Virgin Money Closes Shop in the U.S., Victim of Bad Timing
In October 2008 — the nadir of the global financial crisis — Sir Richard Branson set out to cross the Atlantic on a yacht named after his financial-services firm, Virgin Money.
The British billionaire and his 24-man crew aimed to make the crossing in time to break a world record. But after just two days at sea, a huge wave ripped the main sail and captain and crew were forced to admit defeat.
The failed venture foreshadowed what was to happen to Branson's attempt to export Virgin Money, the company, to the United States.
Just three years after Virgin Money entered the U.S. market with the purchase of peer-to-peer lending company CircleLending Inc., Branson has quietly bowed out of consumer banking here — at least for now.
The company's exit from the U.S. was never officially announced. But Christine Choi, a spokeswoman for Virgin USA, the U.S. arm of Branson's conglomerate Virgin Group Ltd., confirmed Tuesday that the unit is no longer operating.
The news did not come as a surprise to many in the industry. For one, the vision for Virgin Money's venture in the U.S. was never perfectly clear. But its timing hurt the company more than anything, analysts said. After all, it attempted to make a splash in two areas of financial services — peer-to-peer and wholesale mortgage lending — that suffered significant setbacks in the U.S. during the credit crisis.
"Their timing happened to coincide with a financial collapse that was global and the U.S. is a different kind of market," said Mark Schwanhausser, a senior analyst at Javelin Strategy and Research in Pleasanton, Calif.
Virgin Money's foray in the U.S. began in 2007 when it bought CircleLending, a Waltham, Mass., company that arranged loans between friends and relatives. In June 2008, the company bought a wholesale mortgage lender, Lendia LLC, then turned around and sold that business one year later.
Around the same time, Virgin Money parted ways with its chief executive, Asheesh Advani, the founder of CircleLending, who left to pursue other entrepreneurial ventures.
Despite the setback, Virgin Money pressed on. In January, a spokeswoman told American Banker that the company was exploring a number of ways to expand its offerings, including partnering with a big U.S. bank. The company also said at the time that it expected to announce a new CEO in the coming weeks. But such an announcement was never made.
The quiet demise of Virgin Money U.S. is in stark contrast to the fanfare that greeted its entrance into the market in 2007. There isn't even any mention of the U.S. operation on the company's historical timeline on the main Virgin Money website. (Branson's attempt at an Atlantic crossing in his yacht, on the other hand, is noted.)
Choi did not give any reason why the company left the U.S. She said that the social lending business was transferred to its servicing partner, Graystone Solutions Inc.
"Nothing has changed for the customer as Graystone continues to offer the same services, and customers continue to access their loans in exactly the same way they have always done," she wrote in an e-mail.
Graystone did not return phone calls seeking comment.
The company's about-face in mortgage lending occurred as many wholesale lenders exited the business amid increased scrutiny of their underwriting practices during the housing boom. And peer-to-peer lending suffered as many consumers became wary of taking on more debt, especially from nontraditional lenders.
"After the mortgage meltdown and all those issues … I think consumers began to care a lot about [when] they borrowed money," said Christine Pratt, a senior analyst at Aite Group LLC. "Subprime lending put many consumers in positions where they couldn't afford their homes, for example, and lost them. They got hurt by borrowing money from the wrong lenders."
At the same time, it became difficult to persuade individual would-be lenders to invest their money in such a risky product.
"It helps to formalize an informal lending process" as CircleLending did, said John Ulzheimer, founder of 2StepCredit.com, a credit education website. "The problem is, if you don't have people willing to put money into it," the process breaks down.
The peer-to-peer lending business model also has faced its share of regulatory hurdles.
The Securities and Exchange Commission began cracking down on the industry in 2008, forcing peer-to-peer lending service Prosper Marketplace Inc. to shut down its business for nine months while it sought registration approval. Rival Lending Club Corp. has also gone through the registration process.
"The SEC said, 'Wait a second. This sure sounds to us like an investment.' And I think they were absolutely right; it … should be treated with the same regulatory scrutiny," Schwanhausser said. "The challenge is this was happening as the market for credit was melting down and people saw that every investment they had was shrinking in value so it wasn't a good time for people to say, 'I want to try something new.'"
Virgin Money has had success in other markets. Branson launched the financial services unit in the U.K. in 1995, and has since expanded its operations to Australia and South Africa. Today, the company offers a variety of financial products in those countries, including credit cards and personal loans, mortgages and insurance, as well as investment products. Earlier this year, Virgin Money acquired a banking license in the U.K. through its purchase of regional lender Church House Trust.
Schwanhausser said he wouldn't rule out a place for Virgin in the U.S. financial services market just yet.
"Virgin has had the ability to enter markets and disrupt them," he said. "I've got a hunch they have that map with the United States on it and they know how to get here. It's just a matter of when are the conditions right, what fits with them, what's their strategy. … Even when they fail, they're worth watching."