The Power of Technology in Financial Inclusion with Dan Quan from NevCaut Ventures

The Power of Technology in Financial Inclusion with Dan Quan from NevCaut Ventures

Show Video

foreign [Music] you're syncing up and tuning in to the lending link podcast powered by GDs link where the modern day lender can dive deeper into the future of data decisioning and credit Risk Solutions [Music] show everyone I'm your host Rich Altman and today we're diving into a variety of topics with Dan Quan co-founder and general partner at navcot ventures including his experience working at the cfpb the investment landscape of his new company what industry China Sea is expecting for 2023 and so much more but first please head over to gdslink's LinkedIn and Twitter pages at Judas link and hit those like and follow buttons be sure to subscribe to The Lending link on Apple podcasts Spotify or wherever you prefer to listen to your podcast as I shared I'm being joined today with Dan Quan the co-founder and general partner at navcot ventures which launched in May 2021 and invests in early stage in text Dan is also a senior advisor for McKenzie's banking practice since 2018 and an adjunct scholar since 2019 at the Cato Institute Center for monetary and financial Alternatives Dan holds an M.A in public administration from Harvard's Kennedy School of government and an MBA from Drexel University's Bennett s lebows College of Business then also sits on several advisory boards including pay active all right now let's get synced with GDs link [Music] and welcome thank you for having me Rich I want to thank you for joining the lending link today I'm really excited to have you with us uh where are you joining us from today I'm actually uh Sunshine Jacksonville Florida no hurricane everything is very peaceful here before we uh jump into the business side of things I always like to get started with a little personal opportunity to learn more about our guests you share with me that you were born in China and you moved here uh in your 20s can you share any specific feelings you had when you first arrived in the U.S we'll do a call fob right first Shuffle the board a boat and uh even though I did uh study and learn English for I don't know 10 some years in China and uh still speak no language and the second language when you constantly had to do the translation in your head before you open your mouth that was a challenge and well I think that you still couldn't go my second language it's not not my mother town but I think over the years you the translation process became not noticeable anymore and uh someone actually told me that that uh when you speak English in your dream that means you have you have already you have already been you know sort of mastered the language already but I did uh a few times a couple years after I arrive in this country I in my dreams I was speaking English so I guess I already arrived at that point you also shared with me that uh you enjoyed traveling if you could only go back to one place that you've been to before uh where would that be and why Utah definitely if anyone for anyone who has never been to Pluto or don't even know where the country is it's a tiny tiny landlocked landlocked country between China Tibet and and India and Nepal I think yeah I think the Border independent a little bit anyway it's quite expensive to actually uh be in the country because they actually has a daily minimal spending for foreigners because they want to actually keep the country pristine but they're very friendly people very friendly you know government there but beautiful scenery but it's really beautiful very very peaceful tranquil I'll add that to our bucket list my wife and I just got back from Greece and uh turkey recently we had a great time there well thanks for sharing that I always think it's good to see The Human Side of uh my guest but uh let's get down to business now clearly you have a very diverse back background having worked both in the private sector as well as the public sector today I'd like to start off discussing some of your work at the cfpb I see from your LinkedIn profile of that before you join the cfpb you are a research associate at the Harvard School of Business can you share the type of research it did and whether this work was a catalyst for wanting to take a role at the cfpb so I was a research associate at Harvard Business School and was working for a professor his name is Peter tofano at that time he was a senior senior associate Dean at HBS and he was actually about to leave and became the dean acai business school at Oxford so that was his last year at the HBS when I worked for him and I was in my mind you know my math is pretty good not not top-notch but pretty good so maybe PhD in economics is something that's been sort of always appealing to me so that's how I became his assistant and helping him with the research so another interesting thing is in those days when you you talk where you when you think about Finance at you know any school like HBS it's all about Investment Banking you know hedge fund PC uh nobody really nobody thought about Main Street consumer banking like credit cards debit cards loans mortgages but Peter was the first one to actually introduced a Consumer Finance course to a business school not just in sort of top ranking schools but business school period And I didn't know much about customer Finance even though I did have a credit card credit cards such as One credit card and account checking and savings accounts but he really sort of taught me