Joel Radtke Of CollateralEdge On The Future of Money and Banking

An Interview With David Liu

Know your financial market history. Most of the senior professionals in the business that will be evaluating you for hire or advancement have been through important cycles in their careers and have been shaped by them. The 70’s inflation, the internet bubble, financial crisis, etc. all have important implications for the business. Knowing something about those cycles will make you a more well-rounded and informed professional as you encounter your own formative events in the future. On the flip side, being unaware of some of these major events will make you seem naive if you react to current financial events without that context.

The way we bank has changed dramatically over the last decade. It was not too long ago when you had to wait in line in a bank to deposit money. Today things are totally different. You can do your banking without ever walking into a bank. In addition, the whole concept of money has changed. In the recent past, money usually meant bills and coins. But today, the concept of money has expanded to include digital currency and NFTs. What other innovations should we expect to see in banking in the short and medium term?

To address this, we are talking to leaders in the banking, finance, and fintech worlds, to discuss the future of banking and money over the next few years. As a part of this series, I had the pleasure of interviewing Joel Radtke.

Joel Radtke is co-founder, president and COO of CollateralEdge, an innovative fintech platform that is re-envisioning debt capital delivery for the middle market. He has over 25 years of experience operating, financing, and advising growth-oriented middle-market companies. His ability to identify unique solutions to complex problems paired with his visionary mindset has enabled him to take multiple companies through strategic growth and expansion.

Before CollateralEdge, Joel co-founded United Orthopedic Group (UOG) where he executed more than a dozen acquisitions in his role as CFO and helped grow the business from a $15M revenue platform to approximately $100M prior to exit. Prior to UOG, he worked as a private equity investor for Grotech Capital Group, analyzing, executing and managing multiple middle-market healthcare investments.

Joel spent his early career developing his financial structuring, business evaluation and strategic expertise in the investment banking healthcare industry groups at both Alex Brown and Credit Suisse. He has a BA from Harvard University where he graduated Cum Laude and was a John Harvard Scholar.

Thank you so much for joining us in this interview series! Before we dive in, our readers would love to “get to know you” a bit better. Can you tell us a bit about your ‘backstory’ and how you got started in this industry?

I’ve been in the finance industry in different forms for my entire career, evolving from a ‘finance guy’ to a ‘financial entrepreneur.’ My first job was as an investment banker, primarily focused on healthcare financing and M&A transactions. I spent several years with Credit Suisse in New York working on dozens of transactions spanning the spectrum of capitalization structures.

Following my investment banking career, I went to a middle-market private equity firm focused on the healthcare sector. That experience was critical in my career development as we were constantly working with portfolio companies to optimize their capital and minimize financing costs to drive our own returns. That required constant interaction with the lenders involved in our businesses and understanding a lender’s perspective on a new credit opportunity and common themes that caused deals to go awry in the process. While at the tail end of my Grotech experience, I formed a great relationship with a successful CEO from the orthopedic products business. He asked me to come work with him as his CFO to oversee the company’s acquisition plan and financing path for a new business he was pulling together.

I took the leap into the entrepreneurial world and never looked back.

Over the course of 6 years, we executed 15 acquisitions to create a services function to leverage the growth of the core manufacturing company. That path was full of twists and turns. It involved a near-constant look at our financing structure as our needs changed. As a middle market company CFO, I gained a better understanding of the practical challenges of interacting with the commercial bank market as a growing and evolving company.

By the time I left the orthopedic company and moved to Dallas in 2013, I was a full-fledged entrepreneur brimming with ideas for my next thing. I felt there were important insights into structural gaps in the debt financing market that I had seen and lived in my experiences. I met my future CollateralEdge co-founder, Joe Beard, in 2013 and we immediately struck a rapport around our shared experiences in the financing business.

It would take a lot more work and time to get all of the pieces to the puzzle in place to found CollateralEdge, but we saw the outlines of the opportunity from the very start.

Can you share the most interesting story that happened to you since you began your career?

As the CFO of United Orthopedic Group, I was in charge of acquisitions. A lot of times we were making relatively small acquisitions in markets that were strategic for us, so it was less about the specific target company and more about the benefit from the expanded geographic reach and customer access. With one of those deals, I learned an important lesson about needing to truly understand a counterparty’s motivations.

