May 13, 2016  |    Leave a comment

As we approach summer, temperatures and controversy are heating up in the fintech world. This week has been exceptional in the amount of breaking news – starting with the resignation/termination of LendingClub’s CEO on Monday.

 

I won’t repeat in detail the many articles you have probably already read. The two main parts of the story are that someone(s) allegedly altered the loan application date field on a number of loans to make them appear to fit an investor’s criteria. In addition, industry darling and CEO Renaud Laplanche and board member (and former Morgan Stanley CEO) John Mack hadprivate, undisclosed stakes in an outside fund that was buying LendingClub loans.

 

The effects have been sudden and sharp, though it is hard to tell how long-lasting. One good result is that some investors and industry participants will cast a more discerning eye on new ideas and business models. However, it has also given regulators and detractors a chance to feel vindicated, though many are getting swept too far into the “I told you so!” camp. There is a very real danger for incumbents and regulators to swing too far to the other side, and dismiss how these new entrants have changed the industry and customer expectations.

 

This week’s events are not a death knell for fintech startups. However, I do think this month marks a turning point where the hype is fading away and investors will be more critical of sustainable business models (which is currently playing out in VC circles across the board). Nothing this week changes the true potential of marketplace lending or other fintech ideas – it is just an excuse for expectations to be aligned with reality. LendingClub will be used as a scapegoat, right or wrong.

 

The most interesting dynamic will be the big banks who try to claim superiority over fintech startups by claiming that they are virtuous while the fintech startups can’t be trusted – see #3 below. So easy to forget the bad actors of the financial crisis… and even the regulators aren’t exactly securing their customer’s PII…

 

I continue to feel comforted by my theory that the age of “unbundling the bank” is over (see #2 below). Incumbents and startups should continue to recognize that partnerships and learning from each other are keys to building a sustainable business.

 

  1. Treasury Department has joined the OCC in releasing a white paper on online lending. At 45 pages, I have not had a chance to read through it yet, but the summary of recommendations are not surprising… expand access to credit, increase small business borrower protection, creating a new working group on online lending, etc.
  2. In addition, the OCC has said that it may make sense to issue “limited-purpose” bank charters to fintech firms. This would follow earlier moves by the UK government in working to adapt regulations to new banking business models, as mobile-first and digital-only Atom Bank received a UK banking license last year.
  3. Jamie Dimon excoriated fintech firms and financial aggregators in his shareholders letter. However, the NY Times does a great job of explaining his ulterior motive given that his company is losing data, revenue, and customer experienceto these fintech firms. Jamie has built a new business unit called Intelligent Solutions to mine customer data and offer the same services, and he doesn’t want you to leave the safe confines of JP Morgan Chase. The letter itself is a masterpiece and deserves careful study – the straw men created and structure of the article are a lesson in making yourself seem like the savior of the industry and economy while protecting customers (despite reality).
  4. Google has announced it is banning ads for payday loans from its website. According to a Pew Charitable Trust report from 2014 (quoted in the article) about “one-third of the payday loan market is online”. Payday lenders will still show up in search results if a user is specifically looking for that service, but the ads the companies pay for will not appear. Google has not released the expected revenue hit they will take, but payday lenders do pay very high cost per clicks – Google estimated around $5-$13 cost per keyword, which compares to a $2.60 average for financial services in 2014.

 

Have a great weekend!

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