Loans
OnDeck 4th Quarter Earnings Call
February 21, 2015
OnDeck Capital (ONDK) will report Q4 and 2014 earnings on Monday, February 23rd at 5pm EST. If you’d like to view the live webcast, you can register here. You can log in as early as 15 minutes before it starts.
This is a surprisingly crucial moment for OnDeck who has recorded losses every quarter since inception except for the one just prior to the IPO. Since then the company has been confused as a Lending Club for businesses. The companies differ in that OnDeck’s core business is lending and Lending Club’s is servicing fees.
Critics have called out OnDeck’s high interest rates which top out at 99% APR.
In just a couple months, OnDeck has bounced from a high of $28.98 per share to a low of $14.52. It closed Friday at $18.37.
Despite FinTech Disruptions, Many Thing Stay The Same
January 5, 2015
2014 was an unbelievable year!
I kicked off last year by opening an account with Lending Club so that I could understand their product. Today I have tens of thousands of dollars invested on their platform and picking up new loans has become part of my daily routine. You could say I’m not surprised they went public a few weeks ago.
I also launched the industry’s first trade publication and ran it as both publisher and chief editor. We produced 6 issues and distributed more than 20,000 print copies combined. Unfortunately the publication will not be continuing further. It is wild to think that it both started and concluded in 2014 as the magazine had a cult-like following.
7 conferences in 4 cities. Las Vegas (twice), San Francisco, New Orleans, and here in New York. I spoke at two of them. Hoping for at least 1 Miami conference this year. Please??? It’s so cold here right now.
OnDeck Capital took a lot of flak in 2014 from both industry insiders and the media. They shrugged it all off and went public on December 17th. Considering they’ve operated on the fringe of the merchant cash advance industry for so long, it was one of those things you had to see to believe. I didn’t get inside the building but I saw the IPO was real from the outside.
I started off 2014 not knowing what a Bitcoin was. Now I have a copy of the entire blockchain, operate a full node (don’t worry I have port 8333 open), have 10 dedicated mining devices running 24/7, have made purchases with bitcoin, conducted countless transfers, and just finished coding a working prototype application using Coinbase’s API. And when I realized that bitcointalk.org and my cryptography books weren’t enough to satisfy my appetite, I found myself talking about bitcoin on IRC; #bitcoin and #bitcoin-pricetalk on irc.freenode.net. I also know who Satoshi Nakamoto really is now too but he made me promise not to tell anyone.
I rebranded Merchant Processing Resource to deBanked, retiring a name I’ve used for 4 years.
I interviewed former Congressman Barney Frank, one of the two architects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (it was only a few questions).
I got asked by a credible movie producer if I would help him on a storyline for a script about Wall Street and the alternative business lending industry. Don’t worry I turned it down!
I jumped on the payment disruption bandwagon and used Square to process credit card transactions all year. You should know that I previously did merchant account sales. I could’ve boarded my own account and set my own fees but I went with Square anyway.
I finally got set up to syndicate on merchant cash advances.
I ran my first 5k in Central Park.
I moved to a different part of Manhattan.
Of course a whole lot more happened. It was a roller coaster year which leads me to believe that 2015 will be impossible to predict. There’s a lot more room to grow in FinTech but it might be time for fresh ideas. Everyone and their mom built an online lending marketplace platform in 2014.
Similarly, it’s also a tough time to become a loan broker or MCA ISO especially if you’re undercapitalized. The easy profit ship has sailed. Press 1s and UCCs aren’t winning business models, at least not ones that will invite outside capital or ensure survival long term.
2014 changed finance but in many ways it stayed the same.
It still takes 2-4 days to confirm an ACH didn’t reject! This is annoying all around. If I add funds to Lending Club on a Monday, it’s not accessible until Friday evening. If you debit a merchant on Monday, you won’t really know if you have it until a few days later. Believe it or not I actually mailed out more checks in 2014 than in any other year of my life. The ACH system appears to be fine until you use something that is far more advanced, something I will probably write about over the next month. Instantaneous payments, low transaction fees, no bank involvement. Yeah, it’s time for ACH to go away…
And with banks, well… I have opened business bank accounts over the last few years with 3 different banks. The one I opened in 2014 required a two hour in-person interview, a process that involved filling out forms by hand and being threatened that the government would shut everything down in a heartbeat if they found out that I so much as breathed wrong on an ATM. It was a repeat of prior account opening experiences. Although I’ve never had an account closed for doing anything wrong (because I’m not actually doing anything wrong), it is easy to see how much regulatory pressure banks are under. Swiping your debit card upside down could cause the entire bank to get an Operation Choke Point subpoena. They want your business but they’re scared to death of anything you might do with a bank account.
All the major peer-to-peer platforms of 2014 became centralized. Lending Club and Prosper don’t even fall in the p2p category anymore. The market trend has been to create a platform designed for the little guys and then hand it over to a bank or institutional money to do all the funding. In some ways it’s easier to deal with a handful of big players instead of thousands or millions of retail investors. But with the regulatory environment uncertain on so many new investment products, it’s probably also safer to deal with institutional investors, lest the regulators claim they violated a consumer protection law they thought up this morning.
Banks continue to be the biggest obstacle to innovation because at the end of the day, all payments flow through them. How can one deBank and truly disrupt?
Hopefully we’ll find out in 2015. Happy belated New Year.
With OnDeck IPO, Strangers Walk Among Us
December 18, 2014The future isn’t ours to make anymore. Not ours alone anyway. Last week the industry was a group of insiders. Today the outsiders walk among us.
I don’t know who IpoBandWagonTagAlong is but he’s now an influencer in the industry. Almost 13 million shares of OnDeck Capital traded today, its very first day on the NYSE.
It hurts to see “seems similar business to [Lending Club]” as the information being gleaned about OnDeck. I could spend an entire week contrasting the differences but it doesn’t matter anymore. Opinions about OnDeck and the industry they’re part of are about to be formed in tweet-sized pieces at rapid fire pace. Anything longer and the opportunity presenting itself on a trade might pass. Wild.
If you’re in the merchant cash advance business, you’re about to learn that describing the purchase of future sales in anything more than 140 characters is going to work against you. You will inevitably be asked if you do what OnDeck does and you better be concise.
Exactly 140:
“We provide working capital to small businesses by leveraging their future sales. It’s not a loan but it is in some ways similar to OnDeck :)”
Or you could simplify it further and just write:
“Seems similar”
Proud to have OnDeck join the NYSE’s community of the world’s leading, most-recognized companies (NYSE: $ONDK ) pic.twitter.com/ReozilWjbR
— NYSE (@nyse) December 17, 2014
The most striking thing I experienced on opening day was watching so many OnDeck bears transform into OnDeck bulls. Lots of buy orders were placed by those that have been chugging hater-ade for years.
I think that despite reservations with their business model, there was a desire to touch the company in some way, to feel like they were a part of the industry’s milestone. I totally get it. But that brings up an interesting question, how much of the stock can you touch until you start to hold some sway?
I mean shareholders are owners right?
Theoretically, could a terminated ISO buy up shares and then start making demands about re-establishing a partnership? What is the protocol here? Can OnDeck’s ISOs buy OnDeck? Or OnDeck’s competitors? I don’t mean a controlling stake but enough to make some noise. Imagine OnDeck being a funder for the ISOs by the ISOs! If a huge ISO is terminated, does that have to be announced to the public at the same time that the ISO community finds out?
This is a very gossipy industry and coincidentally, I run practically all the industry gossip websites so people like me want to know.
What if a merchant owns shares of the company it is applying to? Is that a positive underwriting data point?
With an office close to the New York Stock Exchange, I was able to at least snap off a few pics of the big banner displayed outside.
And if you’re wondering if I bought stock in OnDeck, I did not. I didn’t buy Lending Club either. It has nothing to do with how I feel about either company.
