Articles by Sean Murray

No, Social Media isn’t the New Credit Score

The “social media is the new FICO score” crowd suffered a blow on Wednesday when a Wall Street Journal article reported that it ain’t working too good.

Almost 3 years ago, Kabbage co-founder Marc Gorlin told CNN that small businesses who link up their facebook and twitter accounts up with their system, were 20% less likely to be delinquent on their loans. Around that time, Hong Kong-based Lenddo was heralding other positive claims about the value of social media. In the loans they made in Colombia and the Philippines for example, Slate reported that “they scrutinized the applicants’ connections on Facebook and Twitter and that the key to getting a successful loan from Lenddo was having a handful of highly trusted individuals in your social networks.”

For a time, non-bank lenders were saying that social media was the future of credit. That is until it wasn’t.

The WSJ recently reported that lenders are backing away from social media data because it’s becoming harder to tap into and because of the potential regulatory consequences under fair credit laws. Just last month for example, the FTC published a report titled, Big Data, A Tool for Inclusion or Exclusion? In it, the FTC warned that “if a company targets services to consumers who communicate through an application or social media, they may be neglecting populations that are not as tech-savvy.” The implication is that there is potential for unconscious and unintended discrimination of certain minority groups. “Systemic disparate treatment occurs when an entity engages in a pattern or practice of differential treatment on a prohibited basis. In some cases, the unlawful differential treatment could be based on big data analytics.”

But even then, companies like Kabbage have seemingly softened their stance on the value of social media anyway. “Who your social circle is, or whether you play ‘Mafia Wars’—we haven’t seen that as very valuable,” Kabbage CEO Rob Frohwein said to the WSJ.

Facebook is restricting the depth of data available to third parties now anyway. As a result, dozens of startups (not just lenders) that had been using Facebook data have shut down, according to the WSJ.

Lenders like OnDeck might not be surprised by the industry’s sudden realization. Two years ago at LendIt 2014, company CEO Noah Breslow said you have to be careful with the noise of social media as there can be a lot of false signals. And RapidAdvance COO Joe Looney was already telling CNBC three years ago that his company was “not going to make a decision based solely on a string of online comments on a social-media site” even though they would consider the mere presence of an active social-media footprint to be a “good sign.”

It looks like the future of credit scoring isn’t likely to be social media any time soon. All hail the fundamentals.

OnDeck Regains Their Swagger in Q4 Earnings Call – Lends $1.9 Billion in 2015

OnDeck’s chief executive Noah Breslow and chief financial officer Howard Katzenberg brimmed with confidence in their Q4 earnings call, assuring investors that it’s full steam ahead. After two previous quarters of profitability and getting no love from the market for it, they’re back to doing what they know best, growing.

OnDeck loaned a record $557 million in Q4, an increase of 51% year-over-year. Despite market fears of an impending economic downturn, the company is just not seeing signs of the alleged doom in the performance of their loans. “We are not seeing weakness in our portfolio at this time,” Breslow said.

Later in the call they reemphasized that their early warning systems are not setting off any alarms. In fact, they said, origination growth is their main goal in 2016. “We currently believe we can grow annual originations by 45% to 50% in 2016,” Katzenberg said.

OnDeck reminded investors that their unique model is specifically built for economic downturns. Among their strengths are their short duration, pricing spreads and daily payments, they said. Those attributes (which are sometimes criticized by consumer groups today) will serve as the backbone of sustainability if the economy goes south.

Also coming back into the fold are outside brokers, which they refer to as “Funding Advisors.” OnDeck spent a lot of time recertifying those relationships in 2015 and the bulk of the effort associated with that is over, they said. The percentage of loans generated from brokers rose from 18.6% in Q3 to 20.1% in Q4.

They also rebuffed speculation that they were giving up their business model in favor of becoming a bank technology service. While they admitted finding value in the partnerships they’ve formed, particularly with JPMorgan Chase, their core business is and will continue to be lending to small businesses. According to Katzenberg, 2016 will have two key objectives however, “One, launching and refining our pilot program with Chase, and two, continuing to build out our infrastructure to add and support additional partners that understand the small business capital assets problem and are willing to invest in a great customer experience.” They expect to see bank service revenues really begin to scale in 2017 and 2018.

Breslow said in regards to the Chase deal, “Chase will be able to offer almost real-time approvals in the same or next day funding a dramatic improvement over a traditional loan process that might take weeks. Chase will hold the loans, which will be priced like bank products on their balance sheet and OnDeck will earn servicing and platform fees based on volume.”

Their 15+ Day Delinquency ratio was down.

Their partnerships with Minor League Baseball and Barbara Corcoran have been very successful.

They lent $1.9 billion in 2015 across the U.S., Canada, and Australia.

OnDeck Loans Record $557 million in Q4, But Reports $4.6 Million Loss

OnDeck funded a record $557 million in Q4 2015, generating $67.6 million in revenue. That came at a cost because they reported a $4.6 million GAAP net loss.

All told however, they loaned $1.9 billion to small businesses in the U.S., Canada and Australia for the full year of 2015.

A record $201.9 million of loans were sold through OnDeck Marketplace® in Q4.

Provision for loan losses during the fourth quarter of 2015 decreased to $20.0 million, down from $20.4 million in the comparable prior year period. The Provision Rate in the fourth quarter of 2015 was 5.6% compared to 6.7% in the comparable prior year period.

OnDeck was up nearly 5% for the day in the hours before earnings were reported. The company has regained some public favor after a partnership with JPMorgan Chase was announced in December. Still, critics have pointed out that the company’s last few positive quarters were dependent on their ability to sell existing loans off their balance sheet to book the necessary revenue to show a profit.

OnDeck has seemingly now returned to their original plan, growth over profits.

In Q3, origination growth had slowed. They reported a profit of $3.7 million on $482 million worth of loans originated. During that quarter, reliance on third party brokers slowed, dipping to 18.6% of their deal flow, but OnDeck CEO Noah Breslow hinted that they may have reached a floor in that ratio. That channel could stabilize and even grow a little bit, he said.

Q4 indeed saw a resurgence to 20.1% from the brokers.

The effectiveness of direct mail marketing was hotly debated in the 2015 Q2 Q&A, but seemed to have relaxed in Q3.

OnDeck’s share price was still down by more than 50% from their IPO, a factor that has potentially contributed to the postponement of other online lending IPOs.