‘The conversation in most bank boardrooms now is can we digitize fast enough?’: Numerated’s Dan O’Malley

If you want to understand just how imperative it is for banks – particularly community banks – to move to digital, you’re going to want to listen to Dan O’Malley. Dan is co-founder and CEO of Numerated, a firm that digitizes the loan experience. He’s working with over 100 FIs who he believes are finally getting the gospel on the need to digitize. 

For smaller banks that have differentiated on service, the next step is to automate with technology. And if they can’t or don’t do it fast enough, Dan actually believes it’s an existential issue for thousands of financial institutions in the U.S.

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The following excerpts were edited for clarity.

The mission

Our customers are traditional financial institutions, banks, and credit unions, some of which have been around for literally over 200 years. These institutions are typically the lifeblood for capital in the communities that they choose to serve. We digitize how they lend to businesses -- we're a digital lending platform for business lending. That means being able to take an application -- anytime, anywhere, online, over the phone at the branch -- incredibly easily, utilizing all of the rich data that financial institutions have on their customers and all the data that's available. This allows you to create a completely different lending experience, one that is free of friction, that's a positive engagement between a bank and a potential business customer.

We create a great experience for the borrower. We create a great experience for the bank in that we are able to reduce the amount of internal work to do a loan (everybody knows banks have a lot of internal processes) by 75%. It's awesome for them. The net result of all of what we do is that more capital flows more easily to more businesses in communities.

The spectrum of SMB lending

I'd say almost every traditional financial institution is doing some sort of business lending. For most of them, that is their core business. We work with 130 financial institutions – over 100 have business and commercial lending as their core business. And so, they're mostly already in the market, and they're looking to transform. They've reached the point where their core business is just not as competitive as they need to be, thanks to the other institutions in their market digitizing, and thanks to non bank fintechs coming in and competing away some of their customers. So, they're at the tipping point where they have to transform to be able to stay relevant.

Bank and non-bank competition

I have been working in the digitization of business lending for, gosh, like, seven, eight years now. And I will tell you COVID clearly changed the conversation. Prior to COVID, we were trying to say, real soon you're going to have a problem where your customers just aren't going to like engaging with you. And these institutions all depend on their relationships and great service to compete. 

And then COVID comes in and makes every bank of the United States a digital bank for a few weeks. And it was just a game changer. There was the Paycheck Protection Program, which got $600 billion to $700 billion out to businesses, largely facilitated through banks. And banks had to digitize if they wanted to be successful with that program. And more or less, maybe 75% to 80% of all banks did do that program. So it was just this forced digital transformation moment. 

And now the conversation is totally different, even in the boardroom of these banks. Boards are scared about how quickly they need to go and transform. So there's real energy behind this in a way that I have never seen in my 20 years of fintech.

The role of technology and service

The core model of most traditional financial institutions is to differentiate on service. All money is green – it's the same everywhere. And if you're going to borrow money, or let your bank keep your money, it's service that defines the choice of who you bank with. And so when it comes to lending, it used to be, hey, we just work really hard. We're there for you, you call us, we pick up – it's great service.

The big differentiation today is that that's not good enough. I actually have to talk to you for everything I need to do with my financial life. That sucks. I don't like that. As a business owner, I say that personally, not just professionally – as a business, I don't want to talk to my bank to get something done. And so I think banks realized that they need to invest in removing friction from the sales process for additional financial products. You might still talk to a business, that's great. But they don't want to have to answer questions that you already know the answer to. They don't want to go and fill out paperwork. They don't want to get together in person. They just want it to be fast and easy. And that's got to be technology enabled. So that's the big change we see in our backs is their core model is really different due to technology today.

Business ecosystems, apps

Banks don't [think about integrating into the business apps their customers use]. That’s my candid answer. They're starting to talk about it, which is cool. I've seen over 130 banks and only maybe like 5% or 10% are talking to us about, hey, could you take your platform and embed into this other platform that we're doing a partnership with? Now we can power lending through that platform. So I think it's starting to happen. But it's pretty early stages for our customers. 

