Big banks and Fintech Lenders

Fintech funding 2016

A wave of lending start-ups with innovative financial technology at their core and with a single minded motive to facilitate small businesses and consumers have taken the lending sector by storm all across the globe. Post-2008 financial meltdown, these startups have grown both in size as well as in numbers at a breakneck pace. The […]

Fintech funding 2016

A wave of lending start-ups with innovative financial technology at their core and with a single minded motive to facilitate small businesses and consumers have taken the lending sector by storm all across the globe. Post-2008 financial meltdown, these startups have grown both in size as well as in numbers at a breakneck pace. The rise of fintech can be gauged from the fact that in a survey by PWC, around 50 percent of the financial services firms shared that they plan to acquire fintech companies in the next three to five years and almost eight out of 10 institutions plan to strike strategic partnerships with P2P lenders.

Fintech Industry in Numbers

Source:

The year 2015 was a record-breaking year where fintech companies were able to raise $19 billion. But 2016 proved to be even better as the financial technological start-ups managed to raise $36 billion in financing across more than 1,500 deals from 1,700 unique investors. The most popular segments were the payment/loyalty/e-commerce segments, which took almost 40% of the total funds raised, followed by the banking and lending segment.

Source:

Why are big banks worried?

According to a recent study, nearly $11 billion in lending profits are at risk over the next five years. For decades, banks have been following and relying on their “loss leader pricing strategy.” Essentially, they provide certain basic products like checking accounts at a price below the cost. This is done to entice customers to avail more profitable products like loans. But now, fintech companies are taking away the profitable part of the business from banks and leaving banks with high overheads and low-profit margins. The shrinking bottom line has banks worried and weighing various options like high charges for bank accounts, acquiring fintech start-ups, or partnering with fintech lenders.

Different approaches used by the banks

In a recent research study by PwC, it was found that 30% of consumers plan to increase their usage of non-traditional financial service providers, and only 39% plan to use traditional banks alone. This has prompted banks to act swiftly. Hence, a lot of partnerships recently have been struck. A few notables include JP Morgan’s deal with OnDeck Capital and Digital Asset Holdings; Kabbage’s partnerships with Santander, Scotiabank, and ING; and Funding Circle’s deal with Santander. The earlier approach of fighting it out with startups or ignoring them has given way to respecting their specialization and realizing that both can thrive using each other’s strengths.

Apart from strategic partnerships, big banks and other financial institutions are using their superior financial power by buying out or investing in fintech lenders. A report by TechCrunch states that “BBVA, Credit Suisse, and JP Morgan have directly invested in Prosper’s latest funding round while Silicon Valley Bank and Norwest Venture Partners (Wells Fargo is the sole LP for Norwest) have invested in Lending Club.”

Banks have also started setting up their own innovation hubs across the globe in their endeavor to launch more innovative products or services. Goldman Sachs recently launched its fintech arm known as Marcus, which will compete with the likes of Prosper and Lending Club. Chase, Wells Fargo, and Bank of America have all set up their own innovation labs in order to compete with new age fintech competitors.

Win- Win situation for both parties

Banks have years of experience and a huge database of customers to draw upon, but they struggle because they don’t have the agile infrastructure needed to meet the ever-changing needs of customers. Having said that, banks have managed to build trust with customers, have well-established regulatory and security frameworks, and are well acquainted with government compliance policies. The most important thing banks have is deep pockets and an ultra-low cost of funds.

On other hand, Fintech companies have made a major splash in the market but have only managed to take a small portion of the lending pie. Another issue is they are able to tackle only one pain point at a time rather than a range of services offered by the brick-and-mortar banks. Though Fintechs have entered the mainstream, partnerships seem to be the fastest and easiest way to move forward for both banks and fintech lenders. Fintech startups can bring their in-depth knowledge of big data and understanding of the nerve points of digital-first customers while banks’ legacies in branding and low-cost funding availability makes this a marriage made in heaven.

Through these partnerships or acquisitions, banks will also be able to tap into the millennial population. The majority of the younger generation has a perception that banks are old-fashioned and unhelpful whereas fintech is considered as smarter and convenient. Considering this generation accounts for 80 million prospective borrowers in the U.S. alone, banks cannot walk away from such a massive consumer segment.

