Consumer lending in the US reached nearly 1.5 trillion dollars in 2018, according to the Federal Reserve Board of Governors, and European banks reported a demand growth of 25% in the second quarter of 2018. Needless to say, it’s a good time for lending. While banks are still paying out the lion’s share of the […]
Consumer lending in the US reached nearly 1.5 trillion dollars in 2018, according to the Federal Reserve Board of Governors, and European banks reported a demand growth of 25% in the second quarter of 2018. Needless to say, it’s a good time for lending.
While banks are still paying out the lion’s share of the loans, alternative lenders are gradually moving in to fill holes in the ever-increasing lending market.
Fintechs Exploit the Growing Market
The traditional banking sector is entrenched in their old way of doing business. Banks and customers alike expect a certain customer experience and style of operational management. While this may appeal to some customers and lending institutions, it comes at a significant cost. Each teller or call-agent interaction at a traditional bank costs an average of four dollars compared to merely ten cents for a mobile interaction.
While the profits of running a fintech are clear, the process of getting up and running is not without its challenges.
Practical Steps for Setting up a Lending Company
Lending markets vary from country to country depending on regulations, legislation, and consumer behavior. This simple roadmap outlines the general process to get started.
Point One: Becoming A Legitimate Enterprise
In order to start lending online, business owners need to create a legal entity. This is the vehicle that all lenders will use to navigate red tape. As this process varies greatly from business to business, it may take as little as 1% or as much as 20% of your initial startup budget.
One possible way of circumventing this is to purchase an already existing bona fide legal entity or lending franchise. For example, the largest franchise lender in the US is Liquid Capital. The short-term costs may run a bit higher, however, the long-term benefits of using an existing household name could potentially pay large dividends.
In addition to the unique requirements for lending entities, regular business costs will often crop up as well. Among others, these could include hiring and administrative overhead and office rental. On average, these costs could take anywhere from 10%-12% of your startup budget.
Point Two: Raising Funds
Raising capital to lend out is the primary operational challenge for any lending startup.
Usually the best way for a startup to begin lending is with their own capital, but when that is not possible (or favorable) funds can be raised in the marketplace. Recently, institutional lenders have become much more comfortable with providing capital to lending startups following the rise of the P2P model.
Any lending company funded by public investors will have to factor in the cost of hiring a Certified Public Accounting firm to perform an audit to certify all financial data including their business plan, valuation, and other financials.
Point Three: Using the Right Technology Platform
The core of any modern lending company is the technological platform it runs on. The platform is the brain of the business and takes time to nurture and grow. It is best to do this in parallel with the other points as it is the primary capital asset of the operation.
When it comes to platforms, there are two main options: building your own from scratch or purchasing an existing platform from a vendor. This crucial decision will have a long-term impact on the business and will greatly affect setup and operational costs. Each option comes with pros and cons:
Building a lending system from scratch is more time-consuming, and can take up to 12 months. It requires a substantial upfront investment as you will need both financial and technological expertise to pull it off. Additionally, time-sensitive shifts in the market could be a factor, so timing your release is of paramount importance. While this option could be risky, it gives lenders full control over the product they build.
Purchasing an existing lending platform is generally less expensive and faster. There are a wide range of solutions both out-of-the-box and fully-customizable. The options fall into two general categories: traditional core banking systems (eg. Oracle, Temenos, and Infosys) or fintech-focused solutions (eg. HES Lending Software).
There are number of software challenges that digital lender should consider when choosing a platform:
In order to optimize productivity, systems often require further customization.
Some systems only cover a single or hand-full of loan management aspects like underwriting, loan origination, or loan servicing, and do not support many back-office functions.
Systems often do not integrate with the majority of third-party services, so lenders might end up needing to mix and match software to run their business.
Some systems do not extend well into new markets or product segments.
Some systems require license upgrades to increase the loan volume or number of user accounts.
With a good understanding of the industry, thorough planning, and about $200,000 to $1,000,000 of startup capital, a state-of-the-art lending business can be launched. Not only do these businesses financially benefit their owners and investors, but they come with the satisfaction of knowing that every loan issued has great potential for improving the lives of the borrowers and their communities.
Natalie Pavlovskaya is the Chief Marketing Officer at HES (HiEnd Systems), a fintech company behind comprehensive lending and credit scoring solutions. She is a Marketing Executive with international business experience in CIS, EMEA, and US, working for more than 7 years in digital marketing.
This year’s digital lending conclave in India features top speakers addressing consumer lending and SME lending concerns. There will also be discussions in equity financing for alternative lenders and debt capital for alt lenders. Speakers include: Gaurav Chopra Alok Mittal Shilpa Mankar Ahluwalia Samir Bhatia And many more Location: DLAI, C/o Capital Float Zen Lefin […]
This year’s digital lending conclave in India features top speakers addressing consumer lending and SME lending concerns. There will also be discussions in equity financing for alternative lenders and debt capital for alt lenders. Speakers include:
Lending is as old as civilization itself. Seven thousand years ago, in the Fertile Crescent known as Mesopotamia, Sargon the farmer had 100 apples. His friend, Hammurabi, had 10 bushels of wheat. They exchanged what they had and now Sargon has wheat and Hammurabi has apples. Everyone bartered to meet their needs. Then Sargon got […]
Lending is as old as civilization itself.
Seven thousand years ago, in the Fertile Crescent known as Mesopotamia, Sargon the farmer had 100 apples. His friend, Hammurabi, had 10 bushels of wheat. They exchanged what they had and now Sargon has wheat and Hammurabi has apples. Everyone bartered to meet their needs.
Then Sargon got a little creative.
He came to Hammurabi with a special offer: 60 apples in return for 10 bushels of wheat with the promise that at a future date, he will deliver another 60 apples to complete the deal. Now, Sargon has the wheat he needs, plus an additional 40 apples. With the extra fruit, he can take the seeds and plant more. In due time, he pays off his friend who is happy to see a 20% rise in income. Everybody benefits.
Thus, began the concept of credit.
It was only a matter of time before some other clever people decided to create a common medium of exchange to scale it up. Currency made it all easier. You could buy apples, wheat, and everything else with silver, gold, and eventually paper.
You could also borrow currency to create leverage. The credit system has underwritten prosperity from Mesopotamia, to the first paper currency minted in ancient China, the deposit and loan banking system which started in ancient Greece, the Renaissance fueled by the Italian Banking system, the first Credit Union in 1852, to the last time 1,000 Smartphones were shipped from Singapore to San Francisco backed by a letter of credit.
From then until now the process hasn’t changed. An individual goes to a lender asking for a loan. He fills out forms, provides information about his assets, income, and current debt levels. The lender reviews the information and makes a decision.
For the most part, lenders are financial institutions who take deposits, which they usually pay very little to depositors to hold, then lend out those deposits to borrowers paying them 10-20%. It has been great for the lenders, who haven’t had any incentive to change or innovate the process.
To pay back the loan plus interest, it’s the borrowers who must take risks. They are the innovators, so they produce. They are the ones forced to sweat.
Credit has propelled man forward from the stone age to the digital age.
The Revolution in Online Lending
The great advancements traditional lending financed came with a downside. The user experience was cumbersome, borrowers were limited to whom the lender decided was a worthwhile risk, and lenders benefited most. A lot of people were left out, and the lenders made huge margins loaning out other people’s money while the people who deposited the money saw very little of those returns.
