Daily News Digest Featured News

Tuesday October 25 2016, Daily News Digest

brexit investors

News Comments

United States

  • New online lending network promises to protect consumers and businesses. AT: “Following the news of OnDeck leading the way on price comparison and several online lenders cooperating to kick off a marketplace lending association, here is more evidence that online lending is trying hard to keep regulators off their backs. It’s another positive sign of growth and respectability for the industry. My only concern is that it could get out of hand with too many competing self-regulatory attempts.” GP : ” One needs to make the difference between SMART Box and ID Analytics clear : SMART box allows SME borrowers to compare the cost of capital between lenders with a standard method. ID Analytics is perhaps very close to being a credit bureau where Lending Club, Prosper, and Marlette contribute information to prevent loan stacking. If I were them I would certainly expect the regulators to name ID Analytics a credit bureau.”
  • CFPB assesses FinTech as positive. GP ” Like all regulators, CFPB has its detractors and its proponents. CFPB courageously came out encouraging “firms focused on giving credit to access the roughly 45 million consumers with little-or-no credit history by using alternative measures”. The agency also discourages “deceptive, harmful and discriminatory behavior”. It’s hard to disagree with that. While some behavior is clearly over the line, the main issue is to identify a clear method on what is close to the line. For example, if one offers auto loans, and most people buying cars are man, is that discriminatory ? I heard of a company who offers wedding loans, and most people taking them were of a certain ethnicity. Is that discriminatory ? Is that cultural ? Should we shut down that company ? Does it discriminate against people who are planning to never get married ? “
  • How venture capitalists use crowdfunding as a way to vet deals. AT: “Not only is it effective, but it should be encouraged. There’s got to be a way to narrow the prospects for the capital backers. Crowdfunding is a terrific vehicle.” GP: ” With one limitation. Crowdfunding works great for B2C products, not so much for B2B. Also, there is a large tendance to over promise, do an outstanding crowd sale, and make it impossible to deliver. The laws of physics seem to be hard to change no matter how much money one has. Also, and I learned a lot from Lampix and the Highway 1 accelerator, the hardware is slow and most crowdfunding sites are for hardware devices. “
  • Charlotte, NC has its own FinTech accelerator. AT: “If a city the size of Charlotte make the news for this kind of innovation, then who can argue that FinTech is destined to be a major wave of progression?”
  • BoA “hires” a robot to give financial advice. AT: “While I’m all for innovation in the banking sector, I can’t help but wonder how many consumers will actually want financial advice from a bot over the phone.”
  • Fundrise owes a lot to the success of its REITs to Title III of the JOBS Act. AT: “And not just Fundrise, the entire industry owes a debt of gratitude to the president for signing it.”
  • Lantern Credit goes after the underserved in lending. AT: “If there is any way to move the financial services industry forward, it’s wrapping our arms around the underserved.”
  • Bad debts drive CircleBack out of lending. AT: “How much more will follow? Perhaps the online lending sector needs to adopt better vetting practice for borrowers. This is why an online lending network is necessary.”
  • Bizfi gets a veteran payments administrator as CEO.

United Kingdom

Canada

European Union

Australia

India

Asia

News Summary

 

United States

ID Analytics Announces the Online Lending Network to Help Protect Consumers and Businesses (Yahoo! Sports), Rated: AAA

ID Analytics LLC, a company in consumer risk management, today announced the launch of the Online Lending Network, a new consortium formed to enhance responsible lending, help protect consumers and businesses, and address credit and fraud risks. Founding members include Lending Club, Prosper Marketplace, and Marlette Funding, as well as lenders representing online, marketplace, specialty finance and social lending. The network has achieved significant coverage of prime and sub-prime lending in only a few months, including over two-thirds of marketplace lending activity.

Through the Online Lending Network, lenders report when a consumer requests an offer for a loan product, submits a loan application, or when a loan is funded. In return, the lender receives information on whether that consumer has either requested other loan offers or applied for loans elsewhere in the days, hours or minutes before. The near real-time nature of the response makes high-velocity fraud, like loan stacking, very difficult. It also has the potential to protect authentic consumers from overextending their credit capacity to facilitate responsible lending.

