Introduction Online lenders are fast becoming the first port of call to avail loans and have been attracting strong funding interest from VCs and PEs. This demand for a digital lending experience has also forced traditional lenders like banks and credit unions to figure out the technology which will allow them to originate loans in […]
Online lenders are fast becoming the first port of call to avail loans and have been attracting strong funding interest from VCs and PEs. This demand for a digital lending experience has also forced traditional lenders like banks and credit unions to figure out the technology which will allow them to originate loans in a flexible yet scaleable way. They have two options: Buy or Build.
The build option can be extremely expensive and time consuming. But the buy option leads to a digital experience that is constrained, as you are dependent the features and functionalities of the vendor. Moreover, there is no way to really differentiate in the eyes of the digital customer. The solution is DigiFi: an open source tech platform which also allows you to customize along with a layer of additional services like hosting, support, platform implementation, etc.
DigiFi was founded by Joshua Jersey and Bradley Vanderstarren in 2014. It started its life as Promise Financial, an online lender, and raised $110 million in credit capital. It built up its own proprietary tech as there was no solution provider in 2014 offering an end-to-end loan origination platform that could automate the entire process. They sold off the tech to a large lending institution in 2017 and pivoted to DigiFi, one of the world’s first open source loan origination systems (LOS) which equips the lenders with flexible and modern tools to create unique platforms and digital experiences.
The company’s ideology is simple: That is to give other incumbent lenders, branches, credit unions, and startup digital lenders a platform where they do not struggle to build core lending capabilities from scratch. The company utilized the year 2017 and early 2018 to build up its platform, and started working with clients in late 2018. The company, with 10 people, has raised $4 million in equity to date and is based in New York.
The Market’s Pain Points and the DigiFi Solution
The ‘build or buy’ question creates a space for a platform that can bring together the qualities that fulfill the core origination requirements of the lending market and yet customize to give the client a competitive edge over other players. DigiFi empowers its clients to control the features and UI/UX so that it suits the specific needs of their unique client base. The existing tech vendors force the lenders into a rigid structure that limits flexibility to differentiate and provides the exact same experience for all sets of clients.
DigiFi gives the best of ‘buy vs. build’. Thus, DigiFi clients do not need to start from scratch and yet have the power to tailor the tech (buy and build, a win-win!). The company’s core platform is open source, and the source code can be accessed on Github. Revenue is generated from acting as a layer that provides hosting, support, platform implementation and customization services.
In crux, the platform of the company has features like complete lending CRM, decision engine for lending decisions, machine learning environment, and open-API architecture, and it can be configured for deployment across a range of lending verticals that include consumer, mortgage, small business, and commercial. DigiFi gives out the open source platform and its documentation for free.
The platform of the company is currently being leveraged by Sprout Mortgage, Mariner Finance, Constant Energy Capital, Greenwave, and Home Point Financial.
The Platform in Detail
The company provides its platform to the lenders for free and charges for additional services of configuration, setup, support, and running. Depending on the requirements of the client, DigiFi offers support plans for a monthly fee. The customization and platform implementation are charged on an hourly basis. The implementation time and cost varies. The implementation might take up to 4-8 weeks at a minimum and can take up to months if the lender needs to build out features from scratch. As compared to years and millions of dollars for building an in–house model, the DigiFi solution is usually in the 5-6 figure range.
As per the CEO of DigiFI, the incumbents are getting better with time as they have a lower cost of capital and existing customer base, positioning them to succeed. Getting the right tech partner on board is thus the critical piece to build a successful moat.
DigiFi offers a platform to lenders looking to tap the online lending market that not only equips them to get the best of the ‘buy vs. build’ system but also ensures full support and customization. It powers the lender with ready-made solutions, fast implementation, support and training, feature controls, unique customizations, flexible hosting options, and a contributor community. It provides the option to integrate all major data sources – Transunion, Equifax, Experian, MicroBilt, LexisNexis, etc. With over 45,000 development hours, DigiFi platform provides it clients a strong barrier to entry with complete configurability with other APIs, true scaleability with AWS, and integrated AI ML solutions.
The 2008 financial crisis saw a lending freeze from traditional banks. Grabbing the opportunity, alternative lenders filled the space. Drawn by superior returns, sophisticated financial investors and funds sprung up to invest via these platforms to directly/indirectly lend to consumers and small businesses. Princeton Alternative Funding is one such player. But the company has had to […]
The 2008 financial crisis saw a lending freeze from traditional banks. Grabbing the opportunity, alternative lenders filled the space. Drawn by superior returns, sophisticated financial investors and funds sprung up to invest via these platforms to directly/indirectly lend to consumers and small businesses. Princeton Alternative Funding is one such player. But the company has had to face rough weather, with bankruptcy protection and multiple lawsuits hobbling its progress.
Princeton Alternative Funding’s Humble Beginnings
Jack Cook (CEO) founded Princeton Alternative Funding LLC (PAF), a fund management company on March 1, 2015. The company is headquartered in Princeton, New Jersey and helps accredited and institutional investors achieve strong positive returns in the alternative lending sector. Walt Wojciechowski is the CFO and Jeff Davner is the President of the company.
Princeton Alternative Funding LLC is the general partner of Princeton Alternative Income Fund (PAIF), a flexible 3(c)(7) hedge fund. The inspiration for PAF was the evolution of fintech. There were no online lenders 15 years ago, and it is the recent technology advancement that has made it possible for the alternative lender market to come into forefront.
Though the company started on a strong note, its relations soured with its biggest limited partner in late 2015.
The PAIF Bankruptcy Filing
Ranger Direct Lending Trust (RDLT) along with RSIF and its affiliate “Ranger,” invested indirectly in PAIF Offshore. PAIF Offshore is a British Virgins Island Offshore entity, which is a limited partner in PAIF. According to the company’s filings, Ranger’s actual motivation was not to be a limited partner but the owner of the fund. They had reflected to their own investors that they control and own PAIF, which was materially false, according to PAF spokesmen. Though the two parties had major disagreements, PAIF was churning great returns for Ranger.
In fact, in 2015, Ranger received cash payments of $2,299,070.00 in the form of returns from PAIF, but they again attempted to acquire an equity interest in PAF. This attempt was rejected by PAIF, which forced Ranger to look for other means, which in turn destabilized the fund operations. Its bankruptcy filing states that the company entered bankruptcy protection while continuing to fight Ranger and its unwanted advances.
The case has turned more complex with Argon Credit, PAIF’s largest finance company borrower filing a bankruptcy petition in December 2016, placing 60 percent of the company’s assets in the PAIF fund at risk. Shortly after, Bristlecone Holdings, another one of PAIF’s finance company borrowers, filed a bankruptcy petition in the U.S. Bankruptcy Court for the District of Nevada.
PAF’s Climb Back to the Top
2015 saw the company open its fund raising doors. In March, they received their first capital. From March 2015 to Feb 2016, Ranger put in a total of $62 million. The company received new management in March 2016 after it was discovered that certain executives colluded with Ranger. The next year, they added more than 13 limited partners. The fund is now focused on providing revolving lines of credit to finance companies.
The fund has purchased a total of 12 portfolios from LOC (line of credit) originators. Two of them have been paid off and the rest are being serviced. These loans mainly comprise of small-dollar short-term consumer loans. All of them are installment loans, and some fall under lease/rent-to-own categories. There are a total of 60,000 consumer loans in the entire portfolio.
The company has an exclusive partnership with Microbilt Inc., a Consumer Rating Agency that provides top of the line analysis and monitoring capabilities. It will have access to proprietary databases and scorecards of MB, which will allow it to analyze loan originators and their performance as well as evaluate borrower performance on a granular level. The proprietary technology software includes auto underwriting tools, statistical models, and software tools to determine the validity of each loan.
