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In today’s market, is everyone an online lender?

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How do you compete when everyone’s an online lender?

The interest surrounding online lending has seen hundreds of millions billions of dollars (debt and equity) being poured into the space. In fact, the amount of money raised by US online lending startups through Q3 2015 was greater than all of 2014. Most of this capital has gone to pureplay startups — like $275M to Earnest, for example) to build out their technology stacks. Marketplace lenders have raised huge amounts of capital — from both the private and public markets — to attempt to get a foothold in the massive lending market. Online balance sheet lenders are participating heavily here, as well.

But that’s not all that’s happening. Ecommerce firms, without a traditional focus on finance, are getting into the action. PayPal just announced it had surpassed $1 billion in working capital it extended to its merchants. Amazon is expanding its lending program to sellers in multiple countries around the world. Chinese ecommerce sites and social networks and now, with Baidu getting into the game, a search engine, are providing financial services. And there are smart investors like Blue Elephant’s Brian Weinstein providing capital to get access to these new channels of finance.

So what does the market look like when everyone turns into an online lender?

 

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Online lender, Upstart hires Mike Osborn as Chief Marketing Officer

Mike Osborn, CMO of Upstart
Mike Osborn, new CMO of Upstart Network

Reworking traditional credit models to extend loans to people without years of credit history is a big undertaking, but it doesn’t appear too big a challenge for online lender, Upstart. In the 18 months Upstart has been participating in lending online, it’s generated $240M in originations, averaging 25% month to month growth since inception.

Now, the company is further investing in growth with the appointment of CMO, Mike Osborn. Osborn comes to Upstart from Uber, where he was the Head of Growth Marketing, responsible for all digital and offline marketing, as well as product management of Uber’s adtech and consumer promotions platforms. This is Upstart’s first hire as CMO and it’s a key role impacting the future of the firm. As founder Dave Girouard wrote on a blog today, “Without the ability to attract quality borrowers to a lending platform in a scalable and cost efficient manner, the rest will be for naught.”

Online lending is about assessing creditworthiness and managing risk. The complexity of that job is compounded when you extend credit to people who may not have a lot of credit history, like Upstart does. Instead of peering backwards into a prospective borrower’s experience with debt in an effort to forecast it forward, Upstart uses predictive metrics, like job history and education, to determine creditworthiness. Osborn’s role will encompass all performance and brand marketing for the Upstart lending platform.

It’s kind of an arms race right now in the online lending space where Upstart finds itself. Both marketplace lenders and balance sheet lenders are aggressively spending on borrower acquisition. A recent WSJ article described the old-school direct marketing tactics employed by firms like Lending Club and Propser. Both firms sends tens of millions of pieces of direct mail each month to acquire new borrowers. Upstart’s Osborn will have to use his growth marketing experience to further ramp volumes.

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[podcast] LendKey’s Vince Passione: There’s no Uber-ization of finance because the banks will adopt technology. Eventually.

Lendkey podcast

As the interest in fintech and financial services in general continues to grow, there’s been chatter of an Uber-like disruption by the startups in the space.

Our next guest, Vince Passione would beg to differ. He’s the CEO of LendKey which provides the incumbent banking system the digital tools it needs to sufficiently compete in marketplace lending. The issue right now isn’t whether marketplace lending is going to grow, it’s more of who takes the lead in this space. It’s worth listening to Vince because he’s been a major part of the move to digitize financial services, leading Citi’s move online and Ameritrade’s Institutional Client group.

This move to online lending started with pure play disrupters like Lending Club and Prosper and is moving to a more collaborative environment with traditional institutions following quickly with their own offerings powered by companies like LendKey. The company has 320 clients and has helped originate over $1 billion in loans with its banking clients.

In Vince’s opinion, there will never be an Uberization of finance because banks and credit unions do eventually adopt technology. They survive. Same thing happened in Internet banking.

There is an entire system of trust and regulatory framework built around banks making them very hard to disintermediate. In this sense, LendKey is providing the shovels and pickaxes for the marketplace lending goldrush and it’s selling them to the big boys.

Listen to the FULL episode

In this podcast, you’ll hear about the following:

  • How and why lending-as-a-service is being adopted by traditional lenders
  • Why banks aren’t being Uber-ized
  • How this whole land grab for online lending will play out
  • New consumer demands for increased transparency, speed, and customization in payment terms
  • How future clients desire to engage with digital lending brands
  • How digital decision making is occurring at top performing banks

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What’s Goldman Sachs doing in online consumer lending?