The Online Lending Network will also provide access to tools to evaluate credit, including the detection of synthetic identities, and detection of potential identity theft, as online lenders are a target for fraudsters using stolen identities.

CFPB Gives Upbeat Assessment of Fintech in ‘Project Catalyst’ Report (The Wall Street Journal), Rated: AAA

The federal consumer finance regulator released a report Monday on consumer-friendly financial-technology products, marking the agency’s first overview of the rapidly expanding industry.

The report covers the work the Consumer Financial Protection Bureau has done on its “Project Catalyst,” which aims to encourage the development of innovative consumer financial products that meet regulatory requirements.

The CFPB outlined in its report the types of fintech products and services that it would encourage. In particular, the agency is looking at firms focused on giving credit access to roughly 45 million consumers with little-or-no credit history by using alternative measures. The agency is also looking at firms that provide better technology for mortgage servicing, digital disclosures, credit reporting, and products that help consumers refinance student loans and manage cash flows through access to their wages.

The report also came with several broad warnings to fintech firms about creating products that are harmful, deceptive or discriminatory. The CFPB noted that both banks and nonbank fintech firms should be held to the same rules and oversight—a topic driving much debate among consumer groups, who want fintech firms to adhere to the same rules that apply to banks, and some in the industry who don’t want sweeping regulation.

How VCs are Using Crowdfunding to Vet Deals (VC-List), Rated: A

The crowdfunding industry is growing at an incredible rate, allowing startups and small businesses to launch more crowdfunding campaigns than ever before. Entrepreneurs from all types of industries have leveraged the opportunities that crowdfunding offers to raise much-needed capital for their companies. As such, some VCs have begun to embrace crowdfunding as a new source of deal flow that allows them to vet deals much quicker than in days past.

Crowdfunding platforms not only provide VCs with efficient instruments to review deals and maintain communication with entrepreneurs, it also provides them with the additional deal flow. It gives them the ability to look at more deals in more geographically disparate locations and invest. VCs can review business plans, proforma financials, disclosures and other documentation without having to listen to a glossy sales pitch. They are then able to ask crucial questions of the entrepreneur seeking funding.

Crowdfunding also helps the class of VCs and other investors that don’t have staff dedicated to sourcing projects, and when entrepreneurs approach this class of investor, they are more likely to get a more personal and direct response, rather than be vetted by staff that are not likely to be as knowledgeable as the investors who make the final decisions.

Crowdfunding, while still a relatively young industry, is proving itself as a valued partner to the VC community. As it continues to grow, we will likely see much more interaction between the two industries.

Queen City Fintech looks for 2017 class as Charlotte’s financial tech scene grows (Charlotte Business Journal), Rated: A

Queen City Fintech, the accelerator program based in uptown, is currently accepting applications for its 2017 cohort.

The program has gained support from major financial firms since launching in 2011. Companies including Bank of America, Wells Fargo, Ally Bank, Synchrony Financial, BB&T, Barings and Ernst & Young see value in investing in an accelerator for the financial technology space.

Charlotte has also made strides in the fintech space as a city, which makes the program more appealing to entrepreneurs around the world.

Bank of America’s Bot Will Spout Financial Advice Through Your Phone (Fortune), Rated: B

Bank of America plans to provide customers with a chatty “virtual assistant” named Erica who will use artificial intelligence to make suggestions over mobile phones for improving their financial affairs.

Michelle Moore, head of digital banking for Bank of America, said in an interview on Monday that Erica will be smarter than a robot because she will bring up topics on her own, using predictive analytics as opposed to only answering questions customers ask.

Erica will be introduced to customers late next year, and will be able to converse by text as well as voice, said Moore.

How Title III of the JOBS Act helped Fundrise ‘democratize real estate’ (Technical.ly), Rated: A

When Dupont-based Fundrise first launched in 2012, the company’s mission was to “democratize” real estate investing — to “give everyone the opportunity to invest directly in high-quality real estate.”

The company’s tech-driven model allowed for a significant departure from the old school methods of real estate investing, but there was a rub — Fundrise’s democracy had imposed legal limits. That’s because, back in 2012, Fundrise couldn’t actually give “everyone” the same investment opportunity. Under the SEC rules of the time, any individual investing with Fundrise needed to be an “accredited investor” — an individual with a net worth of $1 million or $200,000 in annual income. That’s a pretty limited democracy.

