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Welcome to our first conversation with an innovator in small business lending \\u2013 my guest is Sam Hodges, Co-founder and U.S. Managing Director of Funding Circle.

Funding Circle was founded in 2012 and is the world\\u2019s leading marketplace lender that\\u2019s exclusively focused on small businesses. It has made more than $2.5 billion in loans to 20,000 businesses in the U.S., Germany, Spain, the Netherlands and the UK (where it is based). It customers borrow directly from a wide range of investors, including more than 50,000 people, the UK Government, and divers entities like local councils, a university and various financial organizations.

Funding Circle was created because the founders were small business owners themselves and learned how hard it is to access finance, even for a successful business. Even when a loan was approved, they found the process difficult, or the terms unattractive. Sometimes they even felt misled. After opening their 96th loan rejection letter, they decided this was a systemic failure \\u2013 that the traditional bank loan system was broken \\u2013 and they set out to build a new solution. The financial crisis created fertile ground for them, as so many business suddenly had trouble accessing capital (the number of small businesses has dropped every year for the past 8-10 years). And their timing fit with the emergence of marketplace lending as a new model.

As Funding Circle\\u2019s Co\\u2013Founder and U.S. Managing Director, Sam oversees the company\\u2019s overall strategic direction and its day\\u2013to\\u2013day operation in the U.S. He was previously Vice President of Business Development at SecondMarket, the leading marketplace for alternative investments, where he was responsible for corporate and business development and the company\\u2019s geographic expansion efforts. Sam was also part of the investment team at Pequot Capital, an $8 billion global fund manager, covering investments in financial technology and information services. He started \\xa0his career as a strategy consultant at Katzenbach Partners, advising financial services and technology companies. He currently serves on the boards of two private companies. He received his MBA and MS from Stanford University and graduated magna cum laude from Brown University.

Sam points to three key Funding Circle innovations:

• One is delivering a superior borrower experience. They can on-board and evaluate customers sometimes in minutes, or a few days, for situations where a bank might need 30 man-hours to reach a decision.
• Second, they\\u2019ve re-architected how they do credit evaluation. Sam says it\\u2019s not a silver bullet, but they\\u2019ve have created their own rigorous data-driven approach to understanding risk, and they\\u2019re using new data, in new ways, to serve more borrowers.
• And third, he argues that the marketplace model can be more scalable and profitable than the traditional bank approach, enabling them to grow a global business.

In our conversation, Sam expresses his continued confidence in the marketplace model. He discusses Funding Circle\\u2019s risk analytics (he says they hire world class risk officers from world-class institutions). He explains the role of alternative data in driving more sound and inclusive lending.

I was especially interested in how Sam contrasts the U.S. regulatory model with the U.K.\\u2019s efforts, especially on P2P lending. He thinks the fragmented American structure makes innovation here difficult. He also has suggestions for regulatory innovation, including sandboxes and a graduated scale of coverage that would allow small innovators to get up and running more easily. \\xa0He emphasizes the need for interagency coordination and consistency. He says transparency needs to undergird the whole industry, and that requires smart, sound regulation that everyone understands.\\xa0(To listen to our previous episode about the \\u201cRegulatory Sandbox\\u201d with Nitish Pandey of BMO, click here.)

Sam welcomes smart customer protection regulation \\u2013 he discusses his involvement in creating the Small Business Borrower\\u2019s Bill of Rights we discussed in an earlier episode\\xa0with Brian Graham of BancAlliance.\\xa0 See also this Harvard research paper\\xa0by former Small Business Administration head Karen Mills on small business lending.

I hear increasing discussion about more regulation of small business lending. It\\u2019s partly because the online lenders are transforming the market, and partly because the \\u201c1099 economy\\u201d is producing more little businesses that arguably are functionally-equivalent to consumer borrowers.\\xa0 The sector is covered by some of the federal laws on consumer protection, but not by most of them. \\xa0My own view is that regulation will probably need to come, but that we should NOT transplant the existing consumer protection rules into it without first updating them for the digital age. Speaking as someone who helped develop some of these rules, I will say they have a mixed record, at best, of protecting consumers. And complying with them costs a fortune.\\xa0If we\\u2019re going to bring new regulation into the small business sector, let\\u2019s use the chance to take a fresh look, and apply some RegTech thinking.

Other notes:

Newsletter:

I also want to share an announcement --\\xa0this month we\\u2019re launching a newsletter. It will be pithy and punchy and useful, highlighting the most interesting things that have happened, the most exciting things coming up. It will be a way to share some of the fascinating things I\\u2019ve been getting involved with. One example is that,\\xa0this summer,\\xa0I joined the Netherlands\\u2019 Queen Maxima (who leads the UN\\u2019s work on global financial inclusion) on her trip to Silicon Valley. Another is that I just returned from a week in Fiji at the global policy forum of the Alliance for Financial Inclusion, which represents the financial regulators of more than 90 countries in the developing world.\\xa0I\\u2019m also working on ideas for promoting regulatory sandboxes in the United States. And in November,\\xa0I\\u2019ll be speaking in Singapore at Asia\\u2019s first RegTech conference. And I\\u2019m doing a lot of work on RegTech. In fact, in Fiji I heard a new term \\u2013 \\u201cSuperTech.\\u201d\\xa0It\\u2019s a branch of RegTech that means technology-driven solutions for bank supervision.

The newsletter will share some of the intriguing things that are going on, outside our poccasts.

Don\\u2019t forget:

Remember to send in your \\u201cbuck a show\\u201d to keep the podcasts coming

Remember to rate us on ITunes.\\xa0

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Coming guests:

And look for some amazing guests coming up. We have none other than the leaders of Varo, Ripple, LendUp, and Loot (from London)!

We have two amazing, mold-breaking innovators from the developing world \\u2013 eCurrency and OneDollarCellPhone, as well as the head of AFI, the Alliance for Financial Inclusion.

And back in the US, we\\u2019ll have the community bank perspective on innovation.

But first, next up, we have Harvard professor and behavioral economics expert, Brigitte Madrian.

So, enjoy my conversation with Funding Circle\\u2019s Sam Hodges \\u2026 and come back soon!