Welcome back from the July 4th holiday break!
Lots to cover this week, from (1) the latest unemployment and COVID-19 data to (2) moves by industry stalwarts SoFi and LendingClub. Plus, we cover the (3) upcoming IPO of nCino and the (4) IPO prep from Marqeta.
Let’s get to it.
Unemployment Grinds Lower as COVID-19 Rates Continue to Climb
On the macro front, we saw a continued slow recovery in unemployment this week, as the number of initial claims ticked lower to 1.3MM for the week ended July 4. More than 18MM people continue to receive unemployment benefits.
At the same time, the resurgence of the virus across California, Texas, Florida, and other states continues to pose a threat to the economic recovery. Here’s one way of looking at the acceleration of Covid-19 cases:
0 to 1MM cases: 98 days
1 to 2MM cases: 43 days
2 to 3MM cases: 28 days
Source: Covid Tracker
Banks Release Q2 Earnings This Week
Mega banks – JP Morgan, Bank of America, and Citi report earnings this week. The world was in recession in April, and now it is in recovery. At the time, the center of the COVID-19 storm was passing through the real economy and destroying millions of jobs.
Banks were forced to throw together loss estimates hastily with little visibility. It’s probably too early to see loss provisions roll-off (especially with pressure from new Fed stress tests). But we’ll stay tuned to the insights on consumer behavior for next week’s newsletter.
Below is our re-cap of earnings season from last quarter. We also show the market’s reaction to earnings in the trading action immediately following announcement. Winners were generally payments firms and players in POS lending.
The weakest performer was OnDeck. We noted in our analysis of ONDK earnings that business is essentially a portfolio in run-off. Management is dealing with a difficult hand and is taking steps including further layoffs this week as it seeks to fight another day. We also want to see how much PPP contributed to ONDK (and Square, PayPal, and Intuit) in one-time earnings.
OnDeck – Risk of Being “Squeezed in the Middle”?
The structural pressures for OnDeck impact non-bank small business lenders more generally.
On the one hand, OnDeck is trying to stay in responsible lending territory and steer-clear of sky-high opaque MCA fees. This creates a cap on rates and markets.
On the other hand, data and channel advantaged lenders – Square, PayPal, Intuit, and Amazon are picking off great credits at lower APRs.
OnDeck is at risk of being “caught in the middle” – unable to write a loan cheap enough to compete with “BigTech” and unwilling to write a loan with a rate that would put it in predatory lending land.
At the same time, the industry structure has continued to shift. nCino, for example, has enabled scores of community banks to roll-out small business lending technology. Each bank that nCino signs up is a small new deposit-financed competitor for OnDeck.
OnDeck recognizes this. They have focused on renting technology to banks via partnerships. However, this means OnDeck is in a two-front war: having to tie-up precious capital in lending business, and fund capex investments for a SaaS business that takes years to scale.
There’s a lesson and point of caution here for capital intensive Consumer Lending FinTechs.
SoFi Seeks Bank Charter, as Industry Looks to Limit ILCs
The above dynamic partially explains why SoFi has re-started plans to secure a bank charter.
SoFi, led by CEO, Anthony Noto, has formally applied for a bank charter with the OCC. The FinTech is seeking a national bank charter, which would allow the company to lend money and accept deposits independent of its partner banks.
This comes as traditional banks gear up to limit tech firms’ access to the industrial bank charter, reports American Banker.
Traditional banks, which continue to be governed by Fed regulations, have partnered with advocacy groups to argue against the ILC expansion.
PeerIQ ABS Tracker: Snapshot
We’re pleased to introduce a tracker that shows spreads for MPL deals over time. PeerIQ customers can reach out to learn more or receive the underlying data.
Source: Bloomberg, PeerIQ Analytics
Trading volumes continue to remain elevated, nearing $1Bn in June alone (~3x pre-COVID-19 monthly trading volume).
Spreads for IG securities have tightened dramatically. On a weighted-average basis, AAA securities traded at 91bps, 65bps tighter than in January.
LendingClub Expands LCX Platform
MPL leader LendingClub announced that it would expand its distribution. The platform allows 3rd party investors to directly fund loans originated by LendingClub. The new expansion allows funders to back loans using dynamic pricing. Ownership passes directly to buyers (and never touches LendingClub’s balance sheet).
