Daily News Digest Featured News

June 15th 2016, Daily News Digest

United States

Why I’m Still Bullish on Lending Club and Prosper, (Forbes), Rated: AAA

This year is my fourth year of investing in Lending Club notes. My average return has been 7.66 percent, and my portfolio contains about 2,500 notes (pieces of individual loans). The notes I invest in fall in middle credit grades, so they are neither rated the safest nor the riskiest.

When you compare my returns to date on Lending Club notes to the yields offered by low investment-grade corporate bonds, Lending Club notes look far superior. The average yield on BBB bonds is 3.53% at the moment or less than half the return on my Lending Club notes. However, comparing return to yield is not an apples to apples comparison. My Lending Club returns include the impact of defaults which reduce returns, while the yields on BBB bonds don’t. Also, my Lending Club notes are very short-term while with the BBB bonds I would have to take more duration risk to get the 3.53% yield.

In the most recent report, prepared in June 2015, the Fed found, “Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have been almost always higher than returns on all commercial bank activities.” On average, credit card companies get a steady 5-6 % return on assets on credit card debt. It’s important to note that this is a return on assets, rather than the amount of credit card debt these firms have outstanding. They need to have a pile of cash available for borrowing by credit card holders. This cash is not earning high returns. If the return was calculated based on the amount they lent to credit card holders, the returns would be even higher!

Getting a loan through Lending Club or Prosper is much faster than getting a bank loan, or for business owners, an SBA loan. At the same time, it is more affordable than short-term loans, payday loans, and credit card debt. So, P2P lenders occupy a sweet spot, competing on both speed and cost.

Ex-LendingClub Chief Laplanche Sells Part of Stake in Company, (Bloomberg), Rated: AAA

Laplanche disposed of 1.2 million shares through Morgan Stanley in early June, according the filing dated June 13. That stock had a value of about at $5.3 million at the close of trading on Monday. It represents about 14 percent of the shares Laplanche held on May 6, according to an earlier filing.

Cybersecurity best practices for the booming online and P2P lending space, (IT Pro Portal), Rated: A

Online lenders use dynamic data in their screening process to try and automate their underwriting process as much as possible, providing a loan offer bespoke to each consumer or business instantly. However, the continued buzz surrounding online and P2P lending makes it a top target for cybercriminals using stolen identities to create loan applications with synthetic credentials.

The SEC recently stated cybersecurity is the biggest risk to the financial system.

Another risk these businesses face is the bustout/ponzi fraud scenario, where fraudsters use loans from one lender to pay another.

To filter out fraudulent applications, businesses should leverage global shared intelligence to gain a full understanding of users’ digital identities, including actions from different devices, locations and accounts.

In addition to using stolen credentials to initiate loan applications, fraudsters also use these credentials to access already existing online lending accounts in an effort to carry out fraudulent transactions. In many cases, this happens when an online lending account has been created using the same email address and password that has already been compromised in a recent data breach.

Across industries, consumers are becoming more comfortable using multiple devices across accounts. However, this presents another opportunity for fraudsters to attempt compromising accounts. For example, an authentic customer might set up an online lending account from his or her business computer, update the profile from a smartphone, and apply for the loan itself on a tablet.

P2P Lending’s Fatal Mistake, (PYMNTS), Rated: AAA

“To be fair to the founders of that industry, I think they were really angling at trying to create a two-sided marketplace,” Purcell said. “There was not enough supply (dollars) to fund what was migrating to their platforms. They had a very innovative idea, but I don’t think their dreams of getting the funding supplies for those loans played out.”

Mispriced credit caused too much credit demand, he says, and that caused its funding model to be unable to keep up with demand. From there, the market seemed to unwind, he points out during the conversation. The lack of capital in this market, Purcell added, is very fickle, which added to further problems.

Evans agreed, saying that “once you go down, it’s really hard to climb back up.”

As for investing in matchmakers, Webster asks Purcell which type of matchmakers they want to invest in — and what they want to stay far away from. For the latter in that case, those are the businesses Purcell calls the “businesses that have very untested regulatory constructs,” or “very untested issuance performance metrics” behind them.

“I think the biggest place in terms of how we invest money it’s going to be the transaction-oriented provider of services, policing risk assessments in the marketplace economy. I think that it’s not just limited to this genre of marketplace lending. I think lending is going to continue to be a tough business. Whether there’s a matchmaker there I’m not sure,” Purcell says.

“As much as a I travel, Uber really is magic. The elegance of what they’ve designed in simplicity and speed that I can go almost anywhere in the country and pick me up in a black car on-demand. The self policing of network,” Purcell says. “Uber Black Car is the absolute gold standard of what marketplace operations should be shooting for.”

Is The Great Contraction Coming Soon To Alt Lending?, (PYMNTS), Rated: AAA

Pat Grady of Sequoia Capital: “Upside has been grossly overestimated” in the business, Grady said, meaning that the only and probably best thing that can happen now in the online lending space is a “culling of the herd.”

According to LoanDepot Chief Risk Officer Brian Biglin, stacking is “causing problems with the whole industry.” OnDeck and Prosper, meanwhile, told reporters that they have integrated algorithms in their risk assessment strategies to detect and avoid loan stacking.

