The point of sale lending space is really interesting to me. Even though point of sale platforms are providing unsecured consumer loans they have some unique advantages over typical online consumer lending platforms. In many cases, their customer acquisition cost is lower and where loans are provided at physical stores there is less consumer fraud because these are in person transactions.
Our final guest for 2017 on the Lend Academy Podcast is Camilo Concha, the CEO and Founder of LendingUSA. They are a point of sale lender that launched in 2015 focusing on a few specific niches such as dental, cosmetic surgery, pet care and bariatrics.
In this podcast you will learn:
- The founding story of LendingUSA.
- The different verticals they operate in today.
- How their point of sale lending process works.
- The typical terms on these loans.
- A profile of the typical borrower who uses LendingUSA.
- How they do marketing outreach to the merchants offering their loans.
- The different revenue streams they have.
- The scale that LendingUSA is at today.
- How their loan performance has been to date.
- Why LendingUSA is not competing as much on price as other consumer lenders.
- Their overall approval rate for loan applications.
- How they approach fraud prevention.
- Who is providing the capital for these loans.
- Where they are on the path to profitability.
- Why the marketplace lending challenges of 2016 did not impact LendingUSA that much.
- Why their cost of customer acquisition is going down.
- Their biggest challenge in getting their business to where it is today.
- Camilo’s long term vision for LendingUSA.
This episode of the Lend Academy Podcast is sponsored by Wunder Capital: where impact investing meets capitalism.
Download a PDF of the transcription of Podcast 132 – Camilo Concha of LendingUSA.
[expand title=”Click to Read Podcast Transcription (Full Text Version) Below”]
PODCAST TRANSCRIPTION SESSION NO. 132-CAMILO CONCHA
Welcome to the Lend Academy Podcast, Episode No. 132. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt.
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Support for the Lend Academy Podcast and the following message come from Wunder Capital, allowing individuals to invest in solar projects. Earn up to 7.5% annually while diversifying your portfolio and combating global climate change. Create an account for free at wundercapital.com/lendacademy. Wunder Capital, where impact investing meets capitalism.
Peter Renton: Today on the show, I’m delighted to welcome Camilo Concha, he is the CEO and Founder of LendingUSA. LendingUSA is an online marketplace lender, but they are a little different because they are a point of sale lender and they are a point of sale lender in just a few focused verticals. We talk about that, we talk about the different verticals, we talk about how they underwrite, the importance of having a very quick and automated underwriting process as someone is sitting at the point of sale, wanting to know if they’re approved. We also talk about how they’re scaling their business, how they’re funding these loans and a lot more. Hope you enjoy the show!
Welcome to the podcast, Camilo!
Camilo Concha: Thank you so much, Peter, I appreciate being here.
Peter: Okay, so why don’t you get started by giving the listeners a little bit of background about yourself and what you did before you started LendingUSA.
Camilo: Yes, so a little background on me. I was born and raised in Bogota, Colombia, I moved here when I was about 14 years old, lived in Los Angeles ever since. I had the privilege to work for the Bar Association while I was going to college. After college, I worked for a major consultant firm in business turnarounds and doing some critical analysis for businesses. In my early 20’s, I basically started my first company and ever since just been on my own trying to build great businesses.
Peter: Okay, so then tell us a little bit about the founding story of LendingUSA. What led you to create your latest company?
Camilo: Yeah, so early on, you know, my first company was a platform that matched consumers with attorneys. This company was called Attorney Search and it basically allowed them to help each other out by matching them online. I took that same concept and started a company called 1-800-My-Surgeon that matched cosmetic surgeons with consumers. When we started that company we realized early on that there was a huge need for financing so we decided to create a company called MedicalFinancing.com.
MedicalFinancing.com was a platform that matched consumers again with lenders, finance companies and anybody who wanted to participate in the lending environment. We ran that company for many, many years and we acquired other brands along the way because we realized the opportunity was a lot bigger. So we acquired DentalLoans.com, BridalLoans.com, PetLoans.com and about 2015, we were generating roughly about a billion dollars worth of application flow.
Peter: Wow!
Camilo: And after all those years working with all of these financial institutions and consumers, we learned many lessons on what worked and what didn’t work so it felt like it was time to create a better point of sale experience for the consumers and the merchants. I decided to attend one of the LendIt conferences at the time and to my surprise our concept was really well received.
Not only that, we were able to find sort of the pillars of our business, we found and connected with Cross River Bank, we connected with First Associates and we found Direct Lending Partners as well as Online Lending Partners to give us the capital for us to operate and you know, we still have those partners, but basically that’s sort of where it got started. 2015 was when we put it all together at one of the LendIt conferences.
