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The consumer lending industry has changed drastically over the past decade. With an increasing emphasis on technology-based solutions, banks, lenders, and fintech companies have found innovative ways to offer loan products to consumers.
Much of this innovation involves a combination of ease of access, inclusion of data that others may overlook in underwriting, expedited approval decisions, streamlined user interaction, and more.
One company at the forefront of this arena is Earnest — a fintech lender that offers in-school private student loans, student loan refinancing, and personal loans to qualified applicants — which is why I was excited to ask the CEO of Earnest, Susan Ehrlich, a few questions about how Earnest approaches consumer lending.
Read on to learn about how Earnest is establishing its footprint as a leader in online consumer lending.
In this Q&A:
- Getting Started with Earnest
- Earnest & Its Student Lending Approach
- Looking at the Student Loan Industry Today
- What to Expect Moving Forward
Getting Started with Earnest
Q: How did your experience in various chairman positions for financial services companies, including CFO at Simple Finance, prepare you for the CEO role with Earnest?
A: I’ve always been drawn to mission-driven organizations focused on leveraging the power of technology to improve customer’s financial lives and health. I moved to San Francisco from Portland where I had served as the CFO at Simple for the prior 2 years. Simple is a digital bank/fintech that had been acquired by a larger company and run as a wholly-owned subsidiary, so it was a very applicable experience. When I joined Earnest, it too had recently been acquired by a larger company, Navient, in October 2017.
I’ve also been on the Board of the Center for Financial Services Innovation (CFSI) for 7 years (Chair for 2 years), and the Board of Boeing Employees Credit Union (BECU) for 5 years (just starting my 2nd year as Chair)—both mission-driven non-profit organizations working to improve consumer financial wellness. In fact, I was actually elected to BECU Board Chair in April 2018 and accepted the job as CEO of Earnest in July 2018!
Taking on both roles around the same time was a challenge, but when opportunities present themselves, you rise to meet them.
Balancing board responsibilities while serving as the CFO at Simple was only a preview of life as a CEO at a growing fintech. The key is surrounding yourself with great people and execs that support the company goals. We’ve worked hard on evolving our mission and vision as well as our values—what it means to be Earnest—in this new era for our organization.
Q: What was the most exciting aspect of transitioning to your role with Earnest?
A: One of the most exciting initiatives that I got to take on my first few months at the company was refreshing the mission and values. It was a great way to dive right into a new organization, and learn what mattered to the business and its employees.
Setting the company priorities for 2019 was also very exciting, as we were planning the launch of our private student loan product. Balancing an existing strong product suite while bringing to market an innovative, disruptive new offering was the best possible way to become immersed in this space and truly understand the major pain points our customers’ experience.
Being a wholly-owned subsidiary of Navient has provided us the tools to grow, and grow quickly —but it has also presented us with some challenges around integration and maintaining our own unique culture and identity. We’re extremely proud of the brand we’ve built here, which makes operating independently important to me and all the amazing teams at Earnest.
Earnest & Its Student Lending Approach
Q: How is Earnest offering an alternative option to the traditional lending market?
A: When I first discovered consumer lending—in the 1990s—credit was not widely available and certainly wasn’t widely accessible to women and underrepresented minorities. Credit cards—with their emphasis on the use of automated credit scores—changed that.
Lending became more objective, less subjective. Access expanded.
The challenges today are the same as the challenges have always been: How do lenders ensure they are offering the right amount of credit at the right price to the right people at the right time? How can lenders leverage technology to continue to make better/more accurate decisions more efficiently?
I believe the entire category of student loan refinance owes its existence to technology. At Earnest, we go beyond credit scores. We review data such as savings patterns and each applicant’s unique situation to provide rates and terms tailored to the applicant.
As a company, we are excited to apply what we have learned from our refinance product to in-school lending. Today, the process of applying for a student loan is woefully outdated, and I am thrilled we get to disrupt the industry by introducing an intuitive and educational application process.
With our new student loan product, applicants are guided through every step of the process on a streamlined, user-friendly interface available on mobile or desktop. The day Earnest launched its student product, one student completed their application in a total of seven minutes. We think this is how it should be.
Q: What steps does Earnest take compared to other lenders to better serve consumers considering a private student loan?
A: We design our products by listening to our customers and closely examining their pain points. For example, the process of applying for a loan has historically been laborious and time-consuming, but Earnest is modernizing the process from start to finish.
