The Technology Edge: How Non-Banks are Seeking to Dominate Point of Sale Lending

The Technology Edge: How Non-Banks are Seeking to Dominate Point of Sale Lending

LendIt Fintech USA 2018, April 9-11 in San Francisco, was a huge success. One of the more interesting panels was on how the non-banking sector is taking over point-of-sale (POS) lending. Kim Gerhardt, director at the San Francisco office of Edgar, Dunn and Company, moderated the panel. Other panelists included Peter Kalen, Michael Garrity, Mark […]

The Technology Edge: How Non-Banks are Seeking to Dominate Point of Sale Lending

LendIt Fintech USA 2018, April 9-11 in San Francisco, was a huge success. One of the more interesting panels was on how the non-banking sector is taking over point-of-sale (POS) lending. Kim Gerhardt, director at the San Francisco office of Edgar, Dunn and Company, moderated the panel. Other panelists included Peter Kalen, Michael Garrity, Mark Lorimer, and Camilo Concha.

Kalen is founder and CEO of Flexiti Financial, a Canadian company founded in 2013 that specializes in providing easy, instant POS financing through its award-winning mobile application process.

Garrity is co-founder, CEO, and president of a platform that has enabled merchants to facilitate consumer lending since November 2010. Financeit has processed over $2.5 billion in loan applications from thousands of merchants.

Lorimer represents LendingPoint, a lending company founded in 2014 that focuses on personal loans and debt consolidation. He is chief marketing officer. LendingPoint recently acquired LoanHero, which is in the POS lending business.

Finally, Concha is founder and CEO of LendingUSA, a company that provides innovative financing solutions with a specialization in POS lending. LendingUSA was launched in 2013 and caters to consumer finance in a variety of sectors from medical, pet care, consumer goods and services, etc.

Over the years, the POS lending industry has gained scale and seen a radical change. A convergence can be witnessed in the way payments are made and fintech lending is facilitated. The opportunity in POS financing is massive, and banks seemed to have missed the ball. Traditional banks strive to serve everyone, but when it comes to POS lending, merchants have to filter their prospective customers through a narrow funnel extending loans to a comparatively small customer base.

Flexiti Financial’s Entry in POS Lending

When Peter Kalen was asked about what brought Flexiti Financial into the business, the product that it is offering, and the level of traction it has been able to create in the market among other merchants, he articulated that Flexiti’s product is somewhat similar to what Synchrony or Alliance Data System is offering. Flexiti differs in the way transactions take place and aims to reduce the time consumed in the loan application process.

Many organizations issue private label credit cards, but application processes are long and approval rates low. With its experience and vision, Flexiti Financial has successfully introduced a 100% paperless process to offer instant POS financing. Its virtual credit card application can be downloaded from the Google Play store and the Apple store.

These private label cards speed up the loan application process, bringing the process down to three minutes. This is a win-win for retailers and customers. The platform improves the online retailer’s UX by removing the friction at the front-end.

Financeit and Point of Sale Lending

Garrity also shared his views on point of sale lending. He put emphasis on the fact that personal lending is more about new transactions and focuses less on lending. Everything in POS lending, from the technology to APIs is obsessed with enabling easy sales for merchants, improving their experience, and supporting them as they try to close more business. Merchants and customers want financing options, but they do not want to indulge in complicated programs.

Another area that Financeit targets is debt consolidation. The company has delivered a platform that makes it easy for businesses to offer powerful financing options to their customers from any device.

When asked about how they excel at delivering services to customers, Garrity said they have acquired Centah Inc, a company operating in home improvement work-flow and lead management software with joint partner and investor Goldman Sachs. The company redesigned its website to create a platform that manages the process, helps businesses connect with customers, provide dispatch scheduling systems, and represent financing options to customers throughout the process. He warnes other players that if they only focus on financing and not on the transaction, they will be missing out on an important aspect of dominating this space.

LendingUSA’s Role in POS Lending

Gerhardt asked Concha about his journey into this industry. Concha shared that LendingUSA focuses on point-of-need financing, which sits at the intersection of point of sale and fintech. He believes that businesses in today’s era are not required to be good but great if they want to be successful, and they are required to be great in all aspects, namely, marketing, technology, underwriting, and risk mitigation.

Concha started with a company called 1800mysurgeon that matched cosmetic surgeons with consumers. After starting the company, he realized the need for financing as an important part of the business. He decided to create a platform to interact with both surgery and finance to enhance the merchant’s experience.

LendingPoint’s Emergence In POS Lending

LendingPoint started as a direct consumer online lender specializing in 600-700 FICO score customers. Lorimer emphasized that the company understood very early that customer experience is crucial to POS transactions. Although the players in the market now are very good at generating products that banks like to own, they do not necessarily focus on the merchandise. LendingPoint simplifies the lending process by sharing risk and administering payment plans. LendingPoint also offers merchants risk programs to extend in-house, end-to-end services.

Marketing With Established Merchants

All the banks playing in the market are working to deliver better services to customers in different ways. The biggest players historically are Wells Fargo, Citigroup, and Synchrony Financial. They all have significant relationships.

The question is whether these big banks can be a part of this game. Concha believes that banks are an important part of the ecosystem. These banks are good for purchasing loans but are constrained by reputational risks, marketing, and other issues. Lorimer added that LendingPoint also works with some established banks. Talking of the role of hard pull and soft pull in availing credit, he shared that because a hard pull impacts the credit report of the customer, it is a cause for low approval rates. Soft pulls, on the other hand, do not affect the credit score of the credit seeker leading to a higher approval rate for loans.

Garrity shared his point of view on the tie-ups with established banks and financial institutions that become balance sheet lenders. He said they are participants in securitization, originations, and selling. He believes there is clearly an opportunity for all the stakeholder businesses to grow. Online POS lending usually operates separately considering the fact that it is complicated and technology-driven. Banks are, therefore, slow followers of fintech companies.

The Technology Edge Leads to Domination

The next important aspect analyzed was whether it is the technology that enables online POS lending businesses to dominate the lending space.

Kalen believes technology is the most important element of this space. Concha believes this space is all about keeping merchants and customers happy and building long-lasting relationships with them in the process. Lorimer questions the integration of technology among banks and whether banks will be able to adapt to complex technologies. He believes banks aren’t set up to do that, but to deliver a mass homogenous customer service. Garrity, on the other hand, believes the less you see the technology, the more attractive it is; he also thinks it is better for the merchant to focus on increasing the business close rates.

Talking about data management, Lorimer believes technology definitely provides an edge to the business on the back end. The data is the source for everything and it is analyzed and configured to improve the experience. As technology enables automation and brings security, users can access everything at one place and find it already stored in the system.

Kalen agrees that technology is a boon for backend data management. He added to the discussion saying that the more established players have an edge as they have been in business for many years. They have been able to hone their skills over a period of time.

Concha also believes that technology will work for the POS lending as it is different from other businesses. There is a major role of risk, debt, and strong relationships in POS lending, and none of these can be managed properly without technology.

The Challenges of POS Lending

Technology, scale, and partnerships:
Kalen from Flexiti views POS lending as a very different business than retail lending. Getting customers and coping with technology are major challenges. Other challenges that non-bank businesses face are focusing on the scale. It is important for the business to look at the credit cycle and beware of fraudulent practices as it increases the scale of operations.

Credit cycle:
Being on the right side of the credit cycle is crucial to every lending business. The access to credit in the credit cycle determines the risk and therefore the value of the business. Businesses must prepare their strategies, keeping the future in mind.

Regulation:
Lorimer believes this space requires more regulation since the Consumer Financial Protection Bureau (CFPB) is not very active. Poor regulation and lack of control pose a major risk to the players in the market.

Availability of capital and credit risk:
Another challenge is the availability of capital to extend lending facilities. The fear of credit facilities drying up in a day also bothers businesses.

The Takeaway

Kalen has realized that success does not come easy. The companies in this space need to understand that a lot of lending capital is required along with an understanding of the tricks of the trade.

Concha believes it is a 3-step learning process where the business is required to go through a testing phase, an education phase, and an adoption phase.

With LendingPoint’s recent acquisition of LoanHero, it is comparatively a new entrant in the market.

