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Bringing Debt Collection Into the New World
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Hi friends 👋,
Happy Thursday! A little over a year ago, the Not Boring Syndicate backed TrueAccord.
Instead of the typical long Not Boring post, I wanted to mix it up and try something new – I’m sharing the main sections from the memo I wrote for the Syndicate last year as-is, and then adding my thoughts on what’s changed since and where I didn’t think big enough.
While I hope that fintech companies read this and want to work with TrueAccord, the main point of this piece is to highlight the importance of a few themes for investors and builders alike:
The Versatility of Picking the Right Wedge
The Value of Aligned Incentives (beyond web3)
The Different Paths a Great Entrepreneur Can Take Towards the Same Goal
A common piece of venture capital advice is to back great founders in big markets, because great founders will uncover all of the best opportunities. TrueAccord’s founder, Ohad Samet, has proved that as he’s evolved TrueAccord over the past year.
It’s a good reminder that while I can make my best guesses as to where companies and industries are headed, the best entrepreneurs will bend things in unexpected directions.
Let’s get to it.
Have I scared you away yet?
If so, that’s part of the beauty of TrueAccord. It uses unsexiness as a moat, and has quietly built one of the biggest fintech startups you’ve never heard of.
When I first spoke to TrueAccord’s founder and CEO, Ohad Samet, last year, he told me, “I would really love to see more second and third time founders try to build something really hard.”
He’s doing it himself. Before founding TrueAccord, Ohad worked in fraud protection at PayPal, was the founder of Signifyd, founder of Analyzd (Acquired by Klarna in 2011), and was the Chief Risk Officer at Klarna for three years. While running TrueAccord, he also served a one-year stint as a Board Member on the Consumer Advisory Board at the Consumer Financial Protection Bureau (CFPB).
Now, he’s building something really hard. TrueAccord is “debt collection, reinvented,” the largest and fastest-growing technology player in consumer debt repayment. Ohad said the thing that attracted him to debt collection is that it hits the holy grail of major startup ideas: a big, unattended, fragmented, low NPS market, a solution for which would solve a core issue for people.
Over the first seven years of its life, TrueAccord built skills in consumer-friendly digital debt collection. At its core is a personalized, self-serve debt repayment experience that uses machine learning to reach consumers at the right time via the right channels. Instead of constant cold-calling, TrueAccord might text or email at times its found are most successful. Because the company has always had ambitions to build a full suite of financial services for its target audience, it’s taken a much friendlier approach to collections, one meant to retain instead of repel.
Consumers can and do work with TrueAccord directly to get control of their debt, but the secret sauce in TrueAccord’s approach to date has been Recover: a late-stage recovery (read: debt collection) product through which companies pay TrueAccord to collect debt from their customers.
BNPL giants Klarna and Affirm, for example, outsource collections to TrueAccord and pay TrueAccord a portion of what it collects. More importantly, when considering the vision to provide more financial services to the target market, when companies buy Recover, TrueAccord gets paid to acquire customers. That means it has a negative CAC on consumers.
It seems to be working. Each month, creditors send TrueAccord 500k - 1 million potential customers, for free, and then pay them a commission on repaid debt!
The promise and success of Recover has attracted some of the world’s top investors including Khosla Ventures, Homebrew, Felicis, Arbor Ventures, and PayPal/Affirm founder Max Levchin. We backed the company last year, before there was Not Boring Capital, via the Not Boring Syndicate.
When we invested in TrueAccord March of last year, I wrote up a short memo on what excited me about the opportunity. I’m going to include three sections exactly as-is from that memo:
TrueAccord: The Nice Guy in the Massive Debt Collection Market
Consumer Debt Repayment as a Wedge
But then I’m going to show you what I missed, too. I didn’t think big enough. It’s a good reminder – particularly in a period when everyone seems to have turned impossibly bearish – that markets change and evolve in unpredictable ways, and that building blocks can snap together in ways that create bigger-than-anticipated opportunities.
In TrueAccord’s case, I didn’t predict how central lending and consumer debt would become to fintech – fueled by the dramatic ascent of Buy Now, Pay Later (BNPL), consumer fintech, and embedded finance. Some of the most successful tech companies have become, wittingly or unwittingly, creditors. The debt market actually shrank last year thanks to stimulus checks, and as it comes back, the lender composition will lean more tech-forward than it was before.
In response, last September, TrueAccord launched its second product, Retain, a white-label SaaS product that fintechs can use to collect early-stage delinquencies before consumers default, when they’re much more likely to pay.
