Thursday June 22 2017, Daily News Digest

German real estate crowdfunding

News Comments Today’s main news: PayPal, Venmo rolling out instant bank transfers. Sindeo goes out of business. SoFi’s new filing. Wealthsimple expands into UK. PayPal advances 400M GBP to UK businesses. Today’s main analysis: A look at Lending Club’s competition. Today’s thought-provoking articles: Many P2P lenders attract investors by raising interest rates. German RECF booms. International expansion of alternative lending. United […]

German real estate crowdfunding

News Comments

United States

United Kingdom

China

European Union

International

  • Alternative lenders spread their wings internationally. AT: “International expansion could become the big story of 2017 and 2018.”
  • Amazon and the future of fintech, part 2. AT: “Interesting theory. I suppose technology can facilitate more diverse business assets for true technology companies like Amazon, Apple, Klarna, et.al. But I don’t see how this is a lot different than traditional holding companies that expand businesses into multiple sectors other than the fact that the companies themselves are predicted to be the holding companies. Isn’t this what Google’s rebranding into Alphabet was all about? Perhaps Amazon could do the same. That would actually make sense.”
  • Global mobility.

Australia

Canada

News Summary

United States

Instant bank transfers are coming to PayPal and Venmo (TechCrunch), Rated: AAA

PayPal announced this morning a plan to speed up money transfers between its service, Venmo and users’ bank accounts for those with supported MasterCard and Visa debit cards. This new “instant transfers” service will be available at a rate of $0.25 per transaction, and will deliver funds in a matter of minutes, instead of the day or so it typically takes when using PayPal or Venmo.

The company says the feature will be available to the vast majority of cardholders, save for a handful of very small institutions.

In most cases, the funds transferred between PayPal or Venmo and the end user’s bank account (via the supported debit card) will arrive in a matter of minutes. However, some banks may take up to 30 minutes, PayPal notes.

The instant transfer service is now launching into beta with select PayPal users, as a result of these deals, as well.

Lending Club: Take A Look At The Competition (Seeking Alpha), Rated: AAA

CreditKarma is a personal finance website. They provide a list of online personal loan options, given some basic information. I put in $10,000 as my desired loan amount and selected a credit score of 700-749. I got the following list of offers:

That’s eleven online, unsecured personal loan providers. The list does not include some others, like SoFi and Lightstream. Try it yourself here.

Lending Club vs. Marcus

Lending Club is an originate-to-distribute lender, while Marcus is a balance-sheet lender. Lending Club gives much of the profit of a loan to its investors, along with default risk and prepayment risk. Marcus keeps the risks and the profit. If we assume that Marcus’s loans look like Lending Club’s, with interest rates averaging 14% and defaults averaging 6%, then the income from each loan looks approximately like this:

LC: 5% origination fee + 1% servicing fee = 6% of loan principal

GS: 14% interest – 6% default – 1% cost of funds = 7% of loan principal

More importantly, it is a lot more painful for Lending Club to cut back on loan originations, for example in a downturn, and it doesn’t necessarily control the pace of lending. If Lending Club stops originating loans, the lion’s share of its income dries up immediately.

Sindeo closes shop (Sindeo), Rated: AAA

But, startups are hard and simplifying the highly regulated, complex business of mortgages is even harder. I believed we had overcome the biggest hurdles, but unfortunately, we didn’t. Today, we made the difficult decision to wind down Sindeo.

While Sindeo as a startup has failed, our people did not. As a matter of fact, we did what everyone said couldn’t be done.

  • We built a place where people could shop and apply for a mortgage from a robust marketplace of over 1000 loan programs, with one single application and one credit check.
  • We secured partnerships with some of the top real estate and consumer finance brands.
  • We helped our clients save millions of dollars on their home loans.
  • We built a people-centric brand, putting the needs of Sindeo’s clients first.

Sindeo’s Net Promoter Score (NPS) this year is 81, compared to an average of negative three from the top banks.

I am devastated for our employees, their families, our partners and our investors who believed in us, and worked so hard to build Sindeo. We have very talented people who need jobs today. Hire them.

Nick Stamos
CEO, Sindeo

SoFi Lending Corp. (Filer) (SEC), Rated: AAA

We (“us” or “PwC”) have performed the procedures enumerated below, which were agreed to by Social Finance, Inc., Deutsche Bank Securities, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co., J.P. Morgan Securities LLC, and SoFi Securities, LLC, who are collectively referred to herein as the “Specified Parties”, solely to assist you in performing certain procedures relating to the accuracy of certain attributes of the private consumer loans with respect to the SoFi 2017-4 securitization transaction (the “Transaction”). Social Finance, Inc. (“SoFi” or “Company”) is responsible for the accuracy of certain attributes of the private consumer loans with respect to the Transaction (the “Responsible Party”). The sufficiency of these procedures is solely the responsibility of the Specified Parties. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.

Where Major US Banks Have Invested in Fintech (CB Insights), Rated: A

Key takeaways

  • Since 2012, the top ten US banks by assets under management have participated in 72 rounds totaling $3.6B to 56 fintech companies.
  • Ranked by the number of unique portfolio companies, the cohort’s three most active investors are Citi, Goldman Sachs, and JP Morgan Chase — in that order. Citi (including Citi Ventures) participated in 29 rounds to 24 companies, Goldman Sachs in 30 rounds to 22 companies, and JP Morgan Chase in 14 rounds to 13 companies.
  • Goldman Sachs is focusing on payments, investing in six companies in the space.
  • All ten banks have blockchain investments.
  • Although the second largest bank by assets, Bank of America takes the sixth spot on this list, with only six fintech companies in its portfolio.
  • Kensho saw lots of overlapping interest, with six of the cohort investing in its $50M Series B, which valued the company at $500M.