about these things which are frankly quite foreign to me when you actually dug deeper so he wanted he asked me do you like teaching and I said uh not really so we do like doing research I said well not really they said well why are you wasting our time and money to make your PhD candidate and I was like most PhD students end up not end up end up in Wall Street or elsewhere not in Academia it's a what at least on the application they were saying they want to be professors right so essentially I said well I'm being penalized for being honest with you you know how about this this little Agency New agency called Consumer Financial Protection Bureau and he was actually helping them on some of the efforts as they were starting up and uh go check them out if you're interested you know I'm happy to make a you know a connection for you so that's how I actually moved from Boston to uh to DC now thinking about the the work that I later did at the bureau actually for the majority majority of my time I did in the bureau which is about innovation in 2010 either 10 or 11 he and a bunch of other professors actually wrote a letter to uh then directory that there was a war in now Century there was Warren actually strongly urging her not to just simply focusing on enforcement tools and supervision tools to sort of you know get rid of Bad actors they encourage her to really think about Innovation which is something that policy makers and The Regulators at least at that time nobody was even thinking about that the sort of softer approach right so the idea is the enforcement supervision are very effective but belong tools to get rid of Bad actors but at the end of the day financial regulation basically only serves as the the minimum threshold that everyone has to has to abide by right so it's the minimum standard that you have to comply with but how do you encourage firms to go beyond that and you can you can actually kill or ban all the Bad actors at the end of the day consumers still need a good Financial product to to use to live by so they strongly encourage her to really think about ideas like Innovation and I shouldn't say that letter was the Catalyst for project capitalist but right that definitely yeah served that you know I think it was one of the reasons and Peter later on after I took the job actually I he was already over the pound in uh at Oxford I connect I reconnected with him and he said well I should take credit for you know the job you're holding today yeah so that was uh what around 2012 when the cfpb announced project Catalyst yeah and I think you know you kind of talked about the mission that was around uh Innovation any other tenants that were the key objectives for project Catalyst I know one of the big things for the cfpb is all about financial inclusion so was that one of the key tenants as well that you could talk to someone at the one one of the largest financial firms actually uh told me this was when I was at cfdb he said well you guys are taking a very sort of like a better word casual approach when it comes to interacting with with us casual not not in the sense that you're being not serious casual means you're being approachable it will be approachable is a better word so if you give me example where how they engage with another agency whose name I shall not mention is that they have to go through first uh First Step has to go through their examiner an examiner would relate a request to the field manager field manager will request with a requests to Regional director the original director will contact the senior staffer in DC in headquarters to help set up the meeting so from the time they want to have a meeting with the senior staffer in DC till the meeting happens typically two to three a month whereas a crpb with us was much much faster and we realized this is something we should be we should be doing more as an agency because uh you know everybody lives in their own bubble especially in Washington DC you don't know what's going on outside the Beltway and when we started seeing Innovation popping up you know everywhere after the financial crisis when the incumbents basically retreated right so all of a sudden this new thing called the fintech came up right remember in the days Lending Club was was Lending Club of Prosper they were the first Innovative companies that really eating the incumbent lunch when it comes to lending their personal loans I recall that Prosper rolled at first right and really had some challenges getting The Regulators to understand who and what they were yeah they were they were shut down by the SEC and right many Club voluntarily seized their their business for a year so all these earlier Pioneers had challenges you know all sorts of challenges with regulations and I think it's a good thing that the bureau's leadership back then you know director cordray he realized this is something we need to fix so how do we do that right so the first thing is really about information gathering there's a huge information Gap the startups or the you know the guys were who wear jeans they have no idea what kind of regulatory expectations they should meet but those who are like you know the cltb and other agencies who are writing the rules who are enforcing the rules also do not understand how these rules are affecting these sort of Innovations are they helping them are they are they are they hurting them so I think that was one of the reasons project catalysts or office of innovation data it was called was created just to get the information just be approachable