The global lending market is massive. In the U.S. alone, small businesses borrow over $600 billion annually and banks hold over $1.5 trillion in consumer loans.
Yet despite market size, building a profitable, scalable lending startup is challenging because it requires running a capital markets business in addition to running one’s core business.
Take LendingClub as an example. The company needs to cost effectively manage ongoing fundraising from institutional and individual investors (a challenging two-sided marketplace) in addition to effectively operating its core business—acquiring and retaining customers, underwriting risk, managing customer service, and servicing. Its stock price (currently around $5, down from a high of $125 per share) and its disproportionate focus on institutional investors (a pivot from its initial mission) reflects how capital markets are really the tail that wags the dog for a business like this.
Hop over to the auto insurance market for a more encouraging example of the world lending startups might move to over time. An increasing number of companies like Jerry are popping up, whose aim is to allow consumers to seamlessly move from one auto policy to the next, based on price. While by no means a perfectly efficient market, there’s an encouraging promise here and a potential inspiration for lending startups.
Imagine a startup that provided an API that allowed anyone to provide their ideal loan terms (loan type, duration, etc.) and receive funding for the interest rate loan that meets those requirements—across a massive set of lenders worldwide.
Such a startup would allow the broader fintech ecosystem to flourish—enabling companies to offer branded credit products, helping credit counselors lower their cost of credit, and enabling price comparison engines to not just provide an application front end, but to receive full funding.
It would allow lenders to do what they do best: allocate capital appropriately based on risk and achieve meaningful returns. It would allow companies to do what they do best: help provide value for their customers while increasing brand loyalty. It also holds the promise of allowing consumers to seamlessly switch from providers over time. From a venture investor perspective, it would be a potentially attractive and scalable SaaS business focused on building the core infrastructure.
Despite COVID-19 causing many lenders to pull back credit until markets stabilize, there are beginning to be early examples of forward-thinking companies edging closer to this vision, though I struggle to find compelling examples of a robust, pure marketplace.
Some larger companies and more mature startups are making early moves that would enable them to potentially capitalize on this.
SoFi’s acquisition of Galileo holds the potential of a service. This might ultimately enable fintechs to use SoFi’s balance sheet as a service, powered by infrastructure that builds on the approach of how Galileo provides card issuance and digital banking via API.
Amazon’s recent partnership with Goldman Sachs enables GS to combine its balance sheet and underwriting tools with Amazon’s SMB customer data to create an unfair advantage for lending (in terms of acquisition costs and instantly accessible sales and behavior data). Whether or not such an offering is ultimately opened up to other capital providers as a service is yet to be seen, though Amazon was rumored to have explored a marketplace option initially before partnering exclusively with Goldman Sachs.
Ultimately, there exists a massive opportunity for a capital as a service fintech startup. The winner will not only create a massive business, but it will improve lives by creating deeper, more transparent and efficient lending markets. Given the economic impact of COVID-19 we’re experiencing now, millions of individuals and small businesses will benefit.
If you’re pursuing a startup in this area, I’d love to learn more. Please drop me an email.