The so-called Big Four accounting firms provide a myriad of services to large banks but they are all starting to get involved now in marketplace lending. Probably the first mover here, at least in this country, has been KPMG.
Fiona Grandi, a partner at KPMG, is my guest for episode 53 of the podcast. She leads KPMG’s fintech initiatives nationwide and her firm has been engaged by some of the leading companies in the space. Fiona co-authored this popular white paper earlier this year and just this month KPMG came out with their Global Fintech 100 list with many marketplace lenders making the list.
In this podcast you will learn:
- When marketplace lending first got on Fiona’s radar.
- What KPMG is actually doing in the marketplace lending industry.
- How they are bringing banks together with innovative startups.
- Why some startup platforms struggle with compliance.
- Fiona’s opinion on the San Bernardino tragedy and the steps taken by platforms like Prosper.
- What OFAC does and why it is important for lending platforms.
- How Madden vs. Midland is impacting both platforms and investors.
- Why KPMG called out data protection in the Treasury RFI as something the industry should focus on.
- How true marketplace lenders do actually have skin in the game.
- Why the large banks need to enter marketplace lending in some way.
- Fiona’s opinion of the importance of a trade association for marketplace lending.
- Her view on the regulatory landscape today and what changes might be coming.
- What could trigger a change in the pace of new regulations.
Transcription Options
Download a PDF of the transcription of Podcast 53: Fiona Grandi of KPMG.
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PODCAST TRANSCRIPTION SESSION 53: FIONA GRANDI
Welcome to the Lend Academy podcast, Episode No. 53. This is your host, Peter Renton, Founder of Lend Academy.
(music)
Peter Renton: Today on the show, I am delighted to welcome Fiona Grandi. She is a partner at KPMG and sort of the lead of their FinTech marketplace lending practice. She has somewhat of a unique perspective on this industry because she works very closely with some of the major platforms, she works closely with some of the major investors so she sees this industry from an interesting perspective. So I wanted to get her on the show to talk about some of the recent news as well as how the industry is doing when it comes to compliance and regulation, what we can do better and also we touch on what she thinks will happen in the future. I hope you enjoy the show!
Welcome to the podcast, Fiona.
Fiona Grandi: Thank you, Peter.
Peter: Okay, let’s get started by just giving the listeners a little bit of information about your background and what your role is at KPMG.
Fiona: Sure, I’m Partner at KPMG and currently the Consulting Leader for the San Francisco Bay Area and I’ve been with KPMG for 20 years this coming year, but what’s probably relevant to this discussion today, Peter, is that I lead our FinTech practice nationally. I am a financial services and banking partner, I spent my entire career in that and I’m heavily supported by partners in our emerging technologies, venture capital, AltFi funds teams as well.
Peter: Okay, how long have you been focused on the FinTech space?
Fiona: We’ve obviously watched the changing landscape of banking for years, but I think there was sort of a pivotal moment maybe for our firm about three years ago. Every year we host an international financial services conference and everyone flies in from around the globe. Three years ago, we held it in San Francisco and as you’d expect FinTech was a significant part of the agenda. It was attended by KPMG and clients and hundreds of people and what was really interesting is we had companies like Coinbase, Prosper Marketplace presenting, but we also had the big banks there. So we had John Stumpf, CEO of Wells Fargo speak and it was interesting. It was sort of a lightning bolt moment for me hearing Ron Suber talk and the immediate next presentation was by John Stumpf and just the dichotomy of their perspectives. This was three years ago and a lot has happened in three years and I think if you would fast forward to today, everybody is talking about it, everybody’s actually changed their business models, every one of the big banks, whether they’re building or partnering, as we’ve seen in the news.
Peter: Okay, so then when did peer to peer lending first get on your radar?
Fiona: Probably before that, it became a separate industry group for KPMG in 2013. That’s probably when if you were to track our activity and our investment. We made a big change back in 2013. We were the first of the Big Four to make a significant sponsorship with LendIt, we started to issue white papers and really get out in front of the market and the trends with our thought leadership.
Peter: Okay, so then can you just sort of explain what KPMG’s role is…what are you actually doing in the marketplace lending industry today?
Fiona: Sure, really the core of our primary services which is audit, tax and advisory and consulting services. I think what has been unique with us is that we’ve been supporting from a pre-IPO, actually through IPO now with those that have gone through IPO and also brought kind of our global team. So I sit on a global FinTech leadership team that represents right now nine different countries and so some of our best thinking is coming from those teams that serve peer to peer lenders in Sydney or the UK or Israel. It’s really an interesting time.
