#98, Co-Founder and CEO of Perenna, Arjan Verbeek: Revolutionising the Mortgage Market

0:00So we need to change. We need to change that so that we, in a controlled manner, can get these people to own a home or stay in their home if you're 50, 60, because a lot of people are being forced to sell their house because they can't afford to refinance their mortgage. There's no product to refinance them. So we really need a change.

0:26for the past century uk consumers have experienced very little innovation in the mortgage space with lending processes remaining largely inflexible and quite manual and slow our guest today is on a mission to change that and revolutionize the uk mortgage market with an innovative digital mortgage bank. Perenobank have launched a groundbreaking 30-year fixed rate mortgage requiring a minimal deposit. Their advanced tech platform stands out in the mortgage market, offering rapid approvals and enabling users to track every step of the application process on their mobile devices. We spoke with Arjen Verbi, the co-founder of Perenobank, who has spent over 20 years in the banking sector working for major institutions like Barclays, BNP Parabas.

1:18We also explore Arjen's journey in convincing investors of a unique funding model and how that works. We also talked about the UK market and how it's evolved in a different direction compared to the US and other European countries, which I thought was really interesting. We also dive into the mechanics of long-term fixed rate mortgages and how that works. Really great conversation. Arjen's a brilliant speaker. I really think this bank are going to do great things. I think they're going to be really disruptive in this marketplace. Yeah, so I really look forward to what they're going to do. It's Arjen Verbeek.

1:58Thank you so much for coming on the Tech Leaders podcast. I've been really excited to talk to you. I think your company Perenna are doing some incredible things and really disrupting the mortgage market especially. So I can't wait to talk about that. But first of all, Arjen, what does good leadership mean to you? To me, I think it is getting people to follow you on a journey, right? And that is important. You set the right example, you show the right values, and particularly you explain why. Because to get people with you on a journey, you have to, A, believe in it yourself, but also make others believe that you're doing the right thing.

2:34And that's, to me, good leadership. So people need to willingly follow you in that. Absolutely. Absolutely. Very well said. Very succinctly said and very well said. So how do you go about getting people to follow you? And how do you create a positive culture in your business? Well, it's not easy because everybody is different and everybody has a different way of looking at things. So I try to really explain why I do something that I don't say, this is it, we do this. I try to give the reasons for it so that people can see that it's not just me thinking this is what it is. I don't have any hidden agendas.

3:09I open up to people. I make sure that everybody has got a benefit of gaining themselves and growing themselves and reach their own ambitions and targets with that. So there's alignment across everybody. That's, I think, the key thing to make that happen. It's not easy, but people are all different. You need to get the right minds together, really. Absolutely. And you need to have a business plan that you believe in, which you clearly do. So some of the listeners will be unfamiliar with yourself and with your company. But zooming in on yourself, Arjan, can you tell us a little bit about yourself and maybe just give us an overview?

3:46You grew up in the Netherlands. Obviously, you got into the banking sector in the mid-90s. Can you give us a little overview of your career right up to the point of setting up Perina? Yes, I went to university in the Netherlands. I actually did econometrics. Oh, I know it. Well, yeah. Well, it's a study that I think only got put in place when the computer started because it made it possible really to statistically model economic parameters. And then straight after my study, I was really interested in the financial industry. So I got the short traineeship into London, which was obviously the financial heart of Europe at the time.

4:21joined a corporate banking traineeship at the Royal Bank of Canada then joined Moody's at the beginning of the securitization in Europe and after a couple of years there a new instrument was introduced into the UK so we had securitization and then it was a structured covered bump was introduced by one of the big banks I rated that for Moody's and then joined B &P Parba to set up a team to do the same thing and then the run-up to the crisis 2007 I was at B &P and then unfortunately things went wrong. You start looking back and seeing what went wrong, why things went wrong, analyzed what went wrong.

