- Today’s main news: What the SoFi acquisition of Zenbanx means for FinTech’s future. Promontory Interfinancial Network clears path for community banks to purchase SoFi loans. Fund investments into UK FinTech plunge 33%.
- Today’s main analysis: AltFi takes a closer look at the UK P2P sector.
- Today’s thought-provoking articles: Review, takeaways from 2017 private placement conference. 3 reasons FinTech is failing. We need a government that embraces financial innovation.
- What the SoFi acquisition of Zenbanx means for FinTech’s future. GP:” With SoFi able to take deposits and looking at credit cards next, I now believe SoFi is the new leader in the fintech credit market. I continue to believe it is a market that is ripe for disruption, innovation and hundreds of billions of dollars in size.” AT: “This is really stating the obvious.”
- Community banks to have ability to purchase SoFi loans. GP:” Lenders have two main problems: finding borrowers and capital. The bigger the lender the worse the capital issue becomes as borrowers you can nearly always buy by spending more money. Another great move for SoFi, but not a new move: Lending Club and many other lenders had done this years ago. ” AT: “This is a step in the right direction. Online lending really needs a secondary market.”
- Review, takeaways from 2017 private placement conference. GP: “A healthy active issuance market.”
- Patch of Land hires CFO, CMO. AT: “It looks as if the new CMO is already making great strides.”
- Breakout Capital secures credit facility with Drift Capital Partners. GP:” A $25mil in revolving debt.”
- 3 reasons FinTech is failing. GP:” Failing is in the eye of the beholder. Did Apple look like a failure at any point? Is losing billions of dollars failing? How much did it cost to develop the iPhone and was that expense a loss until revenue started coming in? I personally believe that, like in politics, one can really tell what is success and what is failure only once history has settled. “AT: “While an interesting read, it seems self-serving. FinTech isn’t failing so much as experiencing a few growing pains. I agree with the three points mentioned as “reasons,” but I don’t so much think the implication that all FinTech companies must follow a similar path to success is true. The key to success is differentiation.”
- We need a government that embraces financial innovation. AT: “The underlying premise is a sound one, but the U.S. has never done anything like the rest of the world. That said, if we’re going to have a FinTech charter, it should foster innovation and help the industry grow.”
- Fund investments into UK FinTech plunge 33%. AT: “This is interesting. There is still much to celebrate in the UK, but should we blame this on Brexit?”
- A closer look at P2P. GP:” It is not surprising how the interest rates are converging due to competitive pressure and fundamental financial costs. A very interesting chart!” AT: “AltFi’s data is always interesting.”
- Saving Stream hits new milestone regarding value of outstanding loan book.
- Mitek launches in the UK.
- United States
- What the SoFi Acquisition of Zenbanx Means for the Future of Fintech (Lend Academy), Rated: AAA
- Promontory Interfinancial Network Clears a Path for Community Banks to Purchase SoFi Loans (Yahoo! Finance), Rated: AAA
- Review and takeaways from the 2017 private placement conference (Morningstar), Rated: AAA
- Patch of Land Adds Executives Including New CFO and CMO (Crowdfund Insider), Rated: AAA
- Breakout Capital Secures Credit Facility with Drift Capital Partners (Benzinga), Rated: A
- 3 Reasons Fintech Is Failing (Forbes), Rated: A
- We Need a Government that Embraces Financial Innovation (Crowdfund Insider), Rated: A
- United Kingdom
- Fund investments into UK fintech plunge 33% (Fund Strategy), Rated: AAA
- Alternative Finance – a closer look at P2P (AltFi), Rated: AAA
- Saving Stream Milestone: Value of Outstanding Loan Book Grows By 126% (Crowdfund Insider), Rated: A
- Nasdaq-listed fintech Pioneer Mitek launches in the UK (Yahoo! Finance), Rated: B
What the SoFi Acquisition of Zenbanx Means for the Future of Fintech (Lend Academy), Rated: AAA
Fintech companies of all kinds have started to partner with banks but this deal is different. It marks the first time that an online lending platform will have the ability to accept deposits.
