[00:00:00] James Chemplavil: 65% of Microloan borrowers have higher deposits at the credit union. A year after they get a microloan. And for Gen Zs, 90% of Microloan borrowers have higher deposits at the credit union a year after they got that microloan.

[00:00:18] Narrator: Welcome to 22 Minutes In Lending your go-to podcast for insights on all things lending from lending practices, regulatory updates, how to enhance lending efforts and more.

[00:00:29] Narrator: In each episode, Vince Passione connects with industry leaders to discuss the latest trends. And happenings around the lending industry. Let’s dive in to the latest in lending.

[00:00:42] Vince Passione: Welcome back to 22 Minutes in Lending. I’m your host, Vince Passione, and today we’re joined by James Chemplavil, co-founder and CEO of Salus.

[00:00:49] Vince Passione: After more than 16 years in investment banking, James sent out to solve a challenge. He saw firsthand how hardworking people often did, denied access to small but critical loans. That mission led to the creation of Salus, a digital underwriting platform, helping credit unions and community lenders extend micro loans using alternative data.

[00:01:06] Vince Passione: We’re excited to dive into his story, his vision for Salus, and how technology is reshaping lending for the better. Welcome to the podcast, James.

[00:01:14] James Chemplavil: Thanks for having me. Appreciate it.

[00:01:16] Vince Passione: Awesome. So, listen, I took a look at LinkedIn. Uh, you’re one of those, those unique people, right? You’ve got basically two backgrounds, one at Barings, uh, and the other at Ali.

[00:01:25] Vince Passione: Um, so I always love to start out with hearing the founder’s story. So what was your why? What got you from Barings to Ali?

[00:01:32] James Chemplavil: The, uh, the story is probably not a typical one. Um, I was working, as you mentioned, for 16 years at a company called Barings, um, underwriting high risk corporate debt. Um, on the investment management side, loved my job, enjoyed it, enjoyed the people.

[00:01:47] James Chemplavil: Um, and what got me to sales was not kind of a typical path. Um, I’ve got two boys, they’re now 10 and 12 years old, but when my oldest was about 18 months old, he was in a daycare down the street from our house. And one day we found out that his favorite teacher at the daycare was leaving, which in Charlotte usually means you got a job at one of the private schools or one of the public schools, you’re gonna get paid more.

[00:02:10] James Chemplavil: It’s a better job. So I went to congratulate her, find out where she’s going next, wish her well, and what she told me was not what I expected at all. It turns out that she had gotten into a car wreck and even though she had car insurance, she couldn’t afford the deductible that it took to actually get that car fixed.

[00:02:30] James Chemplavil: So now without her car, she tried to take the bus to get to work, which in Charlotte is not necessarily reliable. And after about a week of being late to work the school told her, look, as much as we love having you here. If you can’t be here on time, you can’t work here. So it turns out she wasn’t leaving a job that she loved.

[00:02:48] James Chemplavil: She was losing a job that she loved, and it wasn’t due to anything she had done as an employee. It was really due to the fact that she couldn’t borrow money when she really needed to. As someone who came from a totally different part of finance, I frankly didn’t understand. I thought, this is why banks and credit unions exist.

[00:03:05] James Chemplavil: A young woman with a steady income that needs to borrow money. This is why we have banks and credit unions, and what I found out was for nearly half of adults in the US that don’t have a prime credit score, that’s just not how the system works. And so that was the start of me figuring out a way to try to change that for people like Wendy.

[00:03:24] Vince Passione: So, I think I know the answer to this, but, but why credit unions? Why not look at other balance sheets? I mean, after Barings, you, you had the connection. So what was unique about credit unions that said this was a good place for, for you to sort of invest with Sali?

[00:03:38] James Chemplavil: Yeah, so there’s a couple of reasons that we focus on credit unions.

