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May 24th 2016, Daily News Digest

US

  • Pessimistic comparison of credit card and p2p lending markets.
  • Shanda Group accumulates 11.7% of Lending Club on the public markets.

Canada

  • OnDeck extends product offering.

UK

  • Bank overdrafts volume drops 42% over 5 years due to Basel 3, an opportunity for Alt-Lenders.
  • Deloitte report from yesterday flares responses from Alt-Lenders.

Australia

  • Home loan marketplace signs up Docusign for faster applications.

Singapore

  • State of p2p lending: DBS’s deal with Funding Societies and Moolahsense and numbers.

China

  • Lufax diversifying by offering fx trading platform to its customers.

United States

 

The even cloudier future of peer-to-peer lending, (Money Banking), Rated: AAA

For that to work, for P2P investors to get an attractive risk-adjusted return, it would have to embody a technology that can screen and monitor borrowers at a lower cost than do existing intermediaries in the long-established sector of consumer credit.

That seemed especially doubtful in a competitive industry like credit card lending, which is what P2P lending often turns out to be. While pre-2015 returns looked good (compared to the opportunity cost of funding), we argued that the effectiveness of screening and monitoring could only be assessed over several complete business cycles. Yet, P2P’s entire brief history has been during the post-crisis recovery. It hasn’t yet experienced even one recession. This led us to conclude that the future of P2P lending is much cloudier than many investors seemed to believe.

As we emphasized a year ago, much of P2P lending is for credit card debt consolidation. So, it is worth keeping in mind that credit cards have been around for a very long time. Oil companies and department stores introduced them in the early 20th century, Diners’ Club and American Express followed in the 1950s, and banks got into the act with MasterCard and Visa a decade or so later. Even credit card securitization has been around for decades, starting in the mid-1980s. What this means is that there is a massive amount of data that allows issuers and investors to gauge the ability of borrowers to repay. The implication is that this is a mature, efficient business with substantial competition and narrow profit margins. Even more important, the return on consumer credit debt has been and likely will remain closely linked to cyclical developments.

As the chart below highlights, this relationship is amazingly tight.  For each percentage point change in the unemployment rate, credit card default rates move 0.8 percentage points in the same direction. If we restrict ourselves to the period since 2007 (those are the red dots), the scale of the change in credit card default rates for each percentage point change in the unemployment rate rises above 0.9 percentage points.

Credit Card Default Rates and the Change in the Unemployment Rate (quarterly, 1991 to 1Q 2016)

credit card default rate vs four quarter change in civilian unemployment rate

For example, as of this writing, the net return on Lending Club’s 2015 vintage of loans has declined to the lowest level since 2011 (see here). With limited data, it’s difficult to know precisely why. Yet, we suspect that U.S. P2P firms tried to expand rapidly by tapping into credit markets—rather than just individual investors—for their funding. Much like pre-financial-crisis private label mortgage securitizations, the P2P platforms may have put themselves into a position where the only way they can meet growth expectations is to create supply (new loans) that matches the rapid expansion of capital market demand (that recently has receded).

One possibility is that there is adverse selection—that the rush to find borrowers has diminished the quality of the pool. As we already noted, P2P sites are filled with borrowers consolidating credit card debt. Both are uncollateralized and face information asymmetries that are costly to overcome.

This brings us to our primary concern: the developments we have seen to date don’t capture what will happen when business cycle conditions turn less favorable. Based on the experience of credit card debt, default rates rise in a mature expansion when credit conditions have relaxed beyond long-run norms. And, in a downturn, they could surge. Over the period 2011 to 2014—the latest available data—the return on assets of large U.S. credit card banks averaged 4.94%, compared to the average loss of 2.73% in the 2008-2009 episode when unemployment soared by 5½ percentage points. If anything, since they are likely to have a more difficult time obtaining (re-)financing elsewhere, P2P borrowers probably face a greater risk of default than the norm for bank borrowers.

Where does all of this leave us? Mostly with the same conclusion we offered last year: “If you have a good credit rating and are looking to reduce the burden of your existing debt payments, obtaining a P2P loan could be very attractive. But if you are looking to invest, we remain skeptical. Financial intermediaries have been around for a long time, and there is tremendous competition in the consumer lending business. If websites are to have a big impact on lowering credit card financing costs, perhaps they could better do so by directing borrowers to the lowest cost card providers—much like some mortgage lending sites do today. It would be nice if replacing the most competitive card providers with a website would result in consistently higher returns to investors and lower costs to borrowers, but we doubt it.”

Shanda Group Accumulates 11.7% Stake in LendingClub, (Wall Street Journal), Rated: AAA

Shanda Group, a private investment firm founded by Chinese Internet entrepreneurs, amassed an 11.7% stake in LendingClub, according to a regulatory filing.

The stake, including shares and options, could make Shanda the largest shareholder in LendingClub, which has been besieged by investors, regulators and industry critics following the abrupt announcement of the forced resignation of its founder and chief executive, Renaud Laplanche, on May 9.

LendingClub shares climbed 8.3% on Monday following the Shanda filing, though they are still down 39% since Mr. Laplanche’s resignation announcement.

For Shanda, the investment is part of a flurry of moves in the U.S., having recently invested in Legg Mason Inc. and Sotheby’s.

LendingClub said that it had been discussing the investment with Shanda and views “its actions as an endorsement of the long-term prospects and value of our business model.”

In a statement, Shanda said that it is “a strong believer” in LendingClub’s business model and is “positive on its long-term prospects as it continues to evolve and refine its business.”

LendingClub remains in talks with firms that potentially might buy loans as well as take an ownership position in the company to bolster confidence in the business, the company has said in filings.

The Shanda investment isn’t part of that effort to shore up confidence with lenders. The stake building began before the resignation, with Shanda initially acquiring LendingClub shares in the first quarter, though the purchases accelerated sharply once the stock tumbled.

Shanda began as an Internet games pioneer in China in 1999. The investment group was co-founded by Tianqiao Chen, described as China’s second-wealthiest investor and a multibillionaire by research firm Hurun Report Inc., and his wife, Chrissy Luo, according to Shanda’s website. Its public portfolio is overseen by Cathy Ge, a former Goldman Sachs Group Inc. banker and University of Chicago business-school graduate, according to the site. Shanda said last year it had $8 billion in assets under management.

Several Chinese companies have delisted from the U.S., seeking better valuations in their home markets amid U.S. investor concern about growth prospects and in some cases accounting practices.

In its public portfolio, Shanda seeks to combine “short-term trading opportunities arising from…market inefficiencies” and “long-term fundamental investments,” according to its website. The company didn’t respond to a request for further comment.

P2P backers stand their ground despite scandal, (FT Adviser), Rated: A

P2P Global Investments, the trust that holds stakes in a variety of P2P platforms and whose yield of more than 6 per cent had attracted income-seeking fund buyers and managers.

P2P Global said in a statement that it did not participate in the “near-prime” programme with which Lending Club found issues, and added it did not have exposure to the US firm’s equity.

But the trust, which does invest in the US firm’s “prime” programme, saw its share price drop by 7 per cent in the following days, widening its discount to net asset value back out to around 12.5 per cent.

Aviva Investors’ Chris Murphy said he continued to back P2P Global in his UK Equity Income fund, and noted that the trust invested in high-grade portfolios.

Alan Brierley, director of the investment companies team at Canaccord Genuity, said setbacks and volatility were “inevitable” for a rapidly growing area such as P2P.

Peers such as VPC Specialty Lending Investments and Funding Circle SME Income Fund have also seen discounts widen, despite having no exposure to Lending Club, illustrating the damage done to a sector that had already experienced a shaky start to 2016 as risk appetite fell.

Kelly Prior, an investment manager on the F&C MM Navigator Distribution fund, which holds 1.5 per cent of its portfolio in P2P Global, said she remained confident on the long-term picture for P2P and platform lending as an asset class.

Online SMB Lending To Benefit From Regulation?, (PYMNTS), Rated: A

BizFi’s founder and chief executive officer, Stephen Sheinbaum, told PYMNTS in an interview that the lending model that has been most readily tapped in the alternative lending space — the balance sheet model — tends to show its flaws, and “it is history that shows you that the [credit] market will freeze,” as has indeed been shown in decades past, with Long-Term Capital Management, the Russian debt crisis and, of course, the global financial crisis.

Relying on a balance sheet model, continued the executive, has meant that many operators in the industry have not been able to develop expertise in both aggregation and funding, but that may change over the short term, as Sheinbaum said he could see marketplace lenders moving to shore up credit facilities. If the model is one where the online firm has typically had only one lender in place, it makes sense that it would try to seek out a syndicate of lenders, said Sheinbaum.

When it comes to regulation, he cautioned, “the decision-makers need to be patient and seasoned … Dealing with a business is different than dealing with a consumer.”

Now Begins Marketplace Lending’s Maturity Chapter, (American Banker), Rated: A

All of the swaggering statements we’ve heard about destroying the banking model miss the mark. Marketplace lending is about enhancing the existing lending model. The opportunity to reach new borrowers and make smarter lending decisions means very little if these new companies fail to put in place the building blocks that position themselves for long-term success. You can’t innovate your way past good management.

Marketplace lenders are just as laser-focused on building durable infrastructure as they are on growing origination volume, pricing risk and providing service to borrowers and investors. Fortunately, we are not recreating the wheel in this endeavor. Many successful (and not so successful) companies in finance have come before us. Their experience teaches us valuable lessons.

Innovation takes time. Building a great company also takes time. But with enough skillful and principled execution, marketplace lenders will build companies that continue to deliver on what we’ve been promising. There might be bumps in the road, but I believe that makes us better in the long run.

Canada

 

OnDeck Expands Lending Options for Small Businesses in Canada, (PR Newswire), Rated: A

OnDeck® (NYSE: ONDK) announced today an expansion of its offerings for small business in Canada to include a line of credit up to CAD$50,000 and an expanded term loan up to CAD$250,000 to help meet the growing needs of the country’s 1.1 million small businesses.

New OnDeck Line of Credit: CAD$10,000 to CAD$50,000 in flexible cash

Beginning immediately, Canadian small businesses that have annual revenue of at least CAD$100,000 and have been in business for at least one year can apply for a line of credit from OnDeck from CAD$10,000 to CAD$50,000. Since OnDeck entered Canada in 2014, the company has delivered more than CAD$50 million in financing to Canadian small businesses.

 

United Kingdom

The UK’s Disappearing SME Bank Loan, (PYMNTS), Rated: AAA

Bank loans to small and medium-sized enterprises in the U.K. are dropping by nearly $145 million every month, according to new analysis from online marketplace lending site Funding Options.

The company, which revealed the statistic on Monday (May 23), said recent regulations pertaining to bank overdrafts have caused the steep decline in small business lending volumes.

By the end of March this year, SMEs were borrowing more than $17.5 billion in bank overdrafts, the firm said. That represents a 13 percent decline from levels recorded in Sept. 2014.

The value of total bank overdrafts lent to small businesses has dropped by 42 percent over the last five years, Funding Options added.

“Even the most successful SMEs are at risk of their overdrafts being cut with almost no notice,” said Funding Options Chief Executive Conrad Ford in a statement.

The company explained that recent regulations have forced banks to pull away from overdraft lending; according to Funding Options, the trend is unlikely to see a reversal in the near term.

Bank overdrafts are unsecured, the company explained, and do not outline repayment terms for SMEs. Banks have been forced to reduce their exposure to risk resulting from this kind of financing for their small business customers, Funding Options said.

Deloitte Report Flares Tensions Amid Banks, Alt-Lenders, (PYMNTS), Rated: AAA

Deloitte’s latest report on the topic, “Marketplace Lending: A Temporary Phenomenon?” seems to belittle the alternative lending sector even further.  “We do not believe that the banking model will be fully disrupted by MPLs,” the report concluded, referencing marketplace lenders. “Based on our market sizing analysis, MPLs will not be significant players in terms of overall volume or market share.” 

MPLs React

“Having invented peer-to-peer lending 11 years ago, I have a rather different view of the future of financial services,” said Zopa Founder and Executive Chairman Giles Andrews in an interview with Business Insider. “I think we will increasingly see consumers voting with their feet, or more likely their phones, and seeking out best-in-class products and services based on where they can get the best value and also the best experience. They will look for products that are easy to understand and great technology solutions that make their life easier. I don’t think banks can begin to keep pace with that.” 

“Many of the conclusions in the Deloitte report depend on assumptions which do not reflect the development of peer-to-peer lending to date,” stated a spokesperson for industry group Peer-to-Peer Finance Association, which represents firms like Funding Circle and MarketInvoice, in another interview with the outlet. 

“The industry is under no illusion that it will topple High Street banks, which have existed for hundreds of years, nor does it want to become like them,” the executive added. “The sector is becoming more mainstream, but it will always remain an alternative to High Street banks, whether you’re a saver looking for better returns or a business unable to find the loan that suits your needs.” 

Deloitte did not argue that, with its inability to scramble the traditional lending space, alternative lenders will fade into irrelevancy. 

