- Today’s US interesting bits: a pattern in a series of FDIC communications; Deloitte claims banks going paperless reduces operations expenses by 25%;
- Zopa reduces interest rates by 0.2% and my commentary on central bank interest rate impact in US, UK and Australia on P2P lending.
- In Australia bank savings interest rate is 3%, and P2P is still growing strong. A very useful data point to know.
- International growth is the next frontier, perhaps. However, it is also difficult to work in different time zones, different regulatory formats, marketing needs, languages, and more. I think each company should decide on a case by case basis. For having operated a company with 100 people and offices in Boston, Tokyo, Shanghai, Jakarta, London and New York, one can make this work. But a few important details need to be considered.
- Moody’s report supporting the marketplace lender-bank partnerships for all kind of reasons, not least for the benefits for the borrowers. Good borrower terms means low cost of customer acquisition, lower defaults and more.
- A matter of fact article on the 3 latest FDIC communication.
- And the article we need to understand what the 3 FDIC communications mean. In a nutshell, it affects the state level regulated banks, and it means the FDIC will probably increase scrutiny on bank-lender partnerships.
- Yirendai stock plunges, last time I checked, by 15% alone yesterday. Some due to the new Chinese p2p rules we covered in our analysis article. Some due to the lawsuits filed against Yirendai due to the stock plunge due to the new rules. And some because it just plunged so people piled up. Pros and cons of being a public company.
- Interesting data : Deloitte claims that going from paper to paperless reduces expenses by 25% for banks. Any break-even bank would like to have a positive EBITDA ? CitiBank’s operating Expenses are roughly 58% of revenue. Going paperless will save them about $2.5 billion for example.
- Zopa reduces interest rates by 0.2% in line with the Bank of England rate reduction. We have seen the US FED increase rate and Lending Club and Prosper follow up on the increase. We are now seeing Zopa (and likely the rest of the UK p2p lenders) follow up on the rate decrease of BoE. We also see the P2P lenders also grow aggressively in Australia where the central rate is 1.5% and ANZ savings interest rate is 3% for example. This is some data to argue that P2P lending doesn’t depend, at least for now, on the central bank rate changes.
- Bridgecrowd, LendingCrowd and P2PFA claim there is no evidence that new p2p investors underestimate risk. And the companies share examples on how they try to prevent that. I think more information is necessary for a credible defense of “no evidence exists”. Typically it is hard to show that something doesn’t exist.
- France has 4 P2P lenders focused on financing renewables: Lumo, Lendosphere, GreenChannel and Enerfip. Great direction, helps everybody, including the climate for our children’s children.
- Fellow Finance, in Finland, offers both SME and personal p2p lending. Very challenging to do both well, given how different they are.
- United States
- International Growth Is The Next Frontier for FinTech Companies, (Forbes), Rated: AAA
- Moody’s: Tie-ups between marketplace lenders, banks can benefit small businesses, (Moody’s), Rated: AAA
- FDIC on Marketplace Lending, Supervisory Appeals, and Communication, (Lexology), Rated: A
- Proposed FDIC guidance on marketplace lending could have far-reaching impact on industry, (Lexology), Rated: AAA
- China P2P Lender Yirendai Plunges Another 10% As Lawsuits Pile Up, (Forbes), Rated: A
- Banks, slow as a paper-based process, (Tradestreaming), Rated: A
- United Kingdom
- Zopa drops rates, more platforms to follow?, ( AltFi), Rated: AAA
- ‘No evidence’ of peer-to-peer investors underestimating risk, says P2PFA, (Bridging And Commercial), Rated: A
- European Union
- France looks to crowdlending, (WindPower), Rated: A
- Fellow Finance opened a new financing channel for SMEs, (Email), Rated: A
- The growing popularity of peer-to-peer lending, (Switzer), Rated: A
International Growth Is The Next Frontier for FinTech Companies, (Forbes), Rated: AAA
By 2020, global marketplace lending could reach almost a half trillion dollars, Morgan Stanley reports.
The International Finance Corporation (IFC) estimates that there are 125 million small businesses throughout the world, including 89 million in emerging markets.
Thus, the opportunity is available for FinTech companies such as OnDeck, which began its international expansion by offering loans up to $150,000 (CAD) to small businesses in Canada. OnDeck is by far the biggest U.S. player to enter the market up north. In 2015, the company also expanded into Australia through a partnership with Commonwealth Bank (ASC: CBA) one of that country’s largest banks.
Biz2Credit recently finalized a deal with Australian Finance Group (ASX: AFG), one of Australia’s largest mortgage brokering services providers. The partnership will enable AFG brokers to provide small business borrowers with a broader range of options while allowing faster access to capital. Australia is a hotbed of FinTech activity at the moment.
Earlier this year, Biz2Credit reached an agreement with Tata Capital, the flagship financial services company of the $108 billion Tata Group, to expand the company’s financial footprint in India, and recently partnered with Kotak Mahindra Bank, India’s fourth largest private sector bank. India has 48 million small businesses, almost double the number of the United States, according to the Economic Times.
