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JP Morgan partners with OnDeck – is this a template ?

Lending Times Daily News analysis and data for p2p and marketplace lending

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

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Tips ? News ?

Please free to email us at george@lending-times.com

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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