Looking at LendIt 2016

lendit

One of the must-attend FinTech events is LendIt USA, which took place April 11-12 here in San Francisco. LendIt is a key conference where a cadre of investors, executives and startups get together to learn, network and do deals in the non-bank lending space.

I caught up with three pioneers coming to LendIt: Ron Suber, President of Prosper; AdaPia d’Errico, CMO of Patch of Land, and Brendan Ross, CEO of Direct Lending Investments to talk about LendIt and talk about their involvement.

“Lendit is an annual event by which many measure time, progress or growth. I expect to see venture investors, funds and others looking for high quality, alternative finance and lending companies to evaluate for investment and partnership,” d’Errico says.

At Prosper’s offices in San Francisco, CEO Ron Suber comes across as highly confident in the prospects of the industry he represents, as one of the leading marketplace lenders.

“How have you been?” I learned is Ron’s general greeting, even when meeting someone for the first time; he introduced me to Aaron Vermut, a friend of Andy Bond, a NYC-based former colleague of mine at Scient, but focused our conversation on MaxMyInterest.

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Since the New York Times was waiting for him after we spoke, we did speak about P2P, but mostly chatted about his angel investments, including Patch of Land and Apple Pie Capital (watch its 2015 LendIt Presentation), a rival to fintech company Funding Wonder I was an advisor to prior to joining MaxMyInterest.

Prosper is one of the Platinum sponsor of LendIt USA 2016 and announced its ending its relationship with Citi, which was a big partnership announcement last year.

While companies such as Prosper garner attention (given their position as one of the largest FinTech firms, with a private valuation of $1.8B), I found a lot of insight speaking to smaller, innovative firms that were able to say more about where alt lending is headed.

Direct Lending Investments CEO Ross says: “I’ve been at LendIt from the beginning, when few people were attending. Going now is like a reunion, where you see people you’ve known for a long time.”

In 2016, Ross says alternative lending faces the challenges of having too many lenders vs. borrowers, and finding customers without direct mail or paying for brokers. That will be one of the key conversations to follow at LendIt 2016.

DLIHow is Direct Lending Investments succeeding?  Ross says “we add  value by focusing on profitable niche markets. Being a fund vs. a web site trying to do everything has been critical,” Ross says, adding that DLI “adds value for our investors by sourcing unique dealflow – being focused on areas of lending that are not served well by banks.”

Ross brings a range set of experience across wealth management, as a turnaround CEO, along with expertise in private credit having purchased over $1 billion in loans and receivables from non-bank lenders (more than any other investor worldwide).

But he credits success to his team, including Dr. Bryce Mason, DLI’s Chief Investment Officer, with deep experience in independent loan scoring models and loan portfolios. James Alexander – a former banker from Goldman –  rounds out the management team.

PoL

Patch of Land’s CMO d’Errico told me LendIt has “been a pivotal event for me and Patch of Land since our first appearance in 2014.”

This year, she was a mentor for PitchIt, where she work with startups in alternative lending space. “I can already tell by working with the finalists that the level at which these startups are operating is world-class,” she says.

D’Errico also shared that Patch of Land hit two milestones: having  originated over $100 million in short-term loans for real estate professionals who purchase, rehabilitate and refinance undervalued residential and commercial properties; and returned over $25 million in principal and interest to its investors.

What’s remarkable about this news is that Patch of Land is still 85% crowdfunded, unlike a lot of firms like Prosper  that receive most of their funding from institutional investors.

One big piece of news this year is the decision by SoFi to stay away from LendIt. They are #notabank and also #notatlendit, causing some to speculate why. A common theory is SoFi is looking to separate itself from the category of lender, as it works to promote itself as a broader provider of services with a more unique positioning.

Overall, the reaction from many at LendIt USA 2016 was that the event was quite different from 2015, when the euphoria over the Lending Club IPO was still dominant, and many providers were trumpeting their recent funding rounds.

This year’s LendIt was still a great event, but as one noted, it’s more like an asset-backed lending conference (just without the banks, and with a hefty dose of startups that you might otherwise see at Money 20/20 or Finovate).

