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The small business lending space has seen a lot of innovation over the last decade with fintech leading the way. But there is still much more work to do as many small businesses still lack the access to capital that they deserve.

My next guest on the Fintech One-on-One podcast is Steve Allocca, the head of Funding Circle USA. He has worked at some of the biggest names in fintech (PayPal, LendingClub, Bluevine and now Funding Circle) working on this challenge of helping small business access capital. Funding Circle is a pioneer in this space and recently they received the news that they have been approved for a new SBA 7(a) lending license.

In this podcast you will learn:

• Steve’s deep and varied history in the fintech space.
• Some of the lessons he has brought to Finding Circle.
• What attracted him to the role at Funding Circle.
• The typical terms of their core term loan product.
• Their approach to underwriting small businesses.
• The impact on demand of the increase in interest rates.
• What it means for Funding Circle to be approved to be an SBA 7(a) lender.
• The timetable for when they will be able to start making SBA loans.
• How they are building their lending as a service offering.
• How they interact with the Funding Circle head office in the UK.
• Some of the new hires they have made to the leadership team.
• How they can get a clearer picture of small business data.
• What is top of mind for Funding Circle for 2024.

Read a transcript of our conversation below.

Peter Renton  00:01

Welcome to the Fintech One-on-One podcast. This is Peter Renton, Chairman and co-founder of Fintech Nexus. I’ve been doing this show since 2013, which makes this the longest running one on one interview show in all of fintech. Thank you for joining me on this journey. If you liked this podcast, you should check out our sister shows The Fintech Blueprint with Lex Sokolin and Fintech Coffee Break with Isabelle Castro, or listen to everything we produce, by subscribing to the Fintech Nexus podcast channel.

Peter Renton  00:39

Before we get started, I want to remind you that Fintech Nexus is now a digital media company. We have sold our events business and are 100% focused on being the leading digital media company for fintech. What does this mean for you? You can now engage with one of the largest fintech communities, over 200,000 people through a variety of digital products, webinars, in-depth white papers, podcasts, email blasts, advertising, and much more. We can create a custom program designed just for you. If you want to reach a senior fintech audience, then please contact sales at fintech nexus.com today.

Peter Renton  01:21

Today on the show, we are talking small business lending with none other than Steve Allocca, the head of Funding Circle USA, officially known as the US managing director, he is. We wanted to get Steve on the show for a while, he’s been in the job for almost a year. And he’s got deep experience in fintech, which we obviously go into in some depth, we talked about what Funding Circle does today, its approach to underwriting, and we talk about loan demand as well, and how that’s been trending. And the big news we cover is the SBA 7(a) license that came out a few weeks ago, talking about what that means for Funding Circle, and what it means for small businesses. We talk about lending as a service and embedded finance. We talk about the regulatory front there in this movement when it comes to small business lending, and much more. It was a fascinating discussion. Hope you enjoy the show.

Peter Renton  02:24

Welcome to the podcast, Steve.

Steve Allocca  02:26

Hi, Peter, great to talk with you. And thanks for having me.

Peter Renton  02:28

My pleasure. Great to talk with you. I know we we met many years ago, you’ve had some, you’ve had a really interesting background hitting some of the the biggest names in fintech in your career. So why don’t we get started by giving listeners a little bit of background about some of the some of the stops in your career to date.

Steve Allocca  02:47

Sure. Yeah, I started my career in traditional banking. I actually interned at the Federal Reserve, got me really interested in money and banking system. Started in traditional banking with a couple of different large banks, and found myself increasingly attracted to the idea of using data and technology to provide better solutions for consumers and small businesses who desperately need help making smarter decisions around their money, ultimately feeling more confident about their money. So of course, that led me to fintech and it led me to a company that was one of the original fintechs distributing what was private student loans, largely digitally. And that was before the 2008 meltdown. And that was a brief pitstop just to try to restructure that company, and that became starting my own company that focuses on data and better Portfolio Management Services largely around the education finance space. Ran that company for four years and and had an opportunity to be able to transition leadership of that company that still pretty much exists and thrives today, but transition that leadership to another one of my co-founders, and joined PayPal. Had a unique opportunity to build out PayPal’s credit business and be a part of PayPal’s growing payments ecosystem on both the consumer and the small business side. And also included starting what became PayPal Working Capital, PayPal’s small business lending business. And then after nearly five years at PayPal, had an incredible opportunity to go and and join Lending Club as president of Lending Club and what eventually became Lending Club buying a bank being one of the first fintechs to have what we call a marketplace bank. Did that for about three years and really had, built a particular passion around the small business, the need in small business, which I found to be especially unmet in the marketplace and that focusing on small business is what led me to another stop at a place called Bluevine. Really well known for small business lending but also started small business banking, offered a small business banking product that today now has generated over a billion dollars in small business deposits. I found it really interesting that opportunity to, at the intersection of lending and banking for small business. And then, after about a year and a half with Bluevine, all roads lead me back to a place that I first encountered at PayPal, partnered with, again, in a couple of different capacities at Lending Club, and then partnered with again at at Bluevine. And that’s, of course Funding Circle. I joined Funding Circle earlier this year, in order to, you know, take what is a tremendous business focused on providing capital that small businesses need to win, and using it as a platform to be able to do a lot more, helping small businesses be successful here in the United States.

