Major changes are now afoot: In December, shareholders approved the merger of Fellow Finance into Evli Bank, confirming a plan put forward earlier in the year. This is set for completion on 2 April, 2022. A rebranded bank will launch later in the year, with improved and expanded services for customers. Antoni Airikkala, Director of Investor Accounts and a Member of the Management Team spoke with Roman Steigertahl, Head of Business Development at CrossLend about Fellow Finance’s journey, the outlook for the market this year, and how alternative lenders in general can position themselves to attract capital from institutional investors.

Roman Steigertahl: What will be some of the benefits for your lending activities in Finland arising from your merger with Evli Bank?

Antoni Airikkala: Up until now, we’ve been a marketplace lender, and our balance sheet lending company has been involved in financing the loans. As we are able to collect deposits, it naturally means that we’re going to grow our balance sheet and fund a more significant proportion of loans from our balance sheet than we have done in the past.

We will also be able to access different sources of funding, such as public debt markets in the future.

With our cost of funding going down, of course, we will be able to make better offers to our customers. We can also better target the prime segment of consumer lending, so we are set to become more competitive there.

Roman Steigertahl: When will the new bank brand launch? For customers on the borrowing side, what changes will they see?

Mr. Airikkala: The bank will be set up by the beginning of April and the brand launch will follow. We’re going to be a consumer bank – that is consumer lending, credit cards – and also banking for small businesses. That is our primary target.

As we move into the banking space we want technology to be a differentiator, both when it comes to the experience for our customers, but also in order for us to understand the customer’s needs. That includes offering the right lending products, at the point where they’re doing the purchase and also when they need the money. When it comes to targeted marketing, I think that’s something that we can definitely do better than the current banks.

Roman Steigertahl: Talking about point of sale financing, in 2021 you launched a buy now pay later (BNPL) product in Finland. What is your outlook for this space? Does BNPL compete with traditional consumer financing?

Mr. Airikkala: I don’t think BNPL competes with general consumer loans; we see it more as a new customer acquisition channel. What makes it important to offer BNPL is of course customer acquisition. Not all customers apply for a loan first and then go and buy something. If you want to offer good service to customers you need to be as close to the funding need as possible. So for example online stores and sales counters in physical stores – that’s where you need to be. We see consumer loans as a supplementary product to BNPL. A customer may buy with BNPL, then start using the pay in instalments option, then may refinance that with a consumer loan. BNPL is an important service in the overall range of products offered for consumers online.

Retailers are also more involved in this process because it helps them maximise their conversion. In general, similar financing products are also available when shopping at physical stores, but not everybody knows that you’ll find a financing option or offer at the sales counter. When shopping online, the option is presented to you from the moment you enter the store – it’s much more obvious. In physical stores, the financing is presented at the sales counter at the end, so there are so many steps before the customer actually ends up there.

Roman Steigertahl: It has been suggested that BNPL activity may not always be reported to credit agencies. Could that be a concern?

Mr. Airikkala: Given that the average size of a purchase via BNPL is quite small, I don’t think these purchases are big enough to heavily affect the repayment ability of a prospective customer. It would be better if this activity was reported, but from our position, what you could pull from that data says more about consumer behaviour – for example, does that person make a lot of purchases late in the month around their salary payment day? However, in general, if we have a debt register, it would be good if everyone reports there, that’s the strength of a debt register – all the debts are there.

Roman Steigertahl: Which markets are you active in? What is the current loan demand in these markets?

Mr. Airikkala: We currently operate in Finland, Poland, and Denmark, while in Germany we are about to launch a cooperation with our partner bank to issue loans there.

In Finland, we have consumer loans, invoice finance, and traditional business loans. In Poland, we have consumer loans and invoice finance. And in Denmark, we have consumer loans. Finland is by far the biggest market. Poland is in a relaunch phase for us after new regulation was implemented during the COVID times. So 98% of our volume at the moment comes from Finland. Of our volumes, there is a rough split between consumer and business, but since our business lending is mainly short-duration invoice lending, 95% of our loan book is made up of consumer loans. In terms of our outlook for 2022 and returns for investors, here in Finland, we had a rate cap, but I expect that returns will remain stable. I see this year being very stable.

Roman Steigertahl: You recently pulled out from Sweden. What were the reasons behind that?

