Canaccord Genuity 45th Annual Growth Conference

All right, we're going to continue here at the 45th annual Canaccord Growth Conference. I'm Joe Vaffi, Equity Research Analyst here at Canaccord, focused on fintech. And up next, we are pleased to have with us again, Jason Wilk, who's the CEO of Dave. So across our fintech coverage, I think Dave has clearly been a standout in terms of growth and margin expansion over the last year, clearly knocking the cover off the ball compared to a lot of players in fintech these days. So Dave is an innovative fintech focused on providing a differentiated set of financial services, which helps level the playing field for all Americans. Dave provides a great banking app, which has no minimum balance, no overdraft fees, and modest-sized cash advances. The company also helps members build its credit and even supply them or help them find gig opportunities. The company's extra cash product has really resonated with consumers here over the last year, and we'll be focusing on extra cash here a little bit. So with that, welcome, Jason. Thanks, Jeff. Good to see you. So maybe we just start off super at a high level, introduce Dave to us, the value proposition, and kind of why you are resonating so much with consumers these days.

Yeah, so Dave's been around since 2017. The backstory of the name stands for Dave versus Goliath. We're going up against the major banks and all the predatory overdraft fees and minimum balance fees they're charging. The company is one of the fastest-growing neobanks in the world. We have over 12 million consumers at this point, nearly 3 million monthly transacting members that are paying us some sort of a fee in a given month. The company's just been on absolute tear. We printed our Q2 earnings recently. Revenue is up over 60% to $131 million, with EBITDA up over close to 300% at north of $50 million for the quarter. So just feeling great about the business, the trajectory, and we're playing in a massive jam here with underserved Americans that are overpaying for fees for access to basic banking services and also overpaying for access to basic credit. Where Dave really stands out between our competition like Chime or Cash App, we really start our customer journey with access to consumer credit. Dave was the first company to use cash flow data to underwrite consumers for inexpensive credit in lieu of expensive overdraft fees. And so our average consumer can come to Dave within five minutes of downloading our app and have access to up to $500 of credit to buy gas or groceries, no interest, no late fees, no credit check. And that happens to be a fantastic way to go to market with our CAC being under 20 bucks to open up a new checking account.

Right, that's great. And that's the extra cash product. And I think you found a big source of demand out there, but you were able to underwrite it very profitably. You mentioned the cash flow characteristics. Maybe just double click on that a little bit to kind of explain a little bit how you can underwrite that well and while at the same time exploiting a big demand market.

Sure, so when I was going through college myself, happened to get hit with quite a few overdraft fees that always angered me. I never understood why banks have to charge such high fees for what is a very low risk transaction in my opinion. So Dave was the first company to take a customer's cash flow data. We work with a company called Plaid to give us instant access to consumers' checking account data. We take that information to feed our AI model we call Cash AI. That's looking at a half a billion transactions amongst our customer base to find commonalities of risk. When you get paid, where you work, the types of ATMs you go to, who you send money to, all these risk signals we felt were much more indicative of assessing risk for small dollar credit versus credit scores which are more indicative of whether you can pay a mortgage or a credit card bill. So I really invented this new underwriting system that better serves paycheck to paycheck Americans. And we're doing about a billion eight of originations per quarter, and our loss rates are nearly 1%. When we flash back to when we started the business, our loss rates were nearly 20%. So it's not an easy thing to do to try and invent your own credit scoring system. But fade to today, we've issued extra cash over 150 million unique times and not feeding our AI models, been able to continuously push our loss rates down to record low levels.

And not only the loss rates coming down, but you have been able to actually also offer increased size of the extra cash.