Robos get the press, but adviser tech is getting the money (Financial-Planning), Rated: A

Take the $140 million in funding that Silicon Valley-based Addepar recently raised from sources including SpaceX backer Valor Equity Partners.

Addepar CEO Eric Poirier says the eight-year old performance reporting platform has seen the number of assets its clients hold grow from $300 billion last year to $700 billion.

That’s not to say that there isn’t money for robo advice platforms — blending impact investing and robo advice garnered OpenInvest $3.25 million in seed funding from high-profile VC firm Andreessen Horowitz in May.

LendingPoint founders share recipe for success (Bankless Times), Rated: A

During the financial crisis both said they worked with large balance sheets which helped them understand how to position themselves in the marketplace. That experience also taught them that marketplace lenders cannot simply be technology companies, they also need to apply the lessons learned working in different environments, geographies and at different points in the cycle.

What they saw was a space where near prime consumers, those with credit scores between 600 and 700, were in need of better credit products, with many resorting to payday lenders and their ilk.

When lenders place too much emphasis on arbitrary measure such as FICO scores, they miss so much underneath. In one case the employee of a partner company saw her credit score quickly drop after she paid off a loan early. Even though she had fewer debt obligations, by traditional underwriting methods she was deemed a higher risk.

Alternative data sources can play a role in telling those unique stories while protecting everyone from fraud, Mr. Tavares said. Something as simple as how long a phone number has been active can help validate an applicant’s identity.

LendingPoint also believes it is crucial for marketplace lenders to originate and hold assets on their balance sheets, Mr. Burnside said.

LendingPoint offers personal loans up to $20,000 that can be paid back in twice-monthly installments over 24 to 48 months.

American Express invests in insurance startup Next Insurance (Reuters), Rated: A

American Express Co has invested in Next Insurance, a Palo Alto-based technology startup that sells customized insurance for small businesses online, as Silicon Valley companies look to shake up the insurance sector.

Next Insurance will use the new cash injection, which brings the investment round to $35 million, to expand the products it offers and target new business sectors, the company said.

Office of the Comptroller of the Currency Issues Third-Party Relationship Frequently Asked Questions (Lexology), Rated: A

Focusing on bank-fintech relationships, which likely were a key driver for the FAQs, the OCC notes that when “a fintech company performs services or delivers products on behalf of a bank or banks, the relationship meets the definition of a third-party relationship” that should be subject to the bank’s third-party risk management process. Akin to any other third-party service provider, a fintech company arrangement may or may not be considered a critical activity in this regard.  In an important acknowledgement of the diligence challenges banks face from time to time in conducting diligence of third parties, the FAQs also specifically address situations where a bank does not receive sufficient information from a third-party service provider that supports a critical activity. In that situation, the OCC expects a bank board and management to:

  • develop appropriate alternative ways to analyze these critical third-party service providers;
  • establish risk-mitigating controls;
  • prepare to address delivery interruptions;
  • make risk-based decisions that despite the lacking information, these critical third-party service providers remain the best service providers available;
  • retain appropriate documentation of all efforts to obtain information and related decisions; and
  • ensure that contracts meet bank needs.

The FAQs also specifically address marketplace lending arrangements with nonbank entities and relationships to facilitate mobile payments. In the marketplace lending context, the FAQs assert that a bank board and its management should understand the relationships among the entities involved and the risks specific to marketplace lending relationships, including reputational, credit, concentration, compliance, market, liquidity and operational risks. Management must also ensure it has proper personnel, processes and systems to monitor and control these risks, including, for example, adequate loan underwriting guidelines and appropriate board-adopted policies that include concentration limits. The FAQs direct banks to work with mobile payment providers “to establish processes for authenticating enrollment of customers’ account information that the customers provide to the mobile payment providers” as mobile payment environments become more ubiquitous and as customer expectations dictate that transaction accounts as well as credit, debit or prepaid cards issued by banks are able to be used in mobile wallets.

How The Blockchain Can Create A True Peer-To-Peer Sharing Economy (NASDAQ), Rated: A

One of the blockchain’s most prominent features is that it can bestow trust in a network without the need for a central authority.

The sharing economy refers to a new socio-economic phenomenon in which individuals share products or services with other individuals on a peer-to-peer basis for a fee. However, even though the sharing economy is built on a peer-to-peer model, there are intermediaries who charge a fee for facilitating the transactions.

Enter Blockchain Technology

In a true peer-to-peer sharing economy, there should never be an intermediary who dictates the terms and conditions of a transaction or takes a cut of the payment.

Say you want to rent a car for a short trip from one side of town to the other. To do so, you could use a mobile app to identify vehicles that are available in your vicinity. Then, after verifying the digital identities of both yourself and the vehicle owner, you agree to terms and conditions, such as the fee and duration of the rental, and buy a micro-insurance policy  covering the ride, via an immutable smart contract. Once the terms and conditions are agreed upon and the smart contract is created and verified, you can open the car using your smartphone and the payment is directly deducted from your digital wallet and transferred to the vehicle owner upon completing your trip.

While the above example is purely theoretical at this stage, there are two startups aiming to leverage blockchain technology to create a fairer peer-to-peer economy in the rideshare sector. Austin, Texas-based Arcade City and Israel-based La ‘Zooz both aim to take the “Uber out of Uber” by offering ride sharing without a company acting as a fee-charging intermediary. Instead, drivers and riders deal directly with one another and payments are automatically conducted in cryptocurrency once the ride is completed.

