Welcome to season two of Under the Hood, a podcast series brought to you by Synapse. In this series hosted by Synapse founder and CEO, Sankaet Pathak, Under the Hood takes a deep dive into various challenges and opportunities in FinTech. Topics range from technical design and architecture to regulatory and policy challenges.

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Sankaet Pathak:

Hello, everyone. Welcome to Under the Hood. Today we're talking about taking credit global. In our previous episodes, we've unpacked how this new trend of opening up USD accounts for non-US residents has been picking up. And today my guest is Misha, and Misha is the co-founder and CEO of Nova Credit. And he and I started chatting about would similar things happen to credit as well that's happening to deposits, which is more and more people are starting to pick one currency that is the most stable to be able to get banked. And Misha and I got into a really good conversation about would this happen to credit. So I thought I would invite Misha, have a light conversation about it and try to get into some details. Misha, welcome.

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Misha:

Pleasure to be here. Thanks for having me on the show.

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Sankaet Pathak:

Yeah, for sure. Do you want to maybe introduce yourself to the listeners and then we can dive in?

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Misha:

Happy to. Yeah, so Misha here, one of the co-founders and CEO of Nova Credit. For those of you that don't know us, we're a FinTech that's been around for about six, seven years. And we really started by solving the problem of financial identity mobility. So, millions of folks move around the world. When they move from one country to another, they need to apply for very basic financial services, a place to live, a credit card, an auto loan, a bank account, a cell phone plan. And when they apply for those things, they need to have US credit history. But by virtue of having just arrived in the United States, they are credit invisible.

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And so, for years, this population has gone through the many years process of building credit in order to get access to those things. And we solved that problem by having aggregated the world's credit reporting system. So, we partner with Experian, Equifax, TransUnion, CRIF, Cred Info, various independent bureaus, and we now have connectivity into about two billion consumer credit files from all around the world. And we can move that around the world to help people not have to start over. So that's really where we started the business. And then we also do some work in cashflow underwriting and a lot more there we could unpack with some more time. (2:30)

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Sankaet Pathak:

At the core of it, when I initially heard about Nova Credit, the thing that really jumped out to me that was very relevant given I'm an immigrant is this credit portability. The idea that if I change my country, whatever I've built in credit, I'm not leaving that behind. I'm taking that with me. Now, on top of that, we're starting to see this trend where credit portability and where you live and where you don't live and what currencies you decide to bank in, the lines are starting to blur. (3:05) And Misha, I'd love to hear your perspective on this whole space, just globalization of financial services and its various work streams, what are you seeing, and what's your perspective? (3:18)

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Misha:

So, it's obviously a topic that's very near and dear to our hearts, and I think the core applications of what we've built really are the tip of the spear in terms of the opportunity set that is out there. Maybe I'll spend just a minute explaining a little bit about how we're currently used in the ecosystem and then maybe I can talk a little bit about globalization and some bigger picture thoughts on the space. So we're B2B2C business, and so we've partnered with some of the leading financial institutions in the world. We support customers like American Express and HSBC and Verizon, SoFi and others with providing consumer permission data. And so, the basic way that the credit passport works, and the credit passport really is our flagship product where we've aggregated credit reporting information from all around the world and we have the ability in real time to look at a credit report from India, from the UK, from Canada, from Brazil, from Nigeria, from Kenya, from the Philippines, all over the world. (4:29)

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We have connectivity in over 20 markets at this point and normalize that raw information into one single global standard where the underlying raw data is standardized, the underlying attributes are standardized. So how many trade lines do you have? One's telling how many days past due have you gone. And then the underlying scores are actually standardized into a well understood 300 to 850 FICO range.

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And so that capability, that global connective tissue that enables credit portability as well as the standardization of information is the credit passport. And so that capability has been deployed, let's say with American Express where let's say you just moved to the US from, I don't know, from London, and you apply for any of their credit cards and they determine that you don't have sufficient US credit history. And so typically you would now be rejected for that application. Instead, what happens is that we allow a consumer to bring their history, so basically to port it over from wherever they're from and for that information to be seamlessly accessed, transferred, transformed, upgraded, made compliant with US standards and delivered right into the American Express decisioning process that allows someone to go near instantaneously from a no to a yes.  (5:49)

