iwoca: Online Lending to SMEs


In the tenth episode of SME Banking Club Podcast Series, we speak about online lending to SMEs with Mariusz Zabrocki, Managing Director at iwoca Poland.

Olena Gryniuk: I’d like to start with a question about customers: what’s happening to SME customers during last few years, on your markets of presence? We’ve seen a lot of financial innovations in SME Banking and lending, we’ve seen brand new companies appear, but we still have small businesses that need money. So what SMEs are doing differently now and how they evolve?

Mariusz Zabrocki: I would say a lot of things changed both in the small business lending space as well as outside of it. There was a lot of innovations that somehow adapted to changes that people saw in other spaces of their business. So, over the last couple of years, things like iPhone, Internet, different services got people used to get thing very quickly, easily and seamlessly. But banking wasn’t really at the cutting edge of innovation, wasn’t following that too much. Which is changing! Even if I see for the last two years a lot has changed. There were no real online-only alternative lenders in Poland two years ago. And now we have not only working capital lenders; we have factoring completely automated, leasing which is even automated for micro companies. So, space evolved amazingly over the last years. But in terms of penetration of the market, I think we are still are at the very early stage, there are still a lot of to do in terms of reaching the customers. Because 80% of customers never considered anything apart from their bank to get financing. This is the fact of life. But I think it evolved the way it evolved in other spaces like a currency exchange. Ten years ago, nobody would think about exchanging the currency in another place then currency exchange shop or in a bank, and now most of the people are using walutomat chink or other providers in Poland and equivalents in other countries.

OG: And coming to Poland: how do SMEs choose where to get a loan in Poland? You told they ask their bank first.  What do they value more now – quick decision or price?

MZ: Depends on the needs. Financing need is a very complex one. Either you want to build a new warehouse or buy property, and then you need the mortgage. And also, in your business, you can need to get money for your invoices faster, and you can need a working capital loan, and all those needs have different priorities. So, when you need a loan for a long time then obviously the price should be number one, but sometimes there are situations when you have stock that you can purchase at a very good price, or you need bridge financing to start your investment and without this bridge financing everything stops and you are losing thousands of zlotys or euros every day then price really doesn’t matter, what matters is that you get that reliably very quickly, and also you can repay it very quickly when you don’t need money anymore. So, in iwoca, we focus on the second space when speed is very more important than the price.

OG: Talking about price: can you be competitive on price with the banks – I mean for the products of unsecured lending? Banks are more competitive with pricing and can suggest lower interest rates as they have a lower cost of funding having their deposit base, but at the same time have more operational costs for personnel, premises etc., which you don’t have due to automation of credit decision process?

MZ: You touched two of four biggest costs which you have when you are lending. So, there is financing cost, operational cost, also, there is an acquisition accost and risk cost. When you look at iwoca in comparison to the banks, obviously we have way higher financing costs. They pay 1% for the deposit; we pay several times more for our financing. And this is one of the reasons why we have a floor we cannot go around. Yes, our operational costs are 10 times, or 20 times lower than in the case of the bank. When you look at the acquisition costs then it’s also on the side of the bank because they have the customers, they have the branches, they offer tons of different products, so they can invest in big awareness campaigns which payback. And in terms of risk, we are quite similar. So, I would say that risk costs in relation to revenues are quite comparable between bank and us. And coming back to your question – it is possible if we solve acquisition question and the question of financing. So if we have a partnership, and we have such partnerships, when we have an outside investor, it could be an investment fund, it could be a hedge fund, it could be a bank as well, who want to have certain revenue, certain yield per year and want to enter that space, that’s how we can lower our prices. And on the other hand we can find the partner, for example, it could be a trading platform, the accounting company, a bank, we work with the biggest accounting company in the UK, such as Xero, we work with PayU in Poland, we work with Commerzbank in Germany and many other partners, they can provide customers almost without any acquisition costs because they already have small business customers. And when you have such three parties together, then we can offer pricing which is competitive with banks and still immediately.

OG: Do you offer now lower pricing for the customers which you acquire from the partners?

MZ: Depends on the partner. We have some partnerships where we offer pricing competitive to banks.

OG: Is iwoca a balance sheet lender?

MZ: Yes, we are. Most of our customers are financed with our own financing and on our books. But there are partnerships when an outside party is financing the lending.

OG: Which part of your customers comes to you directly and which part comes from different kind of partners?

