Fifty years ago, if you needed a loan for yourself or your business, you would typically walk into a brick-and-mortar bank, fill out a bunch of paperwork, talk to a loan officer, and wait several days or weeks to find out if you were approved. Today, this story has changed, and it’s going to look even more different in the future.
Say Hello to GreenSky
One fintech company in particular that wants to change the way people borrow money is GreenSky. Based in Atlanta, this enterprise connects borrowers with lenders at the point of sale, and receives a fee from the merchant plus income for its role in servicing the loan. In 2017, its revenue totaled $326 million. The financial analyst Moody’s predicts more than $400 million in revenue for 2018.
After operating as a private enterprise for more than 11 years, GreenSky launched an IPO in 2018. This came just a few months after netting several hundred million dollars from private equity investors. GreenSky’s IPO valued the company at more than $4 billion. It was the first fintech company since Square to go public with a value of more than $1 billion. Going public certainly carries risks, though. For example, Uber and Credit Karma have decided to stay private for now.
Although its stock price has declined somewhat since launching on the NASDAQ, GreenSky has remained competitive with its rivals. These rivals include Lending Club, Prosper Marketplace, and On Deck Capital. While Lending Club and Prosper have had public relations problems in the past, GreenSky has managed to avoid such debacles. Although GreenSky’s CEO David Zalik tends to avoid the media spotlight, he has been featured in Forbes and participated in conferences with Citi and Goldman Sachs in September 2018. He also doesn’t believe in berating traditional banks. He actually is working with them while growing his new tech platform.
Borrowers seem to like GreenSky’s new way of obtaining credit. So far, the fintech company has served more than 1.9 million customers, providing them over $13 billion. Perhaps GreenSky’s most promising distinction is that it has also been consistently profitable with its new way of providing loan services. Its transaction volume has grown steadily from $2.1 billion in 2015 to $3.8 billion in 2017. During the same time, it grew its merchant base from 5,000 to nearly 13,000. Clearly, consumers in the 21st century like the new way of borrowing.
GreenSky estimates the home improvement industry, one of its key targets, to be just south of $350 billion annually. At a transaction volume of $3.8 billion, the fintech company has roughly 1% of the market. Obviously, there’s a lot of room to grow here, and GreenSky knows it.
GreenSky’s Way of Providing Loans
GreenSky doesn’t provide most of the funds for its loans. Instead, it functions as a broker between consumers who need money and banks who want to lend it. Although the company does have a few loans sitting on its balance sheet, its primary business is an electronic platform where borrowers can quickly gain the financing they need for an important project. Say, for example, your air conditioning stops working on the hottest day of the year, but you don’t have the funds to replace it. GreenSky partners with contractors and home improvement retailers to provide quick access to funds to underwrite the home improvement project. During the past decade, GreenSky has built partnerships with thousands of contractors. Today, the total stands at nearly 13,000. There are no fees for merchants to partner with GreenSky. Fees are only assessed when a loan is actually obtained. Other fintech companies, such as Square, have similar policies.
The application for a GreenSky loan is completely electronic, either on a computer, tablet, or mobile device. Information about a borrower can be entered simply by scanning an ID card, such as a driver’s license. The entire form takes just two minutes to fill out, and the whole process is completely paperless. GreenSky promises a decision within seconds. Nigel Morris, a board member of the company (and a co-founder of Capital One) says that the application process is innovative. “I’ve been mucking about in consumer lending for 30 years and very seldom have I seen anything that’s as frictionless,” he says.
Follow the Money
To follow the money, just imagine the funds flowing from a traditional bank to GreenSky, who then passes on the funds to a borrower, who then uses the loan to pay a merchant, like Lowe’s or a smaller home improvement company. Monthly payments are sent to the source of the funding – the traditional bank –but only after traveling through GreenSky first. Some of the banks that serve as the loan source include Fifth Third, Regions, SunTrust, and Synovus. In recent conference calls, the banks have expressed satisfaction with GreenSky’s service.
