LendingTree owns MSN’s homepage again <msn.com>, locking up the main page sponsorship today (9am Pacific Time) with a refi pitch in the upper-right corner and an ad for home equity loans in the Money area (see inset).

In an approach popularized by car dealers, both ads emphasize monthly payment amount rather than rate. This theme is carried through on the landing page which has no mention of rate. In fact, you could complete the entire loan application without ever seeing the rate.

The only rate link is the relatively faint reverse-type line in the upper-right corner. Clicking on it delivers a small, quarter-page popup with disclosures for all 41 promotional offers currently in use by LendingTree — 6,800-words in all across 24 screens (download lendingtree_disclosures.doc).

Interestingly, both offers lead to the same landing page. While it would probably be more effective to craft different pages for each loan type, LendingTree may prefer a common landing page to more easily compare results from its different promotional ads.

LendingTree has a prime spot on MSN's main page today <msn.com>. The eye-catching burgundy ad in the upper-right corner features a 10-second animation ending with the call to action, "Refinance $175,000 now for $729/month." (click on above for closeup).

Clicking through the advertisement leads to a five-question landing page designed to get the prospect engaged in a loan application (click on inset for a closeup). A small link near the top of the landing page takes visitors to a promotional offerings page with disclosures for several loan offers.

It's simple and effective online marketing. The slogan on the top of the landing page says it all:

1 Simple Form, Four Real Offers in Minutes.

Link: WSJ.com - Online Referrals For Home Sales Gain a Toehold.

Here's a way to gain incremental mortgage sales, new banking customers, and potentially a bit of direct fee income from your online services.

Develop an online real estate agent referral program.

Visitors would be able to query your website to find qualified agents specializing in their target neighborhoods. You could do it as a pure marketing play, with no incentives or referral fees; or you could provide eye-popping incentives, such as $2500+ gift cards from Home Depot or American Express offered by LendingTree at their realestate.com site.

In the LendingTree program, the value of the gift card depends on the size of the home purchased and/or sold (you receive an incentive for both buying and selling) as follows:

Incentive  Combined Value (bought & sold)
$250         $100,000
$500         $150,000
$1000       $250,000
$1500       $350,000
$2000       $450,000
$2500       $550,000
$5000       $1.1 million
$10,000    $2.1 million

The incentives are funded by the agent receiving the referral, who rebates a third of their sales commission to LendingTree. The consumer ends up with approximately $500 for every $100,000 in home value over $50,000.

LendingTree also tacks on an extra $100 if the buyer gets the mortgage from a LendingTree lender.

Currently, 7% of home buyers say they found their real estate agent through the Internet. (Source: National Association of Realtors study of transactions in 2003 and 2004, as cited by The Wall Street Journal, Dec. 9, 2004)

Caveats
This strategy is not for the faint of heart. While consumers will love it, driving additional business to your mortgage products, most real estate agents will hate it. So you have to weigh carefully whether it's worth the potential heat. If you rely on real estate agents for mortgage leads, you might want to consider the non-incentive version, where you simply forward home sales leads to agents based on zip code.

-- JB

First quarter numbers provide best evidence yet that the online consumer
loan auction marketplace is viable, even with a more moderate advertising budget.

The front door of LendingTree’s Mortgage area. Note the emphasis on simplicity, “1 easy form…up to 4 real offers.”

But surprisingly, the dominant, “We’ll pay you $250!” message is not well explained. To find out what the catch is, users must return to the home page and follow the obscure, “Want extra cash” link. (The $250 rebate is for accepting a credit card with their app,.)

Naysayers point to last year’s unsustainable $50 million dollar TV-advertising campaign and question the economics of the business. Granted, that wasn’t a rational marketing budget, but it was what investors demanded, at least early in 2000.

In LendingTree’s case, unlike many consumer dot-coms, it appears the brand-building money wasn’t entirely wasted.

In Q1 2001, thanks in great measure to the refi boom, with less than $7.2 million in advertising, the company racked up 750,000 loan applications, of which about 350,000 were good enough to sell as leads to at least one, and oftentimes as many as four, of its stable of 121 lenders. In total, about 22,000 non-credit card loans closed in the first quarter.

