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August 10th 2016, Daily News Digest

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United States

Lending Club’s latest results tell us a lot about the online credit business model, (FT Alphaville), Rated: AAA

Lending Club released its second-quarter results yesterday. Besides the updates on repairs after its scandals earlier in the year, executives provided an insight into some broader shifts that have been bubbling under the surface for some time.

Total originations in the second quarter were $1.96 billion an increase of 2% compared to last year. The slower origination growth was due to the slowdown in investor capital that occurred post May 9. Roughly 51% of the second quarter volume was originated prior to May 9, which represented 42% of the quarter in terms of calendar days.

You can file that under statements that are meant to re-assure but reveal trends that may or may not be worrying depending on your perspective. If you take the bait, and do the maths, you find that even without the slowdown post May 9 — the date founder Renaud Laplanche left the company — Lending Club was on track for year-on-year origination growth of 46 per cent for the quarter.

That compares with y-o-y growth of 68 per cent in the first quarter, 82 per cent in the fourth quarter last year, 92 per cent in the third quarter last year and 90 per cent in the second quarter of 2015. If you assume that Lending Club’s originations would have continued at the same pace after May 9, instead of accelerating, for example, then it seems that the company’s loan growth has been slowing quarter-on-quarter for a little while.

If you take the view that very fast loan growth is desirable, then this is a bad thing. But if you think that numbers like 90 per cent don’t belong in conversations about loan growth, then it’s a good thing. Jaidev Janardana, chief executive of Zopa, told us recently that volume is “a bad metric to be worried about”.

After Brexit, the online lender began rejecting the least credit-worthy customers who would have previously received a loan and assuming a higher level of risk for customers it accepted, which resulted in a higher cost of borrowing for those people. All else equal, the changes had the effect of shaving 10 per cent off its volumes. “We should make the right lending decisions and if that means we are going to grow slower for a period of time, so be it,” said Janardana.

You can see similar things happening at Lending Club, for different reasons, as per this slide from the second quarter investor presentation:

lending club slide q2 16

The first thing to note there is the population reduction in the lowest rated loans.

“As this recovery gets longer, credit has become more available and these individuals in particular have shown a propensity to be building debt kind of coming into the loan and then continuing to accumulate debt after the LendingClub loan as opposed to leveraging the loan to kind of pay off their debt.”

He’s basically saying that subprime borrowers have been coming to Lending Club for easy credit, rather than debt consolidation.

The second thing to note from the slide above is the interest rate hikes.

lending club slide q2 16 2

Those two bars in the middle show how the investor base changed after the scandal. In particular, banks who were previously buying Lending Club’s loans seem to have fled in larger numbers than any other category (though, obviously, the figures in the chart are percentages rather than absolute numbers).

Sanborn talked about this on the call too, in effect providing a hierarchy of funding sources. First, he noted the “self-managed retail investors who proved to be the most resilient”. Then he talked about managed accounts, which includes funds set up to invest in Lending Club’s loans. They “initially paused” but after being paid to buy loans — “incentives,” as Lending Club calls them — many returned.

Then we get to “asset managers, insurance companies, hedge funds and securitization investors”. They “experienced a significant pause”, which is a rather passive way to say they got scared off by a major scandal involving the former chief executive. Asset managers and hedge funds, who were “the most responsive to incentives”, were the first large investors to resume buying, Sanborn said. (As a side note, “responsive to incentives” is a great bit of code to remember if you’re ever asking for a bribe.)

And finally, the banks, who have “more complex diligence and regulatory requirements”, are taking the longest to come back to Lending Club. Things on this front are likely to get tougher for online lenders. Late last month, the Federal Deposit Insurance Corporation invited comments on new proposals for how banks shouldmanage third-party lending relationships.

Online lenders like Lending Club are very unlike banks in a great number of ways, but the role their retail investors play seems awfully like the role that depositors play at banks. They both are the last line of defence and risk losing their money when it all goes wrong. In the case of a bank depositor, government insurance protects them up to a point. But if you’re a retail investor on Lending Club, you own promissory notesissued by the company rather than loans themselves, so all that protects you at present is the fact that Lending Club has no debt.

