NEW YORK: Sometimes supposed disruptors need their established rivals more than they care to admit. Shares in On Deck Capital slumped by more than 25% at one point on Monday after the company said JPMorgan had decided it no longer needed the online lender’s help sourcing small-business loans. It’s a reality check for fintech upstarts.
Shareholders had other issues to worry about from On Deck’s second-quarter results, also released on Monday. Its tax rate for the year is heading above 30%, from 25%. And charge-offs from problem loans were slightly above the upper end of its target range.
The three-year relationship with JPMorgan was purely about providing software to find borrowers and speed up the loan-decision process that at traditional banks could take several weeks. On Deck, along with consumer-focused online lenders such as LendingClub, reduced that to days or even hours.
As a result, the revenue lost by On Deck ought not to be that much. Factor in the investment and legacy technology, Chief Executive Noah Breslow told investors, and the deal was “not a contributor” to the firm’s bottom line. Moreover, he said, newer technology should be easier to use across multiple banks, including PNC Financial Services, which signed up for a similar partnership late last year.
The trouble is, upstart fintech players – especially in lending – have not fulfilled the promise so many saw in them just four years ago. Both On Deck and LendingClub, for example, are worth just a fraction of their 2015 peak valuations. GreenSky, a home-improvement loan app, has halved in value since its initial public offering last year. Loan growth is not as fast as it once was, either – though at 15% compared to a year ago at On Deck, it’s still fine.
Losing JPMorgan’s business is, therefore, a blow to morale. It’s also a sign that traditional banks have woken up to the threat posed by the arrivistes. The $377 billion bank run by Jamie Dimon, for example, has developed its own software to replace On Deck’s. Newer lenders still have a role, but JPMorgan, for one, just showed them who’s boss.