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2016 Predictions

2016


Hello. It’s me. As we kick off 2016, look for consolidation as private companies are forced into the arms of larger players, along lines of last week’s purchase of Jemstep by Investco, or the acquisition of Yodlee by Envestnet, BillGuard’s purchase by Prosper or BlackRock’s acquisition of FutureAdvisor.

It’s incredible how much is written – still – on Robo’s being “on fire” when the facts are so different. Look for capitulation in 2016, among startups in the robo advisor category and continued dominance by a handful in the lending space.

Robo advisors are private, so it’s hard to know how much case they are going through but the themes of recent news (e.g. lowering investment limits) suggest we may see one of the bigger players disappear in 2016, if not 2017.

This development is not specific to digital wealth management, so consolidation and capitulation is my prediction for all areas of FinTech.

pac manIn 2016, look for consolidation within the most crowded areas (e.g. alternative lending, robo advisors) with too many ‘me too’ companies. Look also for some acceleration of Product innovation at bigger firms, as they try to respond to the to FinTech startups who’s captures headlines over the last few years.

 

Advisors: Where the Action Is

The real story is slow demise of the big name firms like Merrill Lynch and Morgan Stanley, as they lose top advisors and clients to RIA’s (not robo advisors).

Less covered by tech media, look for RIA’s to continue to take share from brokerage firms, even as firms like Morgan Stanley explore automated investment services.

What’s behind Morgan Stanley reportedly planning to introduce its own ‘robo advisor’ service is not competing with Betterment, but trying to stay relevant and nimble as it loses share to RIA’s that offer better services, products and technology.

FinTech industry followers are better served to listen to Michael Kitces and Bill Winterberg rather than read press releases from robo advisors.

Financial Data Comes to the Cloud

Is Market Data as exciting as marketplace lending or mobile payments? Maybe not, but it deserves attention, especially as one innovator, Xignite, behind Wealthfront, Betterment, Personal Capital, Motif and StockTwits –is looking to shake up an industry.

xignite

I recently sat down with the Founder & CEO of Xignite, Stephane Dubois, in San Mateo. He noted how robo advisors were among early clients of xIgnite, but that his target market now includes larger financial institutions.

I asked him whether xIgnite was like Stripe for the market data world? My rationale was Stripe has been successful in payments in part due to its focus on developer community.

Stephane_Dubois

Dubois saw the parallel, noting that xIgnite is focused on API’s, innovation and targets developers, while financial data incumbents (e.g. Thomson Reuters, Bloomberg, S&P) often seek to sell products, not delivering the actual data clients want.

 

But he emphasized Xignite targets both developers and businesses (both startup and larger companies at this point in the growth trajectory). As Dubois expressed it, xIgnite’s goal includes growing its business through enabling more responsive front-end tools for financial institutions, and helping it slash back-end costs.

Is Xignite the Stripe of the market data world?

From my experience at Morgan Stanley, I think there’s opportunity. Although there is a lot of focus on controlling market data expense, in light of reduced profits in many trading areas, executives such as Morgan Stanley’s Ken Brady are smart and strategic, looking to control expenditure but also enable the business.

Focus on the Apps, Not the Integration

Screen Shot 2016-01-18 at 10.17.18 PM

This illustration from xIgnite captures the essence of its value proposition and also highlights one issue for large financial institutions.

Banks do a good job managing their third-party expenditures and risk; teams focused on partners on Wall St. (ranging from Operations, Market Data, Tech Risk, Vendor Risk, Corporate Services, COO Teams). What big banks can learn from startups is to focus on the apps, not the integration (and using xIgnite can help with that approach).

Morgan Stanley legend Merritt Lutz jokes that in a post Dodd-Frank world, you can find a risk officer hiding under every desk on Wall Street. But the red tape on risk and expense  management, has slowed down execution. Clients using Morgan Stanley Online can’t see basic portfolio performance reporting online, in contrast to most of its competitors.