But even back in 2012 this was starting to change. That year President Barack Obamasigned the JOBS Act, Title III of which opens up equity crowdfunding to non-accredited investors. And finally, on May 16, 2016, that section of the Act was implemented by the SEC.

There are still some limitations, though. For example, each Real Estate Investment Trust (REIT or eREIT as Fundrise calls them) that the company sets up has a $50 million cap. According to Davis, demand is much higher than this.

Lantern Credit CEO Chad Swensen on Enabling Lending to the Underserved Consumer at Money20/20 (Businesswire), Rated: A

Large segments of the US population are unable to access mainstream credit offer for various reasons. Lending to those underserved segments requires specialized credit risk assessment and management. As banks try to expand access to credit to underserved borrowers, they are turning to innovative technologies to meet the financial needs of more people.

Lantern Credit is using machine learning real-time credit modeling and education to enable consumers to gain better control over their finances and improve their credit wellness. The Company is partnering with lenders and retailers to predict credit worthiness of consumers with greater precision and to facilitate improved matching between credit products and interested customers.

Bad Debts Trigger Online Lender To Stop Dealing (iExpats), Rated: A

Ripples of fear are spreading across online peer to peer lending and crowdfunding platforms as more signs of failing investments become public.

The latest victim is the US online lending platform CircleBack.

The firm has ceased lending as cash from investors dried up on reports of borrowers defaulting on their loan repayments.

The business model was to borrow funds from equity investors that were then loaned to US consumers at interest rates ranging from 6.6% to 35%.

However, investors were concerned that losses were running at 13.5%.

Another concern is crowdfunding equity valuations.

Bizfi Appoints Alternative Finance and Payments Veteran John Donovan as CEO (Yahoo! Finance), Rated: B

Bizfi (www.bizfi.com), a leading fintech company with a platform that combines aggregation, funding and a marketplace for small businesses, announced its board of directors has appointed John Donovan as the Company’s chief executive officer (CEO). Donovan is a 30-year veteran in the payments and alternative finance industry serving both small businesses and consumers.

United Kingdom

Brexit Confronts U.K.’s Online Lenders With Biggest Test Yet (Bloomberg), Rated: AAA

British peer-to-peer lenders were preparing for serious trouble even before the Brexit vote rocked the U.K. on June 23.

Funding Circle Ltd., the No. 1 online lender to small and medium-sized businesses, carried out a stress test envisioning a three-year recession beginning in January 2017 that would crater the property market. If the U.K.’s split from the European Union wreaks that type of havoc, investors in the platform’s loans should still pocket a net return of 6.4 percent, says Jerome Le Luel, the firm’s chief risk officer. That’s not far off the 7.2 percent the loans should generate without a crisis.

fixed income investors uk

The debate shows the tension at play as the industry, which accounts for just 3.6 percent of total lending to small businesses and consumers in Britain, tries to move into the mainstream. First developed 11 years ago by Zopa, the model has taken off around the world: Global peer-to-peer loan volume is projected to hit almost $350 billion this year, a 12-fold increase since 2013, according to research firm AltFi Data Ltd.

The fallout from the Brexit vote isn’t the only source of uncertainty facing the industry. After more than a year of review, the FCA has yet to clear the way for Funding Circle, Zopa, and other big platforms to tap a deep well of new customers: the government’s Individual Savings Account program. Millions of savers use so-called ISAs to manage assets worth 518 billion pounds.

Meanwhile, Philp, the member of Parliament, is pushing for changes that could upend the industry’s economics. He’s asked Andrew Bailey, the head of the FCA, to consider requiring peer-to-peer lenders to invest their own capital as a portion of every loan they arrange for investors.

brexit investors

Policy makers keen to stimulate economic growth are embracing the approach. The week of the EU referendum, the bloc’s European Investment Bank started distributing 100 million pounds in loans to British small businesses through Funding Circle’s platform. The firm was hopeful it would be the first tranche of a recurring program. Now, due to Brexit, it’s probably a one-off.

