Painful personal experiences at opposite sides of the credit crisis brought twin brothers Dave and Greg Feller together at Mogo Finance Technology Inc., one of a handful of online alternative lenders tapping those who can’t or don’t want to deal with a bank.
Greg, Vancouver-based Mogo’s chief financial officer, was riding high as an investment banker at Lehman Brothers in New York when the bank collapsed spectacularly in 2008, struck down by exposure to the imploding U.S. subprime mortgage market, becoming the epicentre for a string of bailouts and forced mergers.
His identical twin brother Dave, Mogo’s chief executive, had begun building the Mogo business a few years before that credit crisis, but he had survived one of his own after loading up several credit cards and struggling for years under the weight of compounding interest.
Dave spent about a decade digging out of debt after graduating from university, while his twin carved out his high-stakes career in investment banking in England and the United States.
On a surreal fall night in Manhattan in 2008 when Greg, then 40, was packing his Lehman belongings into boxes, he didn’t realize his employer’s seismic bankruptcy filing the next day would set the stage for the paths of the once-inseparable twins to reconnect.
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“We’ve always been close,” he said in an interview at a trendy coffee shop in Toronto, explaining that today he views Lehman’s collapse as “one of the catalysts [of a transformation] that has created this whole fin-tech opportunity” for Mogo and other alternative financial services companies.
“The consumer credit crisis really changed people’s mindset of the big institution, you know, how secure are they,” he said. “And changed consumers — and especially younger people’s views of those institutions.”
When an institution such as Lehman can disappear overnight, and giants including American International Group Inc. (AIG) have to be bailed out to avoid collapse, “you just sort of see the opportunity,” he said. “In a lot of ways the old legacy brand can be a disadvantage.”
Like other online lenders sprouting up in Canada and being imported from the United States, Mogo is capitalizing on a combination of new technology and voluminous publicly available data that make the lending process faster for borrowers and cheaper to operate.
The consumer credit crisis really changed people’s mindset of the big institution, you know, how secure are they
While most non-bank lenders say the combination of technology and data-sifting gives them the confidence to lend to borrowers traditional banks wouldn’t touch, a key target of Mogo’s is people carrying credit card debt, which includes bank customers.
“The biggest debt problem in Canada right now is really credit card debt,” Dave Feller said, calling it the “driver” of Canada ballooning consumer debt.
Credit cards are estimated to account for about $82 billion of Canada’s overall $532 billion consumer debt load, according to analysts at Canaccord Genuity.
The Fellers say they hope to entice struggling Canadians by offering to convert their high-interest-bearing credit card debt into term loans that will be paid down more quickly. A further enticement is that borrowers won’t have to wait until their credit score improves to get lower rates — that will happen automatically after 12 months, provided the borrower has stuck to the repayments terms.
“Credit cards have effectively been designed to make it very easy and almost incentivize consumers to overspend,” Dave said, adding that rewards programs are an added lure.
“If I owe $10,000 and I make the minimum payment, it’ll take me 83 years to get out of debt. That’s what I learned when I got into credit card debt.”
Even though he was earning a university degree at the time, and had started small business ventures with his brother while at school, he said he accumulated debt on multiple cards with no understanding of the crippling nature of high compound interest rates.
“While I was in university, I got a package that allows you to sign up for gas cards, credit cards, etc.,” he said. “I filled out that one application form and ended up with 10 credit cards in my wallet. For a period of time that was fun.”
When the fun stopped, and the debt was finally repaid, he used his hard-knocks “initial education on consumer credit” to launch Mogo, which makes loans of up to $35,000 to people with a range of credit profiles, charging interest rates starting at 5.9 per cent.
The Vancouver-based firm isn’t shy about engaging in direct competition with the country’s big banks by trying to reel in over-leveraged Canadians. In fact, the competition is on display as a point of pride on the company’s website, which boasts that Mogo is bringing “creative destruction to a world dominated by the big banks, hidden fees and old ways of doing things.”
Mogo’s loans are funded by a credit facility from New York-based Fortress Credit Co. LLC, and the Fellers are confident the firm can make money with their new approach. The company will be smaller, and more efficient, and will have more financial products – such as the now-available pre-paid credit cards that give Mogo a slice of the fee from each transaction. Mogo’s revenue comes from both short-term and long-term loans, as well as assorted fees paid for loan protection and non-sufficient funds.
The upstart seeks borrowers across the credit spectrum, including those with low credit scores who traditional banks don’t typically want, and charges them higher interest at levels meant to cover the added risk. Competitors in this area are more likely to be payday loan companies or Chicago-based Avant, a new entrant from the United States that targets the same type of borrower.
With more than a million loans extended since 2003, the Fellers are now actively courting millennials, who they feel will embrace the technology and have less allegiance to a big bank.
Going against the banks is a 180-degree turn for Greg, who still lives in New York and spent more than a decade working for big banks including, in addition to Lehman, Goldman Sachs, and UBS, where he advised brand-name clients such as Research in Motion and Nokia.
But he said the financial crisis fundamentally changed the landscape, opening up opportunities that didn’t exist in those days for companies such as Mogo. Among the changes, post-crisis regulations pushed big U.S. banks out of certain lines of business.
“For instance, you saw HSBC in Canada shed their consumer finance business because of the impact on capital requirements,” he said. “That effectively took a big chunk of credit capital out of the market and created a big hole in the Canadian market.”
Excitement over the potential for alternative lenders led to a bit of froth in the market, evidenced in part by the share price declines of those which, like Mogo, opted to go public.
Mogo raised $50 million in its initial public offering this year, at $10 a share. The shares, which began trading in June, closed Friday at $3.19 on the Toronto Stock Exchange.
Publicly traded U.S. online lenders OnDeck and Lending Club have also experienced share price declines since their initial public offerings in 2014.
Scott Chan and Cheng Lu, analysts at Canaccord Genuity, said Mogo could come close to break-even next year. In a recent report, they rated the shares a “speculative buy.”
The market reaction isn’t stopping the Fellers from throwing themselves into trying to differentiate their firm from traditional players, and even other new entrants to financial services.
As they go after a younger demographic, gatherings are being organized at storefront locations in trendy neighbourhoods, featuring wine and contests designed to stealthily teach those who attend about finances and money management.
Plans also include trying to capitalize on the popularity of the Fitbit by developing a similar technology that will track spending patterns and other financial behavior rather than fitness.
Longer-term, the Fellers say, Mogo plans to move into mortgage lending, most likely by teaming up with a regulated financial services partner, as the company did for pre-paid credit cards. There are also plans to reduce the risk on the books by shifting some loans to institutional investors hungry for yield.
With a stated focus on simplicity and transparency for clients, the brothers say the business plan will continue to be influenced by Dave’s experience as a young, indebted Canadian, and the bird’s eye view Greg had of some of the issues that led to the financial credit crisis seven years ago.
“We effectively have the two senior people at the company who live and breathe what we’re doing,” Greg says. “Two heads are better than one.”