What are the advantages of a “pure tech” company where everything is automated? Regulation makes it a product, like a hedge fund (except for some paperwork). On the one side, machine learning. On the other, automating everything from onboarding new clients to calculating value allocation. That pure tech company exists; it’s name is Lending Robot. […]
What are the advantages of a “pure tech” company where everything is automated? Regulation makes it a product, like a hedge fund (except for some paperwork). On the one side, machine learning. On the other, automating everything from onboarding new clients to calculating value allocation. That pure tech company exists; it’s name is Lending Robot.
What’s a Lending Robot?
The company has seven full-time employees and 6,500 clients ($120m AUM) who have been happy with their 2016 return average of 9% net, and more, after fees.
A few of their clients wanted to move into a less comfortable space and diversify more. The best individual investing is cheap and transparent, but not diversified. Flexibility lets people decide their own risk tolerance and time horizon.
Others wanted to build a portfolio of different loans, both consumer and business. Without a fund, that’s hard to do because funds are expensive and opaque. Liquidity is almost vintage, Lending Robot founder and CEO Emmanuel Marot said. “It’s like in 1920, you have to write a letter 45 days before the quarter to ask for funds.” But a fund is a one-stop solution that gives access to many platforms unavailable to the individual investor.
Technology provides the solution for both ends of the spectrum. Like a fund, money goes to Lending Robot, which acts as an institutional investor across four platforms: Lending Club, Prosper, Funding Circle, and Lending Home. The added real estate provides a high return, but is stable. Many investors like this because when you look for the default cycle, it isn’t the same for consumer and business credit, or real estate.
How Lending Robot’s Contracts Are Smarter
The Lending Robot Series has two sliders: conservative vs aggressive and short term vs long term. This provides four options based off where the sliders are allocated. People can mix it up and everything is automated with a time unit of one week. Books are published every Wednesday and new units of ownership are allocated.
Lending Robot publishes every loan and all the data for each loan, including credit scores.
“Not only do we display that,” Marot said, “but we publish it in a way that cannot be tampered with using blockchain technology. We create a hash code, a fingerprint, and that hash code is put at the top of the next Wednesday book. So we create a chain of documents that can’t be changed because if we change one character, the codes won’t change. And we notarize the hash code signature via a blockchain system, Ethereum.”
Essentially, this system creates a smart contract between Lending Robot and the investor.
Liquidity Without Volatility
Lending Robot seeks to provide more liquidity than what is available without increasing volatility.
“Reselling depends on other people,” Marot said. “To cash out in the usual way, you write a letter. In our case, you have a switch: invest or cash out. When you cash out, you receive in priority loan payments coming from investments.”
Lending Robot allocates 33% to 100% of cash flow payment from loans to investors in order to cash out. The time period varies.
“Just the time required to cash out is usually between 2-3 weeks for $200 thousand,” Marot said. “Best case scenario is one week. The worst case scenario could take 3-5 years.”
Marot said it could be 12 months with Lending Home.
The company also can use new money to cash out old investors who want out by allowing new investors to buy units from the old investors. But even if no new money comes in, cash-out can be achieved with the payments. Lending Robot charges a 1% management fee, no performance fees, and no redemption or other fees.
The Technology Behind Lending Robot
“With Lending Home, we work via API,” Marot said, “They have different APIs, and in this case, we are the investors. As a fund, we can access platforms that don’t have APIs for people to manage somebody else’s money. For Funding Circle, the minimum is a $50 thousand investment if you go direct. Via your fund, you can get exposure even if you don’t have $50 thousand.”
The allocation between platforms is accomplished with algorithms and statistical analysis. Instead of naming the platform for your investment, you name your investment style and the algorithm assigns it. For instance, you could say “conservative and short term.” The platform also wires money in and out automatically. Lending Robot can adjust cash out from one platform and put it on a second one.
“It’s stable right now,” Marot said. “There’s a tiny decrease in performance on Lending Club. Prosper seems stable.”
The change of credit bureau at Prosper, however, affected the company recently.
“We are in the process of training our algorithms to start using those new data points and parameters,” Marot said. “There will be a slight effect. It will take a couple of days of work. Funding Circle North America default was not great compared to the UK, so it’s too soon to tell.”
Marot sees the industry growing. Prosper is originating more loans than ever while some of the small players are going belly up.
“People in the middle are doing great,” he said. “SoFi and Lending Home are doing great.”
When asked why they were not working with SoFi yet, Marot said, “The problem with SoFi is that it’s long term. If we really want to provide good liquidity, we need shorter terms.”
To invest in the Lending Robot Series, investors have to be accredited.
“The minimum is a $100 thousand investment, so that’s not for everybody,” Marot said. “For the ones who can, they have no reason not to move (from a managed account to the fund). Even if the fees are more expensive (1% vs .045% today), we actually improved our models and have a more sophisticated loan selection. Using the best performance algorithms on the managed accounts is not our priority.”
What is Lending Robot’s priority is adding new platforms.
“Ideally, we are going to register as a 1940 Act company and be accessible to everybody,” Marot said. “It’s a long-term endeavor, maybe two years out. It takes $800 thousand to set up a 40 Act company, but if that gets you $80mil in AUM, that’s worth it. We still need to operate the company.”
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 Consumer Unsecured Q3 2016 Report: AT: “It’s not clear why loan originations have declined. The bright spot is the decline in Q3 is less than it was in Q2. Could Q1 2017 be a turnaround quarter? We’re hoping so, and anxious to find out.”
LC should become a bank as fasts as it can. AT: “From the looks of things, Lending Club isn’t the only MPL that might consider becoming a bank. As banks themselves start their own P2P platforms, the P2P platforms will have to diversify if they want to remain competitive.”
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.”
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.
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.
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, 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.
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.
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.
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 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.
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.
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:
No special laws for industry regulation;
Constrained by only two main profit models: commission fees and service fees;
Filled with fund-raisers with high project risk;
Non-professional or non-accredited investors with high possibility of blind investment;
No general standard for funding project valuation;
High level of information asymmetry;
Difficulties in equity exits;
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.”
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.
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.
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).
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.
