Derisking the Online Lending Model

Thrive and banks

According to an article in Harvard Business Review, online lenders lent an estimated $10 billion in 2016 to small and medium businesses (SMB) as compared to $300 billion by U.S. banks. A report by Morgan Stanley predicts fintech lenders will garner almost 20% of the market by 2020. The major issue facing banks is the […]

Thrive and banks

According to an article in Harvard Business Review, online lenders lent an estimated $10 billion in 2016 to small and medium businesses (SMB) as compared to $300 billion by U.S. banks. A report by Morgan Stanley predicts fintech lenders will garner almost 20% of the market by 2020. The major issue facing banks is the cost to process a loan is the same for a $100,000 note and an application for $1 million. Thus, banks have no incentive to focus on smaller loans. This led to their exodus and online lenders swarmed into the market.

The Thrive Group Inc. understands the risk-reward ratio is better in helping banks to recapture the market by getting them on the digital-first bandwagon as compared to launching a marketplace lender and struggling with credit and customer acquisition risks. Thrive describes itself as a financial technology company building a modern lending infrastructure focused on digital experiences, intelligent automation, workflow efficiencies, and real-time risk management capabilities.

Background

Founder and CEO Kunal Sehgal got his first taste of fintech when he joined Venmo (now part of PayPal), a mobile payment service in 2011. Kunal was able to understand the technological side of finance at Venmo, how it was thriving because it had married tech and user experience to make the process of transferring money frictionless. Before Venmo, Kunal worked at Rothschild in their London and New York offices as an associate in Tech M&A and debt restructuring.

Considering his entire career has revolved around amalgamating finance with technology, it was inevitable that he would launch a fintech company. Kunal joined forces with Ke Zhu, co-founder and CTO, to launch Thrive in 2015. Ke Zhu has vast experience in developing and implementing tech systems that are both maintainable and extendable. Prior to Thrive, he worked at Prosper as senior software engineer and lead developer.

The Platform

Initially, the company aimed to enter direct lending but decided against it after looking at the market where many startups were struggling to stay afloat because of high default rates, regulatory crack down, etc. Thrive pivoted and developed a platform whose main focus was to make the origination process quicker and hassle-free along with enhancing the user experience. Their first rollout focused on SMB lending and, eventually, the company will target other markets, as well. The goal is to help reduce underwriting and approval times, which will automatically slash costs associated with SMB loans, the original pain point of banks.

The Problem For Alternative Lenders

Most alternative lenders are struggling because of the high cost of capital, lack of stable flow of investment funds, and difficulty in acquiring customers. The original choice for a fintech startups used to be between becoming a balance sheet or marketplace lender. But the future is in redefining and reshaping the lending and borrowing experience. The focus has shifted to infrastructure, and fintechs partnering with banks are leveraging specialization for a win-win. The fintech focuses on borrower experience and reducing costs while the bank focuses on credit risk and customer acquisition. JP Morgan’s deal with OnDeck is a case in point.

Thrive’s First Client

Thrive was recently able to secure its first multi-year technology licensing agreement with Horizon Community Bank (HCB). Thrive will provide the bank’s cloud-based lending technology to help fast-track and complete its end-to-end small business lending process. This will cover digital applications, automated credit, ID verification, automated loan offers, and more. The bank will be able to bring down the loan processing time from weeks to days. The partnership will also open the door to acquiring customers through new digital customer acquisition channels.

This first partnership proved to be more fruitful than expected for Thrive as HCB also decided to come on board as an investor in the young startup.

Revenue Model and USP

Thrive’s first client going live is a huge validation, and the company wants to originate $5-$10 million in loans in the first year. They charge a percentage for every loan origination.

Most startups in the industry originate loans using their own platforms leaving them exposed to market vulnerabilities and risk. Thrive’s nearest competitor is Akouba, which provides SaaS solutions for community and regional banks, but the underlying difference is Akouba stops at the origination phase whereas Thrive provides the complete package right from the origination process to providing loan servicing. Servicing is integrated into the platform making it a seamless solution, and it removes the hassle of coordinating with multiple vendors. LendKey has a similar model but is focused only on student and home loans.

Conclusion

Thrive has hit upon a business and revenue model that is asset light and holds no customer acquisition or capital risk. They leverage banks’ balance sheets and use existing customer relationships for driving business. Thrive will target banks with an average size of $10-$15 billion for future growth. Mid-tier banks would find it difficult to invest resources in building a complete technology infrastructure; the only choice would be partnering with someone like Thrive to capture their SMB customer base.

Author:

Written by Heena Dhir.

