- Today’s main news: Trigger breaches may magnify reputational risk for originators. LendingTree announces top customer-rated lenders for Q3 2016. Landbay, Octopus Choice receive HMRC ISA approval. Ppdai.com plans US IPO.
- Today’s main analysis: The state of online SMB lending. Is China’s FinTech sector just another knockoff?
- Today’s thought-provoking articles: Risk assets enter short-term holding pattern. How bots will soon permeate banking. A whole generation may never retire from work.
- Trigger breaches may magnify reputational risk for originators. GP:” Trigger breaches in securitizations are an early sign that either something was not modeled right in the securitization or that the fundamentals are shifting in the wrong direction. In all cases something to keep an eye on.”
- The state of online SMB lending. AT: “Interestingly, SMB borrower satisfaction is strongest among banks than online lenders. At least, that’s the way it was in 2015.” GP:” Surprising data indeed.”
- LendingTree announces top customer-rated lenders. GP:” Customer experience is very important: leads to customer referrals, return customers…it strongly impacts cost of customer acquisition.” AT: “Lending Club still leads the personal loans category and Credibly leads in business loans. It’s important to note that this is a list that measures customer experience, so the customers are making these judgments.”
- Risk assets enter short-term holding pattern. AT: “The caution mentioned here is due to a new presidential administration. It’s unclear whether this caution is due to a new administration in general or if it is based on who that new administrated is headed by. My suspicion is a little of both with a tilt toward the latter. If that’s true, then how long will it be before confidence is restored? Weeks? Months?”
- Diversification strategies for P2P lending investors.
- How bots will soon permeate banking. GP:” Good news: robots are the dream employee for the compliance department. They are the nightmare employee for the business development team. Perhaps a trade off to make there. ” AT: “There’s no doubt that robotics will play a part in the future of banking. The question is, to what extent?”
- Ford credit, AutoFi debut platform for buying vehicles digitally. GP:” Really outstanding deal for AutoFi ! Congratulations!” AT: “This is an important development for the auto industry.”
- Why banks, alternative lenders will play ball in 2017. GP:” This feels like old news already.”
- Real estate as alternative investment for non-accredited investors. AT: “Non-accredited investors still have few options, so Reg CF is one area where there is a lot of potential for growth and new startups to penetrate.”
- 2017 Americas alternative finance industry study.
- Landbay, Octopus Choice receive HMRC ISA approval. GP: ” This is a another seal of approval and the ISA program should continue being a great source of capital.”
- Goji to launch IFISA for Landbay, Downing, Peer Funding, and UK Bond Network.
- A P2P puzzle.
- A whole generation may never be able to retire. GP:” Of course a little pessimistic but there is some truth in this. A business opportunity perhaps? Or maybe a source of political instability? “
- Why investors are likely to see more robo-input from their financial advisor.
- Ppdai plans US IPO. GP:” Given how well Yirendai is doing, no wonder more companies are interested. I doubt they will do as well though. ” AT: “I believe this is just the beginning of a new wave of foreign investment in the U.S. China is poised to make a big splash of FinTech IPOs in the near future.”
- Is China’s FinTech sector just another knockoff? AT: “A very important question. My take is, No. China has learned to innovate, and the West needs to understand that they’ve discovered the benefits of capital.”
- China Rapid Finance named finalist for LendIt “Innovator of the Year” Award. AT: “See?”
