Introduction Online lenders are fast becoming the first port of call to avail loans and have been attracting strong funding interest from VCs and PEs. This demand for a digital lending experience has also forced traditional lenders like banks and credit unions to figure out the technology which will allow them to originate loans in […]
Online lenders are fast becoming the first port of call to avail loans and have been attracting strong funding interest from VCs and PEs. This demand for a digital lending experience has also forced traditional lenders like banks and credit unions to figure out the technology which will allow them to originate loans in a flexible yet scaleable way. They have two options: Buy or Build.
The build option can be extremely expensive and time consuming. But the buy option leads to a digital experience that is constrained, as you are dependent the features and functionalities of the vendor. Moreover, there is no way to really differentiate in the eyes of the digital customer. The solution is DigiFi: an open source tech platform which also allows you to customize along with a layer of additional services like hosting, support, platform implementation, etc.
DigiFi was founded by Joshua Jersey and Bradley Vanderstarren in 2014. It started its life as Promise Financial, an online lender, and raised $110 million in credit capital. It built up its own proprietary tech as there was no solution provider in 2014 offering an end-to-end loan origination platform that could automate the entire process. They sold off the tech to a large lending institution in 2017 and pivoted to DigiFi, one of the world’s first open source loan origination systems (LOS) which equips the lenders with flexible and modern tools to create unique platforms and digital experiences.
The company’s ideology is simple: That is to give other incumbent lenders, branches, credit unions, and startup digital lenders a platform where they do not struggle to build core lending capabilities from scratch. The company utilized the year 2017 and early 2018 to build up its platform, and started working with clients in late 2018. The company, with 10 people, has raised $4 million in equity to date and is based in New York.
The Market’s Pain Points and the DigiFi Solution
The ‘build or buy’ question creates a space for a platform that can bring together the qualities that fulfill the core origination requirements of the lending market and yet customize to give the client a competitive edge over other players. DigiFi empowers its clients to control the features and UI/UX so that it suits the specific needs of their unique client base. The existing tech vendors force the lenders into a rigid structure that limits flexibility to differentiate and provides the exact same experience for all sets of clients.
DigiFi gives the best of ‘buy vs. build’. Thus, DigiFi clients do not need to start from scratch and yet have the power to tailor the tech (buy and build, a win-win!). The company’s core platform is open source, and the source code can be accessed on Github. Revenue is generated from acting as a layer that provides hosting, support, platform implementation and customization services.
In crux, the platform of the company has features like complete lending CRM, decision engine for lending decisions, machine learning environment, and open-API architecture, and it can be configured for deployment across a range of lending verticals that include consumer, mortgage, small business, and commercial. DigiFi gives out the open source platform and its documentation for free.
The platform of the company is currently being leveraged by Sprout Mortgage, Mariner Finance, Constant Energy Capital, Greenwave, and Home Point Financial.
The Platform in Detail
The company provides its platform to the lenders for free and charges for additional services of configuration, setup, support, and running. Depending on the requirements of the client, DigiFi offers support plans for a monthly fee. The customization and platform implementation are charged on an hourly basis. The implementation time and cost varies. The implementation might take up to 4-8 weeks at a minimum and can take up to months if the lender needs to build out features from scratch. As compared to years and millions of dollars for building an in–house model, the DigiFi solution is usually in the 5-6 figure range.
As per the CEO of DigiFI, the incumbents are getting better with time as they have a lower cost of capital and existing customer base, positioning them to succeed. Getting the right tech partner on board is thus the critical piece to build a successful moat.
DigiFi offers a platform to lenders looking to tap the online lending market that not only equips them to get the best of the ‘buy vs. build’ system but also ensures full support and customization. It powers the lender with ready-made solutions, fast implementation, support and training, feature controls, unique customizations, flexible hosting options, and a contributor community. It provides the option to integrate all major data sources – Transunion, Equifax, Experian, MicroBilt, LexisNexis, etc. With over 45,000 development hours, DigiFi platform provides it clients a strong barrier to entry with complete configurability with other APIs, true scaleability with AWS, and integrated AI ML solutions.
