Serving Up Kabbage to Small Businesses, with a Side of Technology


small-business-7-30-15.pngOne way to look at Kabbage is that it’s a company of mostly millennials who are helping to recreate finance in their own image. Formed in February 2009 during the waning months of the Great Recession, when many commercial banks had curtailed their lending and some were taking capital from the federal government to strengthen their balance sheets, Kabbage provides unsecured consumer and small business loans through its online platform. It is one of the leading players in the emerging fintech sector, and to date has made over $550 million in loans.

Neither Chief Executive Officer Rob Frohwein nor the rest of his leadership team are millennials (the company does have a sense of humor, playfully describing the team on its website as the “heads of Kabbage”), but there are plenty of them working at the company. And if you’re going to hire millennials to work at a fintech company, you’ve got to offer them cool stuff like daily catered lunches and snacks, on-site yoga, top-of-the-line Macs and 27” Thunderbolt displays. And of course, you need to give them stock options for the day when the privately-held company either goes public or is acquired. The irony of the company’s name is that many millennials probably wouldn’t know, unless it was pointed out to them by their baby boomer parents, that “cabbage” is slang for money. 

The financial services industry is experiencing a wave of innovation where several upstarts like Kabbage are taking an old product—money lending in some form has been around for more than two millennia—and using technology to create a 21st Century delivery and customer experience.The company provides small business lines of credit from $2,000 to $100,000, and more recently began offering consumer loans from $5,000 to $35,000, with repayment terms of either three or five years. Unlike most banks, which base their underwriting decisions primarily on the credit scores of the borrower, Kabbage takes a diverse range of information into consideration, and because the process is fully automated, the applicant receives an immediate decision. 

Although conventional wisdom would argue that Kabbage is a threat to traditional banks, particularly in the consumer lending space where much of its activity is focused on consolidation of credit card-related debt, Frohwein says that he wants to work with banks and would rather be seen as collaborator than a competitor. Kabbage’s principal offering is an unsecured business line of credit. Most banks won’t provide that kind of funding without some form of collateral, and they can take weeks to make a decision. Prior to this issue going to press, the company was expected to announce agreements to work with two international banks, and Frohwein was hopeful that similar conversations with U.S. banks would also bear fruit.

Like all fintech companies, Kabbage has benefited from growing consumer comfort with doing financial transactions online. According to Frohwein, 95 percent of Kabbage’s customers never interact with a human at any point in the process. And many of them seem to like it that way. Kabbage might be a company with a culture that has been influenced by the many millennials who work there, but it has created a product that is finding acceptance among borrowers of all generations, and that adds up to a lot of cabbage. Frohwein spoke recently with Bank Director Editor Jack Milligan

Let’s talk about why there is a Kabbage.

There is a Kabbage because you can actually access data from online sources on a real-time basis allowing you to do a couple of different things.

First, you can permit a customer to have a very elegant online experience.  The customer lands on the Kabbage website, which provides access to information relating to their entire business, and receives a decision within just a handful of minutes. 

Because Kabbage gains access to these data sources through the customer’s authorization, we have ongoing access to data. As a result, we understand how that small business operates, not just today—at the time of qualification—but how they’re operating today and any point in between. It gives us a very rich understanding of that small business.

When we started the company, we believed this information would better reflect how a business was going to perform as a customer rather than relying on the personal credit score of the small business owner. The whole premise of the company was based on data access and technology. Our DNA is technology and data access and how that access can provide us with unique insights and customers with better experiences. I think that’s probably what separates us from some of the other players that are in this space who continue to have a lot of manual processes residing within their customer experience even though most have adopted the “data and technology” marketing speak.

When the company formed, did you feel as though you were stepping in and filling a void that was out there for small business borrowers? In 2009, obviously, we were just coming out of the financial crisis. The banking industry had closed up like a clam in terms of lending, and there was a real credit crunch, especially for smaller companies.