FT 300: full 2017 list of top US registered investment advisers (Financial Times), Rated: A

The FT invited qualifying RIA companies — more than 2,000 — to complete a lengthy application that gave us more information about them. We added this to our own research into their practices, including data from regulatory filings. Some 725 RIA companies applied and 300 made the final list.

The formula the FT uses to grade advisers is based on six broad factors and calculates a numeric score for each adviser. Areas of consideration include adviser AUM, asset growth, the company’s age, industry certifications of key employees, SEC compliance record and online accessibility. The reasons these were chosen are as follows:

• AUM signals experience managing money and client trust.

• AUM growth rate can be a proxy for performance, as well as for asset retention and the ability to generate new business. We assessed companies on one- and two-year growth rates.

• Companies’ years in existence indicates reliability and experience of managing assets through different market environments.

• Compliance record provides evidence of past client disputes; a string of complaints can signal potential problems.

• Industry certifications (CFA, CFP, etc) shows the company’s staff has technical and industry knowledge, and signals a professional commitment to investment skills.

• Online accessibility demonstrates a desire to provide easy access and transparent contact information.

 

An AboveLoans.com Review: A Simple Way to Borrow (Saving Advice), Rated: B

Compared to other online lender-matching agencies, AboveLoans doesn’t really stand out among other online lenders. The only part that may seem a bit different is the simplicity aspect. Because AboveLoans only gives out smaller amounts ($35K and less) getting a loan can be a pretty swift process but there is more to getting a loan than how quick it happens.

Loans can range from $500 to $35K and you’ll have anywhere from six to 72 months for repayment.

Applying from anywhere sounds great but how secure is AboveLoans.com? AboveLoans isn’t a lender. It is a lender matching site. The entire process is secure but if you’d prefer a group of lenders not have your information you may want to consider using another site. Once you’ve accepted the lender’s terms, etc. funds will be deposited directly into your bank account.

You can apply for each of the following loans through AboveLoans:

  • Debt Consolidation Loans
  • Emergency Loans
  • Auto Repair Loans
  • Auto Purchase Loans
  • Moving Loans
  • Home Improvement Loans
  • Medical Loans
  • Business  Loans
  • Vacation Loans
  • Tax Loans
  • Rent/Mortgage Loans
  • Wedding Loans
  • Major Purchase Loans
  • General Personal Loans
United Kingdom

WEALTHSIMPLE TAKES SERVICE TO ANOTHER FINTECH HUB WITH UK EXPANSION (Betakit.com), Rated: AAA

Wealthsimple is officially expanding its service to the UK with an invitation-only beta.

The UK expansion comes just four months after Wealthsimple announced its US expansion. The company had been working on its US expansion over the past year.

“Ultimately, our ambition is to be a global financial services company. The UK has a lot of similarities to Canada — similar language and culture, the financial services industry is in a similar place — so it felt like the next logical step,” says Mike Katchen, CEO of Wealthsimple.

Toby Triebel, who previously co-founded online lending platform Spotcap, will lead Wealthsimple’s UK business.

PayPal hits £400m mark in advances to UK businesses (AltFi), Rated: AAA

PayPal Working Capital, PayPal’s small business lending arm in the UK, has hit £400m in cumulative cash advances made to British businesses. Over 22,000 business owners have now taken out an advance from PayPal Working Capital since it launched in 2014. The £400m milestone comes after a 116 per cent increase in total cash advances made by the firm over the past year.

PayPal’s small business lending activities are considerably further advanced in the US, where it topped $2bn in cash advances in the summer of 2016.

The high-yielding trusts more popular than ever (interactive investor), Rated: A

Trust purchases by advisers and wealth managers hit an all-time high over the 12 months to the end of March at £777 million. That’s up 11% on calendar year 2015, when £698 million was piled into closed-ended vehicles.

In addition, Q1 2017 was the second-highest quarterly period for purchases of trusts at £246 million. That’s a year-on-year increase of 85% and 25% more than the previous quarter.

Specialist debt was the most popular sector with advisers and wealth managers in first-quarter 2017. It’s the first time it’s topped the list, accounting for 14% of all investment trust purchases during the period.

He continues that, with the likes of peer-to-peer lending relatively new innovations, another potential risk is that trusts investing in it, which tend to be even newer concepts, are unproven over different economic and investment environments.

The sector average payout is above 6%, with some of the highest-yielding, including Carador Income (CIFU), Ranger Direct Lending (RDL) and Fair Oaks Income, paying over 10%.

SafeCharge reveals research urging fintech innovation for marketplace payments (SafeCharge), Rated: A

According to a study from the Ecommerce Foundation, almost 40% of the world’s online retail market will be controlled by marketplaces by 2020.

This difference creates complex challenges:

  • Regulation – The impending Payment Services Directive 2 regulation requires certain marketplaces which retain funds between a seller and a buyer to hold a payment institution license.
  • Seller Onboarding – Manual processes and Know Your Customer regulatory requirements create friction, which discourages sellers from registering with marketplaces.
  • Payment Checkout – A critical component for any business. Localisation, buyer experience, payment method offering, all must be optimised for conversion.
  • Split Payments – Marketplaces need to split transactions between multiple parties, both for marketplace commission and where a single checkout experience involves multiple sellers.
  • Seller Settlement – Marketplaces are in competition for sellers. Sellers demand frequent settlement of funds, often daily, in their local currency, and using a local payment method.
  • Unique Fraud – Marketplaces face new forms of fraud unique to the sector such as ‘collusion fraud’ where fake buyers and sellers facilitate the sale of non-existent goods with stolen payment cards.

