OnDeck Q2 Earnings Announcement
July 6, 2015Update: The news reports that said OnDeck was reporting earnings today on July 6th were false
An OnDeck representative said they have not yet scheduled a date.
OnDeck (ONDK) was reportedly going to release 2015’s Q2 earnings after the market closed on Monday, July 6th (That information was confirmed as false.) Analysts predict the company will show a loss of 7 cents a share.
The company has faced a fierce sell-off in recent weeks, moving the stock to all time lows and down more than 50% from its high. The trend began after the Q1 report in which company executives argued that a decrease in the interest rates charged to their customers was not a response to competitive pressure.
Bloomberg’s Zeke Faux ran the following headline anyway:
Since then, the stock has struggled to recover. I posted a summary of why that might be on June 29th, in a short piece tiled, What Happened to OnDeck.
Barron’s was particularly tough on them, labeling them a subprime lender in dot-com clothing. For now, the key to an OnDeck rebounds seems to be about shedding that toxic label and convincing investors that despite a crowded field, they are the clear standout choice.
An increase in the default rate this quarter however would probably evoke a further negative response.
Are You Robodialing? The TCPA and FCC Scoop You Need to Know
July 2, 2015
In 1991, when Congress began regulating autodialers via the Telephone Consumer Protection Act, our phones and our relationships with them were vastly different from what that equipment and those relationships look like today. At that time, Congress was regulating a world without text messages and ubiquitous cell phones and a world where autodialers were infuriating consumers nationwide for their ability to generate and dial telephone numbers indiscriminately without regard for who was on the receiving end of the call.
In the intervening years, Congress has made modest TCPA amendments to address unsolicited faxes and nefarious manipulation of caller ID information, but it has otherwise failed to adjust the law to reflect the way we communicate today. The FCC has tried harder than Congress to update its TCPA rules, but it too has failed in this regard. The result is a set of obsolete standards whose significance vastly outpaces their sense due to the TCPA’s private right of action and rigid statutory damages calculation. Companies hoping the FCC would pivot toward sanity in its recent announcement of TCPA guidance are surely disappointed today.
The TCPA has always defined a regulated “autodialer” as equipment with the capacity to store or produce telephone numbers to be called using a random or sequential number generator and to dial such numbers. The FCC’s TCPA rules retain that formal definition, but the FCC has explained that predictive dialers and other equipment enhancing dialing efficiency are also regulated as autodialers because of their capacity to dial numbers without human intervention. The FCC has repeatedly confirmed that the focus of the “autodialer” standard is on the equipment’s capacity, not its actual use.
A number of courts have tried to make this “capacity” standard more concrete by limiting it to the equipment’s present capacity, that is, what the equipment was capable of doing when the calls at issue were replaced, without considering what the equipment could be reconfigured to do at some future time. These courts explained that a focus on present capacity was necessary to ensure that every person’s smartphone would not be regulated as an autodialer based on what it could be reprogrammed to do.
The FCC received a number of petitions seeking more formal, universal guidance on the TCPA’s “autodialer” standard. We are still waiting for the FCC to publish the guidance it has approved, but according to the FCC’s June 18, open meeting, that guidance will not make this issue any clearer. According to the FCC’s preview, that guidance will affirm that the TCPA’s “autodialer” standard focuses on the equipment’s capacity, ensuring that “robocallers cannot skirt consumer consent requirements through changes in calling technology design or by calling from a list of numbers.” If this is an accurate summary of the FCC’s guidance, it will do absolutely nothing to resolve the most pressing concerns on this issue. It will not address whether “click-to-dial” technology, which involves some human intervention but may have the capacity to operate without it, is regulated as an “autodialer.” It will not address whether the definition’s “capacity” element is limited to present capacity or also includes possible future capacity. The surge in private TCPA litigation makes these ambiguities treacherous.
