Monday June 18 2018, Daily News Digest

funding circle

News Comments Today’s main news: Opendoor secures $325M in financing. RateSetter IFISA tops 100M GBP. China Rapid Finance’s earnings call slides. Alior Bank, solarisBank, Raisin, Mastercard partner on European digital bank. Harmoney to lend through its own platform. Amazon launches lending platform in India. Today’s main analysis: Rising interest rates and inflation. Today’s thought-provoking articles: Is P2P lending dying? The economic […]

funding circle

News Comments

United States

United Kingdom

International

Australia/New Zealand

India

Other

News Summary

United States

Opendoor now has $ 325 million more. SoftBank could come next. (Recode) Rated: AAA

Opendoor has already taken out $1.5 billion in loans for home buying. And the company now says it has accepted another $325 million in new financing that values it at more than $2 billion, according to a person familiar with the matter.

Opendoor will expand to 50 cities with the $325 million round. But SoftBank, with its huge $100 billion checkbook, could help Opendoor expand to even more as soon as later this year. The Japanese investor typically invests hundreds of millions of dollars into private companies, and that sort of check would be expected here, though some of the money tends to buy out existing investors.

Rising Rates and Inflation (PeerIQ), Rated: AAA

The Fed raised interest rates for the 2nd time in 2018 and the target Federal Funds Rate now stands at 1.75% – 2%. The committee indicated that it would raise rates twice more in 2018, a departure from the previous stance of 3 rate hikes in 2018.

The Fed summarizes member views using the “dot-plot”. The dot plot consolidates every committee member’s estimates of rates at the end of 2018, 2019, 2020 and the for long-term. The green line shows the median estimate indicating that most Fed members expect rates to be between 2.25% – 2.5% at the end of 2018, and between 3% – 3.25% at the end of 2019.

Source: Federal Reserve, Bloomberg
Source: Bloomberg, PeerIQ

Forward Rates – Where do we go from here?

Source: Bloomberg, PeerIQ

Braviant Holdings Announces $ 50 Million Credit Facility with Keystone National Group (PR Newswire) Rated: A

Braviant Holdings, a provider of tech-enabled credit solutions for underserved Americans, has entered into a $50 million senior secured credit facility with institutional investment firm Keystone National Group.

The Keystone debt facility allows Braviant to expand its newly launched near prime lending platform, Chorus Credit. Chorus is Braviant’s latest offering in support of the company’s mission to promote financial inclusion for 51 million adults considered underbanked by the FDIC. While the FDIC estimates that these adults make up 19.9% of U.S. households, data from the Fair Isaac Corporation, better known as FICO, suggests that 43% of U.S. consumers have below 700 credit scores. In the traditional banking sector, a lower than average FICO score severely limits access to credit for almost half of the nation’s population. Chorus aims to close the credit gap for middle America by offering $2,500 to $10,000 personal loans that are repaid in small, affordable installments.

Is P2PLending Dying? (P2P Lending Expert) Rated: AAA

Seriously. I’m asking. Is p2plending dying? Returns have sucked the last couple of years for all investors, but especially us retail investors since the 2015 and 2016 vintages have performed so poorly. My own returns are 400-500 basis points lower than my returns on my 2013 and 2014 vintage loans were and I know some colleagues and friends who have lost money on these investments.

But can the industry survive?

Source: P2P Lending Expert

How Will the Fed’s Interest Rate Hike Impact the Average Joe? (Dough Roller) Rated: A

On Wednesday, The Federal Reserve decided it was going to increase the federal funds rate by 25 basis points, from 1.75% to 2%. This is the second rate increase already this year. In March, new chairman Jerome Powell and the Fed increased the federal funds rate from 1.5% to 1.75%. The Fed also indicated that they’d be targeting two more increases this year alone.