News Comments Today’s main news: OnDeck files first ABS in two years. Funding Circle opens second Denver office. LendingClub settles with Massachusetts regulator. OFF3R founder to launch personal investment assistant. China Rapid Finance reports unaudited Q4, full year results. Today’s main analysis: Strengthen your fraud prevention strategy. (A MUST-READ REPORT FROM LexisNexis) Today’s thought-provoking articles: True lender litigation is […]
OnDeck rolling out new ABS. AT: This doesn’t signal that OnDeck is out of the water yet, but it is a good sign that they are well on their way to the beach.
Funding Circle opens second office in Denver. AT: Funding Circle made big news in 2013 when it entered the U.S. market. Its growth in the market has been competitive, so this launch of a new office in Denver is confirmation of its presence as a positive sign for the U.S. lending market.
True lender litigation is on the rise. AT: This is an excellent read. JD Supra looks at several recent true lender lawsuits and explains how they impact the future of alt lender and bank relationships.
Strengthen your fraud prevention strategy. AT: A strong focus on e-commerce, but there is a lot of relevance here for the online lending segment, and this must-read report addresses concerns there, as well.
The lender filed documents with the Securities and Exchange Commission for the upcoming deal on Tuesday. Deutsche Bank, Credit Suisse and SunTrust are leading the deal, according to the deal documents.
Funding Circle today announced it is expanding its U.S. operations with a second office in Denver, Colorado. With the move Funding Circle will look to hire around 290 new employees in the Denver area over the next two years to support the company’s growth.
LendingClub has settled with the Massachusetts banking regulator to the tune of $2 million over claims that the company made unlicensed loans in the state.
The state division of banks said that the San Francisco-based LendingClub made over 46,000 loans to Massachusetts consumers without a license since 2011, when it surrendered its small loan company license as a condition of a consent order. The division also said that it found additional unlicensed lending activity at Springstone Financial, a wholly owned subsidiary of LendingClub that has its main office in Westborough, Mass.
Over the last two years the financial industry has seen an uptick in litigation and enforcement actions aimed at banks and their non-bank lending partners. These actions have primarily challenged the validity of the bank partnership model that is used by many non-bank lenders to generate consumer and small dollar business loans.
Bank and Non-Bank Lender Partnerships
Although the structure of a bank and their non-bank lending partners can take many forms, the typical relationship involves the non-bank lender identifying loan opportunities for the bank, which then originates the loan and either immediately assigns the loan to their non-bank partner or another third-party. By partnering with banks, non-bank lenders avoid certain regulatory and licensing requirements in states where their bank partners operate. In return, banks are able to utilize their relationships with their non-bank lending partners to generate leads for additional loans.
In January 2017, the Colorado’s Uniform Consumer Credit Code (“UCCC”) Administrator, Julie Meade, filed two substantially similar complaints in Colorado state court against Marlette Funding, LLC, and Avant of Colorado, LLC. The complaints alleged violations of the UCCC based on the theory that Marlette and Avant were the “true lender,” not their bank partners, in a series of loans made to Colorado consumers, which loans contained interest rates that exceeded Colorado’s usury laws.
Broad Reaching Implications
The CashCall, Madden, and other related actions threaten the traditional bank partnership model that the financial industry relies on to originate, buy, sell, and transfer loans.
Legislative Fix Coming?
There is currently at least one bill pending in the House and Senate that, if passed, would address both the “true lender” issue and the consequences of the Madden decision.
The cost of fraud is sizeable for retail, eCommerce, financial services and lending organizations. Every $1 of fraud costs organizations in these industries between $2.48 and $2.82 – that means that fraud costs them more than roughly 2 ½ times the actual loss itself. Fraud cost as a percent of revenues ranges between 1.58% and 2.39%.
The eCommerce, financial services and credit (rather than mortgage) lending sectors are getting hit somewhat harder.
