Online Lending Hitting A Rough Patch by PitchBook
While consumers and business owners quickly saw the internet as a convenient way to monitor their finances, it took several decades for the option of entirely bypassing brick and mortar banks to materialize. E-Loan, founded in 1997, offered an online platform for consumers to compare loan terms across multiple lenders while slashing broker fees; for a time the company also offered direct origination mortgages, as well as CDs. The platform popularized consumer access to FICO scores, a then-opaque metric used by banks as a standardized measure of creditworthiness. Wall Street’s voracious pre-crisis appetite for mortgage-backed securities prompted investment banks to turn to nonbank originators for loans to securitize. Though not all of these entities operated online, non-banks accounted for over 30% of all residential mortgages in the years immediately preceding the financial crisis. Quicken Loans became the market leader among non-bank originators by offering mortgages and lending products through an online portal.
Other than aggregation of mortgage originators and credit card issuers, online platforms for lending directly did not take off until after the financial crisis. The downturn not only caused material losses from certain credit instruments, but the monetary policy response of slashing interest rates to the zero bound reduced the future expected returns in fixed income portfolios. Retail investors’ newfound distrust in financial institutions further bolstered the conditions for unproven investment platforms to attract interest. While VC-backed Prosper pioneered peer-to-peer lending in 2006, it took until after the crisis for retail investors to trust online platforms.
A wave of upstarts began to facilitate direct investments by retail investors in slices of online-originated loans in amounts as low as $25. There was ample opportunity to profit from compressing the spread between borrowing and lending. Renaud Laplanche became inspired to found Lending Club after realizing that his credit card would charge him 18% interest while he earned less than 1% on his savings account. Prosper and later Lending Club and others experienced exponential growth when many early retail investors in peer-to-peer reported solid doubledigit returns. Subsequently, an entire ecosystem developed around peerto-peer lending, providing reporting, analytics and secondary markets. This attracted the interest of institutions that wanted to leverage their resources to generate outsized returns in the asset class.
Basic Business Models
The new wave of online lenders emerged initially under two distinct business models: balance sheet lenders and marketplace lenders. In addition to the use of novel technology, both business models rely on non-deposit funding. Marketplace lenders continue to evolve as peer-to-peer scales beyond what retail investors can support, pushing platforms to increasingly solicit institutional capital. These companies match buyers and sellers while minimizing their own balance sheet risk. Revenue comes from the collection of an up-front origination fee, as well as a servicing fee throughout the duration of the loan. These deals come with lower margin per loan, thus requiring substantial need for external investment. A lack of visibility into lending models has caused compression in the spreads these platforms are able to generate in fees due to investor uncertainty. Much of the spread they are able to collect goes toward customer acquisition since a large share of the revenue comes from non-recurring sources. Using the public financials of Lending Club as an example, origination fees average 4.47% per loan, accounting for a whopping 87% of the company’s revenue. Furthermore, expenditures on customer acquisition may not pay off in the long run. The target market of debt consolidation, with the goal of getting totally out of debt, does not lend itself to repeat customers.
Prosper took eight years to issue its first $1 billion in loans, relying overwhelmingly on retail investors. Once it tapped into institutional capital, the company took only six months to issue the second billion. When peer-to-peer lending platforms first emerged, these loans were entirely fractional, i.e. small investments were pooled and lent to a single borrower. In 2012 as the asset class matured and demand increased from institutional investors, Lending Club and Prosper began marketing whole loans to single investors. This has evolved into full-blown securitizations. PeerIQ, a marketplace lending analytics platform focusing on the securitizations market, notes a rapidly increasing average size of securitizations, growing from $64 million to $267 million from 2013 to 2016.
Balance sheet lenders originate loans from their own capital or raise funds from Industrial Lending Corporations (ILCs). One popular ILC is Utah-based WebBank, fully owned by Warren Lichtenstein’s Steel Partner Holdings (NYSE: SPLP). Balance sheet lenders such as Avant or Marlette Funding hold the loans on their balance sheets and collect the net interest margin (NIM) or spread between cost of capital and yield. This strategy brings in greater cashflow to the company over the life of the loan, but comes with risks from charge-offs and defaults, as well as exposure to capital markets. To mitigate duration risk, these players tend to focus on high-interest, short-term loans. These firms serve as banklike financial intermediaries, but without the high-friction cost structures such as the expense of maintaining physical branches.