Although the FCC discussion of its TCPA guidance touts the protections provided to consumers, the autodialer provisions apply equally to business-to-business calling. MCA companies must be aware of the TCPA’s autodialer requirements for B2B calling campaigns. They can be sued for improper calls placed to businesses, as well as errant B2B calls that are answered by individual consumers. The FCC’s TCPA rules establish that callers must have the call recipient’s “prior express written consent” for sales calls placed to cell phones using an autodialer or a prerecorded message. This form of consent requires a signed writing from the call recipient and requires certain “magic words” disclosures that must be provided when the consent is obtained. This consent requirement applies to B2B calls as well as B2C calls, and the existence of an established business relationship between the parties to the call does not provide any relief from this requirement. Non-sales calls to cell phones using an autodialer or a prerecorded message require “prior express consent.” This term is not defined, but the FCC has explained that a call recipient provides valid consent to a creditor by volunteering his or her cell phone number to the creditor, such as on a credit application. There are tricky details in this standard, so MCA companies should proceed with caution in order to establish valid TCPA consent.
Technology makes our lives easier, but it makes our TCPA compliance analysis more complicated. The TCPA should not impede technological developments that do no harm, but the law’s enforcement scheme encourages “professional plaintiffs” and greatly increases the likelihood that a TCPA violation will result in a lawsuit. The FCC is presently fumbling an opportunity to address this. It’s unclear when another such opportunity will arise or what it will take for the FCC to decide to align its TCPA rules with the real world.
The Rest of the Alternative Lending Industry’s Funding Numbers
July 1, 2015
Let’s be serious, the industry’s much bigger than we may have let on when we published the industry leaderboard (some mods have been made) in the May/June issue.
Right after deBanked sent the final file off to the printers in May, PayPal announced that the widely circulated $200 million lifetime funding figures were slightly outdated.
How off were they?
Oh, just by about $300 million or so. By May 7th, PayPal’s Working Capital program for small businesses had already exceeded $500 million. The industry leaderboard has been revised to reflect the news. PayPal says they are funding loans at the rate of $2 million per day, which puts them on pace for more than $700 million a year. Um, wow?
One name that’s missing from that list is Amazon, whose secretive short term business loan program is reported to have already generated hundreds of millions of dollars in loans. Given the $300 million discrepancy that PayPal let ruminate for months, we’re in no position to speculate on Amazon. Anyone could try to assess what they’ve been up to however, since they file UCCs on their clients under the secured party name “AMAZON CAPITAL SERVICES, INC.”
Of course if you’re craving specific numbers, an anonymous source inside Yellowstone Capital revealed that Yellowstone produced $35.5 Million worth of deals in the month of June alone. Yellowstone has a strategically diverse business model that allows them to either fund small businesses in-house (essentially on their own balance sheet) or broker them out to other funders. Yellowstone was listed on deBanked’s May/June industry leaderboard at $1.1 Billion in lifetime deals and $290 Million in 2014. June’s figures indicate that they are probably well on their way to surpassing last year’s numbers.
Curiously, platform/lender/broker/marketplace company Biz2Credit has been hanging on to the same stodgy old number for more than a year.
Funded over $1.2 billion. 200,000+ happy customers.http://t.co/3h64lI4cgG #smallbusiness #Funding
— Biz2Credit (@biz2credit) June 19, 2015
They were touting that same $1.2 Billion number exactly 1 year ago. Surely they have done more since then? Biz2Credit’s service covers a much wider scope however so a direct comparison with their peers may not be appropriate. A lot of their loans are arranged through traditional banks which are typically transacted in amounts larger than the average $25,000 deal alternative lenders do.
A source familiar with Biz2Credit’s breadth said he observed a deal where the company helped a businessman in Mexico obtain financing to purchase a new helicopter, a transaction which apparently necessitated a team to fly down there to sign paperwork. Definitely not a standard transaction!
When we published the industry leaderboard initially, it admittedly omitted some of the industry’s largest players. Many firms are fairly secretive about the numbers they release and we’re in no position to disclose numbers that aren’t supposed to be public. Below is data that we hadn’t published previously.
The industry’s unsung behemoths
The $300 million lifetime funding figure publicized by NYC-based Fora Financial can’t be that stale. It’s the number currently stated on their website and a late February 2015 company announcement revealed they were only at $295 million at the time. We feel comfortable enough to now have Fora Financial on the leaderboard.
