Featured News

June 20st 2016, Daily News Digest

US

  • Lending Club’s shares rise 22.06% in the last 4 weeks beating the S&P 500 by 15.69%.
  • Could this be due to the rumor buyout by JP Morgan and Goldman Sachs ?
  • Bessemer is explaining that alt-lender / fintechs are now probably undervalued and hide opportunities.
  • Banks are reducing consumer lending rates (mortgages, auto, and personal loans) in line with the falling bond market rates.
  • Bitcoin app allowing friends to extend lines of credits in bitcoin raises 20% of their $250,000 objective so far.
  • Interesting article showing how difficult it is for banks to handle a very short step in the going mobile process.
  • Great article about SoFi. SoFi calls their borrowers members, offers them classes and extends into wealth management while originating $700m/month.

Canada

  • Canadians finally have free access to credit score thanks to Borrowell.

UK

  • European Investment Bank invests £100 million as a loan to Funding Circle.
  • On the back of higher dividend than expected Funding Circle may attempt to launch a C share offering, testing the capital markets waters after VPC’s failed C share raise last year.
  • Zopa launches real-time fraud protection with Sphonic.

India

  • The debate on p2p regulation continues with interesting points.

 

 

United States

Company Shares of LendingClub Corporation Rally 14.32%, (The market digest), Rated: AAA

LendingClub Corporation (NYSE:LC) has climbed 14.32% in the past week and advanced 22.06% in the last 4 weeks. In the past week, the company has outperformed the S&P 500 by 15.69% and the outperformance has advanced to 20.94% for the last 4 weeks period.

 

JP Morgan, Goldman Eye LendingClub, (PeerIQ newsletter), Rated: AAA

JP Morgan executives are discussing the possibility of buying troubled LendingClub as they consider options for entering the online consumer-lending business. Sources said JP Morgan executives see recent negative publicity surrounding the ouster of Lending Club founder Renaud Laplanche and the postponement of its annual shareholder meeting as an opportunity to pick up the company’s technology at a steep discount. Whether they proceed with an offer hinges on a number of variables, including Lending Club’s ability to raise fresh capital and efforts by Laplanche to orchestrate a leveraged buyout.

Another factor: Goldman Sachs simultaneously is considering a possible deal with LendingClub. Goldman, which has invested substantial time and resources in an effort to build an online lending business from scratch, more recently has considered forming some sort of alliance with an established lender. Sources earlier pointed to Prosper Marketplace as a likely target, but now LendingClub, too, is on the bank’s radar.

Sources said both banks are after technology that would allow them to write large volumes of loans they would fund either through deposits or securitization.

“JP Morgan doesn’t want their servicing or underwriting – they want the intellectual property, the algorithms,” one source said. “They’ve been waiting for a firm to fail and pick up the pieces on the cheap.”

For Goldman the process of setting up its own origination business has proven more costly and difficult than it had anticipated, hence the interest in acquiring a large operation such as LendingClub or Prosper.

 

Alternative lenders aren’t going away, they’re just misunderstood, (Tech Crunch), Rated: AAA

Bessemer Venture Partners has evaluated these businesses as potential venture investments over the past several years, we struggled across a few key fronts when trying to justify the lofty valuations of these tech-enabled, non-bank lenders. Now, with regulators worried that fintech lenders may destabilize the financial system and journalists racing to point out the cracks appearing among fintech lenders, we wonder if the pendulum has swung too far in the opposite direction. Ultimately, we feel that many of these businesses were simply evaluated under the wrong valuation lens.

To better understand the true value these emerging lenders bring to the industry, here is a simple matrix we have used that can be applied across the non-bank, alternative-lending industry:

  • Innovative underwriting: While many alternative lenders do have an innovative underwriting approach (big/new data, better signals, machine learning, etc.), the fixed income capital markets aren’t ready to rely on these untested models. Instead, debt ratings and securitizations for loans underwritten by new lenders are still primarily based on conventional metrics (e.g. FICO). We do believe this will happen, but it will take time and will need to be proven through various economic cycles.
  • Low-cost, capital-lite loan factories: Most lending startups are at their core lower-cost originators taking over the lucrative and capital-lite aspects of banking, where software gives them an edge. The structural deficit of the incumbents makes it difficult for traditional financial institutions to compete with capital-lite startups in many ways.
  • Sustainable growth: New originators have demonstrated some explosive growth relative to established financial institutions, but fast growth isn’t always attractive in this market, as it can result from, or often lead to, problematic underwriting practices and rising customer acquisition costs as fast followers enter these markets.
  • Cost of capital: The cost of deposit funding for banks is significantly lower than it can ever be for emerging, non-bank marketplace lenders; the average cost of capital for a bank is typically < .5 percent, while even for the well-established tech-enabled lender OnDeck’s cost of capital was 5.5 percent in Q1 2016. On the positive side, these emerging lenders do save significant sums by avoiding the huge regulatory costs banks incur.
  • Valuation, valuation, valuation: Alternative lenders have primarily been either fee-based market makers selling loans to investors or have been leveraging their balance sheets and earning interest income and securitization revenue, much like established specialty finance companies and banks. Simply put, these are not software businesses. Historically, banks have been valued on a price/book basis (typically ranging from ~1-2x P/B) with P/E as an additional guide for public equity investors. As alternative lenders have emerged, many venture investors focused on unit economics, but banks have long been valued on their book equity for a reason.

