Monday July 24 2017, Daily News Digest

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News Comments Today’s main news: SoFi loses another senior executive. Prosper performance update for June 2017. Lending-Times listed as #3 P2P lending website. Zopa’s lent 2.46B GBP since March 2005. Zopa sees 35% rise in home improvement loan originations. Revolut partners with robo-advisor. Today’s main analysis: A closer look at Amazon’s lending business. Today’s thought-provoking articles: 5 ICO platforms in China. A […]

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News Summary

United States

SoFi loses another senior executive, as chief revenue officer Michael Tannenbaum departs (TechCrunch), Rated: AAA

Online finance startup SoFi has lost yet another senior executive, the company has confirmed. Chief revenue officer Michael Tannenbaum is the latest exec to leave, following a string of departures in the company’s senior ranks.

Tannenbaum joined SoFi as VP of finance in 2014, but quickly moved up the ranks over the last few years. After the company moved beyond its student loan refinancing business to also include mortgages, he took over that business.

Most recently, Tannenbaum served as CRO, where he was responsible for driving the company’s growth strategy across all of SoFi’s core lending products, including student loan refinancing, mortgages and personal loans.

Tannenbaum is reportedly looking to work on his own startup in the finance space, according to a person familiar with the matter.

A Close Look at Amazon’s Lending Business (Market Realist), Rated: AAA

Amazon (AMZN) has disbursed more than $1.0 billion in small business loans in the past 12 months, implying that the company has supplied about $2.5 billion in loans to sellers on its marketplace since it launched its credit business in 2011. These loans, in the range of $1,000 to $750,000, have gone to more than 20,000 sellers in the United States (SPY), the United Kingdom (EWU), and Japan (EWJ).

The consumer interest in low-cost or free shipping, as highlighted by the survey, could embolden Amazon to add even more perks to Prime to make it more attractive. Prime is vital to Amazon as it fends off competition from the likes of eBay (EBAY), Wal-Mart (WMT), and Target (TGT). According to research company Consumer Intelligence Research Partners, there are more than 80 million Prime subscribers in the United States (SPY).

Prosper Performance Update: June 2017 (Prosper), Rated: AAA

Today we are sharing performance data from the Prosper portfolio for June 2017.

  • The weighted average borrower rate for Prosper’s June 2017 vintage is similar to May 2017, a continuation of a platform rate which is the highest since 2013.
  • Delinquencies for 2017 originations are tracking near 2016 H1 and are in line with expectations based on a materially riskier ratings distribution.
  • Prepayments continue to edge up for 2016 H2 and 2017 vintages.
  • When viewing the U.S. consumer through a macro lens and looking more granularly at Prosper’s loan performance, our risk team expects to continue tightening credit over the remainder of the year.

Top 100 Peer to Peer Lending Blogs and Websites for P2P Borrowers and Lenders (Feedspot), Rated: AAA

#1 Lend Academy

About Blog – Lend Academy is the leading resource for people interested in peer to peer lending. Lend Academy has been bringing you all the news and information about peer to peer lending since 2010. Founded by Peter Renton, Lend Academy not only has the most active news site, but also the largest online forum and the first and most popular podcast in the industry.
Frequency – about 5 posts per week

#2 P2P-Banking

About Blog – P2P Lending Marketplace News and Reviews
Frequency – about 2 posts per week

#3 Lending Times 

About Blog – Daily News, Analysis and Data for the Alternative,Peer-to-peer (p2p) and Marketplace lending space. Lending Times provides daily News, Analisys and News Digest for the Peer to Peer and Alternative Lending industry. We also provide data for the industry.
Frequency – about 9 posts per week

Robo-advice pioneers target ethical investors (AltFi), Rated: A

U.S.-based platforms Wealthfront and Betterment are joining the green investing trend, giving users the option to invest in socially responsible companies.

The rivals are approaching the green investment options differently. Betterment is investing in ETFs that track socially responsible indexes. Wealthfront will allow users to invest directly in stocks and screen out four areas that might not match their socially conscious criteria, including fossil fuels, deforestation, tobacco and weapons.

The Amazon Model: Can New-Age Technology and Local Touch Co-Exist in Lending? (Forbes), Rated: A

Online lending has doubled in size every year since 2010, and the global marketplace lending space is expected to reach $290 billion by 2020, a 50 percent growth year-over-year, according to a Morgan Stanley report.

SurveyMonkey study released this month found that millennials (defined as 18- to 34-year-olds) tend to adhere to traditional methods of banking. In fact, 80 percent of millennials surveyed say they want to be able to visit a brick-and-mortar bank branch, and more than half reported visiting a branch at least once in the last month. Even the most digitally connected generation in history values personal touch when it comes to financial transactions.

