August 19th 2016, Daily News Digest

August 19th 2016, Daily News Digest

News Comments Today we have a treasure of great articles and news. Avant will start charging origination fees. And a new attack against Lending Club pointing out that 30,000 loans on their platform are taken by repeat borrowers. Why is this a bad thing ? A must read for investors : the much larger space […]

August 19th 2016, Daily News Digest

News Comments

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United States

Fintech’s Answer for Chilly IPO Market? Debt, (Wall Street Journal), Rated: AAA

The IPO freeze may be starting to thaw for tech companies, but it still isn’t warmed up enough for fin-tech firms.

Tumult in the new-issue market late last year and early this year claimed two casualties among financial technology firms, mortgage lender LoanDepot Inc. and subprime personal lender Elevate Credit Inc.

Both are online lenders with web-based applications (“tech”) that sell off their loans or warehouse them on outside banks’ balance sheets (“fin”).

They’ve also found an alternative way to raise capital: Via the debt markets, where investors remain starved for yield, and are apparently willing to take on riskier bets than stock buyers.

LoanDepot on Wednesday said it had raised $150 million in growth capital via a term loan sold to investors. The company did not disclose the interest rate. An existing loan from 2013, which matures in October, carried a rate of 11% to 12.75%, according to the IPO filing. The new loan follows Elevate in July announcing it had expanded its credit line from Victory Park Capital, a Chicago-based investor in online loans, to increase its capacity to make new loans.

While investors may be itching for liquidity, Mr. Hsieh is taking advantage of being private to experiment. He said that LoanDepot is using its new capital to pilot mortgage loans that aren’t government guaranteed, such as so-called “jumbo” loans for more expensive homes and second mortgages. LoanDepot will buy the loans itself with the new capital.

“Never in the history of his country have we seen the government fund over 90% of annual loan origination,” he said, referring to government-backed agencies such as Fannie Mae and the Federal Housing Administration who buy loans arranged by private firms such as LoanDepot.

“It’s just a matter of time before fintech firms come in and crack this market open so that new product innovation starts to flow again,”

Avant Parts Ways With 30% of Staff, Including CEO’s Wife, (The Wall Street Journal), Rated: AAA

Earlier this year, online lender Avant Inc. moved into an 80,000 square-foot headquarters in downtown Chicago that had all the amenities of a fast-growing startup. Employees needing a midday break could step away from their standing desks and into a “Nintendo” room full of vintage videogames.

Now, many of those desks sit empty. Around 220 of Avant’s workers, or roughly 30% of its full-time staff, accepted a buyout offer that was extended to all employees this summer, the company says.

It’s “not the highlight of my professional career to have to shrink the size of the company,” said Chief Executive Al Goldstein in an interview.

Avant has long touted a crucial difference with its rivals: It didn’t profit by charging fees to borrowers, and instead sought to sell loans at a big premium to investors.

“We are still competing for mindshare with investors,” Mr. Goldstein said. “It’s progressively difficult to deliver the no-fee product.”

Many online lenders have already increased interest rates multiple times and cut off parts of the population that were previously eligible for their loans.

Part of that tightening was to correct for loans previously offered on terms that were too easy and that have since started to default at faster-than-expected rates.

Cumulatively, the steps taken in recent months put online lenders on more solid footing, but they also weaken what has been a rationale behind the nascent industry: that the firms will lend to people that banks have left behind. Avant this year began requiring borrowers to have more income relative to the size of their loans. It also has been shrinking the size and payback period of its loans.

Avant’s fees will range from 1.75% to 3.75% of the loan amount, which is less than its competitors charge because Avant also receives income from the loans its holds on its books.

There are signs that Avant’s outlook has improved in recent weeks. The lender had originally said it could let go about 40% of staff, but was able to stop at 30%. The firm recently renewed its credit facility with J.P. Morgan Chase & Co. and Credit Suisse GroupAG. Bonds backed by Avant loans were sold in August at the lowest yields of any deal brought by the lender to date.

Avant also said in its investor letter that it broke even in the second quarter on an adjusted basis, and had more than $100 million of gross revenue, “setting the foundation for future profitability.”

“Our mission is to be able to provide access to credit for middle-income consumers around the world,” said Mr. Goldstein. There’s “no question Avant is going to survive and be a winner.”

How Lending Club’s Biggest Fanboy Uncovered Shady Loans, (Bloomberg), Rated: AAA

In Portland, over coffee, Sims said he’d found thousands of instances from 2009 through 2011 in which Lending Club seemed to allow borrowers to split their loans in two if their first attempt to get a loan didn’t find any takers.

