As bank executives for over 30 years, Kevin Clark and Troy Wright both witnessed countless opportunities to support small businesses being missed. That’s what attracted them to the fintech revolution currently transforming banking and financial services around the world. With deep financial expertise and a passion for supporting the economic engine of Canada, Clark and Wright co-founded Lendified in 2015. Since then, the Toronto-based venture has built a team of funding specialists, technologists, and service experts dedicated to delivering a better borrowing experience to small and medium-sized businesses—directly as a fully automated online lender in Canada and indirectly as a provider of cutting-edge lending technology to financial institutions across North America. Using the company’s fast and easy alternative to traditional bank offerings, entrepreneurs can apply for loans online in under 10 minutes, get an instant decision, and often receive funding in just 48 hours. In this Q&A with Ivey Business School Professor Michael King—a former Co-director of Ivey’s Scotiabank Digital Banking Lab—Clark discusses his transformation from old-school banker to fintech entrepreneur, not to mention his company’s evolution from industry disruptor to industry partner.

Michael King: Kevin, I teach an elective called “Fintech and the Transformation of Banking and Financial Services.” In this course, I stress that every entrepreneur must answer three questions. First, who are your target customers? Second, what problem or pain point are you solving for these customers? And third, how will your business capture some of the value created for these customers? So, let me start by asking, what is Lendified’s value proposition?

Kevin Clark: I refer to Lendified as a lending technology company because we are not just an online lender, although that was what we essentially were when we started. Leveraging our proprietary technology, we put loans out the door, but this technology is also sold separately. As a result, it’s hard to succinctly articulate our value proposition in one sentence because we are also a technology company. As a lender, we’re clearly taking the pain points out of borrowing for small businesses through efficiencies, technology and speed to funding. As a technology company, our value proposition is the improved customer experience as well, with the addition of credit rigour in the underwriting, and, again, efficiencies.

MK: What customers are you targeting with your loans?

KC: When we built the business, we were targeting small businesses in Canada. Small businesses have different definitions depending on who you ask, but effectively these are companies that are several million dollars in revenue or less, with five to 10 employees. Small businesses are all across Canada and are the target market for our lending business.

For the technology company, the target customer has evolved. Originally, we tried to sell our software product to the big five Canadian banks. We came to realize that probably a better target segment were smaller financial institutions such as credit unions. What we are seeing today, with the evolution of the business, is that our software can be used to assess any counterparty risk. So business-to-business customers with credit exposures are now a target segment. Any company that takes a risk on another business can use our software to enhance its understanding of what that credit risk really looks like. So the customer base for our credit adjudication software is even broader than even we originally thought.

MK: Why would a small business find it attractive to borrow from Lendified as opposed to either an incumbent bank or a credit union?

KC: Lendified provides a frictionless customer experience: the online application process, the speed of making a decision, and the rapid access to capital. It is certainly well recognized in Canada that the big five banks and larger financial institutions are not fully meeting the needs of small businesses for capital. These financial institutions might do an excellent job in providing banking accounts, taking deposits, and providing other services. But it has always been more difficult to find acceptable economics when using a large credit engine to adjudicate small loan amounts. So Lendified’s value proposition has been that we are quick and nimble, can assess credit quickly, make decisions quickly, and provide a positive customer experience.

“While I jokingly say that I am one of the oldest guys operating in fintech, there are some good things to that. It builds a better pedigree.”

MK: From following your company for a year and more, it seems that Lendified’s strategy has changed over time. How would you describe the strategy now?

KC: Well, Lendified’s strategy—to come back to the technology piece—has changed in that we clearly see that there is more value and opportunity in the credit engine itself than in simply being a lender. The lending business is now just over three years old and is a profitable business. We have made the strategic decision to be a lender in Canada for the future and to grow our loan book from our existing balance of $25 million to a $100 million business. That is totally doable.

The lending strategy has really evolved in that we originally set our sights on being a North American lender. The big marketplace to the south was going to be a good opportunity for us. I think we kind of realized, and I learned this just through being a banker, that you always want to be close to the risk that you adjudicate if you can. We decided that we would stick with our roots and simply be a lender in Canada. We know the laws. We know the marketplace. We know the economic structure of the country. We can be more successful here than thinking about where in North America we should be putting our exposure. That was a relatively easy decision—to focus on being a domestic lender.

Our software, however, does not have border challenges. It is probably a little bit of an 80/20 rule. We can take our software and use local credit bureau or other information. The fundamentals of the adjudication model work in any advanced market. So we now have a different strategy for each of the two businesses.

MK: Let’s talk about the technology behind the credit adjudication software. What is special about your technology? What is Lendified’s competitive advantage?

KC: Lendified’s core intellectual property (IP) is the ability to analyze the bank statements from a small business in seconds and produce what we believe is a determined profitability of the business. We then measure that profitability against the debt obligations and determine a carrying capacity and determine whether it is manageable or not for the company. This process happens in seconds. That is fundamentally the core IP. We have millions of data points in our software dictionary on what a bank statement line item looks like, what it represents, whether it is an operating or a financial item, how to categorize those two differences, and how to determine profitability. That is our core capability.

MK: That sounds very data intensive and sophisticated. Given that neither you nor your partner Troy are programmers, how did you pull this technology together?