really back in the days we actually had a sort of informal dress code when you meet with these guys especially when you you know go to San Francisco or other cities New York you have to wear jeans you don't wear a suit don't wear a tie because you're going to scare people off but of course when the initiative was initially was first launched the the mission was to promote consumer-friendly Innovation right but it's a very big term but in reality what the first thing we did was just trying to get people to talk to you because people are afraid people are very very afraid especially as you know in the early days of crpb yeah there's a lot of you know negative press coverage about the bureau it was a hard job just to to make sure people are willing to sign up and to meet with you and to later on divulge information that you otherwise will not be able to hear so uh undoubtedly a lot of our listeners today are familiar with the uh initial no action letter that was issued to upstart so in 2017 they were issued the first no action letter which was related to the use of alternative data in making credit and pricing decisions I could actually remember reading some of the papers on alternative data surveys that were done and then a second letter in November 2020 was related to the use of AI and machine learning in model development and then 2022 upstart actually requested that the term the letter be terminated when you look back and you share the positive that you feel came from these new action letters and what were some of the Lessons Learned as you and your team evaluated the extension of other no action letters at the time so if you go to agency asking a question most of the times they actually will stay silent they will not tell you whether it's legal or in compliance they will just don't tell you anything the reason being they are afraid to tell you something that could be you know interpreted as something like a blessing or endorsement and also and most of the times they just do not know the answer and I think the no action letter tool was really initially designed just to try to really uh bypass the problem right so if you look at the policy the policy basically doesn't say yes or no policy just says again very legally the crpb will not take adversary actions against you but of course the bureau will have the authority to you know receive the letter so we saw the the use of AI and machine learning and the use of alternative data that can potentially expand access to credit and the CPU has done lots of research in that right the credit invisible the term was basically coined by the city research group but now is there any regulation that specifically bans the use of AI and machine learning or alternative data the answer is no everybody is concerned about obviously discrimination or disparate impact but the regulation doesn't say you shall not use certain data unless it's expressly prohibited by the law right like age gender and other protected classes so there's a lot of hesitations I personally feel the latter has already served his service purpose but what I really want to see wanted to see actually when I saw the second letter coming out I actually I would you know want to say maybe to to write something to issue something that's broadly applicable to the entire industry not just specifically to a company right like upstart I really hope that no watch letter is nothing but a tour it's not the end game right the end game is how can you really learn from these experiments these tests and figure a way to provide broader guidance to the industry so that everybody can can benefit from it but at least there was an experiment there was a lot of empirical evidence that shows uh machine learning and uh the use of non-traditional data if properly supervised and managed does have the ability to expand access to credit without triggering any kind of you know negative consequences that the lenders are afraid of yeah I mean I know that you know you were you talked a lot about when you and I chatted before about open banking data and certainly we've seen explosive growth right in that use of data and certainly uh it's allowed for a lot more uh inclusion of consumers that otherwise might have been denied Kevin moss and I talked a lot about that on the last podcast but you mentioned uh you mentioned Dan uh disparate impact and that's a topic that you know is is all often talked about I still think there's confusion in the market I've asked I'll ask people in the world that say you know explain to me what disparate impact really means and how do you detect it so you know when we think about machine learning and AI in particular do you feel that the application of those tools is doing a good job to ensure that there isn't disparate impact and is it really something easy to determine it is not easy to determine frankly it's a very very difficult and if you look at the sort of still permitting practice of how lenders do to screen by testing it's a very much a manual process right you hire lawyers you hire those special specialty firms that have lots of expertise and they have economists with PhD degrees crunching numbers developing models and do the swiping swipe out and uh it's a very very labor intensive exercise and I don't think it can really those scale and the lenders are scared of it so if you look at the original intent intent of Equal Credit Opportunity Act the ecoa or E coli there were actually two purposes one was really trying to ban the discriminations things like women shouldn't