Using Social Underwriting and IT to change Startup funding

Interview #30 with Gustavo Vinacua, CEO & Founder of Trust·u

About Trust·u: Startups and SMEs face a notorious catch-22: In order to grow, they need funding, but banks won’t lend to them unless they’ve grown to a certain level. Instead, they turn to friends and family for financial support. Seeing an opportunity to address this issue, BBVA created Trust·u to find an innovative way to assess and finance startups.

About Gustavo Vinacua: Prior to starting Trust·u and becoming its CEO, Gustavo worked in the telecoms industry. An entrepreneur at heart, he has also founded various businesses focused on display and interactive marketing, as well as intellectual property.

CFO Brain: Tell us a bit about your background, and how did you in working first at BBVA and at this unique project that is Trust·u.

Gustavo Vinacua: My original background is in the telecom industry, working in Ericsson, Amena, then Orange. In that field, I worked mostly in analytics, marketing, and business development. Before jumping into the banking industry, I worked with Xerox R&D in Europe and created a company called “Rebee” which, as a spinoff of Xerox, would be aiming to deal with intellectual property issues on image management. It didn’t work out well.

In 2010, I joined BBVA to run the innovation centre, which we launched the following year in Madrid. In 2012, we expanded the programme to Bogota, Colombia, then Mexico City, and Houston, Texas.

After a few years in the innovation centre and running open innovation activity globally, I started to interact with thousands of startups who were part of our startup program. After a while, I started feeling like I wanted to get back to my entrepreneurial roots. Two years ago, I started down the pathway to do so, and I was fortunate enough to have the support of my colleagues and bosses to let me create a digital business within BBVA, which is called Trust·u.

On that note, you’re working in the financial industry now. Do you see a difference in being an entrepreneur in this space compared to other sectors?

As you no doubt know, the financial sector is a heavily regulated one. Of course, there are specific things to every industry, but in our case, there are several items related to regulation that you have to take into account. In turn, these rules create extra challenges for anyone looking to build a financial firm from scratch. But in general, the tech we have enables us to quickly produce and connect different pieces both from internal products and 3rd parties, minimising the impact of operating in a more regulated environment.

Could you tell us a little bit more about Trust·u? From what I’ve read, you’re incorporating a technique called “social underwriting.” How does that work?

Small businesses are vital to our society, making up a significant portion of wealth and job creation. However, these companies struggle the most when it comes to arranging finance; especially when they are in their first few years of operations. From a bank’s perspective, it’s quite easy to see why: new companies have little to no data on their financial performance and creditworthiness. When banks use a classical approach to risk assessment, it becomes complicated to loan small businesses and startups money.

We wanted to see if there was a way to improve how businesses borrowed money. We looked at what happened in real life and what happens when small companies reach out for funding, they turn to their friends and family for loans. So we said, “how can we improve that situation?”

What we came up with was a platform that brings together the loans from the inner circle of the small business owners and then we contribute with additional financing on top of it. In practice, the business connects their bank accounts to Trust·u so we can access their transaction data. We then use these data to understand how their business works and how it’s performing.

We automate the monitoring and assessment so that the company doesn’t have to continually send us financial information, freeing them from a burdensome administrative task. From there, we use the data to calculate what we call the ‘trust index’ that acts as a credit score. Then, using these data and looking at the amounts their friends and family input to support them, we give them a bank-backed loan for the majority of their financial needs. For example, if the business needs a 30,000 EUR loan, we would ask them to provide 3,000 EUR from friends and family, and we would loan the rest.

The model we use combines financial data with ‘social underwriting’ — a machine-based way of learning about how friends and family interact with the borrower. In other words, we can take these data points — often times small and otherwise invisible and use intelligent analytics to score the small business based on how their friends and family trust them. Using this immutable information, we can then assign our own rating, letting us confidently lend to the SME.

Let’s look at an example. I have three brothers. My youngest brother is a great guy and I love him, but I don’t loan him any money (laughter). If people close to the borrower can make a risk and lending assessment like that, then we can trust them when we do the same.

Therefore, we created a digital underwriting process and risk assessment model based on shared financial data and social underwriting. Small and starting businesses gain access to financing that they wouldn’t have otherwise or had struggled getting, and we get to tap into a new lending and revenue stream that banks traditionally shied away from. As a bonus we’re also seeing that, thanks to this process, friends and families gain more confidence in the SME, meaning that they’re more comfortable lending to them, unleashing additional, informal funding that would otherwise not be available.

You also talked about machine learning.

Yes, we have been testing and working hard building a risk model using machine learning techniques. These methods give us a potent risk model rife with the data we have access to. We’re quite happy with that since these days, business success in our field is all about leveraging data and technology.

You started in Spain, are you operating anywhere else?

For the moment, we’re only working in Spain. Of course, we’re interested in scaling internationally, but for now, we’re focused on refining the product here before moving into other markets.

Where does Trust·u sit in the range of other BBVA products and services? Is this one the first of its kind or are their other ones in the bank’s product portfolio?

We are still part of BBVA. That said, we’re given a high degree of autonomy, and significantly thanks to the bank’s open-mindedness and forward thinking towards innovation. I’ve been here for seven years, and I’m proud how the group embraces innovation in its culture. Of course, this approach is necessary if we want to mimic what stand-alone startups are doing. It’s a potent strategy that has so far worked well for Trust·u. We have a couple of other similar projects in the pipeline, but they’re not yet quite ready for release.

Do you think more banks will use this approach to innovation in the future?

The intention is to build products where we know there’s a pain point needing solving. While we can operate with more agility in this environment, the primary goal is to learn. In that regard, we’ve learned so much, not only about Trust·u but also elements that we can apply to other projects.

For example, we’re accessing data in a digital and automated way. We’re tapping into a previously untapped social element that has the power to unleash real economic disruption. So from a learning and testing perspective, Trust·u not only creates a unique product but also gives BBVA valuable insights useful for the entire the group.

Let’s talk a bit about FinTech in general and their impact on CFOs and other corporates. How do you see the B2B FinTech ecosystem developing in Europe and how it will impact SMEs?

Data is currently transforming our lives and business and will be increasingly influential. When it comes to small businesses, they’re having access to data that wasn’t there before. Concurrently, technological tools are letting these same firms analyse and use the data to find insights that weren’t previously available. These transformations let them make better decisions and give them more chances to succeed. I’m sure that this will create excellent opportunities for them.

When it comes to FinTech and banks working together, small businesses are a massive business; they’re the heart of our society. Their role is extraordinarily relevant and it is telling that they struggle to access data and resources that bigger companies have which enable them to be more successful.

There’s still lots of room to help them and solve their pain points. Regarding B2B FinTech, there’s plenty of room to innovate and address those issues.

Originally published at www.kantox.com on December 12, 2017.