Leaders in Lending
Leaders in Lending

Episode · 3 months ago

Unlocking the New Lending Experience: The Innovations of Hybridized Banking


Emerging leaders of the consumer lending industry all have a few things in common.

On this week’s episode, Upstart’s Senior VP of Business Development, Jeff Keltner talks about what he’s learned from nearly a decade of working in the consumer lending arena, where the industry is advancing, and his forecasts of who will rise to the top of the market.

What he talked about:

- Differences between the ] phases of fintech innovation

- Latest advancements in innovation and digital transformation

- Hybridization of fintech and traditional banking

OPTIONAL: Check out these resources we mentioned during the podcast:

- https://www.linkedin.com/in/jeffkeltner/

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You are listening to leaders andlending from upstart a podcast dedicated to helping consumer linders,grow their programs and improve their product offerings each week. Herdecision makers in the finance industry offer insights into the future of thelending industry, best practices around digital transformation in one let's getinto the show, hi and welcome to leaders in lendingi'm your host jeff colter and today's a bit of a different episode. And theni'm going to be talking to you directly about our experiences. I hear itupstart and what we've learned about the consumer lending space sincestarting up start in two thusan and twelve. I joined up start as the fourthor fifth employee topic of some debate between our our general counsel alisand i and i, like many of our executive team, came from google, where i hadbeen an early member of the google enterprise team helping to found whatis now. Google work, space or g sweete, and particularly running theeducational sector of that product for a number of years, and so really camefrom the pere technology space. And i want to share kind of what sometechnologists who who felt like there was an opportunity to really improvethe lending experience through the application of better technologies haveseen in our you know nearly ten year i guess nine year long journey in theconsumer lending space and hopefully a few lessons that you can take away fromwhat we've seen and what we've learned over time. So i really want to talkabout her personal ons, unsecured consumer loans cause, i think, they'reillustrative of what's happening more broadly in the industry, the kind ofthe sharp end of the spear, if you will an early example where innovation isreaching the lending industry first, but represent trends that i think willapply more broadly across the consumer banking industry as a whole on. So, ifyou go back to the early days of online lending, what was ones called pure topeer or market play lending? You really found that this category of loans waswas kind of kind of abandoned by banks, particularly after the two thousand andeight financial crisis. Three, the two thousand and eight crisis. I want tosay this was a huge area of business for banks, but we really found thatbanks were engaging in almost none of these or were they were products wereavailable, but the lending volumes were very small and unsecure consumer lawnsand that really left the door open for on my lenders. Fintech players to comein and launch these products that were almost uncontested by banks, and if yougo back and look at the early presentations from the first players inthe space, you really see a focus on lowering the cost basis right. Theysaid we can take a current product, that's in branch, it's so small, it'shard for banks to make profits and that's because their cost basis toohigh. They have people of processing applications, they have in branchemployees, they have real estate and we can get rid of all that we can digitizeit lower the cost base and therefore, even though the dollars are small andtherefore the interest revenue is small, we can still be profitable on theseloans because because we have a lower cost basis- and that was really you canthink of- that is digital. Ending one point out the first phase of thedigital ending you know, evolution was really based pretty much around. Thissense of you know lowering the cost, but i think ultimately, the playersthat are winning now in the unsecured lending space or doing something alittle different than that they're, not just lowering the cost basis by havinga digital process, but they're really trying to figure out. How do we designa better into end lending experience right? How do we not just take and puta digital front end on the way we used to do things but build a better way todo things? That's native to a digital internet connected world and reallythis results in a product? It's both better for banks right, the cost baseis lower, conversion rates are higher, so marketing spend is more effective.You get positive selection bias when you can simplify processes. Your bestconsumers don't want difficult processes. It is better for consumersright, it's faster to complete it's an easier process. You can do it from yourphone while you're lying on your couch, but you don't have to go into a branch,so it's really a win for both the lenders and the consumers, and i reallywant to focus on two areas that i think this process was or is really currentlybeing reimagined right and not just digitized, but fundamentallytransformed in number. One is moving from not just digitization where wetake the old process and you know take...

