Loans

Goldman Sachs Unveils Online Lending Venture, Marcus

Updated: Goldman Sachs’ online lending venture Marcus launched on Thursday.

The investment bank had earlier planned to call it ‘Mosaic’ and its aimed at borrowers with high credit scores (above 660) looking to consolidate debt.

Notably, it’s invite-only for now, meaning the only people who can apply are those who receive a special code from them in the mail. Might that potentially be Lending Club’s customers?

The bank is coming out swinging by promoting their no-late-fee, no-origination-fee, no-fee-of-any-kind-outside-of-interest-charges platform, something no marketplace lender can compete with.

Goldman has been laying the groundwork for Marcus since the beginning of the year. The bank made several key hires for the project including former Consumer Financial Protection Bureau attorney, Mitch Hochberg who was roped in to head compliance for the unit. The venture will be lead by Harit Talwar, former head of card services at Discover Financial and executives from American Express and Lending Club.

As deBanked commented earlier, Goldman’s foray in the crowded online lending universe could be too little, too late with a me-too product. It’s quickly-processed consumer loans might have to compete not only with incumbents like Lending Club, Prosper Loans and Avant but also with other bigger banks like Discover and Chase.

This Startup Wants to Turn Student Lending to Student Investing

What if colleges sold education like a service you could pay for based on the value you receive?

The state of student debt begs for alternatives and there is a growing consensus that education should be a tool for employment, and deriving monetary value be based on outcomes. Virginia-based Vemo Education is hoping to convert that thought into a market. The startup provides income-based financial solutions to colleges and universities.

While a crop of alternative student loan lenders like Commonbond and SoFi attract borrowers with cheaper loans and refinancing options, Vemo’s promise is to begin at the start with pricing college better. It is one of the few companies to offer income share agreements to students via colleges. Income Share Agreements (ISA), as the name suggests is a financial instrument where an individual pays a percentage of income for a fixed number of years instead of paying the sticker price of tuition upfront. “When colleges choose to price tuition as a percentage of future income to graduates, the way college is priced changes,” said CEO Tonio DeSerrento.

The concept was first propounded by economist Milton Freidman in his 1955 essay called ‘The Role of Government in Education,’ in which he described ISAs as an ‘equity investment’ in a person’s future, making the lender an investor. He wrote, “Investors could ‘buy’ a share in an individual’s earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings.”

Sounds kind of similar to a merchant cash advance, doesn’t it? It sort of is. ISAs do not have interest rates either, but they do have a time-bound repayment contract, a feature unlike MCA. An individual agrees to pay a fixed percentage of income over a prescribed amount of time irrespective of the principal amount. That means the total cost remains uncertain until it’s fully paid.

The idea is to reduce the risk of a college education by focusing on employment rather than the process of education, which might be more valuable in reducing the barrier to entry and the risk associated with defaults. It also encourages students from picking nontraditional areas to study instead of popular lucrative fields. ISAs also have room for income exemptions where a student does not owe anything below a certain income. And that is what differentiates the 11-month-old startup from a SoFi or a Commonbond, according to DeSerrento, who is actually SoFi’s former deputy general counsel. “CommonBond and SoFi come into the picture after a student has graduated and employed and they help winners of that make more money,” he said. “By the time SoFi comes in, college is already paid for and the value they can add is as a cheaper substitute for federal loans.”

Vemo is led by a bunch of folks with industry experience, including some that have worked at Sallie Mae. The company’s first client was Purdue University which launched the first ISA initiative in the country. Its ISA fund, ‘Back A Boiler,’ will supplement federal loans and private student loans.  According to its terms, juniors and seniors are eligible for loans starting at $5,000 factoring in expected future income to be repaid over nine years. Vemo also works with for-profit colleges like coding bootcamps where employment is the end goal. “We work with coding bootcamps where 100 percent of the tuition is paid through vemo as a percentage of their incomes,” he said. “They owe nothing unless they graduate and get a job and tuition price is unknown until you get a job.”

