- Put apart Prosper’s daunting Q2 results, a slow news day with everybody on vacation. Today we do have 2 very interesting articles on banking officials’ perception of reality and the fact that financial education doesn’t work.
- Prosper marketplace Q2 results. $35.5m loss on $445m in origination, or about 7.9% origination ratio loss. Compare this with Lending Club’s 4.1% origination ratio loss. Prosper’s cash in the bank: $29m down from $66m at the beg of the year. Lending Club’s cash in the bank is $573m. I would hope that Prosper is ready to raise more capital while turning things around.
- Fundrise’s eREIT captures 70% of the entire Reg A+ capital deployed to date . Low-cost REITs seems like the way to go.
- A further analysis on Lending Club’s Q2 release: the revenue woes started before May 9th, unable to cut costs on origination and servicing. Worth a read for sure.
- Lending Club securities class action suit is proceeding. Lead plaintiff selected. Lead counsel candidates are now applying. A very interesting process.
- A very interesting survey and analysis of Banking Execs perception vs reality of customer experience, technology and technology plans. Extremely interesting.
- An academic paper explaining that financial literacy efforts do not work. “Interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied”.
- And a good article showing that “if you build it they might come” doesn’t work.
- Brexit voted the biggest threat to specialist lending. After Brexit, perhaps we shouldn’t really trust what people vote ? Maybe voting is more a fashion and a popularity contest than an actual quantitative analysis ? All numbers show that Brexit is actually helping p2p lending volumes recently.
- As I was mentioning above, we see ” An influx of investors in the peer-to-peer (P2P) market following recent cuts to interest rates”. The catch is that this influx of new investors are not as knowledgeable about p2p and they may misunderstand the risks vs reward ratios.
- Society One predicts major issues for the major banks. We have heard the story in the US before. I would rather predict partnerships, banks-p2p lenders.
- United States
- Prosper Marketplace Bitten in Q2 With Major Loss, (DeBanked), Rated: AAA
- Fundrise’ eREIT™ reaches $ 70 M milestone, (Crowdfund Insider), Rated: AAA
- Lending Club’s Q2 Earnings Release: Reading Between The Lines, (Seeking Alpha), Rated: AAA
- In Lending Club securities case, judge defies convention for picking class counsel, (Reuters), Rated: A
- Banking Execs and Consumers Clash Over Customer Experience, (The Financial Brand), Rated: AAA
- Financial Literacy, Financial Education, and Downstream Financial Behaviors, (Research Gate), Rated: AAA
- If you build it, they might come: What behavioral science is doing for financial services, ( TradeStreaming), Rated: A
- United Kingdom
- Brexit voted biggest threat to specialist lending, (Bridging and Commercial), Rated: A
- Ex-FCA chief concerned over P2P growth, (Bridgin and Commercial), Rated: A
- Jason Yetton of SocietyOne predicts majors at crossroad, ( Business Review), Rated: A
Prosper Marketplace Bitten in Q2 With Major Loss, (DeBanked), Rated: AAA
Prosper Marketplace Inc. reported a Q2 2016 loss of $35.5 million, down from a loss of only $6 million over the same period last year. While not publicly traded, the company is still required to file its results. Originations for the quarter totaled $445 million.
For comparison purposes, rival Lending Club posted an $81 million loss on $1.96 billion in originations.
Prosper incurred $14 million in expenses just from restructuring related to their downsizing and layoffs which includes the closing of their Salt Lake City office and the termination of 167 employees.
The company also used a lot of cash, finishing Q2 with only $29 million in the bank, down from $66 million at the beginning of the year. Lending Club by comparison had $573 million in the bank at the end of Q2.
According to their 10Q, “Prosper Funding saw reduced listings on the marketplace as Prosper slowed down marketing efforts to reduce demand from Borrowers and maintain marketplace equilibrium. As a result, Prosper Funding experienced a decline in administration fee revenue-related party during this period and expects a decrease in administration fee revenue-related party in the third quarter of 2016 from the third quarter of 2015.”
