- Today’s main news : Sharestates hits $1.3bil in funding capacity; MeasureOne raised $2.3 mil for student loan analytics ; Indian p2p market is growing at 30-35% per month, examples, and data; Fitch claims the Chinese structure finance market is heating up.
- Today’s main analysis : Moody’s SME securitization challenges ; US SME loans are apparently getting more expensive ; A new way for banks and fintech to collaborate via a co-working space;
- Today’s main thought provoking : 4 thoughts from Blackstone’s CEO and what Wall Street’s data hunters do and why;
- 4 challenges for small business marketplaces that will reflect on securitizations. A great insight from Moody’s, a must read for all alternative credit ecosystem participants to imagine new products, problems, solutions or to better understand the market’s needs and future.
- A talk was given by the Comptroller of the Currency on marketplace lending. I extracted quite a lot from his talk.
- And an article that summarizes the talk more briefly than I did.
- Sharestates has secured $1.3billion in investment capital through partnerships only a few months after securing $300 mil. Volumes in the real estate crowdfunding are starting to become serious.
- A great analysis by C2FO on cost of capital , trends and more for SMEs. This report contradicts quite a few latest reports and surveys that claim the opposite ( SME optimism is on the rise, and borrowing is getting cheaper). This survey looks more thorough but it is still hard to figure out who to believe. At least we can say that the trend is unclear.
- MeasureOne raised $2.3 million for student loan analytics.
- An interesting article about a new business : data hunters. Great examples. Also a must read to understand how the future of business is going to look like.
- Blackstone CEO believes much of the hedge fund industry will deviate from 2/20 due to performance troubles. And other thoughts. Thought generating.
- Yesterday we covered Lending Club’s new CFO hire. Today a little bit more information and background.
- An article stating the obvious, but sometimes it is good to repeat it : P2P lending is not the same as a savings account for retail investors.
- A new Bank-Fintech partnership type: work together in a co-working space. A very interesting idea who will be very attractive to many entrepreneurs. I think there is space for such programs in NY and SF easily.
- Chinese structured finance market is growing and fast. All structured finance market participants should take note.
- News Comments
- United States
- Moody’s: US small business marketplace lending securitizations encounter four key risks, (Moody’s ), Rated: AAA
- Comptroller Discusses Marketplace Lending, (OCC.gov), Rated: AAA
- U.S. bank overseer plans report on marketplace lending this fall, (Reuters), Rated: A
- Sharestates Hits the $ 1.3 Billion Mark in Funding Capacity, (PR Newswire), Rated: AAA
- Finding Cheap Loans Is Getting Harder For Small Businesses Around the World, (Bloomberg), Rated: AAA
- MeasureOne – Higher Education and Student Loan Analytics Firm – Provides Improved Insights into Student Loan Repayment and Risk, (PR Newswire), Rated: A
- Wall Street’s Insatiable Lust: Data, Data, Data, (Wall Street Journal), Rated: AAA
- Steve Schwarzman, Blackstone CEO, interview analysis, (Termsheet, Email), Rated: AAA
- Lending Club names former WaMu exec as its new finance chief, as bid to reassure investors continues. (San Francisco Business Times), Rated: A
- P2P lenders not like having money with a bank, (Bendigo Advertisers), Rated: B
- A new fintech coworking space finds big bank partners, (Tradestreaming), Rated: AAA
- Fitch: Chinese Structured Finance Market Continues to Expand, (Reuters), Rated: AAA
- P2P lending on growth trajectory ahead of RBI guidelines, (Business Standard), Rated: A
- With new RBI norms, P2P lending startups are hoping to attract VCs , (Economic Times), Rated: B
Moody’s: US small business marketplace lending securitizations encounter four key risks, (Moody’s ), Rated: AAA
In a new report, Moody’s Investors Service examines several credit risks in securitizations backed by loans to small businesses which are originated by US marketplace lenders (MPLs) that focus on lending to businesses with less than $10 million in revenues. These key risks have been recent topics of discussion and debate among sector participants. As small business MPLs originate more loans, they are likely to continue to turn to asset-backed securities (ABS) to fund their loans.