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And so, in doing so, we've been able to help hundreds of thousands of people enter the financial system who were otherwise credit invisible. And that product's been now in market with partners of that scale for about three, four years. So, we've reached a fair bit of let's say product maturity on that front. And as you take a step back and think about what we're doing, we're allowing a US based financial institution to underwrite a consumer who has physically migrated from country A to country B before they've established any meaningful financial identity in country B. So here in the United States. And when I say tip of the spear, what I really mean is that I think it's a matter of time and I think we're going to get into just how far away are we and where are the early signs of where this is going to happen. (6:44)

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I think it's a matter of time before this concept of financial access for those who physically migrate transforms into financial access for those who digitally migrate, how they bank, how they borrow. And there's a whole host of nuances that we're going to get into it here, but I think that theme of globalization is one that is an unstoppable force with a big asterisk, which is yeah, COVID, a pandemic definitely stops globalization or at the very slows it down, but we're seeing that pick right back up in record speed right now this year. (7:20) So one more to talk through there. 

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Sankaet Pathak:

Okay. So, I find this distinction very profoundly helpful. One, people physically migrating. Second, people digitally migrating. It turns out, and again I can completely corroborate this fact pattern. Before COVID, when we started looking at the global cash use case, which is this account that enabled folks that did not traditionally live in the US to be able to open up an account, it primarily was focused on travel, which is people coming into the US and wanting to spend in USD while they were here for various reasons. As soon as COVID hit and we had various economic policies take shape across the planet, we saw an increase in inflation. And even though people weren't moving around, people's desire to divest at a local currency started to increase and USD seemed the most stable out of fall and people digitally started migrating into this ecosystem. What are you seeing on your side around how far away are we between this physical migration trend and this digital migration trend? (8:36)

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Misha:

Yeah, I wish I had a crystal ball on this one. I mean that's the heart of the question. It's like, are autonomous vehicles a couple years away or 10 years away? Is a true AI a couple years away or is it still decades away? Is fusion a couple years away or decades away? I mean, to do justice to answering that question, you have to start to pick apart the pieces that make it a challenging problem to solve. And maybe just zooming out for a moment, I think what we're talking about from the perspective of a US lender or a US FinTech is today you think about the credit passport and the value of credit portability really from the lens of people who are physically coming here and in need of establishing their financial life. And so that's a super high value, but relatively narrow subset of the US population.

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That's blue ocean, underserved, high transacting in many ways, will be high earning or already are high earning. It's largely knowledge workers. And so, you can think about this segment, it's somewhere in the order of call it five to 10 million folks who are here in the United States that we can take from invisible to full credit file. But the beauty of this concept of credit portability is you can start to think about connectivity into the two billion consumers that we have access to around the world. And that dramatically changes how you think about this segment. So, the people who are physically here, it's really those that have sufficient information to be confidently underwritten around the world. But in order to do that, underwriting is only at one piece of the puzzle. I know obviously Synapse has worked tirelessly on challenges around identity, KYC, AML, fraud. (10:38)

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So, the identity layer we think is really complex when it comes to cross-border. And obviously the underwriting layer has complexity and I think we play a really important role in doing so compliantly, through consent, in a way that satisfies the requirements of all the big four-letter words like GDPR that are out there. There are a whole host of challenges around foreign exchange when you think about some of the previous financial crises that have emerged where there's an underlying mismatch between someone's income and their liabilities. How do you manage for that as a risk officer? Someone who's actually bearing the risk where let's say you're lending in USD, but the person you're lending to is earning in Mexican pesos or British pounds or whatever the underlying currency is, to the extent there's a major swing in the devaluation of the income currency, the liability and the effective interest rate dramatically spikes, right?

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And so, the ability for the consumer to service that loan dramatically spikes. And there's examples of that within Europe that I've read and studied between the EU and Poland as an example historically, or the British or the Swiss Franc and the Euro. There are plenty of examples of that. So, I think the foreign exchange puzzle is one that I haven't yet seen a real at scale solution for. And then there's the whole world of collections to the extent things do go aside, which actually that one feels like somewhat solved at this point.

