Open Lending President and CEO John Flynn, CFO and COO Ross Jessup
The COVID crisis may have caused auto loan demand to stall, but investors who look closely will see it’s revving back up – and the fintech behind it matters more than ever. Open Lending’s technology that helps lenders extend more auto loans to people with a wider range of credit scores has remained critical even during the depths of the coronavirus pandemic, thanks to credit unions that continue to make loans and sharp demand for refinancing. That’s according to Open Lending President and CEO John Flynn along with CFO and COO Ross Jessup, who spoke to IPO Edge in an interview ahead of the company’s formal listing. The company, which serves hundreds of lenders by providing analysis and connecting them with loan default insurance, is going public through a merger with Nebula Acquisition Corporation (ticker: NEBU), subject to a final vote on June 9. Assuming the deal goes through, shares of NEBU will become shares of the combined company and trade under the ticker “LPRO.”
Messrs. Flynn and Jessup also said car purchases have been helped by a shift away from public transportation services, along with the likes of Uber Technologies, Inc. and Lyft, Inc. as a result of social distancing protocols. Looking ahead, they said the company can benefit from geographic expansion as well as loans backed by other assets such as boats.
IPO Edge: Can you tell us about the importance of credit unions as lenders and the role they are playing in a recessionary environment?
Messrs. Flynn and Jessup: Credit unions, our core customers, have the lowest cost of capital and are traditionally viewed more favorably by consumers. As a result, many credit unions ultimately grew their auto lending share in the previous cycle, which we would expect to see in another economic downturn. While this would ultimately grow our existing customer base, there is also additional white space in the credit union market that we can penetrate. Credit unions fund approximately 20{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of the autos financed annually and we have only signed 7{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of the credit union market. Our unique product with our insurance partners and the ability to shield some of the downside risk will allow our community banks and credit unions to continue to provide loans while others may contract. Additionally, autos are viewed as non-discretionary for work and general living. Specifically, we are predominantly focused on used cars, which tend to be more stable during a recessionary environment. Interest rate drops and other stimulus may impact volumes as well. Thus, the need for auto finance solutions will only grow with the relaunch of economic activity.
IPO Edge: How have lower interest rates helped keep business volume up? Is refinancing important and will they remain so?
Messrs. Flynn and Jessup: Lower interest rates are driving considerable refinance interest from consumers, which should result in additional certs. In most cases, refinances can be completed by consumers without entering a physical banking location. This is a channel we are focusing on going forward.
We have several lending services companies as partners. These firms generate refinance and purchase money applications from multiple sources. They have the capacity to ramp originations very quickly. Many of their lead sources are web based and thus less impacted by quarantine or shelter in place. Our account managers are proactively soliciting our lenders to adopt the services of these companies to increase their originations. This channel also has the benefit of a risk arbitrage as these are direct to consumer loans with much lower default risk than our indirect dealer channel.
IPO Edge: What’s the competitive advantage Open Lending has and will it maintain it in the future?
Messrs. Flynn and Jessup: We have no competitors that do what we do – provide risk-based pricing combined with default insurance to the near prime auto market. It took many years to build our business model and gain the trust of the ecosystem participants
- We have worked with credit unions for years and John Flynn was previously the CEO of a credit union. Gaining the trust of credit unions takes time and someone who knows them.
- We must integrate into each of the LOS systems used by our lending customer. It has taken years to integrate into the 20+ LOS systems that we are on today.
- We have earned the trust of our insurance partners with a proven history. This has taken time to build and is not easily developed.
- Our data powers our models and has been accumulated across 15+ years – there are only a handful of lenders with a database like ours that include our mix of LTVs and terms across near-prime. Our data also spans the Great Recession.
IPO Edge: Why do OEM financing arms need your help making credit decisions?
Messrs. Flynn and Jessup: We help OEMs Facilitate new car sales by expanding credit to near-prime consumers where they are not competitive today and support car values by increasing financing availability for used vehicles.
We also help them develop brand loyalty by increasing repeat buyers by keeping customers in the captive customer ecosystem, capitalizing on loan life milestones to localize the customer.
Finally, after working with KPMG, we now know that banks and OEM Captives can get full credit for CECL relief, that is income statement neutral, when using our product. The net effect is a reduction in up-front CECL loan loss provisions of approximately 80{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}. This represents major capital relief for banks and OEM Captives. In this time of risk aversion and uncertainty we think this creates a major opportunity to acquire larger lender customers, including super regional and large regional banks and other OEM Captives in the future.
IPO Edge: How do you feel about the trend of “travel as a service” with the Ubers and Lyfts of the world and the impact on car ownership?
Messrs. Flynn and Jessup: We’ve seen positive trends in our certification volumes in the second half of April and continuing throughout May. We believe this recent success has been driven by the low interest rate environment, traditional lenders retrenching, and commuters shifting away from public modes of transportation. According to recent data from J.D. Power, wholesale vehicle prices have recovered from their lows in mid-April with the weekly wholesale auction price index now down just 1.9{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} from pre-coronavirus estimates.
IPO Edge: What are some future avenues of growth? Should investors expect to see other asset classes and geographies?
Messrs. Flynn and Jessup: In the near term, we continue to expect to grow from a combination of bringing on new lenders and net growth in the existing base. I think our pipeline is a strong as it has ever been with several top 50 credit union signed and expected to start in the coming months or in late pipeline stages. We also have also seen phenomenal success with the two OEMs that have launched to date and have several top OEMs, similar to the two that have gone live, in our pipeline which are not reflected in our financial projections.
In the future we see numerous adjacent opportunities with our existing lenders – leasing, prime decisioning, hub and spoke. In addition, there are numerous geographic and product expansion that we have contemplated, but the opportunity has been so great in auto and in the US that we just didn’t have the capacity, though there are several markets that we have been thinking of for a few years now and could turn to in the coming years.
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