Although Wilmington, Delaware is not the first city that comes to mind when you think of a booming tech scene, a group of entrepreneurs is bringing in big business. Many of these high-tech professionals left their jobs in banking to enter a new market—financial technology, commonly referred to as fintech.
Fair Square Financial, an online credit card business, is one example of a fintech company making headlines. Just recently, the former CEO of Citigroup, Vikram Pandit invested $100 million in the company. Fair Square Financial says that the investment will afford it the opportunity to expand its office space and grow its number of employees within the next couple of years.
The company decided to expand since it was seeing an increase in customer demand. Fair Square’s Ollo credit cards are at the root of it, with its variety of benefits and low fees. The Annual Percentage Rate (APR) is a variable rate that is currently just under 25 percent.
In 2017, Fair Square received $800,000 in grant money from the state of Delaware and private equity investment for $200 million.
The CEO of the company, Rob Habgood, has a lot of experience in the credit card industry, with 20 years at companies that include Capital One and Bank of America. He knows that it takes a significant amount of investment in order to build a company from the ground up, especially one in the lending industry.
Fair Square and similar companies are utilizing the latest technology to make space for themselves in the Delaware credit card industry. Machine-learning and big data sources are the secret weapons behind these fintech services and the reason for their demand, despite the largest banks in Wilmington facing challenges with their own credit card operations.
The chief strategy officer at Marlette Funding, Sabrina Basht, noted that it is getting tougher for the large, highly-regulated banks to hold onto executives when the market is looking for something new. Big banks are not exciting anymore since the opportunity to veer from the traditional system is slim to none. Basht’s company, Marlette Funding, based in Fairfax, offers consumers loans in a lump sum at a fixed-rate.
Basht, and others making their way into the fintech game have gained their banking experience while working at large entities, such as Barclays and JPMorgan Chase. Not regretting the move, she has said that places like Marlette offer an energetic atmosphere that buzzes with innovation. When you compare that to the stuffy, old environment of traditional banks, it is not hard to see why many are jumping ship.
That said, Delaware has had a reputation as the go-to for consumer loans for many, many years, thanks to the traditional banks. They did not have any state laws restricting interest rates, so financial institutions, such as MBNA, would bring thousands of Delaware residents on board for credit card services.
Unfortunately for them, 2005 saw a shift in business. MBNA was bought by Bank of America and a downhill road began. At the time, MBNA has more than 10,000 employees in Delaware, but the acquisition put a lot of jobs in jeopardy. Layoffs or transfers resulted in the thousands over the following years.
It was not until 2017 that the concept of fintech hit Delaware at home. The company, SoFi, based in San Francisco, made the announcement that it would expand its office in Claymont by hiring 400 employees by the close of 2018. SoFi, an online organization that provides personal loans, sparked the fire to Delaware fintech and has been gaining momentum ever since.
Soon after, College Avenue, an online lender for students, made the announcement that it got a venture capital investment of $30 million to continue growing.
Marlette Funding also saw expansion by adding over 200 employees to its Delaware operations, which almost doubled its workforce at the time. Marlette also utilizes machine-learning algorithms in its business. The technology helps in determining whether prospective borrowers are reliable enough to receive credit from the company.
Fair Square has not revealed that its use of machine-learning has proven profitable yet; however, Marlette says it has been for its organization. In 2017, the company netted $11 million and its loan portfolio, as of mid-2018, was worth $2.5 billion. While only four years in business, as that point, Marlette had lent out $5 billion and offered interest rates that ranged from just under five percent to just under 30 percent.
Marlette Funding, who uses the website, Best Egg, for its money lending, is one of several fintech companies in Delaware. Basht claims that they are not as unpredictable or inconsistent as most startups tend to seem. On the contrary, these Delaware companies are the real deal.
It seems that more people are jumping on this bandwagon, with the Delaware Board of Trade having sold a stake in the company to Seven Stars Cloud Group, a company based in Beijing. The transaction was said to be worth over $6 million and gave Seven Stars 27 percent of the company. In 2016, the Delaware Board of Trade had promised to meet specific employment demands before taking $3 million of taxpayers’ money, which they still had yet to follow through on in 2018.
Although it seems that Wilmington is doing fairly well with all of the fintech money pouring into the city, it is still not certain whether or not the companies can make it through an economic downturn. While the inflow of money has seemed to make a positive change in a once rough job market, its longevity is uncertain.
Sanjay Sakhrani, a consumer credit analyst for investment bank Keefe, Bruyette, & Woods Inc., says that the tell-tale sign is when things are not going so well. Right now, things are going pretty well, so the funding opportunities are there. When the marketplace is a bit more volatile, it will be interesting to see how the fintech companies handle the waves.
Sakhrani thinks that the Delaware fintechs may do well in niche areas; however, it could prove difficult to take market share away from big banks in consumer lending services.
Other analysts based in New York are predicting that an economic downturn is on its way for the consumer credit market. While interest rates have reached all-time lows since the Great Recession had ended, rates are now beginning to rise.
Vikrim Pandit, however, seems to think that Fair Square is only strengthening the credit card business by using advanced technology, such as big data and machine-learning. As CEO of Citigroup, Pandit had led the company through the Great Recession until 2011. Pandit is now on the board of directors for Fair Square, along with a couple of other executives who are associated with Orogen Group, Pandit’s investment firm.
Credit Worthiness Variables
Regardless of criticism, Fair Square CEO, Hapgood, believes that his company can handle any dip in the economy. With his team’s background in the credit card industry, he feels that they are well-equipped to survive any rough waters that may come in the future.
There is much to be understood about credit cycles and how the market performs at each one. You have to build your business’s resiliency in order to make it through difficult times. Hapgood says Fair Square is creating machine-learning models for various stages of the business, from targeted marketing to underwriting.
Those in the credit industry have generally used a potential customer’s credit score to gauge whether or not they would make a good borrower. Fair Square aims to see ratings fall between the 600s and 700s, but its CEO does not necessarily believe that a prospect’s score provides an accurate portrayal. That is why they use 150 variables to make the decision. Fair Square uses all of the data available in the market, in addition to that in the credit bureau.
Once a customer is approved and receives an Ollo card, the money that borrowers are using does not come from Fair Square, exactly, but from investors. This is one of the differences between a fintech company and a traditional bank. Since the company does not have customers who deposit money consistently, the money comes from prearranged contracts with the investors.
Hapgood says that the company will look into the securitization market with asset-backed securities, such as loans. These would ensure a fixed return for investors.
Marlette Funding CEO Jeffrey Meiler confirms that his company also does not use funding from depositors to supply loans. Money from investors is loaned out utilizing underwriting platforms and credit return models, which include hedge funds and banks of medium size. From there, the loans are sold to other banks, while services are still managed by Marlette.
Sakhrani is still not convinced that these fintech companies will be able to stay the course. He believes that customer deposits are a form of security, but Fair Square and Marlette do not have those to fall back on. With the future unclear, investors will have to decide whether the risk is worth it.
After the Great Recession, the whole industry has changed. The bigger banks are more hesitant to lend customers money even though the demand for credit cards grow. Meiler notes that small banks have filled these gaps in the past, but they could not get enough of the business to hold staying power. With their disappearance, the opportunity for fintech is primed for the taking.
If you want to take advantage of this fintech push in Delaware, contact ICS. We have plenty of open jobs to meet your needs. Click below to start your search for something more.