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Letter from America: SoFi, Kabbage, Credit Karma

Leading fintech credit platforms in the U.S. are grappling with changing market conditions.



Silicon Valley gave the world the first iteration of digital, mobile-first fintechs. Now some of its leading companies – which have provided an inspiration to startups around the world – are maturing and coming to grips with changing macroeconomic realities. DigFinattended a CB Insights conference in New York to hear some of their stories. Today’s story looks at lending platforms. (Click here for our report on U.S. robo advisors.)

SoFi: becoming a bank
SoFi has weathered its first crisis. The San Francisco-based startup, founded in 2011 to match investors (including alumni) to students to provide cheap student loans, extended into personal loans, mortgages and now investments. But in January its co-founder and CEO, Mike Cagney, stepped down amid allegations of sexual impropriety.

In came Anthony Noto, former COO at Twitter, who has been busy reestablishing the company’s culture and values. This comes at a time when U.S. interest rates are rising. This creates a challenge for traditional lenders, but startups like SoFi have yet to be tested by a real change in macro conditions.

The company has two responses: improve its borrower profile, and engage its customers more regularly via wealth products. Already catering to the highest end of student borrowers, the company needs to turn itself into a de-facto bank, at a time when Marcus by Goldman Sachs is already making headway as an online lender into the same millennial marketplace.

“Our top priority is to strengthen our core loan products,” Noto said, speaking at the CB Insights conference on June 20. The company is reviewing algorithmic variables such as pricing, tenors, loss rates, and credit decisions. He says the product can’t be just about giving millennials access to the cheapest borrowing.

Noto says value derives from a mix of price, convenience (including speed), content, trading execution, and personalization, all of which are driven by technology. The upshot is SoFi is moving to improve its exposure to solid borrowers. “We need a credit profile that endures through this cycle,” he said.

The second tactic is to leverage its relationship with millennial borrowers into a wealth offering. Last week it launched SoFi Money, which Noto says is more than just a robo advisor aggregating equity ETFs. It is a mobile wallet that allows peer-to-peer payments, bill payments, debit card services and advice on discretionary spending. “This is the first product to let us have a daily relationship with our customers,” he said, adding the company wants to use this to increase its data points, so it further personalize its offering.

The company is well funded for the fight, with Softbank have led a $1 billion Series E funding round in 2015 and Silver Lake leading a $500 million Series F in 2017, which included money to fund global expansion.

Kabbage: from loans to payments
Atlanta-based Kabbage, whose platform provides small businesses with access to loans, is also going through a new maturing phase. Since its launch in 2008 it has facilitated the lending of nearly $5 billion in loans to small companies – about 21% of the U.S. total lending to this segment, according to co-founder Kathryn Petralia.

Inspired by eBay – “We thought we could use APIs to get third-party financial information and make loans to businesses on eBay”, she told the CB Insights audience – the platform has expanded beyond ecommerce players. Kabbage now helps all kinds of businesses, from doctors’ offices to restaurants to home builders, cut through the paperwork and complexity of bank loans.

Eligible borrowers can get financing on Kabbage’s app in under 10 minutes, thanks to its use of customer data instead of traditional credit scores. It also enables a variety of financing means, including securitization, factoring and merchant cash advances, all powered by artificial intelligence.

Kabbage is a success story (its backers include Softbank) but it faces many competitors and needs to enter new segments in order to grow. Last month the company announced a move into payments.

Petralia says the company is betting its relationship over ten years with its customers will give it an edge as it comes with other products to help companies manage their working capital. “In a year from now we’ll look more like a Square or a PayPal than a monoline,” she said.

This comes at a time when Square and PayPal are entering SME lending, and sets all of these players more directly in competition with ecommerce giants like Amazon.

Who will emerge the winner? “We need to focus more on the user experience rather than delivering a product,” Petraliya said.

Credit Karma: trusted by millennials
Who has the biggest claim on U.S. millennials? It could be Credit Karma, a comparison site that uses A.I. to help individuals make financial decisions and select products at competitive prices. Most of all, its services are free, giving it a huge brand advantage. (It generates revenue from product providers when there is a sale over the platform, and from advertizing).

All fintech companies (and traditional financial service providers) talk about trust as their coin. Credit Karma, founded in 2008, saw a huge boost to its business of providing data-driven credit scores and recommendations in the wake of the 2017 Equifax hack, which saw the personal details of 145 million people stolen.

Today Credit Karma serves 80 million people, one in three U.S. adults and one in two millennials, says Kenneth Lin, co-founder and CEO. Key to this success – and to building trust – is not just the free services, but also using A.I. to personalize recommendations.

Moreover, unlike many fintechs, Credit Karma helps poor people as well as rich ones, by using a matching engine to connect them to providers willing to give them a credit card or a loan.

The company has avoided scandals and doesn’t feel the need to grow by moving into new market segments filled with big existing competitors. Its pure, everything-for-free model has struck a chord. It seems to be a genuine example of a fintech built around the needs of a broad customer base. Ten years in, Credit Karma does not appear in need of a pivot. It just needs to keep doing what it’s doing.

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