Tuesday November 6 2018, Daily News Digest

Data from Bank of America, Wells Fargo, JP morgan and US Bank shows unbanked us online and mobile banking when banked

News Comments Today’s main news: Preview of OnDeck’s Q3 earnings. Credit Karma acquires Noddle from TransUnion, expands into UK. Lufax to move P2P lending to the blockchain. WeBank hits $21B valuation. Linked Finance loans up 63%. Nubank now worth $4B. Today’s main analysis: The unbanked approaches banking like everyone else. Today’s thought-provoking articles: HSBC, Barclays bucking the trend. International P2P lending […]

Data from Bank of America, Wells Fargo, JP morgan and US Bank shows unbanked us online and mobile banking when banked

News Comments

United States

United Kingdom

China/Hong Kong

International

Other

News Summary

United States

On Deck Capital’s Q3 Earnings Preview (Benzinga) Rated: AAA

On Deck Capital ONDK 26.01% releases its next round of earnings this Tuesday, Nov. 6. Get the latest predictions in Benzinga’s essential guide to the company’s Q3 earnings report.

Earnings and Revenue

Based on On Deck Capital management projections, analysts predict EPS of 12 cents on revenue of $97.33 million.

On Deck Capital EPS in the same period a year ago totaled 1 cent. Sales were $83.66 million. Revenue would be up 16.33 percent on a year-over-year basis.

Source: Benzinga

Strong Wage Growth, HSBC / Barclays Bucking the Trend (Peer IQ) Rated: AAA

QED Investors has raised its largest fund to-date. QED raised $175 Mn in its fifth fund which is focused on early-stage FinTech. QED also released their first quarterly newsletter. (Subscribe here) Matt Burton, the founder and CEO of the Orchard platform, joined as a partner and will lead QED Belay, the newly formalized founding stage investment platform.

SoFi and Marlette are issuing their fourth Consumer Unsecured deals of 2018. SCLP 2018-4 is a $549 Mn securitization. KBRA has rated the tranches A to D AAA, AA+, A+ and BBB respectively. SCLP 2018-4 is the first consumer unsecured deal to receive a AAA rating. MFT 2018-4 is a $266 Mn securitization. KBRA has rated the tranches A to C AA, A, and BBB- respectively.

HSBC and Barclays Leaning In, Marcus and Discover Pulling Back

HSBC and Barclays are launching new unsecured personal loan products. These products will complement the banks’ existing US credit card offerings while competing head-on with Marcus on its home turf. HSBC and Barclays are looking to capture a piece of the $140 Bn personal loan market, that is growing at an annualized rate of eighteen percent.

Discover and Marcus are cautious about the growth in personal loans and the potential for higher lossesGS will temper Marcus’s origination growth and not “chase volume targets”. We note that GS is the only bank whose provision for loan losses increased in Q3 – GS provisions rose by 172% YoY to $174 Mn, while loans grew by 72% – far outpacing loan growth (and what might be expected from loan seasoning).

There’s no excuse for ignoring the unbanked, big banks’ own data shows (American Banker) Rated: AAA

When community advocates ask banks to provide accounts for the estimated 63 million people in the U.S. who are unbanked, bankers typically raised two concerns.

Both arguments appear to be shot down by a new trove of data collected from four of the largest banks: Bank of America, JPMorgan Chase, U.S. Bank and Wells Fargo.

Seventy-four percent of the 3 million previously unbanked people who opened accounts at the four banks in the past year are digitally active. In fact, they are heavy users of online and mobile banking. They are statistically no more likely to call or walk into a branch than existing bank customers.

Source: American Banker

Credit Karma expands into insurance with auto policy service (Reuters) Rated: A

Financial technology startup Credit Karma said on Tuesday it is expanding into insurance through a new service that makes it easier for users to find cheaper auto insurance policies.

The tool generates suggestions by analyzing government information on drivers and vehicles together with data from credit bureaus and public insurance rate filings, bypassing the need for users to manually input information into long forms, the company said.

Kathryn Petralia of Kabbage (Lend Academy) Rated: A

In this podcast you will learn:

  • How Kabbage has changed since they launched 10 years ago.
  • The biggest challenge they have found as they have grown.
  • Their approach to data analytics and the different data sources they use.
  • Why it is important to have a complete picture when a business seems to be struggling.
  • Why they have not pursued direct lending outside of the U.S.
  • Why their banking clients have been outside the U.S.
  • How Kathryn views the competitive business lending environment today.
  • Why banks are not going head to head against Kabbage yet.
  • What Kabbage is doing to foster more gender balance throughout the organization.

