INSUBCONTINENT EXCLUSIVE:
For all of the excitement centered around fintech over the past half-decade, most venture-backed fintech companies struggle to acclimate to
LendingClub and OnDeck have plummeted since their late 2014 IPOs after several years of darling status in the private markets
GreenSky, which went public in May of this year, has been unable to return to its IPO price
Square is the exception to the rule.
Sometimes we overlook the companies that hail from the era that precedes the current wave of fintech
fascination, a vertical which has accumulated over $100 billion in global investment capital since 2010.
One of these companies is
LendingTree, which got its start height of the Internet bubble, going public in mid-February of 2000, less than a month before the Dot-com
LendingTree began in 1996 in a founding story that epitomizes the early Internet era
Doug Lebda, an accountant searching for homes in Pittsburgh, had to manually compare mortgage offers from each bank
So he created a marketplace for loans in the same way OpenTable helps you find your restaurant of choice or Zillow simplifies the home
In the words of Rich Barton, iconic founder of Expedia, Zillow, and Glassdoor, this business is a classic &power to the people play.
The
marketplace business model has been the darling that has driven returns for many of the leading VCs like Benchmark, a16z, and Greylock
Network effects are a non-negotiable part of the explanation as to why
Classic success stories that have transitioned nicely into public markets include Zillow, OpenTable (acq.), Etsy, Booking.com, and Grubhub
LendingTree is often left off of this list, yet, the business sits in a compelling space as consumers and lenders continue to manage their
financial lives online.
Insight in a Sea of Ambiguity
The lending process has been defined by significant information asymmetry between
Lenders have a disproportionate amount of leverage in the relationship
And that not to say it should be different & it perfectly logical to require a borrower to prove their creditworthiness
However, aggregation, synthesis, and recommendations modernize a dated dynamic.
Ironically, in an age where consumers are inundated with
information,less than 50% of interested borrower shop for loans
Most consumers take the first offer they receive
The benefit of a marketplace, however, is price competition and transparency
The ability to shop the market and access the same information that lenders have is a luxury that didn''t exist twenty years ago
The borrowers who do shop through LendingTree reap significant benefits; on average,roughly $14,000 on mortgages and 570 basis points on
There certainly something to be said for comfortability and hand-holding, but at some point the metrics speak for themselves.
LendingTree
isn''t a marketplace in the purest sense because of the process that takes place after a borrower clicks &apply.& While a diner can reserve
a table at any listed restaurant with OpenTable for dinner tomorrow tonight, she can''t simply take the loan she wants
LendingTree lacks the direct feedback loop between consumers and lenders that characterizes most marketplaces
Instead, the platform aggregates information from a network of over 500 lenders to provide options according consumer needs
LendingTree is effectively the onramp for interested borrowers, which necessitates the entry of lenders to fill the borrower needs.
As this
&onramp& continues to serve a larger audience as more consumers conduct their finances online, banks and lenders intend to seize the
Digital ad spend in the financial services industry is going to continue to grow rapidly at an estimated 20% CAGR between 2014 and 2020,
effectively tripling the size of LendingTree core market.
Diversifying away from Mortgages
LendingTree revenue mix has change over the
years.
For all intents and purposes, LendingTree has been in the mortgage business since its inception
The company experimented with a myriad of business models, including a foray into loan origination through their LendingTree Loans product
line, which they ultimately sold off to Discover in 2011
Even in 2013, only 11% of their revenue originated from non-mortgage products.
LendingTree has expanded their platform in a few short years
to build their non-mortgage products including credit cards, HELOCs, personal, auto, and small business loans
They have also pursued credit repair services and deposit accounts, with insurance in the pipeline
Whereas mortgage revenue made up roughly 60% of total sales in Q2 2016, it dropped to 36% as of this quarter
They wanted to diversify their product mix, but they realized they were also leaving money on the table.
Through strategic MA activity,
LendingTree has acquired a number of leading media and comparison properties to expand into new products
Acquiring CompareCards, a leading online source for credit card comparisons, has allowed them to catch up to Credit Karma and Bankrate, who
own a large part of the existing market
Additional acquisitions in tertiary products like student loans, deposit accounts, and credit services have enabled the company to expand
their market share in markets that are both ripe for growth and sparse of competition
The inorganic growth strategy emulates that of two of LendingTree major shareholders: Barry Diller, who company IAC previously owned
LendingTree before spinning them off in 2008, and John Malone, who owned 27% of shares as of November, 2017.
LendingTree has made
significant acquisitions to expand and grow
Enhancing Customer Engagement
The potential scale and success of LendingTree business model is
predicated on discovering prospective borrowers
If they&re repeat customers, that a big win because their promotional costs drop significantly once a customer is familiar with the
platform.
My LendingTree, the company personal financial management (PFM) app launched in 2014, has 8.8 million customers and generates
roughly 20% of the company leads
It offers free credit scores, credit monitoring, and goals-based guidance through a proprietary credit and debt analyzer
At the surface, it not especially different from any of the other leading consumer PFM apps
That been the issue with these apps: the service is valuable, but it very difficult to differentiate beyond UI/UX, which is far from a
defensible moat.