OCC’s Thomas Curry: Regulators Want Dialogue on Fintech, ( Wall Street Journal), Rated: AAA

“It’s not an issue of punishing or subjecting someone to a regulatory regime,” Mr. Curry told The Wall Street Journal CFO Network’s annual conference. “Internally, we are looking at how we can be responsive to both sides of the question—both the banks and the fintech firms and what the relative advantages and disadvantages are of existing regulations.”

The Office of the Comptroller of the Currency, a federal bank regulator, is an independent bureau within the Treasury Department. Part of the OCC’s effort in focusing on how to regulate innovative products and firms is also bringing a cultural shift within the organization, Mr. Curry said.

“There’s a reflexive action among the regulatory community—when in doubt, say, ‘No,’ ” Mr. Curry said.

A “white paper” proposed establishing a centralized office for innovation at the OCC. That central body could “serve as a forum to vet ideas before a bank or nonbank makes a formal request or launches an innovative product or service,” according to the paper. The document also expressed interest in an idea, popular among banks and nonbanks, that would let firms try new fintech products on a small scale before a full rollout.

Fintech is increasingly cropping up on the regulatory radar as officials from various agencies, including the Federal Reserve, Securities and Exchange Commission and the Commodity Futures Trading Commission, weigh how to address an industry that is growing faster than regulation.

Mary Jo White, head of the SEC, has said her agency is closely monitoring fintech, including startups such as Prosper Marketplace Inc. and LendingClub Corp., which make online loans to consumers and small businesses and then sell the debt to individual investors and hedge funds. She has called on such platforms to provide more information about the loans, including data on the borrower’s ability to repay.

 

United Kingdom

Too hot to handle: Industry shies away from P2P as capital shortfall exposed, (Money Marketing), Rated: AAA

Now a firmly established market – with the likes of Ratesetter, Zopa, Lending Works and Funding Circle lending billions – the Government has signalled its intent to boost the number of investors further.

Money Marketing research shows the cash platforms’ set aside to cover bad loans varies enormously.

While Zopa and Ratesetter hold £12.9m and £17.6m respectively against loans worth £2.8bn, Lending Works has just £325,000 set aside and Funding Circle holds nothing at all. A Funding Circle spokeswoman explains the rationale.

She says: “A provision fund introduces new risks; it either has too much money in it which means investors aren’t earning the return they could be, or potentially not enough if losses increase significantly.

The FCA regulates crowdfunding and P2P providers and does have capital requirements for fully-authorised firms. Currently this is the higher of £20,000, rising to £50,000 from April 2017, or a tiered amount as the value of loans increases, from 0.2 per cent of the first £50m to 0.05 per cent of any balance over £500m.

The Treasury’s attempts to bring P2P into Sipps has been met by silence from an industry left “battle weary” by years of scandals centred on unsuitable investments.

But Ratesetter’s Williams says there is an “inevitability” about P2P’s place within pension portfolios. He says: “Because we sit between cash and stocks in terms of the risk profile, but still making an investment, it is a bond proxy. People do have to take on risk but we mitigate it to such an extent in a Sipp wrapper when people are just looking for income, they are not looking for double digit returns they want solid investment-grade returns.

ThinCats Sipp allows withdrawal at about 8 per cent a year without eating into the fund value.

India

Leverage ratio and P2P lending: All you need to know, (The Economic Times), Rated: A

Leverage ratio in simple terms is the relation between the amount of equity that a company has and the amount of debt that it is carrying in its books. It is a measurement of the capacity of the company to meet its financial obligations.

In case of payments banks, the RBI set a leverage ratio of 3% and in case of full service banks the concept of leverage ratio is taken from the Basel III guidelines which is 3%. However, the Indian regulator has set the leverage ratio for banks at 4.5%.

If by leverage ratio the regulator meant that it would put an upper limit on the total amount that can be lent through a platform, then it could restrict the expansion of the sector. Since the RBI is planning to set `2 crore as the initial starting capital, if they set a leverage ratio of 7 then a platform would not be able to lend more than `14 crore, until they raise more funds. That kind of limitation is not something that P2P players are in favour of.

China

Chinese borrowers told to post nude photos as collateral, ( Financial Times), Rated: A

Chinese loan sharks are demanding nude photos as collateral from female borrowers which can be used for blackmail if they fall behind on their repayments.

Female college students in the southern province of Guangdong were told to hand over naked photos of themselves holding their ID cards, with lenders threatening to make them public if they failed to repay their microloans, according to the Nandu Daily, the local newspaper.

While these loans were brokered on Jiedaibao, the P2P online lending platform denied direct involvement as the two parties subsequently agreed terms over another channel. “This is an illegal offline trade between victims and lenders who did it by making use of the platform,” a representative said when contacted by the Financial Times.

“If they borrow from banks there is no threat to personal safety. But if they borrowed from private lenders, especially high-interest lenders, it can happen,” said bankruptcy lawyer Han Chuanhua of the Zhongzi Law Offices in Beijing.

Loans carrying interest rates greater than four times official rates are considered “loan shark” lending in China and the creditors’ rights are not protected under Chinese law, according to Wen Daoquan, a lawyer writing in an online post on disputes involving high-interest loans. Loan sharking itself is not illegal but collectors can’t use “inappropriate means”, he wrote.

 

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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