For instance, in June 2011, a user from the Phoenix area requested $25,000 for debt consolidation. The user was relatively risky, with a FICO score in the low 700s. Lending Club rated the loan “E2”—one of its riskier categories—offering it at an interest rate of about 18 percent. But investors were skeptical, and only $20,525 worth of the loan’s notes were sold. Later that month the same person, according to Sims, borrowed the difference, $4,475, at an interest rate of just 7.5 percent. (Sims guessed that Lending Club’s algorithms gave the second loan a higher rating because it was smaller and thus less risky.)

To the outside, it looks like one reliable loan and one risky loan; in fact they were both risky. “We evaluate each borrower’s creditworthiness based on the most up-to-date data,” the company says in a statement. It adds that users can exclude “relisted” loans from their searches.

In all, Sims’s model has identified about 30,000 loans that were likely taken out by repeat borrowers—information the company has never disclosed but would be valuable to investors, since it could help show if a borrower is overextended. (Prosper, unlike Lending Club, discloses this information.)

Because borrowers could be tapping multiple marketplaces at the same time, such data could show shareholders and regulators if this modern form of marketplace lending is riskier than they think.

On the other hand, because Lending Club makes most of its money by charging fees to borrowers and investors and doesn’t carry many loans on its balance sheet, it has limited incentive to implement such controls. Sims says, “The biggest question every investor should be asking is, ‘Are these platforms actually helping people pay off debt more quickly, or just putting them further in the hole?’ ”

Lending Club argues that any loans a borrower has taken out on the site are built into their credit report and therefore of no special relevance.

That Sims was able to use an algorithm and a home-built computer to pinpoint problematic loans suggests another looming problem for Lending Club: user privacy.

Why the opportunity in alternative credit is far broader than just p2p, (Alt Fi Credit), Rated: AAA

In a personal capacity I started lending on the Zopa P2P platforms 6 years ago when yields were much higher, default rates were lower and underwriting standards were higher across the industry.

Since then, in order to place the flood of money that has become interested in P2P lending, yields have fallen dramatically and underwriting standards loosened.  As this change occurred, I stopped lending P2P to individuals and have diversified to other higher yielding categories that by and large are still relatively undiscovered.

I have been keen on lending against real estate development projects in Canada where there are only 5 big banks and their lending criteria is very restrictive.

I have also lent against life insurance policies in the US that are designed to provide help people who are ill with cancer so that they don’t need to sell their life insurance policies to vulture funds at huge discounts.

International banks have continued to pull out of Africa because of problems and capital requirements back home, I have carefully lent money to commodity wholesalers and traders in Africa.

Another area with a shrinking banking industry is Spain. Structuring loans collateralized against government receivables that give companies reliable working capital can be highly lucrative for investors.  I invest with an old friend who is well connected in Spain and he is also able to source many real estate lending and leasing opportunities in the region.

Finally, micro SME (Small and Medium Size Enterprise) lending in the US is very interesting at the moment.  These are loans that are usually less than $100,000 in size, but bigger in size than Merchant Cash Advances.  The short term loans are typically made to companies across the US and across industries that have been in business for on average 10 years or longer.

These are only a few of the many places I and my clients have invested in over the past few years but it highlights some of the opportunities beyond P2P loans to individuals.

The opportunity to disrupt the credit card rails may finally be opening up, (Daily Fintech), Rated: AAA

The transition to Chip and PIN credit cards in America currently looks like just a big conversion cost – good for vendors and consultants and a big extra cost and time suck for everybody else.

However, below the surface something bigger is brewing. Chip on plastic is incremental change, but Chip on mobile phone is a game-changer.

To the rest of the world, America moving from mag stripe to chip cards merits this reaction – “what took you so long?”

After Chip + PIN is introduced, fraud in Card Present transactions (aka physical retail) becomes too hard, so criminals shift attention to Card Not Present (CNP aka e-commerce).

 

Three factor authentication is better

Chip is better than mag stripe for single factor. Chip + PIN is better two factor than Chip + Signature. But 3 factor is best and that is what mobile phones enable:

Factor 1: something I own (can be a chip on a card or a chip in a phone)
Factor 2: something I know (PIN)
Factor 3: something you know about me (location in a mobile phone, not possible with a Chip card).

The Mobile Payment tipping point.