PAF is now primarily funded by Microbilt to the tune of almost $2.5 million.
The year-to-date audited adjusted returns have exceeded the fund’s performance targets since its creation.
2015: 13.97% YTD return
2016: 17.41% YTD return
2017: 15.17% YTD return
Princeton Alternative Funding does not have many competitors. Even players like Victory Park Capital have exited the space. But Princeton Alternative Funding firmly believes the alternative lending sector and its niche is a growing market. Banks and financial institutions are not able to offer easy credit to the consumer market, which is where alternative lending facilities come into play. It is looking to become a force to reckon with in its niche of short-term small-dollar consumer loans.
News Comments Today’s main news: Wealthfront gets backing from Tiger Global. Funding Circle partners with Kansas bank. Elevate customers see rise in credit scores. NextCapital raises $30M for digital advice platform. London tops tech funding. HMT Treasury says P2P lending not deposit-taking. Yields lower in Euro zone as MiFID II begins. Today’s main analysis: FT Partners’ CEO monthly alt lending market […]
Why did business loan growth fall in 2017? AT: “Maybe businesses are profitable without loans. If cash reserves are growing, they may be managing their businesses on those. On the other hand, business owners could be worried about an economic downturn that could crush their businesses, especially if they are in debt. A third option may be the uncertainty caused by a Trump Administration that is unpredictable.”
As FT Partners wraps up 2017 and looks forward to 2018, we are extremely proud of our accomplishments. Celebrating over 16 years in business, we executed a record number of deals, significantly expanded our team, continued our global expansion and won a number of industry awards during the past twelve months. We are confident that 2018 will be another successful year for the Firm and we are incredibly thankful to our clients and friends across the industry.
In case you missed it, we recently published our latest in-depth, 200+ page industry report: “Source: FT Partners
Business-loan growth fell to its lowest levels since the aftermath of the financial crisis in the final weeks of 2017, a puzzling development that could weigh on bank earnings later this month.
Bank loans to companies grew 1.1% from a year earlier as of Dec. 20, up slightly from a 0.8% rate the prior week, according to Federal Reserve data. That Dec. 13 level was the lowest since spring 2011, when banks were just starting to lend to companies again after the financial crisis.
The readings likely cement 2017 as the worst year for this type of lending in recent history. The average weekly rate of business-loan growth was 2.7% for 2017 through Dec. 20, compared with 9.3% in 2016 and double-digit growth in the two years before that.
“[People] from the banking industry from the tech industry. We have grown up,” said Suber. “We had some people that were great from the early days but were not good for long term growth. There has bee a major turnover in the leadership at many of these companies. My call is that companies are focusing on cash flow, profitability and EBITDA for the first time. Earnings on GAAP basis … I think that is great for the industry. You are seeing companies generate cash. [In the past] Prosper did $400 million in month and it lost money. Now it is doing, say $200 million a month and it is making money. They are being run to be profitable businesses. That is the takeaway from 2017.”
Suber says that today, Prosper makes money every quarter. They have $100 million on the balance sheet and it gets higher every month.
“We are seeing lots of money coming in from Asia to buy loans now. More than ever,” added Suber.
LendingClub, a reporting company, has had a tough two years as its stock has tanked while Wall Street looked elsewhere for growth.
More than 140,000 customers of Elevate’s RISE product have seen an improvement in their credit scores. Additionally, more than 35,000 RISE customers are now eligible to receive at least a 50 percent reduction in their APR and more than 13,000 customers are eligible to receive RISE’s lowest rate.
More than 160 million Americans are either non-prime or “credit invisibles,” without any credit score. These customers account for almost two-thirds of the U.S. population, yet are significantly underserved by the traditional financial industry.
RISE loans are originally priced to risk. Customers are eligible to receive 50 percent off of their rate on subsequent loans after 24 months of payments, eventually achieving a further reduction to 36 percent. Today, more than 35,000 customers have received or are eligible to receive a 50 percent rate reduction and more than 13,000 customers are eligible for an APR of 36 percent.
About the Data
Elevate worked with a major credit bureau to which it reports, gathering anonymized data on RISE customers. Elevate reviewed credit scores of customers from the customer acquisition point up to two quarters after loan completion.
The number of customers who have reached the necessary number of payments to receive a rate reduction was calculated by tabulating the number of accounts at the number of payments necessary.
24 months of payments are required to receive 50 percent off of the customer’s original APR
36 months of payments are required to reach 36 percent
NextCapital officially announced Thursday that it has raised $30 million in new funding to grow its enterprise digital advice platform.
The Series C round brings the company’s total funding to more than $52 million. The round was led by Oak HC/FT, and included additional investments by Manulife Financial, Transamerica Ventures, Vermont Seed Capital Fund and Route 66 Ventures.
Section 4.14 of this year’s report deals with new financial products and there is an entire section on marketplace lending. Here is their conclusion about our space:
Although marketplace lending has the potential to reduce costs and expand access to credit, the extent to which these benefits have been realized thus far is unclear. Furthermore, the marketplace lending model has not been tested through a full credit cycle. There are risks that misalignment of incentives could exist on these platforms.
The original premise of online peer-to-peer lending platforms was simple and democratic: A single mom from Kalamazoo, Mich., could post her story explaining why she needed $5,000 to pay off her credit card, and a retired electrician in Illinois could read it, decide to fund her loan and receive interest far exceeding what he could get on his savings account.
LendingClub and others that proffered this people-helping-people model quickly found they needed to make changes.
Slightly more than two-thirds of households in America frequently make use of traditional banking services, according to the Federal Deposit Insurance Corporation. But that leaves 33 percent of people in the U.S. who don’t, a significant percentage by any measure.
As the title implies, unbanked Americans are those who don’t make use of any banking services whatsoever. This includes debit cards and checking accounts, as well as savings accounts. In 2015 – the most recent year for which data is available – the unbanked represented 7 percent of U.S. households, translating to approximately 23 million individuals, including children, the FDIC reported. The percentage of unbanked households in the U.S. is down slightly from 2013, when it was 7.7 percent.
Families have a plethora of rationales for why they opt to go without banking services, but it’s usually due to what they do not have in terms of savings. Nearly 57 percent of unbanked households cite this as their prime reason, according to the FDIC report.
Around 20 percent of Americans are underbanked, according to the FDIC, which means they have either a checking or savings account, though rarely both. Households are also usually given the underbanked distinction if they’ve used alternative financing options during the previous year, such as money orders or rent-to-own services. Around 67 million Americans are underbanked, or the equivalent of 24.5 million households, based on 2015 figures from the most up to date FDIC survey.
As far as demographics are concerned, millennials are among the most likely to be underbanked, with 31 percent of them under the age of 24, according to federal figures.
BankMobile, the digital-only bank that offers checking accounts to students, wants to start offering them credit.
The three-year-old Customers Bank subsidiary launched a personal loan product for its customers at the end of December, but that was just the first of a suite of credit products the bank plans to roll out this year as part of its “customer-for-life” strategy, according to Luvleen Sidhu, president and chief strategy officer.
BankMobile has 1.8 million customers to date and has opened about 300,000 new accounts each year in the student demographic through its university partnerships.
Why are you expanding into credit now?
We’re just looking at our demographic. Many in our current customer base are living paycheck to paycheck — that’s why personal loans make sense.
How do you plan to expand your products after the personal loan?
We have a lot of products to introduce on the credit side: credit cards in the second quarter, student refinancing in the second quarter, auto loans and home equity by the second half of next year.
You’re partnering with Upstart on credit products. What are the advantages of that approach?