The pros and cons of P2P lending (Bridging & Commercial), Rated: B

Peer-to-peer platforms have revolutionised lending, allowing retail investors to benefit from what was once the preserve of financial institutions and high-net-worth investors.

Pros

1.    Potential returns are excellent, and much higher than can be achieved with dividend yields.
2.    Returns are fixed, and don’t fluctuate like returns from equity investments or the stock market.
3.    Lenders are not charged fees, so the amount stated is the net amount investors receive.
4.    Platforms no longer have to deduct tax at source, so investors will be paid gross and account for their own tax.
5.    Investment terms are typically under 12 months.
6.    Legal charge holders will be paid out as a priority before any owners/equity shareholders.
7.    It is FCA regulated, so platforms must be transparent and are legally obliged to be upfront about risks. Platforms must have contingency plans in place, such as a significant financial buffer.
8.    The launch of the Innovative Finance Isa means peer-to-peer loans can be held within an Isa, so returns are tax free.

Cons

1.    While regulated by the FCA, peer-to-peer lending is not covered by the Financial Services Compensation Scheme, so losses are not underwritten by the government.
2.    Peer-to-peer loans are likely to be tied-in until the borrower has repaid, unless the platform can find a buyer.
3.    Loan periods are short, but investors may have to wait for the loan to complete before they start earning interest. One alternative is for investors to lend money to the finance company and get a fixed return for a fixed period. The rate will be less, but interest will be continuous, so investors can end up with approximately the same return, without having to select individual loans to invest in.
4.    If the borrower does not repay on time, investors need to wait until they have repaid – although they should continue to earn interest in the meantime.
5.    If the borrower defaults, the property will have to be repossessed. If that’s the case, there could be delays of at least several months. The property may not achieve a sale price that allows lenders to be repaid all their capital and/or the interest owed.
6.    While investors will receive a fixed rate of interest that may be higher than average dividends, they will not benefit from capital growth.

China

Many P2P Lending platforms attract investors by increasing interest rate  (Xing Ping She Email), Rated: AAA

Recently, in the background of surging market capital interest rates, the yield of money fund and bank financial products both rose markedly. P2P lending institutions no longer have the advantages in interest rates. In order to attract investors, there comes a new wave of raising interest rates in P2P lending industry.

On June 21st, Tuandai launched a notice of welfare activity, raising the interest rate of product “Futoubao 36”by 0.5%-1.4%.

Recently, Yirendai issued several promotion activities of raising rates, such as rebating 4% for inviting a new user.

On June 17th, JiMu Box announced from that day to June 23rd, if a customer successfully invited new user to invest in the platform, the inviter would receive a coupon of 6% growth in interest rates, in addition to the regular cash coupon and interest rate hikes.

Besides, Ma Tianshuai, the founder & CEO of JieYue United, said they also operated a welfare feedback activity of raising interest rates during the company’s 4th anniversary on June 18th.

Cash and carry (Breaking Views), Rated: A

A Hong Kong Monetary Authority study shows the former British colony is oddly cash-intense. The average person held nearly $6,000 in 2014 – second only to Switzerland.

The first licenses for mobile-wallet apps were granted to Apple, Android Pay, Tencent and others in 2016. Alibaba’s Alipay launched its localised app in May, more than a decade after starting on the mainland. Twenty years after Hong Kong’s reunification with the mainland, in consumer-facing fintech at least, the city looks a decade behind.

European Union

German Real Estate Crowdfunding Market Booms (Crowdfund Insider), Rated: AAA

The road ahead for the German real estate crowdfunding market has been cleared. The threat of being excluded from the scope of application of the crowdfunding regulation, the Kleinanlegerschutzgesetzt (KASG), was taken off the table last month. The crowdfunding market can move ahead on its exponential growth path.

Michel Harms tracks the overall crowdinvesting industry through his crowdfunding barometer and his aggregation site crowdinvest.de which lists all crowdinvesting projects available in Germany. According to his reports, real estate accounts for 80% of the crowdinvesting market. In 2016, the market doubled in size to reach €40 million. In the first five months of 2017 alone, 51 real estate projects raised €52 million. One can reasonably expect the market to triple in size by the end of 2017.

Michel Harms tracks the overall crowdinvesting industry through his crowdfunding barometer and his aggregation site crowdinvest.de which lists all crowdinvesting projects available in Germany. According to his reports, real estate accounts for 80% of the crowdinvesting market. In 2016, the market doubled in size to reach €40 million. In the first five months of 2017 alone, 51 real estate projects raised €52 million. One can reasonably expect the market to triple in size by the end of 2017.

Exporo was incorporated in 2013 by Simon Brunke, CEO, Björn Maronde, Julian Oertzen and Tim Bütecke.

Zinsland was founded in 2014 by Carl-Friedrich von Stechow, CEO, Dr. Stefan Wiskemann and Moritz Eversmann.

Bergfürst was started much earlier than its competitors, in 2011, as an equity crowdfunding platform launched by Dr. Guido Sandler, CEO, and Dennis Bemmann.

Next to the three leaders, around ten new entrants try to carve a market for themselves:

  • Zinsbaustein, launched in 2016, is the number 4 with 8 projects financed to the tune of €9 million.

Others have only financed a few projects so far:

  • iFunded started in 2015 and open for business in 2016, iFunded intends to attract German and international investors who want to invest in Berlin. Its average size of projects is €800K.
  • Home Rocket, started in 2015, Home Rocket operates from Austria but addresses both the German and Austrian investors and developers.
  • immofunding started in 2015, also operates from Austria.
  • Renditefokus started in 2015.
  • ReaCapital started in 2017.