According to Crain’s, OnDeck’s “$1.32 billion market cap at its debut was the biggest for a venture capital-backed New York City tech company since 1999.” The stock exploded upward almost 40% from its open today. A lot of folks in the industry bought in and the rest is history.
Congratulations OnDeck Capital.
Through OnDeck Capital, An Industry Wins
December 16, 2014
Call it merchant cash advance, non-bank business lending, or financial disintermediation. Whatever floats your boat. On December 17th an entire financial methodology will be validated, the daily repayment method. Daily payments don’t exist anywhere else in lending but ’round these parts it’s the standard. It’s what makes unbankable businesses bankable.
OnDeck is a lender. They target small businesses. The costs are high. Anyone could feasibly do those things and plenty are doing them, but only a certain segment of fintech companies utilize daily payments and most of those are merchant cash advance companies. OnDeck is a lender but like it or not their core repayment mechanism overlaps with an industry well known for being even more expensive.
Daily payments are so unique and so revolutionary that it hasn’t sunk in to the masses yet. Even the press glosses over this fine detail to instead dwell on things like APRs and social media’s role in approvals. Daily payment and daily repayment look like tech jargon, some kind of code for a backend computer process to hotwire an anomalous rate algorithm.
Daily payments mean borrowers have to make payments every single business day. It’s daily, get it? If the sun rises and it’s not Saturday or Sunday, it’s time to make a payment. I’m not saying there’s something wrong with this. I’m a proponent of this mechanism. It works for business owners that struggle to make a single lump sum payment each month and it works for lenders who need to mitigate and monitor their risk as much as possible.
I feel it’s better to know there was a problem that started yesterday than to learn there was a problem that started 29 days ago. That’s how OnDeck thinks too. And business owners can incorporate the daily deduction into their normal business operations instead of fretting to cover the balance for a big debit the day before a monthly payment is due.
This isn’t just a theoretical design that can’t function in practice. It’s been working for lenders and factors since AdvanceMe (Now CAN Capital) started doing it in 1998. The daily payment methodology has survived the Dot Com Bust and the Great Recession. It’s grown to a $3 – $5 billion a year industry. By some measures, it’s taken a hell of a long time to go this mainstream.
But it’s here. The press will call OnDeck a lender, a tech company, or a combination of both. They’re a sign of the times but they are unique in that they will show the world that daily payments have a place in the modern economy. With OnDeck leading the way, traditional lenders may consider leveraging their methodology to serve categories of risk they usually shy away from.
I’ve never heard of a business credit card that required payments to be made every day. Some might think that defeats the purpose of credit. OnDeck proves it doesn’t. And 100+ merchant cash advance companies serve as a secondary validation. Perhaps there are lenders that have considered a daily payment system previously and feared the political or legal environment was too risky. But OnDeck is making no apology about what they’re doing or how they’re doing it. They’re putting themselves on the open market, surrendering themselves to total scrutiny.
CAN Capital is gearing up to follow them, the pioneers who first experimented with daily payments 16 years ago. And while OnDeck bemoans their loan program being compared to merchant cash advance, CAN is made up of two departments, one of which is undoubtedly a merchant cash advance service provider.
And there you have it. It’s not all about algorithms or tech or using facebook activity to judge a borrower. Those are old ideas now. OnDeck smashes down the door with something completely different, something that nobody is even talking about, daily payments.
December 17th is Wednesday and just about all of OnDeck’s borrowers will be making a payment. A good many of them won’t even notice. That’s the great part about layering it in as a daily cash flow expense. There’s no worrying about it at the end of the month. If they underwrite the borrower financials well enough, it should be completely painless. That’s not always the case, but it’s the goal.
You can’t possibly understand OnDeck until you understand daily payments. With this IPO, an entire industry wins.
Getting in on the ONDK and LC IPO
December 4, 2014According to Investopedia, “Getting a piece of a hot IPO is very difficult, if not impossible.”
