Daily News Digest Featured News

Wednesday May 24 2017, Daily News Digest

News Comments

United States

  • Commercial & Industrial loans: Does it spell recession? GP:”Everybody is looking for an early indicator of a recession. However markets go up and down for all kind of reasons and indicators nearly always give fake alerts as well. If there was a sure way for an indicator to show which way the market is moving everybody would be a billionnaire. Indicators also work great looking backwards or retrofitting. So while this data is indeed interesting and relevant I would wait for a few more data points and confirming information from other markets and sources and I would want to understand the mechanism underlying the trend before calling wolf.” AT: “I’m no expert on economics, but I have always been amazed at how small details can buck megatrends. The fact is, most economic predictions fail, even when there is good evidence the predictor know what he’s talking about. I’m always skeptical of such data, but I do think it’s interesting. A great read.”
  • Auto lender Santander checked income on just 8% in subprime ABS. AT: “There is always a strong play and some tension against the interests of lenders and borrowers, particularly subprime borrowers. If they want a loan and are afraid they’ll be rejected based on credit scores, there is motivational incentive to engage in financial sleight-of-hand to get that loan. Lender, however, can play their own sleight-of-hand if they want the borrowers. This makes me wonder if we’re headed toward a mortgage-like crisis with auto loans, and, if so, we can expect the same old finger pointing game.”
  • Lending Club publishes vintage performance data. GP:”The net cumulative lifetime charge off is looking really ugly. A must see. 2014 was the worst to date, 2015 is even worse, and 2016 is starting even worse. If I were Lending Club I would ring the alarm bell. Do note that in the same time their origination went from $2.7bil/quarter in Q1 2016 to $2bil in Q1 2017. I think this spells trouble for Lending Club.”
  • Elevate Credit Q1 results. GP”Key numbers: loan loss is about 50%. Ebitda 16% going to 20% . Why exactly isn’t their stock price going up?”AT: “Elevate Credit is looking good.”
  • Americans with financial advisors happier about retirement, economy. AT: “This doesn’t surprise me. People who can’t afford financial advisors typically understand less about how the economy works. They approach retirement savings like diagnosing their medical issues.”
  • MPL: Just because I’m disruptive doesn’t mean we can’t be friends.
  • 19 fintech startups in Austin. AT: “Austin is shaping up to be the fintech capital of the Southwest.”
  • Close loopholes for online lenders in New York. GP:”I don’t think online lenders are evading any regulation by working with banks. They are FDIC or OCC regulated. Why do state regulators out of sudden worry about banks doing loans accross state boarders? I don’t understand the root cause of this cruisade.”
  • Online Lending Association opposes California legislation to cap interest rates. GP:”Caping interest rates may look good for the consumer but in fact it forces consumers who wouldn’t qualify under the cap to either be denied or to end up with an illegal money-lender on the black market and pay even more.”
  • If banks wait for APIs to be mandated, it will be too late. GP:”APIs are the way in the future for data , finance, fintech and in general doing business. They offer tremendous scalability and they provide leverage. Most people are concerned about data control if you have an API or just pure control. However there are many ways to control who has access and what they do with the data. Banks have experience with this in capital markets, at least in currency trading as I know first hand. ” AT: “Yes, yes it will.”
  • Empowering fintech with in-memory computing.
  • Small Change focuses on community development.

United Kingdom

European Union

International

Australia

Canada

Africa

News Summary

United States

C&I Loans: Are We Headed For a Recession? (Business Insider), Rated: AAA

Over the past five decades, each time commercial and industrial loan balances at US banks shrank or stalled as companies cut back or as banks tightened their lending standards in reaction to the economy they found themselves in, a recession was either already in progress or would start soon. There has been no exception since the 1960s. Last time this happened was during the Financial Crisis.

Now it’s happening again – with a 1990/91 recession twist.

c&i loansCommercial and industrial loans outstanding fell to $2.095 trillion on May 10, according to the Fed’s Board of Governors weekly report on Friday. That’s down 4.5% from the peak on November 16, 2016. It’s below the level of outstanding C&I loans on October 19. And it marks the 30th week in a row of no growth in C&I loans.

