- Today’s most interesting news are about banks and their paradoxical branches; how real estate listings could come with financing included; how Bondora proves a 16.7% return to investors; China is putting in place P2P loans and individual caps ; last but not least the pros and cons of regulatory sandboxes.
- Goldman Sachs names Marcus their online lender which will start in October and focus at first on small consumer loans. Marcus was the 1st name of Marcus Goldman. Joseph, the first name of Joseph Sachs, was decided against. I believe they have once again made the right choice.
- FDIC continues to increase its oversight on banks who partner with third party firms to make loans. I think it makes perfect sense for the bank regulator to make sure that the banks are not puppets. This will likely translate in increased bank expenses to work with third party lenders, which will be passed to the lenders, who will pass them to the costs the borrowers are paying. Which, of course, will make the third-party lenders less profitable. Which will erode the regulatory arbitrage why third-party lenders have lower origination fees than bank lenders.
- PeerIQ analyzes the standard whole loan purchase agreement frameworks. Boring but extremely useful to be an expert in.
- For entrepreneurs: an interesting article on global financial architecture and where the innovation space is. Large established companies are not forbidden from innovating either.
- A very intriguing article on banks and their branches. Interesting data : It costs $2-$4mil to open a branch , $200k-$400k per year to operate, and it takes 10 years for a branch to start generating $1mil in annual profit. Bank of America cut down their branch numbers by 25%. The average US bank cut it down by 6%. Some banks want to cut, some do not. A very interesting paradox in the digital fintech age.
- Kickfurther crowdfinances $10.2mil in inventory to date.
- OnDeck is the #16 best company in the US to sell for. A great achievement that is a good foundation for a long lasting company culture which is the real driving of success.
- A new credit bureau is launched from Y-Combinator for immigrants: Nova Credit. Very interesting.
- A great insight in Realty Mogul : “better access to real estate investing through innovation” . A good insight in their MogulREIT.
- Next FTC fintech forum on October 26th in DC.
- 9-months-old online real estate auction house partners with LendInvest. “On the information page for each pre-qualified lot, summary funding details will be presented alongside other key property information.” Imagine if in the US when you go to an open house you can receive guidelines on what financial parameters will automatically qualify you for the house !
- Bondora publishes annual report with audited financials showing annualized net return to investors at 16.7%. It sounds too good to be true so they had to go fully transparent with an audit to support their claims. It is very impressive and certainly attention grabbing.
- Squirrel Money is trying to crack a tough nut : it will offer P2P secondary market in New Zealand. We hope they have set up a central liquidity counterparty which is incentivized to create liquidity in the market.
- New rules will cap the amount P2P lenders can lend per loan to about $30,000 and the amount a given individual can accumulate from all platforms to about $150,000. The Chinese government is all about control. By capping the loan sizes and total amount borrowed they control the size of the P2P market. This also forces indirectly the P2P platforms to put in place a central database of information with who borrowed how much from where and when. A very interesting approach.
- An article advocating for a regulatory sandbox for P2P lenders. For example, P2P lenders should receive the right to operate with “1,000 customers in one city, for three months”. This approach has worked tremendously well in China since the 1980s where the government provided capitalistic sandboxes in Shanghai and Shenzhen/Guangzhou at first. Then the government re-used this sandbox idea for any new initiative. A proven approach at a Chinese scale. If it worked in China perhaps it will work elsewhere.
- United States
- Meet Marcus, Goldman Sachs’s Online Lender for the Masses, (New York Times), Rated: AAA
- Greater Scrutiny Looms for ‘Rent-a-Charter’ Deals, (Wall Street Journal), Rated: AAA
- Peer IQ analyzes Loan Purchase Agreements, (PeerIQ Email), Rated: AAA
- Developing a global financial architecture, (Tech Crunch), Rated: AAA
- U.S. banks want to cut branches, but customers keep coming, (Reuters), Rated: AAA
- Kickfurther Buyers Crowdfinance $ 10.2 Million of Inventory, (PR Web), Rated: A
- OnDeck Soars to #16 on Selling Power’s “50 Best Companies to Sell For” List, (PR Newswire), Rated: A
- Nova Credit launching from Y Combinator to give immigrants access to U.S. credit, (Tech Crunch), Rated: A
- Message from Realty Mogul CEO, Jilliene Helman, (Email from Realty Mogul), Rated: A
- Next FTC Fintech Forum to Discuss Crowdfunding, P2P Payments, (Crowdfund Insider), Rated: A
- United Kingdom
- Online auction house launches pioneering partnership with lender, (Estate Agent Today), Rated: A
- European Union
- Bondora Publishes Annual Report for 2015, (Crowdfund Insider), Rated: A
- New Zealand
- P2P lender Squirrel Money is the first to launch secondary market for investors in NZ, (SMN Weekly), Rated: A
- P2P platforms face lending caps, (Global Times), Rated: AAA
- Creating space for financial services, ( LiveMint), Rated: A
Meet Marcus, Goldman Sachs’s Online Lender for the Masses, (New York Times), Rated: AAA
After much internal discussion, the Wall Street firm has decided to call the retail banking operation Marcus — the first name of the company’s founder, Marcus Goldman.