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There are international cross border collection agencies out there that you can think of in a very similar light as a regular collection’s agency. And then finally is I think potentially the longest pole in the tent is the regulatory puzzle, which is how does a regulator in one country really think about a capability like this when a bank that is providing the financial product is outside of the purview of their regulation and how much extra territoriality do they have in their power? So I know I threw a lot at you there, but maybe we can start to pick away some of those pieces. (12:59)

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Sankaet Pathak:

Yeah, let's unpack some of this and this is why I'm excited to have you on this podcast. Let's pick regulatory. What I really admire about Nova Credit is this consent-based information transfer, which I can only imagine is impossible without consulting, working, getting approvals from the regulators. So, you are probably one of the very few people on the planet that has a much more wider view of this, which is how do you think regulators would or should see capabilities like this where people are not physically migrating with digitally migrating? (13:38)

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Misha:

Yeah, it's a really hard question. So maybe I'll start with one of the big aha moments in our business. We were still in grad school at Stanford and still trying to fumble around thinking through the drunken walk of where could product market fit be?  And we identified a problem which is half of the graduate student population of any graduate program consists of international students. A hundred percent of them will tell you some version of the story that we can now solve, but to actually go out and solve this problem, the first principle, thinking would say that you have to be able to get the underlying information, otherwise you don't have any data advantage in serving this customer. Otherwise, you're just making a bet on a segment that may or may not play out. And so, we went out and we thought, okay, you do some desktop homework.

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There are about 300 credit bureaus in the world. They're growing a very fast rate in the past 30 years. The world's gone from about 30 to about 300 credit bureaus and credit bureaus are built by the big three US credit bureaus. They're built by the World Bank and the IFC who help sponsor them because they help create a safe and sound consumer banking sector. And that allows for accelerated financial access. And with that comes accelerated GDP growth and economic growth. So central banks and regulators are highly incentivized to create a safe and sound banking sector and they want the creation of credit bureaus. And then you can start to break down the nuances of the types of credit bureaus that exist around the world, what are credit registries versus credit bureaus? The simple answer there is registries are typically government owned, bureaus tend to be more private sector, and registries sometimes are required furnishing from all the financial service. (15:28)

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So, there's a lot we can unpack around data standards and you can go into that in a fair bit of detail. But one of the issues we kept running into was like, well, what is your right, Nova Credit, to access this information around the world? And my intent here isn't to reveal our secret sauce or anything like that, but to state a very simple principle, which is that the direction of substantially all regulation around the world is that consumers own their data. That's the funnel premise of GDPR as well as consumers own their data, they have a right to access it, they have a right to see what you have, they have a right to force you to delete it if they want you to. And so a lot of the foundational concept that we built our business on is that very concept. (16:12)

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That was the aha moment where we were speaking with one of the bureaus and the bureau's like, "Why do you have a right to access this?" And I said, "Do you believe that consumers own their data?" And they're like, "Yeah, of course." And they're like, "Well, do you believe that consumers have a right to their data?" And they're like, "Yeah, of course." And they're like, "Do you believe that a consumer can access their data no matter where they are?" And they're like, "Uh, yeah, we don't have an issue with that." And I'm like, "Great, that's all that we're doing here. We're allowing a consumer to access their own information whether they're physically in their home country or physically in the new country."

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And once they have access to it, it's really up to them to determine what they want to do with it. And that really served as the philosophical approach behind Nova Credit. And after seven years of partnership building, meeting regulators, building data integration, standardizing information, we now have connectivity into about two billion consumers all around the globe, which I think is more than any bureau that's out there by a pretty significant margin at this point.

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But now put yourself back in the shoes of a regulator. And so, you ask a regulator and you say, "Do you believe your consumers own their data?" You walk through the same logic and the argument still holds, but there's another argument which is from a safety and soundness perspective, a regulator has a duty to protect the interests of their people, their citizens, and they can only really do that with respect to financial institutions who they have some jurisdiction power over and now you're going to introduce lenders outside of their home country.

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So, I'll pick on, I don't know, our neighbors to the south as an example. So, let's say Mexico, and this is all illustrative, but if you're a Mexican regulator, you have a duty to protect the interest of your citizens. You want the creation of a credit bureau, you want that to exist. You believe that consumers own their data, they can move their data around, but if all of a sudden, to play out an extreme scenario, the entire population of Mexico stopped banking with banks in Mexico and instead started banking with banks in the United States and the Mexican regulator has no oversight over those banks, that's a problem.

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So that's where the tension comes in around individual right and interest versus national safety and soundness concerns.

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Sankaet Pathak:

Just to push back on that notion a little bit, is that a problem or is that just free market? Because if the Mexican banking system is a better product, then now people have a choice of picking too versus right now the de facto is they can only pick the Mexican banking market.

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Misha:

That's the central question, how pro-consumer will a regulator stand? In some of these markets, they're very free market. The consumers own the data, you can move it around any way you want. In other markets and you see this in China certainly, there are data localization requirements that prevent the movement of data outside of one's country that make a lot of what we do very complex in nature. And there are ways that you can navigate through that through more clear consent, more clear authentication and things that we've learned how to navigate over the years.

