Technology

This week Facebook has launched a major new product play, slotting an algorithmic dating service inside its walled garden as if thatperfectly normal behavior for an ageing social network.

Insert your [dad dancing GIF of choice] right here.

Facebook getting into dating looks very much like a mid-life crisis — as a veteran social network desperately seeks a new strategy to stay relevant in an age when app users have largely moved on from social network ‘lifecasting& to more bounded forms of sharing, via private messaging and/or friend groups inside dedicated messaging and sharing apps.

The erstwhile Facebook status update has long been usurped by the Snapchat (and now Instagram) Story as the social currency of choice for younger app users. Of course Facebook owns the latter product too, and has mercilessly cloned Stories. But it hardly wants its flagship service to just fade away into the background like the old fart it actually is in Internet age terms.

Not if it can reinvigorate the product with a new purpose — and so we arrive at online dating.

Facebook — or should that be ‘Datebook& now! — is starting its dating experiment in Colombia, as its beta market. But the company clearly has ambitious designs on becoming a major global force in the increasingly popular online dating arena — to challenge dedicated longtime players like eHarmony and OkCupid, as well as the newer breed of more specialized dating startups, such asfemale-led app, Bumble.

Zuckerberg is not trying to compete with online dating behemoth Tinder, though. Which Facebook dismisses as a mere ‘hook up& app — a sub category it claims it wants nothing to do with.

Rather ithoping to build something more along the lines of ‘get together with friends of your friends who&re also into soap carving/competitive dog grooming/extreme ironing& than, for e.g., the raw spank in the face shock of ‘Bang with Friends‘. (The latter being the experimental startup which tried, some six years ago, to combine Facebook and sex — before eventually exiting to a Singapore-based dating app player, Paktor, never to be heard of again. Or, well, not until Facebook decided to get into the dating game and reminded us all how we lol&d about it.)

Mark Zuckerbergcompany doesn&t want to get into anything smutty, though. Oh no, no, NO! No sex please, we&re Facebook!

Facebook Dating has been carefully positioned to avoid sounding like a sex app. Itbeing flogged as a tasteful take on the online dating game, with — for instance — the app explicitly architected not to push existing friends together via suggestive matching (though you&ll just have to hope you don&t end up being algorithmically paired with any exes, which judging by Facebookpenchant for showing users ‘photo memories& of past stuff with exes may not pan out so well… ). And no ability to swap photo messages with mutual matches in case, well, something pornographic were to pass through.

Facebook is famously no fan of nudes. Unsurprisingly, then, nor is its buttoned up dating app. Only ‘good, old-fashioned wholesome& text-based chat-up lines (related to ‘good clean pieces of Facebook content&) here please.

If you feel moved to text an up-front marriage proposal — feeling 100% confident in Facebookdata scientists& prowess in reading the social media tea leaves and plucking your future life partner out of the mix — its algorithms will probably smile on that though.

The companyline is that dating will help fulfil its new mission of encouraging ‘time well spent& — by helping people forge more meaningful (new) relationships thanks to the power of its network (and the data it sucks out of it).

This mission is certainly an upgrade on Facebookearlier and baser interest in just trying to connect every human on planet Earth to every other human on planet Earth in some kind of mass data-swinging orgy — regardless of the ethical and/or moral consequences (as Boz memorably penned it), as if it was trying to channel the horror-loving spirit of PasoliniSalò. Or, well, a human centipede.

But that was then. These days, in its mid teens, Facebook wants to be seen as grown up and a bit worth. So its take on dating looks a lot more ‘marriage material& than ‘casual encounters&. Though, well, products don&t always pan out how their makers intend. So it might need to screw its courage to the sticking place and hope things don&t go south.

From the user perspective, therea whole other side here too though. Because given how much baggage inevitably comes with Facebook nowadays, the really burning question is whether any sensible person should be letting Mark Zuckerberg fire cupidarrows on their behalf

He famously couldn&t tell malicious Kremlin propaganda from business as usual social networking like latte photos and baby pics — so what makes you think hegoing to be attuned to the subtle nuances of human chemistry!