ISAs are different from loans but not always for the better. While ISAs appear to be less discriminatory, whether the legal framework of anti-discriminatory laws apply to ISAs, is to be determined. Secondly, lack of transparency in pricing could fluctuate payments and since repayment is bound by time, one could potentially end up overpaying for a degree. Consumer protection laws around ISAs are also unclear at this time. Seth Frotman, student loan ombudsman for the Consumer Financial Protection Bureau warned that unknown upfront costs make it imprecise and difficult to understand the risks involved with such an instrument. Moreover, since repayment is based on income, there is also a fear of ‘creaming’ the best students from elite colleges.

In April 2009, US Senator Marco Rubio proposed a bill titled ‘Investing in Student Success Act’ to institutionalize ISAs as an alternative to student loans. That legislation remains in limbo. But DeSerrento isn’t waiting. Since Vemo’s clients are mostly colleges, his concern with the bill only goes so far as to make ISAs legitimate.

Vemo is venture backed by Fast forward, GS2, University Ventures and Learn Capital who invested $2 million in seed funding last year.

Online Consumer Lenders Stumble, While Online Business Lenders Stay On Their Game

Something is happening in the land of marketplace lending, painful setbacks. And it’s mostly on the consumer side.

Avant, for example, plans to cut up to 40% of its staff, according to the Wall Street Journal. Prosper is cutting or has cut its workforce by 28%. For Lending Club it’s by 12% and for CommonBond by 10%. And then there’s Kabbage, whose consumer lending division playfully named Karrot, has been wound down altogether.

Kabbage/Karrot CEO Rob Frohwein told the WSJ that Karrot was put to sleep about three or four months ago, right around the time that it became obvious to industry insiders that the temperature had changed.

Ironically, the person who best summed up the problem is the chief executive of a lender that rivals the ones that are suffering, but has announced no such job cuts of his own. In March, SoFi CEO Mike Cagney told the WSJ “In normal environments, we wouldn’t have brought a deal into the market, but we have to lend. This is the problem with our space.” And that is a problem indeed because the success of these businesses becomes entirely dependent on making as many loans as possible so they can raise more capital to make as many more loans as possible so they can raise more capital. Perhaps the end game of that dangerous cycle is to go public, but the market has gotten a glimpse now of what that might look like, and they’re not very impressed with Lending Club.

The pressure of living up to the expectation of eternal loan growth manifested itself when Lending Club manipulated loan data in a $22 million loan sale to an investor, but it was a problem all the way back to their inception. In 2009, the company founder made $722,800 worth of loans to himself and to family members, allegedly to keep up the appearances of continuous loan growth. It was never found out until last month, seven years later.

That is a perfect example of the vulnerability that SoFi’s CEO spoke of months ago when he said, “we have to lend.” Because if they don’t lend or investors won’t give them money to lend, well then we’d probably see things like massive job cuts, falling stocking prices, and a loss of investor confidence. And that’s what we’re seeing now.

This wave of cuts is not affecting much of the business lending side

Despite the rush to the exits on consumer lending, Kabbage’s CEO is still very bullish on their business lending practice, so much so that they intend to increase their staff by more than 25%.

And in the last month alone, four companies that primarily offer merchant cash advances, have announced new credit facilities to the aggregate tune of $118 Million, one of whom is Fundry which landed $75 Million. Meanwhile, Fora Financial secured a $52.5 Million credit facility in May. Fora offers both business loans and MCAs.

And here’s one big difference between the consumer side and the business side. While online consumers lenders have found themselves trapped on the hamster wheel of having to lend, there is very little such pressure on those engaged in business-to-business transactions. Sure, their investors and prospective investors want to see growth, but only a handful are following the Silicon Valley playbook of always trying to get to the next venture round fast enough, lest they self destruct.

Avant’s latest equity investment, for example, was a Series E round. Prosper and Lending Club also hopped from equity round to equity round, progressing on a track with evermore venture capitalists that were likely betting on the companies going public.

