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Emerging fintech companies, which combine cutting edge technology with finance, are supposed to be disrupting traditional banks with their smooth, low-cost online services. Their sinking share prices, though, suggest otherwise.
As bank stocks surge, the shares of U.S. and Canadian-based online lenders have fallen to a fraction of their debut prices, following a number of relatively recent initial public offerings from the likes of LendingClub Corp., On Deck Capital Inc. and Mogo Finance Technology Inc.
Is disruption ever going to get started?
Fintech has become a buzzword in financial circles in recent years, as thousands of nimble startups – as well as established companies – strive to grab market share from lumbering banks.
Consultancies have tried to define the threat.
McKinsey & Co. estimates that traditional banks could lose up to 60 per cent of their retail profits over the next decade, as fintechs either take business away from the incumbents or force them to slash prices in order to compete.
For anyone who has watched companies such as Uber and Airbnb disrupt their respective industries, the threat of financial disruption looks particularly promising – and online lending has looked like a good place to start, given its traction with consumers and the number of investable options.
LendingClub, a peer-to-peer lender that bypasses traditional banks by matching consumers needing money with investors willing to lend it, raised $1-billion (U.S.) in an IPO in December, 2014, valuing the shares at $15. The share have since slumped below $5.50.
On Deck Capital, which focuses on online loans to small business, raised $200-million at about the same time, valuing the shares at $20. The shares have since slumped to $4.25.
Canada's Mogo has embarked upon a similar trajectory, going public in 2015 with a $50-million (Canadian) IPO that valued the shares at $10. The shares now trade at $2.
What makes these downturns sting even more is the fact that Canadian bank stocks have been hitting record highs in recent days and U.S. bank stocks surged about 30 per cent in November.
Though unprofitable, online lenders have been growing. On Deck reported that loan originations in the third quarter rose 27 per cent over past year, to $613-million (U.S.). In its third quarter, Mogo reported that the value of its loans rose 32 per cent, to $71-million (Canadian) suggesting stronger growth than the banks.
Why are their shares struggling then? Part of the problem is that banks haven't been ignoring the threat. Instead, they have responded by beefing up their own technology departments and striking partnerships with outside companies, essentially heading off the disruptors.
Bank of Nova Scotia, for example, has teamed up with Kabbage Inc. to offer online small business loans; Canadian Imperial Bank of Commerce has partnered with Borrowell Inc. for online consumer loans and Thinking Capital Inc. for small business loans.
More importantly, though, investors appear to be rattled by the funding models of online lenders who remain independent: These companies generally require constant sources of short-term funding to back their loans and LendingClub illustrated this year that these sources can become scarce at the first hurdle.
The company's chief executive officer resigned in May, following an internal review that found faulty sales practices. The brisk reaction by funding sources raised broader concerns about how lenders will fare during an economic downturn.
Initial optimism among investors that these fintech players could grab a significant share of fat bank profits has now turned cautious.
Still, this doesn't mean that online lenders are forever tarnished. In fact, they now appear to be taking steps to secure funding, which could pave the way for better performance ahead.
Last month, LendingClub announced that it had received up to $1.3-billion (U.S.) in backing from a U.S. subsidiary of National Bank of Canada. Last week, On Deck announced that it had received a $200-million revolving debt facility through Credit Suisse.
If promises of financial disruption disappointed early investors, perhaps the next wave will have better luck.