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But if you believe in free markets, if you believe that the industry in global financial services and the globalization of consumer finance will ultimately be a free market, then you have to believe that the end state is one where any consumer anywhere in the world should be able to bank and borrow from any financial institution anywhere in the world the same way that you can go on Amazon and buy a product from anywhere in the world. Why does financial services have to, by definition, be different? If you believe that you're not selling poison, you have to believe that what you're selling is actually beneficial to the consumer. (20:22)

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Sankaet Pathak:

And even if there is a due restriction that is selling poison, hopefully that is publicly evident and known and the consumer can make the decision of not picking poison.

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Misha:

I think that's right, but I think there will be a period of regulatory familiarization, education, conservatism around how to think about this because ultimately it requires a loss of power for some of these regulators and I think different countries are going to have very different views on their willingness to do that.

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Sankaet Pathak:

Yeah.

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Misha:

Maybe just add one thought on it, it's similar to the struggle a central bank has and whether to defend their own currency or peg to the dollar. And that decision has so many broad economic implications, but you can really only fight the tides of free market for so long.

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Sankaet Pathak:

Yeah. Do you think this evolution plays out any differently than crypto? I feel like this plays out a little bit more responsibly than crypto but not any more different.

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Misha:

It depends. If you and I do our jobs, I think it can play out a lot more responsibly. I mean time will tell as we pontificate about what this future free market globalized consumer financial world could look like. It's not clear to me that it has to go through a decentralized crypto blockchain based approach. I think it might, and I think there are certain factors that make that Web3 world more compelling than the Web2 world, but I think there are also a lot of factors that make it less compelling, particularly around regulatory familiarity and comfort around some of these concepts.

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Sankaet Pathak:

(22:15) I mean I think what's not to distract from the topic at hand, but what's making crypto a little harder and more noisy is you have L1 tokens, you have commodity tokens, and you have stable coins all commingled and coexisting into one ecosystem where it's hard to differentiate intellectually what should the consumer be buying. And if we ended up at a place where commodities were regulated like commodities, L1 tokens were regulated like a stock, (22:30) and the first real use case of blockchain that could scale with stablecoin with publicly known reserves, then that's not that bad. That gives consumers a feature that they don't have today, which is to your point, borrowing your words of when you physically migrate, you can also physically hold the cash at hand in that country. When you digitally migrate, you're unable to do so. You're unable to self-custody. But stablecoin provides a really good feature and capability for consumers, which is self-custody, but it's very noisy with everything else that's surrounding it.

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Misha:

Right. Yeah, I mean I think there's also open question of how important is being able to hold the physical currency in the longer term. I don't know. I think that eventually goes away in substantially all use cases, including in developing markets where that's certainly taking place., but I think the hesitance... I think there's a faster path to scale in a non-stablecoin world than there is in a stablecoin world.

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Sankaet Pathak:

I agree.

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Misha:

Because of some of the regulatory friction.

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Sankaet Pathak:

Yeah. Well, let's take the second piece, which is identity, KYC, fraud. I personally have an opinion as to how Nova Credit could help there as well, but where do you think we are? What's missing that was the second big thing that you said that's really needed to be able to move the ball here?

Misha:

Yeah, so I think the conceptual question here is maybe I'd break it into two pieces. As a lender, as the person who is putting dollars at risk, how do you know with confidence that the person that you're lending to in fact is the person that they say they are, in fact is the person whose credit record you're looking at? And again, unpack that one a little bit. Second piece of that is how do you satisfy local market regulations around KYC AML for someone that does not have US identity? And so depending on a bank's underlying customer identification requirements may or may not be permissible as a customer. So I think the first question of how do you get confident with identity matching? A lot of great solutions out there in the identity verification space.

