In the last two decades, dozens of traditional industries have been “Amazoned”—turned upside down by new business models made possible by the Internet.
Obviously, Amazon has upended the retail market, making it possible to buy soap or books or a Halloween costume at a deep discount online, and then to have those products delivered to your door in day or two. Google has transformed the advertising industry, Netflix has out-innovated the cable companies and Apple has re-invented personal computing, music and telecommunications.
There’s even been some disruption in some segments of the financial-services industry. Companies like Lending club, PayPal and Square have changed the way consumers and small-businesses think about loans and payments, for instance.
But in the huge, traditional consumer banking industry—the top six U.S. banks alone represent $1 trillion in equity value—innovation has lagged. Despite some nifty new apps and a few online programs, the consumer banking system is still, we would argue, stuck in the 20th century. Most banks are still structured around the bricks-and-mortar branch system and ATMs, despite the fact that consumers are increasingly doing all their banking online or through their smartphones. Younger consumers especially want an Amazon or Facebook experience when they bank. And despite a wealth of knowledge about their customers—including their spending habits and creditworthiness—banks are still using the simplistic FICO system to assess credit risk.
Why haven’t things changed? Well, re-imagining banking is a little more complicated than putting a song online or ordering a book. The industry is highly regulated and the stakes for trying something new are extremely high for consumers. What’s more, since the 2008 financial crisis, banks are more skittish and have pulled back significantly on consumer and SMB lending activities. It’s not exactly an environment ripe for innovation.
Enter Earnest. This company, started by two banking and Wall Street veterans who understand the complexities of the financial and lending landscape, are building a modern bank for the digitally native consumer. We announced today that Battery is leading a $75 million equity funding round for Earnest, part of a larger, $275 million financing that includes $200 million in institutional lending capital.
By leveraging big data, machine-learning algorithms and modern Web design, Earnest has developed a loan-underwriting model that can offer quotes in minutes and approve loans in hours, instead of days or weeks. Consumers also receive more flexible terms and can complete the entire transaction online. Loan recipients can choose from a variable or fixed loan, pick their exact monthly payment and change their payment amount at any time.
Earnest is currently processing consumer and student loans—student-loan debt in the U.S. currently totals $1.3 trillion—but has plans to diversify its products even more. In the future, Earnest could change the way you bank entirely, helping you fund your home or car, pay your bills or invest your money.
We are excited about our partnership with Earnest and look forward to watching them re-imagine what a bank can do.
*For a full list of all Battery investments and exits, please click here.
This post was written by Battery team members Roger Lee, Ben Johnston and Jeff Lu.