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Ten Years of Investing in Marketplace Lending

I look back at my ten years of involvement in marketplace lending and share the major changes I have seen in the last decade

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This month marks ten years since I made my first investment in what was then called peer to peer lending. In July, 2009 I transferred $500 in to LendingClub to give it a try. Little did I know that first small investment would end up changing my life.

I had first read about peer to peer lending back in 2008 and I was immediately intrigued. I discovered Prosper but when I tried to open an account there they were in a quiet period. So I went looking for an alternative platform and found LendingClub. Within a few months I added $10,000 to that initial $500 investment. Then, I became so enamored with the whole idea of peer to peer lending that I was soon rolling over 401(k) accounts for my wife and I, as well as telling all my friends about it.

It was just over a year later that I decided to start blogging about this industry. Back then no one was writing about it and I really believed the industry had so much potential. So, I started the blog that would become Lend Academy back in November, 2010. The more I learned about peer to peer lending the more convinced I became that it had tremendous potential.

In 2013 as the industry was getting ready to take off I started LendIt, along with my fellow co-founders. It was the first ever conference focused on online lending and the one day event sold out. Then came the go-go years of 2014 and 2015 where dozens of new platforms got under way and venture capital was flowing into the space. The industry had its biggest setback in 2016 with the LendingClub crisis but the strong platforms endured and industry moved to focus on profitability.

Now, as I look back on the last 10 years I see so much has changed. The industry is now known as marketplace lending (thanks to Charles Moldow of Foundation Capital) and it has driven a resurgence in consumer lending and small business lending.

Ten Ways Marketplace Lending Has Changed Since 2009

1. Scale [Read more…]

Upstart Riding Automation and Bank Partnerships to Profitability

The online consumer lender has turned the corner in profitability during a year of strong growth

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Dave Girouard, CEO of Upstart, speaking at LendIt in 2017

Upstart has been quietly doing something that many others have found difficult: building a profitable online consumer lending business. I caught up with Upstart CEO, Dave Girouard, recently to talk about the state of his business and where he sees the biggest opportunities today.

To date Upstart has issued $2.8 billion in consumer loans which equates to 230,000 loans and they are doing about $180 million a month right now. They will end the year with double the loan volume they did last year. But Dave was quick to point out that they are not all that focused on loan volume. The metric they are most focused on is profitability. They have just completed five profitable months in a row and are now generating $1-2 million a month in profits. They expect to be profitable on a quarterly basis going forward.

How have they been able to move to profitability? One contributing factor is automation. Given Dave’s background (and many others on the team) at Google they have been very focused on technology at Upstart from day one. They have created an underwriting engine that is built for automation. Today, two-thirds of their loans are entirely automated and the median time to close a loan deal is 28 minutes. Most of that time is waiting for the user to respond, Dave said it would take less than five minutes if the customer was completely responsive. Manually underwritten loans have a median close time of 50 hours, still a pretty good user experience. They have also kept customer acquisition costs in check as their cost per loan has remained stable even as loan volume has accelerated.

Upstart made a name for themselves as being the first lending platform to leverage artificial intelligence and machine learning in their underwriting. They have also always used alternative data to build their models and have used this data in new ways. To provide investors comfort that all this was blessed by the regulators they sought and received a no-action letter from the CFPB in 2017. They continue to report to the CFPB on a quarterly basis. [Read more…]

OnDeck Announces PNC Will Be The Second Bank On The ODX Platform

The ninth largest bank in the country is partnering with OnDeck subsidiary ODX to offer unsecured lines of credit for small business owners

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It was back in December of 2015 that we first learned about OnDeck’s partnership with JPMorgan Chase. This was the first significant partnership between a large American bank and an online lending platform and it caused a lot of excitement in the industry back then.

A couple of times this year we have heard OnDeck CEO Noah Breslow hint that a second major bank was coming on as a partner soon. Today, we learned who that partner will be: PNC Bank. They are the ninth largest bank in the country, so this gives OnDeck two of the top ten largest banks as clients.

I caught up with Noah and Brian Geary, who heads up OnDeck’s new ODX division (we covered the story of ODX just last week) to talk about this new deal.

Noah started out by saying that the response to the ODX announcement has been very positive. Banks are excited to see OnDeck’s commitment to the banking channel and so that is helping conversations there. He also reminded me that OnDeck’s deal with Chase was renewed last year for another four years so Chase is clearly happy with their partnership with OnDeck.

As a reminder the Chase partnership is for term loans and only for existing Chase clients. Brian Geary said that the new deal with PNC is going to be different in two key ways. First, PNC will be offering an unsecured line of credit, not a term loan. Second, PNC will be offering this to existing as well as prospective clients.