Monday February 13 2017, Daily News Digest

middle east africa alternative finance

News Comments Today’s main news: American Banking Association endorses digital lending solution by Akouba. LendingTree announces top customer-rated lenders for Q3, Q4 2016. Chinese manager of 8 P2P lenders disappears. Today’s main analysis: UK housing whitepaper: Government could boost online lending. Today’s thought-provoking articles: Australian P2P economy now worth over $15B/year. A speculative report to be taken with […]

middle east africa alternative finance

News Comments

United States

International

  • The economics of P2P lending. GP:” Forecast is for Saudi Arabia to have the 2nd largest p2p market at $10.3bn ahead of UK’s $4.3bn. Surprising, isn’t it? What about India? China? Mexico? France? I also get confused when the author uses an expression as p2p money transfer and then p2p lending. They are very different things. And last but not least what is p2p? Is Avant a p2p company in this report? I would take this report with a grain of salt. ”  AT: “This is an interesting read simply for the country comparisons of P2P transaction value.”

United Kingdom

Australia

  • The P2P economy now worth over $15B a year. GP:” P2P goes beyond lending into all kind of sharing markets from Uber to Airbnb. The internet disintermediates AT: “This goes well beyond P2P lending and into the sharing economy as a whole. Nevertheless, Australians are participating in huge numbers.”

Canada

China

Africa, Middle East

 

United States

LendingTree Announces Top Customer-Rated Lenders for Q3 & Q4 2016 (Yahoo! Finance), Rated: AAA

LendingTree®, the nation’s leading online loan marketplace, released today its quarterly list of the top customer-rated network lenders for the third and fourth quarters of 2016. Winners are based on a five-star quality review system for overall customer experience as determined by LendingTree account holders. The list features the top lenders in LendingTree’s core financial marketplace categories: Home Lending, Personal Loans, Auto Loans, and Business Loans.

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

While it was officially launched last year, the Philadelphia Department of Commerce’s 29 member Capital Consortium appears to be up and running now.

RELATIONSHIP TROUBLES THIS VALENTINE’S DAY? YOU MAY WANT TO CHECK YOUR CREDIT SCORE (Elevate Email), Rated: A

If you’re having relationship troubles this Valentine’s Day, you may want to check your credit score. Nonprime Americans are 45 percent more likely to be divorced, according to new research by Elevate’s Center for the New Middle Class, a research institution that examines the everyday effects of being nonprime in America.

“This latest research raises an interesting question about cause and effect. Are people getting divorced because stressful finances put pressure on relationships, or are people becoming nonprime because divorce has negative financial consequences?” said Jonathan Walker, executive director of Elevate’s Center for the New Middle Class. “Regardless of the cause, it’s clear that financial pressures are greater in nonprime couples, and that people experiencing financial difficulties are more likely to be nonprime.”

The study also found that 1 in 5 married nonprime Americans feel they have little control over the things that happen to them in general, and more than 50 percent run out of money every 2-3 months or more often. Additional key findings about married nonprime people include:

  • 4 out of 5 say they cannot regularly save money

  • They are 2x more likely to carry a credit card balance

  • They are 2x as likely to have lost a job in the prior 5 years

  • They are 1.4x as likely to have had their pay or work hours reduced in the prior 5 years

  • They are almost 3x more likely to worry over their monthly expenses

  • They are 1.5x more likely to admit that their finances cause significant stress

In nonprime households, uncertainty compounds with marriage rather than dissipates. In fact, married nonprimes are much less likely to feel they have control in their lives compared to prime people and even when compared to their single nonprime counterparts.

ABA Endorses Digital Lending Solution by Akouba (Yahoo! Finance), Rated: A

The American Bankers Association – through its subsidiary the Corporation for American Banking – has endorsed the digital lending solution provided by Akouba, which provides community and regional banks with an origination and underwriting platform for small business loans. ABA members will receive preferred pricing.

Akouba is transforming the way banks help business owners through a cloud-based, white-labeled technology that provides business lending quickly, accurately and profitably. Akouba’s business lending platform provides banks with leading edge technology that integrates the bank’s own unique credit policies into a convenient, online process—from application to documentation— all the way to closing and funding. The bank uses its own credit policies, originates its own loans and owns the entire brand and customer relationship.

Crowdfunding puts the mojo in flipping (News-Press), Rated: A

For the Landings penthouse, the partners decided to finance the flip with Atlanta-based Groundfloor.

Groundfloor underwrote the project as any bank would, by looking at the partners’ financials and evaluation of the project, then sending a local broker to do an independent appraisal. It considered the cost and scope of work estimated by Helm’s contractors — he works with three contractor teams — and factored it with what the penthouse could be bought and re-sold for.

Here’s Groundfloor’s breakdown:

  • Groundfloor financing: $372,090
  • Partners’ skin in the game: $41,344
  • Project cost $413,434
  • Value after repairs: $610,000
  • Loan-to-after repair value: 61 percent

P2P lending growth attracting regulation (Fort Wayne Business Weekly), Rated: B

Indiana’s securities commissioner encourages investors in the state to do their homework on any peer-to-peer lending they consider as federal officials weigh how they might regulate the new financial technology companies.