The peer to peer lending model, launched by Prosper in 2006, introduced the most significant breakthrough in consumer lending. It transformed the lenders into innovators, reinventing the credit system to fix all of these imperfections.
Online lenders are productively disrupting the ancient credit model in 4 ways:
1. Utilize technology to give users a better experience.
An applicant for a loan no longer has to haul himself to a lending institution, wait on line, and fill out paperwork. Everything can be done in the comfort of the user’s home. The user can fill out forms online and submit them to an online lender in one click. The online lender can call information like credit scores and past income histories from its own computer, make a decision, and if approved, wire the loan directly to the borrower’s account.
2. Leverage new methods of gathering data to transform risk algorithms.
With vast amounts of data available at everyone’s fingertips, online lenders can now use new information to underwrite loans. Risk models can now be expanded to include new factors like social media, email histories, even mobile phone usage. Online lenders like Upstart have advanced lending models that go beyond credit scores to evaluate risk based on academic achievements. Cabbage underwrites businesses by looking at the lenders available Amazon information.
Expanding on the traditional credit score and debt to income models, online lenders are discovering a new class of prime lenders.
3. Diversifying sources of capital.
Traditional financial institutions are no longer the only business in town. Peer to peer lending lets individuals lend to other individuals. A borrower can now get money from multiple sources. Every lender is forced to be more competitive. Retail and individual investors can opt to invest in loans rather than put their money in a checking account. They can be just like any financial institution, making double digit returns on money originally designated for their checking account.
4. Increase profits for all stakeholders.
Automating more of the loan process requires less labor costs to service each loan. That creates productivity gains which translates to more profit for all parties involved.
For thousands of years human progress has marched forward under a credit system that benefits one party over the others. The emergence of a new system of credit that rewards all involved will propel the advancement of mankind to heights beyond our wildest imagination.
Sargon would be impressed.
Gilad Woltsovitch is the Co-Founder and CEO at Backed Inc., responsible for designing the company’s first-class platform, UX and UI. Before Backed, Gilad co-founded iAlbums, a semantic curation engine for media players in 2010 where he served as the company’s CEO from 2011-2014. In 2013, Gilad also served as the entrepreneur in residence for Cyhawk Ventures and joined the Ethereum project, establishing the Israeli Ethereum meet-up group. Gilad holds a Masters of Art Science and Bachelors in Sonology from the Royal Conservatory of The Netherlands in The Hague, University of Leiden.
A one on one with Gilad Woltsovitch, founder of the online lending platform Backed, Inc. His personal journey navigating the turbulent times of the last two years, how Backed emerged from of the online lending chaos of 2016, and how he discovered a Blockchain-based solution to establish a secondary market for credit assets that can […]
A one on one with Gilad Woltsovitch, founder of the online lending platform Backed, Inc. His personal journey navigating the turbulent times of the last two years, how Backed emerged from of the online lending chaos of 2016, and how he discovered a Blockchain-based solution to establish a secondary market for credit assets that can add at least another half a trillion dollars to the online lending industry over the next five years.
This interview consists of two parts. Part 1 is below. Part 2 will be published next Tuesday.
Tell us about the opportunity you see with the plateau online lending has hit and the maturity of Blockchain and Ethereum?
Alternative lending reached a point where it is a sizeable enough industry to remain a viable financing source for credit, we think there is a huge market to disrupt using Blockchain technology because right now this industry reached around $182 billion globally in online lending.
But the potential is much bigger.
The immediate addressable market is around $1.5 trillion globally. The only problem is that all of these assets are being generated in silos so every single company issuing borrower notes is doing its own underwriting, risk scoring, reconciliation, and issuance of notes all inside their own ecosystem.
Because there’s no secondary market, the industry has reached the point where it’s difficult to continue to grow because of these liquidity issues. In a short time, this new form of lending captured over 10% of the market. A new catalyst to move it forward is a real game changer.
How did you get interested in blockchain in the first place?
I read about Ethereum in a white paper. I got really interested in the technology and how it could bring disruption to the world of trust. It seemed like general purpose blockchain is the right way forward compared to the others who were trying to build on top of blockchain which wasn’t what blockchain was meant to be. That’s what got me interested in Ethereum. It is a very pragmatic and elegant solution to making a general purpose blockchain.
The ICO for Ethereum happened, I think, half a year later. I participated it in because I was emotionally invested in it already. I believed in the vision.
Vitalik reinforced the seriousness of this.
What role did you envision Ethereum and Blockchain at that point?
It’s interesting because we were just entering the FinTech space, after getting really excited about the revolution bitcoin brought about. At the time, we felt that the whole technology was too premature to go out and confidently raise funds from investors and be accountable for building a product on top of the protocols that were so young and so volatile. We thought it’s not a right time to build a blockchain business. Especially for us at the time because we are not cryptographic developers.
But, I knew from day one, and I told it to every single investor that joined Backed, Inc., that Blockchain technology should be the foundational kind of structure that we build on for our products.
So, in the back of my mind, even though Backed was started up as a very traditional alternative lender, I always knew that once the ecosystem matures enough, we will incorporate it into the business. That’s what led to the birth of Credium.
What was it that got you so interested in Blockchain technology?
The ability to transfer information transparently, and reduce the need for third party trusted intermediaries in between. It’s something that I began to understand when studying music. I studied the theory of electronic music, or, signals in general. There is a concept called the signal and system theory. When I look into a lot of networks in general, I always look at it from this kind of paradigm, thinking how is the correlation between the signal, as you transfer it throughout your network with minimal amount of loss. If you have signals floating through air, which is in music, you have minimal loss of information because the medium itself is just transferring the data. But once you need to digitize it, and start processing it, and reconciliating between two end points not necessarily speaking the same language, reducing it all to a failed information transference.
The bank hosts information about deposits. How many deposits does it have? How do those deposits behave usually? It needs to analyze through its systems how this information will help loan officers make decisions of how much leverage can it take, who can take the risk, and how does their profile look?
In a centralized system, you need a lot of intermediaries. They stamp the validation, the correctness, the kyc, the credit history, the amount of available funds, the risk model itself. Everything has to be vetted and audited, and when it’s transferred between entities within the same system, or even more complicated, between systems, you have more and more points of failure. Intermediaries cost money. In the end, the borrower pays more.
You see a problem when information has to go through too many hands, and the borrower pays for it?
Exactly. At the end of the day, everybody in the middle needs to get their piece of the pie. In the system of credit, the borrower is always in the lower position to incur all the markups and costs.
Do you see this as the problem that you set out to solve?
This is what drew me into the idea of blockchain. How can we share information that will help us transact transparently without the need of intermediaries? We wanted to start our own business that will help borrowers access credit. It was too early to take a head dive into blockchain back in 2014. The whole world of peer to peer lending was just emerging. We saw that as a great opportunity to focus on a niche market that wasn’t getting served by the big players who dominated the space.
What niche market?
We noticed that the whole experience of people who didn’t accumulate enough credit history in order to be scored sufficiently. The models that the growing industry has been using is taking the minimum risk possible by only rewarding the customers they can find. You were being penalized by the old models for not having enough debt, and then you are paying more for the debt that you do take, which makes it more difficult to pay off, or pay off on time, which makes it harder to get more debt, or pay it off at a reasonable cost.
I saw proliferation of many companies who tried to attack and bring novelty to the risk underwriting mechanism. Upstart is a notable example. It started looking into underwriting people based on their education.