To close, here’s how much the mess that led to Renaud Laplanche’s departure cost the company (our emphasis):

GAAP net loss was $81.4 million for the second quarter of 2016, compared to a net loss of $4.1 million in the same period last year. The results for the second quarter of 2016 were negatively affected by a Goodwill impairment charge of $35.4 million related to the 2014 acquisition of Springstone, an increase in professional service fees of $14.9 million primarily due to matters identified in the board review previously announced, approximately $14.0 million in incentives paid to investors, and an increase in compensation related costs of $6.5 million associated with severance costs and a retention program.

With this Lending Club disclosure from May, shortly after Laplanche left (our emphasis again):

On May 11, 2016, the compensation committee of the board of directors approved incentive compensation packages and salary adjustments for certain named executive officers. Specifically, Carrie Dolan, the Company’s Chief Financial Officer, was granted $3.5 million in restricted stock units (RSUs), which vests quarterly over a four year period, and a $500 thousand cash award, payable twelve months from the grant date. The compensation committee also approved an increase to Ms. Dolan’s base salary to $400 thousand per year, with a 75 percent bonus target. John MacIlwaine and Sandeep Bhandari, the Company’s Chief Technology Officer and Chief Risk Officer, respectively, each received $500 thousand in RSUs, which fully vest twelve months from the grant date, and a $500 thousand cash award, payable twelve months from the grant date.

Here is the Q2 Earnings Deck for Lending Club, (Crowdfund Insider), Rated: AAA

Here is the deck.

Sanborn put an upbeat spin on the results stating they were “confident on their future”. [Comment: the moment when the CEO is anything less than upbeat it’s time to jump ship. So no surprise here. A CEO being upbeat is what I would say “business as usual”. ]

An interesting factoid shared on the call. The Board Review, initiated following the shocking departure of former CEO Renaud Laplanche, cost the company (and thus investors) $13 million.


CUneXus Closes $ 5 Million Series A, (Finovate), Rated: A

CUneXus, creator of sales and marketing automation solutions for lenders, quietly closed a $5 million funding round late last week. Two investors contributed to the round; both prefer to remain anonymous.

The California-based company’s total raised is now $7 million. Regarding plans for the funding, CUneXus president & CEO Dave Buerger said, “The use of funds is twofold: (1) aggressive growth and the addition of key personnel, and (2) continuous product development and improvement.”

Since launching in 2011, CUneXus has built a host of solutions for online and mobile lending and cross-selling. At FinovateSpring 2016 the company announced its recent partnership with Edmunds.com and showed off AutoXpress, a vehicle purchasing experience that takes place completely online or on mobile.

Lending Club looks for reprieve in year of bad news, (SiliconBeat), Rated: A

Comment: this is yesterday’s news, literally. As I explained yesterday, I believe the Q2 numbers for Lending Club are actually really good given the circumstances. The journalist here focuses on the profit and loss line item which is not at all a good indicator of Lending Club’s business at this time. 

The latest black eye for Lending Club came late Monday, when the company reported a second-quarter loss that ballooned from a year ago due to a big drop in loan volume. Lending Club said it lost $81.4 million, or 21 cents a share, on revenue of $103.4 million, compared with a loss of $4.1 million, or a penny a share, on $97 million in sales a year ago. Excluding one-time items, Lending Club lost 9 cents a share.

Those results fell short of the estimates of analysts surveyed by Thomson Reuters, who forecast Lending Club to lose 2 cents a share on $100.5 million in revenue. Lending Club said one of the main factors in its results falling short was that its loan volume, or the value of the loans it handled during the quarter, fell by 30 percent from a year ago to $1.96 billion. The company also said its loan volume would be flat for the rest of the year.

There was also another shake up in Lending Club’s executive ranks, as the company announced the departure of Chief Financial Officer Carrie Dolan. Dolan’s departure comes about three months after Lending Club founder Renaud Laplanche was forced to resign amid a scandal involving loans that were made against the instructions of an investor, as well as Laplanche and his family members improperly using the Lending Club platform to take out multiple loans in late 2009.

Loan originations rose 41 percent from a year ago, to $589.7 million, which Jefferson Harralson, of Keefe, Bruyette & Woods said became “more optimistic” and could offset some of the recent worries about Lending Club’s business.