In 2014, Delaware-based Swift Capital revealed that they had funded more than $500 million. It’s unclear how much that’s increased since then.
Credibly (formerly RetailCapital), has publicized that they’ve funded more than $140 million in their lifetime. Founded in Michigan, the company has opened offices in New York, Arizona, and Massachusetts. They’ve been added to the lifetime leaderboard.
New York City-based AmeriMerchant has a claim on their website that they have funded more than $500 million since inception. How much more exactly? We’re not sure.
Coral Springs, FL-based Business Financial Services keeps their figures mostly under wraps but a good guess would place their lifetime figures at somewhere between $700 million and $1.2 billion.
Miami, FL-based 1st Merchant Funding had reportedly funded close to $100 million in the Spring of 2014. It’s uncertain as to where they might be now.
Woodland Hills, CA-based ForwardLine surpassed $250 million in funding as far back as 2013.
Orange, CA-based Quick Bridge Funding disclosed more than $200 million in funding in late 2014.
Troy, MI-based Capital For Merchants has funded $220 million since inception. But there’s more to the story. Capital For Merchants is owned by North American Bancard, a merchant processing firm that acquired another merchant cash advance company, Miami, FL-based Rapid Capital Funding in late 2014. And coincidentally, Rapid Capital Funding had just acquired American Finance Solutions months earlier, which is an Anaheim, CA-based merchant cash advance company that had funded more than $250 million since inception. All told, North American Bancard owns at least three merchant cash advance companies: Capital For Merchants ($220 million), American Finance Solutions ($250 million+), and Rapid Capital Funding (undisclosed). There are rumors that they’re in talks to acquire at least one more company in the space, which, if true, would make North American Bancard one of the industry’s most powerful players.
Don’t bother counting up the above totals
These figures all barely scratch the surface as deBanked’s database indicates there are literally hundreds of genuine direct funders in the industry.
Thanks to the company representatives that took the time to confirm their funding numbers with us directly. Anyone interested in sharing their figures can email sean@debanked.com. If there is a gross inaccuracy somewhere as well, please report it to us.
This page might be updated in the future so check back!
Tech-based Lenders Clobbered On Dose of Bad Economic News
June 29, 2015How would tech-based lenders fare in a slumping market? Not very well apparently…
OnDeck (ONDK) and Lending Club (LC) set new record lows earlier today amid bad news coming out of Greece and Puerto Rico. OnDeck is down almost 43% from its IPO price and down 61% from its all time high. It was down more than 8% today even though the Dow was only down 2%.
$ONDK was unaware that it focused on Greek loans…. interesting 8.6% drop.
— Mark Holder (@StoneFoxCapital) Jun. 29 at 05:48 PM
The downward trend was dissected in a post that was published just hours before today’s further fall.
Meanwhile Lending Club is in new territory, down 3% from its IPO price and down 50% from its high. So what are investors saying about this?
$LC hmm i really dunno what to say about this…
— mike pham (@mincogneto) Jun. 29 at 05:30 PM
That’s kind of the overall gut feeling. Many feel this company is being unfairly dragged down and yet it continues to fall. A mounting campaign by the Puerto Rican government to declare bankruptcy and a Greek debt disaster clobbered everything today including Lending Club. One tweeter came up with a great idea last week, bail out Greece with a loan from Lending Club…
If all else fails with the IMF #Greece should just apply on @LendingClub pic.twitter.com/RbtnMm5JaO
— World First USA (@WorldFirstUS) June 22, 2015
Last week no one was even talking about Puerto Rico. Now all of the sudden they’re in a “death spiral.”
Watch the death spiral coverage on CNN
The market’s tech lending darlings might’ve gotten pummeled like everyone else but the ease with which they drop should probably be a warning sign. Neither offshore dilemma stands to have any impact on their businesses. So what would happen if a relevant issue were to arise such as a domestic disaster, a sudden rise in unemployment, a recession, a financial crisis, skyrocketing fuel prices, a steep increase in the fed funds rate, or even something no one dares talk about like a legal ruling that could jeopardize the entire bank charter model?