LendIt Partners with Startupbootcamp FinTech For Its PitchIt Europe 2017 Competition (PR Newswire), Rated: A

LendIt, Europe’s largest global show in lending and fintech, today announced its Pitchit @ LendIt contest partnership with Startupbootcamp FinTech for PitchIt @ LendIt Europe 2017, a leading platform for fintech startups who can earn mentorship, endorsement and exposure to leading institutions, investors & press. Online applications also officially opened to qualifying fintech startups.

This year’s competition is slated to see hundreds of applicants all vying for a prestigious spot in the finals, and a chance to present on the keynote stage in front of over 1,000 members and high ranking executives from the global fintech industry at LendIt Europe (9-10 October, Intercontinental O2 Hotel, London.)

This year’s exclusive PitchIt Contest Partner will be Startupbootcamp FinTech, the leading global FinTech accelerator focused on innovation for the financial services industry. The finalists will present to a panel of influential VC judges and mentors, including those from Balderton Capital, Commerz Ventures, Thiel Capital, Index Ventures and Target Global VCs,and other high profile investors in the fintech capital of the world, London.

To apply to PitchIt @ LendIt Europe competition, firms must meet the following criteria:

  • Must be a fintech company
  • Two or more full-time co-founders/employees
  • 2-10 full-time employees
  • Less than 3 years in business (companies founded before 2014 not eligible)
  • Raised less than 4 million GBP since launch date
  • Must have a professional business website
  • Everyone registering on behalf of a specific company must have an email with that company’s domain
  • Past PitchIt Europe finalists are ineligible
International

Alternative Lenders Spread Their Wings Internationally (deBanked), Rated: AAA

As alternative lending gains global traction, a growing number of U.S-based alternative lenders are exploring international growth, with large companies like OnDeck, Kabbage and SoFi leading the way.

To be sure, international expansion requires extensive time, money and regulatory know-how, and some U.S. alternative lenders may never reach the critical scale to be able to compete effectively. Nonetheless, as globalization proliferates, industry observers expect that additional forward-thinking companies will push beyond the limits of their current geographical borders.

Affirm—which works with more than 900 retailers and recently announced that it had processed its 1 millionth consumer installment loan—has focused on domestic growth so far, but the company is now considering a number of options for international expansion, Metcalf says.

Europe, for instance, has seen substantial growth over the past few years, with the U.K. leading the way in alternative finance. It has four times higher volumes in aggregate than the rest of Continental Europe, according to a 2016 report from KPMG and TWINO, one of the largest marketplace lending platforms in Europe. (P2P consumer lending is the largest component of alternative online lending in Europe, capturing 72 percent of the total in the first through third quarters of 2016, according to the report.)

After the U.K., France, Germany and the Netherlands are the top three countries for online alternative finance by market volume in Europe, according to a September 2016 report by the Cambridge Centre for Alternative Finance.

Asian markets, meanwhile, show significant promise for alternative finance players to make their mark due to the sizeable population of digitally savvy consumers who are still largely underbanked. China is by far the largest market for alternative lending in Asia. It’s also the world’s largest online alternative finance market by transaction volume, registering $101.7 billion in 2015, according to the March 2016 Cambridge Centre for Alternative Finance report.

Although there are many possible international markets to explore, U.S. lenders have to tread carefully before planting roots elsewhere, observers say. Some smaller U.S. lenders may find domestic expansion easier and more cost-effective because of the time, regulatory and financial commitment that goes along with exploring international markets.

What’s more, foreign banks looking for alternative lending partners typically prefer to work with larger, more established players.

Within the past several years, OnDeck has begun offering small business loans to customers in Canada and Australia. Frequently Canada is a first step for U.S. companies that want to expand internationally because of the shared language and similarities between the economies, Young explains.

After the Canadian operation was successfully underway, the opportunity arose for the online lender to expand to Australia—which shares several similarities with the Canadian market.

U.S.-based alternative lenders also need to be careful to create products that fit the culture and needs of a particular market.

Take Kabbage, for example. The small business lender expanded into the U.K. in 2013, two years after its U.S. debut. But the company found that having its own small business lending business in the U.K. was too challenging for regulatory and capital reasons. It no longer offers new loans from this platform.

Instead, the funding company decided that a better global strategy was to license its technology to financial institutions in international markets a less capital-intensive, yet economically sound way of doing business.

Kabbage—which recently announced the establishment of its European headquarters in Ireland—has licensing arrangements with Santander in the U.K., Kikka Capital in Australia, Scotiabank in Canada and Mexico and ING in Spain.

For its part, SoFi has announced plans to expand to Australia and Canada this year. The company’s chief executive has also talked about European and Asian expansion in the future.

LendingClub, meanwhile, last November announced a significant partnership with National Bank of Canada and its U.S. subsidiary Credigy.

Amazon And The Future Of FinTech: Part II (Seeking Alpha), Rated: A

The model of the new information age is connectivity and this connectivity comes from building platforms that transcend industries.

But, let’s get back to the FinTech issue. In my previous post, I argued that Amazon, as well as Apple (NASDAQ:AAPL) and PayPal (NASDAQ:PYPL), has entered into the “payments” space and that this is their inroad into the banking field. And the payments space is definitely a “platform market.”

Now, we learn that a major European player in the payments space has actually received its banking license. Klarna is one of Europe’s largest financial technology groups, valued in 2015 at $2.25 billion.

And, now they have a banking license. But don’t expect mortgages from them right away. Expect “payment cards and accounts.”