We signed an LOI with a company for a relatively small amount. As part of the closing process, I invited the owner to our headquarters to grab dinner, meet our team and execute the final deal paperwork. After dinner, we were enjoying some wine discussing the post-acquisition plan when he told me he had one little item we needed to cover before he finished the paperwork.

He said, “After we executed the LOI, I was doing a little more work on my finances. I think I underestimated the remaining mortgage on my property so we will need to bump up the purchase price on the company acquisition by $50k.”

The mortgage he was referencing was on his private property that had nothing to do with the company or the acquisition. My younger self might have laughed or responded sarcastically, but instead, I told him while I empathized with him, the paperwork was already done. I also didn’t have a way to get it reapproved since it did not tie to the underlying business we were buying. He accepted this rather glumly, and we went back to drinking our wine and talking about the future opportunity of the combined companies.

The reason this story stuck with me is that — whether it is an M&A transaction, a job offer acceptance, a new corporate partnership, etc. — there are real people making these decisions, and they do so for a variety of reasons that may be very different from whatever objective metrics you are using for your analysis. In fact, getting lost in the metrics and multiples may often blind you to the true path to get to the business agreement you want.

Since then, I have seen many instances of similar decision-making, and I always try to first understand the true motivations of my counterparty as opposed to assuming they would share my own motivations.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

One of my favorites is: “The best time to plant a tree is 20 years ago. The second best time is today.”

This is an unattributed Chinese proverb that I’ve thought a lot about at different times in my life. I can be a bit of a perfectionist, and one thing perfectionists love to do is beat themselves up over things they wish they had done better. This quote hits that directly. However, it is the second part that I find meaningful. “The second best time is today.”

For me, it is both calming and motivating. Take action now so you don’t have to have this same conversation with yourself in 20 years.

Ok wonderful. Let’s now shift to the main focus of our interview. Can you tell our readers about the most interesting projects you are working on now?

There are many fascinating aspects of our business right now but one of the most interesting is a bit of a sidelight that has the potential to be incredibly impactful. Our Risk & Compliance team has developed the CollateralEdge Bank Rating System (CEBRS). There are 1,000+ banks in the US alone that are active in the core middle market category that is the best fit for CollateralEdge’s solutions. We can’t possibly work with all of them and need to prioritize our time and resources.

A good portion of that decision needs to be objectively determining aspects of the bank’s profile and underwriting performance that have characteristics we think are important. While there are many FICO-like ratings for banks, the bank’s solvency trends aren’t the key factor in our analysis, so we had to create our own. Over many months, our Risk team put together a very interesting algorithm to generate the CEBRS score that allows us to compare a potential bank customer versus others. It also allows us to see trends for current customers to potentially identify developing problems or opportunities.

How do you think this might change the world?

The CEBRS project is a small part of the vision we have for how CollateralEdge can permanently change and improve the world of commercial bank financing. The broader impact of banks utilizing CollateralEdge is to provide a completely new tool to allow them to directly manage loss risk and internal underwriting standards while still driving loan volume and new customer acquisition.

The way we change the world of finance is to make our product so readily available and easy to use for a bank that almost every middle market loan could benefit from attaching CollateralEdge in some form. This would lead to significantly more closed deals for the bank and substantially lower costs of financing for a large number of middle market borrowers. All good news for a strong, growing, and vibrant US economy.

What most excites you about the banking or payments industry as it is today? Can you explain what you mean?

The last few years have been eye-opening for banks in assessing the ways technology can reduce the cost of some core admin processes in banking and payments. Historically there was a resistance to some of these innovations and reliance on ‘this is the way it’s always been done.’ Now, with consumers rapidly wanting to manage a large portion of their lives online and on-demand, as well as the competitiveness of the bank market requiring focus on extraneous costs, many banks have come to see technology solutions in a different light. This is exciting for the industry as a whole, and I feel we are just scratching the service of the impact it can make — especially at smaller banks that may have been behind on the technology adoption curve.

What most concerns you about the banking or payments industry as it is today? What would you suggest needs to be done to address that?

The biggest potential gains for a bank come not just from shaving pennies off current processes, but in reassessing core banking processes from a blank slate in light of new technologies.

