Alarmists are busy drawing parallels to fintech and the dot-com bust of 2000. But here’s why fintech has immeasurably more sticking power than the investment craze over Internet-based companies. Quick to talk. Slow to act. It’s a symptom of most innovations that come to the financial services industry, and there’s good reason for that. Financial […]
Alarmists are busy drawing parallels to fintech and the dot-com bust of 2000. But here’s why fintech has immeasurably more sticking power than the investment craze over Internet-based companies.
Quick to talk. Slow to act. It’s a symptom of most innovations that come to the financial services industry, and there’s good reason for that. Financial services, a sector that’s ripe for change, has long favored tradition. Banks have gone unchallenged for over a century in the marketplace.
But with the generational shift from Gen X to nearly 85 million Millennials, a new digital imperative is emerging. The widespread use of mobile has all but erased the need to visit a physical bank branch. The cost of computing has decreased drastically, representative in that two iPhone 6s contain more memory than the International Space Station. And sentiments toward centralized power in banking is met with distrust at a higher degree than ever before. Fintechs are edging in on low-margin business product offerings like payments with faster solutions and an eye toward the future user.
Fintech’s spotlight moment
It goes without saying that fintech is having its moment. Research firm The McKinsey Global Institute has tracked upwards of 2,000 fintech startups in this space, and estimates as many as 12,000 exist. The 2018 World Economic Forum at Davos discussed fintech at length in a panel of experts titled: “The Future of Fintech.”
There is no shadow of doubt among innovators that the change fintech provides is enduring. But with nervous investors watching Bitcoin’s volatility, it’s important to make the distinction of what makes fintech different from the dot-com boom.
Dot-com businesses operated in the market like a sugar high. Basic cash flow principles flew out the window as many companies skimped on proving their ideas actually had market potential. Speculative valuations led many investors to follow the buzz instead of looking at a balance sheet or profitability. And while it is true that the internet has immense power to displace brick-and-mortar businesses, the momentum was shortsighted. This caused a good number of dot-com businesses to run out of cash shy of the goal, rightfully spooking investors.
Fintech moves into “adulthood”
The difference in the fintech movement is two fold:
A growing distrust of traditional financial establishments, thanks to the housing market crisis of 2008;
Fintech’s unique symbiotic relationship with incumbent banks.
While the dot-com wave was tech’s early failure, fintech’s approach is more timely and measured. The market sector has matured with fintech services that deliver better technology and services to the customer alongside banks as a trusted repository of funds.
Building customer loyalty
Fintech’s current challenge is to draw customers. Banks have always focused on the customer relationship and have enjoyed an assumed level of trust that has gone unchecked for centuries.
But with the turnover from Generation X to Millennials, many of the younger generation are less likely to go with a traditional bank than before. A growing mistrust of centralized banks is one driver that’s widening the scope of traditional financial service providers. Wells Fargo’s recent payout in the amount of $185 million for opening fake accounts under customer names is just one example. According to a 2016 Gallup poll, America’s confidence in banks hasn’t shown signs of improvement since the 2007 recession, lingering around 30 percent.
Unlike traditional banks, fintechs have an approach that creates sticking power through lean operational principles. While banks have clunky legacy technology to deal with, fintechs can afford to serve customers at a lower cost due to better technology. Fintech’s focus on niche market segments means there are huge opportunities to outfit far-flung populations with digital solutions as is the case with the underbanked.
Clearing the regulatory bar
Playing nice with regulators will put fintechs into a winning stride. This is again where the dot-com bust missed the mark.
Forging ahead into the future without a game plan instead of forecasting the requirements for legitimate businesses has its price. Fintech outfits in the U.S. are expectant that the Office of the Comptroller of the Currency will pass down a special charter that will allow them to do business under slightly different terms as banks, but with a measure of prudent oversight. Things like compliance, security of customer data, and anti-money laundering efforts will boost companies on the fringe of the disruption onto center stage. As with most things, and especially fintech, there are no shortcuts.
Disrupting the banking industry is no small feat, but for those who make it out the other side, there are big rewards. The untapped opportunity made possible through technology is vast, but entrants strategic in their approach and operational standards will outlast the others. As with most disruptions, fintech is expected to persist, despite naysayers, although it may not transfuse the market with change as rapidly as some expect. There’s a reason they call it the “slow march” toward progress, but it doesn’t negate the fact that change is coming.
