When it comes to startups, particularly in the financial technology space (fintech), founders always want to disrupt something.
In London’s fintech sector, there are now a slew of challenger banks that want to change the status quo for regular people in banking.
It’s a trend that’s taken off with the likes of Monzo, Starling Bank, Tide, and Revolut.
Yet there are some areas of the financial sector that are seen as too tricky or difficult to disrupt.
However, Aneesh Varma, founder and chief executive of the startup Aire, likes a challenge. Which is why he decided to disrupt the credit industry.
What does Aire do?
Aire’s aim is to change how you score credit. This may not sound particularly exciting at first but once you dig deeper into it, credit scoring practices underscore almost everything in society.
Want to buy a house? Credit score. Want to rent or lease a car? You need a credit score.
It was quite an emotional realisation of why this company needs to exist. We’ve been very keen to preserve that sentiment that there are real consumers out there that we’re trying to help.
This is where barriers start to build up. Say you are an Uber driver and you want to lease a car to drive or you’re on a zero-hours contract, like nearly 1m people in the UK are, and you want to apply for a credit product.
At this point, a bank will ask for a monthly income and you might not have one because your income changes month to month.
“At that gateway, you fall through the net because you don’t fix the box they made,” explains Varma. “You don’t fit the mould or the persona that was set up 50 years ago when that system was developed.”
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Instead, Aire wants to make banks better at giving credit scores to people so that they can access the financial products they need.
“It was quite an emotional realisation of why this company needs to exist. We’ve been very keen to preserve that sentiment that there are real consumers out there that we’re trying to help. In fact, at Aire, a lot of the people we’ve hired come from that group. They’ve been self-employed, or they’re migrants, and they’ve seen the problem first hands,” he says.
Why is it different?
Aire has changed the credit process. It has been establishing a back-end software programme that banks use when customers apply for credit products. The programme uses artificial intelligence (AI) to work out someone’s credit score.
The first premise is your credit score is broken. What you need is to have a slightly more upgraded score that really accounts for the reality of who you are, the context of where you are. There’s something like 4.5bn people around the world who will start engaging more with financial services.
At the moment, when people apply for a credit product, they fall into two categories, yes or no. For people in the yes category, Aire uses its data to refine the initial offer, such as a mortgage offer.
We come in and say we believe [the offer] could be this much sharper, or this much better, same for a credit product or a loan.
On the offer side of the business, Aire is empowering the people in the no category.
Often, what is categories as a no decision by a bank, can be separated into the no and the “I don’t know”.
We also pick up those I don’t knows because the automated system is not sure what to do with it. Aire takes a slightly different look because it has a different contextual awareness of looking at it. We see if we can reach a slightly different decision, but ultimately representing the same credit evaluation that you care about.
Varma uses the example of someone driving an Uber car that they will have leased on credit. “If the driver doesn’t have a good evaluation of them, the lease rates are really expensive,” he explains.
That means the chap is driving 10-12 hours a day and still only taking a sliver home. It’s not like they’re lazy; driving 12 hours a day is hard and they’re doing it for their families. If through Aire we can lower the interest rate they’re paying back because we don’t see them as a bad customer or we don’t add on artificial penalties. This means the driver can take home more, or drive fewer hours a day and spend more time on other things.
In fact, the company recently announced a partnership with Toyota’s car finance business, Toyota Financial Services.
Toyota’s Prius vehicle is known as one of the most popular Uber cars, making the car financing subsidiary a perfect partner to work with the startup when it comes to crediting car leases.
How does it do this?
Aire’s credit scoring uses machine learning to establish what it terms a “meaningful score” instead of the traditional credit score.
Traditionally, if you looked at how credit decisions were always done, there’s a few measure you can use. What have you done with credit in the past, what kind of utilisation do you have, basic metrics. We’re founders who are self-employed, we’re freelancers,we’re migrants, we’re young people trying to figure out why we need to use finance as leverage because our jobs aren’t paying that much yet.
Varma adds: “With advancements, we can make better forecasting. We say great, we can understand this person’s current employment. We can start thinking about how that employment is going to look like over the next 12-18 months, how the sectors are evolving.”
The algorithms Aire’s team deploy add more visibility and depth to a person’s profile, instead of just a white piece of paper, as Varma puts it.
Why did you make a certain choice, do you have certain aspirations, are you looking for training in a new skillset? That helps us understand what choices you’re going to make that will influence your career and therefore your income and affordability. Those character choices determine how you choose to save, spend or invest.
Yet Varma says that what Aire is doing isn’t revolutionary, it’s simply copying what human loan officers used to do.
Effectively our algorithm tries to emulate how a human loan officer would reach a decision. We have a few loan officers we’ve hired and they play against the algorithm at the officer as a way to train it. That’s how we’ve been able to bring this product to market. Instead of getting a team of 400 loan officers who are going to review your millions of loan applications a day, here’s an algorithm that does something similar.
