Blessed by the Potato

Before CPFC15, Borrowell hosted a drinks and appetizers mixer thing, and I got a chance to ask them a few questions about what they do (and full disclosure: they fed me snacks and a coke).

In particular, I was interested in how they approve borrowers, what their risk processes were, etc., and whether they were using any of the data available online to create fancy algorithms for approving loans. Interestingly (and reassuringly, if you’re an investor of theirs) they use very conventional risk metrics. Transunion and Equifax have been in business a long time, and it’s hard to beat credit scores and debt service ratios for determining risk and ability to repay debt. They can look at other factors to provide small tweaks or help identify potential fraud, but the basics are at work here.

Co-incidentally, after I got back I saw this great quote tweeted out: “Every company with a smart way of making loans others won’t later turns out to have a dumb way of making loans others won’t,” which got to the heart of what was on my mind as I was first hearing about Borrowell and innovative lending. And not that I have anything at stake, but it’s what I worry about for fintech start-ups: innovation is great, but there is over-innovation, and while it may be possible to find the decent gems the big banks reject out of hand and lend to them profitably, it’s hard and creates blow-up risk. And having some of these guys blow-up is not in anyone’s interest. There has been some talk about leveraging “big data” to make better loans, but it’s hard to do much more than tweak what already works, and it’s nice to see in practice that the fundamentals are at play there. They also mentioned that there’s a lot of tension between the underwriters and the marketing team, which is essential IMHO (if the underwriters aren’t killing the marketing team’s buzz something has gone wrong — indeed, if the underwriters aren’t separate from the marketing team, something has gone wrong).

The pitch was quite good: they’re not trying to make loans that no one else will, but rather to make it more convenient for people with decent (if not stellar) credit to get a loan without having to go in to a bank, without having to wait a long time to hear back, and without having to risk facing their neighbourhood branch manager to receive bad news. Also, that their main competition was as much credit cards (who do no risk analysis and just lend at high rates to all comers) as banks, especially since banks these days are mostly interested in pushing lines of credit instead of short-term (~3 year) amortizing loans.

Finally we talked for a bit about behaviour and how they can help. It was good to hear that they’re setting up referrals to debt management programs to point people towards if they get flagged by the system during an application as being over-stretched or in distress. And focusing on small-scale, amortizing loans (i.e. not revolving lines of credit, which are just about all the big banks offer these days), they can be more useful for those people trying to get out of high-interest debt.

It’s not a service I anticipate readers here to use — while the rates will depend on individual circumstances, and they will likely be a damned sight better than a credit card or subprime auto loan, they won’t be as good as a line of credit at a bank if you’re in good financial shape (which I assume all of you are) — but nice to know it exists.

I’ve attended a few recent talks about medical device start-ups and serial entrepreneurs, and just tonight got to listen to Dr. Stephen Larson (currently of Northern Biologics) talk about his career path.

Part of his story was pretty typical of others I’ve heard or read about: he joined a company as it was spinning out from a university where the technology was developed, and passed the reins on to someone else as the company made it to the revenue-generating stage from the start-up stage, where it needed a CEO who could be more of a salesperson. Then he went on to run another start-up company. Scott Philips had done surveys of dozens and dozens of such entrepreneurs, and found that on average they started (or joined soon after the company was spun out to guide it through the start-up phase) five companies through their careers.

Another point that Stephen made was that it really helps to get some kind of business experience before trying to run a start-up.

There’s a bit of a myth (helped, no doubt, by massive and highly visible successes like Bill Gates, Larry Page and Sergey Brin, or Mark Zuckerberg) that successful start-ups are launched by people while they’re still in school or recent grads. And maybe that works for some companies in fields outside medical devices (like all the various app or *-tech fields), but aside from a few mega-successes, the successful ones do seem to have some experience under their belts — whether that’s in academia, the business world, or working in industry for a more mature company first.

