Savvy Lending upstarts lean on Wall st. veterans
Through three decades, Jerry Weiss wore coats and ties to the offices where he managed credit risks at the biggest banks in the United States — Citigroup and JPMorgan Chase.
Now the 57-year-old works out of a tiny two-room office in the Flatiron district, home of Bond Street, a startup smallbusiness lender he joined last year. His bosses at are a pair of apple-cheeked Harvard graduates; and the average age of his seven colleagues is 28.
The culture collision reflects the latest challenge to big banks, in which risk-taking and jobs are flowing to dozens of new alternative lenders. The startups aim to reinvent small-business and consumer lending by offering quicker approvals, relying on automated credit checks that include data feeds from bank accounts and tax returns, salted with inputs from social media.
But they still need grizzled veterans who have lived through downturns and learned what can go wrong. Louis Beryl, chief executive of Earnest, a consumer lending startup, said, “When you’re raising a lot of money from debt investors, they want to see someone who’s been through multiple credit cycles.” He has a 45-yearold chief risk officer who previously worked at Barclays.
“I have seen many online lenders who are bringing in some bright young people into the role I am doing, but they are folks who have never made a loan in their lives. They think it’s all science and math, but they’ve never been through a recession,” Weiss said.
Bond Street is one of 25 digital small-business lenders that rely heavily on data analysis in making decisions, aiming at a market with US$300 billion in outstanding loans, a recent report by Autonomous Research shows.
Bond Street was founded in October 2013 by David Haber, 27, its chief executive, who had investing experience at two firms, and Peyton Sherwood, 33, its chief technology offi- cer, who was a computer science major. Haber previously worked at Spark Capital, where he helped partners invest in alternative lending startups such as Orchard and Behalf, and the bank-data startup Plaid.
It doesn’t hurt that Haber’s father-in-law, George Hornig, a Wall Street veteran, made an angel investment in Bond Street and an introduction to the securities firm Jefferies, which will supply funds.
“We wanted to reinvent the small-business lending process, but we realized we didn’t have a credit background,” said Haber, who wants Bond Street to be faster, simpler and more open than banks. His firm offers loans of US$50,000 to US$500,000 at annual rates of 8 to 25 per cent.
As he canvassed bank lending executives before starting Bond Street, Haber spoke with two Orchard founders, who had both worked for Weiss on Citigroup’s small-business risk team from 2009 to 2013.
“A lot of people his age and his level of experience would work at a very high-altitude level and not get into the details,” said David Snitkoff, a founder of Orchard. “Jerry also gets his hands dirty and gets things done on the ground.”
At the big banks, Weiss sometimes seemed like “a cog in the wheel of upper management,” said a longtime friend, food photographer Allen Owens. What’s more, Weiss chafed at being considered one of “the new villains,” with bankers being blamed for the 2008 financial crisis, his son Aaron said.
Weiss recalled being stuck in “endless meetings and endless levels of approvals for everything.” At Citigroup, he said, it took three years to develop a small-business underwriting platform and 18 more months to put it into operation. He added, “I wanted to break free and have fun again.”
The going hasn’t always been smooth. Bond Street had to freeze new loans between December and April while it sought new investors and loan sources. It recently obtained an infusion of new venture capital and a Wall Street lending facility that will allow the hiring of 25 employees in the next 18 months.
Such alternative lending does have its skeptics. “It’s high-risk lending, an accident waiting to happen,” said Gerard Cassidy, a bank analyst at RBC Capital. One sign of risk came in a March report by Goldman Sachs, which pointed out that the loan approval rate of new small-business lenders is 62 per cent, much higher than the 21 per cent at traditional big banks. Others worry borrowers might skip the payments on such loans more readily than they would with other forms of debt.
Recognizing the risk, Weiss is bringing a distinctive quantitative approach to alternative lending. He has helped design Bond Street’s loan approval process to reflect automated inputs from credit bureaus, bank accounts, tax filings and QuickBooks online financial statements. The process also includes targets like expected profits of 1.2 times debt service. After seeing five past delinquencies in one applicant’s report, he observed, “This is a decline.”
But he also values personal contact with applicants to gauge their path to profitability. A coffee shop owner who was hoping to consolidate US$55,000 in credit card debt into a new loan of US$100,000 said on a call that he was seeking the money for “capital expenses, new hires and to load up the shelves.”
Weiss asked about the shop owner’s latest tax filings and QuickBooks updates, and about a new baby, who was audible in the background. “Customers like talking to the chief credit officer,” he said after the call. “And I love hearing their stories.”
They think it’s all science and math, but they’ve never been through
a recession