You saw that there were populations that were being underserved, and that the models were not getting enough information, charging more money because they just weren’t assessing the risks efficiently?
The industry as a whole noticed that these arcane models needed to be updated. Every platform took their own approach on how to resolve this within the regulatory boundaries of risk scoring.
Backed was one of those novelty companies that was part of the Lending 3.0 revolution. Backed was the cosigning flow of the solution.
What niche did you see the most opportunity in during the online lending revolution of 2013?
I noticed that “thin filed millennials,” as I call them, were branded by the Consumer Financial Protection Bureau as “credit invisibles.” This population is basically mainly millennials or immigrants that do not necessarily have enough history in the system to get a sufficient score.
What opportunity did you see to serve their needs?
We looked into how they get through college, to their first job, and their first apartment. We noticed that they rely on their families much more than you would think traditionally.
After 2008, more and more millennials had to rely on their parents to either continue to subsidize their rent, or let them use their parents credit cards because their parents have a good credit score.
How did this fare?
We built up the system in 2015. We launched the pilot program, Backed, Inc, in 2016. We gave our first loans with capital from our equity investors. Our business is growing better than we anticipated.
Around 40% of the portfolio is backed by cosigners. Every borrower with us has seen his credit score increase by at least 10 points.
We reduce a lot of the risk for the cosigners themselves. We really believe in the model.
Has it ever happened that a cosigner had to make a payment to keep the loan from going bad?
We had a few incidents where a payment was missed, but it was paid back by the borrower – at the cosigner’s insistence. The leverage of the relationship between the borrower and cosigner was enough to keep the loan in good standing.
It sounds like this is a successful model. Did you get funded?
We scored a deal with one of the biggest hedge funds in New York. We had a signed term sheet for $20 million investment in our company.
So, the champagne was on the table and the check was ready to be signed?
We started hiring. While this was happening, a disaster happened in the industry that sent shock waves everywhere. It was the entire loss of trust between one of the lenders in the market, who had some issues of backdating their inventory.
Almost every single fund in the hedge fund industry pulled out, and we got a phone call basically saying that they are pulling out of the industry.
Was there any reason they pulled out that was about Backed?
It was clear that we were showing much better returns than expected. The Backed, Inc business model, the risk and underwriting side of the business I definitely think it’s a strong model. Its very niche specific so the challenges still remain on growth, and how big of a market it can achieve.
How is it doing from the Spring of 2016 to now, a year and a half later? Are more people taking out loans?
How has the industry reacted to the 2016 crisis?
It boils down to who has access to lending capital. Backed, in terms of the model is seeing organic growth. There’s more business to be done in our niche.
Until 2013, the model was pretty much peer to peer lending, and the platforms were just facilitating a marketplace between borrowers and lenders, basically allowing retail lenders to enjoy bank returns by diversifying their portfolio so they cut up every loan into securities, and investors with smaller amounts could diversify a whole portfolio of 100 loans without investing more than 10 or 15 thousand dollars, and earning returns just like the bank have on a pool of a hundred different loans.
So, instead of investing in 100 loans, you are investing in 100 fractions of different loan grades, and that was the whole peer to peer solution.
The problem that impeded our growth, just like any other niche platform, is the problem that the general model shifted heavily from 2013 onwards from peer to peer lending towards very centralized sources of capital, like institutional banks.
Gilad Woltsovitch is the Co-Founder and CEO at Backed Inc., responsible for designing the company’s first-class platform, UX and UI. Before Backed, Gilad co-founded iAlbums, a semantic curation engine for media players in 2010 where he served as the company’s CEO from 2011-2014. In 2013, Gilad also served as the entrepreneur in residence for Cyhawk Ventures and joined the Ethereum project, establishing the Israeli Ethereum meet-up group. Gilad holds a Masters of Art Science and Bachelors in Sonology from the Royal Conservatory of The Netherlands in The Hague, University of Leiden.
News Comments Today’s main news: Lending Club considering bid for bank charter. N26 to launch in the UK. TransferWise hooks $280M investment for APAC expansion. Zopa vows rate hike won’t impact loan performance. Hexindai debuts on NASDAQ with 60% increase. Westpac profits AU$7.99B. Kaodim raises $7M. Today’s main analysis: SoFi’s latest consumer lending deal. Today’s thought-provoking articles: How payment tech is […]
Lending Club is exploring the idea of operating as a bank or obtaining a fintech bank charter in order to keep pace with a changing lending and regulatory landscape, an executive from the marketplace lender said on Thursday.
Speaking at the Digital Lending + Investing conference in New York, Valerie Kay, Lending Club’s head of institutional investor group, said that the platform is considering both pathways as the business grows.
One of the earliest changes involving the payment industry is how banks and customers behavior is shifting with one another. Quite simply, people have different expectations with how money should move, as well as how quickly. This is a cross-generational phenomenon and something that banks are trying to keep up with.
According to Business Insider, peer-to-peer payments alone are on pace to be worth $86 billion by 2018. And with the popularity of apps like Venmo, PayPal, and even Square Cashcontinuously on the rise, this trend doesn’t show signs of slowing down anytime soon.
CurrencyPay, an online payment system that not only finances major equipment for businesses, but extends online payment methods from credit and debit cards to include ACH or wire, all the while reducing fees across the board.
Also on Thursday, President Trump rolled out his new tax plan which reduces the number of tax brackets from seven to four and cuts the corporate tax rate to 20% from 35%. Relevant to marketplace lenders, the tax plan reduces the mortgage interest deduction cap by half.
SoFi’s Latest Consumer Lending Deal
SCLP 2017-6 is the largest deal on SoFi’s shelf, and the first since SCLP 2017-5, which priced concurrently with Mike Cagney’s resignation. As we discussed in our previous blog post, SCLP 2017-5 priced slightly wider on the news (10 to 15 bps). SoFi’s latest consumer lending deal, SCLP 2017-6, is the first deal from SoFi with borrowers living in FEMA declared disaster areas, comprising approximately 12% of the deal.
SCLP 2017-6 Structure
Although it may seem that SoFi is structuring deals more aggressively, the A and B classes have higher initial CE when compared to SCLP 2017-5 by 2.38% and 0.76% respectively.
“I think the [regulatory] environment really changes depending on who you’re talking about,” says Dorsey, who traveled to New York this week for the unveiling of Square Register, a new hardware device. “There’s a lot of appreciation for the fact that we’ve spent eight years serving an underserved customer, an underbanked customer, both on the seller and the individual side.” Before Square unveiled its signature card reader, he adds, micro-merchants “couldn’t participate in the economy in the way that the economy was moving.”
An investor roundtable at the Digital Lending + Investing conference in New York on Thursday highlighted developments in the securitization of marketplace loans over the last 12-18 months. The transition to a hybrid funding model for lenders, in addition to the emergence of more sophisticated deal structures, have …
Guided savings: MoneyLion Plus makes it easy and convenient to save $50 or more per month. MoneyLion’s technology analyzes each member’s cash flows to determine when to set aside and save money from their checking account. Via the MoneyLion mobile app, members are provided with personalized daily budgeting tips to help them optimize their spending and increase their savings even further.
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Consumer credit monitoring and financial health startup Credit Karma has launched a new offering today that changes those routines. The company’s new automotive information center is a one-stop shop for helping consumers to manage and organize their vehicle-related finances and information. Included among the capabilities are an overview of the user’s DMV profile, with vehicle and drivers license information, vehicle value estimations, and manufacturer recall notices.