[00:03:41] James Chemplavil: Um, the first one that we focused on was the fact that a lot of credit unions are focused on serving members of the community where they operate. Um, even in the community banking sector, you may see a little bit more of a tilt towards the local businesses, in the small businesses in the area relative to credit unions that are.

[00:03:59] James Chemplavil: Primarily focused on serving the members of that community. Um, the second thing that we saw is an opportunity to work collaboratively. Um, the credit union movement, and they call it a movement. Is just that it is not necessarily the banking world of people competing for every single dollar. It’s a collaborative, collegial environment.

[00:04:20] James Chemplavil: Um, a credit union that’s using our product is just as likely to recommend it to. A credit union down the street because they’re trying to help everyone in their community and they see credit union peers as part of their community. And the last thing that we really saw was there was an opportunity from a technological perspective, a lot of credit unions may not have the same tech resources from a financial or human capital perspective.

[00:04:44] James Chemplavil: And being able to collaborate with them and bring them a technological solution was something that benefited them and benefited us at the same time.

[00:04:52] Vince Passione: Great. So now you are an underwriter by training. You underwrote big corporate debt. So lots of data, you use that all the time. What was the data that you saw that convinced you that micro loans were a necessary and B, it was really a viable business opportunity?

[00:05:06] Vince Passione: ’cause there’s not much money made on one of these loans, right? I mean, this is average balances about $500. And you know, if you look at the revenue on these loans for a credit union, it’s probably less than $200. So give us some of the background there.

[00:05:18] James Chemplavil: Yeah. So, um, the original idea around this actually came from my background in underwriting on the corporate side, and I’m gonna date myself a little bit, but if you go back to the great financial crisis of 2008, 2009, one of the things that we saw as corporate underwriters was that.

[00:05:35] James Chemplavil: You can have asset values, you can have appraisals, you can have estimates of what an asset is worth. Mm-hmm. But when it comes down to actually whether a company would survive and avoid Chapter 11 reorganization, what tended to matter is how much cash was coming in the door versus how much cash was going out the door.

[00:05:53] James Chemplavil: Cash flow was king, and that concept actually ports over really well to people who aren’t. Benefiting from traditionally high credit scores, and that is to say that for people that don’t have a prime credit score. Looking at cash flow underwriting, looking at cash in versus cash out can be a much stronger predictor of someone’s ability to repay and someone’s willingness to repay than kind of traditional metrics may point you.

[00:06:19] James Chemplavil: And that may have to do with the underlying score, but it may also have to do with the underlying age of the person that is applying. A lot of people that don’t have traditionally high credit scores, they tend to be younger. They tend to be earlier on in their career path. So they just haven’t built up enough history in the proverbial system that would generate the credit score that they’re gonna grow into.

[00:06:41] Vince Passione: Now. Look, makes sense, right? We’re in the education lending space. We put credit unions in the education lending space, and we encounter thin files all the time, right? Different demographic, but, but trying to solve some of the same problems. So let James, let’s jump into the product. So the actual loan itself.

[00:06:57] Vince Passione: So, uh. Talk to me about the loan, how it’s structured, and let’s also talk about some of the automation that goes into it. ’cause clearly your business has to be about really reducing the cost to originate a loan that today would, would really generate, it generates revenue, but we need to be careful about the expense side.

[00:07:15] James Chemplavil: No, a hundred percent. So the microloan product that we offer today is a fully automated, digitally underwritten product for an institution to offer to its members or its consumers. 50 to a thousand dollars. The issue that you run into is twofold. When you’re trying to administer a loan program like this, the first is about 94, 90 5% of the people.

[00:07:38] James Chemplavil: That want this loan that are gonna apply for this loan don’t have a prime credit score. So if you’re looking through a traditional lens, a lot of people are gonna fall out of the credit box immediately, and they’re not necessarily people that you want to fall out of that credit box because in our data, what we found is about 94, 90 5% of people that repay that microloan on time, they didn’t have a prime credit score when they applied.

