By Bernard Lunn
Although the Uber of Banking tag does not make sense, narrow it to marketplace lending and the tag is certainly appropriate.
The reason is simply network effects. Banking as a whole is a service business not a network effects business. My decision to use bank x rather than bank y does not influence anybody else’s decision.
Marketplace lending is different. More borrowers attract more lenders and vice versa.
In a network effects battle, the players amass massive war chests. The recent $1 billion raise by Sofi shows that they have joined Lending Club and Prosper in an intense network effects battle.
Lending Club was the first to IPO and that certainly gave them name recognition and it became the Netscape moment for Fintech. Although the stock has not performed well, Lending Club is still valued at nearly $5 billion. Many great companies had bad stock performance and recovered when they reported good results (Facebook for example).
OnDeck is a different story. Not only has their stock performed badly, but their market cap is now so far below $2 billion that they fall into small cap hell (ignored by most funds) and few stocks emerge from small cap hell. When OnDeck first came out to IPO, we figured they had a problem with Customer Acquisition Cost (CAC).
The giant Sofi raise ends the niche marketplace story. Sofi started in student loans, but that was simply a market entry strategy as we reported here.
All these massive markets are niches within marketplace lending. When you realize how massive these markets are such as student loans, mortgages and working capital finance, it is strange to think of them as niche, but within the context of a marketplace that is what they are. If you are a lender, you want to define things like % return, maximum drawdown, loss rates and liquidity ie risk adjusted return on capital. You don’t care if the underlying asset is a student loan, mortgage, invoice finance or whatever. Similarly a borrower simply wants lots of lenders competing to get a low rate and does not care if that lender is an individual or an institution.
Prosper will be the one to watch now. They were the early pioneers, they have done $5 billion in loans and have top tier investors. The game plan used to be to do an IPO at this stage to get the branding value, but they may decide to stay private. If they do, expect some aggressive moves – remaining private no longer means thinking small..
This is not game over for banks – far from it. Marketplaces are good for service businesses and vice versa and service businesses are usually valued more than marketplaces in the long run as we report here.
Banks and marketplaces are natural allies. This is the kind of strategic Fintech dealmaking that we focus on at Daily Fintech Advisers.