Ally Financial Inc. (ALLY) Earnings Call Transcript & Summary

Hello. Thanks for joining us. This is Arren Cyganovich. I am the Consumer Finance Analyst. We are at Citi's Financial Technology Conference, and we are very pleased to have with us Hans Zandhuis from Ally Lending, and we look forward to hearing more about this kind of growing fast business within Ally and some of the strategy. So thanks for joining us, Hans.

Pleasure to be here, Arren.

Just to start off, maybe you could just talk a little bit about your background on Ally Lending. It's a digitally based point-of-sale business. You founded it and now you run it in Ally, that acquired the company in 2019. You just talk to us about what led you to launch this business and how the combination with Ally in all digital direct bank has enhanced your capabilities.

Yes, happy to, Arren. I'll probably hit on a couple of things. One is really the team that we had. And then two, what was -- some background, a little bit on HCS, the predecessor to Ally Lending and then certainly what's happened with Ally. So really, I've had 30-plus years in finance and consumer lending, everything from running strategy and product for BofA Mortgage to running debit for BofA and then did a start-up that was an ACH-based engine payments engine, which we sold prior to starting HCS. And really what we saw when we were -- after selling the previous company, Moneta, we really started looking at the market, and I kind of partnered with a number of venture capital firms, and we were helping tech companies become fintech companies. So how do we get in there, help them kind of really start migrating, adding things like payments. And when we looked at a progression, okay, you can add payments. Payments is generally pretty easy to add. But then how would you also then start adding things like lending. And what happened was a lot of the customers that we were helping were in the healthcare space. And really, what we saw in healthcare was obviously this growing kind of burden on the consumer, growing responsibility on the consumer, higher deductibles across the board, everybody is well aware of, kind of less responsibility by your employers and by the insurance companies. And so we saw a growing area and really what we saw was a minimal amount of competition in that space, in kind of the healthcare lending space. And so we thought it was just a great space to jump into. Again, we all had -- of the 3 of us, certainly, one of them ran all of card analytics for small business and consumer for BofA. The other one ran ops and marketing ops for MBNA and BofA combined and then myself. So it was a good combination of kind of where we started. And we went after the space. We were building the platform in 2014, went live in 2015, grew the space from 0, which we funded our first loans ourselves and then grew it to almost $300 million when we were looking for balance sheet partners and Ally kind of made the strategic move. And it's been nothing but amazing since that acquisition. I think we -- obviously, we've continued to grow. In fact, we've accelerated our growth. And even when we were a stand-alone, unlike a lot of the fintech platforms that were out there, our belief was you always had to own a piece of the balance sheet. So we weren't a believer of just take the WIG and you're only a technology transaction, we believed in the value of the loans. And so of the $300 million, we had $140 million balance sheet that we had built. And obviously, when we made the -- when the acquisition came through, a number of things really popped out. I think one was clearly a strong alignment from culture I think we knew and trust. I think we knew a lot of the executives within Ally from previous employers, BofA or Chase and others. And so we had a lot of trust there. So I'd say trust. We would obviously -- culture. I think they understand the digital environment really well. So there was a lot of kind of overlap there. And then finally, this whole B2B2C. Today, we started as a B2B2C in Ally with all of the auto lending is B2B2C. And so they really understood the importance of key partnerships between us and the consumer and how do you leverage that. And when you add kind of all of that up, it just made -- it made a lot of sense. And obviously, the lower cost of capital didn't hurt.

That's a really great thought. You mentioned culture. You know on culture there is something that JB really talks about a lot in the Ally culture. Can you talk about the significance of the culture at Ally and how it plays into the execution of Ally Lending?

Yes. I mean the do-it-right culture really fit very well with how we stood prior and certainly going forward. We are only as good as our people. And if our people are out in -- front facing in front of both consumers and our providers, if they don't have that kind of mentality of how to do it right, how to take care of consumers in a way that we think is above and beyond what the market drives. I think that's really what creates success. And so when we saw that we couldn't -- today, obviously, you have things like the 0 overdraft that Ally does. We came out with a product that was a true 0 product, a promotional true -- no-interest 0% product. We could never have done that as a stand-alone fintech platform. Ally gave us the ability to kind of come out with an industry-leading product that really has helped kind of, in certain markets, we -- it's not across the board, but it's in all of the markets that we have promos. And we think those are the kind of things that being a part of an organization like Ally allows us to do, which we couldn't have afforded.

Got it. And just in terms of differentiating your business, nearly every bank, traditional and fintech have amped up the focus on digital and many players have added integrated payment capabilities, including BNPL and point of sale. How does Ally Lending stand out in a fairly crowded space these days?