Meanwhile, the performance of their actual loans has remained steady.
Fundrise’ eREIT™ reaches $ 70 M milestone, (Crowdfund Insider), Rated: AAA
To date our eREITs™ have raised more than $70M from individual investors – accounting for more than 70% of the entire Reg A+ industry!
Investors, either accredited or not, may participate in either a Growth eREIT or Income eREIT. As one would expect, the risk/returns are a bit different. But according to recent filings with the SEC, Fundrise is planning to offer additional eREITs – most likely with a regional focus.
At a recent SEC ACSEC meeting,Sebastian Gomez, an official from CorpFin at the SEC, stated about $99 million had been successfully raised under the updated exemption. While approved filings have totaled over $800, Fundrise has hoovered up most of the dollars under the updated securities exemption.
Earlier this month Fundrise revealed a new joint venture where Fundrise affiliate RSE Capital and DC-based Insight Property Group will invest $200 million annually in the DC metropolitan market.
“They chose us when they could basically have any capital partner in the country. Because we are a direct to investor model we believe we have a form of capital that is better than a private equity fund that you normally go to. This is why I started Fundrise and it took me five years to fulfill the vision of trying to create something better.” Miller views Fundrise as the future of real estate finance. “I invented real estate crowdfunding so they all copied me and they all do a bad job at it. They’ll all try and I doubt you’ll see many quality institutions. It’s very difficult to get to writing $10M to $20M checks through crowdfunding.”
Jenkins told Crowdfund Insider Fundrise has seen “unprecedented demand” since they launched the first eREIT. The waitlist is apparently 60,000 investors long.
Recently Fundrise announced the option for investors in their eREITs to redeem shares at no cost during the first 90 days. After that, redemptions may be had on a quarterly basis. Perhaps this is the first step in creating a secondary market?
Lending Club’s Q2 Earnings Release: Reading Between The Lines, (Seeking Alpha), Rated: AAA
Blaming the company’s woes on the former CEO is overly simplistic.
Negative origination growth most likely started in April.
Cost cutting is probably lower than implied.
Adjusted G&A expenses in the second quarter increased $15.4M, attributable to an “increase in legal, audit, communications, and advisory fees.” The added legal and compliance expenses are expected to continue into the future, as Dolan noted that these “unusual expenses” were expected to drop 80% by the fourth quarter of the year.
This means that fraud cost the company about $25M, without even considering future lost business, for a deal that would have brought in revenue of less than $2 M.
While it is absolutely true that investors paused and reevaluated their investments after May 9th, interestingly, the loan file Lending Club released shows that publicly available originations had decreased significantly month over month from March to April (by nearly half a billion dollars), and had decreased year-over-year from April 2015 to April 2016 by $2.1 million. Lending Club may have been planning a significant marketing push in May or June that never materialized due to the circumstances. It is difficult to say how May and June originations would have progressed, as Lending Club’s monthly loan originations have tended to vary significantly since mid 2014.
In other words, the numbers the company just released indicate that Lending Club was already facing some (temporary) loan funding issues before the unsavory events of May 9th.
One of the encouraging items to come out of the second quarter report is the news that Lending Club was able to adjust costs to match the decrease in revenue, and pointed towards a decrease in marketing costs of $16.3M, as well as a reduction in the workforce of 179 positions.
This comes with a caveat, though, as we can see that if we compare quarters year over year. This marks the fifth straight quarter of increased sales and marketing costs as a percentage of revenue. This means each dollar in revenue has cost more to get than in the year previous.
Typically these increases in sales and marketing costs have been more than offset by a decrease in origination and servicing costs, but while the company was able to cut back on marketing this quarter, it was unable to cut back on origination and servicing costs, which increased $1.5M from q1.
Overall sales, marketing, origination and loan servicing ate up 69% of revenue for the quarter.
Meanwhile, the news that the company cut costs by eliminating 11% of the workforce isn’t fully reflected in the numbers yet.