...the documents we used to ask for. Takethe underwriters, who used to do this and put a digital interface, a digitalexchange between these things, but fundamentally the same process movingto a automated process right, one where the underwriting decisions are entirelyautomated, where maybe the id verification, fraud, prevention, income,verification steps can be fully automated. Might how do we reduce thatburden? So i think increasingly, you are seeing lenders focus on automatingthat process right and getting to a place where i'm either requiring a veryminimal set of documents. Only those i really need or no documents for thelenders leveraging upstars platform. We see almost seventy percent of loansoriginated with with no manually uploaded and reviewed documents at all.In those loans convert between two two and a half, sometimes even more timesgreater at a pull through rate from you know, approved the credit decision,point actually originating a loan, and so, of course, that's hugely valuable.Again, it increases the customer satisfaction, it increases the pace oforiginations. It lowers the cost, of course, the magic to doing that isdoing it without creating a lot of fraud and that's something i think manylenders who have come to a digital world have struggled with. How do we?You know when you've got fraud, prevention processes that are orientedaround a physical process and an branch process where somebody has to walk inthey bring their id and just walking in the door frankly as a huge deterrent tofraud, and when you go digitally you have to find other tools and and i'llsay that those are out there like. What we've learned is that it's possible todo that. It generally requires quite a bit of work that requires lots ofdifferent data sources, innovative ways of looking at. What's going on aadaptability of process for the ability to you know, maybe look at whichdocuments were required or being different, depending on different risksignals and our degree of comfort or concern about particular pieces ofinformation and an application varying a lot, and therefore he, theverification processes varying a lot. But you can solve this problem. This isreally where one of the two areas where this second wave or phase of digitalending is really improved upon the old one. Is it's simplifying the processright? It's where you're getting to very easy, sometimes less than a halfhour to complete loan approval distribution of funds. That's kind ofthe second wave- and i think the second area beyond just the simplification ofprocess is moving into improvement of underwriting outcomes, and here it'seasy to get caught in accuracy, metrics and statistics. But i think the core ofthis is: can we approve more of our customers for loans who are going topay us back and every banker? I've spoken to kind of acknowledges thatmost credit policies are in a sense, overly conservative they're not wrongright and they do their job, which is to control losses to predicted,expected and acceptable rates and in most bank credit policies actually dothat quite well, but they do it at the cost of declining a lot of would begood borrowers right. If you look at the loss rates and even a sub primepool that most banks wouldn't even dream of looking at it could be ten inthe worst pools, maybe fifteen or twenty percent loss rates. But, ofcourse, even a twenty percent loss rate means that eighty percent of borrowersdid pay you back, and so, when you cut that whole segment out you're decliningthe eighty percent, who paid back successfully on time in order toprevent lending to the twenty percent who didn't, and that of course meansthat you're unable to serve a wide variety of consumers and almost everybanker i talked to- and this is one of my realizations coming from thetechnology space, where my perception of bankers maybe was colored byhollywood. The perception of investment, bankers and kind of you know the themovies and tv shows around that and my experience with consumer and communitybankers has been so entirely different. They're much more. You know it's awonderful life than wolf of wall street and i think most people here reallywant to help consumers. We really want to get consumers into the right productat the right rate to help the most...

