Luke Voiles, CEO of Pipe, on the optimal way to approach small business lending

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Small business lending is still not a solved problem in this country, or anywhere around the world for that matter, despite a decade or more attacking the problem. But today, we are seeing some new business models and new go-to-market approaches that have the potential to make a huge difference.

Luke Voiles, CEO of Pipe
Luke Voiles, CEO of Pipe

My next guest on the Fintech One-on-One podcast is Luke Voiles, the CEO of Pipe. Luke has been around fintech for many years and he became CEO of Pipe about a year ago now. He has a different perspective on small business lending and how to make it work best for the lender which he goes into in some depth in this episode.

In this podcast you will learn:

  • Some of the big names in fintech where Luke has had leadership roles.
  • Why he decided to take on the CEO role at Pipe.
  • What he did in his first weeks as CEO to fully understand the state of the company.
  • How he describes Pipe today.
  • How their working capital product works and where they sit in the payments flow.
  • The size of the small business they will lend to.
  • Why it is so important to get the payments data for their underwriting.
  • How they inject themselves into the payments flow so they are paid first.
  • Why vertical SaaS companies are the new community banks (see Luke’s article here).
  • Luke’s thoughts on Section 1071 of Dodd-Frank and why it is a good thing for fintech.
  • How Pipe is accessing the capital they need to lend.
  • Why we haven’t yet solved the small business access to capital problem.
  • Why they are not concerned with the expense side of a business.
  • The vision for Pipe for the next five years.

Read a transcription of our conversation below.


Peter Renton  00:01

Welcome to the Fintech One-on-One podcast. This is Peter Renton, Chairman and co-founder of Fintech Nexus. I’ve been doing this show since 2013, which makes this the longest running one-on-one interview show in all of fintech. Thank you so much for joining me on this journey.

Peter Renton  00:27

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Peter Renton  00:57

Today on the show, I’m delighted to welcome Luke Voiles. He is the CEO of Pipe, a position he’s held for about a year now. Now Pipe is a super interesting company. They call themselves the modern capital platform, and they’re all about getting working capital into the hands of small business. And the way they do that is pretty unique. And we obviously delve into the mechanics of how everything works in some depth. We talk also about how vertical SaaS is just such an important piece of the puzzle here, because of the the data and the intelligence that these vertical companies provide. We also talk about underwriting and how they’re able to do this incredibly quickly and easily, pre-approvals embedded on on these SaaS companies websites. We talk about section 1071 of Dodd Frank, we talk about capital markets, and why we haven’t solved the small business lending problem yet. It was a fascinating discussion. Hope you enjoy the show.

Peter Renton  02:07

Welcome to the podcast, Luke.

Luke Voiles  02:08

Thanks, Peter. Happy to be here.

Peter Renton  02:10

Okay, so let’s get started by giving the listeners some background. You’ve been at some big names in fintech in recent years. So why don’t you give us some of the highlights of your career to date?

Luke Voiles  02:23

Yeah, I’ve been at Pipe for about a year, but prior to Pipe, I lead Square Banking. So that was the Square Loans product, Square Checking and Debit Card, Savings and Instant Transfer. And we were in four geographies. So that was a pretty big kind of global banking-like business, we actually owned a bank in the US, an ILC. That was a pretty interesting experience about learning about product velocity, right? Square is really good at building new stuff. Before that, so I was only at Square for 18 months, but before that, I was at Intuit. I led the QuickBooks Capital team. So we built QuickBooks Capital from nothing to $2 billion in loans, we made it $100 million revenue business. And like having access to the customers and the data on both of those is the lesson I think. But great experience and leadership and mission-based and purpose-based leadership and then focus on customers, but Intuit was always so good about understanding that the minute pain points to the customers and helping solve them. Prior to that I was an investor. So I was a credit investor, was at Sixth Street Partners, which was part of TPG Capital at the time. We were doing, we were just buying a bunch of bad loans from banks after the crisis for the most part. So I spent almost a decade doing that. All kinds of credit. So it’s consumer, small business, asset-backed, resi, real estate, everything you can imagine. Was a credit guy for half my career, have been a tech guy, I guess for the latter half.

Peter Renton  03:43

Right, right. So what was it that attracted you to the position to Pipe? Obviously, you had it you had a good gig at Square banking, what was it that made you jump over to Pipe?

