Hi guys, welcome to the Fintech coffee break. I’m your host Isabelle Castro, and today I’m sharing my coffee break was Sho Sugihara, CEO, and founder of UK-based credit-focused fintech, Pave.
Launching first with their consumer-facing credit-building app, Pave looks to use alternative data and algorithms to expand the scope of underwriting for credit using open banking. They have grown and launched their B2B product, Fuse, in 2022, sharing their years of knowledge and experience with other businesses in the hope that it will enrich the industry, giving lenders alternative means to provide credit despite volatile conditions.
I caught up with him just before the holidays at the Pave office in Central London and spoke about the increasingly challenging conditions in the UK. He told me how he hoped the company could pave the way to a better financial future for many consumers at a time when they could need it the most.
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Isabelle Castro – Hi, Sho. Nice to meet you in person. Finally,
Sho Sugihara – Hello. Finally, it’s great to see you.
Isabelle – So we’re here in the Pave office. What gets you up in the morning? What makes you start your day and come in here and get stuff done?
Sho – I think for me, one of the strongest drivers that I’ve come to realize over the years is I have a strong emotional response to instances where I feel there’s, like, systematic unfairness. And whenever I sense that, whether it’s in finance, healthcare, or other areas, I get really driven and motivated. And that’s the thing that I call my fuel cell. It’s an eternal source of energy for me. And yeah, working on causes related to that is what I’ve always been sort of trying to dedicate my career to. It’s definitely not a sector thing. It’s much more of an overall do I see an inefficiency or correction that needs to be made in a system where someone isn’t getting a particular service they deserve? That’s the highest-level answer. Obviously, other things like, you know, coffee alarm clock, etc. Yeah.
Isabelle – Okay, and what made you kind of you wanted to do this? It wasn’t a sector thing. But what made you start Pave and decide to focus on credit?
Sho – Yeah. My first realization of getting motivated by these types of causes was when I was working in Japan, I think I was age 17, from Japan, and I was working with a homeless NUS charity, supporting homeless vendors of magazines, getting back on the sort of job ladder and start earning an income and being able to afford their own living spaces. And talking to the vendors was super motivating. And I started thinking, you know, there’s a lot of interventions that people can provide someone, mainly financial, to really make a difference in their lives.
After that, I moved to Brazil, I think I was 18 at the time and worked in conditional cash transfers, which was a state program that the government at the time was doing. And I worked with families in San Paulo city, helping their kids stay in school. So they could receive the benefits of the conditional cash transfer, which is basically a 0% interest loan that you get if you send your kids to school. And again, kind of that was an extension of seeing how finance could help people get included in the formal economy. So I got interested in finance, then, at the same time, in Brazil, I was working for an entrepreneur who wasn’t from Brazil. She’d come from Germany and started the NGO in the 70s. And built it into this big organization with a strong brand from scratch without speaking a word of Portuguese it just made me realize what one person’s vision could actually do. And so I think, a combination of those two things that got me interested in credit, and being an entrepreneur, although I didn’t actually think I do a tech business until much, much later, when I was 25 or so when I started the company.
Isabelle – What made you come to the UK?
Sho – Hmm, great question. I haven’t really thought of that. I think so. My mum is English. And so we’d had a connection here from a young age. I’d come back in the summers. I went to university here as well. Then had a network of friends that I wanted to be around. I do think there is there is also, though, compared to a country like Japan, where I’ve also worked in a professional capacity, I think there’s a lot less, both bureaucratic and sort of cultural red tape around starting a business in the UK, especially in fintech, which it’s known for.
In a country like Japan, I think I’d have a much harder time doing this. Now it’s getting better, but the startup scene wasn’t very mature there when I was working. So the UK had a lot of benefits from that side, both social and a business angle as well.
Isabelle – Okay. Those are all very good reasons. So in the UK, quite a lot of things are going wrong at the moment. How do you see the current state of the cost of living crisis?
Sho – Yeah, it’s a really difficult situation, right? I think, of course, there are a lot of kind of recent reasons that have put the UK in the situation it is. But there are also much longer-term economic structures that have changed since the 70s, frankly, that have caused a lower-income population to really struggle to get access to good financial products or not see real earnings increases for a long time now. And really, I would say what’s happening now is just another accelerant of a financial exclusion process that has been ongoing. And so it’s disturbing, but it’s nothing new. That doesn’t make it okay, of course, but some of the things that we are concerned about is that, you know, 4 million people in the UK are set to be fully reliant on credit as a safety net in case of emergencies. And that’s a huge number.