...people that we can with their financingneeds, and yet the inability to improve on underwriting has held that has heldus back in terms of being able to reach all the credit worthy customers thatare out there, and this is where i think, there's been a tremendousopportunity to improve, because in the first phase of digital, ending, eventhe fintech online lenders mostly still used credit score based systems, thesame systems that fundamentally what banks have been using for decades andthey were tweaked around the edges and got a little bit better, but notdramatically so, and you know one of the studies we did when we first gotinto this business with trans union, and we rewon several times showed thateighty percent of american consumers have never defaulted on a creditobligation, and yet less than half of credits of consumers have a creditscore that would qualify them for traditional prime bank level credit,and so that discrepancy it's not a tinkering around the edges. That's youknow. Sixty percent more consumers are credit worthy than we think that's ahuge increase, and so you know one of the areas. I think that you're seeingmore innovation now- and it's really exciting- is how do we identify thoseconsumers? Can we take that near prime population? What we sometimes havestart refer to with the hidden prime, the good bar wer, who performs justlike a prime borrower and be able to identify them by looking at you knowmore deeply at credit files, applying more sophisticated models, looking atmaybe alternative types of data. But how do we really go and build a modelthat helps us understand that consumer better and allow us to serve a greaternumber of those consumers which is really whatever lender? I talked to gotinto the business to do is to serve that consumer to help them with thefinancial products that they need at a fair rate, and that's something i thinkyou're seeing in the second wave is kind of these two transformations ofthe personal lone product from a digitization of the old schoolsignature aloud to a highly automated online experience with verysophisticated underwriting to allow you to really serve the broadest number ofconsumers, and so those are the trends we've seen in personal ending over thelast handful of years, and it's really, you know, you've seen a a real shift,even in the online players and those who have executed. These areas wellhave taken advantage of those trends, who've separated in these ways fromothers and those that looked more like the digital in the one point out, andit have not been a successful in growth or profitability, and i think the keything to me is that this started on secured lending right. Naturally, ithink this is where fin tex looked. It's the easiest category of lending insome ways, there's no lean and title it's the hardest category of lending inothers, which is to say it's one of the riskiest forms of consumer lending, butit represented kind of a green field. It was relatively easy to digitize. Itwas a place if there wasn't a lot of competition from existing banks andcredit unions, because really you know most of them had exited the space. Butthere's nothing about what's being done in that space, that's not applicable toany kind of consumer lending, bea, auto lending, helos mortgages, credit cards,lines of credit. All of those products will see the same pressures right and ithink you're starting to see more and more of the fintech lenders, inter intomore core bank lending products, the things that banks really have builttheir balance sheets and their businesses around be those. You knowmortgages on the consumer side or auto loans, credit cards on the consumerside or even the larger loans on the smite, and i will say there was asecond group of online lenders who did much the same thing in the small mediumbusiness base. I think the story is very similar where smaller dollar loansbelow a million or a half million dollars really had been left alone, andthese same kind of trends are coming in and allowing digital lenders to takeshare and serve customers that had, by and large, been been left out of,availability of these credit products for a number of years, and so, when isee these trends, it reminds me a lot of kind of one of the seminal strategytexts, at least for high tech companies. All look at this this this book, askind of one of the similar works and thought processes around innovation isa book by the harvard business school. Professor clayton christenson calledthe innovators dilemma and in the innovators dilemma, christianson arguesthat that existing at como players are...