Luke Voiles  03:53

I think there’s just a few things. Like one, that you take a step back and think about the places you’ve been where you’re super excited to go to work every day. And so for me, it became clear like after I was done with private equity and went to Intuit, how important purpose actually is. Like having a real purpose of like helping small business customers, helping consumers, matters a ton. And so the purpose is a core focus for me, so I drank the Kool Aid at Intuit. It makes you, it makes like Brad Smith was an amazing leader. Like everybody was excited to hear the customer stories and see everything we’re doing to help people. I live for that. And so finding something that I could help mold and make into something like that was one thing. The other was like I was computer science undergrad, like I always wanted to do like startup type stuff. But I graduated right after the tech bubble burst, right and ended up on this long kind of like grad school then credit career. That was a major detour from like building stuff and getting to tinker and create stuff. So the other thing Pipe did is like I get to feel like a founder, and it’s pretty cool. Well last thing is, it was a unbelievably unique situation for three founders to raise $300 plus million in equity to go after an idea, like a big idea. And for me to come in with the right background and skill set to help actually achieve those dreams was sort of a bullseye match, I think. And so like all of those things coming together were enough to pull me away from Square. To say, You know what, I’m gonna go give a shot, like, let’s go build this.

Luke Voiles  04:28

And so to be honest, you weren’t, you were coming into a situation that wasn’t easy, right? You know, the founders had left and there was some negative press. What did you do in the early, in those early days and weeks, to really gain the confidence of the of the Pipe team?

Luke Voiles  05:35

Ultimately I think there’s one thing that stands out above all others. And I’ve heard differing things from different people about whether you should do stuff like this or not, or spend the time to do stuff like this. But for me, it’s obvious, yes, I spent weeks meeting every single employee of Pipe, like all 85 employees at the time, I had four slots a day, 30 minutes each, where I would go, and I would just ask simple questions like, like, what is Pipe doing well that we should keep doing? And then the other question was, well, what is Pipe not doing well, and we should probably stop or fix? And I started with the engineering team, you get through the entire team, and you know, everything about what has happened, what’s going on in the business, what we’re good at, what we need help with, and like how to start to think about putting the pieces together to turn it into a high product velocity machine to go build the stuff that we know we need to build. That’s one piece of it. The other piece of doing that is we’re fully remote. Right, we have a WeWork office in San Francisco that seats 10, and has a conference room, we have another one in New York that seats 10, has a conference room, we have a bigger office in Atlanta, where we have sales and customer success and some other folks that come in a lot. But it’s really, really hard to lead a high performing culture in a fully remote way. And so me sitting down and spending the time to meet every single employee at Pipe starts to build the trust, starts to build a human connections you need as a basic baseline, to like rejuvenate and excite a team to go build something. I do okay at selling a vision and getting excited about a vision. And so like told every single employee like, one-on-one, like what we’re going to go through with this. It goes a long way for me to learn a ton, and for every employee to like, learn who I am and what I care about, and where we’re headed, and that was the best thing I could ever have done. And I would highly recommend it to anyone else that’s coming into an organization of a size like this, where you can do it. Even if it’s a larger organization, like do several layers of leadership on down and even like, a random sampling of some of the ICs to just to make sure you have a grounding for what’s going on in the company that you’re you’re working with.

Peter Renton  07:39

Right. Remember, we bumped into each other at Las Vegas airport? And I think you were either. Yeah, you’re in the middle of it still, because I thought that was just such a sort of a great thing to do, as you can see, but you’ve got a lot of pressures on your time, when you’re just coming into a new role. You’ve really, you’ve got to get up to speed super quickly on everything, right?

Luke Voiles  07:59

That was the fastest way to do it. Like you talk to 10 engineers in a row, you know everything’s happening in that functional unit, and what’s going on. It’s just powerful, right, it makes a massive difference.

Peter Renton  08:09

Okay, so then now it’s been almost a year since you’ve been in this role now, what have you actually changed? And how do you describe Pipe today?

Luke Voiles  08:19

Let’s start with the original vision of the founders and just describe, so they were the what they sold the VC investors and raised tons of money on was creating a new asset class, where SaaS software recurring businesses could just sell their future revenues on an exchange, right and make a whole new asset class. I think the fundamental shift is that we’ve actually expanded the TAM but we make the idea bigger. We go from just SaaS software recurring, which is only 180 billion in TAM, and you go to all money in. You go to all digital credit card, all ACH, all RTP, all payments coming in to small, or through small business software that takes the TAM from 180 to multiple trillions, right? You can go after any type of money and not just the SaaS recurring revenue. That’s one piece. I think the other big shift is, exchanges are really, really hard. But you have to build both sides. It’s like Uber and Airbnb did it, and the founding stories are amazing, the focus required and the execution required, is just narrowing and narrowing and narrowing the problem. For me, the narrowest approach is to just not be an exchange, be a market maker, right? So you go from taking a small fee on exchange to taking a much larger fee because you’re taking the risk. And you can still unload the risk into the capital markets as the market maker instead of just an exchange. And so two things really, you expand the idea for money in, you shift from, like 25/30 basis point exchange fee to six to 10 points of a market maker type fee, and so it’s just a bigger opportunity that way. And it’s just focusing the team, like narrowly laser focusing the team to go build that basically, and so that’s the basic shift. I guess the last, one last piece I wanted to mention here, I think is like the customer acquisition. We spent a bunch of money on building the brand of Pipe, which is, which is a great investment over time. But when you do, like direct businesses in the risk space, it’s really hard to make the unit economics work if you’re going direct to customer and spending money on digital marketing, and so we’ve shifted to a B2B2B acquisition setup. So our actual, our marketing targets and our biz dev targets are the platforms. Are the larger payfacs that are, that already have hundreds of 1000s of small business customers that they’re accepting payments for, and they’re solving problems for. So we go sign one partner, we share back a big chunk of our revenue with them that goes straight to EBITDA for them, and we in turn get access to their entire customer base, and can white label the offering in a way that makes it feel like that same brand for the underlying small business customer. So that’s it. So expand the TAM, change the unit economics with being a market maker, and changing the customer acquisition strategy, but it’s still, it’s still giving access to capital to small businesses who need it, the ultimate underlying pain point is the same. It’s getting access to capital, and it’s just a bigger version of that, that we’re going to go attack.

Peter Renton  11:16

Right. So then how does your actual product work? Maybe you could just take us through an example? Like you have these partners that bring in all these small businesses. Small businesses says yes, I need working capital. What are the terms the deal? What does the product look like?

Luke Voiles  11:31

Yeah, I think with all the experience I’ve had at different places, the only revenue based financing product I’ve ever seen, that actually works at scale, is what Square Capital does, Stripe Capital, PayPal Working Capital, and some of the other bigger verticals are doing it on their own now, too. It’s a merchant financed product, where you’re in the flow of the money. The only way you can open up access to all of these tiny sole props and micro merchants, is to actually get into the flow. So I’ll use a coffee shop as a simple example. A coffee shop using software to run their business sells 1000 coffees a day, you look at six months of history on that coffee shop and can very accurately, looking only at that one data element, like what is the transaction history on credit cards, swiped in person at that one store, you can predict what the next 12 months of credit card revenue will be very accurately. You can lend 10 to 15% against that future. If they’re gonna make a million dollars next year, you can lend them or advance them $100,000, and they pay you back $100,000 plus a fee, and you get paid back first in line. So it becomes for the business, they don’t have to think about repaying the loan, it’s an automatic product, if they have a slow month, they pay you less, you’re just holding some of every day’s transaction to pay back the loan over time. And we’ve built it as a multi-draw line of credit product where the customer can draw down however much they want. If they qualify for $100,000, they can take 10, they can take five and you just modify the hold rate of money coming in to adjust the amount of payments each month. And so it’s very much merchant financing. Almost the same type of product as PayPal Working Capital, Stripe Capital, Square Capital. So simple way to think about it.

Peter Renton  13:15

But there’s lots of different types of organizations that have small businesses. I mean, are you really going off to primarily payfacs and software companies, or are you doing like associations? What what’s your sort of go to market strategy?

Luke Voiles  13:29

I think the way to think about the, so think about the underlying small businesses over here, and I wish I had a whiteboard, it’s more fun with the whiteboard. But think about the underlying small businesses over here. There’s like 33 million small businesses in the United States. 27 million of them are sole props, like they don’t have any employees, they’re very small. Our product can serve 90% of those 33 million businesses because we target businesses with $100,000 is on the minimum side of revenue all the way up to $5 million. So loan sizes, call it $10,000 to $500,000. That is 90% of the businesses in the US. So we are going after and targeting and trying to help these small businesses get access to capital. Basically all of them. The approach to going to acquire them, as I said, B2B2B, there are several buckets, I think about. The best bucket for us is those that have money-in offerings. So think about it as money-in/money-out, or like horizontal services, right? So money-in means that it’s a soft, vertical software that actually processes credit cards, and puts money into a bank account for the small business. With that, we’re able to get to pre-approvals, right or pre-qualified offers before the customer ever sees anything. So the platform can send us 100,000 Unique Identifiers with literally 12 data points. Like we only need aggregate monthly transaction volume for the last six months. That’s six data points, and count of transaction for each of the last six months. So with unique identifier and 12 data points we can get to a pre-qualified offer because the product is so good. We can talk more about this in a minute, but the data that you’re using is so perfectly tied to the risks you’re taking that those small number of data points allows you to get to pre-qualified offer. And so, but in order to get to that perfect frictionless experience, where you start with pre approved offer, like when the customer logs into the software, it pops up and says, Hey, you’re pre approved for $50,000, like people notice. And they started to come and look, or when you go to your payments dashboard, and you see that you have a pre-approved offer that’s just there, it’s a security blanket, you can draw down as much as you want, whenever you want, it starts to become relevant for you. And you will go first to that to draw it down because you know, it only takes a click or two. Because of the deeply embedded experience and the fact that we’re partnering with the money-in payfacs to get those data elements, we’re able to make it a perfectly seamless experience.

Luke Voiles  15:46

When you go beyond the money-in, you can go to money-out, but there’s not enough data to get the pre-approval in money-out. And so the experience becomes more like what the old like older versions of alternative lending looked like where you don’t have as much information on the business, and you have to ask for more. And it’s not as good as the flow. But we’ll start with the payfac money inside, we’ll then expand our partnership targets to like referrals, like Fundera and Lendio have amazing leads coming in. I led the marketplace at QuickBooks, right, we had Fundbox and BlueVine, and Funding Circle making loans to the small business customers within QuickBooks, because those were good customers. And we were able to get enough data to try to get to an approval there. But that’s, that’s one step down from what we have at Pipe, it’s just a, you can’t get to pre-qualified until you ask for more information. So the experience is just not as good, but there’s still access to business that way. Then there’s the horizontal, like there’s other other like, the banks are another option, right? The banks don’t know how to serve products to small businesses that have less than $25 million in revenue, in many cases. It’s crazy. And so there’s an opportunity for Pipe to partner with the banks as well to say, You know what, like, let us see the bank data, we can show you what our pre-approved offers would look like for your population. And if they come in and they like that offer, we can then ask for more data and upsell them to the line of credit at Wells Fargo for example, instead of this more expensive product. So like there’s a path forward for this business to go partner with all types of businesses that serve all types, like all types of Big B’s that serve the little Bs, and the money inside, the money outside, and the horizontal services side. So it’s just the payfac connection point allows for that like a magical experience. And that’s where we’re starting.

Peter Renton  17:25

Because when you’re underwriting as you say, it’s truly pre-approved, right? It’s just like one or two clicks in the and the money is there.

Luke Voiles  17:32

First click is I mentioned like pre-approved offer, I’m interested. Second click is, I’d like to apply. And I agree to have the partner share the data with Pipe. That automates the application, right. And then we send back the fully like, like fully approved offer. And it’s just one more click to come through. It’s like it’s not as perfect as three but like, it’s pretty close to three clicks.

Peter Renton  17:51

But so you can only do that when you say, when you have access to the payment in. And so you obviously have a different flow. When you’re working with a bank or… I imagine, like you have to do a more traditional, shall we say, underwriting process where you’re pulling bank data, you’re probably pulling QuickBooks data and stuff like that, is that like, what’s your underwriting process look like when you don’t have that, that magical money in data,?

Luke Voiles  18:16

You need to get it, is the answer, you gotta get the magical money in data. So you ask the customer. Right now we have our like, you can go to Pipe website and apply for a loan. You have to link your bank account for us to, mainly for fraud checks, and then you have to link your payments account. And so many of the big payments providers have payments APIs where we can pull that transaction data, right. So you can select who your payments provider is, you can then connect that data, we can then do the underwrite. You can’t, like we did it, we did a cash flow based model at Intuit. And it worked. Like you get to a debt service coverage ratio, you have to understand all the expenses. So like we live in a world at Pipe where you don’t have to understand the expenses because you’re getting paid back before the expenses. And can actually, like underwrite based on that single component of revenue. Like Square only saw 40% of the revenue of the customers, like many small business, like restaurants would be selling on DoorDash. Like they’re taking credit cards through DoorDash, right, like half the revenue comes from somewhere else. And so you’re so narrowly tied to it, like you have to get access to those data points. It’s just a different product if you start to underwrite expenses. And the data lift is dramatically higher. Like we had 26 billion transactions at Intuit on the accounting side and the bank side. But it took all of that to figure it out with like 85% accuracy, what the heck was going on in the P&L of that business. And you could do a cash flow based product, but it cannot go as far down the risk spectrum as the merchant finance product can. And so it’s like, you gotta get the data, you need the transaction history, because that’s the data that you’re underwriting against.

Peter Renton  19:47

What if you don’t have the, like you you don’t get the first money in. Like you’re not you’re working with a bank, who has small businesses that might be processing with Square and DoorDash right. So you’re not going to be part of that payments flow, explain to me how you work with that.

Luke Voiles  20:04

So we’re sort of a neobank in the background. I hate like the neobanks aren’t working for small business because they monetize a debit interchange, they cannot figure out lending, they cannot acquire customer, and they’re trying to take the primary spend checking account, and it doesn’t work. You just can’t do it. Like people that had a checking account already would not take Square Checking, it just doesn’t happen. And so our F, we have an FBO layer, we have a bank partner and a BaaS layer, bulletproof setup, by the way with Alloy, and the bank can look over our shoulder live, at every underwrite we’re doing to understand that we’re applying the BSA policy the right way, by the way, I’m very much making sure we’re bulletproof from a compliance perspective, in that sense, multiple backups, that’s a whole different conversation we can have. But the way to think about it is payments is done. If you’re plugging into the payfac partner payments is done, they’re ready to release the money into the customers underlying Bank of America account, we simply need the permission of the business owner that took the loan to switch the deposit account to our FBO layer.

