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 1: The Making of a Growth Machine
Paul Kerwin, CFO of Westlake Financial, shares on how technology, outsourcing, automation, bots and ‘skin in the game’ is turning his auto finance company into a growth machine.
Chief Financial Officer, Westlake Financial
Paul Kerwin oversees all aspects of finance, accounting, treasury management and analysis for Westlake Financial.
Paul joined Westlake as its Controller in 2002 and was responsible for financial planning and reporting. He was named Chief Financial Officer in 2004. Prior to joining Westlake, he was a Senior Accountant at KPMG, LLP from 1999-2002. There, he specialized in the Financial Services and Consumer Markets practices including sub-prime lending, due diligence and various consulting projects.
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 industry. Consider this podcast if you will, your resource for all things consumer finance. All right. So today, ladies and gentlemen, we are sitting here with Mr. Paul Kerwin, CFO of Westlake Financial Services. Thank you so, so much Mr. Paul for joining us on the inaugural issue of Lending in Digital Times.
Thank you very much, John. First I just want to say it's quite an honor to be your inaugural guest.
I could not think of a more apropos guest. And I got to tell you, Paul, I've dealt with a lot of CFOs throughout my career, and you are incredibly approachable. How can I say this? You work with a lot of sea levels who are not as approachable, and you're just an outstanding guy. I've seen you at conferences. You answer every person who comes up to you and every question that they have. Just a very congenial guy, so I appreciate you being here.
Well, great. Thank you very much.
All right, so let's get this started. You are, as we have mentioned already, the CFO of Westlake Financial. So Paul, how did she get here? Can you give me a thumbnail sketch of your background, how you ended up being a CFO of a major auto finance here in North America?
Absolutely. I started studying accounting at the University of San Diego and I went into big four accounting. I worked at KPMG. At about two and a half years, like 80, 90% of the people that are working in big four, you start to look for other jobs. You get a little sick of working 60, 70 hours a week for not a whole lot of pay. And of course, some good opportunities tend to pop up because you're actually talking to a lot of executives at companies. That was about the time that I was thinking about moving on to do [inaudible] didn't really know what I wanted to do. But I met the president of Westlake at a party, and I had just passed the fourth part of my CPA exam looking to do something different, and Westlake was looking for a controller. Actually their CFO was working part-time, which was unusual because Westlake, even at the time was about 150 to 175 people.
I basically looked at the opportunity, it helped the fact that a good buddy of mine was Don Hankey's son. And that was part of the reason that I made the initial introduction to the president and interviewed over here. They seemed to like my background. Maybe they liked the fact that I didn't have a whole lot of experience. They could mold me into what they wanted. I took the opportunity and ran with it. That was back in 2002, I was the controller and then only a couple of years later I became the CFO. So again, I was granted a great opportunity. Looking back, it's exactly what I wanted to do.
Well, and not only looks like you had a great opportunity, but you seized on that opportunity when you had the chance to seize on it, do the work and look where you are today. That's fantastic. Is that Mr. Ian Anderson, the president you're talking about?
No, it's actually Jim [Vagam] who used to be the... He's now the president of UACC, and he was the president of Westlake until 2007. We had a great relationship with other management there at the time and he's the one that hired me and gave me the opportunity. Looking back on it, it was a good thing that I was working at KPMG Working 60, 70 hours a week because the day I started, Jim had asked me to negotiate the fees for our engagement letter for our auditor and plan that out and see how we were going to get the audit done on time. At KPMG, I was just a senior accountant, never had been manager and just thrown an opportunity to like that the first day on your job was basically I think a good roadmap for what I could expect at Westlake.
Just a lot of things thrown at you, which is exactly what you want. I think most people want that. I had to work really, really hard obviously because I didn't have a lot of experience, definitely a position that was way over my head. But something that at Westlake, no one thought that was strange. And I think anyone on the outside thought it was strange, but no one internally thought it was an issue. But I had to work really hard to figure things out and at Westlake they gave me that opportunity and that's all I could ask for.
That's right. That's all one can ask for, is that opportunity. I know that Westlake has grown from, I believe about two billion to nine billion in approximately five years. So my question is, how were you able to achieve this level of growth and did you have to sacrifice margins in order to accommodate that growth?
