JOSE, Calif. — Say goodbye to your stock broker and
financial planner. No more trips to Wells Fargo — you
can get your home loan refinanced on your iPad.
financial tech boom is in full force, driven by Silicon
Valley entrepreneurs creating Web and mobile technology
to offer personal and business loans, manage IRAs and
college savings accounts, plan retirement, buy and trade
stocks, and refinance mortgages. Many of the financial
services once offered only by people charging hefty
commissions are now delivered by lean startups using
lines of code, whose apps have extended credit at
sometimes eye-popping interest rates to consumers whom
traditional loan officers would not serve.
big opportunity is that we have disruptive companies
that are allowing people access to credit that they didn’t
have access to before, and allowing them to do it in a
much easier way," said Daniel Castro, vice
president of the Information Technology and Innovation
Foundation, a nonpartisan think tank. "On net, we’re
all better off with these types of services."
so fast, say some experts. Too many loans left unpaid or
one sharp downturn of the market could send lenders
fleeing these high-tech services.
encouraged by the opportunity to capture a slice of the
$5.2 trillion consumer loan market, venture capitalists
are jumping in. U.S. financial-tech companies raised
$3.8 billion last year from investors, up from $540
million in 2009, and are on pace to exceed that this
year, according to PitchBook, a research firm for
private equity and venture capital. In the first quarter
this year, VCs invested $392 million in Silicon Valley
financial services companies, more than the total for
all of 2014.
this frenzy, JPMorgan Chase CEO Jamie Dimon wrote in
April in a letter to shareholders: "Silicon Valley
is coming. There are hundreds of startups with a lot of
brains and money working on various alternatives to
of these startups have made credit and financial advice
more ubiquitous than ever — most services are
available on your schedule, not your banker’s; some
services lend to borrowers without a credit history or
bank account; and a new crop of wealth management and
retirement planning services cost nothing at all.
we expect a 37-year-old to walk down the street with a
stack of paperwork to go to the local bank, we are
sorely mistaken," said Jason van den Brand,
co-founder and CEO of San Francisco-based online loan
refinance service Lenda.
Regmi recently refinanced his Bay Area home through
Lenda, cutting his original 5.25 percent rate from Wells
Fargo to 4.13 percent.
big thing is trust," Regmi said. "Being very
comfortable online is a big ask. I got over that hurdle
without a second thought. But would I expect my mom to
go do this? I don’t think so. I would expect her to go
into Wells Fargo and talk to someone face to face."
M. Mackey was 23 and without any credit when he wanted
to buy his first property. Every bank rejected him, he
said, but in 2012 he found Prosper Marketplace, an
online lending service in San Francisco. He got a
$15,000 loan at 28 percent interest — near the top end
of Prosper’s rates.
was thrilled," he said. "I wasn’t able to
get a loan anywhere else."
paying off that five-year loan in just two, he got two
more loans from Prosper with much lower rates — 8.5
percent and 7.2 percent — bought five properties in
Kansas and started a rental business.
walk into the bank and there’s still tons of paperwork
and rigmarole," Mackey said. "Everyone wants
every single document you’ve ever had in your life. On
Prosper, they … don’t ask you for your first
that ease of getting capital and the fact that many of
these startups have never been tested by an economic
crisis raises a red flag.
any particular business will be around for a long period
of time, that’s a question," Castro said.
"There is a little bit of ‘buyer beware.’"
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VCs and analysts say the default rates among borrowers
of these nascent lending websites are skewed low because
not enough time has passed to discern who will pay back
three-or five-year loans. Lending Club, for instance,
says it has had an annual default rate of 2 percent to 4
percent. However, LendingMemo, an education site for
peer-to-peer lending, says a more accurate rate is 5
percent; analyst Richard Bove of Rafferty Capital
Markets pegs it closer to 12 percent once more loans
really easy to loan out money," said Charles Moldow,
a general partner at Foundation Capital who has invested
in financial tech firms including Lending Club and
OnDeck Capital. "It’s the equivalent of going
down the street and handing out money. The challenge is
getting it back."
risks clearly haven’t deterred investors or
entrepreneurs. Plug and Play hosts a financial tech
accelerator in partnership with Intuit, Capital One,
Citi Ventures and Deutsche Bank — each bank is looking
for startup technology it can acquire. Corporate giants
including Google, Intel and eBay are also backing
startups — in 2014, more than 90 corporations invested
in financial tech companies, a 176 percent increase from
2010, according to investment database CB Insights.
deluge of funding will force companies to either get
acquired or go public, say VCs. So far, it isn’t clear
whether the public markets are a good fit — Lending
Club has seen its stock value sink about 48 percent
since its peak, and OnDeck Capital, the other company to
IPO, has lost 54 percent.
the investor enthusiasm has afforded a slew of free or
cheap tech services for nearly every facet of your
financial life. Robinhood is an app for the iPhone and
Apple Watch that offers free stock and exchange-traded
fund purchases and trades. AboutLife, a company that
quietly launched this spring, offers free retirement
planning advice generated by software algorithms, not
people. Similarly, FutureAdvisor offers a free service
for guiding investment decisions, as well as a wealth
management service with a $10,000 minimum — a fraction
of the $500,000 many traditional wealth managers
Bo Lu, FutureAdvisor co-founder and CEO: "It used
to be that everyone who didn’t show up to the world
with a half-million dollars was simply out of
sampling of financial tech services:
Mercury News research
tech by the numbers
million — total loans processed by Lenda, an online
home loan refinance service
billion — total loans processed by Lending Club and
Prosper, marketplaces for personal loans
million — losses posted by Lending Club in 2014
percent — decline in OnDeck stock value since IPO in
billion — VC investments into U.S. fintech companies
in the first half of 2015
million — largest VC investment into a U.S. fintech
company this year (San Francisco-based Affirm)
percent — average return for lenders on Prosper loans
originated from 2009 to 2013
Mercury News research