Fed panel puts faster payments on three-year track (American Banker), Rated: A

A panel convened by the Federal Reserve has established an ambitious new goal: By 2020, anyone with a bank account in the United States should be able to receive payments that are highly secure and delivered in something close to real time.

The three-year target is disclosed in the final report of a task force organized by the Fed two years ago.

Ben Miller of Fundrise (Lend Academy), Rated: A

Non-accredited investors have always had fewer investment options than accredited investors. That is starting to improve as some companies take advantage of a law called Regulation A+, created as part of the JOBS Act, to do offerings to the general public.

In this podcast you will learn:

  • The story behind the founding of Fundrise.
  • How the financial crisis shaped the way Ben thought about raising capital.
  • How Fundrise put together their investor deal before the JOBS Act.
  • Why the non-accredited investor is core to Fundrise’s mission.
  • How Fundrise has evolved since doing those early deals.
  • How their eREITs work.
  • The differences between a publicly traded REIT and a Fundrise eREIT.
  • How Fundrise sources their deals.
  • Details of their successful Reg A+ equity fundraise early in 2017.
  • Why Ben thinks Fundrise can be the Blackstone of the internet age.
  • And more

Robo-advisors: The future of investing or the latest financial craze? (Tennessean), Rated: A

Technology has undoubtedly created, destroyed and changed countless industries in the last 20 years.

The financial services has not been immune to this disruption. In 1980, there were approximately 5,500 people working on the floor of the New York Stock Exchange. Today, that number has dwindled to around 700.

In the United States, there are currently over 200 robo-advisors and more are launching every single day. In general, the fees associated with this new way of investment advice range from free to about 0.75 percent. There is normally not a minimum that is needed to start investing, unlike many financial advisors.

Crowd Invest Summit (CIS) has announced that Indiegogo and their equity crowdfunding vertical has joined it’s roster for CIS West 2017.

Applied Data Finance, iHeartMedia, announce marketing agreement (Bankless Times), Rated: B

Fintech lender and asset manager Applied Data Finance (ADF) has signed a marketing agreement with iHeartMedia which will see ADF promote its online lender Personify Financialacross the iHeartMedia series of networks.

‘Fedcoin’ Strikes Again: Fintech Companies Propose Use of Crypto to US Fed (Coin Telegraph), Rated: B

In a report by the Faster Payment Task Force, fintech companies have outlined how Blockchain technology can be used to make payments faster for the US Federal Reserve.

The companies that submitted their proposals include Ripple, Eccho, Xalgorithm, Hub Culture, Kalypton Group, Nanopay Corporation and Thought Matrix Consulting.

United Kingdom

Zopa Has Lent £2.46 Billion Since March 2005 (Crowdfund Insider), Rated: AAA

While revealing a “refresher” of its lending policies, UK-based peer-to-peer lender, Zopa, announced that as of July 20th it has lent £2.46 billion and is lending around £80m per month.

Zopa also noted that it believes diversification is a key tool for the individual investor risk mitigation. The lending platform notably spreads investments across multiple loans, starting in £10 chunks, so that no one borrower has more than 1% of the overall investment.

Zopa sees 35pc rise in home improvement loan originations (P2P Finance News), Rated: AAA

ZOPA said it has seen a 35 per cent year-on-year increase in home improvement loan originations in the first half of 2017, equating to over £92m in funding.

The world’s oldest peer-to-peer lender said on Wednesday that it has now helped over 70,000 people to renovate their home and increase the value of their property.

P2P lender joins bank lobby group (AltFi), Rated: A

ArchOver is now a member of UK Finance, a recently created trade body for the banking and financial sector.

Other P2P lenders, including Landbay, are already part of UK Finance.

HLnot selling new Lendinvest Retail Bond at launch (Money Forums), Rated: A

Lendinvest have issued a 5.25 percent ORB Retail Bond.

Hargreaves Landsdown have decided not to participate in the IPO so unless investors who use that platform set up an account elsewhere, e.g. Interactive Investor, it isn’t possible to buy at launch as the bond has to be in a nominee account.

A New Era in Fintech Payment Innovations? (Law.ox.ac.uk), Rated: A

forthcoming paper in Law, Innovation and Technology laces payment innovations within a payment system. The payment system comprises the initiation of payments, transfer, as well as clearing and settlement. We argue that existing payment systems are defined by certain institutional tenets that serve commercial objectives, but, more importantly, deliver public goods and public interest objectives for users and policy-makers.

Three types of payment innovations have been hailed to have disruptive potential in recent developments. First, innovations in retail payment interfaces or options at point of sale, such as mobile or app payments, may displace the use of cash and cards. Second, virtual currencies, such as Bitcoin, may come to be accepted as legitimate forms of payment by merchants and businesses. Third, new ledger technologies, such as the distributed ledger or autonomous organisation technologies, may replace existing infrastructure in payment clearing and settlement systems.

