Why Citigroup supports online credit start-up BlueVine

Headquarters of the Citi group in New York.

Adam Jeffery | CNBC

Silicon Valley often claims to disrupt Wall Street, but in reality, tech entrepreneurs are increasingly looking east for help growing their businesses.

Last example: Citigroup has just invested in the online lender BlueVine.

Three months after the closing of a $ 40 million funding round led by Menlo Ventures, BlueVine CEO Eyal Lifshitz told CNBC.com his company was providing additional capital from Citi Ventures, the business arm of strategic investment by the New York banking giant. Conditions are not disclosed.

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The two companies have yet to enter into a business partnership, but they are already exploring different ways of working together, said Arvind Purushotham, chief executive of Citi Ventures. JPMorgan recently started providing online loans to small businesses using technology from web lender On Deck Capital. And last year, online lender LendingClub partnered with Citibank to provide credit in underserved communities.

All the big banks are paying attention. In a letter to shareholders a year ago, JPMorgan CEO Jamie Dimon said “Silicon Valley is coming” and told investors the bank is “quite comfortable with a partnership where it makes sense”.

San Francisco-based Wells Fargo has a startup accelerator program and Goldman Sachs is a long-time investor in emerging technology companies. American Express Ventures, like Citi Ventures, has offices in Silicon Valley and New York City, and Capital One Labs integrates technology into financial products.

BlueVine, founded by Lifshitz in 2013 and based in Palo Alto, got its start in the dark corner of finance called factoring, where companies sell their accounts receivable at a discount to a creditor so they can have cash to conduct their operations. The lender earns money on the difference between the discount and the actual value of the invoice, which is usually paid in 30 to 60 days.

Like many aspects of the financial services industry, it is an age-old problem that has been a necessary evil for borrowers in that it is expensive and time consuming. BlueVine therefore automated the process, bringing applications to the Internet and creating algorithms to manage the subscription. This allows the 70-person company to transact much faster, making payments of $ 5,000 to $ 250,000 in one day, reducing costs for customers.

This is exactly how these alliances are formed. Product-driven start-ups are developing user-friendly tools with intelligent algorithms that leverage the speed and efficiency of the cloud – all challenges for traditional banks with thousands of employees in physical branches. But banks offer massive client lists, heavy balance sheets, and credibility with regulators that start-ups lack.

“We found BlueVine was doing factoring in a much more modern way,” said Purushingham, who works in the Citi Ventures Palo Alto office. “They are able to approve invoices for consideration very quickly, and because they are online and connected to the account systems used by small and medium-sized businesses, they are able to pull data from a variety of sources. “

About 85% of BlueVine’s business is factoring, with the rest coming from simpler loans to small businesses, a product launched just three months ago. There, BlueVine competes with technology lenders On Deck and Funding Circle. Purshotham said it was possible Citigroup could enter into a referral agreement with BlueVine to help the bank’s small business customers find attractive credit.

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Not that the relationship between traditional banks and fintech companies is perfectly fluid.

A very different kind of partnership between Citigroup and consumer lender Prosper Marketplace collapsed earlier this month. In the deal, Citi bought loans issued online by Prosper, packaged them, and sold them as securities to the bank’s high net worth clients.

Increased volatility in credit markets and rising interest rates have led investors to demand higher returns than those offered by securities. As demand weakened, Citigroup stopped buying and securitizing the debt.

Prosper President Ron Suber addressed the issue at the LendIt conference in San Francisco on April 11.

Read moreWall St. Mania propels Prosper to $ 2 billion valuation

“When we are not aligned with our investors, when groups sell our loans in the market no matter what, if the market is not ready, it is not good,” Suber said in his speech. ‘opening. “We learned that at Prosper this year.”

For BlueVine, working with Citi has many potential benefits. Lifshitz, who was a venture capitalist before setting up the company, said the bank’s extensive experience in all sensitive issues surrounding the management of financial transactions would be extremely valuable.

“They have expertise in everything related to regulation, infrastructure and compliance,” Lifshitz said. “Having them in our corner is a good thing.”

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David A. Albanese