An In Depth Look at the OnDeck/JPMorgan Chase Deal

JPMorgan Chase Bank OnDeck Capital partnership

On Tuesday, OnDeck and JPMorgan Chase announced a partnership in what I think is the biggest news for the marketplace lending industry all year. The largest bank in the country, with $2.6 trillion in assets and close to $100 billion in revenue, decided that they needed help in providing loans for small businesses. So they turned to OnDeck.

I caught up with Noah Breslow, CEO of OnDeck, yesterday to discuss this historic deal. The roots of the deal began all the way back when OnDeck was choosing its bankers for their IPO in 2014. Noah met with Jaime Dimon and other senior executives at Chase and they were very intrigued with OnDeck’s business. Dimon himself seemed passionate about doing something with small-dollar business loans and the seeds of the partnership were sewn.

OnDeck ended up choosing JPMorgan as one of its bankers for their IPO and soon after they began serious discussions. Dealing with the nation’s largest bank meant that OnDeck had to ramp up much of its infrastructure to meet the stringent requirements for this partnership. This meant significant investments in IT, data security, compliance and more.

How the Deal Will Work

There has been a lot written about the JPMorgan Chase/OnDeck deal this week but I have not read anything that describes the details of how this deal will actually work. With the proviso that they are conducting a pilot and the final details may change, Noah explained how the partnership would operate.

Chase will be offering small-dollar business loans to many of its four million small business accounts. Chase will be using OnDeck’s underwriting technology to be able to give quick approvals and funding for their loans. These will be Chase branded loans that Chase will keep on their own balance sheet but OnDeck will provide loan servicing in a special white label program for Chase. OnDeck will receive an origination fee as well as a servicing fee on each loan.

Now, OnDeck has a pretty broad product suite so I asked Noah where in the spectrum Chase would be making loans. While he wouldn’t provide exact details he said, “it will be consistent with what other banks offer” and that the interest rate will likely be capped at some level. This means rates will be at the lower end of what OnDeck offers (which start at 5.99% for their longer term loans).

When it comes to underwriting Chase’s small business checking account customers Noah said that it will be highly integrated experience. A Chase customer may login to their account one day and see that they are pre-approved for a loan. Noah said that they expect very high approval rates and there is even the possibility of doing a binding approval for some customers. This is possible because of the history that Chase has with these customers – the OnDeck score relies heavily on the cash flow of the business and there will be a great deal of cash flow data being made available.

It should be noted that today the only way a Chase small business customer can obtain a loan from Chase is through a bank branch. The process is onerous and business owners have to wait many weeks before obtaining their loan if they get one at all. The OnDeck deal turns that process on its head by providing very quick turnaround.

Not OnDeck’s First Banking Relationship

While this is a huge deal for OnDeck they already have a successful partnership with BBVA Compass that was established over 18 months ago. In that relationship it is more of a referral program where BBVA send borrowers to OnDeck to apply for a loan. OnDeck is able to use some of BBVA’s data to help underwrite these borrowers but they are receiving an OnDeck loan, funded and serviced by OnDeck. Other platforms such as Funding Circle in the US and UK have similar arrangements with banks.

Noah was somewhat coy when I asked whether this was an exclusive relationship with Chase but he did say they are not precluded from working with other banks. So, while we might not see the exact same relationship it looks like more banking partnerships are in OnDeck’s future.

What Others are Saying

I reached out to a few industry leaders to get their thoughts on this groundbreaking partnership. Here is what they had to say.

Sam Hodges, Managing Director, Funding Circle USA:

This exciting news speaks to a broader trend where banks are realizing that companies like ours are great partners to help them handle smaller loans more efficiently and cost effectively – and get exposure to assets they haven’t had access to in decades. We’re already working with a number of banks here and in our other markets; looking ahead we believe many banks will prefer to put their small business loans through a platform like ours, as a great way to deliver superior customer experience and credit outcomes.

Brendan Ross, CEO & Founder, Direct Lending Investments:

The decline in traditional bank lending to small businesses started in 1995 and continues to this day.  The result is painful:  loyal, long-term small business customers of banks large and small are shocked to be turned down for a loan.  Without partnerships like the one between JPMorgan Chase and OnDeck, the advice a banker could give to a declined borrower amounted to “Sorry about that. Maybe check Google?”