[00:08:00] James Chemplavil: So you’re actually. Removing people that would be good prospects for that loan. The second reason is, is something that I think most of us understand intuitively. It doesn’t matter how big a loan is when you’re processing it. You still have to take the same steps of right, viewing the application, making sure they meet the eligibility criteria, posting that loans here, core processor dispersing the funds and that time.

[00:08:24] James Chemplavil: Staff cost can be debilitating to the unit economics of something like a microloan. So we’re really attacking the problem from two places to make it palatable for credit unions, which is we’re giving you an underwriting tool that allows you to look beyond credit score to identify credit worthy people.

[00:08:41] James Chemplavil: That maybe don’t have the scores that reflect it yet, and we’re also automating steps so that you don’t spend three 30 to 45 minutes and three to four staff members time when they could be working on a larger, more profitable loan for your credit union.

[00:09:00] Ron Draper: This is Ron Draper, CEO of sums credit Union. So in 2014, we were looking for a turnkey student lending solution. One that was simple and efficient for our members to access, and eventually we chose LendKey because it just integrated seamlessly for quick member mobile access. It was easy to remotely review and approve from a loan officer point of view, and I should know because I’m that loan officer.

[00:09:24] Ron Draper: I still recommend LendKey to people whenever I get the chance because after almost a decade it continues to offer consistent product and service delivery, both to our membership and to our staff.

[00:09:39] Vince Passione: So James, based on the product and what you just discussed, who’s the ideal credit union fee? The credit union that really needs the sales product.

[00:09:47] James Chemplavil: So there’s really kind of two buckets for credit unions that need the Salus, microloan and earned wage access product. Um, the first bucket is a credit union that is actively considering how are we going to attract younger members to our credit union and build a primary financial institution relationship for them.

[00:10:04] James Chemplavil: If you’re looking for innovative products that are gonna attract and retain Gen Z members. That’s use case one for sales. Microloans use case two is actually for credit unions that are community impact focused, that are looking to make an impact and save their members money to improve their lives. We know from our data, the CDFI eligibility, low income designated eligibility, even CRA eligibility of microloan borrowers relative to the population.

[00:10:31] James Chemplavil: This is a fantastic product to provide deeper relationships and activity with those particular members. So for credit unions that are focused on community impact and want tools that can reach those members in an efficient way, sales micro loans and earned wage access are a great tool for that, for that goal.

[00:10:48] Vince Passione: Got it. So back to product. I also saw on the website Sentinel. Yep. It looks like that from what I could tell. It tracks the financial position of the credit union’s loan portfolio and has this stress score. So let’s unpack that a little bit. Why don’t we talk about that part of the product offering.

[00:11:04] James Chemplavil: Yeah, I think, um, one of the things that I have loved about working on ous is the fact that the conversations that we get to have with credit unions precipitate our product roadmap for us.

[00:11:15] James Chemplavil: And so one of the things that we saw when we talked with credit unions was they had members that were already using emergency micro loans. They were just getting them from payday lenders, they were getting them from fintechs, they were getting them from a lot of sources outside of the credit union. And the conversation went like this, well.

[00:11:33] James Chemplavil: What if we could get to them before they use those solutions? Right. If only they knew that we already had a microloan that they could be using, maybe they could use ours instead of having to go to a more expensive, more predatory option. And that was really the genesis of Sentinel, which is predictive analytics for your members.

[00:11:50] James Chemplavil: Because what tends to happen with a lot of credit unions is they have an amazing suite of services. They have micro loans. They may have skip a pay on an existing loan, but members don’t know about that service. And the issue for a lot of members is. If you don’t get them that service, if you don’t show it to them in the moment that they need it, they’re gonna go find something else.

[00:12:12] James Chemplavil: And so Sentinel is designed to look at a credit union’s membership and say, for this person who may be entering financial stress, what is the way that we can offer them something that they can use in the moment that they need it so that they can stay on their path to financial wellness.

