Despite being just four years’ old, Avant Credit is one of the largest marketplace lenders in the alternative finance industry. The US firm has been operating in the UK since 2013, and has issued over half a million loans to consumers, totalling more than $3bn in originations.
Avant isn’t a P2P lender – it uses a hybrid business model, holding half of its loans on its own balance sheet, and selling the other half to investors. It also doesn’t sell direct to individuals, but to institutions. While that may make some in the industry (and outside it) blanch, chief executive Al Goldstein believes his model is the way forward.
Building an industry giant hasn’t been easy. In May, Avant had to lay off 60 people (its workforce is 900) and delay plans to introduce credit cards, car refinance loans and to expand into Australia.
At the same time, the sector experienced its first major scandal: Lending Club, and its then chief executive Renaud Laplanche, were embroiled in alleged misconduct and loan mis-selling.
I ask Goldstein about his take on the fiasco, and why his “credit 2.0” approach, and strategy to partner with large, legacy banks, should be given the time of day.
Do you worry we’ll see Lending Club repeats in the industry?
What happened at Lending Club could have happened at any company. I don’t have any inside information, but that sort of thing could’ve happened at a bank, an insurance company. The problem started with bad incentives, so we’re not necessarily going to see it elsewhere. Lending Club has particularly bad incentives because it does not have skin in the game. It’s a public company with very high targets for origination growth.
A consequence for the space, however, is a more challenging funding environment. And the next thing that’s likely to happen is a shake-out. There’s been a lot of noise in this space but, unless you’re differentiated and, in my view, unless you’ve built a balance sheet, you’re going to have a hard time.
Unlike Lending Club and many of your competitors, you use a hybrid model – meaning you sell half the loans you originate, and keep the rest on your balance sheet.
Why do you think this model is going to keep the upper hand?
It is hard to accept the fact that you’re not a P2P marketplace. But I think it’s the right way to go.
We view ourselves as the first of what I’ll call the credit 2.0 companies, and I use the analogy of the first internet companies that never really succeeded. So before Facebook there was Myspace, before Google there was AltaVista. You can capture the market early and move fast, but you’ll miss specific things and have flaws that newer players can capitalise on.
Unfortunately, some marketplace lenders missed some of the opportunity. Another good example is Ebay versus Amazon. Ebay was the darling company early on. They were the pure marketplace, but Amazon has won by a factor of fifty. Amazon is, in a lot of ways, what we’re trying to do. It has its own inventory and warehouses. It really focuses on logistics and distribution. And yet it also has vendors that work with it. That’s a hybrid model, and the way forward in this industry.
We clearly are seeing our key competitors stumble. We haven’t had those issues; we’ve had what we think is the benefit of a better model. So now is a great opportunity to grow market share with our core product, and then develop more products over time.
With hybrid lending, the first benefit is that you actually have a balance sheet and skin in the game. If you have an originate to distribute model, your incentives are misaligned with long-term sustainability. You’re never going to be the lender that pulls back when you should be pulling back. And if the capital markets are shaky, as they have been for the last six months or so, you don’t have sustainability and that balance sheet to lean on.
Second, in the old model, you also have no recurring revenue – it’s all fee based. You originate a loan; you charge a fee. In the credit 2.0 model, you actually have a substantial amount of recurring revenue, so if you slow down origination growth, it’s okay – you can sustain yourself.
Third, the product in the old model is largely a fee-based one. You charge the consumer an upfront fee, then further fees. With our product, there are no fees. Your interest rate is effectively your APR, your cost of interest.
Finally, instead of some basic underwriting that you mask as something quite novel, you actually have to be able to enterprise risk management, which was obviously what was missing at Lending Club. What’s needed is an institutional-level compliance culture, controls, and risk assessment through your whole organisation.
Our view is that, if you can nail that, you can build a gigantic financial institution which has the best technology. And that’s really my view of the path forward. And the market has very quickly showed us that this needs to happen now.
Your customers are middle-income earners with regular salaries of around £30,000. They might not make the cut at a bank, but you’ve just partnered with Regions Bank in the US to ensure more customers’ needs are met.
Do you intend to continue in that direction?
What Avant wants to do is provide credit to the customers that the banks can’t effectively underwrite and can’t effectively lend to. Banks have retrenched and become more utility focused. There are a lot of functions they used to perform that they just can’t do anymore. Moreover, their customer experience is poor – it’s branch-based and there’s really no technology behind it.
What we’re providing is the front-end technology, functional capability and analytic capability, so the customer gets that seamless experience. Banks are going to be relevant players in this market. But what they’re going to do is provide credit to the safest consumers. Together, though, we can provide credit to the full spectrum of people.
The Regions partnership is the first of its kind in the US, and we can do the same here. Platforms need to think in terms of scale, and that means partnering with banks that have huge balance sheets, big brands and lots of customers.
We’re talking with all the big banks right now about how we can work together. We want to be a financial institution and a technology firm that’s not a bank.