The digital space, either as a transaction channel or type of good being sold, is a high risk for even more negative fraud impact. Regardless of industry segment, the percent of average monthly fraud attempts is higher for these types of organizations. For those using the online channel, this is the result of more fraudster focus on the anonymous purchasing environment, particularly leveraging the nocard-present opportunities compared to EMV chip barriers at physical points of sale.
Yet, digital channel / digital goods selling organizations are not fully leveraging the value of risk mitigation solutions. Identity verification remains a challenge and common type of fraud; there is only moderate use of advanced identity verification solutions among these organizations.
These issues will only increase as more firms adopt the mobile channel. Larger merchants / firms tend to be the pioneers of the mobile channel.
Findings show that retailers, eCommerce merchants and financial services and lending firms which layer solutions by identity and fraud transaction solutions
Oscar Health, a U.S.-based insurtech, announced last week it has raised $165 million through its latest investment round led by Brian Singerman and Founders Fund. Founded in 2013, the company stated it is focused on utilizing technology, design, and data to humanize healthcare.
The peer to peer lending term is kind of a loose term nowadays. Like Michael said, a lot of the bigger banks have started to copy this business model, so it’s not exactly peers loaning to peers anymore. But, at its heart, Prosper was actually the first mover on this. A lot of people think it was Lending Club but Prosper actually got there a little bit earlier. But, Lending Club was definitely the big one that got the banking industry on its toes in terms of peer to peer lending.
Marcus by Goldman Sachs is one of the newest ones. Goldman is getting into consumer banking a little bit. On the business side, you have companies like Funding Circle, which is a really interesting concept, because business lending is a big pain in the neck, especially in certain industries.
Lending, much like dating, has been brought online in the past decade with the aim of streamlining the process and dramatically reducing the time spent for both parties. But as the backend systems involved become more complicated to include more data and decisioning points, how do lenders continue to create a simplified customer experience that will bring good customers back for that “second date”?
So who is GreenSky exactly and what do they do? We wrote about the company earlier this year when we learned of their $200 million funding round from PIMCO which made them the most valuable company in the online lending space. The company has a unique model where they partner with merchants and contractors to offer financing at the point of sale. They view themselves as more of a tech company since they do not actually lend any money. This capital light business model has likely led to much of the success they have seen. Instead of lending their own money GreenSky has relationships with about 15 banks. On the tech side, the process is paperless and all done through a mobile device.
For South Dakota consumers, payday loans used to be available at storefronts, but since late 2016, this access and annual interest rates have been cut.
Although South Dakota limited payday lending, it didn’t outlaw it. And some borrowers are hitting online lending agencies found through Google searches under “payday loans”—a familiar option for South Dakota consumers, according to KELO. This alternative carries risks such as a lack of oversight and inconsistent regulation; however, this is a national issue with these lenders.
News that robo-adviser Wealthfront’s valuation dropped was read by many in the financial advice industry as the writing on the wall for direct-to-consumer digital advice startups.
Scott Smith, the director of advice relationships at research firm Cerulli Associates, said the stories surrounding Wealthfront are proof that the market is favoring a hybrid advice approach. While the number of people who want a purely digital advice platform could grow over time, the majority of assets are still held by people over the age of 40 who want human assistance with their financial decisions.
As for Betterment, the company says it isn’t experiencing any headwinds at all.
Real-time payments have landed in the U.S., but banks are still figuring out how to sell them to corporate clients. BNY Mellon, U.S. Bank, Citi, JPMorgan, PNC and SunTrust are the only banks using the Clearing House’s new real-time payments system.
One challenge is simply the legacy infrastructure on which most financial services companies today are built. Companies that provide ERP systems like SAP or Oracle have built their systems in a batch processing world and need to also become real-time.
In the age of PayPal, Venmo and Square Cash, it’s easy to forget that most transactions that take place day-to-day aren’t happening in real time. They feel like they are, but they really just move money from one PayPal user’s balance to another. Moving that balance from PayPal’s banking partner to the customer’s own bank account is still a multiday process.
