‘We see a lot of whitespace in credit cards for near prime customers’: Avant’s James Paris

Near prime focus

Maybe just a quick touch on the business. So Avant was founded seven and a half years ago, focused on middle class, near prime consumers that effectively were not being banked very well by the traditional banks. Some brick and mortar players were out there, but nobody really doing it effectively from a digital standpoint.

We launched initially with a personal, unsecured loan product. Since then, we launched a credit card product about three years ago, which is actually becoming quite big. We've got more credit card customers than loan customers today.

Capital markets

I came in to focus around the funding for the company. We raised an equity round in the fall of 2015. It was the last time we raised equity because Avant actually became profitable in the ensuing years. And then, in addition to that, I helped design our approach around credit facilities, securitizations, whole loan sales, and the mix of all of those things to create stability and a long runway for the company.

We're a little bit different from some others from the standpoint that we actually embrace having assets on the balance sheet. And we think that that helps us ride our way through different periods of volatility in the capital markets and in the real economy.

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Direct lending to platform lending

After spending a fair amount of time working on our approach to all those things, I was able to take on a kind of broader strategic role. We identified some opportunities, as we were thinking about how to partner with big banks. One of the things that we recognized was that the near prime, middle class customer base wasn't being served well by the banks.

And part of that was structural. From a regulatory standpoint, the additional capital that's required by banks to effectively serve those customers is fairly prohibitive. And so we thought that that was a good structural barrier. Banks had real issues with their digital offerings. But we thought over time, they'd overcome some of those tech challenges and be in a position to serve customers well, and we didn't really like the idea of competing with their near zero cost of capital from the standpoint of having insured federal deposits. That was part of the fundamental strategy around how we set up Avant.

As we were out talking to banks, we realized that they probably can't lend to two thirds of their deposit customers, because they're not in that super prime-prime category. What we discovered was that there was actually a strong desire by the banks to be able to serve customers digitally.

Spinning off Amount

That was really the birth of the Amount business, where we started to work with banks to build digital, customized modular platforms for them. I spent a lot of time and helped build up that business over a few years. And then, about a year and a half ago, I came back to Avant, as president with a path to becoming CEO. It's been an awesome five and a half years getting to do a lot of different things.

We spun Amount off on January 1. It's a separate company now. And we've had two successful independent equity raises just on the Amount business side. The businesses is very well positioned from a capitalization standpoint, and is very focused on building digital platforms for banks that can be used across a number of key products for consumers, which include lending products, credit card products, deposit products, and point of sale products, which are in development today with a number of banks. Amount's publicly announced customers include TD Bank, PNC, HSBC, BBVA, Banco Popular, and a handful of others that we have not yet publicly announced. They're really a critical supplier to Avant as well.

Credit card as a product

We launched the credit card product about three years ago. And we intentionally positioned that to sit adjacent to the loan product. From an overall demographic standpoint, if you think about it in terms of FICO (which we don't use for underwriting, but it's a good reference point), the loan business on a weighted average basis has about a 650 FICO score average, whereas the credit card businesses is in the 620 to 625 range.

So for Avant, a few different considerations came into play around thinking about a credit card. Number one, the loan product is really solving a distinct need at a point in time where somebody's got a major purchase -- maybe the roof needs repair or something like that. That's urgent.

The credit card is very different: it's a utility in your wallet or something you can use in an e-commerce setting over and over again. And for us, we wanted to be able to supply products that meet multiple customer needs over time. And so our vision is to be the premier digital bank for the near prime, middle class consumer. We think that it's essential to have a credit card product in the mix to be able to do that.

Building a portfolio

We see a big opportunity because the credit cards are positioned just a little bit downmarket from the loan product. We see customers performing well, and we get better and better at underwriting in that category. We're able in some cases to graduate customers to where they'd be eligible for a loan product because of our unique perspective on them. We're excited about the opportunities to effectively cross sell the products in both directions to customers.

On the credit card side, we've seen tremendous growth. This year, we'll wind up issuing somewhere in the neighborhood of about 240,000 cards, which was relative to our plan this year of 250,000. We had a quite a bit of disruption from COVID in the first half of the year, but really demand recovered in a very substantial way. And performance has been really solid. We intend to keep that going.

We've got a number of investments we're making, where we plan to actually expand the breadth of the credit card offering -- both for a bit of a more upmarket product with features like rewards, cashback, promotional offers, as well as something that's more aimed at emerging credit and thin file customers. We see a tremendous opportunity for growth. There's a lot of whitespace in the credit card category that is positioned in that near prime arena, as opposed to in the deeper subprime area where there's quite a few competing cards, and that's really not our market.

Broadening the target demographic

We've done over $7 billion of unsecured loans to consumers over the course of Avant's existence. I think we had nearly 2 million overall transactions with consumers. That's a lot of data. We've been able to continue to expand our ability to underwrite beyond where we've been most recently. We've got a very structured program, from a governance and a testing standpoint, around product, underwriting, and marketing changes, and so we're able to run very controlled tests, where we authorize 5% of the volume for this period of time to be issued under this alternate policy, and then we're able to let that bake over three months, six months, nine months, whatever we determine is appropriate for a given test.

Then we sort of see, well, what do we learn? And should we make some modifications? We're continuously testing. And it's a way for us to continue to expand the pie.

New auto product

It's early days for us. We're effectively in a pilot today, so we haven't issued a lot of loans, but we're gathering data. It's similar to our credit card business, where it probably took us a good 12 months of making sure that the volume was relatively low as we experimented a little bit in terms of different marketing channels and different underwriting approaches to figure out what was a good intersection between customer demand and our own strategies from a product and underwriting standpoint.

I think we'll follow a pretty similar path on the auto front -- where we think we'd like to get to is to be able to refinance existing auto loans on a direct to consumer basis. Maybe you've got a $10,000 or $15,000 loan, and it's refinanced with $5,000 into the consumers pocket without a dramatic increase in their monthly payments, because you're able to extend out the maturity a bit. We don't see a lot of that kind of product offering in the market, particularly in a digital format.

Serving near prime customers

We're always looking for markets where we think there's a bit of an imbalance between demand and supply. That's where we landed and positioned our credit card product and we see the same kind of opportunity on the auto side. Ultimately, this is all about being able to deliver the products that consumers use the most and need the most within this near prime category. Credit cards and auto loans are about as eponymous as you can get when it comes to a financial product that is used by everyday consumers.

So to us, they're critical as a means of continuing to round out our offering to our customers and our historical data. We know exactly which of our customers have auto loans, because we're able to see that on their credit reports. Today, we have about about 650,000 to 700,000 active customers on the platform, so that ability to give them curated bespoke opportunities and offers is pretty powerful as well. That's something we're working towards.

Looking out to 2021

We are going to continue to grow the credit card businesses, because we talked about going in some different directions there. And hopefully, we'll double it again next year. In addition to that, we touched on auto.

The other really big one for us, both as a company and the broader market or ecosystem, is the point of sale product. It's really exploding, both in terms of installment products available at the point of sale to finance purchases, as well as products that are sort of split pay, after pay type products. That's a big opportunity in a big market.

The other thing that I would say is we have been spending a lot of time around evaluating deposit products, as well. That's a space where a lot is happening with a number of different approaches. It's something we continue to think hard about, both with respect to whether that's something we'd want to build or buy or partner.