The size of this deal brings to mind a similar deal from a few years ago when Spanish bank BBVA acquired the digital bank startup Simple for $117mn. Since that acquisition occurred, reporting shows that customer acquisition and disruption in the banking space is not as easy as it may sound. According to a Quartz report in May of 2014 the BBVA-Simple deal was a challenge from the start as the size of the deal raised alarm in the banking community and Simple’s customer growth was slowing down.
BBVA is still grappling with the ramifications of their 2014 acquisition, American Banker reports today that BBVA has taken nearly $90mn in goodwill impairment charges related to the Simple deal. While the charges seem steep, the company is still happy with the Simple deal from a digital standpoint and they have hired 260 more employees to help that part of the business run. Valuing a digital bank seems to be an inexact science to say the least; Simple went to BBVA for $117mn in 2014 and now BankMobile is on the market from Customers Bancorp in what analysts think will be a deal valued around $100mn.
Mike Cagney has also said that also on the list for SoFi will be their move into offering a credit card. As the roll out of their banking products begins, we will learn more about how this acquisition will affect their overall strategy.
Promontory Interfinancial Network Clears a Path for Community Banks to Purchase SoFi Loans (Yahoo! Finance), Rated: AAA
Promontory Interfinancial Network, LLC and Social Finance, Inc. (SoFi) today announced a new program to enable community banks to purchase super-prime student loans originated by SoFi. The program will help community banks gain access to SoFi’s high quality assets by streamlining the due diligence process.
To assist banks in assessing these loans, Promontory Interfinancial Network commissioned Promontory Financial Group, LLC, an IBM Company, to review and report on SoFi’s underwriting, operations, and systems. The report provides information and analysis banks can use to complement their own due diligence and assists them in their efforts to satisfy regulatory expectations for loan purchases and third-party risk.
The report describes SoFi’s current loan origination and post-origination practices and outlines the controls that SoFi has in place, including those that promote regulatory compliance, consumer privacy, and information security. In preparing the report, Promontory Financial Group reviewed SoFi policies, procedures, and contracts related to underwriting and servicing and tested loan files so as to confirm compliance with federal laws, regulations and guidance.
SoFi President and Chief Financial Officer Nino Fanlo said, “This unique partnership opens us up to a new group of bank investors and further diversifies our funding sources. Large banks have been buyers of our loans for several years, but this program will help small to mid-sized banks participate in the growth of this asset class, and we look forward to building relationships with them. With one of the largest bank networks of its kind, representing more than 47% of all U.S. banks, Promontory Interfinancial Network is an ideal partner for us.”
Review and takeaways from the 2017 private placement conference (Morningstar), Rated: AAA
The corporate bond market started 2017 with a healthy dose of new issue volume priced in the public debt markets. New issue supply in the corporate bond market totaled $178.5 billion in January. New issuance last week included several large new bond deals, such as Microsoft’s (rating: AA+, stable) $17 billion transaction. In December 2016, Morningstar Credit Ratings, LLC downgraded Microsoft by one notch, placing our AA+ corporate credit rating one notch lower than Moody’s and S&P. Our downgrade took into account the company’s trend toward higher use of debt, the result of a more aggressive shareholder-payout policy, and funding for the $26 billion acquisition of LinkedIn. Apple (rating: AA-, negative) also brought a large deal to market, pricing a $10 billion multitranche new issue. Again, our credit rating is lower than the other agencies, as we believe Apple’s credit profile has been affected by management’s trend toward more aggressive capital allocation and a dramatic increase in debt.
Patch of Land Adds Executives Including New CFO and CMO (Crowdfund Insider), Rated: AAA
Real estate crowdfunding platform Patch of Land has announced several management changes with two executives. Min Lee will be joining the real estate marketplace as the Chief Financial Officer and Robert Greenberg has been appointed as its Chief Marketing Officer. Patch of Land said the executives would help accelerate platform growth while stating the company has grown at a compound annual growth rate of more than 290%.
Greenberg has already implemented a program that has apparently grown monthly leads by nearly 270 percent compared to the average monthly totals of the previous nine months. Greenberg has also grown the number of crowdfunding investors registered on the company’s platform to more than 20,000 at year-end 2016.
Breakout Capital Secures Credit Facility with Drift Capital Partners (Benzinga), Rated: A
Breakout Capital, a technology-enabled small business lender, announced today it obtained a new revolving credit facility from Drift Capital Partners, LLC, an alternative asset management company based in Charleston, South Carolina. The facility is structured to scale in alignment with Breakout Capital’s rapid growth, and at least $25 million in revolving debt is expected to be available to provide working capital solutions to Breakout Capital’s current and future customers. Drift’s commitment equips Breakout Capital with significant incremental funding capacity to continue on its strong trajectory and to meet the robust and accelerating demand among small businesses nationwide for Breakout Capital’s transparent, flexible, and innovative financing solutions.
In addition to becoming one of the fastest growing lenders in the market, Breakout Capital is a Founding Member of the Coalition for Responsible Business Finance and a vocal advocate for comprehensive, standardized product and cost disclosure, and full transparency across all alternative finance products.
3 Reasons Fintech Is Failing (Forbes), Rated: A
Everyone from online lenders to bank technology companies has experienced elongated fund-raising cycles, missed targets, and mounting losses.
Right now, the pain is most acute in the online lending space, with industry juggernauts like OnDeck, Lending Club, and CAN Capital seeing depressed stock prices or worse.
While fears of a popping fintech bubble are justified, there is good news. It is by no means too late for the sector to pivot. The first step in saving the industry is to understand why it is failing.
Reason #1: There is a fundamental strategic contradiction between tech and finance
According to Mr. Flowers, “the tech idea that you must get big fast and dominate a sector” is at odds with the slow-moving nature of finance, and lending in particular.
Reason #2 Market realities encourage short-term thinking
If you engage with online lenders like Lending Club or OnDeck, you’d think that they were data companies first, and lenders second.
As competition increases, fintech organizations begin making riskier and riskier decisions. For companies like mine, it could mean accepting clients and deals that aren’t an ideal fit for our product. For online lenders, it means riskier and less desirable loans.
Reason #3: Incumbents in the market are powerful and resistant to change
Incumbents in the finance sector are incredibly powerful and complacent. Most don’t fear fintech companies looking to take their business because, frankly, not a single one poses a real threat at this time.
We Need a Government that Embraces Financial Innovation (Crowdfund Insider), Rated: A
The proposed Fintech charter is anti-FinTech. That’s right. Many Fintech firm founders started their companies because of the already undue burden placed upon the American populace. Most people struggle to access reliable banking products, cheaper credit, real-time payments and investment opportunities. Unfortunately, these are services and products that are rarely made available for the masses.
The OCC’s proposed charter will put us back at least a 100 years.
The white paper published by OCC spends most of its time arguing that the bureau has the “grounds” and certainly the “right” to establish a Fintech specialty charter. It reads like a legal opinion and argument on why the OCC is the single bureau to establish the Fintech charter and they are the ones that should regulate the charter membership. The white paper does not provide any incentive for Fintech companies to seek membership and gave no consideration to the undue burden the additional regulation will place on Fintech firms and established Fintech startups. It simply does not make any sense for any Fintech companies even to consider applying for the OCC’s proposed Fintech Charter.
OCC’s Proposed Fintech Charter is Anti-Innovation
The OCC provided us an illusion that somehow Fintech companies are at a disadvantage and only with a Federally issued bank charter would we finally become competitive to the banks.
This is simply not the case. The Banks support Fintech companies because they are not bound by outdated and overzealous regulation.
Innovative products and services from firms such as SoFi would have died on the table day one within larger institutions that are regulated by bureaus such as the OCC.
OCC’s Proposed Fintech Charter is Anti-Competitive
I have spent a fair amount of time recently in Australia and Asia, talking to Fintech founders and CEOs. Regulation and compliance is always a focal point of our conversations. Often, these conversations end up with their perceptive countries Fintech Sandbox.
The USA is Falling Behind
The United States has fallen far behind some of our global competitors such as China, India and the UK.
The last thing we need is for another government agency to throw its weight around and cast another shadow on our global competitiveness.
We want the OCC and other agencies to revise their proposal and provide the following:
- A single national charter that allows Deposits, Money Movement and Lending regulated by a single agency and supersedes all state regulation. Not multiple charters for multiple activities and an industry that must adhere to local and state regulations on top of federal rules.
- A Fintech sandbox that immediately allows all Fintech startups to move money through existing and alternative money movement rails.
Fund investments into UK fintech plunge 33% (Fund Strategy), Rated: AAA
A report by Innovate Finance and Pitchbook shows investment from venture capital funds fell 33.7 per cent in 2016 to $783m (£632.7m) compared to $1.2bn in 2015. Total investments following the referendum were $368m.
Fifty four per cent of investments came from UK-domiciled venture capital funds.
“Some of the steam is perhaps coming out of the peer-to-peer phenomenon with a shake out of the sector appearing likely as some of their portfolios start maturing.”
Globally the report found fintech investment increased 10.9 per cent to $17.4bn, compared to $15.6bn in 2015.
Alternative lending and financing accounted for 29 per cent of investment and challenger banks accounted for 20 per cent.
The US also saw investment decrease in 2016 to $6.2bn, down 12.7 per cent on the previous year. It was surpassed by China with deal value at $7.7bn.
Alternative Finance – a closer look at P2P (AltFi), Rated: AAA
Since the EU referendum vote last year, inflation in the UK has accelerated (thanks to sterling’s depreciation) but wage growth has remained stagnant, and mortgage rates have risen from their record lows but the interest rates on our savings haven’t budged. Life, as we’re often reminded, just isn’t fair.
Thanks to AltFi Data, we have also been able to track how this nascent industry has evolved since its conception. In particular, it is interesting to note how gross yields across the UK’s largest P2P lending platforms, despite the differing characteristics of their various business models, appear to have converged over time and currently sit around the 8 – 9 per cent range.
RateSetter, which pioneered the concept of a “provision fund” to shelter investors against losses from borrower default, is an outlier here with its consistently low average yields (around 4 per cent).
Another observation worth highlighting is how arrears have crept higher in recent years, driven predominantly by borrowers with lower credit ratings. AltFi Data’s numbers on Zopa, which provide us with the most granular data we have, suggests that borrowers in the A* band almost never fall behind on payments, while those in the lowest bands, C, D & E have seen their arrears rise steadily since 2014 (see Fig. 2 below). This has contributed to more instances of bad debt in the 2014 and 2015 vintages (see Fig. 3 below), although the overall picture remains fairly robust thanks to Zopa’s core A* offering anchoring the numbers.
Saving Stream Milestone: Value of Outstanding Loan Book Grows By 126% (Crowdfund Insider), Rated: A
On Tuesday, P2P lending platform Saving Stream announced its value of outstanding loan book grew by 126% during 2016. In its year review, Saving Stream stated over the last year, its outstanding loan book increased from approximately £73m in December 2015 to £165m in December 2016.
Saving Stream, which was founded in 2012 and is regulated by the FCA, stated its loan portfolio has also significantly increased, having now lent over £250m to property developers and purchasers. In addition, £60m has been repaid to investors. The platform has grown and has more than 13,000 registered users.
Nasdaq-listed fintech Pioneer Mitek launches in the UK (Yahoo! Finance), Rated: B
Mitek (MITK), a global leader in mobile capture and identity verification software solutions, has launched in the UK with a new office established in London. The US-based company works with over 5,500 organisations providing its technology to 70 million consumers across the globe. Mitek provides financial institutions and other highly regulated businesses with mobile verification technology underpinned by artificial intelligence (AI) that establishes an individual’s identity remotely to accelerate the digitisation of Know Your Customer (KYC) and Customer Due Diligence (CDD) processes around on boarding and payments.
This technology is already used by more than 70 million consumers, and is embedded in over five thousand apps by banks, insurance providers, payments providers, and other financial services. Mitek also offers “selfie authentication”, where the user can use their mobile device’s camera to perform a facial recognition scan in order to on-board into a service or authorise a transaction.