Most of these emerging online lenders have provided credit to segments directly impacted by post-crisis legislation, which became neglected or mispriced by banking and government institutions. These target markets include consumer unsecured credit, small business lending, student loan refinance and high earning millennials with limited credit history. Further on, we’ll dive into each of these segments and how upstart lending platforms find novel ways to price risk, mitigate defaults and spur much-needed credit creation. These methods include the integration of alternative data sets and analytics, applied behavioral finance and nontraditional repayment schedules.
Market Applications & Segments
Student & Consumer Loans
It’s no secret that rising higher education costs in the US have burdened graduates with boatloads of student debt. According to the Brookings Institution, outstanding federal student loan debt quadrupled between 2000 and 2014 to reach $1.1 trillion. Federal Stafford Loans account for over 90% of outstanding loans and pay a fixed interest rate of 4.66% to all undergrads and 6.21% to graduate students, irrespective of indicators about ability to repay such as the institution attended or degree earned. More than 70% of federal loan defaults are made by borrowers from for-profit institutions such as DeVry or University of Phoenix. Traditional lenders offer private loans at a floating rate spread + LIBOR, typically around 8%.
Online student loan refinancers have focused on regulatory arbitrage of offering better rates to recent grads with strong career prospects but low FICO scores due to limited credit history. These lenders emerged as peer-to-peer lending platforms for alumni of elite institutions such as Wharton and Stanford, to lend directly to current students. SoFi Founder and CEO Mike Cagney refers to the ideal borrowers as HENRYs—high earners not rich yet. These represent the top 5-10% of earners aged 25 to 40 with high free cash flow and the potential to earn more. Student loans are also an ideal clientele since debt-laden digitally savvy millennials prefer operating online.
While all of these lenders have promised to bring banking relationships back to their interpersonal roots, they have also doubled down on increasing the accuracy of predictive analytics. Traditional FICO scores can be misleading for borrowers with limited credit history. Online lenders have augmented traditional credit scoring with alternative datapoints including job title, employment history, spending habits and income. Lenders speed up the approval process by allowing users to quickly import data directly from social media sites such as LinkedIn and transaction history from online banking platforms. The biggest deterrent to this alternative approach is the lack of track record for alternative credit scoring. Lending based off of criteria other than FICO score has only been around for about five years. To gain broader acceptance of these models, online lenders will need to weather a full credit and interest rate cycle. Adoption of secondary markets will only further refine these criteria.
Consumer and student loan lenders can operate as either balance sheet or marketplace lenders. Peer-to-peer platforms Lending Club (NYSE: LC) and Prosper offset loans with notes auctioned to the public, don’t use leverage and carry no credit risk. These loans are typically sold in bulk to institutional investors; some of the large players have even begun offering securitized loans. In 2Q 2016 we saw a total of six securitization deals: three backed by student loans, two by unsecured consumer loans, and one by SME loans. Establishing relationships with the existing financial services ecosystem will facilitate a more robust market for securitizions and institutional capital, making these firms less dependent on VC equity funding. Firms such as Avant and Marlette Funding have approached the segment using a balance sheet lending strategy. Avant’s sub-prime target market faced disproportionate exposure to the selloff in low-rated high yield credit in the first half of 2016. The massive ramp in issuance preceding a planned IPO may have led the company to drop standards in order to print massive outstanding issuance numbers. Furthermore, the strategy of targeting borrowers who want to consolidate their debt may result in adverse selection bias toward those with extant issues managing personal finances, especially with no enforcement mechanism to force them to actually cancel their other lines of credit.
Small Business Lending
According to a Harvard Business School case study, small businesses have created two-thirds of US jobs since 1995. Even so, these enterprises have become increasingly shut out by traditional banks. To apply for a loan, the average small or medium enterprise (SME) must fill out 25 hours of paperwork which in turn takes several weeks to process before a credit decision is made. This low velocity of money wastes critical time in which a small business may have urgent need for funds. Many of these companies have both poor accounting and record-keeping. Furthermore, the idiosyncrasies of small companies makes finding comps difficult if not impossible. For banks, this makes the transaction costs of lending $100,000 equal to lending $1,000,000.
Small business lending has always been the domain of smaller community banks. However, the consolidation of banking accelerated by the crisis has halved the number of community banks since the mid-80s. This phenomena contributed to deepening the fallout of the financial crisis. Recent reforms increasing capital requirements and oversight have made the paperwork and analysis for a low-yielding loan not worth the cost for banks. As banks have consolidated and grown risk averse, they’ve pulled away credit from small businesses when they needed it most. This exacerbates the cyclicality of the business cycle, and has led many businesses to fail during and after the financial crisis.
Many of the promising entrants into small business lending leverage novel forms of data to make lending decisions. Technology companies not thought of as lenders, such as Alibaba, PayPal and Square, use proprietary transaction data to lend merchants cash advances. These working capital lines of credit are paid off from a small slice of future transactions. This repayment method gives increased flexibility for lumpy sales. OnDeck (NYSE: ONDK) and Kabbage offer more traditional lines of credit, but are able to avoid mountains of paperwork by employing data imported from tax software such as Intuit (NAS: INTU), as well as social media (e.g. from Foursquare which can track foot traffic). This transaction and social media data can be imported and processed far more quickly and efficiently than traditional metrics inputted by hand through paperwork.
Marketplace lenders have tapped into the small business market as well. UK-based Funding Circle—backed by Index Ventures, Accel Partners, Blackrock, USV and others—offers term loans to small businesses in the UK and US and just expanded to the Netherlands, Germany and Spain by acquiring German lender Zencap. The company originally offered loans through an online auction process, but has since transitioned to a proprietary model to assess credit risk and price loans. The company resells loans to individual and institutional investors under the guise of earning a high return (it estimates 7.5%—note that fixed income yields are lower in Europe) while supporting small business. While this figure sounds reasonable, these platforms will need to survive an entire credit cycle before all of the risks are sussed out.
Founders of online lending platforms have kicked around lofty numbers for future market size. Avant founder and CEO Al Goldstein claimed in 2014 that he had a vision for his company as the “Amazon of financial services,” with a future $100 billion valuation on the same scale as bulge bracket banks. Many of these lofty projections imply that online lending can scale outside of consumer and small business loans into a diverse array of lending products including mortgages. In order to make this happen, Avant will need to expand beyond offering personal loans to sub-prime borrowers hoping to pay off credit card debt to auto loans, credit cards and mortgages. Mike Cagney, founder of SoFi, which has cracked the $10 billion origination mark, aims for a valuation of around $30 billion. SoFi has already expanded from student loan refinancing for the most creditworthy borrowers graduating from elite programs to mortgages for similarly “elite” borrowers, including interest-only options with faster underwriting and less restrictive liquid net worth requirements than traditional lenders.
According to research from PeerIQ, there have been more than $50 billion in cumulative online originations from alternative lenders as of the end of 2015. Looking solely at consumer unsecured originations (including student loans), Orchard estimates that originations have totaled $23.1 billion from 2Q 2013 through 1Q 2016. Both data providers note a decided slowdown in 1Q 2016 corresponding with a shift in credit 0markets. According to a 2015 Goldman Sachs report on the rise of shadowbanks, traditional lenders stand to lose $209 billion in unsecured personal lending and $177 billion in small business lending to online upstarts. In order for these platforms to justify lofty valuations, they will need to not only realize their potential in current verticals, but also tap into much larger markets such as the US mortgage industry, which originates $1.2 trillion annually.
