How two ex-consultants plan to revolutionise UK consumer credit

As financial services consultants at EY, Gerald Chappell and Michelle He noticed a weak spot shared by some of the world’s biggest banks: affordable personal loans.

Up against ageing data-sharing systems, bureaucratic decision-making and a lack of business motivation to enter a market easily written off as “risky”, they set out to provide finance to millions of underserved consumers.

The result was Abound, a start-up the duo founded in February 2020 to shake up the messy and archaic world of credit technology.

“We think traditional credit scores are an incredibly noisy way of understanding people’s credit and affordability, and effectively exclude people from the fair finance they should get,” Chappell, who later became a partner at McKinsey and is now Abound’s chief executive, tells City AM.

Chief operating officer He adds that strict regulatory demands, tech barriers and cumbersome management structures make it “very risky” for banks to break into underserved segments of consumer credit. Instead, she says they are “pretty comfortable serving a group of prime customers, which are very low risk and good payers”.

She experienced the pitfalls first hand upon arriving in the UK from Singapore 14 years ago, when every bank she approached rejected her for a £5,000 loan to make a deposit on an apartment. Despite having a job and strong educational background, she was let down by credit decisioning systems that would only evaluate her limited financial history in Britain.

“The traditional approach excludes so many people having access to affordable loans,” He argues.

‘Massive market’

Abound uses open banking technology and artificial intelligence to access and interpret a broad church of transaction data, which means it can give customers access to lower interest rates they would not otherwise qualify for. It calls this segment “hidden prime” or “near prime”.

“It’s an absolutely massive market,” Chappell says, comprising between 10m and 15m consumers in the UK.

Chappell argues the expected annualised default rate of Abound’s loan book, if it were based on traditional credit scores, would be around 12 per cent – a risky position for most lenders. However, he says the actual rate is roughly four per cent, reflecting the shortcomings of dominant credit models. He adds that Abound’s default rate is around 70 per cent lower than its competitors.

“A lot of people talk about the problem being access to credit in the UK. That’s not really the problem from my perspective – the problem is access to the right price credit,” Chappell says. “A large segment of this population should be getting very close to prime rates.

“That has a huge economic consumption effect as well because it means you are putting more demand into the economy, so it improves overall GDP growth.”

The founders sharply criticise what they call the “high-cost, short-term credit” offered by now-collapsed payday lenders like Wonga, QuickQuid and Amigo Loans, which boomed in popularity during the 2010s. There are still lenders charging 1,000 per cent annual interest rates, Chappell says.

Abound’s minimum lending term is 12 months, with an average customer borrowing money for around three years.

The firm has so far lent more than £500m, helped by bumper investment deals. In May, it secured one of the UK’s biggest fintech fundraises this year with a package worth up to £800m, made up of debt provided by Wall Street giant Citigroup and equity from existing investors including Silicon Valley-based GSR Ventures.

Abound’s staff numbers have also grown quickly, with the firm roughly doubling its headcount this year to nearly 100 and moving to a bigger London office in July.

As well as lending from its own balance sheet, Abound sells its credit decisioning software to other financial providers for them to embed in their own systems.

The platform, called Render, has been trained on Abound’s own lending and generates fee income that is not sensitive to falling interest rates. The founders expect banks to line up for its offering after years spent trying to independently overhaul their systems with little to show for it.

“Five years from now, a lot of banks will be asking to use this kind of solution,” He says.

Chappell adds that while the tech arm of the company only represents around 15 per cent of its total revenue, it is growing fast and should make up 30 per cent by the end of 2025.

Europe and beyond

Chappell and He now feel ready to take Abound into new areas. Among them, the firm has its sights set on lending to small and medium-sized businesses, building on its existing base of “sole traders”.

“That segment is really underserved at the moment,” Chappell says. “A lot of banks are uncomfortable with it because they don’t have a regular payslip, they often co-mingle personal and business expenditure.”

Abound will also make its first test loans in a large European country in the coming weeks ahead of formally launching in its first overseas market early next year.

Chappell further highlights a huge opportunity in the US market. “But the risks and the costs of doing it are massive as well,” he says. “And I think the only way to really make that work is to have very good funding in place for it and have a dedicated management team.”

The founders say a US launch is not on the cards for at least another year, adding that it would likely require one or both of them to move to the country.

They are approaching international expansion “one market at a time”, being careful to avoid the troubles faced by other British fintechs that rushed into new geographies only to withdraw soon afterwards.

This ‘growth at all costs’ mentality dominated Europe’s fintech landscape in 2021, when ultralow interest rates gave venture capitalists confidence to pour money into lossmaking start-ups promising to revolutionise financial technology.

Abound is different, He argues, with the “cost conscious” firm hitting profitability two-and-a-half years after it started trading and having no immediate need to raise equity.

“A lot of tech companies think the only way to grow is just to pump external money, one round after another,” she continues, adding that while there is appetite among investors for more equity, Abound is only focused on debt deals at the moment.

“We’ve proven at scale this technology is not only conceptually innovative, but it is truly transformational,” He says, before dashing to Abound’s latest meeting with investment bankers.