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A lot of biometric players, a lot of passport scanning players, players who you tap into third party databases around the world. We do some of that as well. I think where we currently differentiate is not only can we help somebody prove that they have a valid record, valid and current record in a foreign bureau. So, if we continue with the Mexico example, if you tell me someone's identity, I can go and confirm that that identity is in fact real in both Mexican credit bureaus. We work with both of them. We can then go a step further and ensure that that consumer satisfactorily responds to some authentication protocol. And so that takes different forms around the world. Sometimes that's a one-time password, sometimes that's knowledge-based authentication. So, similar to what you'll see in creating a Credit Karma account or logging into NerdWallet. Other times, it is high card cardinality matching, which is just the local standard for how they authenticate because you need enough fields that are long strings to be able to pull it together. (25:38)

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But I think that that problem is becoming increasingly solved and across the various solutions you can cobble together something with enough coverage and enough confidence, and we can unpack those a little bit more. I think on the US regulatory side, that one's harder right now. I think that one takes a little bit more time. I think there will be some early movers in banks who get comfortable with it. But from a US regulatory perspective, as I understand it, and I'll caveat I'm not a lawyer, you should consult with the right legal counsel on all of this, but as I understand a lot of the rules and regulations around KYC AML, there's nothing in US law that requires you to have a US address. (27:35)

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Sankaet Pathak:

No, it doesn't.

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Misha:

You need to collect or verify name, date of birth, address and unique identifier and the address doesn't specify it must be a US address, but many US financial institutions decide to interpret it as a US address. And so, it's precisely in that compliance judgment of interpretation where the regulatory puzzle sits.

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Sankaet Pathak:

Yeah. Which I think is also a feature not a flaw because there's a high level of scrutiny within the US regulatory environment which yields itself to a better product at the end of the day for consumers in my opinion.

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Misha:

Totally.

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Sankaet Pathak:

(28:15) So KYC, identity, credit and writing, they're getting closer to being solved problems with various pieces, database, 2FA authentication, which I think is quite unique on the KYC side and I think could arguably be one of the more stronger ways to verify a customer and especially the ownership of the identity for the customer. What about financial fraud, credit underwriting fraud, or just to your point, let's take two pieces. One is just generalizing fraud globally. The second big piece is which you said external factors dictating delinquencies, so foreign exchange being the primary contributing factor to that. What do you think about those? Where do you think those pieces are today, this is what's needed? (29:08)

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Misha:

I think there are some great companies out there. I'll give a shout-out to SentiLink and Naftali. I think they do some incredible work in the fraud space here in the US climate. Unfortunately, they're not everywhere in the world yet. We hope that they go everywhere. It can help fight fraud all over the world. But I think solutions like that will continue to form around the world, which will help create additional fraud protection. I think tools like 2FA, I think further help combat fraud. I think tools like open banking also further help combat fraud, whereas part of your credit underwriting flow, we can connect into your bank account the same way that we can link into a Plaid or a Finicity and some of their competitors around the world. I think that continues to create greater confidence into the identity match and the custody of an account as a proxy for someone's credit profile. (36:05)

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But I think the fraud problem is close there or close and I think it's a country-by-country question. The credit bureau problem, I'd say we've solved it in the countries that we are operating in. We're not all over the world yet. We've got more work to do. There are some obvious markets where a solution like ours would be so valuable or a solution what we could create. Markets that are going through hyperinflation are obvious areas where a solution like this is so needed, like a Venezuela. But there is no credit bureau there or there was, but it was I believe either divested or shut down. I believe it was by Experian a few years back. Foreign exchange I think is a tricky one and I've spent some time with some of my former colleagues from Goldman thinking through this one on some of those FX desks.

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But I think there's a willingness from the big trading houses to create facilities that can create this, that can solve this problem. But I haven't seen anyone really do it yet. And there are a variety of different approaches and some of the remittance companies have done a good job of chipping away at pieces of this puzzle around how you remove some of the friction of the exchange.

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(31:32) But from the perspective of a lender, let's just focus on that for a second, if I want to lend a hundred million dollars’ worth of consumer loans into Mexican consumers, let's say, or Canadian consumers or whoever it is, I'm going to want to hedge the volatility of the currency mismatch. And so, there are facilities that do this at a corporate level, I think foreign exchange is solved at a corporate level. It hasn't been solved at a consumer level, but when consumer risk is aggregated, it's at a scale that is worthy of being solved for the big trading providers. So, I think this is one of these problems where the industry is ready to solve it, but I haven't seen anyone yet actually take on the challenge of cracking it.

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Sankaet Pathak:

Yeah, my hunch is that version one of global credit is provided to people who are either highly trusted or highly verifiable or have high net worth or in some form or fashion are already divested and hold USD holdings. A good example of this is a high net-worth Brazilian individual already having a bank account or broker dealer account in the US and holds stock or holds cash, and now a margin is provided to them in form of a credit card that arguably is more fancy looking than AMEX and they find it to be very useful because now they have a USD spend card versus a local card with higher tax.

