Daniel Foggo is CEO of Plenti and a true Fintech pioneer. He introduced Australia to the marketplace lending (or peer to peer) model back in 2014, paving the way for Fintech to go mainstream. RateSetter turns 4 in October so it seemed like the perfect time for Daniel to reflect on his journey. Read on in this enlightening interview with Dexter Cousins.
Daniel: Plenti provides a marketplace, much like a lot of other disruptive businesses (Uber as an example.) We provide investors with access to strong, stable investment returns via investments into consumer loans. By connecting borrowers and investors together, we can cut out costs, improve efficiency and ultimately deliver better value to both sides of the market. In operating our platform, our primary objective is to ensure our investors get a good return and that there's stability in the returns earned.
Our model is quite different to some other marketplace lenders, in that we provision for losses, to help support the stability of returns. For every loan funded, an amount is paid into our Provision Fund. Which helps protect investors from any borrower defaults. Our Provision Fund currently has about 6% of the value of our loan book in it, held in cash.
Our Provision Fund has meant that to date, our investors have received every cent of principle and interest they expected to receive. This fund is carefully managed to help ensure protection for our investors. Not just in the strong economic times we are experiencing now, but also in a sustained, stressed economic environment.
On the other side of our marketplace, we provide borrowers with very attractive loans, whether they come directly to us or via an intermediary. We attract customers because we provide very good value. Our rates are up to around 8% lower than those typically offered by the large incumbents. We also provide a very convenient, easy service.
We are a true Fintech business. An equal mix of finance and technology people. Most Fintech's tend very much to be one or the other. We must get credit and finance right. We must deliver the right financial outcomes for our retail investors, We must deliver for important commercial partners such as the Government’s Clean Energy Finance Corporation. Equally we need the right technology in place to perform our duties efficiently and to ensure our customers have an unrivalled experience when borrowing or investing with us.
Daniel: I spent well over a decade in investment banking, latterly at Barclays Capital here in Australia. Lending money to businesses post the financial crisis was an arduous process. It didn’t seem to work very well for the bank or for the bank’s customer. Even if a loan was approved by our global credit committee, as a bank we were often lending money at a loss. For the bank to break even on lending deals, we would have to cross sell other products.
Customers were also paying high rates and fees for credit. Whilst it was hard for us to make money, it was equally hard for them to reconcile the spread between what they were earning on their deposits versus what they were paying on their loans.
It had also become clear to me the banking model had major systemic flaws. The original concept of a bank was to keep your money safe. But banks today are involved in high risk activities which put customer deposits at risk. As a society we manage those risks by ensuring a bank can withstand a one in a 50 or one in a 100-year event. So logically, we see many years where the bank model is unable to provide good value to customers. Then events repeatedly occur where taxpayers are required to bail out tough situations.
The Financial Crisis of 2008 really highlighted the issues I am talking about. Shortly after the Financial Crisis, I read in the Economist that if you were to redesign finance, you wouldn't start with a bank. The implication was that you would have banks, but that there are other models that can serve both the borrower and the investor better, whilst supporting a more robust, more resilient financial system.
This thinking led me to look for an alternative to the bank model I was working in. I wanted to see a new model prosper, a model that could leverage technology and pass on better value to customers, and not have to lean, unfairly, on the tax payer for support.
So, in 2012 I resigned from my job at Barclays, flew my family to the UK and spent 3 months visiting lots of different businesses trying to find a model I thought would resonate with Australians. On my trip I met amongst other businesses, Funding Circle, (expected to IPO in the next fortnight with an approximate valuation of £1.5bn) and RateSetter. They were both very early stage and had both funded less than £20 million in loans.
Once I explained the bank spreads in the Australia market, it was clear to them that there was a significant opportunity for a marketplace lending model in Australia. The spreads were just so much wider in Australia than in the UK. I very quickly made the decision that the RateSetter model, in particular, could prosper in Australia. I flew back here to assess the market opportunity – really to see if I could uncover any reasons why the model might not work here. A month later I returned to the UK and signed a partnership agreement with RateSetter.
It's been a very successful partnership, they've been extremely supportive in building our Australian business, especially as we went through the process of gaining our regulatory licences from ASIC.
Daniel: The initial years were not the most enjoyable years of my life! I spent just under two years going through the licensing process. We started in late 2012 and the term “Fintech” in the submissions probably caused confusion, as it wasn’t a term in Australia at that stage.
ASIC took the time to understand our offering. With the RateSetter model working very well in the UK, we were fortunate in that we could point to it as an example of success.
Political support for our model in the UK and in Australia also helped. There was an increasing awareness politically, and maybe with regulators, that something needed to be done to increase the diversity of our financial system. We couldn’t just have a reliance on one model, being a bank model, but rather needed various models that work together. I think we had some success in explaining that marketplace lending could be part of the solution.