The Motley fool says:
If the bankers think a stock will soar, they earmark much of the shares for their favorite institutional clients (ones that bring in the most in commissions). In a sense, brokerages use lucrative IPOs to curry favor with big clients, to win and retain their business. When brokers aren’t so confident about the company’s prospects, they will try to sell the stock to less-favored institutional clients.
Admittedly these are generalities, not unyielding truths.
But when Lending Club mass e-mailed all their platform lenders on November 17th that they would be rewarded with a chance to get in on the IPO, people got excited. They wouldn’t just automatically get stock though, they’d be given the chance to buy it. An allocation was not guaranteed and a limit as to how much was not immediately disclosed, though it was recently revealed that platform lenders could buy up to a maximum of 350 shares.
At $10-$12 a share, that’s an opportunity to spend a max of $3,500 to $4,200 on the IPO. Getting in won’t make you a millionaire but it’s a little way for Lending Club to say thank you to all those who invest on their platform.
I got the offer and turned it down. I’m very bullish on Lending Club stock but I feel like I’m already invested enough in them as a company through platform lending to need to get even more in. For those not sure how Lending Club really works, their system is not actually peer-to-peer. Investors buy Lending Club notes that are tied to the loans they issue. You are ultimately only investing in Lending Club with every note you buy. You have no relationship or claim to the borrower.
With that being the case, my tens of thousands invested in them is enough, especially from a retail investment standpoint. But I enjoyed the proposal nonetheless because it felt like a gift for getting in on the ground floor of something huge.
I also liked telling people over the last two weeks that I could get in on the Lending Club IPO.
“You hear about Lending Club going public?” I’d ask a friend. And then brag, “Yeah, well I have a chance to get in on the IPO if I want. I could talk to my guy to try to get you in but I don’t know if I can swing it. Maybe though.”
I was pretty damn important.
Until someone told me they could get in on the OnDeck IPO today. He apparently had an inside guy and that inside guy was E*Trade, as in he could apparently get in on OnDeck’s IPO just for having an E*Trade account.
One had to wonder why any schmo with a brokerage account was being asked to buy in. It didn’t sound good for OnDeck but I let my friend have his moment. His guy could try to get me in, etc.
The mass blanket invitation to get in might appear that brokers aren’t so confident about the company’s prospects. But actually back in January of this year E*Trade forged a “retail alliance” with middle-market investment bank Jefferies LLC. A Reuter’s story said that, “E*Trade is betting that it can score points with investors by guaranteeing access to IPOs that brokerage firms normally reserve for their best customers.”
OnDeck’s underwriters include Morgan Stanley, Bank of America Merrill Lynch, JPMorgan Chase, Deutsche Bank and Jefferies. This is in line with “giving its customers access to initial public offerings and follow-on offerings underwritten by middle-market investment bank Jefferies LLC” though I haven’t confirmed the alliance is the cause of this.
Just as with Lending Club’s allocation offer, no one is guaranteed anything with OnDeck through E*Trade. There’s a required approval process which may ultimately yield nothing.
And yet it still feels a little weird, maybe because I’ve been hearing about an OnDeck IPO for years now and I just can’t grasp it’s actually happening. It’s one thing for a big banker to talk about it and another for an old college buddy, my doorman, and Jim who’s the cashier at the local hardware store ask me if I know anything about this OnDeck loan stock advance thing they heard about.
All I know is that sentiment on them is mixed but that ultimately insiders believe it’s great for the industry.
As for both of these the IPOs? I don’t know. I’m not getting in on either of them but it has nothing to do with how I feel about the companies. I can’t wait to watch this all unfold though.
Check out the 224 page OnDeck Prospectus!
Income Correlates With Loan Performance
November 24, 2014
Now that I’ve bought into nearly 1,800 personal loans on Lending Club, I think I’ve got a good enough sample to start running analyses.