It’s quite possible that both companies haven’t bottomed out just yet….
——–
Note: I have no equity positions in either company. I do own Lending Club notes however.
What Happened to OnDeck? (ONDK)
June 29, 2015The lockup expiration came and went but the fall of OnDeck’s stock price started much before that. There were no insider stock sales reported to the SEC since shares became unrestricted anyway.
There’s very little trading volume on an average day and investors on the big message boards either ignore this stock or don’t understand it.
The trend started on May 4th when they released Q1 earnings. The direction wasn’t very much different than Q4. Loan volume went up, interest rates came down, and no profits were to be had, nor were any expected for the rest of the year.
The market interpreted decreasing interest rates as pressure from competitive forces however and down went the stock price.
OnDeck’s execs insisted that they had lowered rates as part of a deliberate strategy to create stickier customers and attract new borrowers. CEO Noah Breslow himself said during the previous 2014 Q4 earnings call that “there’s so much search cost associated with going out and looking at other places and so much uncertainty around that, they [small businesses] typically just take that offer that OnDeck has provided to them.”
His theory is supported by the results of Lending Tree’s recent survey that revealed nearly 60% of small businesses did not comparison shop business loans online during their loan application process.
It’s possible though that the drop had little to do with OnDeck’s actual performance. That same day, Goldman Sachs hinted that they would be joining the tech-based lending field when they announced the hire of Harit Talwar from Discover Financial Services.
But before they had a chance to recover, Barrons published a story that was highly critical of OnDeck just a month later on June 5th. “It’s a subprime lender in dot-com clothing,” the author wrote. It was a tough characterization for them to refute, what with their 50% interest rates and double digit percentage charge-offs and all.
And then the lockup expiration on June 15th coincided with the big reveal of Goldman’s intentions to compete in the marketplace. News sources that picked up the story predicted that the move would impact online lenders like Lending Club and OnDeck. OnDeck’s stock hit a record low that day.
OnDeck has been stuck in the 12s ever since. Can they dig themselves out?
If competition is a factor in the market’s perception, and it probably should be, then investors should keep an eye on the industry’s other top players. OnDeck is not alone in this space and Goldman Sachs will be in for a bigger fight than they probably expect.
Source: deBanked’s May/June Magazine issue
The CFPB is Pretty Busy With Actual Consumers
June 28, 2015
It’s often theorized by industry insiders that the Consumer Financial Protection Bureau (CFPB) will play a role in business to business transactions. But when you actually talk to those employed by the government agency, it seems very unlikely. The CFPB is already very busy playing the role of Better Business Bureau, albeit a nationalized version.
There is currently no categorical option to report business loan or merchant cash advances on their website and the complaints lodged by consumers pertain to very basic consumer problems, such as issues with their credit cards or student loans.
Here’s an example of a CFPB complaint:
2009 XXXX XXXX, XXXX XXXX Thursday of every month I got pulled from class to get a new loan for my living and tuition expenses. I was at XXXX for one year and if I didn’t go to sign the papers for my new loan every month I wouldn’t be able to continue my classes to XXXX. I missed out on important class information and had to make them up on my own time. Homework and other hands on tasks became more difficult to accomplish if I didn’t make up the lost time going to sign loan papers. I was told a rough amount that my school loan would be. About {$15000.00}. I started paying {$120.00} a month for my loan agreement then Genesis Lending increased it to {$190.00}. I called to ask why the increase in payment amount each month. I was told they saw i had a higher income so they adjusted the payment accordingly. Is that legal? I’ve been paying this amount for 6 years and still owe {$13000.00}. I called Genesis Lending and come to find out they have been rolling over all the interest I pay on the loan every year. So all I’m paying is interest basically for the last 6 years. I don’t think I ‘m being treated fairly or legally.
