Can better customer service disrupt financial services?

It is no secret that customer service at most financial services companies is just awful. Banks, brokerage and insurance companies have been cutting back on customer service for years in an attempt to reduce costs and improve profitability.

At a recent Harvard Business School alumni event in NYC entitled “Innovation in Financial Technology: The Startups” three founders shared their successful (and disruptive) business models focusing on delivering better customer service in financial services. The common thread for all three featured firms was their involvement in marketplace lending.

Marketplace Lending 

Marketplace lending is “about the reinvention of consumer finance” according to the American Bankers Association. Until recently it was better known as “peer-to-peer lending” lead by the likes of Lending Club and Prosper.

David Klein

David Klein is the CEO and co-founder of CommonBond and he described marketplace lending succinctly in a blog post this past summer:

“The rise of marketplace lending in recent years is part of a massive wave of disruption that has taken hold in the financial services industry – and it will only grow larger, as marketplace lending is projected to be a trillion-dollar industry within the next 10 years.”

Klein describes marketplace lenders as:

1.    A non-banking financial institution.

2.    Heavily leveraging technology to drive simplicity and speed of process.

3.    Serving a two-sided market of consumers and investors.

More Affordable Student Loans

CommonBond describes itself as “A values-driven fintech company that is re-imagining the student loan experience.” Klein described the origins of his business based on a very personal experience: the pain of student loans.

While he was attending Wharton he had only one option: The Federal Government, offering one rate, no matter where the people when to school or what their credit record was like. “It was a hard process with really bad service, and I knew there were lots of other people in the same position. But what could they do?”

Klein looked at the simple math of student lending: Investors were getting 2% returns, while students were paying 8% interest. “I saw the opportunity there to refinance student loans, saving student borrowers 2-3% in interest in the process.” A more affordable student loan option was born.

“Some call us a shadow bank, but we consider ourselves a sunshine bank, doing something good for consumers.” Klein is adamant about CommonBond’s benefits: “We offer a better product choice, a cheaper price, and use technology to speed up the process and offer improved customer service.”

He observed “We as marketplace lenders are closing the cost of capital and closing the customer service gap versus big banks. This will allow start-ups in the fintech sector to win.”

Faster Small Business Loans

David Haber

David Haber is the co-founder and CEO of Bond Street. The firm is transforming small business lending through technology, data and design. The company believes small business owners are the foundation for growth in the economy, and yet today’s banking system has left them behind.

As Haber explained he took an unconventional path to fintech, having studied biochemistry at Harvard. He then worked at a small venture capital firm.

He saw small businesses struggling to raise money, along with the fact that big structural issues faced banks serving the small business lending market. He told the gathering: “In most cases you can’t apply for a small business loan from a bank online. Then 80% of the applicants got rejected. It’s a really bad customer experience.”

Haber further noted that the consolidation in the banking industry has concentrated assets, and as a result the percentage of banking assets available for small business lending has dramatically declined.

“A $5 million loan takes the same time to process as a $150,000 loan.” So there isn’t much incentive for banks to lend at the smaller end of the spectrum. “And banks don’t want to cannibalize their lucrative credit card portfolios with more attractive lending options from the customers perspective.”

Bond Street offers small business loans from $50k-$500k with rates starting at 6% and offers and a vastly improved customer experience in terms of speed and convenience. Applications are made online and approvals are given in less than 7 day versus the typical 6-8 weeks a bank takes to evaluate small business loan applications.

Better Marketplace Lending Information

Matt Burton

Matt Burton works the B2B side of fintech. He’s the Co-Founder & CEO of Orchard, which provides analytics to the marketplace lending industry.

The company serves three distinct targets: Investment managers who need data to analyze potential lending investments for risk and yield criteria. Loan originators who need access to a wide spectrum of high quality investment managers and institutional investors, and institutional investors interested in entering the marketplace lending sector.

In essence Orchard provides analytics to the marketplace lending industry. They also created a unique marketplace platform between institutional investors and borrowers, show in a great “online lending ecosystem” chart on their website.

Matt admitted that he fell into his start-upbackwards. “I was working as consultant to the hedge fund industry, looking at small money managers, hoping one would have good system for tracking portfolios of small loans. They didn’t.”