The crux of the entire discussion is that POS lenders must be specialized to survive in the market. The business has to endeavor to offer value added merchant services instead of being a one-stop shop to be successful. There is a lot of room for growth provided one understands the complexities of the trade.

Author:

Stephanie Vaughan is vice president at  Allen TaylorPosted on Categories Alliance Data System, alternative lending, Analysis, balance sheet lending, Banks, CFPB, Citigroup, consumer lending, Credit, credit risk, Featured, FICO, Financeit, Flexiti Financial, instant financing, LendingPoint, LendingUSA, LendIt 2018, Online Lending, point of sale financing, point of sale lending, POS financing, POS lending, Regulation, Synchrony Financial, Wells Fargo

What Investors Should Know About Non-Bank Lenders

nonbank lenders

Investors looking to add private debt and private equity to their portfolios may feel overwhelmed by all the choices. From peer-to-peer lending to crowdfunding, there are countless industry players across a wide range of alternative lending and financing models, serving everyone from individual borrowers to small and medium-sized businesses. Any funding model ultimately comes down […]

nonbank lenders

Investors looking to add private debt and private equity to their portfolios may feel overwhelmed by all the choices. From peer-to-peer lending to crowdfunding, there are countless industry players across a wide range of alternative lending and financing models, serving everyone from individual borrowers to small and medium-sized businesses.

Any funding model ultimately comes down to matching the needs of those who want capital with those who can supply capital. Typically, banks or other large financial institutions would act as the intermediary between investors and borrowers or entrepreneurs. But with many banks pulling back after the financial crisis, and the internet making it easier than ever to play matchmaker, the alternative finance universe is attracting more and more capital.

However, there is still broad-based confusion among both institutional and retail investors about the differences between the various alternative funding models. This confusion is exacerbated by how often the terminology is used interchangeably in the media and the larger financial community. The truth is that each funding model has distinct nuances, rewards and challenges, and it’s important for investors and their financial advisors to understand the differences before incorporating alternative lending or financing into an investment portfolio.

In general, these models can be broken down as either debt or equity investments, with a similar risk-reward profile as any other debt or equity investment.

DEBT (lower risk, lower reward)

Peer-to-peer lending

In a peer-to-peer (P2P) lending model, an individual or business borrows from an outside source or sources – a “peer” – rather than a bank. This process is facilitated through a third party, such as an online platform, which makes it easier to aggregate enough peers to fund the loan. These loans typically come with fixed terms and set repayment schedules. Many loans will also include details about the borrower—such as their income, credit score, occupation, and risk level—to help the “peers” (or lenders) determine whether to fund the loan and at what amount. Examples of peer-to-peer loans include consumer loans, student loans, small business loans, and fix and flip loans on single family homes.

Investors can get into the peer-to-peer lending market by purchasing the whole loan, a fractional interest in a loan or building a portfolio of fractional and/or whole loans. Investors then collect the proceeds of each loan payment, with the peer-to-peer lender taking a fee to cover the costs of running the platform. While even the most creditworthy borrowers may default on their loans, investors can mitigate this risk by building a diversified portfolio that includes multiple loans across different risk spectrums. Investors should also consider if the P2P loans they are investing in are unsecured or have some form of collateral securing the loan. Consumer and student loans tend to be unsecured, while small business and fix and flip loans tend to be secured.

Marketplace lending

Marketplace lending is another term used to further describe peer-to-peer lending. While the two terms are used interchangeably, an important differentiator is the source of capital. Whereas P2P lending platforms tend to rely on a group of small retail investors or large institutional investors to fund loans, marketplace lenders prefer to first pre-fund loans and then offer them to investors.

The marketplace lending model, therefore, offers qualified borrowers a guarantee that their loan will be funded within a specific timeframe, which may be an important consideration for some borrowers. For example, while a consumer borrower may be willing to wait until his loan is assessed and funded by multiple peers, a borrower looking to finance a real estate transaction has a closing date that must be met otherwise he will lose his down payment.

Direct lending/balance sheet business lending

In contrast to marketplace or peer-to-peer lending models, a direct lender will rely on its own balance sheet or proprietary access to funds as its primary source of capital. Instead of having to find enough retail and institutional investor capital to match the needs of borrowers, a direct lender can look to its unrestricted access of funds before making a lending decision.

The advantage of this approach is that the direct lender is better positioned to survive a potential downturn since each of the loans on its balance sheet represents a piece of collateral that can be used to offset any potential losses. Investors in these loans will therefore have a better opportunity to allocate capital in all market cycles. Many direct lenders may also manage a fund for accredited investors that consists of a portfolio of some, but not all, of the loans made by the lender.

EQUITY (higher risk, higher reward)

Crowdfunding

In the crowdfunding model, investors are given the opportunity to provide seed capital in up-and-coming products and businesses. Capital is provided in several forms including equity, preferred equity, mezzanine debt and senior debt . While equity stakes are typically small—often less than 1%—even a modest upfront investment can generate a large eventual payoff if the company is successful. This is particularly true of technology start-ups, which can grow quickly if their product or service is well received among customers.

This model is also popular in the arts and entertainment industries. For example, people might choose to fund an independently produced movie, music album or play in exchange for a small piece of revenues and/or additional perks like attending rehearsals and premiere parties, meeting the artist, or receiving a memento from the set. In real estate, crowdfunding is most typically used by developers seeking to raise money to fund development or redevelopment projects.

Investors should find out if the crowdfunder is providing equity and debt on the same project. This is critical should a recovery plan need to be put in place if the project does not go as expected. Typically, equity investors want to hold on and wait for an increase in value , while debt investors want to liquidate immediately in hopes of recovering their investment. A crowdfunder that is representing both equity and debt investors in the same project will have a conflict of interest. In addition, these investments also tend to be fairly illiquid, so investors should tread carefully. While these early stage equity investments could potentially pay off handsomely, there’s always the risk that the company or project is a flop.

Initial coin offerings

An initial coin offering, or ICO, is a brand-new type of funding model that is attracting many of the same types of companies that previously relied on crowdfunding. However, instead of acquiring an equity stake in the company, investors in ICOs receive cryptocurrency coins, like Bitcoin or Ether, which are redeemable for cash on certain exchanges. The idea is that as the company grows and becomes more valuable, the coins will also become more valuable.

Since ICOs are still loosely regulated, investors should take extra precautions when evaluating a crypto-related investment opportunity. While a business idea may sound great on paper, investors should look for growth signs like recurring revenues and a large potential market.

These five models only scrape the surface of the full universe of funding options for individuals and businesses. A company or a funding model doesn’t always fit neatly into a box either, and investors should take care to understand how each funding platform generates revenue and where its capital comes from.

When choosing which segment of the market to pursue, investors and advisors should also consider their risk tolerance, which will help determine whether a debt or equity investment is most appropriate, and at what scale.

Author:

Written by Evan Gentry, CEO of Money360.

Thursday March 8 2018, Daily News Digest

Purchase APR

News Comments Today’s main news: CommonBond receives AAA securitization rating. Ranger Direct returns suffer. Victory Park Capital posts record returns from balance sheet investments. Today’s main analysis: LendingTree mortgage offers report for February 2018. Today’s thought-provoking articles: Can big tech stop the compensation bubble? What’s driving venture capitalist’s attention to B2B fintech? The evolution of modern fintech. United States […]

Purchase APR

News Comments

United States

United Kingdom

China

European Union

International

India

News Summary

United States

Online Lender CommonBond Receives First AAA Rated Securitization (Crowdfund Insider), Rated: AAA

CommonBond, an online lending platform servicing the student loan market, has received its first triple A rating for securitization. Moody’s has assigned provisional ratings of (P)Aaa (sf) to Class A-1 and A-2 notes to be issued by CommonBond Student Loan Trust 2018-A-GS (CBSLT 2018-A-GS). DBRS rated the loans AAA as well. The transaction was CommonBond’s sixth securitization at $233.75 million bringing the total to $1.22 billion.

