After COVID-19’s initial shock, lenders begin ramping up originations once again
- With PPP no longer an option, lenders have to look for new ways to stay relevant during the pandemic.
- For many lenders, Q3 is proving more successful than Q2 in loan originations, though still nowhere near pre-pandemic numbers.
For fintech lenders, COVID-19 meant a significant drop in loan originations.
In April, leaders in the industry, including Kabbage, OnDeck and LendingClub, began cutting off lending altogether. Existing loans started to go bad as consumers and businesses faced unprecedented financial stress. By the end of April, OnDeck reported 45% of its loans to be in some stage of delinquent. Kabbage, once the largest fintech lender to SMBs, ended up selling itself to American Express for about $850 million– a fraction of the $1.2 billion it was worth in 2017.
With the lending spigot closed, various digital lenders like Square and Kabbage, lobbied the Trump administration to participate in the distribution of funds from the CARES Act. The Paycheck Protection Program proved a godsend for some of these lenders. They also were some of the most active issuers of assistance loans throughout the U.S., rivaling many of the big banks. Kabbage ended up issuing $7 billion in PPP loans, helping nearly 300,000 businesses. After being approved by the SBA to participate in the PPP, BlueVine issued over $4.5 billion, saving 470,000 jobs. Intuit’s QuickBooks Capital originated over $1 billion after standing up a PPP app after just 11 days.
For many lenders, the Payment Protection Program became a lifeline. They could issue loans backed by the U.S. Government amidst the crisis and still stay afloat. But with PPP now out, lenders have to find new ways to stay relevant during the pandemic. What’s happening now is a slow increase in loan originations, as lenders begin to pick themselves up from the initial shock of the pandemic.
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Last quarter, OnDeck, a SMB lender, originated $148 million, an increase of over 120% compared to Q2. But originations are still not close to where it was last year at the same time, at $618 million. Like Kabbage, OnDeck needed to be acquired and found a suitor in Enova, a short-term consumer lender. The $90 million acquisition helped OnDeck get back on its feet.
Consumer lenders are dealing with a similar dynamic. LendingClub severely slowed down its originations and is now ramping them up again. LendingClub’s Q3 originations increased by 79% compared to the previous quarter, ending up at a value of $584.1 million. But compared to last year, this is still an 83% decrease.
Though it hasn’t closed yet, LendingClub was already looking for a more permanent source of funds when it acquired Radius Bank in February, before the impact of the crisis was felt. As one of the first examples of a fintech lender buying a bank, this strategy should help the lender weather future financial storms.
Square offers small businesses loans of $300 to $100,000. Its lending arm, Square Capital, has begun issuing loans again after a total cut off in Q2. In Q3, it issued $155 million worth of loans, down 72% compared to last year. Though it’s focused on increasing volumes, it will take the firm some time to get up to pre-crisis levels.
Lenders were hit with a double whammy. It’s not just that lending dropped off a cliff — early on in the crisis, lenders saw their portfolios rapidly degrade in quality. That seems to be tapering off now.
San Francisco-based small business lender Fundbox was one of the only independent platforms that continued originating loans during the pandemic. New CEO Prashant Fuloria said loan delinquency has never been lower.
“We saw our delinquencies rise momentarily from the low single digit percentage points to the high single digit percentage points for a few weeks and then they came back (…)” said Fuloria. “For the last three months or so they’ve been at historic lows — well below pre-COVID levels.”
Fuloria attributed the company’s achievements during the pandemic to its digital and data focused approach. In the last seven years, the company has invested over $100 million in data assets.
“Everybody had challenges,” said Fuloria. “I think we were perhaps more fortunate because of our digital-only approach and our investment in data and how we serve our customers.”