Deal To Watch: The Hemi-Engine Of Reducing Car Loan Fraud

Key Stats:

Summary

The TurboPass team has been selected as a “Deal to Watch” by KingsCrowd. This distinction is reserved for deals selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com.

Entrepreneurial endeavors are, by some, perceived as self-centered pursuits of financial success.  In more cases than not, though, the goal isn’t just to make a profit, but to enact a positive impact on the world at the same time. 

Few companies can illustrate that better than TurboPass Corporation, a startup focused on eliminating fraud in the auto loan origination industry. The company’s ambitions don’t stop there though. If their technology is adopted in the auto loan space, they believe that it can expand to other industries as well.

Problem

In the US alone, several million vehicles are sold every year. In 85.9% of cases, these cars are financed at least in part by borrowing from a financial institution (mostly banks and credit unions). 

In 2017, car purchasers took on $568.6 billion in debt to pay for their vehicle purchases, ending the year with more than $1.1 trillion in loans outstanding. With so many individuals taking part in this space, and such a large amount of money at stake, some degree of fraud is inevitable. 

Add to this that verifying important financial information can take days to weeks, and the industry is begging for disruption.

Solution

TurboPass has envisioned a simple approach to addressing these problems. Through their platform, they allow almost instant income and identity verification to take place. Whether by invitation at the car dealer’s discretion or performed independently, the purchaser will connect their financial accounts to the TurboPass system.   

It will then analyze the data and create a financial report that the car seller and any relevant financial intermediaries can view.  

        *Taken from TurboPass

This direct approach is better than relying on paper documents. After all, paystubs, bank statements, and paper documentation can be fraudulently created. There are other services on the market that compete with TurboPass. PointPredictive, for instance, uses a mixture of artificial intelligence and machine learning to identify potentially-fraudulent loans. But having immediate access to a financial institution’s records cuts through that and goes straight to the most direct source.

TurboPass operates as a scalable SaaS platform for buyers, sellers, and creditors that offers an approximation of a borrower’s income and that verifies their identity. In the process, its automated system reduces the need to print off, fill out, and scan loan documents. This can save dealerships and other parties significant time and cash outlays over time.  

To monetize the system, the company has created six different tiers, or what they call Lanes. The first and most basic of these, Lane 1, is free. It provides 30-day access for companies to see reports that are created and it charges $10 for each report order issued. Lane 6, the most comprehensive option, provides for unlimited reports, but in order to get a quote on that a company needs to call TurboPass. Lanes 2 through 5 fit in the middle of these other two options and cost anywhere between $97 per month and $897 per month. 

Each of these Lane options charge a fee of between $8.15 and $9 per report completed. Each location must pay for the service, so a company that owns a dozen dealerships would have to pay for each of the ones it wants TurboPass to be at. The company also believes that it can generate revenue by charging investors and ratings agencies for the use of its system as a credit tool.  

In terms of initial traction, the results for TurboPass are impressive. According to management, Westlake Financial Services is now referring its clients to the platform. The company serves more than 14,000 dealerships. As a result of this push, TurboPass claims to be on the verge of landing contracts with 3 of the 5 largest auto dealerships in the country. Since Westlake began using TurboPass, the number of days to verify income for self-employed applicants dropped from 14 to under 1.  

         *Taken from TurboPass

Although traction has been impressive, TurboPass’s financial results haven’t exactly been appealing.The firm generated revenue during 2018 of only $17,100, while its net loss was $41,879 and its operating cash outflows totaled $25,209. No reliable data has been provided covering what 2019 might look like, but it is worth noting that as a small, early-stage startup, its books look clean.

Problem Examples

In one of the most recent cases, in August of this year, two individuals were found guilty of submitting fake auto loan applications. Over the time they committed this fraud, from April of 2016 to January of 2018, they cheated 5 auto lenders and 20 different victims out of more than $1 million. Both convicts face up to 30 years in prison, plus significant legal fees. Though this may sound like a one-off to those not familiar with the industry, the practice is quite common.

For the significant size of the auto loan origination market, the estimated amount of fraud is, as a percent, low, but the dollar amount is anything but. In 2019, the market for auto loan origination fraud will be $7 billion in size, and in the few years prior to that it had been rising at a CAGR of about 5%. 

In the image below, you can see that 30% of the fraudulent activities involve income fraud. This is the particular thing that TurboPass is best suited to tackle, but it doesn’t stop there. Another 30% involves employment fraud, and 15% involves both identity fraud and straw borrower fraud.  The remaining 10% involves collateral fraud. With the possible exception of collateral fraud, TurboPass’s system is designed to help reduce all of these concerns.  

*Taken from defi Solutions

In its pitch deck, the management team at TurboPass said that their technology can be used to address fraud in other verticals in time as well. Industries listed include the medical field, the M&A (mergers and acquisitions) market, and the commercial credit space. It can also be useful when it comes to investor due diligence checks. One vertical not listed here, but that is potentially valuable for TurboPass would be the mortgage industry. 

In 2018 alone, fraud rose 12%, with income representation fraud climbing 22%. An estimated 1 in 109 mortgage applications have indications of fraud in them. This is a significant market.   Though not as large today as during the last financial crisis, in the period of 2007 to 2009 fraud was a big concern. In the private label MBS (Mortgage Backed Security) space at the time, it was estimated to be responsible for excess losses of $125 billion.

Terms Of The Deal

At this time, TurboPass is attempting to raise a maximum of $1.50 million, but it will close a round as small as $50,000. As of this writing, the firm has $38,918 committed to its raise, with investors in the firm receiving convertible notes. 

These notes bear a 4% interest rate per annum, plus they will convert valuing the firm 20% lower than what the next capital raise will value the firm at. This is subject to a $4.5 million valuation cap for investors putting in the first $100,000, after which the valuation cap will rise to $5 million. 

The minimum investment accepted by the company, from any one investor, is $100. This raise’s valuation cap is lower than most startups we have reviewed. This is great in the sense that it means investors buying into the firm now are getting a larger slice of the pie compared to other deals.

Management

At this time, there are three core members of the TurboPass team: CEO Michael Jarman, COO Kenneth Jarman, and CTO Jude Samson. Michael has 33 years of experience working in the automotive finance space. Prior to starting TurboPass, he was employed as Dealer Development Manager at California Republic Bank. 

Before his time there, he served as the Vice President of Dealer Financial Services at Regions Bank. His role before that was as Vice President of Marketing and Business Development at Austin Indoor Soccer Center. Kenneth also has relevant domain experience. Before co-founding TurboPass, he served as Vice President at Sierra Motors, where he worked for a period of 10 years.  

Samson, meanwhile, is currently also employed at his own firm, Samson Advisory. Before his time there, he served as a Board Member at multiple internet-based firms. This includes at a company called levelfield.com, a small business website developer.  

As you can see, the team comes with a mix of relevant industry experience and operational capabilities that suit the business needs  well. 

The Rating: Deal To Watch

KingsCrowd has rated TurboPass a “Deal To Watch”. The business is young but it has interesting initial traction. Though sales so far are disappointingly low, the firm is operating in an interesting niche. Its top two executives, CEO Michael Jarman and COO Kenneth Jarman, have significant experience in this area, which is a major plus. 

The small size of the space (compared to other startups we reviewed in the past) may make robust growth difficult. However, if its technology reduces costs and cuts back on fraud, upside from other verticals should come. Perhaps the greatest value for the business will come in the years to come, when management is able to expand its technology to other verticals. This, combined with the growing occurrence of fraud in the auto loan origination space, all make the firm an interesting prospect.