In other words, they are building a platform that will transform banking, one that works through many different companies and industries. Is that what Mr. Bezos and Amazon are working on?

Global mobility: supporting your business (Relocate Magazine), Rated: A

Transferwise has become one of the world’s biggest fintech companies, valued at $1 billion with 700 employees.

Nilan offered a number of benchmarks for his company’s success since it was established in 2011 – its expansion from two to 200 markets, its ever-growing list of international HQs, its boom from 60 employees to 700 – but the one that’s made headlines most recently is the announcement that customers are now sending $1 billion per month using the service.

The threat of Brexit looms, however, and Transferwise is concerned about the impact it will have on the company’s ability to access talent.

Australia

Need a loan? Then ask a peer (Yahoo! Finance), Rated: A

Interestingly, a finder.com.au survey revealed that the majority of Australians think that a good credit score should come with perks. That is, 67% of people believe that a good financial history should mean better interest rates on products like loans.

Here are four things you need to know about P2P loans: 

When reviewing your options, keep a close eye on the fees involved to ensure that you’re not paying more than you can afford.

As P2P lending isn’t backed by a large corporation, do your due diligence by researching the reputation of the platform you’re thinking of signing up with. A quick way to do this is to check for a credit license.

P2P platforms typically offer lower loan amounts, so you may only be able to borrow up to $50,000 for a personal loan. This could be restrictive, depending on your loan purpose and the amount you need to borrow.

Once you’ve wrapped your head around the ins and outs of P2P lending, decide whether this is the right type of finance for you.

Canada

Alternative investing requires more transparency: survey (Benefits Canada), Rated: B

The survey, which polled 200 institutional investors and asset managers, found respondents cited transparency as the leading investment consideration, for both alternative investments (62 per cent) and traditional investments (62 per cent).

According to the survey, risk management is the most important driver for transparency in both traditional and alternative investments. Nearly three-quarters (73 per cent) of respondents said portfolio risk management was the most important element, while about half said regulatory requirements (53 per cent) and competitive considerations (43 per cent) were the most important elements.

Authors:

George Popescu
Allen Taylor

3 Ways Marketplace Lenders Can Expand Internationally

Funding Circle

The most successful online lenders frequently reach a point where they are faced with a question: Continue developing domain expertise over one’s geography or expand internationally? Last year, we covered in-depth the kinds of markets that online lenders can expand into in a three-part series (part 1, part 2, part 3.) Yet, when a company […]

Funding Circle

The most successful online lenders frequently reach a point where they are faced with a question: Continue developing domain expertise over one’s geography or expand internationally? Last year, we covered in-depth the kinds of markets that online lenders can expand into in a three-part series (part 1, part 2, part 3.) Yet, when a company makes a decision to expand, this still leaves a big question open: How will they do it?

Most marketplace lenders come to a three-pronged fork in the road: Expand by partnership, by acquisition, or by colonization.

Partnering into a Market

The first type of expansion is the most low-risk and the fastest to successfully undertake. A successful online lender looking at new geographies also faces a significant slate of new risks should they choose to expand without fully understanding the new market. If they partner with an existing player – whether another lender or an established financial institution – they mitigate a large part of this risk.

Partnering with a local company carries many benefits. A lender can instantly gain valuable insights about the new geography, such as the regulatory environment, credit and underwriting risks, and intensity of competition. They also gain a foothold through an established brand rather than having to build from the ground up in what may already be a fierce market. The drawbacks are that partnership is usually less lucrative for a lender: If they have to partner to enter a market, then they have to share in the gains from entering, and that often means making concessions back to the company they partner with.

 

Current Kabbage lending stats

Perhaps the industry king of expansion through partnership is Kabbage. Kabbage is an online working capital platform based out of Atlanta that has used partnerships to expand out of the U.S. to multiple geographies. In late 2015, they partnered with Spanish bank ING to begin offering €100,000 loans to Spanish small businesses. This also came with an equity investment from ING into Kabbage.

As Kabbage CEO Rob Frohwein commented, “As financial institutions embrace new lending technology, we see that platforms like Kabbage are interesting for them to provide a superior experience to their customers. We are incredibly proud of our partnership with ING, and most importantly, we are thrilled to serve the small and medium businesses powering the economy in Spain.” Kabbage also used an investment from SoftBank – a Japanese investment bank – to expand into the Asia Pacific region by first gaining a foothold in Australia, where it licensed its technology under the label “Kikka.”

Most recently, Kabbage partnered with Santander bank in the UK. As Kabbage COO Kathryn Petralia commented, “Kabbage’s business growth throughout Europe, the Middle East, and Africa has been exponential over the last several months.”

Expansion via Acquisition

Maybe the second most popular way for marketplace lenders to expand into new markets is by purchasing an existing player that already has a strong foothold in the market they want to enter. A marketplace lender that makes an acquisition is usually signaling a more committed desire than a tentative partnership expansion. This usually happens after significant vetting, due to the heavy costs incurred by the purchasing company when they buy out the local player, normally for a mix of equity and cash.

The benefits of acquiring a domestic competitor in a new market are similar to those that a marketplace lender achieves through partnership, with one big addition: They are able to maintain control over how their product is distributed in that new geography, and retain all the profit and benefits from offering it.

One of the most prominent examples of continued international expansion through acquisition comes from Funding Circle, which was originally founded in the UK. In October 2013, the marketplace lender to small businesses expanded into the US, purchasing San Francisco-based Endurance Lending Network. This came in conjunction with a $37 million equity raise for the firm. Then, in September 2015, Funding Circle continued its expansion into Germany, the Netherlands, and Spain with the acquisition of the Rocket Internet startup Zencap, which came following a $150 million round.