LendingTree Mortgage Offers Report – February 2018 (LendingTree), Rated: AAA

  • February’s best offers for borrowers with the best profiles had an average APR of 4.22% for conforming 30-year fixed purchase loans, up from 3.93% in December. Refinance loan offers were up 38 bps to 4.13%.
  • For the average borrower, purchase APRs for conforming 30-yr fixed loans offered on LendingTree’s platform were up 25 bps to 4.80%. The loan note rate hit the highest since March 2016 at 4.70% and was also up 25 bps from January. We prefer to emphasize the APR as lenders often make changes to other fees in response to changing interest rates.
  • Consumers with the highest credit scores (760+) saw offered APRs of 4.68% in February, vs 4.95% for consumers with scores of 680-719.
Source: LendingTree

The $ 5.7 trillion question: Can big tech stop the comp bubble? (INTL FCStone), Rated: AAA

INTL FCStone Global Macro Strategist Vincent Deluard:  “The $5.7 trillion question: Can big tech stop the comp bubble, resist higher yields, and deliver the growth?”  

  • Compensation, especially stock-based comp, is exploding at large tech companies
  • The tech rally rests on a foundation of low interest rates, rising stock prices, and quick revenue growth
  • Many big tech companies are becoming too big to grow
  • Rising interest rates and, God forbids, lower stock valuations could cause the entire edifice to crumble
Source: INTL FCStone

Millennials are seeking non-traditional banking (Digital Journal), Rated: A

A wake-up message for banks: if you want to remain competitive you need to embrace digital multi-channels and appeal to tech-savvy millennials.

A generational change is happening, and businesses have to accept that ‘millennials’ are expecting most products and services to be offered digitally. Financial products, including banking, are not immune from this trend. Two separate reports highlight this tendency.

review by Intelligent Finance has found that the biggest factor that attracts millennials to select one bank over another is an easy-to-use smartphone app, with most wishing to use online banking via a smartphone. In contrast, Baby Boomers stated that face-to-face customer service was the key determinant (with rude service being highlighted as the main reason why this generation might take their money to another bank). In contrast, millennials are most likely to exit from a bank if they did not like the smartphone app or if the bank suffered from a cyber breach.

19 of the top ex-bankers in fintech (efinancialcareers), Rated: A

It’s becoming more common for bankers to quit the traditional financial services in favor of financial technology, either co-founding a startup or landing at an established fintech firm. Some crash and burn and come crawling back to banking with their tail between their legs, but many have found great success in the fintech space.

The following are 19 of the top former bankers working in fintech today (in no particular order).

John Mack, a member of Lending Club’s board of directors

Mack stepped down as chairman/CEO of Morgan Stanley in 2011. Since then, he has invested in various fintech companies, including Lending Club (on whose board he sits), Orchard and Dataminr, which sends social media-based alerts to traders. He also participated in a $10m initial funding round for New England Funding Technologies (NEFT), which created the mPowerCredit credit-rating platform.

Dominic Gamble, founder of Findawealthmanager.com

After starting out as a sales-trader at Credit Agricole, Gamble worked at Credit Suisse for seven years before he moved to Deutsche Bank in 2010. However, a year later Gamble left to set up his website, Findawealthmanager.com, which helps high-net-worth investors to research and evaluate financial advisers.

Points awarded for new ISOs and more; Prizes include a Nintendo Switch (6th Avenue Capital), Rated: A

6th Avenue Capital, LLC (“6th Avenue Capital”), a leading provider of small business financing solutions, announced today the launch of its first “Merchant Madness” promotion. Throughout the month, and coinciding with the annual NCAA Men’s Basketball Tournament, 6th Avenue Capital will award points for all new ISOs, Merchant Cash Advance (MCA) submissions, approvals and funded deals.

  • The breakdown of points* awarded per category is as follows:
  • New ISOs/ISOs submitting first MCA application – 1 point
  • New MCA submissions – 1 point
  • Approved submissions – 2 points
  • Funded deals – 3 points
  • *California submissions excluded.

Points will be awarded from March 1, 2018 to March 30, 2018 and tallied at the end of the month. Prizes will be awarded to the top nine finishers as follows:

  • 5th through 8th place – Amazon Echo Dots (4)
  • 1st through 4th place – Parrot Mambo Drones (4)
  • 1st place – Nintendo Switc and Parrot Mambo Drone

Kabbage CEO Rob Frohwein On Their #FinTechForChange Call Against Assault-Style Rifles (Hypepotamus), Rated: A

How did you decide as a company to take a public stand on this issue?

As a technology leader and financial services company, we believe we have a unique responsibility and opportunity to help prevent future tragedies from occurring. Doing nothing is still a choice. We choose to do something to drive positive change and be an example to others.

How data analytics drives better real estate investing (Housing Wire) Rated: A

For Auction.com, the largest real estate marketplace, innovative technology enables us to provide a superior level of functionality and data analytics on a host of different types of real estate in the 3,000+ counties we serve — helping build stronger relationships with our buyers and sellers, and making us a trusted partner throughout the auction process.

Buyers and sellers demand greater data capabilities

In a world increasingly driven by big data, the real estate professionals who effectively utilize robust data analytics to make more informed decisions typically realize greater levels of success. Just as stock market investors conduct due diligence and use varied data sources prior to purchasing a company’s stock, real estate investors should do the same when buying property. Likewise, sellers come to the marketplace with one goal in mind – selling a property at market-price in the least amount of time. Data analytics serves as a catalyst to ensure that both of these needs are met.

World Economic Forum leads creation of fintech cyber security consortium (The Star), Rated: A

The World Economic Forum has led the creation of an industry consortium focused on improving the cybersecurity of financial technology companies, as collaboration between fintechs and financial institutions grows.

The consortium’s founding members include Citigroup Inc, online lender Kabbage, the Depository Trust & Clearing Corporation, Zurich Insurance Group and Hewlett Packard Enterprise, the companies said on Tuesday.

The mortgage market risk no one’s talking about (BROOKINGS), Rated: A

After the crisis, Congress and financial regulators increased regulation of the credit risk associated with mortgage lending, including the enforcement of stronger underwriting standards. But according to new research published in the Spring 2018 edition of the Brookings Papers on Economic Activity, a boom in nonbank mortgage lending means the mortgage market is still exposed to liquidity risk that very few people are talking about.

What is Blockchain Technology? A Beginner’s Guide (Invest in Blockchain)

The very primitive form of the blockchain was the hash tree, also known as a Merkle tree. This data structure was patented by Ralph Merkle in 1979, and functioned by verifying and handling data between computer systems. In a peer-to-peer network of computers, validating data was important to make sure nothing was altered or changed during transfer. It also helped to ensure that false data was not sent. In essence, it is used to maintain and prove the integrity of data being shared.

Source: Invest in Blockchain

Women in NYC Tech: Angela Galardi Ceresnie of Climb Credit (Alley Watch), Rated: A

Today we speak with Angela Galardi Ceresnie, COO of Climb Credit, the smart student-lending platform. After undergrad and roles at Citi and American Express, Angela took her financial acumen to the startup world in 2013 to cofound Orchard Platform, an investment platform for the peer-to-peer and online direct lender, with Matt Burton, Jonathan Kelfer and David Snitkof. During Angela’s time at Orchard, the company had raised over $40M in funding, backed by some notable investors including John Mack, Thrive Capital, and Spark Capital. In 2016, Angela transitioned to Climb Credit to work alongside the founding team to help it scale. Angela is an active member of the NYC tech ecosystem and continues to give back to the community through her involvement.

 

What are the advantages of being a woman in tech?

We have a unique perspective that we can bring to the table, what has historically been, a primarily male-dominated field, and that allows us to make useful observations and a significant impact as long as we stand behind our ideas. There is also no shortage of support from other women in the industry.

iintoo Returns Net 15.95 Percent on Exited Deals (PR Newswire), Rated: A

Real estate investment management company iintoo investments Ltd. (“iintoo”) announced a 15.95 percent average annual return on investment, net fees, and $3 million in regular distributions to investors since its founding in 2015. The returns are based on iintoo’s six exited investments to date, with a total asset value of $50 million, all of which exited ahead of schedule. With assets totaling $560 million and a global community of 32,000 members, New York-based iintoo opens up access to real estate investments that were once exclusive to professional funders and high net worth individuals.