If this data from eMarketer is even close to right, we are at the Mobile Payment tipping point:

Shh, don’t tell, but Uber is really a payments company with an e-commerce skin. So is Amazon. So is AirBnB. People make a big deal about Uber, Amazon and AirBnB not owning the actual physical stuff/service that we buy – as if vertical integration was an issue in the 21st century. What is much more critical is when a when Merchants become payments businesses through Tokenization.

Tokenization is the one time password that a student of cold war espionage stories would recognize. If you steal the token/one time password, you can steal the contents of that message/payment and only that message. That is fundamentally different from stealing the Primary Account Number (PAN).

Remember those merchants upset by the cost of switching to Chip + PIN? They would like to do this as well. Any entrepreneur who figures out how to offer that to small merchants will do well – maybe Square?

Prosper President Ron Suber on US Fintech Market Outlook, (YouTube), Rated: A

Ron Suber keynote presentation at LendIt China 2016

Learning From Online Lending’s Stumble, (Email, Blue Elephant), Rated: AAA

Online lending had enjoyed significant wind in its sails over the past five years. Aided by the post-Great Recession healing of the credit cycle, lenders were able to originate increasing but limited volumes of loans that provided much needed yield to investors. Along the way, a myth developed that online lending could grow infinitely, stealing business away from big banks while providing investors with the Holy Grail of investing – high returns and minimal risk.

Competition for borrowers pushed lenders to lower rates and increase capacity more quickly than their models could handle. Defaults rose and returns fell accordingly – and that was during a relatively strong point in the credit cycle. It is safe to say the online lending myth has been debunked, or at least been brought back to reality.

The beginning of this evolution is straightforward. Online lending should be treated like any other investment, with the acknowledgement that with return comes risk.

New analytical tools will need to be created to compare different loans across originators, allowing investors to do independent assessment of the risks involved.

Beyond risk assessment, investors must demand clarity between the role played by the lender as loan originator, and the investor as fiduciary. Many online lenders do not keep the risk of their loans on balance sheet – they get paid an origination fee and sell the loans to others. This style of loan origination creates value for shareholders by maximizing the volume of loans originated, not from the ultimate performance of the loans.

Some of these lenders have raised private funds which exclusively buy loans from their own platform. The inherent conflict is that the lender cannot fulfill its fiduciary duty of maximizing loan volume while also being a fiduciary to a loan buyer demanding maximization of return.

In the age of the hyper-regulated mega bank, there is a real need to open up credit markets to small-balance borrowers. Combine this with investor need for yield, and all the building blocks are in place.

Goldman Sachs: A play for the 99%, (Financial Times), Rated: AAA

In April this year Goldman Sachs did something it had never done before. For almost 150 years, it had prospered by getting close to people of power and influence: wealthy institutions, multinationals, rich families.

Now it was trying to appeal to hoi polloi, offering online savings accounts that can be opened with a deposit of just $1, with interest rates about 100 times better than those at big US retail banks like Wells Fargo or Bank of America.

But the launch of GS Bank, propelled by the acquisition of a $16.5bn book of deposits from GE Capital, was not exactly glitch-free. People were baffled by an automated menu system that failed to recognise simple instructions, says Rob Berger, founder of Doughroller.net, a personal finance site. Some customers reported long delays in opening an account; others complained that they could not get on to the platform via an iPad or a Chromebook.

Goldman is moving into Main Street for a simple reason: life on Wall Street has become much tougher since the global financial crisis.

At the same time, revenues in the bank’s asset management division have been squeezed by a broad shift to passive rather than active investing.

All that has weighed on profits. Goldman’s return on equity — the best and simplest measure of how well it is using shareholders’ money — slipped below 10 per cent last year and is expected to come in at about 8 per cent in 2016.

Executives at Goldman bridle at the suggestion the bank has stood still while the world changed around it. They point out that it has kept annual revenues more or less steady at about $34bn since 2012, despite cutting risk-weighted assets by about one-fifth in that time, on estimates from CLSA, the brokerage.

Pay — often a flashpoint — has come down a lot too, reflecting smaller bonuses as well as the different business mix.

In the second quarter this year, Goldman’s accrual for compensation and benefits came to $95,718 per employee, less than half the figure of $211,968 of 10 years ago.
Once investors regain some poise, said Mr Blankfein, Goldman would bounce back too. Higher interest rates, lower energy prices and a stronger economy should help boost the “velocity” of trading. “There are signs on the horizon and indications that we are finally, after a very long time, coming out of that [low volume] environment,” he said.

