The following is an interview between Carissa Feria, VP of Finance of Wharton FinTech, and David Klein, Co-Founder of CommonBond. This interview took place March 29, 2015.
An Interview with David Klein, CEO of Common Bond
Part 1: Restoring the concept of community-backed finance
Tell us about CommonBond and your competitive advantage.
CommonBond is a marketplace lending platform that has focused on the broken student loan market. We provide borrowers with lower cost student loan options to either finance or refinance their education and on average save $10,000. At the same time, we provide investors an opportunity to invest in those loans, and get a competitive financial return vis-a-vis pretty low underlying risk.
In the 2.5 years we’ve been in operation, and 1.5 years at national scale, we have yet to experience an industry-standard delinquency, let alone a default. And a lot of that has to do with our underwriting. That has allowed us to expand on the consumer side to more cities and more states all around the country. Our platform’s performance has given investors the comfort and confidence, and empowers us to continue expanding.
The overarching vision is tied less to a particular asset class, and more tied to the underlying customer. Our strategy is less student-loan specific, and more borrower specific. Our borrower right now is 31 years old on average, with very strong credit, very strong income. They’re at the relative beginning of their customer life cycle. And they will continue to have financial needs over time. We aim to provide them with financial products and services that meet those needs over time. Those financial needs will evolve past student loans into home mortgages, personal loans for life events such as weddings, or home improvement, or credit card consolidation. It will likely evolve into asset-based products as well. There is no shortage of opportunities to provide superior products and services to our current customers and burgeoning customer base, as they continue living their lives over the next several decades. That, for us, is the big vision. Our ultimate goal is to be the leading values-driven financial services company.
So you are transitioning from student loans to the broader lending space.
That’s right. We got our start in student loans at Wharton. We launched our very first pilot program in November 2012, exclusively as a student-lending platform. Even to this day, we are exclusively a student-lending platform, but the overarching vision goes well beyond this. In fact, 2015 might just be the year that we, at the very least pilot, another set of products in an entirely new asset class
In the past, you’ve talked about the value of community psychology as a tool to minimize default risk. Can you share how this might influence the kind of lending you might do beyond student lending?
Absolutely. There is an underlying benefit to being a strong community, to both the consumer side and investor side of our two-sided market. And where both the consumer and the investor win, we as a company ultimately win too. This is something I get excited about, and I’m proud of building. Let me first define what community is and how we cultivate it. And then I’ll talk about how it benefits the consumer side and then the investor side of our market.
We’ve had a very strong community ethos from the beginning. I’d say this is one of five key elements that differentiates CommonBond from other players in this space. The community takes on a few different forms. It could be live events that we throw in New York, borrower dinners in Chicago, San Francisco, North Carolina, or DC. We create environments that allow borrowers and alumni within our community to connect in a meaningful way. In fact, we’ve had people already find full-time jobs through the CommonBond network. People connect with others in our network and find folks to share perspective on matters they care about.
Community Induction happens right after a borrower joins the CommonBond community. We ask a series of questions that range from “What are you interested in?” to “What are you looking to do with your career?” to “What is your guilty pleasure?” We take that information and we provide them with a series of thoughtful gifts in the form of a care package.
For instance, someone just tweeted today that he was interested in the study of space. We ended up sending him a Carl Sagan book alongside typical company swag, and an opportunity to earn $200 for every referral that he sent our way. And he tweeted out, “Incredibly thoughtful gift from my lender, best loan I’ve ever taken out.” It is an example of what we do to create a community for our borrowers that is meaningful and in some way personal and/or professional.
We think this is important to do—restoring the concept of community-backed finance. If you study the history of finance, this is where finance originated. But that sense of community has been lost over the past few decades and that ultimately culminated in the financial crisis. We’re the antithesis of that. It is certainly our aspiration to be the antithesis of the type of finance that led us to the financial crisis.
There is also a redemptive quality to creating a community in and of itself in a way that propels personal and professional success of our borrowers. That is what community is. And I believe, in describing what community is, it is very clear how it benefits our consumers.
From an investor perspective, for something as ephemeral as the word community, there is a very strong redemptive quality. From an on-going risk management perspective, it allows us, as the lending platform, to help our borrowers in times of need. If they find themselves in transition between jobs or in other forms of economic hardship, we are able to, from a very kind and genuine place, help them get back on their feet. We have done this primarily through connecting them to career opportunities. And to the extent we can help them transition in their career, if and when they find themselves in that position, we will do so. Because this increases the likelihood they are able to continue paying their loans, which of course makes the investors happy.