The two most notable capabilities are the auto insurance score and comparison tool and the vehicle refinancing decision tool.
During the Digital Lending + Investment Conference in New York, the consumer credit reporting agency Transunion released the results of a study called ”Fact versus Fiction: FinTech Lenders.” In a nutshell, the study concluded that fintech lenders were not riskier than other lenders, and they are starting to represent a more significant part of the loan industry in the USA.
By the end of the year, the fintech lenders comprised 30 percent of outstanding personal loan balances which is up from four percent in 2012. Up through June in 2017, fintechs represented 32% of the personal loan market.
In the second quarter of 2016, 14.8 million people had a personal loan; after one year, that number increased to 16.1 million. Additionally, the total outstanding personal loan volume more than doubled from $45 billion in Q2 2012 to $106 billion by Q2 2017.
Banking giant Wells Fargo announced on Thursday the launch of its new banking app, Greenhouse. The company described the app as a new mobile banking experience that provides tools to help consumers manage their money and know where they stand financially.
According to Wells Fargo, consumers using the Greenhouse app will be able to have money management with two accounts that work together, immediate access to their Greenhouse account, and the ability to send and receive payments.
Redpoint Capital Group, LLC (“Redpoint Capital”), a leading alternative credit manager, announced today that it has agreed to sell a stake in its affiliated General Partner and Management Company to an affiliate of Dundon Capital Partners, LLC (“DCP”). DCP is led by Thomas (“Tom”) Dundon, one of the founders and former CEO and Chairman of Santander Consumer USA (“SCUSA”), a leading publicly-traded non-captive finance company.
As part of the transaction, both Tom Dundon and DCP Partner, John Zutter, will sit on Redpoint Capital’s Board of Directors along with Redpoint Capital Managing Partners Alex Dunev and Andy Thomas.
Financial services should focus on “making the easy stuff really easy,” Schleck said yesterday during a panel discussion at the American Banker Digital Lending and Investing conference in New York.
Schleck was the sole representative from a traditional bank during the discussion, with fellow panelists hailing from alternative fintech companies and lenders – Lending Club, Funding Circle, and Varo Money.
The key to BofA’s innovation in this space was a cross between data (also highlighted by others on the panel) and simplicity, Schleck said, pointing to the bank’s success with mobile direct deposit as an example.
Citizens Bank is enhancing its small and medium-sized business (SMB) lending offering by digitizing the loan application process, according to a press release published by the financial institution (FI) on Thursday (Nov. 2).
The bank is launching a new platform, built in collaboration with alternative online lender Fundation, allowing SMB customers of the bank to apply for a loan or line of credit and receive an approval online.
BlackRock is pivoting its business to the US west coast, moving Mark McCombe, head of Americas, to San Francisco as part of a broader plan by the world’s top asset manager to step up its focus on technology and innovation.
More than 40 per cent of BlackRock’s $5.9tn in client assets are managed from San Francisco, which accounts for a third of group revenue.
The national advocacy group Small Business Majority, national online lender Fundera, and micro-lender Accion have developed SimpleGrowth, a new online lending marketplace. Calling SimpleGrowth a first-of-its-kind local lending portal, officials say the platform will allow African American entrepreneurs in Chicago to connect with area lenders via a website.
Individuals can seek loans ranging from $500 to $500,000 at various rates, depending on the business owner’s readiness and other factors.
There are 230,000 small businesses in Chicago, but an unusually high percentage of those businesses are owned by African Americans. Cook County, Illinois—which includes Chicago—has the most African American-owned small businesses of any county in the country at 110,000, the U.S. Census Bureau’s 2012 analysis of small businesses reports.
The financing will come from Chicago lenders including Accion, Local Initiatives Support Corporation Small Business and the Women’s Business Development Center, all Community Development Financial Institutions that support small business entrepreneurship. Businesses can apply for the loans for free.
Better Mortgage, a digital mortgage company working to improve access to home financing through transparency, honest guidance, and zero loan officer commissions, announced on Friday it has appointed Jeff Corbett as its Director of Business Development and adding him to its growing Strategic Partnership team.
Amongst those speaking is Karma – a cross-border peer-to-peer lending platform, working to eliminate inefficiencies in the P2P lending industry. Karma will be taking to the stage in the ICOs, Tokens and Cryptofinance conference track on November 29, to introduce their service to delegates ahead of their closed ICO sale later this month.
Specialist provider of P2P and marketplace lending products and services, Goji, announced on Friday it has appointed Peter Breitstone as its new CEO. According to the company, Breitstone has over 20 years of senior executive leadership experience at several global insurance companies, including Insureon, Zurich, and Aon. Breitstone also built and ran Environmental Partners, an insurance brokerage specializing in Environmental Risk and Insurance Management, which he sold to Aon.
PlanCorp is putting its experience and research into a new hybrid robo advisor called BrightPlan, which it says is the first of its kind to be certified by the Centre for Fiduciary Excellence for providing prudent fiduciary practices to clients. The online service offers goals-based financial planning without requiring users to invest.
Clients can choose either a digital-only service, or tap into Plancorp’s team of wealth managers.
N26, a digital-only challenger bank based in Germany, announced on Friday it is launching its services in the UK in early 2018. This news comes after the fintech startup announced plans to launch in the U.S. next year. UK customers may now get early access by signing up directly on the company’s UK homepage.
For the first time in more than ten years, the Bank of England has raised interest rates. The official bank rate has been lifted from 0.25 per cent to 0.5 per cent, the first increase since July 2007.
The hike has divided opinion and it is yet to be seen how severely the impact will hit the UK. Mr Carney expects banks to pass on the rate rise to savers, but said many mortgages, loans and credit cards would not see an immediate impact.
With an alternative outlook, Giles Cross, CMO at FOLK2FOLK, says,“For years low interest rates have been bad news for consumers wanting a positive return on their money in real terms. So today’s announcement may come as a small relief to many people who are looking for an increase. Whilst the reality is that consumers may not see the outcome passed on from their financial services provider or bank for a long time.
Assetz Capital is now the UK’s second-largest peer-to-peer business and property lender and also the second largest in Europe.
What are the three main advantages for investors?
Firstly, we only lend to businesses who we assess as credit worthy businesses with tangible assets.
Secondly, we cater for all types of investors.
Thirdly, we are also the only major UK P2P platform to still offer a manual investment option.
What are the three main advantages for borrowers?
Rather than being just a website with automated credit assessments, Assetz Capital is run by finance, banking, credit and lending professionals with huge industry experience, alongside our large UK-wide network of employed Regional Relationship Directors who visit potential borrowers and help structure the loans.
We’re also a lean business, and as such we have lower overheads than traditional lending institutions. Coupled with the fact that we only lend to credit worthy businesses holding tangible assets, this means our cost of borrowing for businesses is kept low.
Assetz Capital has succeeded in growing loan originations sharply in the past 12 months. How did you achieve that and were intermediaries like brokers a major factor?
To date, more than 350 successfully funded projects have come through brokers, and we predict that this will grow to approaching 1,000 by the end of the 2018 year.
The £154m round valued OakNorth at £934m (approximately $1.3bn). The money came from three investors, The Clermont Group, Toscafund and Coltrane, which collectively took a 16 per cent stake in the company. Today, the trio has been joined by a fourth investor: GIC, Singapore’s sovereign wealth fund.
