- Today we show that while VCs are pulling out of fintech , banks, and mostly Goldman Sachs in fact, are moving in. Jubao and Tencent are using social media for underwriting, apparently effectively.
- And an interesting article pointing out how Morgan Stanely apparently sold 1 BBB- bond to their private bank clients at less than 1% yield and why they are better off selling marketplace lending products instead.
- A reduction by 49% of VC-funded fintech in Q2 2016. ( KPMG and CB Insights report). The interesting part of the report is that many banks and financial institutions have shifted “from denial that change is required to a realization that change is necessary and a growing interest in learning how fintech can help better meet the needs of their customers,” the report noted. And therefore among big banks, Goldman Sachs led the charge on investing in the industry, with 11 deals during the past five quarters, followed by 7 each at Citigroup and Banco Santander.
- Jubao and Tencent use a lot of social media data for their underwriting. Given they are in China they leverage WeChat of course. It helps that China doesn’t have many rules on discrimination or credit bureau regulation. Very interesting.
- A new analysis of OnDeck’s 2nd quarter result. At IPO P/S multiple was 10. Now it’s between 1 and 2x sales. Maybe the right value is somewhere in the middle ?
- Kabbage adds new CFO, assistant GC, and new capital markets lead. Overall great team addition, with a great background. This move validates Kabbage’s prospect and prepares it for the next level up. Congratulations !
- And Kabbage is now 183rd fastest growing private company in America. Congratulations , again.
- BlackRock’s CEO on FinTech: “Technology is transitioning from a competitive advantage to a competitive requirement.” . BlackRock also bought a Robo-advisor. Worth a read.
- Orchard adds market data from franchise SME lender ApplePie Capital. In general, there is much less public data on SME lending and transparency can only help the domain.
- A good article pointing out that large investment banks, like Morgan Stanley, are better off selling marketplace products than large corporate bonds. In passing this article points out that Morgan Stanley underwrote a BBB- on the verge of becoming junk bond and sold it to Private Bank clients at less than 1% per year. I find it hard to believe that after the public shaming of Goldman Sachs for selling , I quote Senator Carl Levin, “shit” to investors, Morgan Stanley will do such deals. I doubt that any amount of fintech investment will bring back people’s trust in banks after this kind of stories.
- United States
- Global uncertainty has claimed a new victim, (CNBC), Rated: A
- When Lending Decisions Go Socia, (Pymnts), Rated: AAA
- OnDeck Capital: Focus On This Key Stat, (Seeking Alpha), Rated: AAA
- VC-backed Kabbage adds three to team, (PE Hub Network), Rated: AAA
- Kabbage Lands Spot on Inc. 500 List of Fastest Growing Companies, (Kabbage), Rated: A
- What BlackRock’s Larry Fink thinks about financial technology, ( Tradestreaming), Rated: A
- Orchard Adds Franchise Lender ApplePie Capital to Market Data, (Orchard), Rated: A
- United Kingdom
- When will private banks offer marketplace lending investments?, (Alt Fi), Rated: AAA
Global uncertainty has claimed a new victim, (CNBC), Rated: A
During the second quarter, VC-funded fintech dropped 49 percent to $2.5 billion from $4.9 billion in the prior quarter. Meanwhile, the number of deals closed fell 12 percent to 195 from 221 in the first quarter, according to a report from KPMG International and CB Insights on Wednesday. (Overall, fintech funding rose to $9.4 billion, a number driven in large part by a $4.5 billion round from Alibaba’s Ant Financial, a private funding round not included in the VC numbers.)
They expect lower levels of funding to continue through the end of 2016 as investors wait to see how conditions shake out.
North America made up the largest share of deals with $1.3 billion funded across 97 deals, down from $1.8 billion across 130 deals in the prior quarter.
At the same time, corporate participation in fintech deals made up a larger share of the total as companies look to the sector to help them test new technology and respond to consumer demand for new ways to engage with their money. This group participated in nearly a third of deals in the second quarter, up from 24 percent in the prior quarter.
Many banks and financial institutions have shifted “from denial that change is required to a realization that change is necessary and a growing interest in learning how fintech can help better meet the needs of their customers,” the report noted.
Among big banks, Goldman Sachs led the charge on investing in the industry, with 11 deals during the past five quarters, followed by 7 each at Citigroup and Banco Santander.
When Lending Decisions Go Socia, (Pymnts), Rated: AAA
There’s a famous Aesop’s fable, “The Donkey and His Purchaser.”
As the story goes, a man purchased a donkey, but before he finalized the sale, he asked the farmer if he could take him home and try him out. When he did, and he observed that the first thing the donkey did was seek out the laziest donkeys to hang out with, he immediately returned him. His explanation was that he didn’t need to see how he performed at work, all he needed to see was which animals he wanted to associate with and that told him everything he needed to know.
The moral of the story is simple: “You are known by the company you keep.”
The Financial Times recently reported on Jubao and Tencent, two Chinese online finance firms, using social media data to assess credit risk, more or less, by the company they keep. According to Jesse Chen, co-founder of Jubao Internet Technology, a top P2P lending agency in China, “If we find you are [social media] friends with celebrities from the entertainment or finance industries, we think you must be to some extent trustworthy . . . since otherwise you wouldn’t have such friends.”
There are two fundamental reasons why China is using data collected from social media to fuel its lending industry, Madhu explained. First, social media use is rampant in China, as it is in the U.S., and established social media platforms are now a legacy providing rich resources for firms seeking valuable personal data. Second, China’s centralized credit scoring system is largely incomplete.
Madhu said that in China, traditional credit rating data such as banks’ records of loan defaults and repayments, are held by the Central Bank, but these data only cover one-third of the population and, up to a year ago, were only accessible to banks. Even though the recent decision to expand access to eight companies, including Tencent and Alibaba, opens up access, the data that can be obtained from those archives doesn’t cover the vast majority of people for whom borrowing money is attractive.
That, Madhu explains, is why Tencent’s WeChat is such an attractive and useful repository for the kind of data that would help the country’s alternative lenders better know their potential borrowers. Its 762 million people do just about everything within the WeChat ecosystem: chat with a friend about where to go to eat, place an order on that restaurant’s website, turn up at the restaurant, see the order on the restaurant’s app order screen and pay for the order — all without ever exiting the WeChat platform.
Madhu is confident that using social media to assess lending risk will grow very quickly in developing countries with limited credit system infrastructure and where the unbanked and underbanked have little means of obtaining financing.
OnDeck Capital: Focus On This Key Stat, (Seeking Alpha), Rated: AAA
OnDeck Capital generated strong Q2 results when focusing on the correct metrics.
The market has forgotten that the company is still a fast growing fintech.
The stock is still incredibly cheap after bouncing off an extremely low valuation.
Even after the rally, OnDeck Capital only has a market value of $450 million. The stock trades at $6 now and traded near $28 after the IPO. The ironic part is that the story hasn’t exactly unraveled in the 20 months since the IPO with explosive loan origination growth of 41% in the last quarter.
When the fintech stocks came public, the market was slapping P/S multiples of 10 on the stocks. Now after a little trouble in the sector, the market will only award multiples around 1 to 2x sales. The right valuation metric is always difficult to derive in a new business model, but the correct multiple is probably somewhere in the middle of these two extreme scenarios.
VC-backed Kabbage adds three to team, (PE Hub Network), Rated: AAA
The firm has named Jeff Hodges as chief financial officer and Scott Askins as general counsel and secretary.
Also, Richard Schafrann has been tapped to lead Kabbage’s capital markets staff.
Previously, Previously, Hodges was CFO of Official Payments while Askins was vice president, assistant general counsel and assistant secretary for WebMD Corp. Schafrann is a former managing director at Goldman Sachs. Kabbage’s backers include Reverence Capital Partners, SoftBank Capital, Thomvest Ventures, Mohr Davidow Ventures, BlueRun Ventures and Santander InnoVentures.
Kabbage Lands Spot on Inc. 500 List of Fastest Growing Companies, (Kabbage), Rated: A
We did it again! For the second consecutive year, we’re thrilled to announce that Kabbage has been ranked on the Inc. 500 list. Kabbage is included in the top 50% of the the nation’s fastest growing companies, claiming spot number 183 on this year’s list.
