58
FINTECHFORBES ASIA FEBRUARY 20 20Fintech 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
effort 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 profit until 2022-
23,” says Russ Mould of British broker AJ Bell. “People lose faith.”CEO Samir Desai58
FINTECHToday Cross River continues to expand, seemingly oblivious
to the looming risks. Just as banks competed in a frenzy to is-
sue “low doc” and low-rate mortgages while the housing bub-
ble inflated, some fintechs have begun making riskier loans.
Last year, one of Cross River’s biggest fintech partners,
Freedom Financial, agreed to a $20 million settlement
with the FDIC after the regulator determined Cross River
used “unfair and deceptive” practices by failing to effective-
ly oversee its partner during the origination of over 24,000
loans. Cross River was forced to pay a $641,750 fine.
An even bigger threat to fintechs is an economic down-
turn. 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 pro-
vision 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 unemployment and low inter-
est rates—is ideal.
“Our revenues have had a compounded annual growth rate
of 45%,” says Gade, who has adopted Silicon Valley speak to
describe his operation as an “everything as a service” compa-
ny. “The talk about a recession or a credit cycle that’s going to
start going the other way is much ado about nothing.”Meridian, known for issuing loans under the licensed name
Trump Financial. Early in his career, Gade, who was born
in Paris, took two years off to study the Talmud. In 2008,
he decided to make his move, pooling some $700,000 in
savings with $9 million from friends and others to invest
in Cross River, a community bank that had received a bank
charter but had no assets.
During Cross River’s first year in operation, Gade and his
small team mostly traded in and out of government-backed
and auction-rate securities. Then, less than two years after
the bank opened, Gade was approached by David Zalik, an
entrepreneur whose fintech, GreenSky, was growing rapidly
by enlisting contractors to make no-interest loans to prop-
erty owners for home improvement projects.
Gade began originating loans for GreenSky and realized
the nascent fintech could become Cross River’s engine for
growth. Gade quickly refashioned Cross River to serve the
fintech’s interests. His timing was perfect. It was 2010, and
the financial crisis had created widespread distrust of tra-
ditional bankers, 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 eager to fill the void, through a
growing field of fintech frontmen.
The rise of fintechs has some benefits. By tapping data
and using behavioral economics, many of the new compa-
nies, like Acorns and Betterment, have increased savings
rates and made personal finance more efficient. Fintechs
have been responsible for some $170 billion in refinancings
and loans to date.
Everything was going smoothly for the sector until about
2015, after a handful of big outfits like LendingClub went pub-
lic. Suddenly investors outside of Silicon Valley began to scru-
tinize the books—and they saw cracks in their foundations. RENAUDLAPLANCHE^ /THE^ NEWYORKTIMES^ /REDUX;^DANIEL^HAMBURY^ /EYEVINE/^ REDUXFintech FiascoON DECK CAPITAL
HARNESSING BIG DATA TO MAKE SMALL-BUSINESS LOANS
IPO: DECEMBER 2014 MARKET VALUE LOSS: $1.6 BILLIONFounded in 2006, On Deck uses data and algorithms to quickly
approve small-business loans—a group many banks are reluctant
to lend to. On Deck’s loans range from $5,000 to $500,000, and
its biggest bank partners have been JPMorgan Chase and Utah-
based Celtic Bank. Celtic accounts for some 20% of its loans.
By 2013, On Deck had originated
$400 million in loans despite charging
sky-high rates of up to 36%. In March
2014, it raised $77 million from Chase
Coleman’s Tiger Global and others.
A few months later it went public. On
Deck’s stock soared 40% to a $1.9 bil-
lion valuation on its first day of trading.
It was downhill from there as mar-
keting expenses ballooned, growth
slowed, and a new crop of competitors
like Fundbox, Kabbage and BlueVine
gained steam. In early 2017, On Deck
reported a 15% net charge-off rate of its loans due to defaults.
Two years later JPMorgan said it would stop working with it.
The original strategy was to “grow, grow, grow—which doesn’t
usually translate into good credit performance,” says Giuliano Bo-
logna, an analyst at investment bank BTIG. “What people really
started to realize is that, while there was a lot of tech, they’re really
more ‘fin’ than tech.” On Deck’s stock is down 75% from its IPO.CEO Noah BreslowF