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Heavier second-quarter marketing expenses at OnDeck Capital highlight a concern throughout the marketplace lending industry: the high cost of customer acquisition as competition from banks and nonbank startups heats up.
August 4 -
The San Francisco company hopes to lower its costs by driving out human intervention as much as possible. To get there, it has made the counterintuitive decision to locate its operations staff in one of the countrys most expensive cities.
September 3 -
Companies like OnDeck and Lending Club are under pressure to keep finding new borrowers, but there are signs that customer acquisition costs are rising amid heavier competition.
May 6
When small-business owners log into QuickBooks to manage their accounting, they can also apply for a loan, and many of them do. The site has arranged more than $232 million in business financing since 2013.
Lenders compete head-to-head for these borrowers. Intuit, the maker of QuickBooks, has partnerships with about 10 different lenders, according to Jeff Kaufman, who leads the QuickBooks Financing program.
The list of finance sources includes some big names in marketplace lending, such as OnDeck Capital and Funding Circle, but also lesser known companies including Swift Capital and Direct Capital. Borrowers, after allowing the lenders to peer under the hood of their businesses, have a chance to comparison-shop.
"They look through all the options, and they can choose if they want to go forward," Kaufman said.
[Coming this November:
QuickBooks Financing offers a case study in a trend that is dogging the top marketplace lenders: their pricing power is being undermined by low barriers to entry in the online lending business and the ubiquity of Internet search tools.
The issue has become grist for stock analysts who are bearish on the nascent sector's two publicly traded firms, New York-based OnDeck and San Francisco-based Lending Club.
"I think the competition is not going away. In fact, it's increasing," said Michael Tarkan, an analyst at Compass Point Research & Trading who has "sell" ratings on both OnDeck and Lending Club.
Tarkan said that comparison-shopping sites such as Lending Tree and Credit Karma, which get paid referral fees on loans to both consumers and small businesses, have emerged as big beneficiaries from the intense competition. "I think customers are going on these websites to compare the offerings, and I think they will continue to gravitate to the lowest-cost options," he said.
The quarterly earnings report from Charlotte, N.C.-based Lending Tree on Monday lent support to that argument.
Lending Tree reported that revenue in its personal loans segment, where peer-to-peer loan pioneers Lending Club and Prosper Marketplace now compete with 22 other companies, was up a whopping 325% compared with the third quarter of 2014.
Lending Tree also set a new record for total quarterly income, $69.8 million, which was 69% higher than a year earlier. Shares in the company were up 22% in late-day trading Monday.
Lending Tree Chief Executive Doug Lebda said that he expects more conventional lenders to enter the fray "because it is quite frankly not rocket science to have an instant approval online for a personal loan."
"Definitely the banks and major financial institutions are not going to cede a big category to the online lenders, and they will be in the game as well," Lebda told analysts during a conference call Monday.
The fierce competition is being stoked not only by the fact that it is relatively easy for newcomers to enter the market, but also by the strong returns that investors in loans from incumbents like Lending Club are earning, said Matt Lipton, an analyst at Autonomous Research. He has "underperform" ratings on both Lending Club and OnDeck partly because he believes their loans margins will narrow as competition heats up.
Lipton used a colorful metaphor to describe how comparison-shopping sites such as Lending Tree are essentially playing lenders off one another. "They're kind of the arms dealers," he said.
Lending Club, which is scheduled to report its third-quarter earnings on Thursday, has enjoyed strong revenue growth in recent quarters. But the average interest rates on the company's loans have been declining even as yields on Treasury bonds, an ultra-safe alternative for investors in the company's loans, have been rising. Earlier this year, Lipton compared Lending Club's portfolio from 2013 with its 2015 loans and found that similar borrowers were paying about 5 percentage points less than this year than they did two years prior.
Lending Club says the falling interest rates are a sign that investors have greater confidence in the firm's online marketplace. But it likely also reflects the intensifying competition for borrowers.
Concerns about the low barriers to entry in online lending - highlighted by Goldman Sachs' plan to join the competition - are weighing on the stock prices of Lending Club and OnDeck.
Shares in Lending Club are down by 4% since the firm's initial public offering in December and by about 50% from their peak later that same month. OnDeck shares are down by more than 50% since the company's IPO, which was also in December.
Meanwhile, shares in Lending Tree have nearly tripled during the same 10-month period. Privately held Credit Karma landed a $175 million investment earlier this year that reportedly gave the company a valuation of more than $3 billion.
Intuit's Quickbooks Financing platform has emerged as a key forum for the competition in online small-business lending.
In September, Intuit and OnDeck announced that the two companies will launch a new $100 million fund to back a line-of-credit product that OnDeck will offer to QuickBooks customers. Then, less than a month later, Intuit said that Fundbox, which specializes in invoice financing for small businesses, was also joining the platform.
OnDeck CEO Noah Breslow professed not to be bothered by the lack of exclusivity in the firm's partnership with Intuit.
"We prefer to win on the strength of our products and our services, rather than a contractual provision saying it's going to be exclusive," Breslow said in an interview.