Written by Lauren Ruef, a research analyst at Nvoicepay.
News Comments Today’s main news: Kabbage says ‘no’ to lending for assault guns. Collateral enters administration. Orix invests $60M in Wecash. SMBs accept face-to-face payments via mobile devices. Today’s main analysis: The friction between new finance and old regulations (a must-read report). Today’s thought-provoking articles: 3 lessons from LendingClub’s earnings. The business schools that produce the highest salaries. Beware fintechs […]
Top 20 business schools where grads earn the highest salaries. AT: “SoFi takes a look at business schools to see where graduates are earning the highest salaries after graduation. There are probably few surprises for anyone familiar with the top business schools, but top salaries don’t reflect a true financial condition for the graduates. How much debt did they incur to earn that money?”
Marketplace lending’s death has been greatly exaggerated. AT: “As many predicted last year, there has been a lot of consolidation and growth in that direction. However, consolidation is more about thinning the heard than lowering the volume. As this graph shows, there certainly is not lowering of the volume.”
PeerStreet mixes play with hard work. AT: “In the 20th century, companies competed on benefits to attract and retain employees. In the 21st century, it’s more about career-building and company culture. PeerStreet is one alternative lender that is using this thinking to attract millennials with talent.”
Beware companies bearing bitcoin. AT: Cryptocurrencies are getting a lot of press right now, both good and bad. There are those who are bullish and those who won’t go near them with a 10-foot pole. Both sides have alternative lenders making their position known. This is a great debate with no easy answer. Those companies taking a chance on crypto, like Square, should be applauded. They built their businesses on risk, calculated and mitigated, so why change now? I see it as an expansion, and a necessary one is cryptocurrencies continue their present climb in interest.”
Kabbage Inc, a U.S. online lender for small businesses, said it will cut ties with clients that make or sell assault-style rifles or that sell weapons or ammunition to people under 21 years old, one of the strongest steps by any financial firm after last month’s high school massacre in Florida.
One piece of good news is that the company recently dealt with its largest liabilities from the 2016 scandal, settling both federal and state class action shareholder lawsuits. The bad news: LendingClub has to pay plaintiffs a total of $125 million, with $47.75 million covered by insurance, leaving LendingClub on the hook for the remaining $77.25 million. That amounts to roughly 12% of the company’s liquid assets and about 5% of the current market capitalization.
2. A challenging environment
In addition to these company-specific problems, the macroeconomic environment has become more challenging, though that is no fault of LendingClub. Increased awareness of personal loans delivered via the internet has spurred a large increase in applications, and LendingClub saw a 43% increase in applications in 2017 — much higher than the company’s 3.7% growth in originations.
3. Cost cuts in 2018
LendingClub believes it has stabilized both its credit model and its investor base in 2017 while introducing new investor products, and it will pivot in 2018 to focusing on controlling costs. Part of that will entail outsourcing its loan servicing to industry-standard third parties while reallocating internal engineers to the things that differentiate the company, like data-driven underwriting and product innovation.
For the full year 2018, the company forecasts 18% to 22% revenue growth while targeting cost growth of only 14% to 16%.
The Milken Institute is out with a comprehensive report this week that drills down into existing legislative action by Congress that addresses the emerging Fintech industry. This is the first report of its kind and provides a solid perspective on what Congress has accomplished to date while recognizing the fact elected officials can do far more.
“Subjecting nonbank lenders to 50 different state usury laws is inconsistent with today’s increasingly interconnected and digital global economy.”
The research provides multiple policy recommendations. In brief, they are as follows:
Provide certainty on “true lender” and “valid when made” issues to maintain a vibrant, competitive marketplace for credit.
Harmonize inconsistent state-by-state regulations related to mobile banking to drive financial inclusion and access.
Update tax reporting guidelines regarding cryptocurrency transactions to protect against tax evasion and to promote a more transparent, responsible marketplace.
Enable the reporting of alternative data that can expand access to credit.
Develop common reporting standards among U.S. financial regulators to foster a more transparent marketplace.
Require the IRS to automate certain data collection and reporting processes that can help enhance the speed and efficacy of the underwriting process.
This report is a must read policy paper for Capitol Hill staffers and US Fintech industry participants.