MZ: Largely depends on the country. In the UK small businesses are really underserved, and the situation is way worse than in Poland, for example. Banks are very slow. We did some mystery shopping which showed that 4-8 weeks is the time that you need to get a loan when you are a new customer to the bank, which is ridiculous. Not to mention that smaller tickets are not interesting to banks. A similar situation is in Germany, Commerzbank doesn’t want customers who want less than 50000 euro because their processing costs are so high that it doesn’t make sense to serve such small customers. There are situations where banks are not capable to serve, also because of their IT legacy systems and other challenges that they face. That’s why in the UK we invest more and more into the direct acquisition. We have massive direct sales, paid search, online marketing channel, and also brokers and partnerships. We have around 8-9% of the small business overdraft market which is comparable to the biggest banks. Our product is not entirely an overdraft, but this is the bank product which is the closets, cause obviously we don’t have current accounts, but we offer flexible lending for 12 months which you can easily top it up, you can renew it frequently. This is our strategy in the UK. But in other countries, like in Poland, and in future markets we consider, we want to stay lean, as lean as possible. We don’t want to build operations, sales teams, this is a very long process, very costly. Our biggest advantage is automation.  We can provide automated process without building operation in a certain country just instead by serving our partners. This is our strategy for Poland; this will be the strategy for other markets in the future.

OG: Which markets do you consider entering in the future? And what are the criteria? How do you choose?

MZ: I won’t reveal what exactly are those countries; we have some countries on the radar. The most important things are regulations, which should be stable, predictable and allow small business lending without the license, which is not the case in many European countries. Second thing, which is very important, is partners who potentially could provide us with tens of thousands of customers. Poland is a good case where you have a very strong concentration in e-commerce but, for example, in accounting, you don’t have here any player with more than a couple percent of the market. We would really look at the markets where we could find partners which in different areas large share and have tens of thousands of customers we could provide automatic lending. The third criteria are access to information. There are countries, like Poland, where access to the information is pretty good, you have several databases, you don’t need banking license to have access to those databases. There are other countries, such as France, where you need to be a bank to have full access to credit data. Or Spain. You could think that Experian and Equifax, they are both in UK and Spain, and you would expect that this is the same thing, but Experian and Equifax have much more data in the UK, you have telco bills data, vote registry, you have everything in Equifax and Experian, you have very good quality of data. In Spain you don’t have it, it’s way more difficult to make a decision without a good quality of the data. So, these are the three things: data, regulations, and scalability through partners.

OG: Are these countries will be located in Central and Eastern Europe or out?

MZ: Our focus is Europe as a whole.

OG: You mentioned last year in your interview to our SBB Magazine that you were in the process of several integrations in a Credit-as-a-Service projects. Could you tell us more about that?

MZ: Credit-as-a-Service is how we call our integrated partnerships, where customer without leaving certain platform can get the loan immediately. We provide it with Tide which is one of the banks in the UK, it’s a mobile-only bank, so you have a mobile app and on the base of your bank statements and other data that this app has you can get approved and we saw a lot of interest from the customers of Tide, it was already a couple of months ago, we see a lot of people getting approved, checking how much they can get. We are in the process of other integrations with other bank and nonbank partners; it’s a very long process in general. After a couple of years of work in iwoca I have to say it’s much slower than you’d expect. Soon also in Poland, as of now, I cannot reveal the names of those partners, but very soon you will hear about some of our partners.

OG: Do you do branded projects here or a white label?

MZ: We are open. Actually, in the case of Tide, it’s pretty much white label. A customer is in the app, they see that iwoca is the lender because that’s the legal requirement and we are the lender of record, but there is really not that much branding of iwoca. So, we can provide a white label to our partners, we also can have co-branded partnerships, and we can have partnerships when customers are redirected to our website, and our brand is visible, and the customer can build a relationship with iwoca. This is especially interesting for partners who are not banks. Because when you are a bank then probably you can think that I want my customers to think that this is my product and I am the lender, and I have that great service and automatic decisions, while in the case of nonbank partners, they are more agnostic towards being our brand visible.

OG: Last November during our Conference in Krakow you mentioned you had 15000 customers. What is your target for this year?

MZ: Our traction is very good. We continue to grow 2,5 times a year, so in October we had 15000 customers so now you could extrapolate to that now we have more than 20000 customers at the moment. So, every year we grow 2,5 times in terms of our number of customers and our loan books, and we continue to grow. We had super strong February; our March also looks very strong, so we continue to bite records every month in terms of loan book origination, number of customers.

OG: Thank you very much for joining me today.