In the longterm you could say it’s more expensive to partner but those costs outweigh the fact that we get to market much faster.
How has competition changed since BankMobile launched?
It’s accelerated. Challenger banks and Neobanks like Moven, GoBank, Simple and Varo continue to flourish and grow. Digital banks like Ally, USAA and Captial One 360 have really done a push in 2017 attracting millennials, tweaking their product, tone, messaging, branding to make sure they start penetrating that segment. Traditional banks are finally realizing the branch based customer acquisition model is not sufficient.
Though banks might be hard-pressed to offer similar wages — average starting salaries at Uber, Pinterest, and Airbnb are all over $220,000, according to Paysa — they can offer something most tech companies don’t: a student loan repayment benefit plan.
Banking giants like Citi and Capital One with much more money and resources at hand have been making branches look more like lounges, coffee shops or museums as they figure out what to do with them with less foot traffic, but in 2018, smaller institutions could start to make a move on their plans.
The Providence, Rhode Island bank is transforming its branches into digitally-connected community centers, Johnson said.
Citizens currently has 1,200 branches, and the bank is in the second year of a 10-year plan to reduce its branch footprint as lease expiries take effect. It’s replacing paper pamphlets with digital tools, like a digital retirement checkup platform customers can use while meeting with bankers. The bank can also project digital content onto the walls of a meeting room — a nod to the digital-first habits of some younger customers. Citizens is on an ambitious track to reduce its retail footprint by as much as 50 percent — a “do more with less” approach that over the long term that will save occupancy costs, CEO Bruce Van Saun said in an earnings call last year.
When a major international bank was looking to improve the response rates for its credit card mailers in 2017, rather than changing the graphics or upgrading the paper stock, it turned to a firm that could offer guidance on how consumers make decisions.
It was trying to tap into the insights of behavioral economics, a discipline that uses psychological observations about human behavior to analyze and predict how people will act.
Banks and rival lenders are butting heads over the credit scores used to decide millions of mortgage requests by U.S. home buyers.
Now, a federal agency is weighing whether to step into the fight, which revolves around a longtime requirement for lenders who sell mortgages to Fannie MaeFNMA -3.17% and Freddie MacFMCC -3.31%to gauge most borrowers using FICO scores. The Federal Housing Finance Agency’s ultimate decision could have wide-reaching ramifications for the mortgage market and home buyers across the U.S.
Many nonbank lenders, which in some recent quarters have accounted for more than half of the mortgage dollars issued in the U.S., want the ability to use a credit score provided by a company owned by credit-reporting firms EquifaxInc.,EFX +0.00%ExperianEXPGY 0.23% PLC and TransUnion.TRU 0.80% These lenders argue the alternative score would open the mortgage market to a greater number of people and lead to more mortgage approvals, helping to boost home sales and the economy.
That is where VantageScore Solutions LLC, the scoring firm that Experian, Equifax and TransUnion launched in 2006, says it can step in.
The company says it can assign a credit score to about 30 million more consumers than FICO. Roughly 7.6 million of those consumers would potentially be eligible for a Fannie or Freddie mortgage, VantageScore says.
With that in mind, a company called PropertyMetrics has built a web based platform that’s designed to help investors come up with a proforma that includes evaluation and analysis. With PropertyMetric’s software it’s possible to analyze any property in minutes, from any device. This means investors can quickly generate a quick cash flow proforma, perform a cash flow analysis and generate PDF reports from anywhere, in a matter of minutes.
I also recently suggested Lending Club Corp. LC, +0.98% in part because of the huge buying by Chinese technology and internet expert Tianqiao Chen, who founded the online gaming company Shanda Interactive Entertainment years ago while he was in his 20s.
He owns around 20% of Lending Club, an online peer-to-peer lending platform. LendingClub recently tightened its lending standards, which hurt loan growth, so the company missed earnings estimates and guided down. But it still expects 15%-20% annual revenue growth over the next few years. This seems plausible given how many people with OK credit would like to refinance their credit card debt with loans. Lending Club estimates $300 billion to $350 billion in credit card debt could potentially be refinanced in this way.
Plain Green, LLC, the online resource for the short-term financial needs of underbanked and subprime consumers, today announces a successful settlement with BEH Gaming Ltd related to loans to the Chippewa Cree Tribe and Chippewa Cree Tribe Development Corporation. Plain Green’s settlement and payment of the debt to BEH releases the Chippewa Cree Tribe and Chippewa Cree Tribe Development Corporation from all liability. The settlement amount is under seal of court order.
The agreement settles a lawsuit filed by Florida-based BEH Gaming Ltd in 2014 (Case # DV-14-142 in the 12th Judicial District Court in Hill County, Montana) to repay loans to expand Northern Winz Hotel and Casino.
Advertising agency R2C inked a deal late last month to become the new media partner for LendingTree Inc.
LendingTree is an online loan marketplace for financial needs like auto loans, small business loans and credit cards headquartered in Charlotte, N.C. AdWeek reports that the company had a media budget of $126.5 million in 2016, and spent nearly $61 million during the first half of 2017, though R2C won’t manage LendingTree’s entire media budget.
When shopping for a business loan, it’s easy to become overwhelmed by fast-talking salespeople, endless strings of acronyms and confusing terms. If it’s unclear how much you’ll really pay for financing, that’s a good sign you should walk away, Hodges cautions.
2. Getting trapped in daily or weekly repayment cycles
Term loans are often the better option, Hodges says. They allow businesses to borrow a set amount of money for a specific purpose, like hiring new staff or stocking up on inventory. The funds are then paid back over a set amount of time, with consistent monthly payments and no surprise fees.
3. Not knowing what you deserve
After seeing countless small businesses get stuck with credit products they couldn’t afford or understand, a coalition of small business advocates, lenders and online credit marketplaces came together to launch the Small Business Borrowers’ Bill of Rights. As the first-ever gold standard for responsible business lending, the Bill of Rights outlines the rights and safeguards that small businesses should expect from finance providers.
London was the top city in Europe for technology investment last year, with more funding going into companies in the British capital than into firms based in Paris, Berlin and the next seven cities combined, data showed on Friday.
Tech firms in London attracted 2.45 billion pounds ($3.3 billion) in venture capital funding in 2017, about 80 percent of the 2.99 billion pounds invested in Britain as a whole, according to data compiled by funding database PitchBook for London & Partners.
Fintech, or financial technology, was the most popular segment for investors, attracting a record 1.34 billion pounds in venture capital, the data showed, led by major rounds for TransferWise, Funding Circle and Monzo.
London’s tech venture capital investment reached another all-time high in 2017 as firms raked in four times more cash than Paris, the nearest European rival.
Softbank’s $502m (£392m) investment in game development platform Improbable was the biggest single investment during the year, but it was London’s burgeoning fintech firms which led the way with a record haul of investments.
HMT Treasury has passed an order confirming that straight-forward peer-to-peer lending does not constitute deposit-taking.
The order relates to the now-infamous “Dear CEO” letter, sent in March 2017, in which the FCA effectively ordered P2P platforms to cease and desist with all wholesale lending activities. The rationale was that a business borrowing money in order to lend that money on constitutes a form of deposit-taking. This was deemed illegal, per article 5, paragraph 1 of the regulated activities order.
Investing in start-ups is becoming increasingly popular and accessible in the UK. The attractiveness of that market has come from two main factors: the success of a number UK start-ups built over the past two decades (ASOS, Just Eat, Zoopla, Funding Circle) which are showing the way for many more to come and the supportive policies implemented by the various governments over the same period to encourage investment in ventures.
These schemes have proven to be extremely popular with private investors who every year invest over £1.5 billion into high growth ventures under SEIS and EIS.