Here are just a few reasons why we think you should stay as far away from Facebookdalliance with dating as you possibly can…

1. Ityet another cynical data grabFacebookad-targeting business model relies on continuous people tracking to function — which means it needs your data to exist. Simply put: Your privacy is Facebooklifeblood. Dating is therefore just a convenient veneer to slap atop another major data grab as Facebook tries to find less icky ways to worm its way back and/or deeper into peoplelives. Connecting singles to nurture ‘meaningful relationships& is the marketing gloss being slicked over its latest invitation to ask people to forget how much private information they&re handing it. Worse still, dating means Facebook is asking people to share even more intimate and personal information than they might otherwise willingly divulge — again with a company whose business model relies upon tracking everything everyone does, on or offline, within its walled garden or outside it on the wider web, and whether they&re Facebook a user or not. This also comes at a time when users of Facebookeponymous social network have been showing signs of Facebook fatigue, and even changing how they use the service after a string of major privacy scandals. So Facebook doing dating also looks intended to function as a fresh distraction — to try to draw attention away from its detractors and prevent any more scales falling away from users& eyes. The company wants to paper over growing scepticism about ad-targeting business models with algorithmic heart-shaped promises. Yet the real underlying passion here is still Facebookburning desire to keep minting money off of your private bits and bytes.
2. Facebookhistory of privacy hostility shows it simply can&t be trustedFacebook also has a very long history of being outright hostile to privacy — including deliberately switching settings to make previously private settings public by default (regulatory intervention has been required to push back against that ratchet) — so its claim, with Dating, to be siloing data in a totally separate bucket, and also that information shared for this service won&t be used to further flesh out user profiles or to target people with ads elsewhere across its empire should be treated with extreme scepticism.Facebook also said WhatsApp users& data would not be mingled and conjoined with Facebook user data — and, er, look what ended up happening there…!! ————————————————————————————————&> WhatsApp to share user data with Facebook for ad targeting — herehow to opt out

Renaud Laplanche spent ten years building LendingClub. In the process, he created an industry from scratch. Circumventing conventional banking channels for consumer credit began in 1996 when Chris Larsen started E-LOAN, which ultimately led to Prosper Marketplace. But LendingClub, which Laplanche founded in 2007, was and remains the poster child for the business of marketplace lending. The industryshort history has been volatile, characterized by both triumphant hype and utter lack of confidence.

History of the Marketplace Lending Industry, CB Insights

While LendingClub has struggled in the public markets since their late 2014 IPO, they have managed to propel their industry into significance, while rapidly expanding their share of the personal loan market to 10%.

After his well-publicized departure in May 2016, Laplanche got started on his next venture in a hurry. Just a few months later he started Credify, ultimately renamed to Upgrade, a company that bears a striking resemblance to LendingClub. In just two years Upgrade has raised $142 million in funding, while originating more than $1 billion in loans since August 2017.

With Upgrade, Laplanche has the opportunity to start fresh with the benefit of hindsight. The initial promise of LendingClub and their competitors was unbundling the banks. Now, to persist and grow, marketplace lenders have realized they need to rebundle, providing an array of bank-like services to better serve their end customers. This post explores what Laplanche is doing differently this time with Upgrade.

Total Addressable Market ≠ Value Capture

There has been a general recognition across many fintech businesses that marketplace business models aren&t enough. The mutually-beneficial arrangement of marketplace lending is a perfect example. Superior customer experience, expedited loan decision, quick receipt of funds, and lower operational costs without legacy infrastructure were the selling points. Charles Moldow famously called it a &trillion-dollar opportunity& in 2014.

He may still be right, but in order to realize the opportunity, marketplace lenders need to capture a larger, more regular share of borrowerattention. Loans may be high-volume purchases, but they&re not high-frequency transactions. So when a platform like LendingClub facilitates a loan so someone can refinance their outstanding credit card debt, is there really a relationship with the customer there Capital is provided, customer service is available, and monthly payments are made. Thatall there is to it.

Total addressable market (TAM) is frequently used to assess opportunity. A critical part of the TAM estimation process might have been overlooked in the early assessments of the alternative lending industry. The large numbers in the figure below reflect an alluring market that LendingClub, Prosper, Avant, Upstart, OneMain, Best Egg and others have attempted to capitalize upon.

The notion of a replacement cycle, which I&ll borrow from Michael Mauboussin, is an important consideration here, particularly in a high volume, low frequency transaction relationship such as consumer lending. Just because a borrower refinances their credit card debt with a loan from LendingClub, therelittle guarantee that all of the money spent on acquiring that customer will lead to future transactions with that customer. Yet, in order for these companies to succeed, the average revenue per user (ARPU) is going to have to rise through some combination of repeat customers and complementary services to deepen the relationship and create new revenue channels.