Peter Renton  05:52

What are some of the lessons you’ve learned along the way that you’ve brought to Funding Circle?

Steve Allocca  05:57

I mean, one of the key things to me that differentiates fintech from traditional financial services is not just the obvious, the focus on on data and technology. But it’s the customer centricity that just comes with the way that a fintech company thinks. It’s a focus on product solutions that solve real problems that customers have. Leveraging, oftentimes data and technology. But this, starting the discovery process, really from a true customer pain point or a true customer need. And then building solutions specifically for that need, is to me one of the great common threads across every stop I’ve had along the way in fintech. But that said, I think we’re just at the beginning of the journey, Peter, frankly, I think we haven’t yet fulfilled the promise of anywhere near optimizing, or best leveraging data and technology, to be able to help consumers and small businesses make better decision and have more confidence around their money. So I think that the best is still in front of us.

Peter Renton  07:03

Right. Right. I would agree with that.  So then, you arrived at Funding Circle, maybe we can just talk about what was the driving force for that decision? What was really, what attracted you to Funding Circle?

Steve Allocca  07:16

Yeah, it’s simple. I mean, in each one of the stops when I was at PayPal, again, at Lending Club, and again at Bluevine, what I saw in Funding Circle was a unique ability to be able to efficiently and effectively assess the credit risk of an established small business. So Funding Circle plays in a somewhat unique space within small business lending, really doing lower-rate, more like bank quality, small business lending to established small businesses where a lot of the other fintech players are playing in the riskier, at the riskier end of the credit spectrum. And that bank quality, more assessing the credit worthiness of a more established business, who’s looking to borrow, you know, in Funding Circle’s case up to half a million dollars in the form of a loan. That’s been back to my traditional banking days now, that’s been the great enigma. In fact that when I was at Wells Fargo, actually called this the invisible middle. We said the banks are really traditional financial services. And banks are really good at helping understand credit and providing solutions for the needs of consumers. And you know, pretty good at doing the same for large enterprises. But small businesses really kind of fall out of the middle. And the reason for that is it’s incredibly complex, to try to understand and efficiently underwrite the risk of a small business. Through my travels, you know, Funding Circle just kept popping up as somebody who’s pretty uniquely cracked the code on being able to combine not just automation and good credit modeling, but also balancing that with the selected, targeted, manual intervention that you really need to do, the human touch that you need to have in combination with the best automation to be able to you know, like I said, efficiently and effectively, manage, understand, underwrite and manage the risk of a more established small business looking to borrow more money. So it’s that particular strength of Funding Circle’s, combined with what I still think is one of the most urgent unmet needs in broader financial services, which is serving the financial needs of small businesses. It’s the opportunity that I think exists at the intersection of those two things that you know, makes Funding Circle pretty uniquely standout.

Peter Renton  09:36

Okay, so let’s talk about what Funding Circle is actually providing. Can you maybe just talk about the, the different types of loan products that you offer?

Steve Allocca  09:48

So Funding Circle really focuses on an unsecured term loan product, up to $500,000. Funding Circle has made than four and a half billion dollars of credit available through that, through that product since its founding. And that’s just in the US. Funding Circle globally also of course operates in the United Kingdom, and the total global number is over $21 billion that’s been lent to date. But here in the US, four and a half billion dollars to date been originated through that unsecured term loan product, effectively unsecured term loan product, I should say, like many loans of this size, there is a UCC lien associated with the loan, but it’s effectively functions as an unsecured product. So that’s really the core focus of Funding Circle to help small businesses get access to the credit, they need to win through a best in class installment loan product targeted at more established small businesses looking to borrow up to half a million dollars.

