JP Morgan CEO Jamie Dimon famously said: “Silicon Valley is coming”. Jamie Dimon is seen as a top visionary on Wall Street and among the best strategists. Many people have interpreted this as “Wall Street is in danger” and this is serious.
Therefore it is no surprised that companies like Goldman Sachs have made hires and have already established a brand for their own online lending company.
JP Morgan Chase has finally also made a very public step in this direction by entering an agreement with OnDeck Capital.
OnDeck Capital is a public company known for offering high interest financing to small businesses. While more products have been added over the last few years, they are known for small business loans with quick loan decision using mostly the bank account statements data for the underwriting. From a regulatory point of view their financing is presented usually as re-factoring, which in many people’s language, stands for “buying future products of the company with cash right now at a pre-agreed price”.
OnDeck shares are down 67% year-over-year while their business is booming. Many people are wandering why this decline. The main reason advanced by most analysts has been the lack of profitability of the company despite high interest rates due to very high defaults. Many people question the sustainability of their business model. Furthermore re-factoring companies have received some bad press recently showing that many of their customers tend to go out of business.
In the deal struck with JP Morgan it appears that OnDeck Capital will soon be able to provide their products and offerings via the local brick and mortar branches of Chase Bank.
JP Morgan Chase is at the time of this article the #1 largest bank in United States by deposits. JP Morgan is #4 SBA lender in the US for loans under $100,000 in size.
Effect on OnDeck
This deal seems like a great business development channel from OnDeck. This deal is expected to reduce their cost of customer acquisition while increasing their credibility and brand. Also this channels is expected to improve the quality of their borrowers and therefore decrease their default rate.
On the other side we can speculate that OnDeck will have to improve their regulatory and compliance framework in order to work with such a reputable firm as JP Morgan.
And last but not least it would be expected that OnDeck’s will have to share some of their revenue with JP Morgan and maybe even reduce their interest rates in order to work with such a reputable firm.
Therefore, in short term, while this may be a great marketing, PR and branding coup for OnDeck it is expected to keep their profit margins stable or maybe even reduce it.
Over long term, however, due to a better brand and presence most likely OnDeck will improve its profitability over time by increase their organic business.
It is therefore no surprise that OnDeck’s stock has popped 35% since this announcement.
Effect on JP Morgan
On the other side it is unclear why JP Morgan decided to partner with OnDeck capital instead of starting their own competitor in this space.
In general the pros and cons of renting, buying or building new businesses is always made. And one has to weight OnDeck’s reputation with the time to market and profitability of this deal for JPM. I would expect that JPM decided to work with OnDeck for a fast time to market and to get access to data and information about how they operate while they are working, in parallel, on building their own in house solution with which they will replace OnDeck in 2-3 years.
And if for any reason JPM fails to build a good product in house I would expect them to have an option to buy a significant piece of OnDeck to defend this business channel.
In addition it is likely that JPM will use this deal as a template and try to sign similar deals with different actors in the personal loans space, student loans space or mortgage space.
Other industry effect
The most interesting part is that with Goldman Sach’s exception, we haven’t heard any news from JPM’s competitors lately. What are Morgan Stanley, Citi , Bank of America , Wells Fargo and so doing ? We know that most of them are providing capital to marketplace lenders. In fact most of the marketplace lending capital comes from big players like this.
Author: George A. Popescu
Tips ? News ?
Please free to email us at email@example.com