Fortunately we have not had to sacrifice margin. A lot of that is the scale in our business. We're very technology focused, I'm sure we're going to talk a lot about that in the future. But we've hired more salespeople, we have over 500 salespeople. Mark Vasquez does a great job managing those folks internally here at Los Angeles, about 350 of the sales reps are throughout the United States, and we've got a couple hundred that are internal. That's been a big push just on hiring salespeople and then always focusing on technology.
We've got Nowcomm, which is our technology provider, they have dealer center, which has been expanded to about 13,000 dealers. And Ian Anderson, you mentioned him, Ian has been pushing on growth for quite some time, probably about five, six years ago that he said our target is going to be $10 billion in portfolio size. And at that time, that was really, you'd almost think impossible in a five, six year horizon. But he pushed really hard, everyone stepped up at the company. Because we've got a lot of scale now, we've been able to provide the margin back to the dealer in the form of pricing. That's primarily how we've done it. Not loosening underwriting, but rather give better pricing to dealers and utilize the technology we have.
I just got back from a conference, it was LendIt 2019 in San Francisco. So Fintech has been on my mind here. What impact do you believe Fintech has had on your business and do you see Fintech having a significant impact on your business moving forward? Can you address that a little bit?
I think the good thing about Fintech is it keeps everyone else on their toes. Basically if you're an auto finance company or a bank basically, probably any company in the United States these days, you have to have a technology focus in order to beat the competition. It's no different in the auto finance realm. A lot of the fintechs though were focused solely on the tech side of it and missed things on the lending side. Not everyone, but I think we've seen some examples of some companies that led with only technology but then forgot that they're a finance company and that you actually have to make a good risk adjusted return. So I think the impact of Fintech is really the companies that have been established, which of those companies are going to embrace technology versus the other companies that don't and have gone by the wayside.
I think you've seen many examples of that in auto finance over the last five years in particular. A lot of companies going by the wayside, they didn't have scale, didn't focus on technology. Westlake focuses on technology. I'm sure [inaudible 00:08:48], some of the larger players, Credit Acceptance. These survivors in this industry are doing well, and it's because they've embraced technology. I don't necessarily see that there's a massive threat from a purely fintech company. It's more just about, if you're not a finance company and you're not embracing technology, good luck because you're not going to be able to have this scale and the monitoring ability to run a successful company.
Do you by any chance have any outsourcing strategy for various aspects of your business?
Well, like many things at Westlake, this is something that's evolved over time. For a long period of time, Westlake we just did everything internally. I think that that worked out well in terms of learning the business because we had to learn every single side of the business from the ground up. We've also had to deal with the growth involved. But you also notice over time as you gain scale, that there's so many things that you may not do too well because you have to focus on so many things. For example, we have partners now that are doing the bankruptcy collections for us but we still do some of it internally. I think that makes sense. But we've realized that even though that's an important part of the business, that there's other companies that maybe have a different focus, different incentives, and if that's their sole focus, they're going to do that well.
Also on the technology side, we've got a technology company, a sister company owned by Don Hankey, our majority owner. They've got over 300 developers. Most of their focus is on helping Westlake grow. And we've got about another 35 internal. You would think that we wouldn't really need to outsource further on top of that, but we have about another 40 or 50 off shore developers that we use because we always want to be able to accept new projects on the technology side. So we've definitely learned over the years that having an outsourcing strategy is beneficial and it helps with scale.
Once again, I just returned from that LendIt Conference and there's been not only at that conference, but there's been a lot of talk, there's a lot of buzz words floating around the industry right now talking about machine learning and data science helping to change the business landscape. How do you see the auto and consumer finance industry being affected by these things?
I think those are new buzz words that basically, really are telling companies that you should focus on analytics. That's something that analytics is getting into every aspect of business here in the United States. Even in the sports side, you can see that a lot more people are embracing analytics. Analytics has been something with auto finance, especially on the subprime aspect, that it's always been an integral part of the business. Machine learning, that is something that, yeah, more advanced in terms of, can you put a lot of variables into a machine and have it spit out a result? We do that, we've got a machine learning and data scientists walking around here.