PYMNTS Daily Data Dive: OnDeck Is On Track With Q2 Earnings, (PYMNTS), Rated: A

The company has altered its business model and is taking on more loans in the balance sheet. Credit performance has improved, which has increased the provision for loan losses. The company is advancing its international expansion, its partnership with JPMorgan and expects gross revenue between $73 million and $76 million in Q3.

Here are the numbers:

$69.5 million | OnDeck’s revenue, which was a year-on-year increase of 9.8 percent and $1.6 million over analyst expectations

$32 million | Provision for loan losses, almost twice the $15.5 seen this time last year

47% | The year-on-year growth in loans under management, reaching $1 billion

41% | The year-on-year growth in originations, which reached $590 million

$0.20 | Net loss per share; projections were for a net loss of $0.24 per share

Marketplace lending technology patents held invalid, (Lexology), Rated: A

On July 25, 2016, three appellate judges in the United States held that a popular online marketplace lender’s patents were invalid because they merely reflected an “abstract idea” that is not entitled to be patented or otherwise eligible for exclusive protection under American intellectual-property laws.

The judges from the Federal Circuit Court of Appeals likened the claimed inventions to a “fundamental economic concept” (i.e., an abstract idea) that served as the basis for the consumer-loan industry. They ruled that simply implementing this concept with “generic technology” to automate the process does not then make it patentable.

To read the full opinion of the Federal Circuit panel, click here.

Peer-to-peer Lending Market to Grow at CAGR of 53.06% to 2020, (News Maker), Rated: A

Comment: This is a report that is being sold. This report 1st came out about 2 weeks ago. Just a reminder. If Lending Club can still grow year-over-year despite all the problems I don’t think anybody doubts that p2p lending could very well grow at 53% CAGR for the next 4 years.

Research analysts forecast the global P2P lending market to grow at a CAGR of 53.06% during the period 2016-2020.

Browse full table of contents and data tables at http://www.marketstudyreport.com/reports/global-peer-to-peer-lending-market-2016-2020/

Credit unions can ‘up their game’ with the right digital lending partner, (CU Insight), Rated: A

Comment: This article is a bit of an advertisement for p2p-bank partnerships. I think it’s worth being clear and reminding the obvious to our readers: quite a few p2p lenders have such partnerships and they seem to function well.

The success of Lending Club and Prosper, despite recent setbacks, demonstrates to credit unions the opportunity to ‘up their game’ and become a part of this digital revolution. What’s more, your credit union can keep the loans on your balance sheet.

Your credit union is able to profitably fund and manage smaller dollar, unsecured loans at a fraction of the cost of manual and paper processes, often as low as $500 each.

What kind of Digital Lending Partner can help your credit union ‘up your game’ quickly? One that has proven success in digital lending, and:

  • Allows your credit union to use your underwriting controls and risk-rating standards
  • Keeps the loans on your balance sheet as earning assets
  • Accepts online applications by computer or mobile phone
  • Provides approvals in an instant, funds in just days
  • Monitors loans, deposit activity and credit information
  • Handles loan renewals
  • Provides proven safety in the cloud
United Kingdom

Britain counting on fintech for banking revolution, (Reuters), Rated: AAA

British banks, starting 2018,  will have to share customers’ data with third parties who can then show how much could be saved by using other lenders, the competition watchdog said on Tuesday. Under the new rules, banks will have to share a customer’s data with third parties, providing the customer agrees. The CMA will also require lenders to publish their maximum fee for unarranged overdrafts, which earn banks 1.2 billion pounds ($1.6 bln) a year.

New banks, consumer advocates and lawmakers, however, derided the plans as relying too much on people’s ability and willingness to use new technology.

The CMA believes setting a 2018 deadline will also boost the “fintech” sector, which uses technology to make financial services cheaper and more efficient.

The government wants to see fintech grow, but European Union countries like Germany would like to lure the sector from London after Britain voted to leave the bloc.

Only 3 percent of consumers and 4 percent of business customers change banks in any year due to inertia.

Andrew Tyrie, chair of parliament’s Treasury Select Committee which has pushed for six years to get more competition in banking, said he was not optimistic the measures will get to the heart of the problem.

Land said the Financial Conduct Authority (FCA), which capped payday loans’ interest rates, will review the overdraft measures and obstacles to new entrants to see if they improve, but Rishi Khosla, co-founder and CEO of OakNorth Bank, said this “passing of the buck” to other market watchdogs could put many fledgling companies at risk.

