In this interview, we talk to Dr. Daniel Bartsch, COO, and Co-Founder of Frankfurt-based creditshelf. It is a novelty since it IPOed successfully in Frankfurt in summer 2018 with a volume of 16.5 m Euros and so became (as of October 2018) the first – and for now, only – listed pure-play fintech from Germany to be listed. Creditshelf is a credit marketplace, where small and medium businesses can lend money up to 5 mn Euros.
During this interview we talk about the startup, the IPO process and Daniel describes why the preparations for an IPO need as long as a baby.
In the interview, you will also learn why they are different from LendingClub or FundingCircle.
If you speak German, you can also listen to the first interview from Joern with the CTO of creditshelf in the Fall of 2016 here: https://hearthis.at/startup/f09f948ainterviews-mit-3-gruendern-von-startups-auf-dem-letzten-coden-new-new-festival-in-karlsruhemp3refdown/ or here the interview with ZenCap, a Rocket Internet-backed startup, now part of FundingCircle: https://podtail.com/podcast/startupradio-de/zencap-im-interview/
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00:05 Intro : Welcome to startuprad.io your podcast and YouTube blog covering the German startup scene with news, interviews and live events.
00:19 Joe: Hello and welcome everybody this is Joe from startuprad.io, you our YouTube blog and startup podcast from Germany in English. Today I’m in the office of a FinTech here in lovely Frankfurt and it’s the first FinTech ever to IPO in Germany. And I do have the CEO here with me. Welcome.
00:39 Daniel: Hi, good morning. Good morning everybody.
00:41 Joe: Would you briefly introduce yourselves to all viewers?
00:44 Daniel: Yes sure. So, my name is Daniel Bartsch. I’m a founding partner of credit shelf and a member of the Executive Board. I look after the client side of our business as well as the daily operations of our lending operations.
00:59 Joe: And you are a FinTech. But before that you have some experiences. I did a little bit of stalking and found you’ve not only been a former banker but also a former consultant. How did it help you?
01:16 Daniel: I think in my prior life, actually this is my third career with Birchel. In my prior life, I was working as a management consultant, that’s basically where I started off my career. Initially, my aspiration was to get a broader sense of the economy. Therefore, working as a consultant was extremely helpful because you get insights across different industries in the various in a very short timeframe. I then focused more on financial services and banking and that was how I got into investment banking. That was right at the time when the financial crisis hit the industry. So, it was a rather shaky time when I joined investment banking.
01:58 Joe: Oh, I know that. At this time, I was just joining management consulting. Interesting times, yeah.
02:05 Daniel: Absolutely. During my career in banking, which I spent roughly nine years also, what we discovered my founding partners in myself were all ex-bankers. We discovered that because of the financial crisis and because of the change of the regulatory landscape, there is a tremendous shift in what banks actually do focus on and to concentrate on. And that is to the detriment of small and medium-sized businesses. That’s a tendency that we have seen not only in Europe, but we’ve also seen that in the Anglo-Saxon world. But also, in Europe where there has been a huge credit gap that has built up as a result of the financial crisis when banks basically shifted away from lending to small and medium-sized businesses. And that was the driving force for us to actually launch credit shelf.
02:58 Joe: And we may add that this is a pretty bad situation for the German economy just because we have a lot of small and medium enterprises and they are heavily relying on credit financing by banks.
03:13 Daniel: That’s absolutely correct. The German economy, obviously, is back-boned by the so-called middle strand. Small and medium-sized companies that are really sitting in the regions and they do very good businesses. They’re really market leaders in their various niches and very solid businesses. However, even though in Germany you have a lot of banks, what we see is that there is a lack of bank funding. Banks do shy away from lending to certain businesses, particularly when it comes to lending on an unsecured basis. Which is very important for some of the business because they just don’t have physical collateral in the way it used to be in the past when the economy was much more industrialized. Today we talked about technology, we talked about digital companies where you have less physical assets. And therefore, physical collateral which banks obviously try and lend against is much less available to some of the businesses. And that’s why we see a gap in the market and I can quantify that gap as well. What we have seen over the past 12 years, shortly before the financial crisis and then predominantly after the financial crisis, is that the German GDP has since grown by 40 percent. But on the flip side, the total lending amount, the total nominal lending amount to SMEs has actually stayed flat. So, it just shows you that there is a tremendous shift away from bank credit which is less available to those businesses. And they have obviously had to use replacements, predominantly equity, but also other sorts of return of financing. And that is why platforms like us are very vital to those businesses. And basically, allowing them to grow to the next level.
05:07 Joe: We may also add that some of the rules that are changing this game are basically from the bank side and they have regulations that they need put more and more equity behind risky credits. And so, all SMEs considered risky by a bank, internally they are not more profitable to lend at the current rates. So therefore, the SMEs have to look around.