For sure. Despite being responsible for most of the growth in our economy, small businesses have historically been treated as the redheaded stepchild of the financial services industry. They’ve been largely ignored over the years. Though we serve all small businesses now, when we started, we focused on online retailers. Traditional lenders are reluctant to provide an online retailer with a loan. It’s not that they’re not good customers, but they’re hard-to-reach and they often have limited operating histories. They don’t have a physical presence so you can’t walk into the store and hear the cash register ringing, and see the smiles on the customers’ faces. If you can serve that audience as Kabbage has, then you can serve all small businesses, because you start with the most challenging segment of businesses.

Explain the products that you provide.

We provide a working capital line credit for small businesses. In the fourth quarter of last year we also launched a personal loan product. We have both a small business direct product and a consumer direct product. 

We also started licensing our platform to third parties, which allows them to start lending in the small business and personal consumer lending space. We announced the first deal with Kikka Capital, out of Australia, a couple months ago. 

Have you also had conversations with domestic banks about the possibility of working with you under a licensing arrangement?

Yes. In the U.S., we are working currently with two banks. Those discussions are in a slightly earlier stage, but we believe we will execute agreements with both of them. One relationship will center on a small business product and the other is on the consumer side. 

The reaction from U.S. banks has been very positive, but it’s a difficult regulatory environment, and there’s a lot of caution that goes into that decision. It’s a process of working with the financial institution and getting them to the point where they really understand how we operate, how this compares favorably to their existing approach and how this grows their core business.

Do you see banks as competitors, or do you see them as potential partners? Or both?

I don’t think I see them as competitors, I actually see them as partners.  I try to help them recognize that this is a market they can serve, it’s not a market they should ignore, and there’s a legitimate partnership opportunity here. They don’t need to take a competitive stance with us. We think we can actually work with all the banks. 

How about in the consumer space?  Or do banks not really focus on the size of personal loans you provide? 

In the consumer space, our loans average about $15,000 and many of our customers are consolidating credit card debt so this is a segment in which banks are interested. Although banks may or may not see that as competitive, they should see what we are doing as important and core to them.  However, again, banks do not need to look at us as competitive.  We are working with a large U.S. bank right now to help them enter this space directly. 

Though very focused on the consumer lending space for many years, small business lending has been another story for them. It’s been traditionally difficult for banks to make profitable, and that’s because there’s typically high acquisition costs, and also there’s a lot of operational inefficiencies. Banks apply the same requirements and invest the same resources for a $30,000 loan as they do for a $3 million loan.  It’s just not reasonable to expect small business owners to go through that hassle for that amount of money.

Explain a little bit more about your underwriting process. It sounds like it’s a very sophisticated approach, and one that’s a little bit different than what most banks employ. 

When a bank underwrites a small business loan they will have a checklist of many items they need to collect: three years of financial statements, FICO score, an asset list, whatever it might be. A bank would expect every small business lending applicant to come to the table with the exact same set of documents and information. We take a different approach.

Kabbage must meet the small business owner where that small business owner is. That means if they have a specific set of relationships with accounting companies, or credit card transaction processing systems, or social networks, or shipping companies or whatever it might be, that’s the data we need to collect and decision on. The data helps us determine the capacity, character and consistency of small and medium-sized businesses, or SMBs, just as the items the bank collects attempt to determine.

We’ve had to figure out a way to basically say, “Give us access to any number of data sources.” Without getting too technical, it’s an API, or application programming interface, approach where we’re given automated access on these electronic accounts for specified information. We don’t have the ability to write to the account, so we can’t manipulate anything within it. It does give us the right to read the information that’s contained within the accounts. 

As you would imagine, it also provides us with a lot of historical information. It doesn’t just relate to the most recent period, it oftentimes goes back many months or many years in the past so we can see how these customers have performed over time. 

The real key to what we do is a couple of different things. One is we are able to take all that information and make it relatable. If somebody gives us access to their credit card transaction processing information and shipping information, and another person gives us access to their marketplace information, personal credit score and social data, we’ve got to figure out, “Okay, how do I make a decision on both of those customers, and make a decision that is consistent and fair across the board?” We have developed that capability over time, and we did that through a lot of trial and error, to be frank, where we made educated decisions as to how we were going to view information. Until you get repayment information back and see the customer’s actual behavior, you really don’t know how well correlated that information is to actual performance. We’ve gone through that process over the last several years. 