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Then I suspect to your point, there is a big opportunity for somebody to be able to create API-based FX hedging platform that's very straightforward to use. You can plug into it, you can arbitrage, you can do some currency hedging, and as the initial version of global credit, which are for people who are a little bit more wealthy, starts taking shape, I think that opens up the startup ecosystem for somebody to build a product like that on top of Goldman, on top of Forex, whichever platform you want to use and make it really easy for everyone to use.

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Misha:

(33:55) I think that's right. I think there's a startup idea in there for someone to go out and crack. I don't think it's going to be us on the FX side, but I think the broader point you made here I think is spot on, which is that global credit already exists in a way. There are many people around the world who have the ability to do this. Maybe I'll call out a couple pockets that we see it already. One is the ultra-high net worth mortgage, right? So, if you are a high net worth, ultra-high net worth, you have an account with let's say one of the big London banks, you live in Mexico, it doesn't really matter. They will figure out a way to underwrite you and provide you a mortgage if you are an important client to them.

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And that's because they have high confidence in your identity, they have high confidence in your underlying ability to pay and then you are ultimately a high LTV customer for them in aggregate, and so they want to continue to retain, keep you happy. So that's already happening. I think we're seeing another example of this, which is people living in let's say the United States or in the UK who maybe are from India originally have family in India and they're going to borrow in the US and the UK and use those funds to effectively purchase a home. So, it's basically like a mortgage, even though it's not directly tied to a property in India. And they have full right to do that. And the cost of capital advantage is so significant that it's worthwhile so long as your income is the same as the currency of your liability.

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Sankaet Pathak:

I think this makes total sense. And to your point, and this is my general argument around global cash and global credit, there are subsections of the population who are already living in that reality. It's just not accessible to the masses easily. (36:08)

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Misha:

The other long-term view on the FX point is that non-core currencies are disappearing. And it's like if you fast forward a hundred years, how many currencies are left? We would think that the US dollar is still around. We'd probably think Japanese yen, Chinese yuan, but it's not clear to me that... I won't pick on the Swiss. I guess they have an argument just to defend their currency forever. It's not clear to me that every currency that is out there today is going to continue to exist. And I think more and more countries will start to peg and connect into one of the big major ones. And when that is the truth, then there is no currency mismatch because then your income and your liabilities are the same. It's in the same denomination.

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Sankaet Pathak:

However, I do think in the medium term where this problem is quite big, and I think it's going to be 50 to a hundred years before that really, really transpires, I think there's a total call to action first startup that builds a global clearing house that makes it super easy to settle and trade in almost any currency. We have so many customers that on constant basis ask for can we decide to ad hoc settle a transaction in rails versus in dollar or pesos versus in dollar. And what's hard to do today is you don't have this ubiquitous, easy to use clearinghouse just sitting in the middle that you can say, yeah, we're just going to plug into this. We're going to have all the settlement accounts and different currencies here, get some kind of protection between trade and fluctuations of currency and then just clearly process payments or lend or transfer money in and out of the ecosystem and have it just work. (38:09)

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Misha:

Yeah. Yeah, I'd love to see that. I mean that would help accelerate this whole point. I mean, we're fascinated with this problem. We view it as an unstoppable force in a way if you believe. If you are pro-consumer in your thinking, if you are a more free market in your thinking, some of these historical reasons for why this hasn't existed, that's going to increasingly become inertia based thinking and it's really a matter of time. But I really think the longest pole in the tent here is the regulatory comfort. So, I think there are certain pockets where it's faster to create this in the small business space rather than in the consumer space. And then I think there are certain corridors in certain countries that are going to be more willing to do this than others.

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Sankaet Pathak:

(39:00) So let's nip at that for a second. I have two examples that I feel like there is a desire to solve this problem faster in some regions and not as fast in other regions. So, let's even go beyond inflation. Let's take Ukraine and Sri Lanka where I would argue that this is probably not the top of mind for a regulator given everything else that's going on. And I consider that as a red-hot scenario, which is like how can you help people divest out of a very uncertain turbulent time. And then the second one comes as inflation, which is to your point, Venezuela, Argentina, Brazil and so on. What are your thoughts on this? How is a Sri Lankan regulator or a Ukrainian regulator going to perceive this given what's happening locally?