China remains a tough nut to crack for U.S.-based FinTech firms, however. According to a report by Tech Crunch, tech-savvy Chinese consumers have readily adopted online banking, money transfers, payments, crowdfunding, lending, and investing via mobile platforms. Further, Alipay, an Alibaba subsidiary, attracted 150 million clients and $93 billion within 18 months. China, as always, makes it difficult for outsiders to enter the marketplace.
Moody’s: Tie-ups between marketplace lenders, banks can benefit small businesses, (Moody’s), Rated: AAA
The partnerships that small business marketplace lenders (MPLs) are forming with banks could help them lower their non-credit costs by cutting customer acquisition costs and funding costs, Moody’s Investors Service says in a report. This in turn should lead to benefits for small businesses.
Although many small borrowers are able to borrow from MPLs, they are often unhappy about the level of interest rates that they are charged on their loans. For example, OnDeck reported in its 10-K filing with the SEC that its weighted average APR for the term loan and lines of credit was roughly 41% in Q4 2015.
Moody’s believes that while lending rates reflect credit risk, they are also high partially because the MPLs have higher customer acquisition and funding costs than banks do. The partnership with banks can help reduce both of these costs.
For example, in the OnDeck-JPMorgan Chase & Co. (A3 stable) partnership, small business clients that are approved by Chase can apply for loans up to $250,000 using the OnDeck technology platform. That allows them to benefit from the speed of an MPL’s platform while being charged lower rates than those typically charged by stand-alone small business MPLs.
FDIC on Marketplace Lending, Supervisory Appeals, and Communication, (Lexology), Rated: A
Not taking a vacation this summer, the FDIC recently published three financial institution letters on important issues for banks.
In FIL-50-2016, the agency requested comment on draft guidance regarding third-party lending. The guidance provides safety and soundness and consumer compliance measures that FDIC-supervised institutions should follow when lending through a relationship with a third party, the agency explained, supplementing the FDIC’s existing Guidance for Managing Third-Party Risk, issued in 2008.
The FDIC also asked interested parties to weigh in on updates to guidelines for institutions to appeal certain material supervisory determinations in FIL-52-2016. Intended to expand the circumstances under which banks may appeal a material supervisory determination, the proposed amendments to theGuidelines for Appeals of Material Supervisory Determinations would be effective upon adoption.
Finally, the FDIC reissued a 2011 financial institution letter to reinforce the agency’s expectations for communications with banks. “An open dialogue with bank management is critical to ensuring the supervisory process is effective in promoting an institution’s strong financial condition and safe-and-sound operation,” according to the letter.
To read FIL-50-2016, click here.
To read FIL-52-2016, click here.
To read FIL-51-2016, click here.
Proposed FDIC guidance on marketplace lending could have far-reaching impact on industry, (Lexology), Rated: AAA
Following up on its recent Supervisory Insights article on marketplace lending and Advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations, the FDIC on July 31, 2016, released its proposed Examination Guidance for Third-Party Lending. If nothing else, this series of recent developments demonstrates the FDIC’s concern with the role of banks in marketplace lending. Unlike the prior two releases, the July proposed guidance is subject to public comment, with a comment period expiring October 27, 2016.
All three issuances share a common set of fundamental concerns. These include concerns that
(a) a bank may rely on a marketplace lending platform to an unjustified extent;
(b) the marketplace lending activity may not fit within a bank’s corporate strategy;
(c) that lending through a marketplace platform may not be consistent with the bank’s underwriting standards;
(d) that the bank may not adequately assure that the activity is being conducted in accordance with applicable law; and
(e) that the bank may not otherwise adequately manage risks inherent in the activity.
While the Proposed Guidance will only apply to state-chartered, FDIC-insured banks that are not members of the Federal Reserve System, it could have far-reaching effects given the increased prevalence of state-chartered banks of all types in marketplace lending. Moreover, the Proposed Guidance may strain the tension between financial innovation and comprehensive regulatory oversight inherent in much of FinTech.
China P2P Lender Yirendai Plunges Another 10% As Lawsuits Pile Up, (Forbes), Rated: A
Yirendai’s stock, which trades as depositary receipts, fell by 10% yesterday to $24.09. It has lost nearly a third of its value since Aug. 18 when it closed at $37.50. China on Aug. 23 announced lending restrictions that have triggered concerns about the growth prospects of an industry that has been hurt by fraud.
Yirendai, which is controlled by lender CreditEase of Beijing, says the U.S. suits are without merit, the government-published Shanghai Daily said today.
Shares in LendingClub of the U.S., whose owners include Chinese businessman Chen Tianqiao and business is comparable with Yirendai’s, lost 1.5%.
Banks, slow as a paper-based process, (Tradestreaming), Rated: A
According to Deloitte, by streamlining the process and adding technology to eliminate paper from the process, operating expenses in the processing divisions can be reduced by as much as 25 percent. Records management associated costs can be reduced by 60 percent to 70 percent.
Though some are experimenting with paperless branches, end-to-end paperless process is still far off. This is especially peculiar considering that since 2000, when the Uniform Electronic Transactions Act was passed, signing and maintaining documents electronically is considered a compliant way to record transactions. Other countries have similar laws.
