P2P Financial Matchmaking: Low CAC and Scale-up Recipes

P2P online lending marketplaces claim to be Tech platforms in the match making business. They pair borrowers and lenders and cover the entire lifecycle of the origination process:

• Customer acquisition
• Sales
• Scoring and underwriting
• Funding
• Servicing and collections

Today I want to think of these platforms as mines. I am going in with my torch and will be looking with you at some of these processes. Come along with me to shed some light on What happens and How in order to acquire a retail customer.

Tech businesses typically report in their filings, metrics like:

CAC = Customer Acquisition cost

CPC = Cost per click

KYC = Know your customer

CLV = Customer lifetime value

If you are interested in understanding more about the factors that affect the CAC (which includes CPC, KYC, and CLV) and how this relates to a scalable business, read more in “How to calculate Your online customer acquisition cost”. Derek Palizay, a strategic marketer, claims that a CLV of 3-5 times greater than the CAC, is a decent rule of thumb for a scalable business.

P2P online marketplaces like Lending Club, On Deck and the sort, acquire retail customers in the same way that traditional credit card businesses have been doing.

• Direct mail
• Google, Facebook ads
• Listings in comparison shopping sites

Mintel Comperemedia, a database that tracks advertisements, reported that for July:

• Lending Club mailed 33.9 million personal-loan offers, more than double the amount during the same month in 2014
• Prosper Marketplace, direct-mail volume increased to 20.2 million offers
• The average monthly volume of personal-loan offers sent through the mail is roughly 156 million y-o-y (through July 2015)

Clearly, the US Postal service is one beneficiary of the soaring old fashioned mail volume coming from these online lenders. The estimated conversion rate from these mailings to a lead is roughly 4%. So, for example from 20million mailings, 800k leads maybe generated (4%). From here on, smart use of data is essential to rank prospects and improve likelihood of conversion into actual customers. Kreditech can be the potential beneficiary at this stage of the mining process. Remember we are still behind the scenes, down in the mining labyrinth before issuing the loan.

From the public SEC filings of OnDeck, that I checked before going down into the mine, the reported customer acquisition costs are:

“During the nine months ended September 30, 2013 and nine months ended September 30, 2014, the average customer acquisition cost as a percentage of principal from all initial and repeat loan originations in each respective channel was 8.3% and 3.9% in our direct marketing channel, 4.4% and 3.4% in our strategic partner channel and 8.6% and 8.2% in our funding advisor channel”

Customer acquisition costs vary largely by acquisition channel. The most expensive way to acquire customers has been direct mailing and funding advisor channels. The less costly way has been through strategic partnerships. OnDeck is focused more on SMBs rather than consumer loans but data related to consumer loans and credit cards is also difficult to disentangle and cant be that different (except for the funding advisor channel). Lending Club (also with public fillings) reports spending $200-$300 per loan but that includes all the servicing.

It’s dark down here in the mine and 8% handle for CAC makes me shiver (2014 figures). Maybe 2015 will prove to be a better year and CACs will be reduced because of customer loyalty, smarter credit scoring and more revenues from strategic partnerships.

On the lower end, it seems that even

4%-5% CAC pretty much would eat up all the spread between borrowing-lending rate

I am still shivering with these thoughts. Revenues but no profitability with such high CACs.

The big beneficiaries from the soaring P2P retail lending volumes (even though overall this space remains small as a % of the overall origination market) seem to be the:

• United Postal Service, with millions monthly mailings (offline)
• Mailchimp, with millions monthly mailings
• Google and Facebook ads

While still operating in the high end of the credit spectrum of the retail market, the strategic direction that P2P retail lending needs to head towards to move from revenues to profits, is clearly

Customer acquisition channels via partnerships for better lead generation and accelerated scale-up. CAC costs need to come down to the 2%-3% range and volume needs to soar.

The easiest partnerships, are already happening with lead generation sites like LendingTree, CreditKarma in the US, and Moneysupermarket in the UK. Credit Karma for example, has over 40million users. The traditional adjacent type of partnerships are similar to those that old fashioned credit card businesses have been engaging in: a la SoFI partnering with the top 100 US universities. Or partnerships with small to mid-size banks that want to participate in the origination business but need to outsource parts of the process that we described above (from acquiring the customer to servicing the loan). These partnerships are also starting to happen in the US and the UK (Zopa and Metro Bank).

The ones that will fuel and accelerate the scale-up process are the tech and e-commerce partnerships, like Lending Club with Alibaba, Lending Club with Google, and Zopa with Uber. These are partnerships will simultaneously lower CAC costs and gain marketshare by accessing customers from other marketplaces that are speeding on the highway of transforming commerce and services.

By Efi Pylarinou