The first full business week of 2018 is flying by while I’m swamped ramping up a new job, but I’m taking a moment to write a few notes on the current state of fintech and consumer finance. This is the set up for the year as I see it:
1. Consumers are starting to trust tech and fintech firms more than legacy banks. A Bain & Co. survey found that almost 60% of U.S. bank customers are willing to try a credit card, deposit account, investment, or mortgage from tech firms they already use, and this number jumps to 73% for 18-34 year olds.
2. Because of this trend, nonbank lenders have earned tons of customers in recent years and now have controlling market share in making home purchase loans to consumers, with their home purchase loan market share at 51% vs. 36% for large depository banks (CHART).
3. Almost every high profile startup fintech lender stumbled in 2017 as they learned that consumer lending and financial services at scale is just a bit more complicated than having slick marketing and mobile functionality. Technology builds/integrations become a very harsh reality when you scale volume and expand beyond products like personal and student loans where regulations—and consumer experience—get way more cumbersome. You can never count out a good competitor, but here’s San Francisco Business Times 1/5/17 on high profile fintech firm challenges coming out of 2017:
Among fintech lenders, Earnest sold to Navient for just $155m, about 40% of its peak valuation. Prosper raised its last round at a valuation of just $550m or about one-third if its earlier $1.9b valuation. Then there’s Lending Club’s shares languishing below the price of a Big Mac, recently changing hands at $4. That’s far below the $25.74 Lending Club shares hit shortly after its December 2014 IPO. SoFi was reportedly in talks with Charles Schwab and other buyers but no deal came together, possibly over high valuations and allegations of sexual harassment among its ranks that led to the ousting of founding CEO Mike Cagney.
4. Mortgage is the gold standard of difficulty in consumer lending because of it’s multi-faceted regulatory burden and extreme competition. If you can do this at scale, you’re onto something. But it’s so difficult just to do scale mortgage lending well, most large-volume nonbank mortgage lenders aren’t making eight and nine figure investments in proprietary technology to compete with Big Tech that’s inevitably coming for the market share they just wrestled from big banks in recent years. These lenders do very well, but if we fast forward five years and beyond, it’ll be hard to maintain meaningful market share as a single product shop.
5. To compete with Big Tech, you need to be a fintech, and fintech requires some proprietary special sauce. Most bank and nonbank lenders with any meaningful market share don’t have the tech and/or are too heavy to build it themselves so they’re plugging it in with non-proprietary vendor tools. This means fintech software firms servicing lenders will win (investors take note here) but many of those lenders aren’t necessarily fintechs with true innovation culture to serve consumers in scalable ways (aka multiple product offerings). The fintech software absolutely helps these lenders but it won’t change most of those cultures enough to meet the evolving expectations of the customer as captured by the Bain research in #1 above.
6. True disruption is when a single brand family makes it so easy for you on one offering that when a new offering from that brand family comes along, your existing trust in the brand makes it seamless to go beyond the product you started with. That’s why Amazon the bookseller now sells you everything. It took 20 years, but it’s here now. And it won’t take that long before you’re doing the same thing with real estate services.
7. Will you always have to or feel the need to use a different brand for lending vs. home buying vs. title company vs. home improvement contractor, etc.? Probably not. As for which firms will soon bring all of this to the table for you, watch for the mortgage companies who have: (1) scale investment in proprietary technology, (2) already expanded beyond mortgage, and (2) mastered customer acquisition/digital marketing at scale. That last discipline is especially critical in expanding into other business lines that serve you throughout your homeownership lifecycle.
This all sets up 2018 to be the year that real estate services converge. Real estate brokers will offer loans, lenders will connect you with real estate services, and tech firms will be coming for it all, unless certain lenders and/or real estate brokers can offer it all first. More on this soon. Hope your year is starting off great.