As I said before, when the Fed increases rates, it usually means something is going well for the economy. And all signs are pointing to that being the case. Unemployment is currently at 3.8%. In the last 50 years, unemployment has only been this low two times. That’s significant, and it means that more people are finding jobs. It may also signify a strengthening job market for you. The Fed projects unemployment will drop to 3.6 percent by the end of the year, too.

Zelle is on track to be more popular than Venmo in 2018 (Business Insider) Rated: A

Zelle is a year-old service that lets you instantly transfer money to someone else, much like Venmo or Square Cash.

But Zelle differs from either service in a major way: because it was built by seven of the largest US banks, it’s often able to integrate more seamlessly with your bank’s mobile app. While other services make you wait a few days for the money you received from friends to show up in your bank account, Zelle can transfer the money almost instantly.

For those reasons, analysts at eMarketer expect Zelle to “leapfrog” other payments services before the end of the year.

Credit Union SMB Loan Approvals Hit Record Lows (PYMNTS) Rated: A

The latest data from the monthly Biz2Credit Small Business Lending Index suggests a slump in small business lending among U.S. credit unions.

press release issued on Wednesday (June 13) detailed the May Index’s latest findings, which found that large banks with more than $10 billion in assets are approving of nearly 30 percent of small business loan applications, a two-tenths of a percent increase from April levels. That figure is also a new high for post-recession big bank lending to small businesses.

Digital-only banks grapple with integrating ‘human’ interaction into their products (Tearsheet) Rated: A

Digital-only banks cater to younger customers who don’t want to talk to bankers at brick-and-mortar branches — or bother visiting a branch at all. Or so they think.

Recent customer surveys indicate otherwise, according to research findings released this month from Celent, commissioned by Samsung. It revealed that customers want some kind of human interaction for complex issues. The study found that about half of U.S. banking customers aged 18 to 44 said they banked digitally, but prefer to resolve some matters in-person. Overall, most customers surveyed preferred dealing with humans on matters like setting up financial goals or getting investment advice. To respond to fraud, a lost or stolen card, or identity theft, a majority of those surveyed across age categories preferred to phone the contact center or address it in a physical branch.

Source: Tearsheet

Real Estate Finance Is Changing, Thanks to ‘Fintech’ Startups (The Bridge) Rated: A

If your student loan debt is larger than your salary, investing in real estate might sound like a joke. But it’s doable, said Dave Conroy of the startup Meridio, a website in beta testing that lets users invest amounts of money that you might have in your wallet right now–even $20–into specific properties. Using blockchain technology keeps each transaction cost low, said Conroy, whose company is an offshoot of Bushwick-based ConsenSys, which is building myriad applications based on the Ethereum platform.

For investors, the service would reduce transactions costs and make a real-estate portfolio more liquid. For owners, it would unlock more capital and streamline transactions. While Meridio won’t provide market intelligence about properties to invest in, prospective investors can call on their own experience, says Conroy, who previously worked for the National Association of Realtors.

Why digital banking and robo advice are pairing up (Financial Planning) Rated: A

Banks and digital wealth startups are headed toward the same goal from different starting points.

Each side is increasingly seeking to package automated investment advice with checking because customers are expressing an interest in getting both services from one provider.

Fifth Third Bancorp’s securities unit teamed up with Fidelity recently to offer automated advice, while the microinvesting app Acorns rolled out a debit card called Spend and opened up 50,000 checking accounts in two days.

Wells Fargo simplifies payments pricing to compete with Square (Payments Source) Rated: A

Wells Fargo will simplify the prices it charges small businesses to accept credit and debit card transactions as the bank responds to pressure from startups such as Jack Dorsey’s Square Inc.

The changes, which are tailored for small businesses that process $100,000 a year or less, eliminate many of the complicated pricing policies that varied from client to client, according to Danny Peltz, who leads treasury management and merchant services at the company. Business customers will also be able to apply online for payment processing capabilities with Wells Fargo, Peltz said.