That’s an advertising cost of just under $10 per application, $21 per good (transmitted) application, and $330 per closed non-credit card loan. If you also throw in the 40,000 plus credit cards cross-sold to applicants, then the advertising cost drops to $116 per closed loan/card.

LendingTree makes money whether the loan closes or not. Lenders pay $6 to $8 per qualified application and $100 to $400 for each closed loan (not including credit cards which are significantly less, see Table 6). LendingTree’s total revenue per transmitted application was $31 in Q1 ’01 vs. $21 in variable marketing expense (e.g., advertising). Therefore each transmitted application contributed $10 dollars to offset fixed expenses and eventually to make a profit. The company expects an operating profit during Q4. This is a good business.

Along with NextCard, PayPal, and several stockbrokers, LendingTree appears to be one of a handful of “new” successful financial service business models to emerge from the Internet land rush. If the company hits its new profitability projection of Q4 2001, its on the way to becoming a household name in the first decade of the new millennium.

The big jump in volume in Q1 was on the mortgage side as consumers rushed to take advantage of interest rate declines. Much of the mortgage volume surge may be short lived, but LendingTree is less dependent on mortgage interest rates than most online lenders.

Why? Its thriving home equity business generated 200,000 applications and 32,000 closed loans in 2000 (see Table 1, below). Despite the popularity of cash-out mortgage refinances this year, the home equity product is on track to beat last year’s numbers. One reason, the size of LendingTree’s HEQ network, which averaged about 50 lenders for most of 2000, grew by a third in first quarter, to 71 lenders. Because a home equity application is four times as likely to close as a mortgage application, the company makes almost twice as much revenue per home equity loan.

Table 1

LendingTree Home Equity Lending Volume

$ millions

Source: LendingTree, 5/01

LendingTree made a strategic move into the real estate brokerage market through its Aug. 2000 acquisition of HomeSpace. Users can earn rebates of up to $1,000 on each home bought or sold.¹

Other Developments

LendingTree became a player in the online real estate business with its acquisition of HomeSpace on Aug. 2, 2000. LendingTree paid $6.2 million in cash plus 639,000 shares, and assumed certain liabilities. The total value at the time was more than $11 million. Home buyers who use a LendingTree network real estate agent earn a rebate of as much as $2,000.¹ The total network includes 7,000 Realtors in 650 real estate companies with more than 2,400 offices in all 50 states.² The network includes agents from Coldwell Banker, Century 21, Prudential, ERA, Remax, GMAC (formerly Better Homes and Gardens), and Realty Executives.

¹$1,000 each for the sale and purchase of a home valued at more than $150,000; $500 for each transaction for homes less than $150,000; users must snail-mail documentation to LendingTree to claim the rebate.

²The Web site lists 41 states with agents in the network; however, 3 states (WV, AK, and OK) do not allow rebates.

LendingTree has not been a big search engine advertiser. In our most recent search engine research, we found only one banner ad running on “loan” keyword searches on Yahoo. The company also advertises on BankRate.

Table 2

LendingTree Web Traffic

thousands of unique users¹ by month

Source: NetScore, 5/01  www.netscoreonline.com  PC Data Online, 4/01   ina = info not available            international = users accessing from outside of the U.S.;

*min:sec; average time spent at the site by each unique user in April

LendingTree continues to give borrowers a $100 to $250 rebate for accepting a credit card with their application. This successful promotion, originally with FirstUSA, has been running for two years, resulting in approximately 150,000 cards being issued.

A-rated credits are set up with a Bank of America US Airways card that carries a $90 annual fee. B credits may receive a no-annual-fee Aspire card from Columbus Bank and Trust. Problem credits are eligible for a First Premier card, which costs $208 the first year for a credit limit of $250 to $1,000 and $84 annually thereafter.

Lending Tree posts the results of customer feedback on each lender. Lenders can opt out of having their scores posted.