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Misha:

(39:53) I have a lot of thoughts. I mean the Ukraine problem we've spent a lot of time thinking about acting on and it's a war that's very near and dear in my heart. Much of my family is from Ukraine. And when this first transpired, when the war first broke out, we reached out to every contact we had, the World Bank, the IFC, the bureaus to try to get in front of the bureaus in Ukraine. And it's the first refugee crisis where the local credit bureau infrastructure is robust, never happened before. You look at the Syrian refugee crisis, the Afghan refugee crisis, the local credit bureau coverage was in the order of one to 4%. Ukraine has coverage roughly between 85 and into the low nineties depending on how you think about the bureaus there. And so, it's like, oh my god, this is an opportunity where cross-border credit portability could be a game changer, could be lifesaving. (41:00)

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Yeah. And I think when you think about these red hot, the easier language situations, the first few weeks or months, the challenge was really about can you actually get in touch with the individuals who are the decision makers, who have the resources to invest in a new partner enablement integration? And eventually we figured that out. We do have a partnership in Ukraine with one of the leading bureaus, but then the next part of the puzzle becomes, well who's going to trust this information? Who's really going to be willing to use this information to take risk? And we found that that has been more challenging. I mean obviously our core market is the US, the Ukrainian migrant flows have been fairly muted into the United States. There was a period where I believe Biden announced that the US would accept somewhere around 200,000. I'm not sure where we are towards that number, but places like Poland saw several million people arrive in the span of a few weeks.

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So that's like years of migrant flow in the span of a few weeks. And there we don't have business in Poland, but that's an area where we have seen success of people being able to open accounts using some of this identity information. I haven't heard proof points on the credit side, but everything we're talking about here, there could have been a better way if global credit already existed, you could see a world where you would believe that Ukrainian credit bureau data could be used to open up a US dollar account and unlock a unsecured line. But I think one of the challenges with these red-hot scenarios is that the underlying ability to pay of the consumer is in question. And so, when a consumer is going through so much economic change and social change, historical behavior, it's still an indicator, but in many ways, it's overpowered by what's going to happen to this person's ability to generate an income and repay the obligations that they're taking on. (43:19)

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Sankaet Pathak:

Is that primarily the reason why you think there has been a reduced receptivity to pretty much this credit portability in these red-hot situations because it's just a very uncertain environment and you don't really know around credit what would transpire? But that should not happen around deposits.

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Misha:

The deposits, that's more an identity question in a KYC question than it is an ability to repay question. My belief and our philosophy on this stuff is credit bureau data is typically viewed as willingness to repay. It's a character lens of does an individual who used to always repay, do we believe that no matter the circumstances, they're going to do everything in their power to continue to repay? And I don't think we've seen evidence to the contrary on that. I think that holds true. But the ability to pay question is a different question.

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You can have a perfect assessment of someone's character, but if they legitimately can no longer be employed because they've relocated in the new economies, unwilling to employ them for whatever reason, or there are just too many people that then it's hard to imagine that they will be able to repay. And so, then it's a question of which economies can successfully absorb populations like this and employ them. And so, I think that the US environment will be able to absorb 200,000 people. We absorb two to three million people every year. It's not that significant of an increase. But in a scenario like Poland, they received several years of migration in the span of a few weeks, and I think that's a very different environment.

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Sankaet Pathak:

Is there a call to action there? Is there some capability that's missing that makes that whole experience much more easier for people outside of just global cash and global credit?

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Misha:

(45:15) I think there's a call to action around just financial literacy for this segment of understanding their options. So, when we were doing our homework on the problem space and getting involved in a number of industry bodies trying to help do what they can to support the situation, there are so many questions that were coming from the field of what can I do with my local country currency to exchange into euros? How do I do it? And so, I think there's always an opportunity to create more content and frankly a curriculum on what do you do as a migrant as you move from one country to another and what services are out there to support you. We've put a bit of thought into that, but by no means have we solved that problem.

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Sankaet Pathak:

It's like NerdWallet, but more global.

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Misha:

That's right.

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Sankaet Pathak:

In nature. Yeah. I have a question that I haven't asked you ever before, but I was thinking about this a little bit more recently. (46:12) Thinking about Twitter and Facebook and these social media platforms that are trying to create a trusted safe space to just converse and interact, and we've seen so much of a debate around bots and spam accounts and fake and forged accounts. Looking through this whole credit yet identity verification workflow that you showed me the other day where you have KBAs and 2FA and you can just onboard customers a much more meaningful and a sophisticated way, do you think there's a place for the technology that you are building and some of the other people are building around social media? Because I would argue social media, it's still digital migration, you're going in this foreign land which is not physical, but you inhabit this place and you're having conversations that in some cases have real consequences and today there's no real identity infrastructure that is scalable that exists there.

