How Clutch turns Credit Unions into FinTech Companies | Nicholas Hinrichsen

Nicky, welcome back to the show, man.

Thanks for having me, Justin. Appreciate it.

Yeah, I know we were just talking before we started recording about how last time you came on the show, you had just launched with Clutch. And that was about a year and a half ago or so. And so there's a lot to kind of dive into, which I'm excited about. Today with the company, what are you— this is gonna go live, by the time this is live, you have a big announcement that will already have gone out. So what are you doing today with the company, Nicky?

Yeah, good question. So, well, let's go backwards. Now we're building software for credit unions. which credit unions, people think it's this outdated legal entity, but it's actually a really, really cool structure. They're nonprofits, tax-exempt, and all the lending should be done through them. They just don't have any technology. And so they used to be very branch-centric. Then COVID started, branches closed, COVID ended, branches opened, but members didn't come back. And so now the members want to be served through technology, which is something we've gotten good at over the years. And so The whole pivot is a strong word, but the redirection of exactly which direction we want to take happened in January of this year, which is 8 months, 9 months ago, 10 months by this. Yeah, crazy. And so we, in the meantime, raised $16 million from Andreessen Horowitz. We have 2 strategic investors. One is CUNA Mutual. CUNA stands for Credit Union National Association. And the other fund is a fund that's purely funded from credit unions. And so we're building software for credit unions. Our goal is to turn credit unions into fintech companies.

With that, let's take a step back. So with that, turning credit unions into fintech companies, take me through the pivot, the slight change. How did that evolve? And how do you get to that point? Because a lot of companies are going to pivot. And so take me through how that went down.

So when we first talked, I told you, hey, the market for auto loan rates is incredibly inefficient. People are overpaying. 90% of the people who get a car loan get it at the dealership. People don't shop for loans, they shop for cars. And so we said, well, let's figure out a way how to target these individuals and find a new home for the loan. We created a lot of content, had a lot of traffic on the website. And once we had inquiries, we would take those inquiries and approach auto lenders, auto lenders, financial institutions, and credit unions to see if they wanted to be a home for this loan. And these credit unions told us, you know what? We'll take it, but 80% of our own members don't have their auto loan with us, and it's really upsetting. Can we just use the technology, which is a loan application portal that makes it incredibly easy to submit a loan application for auto refinance? Can you just build this for us, white label it so we can use it with our own members? And so we're like, that's an interesting one. Ignored it the first time somebody asked. The third time, a different credit union asked the same question, we're like, maybe Maybe we're onto something here. And so this direct-to-consumer model is very difficult anyway in fintech lending because you end up paying all of your margin on customer acquisition cost because it's a commodity, right? You're lending.

Yeah.

And unless you're like a firm which is integrated at the point of sale, it's very difficult to build up distribution. A lot of these fintech lenders, Upstart, Upgrade, you name them, they all buy their traffic from Credit Karma. In some way, what they're doing, Credit Karma could do too. And so we wanted to be independent of these big traffic aggregators and always thought maybe search engine optimization is the way to go. But then these credit unions told us, hey, if you build product for us, I have the audience. I just don't know how to turn the awareness I can create into loan applications. And so this was like the aha moment, number one. Number two, once we Started working on auto refi and drove a lot of traffic. Like some of the credit unions grew 50% year over year in auto loan volume thanks to our help, which was obviously very reaffirming. The other aha moment was, well, we want all kinds of debt. We don't only want auto loans, we want unsecured loans, we want home equity lines of credits, RVs, motorhomes, boats, you name it, mortgages. And so the application expanded to all the other loan categories. And now if you— the initial partners that are using us already, they look just like a fintech company. Like it's the exact same technology they're using, we're just making available to them.

This is something where if you look at industries where they just have archaic technology, generally speaking, they've always kind of done things the same way, there's a massive opportunity. And there's many examples you can look into with that. But I just want to read some of the stats I saw from website: 234,000 loans financed, an average of $76 a month saved. That's That's, I'm sure, just to start with what you guys are doing. How big is this market? When you started looking into it more and more, like, what was the opportunity you guys saw?