Unlike a crowdfunding platform, iintoo works directly with project developers to vet and create business plans to maximize the chances for success.

RealtyShares Survey Shows Many Americans Believe Commercial Real Estate is Critical to Improving Local Communities (Business Wire), Rated: A

RealtyShares, a leading online marketplace for real estate investing, today announced the results from its Commercial Real Estate Investing Survey.

The survey found that a quarter of U.S. adults (25%) felt commercial real estate investment has the biggest impact on enhancing the reputation of a community. Roughly 1 in 5 of those who have or are currently investing in commercial real estate have done so for reasons that may support their community, like helping a friend or family member with capital for a commercial real estate investment (20%) or needing a facility for their own business (17%).

While some are already involved, the survey revealed fifty-three percent of Americans would invest in commercial real estate within their communities if given a chance. For those who have never invested in commercial real estate, affordability and access were the major roadblocks. Sixty-one percent believe they lack the necessary funds, while 19 percent don’t know how to invest. This may be creating an investing gap, as nearly 9 out of 10 Americans (89%) have never invested in commercial real estate, according to the report.

A Guide to Commercial Real Estate Crowdfunding (Commercial Property Executive), Rated A

Charles Clinton, co-founder & CEO of investing platform EQUITYMULTIPLE, delves into the mechanism behind commercial real estate crowdfunding and underlines the most important factors an investor must consider for long-term success.

What opportunities does real estate crowdfunding offer investors?

Clinton: By moving real estate syndication online, real estate crowdfunding has begun to change that old paradigm. Individual investors can now invest in private market real estate transactions at low minimums (our investment minimum at is typically $10,000 per offering) and start allocating a portion of their portfolio into real estate without taking on the burdens of direct ownership.

Investors have full transparency into what properties they’re investing in and the low minimums help facilitate diversification. The best platforms also pre-screen the real estate companies and investments that they present, easing the selection burden on investors.

What are the benefits of crowdfunding investment compared to traditional instruments?

Clinton: Strong yield—after years of near-zero interest rates, investors have been forced to look for yield in new places. Less volatility—these investments are illiquid and non-traded, as opposed to public stocks, traded REITs or cryptocurrencies (a topic on everyone’s mind). While illiquidity has its drawback, it also reduces market correlation, making direct real estate investing less subject to market swings and, in aggregate, exhibit less volatility.

Potential for outsized returns—because private real estate markets are inefficient, there is potential for market-beating returns by investing in markets and submarkets that are underserved by traditional sources of capital, and in properties with untapped potential. Downside protection is also an advantage. Real estate—as an irreplaceable resource with tangible value—is also less vulnerable to recessions. The economy will expand and contract cyclically, but a growing number of humans will always need places to live and work.

Then we have tax advantages. Real estate investing platforms allow individual investors to share in the same unique tax advantages as institutional real estate investors—namely write-offs for depreciation, and a new 20 percent deduction for investments made through an LLC, courtesy of the recently-signed tax bill.

QuantumReverse Expands Its Team (PR Newswire), Rated: B

QuantumReverse, the technology company that is building an advanced reverse mortgage LOS, announced the addition of four industry veterans to its team. QuantumReverse’s team now boasts over 50 years of combined experiences in the reverse mortgage technology space.

Triad ranks among the best places for new small businesses (Tiad Business Journal), Rated: B

The Triad area ranks among the 50 best places for new small businesses, according to a new study by online loan marketplace LendingTree.

Interview with Yann Murciano, CEO of Blend Network (P2P-Banking), Rated: A

Blend Network has already lend £1.5 million GBP to 6 project across Northern Ireland, Scotland and Norfolk with an average fixed return of 12.2% p.a.

What are the three main advantages for investors?

  1. Access to niche markets
  2. High returns
  3. Strong due diligence and credit risk assessment

What are the three main advantages for borrowers?

  1. Access to finance
  2. We bring knowledge and understanding of developers’ true requirements
  3. No exit fee for early repayments
United Kingdom

Ranger Direct’s returns still suffering from Princeton proceedings (Peer2Peer Finance News), Rated: AAA

RANGER Direct Lending’s (RDL) ongoing legal dispute with its Princeton holding pushed its net asset value (NAV) return down to 0.43 per cent in January, the investment trust has revealed.

RDL has been locked in arbitration proceedings with Princeton since last year over its exposure to bankrupt lender Argon Credit, and without these costs it said its returns would have been 0.68 per cent.

The update shows its NAV is down from 0.48 per cent in December.

VPC posts record returns from balance sheet investments (Peer2Peer Finance News), Rated: AAA

VICTORY Park Capital (VPC) Specialty Lending Investments has reported that gross revenue return from its balance sheet investments hit an all-time high in January.

Its balance sheet loans produced returns of 1.08 per cent in January, compared to its marketplace loans which produced 0.04 per cent.

80 per cent of its portfolio was in balance sheet loans as of 31 January, the company said.

Fintech lender iwoca pledges £100m for Northern SMEs by 2020 (AltFi), Rated: A

European small business lender iwoca has announced today its intention to pledge £100m in lending to micro and small businesses in the UK’s Northern regions by 2020, as it fights to counteract the withdrawal of credit by UK banks.

The UK neobank market has reached a critical juncture (Business Insider), Rated: A

Starling Bank and Monzo became the top two banks in terms of customer satisfaction, according to consumer finance site Smart Money People, knocking incumbent first direct out of the number one spot for the first time. Additionally, the percentage of UK consumers willing to use a digital-only startup bank fell during 2017, from 78% in the first half of the year to 54% by the end of the year, according to a survey by RFi Group.

Do SMEs favour equity and alternative finance over debt? (Specialist Banking), Rated: A

At the beginning of 2017, SMEs in the UK accounted for 99.3% of all private sector businesses and 60% of all private sector employment in the UK.

Last year saw a substantial increase in the value and number of SME equity deals (up 79% and 12% respectively) in the UK, as well as continued growth in the value of SME asset finance deals (up 12%) and P2P lending (up 51%).

This was at the same time that traditional bank net lending declined to £700m – down from £3bn the year before.

Forget the Lifetime ISA, we need an ‘Everything ISA’ (City Wire),  Rated: A

A report by the Association of Taxation Technicians (AAT) has criticised the number of ISAs available that brings ‘unnecessary complexity, bureaucracy, and confusion’, said chief executive Mark Farrer.

‘Some ISAs have age limits, some do not, some have a maximum savings limit of £20,000 per annum, one has a £4,128 limit, another £4,000, and the Help to Buy ISA offers a £50 bonus for every £200 saved, up to a maximum of £3,000,’ he said.

Farrar also pointed out the ‘mind-boggling interaction’ between different types of ISAs that means the total saved into a Lifetime ISA (Lisa) – a maximum of £4,000 a year – has to be deducted from the total (currently £20,000) that can be saved into a cash or stocks and shares ISA.

Checkout.com Secures a Place on Tech City’s Future Fifty, (PRNEWSWIRE), Rated: B

Checkout.com, a leading international online payment solutions provider, has been included in Tech City’s renowned Future Fifty programme for 2018.

China

Property Tax In China By 2019? (supchina), Rated: A

Meanwhile, there is no tax on real estate. If you buy an apartment — even if it sits empty — it does not cost anything. Although there has been talk of a property tax for many years, there has been little action aside from a few experiments in local markets. That might be about to change, judging by this Sohu report (in Chinese):

  • At this morning’s press conference at the annual political gathering known as the Two Sessions, Vice Finance Minister Shi Yaobin 史耀斌 told reporters that his ministry and other government departments were “drafting and improving the real estate tax law,” while former Finance Minister Lou Jiwei 楼继伟 said that a draft bill may be reviewed by the legislature this year.
  • One important detail that has not yet been worked out: How will the value of property be assessed — based on appraisal, market value, or some other indicator?
  • Local governments will collect and have the benefit of property taxes.
  • The Party’s biggest worry is, I believe, that a property tax will be an excessive new burden on ordinary households whose only major investments are in real estate.
  • A possible solution mentioned in the Sohu article is leaving the first 160 square meters of a person’s property tax-free, but placing a levy on floor space in excess of that and on additional real estate owned by the same person.
  • “A property tax is a potential game-changer for a real estate industry sometimes called too big to fail for the Chinese and world economies,” says Bloomberg.
European Union

EU proposes crowdfunding ‘passports’ in boost for fintech (Reuters), Rated: AAA

The European Commission has proposed crowdfunding “passports” for the European Union in a draft law that forms part of efforts to boost growth in the financial technology sector.

