Productivity Trends, Schwab Enters the Ring, LC Q3 Earnings

By Tito Donis

November 10, 2019

Greetings,

Charles Schwab announced plans to enter the lending business. Earnings season continued this week with LendingClub reporting better than expected earnings. We’ll dig into those highlights below, but as always, we will start with the macro picture.

The labor department released the latest productivity data, which showed a contraction in productivity - a 30 bps decline in the recent quarter (vs +90 bps growth expectation), the biggest decline in 4 years. Economists have attributed the surprise decline to the ‘cat memes’ and Instagram. (#wekid.)

Below we show an excerpt of long-run productivity growth. Takeaways:

Long-run US GDP and productivity growth is at a lower trend level (2.3%) than observed during the 1960+ period (3.1%)
This means that the ‘speed limit’ for GDP and income growth is about ~2% (consistent with 10-year bond yields of ~1.9% - another rough correlation for growth)

Source: PeerIQ, Blackstone, St. Louis Federal Reserve

The Empire Strikes back

Charles Schwab is entering the lending business. Schwab will be getting into "different types of lending" that RIAs can offer, possibly including mortgage lending, unsecured loans for clients and loans to RIA firms, CEO, Walt Bettinger said. There is no timeline for the rollout of the new services, but Walt Bettinger stated that advisors would be “hearing lots more” in the coming months.

The move is the latest in the ‘convergence theme’ whereby banks, wealth managers, and FinTechs are rolling out offerings to maximize their share of the customer wallet.

In financing news, GreenDot (ticker: GDOT) is launching a fintech accelerator in partnership with Walmart. The accelerator dubbed ‘Tailfin Labs’ will develop solutions that “integrate omni-channel shopping and FinTech, which can be aimed at consumer or small businesses”. The offerings may be built on GDOT’S “Banking-as-a-Service” (BaaS) platform.

We mentioned last week that GDOT was the real winner in the Uber Money announcement, as the behind the scenes infrastructure provider for the ride carrier.

Deserve, a FinTech startup, led by CEO Kalpesh Kapadia, raises $50 million in funding led by Goldman Sachs. Deserve is a lending-as-a-service infrastructure provider that sells their platform to firms that want to offer their own branded cards. Sallie Mae, Accel, Aspect Ventures, Pelion Venture Partners and Mission Holdings also invested in the Series C round.

LendingClub Beats Earnings, Markets Expect Q4 GAAP Profitability

The earnings are a milestone in that it is the first time that LC experienced a positive adjusted net income since the turnaround Sanborn led since becoming CEO in 2016.

Some highlights:

Revenue also topped records at $204.9 million, up 11% year over year.
LendingClub crossed a record $3.3 billion in originations for the quarter, up 16% year over year
GAAP net loss of just $400,000 compared to the prior year period where they lost $22.8 million. Analysts expect Q4 GAAP profitability
Adjusted net income came in at $8 million, up from a loss of $7.3 million, in the prior year period.

LendAcademy has a nice write-up of their earnings here.

Keep an Eye on Shopify!

Shopify Capital originated $141M of Loans and MCAs in Q3. Shopify (ticker: SHOP) provides direct-to-consumer eCommerce websites for online. The lending business is similar in concept to Amazon’s small business lending, Intuit, PayPal, and Square Capital – take a platform business, utilize unique data and channel to originate loans and avoid marketing costs. The growth of these ‘platform lending’ businesses creates a more adverse selection risk for pure-play small business lenders. The Shopify lending business grew 85% YOY.

Prosper Has Launched a HELOC Product

FinTechs are rolling out additional products to diversify away from monoline lending. HELOC, a natural substitute for personal loans in a rising rate environment, are an excellent way to diversify. Consumer home equity is also now at record levels, although the customer experience to tap equity can be cumbersome.

Prosper is working with bank partners so there is no need to go to the capital markets for funding. BBVA is the first bank partner to Prosper. The platform will initially be available to customers in four states (AL, AZ, TX, and FL).

Industry News:

US Productivity Drops by Most Since the Fourth Quarter of 2015 (CNBC, 11/06/2019) The Labor Department states that nonfarm productivity fell 0.3% in the third quarter, which makes it the biggest decline in 4 years.
Risky Mortgage Bonds are Back and Delinquencies are Piling Up (Bloomberg, 11/04/2019) Non-QM Bonds experienced a 44% increase from 2018, making them the highest for any year since the securities became common post-crisis.
BankThink CFPB Can Do Better by FinTechs Than a 'Policy Tool' (American Banker, 11/04/2019) The CFPB finalized three policy tools that are meant to promote financial innovation, but the agency might have to do more to convince FinTechs.
Rate Cap Relief from FDIC Doesn't Go Far Enough, Banks Say (American Banker, 11/07/2019) Bank associations want the FDIC to look into a “market-based” rate solution, which would tie directly with Treasury yields and other federal financial data.
Walmart and Green Dot to jointly establish a new fintech accelerator, Tailfin Labs (TechCrunch, October 29, 2019) Walmart expands its relationship with Green Dot to help startups develop solutions that integrate omni-channel shopping and FinTech.
Shopify Capital Originated $141M Of Loans And MCAs In Q3, Says It’s a Meaningful Part Of The Shopify Business (deBanked, 10/29/2019) Shopify, an e-commerce solution platform, originated 85% more loans in Q3 2019 than it did Q3 2018.
Uber’s Fintech Strategy: A Conversation With Peter Hazlehurst, Head Of Uber Money (Forbes, 11/04/2019) A deeper look into Uber’s FinTech debut.
Dawn Of The Neobank: The Fintechs Trying To Kill The Corner Bank (Forbes, 11/04/2019) NeoBanks are quickly emerging as a huge threat to traditional banks.
BankThink Fintech will reshape how entrepreneurs seek loans (American Banker, November 01, 2019) If technology improves the ability to determine creditworthy vs noncreditworthy borrowers, everyone will benefit.
Talking Fintech Regulation at the 4th Annual Online Lending Policy Summit (Lend Academy, 10/31/2019) Regulation and innovation were the main topics discussed at the the 4^th annual Online Lending Policy Summit.
Prosper Officially Launches HELOCs with First Bank Partner BBVA (Lend Academy, 11/04/2019) Prosper partners with BBVA to release its new HELOC product.
Goldman Sachs leads $50 million investment in millennial credit card start-up Deserve (CNBC, 11/04/2019) Deserve, a FinTech startup that provides a dynamic credit card product, raises $50 million in funding led by Goldman Sachs.
Report: Apple Card Generates $10 Billion in Credit Lines, $736 Million in Loan Balances (Crowdfund Insider, 11/02/2019) Apple Card extends $10 billion in credit lines, while Marcus slows down on personal loans.
LendingClub Q3 2019 Earnings Results Review (Lend Academy, 11/05/2019) LendingClub sees positive adjusted net income in Q3 2019.
Schwab set to offer 'a lot more' banking capabilities (American Banker, 11/05/2019) Charles Schwab states that lending will become “increasingly more important” as they plan to rollout new services.
Hairdresser, Plumber, Lawyer: A Job License Could Help You Get a Loan (Wall Street Journal, 11/06/2019) New credit score created by Experian, will consider consumer rent payments and professional licenses to help them get approved for loans.

Lighter Fare:

There's a Science-Backed Reason Why Only Some People Find a Joke Funny (Inverse, 11/01/2019) One consistent finding in scientific studies shows that laughter is universal.