Monday November 28 2016, Daily News Digest

orchard quarterly originations report

News Comments Today’s main news: Orchard’s quarterly consumer lending report. Today’s main analysis : Why Lending Club should become a bank sooner rather than later. Are there any good reasons to invest in FinTech? Today’s thought-provoking articles: China recovers $ 1.5 billion in online lending fraud case. Why some SMEs are not happy in Hong Kong. United States […]

orchard quarterly originations report

News Comments

United States

United Kingdom

European Union

Australia

  • Why invest in Fintech? AT: “This is an interesting analysis and shows that P2P lending is the top sector within FinTech. While still swaying toward pessimism, it brings out some of the positives in the industry. There is still growth in the sector despite some of the recent fallbacks. FinTech operators should not lose hope because of one bad year.”

China

Canada

MENA

United States

Consumer Unsecured Q32016 (Orchard Platform Email), Rated: AAA

Key Insights

  • Origination volumes continued to fall in Q3, down approximately 21% from Q2 origination volume and down just over 50% from peak originations in Q4 2015. Following years of consistent quarter-over-quarter increases in originations, we hav eseen 3 consecutive quarters of declines in 2016. The Q3 change represents a smaller drop than the one experienced in Q2, and may indicate that these declines are beginning to taper off. We’re not ruling out an uptick in originations next quarter as confidence and capital returns to the origination platforms.
  • 2014 vintage charge offs have increased more steeply than in recent years, aligning closely with rates we saw in 2011 and 2012. While some of this trend can be attributed to deteriorating loan performance, most of it is due to the continued growth of subprime loan origination platforms. These platforms charge off at higher rates but offer investors increased interest rates as compensation for this additional risk. Early indications show 2015 vintage performance on the same track as the 2014 vintage.
  • After increasing 96 bps in Q2, borrower rates fell 79 bps in Q3, primarily driven by decreases in origination volumes for subprime originators in this period.

Lending Club should become a bank as fast as it can (FT Alphaville), Rated: AAA

The fragility of “true” marketplace lenders like Lending Club was displayed for all to see earlier this year when market conditions suddenly shifted, originations plummeted and a scandalinvolving Lending Club’s CEO hit the papers. Marketplace lenders (sometimes referred to as P2P or online lenders) transfer loan revenue and credit risk to loan investors at origination, so they earn nothing from loans held on balance sheet.

The takeaway? Lending Club should become a bank as fast as it can in order to reap the economic benefits of its loans and secure a more stable funding base. And, in the meantime, there are changes it can and should be making to increase resiliency and create the foundation for a sustainable and profitable business.

According to my simplified view, Lending Club would need an annualised net income run rate of $329m (at a 7x P/E) by Q3 2018 to justify its current $2.3bn valuation.

If Lending Club were able to quadruple originations to $8bn a quarter by Q3 2016, with the same aggressive assumptions, quarterly net income would be $93m. That would translate into a market cap of $2.6bn at a 7x P/E, which is around 13 per cent above the company’s current market cap, although the difference amounts to nothing for shareholders absent dividends in the interim.

If Lending Club were able to quadruple originations to $8bn a quarter by Q3 2016, with the same aggressive assumptions, quarterly net income would be $93m. That would translate into a market cap of $2.6bn at a 7x P/E, which is around 13 per cent above the company’s current market cap, although the difference amounts to nothing for shareholders absent dividends in the interim.

Online lending platforms yet to prove their worth (Financial Times), Rated: A

It has not quite turned out like that. After years of rapid growth, the industry in the US has gone into reverse, as concerns over the quality of the assets pumped out by the likes of Lending Club, Prosper and Avant have spread a chill across the sector.

New data from Orchard, a technology and data provider based in New York, shows that volumes across US consumer-loan platforms slipped for a third successive quarter between July and September, dropping 21 per cent to $1.86bn. That was less than half of the peak in the fourth quarter last year.

Through measures such as these, Lending Club says it has lured back almost all of the banks and hedge funds that were active earlier in the year.

But buyers, rather than sellers, still have the whip hand, says Matt Burton, chief executive of Orchard. He notes that platforms have been offering discounts for volume, and sometimes sweetening deals with warrants and preferential servicing fees.

Lending Robot Files to Form Pooled Investment Fund (Crowdfund Insider), Rated: A

Lending Robot, the robo-advisor geared towards marketplace lending assets, has filed a Form D 506cwith the SEC indicating its intent to create a pooled investment fund. According to the filing, the minimum investment accepted will be $100,000.00 with no targeted max size of the fund.

United Kingdom

17 firms authorised to manage Innovative Finance Isas (Bridging&Commercial), Rated: AAA

A total of 17 firms have been authorised to manage Innovative Finance Isas (IFIsa) by HM Revenue and Customs as of 26th October 2016.

