Podcast Transcription Session 61: SNEHAL FULZELE

Transcription

1 Podcast Transcription Session 61: SNEHAL FULZELE Welcome to the Lend Academy Podcast, Episode No. 61. This is your host, Peter Renton, Founder of Lend Academy. (music) Peter Renton: Every industry needs an ecosystem that includes companies like software providers and our industry is obviously no exception to that. Really the first and the leading software provider to the marketplace lending industry is Cloud Lending. So today I am delighted to welcome Snehal Fulzele who is the CEO and Co-Founder of Cloud Lending. Now I've known these guys since pretty much when they got started because software is such an important piece and it's one of the things that new entrepreneurs really want to find out about when they start their platform. So we talk about a little bit about the offerings of what Cloud Lending provides, we delve a little bit into a case study, we talk about whether companies should buy or build and who really is their market and where they see their company going. I hope you enjoy the show! Peter Renton: Welcome to the podcast Snehal. Snehal Fulzele: My pleasure, thanks Peter for inviting me. Peter: Well let's get started by giving the listeners a little bit of background about yourself and how you came to start Cloud Lending. Snehal: Sure, there's a bit of context in that story some of you might find interesting as well. I and my co-founder and the current CTO of the company, his name is Darpan Saini. We met as roommates in 2008 at Carnegie Mellon where we were studying computer science as graduate students. After we graduated, we actually started a non-profit organization to serve women entrepreneurs in rural India. The name of the non-profit organization was 30 Dollar Finance and the reason why we started was, you know, I personally grew up in a small town in India where I've seen microfinance in action in small villages across India. Women come together and they pool money to start a business to help their families, almost sort of similar to marketplace lending, but at a very rural stage. Intrigued by the impact these women were making, we actually created an online lending platform to bring together investors and borrowers. We operated this peer to peer microfinancing portal for two years, we actually saw 99% repayment rate in those two years that 30 Dollar Finance operated. Peter: Wow! Snehal: This was in 2010/2011, that was our first sort of introduction to any sort of peer to peer framework and we discontinued the operation because we had hit some regulatory issues with the Indian government, so on and so forth. I won't go into details, but that was in 2010/2011.

2 During that time, I was actually working at Oracle as an engineer in their financial services group creating banking technology and interestingly enough, during the same time I decided to apply for my first credit card, nothing too fancy, nothing too excessive, just a thousand dollars worth of credit line. I applied at one large bank, then another and then another. I was rejected all three times. It was, you know, how could this be? I was like...it s an interesting puzzle. After 2008, I figured out...after the 2008 financial meltdown the risk appetite of big banks just died. They weren t lending to consumers, they weren t lending to small businesses unless you have the highest FICO score. I had entered the country only in 2008/2009, had not had a credit card before, I had only one year worth of income so given my...but still, I thought given my education from a tier 1 university and my present employer, a lender would see me as an opportunity but quite clearly, they did not. Peter: (laughs) Peter: Just as an aside, I had a similar experience when I first arrived in the US and this was back in the 90 s so didn t have the same details about the financial crisis and everyone trying but I mean, it s hard, it s really hard to get into the system even though you re...i was from Australia and I was in the system there and I had credit card offers all over the place. As a relatively new resident, it s harder in particular I think after 2008/2009, it became a lot harder. I ve heard that from many people. They were professional people who couldn t get a loan, couldn t get a credit card because they didn t have a long enough residence history. Anyway, so go on. Snehal: No, absolutely, the thin file problem and that what SoFi tackled and recently, they raised a billion dollars on their amazing business model, such a great story huh. Anyways, this really intrigued me and led Darpan, my Co-Founder, and I to start researching what other alternatives are there to big banks. We knew that having access to loans is such an integral part of everyone s lives, right? It s like a basic human right now. Now if the banks weren t meeting that need, we knew someone must be. That was the time we learned about the alternative finance market and specifically about companies such as Lending Club and Prosper. As we continued our research we learned that these organizations were building their own technology back-ends. This was when we knew there was a market opportunity. We sensed the market opportunity and we understood from our banking experience while working with Oracle and also our microfinance experience working with rural finance that there will be a growing need for alternate finance and the technology to drive it. Especially with the rise of big data, social media, analytics and mobile technology, there was an opportunity to mine credit worthiness of a borrower outside of traditional FICO scores. These market trends, they were really raw at that point in time. We re talking about 2012, but we sort of anticipated that it was going to almost enter mainstream in over the next three to four years and which we are actually seeing that now. At that time, it meant that alternate finance companies were only going to grow, they would probably enter new asset types, newer markets