The nice thing about the way our product works is once somebody takes cash from our line, they pay it back within, on average, less than four months. Therefore, we are able to determine how effective our models are very rapidly. 

How do you find your customers?

SMB owners do not congregate in a single place. There’s not a hall where SMB owners meet each evening and you can advertise there. They’re everywhere the population is. Therefore, we have had to become experts at locating them.

We have a blended approach. We do both traditional and digital marketing. If you log on to Kabbage.com, we’ll probably follow you for a long time online, and you’ll see more ads from us in the future. On the traditional side, we do radio and direct mail. If you watch TV, you’ll be seeing ads in the fall. 

We also have a pretty robust business development arm where we enter into relationships with other businesses that have a lot of small business customers. It can be those that are offering phone systems to small businesses, or packaging for small businesses, or selling accounting software to them or whatever it might be. We try to work with the folks that work closely with small business owners.

When you look at the personal demographics of who your customers are, is there anything that’s distinctive from a generational perspective? What do you find interesting about your customer base?

We work with SMB owners that are super young and we work with folks who are much older.  However, they all embrace technology at least in some manner. Although we started with online retailers, over the last couple of years, we’ve grown to include all small businesses, so you get your restaurants, your dry cleaners and your professional service firms, and everybody in-between. We see a much broader demographic than we did in the past in terms of their technology savviness. 

You’d be amazed, 95 percent of our customers have a 100 percent fully automated experience. Not only do they not have to interact with anybody specifically at Kabbage, we don’t have a person on the backend specifically reviewing that file.  It’s all done through our system. You’d be amazed at how many of our customers are comfortable just interacting with our system. That didn’t happen overnight; we had to figure that out the hard way. We made a lot of mistakes, and we created some bad experiences, and we worked hard to make it as comprehensible as possible. That’s what we’ve really focused on over the last five years.  Now it seems easy, but we had many sleepless nights on the road to getting there.

What Makes a Great Bank CEO


strategic-vision-7-27-15.png“I think as a company, if you can get those two things right—having a clear direction on what you are trying to do and bringing in great people who can execute on the stuff—then you can do pretty well.”

That pearl of wisdom comes from a 30–something chief executive officer who has helped launch a social media revolution in this country. Maybe you’ve heard of him–Mark Zuckerberg, one of the founders of Facebook. For all his precociousness, I think that Zuckerberg has identified two of the most essential traits of an effective CEO—the ability to lay out a strategic vision for the company, and then bring in talented people who can make that vision a reality. I’ve been thinking about this recently because I believe that over the next 10 years, we’re going to see a big demographic shift among the ranks of bank CEOs as the last of the baby boomers give way to younger generations including, possibly, some millennials. And the coming decade could turn out to be very interesting.

There are certain characteristics or skills that I think all CEOs, in the banking industry as elsewhere, need to have. They absolutely need to be excellent leaders, with the kind of people skills that enable them to work through others, rather than trying to accomplish everything themselves. And the larger the company, the more important it is that they know how to empower their employees. CEOs also need to have strong communication skills, both with their employees and their customers. They obviously need to be good bankers, which over the past several years has meant being good lenders. Some have become good deal makers since banking is still a consolidating industry. They also need the kind of collaborative skills that will enable them to work with an engaged board of directors, which has the potential of making them better in their jobs. And at smaller banks, the CEO needs to be well connected to their community because that’s where the business comes from.

I tend to think of these traits and skills as table stakes for effective bank CEOs. But each generation of CEOs seems to face a different kind of challenge, which calls on their adaptive capabilities. Anyone who has been in the job for the last 10 years had to deal with the challenge of the 2008–2009 financial crisis, which required many banks to work through a pile of bad loans, raise capital and adjust to a greatly increased level of regulation. Each generation of bank CEOs seem to face a different set of challenges, and I don’t expect it to be any different for the next group.

They will need a much more sophisticated understanding of technology, not just in the traditional sense of core processors, ATMs and teller platform systems, but in the larger context of how mobile and digital technology are beginning to change the delivery of consumer and small business banking products and services. And one of their biggest challenges will be to manage the transition from a distribution system that is branch–centric to one that is much more reliant on digital and mobile going forward. This is one of those trends where it might be hard to perfectly time your bank’s migration from brick–and–mortar to digital and mobile, but you don’t want to be too far out in front or too far behind.