Many complaints are just like this, where consumers are not actually reporting illegal activity but instead using the CFPB to vent their frustration. In this situation, the victim was busy with homework and wasn’t sure how their student loan worked so they filed a complaint with the federal government…
The end result was that the lender responded by saying it wasn’t really their problem, the borrower didn’t dispute this response and the CFPB marked the case as closed. Seems like a great use of everybody’s time.
In the handful of presentations I’ve attended by the CFPB, they said they often find themselves redirecting complaints to the business that the consumer is complaining about much like the BBB would do.
Still Reviewing Paper Bank Statements? Stop
June 26, 2015
Are the bank statements you received legitimate? Underwriters in the business financing industry are scouring paper documents for abnormalities hoping to catch fraud in the inducement. And word on the street is that small business owners are doctoring statements and engaging in trickery in record numbers.
Technology has made it easier to create authentic looking documents and the rise in online lending seems to be bringing out the worst in people. Somebody in a desperate situation might not have the guts to look a banker in the eye and hand him a stack of fraudulent documents but they might roll the dice with somebody over the Internet they’ll never have to meet.
The fakes aren’t obvious anymore. Anyone can go online and buy doctored documents from professionals. The business is booming on Craigslist for example where fraudulent documents can be made to order in under an hour.
In the Miami area, fraud hucksters are even beginning to offer deals such as buy 2 fake documents, get 1 free.
Industry-wide, funding companies are complaining that attempted fraud is out of control. One broker recently took to the dailyfunder forum to share her frustration. “I can spot them a mile away!!! 2 different deals submitted this week with fraudulent statements!!!,” she vented.
Other brokers chimed in, sharing their stories such as a merchant whose doctored statements were only noticed because ATM withdrawals were listed with odd amounts like $90.83.
Oddly, nobody seems to be reporting this fraud to the authorities. It all seems to get swept under the rug as business as usual. Orchard co-founder David Snitkoff for example, was asked just last month about the rate of marketplace lending fraud and he apparently said, “No worries, none to date.” He seemed to be implying that fraudulent applicants are getting screened out. But that doesn’t mean people aren’t trying.
Seven months ago, merchant cash advance underwriter Pierre Mena wrote in detail about the challenges he faces in detecting fraud. He said:
Some of the more well hidden fraud can usually be found by comparing the summary page and last page of the bank statement to other statements. Typically, most banks and some credit unions offer you a snapshot of the starting balance, which should generally match up with the ending balance of the previous month. If it doesn’t, you should look for any transactions from the previous month that did not settle until the current month. If there is none, this is usually a red flag indicating that the merchant forgot that statements are continual time series financial data whose totals carry on to the following month.
-Pierre Mena, Rapid Capital Funding
A lot of these issues can be easily overcome by simply disregarding paper statements altogether. Microbilt’s instant bank verification tool for example, will allow you to pull the most recent 90 days worth of transaction data directly from the banks themselves. Funders using these automated checks swear by their effectiveness and the capability is essential for any company that wants to scale.
But a recent conversation with the owners of a broker shop in NYC said this is easier said than done. Merchants are still using fax machines to send statements or claiming they don’t have access to computers or email accounts, they said. They added that their clients would suffer if approvals were completely contingent upon online verifications.
Cultural differences play a role in this according to Gil Zapata, the founder of Florida-based Lendinero. Zapata recently wrote that latino business owners over the age of 45 are not accustomed to doing business over the Internet, email, fax, or phone. “This group has a high level of distrust in doing business via the Internet,” he said.
So is there a middle ground? On the dailyfunder forum, Chad Otar, a managing partner of Excel Capital Management said that he tells merchants they can change their online banking passwords after a verification. And Andy McDonald of Yellowstone Capital wrote that verifying the bank data is beneficial for the merchants too. “It protects the merchant by allowing us to check their account to make sure our pulls aren’t going to bounce,” he wrote in a thread back in April. He also added that he comes across 2-3 applications PER DAY with altered statements.
Humans can only do so much. Pierre Mena actually wrote, “Some of these statements are doctored so well that you may have to zoom in upwards of 300% to find a comma that should actually be a period to separate dollars from cents.” At this point, an instant bank verification would probably work wonders.
