Fifth Third Bank/ApplePie Capital Deal Great, But Bank Deals For Many Other Business Lenders Still a Pie in the SkyDecember 13, 2016
Fifth Third Bank is buying a stake in franchise marketplace lender ApplePie Capital as part of a $16.5 million venture round, the WSJ reported. The prediction that non-banks are evolving into banks is slowly coming true, but will the trend in the commercial space continue?
Consider that ApplePie has only made 120 loans over the last two years, a small piece of pie compared to a company like CAN Capital which has made nearly 200,000 loans and advances since inception. But ApplePie and CAN are not competitors, nor is ApplePie really like the rest of the industry that has long proclaimed that banks can’t profitably make small business loans under $250,000 or lend to borrowers with poor credit history. Instead, ApplePie’s model, terms and customers have always had a common synergy with banks, $420k loans (on average) for up to 7 years to franchise owners at 8.62% APR (on average) and 750 FICO (on average). It’s a borrower profile that has literally resulted in zero defaults for ApplePie so far, though it’s still early days. Business owners can get term-sheets in 5 days and funding in approximately 30 days. Sounds mighty bankish to me.
ApplePie’s loans are even issued by a New Jersey State chartered commercial bank, Cross River Bank. But ApplePie is the platform, using technology to draw attention to franchise owners in need of financing, streamlining the process and providing a way for investors to participate in the deals. Denise Thomas, the company’s CEO and co-founder told the WSJ that banks’ costs are now too high to make $420,000 loans. That might be true but one wonders if such loans should be done over such a long period of time and at such low rates, especially considering that their borrowers are not asked to put up any personal collateral.
Another lender that tried their hand at prime small business borrowers closed their doors last month. In an op-ed penned by Candace Klein of the now defunct Dealstruck, she said of moving away from the mid-prime borrower to prime, “yields began to tighten. Lenders stopped making a profit and backend capital began to question whether there was a ‘there’ there after all.”
But whereas Dealstruck was constrained by their cost of capital, a bank could potentially make it work. One pitfall that ApplePie has however is limited time in business. It’s easy to claim no defaults on loans with 70 month terms (on average) when you have only been business for two years. Even still, it’s not hard to see why a bank would be interested in their particular model. The vast majority of non-bank small business funding companies operate in a totally different universe, with smaller loans, poorer credit, shorter terms and faster service. These are the ones typically associated with fintech, seeing as they have been able to make tens of thousands or hundreds of thousands of loans in a short amount of time. If that market was as easy as pie though, banks probably would’ve forged more partnerships by now.
SBA ‘SmackDown’ In Linda McMahon, As Pick for Administrator Brings More WWE to Small Business FundingDecember 8, 2016
President-Elect Trump’s pick to head the Small Business Administration is Linda McMahon, the former CEO of World Wrestling Entertainment (WWE). The publicly-traded company has produced many household names over the years, from The Undertaker to Bret “The Hitman” Hart to The Rock.
In a public announcement, Trump said “Linda has a tremendous background and is widely recognized as one of the country’s top female executives advising businesses around the globe. She helped grow WWE from a modest 13-person operation to a publicly traded global enterprise with more than 800 employees in offices worldwide.”
If confirmed by the Senate, McMahon will succeed Maria Contreras-Sweet, who has held the position since 2014 and has had a pretty open attitude about online lenders. The former WWE exec taking her place might find even more common ground with the non-bank finance community given that Bret the Hitman Hart is the official spokesperson for a merchant cash advance company.
Sharpshooter Funding in Canada, which heavily features Hart in their marketing campaigns, is affiliated with First Down Funding, a US-company that also does small business funding. A joint-company press release from earlier this year quotes Hart as saying, “When you sit down and listen to the whole format and how it provides money to much needed businesses and small business owners that need financial support and extra funding. It’s a worthwhile endeavor, and I’m actually very grateful that Paul Pitcher involved me with it so far.”
Meanwhile, McMahon says she is up to the task. “Our small businesses are the largest source of job creation in our country,” she said in an announcement. “I am honored to join the incredibly impressive economic team that President-elect Trump has assembled to ensure that we promote our country’s small businesses and help them grow and thrive.”
LendingMania might be just around the corner in 2017.