3 and we were really, really excited, but more specifically, excited because there was no technology platform available companies like these. Peter: Right. Snehal: And that was the reason and that was precisely why we started Cloud Lending Solutions and it was formed then. Peter: Yeah and I know from my perspective...i mean having been following this industry for a long time, I used to get s from people...this was back in...occasionally back in even 2011/2012 saying hey, if I want to start one of these things, what software is out there for me? I used to have to say, well, there really isn't much of anything, but, obviously it was clear to me that there was a demand and when you guys came along...i think your timing was right because there was enough demand. If you were a little earlier, you would have struggled to really create a business, but anyway, I want to make it clear exactly, what does Cloud Lending do? Can you just run us through what your company is all about? Snehal: Sure, so Cloud Lending is a cloud-based technology platform. It is the industry's leading cloud-based, end-to-end lending solution built natively on Salesforce.com. To be more specific, it digitizes and automates the entire life cycle of a loan right from origination through decisioning, underwriting, servicing and collection. If I were to draw a parallel, I mean what Fiserv to banks today, Cloud Lending is to alternate finance companies. We typically form their back-office infrastructure and we automate, like I said, the entire life cycle of a loan. Now Fiserv of the world was created from the ground up for banks, on the other hand, Cloud Lending Solutions was created by keeping in mind the needs of the next generation of lenders, marketplace platforms and online lending companies. So today, our clients include banks as well as non-banks, it includes traditional finance companies as well as...and in fact that was our beachhead market which is online lending companies and the marketplace platforms. Peter: Right, right, I want to dig into that for a little bit here. I know that one of your product offerings is CL Marketplace. Can you kind of just give us some details about that particular product? Snehal: Sure, I can very well do so. So I already mentioned how we support and automate the entire life cycle of a loan, now marketplace lending is a unique phenomena, right? I mean, it brought in a new asset type in the market where investors can specifically choose notes originated by the platform and that too they can choose to just buy part of that note. So it creates an additional level of complexity where each loan is being participated by multiple investors and probably likely going to get different interest rates. Peter: Right.

4 Snehal: So now CL Marketplace is one of the applications in our suite of products. Now that takes care of this complexity of fractionalizing a loan, managing customer and trust bank accounts for the platform, moving funds between these bank accounts, you know, eventually funding the borrowers account and then start servicing the loan. In servicing the loan, again, the other complexity being the payout needs to go to investors based on the interest rate on the notes and also in the process it allows...meaning, the marketplace module allows investors to view their portfolio in real time. Peter: Okay, so you have a marketplace lending platform, you can set it up so you got like a user facing interface where basically they can log in and see their portfolio and that's what you're actually providing, part of what you're providing with CL Marketplace, is that correct? Snehal: Yeah, it's noteworthy to mention that we are actually the back office, the data layer so we don't do the web skin. Typically, our customers, they want to own how the presentation layer looks and they will connect to our back office, meaning the CL platform using APIs. Peter: Right, okay. So then I know you've got other modules. I'm curious about a couple of things you said earlier. You said you also have banks and traditional lenders, what are they using your platform...what products are they using? Snehal: So banks, actually they present our biggest market opportunity today. What's happening is the alternate finance companies of the world like Lending Club, OnDeck and Funding Circle, they have shown or perhaps the biggest and the most important innovation that they brought into this industry is a superior borrower experience. Now banks, they really struggle simply because they're carrying legacy baggage and they are relying on legacy systems that were built in the 80s/90s perhaps running the Cobol programming language and they are just not able to start giving out, start presenting the same superior borrowing experience to their borrowers, superior borrowing experience to their current customers and they would like to do that. So although it's unlikely that we will be able to displace their core processing engines which is the likes of Fiserv, FIS or Jackenbees (?) of the world, but they have all the intentions to start adding a better borrowing experience as an additional skin on their origination and underwriting side of things and that's where we come in. So we learn from our alternate finance space the use of traditional as well as non-traditional data sources in not only verifying the identity of a borrower, but also coming up with automated underwriting models and we are taking whatever we learned in the alternate finance space into the banks where even they are finding it interesting. Now that's just one use case where banks are looking at our origination application, you know, with some interest. There is another very interesting use case which came out of the European market where banks now are now subject to Basel III requirement which has very stringent capital adequacy requirements where...in effect, what's happening is they need to shed off some loans off of their balance sheet if they have to be compliant to Basel III. One of the largest European banks is