4:55So you're referring to the financial crisis around 2008. Exactly. Of course, you were working in BNP, at the BNP Paribas, one of the biggest French banks at the time. What was that period like? It was interesting because it was actually the BNP Paribas Fund in August 2007. That was the first one that closed and it says, sorry, we cannot give people their money back because we can't sell any assets. So for me, the start of the financial crisis was really August 2007, when most people think that the crisis really started in 2008. But that's when the writing was on the wall. BNP was a good institution.

5:31They have a good strategy. They have a very clear strategy. You might not all like the strategy, but it's a very good one. And in the big bank, you could see the local support that BNP had. Everybody in the crisis started looking at their own country, was retrenching, basically, going on. And banks stopped lending, as you might still remember. That was a very challenging time, but learned a lot and learned a lot of the mistakes made. What did you personally learn from that period, coming out of that period, Arjen, which was a good lesson and useful for you when you were growing your own business?

6:04Yeah, so my own business and the start of Perenna comes from the learnings that we did and that we made in the crisis. Because what we did in the financial crisis is increased leverage. We increased leverage a lot. And the products, particularly in the mortgage market, the two, five-year short-term products, they increasingly became more aggressive. People could borrow more. People could self-certify their income. And leverage got out of control and uncontrolled by regulation. Unfortunately, only after the event, the regulations became tougher. So that risk was controlled. but the regulations and also locked up the entire market which meant that people couldn't own a home anymore and home ownership has been declining since the financial crisis quite significantly which is not good either because if you don't own your home and you go for example if you don't own your home in retirement you need to have a much bigger pension pot to be able to pay for rent and that's that creates a lot of instability so we could see that happening and and with technology becoming a bigger and bigger player.

7:08Money is getting faster, as we say. You know, it took forever to take, even Northern Rock people were queuing out at the branches to take money out, of course. But nowadays, it takes you 20 minutes to empty your 10 bank accounts on your phone, right? So money is much quicker taken out of the banks. And that has a real knock-on effect and the risk for banks if you fund a mortgage with a deposit. So that is really an eye-opener. You could see this all coming, which is why we started Piranha, because what we're doing is, and they've done this in Denmark for a long time, but also other countries. if you have a mortgage with a long-term asset, if you like, you want to fund that with long-term money that you get from pension funds and insurance companies, you don't really want to fund that with deposits because that creates a risk in the financial system, particularly because of technology that has made everything so much faster and cheaper and easier to manage.

8:06Yeah, no, absolutely. Can I just set you a bit of a challenge here, Ian, while we're here, and we'll get back on track shortly, but I wanted to, you obviously give a bit of a description of what went wrong during the financial crisis. There'll be some people listening to this episode who are not so familiar with that period. Can you basically just, in a nutshell, try to explain what happened, why there was a financial crisis, and how that changed the financial services sector, especially in the city of London? So what happened was that it was obviously a good economic, in the beginning, at least a very good economic period.

8:41Inflation was controlled, interest rates were fine at around 5%. people were getting wealthier, active. It was after the crisis of the late 80s, early 90s. Everything was in recovery and the economy was working well. That meant that people felt good. They wanted nice houses and it was a very competitive market and people borrowed increasingly to buy assets and particularly houses. Yeah. Now it's all about affordability. If you have a thousand pounds to spend every month, you have to make sure that you can meet your mortgage payments. So the bank started offering products that met that thousand pound threshold, but they kind of forgot that if anything happens, your thousand pounds might be different.

9:26And also the banks started lending to people that said they could afford a thousand pounds, but could they really is a bit the question. There wasn't a real check on that. So people just wanted to buy the house and they then borrowed the money. Now, what happened at some point, and particularly also in the US, a lot of people borrowed and bought houses that pushed up house prices to an enormous number of multiples of income. And at some point, people started thinking, well, everybody on low incomes is owning a house, and can they really afford it? When the doubt started coming into the system, the money dried up, the lending stopped.

10:11And when people couldn't roll over their mortgages, they started defaulting, and particularly in the US, the pressure built. And that completely stopped everywhere at some point, at which point the banks couldn't fund themselves anymore because the market didn't know what the risk was in the banks. And that's when the governments had to step in and rescue the banks because of the risky lending that they've been doing. The banks got a guarantee system from the government so that they at least could access the markets and fund themselves. It was a scary market. Some banks went under, as we know.