The story that the company implied for the cause of this contraction (Renaud LaPlanche’s missteps caused the board to fire him, which caused investors to become nervous and withdraw funding, which caused the massive drop in revenue, but we’re groovy now) is easy to buy into because it is partially true. But the reality is much more nuanced, as it leaves out the considerable headwinds facing the industry as a whole.
Lending Club can be praised for its transparency and the willingness it demonstrated to put things in order.
In Lending Club securities case, judge defies convention for picking class counsel, (Reuters), Rated: A
U.S. District Judge William Alsup of San Francisco refuses to bow to orthodoxy when it comes to selecting plaintiffs’ firms to lead securities class actions.
In May, Judge Alsup was assigned a securities class action against Lending Club, the online marketplace connecting borrowers to investors. This time, he made clear from the beginning that he intended to separate the processes of picking a lead plaintiff and picking a shareholder law firm to represent the class.
In an order in June, the judge set a schedule (and separately provided a questionnaire) for investors to apply to be appointed lead plaintiff. He explicitly said he would “defer” picking lead counsel until he appointed a plaintiff.
On Monday, he issued an order selecting the death and disability fund for Los Angeles water and power workers as the lead plaintiff.
Six other plaintiffs, including three other institutional investors, had submitted leadership motions, but all of them either withdrew their motions or assented to the Los Angeles fund’s leadership after its lawyers at Robbins Geller Rudman & Dowd disclosed the fund’s nearly $13 million loss in Lending Club shares. (Shareholders accuse the online platform of hiding the company’s investment, as well as its former CEO’s investment, in a third-party fund that allegedly purchased notes sold in the Lending Club marketplace.)
Alsup instructed lead counsel candidates to send applications to the Los Angeles fund’s chief investment officer, detailing “their fee proposal, their track record, the particular lawyers assigned to the case, their ability and willingness to finance the case and their proposals for the prosecution of the case.”
So who’s a candidate for lead counsel in the class action before Judge Alsup? I emailed the firms that filed lead plaintiff motions on behalf of Lending Club investors. In addition to Robbins Geller and Kirby McInerney, they include Bernstein Litowitz Berger & Grossmann, Lieff Cabraser Heimann & Bernstein, Pomerantz and Chimicles & Tikellis. Jerry Silk at Bernstein Litowitz and Kimberly Donaldson Smith at Chimicles said they are considering whether to apply to be lead counsel. The other firms did not get back to me.
Banking Execs and Consumers Clash Over Customer Experience, (The Financial Brand), Rated: AAA
Reality Check: Providing a “personalized” experience does not mean putting a customer’s name in an email, or greeting them by name when they walk into one of your branches.
These survey findings reflect a deep misunderstanding of what personalization looks like, and a serious lack of knowledge about what advanced capabilities are available in the field of personalization today.
First, you actually need to know someone before you can customize something for them, and this applies to everything from tailored suits and workout routines to banking services and retirement plans.
The truth is that banking providers are years behind the personalization curve, and it all starts with data. Going all the way back to 2002, Target has been able to predict when a woman is pregnant in her second trimester, and then market to her accordingly. Now remember, Target admits they’ve been doing this for at least 14 years! Meanwhile most banks and credit unions still can’t even stitch their basic customer data together.
Anyone working in financial services who thinks banking is “easy” is completely out of touch with reality. There are few industries that frustrate consumers more than banking. It’s rife with bureaucracy, paperwork and inefficient processes.
Shifting Priorities for Branches
It’s clear that traditional institutions are struggling with the role and relevancy of branches — How many? What size? Services? Staffing? In response, both banks and credit unions have been experimenting with “café style” branches for over a decade with very limited success. With the exception of Capital One 360 (ne: ING Direct) and a handful of others, most café concepts in the banking industry have failed.
Fortunately, financial executives are willing to admit they have a few shortcomings, and are starting to take steps in the right direction. In TimeTrade’s study, customer experience solutions and cross-selling platforms were among the top technologies banking providers said they will invest in over the next 18 months.