get credit right back in the days that was a norm now it's like oh that's definitely illegal right black people people of color shouldn't get credit that's definitely illegal but back in the days that wasn't Norm so that was the first thing the the Act was trying to fix the second thing which actually over the years and decades since the ecola was passed nobody really paid attention to it which is really how can we really unlock the Creditor box expand the credit box so that more people can benefit to get access you know that's really an important factor for people to move up the uh the social ladder so as a result I think lender just becomes extremely conservative you know they stick with the Playbook that they're they're used to right and they're afraid of making any changes and the result is still one of the wealthiest country in the world we still have over 40 million Americans who are Credit Credit being visible that's a shame really ashamed and the Machine learning obviously can help solve that problem does it solve all the problem I don't think so but actually that has the potential to really open up the credit box but it's not an independency it doesn't cure all the problems for sure but machine learning definitely can can really help solve some of the problem the positive side is that Regulators are or where was happening and there are lots of groups that are trying to do research to get a better understanding how AIML can be helpful and you saw a couple weeks ago the White House published a Bill of Rights for AI yeah which I think is all positive right nothing nothing or shattering from that from the document but actually that that's that that lays out some very good sort of principles how you know not just financial services but generally companies should private sector companies should uh you know should pay attention to when they adopt AI in ml but I think at the end of the day everybody is concerned about discrimination nobody wants to discriminate right so I think Regulators need to really provide a better better guidance a role map for compliance and uh I'm not really banking on any agency in the near future to issue such guidance I know the agency is tried in the past and they really try to collaborate with each other but I think at the end of the day they're doing what I call a job that's like Mission Impossible the reason I'm saying that is unlike most of the regulations in the United States when it comes to Fair Landing District impact it's very much principle based so the law the rule doesn't say here's a red line don't cross it right there's no real line so you don't know you don't know until you get a CID or you get an investigation that'll be too late there's always that level of uncertainty on how far you're strained yeah interesting exactly yeah so um kind of wrapping up on the uh cfpb there's been a lot of news about the cfpb over the last uh couple weeks and uh in fact uh this week they announced some uh rules that they're looking at related to uh 1033 and the personal financial data rights what are your thoughts on that is that something that we'll see come about I mean I understand that really about giving consumers a lot more control over their data creating a lot more competition I read an analogy that talked about the portability of phone numbers and how that law allowed people to easily switch from Verizon to T-Mobile and that the goal here is really to allow consumers to more easily hop around if they're not happy with the service they're getting from a particular financial institution you know your opinion on you know when when do you think we'll really see a reality of that happening with the rules well I'm not sure if the rule is ultimately going to be able to achieve that I think uh you know switching phone number um switching wireless provider while keeping up the number is a much easier task than switching your depository institution while keeping your direct deposits and payroll and all the other bill pay information intact uh I think these are two different things very different similar in theory but uh the lab is much much more complicated and I'm not sure the rule will actually achieve that but it will definitely will set up a regulatory framework such that when consumer permission third party to access their data on their behalf as if they were the one that you know access their information and using their mobile app or online banking portal I think that's really the first step back in 2016-15 when we saw open banking psd2 open banking in the UA in the UK and it's psd2 right in the EU we realized you know in the United States we don't have any of these rules or regulations or sort of you know mandates but we have this thing called 1033 which is something that no most people didn't even pay attention to but on the other hand I think the United States has always been at The Cutting Edge when it comes to data sharing I recalled six years ago around this time director codre went to Monday 2020 and delivered speech and toward the end of speech he basically said the data down to Consumers and they have the right to share with their parties so uh so that was the first shot he fired uh across the Bell uh across the hallway exactly and uh six years later we finally the agency is moving on to a official rule making I'm very very happy even though it's you know I wish this could go faster well we're going to take a uh a moment to uh virtually take off your public sector hat and put on your private sector hat and talk about your new business uh