As a result, wealth management units of banks suffer from too long development cycles. Instead of navigating bureaucracies, expense approval and risk teams, developers should be able to focus on apps and the data they need to serve clients.

Bigger banks should be more API-centric approach and embrace Agile in order to enable faster time-to-market on Wall St. and compete with FinTech firms.

2016 

Final thoughts on 2016? I’m looking forward to incumbents moving faster, adopting API solutions like Xignite, during consolidation since as one executive from J.P. Morgan Chase said, ‘Do we really need 1,000 mobile wallet startups?’

I also don’t foresee any big IPO’s in the FinTech space, given the state of the markets, although SoFi and Stripe have all the right pieces in place. For now, I can see Financial Technology Partners being busy with lots of deals focused on the middle market.

2016 should offer a few surprises. I look forward to telling you about them.

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Talking vs. Doing

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CEO of Nerdwallet, Tim Chen, Speaking to VC in San Francisco

Even though Home Depot moved on from its slogan of “Less Talking, More Doing” I’ve been thinking about that statement in the context of FinTech. There are so many conferences and places to network, it’s easy to spend too much time listening to experts versus doing the hard work of growing a business.

Reinforcing this, Level 39’s Head of Ecosystem Development, made this point at SIBOS last week in Singapore (see tweet).

Screen Shot 2015-10-16 at 2.42.10 PM

It’s not that events are a waste of time – it’s just critical to focus on what you do at them, i.e. focus on learning and giving back to partners and others.

As CoreVC‘s Kathleen Utech said, events like Money 20/20 are valuable in part for one-on-one conversations you set up, so make sure you plan them.

Buzz vs. Buzzkill

While there’s still a lot of buzz associated with financial services tech startups, with the latest news being the planned IPO for Square, a successful Los Angeles-based private investor in FinTech told me, “I’m sure a good percentage of startups with huge private valuations will never seen a liquidity event.”

We agreed that well-known startups are suspect, especially in some categories, e.g. robo advisors and online lenders. I’m bullish on the big names in the startup space, such as Prosper, but wonder about the second and third tier.

prosper

I recently sat down with Ron Suber of Prosper the other day and talked about innovation. I think the BillGuard deal was a very smart move. Prior to meeting him, I’d read the Stanford GSB Case Study on Prosper. It’s striking to see the similarities between today’s fascination with FinTech and the earlier euphoria  over E-Loan in the period during the last dot-com boom.

I recommend the case study to see the difference between a good idea and execution, and the key role of regulators. Another important lesson is that VC’s are not the final answer: It’s up to you as the entrepreneur to make smart decisions.

Being Smart: Investing vs. Paying the Price Later

I saw Bill McKnight, Head of Product and Technology at RealtyMogul the other day. It was interesting to see the energy of the office, which was quite different from offices of places like Prosper, which have more of a tech company environment.

realtymogulThe office atmosphere reflected the high percentage of employees who come from a real estate finance background, resulting in a mix between a tech company and a traditional lender.

Bill spoke to me about the importance of moving fast, yet being smart about investments in engineering to avoid “technical debt” later.

Transparency: Metrics that Matter

Another player in the real estate space within FinTech is Patch of Land. I met the CEO, Jason Fritton and CMO, AdaPia d’Errico, on a recent trip to Los Angeles. A somewhat earlier-stage startup than RealtyMogul, I was struck by the strengths of the team in terms of client and market focus.

I’ve also been impressed by Patch of Land’s ability to build a community through its social media efforts. Would be winners in FinTech would be smart to look at how AdaPia’s team uses SM to bolster growth.

Here’s some comparative metrics for Patch of Land (on top) vs. Lending Club. It’s clear from the SM metrics that the objectives are different, with one being more of a broadcast model vs. means for community engagement, but the figures are striking.