Our team conducted over 300 hours of user research with students, cosigners, and financial aid offices to re-engineer the student lending process from start to finish. The resulting streamlined UX experience allows applicants to quickly find out whether they are eligible for a loan before uploading all of the required paperwork.
Some of the key differences between our student loan offering product and others currently available on the market include:
- Mobile optimized – Consumers use their smartphones for just about everything. Why should applying for a student loan be any different? We’ve optimized the experience for mobile because that’s how students prefer it.
- Quick eligibility check – Previously, applicants had to fill out a lengthy application and endure a hard check on their credit before finding out if they were eligible for the loan. We offer a quick two-minute eligibility check that requires only basic personal information.
- Cosigner invite – Most private student loans require a cosigner, and asking someone to cosign on the loan can be the most awkward step for all involved. Our application makes it simple and easy to invite a cosigner to the process.
- Checkout – Oftentimes, students sign a loan without understanding the final price they will be expected to pay back over time. Our team designed a transparent checkout process to provide a summary of each loan before signing.
- 9-Month grace period – We found through talking with recent graduates that they wanted the flexibility of a longer grace period after graduation to get settled. We offer a 9-month grace period after graduation compared to the 6-month industry standard.
Looking at the Student Loan Industry Today
Q: The majority of outstanding student debt is lent by the federal government, not banks or lenders. Do you see any key problem areas with the federal student lending approach?
A: It seems to me that in my lifetime, we’ve seen funding for education shift from an institution-to-institution budget process—where governments funded education directly to the institutions of higher education—to an institution-to-individual process where institutions of higher education are funded based on loans the federal government makes to individuals. That’s a pretty significant risk shift.
By separating the relationship between the payer (the federal government) and the recipient (a college or university) it reduces accountability and pressure to keep prices low. Costs are passed on to students who aren’t price-sensitive now. They are counting on a job in six years to repay their loans.
Unfortunately, there are a lot of parallels to that situation, and the subprime housing situation in the mid-2000s—where asset appreciation, and not affordability, was going to make it possible for borrowers to repay their loans. Remember no income and no-docs mortgages? There are unintended consequences for sure and these pose risks for our system.
Q: As mentioned, the majority of outstanding student debt is lent by the federal government, not banks or lenders. Where can private lenders improve the student lending process?
A: It’s not just ‘the majority’ of student loans lent by the federal government. I believe the statistic is closer to 90% of student loans issued each year are funded by the US Government.
Where can private lenders improve the process? Well, as I mentioned before, our usability lab work led to 5 insights where we’ve focused our attention to improve the experience:
- Mobile optimized – Because that’s how students prefer it.
- Quick eligibility check – We offer a quick two-minute eligibility check that requires only basic personal information. Fast and easy.
- Cosigner invite – The majority of private student loans require a cosigner, but asking can be awkward. Our application makes it simple and easy to invite a cosigner.
- Checkout – Our transparent checkout process provides you with a summary of each loan and your final price before signing.
- 9-Month grace period – Compared to the 6-month industry standard.
What to Expect Moving Forward
Q: Earnest, as well as other fintech companies, stress the importance of utilizing more data compared to traditional underwriting methods. Do you expect a similar shift in approach from other traditional lending institutions in the future?
A: We are seeing it already. As technology evolves and makes it easier for borrowers to share more about themselves with lenders, underwriting will continue to improve. Innovations like Plaid and the use of Artificial intelligence continue to help lenders find more ways to say ‘yes’ responsibly. And that’s a good thing.
Q: Do you envision Earnest branching out into other verticals in addition to student loan refinancing, in-school loans, and personal loans?
A: Our mission is to provide our clients with the financial capital they need to live better lives. Our focus is on engineering, data, and design. We see enormous opportunity in the student loan refinance market where there are over $250B in loans that can be refinanced to more affordable rates for borrowers. We see in school loans as a similar multi-billion-dollar opportunity over time. And personal loans has established itself as a significant market.
Continuing to evolve and enhance the user experience and access to our products in these markets will keep us very busy for the foreseeable future!
Earnest is a fintech company that offers low-cost lending to consumers through comprehensive underwriting and service. Earnest currently offers private student loans, student loan refinancing, and personal loans to qualified consumers.
About Susan Ehrlich
Susan Ehrlich is a recognized leader in the financial services industry with a career in various leadership roles in fintech, banking, and retail. She was recognized as one of the Top 25 Women in Finance by U.S. Banker from 2009 to 2011.
Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.
Author: Andrew Rombach