Peter: Okay, so that’s great to hear. So then as far as what you’re offering today and you mentioned a lot of different verticals, cosmetic surgery, pets, medical, what are the offerings that you have today on LendingUSA?
Camilo: Yes, that’s a great question. Our core product is aimed at solving two things. For the small business owner, we help them grow their business by allowing them to capture more sales and for the borrower it’s about financing the important moments in their lives. We offer installment loans and focus on verticals that make a difference in people’s lives; that’s sort of our focus. We operate mainly in the elective medical industry verticals such as bariatrics, dental loans, cosmetic surgery; we also are focused in the pet market as well as funeral.
Peter: Okay, okay, so then how does it work? So you go in to your dental officer, your cosmetic surgeon and you talk about a procedure that you would like to get done and then they say, well, it’s going to be $4,000 and you think, oh my goodness, I can’t afford that. So how does that actually work at the actual point of sale?
Camilo: Yes, so basically the consumer goes through the consultation at the doctors’ office or the merchant and they are quoted a price for the procedure. You know, the consumer, either they have the ability to pay for that or they don’t, they let them know the advantages of using financing, the doctor or merchant will tell them basically, hey, these are the financing options available.
The consumer will fill out an actual application at the office, they will get an instant decision and then the terms of the loan will be reflected on the computer that they’re using or the tablet. If the consumer decides to move forward an online installment contract will be generated and this whole process takes only about four to five minutes on average.
Peter: Okay, and then so what are the actual terms of the loans typically? How long are these loans, what are the interest rates, what’s the typical size?
Camilo: Yeah, so the current offering that we have is loans that are either 36 or 60 months. We will be expanding that in the near future, but as of today, 36, 60 month loans. The average term is somewhere around 44 months or right in the middle and the average loan amount is close to $6,000 today.
Peter: Okay, okay, and what about interest rates, what’s the range on those?
Camilo: So the interest rates start somewhere between 14.99 all the way to 29.99%, our average interest rate is somewhere around 22% today.
Peter: Okay, so then can you just share a little bit about the typical borrower. Do you have sort of a sense of who they are, how old they are, what sort of salary level they’re at, FICO score, that sort of thing. What does a typical borrower look like for you?
Camilo: Yes, so obviously the typical borrower changes a little bit from vertical to vertical.
Peter: Sure.
Camilo: But I can tell you that overall, we are focused on what we call prime and near prime customers. Our average credit score is somewhere around 683 today, the average income is about $75,000.
Peter: Okay.
Camilo: Just to give you a range.
Peter: Right, right, okay that sounds good. So then you really are sort of just at the lower end of prime on average, I would say. As far as acquiring these customers, I mean, you obviously…the key for you, I imagine, is you’re really operating a business to business kind of company because it’s key for you to have…once you get in on the merchant, it’s the merchant that is going to be providing this as an option to the consumer. You’re not going to be doing that, I presume, so how do you go about…like what’s your sort of strategy for acquiring new merchants?
Camilo: Yeah, so we have obviously created an offline and online approach for acquiring merchants. We go all the way from integrating to software providers to creating exclusive agreements with associations, we have a very strong presence on SEO, for SEO purposes and our websites. We rank usually in the first page for many of the key terms…we do a lot of display media advertising, offline mailers, I mean, we really do an overall gamut of marketing that allow these merchants to come in to us. We do a lot of outreach and sort of podcasts and a lot of different things that allow the merchant to find out what we do. We’re more of a consulting sort of approach is what we normally do today.
Peter: Right, and did you get many borrowers coming to you directly or is it pretty much all through the merchant?
Camilo: No, it’s actually great you mentioned that because we acquired so many brands throughout the years, there’s a lot of people that come to us directly from the internet. A lot of people start their search for a merchant at their house, we call those virtual clients, so they’ll start with that and we capture them there and we basically follow them through all the way to the merchant level. So we do get them directly from the merchant, but we also get…some of our clients come directly to us, from just them searching online so we get both.
Peter: Right, okay and then when the merchant is providing the rate and everything, I presume you’re completely out of that equation. Is that correct?
Camilo: Yes, we’re definitely out of that equation.
Peter: That’s a conversation between the provider and the customer. Okay, so then what are the economics like for the merchants, I mean, how do they…obviously they get the additional sale If this person can’t afford it, they walk out the door and they’ve lost forever, but if they get them signed up…I mean, is there any kind of sharing of revenue with the merchant or how does it work?