1. As a result of the short history of MPLs, the lenders often have not calibrated their proprietary credit models for a long enough period of credit history, such as a full credit cycle, to be considered dependable.
2. Lack of alignment of interest between the MPL and securitization investors could pose risks to the securitizations.
3. Moody’s says the regulatory environment with regards to small business marketplace lending is relatively new and susceptible to change.”If MPLs are negatively affected by regulatory scrutiny or changes, a weakening of their financial strength could damage their securitizations in a scenario in which that outcome leads to servicing disruptions or leaves MPLs unable to honor obligations to repurchase ineligible loans from the transactions under their representations and warranties, among other potential risks,”
4. The ability of small business MPLs to carry out servicing responsibilities through a credit downturn is a risk in small business marketplace lending transactions because MPLs have short operating histories and may be financially vulnerable in a credit downturn if loan origination volumes deteriorate significantly.
Comptroller Discusses Marketplace Lending, (OCC.gov), Rated: AAA
I’ve been fortunate to oversee financial services, banks, and savings associations of all shapes and sizes for more than 30 years, at the federal and state levels.
Marketplace lending may use new technology or techniques, but it’s still about extending credit to borrowers—something that’s been done for more than 3,000 years. As entrepreneurs, you recognized an opportunity to deliver greater value by improving how credit is provided, making it faster, cheaper, and more convenient.
The rapid growth in marketplace lending over the past few years suggests that, as a group, you are on to something. The surging demand for this type of service has gotten investors’ attention. Whole loan sales to institutional investors have been increasing as a source of cost-effective funding, and asset-backed securities have provided an additional source of funding. In 2015, institutions originated about $6.6 billion in securities backed by marketplace loans—that’s three-fourths of the $8.2 billion in such securities originated to date.2 Maintaining strong, stable funding sources is critical to sustaining the sort of growth we’ve seen in marketplace lending.
However, the growth that we’ve witnessed has occurred under relatively positive conditions.
Long-term performance is just one thing to watch. The expansion of marketplace lending raises four other important policy and regulatory questions.
First, do new techniques, technologies, and products raise concerns about compliance with existing laws and regulations? Let’s take the example of the new algorithms for determining the creditworthiness of a consumer. While they have the potential to make credit available to more people who may not have otherwise qualified, do they raise issues of illegal bias? Does an underwriting model create a disparate impact on a particular protected class? New companies and companies deploying new technology should understand and ensure their products and services comply with existing laws, such as the Equal Credit Opportunity Act, that apply to all creditors—even those that are not banks. Lenders who operate without considering these questions may be accruing underappreciated financial risks and reputational liabilities.
Second, are existing laws and regulations adequate? I understand that earlier today, you heard from Congressman McHenry, who has been a real thought leader on these issues, about his views on the adequacy of the current statutory framework.
Third, do innovative activities, products, or services present a need for entirely new regulation or law to protect the public’s interest or prevent risk to the broader financial system?
The fourth type of policy question regarding innovation involves answering should innovation be regulated and, if so, “who” should be responsible for regulating an organization or activity. To some extent, the conversation about whether there should be a national substantive law or a federal license or charter for marketplace lenders and fintech firms is part of answering the question of “who” should regulate the activity.
We have heard voices on both sides of whether to grant federal banking charters to fintechs. Some have suggested that federal charters could ensure that fintechs engaging in banking activity receive rigorous, bank-like federal regulation and ongoing supervision. This may also provide a more level playing field for financial services offered on a national scale. Others have suggested that federal charters could help fintechs better navigate the existing regulatory landscape by consolidating oversight, reducing licensing burden, and applying a single uniform set of rules
On the other side, some have expressed concerns that, if granted a limited charter, companies might face lighter supervision or fewer consumer protections would apply. Others expressed concern that fintechs may seek federal charters to avoid consumer protections granted by state laws. The agency faced similar questions when it granted the first charter for Internet based banks in the late 1990s.
