Lendio’s partnerships have been paying off. Deals with GoDaddy and Staples originated $14 million and $4 million, respectively in Q2 of this year.
Last month (July 21), the company joined hands with digital marketing firm Townsquare Media in cross-promoting products and services. The company has also been pushing the SMART Box initiative spearheaded by the Innovative Lending Platform Association.
“As leaders and stewards in this industry, we feel it is imperative to rally around a common ground of best practices so the responsible flow of capital to Main Street continues and expands,” Blake added. “Providing business owners with the most complete information is one way to make sure that happens.”