Camilo: Yes, so what we’re basically doing is we work with the merchant by allowing them to capture more clients. In exchange for that and to provide a great experience for their clients, we basically provide them with a platform that they can use, they can track all of their clients and in exchange for that we charge them a fee, that fee ranges anywhere between 0 and 10% of the actual procedure or transaction.
Peter: Okay.
Camilo: The average is somewhere around 6% today, but that’s sort of the fee that we charge to provide this type of service to the merchant.
Peter: So the borrower is not paying an origination fee then? To them it’s just an interest, they’re paying interest without paying an origination fee. Is that correct?
Camilo: No, they actually do.
Peter: They do, so you get them on both sides. You get the merchant and you get the consumer, that’s a nice little revenue stream for you guys.
Camilo: It is and I’ll tell you something else. We also get paid on the performance of the portfolio so once we hit the number that covers our interest, anything over that…that’s also part of our profit. So we basically make money from three revenue streams; merchant fees, borrowers’ fees/origination fees, and the performance of the portfolio as well.
Peter: Okay, interesting, very interesting. So then let’s talk about underwriting and how you approach it. You’re obviously going to be seeing a whole variety of different customers that are coming through your platform. What is your approach to underwriting? Obviously, they want a decision quickly and they don’t want to have to sit around waiting for days or weeks for anything to be approved. So just tell us how that process works.
Camilo: Yeah, so all the underwriting that we do is automated so humans don’t make any type of decisions. It’s basically…we capture the credit, we do all the checks in the background and we make a decision on the spot. The way we created our underwriting model was we use publicly available data from Lending Club. They were gracious enough to have the data out there and we were able to take that data to build our initial model.
We retained the services of Dr. Bryce Mason, he’s a former employee of the RAND Company. We used to do a lot of work in the industry for banks buying loans for big banks. He helped us build our initial model. Last year, I hired a gentleman named Sharat Shankar who’s our Chief Operations Officer and Risk Officer, he came from a company called LendingPoint and he came with the mandate to invest significantly to improve our fraud mitigation and also help us model and create our next generation underwriting model. That’s been sort of the approach we feel….you know, we have to keep going and improving our model. Things are always changing so we’re trying to stay ahead of the curve.
Peter: Sure, and so can you just give us a sense of the scale you’re at? When did you issue your first loan? You talked about LendIt in 2015, you sort of got everything together, but when did you issue your first loan and what scale are you at today?
Camilo: Yeah, so the first loan was probably done somewhere around, you know, six months later after LendIt, around that time. So we only had the first six months, we did $8 million in transactions in six months. The second year, complete year, we did about $60 million; this year we’ll do somewhere about $160/180 million. We’re trending to do about $15 million a month today, we expect to do anywhere between $250 to 300 million next year in originations.
Peter: Interesting, and so then what can you tell us about the performance of your portfolio, so far. I mean, you’re still obviously fairly young with a 44-month average duration although I’m sure some of them have already been paid off, can you give us some sense of the performance?
Camilo: Yes, so our loan performance has matched our initial model surprisingly closely. We always knew that our defaults would be higher than Lending Club’s because, you know, they have a lot more experience, they’ve done a lot of iterations, but we always felt that because we’re at the point of sale we are allowed to charge a little bit of higher interest rate to offset some of that risk.
Peter: Right.
Camilo: So our typical yields are somewhere around 600 to 800 basis points higher, higher than you would find on Lending Club and our defaults are somewhere around 200 to 300 basis points higher than Lending Club. So I think net yield compared, same risk buckets, we’re probably 400 to 500 basis points…a little bit ahead on what you normally see on the market out there.
Peter: Right, right.
Camilo: And I think that’s been one of the great things about what we’ve built is we don’t have to compete to get the lowest possible interest rate because we’re at the point of sale and when you’re at point of sale you don’t have to focus so much on that, you have to focus more on service, on making sure that you provide the right loan for the right client and that obviously changes the equation a little bit.
Peter: Right, right, sure. So for most of these merchants, are you the only offering that they are providing or are you competing with others at the point of sale…obviously they don’t want to go through the process multiple times, but I’m just thinking if there’s someone that doesn’t fit in your credit box do these merchants typically have other options or what happens there?
Camilo: Yes, so there’s different ways that this gets done. Some merchants basically have a decision tree where they say, okay, this company goes first, this company goes second and this company goes third, some merchants just use one lender and some may send it to multiple lenders. Everybody does it a little differently, right, so sometimes we will find ourselves….they may run an application with CareCredit which is sort of one of the big companies in the industry and then they may send it to us after or they may go to us first and send it to them after. There’s no real way to sort of…everybody has a way to do it.
