Why Credit Cards Are Hard with Scott Bass from Ensemblex

What if the decision that kills your lending business is one you made six months ago — and you just don’t know it yet?

Host Reggie Young sits down with Scott Bass, Managing Director at Ensemblex, the fintech lending and credit consultancy. Scott brings a rare combination of perspectives: he helped build Capital One’s data-driven credit operation before it was a household name and was one of the first two Americans hired to launch Monzo’s US business.

Scott and Reggie cover what Capital One actually got right that most people miss, the lessons Monzo taught about building products that feel nothing like a bank, and the most predictable mistakes fintech founders make when building credit products. They dig into the six-month lag problem in lending, why being “light on the fin in fintech” is a slow-burning liability, and why Scott believes credit cards remain the most complex — and therefore most defensible — financial product a fintech can build. 

Transcript

Reggie Young: Welcome back to Fintech Layer Cake, where we uncover secret recipes and practical insights from fintech leaders and experts. I'm your host, Reggie Young, chief of staff at Lithic. On today's episode, I chat with Scott Bass, a managing director at the fintech lending and credit consultancy, Ensemblex. The phrase consultant may make you think of somebody who doesn't have firsthand experience, but Scott has decades of firsthand operator experience in financial services and credit.

He was head of US payments and card operations at Monzo. He co-founded a card fintech that was acquired by Green Dot before fintech was even a word, and he worked at Capital One as the director of marketing operations and strategy. Scott and I cover everything from common mistakes folks make when building lending products to why many folks misunderstand Capital One.

Fintech Layer Cake is powered by the card issue platform, Lithic. We provide financial infrastructure that enables teams to build better payments products for consumers and businesses. Nothing in this podcast should be construed as legal or financial advice. If you enjoy Fintech Layer cake, please give it a review on Apple, Spotify, or wherever you listen.

Scott, welcome to the podcast. Excited to have you on today. You are a deep expert in all things lending and credit, so I know you have a lot of good insights for founders and operators who are building those types of products. A place I'd love to start with is that you've spent time at Capital One. You and I have chatted about how many folks incorrectly perceive Capital One as this sort of traditional stodgy bank. But that's not the full story there. It's definitely not a bank that is in the same bucket with what folks may think of, as like a slower traditional bank.

So let's dive into that history of Capital One to start this episode off. Just briefly, for folks that are new to fintech, what should they know about Capital One and its history?

Scott Bass: I think for a lot of people who've been in the industry, they'll actually think of Capital One as the original fintech. It didn't come from a banking background per se. When I started there, it was a monoline credit card business. There were some other kinds of smaller businesses, but it was really 98% a credit card business. So it wasn't really a full-service kind of bank in today's traditional view that you think of Capital One.

But also, just to put some context here, this is how long ago it was, when I interviewed with Capital One, I'd actually never heard of the company. This was pre-brand building, pre-commercials, pre-sponsoring every sporting event under the sun that they do today. That just gives people context here.

But there really is a couple things that was unique about Capital One and their approach, I think, compared to banks, at least at the time. There's two things. One was they really pioneered this whole notion of using data to micro-target customers. The motto, at least back then, was get the right product to the right customer at the right time. It was not a one size fits all.

During the interview process, I remember one of the interviewers was bragging like they had one terabyte of customer data that they used, which, today, of course is insane, but it was a big number back then. And so they would use that to do a risk-based pricing, which was really the foundation of the products that they offered. Some of those concepts were new at the time.

The second thing that was really unique, at least that I saw in the market, was the testing and learning culture. It was very much based on running interesting tests to try and figure out what's the next thing to do, what's the next thing to offer customers. Literally, thousands and thousands of tests were run every year. Now in hindsight, it's probably not all of those are necessarily good or smart tests. There's probably tests that never got read or that data got corrupted in some way, shape, or form. But there were tons of interesting insights that came out of all that test that really helped create a unique product that was offered by the company to all kinds of customers.

Reggie Young: We're recording this the day after the Brex acquisition closed. And so it's like a funny history of Capital One actually started as a credit card company, not a full bank. And now we're seeing, not just the Brex acquisition, but a lot of other fintechs that are trying to become banks themselves. It's like, Capital One did this. This has been a playbook that has happened for.

