How Online Lenders Can Stand Out in a Crowded Field

Online lending is exploding as companies vie for the attention of the tech-savvy and underbanked. Despite regulatory questions and a few high-profile setbacks dampening the rampant initial increase, the field is still growing by leaps and bounds.

According to American Banker, 13 of the largest online lenders saw a revenue increase of 700% in 2010-2014. And Foundation Capital’s read on the landscape is that there is close to $900B in online lending opportunity, with only about 2% of that currently tapped. There is a lot of money to be made in this space, but like most burgeoning fields with enormous revenue potential, online lending companies are sprouting up wildflowers in the spring. With so many of these flowers dotting the countryside, how can yours stand out among the rest?

Cut customer acquisition costs
The destination of cost savings in customer acquisition costs (CAC) is obvious. But the vehicle and route that gets you there aren’t always so self-explanatory. The two commonly taken paths are:

  • Sell to the customers you already have: develop a strategy to turn one-time borrowers into repeat business. One proven way is via a more robust suite of offerings. MoneyLion implemented such a strategy, replete with personalized loan offerings as well as credit monitoring, a recommendation engine, and wealth management tools. According to Lending Times, “This has brought down the company’s CAC to almost 25% of the $400-$500 CAC reported by other lenders in the segment”
  • Get new customers intelligently: lead gen is a jungle. Any number of companies will try to sell you ways to acquire new customers, but it pays to develop an intelligent strategy. Using a targeted combination of SEO, SEM, affiliates, and buying leads through a ping/post marketplace can be the pivotal difference

Streamline identity verification
It’s a fact that much of the information historically used to validate identity is no longer sufficient. With over half of all SSNs freely available for purchase on the black market, online lenders must use a layered identity approach, bringing in multiple sources of third-party data to verify their applications. By organizing these data pulls in a cascading fashion—using one vendor’s results to trigger another vendor’s data—companies can streamline their validation process.

The general idea is to put the broader, shallower, and less expensive data vendors toward the top of the funnel and route accordingly (depending on the outputs provided). For example, many lenders use APIs like Identity Check at the top of the funnel. This allows them to jettison the garbage, speed the promising applications through with minimal friction, and quarantine the rest for either 1) manual review, or 2) moving to the next stage of the process.

The earlier you identify the good and bad applications, the better off you are. You accumulate savings along the way by 1) not wasting money on unneeded third-party data pulls, 2) increasing scalability, 3) better utilizing headcount and cost of labor, and of course, 4) lowering the default rate. Just make sure you are acting in accordance with the FCRA.

Verify leads before purchase
Lenders have tremendous ability to control the quality of leads being purchased. For example, in the ping/post model, you can often “look” at a lead before committing to purchase. So, set up your system with something like Identity Check or Lead Verify APIs to verify the leads before you actually buy them.

This increases lead quality and conversion rates, reduces money spent on expensive data pulls, and decreases the loan default rate. And, in the possibility that a buyer does default, now you’ve got their verified contact information, as well as access to their address history and relatives. This makes collecting, or even “reminding,” that much easier should that time come (knock on wood).

Consolidate vendors
Lenders may use anywhere from 1-1,000 different third-party data vendors. Some vendors may be inexpensive but provide data that just doesn’t move the needle. Some may cost an arm and a leg but save you from losing your head. Some may have offerings that overlap. If you can find a high quality data provider that can kill five birds with one stone, it often makes sense to go that route.

No two businesses are alike. Even two lenders with the same revenue who are going after the same target demographic will have a different tolerance for false positives, different reasons for default, and different challenges for acquiring customers. The only way to ensure that your workflow is firing on all cylinders is to look under the hood and identify which data points—and which data vendors—move the needle.

Create an amazing customer experience
This is harder to quantify, but customer experience matters big-time. Consumer abandonment rates are very high, and one way to lead consumers through the end of the funnel is to make sure your prospect has a seamless, low-friction experience with your underwriting process.

There are a few things to consider when crafting your customer experience.

  • Lower barrier to entry: no sign-in pages prevent them from starting down the rabbit hole—get them in the boat first before requiring them to create an account
  • Ensure fluid process: make sure each successive step of your process follows the step before it, and that your prospect feels like the process “makes sense”
  • Increase the “stickiness” of your brand: foster brand loyalty and adoption by providing tools for your customers to improve their finances, as well as considering additional product offerings
  • Foster trust: applying for a loan can be daunting; going the extra mile to improve the trustworthiness of your brand will pay big dividends down the road in the form of lower abandonment rates and in the form of repeat business
  • Decrease friction: wherever you can, decrease user friction. For example, don’t ask them to take a picture of their government-issued photo ID if you don’t need it. If you can automatically verify their name/phone/address/email/IP immediately, don’t duplicate that effort later. Determine your tolerance for “false positives” and use that to apply just the right amount of friction for just the right potential borrower
  • Define multiple applicant paths: take the good applicants and send them down a frictionless path (some lenders are even auto-funding, which leads to even higher aggregated revenue). Take the bad applicants and throw them out—and route the “medium” applicants accordingly

It was estimated that about 4,000 fin-tech startups existed by the end of 2015 between the US and UK. Add that to the existing 6,000+ banks in the US alone, and online lenders are finding themselves fighting a war on two fronts. Even while they compete against other similarly situated lenders, they are collectively and individually competing against established banks.

It’s a massively competitive landscape. And while there are numerous ways to differentiate your online lending business from the competition, lowering customer acquisition costs, optimizing your workflow and decisioning, and improving user experience are proven strategies for success. Smart application of these strategies can make your flower smell a little better than all the others. And those flowers are most likely to get picked.

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