Monday September 26th 2016, Daily News Digest

Monday September 26th 2016, Daily News Digest

News Comments Main news: Jefferies-Loan Depot securitization breaks trigger; Lending Club’s fund 1st down-month; Funding Circle’s results; GLI’s results; Lufax signs banks for IPO. Main analysis: PeerIQ’s summary of last 9 months. Main thought provoking: The causes and effects of low rates, a must read Economist article; China’s number of p2p lenders will keep growing […]

Monday September 26th 2016, Daily News Digest

News Comments

United States

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United States

Internet Lender’s Bond Deal Starts to Sour a Year After Sale, (Bloomberg), Rated: AAA

Comment: I am not an expert in securitization, nor in investment banking. But it looks to me that Jefferies’ made securitization have by far the highest probability of breaking triggers. This is very strange. See Circle Back and OnDeck’s. And now LoanDepot’s. 

Online consumer loans made by LoanDepot Inc. are going bad faster than underwriters expected, threatening payments to investors who bought bonds backed by those debts less than a year ago.

Cumulative losses rose to 4.97 percent in September, breaching the 4.9 percent “trigger” in the $140 million securitization that Jefferies Group assembled last November and sold to investors that now include the Catholic Order of Foresters, according to data compiled by Bloomberg. Bondholders in the riskiest portion of the deal who may see funds diverted couldn’t be identified because the offering is private.

LoanDepot, which for years has specialized in traditional mortgage banking, began making small consumer loans over the internet last year.

Jefferies has been a lead underwriter of other securitizations backed by loans made by online startups, and at least two of its deals, for CircleBack Lending Inc. and OnDeck Capital Inc., have also breached their triggers. Those include Marketplace Loan Trust 2015-CircleBack 1 and Marketplace Loan Trust 2015-OnDeck 3.

CircleBack Lending hired Jefferies to explore a sale, people familiar said in June, as funding for online-finance companies tightened amid concern about loan performance.

LoanDepot aborted a planned initial public offering last November and turned to other sources of funds, including a $150 million term debt financing completed in August. The company says it recorded 80 percent year-over-year average annual growth from its founding in 2010 to 2015, funding more than $70 billion of loans. Second-quarter fundings reached almost $10 billion in home, personal and home equity loans, the company said.

“Mark-to-market” from Q1’s ABS West to Q3 ABS East, (Peer IQ email), Rated: AAA

This past February, at ABS West, conversations centered on deteriorating collateral performance and liquidity concerns. A steady flow of negative headlines–Madden-Midland, negative ratings actions, San Bernadino, platform layoffs, and global slowdown concerns–weighed heavily on investor sentiment.

Two events marked the peak of investor apprehension:
In the bond market, the pricing of CHAI 2016-PM1 (PeerIQ analysis here) where Mezzanine bonds delivered greater returns than the whole loans themselves.
In the equity market, investor capitulation after the Lending Club May 9th disclosures.

Turning of the Tide

Global credit markets began to firm in April. Lending Club tightened DTI criteria, elevated the role of the capital markets function, and strengthened leadership on the board and executive team.

In May, the US Treasury report published “Opportunities and Challenges in Marketplace Lending”–a constructive regulatory development. Treasury acknowledged the role of securitization in funding growth, and consistent with the PeerIQ RFI, recommended the need for standardized reps & warranties, consistent reporting standards for loan origination data, loan securitization transparency, and consistent market-driven valuation standards.

SoFi achieved a AAA rating for an MPL bond and cracked open the MPL ABS investor market to global investors via its hands-on marketing approach.

PeerIQ observed that secondary ABS spreads continued to tighten despite volatility in the equity markets. PeerIQ also observed in the Q2 tracker that the combination of stricter underwriting, higher coupons, and tighter secondary ABS spreads meant the conditions for securitization were strong.

In June, SoFi brought to market its first rated

LendingClub Fund Has First Negative Month on Valuation Overhaul, (Bloomberg), Rated: AAA

A LendingClub Corp. investment fund that’s struggled with withdrawals this year posted a negative return for August, the first decline in its five-year history, after overhauling how it values holdings and incurring losses on riskier debts.

