0/ Been thinking about new types of lenders that could be enabled by DeFi rails

Generally pretty bearish

Happy to be proven wrong!

A thread

1/ As a loan originator, there are basically three avenues of differentiation

a) lowering cost of capital
b) better underwriting
c) lower cost of customer acquisition

In distant 4th place, there is cost of moving money

Let's explore each of these more

2/ Lowering cost of capital

Why do you think banks take deposits? So that they can lend out at a higher rate! Their profits come from net interest margin

The premise of Lending Club was based on this insight: banks NIM was too fat

2a/ Ironically, LC just bought a bank to.... lower its cost of capital!

What did LC miss?

When they started ~2006, they didn't expect general collapse in NIM

So now they best way to acquire capital is banking deposits

3/ Better underwriting

LC also thought they could do this better... for the most part, it has not scaled. Why?

Because once they proved they were right, other lenders quickly came in

So basically, no moats

3a/

There are theoretical data network effects, but I'm not aware of any that have worked as it pertains to loan originators

3b / SoFi also falls in this bucket. They recognized that FICO was not assessing forward credit risk of business/med/law school students correctly

But, once SoFi proved the new model, competition increased

So how did SoFi sustain growth, where LC didn't?

4/ Cost of customer acquisition

In the early days, SoFi was able to focus 100% of marketing on college students (and conversely, wasn't wasting a dollars marketing to grandma/grandpa)

So they were very efficient with CAC

4a/ But how did that sustain?

Brand. They built a trusted brand for a new generation of high-income earners

And Brand is really just a way to lower CAC (and in some cases, like Apple, charge more to increase top line)

5/ Notice that none of the above are meaningfully changed by crypto rails

6/ But, if you stretch your mind a little bit...

If you can take a strong US-based brand, and help that company expand internationally, where cost of doing business is higher + higher fees to move money around, maybe you enable US-based fintechs to compete overseas

Maybe

7/ I dunno

Not super bullish on it, because typically to serve non-US financial markets, you need deep local knowledge, and that comes from local entrepreneurs

8/ The internet enabled the US to export its version of the Internet - Google, Facebook, Twitter, Snapchat, etc - all over the world

Crypto rails theoretically enable that for finance, but I am a lot more skeptical of this

9/ Why?

Data is not really regulated. Money is. So it's just harder

Also, basically pre-internet, nothing was digitized. Internet benefited from analog-digital conversion simultaneously

In the case of money, money is mostly digitized around the world.

10/ Anyways, rant over

And to be clear, we are def interested in investing in entrepreneurs who have good answers to questions above!

{fin}