First of all, thank you for taking the time to talk to us. I’d like to ask you about some trends in the industry, especially the lending space, and make some predictions about what the business might look like in the future. To start with, I’d like to know what you think about the lending landscape in the EU and the USA at the moment. Do you recognise a tremendous change in customer demands and engagement as peer-to-peer lending platforms and alternative lenders such as yourselves gain ground?
Raj Singh: Thank you. My insight will focus more on what we’re seeing in the UK and US, because that’s where we are living and breathing every day, but we can assume that the trends across the globe are evolving similarly at the moment because of the way consumers are behaving, the way the market has evolved and with it people’s expectations. When we started, there was a big gap in the lending market that was widening because banks were having a lot of difficulties and contracting along with the higher cost lenders. We saw many customers being underserved in the credit market, especially middle income consumers. And this gap is still there. We focus on the customer experience and have a clean product with no fees which is easy to understand. It’s important for us to lower the barriers for customers through efficiency and technology. We serve about 50% of our customers through mobile devices they are loving this fast and easy experience. Our NPS scores are the highest in the industry (80’s). The market is competitive but we have a unique proposition. There has been a lot of noise around the peer-to-peer lending sector and it gets a lot of media coverage. But although it’s growing fast, it’s not growing as rapidly as we’re growing due to our ability to operate more effectively across a much broader spectrum.
Jürgen Hütter: Just some comments on Europe and the US: We don’t currently operate in the rest of Europe. Looking at the UK within Europe you can see how closely aligned the UK is to the US from a consumer behaviour perspective. The US consumer lending market is worth about $12 trillion per year; Europe is about USD10-11 trillion, of which the UK makes up over 20%, by far the largest share.
As you focus on convenience and customer experience: Can you see a change in the demographics of your customers?
Raj Sing: We are still a rather young brand and we want to appeal to the full spectrum within our appetite. We serve a lot of young and older professionals with mid-levels of income, but our oldest customer is 91 years old. We don’t focus on a particular demographic, and look beyond a customer’s credit score. We have tailored scoring models that look at individuals. We use hundreds of variables and have a powerful self-learning scoring method to be able to responsibly serve all kinds of customers.
Jürgen Hütter: Just imagine that you’ve got a spectrum of consumer financial products that go from very low cost (like your personal loans), all the way up to high-cost short-term credits. So I think if consumers want to borrow, they will largely be able to find a method for that – but the question is how appropriate is that method for the consumer? As technology reduces the barriers and the cost of getting a loan we are able to serve more customers. Banks have longer underwriting times and varying levels of approval rates which generally have been coming down given their narrower credit risk appetite since the financial crisis; customers don’t want to go through a drawn out application process and wait for an outdated underwriting system to return with a decision.
We’ve talked to several lending providers in the past months and the central aspects of their business seemed to be Big Data and a great customer experience. How do these merge – or better: how do you make the best use of data provided by people online and creating the best value out of it? ("Smart Data?“)
Raj Sing: That’s a really good question. I think this is something which is continually evolving. We’ve been using more data than probably most others in the industry. All the buzzwords revolving around it, like machine-learning algorithms and Big Data are over used and I’m not sure if people who say they are using them are really doing so the way we do it. We’ve invested hugely in our platform, technology, data scientists and engineers designing our systems, validating them and making us able to react to the market very fast. This is the core of our business and it is highly important how exactly you make use of your data. It’s the most powerful variable in our model. I think smart data is becoming more important, as you have so much data at the moment that it is difficult to decide which data is important. It will continually evolve.
Jürgen Hütter: We use Big Data to support better decisions. This is a lot more difficult to do in the UK than in the US, where you’ve got the FICO score, which is quite predictive, and few credit bureaus. In the UK you have a variety of credit bureaus, all with their own data, and therefore the ability to predict your ‘goods from bads’ is more challenging. Additionally we also started exploring how to leverage social data more effectively to support our scoring.
Regarding traditional banks: Jim Marous has lately written about one-third of retail banking revenues being at risk, also due to a lack of digitalisation in the lending sector. Apart from that, which other sector areas do you see banks losing revenue?
Jürgen Hütter: Banks are obviously already losing share in international bank transfers, due to a large number of digital companies like, for example, TransferWise who started taking significant share. This was not a core product for the banks, but a very profitable one. Ultimately the battleground for the banks continues to be lending. At the moment banks are in the enviable position to be raising deposits cheaply, giving them a lower cost-of-funding benefit – and they’ve got scale and a big customer base. Companies like Avant use cutting edge technology to deliver a transparent product and a superb customer experience. This was recognised by the recent 5-star rating Avant was awarded for its personal loan by Defaqto, a provider of independent financial services ratings. While banks have a lower funding cost, there is a significant operational cost and compliance requirement for deposits and current accounts. Why not partner to better serve more customers and generate incremental income for both bank and fintech?
Raj Sing: I think the only reason why the big banks still hold the majority of the current accounts is because of legacy, but I think this is waning. Banks are still charging a lot of customers for their current accounts but that has already started coming under scrutiny, and ‘built for purpose’ online challenger banks are starting to threaten that share. The interesting challenge for the banks will be the new mobile banks who are going to gain a lot of traction. And why pay for an average customer experience when you can get a brilliant one, and maybe even for free? Established banks are getting attacked from all sides, the investment arms are struggling, the retail branches are struggling, they have a huge cost base and massive legacy issues in terms of their IT infrastructure. They are not nimble and agile enough to keep up with the changes unless they engage in partnerships. This is even more true with the millennial generation. They are both digitally savvy and price-sensitive and will leverage that – and the market has already responded incredibly. Banks struggle to remain relevant. How can you make these huge institution change? I doubt there are enough people working in the banks that talk the same language as their competitors. It boils down to a kind of cultural difference.
We’re approaching the end of the interview. If you like, paint us a picture of "banking in 20 years".
Jürgen Hütter: In 15 or 20 years’ time you are going to have relatively few customers who really want to physically go to a branch. These will be the customers who can’t do what they need to via digital, but that’s something that will change as well as the online and digital offerings develop. You will ultimately be left with those customers who WANT to go to a branch and those tend to be ageing customers who actually value that face-to-face engagement – but that’s going to naturally reduce over time as well. Will there be no branches? No. But there will be significantly fewer branches than there are today. Also, segmentation of the market will become more and more important. Which segment do you have to go after to remain relevant?
Raj Sing: Banks of tomorrow are going to be very unlike they are now. The relationship with the consumer will be different and mainly happen through the brand platform. Banks will either swallow up some of the smaller competitors or collaborate with key players in lending, payments or other areas of expertise. So the bank will ultimately become a hub that can be called on, depending on what the customer’s need is but the need will be served by many other partnership companies who can offer the best products and the service and experience. Bartering and trading will become more common in this market. The banks that will survive in the future are those who are brave today and make that leap of faith.