Flender puts its faith in the crowd (The Business Post), Rated: A

If you are a start-up, or an SME, you know that money does not come easy. In the early days, you might need to tap up your savings, your family or even friends to get started. Even more established companies can fall between the cracks when it comes to bank loans or government funding. For all of these reasons, peer-to-peer lending was created.

Credit scoring startup Aire raises $ 5m; wins Zopa deal (Finextra), Rated: A

AI-based credit scoring startup Aire has raised $5 million in a Series A funding round and won deals to work with P2P lending pioneer Zopa and the UK arm of Toyota Financial Services.

Young people face barriers in farming as report shows 13% of farmers are under 45 (Farming UK), Rated: B

A report has been released showing the barriers young entrants into farming face in today’s often uncertain times.

The report said that only 13% of farmers were under the age of 45 in 2015, but while fewer young people are entering the sector, their ideas are still needed to harness the technologies that can make farming an up-to-date industry.

Finance is seen as the biggest obstacle to growth; 28% are trying peer-to-peer lending and one fifth have tried crowd-funding to help with projects.

China

Information about Five ICO Platforms in China (Xing Ping She), Rated: AAA

Recently there comes a wave of ICO (Initial Coin Offering) around the world. Many people are enthusiastic about the investment on ICO. So, here is the information of five well-known ICO platforms founded in China, which was collected by Nan Gongyuan, a famous Internet finance columnist as well as special commentator on Xing Ping She.

1. Bizhongchou
Founded time:In 2015
website:Bizhongchou.com
background:Affiliate ICO website of block chain media Babbitt
Registered Capital:$ 1,481,613 USD
Legal person:Zhi-Peng Liu(the well-known science fiction writer, Changjia, a consecutive Galaxy Award winner from 2006 to 2008.)
Location:Zhejiang, Hangzhou Province

2. Bitouzi
Founded time:In 2017
website: /> background: Affiliate ICO website of Blockchain asset trading platform BTC9.COM
Registered Capital:$740,795 USD
Legal person:Liu Jingchao
Location:Nanchang, Jianfgxi Province

3. Icoage.com
Founded time:In 2017
website:Icoage.com
background:Affiliate ICO website of Shanghai Qukuai Information Technology co. LTD
Registered Capital:$ 17,996 USD
Legal person: Fu Xiaoqi
Location:Shanghai

4. Ico365.com
Founded time:In 2017
website:Icoage.com
background:Affiliate ICO website of Shenzhen Kedian Technology co. LTD
Registered Capital:$148,161 USD
Legal person:Ye Peifeng
Location:Shenzhen

5. Ico.info
Founded time:In 2017
website:Ico.info
background: Affiliate ICO website of Beijing Yunbi Technology co. LTD
Registered Capital:$ 1,481,613 USD
Legal person:Qiu Liang
Location:Beijing

The World is Paying Attention (Lend Academy), Rated: A

In China there are more than a billion consumers that are generally underserved across a broad spectrum of financial services, making for a diverse and exciting array of opportunities to address. Yet China is dominated by giants – institutions like Bank of China and technology firms like Alibaba –companies that have tens of thousands of employees and hundreds of millions of customers. The scale of the opportunity is enormous, and so is the size of the companies trying to address it.

When 90% of the world’s data were created in the last two years, it is obvious that our ability to create data has far outstripped our ability to measure and analyze it.  This is why companies like ZhongAn (online insurance), Phoenix Finance (wealth management), Lexin (green finance), Wedai (car finance), Credit Karma (financial education), Upgrade (consumer lending in the US), and Lufax (consumer lending & wealth management in Asia) all tout AI/ML as a cornerstone of their strategies.

In the end, fintech is leading us to a more inclusive financial system, which is to say that financial services will be more accessible, more comprehensive, more affordable, and more sustainable.

Dianrong and marketplace lending in China (Enterprise Innovation), Rated: B

At the FINTalks forum, held on July 17, 2017 at KPMG in Hong Kong, Renaud Laplache, co-founder and CEO of Upgrade, described online lending as a massive improvement over lending as offered by banks and traditional lenders. “Online lending generally helped lower costs by about 400-500 basis points – massive cost reductions coming from the ability to use technology to automate tasks that were manual at many banks and also to do away with the branch network – a very costly infrastructure,” he explained in simplified terms.