- United States
- Trigger Breaches May Magnify Reputational Risk for Originators (PeerIQ), Rated: AAA
- The state of online SMB lending in 4 charts (Tradestreaming), Rated: AAA
- LendingTree Announces Top Customer-Rated Lenders for Q3 2016 (Yahoo! Finance), Rated: AAA
- Risk Assets Enter a Short-Term Holding Pattern (Morningstar Email), Rated: A
- Diversification Strategies for Investors of P2P Lending (Equities.com), Rated: A
- Beyond robo-compliance: How bots will soon permeate banking (American Banker), Rated: A
- FORD CREDIT, AUTOFI DEBUT PLATFORM FOR DIGITAL VEHICLE BUYING AND FINANCING (Ford), Rated: A
- Why Banks and Alternative Lenders Will Play Ball in 2017 (deBanked), Rated: A
- Real Estate as an Alternative Investment for Non-Accredited Investors (Crowdfund Insider), Rated: A
- 2017 Americas Alternative Finance Industry Study (Crowdfund Insider), Rated: B
- United Kingdom
- Landbay and Octopus Choice Receive HMRC ISA Approval (Invezz), Rated: AAA
- Goji Selected to Launch IFISA for Landbay, Downing, Peer Funding and UK Bond Network (Crowdfund Insider), Rated: A
- A peer-to-peer puzzle (Financial Times), Rated: A
- A Whole Generation May Never Be Able To Retire From Work (Voice Online), Rated: A
- Why investors are likely to see more robo-input from their financial adviser (Money Observer), Rated: A
- European Union
- ASOS partners with Klarna to launch pay after delivery in Nordics (Retail Times), Rated: A
- New Year’s gift for SMEs: Lending to small business in Australia looks set to improve (Australian Anthill), Rated: A
- Chinese Peer-to-peer lender Ppdai.com plans US IPO (South China Morning Post), Rated: AAA
- Is China’s FinTech Sector Just Another Knockoff? (TheStreet), Rated: AAA
- China Rapid Finance Named a Finalist for LendIt “Innovator of the Year” Award (Yahoo! Finance), Rated: B
Trigger Breaches May Magnify Reputational Risk for Originators (PeerIQ), Rated: AAA
Triggers are a structural feature that provide senior bondholders with protection against a reduction in credit support. Triggers applying pre-defined tests (e.g., minimum excess spread, cumulative loss levels, delinquency rates, violations of reps & warranties, etc.) and may re-direct cashflows to senior noteholders if one or more tests are violated.
A trigger breach may force originators/sponsors to divert capital to repay noteholders rather than re-invest precious capital into revenue-generating origination activities. Such a “double whammy” is associated with headline risk, which can leader to reputation damage, and negatively impact future financing activities, either in a warehouse facility setting or during ABS transactions.
Trigger breaches are a manifestation of unexpected credit performance, poor credit modeling, or unguarded structuring practice.
The average time to breach performance triggers for consumer MPL ABS deals was approximately 11 months as collateral losses ramped up within the deal.
The negative headlines associated with trigger breaches increases the cost of capital for originators, and reduces the availability of funding.
If an early amortization trigger is violated, excess spread (e.g., collateral cashflows less financing costs payable to noteholders) are diverted from equity investors to senior noteholders with the goal de-risking the senior noteholders as quickly as possible. Therefore, although senior noteholders may be structurally insulated from first loss-risk, senior noteholders are nevertheless exposed to high levels of prepayment and reinvestment risk.
From the equity investor’s perspective, tighter triggers allow higher potential equity returns in the absence of any collateral losses. However, if losses exceed the available cushion before the triggers are breached, cashflows to the equity investors will be cut off faster and cause a reduction in the expected equity returns.
Conversely, less restrictive triggers allow more cushion for losses before the coverage tests are breached.
Cumulative Net Loss (CNL) Rate Trigger Example: This prevalent trigger can be defined in a number of ways as issuers and originators work together in the deal structuring phase. Exhibit 2 illustrates a contrived trigger threshold profile. The trigger breach level is defined and increases with respect to the deal age. A trigger event occurs if the realized cumulative net loss rate exceeds the trigger threshold of the collateral.
The state of online SMB lending in 4 charts (Tradestreaming), Rated: AAA
It’s no wonder that SMBs aren’t optimistic about their futures. The median SMB holds 27 buffer days of cash in reserve, according to the JPMorgan Chase and Co. Institute. And when they look to access small working capital loans to improve their cash flows, they aren’t finding a lot of lenders willing to work with them.
It’s not like the average SMB has a major appetite for cash, either. 76 percent of loans that SMBs apply for are less than $250,000 and amost half of them are under $50,000, according to a paper co-written by authors at the Harvard Business School and business loan marketplace, Fundera.