At first blush, Brexit hasn’t frightened off investors. In September, British platforms originated a record 364 million pounds in loans, a 30 percent jump over September 2015.

Brexit feeds into more European commercial real estate investment numbers (FTSE Global Markets), Rated: A

As £1.4bn has been pulled from UK property funds post Brexit, a new study from BrickVest says 21% of respondents both Dublin and Hamburg as top European cities; while 16% selected Frankfurt, highlighting a new trend towards German commercial real estate.

Some 40% of the top ten voted European cities were German, compared with 38% of institutional real estate investors who cite London as the top European city to invest in commercial real estate, ahead of Berlin (36%), Munich (31%) and Paris (22%).  Even so, real estate investment platform, BrickVest’s research showed that three in ten (30%) institutional investors believe Brexit will either increase or significantly increase European commercial real estate investment opportunities. A further one in four (23%) institutional investors believe that Brexit will have no impact on commercial real estate investment opportunities.

The research did, however, highlight some concern regarding the illiquidity of commercial real estate investing. Three-fifths (61%) of respondents do not believe that in light of £1.4bn being pulled from UK property funds post Brexit, real estate investors have enough access to a secondary property investment market.

In light of Brexit, which European cities are you currently looking at/planning to look at for commercial real estate investment? (survey with 96 investors)

 

London

38%
Berlin 36%
Munich 31%
Paris 22%
Dublin 21%
Hamburg 21%
Frankfurt 16%
Barcelona 11%
Zurich 11%
Amsterdam 10%
Brussels 10%
Copenhagen 10%
Warsaw 5%
Milan 4%
Madrid 3%
Stockholm

1%

Bruce Davis, MD of Abundance, Shares Insight & Perspective on FCA Regulatory Review (Crowdfund Insider), Rated: A

The UK has been heralded as the gold-standard of regulatory policy regarding crowdfunding, peer to peer lending and Fintech in general. Many countries have studied the approach established by the Financial Conduct Authority (FCA) before enacting rules of their own.

Today, the FCA is in the midst of a scheduled post-implementation review of the crowdfunding market and regulatory framework.  The agency has published a paper explaining their thoughts and perspective on how disruptive finance has evolved alongside some of their concerns.

Bruce Davis: The FCA made great efforts to consult the industry in the process of developing the regulatory framework for crowdfunding in 2014.

At an individual level, the sector is supervised by a flexible team within the FCA who cover issues as and when they arise. We believe that this level of supervision is sufficient for the risks within the industry although we would like to see a greater emphasis on enforcement of rules against businesses which are adjacent to our sector or operating under an exemption.

Bruce Davis: Aside from the odd ‘off the cuff’ comment, we have found the FCA takes its responsibilities to foster competition and innovation seriously. It could still do more to encourage innovations which will encourage more people to take control of their money and how it is invested.

Bruce Davis: I think that pound for pound the crowdfunding industry is perhaps the most supervised sector in the whole financial services industry. Our track record of customer satisfaction and low levels of complaints suggests that this could be scaled back and more focus put on enforcement of the rules against those who operate outside of our regulated sector (but who still offer investments to the public under exemptions or old assumptions about the permissions surrounding an offer of investments to the public).

Canada

OSC Launches Canada’s First Regulatory Sandbox for Fintech (Finance Magnates), Rated: AAA

The Ontario Securities Commission (OSC), one of the thirteen provincial financial regulators in Canada, today unveiled a new fintech-focused hub called LaunchPad which aims to help guide FinTech startups through the complexities of the regulatory framework.

LaunchPad will be staffed by a dedicated team who will work directly with fintech companies to help them navigate, and even potentially tailor, Ontario’s securities laws while ensuring investors remain protected.

The OSC will apply what it learns through the LaunchPad hub more broadly to modernize regulation for similar businesses. These include online advisory firms, peer-to-peer lending services, crowdfunding platforms and angel investor organizations.

The program has a dedicated website, which can be accessed through www.osclaunchpad.ca, and already accepting now requests for support from eligible fintech businesses.

ontario securities commission

Lending Loop reopens peer-to-peer lending after regulator OK (WHBL), Rated: A

Canadian financial technology startup Lending Loop said on Monday it was re-launching its online lending marketplace after receiving regulator approval to sell investment opportunities to lenders regardless of their wealth.