U.S. banks are not that far away from ubiquitous real-time payments, according to Ward, who said he thinks 90 percent of banks will have implemented real-time payments by the middle of 2019. PNC hasn’t met too many challenges itself trying to sell RTP, Ward said, but clients are still figuring out the best way to take advantage of it and whether they prioritize the needs of customers or suppliers.
MetaBank; a wholly-owned subsidiary of Meta Financial Group, Inc. (NASDAQ: CASH) (“Meta”) today announced a new, three-year agreement with Health Credit Services (“HCS”), a technology driven, patient financing company. MetaBank will approve and originate loans for elective procedures for HCS provider offices throughout the country. HCS will work with its provider partners to market the loans, as well as provide servicing for them. Over the course of this relationship, MetaBank expects to originate at least several hundred million dollars in personal loans.
Amber Baldet, who oversaw development of JPMorgan’s permissioned blockchain platform, Quorum, is leaving the financial institution, according to an internal memo sent Monday by the bank’s head of blockchain initiatives, Umar Farooq.
The story of robo-advisers is an old one, or so thinks Lex Deak, serial entrepreneur and creator of a new breed of online wealth management tool. Deak, who was the brains behind the launch of peer-to-peer lending aggregator Off3r, is rolling out a new online service that he claims will bring web-based investment to the masses and “battle the bias and bullshit that has dogged the investment sector for decades”. The new service, called Personal Investment Assistant — or Your Pia — uses artificial intelligence to help investors sift through a range of robo-advisers, wealth management platforms and IFA networks.
Big names on the board
Todd Ruppert, the former president and chief executive of T Rowe Price — who is no stranger to backing fintech start-ups — is taking a seat on the Pia board. He will be joined by Daniel Sauva, head of creative and buzz at money transfer service TransferWise, and Nigel Webber, who was global chief investment officer at HSBC Private Banking. Gayle Schumacher, a Coutts executive, is taking a seat, too.
A new Innovative Finance Isa (IF Isa) has launched offering a whopping 7.28% annual interest rate. The easyMoney ‘Balanced’ IF Isa allows you to invest in peer-to-peer lending – where your money is lent to individuals or small businesses – within an Isa wrapper, so your returns are tax-free.
The target rate of 7.28% is a guide to what return you can expect from investing in multiple property-backed loans, all of which have a maximum 75% loan to value.
The firm offers two different IF Isas: its ‘Conservative’ IF Isa, has a 4.05% targeted annual return with a minimum investment of £1,000. It is “aimed at investors who are looking for something more than the paltry rates offered by cash ISAs”, says Mr Candole.
China Rapid Finance Limited (“China Rapid Finance” or the “Company”) (NYSE:XRF), operator of one of China’s largest consumer lending marketplaces, today reported its unaudited financial results for the fourth quarter and full year ended December 31, 2017.
Fourth Quarter 2017 Highlights:
Positive operating cash flow of $15.8 million
Total gross billings up 186% year-over-year
Facilitated 6.2 million loans with total loan volume of $1.03 billion
Added 627 thousand new borrowers, up 17% from the end of Q3 2017
Added approximately 10 thousand new investors to reach over 23 thousand investors
GAAP net loss of $3.9 million
Non-GAAP adjusted profit before income tax expense of $1.1 million
Full Year 2017 Highlights:
Year-end cash balance of $94.9 million, up from $74 million immediately after the IPO
Total gross billings up 102%
Added 2.9 million new borrowers, up 202% from the end of 2016
Facilitated over 23 million loans with total loan volume of $3.3 billion
China’s marketplace lending is bracing for regulation around “record filing” systems that kicks into effect this month (April 2018). However, said new regulations may not be addressing altogether the problem of runaway credit that is growing on the back of cash loans and microlending market.
The current most prominent methods of financial fraud are organized fraud, regional fraud, and targeted-occupation fraud. Various criminal and fraudulent organizations, including organizations developing illegal software, hacking databases for sale, and batch registration, have been working together to increase profits. However, their golden times are over now.