Yes. I mean, I think it's probably a number of fronts, kind of which markets you focus and then what capabilities you're building. When I think about it, we are a B2B2C player, but it's how do we always keep our consumers in mind. And when you look at the capabilities that we're building, it's all around improving that experience to help that we fit into the workflow of our providers and our merchants and how do we create kind of an industry-leading B2B experience that goes in the workflow and then in the end, provides a better experience for the consumers because they're in a simple, seamless workflow that's within the provider. And we think that is our kind of approach to the market as opposed to creating something that is, hey, here's our app, use it, it may or may not flow into your workflow, but we believe if you really take the time to kind of make that a seamless integration, spending the money on micro services, a lot of -- where we put our monies around APIs. So that making this very simple to kind of integrate into our providers is probably first and foremost. I would say that -- and as we -- between that API build clearly, the brand of Ally kind of comes out loud and clear. And then -- and when things like do it right, offer an improved kind of the customer service and all of our customer care, those 3 things generally drive the value prop for us to win. And we've been out there winning significantly, really driving those 3 points. And I would say that comes across pretty loud and clear in our NPS scores. So we have -- NPS scores with our providers are 70 and greater. So we feel really good about how that gets received in our NPS scores with our consumers are 40 or greater. So we feel really good about that trend. And obviously, we continue to improve those over time. But I would say that, that's kind of bucket #1. When you also look at what markets we're in. Look, most people are playing in the retail space. If you look at the $1.3 trillion space, kind of what I'd say is the total addressable market for us, $600 billion to $650 billion is retail and a lot of mouths to feed in the retail. That's more than big enough to support everyone. I don't believe anyone is going to takeover the world and own the whole space. I think -- so you have that $650 billion space. But then when you look at home improvement, which sits around $300 million, you look at medical, which sits around $200 million. You look at auto servicing, it sits around $100 million. Those are the markets that we're going to play in, first and foremost, and we're moving to retail when we're ready. We think there's great area -- great high probability of success in those markets that really leverages our strengths and kind of deliver products to our consumers that we think are industry-leading.

It's helpful. You touched a little bit on this in that response, but just in terms of the Ally user experience, can you walk us through the merchants and customer experience at Ally Lending and what your priorities are?

Yes. I mean, I would say our -- from a merchant perspective, we have 2,800 merchants today. We're growing at a 45% clip on that when you look at year-over-year. We have roughly 250,000 active consumers today. Over -- about 0.5 million from inception. That's growing at more like the 85%, 90% clip. So we feel really good about the growth that we're delivering, overall, to Ally. I think we have the real opportunity to be a massive engine for new consumers into the Ally engine and you add that into that mix. I think it's a pretty compelling growth engine from a consumer base basis. I would say that -- we will -- I think we will continue to kind of focus on delivering kind of industry-leading products to the consumers through these channels and through our business partners. But to me, that's where we tend to focus day in and day out.

Got it. You're being very helpful in leading into my next question, which is on products. And I wanted to dive a little bit into the product offerings that you have across the point-of-sale verticals. And what do the economics look like? And do you focus on 1 product type? Is it more promo versus a regular way type of financing?

Yes. I think we're traditional where we have 2 major groups. We obviously have our promotional product that's used in certain industries like some healthcare areas, whether that's dental or cosmetic. We also have your more traditional installed products that does go from a 12-month to 120-month. And we feel there -- we generally do risk-based pricing. And we think that, we're looking for ROAs really in the 3% to 5% range, ROEs north of 25%. We will -- I think, overall, we're -- volume matters in these products, but I think what's more important is volume that's profitable. And so we're looking at ramps, probably sitting at 10% across the board. I'm somewhat indifferent to which product consumers choose. I want them to choose what's right for the consumer. So we want to give them choice. If they want a no-interest product, take the no-interest product, pay it within the no-interest period. If they want to pay it over 10 years, if you're getting a $100,000 new roof or windows, then go ahead and do that. But let the consumer provide the options and let the consumer decide what is right for them. And so what else. I think one of the things you mentioned with things like buy now, pay later. Look, I think buy now, pay later is an interesting product. It's been around a long time. I think everyone will probably offer it in the next 12 to 18 months across the board. But it's not risk -- our average ticket is $5,000. Buy now, pay later's average ticket is $200, $225. We're really -- in the markets where we play, it's not really relevant. I think when we move to retail, when that happens, I'm sure we will have it as part of our offering. But I don't -- it's not something that we're actively driving towards because it's just not important to where we're playing today.

Got it. And then in terms of your growth trends, they've been really strong recently, we originated about $200 million in 2019. That compares to about $1 billion to $2 billion in '21 and '22. If we look out 5 to 10 years, how big can this book of business become and what will determine achieving these goals?