International

The Economics Of Peer-to-peer Lending (The Market Mogul), Rated: AAA

This type of lending has been growing ever since, and last year, the total transaction value of peer-to-peer money transfers reached $50.7bn. According to estimations, it should grow to $75.3bn this year, with the US accounting for a $23bn chunk of the amount.

The forecasts put Saudi Arabia as the country with the second highest value worldwide, with $10.3bn and the UK in third with a $4.3bn chunk of the total.

By the end of last year, peer-to-peer lending platforms based in the UK had already lent a total of £7.3bn. Estimations are that this could equate to half of what the entire P2P lending market has already provided since it was established.

TrustBuddy, a lending platform, went bankrupt in October 2015 and until now none of the lenders has seen their money back at all.

Lending Club had a rough first quarter last year as its stock price had dropped 50% from December 2015 to March. The business volume largely increased, so why did it fall?

When peer-to-peer lending moved into the mortgage business, banks finally started taking it seriously.

But the biggest opportunities are probably related to the potential future market for peer-to-peer lending. PwC forecasts that the market now has the opportunity to reach “vast new segments of untapped market potential”.

United Kingdom

Housing Whitepaper: Government Actions May Boost Online Lenders (Crowdfund Insider), Rated: AAA

So what does the UK government do? How do you boost housing supply in a market that is struggling to meet demand? The white paper states that “since 1998, the ratio of average house prices to average earnings has more than doubled.”

In brief, the UK government plan is as follows:

  • For local authorities, the Government is offering higher fees and capacity funding. They want to make it easier for local authorities to move projects along
  • For private developers, the Government is offering a planning framework that is more supportive of development
  • For housing associations, the Government has announced funding of £7.1 billion
  • For utilities the government expects infrastructure providers to move things along
  • For lenders, the Government is offering a clear and stable long-term framework for investment, including products for rent. In return. they call upon lenders and investors to back developers and social landlords in building more homes.

Stuart Law, CEO and co-founder of Assetz Capital commented on the Housing white paper saying;

“Putting pressure on local authorities is a step in the right direction. It’s time for the alternative finance sector to step up.”

Law believes the role of funding many of these projects could end up being financed by the alternative lending sector.

LendInvest is another platform that may gain with added business.

While Property Partner may have been underwhelmed, the real estate platform stated;

“It is both fairer and wiser that the government has moved to a more balanced view of the property market, which must work for those renting, as well as those who aspire to homeownership. Encouragement of institutional investment is a recognition of the important role that investors can play in providing high quality accommodation and a quality experience for renters.”

Kuflink Aims to Be UK Market’s Leading P2P Brand (Crowdfund Insider), Rated: A

Crowdfund Insider had a chance to interview CEO of Kuflink Tarlochan Garcha to learn more about his company’s platform.

Chan Garcha: Our niche is that our sister company Kuflink Bridging retains 20% in every deal on Kuflink’s peer-to-peer platform. All deals are secured against UK property which means the maximum LTV for our lenders is 56% against an auction value of 90 days.

CG:  Investing 20% in every deal demonstrates to our lenders that we have full confidence in all our deals.

CG:  We have an independent credit committee of three independent non-executive directors. All deals are vetted by them before they go onto the platform. We also use credit reference agencies, independent professional valuations along with internal checks and verifications before a proposal goes to the credit committee.

CG:  We feel it is very important to work with the regulator. Unfortunately, they are under-resourced and the knowledge seems to be fairly low. The process takes much longer than it really needs to. We also feel that Treasury could do more to protect lenders. For example, allow the FSCS to cover peer-to-peer.

Meet Anil Stocker: Boss of peer-to-peer outfit MarketInvoice that’s taking on City lenders (IB Times), Rated: A

After overseeing his peer-to-peer finance outfit cap £1bn in lending over the last four years, Anil Stocker is a man in a hurry to get to his next billion mark “by the end of 2017”.

To the outside world, the Fintech sphere might appear cluttered and competitive, and all about going after big banks, but Stocker says that is an oversimplified interpretation of the market dynamic.

“We’re still the flies around the big elephant, so peers and competitors are on the same side. All of us are small compared to HSBC, Lloyds, Barclays, and other legacy finance players whose market and scope is very, very big. Our goal is trying to convince people looking for invoice finance not to just run to their bank for funding needs, but rather consider talking to us.”

MarketInvoice’s lending has increased four-fold over the last 12 months, providing on average £2,196 every minute to UK businesses.

Furthermore, the appetite for asset-based finance is roaring and MarketInvoice is busy carving its own niche in this £20bn industry, a billion at a time.