Acquiring Fincura and spreading technology

We acquired a company called Fincura, which automates what's called spread. Spreading is basically the process of taking a business's financials in whatever format they’re in. There are no laws for private companies exactly how your financials have to work. And so you could call your inventory 30 different things, across businesses, and classify your revenue into whatever categories you want. So the bank or any kind of lender when it’s going to do a loan to a business, you have to translate their financials into how you look at financials for a business in that industry. That's called spreading. And so what Fincura does is pretty cool. It takes a financial statement or tax return or whatever, in any format – digital or paper scanned in, upside down, turned to the side, coffee stain on it, however you got it – and it converts that image into the spreads, the financials that the bank wants to use.

There's a number of different applications of machine learning to do that, from using machine vision to pull the text off the page, understanding how to categorize whatever crazy categories the business has for their financials, translating it to the bank's categories, and then running some analysis on top to figure out, is this business actually a good business? Are they growing? Can they take out the debt?

And so all of that is fully automated. Any level of machine learning is going to have errors at a point in time. Banks don't really tolerate errors in financial analysis because the regulators get upset. So banks need a higher level of accuracy. Fincura's, and now Numerated's, spreading has this awesome user interface that will actually highlight where a bank underwriter needs to do some work like, hey, this looks off to us, you should take a look at these parts of the financials. They're probably messed up – the coffee stain was too heavy for us to actually correctly interpret these financials. It’s really neat technology that helps our banks automate financial analysis in like a tenth of the time that it would normally.

We got to know the Fincura team for almost six months before we did the deal, including doing a proof of concept to make sure that the platforms would sync up. So before we even announced the deal, we had that done. And then I tell you, the response from customers has been awesome. Within a month of announcing the acquisition, we already sold the technology twice, and we have customers getting ready to use it in Q1 2022. And so we're moving really quickly.

All-in-one lending platform

Many lending platforms have some form of spreading incorporated into the product. We don't think anybody's particularly good at both [the underwriting workflow and spreading]. That's our whole goal: to be a consolidated digital lending platform, from soup to nuts. Eventually, for every single business credit inside of a bank, we will take your loans with a higher degree of automation than any other platform in the market.

Customer engagement

On the customer's digital transformation, it's very early days. Most businesses got a taste of some sort of digital in the PPP process. By the end of the PPP program, most banks offered some sort of digital experience. And one of our customers said, hey, Dan, you have unfortunately created a monster. You've shown our customers how great engaging with us can be. And now we can never go back to the old way. Now banks are trying to figure out what to do with it, but they really haven't put out digital experiences for most of their products. Maybe 5% of products across all banks are digital.

Digital transformation?

I think the conversation at most bank boardrooms now is, can we digitize fast enough to be a winner? And if we can't, let's understand, we're going to sell the bank in the next two, three years. And so you'll see, literally thousands of banks and credit unions getting sold in the next three years. Banks don't really go out of business – they sell. That's going to be what happens to banks that don't think they can make the move to digital.

Revenue is an existential problem. If you can't get more of it, then you probably need to go away. And so, on the efficiency side, how much can you change your operations to bring your cost down? And that, too, is existential, but it's maybe not quite as urgent. Now, the way that banks look at it is they talk about efficiency ratios. And what that means is like, what percentage of the money that they make from a loan do they have to give up to operational cost? Historically, in the industry, when banks were in the good times, you could have an efficiency ratio of 70% or 80% and only make a modest margin. 

That's changed. Good banks are in the low 60s, getting into the 50s. And everybody's talking about a 40% efficiency ratio being where everybody needs to get to to be best in class. And so, costs have to come down substantially, and competition is going to get ruthless, even between banks and fintechs, who don't have the branch footprint cost problem. I think we're like two to three years away from that driving some banks out of business. That will be the next wave of banks tapping out and saying, I just can't change my operations enough to get as cheap as everybody else, and I keep being not cost competitive on loans. So it's gonna happen.

2022 goals

The goal we put out with our team for 2022 is to be the best digital lending platform for all business loans. Our history as a firm was to do fully automated smaller credits and do better than anybody else in the world. And we do that with the Fincura acquisition. And our other investments, we've now been able to expand to a larger class of loans where the bank is going to do a little work. It's not fully automated. So by the end of the year, we want to be the best and standard choice for banks looking to transform how they do business lending – not just for small credits but for all the credits.