This next generation of CEOs will also have to prepare for the emergence of millennials, both as customers and as employees. Be sure to check the July issue of Bank Director digital magazine for a fascinating cover story on the challenges of managing millennial employees, who are now entering the workforce in meaningful numbers. Millennials are also a driving force behind widespread consumer preference for alternative channels like digital and mobile, and as a group they probably have less loyalty to the concept of a traditional bank than their Gen X older siblings or baby boomer parents. Each year they will account for an increasing percentage of the industry’s customer base, and they want to be banked differently.

Unfortunately, the next generation of bankers will also have to become experts at managing the regulatory agencies that supervise their bank. Previous generations have had to worry about regulatory compliance as well, but today’s overseers play much more of an activist role and expect to have an open dialogue with the CEO and the board about any significant action or event that impacts the bank. The CEO—who is the focal point for any communication with the regulators—must be able to manage that relationship in a positive and constructive way.

Internet Banking: what it means for your institution


FirstData-WhitePape4.pngThe way we bank is changing. What used to happen at a branch now happens just about anywhere. Internet banking services have fast become a banking reality. And in today’s changing technology landscape, financial institutions must keep up with customer demands. So what does this mean for your institution? First Data created a white paper to help you understand the consumer technology expectations and trends in banking. We outline what a complete internet banking solution should look like, how to choose the right one, and best practices for a successful conversion program. We’ll cover topics such as:

  • Features and capabilities that an internet banking solution should have
  • A mini case study of a bank that utilized First Data’s Internet Banking Suite
  • Nine best practices for a successful conversion process

 To read the white paper, download it now.

Seven Ways Financial Institutions Can Maximize Profitability


FirstData-WhitePaper3.pngIn the past, financial institutions didn’t need to rethink the way they did business. But times have changed. Between today’s unpredictable global economy and new banking regulations recently enacted, it has never been more challenging to grow revenue, maintain profits and satisfy customers.

Today, banks and credit unions need strategic solutions to replace lost revenue, reduce costs and maximize profitability. First Data has created this white paper to help you explore new ways to effectively evolve your business in today’s world.

Our white paper addresses today’s big issues and critical areas, including:

  • The Durbin Amendment: Can you maintain checking profitability, despite lost DDA revenue? 
  • Debit Strategy: How can you rethink your debit programs in order to increase the profitability of your offerings?
  • New Technology: What do consumers expect when it comes to technology? How important is mobile banking? 
  • Fraud Prevention: Can centralizing fraud management help your institution reduce fraud?

To read the white paper, download it now.

Consumer Adoption and Usage of Banking Technology


FD-WhitePaper2.jpgToday’s consumers, especially those known as Millennials and Gen Y, are used to having technology integrated into most aspects of their work and personal lives. Banking is no exception. To respond to changing customer expectations, banks, credit unions and other financial institutions have incorporated online and mobile technology into consumers’ banking experiences. However, financial institutions still need to answer several questions pertaining to banking technology:

  • How well are financial institutions meeting the needs of consumers when it comes to offering high-tech products and services?
  • Whom do consumers view as the trusted provider of the mobile wallet?
  • How does adoption of banking technology vary for different consumer groups?

This white paper answers these and other questions that are critical to the ongoing success of financial institutions in a rapidly evolving marketplace. The paper is based upon the findings of a recent online research study of 2,000 U.S. consumers conducted jointly by First Data and Market Strategies International. The “New Consumer and Financial Behavior” study assessed consumers’ attitudes, behaviors, desires and technology adoption. This white paper is the third in a series of four based on results of the study and focuses on consumers’ attitudes and behaviors related to technology in banking.

Topics include:

  • Consumers’ attitudes about, and adoption of, banking-related technology.
  • Usage of mobile banking.
  • Perceptions of the mobile wallet by different consumer groups.
  • Usage of online banking and bill payment.
  • Steps that financial institutions can take to appeal to various types of consumers.