If we at the OCC do decide to grant limited-purpose charters in this area, the institutions who receive the charters will be held to the same strict standards of safety, soundness, and fairness that other federally chartered institutions must meet.
These four types of policy questions are among the many that our Innovation Framework Development Team is considering in their work to create a framework to enable the OCC to assess responsible innovation.
One. The framework will support responsible innovation.
Two. The framework will foster a culture within the OCC that is receptive.
U.S. bank overseer plans report on marketplace lending this fall, (Reuters), Rated: A
The U.S. Comptroller of the Currency said on Tuesday his agency plans to complete this autumn a framework to regulate marketplace lending, citing concerns that new financial-technology innovations may pose risks to consumers and the banking system.
Sharestates Hits the $ 1.3 Billion Mark in Funding Capacity, (PR Newswire), Rated: AAA
New York based Sharestates, one of the US online real estate crowdfunding platforms, announced today that it has surpassed $1 billion in committed capital for the purchase of loans.
Sharestates launched its full operation less than two years ago in February of 2015. Since then, the firm has originated over $150 million in loans across more than 210 projects, with an average loan size of approximately $728,000. To date, Sharestates has returned over $50 million to investors with an average return rate of 11.36% for 2016, with zero loss of principal. Sharestates’ current trajectory has it on a $25-$30 million month to month origination volume, leading it to break over $200 million in originations by years end.
This new round of financing comes a few months after Sharestates received $300 million in loan purchase commitments, driven by collaborations with Prime Meridian Capital Management and Colony American Finance.
To compete in the market, Sharestates leverages proprietary technology and a close partnership with The Atlantis Organization, which – founded by Radni Davoodi and Raymond Y. Davoodi in 2004 – has become one of the nation’s leading title agencies with over $4 billion in closed transactions.
Finding Cheap Loans Is Getting Harder For Small Businesses Around the World, (Bloomberg), Rated: AAA
Only 48 percent of small- and medium-sized businesses said they can get financing at rates below 8 percent, according to a new survey from C2FO, a financial technology startup that has created a marketplace where small- and medium-sized businesses can get paid early by the large companies they supply. The inaugural such survey, released last year, showed nearly 60 percent of respondents were able to secure funding at rates below 8 percent.
C2FO canvassed more than 1,800 small- and medium-sized businesses (SMEs) in the U.S., U.K., Germany, France, and Italy, with 80 percent of those firms having $2 million or less in gross annual revenue. It found borrowing was priciest in the U.K. and the U.S. with 42 percent and 47 percent of SMEs borrowing at a rate of below 8 percent, respectively. That compares with 52 of respondents in France, 51 percent in Germany, and 58 percent in Italy.
An apparent higher cost of capital has caused some of these firms to look at other sources, such as peer-to-peer, or marketplace, lending that involves directly matching would-be borrowers with lenders. On average, 18 percent of respondents in each country reported using peer-to-peer lending at some point.
More expensive credit in the U.S. stands somewhat at odds with the most recent survey from the National Federation for Independent Business (NFIB), which showed just 3 percent of small business owners reporting in July that their borrowing needs were not satisfied — 1 percentage point above the record low reached in September of last year. Still, the NFIB small business optimism survey has been sputtering with sentiment making little to no improvement over the last year, falling 0.2 point in August to a three-month low of 94.4.
“Uncertainty is high, expectations for better business conditions are low, and future business investments look weak,” NFIB Chief Economist Bill Dunkelberg said in a statement. “Our data indicates that there is little hope for a surge in the small business sector anytime soon.”
MeasureOne – Higher Education and Student Loan Analytics Firm – Provides Improved Insights into Student Loan Repayment and Risk, (PR Newswire), Rated: A
MeasureOne, a higher education data and analytics firm focused on the $1.4 trillion-dollar student loan market, today announced $2.3 million Seed financing led by Socratic Ventures along with Colchis Capital and University Ventures. The investment will allow MeasureOne to expand its rich data repository and analytics capabilities to help higher education institutions and lenders invest in talent, with better insights into student risk and potential.
