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Continuing the millennial and fintech discussion, I recently attended the country’s largest (business) student run digital media conference, the Berkeley HaaS School of Business’ PLAY — a show curated by high achiever millennials, in which SoFi and PayPal were major sponsors, where some 20% of the agenda was focused on financial services disruption, and 25% of the exhibiting, pre-funded start-ups proposed some kind of re-invention of personal finance.
- In an unstructured analysis by Foundation Capital, roughly 3500 fintech start-ups have received funding in the past 10 years, with some 60-70% started in the past 4. This indicates that many new fincos are just now coming out of their incubation and beta periods.
- To be perfectly clear, SoFi aspires to do away with your old school banking relationships (if you’re a millennial). SoFi’s narrow target allows the company to rely less on lead generation vehicles – a cost and competitive advantage.
- As a whole, SMB lending is in trouble, and that’s exactly where nextgen fincos are finding opportunity.
- Lending Tree portfolio extends to medical and educational loans though SMB lending is still its core. The company has loaned $13 billion so far, with $9 billion in just the past year.
- Credit Karma claims 45 million members – representing a quarter of all US residents who have a credit score. As a partner to lenders, the company is currently focused on facilitating the student and SMB loan process, but counts as well amongst its customers a broad base including top 10% earning individuals such as consultants, lawyers and bankers.
- The bulk of finco competition resides on the supply front, with many companies competing for traffic and attention – this situation likely to force many companies to focus on a specific niche, and to become brands and product lines within larger well-resourced entities.
- Lending Club on average reduces the debt load for SMBs and consumers by 7% versus their old loans.
- Banks for the most part are embracing the fintech newcos (know they enemy), but not so much Sallie Mae which is finally seeing a threat to its student loan monopoly.
- That said, SoFi has originated $6 billion in student loans so far in 2015, tiny in relation to the $1.4 trillion market.
- Fintech newcos are developing their own models of risk, with a focus on cash flow and income versus credit score benchmarking. SoFi no longer uses FICO scores as a “blunt instrument.”
- That said, most established newcos are not using un-tested “wacky” data like social media profiling either – primarily to adhere to regulations and best practices such as Fair Lending rules.
- FDIC reports show that there’s been a rise in bigger loans above $1 million – up 55% — while small loans (i.e. for SMBs) are down 24%. So the customer base for alternative lenders is growing, with “even young white guy business owners” having trouble getting SMB loans via traditional outlets today and seeking other means of financing versus a past demographic of primarily black and Latino business owners from the inner city and other less affluent geographies.
- Mobile usability still has a long way to go in fintech, with only a small handful of newcos allowing for account opening via mobile.
- Contrary to some naysayers who believe that we are about to hit a fintech bubble, we are not yet at the peak of the next gen finco wave as companies who have been in stealth mode the past 1-2 years are now emerging, with the strongest finding their product-market fit in the coming year.
- Niche in fintech is big business. Whether it’s taking SoFi’s stance of focusing exclusively on millennials, or addressing a single sector area such as auto loans, consumer acceptance of handling their finances online and via mobile has reached enough critical mass to support these niches.
- FICO score will be largely irrelevant in next 5 years. While the company has remained under the radar with the Consumer Financial Board, which is too busy attacking the banks to yet look at the underlying flawed foundation/credit bureau underpinnings of people’s financial lives, the fintech newcos are heeding consumers’ pain and addressing it appropriately with their own measures and credit risk models.
- The success that alt lenders have with SMBs will continue to accelerate as new small business owners discover the advantages of going with non-traditional lenders and the word spreads organically throughout local business communities. As some of these businesses grow into small franchises over the next decade, they will continue to be proponents and users of crowdfunding and alternative lending as their loan size needs increase and in some cases, become permanently disenfranchised from traditional lenders.
- Mobile is still greenfield for fintech. The companies that figure this out will rule in the next 5 years, regardless of their position today.
While small compared to more formal tech industry events, the PLAY conference is representative of a new wave of bringing tech to a wider audience in the spirit of Dreamforce (i.e. providing substantive sessions and/or high profile speakers at low cost/free tickets) and content curation in which students or “non-experts” are developing independent voices and running their own home grown events versus passive attendance at more established/massive industry events. Panels and speakers tend to be less scripted, if at all, engendering honest and meaningful discussion. While not entirely free from “pay for play,” these under the radar “micro conferences” are at the least refreshing and gaining mindshare as they literally allow everyone to be in the same room, and can be highly insightful when attendees’ and presenters’ guards are down. We’ll be covering more of these organic, niche events in the coming year.