Friday March 24 2017, Daily News Digest


News Comments Today’s main news: OnDeck’s bumpy ride isn’t over. UK equity crowdfunding recovers. Capital Float partners with Amazon in India. Today’s main analysis: Subprime auto loan delinquencies on the rise. 8 out of 10 online shoppers vow not to return to retailers if they have bad returns experience. Today’s thought-provoking articles: The state of bank innovation. An earthquake […]


News Comments

United States

United Kingdom

European Union






News Summary

United States

OnDeck’s Bumpy Ride Isn’t Over (Bloomberg), Rated: AAA

On Deck Capital Inc. jumped as much as 11 percent on Thursday after a report that the New York-based online lender is an acquisition target of closely held rival Kabbage Inc.

Assuming Kabbage were to propose a traditional takeover at a standard premium, it probably would be swiftly rejected by On Deck’s earliest investors, who still own a combined stake of more than 45 percent, according to data compiled by Bloomberg.

A different type of merger arrangement might not be such a terrible idea, especially in the face of potentially heightened regulation. Together, Kabbage and On Deck could share the costs of compliance, if increased scrutiny of online lending is formalized. The combined company could also cut overlapping costs and create scale, which may help it better compete against other providers of loans to small businesses including Square Inc., PayPal Holdings Inc. and CAN Capital.

Could Kabbage’s purported interest in On Deck draw other suitors?

‘Subprime credit losses are accelerating’: There’s a problem in the auto loan market (Business Insider), Rated: AAA

US auto loan and lease credit loss rates weakened in the second half of 2016, according to a new report from Fitch Ratings, which said they will continue to deteriorate.

Losses on subprime auto loans have spiked in the last few months, according to Steven Ricchiuto, Mizuho’s chief US economist. They jumped to 9.1% in January, up from 7.9% in January 2016.

Banks are losing share in the auto lending market, potentially as a result of tightening lending standards. Independent finance companies and credit unions are stepping in to the void.

The state of bank innovation in 5 charts (Digiday), Rated: AAA

Of the more than 100 banking executives surveyed for industry strategist Jim Marous, 71 percent cited improving the digital experience in their top three priorities for 2017; half also identified enhancing data analytics as a priority and 41 percent cited reducing operating costs. 

Just 10 percent, most likely those from major institutions, indicated that investing in or partnering with a third-party fintech startup is a priority.

The biggest challenge for banks seems to be hiring and retaining innovation talent and leadership with the specialized skills necessary to lead an increasingly digital bank, according to a new report by Celent, Innovation Outlook 2017: Making Progress.

Is Kabbage Gearing Up To Buy OnDeck? (, Rated: A

OnDeck Capital, Inc has market capitalization of $321 million at present, meaning it won’t be a cheap buy. But OnDeck has seen its share price drop 80 percent since first going public in 2014, and as of February of this year had posted five straight quarters of losses. And more losses are widely expected to come — OnDeck has already publicly noted that it has been forced to set aside additional funds for future losses after determining its calculations in its internal models were off.

Kabbage announced earlier this month that it has priced the largest asset-backed securitization of small business loans in the online lending industry. That means it will be selling about $525 million worth of loans to investors, which Kabbage says will allow it to up its loan volume to around $2.7 billion.

Marketplace Lending Industry Sees Efficiency, Cost, Authentication and Transparency as Primary Drivers of Growth (PRWeb), Rated: A

Ninety percent of those involved in the burgeoning marketplace lending industry anticipate an increase in traditional bank and marketplace lender partnerships in 2017, eOriginal, Inc., the expert in digital transactions, today announced as part of the results of a survey conducted at last week’s LendIt USA 2017 Conference in New York.

The increasing convergence of traditional and marketplace lenders was a sentiment echoed by Prosper President and eOriginal Advisory Board Member Ron Suber in his keynote at the conference. According to survey respondents, the anticipated growth in partnership was despite the ongoing obstacles for collaboration, including technology integration (38 percent) and conflicting goals (27 percent).

Survey takers were also asked to highlight challenges to growth within marketplace lending. The top answers included regulations (47 percent) and access to capital (25 percent). When asked to focus specifically on the adoption of end-to-end digital transaction management solution, participants cited the challenges to be full adoption by partners (31 percent), lack of infrastructure (29 percent), security and privacy concerns (22 percent) and cost (17 percent).