ForwardLine Accelerates Growth and Achieves a 350% Increase in Loan Originations (PR Newswire) Rated: A

ForwardLine, a nationwide direct lender providing affordable loans to small businesses, has announced strong results for third quarter 2018, achieving a 350% increase in loan originations over third quarter 2017. The company attributes its growth trajectory to strategic investments in technology, enhanced analytics, and an improved overall customer experience.

Majority of Americans Expect to Use a Robo Adviser (Plan Advisor) Rated: A

Fifty-eight percent of Americans expect to use a robo adviser by 2025, Charles Schwab learned in a survey, summarized in its report, “The Rise of the Robo: Americans’ Perspectives and Predictions on the Use of Digital Advice.” In addition, 45% say robo advice will be the technology that will have the biggest impact on financial services.

In addition, by the year 2025, 57% expect to use robotics, 55% artificial intelligence, 54% virtual reality, 53% big data, 43% augmented reality, 36% blockchain and 36% cryptocurrency.

However, when it comes to financial advice, people still want the human touch, with 71% of people wanting a robo adviser that also gives them access to human advice. Among Millennials, this jumps to 79%. This is true for 73% of Gen Xers and 64% of Baby Boomers.

Forty-six percent of Baby Boomers using a robo adviser say it is perfect for their life stage, and 45% of this demographic group expect to use a robo adviser by 2025.

Is This Community Bank’s Bold Digital Play The Model Of The Future? (The Financial Brand) Rated: A

Online mortgage lending has been a very large part of NBKC Bank’s business model, and remains so.

Now, people in all 50 states can apply online for a mortgage from NBKC. Its originations run between $2.5 and 3 billion annually, and the bank is one of eight mortgage lenders on Costco’s nationwide platform.

AGORA Announces Release of First-Ever Loan Validation Report for Seasoned Loans (PR Newswire) Rated: A

AGORA Data, Inc., a secondary loan marketplace based in Arlington, Texas, announced today, the release of the first-ever Loan Validation Report for seasoned loans. AGORA’s proprietary technology enables car dealers and finance companies to avoid compliance issues with the Truth in Lending Act (Regulation Z), by assessing in real-time any issues with the terms of a loan, either at the portfolio or individual loan level. This includes assessment of the loan APR, Finance Charges, Principal Balance, Total of Payments, Unearned Interest and Gross Balance. Violation of Regulation Z can lead to significant penalties and other legal issues.

Roostify Names Courtney Keating Chakarun as New Chief Marketing Officer (Business Wire) Rated: B

Roostify, a leading digital lending platform provider, announced today that Courtney Keating Chakarun has joined the company as Chief Marketing Officer. Chakarun comes to Roostify from CoreLogic, where she served as Senior Vice President, Marketing & Innovation.

PeerIQ Announces Agreement with Liberty Lending (Globe Newswire) Rated: B

PeerIQ, the leading provider of risk analytics for consumer credit, today announced that Liberty Lending, a leading online platform that provides innovative borrowing solutions to deserving consumers, has entered into an agreement to license two PeerIQ products: Consumer Credit Suite and Analytics Platform.

United Kingdom

Credit Karma acquires Noddle from TransUnion and expands to the UK (Tech Crunch) Rated: AAA

Credit Karma, the US startup with 85 million users that offers credit reports and a platform to browse and buy other financial services, has made an acquisition to help it kick-start its first overseas expansion beyond the US and Canada: it has acquired Noddle, a UK-based credit reporting service with 4 million users, from TransUnion.

Financial terms of the deal are not being disclosed, but Valerie Wagoner, Credit Karma’s VP of International (who had previously been at Twitter), said that it will be a full acquisition of tech and employees — 35 in all — and TransUnion is not taking any stake in Credit Karma as part of this deal, although the two will continue to work together with TransUnion providing data to Credit Karma, as it had done before.

As a point of reference — and a sign of the consolidation and competition in the market — earlier this year Experian acquired another credit scoring service in the UK, ClearScore, for the equivalent of $385 million. That service has 6 million users compared to Noddle’s 4 million. Competition authorities are still investigating that deal, and Credit Karma’s will also have to get the pass from regulators before closing.

