In April of 2014, Eastern Bank, the largest community bank in Massachusetts with approximately $9.8 billion in assets and the largest and oldest mutual bank in the country, hired the team behind virtual banking startup PerkStreet and created Eastern Labs, with the objectives of leveraging the bank’s resources and data to build new financial service technologies and digitizing the bank.
Dan O’Malley, PerkStreet’s co-founder and former CEO, headed Eastern Labs and also served as the bank’s chief digital officer. A reorganization placed approximately 80 product management, mobile, online, and customer service employees within the new lab. Eastern invested about 1% of revenue into Labs, or $4 million a year.
At Eastern Labs, O’Malley and team developed a small business lending platform called Numerated. Numerated lets banks speed and automate small-business lending decisions and provides a real-time commerce platform that increases sales. It enables banks to address the gap in access to credit for small businesses with loans of under $250,000 – too small for banks to make efficiently using traditional underwriting methods.
Numerated used the bank’s own credit policies and customer data to underwrite loans in real time. But Numerated’s marketing capability was the key. The Numerated team helped Eastern Bank quadruple its small dollar small business loan portfolio since late 2015.
In May, Numerated Growth Technologies spun out of Eastern Labs with about a dozen employees. By spinning out Numerated, Eastern is betting that outside capital and a true startup culture will result in an even bigger payday down the road. Numerated is starting life as an independent entity with $9 million in initial capital. The company’s investors include Eastern Bank (with a 25% stake), Cultivation Capital, Hyperplane Venture Capital, Venrock, First Federal Lakewood (a $1.6 billion-asset mutual bank), and financial data and technology firm FIS.
Joe Maxwell, Managing Partner at Cultivation Capital FinTech Fund and Numerated board member, helped structure the spin out. ”I was looking for Numerated. We knew that bank small business lending was about to be transformed by technology and we were looking to invest in a company that has the team and the momentum to be the leader in the space as the transformation happens. Numerated’s experience inside the bank is really unique, a big advantage.”
I recently sat down with Dan for an interview.
Q. Is Numerated what you set out to build when you formed Eastern Labs in 2014?
A. We didn’t know the particular product or application that we would end up focusing on, but the idea was to get into the trenches with bankers to figure out how to build innovative financial technology. That is why we created Eastern Labs and that is 100% what we ended up doing. So, in short, yes!
Q. The costs of originating, underwriting, and closing relatively small dollar business loans has historically been quite high. How does Numerated address these costs?
A. We’ve addressed this not just with traditional software underwriting, but with data, and that’s kind of what makes our platform different than other underwriting platforms in the small business space. You see a lot of lending technology right now that is simply creating faster electronic workflow than had existed with paper.
We do that, too, but what we have done is to enable underwriters and credit officers to express how they want to lend in advance of anyone ever applying. After they do that, the system simply executes loans in real time with no requirement for human involvement. It is as low-cost as you can be to book a loan.
Q. Are you eliminating loan officers?
A. Oh no! You need loan officers to be able to program the system and to review the portfolio to figure out which segments are performing well and which are not, and which segments you want to invest in. The roles of loan officers and business line owners is expanded, I would say, if you want to substantially increase the portfolio, which is what the banks we work with want to do. The job doesn’t go away but the nature of the work is changed.
Q. Is it fair to characterize Numerated as HubSpot sitting on top of small business loan software?
A. We have put marketing automation on top of a real-time loan origination system. That is very much what we have built. It’s worth noting that you really can’t do one without the other. They are inextricably linked.
Eastern Bank or any other bank could have sent their customers email years ago saying, “Hey, we offer small business loans, and if you come into one of our branches, it’s possible that in three or four weeks we might actually give you one.” You could have automated that marketing and booked exactly zero more business loans. We also learned that you can create a real-time business loan but if you don’t automate telling customers about it, you don’t book substantially more loans either. It’s really the two together.
Q. What kind of marketing does the platform allow for?
A. It’s fully automated email for existing customers and for prospects. It’s worth noting how it does that. We know a customer’s or a prospect’s eligibility based on the credit policies at that bank before any marketing ever goes out. That’s the secret sauce. You’re not just spamming everybody and then declining most people. You’re only sending email to people who are likely to get the loan.
It’s funny. There are all kinds of companies focusing on targeting – trying to find a person before they even know they want a car loan. I’ve worked on these kinds of model in the past, and they can only be so good. The problem is that even if that model is okay, you’re still going to decline a whole bunch who really want a car loan. You’ve got to start with who is eligible. We do that.
So, we fully automate email. We also allow banks to send targeted direct mail. I’m an ex Capital One guy, as you know. This is not anything new. We’re just enabling it now for small business. You can send mail on a monthly, quarterly, annual basis – whatever your budget allows – to eligible businesses by geo in the areas around your branches or in the states that you serve.