US equity markets had a bad week as the S&P500 closed 3.3% lower at 2,659. CDX IG spreads widened marginally by 0.6 bps to 55 bps and CDX HY spreads widened by 8.7 bps to 337 bps. We have seen significantly higher volatility this year, driven mainly by rising interest rates and inflation expectations. No new MPL deals have priced since the rise in volatility, although we expect the first $1 Bn MPL ABS transaction to announce soon.
We share a few anecdotes from our informal conversations which we share in generic fashion to protect the innocent:
A large issuer: “Our bonds are oversubscribed 2 to 3x. And when we share that with our investors they want more.”
A large ABS investor: “We need help monitoring losses in the personal loan ABS space. Is this an indutry issue?”
A large investment bank (Warehouse): “We ar doubling our exposure to warehouse lending. We have the mandate to grow the book.”
A large investment bank (Syndicate Desk): “MPL has gone mainstream now.”
A lender: “The 5% risk retention requirement is hurting our ability to issue loans to consumer and grow our business responsibly.”
An issuer: “We are a small emerging originator and we have 7 term sheets – from large banks and small – in the last few weeks. Competition in warehouse lending is growing.”
Also heard at the conference was that Citibank is planning a Marcus-like online lender to enter the consumer unsecured loans space, although the timeline was unclear. Our view is that the GS Marcus – and specifically the ROE and NIM opportunity – is inspiring competitive response from other banks including Citi.
Last year, marketplace lenders learned that maintaining diverse sources of funding is just as important as managing the credit risk in their loans.
LendingClub, Marlette Funding and others developed their own securitization platforms, rather than relying on whole-loan sales to large investors. They also invited some of these investors to contribute seasoned loans to collateral pools for these in-house deals.
It’s clear that equity investors no longer see the value of marketplace lenders, such as companies that provide credit at the point of sale or online lending.
A typical lender leverages equity into debt at a fixed ratio. If they want to grow their portfolio they have to raise equity and lever it into more debt. An off-balance sheet marketplace eliminates the equity-debt leverage ratio allowing a lender to double and triple their portfolio as quickly as they can grow their marketplace.
The fact the Securities and Exchange Commission has been issuing subpoenas to initial coin offering (ICOs) issuers has been rumored for quite some time. Recently, multiple publications, including Crowdfund Insider, revealed this fact. The SEC has been warning of this sort of activity for many months and, while not surprising to most, it is an unpleasant moment for an issuer when that subpoena shows up.
For example, the acting director noted that the agency will devote greater resources to consumer education, instead of relying heavily on enforcement actions to ensure consumers make the correct choices, reaffirming previous remarks in a Wall Street Journal opinion piece (previously covered by InfoBytes here).
On February 27, the U.S. Court of Appeals for the 3rd Circuit held that an arbitration clause is unenforceable if the corresponding forum selection provision designates a forum that does not actually exist.
The rise of alternative lending and familiarity of growing names like OnDeck is beginning to shift public perception of the merchant cash advance, however.
There are scenarios, too, in which a merchant cash advance may actually be the best financial option for a business in need of working capital.
“We see a lot of clients who already have a long-term equipment loan, or an SBA loan, or a loan from a traditional bank or a factoring line, and they’re looking to unlock short-term liquidity from their business,” he said. “When you take out an SBA loan or equipment loan, you have to have some type of collateral to pledge, and that money can dry up quickly. We come in un-collateralized.”
One driver behind the shifting reputation of merchant cash advances is the industry’s participation in technology adoption and innovation.
So, every quarter, he and the company’s management team host an all-hands meeting and outline to the company’s 100-plus employees what the most important goal for the next 90 days will be.
So the word went out to employees that for the time being, efforts to grow the business would have to take a back seat to making certain that the existing business was profitable. According to Meiler, it was employees’ focus on the task that helped Best Egg rack up $11 million in GAAP profits last year, even as competitors were still posting operating losses in the tens of millions of dollars. And, he adds, the company still grew its business by 60% anyhow.
Office exercise happens beyond a standing desk at many of the companies. NvoicePay not only provides stretching areas and lockers to employees, it offers monthly classes with a certified trainer and kinesiologist. Marlette Funding’s Best Egg unit offers employees self-defense classes on site, along with yoga.
And if you like the beach, check out nCino, where employees regularly go for early morning paddleboat sessions at nearby Wrightsville Beach in Wilmington, N.C., and SmartbizLoans, which hosts “Disco Yoga” at San Francisco’s Baker Beach.
