Happen Bank’s Scott Sanborn talks agentic AI and rate risk
- Key insight: Happen Bank is currently allowing LLMs to scrape its website content so they will cite the brand to potential customers, but it is also blocking AI agents from accessing bank accounts until regulatory concerns are resolved, according to CEO Scott Sanborn.
- Supporting data: Sanborn said that Happen Bank’s loan delinquencies have been 40% lower than FICO’s competitive set for around six years.
Despite grappling with rising interest rates and swallowing the costs of a full rebrand, Happen Bank reported that it broke multiple performance records in the third quarter and raised its full-year guidance.
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“In the quarter, financials as a whole were under a lot of pressure in the public market,” Happen Bank CEO Scott Sanborn told American Banker. “There was an expectation that rising rates would really impact our ability to deliver and stay on track with our earnings. You can see with the results that we actually beat expectations and raised the earnings guide.”
American Banker spoke with Sanborn after Happen Bank reported its
This interview has been edited and condensed for clarity.
You mentioned in the earnings call that the bank is preparing for external AI agents. Some banks, as we
When I say we’re preparing for them, what I mean by that is that, step one, we’re making sure we’re visible to those agents and that the content we produce is made available to them. For people searching, which is already an activity happening today, they can find us.
Step two is, once they find us, can they act upon us? Right now, that answer is no – similar to what you’ve heard from other banks, to the extent possible, and without geeking out on it. There are agents that you can quite easily recognize, but if you put OpenClaw on a Mac Mini it looks just like you. That would be hard for anybody to really know. There are some techniques, but it’s not foolproof.
Where possible, we are blocking today until things like identity, authority, permission and liability are worked out. If somebody gets a loan and then says, “Oh, I didn’t mean to get the loan, that agent did it for me,” who’s at fault here? Does the agent actually have permission to withdraw funds on your behalf? There’s a lot of questions that have to be worked out.
When I say “getting prepared,” we are building the internal infrastructure – let’s call it the rails and the harness, if you will, for an agent to be able to ride with the controls built into it. We’re doing that for our own internal agent that we’re developing and will make available to customers, but we’re going to build it in such a way that this could theoretically be repurposed for external agents when the time is right.
It’s our view that money in motion and people in motion will be very good for our business. We’re trying to make it as easy as possible to give them financial rewards for taking action. If that barrier to consumers taking action gets lowered, that ends up, in net, with more people at Happen Bank.
Can you tell me more about the bank’s rate risk strategy, especially with both the impact of the changing rate environment this year and the bank’s reported hedging program increase from $1.5 billion to $2.5 billion this quarter?
Yes, we have about two and a half billion in notional amounts of hedges, which are a combination of caps and swaps. The goal is to absorb some of the impact of rate movement on the portfolio of loans we have under fair value on our balance sheet. We came into the year expecting three rate decreases, and we ended up here with a pretty sharp increase in September.
We’re really pleased that we were able to continue to deliver on our commitments, actually raise our earnings guide and deliver record pre-tax income in the quarter – partially from the benefit of hedges blunting some of the rate impact, but also just really strong execution, continued growth in in loan volume and continued growth in our operating efficiency.
What has Happen Bank already done in the home loan space, and what’s going to be new when the home equity product launches next year?
We’ve been doing unsecured loans for a long time now, coming up on 20 years. One of the major purposes of getting a loan has always been home improvement. We also have another business that we call major purchase finance where we help people afford large purchases like private school tuition, tutoring for your kid, braces, fertility treatment, etc. We decided to go into the home improvement market through partnerships and distribution relationships, which we announced about a year ago and launched six months ago.
The first loan was made in April, and what we shared in our earnings was that last quarter we already did about $100 million in overall loan volume and have added multiple partners. We have a few more in the queue for this year, and we are also enhancing the product suite and the value proposition for the end user. What we’re hearing in the space is that the combination of having the stable funding of a bank but the pace of execution, the ease of integration and the highly streamlined customer experience of a fintech is a pretty powerful combination.
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My understanding is that the bank is expecting a “further provision benefit of $5 million to $10 million” in the next quarter. What is the company’s strategy regarding these provision adjustments?
This has to do with a back book of loans that were booked under CECL [current expected credit losses] with a provision. Those loans are paying down and we have a relatively short duration, so the number will get smaller over time assuming credit continues to outperform. Our losses coming in lower means our entire balance sheet is more productive. We had another new record in net interest income last quarter because our loans are performing great. We share publicly our credit performance versus the competitive set, and our delinquencies have been 40% lower than the competitive set by FICO bands for about six years. It also comes through investor loan sales pricing. In our space, there’s lots of fintechs that sell to investors. Most of them are providing some kind of loss coverage or guarantee or credit protection. We do not – we sell the risk.
This was the bank’s first full quarter under its new name, and one of the things that was mentioned in earnings is that there is a temporary increase in marketing costs due to that rebrand. How much of that is in letting people know about the new name, either existing customers or new ones, and how much of that is changing the marketing strategy towards marketing yourself as a traditional bank instead of only as a lender?
The old name did not reflect who we had become as it was based on the old business model that did not exist anymore. It did not convey that we were a bank or that we had banking products. For people who don’t know you, knowing you’re a bank conveys some trust.
When you look at this past quarter and the increased marketing expenses, that was the cost of doing the lift. We had to rebrand the website, our mobile app, thousands of emails, and call center scripts. All the internal systems also had some friction with the rebrand that you would expect. We lost authority on Google for organic search, so you lose some traffic there.
How do you get around that? We spent a little bit more on advertising. That was simply the actual execution costs of moving to the new brand. By the end of the quarter, we were humming. Existing customers have all made the switch and new customers are responding well. It allows us to start opening up our advertising channels to move into broader awareness channels and establish Happen Bank as a brand that clears the way for people making positive financial steps.