“An EU crowdfunding license would help crowdfunding platforms scale up in Europe,” the EU’s financial services commissioner Valdis Dombrovskis said in a statement.

International

What’s Driving VCs’ Attention To B2B FinTech (PYMNTS), Rated: AAA

According to the analysis, which was released last week, an 18 percent increase in FinTech funding in 2017 led the industry to see $27.4 billion worth of investments. FinTech funding spiked 31 percent to $11.3 billion in the U.S. alone, and the U.K. market’s funding deals nearly quadrupled in value to $3.4 billion.

The volume of deals increased, too, with nearly 2,700 investment rounds closing last year.

B2B FinTechs are playing an especially prominent role in this trend, analysts noted. Anecdotally, these firms have been talking for years about the industry’s potential to make significant disruptions in areas like corporate finance, small and medium-sized business (SMB) lending and more.

The alternative finance market saw a sudden boom, and a similarly sudden period of volatility as big industry names like Lending ClubOnDeck and Kabbage struggled to continue growth momentum. Kabbage was hit with a lawsuit last year initiated by an SMB borrower, and Lending Club’s CEO resigned in 2016 following an investigation into improper loan sale practices.

Fintech – The Evolution Of Modern Financial Technology In The 21st Century (Valuewalk), Rated: AAA

Financial procedures have evolved 

India

Nirav Modi fallout: As banks tighten purse strings, fintech can fill the void (India Times) Rated: AAA

As banks scramble to tighten their credit disbursal process, the ones most affected would surely be the small businesses. The now oft quoted figure from the Economic Survey this year has revealed that the amount of credit or loans disbursed by banks amounted to Rs 26,041 billion as on November 2017, but 82.6% of this was cornered by large enterprises. There is, however, now a robust alternate source of finance for small businesses to tap into.

“Non-Bank Finance Companies (NBFCs) stepped up financing of MSMEs after demonetization. NBFCs can be a very powerful vehicle for delivering loans under MUDRA. Refinancing policy and eligibility criteria set by MUDRA will be reviewed for better refinancing of NBFCs,” said Finance Minister Arun Jaitley while presenting the Union Budget for 2018-19.

Digital lenders call for easing of regulations (The Times of India), Rated: A

The Digital Lenders’ Association of India (DLAI) has presented a set of policy recommendations to the finance ministry, including easing of funding sources for digital lenders, expanding access to the micro and small enterprises (MSMEs), easing paperless transactions, and opening up lending data.

DLAI, formed in late 2016, comprises of 42 alternative lending startups including CapitalFloat, Lendingkart, Indifi, and KredX. It was formed to develop and promote the needs of these players.

Authors:

George Popescu
Allen Taylor

Taking Mortgage Lending, Jumbo Loans Where They’ve Never Gone Before

mortgage lending jumbo loans

Alternative lending has created a new benchmark in borrower experience, especially in the consumer lending space. The fintech lending industry seems to be lagging behind in the mortgage industry, and especially jumbo loans (mortgage loan with strong credit quality where the amount exceeds conventional conforming loan limits), due to their nonconformity with set income and […]

mortgage lending jumbo loans

Alternative lending has created a new benchmark in borrower experience, especially in the consumer lending space. The fintech lending industry seems to be lagging behind in the mortgage industry, and especially jumbo loans (mortgage loan with strong credit quality where the amount exceeds conventional conforming loan limits), due to their nonconformity with set income and credit patterns. Neat Capital is a Boulder, Colorado-based alternative mortgage lender that understands the massive market opportunity the above issues represent. It is focused on creating a digital lending platform for mortgages that is fast, reliable, paperless, and value-accretive for borrowers.

Streamlining Mortgage Lending Underwriting

Founded in 2015 by Luke Johnson, Chad Lewkowski, Christin Price, Ryan Brennan, and Steve Herschleb, the company wanted to deliver a modern approach to mortgage lending centered on making it simple, unique, and transparent.

Underwriting and loan documentation is considered a back office process in traditional banking. Neat Capital is trying to bring this core activity online and looking to capture the loan documentation, underwriting, and loan selection process in one single online session for the client. This facilitates a hassle-free experience for the client and better conversion rate for the startup. It has been able to bring down the entire cycle to 13 days as compared to the 30-60 day norm in the jumbo loan industry.

The company has raised a total of $4.2 million in two funding rounds. Its angel round saw an investment of $2 million. But the company had to face a major crisis in December 2016 and was on the brink of shutdown before it could recover. At the same time, Luke Johnson, CEO and founder, faced a personal tragedy with his wife battling brain cancer. But the employees, investors and other stakeholders stuck together and fought hard to become the fastest lender in the U.S. for jumbo loans.

How Neat Capital is Different From Most Mortgage Lenders

The traditional mortgage lending process is recursive in nature. It involves sending information and documents to underwriting, following up with clients for clarifications, and if the underwriter does not like it, it results in rejection or a change in terms. The whole process is susceptible to getting bogged down on a regular basis, which leads to delays and surprises. So the secret sauce for Neat Capital is to break down this unproductive cycle and provide certainty at the outset in a single online session. The company is unique because it can evaluate a loan in real-time according to a very detailed underwriting guideline and with a high degree of accuracy due to its proprietary artificial intelligence algorithms.

Another USP is its ability to handle borrowers with complicated income streams, net worth, and credit who can’t be analyzed on normal mortgage parameters. The company funds from its balance sheet, but it resells loan into the market almost immediately to free its balance sheet for expansion.

Neat Capital is focused on high quality credit with a weighted average FICO (Fair Isaac Credit Organization) score of 766 and weighted average LTV (Loan To Value Ratio) of 72%.

Neat Competitors and Customers

Alternative lending has seen traction with players like Better Mortgage and SoFi targeting the same clientele. But Neat Capital believes there is a huge addressable market, and it is incumbents like Wells Fargo that are its biggest competitors.

Its typical customer usually has an owner-occupied unit in San Francisco. It also has clients looking to buy second homes or investors looking to buy houses as a real estate play. But it is not restricted to any particular category and covers all conventional mortgage options, as well.

The Future of Mortgage Lending

The mortgage industry has gone online and the application process has moved entirely onto digital platforms. The winner of the market will be the player who can execute the entire loan application process in one single session versus the current scenario of requiring multiple sessions for loan application closure. Also, the industry needs to be ready for a smartphone future where the first and only point of contact between the platform and the borrower would be a smartphone. The application engine needs to be smartphone-powered so that the platform is not losing clients to other smartphone-ready peers.

The company’s future plans are to cover the entire spectrum of conventional Fannie Mae loans to jumbo loans. Instead of focusing on yield expansion or going down the credit quality ladder, the company will aim to concentrate its bets in niches where it believes that other lenders have mis-priced the risk.

Neat Capital also needs to grow while educating clients and referral partners, wealth managers, real estate agents, and employers about why they are different and what is their unique selling proposition. Currently, the company operates in nine states, but it is planning to double that number in 2018.

Conclusion

Neat Capital has focused on a market gap in mortgage lending that has been overlooked by the alternative lending industry. The challenges due to non-conforming loans and income streams & net worth not falling under typical lending patterns made it difficult for players to successfully compete with traditional banks. Neat Capital seems to have solved this problem. A 13-day turnaround for an industry that usually sees transactions taking months to close will definitely revolutionize the market.

Author:

Written by Heena Dhir.