Marcus is expected to be officially unveiled when the bank is ready to roll out the offering, most likely in October, according to people who were briefed on the plans.
Initially, Marcus will offer relatively small consumer loans, a business that Goldman has traditionally avoided.
One potential benefit of the retail banking operation is that it could help temper the reputational problems that Goldman suffered after the financial crisis, when Rolling Stone magazine called it “a great vampire squid wrapped around the face of humanity.”
The big question is whether Goldman will learn to successfully serve retail customers, something it has not done.
The Marcus business was referred to internally as Mosaic and has been operating with a staff of around 100 people.
Greater Scrutiny Looms for ‘Rent-a-Charter’ Deals, (Wall Street Journal), Rated: AAA
The startups’ regulatory advantage may be fleeting. Last month, the Federal Deposit Insurance Corp. proposed guidelines, including one that banks that partner with third-party firms to make loans “will generally receive increased supervisory attention.”
Though the FDIC has had guidelines for relationships between banks and outside vendors, the new proposal focuses specifically on lending partners, including proposing yearly examinations rather than every 18 months. It also recommends that banks should set “performance standards for third parties” and “require access to data.”
Fewer than 50 U.S. banks work closely with online lenders, estimates Brian Korn, a partner at Manatt, Phelps & Phillips LLP. “The FDIC wants to make sure these banks are doing their homework and aren’t just puppets,” he said. He added that in his experience such banks were “very focused on safety and soundness, even more so than other banks of their size.”
Among the most active banks working with online lenders are WebBank, a unit of conglomerate Steel Partners Holdings LP, and Cross River Bank in New Jersey.
The banks declined to comment on the FDIC guidelines. The FDIC is seeking comment on the proposal.
Some experts argue rent-a-charter arrangements reduce risk. Taxpayers aren’t in danger of being on the hook if a loan fails, while borrowers are given wider access to credit even if banks don’t want to take risks.
Online lenders that partner with banks, such as Elevate Credit Inc., have already been subject to some FDIC examinations, according to its chief executive, Ken Rees, because under a decadesold law, a bank’s primary federal regulator has the authority to examine certain service providers and vendors.
Meanwhile, court decisions in Maryland and West Virginia over the past two years defended state regulatory actions to stop an online lender from making loans at interest rates higher than the states permit, though the lender was working with a partner bank.
In July, Colorado authorities sent letters to Avant and Marlette Funding LLC saying state law would apply to loans made by them, although banks originated the loans, according to reports by Kroll Bond Rating Agency Inc. Avant and Marlette subsequently removed certain loans made to Colorado borrowers from bond offerings , Kroll added.
A revised Connecticut law that took effect in July requires companies that sell leads to lenders for people who want small loans, even if they don’t ultimately originate them, to obtain licenses as lenders.
Peer IQ analyzes Loan Purchase Agreements, (PeerIQ Email), Rated: AAA
Prosper announced Q2 earnings this week. We summarize key statistics below, and focus this week’s newsletter on the components of the Loan Purchase Agreement.
- Indemnify the special purpose vehicle and underwriters against material inaccuracies in disclosures of lender’s loan performance.
- Seek a “negative assurance” letter from originator’s counsel in relation to these disclosures.
- Authorize the SPV to rely upon the reps and warranties and re-purchase rights in the LPA.
- Assist in the Buyer in responding to ratings agencies questions.
Specialized legal, tax counsel, and professional expertise is required to navigate these challenges. Additionally, PeerIQ and SFIG recommend that platforms move toward an industry standard rep and warrant package to reduce complexity and improve adoption for whole loan and ABS investors.
Developing a global financial architecture, (Tech Crunch), Rated: AAA
In their Insights article A World Awash in Money, Bain & Company define trust architecture as strong property rights protections, reliable legal systems and institutional depth. What this really boils down to is safety and transparency: People want to see that the money they send across borders is going where it is supposed to. Though the examples Bain uses detail larger foreign direct investments, these architecture problems persist even at the peer-to-peer level.
