After a slow start in the UK and Europe, open banking has gained popularity with fintechs using APIs to access bank data and rails, and using them as a replacement for traditional credit networks to build products. I have.
A UK-based consumer financial services company called Abound is now doubling down on its ambitions in this space, raising significant funding to promote its own open banking-based business. The startup has raised a whopping £500 million ($601 million at today’s rates). The funds will be used to finance loans, bring more customers to the platform, and invest in technology that combines open banking data. and machine learning algorithms to build what Abound believes to be a better “credit score” for applicants. To complement its direct-to-consumer sales in the UK, Abound also plans to expand his B2B offering in Europe, building its own open banking framework, PSD2.
“We think of ourselves as more than credit scoring.” In an interview, CEO and co-founder Gerard Chappell described the banking data Abound uses to build AI-based risk and lending profiles as akin to “financial X-rays.” These help Abound “understand true affordability” when it comes to loans.
Its rise coincides with seeing more activity around open banking. Last year, Visa bought open banking developer Tink, which provides API rails to thousands of banks, for more than $2 billion. Already his one major rail provider, TrueLayer, last he raised at a valuation of over $1 billion (although admittedly way back in 2021…). Token.io and Vyne, on the other hand, like Abound, are examples of startups building more concrete applications on open banking standards (person-to-person payments and merchant services, respectively).
Abound’s new funding includes both debt and equity. Clients US banks Citi and Waterfall Asset Management provide the debt portion. Equity offerings include K3 Ventures, GSR Ventures and Hambro Perks.
As is often the case with lending startups, the bulk of the $601 million here is Debt used for lending. A smaller equity portion is used to invest in the business itself. Abound has not disclosed its valuation, but in one context, Chappell said the startup, formerly known as Abound, is Fintern.AI (which technically remains the parent company’s name) previously raised just under $11 million in equity and about $60 million in financing.
More specifically, the reason for the large amount of funding here is the growing interest in Abound since its launch in 2020.
Its services — based on loans of £1,000 to £10,000, with repayment options extending up to 5 years (although the average repayment is 2.5 to 3 years). Interest rates guaranteed by companies are lower than those offered by banks (currently they are 24.8% APR) — growing by an average of 30% month-over-month. To date, we have issued loans to over 150,000 customers. It plans to lend £1 billion ($1.2 billion) by 2025.
All of this shows something not only about the state of the economy today, but also about the state of fintech. Yes, loans are definitely in demand with the average consumer at the moment to supplement their regular monthly income. But it’s also worth noting how new fintech services are being accepted and adopted as a means to gain that liquidity. So using neobanks and apps to manage your money is nothing new. It’s just another, perhaps better, way of getting it done.
According to Chappell, co-founder Michelle He came up with the idea to build Abound several years ago when McKinsey’s Chappell and EY’s He were both in management consulting. bottom. We are working on the foundation of open banking. The two realized that API frameworks open a clear path for people who can understand how and where API frameworks can be used, he said.
“Consumer credit is very broken,” he said. “Most of it is deeply rooted in ’70s and ’80s technology.”
That trench contains FICO credit scores, and access to that data is reserved exclusively to companies Equifax and Experian to determine creditworthiness. Add to this the fact that the consumer experience with loans in general has been poor and we’ve seen a lot of abuse with predatory lending practices, and we’ve seen a lot of abuse going on. You can see the gap in the market.
Ironically, the current state of loan products may actually be fine for many consumers, especially those with credit histories, and can be clearly categorized as “prime” or “subprime” cases. he added. However, it is not really usable for so-called “near-prime” consumers who are just entering the market. Chappell estimates there are about 15 million in the UK alone.
Most lenders would decline loan or credit applications from these consumers, he said: “They are too uncertain.
So the solution was clear. Leverage Open Banking to build a system that captures basic, real-time details about how individuals manage deposits and withdrawals in their regular bank accounts. Use AI to extrapolate insights from that data. Create a new kind of credit score. This is what Abound has built over his three years leading up to his 2020 launch and is the foundation of his current business.
It might seem obvious that banks themselves could, should, and would come up with something similar to offer their own loan products based on bank data. But Chappell says it’s not as simple as it looks.
“This is very important. It will take more than five years for banks to change their processes,” he said. Their process is usually the very service established in the 70’s and his 80’s way. We combine FICO scores, economics data from the UK statistical office ONS to determine the eligibility of a loan and the likelihood that a customer will default on the loan. We will repay you as agreed.
Meanwhile, Abound says the proof, so to speak, is in the pudding. Chappell says the startup’s default rate is 70% below the UK industry average over the past two years.
So it’s not perfect, but it seems to work better than what it’s replacing.
But this is the technology we’re talking about, so the competition doesn’t end when big banks and other start-ups build what Abound built. Chappell believes Abound will develop even better AI algorithms to better manage its own rates.
This head start has also motivated investors to back the company.
Kuok Meng Xiong, CEO of K3 Ventures, said in a statement: “Abound offers a unique product and differentiated approach that has already proven effective for thousands of customers. increase.”
Krishin Uttamchandani, director of Waterfall Asset Management, said in a statement: “Abound is led by a strong management team, backed by what we believe is a strong technology stack, underwriting methodology and risk outlook, and we are thrilled to be working together. What Abound has achieved with its loans is very impressive and should lay the foundation for a strong platform to better serve customers who should have access to cheaper credit in open banking. , we are thrilled to be your partner on the journey of Abound.”