The need for diverse and institutional capital has favored the largest and most well-established online lenders. For these lenders to continue to scale, however, the industry needs great transparency and additional data around loan performance so that investors can accurately assess risk and trade loans in a liquid market. Prosper’s 2008 class action lawsuit alleging the sale of unregistered securities prompted a settlement that obliged the platform and fellow lender Lending Club to register with the SEC. The costs of SEC registration increase the barriers to entry for peer-to-peer lenders and thus put a constraint on new platforms. More recently, allegations that publically traded online lender Lending Club (NYSE: LC) mismarked loans sold in bulk to Jeffries has rocked the nascent industry. Prosper, the only peer-to-peer lender to weather both the financial crisis and the settlement of an early class action lawsuit from investors, announced in May that it would lay off over 28% of its staff due to declining loan volume. Furthermore, a Supreme Court ruling in Madden vs. Midland Funding called into question the claimed exemption from state usury laws. These challenges have brought up questions as to how online lenders can continue to rapidly scale while maintaining outsized returns for investors. For one, a more liquid market for online loans would create a positive incentive structure to maintain loan quality by facilitating the price discovery that would allow marketplace lenders to compete on more than coupon. The fact that institutions typically purchase these loans at par indicates that the originator does not factor into how they trade.
Platforms have emerged to intermediate between institutional investors and upstart originators. Startups such as Orchard, Blackmoon, PeerIQ, MonJa and dv01 connect lenders and institutional investors, facilitating loan markets by integrating data with advanced features such as portfolio analytics, strategy development through backtesting and performance reporting. The firms facilitate a combination of marketplace and balance sheet lending that Blackmoon calls composite lending and Orchard calls a hybrid model. These intermediaries aim to combine the transparency of marketplace lenders with the greater interest revenue of balance sheet lenders by providing lending platforms with more real-time feedback on the quality of their credit models. Balance sheet lenders transform into composite lenders to hedge against duration risk and dilute less of their equity with venture raises.
Securitization of online-originated loans remains another essential piece to the puzzle for these lenders to attract long-term, low-cost capital. Through 2Q 2016, cumulative securitization issuance has reached $10.3 billion according to PeerIQ, with the peak issuance occurring in 4Q 2016 with a par value of $2.7 billion. Marketplace lender securitizations are similar to ABS (asset-backed securities) in other consumer credit classes; they have similar WALs (weighted average life—the average amount of time until a dollar of principal is repaid), offering prices and subordinations, yet are rated lower than comparable securities. This perception gap remains a challenge given the high profile issues faced by some of the largest online lenders.
Marketplace lending was not immune from the recent volatility in credit markets. Student loan securitizations weren’t as affected as consumer ABS, as spreads widened less on a relative basis. Junior tranches also fared poorly on secondary markets, some of which can be attributed to more senior debt weighted toward student loans. Lenders have also begun increasing rates per investor demands. For example, Lending Club increased rates for borrowers four times since 4Q 2015. First in response to the fed hiking rates, second in response to market volatility, third to account for increased delinquencies and fourth to give investors higher returns.
Accurately pricing risk in a secondary market would mitigate the inherent moral hazard of originators. The window for outsized returns through simple exposure to the asset class has closed. Investors will demand increased reporting analytics and visibility into the individual loans themselves in order to run their own trading algorithms. Studies of private direct lending have found that borrowers of traded loans perform better than equivalent non-traded loans, i.e. those that originators keep on balance sheets. The reputational risks of an originator’s portfolio underperforming in the secondary market have greater residual effects than the lost yield if held on their balance sheet. In other words, the long-run knock on effect from underwriting underperforming loans in an efficient marketplace platform are worse than the short-term losses from charge-offs.
Risks To The Marketplace
Questions remain over how the industry will react to a downturn in credit markets. The primary concerns center around investor appetite, transparency, fraud and diversity of capital. A shift in investor sentiment has begun to cause a contraction in capital allocation to credit, limiting the ability for existing borrowers to roll over their debts. Cracks have already emerged; Avant, a consumer balance sheet lender that uses machine learning tools to replace FICO scores, cited softened investor demand for loans when announcing multiple rounds of downsizing this spring and summer. This came just a year after a $400 million investment partnership to sell loans to KKR, Victory Park Capital and Jeffries. Questions remain as to how many borrowers are using online lenders to pay off other online loans. Anonymity and use of alternative data outside of the FICO system may compromise the ability of lenders to evaluate borrowing on other platforms. The exclusion of a potentially impactful hard credit check has been touted as a feature, not a bug. There may be increased opportunity for borrowers to commit fraud due to lax controls on the use of funds for their intended purposes.