Peter Renton  21:04

Gotcha, gotcha.

Luke Voiles  21:05

And then we take our payment, and that’s it, and then the rest of the money goes to the account. And so instead of messing up asking for split payment or messing up reporting, payments is finished. And there’s reporting there that the accountant can look at based on what happened on the payment side, and then it drops into, intraday, like, for 10 minutes, it’s at five minutes sometimes, into the FBO layer, we can hold our payment and do the money sweep we need and then give the rest of the money to the customer. So that gets us into the flow to have the same risk setup, actually, as a Square, Stripe or a PayPal has, because it’s just a layer, an intermediary layer that lets you do that. But the money still goes to the primary spend account. And which means that there’s no it takes the friction out of the bank part.

Peter Renton  21:46

Right, right. And they’re not actually paying back anything. It’s just coming out of the out of their deposit that was deducted to their account.

Luke Voiles  21:53

Right. And like on the payfac side that works like, if you start, if you want to add, like say it’s a restaurant and you’re getting one component, you could you could literally tell them, hey, you know what, if you link your DoorDash account here to and change the deposit account will give you another $25,000. So it’s also a place for us to take like more share of wallet for the first time. None of these platforms can see the full share of wallet, or had a benefit that was big enough to get the full sphere wallet before and this one will do it.

Peter Renton  22:20

You wrote an article, a guest post for us just last month in January and it actually ended up being one of the most popular articles of the month.

Luke Voiles  22:27

Oh, really? I didn’t know that.

Peter Renton  22:28

Yeah, it’s the new talking about how vertical SaaS companies are the new community banks. Can you just sort of elaborate on that? And what what did you mean, there?

Luke Voiles  22:39

It’s kind of a controversial headline, I guess?

Peter Renton  22:42

It’s got a lot of clicks.

Luke Voiles  22:44

Yeah, maybe? I mean, I think the answer is, and like I spoke about this, like as a keynote one time too. But fundamentally, like business owners need to have their problem solved. Right, they used to go into the bank branch to deposit checks, they used to go and try to get money for the till for the next day. And they were constantly coming in a couple of times a week to like, do their money stuff. And that was the chance that the community banks could actually cross sell, and say, Hey, you also qualify for a loan, or, Hey, let’s talk about the other needs you have on the insurance side. The reality is business owners do not go to the bank branches anymore. They’re going into the software, right? Like initially, that software was like the horizontal software like QuickBooks right or Square. I would argue that Square is a horizontal for retail, right. Like 10% of retailers in the US that are physical use Square terminals, that was more of a horizontal retail play, to accept credit cards. And so that was the first shift. And now the shift is getting even more dramatic, right? You have Toast. Like Toast is a great example. Most people know it because you’re paying if their card at the restaurant on their device that says Toast on it, when the restaurant is taking the check, right, and even taking your order where they’re typing it into the Toast terminal. Toast is able to solve the end to end pain points of the restaurant owner in a way that QuickBooks and Square like of course trying to catch up on the restaurant side, but the way that QuickBooks definitely couldn’t, because they’re so horizontally focused, they’re thinking about nail salons and landscapers in the same way. From a customer pain point perspective. Where Toast is thinking about the restaurant. And then let’s take it even a step further. You now Slice. Slice is taking market share from Toast on pizza shops and pizza joints, to solve the very specific problems of a pizza shop owner using the software. Just by word of mouth, they start to take market share because they’re they’re doing a better job of solving the pain points of the small business. If you think about nail salons and hair salons you have businesses like Boulevard and Vagaro, they’re doing great. Like Boulevard started, it’s just a better appointment software to help fill the seats, and then they added payments and they have more stuff coming. You go to like you see Mindbody and Explore that do yoga studios and gyms and daycares and service based businesses. The future of SaaS software are these verticalized offerings that really all tie back like in a Scott Cook-like style, like focus on the customer pain point, like solving the end-to-end pain points of those verticalized businesses. And if you’re the place that the business owner can go to do everything, they don’t need to take five disparate tools to connect them together. If you can do that, and focus on those pain points, then you can then partner with Pipe to offer everything else. All of the embedded financial services starting with capital, the biggest pain point for the business is access to capital Pipe can come in and white label and partner with any of these vertical businesses that are payments processors, many of them are payfacs, to offer the product. And so it’s just where the business owner is going to complete tasks, I think is the difference. They don’t go to the banks anymore, they go into the software, and that’s where the financial services have to go.