ODX and PNC are still in the testing phase right now. They don’t expect to officially launch the offering until Q1 of next year. A quick look around the PNC website reveals they do currently offer an unsecured line of credit they call Choice Credit with lines up to $100,000. This is the product that ODX will be powering and when they launch it will have a completely different look than the somewhat dated offering on the PNC website today.

Speaking of user experience ODX will be providing the look and feel for PNC’s new offering. This will be a fully white labeled product with a mobile first design built within PNC’s branding guidelines. The bank is not changing their credit risk appetite so all loans will be made within PNC’s existing credit box.

Noah pointed out that what they are offering is not just the technology but the insights they have learned from lending over $10 billion. Not only that but OnDeck and ODX have people with deep expertise who can run this entire lending program for the bank.

My Take

When Chase came on board with OnDeck almost three years I would have expected that by now they would have had several large bank clients. In fact, I would have thought most banks by the end of 2018 would have online offerings for both consumers and small businesses. That has not been the case.

Eventually this will happen and all of the top 50 banks will have a broad product suite of online offerings. But when you look at bank websites today opening a new account (other than a credit card) still requires a trip to the branch in most instances. Moving to a 100% online customer onboarding process is inevitable for all bank products but the change is not happening as quickly as I expected.

I joked with Noah that I hope it is not almost three years before we see the third client for ODX’s lending as a service product. He is highly confident that won’t be the case as banks are now much more receptive to partnering with companies like ODX. Banks know they need to move online or they will be left behind by their competitors.

An Inside Look at the GreenSky-American Express Partnership

The multifaceted partnership is the first of its kind between a leading fintech platform and major credit card company

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We heard on Monday that newly public fintech company, GreenSky, has partnered with American Express in a wide ranging deal. While we have seen some interesting fintech/bank partnerships over the last few years this is one of the most significant. It is also one of the first examples of a company that facilitates installment loans partnering with a large credit card company.

I reached out to both GreenSky and American Express to find out more. But before I get to our conversations there let’s tease out the three ways in which GreenSky is partnering with American Express.

  1. Select American Express merchants will be able to offer financing through GreenSky

American Express merchants will be able to offer GreenSky point of sale financing as an option for consumers. This will happen in the two main verticals where GreenSky operates: home improvement and elective healthcare. Merchants are able to offer financing through the GreenSky Merchant app available for Android or iOS.

  1. American Express consumer card members can apply for an installment loan

This is a pilot project that will be available in the home improvement category in five U.S. cities initially. Consumers will be able to apply for an installment loan through their American Express login. The technology for this program will be provided by GreenSky and development is still ongoing before this will be a production offering.

  1. Access to American Express vPayment

American Express vPayment is a virtual payments solution that provides a virtual account number for each transaction. In this system a token can be provided to a customer for a single use. This obviously makes the digital payment more secure and reduces fraud risk.

[Read more…]

An Inside Look at Bank/Fintech Partnerships: Promontory Interfinancial Network and SoFi

We talk with Blue Ridge Bank and Pioneer Bank about buying SoFi loans through Promontory Interfinancial Network’s Bank Assetpoint® service.

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The recent surge in financial innovation has caused many community banks to rethink how they are serving their customers and what they can do to improve that experience. I recently spoke with two community banks about their decision to buy SoFi loans using Promontory Interfinancial Network’s service.

I spoke with Brian Plum, CEO of Blue Ridge Bank, which is a Virginia based community bank with mortgage offices in North Carolina, and Nicole Austin, Chief Lending Officer of Pioneer Bank, which is a New Mexico-based community bank.

Both banks had experience in looking at fintech partnerships before moving ahead with their decision on the SoFi program. They both said that as lending and banking changed, they needed to better understand how new technology could help their businesses.

[Read more…]

Marketplace Lending Predictions for 2018

A review of our 2017 predictions and some new thoughts for 2018

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Happy New Year everyone. As I do every year at this time I make a few predictions for the year ahead as well as review my previous years predictions.

Review of my 2017 Predictions

First, let’s review my predictions I made exactly one year ago. We had an interesting year as an industry in 2017, it was certainly a better year than 2016. I think I did ok on my predictions from last year although as you can read below I did get some things completely wrong.

