[Editor’s note: This is a guest post from Glenn Goldman. Glenn Goldman is the CEO of Credibly, driving the company’s vision of offering a comprehensive suite of financing products to the broadest range of small businesses. Credibly is a Bronze sponsor at LendIt USA 2016, which will take place on April 11-12, 2016, in San Francisco. Glenn will speak on two panels at LendIt: Diversification of Funding Sources for Platforms and Underwriting Small Business Borrowers.]
It used to be that what mattered to lending platforms was a function of how you defined yourself and your business model.
If you were a pure peer-to-peer player, the thing that really mattered was creating a great marketplace and a user experience that allowed borrowers and lenders to find each other in a way that was simple, intuitive, and efficient.
Or, if you were a balance-sheet lender, it was about having access to capital in a way that was cost effective, with multiple sources available to you. If you were looking at securitizing, what mattered was having enough size to be able to securitize and service those loan pools effectively.
If you were an online lender, or were looking to build an online lending platform, it was primarily about creating a great online experience and having the technology to facilitate it. As the space got a little crowded, what mattered was making sure that you had a lot of focus around acquiring customers in a way that was unique and cost effective.
In more benign credit environments, or in environments where capital, and therefore liquidity, was abundant, companies had the luxury to focus on only one or two things that really mattered, because if you got those one or two things right, then you didn’t need to focus quite as much on some of the other things, like building out sophisticated data science and risk management capabilities or broadly diversified funding alternatives.
Back when there was somewhat less competition for customers, one didn’t need to focus on developing a robust product development and diversification strategy, because you could hit your growth targets with the one or two products you had in your quiver. If you were able to achieve a reasonable cost of acquisition, then maybe lifetime value of customer wasn’t as critical, because it was enough to focus on new funding growth, as opposed to ongoing lifetime value.
The world has changed, however. We are no longer in a benign credit environment, whether that’s being brought on by economic headwinds, or over-lending in certain sectors. There’s the realization that risk has been mispriced, which is becoming apparent in the kind of analyses that rating agencies and investors are doing on existing securitizations of consumer loans. There are fewer dollars being invested in the marketplace space, and those dollars are being much more carefully applied.
All of these things are playing off of each other, in addition to some economic softening, both from a geographical and an industry perspective. Lenders and buyers of loans are starting to see the impact in portfolio performance, and are being a lot more careful about evaluating a platform’s ability to manage risk. Therefore, sophisticated data science and risk management capabilities now really matter.
Competition in the lending space has grown exponentially, and we’re now in an environment where not just cost of acquisition but lifetime value of customer really matter. The ability to serve a broader set of customers across the credit spectrum with predictable write-off rates really matters. The ability to offer a range of products — not just to monetize your current sales funnel of new applicants, but also to extend your relationships with existing customers — really matters.
So we now find ourselves in a place where everything matters, and frankly, we shouldn’t view that as a negative. It is the natural evolution of innovative and disruptive industries, whether it’s music, social media, gaming, or otherwise.
We have an opportunity as an industry to make sure that we are focusing on everything that matters, because everything does matter now. A few hundred players have emerged in the space, most of whom have done a really good job of introducing either broad model-based innovation or innovation within specific stages of a workflow. The new reality means that you have to be able to do all things well, not just one element of a business model.
As a result, our industry will evolve to a place where a few dozen players — the ones who started focusing early on the notion that everything matters, or who are able to pivot and address that fact — will be the survivors in a much stronger, healthier industry.
It’s an exciting time, and I would avoid overreacting to the messages coming from those who have historically been naysayers of the impact and staying power of innovation and disruption. But make no mistake: Rough waters are ahead. We’ve all been in our own rafts over the last couple of years, paddling through Class I and Class II-rated rapids, and every now and then we’ve hit a patch of Class III whitewater.
We’re about to hit Class V, and it’s creating the kinds of challenges that should appropriately raise the bar for those whose business models should survive, and those whose shouldn’t. So let’s make sure that we’re roped in as an industry, we’ve got all the supplies that we need, and we’re ready to come out on the other side exhilarated and inspired.
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.
