Publicly traded Fintech companies to watch in 2022 and beyond | Consumer lending

Update: since publishing this post, I added two companies to my watchlist: Nubank (NASDAQ: NU) and MoneyLion (NASDAQ: ML). Follow the links below to learn more about these companies:
👉🏻 Nubank Q4 2021 Earnings: why is Warren Buffett so bullish about this neobank?👉🏻 MoneyLion: are investors missing out on this rapidly growing neobank?

The last couple of years were extremely productive in terms of FinTech companies going public: Root (October, 2020), Upstart (December, 2020), Affirm (January, 2021), Coinbase (April, 2021), Marqeta (June, 2021), Robinhood (July, 2021) and Nubank (December, 2021) are just the most notable ones, while the list is much longer. The services that these, now public, companies offer range from insurance, to consumer lending, to payments, to investments, to software and cover pretty much every surface of the FinTech attack on legacy financial players.

I have identified around 20 publicly traded FinTech companies across multiple segments (Payments, Consumer lending, Infrastructure, and Investing) and will follow their journey in this newsletter: will describe what they do, break down how they make (or plan to make) money, as well as report on their progress after quarterly earnings calls and other major milestones.

This is the second part of the series “Publicly traded FinTech companies to watch in 2022 and beyond”. Please find the first part, covering Paypal, Block (formerly Square), and Affirm, here. This time we focus on Consumer lenders.

Upstart | UPST 0.00%↑

Market Cap: $9.6B | 1Y share price change: +29%
Revenue (Q4, 2020 - Q3, 2021): $634M | Last quarter revenue growth (YoY): +250%

Website | Investor Relations

Upstart was founded by ex-Googlers Dave Girouard and Anna M. Counselman and a tech whiz Paul Gu in 2012 and went public in December 2020. The company offers personal loans and its value proposition is to use Artificial Intelligence in credit scoring and decisioning; thus, achieving higher acceptance and lower default rates on originated loans, as well as serving consumers that would otherwise be left out (i.e. customers with low FICO scores).

Upstart originates consumer loans through their own website, as well as through white-label solutions on their bank partners’ websites. Originated loans are either retained by the bank partners or sold to institutional investors, as whole loans or through securitization. For instance, in 2020, the last reported fiscal year, 18% of the loans originated by Upstart were retained by partner banks on their balance sheets, and 81% of the loans were sold to institutional investors (the remaining 1% were the loans funded through Upstart’s own balance sheet).

As the company retains very few loans on its balance sheet, the key source of the company’s income are loan origination and loan servicing fees paid by their banking partners. Thus, the revenue stream is heavily dependent on continuing origination volumes, which is a key difference from lenders that keep loans on their balance sheet and earn interest income. To support further growth, the company is working on expanding its offering from personal loans ($81 billion in outstanding balances, as per company’s estimates), to auto loans ($672 billion outstanding balances), and, eventually, to mortgages ($4.5 trillion in outstanding balances).

Upstart’s first full year as a public company was nothing short of impressive. As an illustration, in Q3 2021 (the latest reported quarter) the company originated $3.13 billion in loans (244% YoY growth), and generated $228.4 million in revenue (250% YoY growth). In addition, earlier in 2021, they acquired a cloud provider of automotive retail software, Prodigy Software, converted it into “Upstart Auto Retail”, and started originating auto loans through partnerships with car dealerships.

What to watch in 2022:

• Auto-loan origination volumes. As the company is already one of the largest players in personal loans, the key driver for further growth will be its ability to tap into a much larger auto loan market

• New partnerships that would leverage Upstart’s technology at scale. I am thinking about partnerships with neobanks and other fintechs that want to extend their client offering with consumer credit (and which would be powered by Upstart)

• Acquisitions. The company is profitable, has a sizeable cash position, and is hungry for growth. Thus, growing through acquisitions of smaller players should not be excluded.

SoFi | SOFI 0.00%↑

Market Cap: $10.5B | 1Y share price change: -41.0%*
Revenue (TTM): $870M | Last quarter revenue growth (YoY): +27%

Website | Investor Relations

SoFi (short for Social Finance) was founded in 2011 by four students at Stanford Graduate School of Business, Mike Cagney, Ian Brady, James Finnigan, and Dan Macklin. The company, which for a long time was known as a student loan lender, started by pooling money from business school graduates to fund initial loans. However, it quickly diversified its funding sources, including the use of securitizations and its own balance sheet, and passed the $4 billion mark in issued loans by mid-2015.

In late 2017, the company’s CEO and co-founder, Mike Cagney, stepped down following allegations of sexual misconduct, and the company hired Anthony Noto, former Chief Operating Officer at Twitter, as their new CEO. Under Noto’s leadership, the company started diversifying away from student loans, first by offering personal loans, then launching stock and ETF trading (“SoFi Invest”) and later cryptocurrency trading, and finally launching SoFi Credit Card. In February, 2022 SoFi completed the acquisition of Golden Pacific Bank, essentially setting the final cornerstone for becoming a universal consumer bank.