Like Lithic, Onbo, and of course, AWS, TrueAccord turned many of the tools it built for its own first product, Recover, into infrastructure for other companies with Retain. Ohad calls it the “AWS of Consumer Debt and Delinquency.”
Retain uses data on the 16 million consumers it’s worked with directly and through Recover, plus TrueAccord’s HeartBeat machine learning platform, to identify delinquent customers and reach them through the best touchpoint at the best time. Unlike Recover, through which clients outsource collections to TrueAccord, clients embed Retain right in their stack.
Instead of collecting post-default, Retain helps keep consumers from defaulting on loans in a much friendlier, more tech-forward, and effective way than any traditional delinquency or collections solution could. It’s growing like crazy – crossing the 1 million consumer mark in less than 6 months – and is used by fintech platforms like SynapseFi and Sila.
I also missed just how important the incentive alignment narrative would become in 2021 and 2022. TrueAccord’s business model is aligned with both creditors and consumers: Recover, for example, only makes money when consumers get out of debt. As one sign of that alignment, TrueAccord successfully lobbied for the passage of the CFPB’s Regulation F, which limits debt collectors’ ability to hound people on the phone, among other things.
One of the past year’s biggest themes has been reinventing financial services. Fintech and web3 attracted as much attention and venture capital dollars as any category. The promise of many of these products is that they’ll be able to provide opportunities to people who are left behind by the traditional financial system.
No one is more focused on making sure that everyone has a fair financial chance than TrueAccord. They’ve been working on this for eight years, despite and even because of the fact that debt collection is an unsexy category.
So today, we’ll look back at last March’s memo before looking forward to what the world, and the financial system, look like when TrueAccord achieves its vision:
The 2021 Memo: Nice Guy, Debt Collection-as-a-Wedge, Unsexiness as a Moat
What I Missed: Retain, Incentive Alignment, and a World Without Debt Traps
The 2021 Memo
TrueAccord: The Nice Guy in the Massive Debt Collection Market
Depending on which source you use, 50-80 million Americans spend a significant amount of their income on late charges and interest rates, get harassed on a daily basis by collectors, and are locked out of basic financial services. These people, by and large, are neither miscreants nor victims. They’re totally normal people who happen to be in debt, and want a way out that doesn’t involve a massive hit to their credit or a lifetime of ballooning interest payments.
I was one of them; when I dislocated my knee in college, the hospital sent the bill to the wrong place, we never paid, and I only found out when a collections agency started harassing me. I was happy to pay, but realized that even paying would represent a black mark on my credit score. It was a no-win situation, and I basically had to pay and then wait for years for it to roll off my score. Luckily, I was young and didn’t have a family, but similar situations mean that normal people can’t access the banking system, further exacerbating their financial situation.
TrueAccord helps consumers pull their credit reports, negotiate with creditors and collectors in an informed way by using AI to show them what other people have successfully said and done, uses its heft to negotiate with collectors on consumers’ behalf, offers non-predatory 0% APR loans, and when the consumer is ready to pay, they can do it right through TrueAccord.
TrueAccord is not like the collections agencies you’re probably thinking about: it has a 4.8 star rating on Google and an A+ from the Better Business Bureau.
Consumers never* love a collections agency, but that A+ is a sign that they at least respect TrueAccord. And the approach works: 75-100% more people pay TrueAccord, at a lower monthly rate, than a traditional collections agency or dirty call center.
*Not never. This is an actual review:
"I have had other debts in collections with TrueAccord. The thing I love most about TrueAccord is that the (sic) don't threaten to have you arrested like so many other collection agencies do. TrueAccord is flexible and gives you time to pay. They really do work with you epescially (sic) if you are struggling financially."
But Ohad is a Worldbuilder, and debt collections is the wedge into a much larger market: banking the underbanked. It all comes down to customer acquisition cost (CAC).
Debt Collection as a Wedge
Fintech startups that have gone after the low-end of the market have traditionally followed the same playbook: spend a ton of money trying to acquire customers via Facebook and Google, and try to earn enough from them to make the payback work. It doesn’t. The CAC is too damn high.
In Jack of Two Trades, Marc Rubinstein wrote about why Square’s Cash App viral marketing campaigns were such an advantage: “The strategy kept customer acquisition costs exceptionally low: last year, they were less than $5 per customer.”
