A lot of people are unaware of how FICO calculates credit scores. In this episode, host Merrill Chandler interviews David Smith, a FICO Liquid Credit Liaison, about how one can have a better credit score to make themselves and their business more fundable. Don’t miss this episode to discover the things that you need to watch for in business credit scoring and how things are going to roll out over the next few months and years.
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Into The Black Box: An Interview With FICO Liquid Credit Liaison, David Smith
Now is the day of day, the interview of interviews. I’m in the New York Hilton Hotel in Midtown where FICO is hosting their FICO World 2019 Decisions Conference. I’m in one of their meeting rooms. I’m going to be joined shortly by the individual I’ve quoted a dozen times, if I’ve quoted him once, David Smith. He’s the Chief Consultant for the FICO Originations for the SBSS, Business Credit Scoring Service. You’ll get to hear for yourself the things that you need to watch for on business credit scoring and how things are going to roll out over the next few months and years. I’ve been leading into this one for a minute. A couple of podcasts ago, I mentioned that David had said yes, and that was like a proposal of marriage for me.
I want to introduce you to David Smith. I’ll let him tell you his role and how he works at FICO. I have quoted him a number of times that 80% of all business lending decisions for small and entrepreneurial business rely on the personal FICO score. This is the man and the myth. Thank you for joining me. The last time I met with a bunch of the executives, they had the IP protector. He’s the guy to make sure no one’s letting the cat out of the bag. We don’t have one of those. It’s all on the line. I’m thrilled that you’ve been able to join me.
It’s my pleasure, Merrill. I do enjoy these types of conversations. I talked to banks a lot but talking to the borrower is my new thing. I want to get more into talking to banks about the customer experience during the application process and then driving that education back to the borrower as to why are we doing what we’re doing, what data are we looking at and why?
I was downstairs eating lunch and a gentleman walks up to me. He’s the Vice President in the Analytics Department. He goes, “My name is Alan.” I’m like, “Merrill Chandler.” You guys are all so nice. Do you have like corporate sensitivity training or what goes on here?
We hire well and everybody we work with is smarter than we are. It is one of those things. Every time you meet somebody at FICO, they’re smarter than you. It’s one of those things. We’re pleasant to be around. We have great customers. It’s snarky to say we do. We have good customers that want to do a lot for their customers. They come to us and say, “How can I make this experience better?” I’m not saving puppies. I’m not reading the orphans for a job. If I can make an applicant’s life a little better especially in the small business space, I’ve got a lot of friends who own small businesses. You’re doing 60, 80 hours a week anyway. When you need that line of credit to further your business, to take that next jump. You look at a fourteen-page application and you’re like, “Why am I doing this? I used to give a presentation where the photo of that slide was somebody in their jammies with a laptop in bed. The only light was a glow on the laptop. Their spouse was asleep.” I’m like, “This is when small business owners have time to do anything.”
You guys can relate. It’s fourteen pages and it’s full doc. It’s nonsense.
You’re searching through QuickBooks. Where do I get the report for this thing? Why do I need a resume? I’m an entrepreneur. I don’t want a resume. I want a business. Now I’ve got to make a resume to give to this lender who’s going to file it under “Checked, turned in resume.” I don’t get it.
Tell me how you came aboard FICO. What was in your skillset, besides being devilishly handsome, where they said, “We’ve got to have this guy and put him where you are now?”
Many years ago, I was in the collection recovery space. I was working with debt recovery and companies like that, that are now FICO customers. We’re a legacy company called London Bridge. They’re a British company. They had an office in Atlanta. That’s how I got hooked into this. They moved me into the origination space, which was good.
Tell our readers what are originations.
Anytime you want to open a new account, be it whatever type of account. I don’t say we do loan origination, line of credit origination, card origination. It’s when you want to open a new account or when you want to evaluate the credit worthiness of somebody to be able to offer accounts, that’s origination. It can be deposit account origination, a loan, line of credit, business line of credit, personal consumer, auto, anytime you’re filling out paperwork going, “I need more money for something I need to buy,” that’s origination in my book.