Peter Renton  10:47

Right, right. Okay. So then let’s talk about underwriting. You mentioned that, you know, small businesses are complex, and every small business is different. You’ve obviously got the different markets, different sub segments, different qualities of owners of companies, but I’d love to kind of get a sense of your approach here. And we’ve had a lot of progress, it feels like to me in data availability over the last decade, this has improved dramatically. But I’d love to kind of get a sense of how you’re sort of processing that data. And maybe you could touch on how you’re using AI in this part of your business? What’s you approach to underwriting?

Steve Allocca  11:27

It all revolves around better understanding and measuring a business’s ability to pay. So unlike on the consumer side where credit bureau data can allow you to be able to have a very accurate prediction of credit risk, without really measuring ability to pay on a small business side, both because of necessity, because the bureaus are not as as well tested as on the consumer side. But also because it just makes sense to do if you can leverage some of the technology that you mentioned, or you referenced, that allows us to be able to see cash bank, bank data. A link to automatically link to a bank account and view real time bank data, cash transaction data, cash on deposits, trends, the drivers of those things, that’s going to allow us to be able to much more accurately measure the true financial condition and ability to pay, then, you know, just the information that’s reported to a credit bureau, which is still largely, you know, for loans up to this size, largely what the consumer credit space is going to rely on much more heavily than what we’re doing today for small businesses at Funding Circle.

Peter Renton  12:43

You know, we’re recording this in mid December. And we’re also, the year is almost out. But we still got a little bit of time left. But I’d like to get a sense of when you look back at 2023, what has loan demand been like? I mean, I feel like the small business sector has just had this crazy run the last four years. Has this year been a normal year?

Steve Allocca  13:04

No, this year is anything but a normal year. I think sometimes we, interest rates have been so low for so long.

Peter Renton  13:12

Oh yeah, of course.

Steve Allocca  13:13

0% interest rates. You know this run up that we’ve had an interest rates of effectively 550 basis point increase over the last, you know, less than two years is a larger increase in interest rates than we’ve seen, you know, in 40 plus years in that period of time, in that short of a period of time. So you know, when the core cost of what the product that you’re selling so dramatically goes up in such a short period of time, of course, that’s going to have massive impacts on the business, on demand, and on the ability to be able to match even a best in class product with quality applicants who need access to funding. So yeah, everything has changed a bit this year, starting with that change in underlying interest rates. But also just because, you know, the economy I think has become a lot less certain since the pandemic and we really haven’t gotten anything, haven’t gotten back to what I would consider kind of a normal, steady state, if there’s ever such a thing, since the the massive disruption, that was the pandemic. So things have changed a lot. But in the face of that change, you know, one thing has remained constant, which is there’s still a lot of demand for small businesses that need to smooth over uneven cash flow. And need access to low priced capital to be able to run and grow their business, take advantage of opportunities to be able to, you know, invest in a new location, or expand inventory, or hire. So they’re in the face of all this uncertainty and the the underlying interest rates changing so dramatically in such a short period of time. You know, we’ve still seen, you know, completed applications go up 54% year over year.

Peter Renton  14:59

Wow.

Steve Allocca  14:59

So there’s still quite a bit of demand. I mean, part of that, too is you know what we’re doing to drive growth, we’re still very much in growth mode for Funding Circle in the US. But I think that when you look at that kind of a year over year improvement, it’s a pretty good indication that there’s still healthy demand.

Peter Renton  15:16

Despite the interest rates, people are still willing to pay, you know, a higher rate to get their funding needs met. Obviously, I don’t think anyone expects us to be paying the same rates we were paying in 2021. When you started the year, obviously, no one really knew exactly where we’d end the year in January. We knew that interest rates weren’t going to probably be cut anytime soon. You say you’re in growth mode, so you had planned to be growing this year, regardless of the interest rate environment?

Steve Allocca  15:45

We planned for even more growth this year. So although we’ve had, you know, over 50%, year-over-year increase in applications, we’ve also seen a healthy increase in the actual offers for credit we’ve made, but the offers for credit have grown at a lower rate. So whereas we’ve had a 54%, year-over-year increase in completed applications, we’ve had a 35% year-over-year increase in offers. And that’s a function of two things, it’s a function of the credit quality of those who are applying. And especially as credit gets more expensive, anybody who can wait for potentially rates to come back down, might be more inclined to wait. So that’s certainly one of the things is just you know, a shift in quality of that application mix. But then the other thing is that, you know, like any prudent lender, when you’ve got a time where there’s a lot more uncertainty in the economy, you’ve also got to be, you know, more prudent and tighten your lending standards, so that you’re not going to be making loans that are not going to perform.