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Misha:

Yeah, I think there's a lot to unpack there. I mean, we've seen the big social media giants take big steps in this direction. So obviously everything to do with the Apple facial recognition is one key step in that direction. Being able to do Apple Pay is another step. Facebook Meta had this big investment in Novi, which was their big foray into, you could even say, global credit in a way, maybe with more of a merchant lens than a consumer lens. But most of the merchants are consumers. And so I think it's spot on that there is a need there to harden their confidence around identity. And the next step of that is harden the confidence in not only the identity but the financial history of that consumer because that can unlock a whole suite of additional products and services.

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To be honest, we haven't spent a lot of cycles on the opportunity there. I think as more of the social media giants do take steps into financial services and consumer finance, those opportunities will grow. But I think they're already under enough regulatory pressure that I don't see them being the ones to really break through and lead the charge in globalizing consumer finance. I think the way that they would attack it is much more country by country basis, not through corridors, but by build a product in market A and then do everything and redo it in product B as opposed to the product and country is available to the world. (49:37)

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Sankaet Pathak:

Okay. Yeah, I think that's fair. And I think the funny thing is I think Airbnb's the only one who I think has done a good job of identity verification and taking that very seriously to build a community because you're going and living in somebody's house, you need to know a little bit about them in the other way around. And I do wonder if that is also needed on a platform like Twitter because there is tons of public trust on certain accounts and those number of accounts are only growing, and I'm not sure if current mechanisms do a good enough of a job of verifying someone's identity.

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Misha:

Right. Yeah. Yeah, I'm not very familiar with what it takes to get a blue check mark, but I could see ways where you could automate pieces of that workflow if the user goes through capabilities, something similar to what we have or what other providers out there have around identity.

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Sankaet Pathak:

Yeah, I think that makes sense. Anything else you think that we didn't cover? I think we had this long condensation.

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Misha:

I mean, you used the word call to action a few times and I'd love to ring that bell as well and say we'd love to see more companies out there who are working on problems around global credit. (51:04) I think there's so much opportunity and blue ocean there to stitch together the world's consumer lending market, and I think that building on the backs of the hard work that we and you and other companies have done over the years, I think the problem is becoming ever more solvable. And I think we've stitched together credit reporting. Many companies have stitched together identity. I think we've stitched together components of identity considering if you think about a credit file, the identity is just the header, it's the top of the file, and there's so much more rich information beyond that. I think we're probably maybe not a stones throw away, but I think it's getting closer and I think that some of the cross-border credit card companies that are out there have done great work and we'd love to see more of them form and across not only cards, but other product lines as well.

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There are players in the mortgage space, there are some players starting to emerge in the small business space. And so, if there's anyone out there listening that's interested in thinking through this more, I would be happy to talk through it and share a little bit more about how we've been thinking about this problem.

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Sankaet Pathak:

I cannot agree more. I think we're very close, but there are still capabilities like the clearing house, FinTechs that are just generally approaching this problem, but I think we're technically getting super close to be able to solve this for everybody.

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Misha:

Love it.

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Sankaet Pathak:

Awesome. Misha, thank you so much for joining me. It was a really good conversation. I enjoyed having you here.

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Misha:

Thanks for having me on. Excited to see where this goes. We should do this again in a couple years and see how much closer we are to the holy grail.

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Sankaet Pathak:

Yeah, that would be awesome. Thank you. To our listeners, thanks for joining as well. If you want to hear this episode or more, you can always go to synapsefi.com/underthehood. Thank you for joining. Bye.

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ABOUT NOVA CREDIT

Nova Credit is a consumer-permissioned credit bureau with two products that help businesses make more fair and informed decisions on millions of ‘thin file’, no credit history, or new-to-country applicants. The Credit Passport® unlocks cross-border credit bureau data to help businesses underwrite new-to-country newcomer populations. The Cash Atlas™ provides greater insight into the cash flows of any applicant, including verifying their income with greater precision than alternatives. Businesses use these products to approve more applicants without taking on more risk, and consumers are empowered to put their best foot forward in their applications. The company’s differentiated data sources and proprietary analytics are used by leading organizations like American Express, Verizon, HSBC, SoFi, and Yardi. Nova Credit is backed by investors including Kleiner Perkins, General Catalyst, Index Ventures, and Canapi as well as executives from Goldman Sachs, JPMorgan, and Citi. Learn more at www.novacredit.com or reach out to connect@novacredit.com.