Currently the excellent Wise Alpha is plastered all over the Waterloo and City line. And in recent months Crowdcube has also been blasting out adverts at the Waterloo train station. Not to be outdone, Seedrs is making a regular appearance on the London tube as are a whole number of digital banking apps. Even Abundance in recent years has been making an appearance on billboards at railway stations as far away as Winchester. Now we’re seeing Funding Circle blasting out its message nationwide as part of its multi-million-pound advertising campaign.
This is all very welcome, but I think it poses some broader questions about what the alternative finance space needs to make itself seem more mainstream. I see no reason why a big player such as Funding Circle shouldn’t use big national brand advertising, but I doubt its overall effectiveness. My sense is that much smaller, baby steps are needed to mainstream the sector and originate new customers – and, crucially, build brand acceptance amongst investors.
However, any investment where capital is at risk – such as alternative lending – is not covered by the Financial Services Compensation Scheme (FSCS) and should not be considered as a substitute for cash deposits. So, why should investors look at the burgeoning alternative lending sector? There are three possible reasons:
Funding your income needs
Managing pension allowances – Alternative lending certainly offers attractive returns relative to other investment options, as well as against cash at the bank. ThinCats has achieved average returns for investors of 7%-8.5%(as at 11 Oct).
Shares in Hexindai, China’s fifth biggest P2P lender, surged more than 60 per cent on its Nasdaq debut on Friday, shrugging off looming concerns of possible tighter scrutiny on P2P lending platforms by Chinese authorities.
Shares in the company traded up 65 per cent to US16.50, just 20 minutes into the listing under the symbol HX, from its offering price of US$10 per American depositary share. The company aims to raise up to US$88 million through the flotation.
Jianpu Technology, the Chinese financial comparison site poised to list later this year, has been stripped of its status as a “unicorn” worth $1bn after regulatory filings revealed it had inflated the funds raised from investors.
Peer-to-peer lender Ppdai’s fundraisings detailed in its filing also fall short of earlier disclosures, according to calculations by Crunchbase, which collates its data from a variety of mostly publicly available channels, including US Securities and Exchange Commission documents.
Qudian’s initial public offering prospectus put its bad-loan ratio at 0.5 per cent — an unusually low but not impossible figure, especially if was selling off bad debt to third parties, which is a common practice among online lenders.
Qudian’s prospectus did not advertise a clear pre-IPO fundraising figure. However, Crunchbase says the company raised about $873m from a number of investors before it went public.
Yixin could raise more than $800 million in a Hong Kong float. The Chinese firm wants to be to cars what Ctrip has become for mainland travellers: a one-stop online shop. It is well-positioned for China’s car boom and changing attitudes towards borrowing, but a punchy valuation means it could struggle after listing.
China’s car market is booming. And Yixin smartly targets people born from the 1980s onwards. They are more open to borrowing than their thrifty parents, and many don’t have credit scores, making it tricky for them to borrow from banks instead.
Yixin Group, an online auto-trading and financing company backed by Chinese internet giant Tencent, is planning to raise up to $867 million through an initial public offering in Hong Kong, Thomson Reuters publication IFR reported on Nov. 2.
Leading venture capital firm IDG Capital and Credit Wealth Management, an independent wealth management arm of CreditEase Group, has formed a comprehensive strategic partnership at the latter’s 2017 private equity investment forum held in Beijing on Friday.
The system enables analysis of 20,000 institutions via 60 dimensions such as styles of their management teams, when they exit from companies they have invested in and who buy into these companies.
A prominent Silicon Valley investor who was an early backer of Facebook Inc.partnered in two investments with the Russian state-controlled bank VTB Bank PJSC before it was sanctioned, his spokesman confirmed Friday.
Yuri Milner, the Russian-born founder of DST Global, also invested $850,000 of his personal money last year in Cadre, a real-estate investing platform co-founded and partially owned by the family of Jared Kushner, President Donald Trump’s son-in-law and senior adviser. Milner’s spokesman said that VTB played no part in his Cadre investment, which was done solely on the business merits of Cadre.
Backing young companies sounds expensive and risky but it doesn’t have to be either. Today with no more than €50 you can start lending to fledgling Irish businesses through a peer-to-peer platform like Linked Finance. The same €50 could back numerous new ideas on a crowdfunding platform like Fund It.
Today there are 17,000 people lending a total of over €35m through Linked Finance alone but there’s €99bn more sitting in Irish deposit accounts, according to the Central Bank’s July 2017 figures.
The recent CB Insights Fintech Trends Briefing points to the rise in fintech financings as Q3’17 saw 278 deals to VC-backed fintech companies, the largest quarter since Q1’12. While total capital invested is down 25 percent from Q2’17 to $4bn the pace of the deals show investors appetite for fintech companies is still very strong.
Facial recognition startup Megvii Face++ raised $460mn in their most recent investment round led by China State-Owned Venture Capital Fund and the China-Russia Investment Fund.
German based online lender Spotcap raised $26mn in equity and debt funding.
Credit Sesame, a San Francisco and Mountain View, Calif. – based personalized credit service and financial wellness company, raised over $42mn in funding.
FS Card Inc., a Washington, DC-based financial services company focused on underserved consumers, raised a $150mn credit facility.
Finova Financial, provider of fair and affordable digital alternatives for Americans underserved by the traditional banking system, secured $102.5mn in equity and credit facility funding.
LendingHome, a San Francisco, CA-based real estate marketplace lender, raised $457mn in capital, which includes both permanent equity and the launch of LendingHome Opportunity Fund II.
BlueVine, a Redwood City, CA-based provider of working capital financing to small and medium-sized businesses, secured up to $130mn in debt capital financing.
OakNorth, a London, UK bank that provides debt finance to fast-growth businesses and established property developers, received a $202mn investment.
SalaryFinance, a London U.K.-based innovative financial wellbeing employee benefits company, completed a $52mn funding round.
P2P platforms are great for smaller loans (i.e. paying off credit cards or repairing a damaged car), but they might not be as affordable and available for larger purchases (i.e. a home purchase or a new car). Especially in developing markets, such larger finance goals might be out of reach due to the lack of credit scoring systems or access to capital in the first place.
Now, how could ETHLend be used to fulfill this market? Let us imagine that a bank or an institutional financer is looking to finance asset backed loans. They have a minimum loan amount of $100,000, and because of this they will be unable to accept loan terms for smaller loans. These banks and institutional financiers would be able to go onto the ETHLend platform, and offer their liquidity to another investor (wholesale borrower) who has large amounts of digital tokens (cryptocurrency) to pledge as collateral.
The investor (wholesale borrower) can then take that $100,000 they got from the bank and turn around and offer loans on a smaller scale to people on the platform or in their local markets, whom do not need to pledge collaterals.
Current P2P platforms are not really P2P because they need to have intermediaries like issuing banks or trust accounts for the system to work. This is a problem as intermediaries usually lack transparency and are also restricted geographically.
For instance, the annual interest of a loan in Brazil may be more than 50% while it is only 1% in Japan.
Lendoit is a decentralized peer-to-peer lending marketplace platform that connects borrowers and lenders globally in a fast, easy, and extremely secure manner by using the blockchain and smart contracts.
With the blockchain, Lendoit is able to automate all of the processes required in P2P money lending without sacrificing anything. Instead, everything will be much cheaper and more efficient which is exactly the solution to problems of cross-border loans.
