All of the investment banks are starting to put out lengthy reports on the new class of financial startups that are aiming to take a cut of the big banks' traditional businesses.
There are a couple of choice quotes that I've been saying for a long time, it's nice to see the banks catching up:
“Peer-to-peer” is a misnomer as conventional wisdom underestimates the importance of institutional funding, including banks; this is turbocharging originations."
The fastest growing marketplace platforms are not really peer-to-peer but institutional investors partnering with tech platforms to cherry-pick borrowers, often with offline marketing.
No shit when like 98% of your money is institutional. At this point Peer-to-Peer is a marketing gimmick at best, or a PR nightmare to cut away.
Scale will be crucial in marketplace lending. Credit scoring has yet to be proven as a differentiator, but is likely to be essential to the long-term success of the model.
There are theoretical benefits of big data and machine learning in credit scoring, but they have yet to be proven through a credit cycle. The benefits are clearer in fraud prevention.
There are a few players trying to incorporate additional data points - UpStart with School / GPA (although I have no idea how much that actually plays a part), and Vouch, using your network strength (financial network). Disclaimer: I work at Vouch
This goes to the heart of my belief that you want to be in the pick and shovel business. I've talked with numerous executives at various lenders and they all pretty much agree, a lot of the underlying technology is a commodity - need a servicing platform? There's probably a dozen of different quality. Need a credit engine? lots of those too at different price points.
Even Morgan Stanley agrees with me that the models aren't even a differentiator, but that
Partnerships likely will be the key battleground for marketplace lenders to drive down the cost of customer acquisition and expanding distribution, just as they have been for credit card companies. Partnerships with US regional banks are an intriguing avenue for growth.
So they're all the same... I'm telling you picks and shovels at this point - the early guys got in found the surface gold.
Six clicks is the goal. At Barclays in the UK, customers with an existing relationship with the bank can obtain a personal loan with just six clicks on the bank’s mobile app and have funds transferred the same day.
Alright, lets see how this all stacks out:
- Peer-to-Peer isn't really a thing
- Credit Scoring doesn't seem to be a differentiator, everyone is coming in around the same on rate, which people do care about
- Partnerships seem to be the battleground (which banks - via credit cards already understand)
- People want a consolidated look at their finances (Hi Mint.com)
- People want convenience and speed in application processing, you can't fucking beat what Barclays is doing, leveraging that they already know you saves them a lot of of overhead that LC and Prosper have in "verification"
This is why I think Insikt has a killer product, white label the whole sucker and let a bank (or a large asset manager / hedge fund) brand it and market it via your standard direct mail and partnerships channels and you're in business.
I am excited to see Goldman jump into the online lending, but they don't have the same retail banking relationships a JP Morgan Chase, BofA or Wells Fargo does. If any of these banks are putting together a team - I'm open for consulting :)