So how do you get started with investing in start-ups if you are new to this market?
Your first option is to invest through online equity crowdfunding platforms (ECF) such as Seedrs, Crowdcube and Syndicate Room, which showcase dozens of investment opportunities from start-ups looking to raise equity funding from the public. The advantage of ECF websites is that they are convenient and accessible to anyone with investment tickets starting at £10.
If you consider yourself to be a more sophisticated type of investor looking to build a portfolio of investments with tickets of more than £5,000 per company, then you should probably think about joining an angel syndicate.
A third option to get started is to invest through a start-up fund.
Research found almost 60 per cent of people on a low income turn to more expensive forms of credit to purchase home appliances because they do not have the means to pay up front or access to affordable credit. Seventeen per cent say they used a credit card to make the purchase, 10 per cent used an overdraft and 10 per cent used a store card. More worryingly, significant numbers said that they used high cost credit to buy home appliances, with 13 per cent relying on hire-purchase and eight per cent saying that they used a payday loan.
Blockchain-based banking startup BABB (Bank Account Based Blockchain) has appointed banking technology veteran, Paul Johnson who previously lead one of the UK’s leading challenger banks, Aldermore, as CIO to spearhead the development of the world’s first decentralised bank.
Germany’s 10-year government bond yield fell 2 basis points to 0.44 percent DE10YT=TWEB, off two-month highs hit on Tuesday after weekend comments from the European Central Bank’s Benoit Coeure that there was a “reasonable chance” ECB stimulus will not be extended this year.
Most core euro zone bond yields were down 1-4 bps on the day, with the gap between Italian and German 10-year bonds yields tightened to 160 basis points as Italian yields dropped as much as 6 bps to 2.03 percent. IT10YT=TWEB
Ireland meanwhile kicked off its annual funding drive by raising 4 billion euros with a syndicated 10-year bond, covering around a quarter of its issuance target just three days into the year.
Cryptocurrency has a new king. His name is Chris Larsen, and he’s the co-founder and former CEO of Ripple, which created the digital token known as XRP. He’s now one of the world’s richest billionaires, thanks to XRP’s incredible hot streak.
Bennett, Coleman & Co Limited (BCCL), the publisher of the Times Of India and the parent of Times Internet, has acquired an undisclosed stake in online loan company FinREQ.
As such, it looks like the investment in FinREQ is an ads-for-equity deal.
FinREQ was founded in 2011 and has tie-ups tie-ups with nationalized, co-operative, foreign, private banks, NBFCs and Housing Finance Companies. The company provides a variety of loans ranging from overdrafts, import & export finance, supply chain financing, loans against property (LAP), loans against share, lease rental discounts and others.
Pune-based Social Worth Technologies Pvt. Ltd, which runs online lending platform EarlySalary, has raised Rs 100 crore ($15.7 million) in a Series B funding round led by Eight Roads Ventures India, a company statement said.
A research from the Transamerica Center for Retirement Studies indicated that nearly three-quarters of millennials are saving for retirement and that we started doing so at an earlier age than previous generations.
Peer-to-peer (P2P) lending in India currently gives a net return of 18-22 percent to lenders.
ORIX Corporation (“ORIX”) and Yayoi Co., Ltd. (“Yayoi”) announced today that the ALTOA Online Lending Service, which leverages accounting big data and AI technology, will commence its operation through the jointly established entity, ALTOA, Inc. (“ALTOA”).
The ALTOA Online Lending Service is an online lending service that provides small amount, short-term loans for small businesses through a new credit model that leverages the credit know-how of ORIX, the accounting big data of Yayoi, and the AI technology of d.a.t. Inc., who is a partner in this venture.
While a sturdy job market is giving a sense of security and optimism to American employees, it is not the sole reason for the increase in borrowing. The stagnation in wages; fall in gas prices and the considerable increase in home equity loans, all are contributing factors to the rise in demand for loans. Secured […]
While a sturdy job market is giving a sense of security and optimism to American employees, it is not the sole reason for the increase in borrowing.
The stagnation in wages; fall in gas prices and the considerable increase in home equity loans, all are contributing factors to the rise in demand for loans. Secured personal loans, auto loans, home loans, loans for luxury items like furniture or boats, all are expected to relish bigger demand this year.
Secured loan numbers
Trans Union expects average secured personal loan balances to increase to $17,904 up from $17,411 at the end of 2015, with the volume of secured loans increasing by 3%. In addition to forecasting a rise in demand for private loans, Trans Union expects no change in default rate in 2016. Of the 13.6 million customers who had a secured loan balance as of the third quarter of 2015, 7.13 million were within the prime and higher risk tiers and 3.34 million were within the subprime risk tier.
According to Real Trac statistics in 2015, 1.08 million U.S. properties had foreclosure filings on them. These filings cover default notices, regular auctions, and bank repossession, and are down 3% from 2014. In 2015, a total of 449,900 properties were repossessed by the lender, up 38 percent from 2014. Average price for the bank owned homes in 2015 was down by 41% below the average price of all homes, which is the biggest discount on bank-owned houses since 2006. The foreclosure process in 4th quarter took 629 days on average as compared to 630 days in 3rd quarter, but this number was still 4 % more than what it was in the 4th quarter of 2014.
US auto loans have touched the $1 Trillion mark in total size recently and there are concerns of a sub-prime auto lending bubble in the market. The size of an average auto loan is more than $30,000. An industry report released by Transunion (image below) documents the slide in lending standards with 11 basis points increase in average delinquency from 1% in q2 2015 to 1.11% in Q2 2016. The average auto loan balance has also grown by 2.7% during the period.
Along with the delinquency rates, it is important to understand how the collateral is monetized by the lender and what kind of recovery rates are achieved on repossession. If a client defaults on a home equity loan or a home equity line of credit, the lender can foreclose the house. While the process varies from state to state, but generally default begins after no payment is made for 150 days. Although foreclosure normally takes 2 to 18 months, some foreclosures can take two years or more.
Secured loans are not always secured
Similarly, if someone defaults on their automobile loan, banks take the ownership of their vehicle. Most banks will first issue a notice to a client in default; usually, the allotted time period is seven days, in which they can make good on their payment. If they cannot meet the deadline or renegotiate their loan terms, the lender can petition a court for a permit to repossess the vehicle.
After the bank repossesses the property, it usually takes 3 to 6 months, before the lender can put an REO property on the market. This blocks their capital acts as a huge drag on growth. Lenders are not experienced in maintenance and repair; so they hire professionals to maintain the properties, which again cost money.
This has led to a scenario of “Bank walk-aways”; a situation where banks do not foreclose because the collateral is so underwater that the proceeds from a sale would not be enough to cover the transaction costs of implementing the foreclosure itself. In Oakland County, 27% of foreclosures in the last 5 years were categorized as walk-aways by a news report. Secured loans don’t seem secure anymore!
Secured loans in p2p
On the other side, in the p2p lending industry, the decline in the rate of returns, increase in default rates and saturation in unsecured loan markets have pushed fintech lenders into entering the secured loan segment.
Companies like Realtymogul, Patchofland, Driveup, Zopa.com, etc have started lending against property, cars, gold and other physical collateral. This may entice the investors who might have burnt their hands at unsecured lending; believing that secured lending will ensure protection from capital loss. But it is vital that start-ups understand the existing scenario of secured lending in America and have processes in place to ensure that collaterals can be repossessed and monetized on a feasible basis.
The start-ups will need to rely on many external vendors for enforcing repossession, auctions etc. It is here that the lender needs to be sure that the company itself and its vendors are fully compliant with all the relevant federal and state laws.