navcot that you launched in May 2021 uh interesting name why don't you share a little bit what what does nav caught mean well obviously you know as you mentioned earlier at the beginning of the show this Venture found really focuses on early stage fintech insure attack startups so for anyone to invest in that stage you got to be bold you've got to be willing to take a risk not just start up Founders but also investors and we we happen to be in the camp and uh we would love to roll up sleeves and uh fighting the same trench with the founders that we support and we want to be both so we want to be cautious of course but we don't want to be too cautious so napcar is kind of never cautious but right but we're still very prudent with our LPS money that's for sure but we have done some very very good deals and we're happy with the uh the portfolio we're building so far you know as you evaluate companies you list out the different firms you're involved with on your on your website how do you feel that your experience at the cfpb is affecting or impacting what companies you decide to invest in one of the companies you've invested in is fair play which is about fairness as a service so you know maybe kind of talk about what's that influence that the cfpb days for you have had when you're looking at firms that you might invest in I think at the high level you know I think VC business is more or less an Insider business right so you know the network you know where to find the deals you you know you you build your network you build your name you build your brand so that the founders want to work with you what they seek from you is not just a check they actually want advice so I think a lot of the work that I've done at the cnpb some of the pioneering work in in the use of data in the machine learning and AI as well as open banking that really has translated into very valuable device to Founders that we invest in the founders that we work with glad you mentioned fair play so you know this is really a sort of continuation of my previous work at Bureau um AI machine learning and on display impact which we just talked about and I think fair play really their solution is really is revolutionary in the sense that uh A lender can really do display impact testing on demand you no longer need to hire expensive lawyers in the Consultants to help you and will take them three to six mile this one if you use their software you can do it within you know a couple hours and you can do it constantly and this is something actually when we when we first worked with upstart we were wishing that there was some kind of solution like this because you think about it the lender doesn't know he is you know violating ecoa until they until after the fact right because before the loan is issue you have no idea whether you're in compliance or not like even if today or after you know you look back for six months you are in comprised it doesn't guarantee you in another six months you're still in compliance so ideally Regulators should require vendors to constantly testing of their display impact compliance but no lenders does that because it's very very expensive and I think therapeutic can really do that and I think just beyond also Beyond just lending furthest in doing business it's about marketing it's about insurance as well so the I think the application of their of their software really goes beyond the purely display impact testing which is obviously it's very very you know technical and uh hard for people to understand even for for investors the third thing I think about fairly the sort of Gossip excited is really and we talk about this Rich earlier at the show so folks like you and I whether you use fancy machine learning tools or the alternative data the result from lenders perspective will be the same we probably get the best interest rates the the largest line we can see right but for the people who are who are actually on the edge the results will be very different and you don't know whether a 600 FICO is necessarily better than 580 FICO right but if you purely look at you know traditional using additional regressional model and you know traditional data sources 620 probably is a better risk than 580. but I think once you apply machine learning you may see a different results and I think that's their second look product is going to be if lenders are if they can prove you know their their their accuracy I think lenders will find it very very useful for them to really again more precisely manage the portfolio risk and at the same time without increasing the default risk and open the credit box to to allow more people to get credit interesting yeah so I kind of think about pagaya and Theorem right that are second look lenders but this would be an opportunity for the first look lender to go deeper by by looking at these type of opportunities I'm sure you're familiar with Nova credit right I mean this is actually increasing normal credit too so Nova credit for our audience uh they've built a platform that helps people immigrating or immigrants in the US get access to their traditional credit file somewhere else in the world world and they formed the alliances with several companies they're doing a real great job so this might be a little bit of a personal question but you know I think about you're involvement with project Catalyst uh your role as an Adjunct professor with the center for monitoring Financial inter alternatives fair play I get the feeling that you're kind of on a mission related to financial inclusion