Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Remember the "fintech revolution" that was going to reshape the banking industry? Well, don't go hoisting any new flags over the castle just yet.

Shares of On Deck Capital, the online lender to small businesses, fell as much 37 percent on Tuesday and have coughed up about three-quarters of their value since the company went public in 2014:

Revolting Performance
On Deck Capital's shares have plunged since the company went public in 2014
Source: Bloomberg

And shares of LendingClub, another online lender that went public the same month, are trading at about half their IPO price:

Clubbed
Lending Club's shares haven't fared much better than On Deck's
Source: Bloomberg

Don't even ask about LoanDepot, which saw those charts above and canceled its IPO right before it was about to price in December.
 
The latest leg of the selling came after On Deck's first-quarter financial results stunk up the joint on most metrics, especially the surprise that they didn't sell anywhere near as many loans to investors in their Marketplace platform as had been expected. This sort of blows up, or at least calls into question, a big chunk of what had made the concept appealing in the first place: that On Deck essentially matches borrowers in need of cash with investors who want to buy the loans.

Some of those loan buyers then package them into securities, while some investors hold them until they mature, but the important part is that On Deck doesn't have to hold the debt on its balance sheet and can book a 5.7 percent gain on the sale of the loans. 

Last quarter, On Deck continued to increase loan originations by a seemingly impressive 37 percent but sold only 26 percent of them on Marketplace. CEO Noah Breslow told analysts "it is no longer prudent" to assume the company will sell 35 percent to 45 percent of its loans; the number could be as low as 15 percent for the rest of the year.

The company is pitching this as a good thing, saying that holding more loans on its balance sheet will help bolster future revenue and that its hybrid model allows it to shift to its warehouse credit facilities to fund loans when Marketplace demand isn't generating enough attractive bids from investors. That's what happened last quarter as On Deck continued to move up market by seeking higher-quality borrowers instead of just the hard-luck cases who pay rates that would probably make a lot of loan sharks jealous. As a result, instead of loan origination growth of 45 percent to 50 percent, Breslow said a "more prudent" assumption is for 30 percent to 35 percent. 

Investors in the stock, however, are deciding the prudent thing now is to dump the shares -- and fast.

LendingClub also got hit after On Deck's report, with its shares tumbling 10 percent. The disappointing demand for On Deck's loans comes just as Jefferies and Goldman Sachs are buying up LendingClub loans and packaging them into securities, as Bloomberg's Matt Scully reported last week. Jefferies was said to be handling the riskier consumer loans with an average interest rate of 28.5 percent, while Goldman Sachs was handling less risky debt. 

LendingClub, too, spooked investors recently when it said it was raising rates by 32 basis points on average to "prepare for a potential slowdown in the economy" and the loan losses that accompany it. 

Trouble Ahead?
Lending Club raised rates on riskier loans last month to prepare for a 'potential slowdown in the economy'
Source: Company filing

It's hard to say what the biggest problem here is -- the scary new frontier of automating lending decisions with computer algorithms in a historically uncertain credit cycle; a modern distaste for tech companies going public without profits under their belts; or a tightly crowded competitive landscape (there are more than 160 companies in the online-lending space). 

For sure, the cannons of the fintech revolution will continue to sound louder than ever, especially in online lending. But like the original Internet revolution, the first to go public may not necessarily be the ones who wind up on top. Only time with tell which companies become the Amazon.com of online lending and which end up as the Pets.com. But it would be foolish to expect any revolution to succeed without casualties on both sides. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net