- Today’s main news: OCC must tap breaks on FinTech charter plans. White House publishes framework for FinTech.
- Today’s main analysis: The key to successful P2P investing.
- Today’s thought-provoking articles: Shanghai office vacancies rise. Did India’s online lenders reap the benefit of a note ban? The rise of digital lending in Indonesia.
- PeerIQ highlights alternative pricing, valuation approach and FASB Fair Value Hierarchy in ASC 820. GP:” Very technical and very interesting as usual.”
- The key to successful P2P loan investing. GP: ” Great data and info from Funding Circle. Worth a read.” AT: “The interesting thing here are the recommended tools for P2P investors, especially the advice for competing against institutional investors. Lenders and third-party tool suppliers can use this list to build better investment tools for P2P loan investors.”
- OCC must tap breaks on FinTech charter plans. AT: “I certainly think the OCC should be deliberative in understanding the industry before regulating it, but it seems that opening the door to charters could foster innovation and encourage modernization. The video interview with Charles Moldow is very insightful, particularly where he praises the Obama Administration for their forward thinking and support of FinTech.
- White House publishes framework for FinTech. AT: “It is interesting that this happened on the administration’s last week in office. I can’t help but wonder how it will be taken by the incoming president and his team.”
- Online lenders see more influence under Trump. AT: “A feeble attempt, if you ask me.”
- The state of real estate crowdfunding. AT: “Fairly insightful. I do believe further specialization is in the future.”
- Deadline nears for OCC FinTech charter comments. GP:” We look forward to seing the results of the comments submitted to the OCC.”
- LendIt Forums are mini-conferences.
- Shanghai office vacancies rise.
- P2P lending market is finally slowing.
- China Rapid Finance win another award.
- United States
- Weekly Industry Update (Part 1): January 14, 2017 (PeerIQ Email), Rated: AAA
- The Key To Success In Investing In P2P Loans — With Useful Tools (Forbes), Rated: AAA
- OCC must tap breaks in trying to grant charters to FinTech lenders (The Hill), Rated: A
- White House publishes Framework for FinTech (IBS Intelligence), Rated: A
- Online lenders seek more influence under Trump (The Salt Lake Tribune), Rated: A
- The State of Real Estate Crowdfunding (Lazy Man and Money), Rated: A
- Deadline Nears for Comments on Proposed OCC Fintech Charter (Crowdfund Insider), Rated: B
- LendIt Forums are mini conferences (Bankless Times), Rated: B
- United Kingdom
- WorldPay Founder Nick Ogden to Launch Fintech-Focused Challenger Bank (Finance Magnates), Rated: AAA
- Peer-to-peer lending set for growth in 2017 (Moneywise), Rated: A
- Shanghai Office Vacancies Rise as P2P Lending Declines (Crowdfund Insider), Rated: AAA
- The China P2P Lending Market is Finally Slowing (Crowdfund Insider), Rated: A
- China Rapid Finance Adds to Awards Haul with Hurun Honor (BusinessWire), Rated: B
- Did online lenders really reap the benefit of note ban? (BusinessToday), Rated: A
- Outlook 2017: Rise of Digital Lending in Indonesia (JakartaGlobe), Rated: AAA
Weekly Industry Update (Part 1): January 14, 2017 (PeerIQ Email), Rated: AAA
The FASB Fair Value Hierarchy in ASC 820 categorizes assets across three levels based on inputs to valuation techniques used:
- Level 1 assets have actively traded markets; and valuation inputs are direct quoted prices for identical assets or liabilities.
- Level 2 assets include valuation inputs other than quoted prices that are observable for the asset, either directly or indirectly.
- Level 3 is the most unobservable level and requires many assumptions and estimates. Since a two-way market is not available, fair value is often based on models in which there are few, if any, external observations.
Under ASC 820 guidelines, the fair value of an asset reflects the exit price that would occur in an orderly market.
Current Alternative Pricing and Valuation Approach
Asset managers employ a number of informal approaches to valuation – several of which have limitations.
Amortized Cost: This approach values a loan at its outstanding balance at purchase price plus accrued interest. It may overstate loan price during the early period of the loan’s life, as it does not account for loan status (e.g., delinquency).
Haircut Matrix: Loans are valued at outstanding balance plus accrued interest, with haircuts applied to loans based on their stage in the delinquency queue. The size of the haircut is calibrated to historical loan performance. The haircut-matrix approach improves on an amortized cost approach by incorporating loan status, yet still suffers from major deficiencies ignoring A) changes in a borrower’s credit profile at loan level, B) seasonality of loans, and C) credit spread and interest rate risk premium, and D) a forward-looking view on cashflows.
Loan Loss Provisions: Banks holding loans in the hold-to-maturity book create a provision or accrued liability based on expected losses on the pool.
Asset managers can no longer rely on informal processes to value illiquid securities. A consistent and transparent valuation framework is necessary to promote investor confidence, market integrity, improve comparability of returns, and meet fiduciary and regulatory obligations.
The Key To Success In Investing In P2P Loans — With Useful Tools (Forbes), Rated: AAA
P2P loans have less volatility, a low correlation, and yield much higher returns compared to other fixed-yield investments. Median adjusted returns average 7% on a 36-month loan.
The P2P lending nature means that you must build a portfolio of hundreds of loans where each loan is a fraction of the total portfolio.
Lending Club, Prosper, and Funding Circle have all released statistics that show diversified portfolios give the greatest return and minimize risk.
Prosper also has statistics that show since July 2009, every portfolio of 100 notes or more has had positive returns.
With the recent influx of institutional money, MPL has become much more competitive. The best-quality loans can be snapped up within minutes of being posted.
Loan filtering can help investors consistently outperform the market. Based on back testing from NSR, the most effective filters are: loan grade, credit inquiries in the last six months, and loan purpose.
In the next table, you see how the annual income filter can affect returns on D- to HR-rated loans on Prosper.
Another great tool is LendingRobot, a registered investment advisor offering fully automated MPL investing for individuals.
OCC must tap breaks in trying to grant charters to FinTech lenders (The Hill), Rated: A
The Office of the Comptroller of Currency’s desire to add financial technology firms to its regulatory repertoire, if implemented without a sufficient foundation, could stall the U.S. financial system’s path to innovation and set it back by decades.
Currently, FinTech companies must work with governments on the state level to serve their customers and stay in business. Seeing how operating on a state-by-state basis could cause discrepancies, it seems putting all FinTech companies under the supervision of one federal regulator, as the OCC is suggesting, would streamline rulemakings and enforcement.
The goal of modernizing the OCC is well received, but the agency must take a more deliberative approach before deciding the future of a very complex and still developing industry.
From what we know right now, unless the OCC takes time to fully understand and address the complexities of the FinTech sector, as well as its current weaknesses and strengths, their hasty decision to bring FinTech companies under the same umbrella as banks could trigger unintended consequences for consumers and the U.S. financial system – something the U.S. economy cannot afford.
White House publishes Framework for FinTech (IBS Intelligence), Rated: A
The White House has released a whitepaper, A Framework for FinTech, which “expresses the forward-leaning posture of this Administration to innovation and entrepreneurship, generally, and FinTech in particular.”
The document lays out 10 principles, which, for example, encourage stakeholders to start with the consumer in mind, promote safe financial inclusion and financial health, build in cybersecurity, data security and privacy protections and protect financial security.
Online lenders seek more influence under Trump (The Salt Lake Tribune), Rated: A
The companies increasingly are joining lobbying groups that want laws changed to make it easier for them to attract new borrowers and investors as they look for ways to grow and limit future regulatory scrutiny.
The ability of the lenders to get what they want in Washington likely will have a significant impact on the future of the industry.
The desire to influence U.S. policy comes as regulators and lawmakers step up their scrutiny of marketplace lending. Online U.S. loan volume is expected to reach $120 billion by the end of the decade, up from $20 billion in 2015, according to Morgan Stanley research.
The State of Real Estate Crowdfunding (Lazy Man and Money), Rated: A
The road hasn’t always been easy. While a handful of companies have grown impressively, many others have fallen by the wayside, as many investors and real estate companies have been cautious in pursuing real estate crowdfunding. Those without the requisite experience in tech and real estate have struggled to find scale. Still, the young industry continues to grow impressively year over year.
While growth slowed somewhat in 2016 (likely in response to top-of-market trepidation) the 40% figure is still robust, and the U.S. accounted for a large share of the $1bn of overall industry growth this year.
The trend of division and specialization among real estate crowdfunding platforms is likely to continue, with the potential for consolidation in the advent of a dip in the market.
Deadline Nears for Comments on Proposed OCC Fintech Charter (Crowdfund Insider), Rated: B
The Office of the Comptroller of the Currency is still accepting comments on the proposed Fintech Charter for financial firms looking to operate with a federal charter. The deadline was initially set for January 15th but one report says the OCC has pushed the date back to January 17th to accommodate the long weekend.
The Fintech Charter has the potential to be a powerful tool for aspiring innovative financial firms that seek to compete on the national level. But opposition is mounting from traditional financial firms that have become comfortable with the sizeable regulatory moat that has blocked most competition.
Fitch Ratings posited that a Fintech Charter could harm agility and add cost to innovators. Moody’s took the other side of the argument stating a Fintech charter may aid marketplace lending platforms.
LendIt Forums are mini conferences (Bankless Times), Rated: B
WorldPay Founder Nick Ogden to Launch Fintech-Focused Challenger Bank (Finance Magnates), Rated: AAA
Nick Ogden, the founder of payments provider WorldPay, is gearing up to launch a new challenger bank in the UK after receiving approval by financial regulators, according to a Financial Times report today.
Ogden is planning to launch ClearBank in the coming months and will serve as chairman, according to filings with the Financial Conduct Authority. Former Royal Bank of Scotland senior manager Charles McManus will be chief executive.
Peer-to-peer lending set for growth in 2017 (Moneywise), Rated: A
“We expect a second explosion in the number of people lending and the amount lent in 2017, due to IF Isas [Innovative Finance Isas],” says Neil Faulkner, co-founder and managing director.
But while returns of “3%-7%,” and even “12%, [which] have been possible through short-term, asset back loans,” 4th Way expects to see these rates fall in 2017, “benefiting borrowers at the expense of lenders”.
Shanghai Office Vacancies Rise as P2P Lending Declines (Crowdfund Insider), Rated: AAA
Apparently, the slowdown and consolidation of the Chinese peer to peer lending industry is having an impact on the real estate market. Colliers International is reporting that Shanghai Grade A office space experienced a rise in average vacancy due to the widespread withdrawal from peer to peer lending platforms.
Combined with increasing inventory, office space in Shanghai experienced the highest full year supply in five years. The drop in demand also constrained the annual rental growth rate. The correction was said to be strongest in Puxi, where P2P tenants have clustered in the past two years.
Overall, the Shanghai office sector remained the most active investment market in China during 2016. Thirty-eight large-scale transactions totaling more than RMB 70.6 billion were completed during the year.
The China P2P Lending Market is Finally Slowing (Crowdfund Insider), Rated: A
Today with stricter rules coming and Chinese officials becoming more vigilant against bogus online lenders, the industry is finally slowing. One of the rules requires online lenders to work with custodians for investor funds. According to an article in China News, at the end of 2016, 184 of the 2300 P2P lenders had established such a relationship. Another 122 were in the process of signing a custodial agreement but the majority still have not complied with the law. According to an article in China News, transaction volume dropped by almost half in 2016.
China Rapid Finance Adds to Awards Haul with Hurun Honor (BusinessWire), Rated: B
China Rapid Finance Limited (“CRF” or “the company”), China’s largest consumer lending marketplace in terms of number of loans facilitated, added to its recent haul of awards and recognitions by being named to Hurun Report’s “2017 China New Finance Top 50.”
Did online lenders really reap the benefit of note ban? (BusinessToday), Rated: A
Online credit providers such as pay day loan companies and peer to peer (P2P) lending platforms are growing at a rapid pace and are reaching, where formal finance is unable to reach. While three years ago there were only two P2P lending platforms in the country, as of April 2016 the number had risen to 30, as notified by the RBI.
These platforms are reporting healthy double digit growth rates in disbursals as well as registrations month after month. The monthly average cumulative lending of P2P lenders has shot up from Rs 20-30 lakh to Rs 5-6 crore in just 3 years’ time.
However, this is bright side of the story. While, number of loan seekers shot up, job losses and delay in salary payments have been the cause of concern for the lenders. Post the event, lenders have become cautious of the credibility of the borrowers, who might come across more hurdles before getting a loan.
Outlook 2017: Rise of Digital Lending in Indonesia (JakartaGlobe), Rated: AAA
Digital lending firms anticipate rapid growth this year, banking on a new regulation on information technology-based lending by the Financial Services Authority, or OJK, that will give these companies a firm legal basis to operate in Indonesia.
Lending through services such as Investree, Kredivo, UangTeman and Doctor Rupiah to name a few, could reach Rp 1 trillion ($75 million) this year, which represents a nearly seven-fold increase from last year according to an OJK estimation. While this amount is still small compared to the nearly Rp 4,200 trillion in outstanding loans held by conventional banks, the authority sees potential in these digital services that could fill a gap in small business financing, currently under-served by banks and financing companies.
By regulating how digital firms handle and store customers’ data, the OJK addresses confidentiality issues that are central to any lending business.