Page 131 - Forbes - USA (December 2019)

Fintech Fiasco the party could end fast. Filings with the FDIC show person-

GREENSKY INC. al loans—virtually all from fintech lending partners—account
for a high 60% of the loans on its books. A good deal of the
HOME IMPROVEMENT LOANS loans Cross River carries have sky-high interest rates, forbidden
IPO: MAY 2018 MARKET VALUE LOSS: $3.7 BILLION
in states like New York and Connecticut with strict usury laws.
Cofounded in 2006 by David Zalik, a serial entrepreneur whose The bank itself is venture-funded, attracting money from the
businesses have ranged from selling refurbished PCs to real-es- likes of Andreessen Horowitz and Battery Ventures—some $28
tate investing and cofounding a bank that failed, GreenSky uses million in late 2016. A year ago, KKR & Co. led a $100 million in-

tech to make loans—often at zero interest—for home improvements vestment round, valuing Cross River at nearly $1 billion, rough-
and repairs. Roofers, plumbers and other contractors with mobile
ly three times what a similar-size regional bank would typical- 129

phones are its loan officers. For banks
ly be worth.

it provides great fee income and off-

“Our strategy is to be the only financial services provider to
loads a good deal of the upfront cred- T

the fintech ecosystem globally,” Gade says excitedly. “Changing H
it risk. E
Last May, GreenSky went public, people’s lives is why we do this, before anything else.”
I
raising $955 million. But not long after Prior to his arrival at Cross River, Gade had a decidedly con- N

V
the IPO, cracks in GreenSky’s busi- ventional career. He’d done stints at Bear Stearns and Bar- E
ness model became apparent. In 2018, clays and as CFO of New York mortgage lender First Meridian, S
T
I
GreenSky cut its full-year adjusted known for issuing loans under the licensed name Trump Finan- G
earnings guidance from $192 million to cial. Early in his career, Gade, who was born in Paris, took two A T
$175 million, spooking investors. I
years off to study the Talmud. In 2008, he decided to make his O

Things have gotten worse since, as move, pooling some $700,000 in savings with $9 million from N
CEO David Zalik its lenders, including Cross River, have
friends and others to invest in Cross River, a community bank
pulled back. The startup is also dealing with legal trouble over its
that had received a bank charter but had no assets.

contractor relationships. GreenSky reached a $160,000 settlement

in 2017 with New Jersey’s attorney general to resolve consum- During Cross River’s first year in operation, Gade and his

er complaints, and it is now facing a similar problem in Alabama. small team mostly traded in and out of government-backed and
Since its post-IPO peak of $26, GreenSky’s stock has fallen to $7, auction-rate securities. Then, less than two years after the bank
but Zalik has siphoned out so much that his net worth of $1.6 billion opened, Gade was approached by David Zalik, an entrepreneur
is now larger than the company’s market capitalization. whose fintech, GreenSky, was growing rapidly by enlisting con-

tractors to make no-interest loans to property owners for home
pid. Many fintech unicorns that have managed to stage public

offerings have been severely punished in the aftermarket. Fintech Fiasco
LendingClub went public in 2014 with a valuation of $5.6 bil- ON DECK CAPITAL
lion. Today it is worth $1.2 billion. On Deck Capital, a New York

City–based fintech that makes superfast small business loans, HARNESSING BIG DATA TO MAKE SMALL-BUSINESS LOANS
IPO: DECEMBER 2014 MARKET VALUE LOSS: $1.6 BILLION
is worth $290 million today, down from $1.9 billion the day it

IPO’d in late 2014. It’s a similar story for other fintech IPOs like
Founded in 2006, On Deck uses data and algorithms to quickly
Funding Circle and GreenSky. approve small-business loans—a group many banks are reluctant
“[These] companies positioned themselves as tech compa- to lend to. On Deck’s loans range from $5,000 to $500,000, and
nies, [but] in reality [they] are just leveraging tech to further an its biggest bank partners have been JPMorgan Chase and Utah-
old-school business solution like consumer lending,” says An- based Celtic Bank. Celtic accounts for some 20% of its loans.
drew Marquardt of Middlemarch Partners and formerly of the By 2013, On Deck had originated
New York Fed and BlackRock. “You have investors looking at it $400 million in loans despite charging
sky-high rates of up to 36%. In March
and saying, ‘This is a bank, it is not a tech company.’ ”
2014, it raised $77 million from Chase
By Forbes’ count, some $15.6 billion in market value has al-
Coleman’s Tiger Global and others.
DAVID ZALIK BY JAMEL TOPPIN; BRENT LEWIN / BLOOMBERG

ready been wiped out thanks to ill-fated fintech public offer-
A few months later it went public. On
ings. Other large lenders like Prosper Marketplace and LoanDe-
Deck’s stock soared 40% to a $1.9 bil-

pot have either filed to go public and abandoned plans or re- lion valuation on its first day of trading.

main private. More inflated valuations are hiding in plain sight. It was downhill from there as mar-

All of this could eventually spell big trouble for Cross Riv- keting expenses ballooned, growth
er. Some fintechs it has done business with, like GreenSky slowed, and a new crop of competitors

and LendingClub, have already become investor fiascoes (see like Fundbox, Kabbage and BlueVine
sidebars). There may be more train wrecks coming (see table, gained steam. In early 2017, On Deck CEO Noah Breslow
reported a 15% net charge-off rate of its loans due to defaults.

p. 128). Five of its biggest fintech clients by market value have

Two years later JPMorgan said it would stop working with it.
raised $2.25 billion at a combined value of $50 billion. None
The original strategy was to “grow, grow, grow—which doesn’t

seems ready to undergo the scrutiny of a public offering even
usually translate into good credit performance,” says Giuliano Bo-
as the stock market hits highs and consumer defaults remain
logna, an analyst at investment bank BTIG. “What people really
near record lows. started to realize is that, while there was a lot of tech, they’re really
At the moment, though, it’s boom time in Fort Lee. But more ‘fin’ than tech.” On Deck’s stock is down 75% from its IPO.

D E C E M B E R 3 1 , 2 0 1 9 F O R B E S . C O M