As part of its Q1 earnings press release, the board of directors of Lending Club announced last week that it had accepted the resignation of Renaud Laplanche as Chairman and CEO following an internal review of sales of $22 million in near-prime loans to a single investor. This announcement also presented the company’s first quarter earnings reports, which showed Lending Club stock earning $0.01 per share, less than the $0.05 that was projected, but still a modest $4.1M contribution toward Net Income (up from a loss of $6.4M for the same period last year). This past Monday, after the markets opened, shares of the company were down as much as 26%.
The news about Lending Club came four days after OnDeck Capital reported a quarterly loss of $12.3 million and sharply reduced its earnings projections for the remainder of the year (after previously predicting a $10M – $14M gain this year). OnDeck’s stock price dropped by 34%, the day of the announcement and is down more than 80% since its December 2014 public offering.
Further signaling trouble ahead, Prosper – Lending Club’s primary rival and arguably the inventor of peer-to-peer lending – laid off 170 of its 619 employees, more than 25% of its entire workforce. CEO Aaron Vermut elected not to take a salary this year and Prosper shuttered their Utah operation where they had been planning a dramatic expansion. Proper’s cited reasons you ask? “Slow growth due to waning investor demand.”
The naysayers are starting to come out of the woodwork with the “I told you so”, “who could have predicted that?” and the “what did you think was going to happen?” It does have people wondering if the current business model needs modification. Of late, the fickleness of the marketplace investors that fueled the growth of the segment (mostly in the form of hedge funds, institutional investors, and even traditional banks) is wreaking havoc on the day-to-day operations of these new lending organizations. Some suggest that online lenders have taken on riskier borrowers than they originally thought they would. Many more skeptics question the algorithmic underwriting and, in many cases, unsecured nature of the loans being made.
What does this news mean for online lending and the CDFI industry? In many ways, these companies are making very informative mistakes and uncovering potentially fatal business model flaws we all can learn from. To use a quick example – Which site do you find yourself on more frequently: MySpace or Facebook? We use this example to illustrate a very specific point – It’s not always best to do it first, however, it’s ALWAYS best to do it right.
There are a few themes we’ve noticed from this brutal Spring for online and marketplace lending:
- Trust – Renaud Laplanche’s near overnight exiting of Lending Club has many wondering what other cracks in the foundation are going to be found. Although the Executive Board of Lending Club moved swiftly and decisively, there are doubts as to what else is waiting to be discovered. Once investors lose trust, consider a marketplace lender living on borrowed time.
- New banking products – As quickly as Laplanche exited, Wells Fargo spun up a new line of business seemingly overnight. Wells Fargo is now offering a “FastFlex” next-day-funded loan for small businesses in search of $10,000 – $35,000. Loans will be made in one-year term amounts with payments due weekly. Sound familiar? One must draw a line from the OnDeck and OnDeck-like products offered by the online lending world and this new move by Wells Fargo.
- Validity of algorithmic underwriting – With Wells Fargo’s move to offer the FastFlex product coupled with JP Morgan’s earlier announcement of a partnership with OnDeck, it seems the organizations many called “old”, “too large and stodgy” and “slow moving” are starting to experiment with much faster decision-making methods and behave more like their online and upstart brethren. However, as we are still in a very low default environment, the jury remains deadlocked on the validity of these new credit models and decision engines.
- Opportunity to engage – As these upstart lending companies begin to pull back from the front lines and signal weakness, this presents an opportunity for CDFIs and other more established lenders to push forward and re-engage with the small business community. Our proven methods, augmented with lessons learned about what not to do, put us in a great position to rush in where others rush out.