Hi guys. Welcome to The Fintech Coffee Break.
So today, I shared my coffee break with Patrick de Nonneville, CEO of October.
October is a major player in the European SME investment scene. And on January 19 announced the EIF backing of its new SME V Fund, which has been labeled as an article eight fund promoting sustainable activities.
We spoke about the fund, the challenges of new ESG regulations for SMEs, and how their new tool, ESG X-ray, could help bring transparency to sustainable investment.
Isabelle Castro – Thank you for having me at your offices.
Patrick de Nonneville – Nice to meet you as well.
Isabelle – So you’re here on the Fintech Coffee Break. What gets you up motivated in the morning?
Patrick – Well, coffee helps? I think everybody picked up hobbies during the pandemic. I went quite deep into coffee. I went from like, one random coffee machine to, I think, I’ve got six or seven. My wife tells me to stop. But I really like it.
The thing that really gets me up is learning. I think we’re very fortunate in this sector to have to develop something new, even if it’s now been around for a few years. And we keep finding new ways of doing things better. And doing that with a team is what motivates me.
Isabelle – Nice. When did you know that you wanted to start something like October? And what was the process that that led you to that?
Patrick – Yeah, it was progressive. So I was at Goldman Sachs, I was a partner there. And during, despite the fact that I was a trader with a lot of the regulatory changes that came out of the 2008 crisis was frankly, not super interesting to me.
So I started to look at things to do on the outside and invest in Fintech. So I made a few investments. And as part of that, I was talking to some funds here in France, about what was happening in the SME, crowdfunding space, with Lending Club or companies like Funding Circle, which many of them, by the way, I heard about from Peter Renton’s podcasts. He has been a source of inspiration for many in the industry, including me.
They introduced me to this man, named Olivier Goy, who was also looking into the idea. And I came into the meeting, thinking I might invest. And I came out and called my wife and said, I think there’s something more here. So we decided to launch the company together 2014 made offers during 2015. And then we expanded into Spain in 2016, Italy, 2017, Netherlands, 2018, Germany, 2019. And then COVID. So, I think, I’ll stop there.
Isabelle – Well, you went very quickly.
Patrick – That was part of the plan. We thought if we’re gonna develop technology and expertise in detail, it’s going to be reasonable to exploit it not just in France, but in other countries as well.
Isabelle – Definitely. You’ve got a new fund that’s been backed by the EIF, which has quite a focus on ESG objectives too. Tell me about this.
Patrick – So maybe I can describe very briefly how we lend. So we’re not a balance sheet lender, we have investors who can be retail lenders, who come on the platform in a real light core lending format, which has gone kind of out of fashion but which we love. We have 40,000 active lenders and the great source of feedback and money as well.
Then we have the institutional investors. And because we are fully licenced asset manager, they come via funds that we raise and manage. And so this is a fifth generation fund. And what we find every time we raise a fund is either because of the economic environment or because of regulatory constraints, people’s questions and focus, change. And we have to take that into account.
One of the things especially at the European level, for the EIF, but also for BP France which was also one of the investors, the whole ESG thing has become absolutely priority number one. And for us that fitted nicely in a couple of things, which is it’s become priority number one for a lot of people in the team as well. I mean, we obviously have repetition of older people like me, and then you know, younger people and for them, knowing that we look at ESG, as a company, when we invest is is super important in the recruitment process and staying motivated. So we had started to do some work there.
What we found is for the companies we lend to, they tend to be quite small. The ESG reporting that’s available is of very poor quality. So it tends to be very declarative, they have to fill in endless forms. Or if you look into databases They tend to be based on much larger, very often US based companies.
So for us in the countries we went to, we needed to have a way to extract data automatically, because we don’t want to burden the SMEs, to make that data correlate with what we’re extracting from external databases, and to produce this, what we call, this ESG X ray.
