Business Analysis: Earnest

Several months ago, I was interested in working for Earnest, a startup that offers lower-cost student loans for students who may not have great credit, but have high earnings potential.  I didn’t know anybody at the company, and didn’t want my resume to go into a black hole, so I instead wrote up product report on them, and gifted it to one of the product managers.

It didn’t work – they were looking for more technical PMs.  However, it got me a great conversation.  Several months have passed since then, so I’d like to share this with the world.

Here’s what I did:

  1. I conducted interviews with recent graduates and current students who are Earnest‘s target demographic:
    • I gathered data on brand awareness among current students.
    • I asked recent graduates to test out and walk me through their use of Earnest vs. their current loan servicer.
  2. Using the data I gathered along with my own research, I created a short product analysis of Earnest, highlighting its current challenges of offering competitive interest rates, providing usable tools for understanding debt and making payments, and expanding its brand awareness.
  3. I’ve outlined several proposed solutions to each of the challenges outlined above.

Product Strategy Overview:
Earnest’s end goal is to build a bank of the future.  Earnest differentiates itself because most of its competitors are building a traditional bank, but online – using the same credit scores, services, and paradigms that banks have traditionally used.

In comparison, Earnest is focusing on building a profitable core business by focusing on student loan refinancing.  Once a strong product is built, Earnest can build strong brand loyalty among new graduates, and leverage that trust to slowly build out and define what a bank of the future should look like.

Earnest’s Challenges:
At its current stage, Earnest is building  a core business by cherry picking its customers – customers whose trustworthiness is higher than what their current credit score would reflect, customers whose lifetime value is expected to skyrocket as they grow in their careers.  To acquire these customers, Earnest needs to focus on three areas:

1) Interest rates
2) Tools for repayment and understanding debt
3) Brand awareness

User / Product Research Process:
To evaluate how Earnest is doing on these three fronts, I conducted two studies:

1) First, I interviewed ten recent graduates around the USA who would be ideal customers – advanced degrees, jobs at blue-chip companies like Microsoft, and financially sound.  Ten is not a statistically significant sample size, but I treated this as a focus group.  I asked each interviewee to walk me through their existing student loan servicer tools, to try to use the Earnest interface, and then used non-leading questions to get their feedback.

2) Second, I conducted a survey of 40-odd people around both the CCSF and SFSU, asking questions about both Earnest brand awareness and financial literacy.


The Results:
1. Interest Rates
Overall, Earnest’s interest rates were on par with their current servicers.  There would sometimes be a large spread between Earnest’s rates and the existing rates on the student loans (up to 500 basis points higher), but most interviewees had an option to refinance their student loans through their existing servicer, for rates generally within 50 basis points of Earnest’s offered rates.

However, two of the interviewees also noted that they were talking with a local credit union, having been offered rates 50 basis points below Earnest’s rates.

2. Tools for repayment and understanding debt
Earnest is the clear winner.  When talking to each interviewee, a common thread was dissatisfaction with the tools and interfaces provided by their current servicer.  Common complaints included:
– Inability or difficulty in scheduling automatic payments, especially if loans had already been partly repaid ahead of schedule.
– Lack of transparency in understanding the accumulation of interest, or even how much is immediately due.
– Difficulty in actually making payments, especially when dealing with multiple student loans.

In contrast, the interviewees generally liked Earnest’s landing screen interface, though:
– After calculating an initial rate from Earnest, it’s not obvious that the user can adjust the loan amount and resubmit.  This function would be very useful if the user has multiple loans, and only wants to refinance those whose interest rate is higher than Earnest’s rates.
– Asking the interviewees to actually sign up and test out the payments tool was beyond the bounds of this study, so I have no feedback on that.

3. Brand awareness and financial literacy
Earnest has somewhat low brand recognition (~5% of surveyed students knew Earnest).  Overall student loan financial literacy was also quite low (~20% knew their interest rates, knew when they would have to start repaying, or understood current market rates).  This is a large weakness of Earnest, but also a large opportunity, explained below.

Proposed Solutions:
1) Interest Rates
Earnest strives to use a lot of data to figure out what are the best rates it can offer, using hundreds of data points, but is it currently using all this data in its initial calculations?  Specifically, the company must keep its landing page simple to not scare away potential customers, but after the basic biographical and financial data has been entered, is there any other data that Earnest could use to lower rates even further?  If so, what about a message along the lines of “Our instant calculation offers you a rate of 4.75%, but we might be able to offer you additional savings of down to 4.00% if enter in your driving record”?

As a non-technical PM who excels at digging into data to make data-driven decisions, this is an area I’m quite interested in, but unfortunately Earnest’s algorithms and back-end are not currently transparent to me, so I’m unable to offer more suggestions.

2. Tools for repayment and understanding debt
Earnest is already doing much better than many of its peers in offering usable tools, but I have two suggestions for improvement:

– It’s crucial for Earnest to have a simple landing page, to give a quick tease of low refinancing rates and get clients to sign up, so is there any way to make it easier for users to volunteer their information, perhaps through an integration with other services and tools such as Mint?  This would serve the dual purpose of both making it easier for users to sign up, and pulling in even more data points to offer a more precise rate.

– As noted earlier, multi-loan support is not great; if the user has multiple loans, and Earnest’s rate lies between the user’s existing rates, it’s currently not intuitive that users should only refinance some of their loans.

3. Brand awareness and financial literacy
This is a growing industry segment, so there is massive room for growth.  Specifically, not only do most graduating students not know about Earnest, but they also don’t know much about student loans or how to handle their post-graduation finances.  Hence, there’s an opportunity for Earnest to educate graduating students.  A pilot program might partner up with local colleges, and offer an hour-long Introduction to Financial Literacy guest talk – with, of course, a quick plug for Earnest.  This would not only increase brand awareness and lead to potential new signups, but also increase brand prestige and start building the foundations of a “Bank of the Future”.  In time, this lecture would have to be converted into something more scalable and requiring less boots on the ground.

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