Complytrac is one of the leaders in the space and its partnership with alternative credit data giant-Microbilt has given it a powerful platform to attract fintech clients. Microbilt also has multiple products which are being used by lenders to ensure that secured loans are actually secure. Its ID verification and background screening tools are considered by experts to be amongst the top solutions in the industry. It’s SmartTrac, Property Search report, SPOT verified place of employment, Trace details, and other services have become the standard in the marketplace. Though there have been many launches in this space, Microbilt continues to hold its leadership position due to the staggering data at its disposal. Its alternative credit data points are 3 times more than the combined alternate data of the three largest consumer credit agencies.
Transition from unsecured to secured
Secured lending is a welcome extension for the p2p lending industry which had earlier exclusively focused on unsecured consumer and business lending. Secured lending will allow risk-averse lenders to join the marketplace lending platform for investing and generating superior returns. But secured lending brings its own set of headaches for young start-ups. Compliance needs to be top notch especially during repossession, auction etc. Credit analysis and fraud detection will still play an extremely important role in ensuring that the lenders are not taken for a ride. Investing in the top of the line solutions for combating defaults and ensuring compliance is not a question of choice anymore for young fintech start-ups, but necessary for survival.
Princeton Alternative Funding (PAF), an investment management company in exclusive partnership with Microbilt Inc., a Consumer Rating Agency has posted a 16.78% return in its first year of management. They accumulated roughly $65 million under management in the first year and aim to significantly increase asset under management. Credit bureau partnership PAF’s partnership with Microbilt […]
Princeton Alternative Funding (PAF), an investment management company in exclusive partnership with Microbilt Inc., a Consumer Rating Agency has posted a 16.78% return in its first year of management.
They accumulated roughly $65 million under management in the first year and aim to significantly increase asset under management.
Credit bureau partnership
PAF’s partnership with Microbilt gives it a protective moat through best-in-class analysis and monitoring of both borrowers and lenders. The initial returns posted by the fund are impressive and should help it in attracting new investors. But the fund has still to experience a financial downturn like the Lehman crisis. Despite research that non-prime is not only the first category to be hit but it also experiences the largest number of delinquencies, Microbilt research shows that delinquencies in the subprime marketplace actually trended lower in 2009 and 2010, the peak of the recent major downturn. How is this possible? “This population of consumers is more influenced by the price of gas than the financial markets. 2009 was the last time the price of oil dropped to near $35 a barrel,” said COO Jack Cook. How will the fund manage such a situation and will Microbilt’s analytics hold in such a crisis are important questions.
By targeting a specific category of lenders focusing on non-prime consumers, PAF underlines its focus on generating superior alpha while mitigating risk through superior data and analytics available at its partner firm, Microbilt. In hedge fund parlance, it’s like a fund of funds which will use its oversight and deep knowledge to ensure that its investors end up on the winning side of the trade. The fund is suitable for family offices, fund-of-funds, pension funds, endowments and HNWIs, or basically, qualified investors who are seeking positive yield.
Two-thirds of U.S adults are not able to cover unexpected or emergency expenses. According to recent research, 26 million Americans do not have a credit history, in addition to that 19 million have limited or thin credit files. According to Experian, a further 68 million US Consumers have credit scores less than 601, rendering them ineligible for the majority of credit products. After the financial meltdown in 2009 and subsequent regulation of the banking industry, alternative lending models grew to occupy the space vacated by banks. Princeton Alternative Funding (PAF) is trying to fill the gap for non-prime consumers by providing credit facilities to select lenders while concentrating on the top companies in the space to ensure superior returns for its investors.
Princeton Alternative Funding (PAF), an investment management company launched Princeton Alternative Income Fund (PAIF) in March 2015. The company has an exclusive partnership with Microbilt Inc., a Consumer Rating Agency which provides top of the line analysis and monitoring capabilities. According to the management of PAF, Microbilt(MB), which has been in business for 38 years, has three times the alternative market data than the three big credit agencies combined.
PAF has senior personnel of MB on board as advisors. The close relationship can be attested by the fact that PAF is currently housed in the New Jersey office of MB. Through this partnership, PAIF will be able to lower the risk while ensuring a higher rate of return to its investors. It will have access to proprietary databases and scorecards of MB, which will allow it not only to analyze the originators and their performance but evaluate borrower performance on a granular level. More than 27 million loans have been originated using MB’s database.
The loans have averaged a 15% default rate, which allows for appropriate pricing by the lenders. PAF generates revenue by charging 2% as management fees and 20% as performance fees.
Princeton Alternative Income Fund is an open-end 3(c)7 vehicle with a monthly redemption period, subject to notice of 180 days. Investors have the choice to choose monthly distributions from underlying loans or they can reinvest the capital.
PAF has an experienced team. Howard Davner (CEO) was a founder and principal of Terrapin Advisors and Ryett Capital Partners, a long and short Hedge Fund with a successful track record. He was an equity specialist at Goldman Sachs and a member of NYSE. Jack Cook (CCO & COO) was also a founder of Terrapin Advisors and Director at Credit Suisse in the Fixed Income Division. Jeff Davner (Executive Vice President) was a co-founder of Terrapin Advisors, a partner in Bluestone Capital, and co- founder of ATL consulting.
Targeting sub-prime for better returns
Last year, PAIF agreed to provide a credit facility of up to $ 100 million in growth capital in Balance Credit, a leading online lender to working class families and individuals. The facility will enable Balance Credit to expand their offering of unsecured personal loans and credit services to people who are in urgent need of cash. Balance Credit provides loans that are a better option to payday and title loans. Another credit facility was extended to Argon, a leading provider of online customer loans. The financing has enabled Argon to accelerate their growth in near-prime and prime consumer loans through its own online platform.
A Look at the Automated Clearing House for Lenders Alternative lenders do not have to be relegated to a dark corner of the financial industry just because of the connotations associated with the word “alternative.” Rather, lenders of all stripes can take advantage of some of the legacy systems that have been in place for […]
A Look at the Automated Clearing House for Lenders
Alternative lenders do not have to be relegated to a dark corner of the financial industry just because of the connotations associated with the word “alternative.” Rather, lenders of all stripes can take advantage of some of the legacy systems that have been in place for years. One of those systems is the Automated Clearing House, or ACH.
ACH has, since 1974, provided a way for financial institutions to deliver and receive payments electronically in the U.S. The system is governed by the National Automated Clearing House Association (NACHA), a non-governmental organization with two missions. NACHA’s first mission is to oversee the ACH process, which consists of three components: 1) operating rules, 2) enforcement and risk management, and 3) ACH network development; the second mission is to serve as an industry trade association.
How ACH Works for the Benefit of Lenders
ACH allows lenders a way to receive payments quicker and more efficiently. Before electronic payment systems, payments were made by check, money order, or other types of paper transactions, including cash. With the advent of credit cards, payment and money transfers could be made more directly, more quickly, and more efficiently. Types of transactions that can be made through ACH include credit card payments, debit card transactions, payroll direct deposits, government benefits, bill payments, online banking payments, money transfers, person-to-person (P2P) transactions, business-to-business payments, e-commerce, charitable donations, loan repayments, and more.
The process begins with an originator. It can be an individual, a business, government agency, a non-profit organization, or any legal entity. The originator electronically enters a direct deposit or payment transaction into the network using a routing number similar to those used for check processing. Each transaction is received by an Originating Depository Financial Institution (ODFI).
ODFIs must register with NACHA and follow all NACHA rules to remain in good standing. Once transactions have been received by various originators, each ODFI transmits those payment transactions to an ACH Operator in batches at predetermined intervals. Currently, there are only two ACH Operators, The Federal Reserve, or FedACH, and Electronic Payments Network (EPN), also known as The Clearing House. These two institutions serve as clearing houses for all ACH transactions.