Smart Loan Contracts contain the borrower’s details including his or her score as well as containing the conditions of loans and their respective tenders.
The Smart Reputation Contract works similarly to credit score; in Lendoit, they act as the global score of an Ethereum address and can be utilized for other purposes other than credit transactions.
The Smart Conversion Contract is responsible for converting currencies into the LOAN token when it comes to making transactions on the platform.
Lendoit Global Payments will launch a token for sale for the aptly named LOAN token.
Later this month in Miami, a group of 10 Latin American fintech startups will gather in Miami to compete. Two companies, Alegra and Bankity, are from Colombia and will be vying against peers from Mexico, Brazil, Argentina, and Chile for the $50,000 USD prize.
The competition is part of Visa’s Everywhere Initiative and will be taking place within Finnovista’s larger Finnosummit on November 9 in Florida’s largest city.
Bankity offers the first intelligent banking card in Latin America.
Alegra, founded by Santiago Villegas and Jorge Soto, is also great because it aims to help small business owners with tedious tasks like invoicing and reporting with its cloud-based accounting software.
The sharing economy relies on a distributed workforce, shareable assets, and peer-to-peer transactions and contracts. Companies in these emerging marketplaces handle payments through smart contracts and blockchain technology. This greatly lowers costs, improves trust and transparency with the community, and simplifies transactions at a global scale by making them near-instantaneous, even when distributing payments to thousands of digital wallets at once.
One of the biggest markets for data is social media and online retail. DataWallet, based in San Francisco, helps users download their digital identity and upload it to a blockchain-powered data exchange where companies can purchase it, with payments made to users through the blockchain.
Westpac has processed its first live home loans through its new technology platform, the Customer Service Hub, with the bank saying the initiative aimed at speeding up and simplifying the home loan process as its largest transformation program to date.
For the 2017 financial year, the bank reported AU$7.99 billion in after-tax profit, on revenue of AU$21.8 billion, an increase of 4 percent year-on-year.
As of September 30, 2017, Westpac boasted 13.8 million customers; 4.53 million were considered digitally active, with 72 percent of them using a mobile platform.
Additionally, through its AU$100 million venture capital firm Reinventure, Westpac has made 16 investments covering areas such as blockchain and digital currencies, payments, peer-to-peer lending, as well as big data and data analytics.
The bank also this year entered into a “strategic” relationship with Australian-listed payments firm Zipmoney, investing AU$40 million by way of a private share placement in August to allow the integration of the fintech’s products and services across Westpac’s network throughout Australia, as well as other initiatives including the provision of in-development business-to-business products and services.
In April, the bank went live with Samsung Pay, opening up the phone-based wallet to debit and credit card cardholders across both Mastercard and Visa. This came a year after it launched Android Pay, in addition to Westpac’s own tap and pay function, which was unveiled to customers in 2014.
Independent investment and superannuation platforms like Hub24 and Netwealth are readying to reap the rewards of the “unravelling” of the bank’s traditional wealth management models.
The best interest duty is a key plank of a package of financial advice reforms, known as the Future of Financial Advice (FOFA), introduced in July 2013. This was tested with the corporate watchdog recently ordering Melbourne-based financial planning firm to pay $1.1 million in fines and costs as part of the first civil penalty imposed for breaching its duty to act in the best interest of its clients.
Last week, BT Financial Group (BTFG) said it would expand its life insurance APL from its sole in-house product, adding a minimum of three alternative insurers by March next year.
Increasingly, these platforms are snaring a fair whack of adviser business in the $750 billion platform market, which is growing at 10 per cent a year.
SelfWealth Limited (“SelfWealth” or “the Company”), an Australian FinTech business offering a flat fee brokerage service and social portfolio construction network for Australian investors, is pleased to announce the opening of its Initial Public Offering (IPO) to raise up to A$7.5 million (with a minimum subscription of A$5.0 million).
SelfWealth is offering for issue 37.5 million shares priced at A$0.20 per new share; the indicative market captialisation of SelfWealth will be approximately A$26.1 million. The Company’s ASX ticker code will be SWF.
Despite being a major part of the Indian economy, Small and medium-sized enterprises (SMEs) in India face multiple challenges.
From inadequate banking to lack of constant cash supply, these SMEs are deprived of the smooth and consistent growth factors
These four SME lending platforms are bridging the requirements digitally:
Lendingkart – The company aims to transform small business lending by making it convenient for SMEs to access credit easily.
CoinTribe – Another online loan disbursement platform, CoinTribe provides quick and easy collateral-free loans to small businesses and individuals.
It is the only online lending platform which has back-tested its credit model with large banks.
Faircent – Largest peer to peer lending website, Faircent caters to retail and business loans.
TAB Capital – The platform has commissioned an advanced proprietary algorithm that leverages big data and analytics to simplify and accelerate loan application, verification, approval and disbursement.
The State Bank of India is gearing up to implement blockchain solutions in a number of financial processes including the management of its Know Your Customer (KYC) system.
SBI is now pressing ahead with its first implementation of the decentralized technology by using an enterprise blockchain solution for managing its Know Your Customer (KYC) system, via a new partnership with Intel that sees the technology giant become the consortium’s official technology advisor.
Southeast Asian service marketplace Kaodim Group has raised $7 million (MYR 29.5 million) in a funding round led by Australia venture capital firm Square Peg Capital and Shanghai-headquartered SIG Asia Investments.
Minister for Education (Higher Education and Skills) and Monetary Authority of Singapore board member Ong Ye Kung unveiled the Industry Transformation Map (ITM) for the financial services sector on Monday (Oct 30).
The ITM outlines key growth strategies for the financial sector that aim to generate greater productivity, attain higher growth rates, and create 4,000 jobs each year up to 2020.
These include strengthening financing channels for small- and medium-sized enterprises (SMEs), simplifying the regulatory framework for venture capitalmanagers, introducing dual class share structures for high-tech companies, and encouraging other sources of private sector financing for start-ups and entrepreneurs.
According to a Deutsche Bank report released last year, debt burdens have risen from less than 240 per cent of GDP in 2009 to 265 per cent in 2015. This is largely due to Singapore’s high levels of private sector leverage, for which there are limits to greater growth.
IN TWO short years, Singapore has zipped into pole position in the fintech space, challenging rivals such as London in drawing intellectual and funding capital into the city-state with its open adoption of new technology and more broadly, innovation.
The strategy, led by the Monetary Authority of Singapore (MAS), is now widening to a regional and global endeavour, as MAS expands into cross-border projects that could pay significant digital dividends in time.
This will chiefly include blockchain experiments, with MAS now looking at ways to expand an inter-bank payments pilot to create a cross-border payments system between two countries, Ravi Menon, managing director of MAS, said in a wide-ranging interview with The Business Times.
Seven in ten UAE residents are unsure of the steps needed to achieve their financial goals, a poll by National Bonds revealed on Monday, as the UAE investment company launched a new campaign to encourage better saving habits.
According to the poll of almost 400 residents conducted in the first nine months of the year, 69 per cent of respondents lack awareness about financial planning.
Despite the lack of clarity on how to save and invest their money, 53 per cent were most interested in receiving financial advice related to retirement planning. This was consistent among Arabs, Asians and Western expats, according to National Bonds, while Emiratis are more concerned with advice on financial health.