But we also balance that with a lot of the real world aspects of the business. And we've always been pretty focused on just the basic analytics, static losses, lost liquidations, early delinquency, et cetera. It's similar to Fintech. You need to embrace that. You need to be looking at new technology machine learning. But then again, if you don't understand the business and you just try to start a finance company doing machine learning, you're going to lose a ton of money. I could see a potential backfire on too much reliance on data science and machine learning. That's something that's going to benefit us in the future if it does happen.
As I have already referenced, this is called Lending in Digital Times and you are right in the thick of that. You have reference already some examples, but can you give us any more examples or expand a little bit on how technology has streamlined your operations within Westlake?
Number one, Westlake has always done automated decisioning. Nowcomm, which is our technology provider, they have a dealer management system and the company's name in the market is Dealer Center. I think I already referenced, they've got 13,000 dealers. They actually started because Don Hankey under building here in Los Angeles and in the tech bubble burst, he had a client that left a bunch of servers and an office. So Don, of course, always forward thinking said, "Oh well, why don't I just start a technology company?" And what he did is he said, "I'm going to have my companies use the technology company. They're not going to have to pay any money for that, but they're just going to get incentivized on a percentage of the profits and the volume." So Dealer Center has gone out over 15 years and developed a state-of-the-art dealer management system that they essentially, well, it's very inexpensive. Westlake will actually pay for that if the dealer sends us a number of deals a month. That way it is giving cutting edge technology to the dealership and our Westlake by-programmer our automated decision is embedded in that system.
So first and foremost, that sets us apart from the competition. We've got 24/7 access immediate decisions. Then we've got a lot of other technology that Nowcomm, and our internal team have built to book a deal quicker, identify fraud more, which obviously then helps us have a more aggressive program. It's a combination of things, but number one is just being able to have that automated decision that is embedded in a state-of-the-art dealer management system.
I was doing a little bit of research on Westlake before we got on this, a call here. I noticed, in reading an article online that you had something called [Visor Bot 00:15:27]. I hope I'm pronouncing that right. Can you tell me what that is and if that's helped the operations?
So you saw that article, Visor Bot.
Visor Bought. Izer Bot. Yeah, that's something that, when Ian Anderson started here in 2008, one of the things he brought in a lot of was enhanced analytics. We've always been focused on analytics, but he took it to another level and recently we've actually just came up with a term for more automation and reporting, helping supervisors do their job better, help monitor all this data, and we just called it Visor Bot. It's a supervisor robot. Not that we're going to have robots rolling around here, but it's the fact that we're going to help supervisors, and we are helping supervisors and line level employees manage their operation by helping them with automated reports out in the rep force. We have an automated email that pops up anytime a dealer who hasn't produced with us for 30 days runs a by-program.
We have a special automated alert that goes out immediately to that dealer amongst, it separates itself from all the other applications that dealers are sending. And that alerts that sales rep to say, look, this is a fresh deal. Let's try to get this dealer back up and running. We've got a variety of things. For example, anytime there's an impound charge that is over a thousand dollars, we have an email sent to various people in the department, even management just to try to identify what's happening. These things are impossible to be able to monitor unless you have a certain automation. And if you've got a moment, I'll give you another example that even helps me personally. We monitor swap rates on a live basis because we've got a subscription to Bloomberg and I don't have to sit there and monitor interest rates all the time on Bloomberg.
I can focus on other things to help the business. But any time interest rates move more than five basis points, I get an email with other people in finance and ownership, et cetera. Right there, it has a nice that shows what the trend is, what the trend is the last couple of days, what the percentage of our portfolio that has variable rate, interest rate exposure. And I can make a very quick decision with that information that's sent to me automatically whether we want to hedge our portfolio. So it's just an example of something that takes something that's actually pretty complex and boils it down into something that we can make a hedging decision in two or three minutes versus spending all day monitoring interest rates and figuring out where to hedge our exposure.
Sounds like a very useful tool. You have just tons of experience within this industry. From a more personal level, if you could send out one message to the auto finance industry right now, what would that message be?