and fairness in London would you agree with me and can you share why you're so passionate about the subject and the answer is yes it is when we reached our found you know 18 18 months ago Financial inclusion uh is one of our uh core thesis uh for the fund and obviously as an investor we ultimately want to return the capital to the LPS with with multiples on it right hopefully but we do really believe that with the the power of Technology Financial Innovation I think Financial Services can be more fair can be more inclusive and at the end of the at the end of the day you know as investors we can make a lot of money by doing good things so um probably just you know as a as a new immigrant to this country myself right I lived through poverty myself too you know at the time when I had to borrow a lot of money just to to uh to maintain my lifestyle because uh you know lost my job I couldn't you know without a loan I wouldn't be able to survive live another another week another month so I was keenly aware of how important the access of credit is just a surely it's through personal experience and also I I can still remember the first time I got the credit card you know I have no idea what credit card was when I first you know moved to this country I kind of had some idea of a debit cards but never used debit card in my life before that you know when I was in China so Chronicle was like wow I can borrow money on this piece piece of plastic it's amazing it I I cannot describe to you how how much joy I I had when I opened an envelope and some kind of institution I think was MBNA which doesn't exist anymore give me a car and lived in me that you know you can you can spend money responsible and pay me back right because I was a thin file no file at that time I can tell you another story where we we let the deal investing company can funded right so uh Steph samples is is the founder CEO the mission of the company is just trying to provide the credit to women-owned small businesses right which is hugely neglected and when she sort of described to me when she had a pitch to me and I just that sort of what she described to me as her she herself was a has been a small business owner of her life my experience personal experience as consumer sort of you know fresh off the boat and get credit that I can very much resonate and I I really believe that credit can be more fair and the credit can be more open and more people can benefit more business small businesses can benefit from it and uh what we need is really right Investments right funders and right regulations well it's interesting maybe if more people uh saw opening that credit card as a privilege and not as a right uh they might behave better on how they make those payments so kind of wrapping up on the business side as you think about firms that you might be investing in companies that are out there looking for Capital obviously we're in a lot different market today than we were six months ago 12 months ago any advice that if you know if you were about to interview a startup what is some advice that that you might give them when they're about to come on the navcot Shark Tank well I think the first thing is lower expectation right lower expectation and don't be don't feel offended when the VC pushes back on the valuation uh and uh I think we we got a lot of the pushback you know a few months ago but I think now a lot of funders sort of like kind of sink in with the reality it is a different environment and uh and you really be prudent uh with with the money that you're you want to seek you know from from the investors and uh yeah I think the winters Winters here and the winter is here to stay it's not going to be a uh I'm not talking about the recession pending the pen recession or anything it's really about just the winter in the in the Family Market yeah probably Market is not going to recover anytime soon you know we'll continue to see low multiples depressed valuations and unfortunately good ideas not getting funded and they just you know go badly up that's very unfortunate I think as you know this as well a lot of VCS are really holding cash and sitting on the sidelines and I think hopefully um six to eight months will see some kind of loosening there and uh you know VCS are willing to deploy Capital because at the end of the day you're right LPS give you money not to sit there idle and Collective management fee they want you to invest right I think that's going to change but I'm not sure how quickly the change will come well I guess if you could get that Capital today you're gonna have to have as you say a far stronger selling position I'm glad you mentioned that so another another advice I would I always give to you to startups that we work with is uh which is uh if if someone's willing to give you money write your check take the money now don't worry about dilution unless it's ridiculous turns right but right most VCS are being reasonable they're not they may be aggressive you you'd rather be you know you're the rather be owner of uh one percent owner of a billion dollar company than 100 older but you know fill the business right right exactly good good great well this is a rich alterman your host of the Lenny link and talking to Dan Kwan of netcot Ventures and uh prior member of the cfpb Dan thanks for joining us today I hope you've enjoyed this as much as I have and uh maybe we'll have you back sometime in the future and good luck with your new company thank you for having me Rich [Music]

2023-01-16 18:33

Show Video

Other news