Daily News Digest Featured News

June 27th 2016, Daily News Digest

News Comments

United States

  • UBS reporting an increase in non-performing-loans in subprime and near-prime pay-day lenders and auto loans. “The Fed’s easy money policies have resulted in too much money chasing too few high-quality lenders.”
  • A new very positive p2p lending market study predicting a market growth of 48% per year from 2016 to 2024.
  • Realty Mogul breaks the $200 million landmark.
  • Tomorrow is Lending Club’s annual shareholder meeting (once postponed already). Things to watch in LC : how will it assure retail vs institutional investors, plans for growth and cost and , I believe most importantly, who is in charge ? Without the proper strategic plan Lending Club could turn into Yahoo.
  • Ahead of tomorrow’s Lending Club meeting, some LC stock traders think all is back to rosy in Lending Club, some think it’s about to go bust and probably the most realistic ones think Lending Club will get worse before it gets better.

United Kingdom

  • A reminder that only 3 companies in the UK support Innovative Finance ISA ( IFISA) so far. IFISA seems the low hanging fruit of capital.
  • A great interview with Octopus, £6bn under management, who started powering p2p investment to investors and advisors. A much better read than the noise about Brexit.
  • And of course Brexit. Every single firm argues why they will not be affected. All CEOs will come up with reasons why their firm will not be affected or will even benefit from Brexit. Don’t look at what they say, look at the numbers and at what they do.
  • Funding Circle SME public fund continue with the C share sale to raise additional funds.
  • Very interesting: Klarna raised $35.2 in debt at a very low rate of 4% , and with this occasion releases some very interesting numbers. Klarna handles 10% of the online transaction in Europe. Klarna’s revenue grew 30% last year while valued at $2.25 billion.  

Malaysia-Indonesia

  • Modalku and Funding Societies getting nice traction. Former Indonesian finance minister supporting Modalku.

India

  • Faircent targetting Rs 2,000 crore business in 3 to 4 years. Growing by a factor 40x in 4 years ?

News Summary

United States

What’s Behind The Rise In Consumer Nonperforming Loans?, (Value Walk), Rated: AAA

In the first quarter of 2016, aggregate bank non-performing loans increased for the first time in the post-crisis cycle. Most of these losses were attributed to the energy sector, but there was also an increase in NPL volumes in select consumer loan segments.

Payday-lenders-3

In the report, UBS asks what is driving the increase in consumer NPL and how widespread is the problem? IS this something investors should be worrying about at a time when the Federal Reserve is considering tightening monetary policy?

ubs-credit-2

The study finds that among the respondents, roughly two-thirds of lower income and one-third of middle-income consumers cannot cover day-to-day expenses with income. Moreover, quarterly surveys from Q4 2014 to Q1 2016 suggest stable overall debt utilization by type, but rising usage of auto and car loans, which are offset by the declining utilization of bank loans for the middle-income group. Responses from the lower income group over the same period suggest a consistent decline in debt utilization.

 

One factor that hasn’t been discussed in this argument yet is the impact of student loans on borrowing profiles.

UBS points out that for consumer credit, loans outstanding total $3.5tn comprised primarily of student loans ($1.35tn), auto loans ($1.05tn) and credit cards ($0.9tn). About 30% of students with borrowing report balances greater than $30,000, 30% report balances of $10,000 to 30,000, and the remainder report balances below $10,000 — illustrating the size of the debt burden for many lower and middle income consumers before you even start to take into account auto, mortgage and credit card borrowing. The trends in student loans have been well flagged, with delinquencies running at about 11% but it’s outside the student loan market where the troubles are really starting to mount up for the broader financial system.

ubs-credit-1

Around 60% of the 2015 auto loan originations were to subprime borrowers and delinquencies have been rising every year since 2010. In the first quarter of 2016, 72% of the auto loans outstanding were held by non-bank lenders.

What are the takeaways from this? Well, UBS concludes that the US consumer credit market is going through a period of change; a change in market structure. The Fed’s easy money policies have resulted in too much money chasing too few high-quality lenders.

At the same time, the market has opened up as the ‘democratization of credit’, (more lower quality borrowers gaining access to unsecured credit) has gained traction. Lenders have been leaning on credit scores alone to determine creditworthiness, the last cycle and recent literature underscore several pitfalls related to excess dependence on credit scoring models, including gaming of the system, which is bound to lead to higher default rates and NPLs.