The data isn’t perfect especially since none of the loans have reached maturity yet. Most are still between two and four and a half years away from completion. But strangely, 70 loans paid off early and a good number have already defaulted or are more than 16 or 30 days late and are on their way there.
With at least that to work with, I compared three groups:
- Early payoffs
- 16+ days late or defaulted
- All others
I examined 4 initial factors and I will surely examine many more. While I saw some weak correlation regarding FICO score, it’s borrower income that really stood out.
Ignoring all other factors, the accounts that paid off early reported earning 29% more annual income than the accounts that are bad.
I had heard Peter Renton preach the high income borrower strategy and truthfully I ignored income as a factor in my decision making up until this point. On equities.com, Renton said, “I typically like more than $50,000 in annual income, although $75,000 is even better, and $100,000 is better still.”
Looking at my own sample, there is indeed correlation between the $75,000+ income earners with paying off Lending Club loans early.
Unlike some business loan products, Lending Club personal loans accrue interest rather than bake interest into a fixed total cost. That means a borrower that paid back a 5 year loan in just 3 months only paid 3 months worth of interest.
It was surprising to see that 70 borrowers repaid the loans in their entirety within a matter of months.
Regarding FICO, the score spread between bad loans and early payoffs was only 8 points, a lot smaller than I’d expect. But the portfolio is young and some loans have only just issued in the last few months. With another 2+ years left to go, the sample size of defaults will get bigger and I will be running the numbers on this again.
In in meantime, low income borrowers regardless of all other factors appear to be more risky investments. I guess you could say I’m not surprised, but it’s exciting to see data that supports a hypothesis.
Ready to Trade ONDK and LC?
November 16, 2014
On November 10th, OnDeck Capital finally made their S-1 public. Immediate reactions from inside the industry were mixed. The bears criticized the years of losses while the bulls pointed out that the tide is turning. With a profitable 3rd quarter, OnDeck’s bet on the long game might finally be proving itself.
And without delving into their S-1 for now, the industry should be bracing itself for change. The mysterious world of daily funders (financial companies that deal in daily payments) is about to come under the scrutiny from another body, stock analysts.
Unlike journalists which have bruised the industry with sensational headlines and surface level criticism (high costs, light regulation), analysts will be tasked with truly understanding the fundamentals of nonbank business lending. Not to mention that everyday retail investors looking for an edge will want to learn more about the industry than what a single company’s quarterly financials will tell them.
Daytraders might make decisions based on melodramatic stories but those buying and holding for the long run will be conducting something that’s rarely taken place in this industry, research. Expect these questions to be asked and deeply considered:
- Who are OnDeck’s competitors? (and not just the top 3, but the hundreds that follow them)
- What are ISOs/brokers and how do they operate?
- How do they generate deal flow?
- What is Merchant Cash Advance and how is it similar or different to OnDeck?
- What is the real regulatory environment? (Because there are actually applicable regulations despite articles that say there aren’t any)
- Why does OnDeck collect payments daily?
- Why is OnDeck’s model so much different than Lending Club’s?
Look for the last bullet point to be explored greatly. If OnDeck and Lending Club are both innovative small business lenders broadly targeting the same market, why is OnDeck charging an average of 50% APR paid daily over 6 months and Lending Club charging as low as 5.9% APR paid monthly up to 5 years?
Their products couldn’t possibly be more different. And while Lending Club’s IPO path has curiously stalled, there is nothing to indicate that it will not proceed. That means we should expect comparisons between the two upcoming tickers LC and ONDK, a lot of them.
Details about commissions, closing fees, marketing practices, and transparency will be talked about in open forums by the general public. If it’s controversial, it will be debated. If it’s unique, it will be scrutinized. To an extent, OnDeck, Lending Club, and many of their competitors will cede control of their destiny to the general investing public.
There are folks in the industry giddy over the chance to buy and sell stock in both companies. They have years of experience on the front lines. But just as they’re gearing up to trade ONDK and LC, so too is everyone else.
Get ready for major change…
