Online lenders adopt the model they sought to disrupt

SAN FRANCISCO — It wasn’t long ago that Silicon Valley was striving to break the banking business into separate pieces, with venture capital flooding startups specializing in niches such as credit card refinancing, student loans and small-business finance.

Now the race is on to put banking back together again. This week, at the online lenders' largest annual conference, much of the talk was about building something closer to a full-service bank, albeit one designed for the digital age.

“If the only thing you’re doing is lending money online, it’s going to go the way of the dinosaur,” said Rob Frohwein, the CEO of Kabbage, which started in loans but has added more products for its small-business customers. “Our objective is to sit at the financial nerve center of small businesses.”

Numerous companies at the Lendit Fintech conference professed the need to build broader relationships with their customers — or what was called cross-selling before that term lost favor in the wake of the phony-account scandal at Wells Fargo.

“It’s very hard in fintech to be a single-product company,” said Andrew Graham, the CEO of Borrowell, a Canadian firm that initially focused on unsecured personal loans but has since branched out.

On Tuesday, MoneyLion, a New York-based online lender that focuses on consumers who lack a financial safety net, announced plans to start offering deposit accounts. Those accounts will be part of a bundled package of products that already includes investment accounts and small-dollar loans.

MoneyLion’s announcement followed similar moves by San Francisco-based SoFi, which targets a more affluent segment. SoFi started out in student loans, but has since added personal loans, mortgages and investment products, and plans to start offering a transaction account in May.

Goldman Sachs, one of the best-known names in finance, said Monday that it is considering adding credit cards and wealth management products to its consumer loan and deposit franchise. Despite its 149-year history, Goldman only recently entered consumer banking, and its Marcus platform more closely resembles a startup than an established bank.

Omer Ismail, chief commercial officer for Marcus by Goldman Sachs, indicated that the Wall Street bank plans to move quickly to add new consumer products. “For us, it’s just a question of where do we see the most immediate need? And what makes the most sense?” he said.

There are a number of reasons online lenders are now pivoting to become more full-service financial providers. For one, the digital infrastructure these companies have built is expensive, and it only yields profits when it runs enough transactions.

“Transaction costs kill you,” said Douglas Merrill, the CEO of ZestFinance, a Los Angeles-based fintech company.

Another reason for the shift is that acquiring customers can be quite expensive for companies that do not have an existing relationship with the consumer. Online lenders have long been at the mercy of aggregator sites such as Lending Tree and Credit Karma, which extract fees for customer referrals.

If the digital upstarts can sell more products to their existing customers, their customer acquisition costs should fall.

“Disrupters inevitably start by unbundling individual products because their focused approach gives them a competitive advantage,” Todd Baker, a banker turned industry consultant, said in an email. “But they inevitably end up rebundling with a bank-like group of products built around customer needs because the monoline model is flawed and true value in financial services is found in deep customer relationships.”

What does this mean for banks? For those depositories that have recently added digital lending capabilities, their ability to sell a wide range of other products offers a key advantage.

“If you can prove that you are delivering value and ease to customers, they will tend to stay with you,” said Jeremy Takle, the head of Barclays’ U.S. digital consumer bank. “It is the minority, rather than the majority, that want to shop around for every dollar.”

Of course, cross-selling effectively can be a challenge. Some consumers like to shop for the best deals. Others may be turned off by aggressive offers that do not fit their needs.

Sameer Gulati, chief operating officer at San Francisco-based LendingClub, which has so far remained focused on loan products, voiced skepticism about all the talk from other firms about owning customers.

“Customers don’t want to be owned,” he said. “That’s not really a need out there.”

Kabbage plans to keep adding new products for its small-business customers, but the Atlanta company’s CEO acknowledged that building and maintaining those relationships is difficult.

“If you want to be in a relationship with your customer, you have to have implicit permission to offer them another product or service,” Frohwein said. “That means the customer is genuinely curious, excited and open to trying the new product or service.”