More Than 80% Of Americans With Student Loans Make Sacrifices To Meet Monthly Payment

There’s also, according to some studies, a greater borrower propensity to default among borrowers thanks to lower costs and stigma associated with bankruptcy today than recent history.

Peer-to-peer lending is transforming consumer lending by becoming a major financing substitute for small businesses, (Communication News), Rated: A

Transparency Market Research (TMR), a market intelligence company throws light on the overall market by covering all the major aspects of the peer-to-peer lending market. As per TMR, the peer-to-peer lending market stood at US$26.16 bn in 2015 and is predicted to reach US$897.85 bn by 2024 by expanding at a whopping 48.20% CAGR from 2016 to 2024.

There are a number of advantages of peer-to-peer lending. This type of lending may present better rates as compared to the rates offered by traditional banks. In addition, for the investors looking for socially conscious investment, peer-to-peer lending presents the probability of backing the attempts of people to break-free from huge rate debts. Furthermore, peer-to-peer lending is also adopted by borrowers who, owing to their credit status, are not qualified for traditional bank loans. Peer-to-peer loans can also be utilized for acquiring loans within an area wherein financial institutions do not lend small-balance unsecured loans owing to the limitations in cost structure.

Although the proliferation of new technologies and shifting demographics provide great opportunities for the market, factors such as the increasing regulatory scrutiny worldwide challenge this market’s growth. P2P loans carry a huge interest rate as compared to conventional bank loans. The majority of the loans are unsecured and all the risks are experienced by lenders, so if a small business isn’t able to make payments, lenders undergo heavy losses. Furthermore, the rising competition from traditional lenders and banks will also impact the market negatively.

The market is poised to rise expeditiously in the coming years. Peer-to-peer lending is being highly utilized in small businesses, consumer credits, real estate, and student loans. The development of peer-to-peer small business loans is guaranteed and peer-to-peer lending platforms have come up to fill a niche within the small business capital market.

Amongst the end-use segments, the segment of small businesses held the largest share of approximately 38% in the market in 2015 and is predicted to rise at an extraordinary 48.8% CAGR from 2016 to 2024. Consumers are on a quest for streamlined and simplified lending processes and the companies operating in the peer-to-peer market are capitalizing on this requirement. The key operators such as Prosper Marketplace, LendingClub Corporation, and CommonBond are innovating new products with cutting-edge offerings. Furthermore, Social Finance and CircleBack Lending are also targeting to raise funds for supporting competitive pricing.

Kickfurther Survey Finds Young, Highly Educated Users Eager to Put Their Money to Work, (Press Release), Rated: A

A new survey of users conducted by Kickfurther – the inventory crowdfunding marketplace that connects companies and individuals – finds 73% of the platform’s users are under the age of 35 and more than one-third have graduate degrees. The survey also found 55% of users earn less than $75,000 per year, and revealed the top reasons for using the platform to crowdfund inventory are to earn profits and to supplement traditional investments, while supporting small businesses.

The Kickfurther marketplace enables consumer product companies seeking capital to grow by sharing sales opportunities with individual buyers interested in putting their money to work in the retail market.

Businesses post Consignment Opportunities by choosing the amount of inventory capital they want, the profit buyers will earn, and the estimated duration of time it will take to sell the inventory based on prior sales history. Since its 2015 launch, Kickfurther has funded more than $7.8 million of inventory in 291 Consignment Opportunities by more than 240 companies. Kickfurther users have earned, on average, more than 2% consignment profit per month on completed offers.

RealtyMogul.com’s Latest: The 0MM Landmark, (Email from company), Rated: A

RealtyMogul.com, one of the online marketplaces for real estate investing, announced that it has crossed $200 million in funded equity and debt transactions on its platform. The company also announced it has reached $40 million in distributions of principal and returns to its investors.

Prosper Unveils Its Own Guide to Investing in Marketplace Lending, (Crowdfund Insider), Rated: A

This week, Prosper unveiled its very own guide to investing in marketplace lending. This news comes just days after announcing the launch of its new retail investor experience.

The guide can be found here.

4 things to watch for in Lending Club’s annual meeting, (Market Watch), Rated: AAA

1. Lending Club needs reassure peer-lending investors

It could use some of its cash to compensate for a temporary lack of funding from those investors, but this would only be a stop-gap measure and somewhat contrary to the model.

