A Conversation with Funding Circle’s Sam Hodges
FR: Are you saying that given the opportunities, you actually needed $100 million more?
SH: Frankly, we didn’t need that capital and we’re not planning to spend most of it. But having a really strong balance sheet in itself has a value.
FR: For counterparties?
SH: Yes. I think raising the money when we did was a really strong show of confidence from our investors and it has real benefits in terms of the lending conversations we are having.
FR: Is there any color you can give as to how the capital will be allocated in the US? I ask that because Funding Circle has generated a fair bit of traction here, but there’s a lot of competition here too.
SH: Sure. We’re putting more resources behind all our systems. In terms of our engineering spend, we will be adding a lot of folks to the team here. We’re also continuing to flesh out some of our global functions in risk and analytics.
Success Factors
FR: You’re obviously aware that some of your non-bank competitors here have been experiencing tough times. But Funding Circle is continuing to build momentum both in the US and overseas. Your volumes look strong and your recent securitization in the European ABS market went very well. Why do you think Funding Circle has outperformed?
SH: There’s no magic bullet in this business; however, I would start by saying that almost anyone can set-up a commercial lender. The barriers to entry are very low. You go and get one commercial lending license in a state and make a couple of loans — that’s easy. The barrier is scale, to be able to do it well and to originate loans at a marginal cost that makes sense. Also, being able to process loans in a way that’s reasonably automated and doing the risk analytics properly is difficult. Finally, making sure you have diversified funding sources and servicing the loans over a lifetime are really hard things to do well.
FR: I take it many of the company’s functions are done centrally?
SH: Absolutely. Risk and analytics reports up to a guy named Jerome Le Luel, who used to be head of analytics for Barclays and the CRO of Barclaycard. He sits in London. Tech and product are run globally in the US by David Yu. David used to be the CEO of Betfair, which was the world’s largest betting exchange and was formerly listed on the LSE. The only way we were able to attract someone like David was to give him the opportunity to build out a global infrastructure.
FR: Speaking of being publically traded, has Funding Circle declared or can you say anything specific on the potential timing of a public offering?
SH: We have no immediate plans for an IPO. At some point, might it make sense to go public? I think it’s probably too early to say, but our view is that if you build a really strong business, you can pick your moment.
Entering US Market
FR: Let’s switch to how you got involved. You were head of Endurance Lending Network.
SH: Yes, I co-founded it and was the Co-CEO.
FR: I’m guessing that when Funding Circle made the decision to come to the US, it was confronted by the classic build versus buy calculation. What was it about ELN that convinced Funding Circle that it was the right partner for its US expansion?
SH: From our perspective, we were looking across the Atlantic and observing the great business that Funding Circle had established in the UK. By our estimation, Funding Circle was about 18 months ahead of us. I think Funding Circle’s team looked at us and saw a great deal of synergy in terms of mission and alignment. It’s been a great marriage ever since.
FR: Is there anything you can share about that marriage (i.e., the size of your US businesses)?
SH: We anticipate doing somewhere on the order of about $500 million in lending this year in the US. Four years ago it was zero, so business has been growing very nicely in this market.
FR: Very nicely? It’s more than that…
SH: Yes, we’ve seen pretty incredible growth over a four and a half year horizon.
FR: What’s the expected growth rate in 2017?
SH: Last year we did about $280 million in lending, so call it roughly a 75–80% growth rate we anticipate for this year.
Macroeconomic Environment
FR: Let’s turn to the global economic environment and how that can impact your business. How are you thinking about rates and the impact they can have?
SH: We do anticipate rising rates. That being said, I don’t think you’re going to see a huge amount of divergence between rates across geographies in the near-term. That view has been incorporated into how we are running our business globally. That being said, the most important thing to keep in mind is that we have a lot of control over our spot rates. If interest rates spike in any one of the geographies where we operate, what we can do is raise the nominal rates we’re charging our borrowers and make sure that the relative spread that’s in our pricing stays in there for investors.
FR: And what’s the average term of your loans?
SH: Our range is one to five years, but our current average is about 24 months. So our investors aren’t taking a huge amount of rate risk on loans at the moment. I’d add that we feel pretty confident that we can navigate through an evolving rate cycle. Now if rates were to go up very quickly or very high, that obviously can cause a demand and supply shock, so that’s an eventuality that we think about.
FR: With respect to the US economy, what’s your take on the current economic situation?
SH: Based on our data, which consists literally of thousands of small businesses, I think the view is reasonably optimistic. We’re not seeing major swaths of rising delinquencies or defaults, and cash flow performance for most industries and geographies looks pretty healthy. That’s similar to our view in the UK and Europe. All of the political noise notwithstanding, our window into the economy indicates that it’s doing pretty well in our regions.
Traditional Banking Competitors
FR: Assuming that rates rise gradually, how worried are you about traditional banks becoming more aggressive?
SH: Over the last 18 months, we’ve seen some banks on the margin get more aggressive in asset classes where they haven’t played before. However, we still see a huge amount of opportunity and a big market in front of us.
FR: So no real concern about traditional banking competitors?
SH No. To be honest, a few more banks being slightly more aggressive isn’t something that causes us deep existential concern.
FR: You’ve seen the various tech and infrastructure partnerships some banks have struck to improve their performance and usability. How do you view that?
SH: We’ve spent a bit of time thinking about what the lending as a service model looks like. Our perspective is that it’s very difficult to build both a lending business and a lending technology business under one roof. If you look at a lot of the partnerships that are out there, I would say most of them are in early days. But it might be the case that some banks are able to use some of the technology providers to make their small business lending or borrowing experience significantly better.
FR: So why not be concerned by these LaaS partnerships?
Originally published at www.thefinancialrevolutionist.com.