The fund, overseeing about $700 million at the start of the month, had disclosed plans earlier in the summer to overhaul how it tracks assets. It enlisted outside valuation firm Duff & Phelps Corp. and shifted methodology to forecast how debts will perform individually, rather than in groups. August marked the first month under the new system, resulting in a one-time 0.95 percent reduction to returns, Sanborn wrote.

The LC Advisors Broad-Based Consumer Credit Fund ended the month down 0.49 percent, cutting this year’s net return to 1.24 percent, LendingClub Chief Executive Officer Scott Sanborn told stakeholders in a letter and report Friday.

In June, the investment vehicle was forced to limit redemptions after stakeholders asked to pull out $442 million, or 58 percent of assets under management.

But in the case of the August slump, key developments had already been signaled, with the largest hit coming from a one-time adjustment as the firm improved how it values holdings, Sanborn wrote in the letter.

In the future, “investors should expect more movement in fund returns month-over-month because the new methodology is more responsive to changes in each individual loan’s delinquency status,” he said.

Global P2P (Peer-to-peer) Lending Market Analysis 2016 Forecasts to 2021, (News Maker), Rated: A

Comment: this article is promoting a report.

The analysts forecast the global P2P lending market to grow at a CAGR of 53.06% during the period 2016-2020. To calculate the market size, Technavio considers the lending amount through P2P platforms in the Americas, Asia Pacific (APAC), and Europe, the Middle East, and Africa (EMEA).

Low pressure, (The Economist), Rated: AAA

Interest rates are persistently low. First we ask who or what is to blame. Then we look at one outcome: a looming pensions crisis.

On September 21st the Federal Reserve kept its target for overnight interest rates at 0.25-0.5% but indicated that, after raising the target for the first time in a decade last year, it hoped to raise it for a second time soon—possibly in December, after America’s presidential elections.

Earlier that day, the Bank of Japan (BoJ) said it was staying with its target of raising inflation to 2%. Indeed it went further. The bank said it would continue to buy bonds at a rate of around ¥80 trillion ($800 billion) a year, until inflation gets above 2% and stays there for a while. To help meet this “inflation-overshooting commitment”, the bank said ten-year-bond yields would remain at around zero.

The debt-laden are delighted with the persistence of a low-rate world. It costs much less to service their obligations. But savers are increasingly grumpy. Economists are simply baffled. In the 1980s and 1990s, the high real cost of borrowing (ie, after adjusting for inflation) was the puzzle. Today’s interest-rate mystery is more troubling and there is division over the reasons for it.

One side says it is simply the consequence of the policies pursued by the rich world’s central banks. The Fed, ECB, BoJ and Bank of England have kept overnight interest rates close to zero for much of the past decade. In addition, they have purchased vast quantities of government bonds with the express aim of driving down long-term interest rates.

It is hardly a mystery, on this view: central banks have rigged the money markets.

On the other side of the divide are those who argue that central banks are merely responding to underlying forces. In this view the real interest rate is decided by the balance of supply and demand for the pool of global savings. The fall in interest rates since the 1980s reflects a shift in this balance: the supply of savings has increased as demand for it has crashed.

This ongoing glut in savings is due to two factors in particular. The first is changing demography, mostly in the rich world but also in some emerging markets. Populations are aging. At the same time, the average working life has not changed much. So more money has to be squirreled away to pay for a longer retirement (see article).

A second, related, factor is the integration of China into the world economy. “A billion people with a 40% savings rate; that brings a lot more supply to the table,”

Aging is not the only long-run influence that has tilted the savings-investment scales. By skewing income to the high-saving rich, an increase in income inequality within countries has added to the saving glut. A fall in the relative price of capital goods means fewer savings are needed for a given level of investment. Both trends predate the fall in real interest rates, however, which suggests they did not play as significant a role as demography or China.

A related reason for more saving is fear. The severity of the Great Recession belied the relative economic stability that preceded it.

Consider the business of life-inssurance companies. They pledge to pay a stream of cash to policyholders, often for decades. This promise can be likened to issuing a bond. Insurance firms need to back up these promises. To do so they buy safe assets, such as government bonds.

The trouble is that the maturities on these bonds are shorter than the promises the insurers have made. In the jargon, there is a “duration mismatch”.

When bond yields fall, say because of central-bank purchases, the cost of the promises made by insurance companies goes up. The prices of their assets go up as well, but the liability side of the scales is generally weightier (see chart 4). And it gets heavier as interest rates fall. That creates a perverse effect. As bond prices rise (and yields fall), it increases the thirst for bonds. Low rates beget low rates.