European Union

Fintech startup Klarna taps Permira for around $ 250M at $ 2.5B valuation (TechCrunch), Rated: AAA

Klarna, the Swedish startup that works with e-commerce businesses and retailers to provide financing and other payment services, today announced that it has picked up yet another large investment, its third inside of two months. Permira, the private equity firm and prolific late-stage tech investor, has taken a minimum 10 percent stake in the fintech business. Klarna and Permira are not confirming the exact amount getting invested, or the valuation. But TechCrunch understands that it is more than $225 million, and the FT is reporting a value of $250 million.

Klarna the startup was last valued at $2.25 billion in 2015 and a source confirmed to us that this valuation has gone up as the business has grown. If a $250 million investment works out to 10 percent of its valuation, that would mean Klarna’s overall value has ticked up to $2.5 billion.

Added up, this means that Klarna has raised somewhere in the region of $500 million in the last 7 weeks.

July 21, 2017 – Funding Round Private Equity (Crunchbase), Rated: A

  • Funding Type: Private Equity
  • Money Raised: $225M
  • Valuation: $2.28B Pre-Money
  • Announced On: July 21, 2017
  • Investors: 

Revolut’s robo-advice dance partner revealed (AltFi), Rated: AAA

App-based banking disruptor Revolut intends to partner with its first robo-advisor. A report in this morning’s Citywire suggests that Revolut has already partnered with ETFmatic to roll out its wealth offering. Revolut has confirmed that this is its intention.

Revolut, however, is yet to formally announce the ETFmatic partnership, and it is possible that the proposition that ultimately emerges will look somewhat different.

Bank of Finland: Household debt accumulation poses mounting risk (YLE), Rated: A

Bank of Finland reports that household debt grew five percent in May on the previous year, with so-called unsecured consumer credit, via international online credit providers and peer-to-peer lending services, up by 13 percent in the same period.

As the selection of loan alternatives grows, increasing numbers of Finnish consumers are now moving beyond traditional new home and housing cooperative loans to secure expensive consumer credit from sources that Finland’s central bank says are difficult to monitor.

Figures show that every fourth Finnish resident now holds some kind of consumer debt. Cars, trips abroad, boats and appliances are the most common purchases behind the loans.

The good news in this scenario is that regulators and credit ratings agencies agree that Finnish banks are very stable.

Kickstart Accelerator’s 10 Most Promising Fintech Startups (Forbes), Rated: A

AAAccell (Switzerland)

Converts and develops top research achievements into trusted solutions and tools for the financial services industry.

Fjuul Vision Oy (Finland)

Offers a Software as a Service (Saas) platform for insurers to grow their business at lower risk.

PriceHubble (Switzerland)

Enables smarter real estate decisions by bringing the latest in machine learning, big data analytics and data visualization to market participants along the entire real estate value chain.

International

Fintech’s Wealthy Elder Statesmen (Bloomberg), Rated: A

Shares of U.K. company Paysafe Group Plc — whose businesses include payments processing, digital wallets and money transfers — are trading at an all-time high after an approach from private-equity bidders Blackstone and CVC.

In December, Paysafe’s shares suffered a nasty blow because of fears about its exposure to China’s crackdown on gambling, although they recovered. This is not your run-of-the-mill Worldpay-style payments giant, even if that may be the goal of its prospective private equity buyers.

5 Facts About the State of FinTech — and Why They Really Matter (Mimeo), Rated: A

The rapid innovation in the financial technology, or FinTech vertical, shows no signs of slowing down. In the past year, global investments in FinTech increased 11 percent to a staggering 17.4 billion USD.

1. The Majority of Executives Are Worried

A recent report from Pricewaterhouse Cooper (PwC) revealed that a staggering 80 percent of executives globally feel their business is at risk due to the rate of innovation in the FinTech sphere.

2. Governments Are Getting Behind FinTech

Per KPMG’s recent report on the pulse of FinTech, governments worldwide are beginning to show visible support for innovation in financial technology. The UK, Australia, Singapore, Malaysia, and Thailand have all debuted sandbox programs for regulatory innovation.

3. Blockchain Is Predicted to Take Over in 2017

4. 30 Percent of Consumers Love FinTech

PwC reports that 30 percent of today’s customers plan to increase their use of nontraditional ways of payments, fund transfers, finance, loans, and saving.

5. Robot Bank Tellers May Not Be a Far-off Fantasy

Australia/New Zealand

Non-bank lenders support fast-forwarding Robo-Advice access (Scoop), Rated: AAA

Robo-Advice, Digital-Advice, Automated-Advice. Whatever you choose to call it, the appetite to access financial advice online is growing, and New Zealand’s legislation is yet to catch up.

The law is currently hindering the development of personalised robo-advice models in New Zealand, as it states financial advice must be given by a natural person.