Finally, in October 2014 we had the relevant licenses in place and launched the business.
Daniel: The Royal Commission, Open Banking and Comprehensive Credit Reporting are creating significant structural changes in consumer finance. These changes, in turn, are creating opportunities for Fintech business like we have never seen before.
Maybe the most significant structural change is the shift in trust. We are moving into a world where large financial institutions, who may have prided themselves on having consumer's trust, are quickly finding it's being eroded. Conversely technology-led businesses are typically doing a very good job of building customer trust.
Clearly in finance it is especially important to earn a customer’s trust, although it can take much longer to earn than in some other industries. Fintech business do have a few tools in their tool box to help of course, such as by providing high levels of transparency and control to their customers.
Daniel: We are building an enduring business. There is a perception a tech start-up will become successful overnight. Seek and Carsales.com (a shareholder of RateSetter) are both examples of businesses which listed to great fanfare and are subsequently very successful businesses. What a lot of people don't know is it took each over 10 years to get to IPO.
From day one at RateSetter we've always had a very long view in mind.
This is a multi-decade opportunity to build a model that becomes a significant part of our financial system. To achieve our potential, we want to achieve it in a relatively low risk way, which means very considered growth, which is broadly consistent every month.
Although our approach to growth is conservative, that doesn’t mean we are not growing rapidly, and that there’s not a huge runway for future growth. Our leading volumes are consistently about 100% ahead of where they were a year ago. And we expect to sustain this level of growth for many years to come. We currently fund around $25 million of loans each month. At our current growth rate, within 2 years we will be close to matching a big four bank in terms of the value of amortizing non-mortgage consumer loans funded each month.
Daniel: Long term success comes down to putting the building blocks in place. The first building block – of course – has been to recruit the right people. We have attracted great people, generally because they have quickly understood that by offering better value to our customers and diversifying our financial system, we are in fact providing a ‘social good’. There is certainly also something very democratic about our business model, in that we are providing everyday Australians with access to an asset class which was previously more or less the exclusive domain of sophisticated investors.
Of the first six people in the business, five are still here and the one person who departed is still involved. I am proud of our team, and the fact that our core senior team have a very consistent view about the purpose of our business and where we want to go.
We now have a team of about 90 people, and our team continues to expand rapidly. Everyone in the business is very focused on making sure we deliver on our vision. The challenge of course is ensuring this focus remains as our team grows, not just in number, but geographically.
We work daily to ensure our technology is best in class. We've built a fantastic platform from which we can keep growing. The stability of the platform enables the business to grow at scale without problems. We also perform exceptionally well in terms of credit performance because of the quality of our credit data.
Getting the right equity investors on board has been critical to our success. It has been a very conscious decision to look for investors who can contribute not just money but who can contribute more broadly to the success of the business. Pleasingly all investors on our register have contributed to the success of the business in one way or another.
Our management team and related entities, which have delivered our plans, own nearly half of the company. RateSetter UK obviously gave us a foot up and remain very supportive. Carsales and its subsidiary Stratton Finance have helped us break into the loan broker and automotive lending markets. Five V Capital, our financial investor, has a lot of experience with high growth businesses and has shared their expertise in scaling businesses. Then there are private investors who have helped us in various ways
Daniel:As we continue to add more people the challenges keep evolving. We've been quite lucky, in that our culture has remained consistent. This mostly comes down to the way we recruit people. One of the most important questions for us in recruiting is how a new hire will fit from a cultural perspective, especially whether a candidate understands and buys into our purpose.
In keeping with this philosophy, we have sought to avoid having layers of middle management and to give people flexibility. However, we are a regulated business with significant responsibilities, so you do need to have the right controls and compliance measures in place.
If we are to compete with the large incumbents and other financial services businesses, and we want to continue to grow at the rate we're growing, we need to be doing things better than what they've been done previously, all the time. It is a constant challenge to each member of our team.
Daniel: The person at the helm is perhaps the worst person to articulate company culture and values, as you can often take your own values and behaviours for granted.
I’ve always sought to foster a culture where people are given a lot of autonomy, can take responsibility for their part of the business and are accountable for their – and where relevant – their team’s performance. Everyone in the business has a responsibility to constantly keep evolving and improving.
I believe we have created a respectful culture across the business. We all do the best we can for the customer and for each other. The customer is always front of mind.
Daniel: Every milestone is rewarding. When we were granted our licenses, it was extremely satisfying after so much time and effort. When we funded our first million dollars, it was exciting as we felt we’d proven the model and the platform works. When we funded $100m, we were delighted to be proving to ourselves that we were successfully building a sustainable business, in the way we promised our customers we would.
Maybe that’s it. Delivering on the promise. That is the most rewarding part of the journey.
But really I still feel like the journey is just beginning. I guess that’s the privilege of starting a business that challenges the status quo in such a large part of the economy.
