Very high level & evolving thoughts on lending businesses within fin-tech from someone trying to make sense of the space 👇
1st wave - OnDecks & Lending Clubs taking products that banks always used to offer offline and put them online (e.g Originating loans cheaper)
2nd wave - Alternative lending platforms using their technology to new types of credit
investorfieldguide.com/ali/
investorfieldguide.com/credit/
2nd wave - Alternative lending platforms using their technology to new types of credit
investorfieldguide.com/ali/
investorfieldguide.com/credit/
Why VCs have been bearish on lending
1- very hard - figuring out who to lend to is hard
2- very cyclical - An arbitrage in an easy credit market, but hard in a downturn
3- low margin in beginning
"It's the type of business that can feel really really great, until it doesn't."
1- very hard - figuring out who to lend to is hard
2- very cyclical - An arbitrage in an easy credit market, but hard in a downturn
3- low margin in beginning
"It's the type of business that can feel really really great, until it doesn't."
For those reasons, lending is a tough biz on its own.
But it's a fantastic tool for customer acquisition, b/c there are very few ways that allow you to acquire a customer and get paid while doing so.
e.g At one point, Wells Fargo originated 1 out of every 3 mortgages in the US.
But it's a fantastic tool for customer acquisition, b/c there are very few ways that allow you to acquire a customer and get paid while doing so.
e.g At one point, Wells Fargo originated 1 out of every 3 mortgages in the US.
Lending businesses need to have meaningful advantage in either underwriting or distribution:
Distribution: Square capital lends to its own merchant base, which makes acquiring a customer significantly cheaper & easier.
Distribution: Square capital lends to its own merchant base, which makes acquiring a customer significantly cheaper & easier.
Underwriting: Almost 1/3 of U.S. consumers have FICO scores too low such that most traditional lenders wouldn't lend to them. But many of them are credit-worthy; new data sources can help assess who is & who isn't.
In emerging markets it's much larger.
See: Tala, Payjoy, etc
In emerging markets it's much larger.
See: Tala, Payjoy, etc
We invested in Addi, which is ~Affirm for Latin America
In Colombia, only 14.5% of ppl have credit cards, so it's a clearer value prop & easier to convert to a long-term customer relationship (b/c less options)
In U.S, going from funding your mattress to top of wallet is harder
In Colombia, only 14.5% of ppl have credit cards, so it's a clearer value prop & easier to convert to a long-term customer relationship (b/c less options)
In U.S, going from funding your mattress to top of wallet is harder
Cost of capital:
Needs to be lower than a bank otherwise it doesn't make sense.
Ultimately, most fin-techs are trying to be banks, b/c deposit is cheapest cost of capital.
Needs to be lower than a bank otherwise it doesn't make sense.
Ultimately, most fin-techs are trying to be banks, b/c deposit is cheapest cost of capital.
Promise of p2p lending:
The promise of p2p lending:
How Retail lending works
Borrower —> apply for short term credit —> banks and services —> package loans —> securitization —> tranches —> mutual funds —> investors
Marketplace lending
Borrower —> market —> investor
The promise of p2p lending:
How Retail lending works
Borrower —> apply for short term credit —> banks and services —> package loans —> securitization —> tranches —> mutual funds —> investors
Marketplace lending
Borrower —> market —> investor
The opportunity is to get middle men out the equation:
1/ Retail banks have low NPS and no loyalty
2/ New data sources present opportunities
3/ Web vs in person. Tiny fraction of loans are online (going online improves cost basis)
1/ Retail banks have low NPS and no loyalty
2/ New data sources present opportunities
3/ Web vs in person. Tiny fraction of loans are online (going online improves cost basis)
Target customers at inflection points
Consumer (Lending Club)
Real Estate (Lending Home)
SMB 70B (On Deck, Funding Circle, Cabbage)
Student 59B (Sofi)
Purchase finance (Lending Club, Affirm
Payday (Lendup)
Consumer (Lending Club)
Real Estate (Lending Home)
SMB 70B (On Deck, Funding Circle, Cabbage)
Student 59B (Sofi)
Purchase finance (Lending Club, Affirm
Payday (Lendup)
Credit to @SantiaSua for giving a deep dive here: player.fm/series/venture…
/FIN
Share your thoughts on the space.
/FIN
Share your thoughts on the space.