Only 10 of the 137 lenders listed achieved a perfect 5-star ranking in the overall experience: Bank of America, Champion Mortgage, Citizens Bank, Dime Savings, eSmartLoan, Genisys Financial, LendNetwork.com, Soluna First, Synergy Federal Savings Bank, and Transouth. Dime, Citizens and LendNetwork tied for the best scores across all categories with 5-star rankings in 4 of 5 categories, and 4.5 stars in the final category.

Table 3

LendingTree’s Share of Total Loan Market

full-year 2000 figures

Source: LendingTree annual report, 5/01; market sizes sourced from Forrester

Table 4

LendingTree Variable Marketing Expense

Source: LendingTree, 5/01

Table 5

LendingTree Metrics

Source: LendingTree, 2000 annual report

1.)    Authentic loan applications that meet underwriting criteria for at least one lender; each loan request may be shipped to multiple lenders, but it only counts as one loan request in this total

2.)    Includes cross-sold credit cards, 65% of total closed loans in 2000, see Table 7, for results with credit cards removed

3.)    Does not include revenue from licensing the LendingTree platform (Lend-X)

4.)    Fixed and variable marketing costs

Table 6

LendingTree Pricing

Source: LendingTree price list and OBR assumptions                *Assumes 1 of every 5 transmittal closes, and each transmittal goes to 3 lenders, from the lender’s standpoint, resulting in 1 closed loan per 15 leads      **Actual network revenue divided by number of closed loans

Table 7

LendingTree Loan Originations by Type

Source: Online Banking Report, 5/01; from LendingTree earnings releases                ina = information not available

1)     Number of applications submitted regardless of credit quality

2)     Number of applications transmitted to one or more lending partners; prescreened to match lender’s criteria, but not guaranteed to be approved

3)     Number of applications that result in a closed loan (i.e. loan origination) at a LendingTree lender

4)     Static pool close rate incorporates the average time lag between the submission of a loan application and closure; 120 days for mortgages, 90 days for home equity, 60 days for auto/personal, and 30 days for credit cards

5)     Network revenues on the income statement is higher because we have excluded set-up fees, adaptive marketing fees, and realty service revenues

Definitions

Source: Online Banking Report, 11/00

We first wrote about loan marketplaces two years ago after an eye-opening conversation with LendingTree founder Doug Lebda at Fair Isaac’s 1998 Interact In that article, we recommended that banks take part in Mr. Lebda’s system, if only to learn how to originate loans online.

We still believe in that advice; in fact, we are going one step further in this Report. Lenders should not only participate in loan marketplaces as indirect lenders, but also should steer their own customers to loan marketplaces as part of an open lending initiative..

Since our mid-1998 report, loan marketplaces have received mixed results. On the consumer side, only LendingTree has been able to build a large following closing more than 200,000 loans in Q3 2000.¹ But those loans were driven in by brute spending, a strategy no longer supported by investors. The company’s YTD 2000 operating loss of $52 million (through 9 months), has many observers questioning the validity of the loan-auction business model itself.

We believe LendingTree has the right strategy. But, like many Internet companies, it must find more cost-effective ways to drive business. One important strategy, called Lend-X, is to work closely with financial institutions to deliver loans to the bank’s customer base.

¹The small business loan marketplace has several promising entrants including LiveCapital and PrimeStreet .

Table 1

Advantages of an Open Loan Platform

•          Maintain continued contact with the customer
•          Get to monitor the loan traffic: applications, offers, and closed loans
•          Access to customers’ personal financial statements (if they agree to share)
•          Potential to book more loans through increased traffic and credibility
•          Positive publicity and improvements to bank image
•          Reinforces bank’s role as primary financial provider, increasing account retention across all accounts
•          Referral fees on loans placed with others
•          Fewer outright declines equals happier customers and less customer-service expense
•          Sale of ancillary loan services, such as insurance, home warranties, credit reports, etc.
•          For mortgage applications, getting the first crack at the home equity loan
•          You can recommend a refi as soon as rates go down
•          Increased Web site traffic
•          Customers are happily surprised by the open platform and pass the word along
•          Better CRA performance by facilitating loans to a wider range of credit profiles