05:36 Daniel: That’s correct. There’re two driving forces behind that impacting the economics from a bank perspective when they lend to SMEs. So, one is as you’ve correctly identified as the capital underpinning which is very expensive. Particularly when you lend on an unsecured basis against a smaller type company which usually is also not a top-rated sort of credit. And then, on the other side you look at process costs. And what we find in the banking space and that’s really throughout the different geographies. That’s not just a phenomenon that’s valid for Germany or for France. If you look throughout the landscape you find that banks are using very old style manual analogous processes and they’re not using digital data, they’re not using automized processes. And they’re absolutely not efficient when it comes to their credit processes. And that of course, makes it very difficult. If you lend smaller tickets of course, the profit margin is smaller than if you go into the large ticket lending. And that is why these process costs matter for banks as well. And that’s why some of those banks, we see them shy away from that market.
06:58 Joe: And, you come in play. And how do you actually do that? How does your credit shelf work?
07:06 Joe: So, credit self at the essence is an SME lending platform. It’s based on a marketplace model that means on one side we have borrowers that we source through various different channels that come and find us. And on the other side, we have a network of professional institutional investors who are actually very interested in that asset class because it provides very attractive yield reward characteristics to those institutional investors. Particularly in the current interest rate environment which is obviously characterized by very low yield. And on the other side, you see that all other public assets are trading at very high levels and that makes the private debt segment very attractive. And in particular, when it comes through an automated origination engine, it’s a very attractive value proposition to an investor. So, the way we work is that our credit process is highly automized. We use proprietary algorithms to quantify and qualify applications that come in through our website, that come in through business partners and basically filter them out right at the beginning so that in a later stage of the process we can focus on the credits that we think are attractive in the first place. And a lot of what we actually do in the day to day is refining the algorithm, making sure that we get access to raw data. Every business at the essence, the information that they have in their accounting systems is digital. The problem is that the moment they create an annual report and they print that annual report and somebody obviously has a physical copy of that annual report and starts to distribute that, it’s very difficult to bring that into the digital state. And that’s why, in our process, we rely on having access to digital data as well as, I would say scanned copies of course in certain instances. But what we try and do is we try and get access to the raw data okay, to the numbers behind those annual reports. And then we have them in our system, we can basically work with instantaneous analysis.
09:21 Joe: And I was just thinking, not everybody out there understands what origination means. Could you just elaborate just a tiny bit on that?
09:32 Daniel: Yeah sure. So, when we speak about origination, we’re talking about the concept of on one side sourcing a client, sourcing at borrower i.e. a company that wants to borrow money through the credit market which is our platform. And on the other side, origination also means extending credit to that company. So, when we originate a loan, that means on the other side, let’s say as a flow of business, there’s money flowing to that business. We’re not a bank. We don’t have a banking license. That means we are just a broker if you want to call it that way from a legal perspective. However, the value chain that we cover is the entire credit value chain. The German regulation is very strict. You have to have a banking license if you want to extend loans to individuals or to businesses. That is why we have essentially outsourced that small piece of the value chain which is essentially extending the loan to the business. Here we use a partnering bank that helps us bring the money out to the client. What the partnering bank does is they extend the loan to the borrower and then in the same second our special purpose vehicle purchases that loan and then sells it to the underlying investors. So, that’s the concept that we had to put in place to be a regulatory compliant, when we talk about originating the loans.
11:12 Joe: That is a pretty cool business model. In the back of my mind there have been tingling two startups that do use similar things. One of them is Funding Circle. May or may not be one of your direct competitors as well as Lending Club in the US. Disclaimer, I hold a small stake in it, but the share didn’t perform well recently. Can you just show a little bit, the difference between you and them?
11:40 Daniel: Yes sure. So, both Lending Club and Funding Circle are using our marketplace lending model which is same model that we use. That means, they typically don’t take principal risk when they facilitate lending transactions to their clients because the ultimate risk sits with the various investors that are purchasing those loans. I think there are a number of differences when it comes to Lending Club and also Funding Circle. Probably, Funding Circle is closer to what we do because they also lend to SMEs. Whereas, Lending Club is a consumer lending platform essentially. Funding Circle is a SME lending platform. They’re probably the biggest at the moment in Europe. They are also lending to German SMEs by the way. So, they have a presence here in the German market. They are no really a competitor to us because the segment that Funding Circle are actually targeting is the smaller segment. So, it’s more the smaller type businesses. Typically, smaller type companies or professional individuals that seek smaller tickets of loans. So, to put things into comparison, Funding Circle’s loans, I believe, are starting somewhere around 10, 20,000 euros and they go up to potentially 200 thousand euros or so. Our loans at credit self they start at a hundred thousand and go up to five million. So, our companies are probably significantly larger. So, more established middle strand companies. What we do is we need to have substance in the businesses that we need for our analysis. So, if you compare our credit process to Funding Circle, probably Funding Circle are the individual behind the businesses is very important to them because these are small businesses and a lot of the creditworthiness of that business relies with the individual. Therefore, the scoring model that they use is what we would probably refer to as a consumer plus scoring. So, they look at the consumer, they look at the individual behind the business. They score that individual and then they of course, also score the business. But essentially, the credit worthiness is with the individual. In our world, the credit worthiness actually is with the company. The individual behind matters. It’s very important to understand that the individual is a clean person. That they’re not involved in any dubious activities and that they have their personal financial situation well established and that it is clean. But on the flip side, the essence of the analysis that we apply is the company and the ability of the company to repay the loan out of its cash flow and operations. And then of course, you still look at the individuals behind, but for us it matters much less than if you have a very small say five or six people business. Where of course, a lot of that business substance sits with the owner.
