Here Come The Big Boys: Wells Fargo Kicks P2P Lenders While They’re Down

Here Come The Big Boys: Wells Fargo Kicks P2P Lenders While They’re Down

Earlier today, we said the following about marketplace lenders (the politically correct name for P2P, or online lending):

 

“Coming full circle, it’s worth noting that even from the start this business was a risky proposition. These online intermediaries are comparatively inexperienced when it comes to underwriting - no matter who’s on the board or on the management team. That is, given their size versus the size of large traditional lenders, and given the untested nature of online lenders’ algorithms, it was always unlikely that they’d be able to model risk as effectively. That’s not to say that Wall Street has a good track record when it comes to effectively modeling risk (see subprime housing ca. 2007), it’s simply to say that mistakes here were inevitable and given constraints on funding for marketplace loans, it was something of a foregone conclusion that there would one day be a confluence of rising charge-offs and possibly shady end-arounds to secure more money to keep the businesses going. That’s exactly what happened to LendingClub.”

 

The implication there is that contrary to former LendingClub CEO Renaud Laplanche’s contention that online lending would “upend finance,” a lack of dry powder combined with untested risk assessment models would invariably put the industry at a disadvantage vis-a-vis traditional lenders.

 

As Compass Point’s Michael Tarkan told Bloomberg back in February after LendingClub’s LC Advisors disclosed in a presentation that the 5-year cohort was underperforming versus company expectations, “their business is to take data and use that to underwrite risk, [so] if you’re an investor in the loans on the platform, this creates a concern around that underwriting model.”

 

“That underwriting model” involves the use of algorithms to assess credit risk, a Silicon Valley-ish approach that replaces face-to-face interaction with a loan officer with face-to-screen interaction (if you will). The obvious advantage to that model is speed and it’s helped online lenders capture business from traditional banks.

 

Back in December, On Deck (whose shares plunged a week ago after metrics seemed to suggest it was having a difficult time offloading its loans through the company’s marketplace platform) partnered with JP Morgan on a pilot program designed to allow the online lender to originate loans and use any data gleaned to tweak its algorithms while making JP Morgan more competitive in small business lending. Here’s a look at the rather abysmal performance On Deck has turned in since going public:

 

On Tuesday, we learn that  Wells Fargo - which as of the end of last year outstripped JP Morgan and most other competitors in the small business arena - is cutting out the marketplace middleman to launch “FastFlex”, a loan product that doles out as much as $35,000 to borrowers and is funded as quickly as the next business day. Here’s WSJ:

 

“Wells Fargo & Co. is launching a loan offering that could kick online competitors while they are down.

“The nation’s most valuable bank and the third largest by assets is planning to unveil a loan product Tuesday that is geared to small-business customers that have recently been gravitating to faster online lenders.

“Unlike some other banks that opted to partner with online lenders to make faster loans, Wells Fargo is going to launch the product on its own.

“Online lenders have grown quickly because small-business and other customers view their offerings as easier to obtain. ‘We took a look at what our customers were saying [and realized] a product that would have quick decision making, fast funding and ease for the customers” could be attractive, said Lisa Stevens, Wells Fargo’s head of small business.’”

Yes, “quick decision making and fast funding.” In other words: exactly what you don’t want in your underwriting standards. Consider that quote from Stevens and then consider the following comment from the aforementioned Michael Tarkan regarding LendingClub’s Q1 performance:

“Borrower debt-to-income levels are rising, income verification continues to slide, and monthly originations jumped at quarter end.”

In other words: speed and volume come at a cost.

When WSJ first reported the pilot program between On Deck and JP Morgan late last year, they told the story of a Justin and Susanna Furlone, owners of Wishbone Pet Co. Wishbone borrowed nearly $100,000 from On Deck only to discover that servicing that debt at the interest rates On Deck charged was quite burdensome.

According to The Journal, the Furlones chose the marketplace lender “after a banker from Wells Fargo said they likely wouldn’t get a bank loan to purchase inventory and manage payroll.”

Maybe they can try again with FastFlex.

Whatever the case, this is likely bad news for the marketplace lenders just when they don’t need it. If banks begin offering the same speed at lower rates, it will be a further blow to a space already dealing with questions about how long it will be before the ABS door slams shut curtailing companies’ ability to fund more loans.

As for Wells and any other big bank that decides “quick decision making and fast funding” is the way to go, they would do well to remember Countrywide’s experience with the infamous “Fast and Easy” program - although it will likely be some time before programs like Wells’ FastFlex grow large enough to pose a threat to the balance sheet.

Spread the love

1 Comment