The amount of credit that’s being taken out at the moment, the growth in that has been the highest we’ve seen since 2005. And so there are some stats that are showing consumers are increasingly or have used up the savings they had accumulated during COVID. We’re entering this quite scary territory where credit has to be the sole source of getting people through the next few months, which are going to be tough.
The economic consequences of that, in the short term, are scary. But also, going back to that point of sort of structural inequality in the long term, are, for me, even more concerning, so it’s going to be a difficult time. And there’s just no way of getting around that, I think we can only hope for stability in the war in Ukraine, and inflation across the world, getting tamed successfully by central banks. But I think a lot has to go right for that to happen. And we have to plan for the worst, I would say.
Isabelle – And where do you see fintechs? Like, where’s their role in this?
Sho – The more I speak to lenders and banks, and also, we’re a lender ourselves, so our own operations and looking at them, there’s a balance that we’re going to have to strike. One is credit is a very, very useful tool for customers who can’t afford it. When they face circumstances like this, it’s precisely these moments when they need it. But identifying customers who can feasibly afford it is extra difficult right now because income is volatile, and expenditure is volatile as well. So there’s that you have to lend to people responsibly and do that to your best capabilities.
The competing force to this, of course, is, you know, at the same time, lenders have to iterate their lending criteria quite carefully. And make sure that they’re not overextending credit to people who can’t afford it or who can’t take and so that they don’t take on too much risk. But the most important thing as an industry, I would say, is, and unfortunately, I don’t think many are doing this. But the worst thing we could do right now is sit on our hands and say; actually, I’m too scared to lend because I might lose my job if I do, and I’m just going to do business as usual practices and only lend where I’m extremely comfortable.
That’s the kind of behavior that has caused the structural inequality in my mind to continue over the years. And I know this is a very high-level statement, but I am happy to get into the detail. But that’s the behavior that we as fintechs and as a financial services industry just can’t afford at the moment.
Isabelle – Well, I know you’ve brought it up. Do you want to get into detail?
Sho – Of what we do? Yeah, yeah. So I think we have two businesses. Essentially, one is the Pave app, which is a consumer credit-building app. Both of these businesses are in the UK. The second is a credit decisioning tool for businesses that uses machine learning and AI to look at transaction data on the consumer to help provide an affordability and credit decisioning and financial health monitoring service, which is trained on the data that we have acquired through the Pave app.
Why focus on businesses is sometimes a question I get. Well, the reason is I had a brief stint at McKinsey working in both their financial health and financial services, arms, and healthcare systems. And I like to use a parallel in healthcare to describe why we have these two businesses.
The Pave app is a product that is essentially treating customers with, let’s say, acute financial illness. So you’ve taken out a credit card and defaulted on it, or you don’t have a credit history or have some bad records on your credit file. We’re kind of taking those patients, let’s say, I’m providing them with open banking powered insights to help them budget and monitor their bill payments. And then we’re also extending a credit line that helps them make sure their account balance is sufficient to pay bills on time. And so it’s sort of a treatment product.
We’ve had about half a million downloads, and it works on a subscription fee. And we have hundreds of 1000s of paying users over the years, which has been great. And so that’s our sort of, I’d say, secondary, tertiary acute care product. But when we look at the financial system, I think that is really just treating the symptoms, right? So how can we change the system entirely? Well, we think to have the level of impact we want to achieve, we have to go further up the value chain of credit.
One of the issues that we see in the system right now is that there’s a lot of valuable data on consumers that can help them get better products that suit their financial situation. But we’re not really using that. So what the Fuse product, which is our credit analytics platform, is trying to do is we’ve trained models and algorithms using the pay gap data that we’ve acquired, which helps lenders make better decisions using consumer transaction data. So now you’re kind of going to the source of the issue and saying, Okay, we’re gonna give lenders and banks better tools to diagnose where a “patient” is and provide them with the right type of product that doesn’t jeopardize that customer’s financial health.
This product has been really exciting because we’ve managed to show that it can be as good if not better at diagnosing a customer’s financial situation and creditworthiness compared to a credit file, which is the traditional way of doing credit scoring. And so we’re rolling this out with lenders across the UK at the moment.