In that context, say analysts, Goldman needs new income streams to boost RoE. In the autumn it plans to start putting its new GE connections to work, launching a venture offering loans online to consumers and small businesses. That unit has hired dozens of senior people from companies including Lending Club, Citi, Amex and Barclaycard.

More retail banking products could follow — such as car loans, mortgages or a “robo” wealth management platform.

Before the financial crisis, Goldman did not even have a federally insured bank but it was forced to open one in 2008 as a condition of receiving bailout funds.

Deposits now account for 23 per cent of the bank’s funding mix, up from 3 per cent at the end of 2007.

The new mix helps profits, too. Even though Goldman is paying its GS Bank depositors a near market-leading interest rate of 1.05 per cent a year on online savings accounts, for example, that is still much less than the cost to Goldman of issuing long-term bonds.

GS Bank’s 160,000 or so depositors should be a useful support for the new lending venture, which represents a direct strike against peer-to-peer platforms, which match needy borrowers with investors hungry for yield.

In a research note last year, Goldman analysts said $10.9bn of annual profit generated by traditional bricks-and-mortar lenders was at risk of being lost to more nimble upstarts. Of that, the largest chunk — $4.6bn — was from unsecured personal loans, with another $1.8bn from small business loans.


A successful launch of a Lending Club-like business would be a feather in the cap of Stephen Scherr, a former head of the financing group who was named chief strategy officer in June 2014.

Recasting Goldman as the friend of the consumer and small business will not be easy. For many people across the US, the brand is associated more readily for its legal and political scrapes after the financial crisis than its philanthropic programmes.

One former employee notes a more fundamental mismatch: the fact that making money from retail banking depends on churning simple, low-margin transactions at high volumes. That is the opposite of Goldman’s core strategy over its 147 years, which has focused on complicated deals for big clients.

Goldman is clearly gunning for growth from GS Bank: vacancy lists on its website show 22 positions available at the unit, more than in securities and investment banking combined.

Millennial fintech service Stash raises Series A funding, (New York Business Journal), Rated: A

Stash raised $9.25 million, in a Series A funding round.

Stash helps Millenials invest. Investments in Stash are Exchange Traded Funds(ETFs) or stocks. Stash picks a select group of the thousands of ETFs and stocks available, based on factors like low fees, managed risk, and historical performance. Stash recommends a set of those investments for you, based on the profile you fill out when you sign up. For each investment available to you on Stash, you can see the primary company or companies included, and can visit the website of the investment for more information.

United Kingdom

Seven in 10 Moneywise users would use P2P lending to boost savings, (Money Wise), Rated: AAA

Seven in 10 (71%) Moneywise.co.uk users would consider using peer-to-peer (P2P) lending in a bid to earn higher returns on savings, our latest poll results reveal.

Interestingly, our poll, which received 890 votes between 9 and 16 August, also reveals that more people have gotten into P2P lending over the last six months.

When we asked the same question in late February 2016, of the 892 who voted then, a smaller 33% said they already use P2P lending, while 38% said they’d consider doing so in future.

An increasing number of people have also now heard of P2P – with 9% not having heard of it in February, compared to just 6% now.

However, conversely the number of people who wouldn’t use P2P has risen from 21% in February to 23% in August – perhaps highlighting a greater awareness of the risks involved.

The Entrepreneur: Rhydian Lewis, RateSetter , (Startups), Rated: AAA

We’ve passed a few milestones since we wrote our first loan in 2010: we launched in Australia in 2014, passed £1bn in total lending in 2015 and we now have more than 300,000 customers. We’ve also lent more than £250m to business borrowers, which has made a real difference at a time when banks are reluctant to lend to small businesses.

However, the thing I’m proudest of is that to date, every individual RateSetter investor has received the returns they expected without losing a penny.

RateSetter was self-funded when we launched, but we’ve since raised £30m from a range of investors including City heavyweights like Woodford and Artemis.

Our intention is for RateSetter to ultimately be a publicly owned business. It’s difficult to draw a precise timeline for things like this, but it’s a process that will take at least a few years. In terms of the size of the RateSetter loan book, currently there are more than £600m of active loans – we’d like it to be several times that figure in three years’ time, which would bring us in line with a small bank in terms of scale.

We’ve focused on retail investors throughout, and kept institutional investment to less than a tenth of the total.

This might surprise you, but I actually think that the UK has taken a positive approach to regulation – we and others in our sector successfully lobbied to be brought into regulation and it has so far proved to be a good thing.

I think one of the biggest mistakes entrepreneurs make is not being committed to the long run and failing to see things through.

Author:

George Popescu