MeasureOne specializes in data-driven insight for the higher education finance industry, and its most recent report on private student lending shows that families are effectively managing their private student loans.
MeasureOne, founded in San Francisco with offices in Dallas, TX and Ahmedabad, India. MeasureOne is applying data science and industry expertise in order to increase understanding of student loans and empower student loan lending, risk assessment, repayment, capital market investments and public policy development.
Wall Street’s Insatiable Lust: Data, Data, Data, (Wall Street Journal), Rated: AAA
A new species is prowling America’s most obscure industry conferences: the data hunter.
In one recent example, Mr. Haines discovered a mobile advertising company that also collected data on the type of device someone was using when displaying an ad to them. The data helped estimate iPhone sales ahead of Apple Inc.’s announcements in 2011 and 2012, and it was lucrative for Mr. Haines’s old company, Quanton Data.
Erik Haines, head of data and analytics at New York-based Guidepoint Global LLC, trawls the globe for meaningful data to sell to hedge-fund clients.
Hedge funds and other sophisticated investors are increasingly relying on intermediaries like Mr. Haines, 35 years old, as they seek insights into a company’s sales and health that aren’t readily available from conventional sources.
Gone are the days when a hedge fund would call up a random sampling of Aéropostale stores to ask managers about sales or simply visit big-box retailers to get a feel for the traffic.
The firm struck a deal with a large insurance company to find out every day what kinds of cars received insurance policies, a possible indicator of how sales are going for automobile manufacturers. Another deal is with a company that surveys construction permits across county municipal offices, which is a “proxy for construction activity,” he said.
There are also companies set up to create exhaust. In those cases, often a person’s data is the price of a free phone application or service. For example, app provider Slice Technologies Inc. lets users track the arrival of packages to their homes in its signature Slice app or block spam through another service it owns called Unroll.me without charge. But in exchange for those services, about four million users allow the company to read their emails. Slice, in turn, also analyzes receipts and other data in a person’s email which it packages into anonymized data for advertisers and hedge funds. It might showAmazon.com Inc. selling more of a particularly profitable item or an increase in Netflixsubscriptions, which investors can use as a factor in their trades.
Steve Schwarzman, Blackstone CEO, interview analysis, (Termsheet, Email), Rated: AAA
Dan Primack in Termsheet reports:
“Blackstone boss Steve Schwarzman was interviewed at a CNBC conference yesterday by Becky Quick, and said four things of particular interest: (1) He believes much of the hedge fund industry will deviate from 2/20 due to performance troubles; (2) When asked what Blackstone’s stock price drop over the past year is a reflection of, he replied: “That’s a reflection that investors are wrong.” (3) The Fed will eventually raise rates (in part because the media is “daring” it to do so), but he believes the only real impact will be on financial markets, not on the real economy. (4) He declined to endorse either presidential candidate, and also seemed to accept the idea of changing the tax treatment of carried interest, as part of a more comprehensive tax reform package.”
Lending Club names former WaMu exec as its new finance chief, as bid to reassure investors continues. (San Francisco Business Times), Rated: A
Comment: We covered these news yesterday. More information today.
Thomas Casey will start his term at Lending Club Sept. 19. He was the finance head at WaMu prior to its sale to J.P. Morgan Chase & Co. in 2008 and was most recently finance chief for Acelity LP Inc.
In mid-July, Lending Club appointed BlackRock Inc. veteran Patrick Dunne as its new chief capital officer, as the company continues to struggle to restore investor confidence after forcing out its former CEO amid a lending scandal. Dunne is well known in Bay Area finance circles, having formerly headed BlackRock’s S.F. office.
