When the financial technology world began blowing up in the years after the market collapse of 2008 many people talked about this idea of how the Fintech startups would win out and beat the big financial institutions at their own game. This has yet to become a reality and will never become a reality and that is for good reason.
Fintech is a lot less about revolution, and a whole lot more about evolution of financial services to adopt technology. The real winners of the Fintech evolution in financial services are customers and companies that are going to benefit from improved processes and services thanks to the adoption of tech-enabled offerings that will finally bring the financial markets into the 21st century.
How this technology is implemented will come in many different forms. Some companies will partner with Fintech startups, while others will build out technology capabilities in-house or acquire technology through acquisition. One unique offering is LendFoundry that is providing the first full operating system to enable marketplace lenders, banks and credit unions the opportunity to provide a 21st century loan experience to customers without building out any of the capabilities in-house.
This much needed service will help more financial institutions focus on the core of their business or the “Fin,” while they let the tech folks focus on what they are best at, the “tech.”
Welcome to Fintech and the evolution of our financial markets. Check out my discussion with the brilliant, and sound business minded individual behind this great service, Roger Vogel…
CL: Roger, you have a strong technology background from working at IBM to working in medical devices. Now you're working on something really exciting, being LendFoundry in the Fintech space. So, how did you end up in this position today?
RV: As you said, it's a long, interesting road. But you know, what's fundamental for all of this is the basic technology. Information technology underlies all of that. I spent twenty years with IBM, largely in storage. After that time, I just felt like I needed to do something different, and I popped into medical devices. You would think that'd be a hard transition to make, but it really isn't because it's all hardware and software. It may be different applications, and different regulations but largely it’s the same idea.
In fact, in some ways it was nicer because instead of having to produce a new product every eighteen months, it was just the opposite. If you had something that worked, nobody wanted to change it, so sometimes that took a little of the pressure off. But again, it's a technology theme. Eventually I sold that business, and I was looking to get back into IT, which is when I intersected with Sigma Infosolutions. They were just beginning to get into the Fintech space. It was a wonderful opportunity, and we just brought those two things together.
CL: For those who don’t know, how do you define LendFoundry as a business?
RV: LendFoundry is a full tech stack to support marketplace lending. Initially, we are focused on marketplace or non-bank lending, but it could theoretically be disruptive for any financial institution. Basically, what we're doing is we're trying to apply the same type of technologies that delivers Netflix or Amazon--highly scalable, cloud-based, self-tuning performance platforms--to the lending space.
When you open up your aperture, for example, as an unsecured consumer lender to whomever might apply to your website, you may only ultimately be turning two or three percent of those applications into real loans, and yet you still have to deal with 100% of them. Our ability to scale and perform in that way is really important.
CL: Who are the core consumers of LendFoundry that decide building these capabilities in-house doesn’t make sense?
RV: Today, it's what I would consider lenders that are not as large or as obvious as, say, a LendingClub. They've built their tech in house quickly, but a lot of folks in the space that are doing maybe two or three-thousand loans a month originally built their tech in-house, but they're learning that they want an expert to be running the technology component of the business.
These are smaller lenders that are saying their expertise is in lending, underwriting and credit modelling. In the early days, there was a lot of mishmash of is it a tech company or is it a lending company? I think we've learned that you could be a really good lending company with good technology. But, pure technology alone is not going to make you a good lender.
So, what we try to do is we're working with a lot of folks who have great visions in the way they lend, great visions in the way they do their credit model, and access to a lot of debt capital, but they need systems to help them run efficiently and effectively. So, we produce that for them.
CL: One of the things I find really interesting about your business is you do so many things. You have CRM capabilities, API integrations, etc. How do you do all of those things and still provide quality experience, and you provide a business that's scaled very well, very quickly?
RV: Part of the reason for that is Sigma Infosolutions, which is the parent of LendFoundry that has been around for more than a decade. We are a software house. Basically, we do business intelligence. We do Java work. We do website development. We do a lot of different software, so we have a history of software development and that kind of experience. So, that's what we bring to the table.