It’s possible to see the positive impact this continued expansion has had on Funding Circle’s ability to grant loans in the chart below. Loan count doubled between 2012 and 2013, and again between 2013 and 2014, as the firm expanded its U.S. operations. Likewise, though Funding Circle’s originations in continental Europe have ramped up more slowly, it maintained a similar pace of growth through the end of 2015.

As Funding Circle CEO Samir Desai mentioned following the Zencap acquisition, “Our vision is to help millions of businesses across the world sidestep the outdated and inefficient banking system and borrow from investors. Today’s news is the next exciting stage of this journey. By coming together, we combine Funding Circle’s leading position in the UK and U.S. with Zencap’s deep understanding of local markets to create the first truly global marketplace lending platform.”

Colonizing a New Geography

The last expansion method is the most controversial: Going it alone. Marketplace lenders can choose to “colonize” new geographies through a native expansion, bringing their brand clout and international expertise to a different market themselves, without any partnerships or acquisitions. This is a favorite method in many tech sectors, such as online commerce or the sharing economy. However, it has shown mixed results in the past, such as Uber’s painful exit from China due to competitive pressure from rival Didi Chuxing.

One of the more prominent examples of expansion through colonization comes from online lender OnDeck, which in 2015 separately expanded its U.S. operations to Canada and Australia by establishing new offices in both geographies. In Canada, OnDeck’s entrance was facilitated by the fact that it was entering a relatively uncompetitive market, with Lending Loop the other established lender in the region. Australia, conversely, is a relatively mature market with a host of other online lenders such as ThinCats, SocietyOne, and RateSetter – a UK peer-to-peer lender that expanded into Australia the same way as OnDeck.

As OnDeck CEO Noah Breslow commented upon expansion, “Australia represents an exciting growth opportunity. Similar to the U.S. market, in Australia, we see a huge gap between small business financing needs and the availability of capital from traditional sources. There is significant unmet small business lending demand in Australia, and we believe our online platform is well suited to address the capital needs of Australian small businesses.”

RateSetter made similar comments when they expanded via colonization. As founder Rhydian Lewis noted, “Australia’s financial system is ripe for disruption – for too long, banks have been offering below-par savings and loan deals in the absence of real competition.”

Success in going it alone depends on many factors, such as the ability to scale quickly in an already competitive market, and the ability of a company to leverage an international brand in a way that disrupts loyalty to local ones. This normally means that colonizing lenders have to be very well-capitalized – having raised a lot of equity – to support not only their existing operations but also their more nascent, experimental geographies. Time will tell if the examples above pan out for OnDeck and RateSetter.

Author:

Written by Nik Milanovic

International expansion in lending, part 2

International expansion in lending, part 2

(Read part 1 here) International expansion is critical to the ongoing development and growth of marketplace lending businesses, especially those based in smaller markets. As Dr. Gal Aviv, the CEO of BLender, put it, “Offering multi-national P2P lending has been our vision since BLender’s establishment. Since our Israeli launch in 2014, we have built the […]

International expansion in lending, part 2

(Read part 1 here)

International expansion is critical to the ongoing development and growth of marketplace lending businesses, especially those based in smaller markets. As Dr. Gal Aviv, the CEO of BLender, put it, “Offering multi-national P2P lending has been our vision since BLender’s establishment. Since our Israeli launch in 2014, we have built the foundation, infrastructure and technology to enable BLender to operate in the global market, so we will be able to face operating, cultural, technological, regulatory and taxation challenges.”

This expansion is usually easier said than done – as referenced above, there are significant operational hurdles to expanding the same business model between two distinct countries. There are 1,000’s of marketplace lending services around the world (1,500 in China alone) – and it is unclear how many of them operate across borders. Some of the most notable lenders that have expanded internationally are Bondora (Finland, Spain, Estonia), ThinCats (UK, Australia, Poland), and Funding Circle (UK, US, Germany, Netherlands, Spain.)

Yet none of the lenders who ultimately work across borders begin their lives as international marketplaces. To choose where to expand, they have to carefully consider a variety of factors, the most important of which we laid out in our first article:

  1. Credit metrics
  2. Legal and regulatory environment
  3. Online penetration and trust
  4. Current banking failure

Working down our list of criteria, we can create a matrix of which countries score high in each category. We’ll leave out countries like the US or UK that already have highly developed marketplace lending industries, and focus on those most likely to be ‘next.’

Orchard’s online lending ecosystem map for the US and the UK – both highly-developed markets

Credit infrastructure

What countries have good credit infrastructure? Where is it the safest to lend? This is maybe the most difficult question – so many factors, from how to take liens on assets to inflation volatility, combine to create a good credit environment.

One high-level metric lenders can look at is the credit rating of the country as a whole. Bureaus such as Moody’s and Fitch provide frequently updated national ratings, from AAA (best) to C and DDD (worst.) These metrics are a good shorthand for how stable the country is (and whether it can make good on its national debts), but provide little information on how stable the credit market is within the country. For instance, Moody’s can tell you not to expand into a DDD country in the midst of a civil war, but not how to differentiate between the variety of B or A countries.

Fortunately, as part of its Doing Business Project, the World Bank in 2013 began tracking a novel metric: the depth of credit information index from 0 (low) to 8 (high.) This index ranks countries by how effective their domestic credit bureaus are at collecting actionable credit information. A similar ranking that can be used here is the World Bank’s ease of providing credit index.

