Silicon Valley’s Financial Tech Boom: When Your Tablet Becomes Your Adviser

By Heather Somerville
San Jose Mercury News.

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.

The 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.

“The 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.”

Not 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.

Still, 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.

Amid 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 traditional banking.”

Many 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.

“If 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.

Sarvesh Regmi recently refinanced his Redwood Shores home through Lenda, cutting his original 5.25 percent rate from Wells Fargo to 4.13 percent.

“The 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.”

Jordan 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.

“I was thrilled,” he said. “I wasn’t able to get a loan anywhere else.”

After 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.

“You 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 born.”

But 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.

“Whether 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.'”

Some 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 have expired.

“It’s really easy to loan out money,” said Charles Moldow, a general partner at Menlo Park’s 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.”

Such risks clearly haven’t deterred investors or entrepreneurs. Sunnyvale’s 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.

This 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.

But the investor enthusiasm has afforded a slew of free or cheap tech services for nearly every facet of your financial life. Robinhood, based in Palo Alto, is an app for the iPhone and Apple Watch that offers free stock and exchange-traded fund purchases and trades.

AboutLife, a San Francisco company that quietly launched this spring, offers free retirement planning advice generated by software algorithms, not people. Similarly, San Francisco-based 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 require.

Said 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 luck.”

A sampling of financial tech services:

Personal/consumer loans:
Prosper Marketplace
Lending Club

Home loans/refinancing:

Business loans:
Funding Circle
OnDeck Capital

Financial adviser:

Stock trading:

Credit management:
Credit Karma
Credit Sesame

Source: Mercury News research

Financial tech by the numbers
$50 million — total loans processed by Lenda, an online home loan refinance service
$13 billion — total loans processed by Lending Club and Prosper, marketplaces for personal loans
$33 million — losses posted by Lending Club in 2014
54% — decline in OnDeck stock value since IPO in December
$2.5 billion — VC investments into U.S. fintech companies in the first half of 2015
$275 million — largest VC investment into a U.S. fintech company this year (San Francisco-based Affirm)
9.33% — average return for lenders on Prosper loans originated from 2009 to 2013

Source: Mercury News research

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