Update 11/30 7:30 pm: CAN says they are still open for business and still providing access to capital for current customers and renewal business. They are not actively seeking new business at this time, but will evaluate it as it comes in.
Part II of the industry’s season finale has begun. On Tuesday afternoon, CAN Capital confirmed that CEO Dan DeMeo had been put on a leave of absence. The chief risk officer and chief financial officer have also reportedly stepped down. Parris Sanz, the company’s chief legal officer, is now running the company, a CAN spokesperson said. His new title, acting head (which is how their statement referred to him), is perhaps a subtle clue that the company did not plan these moves far in advance. And it’s the phrasing that’s used to describe the departure of these executives that’s worth raising an eyebrow. A leave of absence? A curious fate indeed.
In an exclusive interview deBanked conducted with DeMeo last year, he said of CAN at the time, “it’s a self-sustaining business. We’re not forced to approach the capital market to cover our burn rate. We’re cash-flow positive.”
But more recently, there’s a different tone. A spokesperson for CAN said that the company had “self-identified that some assets were not performing as expected and that there was a need for process improvements in collections.” The sudden decapitation of the company’s top officers seems a harsh consequence for this apparent underperformance, especially given that CAN has long been on the short-list as a potential IPO candidate. DeMeo himself had been with the company since 2010, having started originally as the CFO and rising to the CEO position in 2013.
While CAN Capital is a private company, they are notable in that they have originated more than $6 billion in funding to small businesses since 1998 and secured a $650 million credit facility led by Wells Fargo just last year.
Some of CAN’s ISOs report being told that originations have been put on hold until January. A source with close knowledge of the company however, said that’s not correct. The Financial Times reported though that CAN had paused new business until the end of the year and would only be servicing current customers. And they might indeed need time to upgrade their systems since American Banker cited an unnamed source that said “problems arose when CAN Capital used old systems, which were not designed to require daily repayments, to collect money owed by term loan borrowers.”
Some outsiders are not surprised by what’s going. Alex Gemici, the chief revenue officer of World Business Lenders (WBL), said that it’s an indicator that uncollateralized lending is not the panacea everyone thought it was. “What we’ve been saying all along is right there on deBanked,” Gemici said, while directing me to the prediction they made a year ago that appears right on this website. At a December 2015 event at the Waldorf Astoria, WBL CEO Doug Naidus told a crowd comprised mostly of his company’s employees that he believed the bubble was about to burst. He doubled down on that prophecy in an interview four months ago in which he chided companies for having forsaken sound underwriting.
Is he right? In the last six months, the CEOs of Lending Club, Prosper and CAN Capital have all stepped down. Avant shed a lot of its staff. Dealstruck, Circleback Lending and Windset Capital have stopped funding. Confidence in the business side of alternative finance has also started to slip on a measurable basis before the election even happened.
“I believe companies are experiencing higher than normal losses due to a serious lack of proper underwriting practices, policies, and procedures,” said Andrew Hernandez, a managing partner at Central Diligence Group, a company that specializes in risk analysis who wasn’t commenting about any lender specifically. “As I say to people not familiar with the space, ‘putting the money out is the easy side of the business; getting it back is what proves to be the most difficult.'”
But CAN has not specifically fingered underwriting practices as the reason for their management shakeup, instead leaning towards it being a lapse in their process as the company grew. “It became clear that our business has grown and evolved faster than some of our internal processes,” they said in their statement.
The only alternative business lender funding more annually is OnDeck, a company that has garnered its fair share of criticism over its lackluster financial performance. Their stock is currently down a whopping 77% from the IPO price, but they have put on a good face for the industry they lead. The familiarity of their famous CEO and the decade in business under their belt arguably even has a calming effect on the tumultuous world of financial technology startups.
OnDeck too though, has been referenced in the context of bursting bubbles. Less than two years ago, RapidAdvance chairman Jeremy Brown voiced concern that the industry was heading into unsustainable territory, even going so far as to call out OnDeck by name. “When I see some of the business practices, offers, terms and other aspects of our business today, I am worried,” he wrote. “I am worried because I believe that 2008 has been too quickly forgotten, and very few, other than those of us that were on the front lines on the funding side at that time, appreciate what happened to outstanding portfolios at that time when average duration was 6 months and no deals were written over 8 months.”