Based on the Fed’s monthly reports, C&I loans outstanding at the end of April, at $2.095 trillion, were down a smidgen from October’s $2.098 trillion and were down 4.3% from the peak in November. This marks the seventh month in a row of no growth in loans.

c&i loans banks

C&I loans are tightly connected to the real economy. They’re an indication of what businesses are up to, from a shop needing a loan to buy a piece of equipment to the multinational funding its receivables. C&I loans show whether companies in aggregate are expanding their needs and activities or whether they’re curtailing them.

More typical scenarios would be the prior two recessions. In 2001, C&I loans peaked in February 2001 and then declined. The official recession began in March 2001 and ended in November 2001. But C&I loans kept falling until May 2004.

c&i loans 1987-1994

Where does that leave us today? In the first quarter, GDP grew at a desperately anemic 0.7% annualized, meaning that at this rate, growth for the entire year would be 0.7%. But it’s not a decline. This type of stagnation would be far below the lamentably anemic 1.6% growth in 2016 and the standard issue projection by the Fed of around 2% growth in 2017.

Auto Lender Santander Checked Income on Just 8% in Subprime ABS (Bloomberg), Rated: AAA

Santander Consumer USA Holdings Inc., one of the biggest subprime auto finance companies, verified income on just 8 percent of borrowers whose loans it recently bundled into $1 billion of bonds, according to Moody’s Investors Service.

The low level of due diligence on applicants compares with 64 percent for loans in a recent securitization sold by General Motors Financial Co.’s AmeriCredit unit. The lack of checks may be one factor in explaining higher loan lossesexperienced by Santander Consumer in bond deals that it has sold in recent years, Moody’s analysts Jody Shenn and Nick Monzillo wrote in a May 17 report, which reviewed data required of asset-backed bond issuers that’s recently been made available.

The higher losses in the loans backing the bonds have been visible to investors, Kang said. Investors have been protected because Santander Consumer included extra loans in the securities in case some went bad, for example, creating a buffer against losses, he said. The Moody’s analysts didn’t make any claim that noteholders were at risk as the bond-grader simply looked at the new data available in the deals to provide analysis on how lenders underwrite.

Moody’s findings shed light on risks related to the boom in auto loans, which has contributed to pushing U.S. household debt past $12.7 trillion. While the market for the debt is much smaller than the subprime-mortgage market that triggered the Great Recession, regulators have grown concerned that lenders are taking advantage of borrowers and putting them in cars that they can’t afford.

Loans with low or no credit scores, no co-signer and no income verification made up about 9 percent of the total pool balance of Santander’s bonds, compared with less than 1 percent of AmeriCredit bonds, according to Moody’s.

Fraud Concern

Market participants have become concerned with rising fraud levels, and signs that borrowers are getting smarter at gaming their credit scores to make them appear stronger than they really are. As many as one in five auto-loan borrowers admitted in a recent UBS Group AG survey that their applications for debt contained inaccuracies. Santander Consumer recently convened with a dozen of its competitors to discuss how to combat rising fraud, Bloomberg previously reported.

Around 42 percent of Santander Consumer’s subprime auto loans made between 2009 and 2014 by dealers identified as “high risk” in Massachusetts and Delaware have defaulted or will default, an amount that is substantially higher than the losses in the overall lending portfolio, Moody’s said in a separate report.

Around 42 percent of Santander Consumer’s subprime auto loans made between 2009 and 2014 by dealers identified as “high risk” in Massachusetts and Delaware have defaulted or will default, an amount that is substantially higher than the losses in the overall lending portfolio, Moody’s said in a separate report.

Lending Club Publishes Vintage Performance Data (Lend Academy), Rated: AAA\

Yesterday Lending Club filed a S-3ASR with the SEC which provides comprehensive and updated information on the business.

Below is a chart of interest rates over time for grades A-G. For many grades you can see a ‘V’ shape as interest rates decreased from around 2013 until 2015 when they started to increase.