Experian to Offer a New Trended Data ‘Multi-Dimensional View’ of UK Consumer Finances with the Launch of Credit 3D (Business Wire) Rated: A

Experian is launching a new range of services to help lenders evolve their approach to making consumer credit decisions, so businesses can make more informed decisions and deliver fairer, more affordable outcomes for their customers. It’s now possible to take a multi-dimensional view of a borrower’s financial health with Experian Credit 3D.

Knowing a consumer’s credit information at a single point in time only offers a snapshot of their financial behaviour. However, by using innovative trended and alternative data sources via Experian Credit 3D, businesses can access an unparalleled set of insights, enabling faster decisions based on a more rounded picture of affordability.

Insolvency reforms may hinder P2P loan recoveries (Peer2Peer Finance News) Rated: A

REFORMS to the way HMRC is treated as a creditor will make it harder for some peer-to-peer lending platforms to recover bad debts, an insolvency practitioner has warned.

Chancellor Philip Hammond announced in his 2018 Budget last week that HMRC would be given preferred creditor status in business insolvencies to ensure tax is collected.

Simon Bonney, a partner at Quantuma, told Peer2Peer Finance News this would impact any P2P platforms accepting floating charges, such as stock, receivables or cash at the bank, as security on loans.

Goji launches SIPP wrapper for direct lending bonds (Peer2Peer Finance News) Rated: A

GOJI has made its direct lending bonds available in a self-invested personal pension (SIPP) wrapper.

Investors can now access the specialist investment manager’s direct lending bond through both an Innovative Finance ISA (IFISA) and a SIPP.

Its diversified lending bond targets returns of more than five per cent by investing in loans sourced by alternative finance providers in the property, small business and education sector.

Lloyds Banking Group to add 2,000 jobs in digital shake-up (The Guardian) Rated: A

Lloyds Banking Group is planning a major restructuring of its workforce, adding 2,000 jobs as it refocuses its operations on digital technology.

Britain’s biggest high street lender will cut 6,000 jobs but create another 8,000 as part of a £3bn reorganisation over the course of the next two years.

The job losses will be spread across the group transformation division, corporate banking, retail and community banking, Sky News reported. New roles will be oriented towards digital technology.

Alternative Airlines: “Spread the cost of a flight over monthly instalments” (Travel Daily) Rated: A

UK based flight search site Alternative Airlines, has put the cat amongst the pigeons with an announcement of a new deal with Affirm to roll out what the American company describes as its “fair and honest alternatives” to traditional payment options.

The new partnership will see customers pay for their flights in instalments, instead of one single tranche. Giving them the opportunity to plan ahead and even open up a travellers horizons by giving them a chance to experience more wide-ranging trips, with the US customers able to divide fees over three, six and 12 months instalments.

China/Hong Kong

Chinese Wealth Manager Lufax Eyeing P2P Lending with Blockchain (Blockchain Reporter) Rated: AAA

Lufax is transferring its entire peer-to-peer (P2P) lending portfolio worth “tens of billions US dollars” onto the blockchain platform, according to a post on South China Morning Post.

Tencent-Backed WeBank Hits $ 21 Billion Valuation (Caixin Global) Rated: AAA

Tencent-backed online lender WeBank Co. Ltd. has reached a sky-high valuation of 147 billion yuan ($21 billion) after less than four years in operation, becoming one of the world’s largest “unicorn” companies.

The new valuation is based on a legal document  attached to an auction notice on Taobao.com, which described the upcoming auction of a minor stake in WeBank.

WeBank’s latest valuation makes it the fifth most valuable privately-held company in the world, based on the CB Insights list.

Hong Kong’s appeal as a virtual banking hub is about to be put to the test as first online lenders arrive (South China Morning Post) Rated: A

Of the 29 virtual bank licence applications before the HKMA, submissions have been made by WeLab, HKT, Standard Chartered Bank, as well as an alliance between Australia’s Airwallex, Bank of East Asia (BEA), and mainland firm Sequoia Capital China.

There are 21.43 bank branches and 50.09 ATMs for every 100,000 residents in Hong Kong, higher than the global city average of 12.6 and 47.55 respectively in 2016, according to World Bank data.

European Union

Linked Finance’s loans up 63% in first nine months of 2018 (RTE) Rated: AAA

Peer-to-peer lending platform Linked Finance has facilitated loans of over €28m in the first nine months of this year, an increase of 63% on the same time last year.

The lender said it was on track for record growth this year.