For risk experts like Hernandez of Central Diligence Group, he thinks the newness of everything has been part of the problem. “I believe [funding companies] have faced a big hurdle in acquiring talent,” he said while adding that funding companies can be forced to hire underwriters with no prior knowledge of the product just to keep up with the growth.
While still very little is known about what exactly happened at CAN Capital, most people that deBanked spoke with were shocked that anything could happen there at all. “It’s insane,” said the chief executive of another competitor who wished to remain anonymous. “This is CAN we’re talking about.”
A sign of the times?
It’s Here: Artificial Intelligence Changes MCA Broker’s Business, Improves Bank Underwriting and Debt CollectionNovember 22, 2016
In this age of man versus the machine, the case for artificial intelligence and machine learning does not need many vociferous advocates.
Some predict that revenues from fintech startups using AI and predictive models is set to jump by 960 percent or to $17 billion by 2021. We might be closer to that number than we think, considering 140+ AI startups raised a total of $958M in funding in Q3’16, alone.
While healthcare, cybersecurity and advertising are frontiers of AI innovation, the growth and momentum of big data in finance (spurred by online lending) is fast bringing fintech to the forefront. In lending, specifically, data has become the new currency. It’s not so much that lenders didn’t use data for decision making earlier, but the data available then, wasn’t as rich or as extensive. A loan approval decision that just required a decent FICO score and assessment of character has expanded to include data points like a business’ social media presence, reviews, and owners’ background history.
Today, artificial intelligence in fintech has grown to tackle cybersecurity threats, act as a personal assistant, track credit scores and perform sentiment analysis to predict risk — making automated underwriting just the tip of the iceberg for what artificial intelligence and machine learning can do for the financial services industry. deBanked spoke to three fintech upstarts that have taken AI beyond underwriting.
When Roman Vinfield started his ISO, Assure Funding in early 2015 with 16 openers, five chasers and three closers, little did he know that a business intelligence software would replace 85 percent of his staff for the same productivity. He stumbled onto Conversica, a AI-powered virtual sales assistant and was convinced to give it a try.
“I hadn’t heard anything like an artificial-intelligence sales assistant,” said Vinfield. “The results we got within a month of using it were unbelievable.” Within the first month, Vinfield made $35,000 in revenues by spending just $4,000 and eventually reduced his staff of 24 to 4 people. He was so sold on its potential for the merchant cash advance industry that after prolonged negotiations, he secured the rights to be the exclusive reseller of the software, and called it AI Assist. The software is now used by leading MCA companies like Yellowstone, Bizbloom and GRP Funding.
While Conversica’s clientele includes auto and tech giants like Oracle, Fiat, Chrysler and IBM, for the financial services industry, it’s marketed and sold to MCA and lending companies through AI Assist. It integrates easily with CRM software like Salesforce and creates a virtual sales assistant avatar that tracks old leads and reestablishes engagement. In the lead generation race, where a 3-5 percent response rate could be considered good, the response rate for Conversica has been 38 percent.
Designed to be akin to a human sales assistant, Conversica’s technology can determine a lead’s interest based on the response and set up a conversation with the sales department to follow up. “Your Conversica virtual assistant is an extremely consistent, personable and tireless worker. She doesn’t get sick and never needs a break. She never gets discouraged, and she improves with each engagement,” says the AI Assist website.
Personal chat assistants for money management and sales is one of the popular modes of AI implementation in fintech, given it’s scalability in lending for functions like debt collection. One company that does this, is True Accord. True Accord, similar to AI Assist uses automation software to schedule and send messages to customers by the company’s “Automated Staff”
The San Francisco-based company was founded by Ohad Samet who has over 11 years of machine learning experience in finance. The idea came to Samet while he was working as a chief risk officer at payments and e-commerce company Klarna, underwriting loans worth $2 billion. “While working at Klarna, I realized how big a piece debt collection is and I did not like the way it was done,” said Samet. “I needed machine learning to change it.”
Samet founded True Accord in 2013 to develop a debt collection AI assistant and today the company works with leading banks, credit card companies and food delivery services and has collected over half a billion dollars. It establishes targeted communication with the customer less frequently than traditional collection agencies and allows customers to pay their dues over mobile, which accounts for 35 percent of collections for the company.