 

Screen Shot 2015-10-20 at 2.58.28 PMScreen Shot 2015-10-20 at 2.54.09 PM
Screen Shot 2015-10-20 at 2.58.14 PM       Screen Shot 2015-10-20 at 2.55.38 PM

 

Steady Growth

Tim Chen, CEO of NerdWallet spoke to a packed house of about three hundred members of the SF FinTech Meetup at its offices in San Francisco recently.

nerdwalletPersonally, I was impressed by Tim’s modesty as he spoke of growing NerdWallet from tough early days when it made very little money. He won the crowd over with his timeline showing user growth matched by the SEO work to grow reach (building links and creating content).

Talking to others in the world of FinTech is useful, since I think each and every interaction with others can be a learning opportunity, but beware attending too many conferences on FinTech, when you could be building something.

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Transparency

transparency

In a world in which Google’s reorganizing itself to boost transparency into its main business, I thought it would be a good week to talk about transparency.

I’m a big fan of a transparency. A former boss, now chief operating officer of Morgan Stanley’s technology division, used to remind me that sunlight is the best antiseptic.

He used the term referring to dashboards on financials, projects and risk – but I’m using in a context of being transparent with your customers about your value and pricing.

In my experience, banks, are less transparent than startups. I think a reason is that banks have a lot of different constituents – and less of a singular value proposition – but startups and banks can fall short.

lendingclub

Consider Lending Club. A former employee told someone it saves the average borrower only 1.5% after factoring in all its fees.

It’s still decent savings, yet the company plays up the gap between savings account rates (<1%) and credit card rates, as if it were passing along savings of that magnitude.

prosper logo(This issue isn’t limited to Lending Club. As reported by Bloomberg, a disclosure by Citi on securities from Prosper gave a forecast return of 5.48% on low risk loans; total losses were forecast at 8%; 13.2% average APR)

Lending Club and its peers are great models, but I think they could be more transparent. I’m optimistic about marketplace lending. But to help make it better, I encourage everyone to provide feedback to the U.S. Treasury’s RFI on this sector. Comments are due on Sept. 3rd.

I just read Morgan Stanley’s Smittipon Srethapramote set a target of $24 for Lending Club (60% above from its current price).

I’ve not spoken to Smittipon since the IPO, but read he was bullish given acquisition cost trends and growth ‘runway’: I was glad given my upbeat take on Lending Club in TheStreet.com.

Another topic I’ve been thinking about lately is this chart:

Screen Shot 2015-08-10 at 8.29.03 PM

Created by the Financial Brand team, including FinTech Mafia member, Jim Marous, it was well worth sharing. It does speak to both how banks may have their heads in the sand, and also the marketing work that remains to be done at some startups.

As an advisor to startups, I’ve seen how difficult it is to break out into even the level of awareness of firms in the table, despite the increase in venture funding for FinTech.

LoanNowLogo

I’d like to mention a startup, LoanNow, which is early stage and seeking to break out. I recently spoke with Miron Lulic, President of LoanNow, a ‘white hat’ (or responsible) online lender.

Similar to LendUp, key differences with LoanNow is it offers installment loans vs. revolving credit, and provides higher loan amounts. I admire Lulic’s goal to make lending better via technology, which he observed was pretty appalling in the payday lending industry.

LoanNow wants to bring better technology and an improved user experience (UX) to an antiquated, category of lenders that they also believe charges its borrowers too much.

We Help Good People Get Better Loans

LoanNow offers ‘gamification’ (e.g. challenges to meet in order to lower the APR), but one innovation unveiled at Finovate was ‘group signing’, or micro co-signing by your friends,  to lower your interest rate (similar to Vouch).

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LoanNow has the potential to succeed since it’s motivated to do the right thing for its clients, and is laser-focused on its target customers.

It’s a tough market for startups without backers from the biggest names, but I wish them well – and think they’ll be successful.

Several VC’s are staying clear of online lending (seeing it is ‘too hot’ as Emergence Capital told me, or in conflict with prior investments, as First Round Capital and CrossLink Capital indicated).

But it’s good to see Andreessen Horowitz is embracing FinTech with its recent appointment of Alex Rampell, former CEO of Trial Pay, as a new partner focus on opportunities in FinTech.