As an example, one bank executive we work with began mapping out the steps between the initial company touchpoint and the executed transaction for a new commercial loan. When he showed me the flow chart, it looked like a dozen snakes dropped out of a basket on top of each other! He was astonished at the hidden cost in time and personnel attention in the back and forth between due diligence, deal structuring, and negotiation — 75–80% of which was not directly impactful on the bank’s underwriting and 100% of which was completely lost in underwriting that did not result in a closed deal. These costs were not being tracked anywhere so the senior bank team had little idea of the true cost of an individual transaction execution or the profitability of the overall transaction underwriting activity. It can be a huge blindspot for a typical bank and a sinkhole for costs.

The conclusion that many forward-looking bank execs are coming to is, first, they can’t afford NOT to look at technologies to help address hidden cost areas and, second, a core process such as standard commercial loan underwriting may need an overhaul and not be approached the same way it was 20–30 years ago or longer.

One bank CFO put it this way, “The process to approve a $50mm loan is exactly the same as to approve a $1mm loan. How does that make sense? We need to continue to bring in the $1mm loans as many of those turn into very successful long-term customers. However, they don’t represent nearly the near-term risk that a $50mm loan represents. We need to look at automation options or other process edits to not misallocate precious underwriting personnel and resources.”

How would you articulate how the concept of money has changed in recent times? Is it really a change? How is it still the same? Can you explain what you mean?

I am a partially reformed gold bug, so I’ve thought a lot about what money is and what it isn’t. A bar of gold has been useful for hundreds of years as a store of value and wealth, but it is not that useful to buy a hamburger on the street corner when you’re really hungry. Those green bills in your wallet accomplish both missions of store of value and medium of exchange, but the unabashed money printing in the last decade-plus has made people wonder about that.

I believe the biggest change to people’s thinking about money has come from the crypto/Bitcoin surge as well as a number of related digital phenomena like NFTs or even real estate in the metaverse. It shouldn’t be that surprising — even an old economy NFT like a baseball card has value seemingly untied to its core worth (or usefulness in buying a hamburger.)

Often things have value because someone else thinks it has value and is willing to trade valuable things for them in return. The readiness and reliability of that value exchange can come and go — as investors in Dutch tulips and Pets.com stock can attest. Gold has fluctuated in value but has stood the test of time as being always worth something, and that shared belief among millions of people and governments has its own self-reinforcing effect.

Crypto has a lot of potential, but it behaves more like an internet stock right now than a store of value. If it turns out that it is a store of value and an easily recognized medium of exchange, then it is radically undervalued right now. If it is not a store of value, but merely a fad (like NFTs may turn out to be), then it isn’t worth anything at all.

Based on your vantage point as an insider in the finance industry, what innovations should we expect to see in banking in the short and medium-term?

I expect that banks will try to get in front of crypto and blockchain contracting. I expect this to be a more specialty, one-off area until there is more regulatory clarity.

How has the pandemic changed the way banks interact and engage with their customers?

I think the pandemic accelerated trends the banks were already seeing. Specifically, consumers want mobile/online options to do almost all of their bank activities. However, in addition to the impact of consumer banking, the PPP experience probably accelerated banks to think about actual business loans with a minimum of direct physical interaction.

There is a growing sense amongst bank executives about the need to reduce the administrative cost of loan underwriting to match the actual risk to the bank. PPP loans were a unique circumstance, but they forced the banks to streamline the procedure and do it remotely.

In your particular experience, how has the pandemic changed the way you interact with, and engage your customers?

While it’s in the process of changing, for the last year-plus many of our customers and potential customers had corporate policies to not be in office. Where before it would have required meeting logistics to match people’s schedules for a conference room presentation and intro, in most cases over the last year or so, we were accomplishing that through Zoom. It made it much easier to get sessions scheduled and executed quickly. Additionally, in many cases, our regional bank customers have distributed operations with RMs/Market Presidents in one location but credit officers or underwriting in another. As opposed to being an obstacle, it now became a lot easier to ensure we had all of the right people on the call to hear our story and ask questions.

In my work in the telecom space, I’m very interested in the importance of user experience. How much of your interactions have moved to digital such as chatbots, encrypted messaging apps, phone, or video calls? How has this shift impacted the user and customer experience? What challenges do these apps present when used as a customer engagement tool?