Lending Club interest rates

If you invested across the platform in 2015 your performance remains in line with 2012 vintage although your charge-offs are still elevated from some of Lending Club’s best vintages. 2015 charge off rates at month 19 are 40 bps above 2014, 80 bps above 2013 and 130 bps above 2011 (the best performing vintage of 36 month loans).

Lending Club net cumulative charge offs

While still early, 60 month loans originated in 2015 are performing in line with the 2011 vintage. 2015 charge-offs at month 19 are 100 bps higher than 2013 and 80 bps higher than 2014.

Investors in grades A-C fared much better than those who invested in grades D-G. For most loan grades it is hard to distinguish trends for the 2016 vintage with the exception of E grade loans where you can see charge-offs are trending higher than 2015.

Elevate Credit: Elevated Results (Seeking Alpha), Rated: AAA

The first quarterly report after an IPO is always crucial to understand a company. Companies are typically in major growth modes and investors get the first opportunity to view results in comparison to market expectations. As well, investors will have to substantially modify future results for the additional 14 million shares from the IPO and the expected $14 million dip in annual interest expenses from paying off high cost funding with the IPO proceeds.

For Q1, Elevate Credit passed with flying colors. The fintech beat EPS estimates by $0.05 and exceeded revenue estimates easily.

The biggest issue remains the loan loss rates and cost of funding. For Q1, Elevate had a loan loss provision of 54%. At the same time, net interest expenses of $19.2 million virtually wiped out all of the impressive operating income of $21.6 million.

The company targets reaching adjusted EBITDA of $100 million this quarter. At a current market cap of $315 million, the stock only trades at 3x EBITDA targets.

Elevate Credit

Americans With Financial Advisors Feel More Prepared For Retirement, Optimistic about the Economy and Less Stressed (PR Newswire), Rated: A

New findings from Northwestern Mutual’s Planning & Progress Study revealed that Americans who receive guidance from financial advisors feel markedly more prepared for retirement. According to the data:

  • 7 in 10 (70%) Americans with advisors said their retirement plan is designed to withstand market cycles compared to 30% of those who do not use an advisor
  • Nearly all those with an advisor (92%) have discussed retirement with someone relative to just half (51%) of those without an advisor
  • People without financial advisors are twice as likely (53%) as those with advisors (27%) to view lack of savings as an obstacle to financial security in retirement
  • 49% of people without an advisor have taken no steps to address the possibility of outliving their savings – three times as many as those with an advisor (15%)

MARKETPLACE LENDING: JUST BECAUSE I’M DISRUPTIVE DOESN’T MEAN WE CAN’T BE FRIENDS! (All About Alpha), Rated: A

Mark Shore, chief research officer of Shore Capital Research, and an adjunct professor at DePaul University, has prepared an “overview” of marketplace lending for institutional investors and wealth managers.
alternative lending
The grey bars in the above graph represent recessions. The curve flattened out for a period in the early 1980s, carrying it through the two recessions of that period, then resumed its upward path. It flattened out again in the early 1990s, and again soon resumed that path., It was utterly unaffected by the dotcom bust and the resulting recession at the beginning of the new millennium. But it was thrown briefly into reverse by the global financial crisis less than a decade later. Still, here too, it has resumed its upward path.

What all this establishes, in Shore’s view, is that with total outstanding consumer credit at $3.7 trillion, MPL has room for further growth.

19 fintech startups in Austin that are shaking up finance (Built in Austin), Rated: A

Austin is emerging as a center for fintech innovation. Entrepreneurs are collaborating with the financial sector steeped in centuries-old traditions, and creating a new way to approach this age old industry. Here are some of the most prominent leaders in Austin fintech, along with a few startups worth keeping an eye on.