If a growing bulge of middle-aged workers is behind the secular decline in real interest rates, then the downward pressure ought to attenuate as those workers move into retirement. Japan is further along this road than other rich countries. Yet its long-term real interest rates are firmly negative.

A concern is that as more people retire, and save less, there will be fewer buyers for government bonds, of which less than 10% are held outside Japan. Another of the Geneva Report’s authors, Takatoshi Ito of Columbia University, reckons there will be a sharp rise in Japanese bond yields within the next decade. There may be political pressure on the Bank of Japan to keep buying bonds to prevent this.

Swedish FinTech Klarna Partners with SAP on Whirlwind Three-Month Business Overhaul, (PR Newswire), Rated: A

SAP announced today that Klarna, has become the first customer to go live with smart accounting for financial instruments (smart AFI), a new functionality based on the SAP® Bank Analyzer set of applications, 9.0 release. In just three months SAP implemented the solution including accounting rules configuration, data integration and a full setup of the SAP HANA® database environment, proving that up-leveling market and product growth does not have to be a long and arduous process.


United Kingdom

Global expansion almost doubles losses at fintech unicorn and peer-to-peer lender Funding Circle, (City A.M.), Rated: AAA

The peer-to-peer lending group is set to post a full-year loss of £36m when it publishes its accounts on Tuesday, after expanding into Europe and the US ate into profits. However, revenues at the firm, which was founded in 2010 and has lent more than £1.5bn to small and mid-sized businesses, rose 140 per cent from £13m to £32m last year.

“We expect our UK business to be profitable in the fourth quarter of 2016 and to generate significant cashflow in 2017 to finance international operations” said chief executive Samir Desai.

In 2015 the company raised $150m (£116m) of new equity for the business and listed the first and only single platform investment trust – the £150m Funding Circle SME Income Fund – on the London Stock Exchange.

GLI Finance Limited Unaudited Interim Results for the six month period ended 30 June 2016, (Email), Rated: AAA

Full report can be found here.


  • The Company losses for the period were GBP6.9m (June 2015 profit of GBP5.3m), impacted by GBP13m write downs in investments in underperforming or liquidated platforms following the strategic review;
  • Group organized with Three Pillars to improve operational focus and assist reporting our strategy;

Pillar One

  • Sancus BMS Group on a pro forma* like for like basis, increased consolidated revenues from GBP2.7 million in H1 2015 to GBP4.0 million in H1 2016. The period was notable for the consolidation of the Sancus group and its amalgamation with BMS and Platform Black to establish our specialty lending business.

Pillar Two

  • Valuations in our prioritized platforms, The Credit Junction, LiftForward, Funding Options and Finexkap increased by GBP5.5m in aggregate. Investments in underperforming or liquidated platforms were written down by GBP13m. We have been very prudent in reorganizing this portfolio and we fully expect to see value of this portfolio build materially in future periods;

Pillar Three

  • Amberton Asset Management remains de minimus and we expect to make progress on this pillar in the next 12-18 months;


  • As a consequence of the considerable restructuring in the period together with writedowns in Pillar Two, the Net Loss for the period on the GLI Measurement Basis** was GBP10.3m (H1 2015: Net Profit of GBP0.2m).
  • As a consequence of making early write-downs and recognizing losses in underperforming assets, together with raising capital and reorganizing Sancus BMS Group, the Companies’ balance sheet is significantly strengthened. Nonetheless, during the period the Company Net Asset Value “NAV” per share decreased from 42.73p to 37.07p;
  • Company debt to gross asset ratio is 30% (31 December 2015 33%)
  • Company Net Assets have increased in the period from GBP98.2m to GBP105.6m and;
  • The Company’s weighted-average cost of debt decreased from 8.6% (year to 31 December 2015) to 6.8% (period to 30 June 2016).

Post period end

  • Ordinary share placing raised GBP7.1m from Somerston Group in August 2016;
  • New wholly owned subsidiary, FinTech Ventures Limited (“FVL”), created to hold, initially, the four Prioritised FinTech platforms thereby enabling independent capital raises to support these investments.
  • Name change of GLI Alternative Finance Limited Plc to the SME Loan Fund (“SMEF”) on 1 September 2016.

