Small-Dollar Loans are on 🔥
Marcus, Marcus, Marcus! & RIP LendingClub
Competition in Small-Dollar Lending Finally Paying Off For Consumers
In late March, several US financial regulators, including the CFPB, FDIC, and OCC, issued a joint statement encouraging responsible small-dollar lending in response to the economic dislocations caused by COVID-19.
It’s unclear if Bank of America’s announcement this week of its Balance Assist product is in response to this change in guidance. The joint statement is a sharp change from guidance issued in 2013, which led Wells Fargo and US Bancorp to wind down similar deposit advance programs.
Balance Assist is the latest (and, if consumers qualify, arguably best) mutation in the “small-dollar loan” space. A quick overview:
“Traditional” payday loan: $15 per $100 borrowed; typical loan amount of $375 (varies by state)
“Fintech” 1.0 payday loan: $15 per $100 borrowed; typical loan amount of $375 (varies by state)
Earnin: optional “tip” to access up to $100 per day (max $500)
MoneyLion: $1/month and optional “tip” to access up to $250 (+express funding fee)
Dave: $1/month for budgeting & financial tools/credit building and to access up to $100 (+$5 express funding fee)
Brigit: $9.99/month for budgeting & financial tools and to access up to $250
Cash App (Square): $5 per $100 borrowed; access to up to $200 (limited beta)
Varo Bank: unknown, but with its bank license in hand, plans to build a small-dollar loan product
Bank of America (Balance Assist): Fixed $5 fee to access up to $500; repayable over 90 days
And this list doesn’t include early wage access offered via employers, like Even and DailyPay, which can charge users less as repayment happens directly via payroll and they earn fees from the employer offering the benefit.
Arguably, the startup ecosystem is doing what it’s supposed to: VC-backed companies are expanding consumer options by experimenting with new business models, alternative products, and innovative approaches to underwriting, like looking at bank account transaction data.
Asked for comment, Jason Wilk, CEO of Dave, made a similar argument, saying, “Dave reinvented overdraft four years ago, allowing customers to access $75 interest free to buy everyday essentials like gas or groceries. Dave’s challenger bank has grown to 8 million customers and as a result led to the creation of more friendlier choices in the market.”
The new crop of apps isn’t without critics. Earnin, in particular, drew criticism from regulators for linking the amount borrowers could borrow to the size of “tips” on previous loans. Regulators I spoke to suggested that tip/subscription-based products fall into a grey area but generally viewed them favorably compared to higher-cost products.
While some of these offerings likely won’t survive long term, inarguably they’ve introduced fresh competition into the small-dollar loan sector, resulting in more and better consumer choices.
Help Wanted!
In conversations I’ve had with a number of founders and CEOs in the past few weeks, there’s been one recurring request: experienced digital marketing talent. If you’re a marketer looking for a full-time, contract, or consulting engagement, let me know by replying to this email (or find me on Twitter or LinkedIn), and I can facilitate proper introductions.
RIP LendingClub
Okay, the business isn't dead, but the platform for retail investors is. Kind of takes the "p" out of p2p (well, the first one).
The original premise of p2p was promising. Instead of savers earning a meagre (but safe and liquid) return from a bank, p2p enabled savers to directly take on some of the functions/risks of banking:
Liquidity risk. Banks serve a maturity transformation function, by 'borrowing' on a short time frame (on-demand deposits) and lending on a longer one. With p2p, this risk was taken by savers.
Credit risk. Savers are making an investment with capital at risk instead of a FDIC-insured, risk-free savings account.
By taking on some of the functions/risk of a bank, savers earned a higher return (I earned 5%+ on my LC portfolio).
With LendingClub’s original business model, it earned revenue from originating and servicing loans, making revenue growth entirely dependent on growing loan volume.
As LendingClub grew its originations, retail investor demand (the source of funding for loans) on the platform didn't keep pace. In recent quarters, self-directed accounts comprised just ~4% of origination volume. The rest came from bank & institutional investors.
With the pending acquisition of Radius Bank and the ability to hold its own deposits, LendingClub will continue to lend but looks much more like a traditional lender compared to its p2p roots.
(Originations graphic via Peter Renton/Lend Academy)
Marcus, Marcus, Marcus!
Lots of Marcus by Goldman Sachs news lately:
Leadership 'shakeup' - After five years building Marcus from scratch to a US+UK, multi-line business with $92b+ in deposits, Harit Talwar is stepping into a chairman role. His number two, Omer Ismail will step up to lead the consumer banking business.
Having worked with both during my time at Marcus (still remember my first nervous meeting with Harit in the corner of the 28th floor!), I'm sure this will be a seamless transition with the team continuing to focus on executing its strategic vision with exceptional quality.
GS buys GM's credit card biz. The move adds ~$2.5b in card balances. More importantly, GS should be able to re-use the technical infrastructure built for Apple Card, and it provides the groundwork to test car-connected commerce (eg, shopping and payments embedded into dash infotainment systems).
GS partners with Walmart to offer Marcus SMB line of credit to marketplace sellers. This partnership demonstrates:
-GS didn't give an exclusive to Amazon
-Is building reusable, partner-agnostic tech
-Willingness to grow SMB loan book
Both the GM and Walmart deals speak to GS' infrastructure/BaaS play - whether Marcus-branded or not - as long as it can increase the size of the loan book (and generate attractive risk-adjusted returns).
Venmo Launches a Credit Card
The most interesting part about Venmo's credit card launch may be its implications on payments, not credit.
The integration of a card from issuing bank Synchrony into Venmo is unsurprising. Parent company PayPal has offered multiple credit cards -- with similar rewards to the new Venmo offering -- for years.
On the credit side, the case is clear:
Paypal already has legal, technical, and partnership infrastructure to run a card program
Venmo has a huge MAU base
Venmo has proprietary (if incomplete) picture of users’ deposit/transaction data
Other lenders generally have been tightening underwriting and cutting credit lines
So If you put a credit offer in front of 52 million Venmo users, you're bound to issue cards (at essentially $0 CAC)
On the payments side, the logical play is to further position Venmo as payment method for online and in-person transactions, capitalizing on covid-accelerated trends in:
contactless payments via NFC
QRs for payment (like Alipay & WeChat Pay, but also Starbucks)
ecommerce
"near"-com, where users order/pay in-app but collect in-person (food order ahead, curbside pickup)