10:46Most of them were rescued. The other thing that happened at that time was the central banks. They stepped in and supported, and they lowered interest rates to a very, very low level, almost unacceptably low level. If you're an economist, and I am, money should never be free, really. And it basically was. But that obviously helped everybody because if you have a lot of debt, but it doesn't cost much, you will not default. So that really helped the market to recover, but it became artificial. And it stayed probably too low for too long because money was cheap forever until, was it a year, two years ago when interest rates started going up again.

11:26And that's why we now have the challenges that we currently face where people suddenly have all the shocks because people had a two-year fixed or a five-year fixed. They're now increasingly moving to a payment which is two or three times as much. And that creates a new risk in the system. So it all started with building up this leverage in the system that we then kind of could afford because interest rates were put to a very low level. but that at some point had to go up because inflation must go up. You had geopolitical issues and now we're dealing with risks that are not from 10 years ago. They are from almost 20 years ago, basically, when it all started.

12:07Very, very good description, Ayaan. I couldn't resist. That was fantastic. Thank you so much. Let's get back on track. Summer of 2013, you decided to leave BNP Paribas. You decided to set up your own business. Talk us through that period in your life and what prompted you to make that decision and tell us a little bit about that capital management organization that you set up, which then ultimately became a challenger bank. So what happened was that I was sitting between 2010 and 2013 at B &P Paribas, servicing the clients, but you become a solution provider, unwinding structures that were put in place before the financial crisis.

12:43And then you have a certain mandate to execute because everybody in a big bank has got their own mandate. You're all siloed. And then we say, well, it's great to do this, But the real solution is to do this, the long-dated fixed-rate mortgages. That's what can turn things around in the UK. That will solve the problem over time because interest rates are now very low. You just lock that low rate in for people and then they can recover over time. But A, it was not my mandate to do that in B &P Barber. So I couldn't really do it there. Try to have other banks interested in that, not having to give up my job because that wasn't the idea at the time.

13:22But everybody says, great idea. Really see where you're coming from. But once you make it work, let me know. Everybody wants to be second. Nobody wants to be first. So at some point, myself and two colleagues basically said, well, nobody wants to work with us to do this. Someone has to be first. It is the right thing. Let's just do it. So in 2013, we decided to leave structured employment, as we call it, and became self-employed and entrepreneurs, setting up initially a fund manager. the Sprenner Capital Management at the time. Because in the Netherlands, big pension funds put funds into mortgage funds and those funds will then buy the long-dated fixed-rate mortgages because it's a very good matching asset.

14:05I mean, if you think about it, a mortgage goes from 30 years to zero and someone pays it down with 500 pounds a month. A pension is from over 30 years to zero because that's the lifespan, receiving 500 pounds a month. So it's a great matching asset. And you see that pension funds in other countries have got a lot of exposure to mortgages or mortgage debt, but not in the UK. So we set up a fund manager, got that going, talked to all the pension funds and insurance companies. And then you find out that we've made some other mistakes in the past. That means that we cannot really do what's, for example, being done in the Netherlands.

14:42The pension funds were, well, there are thousands of them, and they're small, outsourcing all their investment decisions basically to consultants. And so it's a fragmented industry. And they all saw the logic. They all liked it. And then you come back to, again, okay, set it up. And then once you have a seed fund, we can look at it. But, yeah, who's going to seed you? There's nobody around to seed you. So it's a chicken and egg. Insurance companies, they liked it, but they had the Solvency II regulations, as they were at the time, to deal with. they couldn't take any flexibility. And to do 30-year fixed-rate mortgages, you need to give the borrowers the flexibility to change their life and not be locked into their mortgage.