The fintech company makes money primarily in one of two ways (usually both):
- fees paid by merchants who offer financing with GreenSky
- fees from banks while the loan is still being serviced
The first category amounts to around 7% per transaction, while the second category is estimated at roughly 1% of a loan’s value every year
The loans themselves sit on the books of the banks. This means that GreenSky isn’t responsible for any defaults. Nevertheless, GreenSky’s revenue can still be affected by the performance of the loans. The traditional banks that provide the funds don’t have to do any of the groundwork to attract borrowers. That’s done by GreenSky and the merchant, who pitches the loan as a way of enticing the customer to buy their product or service. So GreenSky’s platform is an attractive service from the bank’s point of view. And all three parties – the bank, GreenSky, and the merchant – earn revenue. And the consumer gets fast, easy access to affordable payment options for needed home repairs or upgrades. Everybody wins.
The APR’s for GreenSky’s products tend to fall between 5% and 24%, depending on the borrower’s credit profile. Loan terms vary from 42 to 90 months, and customers can borrow up to $55,000. GreenSky does not cater to subprime borrowers.
A GreenSky loan also comes with a six-month purchase window. Because this is a line of credit, borrowers are free to use whatever amount they need up to the maximum level. The line of credit expires at the end of the purchase window, and the account balance automatically converts to a fixed series of payments
Some of GreenSky’s loans come with a 0% APR promotional period as a way of enticing customers to take the plunge. The period can last for several months. During this time, GreenSky pays the interest to the bank that provided the funds, which means the special financing costs GreenSky rather than the bank. Merchants typically pay a higher fee to offer these deferred interest loans. Borrowers have to pay off the balance of the loan by the end of the promotional period or pay the deferred interest. Interest is billed during the promotional period, but all interest is waived if the entire purchase balance is paid in full before the end of the promotional period.
GreenSky definitely is not going to stop at home remodeling. It has its eyes set on other industries as well, and for good reason. The healthcare industry in particular is a multi-billion dollar industry, and GreenSky is already tapping into this opportunity. Many procedures aren’t covered by insurance, so this area is an ideal target for GreenSky. Procedures like dental work, plastic surgery, vision services, and veterinary care are good examples. Other areas that GreenSky has its eye on include auto repair, online retail, power sports, and jewelry. Tapping into these industries will put it into competition with Klarna, an online financial services company based in Sweden, and Affirm, another fintech startup.
New Partnership with American Express
Late in 2018, GreenSky announced a new partnership with American Express. Under the agreement, merchants in key areas, such as health care and home improvement, which accept AmEx cards will be able to tap into GreenSky’s credit services to help customers finance large purchases. This collaboration will provide GreenSky with many more merchants overnight.
One feature of the new alliance is a digital direct loan platform that allows AmEx cardholders to search for merchants within the GreenSky network. Initially, this service will be rolled out in just five American cities, but in the future will almost certainly be much bigger.
Case Study in Healthcare
One medical facility that has brought GreenSky in-house to help its patients finance its services is the 20/20 Institute in Denver, Colorado. The company is a LASIK provider that focuses on the millennial generation. It partnered with GreenSky to offer closed-end loans for patients who couldn’t afford to pay up front. Dr. Mark Danzo, the optometrist-manager of the 20/20 Institute believes that GreenSky’s modern approach to financing is a game changer: “More patients are willing to finance, thus we get more procedure volume as a result, so it’s a real win-win.”
Dr. Danzo also notes that bringing GreenSky’s financing solutions in-house has improved the business’s bottom line. 20/20’s revenue is up nearly 30% since partnering with GreenSky. “By far, our millennial patients prefer a closed-end loan to an open-ended revolving credit card account,” Dr. Danzo commented. “They are much more willing to explore credit when it’s for a specific purpose and there is an end to the obligation in sight.”
This type of financing –taking out a loan for a specific purpose at the point of sale using a computer or mobile platform – is likely the way of the future, especially for big-ticket items. Because the application process is so convenient and fast, consumers will be more willing to take this route, especially if a lower interest rate is possible.