  1. 2017 will be the year of the bank partnership
    I would say I was partially right on this one. We certainly saw a large number of new bank/fintech partnerships with deals closed from Avant, Fundation, Upstart, P2Bi, LendUp, Biz2Credit and many others. And in Europe the floodgates opened with dozens of new deals between lending platforms and banks announced. But in the US I was expecting even more partnership deals than we had so I think it is bit of a stretch to call 2017 the year of the bank partnership here.
  2. The OCC Fintech Charter will receive a positive reception
    It was an interesting year for the OCC Fintech Charter. With Thomas Curry leaving as head of the agency in April, then Keith Noreika holding the acting role for a few months and finally Joseph Otting being sworn in to lead the agency in late November it was difficult for any new initiative to get momentum. There was also the case of the Conference of State Board Supervisors suing the OCC over the charter, which was dismissed in December. So, while many of the fintech platforms supported the charter there was no real positive movement this year.
  3. Lending platforms will offer banking products
    While we had a couple of platforms offering credit cards for the most part this prediction failed to materialize. With the possible exception of SoFi I think we are still some time away from lending platforms offering a variety of banking products.
  4. One large platform will be acquired
    I am going to say I got this one right as one major platform was acquired in 2017. Student lender Earnest was acquired by Navient in a deal announced in early October. My guess that Prosper might be the platform to be acquired was wrong but there were rumors flying around about acquisition talks at more than one major platform last year.
  5. There will be no new IPOs this year
    I was almost right on this one but one US lending platform did have an IPO in 2017. Short term lender Elevate went public in April after postponing their IPO in 2016. None of the major marketplace lenders braved the public markets in 2017 as valuations continue to be depressed at many of the leading companies.
  6. China will become an important source of capital outside the USA
    I got this one right. China continues to make its presence felt as more US companies are looking for capital from that part of the world. The leading Chinese fund, the CreditEase Fintech Fund, made investments in 2017 in Upgrade, dv01, Orchard, Lenda and Nav just to name a few. China is now becoming a consideration for many more companies looking to raise money.
  7. Artificial intelligence will take center stage
    I think I read more articles about AI this year than in the previous five years combined. Whether it is for underwriting, customer acquisition, collections, compliance or cybersecurity AI is now central to the success of many lending platforms. It has taken center stage and will remain important for the foreseeable future.

[Read more…]

P2Binvestor Creates a New Kind of Bank Partnership

P2Binvestor and New Resource Bank partner on a new kind of asset backed lending deal

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P2Binvestor (or P2Bi for short) is an asset-based small business lender that has been around for a few years. I am an investor and they have been included in my quarterly returns roundup for some time now. Also, I interviewed CEO and Co-Founder, Krista Morgan on the Lend Academy Podcast a couple of years ago. Full disclosure: I am also on their advisory board.

Today, they announced an innovative new bank partnership product that is truly noteworthy. I chatted with Krista earlier today to get the scoop and some background about this new product. It all started at a hockey game about a year ago when she was chatting with a commercial banker. The banker lamented the fact that so many of their customers wanted more money than they were willing to provide. While discussions with that banker did not go anywhere the idea was germinated in Krista’s mind. What if there was a way to partner with a bank on a loan where P2Bi contributed to the deal along with the bank?

When Krista started discussions with San Francisco-based New Resource Bank earlier this year they were immediately receptive to the idea. After several months of back and forth and a couple of initial deals to test out the platform they are ready to announce their new partnership and this new structure to the world.

How These Deals Work

There is a detailed explanation of how this all works in Krista’s LinkedIn post she published today but here is a quick excerpt:

Businesses that don’t qualify for traditional bank financing are evaluated by P2Bi for a partnership loan based on joint credit policy criteria. Qualified businesses are extended an asset-backed line of credit with capital provided by the bank in a senior secured position, and the P2Bi marketplace in the second position. 

So, this is one loan, or line of credit to be precise, but with part of the funding being provided by the bank and the other part by the P2Bi investor marketplace. P2Bi will blend the interest rates from the bank and the marketplace for a lower interest rate for the borrower than they would have received if it was just the marketplace funding the loan.

Here is the really cool part: P2Bi remains the senior lien holder so they are in control if there is ever an issue with the loan. Having said that the bank is in a senior secured position so the bank must be paid in full before any of the marketplace investors get any of their money. But given these are asset-backed loans and in this relationship they are only lending up to 80% of the value of the collateral it is not as risky as it first seems.

My Take

I have invested in two such deals on their platform already and I think this could become really popular. It is a win-win-win where the borrower gets a lower rate, the bank gets to participate in deals they would otherwise miss out on and marketplace investors get more deals to invest in.

We have not seen as many new bank partnerships as I expected we would this year. So, it is good to see a platform getting creative and coming up with a new way to partner with banks. Krista said they would welcome other banks who are interested in expanding their loan book in a similar way. It will be interesting to see if this becomes a popular new model for banks to partner with fintech platforms.

The American Bankers Association Endorses Online Lending Software Provider Akouba

The endorsement is a huge boost for Akouba, a small business lending software provider for community and regional banks.

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We have said a number of times that 2017 is going to be the year of the Fintech/Bank partnership. This announcement today from the American Bankers Association (ABA) fits in very well with that premise.