The ACH Operator then sends each transaction to the Receiving Depository Financial Institution (RDFI). The RDFI debits or credits the payment receiver’s account accordingly. According to NACHA rules, credit transactions settle within two business days while debit transactions settle within one business day. NACH has even modified its rules to allow for same-day processing.
As a lending institution, you can have your clients set up a loan account and use ACH to receive loan repayments automatically by withdrawal or through a manual system where the debtor makes periodic payments to you through ACH processing. Through this system, you’ll receive your payments more quickly without risk of paper checks bouncing or taking days or weeks to arrive in the mail before you can cash them. The system is also less expensive than check processing since multiple transactions can be processed simultaneously through electronic means.
How Lenders Can Use ACH for Payment Processing
When it comes to ACH processing, lenders can use electronic payments both for borrower repayment and for sending approved loan monies to borrowers. Before you underwrite new loans, however, make sure you verify borrower bank accounts and perform some due diligence on borrowers who want to use ACH for sending and receiving money.
ACH transaction fees vary from one financial institution to another. Typically, they are either a percentage of the transaction or a flat fee. However, some entities allow free payment transfers under certain conditions. For instance, PayPal allows its users to withdraw from their accounts and send money directly to their own banks at no charge. ACH can be used for such transactions. If your lending institution wants to use free payment transfers as a selling point to entice borrowers into doing business with you, you can use ACH.
Another reason to use ACH is for account verification ( Once you receive a borrower’s application with their bank account information, you can send a real-time verification check electronically to that financial institution or use a bank account verification tool like IBV or databases to verify the account exists. This can save you a lot of time and expense in collections if you approve a loan and find out later the borrower has no bank account.
Even with ACH transfers, there is always a risk that a borrower’s loan repayments will return unprocessed. You cannot predict whether an individual has the necessary funds to make a payment. Therefore, a certain amount of risk is involved. You can diminish that risk by collecting transaction history on a potential borrower and underwriting a loan based on what you find. If a borrower has a high number of ACH transactions that have not processed due to insufficient funds, then you can adjust their payback terms or deny the application. Microbilt has a risk verification service you can use to make those judgments .
As mentioned before, if you wish to set up automatic debits for borrowers where loan repayments are made through ACH at pre-established intervals, then you can approve loans based on a pre-arranged electronic repayment schedule.
In recent years, NACHA has made more accommodations for money transfers and payments outside of the U.S. However, there are some tricky rules and language involved with these processes. In terms of ACH, there is no official ACH process for foreign transactions—that is, financial transactions that take place between entities where neither party is in the U.S. That doesn’t mean money transfers can’t take place, but NACHA does not have the authority to oversee or regulate such transactions.
Where NACHA has made headway is in transfers and payments between entities where one party to the transaction is in the U.S. This process requires a Gateway. The Gateway is the financial institution or ACH Operator that processes electronic transactions into or out of the U.S. to or from other countries.
Because of the heightened awareness and sensitivity to international drug and human trafficking, terrorism, financial crime syndicates, tax evasion, offshoring, and other illegal activities, the Office of Foreign Assets Control (OFAC) has worked with NACHA to see that the latter includes in its policies rules that ensure ACH transactions do not run afoul of U.S. law. Therefore, this should be a concern for lenders who loan money to foreign entities and individuals or who are considering payment processing across borders.
One positive for lenders is that ACH transactions involving residents of U.S. military installations, embassies, and other U.S. real estate assets in foreign countries are considered domestic transactions and therefore do not need to follow NACHA International ACH Transactions (IAT) rules.
What is the Dispute Process for ACH Transactions?
Lending institutions can go to great lengths to minimize risk, perform due diligence on borrowers, risk verify bank accounts, and check transaction history only to be faced with disputes from borrowers who claim that an ACH transaction was unauthorized. You might even face a situation where a loan you process through ACH was sent to the wrong bank account, unauthorized due to some type of fraud, or simply processed inaccurately. NACHA does have a dispute process.
Regarding disputes, there is good news and bad news. The good news is if you want to dispute a transaction, NACHA rules are in your favor. If a borrower disputes a transaction, NACHA rules are in the borrower’s favor. That doesn’t mean that all disputes are valid and the disputer automatically gets a free ride. It does mean that disputes are an honor to protect the consumer’s interest.
According to NACHA rules, an RDFI must honor a stop payment. RDFIs are in no position to make judgments concerning valid or invalid transactions. A transaction made is a transaction authorized, and that includes disputes. It also includes automatic debits. If you set up an automatic loan repayment schedule by ACH and the borrower disputes that, then those transactions will not take place. You still have recourse under the law to pursue repayment of the loan through other means, and that includes reporting the borrower to the appropriate credit agencies. So, while the benefit of the doubt is given to the disputer in ACH transactions, the law is still on the side of the part with the burden of proof. Keep in mind that once a transaction is out of the ACH system, then NACHA is no longer involved.
In other words, the ACH dispute resolution process can work for lenders or against lenders depending on which side of the dispute they are sitting on. Keep your attorney in your back pocket.
A Disruptive Alternative to ACH
Disruption in the financial industry is beset by one constant reality – intermediaries are no longer necessary. Peer-to-peer (P2P) networks have impacted almost every corner of the financial world, from real estate transactions to banking. Investors can manage their own portfolios, borrowers can turn to the crowd, travelers can exchange currency electronically, and friends and family can send money direct from one bank account to another through their smartphones. This disruption has hit the lending industry just as well.
Venmo is a mobile app that allows one party to send money to another party without involving multiple intermediaries. Transfers use the ACH system and therefore are subject to NACHA rules, however, Venmo account holders are not required to receive the money you send them. Practically speaking, even if you authorize a loan and you send borrowed money to a Venmo account holder, if the Venmo account holder does not authorize receipt of that money, it hasn’t been borrowed. This is another layer of protection, both for the lender and the borrower.
Another benefit to using Venmo is that a Venmo account must be tied to a bank account. During the loan application process, you can have potential borrowers set up a Venmo account and make it a precondition to transfer money through the app. All transactions are free as long as money is funded through a bank account or money is transferred from a Venmo account balance.
clearXchange is another P2P money transfer app that can be used for borrowing and lending money. The benefit to using clearXchange is that it is owned by fraud prevention and risk management company Early Warning and used by the nation’s largest banks. Network banks include Capital One, Bank of America, and Wells Fargo. It is also web-based, which means that borrowers do not need to use their smartphones to conduct transactions.
Such technology succeeds because developers have placed a high priority on security and data encryption technology. Lenders and borrower can be confident that transactions are secure and payments made quickly and safely.
The best way to stay current in your lending practices is to utilize the technology that makes payments and money transfers easy and more affordable. ACH wins on both points. The future of lending and borrower repayment is electronic, and it’s only going to get better.
IdentityMind, a RegTech company, reports that according to its analysis, fraud caused 12% of losses in P2P online lending in 2014. That translates to almost 1.2% of total funding which is 2-3 times as compared to banks or retail cards. The alternative lending industry is facing concerns around data accuracy and data verification. Besides internal […]
IdentityMind, a RegTech company, reports that according to its analysis, fraud caused 12% of losses in P2P online lending in 2014. That translates to almost 1.2% of total funding which is 2-3 times as compared to banks or retail cards.
The alternative lending industry is facing concerns around data accuracy and data verification.
Besides internal company controls, the big issue facing the MPLs of all size is online fraud.
