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HFEBRUARY 20 20 FORBES ASIAhedge funds and bond buyers, or securitize it into bundles
of thousands of such loans.
On the stock market, banks tend to trade for a fraction
of the multiple technology stocks do. That’s why fintechs
are eager to position themselves as tech firms, not financial
firms. The VCs are eager to sell that story, but the market
hasn’t been that stupid. Many fintech unicorns that have
managed to stage public offerings have been severely pun-
ished in the aftermarket.
LendingClub went public in 2014 with a valuation of
$5.6 billion. Today it is worth $1.2 billion. On Deck Capital,
a New York City–based fintech that makes superfast small
business loans, is worth $290 million today, down from
$1.9 billion the day it IPO’d in late 2014. It’s a similar sto-
ry for other fintech IPOs like Funding Circle and GreenSky.
“[These] companies positioned themselves as tech com-
panies, [but] in reality [they] are just leveraging tech to
further an old-school business solution like consumer lend-
ing,” says Andrew Marquardt of Middlemarch Partners and
formerly of the New York Fed and BlackRock. “You have in-
vestors looking at it and saying, ‘This is a bank, it is not a
tech company.’”
By Forbes’ count, some $15.6 billion in market value has
already been wiped out thanks to ill-fated fintech public of-
ferings. Other large lenders like Prosper Marketplace and
LoanDepot have either filed to go public and abandoned
plans or remain private. More inflated valuations are hid-
ing in plain sight.All of this could eventually spell big trouble for Cross
River. Some fintechs it has done business with, like Green-
Sky and LendingClub, have already become investor fias-
coes. There may be more train wrecks coming. Five of its
biggest fintech clients by market value have raised $2.25
billion at a combined value of $50 billion. None seems
ready to undergo the scrutiny of a public offering even as
the stock market hits highs and consumer defaults remain
near record lows.
At the moment, though, it’s boom time in Fort Lee. But
the party could end fast. Filings with the FDIC show per-
sonal loans—virtually all from fintech lending partners—
account for a high 60% of the loans on its books. A good
deal of the loans Cross River carries have sky-high inter-
est rates, forbidden in states like New York and Connecti-
cut with strict usury laws. The bank itself is venture-fund-
ed, attracting money from the likes of Andreessen Horow-
itz and Battery Ventures—some $28 million in late 2016. A
year ago, KKR. led a $100 million investment round, valu-
ing Cross River at nearly $1 billion, roughly three times
what a similar-size regional bank would typically be worth.
“Our strategy is to be the only financial services provider to
the fintech ecosystem globally,” Gade says excitedly. “Chang-
ing people’s lives is why we do this, before anything else.”
Prior to his arrival at Cross River, Gade had a decided-
ly conventional career. He’d done stints at Bear Stearns and
Barclays and as CFO of New York mortgage lender FirstFintech FiascoGREENSKY INC.
HOME IMPROVEMENT LOANS
IPO: MAY 2018 MARKET VALUE LOSS: $3.7 BILLIONCofounded in 2006 by David Zalik, a serial entrepreneur whose
businesses have ranged from selling refurbished PCs to real-estate
investing and cofounding a bank that failed, GreenSky uses tech to
make loans—often at zero interest—for home improvements and re-
pairs. Roofers, plumbers and other contractors with mobile phones
are its loan officers. For banks it pro-
vides great fee income and off-loads a
good deal of the upfront credit risk.
Last May, GreenSky went public,
raising $955 million. But not long after
the IPO, cracks in GreenSky’s busi-
ness model became apparent. In 2018,
GreenSky cut its full-year adjusted
earnings guidance from $192 million to
$175 million, spooking investors.
Things have gotten worse since, as
its lenders, including Cross River, have
pulled back. The startup is also dealing
with legal trouble over its contractor re-
lationships. GreenSky reached a $160,000 settlement in 2017 with
New Jersey’s attorney general to resolve consumer complaints,
and it is now facing a similar problem in Alabama. Since its post-
IPO peak of $26, GreenSky’s stock has fallen to $7, but Zalik has si-
phoned out so much that his net worth of $1.6 billion is now larger
than the company’s market capitalization.CEO David ZalikFintech FiascoLENDINGCLUB
MARKETPLACE LENDER
IPO: DECEMBER 2014 MARKET VALUE LOSS: $8.8 BILLION
Launched 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 after, financial filings revealed that LendingClub was
burning 43% of its revenue on sales
and marketing. In its first 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.
Regulators alleged they used LC Ad-
visors to prop up loan underwritings
and improperly adjusted monthly fund returns to downplay risk.
Laplanche was barred from the securities industry, 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 LaplancheDA
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