  1. Creditcards.com
  2. Founded in 2004, World First provides businesses with currency exchange and international payment solutions across the world.
  3. Buzz Points developed a loyalty and rewards program, rewarding customers for going local with businesses and financial institutions, instead of buying and banking from national chains.
  4. Self Lender launched in September 2014 to help consumers build good credit.
  5. Student Loan Genius offers a leg up with a 401k-style financial perk to help employees pay off their school debt faster.
  6. EasyPayDirect gives online merchants an easy way to accept payments, plain and simple.
  7. Banker’s Toolbox provides software-based solutions and consulting to small banks to help detect fraud, money laundering and other financial crimes.
  8. Able Lending
  9. Honest Dollar launched at SxSW and raised $3 million to offer alternative, streamlined retirement savings plans directly to workers.
  10. SimplyTapp launched its mobile payments platform for card issuers and developers in the summer of 2014 to ultimately allow consumers to make easy payments from their smartphones in lieu of physical cards or cash.

See the other 9 here.

Close loopholes for online lenders, N.Y. regulator urges Albany (American Banker), Rated: A

Online lenders are evading New York regulations by claiming their loans are “made” by federally chartered or out-of-state partner banks, the state’s top financial regulator told lawmakers in Albany Monday.

Online Lending Association Opposes California Legislation to Cap Interest Rates (Crowdfund Insider), Rated: A

The Online Lenders Alliance (OLA) has sent a letter to the California Assembly Apparitions Committee stating their “strong opposition” to AB 784.  This bill, if enacted into law, will set a rate cap for consumer loans between $300 and $5000.  OLA states this legislation has the potential to limit an important source of funds of underbanked consumers in California.

If banks wait for APIs to be mandated, it will be too late (American Banker), Rated: A

Many executives believe the U.S. will get a similar PSD2 mandate, and they fear that the U.S. version of the regulation will force them to give up unilateral ownership of a treasure trove of data and cause further erosion to their bank’s bottom line. To them, designing, building, securing and maintaining an API for consumers, fintechs and others to use is a scary, losing proposition. The reality, however, is that the data-sharing model is essential for customer retention. Instead of fearing potential regulation, banks should embrace the open banking model now.

First, with the flood of technological change hitting financial services, there are compelling reasons APIs will soon emerge as a truly transformational innovation that makes consumers want to stay with their bank. APIs will have the same effect on retention while improving the consumer’s experience to a larger degree; they make managing their financial lives easier. If a customer can get that convenience through his/her bank, it will be an even greater incentive to stay with that bank.

Empowering fintech with in-memory computing (Bob’s Guide), Rated: A

Empowering Fintech with In-Memory Computing, a new whitepaper by GridGain Systems, discusses how in-memory computing is one of the key technologies powering the Fintech revolution.

a) In-memory data grids are inserted between the application and database layers to cache disk-based data from RDBMS, NoSQL, and Hadoop databases in RAM. Data grids typically replicate and partition data caches automatically across multiple nodes and enable on-demand scalability simply by adding new nodes to the cluster. Some data grids offer ACID-compliance, as well as support for all popular RDBMS.

b) In-memory SQL grids supplement or replace a disk-based RDBMS, utilising ODBC and JDBC APIs to communicate with the SQL grid. An in-memory SQL grid typically requires no custom coding and is horizontally-scalable, fault-tolerant and ANSI SQL-99 compliant. It should also support all SQL and DML commands such as SELECT, UPDATE, INSERT, MERGE and DELETE queries. Some in-memory SQL grids also support geospatial data.

c) In-memory compute grids enable distributed parallel processing of resource-intensive compute tasks. They typically offer adaptive load balancing, automatic fault tolerance, linear scalability and custom scheduling. They may also be built around a pluggable service provider interface (SPI) design to offer a direct API for Fork-Join and MapReduce processing.

d) In-memory service grids provide control over services deployed on each cluster node and guarantee the continuous availability of all deployed services in case of node failures. Most in-memory service grids can automatically deploy services on node startup, deploy multiple instances of a service, and terminate any deployed service.

e) In-memory streaming and continuous event processing establish windows for processing and run either one-time or continuous queries against these windows. The event workflow is typically customizable and is often used for real-time analytics. Data can be indexed as it is being streamed to make it possible to run extremely fast distributed SQL queries against the streaming data.

f) In-memory Apache Hadoop acceleration provides easy-to-use extensions to the disk-based Hadoop Distributed File System (HDFS) and traditional MapReduce, delivering up to ten times faster performance. The in-memory computing platform can be layered on top of an existing HDFS and used as a caching layer offering read-through and write-through, while the compute grid can run in-memory MapReduce.