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Still, some startups may have to bypass VC’s and emulate Patch of Land, that grew with the help of several  accredited investors and a credit line, before gaining larger investors.

Embrace transparency

Here are my two closing suggestions for other early-stage firms in the online lending space.

  1. Be true to audience and brand. If you’re targeting the lower end of the market, i.e. payday loans, don’t use a web design firm to make your site look like you’re Stripe (targeting developers) or LendingClub (targeting prime borrowers). Be yourself – don’t try to be like someone else.
  2. Embrace transparency.  Be very upfront about your value vs. other options that exist, i.e. don’t knock the banks as being ‘not lending’ since 2008 or ‘ignoring the SMB market’ when recent published figures don’t support this. Tell the truth, and you’ll win with customers.

P2P & Marketplace Lending

LC race

As the online lending industry prepares for its big event, the LendIt USA conference in NYC on April 13-15, I thought it a good time to discuss peer-to-peer (P2P) lending.

To me, this aspect of FinTech is the perhaps the most interesting, innovative and straightforward versus other areas, such as payments (with all its participants – as noted in my last post), digital banking, cryptocurrency, and robo advisors.

P2P lending is disruptive and proven; it adds value in a clear way by providing better rates for borrowers, and higher rates for savers seeking to invest. Companies are tech-led, often with a distinctive ‘non-bank’ culture, people and work environment.

But at the same time, there are a few misconceptions I’d like to address  – without detracting from the alternative lending industry’s innovation and success.

lendacademy Most readers are familiar with P2P lending, given the press coverage lately. But for those who don’t know a lot about P2P, I’d suggest starting off by reading Peter Renton’s superb blog:  LendAcademy.

Inspired by Peter Thiel’s question (from his book, Zero to One), “What important truth do very few people agree with you on?” here’s of few of my thoughts on P2P:

First, although this misunderstanding is more pervasive in the public than readers of this blog, ‘P2P lending’ is really not true P2P – and hasn’t been for some time. The fuel behind the industry’s growth has come largely from big institutional investors.

prosper

(The name marketplace captures the shift. For instance, at providers like Prosper, around 2/3rd of investors in its loans are institutions and 1/3rd are retail investors).

Beyond this, some in the press say that banks are “threatened” by marketplace lenders. A classic example of this was in the 2014 post “Why Wells Fargo Is Terrified of Peer to Peer Lendingpublished on Lending Memo, an affiliate link site (i.e. paid for clicks to alternative lenders). The truth is far more nuanced.

Just as institutions play an important role in the P2P model, big banks (especially the larger ones) benefit in myriad ways, e.g. wholesale banking groups are getting revenue from the related growth in ACH payments. Banks also profit by lending to the institutional investors that participate in the new platforms.

LC logoAnd CEO Renaud Laplanche has stated, Lending Club is expanding the market, not trying to take out the banks. Someone once said, having met Laplanche at a meeting at a bank: “He would fit in here easily.” (He’s famously low-key).

Having worked at Morgan Stanley, I know its people and franchise played a part (along with other banks, like Wells Fargo) in building Lending Club, from placing Mary Meeker and John Mack on the company’s Board, to helping plan as well as manage its IPO, to capturing the post-IPO wealth management opportunities. This is true at other big banks across other platforms.

kabbage

And not just the big banks. Forward thinking banks, like Celtic Bank, behind Kabbage, also benefit from the growth in new lending marketplaces.

Another line often heard that I would disagree with is the marketing meme: “You know how bad banks are? Use X – we cut out the middleman.”

But many of the institutions are hedge funds or private equity firms. In fact, some funds just put up 15%, borrowing the rest from Citi, to leverage up their returns on marketplace sites from 8% to 12%. (This is fine by me, but let’s spare the David vs. Goliath myth about banks vs. startups since the story is more symbiotic).

And is the experience much better? Perhaps on pricing and speed. But some of customer experience (from Notes and using tools like Nickel Steamroller to having to master XIRR to see how you’re doing) isn’t a lot better, if you ask me.