“We humans don’t want to accept it but the reality is that, when it comes to scale, machines make better decisions than humans,” said Samet. “Machines are consistent, they are not tired, not angry, don’t fight with the significant other and all of this makes for better accuracy, better cost structure and better returns of scale.” While this might be true, building an efficient, compatible and compliant model is harder than it might seem.
Since AI tools do not come in a one-size-fits-all package, its application can be as varied as the range of companies that use it. Building an AI framework that aligns with a company’s targets while being compliant to regulatory mandates can be an uphill task.
Recognizing this opportunity, James.Finance, a Portugal-based startup is using artificial intelligence to help financial institutions like banks build their own credit scoring models. Founder and CEO Pedro Fonseca, describes James as a “narrow AI” for a specific purpose of guiding risk officers to build machine learning models that follow regulatory compliance.
The startup works with consulting agencies or partners to reach out to banks. It offers a trial run of the software, which it calls a ‘jumpstart,’ where a risk officer is provided with James’ technology and in 24 hours, he or she will have to beat it with their in-house AI software.
“And we are consistently able to beat the models,” said Fonseca. The company won the startup pitch at Money 20/20 in Copenhagen earlier this year after receiving an uproarious response in Europe. Fonseca wants to divert his attention to the US’s fragmented banking market, which is dotted with smaller banks and credit unions. “The US is a perfect target for us. We are looking to work with local consultancies that know the problems of a bank intimately.”
As these entrepreneurs vouch for it, the current state of AI use in fintech is just the tip of the iceberg. And anything man can do, machines can do faster and better, right?
It’s not very often that an infant upstart comes by and swoops up an erstwhile industry leader.
While new to the scene, Versara Lending is a New York City-based debt consolidation lender that has already acquired Peerform, one of the early P2P lending marketplaces run by Wall Street credit broker Mikael Rapaport. The company confirmed that it is not an acqui-hire and that Peerform’s entire operation will be merged and be operated by Versara. Rapaport also changed his LinkedIn profile to reflect another new position – SVP of lending markets at Strategic Financial Solutions, a NYC-based financial consultancy firm, which appears to be related to Versara.
Versara only lends in seven states including Arizona, Florida, Georgia, Missouri, North Carolina, New Mexico, and Utah. In contrast, Peerform was founded six years ago, as Lendfolio by Rapaport and other Wall Street execs, Meytal Benichou and Elie Galam. The company raised $5.3 million in funding since inception and its proprietary Loan Analyzer tool matched borrowers with lenders on its platform who funded personal loans up to $25,000.
“We are committed to continue the growth we’ve experienced since we started the company in 2010,” said Rapaport, Founder and CEO of Peerform, in a statement. “In order to realize our potential, it was important for us to build a strong strategic partnership. By joining Versara, we will be able to combine our resources to scale quickly to compete effectively in the consumer lending industry.”
Once a posterboy for P2P lending, Peerform now is emblematic of the churn in the industry. At its launch, Peerform was ready to compete with Lending Club and Prosper head on, backed by institutional investors, thanks to the founders’ investment banking pedigree. The company’s platform started by offering personal loans to borrowers with a FICO score of above 660 for a three-year term. But after failing to gain critical mass, it reinvented its underwriting algorithm with its loan analyzer tool to lend to riskier borrowers (FICO scores <600).
“At this early stage it is difficult to tell whether Peerform will become a strong alternative to Lending Club and Prosper. But their timing is far better now,” Peter Renton wrote in a blogpost on LendAcademy in 2014.
Two years hence, Lending Club has taken several lumps, Prosper’s prospects are in question and in a David and Goliath-esque scenario, once touted to be an industry leader, Peerform hands off its reins to a startup.
Loan investors will have to wait even longer to find out if the resignation of Prosper’s chief executive on Monday holds special significance. That’s because on Tuesday the company informed the SEC that they would be filing their 3rd quarter results late. They were unable to complete the report in a timely manner, according to the filing, “without unreasonable effort or expense due to a delay experienced by the Registrants in completing its financial statements and other disclosures in the Quarterly Report relating to a recent arbitration decision.”
Jay Antenen, the Senior Editor for DealReporter, said on twitter that the arbitration reference has to do with “the early 2013 loan purchase agreement Prosper signed with Colchis.” According to a brief Antenen published with Eleanor Duncan on Debtwire, “Under that deal, Colchis gained the right to see Prosper’s origination pipeline and bid for loans at no disadvantage to other investors on the platform.” Apparently, there may be some tension between Colchis and new investors.