I moved into that department and got connected to this product called liquid credit. Whether that’s a boon, a bust or a curse, I don’t know. It is reality. Liquid credit was Cloud before Cloud was cool. We were doing this web service thing back in the early ‘90s when nobody was doing the web service thing. The idea was based on a client-server solution that we had called Credit Desk. Everybody loved Credit Desk because you type in name, address, serial number, hit a button and you get credit information back. It would give you a rudimentary decision to start.
This was used by all kinds of small ticket lenders in the consumer and small business space. We said, “Client servers are going away, what can we do?” Web services came out, API calls, all this stuff, all this “modern technology.” We moved it to these servers sets up somewhere in Minnesota and started it there. It keeps the servers cold. A couple of years ago, they moved it to an official Cloud, the FICO Analytic Cloud outside of Chicago. That’s how I got into this. Liquid credit is the platform that delivers the SBSS, the Small Business Scoring Service product.
That’s why I talked to my students and my clients about my podcast is SBSS, which stands for the Small Business Scoring Service. That is delivered on liquid credit platform. SBSS is the scoring model.
It’s more of suite of models. Sometimes a bank will say, “We use liquid credit.” It’s like asking for a soda down South. “Can I have a Coke? Yeah. What kind?” “You use liquid credit, consumer or small business? We have pooled models for both.” You’ve got to dive an extra layer deep. It’s usually SBSS but sometimes consumer. Liquid credit is the delivery service, the technology behind the models.
Tell me how long has that liquid credit to SBSS conjunction been around?
It’s in the early ‘90s.
This is you coming from London Bridge, the collection model and they swooped you up?
I came over in 2001. The product’s been around since the early ‘90s. London Bridge got purchased by FICO.
Because they held the liquid credit.
No, liquid credit is a FICO thing. They bought us for the debt collection software called Debt Manager. It came through a series of iterations.
FICO has this massive of how to compassionately and intelligently collect that. I’ve seen their presentations on it. It’s brilliant. Those are your origins?
Yeah, that’s mine.
How does SBSS, the liquid credit, how does that differ from what people know as the Paydex score or the Intelliscore from Experian?
Paydex is D&B’s health of the business score. Intelliscore is Experian’s health of the business score. Those are probably more of an equation to the FICO score. The consumer FICO score says how do they treat all of their credit in the past. The Paydex score and Intelliscore are going to say the same thing. How do they treat their credit? What do they look like from a credit profile? That’s good. Those are great scores. Imagine my analogy here is those scores, all of them tell you how much payload is on the truck and how it’s managing that payload. The SBSS score says, “This is an applicant, these are credit seekers. You’re going to put more payload on that truck. At what point do you blow the tires of that truck?”
We’re going, “If you put what you’re asking on the truck, you’re going to ruin the truck.” In other words, this is going to be a bad decision. They’re going to go delinquent. We predict a certain percentage of these are going to go delinquent and that’s what SBSS does because we’ve looked at hundreds of thousands of accounts pre and post new credit. We can tell the statistical decision significance predictiveness to say these are the ones that are going to score low. These are the ones that are going to score high. The low scores you may want to avoid as a financial institution because once you put new payload on, you start blowing tires. Every business with stress, every borrower with credit has stress, meaning there’s a certain give point. There’s a certain point between income and credit that you start going south. That’s what SBSS is geared to tell you.
As all my readers already know, he is being extremely kind and generous towards his competition.
FICO and Experian have a great relationship in different levels. We coordinate with the data. We partner with the SBA to deliver both portfolio analysis of how much credit risk is in the SBAs existing portfolio. Frankly, the SBA is chartered to bring on riskier trucks. As taxpayers, we all are involved in that. There’s a point of pride, frankly, “I get to be part of that.”
Are you still liaison with the SBA, Small Business Administration?Every business has stress. Every borrower with credit has stress. That only means there's a certain give point. Click To Tweet
I’ve met with them a couple of times. We always go in December because the fiscal year in September, they give D&B a data dump in October. D&B gives us the data dump, we score it out, and we’d go meet and present that sometime in the winter. This is every account in the portfolio and how risky is it? It’s part of their lender oversight program. It helps protect the federal tax money that we all contribute to. That’s my point of pride. I help Goldman Sachs make billions of dollars too, but I’ll protect the taxpayers in this one corner.
The reason why I’m chiding the others on the personal side, Fair Credit Reporting Act, you have reporters and you have scores. They’re not the same entities but on the business side because business credit reporting is, as you said, the last time we met is the equivalent of the consumer credit scoring in the mid-‘80s.
