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Will Lending’s Future Be Untethered From Banks?

The problem with a financial crisis is that the climb out has been particularly arduous for consumers and retailers. Even though spending and wages have recovered (albeit slowly and at a lesser rate than many would like) spending continues to frustrate. Consumers may be returning to work, earning more money and are even paying less at the pump, but big increases in consumption seem to be a thing of the past. The result is customers who pay bills on time more often but not avid consumers ready to light retail on fire.

Among the many factors contributing, is the simple fact that for many the credit crunch that followed the credit crisis is still alive, well and cutting off access to financing for scores of low- and middle-income consumers, which in turn lowers their economic activity.

“Banks are dealing with so much new regulation. To be specific, BASEL II and BASEL III, determines how much risk weighted capital or how much equity they have to put up against loan portfolios which makes it hard to lend to consumers generally, but also to lend to consumers that fall outside of the traditional underwriting box,” Insikt founder and CEO James Gutierrez told PYMNTS in a recent interview.

That nontraditional box contains lots of different types of potential borrowers Gutierrez noted, including those with poor FICO scores, no FICO scores or lower income individuals. The system by which creditworthiness is determined by traditional lenders is broken, according to Gutierrez because it excludes those who could and should be given credit, often not for very good reasons.

And that is the crack that his company is looking to fix. Insikt is a lending as a service platform that works behind the scenes with retailers to allow them to offer loan products to their customers.

“Retailers, online companies, payment companies any company that is dealing in a directtoconsumer business and is dealing with large numbers of people that fall into those buckets, realize that this is an opportunity,” Gutierrez said. “They are saying ‘this is my customer I know a lot about them, they can’t get financed elsewhere and I want to step in and help them get financing. I want to step in with a product they are buying from me, or I want to help them get a loan. In doing so I want to build a better bond with my customer, build loyalty.’”

The problem for most merchants and service providers, however, is that they aren’t in the business of making loans and don’t have the team, infrastructure, knowledge or ability to either fund the loans or syndicate them out to other investors. On the whole, these businesses generally don’t have any ability to assess risk or bear the loss if loans aren’t repaid.

“We have a really flexible platform and architecture. We’ve got basically custom credit scores built for all of our partners and its all a learning model. So for every loan we make, we learn more how to underwrite for people,” Gutierrez explained. “The bottom line is that we want to be a white label provider. Right now we’re winning a lot in the retail sector, but the next frontier is making sure we are everywhere online and available everywhere on mobile.”

And that further development on mobile will doubtlessly be aided by the additional $16 million Insikt just pulled in in Series B funding. Existing investors Firstmark Capital and Serengeti Asset Management joined strategic investors Jefferies and Atalaya Capital Management to participate in the round. That newest infusion of cash will go into building out their capacity.

“Now we’ve got to scale up. We’ve got this interesting technological challenge which is multi-tenancy. We’ve got multiple discrete portfolios by partners and unsurprisingly we need great engineers to do that.”

They are also looking to work with their next generation of partners, as well as a more sophisticated operations center to deal with loan servicing.

The $16 million brings the firm’s total equity funding to roughly $25 million. That $75 million is likely to increase to over $100 million in the next month or two, as loan volume has increased “incredibly quickly according to Gutierrez.

“We’re the first to have pioneered lending as a service or credit as a service, but basically it’s this whole theme that lending of yesterday is done through these stodgy banks and government run balance sheets and programs,” Gutierrez asserted. “Lending of the future is going to be through awesome customer experiences built by new companies that realizes they more, unique data on customers – and if they put that data to work, can make really attractive loans. We want to power that transformation.”

That transformation will not be easy; there is a reason banks don’t lend to sub-prime customers and aren’t encouraged by statute to do so. Default rates are a problem, which leads to high rates being charged on the loan to cover the higher risk pool, which in turn leads to charges of price-gouging of the financially disadvantaged. However, not adequately gauging risk in loans is clearly a very serious danger for lenders – as the entirety of the financial crisis demonstrated.

But despite being just shy of 40, Gutierrez is more experienced than his youthful feature denotes, and Insikt isn’t his first financial services rodeo. Before founding this company, Gutierrez founded Progreso Financiero, a financial services company that specialized in connecting lower-income Hispanics to financial products.

“We debunked that traditional view that there’s just a group of people here who are not creditworthy. That happened to be Hispanics, immigrants, who were hard working but without a credit score. And because they lacked a credit score, banks didn’t have enough data and declined them out of hand. With big data we found a way to approve them and have low losses.” Insikt, Gutierrez says, is his second-act attempt to expand the benefits of big-data credit scoring to a bigger audience, which he thinks is the way of the future.

“We’re going to see more and more of these brands that have direct-to-consumer businesses that say: ‘We want to be part of the solution and bring these lending products to our own customers.’”

Gutierrez believes that’s the shift and what will power the next several innings of innovation in financial loan technology. Insikt can score those customers and lend to them at an attractive rate even if they fall outside the regular creditboxes.”

“That is entirely integrated into our partners customer experience.”

And while Insikt is not the only player in the micro-lending game, they are unique in their desire to work with consumers through the medium of the merchant. But that may be the company’s secret sauce – access to an actually unique stream, that of their retail partners.

“We use thousands of attributes and data sources, including information from our partners, to come up with a better risk assessment. A bank using arcane systems and archaic processes comes up with a ‘no,’ we come up with a ‘yes.’  And we produce a borrower with pretty low losses.”

But that doesn’t mean that Insikt can approve everyone.

“We don’t want to also be in the business of approving everybody because we’re charging everyone 500-percent interest rates, Gutierrez said.

They are however, charging a 36-percent interest rate on average, which is certainly not as well as one would do with even a high interest credit card (though much better than how one might fare with a short-term loan).

But it so far, at least, seems to put a more diverse audience in touch with credit products,  and credit products that speak to a direct need since they are attached to a retail experience. It might not be enough to make Insikt and those like it the entire future of consumer lending, but it seems likely it will at least earn them an important spot at the table of credible lenders.

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