Peter: Right, right, so it’s possible that you may be competing with some merchants head to head and in other places you sort of got somewhat of an exclusive arrangement. So just on that, what percentage of borrowers are you rejecting because they’re too subprime or for whatever reason they don’t fit in your credit box?
Camilo: So today our approval rate is somewhere about 35%, somewhere along those lines. You know, we are not looking to be in the subprime market, we want to stay in the prime and near-prime market and we feel that our model was created to coexist with companies like CareCredit, we’re not trying to compete head to head with anybody. I think it’s not a good idea to do that because that becomes a zero-sum game where nobody wins.
We’re trying to sort of create our niche market for what we do and the type of loans that we feel that we can do better, we focus more on installment loans. So installment loans are definitely different than revolving lines that are out there so they work better for some clients. We can provide a higher amount so we just try to coexist overall.
Peter: Right, right, so I imagine that fraud is probably less of a problem for you than the pure online lenders like Lending Club, Prosper and whatever because this is an in person…because this is point of sale by its very nature it’s going to be in person most of what you do, I imagine, is when someone’s coming and they’re sitting across the table from a practitioner of some sort. So what is fraud like for you guys, is it really a minor problem?
Camilo: You know what, it’s not a minor problem because we don’t have the same issues that you would find in the Lending Clubs’ and Prospers’ of the world where you have so much consumer fraud. But what the fraudsters try to do is they try to create fraudulent merchants.
Peter: Ah, right, yeah.
Camilo: So they go the other route so obviously once they…if they’re able to go through as a fraudulent merchant then every application that comes through will be fraud.
Peter: Right.
Camilo: So we don’t focus so much on the consumers, we focus a lot more on the merchants because if a merchant is a real merchant, the consumers…you know, most of the time, with the exception of some familial fraud, will be actually real, but if the merchant, we let them through our doors and they are fraudulent merchants, I guarantee you that that’s a big number.
Peter: Right.
Camilo: We’ve been able to contain that very much because we are very strict on who we allow to do business with, we do a lot of background checks, we really do a lot of due diligence, but there is that issue out there, for sure.
Peter: Right, that makes sense. You could suddenly, it’s not like one loan, it could be a hundred loans that are all going to go bad.
Camilo: Exactly, exactly, yeah.
Peter: Okay, so let’s talk about the investor side of the business or the funding side shall we say. How are you funding these loans, where are you getting your sources of capital?
Camilo: So our operating capital comes from Direct Lending Investments and a company called Online Lending Partners. It was a partnership with the Merage Family, the Hot Pockets family. They gave us the initial seed capital to start our company and then Online Lending Partners gave us the capital to lend out for our loans. We basically have a line now, we’re about $200 million with Direct Lending Partners.
We just recently, about two weeks ago, got another $50 million warehouse line from CapSource and we’re working a couple of other ones from some major, major banks for $100 million. So we basically, you know, started…we were lucky enough to meet with Direct Lending Partners, they believed in us and they’ve been amazing partners for us and we now have gone beyond and looked for banking relationships as well and we were able to accomplish that recently. We are now looking into…also looking for forward flow agreements and selling some more loans. Ideally, we want to be able to securitize our transactions sometime in 2018.
Peter: Okay, okay, I saw that…I think it was just a press release that came out yesterday that had the CapSource thing. So Direct Lending, that’s Brendan Ross’s company, right, is that who’s providing…
Camilo: That is correct.
Peter: Right, we’ve had Brendan….Brendan has been on the podcast here a couple of times actually, I’ve known him for many years. That’s great, I know he speaks highly of you guys when I’ve spoken with him about it.
So I wanted to get a sense on…it seems like you’re going along pretty well, you’re growing reasonably quickly, but as you know in this business it’s not as easy to raise equity capital as it used to be. Everyone wants to know how close you are on the path to profitability so what can you say about that? Is this a 2018 goal for profitability or what?
Camilo: Yeah, I mean, we’re very close to profitability. Candidly speaking, the only reason why we’re not there is because we keep on reinvesting for growth.
Peter: Sure.
Camilo: So we’re very close. Our economics between the merchant fee, the origination fee and sort of the upside of the portfolio are very strong and as we start lowering our cost of capital we are exponentially going to become very, very profitable. So we’re on our way to get that done today, but we are very much focused on what we call controlled growth, meaning we have a path of growth that even though we can do more, we’re trying to maintain that path so we are responsible insofar as how much we have to raise and we don’t go out there and do a billion dollars and then disappear the next year.