It also noted that loans in the quieter third quarter covering the summer holiday months were up more than 62% to €9.3m, while average loan size also rose significantly – up 33% to €62,000.

International

Nubank is now worth $ 4 billion after Tencent’s $ 180 million investment (Tech Crunch) Rated: AAA

Nubank, the Brazilian financial services company, has raised $180 million from the Chinese internet giant, Tencent.

With the $4 billion valuation, it also makes Nubank one of the most highly valued privately held startups in Latin America.

International P2P Lending Volumes October 2018 (P2P Banking) Rated: AAA

Zopa leads ahead of Mintosand Ratesetter. The total volume for the reported marketplaces in the table adds up to 481 million Euro. This month I added Crowdproperty.

Dofinance crossed 50M EUR total volume lent since launch.

Source: P2P Banking

The Fintech 250: The Top Fintech Startups Of 2018 (CB Insights) Rated: AAA

12 QED portfolio companies named to CB Insights’ Fintech 250 list of the most promising financial services start-ups: Shout outs to AvidXchange, blooom, CircleUp, Credit Karma, Creditas, Flywire, Klarna, LendUp, Nubank, Roofstock, Signifyd, and SoFi! (Credit: QED inaugural newsletter)

Source: CB Insights

Credit Karma

The company provides individuals with credit scores and reports and makes recommendations based on data accordingly

Klarna

Klarna offers safe and easy-to-use payment solutions to e-stores with the ambition to make e-commerce safer, simpler, and more fun.

LendUp

LendUp’s mission is to provide anyone with a path to better financial health. Through its proprietary software, it designs safe, transparent products that expand access, lower costs, and provide credit building opportunities for the population of Americans who currently have limited options within the traditional banking system because of low credit scores and income volatility.

Roofstock

Roofstock runs an online marketplace where retail and institutional investors can buy and sell homes in the United States occuped by renters.

The entire Fintech 250 list and report is available here.

Australia

New giants Afterpay and Revolut are redefining trust for the fintech generation (Australian Financial Review) Rated: AAA

More than 500 fintech aficionados hit the swanky Peninsula event space in Melbourne’s Docklands last week for the third annual Intersekt festival.

The three-day shindig, organised by FinTech Australia, debated topics such as how start-ups can capitalise on the loss of trust in incumbent institutions (exacerbated by the banking royal commission); and the extraordinary rise of “neobanks” around the world.

Anthony Eisen, co-founder of local payments star Afterpay, and Chad West, the marketing head of globally focused neobank Revolut, explained how they have lured customers by reinventing traditional fee models.

Unexpected expenses hit many of us, so here’s how to handle them (News) Rated: A

LARGE unexpected expenses are hitting the household budgets of two-thirds of Australians, and many are resorting to dangerously expensive credit cards to get themselves out of a financial jam.

Cars are the biggest cause of unpleasant financial surprises, according to new research by marketplace lender SocietyOne, followed by travel costs and medical bills.

The lender’s When ‘It’ Happens report reveals that 40 per cent of people would cover unexpected costs by borrowing money from family and friends, almost 20 per cent would add the expense to their mortgage, 31 per cent would sell stuff, and 28 per cent would take on extra credit card debt.

Asia

21 Remarkable Fintech Founders Under 35 in Southeast Asia (Fintech Singapore) Rated: AAA

Iwan Kurniawan, 28, Indonesia; Reynold Wijaya, 29, Indonesia Co-Founder, Modalku

Together with Kelvin Teo, Iwan Kurniawan and Reynold Wijaya founded Indonesia-based Modalku, called Funding Societies in its sister operations in Singapore and Malaysia, a peer-to-peer (P2P) digital lending platform that connects cash-strapped SMEs with lenders. The startup is backed by Sequoia, Softbank Ventures Korea, and Alpha JWC Ventures, and recently passed the US$110 million mark through more 3,000 loans to businesses in the region.

Rachel De Villa, 25, Philippines  Founder and CTO, Cropital

Rachel De Villa is the co-founder and CTO of Cropital, a crowdfunding platform that helps finance local Filipino farmers. Established in 2015, Cropital aims to improve the income and productivity of farmers through crowdfunding, providing scalable and sustainable financing. Through Cropital’s online platform, investors choose a farm or farms to invest in. Cropital manages the fund for the farmer making sure it goes to the right resources, assuring as well that investors will get a return on investment.