5 actually using our technology, specifically the CL Marketplace module, to build a private marketplace so that they don't have to shed out the entire loans from their balance sheet, but they could keep part of the loan and then sell off let s say half or 75% of the loan to a closed community of investors. Peter: Interesting. Snehal: So what that will do for them is they get to keep the borrower relationship because they are the ones originating and they are the ones who are actually funding the loan and also eventually servicing it then exposing the remainder of the loan to their closed community of investors by setting up a private marketplace. So that was, I thought, was a very interesting use case that came out and it s not only one bank, but we have received interest from a couple of more European banks and it's more prevalent in Europe than in the US. Although we don't have data from like 100 banks who all want to do this, but that s an interesting use-case that I thought I'd share. Peter: Yeah, that's fascinating. Yeah, it's clear that you have a whole division that really is or a whole I guess market, that in some ways is obviously much bigger than the alternative finance market because obviously what's going on in Europe, but even what's going on in the US. You mentioned borrower acquisition and how...that's another thing that I think this industry has really innovated on. You mentioned borrower experience, but having that be so fast, having the turnaround be fast and having the experience of the borrower be what the 21st century consumer should expect. A lot of banks are obviously struggling dramatically, that is why a huge...i had Noah Breslow on the show a few weeks ago and he talked about the deal with Chase, I mean, the largest bank in the country by...i don't know exactly what metric they use I think by assets or by revenue, or something like that, the largest bank in the country cannot do this themselves and they needed a company like OnDeck. So, I imagine, something like that bodes well for you guys right because...obviously, Chase or Citi is not going to be a target market for you, but all of the smaller banks who want to do similar sort of things to what Chase is doing, they can now use you guys in some ways to do some of that, right? Snehal: Oh, yeah, definitely. I mean, incumbents have an interesting perspective on marketplace lending platforms. When I say incumbents I really mean either banks, traditional banks as well as some tier one financial institutions. In the past, and we actually even today, we see that they are wanting to partner with marketplace lending platforms really to leverage their technology advancements, really to leverage their big data algorithms or just leverage the markets that they are in, the asset type that they serve, perhaps, traditionally they wouldn't go after, but they found a way to make loans to these markets through marketplace lending platforms and that is why you are seeing more and more partnerships in the space. Although it is a good way to make yields as an investor and enter asset types where the incumbents haven't yet looked at, eventually what we believe is that they would want to

6 leverage next generation technology to retain their existing customer relations. In a partnership model, they are in a sense do not really have control or access to those borrower relationships and that's perhaps the most important thing any business would have, have the customer relationship. Peter: Right. Snehal: And we do believe that soon enough, incumbents, including banks will have to really look at their legacy technology infrastructure and as we speak, they are doing that, large banks such as Chase and Goldman Sachs, we are seeing that they want to set up online lending businesses so it's a very interesting time for us. I think you brought in a very good point early on where you said if we had set up Cloud Lending Solutions like two years ago, we would not have a viable business model. I'm a big believer that if you are setting up a business, you have got to do it at the right time. The product to market fit is probably the biggest driver towards a successful start-up and I feel you know that Cloud Lending's timing couldn't be better. Peter: For sure, so then let's switch back to the alternative lenders, marketplace lenders and I know many of them choose to remain anonymous, but can you give us a sense of how many platforms are actually using your software today? Snehal: Sure, we actually have over 80 lending companies using our cloud platform. I typically put them in 2 buckets; one is established companies which probably don't claim themselves to be fintech companies and the other bucket being fintech companies who are either online balance sheet lenders or marketplace lending platforms. We have a 55%/45% split with 45% being marketplace and online lending or online balance sheet lenders. Peter: Right, okay, I know on your website there are some of your clients who have agreed to have their names shared publicly, could you take us through one or two examples of a company that has implemented your technology? Snehal: Sure, I think one of our success stories is Harmoney. They are a marketplace lending platform out of New Zealand. I think it will be interesting to speak about them. I call them one of our success stories in a sense that we sort of delivered against our claims which is to allow a new marketplace lending platform to focus on what's really important for them which is really in my experience is the borrower experience, their underwriting model which is their secret sauce and sort of leave the rest of the technology platform which involves origination work flow, decision engine, bank relationships, fund movement, servicing and collections to Cloud Lending. Peter: Right, I know the Harmoney guys well. I'm sure they've been one of the fastest growing platforms and have had a lot of success. They're a great sounds like a great client. Someone's listening to this and they've just started or are about to start a new lending platform or they've taken over an existing one they want to completely re-jig the technology...obviously, people have options, you can build it yourself and I know you've done some...you've had white papers and things you've released on this, but what are the real advantages from going with someone