When you think about the whole ecosystem, where does KPMG fit in? We kind of fit in on all different sides. We work with the banks that are investing that maybe are looking to us to provide some independent perspective before they invest their dollars. We work with the platforms themselves trying to get them matured, whether it’s a back office, middle or front office perspective. We certainly work with the funds.
I think one of the key differentiators right now is our innovation services that we’ve really been developing probably over the last five or six years. We bring banks into our innovation labs that we have in the US or globally and we try to pair them up with FinTech companies; we are doing presentations on some of the most groundbreaking and innovative things happening in peer to peer lending. Part of that is also the alliances and partnerships that KPMG has entered. I’ll give you just a couple of examples. I think you know of Matchi which is the matchmaking service between FinTech companies and financial services more broadly, but we also have alliances with news companies like Owlin which is a news alert service. KPMG and Owlin have created a technology trends index which is just pretty amazing.
Peter: Okay, so I want to just actually dig into a little bit of that. You mentioned the FinTech lab that you have and you’re bringing banks together with innovators. Can you just describe that in just a little bit in more detail. Are you making introductions, are you kind of driving joint ventures? What does it look like?
Fiona: We are making introductions and it’s really across a spectrum of what banks are doing because if you look at the first and second tiers certainly in the US and possibly globally, they’re all taking different approaches. Some of them have their own innovation lab so they’re bringing us in to kind of pitch us and get our feedback as an independent player. They’re also looking to buy and partner so they’re looking for introductions, absolutely. Typically, they’re coming to KPMG and saying…we have a problem that we need to solve. We don’t have the right customer experience happening and these platforms do. How can we get it or how can we leverage the platforms to expand and reach more customers? So I think it’s a conversation and it’s certainly multi-faceted.
Peter: Okay, interesting. So I want to talk about your white paper that you put out a few months ago, earlier this year. It was interesting because it wasn’t like a lot of the other white papers I read which is sort of like here’s an overview of the industry and this is where we think it’s going. Yours was a very specific, you took one topic and really drilled down into it. The title was “Values-Based Compliance: A Marketplace Lending Call to Action.” So I wanted to sort of spend a little bit of time on this because I think it’s important. Let’s just talk about compliance. You actually talk in the white paper that some platforms…many platforms, in fact, that you started working with, they really are not doing a very good job when it comes to compliance, but that it is improving. What does the industry need to do when it comes to compliance? What are people doing wrong?
Fiona: These platforms are coming from a place of addressing a need in the market, but, essentially, their technology, their unique differentiation is the technology and so regulatory compliance, while they may have a chief risk officer or a lobbyist and a compliance officer in-house, it’s not necessarily a core competency throughout the company of these platforms.
So I think that they struggle to really embed some of the fundamental concepts of just thinking of compliance in day-to-day tasks. So compliance often tends to be more of a bolt-on rather than an embedded component within the organization, but are most companies doing it wrong? I don’t know if I would say they’re doing it wrong. I think given their patterns of growth, it’s hard for them to invest in things like regulatory compliance and back office maturity, but we have seen some really significant changes in the few years…this is the result…Obviously, we’ve had a couple of big IPOs…that certainly is bringing up kind of the base level for everybody in peer to peer. We’ve also seen and KPMG plays in this space that the funds and the institutional investors are the ones…probably more so than the regulators that are asking for…what is your OFAC Program or what is your anti-money laundering program, how do you deal with these types of regulations? You’re seeing everyone start to make a focus on compliance.
Peter: Right. Let’s use that as a segue, I mean, we are recording this on December 11th which happens to be the one year anniversary of the Lending Club IPO, but also…I wanted to talk about something that came up early this week where it became apparent that one of the shooters in the San Bernardino tragedy took out a loan apparently through Prosper via WebBank and that has created a major kind of firestorm in the media. I’ve been interviewed many times, I’m sure you’ve been on the phone a lot this week around this issue and I guess, I’d like to get your thoughts. Firstly, do you think that there’s anything these platforms have done or need to shore up some of their OFAC…In fact I’d like you to explain what OFAC is as well and the AML stuff. There’s been some people questioning it this week. I just want to first get your thoughts on the events of this week.
Fiona: Sure and I have to qualify what I’m saying…these are my views and not the views of KPMG and much of this information as you just described is coming out sort of daily and evolving. It’s really difficult to look at the circumstances of the loan that was made and the connection to the very tragic event to say that a bank would have made a different decision than the peer to peer platform made.