It’s probably jumped up a little in ‘89, ‘90. That’s from a regulatory perspective. There are not as many boundaries to that. We did a marketing score out using the SBSS score with a bank and their lawyers were freaking out when they included the consumer credit because with that comes all the federal regulations of the consumer credit. We trim that out and use the business credit and that went through fine. It’s a business. It’s much different than consumer entities.
That’s why I bring it up is because D&B scores its own data, Experian scores its own data. You can’t do that on the personal side. I don’t want to go into collusion. You don’t have to answer this because you do have amazing relationships with all of these vendors. The D&B, Intelliscore with Equifax and Dun and Bradstreet’s Paydex score, they are health of the business, but they don’t list utilizations. They don’t list the data points necessary to create a clear picture even the health of the business from my perspective as a borrower and as a user and being scored.
Their analytics take that into account. Even the SBSS score, people say, “Does it take X piece of data into account?” When the answer is no, I’m like, “That’s fine because the model doesn’t, but your strategy can.” When something isn’t taken care of in the model, a characteristic taken care of in the model, that’s when the bank will use it in a strategy. The model is going to evaluate that piece of data the same way every time. If you score this value, you’re going to get this many points. This other value, you’re going to get more points. In a strategy, that’s up to the bank. That’s when you’re like, “This bank said my utilization level was fine. You’re saying it’s high. What’s the deal?” That’s strategy. It’s through the door population. It’s risk tolerance. It’s what they’re used to for each individual institution.
That’s why we vet banks, why we vet the lenders individually and regularly, like quarterly to make sure that a program, an offering or a strategy is still the same thing now as it was before.
We’ve got a customer that’s putting in a new loan origination system. They’re taking that time, which is brilliant to assess all their strategies. What does new technology allow us to do better or stronger, faster? That their customers will experience differences because they’re going to improve their risk strategy. Those that were marginal previously maybe green lighted and may be declined depending on how they were marginal.
To that point, how does liquid credit, the SBSS, feature use the personal score data and metrics? What does it use from the business information?
There are four areas of data that the SBSS models use. One is the consumer credit of the principals.
Is that the FICO 40 or does it use the score and rely on the score for the heavy lifting?
The score is one input. We’re looking at things like utilization rate and other things, your major derogatory or have you ever been 90 days late, greater than 120? What’s your utilization rate? It’s the basic credit stuff because small businesses react and act like the business principals, not necessarily the owners but the owners and everybody else in the company. The smaller the business, the more this is true.
The reason why the personal modeling, that’s how FICO has used hundreds of millions of transactions to be able to predict borrower behavior en masse, but be able to take that data and say, “How they will treat this money is how they treat every money, all the money, every dime, a week of the OPM.”
The literal exception to that was what they call strategic defaults after the great recession. We had to dig deep for that. It’s a psychology score basically. It’s not an ability to repay because we don’t necessarily look at every bit of financial piece of information on the business. It is a willingness and it’s a psychology score. How do they treat their credit? Loosey-goosey or not so loosey-goosey. Depending on the bank’s credit tolerance, you may fall into that or you may fall out of that. There are four areas of consumer data for the principals and our score can look at two. We pick the worst one because we did the two submitted. We ran all the numbers and that was the most predictive. It’s not an average. It’s not a blend. It’s not the highest. It is the lowest of the two.
We look at the Business Bureau. That’s either the Experian report or the D&B report. We do pick up the Paydex and Intelliscore, but also other things. We’re looking at other aspects. It’s a characteristic in most of the models. I won’t say all the models. When we talk about SBSS, the version 7 score is a suite of 79 different models with various data points. The other data element is what we call application data. That is, years in business, owner’s net worth, what’s your current checking and savings balance?
SIC code or the type of users or the industry?
In version 6, there is one model that has that. What we found is, unless you’re a startup, the industry doesn’t matter if you can survive the first two years. Most small businesses act the same and will react the same in general.
Did you say SBSS perspective because I know a lender underwriting software?
It is a modeling perspective.
I know that the lenders have strategy and they look at some industries as pariah.