Table 2

Disadvantages of an Open Loan Platform

•          You’ve introduced your customers to the competition; if you have a poor value proposition, you’ll exacerbate the problems you already have
•          Inevitably, some lost loan deals
•          Customer confusion over the new process
•          Lack of control over the pricing and practices of competitive lenders
•          Customer service complexity in resolving problems associated with other lenders

Table 3

Advantages of Lending through an Online
Loan Marketplace

•          Incremental loans, loan fees, and loan outstandings
•          Potential to reduce acquisition costs
•          Can test new underwriting criteria
•          Can test new loan products (e.g., sub-prime)
•          Can test new geographic markets
•          Can test new market segments (e.g., lawyers)
•          A way to get started  lending online while building your own infrastructure
•          Determine how your lending price/performance compares to other bidders
•          Test the importance of price vs. other loan attributes: For example, if the other three bidders are offering mortgages for 7.25%, you could test whether buyers might pay 7.375% if you require a smaller down payment, bundle a home equity line of credit, and/or give them a free computer, etc.)
•          Low fixed costs

Table 4

Disadvantages of Lending through an Online Loan Marketplace

•          Lower margins on individual loans
•          Ultra-fast turnaround time is required on initial loan decision (measured in hours, not days)
•          Shared customer relationship
•          Shared control of the loan process
•          Competitors can better track your pricing
•          Competition from the loan marketplace or its partners for ancillary services: bill payment, credit bureau services, client-list rental, sales of aggregated applicant info, email refi alerts (e.g., telling your customers when to refi the loan you hold/service); could be mitigated with contractual arrangements
•          Compliance issues with the bidding process and timing of disclosures (most of these issues have been ironed out, but your compliance department may not necessarily agree with all business practices)
•          Privacy issues with shared applications
•          Resource shortages (capital, human, equipment) at the loan marketplace which is still focused on survival (could be mitigated with equity investment)
•          Customer service coordination and problem resolution
•          Corporate culture issues

LendingTree is the dominant consumer loan marketplace today, on a pace to book nearly
one million loans annually across its network of more than 115 lenders.

Table 5

the LendingTree process

1.        User completes an online loan application; a 15-to-30 minute process.

2.        LendingTree pulls a credit score and classifies the application from sub-prime to A+.

3.        LendingTree sends the application and credit score to up to four lenders interested in this type of loan. Lenders pay a few dollars for the privilege of bidding on the deal.

4.        Lenders do their own underwriting, including pulling complete credit bureau report(s). Note: All credit bureau inquires for secured loans/lines (home equity, mortgage, car) received during a 14-day period are counted as a single inquiry for the purpose of calculating subsequent credit scores. This is not the case for personal loans or credit cards.

5.        As soon as an hour later, lenders post loan offers on the LendingTree Web for viewing by the user. Users are notified when offers are made.

6.        User selects the offer they like best and works directly with the lender.

7.        Lender closes the loan using normal procedures and pays LendingTree several hundred dollars at closing.

Source: LendingTree, 11/00

Sizing the Web-based lending market is difficult:

•  The public pure Web-based lenders provide useful sales data, especially E-Loan, Mortgage.com, Finet (Table 4 to 6) and Lending Tree (Table 7 - 9); but they have relatively low share compared to traditional lenders who originate the majority of online loans but don’t usually report Internet volume separately.
•  Many loan applications are multi-channel; applicants may have surfed the Web for rates, then applied in person or by phone.
   

At year-end 1998, the total outstanding debt by U.S. households amounted to approximately $5.4 trillion (source: U.S. Federal Reserve). There were more than 21,000 financial institutions providing the credit (source: U.S. Census Bureau). Forrester Research projected that $1.9 trillion in new loans were originated during 1999, with $25.7 billion (1.3%) originated online. It expects the online share to grow to $168 billion (9.5% of total) by 2003 (Table 2), for a compounded annual growth rate of 60%.

