The next revolution in alternative lending




The rise of alternative lenders has been nothing short of revolutionary for both personal and SMB finance. Instead of waiting at a neighborhood bank to be approved for a loan, consumers now have multiple options right at their fingertips. They can choose the rates they want, at the terms they want, with the experience they want. The days of the neighborhood bank are slowly but surely evaporating.

These lenders are not only better at offering the right options to consumers, but can often run at a fraction of the operating costs of regular banks. For instance, see the operational costs of Lending Club vs. a typical bank below from Goldman Sachs' initiation of coverage report.

Goldman estimates up to $11 billion in profits could shift from traditional banks to the alternative lending sector. The secret has been out for a while: alternative lending will significantly impact how the future of personal lending looks. The venture world has responded in kind. According to Christine Magee’s analysis, the funding for lending-based startups has been up over the last 5 years from 2010-2015.

Companies such as SoFi, AvantCredit, Earnest and Upstart are now increasingly competing for the same customers, with new startups being funded everyday. At the same time, while LendingClub was one of the first pioneers in this space, websites like CreditKarma have made the barriers to entry for alternative lending minimal.

The question now becomes: how do you build a successful alternative lender that can compete in today’s world?

The answer is simple, yet incredibly hard to implement: building a great customer acquisition channel.

As the business becomes a commodity, the relationship with the customer is what matters, and that starts with how you acquire a customer. In a world full of alternative lenders, the answer is to look more like a modern e-commerce play that cares about understanding its marketing channels, rather than assuming you are immune from traditional market forces due to the existence of slower incumbents.

For example, the Goldman Sachs report shows that from 2013 to 2014, a large portion of Lending Club’s Google traffic declined (51% to 39%), though you can point out it didn’t grow as fast, with the conclusion still being traditional SEO caps out. I suspect it is at a much lower percentage now. At the same time, direct traffic grew from 10% to 21%. To succeed, Lending Club eventually ended up building a brand that differentiated enabled it to acquire customers faster and cheaper.

The moat for Lending Club and anybody else looking to succeed in alternative lending is the ability to acquire customers at a cheaper rate than anybody else. It is the only sustainable advantage a true business in this category can be built on.

What this means is building a channel that converts and tracks your user experience from day one. It means employing targeted acquisition toward users who need your product the most — sometimes, through creative means. It means determining what the best channel is with a laser focus, be it radio, TV or even billboards. Success here often comes down to enforcing rigorous marketing discipline and figuring out attribution at every stage of the funnel.

Lastly, and perhaps most obviously, the best way to build a great channel is to build a great product - starting from seamless onboarding to a fantastic support experience. The only way a product can keep its customer acquisition costs low is if it grows by word of mouth.

Given all of this, the alternative lending space is still young and just getting started. A majority of the loans in the United States today are still provided for by the major banks, and there’s room for better, more efficient players to reinvent the process and build new brands. I, for one, am hopeful that a slew of new startups will figure this out.