Let them take care of that. Bank policy and bank strategy, from a modeling perspective, we found it not to be predictive except for in our startup models in version 6, which is pre-recession. I’m just explaining that on that note. I don’t know if pre-recession has anything to do with it, but the new model said it doesn’t matter. We look at over 300 characteristics when we build these models. By the way, smarter people than me build these models. Please don’t think I’m over there. These men and women are brilliant. They know what they’re doing. It’s amazing to watch them work and listen to them talk.
They look at 300 different characteristics. I’m a relationship guy. I’m not a smart guy. Please don’t tag me as intelligent. I like to joke to say I’m Coco the Gorilla who can sign language and ask for grades compared to these mental giants that I worked with. I work with a lady, Michelle, who’s brilliant. She’s smart. We look at hundreds of characteristics and we pick out the ones that are the most predictive, that give the most “weight.” We use those. SIC code didn’t make the cut this time. Will it make the cut next time? I don’t know. We let the data talk. We let the data tell us what’s predictive.
It’s relatively unbiased, even though I came out of a meeting, a presentation saying polluting of data sets with bias.
That’s where the heavy lifting comes when it comes to building these models. You’ve got to filter out the noise before you start building the model. Otherwise, you’re driving to a specific course and we don’t want that to happen. This is like, “Take us wherever you want to go” model. It does where if you don’t filter the data, if you don’t get rid of all the biases in the data, you’re going to end up with a bad product.
That’s helpful because I’ve known that SIC codes are vital. I didn’t know how it related to the actual SBSS modeling.
It’s a modeling thing. The strategy of the bank, they might not want to touch industries. We all know there are some industries that are painfully underbanked and rightfully so. There are some industries that the banks will want to do business with and just can’t. The marijuana industry in Washington. There’s so much money in it and bankers are capitalists. They want to get that money and literally can’t. We’ve got to wait.
What I was understanding is that truly non-national bank charter, meaning the local tiny ones that can legally do it within their own state.
If you’re a federally chartered bank, you can’t touch it.
These little tiny banks, mom and pop banks we call them. These are high net worth individuals who are going in, high return, high something another.
I’ve read about these small banks having to launder the money. They literally put it in a washer and dryer because it wreaks so much, they can’t put it with their other money. It’s a funny conversation, but it’s true. We’ve got a bank, a potential customer out in Washington State. We don’t want anything to do with this industry. They’re checking boxes to totally avoid it. If you’re in any way related to it, you have to stay away. They’re fearful of it.
There are 5,400 in my last count. I download PDF, 5,400 banks in the United States that are federally chartered and can’t touch that industry.Business credit reporting is the equivalent of the consumer credit scoring in the mid-80s. Click To Tweet
Those are legal industry. There are a lot of things that are legal industries that banks don’t want to touch.
That’s what it means when he’s talking about strategy versus pure data modeling.
There are also industries that banks haven’t had good experience with and they don’t want to deal. There’s personal underwriter bias too of, “Another one of these, I’ve lost my shirt.”
What the automatic underwriting systems are trying to get out of is that 70-year-old banker who says, “Not you again, Mister. I knew you when you’re twenty. I still don’t want to do your business when you’re 50.”
I talked about human bias. It’s not a bad thing. We all have bias and bias can be positive or negative. I have a bias towards Indian food. I have a bias towards a lot of food, but I have bias towards Indian food. It doesn’t mean I don’t like other food. There are some things you can have a bias on. Some things you can’t have a bias on. When the concept of going to different underwriters and getting different decisions on things, that’s on the way out. The bank wants to treat everybody the same because as we talked about before is the customer experience. I want to be able to apply here and get the same answer from anybody in the bank. Whatever branch I stopped by, whether it’s the east bank, east branch, the west branch, wherever I want to get the same answer. That’s central decisioning, automatic underwriting, all that stuff is headed to it. In the small business world, people hate the word automation. I tried to say expediting.
We’re all in it. You give us a model, report our behavior to the model, approvals are worth the wait.