Goldman consumer banking

Goldman has ambitious plans to offer loans of a few thousand dollars to ordinary Americans and compete with Main Street banks and other lenders. Goldman Sachs has built its brand on handling the portfolios of the rich and powerful. For 146 years, the venerable bank has provided all kinds of financial services, including banking and investment management to thousands of clients– individuals and businesses — globally.

In June, Goldman Sachs communicated that it was further investing in its consumer lending business. Lending a few thousands dollars to a family to remodel a kitchen is a far way from underwriting top tech IPOs, but GS looks serious about investing in its consumer lending offering. Goldman can do this given the fact that it converted to being a consumer bank from an investment bank during the financial crisis — enabling it to take on deposits.

While its activities seem to be in the early planning stage, Goldman’s interest appears to center around providing small loans of a few thousand dollars to Main Street, pitting it competitively alongside consumer banks and marketplace lenders like Lending Club and Prosper. It doesn’t appear that the company intends to establish a marketplace around its lending product (like Lending Club), opting instead to lend off its own balance sheet. Further signaling its intentions to the market, GS hired Harit Talwar, Discover Financial’s former CMO, to head its consumer unit.

Then, in August, Goldman Sachs acquired GE Capital Bank’s online deposit platform. As part of the purchase, GS will take on $16 billion in deposits, made up of $8 billion in online-deposit accounts and $8 billion in brokered CDs. Dozens of employees were targeted with expertise in areas including marketing, credit and engineering, according to one of the people. Without the onus of maintaining local branches, the global bank is quickly putting the pieces together to be a serious competitor in online consumer banking.

Now, Goldman Sachs is trying to poach top management from its newly-found competitors in a market that’s quite competitive for talent. Lending Club’s recent IPO may still have senior leaders there locked up on selling shares and the recent performance of top firms like Prosper make for a competitive recruiting environment. “We have recruited talent from a wide array of industries to build a team with diverse experiences,”Andrew Williams, spokesman for Goldman Sachs said in a statement. According to Bloomberg Businessweek, GS is contacting senior level players at firms in New York and San Francisco and it appears to be having some success: according to employees’ LinkedIn profiles,individuals have joined Goldman Sach’s online lending group from  Citigroup Inc., Barclays Plc, American Express Co. and Discover Financial Services.

Goldman Sachs is a technology firm

For years, GS has been trying to convince the public that at its heart, it’s a technology company. Numerous managers have emphasized that Goldman Sachs has more engineers than Facebook — from CEO, Lloyd Blankfein all the way down the ranks. From internally developed products and services to investing in rising fintech stars, GS is active. It’s one of the banking firms behind Symphony, a communications app that just raised $100M and is taking on secure messaging in financial markets and beyond — taking aim at Bloomberg’s sweet spot.

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Build, Buy, Partner, or Ignore: Banking’s response to online lending

banks competing in online lending

Much attention is given to the startups in the online lending space. Companies like Propser are raising huge rounds. Acquisitions in the online lending space are beginning to become more frequent. With new investments and new companies being formed weekly, we almost never read about how banks are responding to some of the competitive pressures fintech startups are bringing to bear.

online lending and banking competition

There are basically 4 ways banks are addressing fintech competition in online lending:

  1. Build their own offerings:[x_pullquote type=”right”]Lending.com is the latest entrant into an online consumer and small-business loan market that Morgan Stanley MS -0.22% analysts estimate could grow to $122 billion in 2020 from $12 billion in 2014.[/x_pullquote]The Blackstone Group recently announced it would be setting up its own competitive offering to provide loans for consumer purchases of big-ticket items as well as small-businesses loans. Blackstone’s new platform, which will launch as Lending.com, comes shortly after news that Goldman Sachs would be doing something very similar. As lead underwriter for LendingClub’s IPO, the growth potential of online lending wasn’t lost on Goldman. When LendingClub’s founder and CEO appeared on the Tradestreaming podcast, it was clear that LC had its sights on disrupting the credit card business — it may be that online lending its an expansive move for banks and financial services firms like Goldman and Blackstone.
  2. Buy startups in the space: While we’re starting to see some of the startups consolidate and purchase other online lenders to capture market share, there haven’t been a whole lot of examples of incumbents acquiring upstart marketplace lenders. BFS Capital, a firm that’s been in business since 2002 and has leant out over $1 billion to small businesses, did make a recent acquisition as it welcomed Entrust Merchant Solutions to its growing family. As the parent company to the UK’s Boost Capital, BFS doesn’t appear to have a lot peers acquiring growth. Regulation may play a key structural role, preventing traditional banks from getting into the online lending business.[x_pullquote type=”right”]“We do practically no auto loans, no student loans, no unsecured personal loans. So as long as I have my name on those Lending Club mailers, the materials and the loans, that’s key to me.”[/x_pullquote]. Regions Bank recently disclosed a relationship with Fundation Capital
  3. Partner with the online lending startups: LendingClub has found some success in partnering with small, regional banks, with more than 200 of these players on the LendingClub platform. Small banks have, by and large, strayed away from unsecured lending, favoring mortgages instead. Partnering with online lenders enables the banks to quickly relaunch their offerings and provides the online marketplaces with partners that have deep, local roots and great direct mail lists.
  4. Ignore the future: It’s not easy to be a bank today. Regulation limits their decision sets. Competition from the bottom up is happening in fintech, where everyday, new, freshly-minted startups with sometimes hundreds of millions of dollars in backing are taking aim at the banks. Competition is happening laterally, as well as speciality financial service providers are expanding into core banking offerings. For the most part, banks struggle to keep up with the technological requirements today’s digital generation demands. While some banks may decide to “partner with the enemy”, many lack the wherewithal to rebuild their businesses within their regulatory parameters to compete against largely-unregulated competition.

