Alternative lender LendUp gets funding for credit cards

Alternative lenders see funding

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US-based alternative lender LendUp, a company focused on providing online- and mobile-based credit products to underserved populations, raised $47.5 million in an equity deal, according to The Wall Street Journal.

The new funding, which reportedly brings the firm’s valuation to $500 million, will be used to expand the firm’s L-Card subprime credit card product line. L-Card users, who may pay up to $60 per year in annual fees, will be able to borrow between $300 and $1,000, with a 19-29% interest rate.

That could make the firm more competitive with traditional issuers, which also offer card products aimed at subprime borrowers who wouldn’t ordinarily be approved for credit products. And LendUp reportedly plans to hold the loans on its balance sheet, which could give the firm revenue and added security amidst tumult in the online lending industry.

A credit card line could provide a strong acquisition channel for customers with a potential high lifetime value.  

• Subprime credit cards are popular right now. US credit card balances are on track to hit $1 trillion this year. Many of those customers are subprime — the majority of the 10 million new credit card customers in the past year were subprime, according to TransUnion.
• Subprime cards can be profitable in and of themselves. Subprime cards are expensive for borrowers — the overall average APR is 18.2%, but for subprime borrowers, it’s 22.2%, according to CNBC. That gives firms a way to make money off of these consumers.
• But for lenders, they also work as an effective customer funnel. Discover recently launched a secured version of its flagship Discover It Card targeted at subprime consumers who might not be otherwise approved for credit. Discover could then convert the customers that use the card to build credit to more traditional or profitable prime credit products. LendUp could do the same thing, and use its L-Card to bring consumers to borrow more from the company, which builds high lifetime value customers at a low acquisition cost.  

Alternative lending is particularly important for small businesses represent 99% of US companies, 54% of total sales, and 55% of all jobs, according to the US Small Business Administration.

These businesses need capital in order to grow, but small businesses are underfunded — only half of small businesses with $100,000 to $1 million of annual revenue received at least some of the financing they applied for from large banks in late 2015. This is partially because banks have retreated from this segment because issuing loans to small businesses using the traditional underwriting model is expensive. This leaves a massive amount of unfulfilled loans that we estimate reached $96.5 billion in Q4 2015.

Alternative lending companies have stepped in to capitalize on the opportunity available in helping meet more small business' lending needs.Alternative small business lending platforms use machine learning and digital tools to extend credit to a wide array of small businesses quickly and efficiently, particularly to those that have been rejected by banks. Alternative small business lending companies provide digital platforms that connect small business borrowers to capital using nontraditional means.

We estimate that alternative small business lenders originated $5 billion and had a 4.3% share of the small business lending market in the US in 2015. But alternative small business lending platforms will originate $52 billion and gain a 20.7% share of the total market by 2020, driven by the continued growth of new players, increased borrower awareness and interest, and most importantly, major partnerships with big banks.

Evan Bakker, research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on small business alternative lending that analyzes the market opportunity for alternative lenders, forecasts the market share and volume growth of alternative lending platforms, profiles key players, and addresses the main industry risks.

Here are some key takeaways from the report:

• Alternative lending platforms are in a position to capitalize on this underfunding and also take share from banks. These companies use machine learning and digital tools to extend credit to a wide array of small businesses quickly and efficiently. We estimate that alternative lending companies' share of the small business lending market in the US will reach 20.7% by 2020.
• Alternative lenders are now partnering with banks and this will propel growth going forward. New lenders are finding opportunities to offer white-label services to major banks. We expect banking partnerships, like the one between JPMorgan and OnDeck, to add 7.7 percentage points to the alternative lending industry's market share by 2020.
• A flurry of new lenders have entered the market, but it's still early innings. A handful of small business lenders, from Funding Circle to Credibly, have entered the market and this is creating challenges as customer acquisition costs rise and alternative lending companies struggle to differentiate themselves.

In full, the report:

• Forecasts the market share and volume growth of the small business alternative lending sector, and breaks down the main growth drivers.
• Explains why small businesses are underfunded, and quantifies the market opportunity for alternative lenders.
• Defines the different types of platforms that alternative lenders employ, including their revenue models.
• Lists the advantages and disadvantages that alternative lenders have compared to traditional players.
• Overviews the key players in the industry and identifies their growth factors as well as the pain points limiting their growth.
• Pinpoints the key risks that could undermine the success of alternative platforms

To get your copy of this invaluable guide, choose one of these options:

1. Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
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The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of small business alternative lending.