Overstock’s Banking Play: Point-of-Sale Lending

Retailer Overstock.com announced it is getting into the financial services business with the launch of its FinanceHub. Tearsheet reported that FinanceHub is:

"A sort of marketplace for financial services that includes existing Overstock credit cards and insurance products; loans by LendingTree, Prosper and Sofi; and a robo-adviser for automated investing. The platform and Overstock's  broader financial services strategy is nothing more than a natural extension of the company’s retail function, buying and selling consumer goods, according to Raj Karkara, Overstock’s vice president of loyalty and financial services."

Tearsheet quotes Karkara as saying:

“It’s all about providing the best value to the consumer: best in class products and experiences. The experience part is something that traditional financial institutions haven’t focused on but they’re turning that around now. Consumers don’t want to sit and sign 50 documents, they just want to go online and get through the steps they need to take to move forward.”

With 40 million unique visitors each month, the reality is that there is no such thing as "best in class" that applies to a segment of consumers that large and undifferentiated. And his comment about consumers not wanting to sit and sign 50 documents reminds me of something that bankers know all too well: There is nothing easier in the world of banking than lending money--the hard part is getting it back. There's a reason there are 50 documents to sign, you know.

The news in American Banker regarding Overstock's robo-advisor plans raised some eyebrows here at Cornerstone. According to Cornerstone Senior Director Joel Pruis:

"While it's smart of Overstock to focus its robo-advisor strategy on women, and on taking an automated approach to provide advice to a large group with smaller relative dollars, there are some problems with the strategy. Robo-advice requires a level of understanding of investing, risks, and what can happen in the market. Users that blindly follow the robo advice in a 2-day market down turn like the one just experienced will likely get scared, dump their stocks, and then scream at their iPhones about how they just lost $X,XXX listening to that Robot. After they sell everything, how likely are they to go back the next day and listen to Mr. Roboto to see what would have happened if they had just stuck with it?"

Platformification

And what about the FinanceHub concept? The strategy is a great example of a platform business model (for more on this see The Platformification of Banking white paper, which you can download for free here). In a business context, there are many definitions of a platform business. Here's my favorite, from a site called Platform Strategy:

“A platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create and exchange value.”

There are three important components of that definition: 1) Business model--first and foremost, a platform is a type of business model; 2) Plug-and-play--a platform must enable participants to easily engage—and disengage (which partnerships typically don't); and 3) Create/exchange value--one plus one has to equal more than two, or there's no need for the platform.

In order to successfully execute a platform strategy, a company must:

  1. Become a magnet. Without the ability to attract a meaningful number of the "right" participants, a platform cannot succeed. Simply having a lot of producers and consumers is no guarantee of success. The platform must attract the right producers (those with the most desirable products and services) and the right consumers (those with whom the producers in the platform want to do business).
  2. Act as a matchmaker. A platform requires a mechanism for matching consumers to the right producers, and for enabling producers to reach the right consumers who come to the platform. At its most basic level, a search engine can be a matchmaking mechanism.
  3. Offer a toolkit. The toolkit is what enables producers (and consumers) to easily plug-and-play. This is why Application Programming Interfaces (APIs) are so critical to firms pursuing platform strategies.

Is Overstock a platform?

It certainly is a consumer magnet. Too many wannabe platforms think that's all it takes. They're wrong. They have to be a magnet and attract many other providers. A few one-off partnerships does not constitute a winning platform. That's not a platform--it's a distribution deal.

Is it a matchmaker? Interestingly, the screen shot shown on the Tearsheet site makes it look like Overstock does matchmaking:

But that's Lending Tree's matchmaking capabilities, not Overstock's. There's no better example of a platform with strong matchmaking capabilities than Amazon. And they're able to do it because of the data they have, and their ability to use it and deploy it. Does Overstock have the same ability? I don't know.

And does Overstock have the toolkit? Can it seamlessly integrate the participants (producers and consumers) on it platform? I seriously doubt it. Mr. Karakara can chide the banking industry for a poor user experience, but I doubt Overstock has a better solution.

The Real So What? to Overstock's Financial Services Strategy

Regardless of Overstock's chances for success in financial services, there is something about its strategy that bankers should be paying close (and closer) attention to: The prospect of point-of-sale lending. According to Forrester Research:

"Digital point-of-sale lending has emerged as a new category of lending to help consumers finance new spending and to help merchants reduce basket abandonment. By partnering with merchants and embracing digital technologies, disruptors like Affirm, Bread, and Klarna are competing directly with credit cards and store cards to provide customers with quick and easy short-term credit at the checkout. Digital business strategy executives should read this report to learn about the leading digital point-of-sale lenders, assess their disruptive potential, and understand how to outsmart them."

Affirm, founded by ex-PayPal founder Max Levchin, works with borrowers under 35, and has already shipped its solution to 850+ offline sellers and more than 10 big e-commerce platforms. And within six months of launching in April 2015, LoanHero made thousands of loans to prime, mid-prime and sub-prime consumers, all in a controlled rollout to five states and a select group of 100 merchant partner locations. The firm was acquired last month by LendingPoint.

Ron Shevlin
Director of Research
Cornerstone Advisors

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