Table 1

number in thousands, dollars in billions

OL %= percent of the dollar volume originated online            

¹Total originated on- and off-line

Table 2

billion $

Source: companies

Table 3

billions of dollars

Source: Piper Jaffray, 4/00

Table 4

billion $

Source: company reports and Piper Jaffray, 4/00

¹B2C share of total company volume

Table 5

Online Average Loan Size¹, 1999

Source: Piper Jaffray

¹Includes all types of consumer loans originated by the companies

²Average loan size fell due to acquisition of BofA’s Internet auto loan unit

Table 6

Online Acquisition Cost for Mortgages, Q1-Q3 1999

Source: Piper Jaffray

¹Includes home equity and sub-prime loans referred to other lenders

Lending Tree

Lending Tree first revealed its operating metrics in registration statements prior to going public Feb. 15. The company has continued to provide enough operating details to make it a good source for online lending trends.

In 1999 the company transmitted 186,000 loan applications (aka “qualification forms”) to its network of 104 lenders (Table 47). The total dollar volume transmitted was $16.2 billion. The average loan amount applied for was $88,000. More than 27,000 loans were closed amounting to $941 million in loans and lines. These results sound a little better than they really are because a substantial number of the loans (60% in Q1 2000) were credit cards cross-sold to applicants for other products (see Table 45 for a breakout in Q1 2000). Applicants earned rebates as high as $500 for taking the credit But even backing out credit cards, in Q1 2000, Lending Tree closed 7,500 loans for an annualized rate of 30,000 loans worth nearly $2 billion, a healthy amount of activity in a market sector barely two years old.

Lending Tree’s current tag line, “When banks compete you win,” strikes a chord with consumers.

Table 7

dollars in millions

Source: company, 5/00

¹Does not include 14,569 cards, $73 million in credit lines, and $232,000 in revenue cross-sold to other loan applicants

Table 8

Top Lending Tree Lenders* by Closed Loan $

Source: company, total lenders as of 3/31/00; top lenders for the month of Oct. 1999, based on loans closed

Table 9

¹Includes a large number of credit cards cross-sold to other loan applicants which earns the applicant a substantial rebate at closing; in Q1 2000 there were cross sales of 14,569 cards, $73 million in credit lines, and $232,000 in revenue (see Table 7); ²Excludes revenues from licensing its platform technology; ³ Does not include the cost of the sales staff

Table 10

unique monthly visitors (thousands)

Source:  PC Data Online www.pcdataonline.com ; Gomez Advisors Summer 2000 Mortgage Scorecard, rank of 26 total www.gomez.com ; 5/00          

 n.r.=not rated

First USA/Lending Tree

www.lendingtree.com

Lending Tree’s clever credit card promotion
with First USA pays up to $500.

First USA (Wilmington, DE; $69.5 billion; 46.1 million accounts with 59.1 million cards), the credit card division of Bank One, has teamed with privately held loan marketplace, Lending Tree (OBR 6/98), to offer a clever promotion. Lending Tree loan applicants earn up to $500 when their loan closes if they agree to take a credit card from First USA. To request the card, applicants simply check a box on their loan application. The card is a no-fee, 9.99% fixed rate (with 4-5 month 3.9% teaser) Platinum product similar to that used with Yahoo! (OBR 2/98), WingspanBank, and its own e-Card (OBR 11/98).

Loan Bonus Program

Source: Online Banking Report estimates, 7/99

1) Bonus on closed loans only; to claim, user sends credit card number, closing loan statement, and Lending Tree password to First USA.

2) Assumes First USA pays an estimated $125 per card acquired whether the bonus is claimed or not.

3) Estimated Lending Tree promotional cost per closed loan.

The program appears to be a real winner for both companies. From Lending Tree’s standpoint, it gets to advertise a $500 bonus with little out-of-pocket expense. We don’t know how much First USA is paying for the cards, but we would guess it’s in the $100 to $150 range, given the quality of the applicants, and the fact that First USA gets to evaluate an entire mortgage application when underwriting the loan. Since only closed loans can earn the rebate, and applicants must jump through hoops to claim it, we would estimate only half of the new cardholders actually are paid a bonus. That means the actual cost to Lending Tree is only $125 or so per booked mortgage, zero for home equity loans, and a small profit for each auto loan (see table above). Any way you cut it, it’s a whole lot less expensive than the $900 PC systems Microsoft HomeAdvisor was offering most of the summer (OBR 3/99).