The Financial Services Federation (FSF) has submitted in support of the Consultation Paper: proposed exemption to facilitate personalised robo-advice, which could accelerate the provision of personalised robo-advice services ahead of law reforms which aren’t likely to take effect until 2019.

Fintech the future (SMH), Rated: A

​According to Kate Carnell, there have been less than 10 complaints about fintech operators in Australia since March 2016.

There are an estimated 600 fintech operators in Australia. The industry is burgeoning and continues to attract new players, so receiving less than double-digit complaints in 16 months isn’t a bad track record.

“So the growth rate is quite phenomenal and there’s more to come. We know of at least another 20 to 30 that are yet to launch.”

Small business lender expands BDM team (Australian Broker), Rated: B

Small business loan specialist OnDeck Australia has announced two new appointments to foster growth in its broker channel.

The firm has hired two new business development managers (BDMs), Adrian Dodson in Melbourne, Victoria and Tim Kwast on the Gold Coast, Queensland.

India

P2P players plan to widen lender base (Telangana Today), Rated: AAA

With the Reserve Bank of India guidelines on peer-to-peer lending firms likely to be released in a few weeks, city-based companies are getting ready to increase their registered lenders. They are optimistic that demand for loans will rise significantly as the haze surrounding the lending platforms will be cleared.

For instance, city-based i-lend says there is loan demand of about Rs 500 crore in one year while another firm Oxyloans says there could be a demand for Rs 600 crore in the same time.

Another player, Oxyloans, has 1,300 users including 264 lenders and 1,000 plus borrowers. “We see a loan demand of Rs 600 crore and are hoping to achieve Rs 200 crore in six months or so,” said Radhakrishna Thatavarti, founder and chief executive officer of SRS Fintech Labs, which operates Oxyloans.

Axis Bank to deploy tech solutions of three startups from Thought Factory accelerator (VC Circle), Rated: A

Private sector lender Axis Bank has selected three fintech startups from the first batch of its accelerator programme ‘Thought Factory’ whose solutions it will commercially deploy at its business units, it announced at an event in Bangalore on Friday.

Six startups, namely S2Pay, Pally, Perpule, FintechLabs, Paymatrix and Gieom graduated from the first batch. Axis Bank will collaborate with Pally, FintechLabs and Gieom for their tech solutions.

Using AI, Pally enables businesses in the financial domain to deliver better customer experiences. It has created a chatbot that creates an investment portfolio for tax savings when it is fed an image of a salary slip.

S2Pay’s solution forms a layer over any payments app and users can make secure payments from their mobile app, even when they are offline.

A Kalaari Capital-funded startup, Perpule allows users to scan products from their mobile app and pay from within the app once the list is complete.

Sunil Kalra, Rajan Anandan back fintech startup Monsoon CreditTech (VC Circle), Rated: A

Monsoon CreditTech Technologies Pvt Ltd, a fintech startup that has been in stealth mode till recently, has raised an undisclosed amount of funding from marquee investors, the startup said in its statement.

The investors include independent angel investors Sunil Kalra and Aditya Singh, former senior Microsoft executive Rishi Srivastava, and Google India’s Rajan Anandan, the statement added.

Asia

Ron Suber Says P2P Lending is Daylight Banking (Not Shadow Finance) (Crowdfund Insider), Rated: AAA

Ron Suber, perhaps the most prominent global Fintech Ambassador and President Emeritus of Prosper Marketplace, is on an extended swing across Asia visiting various platforms and presenting at events. Visiting with CNBC Asia this week, Suber explained how important transparency is for online lending and how both sides win: investor and borrower.

Startup Modalku Launches Mobile App for Individual Lenders (Jakarta Globe), Rated: A

Mitrausaha Indonesia Group, a homegrown marketplace that provides peer-to-peer lending, introduced a new mobile application that will allow individual lenders to offer loans to small businesses using a crowdfunding scheme.

Mitrausaha, which flies the Modalku flagship, offers small and medium enterprises (SMEs) access to non-collateral loans with interest rates ranging from 12 percent to 26 percent.

Modalku had launched a mobile app in January called “Modalku Dana Usaha,” customized for prospective debtors looking to replenish their working capital. The app is available on Android and iOS.

Lenders can start investing with Rp 1 million ($75).

New individual lenders need to deposit Rp 10 million into their account before giving out loans.

Early days for alternative funding (The Star), Rated: A

Two years ago, the Securities Commission gave out licences to operate equity crowdfunding platforms and last November, it gave out the licences for peer-to-peer lending.

pitchIN, one of the six operators of the equity crowdfunding platforms, has raised the most among the operators since end-2015, raising more than a third of the RM16mil raised by issuers up until this June.

Funding for early stage start-ups has become much harder due to grants becoming bleaker and investors looking for quality deals.

