Managing debt is complicated — even for consumers with perfectly ordinary borrowing situations. If you’re looking to spend your money in the smartest way possible, should you accelerate your student loan payments, or pay down your car loan or mortgage first? Or should you be investing more instead?
Tom Anderson, founder and CEO of Supernova Companies, thinks the fragmented nature of the lending market is hurting consumers.
“That’s not the best way to borrow money,” said Anderson. “You should always borrow money in the way that you can get the lowest possible rate.”
Anderson’s company provides lending technology to financial institutions. Its cloud-based platform assesses how likely a consumer is to repay their loans and lets borrowers post their investment portfolios as collateral.
Unlike most consumer loans, which are secured by assets like houses or cars, a loan secured by an investment portfolio carries little risk for the lender. It is much easier — and cheaper — to sell off parts of an investment portfolio than it is to put a used car or house on the market if the loan were to fail.
For consumers, that risk reduction translates to lower interest rates and greater flexibility, Anderson said.
“Let’s say you wanted to buy a car,” said Anderson. “There’s no cost to set up our loans, no ongoing fees to have it and it’s interest only… You actually don’t even have to make a monthly payment, so long as your line is in good standing — you can choose how much of the principal you want to pay off on your car any time that you want to.”
Tom Anderson speaking at the US Bank Conference. (Credit: Dave Cruz)
A veteran financial advisor, Anderson got into the lending business as a way to differentiate himself in the crowded wealth management industry. By offering loans alongside investment advice, he could manage a client’s finances more holistically — kind of like a personal chief financial officer.
The approach caught on, and it didn’t take long before Anderson started coaching other wealth managers on how to adopt the same approach. In doing so, he discovered that many of them were concerned about the work they would have to put in before they could start offering loans.
In that reluctance, Anderson saw a business opportunity.
“They can sell these loans, and they could build these systems to monitor their collateral, but it’s harder for them to comply with regulations,” he said. “And the most difficult thing is that they can’t fund the loans.”
At the same time, Anderson knew that many large banks would be more than happy to add these kinds of loans to their balance sheets. To bring these industry needs together, he organized a Chicago-based team of Morningstar technologists and Merrill Lynch financiers in 2014, and started laying the plans for Supernova’s cloud platform.
Unlike many startups, the nature of the lending industry meant Supernova did not have the luxury of going the minimum viable product route. The product had to be complete and work from the get-go.
“You need to have a system that can dramatically scale, and that has a tremendous amount of platform integrity, because we have to pass a lot of third party risk assessments from very intense organizations,” he said. “We solved the scaling problem by designing a cloud-based solution, but then we had to get a lot of companies comfortable with the cloud who hadn’t historically been using it.”
Supernova’s engineers also spent a lot of time building out APIs to ensure compatibility with the in-house computer systems major banks use, which in many cases can be old and clunky. Putting that platform together, Anderson said, was a far greater challenge than he expected at the project’s onset.
“I think if I would have known how hard this is, I don’t think I would have done it,” he said. “It’s was a longer, harder and bumpier road than I expected. But now it works and our technology is awesome.”
Anderson also credits the financial institutions he’s worked with for believing in the idea and supporting his company throughout the process.
For now, Supernova focuses primarily on providing its services to other financial institutions, but Anderson said his long-term plans include direct-to-consumer lending. He believes his company’s new take on lending is a first step toward a system where each consumer only has to manage one line of credit, rather than a hodgepodge of credit cards, car payments and mortgages.
Anderson said Supernova has about a dozen technologists on staff in Chicago, but he expects that figure to double in 2017. To him, there could be no better place to build out a technology team.
“It’s hard to find talent that understands the combination of finance and technology in our business, but that talent is very strong in Chicago,” he said. “That’s our greatest competitive advantage.”
Images via Supernova Companies and Dave Cruz.