Wharton FinTech Podcast
00:04:48 · Matt Palese
[00:04:48] S1: Yeah. So refinancing as an asset class, I think if you were to step back today and just take a look at the overall market, today it's $1,800,000,000,000 The problem just continues to grow and there continues to be a huge and massive opportunity to help customers pay off their loans faster and as a result of that save a meaningful amount of money. To put that into context, we believe there's about $100,000,000 of student loan debt today that qualifies and would benefit from refinancing. But if you look back last year, only about $10,000,000,000 actually took action or $10,000,000,000 of debt actually refinanced. So call it 10% of that actually took advantage of the option. And so the fundamental problem here that we're trying to solve is just figuring out how we reach more people who are eligible to refinance. And so my ultimate goal is to try to get that 10% number a lot higher. And I want to see that 1,800,000,000,000 in overall student debt come down. I think the other component here is, when you zoom out a little bit and you think about, well, how do we view success? From my vantage point, it's basically helping them get out of student loan debt so they can really live the life they envision. That's our mission. It's effectively on the proverbial wall, right? But the reality is that's obviously a lot easier said than done, and how you get there looks different for everyone. I think for some people it might mean keeping their payment the same or even increasing it slightly so they can pay off the loan significantly faster. And then for other people it might mean reducing their monthly payment by extending their loan term. It's all circumstantial and it really depends on the customer, but the way that Earnest looks to enable that is to really offer the most flexible options in the simplest and most automated way, while sort of combining that with best in class customer support to really help guide customers and borrowers through these complicated decisions.
00:06:49 · Vaibhav, Matt Palese
[00:06:49] S0: Understood. And I understand that being flexible for the first time borrowers or for those refinancing this loan is the key point here and is something you're absolutely focused on. I'm also curious to understand a little more about the business model here. Are you essentially making money through lending margin? What are your funding sources look like? Or perhaps are there any other revenue streams as well, like data partnerships, etcetera? [00:07:15] S1: Yeah, so at its core, I mean, we're a lending business, so we make money on the spread between our cost of funds and the rate we offer our borrowers. That is fundamentally the model here. I think the key call out is that we don't charge fees of any kind. What that really means in practice is that when you apply for or take a loan out with Earnest, there are literally no origination fees, no application fees, no late fees, no insufficient check fees if a check happens to get returned for some various reason, or like hardship enrollment fees. And so if a borrower hits a snag or goes through a rough patch and needs help, we have programs that allow them to help them get through that stage. And there's no fees that come along with any of those programs either. The problem we are trying to solve is helping borrowers get out of student loan debt faster. Right? And so piling on fees cuts directly against solving that problem and really contradicts our overall mission at Earnest.
00:07:15 · Matt Palese, Vaibhav
[00:07:15] S1: Yeah, so at its core, I mean, we're a lending business, so we make money on the spread between our cost of funds and the rate we offer our borrowers. That is fundamentally the model here. I think the key call out is that we don't charge fees of any kind. What that really means in practice is that when you apply for or take a loan out with Earnest, there are literally no origination fees, no application fees, no late fees, no insufficient check fees if a check happens to get returned for some various reason, or like hardship enrollment fees. And so if a borrower hits a snag or goes through a rough patch and needs help, we have programs that allow them to help them get through that stage. And there's no fees that come along with any of those programs either. The problem we are trying to solve is helping borrowers get out of student loan debt faster. Right? And so piling on fees cuts directly against solving that problem and really contradicts our overall mission at Earnest. [00:08:17] S0: Yeah. I'm also curious to understand how big is your loan portfolio today? And I can only imagine managing a big loan portfolio at a pretty large scale is quite operationally intensive and the infrastructure behind the scenes would be equally important. How much of that is in house, outsourced to partners or to other service providers perhaps? Curious And to understand, what does your tech stack and or investment look like?
00:08:46 · Matt Palese
[00:08:46] S1: Yes. Ever since Earnest was founded in 2013, we helped customers by refinancing over $24,000,000,000 of student loan debt. Currently there's about $10,000,000,000 that sort of effectively sits on our balance sheet. And so if you translate that into actual customers over the life of Earnest, it's well over 400,000 customers and active customers today, it's more than 250,000, as an example. And you're right, I mean, all of our servicing today is, it is complex and servicing is something that we have been extremely intentional. Almost all of our servicing today is managed internally by Earnest employees. We do augment that with a servicing partner, but they mostly handle back office processing. Nearly all customer facing interactions are handled by someone at Earnest. On the tech side in particular, and as I mentioned earlier, we've been extremely intentional about how we leverage, where we leverage technology. One of the value propositions for Earnest, and this is directly from customers, is the value that they put on the human centric servicing approach that we provide. And we want to continue with that focus even as we scale. So you can think about our technology investments today largely related to augmenting, whether that means self serving on our web portal and making sure they have access to the right information to help them make decisions after they take out a loan, whether it's sending us an email and interacting with us through that channel or using chat to get sort of real time responses, we want to make it as seamless as possible. I'll give you an example of how that works in practice today. So if they want to talk to a live team member, we are typically able to get them connected with a live member of the team within ninety seconds of their request. All of this is really built around the goal of providing on demand service that enable our customers to get the support they need, using whatever channel is most convenient for them.
00:11:00 · Vaibhav, Matt Palese
[00:11:00] S0: Yeah. And speaking of technology, would you describe Earnest as effectively a FinTech company in that it's different from traditional lenders who might be in the same business? [00:11:13] S1: Yeah, absolutely. The way I think about FinTech is largely managing the customer experience through a digitally native lens and leveraging technology in ways to make the experience better, faster, and more effective. Everything that we do today in terms of how we acquire the user, which is largely across digital channels, how we help the borrower navigate the application process online, how we help the customer get a fast and easy decision that's understandable, the data sources that we use to facilitate those decisions, all of those are using technology in a way that helps us get to that decision and the ultimate outcome for the user. There's a loan disbursement mechanism that happened, is automated as well for us to actually disperse the funds directly to the servicer and to make sure those funds are dispersed and processed by the loan servicer that we're paying off quickly and automatically. And then there's the servicing component, right? And that's just optimizing for one particular channel there. That's making sure that we are optimizing for all the channels in order to serve all of our members.
00:12:25 · Vaibhav, Matt Palese
[00:12:25] S0: As you said, I can appreciate that a lot of the technology here is all consumer facing, all the way from acquiring to servicing, to helping them, on an ongoing basis. You also mentioned data sources for making the right decisions. I'm curious what your underwriting model slash process looks like. I can think of data points like education, employment, credit score, things like those, but would be to hear from you how your underwriting process is currently placed and how that might be, let's say, different from others. [00:12:56] S1: Yeah, the way I would think about this is our goal here is to really form a complete picture of the borrower as fast as we possibly can to give them the best possible price in the least amount of time. Right? That's the North Star. That's the objective. When you think about FICO in particular, which is heavily used across the lending space for a lot of different reasons, that is one critical input into helping us form that picture. But we also look at things like career trajectory, what your real free cash flow is after things like taxes and other debt obligations. You know, what your savings behavior is, whether you have other sources of income that we should be taking into consideration. So the better we understand someone as an individual using the right data, the more accurately we can assess their risk, the more competitive the rates we can offer to our borrowers, and the higher chances and the higher the likelihood of them actually saving over the long term.