This all belies the fact that Prosper’s previous quarter produced a gut-wrenching $35.5 million loss on just $28 million in revenue. They had $14 million in expenses just from restructuring related to their downsizing and layoffs which included the closing of their Salt Lake City office and the termination of 167 employees. Their first quarter of the year yielded a $17 million loss on $56.5 million in revenue.
On Monday, the company’s CFO, David Kimball, was promoted to CEO to take over Aaron Vermut’s role. Vermut will remain on the company’s board.
For years, the CFPB has rejected all calls by republicans (and even some democrats) to reconfigure its one-director leadership to a multi-member commission. At present, Director Richard Cordray has full authority to create the rules and enforce the rules and reports to no one, not even the President of the United States. As the only executive agency with significant authority to operate in this manner, critics have become increasingly worried the CFPB might abuse its power. And just last month, the agency was accused to have actually done so.
In PHH Corp. v. CFPB, the CFPB was alleged to have made legal errors in their enforcement action against a mortgage lender, but more to the point, that the CFPB itself was unconstitutional. The United States Court of Appeals for the District of Columbia Circuit agreed in part, ruling the agency’s structure unconstitutional. The agency was ordered to cure the defect either by conceding its directorship to a multi-member commission or making its leader report directly to the President of the United States.
But the CFPB has refused to comply, arguing shortly thereafter in another case that the “decision was wrongly decided and is not likely to withstand further review,” amplifying fears that the agency had gone rogue and potentially become drunk with power.
Cordray, who has tried to assure critics that his agenda is merely meat and potatoes, now faces a new challenge, a Republican president and a Republican-controlled Congress, who may see this as their only opportunity to rein him in.
According to Bloomberg, sources contend that the CFPB’s and Democrats’ previous unwillingness to concede anything at all, now puts the entire agency itself in jeopardy. Cordray himself is at great risk of losing his job, the Huffington Post asserts.
Already there is chatter of firing Cordray on Trump’s first day in office either for cause as Dodd-Frank allows for, or simply at his own discretion, as the Appeals Court ruled would be acceptable.
Has the CFPB erred all this time?
A recent disappointing New York trial court decision concerning merchant cash advances has been making the rounds over the past few weeks and a few industry players have been asking if there is cause to be concerned. While the case will likely have little precedential value, it should serve as a reminder to all funders and ISOs in the industry to invest resources where they matter; on employee education, contract review, legal representation, and customer service.
Failures or breakdowns in these areas can lead to consequential events. With so many products being offered in the marketplace to small business owners today, it is of great importance to be educated on what they all are and how they work. Sales reps, underwriters, and other staff should know what’s in the language of the contracts and be able to articulate it accordingly.
A starting point, of course, is getting your certificate in Merchant Cash Advance Basics, the online tutorial that covers the differences between the purchases of future sales and loans. It is worthwhile even for industry veterans to take considering how much MCAs have evolved over the years.
We’ve also got a list of several industry attorneys on our website, none of whom pay to be there.
Of note for contracts and legal compliance is Hudson Cook, LLP, who actually created the MCA Basics course.
Of note for litigation concerning the validity or enforcement of contracts in New York courts, is Christopher Murray of Giuliano McDonnell and Perrone, LLP, whose experience includes the VIP Limo case and several others.
It helps to have a system in place to try and resolve conflicts with merchants before they escalate. But that job is made far easier when the contractual expectations of all parties is understood from the beginning.
What’s the takeaway from a case that has gone wrong? That you should work hard to do everything right.
OnDeck traded below $4 on Friday, a new all-time low that came in the wake of the company’s earnings announcement just the day before. Apparently, the company’s record-breaking $613 million in quarterly originations was not the assurance that investors were looking for.
Their report showed that more of the company’s loans are staying on their balance sheet and notably, there’s been an increase in the percentage of loans sourced from brokers. 27% of the dollars originated in Q3 came from brokers versus only 24.5% during the same period last year. Meanwhile, the raw number of loans originated by brokers is up from 18.6% to 20.2% in Q3 year-over-year. These are still substantially lower than previous years. For instance, brokers originated 41.4% of dollars in 2014, 56.54% in 2013 and 75.1% in 2012.
