Behind the Scenes at Orchard Platform, a Struggle to Innovate

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But they didn’t.

More than a year after Mr. Burton revealed his big plans, Orchard has completed just a scattering of transactions. Over that time, it burned through more than $5 million in legal fees and other expenses. A regulatory snarl over whether the loans would be treated as securities caused delays. Major lending platforms were reluctant to participate. And the market for loans was thrust into upheaval by a wave of defaults and a scandal that broke last May at Lending Club.

Next month, hoping to add momentum, Orchard plans to unveil a scaled-back version of the platform, eight months later than first planned.

But regardless of the company’s fate, its struggles thus far reveal just how hard it can be for a new entrant — even one with successful founders, a promising service and big-name investors — to break into a highly regulated industry.

In a series of interviews over the last 15 months, Mr. Burton and other Orchard employees offered an unusual inside look at a project that has not gone as envisioned, but that they believe still holds promise — especially in a Trump era of potentially lighter financial regulation.

“In general, it has been a humbling process going through it,” Mr. Burton acknowledged last week. “We have definitely learned a ton. When you’re operating in a new space in fintech, it’s hard.”

When Orchard was founded in 2013, marketplace lending was just taking off. Unlike banks — which take deposits, make loans and hold capital to absorb loan losses — marketplace lenders match investors and borrowers directly, with the investors taking the risk of losses in exchange for higher interest rates.

Orchard began by offering institutional investors an automated service to analyze the loans and buy them from different online lenders. But its long-term plan always included creation of what Mr. Burton calls a “many-to-many” trading platform.

“What got us excited was seeing what happened in online advertising,” said Dan Ciporin, whose Canaan Partners invested in Lending Club and Orchard. In that realm, he said, access to data drove a shift away from ads being sold via “golf-course relationships.” Mr. Burton’s pitch: “Why can’t we do the same thing in financial services?”

But building an auction-style exchange for loans proved to be significantly more complex than building a marketplace for online ads.

As Matt Harris, a start-up investor at Bain Capital Ventures, put it, “Building a trading venue and attracting liquidity is somewhere between difficult and impossible.” He still believes Orchard can get there eventually.

Mr. Burton, 32, is 6 feet 4 inches, thin and resolutely cheerful. He sometimes takes his miniature Australian shepherd dog, Chico, to the office. At his desk is the 1972 book “The Inner Game of Tennis: The Classic Guide to the Mental Side of Peak Performance.”


The Orchard Platform offices in New York City. Credit Guerin Blask for The New York Times

Seeking financial expertise, Orchard recruited a few Wall Street veterans from Merrill Lynch and Bear Stearns. In late spring of last year, Mr. Burton had more than a dozen roadshow meetings with executives from the largest loan platforms, including Lending Club, Prosper Marketplace and Social Finance.

He hoped to charge them monthly fees of $2,500 to $5,000 to participate. Orchard also offered them the ability to be its “data partners,” so Orchard could standardize their data for trading purposes — which Mr. Burton called “the big heavy lift.”

Standardizing data was daunting because each loan platform had its own legal and data formats, such as different definitions of debt-to-income, said Ram Ahluwalia, chief executive of PeerIQ, which tracks alternative lending.

Orchard also enlisted the help of Meredith Cross, a lawyer at WilmerHale and the former head of corporate finance at the Securities and Exchange Commission, as it met with Wall Street regulators.

But in July, S.E.C. officials told Orchard that they would consider loans being traded as securities, potentially imposing a tougher level of oversight. That made some lenders nervous about participating. Some lenders were also concerned about exposing investors they had cultivated to loans from competitors.

“We do not have a current need for a trading platform,” said Ryan Rosett, a chief executive of Credibly, which offers small-business loans. “Our capital markets team has the ability to sell our loans directly to a pool of institutional investors.”

By late July, 10 of the 30 top lenders signaled they could not participate quickly enough to meet a planned Oct. 15 platform debut. Among them was Lending Club, even though its board had three Orchard investors, including Mr. Mack and Mr. Ciporin.

Orchard was also fighting a separate headwind. The broader market for online loans was being buffeted by higher consumer loan defaults and investor fears. Some online lenders cut staff members, and others shut down as loan growth dried up.

In late September, Orchard postponed the unveiling of the trading platform, newly named “Orchard X,” to November from October. A few weeks later, its new goal became “just to do some trades of any size” by year-end, one Orchard staff member said. But Orchard X’s regulatory approvals were delayed until January.

In December, Mr. Burton expressed frustration at the difficulties. As Orchard X struggled to get going, he said, legal documents for trades had “ballooned to 150 pages from a 20-page contract,” leaving him exasperated. “I’m a tech guy!” he said.

As it moves forward, Orchard has played down the regulatory issue, proceeding without an explicit formal S.E.C. ruling on whether the loans are securities. It is a potentially risky move, but one the company believes will work in part because it has dropped its goal of legal standardization, cutting the need for lending platforms to agree on regulation issues. The S.E.C. declined to comment.

In January, Orchard X arranged its first sale of about $30 million in loans from an ailing platform, a small-business lender called CAN Capital. The auction took a lengthy four weeks to complete. But Orchard X did receive a fee of 0.5 percent of the sale price.

It has since provided data for a smaller loan sale for another lender, Credibility Capital, and signed up with a dozen other lenders to broker loan auctions as well as private placements and two other types of transactions — “forward flow” agreements and credit facilities — in which investors provide funds to lenders for future loans.

Although Orchard X would receive commissions for all such sales, it would not clear and settle the auctions like an exchange.

Looking back, Mr. Burton said on April 4, Orchard should not have tried to persuade lenders to join the trading platform all at once. Having raised $30 million in 2015, Orchard plans to announce next month that it has raised an additional $20 million or more and to formally roll out its revised Orchard X transaction platform.

Mr. Ciporin, the venture investor, is convinced that Orchard X will someday “do transactions instantaneously around any loan.” And while acknowledging that Orchard “didn’t initially provide enough time for an evolutionary process,” he remained optimistic.

“I don’t think anybody sees this as a major blow,” he added. “I would put it in the category of a minor hiccup.”

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