In addition to that, we were fortunate in that before we ventured into the SaaS space, we had done a couple of very large projects for clients. One was a loan origination system port for a major non-bank lender. We also did a loan origination and loan management system for a working capital float firm. As we learned through that, we were able to bring that capability into the LendFoundry project.
CL: Are you leveraging their customers and that business to be able to build out the LendFoundry group?
RV: Well, sure, in the sense that once the word got on the street that we had this product and we had this capability, it did make it easier for us to break in. But, we still have to market, find the customers, and deliver on our value proposition. That is critical to our success.
CL: You're servicing loan originators, but what about banks and people who just want to provide loans in a more efficient way and can't keep up with the marketplace lenders because of their technology infrastructure? Can they be customers of this as well?
RV: Absolutely they can. Infact, we have our eye on some credit union opportunities, and we've talked to a few traditional financial institutions. I think that's the direction we're going to go in. They can clearly see the disruptive play. They know that the millennials are really not going to want to go into a brick-and-mortar bank and spend three hours with a loan officer getting a loan.
They also probably see the value in the improved underwriting capability as we go out to the ecosystem and pull all this data. It's not just us, obviously; it's all the other folks that we integrate with to do it to provide a better underwriting experience and reduce the default rate. I think all of that is attractive to the traditional banks. They're going to have to adopt similar technology if they want to win in the long term.
CL: How do you manage risk compliance and make sure that all the software meets regulatory restrictions as well?
RV: It's expensive, but we invest in that. We have a couple of consultants that make sure we stay compliant. We stay on top of all the regulations to the best of our ability. We are currently going through a full audit of our IT infrastructure to make sure everything is secure. We have what's called an SOC compliant system.
There's a whole series of tasks and audits that you do on a regular basis to maintain compliance because it's critical in this environment. I tell you what's interesting, coming from the medical device environment has actually helped me because the FDA did the same thing, just for different reasons.
CL: Do you think there's a play where you could also just be providing the regulatory framework to help people manage this process?
RV: It's certainly possible. One of the things that we're thinking of is we're really striving to get our IT infrastructure to the very top of the shelf in terms of compliance and regulatory capability. Once you're there, then yeah, you could probably offer that service and that capability to others. There are other industries that I think would be very interested besides lending. Think insurance companies and other regulated industries.
CL: Are there any challenges in onboarding customers to this platform? How long does the typical process take from closing to when it actually is up and running?
RV: It can take three months or so, these days. We're always improving our ability to do it faster. The challenge is, sometimes, especially with new lenders, there's a lot of things that the client has to go through, too. They have to get their lending licenses in place or underneath the correct charter, and have all of their documentation in place. When you add all that up, it typically takes about three or four months, but we're constantly trying to improve that. I have a goal in the not too distant future of being able to do it in about three weeks. We'll see if we get there.
CL: Are there certain customer bases that are easier to integrate into than others?
RV: Yes, if somebody is following a very traditional workflow implementation is easier. Most of the lending originating workflow is similar, but it depends on your credit model, and what third party you use to validate your customers during the underwriting process. If you have a very unusual process, it'll take us longer because we have to do some editing of our workflow to integrate correctly. The other element that can drive up time of implementation is if you already have a buyer system where we need to migrate the data over. Data migration can be tricky but we work to do that in parallel.
CL: In terms of actually underwriting the loan are you conforming to their underwriting methods or are you providing that to the customer?
RV: Underwriting is largely a validation step to make sure all the pieces are there. Before that the credit model is where one takes all the information from the ecosystem, puts it through their special "sauce," if you will, and come up with an idea that, yes, you're a good guy that I should lend money to because you're going to pay me back and here is the price that I should lend it to you at that's commensurate with your risk. That's the credit model.
We don't actually do that, but what we do is we build a generic rules and decision engine that lets folks program their credit model, or we can do it for them, to be run through our software. But the credit model will vary from customer to customer.
CL: Do you think we'll see more SME banks and organizations getting into this space because now it's accessible and easy to do with software like LendFoundry?