The market opportunity for marketplace Lenders, LendingClub Investor Day 2017

With this realization in mind, fintech players across the board have focused on deepening relationships with customers to drive sales and lower SG-A costs. Customer acquisition is a major component of the income statement for these companies. The more engagement a lender has with their end customer, the greater the chance they stand to not only be called upon when a borrower needs to borrow again, but ultimately pinpoint opportunities for product recommendations.

And thatexactly what Upgrade is doing. In many ways, they&re quite similar to LendingClub. Upgrade offers personal loans between $1,000 and $50,000 over three-to-five-year repayment periods at rates competitive with major banks. LendingClub varies a bit in the principal amount offerings and APRs, but they essentially do the same thing. Loans are originated through WebBank, the partner bank that also works with LendingClub. Operationally, therea blockchain component for data remediation and security purposes. However, the extent and value of this application are unclear.

Marrying Credit with Financial Wellness

The notion of financial wellness is increasingly popular among consumer fintech companies, as well as incumbent financial institutions. It reflects a transition away from a purely transactional relationship to a fiduciary one, as we&ve also seen in the wealth management industry. The tricky thing about this is that although it may be the right thing to do, late fees and overdraft penalties make up a sizeable portion of traditional bank revenue.

Where Upgrade differs from LendingClub is in their customer engagement model. Upgrade provides several features to customers that resemble a conventional personal financial management (PFM) app. Their Credit Health service offers free advice and monitoring tools, personalized recommendations, and customized updates for individual credit scores and underlying rationale. Additionally, they offer a financial education tool open to the public called Credit Health Insights, which offers tips and tricks for debt management and financial wellness. At the surface, therelittle differentiation here. A free credit score is becoming table stakes for any financial institution, and personalized insights are to be expected.

Upgradeborrower value proposition, LendIt 2018 Conference

In Upgradecase, however, the framing of the dual service is compelling. Typically, online lenders only approve 10-15% of applicants. While the credit underwriting models are looking for the most compelling borrower profiles who will pay back their loans, the majority of interested borrowers are sent back to the drawing board.

A major focus of Upgrade is to build the credit of the other 85-90% of applicants who are typically rejected so that they improve their profile and obtain a loan in the future. Credit repair and financial wellness are underserved markets today, although companies like Bloom Credit are working to change the record. This product combination helps to unify the interests of Upgrade and borrowers, both approved and rejected.

Reinventing Consumer Credit

At the LendIt Conference in 2017, Laplanche concluded his presentation with a reference to the Wright Brothers. He discussed how he was enamored with their ability to combine two things to create something entirely new, which in their case was &wheeling and flying.& A year later, he returned to LendIt with a new product release that borrowed from the innovation strategy of Orville and Wilbur.

Upgrade launched a first of its kind product, a Personal Credit Line, a hybrid of a credit card and an unsecured loan. Herehow it works: customers get approved for up to $50,000 in credit, from which they can draw down as needed. They only pay interest on whatborrowed, over the course of a 12-60-month timeframe. The interest rate is also fixed over the term of the loan.

UpgradePersonal Credit Line, a hybrid of a personal loan and a credit card, Upgrade

The product is built on the premise that the level of innovation in the origination of consumer credit has been somewhat limited. Laplanche attempted to reinvent it once with the creation of LendingClub. In some ways, it worked. Personal loans originated by fintech lenders account for roughly a third of outstanding consumer loans according to Transunion. Now hetrying to do it again.

First Mover Disadvantage in Consumer Fintech

When I first read the press release for the Personal Credit Line, I thought it was a very compelling way to expand the menu of options to qualified consumers. It puts more control in the hands of the borrower, so they can avoid the vicious cycle of consumer debt. I was also reminded of a comment made by Josh Brown, CEO of Ritholtz Wealth Management, after Wealthfront released their &Portfolio Line of Credit& product in April 2017. He said that while it might sound flashy, therenothing holding Schwab or Fidelity back from offering the same product tomorrow.

Whatso challenging about consumer-facing fintech companies is that customers are expensive to acquire, they&re difficult to keep, and products are easy to replicate. Providing a free credit score is easily accessible through a partnership with Equifax or Experian. Itcommoditized. The situation is similar with personal financial management tools. This Personal Credit Line seems awfully similar. Whatto stop Chase or GoldmanMarcus from offering an identical product, perhaps with even better rates U.S. Bank just launched a similar product, albeit for a different use case, called Simple Loan. Ita $100 to $1,000 loan marketed as a payday lending alternative, with a roughly 20% lower interest rate than typical payday lender offers.