New Technologies and New Customer Experiences Drive Banking Today (Lend Academy) Rated: A

American Banker’s Penny Crosman sat with Cathy Bessant, Chief Operations and Technology Officer, Bank of America to discuss the bank’s use of AI.  She described how the bank has inventors all over the world in their distributed innovation model.

Peer to Peer Micro-Credit Site Puddle Shuts Down (Crowdfund Insider) Rated: A

Puddle, an online lender that provided micro-credit in a peer to peer platform, is shutting down.

In an email circulated by the company, Puddle founders stated that after five years of operation the businesses model was “unsustainable.”

RealtyMogul, Comunidad Realty Partners Sell Dallas Area Investment Property (Herald Courier) Rated: B

RealtyMogul, a pioneer in providing private real estate to discerning investors, announced that it has sold an investment property in partnership with Comunidad Realty Partners at greater than 1.5 times its purchase price.

The property, Lodge at Main, a 208-unit multifamily apartment complex in the Dallas/Fort Worth, Texas area was acquired in 2015.

California may force online business lenders to disclose rates (American Banker) Rated: AAA

A bill pending in California aims to tame the disorderly, confusing and largely unregulated world of online small-business lending by mandating that borrowers receive standard price disclosures.

The bill, which passed the Senate without a vote to spare and has failed to garner much support from either the online lending industry or its critics, still faces a tough fight in the state Assembly. But if the measure does get enacted in California, it could serve as a blueprint for other states.

The legislation tackles the question of whether commercial lenders should be required to disclose the price of financing in a way that enables borrowers to compare multiple offers. Just as nettlesome is the question of how any such comparison metric should be calculated.

Source: American Banker

The bill would apply to small businesses that borrow $500,000 or less.

United Kingdom

RateSetter Reports IFISA Tops £100 Million in Record Time (Crowdfund Insider) Rated: AAA

UK based peer-to-peer lender RateSetter is reporting that subscriptions to its IFISA have surpassed £100 million. This milestone took four months to reach and, according to RateSetter, faster than any other P2P lender. To date, RateSetter has originated over £2.5 billion in online loans to both businesses and individuals.  RateSetter states that more than 10,000 IFISA accounts have now been opened.  The average annual return received by investors stands at 4.4% with more than £100 million in interest having been paid.

Peer-to-peer lender Ratesetter to raise £30m as London float looms (City A.M.) Rated: A

Peer-to-peer lending business Ratesetter is working on a £30m fundraising which is expected to be a prelude to a London float.

According to Sky News Ra

tesetter is working with investment bank Lazard and broker Peel Hunt to raise £30m from investors.

The funding round would value Ratesetter at about £280m.

The fundraising is expected to be a precursor to a stock market flotation which could take place as early as next year.

THE ECONOMIC IMPACT OF LENDING THROUGH FUNDING CIRCLE (Funding Circle) Rated: AAA

In the UK, where Funding Circle has been established the longest, the platform is now competing directly with banks in the small business lending market – with net lending through the platform exceeding that of the entire UK banking system for two successive quarters at the end of 2017. A survey of Funding Circle’s customers undertaken for the study suggests 89 percent of the platform’s UK small business customers would approach
Funding Circle first again in future, rather than going to a bank.

Source: Funding Circle

Read the full report here.

Funding Circle CEO on the Fintech Frenzy in Europe (Yahoo Finance) Rated: A

How the big three shaped P2P (Peer2Peer Finance) Rated: AAA

ALTHOUGH we still tend to think of peer-to-peer lending as a young sector, it is now 13 years since Zopa became the first lender in the market. It was joined five years later by Funding Circle and RateSetter and since then the big three have dominated the P2P market.

Here are some of the key moments in their journeys.

London Block Exchange To Strike Deal With UK Bank (Crypto Daily) Rated: A

London Block Exchange, a UK based crypto provider is alleged to be pairing up with a new UK based bank, ClearBank.

If this news is indeed true, this will mark the first time a lender has struck a deal with a cryptocurrency-based entity.