So this idea of community meaningfully engages our borrowers and alumni to help each other achieve personal and professional success. It has a real redemptive quality to both the consumer on our platform, as well as the investor.
Given that institutional capital enables scale and speed in building a lending platform, how can CommonBond engage the community of institutional investors in community building?
In the beginning we thought the community was going to be this community of borrowers and an equal number of investors. That has actually morphed into a community just among borrowers, who themselves are current students as well as alumni, that go back several years. We have the refinance product, for people who have graduated in the years past. So just among our borrowers community, our company and extensions of our company, we have developed a pretty powerful community -- a community that has served the initial purpose of propelling our borrowers personal and professional lives. We’ve noticed that the power of the community is derived from our borrowers, both current students and alumni, and our platform and situations we create to connect meaningfully for personal and professional success.
Competitors like SoFi allow individual investors to invest in your platform. Is that different from your strategy where you only bring in institutional capital?
We got our start raising money from Wharton alumni. Since then, we’ve decided to focus on institutional capital for a particular period of time to ensure that we were able to raise sufficient capital to keep up with the borrower demand. We are still in that phase where we’re focused on institutional capital but fully intend to reintroduce the opportunity for individual investors to invest in the platform. If I had to venture a guess as to when that would be, we’re probably about a year away from reintroducing that, give or take.
For every loan taken out on your platform, you send a less privileged student to school. Critics of the one-for-one model say that it’s often used purely as a marketing tool. Do you think your borrowers resonate strongly with your mission? Or do you think they’re focused on simply securing the lowest rates?
There are a few different questions here. One question is: “How important is rates to borrowers?” The other question is: “Is your social promise real?” I’ll answer both of those in that order.
There’s no doubt that rate is important to people, period. Rate is going to be one of, if not the most important, factors in a borrower’s decision. But there are a host of other elements that influence people’s decisions: simplicity of process, speed of process, service and experience. Community is yet another dimension. And then the last piece is the values of the company with whom you as a borrower decide to engage. We are proud of our social promise. It is nothing more than a reflection of what we value as a company, as founders, and as employees.
So now, is our social promise real or is it a marketing ploy? There’s no doubt that if you have a strong social mission as a company, you’re likely going to face criticism. A lot of corporations have checked the box of corporate social responsibility. And I think a lot of people over the last couple decades have seen companies do projects to simply check the box. They have lost faith in the idea that business can and should be a force for positive change.
However, CommonBond is different. Frankly, I come from a place that is equally cynical of companies who simply check the box as it relates to social mission. I have been inspired by the likes of Tom’s Shoes and Warby Parker, who do more good the more profit they make. When going back to business school, I decided that no matter what company I was going to start, it was going to have a very strong social mission.
I believe going forward that great and lasting companies will be founded by people who understand that in building a company, it is important to have a revenue model, to generate profits over time, and to distinguish between competition. But it’s as important to deliver social value and not just economic value. Unfortunately, this mindset is still the exception to the rule. But I do think that we will reach a tipping point. In our generation of consumers, so many people believe and value the need for a social mission.
That is truly admirable and I hope will resonate with many others.
An Interview with David Klein, CEO of CommonBond
Part 2: The future of online lending
In the past, when you’ve talked about having to move down the credit spectrum, you’ve always returned to this sense of responsible lending. What is your view on the use of data for proprietary credit metrics and alternative credit scoring?
Two things: first, underwriting is clearly important, it’s probably one of the most important aspects to get right. As a platform, you create a track record, which capital markets use to determine whether to continue providing capital.
Then you start getting into some interesting questions: How do you underwrite? And is there a better way? Capital markets and investors like to see certain underwriting qualities vis-a-vis results. So although there has been talk that FICO is not as predictive as other measures, FICO still remains one of the most important factors that capital markets use to evaluate credit quality. As are debt-to-income and free cash flow. We certainly incorporate these in our underwriting. Now, the interesting part of underwriting today is how to use publicly available social data on people. For instance: How do you use information that is available on Facebook, Linked-In or Twitter? How do you gather and find potentially predictive attributes that predict future repayments better than some traditional measures? And if you find a series of attributes, how long will it take for the investor community to get comfortable with these new data points?
At CommonBond, we like to cover all our bases. We underwrite to things like FICO, debt-to-income, free cash flow, credit history, employment, and income. These give capital markets great comfort. But, we’re not necessarily stopping there. Over time, with continued data and performance metrics, we can convince the investor community of potentially innovative ways to underwrite, that are more predictive than traditional ways. You will need years of data, but we have already started bringing the appropriate people on board to work at CommonBond to help us continue to figure that piece out.