Alexa Now Orders Starbucks From Ford Sync 3 (, Rated: A

Starbucks just recently announced an ordering integration with Ford’s SYNC3, the automaker’s voice-activated technology powered by Alexa. In a nutshell, this will allow drivers to voice-order their caffeinated beverage of choice while on the road.

On the new in-car voice ordering feature, customers reportedly assign their usual Starbucks order in advance and can direct the request to the 10 stores they’ve most ordered from.

Is Lending Club Really Like Amazon? (The Motley Fool), Rated: A

At the recent Lendit conference, CEO Scott Sanborn made an interesting argument: that online lending is currently in a similar place to online retail at the turn of the millennium. He read passages from a 1999 Barron’s story, “Amazon.bomb,” which criticized Jeff Bezos and foretold the end of Amazon (NASDAQ: AMZN) as we know it. As Amazon investors are well aware, that didn’t happen!

Does Sanborn have a point?

Lending Club was also a first mover in its field, and commands a leading 45% market share Sanborn argues this scale enables a similar “network effect” that will allow Lending Club to get through this tough period.

The second parallel Sanborn drew was cost savings. Just as online retailers like Amazon cut out the costs of physical stores, Lending Club and other online lenders don’t need bank branches or human underwriters. These costs savings allow online lenders to offer loans at lower rates than credit cards, which is how people traditionally obtained unsecured personal loans.

And while sites like eBay and Amazon need buyers, investors in high-yield loans are more fickle. The current low-interest rate period has made high-yield online loans attractive — but that could change if the Fed raises interest rates.

If defaults spike, Lending Club’s underwriting algorithms would come under scrutiny, and lenders might flee the platform again. In contrast, an Amazon customer pays right away, a good is shipped, and the transaction ends. And while Amazon needs to cultivate repeat customers, Lending Club is much more dependent on the financial behavior of others on an ongoing basis.

Why China’s .6 Billion Peer Lending Fraud Is Unlikely To Happen To Lending Club (LC) (CNA Finance), Rated: A

A key difference between the Chinese and US peer lending scene is the level of defaults that occur due to fraudulent listings. Up until the recent regulatory crackdown, fraudulent listings on Chinese lending platforms were rampant, often running as high as 50% versus 1% in the US.

The lack of regulation in China has also fostered a large number of fly-by-night operations opening up shop, often with dubious intentions from the get-go. The hurdles to entry for peer-to-peer lending platforms in the US by contrast are substantial. In fact regulation of the sector is considered so severe that Zopa, the largest based marketplace lender in the UK has actively shelved their expansion plans into the US in order to avoid becoming tied up in US regulations.

Why mobile might be the only platform to serve underbanked (American Banker), Rated: A

In 2015, a Federal Deposit Insurance Corp. study found that one in five citizens were “underbanked.” That same study also found that almost 8% of respondents were completely “unbanked.”

Yet financial institutions globally are serving more people than ever. A recent report from the World Bank found that from 2011 to 2014, 700 million people became account holders at banks, other financial institutions or mobile money-services providers. The number of unbanked individuals dropped by 20%, to 2 billion adults, during that same time period.

To be sure, the use of mobile banking is also growing in the United States. A recent Bank of America report found that 54% of consumers used a mobile banking app, for instance.

In 2015, Pew Research found that although two-thirds of Americans owned a smartphone, 19% of respondents rely on a smartphone to some degree for staying connected to the world around them. Further, 10% of Americans who own a smartphone lack broadband internet at home and 15% who own a smartphone admit to having a limited number of options for internet access beyond their cell phone. Deemed “smartphone-dependent,” this group is largely made up of relatively low-income individuals, consumers with less education, younger adults and minorities.

Are Peer To Peer Loans Right For Your Portfolio? (Forbes), Rated: A

Estimates vary, but the peer to peer market is expected to grow to somewhere between a few hundred billion to over trillion dollars over the coming years, as it captures a high single digit share of consumer lending. The key medium term questions for growth are firstly, how well banks react with their own online lending services, and secondly how successful peer to peer lenders are at maintaining effective lending standards.

Due to differing state regulation, peer-to-peer loans are available in the majority of states, but not everywhere, income qualifications may also apply, such as having an income of over $70,000. Currently, if you live in Iowa, New Mexico, North Carolina or Pennsylvania then your ability to own loans via peer to peer platforms is likely constrained, but in most other states in the US you may qualify.

