After $3.5 billion in business loans spread across 100,000 customers, online lender Kabbage is showing one successful path for the fintech industry. In this Knowledge@Wharton interview, Spencer Robinson, head of strategy for the company, explains what Kabbage has discovered that allows it to approve loans in minutes, versus what he says can often be a multi-week slog with traditional banks. Robinson spoke with Knowledge@Wharton during a recent conference at the Federal Reserve Bank of Philadelphia — “Fintech: The Impact on Consumers, Banking, and Regulatory Policy,” where he also was a speaker.
An edited transcript of the conversation appears below.
Knowledge@Wharton: Your website notes that you’ve provided $3.5 billion in financing to some 100,000 businesses online, and you’re still not a household word, which, with those kinds of numbers, surprises me. So you seem like a good example of these fintech companies that are stealthily disrupting parts of the financial landscape and then, one day you’ll be big enough and people will actually sit up and take notice. Do you see your company that way?
Spencer Robinson: Our brand recognition has really shot up the last couple years — that’s as much to do with the industry as it is our place inside of the industry. The industry is getting more recognizable. People understand it. It’s become a standard question when you talk to small businesses and people about lending: “Are you going to look at the online lenders.” And I think all of that is helpful.
We sit at the top crop of that set of people and that’s where we’re happy to be. I agree with you, I think we’ll be more of a household name as the industry continues to grow. Our partnership capabilities with the large financial institutions around the world, I think, will drive that as well.
Knowledge@Wharton: Back in the dotcom age, 17 or 18 years ago, there were companies trying to do this. I don’t think too many succeeded. What happened in the meantime? Was it that technology got better? People learned from mistakes?
Robinson: All of the above. Technology has definitely improved to the point where what we do with data, I would say, is mainstream now. You can find the technologies to do it. You can find the people to do it. You go backwards 15, 16, 17 years and these people were few and far between. The concept of data science and big data was something still largely in the academic space. And so trying to go mainstream with something like that was a little more difficult.
“It’s become a standard question when you talk to small-businesses … “Are you going to look at the on-line lenders.”
Obviously some people were able to do it. Capital One really changed the way people looked at consumer credit finance. And that sort of mindset really helps lay the foundation for the types of things that we do. But specifically when we look at our ability to succeed here, … we came into the industry with a bit of a different view. We came into it with a view of what can we do with the data? This data is obviously going to be useful to predict the capabilities of a business. Whereas what you see is a lot of people find a niche in finance and a niche in lending and say, “oh, I’m going to go fill that.” And I think that difference in mindset just really has allowed us to grow successfully and grow appropriately.
Knowledge@Wharton: It’s interesting, the difference between you and a traditional lender. I’ve seen stories about Kabbage. One is about a small business owner who wanted to borrow $50,000 and they took their loan request to a bank. It took three weeks and the answer was “no.” And then they went to you and they got their $50,000 in six minutes. Why can’t banks do that? Why is it that you can do that?
Robinson: I would say banks can. A lot of times it’s a matter of getting out of your own way. A lot of what we try to push, what we try to speak about, what we try to evangelize, if you will, is if you look at the credit process and you look at the lending process, and you really start to question why you’re doing various things, we find there are faster, easier, better ways to do it. And with the advent of the availability of the amount of data that’s out there you can really take advantage of that to answer the same questions that banks have been asking for years [and do it in] six minutes rather than three weeks.
Knowledge@Wharton: There’s a big difference in interest rate charges. What is your average interest rate now?
Robinson: Our APR average is right at about 39% to 40%. The fact of the matter is it costs me a lot more to operate than it does a bank. So all of those factors have to come into that. But I do like to say, especially when you’re looking at small-business lending and small-business finance, APR is not really the most fair way to approach it from the businesses standpoint.
Yes, if you compare that to your credit card, it’s more expensive. But you are not going out and buying a TV. You’re buying appreciating assets, not depreciating assets. And when you take that into the consideration, the effect of APR at the end of the day there becomes extremely low. It’s truly opportunity cost that you’re looking at rather than the costs of the funds themselves.
Knowledge@Wharton: Would you say that you have higher losses on bad loans than banks because you’re doing things in a different way?
Robinson: No. I would not say that. What I would say is I operate with a significantly larger band of the credit spectrum. And so if you look at my cream of the crop, if you will, my cream of the crop is going to compare to anybody’s cream of the crop in terms of loss rates. The thing is I go far deeper than a bank would even be willing to consider. There’s a whole lot of reasons I can go far deeper. Yes, my capabilities with the data allows me to be a lot more precise. And that precision matters the farther down you go into the credit book. My range of losses aren’t going to be as large as you would expect from more traditional decisioning processes there. And quite frankly [there is] brand risk. A large financial institution just physically can’t offer the products at the prices which I can. And I’m able to fill that niche of providing credit to people who otherwise wouldn’t be able to get it.
Knowledge@Wharton: What is the highest amount that you lend?
Robinson: We’re at $150,000 now.
Knowledge@Wharton: It sounds like your ability through data analytics is your secret sauce, that’s your differentiator would you say from most other companies?