Q. So does the skill of the bank’s marketing department determine the success of the program?
A. It does and it doesn’t. It’d be hard to argue that a bank with a lot of marketing sophistication isn’t going to be more successful at marketing. That’s incontrovertible.
What the platform allows, though, is for banks that have not invested in either capacity or in digital marketing talent to be competitive. What we heard from the market is that it’s awesome to allow for lots of marketing but that they’re just not staffed to send a million emails a year. So we enable them to get into lots of marketing without having to staff up. They can do it with software.
Q. Each bank has its own credit policy. How much flexibility does Numerated allow for?
A. 100% flexibility is the short answer. We can provide perspective and a place to think about starting in terms of the credit policy, but at the end of the day, the bank is going to be lending from its own balance sheet so it has to own the credit policy. That’s what we built in from the very beginning.
It’s worth noting that it’s not just about expressing a preference for this type of business, or that FICO range, or this industry. We allow them to define segments and we also allow them to define what happens specifically for each segment. A good example of that: If you have new customers coming into the bank, you can say for certain industries or for certain corporate types – say sole proprietors, who are notoriously risky for small business lending – that you actually want an underwriter to take a look at every deal. That you want full tax returns and you want eyes on it. You can also say that for a dental office that has been in business for 15 years with an owner of set of owners who have an 800 FICO, you’ll lend in real time. Just give the guys their loan. So, we let them express how they want that loan to be treated on the back end.
Q. You tested the Numerated platform with Eastern Bank for over a year. What are some of the more interesting things that you learned?
A. The biggest thing was how much the marketing automation was really needed. When we launched the platform targeting existing bank customers it went really, really well. We quadrupled the amount of lending that was going on in scored small business loans. Awesome.
But when we started targeting new customers, it did not have anywhere near as big an impact. It was frustrating. But when we went back and did the analysis from the existing customer launch, we realized that 90% of the loans were coming from customers we were emailing – and we only had email addresses for half the customers. It isn’t just that it’s a five-minute loan – we have to be able to tell people about it.
So that’s when we put the product on the website, that’s when we put it in direct mail, that’s why it’s in search and on Facebook. We gave the bankers new tools for prospecting and now it’s a totally different ball game, and we see robust bookings not just for existing customers but for new customers as well.
Q. There must have been a lot of trepidation inside the bank when you said you wanted to open this up to non-customers. How did you convince them that this was a good idea?
A. There was no doubt that we would offer it to new customers. In fact, Bob Rivers, who is the CEO of Eastern, from day one wanted it to be about bringing in new customers. That doesn’t change the fact that everyone was more nervous about lending to new customers than they were about lending to existing customers.
So how did we get the bank comfortable with it? The answer was that we needed to expose a different set of tools – a different set of ways to monitor the portfolio – that hadn’t previously existed. We needed the ability to hold a loan until an underwriter could take a look at it and we needed the ability to monitor loans by existing and new customers so we could stop any issues that were arising. If we got the credit policy wrong we wanted to know as soon as we could. Building out those capabilities made a difference.
Q. Am I right to assume that Numerated can expand a bank’s geographic reach? Do metrics change as you start working with businesses that are farther away from a branch?
A. Yes, a bank can use our platform to extend its reach. You’re no longer bound by having to do loans in a branch and you can use targeted marketing to reach out wherever you’d like on a highly specified basis.
We do see – and I think every banker would intuitively know – that you’re going to perform differently without a brand. When you get into new geographies you have to factor that in. You probably need to think differently about marketing costs; you probably need to think differently about your credit policy. Which we let you do – you can specify a different credit policy based on geographic location of the customer, their distance from a branch, and whether they’re in a specified zip code. You can and you should be thinking about all of that.
Q. How much loan activity are you generating outside of banker’s hours?
A. Customers have completed an application in every hour of the day. It is ‘round the clock.
I think that’s tremendous, being able to set that expectation for service, not just for logging into online banking to see your balance but for buying product whenever you need it, whenever you have time to get it done. Just like all of us do our Amazon shopping in the snippets of free time we have during the day, or sitting in bed at night, that’s how people will eventually shop for most of the different product in a bank.
You don’t want to do piles and piles of paperwork to find out if you can get a loan; you want to know first if you can get the loan. Then you can take some time to figure out how you’re going to use it.
Q. Is Numerated a tool that can be used by individual loan officers?
A. Individual bankers can’t by themselves license the software. Their bank has to license it. The implementation is pretty significant; you’d only ever do it at the bank level.
The application, however, is personalized for each banker. A banker is typically part of a branch or assigned to a region; we are going to personalize their customer or prospect set based on that. Someone in the back office using the platform as an underwriter or an admin, they get personalized login credentials, as well.