Lenders I work with, including Biz2Credit, Quarterspot, Dealstruck, and IOU Financial are all working with or courting banks of all sizes, and deals like this will become the norm in the US over the next few years.

Rohit Arora, CEO & Co-Founder, Biz2Credit:

This announcement takes marketplace lending more mainstream as the largest banks like Chase seems to be validating the online lenders. In my view the next wave of partnerships will be more white label full-fledged deals happening like the one that we announced recently with Customers Bank also.

Jared Hecht, CEO & Co-Founder, Fundera:

This partnership only helps to further legitimize and cement the notion that online lending is here to stay. The endorsement of a Big Four bank in the US is a clear signal that the practices of modern lenders can not only achieve scale, but can provide a superior experience that small business owners will come to expect.

Brock Blake, CEO & Founder, Lendio:

The OnDeck / Chase announcement is a landmark deal in the industry and a positive sign for the relationship between traditional banking institutions and innovative lenders. In an inefficient market of small business loans, this is definitely a step in the right direction.
At the end of the day, the small business owner is the real winner. Chase customers that were previously unbankable and were denied credit through Chase will now have loan options made available to them.

My Take

I don’t think we can overstate the importance of this deal for the future of marketplace lending. Here we have the largest bank in the country, with such vast resources, acknowledging that there are some things that they don’t do very well. By engaging in this partnership Chase is sending a message to other large banks that partnering with leading marketplace lenders may be the best way forward.

This is a true David and Goliath partnership. OnDeck has issued just over $3 billion in total loans since inception and in the third quarter revenue came in at $67 million. This compares to Q3 revenue at JPMorgan Chase of $23.5 billion. With four million small business customers even if a tiny fraction of these decide to take a loan it could provide a huge revenue boost to OnDeck.

But finances aside. What this deal does is bring partnerships with marketplace lending platforms to the top of mind for all large banks. I think in the future we will look back at this moment and see this groundbreaking deal as a turning point. Banks can no longer ignore marketplace lenders and creating partnerships is the new blueprint.

There has been hundreds of articles written this week about this deal. Here is coverage from the Wall Street Journal, Financial Times and Bloomberg.

Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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Observer
Observer
Dec. 4, 2015 8:18 am

Great post Peter and team. Awesome deal for the industry and for OnDeck.

FinTechIdiot
FinTechIdiot
Dec. 4, 2015 9:02 am

Great scoop Peter. Was there any discussion around a range of rates these loans may have? OnDeck is not the cheapest and I wonder what type of appetite JP Morgan for some of the higher rate deals given their recent regulatory compliance issues.

Sam h
Sam h
Dec. 4, 2015 9:15 pm
Reply to  Peter Renton

Peter – great post and it’s been a long time.

I think you are off here. Having worked on all aspects of the Fundation / Regions transaction, I don’t think there will be many (if any) ONDK/JPM deals done in that range. The loans issued via this partnership will have ‘APR’s well in excess of 20% (maybe even higher than 30%). Not that there is anything wrong with that….

Happy to discuss more

Jeff Lunt
Jeff Lunt
Dec. 15, 2015 2:19 pm

Bought some shares of OnDeck for long term holding. Really interested in continuing to watch this industry grow.

Daniel Steve Villarreal, Ph.D.
Dec. 15, 2015 5:20 pm

Hi Peter, I bank with Chase but I’m an expatriate (American living in Taipei, Taiwan) with no US address. I’ve been hampered in investment opportunities due to FATCA (long story!). I’m wondering if there might be some opportunities for Chase customers like me to invest via this new program. Any ideas?

Thanks!

Dan Villarreal
Taipei, Taiwan

Daniel Steve Villarreal, Ph.D.
Dec. 21, 2015 4:17 pm
Reply to  Peter Renton

Hi Peter, thanks! It’s tough being an expat who would like to be an investor as well!–Merry Christmas, Dan Villarreal–Taipei, Taiwan

JC
JC
Dec. 16, 2015 1:04 am

Thanks for digging into this! With a spotlight that bright, nobody can ignore the shift.
Btw, sewing the seeds?

James
James
Mar. 11, 2016 7:03 pm

Too bad their stock is tanking and their reporting negative earnings.