Or it could decide to keep funding loans and switch to a hybrid model, where money for loans come both from its balance sheet and external investors. This could reassure the market by showing Lending Club has direct skin in the game. In any case, some clarification is needed.
2. It needs to clarify the role of institutional and retail investors

Ironically, Laplanche often made the point that individual investors were desirable because they provide a more stable funding base than institutions. As he expected, it seems institutional investors with cold feet have had a much bigger impact on Lending Club than the withdrawal of a few retail investors. It may be anecdotal evidence, but LendingRobot, whose clients are all individuals, hasn’t experience a massive exodus of clients.

3. What’s happening with growth and costs?

Lending Club needs to push up its stock price to appease the board and stockholders, to keep key employees, and to send a positive signal to the people and institutions funding its loans. While the $8 billion valuation reached after IPO may be unattainable again for a long time, the company may at least make believable promises that it will once again grow at a high yet sustainable rate.

4. Who’s in charge?

While the board acted swiftly in nominating Scott Sanborn as acting CEO, it hasn’t clarified if that is just an interim position or a long-term appointment. Lending Club could reassure Wall Street by attraction a prominent business or financial industry figure as CEO.

LendingClub: Positive Signs Of A Sector Thaw, (Seeking Alpha), Rated: A

  • LendingClub has seen the stock rebound from the death watch lows from mid-May.
  • The fintech sector is starting to show some signs of improving data points after a disastrous period.
  • The stock remains attractively priced even if the loan demand doesn’t rebound.

LendingClub And OnDeck Will Die In The Next Recession, (Seeking Alpha), Rated: A

  • LendingClub’s (and that of other p2p lenders) business model is a race against time, but without a finish line.
  • Already, LendingClub’s algorithm is underperforming.
  • Moreover, because a recession is eventually inevitable, LendingClub will eventually go under.

Lending Club: It Will Get Worse Before It Gets Better, (Seeking Alpha), Rated: A

  • LC needs institutional capital to grow, and institutional capital has become scarce for reasons that have nothing to do with the recent scandal.
  • The growth investor base of LC may flee.
  • Q2 is going to be ugly.

United Kingdom

Have Innovative Finance Isas failed?, (The Week), Rated: AAA

The issue is that nearly three months later the take up for Innovative Finance Isas has been far lower than expected.

“[…] hardly anyone is offering them. Why is a scheme that the government was so keen to promote looking so lifeless?””

So far only three providers – Abundance, Crowdstacker and Crowd2Fund – have got approval. All the big names including Zopa, Ratesetter and Funding Circle are still waiting.

Innovative Finance ISAs may have launched with a whimper rather than a bang but hopefully soon more providers will get past the red tape and be able to offer savers access to the raciest member of the ISA family.

“Adviser-friendly” P2P – An interview with Octopus Choice, (Alt Fi News), Rated: AAA

Octopus Investments – the UK fund manager with more than £6bn under management – launched a new peer-to-peer lending product in April called Octopus Choice.

The new platform has been tailor-made for financial advisers from the outset, a group of gatekeepers that the wider peer-to-peer lending sector has yet to seduce. Octopus Investments has been around for some 15 years and boasts over 50,000 clients. Its raison d’être is to simplify complex investment products for both advisers and individual customers, with a particular focus on tax efficient investments. So why, after 15 years, has Octopus now opted to move into the new-fangled business of peer-to-peer lending?

“Over the last couple of years, we’ve consciously been looking at how to create products that are more universal, that have more appeal to a wider customer base,” began Richard, acknowledging that tax efficient investments occupy something of a niche position in the market. The P2P sector stood out as an area in which Octopus would be able to effectively leverage its existing strengths, namely: a loyal following of over 3,500 financial advisers, and “really strong proprietary deal flow”. The latter of these refers to the deal flow of bridging and buy-to-let lender Dragonfly Finance – one of Octopus’ asset backed lending businesses. Dragonfly has been around for 8 years, and has just topped the £2bn mark in cumulative lending – with a loss rate of around 0.1% to date.

The enabling technology and bespoke regulation that goes along with peer-to-peer lending have created an opening for Octopus. “What we realised is that there’s an opportunity to help financial advisers add value to their clients’ portfolios through the P2P market and give retail investors the chance to invest directly in Dragonfly loans,” said Richard. The type of investor he envisages is one who is looking for lower volatility returns than can be found on the stock market, but also for better returns than are offered by cash products. Asset backed lending – which banks, family offices and wealthy groups of people have been doing for centuries – fits the bill. Octopus is just trying to make it more “retail friendly”.