     Company name                                                                        Types of business

  • Abundance Investmnt Ltd                                                       Peer-to-peer
  • British Pearl Ltd                                                                        Property crowdfunding platform
  • Crowd2Fund                                                                              Crowdfunding platform
  • Crowdcube Capital Ltd.                                                           Crowdfunding platform
  • Crowd for Angels UK                                                                Crowdfunding platform
  • Crowdstacker Limited                                                              Peer-to-peer
  • London House Exchange (Property Partner)                       Property crowdfunder

Crowd2Fund was one of the first firms to offer the IFIsa and revealed that it had seen a growth of investors in the past six months.

(NOTE: This list represents only crowdfunding and P2P firms on the list. For the complete list, click the link.)

UK Government Commits To Invest £500,000 A Year In FinTech (PYMNTS), Rated: A

The U.K. is already a hotbed of FinTech startups, but the government is getting behind it in a bigger way, committing to invest £500,000 a year into financial technology companies.

According to a report, the U.K. government is also gearing up to launch a network of regional FinTech envoys as an effort to enhance the country’s status as a leader in FinTech. The funds, noted the report, will come out of the Department of International Trade.

European Union

ECrowd! raises more than €300K in second round of funding (Finextra), Rated: A

The debt crowdfunding – also known as crowdlending- platform ECrowd!, specializing in sustainable investments, has closed an investment round of € 307,900 through the online investment platform Crowdcube (equity crowdfunding).

This is the second round of funding which ECrowd! has closed in just over a year. In all, 135 private investors have participated in the round in exchange for 10.24% of the capital of the company. The largest investment was € 76,000, coming from a private professional investor.

Australia

LONGREAD: Why would you invest in fintech? (Bluenotes), Rated: AAA

As it stands today, fintech to date is not innovative or transformative enough and investment dollars are not sufficient to build a world-leading financial-services breakthrough.So let’s analyse the decimators. The World Economic Forum’s Cluster of Innovation Model provides one view of fintech and breaks the market into 11 major sectors and 33 market segments as shown below.

Total Fintech investment from 2009 to 2015 totalled $US43.9 Billion, including Venture Capital(VCs) and other investors such as private equity and crowd funding.

So let’s analyse the decimators. The World Economic Forum’s Cluster of Innovation Model provides one view of fintech and breaks the market into 11 major sectors and 33 market segments as shown below.

The key question is whether this level of investment is sufficient for major disruption. Uber, for example, has raised $US11.45 billion in funding and debt in 14 funding rounds since March 2009 and has had some success in some taxi markets – markets much smaller than financial services.

Total fintech investment by VCs from 2009 to 2015 is $US31.3 billion while total VC investments over same period is $US476.4 billion. Therefore, fintech is only 7 per cent of all VC investments – it is not a dominant category.

The major fintech angel-investing and start-up categories are:

Peer to Peer Lending: Lending to consumers using online, mobile and social media that matches lenders directly with borrowers.

SME and business lending: Mobile, online and social media lending services targeted at small-to-medium businesses.

Student loans: Direct lending to students using mobile, online and social-media channels.

Point of sale/online payments: Tech services targeting online payments, point of sale payments and related services .

Crypto currencies: Cyber or digital asset designed to work as a currency or a value exchange.

Digital banking: Retail banking using social media, mobile and web based services often supported by tools and rewards e.g. budget tools.

Local and international remittances: Remittances services for local person-to-person payments and international transfers using social media, mobile and the web

Wealth/investment and related tech: Investment and pension products using mobile, social media and the web.

Insurances and tech: Insurance and tech services using web, mobile and social media.

The leading segment is P2P Lending with $US5.2 billion followed by three segments – SME lending, POS/online payments and digital banking.

It is significant these nine segments total 67 per cent of fintech investment. It is likely therefore any major disruptor will emerge from these segments.

Fintech’s first decade is high on hype and spin but very low on delivering its ‘vision’ of a total disruption of financial services.

The modest level of investment to date – $US43.9 billion – is not enough to create the next financial service giant.The P2P example is salient. Launched when money was cheap, the sector has realised it is not quite easy to build a billion-dollar business.

China

China recovers over $ 1.5 billion of assets in online lending fraud case (Reuters), Rated: AAA

China has recovered more than 10 billion yuan ($1.5 billion) of illegal assets since launching a fraud investigation into an online lending platform, the official Xinhua news agency quoted the Beijing public security bureau as saying on Wednesday.

China’s police have seized nearly 300 million yuan in cash, 187,000 grams of gold, as well as real estate, jewelry, stock equities, luxury cars, and helicopters from online peer-to-peer (P2P) platform Ezubao, Xinhua said.

Why many SMEs are unhappy in Hong Kong (The Asset), Rated: AAA

One-in-five small and medium-sized businesses (SMEs) in Hong Kong are dissatisfied with the availability of finance and 57% of SMEs rate highly the importance of their main financial services provider in understanding how theirbusiness works.