Australia

Peer to peer economy now worth over $ 15 billion a year (Mozo), Rated: AAA

The bi-annual Sharing Economy Trust Index, produced by peer-to-peer lender RateSetter, showed that trust in ride sharing platforms such as Uber and online marketplaces like eBay have grown the most.

With the sharing economy now worth over $15 billion a year, the study revealed that over two thirds of Australians actively participate in the market – whether by spending or earning.

Online marketplaces such as Ebay and Etsy remained by far the most popular way to make money through the sharing economy, while ride sharing, online outsourcing, peep-to-peer lending, and accommodation sharing also proved popular with Australians.

Aside from earning money, consumers can also use the sharing economy to save on goods and services. If we take peer to peer lending as an example, Mozo’s database shows a borrower with a good credit score could secure a rate of just 8.90% by taking out a personal loan with peer to peer lender RateSetter. That compares to the average 12.21% rate offered by the big banks.

Canada

WAVE LAUNCHES SMALL BUSINESS LENDING WITH ONDECK PARTNERSHIP (Betakit), Rated: A

Toronto-based Wave, which provides entrepreneurs with accounting, payroll, and invoice software to run their small businesses, has officially stepped into the lending space.

Wave is partnering with US-based OnDeck, which provides small business lending. Lending by Wave will use OnDeck’s platform to streamline and automate the lending process within Wave’s platform.

China

Manager of 8 P2P lenders disappears, $ 145m in investors funds locked up (Global Times), Rated: AAA

Eight peer-to-peer (P2P) lending platforms announced that their manager disappeared in January, leaving investors unable to withdraw at least 1 billion yuan ($145 million) in funds, domestic media has reported.

The platforms, cmtouzi.com, naipinglicai.com, zaodianlicai.com, wanerjialicai.com, qianguan360.com, lexinglicai.com, xjinfu.com, huoniu360.com, simultaneously announced on January 18 that their manager Fang Fan’s mismanagement of funds had left investors unable to withdraw their money, according to a report on chinatimes.cc.

The platforms are all controlled by Beijing Qiyuan Fortune Network Technology Co, according to the report. As of January, cmtouzi.com users had invested 170 million yuan on the platform. The figure was 350 million yuan for zaodianlicai.com and 428 million yuan for naipinglicai.com. In total, the three platforms controlled nearly 1 billion yuan in user funds.

At present, cmtouzi.com continues to operate. On Friday, the platform issued a statement that denied the incident was caused by inappropriate management. It also issued a plan that would allow investors to withdraw their money.

Africa, Middle East

Cambridge Centre for Alternative Finance Publishes Africa & Middle East Alternative Finance Report (Crowdfund Insider), Rated: AAA

The Cambridge Centre for Alternative Finance (CCAF) has published its first benchmarking report covering alternative finance in the African and Middle East markets. Growth was said to be at 59% during 2015 with a total pegged at $242 million. Much of the alternative finance came via equity crowdfunding and online microfinancing. This is in contrast to more developed markets where peer to peer lending (online lending) tends to dominate.

In Africa, the market was nearly $190 million between 2013-2015, and grew 36% in 2015 to $83 million. Most African activity was through online microfinance as well as donation and rewards-based crowdfunding. Investment-based equity and debt models are yet to really make their mark on the African market. CCAF said 2016 may be the year that investment crowdfunding emerges in these markets.

As for the Middle East, about $286 million was raised in 2013-15, including an increase of 75% in 2015 to $159 million. Equity-based crowdfunding accounted for two-thirds of market activity in the Middle East – with the vast majority occurring within Israel. Donation and reward-based crowdfunding, online microfinance, peer-to-peer business and consumer lending and real estate crowdfunding accounted for similar proportions of market activity of 5% to 6% in the Middle East.

Israel was by far the largest market across the surveyed regions, with a total of nearly $125 million in 2015, followed by the United Arab Emirates (UAE) with over $17 million, Kenya with more than $16 million and South Africa with $15 million.

Other findings of note from the CCAF report include:

  • In 2015, well over 75% of the total online alternative finance raised from Africa and the Middle East regions was funding for start-ups and SMEs, with $62 million raised across Africa and $132 million raised across the Middle East. 
  • In Africa, 90% of online alternative finance originated from platforms headquartered outside of the continent, while in the Middle East the reverse is true with 93% of online funding originating from home-grown platforms in the region.
  • Both the African and Middle Eastern online alternative finance markets are showing signs of decelerating growth, particularly in the Middle East. The Middle East experienced an annual growth rate of 152% from 2013-2014, but that rate fell to 75 per cent from 2014-2015. The African market grew 38 per cent from 2013-14 and 36 per cent between 2014-2015.

 

Authors:

George Popescu
Allen Taylor