Page 136 - Forbes - USA (December 2019)

Fintech Fiasco to the looming risks. Just as banks competed in a frenzy to issue
LENDINGCLUB “low doc” and low-rate mortgages while the housing bubble in-
flated, some fintechs have begun making riskier loans.

MARKETPLACE LENDER Last year, one of Cross River’s biggest fintech partners, Free-

IPO: DECEMBER 2014 MARKET VALUE LOSS: $8.8 BILLION
dom Financial, agreed to a $20 million settlement with the
Launched by Frenchman Renaud Laplanche on Facebook in FDIC after the regulator determined Cross River used “unfair

2007 as a loan marketplace, LendingClub’s mission was to re- and deceptive” practices by failing to effectively oversee its part-
place bankers by directly connecting borrowers to lenders, lower- ner during the origination of over 24,000 loans. Cross River was

ing costs. Still, bank partners like Cross River helped LendingClub forced to pay a $641,750 fine.

134 grow at blistering speeds. By 2014 it reached $5 billion in loans and An even bigger threat to fintechs is an economic downturn.
went public, peaking at a value of $10 billion. In the third quarter of 2019, Cross River reported that its
Not long after, financial filings revealed that LendingClub was problem loans doubled to nearly 2% of total, led by a $17 million

N burning 43% of its revenue on sales
O problem in commercial real estate, where 10% of its assets were

I and marketing. In its first four years as past due. (Cross River says most of the loans are now current.)
A T a public company, LendingClub lost
G $340 million. But since the fall of 2016, Cross River’s provision for loan losses
I has nearly doubled as a percentage of average loans. Even more
T Then, in September 2018, its asset-
S
E management arm, LC Advisors, and recently its reserve coverage ratio of “past due or nonaccrual”
V Laplanche, plus another executive, loans has declined from 489% to 114%. This at a time when the
N
I agreed to pay $4.2 million in penal- overall environment for credit—thanks to record-low unem-

E ties to the SEC for misleading investors
H ployment and low interest rates—is ideal.
T about the loans they were buying. Reg- “Our revenues have had a compounded annual growth rate
ulators alleged they used LC Advisors
of 45%,” says Gade, who has adopted Silicon Valley speak to de-
to prop up loan underwritings and im-
Cofounder Renaud Laplanche scribe his operation as an “everything as a service” company.
properly adjusted monthly fund returns
“The talk about a recession or a credit cycle that’s going to start
to downplay risk. Laplanche was barred from the securities indus-
try, and today LendingClub’s stock is down 80% from its peak. going the other way is much ado about nothing.” F
“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.” Fintech Fiasco
FUNDING CIRCLE

improvement projects. PEER-TO-PEER BUSINESS LENDING
Gade began originating loans for GreenSky and realized the IPO: SEPTEMBER 2018 MARKET VALUE LOSS: $1.5 BILLION

nascent fintech could become Cross River’s engine for growth.
Funding Circle was conceived over pints in a London pub by a for-
Gade quickly refashioned Cross River to serve the fintech’s

mer management consultant named Samir Desai, 36, during the fi-

interests. His timing was perfect. It was 2010, and the finan-
nancial crisis. As with LendingClub, the idea was to match borrow-
cial crisis had created widespread distrust of traditional bank- ers—in this case small businesses—with
ers, consumers had little equity to tap in their homes and banks institutional investors on the internet.
largely stopped extending credit. Cross River and several other Funding Circle listed on the London
specialty banks like Utah’s Celtic Bank and WebBank were ea- Stock Exchange in September 2018,

ger to fill the void, through a growing field of fintech frontmen. raising nearly $400 million at a value

The rise of fintechs has some benefits. By tapping data and of $2 billion.
using behavioral economics, many of the new companies, like That was the high point. Within nine
months the company cut its revenue
Acorns and Betterment, have increased savings rates and made
growth target by half, citing reduced
personal finance more efficient. Fintechs have been responsible

demand for its loans and a proactive
for some $170 billion in refinancings and loans to date.

effort to “further tighten” lending to
Everything was going smoothly for the sector until about riskier businesses. Its stock has plunged

2015, after a handful of big outfits like LendingClub went pub- by 77% in just over a year. CEO Samir Desai
lic. Suddenly investors outside of Silicon Valley began to scruti- “Funding Circle is talking about not making a profit until 2022–

nize the books—and they saw cracks in their foundations. 23,” says Russ Mould of British broker AJ Bell. “People lose faith.”
Today Cross River continues to expand, seemingly oblivious RENAUD LAPLANCHE / THE NEW YORK TIMES / REDUX; DANIEL HAMBURY / EYEVINE / REDUX
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