Industry News
Brief: New York’s Attempt to Over-Regulate Lenders Downgraded to Doubtful
March 14, 2017
The Governor’s budget bill has encountered resistance up in Albany, sources say, specifically Part EE that aimed to amend New York’s banking law and impose sweeping licensing restrictions on all types of lending and finance. Analysts felt that the language could have vast unintended consequences beyond just online lenders, including factoring, commercial lenders and brokers, merchant cash advance and the securitization markets.
The passage of this proposal now looks doubtful. The Assembly, one of two branches of the State’s legislature, introduced their own version of the budget on March 13th and removed the language.
“The Assembly rejects the Executive proposal granting DFS regulatory authority over any online lenders doing business in New York State,” the bill says. Notably, they also rejected “the Executive proposal to authorize enforcement of Insurance, Banking, and Financial Services Law against unlicensed individual or businesses, including bringing a civil action.”
The Senate echoed same. “The Senate denies the Executive proposal to authorize the Superintendent of the Department of Financial Services to expand the regulation of small loan lenders,” their bill states.
Industry trade groups, namely the Commercial Finance Coalition (CFC), had mobilized quickly to tell their members’ stories up in Albany two weeks ago. One of the group’s concerns was that they had not been consulted in advance, nor given any time to engage in a discussion about the proposal.
“They should allow all the stakeholders to have their voices heard,” said Dan Gans, CFC’s executive director. With the proposal’s chances of making it through the final budget by the March 31st deadline waning, the group and others may finally get an opportunity to do just that at some point later in 2017. According to The CFC, they are looking for additional companies to support them in that endeavor. Anyone interested in finding out how they can help should contact Dan Gans at dgans@polariswdc.com.
Brief: Former CAN Capital CFO Moves On
March 9, 2017According to the WSJ, Aman Verjee, who was CAN Capital’s CFO up until late last year, has taken the COO position at 500 Startups. The company has invested in more than 1,800 startups across more than 60 countries. According to the website, “500 Startups was founded in 2010 by former PayPal and Google alumni Dave McClure and Christine Tsai, along with many other friends and supporters.”
CAN Capital has not yet named a replacement CFO.
Letter From the Editor – Jan/Feb 2017
March 4, 2017When deBanked first launched online in 2010, I thought it was too late, that perhaps all the exciting changes in alternative finance had already taken place and that aside from a few obsessed geeks, there wasn’t that big of an audience to write for. It certainly felt a bit out-of-style, especially since I had been working in the industry for more than four years by that point. The only publication that was dedicated to the scene at the time had already come in to the public eye and vanished. Many alternative financial companies had met the same fate, thanks to the financial crisis.
In a way, deBanked started off as a post-apocalyptic diary, an accounting of the industry’s survivors and their roles in the new world order. Primitive, my reporting may have been then, but interest quickly grew. By mid-2011, I was already forced to change web hosts to keep the website from slowing down. In my day job as a commercial finance broker, I continued to talk to small business owners all the over the country about a common theme, that banks just weren’t lending. And maybe they never would again, some predicted anyway. Or maybe the way loans were made in general would just never be the same.
Looking back among my old 2011 stories, I discovered that I had written a personalized review of Square’s payment technology and had given it high marks. Back then however, I saw Square as a payments toy. It was innovative and sexy, but unrelated to lending. Fast-forward to 2016 and Square’s capabilities have expanded. I should know, they funded my business exactly five years after my review. In this issue, I’ll walk you through what it was like to play the role of borrower, and put marketplace lending up to the ultimate test. Thanks to Square Capital, my journey has come full circle or more appropriately, full square.
This issue is the first of 2017. For alternative finance, it fortuitously feels like the beginning, not the end. If our descendants far in the future stumble upon these stories, I pray they will enjoy our accounts of the transformation, when entrepreneurs dared to look at the world in front of them and boldly decided to change it. It was the early 21st century, historians will say, when mankind dared to de-bank and change everything we knew about finance. In the here and now, you are a part of it all…
Letter From The Editor – Mar/Apr 2017
March 1, 2017Out of the many lenders and marketplaces that reported their 2016 earnings in the last month, several didn’t look so good. If algorithms and branchless-finance was supposed to make lending so much more efficient, why is it that so many online lenders are struggling to make a pro t?
As it would turn out, banks were not as doomed or as outdated as the technologists characterized them to be. Their cost of capital and brand name recognition (for most of them anyway) is proving very tough to compete with. In this issue we explore the latest trend, the drift back towards banking. That doesn’t mean that we are returning to a purely bank-dominated lending universe, however. On the contrary, it’s mainly the prime borrower market that banks are working to service better. There’s an entire segment out there for which bank financing is not the answer, at least not yet, and there’s plenty of exciting events taking place.
For small business owners, some still want a relationship with the person helping them obtain capital, they just want it in a different way. In the last few months, we spoke with several professionals who attest to having a text-based relationship with their clients, as in they communicate back and forth through their phones over text.
When I first heard about this, I assumed it had to be a one-off. “Wait, your applicants text you for updates with the underwriting process?” I asked a sales representative who seemed stunned that I would think that was odd. After a quick poll of other salespeople at a conference, the truth became clear to me. If you don’t attempt to have a text relationship with your clients, you might be at a disadvantage. In this issue, we explore why that might be.
And on that note, RU ready 4 this issue? Cuz I g2g so ttyl. Thx. 