Private Investment and Corporate M&A
The increased regulatory burden on banks after the financial crisis, combined with advances in data and analytics, has driven an interest in fintech, and we’ve seen a rapid influx of equity funding enter the online space to facilitate growth. Online lending platforms have their own regulatory, analytical and developer costs that must be funded through venture capital. The applicability of technological, financial and regulatory expertise has prompted bets on the space by a diverse group of investors, including traditional venture capital and private equity firms, hedge funds, mutual funds, corporate VC arms and financial services executives-cum-angel investors. Since the start of 2011, online lending has attracted $12.6 billion in capital across 463 completed deals. Investment in the space has increased exponentially this decade, reaching a zenith in 2015 when nearly $5.2 billion in capital was invested across 132 completed deals.
The largest deal in the period was the Series F round of student loan refinancer and consumer lender SoFi, which raised $1 billion of equity capital in August 2015. To illustrate the range of investors in the space, participants in the round led by Japanese telecom conglomorate SoftBank included hedge fund Third Point; mutual funds Wellington Management and The Hartford; private market secondary investment platform SharesPost; Chinese social network RenRen; and a number of traditional venture capital firms.
The 2015 peak in investment saw lots of hot money flow into the online lending space. Online lenders were awash in capital in 2015, raising $3.4 billion in VC funding alone. The recent popular scrutiny of high profile online lenders has meant unprecedented interest, but also a slight pause in private investment. Thus far in 2016 we’ve seen just $2.2 billion invested across 65 deals; comparing 1H 2016 with 2H 2015 yields a significant 44% drop in terms of capital invested. On balance, the consistently robust deal count indicates that innovative upstarts have continued to raise capital even as the industry faces challenges. Notable recent transactions include financial goal setting platform Payoff, which raised $47 million in June, and small business instant cash advance lender Kabbage, which raised a $135 million Series E and increased its revolving credit facility to $900 million in 4Q 2015.
The drop in VC and other private funding comes at a time when platforms are desperate for more diverse funding and sticky capital.
Online lending platforms have a strong preference to form long-term partnerships with both equity and debt investors rather than one-off transactional agreements. This leads to investors commanding more power in the online lending ecosystem than in other tech sectors. We’ll likely begin to see platforms cut costs and soon accept down rounds, as the increased regulatory scrutiny of the industry comes with higher compliance costs. In order to accomodate hot money, some platforms dropped lending standards. This will lead to underperformance that will cut into the equity of balance sheet lenders, and reduce investor demand for loans sourced by marketplace lenders. While we’ve already seen substantial layoffs at high-profile lenders including Avant, Lending Club, CommonBond and Prosper, platforms will also need to raise additional equity, perhaps accepting a drop in valuation in the form of a down round.
Naturally, fintech has developed in concentration around a handful of urban centers with significant resources in both finance and technology. Given the human capital intensive nature of the business, nearly two-thirds of equity investment in the space since 2010 has gone to startups located in the top five cities/regions. The Bay Area accounts for a whopping 34.4% of equity capital, the majority of which can be accounted for by the two most capitalized lenders: Lending Club and Prosper. New York accounts for 10.5% of equity funding, with many analytics platforms domiciled in Silicon Alley. These firms have tapped into the large pool of Wall Street talent not only to recruit employees, but also for advice and a source of capital. Likewise, London has accounted for 10.4% of capital invested and 8.5% of transactions. While it’s no secret London leads other financial hubs in areas like payments and blockchain, the lower barriers to entry for starting a bank in the UK make the abundance of online lending deals surprising.
Institutional Involvement & Risk Management
The low interest rate environment of recent years was ideal to push institutional investors toward an unproven but potentially lucrative asset class. Institutional investors began to chase yield in their fixed income allocations, as sovereign and corporate credit began to trade at record low levels thanks to central bank asset purchases. As we stand now, over a third of outstanding sovereign debt trades at negative nominal yields. Furthermore, duration has expanded, forcing investors to be exposed to even greater price sensitivity for lower and lower yields. It is in this environment that higher-yielding shorter duration assets become attractive. Loans on the Orchard Platform have a weighted average coupon of 13.7%.
Marketplace loans come with additional complexity compared to other fixed income assets. In addition to the standard risks of prepayment and default in the mortgage and consumer lending space, marketplace loans have many asymmetries around monthly payment date and underwriting standards that vary across origination platforms. Furthermore, investors must evaluate the risk of whether or not the originators and servicers will survive a downturn. Platforms must disclose contingency plans in case of bankruptcy in order to assuage investor concerns.