Scott Bass: Yeah. 

Reggie Young: Cool. I know you also spent some formative time at Monzo. What were some of your top learnings from your time at Monzo?

Scott Bass: That's an interesting time as well for us to be talking about that. I don’t know if you saw- was it last week, I think, a notice saying that they're going to exit the US business, which was really sad for some of us to see. I was one of the first two Americans brought on to help build out the US business here. This was 2019. There was already a small team in London that had started doing some of the groundwork there when I came on board.

Just to give you some context there as well, when I joined Monzo, it was like less than 2 million customers in the UK. Today, I think they have like 15 million customers there, which is almost 25% or 30% of the adult population. Tremendous success. But in the US, it was very much a start-up. It was a small, scrappy team.

But the things that I really took away from working there, in some ways, there's a parallel with Capital One. They didn't approach things like a traditional bank. And also, Capital One, a lot of that came from the culture of, in Capital One's case, they hired a bunch of people, not necessarily out of banking, a lot of people right out of college, or in my case, right out of the military, and trained them on the business. In Monzo's case, they hired a lot of young people. Some had tech backgrounds, a lot of 'em had tech backgrounds. And so they were constrained by bank thinking or bank experience. That was one thing.

Another thing was it was very much a tech-focused development of the products. They had an online community. They would do in-person events, and they would relentlessly get feedback from customers on what are the next features to be built. I felt like it was very much like a software type of culture rather than a bank type of culture.

Then the one other thing that was very unique to me, probably the biggest takeaway that I took from that experience, they approached their relationship with customers in a completely non-bank kind of way. It was very plain language friendly. You read through their terms and conditions, it was written not by a lawyer, nothing against lawyers, but it was just plain language, like how you'd explain it to a friend. I've never seen that kind of anywhere before working there. It opened my eyes to what you could do, what's actually possible.

Reggie Young: Yeah. I love it. It's the difference between getting your sort of the email from wherever you bank or have a fintech product with. That's, we're updating the terms, and like this indemnification clause is getting updated versus the plain English. Here's what it practically means. It makes a big difference in the customer experience.

Cool. Let's turn to Ensemblex. Why don't you give listeners a brief spiel about what the firm does and what sort of problems you help fintech build or solve?

Scott Bass: Yeah, for sure. We're a team of seasoned credit experts, and we help companies build and launch, manage, grow, and sometimes actually help revive lending products and businesses. Most of us worked at Capital One sometime in our career or other large financial institutions with fintechs. Our two co-founders were senior execs at Capital One.

We've also founded several fintechs along the way. We've seen interesting perspectives of the good things that come from big companies, like the processes and the controls that come with that. But we've also been founders, and so we've seen where you got to be practical and nimble and move quickly. We think we bring an interesting blend to our clients where we work with them. We try and help figure out what's best for them in their situation.

We do three things really with our clients. We act as senior or executive credit risk advisors. In some cases, we actually act as rational chief risk officers for some period of time. We also help clients build and launch new credit products, really from the product and organization and infrastructure perspective. We don't offer platforms ourselves, but we help our clients figure out which platforms, like Lithic, to work with.

And then the last thing we do is we build world-class machine learning models for underwriting. We have some very experienced people who they'll pioneer a lot of the techniques, and we've been doing it longer than anybody we know in the market. So those are the three main things we do.

The last thing as well, we also have a venture studio. We partner with founders to launch and build new companies. That's what we do. Just from a market perspective, we work all over the world. Majority of our work is in the US, but we do a lot of work outside of the US. So we do work in Latin America, like Brazil and Mexico, Colombia. We've also worked in Australia, Europe, and in the UK, Africa, India, everywhere but Antarctica. We haven't touched that yet.

Reggie Young: Untapped market, untapped TAM down there. Tell me a little bit about the job. You mentioned chief risk officer and how you all do fractional work there. What is the job of a chief risk officer from your view? 