...often threatened by new market entrance,and those new market entrance typically are attacking lower margin, customersor offering the lower margin products in an incumbents, suite and soincumbents rationally, don't really compete. They don't want to invest alevel of resources. Well, i got to put all this resource in to getting betterat this thing. That's like a small portion of my business and it doesn'tmake sense to do that. I'm going to focus on improving my capabilities formy largest customers for my biggest products, my most profitable productlines and i'm not really going to attack this kind of new thing. That'snot not really there, but of course the story goes that often those newentrance go from the low margin, customers, the low margin, productsthat the small sale size and they grow into the bigger products and that theirinnovation around technology, often around capabilities that were not therebefore new distribution or production mechanisms allows them to win thelarger share of business. And you can see this whether it's you know digitalbookselling, and why is amazon the winner and not barns and nobles orborders, which many of us remember, and i still see the boarded up bordersaround my house. That's gone right and why? Why did amazon when why? Why didblockbuster lose to netflix in the streaming wars? Right streaming was alittle side thing they didn't have it wasn't going to be the serious business?It wasn't the big business it so it was underinvest in and these are not oftenirrational decisions by the income of player, but they do ultimately put theincumbent player in a difficult position to respond to these emergingtechnologies and competitive threats that represent really size mixed shiftsand capability, and the question becomes: how do i? How do i deal withthat? And so i want to talk about what i think we can learn from christensen'swork and in what i think mental models are for how you approach this, and ithink the first is that when you try to you know, take your existingdistribution mechanisms. You are existing infrastructure and serve thisnew capability. It often doesn't work right, so i think of this in thebanking segment. As you know, if we try- and you know, put a digital code ofpaint over a manual process right- you're not going to compete with apurely digital process. So if you have an a form that comes in, but then youwait two days for a manuae writer to review versus a digital process thatwas digital ated. When you go, i i would never starting dinovo build adigital process that relied on a human to get back a rate and one of the mostvaluable things that we've seen in the personal loan space is the ability toinstantly check or rate and see. You know, interest rates, maximum loansizes that you can qualify for so so consumers can go and check availabilityof different options, and i think enabling those things is is criticaland if you're kind of you know digitizing the old process versusstarting with the blank slate, it can be quite hard to figure out how you dothat to build that same level of experience, and so you typically buildyou know the best you can on top of the existing tools, but it's notcompetitive, and so i think you really got to think about how do i maybe startfrom scratch in some of these areas? How do i really start to bring in brandnew capabilities right, and this is where an interesting thing we've seensome banks? Do i used to launch entirely new digital banks beside theirexisting physical footprint? They're existing branch footprint right sothey're going to go and they're going to compete with the neo banks, thechallenger banks of the world, on an equal footing with a purely digitalexperience. You know. Sometimes these customers can't even come into thebranches of the bank. That's offering the digital bank to be serviced butthey're going to you, know, they've started and launched, and actually aseparate line of business to launch digital bank. Often those areunconstrained by the traditional geographic footprints, and so i mightbe a two or three or a one, five state footprint as a bank with my branches,but i might take my digital bank and go to all fifty states and attractcustomers in digital channels and serve them through a mobile ap or a digitalexperience, and the wonderful thing about that is when you unlock yourdigital team. In that way, from needing to be deeply integrated into the branchyou allow them to build best of class...

...products right and to really figure outwhat it takes to win. Now. I think, ultimately, the winning banks- and manyof my guests have said this, and i think that right will be those that cancombine high levels of customer service. High touch service, support advice. Ithink many consumers are really looking for advice and finding the rightproduct the right fit for what they need with the highly digital experience,the ability to apply from your phone on your couch. I think the combination ofthis to things is really powerful, but starting from the old way, as opposedas to starting fresh and then layering in well, i've got a digital experience.What do i do if somebody comes into the branch, i think, is a very differentapproach to answering the question and finding your way to that hybrid future,and i think those who start de novo will be really an advantage when itcomes to. How do i build the best hybrid experience, and how do i makesure i understand the pure digital experience that people want? How am ilearning about what it takes to win in the digital experience in the digitalmarketing channels? Right when you, when you move to digital you've, got awhole different customer acquisition. Experience right, you've got differentkinds of marketing, got different kinds of of sponsorships. You might do dopodcast sponsorships all sorts of things that allow you to kind of engagein a different way, and i think that's a really interesting thing, and one ofthe interesting things that you read in the innovators dilemma and is actuallyeven fully isolating those units from a pl point of view, so that you've gotreally the ability to start fresh to start almost like a competitor, andoften you find that the successful companies translating into the newworld are allowing their new business lines to compete and take away businessfrom their old business lines, even when it's less profitable, becausethose new business lines represent the future. And so, if you know, if youstill need your old way and you've got your new way, you want the new way tobe able to compete and win customers away even at a lower profit marginwhere it makes sense. And if you have the same organization trying to do that.Of course, organizational people don't want it if you're a manager and do iwant to invest in my less profitable area my more problem and invest my moreprofitable. If i could drive more adoption of x, product or wide product,i want the more profitable product, a larger product and so driving thatseparation, so that you set that business unit free, i think, is reallyinteresting and that to me is what's really fascinating about the kind ofdigital bank setups that are happening. You don't have to go all the way totake advantage of this. If you see it to the to the kind of digital brand andseparated bank, but i do think starting your process of moving to your nextphase of lending with the question of which products can, i start puredigital right, which products need to be thought of as digital first andbranch oriented second, which products really need to be thought of as branchfirst in digital second, and then how do i combine the experiences the two,but assuming that there are places on each side and where digital first needsto be the answer? Finding a way to do that, and maybe it means setting up youknow two different lending programs with similar products. One, that'sdigital one! That's branch oriented! That's you know follows your existingprocesses, but but really being thoughtful about how you unlock theinnovation, so that you're able to not just take small incremental steps whengiant leaves are available and so that the teams that are responsible for thenew products and initiatives are unlocked from the economics. Thepolitics of the current business, and you know often territorial disputesthat can emerge around wanting to not have a new product line, take customersfrom an old product line. I think those things are really important and the thebanks that are able to do that right who are able to thread that at thatneedle and find a way to support the teams, doing innovative things toreally build, whether it's you know partnering with third parties, whetherit's buying newer systems and piecing them together, so that you can havesystems that are super optimized for one kind of product or another andproviding really that better experience in the digital and then connecting toyour branch organ systems. I think those that are able to do that and finda way to unlock the innovation. The digitalproduct areas to really be theirmost full expression of what they're...