Since the launch of Kabbage to SMBs just five years ago, we’ve expanded the product’s capabilities to now serve more than 80,000 businesses – from retailers to construction businesses to professional service firms – and now power more than $2 billion in lending transactions around the globe.
What BlackRock’s Larry Fink thinks about financial technology, ( Tradestreaming), Rated: A
“Technology is transitioning from a competitive advantage to a competitive requirement.”
The company’s hosted Aladdin platform is used by 20,000 investment professionals around the world. It combines risk analytics with portfolio management, trading and operations tools on a single platform.
BlackRock also acquired software-driven portfolio manager, FutureAdvisor in 2015. It was the first time a major financial services company acquired a roboadvisor. Robos like FutureAdvisor are efficient distribution channels for distributing the firm’s iShares ETFs. LPL Financial is one of the first major financial institutions to use BlackRock’s software for its digital advice platform.
“We also believe that the evolving technology and regulatory landscape including the new DOL rule in the U.S., digital advice will play an integral role in increasing access and transparency for investors,”
Orchard Adds Franchise Lender ApplePie Capital to Market Data, (Orchard), Rated: A
Orchard Platform, the technology and data provider for the online lending space, today announced that ApplePie Capital, the first online lender solely focused on the franchise industry, has been integrated into its Market Data product.
The franchise industry represents a large and growing segment of small business borrowers, with an annual demand for capital in excess of $45 billion.
“We’re thrilled to announce the addition of ApplePie to our Market Data product,” said Orchard CEO Matt Burton. “ApplePie has an extremely unique offering that will provide institutional investors access to a strong and well-understood loan pool, and ApplePie’s inclusion in Orchard’s Market Data product will provide ApplePie with additional exposure to leading fixed-income investors.”
The integration of ApplePie’s data reflects Orchard’s commitment to providing small business originators with access to a diverse set of capital providers.
When will private banks offer marketplace lending investments?, (Alt Fi), Rated: AAA
Global investment bank Morgan Stanley underwrote a large bond issue for Repsol (rated BBB-, negative, that is, on the verge of becoming a junk bond) and then sold this same bond to Morgan Stanley´s own private banking client base. As Repsol is deeply indebted and facing an uncertain future, the company has had difficulty tapping the professional institutional bond market in recent years.
The solution? Morgan Stanley sells Repsol bonds to their own captive, much less sophisticated Private Banking clients who are desperately seeking yields on their fixed income investments in the ongoing near zero (or even below zero) interest rate environment for traditional fixed income and bank deposits.
What is the compensation for Morgan Stanley private banking clients for assuming Repsol risk over the lifetime of the bonds until they reach maturity several years from now? Less than 1 per cent per year. Not a very generous risk adjusted return, especially considering the very poor rating of the Repsol bond. It is difficult to understand how the army of investment strategists, analysts, and portfolio managers of all kinds in the employ of Morgan Stanley are not able to offer their own wealth management clients in their Private Banking division a more worthwhile alternative.
What are the specific advantages of marketplace lending investment over traditional fixed income investments? I highlight the following:
Attractive, consistent returns across marketplaces and strategies:
The chart below tracks the performance of this index since 2011. Despite the scary headlines concerning problems at US platforms such as Lending Club, what we see is years of steady, predictable, attractive performance between 6% and 8% per year.
Source: AltFi Data
In the United Kingdom, the Liberum AltFi Returns Index measures the returns for investors generated from marketplace lending through the leading UK platforms.
Again, we see years of steady, attractive returns for savers, averaging between 5 per cent and 6 per cent per year.
Source: AltFi Data
Diversification of Risk. Marketplace lending by its very nature lends itself to broad diversification.
Self Liquidation As marketplace lending loans typically have much shorter maturities than traditional fixed income investments, an investor can normally recover their investment through maturity of the underlying loans. In the case of invoice lending and trade finance, loans are typically between 60 to 90 days, while real-estate bridge finance in rarely longer than a year. These shorter maturities are an enormous advantage when compared to holding longer maturity traditional bonds as a fixed income investor.