Q. Which institutions do you think are in your wheelhouse? Are they all banks?
A. They are all banks today, though we’ve definitely had a number of credit unions reach out to us.
I think our story resonates with banks in the $5 billion to $30, $40, $50 billion range. Banks that are going to look at Eastern’s experience and say, yeah, I can see how that works for me, too. I think Bank of America is going to come at the problem very differently and a $500 million bank is going to come at the bank a little differently, too. We may have some announcements later on in the year but that’s where we’re going to be focused in the short term. Not that we don’t expect to sell the platform more broadly over time.
Q. Does the ongoing involvement of Eastern Bank and First Federal Lakewood give other banks pause?
A. It’s been a fairly strong positive, to be honest. When banks commit to something, they commit to it all the way. We have two banks that have been involved with the system, use the system, and need the system to be successful. When we talk to a bank as a six-month old FinTech company, they don’t really look at us as a six-month-old FinTech company. We have two banks invested in us, and FIS, and two top-tier venture capital investors. It answers a lot of questions about how we see the future of the company and our commitment to the space in a way that even a three- or four-year-old FinTech company is probably not going to be able to represent.
Q. Who has licensed Numerated thus far?
A. The only one we have announced is First Federal, since they participated in the investment round. We are holding onto the other names for now but will make some announcement later on this year.
Q. Is this a traditional software license? SaaS? How are you pricing it?
A. It is SaaS. There’s an annual licensing fee that depends on how many of the modules you want. Do you want to do email automation? Do you want to do direct mail automation? There are a number of capabilities.
We also want to participate in the success of the program, so we also charge a fee to reflect that. If you don’t do a lot of loans you’re not going to pay us a lot of money. But if want to drive substantial growth, we are incented to help you drive volume. That’s a little bit different than other players in the space. We really like that model and so have the banks that we’ve partnered with.
Q. At the average bank, which systems are you integrating with? What data do you need access to?
A. In terms of the data that comes to us, we need to know who their customers are and we need to know their status with the bank – existing accounts, existing loan exposure, are loans in good standing? You want to do relationship pricing sometimes.
We will also typically take all of the transaction data, for a couple of reasons. You often need it to execute the credit policy of the bank. The bank might not want to lend to customers who overdrafted ten times in the last year, for instance. But we also use that data for machine learning. We can help a bank understand who is lending to its customer base already. By looking at payment data, we can help a bank understand who’s buying merchant processing (but not from them), who’s buying payroll services (but not from them). We can build a cash flow model of the business based on transaction data. And we can validate revenue, at a high level, for the business. Transaction data is pretty powerful stuff. Our system provides ways you can use it to drive a lot of value.
Q. Is there a mobile capability?
A. Over half our loan applications come via mobile device. It needs to be a mobile-first application and it is. We are working to integrate it into mobile and online banking applications, so that a customer logging onto his or her mobile banking application can see or start the process of applying for a loan from within that application. Historically we’ve been outside that mobile, authenticated space. We’re working on that now and it’s pretty exciting.
Q. How quickly can you have a new bank up and running?
A. If the bank can work quickly, we can have them up and running in a shade over three months. It can take longer if the bank wants to do heavy customization.
Q. Can you originate SBA 7(a) loans?
A. We can. Overall, about 30% of our loans go SBA. It’s the fastest way to get an SBA loan in the country by a lot, and it’s an awesome customer experience. The cool thing is we only route applicants into the SBA process if that’s how the bank has scored them.
A lot of banks will make a customer fill out an SBA application when they come in to fill out a regular loan app. Or, they’ll ask the customer up front, confusingly, if they want an SBA loan. The customer doesn’t know. He or she wants a loan. You tell me what the right one is.
We let the bank say, “Here are the segments that I’m not going to lend to without an SBA guarantee, so I want you to take these applications, score them, and – if they require it – route them to the SBA application.” Which we do all in the same session. For the customer, it doesn’t look any different. They’ve applied, they’ve gotten their terms, and then there’s just another page you have to fill out for the SBA. They can do it literally in 60 seconds. We have some cool, back-end workflow built in to automatically route the bank’s internal SBA paperwork through the platform. We close SBA loans same day and automatically forward those loans to the SBA’s systems. It’s pretty neat.
Q. Is Numerated the answer for banks that are worried about losing small business loan customers to P2P lenders and folks like OnDeck?
A. We built this platform to make sure that Eastern didn’t lose its position in small business lending. And not just to not lose it, but to grow it. Eastern is the #8 SBA lender in the country. We were not going to let small business go the way of alternative lenders.
Q. What’s it like for the small business owner when she sits down at the keyboard to apply?
A. We’ve made it as easy as possible for a business owner to borrow money. The application for a loan for less than $100,000 on our system requires five questions. It can’t get any shorter, realistically.