So we’re taking this slow approach, the methodical approach and, yes, we’re not growing as fast as everybody else is, but we’re definitely steady, we feel like this is a marathon, not a race. So that’s the approach that we’re taking as far as our business.
Peter: Right, right, it’s interesting, you’ve growing your business in a reasonably difficult time period because if you launched late in 2015 and then we saw an investor pullback from marketplace lending in general in early 2016, then we had the Lending Club issues and it sounds like those kinds of things haven’t really impacted you. Or, maybe I should ask the question, have you seen sort of a lot of people questioning and has it been difficult to get that investor capital given what has happened in the marketplace lending space over the last couple of years?
Camilo: Yes, so the answer is no, it has not been more difficult and I think the real reason behind it is because we have a completely different model than what you see out there. What I mean by that is we basically are signing up doctors and merchants one by one, the old sort of school way; hundreds and hundreds of merchants every month that we sign up and they’re kind of like an annuity if you think about it, right.
Once we sign them up and they start sending us business the cost of acquisition keeps going lower and lower as they send us more and more loans over time. So I think the investors are very savvy and they look at that cost of acquisition, they look at our yields because we’re able to charge a little bit more and they realize that the opportunity is there and it is a different type of business model than what you normally see out there. So we’ve been very lucky where we have strong partners that believe in what we’re doing. So we have not seen that yet.
Peter: Right, right, okay that makes sense. You’re not competing head to head with all the other…you know, the Lending Clubs’, and Marcus, Avant, and whatever. You’ve got a slightly different niche and you just said something there that was really interesting to me like your cost of acquisition is going down and I think your cost of acquisition really is…once you’ve got merchants in place, you know, I imagine you pretty much have a zero cost of acquisition in some ways because you’re getting a fee back from the merchant for underwriting these people.
It’s a case of getting more and more merchants on so I could see how that is an appealing model and I could see why your investors would be more positive on it than just the general, the sort of more standard marketplace lending model. What I’m curious about is, what has been your biggest challenge in getting your business to where it is today?
Camilo: So the biggest challenge I believe is that…you know, it’s very difficult to be great at one thing, right, and it’s much more difficult to be great at four things; meaning in this business you have to be great in sales, you have to great in underwriting, you have to be great in technology, you have to be great in finance and at raising capital like you have to really to be great at a lot of different things to be successful. So it’s challenging to be able to put all those things together into a nice little bouquet of success.
Peter: Right.
Camilo: So that’s been challenging. I’m learning every day about something.
Peter: (laughs) Aren’t we all, aren’t we all. That makes sense. Okay, so then we’re almost out of time, but last question, what’s your long term vision here? Do you want this to be in every doctor’s office, dentist’s office, funeral home, what have you in the country, what’s your long term goal here?
Camilo: You know, our long term goal is very simple. We just want to be the number one provider in the markets that we service, that’s our main goal. We’re never going to be in a bunch of markets, but the ones that we’re going to be in we want to be the number one provider.
Peter: Okay, well that sounds great and I certainly wish you all the best of luck. I appreciate you coming on the show today, Camilo.
Camilo: Thank you so much for your time. We really, really appreciate it and, you know, thank you for what you guys are doing with the industry. I’ve got to tell you, without you guys putting this great sort of convention together we wouldn’t be here so, thank you!
Peter: You’re welcome. Well, thanks very much, Camilo, will talk to you later.
Camilo: Sounds great, thank you.
Peter: Bye.
The point of sale market is a really interesting one to me. It’s one that as we just talked about there are some unique advantages to the lending platform, but it’s also one that I think is going to be going through a rapid, rapid transition. We’ve seen really successful companies like GreenSky, Affirm and Bread coming out that are…other point of sale companies not necessarily competing directly against LendingUSA, but they’re all innovating on the point of sale.
I think that the credit card business is obviously been the default financing mechanism from most point of sale transactions and you know that could be changing. In fact, I’d be surprised if over the next decade that doesn’t start to shift dramatically and companies like LendingUSA are going to be at the…you know, they’re going to benefit from and they’re going to be at the forefront of that shift.
Anyway on that note, before I sign off, this is our last podcast of 2017. I would like to thank every one of you very much for listening throughout the year and for helping to make this podcast a success. I’d like to wish you all a safe and happy holiday season and all the best in 2018. We are going to be off next week and we will be back in 2018 with some more great guests. Thank you again for listening and I’ll catch you next time. Bye.
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