P2P lenders not like having money with a bank, (Bendigo Advertisers), Rated: B
A new wave of online marketplaces is offering savers, investors and those running their own super funds much higher interest rates on their cash than they can get from banks.
All use “risk-based pricing”, where borrowers with the best credit scores pay lower rates of interest than those with poorer creditworthiness.
With a bank, everyone who wants a car loan who is considered a good risk pays the same interest rate.
With P2P lenders, the investors say how much money they want to invest, the term and the interest rate they want to receive. Then it is an auction process to match-up lenders with borrowers. [Comment: To my knowledge there are very few P2P lenders who still do reverse auction if any at all ].
While P2P lenders could be a good option as part of a well-diversified portfolio, they are not like having your money with a bank. [Comment: It is in the entire industry’s interest to make sure retail investors have a realistic expectation of risk vs reward of what they are getting into. Unhappy retail investors who have the impression that fraud was committed usually attracts draconian regulation. ]
A new fintech coworking space finds big bank partners, (Tradestreaming), Rated: AAA
For banks, just keeping up with customer expectations forces them to run at breakneck speed. To do this, some institutions run hackathons or add bean bags and an open space floor plan.
A new model developed by Israeli fintech hub, The Floor, solves this problem. Four of the world’s largest banks, HSBC, Santander, RBS and Intesa SanPaolo partnered with the the coworking space, looking for better dealflow. In addition, Accenture, KMPG and Intel are also cooperating with the new program.
The Chinese Pando Group, a $250 million venture firm, is an investor in The Floor and also provides a bridge to the East Asian market, traditionally ignored by Israeli companies.
Citi and Barclays also operate fintech accelerators in Israel, but those are focused on seed stage startups and operate as any other accelerator. The Floor targets companies in growth stage that have already raised at least $1.5 million in equity. “The goal is to get these startups integrated in banks,” explained Cohen.
The banks have a final say in approving companies into the coworking space. “We are a boutique coworking space,” said Moises Cohen, one of The Floor’s founders.
The Floor targets companies in growth stage that have already raised at least $1.5 million in equity. “The goal is to get these startups integrated in banks,” explained Cohen.
The Floor’s management team uses their industry connections to dramatically shorten the time it takes a participating fintech firm to get a pilot with a major bank. In at least one case, the team managed to get a startup integrated with a partner in under 2 months.
The model has attracted 10 companies since the hub was founded early this year. The Floor plans to expand that number to 25, or 5% of the fintech firms located in Israel. The new coworking space opened in August in the Tel Aviv Stock Exchange building. Before that, the companies worked in their own spaces. One company relocated from Russia to join The Floor.
Fitch: Chinese Structured Finance Market Continues to Expand, (Reuters), Rated: AAA
China’s structured finance market will continue expanding in both scope and scale, with increased asset-class diversification.
A total of CNY193.4bn (USD29.8bn) of Chinese structured finance transactions were issued in 2Q16, representing a 96% yoy increase. The increase was principally driven by 242% growth in the Asset-Backed Specific Plan scheme, which is regulated by the China Securities Regulatory Commission.
Issuance under the Credit Asset Securitization (CAS) scheme, which is regulated by the People’s Bank of China and China Banking Regulatory Commission and is the leading structured finance market by size, increased 43% yoy. The increase was predominately due to residential mortgage-backed securities (RMBS) and auto-loan asset-backed securities (ABS) issuances, although limited by a significant fall in collateralised loan obligation issuance. Fitch expects both RMBS and ABS asset-classes to maintain the growth momentum in 2H16.
Highlights for 2H16 include the issuance of three non-performing loan (NPL) ABS and two asset-backed note (ABN) securitisation transactions.
The three NPL ABS deals, originated by Bank of China Ltd. (A/Stable) and China Merchants Bank (BBB/Stable) were pilot transactions, as the regulators have restricted the market during the 2008 global financial crisis.
Fitch expects more NPL ABS to be launched in the near-term, as the government has granted quotas of CNY50bn to six commercial banks to help them deal with rising NPL ratios.