Burton saw the opportunity to fill the analytic gap with great customer service.

“All these guys tried to do it on their own” Burton said. “I decided to start a business that would provide analytics to the marketplace lending industry.”

Forbes reported earlier this year that the volume of loans made by online matchmakers last year totaled $14 billion and will grow by a compound annual rate of 47% through 2020.

Orchard typically charges clients about three basis points against the amount invested or managed through the company. This year Orchard expects to have about $3 million in revenue. In July the company’s 59 clients make $227 million in loans using Orchard. They’ve raised $12 million in financing, which valued the company at $50 million.

Backers include a prestigious group of former big-time Wall Street executives including Virkam Pandit (former CEO of Citigroup), Jack Mack (formerly of Morgan Stanley) and Capital One  founder Nigel Morris. 

in the Forbes article Jay Posner, managing director of client Blue Cub Capital Management, said Orchard "levels the playing field. The ability to buy loans milliseconds after they're available allows me to compete with larger funds that have more resources."

Burton observed at the HBS event "Lots of people are fleeing banks, especially the under 40 crowd. This will only build the marketplace lending sector." He continued "Traditional banks are facing death from 10,000 cuts from startups."

Measures of Success 

These three startups are delivering compelling evidence that focusing on superior customer service, expressed as a lower cost, faster service or better information can indeed disrupt the financial services sector. 

The clearest vote of confidence in these companies has been their success at fund raising and business growth.

In September of this year, CommonBond raised $35 million in a Series B funding round led by August Capital, and surpassed $100 million in refinanced student loans.

Bond Street announced $100 million in funding last June from venture capital firm Spark Capital and global investment bank Jefferies. "Our biggest challenge for the past year was not having enough lending capital" said David Haver.

In September Orchard Platform raised $ 30 million. The NYC based venture capital firm Thrive Capital lead the round of new investors, which also included former Goldman Sachs president Jon Winkelried, Victory Park Capital and Thomvest Ventures. This latest round brings Orchard’s total fund raise to $ 44.7 million.

What my dog taught me about social media.

I got an important lesson about social media recently from my dog, or rather from his passing. I posted the following piece on Facebook without giving it much thought:

Decoy our Black Labrador Retriever died peacefully on Monday night 10-12-15 at the Animal Medical Center in NYC. 

Decoy

He came to NYC over eleven years ago as a rescue dog from Charlottesville, VA. Since then he enjoyed a full life with long walks, ocean swims, interesting smells in NYC, frolics in the snow, back rolls on the beach and dog treats at every port of call. 

Decoy made many friends throughout his life, including the staff at our apartment building, the owner of our dry cleaners and the guys at the local FDNY firehouse, in fact anyone with a biscuit in hand. 

He was a member of our church, where he often worked as an usher and appeared in the annual Christmas Pageant - as a black sheep. 

Despite his best efforts both in Central Park and on Eastern Long Island, Decoy never successfully caught any rabbits, squirrels, ducks, geese or deer, and he made hundreds of attempts at the chase. 

He was a family member and friend who will be missed, and never forgotten. RIP Decoy.

The response I got back was overwhelming. So what did I learn about social media? 

Write from the heart if you want to connect with people. I have to  put aside all the logic, process and strategy I learned in business school and practice professionally once in a while, and let my heart speak in my writing. Apparently it resonates with lots of people. 

Live in the moment. Decoy never worried about what happened yesterday. He lived for our early morning runs in Central Park and visits to the beach on Long Island. As far as I could tell he never worried about the future. I shared this in my Facebook post. Capturing the simple moments that make up our lives and sharing them is what social media is all about.

Trust the Data: I work with lots of clients on social media marketing programs, and tell them to closely observe what creates engagement with their audience; then use that data as a guide to creating content that matters to people. After my article on Decoy appeared, my Klout score (measuring my online social influence) went through the roof.

Of all the messages I got back from the Decoy Facebook post, my favorite was the following: 

Dogs come into our lives to teach us about love, they depart to teach us about loss. 

A new dog will never replace an old dog. It merely expands the heart. 

If you have loved many dogs, your heart is very big. 

Decoy expanded my heart in countless ways, and in turn opened my perspectives on how to share that gift, using social media.