It’s a full report that is compliant with the new regulations in Europe SFDR, that taxonomy, and that will allow us to give our investors all the information they need, and want to follow what’s happening. And for us also, little by little to start to give that transparency back to the SMEs as well. Because for them, it’s becoming important. And I think it makes sense to see what’s happening with energy prices at the moment. Things which should be part of a risk assessment of is that company viable over like the four or five year term that we lend money to them, have to include those criteria as well.
It’s true for government is true for the social approach, you know, looking at, do they pay the salaries on time, for example? Or do they push some of their workforce towards less theory type of lending? You know, it’s really important. And so we do all this automatically, by the analysis, we do all the bank statements by access to external databases. And so it’s very light touch for the SMEs. We’re really proud of it.
Isabelle – Yeah, it sounds really revolutionary, especially because I think the taxonomy is coming into effect for SMEs in 2026. And so do you think SMEs are equipped for this at this point? And is funding going to drive their ability to do this?
Patrick – So the way it’s gonna flow is that regulation is going to impact the people who provide the fundings, the banks, mostly, but also the insurance companies, you know, all these institutions who are providing cash in the economy, that’s their job. They’re going to feel those constraints. And at the moment, again, there’s no way for them to do that properly for very small companies.
That means, and we’ve seen this with other regulations, that the larger companies are going to keep their access to the funding markets, because they have the resources internally to answer those questions, the small ones, it’s going to be really difficult. So because our mission is to finance businesses better, if we don’t provide the tools for the SMEs to continue to access finance in that new environment, then we’re failing to provide an answer.
Isabelle – Your fund is labelled Article Eight SFDR, which I’ve read means that it promotes sustainable activities. It doesn’t necessarily have to be compliant with the taxonomy. But it needs to promote these kinds of activities. What do you look for? What will you look for?
Patrick – So, you know, for people unfamiliar with this, depending on the on the ranking eight, or nine, nine will be an impact fund. So a fund where every single investment has to have an impact according to certain criteria.
And eight means first of all, a certain level of transparency on the environmental impacts of the SMEs, which could finance and the tracking of some metrics there. It doesn’t mean that we are not going to make a loan, if there’s no, you know, given positive impact for that loan. But it does mean that we’re going to be able to track those metrics through time. And the metrics that we focus on industry are, you know, it’s all three, the E the S, and the G, environment, social, and governance.
And social, I think a big thing we’ve been doing is tracking the number of jobs that are created, thanks to the loans. And it’s one of the great pleasures we take to know that we’re supporting this super important metric across Europe, because, you know, most employment is actually coming from SMEs.
But also on the on the environmental aspects, you know, by going very granular into the analysis of the bank transactions, we can see the amount of energy, the type of provider they use, are they using renewable provider? That’s that’s also something that is important for the investors to have transparency on.
Isabelle – You mentioned that the EU have made ESGs a big part of their kind of push forward. What do you see your role as being in achieving these goals that they have?
Patrick – I think, the potential difficulty of if you say, “our priorities environment”, I don’t think anybody believes that turning Europe into some kind of nature reserve is going to be a good plan, right? That needs to happen in the context of growth. That needs to be done in the context of supporting the people in the EU, and that means jobs. And so our role is to make sure that that transition happens in a way that still facilitates growth and still facilitate that job growth. ratio. I mean, that sounds very immodest. But this is where we view what we’re trying to do, especially when those constraints that European companies face are not shared by companies in Asia or the US.
Isabelle – Okay. Go into that a bit more. How are they not the same constraints?
Patrick – Well, I think the EU is well ahead of the US and China in terms of transposing the kind of agreement that everybody has and we need to make a huge amount of effort, especially on emissions, into constraints for regulated entities like banks, and insurance companies, and hence to the people, to their customers.
It’s kind of a good thing, because we hope that that’s going to lead by example, and other countries are going to do the same. But at the same time, if you’re the first to have those constraints, you do get into it uncompetitive position versus companies in other countries. And, you know, I think the European leaders are very conscious of that. But at the same time, the political imperative they have their trade seems very clear to them as well. So it’s, it’s not a balance, it’s easy to get rights, I think.