As more SMBs turn to online lenders, they’re not always coming back happy. That’s mostly due to the high costs of some of these early loans.
Approximately one-in-six small businesses considering a loan will apply to an online lender this year. But because there’s a lack of data collection on overall loan originations in the U.S., it’s tough to accurately size the effect of new entrants in the SMB lending space.
LendingTree Announces Top Customer-Rated Lenders for Q3 2016 (Yahoo! Finance), Rated: AAA
LendingTree®, a leading online loan marketplace, released today its quarterly list of the top customer-rated network lenders for the third quarter of 2016. Winners were based on a five-star quality review system for overall customer experience as determined by actual LendingTree users. The list features the top lenders in LendingTree’s core financial marketplace categories: Home Lending, Personal Loans, Auto Loans, and Business Loans.
The top lenders of Q3 2016 by rank are:
Home Lending Category
1. Veterans United Home Loans
2. Triumph Lending
3. Royal United Mortgage
4. HomePlus Mortgage
5. Wyndham Capital Mortgage
6. North American Savings Bank
7. Pulaski Bank Home Lending
8. AmeriSave Mortgage Corporation
9. ConsumerDirect Mortgage, A Division of FirstBank
10. Insight Loans (tie)
10. Seckel Capital, LLC (tie)
Personal Loans Category
Auto Loans Category
Business Loans Category
Risk Assets Enter a Short-Term Holding Pattern (Morningstar Email), Rated: A
Between the uncertainty driven by the change in the administration and the arrival of fourth-quarter earnings season, risk assets entered into a short-term holding pattern last week. The average corporate credit spread of the Morningstar Corporate Bond Index, our proxy for the investment-grade bond market, was unchanged at +127 last week. In the high-yield market, the credit spread of the Bank of America Merrill Lynch High Yield Master Index was also unchanged at +402. In the equity markets, the S&P 500 was essentially unchanged for the week, declining 0.10%. Price action in the commodity markets was mixed, but overall price changes were modest.
A significant portion of investors’ caution toward the corporate bond market is the acknowledgment that corporate credit spreads are trading at very tight levels compared with recent and historical averages. The current level is the tightest that credit spreads have registered since late 2014 and significantly tighter than long-term averages. The average spread of the Morningstar Corporate Bond Index is 41 basis points tighter than the long-term average of +168 since the end of 1998. The average spread of the Bank of America Merrill Lynch High Yield Master Index is currently 178 basis points tighter than its longterm average of +580 basis points since the end of 1996.
In addition to the volatility that earnings can generate, with the change in the administration, many investors are treading cautiously in the market until there is greater clarity regarding the policies that President Donald Trump will pursue in the near term. As such, defensive issuers generally traded better last week, although there did not appear to be a significant sector rotation toward a defensive portfolio posture.
Diversification Strategies for Investors of P2P Lending (Equities.com), Rated: A
Peer-to-peer lending is gaining a momentum among investors. 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.
And this is not an asset basket into which you put too many of your investment eggs.
The low minimum investment at these services makes diversification easy. However, loan selection takes time, and speed is key to getting the best loans.
Although default rates are higher on grades D–G at Lending Club, and grades D–HR at Prosper, the ROI is higher too. Loan filtering can mean successful investing in these lower grades.
Beyond robo-compliance: How bots will soon permeate banking (American Banker), Rated: A
As banks become more comfortable with the relying on software robots to replicate the actions of a human interacting with machines to handle rote tasks, experts say they will be quick to deploy the technology companywide as a way to trim expenses and redirect employees to more crucial tasks.
This could include areas in finance departments that are heavily manual, such as accruals and managing and clearing payments. Human resources and administrative functions is also an area where robotics can be deployed.
Austria’s Raiffeisen Bank International AG is among the first to work with Accenture and Blue Prism to automate various business functions. Additionally, it is in the process of creating an in-house robotics center dedicated to experimenting with how the technology can be used in different functions at the bank.
The bank started out with four pilots implementing robotic process automation in tasks that had “low-to-medium complexity; rule-based processes with a logical order of steps, repetitive process patterns with clearly defined process options,” said Markus Stanek, head of group efficiency management at the bank.
With the center, Raiffeisen will experiment with how to implement robotics in in a whole host of banking functions.
There’s a new way for customers to purchase or finance a new Ford vehicle in minutes – right from a dealership website from anywhere, on any device – through a new platform from Ford Motor Credit Company and financial technology company AutoFi.
In addition, Ford Credit has made an investment in AutoFi as Ford Credit continues pursuing technological advances to make the financing experience better.
The AutoFi platform can be used now at Ricart Ford in Groveport, Ohio, and will roll out over time to more Ford and Lincoln dealerships across the United States. The introduction comes as 83 percent of Americans say they would like to spend as little time at the dealership as possible when shopping for or buying a car, according to a new survey of more than 1,000 U.S. adults conducted online by Harris Poll on behalf of Ford Motor Company. Many of those same people, however, still want to touch and feel their new vehicle before signing on the dotted line. The new platform provides the best of both worlds.
Through the dealer website, customers have a transparent and seamless purchase and finance experience from anywhere on their mobile phone, tablet or computer. Once the online part of the transaction is complete, all customers need to do is sign the paperwork when they collect their new Ford.
Consumers may shop for a new Ford in the showroom or from anywhere via the Ricart Ford website. After selecting a vehicle, they can apply for credit and receive a decision, choose the financing terms that make sense for them, and then review and select optional vehicle protection products – completely online on their own time. Customers then can review a final summary of the financing terms and schedule time to complete the transaction and pick up the vehicle.
Why Banks and Alternative Lenders Will Play Ball in 2017 (deBanked), Rated: A
According to the Wall Street Journal last year, big banks have decreased the number of loans to small businesses by more than 38 percent since 2006.
But the recession helped pave way for another industry – alternative lending – which has significantly improved access to capital for small businesses. According to the Small Business Administration (SBA), the 2016 fiscal year was a record setting year for loans, with more than 70,000 approved that totaled $28.9 billion and supported nearly 694,000 jobs.
More and more headlines show that banks are shifting their strategies to keep up with America’s technology and alternative lending habits, making 2017 the year banks finally get back into the fray and play ball with alternative lenders to improve the lending process.
No longer content to be sidelined, banks are starting to play ball, and they will continue to do so at an even faster pace. The fact that banks are moving in now and increasing small business loans validates alternative lending.
Real Estate as an Alternative Investment for Non-Accredited Investors (Crowdfund Insider), Rated: A
So what are some of the options for both non-accredited, as well as accredited, investors today. Below we have highlighted several opportunities to invest in real estate assets online.
Today Fundrise has moved away from single property crowdfunding having trailblazed a new fund structure labeled the eREIT. Using Title IV of the JOBS Act which updated old Reg to a more flexible security exemption called Reg A+, their eREITs have grown from one to now five (2 of them are sold out).
Small Change is on a mission to become the first real estate funding portal to utilize Reg CF. Created by Title III of the JOBS Act, Reg CF allows issuers the ability to raise up to $1 million online from both accredited and non-accredited investors.
Originally only for accredited investors, this changed when RealtyMogul.com created their MogulREIT (using Reg A+) to offer non-accredited investors the chance to join in on the real estate offers listed on their platform. Minimum investments used to be $2500 but have since been lowered to $1000 to facilitated a wider audience.
American Home Preservation or AHP purchases distressed mortgages at a discount. The platform reports the discount can be up to 50%. They then try to work out a sustainable solution for the home-owners in a win-win scenario. The people keep their home and investors earn some income. AHP strives to pay a return 12% per year on invested capital in the fund (Reg A+). AHP not only has a unique approach to real estate investing but also has probably the lowest investment minimum at just $100.
2017 Americas Alternative Finance Industry Study (Crowdfund Insider), Rated: B
The Polsky Center and the Booth School of Business at the University of Chicago and the University of Cambridge Judge Business School are working together once again on their benchmark research on alternative finance. The America’s study, first completed in 2016, will be reviewing sector growth in North, Central and South America. Widely cited as the very best data available on the growth of Fintech, the study will quantify marketplace/peer to peer lending, crowdfunding and other forms of alternative finance.
While the research has been described as industry leading, there is a question as to how policymakers are using the data. Ziegler believes that regulators have recognized the value in academic and evidence based research that is unbiased.
Last year’s alternative finance report found that the Americas online alternative finance industry grew to $36.49 billion, a 212% annual increase from the $11.68 billion in 2014.
Landbay and Octopus Choice Receive HMRC ISA Approval (Invezz), Rated: AAA
On Monday, the buy-to-let mortgage specialist Landbay announced that it had passed the 2nd step in regulatory proceedings allowing the P2P lender to offer IFISAs to its investors. Landbay was granted full FCA authorisation in December, making it a member of a niche, but growing, group of peer-to-peer platforms with full permissions – a necessity if a platform wishes to offer the IFISA. The P2P platform has facilitated over £42million worth of investments, in over 421 loans to UK property borrowers, since its inception.
Octopus Choice, a recent entrant into the UK P2P market (early 2016 launch), announced that it’s also been approved as an ISA manager by the Board of HM Revenue and Customs (HMRC).The product of Octopus Investments, the Choice platform has made waves in the P2P lending industry since inception, facilitating more than £45m worth of loans to asset-backed property borrowers, inside one year.
Goji Selected to Launch IFISA for Landbay, Downing, Peer Funding and UK Bond Network (Crowdfund Insider), Rated: A
Specialist provider of P2P and marketplace lending products and services, Goji, has announced that Landbay, bond investment platform UK Bond Network, crowd bond provider Downing, and SME-focused P2P platform Peer Funding have each selected their platform to offer the Innovative Finance ISA (IFISA). Goji said expectations were to launch the IFISAs before tax year deadline.
In an increasingly competitive crowdfunding market, Goji says that firms offering the new investment vehicle are finding themselves a step ahead of the competition as the IFISA quickly becomes an easy differentiator in the eyes of investors.
Why investors are likely to see more robo-input from their financial adviser (Money Observer), Rated: A
The Treasury consultation highlighted that many people rely on digital services for information and guidance on key financial decisions and the new body will have a ‘well optimised’ website as well as telephone, webchat and face-to-face guidance.
We strongly believe that digital communications can help streamline the financial advice process and allow people to choose how they consume information, and are pleased to hear that the new guidance body will recognise this.
There is no question that there is a role for automated advice. To make advice more inclusive the industry needs to develop alternative distribution channels that potentially appeal to a new generation of customers.
In its current guise automated advice is perfectly positioned for those people who have simple investment needs, or who are not looking for a holistic financial review. It can offer a personal recommendation, which differentiates it from self-select or execution-only strategies.
ASOS partners with Klarna to launch pay after delivery in Nordics (Retail Times), Rated: A
Klarna’s pay after delivery allows retailers to bridge the gap between the online and offline shopping experience. When making a purchase on desktop or mobile, customers in the Nordics will now have the option to pay for their products up to 14 days after delivery – giving them the chance to try on their purchases before paying.
New Year’s gift for SMEs: Lending to small business in Australia looks set to improve (Australian Anthill), Rated: A
Until relatively recently, a bank rejection meant a business had to forsake growth, stretch its own payments or extend terms to the ATO. But more recently, business owners are being referred to a bank’s lending “partner” of choice, which typically charge interest rates of at least 20 per cent, and in some cases can even reach triple digits.
Luckily a new group of non-bank intermediaries is emerging to provide direct access to the extremely profitable asset classes that have long been solely the domain of banks. The combination of huge volumes of new data, virtually unlimited computing power, and omnipresent networks is enabling innovations like robo-advisers and marketplace lenders to provide lower cost, highly diversified investments for generating reliable, robust and lower capital risk returns.
Business owners and investors are beginning to take notice of the opportunity this represents. In 2014, there was $0 marketplace lending for business conducted in Australia, but according to Morgan Stanley, in 2015 the market reached $25million, and by 2020 it is forecast to grow to $11.4billion, representing 12 per cent of the total addressable market.
Marketplace lending addresses the concerns small business has with banks, and the needs for investors for stable fixed-income returns. Businesses can gain access to funding without the need for collateral, being subject to outdated models of risk, or enduring application processes spanning weeks. Sophisticated investors are empowered to take control of their own portfolios, choose the risks they are willing to take, and effectively “be the bank”.
Chinese Peer-to-peer lender Ppdai.com plans US IPO (South China Morning Post), Rated: AAA
Ppdai.com, one of the mainland’s largest online lending platforms, is reportedly planning to raise US$200 million in a US initial public offering (IPO) ahead of Beijing’s tightened regulation on the peer-to-peer (P2P) lending sector.
It would become the second mainland P2P firm to go public in the United States, following Yirendai.com’s US$75 million IPO in late 2015.
Is China’s FinTech Sector Just Another Knockoff? (TheStreet), Rated: AAA
The number of counterfeit products pumped out of China is unprecedented. Their total value adds up to $1.2 trillion, which accounts for 63.2% of the world’s total. Chinese make fake Gucci clothing and Cartier watches, open Apple stores that aren’t authorized retailers and have even duplicated global investment bank Goldman Sachs.
So whether China’s technology sector is another pirated import is a fair question. And the answer isn’t black and white.
Eight of the 27 fintech outliers in the world are located in China and are valued at more than $96 billion combined. The four largest outliers are Chinese. Antfinancial, which operates the payment affiliate of Chinese online retailer Alibaba, is the largest by a big margin. Meanwhile, the U.S. is home to 14 fintech outliers that are collectively worth $31 billion.
What’s Driving China’s Rise?
First, over the past few years, central banks have worked to develop digital finance in China by providing a supportive regulatory framework.
Surpassing the U.S. in 2013, China now makes up 47% of the world’s digital retail sales, and demographics suggest that share will continue to rise. The country has 721 million internet users (around 52% of the population). In comparison, 89% of the U.S. population uses the internet.
Third, a large segment of China’s population remains underserved by traditional banks.
Two Groups Are Accelerating the Process
As we can see below, 20% of Chinese adults do not have access to banking services. China has 8.1 commercial bank branches (and 55 ATMs) per 100,000 people. This is much less than the 28.2 branches (222 ATMs) in the U.S. and Canada, and the 28 branches (81 ATMs) in Europe.
Despite accounting for 60% of GDP and 80% of employment in urban areas, small and medium-sized enterprises (SMEs) get less than one-quarter of loans in China. In growing numbers they are seeking online finance solutions for their payments, credit, investments and insurance needs. Peer-to-peer lending networks make it possible for businesses to receive loans far faster than they could through a bank.
China’s fintech sector is particularly dependent on payment solutions. Currently, about 40% of China’s banking services customers use fintech platforms for domestic and international payments. Almost 58% of all internet users use fintech payment applications, meaning that 380 million Chinese people shop on the internet with their phones. Slightly less than 200 million people substitute their phones for a wallet for in-store payments.
China Rapid Finance Named a Finalist for LendIt “Innovator of the Year” Award (Yahoo! Finance), Rated: B
China Rapid Finance Limited (“CRF” or “the company”), China’s largest consumer lending marketplace in terms of number of loans facilitated, was named a finalist for “Innovator of the Year” honor at the first annual LendIt Industry Awards.
CRF is the only Chinese company nominated in this top category, which will honor the company that has demonstrated a strong culture of innovation, producing groundbreaking changes in the industry. CRF was selected as one of seven finalists, out of hundreds of applicants worldwide, by more than 30 industry experts who judged finalists representing innovation, emerging talent and top performers.
The company will compete for the honor at the LendIt Awards Ceremony on March 7, 2017, at the LendIt conference in New York City. LendIt is the world’s largest show in lending and fintech.