So what obstacles does technology need to overcome to create a reliable infrastructure to move money to emerging economies?
In his insightful article, When Bitcoin Grows Up, British journalist John Lanchester dives into why, historically, banks came about in the first place. When we spend money or get paid or give a loan, what we’re really doing is making an entry on a register. That entry says “this thing of value is being transferred.” Before the invention of common currencies, people would barter goods directly, or keep informal “IOUs” to log debts. The creation of banks allowed people to log their transactions in a centralized, authoritative ledger — the banker’s.
Though it’s difficult to paint heterogeneous markets in such broad strokes, the trend is clear — poorer people have less access to banks. This makes it hard to store and transact money.
One solution, which Lanchester evaluates thoroughly, is that of digital currencies based on technology such as blockchain.
Another problem for the developing world is the failure of many countries’ trust architecture to provide reliable personal identification and credit underwriting.
To solve this problem, the Indian government has famously rolled out an initiative to give a digital identity to its 1 billion+ residents using biometric identification. Now, following its critical success, Russia, Morocco, Algeria and Tunisia are all exploring similar programs.
Another novel approach to creating credit files comes from Kenya, home to the wildly successful Safaricom startup M-Pesa. In 2013, 43 percent of Kenya’s GDP flowed through M-Pesa. The tech is built on a radically simple idea: If you have access to someone’s cell phone account, you have a way to identify them individually and a history of payments to tell if they’re creditworthy.
Innovative technology firms, well-versed in the challenges of the developing world’s financial trust architecture, stand to revolutionize the way money is sent and lent globally. These solutions could also “trickle up” from the personal level to larger-scale investments, as transfer risks are smoothed across geographies. The inertial build-up of capital pools in the developed world creates an almost limitless opportunity for those platforms that can overcome the hurdles damming it.
U.S. banks want to cut branches, but customers keep coming, (Reuters), Rated: AAA
Despite banks’ nudging toward online tools, many U.S. customers are not ready to give up regular visits to their nearest branch, complicating the industry’s efforts to slim down.
U.S. banks have trimmed the number of branches by 6 percent since it peaked in 2009, according to Federal Deposit Insurance Corp data. The 93,283 branches open at the end of last year was the lowest level in a decade.
Yet analysts who have examined the data say banks should have done more to offset the pressure on revenue from low interest rates and regulatory demands.
The number of FDIC-insured banks has fallen by more than 25 percent over that time.
Bankers across the industry say that online banking complements traditional services for U.S. customers, but few have gone fully digital. While other factors are at play, one difference is that U.S. customers still routinely use checks and need branches to process them, said Rick Spitler, managing director at consulting firm Novantas.
The traditional branch costs roughly $2-4 million to set up and $200,000-400,000 per year to operate, according to Ed O’Brien, an analyst at Mercator Advisory Group.
Executives at JPMorgan Chase & Co JPM.N, the country’s largest bank, say each branch earns about $1 million in annual profit, but takes a decade to reach its full potential.
John Elmore, vice chairman of community banking and branch delivery at U.S. Bancorp, says branches are especially important for small businesses that need to deposit cash frequently, prefer to negotiate loans in person, or want strategic advice.
They have reduced the number of tellers and moved them to the back. Their ATMs can perform more sophisticated tasks and banks have developed nifty mobile apps for routine banking needs. They are even experimenting with digital loan underwriting.
Yet customers still expect contact with bank staff and JPMorgan recently had to hire more tellers after customer complaints.
Bank of America Corp BAC.N, which has closed a quarter of its branches since 2009, could eventually serve as a test case.
Kickfurther Buyers Crowdfinance $ 10.2 Million of Inventory, (PR Web), Rated: A
Kickfurther Consignments are not loans. Buyers provide inventory, marketing, and sales support for businesses, and they earn Co-Op profits when Consignment Inventory sells. In this way, the interests of the businesses are directly aligned with the interests of their Buyers.
Businesses post Consignment Opportunities by choosing the amount of inventory they want, the consignment profit Buyers will earn as inventory is sold, 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 $10.2 million of inventory in 339 Consignment Opportunities by 288 product companies. Kickfurther users have earned, on average, more than 2% consignment profit per month on completed Co-Ops.
OnDeck Soars to #16 on Selling Power’s “50 Best Companies to Sell For” List, (PR Newswire), Rated: A
OnDeck® today announced it has been named to the Selling Power 50 Best Companies to Sell For list for the fourth consecutive year, rising to #16 on the list, ahead of sales giants ADP (#18), Google and Microsoft (tied at #37) and IBM (#50).