Global depth of credit information index – darker countries have better credit bureau data available for underwriting, lighter countries have less data

Unsurprisingly, some of the highest-scoring countries tend to be those with already-developed marketplace lending ecosystems: the US, Germany, New Zealand… However, there are also many frontier markets that score highly: Armenia, which has “improved access to credit information by making it mandatory to gather and distribute information from financial institutions and utility companies,” and Rwanda (neither of which have native peer to peer lenders), Zambia (recently targeted by Zidisha, an MFI), Saudi Arabia (a possible target for Liwwa next door)… Though these markets are small compared to more mature, western economies, their wealth of public underwriting information makes them attractive targets for expansion.

Legal and regulatory environment

A second criterion relevant to a marketplace lender is the strength of the legal environment in a country they are expanding to. Can they reliably enforce repayment contracts with their borrowers? Do borrowers have robust bankruptcy protection? Can investors be held accountable for their commitments?

Similarly, its credit and underwriting infrastructure rankings, the World Bank has also developed a useful index for comparing countries across what it calls the “ease of doing business.” This ranking takes into account some factors not directly relevant to a prospective marketplace lender, such as the ease of dealing with construction permits or the level of entrepreneurial activity in the country.

However, the ranking also contains many relevant criteria:

  1. Protection of minority investors in a business (the debt and equity investors on a platform.) This gauges whether investors can legally recoup losses from, among other things, default and fraud. Some of the highest-scoring countries are not those you’d expect: Kazakhstan (3rd), Georgia (7th), Slovenia (9th)… the US is ranked comparably quite low, at 27th.
  2. Enforcing contracts. This measures the ability of a marketplace lender to ensure that both its borrowers and investors make good on their payment and repayment commitments. It reflects the time and cost needed on average to resolve a commercial dispute in court. Here again, many OECD high-income countries score highly, but eastern Europe also does surprisingly well, including Lithuania (6th), Croatia (7th), and Hungary (8th.)
  3. Resolving insolvency. The risk of bankruptcy exists on both sides of the marketplace – insolvent investors may not be able to make good on ongoing lending commitments, while insolvent borrowers cannot afford repayment. This ranking measures current domestic insolvency law and the bottleneck in pursuing claims against bankrupt parties. Some of the notable standouts here include Slovenia (12th), Cyprus (16th), and Thailand (23rd.)

Overall, outside of the mature marketplace lending geo’s (western Europe, the US, and Oceania), the markets poised for the next great expansion of peer to peer lending from a legal and regulatory standpoint lie in eastern Europe, central Asia, and the tiger economies.

Online penetration and trust

A lender is only as successful as the market it addresses. If a market is open, accessible, trustworthy, and popular, any lender that opens up shop will be able to quickly attract good customers and generate loans. In the case of banks and antiquated lenders, this meant a well-situated physical location in a prime, safe foot traffic area. For marketplace lenders, it means countries with high internet penetration and consumer trust.

Internet penetration varies widely globally and is a critical minimum requirement to establishing a base for marketplace lending. A variety of services – Nielsen, International Telecommunications Union, GfK – offer a consolidated look at which countries perform best in terms of how developed their internet ecosystems are. Ranked against each other, it’s immediately apparent that small, rich countries tend to have better internet penetration. However, these countries are usually too small (in terms of population) or too over-developed (in terms of an online lending ecosystem) to present attractive international expansion targets.

Interesting markets that fall outside of the mature lending ecosystems include:

  1. The middle east:
    1. Bahrain (18th in global rank) with a 90% internet penetration, 99% literacy, and a 1.3m population. (Its neighbor, the UAE, is home of the p2p lender Beehive.)
    2. Qatar (27th in global rank) with an 85% internet penetration, 96% literacy, and a 2.1m population.
  2. Eastern Europe:
    1. Kosovo (40th in global rank) with a 76% internet penetration, 92% literacy, and a 1.9m population.
    2. Slovakia (37th in global rank) and the Czech Republic (48th) – new markets, but already home to such lenders as Bondora, Finbee, Estateguru, Zlty Melon, Symcredit, and Zonky.

Current banking failure

Finally, a defining characteristic for an attractive international market is the robustness – or lack thereof – of the current banking system. If traditional lenders struggle to give credit to businesses and consumers, it paves the way for online lenders to establish a fast, firm toehold in those markets.

This characteristic is somewhat harder to measure, but one good heuristic that can be used is the average interest rate that a country’s bank offers its borrowers. Countries with higher commercial prime interest rates, which present worse borrowing environments, reflect a higher degree of risk in their target markets. However, this also provides an opening for marketplace lenders to undercut traditional lenders by introducing lower risk-adjusted pricing.

A snapshot view of countries with the most forbidding available interest rates shows that banks in underdeveloped economies, such as Madagascar, Malawi, and Laos, tend to offer high rates on loans (from 25% to 61% – compared with below 5% in the US.) Other countries working through turbulent recessions, such as Argentina and Brazil, suffer from similar high rates (from 26% to 33%.)

These astronomically high commercial prime rates demonstrate that credit is unstable in these geographies. This should be taken as a warning to any marketplace lender looking to expand to the region – defaults may be high, or credit indicators may be unreliable. However, for an online lender that can reasonably price risk on its loans or leverage new underwriting data unavailable to banks, these countries can also present enticing targets.

The second and third tiers

As the final installment of this post series on international marketplace lending expansion, we’ll look at which countries do not present attractive markets for near-term expansion. These fall into the 2nd (Dissimilar) and 3rd (Foreign) tiers discussed in the first installment. To better understand why they are not attractive markets, it’s important to also evaluate how and what they could change to improve their standing in the future. This will be the focus of our next post.

Author:

Nik Milanović