New real estate crowdfunding site focuses on community development (Curbed), Rated: B

That’s the promise behind Small Change, a new real estate fundraising platform Picker founded that’s designed to help communities play a bigger role in their own redevelopment. Often, smaller projects rely on a grab bag of funding, including community development block grants and scores of small investors, making the process of assembling capital time-consuming. By creating a platform that anybody with enough money can use—some projects take investments as small as $500—Small Change seeks to democratize and streamline the entire funding process and help buttress “transformational” developments.

Since starting last summer, the platform has raised more than half a million dollars, and Picker was named a Global Urban Innovator by the NewCities Foundation,

United Kingdom

Funding Circle gets FCA seal of approval (Financial Times), Rated: AAA

Funding Circle, the largest peer-to-peer company in the UK, has received authorisation from the City watchdog in a seal of approval for the burgeoning small business lending site.

Authorisation will enable Funding Circle to expand and launch its Innovative Finance ISA, which allows individuals to lend to borrowers in return for income within a tax-free wrapper.

Some robo-advisers are more equal than others (City A.M.), Rated: A

When people are deciding what to do with their hard-earned money, they have several options: seeking out the support of people they know; talking to their bank, paying an expert independent financial advisor (IFA), or – they can go online.

The report shows that even the wealthiest investors prioritise seeking financial advice online before doing anything else.

We hear a lot about the advice gap in this country, and rightly so. Traditionally this gap has been based on cost. But, as our aforementioned research attests, this is about more than money.

It’s also about time and access.

But the rise of robo-advisers has done little to help consumers access advice and close the knowledge gap.

‘My cash is going nowhere at the bank. Is peer-to-peer the answer?’ (i News), Rated: A

After the financial crisis, the Bank of England cut its base rate to just 0.5 per cent to reduce the cost of borrowing, get people and businesses spending, and boost the economy. Since then, the base rate has only moved once – down again, after the EU referendum, to 0.25 per cent.

But to play devil’s advocate, your comparison between depositing money with a bank and investing in a business is a little dubious – because of the disparity in risk.

That business could fail and you could lose your money, so the potential return has to be higher to persuade you to take that risk. With cash, the risk of losing money is negligible (assuming you don’t hold more than £85,000 – the limit of the FSCS cover – with any one institution), and you pay a price for that security.

When you lend, there is always a chance the borrower will default. However, P2P platforms mitigate the risks in two ways. First, by developing options that let you lend to dozens, or even hundreds, of borrowers at the same time, they enable you to spread your risk and still make money even if a small number default. Second, the platforms build up provision funds to compensate you in defaults.

Lendy produces range of educational videos (Bridging&Commercial), Rated: B

Peer-to-peer (P2P) platform Lendy has announced the launch of a new range of educational videos.

The series includes a new corporate video explaining the benefits of P2P lending and featuring genuine users from the site.

Other videos include a short programme on why investors like P2P lending and an animated guide showing new investors how to get the most from the platform.

European Union

EstateGuru Says More than €1 Million in Interest Paid to Real Estate Investors (Crowdfund Insider), Rated: AAA

Peer to peer property lender EstateGuru has shared that investors on its platform have now earned in excess of €1 million. The Estonia-based company said that nearly 6900 investors from 39 different countries have earned, on average, 12.63% since platform launch in 2014. EstateGuru also reports there has been no loss of capital on the platform.

Transferwise Borderless Accounts Allows To Set Up Free UK Account and Free EUR Account (P2P-Banking), Rated: A

Transferwise just announced that they offer a new Transferwise borderless account which will hold up to 15 currencies and offers local bank accounts in GBP, EUR and USD. The account is advertised as free (no setup fee) and without any monthly fees.

