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Silicon Valley often claims to be disrupting Wall Street, but in reality tech entrepreneurs are increasingly looking East for help in building out their businesses.
The latest example: Citigroup just invested in online lender BlueVine.
Three months after closing a $40 million financing round led by Menlo Ventures, BlueVine CEO Eyal Lifshitz tells CNBC.com his company is bringing in additional capital from Citi Ventures, the strategic investing arm of the New York banking giant. Terms aren't being disclosed.
The two firms haven't yet worked out a commercial partnership, but they're already exploring various ways they can work together, said Arvind Purushotham, managing director at Citi Ventures. JPMorgan recently started issuing online loans to small business customers using technology from web-based lender On Deck Capital. And last year, consumer 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 that the bank is "completely comfortable with partnering where it makes sense."
San Francisco-based Wells Fargo has a start-up accelerator program and Goldman Sachs is a long-time investor in emerging tech companies. American Express Ventures, like Citi Ventures, has offices in Silicon Valley and New York, and Capital One Labs is building tech into financial products.
BlueVine, founded by Lifshitz in 2013 and based in Palo Alto, got its start in the obscure corner of finance called factoring, where businesses sell their accounts receivable at a discount to a creditor so they can have cash on hand to run operations. The lender makes money off the spread between the discount and the actual value of the invoice, which typically gets paid in 30 to 60 days.
Like so many aspects of the financial services industry, it's an age-old problem that's been a necessary evil for borrowers, in that it's costly and time consuming. So BlueVine automated the process, bringing applications onto the internet and building algorithms to handle the underwriting. The 70-person company can thus transact much more quickly, issuing payments of $5,000 to $250,000 in as quickly as one day, in turn lowering costs for customers.
It's exactly how these alliances are being formed. Product-focused start-ups are developing user-friendly tools with smart algorithms that take advantage of the speed and efficiency of the cloud — all challenges for traditional banks with thousands of employees in physical branches. But the banks offer massive customer rosters, hefty balance sheets and credibility with regulators, which start-ups lack.
"We found BlueVine doing factoring in a much more modern fashion," said Purushotham, who works out of the Citi Ventures Palo Alto office. "They're able to approve invoices to be factored very quickly, and because they're online and plugged into account systems that small- and medium-sized business use, they're able to pull data from a variety of sources."
About 85 percent of BlueVine's business is factoring, with the rest coming from more straightforward small business loans, a product it launched just three months ago. There BlueVine competes with tech-powered lenders On Deck and Funding Circle. Purushotham said it's possible that Citigroup forms a referral arrangement with BlueVine to help small business customers of the bank find attractive credit.
Not that the relationship between traditional banks and financial tech companies is entirely smooth.
A very different kind of partnership between Citigroup and consumer lender Prosper Marketplace fell apart earlier this month. In that deal, Citi purchased loans issued online by Prosper, packaged them up and sold them as securities to the bank's high-net-worth clients.
Increased volatility in the credit markets and rising interest rates led investors to ask for higher yields than the securities were offering. With demand flagging, Citigroup stopped buying and securitizing the debt.
Prosper President Ron Suber addressed the issue at the LendIt conference in San Francisco on April 11.
"When we don't have alignment with our investors, when groups sell our loans into the market no matter what, if the market's not ready, it's not good," Suber said in his keynote address. "We learned that at Prosper this year."
For BlueVine, working with Citi has plenty of potential advantages. Lifshitz, who was a venture capitalist before starting the company, said the bank's extensive experience in all the sensitive matters surrounding managing financial transactions will be extremely valuable.
"They have expertise in everything around regulation, infrastructure and compliance," Lifshitz said. "Having them in our corner is a good thing."