One major contingency is a lack of diversity in capital sources for online lenders. Many US lenders have relied on short-term warehouse lending from industrial lending corporations typically incorporated in regulation-light jurisdictions such as the states of Utah, South Dakota and Delaware. In order for online lenders to diversify their capital base, they must facilitate institutional investments in their loans. Lenders must cater to increased due diligence and reporting needs of more sophisticated investors.
Increasingly, these institutional investors are relying on third-party platforms to make their data as transparent as possible to assess all manner of risks. Platforms such as dv01, Orchard and PeerIQ offer solutions for more robust analytics than can be run in Excel. Investors need to be able to drill down into loan and cohort level data in order to run analysis and backtesting on performance. Given the short history of the industry, investors must familiarize themselves with the underwriting practices of upstart online lenders. This means an extra level of scrutiny of the data. Due to the limited comps, investors utilize data from the most established players in the industry such as Lending Club and Prosper, as well as comparable ABS products. In order to get an idea of how loans performed during a downturn, investors can purchase alternative historical datasets from the financial crisis. Investors can utilize traditional consumer credit card securitizations from Experian and Equifax to model out similar borrower profiles in a distressed macro environment.
The threat to continued innovation in the online lending space stems from an immature secondary market for trade these online-originated securities. Fears swirling around the industry remain firmly grounded in the experience of 2008. As we witnessed firsthand eight years ago, poorly understood illiquid products can cause a great deal of pain for financial institutions, especially once the pool of counterparties shrinks due to external shocks. Reducing complexity lowers funding costs for originators and increases liquidity for online-originated ABS products. Platforms that grew too fast using hot money will struggle. Layoffs will continue in the near term, as companies continue to thin expenses while weathering a cyclical slow in originations. Further, the aforementioned attention being paid to cost cuts also stems from companies seeking to find spend discipline as they attempt to prepare their respective businesses to secure permanent capital via the IPO markets. The IPO window has remained relatively narrow for most businesses, so new platforms undergoing growing pains similar to online lending have an even steeper hill to climb.
Spreads between speculative high-yield debt and risk-free treasury securities have shrunk to historically low levels recently. We expect yields to remain suppressed below historical levels for the foreseeable future and think online-originated loans will benefit from this outcome as investors scour for yield and re-allocate their credit portfolios.
Lastly, the influx of capital into online loans is only made possible with heightened transparency and sophisticated tools to help analyze both single and packaged loan products. We think the development of a secondary market for such loan products will continue to mature over the next 12 to 18 months as more institutional investors funnel capital into the space. Further, private backers won’t shy away from providing equity capital, but transactions may well become smaller as private investors look to invest in the peripheral ecosystem of the space, and not necessarily into the core marketplaces, many of which have already received significant amounts of capital.
We hope this report serves as a valuable resource as you continue to explore this nuanced sector. As the industry continues to mature, we’ll keep a close eye on it and provide updates as develpments unfold. As always, feel free to reach out with any comments or questions at email@example.com.
Select company profiles
Lending Club (NYSE: LC)
Location: San Francisco, CA | Year Founded: 2006 | Capital Raised to Date: $1.1B*
First Funding Date: May 2007 | First Funding Amount: $2.0M
IPO Date: December 2014 | IPO Amount: $870M
*Includes IPO amount and $55M of known pre-IPO debt
Description: Founded in 2006, Lending Club serves as ostensibly the most well-known and largest online peer-to-peer lending marketplace. The company facilitates personal and business loans, as well as financing for elective medical procedures, leveraging technology and a zerobranch infrastructure to drive costs down and charge borrowers lower rates. Having helped fund more than $18.7 billion in loans to date, the company itself doesn’t assume the credit risk of the loans it helps sell, but simply connects borrowers and investors via its online platform. Recently, the company has come under heavy scrutiny following the ousting of it’s founder and CEO, Renaud Laplanche. The ousting follows a scandal in which the company had misrepresented a portion of a $22 million loan package sold to an investor in order for the loans to meet the client’s requirements. While Laplanche had called for an internal investigation, according to media reports the board had determined that the ex-CEO hadn’t offered a full account of what he knew about the aforementioned sale. In addition, Laplanche was invested in an external investment vehicle that had been a buyer of Lending Club loans. His personal interest in the vehicle, Cirrix Capital, was never disclosed to the board, yet Laplanche had submitted a proposal to the firm to allow Lending Club to invest in the fund, despite failing to disclose his personal stake.