“Our process is literally six minutes start to finish from the business owner’s perspective.”
Robinson: I’d say that’s half the story. The other half of the story is our view of the experience of the customer. Our capabilities of the data allow that different view of the experience for the customer. But we drive for that simplicity and that ease from the end customer’s perspective. When you mentioned the six minutes before, the six minutes versus three weeks, what you didn’t account for in there is the time that the business itself had to spend getting all of their stuff ready. And so our process is literally six minutes start to finish from the business owner’s perspective. That same business owner that walked into the bank and had to wait three weeks probably spent three weeks before he walked into the bank getting everything in order. The bank asks him to translate his business to them. We say, “Give us you, we’ll translate you to us.”
Knowledge@Wharton: Are you partnering with any big banks?
Robinson: We have several partnerships around the world.
Knowledge@Wharton: How do they work? How do they leverage you? How do you leverage them?
Robinson: The underlying platform that Kabbage.com runs off of, we offer that platform as a service to financial institutions. What this means is the capability of the data aggregation, the capability of connecting to external sources, that continuous flow of data that comes in is a very important factor that really allows the creativity with the product set. We sell those capabilities to the banks so that they can reach their customers in a more intimate fashion.
The level of integration spans from a core technical integration, where we’re connecting deep into the bank’s financial products themselves, all the way out to — we’ll either connect in with their existing user experiences or develop a customer experience for the bank.
Knowledge@Wharton: With the Equifax situation everyone has new big concerns about cyber security. How do you look at that? You are only online and so you’ve probably had more experience than some others.
Robinson: It’s something that you can’t turn a blind eye to. You can’t just assume everything’s going to be okay. Security, in particular it comes down to data security, is something that you look in the face of every day. There are a number of things that we do to protect our data and keep it safe. That, at the end of the day, is the most important thing to us. If that data, if the trust with that data and that data security goes away, then that becomes a significant problem for any customer doing business with someone who’s interacting with that data.
We also have the benefit of we started seven years ago. Technology was different seven years ago than it was 50 years ago when other institutions were beginning. So we don’t have some of the legacy stuff that’s had to evolve over the ages. So when we started security and data security, data privacy was already a big thing. It’s something we were able to build in really from the ground up rather than trying to go back as we learn more and technology evolves and say, “We’ve got to put this protection on, that protection on.” And that’s where you see some of the older companies struggle with trying to keep up with the technology and still keep the security in place.
Knowledge@Wharton: How do you think your company will change in the next two to three years?
Where you’ll see Kabbage really continue to push and evolve the space is where I talk about that simplicity and that customization for the end customer itself. The end idea here is to philosophically get us back to what it used to be for a small business and their banker — walk in and the bank knew you. Your banker knew who you were, knew what you were trying to do, knew what you needed. There’s no reason we can’t replicate that same sort of interaction with the sets of data we have available today.
“Our APR average is right at about 39%-40%. The fact of the matter is it costs me a lot more to operate than it does a bank.”
And rather than force you, the small business owner, to choose between these standard five products that we offer, we say here’s what’s best for you, your business, for what you’re doing right now. And through that you’ll be able to get better utilization out of the customers, better repayment behavior, and really better growth out of the small businesses themselves, which is good for all of us.
Knowledge@Wharton: Are there certain kinds of businesses or professions that use your services more than others because given the interest rates — that’s going to limit the number of people who are going to come to you?
Robinson: Quite frankly, no. If you look across our book it’s a pretty even swath of what you’d expect to see in a small business landscape. You go back to our early days, we formed out of e-commerce if you will. So we’re still a little heavy in the retail space. If you look at our product it’s still relatively retail-centric. But there are applications and uses for industries across the board. As we’ve pushed out there we’ve seen that expansion take place as well.
We’re definitely a small- to medium-business product. I have businesses doing $50 million to $100 million a year. I don’t have a ton of them, because it does come to a point where you start to evolve into a different type of product set. And when you talked about the highest loan amount we do, the follow-on questions would be, what different structures do we do? What are our longest terms? Our attempt is to grow and grow up with our businesses into those various product sets as well, so that there is no need for you to go somewhere else — we can grow and evolve there with you.
Knowledge@Wharton: Do you have an average term for a loan?
Robinson: Currently what the customers get access to with Kabbage is essentially a line of credit-type product. So, we’ll offer you an amount of money that you can use as needed, and that’s where the continuous flow of data comes because I’m able to evaluate that account level exposures over a period of time, so I can put together that seeming line of credit.
The individual draws installment loans with terms of six months or 12 months. Our fee structure allows you to repay at any point, and so once you repay the fees stop. You only pay for the funds for the amount of time that you use it versus a number of other companies in the market — they’ll front-load those fees to where you owe the whole thing back. Maybe they’ll give you a discount for repaying early. We prefer to be as transparent as possible with the fee structure and say, ‘Look, keep it for two months, pay me back, and this is what you’re going to owe at two months. Keep it for the full 12, you’ll owe this much.’