Zoopla partners with Landbay for P2P lending solution, (Financial Reporter), Rated: B

The new channel on the Zoopla website includes a peer-to-peer lending solution, in partnership with Landbay, where anyone can invest from as little as £100 into buy-to-let mortgages, statistically the lowest risk form of peer-to-peer lending.


Financeit expands management team by tapping CFO from Capital One Canada, (Morningstart), Rated: A

This addition to Financeit’s management team will help propel the Toronto-based company into its next stage of maturity as it continues to expand its market share in the point-of-sale financing industry.

With 20 years’ experience managing and leading finance teams in Canada and the United Kingdom, Hanning served as Capital One Canada’s Chief Financial Officer for nearly five years. Prior to becoming CFO, Hanning held various senior positions within the bank’s Canadian and United Kingdom operations over the previous 12 years. He started his career at Glenfield Hospital NHS Trust in Leicester, United Kingdom.

Hanning’s entry into Financeit comes on the heels of the company’s $339 million acquisition of TD Bank Group’s indirect home improvement financing assets in partnership with Concentra.


Beyond Bank Australia and SocietyOne announce key partnership, (PR Wire), Rated: A

Beyond Bank Australia is continuing its expansion into the fintech sector, forming a significant partnership with the nation’s leader in marketplace lending, SocietyOne.

The agreement sees Beyond Bank tip in $1.5 million for an equity stake in SocietyOne as well as increasing its existing funding commitment in personal loans to $10 million. The arrangement was formalised on Friday, September 23.

SocietyOne now has ten mutual banks and credit unions among its 200 investor funders and is actively engaged with a number of other potential investors as it undergoes further expansion, targeting a 2-3 percent share of the $100 billion consumer finance market by 2021.


P2P lender Lufax taps four banks for Hong KongIPO, (China Daily), Rated: AAA

CITIC Securities, Citigroup, JPMorgan and Morgan Stanley have started preparatory work,although no formal mandate has been awarded, the people said.

The volume of Chinese P2P loans stood at 680.3 billion yuan ($102 billion) at the end ofAugust, more than 20 times levels seen in January 2014, according to industry data providerWangdaizhijia.

One third of China’s 3,000 peer-to-peer lending platforms ‘problematic’: new report, (SCMP), Rated: A

The 2016 Blue Book of Internet Finance, published on Friday, found 1,263 of the P2P platforms on the mainland up to the end of 2015 were problematic, which included cases of fraud or firms going out of business.

This total included 896 P2P platforms that got into problems in 2015, with more than half involved in fraudulent tricks that took advantage of loopholes in regulations, the report said.

“China’s slow economic growth has led to plunging business for small and medium-size companies; It increases the risk of loan defaults,” the report said, adding that the risk of financing usually rose after accumulating over a long period.

In one typical case of fraud, highlighted in the report, one P2P platform, Rong Zuan Dai, went online in November 2015 and published 37 financing projects that promised high interest rates to hundreds of investors. But after two weeks the website suddenly closed.

Of the current total, Guangdong province had the largest concentration of P2P platforms, with 18 per cent of the national total, the report said.

It estimates that the number of P2P platforms nationwide will continue to rise at a rate of 90 per cent over both of the next two years as the industry further consolidates, and could eventually reach 10,000.

The number of active users of P2P is also expected to surpass nine million in 2016.


George Popescu

August 19th 2016, Daily News Digest

August 19th 2016, Daily News Digest

News Comments Today we have a treasure of great articles and news. Avant will start charging origination fees. And a new attack against Lending Club pointing out that 30,000 loans on their platform are taken by repeat borrowers. Why is this a bad thing ? A must read for investors : the much larger space […]

August 19th 2016, Daily News Digest

News Comments

United States

United Kingdom


United States

Fintech’s Answer for Chilly IPO Market? Debt, (Wall Street Journal), Rated: AAA

The IPO freeze may be starting to thaw for tech companies, but it still isn’t warmed up enough for fin-tech firms.

Tumult in the new-issue market late last year and early this year claimed two casualties among financial technology firms, mortgage lender LoanDepot Inc. and subprime personal lender Elevate Credit Inc.