Isabelle – Yeah, I bet. Especially in the current economic conditions, right? Have you noticed a change in how SMEs are kind of regarding ESG objectives?
Patrick – To be frank, not yet. I think the the main priority for them, in this environment, is that they need to survive. They’ve gone from facing massive demonstrations, we forget sometimes that in France, before there was COVID, there was a huge social movement with the yellow jackets that actually damaged the SME network quite heavily. And then you have COVID. And then you have the cost of energy and the supply chain crisis that we’ve had. I mean, for them, frankly, it feels like they’re going from crisis to crisis all the time. And so that’s why it’s important for us to make that submission and that visibility for them of what is their impact compared to their peers, as easy as possible. It cannot be another just constraints.
And, frankly, I mean, again, when we looked at it, and what was available in the market, 90% of the solutions consisted of sending them an Excel sheet with five pages to fill in. If you’re, you know, an international or like, you know, 20 million turnover company, you can do that. If you’re a mom and pop shop, or you know, a small factory with maybe 200 employees. It’s just too much.
Isabelle – Yeah. So do you think your ESG X ray is going to be quite fundamental in changing this?
Patrick – Well, that’s, that’s our goal. And we have super interesting discussions with regulators and with basically markets, organisations to make sure that it contributes to making the tools available, so that this transformation can happen in a smooth way, not just with our SME customers, but with everyone.
Isabelle – So with ESG – there is this kind of big thing that there’s a lot of greenwashing happening. How are you going to bypass that, especially when it comes to making your investments?
Patrick – Right, this huge problem and and we saw two months ago, you had a whole bevvy of supposedly Article Nine funds, so article nine funds, impact funds, which said, you know, every loan or every investment we make is going to have a positive impact on such and such metrics. And they lost that classification. Because there was greenwashing. I mean, they couldn’t follow it up. And it was just pretending.
I think that’s hugely damaging, by the way, to the whole ESG effort.
The way around this is data. You know, the new vehicle that the EIF is investing in is going to fund 3000 companies. So it’s very granular. And to provide the amount of transparency we’re going to be able to provide with ESG X ray on each of these companies, is the best way to make sure that the impact is measured accurately and objectively.
Also you can sync that the method by which most SME reporting is done, which is, you know, again, send them a questionnaire and send it back. We know from experience, if you ask a question to SME, they will give you the convenient answer because they don’t have the time or they don’t have the information necessarily. Sometimes it’s a bit less benevolent than that. Right? They know it has an impact on their financing. So if you get the information automatically, without that kind of subjective elements, you have a much better quality answer.
Isabelle – For sure. What do you think, is the biggest challenge in setting up this fund?
Patrick – Oh, the other element, definitely, I mean, we haven’t talked about this yet, but the moving interest rates over the last months is a big shock to the system. We have many people in the team who have never seen a rate rise in Europe since 2010. You know, we’ve all gotten used to a low stable amount. And so that has had a dramatic effect immediately on the investors’ expectations. And so we’ve followed suit, you know, we’ve increased rates as the market was moving. So you know, we’re offering much higher returns to investor now that we were in 12 months ago. But of course, it has an effect on demand. Higher interest rates means more expensive money means less demand for money. And the SMEs have to consider really if borrowing at such high rates means that projects make sense. And so and that’s completely natural. I mean, it’s not like a side effect, that’s the main aim of having rates higher. So it means we have to be more selective of the companies will come and we have to manage this. But at it’s part of the cycle. It’s not easy, but it’s part of cycle.
Isabelle – How do you hope the sector will progress, both SME sector in general and funding SMEs, but also in this aspect of ESGs?
Patrick – Right? I mean, in the sector, as you speak about the Fintech, SME funding sector. It’s it’s normal first crisis, because COVID was a crisis. And I think when we launched 2014- 2015, a big thing that people were telling us is okay, but, you know, the environment currently is very benign, and what’s going to happen when it’s not?