Why did Aire choose to do this?
For Varma, this all goes back to his experiences with financial systems. He moved to London from New York in the early 2000s, after the bank he was working for, JP Morgan, offered him a role in the UK’s capital.
I had an interesting set of months where I was dealing with the financial system not quite sure who I am. Couldn’t get a bank account, couldn’t sort out my credit card, couldn’t get a phone contract. Sometimes I look at my friends who are building a photo-sharing startup or food discovery and I think, man I wish I was doing that. But, this isn’t a Snapchat.
After leaving JP Morgan to work on various startups, including an e-commerce startup named Fabricate, Varma took some time off to have a think about his next plans.
This was where the idea for Aire was born.
I’d been in the UK for about five or six years and I was feeling that the financial system hadn’t quite understood what I represent or the new reality of the world we live in. We’re founders who are self-employed, we’re freelancers, we’re contractors, we’re migrants, we’re young people trying to figure out why we need to use finance as leverage, and maybe buy a couch on finance because our jobs aren’t paying that much yet, and access is slim.
After complaining regularly to various banks and institutions, (“writing in green ink means it’s more likely to be read”) Varma turned his attention on the credit industry. And the more he researched it, the more he decided that it needed a revolution.
For instance, there were only three credit agencies in the UK before Aire moved in: Experian, Equifax and Callcredit.
Whenever you have three large companies running the show, you’re going to have very little innovation or thinking about what the consumer needs and in many ways consumers get side-lined.
Last year, the company became the first new credit bureau in the UK to be accredited by the Financial Conduct Authority for around 100 years.
If the industry is ripe for disruption, why isn’t everyone else doing this?
Financial services have seen their fair share of new entrants over recent years. If what Aire is doing is so necessary for the credit industry, why aren’t other startups getting involved?
Sometimes I look at my friends who are building a photo-sharing startup or food discovery and I think, man I wish I was doing that. But, this isn’t a Snapchat, though I have nothing against Snapchat. We’re not a 0-100 overnight business. This takes a lot of participants who need to buy into it.
By participants, Aire means the regulators, like the FCA, and the banks, which they needed on board to have access to their data and customers.
It took two years for us to work with the regulators. I do give them a lot of credit because they’ve opened up — they have an open mind and they can see we’re trying to do a new thing.
As well, despite his background in banking, Varma didn’t want Aire to become one of the new breeds of banks because he had bigger plans.
“Our models have now seen close to $5.5bn credit. We’re pretty proud of this. In Europe, even the largest fintech company has only lent about $1.5bn,” he says.
That’s one of the reasons I didn’t want to be a neo-bank or a lender. I felt that if you become a financial services company, you’re putting yourself on a certain growth path. Whereas being a data or a tech company, you’re on a slightly different projection.
Earlier this year, the FCA declared that unsecured consumer credit was hitting pre-Financial Crash levels of around £200bn.
“We’re probably the only credit agency in the world that says you shouldn’t have credit to begin with it.”
For a credit-scoring agency, the onus is on Aire to ensure that they’re not making risky decisions on credit.
“We do see people being overloaded with credit when maybe they’re not ready for it and sometimes there is a lack of awareness about how to understand the consumer. We’re probably the only credit agency in the world that says you shouldn’t have credit to begin with it, it’s only when you genuinely need it that you should unlock it. This is the balance we have to find and our own moral compass is quite important for this.”
There are other moral moments that come up for Aire. For instance, the company decided early one that it wouldn’t work with pay-day lenders.
“I don’t think what they’re doing is the right kind of financial product to begin with and it represents the easy way out. Instead, mainstream financial services need to pick up their game and Aire can help with that,” says Varma.
Aire is ready for expansion
The company recently announced it had raised $5m in Series A funding, bringing the total it has raised so far to $10m. What does it want to do with the money? Prepare to enter the US market.
Pension plans, insurance products, wealth management. All this depends on your credit score data, it’s scary.
“The US is going to be a very important market. It’s the most mature and sophisticated market when it comes to credit,” he says. “And for us to prove that we can operate at that level, it will make us a lot more capable of operating in other markets.”
The Brexit vote last year, changed the way the company was feeling about expansion into Europe, another reason why it’s decided to jump straight to the States.
Instead of one single market, Europe became 27 different markets. And right now, one single, large market like the US made sense to us.
After the US, the company wants to move into Asia, particularly India. Its expansion internationally will be helped by its global team, which has people from across Europe and beyond.
What is going to happen in the future?
One thing Varma is very passionate about is the future of work and how Aire can get ready for this.
“There’s something like 4.5bn people around the world who will start engaging more with financial services. At some point they will need bank accounts and credit cards. But beyond that – pension plans, insurance products, wealth management. All this depends on your credit score data, it’s scary.”
We’re still in the early innings of people trying to figure out what the reality looks like for this group. That’s going to be interesting for Aire to explore.