The ABA announced that they have endorsed the digital lending solution provided by Akouba, a software provider that helps banks deliver small business loans in an efficient manner. This is a coup for Akouba, a startup with 11 employees (according to LinkedIn) that was founded in 2014.

Akouba first came on my radar about a year ago when they applied to PitchIt @ LendIt. They were chosen as one of the eight finalists and they presented to the judges and audience at LendIt USA 2016 this past April. They did not win and I have not heard much from them since that time but clearly they have been getting traction.

A More Efficient Way to Underwrite Small Business Loans

Akouba was conceived because most community banks do not have the capability to underwrite small business loans efficiently. They use old, paper-based methods that make it difficult to underwrite small dollar loans profitably, particularly the sub-$250,000 loans. Akouba provides the technology that converts this paper work flow into an online process from application all the way through funding. They are able to work with the banks underwriting model and incorporate it into this online process.

[Read more…]

What the Orchard & Sandler O’Neill Deal Means for Bank Partnerships

We look into one of the latest bank partnerships in online lending, this one with data and analytics provider Orchard.

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Sandler_ONeill_Orchard_Partnership

Orchard recently inked a partnership deal with investment bank and broker dealer Sandler O’Neill to provide their bank and specialty finance clients access to the Orchard platform. Orchard provides an integrated platform that helps to connect online loan originators and investors with access to a variety of web-enabled tools, including market data, benchmarking, investor reporting, portfolio analytics, and cash flow simulators, as well as capital markets software.

Sandler O’Neill’s network of community banks, thrifts and specialty finance institutions will now be able to access the online lending asset class. Orchards network of originators will give these institutions a diverse group of choices so they can better understand where to allocate their capital.

Online lending has seen a surge in bank partnerships the last two years and it does not look like stopping anytime soon. 2017 looks to be the year of the bank partnership and deals like Orchard/Sandler O’Neill can only help to accelerate this trend. While the initial partnership will help Sandler’s clients allocate capital, the more interactions that traditional institutions have with emerging fintech companies the more possibilities emerge.

“Many banks and specialty finance companies are ramping up their exploration of online lending to start 2017,” said Orchard’s Chief Commercial Officer Bill Ullman. “While some are just beginning to look and to make sense of this emerging space, others are deciding on the best tools to start making an allocation. Working with Sandler O’Neill, Orchard is providing them the expertise and data to begin evaluating and monitoring the wealth of opportunities that exist across the online lending market.”

Big incumbent banks have a lot of resources at their disposal. Being able to evaluate, partner or even build their own solutions is a luxury that small firms just do not have. Using a firm like Orchard to help provide access to this emerging asset class allows for the small institutions to be a lot more efficient when looking to interact and deploy capital.

Lend Academy has been keeping a tally of fintech/bank partnerships that you can view here; as the chart points out the types of bank partnerships can vary in scope and size. Community banks and special finance institutions can benefit greatly from a partnership, though they are unable to spend the necessary time to research all of these emerging companies. This is where the partnership of Orchard and Sandler O’Neill comes in, while it is still early days, the potential for a whole host of partnerships is an exciting piece of news for the market.

The New Intersection of Banks and Marketplace Lending

The lines are blurring between banks and marketplace lending platforms and I argue that is not a bad thing.

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banks_marketplace_lendingSince Lending Club announced the first bank partnership in 2013 banks have been increasing their involvement in the marketplace lending industry. But in recent months it feels like banks have become even more integral to our industry. Platforms are now actively contemplating acquiring a bank or starting their own bank. Many think this marks the end of the disruptive nature of marketplace lending. I couldn’t disagree more.

Zopa is Leading the Way Again

Zopa began the peer to peer lending revolution when it launched in 2005 and they are leading the way again with their announcement last month that they will be launching a digital bank. Their application has to go through a lengthy regulatory approval process that could take as long as two years but once approved they will be able to take deposits and offer a full suite of banking services.

The digital bank will remain separate from their P2P lending platform but clearly there will be some cross selling to Zopa’s clients. Zopa investors may decide to open a savings account or take out a small business loan, services that Zopa could add once they launch their digital bank.

SoFi is the Company to Watch in the USA

SoFi has a very different business model to Zopa. They were never a peer to peer lender but have operated a hybrid marketplace/balance sheet lending model. They are, however, the clear leader in online lending today in the US. They currently offer multiple products: student loans, personal loans, residential mortgages as well as wealth management services and recently began offering insurance. This suite of products looks similar to what many bank holding companies offer. [Read more…]

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We are a team of fintech enthusiasts who have been covering the industry for many years. With a deep knowledge of online lending, digital banking, blockchain, artificial intelligence and more our team covers the daily news and writes in-depth editorials.

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