Fintech is red hot. In the past 18 months alone, we've seen more than 400 new lending companies launch. Walking the LendIt 2015 exhibition halls just a few short weeks ago, there were easily 300+ on display.
This sudden influx leaves many wondering: what happens when a market sees this type of surge? The answer: only the differentiated survive.
When a market experiences this type of escalating competition, every player quickly realizes there are hard limits within any market - even one as exciting as fintech. It's a classic demonstration in the mechanics of supply and demand. This large, new class of lending startups, awash with marketplace and commercial lenders, are all competing for the same capital and the same customers. Needless to say, there's only so much supply to go around.
Eventually, markets teeming with small startups fighting for market share boil over. Not all can survive. Some are gobbled up by larger and more established players, while others sink to the bottom, unable to keep up with the endless upward bidding of lead generation and capital costs.
In the end, the key to surviving this type of market surge is differentiation. From a company's perspective this means separating yourself from other competitors in a meaningful way. Easy to say, much harder to do.
Differentiation is far more than better advertisements and a snappy UI. In the case of fintech, differentiation means finding and/or creating proprietary sources of capital and lead generation, all the while building a financial model capable of weathering an eventual downturn. Not to mention, there is the monumental task of creating something that is truly novel and that customers want -- which is no walk in the park to begin with.
From the very beginning, we have taken a novel approach with Vouch:
Vouch is digitizing the financial trust between people, making it available for underwriting and pricing decisions at a scale never before conceived. The trust individuals share is a proven credit metric that, before Vouch, had not been digitally recorded. By utilizing this new twist on an age-old method of underwriting, we are seeing default rates significantly below the industry average.
Vouch is also more than a lending company. We are creating a suite of products beyond just a portfolio of loans. Vouch is a network of borrowers taking proactive steps to improve their credit. Vouch borrowers, and non-borrowers, are building personal financial networks and communities with the Vouch Network. For individuals, these financial networks provide a resource to establish credit or lend support to other connections. For Vouch, it is an engaged audience of more than 168,000 within the company's ecosystem.
We are also taking a unique approach to financial stability. No matter how you cut it, markets will forever be volatile. We recognized this from the start and Vouch's financials are built to weather the inevitable market downturn. Our business model is designed in such a way that it can absorb half the revenues or twice the losses we forecast, and we stress test it all the time. And when it comes to our sources of capital, we keep those highly diversified to mitigate risks stemming from market corrections.
Of course, Vouch is not the only company in the fintech space actively differentiating itself from competitors. A number of early movers in the space have already achieved billion-dollar loan origination scale. This quantity has a quality all of its own. When a lending company reaches this scale, the sheer volume attracts capital partners of a unique class. These partners are willing to facilitate larger amounts of capital at lower prices, giving a competitive advantage to those companies who hit massive scale. Everyone else has to get creative in order to keep rates competitive.
One way companies are tackling this is with proprietary algorithms that incorporate the most advanced machine learning to make "better" decisions. These algorithms are capable of improving over time, further accelerating a lender's progress. Also these algorithms are designed to yield lower default rates, lowering risk and increasing profitability.
Although the current influx of startups in the alternative lending space is straining the limited resources of the market, there is a silver lining: real change is coming to the financial services industry. For those who succeed in establishing an innovative and a novel approach, the opportunity for change in financial services is unlike any we've seen in decades.