Make no mistake – this is true innovation – we have never seen this in FinTech. It is also another in transforming LendingClub truly into a marketplace. Dynamic pricing enables primary markets to clear by simultaneously matching capital and origination.
The big question is whether this innovation reduces LendingClub’s reliance on fragile wholesale funding markets, or enables it to attract a wider base of whole loan buyers. We are eager to see how this plays out.
nCino, Marqeta: New Breed of FinTech
The last few days have brought more color on a couple of leading FinTechs that are gearing up for their public markets debut.
The new genre of FinTechs are balance sheet light, SaaS focused, and selling to the enterprise.
First out of the gate will be nCino, led by Pierre Naude, which is targeting a valuation above $2.5Bn in their upcoming IPO. That’s according to their latest S-1 filing, released this week, which sets an initial price range of $28 to $29 per share when it comes to market next Tuesday.
The FinTech offers software tools that streamline account opening, lending, and compliance services on behalf of banks and other financial institutions worldwide.
We received news this week that Marqeta, the Oakland-based card issuing platform, led by Jason Gardner, is kicking off its own IPO process. Sources told Reuters that the 10yo firm was beginning to interview investment banks to lead its process, targeting late this year or early 2021.
Marqeta was last valued at $4.3Bn in a $150MM fundraising round in May, and bankers have indicated that it could be valued higher in public markets.
Factoring Firm Taulia Finds its Own Financing
Taulia, the billing and factoring platform led by CEO, Cedric Bru, announced a planned $60MM financing round this week from JPMorgan, Ping An, Saudi oil giant Aramco, and others.The round is reported to value the firm at around $400MM, and will be used to help drive global expansion into China and the Middle East in partnership with its backers.
In the News:
- US Heads for Fiscal Cliff as Stimulus Fades (Financial Times, 7/11/2020) Economists are concerned that political stand-off over the extension of aid could damage recovery as the pandemic rages.
- SBA Paycheck Protection Program Loan Level Data (Treasury, 7/6/2020) SBA Paycheck Protection Program loan level data by state.
- Big Banks Join Fight Against New ILCs (American Banker, 7/6/2020) Big banks are opposing key aspects of a regulatory proposal that would smooth a path for new entrants like SoFi and Square.
- Banking’s Delusions Of Digital Transformation (Forbes, 7/6/2020) The banking world seems to believe that the COVID-19 pandemic has helped accelerate the digital transformation in banking, but that won’t happen until 4 things take place.
- DBRS Morningstar Finalizes Provisional Rating on Affirm Asset Securitization Trust 2020-Z1 (DBRS Morningstar, 7/8/2020) Affirm issued its inaugural ABS deal, rating the FinTech lender as Class A through Morningstar.
- ‘Buy Now Pay Later’ Is Having a Moment as Pandemic Changes Shopping Habits (WSJ, 7/11/2020) Despite the pandemic, Melbourne-based FinTech, Afterpay, has signed up more than 1.6MM users in the U.S. since March.
- LendingClub Expands LCX Platform (6/30/2020) LendingClub expands its LCX platform and it now allows LendingClub to sell loans at dynamic pricing before they are originated.
- Student Lender SoFi Applies for a Bank Charter (Reuters, 7/9/2020) SoFi applied for a Bank charter with the OCC, which if accepted, would allow the company to hold customer deposits and make loans.
- Podcast 255: Vishal Garg of Better (Lend Academy, 6/10/2020) CEO and founder of Better.com, Vishal Garg, speaks about the state of the mortgage market and how Better has been able to thrive during the COVID-19 pandemic.
- nCino sharply raises its IPO price range, boosting possible valuation to $2.6B (TechCrunch, 7/10/2020) FinTech startup nCino, is expected to make its market debut at $28 to $29 per share.
- JPMorgan, Ping An to Fund Financial Technology Startup (WSJ, 7/9/2020) Taulia is seeking $60MM from its investors to expand globally and introduce new products.
- Exclusive: Goldman Sachs-backed payments startup Marqeta prepares for IPO (Reuters, 7/9/2020) Oakland-based FinTech startup, Marqeta, is looking to hire investment banks to advise on a potential IPO.
- WeWork On Track for Profits and Positive Cashflow (FT, 7/12/2020) SoftBank Group International CEO, Marcelo Claure, points to greater demand from big companies for flexible office space during the COVID-19 pandemic.