Both are online lenders with web-based applications (“tech”) that sell off their loans or warehouse them on outside banks’ balance sheets (“fin”).

They’ve also found an alternative way to raise capital: Via the debt markets, where investors remain starved for yield, and are apparently willing to take on riskier bets than stock buyers.

LoanDepot on Wednesday said it had raised $150 million in growth capital via a term loan sold to investors. The company did not disclose the interest rate. An existing loan from 2013, which matures in October, carried a rate of 11% to 12.75%, according to the IPO filing. The new loan follows Elevate in July announcing it had expanded its credit line from Victory Park Capital, a Chicago-based investor in online loans, to increase its capacity to make new loans.

While investors may be itching for liquidity, Mr. Hsieh is taking advantage of being private to experiment. He said that LoanDepot is using its new capital to pilot mortgage loans that aren’t government guaranteed, such as so-called “jumbo” loans for more expensive homes and second mortgages. LoanDepot will buy the loans itself with the new capital.

“Never in the history of his country have we seen the government fund over 90% of annual loan origination,” he said, referring to government-backed agencies such as Fannie Mae and the Federal Housing Administration who buy loans arranged by private firms such as LoanDepot.

“It’s just a matter of time before fintech firms come in and crack this market open so that new product innovation starts to flow again,”

Avant Parts Ways With 30% of Staff, Including CEO’s Wife, (The Wall Street Journal), Rated: AAA

Earlier this year, online lender Avant Inc. moved into an 80,000 square-foot headquarters in downtown Chicago that had all the amenities of a fast-growing startup. Employees needing a midday break could step away from their standing desks and into a “Nintendo” room full of vintage videogames.

Now, many of those desks sit empty. Around 220 of Avant’s workers, or roughly 30% of its full-time staff, accepted a buyout offer that was extended to all employees this summer, the company says.

It’s “not the highlight of my professional career to have to shrink the size of the company,” said Chief Executive Al Goldstein in an interview.

Avant has long touted a crucial difference with its rivals: It didn’t profit by charging fees to borrowers, and instead sought to sell loans at a big premium to investors.

“We are still competing for mindshare with investors,” Mr. Goldstein said. “It’s progressively difficult to deliver the no-fee product.”

Many online lenders have already increased interest rates multiple times and cut off parts of the population that were previously eligible for their loans.

Part of that tightening was to correct for loans previously offered on terms that were too easy and that have since started to default at faster-than-expected rates.

Cumulatively, the steps taken in recent months put online lenders on more solid footing, but they also weaken what has been a rationale behind the nascent industry: that the firms will lend to people that banks have left behind. Avant this year began requiring borrowers to have more income relative to the size of their loans. It also has been shrinking the size and payback period of its loans.

Avant’s fees will range from 1.75% to 3.75% of the loan amount, which is less than its competitors charge because Avant also receives income from the loans its holds on its books.

There are signs that Avant’s outlook has improved in recent weeks. The lender had originally said it could let go about 40% of staff, but was able to stop at 30%. The firm recently renewed its credit facility with J.P. Morgan Chase & Co. and Credit Suisse GroupAG. Bonds backed by Avant loans were sold in August at the lowest yields of any deal brought by the lender to date.

Avant also said in its investor letter that it broke even in the second quarter on an adjusted basis, and had more than $100 million of gross revenue, “setting the foundation for future profitability.”

“Our mission is to be able to provide access to credit for middle-income consumers around the world,” said Mr. Goldstein. There’s “no question Avant is going to survive and be a winner.”

How Lending Club’s Biggest Fanboy Uncovered Shady Loans, (Bloomberg), Rated: AAA

In Portland, over coffee, Sims said he’d found thousands of instances from 2009 through 2011 in which Lending Club seemed to allow borrowers to split their loans in two if their first attempt to get a loan didn’t find any takers.

For instance, in June 2011, a user from the Phoenix area requested $25,000 for debt consolidation. The user was relatively risky, with a FICO score in the low 700s. Lending Club rated the loan “E2”—one of its riskier categories—offering it at an interest rate of about 18 percent. But investors were skeptical, and only $20,525 worth of the loan’s notes were sold. Later that month the same person, according to Sims, borrowed the difference, $4,475, at an interest rate of just 7.5 percent. (Sims guessed that Lending Club’s algorithms gave the second loan a higher rating because it was smaller and thus less risky.)