Awareness remains an issue, with entrepreneurs who want to raise funds through either ECF or P2P lamenting the lack of awareness or understanding.

Collapse of branch banking in 1 century (Korea Times), Rated: A

Throughout paradigm shifts, banks’ operations have changed dramatically. Many global lenders are now setting up branchless and digital operations as the way to go ― a move that is in stark contrast to the strategy they took over the past century.

According to a 1932 Federal Reserve report, the Bank of Italy had 25 offices by the end of 1919 and it rapidly increased to 292, 10 years later. Except for 40 branches in San Francisco, home to its headquarters, 252 were out-of-town branches, scattered literally all over California.

JPMorgan Chase is scaling down its branch networks, Citigroup is accelerating its move to transform into a digital bank globally and Wells Fargo is downsizing its branches so it can hire fewer employees and sit in a smaller space.

A CNN Money report said the number of the bank’s branches in the U.S. dropped by 10 percent to 4,789 as of the end of the second quarter of 2015.

Korea’s homegrown banks are also joining global giants’ moves.

According to six banks ― KB Kookmin, Shinhan, Woori, KEB Hana, NH NongHyup and Industrial Bank of Korea (IBK) ― the total number of their branches across the country declined to 5,493 at the end of May this year, down 442 from 5,953 at the end of the first quarter of 2013.

Liftoff enters Japan with former Criteo exec as country manager (e27), Rated: B

California-based mobile app marketing and retargetting platform Liftoff announced its official launch to the Japanese market today with the appointment of Country Manager Kota Amano, former Senior Director of Partner Development, APAC at Criteo.

In a press statement, Liftoff said that it has opened a data centre in Tokyo and is hiring a team of Sales and Customer Success Managers.

Canada

HOW TO NAVIGATE CANADA’S TANGLED REGULATIONS AND BUILD YOUR FINTECH STARTUP (Betakit), Rated: AAA

Our team at Ferst Digital is building a mobile-first banking platform that helps startups and small businesses. Our platform will let them bank, manage their finances, and integrate all of their financial productsand services in a simple and intuitive way.

To empower ourselves, we decided to own our regulatory know-how.

We decided to categorize our regulators around three common forms of purpose: protection, behaviour, and permission.

Authors:

George Popescu
Allen Taylor

Digital Lending’s Impact on Home Improvement Financing

Digital Lending’s Impact on Home Improvement Financing

When compared to traditional consumer credit products, home improvement purpose consumer loan performance is declining. We think increased competition from emerging point-of-sale lenders may be contributing to this trend and is indicative of an expansionary phase in the consumer credit cycle. Home improvement borrowers are migrating to digital lending: One survey indicated that roughly the […]

Digital Lending’s Impact on Home Improvement Financing

When compared to traditional consumer credit products, home improvement purpose consumer loan performance is declining. We think increased competition from emerging point-of-sale lenders may be contributing to this trend and is indicative of an expansionary phase in the consumer credit cycle.

Home improvement borrowers are migrating to digital lending: One survey indicated that roughly the same percentage of respondents would consider an unsecured consumer loan and HELOC / HEL to help pay for a home improvement project.

Purpose-focused originators are lending to these borrowers because they are relatively good credit risks: Lending Club (LC) home improvement purpose loans tend to prepay faster, are smaller in size, and attract borrowers with a slightly better credit profile than a comparative cohort, although they tend to charge-off at a slightly higher rate.

LC unsecured home improvement loan performance has diverged from that of traditional secured loans: In 2011-2012, the monthly charge-off rates for consumer loans was roughly equivalent to the deep delinquency rates of auto loans and HELOC’s and the default rate of bankcards. Since then, digitally-originated loan charge-off rates have increased while risk indicators for comparative products have trended down.

The lender specialization trend augurs well for credit markets. Differentiation in asset performance is a hallmark of the expansion phase of the credit cycle and may indicate a further market normalization as unsecured credit warrants a larger risk premium.

Introduction

It is no secret that digital lenders have made major inroads into lending markets in the last decade. In the next decade, we expect their reach to grow further into niche verticals including real estate-related products like home improvement loans. So here, we shine a light on the products consumers use to finance home improvement and pay special attention to digitally-originated consumer loans used for home improvement purposes. In this piece, we (1) recount the evolution of home improvement products, (2) describe the features and claim on assets of traditional and new products used for home improvement, (3) provide a performance comparison of Lending Club home improvement purpose loans to a consumer loan control set, and (4) discuss the LC loan set’s relative risk to more traditional products using Federal Reserve and S&P / Experian data.

