Online lending has a pretty simple value proposition: Bank cheaper by (1) doing it online and (2) using innovative alternative creditworthiness metrics. By cutting brick-and-mortar costs with the left hand while capturing previously overlooked markets with the right, web-only lenders like SoFi and OnDeck can out-retail-bank retail banks. That's the promise, at least.
Part (1) of that plan has gone just fine. The banks are online and they're lending. But in 2016 part (2) turned into a thing. Delinquencies rose among just those populations that these lenders developed fancy algorithms to serve. At LendingClub, highly indebted borrowers are falling behind on payments. Student loan specialist SoFi (mission: “kill banks”) has suffered rising losses. Etcetc. The natural conclusion: These lenders overreached in their loans to lower credit quality borrowers.
That's backwards, Elevate Credit wants you to believe. It's not that web banks have gone too far into the under- and un-banked. It's that they haven't gone far enough. The company, which brands itself an online payday lending alternative, has recently revived its previously postponed IPO in a bid to make everyone forget about the annus horribilis of the online lending world. From Business Insider:
The company is offering 7.7 million shares at $12 to $14 each, it said in an updated filing on Monday. It has also put aside 1.15 million shares that the underwriters have the option to purchase. At the top of the range it would raise about $124 million.
Getting online lending's groove back in 2017 is not a mission for the SoFis of the world, whose audience tends to be better-off early-career professionals and the like. For Elevate, the future is down-market. CEO Ken Rees:
How did Elevate thrive while so many other online and marketplace lenders struggled for funding, growth and profitability? We believe it is because of our steady focus on serving the vast and underserved segment of approximately 170 million non-prime consumers in the US and UK who are seeking better financial options […] Our customer is typically deeply frustrated with traditional banks, which have ignored their need for access to credit, fair pricing, and a path to lower rates and better credit. Even though non-prime consumers now outnumber prime consumers in the US, most fintech investments and innovation have largely focused on providing credit to prime consumers who are already swimming in it.
“Non-prime” has a nice ring to it, but how down-market are we talking here? Rise Credit, Elevate's main U.S. brand, boasts a portfolio-wide effective APR of 156 percent. That's lower than your typical payday loan, but several factors greater than the maximum rate a LendingClub or Prosper might charge. I.e., it's a lot.
In another age we might worry whether a company that's trying to become the Amazon of payday lending, hawking triple-digit high-fee loans across state borders, might be vulnerable to regulatory risks stemming. But the bigger question for now is whether the wave of pain that spread over the bigger players in the market has also hit their bargain-basement peer. The answer is: kind of?
Net charge-offs as a percentage of revenue have increased to 57 percent in Q4 2016 from 51 percent in the second quarter of 2015 – the earliest date listed on Elevate's S-1. Over that same time provision for loan losses have risen to 59.4 percent from 43.9 percent. Things are looking dicier, but it's not clear Elevate is in any sort of trouble. Revenue rose a healthy 27 percent in the last year. Though the company still isn't profitable.
Anwyay, Elevate's IPO prospects may have less to do with trivialities like its ability to make more money than it spends and more to do with investor appetite for shiny new stock issues. If Snap is any indication, that appetite remains high. So we'll just leave you with this: