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The week in fintech: Investors bet against LendingClub, On Deck in March

This weekly recap features updates on bank technology, payments, online lending and other news in the financial technology space. Send tips, ideas and chatter to kate.garber@spglobal.com. For other recent fintech news, click here.

Ahead of first-quarter earnings, some investors are betting that shares of LendingClub Corp. and On Deck Capital Inc. are poised to fall.

Both marketplace lenders saw short interest in their stocks' tick up in March.

According to S&P Capital IQ data, On Deck's short interest as a percentage of shares outstanding went from 5.84% on March 3 to 7.01% on March 31. For LendingClub, the measure rose from 13.11% on March 3 to 14.32% at the end of the month.

Between Jan. 1 and March 31, On Deck's stock rose 8.15% and LendingClub's stock climbed 1.29%.

"As these stock prices climb, it becomes more inviting for short sellers to become involved," said BTIG LLC analyst Mark Palmer.

Palmer said incremental short sellers might have been drawn to the stocks by concerns around consumer credit, as there have been recent signs of weakness in areas like auto lending. While deteriorating credit quality in auto lending does not mean there will be impaired credit quality among digital lenders, shares of On Deck and LendingClub might have been shorted on the "read through" around this credit trend, the analyst said.

The short interest increase in On Deck's stock is particularly surprising since the company has been at the center of buyout rumors recently, Palmer said. Citing unnamed sources, Reuters reported March 22 that Atlanta-based Kabbage is considering On Deck as an acquisition target.

"The last thing that a short seller wants is to have that position on when the company gets bought at a premium," Palmer said.

From his perspective, a deal does not make sense for On Deck right now and talk of a sale is probably premature and speculative. The company is transitioning from a hybrid marketplace model to a primarily balance sheet lending model. That required a substantial provision expense increase that has carried through to On Deck's share price, Palmer said.

While short sellers may be positioning for near-term consumer credit deterioration, LendingClub continues to build out its management team. On April 4, former JPMorgan Chase & Co. executive Santiago Suarez said he was hired as LendingClub's head of strategy and corporate development.

Palmer said Suarez's hiring is a big get for the marketplace lender.

"I also believe that it indicates that some of the broader strategies that LendingClub has talked about employing, building off of the marketplace platform, including additional verticals, may not be as far off as some investors may have been thinking," Palmer said.

Also in the fintech space this week, it was announced that former LendingClub CEO Renaud Laplanche co-founded Upgrade, a consumer credit platform. The company started operating in August 2016 and closed a $60 million Series A round of financing in March.

In deal news, payments company CardConnect Corp. acquired Chicago, Ill.-based financial services provider MertzCo Inc., which markets and resells credit, debit, gift and loyalty cards, among other payments services. In an April 4 note, William Blair analyst Robert Napoli said the deal is in line with CardConnect's strategy and should be "nicely accretive."

Napoli also published a note on Square Inc. in which he raised his 2017 and 2018 adjusted EBITDA estimates. The analyst said he is more confident that the company will create strong operating leverage in coming years if Square Capital, its small-business lending service, performs well.

From March 30 to April 6, the SNL U.S. Financial Technology Index fell 0.44%.

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S&P Global Market Intelligence released a fintech primer on four areas — digital lending, payments, blockchain and digital wealth management — of particular interest due to their rapid pace of growth, technological disruption, and regulatory and other risks. Click here to read the primer.