The Banks Behind Fintech
Anyone with a passing familiarity of fintech recognizes the big names: LendingClub and Prosper in consumer lending, OnDeck and Kabbage in small business lending, Moven and Simple in mobile banking, PayPal and Dwolla in payments, etc. However, most people are not aware of the banks that operate behind the scenes, enabling these fintech companies to do what they do. Each of the companies above rely on a traditional bank somewhere in their process, so I wanted to shed some light on who the major players are.
WebBank powers a huge part of the consumer marketplace lending market, originating loans for LendingClub, Prosper, and Avant. In 2015, these three companies issued a combined $14 billion of consumer loans. Given the business model of originating loans to sell, WebBank has a 44% ROE.
Celtic Bank is very similar, but in the small business lending market. Celtic serves Kabbage, Square Capital and OnDeck. OnDeck generated nearly $2 billion in loans last year, Kabbage claims to lend out $5 million per day, and Square Capital has generated around $340MM in the first two quarters of 2016.
CBW Bank helped both Moven and Simple get off the ground, and the Moven card is still issued by CBW.
The Bancorp also helped Simple (before its acquisition by BBVA for $117MM) offer its services. While lesser known to consumers, The Bancorp supports over 75MM prepaid cards in the US with over 100 private label non-bank partners, and has partnered with PayPal, Bridgestone, T-Mobile, Univision, and Walgreens.
Comenity Capital Bank powers PayPal Credit (formerly Bill Me Later, acquired by eBay for $1 billion). While PayPal Credit extended $166 million over the Thanksgiving shopping weekend last year, the service has not been without controversy. PayPal had to pay a $10 million fine (and return $15 million) last year for misleading borrowers, including allegations that tens of thousands of customers thought they were signing up for a regular PayPal account rather than a loan.
While many of these “back-end banks” have found a niche in serving the fintech companies, they also risk tying their fortunes too closely to a handful of large players in a volatile sector. This is especially true for the banks who originate loans through the marketplace lenders — a market that has seen some significant pullback this year.
However, it does show that a bank does not have to be large or well-known to be innovative or work with new technology. For smaller banks, embrace the future and leverage your ability to move quickly and work with fintech companies. For fintech startups, seek out the banks who are forward-thinking enough to support your initiatives while also being responsive and stable. For fintech investors, build relationships with the right banks to help connect your portfolio companies to a trusted partner.
Kabbage has launched a new mobile app. The new app supports the entire loan process, from application to funding, in what they claim is the industry’s only fully-automated loan process with funding within minutes.
Fidelity has joined the ranks of large investment firms launching a digital offering. Slightly different from the traditional robo-advisor model, Fidelity’s portfolios are constructed by portfolio managers, and the digital aspect comes in to help match investors to the right portfolio. Given the perennial conflict of interest in moving investors into their proprietary index funds, and the interesting name choice (Fidelity Go), this seems like a very underwhelming offering.
$60 million worth of Bitcoin was stolen from the Bitfinex exchange. Hovering around $600 before the hack, the price of Bitcoin dropped to under $500 briefly, but has since made up most of the ground to settle around $580. This is the largest loss of Bitcon since Mt. Gox lost $350MM worth of Bitcoin in 2014, and follows the recent theft of $53 million worth of Ethereum in June. For their part, the Ethereum community evaluated all options and seem to be going with the hard fork to settle the issue (after evaluating the soft fork, the spork, and other various utensils).