That's a great question. The message I would send is that everyone's got to be cognizant that we are in a very positive environment, especially from the consumer standpoint. So the consumers in very good shape. We've got record low unemployment, we've got tax reform, it's putting more pay into the customer's hands. We've got gas prices that are relatively low versus prior periods. That's putting the customer and the entire economy in very solid footing. And of course, the loans that are being booked now or five, six, sometimes even seven year loans. We definitely don't go that long. But I think people need to be aware of the fact that when you're booking these loans and everything is going pretty well right now.
There's indications that some companies have delinquency that's very high, but there's a lot of companies, us included, that are almost at record low delinquency. And that's not a surprise because consumers are doing very, very well right now. But what's going to happen over the term of that loan that people are booking? We've seen some signs of some aggressiveness and it's very common in the lending world. Is you book a loan today thinking, oh, everything's great. The unemployment's low, people aren't having their hours cut, money's in their pocket, but that's going to change over the next five years. It could happen next month, it could happen two years from now.
It's just a common cycle that people get aggressive when times are good and then two, three years down the road when a customer's in too much car and they still have three, four more years, that's when things explode. And we're cognizant of that. We've kept our pricing, our pricing is actually down a bit, which makes it easier to book more volume, but we're not loosening underwriting because we know that things are going to change. So I would just say look, cognizant of the fact that things are good right now. It's not going to last forever.
I know that you have been doing this a long time and what I want to ask is what makes you tick? In other words, what gets you out of bed in the morning and keeps you pushing through these days with these long hours and all the challenges that you face during a day with various employees and the market situation, et cetera. What makes you tick, Paul? What gets you out of bed in the morning?
Yeah, it's a combination of being at Westlake, which is a company that is always growing. We're always focused on growth and we know that we can grow in any environment. Sometimes you can lose some of the programs, sometimes you need to tighten. But when you're at a company that is always focused on growth, a privately held company with a lot of skin in the game from the employee base, that keeps things exciting because you really can think about the decisions that you're making today, are things that you're going to be around to see in three, five, 10 20 years. [inaudible] and I think that that makes things more fun when you're growing, when you can start a floor plan company and have some growing pains like we had, but then fix it and then get it growing again. These are things that, they're not our core business. They are very, very important parts of our business, but it's nice to be able to grow and then also get new opportunities.
Then just in general, auto finance, especially in the subprime side, is a very interesting business. There are so many opportunities as you know, to lose money. That's the way we look at it. We don't say, oh, there's so many opportunities to make money. That's pretty obvious given the fact that you can charge a fee to the dealer and you charge a pretty good rate. If you can just avoid as many mistakes as possible, you're going to make good money. But there's always going to be things that come out from left field, whether it's on the underwriting side, the economy side, the regulatory side, there's just tons of risks in this business and that's what makes it exciting. So there's a never ending project list on my desk and everyone else's desks here at Westlake. Frankly, people have a good time here too. That makes it easy to come to work.
We all have to grow as individuals. So my question to you is, where do you still have room to grow as either an individual or a company executive or both?
What's nice for me is I don't have to ask that question very often because new things are thrown at me. It's very similar, I guess to the last question I just answered. But I'm always given new things or always tasked with new things that provide learning opportunities. Every month something pops up that I haven't dealt before. Now we've got a servicing division, a portfolio acquisition division, we deal with companies in bankruptcy. There's always things to learn. And one thing I'm always trying to get better at mentoring people, understanding what management is doing, trying to help people along in certain areas. I'm definitely, I learn a lot more than I think the people that report to me, but it's always something that's important to me is empower people at the company. Just like I was thrown a lot of things and given a great opportunity, that's something that I am a huge believer in, our management is. And that's something I'm always focused on is trying to make sure that our employees are empowered and they see that the things that they're doing are making a difference.
There are going to be people listening to this episode who are just beginning their journey in the consumer finance industry and they're hoping to be a CFO like you someday. What advice would you give them moving forward?
The basic, always work hard and I think ask for more responsibility. Especially you're in your career, I think you usually have a little more time on your hands. Maybe not for everyone, but typically, when you're straight out of college especially, you've got some more time on your hands. I think the key is, is that you put extra hours in. If you put extra hours in at any company, then you're going to get noticed. If you also ask for more responsibility and focus on learning, I know it sounds obvious, but from what I've seen here at Westlake, we provide a lot of opportunities.