Yeah. So, let's start with auto because the opportunity is all kinds of debt, but auto is interesting. And there's actually other interesting stats. Let's start with a different one. Every 3rd American is a member of a credit union. And do you think these are archaic structures and organizations and industries that people don't care about? Every 3rd American is a member and a lot of them don't even know they are. So number one interesting stat. Number 2, there's 100 million auto loans out there, and in total it's $1.4 trillion in debt. And so this is a conservative estimate, like 30% is massively mispriced. 30% could just press a button, refinance, and save thousands of dollars. They just don't know it's possible. The reason they don't know it's possible, it's really interesting because structurally most auto lenders get the deal flow from dealerships. So if you're Capital One, for example, you will partner with a car dealership. So the car dealership sends the traffic to you. If now the Capital One went direct to consumer and refinanced people or gave somebody a loan before he even goes to the dealership, the dealer would be upset. It's like, hey, I'm sending you all the volume and now you're cutting me off. I'm not going to send more volume your way. And so there's what's called the indirect business for the lender, which is the dealership referral, and there's the direct business, which is direct-to-consumer. Every single time the direct business grows too much, the indirect business, which is much bigger, will push them down. It's like, stop, you're pissing off our dealership network. They feed us, so we can't piss them off.

With that too, then, you mentioned how big this market is and, you know, how many different— how many people are obviously involved in— 1 out of 3 has one of these. How'd you strategically kind of go about that in terms of which credit unions you're partnering with or who you partner with and, you know, how you kind of allocate resources because you can't boil the ocean. So how did you go about that?

That's true. And so just to define how big the ocean is, there's 5,000 credit unions. Okay, that's massive. Yeah, we— it's one of these things where the top 20% own 80% of the market. So that, in theory, makes the selection process relatively easy. But it's counterintuitive because the credit unions are affinity groups, They all started out as an affinity group of people with similar work for the same company, like Boeing Credit Union, for example, American Airlines. And so although some of them are smaller, that doesn't mean they're bad. That actually means they may have the even more loyal membership base. And so you don't want to exclude anyone. What you want to do is you want to build a product that they can sign up and self-serve. And so if you think of Square, for example, Square the dongle, Like, that was so easy to sign up for and use. Square also made a conscious decision not to put a phone number on the website so nobody could call and have like demand support. And so we want to build a product that's as easy as Square, the dongle, for consumers, for Koreans to understand so they can sign up themselves and use it versus building like a big sales motion and then trying to sell to them. Because if you sell to 5,000 Koreans, You can't, you can't hire enough people. But if you build a product that's self-serve, they will self-serve themselves into using it.

Yeah, it's really good insight. And I was one of the, I think, maybe one of the first in terms of finding that Square dongle. I was using it for like personal training clients back in the day.

Oh, seriously?

Yeah, I was like, this is amazing. I'm like, wait a minute, they just swipe their card, boom, session done. Like, I thought it was the easiest, amazing thing to do. And so I remember seeing how that just reduced the amount of friction so much that it was a no-brainer. Why would I not use this? And so from that, though, you mentioned, you You know, these archaic systems, there's always a reason for them. Like, they obviously are willing to pay you, but they have a technical kind of deficit in terms of doing it themselves. Did any of them do them themselves? Or like, what was that kind of threshold they had to pass as to like, to be able to get the technology to be able to do this? And I wonder that, I wonder that because I'm thinking, are they incentivized at all to do it themselves versus hiring someone like—

Yeah, no, 3 really good questions you asked without noticing it. Number one, Don't they have any technology? And yes, they do. And so they have these what they call loan origination systems. A loan origination system is a workflow system they use internally. And so there's like basically 3 players who own 90% of the credit union market. These businesses are like perfect businesses for private equity funds to acquire because they're like switching costs are incredibly low— sorry, incredibly high.

Yeah.

It's very deep ingrained. And so you can just raise prices and the Croatians will have to pay for it. And so that's exactly what happened. There's a number of them that went public, successful companies, worked out great for the fund, but every single Croatian hates them. They're like, I have a bad experience. I don't get any support. They don't innovate at all. The one thing they had to do, these loan origination systems, was, well, the internet happened. You can't deny it. And there was a tool that was internally used often by branch employees. And then these loan origination systems said, okay, I'll create a form that you can put on your website. So a loan application can go straight into the loan origination system. But these forms have literally 47 fields you need to fill out to do the same thing that we can do in 2 clicks. And so beating that technology and working with that, and we're not beating it, we're just sitting on top of it. And it's not very difficult to sell that because The one-to-one comparison is just so compelling. But then the next question is, well, why don't credit unions build their own website or consumer front end? And as I mentioned, there's 5,000 of them. They're not technology companies. They can't hire software engineers. They don't know how to build software. Neither should they know because they're banks. They're small banks, really good at lending. They wouldn't be good at technology. And so they need— they call them vendors. I would argue you need partners, partners who make you better. And then the excuse or the shortcut credit unions used to still solve the problem was like, okay, instead of us giving loans, let's work with brokers. Let's have brokers do all the work and then they package everything up and then they sell it to us, to us credit unions. And so we just buy a loan. The problem with that is you're not getting a new member, you're getting a loan. Which, if you need to deploy capital, that's good. But the mission and vision of a credit union is to help individuals with their financial well-being. And so they want members. And we're the only vendor out there that tells them, hey, we're not trying to sell you loans because you have cheap capital. We're trying to make you better. We're trying to turn you into fintech business so you can compete with all the other fintech business and you should win. You're the cheapest cost of capital, you don't pay taxes, you're nonprofit, you just don't have the technology. And that's why our value proposition is very compelling to them.