OnDeck (NYSE: ONDK)
Location: New York, NY | Year Founded: 2007 | Capital Raised to Date: $464M
First Funding Date: February 2007 | First Funding Amount: $2.2M
IPO Date: December 2014 | IPO Amount: $200M
Description: OnDeck is a provider of online small business loans. Founded in 2007, the company’s proprietary credit scoring system leverages advanced analytics to make real-time lending decisions and deploy capital to businesses in as little as 24 hours. Its credit analysis process ecompasses a thourough evaluation of thousands of data points regarding a business individual’s needs in place of evaluating personal credit in order to better quantify risk. To date, the company has lent over $4 billion to more than 50,000 customers across 700 industries.
Location: San Francisco, CA | Year Founded: 2005 | Capital Raised to Date: $361M
First Funding Date: April 2005 | First Funding Amount: $7.5M
Latest Funding Date: April 2015 | Latest Funding Amount: $165M
Description: Launched in 2006, Prosper is the first U.S marketplace lender, providing a platform that matches borrowers with both institutional and individual lenders. Through its flagship loan product, borrowers get access to low-rate, fixed-term loans that promise to come with no hidden fees or prepayment penalties. The company allows individuals to request loans between $2,000 and $35,000, while allowing individual lenders to invest as little as $25 in each loan listing they select; Prosper handles the servicing for all loan transactions.
SoFi (Social Finance)
Location: San Francisco, CA | Year Founded: 2011 | Capital Raised to Date: $1.42B
First Funding Date: October 2011 | First Funding Amount: $4.0M
Latest Funding Date: August 2015 | Latest Funding Amount: $1.0B
Description: With over $10 billion in loans issued to date, SoFi is a large player in the marketplace lending space and the largest provider of student loan refinancing products. Similar to other online lenders, the company incorporates enhanced technology and analytics into its underwriting process, but also evaluates unique items such as career experience and undergraduate/graduate school degree programs studied when assessing creditworthiness. In addition to dominating the student loan refinancing market, the company provides mortgage lending and refinancing solutions, personal and parent loans and wealth management services. Lastly, SoFi continues to find success selling packaged and securitized loans to qualified institutional investors. Despite the recent concerns sparked by the recent Lending Club scandal, the online lender recently completed one of the largest consumer loanbacked bond sales of 2016, completing a $380 million offering that saw 28 investors participate. According to media reports, the offering generated demand of nearly three times the amount of bonds that the company was looking to initially sell. The sale was completed in mid-June.
Location: Chicago, IL | Year Founded: 2012 | Capital Raised to Date: $1.357B
First Funding Date: May 2013 | First Funding Amount: $9.0M
Latest Funding Date: August 2015 | Latest Funding Amount: $1.0B
Description: Avant, which operates under the name AvantCredit in the UK and Canada, is a marketplace lending platform that leverages big data and machine-learning algorithms to offer a highly customized approach to streamlined credit options. At its core, Avant is a tech company that is dedicated to creating innovative and practical financial products for all consumers. More than 310,000 loans have been issued worldwide through the Avant website. The company laid off 60 employees in May and is reportedly downsizing further by offering voluntary severance packages.
Location: New York, NY | Year Founded: 2013 | Capital Raised to Date: $44.7M
First Funding Date: December 2013 | First Funding Amount: $2.7M
Latest Funding Date: September 2015| Latest Funding Amount: $30M
Description: Orchard offers technology and data to the marketplace lending industry, powering the interactions between institutional investors and loan originators. Using the company’s platform, investors are able to understand, access and execute marketplace lending investments; products and services include market data & research, an order management system and detailed reporting & analytics. For users looking to access lenders, Orchard provides access to a diverse group of institutional investors who use the company’s platform to purchase marketplace lending assets.The company has raised $44.7 million in venture funding and was last valued at $145 million with a $30 million Series B it secured in September 2015.
