Fintech FiascoFUNDING CIRCLE
PEER-TO-PEER BUSINESS LENDING
IPO: SEPTEMBER 2018 MARKET VALUE LOSS: $1.5 BILLIONFunding Circle was conceived over pints in a London pub by a for-
mer management consultant named Samir Desai, 36, during the fi -
nancial crisis. As with LendingClub, the idea was to match borrow-
ers—in this case small businesses—with
institutional investors on the internet.
Funding Circle listed on the London
Stock Exchange in September 2018,
raising nearly $400 million at a value
of $2 billion.
That was the high point. Within nine
months the company cut its revenue
growth target by half, citing reduced
demand for its loans and a proactive
eff ort to “further tighten” lending to
riskier businesses. Its stock has plunged
by 77% in just over a year.
“Funding Circle is talking about not making a profi t until 2022–
23,” says Russ Mould of British broker AJ Bell. “People lose faith.”CEO Samir DesaiFintech FiascoLENDINGCLUB
MARKETPLACE LENDER
IPO: DECEMBER 2014 MARKET VALUE LOSS: $8.8 BILLIONLaunched by Frenchman Renaud Laplanche on Facebook in
2007 as a loan marketplace, LendingClub’s mission was to re-
place bankers by directly connecting borrowers to lenders, lower-
ing costs. Still, bank partners like Cross River helped LendingClub
grow at blistering speeds. By 2014 it reached $5 billion in loans and
went public, peaking at a value of $10 billion.
Not long aft er, fi nancial fi lings revealed that LendingClub was
burning 43% of its revenue on sales
and marketing. In its fi rst four years as
a public company, LendingClub lost
$340 million.
Then, in September 2018, its asset-
management arm, LC Advisors, and
Laplanche, plus another executive,
agreed to pay $4.2 million in penal-
ties to the SEC for misleading investors
about the loans they were buying. Reg-
ulators alleged they used LC Advisors
to prop up loan underwritings and im-
properly adjusted monthly fund returns
to downplay risk. Laplanche was barred from the securities indus-
try, and today LendingClub’s stock is down 80% from its peak.
“LendingClub was brought public by Morgan Stanley’s tech
bankers. They tried to sell it as a tech deal,” says Derek Pilecki of
hedge fund Gator Capital Management. “It’s a loan originator.”Cofounder Renaud Laplanche134
THEINVESTIGATIONFORBES.COM DECEMBER 31, 20 19to the looming risks. Just as banks competed in a frenzy to issue
“low doc” and low-rate mortgages while the housing bubble in-
fl ated, some fi ntechs have begun making riskier loans.
Last year, one of Cross River’s biggest fi ntech partners, Free-
dom Financial, agreed to a $20 million settlement with the
FDIC after the regulator determined Cross River used “unfair
and deceptive” practices by failing to eff ectively oversee its part-
ner during the origination of over 24,000 loans. Cross River was
forced to pay a $641,750 fi ne.
An even bigger threat to fi ntechs is an economic downturn.
In the third quarter of 2019, Cross River reported that its
problem loans doubled to nearly 2% of total, led by a $17 million
problem in commercial real estate, where 10% of its assets were
past due. (Cross River says most of the loans are now current.)
But since the fall of 2016, Cross River’s provision for loan losses
has nearly doubled as a percentage of average loans. Even more
recently its reserve coverage ratio of “past due or nonaccrual”
loans has declined from 489% to 114%. This at a time when the
overall environment for credit—thanks to record-low unem-
ployment and low interest rates—is ideal.
“Our revenues have had a compounded annual growth rate
of 45%,” says Gade, who has adopted Silicon Valley speak to de-
scribe his operation as an “everything as a service” company.
“The talk about a recession or a credit cycle that’s going to start
going the other way is much ado about nothing.”improvement projects.
Gade began originating loans for GreenSky and realized the
nascent fi ntech could become Cross River’s engine for growth.
Gade quickly refashioned Cross River to serve the fi ntech’s
interests. His timing was perfect. It was 2010, and the fi nan-
cial crisis had created widespread distrust of traditional bank-
ers, consumers had little equity to tap in their homes and banks
largely stopped extending credit. Cross River and several other
specialty banks like Utah’s Celtic Bank and WebBank were ea-
ger to fi ll the void, through a growing fi eld of fi ntech frontmen.
The rise of fi ntechs has some benefi ts. By tapping data and
using behavioral economics, many of the new companies, like
Acorns and Betterment, have increased savings rates and made
personal fi nance more effi cient. Fintechs have been responsible
for some $170 billion in refi nancings and loans to date.
Everything was going smoothly for the sector until about
2015, after a handful of big outfi ts like LendingClub went pub-
lic. Suddenly investors outside of Silicon Valley began to scruti-
nize the books—and they saw cracks in their foundations.
Today Cross River continues to expand, seemingly obliviousFORBES (ISSN 0015 6914) is published monthly, except January and July, by Forbes Media LLC, 499 Washington Blvd, Jersey City, NJ 07310, Periodicals postage paid at Newark, NJ
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