OnDeck refers to brokers as “funding advisors” in their reports, with company CEO Noah Breslow noting that this channel has grown 40% year-over-year, almost twice as fast as their direct and strategic channels. Analysts took note and Brian Fitzgerald from Jefferies asked why this was occurring on the morning call. Breslow responded by saying that it wasn’t due to any intentional reallocation of resources among the channels.
“So at any given quarter you may see a push/pull on the relative growth rates of the channel but I would say that we’re not sort of allocating resources or dollars between channels and the channels really are competing for resources internally. So I think the dynamic in funding advisors frankly, is a positive. We took that channel down last year, we did a pretty aggressive recertification. So we’re working with a lot fewer partners than we did a while back and on the flip side, those partners are higher quality and we’re seeing better originations now from them; and we’ve really optimized our conversion rates with a number of those partners. So we feel we feel pretty good about that.”
Also discussed on the call was OnDeck’s partnership with Barbara Corcoran, in which it was said that the company is sending out direct mail using her name and likeness to promote the company. Her TV commercials have already been making the rounds.
And just as signing on Shark Tank stars as partners probably doesn’t come cheap, Breslow suggested that the industry competition had really been narrowed down to the players who had already made hundreds of millions of dollars in loans.
“I think it’s fair to say that the very early stage start-ups or the subscale players are increasingly having a little bit more trouble competing, so we are seeing the preponderance of some of the marketing activity coming from folks who are a little bit larger in scale. And my sense is that continues and that’s going to consistent with the overall trends that people have seen. So the folks who are buying marketing at this point are folks who have loaned hundreds of millions of dollars as opposed to tens of millions of dollars, and I think the VC environment for these types of companies remains pretty challenging.”
As the year draws to a close sending everyone into a dizzying holiday frenzy, funders are prepared to fire on all cylinders to fuel their retail customers with cash.
The last quarter is crunch time for funders alike, who start preparing months in advance — designing new products, marketing and selling them. deBanked spoke to a few to find out what business looks like at this time of the year and what’s in store for 2017.
For some, Christmas comes in August
At South Dakota-based Expansion Capital Group, the holiday prep started as early as August. “We think demand is going to be very strong and to accommodate for it, we started 60 days early,” said Marc Helman, director of strategic partnerships. The company launched four new products in August for a wide spectrum of borrowers — longer term products for existing customers and starter offers for new companies and those with challenged credit.
Since the demand peak is cyclical, most funders who have been around a while have the drill down to a science. For NYC-based funder Hunter Caroline, demand spikes up close to the tax extension period, in September and October. “We sit down with our marketing team, see which clients ramp up this time of the year and focus our sales efforts in that direction,” said Cody Roth, managing partner at Hunter Caroline. During the holiday season the company turns its attention to customers in mom and pop retail, restaurants, liquor stores and gift stores in small towns.
“We weigh a lot into seasonal businesses and have certain hybrid programs,” Roth said. “We collect a little bit more during the busy season and keep it down during the slow time.” For this year specifically, the two-year-old firm is pushing invoice factoring, purchase order financing and unsecured loan products apart from its usual business loan offering of up to $4 million for 24 months.
Plan, pilot, pivot
Q4 is also the time when companies plan and strategize for the year ahead. And for loan marketplace Bizfi, a lot of changes are in the offing. The company appointed John Donovan, a 30-year veteran in the payments and alternative finance industry as its new CEO. And while on track to approach nearly $600 million of fundings this year, Bizfi also decided to cut ties with some non-performing ISOs to increase efficiency. “We just told around a hundred sales offices we could not do business with them anymore to use resources for our own funding channels that have better conversion rates,” said Stephen Sheinbaum, founder and president of Bizfi.
The holiday season is arguably one of the busiest times of the year for merchants, but it doesn’t have to be so for funders. Jason Reddish, CEO of New Jersey-based Total Merchant Resources advises all his clients to take the money when they don’t need it, asking clients to borrow early, put away the money and by November, have the capital pay for itself through the peak season. “The oldest problem with credit is that you get as much as you want when you don’t need it,” Reddish remarked. “You have access to cheap and the most flexible money when you don’t need it.”
The company tries to structure deals that way for some of its retail clients who see high holiday demand.“We see a pretty big spike going into the holidays and then there is a holiday hangover where they are absorbing all the money they borrowed,” Reddish remarked. “Until the hangover wears off in February and we get busy again.”