To the outside, it looks like one reliable loan and one risky loan; in fact they were both risky. “We evaluate each borrower’s creditworthiness based on the most up-to-date data,” the company says in a statement. It adds that users can exclude “relisted” loans from their searches.

In all, Sims’s model has identified about 30,000 loans that were likely taken out by repeat borrowers—information the company has never disclosed but would be valuable to investors, since it could help show if a borrower is overextended. (Prosper, unlike Lending Club, discloses this information.)

Because borrowers could be tapping multiple marketplaces at the same time, such data could show shareholders and regulators if this modern form of marketplace lending is riskier than they think.

On the other hand, because Lending Club makes most of its money by charging fees to borrowers and investors and doesn’t carry many loans on its balance sheet, it has limited incentive to implement such controls. Sims says, “The biggest question every investor should be asking is, ‘Are these platforms actually helping people pay off debt more quickly, or just putting them further in the hole?’ ”

Lending Club argues that any loans a borrower has taken out on the site are built into their credit report and therefore of no special relevance.

That Sims was able to use an algorithm and a home-built computer to pinpoint problematic loans suggests another looming problem for Lending Club: user privacy.

Why the opportunity in alternative credit is far broader than just p2p, (Alt Fi Credit), Rated: AAA

In a personal capacity I started lending on the Zopa P2P platforms 6 years ago when yields were much higher, default rates were lower and underwriting standards were higher across the industry.

Since then, in order to place the flood of money that has become interested in P2P lending, yields have fallen dramatically and underwriting standards loosened.  As this change occurred, I stopped lending P2P to individuals and have diversified to other higher yielding categories that by and large are still relatively undiscovered.

I have been keen on lending against real estate development projects in Canada where there are only 5 big banks and their lending criteria is very restrictive.

I have also lent against life insurance policies in the US that are designed to provide help people who are ill with cancer so that they don’t need to sell their life insurance policies to vulture funds at huge discounts.

International banks have continued to pull out of Africa because of problems and capital requirements back home, I have carefully lent money to commodity wholesalers and traders in Africa.

Another area with a shrinking banking industry is Spain. Structuring loans collateralized against government receivables that give companies reliable working capital can be highly lucrative for investors.  I invest with an old friend who is well connected in Spain and he is also able to source many real estate lending and leasing opportunities in the region.

Finally, micro SME (Small and Medium Size Enterprise) lending in the US is very interesting at the moment.  These are loans that are usually less than $100,000 in size, but bigger in size than Merchant Cash Advances.  The short term loans are typically made to companies across the US and across industries that have been in business for on average 10 years or longer.

These are only a few of the many places I and my clients have invested in over the past few years but it highlights some of the opportunities beyond P2P loans to individuals.

The opportunity to disrupt the credit card rails may finally be opening up, (Daily Fintech), Rated: AAA

The transition to Chip and PIN credit cards in America currently looks like just a big conversion cost – good for vendors and consultants and a big extra cost and time suck for everybody else.

However, below the surface something bigger is brewing. Chip on plastic is incremental change, but Chip on mobile phone is a game-changer.

To the rest of the world, America moving from mag stripe to chip cards merits this reaction – “what took you so long?”

After Chip + PIN is introduced, fraud in Card Present transactions (aka physical retail) becomes too hard, so criminals shift attention to Card Not Present (CNP aka e-commerce).


Three factor authentication is better

Chip is better than mag stripe for single factor. Chip + PIN is better two factor than Chip + Signature. But 3 factor is best and that is what mobile phones enable:

Factor 1: something I own (can be a chip on a card or a chip in a phone)
Factor 2: something I know (PIN)
Factor 3: something you know about me (location in a mobile phone, not possible with a Chip card).

The Mobile Payment tipping point.

If this data from eMarketer is even close to right, we are at the Mobile Payment tipping point:

Shh, don’t tell, but Uber is really a payments company with an e-commerce skin. So is Amazon. So is AirBnB. People make a big deal about Uber, Amazon and AirBnB not owning the actual physical stuff/service that we buy – as if vertical integration was an issue in the 21st century. What is much more critical is when a when Merchants become payments businesses through Tokenization.

Tokenization is the one time password that a student of cold war espionage stories would recognize. If you steal the token/one time password, you can steal the contents of that message/payment and only that message. That is fundamentally different from stealing the Primary Account Number (PAN).

