Bank VC Files: Building the “Credit Karma for Small Biz”

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Nav dashboard monitors both personal and business credit

We are huge fans of strategic investing by financial institutions, especially in lower dollar amounts, what we call strategic seed investing. It’s the ultimate win-win in business. NewCo gets capital, credibility and adult supervision on the board. OldCo gets inside access to experiment after experiment in its core market without risk of sullying its billion-dollar brand. That’s why we’ve seen a dramatic rise in venture investing by large financial institutions in the past 18 to 24 months.

The best place to find new strategic investments? Our quarterly Finovate events around the globe (of course). But to help you narrow down the possibilities from our 857 alums, we try to highlight promising areas here from time to time.

Today, we look at risk-evaluation services targeted to small- and mid-sized businesses (SMB), also known as business credit scores.

Given the massive businesses built on the back of consumer credit scoring—Experian, Equifax, TransUnion, Credit Karma, Intersections, and all the mid-size credit score retailers—it comes as no surprise that these same players, along with a few startups, are targeting SMBs.

We’ve seen a number of alt-credit-score plays at Finovate (Aire, EFL, xxxxx) but only one was focused exclusively on small-business credit scoring:

  • cortera_logoCortera: The company appeared at Finovate in May 2010 (FS10 video). Ten months later, it landed $50 million in private equity funding for a total of $60.7 million raised. Earlier this year, the company picked up an additional round of growth debt, but the amount was not disclosed. Two strategic FI investors were involved in its 2008 $8 million Series A: CIBC and Fidelity.

The big three

  • Dun & Bradstreet: The company that created the industry sells reports from $60 to $150 each or $188 annually per company tracked.
  • Experian provides a number of business credit evaluation reports in the $40 to $50 price range each or on subscription basis for $150 annually (per company followed).
  • Equifax provides similar information for $100+ per report, or $20 per month per company tracked.

The new startup: Nav
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Since Cortera does not appear to be in fundraising mode, and the big three are all major companies, banks should look at newer players. One that seems promising, and is currently raising $12 million (at a $65 million valuation), is Nav (formerly Creditera).

Nav is geared to SMB owners for monitoring their own company. It is not currently offering services for evaluation of other companies, the bread-and-butter of D&B and others. Nav’s service combines personal and business credit scores, essential for small-to-medium businesses, for $30 to $50/mo. It’s a single source to get reports across five sources—D&B, Experian, Equifax, Transunion, and FICO. The company also offers a freemium option, with free access to summary data from two sources free of charge and obligation (with no credit card required).

Nav also runs a commercial lending marketplace where owners can look for business credit cards, loans and other financing from Nav-affiliated lenders.

San Mateo, California-based Nav was founded in 2012 and raised a $6.5-million Series A led by Kleiner Perkins in Nov 2014. The company was founded by Levi King, who previously co-founded alt-lender and 2011 Finovate alum Lendio.

Investing in the business risk-evaluation space

Why banks should be interested in the space:

  • Business owners seeking their company’s credit report may be in the market for financing
  • Business (and personal) credit reports is a potentially lucrative, fee-based business
  • Business credit score monitoring is a valuable entry-level service to begin a banking/credit relationship, especially if owners are drawn to the site multiple times each year
  • Understanding of the needs of small businesses will help any FI looking to grow its small-biz services
  • The freemium model could be a great value-add for business checking accounts
  • The free service could be a good draw to the bank’s website

 

Commentary: Prosper Signals Move into PFM with $30 Million Acquisition of BillGuard

billguard_prosperIt’s a little bittersweet when two of my favorite fintech companies combine. I am happy for both, but will miss seeing what BillGuard could have done as a stand-alone financial transaction watchdog (see note 1). After raising $16.5 million, the $30 million in cash—plus undisclosed amount of Prosper stock (note 2)—should provide a decent payday for investors, founders and employees. Caveat: without knowing the liquidation preferences of later investors, or the stock piece, we don’t really know how all the stakeholders fared.