While we’re currently experiencing some soberness after years of froth in the space, this current negative sentiment may now lead to overly depressed valuations and overlooked opportunities.

Consumer lending rates, including mortgages, auto, and personal loans are declining, (Peer IQ newsletter), Rated: AAA

The average 30-year fixed mortgage rate fell to 3.59%. According to Bankrate, rates on personal loans fell 7 bps from the prior week to 10.94% and are down 60 bps from their 2016 high.

Yields on marketplace lending bonds have also tightened substantially reflecting the strong demand for exposure to the unsecured consumer credit risk.

Bitcoin P2P lending app CredibleFriends raises 20% of its financial goal, (EconoTimes), Rated: AAA

Comment: Credible Friends website has no location, no team, no address…it looks very suspicious.

CredibleFriends, a peer-to-peer lending platform built on Bitcoin to quickly extend lines of credit to all trusted friends, has pitched on online investment platform, BnkToTheFuture and has raised 20% of its financial goal to $51,000.

CredibleFriends users can set credit limits for individual friends, who can spend bitcoin online or in person. Dixon says that the company’s mobile wallet allows anyone in the world to act  like a bank and issue credit to their friends in seconds.

Kuber Financial Acquires Mobilend, Positions Platform to Provide Lending Service on Every Device, (Crowdfund Insider), Rated: A

Mobilend is described as a “first of its kind” mobile lending platform.

Kuber, a fintech investor and holding company, was founded by CEO Timothy Li, a well established Fintech veteran, who has worked on multiple, prominent internet finance platforms. Most recently Li was CIO of RealtyMogul, the largest real estate crowdfunding platform in the US.

Banks struggling to handle mobile disclosures, (Banking Exchange), Rated: AAA

Comment: a long article showing the agonizing difficulty of a fairly short step in offering lending online for a bank.

Unlike nonbank competitors however, banks must innovate while keeping an eye firmly on compliance. Lengthy disclosures, particularly for loan products, are not mobile-friendly and can result in slower rollouts of mobile products. So how can banks meet their customers’ expectations while also satisfying disclosure requirements ?

Ratings agencies offer measured take on marketplace lending, (Alt Fi), Rated: A

Anthony Parry, SVP at Moody’s Investors Service, and Matthias Neugebauer, MD at Fitch Ratings, at Global ABS were measured in their views on the emergent marketplace lending sector.

On the subject of alignment, Parry said that reputational risk for marketplace lenders – as relative newcomers to ABS markets – is an important factor. Transparency at the loan book level is useful, but perhaps less so for new issuers than a broader culture of transparency.

While the major ratings agencies are certainly taking an interest in marketplace lending, it’s also clear that there’s a fair amount of uncertainty around the asset class at present. The lack of an established track record for the vast majority of platforms was an often talked about point at Global ABS, as was the fact that the platforms are for the most part yet to weather a downturn in the economy. Moody’s in fact published an update on marketplace lending in March, summarising its key concerns around the industry, which included the threat of cyber-attack and regulatory risk. Fitch posted a video summarising Neugebauer’s thoughts on marketplace lending this week, which may be viewed below.

Balance Sheet: Lending Club Buys Own Loans as Chatter Increases of Potential Acquisition, (Crowdfund Insider), Rated: A

In a recent article in WSJ.com, an analyst report is referenced stating Lending Club (NYSE: LC) is buying more of its own loans. While it was labeled as a “mixed indicator” it is also a vote of confidence in the assets as Lending Club shifts away from P2P/institutional model towards one where Lending Club utilizes its own balance sheet. The same report labeled the strategy a temporary measure, as the loans will be resold, while funding channels are reconstructed.

Meanwhile, another report states that JPMorgan and Goldman Sachs are both kicking the tires of  the largest marketplace lending platform in the US.  Smart money never wastes an opportunity to benefit from a crisis – especially one that is believed to be temporary.  Lending is inevitably moving online. Buying an established player, with a known brand, while prices are cheap – simply makes sense.  Concurrently, recent investor Tianqiao Chen, owner of Shanda Media, has been increasing his holdings in the beleaguered online lender.  He clearly believes there is an opportunity to drive capital gains.