We empower people to make decisions, to get involved, to go talk to anyone at the company, go into Don Hankey's office and ask a question. We like that. We're just trying to grow the company moving forward. I think that's something that if employees do that and have a broader knowledge base, then they're going to succeed regardless of where they go. At Westlake, we're growing, so we're providing a lot of opportunity internally and hopefully that's how it is at other companies. But regardless, if you work hard and focus on your knowledge base, then you're going to do well just about anywhere.
Paul, if I was in your position, I would be like a scared cat on the highway every day. And I mean that as a compliment. So my question is, how do you overcome the fear of making a bad decision that could potentially run the business into the ground?
Yeah, the best way for us to do that, and I think the way that we do run the business is we have cushions, we have cushions in the margins, and we always have liquidity. So I would be very stressed out if we had six, seven to one leverage. If we had margins of one or two percent, I'd probably wouldn't be able to sleep at night because there's so many things in this industry that you just can't plan for. So you essentially need to plan for just about everything. A lot of times people talk about, oh, the used car market. Well, I don't know where the used car market is going to be, but I can tell you that if the used car market goes down 15%, we're still going to be in business. Other companies are not going to be in business.
We set ourselves up for the unexpected. We keep our leverage lower than most companies our size. We have strong cushions in the margin, so we don't go out and buy every deal. We go out and try to hire over 500 salespeople and give them a good product and give them really good technology and try to price our best dealers aggressively. But we need to be focused on margins. Frankly, that's what helps me sleep at night. I look at our margins right now, I know things are going to get worse. We're going to be in pretty good shape to sustain any issues in the economy. And look, I also know that maybe we won't. I think that's what keeps us on our toes as we always got to be looking out for what we're missing because I can tell you we're making mistakes every single day, and we're missing a lot every day. But if we can get maybe the majority of it, I think we'll do just fine.
What do you do when you're overwhelmed, Paul? In other words, we all get stressed and we all need a way to have a release valve. Do you have any particular way of dealing with that?
I delegate. That's the easiest way. Just get other people to do the work. Now, people that work for me and work with me, I'll probably laugh because delegation is actually something that is really important. It's also, instead of delegation, I call it empowering. That sounds like a nicer way of doing it. But I'll tell you, I'm not overwhelmed. And the reason is, is because we really do have a strong team that are also passionate about growing. If there's a problem with Westlake besides the parking here in Los Angeles with so many people, is just the fact that our people always want to take on new initiatives. So sometimes we're doing too many things, too many irons in the fire, that can sometimes be a bit overwhelming, but we've got a lot of people to step up, fill the gaps when we need to.
What is on your music playlist right now?
I've got a lot of Queen on there right now just because I watched that movie the other day, which by the way is great. Yeah, I've always been classic your Rock guy, Van Halen, listening into a lot of Queen, like I said, just because I love the movie. Yeah, I'm also listening to a lot of podcasts, which of course, not music, not your question, but I do like podcasts. We've talked about that. There's always some good ones I listened to, Dan Carlin on history a lot and even Joe Rogan's got some good ones. And now, John Michael.
Right, in Lending in Digital Times with Paul Kerwin as the guest. You'll be able to listen to another one. That sounds great. All right. So Paul, this has been a fabulous time together. You said on the beginning, "I hope I don't let you down." Well, I can tell you, you did not let me down at all and I'm sure you are not letting the listeners down either. Any parting thoughts before we go our separate ways here?
Again, I want to thank you and I'd like to also, the Westlake way is to have our name and phone number on the website so customers can call and give me complaints or call me with business opportunity ideas. So my number, 323-692-7070. My email, email@example.com. We'd love to answer any questions that people have. If you want our take, whether you believe it or not, definitely happy to share. I just want to, again, thank you for having me on. I really appreciate it.
Thank you so much, Paul. We'll have to do a follow-up episode at a later time. Once again, I have truly enjoyed your time today.
All right. Thank you very much, John.
Take care now. Bye. Bye.
What did you think about our inaugural episode? Feel free to reach out to me at John.Michael@conduent.com. Until next time, thanks for joining us.