Abraham Viktor, 25, Indonesia  Co-Founder and CEO, Taralite

Abraham Viktor is the co-founder and CEO of Taralite, a P2P lending platform. Taralite’s loans are issued by financial institutions other than banks, also known as multi-financers, which allows it to reduce the interest rate up to 2% and extend the loan period of up to three years. The platform accepts houses, cars or motorcycles as collateral. Founded in January 2015 as Wedlite, Taralite graduated from startup incubator program Global Entrepreneurship Programme Indonesia (GEPI) in November 2015. Previously, Viktor was an investment banking analyst, first with Boston Consulting Group and later at Nomura investment banking.

Mohamed Abbas, 27, Singapore Co-Founder, Rely

Mohamed Abbas is a tech entrepreneur and the co-founder of Rely, a startup that enables online shoppers to shop and pay for their purchases by splitting their cost into manageable monthly payments, interest-free. Abbas is also the co-founder of Onelyst, an online marketplace that helps users from lower-income brackets compare loan rates across different licensed moneylenders. The website allows users to find loans for different purposes, such as medical or rental expenses, and produces a list of personalized options in minutes.

Gov’t To Launch Crowdfunding Platform To Help Home Buyers (Property Guru) Rated: A

The federal government announced during the tabling of Budget 2019 on Friday (2 November) that it will introduce a “property crowdfunding” platform by Q1 2019 to help Malaysians buying their first homes, reported Bernama.

On Sunday (4 November), Prime Minister Tun Dr Mahathir Mohamad said the scheme is the first of its kind in the world, and will enable people to buy a home as long as they can a pay the 20 percent down payment, which can be financed via savings, debts or withdrawals from their Employee Provident Fund (EPF) account. The remaining 80 percent will be funded by investors via peer-to-peer lending supervised by the Securities Commission.

Dubbed as FundMyHome.com, the property crowdfunding platform is expected to help the Pakatan Harapan administration fulfil its election promise of one million low-cost housing within 10 years.

Malaysia teams up with The Edge on property financing portal (Tech in Asia) Rated: B

CIMB and Maybank are the participating institutions that will contribute towards the externally funded 80-percent portion of the house price, with more expected to sign up in the future.

The site – developed by finance and real estate media platform The Edge – will list about 1,000 homes costing less than US$120,000 during the first phase of its rollout. All properties listed will be completed or near completion, and buyers looking for rental income will be allowed to “buy to rent” through the portal.

Authors:

George Popescu
Allen Taylor

The Latin American Alternative Lending Landscape

Latin American alternative lending

The alternative lending juggernaut shows no sign of slowing down and is enjoying remarkable growth all around the world. The Latin American & Caribbean (LAC) industry is also enjoying the wave; the 2017 Americas Alternative Finance Industry Report highlighted the region as a hot spot of lending growth with volumes jumping by over 200% in […]

Latin American alternative lending

The alternative lending juggernaut shows no sign of slowing down and is enjoying remarkable growth all around the world. The Latin American & Caribbean (LAC) industry is also enjoying the wave; the 2017 Americas Alternative Finance Industry Report highlighted the region as a hot spot of lending growth with volumes jumping by over 200% in the completed year 2016. The industry grew from $110 million to an estimated $342 million with business lending accounting for 57% of the total pie.

Source: 2017 Americas Altenative Finance Industry Report

Brazil: A Gold Mine for Alternative Lenders

The so-called Big 5 economies of the region are Brazil, Mexico, Argentina, Chile, and Venezuela. In total, there are 25 countries across Central America, South America, and the Caribbean. The South American market (i.e. basically ex-Mexico) in general, and specifically Brazil, has always been hampered by a lack of banking services, which has opened the floodgate for fintech startups to tap this $6.5 trillion economy. Brazil is an extreme case in point on how lucrative the market can be. 160 million adults are using some kind of banking service, but only 55 million are borrowers, as per Brazil’s central bank. Add to that almost 20 million unbanked people, and you can see the size of the opportunity for a lending startup. Moreover, 85 percent of Brazilians now live in cities; but, 40 percent are excluded from the traditional banking system as per São Paulo-based Itaú Unibanco, the largest private bank in South America.

Yet, the Brazilian population is heavily smartphone-dependent, and fintech lenders have leveraged this to offer differentiated banking and credit services. This gap seems to have been identified by leading US VCs as well. Nubank, a digital finance company that launched a no-fees credit card in Brazil, became the first investment in South America for Sequoia, DST Global, Founders Fund, and QED. It has now raised a cumulative equity and debt funding of over $377 million.