Yeah, that's important to know. Most companies to try and drive lower loss rates tend to pull back on their credit limits. I mean, we've had the opposite effect where Cash.ai has been getting better over time. Our average originations per user is up, I believe over 40% year over year, and loss rates have come down significantly over the past several years. I think until this most recent quarter, we've had loss rates going down seven consecutive quarters with origination sizes going up. And how we make money in that product is a very transparent and simple model where we're effectively charging a 5% fee for access to the money with a cap of $15 per origination and a minimum of five bucks. And so when you think about our product in comparison to a JP Morgan or a Wells Fargo, They're charging you $34 every time you overdraft your account. That could be for a $5 cup of coffee. With Dave, you're borrowing $100, and it's only costing you $5. It's a very transparent amount of money. Customers know what they're approved for every time they log into the app, and it's a very simple experience where they can send the money to their Dave card for free instantly and spend the money with us, but they can also send the money out to an external account as well and add it to their own funds to pay their rent or bills.

And just kind of staying on the credit side for a second, you're also expanding your credit algo, right? Materially, right?

Yeah, yeah.

Even though the loss rates are good, you're still moving forward with it.

That's right. I mean, we actually introduced a new pricing scheme last year where we were mostly monetizing our extra cash through optional fees. Dave was sort of a pioneer in letting customers pay what they thought was fair for access to the feature and after issuing the product 120 million times we kind of knew exactly what people were willing to pay and that ended up around that five percent per transaction fee where we found with the optional fee structure is the higher we got customers up on the limit curve their willingness to pay us optional fees went down and so moving to a mandatory fee structure last year has really changed the game in terms of our ability to monetize so we've seen our average revenue per user grow over 40 percent year over year since we've changed our fee structure and because we've seen our spreads increase so massively we've also felt more comfortable bringing up our loss rates a little bit to maximize for gross profit right and so i think it was actually a big miss with investors this quarter who sold off our stock thinking our loss rates are going up into some negative consumer trend it's actually the opposite i mean dave because the duration of our extra cash solution is so short-term, average duration being about eight days. And if you pair that with the fact we have AI analyzing half a billion transactions on top of 150 million unique credit originations, we're very much in control of our loss rate scenario. And so we brought loss rates up just by 6%, which helped us maximize gross profit, and that led to record EBITDA growth. And so we think it was a major oversight from the passive investors that, you know, didn't really spend time, you know, reading through the script and understanding exactly the strings we pulled to deliver such a great quarter. Right.

Yeah, I think, you know, I mean, you're still clearly operating within the band of lost rates

that you feel comfortable with, right? Oh, without a doubt. I mean, our loss rates on 120-day basis are nearly 1%. Our average monetization and our spreads are over 6% on a gross basis. So, So, you know, our net spread is fantastic. And when you combine that with how short duration, it's an amazing business. And we have a lot of room to run on loss rates, you know, should we want to bring them up. But we feel very good about where we're at at this point. I think it's a new sort of baseline for us of which to optimize from. And that's all based on the new monetization working so well in our AI model, really trying to find the most optimal way to, you know, drive the right level of origination against the gross profit output.

And so your revenue model kind of works in growth of monthly active users combined with volume per active user, mostly in extra cash, right? Yeah, yeah, that's right. So going back to that first piece, which is monthly active growth, you still have a very attractive customer acquisition cost metric. And I believe in the quarter you might have even improved the payback period on that. Is that correct? that's right um and so you're printing money do you think you should accelerate your your or should you accelerate your cac or your your spend on customer rack here because you're doing so well or is it do you think the model's kind of fine-tuned where it should be here look i think

well to your point our paybacks are at an all-time low we're now paying back our customer acquisition costs on a on a gross basis in in four months at this point so it's been fantastic return on investment some of the lowest cac to cac to payback returns in in the industry by some margin and we only saw a dollar increase in cac sequentially as a result of us increasing marketing spend we acquired almost 800 000 new members in the quarter so it's a you know fantastic growth algorithm at such a low cac but we're making such rapid strides in arpu growth and and an LTV expansion that we don't feel the need to step on the gas too much. We're seeing fantastic year-over-year growth rate. I think it's more than healthy at the rate that we're growing, and we're developing new products. We're pushing up average revenue per user, and so no need to sort of rush it. We feel very good about our sort of compounding growth rate at this point.