Addressing an employee’s well-being and comfort comes in different forms, whether it is Cross River Bank’s policy of providing 100% of the premium for various insurance benefits covering employees and their families, Nav’s unlimited paid time off option for employees, or Ensenta’s tradition of celebrating workforce diversity with multiple holidays, including Kwanzaa, Diwali, and the Day of the Dead.
To that end, they’ve established a company that regularly celebrates its successes and milestones with parties, and encourages employees to get together and have fun in nonwork environments. A prime example of the latter is the PeerStreet Olympics, an annual event in which the company is divided for a day into teams of friendly athletic competition, some of which takes place on the beach near its Southern California offices.
Collateral (UK), a small P2P company offering pawnbroker-style and property-backed loans with 15 per cent returns, went into administration on Wednesday after it emerged that it was not authorised by the Financial Conduct Authority.
PEER-TO-PEER investor BondMason has offered to step in and manage the loanbook of the troubled Collateral platform.
BondMason, which invests in loans across more than 30 P2P platforms on behalf of investors, revealed it has invested 2.48 per cent of its portfolio through Collateral, which has fallen into administration.
PEER-TO-PEER lending firms have been reassuring their investors about the safety of their platforms in the aftermath of Collateral going into administration.
Business lenders Ablrate and MoneyThing have both sent messages to their customers detailing their stability, performance and regulatory requirements that mean they have to hold client money separately and have a ‘living will’ that puts a plan in place should a business fail.
The proportion of south east companies which are only paying the interest on their debts – one of the signs of a so-called ‘zombie’ business – has risen to four per cent in December from one per cent in April 2017, according to indicative research by R3, the insolvency and restructuring trade body.
This represents around 12,000 businesses in the region.
Rather than try and undercut banks, or chase millennial savers’ pennies at a loss, fintech firms are now leaping at the chance to make serious cash through a technology that most banks won’t even touch. What’s more, Bitcoin has the power to take over people’s lives. One trader says it’s worse than gambling; Korea calls victims “zombies.”
Here’s a roll call of recent converts: Mobile-payments firm Square Inc. has rolled out Bitcoin trading; social-payments app Circle splashed $400 million on Poloniex, only about 15 months after it had stopped offering bitcoin trading; and money-transfer company Revolut has started offering crypto trading facilities.
Trading platform Coinbase booked more than $1 billion in revenue last year, according to Recode, which, if true, is more than peer-to-peer marketplace Lending Club and more than Square. On top of the money to be made from trading fees and asset-price gains, Bitcoin could also act as a lure, helping startups cross-sell their other products to a bigger audience.
On Friday, London-based FinTech firm Humaniq revealed it is marking the milestone of its mobile app reaching its first 50,000 downloads by unveiling a new, improved version.
Some of the new features include:
New referral program: The new 2.0 referral program will build on this by displaying community progress with referrals and thereby make the referral process more transparent and intuitive for all users.
Transaction options extension: Transactions can now be made through the messaging chat system.
New registration process: Allows users to start interacting with a Humaniq assistant bot, which becomes smarter and is learning to execute more useful commands, even without the registration.
The country’s largest peer-to-peer lending platform said that it had supported the creation of more than 2,400 jobs since it began its Irish operations almost five years ago.
Linked Finance, which connects local businesses in need of loans with an online lending community of individuals, institutions and other investors, said firms that had borrowed money through its platform had raised staffing levels by 24 per cent on average.
ArchOver, the peer-to-peer (P2P) business lending platform, has announced Bill Johnston will join its board of directors as a non-executive director (NED). In his role, Bill will support ArchOver in formularising its training and development programme, to ensure it has the right talent in place as it continues to scale.
Japanese financial services group Orix bought a 6.4 billion yen ($59.8 million) stake in Wecash, a Chinese startup that uses big data and artificial intelligence to rate consumer credit.
Wecash can calculate a consumer’s creditworthiness in 10 seconds or less using phone records and other personal information, and has partnered with dozens of financial institutions so far. It also suggests potential lenders to consumers looking to take out a loan.
Only about 30% of the Chinese population is believed to borrow money from banks.
Big banks are particularly exposed when it comes to ETF funds. The fast-growing $5 trillion-dollar industry is being challenged by a crop of robo advisors, such as Apler’s portfolio company Sigmastocks, an algorithm-powered tool that tailors portfolios for customers, or BetterWealth, a roboadvisor app.