Often peer to peer debt is issued for several years and so earning a, say, 9% return in one year is great, but if the next year the loan defaults and you lose the full value only 1 year into a 3 year loan term, then that temporary 9% return is not so attractive, and you’ve lost money.

With debt investing, you do need to pay careful attention to your downside risk if you want to be successful, because your interest payments (your upside) can be fairly small relative to the total amount you have at risk (your downside).

Again, to return to the graph above, how many of borrowers can’t pay you back in a bad economy is a reflection of your lending standards, with tighter standards you’re likely to see more borrowers able to pay you back, with looser standards your loans could see far higher loss rates on your investment. There are strong voices on both sides of this debate.

This matters because as interest rates increase, your peer to peer loans are received fixed interest payments. So earning, for example, 5% may seem attractive now, but if the Federal Reserve were to sharply raise interest rates in the coming years, then 5% may be less attractive if government debt also paid 5% interest and so you could invest in government securities, rather than peer to peer and achieve a similar interest rate, or purchase newly issued peer to peer debt at higher interest rates.

With peer to peer lending you may be invested invested in a loan for several years, whether you like it or not. Some peer to peer lenders have so-called ‘secondary markets’ that enabled notes to be traded, though there’s no guarantee your note will sell.

It is possible to defer or eliminate tax on peer to peer loans, by purchasing peer to peer loans within an IRA for example.

5 local startup leaders weigh in on what’s in store for fintech in NYC (Built in NYC), Rated: A

Clarity Money

My hope is to see more technical talent join the New York tech community in general. There are already a few unicorns in the space based in New York and this is very promising. We are noticing a lot of people in banking and consulting who are joining the fintech community because of the lack of innovation and disruption in big corporation due to regulations and bureaucracy.


First, this location is unparalleled for access to talent. New York is home to so many diverse industries — from design to marketing to risk analysis — and that helps us hire top-notch team members. Second, as a fintech company, there’s no better place to be than in one of the world’s largest financial markets.


Being based in New York has made all the difference for Payoneer. New York has always been a financial services hub, but has really become a ‘high-tech hub’ and that has helped our digital payments business grow beyond our expectations. The combination of the city’s dynamic startup community and established financial services community has allowed Payoneer to build a very strong foundation of employees, partners and customers. There are people with big dreams in all of the hi-tech hubs, but particularly in New York many of these people have been in demanding, professional environments for years, so they bring a different focus and discipline to the table. In my opinion, there truly is no place better to start or expand a fintech company than in NYC.


Being in New York enables me and the whole team to be close to our customers and partners, making sure we understand what their vision is and how we can help them overcome their challenges. The fintech ecosystem in the city has grown significantly in the recent years which enables us to learn and cooperate with other local companies.

NYC is still a significantly more traditional market than the Silicon Valley, especially in the financial sectors, and we haven’t seen as much crossover of experienced successful executives into fintech companies. In the last few months, I’ve started to get the feeling that this is beginning to change. Several people I know, who worked for 30-plus years for big banks, have moved to startups that are challenging those same banks to be better, and leaner.


ConsenSys now employs 160 blockchain and Ethereum experts with offices in several major cities around the world including the Middle East and Asia, making it the largest blockchain startup. About 40 percent of our staff works out of our office in Bushwick, Brooklyn. We’re proud of our remote-first work culture, and at the same time, many of the Fortune 500 clients of our enterprise group works with are based in New York.

Although Ethereum is increasingly catching on all over the world, there is so much excitement about it in New York that we chose to host the launch of the Enterprise Ethereum Alliance right in Brooklyn, along with 30 partners. New York has been a financial capital of the world for many years, so it makes sense that interest in blockchain would be high here.

What Is a Mortgage REIT? (Yahoo! Finance), Rated: B

Mortgage-backed securities got a black eye in the financial crisis, but real estate investment trusts that own them are currently generous to income income-oriented investors, with dividend yields averaging nearly 10 percent, according to the National Association of Real Estate Investment Trusts.

But with interest rates expected to rise, are they safe enough for a retiree who must preserve principal? Experts have mixed views.

Like ordinary bonds, mortgage securities can lose value when rising rates make older issues with lower yields less appealing. On the other hand, funds that own mortgage securities can gradually pay higher yields as newer securities are added to the portfolio.

