A few short years after imprudent consumer lending helped trigger the Great Recession, some financial companies have emerged that actually take just seconds to decide whether to approve a loan application. And the entire process is automated.
One such firm is AvantCredit, which wrote its first loan in January 2013 and currently is writing about 13,000 to 15,000 per month, says CFO Suk Shah. The number 500 is strangely prominent for the firm at present: it has garnered about $500 million in equity funding and another $500 million in debt funding, underwritten approximately $500 million worth of loans and hired around 500 employees.
AvantCredit uses multiple technology tools to approve or deny loan applications within 8 to 10 seconds. For example, Yodlee, a consumer account aggregation service, also provides a service that allows lenders, with the consumer’s approval, to look into the applicant’s bank account to verify income and employer. “We use various facets of technology to ensure that we are providing an even more robust underwriting mechanism than a brick-and-mortar lender would do,” Shah claims.
The fast pace and the departure from banking tradition were big draws for Shah, who joined the firm in July. He had been working at General Electric for eight years, the last few at GE Capital, when he and some co-workers moved in 2010 to HSBC. He was promoted in January 2013 to CFO of the big bank’s North American commercial banking division, but he eventually decided he wanted a different sort of career path.
“If you’re in big banking today, your career is probably very different from what it would have been a few years ago,” Shah says. “You’re heavily involved in Basel III and all the regulatory work around Dodd-Frank. There are so many rules. I felt more like a lawyer than an operational CFO, and that wasn’t where I was going to play out my career. So why not join a fast up-and-coming organization [that is not a depository institution and thus is] subject to much less regulation, where I could be a lot more flexible in terms of leading rather than being led by the regulators?”
He says unsecured consumer lending is a very different business from senior secured commercial lending, but it’s familiar to him nonetheless. “At the end of the day you’re still lending money, you make cash the same way, and to the extent you need to generate good margins and reduce costs, it’s the same game.”
All of the applications to AvantCredit are made online. A majority of customers arrive from partners like LendingTree and CreditKarma, which act as exchanges that connect lenders with consumers seeking loans. AvantCredit also uses digital marketing — purchasing Google keywords, for example — and direct mail to drum up customers.
The firm’s target market is consumers with FICO scores in the 600-700 range, whom, according to Shah, are very underserved. “Since the recession, there has been a massive vacuum of capital for what we call the mid-prime and near-prime credit capacity,” he says. LendingClub and Prosper are doing what AvantCredit is doing, with e-applications and e-approvals, but in the FICO 660-and-above market, Shah notes, while Payday Loan focuses on the under-600 space. “On a FICO basis we probably compete with SpringLeaf and OneMain [Citigroup’s subprime lending unit, which recently filed for an IPO], but we bring the experience online, where a consumer doesn’t have to walk into a bank or talk to anybody,” he says.
But despite defining its target market on a FICO-score basis, Shah says that within that 600-700 range, a FICO score is actually a poor predictor of whether someone will reliably pay back a loan. “It’s a gray space,” he says. “It’s people who are not living paycheck to paycheck but haven’t necessarily made every payment on time, maybe because of a medical emergency or something. So we use other attributes to determine whether an applicant is likely to charge off,” or fail to pay.
AvantCredit has written about 100,000 loans, averaging $5,000 with a 36% interest rate over a three-year term. But as even the oldest loans were written less than two years ago, the firm doesn’t yet have a robust database on the loans’ performance. Shah, however, says an expected trend is now emerging: if a borrower is going to “charge off,” it will happen within the first three payment dates.
That’s giving the company a lot of credibility with investors and lenders, Shah says. Indeed, on Dec. 4 it announced a $225 million Series D funding round and a $300 million expansion of its credit facility.
Shah, meanwhile, is not only CFO but also “head of talent.” That’s not just an informal title. Despite now having 500 employees, the firm has no HR leader other than Shah. “That’s an easy transition for me,” he says, “having gone through GE’s financial management program and having led large teams. I have the experience to understand how to develop, mentor and grow people, and it was easier [to give me that role] than bring in someone off the street at a big salary to do the same thing.”
That will happen eventually, though, perhaps as soon as six months from now. Given the firm’s quick growth, and the fact that Lending Club, OneMain and small-business e-lender OnDeck are all getting ready to go public, “my time will be spread pretty thin,” Shah says.
He adds that AvantCredit’s commitment to its people is underscored by investments in their future. Buoyed by the $1 billion in funding it’s collected, the firm offers 401(k) plan matching contributions and up to $2,500 to pay for continuing-education classes. “Not many start-ups are doing things like that 20 months in,” he notes. Select individuals are eligible for a fully paid MBA program taken on a part-time basis, provided they agree to stay with the company for a few years.
The firm also has a leadership training program based loosely on General Electric’s FMP program. “It’s not as rigid as the FMP — we’re a start-up and need to be flexible, so it’s not a locked-in-step, six-month rotational program,” Shah says. “But it gives kids who are maybe two or three years out of school, and maybe have done a bit of investment banking or consulting but want to be generalists who might one day be CEOs or general managers or even CFOs, the opportunity not to be siloed in a particular area.”
The goal is to move 15 to 20 people a year through the program.