Lending in Digital Times explores the dynamic lending landscape and how the latest technologies are transforming it. John Michael, from Conduent’s Consumer Finance and Mortgage Solutions, interviews fintech leaders and experts to discuss how digital transformation is impacting the lending business and shaping its future.
Read this case study to learn how Conduent's auto finance solutions transformed a small auto lender into an industry giant.
Episode 2: Differentiation is critical and technology gets you there
Daniel Chu, CEO & Founder, Tricolor Auto Group & Ganas Holdings, shares how his career as a college basketball coach prepared him for running a thriving organization, which relies on technology to drive differentiation in the crowded space of auto finance lending. He points out that delivering a successful and agile business is a process and not an event.
Daniel Chu, CEO & Founder,
Tricolor Auto Group & Ganas Holdings
Daniel Chu has distinguished himself as a successful entrepreneur, having founded six companies over the past twenty-five years, including two which became public.
Daniel currently serves as the Founder and Chief Executive Officer of Ganas Holdings, the nation’s largest used vehicle retailer focusing on the integrated sale and financing of vehicles to Hispanic consumers. The company operates a branded chain of thirty six dealerships across twelve metropolitan markets operates in Texas as Tricolor Auto Group, and in California as Ganas Auto Group. The company has been recognized by Inc. magazine for five consecutive years as one of the fastest growing companies in America.
Prior to his current role, Chu founded two other firms in the auto financial services industry which became publicly traded. He has served in the capacity of CEO with seven different companies. Before that, he coached intercollegiate basketball for seven years.
Welcome all, and thank you for tuning in to Lending in Digital Times, a Conduent production. My name is John Michael and I will be your host for this episode. If you are interested in a podcast that tackles the technology helping to transform the consumer lending space, then this is the show for you. My job here is quite simple, actually. My job is to provide a platform for the amazing thought leaders throughout our industries. Consider this podcast if you will, your resource for all things consumer finance. Okay everybody, so today we are sitting here with Mr. Daniel Chu, the CEO of Tricolor, and I am very excited about this interview today.
So Daniel, first things first. You know, I don't like to read bio's of people just because they're so stiff, so can you tell me how did you get here? Can you give me a little thumbnail sketch of how you arrived at this point in your career please?
Sure. Well, I've really always been intrigued with the idea of creating or building something. I really think, oddly enough, the roots to that interest go back to when I was in college, and then shortly after college I played basketball in college and coached, and the school that I played at had reinstated basketball after not competing for 15 years. And then, I proceeded to go on and coach at a university that also reinstated basketball after about an 16 or 17 year absence.
And so, both of those experiences gave me some insight into the fun and the excitement involved, and really trying to build and create something. And I think I've kinda carried that into my professional career, I've been fortunate enough to be involved in five or six startups, and over the years just been been motivated, enthusiastic about just the process of building and creating.
What would you say is the secret to your success in the consumer finance industry?
So for us, I would probably talk mostly about our differentiated approach. If you look at consumer finance today, it's a very crowded, very competitive industry. And I really feel like to be successful on a sustainable basis, you really have to be differentiated. If you look at the lenders that are all chasing the typical general market consumer, it's really the largest lenders that are going to survive. Those are the lenders that have scale in their operations, and operating efficiency that goes along with that scale, and probably more importantly, they have the lowest cost of funds.
So for us to be successful, we have to find a way to be differentiated, and I think there are many opportunities in lending to be differentiated. There are all kinds of interesting case studies that we've seen in consumer lending over the last few years. I like SoFi, is a great example, a company that targeted initially graduates of elite business schools because they had a belief that those individuals and that profile would perform better on their obligation to pay back a loan.
Our differentiation is the Hispanic market. And so we're focused on a Hispanic consumer who is not able to access traditional credit. One that we would characterize as being credit invisible.
Does Tricolor actually mean something in Spanish?
It does. So, to a Hispanic who originates from Mexico, that individual would refer to their national flag as my tricolor. They would also refer to their national soccer team as my tricolor. And soccer, as you know, is a source of endearment and pleasure to that, and passion for that consumer. And so, we've been fortunate to land on that name, and I think it's resonated well.
Yeah. Well now the company name means, now I understand what it means. That really clears it up for me, I appreciate it. And I also want to circle back here to something, or to just something real quickly. You mentioned about the basketball coaching okay, so just from a personal standpoint, how did you run across being a basketball coach? How did that come about?
So it really was a passion of mine, or an interest or an aspiration of mine from the time I was probably a teenager. What it ended up being was a tremendous preparation for business, because I think, in sports, and particularly in coaching, more than anything else it's ongoing training on how to deal with people. How to interact with people. And, you know, at the end of the day, as a CEO I believe my job is always, not only managing people, but understanding how to persuade people. How to get people aligned, how to get people focused on a single vision, a single goal. And I think coaching was great preparation for that.