Inside SoFi’s Exclusive Club For “Great” People, (Fast Company), Rated: AAA

The privately held financial technology, or fintech, startup, which provided student-loan refinancing when it launched in 2011, now offers its borrowers—or “members,” as SoFi calls them—products such as home mortgages and wealth-management tools. Membership also comes with less conventional benefits that are designed to encourage loyalty (and increase referrals), including social events, networking, and the ability to pause loan payments if you lose your job. Becoming a SoFi member, the company boasts, is akin to joining an elite club for people with prime credit scores and exceptional career potential.

“When you become a member, we want to invest in you,” says cofounder and CEO Mike Cagney. “The real opportunity is in taking traditional banking and recasting it into this concept of money, career, and relationships.”

If he can maintain SoFi’s loan performance while adding members and making the club less exclusive, he’ll be laughing all the way to the, well, bank. If members fall behind on their payments, SoFi could become yet another example of unregulated lending run amok.

Of SoFi’s 150,000 members, 100,000 joined in the past year, and it originates $600 million to $700 million in loans every month (compared to about $200 million per month in the first quarter of 2015).

But unlike most online lenders, and thanks in part to the $1.2 billion in equity funding it raised last year, the company is now able to “turn over” its balance sheet six to eight times per year, creating a powerful capital engine that has been profitable since 2014. Early competitors like Earnest and CommonBond, which focused on designing a slick student-loan-refinancing experience rather than hiring talent with Wall Street know-how and relationships, as SoFi has prioritized, process a much smaller volume of loans per year.

Now SoFi is working toward other prizes, which, if claimed, would increase the lifetime value of its customers. In personal loans, it’s catching up to Lending Club, the troubled online lender that was once the clear market leader, as well as the top consumer banks. In mortgages, SoFi is targeting underserved categories, such as borrowers with minimal savings but six-figure salaries. And in wealth management, the company is beta testing a platform that will allow customers to turn the money they save by refinancing a student loan into SoFi-monitored nest eggs.

This spring, Moody’s gave SoFi its first-ever triple-A debt rating, the highest available to a startup online lender.

One way the fintech companies are dealing with the uncertain landscape is by establishing partnerships with banks, which allows banks to provide services like real-time small business loan approvals. Over the past five years in New York, for example, the proportion of fintech venture dollars going to collaborative companies has grown from 37% to 83%, according to Accenture. McKinsey & Company estimates that banks are likely to see 20% to 60% of their profits evaporate in consumer finance, mortgages, and wealth management over the next 10 years as new companies enter the market.

Cagney, for his part, has no interest in consumer-facing partnerships with Wall Street mainstays. He plans to remain unburdened by banks’ regulatory responsibilities and experimenting all the while: “Our guiding principle has always been, if it’s a [regulatory] gray area but it’s good for the consumer, it’s okay.”

 

Canada

Borrowell and Equifax Canada Partner To Provide Canadians Free Access to Credit Scores,( Press Release), Rated: AAA

Comment: Given the prominence of free credit scores in the US, it might surprise you to learn that, until today, it hasn’t been possible to get your credit score for free here in Canada. Borrowell just launched a service that does that, in partnership with Equifax.

According to a 2015 recent survey published by BMO Bank of Montreal, approximately 56 percent of Canadians said they have never checked their credit score, and only 14 percent check at least once a year.In an April 2016 survey conducted by Equifax of more than 1,000 U.S. consumers nationwide, only 27 percent of consumers check their credit score – with the majority of those consumers receiving their score for free from a third-party website.

“We’re excited to partner with Borrowell to bring this game-changing financial service to Canadians,” said Chris Briggs, Chief Marketing Officer, Equifax Canada. “Accessing a credit score can be an important first step for a consumer on his or her financial journey – in helping them better understand their personal financial situation. Our decision to work with Borrowell is based on our mutually similar desire to work with consumers to provide them with the information they need to get started on the path toward financial wellness.”

As well as providing resources that help Canadians better understand their credit scores, Borrowell also plans to present consumers with personalized offers for third-party financial products in addition to its own loan products.

Headquartered in Atlanta, Ga., Equifax operates or has investments in 24 countries in North America, Central and South America, Europe and the Asia Pacific region. It is a member of Standard & Poor’s (S&P) 500® Index, and its common stock is traded on the New York Stock Exchange (NYSE) under the symbol EFX. Equifax employs approximately 9,200 employees worldwide.

 

 

United Kingdom

European Investment Bank agrees £100 million investment loan package for Funding Circle, (Finextra), Rated: AAA

The European Investment Bank today agreed a £100 million investment in loans to UK small businesses originated through Funding Circle, the world’s leading marketplace for business loans.

This investment, alongside £25 million from the Funding Circle SME Income Fund, will enable over £200 million of new loans over 7 years, and provides a further injection of much-needed funding into the UK small business sector.