Conclusion

The lending industry is witnessing the dawn of a new era. You have startups helping trillion dollar lenders become nimble and offer a seamless lending experience across all digital platforms. You are seeing banks as the lending partners of technology platforms whose cost of borrower acquisition is a fraction of the bank’s marketing costs. Fintech lenders are associating with credit unions and community banks and helping them tap their own existing customer base for up-selling and better conversion. It is vital for traditional banks to accept that fintech has helped the lending business evolve into a new landscape. They need to adapt or be ready for disruption by other banks who are striking deals with fintech lenders for growth and survival.

Author:

Written by Heena Dhir.

Strategic Funding Source Purchase of CAN Capital Falls Through

CAN Capital Strategic Funding Source

An anonymous source informed Lending-Times that Strategic Funding Source, Inc. was in the midst of acquiring CAN Capital when, toward the end of closing, the deal’s bottom fell out. The source inferred that the company was relying on an inexperienced in-house team to perform due diligence. The team allegedly overlooked software subscriptions and failed to estimate […]

CAN Capital Strategic Funding Source

An anonymous source informed Lending-Times that Strategic Funding Source, Inc. was in the midst of acquiring CAN Capital when, toward the end of closing, the deal’s bottom fell out. The source inferred that the company was relying on an inexperienced in-house team to perform due diligence. The team allegedly overlooked software subscriptions and failed to estimate the number of personnel required to maintain them.

To add to the challenges, Strategic Funding Source had a crew working on their headquarters building and they struck a water main drenching five floors including the server room, the source said.

“Unfortunately, in order to save money, they did not have a disaster backup plan in place,” he said.

In November 2016, CAN Capital replaced three executives after a review discovered that some assets weren’t performing as well as expected. The company also identified some of its collections processes that needed improvement.

Prior to that in the same year, the company hit a few milestones that include delivering $6 billion of working capital to U.S. small businesses, won the Silver Stevie award in the “Company of the Year” Banking & Financial Services category of the American Business Awards, and named to Inc. 5000 List for the fourth consecutive year. CAN Capital was founded in 1998 and is headquartered in New York City.

Also headquartered in New York City, Strategic Funding Source was founded in 2006. In January, the company integrated Capify, a merchant cash advance company, into its platform.

Lending-Times has reached out to both CAN Capital and Strategic Funding Source for comment. We’ll provide an update should they respond.

Authors:

Allen Taylor

Monday March 13 2017, Daily News Digest

personal loan ABS pricing spreads

News Comments Today’s main news: AmEx lending pushes beyond credit cards. RateSetter releases performance statistic update. Yirendai presents new open tech platform. Today’s main analysis: Securitization spread analysis from PeerIQ Today’s thought-provoking articles: SoFi looks at pharmacy schools. P2P lending landscape in China. P2P lending takes hold in Africa. United States AmEx lending push goes beyond credit cards. GP:” […]

personal loan ABS pricing spreads

News Comments

United States

United Kingdom

China

Asia

Africa

News Summary

United States

AmEx’s Lending Push Goes Beyond Cards (WSJ), Rated: AAA

American Express Co. is pushing into the booming personal-loan business despite investor worries that an expanding roster of lenders may be getting into the game at too late a stage.

Such fears put AmEx executives on the defensive Wednesday at their annual investor day conference. Chief Executive Ken Chenault acknowledged the company has received questions about the timing of recent efforts to expand lending. These include through credit cards and expanding last year into personal loans—the first time the iconic card company has engaged in such lending.

But he said that AmEx is “very comfortable” because the initiative involves lending more to its existing card customers.

 

Online lenders have been using these loans to appeal to mostly creditworthy consumers who want to consolidate high-interest credit-card debt. Around three out of every five loans LendingClub has made since it began lending in 2007, for instance, went toward paying off higher-cost debt, according to data from the San Francisco-based company.

And there are plenty of credit-card customers to target. Total credit-card balances have grown to be just shy of $1 trillion, climbing steadily toward crisis-era levels. The Federal Reserve reported this week that balances in January were $995 billion.

SoFi takes a look at best-value pharmacy schools (Drug Store News), Rated: AAA

Lender and student loan refinancing company SoFi this week conducted a rundown of which pharmacy schools provide students the best bang for their buck by comparing which schools have the highest average salaries relative to their student debt, on average. It also looked at the pharmacy schools’ graduates have the highest average salaries and schools whose graduates have the highest amount of debt relative to their income.

The pharmacy school with the highest average salary was the University of California, San Francisco, which had an average salary of $145,297, which was 1.3 times the average $109,394 in debt students depart with. The University of the Pacific’s pharmacy school came in second, with an average salary of $137,639 and salary-debt ratio of 0.8. It was followed by Midwestern University – Glendale, whose graduates earn $133,867 on average; University of Southern California, with its average graduate salary of $133,328; and Harding University, with its average salary of $132,748. However, all four schools that followed the top slot had students with debt higher than their average salary, and three were below the average of all pharmacy schools.

ARCT 2017-1 as a “Cross-Over” Product between Near-Prime and Super-Prime Personal Loan ABS (PeerIQ), Rated: AAA

On the weighted-average adjusted basis, we observed flattening in the credit curve: the A tranche is 60 basis points tighter and the B tranche is 130 basis points wider than the corresponding tranches in non-prime deals (Exhibit 3). This flattening behavior is expected as the subordinate tranches on near-prime collaterals have heavier expected losses than that of prime collaterals. Comparing to the SCLP shelf, ARCT 2017-1 is priced about 40 basis points wider on the A tranche and 280 basis points wider on the B tranche. We believe that the “first-dollar” loss risk is relatively low for ARCT 2017-1 A class investors with a 0.83yr WAL.

Orchard Weekly Online Lending Snapshot (Orchard Platform), Rated: AAA

REMAND DECISION IN MADDEN V. MIDLAND FUNDING RAISES QUESTIONS REGARDING CHOICE OF LAW CLAUSES IN CONSUMER LOAN AGREEMENTS (Pepper Hamilton LLP), Rated: A

On February 27, the U.S. District Court for the Southern District of New York issued a highly anticipated decision in Madden v. Midland Funding1 on remand from the U.S. Court of Appeals for the Second Circuit. The decision dashes industry hopes for a favorable ruling on the case’s choice of law issues that would blunt the impact of the Second Circuit’s 2015 conclusion that the National Bank Act (NBA) did not preempt plaintiff Madden’s state law usury claim. Just as importantly, however, the decision turns a spotlight on lenders’ ability to override state usury laws by relying on choice of law clauses in their loan agreements with consumers in certain states like New York.

In finding that New York’s criminal usury law constitutes a “fundamental public policy” of the state, the court cited the Eighth Circuit Court of Appeals’ decision in Electrical & Magneto Service Co. v. AMBAC International Corp. for the position that the “existence of a criminal provision ‘is significant because the legislature would not allow a criminal law to be bypassed by the mere existence a choice of law provision contained in a contract.’”

Pepper Points

  • The district court’s opinion should raise concern for all non-bank lenders because choice of law clauses are often relied upon in the industry as a means of overcoming more rigorous state usury restrictions.
  • As noted throughout the opinion, interpretations of state law by federal courts carry little weight as precedent.14 A future court would be free to disregard the district court’s interpretations of New York law and might arrive at a different conclusion regarding the applicability of the criminal usury cap to defaulted debt.
  • If NBA federal preemption had applied based on the assignment of plaintiff Madden’s loan to the defendants from a national bank, the choice of law issue would have been moot.
  • A future case involving bank model lending would likely have a different outcome, even within the Second Circuit, because the arguments in favor of federal preemption would be stronger than what exists in a case involving the purchase and assignment of defaulted debt due to the bank’s greater degree of ongoing involvement.

Increasing Small Business Units to Act as Building Blocks for Peer-to-Peer Lending Market (Digital Journal), Rated: A

The key trend likely to be adopted by leading players in the global peer-to-peer (P2P) lending market is to build strategic alliances to expand its small business loan divisions. For instance, Prosper Marketplace, Inc. joined hands with OnDeck and bought American Healthcare to improve its product portfolio. Similarly, LendingClub Corporation is also targeting startups by collaborating with trustworthy investors in the market.