What important truth do very few people agree with you on? – Peter Thiel

“Banks can’t innovate and are too slow” is another piece of conventional wisdom that I partially disagree with, though I agree to a point. To me, Schwab’s roll-out of the Intelligent Portfolio’s is a proof that incumbents can be fast followers.

But I agree that the nimble size of startups, focus on customer needs, role of VC’s and lack of legacy technology can lead to more innovation. And the startups can lead to others having to up their game, e.g. Prosper’s superior credit model will lead others to improve their model, for example.

canaan partnersI could still envision banks, either as a consortrium or supporting a startup backed by the VC’s active today in FinTech, e.g. Canaan Partners, CoreVC, Foundation Capital, A16Z, General Catalyst Partners and Google Ventures – starting a broker-dealer to create a cross-company secondary market in notes from Prosper, LendingClub and others.

I’m sure there will be plenty of other interesting conversations about SoFi’s valuation, and whether Lending Club’s post IPO performance suggests anything other than too high expectations (plus effect of the looming June lock up) at LendIt.

It’s a pivotal time for marketplace lending, as recent articles in the FT and on some industry blogs have noted. It’s clearly in the early innings, but I expect lots more great things to come from marketplace lending.

But to close, having sailed for LBS vs INSEAD in a race around the Isle of Wight, I’d like to just give a shout out for Lending Club’s record time across the English Channel last week (see photo at top).

Impressive achievement and useful reminder there’s a world of adventure out there – beyond the stock market and marketplace lending!

 

2015 Predictions

2015

OK, I’ll admit it. I’m already over all the New Year predictions…. I’ve read thoughtful predictions that contradict themselves, such as ApplePay will not succeed (or that it will), so I’ve decided not to make a list of predictions.

What I’ll predict, however – pretty confidently – is that the year 2015 will bring a lot of exciting developments in FinTech.

It’s been difficult to be upbeat lately, with the negative news coming from the Middle East, the slowdown of European economy (and rise of the extremist parties there), hacking and security incidents, the chasm between left and right in the US.

But I’ve been reading Abundance, the book by founder of the X Prize, Peter Diamandis, co-authored by Steven Kottler, who wrote The Rise of Superman, on the science of high performance sports (and concept of entering a ‘flow state’).

abundance

One key take-away from the book was the inbuilt bias we have to see risks, and to focus on negative events, which drives both media (since we tend  to read bad news more than good news) and influences everything from politics to career decisions.

For instance, companies like LendingClub had successful IPO’s, and innovations like Apple Pay are unveiled in 2014, yet instead of focusing on the positive, VentureBeat publishes articles like “Are We in a FinTech Bubble?

Just because something like financial services technology is doing well as industry, doesn’t mean we need to be looking around the corner for bad news to come. Speaking personally, I’m excited to be living in such interesting times in San Francisco:

“We’re living through a tech revolution. We get to work with the most exciting companies in the world..” (Michael Grimes, Global Head of Tech Banking quoted in New York Times article of 2014)

During my time at the 2725 Sand Hill Road offices of Morgan Stanley, I was glad to interact, even briefly – since the bankers are always busy – with its pantheon of talent, such as bankers Dave Chen, Paul Kwan, Paul Chamberlain and Andy Kearns.

Returning to predictions, will ApplePay be successful in 2015 or not? I do think so, but as I’ve said, I believe we have a tendency to focus on winners vs. losers, and I really don’t think that’s the most important question of the new year (or even FinTech).

A16Z’s Benedict Evans was spot on last year calling for an end to the debate over whether iOS or Android will “win.” I think 2015 will be an amazing year for FinTech, whether ApplePay achieves rapid growth or not, is my prediction.

What excites me? As someone who worked early on in my career launching an online bank in the UK, I’ll always be looking to see what startups will be doing, but the ‘FinTech bubble’ article in VentureBeat gets it wrong, when it says since Millennials do not trust Banks, therefore startups will be favored to win over the incumbents in the long term.