Trying to get REIT investors to think like a property investor — and not a stock market investor (FP Street), Rated: B

In other words, to generate a return in REITS, investors need to think like a property investor — and not a stock market investor. All of which means that perceived wisdoms — including that REITs are an interest play, higher-dividend-paying REITs are more attractive investments, and REIT returns are macro-driven — need to be expunged.

6 Guidelines for Building a Client-Friendly Financial App (Think Advisor), Rated: B

The Fintech App Development Compass outlines six steps to help firms build and launch an effective app for their clients.

  1. Know Your User
  2. Focus on Access – One of the hallmarks of fintech is that it can bring financial services to underserved portions of the population.
  3. Establish and Maintain Trust – To keep that trust, they need to make sure that clients will be safe when using the app, and that their concerns and feedback will be heard by developers.
  4. Test and Iterate
  5. Drive Positive User Behavior
  6. Recognize the Value of Mutual Success

Closed-End Funds: Democratizing Alternative Investment Strategies (Think Advisor), Rated: B

Flows into the alternative asset category show this; a 2015 McKinsey article notes that global alternative assets under management grew at a 10.7% annualized rate between 2005 and 2013, twice as fast as traditional investments.

As a result, lines have blurred between traditional and alternative asset classes as investment managers battle for an overlapping opportunity set.

Open-end mutual funds can invest only 15% of their portfolios in illiquid securities. Closed-end funds do not have this restriction, making them attractive vehicles for investing in alternative strategies.

United Kingdom

8 out of 10 online shoppers vow not to go back to a retailer if they have a bad experience returning items (Net Imperative), Rated: AAA

Retailers who fail to provide consumers with a customer friendly and easy returns service risk losing a large proportion of their customer base, according to new data from leading European payments provider Klarna.

Online returns are big business for British retailers today, with nearly 9 out of 10 (87%) of online shoppers having returned items they have purchased online.

On average online shoppers estimate they returned 10% of their total online purchases in the last twelve months. With online spending in the UK reaching £133 billion in 2016, the online returns economy in the UK could be valued as high as £13bn.

A survey of 2,000 UK consumers reveals that 83% of respondents who shop online would not shop with a retailer they have a bad returns experience with. Over three quarters (77%) of online shoppers believe UK retailers need to improve their returns capabilities, while one in four (28%) have been put off returning items due to the hassle of the retailer’s returns process.

Two thirds of online shoppers (67%) say easy returns are an essential factor in their choice of retailer. 28% of online shoppers would spend more if there was an easier online returns process, while 67% say free returns mean they will buy more from a retailer over time.

Report: UK Equity Crowdfunding Recovers from January Slump (Crowdfund Insider), Rated: AAA

The report states:

“February’s OFF3R Index data, made up of 6 equity crowdfunding platforms, has shown a strong uptick funds raised since January. The figures have jumped from just under £9 million in January to well over £16 million in February. These figures were boosted by large rounds from Hibergene (raised via SyndicateRoom) and CauliRice (raised via Crowdcube). Early data from March appears to suggest that this momentum will continue for the equity crowdfunding sector. There has been an increase in the number of larger rounds this month across many of the platforms. This is consistent with the data trends that we saw last year as investors increase investments in equity crowdfunding just before the end of the tax year.”

How tech can help close the advice gap (FT Adviser), Rated: A

Robo advice has been touted over the past 24 months as an answer to the advice gap.

In the Review, which was published in March 2016, robo-advice was hailed as one of several areas where development of technology-based services could go some way towards closing up the so-called advice gap.

“That is why we need to defend professional advice and help firms by using any new emerging technology and have it embedded in their businesses, so the experience the customer receives when they come and meet with their adviser is as streamlined and professional as possible. Quite simply we cannot allow our profession to be left behind.”

As the FCA’s Mr Geale explains, technological innovation will create new ways for consumers to engage with the financial services industry, and the industry will find new ways to provide compliant products and services.

There will always be circumstances or considerations that cannot be captured by an automated model, which is why some firms, such as Learnvest in the US, offer a 24/7 email contact offering, while Australia’s Movo offers tiered packages tied to different levels of human involvement.

Open APIs to shake up small business banking market (Finextra), Rated: A

The global fintech industry, with an estimated 12,000 fintechs and counting, has changed the way small businesses can manage their money in all kinds of ways.