So it’s going to be tough for many platforms, but those who make it through I think, will have really strong argument to say, Okay, we’ve we’ve gone through this, COVID, higher rates, and and we’ve shown we can adapt. And so the answer of, is the sector going to have a long term impact is going to be answered by this crisis, I hope.
As far as the ESG aspect, I think, especially in Europe, it’s not something that is optional. People are going to have to deal with it. And we have a big role to play as fintechs to make sure that it doesn’t end up in something that closes the door to funding for the small companies.
Isabelle – Yeah, absolutely. I think you guys have a huge role and kind of challenge.
Patrick – Challenge and opportunity. Yeah. It would have been much simpler for us, if we could have just gotten a solution off the shelf. The fact that we had to build it ourselves means it’s now a product, right?
Isabelle – Are you going to use the ESG X-ray, are you going to let other companies use it?
Patrick – It’s interesting, in 2021, COVID struck, and demands for loans just collapsed. So for a couple of months, you know, March, April, we actually were wondering if we still had a business. And the bank called us and said, “Well, we know you guys have developed a lot of tools, especially to fight fraud,” because as an online lender, you’re very exposed to that. And that bank, all their lending was now removed, because the branches were closed.
So they were thinking, “Okay, now we’re exposed to this as well. Can we use your tools?” And earlier we would have said, well, no way. I mean, that’s yeah. But then we said yes. And so we started selling those tools. And by the way, our lending business then rebounded very strongly at 2021 was our best year. So we started selling those tools. And we package it under the name October Connect. And so now we’ve got customers in France, in Italy, and Spain, we use those tools and ESG X ray is I think, by Q2 is going to be part of that toolbox that we offer.
Isabelle – So it will be impacting everywhere, eventually.
Patrick – But for for that we need to demonstrate it we need to prove that is doing the right job of extracting the information and as you said, that it is not another green washing tool. More data is really helping and doing something that’s truthful, you know, fast and cheap to operate as well.
Isabelle – Well, it sounds great. I’m sure that you’ll be able to prove it. What’s the piece of advice you’ve been given that you would give to other people?
Patrick – I’ve been given a lot of advice, especially from the team. You know, it’s one of the things I appreciate is we when we have you know, discussions, almost always has the question, okay, if there’s one thing you want to tell me. I think it’s always interesting to me that I feel like I’m talking about our vision all the time, and how we’re gonna get there on that plan. But I still get the question all the time. And so for if you’re, you know, leading or building company, you always have to under estimate how much people will actually listened to you And you always have to just do it again and again and again and again. And you cannot stop until it feels like way too much to you. And it’s not something I’ve thought about before. Naively, I thought once would be enough.
Isabelle – My final question, which is the curveball question, it’s a random question, which I picked just before I came in here. If you had six months with no obligations, or financial constraints, what would you do with the time?
Patrick – Well, I would probably take a small plane toward the United States, because it’s one of my passions, and I’ve never flown in the United States. And I’d love to It’s paradise.
Isabelle – So are you a pilot?
Patrick – Yeah.
Isabelle – Really? Wow.
Patrick – So is my wife, it’s a hobby we share.
Isabelle – Oh, that’d be so nice.
Patrick – Its not very ESG but we’ve we’ve found ways to offset what we do there in a very solid methodology. But it’s, yeah, it’s a nice question.
Isabelle – That sounds lovely. Well, thank you. Thank you for your time. I’ve really enjoyed talking to you.
Patrick – Thanks for coming down, we haven’t got our coffees.
Isabelle – No, we haven’t got our coffees. But I think I hear them coming. So thank you. Oh, how if someone wants to follow you or connect, how could they get ahold of you?
Patrick – So on LinkedIn, I’m on Twitter as well. @p2nvl is my handle. It’s not very easy to find. But yeah, LinkedIn works
.Isabelle – Okay, cool. Thank you so much.
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That’s it from me. Until next time, enjoy your downtime.