Creating a New Market for Invoice Financing

invoice financing

We see so many great businesses failing to take off because they are unable to get funding from legacy financial institutions and high-interest rates charged by alternative lenders deter them from seeking credit. Their growth is perennially hampered by slow paying customers, which leads to cash flow issues. Realizing that there is a funding gap […]

invoice financing

We see so many great businesses failing to take off because they are unable to get funding from legacy financial institutions and high-interest rates charged by alternative lenders deter them from seeking credit. Their growth is perennially hampered by slow paying customers, which leads to cash flow issues. Realizing that there is a funding gap for startups and growing companies, Gabriella Krista Morgan, with her father Bruce Morgan, launched P2Binvestor, a crowdfunded receivables finance company operating an investment platform for small- and mid-sized businesses.

P2Binvestor was founded in 2012. Its headquarters is in Denver, Colorado. The firm has raised over $16 million in various funding rounds with Rockies Venture Club taking the lead in Series A. Though the company was launched in 2012, it took two years of groundwork (raise money, infrastructure, legal framework, etc.) to bring the platform to market. CEO and Co-Founder Gabriella Krista Morgan has a degree in economics and political science from McGill University. Prior to founding P2Pinvestor, she was accounts director at SapientNitro.

P2Binvestor’s Business Model

P2Binvestor provides lines of credit (LOC) from $250,000 to $10 million backed by the borrower’s receivables and inventory. Companies that are growing quickly but do not qualify for funding from banks because they do not have several years of operating history and cannot afford high-interest rates charged by online lenders is the target market.

The platform follows an asset-based lending model and has also developed in-house technology to facilitate management of LOCs. Traditionally, managing LOCs has been the Achilles heel for both lenders as well as borrowers. Therefore, P2Binvestors was focused on building a modern borrowing experience and a sophisticated technology that is capable of early detection of problems in underlying invoices. Through constant monitoring, it is able to resolve problems before they snowball into defaults.

It has extensively used machine learning to identify patterns in data and has used its own data for developing an algorithm focused on loan performance rather than upfront underwriting. That means financing offered by P2Binvestor is quite different from the traditional term loan. Since P2Binvestor is constantly lending, its underwriting process is constantly developing and thus minimizing the default risk.

A customer can borrow ranging from $250,000-$10 million, or depending on the value of their invoices. But on average, the firm lends around $1 million on average. Based on outstanding balances, the borrower pays daily interest and APR ranges from 15%-19%. The customer only pays for the amount used and not on the total LOC limit.

Bank Lending Program

The company has also launched a Bank Lending Program. Under this program, it partners with banks to lend to companies that have growth potential. Launched in 2017, the company has found its first partner, New Resource Bank. The bank will provide P2Binvestor’s products using P2Binvestor’s technology. The loans will also be managed by P2Binvestor; the rate of interest ranges from 8%-12%. It’s a 50-50 partnership meaning 50% of the funding is provided by the bank and another half by the P2Binvestor marketplace. Since bank’s funding is cheaper, rates are substantially lower than typical marketplace lending rates.

This program is unique as no one offers such a program. It is particularly beneficial for companies that are growing at a neck-breaking pace. By providing quick funding at bank rates, P2Binvestor is helping to lower the cost of capital for its target market while expediting growth. The lending ratio is 50% to product-oriented companies and 50% to service companies. It typically lends to consumer product companies (mostly new brands), media companies, staffing companies, light manufacturing, and distribution companies. Most of the companies it lends to have consistent payroll and inconsistent payers.

Flexible Lending Practices

Unlike other lenders in the market, the P2Binvestor lending model is fairly flexible. That means the customer can borrow as per their needs and any time they want. Loans are not fixed in nature–for instance, $1 million for three years–rather, they are dependent on the borrower’s invoices. This model does not let the company overstretch, thus ensuring responsible lending.

P2Pinvestor has issued loans in excess of $125 million in LOC in the last three years. Its collection rate is quite high (80% collected) and its default rate is under 2% for the entire portfolio. Having its own in-house collection team does help. It garnered $6.5 million in revenues last year and expects to reach $11 million by the end of this year.

Though there are plenty of alternative lenders, there are not many lenders dealing in a ticket size north of $1 million. Having said that, P2Binvestor’s biggest competition is traditional asset-based lenders. Though there are more than a thousand lenders in the space, the firm’s cutting-edge technology and focused customer service gives them an edge over rivals.

A hybrid lender that syndicates 80% of its portfolio off the balance sheet, P2Binvestor is more of a “deal marketplace” where institutional investors can buy into deals in which they are interested. P2Pinvestor then uses its own balance sheet to fill funding gaps.

Diversity is the Path to Future Lending

The company will look to enter into further partnerships with banks. Traditionally, banks have not been big on invoice financing, but P2Binvestor believes technology will help banks to get comfortable with this new financing vertical. Its long-term goal is to provide a complete set of lending products to its target market.

The CEO wholeheartedly believes in diversity, and that is the reason why 50% of the company’s workforce is female. It is trying to bring a new wave to the corporate world where women get an equal shot at leadership roles. It is just the beginning, but the company is fully committed to its diversity program.

In a short span of time, P2Binvestor has become a leader in its segment. It has constantly stretched the boundaries with technology, innovation, and culture, and that is the reason it is expected to continue redefining lending norms. With groundwork already laid for future expansion, P2Binvestor will be looking to dominate big-ticket alternative lending.

Author:

Written by Heena Dhir.

2018 Predictions for MPL, SMB Lending, and Other Alternatives

Lending Club

In just over a decade, alternative lending has evolved from a niche fintech play into a hundred billion dollar industry. 2017 was somewhat of a bumpy ride. Growing competition, shrinking bottom lines, stringent regulations, and traditional banks’ willingness to take on alt-lending using their financial muscle were the key trends that emerged last year. It […]

Lending Club

In just over a decade, alternative lending has evolved from a niche fintech play into a hundred billion dollar industry. 2017 was somewhat of a bumpy ride. Growing competition, shrinking bottom lines, stringent regulations, and traditional banks’ willingness to take on alt-lending using their financial muscle were the key trends that emerged last year. It is difficult to be sure what 2018 will bring, but here is what experts and pundits are predicting.

Marketplace Lending

Ron Suber (Founder and former president, Prosper & chairman of the board, Credible) believes the marketplace lending industry has finally grown up. Companies will focus more on cash flow, profitability, and EBITDA. He encouraged online lenders to look for a lower cost of capital if they want to compete with the like of Marcus. He is also predicting the entrance of big technology companies like Amazon, Apple, Facebook, and Google.

Peter Renton (Lend Academy) believes five of the top 25 banks will launch their own platforms. He also believes Congress will pass a Madden fix and the IRS will modernize with its own API. One startling prediction he makes that one of the top online lenders (Lending Club, SoFi, Prosper, OnDeck, or Avant) will be acquired, and he believes a major platform will be hit by a cyber attack. Like everyone else, he believes the tech giants will solidify their positions in alternative lending, and more interestingly, he says messaging apps will integrate with online lending platforms.

Krista Morgan (CEO, P2Binvestor) makes predictions for MPL sector:

  • Companies will shift their focus on business models and unit profitability as hiring and spending decrease.
  • Mergers and shutdowns will continue as equity investors remain absent. She thinks it will be a tough year.
  • Investors believe the market is set for a correction; therefore, they will be looking at short duration assets for deploying their capital. Platforms will have to shift their focus to product development.
  • 2018 will be the year of increased diversity.

Adam Stettner (Founder and CEO, Reliant Funding) predicts a year of instability. He also believes market variables will counterbalance themselves this year. The Fed is expected to increase interest rates, which will have a ripple effect in terms of rates for various types of loans. If unemployment levels remain low, it will lead to wage inflation. So the order of the day for alternative finance and small business funding companies will be adaptability, he says.

Additionally, Stettner sees a year of increased fraud, and companies will have to invest in identification tools and fraud detection techniques.

Two more predictions he points to are increased consolidation as companies overextend themselves and more disruption from big business names entering the space.

The Motley Fool is predicting a Lending Club stock price turnaround.

Juan Tavares (LendingPoint) predicts balance sheet lenders will take over, there will be more collaboration, and payments and credit will intersect more.

