Lending Club Stops P2P Loans For High Yield Savings—Acquiring The "Right" Users

And Breaking Down Venmo's Credit Card

Hi everyone! Ian here.

If you haven’t seen the news, I’m super excited to announce that Julie VerHage is going to be my cofounder at Fintech Today, and that’s just the start of a lot of news coming out over the rest of the year.

Bringing Julie onboard was a no-brainer for me; both her and Cokie have been a great balance in helping figure out what’s possible with Fintech Today. Julie has been a great sounding board, and it’s great to find someone as equally as passionate about fintech as I am.

We have a lot of goals and a really broad vision, that we’re excited to share over the next few weeks.

Acquiring The “Right” Customer

There’s acquiring users and acquiring the right users.

What’s the difference? For most consumer fintech companies nowadays, that’s starting to mean acquiring users that stay on your platform the longest.

In chatting with some late stage investors about Chime’s recent funding round, that’s pretty much the general consensus: that consumer loyalty is becoming a major metric for later stage fintech companies. For these companies, while customer acquisition costs is getting higher compared to 4 years ago, and and the space is getting increasingly crowded—the benefit is that these millions of customers that are already onboarded seem to be extremely sticky. And because these sticky users stay on the platform for years and their engagement increases over time, the company’s long but high payback over time offsets historically rising acquisition costs to the point that these companies are profitable on a per user level over time. The hard part to solve is creating an engaging experience to keep people using your banking app for years.

According to new data from Adjust, a performance marketing firm, and Apptopia, an app intelligence platform, there’s both good and bad news for fintech operators on that front.

Bad News

Churn for payment and banking apps seem lower than reference apps in other verticals (news, music or shopping). Check out the chart from below:

As you can see, payment apps have a significantly steeper drop than the others. The report notes that over time, around Day 10, bank apps and reference apps essentially even out in terms of churn.

Payments are highest frequency action you can take in finance, but that also means you have tons of options. As consumer payments gets more fragmented, it’s going to be harder for “just-payments” companies to continue to retain users.

Good News

I promised good news so…on the bright side it seems like costs per installs are dropping—which means a really great marketing campaign can have an outweighed impact on your growth numbers right now.

The data shows that it’s still significantly cheaper to pay to acquire an installed user than it was in January 2020—by a large margin.

So while it’s harder to get users to keep using payment and banking apps, it’s cheaper to acquire them than ever before. My advice? Definitely keep acquiring customers, but start to think more deeply about products around retention and engagement. In the long run, as you think about further funding rounds down the line, you’re going to need to be able to prove that you can retain users just as efficiently as you can acquire them (if not better.)

The Breakdown: Venmo’s Credit Card

Venmo released their credit card publicly earlier this week, and I wanted to take this week’s essay to highlight some bits of the announcement I found either noteworthy, confusing, or something to keep an eye on in the future:

Reward Structure:

  • I think it’s pretty unique that the reward tiers are category agnostic, in the sense that you get 3% for the category you spend the most in, no matter what category. Most credit card reward programs limit it to certain purchases, like food and dining, otherwise cardholders can just rack up points by using it for big ticket purchases like rent (more on both those bits later on.) But, for most Venmo users, the simplicity for this rewards program makes it easier to comprehend.

    It’s important to remember who this Venmo credit card is for. If you think about it, it’s only valuable for a subset of Venmo users—people who use Venmo often and don’t have access to a credit card, either because of their financial situation or age. So, for your first credit card, 3% cash back on your top category is easy to understand and spend (the money goes right into your Venmo account.)

  • $10k Max Spend: If you read the terms and service though, Venmo’s protected themselves against giving away massive amounts of money in rewards.

“That exceed, in whole or in part, the annual spend limit of $10,000 in your combined 3% and 2% Spend Categories beginning the first Statement Period following your Anniversary Date.”

  • This means that you can only really get rewards for $10k in spend—not much in the grand scheme of things. That translates to $2k every month, or 2.5 months with $4k spend. Considering the assumed target demo, giving them less of an incentive to spend a LOT on this card makes sense.

  • 1% for Venmo payments: P2P transactions are typically outside of most credit card reward structure. I don’t even think Cash App incentives P2P use through its rewards program. But for Venmo, this makes sense. Venmo makes a good amount of revenue now from instant cash outs, and enabling more transactions on the platform is rarely a bad thing (at this point, I assume the margins on a per transaction basis aren’t as bad as they were back in the day.)