You know, when you look at the villains in this…you know, we’re talking about somebody who is a US citizen, who had been here for several years and it’s hard not to see that this is sort of a little bit of a canary in a coal mine trying to alarm the US population around just some of the challenges in our regulatory system, but when you peel back the onion and look at the facts and circumstances, would it have been different if somebody, another one of the top five banks, had made that decision.
I think you’ve probably seen the news today that the California Department of Business Oversight indicated that they’re coming out with their own inquiry launch, I think officially today, and there’s certainly increased scrutiny coming, but when I look at the San Bernardino circumstances specifically, it’s hard to say how we would have prevented that and what regulation needs to do to further protect the US.
I think a lot of the focus is around small business more conceptually. When you think about the Consumer Protection Board, the CFPB doesn’t have protection over small business and that’s where the California Department of Business Oversight is going with their inquiry. They are trying to see how money can pass through loans and the question is…can an individual fund sort of a specific loan and pass through dollars to bad players that are out there and how do we protect against that and that’s a very difficult question to answer.
Peter: Well, I tell you, it’s not impossible. I’ve been investing on these platforms for many years and I look at all the new platforms. There is really only Prosper and Lending Club today that are open to non-accredited investors. One, you have the accredited investor hurdle which you may be able to overcome, but then a lot of times it’s blind. I mean, like how do you know…when you apply for Lending Club and Prosper, you don’t know whether that’s going to go on the whole loan platform and going to be done by an institution or whether it’s going to go on the retail platform.
The way I look at it, the systems we have in place today prevent…if you are a bad actor and you want to funnel money through these loans, there’s no way to do it where you can guarantee you’re going to be able to do that. So I think that’s something that’s good that we have in place today. We’ve also got the House Financial Services Committee that’s also looking into this. Do you feel, and it’s going to be your personal opinion, that anything should change as a result of what has gone down the last couple of weeks?
Fiona: Clearly, changes are coming so that’s guaranteed. (laughs) I feel safe saying that. I think we really need to evaluate the expectations of the peer to peer marketplace lending platforms, what bar are we holding them to? When you think about the specific events that came out this week, are we expecting marketplace lenders to catch things that our own FBI…they didn’t see red flags, they didn’t trigger…so I think we need to step back, take sort of a broader picture. I do think that the marketplace lending landscape does provide scenarios that certainly regulators and government did not contemplate. So how does that potentially change some of the risk profile that OFAC and anti-money laundering…and OFAC being the Office of Foreign Assets Control, that those laws and regulations are intent to protect us.
Peter: Right, I just want to stop. Before we go onto another topic, I want to make sure…can you explain OFAC, what it is and what it has to do with people trying to obtain a loan from a platform or from anybody?
Fiona: Sure, OFAC is really a financial intelligence enforcement agency so it’s a component of the US government and it’s supposed to prevent terrorist dollars, bad actor dollars from funneling money, laundering money, pushing money through the US regulated system so it’s a protection. There are things that platforms, that banks, that anybody that is passing money through have to comply with. Checking against the OFAC list for bad players means having a certain amount of…in bank regulation we talk about know your customer so there’s specific laws trying to protect us from moving around the money of the bad players in the market.
Peter: Right, right, okay let’s move on, but I want to stay in the legal arena just for a few more minutes here and talk about something else that is topical this year and the last few months is the Madden versus Midland case. Could you talk a little bit about this case and what you are advising your clients around this case that has now gone all the way to the Supreme Court?
Fiona: Sure, (laughs) I’ll have to preface it Peter with saying that I am not a lawyer and certainly…and this is not legal advice.
Peter: Neither am I (laughs).
Fiona: We’re in the same boat. We’re not advising specifically any immediate action. The ruling applied across three specific states; New York, Vermont and I think it was Connecticut, and I think it wasn’t surprising, at least to me…the ruling said that platforms that are working with originating banks are not exempt from state usury laws so I guess it wasn’t surprising, but what would you do with that information?
I think the platforms, the peer to peers really need to look at what percentage of their loans are affected by the ruling, what are their biggest exposures in those specific states named and do some risk analysis around that. It shouldn’t be a difficult exercise and I think the platforms need to be prepared that their boards and venture capital partners, their investors are going to be asking about this, if they haven’t already.
Peter: Right.