I mentioned our use of Zoom above and many banks use Teams as well. We have not yet adopted chatbots as part of our customer service repertoire, but we are looking into it. More interestingly, our business model is highly tied to an integrated series of contracts per transaction. As opposed to the old school method of emails and scans, we have designed our process from the start to incorporate the e-signature technology. These tools have improved markedly over time and now incorporate click features like in-line suggestions and negotiation tools. Additionally, the use of such methods opens up automation and other opportunities to reduce the frictional cost of human touchpoints per interaction.

If you could design the perfect communication feature or system to help your business, what would it be?

Since so many of our projects are multi-layered and very fluid, there is an evolving string of questions and bits of work that contribute to moving the project forward. It often involves different people throughout the company, some of whom are waiting on others to press ahead with their part. It would be ideal to have a tool with the ability to aggregate all of these in-line communications and tasks for convenient productivity with automation that forwards the work product intelligently to the next stop in the chain.

Fantastic. Here is the main question of our interview. What are your “5 Things You Need To Create A Highly Successful Career In The Modern Finance, Banking, and Fintech industries?

1. Bring certifiable technical skills

Increasingly, candidates or opportunities are being screened out by certifiable external certifications, such as CFA, CPA, MBA, etc. The proliferation of large job screening tools has made it harder for you to advance without crossing certain screening hurdles.

2. Know your financial market history

Most of the senior professionals in the business that will be evaluating you for hire or advancement have been through important cycles in their careers and have been shaped by them. The 70’s inflation, the internet bubble, financial crisis, etc. all have important implications for the business. Knowing something about those cycles will make you a more well-rounded and informed professional as you encounter your own formative events in the future. On the flip side, being unaware of some of these major events will make you seem naive if you react to current financial events without that context.

3. Bring an apprenticeship mentality

When I was a young investment banker, the most common pejorative was ‘managing analyst.’ That referred to a first or second-year analyst that started offering opinions and carrying themselves as if they were a managing director. However, they had limited to no experience and completely misplaced confidence in their judgment. It takes a long time to master any craft and experience is hard-won from the real world, not from a book. Show up to any finance job with a healthy appreciation for those senior to you, and try to learn something as opposed to assuming the same attitude that served you well in a college seminar will be well-received in a real finance job.

4. Maximize your observation skills

The nice thing about many finance roles is that you get to be in the room in many client meetings even if you are expected to only listen and learn. Don’t zone out during those meetings just because you won’t be speaking. One of the best things I did in my career when I was a very junior professional was to prepare for every meeting like I was the managing director and would be in the line of fire on client questions. I would listen to how my senior professionals would manage a meeting and, in particular, the questions they would answer from clients. There were many, many times where I listened to a client question and realized I had no clue how I would respond. I would then listen in amazement as my managing director skillfully answered and satisfied the client. Not only was that a useful dose of humility, but it kept me engaged and accelerated learning in a low-stakes situation where my credibility and reputation were not on the line.

5. You are always being watched and evaluated

You should assume that you are being evaluated as a professional whether you are on the clock or not. I distinctly remember a time early in my career. I was on a flight from New York and happened to be sitting behind a competitor team of investment bankers that were flying to pitch the same business my team was going to pitch. They had no idea who I was and spent the entire flight discussing their pitch and strategy. When we landed, I was able to share all of that with my senior bankers who were able to adjust their own pitch and undercut the competitor’s arguments preemptively. We wound up winning the business. The finance industry is highly competitive and rife with highly confidential information. Never assume you’re not being overheard and conduct yourself with professionalism and discretion at all times. It will serve your career well.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger.

My movement would be for everyone to know something real. I am not a fan of the ‘fake it ’til you make it’ mentality that seems to pervade society these days. Instead of being an inch deep on a topic but spouting off like you’ve studied it your whole life, actually study it! People use the examples of rocket scientists and brain surgeons for a reason — you can’t fake that. It takes effort and experience and years of dedication to master a craft. It almost doesn’t matter what it is. There was a theory going around a while back that it takes 10,000 hours of practice to master a skill. My movement would be for as many people as possible to spend that 10,000 hours on whatever skill interests them and seizes their passion. It doesn’t matter if it is being a rocket scientist or a plumber — whatever you are, be a great one!

How can our readers further follow your work online?

You can follow CollateralEdge on LinkedIn or at our website at www.CollateralEdge.com.

Thank you so much for the time you spent doing this interview. This was very inspirational, and we wish you continued success.