Remember those merchants upset by the cost of switching to Chip + PIN? They would like to do this as well. Any entrepreneur who figures out how to offer that to small merchants will do well – maybe Square?

Prosper President Ron Suber on US Fintech Market Outlook, (YouTube), Rated: A

Ron Suber keynote presentation at LendIt China 2016

Learning From Online Lending’s Stumble, (Email, Blue Elephant), Rated: AAA

Online lending had enjoyed significant wind in its sails over the past five years. Aided by the post-Great Recession healing of the credit cycle, lenders were able to originate increasing but limited volumes of loans that provided much needed yield to investors. Along the way, a myth developed that online lending could grow infinitely, stealing business away from big banks while providing investors with the Holy Grail of investing – high returns and minimal risk.

Competition for borrowers pushed lenders to lower rates and increase capacity more quickly than their models could handle. Defaults rose and returns fell accordingly – and that was during a relatively strong point in the credit cycle. It is safe to say the online lending myth has been debunked, or at least been brought back to reality.

The beginning of this evolution is straightforward. Online lending should be treated like any other investment, with the acknowledgement that with return comes risk.

New analytical tools will need to be created to compare different loans across originators, allowing investors to do independent assessment of the risks involved.

Beyond risk assessment, investors must demand clarity between the role played by the lender as loan originator, and the investor as fiduciary. Many online lenders do not keep the risk of their loans on balance sheet – they get paid an origination fee and sell the loans to others. This style of loan origination creates value for shareholders by maximizing the volume of loans originated, not from the ultimate performance of the loans.

Some of these lenders have raised private funds which exclusively buy loans from their own platform. The inherent conflict is that the lender cannot fulfill its fiduciary duty of maximizing loan volume while also being a fiduciary to a loan buyer demanding maximization of return.

In the age of the hyper-regulated mega bank, there is a real need to open up credit markets to small-balance borrowers. Combine this with investor need for yield, and all the building blocks are in place.

Goldman Sachs: A play for the 99%, (Financial Times), Rated: AAA

In April this year Goldman Sachs did something it had never done before. For almost 150 years, it had prospered by getting close to people of power and influence: wealthy institutions, multinationals, rich families.

Now it was trying to appeal to hoi polloi, offering online savings accounts that can be opened with a deposit of just $1, with interest rates about 100 times better than those at big US retail banks like Wells Fargo or Bank of America.

But the launch of GS Bank, propelled by the acquisition of a $16.5bn book of deposits from GE Capital, was not exactly glitch-free. People were baffled by an automated menu system that failed to recognise simple instructions, says Rob Berger, founder of, a personal finance site. Some customers reported long delays in opening an account; others complained that they could not get on to the platform via an iPad or a Chromebook.

Goldman is moving into Main Street for a simple reason: life on Wall Street has become much tougher since the global financial crisis.

At the same time, revenues in the bank’s asset management division have been squeezed by a broad shift to passive rather than active investing.

All that has weighed on profits. Goldman’s return on equity — the best and simplest measure of how well it is using shareholders’ money — slipped below 10 per cent last year and is expected to come in at about 8 per cent in 2016.

Executives at Goldman bridle at the suggestion the bank has stood still while the world changed around it. They point out that it has kept annual revenues more or less steady at about $34bn since 2012, despite cutting risk-weighted assets by about one-fifth in that time, on estimates from CLSA, the brokerage.

Pay — often a flashpoint — has come down a lot too, reflecting smaller bonuses as well as the different business mix.

In the second quarter this year, Goldman’s accrual for compensation and benefits came to $95,718 per employee, less than half the figure of $211,968 of 10 years ago.
Once investors regain some poise, said Mr Blankfein, Goldman would bounce back too. Higher interest rates, lower energy prices and a stronger economy should help boost the “velocity” of trading. “There are signs on the horizon and indications that we are finally, after a very long time, coming out of that [low volume] environment,” he said.

In that context, say analysts, Goldman needs new income streams to boost RoE. In the autumn it plans to start putting its new GE connections to work, launching a venture offering loans online to consumers and small businesses. That unit has hired dozens of senior people from companies including Lending Club, Citi, Amex and Barclaycard.

