In advance of its application to make an initial public offering ("IPO") of its common stock, Elevate has published a very thorough review of their business model. I find this kind of document to be a rare opportunity to gain perspective on online lenders. These S-1 filings tend to be far more detailed than even an annual report.
A few highlights:
A) In 2014, Elevate set aside a sum equivalent to 62 percent of its revenues to provision for potential loan losses. In the prior year, they set aside 58 percent. Elevate says that it constantly has to tinker with its underwriting algorithms. This is fairly common in the non-bank non-prime space, but the general assumption is that machine learning works.
B) All of their debt comes from one source. Victory Park Management LLC, a subsidiary of Chicago-based Victory Park Capital, has extended the credit used by Elevate to support its Rise and Sunny portfolios. Victory Park has been active in this space: they have positions in Think Finance, Kabbage, Avant Credit, Borro and Fast Trak Legal Funding. Former Senator Joseph Lieberman recently joined the firm as Chairman of its Executive Board. At the end of September, Elevate had $247.3 million outstanding to Victory Park at a floating interest rate of the 3-month LIBOR plus 13 to 18 percent. At the end of September, the 3-month LIBOR rate was 3.255 percent.
C) Republic Bank is originating their Elastic line of credit product. Elevate is merely the marketer and the back-end technology provider. After origination, Republic and Elastic SPV share in the proceeds. Elastic SPV is owned by Victory Park. But Republic is the funder, even if they sell 90 percent of the loans to Elastic SPV. Readers of Bank Talk may be familiar with Republic Bank. This is the same Republic Bank ("RBCAA") of Kentucky that is well-known for its now-defunct refund anticipation loan business. The FDIC persuaded Republic to leave the refund anticipation loan space a few years ago, but the company is nothing if not resilient.
D) High-cost online lending is not very profitable. Through the end of September, Elevate recorded revenues of approximately $300 million. But in doing so, they provisioned for loan losses of $161 million and paid marketing fees of almost $48 million. They operated at a loss after accounting for their expenses and other costs of sales. From 2013 to the end of 2014, Elevate lost $99.4 million. The concept still needs some refining.
E) Customer acquisition costs are very high. On average, Elevate is paying approximately $270 to acquire new customers. But those are not coming from the standard lead generation channel. According to the company, those costs are the product of direct marketing.
F) The loans are very expensive. Effective APR was 181 percent through the end of September this year.
G) Lots of business going on here: 450,000 customers have taken out loans of approximately $1.2 billion.