How do you see the future of the industry, and in particular for CommonBond?
Old and new finance each bring a set of strengths that the other doesn’t have. I’ve had a very strong sense of this for the last two years or so, just as we were starting to become a national platform. Traditional companies bring capital scale and liquidity. Emerging platforms bring a generally superior product: better price, technology for a simpler and easier experience, and improved service. It’s easy to start to see a world in which traditional finance becomes the financial back-end that provides liquidity at scale, and new, emerging companies are the consumer-facing front-end.
So what do you look for in a partner?
We look for a few things. Do they believe in our vision of providing a better product at a better rate through very strong tech-enabled ways with best-in-class service? Those who consider us a potential partner, rather than a threat, are the ones that share our vision. Secondly, does this partner have the customer at the base of all their decision-making? The ultimate decision-making criteria should be the customer. If you’re thinking of the customer first and making all of your decisions through the customer lens, we believe it’s very difficult to lose.
Do you think that it is a race for traditional institutions to begin to partner with these young, emerging companies?
Here’s what I know. Finance is going through massive shifts right now. And traditional incumbents are either not keeping up with those shifts or are otherwise unable to provide customers with innovative products, which are appropriately priced, with intuitive technology and best-in-class service.
With that as the premise, if I’m a big company, and I see that’s where finance is going, and I see finance is running away from me, I’m going to want to know where is finance running to. And one of the places is this world of marketplace lending—the products are superior, the prices are more appropriate, the technology exists to speed up and simplify the process, and the service is better than traditional incumbents. Now, how banks or traditional finance reacts is going to be likely highly variable and dependent upon each company.
In terms of hiring, what is it that you’re looking for and how do you think MBAs can add value to CommonBond?
Love that question. Many times you’ll hear emerging companies say they don’t want MBAs. There’s sometimes a pejorative associated with an MBA in the startup culture. I vociferously reject that. MBA training leads to four of the most important things for anyone to be successful at a startup: First, strategic acumen, which is good business judgment and ability to run with a piece of the business. Second, executional quotient or getting stuff done. Third, internal drive in service of the company. And fourth, of course, is being a good person, this is real. This is something that you just get a sense of when you talk to somebody over the phone, in the interview, over three rounds of interviews.
The third is where I think a lot of MBAs and startups trip up and why there might be a historical thaw in the relationship between the two. Many startups have experience with MBAs who are driven, but for themselves, as opposed to the company. And it’s in those instances where nobody wins. Such qualities are usually tied to ego. Whenever you start managing to ego as opposed to managing to a successful, sustainable company, that’s not a very healthy organization.
Going through an MBA program does not necessarily mean you are going to have these four things. You don’t need to be an MBA to have these things. But I’ve noticed that many MBAs do hold these four things in spades.
And if you have these things, then we at CommonBond will hire you all day long. Roles that we’re hiring for right now for which I think MBAs who fit those four dimensions are: business development roles, potentially product management roles, and our finance team roles.
Anything else you’d like to add?
I think one key point we briefly touched on was responsible lending and borrowing. It is a very big deal. Not a lot of people are talking about it, but I think they should. Borrowers have a responsibility to get smart and make good decisions. Lenders have the responsibility to underwrite appropriately and to help educate borrowers to make those good decisions. Not many lenders are doing the latter. We are different.
One of the things that we spend a lot of time on—and we have full time folks on this—is to generate at least one piece of meaningful content every day. We clearly communicate otherwise complex or overwhelming concepts to people considering getting a student loan, or to those who have it. Every week we publish something called “Student Loan Concepts Explained.” One week we might talk about capitalized interest and another week, we might talk about forbearance. In fact, we have our own channel on the Huffington Post.
We’ve created a tool called MBA Budget Calculator for any student considering whether to go to school, so that they understand what student loans will look like vis-à-vis average or median salaries from their potential institution. This tool calculates monthly income as well as likely monthly payments from debt. We will tell you whether that debt to income ratio is good or bad. And, if it’s bad, we’ll even go so far as to tell you that you should consider either another school that’s not as costly or another path of scholarship that leads to a higher paying job. It allows you to uncover other sources of income or free money like scholarships or grants that you normally wouldn’t have considered because you didn’t have this knowledge. Our goal is to arm potential borrowers and current borrowers with as much information in as simple and structured a way as possible.
Right now this is a reflection of who we are and why we exist. I couldn’t tell you that because we do this, how many more borrowers we might have. But, that’s not exactly the source of why we do it, right? It’s the right thing to do. It’s part of our mission, and it fits our overriding philosophy of being a great company.