The UK proves its tech chops, Google’s massive diversity gap and Brexit cause business tensions (Elite Business) Rated: A

Out of Europe’s 34 unicorns, the UK has produced 13. These have a combined value of $23bn, equal to 38% of the European total. This puts the UK ahead of Germany  and France, which have six and three scaleups valued over $1bn respectively. Given the nation has already spawned success stories like Deliveroo and Funding Circle, it’s hardly surprising that VC investment is also booming in the UK. Last year British startups raised $7.9bn compared to Germany’s $3.2bn and France‘s $2.8bn.

Brexit has made UK SMEs worry about talent

Having polled companies in 11 countries, researchers revealed that UK entrepreneurs were much less confident about the conscious uncoupling than those in the EU. Overall, 57% of respondents felt that their biggest challenge was that they had too little time and that they were doing everything themselves. This was double the 24% who thought hiring the right people were their biggest worry.

Alternative finance funds see mixed success (Peer2Peer Finance) Rated: A

Over the past year, P2P Global Investments (P2PGI), VPC Specialty Lending Investments and Ranger Direct Lending (RDL) have moved away from pure P2P to boost returns and narrow their discounts, while the Funding Circle SME Income Fund (FCIF) has remained true to its roots, all with varying outcomes.

The FCIF investment trust solely backs loans originated via the Funding Circle platform and saw its net asset value (NAV) return 6.9 per cent last year, while trading on a healthy premium.

In comparison, RDL – which has recently announced its intention to close – returned 5.4 per cent, VPC – which has shifted from P2P towards balance sheet lenders – saw its NAV total return grow by 3.07 per cent, while P2PGI – which last year merged its manager MW Eaglewood with Pollen Street Capital and is focusing more on asset-backed alternative lenders – reported a NAV return of 3.03 per cent during 2017. RDL and P2PGI are both trading at double-digit discounts to NAV.

Updated Crowd2Fund app includes IFISA management tools (Peer2Peer Finance) Rated: B

PEER-TO-PEER platform Crowd2Fund has relaunched its app to include Innovative Finance ISA (IFISA) management features via their smartphones.

Digital Challenger Redwood Bank Raises £9.8 Million (Crowdfund Insider) Rated: A

Redwood is targeting the SME market. Products include mortgages for business owners and professional landlords, as well as a range of savings accounts. Redwood seeks to offer British businesses fast, simple, transparent loans and savings accounts, coupled with superlative service. They also promise that money is being invested back into British business and into the communities they are a part of. Warrington Borough Council has a 33% stake in the firm that was pegged at £30 million.

BIS wants tighter rules for funds offering credit, fintech (Reuters) Rated: A

Regulations introduced after the financial crisis a decade ago to smooth out banking booms and busts should be extended to funds that provide credit, or shadow banks, and fintech firms, the Bank for International Settlements (BIS) said on Sunday.

The introduction of “macroprudential” policy requiring banks to build up separate “countercyclical” buffers of capital if credit markets become frothy was a core crisis-era innovation.

The buffers can be released if loans begin turning sour and maintain resilience of the financial system to shocks – a departure from the traditional “microprudential” focus on the stability of individual banks.

China

China Rapid Finance 2018 Q1 – Results – Earnings Call Slides (Seeking Alpha) Rated: AAA

Source: Seeking Alpha
Source: Seeking Alpha

Chinese P2P giant Lufax dodges valuation bullet (Nasdaq) Rated: A

Lufax is wisely trying to grow up in private. The Chinese financial technology giant, which focuses on peer-to-peer lending and wealth management, plans to raise more than $1 billion at a $40 billion valuation ahead of a delayed Hong Kong flotation, says Reuters. That makes sense. Listing now could upset Beijing, and might only be achievable at a discounted price. Abundant venture capital allows the Ping An-backed startup to keep growing without a distracting market debut.

