Open banking startup Abound takes $601 million to supercharge its AI-based consumer lending platform

Image credit: Peter Dazeley/Getty Images

After a slow start in the UK and Europe, open banking is catching on with fintechs, which use APIs to access bank data and rails and use them as an alternative to traditional credit networks to build products.

Now a UK-based consumer lending service called Abound is doubling down on its ambitions in the space with a major fundraising to run its own open banking business. The startup has raised a whopping £500m ($601m at current rates) – money it will use to finance loans, bring more customers to the platform and invest in its technology, which combines open banking data and machine learning algorithms to build what Abound believes is a better “credit scores” for applicants. To complement its direct-to-consumer offering in the UK, Abound also plans to expand as a B2B service in Europe, which has built out its own open banking framework, PSD2.

“We see ourselves as going beyond credit scoring,” CEO and co-founder Gerarld Chappell said in an interview, describing the bank transaction data Abound uses to build its AI-based risk and lending profiles as akin to “financial X-rays.” These, in turn, help Abound “understand true affordability” when it comes to lending.

The rise comes at the same time as we see much more activity around open banking services. Last year, Visa bought open banking developer Tink, which provides API rails for thousands of banks, for more than $2 billion. Another major rail provider, TrueLayer, last fetched a valuation of over $1 billion (given that was back in 2021…). Meanwhile, Token.io and Vyne, like Abound, are examples of startups building more specific applications on open banking standards (person-to-person payments and merchant services, respectively).

Abound’s new funding includes both debt and equity: with US bank Citi plus clients from Waterfall Asset Management providing the debt portion; and K3 Ventures, GSR Ventures and Hambro Perks provide equity capital.

As is typical with lending startups, the vast majority of the $601 million is here debt, which will be used for lending; the smaller equity portion will be used to invest in the business itself. Abound doesn’t disclose valuation, but for some reason Chappell confirmed that the startup, formerly known as Fintern.AI (which is technically still the parent company’s name), had previously raised just under $11 million in equity and around $60 million in loans.

More pointedly, the reason for the large sum raised here is that Abound has seen a surge of interest since its launch in 2020.

The service – based on loans of between £1,000 and £10,000, with repayment options extending up to 5 years (although average repayments have been 2.5-3 years), with interest rates guaranteed by the company to be lower than those offered of banks (currently 24.8% APR) — has grown an average of 30% month-on-month; it has issued loans to more than 150,000 customers to date; and it says it is on track to lend 1 billion pounds ($1.2 billion) by 2025.

All of this not only signals something about the state of the economy today, but also the state of fintech. Yes, loans are definitely in demand for average consumers at the moment to supplement their regular monthly income. But it is also remarkable to see how new fintech services are being accepted and adopted as a means of getting that liquidity. It is no longer a novelty to use neobanks and apps to manage money, in other words; it’s just another way, and maybe for some a better way, to get it done.

Chappell said that he, his co-founder Michelle. He came up with the idea to build Abound years ago when both were working in management consulting – Chappell at McKinsey and He at EY – where they worked with financial services giants that helped build credit products and work around the foundations of open banking. The two saw that the API framework provided a clear opening for those who could understand how and where they could be used, he said.

“Consumer credit is very broken,” he said. “Most of it is deeply rooted in technology from the seventies and eighties.”

This entrenchment involves the FICO credit score, and access to this data dominated by the companies Equifax and Experian to determine creditworthiness. Add to this a generally poor consumer experience for loans, and the fact that we have seen a lot of exploitation with predatory lending practices, and you can see the gap in the market for better products that better meet customer needs.

Ironically, the status quo of loan products may actually be good for many consumers, especially those whose credit history, he added, can clearly be categorized as “prime” or “subprime” cases. However, it is practically useless for those new to the market, so-called “near prime” consumers. There are around 15 million of these in the UK alone, Chappell estimates.

Most lenders will turn down loan or credit applications from these consumers, he said: “They’re just too insecure.”

So the solution was obvious: build a system that taps into open banking to get basic real-time details about how a person manages the ins and outs of a regular bank account; extrapolate insights from that data using AI; and create a new type of credit score. This is what Abound took around three years to build before launching in 2020, and it is what now forms the foundation of the business.

It may seem obvious that a bank itself could, should and would come up with something similar to offer its own bank data-based loan products – at least for its own customers, if not loans for those who bank with others. But Chappell said it’s not as simple as it seems.

“This is very non-trivial. It will take banks five years or more to change their processes,” he said. statistics office, ONS, to determine loan eligibility, as well as how likely it is that a customer can default on a loan, or repay as agreed.

Meanwhile, Abound says the proof has been in the pudding, so to speak: Chappell said that over the past two years, the startup has had 70% lower default rates than the industry average in the UK

That is, it’s not perfect, but seems to work better than what it’s trying to replace. “For every 10 defaults by a competitor, we have three,” he said.

But since this is technology we’re talking about, the race doesn’t end when big banks or other start-ups build what Abound has built: Abound believes it has first-mover advantage, and then in the time it will take competitors to build something similar, Chappell believes that Abound will have developed even better AI algorithms to better manage its own rates.

That head start is also what motivates investors to support the company.

“The loan industry is dominated by old practices, such as traditional credit scoring, which ignore technological developments over the past decade,” Kuok Meng Xiong, CEO of K3 Ventures, noted in a statement. “Abound delivers a unique product and a differentiated approach that has already been proven to work for thousands of customers. We are excited to see Abound’s offering grow in the years to come.”

“Waterfall is excited to be part of Abound’s business expansion as it seeks to use open banking in a more informed way to help the consumer,” Krishin Uttamchandani, director at Waterfall Asset Management, added in a statement. “Abound is led by a strong management team that we are excited to work with, supported by what we believe to be a robust technology stack, underwriting methodology and view of risk. What Abound has achieved in its first two years of lending has been very impressive and should lay the foundations for a strong platform to better serve customers who will be able to access cheaper credit with open banking. We are delighted to be a partner in the Abound journey.”