While the future of banking is uncertain, one thing actually is: tomorrow’s banks won’t resemble today’s banks. Regulation will play a key role in determining in which ponds tomorrow’s banks actually fish. Meanwhile, fintech is enjoying a cold glass of white while chowing down at the fish fry.

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Why I wouldn’t want to be a bank in this market

Album_no_respectAs the late Rodney Dangerfield put it so eloquently, banks don’t get no respect in today’s market.

It’s not that they haven’t tried. Post the 2007-2008 credit crisis, many of them have cleaned up their acts.

But, it’s not just the fact that banks are now forces to lay in their own financial beds that has made bankers lives so tough of late.

Banks face (new) tough competition

It’s also about competition. Banks are being assailed on all fronts in a way they’ve never been threatened and I think the writing is one the wall: the core functions of banking are being challenged by a whole new generation of startup financial service providers that may eventually displace them. We’re in the early stages of sprinting a marathon to build the most influential finance companies.

Today’s consumer lending: from the consumer to the consumer

One of retail banking’s bread and butter business lines is a basic form of lending arbitrage. They take deposits from customers (paying out a low interest rate) and then lend it out to other customers (at a higher interest rate).

But many individuals are borrowing outside traditional banking channels. Lending Club, the largest peer to peer lender, just surpassed $4 billion in small personal loans it’s underwritten on its platform. Borrowers on peer to peer lending platforms either couldn’t qualify for loans, got worse rates with banks or just would rather avoid the banking sector all together. Banks see the writing on the wall — Union Bank just announced it would team up with Lending Club to deploy its own capital into loans on Lending Club’s website. You can hear how far the company has come since my 2012 interview with Lending Club founder and CEO.

Business loans: the next domino to fall

Lending Club made it very clear as it gears up for its own multi-billion dollar IPO (expected this year) that it’s interested in getting into business loans. It’s here, in the commercial loan business, that banks are facing their fiercest rivals right now.

  • Long term loans: Newly-minted companies like Funding Circle has already lent out hundreds of millions of dollars to business looking to borrow money for years at a time. The demand for these types of loans from non-banking sources is huge.
  • Short term loans: Businesses looking for shorter term loans and access to working capital are turning more and more to companies like OnDeck. Armed with new credit models, these firms can frequently be more quick and nimble, approving loans in minutes (versus days and weeks at traditional lenders).
  • Specialty loans: Perhaps the most interesting entrants into the online lending market are the specialty ecommerce and payment platforms. Amazon is hiring boatloads of people to staff up its new lending division. Paypal is doing the same with its new Working Capital loans for small businesses that use the payment platform. These companies are perfectly situated in their customers’ business to a) determine creditworthiness and b) to provide them with a loan. And student loans? Forget about it — there are startups like Pave (hear my recent interview with Pave’s co-founder) trying to create more efficient (and cheaper) ways to finance higher education.

Look for more innovative online lending models to proliferate in the next few years like the kind that Zazma employs. A startup that’s received investments from top venture capital firms, Zazma provides trade financing to small businesses. Need to stock up on some inventory before the holiday season? Zazma will pay your supplier for the goods and work with you on payback — all almost instantly online. Low friction like credit cards and quick access to working capital.

Today’s “no respect” for the banking sector is so much more than just the product of the recent credit crisis. Smart, well-funded startups are beginning to chip away at banks’ core value to the economy and consumers (both retail and business) seem to happier with their new-found options.

What do you think about the changes in the lending market? Let’s discuss in the comments below.