Before you check the rest of our deep dive about debt/loan related startups, I wanted to make it clear that this is not a highly technical analysis of debt as a general concept nor about our opinion of the current trends shaping the economy as a whole and where it could lead us. We let this task to more competent people and this is not the aim of our work.
Together with Chloe and Mamadou from Idinvest we decided to explore this landscape because we noticed an increasing number of startups in the lending space. Whether it’s companies providing loans to consumers and businesses or pick and shovel startups that help debt providers manage the debt lifecycle better, new interesting models and trends are emerging and we thought it would be interesting to cover some of them.
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Table of content:
Video 1: The great debt flood
Video 2: The verticalization of lending platforms
Video 3: The rise of embedded lending
Video 4: Debt lifecycle management tools
Video 5: New debt models for millennials
Debt is becoming ubiquitous and capital a commodity
Increasing debt levels and decreasing borrowing rates
At a very macro level, the overall level of debt has been increasing on almost every front.
Even before the pandemic, general government debt across the major world economies has been rising for the past 30 years, and the COVID crisis only accelerated this trend, leading us to levels of government borrowing we haven’t seen since world war 2.
And it’s the same thing on the corporate side, even before the COVID crisis corporate debt was at thirty years high with more than 10trillion dollars of corporate debt for US companies.
On the consumer side, the trends are much more geography-specific as the level of debt for American consumers has historically always been higher than in Europe. But much shorter trends seem to indicate that both in Europe and in the US, it has been increasing in 2020 at least.
In parallel to this overall debt level increase, interest rates keep falling from the FED interest rate the past 30 years to the European Central one the past 20 years or even the mortgage rates which have reached a 30 years low in the US in July 2020.
As I’ve explained in the intro, whether it’s a good thing or a bad thing and how this whole situation will end up is beyond our knowledge, and not the purpose of our deep dive. What we noticed is that debt is flooding the market and money is becoming a commodity in the financial economy, both of which are pushing new models and trends embraced by startups. And this is what we’ll cover in the next videos.
Trend #1 – B2B: the verticalization of business lending platforms
The first noticeable trend that started a couple of years ago is the verticalization of lending platforms.
At the beginning were horizontal/generalist lending platforms
If you’re a small business looking for a bit of money, there’s no shortage of generalist platforms where you can apply to get a loan ranging from a couple hundreds of dollars to several tens of dollars. OnDeck, Funding Circle, Lendio are all positioned on the broader small business segment and their value proposition is to offer loans in a much faster and simpler process than with a traditional bank, as well as potentially better terms. They belong to the first generation of online lending platforms that aim to disrupt traditional bank loans.
Then a new generation of vertical platforms emerged
But the past couple of years, a wave of new lending platforms has emerged and they very often adopt a vertical approach by targeting specific industries and business segments. One of the low-hanging fruits is the eCommerce category where several players such as Clearbanc, WayFlyers, and others offer revenue-based financing to online sellers.
A first advantage of focusing on a specific business segment is that these landing platforms can assess more precisely the companies they will potentially lend money to by developing more specific business scoring.
In the case of eCommerce for example, the majority of the lending platforms will plug into the marketing tools of online sellers, most of the time their Google or Facebook ads account, to analyze the performance of their marketing campaigns and assess this way the lending risk.
Come for the money, stay for the tool
The second advantage for a lending platform to focus on a specific industry is to lock borrowers with homemade tools.
As we’ve explained in the first video, capital is becoming a commodity and the lenders are all chasing the best borrowers. A potential way for lenders to differentiate themselves is by attracting businesses with cheap capital, but to lock them with tools. For example, Wayflyer offers to online sellers an analytics tool that helps them grow faster. Clerbanc is also testing various tools such as a benchmarking/valuation calculator based on the data they collect from their customers. Clearly, the mid-term play of these vertical lending platforms is the “Come for the money, stay for the tools” one.
Trend #2 – B2B: the rise of embedded lending
We’ve seen in the previous video that a new breed of verticalized lending platforms is emerging. But in parallel to these pure players, there’s also an increasing number of non Fintech companies that offer loans to their customers, which is also called embedded lending.
Loan as a Feature
Embedded learning is not a new trend, for instance, Amazon has a loan program for its marketplace sellers for years now. What’s new is that this trend seems to accelerate as more and more platforms embrace it. Shopify has recently launched its loan program for SMBs, so has Quickbooks, the accounting software, in order to provide funding to their customers, and even Salesforce recently announced their grant program for small businesses.
I personally think that at the moment “loan as a feature” is used by these platforms mainly for retention purposes:
- First, because you help your customers either survive or thrive, depending on the reason for the loan. In the first case, it avoids a customer churn by helping them stay alive and in the second case, if you help a customer grow, they will also likely spend more money on your platform, which is a virtuous circle.
- It also probably has a locked-in effect as the customers will stay longer.
Obviously what’s common to all the platforms we’ve mentioned is that they can provide unique customer data to the underwriting/lending companies they work with and that manage these programs.
The democratization of embedded lending
If it’s relatively easy for Amazon to partner with Goldman Sachs to run its loan program, not every startup or tech company out there can do that. This is why we’re also seeing an increasing number of infrastructure fintech companies offering “embedded lending as a Service” or as an API.
In that perspective, you have the “verticalized approach” which focuses on specific segments or use cases, like Alma or Klarna which let online sellers integrate the “buy now, pay later” scheme in their shopping cart process. But also more all-around approaches such as Resolve which let any B2b company offer lending-related features in their product.
It’s also worth noting that beyond the retention aspect, embedded lending can have a real effect on small businesses’ margins as, for some models, they take a cut on the interest rate.
Trend #3 – B2B: Debt management tools
As debt becomes ubiquitous, the complexity to manage it increases, creating opportunities for tools to help both lenders and borrowers handle it.
The debt management lifecycle
At a very macro level the debt management lifecycle can be decomposed in four steps:
- The first step is the find/connect part and consists of the borrowers finding loans, and for lenders to connect with the relevant borrowers
- Once it’s done, you have the assessment phase. Borrowers will compare the different loan options they have found and choose the best one for them. On the lender side, they will score the potential risk of each borrower to decide whether to lend money or not and if it’s the case under which conditions.
- The third step is the closing phase and all the admin tasks required to seal a deal
- And the last step is the management phase. When you are a borrower it means paying back your debt and keeping an overview of your financial situation. And from a borrower’s perspective, it means making sure that your debt collection process runs smoothly.
The rise of debt management tools
What’s interesting is that we see new products emerging for each step of this process and with different approaches.
For example, Receeve is a white label debt collection management platform that helps banks with this very specific aspect. TurnKeye Lender is opting for the horizontal approach by creating a suite of tools covering the overall funnel from loan origination to underwriting and debt collection. Homebot is a real estate and lending marketing tool specifically built for real estate agents and loan officers to improve their marketing.
On the consumer side, the bigger trend is financial wellness and a new generation of personal finance management tools targeted at millennials. It’s for example what Resolve is trying to achieve with its suite of tools to guide people out of financial distress. It ranges from comparison tools to content or access to a pool of debt experts.
“Come for the tool, stay for the money”
In both the business or consumer cases, what’s interesting is that many of these startups first offer the SaaS/tool component, but could add later the financing aspect through a marketplace. The play could be this time “come for the tool, stay for the money”.
Trend #4 Consumers: Millennials and new debt models
On the consumer side, two of the major trends that I want to cover are:
- The rise of products targeted at millennials and younger generations
- And the emergence of new debt-related models / packaging
Debt for millennials
Nothing really new here, similar to what happened on the bank and insurance sides, we’re seeing a new breed of debt-related products specifically built with millennials and younger generations in mind. Their approach is to offer more user-friendly and modern products.
It’s the case for example of Prosper and SoFi which enable consumers to request a personal loan from a couple of hundreds of dollars to a couple of tens of thousands of dollars quickly and follow it via mobile apps.
We’ve mentioned it briefly in the previous video, but on the money management side, the same trend is happening.
New debt models and packaging
If the companies I mentioned just before keep a traditional approach to debt, there’s also a bunch of them that innovate on the debt model itself and its “packaging”.
A good example of that is the home equity trend. The way it works is that as a consumer, instead of taking a traditional mortgage, you can sell “shares” of the house you want to build, and the companies/people who buy these shares will get a return on investment once you sell your house, which hopefully, will increase in value.
What’s interesting to notice is that this “equitization” of assets is happening in various aspects of our life. It goes as far as “equitizing” your career. It’s the purpose of Human IPO which is a service on which you can invest in people early in their career and get a potential return on investment when they become successful.
I’ll finish this part with the increasing number of consumer, but also b2b startups, that provide debt through salaries advance. For example, Wollit is a financial service for gig workers or freelancers who can plug their bank to the app which will enable Wollit to analyze their revenue history and provide them with short-term loans when they need it. They call it income smoothing.