Orchard Platform Is Disrupting Financial Services From The Inside Out
TrueBridge Capital, Contributor
Just a few months ago, based on media headlines alone, it would have appeared that marketplace lending was dead. The founder of the world’s largest marketplace lender (LendingClub) and pioneer of the space itself, Renaud Laplanche, was abruptly fired over evidence of fulfilling faulty loans, sinking the share price of LC and prompting some to draw parallels to the financial crisis or question the durability of the entire industry.
Rather than dodge the incident, however, fintech startup Orchard Platformis tackling it head on, using its powerful technology and unique position as a conduit between institutional investors and loan originators to make marketplace lending more transparent, secure investor trust and interest, and accelerate the growth of the still-nascent industry.
Since its appearance on Forbes’ first annual Next Billion Dollar Startupslist last year, the New York-based Orchard Platform has grown its team by at least 200%, partnered with over 20 new loan originators, and continued expanding internationally. But beyond that, Orchard has been working to develop exactly what marketplace lending needs to transition from this year’s growing pains into adulthood: a secondary market.
Co-founded in 2013 by a team of financial services and technology experts, including CEO and former ad tech veteran Matt Burton, Orchard has developed software that amasses and analyzes data from a wide range of marketplace loan originators, providing order management, benchmarking, and other tools to analyze loan performance. The platform arms institutional investors with the ability to easily scale their loan portfolios and gain insight into their performance over time. And it benefits marketplace lenders by raising their profiles among investors and expanding their reach to new, diversified sources of capital.
Orchard’s general mission is simple—become a turn-key solution to both sides of the marketplace lending table. But to fully accomplish that is a much more difficult task involving close collaboration with the same entities that are anathema to many startups: regulatory bodies and financial institutions.
“We want to become mission-critical to both sides,” said Orchard CEO Matt Burton in a recent interview with TrueBridge. “To do that, we need the data tools, the infrastructure, and both secondary and primary markets.”
For the past two years, Burton and Orchard have worked closely with the SEC to clarify regulations surrounding marketplace lending and launch what would become the first-ever secondary market in the space. Burton and his team applied for Orchard’s broker dealer registration, clearly articulated their objectives, and have since moved in lock-step with FINRA to educate them on the industry, all while building out their relationships with policy leaders in D.C.
“It’s the antithesis of everything startup,” said Burton. “But we continue to pound the rock and work with them in a very proactive way.”
Although it may seem like an uncommon move for a fintech startup, those in the marketplace lending space would likely agree that there is a great need for a secondary market, as well as open lines of communication with regulators.
Establishing a secondary market, Burton argues, is essential for the overall growth of the asset class. Marketplace lending has gained significant real estate in recent press, but it dwarves other asset classes in size. Giving investors the ability to liquidate their investments when necessary would attract more capital to the space, and trading of the assets would pave the way for more accurate measurements of their values in the marketplace, incentivizing even more institutions to invest in the asset class.
A larger group of investors, in turn, would provide lenders themselves with larger and more diversified sources of capital, and help them keep up with the consumer demand that banks have thus far failed to satisfy.
“The universe of investors who work with LendingClub, Prosper, Funding Circle, etc. is small. So we need a secondary market for lenders to attract the hundreds of billions of dollars to fund the space over the next 10-20 years,” summarized Burton. “If we want the industry to grow to its potential, we need solutions, and just like there are solutions for the borrower side, we need solutions for the capital side.”
In a whitepaper on marketplace lending published this past spring, the U.S. Treasury Department made clear that there is a need for a secondary market, and that the active growth of a securitization market would require “transparency and significant repeat issuances,” including standards on reporting data for loans and registries for tracking transactions in the space.
As Orchard said itself in a response letter to the Treasury, however, it holds a unique position in marketplace lending as neither an investor nor an originator, with a powerful, data-driven platform that provides the granular transparency on loans recommended by the Treasury for the growth of a secondary market. And, as the company announced in March of last year, it has already taken a small step towards establishing a secondary market.
“Regulators are realizing that online lending isn’t going away—there’s broad consumer demand for it,” said Burton. “The Treasury said that what this industry needs is a third party whose sole job is to be a central utility, where you can get data transparency. That’s going to be good for everyone, regulators and participants. And the LendingClub news puts weight behind that argument.”
While Burton argues that the LendingClub faulty loans were an isolated incident, and investors have continued to show confidence in its products, the incident exposed the danger of allowing the hype of a still-growing asset class to get ahead of its reality. And it has crystallized the value of a company like Orchard, its collaboration with the SEC to build a utility for the industry at large, and its ability to provide the transparency necessary to take marketplace lending to new heights.
“First generation players moved an offline process – walking into a bank branch and filling out paperwork – into an online process, so it became better. But it wasn’t transformation. What we’re seeing today is that once it goes digital, a value chain develops, and we’re specializing one aspect of it,” said Burton. “We want to be the tech provider for online lenders, help them scale their funding to meet the needs of consumers, and bring institutional investors to the right platforms by giving them the right data and infrastructure. We’ve only just scratched the surface on what we can build and what insights we can provide to investors.”