Some investors arent waiting around for the
performance of mass market lending to improve.
Private equity firm Silver Lake and Japanese asset manager
SoftBank Group were part of a group that this month agreed to
$500 million in Social Finance, or SoFi, an online lender
that started as a refinancer for student loans and is rapidly
morphing into a private bank for Silicon Valleys newest
recruits. The latest round of funding created a $4 billion
valuation for the company, according to the Wall Street
Journal. Silver Lake and SoftBank declined to comment on
their investment in SoFi, which has been one of the most
consistently profitable online lenders.
Whereas Lending Club, Kabbage, and SoFi have been hot spots
for investors looking to bet on fintech, the
budding online lending sector has seen some tough times. Last
year investor confidence in online lending declined sharply
amid a federal regulatory probe of
Lending Club and middling loan performance in the industry.
To help improve performance, online lenders scaled back the
number of loans they provided in the second half of 2016,
narrowing credit standards to limit those that were high risk,
according to U.S. data provider Orchard Platform Advisors.
SoFis model diverges from other online lenders in a
few significant ways. Rather than ignoring traditional
financing structures entirely, SoFi melds them with technology
to create a high-tech private bank for borrowers with Silicon
Valley sensibilities and high salaries. Borrowers who work with
SoFi to refinance student debt are offered career counseling,
mortgages, and wealth management services as a way to keep them
with the company.
SoFi is really using student loans to surface the
future 1 percent by getting them at the point of the student
loan and then offering them financial products for the rest of
their lives, explains Brendan Ross, CEO of La
Cañada Flintridge, Californiabased Direct Lending
Investments, a $940 million hedge fund that provides credit to
online lenders and invests in them.
SoFi recently reinforced two big traditional banking pillars
of its business: savings and checking accounts and mortgage
lending. The fintech firm announced February 1 that it had
bought a mobile banking start-up Zenbanx ,
a deal that gave SoFi the platform it needs to start offering
products that look and operate much like traditional checking
and savings accounts. Also in February, Fitch Ratings agreed to
add SoFi to its mortgage origination
reporting. Fitch had already said in December that it would
rate SoFis first issuance of residential mortgage-backed
SoFis issuance in 2016 had an average FICO of
777, so that tends to equate to good performance, said Roelof
Slump, a New Yorkbased managing director at Fitch. FICO
scores provide a measure of consumer credit risk.
Its no surprise then, that high-profile private equity
names are lining up as investors. But its also different
from the egalitarian hymnal that fintech largely sings
Companies like Lending Club, which was one of the early
movers in the industry, started out by offering marketplace
loans to almost anyone. The vast majority of the loans
refinanced high interest rate credit card balances down to
something more affordable or paid off other consumer debts.
That model allowed online lenders to expand rapidly and catch
the attention of institutional investors interested in private
debt. But as Direct Lendings Ross points out, that
attention has led them to lower overall credit standards
because they have too many investors and not enough
Mass market lending platforms tend to bring in borrowers
through a somewhat generalist approach: They rely on direct
mail, web site ads, and other forms of advertising to get
applicants. SoFi, by contrast, is crafting a proprietary deal
flow network from its affluent user base.
Without proprietary deal flow, it means that the worst
offers are accepted every time, so the overall standard of the
loan book starts to go down, Ross explains.
When scouting for lenders for his fund, Ross looks for a a
differentiated business model that benefits from proprietary
deals and exhibits more consistent performance. One lender Ross
invests in, for example, is available through doctors offices
and offers direct financing for medical procedures.
As the industry matures and winners begin to emerge, the
online lending Old Guard seems to be looking for its own
proprietary angles to add value. Ross notes that Lending Club
recently started working with investment bank Jefferies to
strengthen its lending business. Lending Club management has
said that it used last years pullback in lending to
reinvest in operations.
2016 was a year of investment in the company,
Tom Casey, Lending Clubs CFO, said in the companys
fourth-quarter earnings statement on
February 14 . We developed better internal processes,
stronger controls, and a diversified investor base that will
help us compete in the future.