Source:

An underlying reason behind the unprecedented adoption of alternative lending has been the severe banking crisis that hindered the region for more than a decade. With the economy gaining momentum, there is huge latent credit demand, both from individuals as well as SMEs. For instance, Brazilian consumers pay an average of 190 percent a year for unsecured overdraft, credit cards, and consumer loans from banks. The Brazilian government is firmly behind these fintech startups as they look to democratize lending, and more importantly, lower borrowing costs for their voters.

ance/homebox/brazils-fintech-is-a-carnival-of-innovation-in-latin-america/

Leading Players in Brazil Fintech Lending

  • Creditas – Creditas was founded in 2012 by Sergio Furio and has a headquarters in São Paulo, Brazil. It has raised over $77 million in various rounds of funding. Formerly BankFacil, Creditas is a digital lending platform focused on secured lending. The firm funds its customer loans both through investors and financial institutions. Core products include a version of home equity and auto loans in which borrowers offer their residences or vehicles as collateral.
  • Geru – Launched in 2013, Geru is headquartered in São Paulo. A simple, fast, fair, and cost-effective online loan platform, Geru was inspired by the international model of marketplace lending and provides registration and credit rating services for people who wish to obtain a loan. It offers loans up to $10,000 with an interest rate ranging from 1.88%-5.02% per month, and terms ranging from 12 to 36 months.
  • GuiaBolso – Brazil’s leading personal finance platform, GuiaBolso has millions of users who have downloaded its finance app and consumer credit marketplace. It has raised over $60 million in funding.

Apart from the above, there are many Brazilian fintech lending startups like Simplic, Biva, and Noverde that are charting their own path in the Brazilian lending market.

Non-Brazilian Alternative Lenders

  • Credivalores-Crediservicios – Launched in 2003, Credivalores-Crediservicios is headquartered in Bogotá, Colombia. It has raised $34 million from various rounds of funding. It is a non-banking financial company that provides consumer loans for individuals and small companies. The firm also focuses on payroll-deduction loans and consumer lending collected through public utility bills as well as discounting checks and insurance policy financing to low and middle-income individuals.
  • Sempli – Sempli was started in 2016 by Esteban Velasco and Felipe Llano. Its headquarters is in Colombia. An online lending platform for small and medium enterprises in Colombia, the firm has raised $3.6 million from various rounds of funding. It offers loans ranging from $10k-$100k for working capital and/or business expansion.
  • Afluenta – Started in 2010 by Alejandro Cosentino, Afluenta is headquartered in Buenos Aires, Distrito Federal, Argentina. It has raised over $13 million in various rounds of funding. Afluenta is the first and only marketplace lending company for consumer and SME loans operating in more than one country in Latin America. Afluenta successfully launched its services in Argentina where their lender base achieved net USD yields of +20% in the last three years. It currently operates in Argentina, Mexico, and Peru with plans to expand to Colombia & Brazil. It has lent over $460 million and has granted 11,403 loans so far.

Future Outlook

Even though the region has been engulfed by a recession for the last decade, the World Bank still expected the Latin American economy to grow by 1.8 percent in 2017 and 2.1 percent in 2018. The UK and US have matured as markets with leaders in almost every emerging niche. South America provides an untouched hunting ground for fintech lending expansion. The light-touch regulatory rule and implicit government banking to expand credit services should see the region emerging as a hot bed for alternative lending innovation.

Author:

Written by Heena Dhir

The QED Matrix Helps Leaves and Mountains Become Trees

QED Matrix

Nigel Morris is a co-founder of Capital One and has led it to emerge as a multi-billion dollar behemoth. During his time at Capital One, he noticed there is a gap between banks and the fintech industry. To bridge this void, his team rolled out QED Investors in 2007 and was able to bring on board […]

QED Matrix

Nigel Morris is a co-founder of Capital One and has led it to emerge as a multi-billion dollar behemoth. During his time at Capital One, he noticed there is a gap between banks and the fintech industry. To bridge this void, his team rolled out QED Investors in 2007 and was able to bring on board some ex-colleagues from Capital One to build QED; this helped him to ensure the team hit the ground running. QED has invested in multiple startups that have not only become unicorns, but have changed the entire landscape of the financial ecosystem in which they operate. Most notable are Credit Karma, SoFi, Prosper, GreenSky, BrainTree, and ApplePie.