Scott Bass: We do a lot of things around helping companies figure out how to either build or modify their credit policies to meet the opportunity that they're trying to go after. So we bring our experience, what we're seeing in the market, and what we've done ourselves to help shape what the product looks like from a risk perspective to make sure that-

One of the things that we've come across is we've worked with some clients where they're super excited about, they're getting high response rates or high approval rates. We’re like, that might not necessarily be a good sign. One of our principals, Shawn Budde, says, in a lending business, you can make a bad decision today if you don't realize it. You actually don't find out that your business died until six months later that you killed your business on the day you made that decision, because at that time frame that lag- we really try and help shape what companies are building. And then a lot of times, we will help them put in place the right kinds of ways to measure the business on a weekly or monthly time frame to be able to measure that health of the business and get ahead of what's coming down the pipe six months from now.

Reggie Young: Yeah. Easy to give out money, hard to get it back.

Scott Bass: That's right. Any fool can lend a dollar.

Reggie Young: Yep. What are some of the most common misperceptions or preventable mistakes that you see folks building credit and lending fintechs run into?

Scott Bass: One of the most common things we see is just an underestimation of the time and the complexity and money it takes to build lending. I'm sure you guys probably see this in the clients that you guys work with. If you haven't been there and done it before, there's a lot of things you don't know that are going to be hard and/or complex that you’ve got to build an account for. I'd say that's one thing.

When we talk to companies out there, prospects or clients, whatever, a lot of times, especially in the fintech space, we see companies who are really competent on the tech side of things, but they're light in the fin side of things of fintech. The good companies are the ones that we find are the ones that realize that, and they bring in- either they hire folks appropriately, or they bring in external folks to help them for a period of time to help train their team. Those are the ones that we tend to see get traction and survive. And the ones who don't are the ones that they find out two years later they made mistakes that they should have addressed early on.

Reggie Young: Yep. I just recorded a podcast with Gavin Nachbar, the founder of Column Tax, now Chief Product Officer at Aiwyn. He was new to tax filing and had to navigate it. He had a framing that I've loved and used a bunch since, which is, he needed to become a historian of fintech. There's so much history and lessons you can learn, but you have to seek out the people who know the history and read the books and blogs and all that sort of stuff to learn the lessons that are very easy to find out. But if you come and say, oh, I don't need to worry about what's been tried, I should just do it my own way, you're going to step on some landmines.

Scott Bass: Yeah. Along those lines, one of the things that we have said on multiple occasions of people, let us work with you to help you find new issues. We already know all the old ones, kind of the history. Let's find the new problems. Let's make new mistakes. Don't make the old mistakes that if you did the history, research you would know about. 

Reggie Young: I'd love to jam a bit on the fintech that you founded. To help orient folks, what was Ready Financial Group, and what was fintech like at the time that you founded it?

Scott Bass: This was going on 20 years ago. I left Capital One with three other ex-Capital One guys. We had worked together. We looked around what the marketplace was like and what was available and also what the infrastructure was that was available at the time for products you could go build. We settled on building a prepaid card company.

Prepaid cards at the time, they were in the market. Netspend existed. Green Dot existed. They were both the two predominant players, and there was a bunch of small companies like us that were just getting going. So we went after that market. At the time, prepaid cards were basically for folks who couldn't get or didn't want a traditional checking account. It's a very different product than today. The norm was there was a monthly fee that you paid to have the account, like old-school checking accounts. You used to have those.

So anyway, we co-founded that and had some good traction and progress, even doing that from Boise, Idaho, which makes it hard to raise money, to be honest, not being in the Bay Area or New York. We did that with the infrastructure companies at the time, which was not the smorgasbord of everything under the sun you could find today. We did that for about four years, and then we merged with the larger competitor. And then after a few more years, that company got bought by Green Dot. So that's how I ended up at Green Dot for a few years. 

Reggie Young: Any top lessons or insights from growing that early prepaid start-up into becoming part of Green Dot? Any top lessons from that journey?

Scott Bass: Yeah. There's a couple things that kind of stand out. One was when we started the company, smartphones weren’t a thing. They just weren’t around. When they came into the market, I would say we were slow to move on the mobile experience. We dabbled in it, and we did end up launching one. But I would say, in hindsight, we could have moved faster and experimented more quickly. That would've been, I think, super helpful as far as adoption and being leaders in that area. But at the time, I think people were still trying to figure out, how and why are people going to use mobile apps? What is this whole thing about? So that was one.

