The two main p2p platforms in the U.S. have split personalities. They have to because they are catering to two different sides of their marketplaces: the lender and the borrower. But it makes for a more expensive and cumbersome website that splits resources and forces a mixed marketing message.
Jonathan Ende has a different idea. He is focusing exclusively on borrowers and creating a company and a website built from the ground up with one purpose: to delight borrowers. He calls his new company BorrowersFirst and they have been in stealth mode for many months. Recently, they invited me to their office to meet their team.
If it’s BorrowersFirst What About Investors?
You may wonder why I am featuring this new online lending platform that doesn’t cater to investors. Obviously, there is going to be an investor side of this company, it is just not an area that will have a public face or one they will be devoting much in the way of resources. Say what?
Unless you are brand new to the blog and p2p lending in general you will know there is a large oversupply of investors on both Prosper and particularly Lending Club today. That, combined with the fact that Ende, the BorrowersFirst Founder and CEO, is a 20+ year veteran on Wall Street, means that they are very confident the investor money will come. Ende even said this to me in our conversation:
If I wanted to raise $250 million through my network of contacts to invest in this asset class, I believe I could do that with very little trouble. Today.
Now, this could be the irrational exuberance of an overconfident CEO or it may in fact be true. Time will tell. But given what I am hearing from institutional investors today there is huge unmet demand for this asset class.
So, you are probably thinking now that regular investors are going to be completely shut out of this new platform. While it is true that BorrowersFirst is going to be for accredited investors only they would like to find ways for regular investors to participate at some point. More on that later.
How Exactly Are They Putting Borrowers First?
By not having to publicly appeal to investors they can focus their marketing on a single mission. Ende and his team have been talking with potential borrowers for months including several people who have obtained loans on Lending Club and Prosper. They have been learning the needs and wants of this group.
At BorrowersFirst they are planning on offering flexible payment schedules. Instead of one payment every month, borrowers could split them in two. They are also focused on a much simpler borrowing process. They found out that borrowers don’t so much care about the interest rate, the monthly payment is more important. So they will be emphasizing that point in the application process. They also intend to have friendlier collection practices, introduce reward programs and provide education.
They have also created an entire sister site called Money Stoop that is going to have a complete editorial team with the mission of making finance fun and engaging. Here Ende is going all out hiring Marcy Bloom, a former Conde Nast publisher, to manage the site content and there will be a team of top writers. His goal is to make Money Stoop one of the top finance sites online and BorrowersFirst will sponsor it.
A Team of Rock Stars
Ende has funded the entire operation himself and you can see he is firmly in control. The key to success, he believes, is to attract a rock star management team. He feels that he has done just that.
I was able to meet his entire management team either in person or by phone and while I can’t confirm they are rock stars, each person has an impressive resume with a great deal of experience in consumer lending.
Underwriting is a key area that can make or break a company in this industry. You want someone who knows consumer credit intimately and has built successful credit models in the past. Ben Duran is the Chief Risk Officer, he started his career in banking, built out the Decision Science and Fraud Risk departments at Dell Financial Services, and has been working with consumer credit models for 20+ years. Recently, at Bill Me Later (now owned by PayPal), he was responsible for building a model to make instant credit decisions for consumer online purchases. He has been poring over the Lending Club and Prosper credit models for months and believes he has built a better mousetrap that he will put to work at BorrowersFirst.
Most startups would hire a software developer and then buy a server somewhere to host their website and that would be the extent of their IT investment. This is not the case at BorrowersFirst. They have hired a top notch CTO, Terry Oehring, with 22 years of experience, who built a large IT security company and was most recently the CTO of WhyNotLeaseIt. He has brought on a team of seven developers, who he also describes as rock stars, to not just develop the website but to make it the fastest and most secure site in the industry.
They also have an experienced CMO, an E-Commerce guy and an experienced General Counsel. Where are they lacking? None of these people have any experience at Lending Club and Prosper. To overcome that deficiency Ende has brought on John Witchel, Co-Founder of Prosper, as a senior advisor.
Launching with a Lemonade Stand
Ende described the current offerings of Lending Club and Prosper as the online lending equivalent of a lemonade stand. They have one product and you can get a small or a large (a three year loan or a five year loan). But far from being critical of this approach he is embracing it.
To start, they are going to offer loans up to $35,000 in three and five-year loan terms. They will have a 640 FICO cut-off with a 6% – 30% APR and they are focusing on debt consolidation loans.
The BorrowersFirst website will launch in private beta in early October after a small direct mail campaign is sent to one state so they can test all their internal systems and website. A broader public launch should happen before the end of the year.
In their first 12 months, their goal is to issue $250 million in new loans. That is a lofty goal. Let’s keep this in mind, Prosper took five and a half years to reach $250 million in new loans and it took Lending Club nearly four years to do the same.
From Lemonade Stand to American Express
This is a theme that was repeated throughout my time with the BorrowersFirst team. They want to take online lending from a one product offering like the lemonade stand to a sophisticated and diversified company offering a suite of products similar in scope to an American Express.
They expect to expand into auto loans, home mortgages and credit cards. In fact anywhere a consumer obtains credit BorrowersFirst wants to play. Curiously, when I asked about small business lending they said this is not on their radar. They want to stay focused on consumer borrowers; there is plenty of runway for them in the $11+ trillion dollar consumer debt market.
The Opportunity for Investors
BorrowersFirst is designed for institutional investors although officially they will be open for any accredited investor. But here is the kicker – investors have to take whole loans so unless you are putting $5 million or more to work you will not be diversified enough to participate (assuming you need over 300 loans to build a properly diversified portfolio). They will not be splitting up loans into fractions nor will there be any public loan picking.
The advantage for very deep-pocketed investors is that BorrowersFirst will have the ability to tailor loans to specific needs. Want three-year loans with an expected return of 10%? No problem. Want to delve into the lower end of the credit spectrum and shoot for 14% returns (with a larger standard deviation), no problem as well.
So, how can regular investors participate? Initially, they won’t be able to. But this industry is maturing and I know of at least one potential offering that is considering investing on their platform that may allow retail investors on board. I am not able to share details yet but stay tuned.
On paper and in person BorrowersFirst seem like a strong team. But they have set themselves a high bar for success. The $250 million number will be a stretch but it is a good measuring stick to see if their confidence is justified. Twelve months ago I would have said their goal was impossible but when Lending Club issues $174 million in a single month you certainly can’t say that any more. And given their transparency Lending Club has created a very public model for success in this industry.
There are still many unknowns here. How will the BorrowersFirst team execute? Will they be able to retain their top talent? As I said none of their key management has any “in the trenches” experience at Lending Club or Prosper and John Witchel, their advisor has been gone from Prosper for five years now. So, that could work against them.
Right now BorrowersFirst are working with a blank sheet of paper so it all sounds very promising and I could tell the team was passionate about what they are doing. They have created a solid foundation, now they have to build a great company.
Full Disclosure: BorrowersFirst paid for me to fly to New York and meet with their team in person rather than conduct my interview via a conference line. I don’t believe this article was compromised by their offer to pay for my trip, other than the fact it is probably a little more detailed, but wanted you to know anyway.
Disclaimer: This article is provided for information purposes only. It is not investment advice nor is it an endorsement for investing in the loans of BorrowersFirst.