Where did you coach?
So I coached at the University of Miami for five years, right after I graduated from school, and I was a head coach at a school called the University Of The South in Tennessee. And then, from there ended up having the opportunity to start a business in auto finance and then used cars. And I often tell people, when I decided to leave coaching and going in to a business that involves used cars, I always tell people my mom would say, "Well, if you would just go to law school, you would be able to make claim to the three most disreputable professions known to society." But I didn't, I wasn't able to take that last step.
The U huh?
The U, yeah.
Alright. So let's switch back to your company and your career a little bit. So how has technology streamlined, not only the operation that you have now, but the different organizations you have worked with in the past?
So our business model is a little unique in auto finance, it's more of a vertically integrated model. Think about DriveTime, for example, who is the largest scaled operator in our segment. So we're operating really a hybrid model, where consumer finance is one component of a vertically integrated structure. The other one being the fact that we are in the retail auto business. So when you look at technology as it's applied to our business, it's really across all of the processes that drive that vertically integrated structure.
I really think most notably of two. We have invested a lot of effort and resources into our supply chain technology, and many aspects of it, or really most aspects of it from how we purchase and what vehicles we purchase, to how we recondition those vehicles and make them the most suitable possible for our consumers, is a very technology driven approach. And then, really one that we have I think hung our hat on, is the technology that we have invested to develop our ability to segment our consumers. So in many cases we're segmenting a consumer that either has no credit file or a very thin credit file, and so we're really relying on a lot of the technology we've developed to enable us to get enough insight into how to grade and score that consumer, which in turn would allow us to offer finance.
Is there any specific technologies you want to mention in that arena? I don't want to give away your secret sauce. I'm just curious.
So, going back to seven or eight years ago, we really deployed basic regression analysis, linear regression analysis looking at one independent variable and its impact on a given dependent variable. In the past 12 months we've made a lot of progress to introducing machine learning into that segmentation model, and frankly, the results and the outcome of that investment has been really phenomenal. What that neural network allows us to do is take all of the data that we're gathering from the consumer and identify patterns in that data as it might relate to their propensity to pay, that a typical regression model would not give us insight into. So, it's been a powerful compliment to our existing segmentation and risk strategy, but one that we're going to continue to invest in.
Great. So you hear a lot about fintech nowadays. You know, in fact, we went to a conference that's specifically geared toward fintech, I don’t know if you're out there in San Francisco or not. But what has the impact of what is referred to as fintech, which by the way, as you know, means different things to different people. What impact has fintech had on your business, and do you see some sort of significant shift in how the business runs because of that technology in the future?
So, as you know, fintech does incorporate many different strategies, from actual lending, to what people would refer to as regtech, or regulatory directed business models, insuretech, payment processing. So it spans a pretty broad set of businesses. As it relates to us in lending, we have currently a lot of strategies that we're executing on to make that experience for the consumer more of a digital experience. Beginning with how we engage with that customer online in the lead generation process, all the way through conversion. But I really think there's some interesting takeaways from just the volume of fintech activity and investment that we've seen in the last couple of years.
Within lending, it's probably had its most profound impact on the unsecured space, and the unsecured space make sense because it's obviously difficult to transact a car completely online, you at some point have to physically deliver the vehicle. But for an unsecured loan you can underwrite, score, offer financing, and actually transact alone completely online. And then, remit or deposit those funds in a borrower's checking account, or through some other process. And so, that is a business that fintech, I think, has gravitated toward, and you've seen a tremendous explosion in the personal lending space as a result.
I think, honestly, the verdict on whether those investments will really result in positive outcomes remains to be seen. The unsecured lending space has an element of risk that we don't have to necessarily model around because we're secured by a motor vehicle, but certainly, it's a great application for a lot of the technology available, and a lot of the new sources of alternative data that enable an online lender to find a differentiated niche and really have some success with it.
So if you could send out one message to that consumer finance, or I guess in this particular case the auto finance industry, what would that message be?
So, I would first point to differentiation. But beyond that, I would say the main message or the main takeaway I've learned, and I've been doing this for over 25 years I think, is that you really have to work towards building a model, that at the end of the day maximizes the present value of the future cash flows from the loans you're originating. That has to be the focus. So if you're focusing on maximizing that present value of cash flows, you are not necessarily looking at, what do I think I'm making today? You are looking at everything horizontally or in a vintage view.
And we believe that's the most effective way to manage a lending business, because when you're in the lending business, you're ultimately extending a certain amount of credit in anticipation of receiving some set of cash flows coming back. You have to understand what the value of those cash flows, really on a loan level basis are. That's how you achieve, in our opinion, real value creation.