More retail banking products could follow — such as car loans, mortgages or a “robo” wealth management platform.

Before the financial crisis, Goldman did not even have a federally insured bank but it was forced to open one in 2008 as a condition of receiving bailout funds.

Deposits now account for 23 per cent of the bank’s funding mix, up from 3 per cent at the end of 2007.

The new mix helps profits, too. Even though Goldman is paying its GS Bank depositors a near market-leading interest rate of 1.05 per cent a year on online savings accounts, for example, that is still much less than the cost to Goldman of issuing long-term bonds.

GS Bank’s 160,000 or so depositors should be a useful support for the new lending venture, which represents a direct strike against peer-to-peer platforms, which match needy borrowers with investors hungry for yield.

In a research note last year, Goldman analysts said $10.9bn of annual profit generated by traditional bricks-and-mortar lenders was at risk of being lost to more nimble upstarts. Of that, the largest chunk — $4.6bn — was from unsecured personal loans, with another $1.8bn from small business loans.

A successful launch of a Lending Club-like business would be a feather in the cap of Stephen Scherr, a former head of the financing group who was named chief strategy officer in June 2014.

Recasting Goldman as the friend of the consumer and small business will not be easy. For many people across the US, the brand is associated more readily for its legal and political scrapes after the financial crisis than its philanthropic programmes.

One former employee notes a more fundamental mismatch: the fact that making money from retail banking depends on churning simple, low-margin transactions at high volumes. That is the opposite of Goldman’s core strategy over its 147 years, which has focused on complicated deals for big clients.

Goldman is clearly gunning for growth from GS Bank: vacancy lists on its website show 22 positions available at the unit, more than in securities and investment banking combined.

Millennial fintech service Stash raises Series A funding, (New York Business Journal), Rated: A

Stash raised $9.25 million, in a Series A funding round.

Stash helps Millenials invest. Investments in Stash are Exchange Traded Funds(ETFs) or stocks. Stash picks a select group of the thousands of ETFs and stocks available, based on factors like low fees, managed risk, and historical performance. Stash recommends a set of those investments for you, based on the profile you fill out when you sign up. For each investment available to you on Stash, you can see the primary company or companies included, and can visit the website of the investment for more information.

United Kingdom

Seven in 10 Moneywise users would use P2P lending to boost savings, (Money Wise), Rated: AAA

Seven in 10 (71%) users would consider using peer-to-peer (P2P) lending in a bid to earn higher returns on savings, our latest poll results reveal.

Interestingly, our poll, which received 890 votes between 9 and 16 August, also reveals that more people have gotten into P2P lending over the last six months.

When we asked the same question in late February 2016, of the 892 who voted then, a smaller 33% said they already use P2P lending, while 38% said they’d consider doing so in future.

An increasing number of people have also now heard of P2P – with 9% not having heard of it in February, compared to just 6% now.

However, conversely the number of people who wouldn’t use P2P has risen from 21% in February to 23% in August – perhaps highlighting a greater awareness of the risks involved.

The Entrepreneur: Rhydian Lewis, RateSetter , (Startups), Rated: AAA

We’ve passed a few milestones since we wrote our first loan in 2010: we launched in Australia in 2014, passed £1bn in total lending in 2015 and we now have more than 300,000 customers. We’ve also lent more than £250m to business borrowers, which has made a real difference at a time when banks are reluctant to lend to small businesses.

However, the thing I’m proudest of is that to date, every individual RateSetter investor has received the returns they expected without losing a penny.

RateSetter was self-funded when we launched, but we’ve since raised £30m from a range of investors including City heavyweights like Woodford and Artemis.

Our intention is for RateSetter to ultimately be a publicly owned business. It’s difficult to draw a precise timeline for things like this, but it’s a process that will take at least a few years. In terms of the size of the RateSetter loan book, currently there are more than £600m of active loans – we’d like it to be several times that figure in three years’ time, which would bring us in line with a small bank in terms of scale.

We’ve focused on retail investors throughout, and kept institutional investment to less than a tenth of the total.

This might surprise you, but I actually think that the UK has taken a positive approach to regulation – we and others in our sector successfully lobbied to be brought into regulation and it has so far proved to be a good thing.

I think one of the biggest mistakes entrepreneurs make is not being committed to the long run and failing to see things through.


George Popescu