From the sounds of it, though, it’s no acqui-hire. BillGuard said it’s tripling its dev team to 75 and will be heading full-speed-ahead on its product roadmap. That sounds good for BillGuard.

The more difficult question is why Prosper is spending 20% of the $165 million it raised in April on an ancillary service? The company says it is looking to move into broader financial management. And with 1 million visitors per month—the vast majority of which are likely to be unqualified for a Prosper loan—marketing PFM and credit-monitoring services have some appeal. But it seems like it could be a distraction (note 3).

But at least from the outside, I’m not seeing BillGuard as a significant value-add at this point. Even if Prosper were to convert 1% of its 1-million/mo traffic (optimistic) into BillGuard’s $5 to $10/mo credit-monitoring services with a margin of 50%, that would only add $75,000/month to the bottom line or about $900,000 in the first year—assuming 50/50 mix at the two price levels. Depending on attrition rates, that would grow over time, but it’s still not a great return on $30+ million. And if Prosper is looking to mine BillGuard’s 1.7 million customers for new loans, the lender could have done it much cheaper via partnership.

Peter Renton, writing at LendAcademy, has the best justification for the deal I’ve seen. Prosper needs something to stay engaged with loan customers—and presumably denied loan customers—since there is little reason for them to log back in once the loan has been made and automatic payments established.

All those reasons are part of the valuation. But my guess is that Prosper has something grander cooking, and BillGuard is just a piece of that puzzle. Perhaps they seek to take on Credit Karma in the broader credit-reporting/lead-gen space. I look forward to more news down the road.

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Notes:

1: Chris Larsen showcased Prosper at our initial multi-unicorn-producing Finovate in NYC in 2007, winning our very first Best of Show trophy (along with Mint and MortgageBot).
BillGuard was named Best of Show at its two Finovate appearances, 2011 and 2012.

2: The terms of the deal were not disclosed in the official announcement. VentureBeat appears to be the widely cited source of the “$30 million plus stock” terms.

3: I bet Prosper’s FI investors—BBVA, Suntrust, Chase, USAA—like the deal. They not only have an inside peek at BillGuard’s metrics, but also a ringside seat to see how a lending specialist can or cannot expand into broader banking/PFM services.

 

Mobile Fees: BillGuard Goes Freemium with Integrated Credit Monitoring

 

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We are always on the lookout for digital fee-income opportunities. And if I got a nickel for every one of them I’ve ever found … I’d have about a buck at this point. Fees in U.S. online banking are rarer than the (not-so) mythical fintech unicorn. And mobile banking fees are pretty much non-existent outside a few remote deposit fees (see previous post).

billguard_main_newBut last week BillGuard demonstrated a promising new avenue for incremental fee income: Integrated mobile identity-theft alerts, resolution and insurance (see inset). Actual credit report access is not included, but BillGuard says that it is coming soon. The service is mobile only, and the company currently has no plans to add it to the desktop version.

The credit and fraud monitoring is powered by CSIdentity (CSID), an Austin-based firm that says it powers 80% of the retail identity-theft-protection industry. The company, founded in 2006, has raised $36 million in equity (mostly in 2010) and $6 million in debt.

What it costs
The service is value-priced, at $2.99/mo for the single bureau Pro version or $6.99/mo for the 3-bureau Ultimate. In comparison, most ID-protection services are in the $15 to $20/mo range (Experian charges $15.95/mo for a private-labeled version called ProtectMyID with BillGuard). Founder Yaron Samid says BillGuard provides essentially the same third-party monitoring as the $30/mo offering from Lifelock for one-fourth the cost. And with BillGuard, users get credit/debit card transaction monitoring (powered by Yodlee) for free.

BillGuard premium benefits:

  • Credit bureau monitoring (3 bureaus in Ultimate service, 1 in Pro service)
  • Identity restoration services (via call center help)
  • 24/7 call center support
  • Lost wallet recovery
  • Social Security Number fraud alerts (Ultimate service only)
  • Black market alerts (Ultimate only)
  • $1 million insurance (Ultimate only)

Cardholders are already looking to their smartphones to stay informed of problems in real-time (case in point, BofA just integrated fraud alerts into its mobile app). So it makes sense to deliver extra protections services in-app. Although there is stiff competition from free ad-supported versions such as Credit Karma, we believe integrated protection services are a logical fee-based upgrade for mobile banking customers.