So, I know you've been doing this for a long time, and I asked one of my previous guests the same question, because I'm always curious with guys like you, and by that I mean who are accomplished, you've been around many startups, you know your way around, you've seen all the mistakes made. What is it that makes you tick, if you will? What drives you to continue to get up in the morning and deal with the same sort of challenges that you see every day?
So obviously when you're growing a business it's full of challenges, and I think the most important thing that I like to share with people is around the mindset that you take when you're approaching those challenges. What I really believe is that there has to be a mindset that that values continuous improvement, it values learning, it values personal growth. Because, to properly or effectively deal with those challenges, you really have to embrace them. You have to understand that growing a business is going to present along with it a set of problems, and you can either look at those problems with a scarcity mentality and react with fear, or you can look at them as an opportunity for growth and opportunity for learning.
Speaking of growing and learning, when you think about it from a personal level for you, I mean, everybody needs to grow, right? We all need to improve ourselves. You know, you have football coaches, basketball coaches as you know, I'm sure you sit in a film room afterwards and see how we could have improved from our performance the day before. Where do you think that you need to grow as a CEO, as an executive of a company?
So, I am still trying to make sure that I am aligned with the rate of change that we're seeing in our industry. Technology impacts auto finance, really with the same magnitude that it's impacting industries that maybe are a little bit more visible, like retail. And so, as a CEO, I want to make sure that I'm prepared in terms of being agile enough to pivot, and to react to changes that technology is bringing to our business. So it goes back to that continuous improvement approach, but it really speaks to being able to be open to the fact that, if you're going to be successful today, and you're going to embrace technology and what technology is potentially doing to disrupt your business, you have to be willing to experiment with new things, you have to be willing to test new things. You have to be willing to fail, and then you have to be able to pivot from those learnings toward a strategy that's ultimately going to be successful.
What do you think the best piece of counsel you have ever received may be?
I'd say, I think about two things most. Very early on, a mentor always emphasized to me that success should never be viewed as an outcome. Success is not an event, success is a process, it is a journey. And if you're building a business, growing a business, working toward a business that's sustainable, that's agile, that's fundamentally sound, it really is a process, and you have to love that process. And I think that's probably one of the main lessons I've learned, and things that I've gathered.
The second thing I would say that really goes hand in hand with what we've already talked about is the whole idea that with every challenge there really is an opportunity. That with every problem that you recognize or encounter in a business, it really needs to be viewed and needs to be digested, not just as a problem, but really as an opportunity to improve and get better.
Yeah, I guess that could apply to our personal lives as well. And on the flip side of that, have you ever been given any bad advice?
I'd say, I don't know if it's bad advice or misleading, but a lot of people taught me early on, or at least advocated to me early on, especially because we run a business that involves a retail auto component. There was this idea that was perpetuated to me that sales cures everything. That if you just focus on sales, it really will negate all of the other evils or all of the other flaws in a business model.
I think in the consumer finance business nothing could be actually further from the truth. If you look at indirect lenders, if their sales force is out in the field purchasing, building relationships that ultimately end up purchasing loans that are not good loans, their sales may look very good but their ultimate performance and the ultimate sustainability of the company really could be compromised.
Do you remember a time within your career where you were presented with a challenge if you will, and maybe there was gray area in the situation, and you had to go inside and trust your gut instinct, that little voice that whispers to you inside, and if you can remember something like that can you give me an example?
So I've had a few of those types of pivotal decisions that I've encountered. I would say, that in general, I do like to rely on my gut feeling to at least guide some part of that decision. But I think as an executive, I think what's more important is to be aware of the energy that's around you when you're making those decisions. Because ultimately, you're going to rely on people, and if the people involved on the other side of that decision have the right energy that lines up, I think that in turn really catalyzes that gut decision that says, yes, this is the right way to go, or perhaps it's not the right way.
Very good. So in other words, you use a combination of factors. You trust your gut, but yet, you read the folks around you, and then just proceed with the best decision you have on that day. So if I was in your position, I would be, how do I put this? Like a cat on the highway every day? In other words, I'd be living in fear of making a bad decision. And I'm not saying this is good. So how do you live with that, I guess that fear, or that angst that is involved with affecting many people with decisions and levers that you turn on a day to day basis?
So I think one of the learnings that I've experienced over time, is that in order to really be sustainable, to be able to, not only embrace those challenges but make the right decisions, you have to surround yourself with a great team. And I think for a CEO, the sooner a CEO can acknowledge and accept that by hiring people smarter than he is, more capable than he is, that the organization is going to be better off in advance, the better off he is. And, that was something that was drilled into me early on, because I knew I wasn't the brightest guy in the room it was easy for me to accept, but it's really led to, not only a much more successful organization, but a team that I think is energized, and engaged, and focused, because they all have a tremendous value they bring to the table, they recognize that. And so the collective energy can be powerful.