According to Petrogiannis, there is some confusion within the banking industry about the compliance of esignatures. Additionally, not many companies have changed internal policies with the change in legislation, according to the Deloitte report. Though the report focuses on the South African banking industry, it is representative of trends in banking elsewhere.
The story of paper is symptomatic to the speed of the banking industry. It has been about 16 years since the UETA was passed and almost 10 years since Steve Jobs introduced the first iPhone and the mobility revolution that followed. In this case, at least, banks are more than a decade behind both technology and regulation.
Zopa drops rates, more platforms to follow?, ( AltFi), Rated: AAA
The UK’s largest marketplace lender is cutting lender rates by 0.2 per cent across all three of its products.
Interest rates on Zopa’s Access, Classic and Plus account will fall to 3.3 per cent, 4.1 per cent and 6.5 per cent, respectively, effective as of September 8th.
The rate that Zopa delivers to its lenders is, of course, inexorably linked to the rate charged to its borrowers. And that latter rate was the first to fall, as the platform took steps to remain competitive while maintaining a “high standard of borrower”.
UK peer-to-peer lenders were overwhelmingly positive in the wake of the Bank of England’s decision to cut rates in early August, with a number of sector representatives saying that the move would prompt large swathes of investors to look to P2P in the search for return. But there’ll be nothing for those investors to lend against if the platforms can’t stay competitive on the borrower side, hence today’s adjustment.
According to AltFi Data Analytics, average gross interest rates across Zopa products fell from 7.2 per cent to 6.7 per cent in July. That rate will surely fall further in August.
Rates at rival P2P lender RateSetter are determined by the market, rather than by the platform. And at this stage, the market seems to be following a similar pattern. Average gross interest rates at RateSetter fell from 4.7 per cent to 4.4 per cent in July, and one must assume that they have continued to drop in August. We should be able to say for certain within a week or two. Stay tuned.
‘No evidence’ of peer-to-peer investors underestimating risk, says P2PFA, (Bridging And Commercial), Rated: A
In August, former chief executive of the Financial Conduct Authority (FCA), Tracey McDermott, expressed concerns that the rapid growth of the P2P marketplace could leave some investors unaware of the risks.
However, Robert Pettigrew, director of the Peer-to-Peer Finance Association (P2PFA), insisted that this was not the case.
Louis Alexander, managing director of The Bridgecrowd, explained that the firm requires all new investors to complete a questionnaire which assesses their level of knowledgeability.
“We only select investors to join that have a suitable level of knowledge of loans, property and investing.”
LendingCrowd recommends that all investors seek independent financial advice before entering into any type of investment, including lending through LendingCrowd. Stuart Lunn, CEO of LendingCrowd, said: “…[We] recommend that investors diversify their investments as much as possible by lending to as many different borrowers as they can, to help reduce the impact of any losses on their portfolio.
France looks to crowdlending, (WindPower), Rated: A
There are four in France that focus on renewables: Lumo, Lendosphere, GreenChannel, and Enerfip. From 1 October developers will be able to borrow up to €2.5 million a year in certain cases, said Reid Feldman, a partner at the law firm Kramer Levin Naftalis & Frankel.
They see crowdlending as a way to involve local citizens. When people become involved in financing “their” project, it “allows them to take ownership and become an engine of development of the project, not a spectator”, a spokesperson for developer ABO Wind said.
Meanwhile, local authorities increasingly see crowdlending as “very important for good project development”, said Laura Verhaeghe, co-founder of Lendosphere said, which has raised nearly EUR6 million in 27 funding campaigns for wind projects.
There is a lot of energy in the sector,” Feldman added, while Thomas Verhaege of developer Innovent has high expectations. “We hope in future to be able to raise all the money from private investors,” he said.
Fellow Finance opened a new financing channel for SMEs, (Email), Rated: A
Fellow Finance Oyj is the largest crowdfunding service in the Northern Europe and the first one that offers both peer-to-peer-lending services to consumers and loan-based crowdfunding to companies. Fellow Finance has intermediated loans for over EUR 72 million and the service has 104,000 users from 35 countries.
Fellow Finance has opened a crowdfunding service intended for small and medium-sized companies.
Fellow Finance is the first platform in the Northern Europe that offers loan-based crowdfunding for both companies and consumers.
The growing popularity of peer-to-peer lending, (Switzer), Rated: A
Now, the banking community is taking notice of these emerging competitors in the lending sphere. As P2P lending moves towards bigger loan offerings, rather than offering small-dollar-amount personal loans, customer bases appear to be decreasing in the big banks. As more borrowers start to outsource their loan options from the big banks, the user-friendly and efficient lending and investing experience of P2P lending could emerge as the preferred option.
Banks and the stock market are, however, not entirely redundant. With the interest rate for a one-year term deposit sitting at 3.00% p.a. with Commonwealth and Westpac, the stability of these institutions seems to be reliable for investors.
So, will P2P lending’s most significant impact be not only how it changes the process of lending, but how it changes the banking industry?