Introduction In 2008, when Satoshi Nakamoto first introduced Bitcoin to the world, nobody would have thought the “virtual currency” will become such a big phenomenon in less than a decade. From being a decentralized source of sending and receiving money to any part of the world, it has transformed into a lucrative investment avenue. It […]
In 2008, when Satoshi Nakamoto first introduced Bitcoin to the world, nobody would have thought the “virtual currency” will become such a big phenomenon in less than a decade. From being a decentralized source of sending and receiving money to any part of the world, it has transformed into a lucrative investment avenue. It was trading in the single digit range in 2012 and now recently touched $5,000 for one single bitcoin. Now, startups are issuing their own currencies/tokens via initial coin offerings (ICO) to raise funds.
ICO is an unregulated channel of crowdfunding that uses tokens/coins to raise capital for the issuer. In an ICO, investors buy the coins, which can appreciate in value depending upon how successful the business is. The first ICO was by Mastercoin in 2013. It raised approximately $600,000.
The rise of ICOs can be gauged from the fact that almost $1.3 billion has been raised via ICOs by startups this year.
ICO and Equity: Similar or Different?
There are two schools of thought when it comes to ICOs. Many cryptocurrency enthusiasts feel that ICO is similar to an IPO. It sells coins/tokens instead of shares to investors and has the ability to generate lucrative returns if the business takes off. Also, just like IPOs, ICOs are restricted by the number of tokens and the duration during which the company can sell these tokens.
Many lawyers and general investors feel it is a different breed from an IPO. The main difference being an IPO gives investors a right of ownership in the company when they buy the shares whereas, in the case of an ICO, the buyer gets the right to participate and profit from the business’s ecosystem. Tokens only appreciate in value if the project takes off, but tokens do provide other additional benefits. For example, the tokens issued by Storj — a decentralized storage solution — can be exchanged for storage space on the platform. Any ICO that gives the right of ownership to investors is technically offering securities and would thus need to register with the Securities and Exchange Commission (SEC).
When it comes to regulations, ICOs basically enjoy a free run as compared to the heavily regulated IPOs. IPOs require a ton of paperwork, millions of dollars in fees, and months of preparation to ensure they are compliant with all relevant laws. Any company can launch an ICO at any stage of its life, which means investors are open to risk with regards to the legitimacy of the company.
What does the SEC Have to Say About ICOs?
So far, the SEC has not taken any serious stance against cryptocurrencies, but the growing popularity of ICOs has prompted the commission to form regulatory guidelines. In July this year, the SEC issued the results of an investigation into the ICO of DAO – a decentralized venture fund. DAO raised $150 million worth of ether from 11,000 investors and then got hacked out of $50 million worth of virtual currency. More importantly, the DAO tokens were structured as a security.
On July 25th, 2017, the SEC declared that some ICOs will come under the same regulations that are applicable to other similar investments like stocks. The critical thing to note is the ruling did not include “all” type of ICO offerings but it did include those ICOs which are structured like a security. The SEC believes “ICO may provide fair and lawful investment opportunities,” however, they can also be “used improperly to entice investors with the promise of high returns in a new investment space.”
Market Size Comparison: Bonds, Equity, and Cryptocurrency
Fixed income solutions (bonds, treasury) using traditional currency is a fully developed and functional market and has been around for many decades. The size of the U.S. fixed market is almost $40 trillion, and the U.S. corporate bond market in 2016 stood at $8.5 trillion. The U.S. equity market stood at over $25 trillion in February 2017. In comparison, the cryptocurrency market, though growing rapidly, is still a fair bit behind other developed security markets. Cryptocurrency market capitalization as of June 2017 stood at $103.9 billion with Bitcoin being the major player.
Lack of fixed income solutions
The ICO world has always been focused on valuation gains. But the real maturity of this nascent market will be judged by its depth of fixed income solutions for investors. Though many HYIPs (high yield investment programs) like GlobalBid, CryptomineHolding, and Laser were floated in the cryptocurrency market, there are still doubts over their legality. They come across more like a Ponzi scheme versus a safe investment option. The best example could be Bitcoin-Trader HYIP, which disappeared overnight.
This is where the opportunity lies for an entrepreneur who is willing to take the risk and come up with an innovative yet safe fixed income solution that will help in tying both the worlds together (fixed income solutions and the cryptocurrency market). Investors will gladly accept a solution that provides stability and security of fixed income investment solution alongside the higher returns and blockchain benefits of the cryptocurrency market.
Lending Platforms in Fixed Income
The first real breakthrough has been the emergence of peer-to-peer lending platforms using bitcoins. The technology which has revolutionized consumer and small business finance is being utilized by startups in conjunction with cryptocurrencies to offer fixed income solutions to cryptocurrency investors. Though there are not many lending platforms that use cryptocurrency, the few notable ones are mentioned below:
Bitbond – Headquartered in Berlin, Bitbond is the first global marketplace lending platform for small business loans. Investors simply need to sign up with the platform and deposit bitcoins in their bitcoin wallet, then browse through the available investing opportunities. Once the project is fully funded, the investor starts to receive monthly repayments with interest until the loan matures. The repayments go straight to their bitcoin wallet. The investor can either reinvest or send the coins to a bitcoin exchange to trade it for fiat currency. Higher Returns – The average APR is 13%, which is pretty high as compared to returns offered by generic P2P lenders.
Nebeus – Nebeus is an online lending platform based out of the UK and was launched in 2015. It offers services in lending, trading, and remittances. Loans offered by Nebeus have a term of micro (30 days) to standard (360 days). The loan size is determined according to the borrower rating. Returns – Investors can expect a yield up to 12.5%.
Getline – Based out of Warsaw, Poland, Getline was established in 2015. It uses a third party platform Esteemify for account verification. Borrowers and investors need to add social accounts as well personal verification details such as bank account, proof of income, etc. Total amount funded so far is 178.86 BTC and the platform usually deals in credit line loans. Fees – 30% of any profit obtained by the lender.
BTCPOP – Headquartered in the United Kingdom, BTCPOP was founded in 2014. It is an online lending platform that also has an altcoin exchange and a share market, and it also supports IPOs, bond funding, and trading. It deals in various types of loans like custom personal loans, personal loans with collateral, instant loans, business loans, IPOs, bonds, and instant collateral loans.
Returns – Lenders can expect an APR of 10% or more.
Cryptocurrencies and ICOs are redefining the concept of money and fund raising. But for a jump to the mainstream, fixed income options need to be developed for the wider investor base. P2P lending using virtual currency is a good start, and it seems a major shake up with a fixed income offering is just round the corner.
For many decades, any startup looking for funding would have to go to a VC firm, the self-appointed gatekeepers to capital. Crowdfunding in general, and sites like Kickstarter in particular, democratized the funding process. It allowed young companies to get themselves directly in front of prospective consumers and raise funds from backers. Initial Coin Offering […]
For many decades, any startup looking for funding would have to go to a VC firm, the self-appointed gatekeepers to capital. Crowdfunding in general, and sites like Kickstarter in particular, democratized the funding process. It allowed young companies to get themselves directly in front of prospective consumers and raise funds from backers.
Initial Coin Offering (ICO) is the next big thing in the world of fundraising. It combines the features of an IPO and crowdfunding allowing backers to support a startup via donations while generating massive returns on their investment. ICO is basically crowdfunding of a new cryptocurrency venture where a percentage of the cryptocurrency (and not the venture itself) is sold. This new cryptocurrency is usually sold for a fiat currency or other mainstream cryptocurrency like bitcoin.