“The FCA should be prepared to step in with an industry-wide cap if they (the banks) do not significantly reduce the charges being paid by people who fall into difficulty,” said Money Advice Trust, a charity that helps people deal with debt.

The Financial Services Consumer Panel, which advises the FCA, said the measures rely on untested technology and consumers having to act on complex information. “At least it has given the FCA some good evidence to take on the banks.”

VPC Speciality Lending fund shifts strategy to greater balance sheet exposure after difficult Q2, (Alt Fi News), Rated: AAAVPC performance

The key drivers of the recent shortfall, VPC says, was a cash drag from holding cash to cover currency hedges, and a peak in defaults, reflecting the life cycle of loans.

The portfolio is a combination of ‘marketplace’ and ‘balance sheet’ loans. Marketplace loans are originated by a platform, which earn an origination fee, with the fund lending directly to underlying borrowers targeting unlevered returns of 6 to 10 per cent, or 11 to 18 per cent on a levered basis. Balance sheet loans on the other hand are made to platforms with target returns of 11 to 16 per cent on an unlevered basis. The balance sheet loans are made through a special purpose vehicle [SPV] with the platform using the cash to originate loans.

At launch back in March 2015 balance sheet Loans were expected to be around  half of the portfolio, and currently represent 43 per cent of the invested portfolio. However, according to analysts at Numis Securities the management team at VPC believe that industry illiquidity has created attractive opportunities for balance sheet lending.

The VPC Speciality Lending Investment trust is looking to up its stake in balance sheet lending with profits from its marketplace loan holdings and move away from Funding Circle US’ exposure. More spare cash will be moved into balance sheet loans rather than marketplace loans in the VPC Speciality Lending investment trust, according to an update by the closed-ended fund’s management team.

The VPC Speciality Lending trust saw growth in its net asset value of just 0.33 per cent during the second quarter of 2016 on a total return basis, reflecting a 0.62 per cent loss in May.

According to AltFi Data, VPC Speciality Lending had outerperformed the broader UK marketplace lending space, as measured by the Liberum AltFi Returns index (the LARI) since its launch back in March 2015 until recently.

While the fund’s Q2 numbers are “below expectations”, VPC says long-term returns should be in their target range. The higher than expected losses, they add, came from the Funding Circle US loans which substantially underperformed expectations while the balance sheet loans in the portfolio experienced no setbacks and are generating coupons of between 12-16 per cent, with a weighted average coupon of 12.96  per cent

The trust is currently trading on a discount of 16.9 per cent. At launch in March 2015 it moves rapidly to a premium likes its peers in the space such P2P Global Investments. But, like its peers, it has also seen a substantial period at a double digit discount in 2016.

“We believe there is little scope for this discount to narrow until the fund consistently delivers monthly returns in line with its target. In addition, we believe the fund’s fees are high at 1 per cent of gross assets with a 15 per cent performance fee on net asset value [NAV] returns  [with] no hurdle.”


FCA Chief Told Parliament Committee Crowdfunding is Too Small to Be Systemically Important, (Crowdfund Insider), Rated: AAA

Financial Conduct Authority (FCA) Chief Executive Andrew Bailey basically gave a Parliament Treasury Committee a crash course on Crowdfunding 101 this past June.  The letter by Bailey was recently posted on the Treasury Committee website, along with a statement from Andrew Tyrie MP, Chairman of the Committee, who questioned “government subsidies”;

“On the basis of this correspondence, the risks associated with crowdfunding platforms appear to be restricted to those using the platforms to lend or invest. Government policies to promote the crowdfunding sector may have the right intention – to increase competition in the SME lending market – but government tax incentives, in effect government subsidies, may be encouraging some consumers into the use of inappropriate products. The FCA needs to be alert to these risks. The Government may need to reconsider these tax incentives.”

There is also an element of irony here. Internet finance is broadly recognized for its high degree of transparency. Old finance is known for its obfuscation and arcane operations – the source of too many systemic problems (how soon we forget the saga of LTCM). Many in the alternative finance sector believe Fintech is empowering finance to  come out from the shadow banking past and is better labeled as sunlight banking. It remains a truism that the best form of regulation is transparency.

