Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is Desperate American Express following in Lending Club’s Footsteps?

American Express Co. (NYSE: AXP) wants a piece of the action pioneered by Lending Club (NYSE: LC) and OnDeck Capital (NYSE: ONDK). The grand old name in American credit cards has plans to launch its own online lending platform for close to subprime loans.

Working Capital Terms will offer loans of $1,000 to $75,000 to small businesses with 90 day terms, Bloomberg reported. AmEx hopes to profit from interest rates of .5% to 1.5%.

The hope is businesses will be interested in the loans, because American Express will put payment directly into vendor’s accounts. The idea is that a small contractor who cannot pay his lumber bill will use Working Capital Terms to pay off Lowe’s (NYSE: LOW); then pay AmEx back from future profits.

How American Express’s New Lending Platform is Supposed to Work

The biggest problem small businesses and freelancers often face is waiting for payment for customers. As a freelancer, I’ve found that even great clients sometimes delay payments for weeks or months. That can create problems because I still have bills like phone, internet, rent, etc. to pay.

Historically small businesses have had to use credit cards, vendor credit or so-called hard money lenders to cover such short falls. In recent years, companies like PayPal, OnDeck, Square (NYSE: SQ) and Prosper have tried to fill the gap with loans based on cash flow.

Banks have often reluctant to lend to smaller businesses because of a lack of credit history and uncertainty. Startups and single-proprietorships often have the most trouble finding credit, even though they are usually its biggest users.


Like their brethren at PayPal (NASDAQ: PYPL) and Square, American Express’s leaders think they can limit the risks from such lending with their detailed knowledge of spending habits. For example, Amex might extend more credit to a borrower, who only uses his credit card to pay for business supplies. The company deny credit to somebody who uses her card to pay off a bar tab or a casino.

Lending Club Could Make Money

The problem with this business model; as skeptical investors, will point out is that Lending Club and OnDeck are not making money with similar platforms. The financial numbers highlight the risks American Express is taking.

Lending Club’s performance in particular has been dismal. Its lasting earnings report from March 31, 2016 included these numbers:

  • Revenues of $501.15 million.


  • A net income of $5.516 million


  • A free cash flow of -$542 million.



  • $78.19 million in cash from operations.


  • $583.84 in cash and short term investments.


Obviously, Lending Club’s business model is a little different from what Amex is proposing. Lending Club makes loans to individuals and sells equity in them directly to investors the so-called peer to peer lending. Yet its inability to generate float throws serious questions on the whole business model.

Yet there are two figures in Lending Club’s books that show why American Express is so interested in this business. Those numbers are cash from financing and revenue.

Lending Club reported making $1.91 billion in cash from financing on March 31, 2016. That numbers was down from $2.195 billion a year earlier, but it is still pretty impressive for a company that reported a market cap of $1.591 billion on July 5, 2016.

The other was revenue; Lending Club’s revenues grew by $71.22 million or a little over 14% during first quarter 2016. Between March 2015 and March 2016, Lending’s Club’s revenues almost doubled increasing from $253.74 million to $501.15 million.

It looks as if Lending Club could have a growing business that generates a lot of cash from financing. Yet it also looks as if Lending Club lacks the resources to make the business profitable.

Is OnDeck Making Money?

The situation at OnDeck; which operates a platform similar to the one American Express is trying to set up, is worse than Lending Club. Unlike Lending Club, OnDeck is currently losing money.

The business lender reported these numbers on March 31, 2016.

  • Revenues of $260.69 million.


  • A net income of -$8.503 million


  • A free cash flow of $13.73 million.


  • Cash and short term investments of $136.85 million.


  • $110.62 million in cash from operations.


It looks as if OnDeck is not making money and has very little float. It reported making just $83.92 million cash from financing on March 31, 2016. That number was less than one fourth the $383.04 million in cash from financing OnDeck made a year earlier.

Despite that OnDeck did report impressive revenue growth. It reported revenues of $180.61 million in March 2015 that grew to $260.69 million in March 2016. OnDeck’s revenues grew by $6.23 million during first quarter 2016, according to data assembled by ycharts.

So Why is American Express interested in Online Lending?

These numbers show us that online lending is a fast growing business, which is probably why American Express is so interested in it. Amex’s revenues have fallen over the past year from $33.97 billion in March 2015 to $32.96 billion in March 2016.

Most observers expect them to take a far bigger hit this summer, because Costco Wholesale (NASDAQ: COST) switched its exclusive credit card to a Citigroup (NYSE: C) Visa. American Express needs all the revenue growth it can get and here is fast growing revenue stream that is potentially profitable.

More importantly, Amex will not take that many risks by launching a lending platform. American Express reported cash and short-term investments of $25.04 billion, a net income of $5.064 billion, $11.32 billion in cash from operations and a free cash flow of $2.167 billion.

If it needed, Amex could easily finance the cost of writing all those Working Capital Loans out of pocket. Yet it may not need to do that, because the company can probably sell most of those loans pretty quickly to private equity firms, hedge funds or investment bankers.

A strong possibility is that Amex will keep the good loans and sell the riskier ones to investors. Either way, American Express can make quite a bit of money.

Amex is a Value Investment and the Future of Online Lending

More importantly it has the resources to greatly expand this new business lending market. One of the biggest resources Amex has is its name which will attract many borrowers and investors that would never touch something like OnDeck or Square.


This of course raises an intriguing question: will American Express buy Square, OnDeck or Lending Club? All three companies are pretty cheap right now, OnDeck had a market cap of $346.51 million and stock price of $4.9 on July 5, 2016, Lending Club offered a market cap of $1.591 billion and a stock price of $4.17 on the same day and Square had a market cap of $2.886 billion and a share price of $8.935 billion.

My answer is no, American Express will not buy those companies because it does not need them. Amex has the resources to develop its own superior lending platform that will make money and drive those bottom feeders out of business. The new lending venture shows that Amex is still a really good company and a value investment because its management has the guts to take advantage of new opportunities, and the resources to do it right.

Expect to see consolidation in this sphere, as giants like Amex push out the small fry, and the smaller operators either go under or get gobbled up by banks or private equity funds. Amex proves that online lending is here to stay but Lending Club, OnDeck and possibly Square are not.