[00:12:27] Vince Passione: Now James, are you just looking at the data the credit union has or are you like a method where using someone like Method where you can put telephone number and method will go out and look at all the different loans that someone might have?

[00:12:39] Vince Passione: Not just what’s residing at the credit union.

[00:12:42] James Chemplavil: So we are starting with just looking at credit union data because there is actually a wealth of information just embedded in credit union data that they have with their members. When a member has a primary financial institution relationship with a credit union, there is a wealth of information that you have about what’s happening in that member’s life, in the data that you have.

[00:13:04] James Chemplavil: With that member. So when you have a member that is going through a situation in life, sometimes their financial data may reflect that situation before they come to you and ask for help. Mm-hmm. And what Sentinel allows you to do is it allows member service representatives, it allows loan operation staff, it allows collection staff to be a little bit sharper and be a little bit more knowledgeable about what that member is going through so that they can make those interactions and solutions offered more powerful for the member.

[00:13:33] Vince Passione: Now, how does, how does the credit union staff interact with Sentinel?

[00:13:36] James Chemplavil: So the way that a credit union staff member would interact with Sentinel is actually more of a dashboard. So you can actually look at members and take a sense of. How are our members stratified by stress score? How are they stratified by, um, changes in income, changes in expenses, and then they can dig into those specific parameters and decide, how do I want to potentially reach out to this member?

[00:13:58] James Chemplavil: Is there something that I need to bring to their attention so that they can actually stay on the path that they’d like to stay to? The classic example that I’d like to, to bring up is. If someone gets sick and they miss a few days of work, now their paycheck is lighter than it normally is. Now they’ve got bills that are gonna look a little bit different at the end of the month.

[00:14:17] James Chemplavil: If you can reach out to that member the week before their loan payment is due with Skip a pay that they’re eligible for that. Now they’ve solved their solution without needing to spend any extra money. But if that member finds out about Skip a pay two weeks after. They miss their loan payment. Not only can’t they use Skip a Pay now, but they’re ineligible for Skip a pay for the next 12 months because that’s the way Skip a pay eligibility works.

[00:14:42] James Chemplavil: That’s really what Sentinel is all about, is it’s trying to surface solutions for members when they can actually use them and not after the fact. It allows credit unions to be proactive, not reactive to their members’ financial lives.

[00:14:55] Vince Passione: So we talked about the underwriting criteria. You talked about, you know, so using, using cash flow, uh, these folks won’t have a credit score.

[00:15:03] Vince Passione: Can you help us a little bit on, can you help us understand, so what are you considering when you look, what are some of the key parameters you’re looking at to look at credit worth in this? ’cause I always say, look, there’s two parts of this process for us, right, as people who lend, right? One is someone’s willingness to pay.

[00:15:17] Vince Passione: There is someone’s ability to pay. Right? And, and, and typically their willingness to pay is, I look at their credit score, right? To see how they’ve paid in the past and, and their ability to pay. I’m looking at their economic capabilities, right? I’m looking at their cash flow. So what are some of the things you’re pulling outta the data?

[00:15:35] Vince Passione: If a client’s asking you, okay, if you’re not using credit score, what does that, what does that scorecard look like?

[00:15:40] James Chemplavil: Yeah, absolutely. And so for a credit union that has members that have direct deposit relationships with the credit union, there’s a wealth of information that you can take out of that. And that’s what our model leverages.

[00:15:53] James Chemplavil: And the example that I like to give is you can have two people that are asking for a micro loan. They may both have a six 20 credit score. When you look at the underlying transaction data of number one, they consistently earn. More than they spend. They’re saving a little bit of money every month. Mm-hmm.

[00:16:11] James Chemplavil: Except for the last 30 days where there was a drop in income that was unusual or a spike in expenses that was unusual. That person’s ability and willingness to repay may look different than member two who has that same six 20. But you can see in their transaction data, they are consistently spending more money than they earn, and it’s more of a melting ice cube kind of situation.