The investor chooses the amount that they wish to invest, and those funds are then spread across a diversified portfolio of secured Dragonfly loans. The target rate of return is between 5 and 6%. There are currently 21 loans trading on the platform. No more than 5% of an investor’s funds will be allocated to an individual loan. Octopus handles all allocation and management responsibilities. The loans are made available on the platform through a blind allocation process, dependent on capacity. Octopus cannot cherry pick which loans are placed onto the platform. All of the loans are sourced from its proprietary deal flow.

Stuart says that, as the loans come from Dragonfly’s tried-and-tested deal flow, Octopus Choice is comfortable with going “one step further” and investing in the loans. 5% of the capital in each loan is contributed by Octopus, in a first loss position, meaning that investors would get their money back before Octopus in the event of default. Investors also earn all of their interest before Octopus earns any for itself. The combination of the conservative LTVs and the first loss piece means that the “underlying asset has to fall 33.5% in value before any investors’ capital is at risk”, according to Stuart.

An Intelligent Partnership report from December last year revealed an endemic lack of awareness about the alternative finance sector within the advisory community. The headline findings were that 27% of alternative finance platforms had no plan in place for marketing to Independent Financial Advisers (IFAs). More concerning, however, was the fact that only 7% of the advisers surveyed realised that the many different moving parts of the alternative finance industry were and continue to be regulated.

Given that Octopus Choice will have monetary skin-in-the-game, do Richard and Stuart still see a role for transparency at the loan book level? Richard explained: “We’ve shared our historic Dragonfly data with some due diligence companies, who’ve looked at it and who have written third party independent due diligence on Octopus. What we’re going to do going forward is we’ll be very transparent on the loans that have gone through the platform as we scale up. In time, we will share the performance of the loan book, as other peer-to-peer platforms do.”

Bottom line? The way that Octopus thinks about “P2P” is interesting, and reflective of a trend that we’re seeing across the space. Said Richard: “P2P is a way of facilitating secured asset backed lending, on a fractional basis of ownership, to retail investors. For us, it’s another way of helping financial advisers and their clients to access an attractive market.” Octopus has selectively adopted the front end of the marketplace lending model, marrying that medium with its existing strengths to create an intriguing new form of investment. But make no mistake! “We’re not a marketplace, but we are offering access to our proprietary deal flow and exposure to markets where we believe our investments can really make a difference,” said Richard.

5 key considerations post Brexit, (Alt Fi News), Rated: AAA

Marketplace lending companies have long lauded the uncorrelated nature of the returns that they offer to investors. The coming months will put such claims to the test. Many have voiced concerns over the capacity of marketplace lenders to weather a downturn in the economy. We may be about to find out just how resilient they are.

If there’s one class of alternative finance provider that you’d expect to be affected by Brexit, it’s the real estate platforms. But remember that there are many different types of platforms within the real estate sector. “Buy-to-let mortgages were one of the best performing types of loans throughout the credit crisis, and we believe demand for rental property will continue to outstrip supply, while average rents will continue to increase above the rate of inflation. We will no doubt see significant change over the coming months, but agile peer-to-peer platforms are in prime position to capitalise on this opportunity.”

Potentially more exposed are the real estate equity crowdfunding platforms.

Prevailing sentiment appears to be that the regulator got things right in the UK, but until now there’s been a lingering question mark over what might be the effect of European legislation at the UK level. Can we now cross that question mark out?

In uncertain times, the purse strings tighten. 2016 has so far been anything short of certain. In marketplace lending specifically, events in the US have conspired to throw the sector into a state of near turmoil. Institutional investor demand for marketplace loans has been falling off a cliff and share prices have tanked.

Though it may seem like a natural pathway for international expansion, not one of the other “big five” peer-to-peer lenders have yet made the leap into continental Europe. The word is that is that it will take Britain at least 2 years to negotiate its exit from the European Union. It wouldn’t be at all surprising if the intervening period of uncertainty causes platforms to hold off on any European expansion plans.

P2P industry: Brexit will not disrupt our sector, (Financial Reporter), Rated: A

“Investors in the sector are uniquely insulated from the storm”.

Christian Faes, co-founder & CEO of LendInvest, agreed, stating that the firm doesn’t anticipate a “wide-scale crisis of 2008 proportions”.

Funding Circle SME Income Fund to raise cash amid strong demand, (Digital Look), Rated: A

The Fund said that as of 24 June it had invested over 85% of its assets in 1,245 small to medium enterprise (SME) loans in the UK, US and continental Europe.

The Fund had generated asset value total return of 0.87% for the year ending 31 March 2016, with net asset value per share excluding income standing at 98.0p.

It was targeting an annual dividend of between 6p and 7p per share once invested completely. The Fund declared an initial dividend of 1p per ordinary share.

Dividends were expected to run at a rate of between 1.5p to 1.75p per ordinary share per quarter for each three-month period going forward.

Chairman Richard Boléat said: “We expect that dividend yield on a cumulative basis will be 6% to 7% based on the current share price. It is our intention to adopt a progressive dividend policy to the extent that the Company’s future performance permits.”

“As is usual in C share offerings, any funds raised will be deployed in a separate pool until the earlier of nine months or at such time as the funds have 90% invested, at which time they would be converted to ordinary shares, thus avoiding the performance drag on the ordinary shares that would otherwise derive from holding a substantial cash position pending investment.

Swedish payments firm Klarna taps debt market for the first time, (Reuters), Rated: AAA

Swedish payments firm Klarna, one of Europe’s most highly valued tech startups, said on Monday it had tapped debt markets for the first time, issuing subordinated notes totaling 300 million crowns ($35.2 million).

The move comes as other technology firms are also opting for debt rather than equity to raise fresh funds.

Klarna, which handles about 10 percent of all online transactions in Europe and launched last year in the United States on online payments giant Paypal’s home turf, said it issued debt to support its expansion and diversify funding. It added that this issue was a first small step to a wider presence in debt capital markets.

Klarna, which saw revenues grow nearly 30 percent last year, has said it is profitable without offering specific details. Based on an equity financing round at the end of last year, Klarna had a $2.25 billion valuation after Swedish insurer Skandia bought a 1-percent stake for 200 million crowns, Swedish media have reported.

Klarna said the 10-year notes have a floating rate based on three-month STIBOR plus 4.5 percent per year, or an initial coupon of about 4 percent. It added that notes were allocated to a limited number of large Nordic investors.

Klarna investors include the founders, Sequoia Capital, Skype founder Niklas Zennstrom’s Atomico, General Atlantic, DST, Wellington Management CO and Wellcome Trust. Michael Moritz, a Sequoia Capital partner whose milestone investments include Google and PayPal, is also on its board of directors.

The company told Reuters in February it generated 2.8 billion Swedish crowns in revenues last year, up from 2.2 billion crowns in 2014, thanks to strong sales in the Nordics and its German-speaking markets. It expects revenues to rise by about 40 percent this year as it grows in the U.S. market.

Malaysia-Indonesia

Indonesian-Malaysian pair breaks through Southeast Asian lending, (The Jakarta Post), Rated: A

Less than a year ago, two Harvard MBA students started a business project in the online lending marketplace. Now the project is on stream in Singapore and Indonesia, and Reynold Wijaya, 27, an Indonesian national, and Malaysian Kelvin Teo, 29, have raised more than US$6 million in loans for SMEs in the two neighboring countries.

Modalku partners with Bank Sinarmas and Funding Societies with DBS in escrow accounts that enable the fund to be pooled there instead of being held by lending marketplaces. They started out with US$1.6 million in seed capital, primarily from Indonesia-focused venture capital firm Alpha JWC.

Modalku offers three to 12-month loans with a 15 to 20 percent interest rate per year, compared with 18 to 22 percent at traditional banks and more than 30 percent with loan sharks. Funding Societies loans are three to 24-months with a 9 to 14 percent interest rate per year.

Former Indonesian finance minister Muhammad Chatib Basri, who is among the advisers for Modalku and Funding Societies, called the peer-to-peer lending projects an “extraordinary idea” that will change the way lending is disbursed for unbankable SMEs and realize every country’s dream of financial inclusion.

“This sharing economy-slash-digital economy is addressing asymmetric information issue that has disabled market formation. This is going to change the market,” said Chatib, advising the Indonesian-Malaysian pair to prioritize consumer protection and prudence.

India

Faircent.com aims at Rs 2,000 crore business in 3-4 years, (The Economic Times), Rated: A

Peer-to-peer lending facilitator Faircent.com is eying business transactions worth Rs 2,000 crore in three to four years on rising demand for loans in the country.

“We are looking at closing this financial year with business transactions at Rs 50 crore. Next year, we are looking at around Rs 200 crore (2017-18). And then we are looking at around Rs 2,000 crore of business transaction. In next three to four years we want to reach there,” Rajat Gandhi Founder and CEO Faircent.com said.

“RBI is also of the view that p2p lending will bring down the interest rates and will make greater access to credit. The peer-to-peer lending disrupts the whole banking system, it removes the banks and connects one to the lender,” Gandhi added.

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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