Peter Renton  25:42

I want to switch gears I want to talk regulatory for a second and just ask you about section 1071, which is a part of Dodd Frank that requires lenders to maintain and compile the dates and data on minority owned businesses, that sort of thing. So what are your thoughts on that? And how are you kind of bringing that into your flow?

Luke Voiles  26:04

I actually think it’s a good thing, right. So let me just run through the purpose and mission of some of the places I’ve been. Like Intuit was to power prosperity for small businesses and consumers around the world. Square was to make financial services fair, accessible and inclusive. Pipe is to empower financial freedom for business owners through open, accessible and unbiased financial products, like enabling, enabling them to grow on their terms. So fundamentally, all of these businesses have a solid purpose to go help the small business get access to fair and unbiased capital. So they can grow their business, right. 1071, is fundamentally just going to be transparency, to make sure that you can see how fair and accessible your products are, the banks won’t look great. And that’s why they’re pushing back, because they have historical, like reliance on things like FICO score, that actually has a bunch of inherent bias within it. And I’ve seen fair lending reviews that said, Hey, you actually have some bias. But it’s because you use FICO. And that’s it for risk reason, and it’s okay. And the whole, the whole like chicken and egg of having a loan to get a score, and needing a score to get a loan, goes away when you have a product like Pipe’s because we don’t pull FICO. We don’t pull bank data. We don’t pull any commercial scores, like you only need the transaction data. That makes it the most unbiased product by definition, because the business speaks for itself. 1000 coffee sales a day for six months, we’ll tell you what the next 12 months are going to be, nothing else matters, right. It makes it the most unbiased product you can imagine. And yes, 1071 will add a bit of friction because you have to collect some of the data. But if everybody’s collecting it in a similar way, then it’s similar friction. But still, I think it actually will show how, how much fintechs are helping, like business owners and sole props get access to capital across the board. So I’m a fan, actually.

Peter Renton  27:53

Alright well, let’s talk about the other side of that equation there and the capital itself. I mean, you’ve got a lot of experience in this space, but how is Pipe accessing the capital to lend to, to all of the customers?

Luke Voiles  28:08

So I’ll tell a story on this one to make it a little more powerful, I guess. But so I’m an advisor to Nyca Partners. And that’s Hans Morris’ fund. He’s one of the few VCs that really understands risk and banking and credit. And one of the things he said, like really stuck in my head, and was basically what he said, he’s never going to invest in another lending business, unless it can actually get to a balance sheet light setup, where you can unload all of the risk and not stack the balance sheet and effectively become a bank. And so in order to get to a place where you can sell the risk, you have to have the optimal, perfect product. And so when you think about the customers that we have to serve at Pipe, there’s three big buckets. The underlying small businesses, the main customer, they’re getting a multi draw line of credit, it feels like a security blanket, they don’t have to think about paying it back, like you solve their problem. The channel partner gets a super easy frictionless connection, and in less than a week can turn on an embedded product. And then the capital markets in order to make advances or make loans, you have to have money, capital markets have to be okay with the risk. And they love the merchant financed risk. They’ll buy whole loans all day long on the risks that I just talked about where you use the data to underwrite the next 12 months, and you can get into the flow of money and get paid back in a priority position ahead of the expenses. That risk they’ll buy all day long. And so the ultimate goal for us is to build six months of history to get to a place where we have enough history that says you know what, look, these curves all match the same curves you’re seeing from Stripe and Square and PayPal, you can buy our whole loans too. And there are participations however we structure them, ignore the semantics.

Luke Voiles  29:49

And so that’s one piece, like so the goal is to get to that point where you can literally with $4 million of the balance sheet, you can do a billion dollars a year in volume, because you can turn it every single day, every single business day, and so you can just flip it and go. And that gives you unlimited scale from from a lending perspective or from an advance perspective, because you don’t actually have to balance sheet any of the risk, or you don’t have to use your equity to go deploy. Like one of my biggest pet peeves, and I’ll just say is when lenders announce the $500 million raise, $5 million of equity and unsecured line for $495 million, we’re like a forward flow that’s never gonna get filled up. And so like, it’s just nonsense, and so the reality of those businesses is those advanced rates are probably 70, or 80. And they’re going to put 30 cents on the dollar of equity into every loan they make. And that’s just not scalable, right. And so, we have a bit of a chicken and egg, we have capital to hold a bunch on balance sheet out of the gate, and it’ll be our kind of baseline over time, we’ll fill that up. And then we’ll start selling whole loans on an ongoing basis. So we’ll have some protection as well, you want to have a warehouse facility, just to handle the ups and downs in the market. There’s like some real lessons from even 10 years ago, where some consumer lenders, like had whole loan sales turned off, and they didn’t have a warehouse, and they had to almost shut down their business. And so there’s a real, there’s a real I don’t know, like, it’s a diversification and safety thing for the balance sheet side for the asset side of the balance sheet to have and make sure you can, like handle any situation. And so we’ll have some balance sheet, but mostly will be whole on sales.