[00:16:32] James Chemplavil: Those two people may look the same by their credit score, but their transaction data is gonna tell a very different story. And that’s an example of kind of how cashflow underwriting can surface credit worthiness using non-traditional data.

[00:16:45] Vince Passione: So I’m sure one of the biggest hurdles that, that you, you encounter in talking to credit unions is performance.

[00:16:51] Vince Passione: So what did delinquencies look like? I mean, if I go back and in, in doing research for this podcast, you know, look, I I, I sort of predate you and my, my, my history. My corporate history and, and I remember when Grameen launched, right? And, and, and the promise, and I think the actual delivery of Grameen was this 95% repayment rates, and it was all about solidarity, right?

[00:17:12] Vince Passione: It’s what credit unions were actually based on that this concept that if the borrower has agency, if they control the governance structure, that they’re gonna perform better. I, I, is that part of a, what do delinquencies look like? And B, is this part of your vision at some point?

[00:17:30] James Chemplavil: No, it, it is. The question frankly for microloans is how are these going to perform?

[00:17:35] James Chemplavil: And it’s why we’re so proud of the platform that we’ve built. So we have done about lenders through our platform have made about 14,500 loans on a fully automated basis that represents a little over two and a half, $2.6 million in notional loan volume. And what we have found is, again, going back to our original foundational testing, what we found is if you underwrite people.

[00:17:59] James Chemplavil: Just look at six 20 to six 60 credit scores they’re gonna charge off. And let’s talk about what a loan officer is gonna care about. At the end of the day, they’re gonna charge off at about a 27% rate, which is not an economically sustainable program, no matter how you slice it. With ous models, you can actually generate at the lowest risk tier, a realized 3% charge off rate.

[00:18:21] James Chemplavil: So that’s about a 90% reduction in charge off rates. Mm-hmm. Now that spans our FinTech and credit union customers. What we have found anecdotally in our data is that that credit union member connection to their credit union does actually result in higher repayment rates. And so what that does for the credit union is they can say.

[00:18:42] James Chemplavil: I know I’m not gonna have a 25% charge off rate, and I get to choose. Do I want a 5% charge off rate, a 3% charge off rate? Do I want. To have more reach with this program. We’ve seen some credit unions that are actually comfortable going up to a 10% charge off rate for these types of loans because they’re motivated by more than just the charge off rate, but reach and impact for these loans in their community.

[00:19:06] Vince Passione: Makes sense. So let’s talk about the revenue model going forward. How do you see this, this revenue model evolving for a credit union? Is it all about upsell, cross sell? ’cause you’re talking about making a, making a member for life right out out of this product. So how does it work?

[00:19:21] James Chemplavil: The way that I would think about this is, and this may come as a shock, but.

[00:19:26] James Chemplavil: Micro loans are not designed to be a prime money maker for your credit union. And the reason that I say that is you’re never going to have enough notional loan volume out of micro loans to drive your p and l up or down. It’s just not a big enough number relative to mortgage loans, auto loans, personal loans, what it is designed to do.

[00:19:47] James Chemplavil: Is 88% of microloan borrowers are millennials and Gen Z. The median borrower age is 29, right? If you want to attract those types of members to bring them into your credit union, to get that direct deposit relationship, you need to bring them the product that they want to use in the marketplace, and we know that they want to use this product in the marketplace.

[00:20:07] James Chemplavil: And I’ll give you two Dodd-Frank examples. Chime in, Dave. They both offer myPay, which is early access to paychecks. They offer extra cash advances. They have grown in the last two years by 7 million members. That is the same amount as the entire credit union industry has grown combined over that same time period, and those members are 75% Gen Z and millennial.

[00:20:34] James Chemplavil: What’s the major difference between these two product offerings? One is offering something that younger members clearly want to use and need to use, and one is still developing that product offering. So the lifetime value proposition is if you want to get Gen Z and millennial members down the line for your auto loan and your mortgage loan, you can try to rate compete 10 years from now with every bank.