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Screenshots

BillGuard iOS app homescreen includes a pitch for its premium ID protection (17 June 2015)

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An actual fraud alert I received after signup for BillGuard Ultimate (19 June 2015)
Note: It was from a breach in November 2013. I assume I received the alert this week since I was a new customer.

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Launching: Self Lender Helps Build Credit with Digital "Credit-Builder" Loans

image Ever since the financial debacle of 2008, it’s been harder for consumers to establish their first credit account. Therefore, with no credit history or score, it becomes even harder to get credit. That’s created a Catch-22 around new credit that Denver-based startup Self Lender looks to address. The company launched today at TechCrunch Disrupt (see full presentation here, at bottom of post).

Self Lender has a fairly straightforward value proposition.

  • Agree to transfer a certain amount of money to yourself for a set period of time via the Self Lender platform.
  • Self Lender reports the payments to credit bureaus as a secured loan.
  • At the end of the contract period, between 3 and 12 months, the user gets their money back (without interest) or can use the funds as a down payment on a vehicle or other item with the balance financed by Self Lender lending partners (see screenshot below).

The funds are held in an FDIC-insured account. Users can make their monthly transfers via ACH, debit card, paper check/money orders, or via cash through PayNearMe’s network. The startup also will accept bitcoin payments, an interesting side note that wasn’t mentioned during their demo.

Self Lender will make a few dollars on interest and lead-gen commissions, but its primary business model revolves around charging $3 per month for the service.

Thoughts: Many banks and credit unions offer products with similar benefits. According to CUNA (note 1), 15% of U.S. credit unions offer “credit builder loans.” Banks and credit unions also offer CD/saving secured loans. But those deposit-secured loans generally require a good sum of cash to get started. For example, Wells Fargo has a $3,000 minimum deposit and $75 origination fee. Self Lender lets you get started with just $25.

So, the concept is good. But I think it will be difficult for the company to get consumers to entrust them directly, so distribution through FI or PFM partners is crucial. To that end, during the Q&A session, Self Lender said it was hoping to ink deals with one or more major banks in the near future. 

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Self Lender demonstrates how the money saved in the platform can be used as down payment (9 Sep 2014)

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Note:
1. Source: NY Times, 6 Feb 2012. http://bucks.blogs.nytimes.com/2012/02/06/credit-builder-loans-can-help-burnish-your-credit-score/

Cyber Monday in Banking

imageI’ve written about Black Friday promotions at ING Direct (see note 1), Service Credit Union, and the growing Small Business Saturday event spearheaded by American Express (which even earned a tweet from  Obama).

This year I also noticed a trickle of activity on Cyber Monday as well. It’s probably better than Black Friday for online/mobile campaigns. Better yet, use the approach of Visions FCU (screenshot 2 & 3) and use the entire weekend to maximize the impact. 

Cyber Monday promos:

  • 50% off credit-monitoring products from Quizzle, the spinout from Quicken Loans (see email below)
  • Visions Federal Credit Union offered a loan special from Black Friday through Cyber Monday (screenshot below). The CU reported $10 million in loans on Friday alone.
  • Navy Federal Credit Union offered bonus rewards-points for purchases made online

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Cyber Monday email from Quizzle (link; Monday, 7 AM Pacific, 28 Nov 2011)

Cyber Monday email from Quizzle

Visions Federal Credit Union Thanksgiving weekend loan special (28 Nov 2011)

Visions Federal Credit Union Thanksgiving weekend loan special

Visions landing page (link)

Visions FCU landing page Black Friday landing page

Navy Federal Cyber Monday cashRewards promo (link)
Note: Given the date shown, this page is likely a carryover from 2010. But it’s still available via “Cyber Monday” searches on Navy Federal’s website.