My presentation here at FICO World, the sole reason I’m here, I believe the thing is titled Why Small Business Lending is Terrible and What We’re Trying to Do About It. A good friend of mine called me up one day, “I’ve known this guy for twenty years. Our kids have grown up. We know each other. I slept on his couch for goodness sakes. Dave, I applied for $50,000 business line of credit to the bank that I have hundreds of thousands of dollars in, and they handed me back a fourteen-page application and wanted a ton of other documents because they don’t know me. What do I do?” His big question was, “Is this the regulation demanding this? Is this what everybody goes through or is this what my bank is putting me through?” At that point I said, “That’s your bank.” Everybody faces the same regulation, but if you go to bank X, Y and Z, you’re going to get an automated system. You’re going to get a quick, at least a go-no-go answer within hours or seconds. We can do business, but you need to complete this other stuff.
I tell this story. One of my clients, we would call him Tennessee Tom to maintain his privacy. Just like your friend, he banked at this bank for seven years and made his deposits, did his thing. The only people who knew him in the bank were the tellers. We started telling him how to optimize certain things, certain traffic patterns in his deposits, all that stuff. One day, he walks in and the bank manager scoots right out of his office and said, “Hi, Tennessee Tom, my name is so-and-so. I’m the bank manager.” He’s like, “What have you done? What did you guys do?” I said, “This is where the automatic underwriting systems hit the real world.” When the email goes to the bank, the bank manager says, “This is a person of interest.”
My friend who will remain nameless and the bank will too, by the way, was told during the borrowing process that they were one of the top three deposit accounts for that branch and they were still treated like anybody who walked through the door.
That’s one of the things that I wanted to ask is what is it that in the underwriting in this modeling process, what are the general performance indicators from the personal profile. You’re going through the four areas. One was the credit from the principal.
I don’t think I ever name the fourth. It’s financial data from the business. It’s EBITDA interest rate. It’s debt service ratio, quick ratio, current ratio. Those things need to be within a range. Google the range.
Is there a window?
I don’t keep those things in my head to be perfectly honest. They certainly don’t give me access to the code. Google quick ratio, current ratio, and you’ll see what a good one is and what is not. Try to stay away from the extremes. Try to hit in the middle and you’re solid. Call your bank and say, “What kind of financials do you all look at and tell them to me?” Then go google on them.
We’ve trained our borrowers and we’ll tell them certain structures that are being measured. The thing that is most fascinating is they only have access to the loan officers and the loan officers are like, “Bring it.” They said it’s done right and then they’re like, “I’m sorry.”
Figure that out, talk to the business developers, the person you meet at the bank, the person that shakes your hand. You need to say, “I need information and I need information from somebody. I’m not here to get muffins or bagels. I’m here to be told information.” What’s funny is the fintechs. If you go out to a fintech lender website, they will tell you straight up, “You need to have this much cashflow. You need to be in business this many years and X, Y, Z.” You go, “I have this. I don’t have that. I won’t apply to them. I have this.” You keep flipping the pages. Whereas a bank doesn’t necessarily do that. Go figure it out. On the Google page, it tells you straight up on the little ads on the right side. Anyway, back to that. Consumer credit in light of being a small business owner, your credit generally sucks more than the average consumer because especially the newer businesses, you’ve utilized your personal credit to buy office paper, to buy stuff. To get your business on the up and up and congratulations.
I understand that has to be done sometimes. These banks understand that. You’ve had to drop $20,000 on your Amex to cover payroll or to cover this or to cover that. The quick advice is get it off as quickly as you can without risking or ruining your business because the small business lenders understand that whereas the average consumer has a 715 or whatever. Average small business owners can have a 680. That’s okay. It’s not stellar. We prefer 700, but we totally get it. You’re mixing your credit and that’s great. The first chance you get to get business credit, grab it, use it and cycle it. Use the mess out of it. Use it and use it a lot, pay it off and pay it down.
Put traffic on business instruments so they can continue to stay active to where you protect your consumer stuff.
What we found during the recession, right before recession as things started getting bad, business credit utilization spiked, but so did personal credit because they ran out of business credit. They’re having to throw everything on their personal cards. When post dot-com bust and during recessions, as a small business owner, I put on my shingle as a consultant or I’m selling widgets or whatever, there’s usually another job to go to. If I’m a consultant in the IT world, I can always go, “This isn’t working,” and go to another firm. That’s not always available. When that’s not available, people start using personal credit. They get in this cycle of they don’t survive, the business goes bankrupt, they go bankrupt personally because they’ve thrown all that stuff on their personal credit. It’s a seven-year recovery period at that point, so don’t. I hate to say it, let the business go. It’s a strategic default in the business, but don’t ruin your personal credit for your business, ruin your business credit and pay it off. I’m not saying walk away from it, but I am saying that once you start mixing the two, you mix the two to start and you mix the two at the end when a business fails.