Financial Literacy, Financial Education, and Downstream Financial Behaviors, (Research Gate), Rated: AAA
Policy makers have embraced financial education as a necessary antidote to the increasing complexity of consumers’ financial decisions over the last generation.
We conduct a meta-analysis of the relationship of financial literacy and of financial education to financial behaviors in 168 papers covering 201 prior studies. We find that interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples.
Like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention. Correlational studies that measure financial literacy find stronger associations with financial behaviors.
We conduct three empirical studies, and we find that the partial effects of financial literacy diminish dramatically when one controls for psychological traits that have been omitted in prior research or when one uses an instrument for financial literacy to control for omitted variables.
Financial education as studied to date has serious limitations that have been masked by the apparently larger effects in correlational studies. We envisage a reduced role for financial education that is not elaborated or acted upon soon afterward.
We suggest a real but narrower role for “just-in-time” financial education tied to specific behaviors it intends to help. We conclude with a discussion of the characteristics of behaviors that might affect the policy maker’s mix of financial education, choice architecture, and regulation as tools to help consumer financial behavior.
If you build it, they might come: What behavioral science is doing for financial services, ( TradeStreaming), Rated: A
A recent survey conducted by TimeTrade found that while both bank and credit union executives thought that they were providing positive personalized banking experiences, their customers thought very differently.
Sadly, financial education isn’t living up to its promise of financial salvation. Various independent studies have shown that financial education’s impact on future behavior is negligible.
Behavioral science tries to understand how people behave and why. “Fundamental behavioral principles can make it hard to act on your finances,” said Katy Davis, vice president at ideas42, a nonprofit that leverages behavioral science to design scalable solutions for societal problems, including financial ones. “Finances can be daunting, it can be confusing, it’s easy to procrastinate. It’s what we call the ‘intention-action gap’ – even if you know what you should be doing, it’s actually really hard to follow through.”
For example, Alliant approached ideas42 after the credit union launched its new mobile check deposit technology. Despite the convenience that the new check tech affords, Alliant found that most of its user base stuck with the traditional method of depositing checks. After talking to the credit union’s clients, ideas42 realized that the problem wasn’t about security or trust, but about experience. Customers just didn’t feel comfortable trying out technology they hadn’t tried before.
For this to happen, financial institutions, incumbents and startups alike, first need to embrace the concept of consumer-centric design. “Oftentimes in technology, there’s a sort of ‘if you build it they will come’ mentality,” explains Davis. “Financial institutions need to think about how this product is going to fit into customers’ lives. They need to design for people and know their customers well.”
Brexit voted biggest threat to specialist lending, (Bridging and Commercial), Rated: A
“The first few weeks after the June referendum were characterised by people pulling up the drawbridge, although thankfully a sense of rationality has now returned.
“The problem is that it is too early to judge the effects of Brexit and that causes the dreaded uncertainty which markets hate.
“So yes I would say the uncertainty caused by Brexit is the biggest concern for the specialist lending industry.”
Ex-FCA chief concerned over P2P growth, (Bridgin and Commercial), Rated: A
An influx of investors in the peer-to-peer (P2P) market following recent cuts to interest rates could result in less knowledge of the risks involved, according to Tracey McDermott, former chief executive of the Financial Conduct Authority (FCA).
“Many lenders recommend that investors seek specialist financial advice before investing, and an increasing awareness of the P2P sector among independent financial advisers could result in investors being more savvy.
“All P2P lenders should make sure that they have clear, detailed information about investing and the associated risks readily available to help educate potential investors about the sector.”
Jason Yetton of SocietyOne predicts majors at crossroad, ( Business Review), Rated: A
Marketplace lender SocietyOne has maintained its growth trajectory, with new chief executive Jason Yetton predicting a rough time for the major banks unless they adapt successfully to the digital revolution.
After making its first loan in August 2012, SocietyOne’s loan book currently stands at $130 million after breaching the $100m mark in April.
Mr Yetton has previously set a 2020-21 target of 2-3 per cent of the $100 billion consumer finance market, with the personal loan segment about one-fifth of that market.