Simplification of modes used for peer-to-peer lending such as improved online interfaces has augmented the peer-to-peer lending market in the recent years.

JPMorgan Chase to Acquire MCX ?FinTech Payments Technology for Chase Pay (IT Business Net), Rated: A

JPMorgan Chase (NYSE:JPM) has agreed to acquire MCXs payments technology to help expand Chase Pay, the mobile and digital wallet for Chase customers. MCX, a network of Americas largest merchants, was the premier launch partner for Chase Pay in October 2015. The transaction is expected to close in the coming weeks.

Participate in The 2017 Americas Alternative Finance Industry Survey (Orchard Platform), Rated: A

There’s still time to participate in The 2017 Americas Alternative Finance Industry Survey. The deadline is March, 15. Orchard believes that by participating in this high-profile and high-impact research, originators can help broaden and deepen coverage of our fast-changing industry and is supporting the survey as a key research partner for the second year.

Your platform will be prominently acknowledged and thanked in the report with logo displayed. Your data will only be analyzed and presented in aggregate format by country and model. No individual platform’s data is therefore divulged. After the survey is completed, data that you submit will be encrypted and stored safely to ensure continued anonymity and confidentiality.

The 2 Best P2P Lending Automation Tools For Investors (Forbes), Rated: A

What started as peer-to-peer has grown into a marketplace. The likes of JP Morgan and Citibank now account for over 65% of new capital.

Institutional involvement in the sector has made P2P investing highly competitive. Institutions use algorithms to select the best quality loans, snapping them up only seconds after being listed.

NSR Invest is a registered investment advisor that offers managed and self-directed accounts to P2P investors.

Investors can link their Lending Club, Prosper, and Funding Circle accounts to the website and have NSR invest for them. Depending on the NSR strategy chosen, users outperform the market by as much as 2.6% (average is 1.5%).

LendingRobot (LR) is another registered investment advisor offering fully automated P2P investing. Investors can link their Lending Club, Prosper, and Funding Circle accounts to LR. Like NSR, LR offers managed and self-directed accounts.

For managed accounts, investors can select their desired return levels that range from conservative to aggressive. Based on your selection, LR “cherry picks” suitable loans.

On average, LR users outperformed the market by 1.45% over the course of 2015–2016.

For self-directed accounts, users select loans based on criteria such as monthly income and loan purpose.

IHT Realty Seeks Crowdfunding for Jacksonville Multi-Family Deal (Globe Newswire), Rated: B

IHT Realty Crowdfunding announced on Thursday a new program that will offer investors a guaranteed six-month return regardless of how early the property sells.

Lenger Financial is offering a strong debt coverage ratio of 1.28 with an excellent after repair value (ARV) of 74 percent. The sponsor is projecting a gross annual income of $15,590 and a projected net operating income of $10,443.

Real estate crowdfunding exec is top HUD adviser (The Real Deal), Rated: B

Earlier this week, ProPublica published a list of more than 400 Trump administration officials working across the federal government’s major departments. The list includes a number of officials at the Department of Housing and Urban Development, such as its “Senior White House Advisor,” Maren Kasper. Kasper most recently served as a director at Roofstock, an Oakland-based investment platform for single-family rental homes.

Is a Bitcoin ETF a Good Investment? (Kiplinger), Rated: B

The Securities and Exchange Commission denied approval of the Winklevoss Bitcoin Trust ETF, an exchange-traded fund that would track the value of digital currency bitcoin. Friday’s highly anticipated decision came nearly four years – and a dozen amendments – after the fund was first proposed and delayed indefinitely making gaining access to the currency as easy as logging into your online brokerage account.

LendingTree Appoints J.D. Moriarty as Senior Vice President, Corporate Development (PR Newswire), Rated: B

LendingTree® (NASDAQ: TREE), the nation’s leading online loan marketplace, today announced that J.D. Moriarty will be joining the company as its Senior Vice President, Corporate Development, effective April, 2017.

In his new role, Moriarty will be responsible for business development and strategic acquisitions as the company continues to expand its footprint in the lending and financial technology industry.