That’s the whole strategy I’m teaching all of our readers is how to build them independently from the beginning and forever.
One of the portfolio evaluation tools that we tell banks to look at. Meaning once you’ve got an account on the books, they’re going to measure you monthly or quarterly, some annually, but usually quarterly at least to say, “How is this business doing?” We see how they’re paying us back. That’s a yes, no, thumbs up, thumbs down. Otherwise, how healthy are they? They’re going to grab your consumer credit. It’s a soft pull. It doesn’t hurt you. If they start seeing the personal credit, utilization start to spike, that’s a warning sign. That means they’re using personal credit to feed into the business and that’s a danger. You’re going to start getting those phone calls.
We cover the fourth. The consumer credit from the principals, the business metrics or the health of the business.
Paydex and Intelliscore, those reports.
Does SBSS pull both of those?
We pull one and that’s up to the bank. We were data agnostic is the phrase. We work with everybody because we don’t hold data. We’re not a credit agency ourselves.
You’re literally running the report based on what you could pull.
We literally knock on the door as the bank to get that credit report from D&B or Experian. The third one is application data. It’s reporting. It’s what the banks tell us. We don’t go check it. We’re not like, “How long have they been in business?” We don’t check that against the D&B. We don’t check that against secretary of state. We expect the bank to have vetted that information. Owner’s net worth, we expect it. We expect the bank to go, “Really? You’re 22 and you’re worth $37 million?” We assume that all the data that we get is vetted and inappropriate.
That’s real but lender software and intel is supposed to decide.
The whole application process, that’s why it’s so daunting. It just is, but if you’re making claims, we had one SBSS user call us up and go, “You’ll let this nineteen-year-old kid tell us he was worth $10 million.” We’re like, “We didn’t tell you anything.” We scored him according to his data. He took the equipment down to Mexico and sold it. The fourth one is financial data. It’s basic. It’s asset liability, profit loss statements stuff. It’s debt service ratio. We covered all those four.
This is an amazing bully pulpit over exactly what’s happening out in that market.
There’s a fifth element. It’s more of an interbank thing. If you’re not in the banking industry, you’re not going to know who these are. There’s a small business financial exchange, which is an independent data consortium with a bunch of bank partners that get bank level data. It’s more data on the loan. A trade line on a credit report, that’s all of your accounts. Your Amex account is a trade line. Your auto loan is a trade line. That’s what that means. That’ll tell you, are they paying as negotiated? Meaning, are you making your minimum payments? Are you doing it within the expected date? Whether these are monthly or quarterly payments, annual, are they current? It will say, what’s the original balance? What’s the current balance? What’s the payment, whether it’s quarterly, monthly or whatever. That’s all they tell you. It doesn’t say that last month minimum payment was $300 and I made a $15,000 payment and drop this balance down tremendously because I’m doing well. That’s what SBFE does because the bank reports back to SBFE a bunch like 40 or 50 more pieces of data.Human bias is not a bad thing. We all have bias, and it can be positive or negative. Click To Tweet
Tell them what SBFE is.
SBFE is Small Business Financial Exchange. It’s a data consortium where banks give and get. If they give a loan to Sally’s plumbing company and she banks with Bank X when Bank Y who’s also a member of SBFE wants to lend to Sally’s plumbing, they go to SBFE and say, “Tell me what other banks know about.” It’s got more information like, did they make a big payment? What are some of their balance information? Give me something deeper. Do they pay early? Do they pay a little late but not late enough to report? There’s a 31-day payment. One day late is not 31 days late. It’s slow payments. How are they paying? SBFE provides that information. You don’t have an account there. You can’t go get an account there, but it’s nice to know it does that. D&B has its equivalent called SBRI, Small Business Risk Insight, which is again 40 or 50 different bits of data. We have flavored models on that data. It’s all bank level data. All you have to do is take care of your bank loan and you’ll take care of that. That’s just downstream.
What types of lenders are the early adopters for liquid credit? Are the tier-one banks, the big ones, the little mom and pops doing that?
