Batters Up - OnDeck's Got A Brand New Pitching Game

| About: OnDeck Capital (ONDK)

Summary

New Acquisition Strategy (ISOs vs. Direct).

Balance Sheet vs. Marketplace.

An alliance with JPMorgan Chase.

It's been a year since OnDeck (NYSE:ONDK) and LendingClub's (NYSE:LC) historic IPO. Since then, both firms lost over 70% of their value. More than 30% of their value vanished in the first few weeks of 2016.

Despite triple digit Year-over-year growth and the return to profitability in Q3'15. Both companies are still not getting any love.

In "Love The Company, Hate LendingClub Stock", I laid out 3 strategic pitfalls of LC. Their compliance strategy has an existential single point of failure. A string of nimbler competitors such as Avant, LendUp and Zest Finance are champing at the bit. LC's product line is becoming stale.

But let's take a look at OnDeck's latest strategic shift and what it means to investors

New Acquisition Strategy - Independent Sales Organization (ISO) vs. Direct to Consumer

OnDeck put in place an ISO vetting process last year that turned away many of their lead providers. OnDeck wanted a gradual tradition. But the ISO network got spooked and took their relationship elsewhere. The pressing issue is how they will replace the broker network with internal efforts?

OnDeck made a sincere effort on TV, Satellite Radio and Direct Mail in 2015. These advertising channels are capital intensive. It may take a years for the OnDeck to optimize these acquisition channels. Either way, nothing replaces personal relationship that ISOs have with their clients.

Small business owner might need someone they trust to guide them through the process. Most lenders need bank statements and tax records as part of their underwriting process. Small business owners may already have these financial with their ISOs. It would be a hard sell to uploading to a faceless website.

For now, OnDeck managed to cut the middle man, but time will tell. They may start getting a different type of clientele with out the ISOs.

Balance Sheet vs. Marketplace

OnDeck decided to become a marketplace lender 2015. OnDeck was a balance sheet lender and they borrowed money to lend to small business owners. A marketplace lender doesn't lend with its own money. They act more like a broker, lending money on behalf of someone else.

So why did OnDeck decide to do this? In Q3'15, OnDeck decided to release a few million dollars from their Loss Reserves. Loss Reserves is a tool balance sheet lender uses to hedge risk against credit loss.

OnDeck released just enough Loss Reserves to catapult themselves into profitability. They may release the rest to juice another quarter.

Loss Reserve aside, OnDeck, just like LendingClub is now at the mercy of the secondary market. To damper this risk, they made a deal with JPMorgan Chase (NYSE:JPM).

Alliance with JPMorgan Chase

In Dec'15, OnDeck and JPMorgan Chase announced an alliance. It is a first of its kind where a traditional bank is leveraging a fintech platform to launch their products.

It appears that this a broader strategy at OnDeck to shed their lender moniker. Becoming a marketplace lender and license their technology might just pay off for OnDeck.

Bottomline

It's hard to value OnDeck while they are going through this seismic metamorphosis. Although their attempt to become the standard Lending Operating System is clear. They need to act fast and make other alliances before Avant, LendUp, Prosper catches up.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.