7 like you rather than getting something completely customized to your own needs and building it yourself? Snehal: Sure, I think I want to make one point very clear and actually, this is true for all serious platforms out there who claim that they have built something from scratch. I think many lending platforms say that they have built all of it. What they typically mean is they have purchased best of breed software and built integrations and a web skin on top of it. I am sure that it is true for all the leading lending platforms out there because that's how any serious lender would do. I mean, to make a point let me explain with an example. All of them require a GL software, General Ledger software to run their financial accounting and month-end reporting/year-end reporting. Now that does not mean that they will build it from scratch because it doesn't create any value for their business. They will just go and probably purchase Oracle Financials or SAP or something similar to do that. Now same goes with certain aspects of a lending platform. A serious and a smart platform would not want to spend their time and energy on writing algorithms of how to calculate interest rate or drawing amortization schedules because simply there is no value being created for the business if they would to spend their resources into doing that. I do believe that one of the reasons why Harmony has been so successful is because they know where they want to focus their energy to create value for their business. They are focusing their energy on their strategy of acquiring borrowers, the borrower experience, the customer experience and their underwriting model. They are leaving all of that to Cloud Lending which is how do we service this loan, fund movement between banks or collection so all of that is being handled well, they are using our technology to handle these aspects, but there are other aspects which are probably more important for a business and they want to do it in-house which is their secret sauce. Peter: Right. Snehal: Now if I were to even go on further, each one of these lending platforms would need loan portfolio management software. Now they could either go with an old software provider such as Fiserv which was actually really meant for banks or someone like Cloud Lending which was built from scratch, from the ground up but keeping in mind the requirements of next generation lenders. It scores above legacy platform such as Fiserv and Oracle when it comes to serving specifically online lending and the marketplace platform community. Peter: Okay, so let's just take that another step further. So someone has agreed to come on board, they want to be up and running quickly...that's a lot of people, they want to implement it tomorrow, that would be great. So what are the biggest challenges for getting up and running quickly from the platform's perspective? Snehal: Sure, just to reiterate. So we are not a white label marketplace lending platform, we actually enable marketplace lenders to use our technology to go to market faster by building their complete solution around our platform. Now to answer your question, I think it really

8 depends on the maturity of the business model and the organization that we are dealing with. It really depends on the maturity of the organization. Now in our experience, what we have seen is let's say a garage-based start-up by high energy entrepreneurs with less domain experience and if they want to build a fintech lending business, what we have seen...again, this is my personal experience, initially they will be of the view of let's build everything in-house, but typically the smart ones realize fairly quickly that and the ahha moment comes to them when they figure out the business model, and it takes about a year of operation to reach that stage. At that stage they start to think about scaling their business and realize they want to focus their energy on creating value for their business and that doesn't include building a loan portfolio management system. So that's when they start spending their energy on defining their algorithm, underwriting algorithm, (inaudible) to use, minimizing cost of customer acquisition and do not really worry about the loan portfolio management system. On the other hand, if an established institution is to start a new line of business, an online lending platform, from the onset they sort of know that they are going to evaluate best of breed lending technology to build their business around. Typically, they have figured out their ideal customer profile, market segmentation, underwriting algorithm or acquisition strategy. So long story short, I think the clarity in the requirements and the business model perhaps poses the biggest challenge for any customer who want to get up and running quickly on Cloud Lending platform. Peter: Yeah, that's sounds reasonable. So just curious now, you've got your banks, your alternative lenders and these are obviously very different kinds of markets, how are you reaching these customers, how are you getting the word out about Cloud Lending so they know that you guys exist. Snehal: Sure, we continue to focus on alternate finance companies. I mean, that's our bread and butter and we really continue to...would like to maintain that lead that we have so far. Events such as LendIt helps us find prospects, I mean that's like in one statement. This is the place where any player who is looking to start a marketplace platform or an investor looking to invest in marketplace lending...i mean, they cannot miss an event like LendIt and there are a few more events. We do make a point that we have our presence felt in all those alternate finance events in the US and also abroad. The fact that we have deployed over 20 active marketplace platforms already around the globe helps. We have gained significant domain expertise and sort of real on the ground insights which our prospects find very valuable. Many times, we are their source for best practices in marketplace lending. Peter: Right, I certainly appreciate the plug for LendIt there. We certainly aspire to help bring people together and meet folks like you. So I just want to be clear, where are you actually operating? I mean, you said around the globe and Harmoney are in New Zealand, I know you

