Many financial institutions are behind the times when it comes to tech-enabling their internal processes. The sale of loans is done by human brokers with a limited network in a process that typically takes 3-9 months — a timeline that makes it difficult to plan within quarters and limits loan growth. Pavleen Thukral, a Georgia Tech Computer Science alumnus formerly of Bloomberg, saw a gap in the way loan trading operates and the lack of liquidity that most lending institutions experience.
Now, this first-time founder has been backed by serial entrepreneurs Allen Nance and Paul Judge of TechSquare Labs to build an online marketplace to optimize loan trading. Stackfolio provides a full suite of tools and analytics to help banks, small to large, make more effective trading decisions on a national level. The platform offers tiers (with fees based on asset size) that provide tailored recommendations based on machine learning, full data access, digital 2-pager, transaction simulations, and more.
Following a beta with Gwinnett County, GA-based small bank Brand Bank last summer and a public launch last December, Stackfolio has grown its client base to over 300 banks across 44 states, with almost $100M in loans listed on their marketplace.
“We had the first trade, a $12M loan trade, with Brand Bank and another bank in Texas that’s about $2-3 billion in asset size,” says Thukral. “That was a huge validation of actually being able to do a $12M loan pool through our product. We took the feedback from that first trade and we’ve improved our product significantly since then.”
Thukral and Stackfolio’s CRO Omar Esposito talk about how Stackfolio is flipping the loan trade industry on its head and tackling four main problems banks have with their online marketplace and data research.
What problem is Stackfolio trying to solve?
Stackfolio is an online marketplace for loan trading powered by a data research platform. A bank is an investor — they take their customers’ deposits and invest them to try to earn a return. A bank tries to make money by issuing loans. So if I’m a commercial bank and I wanted to invest in agriculture, I would give a loan to a farmer, and then collect interest on that loan. But the problem is, if I want to diversify out of agriculture the same way any other investor would, I have to now do something with that loan. In today’s loan industry, I would go hire a human broker to pool up millions of dollars of agricultural loans in my bank, and then go sell that pool to another bank or financial institution.
The first problem is this process is very expensive. The broker will charge anywhere between 25 to 75 basis points (a unit of measure for interest rates and other finance percentages). That’s basically 0.25 to 0.75 percent of the trade. That’s a financial hit since there’s already single-digit yields on these loan pools. A bank is only expecting to make anywhere between three to four percent yield on any given loan pool in the current interest rate environment, and if you take 0.25 to 0.75 percent off the top, that’s a huge deal to the bank.
The second problem is that a human broker has very little visibility into the market. You’re pretty much calling up the five to ten bankers that you just took out to lunch last week. The third problem is that there’s absolutely zero pricing transparency in this market. Brokers make both banks sign an NDA going both ways, nobody’s allowed to talk about who’s paid what for similar loan paper. Then the fourth and final problem, which of course stems from the fact that it’s a human-brokered market, its extremely illiquid. It can take three to nine months to close a trade. So if you’re in a bank in a board room trying to figure out your asset allocation for a particular quarter, it’ll take you more than a quarter to solve the problem.
How does Stackfolio provide more visibility to banks in the marketplace?
We set out to build an online marketplace for banks to be able to go direct and trade with each other online. We looked at this and said okay, we’re not eBay. We’re not trying to do transactions that are $20 to $100, so we can’t just put up an online marketplace and expect banks to flock to it. They’re doing millions in trades at a time.
We’re not just eliciting service, we’re not just listing loans — it’s a full online transaction wizard to walk you through every step of the process. This is important because loan trading is a pretty complicated process. There are 13 steps — and we also add analytics on top of that. For example, we just released a tool a couple of weeks ago that allows you to do month-over-month projections and yield analysis on loans you’re bidding on. You select particular loans in the pool and then we project out what the month-over-month cash flows of those loans would be. That’s only something you could get if you basically called up your broker, and said, “Hey, Could you run this on Bloomberg for me.”
What’s your revenue model?
We make revenue on the paid analytics. We have an annual SAS base model to stage the business and we charge based on asset size of the bank on an annual subscription. Then on the marketplace side, we charge anywhere from 25 to 50 basis points. We’re tending to lean towards that 25 basis point side right now to acquire customers. If you’re a community bank that already does this, our transaction wizard takes your existing process, digitizes it, and makes it more efficient.
How has it helped having such experienced entrepreneurs as Paul Judge and Allen Nance at arm’s reach for mentorship?
Allen is the one that’s primarily involved with Stackfolio, to guide us through how to deal with some of these larger bank CEOs, because that’s a process I had to get very comfortable with. Allen was one of the first folks that showed me that there’s a lot of this business that’s very different from what I expected. I almost on principle never walk into a meeting with a banking CEO with a blazer on. I might wear a collared shirt, maybe.
It actually gives us a little bit of cache because when we walk into a meeting and they see me, and they were expecting to see some stodgy 50-year-old guy, they understand that we’re not a traditional human brokerage team — we’re a tech company that’s coming to partner with their bank and help them grow. They’re dealing with a company that is different from the folks that they’re used to dealing with.
How do you hope Stackfolio will influence how the banking industry participates in the local tech scene?
It’s a really huge goal for us. I want to sell this notion that the banking community needs to come be a part of Tech Square, part of the tech scene in Atlanta, and one of the best ways to do that is to partner with us. Soon we’ll be hosting a banquet reception primarily for that. We want to introduce all these bankers to Stackfolio, but we also want to introduce them to the Atlanta Startup Battle and Tech Square. I don’t know if you’ve ever been to a banking conference, but it is not like the Atlanta Startup Battle.
What are your immediate short term goals as far as where you guys go from here?
I like to call it my race to a thousand banks. The moment we hit 1000, we’ll have a network equivalent to the biggest banking guys in the country. And we’ll have done that in a twelfth of the time it took them. That’s number one.
Number two is we’d really like to get to $150M in transaction volume 12-18 months from now. That’s when we’ll have proven our idea. Our goal is to try to take that 3-9 month process down to a month, where most of that month is due diligence. Then we’ll completely remove the amount of effort it takes you to match with another buyer or seller, to try to get a trade done, and facilitate the trade. And finally, we want to expose smaller banks, often untouched by most brokers, into this buying and selling behavior that they are completely unable to do at the moment.