To date, Funding Circle has facilitated more than £1.25 billion of loans to 16,000 businesses in the UK. Since launching in 2010, lending to small businesses through Funding Circle has evolved to include a diverse range of investors. This includes national and local government backing in the UK and support from international organisations such as the European Investment Bank and European Investment Fund, and KfW, the German development bank.

Currently, there are more than 5.4 million small businesses in the UK accounting for 99.3% of all private sector business. Collectively small businesses make up 50% of GDP and 60% of employment.*

Zopa deploys Sphonic WFM for real-time fraud detection, (Finextra), Rated: A

Market-Leading Peer-to-Peer (P2P) lender Zopa today announced it is to launch Sphonic’s Workflow Manager (WFM) solution to mitigate against fraud in the fast moving digital environment.

Sphonic’s core product WFM, acts as a Context-Broker that leverages data points from over 50 of the world’s leading data vendors and risk management technologies through an intelligent workflow engine. WFM enables access to vendor services through a single RESTful API, removing the complexity of multiple integrations, as well as leveraging the Sphonic flow-control logic within the platform driving real-time insight to detect fraud efficiently as well as identifying genuine consumer behaviour.

After a successful trial of WFM, Zopa has agreed a long-term contract with Sphonic to integrate its technology and profile risk across its platform.

Funding Circle SME Income fund considers C share issue, announces first dividend, (Alt Fi News), Rated: AAA

The latest investment trust offering exposure to the burgeoning P2P/marketplace lending space the Funding Circle SME Income Fund is looking to tap more investor cash in its first C share issue, according to documents released to London Stock Exchange.

Near full deployment of its initial capital has prompted the managers of the Funding Circle SME Income fund to look to raise further cash, with the fund approaching 90 per cent full-investment.

This follows the fund revealing it had secured a £100m injection to finance UK SME loans through the Funding Circle marketplace from the European Investment Bank (EIB) allowing it to become fully levered and closer to reaching its target 8-9 per cent dividend yield. A potential equity raise in the form of a C share would reduce the potential leverage provided by the EIB loan.

P2P Global Investments was the last of the P2P/marketplace lending trusts to successfully hit its target C share issue, which it did in last year in July. VPC Speciality Lending failed to raise its minimum target of £200m later last year and Ranger Direct Lending cancelled its own planned C share issue in November. Since the cancellation, it has recently announced plans to tap a Z share issue.

Funding Circle SME Income Fund’s first dividend was also announced at 1p per share, payable in July. This is ahead of the 0.75p expected at its initial public offering (IP0) back in November 2015. Succeeding dividends will be a quarterly rate of 1.5p to 1.75p, which represents a prospective dividend yield of 6.2-7.2 per cent per year based on the current share price.

Unlike its peers, the Funding Circle SME Income fund peers by having no management or performance fees at the listed fund level.

Monica Tepes, director of investment company research at Cantor Fitzgerald says investors benefit from a layer of fees being taken out but also this means the loans are less diversified.

India

P2P lending: Finding the right balance, (Live Mint), Rated: A

Given the peculiarities of India’s economy, it needs to be seen differently from other global P2P markets; we require the right mix of regulatory practices to guide this model’s growth

The RBI has proposed six key areas for framing the regulatory guidelines around P2P lending. These areas include permitted activity; reporting, prudential and governance requirements; business continuity planning; and customer interface.

Given the potential of rapid growth—and the aggressive lending plans by P2P players this is likely to lead to—there is also the possibility that questionable practices such as credit enhancement or other financial incentives offered by the P2P platform will creep in.

Additionally, the growth of P2P lending in India could invoke interest from foreign entities to invest in India. It is presumed that the guidelines on foreign investment, as they now apply to a technology platform, would also apply to P2P platforms. There needs to be clarity on the maximum ticket size of transaction that can be serviced by P2P lenders to clearly differentiate them from other lenders, such as microfinance institutions and banks.

The RBI paper mentions that the funds should only flow from the lender’s bank account to those of borrowers. However, this practice could result in an operational complexity or delay as many a times, the platform might pool funds from several lenders for one borrower.

The RBI’s proposal to make it mandatory for P2P lenders to set up a brick-and-mortar presence may also go against the viability of the business model.

The RBI will presumably cover the confidentiality of customer data, both from a lender and borrower perspective, well. However, the mechanism through which P2P platforms can recover bad loans needs to be emphasised.

P2P lenders must submit quarterly reports to the RBI, stating their financial position, volume and the nature of loans disbursed. The business continuity plan (BCP) for P2P lenders needs to be well-devised. These players may need to store the documentation work, post-dated cheques and other business records, which can be handed over in times of business default. The responsibilities of the board of directors and senior management need to be outlined, as in the case of banks.

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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