The price increase you put in or the price change, let's call it, you know, a couple quarters ago, I think everyone thought, well, hopefully it works, But clearly, you had done your homework, and it was a huge home run in terms of ARPU growth the last couple of quarters. You're putting in a new change in your pricing for new members, right? Increasing the monthly subscription fee from one to three. maybe just kind of dig in a little bit on why you feel comfortable with that new pricing model there. I mean, you did your homework the first time. So, you know, hopefully you're doing your homework the second time.

Sure. So just taking a step back on the ways the company makes money. So since the beginning of the business in 2017, we've had a $1 per month subscription fee. And we've been in testing of that over the last six months to measure conversion and retention impact if we were to actually increase the price. Back in 2017, all we were offering was $75 credit limits. We didn't have a checking account at that point. And so the value we've increased over time for the customer is not really commensurate with the subscription fee we've been charging. So we've been in rigorous testing for six months, landed on a $3 monthly price point for new customers, and no impact to conversion or retention. And so that also has helped impact our faster payback is that it's effectively 100% gross margin product for the business. And so we were excited to finally see that roll out. We did not increase pricing for existing customers yet. We feel with the pricing change, the extra cash we made last year that were more than sufficiently monetizing this base at this point. But we do reserve the right to increase that cost over time should we be willing to. But we felt mostly prudent to change the price for new customers. I went over the extra cash revenue model with the 5% fee. And then lastly, we are making interchange from MasterCard on our Dave debit card, of which we had nearly a half a billion dollars of card spend in the quarter. So that business is growing nicely, and there's a lot of synergy between extra cash and our debit card being that it's instantly available if you want to access credit with our Dave card. So it's an exciting opportunity. We're still chipping away at hopefully making Dave more of a primary top-of-wallet card for consumers over time.

That's great. So it sounds like the price increase for new customers, the cost to onboard isn't that material, so it should be accretive to margins going forward, right?

Yeah, it already is, and it's accreted to LTV as well. You can clearly see it, and as more new users become a bigger part of the portfolio in the next year, our subscription revenue should be growing in a very nice clip as we start to have more users onboarded on that every quarter.

Right. So interchange is growing, but like the rocket fuel these days is extra cash growth, right?

Yeah, it's extra cash growth and subscription revenue growth as well.

Yes. But maybe we'll switch gears and, you know, where you are in the journey of, you know, exploiting those cash advances in extra cash to move that to, you know, the day of debit or debit card and drive even higher interchange there. Like, you know, where are the pieces that you can work on from here to make sure that money is going to the Dave card and not somewhere else?

Yeah, it's not a requirement. People bank with Dave. I think that really separates us from the likes of a Chime, which requires a direct deposit to get any access to value, including consumer credit with them. We take a very different approach in that people do not wake up in the morning excited to switch their bank account, especially just to obtain short-term credit, our approach is we're going to offer you that credit within minutes of joining by just linking your existing bank account to Dave. And we think overall the TAM of people willing to connect a bank account for access to services is far larger than those willing to switch their entire banking life to get access to And that really shows up in our CAC, with our CAC being $18 versus Chime at well over $100 for the same account sign-up. So we feel very good about where we sit. We can spend one-tenth of the marketing dollars and still acquire the same amount of customers per quarter. So it's a very powerful engine that we've developed here.

But you're probably putting incentives in so that they send it. So they do get a Dave bank account when they do sign up, if they use it or not, right?