Yet oddly enough, many of our government-funded support programs for entrepreneurship are highly age discriminatory. Some have age limits in the 20’s, which excludes almost everyone who pursued post-graduate work (except for a few who finish super-fast). A recent article in the globe featured a start-up, and the founder mentioned how confusing all the support programs are. It’s a bit of a job to find out what kinds of support your fledgling company might be eligible for, apply for it, manage the reporting, etc. And there is a lot of overlap between some of these programs — but I wonder if that’s by design, to create some randomness for natural selection to work on, and to provide many opportunities for entrepreneurs to try to sell themselves to supporters.

I’ve finished the major upgrades to the backend, which should take care of those pesky PHP errors that had been cropping up over the past few weeks.

That upgrade also makes my site compatible with many of the new-fangled WordPress plugins that I’ve been ignoring for the past decade. So I may continue to fiddle with those, and the theme/CSS is totally up for a revamp, but the major risk of site breakage appears to be past us.

The URL for the RSS feed looks to be the same, so those of you using a reader should not experience any interruptions.

The long weekend seems like a good time to screw around with the backend of the site. If you are on the RSS feed Tuesday and this is the last post you receive in your reader, then I have broken the feed, please come back to the site and add it again. I’ll post again whenever I’m done.

For those visiting the site directly, there may be some weirdness in the layout as I fiddle.

Had a great chat on Because Money about who might be well-suited to being a DIY investor, what traits you might want to focus on as a DIY investor, etc., which should be airing later in October. I want to use this post to go down a side alley we didn’t talk much about in the episode.

Only ~13% of Canadians are DIY investors, and most of them started in the last 5 years. While we didn’t quite agree on precisely how many people should/could use a DIY approach, we were all giving estimates well above that figure. There’s a lot of room for improvement.

So what is stopping people from becoming DIY investors, what are the barriers? I like to think in terms of intrinsic and external factors.

For external factors, the environment has been getting a lot friendlier for individual DIY investors over the past few years: low-cost ETFs increase the cost savings available and make it very easy to create broadly diversified portfolios — whatever your position on efficient markets and index investing, it’s undeniably easier to implement than value or dividend or day-trading or whatever DIY strategy, which is part of why gurus like Warren Buffet recommend it for regular people. Brokerages like Questrade offering free purchases makes those ETFs accessible to investors with smaller starting portfolios, and even the bank-affiliated brokerages have extended $10 commissions to all customers without a net worth test. On the other end of the spectrum, Tangerine and the robo-advisors have made it very simple and easy to be a DIY investor — about as easy as a visit to the local bank branch salesperson/”advisor” was, at less than half the cost and without having to find a slushy parking spot in February.

The environment and the tools available to be DIY investors are quite good now — massive leaps ahead of what potential DIYers faced just a few decades ago.

So the remaining barriers are inside people’s heads. Not just their behaviour, but their biases and assumptions that are stopping them from starting, or even looking into whether they should start. Things like assuming you need to be rich before you think about investing, that you need to be a genius or use a lot of math, or get some kind of license or certification to purchase investments on your own.

All of these are easily solvable with a bit of education. Of course I have my own solution for that in the form of The Value of Simple (plus this other thing that I’m working on).

And of course, doing DIY investing doesn’t mean you have to do everything on your own. You can find planners, accountants, coaches, etc. to help with any parts you’re not comfortable with.

So there are a great many people out there — maybe half of you reading this or more — who could move into doing DIY investing to save on fees, or get started with investing in the first place. So what are you waiting for?

As a side point to this side point, there was a bit of disagreement on what DIY is, and I’ll just say I’m not too worked up on the semantics either way. In particular, the question was raised as to whether using a roboadvisor or all-in-one fund with automatic rebalancing like Tangerine was really DIY? For myself, I would count them as part of the DIY route as they still require following your own plan, picking your own product (even if that product is just Tangerine premix #2) and not getting sold on the fund of the week, pushing money to your investments vs having a salesperson trying to pull, and above all, reaping the main benefit of DIY: lower costs.

Anyway, there are a few Because Money episodes from season 2 up now, and be sure to watch for my guest appearance comes out later this month.