So Daniel, who is your role model? Besides me, of course. Do you have other role models?
So really, I think mostly, when I think about role models I think a lot about my background playing and coaching. I was around a lot of great coaching role models, really taught me a lot about, as I said earlier, how to deal with people, interact with people, and ultimately, a lot of insights into leadership. But I think, one of the most important lessons that my role models taught me, is really just the importance of culture in an organization. So going back to a team environment, and now translating that into a company. I've really been able to see and validate the idea that, at the end of the day, culture really beats strategy, and culture is really what makes a company special and what really drives a company's success.
Yeah, I've heard that before, culture eats strategy for breakfast. And so, can you dive into that just a little bit further? In other words, when you see things going off the rails, right? I'm sure with all these startups you've had some hiccups, right? When you see things going off the rails, is there some sort of strategy, for lack of a better word, that you have to get things back on course?
So, for example, I think, as it relates to culture, I think the idea within an executive team and within a company, that mistakes are okay, failures are okay. We can persevere, and we can take those learnings, and we can actually improve. That becomes, again, that mindset toward growth and towards success versus scarcity can be a powerful component of a great culture. And you see it in teams, you see it in companies. It's really, to me, one of the fundamental ingredients to a team that's fun to be a part of, or a company that's fun to be a part of.
Yeah, they always talk about that locker room mentality. When that locker room starts to go south, you know, it's not going to be a good team. So is there anything you've changed your mind about lately?
So I think I've continued to evolve my view about what skills are really valuable in the marketplace today. Growing up, I was fortunate to go to high quality schools. I went to Cornell University for two years, I went to Washington University where I graduated. And I think coming out of that educational environment, I personally placed a high degree of importance on reading, on writing, on math, on communication skills like active listening. And I really did believe, even though we hear a lot of, I've heard messages to the contrary in this more technologically advanced environment we currently live in, that those reading and writing communication skills would eventually deteriorate in value.
I'm almost ready to succumb to that idea. I don't see a lot of those basic communications skills really, actually maintaining the kind of marketplace value that I always thought they would have. Because, ultimately, that's what drives our ability to connect with people, engage with people, persuade people, sell a product. But now, I think really, those thinking skills, which are also cultivated in the right educational environment are really more important. So I think about critical thinking skills, I think about analytical thinking skills, and if I've changed my view about something, it's that I would probably place more emphasis on developing those today than I would have said 10 or 15 years ago when I really thought communication skills were really the key to building a longterm path that gave you a chance to experience growth and success.
Speaking of education, what book are you reading lately?
So, I've read hundreds of business-related books, from strategy, to leadership, to digital transformation, the topic that we've referenced some. I think I've really been most impressed, if I look at what I've read, I've really been most impressed with an author named Clayton Christiansen. He's a Harvard Business School Professor, but he's probably advised and consulted more Fortune 100 Companies than probably any single person in the US. He is given the credit, or, the whole term disruptive innovation is really attributed to him. He innovated, call it that term.
And so, I'm currently reading one of his books called Innovator's Dilemma, but I've read four or five of his books, and more than, I think, any author I've read in the last six or seven years, he stands out as being the most forward-leaning in the way he thinks, the most innovative, and draws from so much actual experience that accompanies the observations that he's made. So we've really, I think I've benefited personally, but we've implemented a lot of those ideas as well into our strategy.
Well, Daniel, this has been absolutely fantastic. Before I close it up here, put a little bow around this, is there anything in particular that you have as a parting thought that you'd like to share?
Well, I'd say if, as kind of a closing thought, I would say that to really tie together a lot of the ideas that we've been able to talk about today. I would say when you think about mindset, whether you characterize it as a positive mindset, a growth mindset, a success mindset, I think what you're really trying to develop there is a formula based on some real fundamentals. A positive attitude, an attitude toward continuous improvement, toward personal growth. You're really trying to develop that mindset to ultimately, at the end of the day, I believe, stand the test of time, and that's the real test in business, is the test of time.
And so, if you said, "Well what is the parting shot?" I'd say, "Well, given the fact that today we're in this very rapidly changing environment, largely as it relates to technology, it's relying on those fundamentals and that approach that give us an opportunity or a chance to really experience success. And so, it really all goes back to mindset, but the outcome of that, I think, is really the test of time, sustainability.
Well, I really appreciate it. As you can see here, I've been furiously taking some notes. My favorite part about this is I get to sit down with folks like you, who are thought leaders in the industry, have some one-on-one time, and I get to have some tidbits and pearls of wisdom that I can take away and use in my business live. So I really do appreciate you being here today.
Thank you, sure.
Thanks for having us.
What did you think about this episode? Feel free to reach out to me at John.Michael@conduent.com. Until next time, thanks for joining us.