BETA
This is a BETA experience. You may opt-out by clicking here
Edit Story

Online Lender Earnest Raises $275 Million; Has Originated $400 Million In Loans This Year

Following
This article is more than 8 years old.

Earnest, one of the new online lenders using smart algorithms to serve millennials who may have short credit histories, announces Tuesday $275 million in new funding. Seventy-five million dollars of that is a series B round led by venture capital firm Battery Ventures, and an additional $200 million comes in the form of lending capital from New York Life and other insurance companies.

The San Francisco-based company, launched in May 2014, started out making personal loans, but its most popular product is student loan refinancing. Rolled out in late January, when the company received a $17 million series A round of financing, that offering has helped fuel rapid growth, bringing this year’s total loan volume to about $400 million dollars, 50 times greater than the $8 million Forbes reported it lent last year.

The company has also added staff at a quick pace. Now at 160 employees, up from 30 a year ago, it plans to add another 200 new workers — primarily in engineering, such as data engineering, data science, product design and product management. The goal is to expand into new products, and eventually, to become the Amazon of financial services.

“This is the beginnings of building the team to expand to all consumer financial products,” says Earnest CEO Louis Beryl. “What this speaks to is a tremendous vote of confidence [from] our investors that we’ve already laid the building blocks and are really starting to see tremendous growth to take our model and expand it to many more people and many more products quickly.”

Earnest is one of the many new startups including SoFi, Common Bond, Upstart and Pave using big data and algorithms to provide financial services to consumers neglected by traditional banks. Although it got its start later than market leader SoFi, which has so far funded more than $4 billion in loans today and said at the end of September that it expects to fund $6 billion in loans by the end of 2015, Earnest has differentiated itself with a novel algorithm and unique products. The company says 15% of its customers had recently refinanced with a competitor but then switched to Earnest.

Many of the companies in this category use alma mater, major, employment and credit score to underwrite the loans and determine the interest rate. Earnest, on the other hand, eschews the credit score and instead adds in checking, credit and savings (including retirement) data, noting not only whether the applicant made a credit card payment on time but also whether she paid the minimum or full balance, and spotting financially responsible borrowers due to their savings behaviors. That, in turn, allows the company to offer some of the least expensive loans on the market, saving its borrowers an average of $18,000; the average loan amount is $70,000.

The company also uses the 80,000-100,000 data points it gathers on each user to offer a precision pricing feature, in which borrowers can switch between variable and fixed rates, drop from a 15-year to a five-year loan (particularly appealing to those, such as medical residents, who see their incomes rise), customize their loan payments down to the penny, or pay biweekly to better match with their paychecks. All these tweaks can save borrowers even more on their loans. More than 95% of its clients take advantage of precision pricing, which Beryl says accounts for a large portion of the $18,000 that the company saves its borrowers on average.

Earnest also distinguishes itself by servicing the customer throughout the lifetime of the loan, which can be as long as 20 years. “[Our competitors] only really answer the phone while they’re originating your loan. In a student loan refinance, these products can go to 20 years. The average loan is 10 years long. So we’re talking about someone entering a product relationship with you for a decade or more — a decade on average,” he says. “People really care about what that experience is going to be like over that entire decade, not just for the first couple weeks of originating that loan.”

Beryl credits these features for the company’s high net promoter score (a number from -100 to 100 that expresses a consumer’s willingness to recommend a company to others). At 81, he says it is higher than any in financial services. (In March, NPS co-creator Satmetrix announced that Costco had the highest overall score at 79.)

So far, Earnest’s big data algorithm has enabled it to target a financially responsible crowd. Although it’s too soon to determine the company’s default rate — typically, defaults peak in the second year of the loan — the company so far has a default rate of 0% and none of its student loan refinancing borrowers have ever missed a payment.  This could indicate that the company could be serving more borrowers — and making more money — than it already is. To that, Beryl says, “every day that goes by, we’re taking in this data and were constantly iterating so that we can build a better product. … Our mission is to democratize access to high-quality financial services, and big part of that mission is better access to credit for millions of people at earlier ages and at cheaper prices.”

The company also announced the addition of Battery Ventures general partner Roger Lee to its board. “Our overarching thesis is that the financial services industry does not yet have an Amazon,” Lee says. “Most other consumer industries have been really disrupted by the Internet, mobile, data and design. And yet consumer finance has not been. We think that that’s going to change over the next 10 years.”

Lee, who has experience as a two-time entrepreneur (selling e-commerce site NetMarket to Cendant and application service provider Corio to IBM ) and has been a venture capitalist for the last 15 years, notes that millennials don’t have a particular brand affinity with the bank such as Wells Fargo or Bank of America . “If you are going to unbundle a bank and look at each product on a de novo basis and design them from scratch, what would it look like?” he says. “That’s what Earnest is doing, and it turns out it’s quite different from what Wells Fargo and B of A designed a hundred years ago, which is largely what their products look like today.”

Beryl says New York Life was a good fit to provide debt facility because the two companies' philosophies aligned.“We try to charge our clients the lowest possible price and build a relationship with them for their whole lives,” he says. “And this is very aligned to New York Life and some of our other partners in terms of building relationships — versus some hedge funds, as a counterexample, that might be looking for a financial institution to charge customers the highest possible price.”

Though Beryl declined to say what products it might offer next and when, the company will be launching an app by the end of the year that will enable borrowers to manage their existing loan(s) and apply for additional loans. The app will also have a referral code feature that gives them and any referred friends who sign up a $200 bonus.

Follow me on Twitter or LinkedInCheck out my website