The promise of fintech is so great that $36 billion of venture capital and growth equity has been invested in the sector globally in 2016 alone, representing exponential growth since 2010. The promise of fintech is so great that $36 billion of venture capital and growth equity has been invested in the sector globally in 2016 alone, representing exponential growth since 2010.

Although there are big differences between small business banks and loans in costs and quality (with some banks charging twice what others do for monthly bank account fees, for example), 28% of UK start-ups don’t look into the lifetime costs of a bank account when they open one, and only 4% of businesses switch bank accounts each year. And 35% of businesses who think their banking service to be poor are still not considering switching.

To align with the Open Banking agenda, Nesta’s Challenge Prize Centre has launched the ‘Open Up Challenge’, a new £5m prize fund to inspire the creation of next-generation services, apps and tools designed for the UK’s 5 million small businesses. The Challenge is looking for 20 winning entries from anywhere in the world that will use the UK’s open banking APIs – newly available from early 2018 – to transform the way small businesses discover, access and use core financial products.

Why investors should demand even greater levels of disclosure from P2P platforms (City A.M.), Rated: B

These platforms are proving that, when it comes to matching borrowers and lenders, online is a superior location to the traditional bank branch network. A chunk of bricks and mortar cost has been removed and platforms are able to access new sources of data to determine the expected risk of the loan. This results in better rates for both borrowers and lenders.

Thankfully, the market-leading platforms, both in the UK and the US, have significantly developed their approach to disclosure. They recognise that the answer lies in validation and standardisation. They may not eat their own cooking – but they can ensure that their output is subjected to the most intense scrutiny. Zopa, Funding Circle, Ratesetter, Market Invoice, and now Prosper Marketplace in the US, are providing sufficient disclosure to allow third party validation of their lending data, in order to show their returns to a consistent standard.

Presenting granular historic data of this kind also demonstrates the correct alignment between platform and investor. Lenders should seek platforms that can demonstrate that their overriding motivation is to originate loans at an interest rate that adequately compensates for the risk of default.

Platforms rely on revenues derived from loan origination fees. So, if the status of historic lending can be meaningfully appraised, then continued loan origination fees rely on the performance of historic loans. That results in a genuine alignment between investor and originator because the economic outcomes for both have become inextricably intertwined.

European Union

An earthquake in European banking (The Economist), Rated: AAA

To date, despite dire warnings, European retail banking has been remarkably unscathed by technology-driven disruption. Customers stay loyal, and banks still do the most of the lending. Financial-technology (“fintech”) companies are beginning to mount a challenge, most conspicuously in the online-payments industry in northern Europe: Sofort, iDEAL and other fintech firms conduct over half of online transactions in Germany and the Netherlands, for example. But their reach is more limited elsewhere in Europe. Physical payments are still overwhelmingly made with cash or bank cards.

Regulators, however, are about to transform the landscape. The Payments Services Directive 2 (PSD2), due to be implemented by EU members in January 2018, aims to kick-start competition while making payments more secure. Provided the customer has given explicit consent, banks will be forced to share customer-account information with licensed financial-services providers.

This should change the way payment services work. They could become more integrated into the internet-browsing experience—enabling, for example, one-click bank transfers, at least for low-value payments. Security for payments above €30 ($32) will be tightened up, with customers having to provide two pieces of secret information (“strong authentication”) to wave through a transaction.

According to Deloitte, a consultancy, banks’ lockhold on payments serves as a handy source of income, earning European banks €128bn in 2015, around a quarter of retail-banking revenue. Many see PSD2 as a threat to their business models; they fear becoming the “dumb pipes” of the financial system.

European Commission opens public consultation on fintech (Finextra), Rated: B

The Commission has set up a Task Force on Financial Technology working across issues relating to financial regulation, technology, data, access to finance, entrepreneurship, consumer protection and competition.

Market participants and EU citizens are invited to give their feedback by responding to an online questionnaire which addresses emerging aspects of the fintech ecosystem, including the application of artificial intelligence and big data, distributed ledgers, and barriers to market entry for fintech startups.


Money Management asked financial service law firms and an Australian regtech what the top 10 common areas of regulatory and legal concern were, and broke down the nexus of technology, advice, and regulation.

The Fold Legal managing director, Claire Wivell Plater, said the fintech ‘regulatory sandbox’ specified in ASIC RG 257, would not shake up traditional advice due to capped limitations.

New said the legal crux with sandbox was taking disclosure, reduced compensation, and additional dispute resolution requirements into account.