Online business lender Kabbage might have the best model. On their website, applicants are instructed to enter their email address followed by their bank account username and password. Their system will analyze their bank transactions and if eligible, will then ask the applicant for their first and last name. It flies in the face of all the pushback that funders claim merchants give them over data privacy and security.
Four months ago Kabbage announced they were already up to funding $3 million per day. Obviously there is an entire segment of small business owners that are sucking up whatever concerns they had about bank verifications in order to get the capital they need.
The majority of the small business financing industry is still relying on paper statements and probably shouldn’t be. If you have to zoom in upwards of 300% to find a comma that should actually be a period and if con artists are offering discounts for bulk orders of fraudulent statements, it may be time to throw in the towel and join the rest of the world in using the Internet…
Dear Brokers, Investors Love You Too
June 25, 2015Hedge funds, private equity, and family offices have been all hot and bothered by lending marketplaces and direct funders for a while now, but there’s a new sexy stud that everybody wants to take to the dance, the brokers that originate the deals. An entire segment of the industry still calls them ISOs (Independent Sales Organizations) and in 2015, nobody can seem to shut up about them.
One minute brokers are being fingered as the source of the industry’s moral decline and the next minute they’re the lifeblood of it all.
Ever since World Business Lenders began acquiring broker shops and converting them into franchisees, the institutional investors suddenly woke up.
They’re Buying Brokers? BUT WHY?!
Over the years, dozens of funders have opened for business and then realized they don’t know how to get deals or where to get them from.
It’s not a build-it-and-they-will-come industry anymore. As much as certain people try to berate brokers, it’s widely believed that they still control up to 50% of the industry’s deal flow. Institutional investors examining portfolios have taken notice that some funders are successful only because they have a loyal group of broker shops. So if the brokers make the funder, then why not court the brokers?
And so they’re doing just that…
If you’re brokering less than a million a month though, you’re not really investment material yet. There’s thresholds. The more volume you produce, the more options at your disposal.
At this size, you’re really just a couple of dudes (or dudettes) sitting in a room with phones. There’s not enough action to get anyone excited. There may be some potential to get an investor to co-syndicate with you, but that’s it.
$1 Million/month to $4 Million/month
Congratulations, you’re not just a bunch of dudes anymore. If you’re using decent software, hopefully you can print out the necessary reports to woo investors. At this level you’re eligible for co-syndication, an advance rate to fund your own deals, or to be rolled up as a franchisee. If you’ve got a criminal record or have been banned by the SEC, then forget it though.
$4 Million+
If you’re not already funding your own deals at this point, you’re going to be encouraged to by an investor. They’ll want to set you up on a platform that they trust and participate in the funding in some way. You can get a credit facility. You’re also acquisition material. Funders and investors have little interest in acquiring a couple of dudes sitting in a room because there’s no actual assets to value. At $4 million a month and more, there may potentially be something beyond just the dudes running the company and therefore something to consider. If you can’t pass a criminal background check though, then forget it. And if you’re running scrappy like a $200k/month shop, then they’re not really going to be able to help you. It doesn’t help if you’re stack-heavy either.
But just because you do the volume, that doesn’t mean you can just show an investor an Excel spreadsheet and hope that they’ll fork over millions of dollars in return. You have to run your shop like a professional, not a dude (or dudette of course). And if you think you meet that criteria, that’s great news, because investors want to talk to you really badly.
Last year, every banker I sat down with told me they were looking to invest in the next OnDeck or CAN Capital. And what happened was, you had 200 bankers competing for the same handful of deals. This year, the conversations are all about brokers.
“Who wants to become a funder?”
“Who needs money to syndicate?”
“Who is serious about growing their broker shop?”
Did someone say Year of the Broker?
It damn sure is. If you’re funding more than a million a month, don’t rely on stacking, don’t have a criminal record, have actual reporting systems (not Excel), and want to be a funder or participate in more deals, then there’s a group of investors that are ready and willing to swipe right.
You might not be the next OnDeck and that’s okay. If you’ve got the flow, you can get the dough. <3 😉