Fintech Opportunities and Hindrances

Morris has seen the best and worst of big banking and fintech startups. He has seen that banks have some really important assets that fintech companies lack: low-cost deposits, regulatory access, top-notch compliance, huge customer base, and high profitability. But they are trying to be everything to everyone and this is where fintech companies are gaining ground. Fintech companies, rather than offering everything, offer a specific product or service that banks haven’t developed or cannot develop because that is just not part of their DNA.

On the other hand, Fintechs have been extremely nimble and have evolved into dominating spaces that have been vacated or neglected by banks, online consumer lending and small business lending being prime examples. However, banks have accepted the hard truth and have started striking partnerships with fintech lenders.

Morris is of the opinion that both sectors had been operating in silos. Though both have “complementary sets of skills,” they have only now really started communicating and exploring opportunities together. This lack of being able to meet on common ground was more of a cultural issue than anything. Startups do not understand or appreciate the hierarchy and sometimes bureaucratic structural setup of banks, and banks obviously are extremely wary of aligning themselves with unwieldy trigger-happy startups that can land them in a regulatory mess. So this communication gap is the biggest hindrance that both sides need to overcome to make this partnership work.

Bridging the Bank-Fintech Gap

In their endeavor to bridge the gap, QED has taken massive strides in the last six months by striking groundbreaking partnerships–one with Fifth Third in Cincinnati and another with Scotia Bank in Toronto. This partnership is beneficial for all three parties involved: Banks, Fintech companies, and QED.

Fifth Third has invested heavily in QED portfolio companies like GreenSky, ApplePie Capital, and AvidXchange. The focus of the Scotia relationship is in Latin America as they have a tremendous presence in LatAm and Central American countries outside of Brazil. They are exploring multiple opportunities together in those markets and should be able to announce a groundbreaking deal soon.

The QED Matrix

Nigel Morris believes that differentiating between fintechs and banks on a single perimeter is not feasible or sufficient. That’s why he came up with the QED Matrix.

The matrix has been developed on the lines of the BCG matrix (which is used for analyzing business units). The QED Matrix is used to show the trade-offs in the business model structure of the financial service institutions. The gist of is that each quadrant has its strengths and weaknesses, so entities moving towards the center are in the best shape.

The Matrix is based on two spectrums:

  • Resilience is a function of factors like brand capitalization and product suite diversification;
  • Flexibility concerns both infrastructure and decision making, and also includes organizational design, technology, culture, talent, and much more.

Classifications of each quadrant:

  • Mountains – Firms listed as mountains are high in resilience and low in flexibility. They have resilience because businesses have product diversity, brand, capital reserves, distribution networks, and low cost of capital. But low in flexibility due to institutional inertia, low growth, technical debt, and focus on regulation and cost reduction.

Examples: Citibank, Fifth Third Bank, Suntrust etc.

  • Boulders – Firms under this quadrant represents low resilience and low flexibility. Low resilience due to lack of capital reserves or product diversification of larger banks. They also lack in flexibility due to legacy infrastructure, weak talent pipeline etc.

Examples: Regional banks, Credit unions, Community banks.

  • Trees – Trees represent high resilience and high flexibility. High resilience due to factors like product diversification and loyal customer base and high flexibility due to clutter-free organizational structure, less technical debt, and open access to talent.

Examples: SoFi

  • Leaves – Firms under this quadrant represents low resilience and high flexibility. Low resilience due to product concentration and lack of stable low-cost capital. High in flexibility due to simple organizational structure, technology infrastructure, etc.

Examples: GreenSky, Avant

Analysis

Obviously, Trees represent the best of both worlds. But the thought process behind the QED Matrix is for banks and fintechs to realize where they are in the matrix and what type of partnerships should they pursue to ensure they remain relevant in the twenty-first century. So a boulder should look to partner with leaves so that its customer base can be monetized properly. Leaves should look to partner with mountains so that they have access to cheaper capital and a diversified offering and customer base. Whatever the situation, QED is sitting in the middle of the matrix. It is not only a capital provider to fintechs, but also the creator of a platform for dialogue with banks; this should help it become the first choice for entrepreneurs looking to build a sustainable fintech business.

Read about Nigel Morris’s LendIt USA 2017 keynote titled “If I Were to Start a Bank Today, This is What It Would Look Like.”

Author:

Written by Heena Dhir.