European Union

Alior Bank, solarisBank, Raisin and Mastercard to unveil European digital bank (Fintech Futures) Rated: AAA

Poland’s Alior Bank has teamed with solarisBankRaisin and Mastercard to unleash a pan-European digital bank.

The new offering, which is planned to be launched in the fourth quarter of 2018, will be built on the “strengths of all partners”.

Alior Bank will deliver multicurrency accounts with international transfers and deposits.

solarisBank will add the banking infrastructure with its technological, compliance and regulatory framework.

Raisin through its network of partner banks, is adding various savings and investment possibilities to the offering.

N26 launches a revised metal card (Tech Crunch) Rated: A

Fintech startup N26 is updating its N26  Metal product and launching it tomorrow. You might remember that the company first announced its premium card at TechCrunch Disrupt Berlin in December 2017. Shortly after the conference, the card was available in early access for existing N26 Black customers.

But the company had to go back to the drawing board and update the card design. N26 Metal customers had some complaints about the design of the card in particular.

International

Fintechs are staring down the future of banking (Financial Post) Rated: A

For instance, U.S.-based Lending Club, which has been around since 2007 and which is public, has arranged US$35 billion in consumer loans for its two million borrowers. The average loan — and it originates about US$2.4 billion a quarter — is about US$14,000.

Those themes were on full display this week in Toronto at an event organized by the KiWi Private Credit Fund, which raises capital from investors and purchases unsecured consumer loans and secured small business loans originated by established U.S.-based lending marketplaces.

“But they are not good at pricing a 9 per cent or 12 per cent risk,” he added, all of which allows entities such as his, to meet that need. It has US$27 million in assets; an average loan of almost US$14,000 and targets a return in the six- to eight-per-cent range.

Australia/New Zealand

Harmoney is to begin lending money through its own online platform (Interest) Rated: AAA

Peer to peer lending facilitator Harmoney Corp is making a number of tweaks to its operation, which will include the ability to lend its own money through its own platform.

The company has also renamed its ‘platform fee’ – recently the subject of Commerce Commission court action – as an ‘establishment fee’ and dropped the fee by $50 to $450. The company has also tweaked some of its interest rates higher (see below tables).

Harmoney will now be operating two different markets within its platform; the existing P2P facility and a new ‘wholesale market’ operated through a new subsidiary Harmoney Nominee.

Australian regulator sues Westpac for staffer’s poor financial advice (Reuters) Rated: A

An Australian regulator filed a lawsuit against No. 2 lender Westpac Banking Corp (WBC.AX) over a financial planner it alleges gave poor advice for years, upping its scrutiny of a sector already under fire amid an embarrassing public inquiry.

Australia’s A$5 billion ($3.7 billion) financial planning sector has provided some of the most damning evidence at an inquiry into finance sector misconduct, ordered by the government after a string of banking scandals including fraud.

P2P lender cuts rates (Good Returns) Rated: A

Peer to peer lender Lending Crowd has cut its borrower interest rates for all new business and personal loan applications including vehicle purchases and debt consolidations.

A1 grade personal borrowers will have a market leading rate of 6.89% pa and SME businesses will have rates available from 7.98%. Interest rates across all loan grades will range from a low of 6.89%
to a high of 18.96% (previously 7.90% to 19.75%).

Parents giving $ 10k towards kid’s first car (Finder) Rated: A

Survey shows 60% of parents are giving kids $10,594 to buy their first car.

According to research conducted by RateSetter, parents are stumping up $10k to get their child their first set of wheels.

RateSetter found that among parents who bought their child a car, 15% chose a new model, 71% opted for a used one and 14% donated their own vehicle. The majority of families could afford a car under $10,000, while 26% spent between $10,000 and $20,000. A lucky 12% of kids were gifted over $20,000 towards their ride. Parents in Victoria spend the most on their child, up to $13,386. In NSW, the average outlay was $10,404.