These are pooled models, meaning we build these over a couple of hundred thousands’ accounts on pool of a bunch of portfolios, hence pool models, to get that couple of hundred thousands’ accounts because the Bank of America’s and the Chase’s, they have hundreds of thousands account all by themselves. They have floors of analytic teams that can go build models and they’ve got their own nerds and that’s good. They have their own what’s called custom models. The mid-tier banks are going to have an analytic team and they’re going to have a good size small business portfolio, but it’s not their thing. In certain departments, we hang out at those mid-tier banks, meaning the top 50 banks, the 25 to 50s. We do work with P&C, Fifth Third, M&I, M&T, those level of banks.
The big banks in the grand scheme of things, let’s not understate, they are mid-regionals, mega-regionals, whatever you want to call them. Renasant Bank is another great customer of ours. They’re all over the Southeast and they tout to be a small business bank. Those organizations that say, “We don’t have enough in our portfolio to build a model on it.” Because the irony between the credit risk team and the model build team is the credit risk team doesn’t want to have bad accounts. The only way to build a good model is to have a lot of bad accounts. It’s 300 bad accounts is what our modeling team says. A credit risk manager will not have a job when they approach 300, not even close to 300. “You’re fired but our model is awesome. We’ve got a model that will beat everybody, but please leave.” It’s the mid-tiers and below.
They only have their own internal analytics.
We play well in the equipment lease areas within some of those larger banks. The P&C, the Fifth Thirds, BB&Ts, hundreds of thousands. They’ll never use our commercial card because they’ve got hundreds of thousands of commercial cards. It’s the smaller banks. It’s the community banks. It’s the six-branch bank in West Texas that goes, “We need something. We want to know how this principal business is doing.” We want to look at it from what’s called a blended perspective, so the business data and consumer data. We want it based on something bigger than we are. We can look at our underwriter’s decision. Where do we have this? That’s the SBSS score.
That’s tier-two and below. Tier-two and tier-three are the sweet spot for SBSS, liquid credit, etc. This could be a professional or a personal answer, but what is the adoption model for these tier-two, tier-three banks? How long until you have taken over business scoring like you have the personal scoring?
The FICO answer is our partnership with the SBA drives a lot of this business. Once they say, the SBA is using it as part of their low dock, it’s legit. It’s literally been vetted by Congress. I can adopt it now too. Let me tell the story. What’s causing this increase in adoption is the SBA because that makes it easier within the regulatory and the legal aspect. It’s the fintechs, the OnDecks, the Kabbages. I type in eight pieces of data about me and my business and I get an answer back within seconds. That is crushing the community. I can get up to $250,000 from OnDeck in a matter of minutes. Kabbage says they can fund your PayPal account in seven minutes. They don’t do us. They’ve got their own analytics. They’re financial technology. They’re coming in hot and heavy. They’ve got their analytic team. Some of it works and some of it doesn’t. They are the canary in the coal mine. Let them go test something for good or bad. We adopt what’s left.
They’ve walked through the minefield first. Some of them survived, some of them haven’t. Those that survive, you’re like, “I got to follow that path because that works.” What’s happening in the community banks in the mid-regionals is that small business owner says, “This fourteen-page application isn’t worth it.” This is the story I’m telling at FICO World. It’s not worth it. Where is an easier decision? I will abandon my community bank and go to somebody else, go to the fintech, go to the captive lender, go to whoever.
The fintechs are fishing for those guys right there.
The small business owners are willing to pay more for that loan because time has value. Imagine that. My customers are coming to me going, “How do I do this?” The answer is start small, start at the $50,000 to $100,000 level. Get an automated or expedited process for that. Get comfortable with it. Use SBSS as part of that and get comfortable with it. Once you’re comfortable with it, once the bank can see, “We’re not losing our shirt, go up to $150,000 then go to $200,000 because the SBA uses it for their seven-day program for $350,000 loans.
You told me the model goes all the way to $1 million.
It does. FICO here is telling you, “You better not be given $1 million away to a small business just on that score.” That’s where the SBSS score becomes a piece of that. The SBSS is one of many things for that $1 million decision. What I’m saying here is if you apply for $1 million, expect to turn in paperwork. We got to do this, but for $50,000, that’s a credit card decision. I literally told my buddy, “Go get a Spark Card. They’re going to give you $50,000, $35,000 because I know your FICO score.” He’s a young business. I was like, “If this is what you need to do, go do it. Truthfully, self-fund or go to captive.”