9 mentioned Europe. I mean, are you a truly global company, where do you have clients and where are you operating? Snehal: Sure, in terms of geographies, we have strong presence in North America, 45% of our customers in this belt and then the UK and ANZ region. Australia has been an exciting market for online lending. It's a small market, about 15 million people, but we are seeing a tremendous amount of interest in the ANZ region. These are the three markets that we have a strong presence in and we continue to build on that. Peter: Okay, so before I let you go I want to talk about...you're in an interesting position here, I mean, you're the number one player in a new market, you certainly got a lead on anybody else offering similar products, so what is your vision for Cloud Lending, where do you want to take this? Snehal: Sure, we are very aspirational, we are a dedicated team. Actually, we just hired our 100th employee last week. Peter: Wow, congratulations! Snehal: Well, in terms of vision, our five-year vision is to build and open a Cloud platform for broader financial services. We do believe that it goes beyond just lending, including insurance, wealth management, personal investing and such. Now although our focus is going to be lending for the foreseeable future, but our long term vision is to make our platform available for third parties who are interested in building apps using whatever we learned and whatever common cloud services that we plan to expose as part of our platform solutions soon. That will not happen until the middle of next year, but that's what the future holds for us. We are very excited about exposing our common services so that others can start using our platform to build applications for the wider and broader financial services industry. Peter: Okay, so last question, I can't let you go without asking you about mobile. I feel like here you are, you're a tech company that's very much in the center of everything that's happening in our industry and mobile still seems to be something that everyone is saying, oh, it's going to be in the future, there just isn't a whole lot of use cases out there. I mean, are you hearing some of your clients saying we want to make sure that this is all mobile-enabled or even more than that. I mean, are they focusing on mobile as sort of a core way to run their software, what are you hearing on that front? Snehal: Sure, that's a very interesting question and I have an interesting answer to that. Peter: Okay. Snehal: What we are seeing is the mobile use case is perhaps stronger in emerging economies. We do have some customers in Latin America and some in Southeast Asia and the demographics is such. They're at an interesting point where it seems like they have leapfrogged the desktop. They have more mobile penetration than desktop penetration in those geographies

10 and they're a younger population. India is perhaps the youngest country in the world right now with the majority of the population, I think 50% of them, in the age of I want to say and they are all very heavy mobile users. These use cases are stronger in these markets where they want to enable everything for mobile as compared to even in the US or UK and Australia for that matter. Although it looks very enticing that okay, let's build everything for mobile, but from a lending standpoint we are still seeing that until and unless the millennials come into play the mobile strategy is going to take a backseat in these three markets that I talked about, but not too distant. I think we are talking about a five-year time where they want to have mobile capability for everything. Not to say that we don't have any mobile capability within the Cloud Lending platform, this is just API driven and we have customers who have mobile interfaces again hooking on to the same APIs that a desktop version would. So from a capability standpoint, it exists, but from an option standpoint, here you have my answer. Peter: Okay, well, that's fascinating because I can explore that for another 30 minutes, but our time is up, I'm afraid. I really appreciate you coming here today, Snehal, it was fascinating. Snehal: Thank you Peter for having me. Peter: Okay, see you later. Snehal: Bye. Peter: So I want to just take up that last point that we were discussing and that is about mobile. While I totally get it that in this country it's really not as important, but when I was in China earlier this year, it was amazing to me that everybody uses their phone. For a lot of them, it s their only computer. They don't own a laptop, they don't own a desktop and these are professional people, we're not talking about poor people and this is all they can afford. These are all professional people, they choose to do business with their cellphones so if you don't have a mobile phone app, you don't really have a company in China, particularly in this industry. I had conversations with people who would show me the apps on their phone and they could do everything with that. They take out a loan, they can look at their investment portfolio when it comes to peer to peer lending. In Chjna that is what they use, they use their phone as their primary access point be it a borrower or a lender. Now we're not here yet in the West, but I agree with Snehal that we will probably be a few years away from that, but I also think it's definitely coming and people who are not thinking about mobile now I think will be left behind. On that note, I would like to say thank you very much for listening. I sure do appreciate it and I will catch you next time. Bye.