“OnDeck’s top twenty ranking on the Selling Power 50 Best Companies to Sell For list is a clear indication of our relentless commitment to fostering a top-notch workplace environment where employees feel both supported and challenged,” says Paul Rosen, Chief Sales Officer at OnDeck.
OnDeck’s robust compensation packages include medical, dental, vision and life benefits, up to four months of paid parental leave, lunch on OnDeck plus a fully-stocked kitchen, 401(k) matches, compensation for education, student loan refinancing and more.
Nova Credit launching from Y Combinator to give immigrants access to U.S. credit, (Tech Crunch), Rated: A
For millions of immigrants (roughly 15 million) landing on U.S. shores — even ones who had successful jobs abroad — there’s no way to access credit.
Collecting credit information and credit proxies (like cell phone billing receipts and records) into a single report it calls the “Nova Credit Passport”, Nova Credit passes the report onto the lender so that they can make a more informed determination on whether to accept or reject a credit application.
Both the UN and the World Bank have identified financial inclusion and the ability to access global credit as one of the keys to development and poverty alleviation globally.
Nova makes its money by charging lenders for access to their reports, in the same way Experian and Equifax do.
So far, the company is concentrating on two markets, India and Mexico, which account for roughly 21 million immigrants to the U.S. every year. As the company expands it intends to add countries in the UK, the European Union, Brazil, Russia and China.
Launching at Y-Combinator’s demo day this weekend, Nova Credit is already generating buzz among financial services companies. It has also partnered with organizations immigrant organizations like fwd.us and Partnership For A New American Economy.
“We’re partnering with credit unions and fintech lenders,” said Goulimis. “Credit unions are committed to financial inclusion and trying to move away from taking shots in the dark [and] on the other hand we’ve been working with bigger fintech lenders [who] are trying to underwrite people who are unbanked.”
Message from Realty Mogul CEO, Jilliene Helman, (Email from Realty Mogul), Rated: A
What [Realty Mogul is] here for: to give more people on both sides of the marketplace (real estate companies and real estate investors) better access to real estate investing through innovation (in technology, products, regulations, or any other way).
Until now, RealtyMogul.com was only open to accredited investors. To date, over 80,000 people have expressed interest in what we do by joining our investor network, but only the 25,000 accredited investors within that group could invest through our platform.
So we did just that – starting this week, investing on RealtyMogul.com is finally available to nearly all investors*.
MogulREIT I Basics
Thanks to recent changes under The JOBS Act (more specifically, Title IV of the JOBS Act known as Regulation A+) we are now able to offer non-accredited investors the opportunity to invest in a diversified pool of commercial real estate investments through a single investment, MogulREIT I, a real estate investment trust (or “REIT”).
A “REIT” is a company that owns or finances real estate. REITs give their investors the opportunity to participate in large-scale real estate transactions by purchasing shares of the company that owns or finances them. REITs typically do not pay tax at the company level, and so they avoid the double-taxation problems that many corporations face.
Our first REIT, MogulREIT I, is a public non-traded REIT. That means that it is registered with the Securities and Exchange Commission, but is not traded on a stock exchange.
MogulREIT I investors can enjoy regular income, potential capital appreciation, and diversification across geographies, property types, and investment types.
We designed MogulREIT I to be accessible through our online platform, RealtyMogul.com. By offering it directly to investors instead of through other third-party distribution channels, we are able to eliminate the high expense loads that result from traditional, commission-based sales.
Investors in MogulREIT I will not be charged any sales commissions and the organization and offering expenses are anticipated to be approximately 3% of the target total raise of amount. Traditional non-traded REITs typically charge an average sales commission of 7% and organization and offering expenses of up to 15%**. That’s 400% more than what we charge.
Next FTC Fintech Forum to Discuss Crowdfunding, P2P Payments, (Crowdfund Insider), Rated: A
The Federal Trade Commission (FTC) recently announced their next Fintech Forum. The next event will take place on October 26th at the FTC HQ in Washington, DC.
At the first Fintech forum, the FTC managed to bring together a respectable group of industry representatives. As we understand it, FTC staff is reaching out to potential panelists now.
The half-day forum will examine the various models of crowdfunding and peer-to-peer payments used by companies, the potential benefits to consumers, and possible consumer protection concerns. In addition, the forum will look at how the FTC Act and other existing consumer protection laws might apply to companies participating in these areas.
Online auction house launches pioneering partnership with lender, (Estate Agent Today), Rated: A
LOT11, an online auction house, is teaming up with short-term lender LendInvest in the first alliance of its kind. On the information page for each pre-qualified lot, summary funding details will be presented alongside other key property information, such as floor plans and legal documents, reflecting the imperative of arranging auction finance in advance of a bid for prospective bidders.