The lack of physical interaction, lower underwriting standards due to higher competition and tens of thousands of dollars in plunder in a single hit is luring many sophisticated fraud rings to this industry. Even if one group can demonstrate that it can circumvent the algorithms of a lender at will, it can practically bankrupt the company in no time. This issue has become vital not only for the profitability but the continuity of the industry. It is important to understand the size of the problem:
Source: IdentityMind Global
The MPL industry’s grappling with the issues of online fraud has led to the birth of multiple risk management solutions and KYC validation agencies looking to add a layer of protection to the existing fraud detection systems of alternate lenders. Ideally, the first step for fraud protection should be multiple KYC checks so as to ensure the authenticity of the applicant. The originator should verify the social security number and whether the data provided by the prospective borrower can be connected to any public record which will authenticate the same. The physical address can be a treasure trove of information, not only it helps understand the socioeconomic position of the client, it also can assist in unmasking scams. Experts agree that addresses associated with prisons, hospitals, universities, warehouses etc are a potential source of fraud. The MPL should also have access to private database providers to ascertain that the applicant is not on any kind of blacklist.
3rd party companies like Microbilt offer existing and proven proprietary anti-fraud tools. For example, Microbilt’s Instant Bank Verification (IBV) product allows lenders to verify that a bank account as reported by the borrower is correct and accurate.
Experian, one of the three largest credit agencies in the US along with Equifax and TransUnion, has launched Hunter – a fraud detection technology for financial institutions. It relies on its extensive databases to cross-link applications and find patterns of fraud. It has been successfully incorporated in the credit monitoring systems of multiple banks and has helped save its clients millions of dollars. There are other fraud detection systems reliant on databases like Contego; it recently partnered with LendInvest for enhancing its due diligence process. Contego enables real-time identity verification by aggregating ‘best of breed’ data from a variety of sources, including law enforcement agencies, commercial suppliers and open data sources. KYC authentication and database scouring for any red flags should be the first line of defence for any MPL looking to fight fraud.
KYC Database authentication is important but the history of the device and the email address from which the application has been made can be a rich source of information. Devices can provide insights which can help deduce the intentions of the person behind the device. Technological solutions exist which identifies and continues to recognize devices over time without requiring personal information. Emails are the first point of contact today and as such a lot of information can be gleaned from the users email ID. Companies like Emailage provide transactional risk assessment by assessing and scoring email data for organizations around the world. It is able to provide advanced information like whether the customer’s name matches the email owner’s name, instances of email tumbling, velocity of the email and other unique characteristics which are not available from a simple online application. Iovation and ThreatMetrix work in the field of device authentication and their tools are being used by multiple banks, credit card companies and online lenders to catch fraud before it takes place.
Proxies and Tor
Proxies and Tor network help not only the office staff to bypass company firewalls for accessing Facebook incognito, but are increasingly used by anonymous online groups focussed on committing fraud continuously. It is extremely vital that an online lender reviews the IP address of its online applications to analyse the geolocation of a borrower by triangulating IP address, phone number and billing information. Also essential is to understand the flow of traffic to the website; is the traffic coming from non-corporate proxies, is it originating from the Tor network or is it being initiated by a bot? All the above should raise a red flag in the credit department. Companies like Neustar , Kount, IdentityMind have the ability to IP pierce to identify the real location of the user. Being able to examine the real location of an IP in conjunction with billing address and KYC adds another dimension to fraud prevention.
Marketplace originators have revolutionized the business of lending. They have been able to facilitate tens of billions of dollars in additional funding and have entered the mainstream after the IPO of LendingClub and OnDeck. But their soaring popularity and online exclusive approach have made them a prime target for online fraudsters looking to make a quick buck. The industry has emerged to provide a hassle free experience to borrowers and pass on the savings from a non-brick and mortar structure to the investors. It is unlikely they will revert to physical checks to solve fraud. With multiple SaaS providers emerging to provide tools like KYC authentication via multiple databases, email and device identification and geolocation analysis by IP piercing, targeting scams by augmenting existing in-house fraud protection systems is a no-brainer for online originators.
In a recent article, LendingTimes.com looked at differences between alternative data and traditional credit reports in regards to online lending. Now, we intend to further explore the uses of alternative data by examining two sectors of the alternative data source industry: companies that cultivate Big Data and companies that use Big Data as a source […]
In a recent article, LendingTimes.com looked at differences between alternative data and traditional credit reports in regards to online lending. Now, we intend to further explore the uses of alternative data by examining two sectors of the alternative data source industry: companies that cultivate Big Data and companies that use Big Data as a source for risk assessment in marketplace lending.
Big Data’s Worth is Growing Big (Like $48.6 Billion-Big):
First and foremost it’s important to note that Big Data is a business all on its own. Companies, such as Microbilt, have been collecting alternative data for their clients for over 35 years. Alternative data companies are profitable and growing. IDC predicts “big data technology and services market growing at a CAGR of 23.1% over the 2014-2019 forecast period with annual spending reaching $48.6 billion in 2019.”
With the surge of marketplace lending over the past few years, the alternative data business has been booming. Companies are looking for the fastest and easiest way to get reliant information about potential employees, clients, and borrowers; Big Data companies, like Microbilt or LexisNexis, are providing banks, marketplace lenders, and other companies with essential (and speedy) information.
Putting These New Data Sources to Work in More Way Than One:
In our previous article on alternative data sources, we discussed a few of the many types of information that are usually excluded from traditional credit reports but included in alternative data reports, such as utility bills, bank account records, and even social media account information. While all of this information has proven to be useful in risk management for lenders, it is also being utilized by government agencies, nonprofit organizations and commercial businesses. Often times, Big Data is being used for the sole purpose of identity verification to prevent fraud, but it also helps form a complete picture of individuals and businesses.
Microbilt not only caters to lenders but also many other types of organizations. They offer services such as bank verification, background screening, and business credentialing. Using several hundred variables of data such as criminal records, DMV records, government filings and phone records, Microbilt can help confirm identification and assess risk.
With access to what seems to be an infinite amount of information, it’s is easy to understand why online lenders are choosing to utilize alternative data. Big Data allows them to make very informed decisions about potential borrowers in just a few minutes. The ease and speed of decision-making have made online lending a much more attractive option for borrowers as well.
How Alternative Lenders are Using Alternative Data:
With marketplace lending on the rise (123% CAGR since 2010 and reported $36billion industry in 2015), online lenders are in need of data that can keep up with their pace. Unlike traditional lenders that use standard credit reports to assess potential risk, more and more marketplace lenders are turning to alternative data in order to find and weed through loan applications in a very timely manner. The connection between online lending and alternative data is so strong and obvious that it is no wonder that several companies founded in recent years have combined the two businesses.
Kabbage, for example, is a marketplace lender that collects and uses Big Data in their lending platform. They were co-founded in 2008 by Marc Gorlin, Rob Frohwein, and Kathryn Petralia and were named #63 on Forbes’ America’s Most Promising Companies list in 2015. They have been utilizing alternative data from the start in order to make greater informed decisions about small business lending.
One of the most prominent forms of alternative data that Kabbage uses is social media. When a potential customer creates an account with Kabbage to apply for a small business loan, they are given the option to connect one or all of their business’ social media accounts to their Kabbage account. This simple connection can have a huge impact. Co-founder Gorlin explained in a 2013 interview that they’ve “learned that if someone has added Facebook or Twitter data” to their Kabbage account “they are 20 percent less likely to be delinquent.”
Big Data or Big Brother?
Other than social media Kabbage also looks at other types of alternative data: sales records and employee history, as well as how often the company uses 2-day shipping for its products (therefore implying they place customer service/satisfaction high on their priority list). Kabbage takes qualitative data and turns it into quantitative data, taking every piece of information into account when assessing risk.
