“We didn’t just build a better student loan. We built a community.”
When David Klein, Michael Taormina, and Jessup Shean decided to return to school for their MBAs, they knew that they would have to rely on student loans to fund their education. Like millions of other prospective students, they discovered to their dismay that interest rates were remarkably high, the process was highly complex, and the service was exceptionally poor.
David summarizes the funding landscape that he and his peers encountered:
The federal government charges the same, high fixed interest rate to all students, regardless of past credit history or future likelihood to repay the loan. Grad school students pay 6.8% fixed for the first $20,500 borrowed and 7.9% fixed for money borrowed thereafter. In addition, borrowers must pay an origination fee of 1%-4%. Those numbers are simply too high. For many qualified students, this is a significant mis-pricing of credit risk.
Private bank lenders, the typical bastion for market-based pricing, aren’t offering a much better deal for fixed rate student loans. Still shell-shocked from the financial crisis, many banks are “gun shy” when it comes to extending student loans and have either stopped lending or raised rates considerably, making it even more difficult for students.1
In response to this “broken system,” in late 2011 during their first year at Wharton, David and his classmates founded CommonBond. Since then, the company has experienced rapid growth:
- November 2012: Launched first pilot student loan program at Wharton
- September 2013: Expanded to 20 MBA programs across the US
- March 2014: Extended coverage to 50 schools across four graduate degree programs (Business, Law, Medicine, and Engineering)
- Early 2015: Scaled to 200 schools across 14 graduate degree programs (e.g., Nursing, Public Policy)
- September 2015: Expanded again to 2,000 schools, having originated over $500 million in loans to 10,000 borrowers2
Though the company has not disclosed information on its valuation, it recently received over $35 million in funding and is aiming to triple its loan financing to $1.5 billion by the end of 2016.3
CommonBond’s value proposition emphasizes four critical components:
Savings: Borrowers save up to $14,000 over the life of their loans relative to government-backed alternatives.
Simplicity: Interested individuals can complete an application online and receive a rate quote in under five minutes.
Service: So-called “Care Experts” are available nearly 24/7 via chat, phone, and email: “Real people, real experts, real care – Customer care is at the heart of CommonBond. We’re here for you whenever you need us.” (See exhibit 1.)
Social good: For every degree financed with CommonBond, the company funds the education of a student in need for a full year through a partnership with a nonprofit in Africa – this 1-for-1 model (similar to that of Tom’s or Warby Parker) is the first its kind in lending.3
Ex 1: Care Team hotline (on the CommonBond homepage)
Delivering on these elements, CommonBond boasts some of the best customer satisfaction figures in private lending – for example, whereas fewer than one in ten customers of national banks would recommend their bank to others,4 more than seven of ten would recommend CommonBond.3
Four factors contribute to CommonBond’s ability to serve its customers:
Branchless lending: Limited public information exists on CommonBond’s operations, but its asset-light, online-only presence likely generates significant cost advantages over traditional players. Online lenders typically enjoy cost savings of over 400 basis points compared to brick-and-mortar banks, whose branches often consume 30-35% of their overall operational expenditures.5
Focused product offering: CommonBond does not attempt to be everything to everyone. Through its qualification process and aggressive social media marketing strategy that specifically targets students at top schools, CommonBond selects for low-risk (“super-prime”) borrowers with FICO scores of 700+ and proven free cash flows, i.e., highly creditworthy debtors.3
Sophisticated risk assessment: Unlike the government’s “one-size-fits-all” approach, CommonBond has developed its own data sources and algorithms to evaluate potential borrowers. So far, this proprietary model has proven exceptionally successful: while their loan portfolio is still young, CommonBond has never had a default or even a delinquency.6
Customer-centric team: Of the 50 employees at CommonBond, seven are on the Care Team, which, in addition to providing around-the-clock customer service, sends hand-picked gifts to borrowers and arranges borrower dinners in cities across the country to bolster a sense of community. Moreover, the 10-person Engineering Team focuses first and foremost on improving the user experience (see ex. 2 for a screenshot) – as one example, in the last five months, the team has reduced the number of steps required to get a rate quote, cutting the time-to-quote from seven to five minutes.3,7
By aligning the company’s business and operating models, CommonBond has succeeded in disrupting the student loan market. This summer, CommonBond completed its first securitization at $100 million of student loan assets, marking the first time that Moody’s has issued an investment-grade rating for a first-time-issuing marketplace lending platform. “This is a major milestone for CommonBond that reflects the quality of our underwriting, the strength of our team, and the scale of our platform,” said David. “This securitization has meaningfully expanded our investor base among top institutions and money managers, and further positions us to meet and exceed our growth objectives over the coming months and years.”8
- Company presentation at HBS; December 3, 2015.
- Moldow, Charles. “A Trillion Dollar Market By the People, For the People: How Marketplace Lending Will Remake Banking As We Know It.” https://foundationcapital.com/fcideasfintech