That's correct. So every customer that signs up in that CAC number we talk about, That is a person who is signing up for a full-on checking account with Dave. Now, whether they use that account or not is not baked into the CAC. But we incentivize people to trial the Dave card by giving them a discount on extra cash. If you want access to the money instantly on your Dave card, you're just paying the origination fee of 5%. No additional cost to have the money instantly available on the Dave debit. If you want to have your extra cash available on your external debit card, there is an additional 1.5% fee. So customers do save a few bucks by using the card, and that's enough of an incentive to drive about 30% of originations, go from extra cash onto the Dave debit card, and it's a nice way to grow. We haven't really done a whole lot of incentives beyond that, and so you just tend to see a nice synergy between those two products. we've been in testing cash back rewards on gas and groceries knowing that the top use case for that product is people coming to borrow money for their short term essentials so we're seeing some nice nice uptick there and you know we're going to continue to chip away opportunities to to do that but we don't need direct deposit to win and so the way we think about card adoption and it's an amazing way to drive longer-term retention and engagement and so we're We are now also sort of hedging ourselves here by building a new type of BNPL credit card type product that will give customers another opportunity to access credit instantly, give them a little bit more duration. And our goal really is to think of ourselves as top of wallet. And we think about, you have your American Express card that has all your spend, but your direct deposit goes into your Chase account. Who's your primary account? I'd argue your Amex card is your primary vehicle. And so we're sort of shifting our approach. don't actually need the paycheck we just want to be top of wall and so if you want to be direct deposit that's great if you want to use extra cash a couple times for a month and send it to the day card awesome or if you want to use this new product we're developing for next year that's another way for us to get incremental top of wallet shots on wall right do we have an idea when that's

gonna hit the mark I mean you must be testing and figuring some things out on

it now not testing yet so we'll be in friends and family testing in q4 and and with the stretch goal of testing with new customers in the fourth quarter as well. But that will go through a pretty rigorous review process because we'll be testing the efficacy of our cache AI underwriting from ExtraCache onto this new product that does extend slightly longer duration of, call it, 30 to 60 days. And so once we get confidence in the loss rates on that, then we can more broadly roll that out. But we're excited. Buy and update later is a very hot category with our customers. over half our users which we can see in our transaction data are engaging with BNPL in some form or fashion and we have a zero percent market share and

they're paying it off you can see that too right that's the beauty of our information we have access to right you see everything they're doing right right

we know who you bank with you know your credit providers are we know if you're paying back on time we know what fees you're you're likely paying in sales a tremendous data set we have to gain competitive intelligence on what we should be building just by virtue of what our customers are interacting with right so it sounds

like you see that opportunity and it's kind of clear there it's not it's not you're not doing this just you know because you need a new growth engine more or less it's like a good opportunity

no look we feel great just about our core business and the ability to keep growing that at a great clip year after year for many more years to come if we think about our total adjustable market within extra cash and dave debit being about 150 million americans in this past quarter we only had 2.6 million monthly paying members so from a total penetration perspective we feel like we're very far from saturation and this new credit product will just allow us to further penetrate the tam have a new go-to-market support new distribution and um you know just excited about the opportunity overall and because we don't need the growth we're taking our time with the want to make sure that the loss rates are perfect want to make sure that the product really is resonating with consumers and we've got a really nice

roadmap plan for that solution got it one more question there if you do roll out that out it's a little longer duration I know you also switched your bank partner right that's right who may put some their balance sheet to work on some of your loan portfolio or do you think your balance sheet can handle the new product as well as the existing product or you know you have to think

about that a little bit I mean absolutely I mean it's gonna be another very short duration product you know fairly low limit product as well and to your point we announced that our new banking partner who will be the the issuing bank of this new credit product it's called coastal community bank we're very excited to work with them we just signed a really unique deal with them where they're gonna effectively they're already originating all of our extra cash loans right now and now they're just going to hold those those loans through through the maturity okay and so we effectively are going to have no balance sheet at the business zero debt on the company whatsoever and that's going to unlock a lot of cash for the company everything once we've migrated to that that new facility with them that's going to bring over a hundred million dollars of net cash into the business that's currently being tied up in receivables that the company is currently funding so it's a great unlock And they're very willing to look at this new credit product as well as another potential thing they would fund for us.

Does that change your economics on extra cash if they're holding the loans on their balance sheet?