All things considered, funders are on their marks for the holiday. Will it be bright for them?
It’s not about replacing banks, it’s about making financial services more accessible, said Square CEO Jack Dorsey in regards to what his company and others in the fintech space are doing. During his fireside chat-style address at Money2020, he bemoaned chipped card transactions for being so slow while defending their decision to go public when they did.
“It took us a long time to get [transaction times] down to under five seconds,” Dorsey said. Their goal is to get it down to 3 seconds, which is 7 seconds faster than today’s industry average. The payments CEO who is also the CEO of twitter, appeared to empathize with consumers on long wait times with chipped cards. People aren’t happy,” he said. “It’s really, really, really slow.” While more security is good, he argued that it has to be complemented by a frictionless experience for consumers.
Square Capital, their lending division, was hardly mentioned during his time on stage, which seemed more a consequence of his time allotment than its relative importance. The company funded $189 million to their small business customers in the second quarter. “Our goal is to make sure we’re helping our sellers grow,” Dorsey said. “As they grow, we grow.”
When asked if the timing of their IPO last November was the right choice, Dorsey said that going public should be viewed as an enabler, not the goal. “It’s an investment vehicle,” he argued while standing by their decision. Notably, compared to OnDeck and Lending Club, Square is the only one of the bunch to be currently trading above its IPO price. The stock recently closed at $11.15, up 24% from their $9 IPO on November 19, 2015.
The Lending Club that presented at Money2020 this week was not the same Lending Club of years past. Not only is keynote speaker Scott Sanborn a different kind of CEO than his predecessor Renaud Laplanche but also the regulatory environment in which he must govern has changed. In the era of government interest, Sanborn told a huge conference audience that the company thinks about two things, regulation and downturn readiness. In that regard, they sounded very much like a bank.
But there was good news too. “I remain very bullish about the future,” Sanborn said. That’s in part because the company announced earlier that they were entering the $1 trillion auto finance market with a refinancing product.
What’s noteworthy is that auto refinance borrowers will pay no origination fees to Lending Club, a stunning departure from the 1% – 6% origination fees charged on their personal loans. One can’t help but wonder if that move was a response to new competition, namely Marcus (operated by Goldman Sachs), whose new personal lending platform charges no-late-fees, no-origination-fees, nor any fees at all outside of interest charges. While Marcus is not offering auto loan refinances in their initial rollout, Lending Club may be using this market to try and master the no-origination-fee model to compete against Goldman Sachs and any other new bank entrants in the future on every playing field.
At Money2020, Lendio CEO Brock Blake shared a joke that was made backstage about OnDeck’s CEO, Noah Breslow. “He’s the senior citizen of the industry,” he told a public audience, which referred to how long OnDeck has been around. It’s a label that Breslow lightheartedly embraced on an SMB lending panel he participated in on Tuesday morning.
Just a day earlier, deBanked met with executives from OnDeck, including Breslow to speak among other things, a collaborative initiative to codify business loan disclosures. APRs are among one metric they have recently agreed to display on their contracts, though in fairness they already did that on their line-of-credit product and on all of their loan products in Canada, the company asserted. While they don’t expect it will necessarily increase or reduce borrower interest, they believe that it may help a prospect make comparisons in what has become an increasingly competitive, yet fragmented market. “The use-case for the borrower isn’t changing,” Breslow said.
OnDeck will remain focused on small businesses as the customer and there are no plans to venture into mortgages or student loans like several of their counterparts in consumer lending. There’s also no plans to follow SoFi and integrate a dating feature into their mobile app. Instead their mobile app offers a frictionless experience for their existing line-of-credit customers to draw funds or make payments.
The JPMorgan Chase-OnDeck partnership is still in the “initial rollout,” according to Breslow, despite the deal being announced almost a year ago. Metrics such as the number of loans originated through the arrangement have not been disclosed, but for the record, it’s restricted to customers that are applying for a loan online, not those applying in person at a Chase branch.
On the SMB lending panel, Breslow and others asserted that their initiative to be more transparent is not about encouraging business lending to be regulated like consumer lending. “If we regulate commercial lending more like consumer, ultimately less capital is going to flow, when the goal should be to get more capital to flow,” he said. Wise words from an industry senior citizen.