It’s also a good arrangement for First USA as well. The card company picks up a few quality credit cards, but more importantly gets valuable marketing data on what type of customers are using Lending Tree, how they respond to the offer, and whether they end up using the card. All this info can be put to profitable use at First USA, and at its sister companies, WingspanBank and Bank One. Certainly, First USA and company must be weighing the pros and cons of getting into the loan marketplace business themselves.

Given the investments Bank One has made on portal deals, we are surprised they let Providian outbid them for GetSmart and its 750,000 visitors per month earlier this year (sold for a reported $30 million, OBR 2/99). Maybe they have their sites set on Lending Tree instead.

Contact: Douglas Lebda is Founder, (704) 541-5351.

It’s way too early to write the definitive history of credit cards on the Net,
but here are the leaders in the online movement (so far).

First USA launched an answer to NextCard, e.card, “E-Commerce Services from First USA.”

While E-Loan and NextCard have pioneered Web-based sales and marketing tools and techniques, First USA (Wilmington, DE; $65.2 billion; 60.5 million customers), a division of Bank One (Columbus, OH), through massive marketing expenditures, has captured the lion’s share of business online. The Brittain study found that First USA’s share of online buyers was three times higher than its nearest competitor, MBNA, which is advertising on 500 of the 4,500 Web sites hosted by its affinity partners. MBNA has experienced a 20% approval rate online.

First USA’s online reach is remarkable. One analyst estimates First USA will have more than 1.5 billion online advertising impressions next year. Besides co-branded efforts with Yahoo! launched in Feb. (OBR 2/98 ) and AOL (launched in June 1996; OBR 7/96 ), the card giant has a $90-million, five-year exclusive pact with Microsoft, and will likely be part of parent Bank One’s $125-million deal with Excite.

While the company has primarily relied on co-branded offerings to build its Web-based portfolio, the company has just released its own Net-branded product, the e.card (screenshot above). The card has a great name, although the ecard.com domain is currently owned by Internet Outfitters in Santa Monica (310) 664-4800. The card features a 5% cashback feature from Amazon.com and several other merchants including eToys. Initial rate is 3.9% and normal “go to” rate is 9.9%.

The First USA e.card site www.getecard.com is obviously a work in progress as it only includes three pages: home page (left), online application, and regulatory-required terms and conditions.

NextCard (San Francisco, CA) continues to lead the race to become the first Amazon.com of financial services. Through November, the company has received more than 750,000 applications. According to the company, approval percentages are, “consistent with industry averages.” The company’s animated “2.9%/Apply Now” banners are seemingly everywhere on the Net, not surprising considering the company is now a top-20 banner advertiser and has some 2,000 affiliates pitching its product for a $10 per approved application.

Bottom line, less than 9 months from start-up, NextCard
is pulling in more than 10% of total online credit card applications—a phenomenal performance considering its deep-pocketed competition. As a result, NextCard bagged an immense $38 million round of financing in Nov. from three blue chip Silicon Valley VC firms. The money will be used to continue the company’s aggressive online marketing efforts and capitalize an Internet banking operation. We wouldn’t be surprised if they simplified the process by purchasing an existing bank or thrift.

American Express (New York; 42.7 million cardholders) has clearly been the leader in online card services, first offering online account access in February 1995 via America Online (OBR 5/95 ) and the Web in April 1997. The company’s early 1995 AOL offering also included online card member and merchant account applications. The company was also the first to integrate value-added non-financial info, primarily travel-related, into its online presence (on AOL) in 1995 and on the Web in 1996 and 1997. Finally, and most significantly, industry sources unofficially peg AmEx’s registered online base at one million. 8