Fiona: It’s an indicator that the regulatory regime is changing, but it takes time to respond and react. I think we just have to wait and see how this all plays out.
Peter: Speaking of waiting and seeing, we had the Treasury RFI over the summer. I think you guys were the only Big Four accounting firms to actually do a response…
Fiona: We were brave (laughs).
Peter: …yes (laughs), to the Treasury and I read through your response just the other day and one of the things you mentioned was data protection as one of the key things the industry needs to focus on. The fact is we haven’t had a cyber attack, at least not a major one. So can you just talk about what does the industry need to focus on when it comes to cyber attacks.
Fiona: Sure, I think one of the reasons why we called it out in that Treasury RFI request for information was because it certainly is a significant risk in any banking industry, right? If you just think about the nature of PII, the Personal Identifiable Information, that comes with loans and accounts it is easy to see how the platforms, the peer to peers are certainly exposed as the banks are. So I think the comment was more around making sure that in marketplace lending we think about what the risks are, that cyber attacks are also at the top of the list.
I think thinking about security, data protection, information protection is not necessarily a core competency for these FinTech companies so for them to not spend time focused on it and thinking about how they may have different risk exposures because they’re so mobile, because of the nature of how you provide them data and how your loans get funded. I think they’d be putting themselves at risk if it wasn’t at the top of their risk assessment list.
Peter: Right, so one other thing you talked about there was skin in the game. This is one of the things that the RFI seemed to be most interested in and you had an unusual, a different approach I guess. Can you talk about…you talked about maybe an alternative to what people traditionally think about as skin in the game. I don’t think you provided a whole lot of detail, but can you just expand on that, expand on what you were thinking there.
Fiona: Sure, in banking we talk about skin in the game in terms of risk retention. With peer to peer we’re talking about actually taking loans on to the balance sheet and what that means thinking about the platforms that don’t do that. Do they truly have skin in the game and I think our comment was really directed at…there’s absolutely skin in the game.
One of the key foundational concepts is around the transparency of the loan portfolios and seeing exactly what is happening in terms of loan characteristics and data accuracy and so in marketplace lending that’s the skin in the game.
If you look at it from a macro perspective, the interest of these platforms and their investors are absolutely aligned. If you have a loan that doesn’t perform even though it’s not on the balance sheet, you lose your investors and ultimately the market share. On a micro level, if an individual loan fails, you lose those critical servicing fees that are part of the success of many of these platforms today.
Peter: Right, no, that makes sense. So I know that in your work you talk with a lot of the large banks so I want to talk a bit about that. When we set up this interview we didn’t know that Chase and OnDeck were going to actually announce a partnership, but we know that now and I had a chat with Noah Breslow, the CEO of OnDeck, and we talked in detail about this deal. Do you think that…firstly, two-part question, one is…is this a game changer for the big banks and do you think that in a related way is this is a blueprint for other deals or do you think other banks are going to take a different approach?
Fiona: Yeah, certainly the Chase/OnDeck deal was very exciting. It’s a bellwether moment for the industry as a whole, but I don’t know that I could make any more predictions in this evolving industry. We have had so many great groundbreaking moments, some of which were announced at LendIt last year. Will there be more of the same? I think we’re definitely going to see banks, the biggest banks, moving in this direction.
Some of them are building, thinking about Goldman, others are partnering, investing, looking possibly to acquire…Funding Circle and Santander have been kind of moving in this direction from before so I think you’ll see a lot more of this and the banks are acknowledging that the platforms certainly have something they don’t have, whether it’s the proprietary algorithms or just the differentiated customer experience. The banks recognize they cannot fit some of the smaller dollar loans into their existing sales channels and yet there’s an opportunity in the market there so they need to get in somehow or they’re just going to miss that opportunity.
Peter: So do you think that’s the big change then when it comes to big banks over the last couple of years since you’ve been talking with them is that…before they sort of…you talked about Ron Suber coming on before John Stumpf and that’s such different perspectives, I’m wondering if that same duo came on today whether their perspectives would be still be very different. It seems like, from my perspective, at least, that banks are now realizing that this industry is here to stay, that this is something that they can actually benefit from and help them grow. It seems like that’s been a big change from ignoring it to using it as an opportunity. Is that fair to say?