But the bottom line, Deloitte concluded, is that — as the lending market stabilizes post-financial crisis — banks will continue to have a cost advantage over MPLs. With a lack of regulation in the space, plus heightened risk for investors and a lack of transparency for borrowers, mean bank lending is far from being in a position to fear the alternative lending space. 

All in all, Deloitte predicted that MPLs will capture just 1 percent of the market by 2025. 

Australia

 

Australia’s first home loan marketplace HashChing has digitised its mortgage broker registration with DocuSign, (Austrlian Anthill), Rated: A

HashChing, Australia’s first online home loan marketplace, has turned to DocuSign to accelerate the registration process of its key user group, mortgage brokers. HashChing currently has 81 active brokers registered and its next phase of growth relies on efficiently processing the already registered 1,200 additional brokers waiting to be activated.

Launched in August 2015, HashChing is disrupting the way Australian’s source home loans, as the platform is powered by brokers, not bankers.

As of April 2016, HashChing has processed close to 1,000 home loan applications worth $530 million and recently closed $1 million in funding from investment firm Sapien Ventures.

“HashChing is a great example of a business model truly disrupting a traditional market,” said Brad Newton, Vice President, DocuSign Australia and New Zealand.

Online home loan marketplace faces big demand from brokers, (Australian Broker), Rated: A

“HashChing is helping brokers by not only providing leads but also providing them the business tools to manage those leads effectively. At the moment brokers use different tools including Excel sheets to manage the business – which is not the most efficient way to manage leads.

“For an average broker dealing with 20-30 leads a month, the process can become cumbersome and loss of business is a potential outcome, if they forget to call the consumer at the right time.

“Our CRM not only helps them effectively manage those leads but also help them save that business because they can set reminders within their dashboard to be reminded about a follow up.”

“Brokers are very happy with the quality of leads because they don’t have to pay per lead. It’s a win-win situation for everyone because consumers get access to great home loan deals,” he told Australian Broker.

Singapore

 

P2P Funding In Singapore – Here’s A Look At How It Stacks Up Against Bank Loans, (Vulcan Post), Rated: AAA

Recently, DBS has inked a deal with two p2p platforms to boost funding options for SMEs, assuring that SMEs have alternatives at whatever stage of their growth. In a statement, DBS said they will “refer […] smaller businesses that the bank is unable to lend to, to Funding Societies and MoolahSense.

To date, p2p funding websites Funding Societies and Moolahsense have financed S$ 6.1 million and S$ 10 million worth of loans respectively, with the majority of interest rates landing in the 11 ~ 15% region (76%) and having a <6 – 12 month term (82%). Interestingly, out of the S$6.1 million for Funding Societies, 51% of loans disbursed were under S$99k, with 24% under S$50k.

In comparison, SPRING Singapore’s Micro Loan Programme (MLP), offered by the local banks, allows up to S$100k on loans and has a repayment term of up to 4 years, as well as competitive interest rates ranging from 7% p.a. to 9% p.a.

DBS for example, which currently services over 100,000 SMEs in Singapore, handling an average of 1,800 micro loan applications a year, which is over 50% of all micro loan applications supported by SPRING. The sheer number of clients which DBS handles should give you an idea of how sought-after a financial relationship with a bank is.

 

China

 

Saxo Bank lands white label agreement with Chinese P2P lending giant Lufax, (Leaprate), Rated: AAA

Retail forex broker Saxo Bank has announced a new white label partnership with Lufax, China’s largest internet finance company, active in the peer-to-peer (P2P) lending business.

In its latest funding round earlier this year from investors including Bank of China Group, Guotai Junan Securities and Minsheng Bank, Lufax was valued at about $19 billion. As of April this year, Lufax’s number of registered users stood at over 21 million, a quarter of which are active investors.

The Lufax partnership, expected to launch within the next three months, will see Lufax leverage the trading technology that underpins Saxo Bank’s SaxoTraderGO platform. Saxo Bank will be providing Lufax’s considerable client base with a seamless experience across mobile and desktop platforms, including complete functionality across the trade cycle – from pre-trade, execution and post-trade services for ETFs and cash stocks initially.

Gregory Gibb, CEO of Lufax added:

We are delighted to be able to offer an alternative channel of this calibre to our trading community. Saxo Bank is at the forefront of online trading and its expertise will strengthen our ambition to be China’s leading online wealth management provider.

 

 

Author: George Popescu

George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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