Online lending 2.0? Former Zencap boss goes all-in on automation with new platform

Matthias Knecht talks to AltFi about his new invoice finance platform: Billie.

Matthias Knecht, former founder and CEO of Zencap, is back in the online lending game. Knecht sold Zencap to Funding Circle in October 2015, allowing the London-based business lender to branch out into Europe. He then quit the company in June 2016, and was promptly followed by fellow co-founder Christian Grobe.

Now the pair have returned with a new online lending platform, which Knecht is touting as online lending 2.0. There is a touch of the Renaud Laplanches about the comeback. Knecht’s departure from Funding Circle was not marred by controversy in the way that Laplanche’s from Lending Club was (although there were reports of a “dispute” between Knecht and Funding Circle’s UK leadership team). But both men have recently returned to the sector with brand new takes on the fintech lending model – not to mention significant venture backing.

Knecht’s new platform, Billie, has already clinched €3.5m in a seed funding round that Knecht claims is one of the largest seed rounds in the history of European fintech. But what exactly does the platform look like, and why is it different to what came before?

Funding Circle, Knecht’s former shop, is a world-renowned innovator, but its underwriting processes are not necessarily revolutionary. Yes, the firm uses fresh data sources and automation in an attempt to maximise efficiency, but there's also a great deal of human intervention. Not so with Billie.

“With our technology we are able to offer Germany's first instant credit scoring for SMEs,” said Knecht. “This allows our customers to move from registration to full approval in under seven minutes, without any human interaction.”

“For other online lenders, credit approvals usually takes 48 hours or more since most still rely on lengthy manual processes which, to be frank, are not too different from that of traditional banks. In contrast, we have a strict focus on automation and scalability. This, of course, is only possible with the support of strong partners and a massive dataset used to train our risk engines on.”

So who are these mission-critical partners? Currently, Billie is working with three. The first is TARGO Commercial Finance, a German factoring firm with approximately €50bn in annual originations. Knecht describes TARGO as a major strategic partner, but clarified that it is not a shareholder in the business. TARGO, which is part of the French banking group Credit Mutuel, is currently Billie’s main provider of debt capital. 

The firm is also partnered with Euler Hermes, the world's largest credit insurance company, and finally with ETL, Germany's largest tax advisor network with approximately 100,000 SME customers.

“All three partners are deeply engaged in sharing best-in-class knowledge and helping us growing our digital business model,” said Knecht. “With the support of these partners, we are able to tap decades of knowledge in fraud detection and credit scoring, they provide data for training our risk engines and refer customers.”

But to return to the question of technology: what is the rationale behind Knecht’s decision to rely so heavily on automation? Intuitively it seems like a risky tack for a company with zero track record to take. But Knecht sees no other way, reiterating the need for instant credit decisions in small business finance.

“In order to successfully address the mass SME market, a credit process providing instant decisions is needed,” he said. “Indeed, almost all start-ups lack the data to apply robust statistical analysis or even modern machine learning techniques to credit scoring. This has usually resulted in higher than expected loss rates in early cohorts. You will see this in the data of all major online lending platforms: across all geographies, early cohorts overshot initial loss rate projections and only after a few years credit models could be built on a dataset that was large enough to yield satisfactory discriminatory power.”

Not especially heartening – but wait! There’s more:

“Therefore, we are taking a different, big-data-driven approach at Billie from day one. Together with our partner ETL we have built a bank account scoring model on more than 100 million transactions over the last 10 years containing hundreds of defaults on a portfolio highly similar to our expected SME portfolio. In that, we differ from almost all start-ups in the space, and even our own history at Zencap/Funding Circle, by starting with a well calibrated credit model from day one. For statistical experts: our Gini currently stands at around 70 per cent which brings us in line with the best German banks.”

Of course none of this would matter much if Billie didn’t hold the right regulatory permissions. Billie is regulated by the German Federal Financial Supervisory Authority (BaFin), and obtained its licence in just three months. The company is perhaps unique within the German market in that it does not work with a “fronting bank”, in the way that most alternative finance firms do locally.

“Our licence allows us to advance financing to German SMEs against their open invoices without using a fronting bank,” explained Knecht. “We are pretty unique in that we are the only factoring startup which went through the licencing process. None of our competitors, like bezahlt.de/Finiata or Advanon, did that. Due to our experience in the sector, we were able to complete the application process in-house, without any external support from lawyers or auditors.”  

In addition to regulatory approval and its €3.5m in seed funding, Billie also boasts a formidable advisory board. This features Jörg Asmussen, who was formerly Secretary of State at the German Ministry of Finance, and who is also a former member of the ECB Board of Directors. Currently he is practice leader for financial institutions for Lazard’s European operations. Joining Asmussen on Billie's advisory board is Joachim Secker, CEO of TARGO Commercial Finance and a member of the board of the German Factoring Association. Knecht refers to Secker as the “godfather” of German invoice factoring.

“We are combining leading regulatory experience with deep industry knowledge to make sure Billie is well connected with the traditional financial world from day one,” said Knecht. “Thus, we can make sure to incorporate long-standing industry expertise with the latest digital technology.”

Knecht is attempting to strike an almost contradictory balance: old-school financial services nous, paired with a greater weight of emphasis on automation than has been risked by his predecessors. Whether he can pull it off remains to be seen.

But the early signs – in terms of volumes advanced, venture capital support and corporate partnerships – are positive.