With that too, then what is the business model for you guys at WithClutch?

It's a mix of SaaS and performance-based revenue. So software as a service, just use the tool, put it on your website and integrate in online mobile banking. And like, that's just the foundation. And then what the tool does in a very clever way, if you apply for a loan, be it a refinance or personal loan or even a credit card, you will get the decision immediately, which that's new. Like, if you go to the credit union website, you submit, it's a one-way direction thing. You don't get the decision. You're like, okay, great, loan application received, we'll be in touch.

Yeah.

So getting the reaction in real time, that's new. And then B, since we do a soft credit pull to determine whether or not you qualify, We can tell you, hey, Justin, I see you applied for this credit card, but what about that car loan and the mortgage? You're massively overpaying on those. So submit your application, but let us take a look at these other products for you too and save you money. And so as a result, we have an upsell and cross-sell component in it, which you as a consumer, you just save money. It's free money. For the credit union, it's considered upsell and cross-sell. And so on these incremental opportunities, we charge a percentage of the original loan volume if and when it funds.

With this, I know you mentioned, kind of when we were communicating beforehand around, you have 21 or so people on the team, mostly kind of hiring a lot of engineers with this as well as you've grown. And obviously, you mentioned earlier in the show with getting the backing of a new round here of $16 million. How's the hiring gone for you guys in terms of, you know, winning the talent battle? Because it's something that every startup has to go through, especially, you know, we have those expectations for growth in the big market you see, and Andreessen Horowitz on board. How have you gone through the talent side and kind Yeah, good question.

So there's 2 thoughts here. Number one, both I'm very excited about. Number one, out of the 21 people, 17 are software developers and 2 are UX designers. And then there's the 2 founders. Like, it's a pure software business, very different than the business we built before where the majority of people were not software engineers. The majority of people were call center employees, support people, auto technicians. So, exciting part number 1 is we're 100% software. And then, the good news is we're in an industry that's very highly self-referencing. So, if one credit union is successful, they'll tell their friends because they're all friendly with another. Hey, you should use this tool too.

Yeah.

And so, we have a lot of inbound traffic, which is great. We don't even do any sales. It just comes inbound. Thought number 2, we were based in the Bay Area, Chris and I. I moved to New York in the meantime, but we were based in the Bay Area. And had the experience of trying to build an engineering team in San Francisco before and knew this time we wouldn't want to do it again. You just have no chance competing against Apple, Google, Facebook, Amazon, you name it. And the main reason is all these companies have appreciated so much in value. These stock grants have become so valuable that it probably wouldn't be a wise decision to leave any of these companies anyway.

Yep.

And so we said during COVID well, we'll be hiring remotely anyway. And since we are hiring remotely, why limit it to the US? Like, the thing we cared about was time zone and language, like the ability to speak English, but thankfully it's a small world. And so our whole engineering team is in Latin America. They're all in— there's 16 out of 17 in the south of Brazil. The head of engineering used to work at Nubank, the biggest neobank in the world. So we hired him and then he built the team around himself. And so different than a lot of our fellow entrepreneurs, we actually had a really successful hiring journey over the last 2 or 3 months. We went from 2 to 17. It happened to be people that our previous engineers have worked with before, so lots of referrals, but it's worked out really well for us. And so I'm really thankful for, for A, Having met Raphael, the head of engineering, who's exceptional, and then B for just having the courage to do it.