The two ABN securitisation transactions adopted a special purpose trust structure similar to CAS scheme, the first time this asset-class has used this structure since inception in 2012. This type of instrument allows non-financial corporates to issue asset backed notes in China’s interbank bond market.
The opening up of the interbank securitisation market to non-financial corporates leads Fitch to expect a continued flow of ABN issuance, as it provides a deeper investor-base than the stock-exchange bond market
A full copy of the report, China Structured Finance Quarterly – 2Q16, can be found here.
P2P lending on growth trajectory ahead of RBI guidelines, (Business Standard), Rated: A
While RBI prepares the blueprint to regulate the sector, for some of the pioneers in the field, business is growing at the rate of an average 30-35 per cent on a monthly basis.
Delhi-based Faircent, which started operations around 2014, saw almost more than ten times growth in loan transactions in the last one year, according to Rajat Gandhi, founder and CEO, Faircent. So far, the company has raised close to $3.5 million, with one of the investors being Mohandas Pai, former director at Infosys. On an average, there has been an almost 35-40 per cent growth in monthly business for the company, according to Gandhi. The number of loan requests in the platform too has doubled between April-September 2016, from about 14746 in April to about 29108 in the beginning of September.
Another P2P lending platform, Lendbox, which started operations about ten months back, has already facilitated loans of around Rs 9 crore in its platform. Loan disbursements through the platform has been growing at around 30-32 per cent on a monthly basis, according to Ekmeet Singh, CEO, Lendbox. Further, the company is looking to raise around $3 million from investors.
The industry is expecting RBI to create separate category of NBFCs (non-banking finance company) for P2P lending on the lines of NBFC MFIs (Microfinance Institutions), which in turn is expected to give a strong footing to P2P facilitators.
“Since P2P platforms do not undertake lending themselves, and are mere facilitators, capital requirement of Rs 2 crore, which is at a par with NBFCs, could be too high for most P2P platforms to meet. Hence, we suggested RBI to create a separate category of NBFCs,” according to the founder of a P2P company.
“After RBI came out with draft regulations on P2P lending, there has been an increase in interest in the sector from institutional investors as well as borrowers and lenders. We are in advanced stages of discussions for raising around $3million to fund growth,” said Singh.
Micrograam, a rural-centric P2P firm is looking to raise around Rs 10 crore from investors, said Rangan Vardan, founder, Micrograam. At present, the capital base of the company is close to Rs 2.5 crore. The company has facilitated lending of about Rs 21 crore in the last five years. In 2014, the company had roped in V Balakrishnan, former Chief Financial Officer of Infosys, as its chairman.
Hyderabad-based i-Lend, which started operations around 2013, has been going slow in lending, but is expecting a surge in business and institutional lending after RBI comes out with final guidelines on P2P lending. The company is looking to raise around $1.5-2 million from investors.
“At present, we are growing at a rate of around 15-20 per cent on a monthly basis. We are present in three cities–Hyderabad, Chennai and Chandigarh. We are planning to expand to Bangalore soon. The sector is waiting for RBI guidelines. Once it comes out, institutional investments are likely to increase significantly,” said Shankar Vaddadi, Founder & Director, founder and director, i-lend.
With new RBI norms, P2P lending startups are hoping to attract VCs , (Economic Times), Rated: B
There are about 40 [P2P lending] entities in the country, according to Xeler8, which tracks startup activity in the country. Mohandas Pai, who has backed Faircent, said the Reserve Bank of India’s regulatory guidelines will bring clarity, which will attract more players and intensify competition.
On the other hand, regulation may also lead to many players shutting shop if they’re unable to meet requirements such as maintenance of Rs 2-crore capital and an interest rate cap, which were published in the RBI’s discussion paper in May.
“I know of at least five startups from this space that will have to shut down once the final guidelines are out,” said Sunil Kumar, founder, Bengaluru-based P2P startup Loan-Meet, which has been bootstrapped since it started operations last year.