Small Business Lending

Trevor Dryer (Co-founder and CEO, Mirador) made predictions on small business lending:

  • Banks will continue to increase small business lending and alternative lenders will struggle.
  • Crowdfunding got a boost last year when Title III of The Jumpstart Our Business Startups Act (JOBS Act) was implemented, opening the gates for crowdfunding. Dryer believes this sector will thrive in 2018.
  • Alternative lending has removed physical barriers that makes the lending process faster and more convenient. Alternative lending will continue to be more inclusive and encourage more people to start businesses.
  • Legislative barriers will continue to fall.
  • Alternative lenders will focus on experience and relationship building. Companies able to streamline and automate the application processes will thrive.

Alternative Lending in India

Rajesh Gupta (Founder and CEO, Cash Suvidha) made the following predictions for the Indian alternative lending market.

  • A significant increase in alternative lending market share.
  • Favorable regulations, cash benefits, ease of usage, and increased internet and smartphone penetration.
  • Investors and venture capitalists will remain optimistic about the Indian alternative lending industry since it is the second most funded segment in Indian fintech.

“2018 will witness a transformation in the Indian financial landscape, all thanks to alternative lending,” he writes.

Traditional Financial Services and Alternative Investing

Kevin McPartland (Greenwich Associates) says 2018 will be the year of digital. He believes product-agnostic investing will be huge, and passive investing will gain on active investing. 2018 will also be the year that alternative data goes mainstream, he believes while data will be more important than trading. He also believes wealth management will “come out of retirement” and, finally, a ton of innovation in the financial markets as banks focus on crypto.

Chris Skinner (The Finanser Blog) writes a lot about banking’s reaction to alternative lending. He believes 2018 will be the year of artificial intelligence for banks and that banks will continue to drive digital technology deeper into their core systems. Not surprisingly, he also predicts that banks will develop more proof-of-concept operations for distributed ledger technology. Finally, he predicts the banks will develop an Enterprise Data Architecture this year to clean up their fragmented systems.

Alexander Prokhorov (FinSight Ventures) made some general predictions for fintech that apply just as well to alternative lending:

  • Software will converge with financial products in the U.S. and Europe
  • Insurtech will be more prominent
  • Artificial intelligence will transform financial services
  • There will be a lot of innovation in emerging economies such as Africa, Latin America, and Asia
  • Wealth management will pick up speed
  • Crypo assets and blockchain will take center stage for retail investing

Mitek believes 2018 will be the year of the cyber criminal and predicts there will be 150 million attempts to set up fraud accounts this year.

Don Steinbrugge, CFA (Founder and CEO, Agecroft Partners) is predicting a banner year for the hedge fund industry. He believes hedge fund assets will reach an all-time high for the 10th straight year. He also believes there will be an increase in hedge funds shutting down. And there will be an increase in cryptocurrency funds. Strategies that will gain assets, he believes, include:

  • Asia long/short equity
  • Reinsurance
  • Those that blur the lines between private equity and hedge funds

The Lending-Times Prediction

Allen Taylor (Editor, Lending-Times) believes more U.S. platforms will open the doors to non-accredited investors. Blockchain will feature more prominently in alternative lending with more platforms focused on crypto-lending including a prominent alternative lender adding cryptocurrency to its list of core services. He also believes increased specialization will lead to platforms targeting specific industries, regions/states, and other narrow target markets.

Conclusion

2018 will surely see the alternative lending industry enter a consolidation phase to withstand the changes in market dynamics, and companies best able to cope with these headwinds would emerge bigger and stronger.

Authors:

Written by Heena Dhir and Allen Taylor.

Allen Taylor

How One Online Lending Platform Emerged From the Trust Crisis

Credium

Part 2 of an interview with Gilad Woltsovitch, founder of the online lending platform Backed, Inc.  Read part 1 here. What happened after 2013? The whole source of capital has shifted dramatically, and the reasoning is that in building a marketplace, you always have two sides to fill. Because of the environment of 2008, with […]

Credium

Part 2 of an interview with Gilad Woltsovitch, founder of the online lending platform Backed, Inc.  Read part 1 here.

What happened after 2013?

The whole source of capital has shifted dramatically, and the reasoning is that in building a marketplace, you always have two sides to fill.
Because of the environment of 2008, with no credit sources, there was endless flocking of borrowers to lending platforms and the supply side for credit was very hard to fill to catch up with the demand. Platforms have been fueled by VC funding, with a mindset of capturing market share and cared less about showing profits, and more about booking more and more loans.

What happened was that the lending platforms needed to market to enough retail investors to support the high demand. They needed to collect a lot of individual lenders in order to have a real diversified or decentralized source of financing for such a large amount of loans. In order to solve that, VCs started fueling platforms with their own balance sheet lending, saying “Ok, until you find enough resources to fund these loans, take some of our equity money and start giving out loans and carrying on your balance sheet as debt.”

When that started to scale up, they were allowing themselves to be a little more lenient in the risk models because they weren’t dealing with other people’s money, and they saw more and more coming in. They saw the valuations going so high, it was a little less painful to lend that money out.

That’s all they focused on. Giving up on those stringent controls of risk meant that they have higher defaults which showed up only 3 years later, in 2016. While the market share was going up so rapidly, the hedge funds and the banks saw a great opportunity and said, “okay, they need supply to fill up the high demand for loans,” so, along with the balance sheet model, the marketplace lending paradigm came into place, and p2p lending shifted almost entirely from connecting borrowers and lenders to connecting between loans and centralized sources of finance, either balance sheet, or selling it directly to institutional investors who started having much more demand on how to price the loans themselves, and access to the inventory.

Institutional money caused a bit of a problem because they forced the peer to peers to change?

Yes. When you’re a marketplace lender and you need to fund $100 million in loans, you need to have 10,000 individuals deposit $10,000, it’s a big challenge. But if you have a Wall Street hedge fund come up to you and say “I’ll give you $100 million,” then you allow them to dictate some of the business metrics.

They don’t only dictate the cost of capital, they also require you to hire lawyers, and to hire grading companies, and to hire other known mediaries(?), notaries to vet and proof stamp everything that you do so they will deem it appropriate for them. That’s more money that someone needs to pay. It’s a cost that needs to be taken on by someone in the lending equation.

That started jacking up the prices because lending capital itself was becoming more expensive as retail investors were expecting 5-6%, but hedge funds like to see double digits. All of these caused platforms to rush in to gain market share on very unstable sources of capital that are very much just following where the highest return will go.

This led to the centralization of capital sources and created additional risks. Concentration risk entered into it when you solve the supply side by letting hedge funds finance your loans, it puts some sort of ease on the platforms to continue to focus on the borrowing side, and taking this false assumption that the hedge funds will always be there.

It all hit the fan in 2016, and there was a huge trust issue between the lenders of the hedge funds and the platforms. They pulled out all their funds from most platforms.

It sounds like 2016 saw a huge vacuum open up in online lending?

Yes. A lot of small platforms did not survive. This centralized a lot of the power within the platforms that were able to do securitizations. Because the hedge funds pulled out, balance sheet lending is almost the surviving model of all the alternative lending models.

Platforms get a credit facility from institutional investors, whether it’s a hedge fund or a bank, this way those institutional investors are hedged against the risk. They give you the credit facility and you pay them back interest rates.

A balance sheet lender gives out loans at a higher rate than its cost of capital and lives on the margin.

You make it sound like individual investors and individual lenders are both getting held with the bag?

Exactly.

The originators themselves who are issuing those loans on behalf of the capital that they are paying for are suddenly stuck with a whole lot of debt on their balance sheets. The platform generates loans with an average of 4 years per loan. if you are issuing $1 billion in loans, you have an average of $4 billion on your balance sheet that you can’t offload. There is no secondary market for it. You cannot liquidate or leverage those assets in order to grow your business.
Platforms have become digital agents for the banks and institutional investors. They source out all of the borrowers. They do the pricing. They fund the loans. But there always constantly squeezed within a margin between the cost of capital and the rate they can lend out while still being competitive.

That is why the platforms who have access to cheap capital are the big survivors.

Do you have a better solution?

That’s exactly why we started Credium.

The industry transformed into something it was not set out to be. Now individual investors can only access this lucrative asset class by buying tranches in securitized SPVs by brokers who are selling off securities of platforms. By paying all these intermediaries in the middle, you end up receiving a much worse deal than you would if you directly lend, which was the original p2p vision.

