The 4 distribution models of digital financial products

distributing online financial products

Distribution — well, profitable, scalable, and repeatable distribution — is key in selling financial products. LendingClub learned this lesson well: as distribution channels dried up for the firm’s consumer loans, the firm’s CEO created (and didn’t disclose) a fund that would buy these loans. The ending was ignominious — as the CEO stepped down, the Department of Justice stepped in and LendingClub’s stock price doesn’t stop going down.

But the distribution issue is core to understanding why investors have grown skittish over Lending Club in particular and marketplace lending in general. Whether a firm is a fintech upstart or an incumbent financial institution shipping financial products, without viable distribution channels, new digital products can be dead on arrival.

Effective distribution channels should be profitable (lifetime value of the customer should surpass acquisition costs), scalable (a process that has room to grow larger in size) and repeatable (can you keep doing what you’re doing?).

There are 4 overarching models financial firms can use to distribute their products.

Piggyback Model: One way new products can find their way to end customers is via the piggyback model. At its heart, this is a marketing partnership where a financial institution partners with another institution (could be another financial institution or not) that owns the end user. This is essentially what On Deck Capital is doing with its partnership with JP Morgan: the bank owns the business customer and can relatively easily distribute the online lender’s products across the U.S. With shared economics, both parties benefit in this model.

Piggybacking non-financial distribution channels works well, too. Stockpile, a fractional stock brokerage, distributes gift cards redeemable in shares of favorite companies. When a customer at kmart or Safeway buys a $50 gift card of Amazon stock for his nephew’s bar mitzvah, the startup brokerage just acquired a customer through a piggybacked, offline distribution channel. The point is that the financial firm works in tandem with another entity that owns the customer to effectively deliver its product.

Inflection Model: This distribution model was written about recently by the people over at Andreesen Horowtiz. As an investor in fintech, the venture capital firm recognizes how paramount the issue of distribution is in getting a standalone finance company off the ground. AH encourages financial firms to market products or services at trigger events in customers’ lives. These inflection points can be lifecycle events (like graduation), a point in time (immigrating to a new country) or a micro-event (a major purchase). By finding these inflection points, firms can typically find a way to pull (vs. push) customer demand and do it in a way with lower acquisition costs.

Because financial products are typically sold and not bought, customers require something on their end that moves their “dissatisfaction threshold” so much higher that they’re finally open to switching products. When a firm times its pitch at one of these points, it should find ready, willing, and able buyers of its products. Online lender, SoFi pioneered this model by targeting HENRYs (High Earning Not Rich Yet) — recent high-potential graduates saddled with student debt. These prospects are amenable to an offer because of where they are in their lives and if successfully delivered, they should be open to other lifecycle-type loans. That’s why the firm has rolled out personal loans, mortgages, and investing products as complements.

“The best inflection points occur early in a customer’s life, when it’s easier to become that person’s primary provider of financial services. Such early-lifestage customers probably haven’t been with their current provider for a long time (so they’re easier to switch) and haven’t yet adopted many of the products they’ll need in the future (easier to upsell),” Angela Strange and Alex Rampell wrote recently on the company’s blog.

App Store Model: Some technology firms are working on finding a way to provide digital solutions for very discrete parts of banking. Delivered via APIs, these unbundled banks have a clear model for distribution. Like Apple’s App Store, these firms act as technology clearing houses that other financial institutions or consulting firms can use to integrate software and feeds into their own applications. The app store model, employed by firms like Plaid, essentially creates a la carte software offerings of banking services. Customers like acorns and venmo merely need to integrate Plaid’s solutions into their own applications. It’s like the piggyback model in that it uses indirect channels except it’s not B2C — it’s B2B or B2B2C.