RV: I think we will. I think like anything else industries can stay inefficient for just so long. I came from the basic IT world where I did storage for years. We were chasing a price curve that was declining at twenty percent a year. If you didn't get smarter about how you did things, you went out of business.
There's no reason why, for me, to think that the financial industry can remain very inefficient forever, period. Now there's finally some pressure on the system. Everybody's going to have to start to play and adapt to new technology. Who benefits from this adoption?
The borrowers and the customers.
CL: Do you have plans for how much you would like to scale, and do you have a path to profitability, or are you already there?
RV: As a company, we're already at profitability. This particular product will cross into profitability next year. Probably about mid-2018. We're fortunate that we're launching this as part of the bigger enterprise, so we can ride on their loral’s a little bit.
We'll be profitable on our own by about that timeframe. In terms of the long-term road map, we want to add more asset classes. Today, we support unsecured consumer and business loans. We want to add auto, which we should see coming out in the next six or eight months. We're also looking at student loans, and ultimately, we're looking at potentially getting into the mortgage space as well.
CL: Is the reason that you—and several individuals involved in the lending space-- go after unsecured debt first is because it's an easier asset class to get into, with the mortgages and auto space being more regulated, and how much larger of a challenge does that present?
RV: Some of its regulation, some of it's the collateral. When you're in a collateralized loan, for instance if you're doing an auto loan, you have to worry about the clock. If you're doing mortgage loan or re-finance, you've got to worry about the property. Unsecured consumer is probably the simplest in that sense, and it is definitely less regulated than some of the other spaces, but it is still pretty highly regulated.
CL: LendFoundry is touted as being a full operating system solution that has been built from the ground up. What have been the challenges of this, and how does that enable easier integration with any service provider?
RV: What we've done is use a micro-services architecture. Basically, what that means is if you think about all the self-enclosed functions in our system, like an engine that executes an ACH to move money around or an amortization engine, these things are designed to be little islands that communicate with everybody else via API. So, our whole design is based on that, and that gives us two very big advantages: one is from the standpoint of performance and scale.
For example, if I'm taking applications and my amortization engine is all of a sudden just inundated with thousands of requests, I can spin up another instance of that on another server and redirect some of the workload there. So, you get that sense of parallelism.
That's what allows you to form a horizontal scale, which is a much more effective way than trying the vertical scale. So, it allows for that horizontal scaling, multiple instances and parallelism.
The other nice thing about it: if you do everything by API. Even our front end, that you interact with online, is talking to our back end via API as if we were at arm's length to each other. That makes it very easy for us to talk to anybody via API. So, that's one of the reasons why our integration is very high quality. We're also able to open up our back end if people want to use our services a la carte. It's not something we've largely offered yet, but it's possible.
For example, we build the front end for most of our applications. But if somebody comes in with a very unusual product, maybe it has to do with an unsecured consumer, but the workloads are really different. If they can build that front end, we can apply our backend services just through the API, so we can work with them a la carte, as well. All of that is what gives us the flexibility. We're not tied to another application, like Salesforce, and that has helped us out a lot.
CL: It's funny you say that because my next question was, "are you offering this a la carte?" It seems like a very major offering, and does everyone need the whole data in the whole set? Probably not.
RV: Probably not. We offer a la carte on two levels. One is you do not need to have the LOS and the LMS and all of these surrounding portals. You can just choose one or the other. We have a client today who simply uses our LMS and uses their own LOS. We have clients that use our LOS and use other services so that we can communicate with them. Or we can do the whole stack. So, there's that level of a la carte.
Then, underneath that, if you really want to get granular, you could build a front end application and use our services like amortization calendar, money movement, etc., a la carte, as well.
CL: How are you monetizing the platform? Is it just a subscription SaaS subscription?
RV: It's a basic SaaS model. There's a setup fee. It's not very exorbitant. Usually, it's going to be sub fifty-thousand dollars or less. Then, we have a transaction fee. So, if you're originating loans on our platform, we'll take a little bit of each loan you originate. If you’re servicing the loan on our platform, each time you touch the loan we'll take a little fee. So, that way we share the risk with our customers, and we also grow with our customers.