...capable of will be the ones that havethe best chance at melting, the old world right. The the need of manycustomers to have an impersonation, and it's not just some customers want tointeract in person and some one to be digital. I think every customer franklywants both depending on their needs, their comfort level with the particularproduct. You know i may be in a dealership and want to get an not alone,and i want it fast and easy. Don't want to talk to anybody, and i may be tryingto plan for retirement, need to understand how i do that and where iturn to and what kind of products were available. And how do i think about aroth ira versus nira? That's a conversation and it's one that bankswith the right relationships, the right in person call center capabilities arereally well suited and well positioned to take advantage of to provide thatlevel of service and figuring out a way to unlock your digital capabilitiesfrom the existing systems, the existing processes, so that you can actually winin both and then find the way to melt them together. Over time, i think willbe a really powerful opportunity and a really awesome opportunity for bankswho are able to take advantage of it to really start increasing their marketshare to start winning the day, because, ultimately, what a transition like thedigital internet, mobile kind of multiple transitions that are coming atus all at once, only accelerated by ovid really represent, is a point intime when winners and losers will shift, and some people will will end upwinners and growing substantially, and some people won't, and so it's anopportunity for banks to really separate themselves where we're in thenot super early days. But we're at that point where i think people will bechoosing one path or another, and some past will lead to to growth and marketshare to growth and profitability. To larger success in some pasts will leadto. You know shrinking of the bank, and probably you know, conglomerations, andyou know lots of ma activity where we're putting a lot of these smallerbanks together, because they're not making these transitions fast enough.So i think it's a massive opportunity to take advantage of for those who cansee it and take advantage of it. So those are a few of the thoughts, thethings i've learned over my last not quite decade in the lending space,looking at it from the point of view of a technologist who's, come into theconsumer lenning space and tried to understand it and compete in iteffectively, and you know hopefully, as you think about you, know your ownjourney towards how do we think about the future of consumer lending? How dowe think about digitization digital products? New products? Do we need tobe an unsecure? We need a new kind of he lock and what are the places toreally invest it, and how do we do that that some of these thoughts are helpfuland we're always happy to share more thoughts? You know you can you canreach us pretty easily, i'm just jeff et up sarco. So if you want to want totalk about any of this or share your own thoughts, please do feel free toreach out now. I guess there's nobody here to ask me my three lightning roundquestions, but i'm going to ask him to myself anyway, so number one. What'sthe best piece of career advice, i ever got so my first job out of college. Iworked for my fraternity, true story and it was an amazing learningexperience. But i was in this meeting in boston with the guy named jaybrunetti and i was needed to ask jay to do something. For me. I needed a favor.It was a big favor and i sat down and i had breakfast and i explained thesituation of jane. I think i was young and i was i was trying to convince himto do something, but i want to ask him: i just wanted him to come to theconclusion of zone. He said jeff, i'm going to say yes, but you have to askthe question people can't say. Yes, unless you asked the question, ithought that was great advice. I've you throughout my career that when you wantsomething you got to ask, if you don't ask you can't get, and so that wasprobably the best career advice. I've gotten use it all the time. A secondquestion: what's the best piece of advice, i've gotten in consumer lendingi've given a lot of my thoughts, but one of the things simple mental model,maybe not advice, but a mental model that our co founder, pago put out forconsumerist consumer loans are really a very simple equation. It's kind of youknow, default lost operational costs and required return, equals the cost ofthe consumer and lower cost to the consumer wins. And so, if you can findways to reduce the default risk by better identifying risk to reduce theoperating cost by, you know simplifying automating processes or to reduce thecost of capital. By having more...