Give me a customer-obsessed, strong value proposition incumbent – such as Vanguard or BlackRock – that has completely revolutionized investing, disrupted industry cost models, and create low-cost, superior investment products, anytime.

Vanguard      blackrock

I’d gladly do business with these incumbents – versus FinTech startup like Wonga, a much-hyped UK peer-to-peer lender that charges high interest rates to low-income borrowers…. and has been criticized by everyone in the press, even the Church of England, for what it does to those who are least advantaged in UK society.

wonga

Back in the US, Silicon-Valley’s Personal Capital is an innovator in wealth management, like Motif, plus I was impressed by CEO Bill Harris’s talk at The Future of Money in San Francisco last month.

But I was surprised by its hyping $1B in AUM after five years in business. Seriously? Morgan Stanley’s star advisors like Mark Curtis and Greg Vaughan manage $27B and $14B+ (see Barrons report) while the Firm manages $2 trillion for its clients. I do wonder if some of the startups will achieve sufficient scale. Their value proposition and execution need to be compelling.

Turning to lending, given the momentum from last year IPO of LendingClub and OnDeck, I will be keeping an eye on the plethora of interesting peer-to-peer lenders trying to make things better for people and businesses who need credit.

I’m a fan of Prosper, that show vision and execution, going after a new market, and trying to deliver something demonstrably better, through its pricing, product innovation and UX.

prosper

While I also respect how Prosper’s marketplace has made $2B in loans, I like even more its message of having empowered 250,000 borrowers, through better rates than banks and increased transparency. Take that, Wonga!

SoFi

As for SoFi, based in the Presidio section of the city (right by LucasFilm’s offices), I like how they began as a way to reduce the interest rates paid on student loans by leveraging the power of alumni to give people a better deal. To me, it’s a solid innovation like affiliate marketing, when places like MBNA, a former consulting clients of mine, signed people up for credit cards based on  their membership in groups, passing on the savings derived from lower default rates and acquisition costs.

Today, SoFi is expanding into mortgage lending. While in US, mortgage rates are low now, just as gas prices have swung from high to low over the last two years, I think SoFi is smart to go after the huge mortgage market and diversity from student loans.

What else will be exciting in 2015? Workflow and connected services have my vote. I’ll address this in detail in a future post, but everything I see points to a more API and app-centric world of financial services beyond anything we’ve seen to date.

Here’s a glimpse… Last month, The Verge announced WorkFlow as one of the most exciting new apps to appear in the App Store. Essentially, it enables you to create customized workflows, using a simple drag-and-drop interface, so that you don’t need to follow repetitive, multi-step processes for multiple apps anymore, among other things.

Workflow

Take the example of texting someone to let them know when you’ll be home. Using Workflow for iOS you can create a workflow to: 1) Open the Maps app; 2) Use app to see how long it will take for you to get home; 3) Open up your Messaging App (or email) and then text or write saying, “On my way. Be home in xx minutes” You can run it anytime using a single tap on your phone.

The possibilities are endless. The above use case is a simple example, but there are many in FinTech I can envision, i.e. you don’t want to open the online banking or brokerage app on your phone, but would like to check something, without multiple steps, using your fingerprint authorization and getting a quick summary of your balances and YTD time-weighted return.

Workflow screen shot

I sense innovation coming here, especially as providers like Yodlee, Intuit and others continue their focus on API’s and enabling developers using financial data. Using API’s and workflow, I see lots of cool solutions to be envisioned and built.

Here’s to an exciting future we all watch unfold in 2015!

Lending Club IPO

lending_club_logo_new

Last week, the biggest news in FinTech was Lending Club (NASDAQ: LC) went public in an IPO that was significant for 3 reasons:

  • First, it’s now one of the best-known public names in FinTech, and more specifically is new proof point that traditional financial services, such as credit, can be disrupted by a technology-focused startup.
  • Second, the size of the offering and the amount raised – which was over $1B, since the underwriters exercised their full option for 8.7 million shares – put it among the largest US technology IPO’s in recent memory. This is significant since the scale both generated headlines and calls attention to category.
  • Third, the business model: peer-to-peer (P2) or marketplace lending, is a key category for a range of players in FinTech, such as Prosper, OnDeck and SoFi.