$5 is cool, but what if someone just gives you customers? TrueAccord’s main customers are companies that need to collect debts from customers -- Yelp, Upwork, and LendUp are some of its clients -- and collectively, they send TrueAccord 500k - 1 million people per month. Yup, instead of paying to acquire customers, companies just send them to TrueAccord. Of those, 5-30% choose to work with TrueAccord (it’s opt-in), and that number is growing as TrueAccord’s positive reputation builds. People in debt are rational and want a way out, and TrueAccord is the friendliest, easiest way to do that. Plus, the companies that send TrueAccord customers pay it 15-20% of the money collected. So really, the consumer debt repayment product that TrueAccord offers right now is a fast-growing, high-margin, negative-CAC channel for its bigger ambitions.
Once TrueAccord owns the customer relationship and has helped those consumers out of debt, it can begin to layer on additional financial services: partnerships with neobanks, debit cards, banking services. These are excellent businesses once the customer is in the door, but many attempts die at the hands of high CACs. TrueAccord is playing the long game, and has been for the past seven years, because it knows it can do well by doing good.
Fewer consumers in debt, more consumers with access to financial services, more profits for TrueAccord.
It sounds like a perfect playbook. Why hasn’t anyone done it before?
We can all agree that debt collection isn’t sexy. We all want to avoid it entirely, and those of us who’ve had to engage know that it’s a terrible and hopeless experience.
It’s equally difficult to build a business in the space: there are compliance issues, reputational issues, people treat their vendors like shit, it’s commoditized, and there’s fierce competition from boiler room call centers. It’s different than traditional SaaS: your clients don’t love you, there’s no customer obsession. The best you can do is make sure that a customer’s experience with you sucked less than the customer’s experience with another company.
For most people, that’s a deterrent. For Ohad, that was an opportunity. He bet that people would be attracted to other, shinier opportunities in fintech and avoid getting their hands dirty in consumer debt collection. He was right, and that’s given him and the TrueAccord team a seven year head start.
That head start means it’s worked with more than 16 million consumers, built up a massive database on what works with which types of vendors, and built something counterintuitive: a respected brand in debt collection. After years, people are talking online about their relatively positive experiences with TrueAccord, and that helps convince others to work with them when their collections are handed over.
It also means that TrueAccord has been able to build a uniquely cohesive culture.
“There’s something bonding,” Ohad quipped, “about a vision so compelling that smart people are willing to tell their friends and families they work in debt collection.”
The culture that TrueAccord has built around that vision is one of the company’s strengths and something that keeps it on the right track. He said that if he tried to ask TrueAccord’s head designer to do something that started exploiting consumers now that they’re big enough to do so, “She would tell me to go to hell and then quit on the spot. As she should.”
The company culture he described is like an antibody to bad behavior. “We don’t need a ‘no assholes’ rule here because an asshole would naturally feel so out of place.”
TrueAccord is mission-driven, operating in an unsexy space, and taking a longer view than anyone in the room. It would be nearly impossible for a well-funded startup to come in and compete with TrueAccord because of the moat it’s built, and no large player wants the reputational risk of working in debt collection. It may be one of the few fintech companies impervious to Stripe’s ever-expanding scope; can you imagine Stripe Collect?
What I Missed
In the past year, instead of turning its focus more directly on consumers, TrueAccord discovered an opportunity to reach even more customers by providing white-labeled early-stage collection services to fintech companies via Retain. The vision remains the same, but the sequencing is different. Retain offers the opportunity to help the most people avoid default today.
That said, the same strategies apply to Retain:
Debt Collection as a Wedge. TrueAccord is using its experience, technology, and reputation in debt collection to wedge into the stacks of a new generation of creditors instead of using debt collection as a wedge into offering more financial services to the unbanked itself (for now).
Unsexiness as a Moat. Given the choice between extending someone a loan or trying to collect their debt, 99 out of 100 fintech companies would choose (and have chosen) the former. That means that there’s been an explosion in the number of companies offering credit, but there hasn’t been a commensurate explosion in the number of companies who can collect debts when it comes to it in a way that fintech companies would be proud to partner with.
Those two strategies have afforded TrueAccord the rare opportunity to build core infrastructure in a fast-growing space uncontested.
Embedded Finance, BNPL, and Retain
In a year of financial markets craziness, 2021 belonged to fintech. That meant more new companies offering more credit products to more consumers.
In the private markets, according to CB Insights, fintech companies accounted for $131 billion of the total $621 billion in global venture capital funding.
Within fintech, two of the biggest trends have been embedded finance and Buy Now Pay Later (BNPL).
Embedded finance is a topic we’ve covered a few times in Not Boring, when we talked about Unit, Lithic, and in a recent Not Boring Founders convo with Stilt’s Rohit Mittal. Fintech Today’s Ian Kar defines it as, “When a non-financial services company creates financial services products for their users, embedding them into its existing products.”