  • Rent on Venmo Credit Card? Anyone else pay their rent through Venmo? Usually you pay one person through Venmo and they pay the landlord? No? Well it’s a thing just trust me.

    Imagine paying your rent with your Venmo credit card? If your landlord takes a credit card (many don’t), you can collect 3% off a $5,000 transaction: an extra $150 bucks for just paying rent. And even if your landlord doesn’t let you, you can use the card to Venmo your roommate and collect 1% for doing a transaction you’re going to do anyway.

    Idk if I were getting my first credit card, I would do this and use the $150 to buy a PS5 🤷‍♂️

A Venmo QR code Designed Into The Card

  • I Love This Idea. It’s not like I’m becoming more bullish on QR codes as a payment method—I think NFC is the long run winner, and it’s more secure—but QR codes are popping up with interesting use cases. Snapcodes and IG’s copycat version that have already gotten people familiarized with the idea of using QR codes to interact with other people. This card puts it on steroids.

    Cards are super interesting in fintech—an industry where almost every product is intangible. You can’t “feel” or “touch” a loan product—maybe the things you can buy from it, but not the actual product. That lack of connection makes it much harder to sell fintech products to consumers. Debit and credit cards are the only physical fintech product that I know of—everything else is really just software—so it’s unique to see Venmo leveraging that unused real estate to tie back it’s mobile experience.

The Complexity

This credit card reward structure that feeds into Venmo’s closed loop payment system is much more difficult to build than it seems.

The credit and debit systems are completely different so you need to build everything from the ground up. So, while Venmo built out a debit card pretty recently, with a rewards program powered by Dosh, they can’t reuse most of that work. The partnership is with Synchrony and Synchrony Bank, a completely different infrastructure and partner bank.

These rewards don’t seem to be available in real time, but if they are, then this is even harder (real time reward redemption like Cash App and Point is more difficult since…it’s in real-time.)

Also, credit cards are structured like loan products behind the scenes, something PayPal has experience building but not Venmo. That adds another layer of complexity here: how is Venmo funding these credit card loans? In theory, you need capital to lend credit off of; PayPal’s massive balance sheet can support this, but if it ends up being a hit, funding is going to get complicated.

Overall though, it’s a pretty impressive feat for Venmo, which has been falling behind Cash App in product velocity for some time now.

Lending Club’s Pivot To High Yield

This came in at the last minute, so still making sense of it, but it seems like Lending Club has decided to completely stop P2P notes on its platform—essentially stopping the innovative peer-to-peer lending platform that made it a unicorn in the first place.

This is the long term fate for a lot of tech-enabled lenders: become a bank, or die. The cost of capital for business lending is just too high unless you can offset that by collecting deposits for these businesses too, and lend off of that. Square & Lending Club opted for the charter route; Square by becoming a ILC bank themselves, Lending Club by acquiring Radius Bank. Kabbage did kind of; they sold to American Express, which is technically a chartered bank (it’s the only credit card network that’s a bank…I know it’s weird, just let it go.)

But what are noteholders, and Lending Club, to do? It’s not like Lending Club’s going to stop lending, they’re just going to be leveraging Radius Bank’s deposit base instead of capital from rich people. So, Lending Club and Radius Bank announced an “exclusive high yield savings account” for noteholders.

“We are partnering with Radius Bank to develop a high yield savings account (Founder Savings) available exclusively to our Notes investors as a sincere thank you for your dedication to the community. The new account will include an auto-save feature, which will enable you to automatically transfer your available Notes cash account balance to your Founder Savings Account on a weekly basis. If you don’t choose to open a Founder Savings account, your Notes account cash position will continue to build until you transfer those funds to another financial institution. “

The website here says that there will be an exclusive interest rate only available to noteholders.

It’s actually brilliant for a company that someone once said “struggles to chew gum and walk at the same time, so it’s surprising they bought a bank.” The biggest issue with shutting off the P2P loan side was the capital loss Lending Club would incur when people withdrew their funds. Now, investors don’t have to worry about that; they can just have the funds rollover into a high yield savings account. Since that interest is going to be funded from the yield on the loans most likely, it’s not a big financial hit to Lending Club either.

For Lending Club, a pivot into high yield savings makes a ton of sense. The company should focus on acquiring deposits aggressively, and then figure out how to lend that efficiently after that (just my thoughts: I’m not as well versed with LC’s business so if you disagree, email me!)