United Kingdom

RateSetter Releases Performance Statistic Update (Crowdfund Insider), Rated: AAA

P2P lender RateSetter announced on Friday it has updated its performance statistics. According to the lending platform, a new set of fields on the Performance by year means investors may now view the amount lent by year, which is broken down by lending type.

PwC and Startupbootcamp chart fintech maturity (Finextra), Rated: A

In a new report, ‘The start-up view: a year in FinTech’, Startupbootcamp and PwC analyse application data from Startupbootcamp’s FinTech accelerator programme as well as the volume of deals in the UK FinTech market in 2016.

Startups are putting more emphasis on solving real customer problems using AI and machine learning.

There remains, however, a disconnect in the interest shown in this area by startups and investors, with the report showing that for many investors it is still too soon to invest in smarter faster machines. There remains, however, a disconnect in the interest shown in this area by startups and investors, with the report showing that for many investors it is still too soon to invest in smarter faster machines.

Despite Brexit, the UK should remain a global FinTech centre
UK based startups made up 34% of all applications to Startupbootcamp in 2016, up from 22% the year before, demonstrating the constant growth of innovation and wealth of talent in the UK.

Currencycloud lands M Series D (Bankless Times), Rated: A

Cross border payments platform Currencycloud has completed a £20 million ($25M) Series D round. New investor GV (née Google Ventures) joined existing investors Notion Capital, Sapphire Ventures, Rakuten FinTech Fund and Anthemis. The money will fund a global expansion.

British P2P startup lender secures 0 million worth of funds (The Technews), Rated: A

A peer-to-peer (P2P) startup based in the UK called the Fund Circle has successfully raised a capital of $100 million.

Funding Circle has successfully managed to lend over 2.5 billion pounds ($3.07mil) internationally in 2016. Currently, the company has offices located in San Francisco, Berlin, and the Netherlands. Moreover, the company has its largest market in the UK worth of $981mil.

Former bank CEO joins P2P lender (TheAdviser), Rated: A

Peer-to-peer lender RateSetter has appointed former ING Direct chief executive Vaughn Richtor to its Australian board of directors.

Mr Richtor has a wealth of experience in the banking sector, having served as the chief executive of ING Retail Banking Asia prior to becoming CEO of ING Direct.

UK PropTech Association discusses rise of technology (Development Finance Today), Rated: B

There is no ignoring the record number of proptech M&As and fundraising events seen in 2016 and this looks set to continue in 2017. Already, proptech funding activity in the UK alone has been astounding this year, with Purplebricks’ £50m raise to drive their international expansion the latest example. This comes on the back of three strong fundraises by proptech finance companies: LendInvest, Habito and Trussle.

In order to support this burgeoning sector, we launched the UK PropTech Association (UKPA) this month.

China

Yirendai Presents New Open Technology Platform at 2017 LendIt USA Conference (Crowdfund Insider), Rated: AAA

Yirendai (

Yirendai CEO on Peer-to-Peer Lending Landscape in China (Bloomberg), Rated: AAA

 

A brief look at the current state of the Chinese P2P lending industry (e27), Rated: A

Since 2007, peer-to-peer platforms (P2P) lending has mushroomed in China as a new source of fixed income for retail investors. Peer-to-peer lending is a new method of debt financing that allows people to borrow and lend money without a financial institution. Harnessing technology and big data, P2P platforms connect borrowers to investors faster and cheaper than any bank.

Last year, the country’s US$60 billion peer-to-peer lending sector was dogged by scandals and fraud due to loose oversight. This resulted in China’s authorities’ imposing new rules due to concerns about defaults and fraud among the nation’s 2,349 online lenders.

Right now, China is facing two extremes of P2P platforms going up and down: record-breaking funding rounds (Lufax US$10 billion) and record-breaking Ponzi schemes (Ezubao, US$7.6 billion).

Yirendai

The New York-listed firm, unlike its peers, has not only been expanding its business rapidly but also set its sights on disbursing loans worth 100 billion yuan (HK$ 112.8 billion) a year by 2020.

Dianrong

Just a few days ago, Dianrong made an official announcement that it is launching China’s first-ever blockchain platform, named ‘Chained Finance’ by joining efforts with FnConn, a subsidiary of Foxconn Technology Group.