LOT11, which is only nine months old, attracted participants from more than 120 countries to its most recent online auction.
Bondora Publishes Annual Report for 2015, (Crowdfund Insider), Rated: A
Bondora, a European peer to peer lender based in Estonia, has been on a big push to bring greater clarity and transparency to their lending platform. The initiative is not a requirement but a strategic decision to drive investor confidence and utilization.
Earlier this month, Bondora published an audited annual report from last year. As a private company there is no mandated need to do this but Bondora has published it regardless.
Bondora raised equity in the amount of €4.5 million during 2015 and thus strengthened the balance sheet substantially.
Bondora may be a smaller platform but they have big ambitions. The P2P lender claims some of the highest returns in the industry and hosts a secondary platform for investor liquidity. The current annualized net return on investment stands at 16.7% and the highest grade loans are generating about 12 % today. Most loans are small distributed across three countries: Estonia, Finland and Spain. Anyone may invest in Europe. US investors must be accredited.
P2P lender Squirrel Money is the first to launch secondary market for investors in NZ, (SMN Weekly), Rated: A
Peer-to-peer lender Squirrel Money announced on Thursday it is launching secondary market next week, which will allow loans to be on-sold to other investors. The Squirrel offer will be the first P2P secondary market available in New Zealand.
Squirrel Money expects that the launch of the secondary market will encourage more people to make long-term investments.
Keep in mind, however, that Investments being sold through the Secondary Market are subject to an administration fee of 1% (up to a maximum of $50) per investment sold.
Squirrel Money has so far lent $225,899 in loans. Earlier this year, the company raised $3,424,400 through its crowdfunding campaign on Snowball Effect – NZ’s leading equity crowdfunding platform.
P2P platforms face lending caps, (Global Times), Rated: AAA
Chinese authorities will roll out rules governing the country’s peer-to-peer (P2P) platforms, which are expected to set borrowing limits for the sector, a move experts said on Sunday highlights the regulatory emphasis on inclusive finance.
The China Banking Regulatory Commission (CBRC), together with several other departments, will set specific borrowing limits in the Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries, which are expected to be issued around February 2017, domestic news portal thepaper.cn reported on Saturday, citing anonymous sources close to the matter.
Specifically, the report said an individual would be able to borrow no more than 200,000 yuan ($30,211) from a single P2P platform and no more than 1 million yuan in total from various platforms.
As for companies or other organizations, the amount should not exceed 1 million yuan from one platform or 5 million yuan from several platforms.
According to a draft version the CBRC released in December 2015 for public comment, P2P platforms should focus on small-scale lending and, with adequate risk management capabilities, should keep close control of borrowers’ total balances from all P2P platforms.
“At present, some P2P platforms may see ‘big orders’ for money, lending tens or even hundreds of millions of yuan to some real estate enterprises or other capital-intensive sectors, instead of supporting individuals and small and micro-sized enterprises,” Luo told the Global Times on Sunday.
“They will need to adjust their business once the borrowing caps become official,” Luo said, noting that tighter controls are inevitable.
Creating space for financial services, ( LiveMint), Rated: A
It is widely acknowledged that financial inclusion, and financial services more broadly, are at an inflection point in India. The so-called JAM trinity (Jan Dhan-Aadhaar-Mobile) and recent regulatory innovations (like the introduction of differentiated banking licences) have set the stage for a transformation.
As Nandan Nilekani eloquently put it, India has reached its “WhatsApp moment” in financial services.
Notably, there is a chicken-and-egg problem of innovation. Regulators desire to fully understand the potential risks of new technologies and approaches before making a decision.
So, how does one overcome this chicken-and-egg problem? One big idea that is taking shape is that of a “regulatory sandbox”.
A sandbox is a mechanism through which the regulator permits realistic simulations and limited-scale experiments of financial innovations in controlled environments (often ‘relaxing’ some regulatory norms). It studies the results of these experiments, and then makes final regulatory decisions. The sandbox functions as a safe space to try out innovations, and understand their associated risks, before allowing full-scale roll-out.
Here’s where a sandbox approach could help—by permitting an experiment where P2P lending platforms can be given some regulatory leeway such as being allowed to access centralized credit score and KYC databases, and hold funds in centralized accounts. Such an experiment could be run as a pilot with a limited set of customers—for instance, 1,000 customers in one city, for three months. If the regulator is satisfied that there were no major regulatory issues, the regulatory leeway could be formalized into the regulations.