Nearly three years after the implementation of the Future of Financial Advice (FOFA) reforms, Wivell Plater said advisers could trust technology solutions and recognise that through all the FOFA changes, it played a part in the agenda to maintain integrity in financial advice.

Managing director of regtech firm GRC Solutions, Julian Fenwick pointed to conflicted remuneration, best interests duty and continued issues of conduct risk; advisers would need to be flexible and ensure a technology partner would not compromise legal obligations or align them to a third-party.

The potential lack of flexibility in technology solutions placed best interests duty compliance as a significant area of attention for the regulator.

Vigilance was required around updates to ASIC and the Australian Prudential Regulation Authority (APRA) policy amendments, and would help advisers stay abreast of legal hurdles.

The Financial Planning Association (FPA) last year proposed robo-advisers appoint independent actuaries to monitor automated advice.

Wivell Plater said advisers were skating on thin ice when it came to ensuring automated advice still provided client and situation accurate solutions.

Lack of specialist knowledge on algorithmic resources was a pitfall for unintentional non-compliance.

‘Regtech,’ or regulatory technology, emerged as a major forerunner last year in financial services, and New said advisers had questions about check-ups on newly-implemented technologies and how they could be utilised for risk mitigation.

Wivell Plater recommended advisers check that both their systems, and those of their technology providers, were well protected against cyber-attacks which compromised privacy law.

Technology was no substitute for professionalism, which meant planners needed to ensure their own competency was up to scratch.

Wivell Plater reminded advisers that it was their ASFL duty to safeguard themselves and maintain regular checks on technological services.


Report: China’s digital edge export-worthy (China Daily), Rated: A

China is in a strong position to export its internet financial services and standards to economies along the Belt and Road Initiative, as the country maintains an “obvious” edge in the booming sector, a key report said on Thursday.

As of October 2016, the Chinese mainland had about 1,850 peer-to-peer lending online platforms, with total transactions in the first 10 months of last year exceeding 1.59 trillion yuan ($232 billion), data from the report showed.


Capital Float partners with Amazon India to disburse loans to e-sellers (India Times), Rated: AAA

Digital lending platform Capital Float has announced its partnership with Amazon India to disburse thousands of loans to e-sellers. The company – the only fintech startup to partner with the e-commerce giant – has also partnered with other leading online platforms including PayTM, Snapdeal and Shopclues.

Capital Float has designed a collateral free credit facility for online sellers called Pay Later that helps them make supplier payments within 24 hours.

3 Ways Fintech Is Disrupting The Indian Lending Space (CXO Today), Rated: A

The Indian fintech sector saw investments upwards of $1.6 billion in 2016 and has been growing at a steady rate, while investments in the global sector grew by 10% to $23.2 billion.

P2P lenders in India are primarily focussing their portfolio on categories such as personal loans, commercial loans and micro finance. The P2P lending model has great potential for growth in India considering the fact that there are over 5.5 crore small businesses operating in the country, a large percentage of which do not own bank accounts.

Though robo advisory has a low market share, it is nonetheless expected to grow at a CAGR of 68% and manage assets worth USD 5 trillion by the year 2025.

Bengaluru NGO extends loans to farmers widows in Warangal (Th Hans India), Rated: B

Rang De, peer-to-peer lending platform has associated with the town-based Sarvodaya Youth Organisation, is offering loans to the farmers’ widows in the district. At a programme held in Hanamkonda, Parkal MLA Ch Dharma Reddy distributed loan of Rs 50,000s to a group of widows of Atmakur mandal.

The selected widows were given each Rs 50,000 loan and every month 20 farmers’ widows would be selected to distribute the loans. The loans could be repaid in instalments spread over 24 months, he added.


Cato Pastoll of LendingLoop Presents Bringing Peer-to-Peer Lending to Canada (StartUp Toronto), Rated: AAA


George Popescu
Allen Taylor

Advertorial: How to Win the Battle Against Loan Stacking

Advertorial: How to Win the Battle Against Loan Stacking

As more individuals and businesses turn to online lenders for instant approval and quick turnaround/funding, the issue of loan stacking continues to make headlines. How can a consumer receive multiple loans of the same type on the same day … with no intention of paying and without raising flags? When it comes to loan stacking, […]

Advertorial: How to Win the Battle Against Loan Stacking

As more individuals and businesses turn to online lenders for instant approval and quick turnaround/funding, the issue of loan stacking continues to make headlines. How can a consumer receive multiple loans of the same type on the same day … with no intention of paying and without raising flags? When it comes to loan stacking, timing matters. The key is the speed of the transactions, which sometimes occur simultaneously or within a few minutes of each other, coupled with the length of the reporting gap to credit bureaus.