What's in that transition? So doing that and seeing that you know it's incredibly difficult to compete on talent, especially in Silicon Valley, kind of doing that. What have been the you know the challenges or the complexities with that? Obviously, it's worked out for you, which is great. But what have been the complexities around that, or what were you even considering with with that switch? Because if other people are You know, founders are kind of looking at, well, I don't know if I can hire a full Latin American team, like, or outside the US, like, what are some things to think through when they go through that decision?

Yeah, good question. So I think number one, culturally, Chris, my co-founder, and I just vibed with South America. My parents are from Argentina, and Chris's mother is from the south of Brazil. So we kind of feel home there. We're there a lot. Like, I love being here. I'm in Brazil as we speak.

Nice.

And so, like, culture, we just understood the culture, number one. Number two, we knew we couldn't lead this team ourselves. Like, we needed somebody super senior who we somehow magically have to convince to work with us, to join us. And so, that's actually the third point. We're obviously, as a startup, the most valuable thing we have to give is not cash, it's equity in the company. And so, outside of Silicon Valley, Definitely outside of the US, people have not experienced how equity in a company can be life-changing. So you offer somebody shares in the company, which I consider incredibly valuable, and that other person in Latin America more likely than not doesn't know anyone who's ever received equity, and if so, who's ever made money with it. So they'll discount the most valuable thing I can give to them as part of their compensation. And so we're putting a very, very deliberate effort into explaining how equity compensation works. And we're bringing in guest speakers so the team can hear it from not only from me, who I'm biased obviously, but from other people. It's like, you want this equity. We also had this massive benefit that our previous company worked at. And then we're very close to some of the software engineers who used to work with us. And so we couldn't hire them for non-competes, but they offered to be references. And so now a bunch of our engineering candidates in Brazil We put them in touch with our good friend Zach, and Zach told them, take no cash, take all of the equity. That's what I would do, he said. And then obviously we would never do that, but it helped conveying that, hey, we're in this together. Every single person in the engineering and the whole company has equity in the company, and we want this to work out for everyone if it works out. And I think we've made a lot of progress.

Okay. I think I'm finding this fascinating because Some things you don't think about until you actually do it, which is your exact point. Like, if they have— if they haven't seen it before, how are they supposed to understand what that— what the worth is? And then you weigh things differently. And in your eyes, you're like, yeah, like, equity is worth the most. I'm not gonna like just shortchange you and not give you more equity. Like, you deserve it.

Exactly. And it's difficult because you see them make decisions like, hey, your offer is, let's say, $100,000. I got an offer for $110,000 somewhere else. I'm like, you can't just ignore $100,000 equity that you're getting on top. Like, you're trading 10 for 100. That makes no sense.

Yeah.

And so I don't mean to be like condescending or anything. It's just something they haven't experienced.

Yeah.

I think now having been with us and having seen the equity increase in value because we had the funding round, I think now it's a no-brainer to the people who've experienced it. And obviously we can only repeat it As many times or so often that Chris and I barely pay ourselves because we fully believe in the equity of this company. And so, it's just communication and an effort and it needs to be deliberate and you'll get there. But yeah, if people haven't experienced, even if they don't know anyone, or especially if they don't know anyone who has experienced strong appreciation in equity, then they don't value it. And you and I would do the same thing if we didn't know better.

Yeah, absolutely. I mean, you just don't know. So, how are you supposed to even go about that? You don't have that frame of reference at all, which is, yeah, a struggle. Even like some of the things we see at Violize Venture Capital and looking at some of the founders we talk to and everything as well, like people don't understand what's industry standard or like what's normal or whatever. And you'll get pitches for someone who's like, yeah, we're raising like $30K on whatever. You're like, you're giving up way too much of your company for that. I'm like, just like, but there's no reference around it. So you don't know what you don't know, which is why I love doing these interviews and like people who have different experiences as well with that. And one of the things I'm gonna go to, 'cause you can't just gloss over this, raising $16 million from Andreessen and other ones as well, like really important partners. How did that fundraising process go this time around in this particular round? I'm curious.

Yeah, good question. So Chris and I left Carvana knowing what we wanted to do. And it was in a space that we happened to understand really well because we just spent 8 years in that space. And so what we didn't know is Carvana has a thesis— sorry, Carvana— Andreessen has a thesis around we don't do early stage, super early stage seed rounds unless It's serial founders or repeat founders, like ideally a team in the same space that they know. And so we, like, we literally, the conversation with Andreessen started me saying, hey Alex, Alex Rampal, we're way too early for you. And he's like, well, let me hear you out first. And then I told him a story and then we just got lucky that he understood the thesis immediately. He's like, hey, you should talk to one of my partners, great guy, Anish, who was at Credit Karma for 4 years. A serial entrepreneur himself. And then we told him what we wanted to do. He's like, yeah, so A, I understand the space. I know exactly what you want to do. I love this. I've always wanted to do this. B, serial founders see in a space that they know. And it wasn't as obvious to us as it was to him. He's like, this was the easiest seed round he's ever done. Like within 24 hours, we had a term sheet and they've been incredible partners ever since.

