[Editor’s note: This is a guest post from Stephen Dash, Founder and CEO of Credible, the multi-lender marketplace. Stephen was formerly an investment banker at J.P. Morgan, and more recently founded QC Media and was an Investment Director at MHC & Co. Credible is a Bronze sponsor at LendIt USA 2016, which will take place on April 11-12, 2016, in San Francisco. At LendIt, Stephen will be on panels related to student lending and lead generation.]
As online lending has grown and evolved, the term “peer-to-peer lending” has fallen out of fashion.
In a subtle but meaningful shift, it’s more common today to hear the dominant business model described as “marketplace lending.”
The change in terminology is about more than just semantics. As more money flows into online lending, P2P isn’t the best characterization of the way this business model often works.
As originally conceived, P2P lending held out the promise of matching borrowers with lender-investors, cutting out institutions and allowing individuals to transact directly with each other. The true P2P platform provider was simply an intermediary, providing the technology connecting lenders and borrowers.
The difficulty of scaling up true P2P lending models beyond a niche level led to the advent of marketplace lending, where institutional investors buy loans after they’ve been originated and funded by an online platform that’s typically working with a “bank of record.”
Utah-based WebBank, for example, is the original source of funding for loans made through Lending Club, Avant, and Prosper (Lending Club recently announced a new relationship in which WebBank will maintain an ongoing interest in loans after they’re sold, with “the majority of the bank’s revenue” tied to the terms and performance of the loans.)
A number of online lenders, including Pave, Upstart, Affirm, Best Egg, Vouch, Health Credit Services, ApplePie Capital, and Promise Financial have partnered with New Jersey-based Cross River Bank to originate loans.
Other online lenders, including SoFi and Earnest, have opted to become licensed as lenders in their own right, eliminating the need for a “bank of record”.
Although the term “marketplace lending” might suggest otherwise, from a consumer standpoint, lenders are not competing for your business on many of these sites. There’s one set of loan products being offered, and the same underwriting model is employed regardless of who is ultimately providing the funding.
Marketplace lenders do compete with each other, but borrowers have to go from website to website to see who’s offering the best deal for their individual credit profile — or find out if they can get a loan at all. If a borrower does get an offer, it’s take it or leave it.
Multi-lender marketplaces
An online lending business model that preserves the free market spirit of P2P lending but can be more easily scaled is the multi-lender marketplace. Multi-lender marketplaces allow consumers to see offers they’re eligible to receive from multiple lenders, and choose the one that’s the best fit for their circumstances.
Credible’s credit decisioning technology processes lending criteria for multiple lenders in real-time. This technology, coupled with relationships with all three major national credit bureaus, allows borrowers to prequalify within 90 seconds of landing on Credible.com. In other words, Credible is able to show consumers the actual loans, rates, and terms that they qualify for from multiple lenders, without having any of their contact details shared with lenders.
Credible’s multi-lender marketplace provides access to a range of loan products from vetted partner lenders, each employing their own underwriting models and serving different borrower segments.
Some of our partner lenders will refinance six-figure student loan debt held by higher-earning borrowers. CordiaGrad will refinance up to $350,000 in student loan debt, for example, and CommonBond has no upper limit.
Other lenders are willing cater to borrowers with less than perfect credit scores or modest incomes. Citizens Bank and U-fi, for example, will refinance the student loan debt of borrowers making as little as $24,000 — and even less with the addition of a cosigner.
Some websites that might at first glance appear to be multi-lender marketplaces are actually little more than lead generation or referral sites. Simply displaying a range of rates offered by lenders that a borrower may or may not qualify for, and sending that borrower or their personal information along to lenders, is a business model that sets both borrowers and lenders up for failure.
What if your favorite travel website told you the flight you were trying to book from San Francisco to New York would cost somewhere between $220 and $860, would leave at an unspecified time today and arrive some time tomorrow, and that there might be a seat for you?
It’s all about the customer experience. We designed Credible to be the way we would want to shop for loans. Credible gives borrowers the ability to compare prequalified offers without the hassle of filling out multiple applications. This means that there is no impact on a borrower’s credit and that the borrower remains in control of with whom their data is shared.
They’re everywhere you look
Credible’s multi-lender marketplace provides a superior experience for consumers that has the potential to transform lending in much the same way that “multi-offer” marketplaces have revolutionized other verticals.
Amazon.com has become the dominant player in online retail by partnering with sellers who make offers through the site. These partnerships allow consumers to find exactly what they’re looking for and then decide who they’d like to buy it from, based on the price and level of service provided.
Other verticals where the “multi-offer” marketplace model has taken root include travel and insurance.
In the travel category, sites like Kayak and parent company Priceline vie with Expedia and its subsidiaries Orbitz and Travelocity to help consumers comparison shop. Kayak, for example, helps its partner hotels display prices and availabilities in real time and allows users to book online. Hotels connect to Kayak and other sites via “booking engines” like SynXis, Fastbooking, Travelclick, and WIHP.
In the consumer insurance industry, Progressive Direct lets customers compare rates charged by other big insurance companies in most states and situations. Progressive also operates an agency business, partnering with independent agents who also offer policies from other insurers.
Because they provide a superior consumer experience, multi-lender — or “multi-offer” — marketplace sites have enormous growth potential. Not only are such marketplaces in the best position to fulfill consumers’ expectations of transparency, choice and value, they also offer providers of financial products and other goods and services with a more cost-efficient way of reaching their target audience.
But it takes more than software engineers and a marketing team to build a multi-lender marketplace. Every borrower is unique, and multi-lender marketplaces like Credible must earn the trust of borrowers and lenders alike before they can tap into the information that’s needed from both in order to bring them together.
It’s not something that you do overnight — it’s an endeavor that requires vision, dedication and time. To build trust and provide value to borrowers, you must prove your commitment to establishing and maintaining a level playing field on which free market principles can thrive.
Launching and growing a multi-lender marketplace requires a commitment to fairness and a belief in the virtues of competition — values that Credible was founded on, and which continue to drive our success.
The host of this blog, LendIt, is the largest conference series dedicated to connecting the global online lending community. Our conferences bring together the leading lending platforms, investors, and service providers in our industry for unparalleled educational, networking, and business development opportunities. LendIt hosts three conferences annually: our flagship conference LendIt USA as well as LendIt Europe in London and LendIt China in Shanghai. Visit our home page to register for the next event and to subscribe to our newsletter.