I guess the parallel to that I see today is really AI and use of AI tools. It's not exactly the same, but just try and experiment and try things sooner rather than later. Don't wait until everything is all figured out. The other thing I would say, this is a learning- it's not really we had much choice in the matter back then, but we went with a big infrastructure player that provided the systems we needed to be able to do the product. And back then, there wasn't all the cool APIs that you have today. You can build all kinds of new cool things that go along with that.

My point here is even in today's market, with all the options out there, be really thoughtful about figuring out who the partners are that you work with because they'll end up being constraints on your business down the road. Those are big, important decisions to make.

Reggie Young: I love it. Definitely good insights and lessons learned. To kind of pivot to a wildly unrelated fintech question, you are the first guest I've had on who worked on a nuclear power submarine. I don't even know where to start asking about that, but I just feel like I have to. What was that experience like? What would surprise folks about that sort of job?

Scott Bass: I'm surprised by that, because it's a very natural transition going from nuclear power to financial services. Surprising to a ton of us. 

Reggie Young: So all about risk management.

Scott Bass: Yeah, totally. Actually, it was not only a nuclear power, but I was on a submarine that we carried nuclear ballistic missiles, so kind of both nuclear things going on. This was my first job out of college. I was an engineering major in college. I went into the Navy, working on the submarine. They're big. They’re modern submarines. I was on the biggest one, the ballistic missile sub. It's 560 feet long. It's three stories high inside. It's big. The most common question I've gotten is, are you claustrophobic? No, not really.

The equivalent, I would say, is if you were being locked in a three-story, smelly, windowless manufacturing building with a bunch of really smart, mostly cynical tech people and mechanics months at a time, you wouldn't feel claustrophobic. You’re just, I like to be able to get out of this building every once in a while.

Reggie Young: Interesting. I'm sure that was a fascinating time. My standard roster of wrap-up questions, what's something you've been thinking about a lot lately that you think folks in fintech aren't thinking about enough?

Scott Bass: It's similar a little bit to an earlier answer. I think we keep seeing situations, we keep having conversations with folks in the industry, maybe had earlier conversations with folks that we know that companies are- they're either not investing or not investing too little or too late in credit-specific help. I feel like we see information about fintechs that look promising for a while, or whatever, that run into issues.

Building cool-looking products probably feels good, certainly from a design perspective, from a tech perspective. But if you haven't grounded the business in solid unit economics and assumptions, you're just sitting on a ticking time bomb, if you don't address it sooner rather than later. That might not sound like a super insightful, timely thing, but it is constant that we have these conversations. We've been doing consulting now as a company for seven years. That is the most common thread we've seen over the course of that entire time.

Reggie Young: There's so much complexity. We see this sometimes in folks who want to launch credit cards and don't think about- they see higher interchange on credit cards and they say, that's better than debit, I want that. They don't think about you have to give rewards, and that eats into some of the difference in interchange, and that you got your cost of capital and you’ve got to get enough data on your products to be able to go get some sort of capital provider, which it's like a chicken and egg problem for many folks. It's not an easy product to launch, but it's a sort of moat. In a time of AI when software is much easier to write, that sort of complexity becomes a defensible moat if you can crack through it.

Scott Bass: Yeah. You guys have a front-row seat to this. Credit cards, honestly, they're the most complex financial instrument out there that gets regularly used by people from a product perspective. It's a tough one to pull off and succeed in.

Reggie Young: Yeah, definitely. Awesome, Scott. I appreciate you coming on sharing a lot of your wisdom and insights from your experience. If folks want to get in touch or find out more about Ensemblex, where should they go?

Scott Bass: We're ensemblex.com, just the word ensemble with an X on the end. My email is scott@ensemblex.com. People are free to reach out anytime.

Reggie Young: If you'll launch a credit card, go reach out to Scott. It'll be worth your time for sure. 

Scott Bass: Appreciate that. Happy to chat.

Reggie Young: Awesome. Thanks so much for coming on, Scott. 

Scott Bass: Yeah. Thanks, Regie.