Max Levchin’s Affirm, which provides financing for consumer purchases, is also using the app store model to distribute its products. The startup has found a way to integrate its tools into firms like Expedia and Eventbrite. In this way, when a customer is nearing completion of a transaction on an ecommerce site, they’re offered an option to create a payment plan to finance their purchase. The app store enables digital financial products to be fully integrated into another firm’s technology product to reach end users.

Machine Gun Model: Alas, the machine gun model is what some of the more plain-vanilla online lenders have used to distribute their products and grow their companies. Marketplace lenders like LendingClub and Prosper have been big users of direct mail marketing, sending tens of millions of pieces of snail mail to potential borrowers throughout the U.S., encouraging them to apply for loans on their platforms. But, as recent events have shown, it’s hard to build a scalable, repeatable, and profitable distribution channel this way.

Photo credit: F. Berkelaar via Visual hunt / CC BY-ND

Building the Google of finance – with Uri Kartoun

P2P Lending's Developing Debt Market

There aren’t a lot of really innovative search technologies for investors.

That’s changing — researchers and entrepreneur are looking at unique ways to classify financial product data on mutual funds and ETFs. That means it gets easier for us to identify new investments that make sense for our portfolios.

Uri Kartoun, co-founder of Stockato, has some great academic experience in robotics and classification of large data sets and he’s turned his attention to investing.

Uri joins us to talk about how his set of cloud tools can help this generation of investors find the investments they’re looking for…and maybe what they didn’t know they were looking for.

Listen to the FULL episode

About Uri Kartoun

Uri received his PhD from the Ben-Gurion University of the Negev in Robotics and Intelligent Systems and worked as a research Software Developer Engineer at Microsoft Business Solutions Group.

Learn more

Even More Resources

Blowing up the fine print in financial product marketing

As a user of various financial products over the years, I sometimes wonder what it is I actually own (most of the time this occurs sometime after hitting some single malt before bed and sometime before day break).  I dunno — I read the labels on food that I ingest.  Just thought it might be interesting to know what’s in the mutual fund into which I invested all my life’s savings.  Just for kicks, you know?

So, I decided to do a little sleuth work and *pull back the covers* on the disclaimer language on some of the most widely held financial products.  What I found written in Arial font size 6 might be a little surprising to owners of mutual funds and ETFs:

Of course, past results are not at all, in any way, form, or fashion indicative of future performance.  No way and it doesn’t even matter that we have to say that.  We probably would anyway just to cover our own asses.  Anyway, in terms of performance, it’s really just a crapshoot.  Who wrote that Random Walk thingie again?  We’re not big fans of him (he’s probably an academic).  We don’t love Bogle either — he’s the one who tried to force us into buy and hold strategies.  Cramer’s more our speed, if you care.  We sell/market financial products that trade in a secondary market so we don’t really care all that much anyway how they perform.  As long as we grow our assets under management and provide liquidity to the products.  In fact, we’re not quite sure what to make of all the blogger research that shows that our ETFs don’t come close to tracking the indices they’re supposed to follow.  And those leveraged ones — the 2x, 3x, 4x, XXXs — who really understands how all those things work?  I mean, can you really use daily future rebalancing as part of a core strategy anyway??  Thankfully for us, it’s products like these that enable us to raise our management fees in an environment that continuously pushes fees down.  We had it good with mutual funds — whose stupid idea was to transition to lower-fee ETFs? By the way, if you really want performance, why not try just giving your money to one of those fancy hedge fund vehicles?  They seem to know what they’re doing, right?  Man, I’d like to be in their shoes.  Me?  I’d be David Tepper or maybe  Bill Ackman.  Yeah, Ackman.  With his build and that gray heirhair, he’s totally a baller investor. Also, you should know, that we don’t really believe all that new-fangled behavioral research that shows that for investors, our products are sort of like drugs in the hands of addicts.  In essence, there’s no way these people are going to make money in the market anyway.  So, why not provide a vehicle that purports to do as much.  Is that so bad?  Is it?

Wow, who knew what was written in all that small print?

photo courtesy of somegeekintn