–Sean Murray
Square Capital Made More Loans, Maintained Default Percentage, Continued to Show Why They’re A Tough Competitor in Fintech Loan Market
February 22, 2017Square has continued to set itself apart in the fintech lending space. The company announced Wednesday that Square Capital had facilitated 40,000 business loans for a total of $248 million in the fourth quarter of 2016. And they did that while holding their default rate at 4%.
A look at their recent loan volume compared to their competitor OnDeck:
| 2016 | Square | OnDeck |
| Q1 | $153,000,000 | $570,000,000 |
| Q2 | $189,000,000 | $590,000,000 |
| Q3 | $208,000,000 | $613,000,000 |
| Q4 | $248,000,000 | $632,000,000 |
Square Capital’s biggest competitive advantage is that they have practically no acquisition cost for their borrowers. “We’re able to upsell and cross-sell to our base of millions of sellers with minimal incremental cost,” Square’s Q4 earnings presentation says. Their payment’s customers, which they can convert to borrowers, processed around $50 billion in transactions last year.
Square had a net loss of $171.6 million across 2016 however, the bulk of which originated in the first quarter. The net loss for Q4 was only $15 million.
Prospa, Now Valued at $235 Million, is a Major Online Small Business Lender
February 22, 2017
Online small business lending in Australia is taking off, especially for Sydney-based Prospa, who according to the Australian Financial Review, has slightly more than half of the industry’s market share. The company just announced a $25 million (AUD) equity round led by AirTree Ventures that pegged Prospa’s value at $235 million (AUD).
Prospa is significant in that it received early support from US-based Strategic Funding, the same company that just absorbed the US operations of Capify. A 2013 press release said that Strategic would be providing the technology for the electronic servicing, underwriting and cash management of all Prospa Advance accounts in Australia in addition to jointly funding all the merchant cash advances and loans they originated. Sources say however that the arrangement is no longer in effect.
In September 2015, The Carlyle Group, one of the largest private equity firms in the world, participated in a $60 million round for the company. Prospa has now funded more than $250 million to small businesses since inception.
“The market in Australia has been very ripe for alternative finance,” Prospa co-CEO Beau Bertoli said to deBanked about 18 months ago. “We see an opportunity for the alternative finance segment to be more dominant in Australia than it is in America.”
The Australian Financial Review cites Bertoli as more recently saying that the market there could grow to at least $20 billion in the next five years.
Similar to offers in the US, Prospa lends between $5,000 to $250,000 for loans up to one year.
Layoffs, Big Losses for OnDeck in Q4
February 16, 2017
OnDeck weathered a brutal fourth quarter driven largely by an increase in provision for loan losses which increased to $55.7 million, up from $20.0 million in the comparable prior year period. $18.7 million of this can be attributed to loans with original maturities of 15 months or longer whose performance has deviated or is expected to deviate, the company said. “As a result, the Provision Rate in the fourth quarter of 2016 was 10.2% compared to 5.6% in the comparable prior year period,” the company reported. For the full year of 2016, the Provision Rate was 7.4%, compared to 5.8% in 2015. CFO Howard Katzenberg said on the earnings call that it will likely continue to hover at around the 7% level.
The company lost $36.5 million in Q4 and $86.5 million for the year.
To try and turn things around, OnDeck is laying off up to 11% of their staff as part of a “cost rationalization plan.”
James Hobson, their COO, recently announced his resignation and March 15th is his last official day.
On the earnings call, Katzenberg wouldn’t say how many loans in their portfolio were 15 months or longer, but did say that it’s more than a third of their book. This is notable given that this segment is the one in which performance isn’t matching their models and led to the recalibration of loss expectations.
Meanwhile CEO Noah Breslow explained that losses did not stem from their partnership with Chase since Chase held all those loans on their own balance sheet. Breslow said their role in that relationship is servicing.
No origination channel was directly responsible for the loss provision increase. One analyst surmised if perhaps third party brokers or funding advisors, as OnDeck calls them, might be responsible, but the company said that origination channel wasn’t a factor.
Despite the fact that OnDeck is now using the 5th generation of their proprietary OnDeck Score, they were unable to predict performance on loans that now make up more than a third of their portfolio, yet the company said they remain very confident in their scoring model.
“Loans sold or designated as held for sale through OnDeck Marketplace represented 15.8% of term loan originations in the fourth quarter of 2016 compared to 39.8% of term loan originations in the comparable prior year period,” the company reported.
Lending Club Reveals Q4 Figures, $146 Million Loss for the Year
February 15, 2017
The year that shook the industry ended six weeks ago but the total damage wrought is just now coming out. Lending Club lost $146 million in 2016, $32 million of which can be attributed to Q4. But it didn’t end all that badly according to CEO Scott Sanborn.
On the earnings call he said, “our attention was focused on rebalancing our funding mix, a key step to bolster our resiliency and enable a return to growth. We set a target to help our bank partners close out their rigorous diligence, so that they could return to scale. I’m pleased to say that our efforts have paid off as not only are all of our key bank investors back buying on the platform, but we’ve also welcomed multiple new bank partners over the last few months.”
And so they’re feeling quite optimistic. “It’s an exciting time for Lending Club and I look forward to beginning the next phase of our growth,” Sanborn concluded before turning the call over to new CFO Tom Casey.
Casey went on to predict that the company would lose another $69 million to $84 million in 2017, with nearly half of that expected to be generated in the first quarter of this year.
In brighter news, the company celebrated the 10th year anniversary of their first loan and surpassed more than $25 billion in loans since inception. With close to 2 million customers-to-date, that would mean that nearly 1% of the adult population in the US has had a Lending Club loan.
Less than 10% of their loan volume is comprised of education and patient finance loans, small business loans, and small business lines of credit, according to their report.