Source: Online Banking Report, 11/98

Portal Banner Advertising: 1998 vs. 1997

Abbreviations: AmCent = American Century; AmDebt = AmeriDebt www.mercuryseven.com CCC = Consolidated Credit Counseling Services www.debtfree.com CityLend = City Lending, a division of City National Bank of West Virginia www.citylending.com ConsInfo = ConsumerInfo.com; DataTransAssoc = Data Transfer Association www.evsistore.com MM Int’l = Money Management International www.mmintl.com Mtg Net = MortgageNetwork.com; Mtg Qte = MortgageQuote.com; Nations CC = NationsBank credit cards; Wells = Wells Fargo

Portals, previously referred to as search engines, are used by the majority of Web users (87% in one survey). Financial services companies have been advertising on these sites since they first accepted advertising in 1995. But even as recently as 12 months ago (see table right), less then half of the lending “inventory” was used. The times have changed. This month, we found 95% usage. Of thirteen loan-related search terms across the five largest portals, only three weren’t at least partially sponsored by financial companies (“auto loan on InfoSeek, “credit card” and “personal loan” on HotBot). If you factor in partial sponsorships, financial company share of the loan terms was 86%.

The most interesting result of this research: portal advertising is dominated by non-banks including mortgage brokers, Web-based loan marketplaces, and other specialty lenders. The day we tested, only two traditional financial institutions were advertising: NationsBank was pitching its card under “credit card” on Yahoo and Infoseek; while Wells Fargo was a partial sponsor of various “loan” phrases on HotBot (see table below).

*Number of loan terms with a financial services banner ad appearing
in at least one out of 10 searches of 13 loan terms at five portals
(65 total sponsorship opportunities)

**Taking into account partial (rotating) sponsorships of certain words, the actual financial services share of loan terms is 56.1 of a maximum 65 sponsorship opportunities, or 86%.

If this trend continues, it will have profound implications on Web-based lending. In this new world, it will be necessary to partner with one or more of the new loan marketplaces: The Lending Tree, Get Smart, Quicken Mortgage, iQualify, MortgageAuction.com , eStudentLoan.com , and others.

Lending Tree has a mellow and inviting front page with the consumer-friendly tag-line, “Apply in Minutes, Know within Hours.” It looks like a place offering genuine assistance, not simply trying to make a buck off page impressions.

On the right side of the screen is a customer testimonial followed by a table of features. In the lower righthand corner a scrolling “ticker” lists participating lenders, an important credibility builder.

Finally, the two calls-to-action at the bottom, “Start Looking for a Loan,” and “Check your Loan,” engage the target market immediately.

Lending Tree Participating Lenders

American Finance & Investment

Bann-Cor Mortgage

Eastern Mortgage

Greenpoint Mortgage

The Money Store

National City

Pacific Capital Mortgage

PNC Bank

YES Capital Funding

Zions Bank

Source: company, 6/30/98

Launch Date: Applications first taken February 18, 1998. The company was launched in 1996, originally operating under the name CreditSource USA.

End-User Cost: $0

Target Market: Consumers looking for vehicle loans, first mortgages, and/or second mortgages.

Lending Tree compares itself to online competitors.

How it Works:

1. User visits www.lendingtree.com .

2. User completes secure online loan application that takes less than 15 minutes according to the company.

3. Lending Tree pulls a credit score from TransUnion and classifies the application from sub-prime to A+.

4. Lending Tree sends the application and credit score to a maximum of four lenders interested in this type of loan. Lenders pay a few dollars for the privilege of bidding on the deal.

5. Lenders do their own underwriting, including pulling complete credit bureau report(s). Note: Fair, Isaac credit screening programs now use algorithms that classify these multiple credit bureau inquiries as a single inquiry for the purpose of calculating a credit score.

6. As quickly as an hour later, lenders contact the applicant by email and phone with credit offers. All offers are also posted on the Lending Tree Web where users can log in with a password to evaluate all offers side by side.

7. User selects the deal they like the best and proceeds to closing.

8. Lender closes the loan using normal procedures and pays Lending Tree several hundred dollars at closing.

Financial Institution Cost: Initial license fee in the $10,000 range; several dollars each time they bid on a deal; several hundred dollars when the loan closes.