No, it doesn't actually. I mean, if you compare the cost of funding on this new facility compared to what we were doing right now with our off-balance sheet facility with Victory Park, we're saving roughly 200 basis points on that facility. So costs have come down, reducing our debt. I'd say the one difference on this facility versus today is we are self-funding a lot of the originations. So we have $150 million credit facility today. Only $75 million of that is drawn. The rest have been self-funding. And this new model will likely be having Coastal fund 100% of the originations. And so even though it's coming at a 200 basis point reduction in cost, we are taking on, they're taking on more of the receivables. So, you know, it's not like a massive cost savings for the business, but it's really a way to unlock a lot more cash.

Fair enough. That makes sense. I want to circle just back to the debit card just a little bit. Are you currently doing like virtual NFC? If they want to sign up for your debit card, they can just tap on their phone pretty quick? Or do you still have to get the physical card?

Yeah, you can provision to Apple or Google Wallet within seconds of joining. It's a very popular way for our customers to spend. The Dave Check-In Account is a full-service checking account. You can cash checks. You can send money. You can access a virtual card.

You can go to an ATM somewhere.

Yeah, we have 50,000 free ATMs with our network. It's well set up to be someone's primary account, and we don't have an insignificant amount of people that Dave is their primary account, It's just not the majority of our users that are using us or thinking of us in that way today.

Got it. So why, I mean, maybe it's a stupid question. So you're kind of disrupting big banks a little bit here. Not only, why aren't, do they think they make more money in overdraft still versus kind of changing their model and providing a service to you? I mean, it would be a big pivot and a big shift, you know, from a psychological standpoint to do it.

Well, the banks, and we talk a lot about this in our supplement, but the big banks are disadvantaged in the sense that their cost structure is so high that if you're looking at a customer that we're serving today that's making under $100,000 a year, they don't have credit cards, they don't have a mortgage, that's largely an unprofitable customer for the large banks. And so when you factor in all the bank branch fees or infrastructure costs, it is not a secret that it costs big banks 300 bucks a year just to serve as a basic checking account. And so the only way to recoup your costs on that is through heavy overdraft fees. And if the overdraft fees go away, they're just going to increase their monthly minimum balance fees or charge a mandatory monthly minimum to recoup that cost. And so we don't think that big banks will ever be able to change their ways to have such a low cost structure. Dave is entirely digital first, no bank branches we're using AI throughout the business from customer support to onboarding to underwriting and we're servicing 3 million users of 12 million total registered customers with only 300 employees so that's a really impressive stat we've had the same level of employees now for several years at this point and we think that we can continue to develop our roadmap with the team we have with no meaningful investment in in headcount and it's pretty amazing what you can what you can build and do at this point and that's just gonna further differentiate us from the big banks because those cost savings and AI enablements end up just being pushed to the consumer in terms of better better faster cheaper product sure I don't know if it was on your

earnings call or maybe one of your you know close comparables where management cited the conference call comments from a big bank and the CEO said look most of

accounts are unprofitable you know so yeah like you see jp morgan going more and more up market their goal is to open more bank bank branches they're increasing the cost of their sapphire car like they want this you know middle upper class type market because you know there is significant ltv there but when you think about the opportunity within the the uh paycheck to paycheck consumer it's just massive when you think about it from a digital only ai first approach where you just don't have a very high cost to serve, and there are fantastic returns there. Our margins are over 70% at this point, and we're doing that with a product that's 90% cheaper than the big bank. So that's a pretty compelling, and we think long-term, durable place to sit within fintech.

That's great. You and Kyle have done an amazing job in growing Dave over the last few years. We've got a packed room here, people clearly paying attention to your story. so great execution here over the last couple years and I'm looking for more so awesome

thanks Jimmy we're excited and then and for those that maybe didn't see it this morning we announced a share of purchase authorization up to additional 125 million so we're feeling very confident we're you know again feel that investors really missed out on the narrative here this past quarter that you know that Dave is well in control of loss rates and we have an unparalleled data set with very fast payback to support that you know we're going to put our money where our mouth is on, on the buybacks.

Very good. Yeah. All right. Thanks Jason. Thanks Joe. Great to see you. Appreciate it.