The borrowers end up paying more because there’s more middle men as the value chain got longer.

The silver lining in all of this is Blockchain. By 2016, it matured enough to truly decentralize this whole complex system of online lending which requires transfer of accurate trusted information between two parties who want to transact.

All this complexity can be solved by setting up a secondary market that will allow the 98% of platforms operating by holding debt on their balance sheet to go ahead and liquidate their debt.

How does it address the trust crisis of 2016?

With peer to peer you had to trust the server of the platform that the information their hosting there has always been that exact same information, and nobody changed it in between. That’s why you have all these intermediaries to audit and make sure that the information that’s being transferred between two sides of the marketplace is accurate, and transparent, and time stamped, and everything is kosher.

That answers the crisis of trust? What about the barrier of liquidity?

We are setting up a secondary market which will allow any platform to sell their borrower notes as long as it’s registered and regulated as a security.
The lenders have the upside of offloading their debt.

Traditional peer to peer lenders have access to liquidity by uploading their loans and having somebody else buy it, without having to be a specific member of their platform. It gives them the chance to offload a huge amount of debt off their balance sheet, and focus on growth.

On the buyer side, we are allowing anybody to have full transparency to the risk of the note, the pricing of the note, the servicing history of the note. Anybody who wants can have exact accurate information in a smart loan contract that is locked on the blockchain.

How will this benefit individual retail investors over peer to peer?

With peer to peer you have to trust the platform issuing the note. If you want to put $100,000 in Lending Club notes, you have to part ways with that $100,000 for up to 5 years because those notes are going to start paying back on a monthly fixed income return.

If you want to liquidate in the middle, you have to find another Lending Club user who is willing to buy off your inventory. Since there is no real liquidity in that secondary market because there is a very small, closed system, you will have to give a very big discount just to get your money back before the period is over.

It’s a huge advantage if you are buying a note and you can park your money there for a few months, and just sell it off. We are introducing a complete supply side for liquidity.

What happens to online lending if there is no Blockchain or secondary market? What are the consequences if these disruptions don’t happen?

Online lending will stagnate.

Your secondary market is being set up to resume the growth in online lending?

Exactly.

We think that institutional investors like insurance funds have a great opportunity to enter this market if they know that they would have a secondary market where they can trade this asset. We are creating a tradable asset with the mechanics to have a fair market value and price discovery.

Can this do anything to the cost of capital for lending platforms?

Yes. We are also introducing new buyers to the market. We have a whole universe of crypto-investors who currently have no ability to protect against volatility. The only option they have today is to transfer to a pegged digital currency, which holds a reserve of fiat cash and protects their deposit, but they get no interest on it.

There’s a few downsides to that. One downside is the fact that this is not a security. It’s not regulated and you don’t really know if this capital sitting as a reserve for those pegged tokens is used for leveraging or other things.

The second is that it doesn’t pay any interest. All you do is protect against volatility. You might as well have put the cash under your pillow.

Parking it in this pegged currency is a solution that today reached $500 million in market cap of crypto-currency parked just to protect against volatility. There is a concentration risk because there is a single body controlling all of that half a billion dollars. If there is any failure of trust. If there is any failure in management of those funds, the whole market cap is at risk.

By backing up your cryptocurrency savings with borrower notes, you get it backed by a regulated security that has an originator accountable for the risk scoring, underwriting, and everything regulatory agencies require. You have servicers that are accountable for making sure that the loan is current, collected, and up to date, and you have the Credium Foundation that is also accountable that both the originator and the servicer are compliant and functioning in order.

You have a pegged cryptocurrency that is backed by a regulated security accountable to parties to make sure that the funds are backed up, plus, it pays you a return. You get interest for locking up those funds in a fixed income savings instrument.

The other upside is that you have a secondary market so if you want to liquidate it you can sell those tokens to somebody else.

The third advantage is that you don’t have concentration risk. We are onboarding as many originators as possible. If one of them fails, only those invested in that specific originator will get hit, but the market will be resilient because there are so many other originators involved.

How much more of the market share can be acquired once you set up a secondary market?

With a secondary market, online lending can go from 10% to at least 50% of the market over the next 5 years. Blockchain technology will enable people to transact using tokenized securities. There are no intermediaries to trading them.

That’s your goal?

The Credium Foundation has two arms. It has a protocol development, developing standardized risk pricing, decentralized exchange of borrower notes, pegged currencies to back those notes, that’s the protocol.

Then there is Creduim Foundation which we are calling the Alternative Lenders Alliance to participate in building the marketplace inventory, designing the product themselves – the fixed income securities that they are issuing today but as digital tokens, and working with regulators to ensure that the regulatory framework matches the requirements.

Blockchain delivers regulators on a silver platter all the information they can ever hope for. A decentralized marketplace will enable regulators to have full transparency and immediate access to all information exchanged at all times.

So, you are saying that Blockchain can add at least another half a trillion dollars to the online lending industry in the next 5 years?

Yes.

Authors:

George Popescu
Allen Taylor

Online Lending: Building a Secure Business Model

marketplace lending business models

By Evan Singer, CEO of SmartBizLoans The online lending business model often rests on a wavering foundation, at least according to a recent Moody’s report. Confidence-sensitive funding and low recurring revenues have left many lenders unprepared to handle market and regulatory changes. This exposes them to great risks which are often overlooked by media and […]

marketplace lending business models

By Evan Singer, CEO of SmartBizLoans

The online lending business model often rests on a wavering foundation, at least according to a recent Moody’s report. Confidence-sensitive funding and low recurring revenues have left many lenders unprepared to handle market and regulatory changes. This exposes them to great risks which are often overlooked by media and zealous retail investors. While the report underscores a number of vulnerabilities within the industry, it’s paramount to remember that not all online lending providers are created equal.

Balance sheet lenders – This time-honored lending model is often not what we associate with “online lending” since it is the most traditional of lending architectures. Lenders retain “skin in the game” by lending their own money, thereby protecting against borderline risk because the stakes are higher. However, because funding for many of these loans in the alternative or online world comes from high-cost sources like venture debt facilities, loan pricing to the borrower has to be much higher to make business models work. And higher loan pricing attracts riskier borrowers. Some alternative balance sheet lenders are able to secure low-cost capital through a bank facility, like OnDeck, and this model can prove to be more successful if loans are well priced to attract higher quality borrowers.

Marketplace lenders – The marketplace model is the true buzzword in the online lending industry, and it is employed to solve what the balance sheet model may struggle with. This model allows companies to operate with less risk as they are able to focus on acquisition, underwriting, originating, and servicing, and do not need to raise their own capital to lend. Instead, lending capital comes from a spectrum of investors including hedge funds, banks, and individual retail investors. However, since revenue relies on the number of loans a marketplace lender originates versus ongoing interest income, a rapid push for growth can create volatility in these companies’ structures, as suggested in Moody’s report.

Additionally, the funding for marketplace lenders can be confidence-sensitive. Cheaper capital sources get cold feet after seeing defaults increase and demand a higher return for the increased risk, leaving marketplace lenders with the choice of raising prices to borrowers or tightening credit standards.

Marketplace technology platforms – Don’t confuse this with the marketplace lending model. Marketplace technology platforms are pure marketplaces that act as liaisons between originators and borrowers, thereby solving a connectivity problem between the two groups. A good example of this is pure P2P lending – so rare in the market today. Retail investors are connected directly with borrowers on a one-to-one basis, protecting them from external risks and allowing them to evaluate ad-hoc default risks. SmartBiz Loans is an example of a bank-specific marketplace technology platform. Small business owners are matched with the right bank to originate an SBA loan, increasing approval rates and allowing borrowers to save time and banks to improve efficiency.

As pointed out in an article by the insightful Jason Jones of LendIt, the industry is seeing momentum behind companies transitioning to a “hybrid” model that utilizes pieces of these and other models to maximize profitability and minimize risk. If the industry continues to focus on meeting customer needs through innovation, adjustment, and collaboration with traditional parties like government regulators and banks, we are en route to building a sustainable future for online lending in all its forms.