For purposes of today’s discussion, what it means is that more non-banks are extending credit to customers than ever before.
BNPL – which essentially extends customers zero-interest loans at the point-of-sale in order to increase conversion – had an even bigger year than embedded finance:
In January 2021, Affirm priced its IPO at $49 and popped 110% on its first day of trading to a market cap of $24 billion. It peaked at $46 billion in November.
In June, Softbank led a round in Ohad’s old company, Swedish BNPL Klarna, that valued it at $46 billion.
In August, Square bought Aussie BNPL Afterpay for $29 billion.
Things have cooled off since from a valuation perspective. Affirm, whose biggest customer, Peloton, has struggled, is trading at around $8 billion. Index Ventures’ Mark Goldberg pointed out that, because it’s still private and not marked daily, Klarna is on paper worth more than a basket of big public fintechs combined:
But for our discussion, what’s important is volume, not valuations. A Juniper Research report estimated $226 billion in 2021 BNPL volume, and projected growth to $995 billion by 2026, or roughly 25% of all ecommerce spending. Once again, more non-banks are extending credit to customers than ever before.
Both embedded finance and BNPL might want to offer credit to more people, but they don’t have the (old, shitty, harassing, etc…) infrastructure that banks have in place to make sure that they can prevent borrowers from defaulting and collect if they do. They’re faced with a few options:
Build. Fintech companies could build collections in-house, but it’s complicated from a compliance perspective, not a core competency, and not sexy enough to excite employees. Plus, as discussed in last year’s memo, many companies don’t want collections on their hands.
Bad. They could go with the bad solutions – working with traditional collection agencies who harass people and often end up in court – but that would be bad for brand, wouldn’t integrate technologically, and could hurt morale and mission.
Partner with TrueAccord. TrueAccord has the expertise, experience, and technical chops to collect more effectively than traditional agencies, and it’s the only modern solution that modern companies don’t feel weird turning their customers over to.
More and more, embedded finance and BNPL companies are turning to TrueAccord and using one or both of its two products:
The original Recover product is used by giants like Klarna and Affirm. With Recover, clients outsource collections to TrueAccord and TrueAccord takes a ~22% fee. In a case study, Klarna’s VP of Debt Collection said that they originally built in-house to maintain the customer experience instead of working with old school debt collectors, but when they decided to double down on their core strengths, they chose to partner with TrueAccord because of its customer centricity and multi-channel approach to debt collection. Klarna wants to retain customers even after they’ve gone through collections, and having a competent but friendly partner helps. Speaking of retaining…
TrueAccord’s Retain product, offered through platforms like Sila and SynapseFi, is a white-label SaaS solution that clients can use to keep their customers out of debt collection by catching potential delinquencies at the earliest stages. Instead of collecting once a borrower has defaulted, the goal with Retain is often to keep them from progressing through stages of delinquency. In the early stages, most consumers actually do pay back if you catch it early enough.
In a case study with an unnamed “financial services giant,” TrueAccord highlighted two of the metrics companies track to measure success:
Roll Rate: the % of dollars that became progressively delinquent.
Gross Flow Through Rate: percentage of dollars that flowed from one bucket across multiple subsequent buckets (stages of delinquency).
In a bake-off with the company’s existing provider and two new candidates, TrueAccord won handily:
The reason, according to Ohad, is that TrueAccord built up its models and understanding across the 16 million people it’s worked with to get out of debt, and it understands when to reach them with which type of message on what channel. Like Lithic and Onbo, it took what it built on the consumer-facing side and applied it to building infrastructure. Unlike a normal debt collection company, which puts the vast majority of its employees on the phone calling debtors, more than half of TrueAccord’s team is tech, product, and data science. He wants to build a scalable way to keep or get people out of debt. And it seems to be working.
Ohad told me that in just its first 6 months, Retain crossed 1 million consumers.
But so what? Why is the world a better place if Ohad and TrueAccord win?
Alignment Incentive and A World Without Debt Traps
“Between fintech, web3, and crypto, we’re reinventing all of these things in financial services. We need to re-invent, and get rid of, debt traps.”
A lot of what I write about in Not Boring deals with the upside, with imagining what could go right if things go really right. In Ownership and the American Dream, I literally wrote, “We need to stop focusing so much time worrying about protecting peoples’ downsides and start spending more time working on getting more people more upside.”
That piece was about ownership and equity: in equity investing, the most you can lose is your investment; your upside is uncapped.