An insider once commented, “Certain P2P platforms only have a user retention rate of 20% following promotional events due to malicious users while the remaining 80% became inactive. Platforms spend a lot of money on marketing which has directly led to continually rising costs in customer acquisition.”
Hexindai’s risk control technology has laid a solid foundation for anti-fraud progress
Introducing new technologies to enhance anti-fraud capabilities
Small business lender OnDeck Group is hosting an event centred on SMEs and the changing lending landscape in Australia.
Taking place on 17 April, CEO Noah Breslow, will host a select group of brokers, aggregators and finance partners, with special guest Stephen Koukoulas, Managing Director of Market Economics, and Economic Advisor to illion (formerly Dun & Bradstreet).
OnDeck has now loaned over $8 billion to 80,000 small businesses across the United States, Canada and Australia, making it one of the largest online SME lenders globally.
Borrowing against cryptocurrencies is becoming a big new trend in the industry. A number of startups have sprung in crypto-backed lending space, which include SALT, CoinLoan, Ethlend, Unchained Capital and most recently Nuo Bank. Now a new startup with similar offering is eyeing the Indian market from New York. The startup, called BlockFi, offers cryptocurrency backed loans to individuals and companies both in 35 states of USA as of now. However, it’s planning to expand internationally very soon, and in that expansion it sees India as a major opportunity. This was revealed by none other than company’s CEO Zac Prince in a recent interview to Bitcoin Magazine.
Namaste Credit, a digital marketplace and technology platform for SME loans, has raised $3.8 million in a Series A investment round from Nexus Venture Partners.
The company intends to use the corpus raised to grow its geographic footprint, enhance its technology and data analytics platform, and further scale its business. The company also plans to significantly increase its channel partner program across India and further expand its technology licensing partnerships with lenders globally.
Owned by Delhi-based Opendoors Fintech Pvt Ltd, Namaste Credit is a digital platform which serves as a marketplace for borrowers and lenders. It focuses exclusively on small and medium enterprise (SME) customers.
“SME credit is seriously constrained due to lack of reach and relevant data to assess credit-worthiness of borrowers. Namaste Credit’s technology, combined with its channel partners and lender network, is already making a significant impact on facilitating credit to SMEs in a win-win manner for all,” said Anup Gupta, managing director at Nexus Venture Partners, in a statement.
Last month, state-owned banks was not up for President Joko Widodo’s (Jokowi) challenge to provide students with the option of student loans. However, companies of Fintech (technology-based financial services providers) responded positively to the president’s challenge.
Danacita and Koinworks are Fintech peer-to-peer lending companies that focus on funding the education sector. Meanwhile, Danadidik is an academic funds provider that is on crowdfunding as its main financial backing.
The three platforms also provide a long-term loan for university students with a tenor from four to six years. Each of these companies applies varying methods of repayments from 9 percent- 20 percent low installments up to profit sharing a student’s wage once they have found jobs.
In a recent article, LendingTimes.com looked at differences between alternative data and traditional credit reports in regards to online lending. Now, we intend to further explore the uses of alternative data by examining two sectors of the alternative data source industry: companies that cultivate Big Data and companies that use Big Data as a source […]
In a recent article, LendingTimes.com looked at differences between alternative data and traditional credit reports in regards to online lending. Now, we intend to further explore the uses of alternative data by examining two sectors of the alternative data source industry: companies that cultivate Big Data and companies that use Big Data as a source for risk assessment in marketplace lending.
Big Data’s Worth is Growing Big (Like $48.6 Billion-Big):
First and foremost it’s important to note that Big Data is a business all on its own. Companies, such as Microbilt, have been collecting alternative data for their clients for over 35 years. Alternative data companies are profitable and growing. IDC predicts “big data technology and services market growing at a CAGR of 23.1% over the 2014-2019 forecast period with annual spending reaching $48.6 billion in 2019.”
With the surge of marketplace lending over the past few years, the alternative data business has been booming. Companies are looking for the fastest and easiest way to get reliant information about potential employees, clients, and borrowers; Big Data companies, like Microbilt or LexisNexis, are providing banks, marketplace lenders, and other companies with essential (and speedy) information.