There is something to be said for being first to market, but ease of replication limits the defensibility of that position. There is a clear interest in an expansion into new products, which will continue to help Upgrade to differentiate the value proposition to consumers, and maybe one day small businesses. The unfortunate reality is that bigger players with an existing customer base and a lower cost of capital are on their tail.

Forget about Democratization

Renaud Laplanche rings the bell with his team at LendingClub (DON EMMERT/AFP/Getty Images)

The real insight that distinguishes Upgrade from LendingClub is the profile of the users. On the supply side of the marketplace, Upgrade only welcomes institutional investors. LendingClub was, and still is, marketed to individuals and institutions.

The peer-to-peer model turned out to be a little too idealistic to serve as the foundation for a business. The concept of a marketplace is really attractive & the ability to invest in others, as cliché as that may sound, has a philanthropic twist to it that even implies a social good. Or, at the very least, an alignment of interests. Except interests aren&t aligned because of the mercurial nature of retail investors, which makes for unstable sources of capital.

LendingCluboriginal business model, in the pure P2P form, was reliant on the ability to create a new asset class. The notion of investing in consumer credit may sound compelling, and return prospects may be even more appealing. But, you can&t bootstrap an asset class and base a business model around retail adoption. LendingClub had to solve for distribution of their service, as well as the dissemination of the broader concept of unsecured consumer lending as an asset class.

On Laplanchesecond go around with Upgrade, thereno more promise of democratization of a new asset class. Instead, large multi-billion-dollar credit investors own the supply side of the marketplace. As a result, therea more stable capital base of institutional investors who know what they&re investing in and the reason why they&re investing in it.

What Laplanche did this time around was base his business model around stability. In this market it can pay to be a follower. LendingClub touts the notion that they have &brought a new asset class to investors,& but that education campaign came at a serious cost. It also invited boiler room-like sales behavior from competitors. Upgrade is stepping in after a decade of marketing to scale an untested industry to the masses. Fortunately, a lot of the work has already been done for them.

How Different Can You Be

Upgrade is led by as experienced and forward-thinking of a leader as they come in the marketplace lending industry. They expect to originate over $2 billion loans in 2018 and hit profitability by year-end as well. They&re redefining convention when it comes to consumer credit products.

The question, however, remains: how long can the novelty last Consumer fintech is fiercely competitive. Italso increasingly occupied by incumbents with far lower costs of capital, large existing customer bases, and the ability to experiment in a way that a startup cannot. The unsecured consumer lending space has attracted mountains of capital in the past five years, but the opportunity is clearly defined. The number of lenders issuing more than 10,000 personal loans per year has more than doubled since 2011.

Therea network effect component to marketplace lending businesses, particularly as lenders are able to maintain more connected relationships with consumers. But when it comes to standing apart from the rest of the pack, a differentiated product offering isn&t a very wide moat.

Lime, the 18-month-old, San Francisco-based company whose bright green bicycles and scooters now dot cities throughout the U.S., launched a pilot program in Tacoma, Washington, today, but that tiny victory might have felt short-lived. The reason: on the opposite side of the country, a Lime rider was killedtoday by an SUV while tooling around Washington D.C.DuPont neighborhood. The local fire department shared video of the rescue, which shows that the victim, an adult male, had to be pulled from the undercarriage of the vehicle.

Itthe second known fatality for the company following a death earlier this month in Dallas, when a 24-year-old Texas man fell off the scooter he was riding and died from blunt force injuries to his head.

On the one hand, the developments, while unfortunate, can hardly come as a surprise to anyone given how vulnerable riders or e-scooters are. E-scooter use is on the rise, with both Lime and its L.A.-based rival Bird, announcing this week that their customers have now taken north of10 million rides. At the same time,city after city has deemed their use on sidewalks illegal out of fear that fast-moving riders will collide with and injure pedestrians. That leaves riders sharing city streets with the same types of giant, exhaust-spewing machines that they hope to increasingly displace. In fact, sales of traditional SUVs has continued to surge, thanks in part to low unemployment, high consumer confidence, and Americans& enduring love with gigantic vehicles.

One solution to the issue, and one for which the e-scooter companies and their investors have been advocating, are protected lanes that would allow e-scooters to be operated more safely. Birdhas even publicly offered to help fund new infrastructure that keeps cyclists and scooter riders safer.

Another possible answer would appear to be mandating the use of helmets with e-scooters, though California evidently disagrees. On Wednesday, Governor Jerry Brown signed a bill into a law that states Californians riding electric scooters will no longer be required to wear helmets as of January 1.

The bill was reportedly sponsored by Bird.