Precision Pricing: A Matter of Time
Three years ago, we rolled out Earnest to a close-knit group of friends and family. From day one in alpha, our team set out to deliver a fundamentally different, more inclusive system for lending money and repaying loans. We believed the old system was (and still is) opaque and mis-aligned with customers’ best interests.
Our idea was to build a financial institution that blends smart technology and design to deliver significantly more value to people everywhere — and that means saving you money. We wanted to create a product that empowers people to easily make payments that fit their budgets at any given time. We also wanted to collect honest, critical product feedback from our first group of clients that we could implement for the benefit of our next million.
In this first group of alpha clients, a friend of mine, a doctor, asked why there wasn’t an option to repay loans based on her own specific budget. Like a lot of us, she budgets in round numbers — like for example putting aside $850 a month for her student loans instead of the awkward $837.27 minimum balance lenders typically charge. The reason lenders reach those overly specific amounts is because they start with the loan term — like 5, 10, or 15 years — and then find a monthly payment to match the term. But, my friend wondered why they couldn’t just flip it the other way around? Why was it so hard to let her pay the exact amount she wanted to budget each month?
She had a phenomenal point. Why wasn’t this normal practice? More strikingly, why was no one offering it?
Within a week of that conversation, a data scientist on our team came up with the answer and we brought it to life over the next few months: Precision Pricing. The concept-made-reality is a customized and optimized repayment tool that generates loan terms tailored to each individual’s budget. That means, depending on how much a person can (or wants) to pay each month, we give them the repayment schedule and interest rate to match. Over time, our clients only pay for as long as they need to — think 9 years and 3 months, instead of a full decade — and they save even more money by paying an interest rate that matches their term.
This is personal for me. After encountering first-hand America’s $1.4 trillion student debt problem when I was financing my own graduate education, I recognized that traditional lending practices are part of the problem. It motivated me to found Earnest. I’m incredibly proud of the flexibility we’ve introduced to the lending world. I’m even more proud of the fact that Precision Pricing has played a role in helping Earnest clients save an estimated $300 million over the lives of their loans.
A few weeks ago, we decided to quantify the impact Precision Pricing could have on the entire U.S. student debt community. What we found was pretty amazing. If applied to all Americans with outstanding government and private student loans today, Precision Pricing could save people roughly $10.5B — money that could be applied to college debt, or converted into additional retirement savings. I believe it’s only a matter of time until this becomes reality and we’re doing everything we can to lead by example. In the meantime, we as Americans need to push our financial institutions to adopt innovative practices, like Precision Pricing, that empower millions of people in debt to get out of it faster.
After all, taking-longer-than-expected is common business practice for traditional banks and lenders. But consumers shouldn’t have to accept that many financial institutions still use tired, paper-based formulas and ask customers to fax piles of documents to complete transactions. I can’t speak for you, but I don’t have a fax machine. People shouldn’t have to accept that outdated processes and products still reign supreme in finance. I don’t.
But, the future looks promising.
Goldman Sachs’ new Marcus product marks the first time a traditional lender has emulated us to offer Precision Pricing. A global financial giant and seasoned lender no less. One that understands the importance of evolving to the realities of a technology-focused future. Their adoption of Precision Pricing-inspired tech also provides market validation that Earnest is onto something big, similar to Microsoft’s recent entry behind Slack in the work messaging world.
In fact, Earnest is doing for financial services what Amazon did for ecommerce. We’re a full stack, vertically integrated startup creating and scaling technology that offers consistent value by reducing friction and costs for consumers. One that makes the most of software automation, data science, customer feedback and design to shake up the norms of a stale industry.
Earnest got there first by inventing individualized lending technology and building Precision Pricing from scratch. We engineered a hyper-personalized tool for individuals, not a bucketed group of nameless account holders, because we believe the future of finance is built on products and services that efficiently deliver value to customers while saving money and time for everyone. I’m proud of what it has enabled for our customers — control over payment schedules and access to money saving opportunities — and I’m confident its use will continue to spread and will be the technology that forces the industry into a new era of client-centric practices.