India

P2P lending companies change tack in bid to become NBFCs (Business Standard) Rated: AAA

Peer-to-peer (P2P) lending companies are changing their business model as they migrate to becoming (NBFCs).

RBI had created a special category called NBFC-P2P, in view of the proliferation of entities. While mandating Rs 20 million as minimum net worth, RBI had also imposed a Rs 1-mn cap for individual lending on such platforms.

So far, a couple of these entities have got an NBFC licence from RBI. Faircent says it got the licence about 20 days earlier.

Amazon launches lending platform for sellers (The Economic Times) Rated: AAA

Amazon India has launched a platform for lenders and sellers wherein sellers can choose from competitive rates and loan offers. It will also open its APIs to lenders to plug in and lend to the sellers as part of the new programme, called the seller lending network.

India will be the first geography for Amazon where it has launched such a seller platform.

Fiscal 2015 World Bank Lending Report highlights India as one of the biggest Loan Beneficiary (Digital Journal) Rated: AAA

Fintechs offer loans to individuals with low credit scores as well. For instance, in the case of Qbera, individuals with a minimum credit score of 600 can qualify for personal finance. This is not quite so in the case of private banks – individuals need to have a minimum credit score of 750 to be eligible.

Aye Finance Secures $ 21.5M in Series C Funding (Finsmes) Rated: A

Aye Finance, a Gurgaon, India-based provider of financial services to micro and small businesses, secured $21.5m in Series C funding.

Backers included CapitalG, SAIF Partners and LFT.

The company intends to use the funds to accelerate business growth.

P2P lending: Can India replicate the UK experience to achieve Sabka Saath, Sabka Vikas? (Economic Times) Rated: A

India is still struggling with a huge credit gap that is holding back the economy. Getting a bank loan is an extremely cumbersome and long-drawn process for salaried individuals and small businesses, alike. According to a study conducted jointly by ASSOCHAM and EY, around 19% of India’s population remains unserved by the traditional banking sector.

Several million MSMEs that lack a tangible financial record are thus not eligible for credit from legacy financial institutions who still use traditional credit and financial data to evaluate eligibility. For the Indian economy to achieve the next level of growth, the current gap of nearly $200 billion in credit supply to MSMEs and significant under-banked population of India needs to be addressed immediately.

Asia

FSC reins in P2P firms (Korea Joongang Daily) Rated: AAA

In Korea, P2P firms, which directly connect borrowers with investors through online platforms, are not under the direct supervision or management of financial authorities. The Financial Services Commission (FSC) only indirectly supervises them by requiring registration of P2P firms’ lending subsidiaries, which most P2P firms use to carry out the process of lending money to borrowers.

But this safeguard also has many loopholes. TheHighOneFunding, for example, had uploaded the name of a different person as CEO when it registered its lending subsidiary with government regulators.

With more investors attracted to the idea of making easy money through high interest rates on P2P lending, the cumulative amount of loans on such platforms has dramatically increased, from 37.3 billion won in late 2015 to 3.50 trillion won as of May.

MENA

Where’s the money, honey? (Gulf News) Rated: AAA

According to the Khalifa Fund for Enterprise Development, nearly 50 to 70 per cent of loan applications made by SMEs in the UAE are declined by traditional banks, while loans to SMEs account for around four to five per cent of the outstanding bank credit in the UAE.

Enter peer-to-peer lending.

Over the years, such platforms have become big business: In 2016, the size of the peer-to-peer lending market in the US, UK, the European Union, Australia and New Zealand was estimated to be more than $72 billion, according to AltFi. In China, loan originations in 2015 were estimated at $101 billion.

Authors:

George Popescu
Allen Taylor

Impact of Interest Rates on P2P Lenders

bank of england base rate

Every time there are talks of a rise in interest rates, financial institutions go into a frenzy. The 2008 recession had forced central banks around the world to drop their rates to historical lows. But with the global economy stabilizing, the US Fed and other central banks have started tightening rates. We will be covering […]

bank of england base rate

Every time there are talks of a rise in interest rates, financial institutions go into a frenzy. The 2008 recession had forced central banks around the world to drop their rates to historical lows. But with the global economy stabilizing, the US Fed and other central banks have started tightening rates. We will be covering effects of the rising interest rates on three of the biggest P2P markets in the world: the UK, US, and China.