Isabelle – You said, and kind of like our previous messages and stuff, that this was your main focus for now. What effect do you think these kinds of products will have? What do you hope that will do?
Sho – Yeah, I think, I think the main thing is, you know, one thing that’s a little not crazy, but unfortunate about the financial system at the moment is if you’re a customer of a bank, and you’ve banked with them, you have a current account savings account, whatnot with them, they have a lot of this data on you already. But at the moment, they’re not using this data because it’s quite messy, difficult to label, and difficult to incorporate into existing underwriting practices.
With tools like Fuse, we can do is start showing the value of using this data and making it easier to use it by cleaning the data and making sense of it, and having models trained already that you can deploy. And so my hope is products like Fuse start encouraging and creating the business case for lenders to use what would be currently called alternative data and make that mainstream and just normal to us, and by doing so provide credit to more people at a more affordable rate.
As you can probably tell, this is why I think this product is really important right now. All right, if we’re just doing our Pave app and treating the sort of symptoms of the financial system and the problems we see with it today. It wouldn’t be good enough to move the needle. And so yeah, having a much more systematic approach going upstream in this cycle is what we’re focused on at the moment. And our ambition is that this will have a much more sizeable dent in how financial systems work today and for the better.
Isabelle – I imagine it will really help with kind of financial inclusion, especially when you’re using all this kind of alternative data.
Sho – Yeah, that’s right. And I think there are many other applications of this technology that excite me. So I’ve been talking about how you can use our tech at the point of a credit application or at the point where a customer takes out a loan. But what’s amazing about something like current account transaction data is that we can also provide an ongoing analysis going back to that healthcare analogy.
We’ve diagnosed the patient and given them a treatment or credit that hopefully helps their financial health rather than hinders it. But what’s crazy about the system today is, you know, if you make a mortgage application, your credit file or credit status won’t get checked again for a very long time, even though you might have gotten another job or lost a job or have, you know, had a kid or whatever. Our technology lets you provide ongoing monitoring of a customer and really understand different triggers that might have changed their financial health status.
That’s an application that I’m super excited about and what it can do for Financial Inclusion. It’s actually an area that the regulator in the UK is looking at. And we think it’s kind of a duty on the lenders’ behalf to make sure we are updating our services and loans to match the customer’s circumstance and creating a much more efficient credit cycle lifecycle and system. To me filling in that gap, you know, from going from diagnosis, providing the product, so then ongoing monitoring and management. And if a patient or financial health care patient still doesn’t quite manage to stay healthy, then providing treatment, I think we have to look at it in those different chunks. And really, the technology that we have can power a lot of solutions within that overall lifecycle of a customer.
Isabelle – And well, we’re at the end of the year. We’ve got 2023 ahead. What do you hope for the future of this year? What are you going to be focusing on?
Sho – In 2023? I mean, our biggest ambition is to scale the Fuse product. So we’ve started to have a lot more conversation and deployment of the solution and building out proof points. We’ve already shown it can do things like halve lost rates and improve credit model performance by 25-30 %. But really, proving that it has applications across multiple different types of lenders is a big focus.
We also think the product is scalable into any geography that has transaction data. So part of our ambition is to look at other geographies where we could use this tech. But I think that’s all sort of centered around our ambition, I will just be very happy if this coming year was a year where you know, as an industry, we’re able to reflect and think, Okay, we don’t want to repeat the mistakes of 2008, we want to make sure consumers, especially the ones excluded today have a proper shot at getting included into the financial system.
What will make me happy is if I see more and more lenders taking risks, you know, by innovating and trying to do everything they can to support customers at this difficult time instead of being conservative and sitting on their hands. I think that’s the one thing that would make me the happiest if the industry has a kind of turning point. It’s a very difficult thing to achieve. But I think it’s it’s long overdue. So that would be the thing.
Isabelle – I mean, you’re quite connected to the lending community over here. Do you get a sense that other lenders are going to go that way?
Sho – I think the majority No. There are some, some of our partners that I just said, it’s such a delight to work with them because (I can’t say who but) there’s one company in particular that has an incredible customer-centric approach. And one of the things the CEO told me just has always stuck with me, which is to say, you know, it’s in downturns like this where you can acquire your most loyal customers, which is so true, right? No one else is offering them credit. And, of course, they’re gonna be with you for life if you are the one doing so. And so that’s kind of there are some edge cases. I think too few. If I’m totally honest. Yeah.
