The Importance Of Being Earnest

There are many, many financial service firms out there vowing to build “the bank of the future.” Regular readers of PYMNTS’ Alternative Financial Services Tracker as well as our Financial Inclusion Tracker are familiar with the standard line about that bright new future: Simply stated, banks have gotten too big to work. Over-extended, over-regulated and over-stuffed with services trying to offer something for anyone, banks have managed to work hard to underperform for everyone.

And that narrative has motivated beaucoup bucks from VC and equity funding. In all, almost $12 billion was invested in financial technology firms last year, according to CB Insights. That’s up over $5 billion from the previous year, and the highest amount invested into financial services technology companies in the past five years. That represents a $5 billion pick-up from 2013.

Unsurprisingly, free flowing investment capital attracts interest, meaning the firms looking to break the bank, so to speak, and offer the disruption that will change the face of financial services forever are somewhat more numerous than they were five years ago. And some of those startups are “established” and extremely well capitalized. Lending marketplace SoFi, for example, is currently valued at $4 billion (having raised ~$1.8 billion from investors over 11 rounds, the last of which was worth $1 billion.)

Plus, the big banks have not exactly failed to notice the legion of technologists amassing on their shores and looking to storm the castle.

Jamie Dimon experienced the Financial Crisis as the CEO of the biggest of the big banks, followed by headlines that called for him to be prosecuted and jailed, followed by a battle with throat cancer. You know what scares Dimon enough to mention it in two consecutive years of letters to JPMC’s investors? Tech-based financial services providers.

“They all want to eat our lunch. Every single one of them is going to try,” he noted in 2014.

The banks, as it turns out, like their lunch and are not interested in watching technology players eat it — big or small. They are willing to work with tech firms and to offer small startups access to their established scale and consumer networks (not to mention the income stream from selling their software and/or services), but the bank gets to keep a firm hold on the reins of the consumer relationship that they already own.

With big money on the line (not to mention extraordinarily tight competition on all sides), it is a space that is harder on up-and-comers than all the big investments associated with the space would suggest. There are a lot of dollars up for grabs in financial services — but there are also more hands than ever reaching for them.

But at least one alt lender managed to successfully grab and hold investment dollars this week. That lender was Earnest, which has managed to land $275 million in equity and debt financing. That breaks down into a $75 million equity round led by Battery Ventures and $200 million in lending capital backed by New York Life and an unnamed institution.

This latest round follows Earnest’s $19.8 million Series A round from Maveron earlier in the year.

Earnest is an alternative lender that mainly focuses on loans for education (either college or certification classes) and personal loans — though educational lending makes up a much larger share of their business. Behind those loans is the firm’s big data engine that factors in 10,000 data points, including consumer factors such as bank accounts, education levels, credit cards, education, social media data and roughly 100,000 other data points.

“I think we look at everything except credit score,” Earnest Chief Executive Louis Beryl said in an interview. “We are leveraging the power of math geeks to deliver something much better to millions of people.”

Beryl’s stated goal — “to build the bank of the future for the next generation” — may sound familiar, but their road to achieving it is based somewhat differently. Earnest is tackling its mission through building better consumer relationships. Additionally, Earnest is not a marketplace lender (like SoFi), which helps borrowers connect to potential lenders looking to invest. Earnest underwrites and lends itself — and, according to their CEO, underwrites more than just loans.

“We say that we originate client relationships, we don’t originate loans. And that is an end-to-end commitment from us.”

“We say that we originate client relationships, we don’t originate loans,” Beryl noted. “And that is an end-to-end commitment from us. We want our customers to feel in control and cared for at all points in the loan process.”

At the origination stage of lending, that value is mainly felt in speed, as Earnest delivers loan rate estimates in under two minutes — and at a reasonably low cost. According to reports, the lowest available variable loan rates as low as 1.9 percent and fixed rates start at 3.5 percent. The firm also eschews fixed repayment periods of 10 years-15 years, instead allowing users to customize their repayment plan (and it assesses a customized interest rate to go with it).

“About 95 percent of our users are under the age of 35, and we are really helping people save a lot of money over a lifetime by letting them refinance their student loans. The average person saves $18,000 with Earnest,” Beryl said. “It’s the purpose of a bank to help people realize their hopes and dreams. We want to expand to really be able to serve professionals over their whole lives.”

Their newest round of funding will reportedly go toward the addition of 200 new staff members (the company currently employs 160) and a mobile rollout of the firm’s lending tools.

“Our bet is on the idea that the future of finance will be real-time connected accounts using software and data [to] drive down costs,” says Beryl. “Our lending platform can support a multiplicity of service from financial planning or financial education because we are so data-focused.”

When asked about specific products, Beryl declined beyond advising that we “stay tuned.”

Investments for the week of Nov. 13, 2015

Now that’s a bit more like it. Talk about a rebound! Our investment tracker took a bounce – this time northward, with a total of about $798 million in fund flows for the week. That’s quite a bit higher than the $150 million invested in the previous week. The preponderance of activity came in the FinTech space at 98 percent of the investments. Below is the overall activity, broken down by our two main segments.

The bulk of the investment activity came with two large, triple-digit deals and then a number of smaller transactions. Half the money that changed hands came with a single transaction, with a $403 million acquisition of C1 Financial by the Bank of the Ozarks, with an eye toward expanding in the southeastern part of the United States. The next largest deal, in terms of dollar signs, came in the form of Tenable Network’s $250 million capital raise, through a consortium of investors, led by Insight Venture Partners. The deal speaks to the increasing importance of network security to a number of agencies and enterprises, especially among government operations. Together, those two deals were 81 percent of all movement in the week, trailed by A10 Capital’s $67 million bridge loan, earmarked toward buying some additional properties across retail, industrial and office buildings.

Within FinTech it’s worth drilling down to see where the bulk of activity lay within the sector, and we can see that there is critical mass in banking for the week, and also security and fraud technology. The latter comes as no surprise given the continued trend of data breaches and compromised government employee and consumer data. See below for the sub category breakdown for the week in FinTech.



The pressure on banks to modernize their payments capabilities to support initiatives such as ISO 20022 and instant/real time payments has been exacerbated by the emergence of COVID-19 and the compelling need to quickly scale operations due to the rapid growth of contactless payments, and subsequent increase in digitization. Given this new normal, the need for agility and optimization across the payments processing value chain is imperative.