International

Goldmoney Invests in, Partners with U.K.-Based P2P Lending Platform (Geology for Investors), Rated: A

Goldmoney Inc. (TSX:XAU) (“Goldmoney”), a precious metal financial service and technology company, today announced an investment in and partnership with Isle of Man-based investment company LBT Holdings Ltd. (“LBTH”), parent company of Lend & Borrow Trust Company Ltd. (“LBT”), a U.K.-based online platform offering auction-rate peer-to-peer lending and borrowing collateralized by precious metals.

The private investment gives Goldmoney the right to nominate a board member and the right to provide precious metal dealing and storage solutions to LBT clients. Goldmoney may also elect to implement facilities with LBT whereby eligible clients with a Goldmoney Holding – U.K. residents and businesses initially, with other countries added over time – can access LBT auction rates and earn interest income from loans fully secured by precious metal collateral.

Change is part of fintech maturation process (Bankless Times), Rated: A

Marketplace lenders need to adjust if they are to mature into lasting, profitable businesses, John Zepecki believes.

In most sectors the larger players have the money to spend on the mobile and digital experience, while smaller competitors can struggle, Mr. Zepecki said. This is true for fintechs, which are taking on established entities. That’s a tough act, but technology makes it easier by allowing new entrants to skip a few steps.

Where many fintechs struggle is in developing a long-term relationship with the customer, Mr. Zepecki explained. Some serve specific niches such as franchisees or equipment finance. Because the product has a narrow focus, they have to continually work on customer acquisition as repeat business rates are lower. Even the biggest fintechs are struggling to generate repeat business and have to turn to additional rounds to maintain capital flow.

Lending Club and OnDeck are having rough starts so far this year as their problems have followed them from 2016, Mr. Zepecki said. If repeat customers fail to keep coming back the high cost of acquisition, coupled with the riskiness of some loans,  will make it challenging for them to achieve sufficient and lasting profitability.

Financial institutions are working to solve the friction problems alternative lenders have addressed, so if the upstarts do not have an effective long-term strategy their area of differentiation shrinks and they risk losing their spot in the marketplace.

Australia

How Pocketbook went from a Sydney spreadsheet to a fintech with 300,000 users (Financial Review), Rated: A

“Pocketbook started out as a spreadsheet,” Singh told Business Insider.

That spreadsheet was then developed into an app in Singh’s living room, and launched commercially on October 2012.

Fast forward almost five years and the software now has 300,000 users.

The app also lets users know how much they can “safely spend” in the coming period, after analysing the person’s income and expenditure history.

Canada

Canadian FinTech startup Mylo launches mobile app and raises $ 1.25M (Marketwired), Rated: A

Mylo Financial Technologies (Mylo), a Montreal-based FinTech startup that offers a mobile personal finance platform to help Canadians achieve their financial goals, has successfully raised $750K and completed its pre-seed financing round. This latest raise brings Mylo’s current financing to $1.25M, led by Ferst Capital Partners (FCP) with the participation of leading FinTech angel investors.

The company raised $500K at the ideation stage from Ferst Capital Partners in January 2016 as one of its Foundry startups. It has raised an additional $750K in May 2017, closing its pre-seed round of $1.25 million.

Africa

Fintech can unlock business potential of African banks (fin24), Rated: B

Fintech is turning traditional banking on its head and is disrupting the way ordinary Africans manage and use their money.

Speaking at a Fintech Innovation Business Forum hosted by the Cape IT Initiative and Innovation Norway, Arise CEO Deepak Malik highlighted the importance of financial service providers investing in this critical sector through collaboration with fintech innovators.

“In this connected digital era there is a need for smart financial solutions that add value to people’s lives. Fintech has the potential to reimagine traditional banking products and it is important that banks use this technology to unlock their full economic potential,” said Malik.

Authors:

George Popescu
George Popescu
Allen Taylor
Allen Taylor

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