The company, which paused its unlicensed operation in March, said the Ontario Securities Commission has now granted it an exempt market dealer license, and that it can connect small businesses looking to raise capital to individual lenders seeking a return on capital everywhere in Canada except Quebec.

The approval, which follows a rival company’s green light last month, suggests Canadian regulators are coming to terms with the peer-to-peer lending model, which is already popular in the United States, Europe and elsewhere.

The company will allow borrowers – typically small and medium-sized businesses – to seek loans of between C$5,000 and C$500,000 and over durations ranging from 3 months to 5 years.

Rival Lendified Holdings Inc and its Vault Circle Inc subsidiary secured an exempt market dealer license on Sept. 28. It plans to present lending opportunities only to accredited investors, who must have significant financial assets when it launches in the first quarter of 2017.

European Union

Post Brexit: Bondora Plans European Office in Germany Instead of London (P2P-Banking), Rated: A

Estonian p2p lending marketplace Bondora will open a new European office in Germany, saying that post Brexit London is no longer attractive as a Fintech hub. Bondora formerly planned to move to London but stopped the plan after the Brexit vote. ‘There is too much uncertainty, the UK lost its attractiveness as a fintech hub’ explains Bondora CEO Pärtel Tomberg the decision.

For the Bondora business model very good access to the European market is crucial says Tomberg. He sees uncertainty how long London might be able to provide this.

P2P Lending Won’t Displace Banks; Dealing with Credit Risk Management (Fintech News Switzerland), Rated: A

Peer-to-peer lending, which aims at shaking up the banking market and attacking one of the core profit-generating activities of banks, is not likely to displace banks from their core roles of lending to retail consumers, according to a report by Deloitte.
Despite the promising outlook, the P2P lending industry has recently come under fire as Renaud Laplanche, CEO of Lending Club, one of the leading platforms in the US, was forced to resigned after the company revealed that it had provided mis-assessed loans to Jefferies and Co., which was distributing the loans to institutional investors, reports the Wall Street Daily.

The skepticism over P2P lending has also been felt in China where loan sharks have been widely criticized for practicing aggressive debt recovery tactics, demanding, for instance, nude photos as collateral from female borrowers for blackmail if they fall behind on their repayments, reports the Financial Times. Other disturbing debt recovery tactics in China include property destruction and bodily injury.

While P2P lending has enabled the masses to gain access to credit and investment opportunities in China, the sector has nevertheless a Wild West aspect with lenders reportedly peeking in bathrooms in order to assess credit risks and borrowers settling payment obligations with bottles of spirits.

Yet, P2P lending remains a risky bet compared to other savings and investment options, according to Deloitte. However, it highly depends on the market. Switzerland seems to be a very attractive destination. The country is known to be very reliable and strict in credit-Risk Management and investors can get attractive yields with the likes of CreditGate24 and others.

p2p lending risk

Australia

Bravura Solutions chief: fintech doesn’t need to go abroad to be successful (Australian Financial Review), Rated: A

Bravura Solutions is proof that fintech is one of Australia’s unheralded export successes. At least that’s the view of chief executive Tony Klim, who says his company’s return to the ranks of the ASX will show it is possible to build an internationally successful fintech business based in Australia.

Bravura, which is in the midst of a $200 million, pre-Christmas share sale, provides software and technology services for superannuation, life insurance, and private wealth firms. It administers about $2.3 trillion of assets for clients including Bank of New York Mellon, JPMorgan, Mercer, Fidelity, and Citigroup.

The initial public offering for the company, backed by local private equity firm Ironbridge, is Bravura’s second attempt at life on the ASX, coming a decade after it first floated on the exchange as a two-year-old business focused on the British and Asian markets.

One of the biggest differences between then and now, Klim says, is that Australia is much more focused on technology, as the commodities boom that has powered the national economy for decades fades and the government attempts to identify and help develop other sectors that may one day take the place of mining.