Fiona: Absolutely, I think you’re right. I think marketplace lending is here to stay. I think any one of the banks would have said five years ago, technology will change us. Well, I think today they understand better and have now, in the last couple of years, invested, spent resources and dollars to embrace that change. Just as you said, they see it as a market opportunity. The real test is going to be…as we see interest rates increasing for the first time potentially and listen to all the industry experts that are talking about what those rate increases are going to do to the marketplace lenders…if that will be the testing ground and we will see what the big banks’ appetites are going to be as those rates change for the marketplace lending market.
Peter: Right, although if we get a quarter point move on interest rates, it’s not a dramatic, it’s not going to change the scene dramatically, I wouldn’t think, but who knows where interest rates will be this time next year or in two years so I guess it’s certainly a fair question. It’s one that gets asked a lot for sure.
So just a couple more questions before I let you go. So I’ve been asked by reporters a couple of times this week about…what is the industry’s response here around the whole San Bernardino thing and the fact that we don’t have a trade association yet. It seems to me that this is now becoming more and more important. I mean, what are you hearing in your conversations with the marketplace lenders around that topic?
Fiona: Sure, trade associations are an interesting concept. It’s hard to say whether we will have one in marketplace lending and how necessary it is. What I do think is necessary is movement towards self-governance or trying to be out in front of regulation and being thoughtful and sort of consistent across the marketplace.
You know, if you think about the Small Business Borrowers’ Bill of Rights, it came out I think it was early August of this year, that was really pivotal. That was a consortium of platforms coming together including big names like Lending Club and Funding Circle and the purpose of that borrower bill of rights was really just to define the fundamental financing rights for small business borrowers in the lending process, but what it did was really raise the bar for the whole industry. So that kind of self-governing activity that pushes responsibility and accountability is going to be the thing that really supports the industry as a whole.
Peter: Do you think you can do that without a trade association? Do you think you can just have sort of a self-governance, that’s sort of a loose alliance?
Fiona: Probably not because somebody’s going to have to drive some of that accountability so it’s not enough just to say that you abide by the borrower bill of rights (laughs).
Peter: Right, exactly. (laughs)
Fiona: Probably somebody needs to come in, maybe that’s a place where a firm like KPMG can play. Ultimately, there will be some sort of association where people agree to adhere to certain fundamental activities and responsibilities and that’s a good thing for everyone which is why so many platforms signed on to that borrower bill of rights.
Peter: Okay, last question. I want you to at least look into your crystal ball and say…where do you think we’re going to end up when it comes to regulation of this industry? Can you give us your best guess when it comes…where will we be in three or five years time when it comes to regulation?
Fiona: Given what came out on The Wall Street Journal this morning about the California Department of Business Oversight, you know, launching an inquiry, change is imminent. I feel very comfortable saying that, but looking into a crystal ball…you know, what do I see? I still think that the peer to peer lending is providing credit, opening credit and still somewhat of a closed market and as long as the platforms can tout that societal good, the impact that they have and the role they play in the broader economic environment, I hope that the regulators will support that instead of restricting the growth of these platforms that they will work with them.
I’ve talked to many CEOs of some of the biggest platforms and they are proactively trying to work with the regulators, talk with the regulators, lobby and stay out in front of it and I think that will certainly support the success of everyone in peer to peer.
What would change? The glacial pace at which regulation moves will be things like San Bernardino and maybe it won’t be San Bernardino per se, but it would be some sort of a breach of information and it may not be one of the bigger platforms, it may be one of the smaller platforms, but it will certainly change the pace at which the regulators move in this space and it will affect everyone in the peer to peer lending industry.
Peter: Okay, that’s fair enough, I think that’s great. On that note, we will end. I really appreciate your time today, Fiona.
Fiona: Absolutely, thank you so much, Peter.
Peter: Okay, thank you.
I just want to pick up on one thing that Fiona said there and that was about the trade association. I’ve talked about this before, I think events of this week have crystallized in my mind the importance of gathering the industry into one umbrella. We are being looked at in a similar way, people are putting in Lending Club, Prosper, OnDeck, Funding Circle, Kabbage, everybody who makes a loan online. We’re all being lumped in together so I think it really behooves us now more than ever before that we should come together as an industry, something that I’m going to be talking to people about in the coming weeks. I’m hoping that by LendIt in April, we can have some kind of organization established where we can move forward as an industry and have a common voice in dealing with the challenges that will, no doubt, come our way in the future.
Anyway, on that note, I’ll sign off. I very much appreciate you listening, I wish you all the best for the holidays and a happy and prosperous New Year to all and we will chat again in 2016. Thank you very much. Bye.[/expand]
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