Loan stacking is an ongoing concern with serious consequences for marketplace lenders. Like all fraud, it greatly increases risks for defaults and erodes profits. The issue has lenders scrambling to shield themselves while continuing to satisfy customer expectations.

Loan Stacking: What Is It?

Though definitions can vary slightly, most financial experts agree that loan stacking occurs when a consumer secures multiple loans of the same type from different financial institutions by exploiting weaknesses and time lags in reporting to credit bureaus. This intentionally deceitful behavior constitutes fraud, as opposed to a consumer simply shopping for multiple options.

Not Your Grandfather’s Loan Stacking

Sometimes called “credit stacking,” the practice dates back to the 1800s. But it became a much bigger issue in the early 2000s, when online small-dollar lenders began dealing with its modern version. The fraud proliferated as automation decreased the time necessary to secure a loan and receive proceeds. In subsequent years, loan stacking has been compounded by lead generators propagating consumer applications to multiple lenders electronically.

Lenders have tried to solve the problem in multiple ways. Some have simply implemented more aggressive underwriting, seeking consumers who appear responsible with their use of credit. The challenge is that lenders are working from a false assumption that consumers with higher credit scores won’t stack multiple loans.

In evaluating available credit reports, lenders often search for dates and frequency of hard post inquiries. However, this approach has limited success because the lead generation environment causes multiple inquiries that may not be an accurate reflection. Even “real-time” reporting, which reduces the window of invisibility from days to hours, is an incomplete remedy because it allows a brief blind spot to exist.

Finally, a Solution That Closes the Reporting Gap

Clarity Services offers Temporary Account Record, an innovative solution that further closes the gap from hours to minutes, greatly reducing risk for underwriting unsecured loans to consumers throughout the country.

It’s similar to the process that occurs with credit cards, where the final transaction on a purchase isn’t posted for several days. At the time the purchase is approved, a temporary hold is placed on the credit card for the amount of money that covers the transaction – thereby reducing the available credit balance. A Temporary Account Record, which is typically triggered by a consumer’s e-signature, works the same way.

For example, if a loan is approved at 10 a.m. the lender submits a temporary tradeline, which is available for other lenders to view in the Clarity system until it is replaced with a permanent tradeline record.

Lenders can see other tradelines, which exclude lender names, and make a determination of whether the consumer can handle the stacked loan. Both lenders win; the lender who submits the temporary tradeline reduces the likelihood that someone else will stack a loan and overextend a consumer after they’ve made a loan. The other lender has visibility into a possible stacking that can indicate a consumer may have difficulty with repayment.

Benefits of Temporary Account Record:

  • Closes the reporting “window of invisibility”
  • Makes it much more difficult to stack loans
  • Is necessary if proposed CFPB small-dollar rules become law
  • Lowers default rates

So, what type of information appears in a Temporary Account Record? Structurally, it is identical to a traditional account record, including data such as loan amounts and payment terms. What’s different is a flag that notes it’s a temporary record and not a funded tradeline record.

Add Clarity and Reduce Risk to Subprime Lending

The value of Clarity’s subprime consumer credit data cannot be overstated, particularly when you consider that 51 percent of U.S. households fall into the nonprime category, as well as consumers with no credit file or thin files that don’t generate a traditional credit score. In the U.S. today, there are roughly 53 million people without a reliable FICO® score, either because their credit history is insufficient or nonexistent.1 Clarity maintains a dedicated, full-time Fraud Prevention Team to provide lenders with maximum protection against loan stacking and other threats.

Safeguard your profits! Call Clarity’s fraud experts today at 727-400-6754 to schedule a brief consultation.

1 FICO. (2015). Insights White Paper No. 90, Can Alternative Data Expand Credit Access. Retrieved from


Tim Ranney is president and CEO of Clarity Services, Inc., a real-time credit bureau providing credit-related data on subprime consumers. Prior to founding Clarity in 2008, Ranney spent 20 years as a leader in internet security and risk management, serving as COO of an industry leader and senior executive for both Network Solutions and VeriSign.