Overall, only 20% of SMEs are using external financing sources such as bank loans, leasing, private equity and crowd funding. The bulk of funding for most Hong Kong SMEs are from the companies’ retained profits, which account for 53%, followed by savings (10%) and bank loans (8%). Bibby Financial analysts say that the most common avenue for SMEs to get bank loans is to pledge property or cash deposits as collateral. This explains why only a small proportion of SMEs get financed by banks or externally, as most of them lack excess assets for collateral purposes. Moreover,the research found thatreceivables financing accounts for just 2% of funding in Hong Kong, compared with 13% in the US. Bibby Financial analysts believe the significant gap may stem from Hong Kong SMEs’ lower awareness of factoring and similar trade financing tools, which are not yet common in the market where there is considerable room for growth.

WeiyangX Fintech Review (Crowdfund Insider), Rated: A

On November 15th, JD.COM announced it would transfer/sell all the shares it held in JD Finance.

On November 17th, Yonyou Network Co., Ltd announced it was jointly launching Zhongguancun Bank, which is the first private and digital-centered bank in Beijing, with ten other companies.

However, Gregory D. Gibb, co-chairman of Lufax said in a recent interview that robo-advisors in Chinese financial service market had yet matured.

The year of 2015 is regarded as a milestone of China’s equity crowdfunding industry—Internet giant Alibaba, JD.COM and 360 were all targeting this emerging market. In spite of the thriving prospect, the industry is still faced up with a number of problems:

  1. No special laws for industry regulation;
  2. Constrained by only two main profit models: commission fees and service fees;
  3. Filled with fund-raisers with high project risk;
  4. Non-professional or non-accredited investors with high possibility of blind investment;
  5. No general standard for funding project valuation;
  6. High level of information asymmetry;
  7. Difficulties in equity exits;
  8. Not sufficient attention attached on fund custody.

The P2P lending industry has experienced tremendous growth in the past years, yet only a few managed to be profitable. This is the same situation with China, which is now the largest P2P lending market in the world. Xue Hongyan, senior analyst at Suning Institute of Finance, said:

”According to public information, only 1% of the 2154 Chinese P2P lending platforms have managed to be profitable.”

Making P2P firm globally respected (China Daily), Rated: A

At the time of this interview, Tang Ning, founder and CEO of CreditEase Corp, one of China’s leading peer-to-peer or P2P lending and wealth management firms, was busy with his preparations to attend the Asia-Pacific Economic Cooperation or APEC Economic Leaders’ Meeting in Lima, Peru, this month.

He became the pioneer of P2P lending in China when he founded CreditEast in 2006. Under his stewardship, CreditEase has grown rapidly and has 100 billion yuan ($14.7 billion) in assets under management now.

Ten years on, CreditEase has four branches in the United States, Israel, Singapore and China’s Hong Kong. Tang visits the US up to three times a year to teach at Harvard University and Stanford University as well as interact with financial services industry leaders and venture capital institutions.

CreditEase Corp has set up the Fintech Investment Fund totaling $1 billion, half of which will be invested abroad.

QuantGroup closes $ 73m Series C led by Sunshine Insurance (Deal Street Asia), Rated: A

Fintech startup QuantGroup has closed a RMB500 million $73 million) Series C financing round led by Sunshine Insurance Group Corporation, Fosun Capital, Guosen Hongsheng Investment Co., Ltd., and other undisclosed investors.

QuantGroup, which operates via QuantGroup.cn, provides online financial services including credit-based consumption and IOUs. It previously raised an undisclosed series A funding round from Fosun Kinzon Capital, Banyan Capital and China Grow Capital and a series B round from Zhixin Capital, Star VC, Oriental Fortune Capital and others.

Canada

First Digital Lending Platform To Be Granted Exempt Market Dealer Licence By OSC (Mondaq), Rated: AAA

On September 28, 2016, Vault Circle Inc. (Vault Circle) announced that it had received approval by the Ontario Securities Commission (OSC) to operate as an exempt market dealer in Ontario.

The proceeds raised by Vault Circle from accredited investors will be used by Lendified Inc. (Lendified), an affiliate of Vault Circle, to provide alternative financing options to small and medium sized businesses (SMEs) in Canada.

The OSC initially set out its expectations for businesses planning to operate “peer-to-peer” lending websites on June 19, 2015, by highlighting the concern that such online platforms and their related activities may trigger the application of dealer registration and prospectus requirements under the relevant provisions of the Securities Act (Ontario).

MENA

2016/17 TRN Report: Top Exit Strategies of Real Estate Crowdfunding Platforms (MENAFN.com), Rated: A

Real estate crowdfunding (RECF) landscape has transformed rapidly over the past four years. It is much easier to become a real estate investor or developer today, than it was a few years ago. Also, the industry is now open to everyone wherever they are. The developments are making the industry more accessible, transparent, attractive and rewarding.

Most crowdfunding legislations passed and enacted so far have diminished the requirements for real estate investing.

Exit strategies make it easier for investors to leave a deal without necessarily having to pull out their money. One exit strategy is allowing investors to sell their property shares to willing buyers on a secondary market. These strategies made it easier for RECF investors to liquidate their investments.

Authors:

George Popescu
Allen Taylor