When compared to traditional consumer credit products, home improvement purpose consumer loan performance is declining. In the past, these loans had a similar risk profile to HELOC’s and auto loans, but recently their charge-offs have risen on a relative basis. We think increased competition from emerging point-of-sale lenders, who can offer cheaper financing, due in part to a secured claim on property, may be contributing to this trend. Consumers already consider digital lenders and HELOC’s / HEL’s similarly when looking at financing options for home improvement[1]. And home improvement is the third most popular loan purpose for LC loans originated in 2016. With the cost of customer acquisition rising, it only makes sense that digital lenders partner with service providers to offer their products and satisfy consumer needs.

Going forward, the trend towards point of sale lenders may accelerate as further originator specialization occurs and new platforms pick-off desirable customers, like home improvement purpose borrowers. In fact, our analysis indicates that LC home improvement purpose loans tend to prepay faster, are smaller in size, and attract borrowers with a slightly better credit profile than

a comparative cohort, although they tend to charge-off at a slightly higher rate. For purpose-agnostic lenders like Lending Club, the specialization trend may be a net negative, but it augurs well for credit markets. Differentiation in asset performance is a hallmark of the expansion phase of the credit cycle and may indicate a further market normalization as unsecured credit warrants a larger risk premium.

A Look Back

After the 2008 financial crisis, heightened regulatory burdens and cost imbalances contributed to traditional lenders curtailing consumer lending activity. This was especially true for home equity lending products as issuers reeling from write-downs due to home value declines cut issuance. Home equity revolving balances outstanding fell from their peak of $714Bn in Q1 2009 to $472Bn in Q3 2016.

Sensing opportunity, digital lenders filled the consumer credit void and are now projected to generate over $10Bn of ABS issuance in 2017[2]. Digital lenders have proven that issuing consumer, small business, and student credit online is a desired service and a viable business model. Now, we see digital lending pushing into other complex, fragmented, or underserved credit markets, including real estate-related lending. In fact, digital lenders that specialize in underwriting mortgages (e.g. LendInvest), real estate-related lines of credit or financing (e.g. Patch of Land), and point-of-sale appliance (like HVAC units) purchase and installation loans (e.g. Financeit in Canada) have already emerged, and are growing rapidly.

Consumers Have Options

The home improvement financing products consumers use have changed before and after the financial crisis. Pre-crisis, borrowers used HELOC’s, home equity loans, and home improvement loans. Whereas post-crisis, those products were harder to obtain, so some homeowners used digitally-originated consumer loans instead. In fact, one survey indicated that roughly the same percentage of respondents would consider an unsecured consumer loan and HELOC / HEL to help pay for a home improvement project. Below we compare these products by first describing their structure.

 

Home Equity Line of Credit (HELOC’s): HELOC’s allow for a great deal of flexibility in structure. They are typically lines of credit, but can be structured as amortizing loans (with fixed rates, terms, and payments), or loans that require balloon payments at the end of a draw period. They are long-dated, with terms of 5 to 20 years and their size is dependent upon the home value and borrower equity. They are typically variable rate instruments and payments can be designed to be interest-only upfront. HELOC’s are secured by real property claims, even though they are typically non-recourse with respect to a borrower’s personal finances. They are generally subordinate to a mortgage in a bankruptcy and liquidation process. The interest paid on these loans are typically tax deductible for the borrower.

Home Equity loans (HEL’s): Home equity loans are less configurable than HELOC’s although they share many characteristics. Like HELOC’s, these loans are secured by a borrower’s home equity. Therefore, their size depends on the home value and equity amount. They are variable or fixed rate, typically 10-15 years in maturity, and subordinated to the primary mortgage holders claim. The interest paid is typically tax deductible. Unlike HELOC’s, these are typically amortizing installment loans, where borrowers make pre-determined monthly coupon payments.

Consumer installment loans used for home improvement: These loan’s structures are incrementally more rigid than HELOC’s and HEL’s. They have fixed interest rates, terms, and payments. They are generally short-dated (3-5 years in term). Unlike HELOC’s and HEL’s, consumer loans are typically unsecured. These loans are increasingly digitally originated.

Since the crisis, some digital issuers have carved out a niche in this product. For example, One Main Financial, Financeit, and Lightstream issue home improvement loans online, as well as point-of-sale channels.

Home improvement loans: Home improvement loans may have the least flexible structures of the bunch. These loans are issued for the express purpose of financing home improvement projects. The originator may require contractor estimates and home appraisals as inputs to the underwriting process. The originator may also hold back a portion of the loan disbursement until the project is completed or project milestones are reached. The loans typically are less than 7 years in term. Sometimes the loans are secured by liens on property, which are subordinate to the mortgage.

Further Discussion on Claims on Assets

A key difference between HELOC’s / HEL’s / home improvement loans and consumer installment loans used for home improvement is the relative claim on real property. As mentioned in the last section, HELOC’s and HEL’s are secured by the property value, while home improvement loans may be issued with a secondary property lien, which is a weaker claim.