But over on the business side, they’re much less likely to involve venture capitalists. Equity deals tend to be one-offs, major stakes acquired by private equity firms or private family offices, sometimes for as much as a majority share. These deals tend to be substantially bigger, are harder to land, and are less likely to be driven by long-shot gambles. In other words, the motivation is less likely to be driven by the hope that the company can simply lend just enough in a short amount of time to land another round of capital from another investor.

Examples:

• RapidAdvance was acquired by Rockbridge Growth Equity
• Fora Financial sold an undisclosed but “significant” stake to Palladium Equity Partners
• Strategic Funding Source sold a large stake to Pine Brook Partners
• Fundry sold a large stake to a private family office

Business lending behemoth CAN Capital has raised all the way up to a Series C round but they’ve been in existence for 18 years, way longer than any of their online lending peers. Several other of the top companies in the business-to-business space have relied only on wealthy investors that did not even warrant the need for press.

The upside is that these companies are less vulnerable to the whims of market interest and confidence. Having a down month would not trigger an immediate death spiral, where a downtick in loans means less investor interest which means a further downtick in loans, etc.

The margins in the business-to-business side tend to be bigger too, which means it’s the profitability that often motivates investments, rather than pure origination growth potential.

There are outliers, of course. Kabbage, which has raised Series A through E rounds already, admitted to the WSJ that they still aren’t profitable. Funding Circle, which also raised several rounds, disclosed that at the end of 2014, they had lost £19.4 Million for the year, about the equivalent of $30 Million US at the time.

These facts do not mean that either company is in trouble. Kabbage is not limiting themselves to just making loans for instance, since they also have a software strategy to license their underwriting technology to banks like they have already with Spain’s Banco Santander SA and Canada’s Scotiabank. And Funding Circle enjoys government support at least in the UK where they primarily operate. There, the UK government is investing millions of dollars towards loans on their platform as part of an initiative to support small businesses.

Business lenders and merchant cash advance companies may not necessarily be on the same venture capital track as many of their consumer lending peers because it is a lot more difficult to perfect and scale small business loan underwriting. Even the most tech savvy of the bunch are examining tax returns, verifying property leases, reviewing corporate ownership documents, and scrutinizing applicants through phone interviews. While this process can be done much faster than a bank, there’s still a very old-world commercial finance feel to it that lacks a certain sex appeal to a Silicon Valley venture capitalist who may be expecting a standalone world-altering algorithm to do all the risk related work so that marketing and volume becomes all that matters. Maybe on the consumer side something close to that exists.

Instead, a commercial underwriting model steeped in a profitability-first mindset makes online business lenders better suited to be acquired by a traditional finance firm, rather than a venture capitalist that is probably hoping to hitch a ride on the join-the-fintech-frenzy-and-go-public-quickly-so-I-can-make-it-rain express train.

Consumer lenders who had to lend and are faltering lately, will now have to figure out something more long term beyond just making as many loans as possible. It might not be something that excites their venture capitalist friends, but it is crucial to building a company that will last a long time.

Midland Funding Gets Mentioned in John Oliver’s HBO Show

The infamous Midland Funding you might know from the Madden v Midland case, was mentioned on John Oliver’s Last Week Tonight and not in the best context. Midland is a subsidiary of Encore Capital Group, the largest publicly traded debt buyer in the United States and the episode was about the not-always-peachy world of debt buying and debt collection.

Oliver referenced Midland just to provide background on an industry as a whole, not to imply that they were involved in anything negative.

More background was added by Jake Halpern, the author of Bad Paper: Chasing Debt from Wall Street to the Underworld, who explained that the sale of debt from one party to another is not always done using the most sophisticated means, with it often being simply a list of fields on an Excel spreadsheet.

Oliver, who took his research to the extreme, actually set up his own debt collection company in Mississippi and purchased $15 million worth of debt that was aged beyond the statutory collections period for the bargain price of $60,000. Rather than try to collect on the debt, which he mentioned would not have been illegal, he decided to forgive the debt entirely and set the record for TV’s largest monetary giveaway in the process.

Oliver was careful to remind viewers throughout that while there are a few bad seeds and horror stories, the industry itself is regulated and is not illegal. You can watch the episode below: