Daily News Digest Featured News

Tuesday February 21 2017, Daily News Digest

News Comments

United States

  • Defaults Slash Returns for Online Loan Investors GP:”Very interesting data from Colchis and P2P GI. A must read. Defaults are a real problem that has to be taken seriously.”
  • PeerIQ’s weekly industry update. GP: “Lending Club is showing stronger interest in balance-sheet risk throught building securitization shelf in-house. Other platforms may want to take note. And a very interesting reminder that all debt indicators are in the green.” AT: “With consumer confidence high, wage growth strong, and other economic indicators improving, we should see a rise in consumer loans. The outlook for MPL has never been better.”
  • High rate of defaults hit P2P lending sector. GP:” Finextra is mentioning this article. AT: “This is truly one of the biggest problems the industry faces. On the flip side, defaults are bound to happen. They are a critical part of the lending business.”

United Kingdom

European Union

Australia

Asia

India

United States

Defaults Slash Returns for Online Loan Investors, (WSJ), Rated: AAA

LendingClub unit, Colchis Capital record lowest returns in their main funds since each launched in 2011.

At LC Advisors, the Broad Based Consumer Credit (Q) Fund returned 1.83% in 2016, down from 5.76% in 2015 and 8.02% in 2014, according to the investor documents. That was worse than the 2.65% return of the Bloomberg Barclays U.S. Aggregate Index, a broad measure of performance of various fixed-income securities that LC Advisors uses as a benchmark.

LendingClub said in a securities filing in January that it was seeing signs of a stabilization in delinquencies after it raised rates on borrowers by a weighted average of 1.18 percentage points over the course of several months. And the Broad Based Consumer Credit (Q) Fund has outperformed its benchmark by more than 2 percentage points over the past three years. “The holistic performance of the Fund tells an important story,” LC Advisors said in a letter to investors.

Colchis’s P2P Income Funds, which have $1.3 billion in assets under management, posted a 2016 return of 6.2%, according to investor documents.

Colchis’s returns exceeded 9% in each of the preceding four years but were weighed down in 2016 in part because of weak debt-collection efforts at LendingClub and Prosper and a new accounting regime introduced earlier in the year, according to the documents.

Meanwhile, P2P Global Investments, which is managed by a unit of U.K. hedge-fund firm Marshall Wace LLP and listed on the London Stock Exchange, returned 4.1% in 2016, down from 6.6% the year prior.

At the end of the year, the fund’s shares traded at a roughly 20% discount to its net asset value.

Weekly Industry Update: February 20, 2017 (PeerIQ), Rated: AAA

In a major shift, Lending Club unveiled in their earnings announcement its plans to sponsor its own securitization program with up to $100 Mn in quarterly issuance. Although the size of issuance is relatively small to Lending Club’s overall origination volume, the shift reflects Lending Club’s new management team’s willingness to take balance-sheet risk.

OnDeck reported fourth quarter and full year 2016 financial results on Thursday. Despite record revenue and origination, investors reacted negatively due to a build-up of loan loss provisions (up 3x to $55Mn) and wider realized losses for the quarter (~$36.5 Mn in Q4 ’16 losses vs. a loss of $5.1 Mn in the prior year period).

The Consumer Confidence Index is at a 10+ year high, wage growth is strong (91-month high), and other economic data (housing starts, asset prices, home values) are near or have exceeded their peak levels.

Under the buoyant backdrop, the Fed’s Center for Microeconomic Data also released its latest Quarterly Report on Household Debt and Credit. The report revealed that total consumer debt outstanding increased $226 Bn to $12.6 Tn (1.8% growth) in Q4.

This increase was driven by increases across all debt products with significant growth in non-mortgage products (particularly, student, auto, and credit card). Mortgage origination volume, including refinancing activities, stands at $617 Bn – the highest level since the 2008 Great Recession. Consumer debt balances are at the highest level since 2007 Q3.

High rate of defaults hit P2P lending sector (Finextra), Rated: AAA

Investors in the peer to peer (P2P) lending sector have seen their returns suffer due to a high rate of borrower defaults among start-ups, reports the Wall Street Journal (WSJ).

Shares in a number of P2P lending platforms have dropped as high profile players like US-based LendingClub and On Deck Capital have faced numerous difficulties. Investors previously attracted to the sector are now rethinking their approach, reports the WSJ.

The lending platforms are finding it difficult to bring down the default rates of their borrowers – insisting on more stringent credit standards and a more thorough application process would make the challenger lenders less attractive in comparison to the incumbent, traditinal lenders.

 

United Kingdom

Midsized Companies Turn to Marketplace Lending at Lendix & Creditshelf (Crowdfund Insider), Rated: AAA

At the onset of the marketplace lending market, lending to businesses was equated with lending to small and very small businesses: businesses at the low end of the small and medium-size enterprise (SME) market who were borrowing on average under €100,000. However, as the alternative lending market matures, it seems to attract larger SMEs borrowing bigger tickets, north of €400,000.

Olivier Goy is the founder and CEO of Lendix, an international business lending marketplace launched 2 years ago in France which has since then expanded into Spain and Italy. Tim Thabe is the co-founder and Managing Director of creditshelf, a German B2B lending marketplace for SME corporate borrowers and professional investors which launched in 2015.

Olivier GoyAt the onset, we did not plan to serve bigger tickets.

To give you an idea: the average loan size projected in our business plan was €50,000. The actual loan size in our first year of operation was €200,000. Now it is €400,000.

Of course, our funding mix, the fact that 80% of our funding comes from institutional investors was key to achieving this.

Tim Thabe: Indeed, we have deliberately targeted larger tickets. Our motivation was twofold. Firstly, we believed that we needed larger tickets to justify the expense of in-depth credit risk analysis. Secondly, the larger SMEs have more history and substance, and therefore more material to which we can apply this risk analysis in a meaningful way.

Currently, our average loan size is between €500,000 and €600,000. We expect it to grow towards between €800,000 and €1 million.

Olivier Goy: Bigger tickets are less expensive to recruit than small SME borrowers. However, the structure of larger SMEs is more complex, therefore is takes more time to analyze them and assess their credit risk. So far, we have not noticed a major difference in default rate, even though we know for a fact that there is a negative correlation between company size and credit default rate.

Olivier Goy:  European alternative investment funds (ELTIFs) now make it easier to invest in larger tickets. We are voluntarily limiting ourselves to €2.5 – €3 million because don’t want to be exposed to a few big tickets.

Tim Thabe: At creditshelf, we don’t have a regulatory loan size limit because we use a fronting bank and because we raise funds for each project from a small number of accredited investors; 20 or fewer.

The main issue with regulation is that it is not consistent throughout Europe.

Tim Thabe: We believe that there is a gap in the private debt market reaching from very small tickets all the way up to ticket sizes of €10 million or €15 million where private debt funds are starting to operate and traditional private placements can be arranged economically.

OFF3R Index: Strong P2P Lending Growth Continues (Crowdfund Insider), Rated: AAA

OFF3R, an online marketplace for alternative investments, published a report on P2P lending and crowdfunding last week. OFF3R said that while equity crowdfunding sagged in January – dropping 65% from December – P2P lending remained strong.

Regarding P2P lending, OFF3R covers nine UK platforms in their Index. According to their numbers, these nine platforms lent a total of £294 million in January 2017, an increase of 6% versus December 2016.

OFF3R stated that historically low-interest rates are helping to drive investor interest in P2P lending assets as their risk-adjusted returns are appealing. OFF3R said this is highlighted by the fact that the Index platforms lent 50% more money in January 2017 compared to the same month in 2016.

OFF3R

Banks warm to alternative finance providers (Bridging&Commercial), Rated: AAA

Speaking at Fintech Fortnight on 16th February, Angus Dent, CEO of P2P business lender ArchOver, revealed that some banks were now directing borrowers they cannot serve to alternative finance providers rather than rejecting them outright.

Angus suggested that by recommending borrowers to platforms such as ArchOver or RateSetter, banks could maintain a relationship with the client rather than risk losing them to a competitor in future.

P2P lending discovers new pitfalls in the construction sector (Financial Times), Rated: AAA

A couple of years ago, a little-known civil engineering company called Elimco UK got into trouble.

Pressed for money, the company did what a small but growing number of businesses are doing today. It turned to the “peer-to-peer” lending sector. In June 2015, Elimco began using MarketInvoice, a startup backed by the government-owned British Business Bank. Cash flowed again, but not for long. Eight months later, Elimco was in administration and MarketInvoice’s investors were looking at losses of almost £800,000.

When MarketInvoice first took on Elimco as a customer in June 2015, the firm was assigned a high risk rating, seven out of 10, even though it had a guarantee from its Spanish parent company. But Elimco’s risk rating soon improved dramatically. By August, just two months later, it was selling invoices with a risk rating of two out of 10, in part because it had made payments on time.

To-date, MarketInvoice has financed around £1bn in invoices and plans to double that number this year alone. The construction sector accounts for about 16 per cent of invoices* sold through the seven-year old startup.

One of the factors investors are unable to filter by with MarketInvoice’s autobid function, however, is sector. An investor can’t decide to avoid construction companies, for example. Last year, in an email to an investor seen by FT Alphaville, a MarketInvoice employee said this was because it would be harder for businesses to get financing if investors could engage in sector by sector “cherry picking”.

In construction, you have ‘set off’ rights, which give a customer the right to withhold payments due on one contract in order to compensate for costs incurred on another contract. It’s basically a form of security for the customer.

Set off rights proved to be an issue in the case of Elimco. When it went into administration, it was owed £1.4m by Scottish Power, which in turn claimed around £2m for costs it would have to incur to complete other work Elimco was contracted to do. Elimco UK had little in the way of assets, so the only money available to be distributed to MarketInvoice was the money owed by Scottish Power, which had effectively said it wouldn’t pay because of its ‘set off’ rights.

BondMason CEO Stephen Findlay Comments on RBS Move into Online Lending via NatWest (Crowdfund Insider), Rated: A

Last week, NatWest – part of the Royal Bank of Scotland (RBS) – announced a new online platform designed to simplify the loan making process for UK SMEs.

Stephen Findlay, CEO of BondMason – Robo-Advisor for investors in P2P loans, shared his thoughts on RBS’s strategic move challenging peer to peer lending.

“… we don’t view this as negative competition to the P2P platforms already in this space, or vice versa. Rather, we think these different offerings will complement the industry and encourage improved standards and better self-regulation as more participants enter the market – a ‘flight to quality’ which we certainly welcome. The move by the banks also supports the growth of what is becoming a mainstream asset class, demonstrating that P2P lending is now recognized and being embraced by the traditional banking and finance sector.”

European Union

Anaxago Opens Up French Real Estate Crowdfunding to Institutional Investors (Crowdfund Insider), Rated: AAA

Anaxago Immobilier, the real estate arm of leading French equity crowdfunding platform announced last Saturday that it has secured € 10 million of funding pledged by a group of French institutional investors, qualified investors, and family offices to finance real estate development projects alongside retail investors. With this move, the firm departs from its 100% retail investor-funded model.

The French real estate crowdfunding market emerged only in 2015. It is almost entirely dedicated to the short-term (average 17 months) debt-funding of real estate development, as opposed to funding buy-to-let.

This FinTech CEO Is Making Money Instantly Available Anywhere In The World (Forbes), Rated: A

The mission of Creamfinance is to become the first one-click consumer loan provider in the world; making money available anytime, anywhere. The startup has raised over $7.3 million in funding to date, and has grown to over 200 employees expanding across 7 countries. In 2014, the data-driven consumer lending company raised 5 million Euros from the leading international venture capital fund, Flint Capital, which invests across the U.S., Israel and Europe.

Creamfinance currently offers consumers rapid credit solutions in several global markets, including Poland, Latvia, Czech Republic, Georgia, Denmark, and Mexico.

Matiss Ansviesulis: We focus on Smart Data scoring, otherwise known as behavioral pattern recognitions tools focusing on relevant, value-adding data.

We all know that big data is defined around four core aspects – data volume, velocity, veracity, and value. Whereas volume and velocity aspects refer to data generation and storage process, veracity and value deal with the usefulness of the data. In Big Data, due to the large number of data points, a lot of noise is being created, which challenges the value of data. Instead, we focus on smart data — well-defined, meaningful information that can expedite information processing and offer more privacy, stability. This is way more economical and creates less noise.

In 3-5 years, I hope to have initiated more discussion and action towards FinTech and banks cooperation. Also, in 3-5 years, I expect other companies to put emphasis on smart data scoring that leads to quicker decision making, and therefore more speedy loans for the customer.

Australia

Federal Treasurer Scott Morrison recently told a G20 conference in Germany of his plans to encourage more robo-adviser start-ups to launch in Australia.

But his comments highlight a general lack of understanding of the differences between “robo-advisers” and the digital advice needs of the majority of Australians.

However this leads to a common misunderstanding that pure B2C robo-advice start-ups address the everyday person, they don’t. In fact, we estimate they will only represent 5 per cent of the market.

It is broadly accepted that 15 per cent of the Australian population utilises traditional financial advisers (about 2.4 million people currently see planners according to Investment Trends— and typically that is the wealthiest 15 per cent of the population seeking to enhance investment opportunities.

The fact is robo-advisers are geared towards people making non-super investments. Ordinary working Australians – the other 85 per cent of the market – are accumulating wealth into superannuation and their homes.

Advising the remaining 80 per cent of the population is what the banks and super funds are striving for.

Asia

Alibaba Unit to Invest $ 200 Million in Korea’s Kakao Pay (Cryptocoins News), Rated: AAA

China’s Ant Financial, the financial investment arm of Alibaba Group and the world’s most valuable Fintech company, will invest $200 million in the mobile payment subsidiary of Kakao Corp, a major South Korean messaging platform.

Ant Financial announced the investment to be a part of a ‘larger strategic partnership agreement’ which will see Kakao Pay gain access to Ant Financial’s tremendously popular Alipay platform, allowing subscribers of both platforms to use each other’s services. Fundamentally, the move is to bridge Ant’s 450 million global users with Kakao Pay, which has over 14 million members in South Korea.

Further, the new partnership will benefit some 7.5 annual Chinese tourists visiting South Korea. Alipay users will be able to use their payments app with Kakao’s network of 34,000 South Korean merchants, both online and offline.

New platform revolutionizes the way Cambodian businesses borrow money (Southeast Asia Globe), Rated: A

Frustrated by limited funding options for small businesses, Chansamrach Lem launched the country’s first online peer-to-peer lending platform

Securing funding is a significant challenge for small- and medium-sized enterprises (SMEs) everywhere, but it is an even bigger obstacle in Cambodia, where banks, by and large, only accept real estate as loan collateral and few alternative financing solutions exist beyond friends and family.

While other P2P lending platforms are already in use in Cambodia, Komchey is the first such software to be designed and owned by a Cambodian company.

India

RBI asks banks to collaborate with fintech cos (India Times), Rated: A

The RBI deputy governor has said that in view of the competition from fintech companies, banks should reorient their business model and look at collaborating with more efficient players after assessing the likely impact of disruption.

The deputy governor said that SME lending, being a hugely underserved market, is a major opportunity for fintech startups to build and scale up sustainable businesses by offering services such as credit underwriting, and marketplace lending.

With around 51 million units throughout the geographical expanse of the country, MSMEs contribute around 8% of GDP, 40% of the total exports and around 45% of the manufacturing output.

South America

Interview with the CEO of Brazil Fintech Company, IOUU (TechBullion), Rated: A

Bruno Sayão: Our inspirations are Funding Circle (Europe) and Prosper (USA) and like them, we are passionate about micro and small companies, so we want to revolutionize the way they access financing. For this, we want to build a marketplace and make financing fair, simple and fast.

Bruno Sayão: IOUU charges only a credit origination fee after the company is able to capture the desired loan amount.

Bruno Sayão: In IOUU we try within 48 hours to inform if the company is going to be able to take loan with us, we created an extremely efficient process, whereas in the banks these processes are inefficient.

In addition, the interest rates charged are much lower than the banks, since our spread is extremely low because the whole process is done 100% online and we do not hide tariffs, the borrower knows exactly how much to pay in interest, IOF and Rate.

Bruno Sayão : Currently our biggest challenge is to get a partner financial institution interested in backing our operations, because in Brazil we can only operate being within the norms of the Central Bank of Brazil, since we act as banking correspondent;

Bruno Sayão : For the Brazilian to invest is still difficult and complex. People can not really understand the types of investments that are available and how they can do them. Estimates indicate that 55 million people over the age of 18 do not have a bank account and that 40% of micro and small enterprises in Brazil are debtors.

Bruno Sayão : Peer to peer lending is a risky investment made to diversify the investor’s portfolio. To mitigate risk to the maximum for the investor, our technology can verify in more than 500 public and private databases the credit history of the companies that will be published for capture in the platform. In addition, we recommend never investing the entire value in a single company, but rather diversify the investment into a pool of companies.

Authors:

George Popescu
George Popescu
Allen Taylor
Allen Taylor

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