15:21And the insurance companies couldn't give them that flexibility. So in a fund, we couldn't actually do anything to bridge that gap between the consumers and the insurance companies. So then in 2017, it was, we said, look, the only way to do it is to follow the Danish model, where we issue bonds that everybody will buy all day long without having to think about it because they're very highly regulated, low risk, et cetera, and use that to fund the mortgages. And then we will manage on the bank's balance sheet the basis risk, so to speak, the difference on flexibility. So we put a proposal to the PRA in July 2017 to set up this Danish-style bank in the UK.

16:02And it would be a new funding platform, a new type of bank. because it doesn't obviously exist in the UK. This is a bank that doesn't really want to take deposits to fund their mortgages. And also then the second thing is we obviously wanted to not use the legacy technology that we have, but really upgrade that. And for the first time, have one platform that connects assets and the liabilities of a bank so that we have a very good overview of the risks that we were running in the bank. So that took a while. First, we had to educate the regulators to what this bank is and how it behaves and what that really looked like.

16:35Then we had COVID, which obviously didn't help either. So the end of last year, we finally managed to start lending. And that's going very well. There is a lot of interest. It is difficult to educate the entire market of why it is a good thing and that it actually, people are not locked in. People are almost thinking in a certain way because they've always thought in a certain way, it's hard to change people's mindset. But we're getting there. And we can see the politicians beginning to use long-dated fixed-rate mortgages more. it has been tried before already in 2004. David Miles wrote a big report and Warren Brown, I think, was the one who commissioned that.

17:13People know, the government knows, Bank of England knows, institutions know that it's a good thing for the market. But then for the market to stop thinking cheap and short term is a big step because it's difficult to change people's behavior on that side. So now after the financial crisis, the product actually addresses issues that we have. so it just makes the market work properly again. This episode was brought to you by Be Digital. Be Digital support leadership teams to optimize cost and get more out of technology investments. Be Digital and the team have unrivaled expertise with technology license management and data remediation and are therefore perfectly positioned to help prepare organizations for AI technology capability.

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18:25so i want to come maybe come back to unpicking sort of long long dated fixed rate mortgages a little bit in due course but what i wanted to ask you about iron you've mentioned you've alluded to this a couple of times that the uk model is different the uk industry is different to the especially the danish model but the danish model is quite similar to lots of there's lots of countries who do it that link pensions and mortgages together and have long dated fixed rate mortgages. Why has the UK evolved in a different direction? What's the reason for that? Why is it an outlier? Yeah, it's a good question.

18:59And it probably started before I was active in the market. So it's a little bit of guesswork in it. But I think it's funny how certain choices in a country just make certain things go into a certain direction. And it's not just the UK, It's the entire Commonwealth. So you can see that the market has grown in the Commonwealth countries in the same direction. What about America? America is more similar to Denmark, yeah? Correct. And the American system was set up after the savings and loan crisis and big crisis in the 30s where the banks stopped lending on mortgages in the same as in the financial crisis.

19:38so what the government did they set up a an agency just to let the banks lend and they would buy the mortgages from these banks so that they could just lend without having capital or liquidity issues so that is similar almost got that by solving that crisis in this way where in Denmark it was it was 1850 I think I don't know the exact date but it's when I think the British army the British navy actually was bombing Copenhagen apparently and they mean afterwards a way to rebuild Copenhagen and they dreamt up this system. And that's been working for like 200 years. So there's a different trigger point for different countries.

20:17We never had a trigger point like that in the UK. So the banks just grew and the building societies were obviously doing the first lending of mortgages on deposits. And we've never changed that model. We've never had to change the model. and the deposit-taking institutions just kept doing the mortgage lending. Building societies became banks when they converted and they just grew bigger, they merged. And now we have a situation where you have five, six deposit-taking institutions that basically are the biggest and control the market. The rest is following that. So there has never been a trigger to really change and rethink in a shock effect or in a real crisis how to stimulate the mortgage market.

20:59Right. Okay. No, that's good. Thank you for that context. So I suppose this is part of your core message then is that you are trying to change or trying to provide a different way of doing things in the UK market. Yeah. Absolutely. Because we've had a shock effect now, which was the financial crisis, but we haven't changed. So we're still doing the same thing as we did in the financial crisis. And we've spoken to Americans and American people are very, they think 30 are fixed, that's the mortgage, and I don't take any risk. We have had a shock effect in the financial crisis, but we're just still doing the same product that caused the financial crisis, but we haven't adjusted to the new world.