Location: New York, NY | Year Founded: 2014 | Capital Raised to Date: $8.5M
First Funding Date: September 2015 | First Funding Amount: $8.5M
Latest Funding Date: September 2015| Latest Funding Amount: $8.5M
Description: PeerIQ is a financial information services company that provides institutional investors with tools for analyzing, assessing and managing risk in the peer-to-peer lending market. PeerIQ’s analytics platform aggregates industry data from leading P2P platforms and offers sophisticated credit analytics, independent benchmarks and reporting to enhance efficiency and increase liquidity across the emerging asset class.
Location: New York, NY | Year Founded: 2015 | Capital Raised to Date: $7.5M
First Funding Date: 2015 | First Funding Amount: $2.5M
Latest Funding Date: June 2016 | Latest Funding Amount: $5M
Description: The analytics and reporting platform increases liquidity by simplifying all aspects of loan and bond investment, from portfolio management to securitization. To date, dv01 has provided investors real-time insight into more than $23 billion of loans from the biggest marketplace lenders, including Lending Club and Prosper.
Location: New York, NY | Year Founded: 2011 | Capital Raised to Date: $319M
First Funding Date: November 2012 | First Funding Amount: $1.0M
Latest Funding Date: July 2016 | Latest Funding Amount: $30M
Description: Founded in 2011 by three MBA students, CommonBond is an online lender that utilizes technology to lower student loan costs. The company both funds and refinances student loans, claiming to save its members more than $14,500 on average over the life of their loans. The company has also serves as the first pioneer of the “one-for-one” model, partnering with Pencils of Promise to fund the education of a student in need for every loan funded on its platform. Recently, the company announced two major announcements: a $300 million funding that comes as a combination of equity capital to fund operations and lending capital to fund loans, as well as the acquisition of Gradible, a provider of loan evaluation resources to provide suitable repayment plans for different financial situations. With the acquisition, employers will be able to use CommonBond to help employees properly assess their student loan repayment options while also enabling companies to contribute directly to their employees’ monthly student loan payments, a benefit that many millennials have begun to seek out in the workplace. The online lender has funded more than $500 million in loans, and with it’s most recent capital injection, it has surpassed the $1 billion mark in financing across equity and debt.
Location: San Francisco, CA | Year Founded: 2012 | Capital Raised to Date: $107.5M
First Funding Date: January 2013 | First Funding Amount: n/a
Latest Funding Date: September 2015 | Latest Funding Amount: $50M
Description: Fundbox leverages deep data analytics to accelerate cash flow and clear invoices for small business. The Fundbox risk engine taps into numerous data signals within its network to assess customers and invoices for risk, using existing accounting, e-invoicing and payroll software to allow small businesses to choose which invoices to clear. The company has underwritten more than 39 million invoices and helped more than 30,000 SMBs across the US.
Location: Atlanta, GA | Year Founded: 2008 | Capital Raised to Date: $316.5M
First Funding Date: November 2009 | First Funding Amount: $700,000
Latest Funding Date: October 2015 | Latest Funding Amount: $765M
Description: A financial services data and technology platform, Kabbage provides fully automated funding to small businesses in as little as minutes. The company leverages data generated through business activity such as accounting, online sales, shipping and dozens of other sources to understand performance and deliver funding in real time. Through its Karrot brand, Kabbage also offered consumer loans via its automated platform, though the company recently announced that it will no longer focus on the consumer segment.
Location: London, UK | Year Founded: 2010 | Capital Raised to Date: $300M
First Funding Date: February 2010 | First Funding Amount: $1.1M
Latest Funding Date: April 2015 | Latest Funding Amount: $147.2M
Description: Funding Circle is an online marketplace exclusively focused on small businesses. More than $2 billion has been lent through the platform to 15,000 businesses in the UK, US, Germany, Spain and the Netherlands. Businesses can borrow directly from a wide range of investors, including more than 47,000 individuals, the UK government, local councils, a university and a number of financial organizations. UK-based Funding Circle launched in the US in October 2013 and holds headquarters in London, San Francisco and Berlin.