Nearly every established industry in the world has seen, at least a level of, competition from one or many startups. That said, a few industries have been able to withstand or push around new companies. Although certainly not the only such example, the banking industry has been unusually strong against young competition; specifically the loan and debt segments of the industry. Some of this resistance can be attributed to the huge barriers to entry, namely the massive amounts of capital involved. Banking is a volume game. Quite simply, those banks with more money to loan, or to invest, will control a larger part of the market. In turn, those banks with larger reserves can afford to lower rates to push around the smaller competition.
In theory, it is damn near impossible to establish a new bank without an obscene amount of capital. However, when you scratch the surface a bit, there is room for new players. There are a few segments of high-risk borrowers that the established banks tend to avoid. While avoiding these segments makes sense on the massive scale that some of the powerhouse banks operate, there is ample room for more specialized lenders to operate. It really comes down to a resources vs. rewards calculation. Sure, the large banks could lend to the under-served markets, but they really have no motivation to do so; the time spent on diligence and vetting is not even worth the, comparatively, meager gains. Multinational banks are batter served to make a few large, high-return investments than many low-return investments. Smaller, hyper-focused lenders, on the other hand, are better suited to tackle these high-risk segments.
One such bank is Earnest. Since launching in 2013, Earnest has been focusing on refinancing student loan debt. The bank has had success, in large part to its – at least initially – singular focus on one high-risk borrowing segment. By limiting their lending to student loan refinancing, Earnest has been able to develop a new approach to analyzing the various factors:
Earnest’s application and underwriting process uses rich data science and proprietary software in order to develop a holistic understanding of clients’ financial habits and preferences while reducing overhead and infrastructure costs. By performing the industry’s most comprehensive consumer credit analysis, Earnest’s products are personalized to individual needs — resulting in lower rates, term flexibility and transparency, and exceptional lifelong client relationships.1
Earnest has proved successful enough that they just closed $275 million in total funding. $75 million in a Series B round, and $200 million in “institutional lending capital from New York Life and others.”2 In the funding announcement, Earnest noted that it will look to expand its services beyond the student loan and personal loan market, as well as drastically increasing its 160-person staff. While breaking into the banking industry is hard, this announcement proves that it is achievable.