Peter Renton  16:45

I want to talk about the big news from the SBA. For the first time in, I don’t think, was like four decades have issued new SBA 7(a) licenses, maybe you could just explain what an SBA 7(a) license is, and what actually, you got approved for?

Steve Allocca  17:04

Yeah, this is a really big deal, Peter, this is what I couldn’t be more excited about, our ability going forward, to be able to bring really compelling value to entrepreneurs and small businesses through better access to what is already a best in class product in SBA. So, you know, the SBA, most people know, is among the if not the lowest cost source of capital for most small businesses in the United States. The issue with the SBA is that because it’s only offered through through banks, and a very select, a very limited number of small business lending corporations licensed by the SBA to make those SBA loans, for the last 41 years, there has only been 14 SBLC licenses. And because of that, and because of the fact that the process is lengthy, and not particularly designed with a digital first approach, the other thing that people know about the SBA, besides that it’s reliable access to low cost capital is, it’s slow, it takes a long time, it usually requires 50 documents, and weeks, many times to be able to get access to the loans, and that’s once you’ve applied, and just the act of applying itself usually involves a largely paper based, very, very manually intensive process. What we’re seeking to do is take advantage of an opportunity now, to be able to bring a lot of what Funding Circle uniquely does really well, which is bring a product that is digitally native and was designed to be fast and easy in a digital environment, bring that to the SBAs. We can combine the the speed and ease and digital experience that Funding Circle’s become known for with the low cost access to reliable capital that the SBA is known for. I think the combination of those two is what the new SBLC license affords us to do. And we think the potential for it is going to be transformational for small businesses, and maybe even for small business lending across America.

Peter Renton  19:20

So what’s the status of that? Like when can you start doing your own small business or SBA loans? You’ve been doing 7(a) loans it seems like for a while, obviously not under your own your own license. What’s the status of doing your own?

Steve Allocca  19:35

Right. What Funding Circle has done to date has been simply to refer customers who know about SBA and who want SBA as an alternative to the products that Funding Circle offers directly, will refer that customer to an existing SBLC or bank they can make small business loans today. Going forward, once we actually have the license, and what the SBA announced last month, was the intent to award that license. The SBA has to do a final exhaustive review of a number of policy documents and some other steps that validate that intent to provide the license. And then they’ll actually grant the license. They haven’t provided a specific timeframe to be able to do it, but our hope is that it’s imminent, into 2024, we should have that license granted, and then we have the ability to start actually directly making SBA loans. And our approach, like I mentioned before, is going to be to bring the best of Funding Circle, our ability to be able to bring those loans in through a digital experience that’s going to be faster and easier than what any applicant has experienced before and looking to get access to SBA funding.

Peter Renton  20:45

is Okay, well, let’s hope so. So, I want to talk about lending as a service, because I’ve seen articles about you guys, you know, working with companies like Customers Bank, Pitney Bowes, who’s obviously a non-bank, DreamSpring is other one I’ve seen. Tell us a little bit about what you’re trying to do there. What’s the strategy?

Steve Allocca  21:05

Great. Yeah, I mean, lending as a service and another adjacency of money as a service, the idea of embedded finance is something that, you know both are areas that we’re really excited about. And the idea with both is bringing the best of Funding Circle, the ability to be able to bring a digital experience to both apply for and get access to, a best in class credit product in a fast and easy way on your computer or mobile device. We’re going to be able to bring that to more banks, financial service institutions, and frankly other companies that have large bases of small business customers who can value from getting that access, that Funding Circle spent more than a decade developing. What we find is that, you know, banks are struggling to meet the needs of their small business customers, and other companies are looking to provide financing solutions for their small business customers who are hungry to find ways to be able to feel more confident about their money. Our view is that we can bring the application and lending experience that Funding Circle has developed, designed, and developed and honed over the past 10 years, to banks and other companies that have strong bases of small business customers who could benefit from access to that service. And we think that’s even enhanced in the world where, you know, we’ll be offering not only a small business lending product, but also for the SBA product as well.

Peter Renton  22:36

Okay, so Funding Circle was started in the UK, how much do you interact with the UK office these days? I mean, do you do sort of act pretty much independently? Or are you in regular contact with the people over there?