Roche-Saunders explained a few days back it was clear that traditional finance sees “P2P encroaching on their space.”  Yet she was confident in the abilities of the FCA to draw the line at a point where competition is enabled and alternative finance can thrive. The FCA review process is accepting comments now with a deadline of September 8th.

FundingKnight to boost loan book after acquisition, (Bridging And Commercial), Rated: A

Gary Mealing, head of property lending at FundingKnight, explained to Bridging & Commercial that the company expects a large increase in activity after GLI Finance acquired its remaining shareholding.

FundingKnight’s origins and our skills are in commercial assessment, which means we’ll be focusing heavily on businesses with a property need and we’ll also have an appetite to fund over longer periods, also for larger amounts – up to £5m.

There has been a lot of focus around commercial property funds and the pressures from their investors to liquidate, and then there is the uncertainty so far with regards to the UK economic growth post-Brexit.

European Union

Interview – Finbee the First Year, (P2p Banking), Rated: A

More than 3,000 investors have issued 2M EUR worth of loans via FinBee and none of them lost any money due to a default and our compensation scheme. P2P lending is a relatively new concept in Lithuanian lending market, so raising awareness and overcoming scepticism was one the biggest challenges that we’ve faced from day one.

Current default figures are better that we expected and projected. We expected to operate with 8 to 10 percent of non-performing loans. Currently we have 2.25 percent (it worth noting that we consider a loan to be non-performing when two monthly instalments are missed, that is when loan is 60+ days late). We also project 40 percent recovery of non-performing loans. So we expect 4.8 – 6 percent losses after recovery. Having in mind that investors now invest on 26 percent interest rate on average, they can expect 20 percent returns even without our compensation fund.

What plans and goals do you have for FinBee for the next year?

Operations in Czech republic.


Raghuram Rajan sets agenda for rest of his term, (Live Mint), Rated: A

Reserve Bank of India (RBI) governor Raghuram Rajan set himself a crowded agenda in the last four weeks of his term as he left interest rates unchanged in his final monetary policy review on Tuesday.

On his agenda: guidelines for peer-to-peer (P2P) lending platforms and account aggregators, new norms to improve the functioning of corporate bond markets and tweaks to the marginal cost-based lending rate (MCLR) system, which Rajan hopes would improve the pass-through of past rate cuts by the central bank.


Digital gold and silver may be up for P2P lending soon, (Asia One), Rated: B

(P2P) lending in Singapore could soon be extended to cryptocurrencies, if a unique partnership between vault operator Silver Bullion and a gold-backed digital currency seller is inked.

Silver Bullion, a gold and silver vault that offers peer-to-peer lending backed by those commodities, is in talks with Digix Global, a company that sells asset-backed tokens – or cryptocurrency bearing rights to gold – to use these tokens to borrow funds on the loan platform, the vault operator told The Business Times.

Several borrowers use the loan to buy more bullion with it, Mr Gregersen said. Lenders, on the other hand, use the interest to pay for storage on their own silver or gold stash.

Such loans are fully backed by physical gold and silver, and lending that stretches beyond six months has a collateral-to-loan value of at least 200 per cent. This means that a loan of S$100,000 must be backed by a collateral worth at least S$200,000. The exceptions are loans with a one-month tenure, which have a collateral-to-loan value of 160 per cent.

The discussion comes as Digix Global has moved to store gold bullion that is backing its cryptocurrency with Silver Bullion. They expect to store up to US$3 million worth of gold in Silver Bullion’s vault by the end of 2016. Digix Global will be transferring its gold holdings from Malca-Amit, at Singapore’s Le Freeport.

On Digix Global, users can buy Digix tokens, each of which represents one gram of gold.


George Popescu
George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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"Your daily letter is great!" , Ram , Founder and CEO, PeerIQ

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"Hi George - just want to tell you that you are doing a great work with Lending Times;-) Brgds, Kasper" , Kasper, Partner and Co-founder at Dansk Faktura Børs A/S

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"I've been following your newsletter for some time now and have been very impressed with the content." Charlie,Co-Founder | Bolstr

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"Hey George, I must say I really enjoy your site. It has inspired me to do some changes at our platform and we are the biggest consumer lender in Sweden." , Ludwig, CEO @ Savelend Sweden AB

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"Your daily email is very useful. It gives quick update on what's going in the market. Thank you very much for all that info." Yann Murciano, Head of Base Metals Trading at Morgan Stanley

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