KC: The answer is data science. Each of the different weighted contributions to our credit analysis is effectively a probability of default, and that comes from data science. Data science is not one of my skill sets. But if you can build a really capable data team and enable them with all the data generated from over $60 million of adjudicated credit and over $300 million of credit applications—that is a fair bit of data. So the data science team is inevitably trying to determine probabilities and expected use cases for the data. They like it when we don’t get our lending decisions right, because they need to know what it looks like when a customer cannot service or repay a loan. The silver lining to a few bad debts is that we get information from it. So our core IP is having data scientists analyze all of the data that is coming through the system and producing probabilities of default that we use when making our lending decision. That is where the financial services backgrounds of the founders prove to be valuable.

MK: I am glad to hear that there is still a place for old-fashioned expertise in a world of technology. Now tell me, how did the acquisition of the Vancouver accounting start-up Mentio help accelerate the business, particularly on the technology side?

KC: The Mentio acquisition was clearly critical for us and happened at a perfect time. It has been one of the best decisions that we’ve made in the business in terms of its growth and stability. The acquisition fundamentally speaks to the core skill sets of the management team when we started the business, which were a classically long-standing credit discipline skill set and good governance skill sets from working for a large financial institution—those were great skill sets to have. While I jokingly say that I am one of the oldest guys operating in fintech, there are some good things to that. It builds a better pedigree. It helps build a good culture in the organization. But what we didn’t really possess was awareness and skill with newer technologies. We needed to acquire those skill sets. I view it as having three legs to the stool: a financial services leg, a data science leg, and a technology leg. Technology is being able to connect through automated programming interfaces (APIs) and find data to bring in to our lending process. Technology in the ability to write code— to take the expertise in my head around the credit adjudication process and actually write it down in code to discipline the decision making in the software. So Mentio brought the technology piece to us and the skill sets and leadership to build out the Lendified team.

MK: You mentioned earlier that you now see your target customers as the credit unions and smaller financial institutions. Can you explain how your thought process has evolved in terms of partnerships with those kinds of financial institutions?

KC: I recall when we started back in 2015 that all the talk was about disruption. It is quite interesting that we don’t really read about disruption today. We may still see it mentioned in the media, but three years ago disruption was the name of the game. That was what fintech was really doing. It was disrupting everything. But there has been a change of paradigm about whether it is really disruption or whether there are actually complementary innovations going on in the financial services space that are helping everybody.

MK: So what is your view? Are fintech start-ups like Lendified disrupting the incumbent financial institutions or partnering with them?

KC: I wrote a Globe and Mail article about this in 2016, when I noted we are not disrupting, but actually creating an opportunity for complementary services to be provided in a space that frankly needs extra products and services. I maintain that view. I think partnerships with financial institutions are important for fintechs in a lot of ways. For Lendified, there are partnerships on how we originate our loans and how we sell our software.

At Lendified we have effectively built two operating companies. We didn’t start that way. We didn’t think we were doing that. We thought we were creating a really effective lending business, which we have today. But the credit technology has turned out to be a successful software-as-a-service (SaaS) business unto itself. So for the SaaS platform—for the credit technology—our goal is clearly to partner with larger organizations.

MK: And has it worked out to license Lendified’s software to larger financial institutions? I would think that the big banks already have this capability, so why would they consider using Lendified’s software instead of an application developed in-house?

KC: What is actually quite interesting is that we thought that our product would be sold on the basis of its efficiency. We thought that we could actually displace headcount. We could do all these things that would make efficiency the reason for acquiring or subscribing to our software. It didn’t prove to be really the case. Then we thought, well, maybe it is the credit rigour because we had built a rigorous enhancement tool through cash flow analysis. That proved to be interesting. But what really has sold the software is the customer experience. What the large financial institutions have been thinking about most is how to improve the customer experience. And that is actually what the Lendified technologies platform actually does. Ingrained in our platform is a better customer experience for onboarding customers, collecting their information, getting results, and allowing borrowers to walk away with capital in their business. The rigour and efficiency of the process are almost a by-product. It is quite interesting.

MK: What emerging technologies do you think are going to be important for the lending and credit adjudication business?

KC: The use of artificial intelligence (AI) is clearly coming into our fold. Very simply, it is the ability to build into the decision-making process information that has proven to be valuable in the past and apply it for the future. So, the probabilities that have been analyzed by the data science team are moving into what I refer to as AI. The fundamentals of simple machine learning, namely learning from the past and applying decisions based on probabilities to the future, is what we have now built into our credit adjudication engine. AI and machine learning are applicable now to our business and are going to be there forever. AI is going to be in everybody’s business, and it certainly is in ours.

MK: What would you say are the main skills you need as a leader in a fintech start-up?

KC: You know, leadership skills in fintech is a really interesting topic because it comes back to my point of being an old guy in fintech. My career in fintech has been only four years. My career as a banker is now over 30 years. If you asked Picasso how long it took him to paint that painting, he wouldn’t say three days, he would say 40 years because that is actually what it has taken to develop his abilities. Do I think that Lendified would be the same today if I had just started this with four years of experience? No, it would be a very different company.

I think leadership is hugely valuable in fintech. What is interesting to me is that at Lendified we compete with companies where the CEOs are half my age. That is okay. It is not like this is a foot race. What is interesting to me is how you build a culture and how you build a company. From my perspective as a long-time career financial services guy, you need to hire very different and skilled capabilities, broadly different for different capacities. The old saying “hire smart people and get out of the way” wholly applies to this business. Because fintech is not just about that one team of data science or AI. Being a lender, you need credit methodologies, you need credit policy, you need back-office infrastructure, you need capital, and you need organizational structure and leadership. That is true whether you’re a bank or whether you’re Lendified.