Navy Federal Credit Union Cyber Monday landing page

Notes:
1. ING Direct was at it again with seven offers over the Thanksgiving weekend (Deposit Accounts has the full rundown). However, the specials did not extend into Cyber Monday.   
2. 1st Financial Federal Credit Union ($210 million, Wentzville, MO) and Heritage Community Credit Union ($200 million, Sacramento, CA) offered loan deals on Black Friday according to CreditUnionsOnline.com

Credit Karma Launches "Hands Free" Account Aggregation

Everyone likes the idea of an online PFM, but relatively few will take the time to enter the necessary account numbers and passwords. Fewer still will keep it running smoothly by coming back periodically to update passwords, provide security question responses, and so on. That friction means it’s not benefiting as many people as it could. 

But Credit Karma removes the friction, at least on the credit side, with its latest feature, My Accounts (see first screenshot below; see fourth screenshot for today’s email announcement). The startup parses credit bureau data to automatically present each user with an aggregated look at their debt over time. The service requires ZERO account info from the user, they simply sign up with Credit Karma to get free credit report info.

Historical data is captured each time the user updates their credit info at Credit Karma. Since it’s new, there’s just a single data point on my account (see second screenshot).

To earn advertising and referral income, Credit Karma integrates card offers into My Accounts with a Recommended Cards tab in the tertiary navigation (third screenshot). Cross selling is also woven into other areas as well (first screenshot). Credit Karma also covers home loans, auto loans, and personal loans. Each has their own tab in the secondary navigation.

The company has 3.5 million registered users and is adding 500,000 every quarter.

Bottom line: Keeping closer tabs on debt has huge benefits for many households. Credit Karma’s "no data input" method makes it easier. The last remaining hurdle is integrating the data into online banking so it’s not forgotten (see UW Credit Union post).  

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Credit Karma "My Accounts" (7 Nov 2011)

Credit Karma "My Accounts"

Balance history is tracked for each card
Note: Only one data point, since this was my first time using the new feature

Balance history is tracked for each card

Integrated offers drive revenue

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Email announcement of new feature

Credit Karma's email announcement of My Accounts

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Note: We’ve have written a number of reports on PFM and related issues in our subscription service, Online Banking Report.

M&T Bank Adds FICO Credit Score View to Online Banking, Charges $2.99/mo

image It figures. As soon as I write a report complaining about the dearth of online fee-based services, a major bank launches one, practically the same day.

Buffalo, NY-based M&T Bank just released an upgrade to its online banking system adding:

  • Intuit’s FinanceWorks PFM
  • Equifax-provided FICO score

Both are good moves, but it’s the credit score service that’s especially novel. It’s integrated directly into online banking, so customers needn’t log in to another site to view their score. And the bank is charging for it, to the tune of $2.99 per month. 
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Potential
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It will be interesting to see how M&T promotes the new feature to its online banking base which numbers 700,000 to 800,000 (active monthly users) based on traffic estimates from Compete. I’m also curious to see whether the bank upsells pricier, full-featured credit monitoring and/or credit reports to the $2.99/mo base. (I’d be surprised if they don’t.)

There’s no mention of a free-trial period, but based on industry experience, that is likely to be one of the best marketing strategies available. Given all the misleading advertising in the market (“free” credit scores that cost $15/mo), I’m pleased to see that M&T is upfront about the cost, mentioning it within the first 50 words of the landing page.

With an aggressive promotional campaign, it seems possible the bank could eventually get 10% to 15% of its online base using it. Then M&T gets a dual benefit: a unique and powerful tool for its customers and $3.5 million in incremental gross revenues (if it hits 100,000 users). The bank can also upsell credit monitoring, credit scores for other family members, along with balance transfers and other credit products. 

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M&T Bank landing page for new integrated credit score (link; 6 Jun 2011)
Note: Pricing disclosed upfront (yellow highlighting is ours)

M&T Bank landing page for new integrated credit score (6 Jun 2011)

Note:
1. See our current Online Banking Report, Creating Fee-Based Online & Mobile Banking Services.