However, the ability for LendingTree to lock in customers and accumulate customer data to personalize product
recommendations is a breakthrough for both consumers and lenders
Consumers outsource the loan diligence process to their phone, which explores the universe of lending options in order to find the most
suitable options.
LendingTree new personal finance management app
(Photo by LendingTree)
The leader in this space is Credit Karma, and by a wide margin
They&re estimated to have around 80 million customers
Those numbers appear starkly different at first glance, but it important to keep in mind LendingTree is relatively new, launching in 2014
Credit Karma developed a more captive relationship with customers from their inception in 2007, beginning as a free credit score platform
They&re effectively in an arms race, trying to emulate each other primary value propositions in order to win over a larger share of customer
attention.
By all accounts, the My LendingTree product is still in its infancy
Personal loans make up nearly two-thirds of revenue generated through My LendingTree
Credit cards were integrated through CompareCards earlier this year; deposits will be integrated in the fourth quarter through
As the platform more formally integrates mortgage refinancing and HELOCs, there are more channels to drive user engagement.
For the
consumer, this app reinforces the aggregation and connection between interested borrowers and willing lenders
Arguably more significant, however, is the personalization of individual customer experience that will drive further engagement and improve
the recommendation engine
With the continued migration to online and mobile for financial services, this product benefits from natural demographic tailwinds.
If
LendingTree can successfully reengage with customers on a more recurring basis via My LendingTree, the app should be accretive to overall
variable marketing margin because they&ll have to spend far less on promotional activities due to organic customer
The combination of a market-leading aggregator with a comprehensive PFM tool creates a flywheel effect where success begets success,
particularly with a major head start in the lending aggregation business.
Removing the Informational Asymmetry
In LendingTree business
model, customer demand drives the flow of ad dollars and ultimately origination volume
Lenders follow customer demand
LendingTree helps expedite that process
Lenders can expand their conversions by boosting the number of high-quality leads and reducing obstacles to the loan application process
LendingTree improves both catalysts.
On the lender side, My LendingTree fundamentally changes LendingTree value proposition
They used to be responsible for connecting lenders with warm leads to drive conversions
With an existing customer base, the lead generation suddenly gets easier
It also significantly reduces the customer acquisition cost for lenders, notoriously a major component of their expense profile.
Nearly 50%
of all consumer interactions with banks and financial services companies occur online
It not controversial to say that figure is likely heading in only one direction
Currently, credit cards and personal loans are the most automated online application processes because the decisioning occurs relatively
Of the expansive network of mortgage lenders on LendingTree platform, only 40 currently enable borrowers to continue their application
As mortgages and small business loans become more automated through partnerships with third-parties like Blend and Roostify, LendingTree
will benefit from more seamless integrations and likely, higher conversions.
The real value proposition for the lender, however, is in the
Just as the number of stock brokers and equity traders has diminished significant, the role of the loan officer will follow a similar
LendingTree initially supplemented loan officers in their borrower sourcing from a marketing perspective, which drove loan officer
commissions down significantly.
Doug Lebda next conquest is to supplant the entire sales function
In response to a question about LendingTree impact on lender headcount, Lebda responded: what will happen is [lenders will] be able to
So the real competitor, if you will, to LendingTree…is the fully commissioned loan officer…In the future, you&re going to have
LendingTree convincing the borrower through technology and then you&re going to have an individual lender just basically processing and
getting it through.
The relationship between a loan officer and a prospective borrower is marred by informational asymmetry
Incentives aren''t aligned
Soon enough, the pre-approval process launched through their new digital mortgage experience, &Rulo& will help to solve a problem that has
plagued LendingTree since its inception: an exhaustive pursuit from loan officers.
With Rulo, LendingTree sorts and filters the list of
offers and provides a recommendation based on the best option
Then, the app allows you to contact the lender directly, offering the consumer the freedom they historically haven''t had
Commenting on the early success of the new experience, Lebda said &[the conversion rate is] literally about triple what it is on the
LendingTree experience.& LendingTree is streamlining a low value, yet operationally costly element of the lending business that has remained
more or less stagnant for half a century.
Seeing the Forrest through the Trees
The fawning over fintech companies has driven exorbitant
amounts of global investment from venture capitalists and private equity firms who are ultimately looking for exit opportunities
Two things are happening: first, most of the major fintech companies aren''t going public, although that is beginning to change
Second, and perhaps more importantly, the ones that do go public don''t fare particularly well.
The tried and true strategy of most emerging
financial technology startups is to focus on user growth and monetize later
LendingTree did the opposite; they created a cash-flow generating platform that served a critical purpose, simplifying a historically
complex landscape for consumers, while simultaneously driving directly attributable revenue for lenders
They have proved their original value proposition, connecting borrowers with lenders, and now they&re playing catch up to provide
supplementary tools to add more value for customers
It a rare pathway, but a productive one that more fintech startups should consider.