He wanted some general fundage. He ended up buying some capital and he went to one of the lenders on the website for that particular. They were in film so they did a camera and I said, “Go see what lenders they have available for the camera since this bank still is dragging their rear end on you. They did. It was a funny story. He’s talking to me and he goes, “Guess what happened?” I said, “What?” He goes, “As I got the cameras from this fintech,” because this lender had a relationship with the service and they ordered the cameras for them.
Now it’s a great service in banking industry, they just collateralize the loan. It’s an easier loan to give when I know I’m lending you $30,000, but I specifically bought $30,000 worth of stuff. I know where to get it if I need it. It makes for an easy loan. Still I talked to one person and he’s literally unboxing these cameras. When that small community bank calls him and says, “I think we figured this out,” he was like, “Yeah, I did too.” What’s driving all this is the fintechs, what’s pushing banks to go, “We’re losing our shirts in this arena.” My friend begged to stay, but eventually it was like, “This is ridiculous.”
How long do you see for this adoption that’s being driven by fintech?
In my head, it’s three years because the technology cycles, everybody’s old technology has to be replaced and nobody’s replacing old technology with yesterday’s technology. Companies hold on the loan origination systems for about ten years and every time you recycle that, you’re grabbing the next best stuff. If I can do that, if I can automate something where I can, the banks are going to choose to automate it. I want to take a fourteen-page application down to a three-page application and decision that in three hours, not three weeks or twelve months or whatever. Three years and that will cycle a lot of the old technology out and get some new mindsets in. You’re going to start seeing new examples of things. By the way, I do want to talk about there’s an organization out there called FinRegLab.org. They did a fintech study because these fintechs are going in and looking at cashflow. Maintain your bank accounts, that’s the next thing. Don’t NSF, keep this stuff clean, pump everything through one account.
Don’t bounce a check or a debit. Put a zero floor on your debit card so you can’t bounce it before it accepts it.
They’re looking at cashflow to say, “Is cashflow predictive?” They determined through studying six different fintechs that cashflow is a predictive credit risk indicator. That’s the canary in the coal mine. You’ve got to have the canary come back up and go, “This is good.” They’re taking that information and proselytizing it. Early adopters are going to get it first, then a few years from now, you’re going to see cashflow because I’ve been saying this for years, cashflow is key. Do you know why?
If you have money, you can pay your bills.
No, that data’s free. It’s free and unregulated because you’re my debit account. You check with me. I know this. It’s free. It’s right here. It’s within the bank. I don’t have to have your permission to check it because you gave me all that permission when you signed up. It’s free data.
What’s fascinating is I teach our borrowers that the worst thing you can do is get a cash credit line that is a check guarantee card. You can put it on a regular card, but that indicator, every time you use that credit line, you’re punching through zero, which is the free indicator you’re talking about that says, “These guys are using credit to pay what should be cash transaction.”
That’s the utilization. In the consumer side, when you start seeing your utilities pop up on your credit card, you’re using your credit as cash, a stuff that you should not be using it for and you can start checking it out. That’s danger zone stuff that you want to stay away from, but the next thing is cashflow. The next thing is looking at your debit accounts. We’re even doing that on the consumer side. The ultra FICO score for the underbanked is looking at some cash looking at NSF and such on the consumer side. It’s come in the bank. Keep them clean, have everything pumped through one account. Once everything’s in there, you diversify it out, that’s fine. Show all of the cashflows.
You can send the greatest traffic message.
This is how much I’m worth to you. All my money comes into one spot. You can see it pile up. You can see it disperse, but that deposit amount for the month average balance, it’s huge. That is very predictive.
Thank you so much for being here and being willing. These guys for very good reasons keep a tight lid on your tech. It means a lot to me. We’ve met a couple of now. Thank you for being willing to talk to borrowers who are trying to walk the minefield without stepping on the landmines. This is vital and we get this from you.
This is missing in the small business credit space and I’m glad you’re filling it. I’m more than welcome to come in and talk about it when I can.
Thank you very much. I appreciate it. It’s been wonderful.