The business model has been explained sufficiently elsewhere, but the essence is that the Internet enables customers to borrow more cheaply than they might have using traditional sources. On the other side of the balance sheet, lenders (‘investors’) can receive a higher return for a fairly transparent amount of risk than they would otherwise. A win-win.

And what growth….

LC graphic

Source: Company Filing

On a personal note, as a San Francisco area resident, I was also glad to see the success of Lending Club as a validation of this new emerging category of business to be based here.

Its HQ is right in heart of South of Market (SoMa) alongside Twitter, New Relic, Google, GitHub, DropBox, Quid and Hired.com

Screen Shot 2014-12-17 at 11.13.44 PM

Note:  Lending Club was once based in Sunnyvale and Redwood City, moving to SF in 2011, so also constitutes an example of recent migration from Silicon Valley to SF.

As a former Morgan Stanley executive, Cynthia Gaylor, who worked at the office I did at Sand Hill Road in Menlo Park, tweeted in 2013 when she left the bank to head up Twitter’s corporate development team, “Let the migration north begin!”

 

While one could certainly argue – and analyst coverage would definitely support this view – that Lending Club is a financial services company, to me the company is also very much a tech company for 3 reasons: origins, culture and vision.

First, remember… this was literally one of the first apps you could use on Facebook! Further, the founders were not bankers, but rather included CEO Renaud Laplanche as a former the entrepreneur who had a successful exit, and then worked at Oracle).

The culture is also typical of that at most technology companies, in terms of what’s seen as positive about working in tech, i.e. open and collaborative culture, non-hierarchial, focus on engineering, importance of product, and “quirkiness” (e.g. offices to encourage a sense of play and collaboration).

In terms of culture, Glassdoor gives Lending Club gets a 4.6 / 5 star rating. Just compare that to traditional banks like Morgan Stanley, where it’s about 3.5: Lending Club gets ratings more like a well-run tech company or startup.

More importantly, the vision. As John Battelle said this fall at NewCo Silicon Valley’s kick off event at Survey Monkey’s HQ, the latest crop of tech firms based are looking more than just to make money – they want to change the world, or at least improve something that is broken. Lending Club definitely has that vision.

In fact, it was born of the founder’s frustration that typical credit card rates were 18%, which seemed altogether too high to him, so he envisioned a way to match borrowers and lenders directly. There’s obviously much more to it, but the best business idea also has a simple “story” to it, and clearly this is true for Lending Club.

 

This blog does not provide investment advice, so I’m not going to provide a view of their valuation, but I applaud their success. CEO Renaud Laplanche is not someone I know, but connected with when I when I moved to San Francisco, as a fellow graduate of London Business School.

It’s good to see a fellow graduate succeed, especially when these days an MBA carries less weight than being a full stack engineer. The world needs both!

From my experience in launching new products at established banks and startups, Lending Club provides a compelling example of how to embrace the value of technology in a really smart way, and deliver value to several market participants.

And the timing couldn’t be better. The IPO market is back on track in 2014, with recent successful IPO of Alibaba earlier this fall. Just today, another, albeit smaller marketplace lender, OnDeck focused on small business lending, went public.

 

Well done, Lending Club – here’s hoping many other FinTech firms will find similar success, rewarding entrepreneurship and risk-taking, and hopefully providing a push towards innovation among the larger financial services companies, as well as a shift in the corporate cultures of banks – both here in the US and around the world – towards a more inclusive, collaborative culture.

Not all banks will fully embrace user-centric design or Scrum, but I hope some do, along with view that making things better is more than just delivering a slightly better loan or APY…

 “We want to transform the banking system into a marketplace that is more competitive, more consumer-friendly, more transparent.” CEO Renaud Laplanche

Welcome news, and a model to emulate….. it takes more than just ping pong tables and pet-friendly environment!

Happy Holidays!