Peter Renton  31:24

Right, right. Okay, so you and I met, I think it was about 2016, not long after you started at Intuit. And so you’ve been around this, this space now for quite some time attacking this problem. And we still see that small businesses don’t have access to capital. And the surveys done all the time with so many small businesses don’t have access to what they need. And you know, fintech has really been attacking this for more than a decade, you’ve been doing this for eight years. Why haven’t we solved this problem yet?

Luke Voiles  31:55

There’s several things. And so one is I don’t think the right tech teams have attacked it yet, right. You have to have like real time transaction payments, quality, technology teams, we have ex-Stripe and Plaid engineers on our team, you have to have that level of tech. The right designers, the right product teams to go make stuff happen fast, and the right org set up to actually have product velocity. So you see a lot of alt lenders that say they’re tech, but they’re just not, right. They don’t have APIs, they don’t have Stripe quality APIs. They have something that’s okay, but doesn’t really work. And they really can’t, they really can’t do the stuff automatically, like they claim. They have an like, there’s a consumer, I’m not gonna say any names. There’s consumer lenders that famously had 100 people in the back office trying to do loan servicing, because there’s too many edge cases, for example, right? And so at Pipe we built it in a way to actually have free scale using stuff off the shelf like loan servicing up, like, why would we build on servicing it, there’s modules you can get off the shelf? Why would we do KYC orchestration layer, if you can get Alloy to go do that for you, right and link to all the data you need and help you change the rules. And so I think that we’re getting to a place in tech now, where there’s some of the modules are good enough to build entirely at scale business on. The tech teams are getting good enough and attacking those problems. So that’s one piece of it.

Luke Voiles  33:13

I think the other piece is just what I talked about before the data and the experience. You cannot get to a pre approved like, think about the old school way to do it, the Capital One sending a pre-approved offer via direct mail to the customer.  That works because it’s personalized, and it’s a pre-approval, and they know who you are, because you’re a consumer, and they have your income data, they have your FICO scores, that’s all you need for consumer, there is no equivalent on the small business side. There’s so many different scores, there’s so many different industries, it’s just a mess. And so the, I think narrowing the dataset, and like go back to the I’ll just I’m going to make the analogy, I’ll go back to the Uber and Airbnb stories of like narrowing the problem and figuring out what you can solve, you can narrow it to get to a pre-approval if you only lend against like the revenue from one cash flow stream. So you once you narrow the problem to just that, and then attack it with like, with everything you got, that’s when it’s going to start to work because the data is perfect. And that makes them the customer experience perfect for the first time. It’s frictionless for the first time, it’s pre-approval, click to click to apply, but click to go to like confirm that this is your information and click here to take the money. And that’s it. And then you don’t need to think about paying it back, right. Like I think we’re at an inflection point now where many businesses are shifting to these payments platforms. And that’s going to allow the embedded financial products to finally like win the day because they’re doing it directly the way that Funding Circle and OnDeck and others have done it never really worked because the data was too messy, you had to have too much. And so I think narrowing a problem to that data is the piece that makes the most sense, right?

Peter Renton  34:42

This is keep coming up in my mind as you’ve been talking here. So I want to ask this question. You talked about the coffee shop owner, you’re getting a piece of credit card revenue that’s coming in, but obviously there’s going to be coffee shops that are run really well on a financial basis. And then so there’s gonna be some that are barely breaking even and some that are making you know, 10% margins or more with the exact same payment stream, right? So how can you kind of reconcile, you say you don’t need the expense side of things. But clearly there is differences in how business owners manage, is one of the challenges of small businesses, you’re gonna have two very identical coffee shops as far as size goes, and the profitability is very different. How do you how do you sort of reconcile it?

Luke Voiles  35:28

You have to take the end of one and shift to the portfolio view, right? When you when you lens to 100,000 small businesses, and you can see the trends in the revenue where it’s going up, or it’s going down, you can immediately pick it up. Because you’re underwriting real time every single day. And those that are trending in the wrong way, you can put in a higher risk bucket, you can make them pay over a shorter timeframe, you can make it like where the risk that you’re taking from an outstanding balance perspective is just way lower. And then when you look at the portfolio level view, even if you have 100,000 small businesses, you’ll have sure you’ll have 100 or 1000 that are in the category that you just described, but most of them will not be. And so the portfolio construction allows you to underwrite the entire, the entire business base in the US, knowing what the overall trends are, it just works from a portfolio perspective, because you have less than 3% losses by vintage and less than 10 by, like from an annualized perspective. And when you have enough money coming in from a yield perspective, the excess spread just works. And so yes, you’re right. But the portfolio construction solves that risk. Right? That’s it.