Yes. I would say, we would anticipate, this year, when you look at kind of where we were and where -- between that $250 million, $300 million when the acquisition closed in the -- to over $1 billion this year. And really, when you look at the market, and where the bar that I like to set, you look at -- you name the competitor, the competitors that I think matter in my space are growing between $800 million and $1 billion a year. And that's really the direction that I think the business needs to grow year in and year out to be competitive and deliver the kind of growth that we need. As long as it's smart growth. I think if people get out -- people out there start getting stupid in how they price the market, I think we're going to be thoughtful there. But for us, first and foremost, we're delivering long-term value, long-term growth of that value. And I would -- but those really are the targets that I'm sending because our belief is we -- I'm still kind of some of that Jack -- I know Jack Welch as a long time ago, but I was a big Jack Welch fan. And you really want to be top 3. [ Audio Gap ] is critical. There are multiple ways to do that. You can have that kind of a simplified app and kind of go through that app or have a kind of a standing line in that environment or you're integrating kind of where -- which direction we're heading in is, how do you integrated into the workflows of the providers. And I think that, that has real longevity. I believe that it's a stickier product. If you are integrated into the experience and the point-of-sale experience of whether it's a medical provider or home improvement or eventually a retailer, that is sticky, very difficult to rip you out of that process. And so that's really -- I've always believed that's the right way to go. Consumers can be finicky. And so when you're -- the more integrated you are, I think the sticky you're going to be longer term, which I think -- I generally believe that's the direction we're going in. I would also say then is it becomes important to just have choice. I really want -- as you then get to that point and you get to that moment of truth at the point of sale, you want to give consumers whatever choice they're looking for. So whether they want to pay that over a 6-month no-interest or they want to pay that over 120-months. We have to have that full breadth. And I think that's what we will do. And then there are some really interesting things that I think are starting, but I think you're -- I generally believe when you look at the payments, where we are in the payment cycle, I would say we're probably in inning 2, maybe inning 3 of probably a double header user. I think that -- I think we have a long way to go. And when I think of really where the industry is going, even -- I actually had this thought even when I was running debit in my early days at BofA which is it's how do you really get to a point where it's almost like consumers pay and then they can settle however the way they want to settle, down the road. And I think we're going to head that direction over the next 5 to 10 years where it's almost like a settlement account and people and then say, okay, here, I want to pay this with my lending kind of fixed income or fixed term, things of that sort. But I think we're away from there. But I think there are some really interesting things happening within -- with the -- in the kind of the merging of point-of-sale lending and payments. And we're certainly, I think, we're a leading contender in that space, as that migration happens over the next 5 to 10 years.

It's an interesting thought. I have to noodle that one for a bit. The -- maybe you could talk a little bit about the hiring for tech employees right now. There's been so much capital flowing into the fintech space. A lot of folks looking to hire some technology professionals. Are you seeing rising hiring costs or challenges in finding the right employees for your business?

Yes. I mean, I would say it's across the board. I think if anybody is saying there, that hiring people these days is easy. I'd like to see what they're drinking at night. I think it's very difficult. I think even Ally, overall, has seen a 20% increase overall in comp. And I think that's really just going to be consistent. I think we're going to have -- we are seeing incredible wage inflation here and that's across the board. I think even if you have kind of a good currency and cash sitting on hand, it's more the difficulty of finding good people. I think we're tracking that kind of -- I have a -- I'm looking every month at where -- our hiring plans and are we on track. Right now, we're -- I'm within 2%, 3% of what I expected our hiring to be. So I feel good about where we're going. But it is certainly -- there is certainly wage inflation and you just have to make sure that you can compete. And so I would -- I think I would continue to see that, trying to think if there's anything else that I would throw out there on that. I think we're -- I mean, that covers most of it.

Okay. And then this is a question that I think about a lot as we see these fintechs emerging. But do you see any competitive advantages or disadvantages to originating loans and holding them on balance sheet versus the more common fintech model of selling those to other finance providers.

No. In fact, as I mentioned earlier, I think to be a good lender, you have to hold it on your balance sheet and understand the risk you're taking. In fact, I've seen model after model, whether you're in mortgage or whether you're in unsecured or you're in others, that the kind of tech taking the referral fee only model is always great, and everybody thinks it's the best model when the market is hot and growing. And then all of a sudden, as soon as you kind of run into any bumps, and we even saw that last year in 2020. And literally, in under 90 days, we had -- I had competitors out in the market that basically couldn't have weathered the storm, they didn't have enough balance sheet. And in fact, we were opportunistic during those time to pick up teams of people that had capabilities that what we wanted, whether that was in home improvement or that was in things like retail where we were able to kind of pick up teams of people, 10 here, 30 here, 40 there to basically -- because people haven't really put money away for a rainy day. And I generally believe that you have to own the balance sheet. You have to really see what's happening day in and day out. When you start seeing the cracks, you got to react, you got to react to pricing, you got to make sure you're kind of, again, managing that risk and reward. And I think that we -- one of, I think, our strongest attributes as a lending -- and I still think of us as we're a fintech platform that happens to be in a bank. And I think that one of our strongest attributes is our credit risk kind of strategy. And I think that kind of goes hand-in-hand with the balance sheet. I think the securitization market is great and offering great pricing, and I'm happy for all those guys. And as a former fintech player that we had put it to our own balance sheet, we had balance sheet that probably cost us -- originally, cost us 13%. Then we got it down to about 6%. By the time we were done before as Ally acquired us. And then obviously, people are securitizing at much lower rate than that today, but that will change, as always. And I think any group that's out there doing securitization, they absolutely should have portfolio of balance sheet options between securitization, their own balance sheet, some forward flow, but -- because if you don't have that, your, I think, your model is flawed.