[00:20:58] James Chemplavil: Or you can actually give them the service they want right now and turn them into a member for life, because now you’re gonna be the first person they call when they’re ready for the milestone of an milestone of an auto loan or mortgage loan or the next phase of, of what they need.

[00:21:13] Vince Passione: Yeah. Great story.

[00:21:14] Vince Passione: Great circuit product. Do you see yourself getting out in the front of the credit unions to help them acquire members at some point through the product or not?

[00:21:22] James Chemplavil: No, that’s absolutely, that’s absolutely what earned wage access is about because with earned wage access, you don’t need three to six months of account history to analyze in order to see if someone’s eligible for a microloan.

[00:21:36] James Chemplavil: And the data is showing us, we go to the app store and look at the top 100 apps. Earned wage access is a real solution that people use every day, and so because earned wage access only requires one or two paychecks to be direct deposited into the credit union, it does two things. First, it allows them to acquire members because.

[00:21:55] James Chemplavil: We can say to a prospective member as a credit union, we can give you access to earned wage access in a couple of weeks from signing up. And the credit union gets the direct deposit relationship right off the bat, which is what they’re looking for anyway.

[00:22:08] Vince Passione: I think that product, right, given where credit unions are chasing deposits right now, and every, I mean, every financial institution is chasing deposits in some way.

[00:22:18] Vince Passione: That’s, that is a great marketing tool to acquire a new member and to, to become that sort of direct deposit taker. Right. Which is the bread and butter, right? For many of these community-based financial institutions.

[00:22:30] James Chemplavil: Oh, absolutely. We’ve got, we’ve got a credit union that we’ve been working with when they started offering micro loans a year after someone has gotten a microloan from this credit union.

[00:22:41] James Chemplavil: 65% of microloan borrowers have higher deposits at the credit union. A year after they get a microloan. And for Gen Zs, 90% of microloan borrowers have higher deposits at the credit union a year after they got their microloan. Yeah. So in terms of deepening the relationship, it, it’s turning into a bit of a no-brainer from a data perspective.

[00:23:04] Vince Passione: So what’s the future for s what’s in the product pipeline?

[00:23:08] James Chemplavil: So, um, we have got some really interesting things around the product pipeline, and it really stems from what I just talked about. You want to create a member for life. So a member for life means that you’re there for all of the milestones that they have.

[00:23:22] James Chemplavil: So you start with something like micro loans or earned wage access where you’re helping somebody deal with small financial emergencies. But what do we all want in our twenties and thirties? If we want, we want our car, we want our first house, we want. The American dream of home ownership, that only comes through a traditional credit score.

[00:23:38] James Chemplavil: So we are actually working on the product roadmap right now for products that not just help someone with short-term financial emergencies, but build them a path that gets their traditional credit score to where banks and credit unions are more than willing to say, we’ll give you that all loan, we’ll give you that mortgage loan because that is the lifetime member value proposition.

[00:23:59] James Chemplavil: And I would say this. Gen Zs and millennials, they are two to three times more likely to want an auto or mortgage loan in the next five years relative to Gen Xs and baby boomers. The demand is there and the race is on to basically compete for these members now. Give them what they want so that they stick with you for years in the future.

[00:24:20] Vince Passione: It’s great. Well, a great conversation James. Thank you for joining the podcast.

[00:24:24] James Chemplavil: Yeah,

[00:24:25] Vince Passione: that’s a wrap to this episode, 22 minutes in lending. Uh, and to our listeners, thanks for tuning in and be sure to subscribe, share, and join us for our next episode. Thanks again, James.

[00:24:34] James Chemplavil: No. Thanks for having me, Vince.

[00:24:35] James Chemplavil: Appreciate it.

[00:24:36] Vince Passione: Awesome.

[00:24:37] Narrator: Thank you for listening to the 22 minutes in Lending podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five star review.