What it’s like to launch a credit fintech during an economic crisis
Curve's Paul Harrald describes how the current climate checks his appetite for risk and criticizes the "unedifying" behavior of other lenders.
A recession might not be the best time to be in the lending business, but Paul Harrald thinks it might be a great time to get into the lending business. As the head of Curve Credit, a new lending product from British fintech company Curve, Harrald is preparing to launch an alternative to the pay-for-it-later products offered by startups such as Klarna and Affirm. But he wants to go about it a different way.
While Klarna and Affirm both partner with merchants to be featured at their checkouts, Curve plans to build Credit directly into its existing app, which currently aggregates all your credit cards into one card. That means Curve Credit is designed to be merchant agnostic. "Immediately after making the transaction, or subsequently, [users] can translate those transactions into short-term installment loans," Harrald explained. "I don't need to integrate with merchants, and frankly my customers have point-of-sale credit no matter who they're shopping with."
But what about the timing, exactly? "We're lucky in the sense I don't have a great big revolving portfolio of credit card receivables [that I'm] sweating," he explained. "I get to launch into the environment … I get to be conservative, careful, thoughtful, when I launch these products — far more conservative and careful than I would otherwise have been under normal economic circumstances."
Harrald hopes that Curve Credit's differentiation and timing could yet help it compete with the big players. In a conversation with Protocol, he discussed the ethical concerns around pay-later products, how Credit fits into Curve's overall plan, and why he's not interested in late fees.
This interview has been edited for clarity and length.
What's Curve Credit's business model?
The primary source of income for Curve Credit is interest income. [But] we will use interest-free loans to get people accustomed to the UX, and it will be available, for example, to higher-tier customers, perhaps — we will make interest-free loans available to them as part of their subscription.
I will just make one point, though. We are approached, already, by very large OEMs with a view to us financing the purchase of their products, for example consumer electronics, on Curve Credit's balance sheet in exchange for a fee. There are some very interesting business models where we partner with a large OEM, either on their .com or just via the [Curve] app. If I can identify the purchase as an eligible product, then I can offer discounted terms, and of course some of these corporates are willing to fund the loans, they have cash on [their] balance sheet. They have units that are devoted to the promotion of the products by using the cash on [their] balance sheet. There's a very interesting business model where the liquidity is provided by an OEM, for example, the lending and point of sale capability is provided by Curve, and then we decide who takes the credit risk. The entity that takes the credit risk earns the interest income, otherwise they earn a fee.
Other pay-later products, particularly Klarna, have received a lot of criticism for encouraging young people to get into debt — even though for a good chunk of their customers they don't charge interest. How are you feeling about the business model's criticism?
My response to it is I'm not going to tell people whether they should be borrowing or not. That strikes me as patronizing. I am going to be a responsible lender: I'm going to use every item of information available to me, to ensure that my customers can clearly afford to repay the loans. I'm going to do my part.
The other thing I think it's incumbent on me to do is to ensure that there's responsible borrowing, not just responsible lending. And the way you make sure that customers can borrow responsibly is to give them in the clearest possible terms, before they make the borrowing decision, the consequences of the borrowing decision. You have to lay it out clearly: the amounts that you will be asking on what dates in every month, ensure that they've read it, and ensure that they consciously say "I've read that, I'm OK to borrow this amount of money."
I don't buy the criticism that people are being lured into borrowing. People are smarter than that, for the most part. If you behave responsibly, they're smarter than that.
The only other thing I would say is that not granting credit because you're worried about this is just as much a cause of anxiety for some people as granting credit, particularly right now. People need a breather, and credit provides them with a cash flow smoothing breather.
On that point about people needing a breather: Obviously, yes they do, but what we also don't want is people getting that breather to then end up with a bigger problem because of high interest rates. How much will Curve charge for loans?
Our product, frankly, wouldn't make sense if we charged anything remotely like credit card interest rates: You could mimic my product on a credit card and save money if you do that. Nor do I need to charge credit card interest rates, because my onboarding cost … will be as low as it could possibly be, because a lot of my customers come through the Curve OS system. They've been KYC'd, all of that stuff has happened before they get to me. I just then need to check creditworthiness and affordability, vulnerability, make an offer, once. The customer then gets a credit line, [and] they can transact within that credit line unless I get adverse information. It's a very, very efficient system I've got.
What's left is I need to cover my funding cost, my credit costs, I need to provide a suitable return to my investors. I expect my loans to sit either side of 10% [annually], in quite a sweet spot.
It's likely that bankruptcies will spike soon, given the economic environment, so it seems like an interesting time to be launching a credit product. How are you dealing with that risk?
The one thing that's happened and will happen is the interpretation of credit referencing data will be turned on its head. For example, in the U.K. and elsewhere it is mandatory for issuers to give people payment holidays. What that means is there are a whole group of latent defaults that simply won't appear in the data. These are people who could not have paid but were not asked for a repayment. [And] these payment holidays cannot affect credit scores. So the first technical response then is to completely reinterpret credit referencing data and to place a heavier reliance on other leading indicators of financial difficulty.
There will be a material increase in the insolvency type arrangements that are available to consumers. Of course, we're lucky in the sense I don't have a great big revolving portfolio of credit card receivables [that I'm] sweating. I get to launch into the environment. I get to be conservative, careful, thoughtful, when I launch these products — far more conservative and careful than I would otherwise have been under normal economic circumstances.
I just want to come back to another point, though. When somebody gets into payment difficulties, if you look at the process that typically ensues, it's highly formal, it's legalistic. It's borderline inhuman, in my view. The collections of consumer debt neglects the psychological state of the borrower, who is in a very anxious state. They're in distress. It's my view that it both makes economic sense and makes me feel more human, if I offer far, far more forbearance to these people than would typically be the case.
If somebody gets into payment difficulties with Curve, then my instinct is to say, take a breather. Just miss the payment. No late fees — I'm not going to make money on late fees, I just hate that practice. There will be penalties if you repudiate your contract with us, but if you're in genuine financial difficulty, I can look at your credit reference, I can tell you're in trouble.
What normally happens is a race to get the little bit of money that's left. I think you have to have a much longer-term view of the collections process. It's not about the short-term land grab for the few dollars that the person has. It's about maintaining a communicative relationship with this customer, so that when they eventually get back into the gig economy, when they eventually get their job back, you still have a working relationship with them and you're able to rehabilitate their credit and recoup the money that was lost. We will take a much longer relationship-based view of the collections process when it will inevitably happen to us.
The sight of 10 lenders constantly phoning and sending letters to get money that might otherwise be used for food is unedifying at minimum, and I'm not going to participate in that land grab.
When Curve Credit was announced earlier this year, it was suggested that Curve planned to build a marketplace model with multiple lenders on offer. Is that still the case?
My plans are six-month plans, not six-year plans. I want to generate revenues [by] lending, but it would be absurd of me to think I'm the only lender that Shachar [Bialick, Curve CEO] and the Curve team would ever do business with. Surely not.
In fact, it would be absurd of Curve to only have Curve Credit as its lender, it seems to me. I cannot occupy the world of lending; it's too big. I can get really big: Curve Credit will be a standalone unicorn in three years, I suspect. But that's just a speck in the ocean of lending.
From a lending point of view, I would happily sit next to a global panel of lenders, all of whom are vying to give the best terms possible to the customers of Curve should they wish to finance a purchase.