I definitely agree with you and probably it will take a next credit event till we actually see how folks figure through that type of model. You noted that your business is primarily B2B2C today, but you sit alongside Ally that has a very large customer base, $9 million at Ally, $2.5 million Ally Bank depositors, how does your business fit in with the broader Ally ecosystem?

Yes. I mean, clearly, it's a great opportunity for us to cross-sell into that group. And again, as we talked about it, to me I still believe in -- and when you make strategic -- that doesn't even include getting things like cross-selling into the Ally customer base. So I feel like all of those things are things yet to come. But we will certainly be leveraging that. That would be -- and again, you add that to -- with Fair Square, us providing kind of installment loans, Fair Square adding cards. It's -- and we become a pretty significant customer engine for the broader Ally that I think will be significant, let alone delivering assets that have very high ROEs and ROAs.

And we touched a little bit, it looks like my lights are going out, on consumer credit, obviously, it's been pristine, the stimulus and unemployment benefits have obviously helped that. What do you see in your book of business? And to what extent do you expect to see some of these behaviors to become permanent or are they temporary?

Yes. It's definitely temporary. We're -- I think we all know that this has kind of been -- kind of goldilocks from a lending perspective. And I would say that we would anticipate that we get to more normalized loss rates here in '22 to early 2023. And that's -- we were already -- even though we're not seeing those, we generally -- I think, especially on a growing portfolio, our portfolio loss rates, we expect to be in around 4% to 5%. And even with that, we're still taking kind of an appropriate approach to seesaw around that and kind of sitting more in the 10% range. So when you look at kind of our general conservative approach to where we think losses are and kind of how we're handling from a GAAP perspective, again, I think it's the right thing to do. And when we generally say kind of where losses will go. We expect losses are going to return to normal. We've -- this business, overall, should be a 6% to 7% loss business on lifetime losses when you look at home improvement, when you look at medical. And when you look at kind of -- even when you kind of throw in retail, the blend for us will be in that range. And we feel very comfortable with that, especially with the yield that we get off of it.

Okay. And then we'll just wrap up with a quick question on regulatory. How would you characterize the regulatory environment right now? And fintechs have somewhat benefited from sort of regulatory arbitrage. But now you're part of a large and growing bank. Do you notice any particular challenges operating within the bank?

Well, so I have been on both sides of the coin. And I would say it is certainly not an even playing field. And I'm looking forward to actually when you look at all of the kind of acquisitions that have taken place in the point-of-sale space over the last, call it, 12 to 18 months. What we've gone through in the last 24 months, we're through it, and I feel really good about it. And frankly, as being a former banker, we kind of ran our shop cleanly. In fact, we had a lot of our industrial charter banks coming to us saying, "hey, how did you guys handle this, that's handled right?" And that's only kind of continued as we've integrated into Ally. So I think when you look at a Harvard business case study of what kind of acquisitions and -- acquisitions that gone well. I think the alignment of Ally and HCS was kind of spot on in terms of how we approach credit, how we approached regulatory and compliance. It's going to be interesting to see how these other acquisitions go because I think a lot of -- I don't believe there was a lot of that expertise around the table. And I think people are going to be -- have their hands full, trying to make a lot of those processes a little more compliant because they are now going to be under the scrutiny. So I think a lot of our competition is going to probably have their heads down for the next, call it, 18 to 36 months as they try to become assimilated. And we didn't really have that issue because of -- we had a lot of ex bankers, and they -- not only are we -- do we know how to run a tech platform, but we know how to run the fin side. And it's the combination of those 2. And really, I don't think it could have gone better. And I expect the same thing, quite frankly, with the Fair Square work. Because I think they get it as well. They're all ex bankers and you've got -- you need that to be able to assume the bank compliance stuff, and there's -- and you've got to have the expertise and we have that. And I think it's going to be interesting to watch on across the market.

Well, thanks so much for joining.