Lufax

Lufax (陆金所) is the largest player in China and the third largest in the world. It is important to note that Lufax, formally known as Shanghai Lujiazui International Financial Asset Exchange, is 44% owned by financial conglomerate Ping An Insurance Group.

 

Asia

Investree on a Push to Expand Peer-to-Peer Lending Network (Jakarta Globe), Rated: A

Investree Radhika Jaya, a local startup providing a peer-to-peer lending marketplace, is looking to open representative offices in major Indonesian cities this year as part of a push to expand its lending by more than sixfold this year.

The company, which matches individual lenders with borrowers, expects to mediate Rp 400 billion ($30 million) in loans from lenders to borrowers this year, up from Rp 65 billion last year, Adrian A. Gunadi, Investree co-founder and chairman told the Jakarta Globe on Thursday (09/03).

One is a loan whose terms are custom fit for employees, who will pay it back using automatic deduction from their salary.

The other is for small and medium businesses, which supply listed companies, multinational firms, state-owned enterprises or government offices. This loan is given against these SMEs’ invoices to their clients, reducing risk revenue mismatch that could hamper the debt payment. “These way we do not directly compete with banks. We complement them,” he said.

As of Friday, Investree has processed Rp 86.7 billion in loans for 395 borrowers, most of them SMEs.

This fintech startup is disrupting Korea’s banking sector, rewriting regulation (Geektime), Rated: A

Korean financial services app developer Viva Republic announced last week the close of their Series C funding round, bringing home $48 million in new capital.

Launched in February 2015, the company’s app Toss now claims 6 million users in their native market, providing P2P transfers between friends and family. They have since added services such as loans, a financial dashboard that shows all of the user’s accounts (an important feature as Koreans have 5.4 accounts per person on average), and a credit monitoring service.

Viva Republica’s decision to look abroad for new backers should be taken as a sign that they understand that if they will want to continue to scale, they will need investors with a wider viewpoint on the potential of powerful fintech solutions than what is available to them in their home ecosystem.

Africa

P2P lending takes hold in Africa (Gadget), Rated: AAA

Africa has caught the attention of those in the ever-evolving peer-to-peer (P2P) lending sector. A recent report published by the University of Cambridge Judge Business School analyses the current position of Africa on the world’s alternative finance stage.

The report explains that crowdfunding in Africa is just beginning to gain publicity and garner attention. As detailed in the document, the third-largest model in Africa is P2P business lending, which totalled $16 million in volume over a two-year period between 2014 and 2015.

Kenya and South Africa are the market leaders, raising $16.7 million and $15 million respectively from online channels in 2015. P2P business lending had a lower average deal size, of $41,000, with an average of 24 lenders each.

The make-up of the South African market differs markedly from the rest of Africa. In 2015, the vast majority of market activity – $13.8 million – came from P2P consumer and business lending, with the remaining $1.2 million spread across microfinance, donation-based and reward-based crowdfunding.

Crowdfunding’s growing impetus in Africa (Biz Community), Rated: A

Peer-to-peer business lending is the third-largest finance model in Africa, totalling $16m in volume in 2014 and 2015, and it’s growing in popularity.

The Africa and Middle East Alternative Finance Benchmarking Report, published in February, is the first comprehensive study of the size and growth of crowdfunding and P2P lending markets in Africa and the Middle East. It includes additional chapters on the regulatory landscapes in Africa.

Need for SME finance sees arrival of FinTech lenders (Moneyweb), Rated: A

The lending landscape in South Africa is transitioning. Taking the lead from their global counterparts, there are a host of smaller FinTech lenders entering the market, bringing with them an opportunity for SMEs looking for growth funding. However, by year-end we could see yet another shift.

Back home, the growth in the alternative lending space has largely been in response to the increased demand from SMEs looking for smaller and more short-term loans. These smaller deals generally attract more interest and are often unattractive to the bigger, traditional lenders.

International uncertainty, especially around shifts in regulations under the Trump administration, could see shifts in how banks are able to lend. However, the South African Reserve Bank has traditionally erred on the side of caution and we can expect a steady hand in our regulatory outlook. Similarly, if the US interest rates tick upwards, additional risk will enter the market and lending will be affected.

Authors:

George Popescu
Allen Taylor