...confidence in the capital markets oryour credit committee and your underwriting capabilities, then you canreduce the cost and you can win and that's a it's a simple framework for avery complex set of actions. But it's a framework that helps me think about thetruth of lending all the time and also to keep in my mind what i think of isthe true north for consumer lending, which is the consumer right, and are wefinding ways to make product offering capabilities better for the consumer?And then i guess i need a bold prediction. I'd love my bull predictionto be large numbers of downloads of this podcast, but i think my bullprediction is that you know the future will really be not fin text, beatingbanks and not bank speeding, fen tax. But i think that the combination of youthink of fintac is really becoming the technology partners to financialservices. Institutions. Players like that have existed for a long time andmost banks have been buying forms of technology, and i think that the mostsuccessful financial institutions will be those that are able to find the besttechnology players, including new emerging players and melt them togetherto provide high quality experiences across products and high qualityexperiences for each individual product. That they're focused on that they canreally optimize, tie those things together, but really focus on eachproduct and offering being tightly integrated together but highlyoptimized for what it is, and i guess my bull prediction is: there will be ahandful of banks that do it well and a large number that don't and thatthere's a tremendous opportunity right now for banks to win and that therewill be. You know a number of winners who come out of this much stronger thanthey were a few years ago, and i look forward to see and if that's true ornot, somebody'll have to come on a year from now and test me if i was right ora couple o years from now to touch me pies right. So i hope that was usefuland thanks for listening upstart partners with banks and credit unionsto help grow their consumer lonnrot and deliver a modern all digital lendingexperience. As the average consumer becomes more digitally savvy. It onlymakes sense that their bank does to upstarts a islanding platform, usessophisticated machine learning models to more accurately identify risk andapprove more applicants than traditional credit models, which godrates near zero upstarts. All digital experience produces manual processingfor banks and offers a simple and convenient experience for consumers.Whether you're looking to grow and enhance your existing personal and autolining programs or you're just getting started up star can help up startoffers an into in solution that can help you find more credit worthyborrowers within your risk profile with all digital underwriting on boardingloan closing and servicing. It's all possible upstart in your quarter, learnmore about finding new borrowers. Enhancing your credit decision, ingprocess in growing your business by visiting upstart com for dash banks,that's upstart for dash banks, use been listening to leaders and lending fromupstars make sure you never miss an episode subscribe to leaders andlending in your favorite podcast player using apple podcast leave us a quickrating by tapping the number of stars. You think the show deserves thanks forlistening until next time. The views and opinions expressed by thehost and guests on the leaders and lending podcast are their own, andtheir participation in this podcast does not imply an endorsement of suchviews by their organization or themselves. The content provided as forinformational purposes only and the discussion between the host and guestsshould not be taken as financial advice by companies or individuals. A.

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