When David Gens started Merchant Advance Capital in 2010, his first customer was a small Calgary-based retailer. The owner was a former roommate who was importing trinkets and furniture from Bali to his store, Bali and Beyond. Without an obvious market for his products from the small Indonesian island, the owner struggled — not with actual sales, but with simply securing a loan from a traditional financial institution to grow his business.
Employing a lending model that Canadians were then not exposed to, Gens’ company provided the store with the capital to help increase shipments and inventory. But instead of providing a loan and charging a fixed monthly interest rate, Merchant bet on the business’ future sales. They provided the funding up front and then took a percentage of future credit and debit transactions until the money was paid back.
It has been eight years since Gens started his company, which is now a national leader with 1,300 clients, $160 million in loans provided, more than 40 employees, and offices in Vancouver and Toronto. What’s more, the company grew 3,055 percent between 2012 and 2017. BetaKit recently spoke to Gens about building his business, the evolving financial services market, and the proliferation of so-called FinTech startups in Canada.
Alternative lending
Alternative lending, online loans, microfinancing, FinTech — Gens is particularly fussed on the latest buzzwords to describe what his business does. “I think the shortest possible way of explaining it is we provide capital to businesses,” he said. “One of the most challenging things as an entrepreneur is finding the money to do your thing.”
“There’s some companies in FinTech that are more Tech than Fin, and there’s some that are more Fin than Tech. It’s been maybe a bit overplayed.”
Back in 2010, he recognized that the small business financing industry was significantly more developed in the US than Canada. Limited access to capital for small businesses isn’t a uniquely Canadian or North American problem, he said. It’s a global issue. “Banks all over the world are highly regulated institutions and they struggle to take the types of risks that you have to be comfortable taking if you want to back a small business,” he explains. Gens’ ability to recognize this opportunity is what has enabled him to build Merchant to where it is today.
Humble beginnings
While Gens studied finance and worked in private equity earlier in his career, he said that he knew little about running a business loan company when he started Merchant at the tender age of 22. Like many entrepreneurs, he learned on the job.
“I was by myself working out of my apartment for the first 18 months, and kind of wearing all the different hats of the business.”
While the business model he sold to his own company’s investors was basically already proven in the US, he admits that starting Merchant was risky bet. “I mean, even if it’s a proven business model, I am definitely unproven at that time,” he said. “You know, it’s not like I was head of credit in the small business group of a bank or something.”
Adopting technology to manage risk
Gens touts the technology his firm leverages in their work, but he recognizes that the major banks have come a long way when it comes to their technology and their ability to serve more diverse clients.
“Some of them are acquiring [technology], some of them are building it, some of them are partnering with it, and it’s all really great to see,” he said. “But I think there’s always going to be a need for pools of capital that sit outside the banking system, willing to take risks the banking system’s not going to take.”
He said it’s not the lack of innovation that the Big Five suffer from. “It’s a risk uptake problem, and being a highly regulated financial institution, it doesn’t matter how good their tech is.”
How does Merchant manage the risk involved in financing an unknown restaurant or local clinic expansion? They rely on a massive bank of data, increasingly sophisticated statistical models, and a complex technology stack. Gens prefers to emphasize the partnership that humans and machines must make to yield the best outcomes, though — what some technologists might call cognitive collaboration.
“Statistical models always have blind spots. They don’t handle exceptions well. They don’t handle changing environments or, let’s say a changing economy,” he explained. “I think you get the best of both worlds if you lean on your tech and your statistics to make the approvals really efficient and make the customer experience great, but you still have a person doing a gut check and taking a look to make final decisions.”
For example, Gens’ firm looks at more than 300 variables when evaluating a prospective client. Yes, credit score matters, but Gens explains there many other factors at play. “So, what’s on someone’s credit definitely feeds into the model, but what’s even more important is how does their business look?” he said. “We look at all sorts of metrics that come out of a business’ bank statement, which we can now scrub electronically using the latest and greatest tools. But we’re also plugging into online reviews and statistics around their geography and all sorts of different indicators to judge the health of their business.”
Defining FinTech
If you were to consider Merchant’s innovative approach to marrying technology and human judgment in facilitating financial transactions, one might call them a FinTech. At least, if we’re using a definition of FinTech peddled by Computerworld, which is, “anywhere technology is applied in financial services or used to help companies manage the financial aspects of their business, including new software and applications, processes and business models.”
But Gens won’t commit to the label.
Gens’ strongest views about financial services and technology are revealed when you explicitly ask him to talk about FinTech. “I have some relatively strong views about this,” he said, to make sure you know.
“FinTech’s a very exciting place, and there’s a lot of exciting things going on, so I don’t want to take away from that. But there’s also a lot of financial services business that are simply using technology to do their financial services better. To me, that doesn’t turn them into a tech company. It makes them a financial services company that knows how to operate in the 21st century, and is being the best it can be, right? So I think at the end of the day, what do we do? We aggregate capital, we make credit decisions, and we deploy that capital in smaller chunks out to all these smaller businesses that need it. I mean, that’s an old business model. I really do feel like if I’m honest with myself, we’re a financial services business and we use technology to be the best that we can be.”
One of the distinctions he wants to raise is the growth potential of tech companies. “The reason why tech companies get really high evaluations is the incredible scalability that comes along with it, and when you’re for example creating credit, it’s not the same as that super scalable tech business. Because first of all, credit is not really a unique product and a loan from XYZ Co is the same as a loan from ABC Co.”
It’s not a winner-take-all market, he adds. “You’re always gonna have lots of people providing credit.”
Gens has a lot more to say on this topic, but he allows himself to conclude by saying, “I think there’s some companies in FinTech that are more Tech than Fin, and there’s some that are more Fin than Tech. And I think it’s been maybe a bit overplayed.”