Steve Allocca  22:53

It’s really a little bit of both Peter, I think we have the best of both worlds now. I mean, we have the benefit of having access to a lot of the resources of a global company. And in many ways, we’ve got an opportunity to draft off of and adopt best practices from the UK market, you know, where Funding Circle is larger in the UK market than what we do in the in the US today. But also, there’s a recognition that, you know, the US and the UK are two very different markets. So we do have quite a bit of autonomy and independence to be able to make sure that the solutions that we create, and the and the decisions that we make are with our customer in mind, you know, the US, entrepreneur, US small business owner, specifically in mind.

Peter Renton  23:42

So tell us about some of the new hires that you’ve got, I noticed one, one former Goldman Sachs person who we know reasonably well and the tell us a little bit about the state of the executive team at Funding Circle.

Steve Allocca  23:56

Yeah, we’ve made some some great additions over the past 10 months that I’ve been here to the Funding Circle leadership team including Kanthi Muthiah who is somebody who worked with me at PayPal. And Kanthi runs product for us here in the US and has just done an amazing job in just a few months now already building out an entirely new product roadmap discipline for Funding Circle. And then most recently, you alluded to Kos Joshi were able to attract from from Goldman Sachs and Kos ran the embedded finance business at Goldman Sachs for small businesses, including a very large relationship with Amazon. So we’re very fortunate to have not only Kos and Kanthi on board here in the US, but a number of leaders within Funding Circle in the US and even a couple from the UK that are totally dedicated to the US business and help us chart a course for growth going forward.

Peter Renton  24:58

Right. Okay, so I want to talk about regulation beyond the SBA. And obviously, we also, we operate with a lot of state regulatory frameworks. There seems to me that there’s been movement for more transparency in small business lending, you know, we have the Truth in Lending Act for consumer loans there. There is no national equivalent to that, at least not yet. But there are some state, I think your state in California is one that’s sort of taking a lead here, what would you like to see when it comes to more transparency? And is there a regulatory solution that we should be pushing for?

Steve Allocca  25:39

The one thing I think that represents the biggest opportunity for us is just to continue to leverage the sort of running headstart that we have, with small business lending in particular, making better use of the data, and insights and information that we increasingly have, as the world continues to digitize. We’ve got data in, you know, actionable, efficient, actionable form, to be able to actually measure the financial condition, the financial stability and the financial health of a small business. And if we’ve got the ability to be able to get access to those data, and better turn them into insights, it’s incumbent upon us to be able to translate that back to a small business so that they can better understand what makes their businesses tick and make better decisions, which ultimately should lead to more financial stability, and hopefully, you know, more growth, more positive cash flow generation from that business going forward. And if we’re doing that right, then shouldn’t that picture be perfectly linked to the business’s access to credit and the terms that they have to pay for that credit? That’s the world that I get the most excited about, when it doesn’t need to be a big mystery, credit doesn’t need to be a black box. What a small business can do to be able to impact their ability to get access to confidence, certain access, to credit on the best terms, doesn’t need to be a big mystery. It just needs to be a better understanding, and then a better ability to be able to manage those levers that make their business more financially stable, and ultimately will help their business, you know, win in the marketplace and therefore, grow. Grow profitably and grow free cash flow over the future, the ability to be able to do that is where you know, regulators have a lot of space to be able to help us ultimately make sure that we’re getting access to the data that can allow us to be able to bring that clearer picture to the to the minds of small business, and then make sure that we you know, we use that risk responsibly for the benefit of the small businesses.

Peter Renton  27:47

Okay, so what is top of mind for Funding Circle in the new year?

Steve Allocca  27:51

For Funding Circle in 2024, everything is going to be about how we can effectively launch and scale the SBA 7(a) product that we’ll be making directly with the new SBA license. I think we’ve got a truly transformational opportunity to bring the best of Funding Circle, the ability to be able to to get access to the credit that a small business needs to win more quickly, more easily, and in formats that are more digital, and to deliver a better digital experience overall, and combine that with the you know, low cost access to capital that the SBA is, and it has been for a long time, will continue to be reliably known for. I think bringing those two things together is a really unique opportunity for us. And that’s going to be our predominant focus.

Peter Renton  28:44

Okay, well, we’ll have to leave it there, Steve. Always great to chat with you. Thank you so much for coming on the show and best of luck with that new SBA license.

Steve Allocca  28:53

Thank you very much, Peter. Been a pleasure.

Peter Renton  28:57

Well, I hope you enjoyed the show. Thank you so much for listening. Please go ahead and give the show a review on the podcast platform of your choice and go tell your friends and colleagues about it. Anyway, on that note, I will sign off. I very much appreciate you listening, and I’ll catch you next time. Bye.