On the other hand, consumer installment loans are effectively unsecured, although there are methods for recovery. Consumer loan originators have the option of filing a judicial lien on the borrower’s property. However, these liens are tenuous and can take years to litigate. Furthermore, they may be beneath other liens emanating from the same project. For example, if a homeowner stops paying his bills, and both a lender and contractor file liens on the property, then the lender’s claim may be subordinated to the contractor’s lien on the home improvement value.

In Canada, some loans used for home improvement purposes are on slightly firmer ground. The Personal Property Securities Act (PPSA) passed in 2012 defines the claims lenders can enforce on debtors.

To paraphrase, lenders can repossess fixtures used in the project, while other building materials embedded within the property can only be recovered through a mechanics lien registration and litigation[3]. For example, a lender can repossess lighting used in a project relatively quickly, whereas a loan used for structural support may require a forced sale to generate recoveries.

Home Improvement Loan Borrowers Are Desirable Customers

Based on our comparison, Lending Club home improvement purpose loans tend to have a higher credit quality and perform marginally better. Before delving into the conclusion further, we describe the data sets used. Both our home improvement and control sets contain loans where the borrowers are homeowners or mortgagers. The loan subset with home improvement as the purpose (HI loan sample) had over 56,000 loans or over $800MM in issuance. Conversely, the control set (non-HI loan sample) did not have a home improvement purpose and contained over half a million loans and over $8Bn in issuance. These two sets have a similar distribution of grades and annual vintages.

On average, LC loans with a home improvement purpose have marginally higher credit quality. Before 2014, LC home improvement borrowers had a median FICO score that was 8 and 15 points higher than the non-home improvement control set and auto-loan borrower scores. However, that difference has fallen for more recently issued loans. Meanwhile, the average LC home improvement loan borrower has a lower DTI over the entire sample set (roughly 3 points). In addition, LC loans used for home improvement are smaller in size (by ~$1,300) and carried lower interest costs for loans originated before 2014. Since then, the average interest cost difference has shrunk substantially, but both are generally cheaper than interest charged for loans on used cars.

Performance-wise, LC loans used for home improvement tend to prepay faster, while maintaining a similar or slightly higher level of defaults. High grade (A thru D) home improvement loans prepay at a quicker pace and charge-off at slightly higher to similar charge-off levels. Meanwhile, lower quality (E thru G) three-year loans tend to prepay slower, but charge-off less than their non-home improvement cohort. Lower grade five-year home improvement loans tend to prepay faster and default at lower levels, but the sample size is small.

When segmenting by vintage, the story is similar. Across vintages the home improvement loans prepay faster, but charge-off slightly more. The only outlier is five-year term, 2013-originated loans, which appear to charge-off at a lower rate after one-year of age.

More Originator Specialization and Fiercer Competition Ahead

LC home improvement loans have become riskier than comparative products with a secured claim on assets. However, this was not the case in 2011-2012, when the monthly charge-off rates for consumer loans was roughly equivalent to the deep (90+ days) delinquency rates of auto loans and HELOC’s and the default rate of bankcards. Since then digitally-originated loan charge-off rates have increased while risk indicators for comparative products have trended down.

Why this divergence in performance? We think an increased competition for desirable prime borrowers may be contributing to the change. Since Lending Club proved the marketplace business model, new platforms have created competition for desirable prime borrowers by reducing interest costs and mitigating losses through securing their claims on property and reducing customer acquisition costs by partnering with contractors at the point of sale. For example, Financeit allows contractors to refer customers to its loan program for minimal cost after project estimates. While some of the decline in the LC home improvement purpose loan borrower’s FICO score may be due to a secular trend lower as consumers levered up their balance sheets, much of it may be due to fiercer competition.


More broadly speaking, unsecured consumer loans underperforming secured loans is a healthy sign for credit markets, but a potential net negative for purpose-agnostic lenders. The fact that defaults were similar previously, may have been an anomaly and indicative of a repair phase in the credit cycle. The fanning out of performance may indicate that credit markets have healed and matured, and that new credit suppliers may be joining the fray. This may be good news for investors, who may anticipate a greater stratification of credit risk going forward, and borrowers, who may enjoy lower costs and more customized products.

Author

Aspire Fintech. Aspire enables Originators and Investors to better access, unlock and empower lending data. Aspire counts Marlette Funding, Progressa and Prosper among its data partners.

Contact Information

Aspire Financial Technologies Inc. 250 University Ave, Suite 231 Toronto, Ontario M3H 3E5
+1 647 317 7180
www.aspirefintech.com

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