Financial Institution Pros:

•  Incremental loans, loan fees and loan outstandings.
•  Potential to reduce acquisition costs.
•  Can test new underwriting criteria.
•  Can test new loan products (e.g., sub-prime).
•  Can test new geographic markets.
•  Can test new market segments (e.g., lawyers).
•  A way to get started in online lending while building an infrastructure to take applications on your own Web.
•  Determine how your lending price/performance compares to other bidders.
•  Test ways to attract borrowers other than price. For example, if the other three bidders are offering mortgages for 7.25%, you could test whether buyers might pay 7.375% if you require a smaller down payment, bundle a home equity line of credit, and/or give them a free computer, etc.)
•  Low fixed costs.
•  Lending Tree is operated and directed by ex-bankers familiar with regulatory, compliance, and operational issues faced by lenders.

Financial Institutions Cons:

•  Cutthroat competition in speed and price..
•  Requires ultra-fast turnaround time on initial loan decision (measured in hours not days).
•  Diminishes the value of your band name, at least in terms of commanding a premium price based on name alone.
•  Must share the customer relationship.
•  Must share control of the loan process.
•  Competitors can track your price versus underwriting criteria.
•  Lending Tree could eventually move up the value chain by offering bill payment, credit bureau services, renting their client list, selling the aggregated info on applicants, email refi alerts (e.g., telling your customers when to refi the loan you hold/service); could be mitigated with contractual arrangements.
•  Compliance issues with the bidding process and timing of disclosures (Lending Tree says they have these figured out, but your attorney may not agree).
•  Privacy issues with shared applications.
•  Financial resources of Lending Tree (realize they are still thinking “burn rate,” e.g. survival, when you are focused on increasing earnings/revenue); could be mitigated with equity investment/ commitment.

The Latest Developments:

•  Creating a co-branded loan center at GeoCities.
•  Expected to become a featured lender on Infoseek in July.

Tools & Advice relies heavily on calculators and worksheets licensed from SmartCalc.

Analysis: On paper anyway, the concept sounds intriguing. The company reports a 65% approval rate and a 25% close rate on approved applications, e.g. 16% of applications close. That’s a good indication they are attracting a stellar applicant pool. But they have several significant challenges ahead:

• Creating a trusted brand name and environment where users feel comfortable submitting private info. Once there are dozens, even hundreds of loan marketplaces established, users will gravitate toward the biggest “names.” The company should
  
  beef up its online info on privacy, security and other credibility-builders (see NextCard, OBR 5/98).
• Creating enough traffic to feed their lenders a meaningful volume of loans. Long-term, lenders won’t bother mastering the nuances of a proprietary framework unless they can count on significant loan volume. Again, as competition increases, lenders will only deal with sites that can deliver significant loan volumes such as GetSmart or Quicken.com.
• Keeping enough lenders in the fold to maintain a realistic bidding process (as more lenders create good direct lending capabilities they may be less interested in sharing revenues and customers with Lending Tree). For a while, the company must maintain a delicate balance, feeding enough volume to each lender to keep them interested, and bringing in new lenders to beef up the overall program.
• Making sure lenders are playing fair. Any auction will quickly disintegrate if there is the slightest perception that the process is rigged or tilted in favor of one or more bidders.
• Keeping fraud/nuisance apps to a minimum. Lenders should be spared from dealing with worthless applications.
• Resisting the temptation to compete with its lender partners for ancillary services such as credit report sales, bill payment, etc.

Despite all the cautions, we like what the company is doing. We had an opportunity to visit with company founder and President Doug Lebda recently in San Francisco and came away impressed with the company’s direction. They have assembled a savvy group of board members and advisors that should provide the needed direction. The biggest challenge is gaining mindshare in the burgeoning market for online loans.

Whether Lending Tree can take it to the next level depends on a lot of factors we can’t fully evaluate. However, we have little doubt the business model is a winner. Financial institutions should consider participating in one or more loan marketplaces as a learning exercise if nothing else.

Contacts:

Robert G. Wilson is CEO; James Bennett is Co-founder and VP Marketing & Business Development; Richard Stiegler is CTO; Donald Colby is COO; Douglas Lebda is Founder and President at
(704) 541-5351.