UW Credit Union Adds Free Credit Scores to Online Banking Dashboard and Links to Credit Karma

image I’ve long been impressed with the work done by Eric Bangerter (Director of Internet Services) and the UW Credit Union in the online channel. Nearly every one of its new features gets starred in my blog reader. And since its early-2008 launch, I’ve cited Eric’s blog, UW SourceCode, as the best example of how to communicate to your power users and online banking fans (see blog feed within the online banking dashboard in the first screenshot).

But the latest innovation might be my favorite. The Madison, WI-based CU has integrated credit scores, powered by TransUnion, directly into the online banking interface (see first screenshot). This is exactly where it should be, so that users can keep tabs of their credit health, without needing to go through the tedious and oftentimes expensive process of authenticating yourself at a third-party site.

image Even if that’s all they did, I’d give them an A+. But there’s more. UW CU has become the first financial institution to offer a private-branded version of Credit Karma’s credit report portal. The credit union pays a license fee to Credit Karma in order to offer the private-branded, ad-free version (see second screenshot). Sears also offers a similar service for its store card (see previous post).

UW CU members (120,000 active online bankers, see note 2) appear receptive to the info. In the first few days, more than 5,000 had clicked on the link, with more than 2,800 completing the registration process. That is a huge win for the members, the credit union, and Credit Karma.

Bottomline: Most of the time (98%/99%), end-users need see their credit score only for reassurance that nothing horrible has happened to their credit file. But the problem with posting ONLY the credit score is that those 1% to 2% who want more info often need it fast. And if you don’t offer a deeper dive complete with explanations of what’s going on, you are going to end up with confused and/or irate customers and a bunch of phone calls.

So, there needs to be a mechanism available for drilling down into the full report. And the Credit Karma portal is a relatively low-cost way to do that. Alternatively, you can upsell the full credit report for a fee in the $5 to $10 range or sell an annual subscription for unlimited access (see note 1).  

UW Credit Union online banking homepage showing credit score and Credit Karma linkage (16 Sep 2010)

UW Credit Union online banking homepage homepage showing credit score and Credit Karma linkage (16 Sep 2010)

UW Credit Union co-branded credit portal powered by Credit Karma

UW Credit Union co-branded credit portal powered by Credit Karma

Notes:
1. For more information, see our Online Banking Report: Credit Monitoring Services (published in 2007).
2. UW CU has 150,000 members in total; 120,000, or 80%, have used online banking in the past 90 days; 80,000 (53%) used it in the past 30 days.

Credit Karma Provides Free Credit Scores to Sears Cardholders with Private-Label Version

image Finovate alum Credit Karma recently started providing a private-label version of its credit reporting service to Sears cardholders (see note 1). The service includes free credit scores and other data to help put those scores in an understandable context (see FinovateStartup 2009 video here).

image The new service, launched Sep. 2009, is delivered through a dedicated site, searscreditscore.com. Since Sears cardholders must make a purchase each year to use the site, it provides an ongoing usage incentive.

The Credit Karma-powered service is clearly branded as a Sears and Kmart offering (note 2, screenshot #1). Interestingly, Sears also takes the opportunity to offer targeted advertising space to financial companies (screenshot #3). It also markets the credit-analysis service on its own credit card site (screenshot #2).

While Credit Karma traditionally derived revenue from advertising on its site, this move into the private-label channel provides additional growth opportunities. The Sears private-label site had nearly 140,000 unique visitors in February, about one-third the total at Credit Karma (see table below). It’s a good deal for Sears, too: Offering credit-score analysis differentiates it from other retail card providers and conveys concern about its customers’ financial well-being.

Website traffic at searscreditscore.com vs. creditkarma.com  image 
Source: Compete.com, March 2010 (link)

1. The Sears credit score site, powered by Credit Karma

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2. Sears promotes the credit score service on its website

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3. Sample page from Searscreditscore.com
Note ads for Citi and ING Direct

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Notes:
1. Sears cards are issued by Citibank, one of the advertisers in the private-label site.
2. Kmart acquired Sears in 2004.