CL: Are you considering capital to grow the organization and the business?
RV: Yeah, it's a small team here in the US, and we have two large delivery centers in India, which are part of our company. We've dedicated about fifty of those, so we have fairly decent team, but we are considering a capital raise. We can get a lot done with our internal cash flow, but we could probably do more. I talked to various investors. We aren't really a start-up, so we don't necessarily appeal to the venture guys so much as the folks looking at second-stage investment a little bit more. But yeah, we're in conversations. What we would do with that money is just accelerate our rotary.
The Minute Rundown with Roger Vogel
CL: If you could provide one tip to someone considering starting up, what would it be and why?
RV: I would say its two things. One is, I think, it's really important to understand the industry that you're getting into. You cannot spend too little time doing your homework to understand where you're going. That is one critical thing, and not that easy to do. Some of these industries are very complex. But to the extent that you can really understand the industry you operate in, the better off you're going to be.
The second--it kind of relates to your previous question--is don't be under-capitalized. That's the traditional problem of a great idea that just doesn't have enough money to capitalize it. I'm a little bit of a traditionalist. I try to build businesses that are profitable pretty quickly. I've never had anybody give me a hundred million dollars. Maybe they will after they read this blog, I don't know. A lot of these models of dry revenues that will eventually lead to profits is certainly possible, but my own personal goal has been to try to build a more balanced business. I have nice revenue growth, but I get profitable pretty quickly as well.
CL: I like that. There's nothing wrong with being profitable. I know it's overrated these days. There's something to be said for it, I would say. I saw you're a mechanical engineer and graduated from RPI. That's my brother's alma mater. Having that background, what was your favorite part about attending RPI?
RV: First of all, I got a great education. I want to give RPI a plug. It's never let me down, that education that I got there, and it was a fun school. It was good to be with a lot of tech guys. There were no girls there, and that was unfortunate. Nonetheless, RPI is an outstanding school.
I got a great education. I learned how to solve problems. That's the key. I don't remember that much mechanical engineering. I did about three years of real, true mechanical engineering. Then I got into software, but I learned how to solve problems. That's really important.
CL: What mechanical engineering skills have you taken to build these businesses?
RV: I tell you, it's surprising. It's problem solving, it's breaking complex issues down into smaller parts that you can work on. Some things like statistics and things that you might have learned actually apply very well. This is profit-based, so yeah. I think you bring your thinking and your problem solving capability forward. I wouldn't trust myself to design a bridge today, but I could probably manage a bridge production pretty well.
CL: If you could model yourself after one founder, who would it be and why?
RV: I've seen many of them. Obviously, you look at a guy like Mark Zuckerberg, and it's amazing, what he's been able to do. And you know, that kind of aggressiveness. Just like the guys who pioneered the Fintech space, obviously. Whether they were ultimately very successful or not, it doesn't matter. Their guts in pioneering it, I think, were both really, really good.
What I genuinely appreciate about Roger is his ability to apply an engineer mind to a financial world problem. Having grown up in a family of engineers something that was never lost on me was the responsibility of being thoughtful in providing solutions to a problem. So often in the world of engineering you are dealing with processes that can get someone hurt if not done correctly. Imagine misjudging how much a bridge can carry when you are building it?
The reality is however, just because no one gets physically hurt when you mess up a solution to a financial service offering does not mean that it shouldn’t be done with just as much care. It is still just as important. Roger gets that both investors in his company and users of his service deserve to have an offering that is fully built to handle any situation and to not go out of business.
He is the type of mind we need more of in the financial world. What he is providing is meeting a real need. He and his team have recognized how important it is to enable lenders and financial institutions to focus on what they are good at which is managing loans and investors. But in this new world they will need to adapt. LendFoundry makes that easy. It’s a full solution to providing a 21st century experience without the knowledge or knowhow.
Having confidence in those systems is how old financial service companies and new ones alike can feel confident that they are evolving as they should with this new wave of innovation. I love the solution Roger. Thank you for your measured and well-designed approach to solving tech management for our new generation of marketplace lenders.