Isabelle – So going past 2023 into 100 years into the future. What do you hope has been invented by then?
Sho – In fintech? I think there’s a lot of cool stuff happening. Right. So one of my that’s controversial, but I do think there’s a lot of exciting things we’re seeing what exciting potential we see in products like buy now pay later, and offerings where products are made interest-free because there are other sources of revenue.
In this case, you know, merchants paying for customer acquisition, subsidizing the APR, and alone, to make it interest-free for the consumer. I think these are great innovations, right? Ultimately, so long as it’s done responsibly. These are products that can help many more people get access to credit. So that’s kind of one area that excites me.
The second area that excites me is this integration of credit with payments, which is, again, buy now, pay later, where every transaction that you’re making can essentially be turned into credit (responsibly). Our experience as a consumer goes from having to apply for a loan and deal with APR and all this stuff to actually having a seamless and amazing current account that, you know, you can purchase anything, you can make it turn it into credit when you want, it can automatically detect when you can’t afford a product like that. And then also automatically update conditions around that loan to match your earning status. If that changes, change your payment terms or APR based on how you’re doing.
That’s where I think consumer credit and consumer finance is going. And I would love it, but I think it’s it’s extremely difficult to do that. Because there are so many different actors and different datasets you need to connect up to make something like that work. But I would really like that, you know, one day, people are gonna say I’m crazy for saying this, but like, why can’t a mortgage be free? You know, why couldn’t it, right? Why couldn’t you have a system that is efficient enough to say, Okay, well, the seller of the house pays a bit of margin to the loan provider, and the consumer has an experience where it’s seamless but also interest-free. I know that sounds nuts. It is. But I think that’s the kind of ambition where finance could go ultimately, you know if it had the benefit of the consumer in mind, and I think we’re starting to see trends that are pushing that towards that. So in 100 years, if there’s a current account that gives me a free mortgage, I would love that.
Isabelle – I mean, 100 years is quite a long time. It’s a long time. Yeah, it might happen. It might happen. And I mean, fintech is very focused on the customer, right? Most of the time.
Sho – Most of the time.
Isabelle – So if you found a new uninhabited planet or location, who are the three people that you bring with you to start civilization?
Sho – So I’m assuming, Okay, I’ll assume like a desert island or something on Earth. And in that, I think the first thing you need is survival skills. So I definitely bring an ex-military, survival-trained individual to just help out.
Isabelle – Like Bear Grylls?
Sho – I don’t know who that is. Sorry. I’m so…
Isabelle – Sorry. He’s someone like that. Yeah, he’s basically that.
Sho – Great. Bear Grylls, it is, and second would be a doctor. I know that, sorry, I’m really practical. But yeah, definitely a medical professional. And then third, I don’t know. It’s going to be pretty bleak, right? You’d need some entertainment, I’d bring Ricky Gervais. He’d be useless, no offense to him, except for providing comedy, but I think someone like that.
Isabelle – I think it’d be pretty useful if you keep the morale. Maybe not the morale up, but he’d be funny.
Sho – I’d say those three would be great to have around.
Isabelle – Okay, that sounds like a pretty cool civilization. I like the Ricky Gervais angle. Definitely. So now we come to the curveball question time. In a movie of your life. What would your theme tune be?
Sho – Oh, wow, that’s really, really difficult. I don’t know. I always love Bohemian Rhapsody that song, but that’s just too flamboyant.
Isabelle – Oh, no, that’d be perfect.
Sho – So many stages and so many different key changes in tones. I think it’s a good summary of startup life. Let’s stick with that. I think that works. Well. Okay.
Isabelle – Cool. Bohemian Rhapsody is perfect. Well, thank you for hosting me. Thank you for your time. I really enjoyed our conversation.
Sho – Thanks for the opportunity.
If you want to find out more about Pave, you can find them online at paveapp.com. You can follow Sho on LinkedIn.
As always, you can reach out and chat with me on my personal LinkedIn or Twitter at IZYCastrowrites. That’s I Z Y. But for access to great daily content, check out Fintech Nexus on LinkedIn, Twitter, Facebook, or Instagram.
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That’s it from me. Until next time, enjoy your downtime.