How Vikram Pandit’s failures at Citibank made his investment in student loans possible

September 4, 2013
September 4, 2013

One criticism of startups  is that they only solve the problems that startup founders have: Getting vacation rentals (AirBnB), finding a cheap car service (Uber), building a colony on Mars (SpaceX).

CommonBond, a new lender that just raised $100 million in venture funding, could fall in the same bucket: It was founded by a couple of Wharton MBA grads to give loans to students who want MBAs of their own. On some level, it’s like a scene from a science fiction movie—the bankers are learning how to reproduce!

But the company (which, incidentally, donates some of its profits to educational charities in the US and Africa) represents an important trend: Retail lending moving away from banks to non-bank lenders, financed in part by the people who made bank lending passé.

The start-up began after its founders had a hard time financing their own student debt at Wharton at competitive rates. Their company attracts funding from individual investors, especially alumni of MBA programs, and then gives loans to students at rates as low as 5.99% if they consolidate their undergraduate debt with the company; it also refinances loans of MBA graduates.

CommonBond is trying to fill the void as traditional banks have become reluctant to provide cheap loans in the wake of the 2008 crisis. Its new investors include former Citigroup CEO Vikram Pandit and Thomas L. Kalaris, a former Barclays banker.

The involvement of erstwhile financial titans is notable since CommonBond has a window of opportunity because major banks shifted focus from lending to trading before the financial crisis, and today are lending relatively little thanks to increased regulation and a weaker economy. To our eyes, it’s a bit ironic that folks like Pandit who led that shift are investing in a plain-vanilla lending start-up.

CommonBond isn’t the only start-up seeking to fill this void—Prosper was founded before the crisis—nor is it the only one with funding from a former financial bigwig: Lending Club has former Morgan Stanley CEO John Mack on its board of directors. At Morgan Stanley, Mack implemented a prop trading strategy that led to billions in losses on mortgage bonds during the crisis, contributing to the regulatory crack-down bankers blame—perhaps erroneously—for their reluctance to lend.

With the new investment round in hand, CommonBond is preparing to expand its business to other professionally focused graduate programs—law, engineering and medicine—in the hopes of continuing to minimize credit risk. With all the attention on the growing importance of higher education, and the need to lower the cost of access, CommonBond may have found a nice niche indeed—just stay away from those derivatives.

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