21:41So that's why some segment of the market are just not able to borrow, because the central bank sees the risks, accepts the risk, has put mitigants in place, like the loan-to-income cap. But unfortunately, that medicine is now also killing the hopes of many people to actually be able to get on the housing market. So it's creating systemic risks in itself. So we need to change. We need to change that so that we, in a controlled manner, can get these people own a home or stay in their home if you're 50, 60, because a lot of people are being forced to sell their house because they can't afford to refinance their mortgage.

22:21There's no product to refinance them. So we really need a change. Yeah, of course. Absolutely. So Perenna, your launch product was a 30-year fixed-term mortgage. What sort of deposit would be required for access to that product? Yeah. So the deposit is always an interesting question. I'm a Dutchman. In the Netherlands, we have 100 % loan-to-value mortgages. As in no deposit down, I think they call it in the US. I'm very comfortable with that because you have to live somewhere and home ownership is important. If your mortgage is, you know, 500 pounds day one and it's 500 pounds year 30, the risk of you defaulting is actually very low.

23:01So the value of the assets shouldn't mean much, apart from the fact that if something happens, the bank has a bigger loss, so you need to charge more. But that's fine. You're still helping people onto the housing ladder. So we want to go as high as possible on the loan to value side. We're doing 95 % at the moment. So 95 % LTV, 30 or even 40 a mortgage to keep the monthly payment as low as possible and help people really onto the housing ladder. So that was the first mortgage that we put out. We also have interest-only mortgages at a fixed rate for the long term. That's really aimed at people over 50 that need to refinance onto a product that meets the regulations and matures after people's lifetime, really, so that they can be repaid from the sale of the house.

23:50So those are the two products that we're really like. It seems you've got to focus on first-time buyers. That seems to be your core market right now. Is that fair to say? First-time buyers and later life, as in 50 plus. That's the core focus now, but we are working also with partners. We're looking to work with partners. We don't want to do everything ourselves. It's very hard to go and get the consumer touch points. There are a lot of people that fight over consumer touchpoints. So you're talking about retail partners like building societies and things like that. So we're very happy to work with building societies.

24:21We're very happy to work with brokers, very happy to work with non-financial institutions, house builders, property websites. They all have touchpoints, and they're all there to sell houses, to give people home ownership. so we are happily putting the products through them into the market so that we can focus on what we're good at which is basically financing the mortgages instead of doing all the origin because marketing costs a lot of money and if you if you have an easy way to do that more efficient way then everybody should just do what they're good at really yeah absolutely so you've got your banking license and obviously you've got a obviously a very attractive product with a clear purpose to provide a unique service in the UK mortgage market.

25:06That's great to have your product side sorted, but you still need capital to keep going to get through this banking license process and obviously scale to a point where you can stay in the game and you can achieve organic growth. So can you talk us through your investment journey from initial concept and the embryonic stages with you and your co-founders right through to today? How many investment rounds have you gone through and how have you found trying to raise capital for the business? So we started by eating up our own savings. That's where every entrepreneur needs to start. And then in 2018, we did a friends and family bigger round that got us going.

25:45After that, I think just before COVID or in-co, we did a city round. So bankers, et cetera, some wealthier individuals put the money in to get us to the banking license stage. To get the banking license, we needed some proper capital. We're talking about, you know, 15 million and after that, another 30, 40 million. And that came from the US. It came from a US financial services investor that put that money in. Unfortunately, the UK investor base is quite tiny. You can read a lot that the UK doesn't really invest in startups and helps us. And that's, like I said before that that's really the case unfortunately it should be the uk that really helps us now that we have our license we need to obviously raise more money to actually support lending so we have we have a deadline from a from an investment bank retail bank from the continent to finance our mortgages but we need under every loan we write we need to have about call it five percent of equity.