Origination
To attract meaningful capital partners, you must demonstrate that you can produce, cross-sell and service. It doesn’t matter which asset class you are going after or how novel your direct marketing efforts are, it’s always about how much can you produce.
Capital Markets
The old adage, “Build it and they will come” simply does not apply here. Your potential capital partners have seen just over 200+ FinTech player before you stepped into their office and pitch your ideas on market size and you will capture it all. Be ready to spend 3 to 4 months with your capital partners before you see a dollar. Oh, and lawyer up. You will need it, and your counsel will need their counsel.
Licensing
Rent a Charter is all the rage right now but leave some room for a state by state licensing strategy. You will need it, the cycle of bank charter crackdown is every 5 to 7 years. It won’t last forever and build your tech to assume the state by state complexity up front, your entire firm might take 6 months to recover from any regulatory or legislative event. Your employees and your board would thank you for that in due time.
Risk Management
Don’t even think about raising debt or equity without a tested credit risk management team. Most of the shops are tech-heavy to get the minimal viable product out and risk and credit is an afterthought. VCs and Debt providers will always show you the door before you get a solid risk team that can connect with their quants. If you are lucky to find the right team, most likely you will have to rewrite and modify 40~50% of your code.
Soft Inquiry vs. PreScreen vs. PreQualification vs. PreApproval
No, They are not the same, and each of these credit inquiries has different uses under a different context. Most importantly, misinterpretation of these concepts, however innocent they may carry serious compliance and legal consequences. Most of your account executives at major credit bureaus, unfortunately, don’t know enough to give you the official interpretation. Each of the prime bureaus (and yes, there are subprime bureaus) have their own interpretation as well. And by the way, there’s no definition of what a Soft Inquiry is in FCRA (Fair Credit Report Act)…
“Our credit score is better than FICO”
When you compare two scores, you must have the same target definition and to certain extends same sample population. Otherwise, you would compare apples to oranges. Your score most definitely has a different target and interpretation than FICO. The true test other than the hypotheticals is to launch and let defaults come in… are you willing to risk your balance sheet? Fear now, proper credit risk modeling techniques are prescriptive, get a good book from Amazon. Better yet, see number 4.
Direct Mail
Yes, it works. That’s why lending firms are still doing it. Here’s a trick, use two shops, randomize and observe. Ask for mail tracking tools for your fulfillment shop and of course, see the list with you and your employees address for good measure. Starting thinking about your risk and response models and your e-mail strategy, now.
Automation != Better
You will be surprised that your bank partners and capital partners are fairly conservative. Although conceptually, credential based verification, IP Geolocation, out of wallet authentication sound and works great in practice, the credit committee members at any one of the large debt firms will need to see scared and faced bank statements. It’s not personal, it’s just business. Be ready for that.
Partnership
Focus on what you’re good at and realized that you can’t do it all. Be prepared to outsource specialized tasks and focus on 1. Origination. Digital Marketing, Loan Servicing, Legal/Compliance work can all be outsourced while you build out your in-house expertise. Get your business to operate at the industry standard and focus on your operations. You will discover your secret sauce in no time.
IT ~ LOS/LMS
Your IT Partner is critical at the early stage of your firm. Finding a tech team that can deliver with specific experience is rare. There will be a ton of debate between the founder and the board on whether to build or buy. It’s a strategic decision you must make up front if you want to control, build. If you appreciate time to market and try out your ideas without a giant capital outlay, buy or park yourselves on many SaaS lending platforms available to support finch startups!