Mr. Airikkala: It proved to be a rather hard model. The loan commissions for the brokers, so the customer acquisition costs, are quite high. If you don’t have an existing book, it’s quite an expensive market to enter into.

Roman Steigertahl: What is the attraction of Germany? Obviously on the consumer borrowing front it’s a very large and active market, but it’s also quite competitive.

Mr. Airikkala: The payment behaviour is quite good, and the available data is high quality. Credit agencies, such as Schufa and Boniversum, provide relevant data for credit scoring. Compared with our home market where we have the most expertise, Germany and Finland don’t differ that much. The rate cap [on unsecured loans] in Finland is now 20% – they are very similar markets when it comes to pricing. There are some pros and cons: The available data on customers is a bit better in Germany, but then again in Germany the sale prices for late portfolios are a bit lower.

Roman Steigertahl: You signed on a number of new institutional investors in 2021, including nordIX and Dynamic Credit. What are some of the features of Fellow Finance that are attractive for these kinds of investors?

Mr. Airikkala: Primarily it’s the fact that we’ve now been in this business for six years, and we have shown a stable track record on returns. Recently, we’ve gone through a short slow-down in economic activity and our modelling has passed that test. So I think that’s a thing that attracts investors. Very stable returns, diversified portfolios, and good payment behaviour are the key to attracting institutional investors.

Roman Steigertahl: What are some of the metrics that potential investors are focused on in terms of your book, such as default rate, pricing of risk, etc.?

Mr. Airikkala: They care about the return, and will look to see how the component parts affect that return. For example, What are the interest rate levels? What are the credit losses? When they focus on credit losses, what is important is that we sell the non-performing loans after 90 days so there are no questionable loans in the book that are hard to value. If you have a loan that is 270 days late, it’s always a question of how you would value that. We sell all our loans [in Finland] after 90 days of delinquency at 44% of their book value to a collection agency, so investors don’t have to think about that.

Roman Steigertahl: It seems like investors want a track record, but newer lenders also need investment to grow. How can a newer platform overcome this?

Mr. Airikkala: Either you hire or buy the knowledge, or you build it up, which is costly. Of course, when we launched, we had prior experience. The people in the credit analyst team need to know how to build a scorecard, a credit scoring model, but they must also have had experience operating in that market with a similar clientele and similar marketing channels. You also need to have skin in the game, schemes where you invest half yourself or take a decent portion of the risk yourself.

Roman Steigertahl: While some institutional investors are active in the private debt space, many are not. What sort of developments do you think we could see going forward?

Mr. Airikkala: Our institutional investors understand and have a great interest in consumer loans and also marketplace lending. But for many, it’s often too exotic. Consider an insurance company – they have multiple investment options. To invest in private debt requires a person who is interested in digging deep into it. They then need to go through the discussion with their own organisation and legal team. It also requires a lot of selling inside the institution’s organisation. But of course, standardising it, as CrossLend is doing, is helping. If we want to attract more institutional investors, we need to make it very easy for them. Because people have a tendency to go for the easiest solution – which is a natural thing for them to do.

Some investors have come on board – Citadele Bank invested in our platform [via a note structured by CrossLend] and there was a Portuguese bank as well. These banks had set up divisions to look at alternative lenders. First of all, if such a theme exists within the bank, it means there’s enough willpower to do it, and a dedicated team. So an institution must have the energy to go through the internal hurdles and overcome the obstacles.

Roman Steigertahl: You’re a success story, but it’s been a lot of hard work. What advice would you give to an earlier version of yourself and the platform?

Mr. Airikkala: In Finland we did very well, but when you enter a new market you need local expertise. For instance you need to know how products are marketed, such as through which networks or channels. When it comes to credit scoring, of course, there are credit bureaus, but you need to identify and understand the consumer behaviour that lies behind those data points, and this requires an understanding of the society itself.

The interpretability of the data points in credit bureaus requires a lot of local knowledge, and knowledge of consumer behaviour. You also have to understand the coverage of the credit bureaus – what kind of data is entered into the database and what might actually be left out? What is beyond the bureaus’ scope?

Paying is still a behavioural thing and there are different behaviours across different countries in Europe – such as how much payment time is usually given for customers in a specific country, and how much overdue people typically pay. When these differences are significant, you need to know them and include them in your models.