Why would a longtime investment banker get out of that business and take up with a startup company as its CFO?
Actually, it’s becoming fairly common for Wall Streeters to morph into corporate finance chiefs, particularly at technology companies. Unquestionably the biggest name is Ruth Porat, who left Morgan Stanley for Google. And just this week, Laurence Tosi hopped from The Blackstone Group to Airbnb, representing a big subset of this population: those landing specifically at financial technology companies.
One such person, Morgan Edwards, who joined student-loan firm CommonBond as CFO last month, imagines that his motivations for making the move align with those of many peers who are doing the same thing.
“I worked with some of the smartest, hardest-working people at very large organizations with fantastic platforms for a long time,” says Edwards, 55, who counts Macquarie Capital, Bear Stearns, and Morgan Stanley among his former employers. “Those were great jobs with good compensation, and it was really fun. But some of the fun had gone away.”
That mindset sparked his interest in finding a new line of work just about the time a new trend came along that provided an exciting opportunity. About a year and a half ago, he says, “marketplace lenders,” a new breed whose early loans had been financed by equity investments from individuals, began seeking to borrow capital from large institutions like the ones Edwards has worked for.
“You could see the future, in the sense that debt financing for marketplace lending was going to be a reality,” Edwards says. “The credit markets only finance businesses that they have a high level of confidence will succeed. As marketplace lenders began to obtain access to debt, it was a sure sign that marketplace lending was here to stay and represented the next wave of finance.”
A New Lender Category
While the term “marketplace lender” has been defined variously, a more standardized definition has been crystallizing lately. It was articulated this way by Edwards’ new boss, CommonBond CEO David Klein: “a (1) non-banking financial institution that (2) heavily leverages technology to drive simplicity and speed of process and (3) serves a two-sided market of consumers and investors.”
Most of the approximately 150 to 200 marketplace lenders — the best-known and most successful, by far, is Lending Club — started out as “peer-to-peer” lenders, since their capital came from individual investors. Now, for those that have demonstrated good business models and loan histories, “large chunks of capital are pouring in from the institutional market,” says Edwards, noting that he expects to spend the bulk of his time this year and next on raising debt capital to fund growth.
In fact, CommonBond, whose core business is refinancing existing graduate-student loans at lower interest rates, claims that among thousands of loans it has written, it has not yet experienced a single default or 30-day delinquency. That may strain credibility, but Edwards acknowledges that no credit model is perfect, so it’s inevitable that the firm eventually will experience such losses.
But a key reason CommonBond has had a clean track record so far is that it originates loans only for the most creditworthy borrowers. The target customer has an income of at least $140,000, a FICO score around 760 to 770, and no adverse credit history. The average borrower is 32 years old.
The market is brimming with such people, Edwards contends.
The student loan market “is broken,” he says, in the sense that the federal government, which provides the vast majority of such loans, doesn’t really measure credit risk. Everyone who gets a loan gets the same interest rate.
“We say to our particular slice of the market, ‘We can help you save money, and you deserve to save money, because your credit risk is better.’ That’s the excitement about marketplace lending regardless of the product,” says Edwards. “Because of the data that’s available now and the tools for understanding it more deeply and meaningfully, you can make better credit decisions, and everyone, even the riskiest consumer, gets a better rate than they did before.”
A Winning Business Model
CommonBond originates loans and generates revenue by selling them to investors — banks, asset managers, money managers, hedge funds, insurance companies — at a premium. The business has done well enough that it was able to win investment-grade ratings from Moody’s Investor Service and DBRS for its first securitized product, a $100 million package of loans that closed in June, yielding 3.2%. It marked the first time Moody’s assigned such a rating to a marketplace lender doing its first securitization, according to Edwards.
The company’s growth is dizzying. Less than two years since its national launch in September 2013, it has originated loans for more than 2,000 graduates of some 700 graduate-degree programs. It also provides in-school loans to students at 20-plus MBA programs. That reflects CommonBond’s origin: it was founded in 2012 by three students, including Klein, at the University of Pennsylvania’s Wharton School of Business.
One of the company’s foundational principles is a social promise: for every loan it originates, it in turn funds the education of a student abroad for a year. It does this through a partnership with Pencils of Promise, an organization that builds schools in the developing world, so far focusing on Guatemala, Ghana, and Laos. It’s an affordable program for CommonBond, because the annual educational cost for students in those countries, including transportation, books, and supplies, averages just $100. But “it makes a huge difference in their lives,” Edwards says.
The company’s long-term vision is to expand its lineup of financial products beyond student loans — it’s planning a pilot for its first such product next year — and ensure loyalty to the CommonBond brand with exceptional customer service. According to Edwards, loan applicants provide just a few data points in an online application and are quoted an interest rate within five minutes; loans are finalized within a few days; and should applicants or borrowers request human interaction, they’re guaranteed to get a response within 24 hours, although the average response time is just over an hour.
Meanwhile, traditional commercial lenders are watching the marketplace lending phenomenon with interest, says Edwards. Wells Fargo, in fact, is among a handful of players in the student-loan arena, although CommonBond and SoFi are the market leaders. But generally, big banks’ cost structures inhibit them from offering loans at the low interest rates marketplace lenders charge.
Referring to competition among marketplace lenders for student-loan business, Edwards says, “The good news for us is that the market is north of a trillion dollars in existing student loans, and all of us together that are competing in this space have so far written only a few billion dollars’ worth of loans.”
About marketplace lending in general he says, “There’s real optimism — not just that it’s going to stick, but that it’s going to be successful, and probably massively so. There are opportunities for growth, value creation, idea creation, and newness and freshness.”