Putting These New Data Sources to Work in More Way Than One:
In our previous article on alternative data sources, we discussed a few of the many types of information that are usually excluded from traditional credit reports but included in alternative data reports, such as utility bills, bank account records, and even social media account information. While all of this information has proven to be useful in risk management for lenders, it is also being utilized by government agencies, nonprofit organizations and commercial businesses. Often times, Big Data is being used for the sole purpose of identity verification to prevent fraud, but it also helps form a complete picture of individuals and businesses.
Microbilt not only caters to lenders but also many other types of organizations. They offer services such as bank verification, background screening, and business credentialing. Using several hundred variables of data such as criminal records, DMV records, government filings and phone records, Microbilt can help confirm identification and assess risk.
With access to what seems to be an infinite amount of information, it’s is easy to understand why online lenders are choosing to utilize alternative data. Big Data allows them to make very informed decisions about potential borrowers in just a few minutes. The ease and speed of decision-making have made online lending a much more attractive option for borrowers as well.
How Alternative Lenders are Using Alternative Data:
With marketplace lending on the rise (123% CAGR since 2010 and reported $36billion industry in 2015), online lenders are in need of data that can keep up with their pace. Unlike traditional lenders that use standard credit reports to assess potential risk, more and more marketplace lenders are turning to alternative data in order to find and weed through loan applications in a very timely manner. The connection between online lending and alternative data is so strong and obvious that it is no wonder that several companies founded in recent years have combined the two businesses.
Kabbage, for example, is a marketplace lender that collects and uses Big Data in their lending platform. They were co-founded in 2008 by Marc Gorlin, Rob Frohwein, and Kathryn Petralia and were named #63 on Forbes’ America’s Most Promising Companies list in 2015. They have been utilizing alternative data from the start in order to make greater informed decisions about small business lending.
One of the most prominent forms of alternative data that Kabbage uses is social media. When a potential customer creates an account with Kabbage to apply for a small business loan, they are given the option to connect one or all of their business’ social media accounts to their Kabbage account. This simple connection can have a huge impact. Co-founder Gorlin explained in a 2013 interview that they’ve “learned that if someone has added Facebook or Twitter data” to their Kabbage account “they are 20 percent less likely to be delinquent.”
Big Data or Big Brother?
Other than social media Kabbage also looks at other types of alternative data: sales records and employee history, as well as how often the company uses 2-day shipping for its products (therefore implying they place customer service/satisfaction high on their priority list). Kabbage takes qualitative data and turns it into quantitative data, taking every piece of information into account when assessing risk.
Many people see this as a pro to alternative data. More information means better-informed decisions. But some analysts are starting to wonder how much information is too much information? While banks are typically only looking at numbers, companies like Kabbage are also privileged to age, race, religion, and other factors. Marketplace lending lacks the regulations placed on banks; again, this can be seen as a negative or a positive depending on the situation and the outcome.
While there are some worrisome aspects to using alternative data, Kabbage and other companies have been very successful in their use of it. According to Forbes of 2015, Kabbage has done $41million in revenue and have raised $106milling in venture funding. They, along with many other similar alternative lenders, continue to look “promising.”
Marketplace Lenders “Could Command $150 Billion to $490 Billion Globally by 2020”:
Morgan Stanley reported that in the year 2015, online lenders provided 7.9 billion in small-business loans, which is an enormous 68% increase from the previous year, but it is important to note that this number only makes up 3.3% of the total small-business loans in the US. Morgan Stanley believes online lenders’ share of not only small-business loans, but also P2P lending will continue to rise, stating in a report from June 2015 that marketplace lenders “could command $150 billion to $490 billion globally by 2020.”
The marriage of alternative lending and alternative data seems like a match made in heaven, but their sky-rocketing CAGR’s and minimal government regulations have many analysts worried of a potential (and some may argue inevitable) bubble burst. While there is a potential for billions of dollars of business within marketplace lending industry, it will be interesting to see how the use of alternative data continues to spread.