A deep read of OnDeck Capital‘s earnings report yesterday reveals this truth: the company is moving away from marketplace lending.
OnDeck is largely ditching funding through marketplace in favor of more traditional sources of capital, such as securitization — no small development considering that OnDeck is a standard bearer of the marketplace lending industry.
Specifically, about 26% of OnDeck’s first quarter funding came via marketplace lending, down from the “35% to 45% range” in the fourth quarter of 2015. And it will come down further. The company’s earnings presentation indicates that OnDeck is aiming for as little as 15% of its originations to be funded through marketplace lending.
Why, you ask? Well, because marketplace lending, er, sucks. OnDeck generates 50% — 50%! — more net income when it funds through Wall Street than through marketplace lending. That’s eye-popping.
Howard Katzenberg, the company’s CFO, said (in a more genteel manner) that the addition of traditional funding facilities — the company has a new warehousing facility, for example — led to “this strategic decision to reallocate more funding towards our credit facilities as opposed to marketplace, with the premiums being offered by certain participants [becoming] unattractive.”
The small business lender originated about $570 million of loans last quarter, up 37% from the same quarter in 2015. OnDeck’s portfolio is nearing $1 billion of outstandings.
Noah Breslow, the CEO and founder of OnDeck, framed this shift from marketplace lending as part of wider pivot on credit quality.
“We felt like for 2016 … especially in this environment, we didn’t want to peg ourselves through a growth-rate-at-all-cost,” he said. “We feel like the credit quality is very important for us to maintain.”
The result: OnDeck is tugging hard on the reins of its credit originations to the tune of 30% to 35% of YOY lending growth this year, as compared to 45% to 50% that the company had previously expected for 2016. Not surprisingly, OnDeck stock [ticker: ONDK] is getting crushed today, down around 6%. (LendingClub stock is also off around 3% today, after a fall of around 10% yesterday.)
Even during OnDeck’s earnings call yesterday, investors had a hard time reconciling a need for greater credit underwriting prudence without “any leading indicators that indicate that the credit quality of those borrowers is deteriorating.” It would seem — and this is speculation — that the capital markets are encouraging OnDeck to improve its credit quality, a theory supported, at least in part, by Prosper’s retrenchment. That this move up the credit spectrum by OnDeck might contradict its original mission is, well, an unfortunate byproduct, it would seem.