United Kingdom

Last year, Bank of England (BoE) reduced the interest rate by 0.25 percent along with a sling of monetary policies to encourage growth. But in October of this year, BoE increased the interest rate, though only marginally by 0.25%. Both of these times, banks and other financial institutions immediately reviewed the mortgage and saving rates, and the effect was passed on to customers. But the change is too small to have any damaging effect on P2P lenders.

Source:

 

Moreover, P2P lenders do not fall directly under the scope of BoE, hence, are not immediately affected by the BoE base rate. Lender return is directly proportional to the demand and supply in the market. For the short term, P2P lenders will not be making any headline-grabbing changes to their rate structure. If the rate does end up crossing 2%, the P2P market will definitely ring up some changes in their rate structure.

Zopa, the pioneering UK-based P2P platform, was able to thrive even when rates were above 5%. But the real reason P2P gained a substantial foothold in the UK was because of the low yield environment. With saving rates below inflation, money lost its value over a period of time when held in savings accounts. This prompted people to go for P2P platforms as alternative saving options even though it had a way higher percentage of risk attached to it. If rates do reach a certain level, the lender might go for the safer option of saving accounts returns rather than the high-risk high-profit approach offered by P2P platforms. But if P2P lending is considered an investment, the yield will always be attractive for a certain class of investors.

United States

During the last decade, the US economy endured the worst financial recession in 80 years. And to counter that, the Fed dropped the rates to 0-0.25% for an extended period of time. But with US unemployment rates at multi-decade lows, the rate has been slowly yet steadily hiked to a range between 1%-1.25%.

Impact of increase in the interest rates

Lending Club, the largest P2P platform in the United States, has mentioned in its prospectus the adverse effect hike in interest rate will have on its business

“… fluctuations in the interest rate environment may discourage investors and borrowers from participating in our marketplace, which may adversely affect our business.”

Many retail investors use the P2P platform as an investment option. Since they lend directly to the borrowers, the non-involvement of the intermediaries allows them to enjoy handsome returns as compared to returns they get for depositing into saving accounts.

Source:

As the chart above clearly depicts, a number of delinquencies are directly impacted by the increase in the interest rate. The higher the interest rates, the higher are delinquencies. Thus, the low rate environment had led to lower delinquencies. But now, there is a growing fear that a hike in interest rates will be detrimental to peer-to-peer lending platforms.

Ben McLannahan of the Financial Times believes that an increase in Fed rates can actually devastate the nascent peer-to-peer lending industry.

  1. Increasing default rates for peer-to-peer lending notes might trigger an exodus by institutional investors, thus triggering liquidity concerns and
  2. Traditional investment options would see returns revert to historical means, rendering moot the allure of higher returns offered by the p2p industry. (Source)

China

China is one of the biggest markets in terms of size and population. Even new regulations and the crackdown by authorities cannot halt China’s P2P market juggernaut. In March this year, it crossed $130 billion (Rmb 900bn), and it is widely expected that lending will cross Rmb 1 trillion mark this year.

With outstanding loans weighing heavy on the balance sheets of lenders, the regulatory body PBOC is worried this will lead to yet another economic recession, and that is the reason it is clamping down on the P2P industry. For the most part of its journey, the P2P industry in China has been unregulated. The sudden onslaught of regulators led to a major decline in the number of players. Case in point: There were 2,281 P2P platforms in the country, and now the number has come down to 331.