In addition, in 2020 SoFi acquired Galileo Software Technologies, a software vendor providing core banking, payments, and card management software for such FinTechs as Dave, MoneyLion, Robinhood, and Chime. In the latest earnings call (Q3, 2021), the company reported that Galileo now powers over 89 million accounts for its customers (up 82% from 49 million accounts at the end of Q3 2020). SoFi also reported that Galileo generated $178.4 million in net revenue over the last twelve months, representing 20% of the total company’s revenue.

As can be seen from the above, Anthony Noto and the team at SoFi have been very active in developing and scaling the company. In order to support further growth, the SoFi went public on June 1, 2021 via a reverse merger with Social Capital Hedosophia Holdings V ($IPOE), a SPAC sponsored by Chamath Palihapitiya. As the result of the IPO, the company raised approximately $2.4 billion in cash proceeds.

What to watch in 2022:

• The rollout of the banking license. The banking license provides SoFi with a number of benefits, with the most immediate being the ability to attract cheap deposits, and offer cheaper loans to their customers.

• Continuation of growth. At its latest earnings call, the company reported 96% YoY growth in customers (SoFi calls them “members”), 28% YoY growth in net revenue (as well as guided for 49-55% YoY growth in Q4, 2021). Can they sustain this volume?

• Acquisitions. The company has lots of cash and is aggressive in its growth ambition, so I don’t exclude growth via acquisitions (especially if these acquisitions allow extending product offering, i.e. insurance).

• Galileo. Galileo is a software business, which has different metrics, dynamics, and valuation multiples from the rest of SoFi businesses. I wouldn’t be surprise if the company decides to spin off or sell Galileo (especially if it will have great acquisition opportunities).

* SoFi went public on June 1, 2021, so the indicated price change reflects performance starting from the date of the merger.

Lending Club | LC 0.00%↑

Market Cap: $1.9B | 1Y share price change: +47%
Revenue (Q1, 2021 - Q4, 2021): $898M | Last quarter revenue growth (YoY): +172%

Website | Investor Relations

LendingClub was founded in late 2006 by Renaud Laplanche and initially pursued a peer-to-peer lending model, connecting borrowers looking for personal loans with individual investors. The company, which was a FinTech darling at the time, went public in December, 2014 and reached a market cap of over $9 billion on its first day of trading. However, struggles to scale the business, failed entry into auto lending segment, as well as the scandal caused by alleged “inflation” of origination volumes, resulted in ousting of the company’s CEO and founder, as well as the collapse of the stock price.

Over the years, LendingClub (and pretty much the whole peer lending industry) realized that scaling consumer lending business requires cheap capital (i.e. banks fund their lending via almost free deposits, while peer lenders had to provide double-digit returns to attract individual investors). At first, they started pivoting away from the peer-to-peer lending model by selling originated loans to institutional investors, then partner banks, and eventually decided to become a bank themselves by acquiring Radius Bank in 2020 (the deal closed in early 2021).

Following the acquisition of Radius Bank, LendingClub started positioning themselves as a “Marketplace Bank”, meaning they would continue selling part of originated loans to institutional investors and banks as before (and generate income via origination fees), but would retain the other part of originations on their balance sheet (and earn interest income through the lifetime of the loan). In 2021, the change in the business model allowed the company to achieve profitability for the first time in its history.

LendingClub originated $10.4 billion in personal loans in 2021, and guided for $13 billion in originations in 2021. The company generated a net income of $18.6 million for 2021, which was a significant change compared to the $187.5 million net loss in 2021. As they continue to build the loan book by retaining part of the originated loans on their balance sheet, the interest income growth will outpace origination growth. Thus, the company guided for $130-150 million in net income in 2022 (or 600% - 700% YoY growth).

What to watch in 2022:

• Origination volumes. Management has been quite cautious in giving guidance during 2021, which allowed them to consistently exceed expectations. $13 billion in originations in 2022 (as per the guidance) would be their record, but it is not far away from the $12.3 billion the company originated in 2019

• Share of retained loans. Management reiterated the intention to keep 15-25% of the originated loans on their balance sheet; however, given the expected $13 billion in originations, this is quite a wide range of $1.95 to $3.25 billion. A higher share of retained origination hurts short-term income (through lower marketplace fees and provisions for loan losses), but will help accelerate interest income growth

• Growth of the loan book. LendingClub originates high yielding consumer loans that increase overall yield on the total loan book. Thus, both the size of the book and the yield are expected to grow considerably

Upstart reports Q4 and FY 2021 results on February 15, 2022, SoFi reports on March 1, 2022, and LendingClub already reported their results on January 26, 2022 (please read my review of LendingClub earnings call).

Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.