Banks Are Missing The Point—Alternative Lending Is About More Than User Experience

Alternative lending platforms deliver an automated end-to-end loan experience from application and origination to underwriting and servicing. Essentially, these kinds of companies sit at the intersection of tech and traditional banking, and increasingly they face potential threats from both big tech companies like Google or Amazon, as well as incumbent banks.

But according to those in the space, there is little to fear.

“Instead of looking at the holistic lending solution from underwriting to servicing the loan, banks are after a front-end solution for on-boarding new borrowers, and that’s only part of the solution,” says Howard Katzenberg, CFO of alternative small-business lending platform OnDeck, speaking at CB Insights’ Future of Fintech conference. “At the same time, banks are still waiting to see what happens with companies like ours before partnering and moving in to the space full-on.”

Katzenberg was joined on the State of Alternative Lending panel by Sameer Gulati, the COO of online lending marketplace Lending Club, and Kathryn Petralia, the co-founder & head of operations at Kabbage, which automates the underwriting process for small-business loans, in a conversation moderated by Peter Rudegeair of the Wall Street Journal.

Big tech might in fact be an opportunity for some of these alternative lending startups.

Gulati noted the potential to partner with big players especially tech companies entering the space. “It is an endorsement of what is possible and could expand the addressable market for everyone. We can provide the financial services expertise and partner on the tech side, which is more promising than partnering with traditional banks that are focused on making headway from a user-experience perspective.”

“It is hard to serve small businesses with capital and underwriting in an efficient way without using tech and automation to do it,” Petralia said. “We are able to serve customers across larger segments and as the larger players get better on the user experience it will push us all to be better.”

Panel participants noted that alternative lending is still a nascent space with plenty of room to grow and stake out market share. “We are still finding out how consumers will behave around this particular product and we are still in the early innings,” Gulati said.

o with Robinhood, you can go from downloading the app to buying a stock in less than five minutes, it was an experience that really wasn’t there before. People were used to kind of multiday or multi-week waits. A lot of that’s accomplished by the application of data science and automation on the back end. And sort of this year, we’ve sort of been doubling down on that, bringing in more people that are experts in machine learning. And the goal is to sort of surface a lot of these insights and a lot of that muscle to customers so that they can make better trading decisions.

So I think really this year we’re gonna go from Robinhood being the best and most economical way to transact, into it being hopefully an integral part of a customer’s decision-making process in making an investing decision. So, we’re really trying to do a lot more to help people make more informed decisions.

Jen: Given all that data, are there hedge funds algorithmic traders who are coming to really eager to get a piece of that data? And how do you work with them? What do you tell them?

Vlad: I don’t know, I mean we’re not in that business. The goal of that data is helping customers make decisions. So I think if we were to… Like we would never consider selling any of our customer information to hedge funds or financial institutions, I think that would be incredibly contrary to our mission.

Jen: Given the data though, have you learned about your core customer? I guess who is the average Robinhood user you talked about? You know they’re relatively young, and you know are they a day trader or do they trade a certain amount of times per week? Who are they?

Vlad: Average customer is 30 years old. They trade a little bit more than sort of the average customer of a typical online brokerage. I think a lot of that is because we allow people to do things that they wouldn’t be able to do otherwise. So, rather than sort of buying one stock at a time because you’re being charged 10 bucks every transaction, you can buy maybe one share of 50 different stocks. That suddenly kind of economical thing that you can do, whereas that would have cost you hundreds if not thousands of dollars in trading commissions before. So, we have people that are actually diversifying with much smaller account balances than they would have been able to do in the past, and so, that kind of leads to higher than normal trading activity. But I wouldn’t call it day trading per se. When you say day trading, people think sort of speculative buying and selling. People on Robinhood, the vast majority are actually just buying and accumulating over time.

Jen: Something that is obviously a hot topic right now that we’ve heard a lot about at this conference is cryptocurrency, Bitcoin, and Athyrium.

Vlad: Totally yeah.

Jen: Have you thought about getting into that business of trading cryptocurrencies?

Vlad: Yeah totally, we’re looking at it. You know a lot of customers have been interested in it and requesting it. And it’s definitely something that we’re taking a look at.

Jen: Would that change the way in terms of dealing with regulators, are there additional regulatory issues that you can imagine would it affect your decision in getting into that space?

Vlad: Yeah. Regulatory issues are always front and center and that’s one of the things that we’re always very, very conscious of. We wanna make sure that we’re doing things properly and correctly and be in communication with the regulators as we’re sort of expanding into additional lines of business. And I think a lot of people are kind of scared off by the prospect of regulation. But really, regulation is aligned with consumer finance in a lot of ways because the regulators are there to make sure that the customers are well taken care of. And it’s not there to be onerous or to prevent people from innovating, you actually see a lot of the regulators are really open and embracing a lot of these new innovations. I mean FINRA had or is having a conference about block chain.

So there’s a desire to understand and implement a lot of these innovations. But there’s also a primary focus to make sure that customers understand what’s going on. They’re being communicated to in a clear and sort of straightforward way. And companies aren’t taking advantage of their customers, which unfortunately has happened in the past. So they’re there for a very good reason.

Jen: We’re almost out of time, but you talked about additional lines of business. Are there particular areas that Robinhood is looking to get into soonest and what is your timeline look like for that?

Vlad: Yeah I can’t comment very specifically on sort of new product developments, but I would say that in the past couple of years as we’ve rolled out things like Robinhood Gold which have grown really quickly, we’ve sort of noticed that we have a very, very unique asset among other companies in our space and it’s that customers love our product and love our brand. And so, when we’ve released things like Robinhood Gold, people adopt it quite quickly. Not just because it sort of addresses a pain point but also because they spent a lot of time on our products and they’re very engaged.

So that’s sort of shifted our thinking in a way, away from thinking of ourselves as just an investing company, and more towards thinking of ourselves as, what if we provide sort of an awesome solution to our customers every financial need. We think about okay, what do they need when they’re 18 years old? Or perhaps even younger all the way to retirement and how can we grow with our customers and sort of provide them better products, where they capture the vast majority of the value from that financial product and service.

So, I think over the next couple of years, certainly, within the next five, 10 years Robinhood will look very very different. And the goal is for you to get any product that you can walk into your local, national bank branch office and get faster, cheaper, with a much better user experience. And again, where the customer gets the vast majority of the value from that transaction. So that’s the goal, and it’s somewhat broad but people’s financial needs are broad, and I think we’re barely scratching the surface of what people actually need.

Since we live in very unique times, people can no longer sort of count on their employer sponsored pension plan or even social security very, very questionable, what’s gonna happen? A lot of ways the social safety nets are in a weak shape, and so our approach to that is empowering the individual with better tools. Because over the next couple of decades, I think the individuals are going to bear the brunt of the onus of planning for their financial futures, building their wealth, and taking a lot more responsibility for sort of making sure that they’re well taken care of in retirement and so forth.

Jen: And on that note, I think that will do it for time but that was a great note to end on and thank you so much Vlad for being here.

Vlad: Thank you so much for having me.