We do it by pulling in a lot of data, creating a lot of data, and asking banks to do their work in advance so that when these loans come in they don’t require any time. The customer can get an instant decision. That’s the real mind-set shift for banks. They need to do their work in advance.
During the implementation process, they have to figure out how they’re going to feel about a dentist with a bad FICO, or someone who’s in construction with a good FICO. Or a sole proprietor (which they kind of don’t like) who’s been in business for ten years (which they kind of do).
The good news is we bring a bunch of data to the party and can help banks with those decisions. Once you do that, the customer experience is awesome.
Q. Assuming she’s approved, when does the money hit her bank account?
A. The fastest we have ever done a loan – from when the customer started the application to when the money hit the account – is two minutes and 57 seconds. I don’t think it’s possible to be faster than that.
The decision comes within 10 seconds. After the customer signs the documents (which happens online) the creation of the money in his or her account takes about 20 seconds. There’s 30 seconds of work that we have to do. Everything else is up to the customer. How quickly do they key in their application, and then, more than anything, do they want to take some time to review all of the loan documents? Some customers want to spend a couple days on it. Some have a business partner they want to talk to.
Q. Will small business owners pay more for the convenience of an online process and immediate disbursement? Should they have to?
A. You get the same price whether you do it online, in the branch, over the phone, in your underwear on your sofa, or in a suit in front of a banker.
What I will say is that if you can create an incredibly convenient experience, you can charge more for it as a bank. If I allow you to click a button and get your money in two minutes and 57 seconds, I’m saving you time and you don’t have to shop any further. For that, I can probably charge you a little more. I invested a bunch of money, as a bank, to make this happen for you, so let’s both benefit. We’ve seen that be a good tradeoff for both the bank and the customer.
If you’re a small business owner, you really don’t want to spend 30 hours getting a loan. But that’s what the Fed says is the typical amount of time spent by a small business to get a loan. How do you value your time? $100 an hour, $200 an hour? Whatever it is, that’s a lot of money.
So, better for the customer and better for the bank. Really turn small business into an attractive opportunity as opposed to one where it’s impossible to make any money.
Q. What does Numerated need to do now to scale?
A. We need to bring this platform to as many banks as we can. I think it’s mostly about our ability to offer high-quality execution, rather than about our ability to sell the platform. We have intense sales interest in the platform. We are running to continue to staff our implementation team, hire implementation engineers. What we can’t do is bring on 20 banks at once and have it not go well. Our customers have to be successful. The name of the game right now is staffing up and high-quality execution for our customers.
Q. Is the platform complete or are there enhancements in the pipeline?
A. Software is never done. If you’re asking if the platform is ready for prime time, I can tell you that it has been in continuous production for nearly two years and has booked nearly $100 million in loans.
But there are a ton of additional features we’ve been asked to build, not just by Eastern but by other banks. The feature requests are coming in fast and furious. We like the runway we have in front of us. We think there’s a lot we can continue to add to the platform that banks are going to find valuable and that will create additional revenue opportunities for them.
Q. Unlike most banks, Eastern Bank has experienced technology entrepreneurs on its board. Did that help smooth the way for you at Eastern Labs?
A. Of course. It helped a lot. The experience and background of Eastern’s CIO, Don Westermann, was also tremendously instrumental. If Don hadn’t been a person who wanted to innovate, we wouldn’t have been able to do something as out-there as Labs. It wasn’t just having experienced people on the board, but having people like Don, and Bob, and Rich (the CEO and President) was instrumental as well.
Q. What advice do you have for other small to mid-sized banks considering an innovation lab of their own? How do they make it work?
A. You’ve got to figure out what scope of bet you feel like you can make. Some banks will be able to make bigger bets than others. The fact that Eastern is a mutual enabled it to make longer-term bets. You have to right-size the scope of your endeavors and think pretty seriously about team and talent. What kinds of people can you attract? You can’t assume that you have the right talent on your existing team.
Q. Is this spinout the end of Eastern Labs? Will there be a Labs 2.0?
A. I can give you the perspective that Bob and others at the bank have shared and it’s one that I agree with. Labs 2.0 will be something different than Labs 1.0., for a bunch of reasons. It’s going to be a different group of people doing it. Eastern learned a lot from Labs 1.0 so now they’ll want to learn new things.
Q. What is happening to the folks at Labs who did not come to Numerated?
A. They largely stayed on to manage the Express program, to continue driving it, and they are fully integrated with the rest of the bank.
Q. What else would you like people to know?
A. It’s a really awesome time in the banking technology space. As we’ve begun having more conversations with prospective customers, it’s just amazing to me how everyone is looking at transforming their businesses. There’s not a bank out there that isn’t thinking about it. It’s exciting.
As someone who’s been doing FinTech for ten years, it’s cool to see. It was a different space ten years ago. There were a lot of banks then that thought they didn’t need to change.
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