ICO, also known as crowd sale or token sale, emerged in 2013 as a fundraising option. Bitcoin, born in 2009, started gaining traction in 2013 and inspired to the birth of Ethereum and Ripple amongst the first ICOs. Below is a chart depicting the market capitalization (more than $45 billion) of Bitcoin. Ethereum had reached a market map of over $30 billion in June 2017.
One of the first cryptocurrency ICOs was by Ripple in 2013. Ripple Lab developed an innovative payment system called Ripple and produced 100 billion XRP tokens, then sold those coins to fund the platform. Ethereum sold its ETH for 0.0005 Bitcoin and received nearly $20 million on the ICO.
Comparison with IPO
One needs to granularly bifurcate the intricacies of both fundraising techniques to draw parallels between the two. The one major underlying difference is ownership stake. Under an IPO, shares released always denote ownership in the respective company, whereas ICO does not represent a stake in the company by design. With an ICO, more coins mean more voting power but, generally, tokens are used in exchange for other currencies.
Another difference is regulation. In most countries, IPOs are heavily regulated, and non-compliance can lead to dire consequences whereas ICOs are still in the regulation’s so-called “gray” area. Therefore, any project can be launched, and anyone from around the world can invest in the project. This relaxed environment no doubt presents a window of opportunity, but it also becomes riskier as compared to regulated financial instruments.
As with any new phenomenon, there are bound to be some bad apples. ICOs are no exception. The ICO boom has really picked up in the last year or so. Fly-by-night operators looking to scam the general public have also entered the market. Matchpool, Bitbay and many others, have been embroiled. As the platform has matured, investors are becoming more discerning and the initial gold rush should subside into something more sustainable.
In actual terms, ICO legally is still undefined. Reason being, tokens, or coins, are sold in the form of digital goods and not as financial assets. That is why it is called a “crowd sale.” This has simplified the process of raising funds, but the unprecedented success of ICOs like DAO, a stateless investment fund, has caught the eye of regulators, and it will not be long before regulations kick in. The SEC is currently evaluating this capitalization method but hasn’t made any public comments. Rumors are that the SEC is contemplating whether to consider tokens or coins as securities, which will allow investors to sue issuing companies in case a project doesn’t take off and issued tokens become worthless.
Law firms familiar with securities and online token markets, however, believe that as long as token issuers follow a few simple rules, coins are unlikely to be categorized as securities:
tokens should be able to live independently of the emitting company
tokens shouldn’t represent any interest in any cash flow from the emitter
the emitter should pay income tax on the emitted tokens as they are the proceeds of a revenue event for the emitter
Having said that, lack of regulations gives companies a chance to go to market and innovate at a rapid speed. It gives elbow room to ecosystem participants like startups, investors, and markets-in-general to come up with their own solutions to combat unexpected roadblocks.
Not For the Faint-Hearted
The onus is on the investor to dig deep in getting familiar with a project, its future scope, founding team, etc., and the risks range from fraud management to cyber attacks. But ICOs and new cryptocurrencies have had massive successes, as well. There is no doubt that there are lots of pitfalls on the ICO road, but only an investor can decide if the rewards are worth the pain of extensive due diligence.
The below graph indicates that ICOs have had some major hits with investors making 50x to 800x returns in months. It makes you consider that maybe the risk-reward ratio is currently skewed towards the risk-taker.
Regulation D is a set of rules under which an issuer can sell its securities without having to register with the SEC. Rule 506 under Regulation D has been the most widely used means of raising capital in the US. Rule 506 was basically bifurcated into two separate rules — 506 (b) and 506 (c) […]
Regulation D is a set of rules under which an issuer can sell its securities without having to register with the SEC. Rule 506 under Regulation D has been the most widely used means of raising capital in the US. Rule 506 was basically bifurcated into two separate rules — 506 (b) and 506 (c) — after the passing of Title II of the Jumpstart Our Business Start-ups (JOBS) Act in September 2013. 506 (b) is merely the extension of the old Rule 506, and 506 (c) is the new section that has completely revolutionized the world of private investing.
Under rule 506 (b), companies are free to accept backing from accredited investors and 35 non-accredited investors for an unlimited amount. Under rule 506(c), companies can sell to accredited investors only. On top of that, they need to verify that each investor is accredited.
An accredited investor is one who has a net worth of $1,000,000 excluding his primary residence, or if he has made $2,000,000 on an annual basis in the past two years.
So what is the advantage of this new rule? It allows for general solicitation.
506(b) does not permit general solicitation. The issuer needs to prove a pre-existing relationship with investors. This reduces the pool of investors a company can target. With general solicitation allowed under 506(c), start-ups can leverage the internet, TV, radio, and other media to attract a larger base of investors. This has “democratized” investing and the ability to raise capital. A company offering securities need not have any prior relationship with investors. Rather, they can publicly promote their capital-raising offer.
Crowdnetic, now FinMkt, tracked 6,063 investment crowdfunding private offerings under JOBS Act Title II 506(c) rules, which have combined recorded capital commitments (“RCC”) of approximately $870.0 million in the two years between September 23rd, 2013 (when Title II rules went into effect) and September 23, 2015 (the date of the report).
There is not an ounce of doubt that Rule 506(c) has brought a lot of upside for the issuers as they can broaden their reach by advertising their offering. The issuing company can raise more capital at a much faster pace without relying on the traditional gatekeepers that earlier helped them to find suitable investors. From the perspective of the investor, under rule 506(c), the advertised offering benefits them, as well. They now have a much larger choice available and can get on board a startup much earlier in its life as compared to waiting for an IPO.
Effect of 506(c) changes
There is an additional burden of verifying investors and making sure they meet the SEC’s definition of “Accredited Investor.” Many companies have sprung up to help start-ups outsource this tedious legal due diligence.
Startups have been using social media to attract users and customers since at least a decade. Now, they are able to leverage their skill set to attract money for their ventures. We are used to hearing about CAC (i.e. Customer Acquisition Cost); we will soon be reading about CAI – Cost of Acquisition of Investor. This metric will become a key success factor for start-ups looking to grow aggressively, and it allows them to even sidestep venture capitalists for funding.
Research by Crowdnetic shows that investors are comfortable investing in startup equity, thus highlighting that markets and investors have accepted this new rule with open arms.
What does it mean for alternative lenders?
This rule is a boon for marketplace lenders. They have proved adept at bringing thousands of lenders onto their platforms. P2P lenders have generally been a happy lot due to higher risk-adjusted returns they’ve been able to generate through platforms. The company should be able to tap this base for equity fundraising, as well. If you’ve invested $50,000 through SoFi, you might be predisposed to invest $10,000 in its equity.
And not only start-ups, even VCs and accelerators are taking note of the rule and its implied implications. 500 Startups has recently filed a Form D under 506( c ) for a fintech fund targeting a raise of $25 million. It is a prominent accelerator and has invested over $350 million in 1800 companies. This shows that the entire ecosystem of fundraising is poised for an upheaval with the 506(c) rule.
Rule 506 will break the hegemony of investment bankers and VCs over the fundraising process. A startup doing well can target its own user base for accredited investors rather than having to pay sky-high fees or dilute control to VCs. The startup community has been extremely receptive to the change, and you can see multiple platforms launched for the sole purpose of helping thousands of start-ups raise funding from a wider pool of investors. It is easy to see that 506(c) has been a win-win for all involved.