Yeah, that is interesting to kind of hear. If they have an idea of what they're looking for, or what their exceptions could be going into it, then they can make the decision a bit faster. Which, yeah, which is helpful to understand from that. And, and to that point, so with that new fundraising round, everything, and you obviously mentioned kind of the hiring process that you've kind of adapted and kind of changed a little bit with going into Latin America. What is next in terms of this kind of next 12-18 months till your next round of funding?

Good question. So we started with auto, auto refi, because we understood it.

Yeah.

What we didn't realize is you can refinance all the other products. So what we built in auto, which auto is the hardest because you have collateral. For unsecured personal loan, you don't have collateral, it's just money.

Yep.

So we built the different verticals and we should be done by the end of the year, number one. And then the other thing, it's not only about refi. You really want every touchpoint a member has with a credit union, you want to use it to surface opportunities for that member to save. And so if you want to apply for a credit card, I want to be able to show you auto refi. If you apply for a mortgage, I want to let you know that you can save on your unsecured loan that you have or your boat. And so it really needs to be these 2 dimensions, all the verticals. And then for every type of intent you're coming in, we want to surface on all these verticals your saving opportunities. And so we're obviously super heads down building that until the end of the year. We have partners who are excited for us to launch it with them. It's all educated based on feedback we've received. Like, none of what we're building, which is such a blessing this time, is based on, I think this is going to work. No, it's like, build it, I'll pay for it. And so we're really excited about that. And then I hope we transition from being heads down building to starting a sales motion early next year. We have 13 credit union clients. Nice. Some of them very, very big. We— these— most of them came through inbound requests or like inbound interest. Next year, we're hoping to really attend conferences, put ourselves in front of credit unions, tell them what we're up to, tell them that we're here to serve them. We're also what's called a credit union service organization, a CUSO. You would have never heard of that, but you basically form a CUSO that allows you to take money from credit unions as investors. which some of the credit union clients that we serve want to be investors. Great, obviously.

Of course.

And then, and then it really shows a sign that you're committed to the credit union movement and you want to serve credit unions. And so 2022 will be the year for us to really get the message out there and then grow based on partnerships.

With that, I know we're almost out of time here. I'm just curious, with thinking of the consumer and coming back to that, like, what does that then look like for the consumer when you've kind of accomplish your mission, your vision of where you want to get to. As me, the consumer, what does it look like for me in terms of going through this process and all these different loans I have in my life? Walk me through that vision of that.

Good question. So, A, you wouldn't even know you're interacting with us. Like, if we do a great job, touch and feel is as if you interact with your credit union, which that's what it is already. And I think it'll only get better from here. Number one. Number two, I think consumers will say, wow, My credit union has really invested into technology because now I have the same experience with my credit union as I would have if I went to Credit Karma and applied for a loan. Like, my credit union is creating exactly the same experience. And I know that the credit union has my best financial interests in mind. So I trust them much more so than third-party resources. And so once we get there, I think we'll be very successful.

Yeah, I love the businesses that, you know, it's always— they talk about kind of picks and shovels and things that are the infrastructure behind it, because those are just massive businesses typically that we don't have any idea about, which is kind of insane.

Yeah, no, we would've never guessed. Like our investors say, dude, Chris and Nikhi, Agaba Nikhi, you two are made to do this. And the reason why is because you've got all these scars from having been in the space for so long and these great partners you have, they really trust you, want to lean on you. So like just earning that trust, you can't do this overnight. Like we had to work with them for 7 years, 8 years to really earn that trust and understand them better. And now we, We're hopeful that our partners see it the same way.

Yeah, and I I love having people on again. I've had a few people now on like a second time to see the progression and how people one they've progressed so much in terms of their business evolving, but two the business even changing. And I think with this new direction you have as well and everything kind of announced it, it's exciting. So I appreciate the time, Nikki. Thanks for coming on the show.

Thanks, Justin, for having me. Of course, thanks for having me. This was so fun again.