Many people see this as a pro to alternative data. More information means better-informed decisions. But some analysts are starting to wonder how much information is too much information? While banks are typically only looking at numbers, companies like Kabbage are also privileged to age, race, religion, and other factors. Marketplace lending lacks the regulations placed on banks; again, this can be seen as a negative or a positive depending on the situation and the outcome.
While there are some worrisome aspects to using alternative data, Kabbage and other companies have been very successful in their use of it. According to Forbes of 2015, Kabbage has done $41million in revenue and have raised $106milling in venture funding. They, along with many other similar alternative lenders, continue to look “promising.”
Marketplace Lenders “Could Command $150 Billion to $490 Billion Globally by 2020”:
Morgan Stanley reported that in the year 2015, online lenders provided 7.9 billion in small-business loans, which is an enormous 68% increase from the previous year, but it is important to note that this number only makes up 3.3% of the total small-business loans in the US. Morgan Stanley believes online lenders’ share of not only small-business loans, but also P2P lending will continue to rise, stating in a report from June 2015 that marketplace lenders “could command $150 billion to $490 billion globally by 2020.”
The marriage of alternative lending and alternative data seems like a match made in heaven, but their sky-rocketing CAGR’s and minimal government regulations have many analysts worried of a potential (and some may argue inevitable) bubble burst. While there is a potential for billions of dollars of business within marketplace lending industry, it will be interesting to see how the use of alternative data continues to spread.
Search Google for loan fraud and you’ll get all kinds of information on lenders scamming borrowers. There is much less information available on scams perpetrated against lenders, but it happens. In fact, we could categorize unsecured personal lending scams into three basic types of fraud: Application Fraud Information Fraud Asset Theft Types of Unsecured Personal […]
Search Google for loan fraud and you’ll get all kinds of information on lenders scamming borrowers. There is much less information available on scams perpetrated against lenders, but it happens. In fact, we could categorize unsecured personal lending scams into three basic types of fraud:
Types of Unsecured Personal Loan Application Fraud
Perhaps the most basic type of loan fraud is application fraud. It occurs when a potential borrower provides misleading information on an unsecured personal loan application. Borrowers attempt to defraud lenders in a number of ways by presenting false or misleading information on their loan applications. Here are some of the most common examples of application fraud targeting unsecured personal lending institutions:
Identity Theft – With identity theft, the applicant uses someone else’s identification to secure a loan. This personal information may include name, social security number, bank account information, credit card numbers, and other personal identification while associating that information with an e-mail address, PayPal address, or other accounts where the fraudster can access the money once it has been loaned. In the case of cash loans, the fraudster need only present identification that verifies the victim exists. In some cases, they may be able to show some proof that they are that individual. In any case, once the identification of the victim has been verified, the fraudster gains access to loan funds and disappears.
Fake Bank Account – A little more difficult to pull off is the fake bank account. This usually involves the creation of a fake identification. Since the fraudster isn’t claiming to be an actual real person, the only victim of this crime is the lending institution. The borrower uses the black market or underground resources to secure a fake name, social security number, birth certificate, and other personal documents to give the impression that they are a legitimate individual. Once that is accomplished, they set up a bank account in the fictitious person’s name and use that account as the basis for applying for an unsecured loan. Once the deposit has been made, they can make a large cash withdrawal and disappear.
Other Loan Misinformation – Other types of lender fraud include subtle misinformation. For instance, misrepresenting one’s income or personal assets. Other fraudsters may include illegitimate personal references or employers. These types of fraud generally require a co-conspirator—either a friend or relative—who acts as the reference or employer on behalf of the fraudster. Once the loan has been made and the fraudsters have access to it, they all disappear. Other application fraud schemes may be more sophisticated and require multiple actors.
While many lenders have discovered ways of detecting application fraud, and law enforcement agencies have been successful in bringing fraudsters to justice, it is important to recognize that these scams continue to plague the unsecured personal lending industry and companies that do not take measures to detect and prevent it could fall victim to it at the drop of a hat. The best defense against application fraud is vigilant identity and bank account verification. Visit for more information.
Types of Unsecured Personal Loan Information Fraud
With information fraud, people use breached or compromised information to gain access to bank accounts, loan applications, and other tools to defraud lending institutions at someone else’s expense. Here are some common types of information fraud.
Web Scraping – Web scraping involves the use of web crawlers to seek out and find personally identifying information through social media accounts and other websites where people sign up for membership or set up profiles. This practice is often followed up by fraudsters setting up fake accounts themselves to troll individuals and lure them into giving away other information, which is then used to steal identities or apply for loans using application fraud techniques.
Account Hacking – A more nefarious form of lending fraud involves hacking into the bank account of an individual and applying for a loan on their behalf. The fraudster usually has a way of re-routing borrowed money into their own personal accounts and absconding with the funds before the scam is detected.
Loan Phishing Scams – A very common way in the digital age to acquire information that can then be used in the execution of a loan fraud is through phishing schemes. Fraudsters send an e-mail to unsuspecting individuals purporting to be their bank or other financial institution—PayPal has been used quite often as the face of these scammers. The fraudster attempts to get the e-mail recipient to click a link and enter account information into a site designed to look like the victim’s bank website. However, what the victim often does not know is that the site is a hoax and they are sending their bank account information to the person who will then use it to wreak havoc on their lives. Such schemes defraud the unsuspecting victim then defraud the lending institution as the information gatherer uses that falsely acquired information to apply for a loan and then runs off with the money.
Accessing Data Leaked on the Dark Web – Underneath the billions of web pages indexed by the search engines, there are billions more that are only accessible if you know how to find them. Fraudsters have become adept at searching the Dark Web, or DarkNet, to find information they can use in identity theft, account hacking, application fraud, and other types of unsecured personal lending fraud. They use a networking technology known as Tor that allows them to use the Dark Web and search for the information they are looking for anonymously.
Types of Unsecured Personal Loan Asset Theft
Asset theft takes place when an individual or institution steals money or other valuables in the process of borrowing money. Some of the common ways this is done are listed below.
Bankruptcy Fraud – When individuals file for bankruptcy, they may apply for a loan to pay off debtors and to protect certain personal assets allowed protection under the law. Bankruptcy fraud involves the hiding of assets or income or non-disclosure of certain assets or income that might cause the lending institution to deny the loan.
Wire Intercept – Similar to account hacking, wire intercepts allow fraudsters a high-tech way to re-route money transfers from their original destination into their own bank accounts. This type of fraud has become more prevalent in recent years and often involves intercepting loan funds and re-routing them to offshore or foreign bank accounts.
Account Takeover – An account takeover is a more sophisticated form of hacking that involves the added step of shutting an individual out of their own bank accounts.
P2P Money Transfers – The rise of crowdfunding, marketplace lending, and peer-to-peer (P2P) networks have allowed individuals to transfer money instantly from one party to another through mobile apps without the need for an intermediary. The problem is, these apps can often be unsecured or easily hacked by fraudsters seeking information to steal, exploit, or to use wire intercept and account takeover techniques to access borrower or lender funds.
Mule Herding – In the underground economy, fraudsters may seek out what are known as mules. These are individuals who will do the dirty work for the fraudster then send the cash to the fraudster through Western Union or other channels. They are usually found through the Dark Web and may be involved in fraud at any number of levels including information retrieval, application fraud, data breach services, and hands-on theft and delivery of assets.
In the digital age, fraud prevention is not simply the responsibility of individuals who may fall victim to fraud. It’s also the responsibility of the lending institutions whose reputations and assets may be on the line, as well. Data and information security is becoming more important daily for the protection of the entire unsecured personal lending industry. A few companies we covered previously which provide services that can help with anti-fraud solutions are and