14:51 Joe: Hmm. That is very interesting. For everybody who speaks German, we’ll try to link the interview with your former CTO as well as send desk which was then bought by Funding Circle and established a presence here in Germany. And I just now wanted to touch on how it was for you especially the process of getting to an IPO. Because you are not only the first FinTech ever to be listed in Frankfurt, you’re right now the only one to be listed in Germany.
15:28 Daniel: Yes, that’s correct. Our IPO has been the first pure-play FinTech IPO in Germany. And we’re of course a little bit proud about that to be honest. What was the driving factor behind that? I think from our perspective, that’s the reason why we chose to go into the prime standard of all Frankfurt Stock Exchange is to become more transparent and also to get a bit of a stamp of confidence and reliability towards partners that we work with in the day-to-day business. Institutional partners predominantly, be it on the Investor side or be it when it comes to multiplying our business. And here we particularly use bank corporations as a channel for future clients that come to credit self and receive loans through our process. What we see is it’s very important to those institutional partners to have a credible counterpart. Counterpart that they have trust in and that they believe it will be around the corner in a couple of years’ time as well. And that was the reason why we essentially went public. To give them a signal saying look guys we’re here for good, and on the other side we have the financial resources you know to build our business .We could have probably received the funds through private channels as well would have probably been slightly less costly as well. But on the other side, as I’ve said being public is a benefit of itself. It means that in our case we of course publish on a quarterly basis. We provide a lot of transparency to stakeholders around us that want to do business with us, and that’s very important. And also, lastly not least certainly, is the fact of motivating the staff and the employees. And literally, what you have when you’re a public company of course you have some sort of a currency that you can also use in remuneration. And that’s also very important for us because labor market is very tight, and we need to attract the best talent in the market. Therefore, that sets us ahead of some of the competition in the labor market.
17:56 Joe: Well, that was most of the stuff I wanted to know from you. Just to tease you a little bit. There’s one question I like to ask my interview partners before we close the interview and here it comes. If your life would be either the title of a movie or of a book or a combination of both, what would it be and why?
18:21 Daniel: In my spare time I like to read books, if I ever find the time to do so. On the flip side, I think in this day and age movies and pictures that are actually moving, i.e. a movie, is very attractive. I think you could probably bring over much more impressions in a movie. I think the book relies more on the fantasy and activating everyone’s brain to think about an illusionise or visualize essentially what’s going on in the book. I personally think I would go for the movie.
18:59 Joe: Which movie? Which title?
19:05 Daniel: That’s certainly a good teaser. If it would depict my life, I think it would be something like from ground going to the next level, going further against all boundaries. Because that’s what you face in real life as well as in business life. You face a lot of boundaries and barriers and you should just never stop. You need to manage around them you need to manage to find your way around them and overcome these. And I think that’s also what describes credit self at the heart. When we started this business four years ago, literally, there have been so many barriers and it’s just you need to just never give up. You need to just make sure that you come across them and over them and that’s how you go on.
20:02 Joe: And if somebody’s out there who wants to get listed like yesterday. What would your best top recommendation for them be?
20:17 Daniel: I think from our perspective, make sure you bring a lot of time because this doesn’t just happen in one or two days. And make sure you get the lawyers in place. That’s one of the findings I think. When I look back at our process, literally, I think at some point there have been more than 40 people involved in that project. Predominantly of course, external people and predominantly lawyers. And it’s just amazing to me as a business person to see how much legal resource is actually required to complete such process. And yeah, that’s something that you should learn, certainly have in your focus
21:05 Joe: Just out of curiosity, my last question. How long did the process take from like we want to IPO till ding-ding-ding we’re here?
21:16 Daniel: We listed like July of 2018. I think the idea of IPO in the business first time I think we were seriously thinking about that was probably sometime beginning of q4 of last year. So, sometime in October we really started thinking about this as a serious potential avenue for us to grow the business and bring it to the next level. So, I think it’s probably fair to say something like six to nine months is probably a process that you need at the minimum I would say. Because I think the project team, I was mind-blown at the amount of time and effort that went into it. And I don’t think that you can have really do it and given the side the size of the business we are, with the limited resource we have as a start-up essentially. I think going for less than six-months is ultra-aggressive.
22:23 Joe: So basically, the same time as for a baby?
22:25 Daniel: Yes. Every good thing takes time.
22:29 Joe: Great. It was my pleasure thank you very much.
22:32 Daniel: Thank you, thank you very much.
22:37 Host: That’s all folks. Find more news, streams, events, and interviews at www.startuprad.io. Remember, sharing is caring.