Peter Renton  36:35

Okay. That’s good. That makes sense to me. Let’s close with sort of, you know, forward kind of looking vision here, I’d love to kind of get your sense. I mean, this is, you know, we’ve talked about, we haven’t been able to solve this yet. It sounds like Pipe is really trying to be that difference maker. But so maybe just take us through the vision,. You’ve now been in the job for a year. What’s your vision for Pipe for the next five years?

Luke Voiles  36:59

The way to think about it is the capital is our wedge, every business has a wedge. Square’s wedge was just accepting credit cards with a phone, so the person that the farmers market could accept the card. Square’s wedge is just to allow payfacs to solve the biggest pain point for their small business customer, which is access to capital. And frankly, it has one of the higher lifetime values, right, taking the risk allows us to take but get higher revenue from that product. So capital number one will pay the bills, give us unlimited runway. And number two, and this is critical, because it’s access to the data to offer the other products, right. And so once we have, we’re in the flow of the data and have access to the data, it opens up opportunities for other stuff. Like I hate to say, if you look at what financial services that businesses need are, and what the other startups are doing. Like our roadmap is just a mixture of that stuff. Capital is the wedge, corporate BIN card as a spinned mechanism attached to our line, is another one, and then naturally that follows that is expense management or spend management and then bill pay. You start to go like lending against the money in and then starting to stole the money out problem. So if we’re partnered with companies like vertical SaaS businesses, solving all the problems that they want to offer a an invoicing product or a bill pay product, they can just literally flip the switch and turn it on, they’ve already integrated our API, right?

Luke Voiles  38:21

After bill pay, then naturally you think about payroll. Payroll is a challenging one. But like the CFO, I hired or we hired here, ran the finance team at Intuit, that handled to payroll. I love the platform, behind the payroll business at Intuit. They pay like 16 million employees or workers on behalf of 1.6 million small businesses, 80% of which have less than 10 employees if you’re the 10, like it’s small, and there’s not much competition there. So there’s a real opportunity. Yes, it’s super sticky. And you got to convince people to switch like once or twice a year. But that’s a very interesting one like to solve that problem for the small business makes more sense like two or three or four or five employees, we don’t want to go, like ADP owns the biggest and there’s some other players in between. But going after the micro like the micro business, the space, here’s the example the space that Brex just walked away from because they couldn’t, they couldn’t make the unit economics work, they couldn’t make enough money or they couldn’t acquire customers for cheap enough to make it work. The way we set it up with B2B2B, and with a risk, like a risk engine that can create revenue, it’s going to change how that works. And we can offer all of these, so what I just went through is almost every embedded financial service product you might need if you’re a small business.

Luke Voiles  39:31

And then the whole, like the moonshot for us is an AI sidekick, right? I’ve watched horizontal businesses, and I’m gonna say this, but I will explain why it actually makes sense for us. I’ve watched these horizontally focused businesses try to make a sidekick that works for decades, and they can’t because they treat the business think of landscapers and nail salons and the restaurants are all the same. That data is all the same. So the sidekicks don’t add much value but for basic financial stuff. Once you have all of the embedded financial services connected together in the same API, and a sidekick that understands nail salons better than anything, right? Like with 1000s of nail salons worth of data that can answer any question related to a nail salon. And then it can go pay payroll for you, or it can automatically draw it on the capital line to go with it go pay payroll for you, if you don’t have enough money, tell you when you need to order stuff. It changes the dynamic. And the reason why it makes sense is because the data access, you have to have access to that data, all these other AI startups that are pivoting to it. They’re all me to, using off the shelf tools, but have zero access to unique data sets that can actually solve the problems for small businesses. And so for us, once we have the vertical datasets in order to start to train those models, and have them actually be able to be the UI or the interface to control all the financial services. That’s the moonshot. We’d love to have SaaS, like a SaaS business based on that. Payroll is a SaaS business too. And you have a bunch of transactions style, like Square-like revenue, or Stripe-like revenue, that would let us IPO this company and go help more small businesses, right. That’s the goal. It’s everything.

Peter Renton  40:58

Good to see you’re not thinking small there, Luke.

Luke Voiles  41:01

I mean, like we did the hardest thing first, like lending is the hardest, and we executed and built it rapidly, and everything else is going to be easy compared to that.

Peter Renton  41:08

Right. Okay. Well, let’s leave it there. Luke, it’s always great to chat with you. Thank you so much for coming on the show today.

Luke Voiles  41:14

Thanks, Peter. I enjoyed it.

Peter Renton  41:17

Well, I hope you enjoyed the show. Thank you so much for listening. Please go ahead and give the show a review on the podcast platform of your choice and go tell your friends and colleagues about it. Anyway, on that note, I will sign off. I very much appreciate you listening, and I’ll catch you next time. Bye.