Interest Rates

The basic interest rate is hovering around 4.35 percent. Chinese regulators believe the global economic situation is still shaky, therefore, raising the open market rate is much more appropriate than raising the benchmark rates. In February this year, PBOC raised the interest rate on open market operation to reverse repurchase agreements (repos) by 10 basis points, and furthermore, it increased the lending rates on standing lending facility (SLF). The overnight rate for the SLF loan was raised to 3.1 percent from 2.75 percent. The SLF rate acts as a de facto ceiling for interbank lending.

Source:

A change in short and medium lending rates were executed to address the rapid build-up in debt and to safeguard the economy against the consequent financial risk. Increase in interest rates along with regulatory reforms being put in place by PBOC will help the industry to grow in a safe and structured environment.

Conclusion

Rising interest rates pose a threat to the P2P industry as the initial adoption was triggered by the low yield offered by traditional banks. P2P lenders were able to circumvent this and offer a win-win for both borrowers and lenders. With interest rates inching up, many feel the P2P lenders will be facing higher delinquency and lower investor interest. But this does not take into account the evolution of the industry; the players have been extremely nimble and understand the predicament facing them. Many have tightened lending norms, and almost all players now have long-term institutional money on board. With credit algorithms leveraging artificial intelligence and machine learning, profitability for the nascent industry is not a distant dream. In such a scenario, interest rates offered by P2P lenders will adapt to the demand-supply ratio in the market.

Author:

Written by Heena Dhir.

More on the return of advanced economy inflation

Inflation is creeping back into the advanced economy macro environment due to base effects, commodities and EM growth constraints, says Citi’s Willem Buiter. While disinflationary forces are still out there, it does feel increasingly like something has…

Inflation is creeping back into the advanced economy macro environment due to base effects, commodities and EM growth constraints, says Citi's Willem Buiter. While disinflationary forces are still out there, it does feel increasingly like something has changed in terms of the global outlook.

Continue reading: More on the return of advanced economy inflation

Monetary policy: it’s mostly fiscal

Inflation is always and everywhere a monetary phenomenon…Government spending may or may not be inflationary. It clearly will be inflationary if it is financed by creating money, that is, by printing currency or creating bank deposits. If it is financed by taxes or by borrowing from the public, the main effect is that the government spends the funds instead of the taxpayer or instead of the lender or instead of the person who would otherwise have borrowed the funds. Fiscal policy is extremely important in determining what fraction of total national income is spent by government and who bears the burden of that expenditure. By itself, it is not important for inflation.

–Milton Friedman, “The Counter-Revolution in Monetary Theory” (emphasis in original)

Friedman’s idea was radical when he suggested it in 1970, but it has since become boringly mainstream. Nowadays the standard line is that central banks have all the power and (usually) offset the impact of fiscal policy changes.

So it was refreshing to read a speech by Christopher Sims at this year’s Jackson Hole economic symposium suggesting that the common view has things backwards. To the extent central banks have any impact on inflation, it’s by tricking elected officials:

Continue reading: Monetary policy: it’s mostly fiscal

Inflation is always and everywhere a monetary phenomenon…Government spending may or may not be inflationary. It clearly will be inflationary if it is financed by creating money, that is, by printing currency or creating bank deposits. If it is financed by taxes or by borrowing from the public, the main effect is that the government spends the funds instead of the taxpayer or instead of the lender or instead of the person who would otherwise have borrowed the funds. Fiscal policy is extremely important in determining what fraction of total national income is spent by government and who bears the burden of that expenditure. By itself, it is not important for inflation.

–Milton Friedman, “The Counter-Revolution in Monetary Theory” (emphasis in original)

Friedman’s idea was radical when he suggested it in 1970, but it has since become boringly mainstream. Nowadays the standard line is that central banks have all the power and (usually) offset the impact of fiscal policy changes.

So it was refreshing to read a speech by Christopher Sims at this year’s Jackson Hole economic symposium suggesting that the common view has things backwards. To the extent central banks have any impact on inflation, it’s by tricking elected officials:

Continue reading: Monetary policy: it’s mostly fiscal