Dr. Danzo has one cautionary note: Employees are not always prepared to handle the financing aspect of a procedure.
“I would encourage practices to make sure their staff is comfortable with money issues. Most practices I have consulted with are uncomfortable proactively talking about financing. Train staff to proactively present the value of the practice’s offering, the fees, and the available payment options, including the differences between a revolving credit card and a closed-end loan.” – Dr. Mark Danzo
In-house financing isn’t the dominant credit solution yet. But, as businesses turn to fintech companies like GreenSky, they will adapt and consumers will be ready.
Case Study in Home Repair
East Coast Roofing, Siding & Windows has been offering home repair services in New Jersey since 1979. When it works with homeowners, it offers more than just remodeling. It also provides several payment solutions, one of which is through GreenSky. East Coast reports that financing a project like a home improvement is a large undertaking for many of its customers. Paying in cash is just not an option for many of them. But setting up a payment schedule allows many customers who would otherwise walk away from a deal to take on the project.
East Coast’s customers report satisfaction with the in-home mobile application process. “[T]he quick credit decisions and minimal paperwork have made working with GreenSky a delight,” says East Coast. “We receive payments quickly and charges are as simple to process as a major credit card. Various payment plans are available through GreenSky for almost everyone’s budget.” To offset the cost of using GreenSky, East Coast adjusted its prices a small amount. The home repair firm estimates that about 50% of its customers will finance rather than pay up front.
GreenSky Isn’t the Limit
The transformation of the credit industry into a paperless system goes well beyond GreenSky.
In particular, blockchain offers a paperless method of tracking loans, payments, and other transactions completely in the cloud. Essentially, the way it works is that every transaction is digitally recorded in the cloud. Once recorded, a transaction cannot be erased or altered. It’s a permanent record. Blockchain is also completely decentralized, meaning no one institution has control over it.
Because no one organization controls blockchain, and because records cannot be manipulated, there is less possibility of fraud. Blockchain offers a greater level of security, which is something sorely needed in the information age. Also, blockchain can integrate with the internet of things (IoT), which is the interconnection of physical devices, such as home appliances, vehicles, and other items that have hardware and software that allow them to send and receive data. So, for example, in the future, it may be possible to conduct financial transactions within an automobile or airplane, with no manual input or mobile device. Only your voice will be required to input instructions and complete a transaction.
Currently, a fintech startup in Kenya called BitPesa uses blockchain to record digital currency transactions. Users in select African countries can send bitcoin (a digital currency not issued by any government) to Chinese bank accounts. Because Chinese companies do a lot of business on the African continent, this payment solution cuts down on the time and costs required under the old system of transferring money overseas.
BitPesa estimates that the new electronic system is about 60% cheaper than older methods of foreign exchange. The fintech startup earns its revenue by charging a transaction fee. Once the transfer has been initiated, it takes just a few minutes or hours for the funds to arrive in the Chinese bank account. Everything is done digitally. There’s no physical bank or paper wire transfer form. Because the system uses bitcoin, the money itself is digital. It’s just ones and zeros, but, so far, everything is working.
Another fintech company successfully using blockchain is Ripple. It recently launched an app that uses blockchain to help facilitate payments in Japan. Bitcoin and blockchain have both found a wide reception in the country, so Ripple’s app will likely have many users. The app is called Money Tap, and it is gradually being rolled out. Over 60 Japanese banks have signed up, although a smaller number will be included in the early launches. The app settles financial transactions instantly and requires a QR code, bank account, or phone number to use.
The CEO of SBI Ripple Asia, Takashi Okita, expressed optimism that the mobile app would make financial transactions safer and faster: “Together with the trust, reliability, and reach of the bank consortium, we can remove friction from payments and create a faster, safer, and more efficient domestic payments experience for our customers.”
Whether looking at Ripple, BitPesa, or GreenSky, the general direction of financial technology is obvious and certain. With the rise of digital finance, mobile payment technology, and cloud-based recordkeeping, the new 21st-century method of taking out loans, making payments, and sending money is here to stay.