Things are practically the opposite when it comes to debt: the most you can borrow is what you borrow, the most you can lose is your home, car, wages, and financial freedom.
Debt isn’t a bad thing. It’s an incredibly useful tool when used responsibly. And we use a lot of it. According to research firm Kaulkin Ginsberg, US consumer debt, not including mortgages, is approaching $4.5 trillion.
The problem is that the way the system is set up now for many borrowers is a nightmare. Every time I talk to Ohad, he points out that people who are in delinquency or collections aren’t bad people, and rarely just don’t want to pay their debt. Sometimes, they just forget, something falls through the cracks. Others, they just get overextended and can’t pay it.
Maybe they make some mistakes. Maybe they get hit with an unexpected medical bill and rack up medical debt. Maybe they took on loans for college and are still paying them back years later. Maybe they just have a low salary despite working really hard. They fall into debt traps and they can’t get out.
At that point, historically, their life becomes more of a nightmare. They get harassing phone calls. The system is oppressively complex and they don’t know where to turn. Ohad told me that there are debt collectors out there who sue people, and then throw away the papers they were supposed to serve them, mark them as served anyway, and then start garnishing their wages without warning. The system is all about lawsuits and putting people in bankruptcy, and then making it really really hard to recover from bankruptcy. Without good software, and with no desire to continue the relationship with the consumer, the easiest way to collect from someone is to get the court to intervene.
But just like I write about upside alignment incentive in web3, Ohad is using alignment incentive to reshape the system.
When we spoke last week, I asked him what the end state for TrueAccord is, and after half a second, he replied that he wants TrueAccord to be “the one company that knows how to help these consumers while ethically monetizing their journey.”
That’s possible because TrueAccord’s incentives are aligned with consumers.
On the Recover side, TrueAccord is incentivized to find customers, give them the best service, help them pay back debt, and help them build equity. TrueAccord’s job is to navigate what the consumer can really afford and what the company will accept in a way that works for both sides. Creditors pay TrueAccord ~22% of the amount they collect, so it wants to make it possible for people to pay back as much as possible, and TrueAccord wants to build long-term financial relationships with the consumers from whom they collect. That creates a healthy tension – between collection and customer acquisition – all funded by a third-party.
On the Retain side, TrueAccord is incentivized to keep clients’ customers from defaulting and to keep them coming back. Since most of its Retain customers are brand-forward fintech companies who’ve spent a ton on customer acquisition, retention is as important as collection. It’s another healthy tension – between collection and retention. In this case, if TrueAccord does a good job, fintech companies will continue to pay its SaaS fees.
The alignment incentive even extends to regulation. Since TrueAccord is by far the most technically sophisticated debt collections company – which isn’t saying much – they lobbied for Regulation F, which “almost obliterated the ability for collectors to harass customers over the phone in order to collect a debt.” Consumers win – they get harassing phone calls less often; TrueAccord wins – the method they use least and their competitors use most is hampered; and sleazy debt collectors lose.
But while they’re willing to pull out the legal big guns when needed, Ohad’s response when I asked how he’ll measure TrueAccord’s impact was the opposite: “We see our impact when we work with someone who used to sue a lot of people, and we track how much less they sue.” He estimated that with Recover, TrueAccord cut litigation volumes by a third.
To get the other ⅔, he told me, they need to rethink the entire system. That’s why partnering with fintech companies early, before consumers get into trouble, is so key.
When TrueAccord started, he said, consumer lending meant Lending Club, who sold debt to debt buyers, who sued to collect. Regulation can help move things more digital, and technology can work to make the existing system a little bit better, but Ohad wants to rebuild the whole thing. (This is the kind of sentence you’d read in a shitty article, too, but you have to meet Ohad – he’s made his money; this is a mission for him).
That’s why Retain is both good business, but also the fastest way to help people avoid debt traps and the helplessness that comes with falling deeply behind.
“We’re bringing financial services into the new world. We need to use this opportunity to work with fintechs and put a proactive plan in place to not sue people.”
Retain, he hopes, will give companies the plug-and-play tech tools – the “AWS for consumer debt and delinquency” – that they can use to solve problems before they get too far. So that they can avoid having to sue, so that consumers can stop getting hit with confusing court cases and unexpected wage garnishment and get back to building back their credit.
The mission’s the same as it was when I met Ohad a year ago, but TrueAccord’s taking a slightly different path, and the vision and opportunity have gotten bigger along the way. It’s even kind of sexy now.
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Thanks for reading, and see you on Monday,