Splash Financial is trying to give small banks and credit unions a way to compete in the private student loan market now dominated by the likes of Sallie Mae, Social Finance and Navient.
The Cleveland-based fintech runs a lending platform for small lenders that might lack the resources to build one of their own but are flush with deposits and are looking for new lending opportunities. Borrowers submit digital applications for either new or refinanced loans through Splash, then small banks will answer back with offers on rates and terms.
Investors believe Splash is on to something. The company raised $44.3 million during a Series B funding round that closed this month from new investors that include partners of the venture capital firm DST Global and Citi Ventures, Citigroup’s venture capital arm. Founder and CEO Steve Muszynski said in an interview that the company will use the funds to expand its network of small banks and credit unions
Still, this may seem like an odd time for a student loan fintech like Splash to be raising new funds from big investors.
In the first place, the federal government dominates the student loan market. It has roughly $1.7 trillion of loans outstanding versus about $138 billion on the books of private student lenders.
Moreover, at the height of the COVID-19 pandemic last year, the federal government paused student loan payments and reduced interest rates to 0% through September 2021, lessening the need for borrowers to refinance debt with private lenders. There have also been proposals for a wide-scale cancellation of student debt with the Biden administration recently targeting $500 million in relief for certain loans.
Nonetheless, the private student loan market is growing — outstanding balances are up about 30% since 2017, according to data firm MeasureOne — and Muszynski said there is ample opportunity in a market, despite calls to forgive massive amounts of student debt.
He also hinted that the eight-year-old company could soon be branching out into other products.
What follows is the interview, which has been edited for length and clarity.
With the Series B round, what specific new things or use the funds for?
STEVE MUSZYNSKI: The money is going to be used to both continue to expand our team. We’re located in Cleveland with a lot of people here, but we're hiring all over, [and this] going to allow us to really invest a lot of the capital into continuing to scale out our team to support consumer acquisition ... along with investing in our automated digital lending platform. Then, we’re continuing to focus on expanding our lender network.
Have you reached profitability yet?
We don't disclose our financial position ... but we're continuing to grow significantly as a company.
Are prospective investors raising any concerns about what risks might be posed from the potential of a massive forgiveness plan? What do you tell them?
I think anytime your business is one thing, you run concentration risk. We're in the process of expanding out various products. Our mission as a company is to create a faster and less expensive financial world. So that's not student loan specific. Investors are looking at [forgiveness] and it definitely is a question that people ask. Student loans are actually a huge problem in the country, but it's the largest growing consumer asset class out there. And when you look at mass cancellation, it's highly unlikely that people snap their fingers and loans are just gone. You know, you're talking about $1.7 trillion.
I think what's more likely to happen on mass forgiveness is sort of a targeted approach. I could see it being hyper-targeted towards people that have significant delinquencies or challenges paying their loans, or just to reform some of the government repayment programs. Our investors got comfort in that it's unlikely that there's mass reform that impacts our business.
What other products can you say that you might be expanding into? Would it be personal loans or even mortgages or auto loans?
Eventually, without naming specific products, there'll be announcements coming out. But I think your insights are in the right direction, as you just map out the way we think about it as the life cycle of our consumer. If you look at the core person, they’re a few years out of college or getting an advanced degree, or starting a family, maybe they have some credit card debt, maybe they're going to get their first home. We really want to be able to be there throughout their various life stages. That doesn't always have to be that Splash needs to build everything. It could be through partnerships.
Have you seen business pick up a lot during the pandemic or given the potential rate environment we're going into?
We've had significant pickup in both application volume and people that are refinancing loans. And that's during a period when the government actually, for federal student loans, put a pause on payments, and reduced interest rates to 0%. There's been actually a big shift and the types of people that are refinancing, where it used to be heavily people that had federal student loans, because the government's the main lender when you go to school, and now it's a lot of people that have private student loans that took out loans from banks or credit unions, and they graduate, and we can offer them a lower rate through our network of lenders.
The financial systems are flush with liquidity, because of all the stimulus, and it is hard to get [loans]. And so we continue to be able to grow our lender network, where people are coming to us and saying they're looking for high-quality loans. And this actually is a very low-risk asset category. Because 100% of the people have graduated, you're talking about even on the worst portfolios for student loan refi, the default rate tends to be at 2%. And in our portfolios, it’s well south of that, and overall lifetime forecasts of loss our overall portfolios are forecasting close to 1%. So it provides a great opportunity to shift capital away from a securities portfolio to a low-risk loan asset.
Another trendy subject lately is fintechs buying small traditional banks or applying for charters on their own. Have you given any thought about whether that would be of interest to you at all? Even deep into the future?
We pay attention to it just like everyone else. But we're different because our core DNA is about partnering with banks and credit unions. So I don't see that as necessarily providing any significant benefit to us as a company, at least in the near to medium term. Rather, we just continue to grow our partnerships and then be able to support more financial institutions.