Although the region’s leading banks, such as Danske, Nordea and Swedbank are doing some good things and building new digital banking products and roboadvisory capabilities, Apler says, it won’t be enough.
Apler’s online bank Collector, which received its full banking license in 2015, has expanded to comprise cards, saving accounts and quick loans to both consumers and businesses. Collector doesn’t face the same issues as legacy banks in a digital world, Apler explains.
Total venture capital across the global FinTech market between 2010 and 2017 hit a combined $97.7 billion, growing at a compound annual growth rate (CAGR) of 47 percent.
Accenture highlighted Kabbage, the U.S. alternative small business lending firm, that secured $900 million in 2017, while other alternative finance players, like LendingPoint and SoFi, landed significant investment rounds.
This week, alternative lender C2FO showed that the alternative finance funding gears are still turning, landing $100 million from Allianz X and Mubadala Investment Company. Existing backers Temasek, Union Square Ventures and Mithril Capital also participated, an announcement said.
This week’s blockchain investment comes from Square Peg Capital, which provided $5.5 million in Series A funding to AgriDigital, an Australian company hoping to use the funds to expand into North America.
Reports in The Australian Financial Review this week said the company uses blockchain to facilitate supply chain finance to the agriculture business, offering supply chain management features also powered by distributed ledger technology.
According to CB Insights, $4.7 trillion of revenue generated by financial services firms is at risk of being displaced by fintech startups.
Prominent business school alumni have founded successful fintech startups, such as Giles Andrews, who setup peer-to-peer lender Zopa after getting an MBA at INSEAD. Jeff Lynn and Carlos Silva developed crowdfunding platform Seedrs during their MBA at Oxford’s Saïd Business School. According to PwC’s Global Fintech Report 2017, funding of fintech startups has increased at an annual growth rate of 41% over the past four years, with $40 billion in cumulative investment made.
Niels Turfboer is UK managing director at Spotcap, the Berlin-based online lender.
Bitstrades is clearly aiming to position itself as a complete platform that both links users together and also leverages economies of scale to make both lending and investing possible. The Bitstrades ICO raised millions in funding and now the BSS token is available for trading.
Bringing financial planners into the credit space would be unnecessary, according to a Commonwealth Bank executive, as there are more than enough brokers to service the mortgage needs of Australians.
The CBA executive said: “With 16,000 brokers out in the marketplace, we’re certainly not in a position where we need more people to serve Australians well in meeting their mortgage needs. For me, it’s certainly not a quantity issue.
The PC has also alleged that brokers working for lender-owned aggregators could feel compelled to provide customers with home loan products offered by the bank with an ownership share of the business.
Commissioner Stephen King referenced CBA’s ownership of Aussie Home Loans and cited figures published in the PC’s report, which said that 37 per cent of loans written by Aussie brokers were for CBA products.
India is poised to be a USD 4-trillion economy by 2022, of which USD 1-trillion would be digital economy.
Digital economy was a focal point for this budget ’18 as government’s support with regard to lending MSME’s allocated 3794 crore in the form of capital support and interest subsidy by 2022 which will help develop the MSME sector. Micro, Small and Medium Enterprises (MSMEs) contribute about a third of India’s manufacturing output and provide employment to over 10 crore people. Despite this, the share of institutional lending in the total borrowings of MSMEs is less than 10%.
The prudential guidelines include maximum leverage ratio that can be maintained (2 times), minimum net owned funds (Rs2 crore), cap on aggregate exposure of lender to all borrowers (Rs.10 lakh), borrowers across all P2P (Rs10 lakh), exposure of single lender to borrower (Rs50,000) and maturity of loans (not exceed 36 months).
Signzy developed blockchain and AI-based solutions to digitally identify, verify, and authenticate customers. Its onboarding solution, Real KYC, has now been deployed by more than 45 large clients, including leading banks, NBFCs, mutual funds, P2P lending platforms, payment wallets, and so on.
Mastercard is working with Facebook Messenger to bring a digital payments and banking experience to small businesses in Nigeria, in an effort to incentivize Nigerian merchants to close the mobile payments adoption gap and bring them onto the formal financial grid.
The payments giant, which has said it’s in the business of killing cash, is bringing this initiative to a country where 98 percent of the $301 billion in consumer-to-business payments is transacted using cash.