While fintech firms operating in consumer niches such as peer-to-peer loans have captured the imagination of the media and investors alike, Klim proudly says Bravura has been profitable by focusing on less sexy stuff.

9 Australian companies have made it to the latest global Fintech 100 (Business Insider), Rated: B

Nine Australian companies are in the global 2016 Fintech 100.

The latest annual list, compiled by accelerator H2 Ventures and KPMG, includes Prospa (31), Tyro (43) and SocietyOne (50) among the leading 50 established fintech companies.

Another six are in the 50 emerging stars list: Afterpay, Brighte, Data Republic, Identitii, Hashching and Spriggy.

India

Our take: as Fintech firms allowed 100% FDI through automatic route, challenges for regulators (Medianama), Rated: A

Fintech companies classified under “other financial services” will now be permitted 100% foreign direct investment (FDI) through the automatic route, as opposed to the approval route earlier, according to a Reserve Bank of India (RBI) notification.

The RBI and other regulatory authorities have an uphill task of trying to figure out which fintech companies fall under whose purview. Regulators will have to spell out explicit rules and come out with more detailed classification. Fintech companies operate in areas where regulation in unclear, and regulators need to update themselves on their activities and specify  what a particular company can and cannot do.

A great example of this was the RBI’s consultation paper the peer-to-peer (P2P) lending companies which sought to regulate them as NBFCs. It added that it took into consideration SEBI’s guidelines on crowd funding, and clarified that since P2P lending it is not a transaction where equity or debt is exchanged, it would come under the RBI’s ambit.

The RBI’s review of guidelines for prepaid payment instruments (PPIs) is welcome and it will be in the interest of everyone to understand new developments in the fintech space. Other regulators would be wise to issue or clarify rules for developments in their sectors.

Asia

P2P lending rises in Korea in Q3 (Korea Herald), Rated: A

Peer-to-peer lending in South Korea rapidly grew in the third quarter, reaching 188 billion won (US$166 million), according to the data compiled by industry tracker Crowd Institute.

Local banks shunned lending to such small businesses amid a protracted economic slowdown, but for investors hunting for high returns, P2P lending emerged as an alternative investment tool amid record low-interest rates in Asia‘s fourth-largest economy.

The alternative lending service has gained popularity in the past few years, with accumulated P2P loans reaching over 150 billion won as of June this year, and the figure is expected to top 300 billion won by the end of the year.

Overcoming challenges: Building a strong and sustainable fintech sector (Business Times), Rated: A

While fintech holds great promise for the society with key benefits being cost-effectiveness, efficiency, and exceptional user experience, it is still a fairly nascent sector. As with all industries that are developing rapidly, there are growing pains and issues to be ironed out, especially those surrounding corporate governance and regulatory requirements.

Singapore has been proactively addressing the subject with the Monetary Authority of Singapore (MAS) setting up a fintech and Innovation Group in 2015 to examine regulatory policies and sector development strategies.

Besides online lending, cryptocurrencies such as bitcoin have also had their fair share of issues. Bitcoin famously vouched to give a bank account to anyone without requiring identity verification. While the process becomes more seamless, the anonymity of it may expose it to vulnerabilities. In August this year, hackers stole US$65 million worth of bitcoins from bitcoin exchange Bitfinex and in 2014, US$460 million of bitcoins vanished from Mt Gox, the world’s largest bitcoin exchange before it declared bankruptcy after the hack. Incidents such as these are a cause for concern, but it is important to keep in mind that they are rare and far between. These scandals expose the gaps in the sector and provide a valuable learning experience.

In Singapore, the MAS has set up a regulatory sandbox to allow startups to experiment with fintech solutions within a well-defined space and duration. For that period, the MAS will ease certain regulatory requirements and provide appropriate safeguards to contain the consequences of failure for customers. Other countries such as Thailand, Australia, the UK, and Malaysia are also implementing their own versions of a regulatory sandbox to develop a safe and conducive sector where innovation has the space to flourish.

As with every worthy endeavor, growing pains are an inevitable part of the process. With the government’s active involvement in the sector, Singapore is in a good position to learn from experience and embrace change instead of being hampered by short-term challenges.

Authors:

George Popescu
George Popescu
Allen Taylor
Allen Taylor

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