In just over a decade, alternative lending has evolved from a niche fintech play into a hundred billion dollar industry. 2017 was somewhat of a bumpy ride. Growing competition, shrinking bottom lines, stringent regulations, and traditional banks’ willingness to take on alt-lending using their financial muscle were the key trends that emerged last year. It […]
In just over a decade, alternative lending has evolved from a niche fintech play into a hundred billion dollar industry. 2017 was somewhat of a bumpy ride. Growing competition, shrinking bottom lines, stringent regulations, and traditional banks’ willingness to take on alt-lending using their financial muscle were the key trends that emerged last year. It is difficult to be sure what 2018 will bring, but here is what experts and pundits are predicting.
Ron Suber (Founder and former president, Prosper & chairman of the board, Credible) believes the marketplace lending industry has finally grown up. Companies will focus more on cash flow, profitability, and EBITDA. He encouraged online lenders to look for a lower cost of capital if they want to compete with the like of Marcus. He is also predicting the entrance of big technology companies like Amazon, Apple, Facebook, and Google.
Peter Renton (Lend Academy) believes five of the top 25 banks will launch their own platforms. He also believes Congress will pass a Madden fix and the IRS will modernize with its own API. One startling prediction he makes that one of the top online lenders (Lending Club, SoFi, Prosper, OnDeck, or Avant) will be acquired, and he believes a major platform will be hit by a cyber attack. Like everyone else, he believes the tech giants will solidify their positions in alternative lending, and more interestingly, he says messaging apps will integrate with online lending platforms.
Krista Morgan (CEO, P2Binvestor) makes predictions for MPL sector:
Companies will shift their focus on business models and unit profitability as hiring and spending decrease.
Mergers and shutdowns will continue as equity investors remain absent. She thinks it will be a tough year.
Investors believe the market is set for a correction; therefore, they will be looking at short duration assets for deploying their capital. Platforms will have to shift their focus to product development.
2018 will be the year of increased diversity.
Adam Stettner (Founder and CEO, Reliant Funding) predicts a year of instability. He also believes market variables will counterbalance themselves this year. The Fed is expected to increase interest rates, which will have a ripple effect in terms of rates for various types of loans. If unemployment levels remain low, it will lead to wage inflation. So the order of the day for alternative finance and small business funding companies will be adaptability, he says.
Additionally, Stettner sees a year of increased fraud, and companies will have to invest in identification tools and fraud detection techniques.
Two more predictions he points to are increased consolidation as companies overextend themselves and more disruption from big business names entering the space.
Juan Tavares (LendingPoint) predicts balance sheet lenders will take over, there will be more collaboration, and payments and credit will intersect more.
Small Business Lending
Trevor Dryer (Co-founder and CEO, Mirador) made predictions on small business lending:
Banks will continue to increase small business lending and alternative lenders will struggle.
Crowdfunding got a boost last year when Title III of The Jumpstart Our Business Startups Act (JOBS Act) was implemented, opening the gates for crowdfunding. Dryer believes this sector will thrive in 2018.
Alternative lending has removed physical barriers that makes the lending process faster and more convenient. Alternative lending will continue to be more inclusive and encourage more people to start businesses.
Legislative barriers will continue to fall.
Alternative lenders will focus on experience and relationship building. Companies able to streamline and automate the application processes will thrive.
Alternative Lending in India
Rajesh Gupta (Founder and CEO, Cash Suvidha) made the following predictions for the Indian alternative lending market.
A significant increase in alternative lending market share.
Favorable regulations, cash benefits, ease of usage, and increased internet and smartphone penetration.
Investors and venture capitalists will remain optimistic about the Indian alternative lending industry since it is the second most funded segment in Indian fintech.
“2018 will witness a transformation in the Indian financial landscape, all thanks to alternative lending,” he writes.
Traditional Financial Services and Alternative Investing
Kevin McPartland (Greenwich Associates) says 2018 will be the year of digital. He believes product-agnostic investing will be huge, and passive investing will gain on active investing. 2018 will also be the year that alternative data goes mainstream, he believes while data will be more important than trading. He also believes wealth management will “come out of retirement” and, finally, a ton of innovation in the financial markets as banks focus on crypto.
Chris Skinner (The Finanser Blog) writes a lot about banking’s reaction to alternative lending. He believes 2018 will be the year of artificial intelligence for banks and that banks will continue to drive digital technology deeper into their core systems. Not surprisingly, he also predicts that banks will develop more proof-of-concept operations for distributed ledger technology. Finally, he predicts the banks will develop an Enterprise Data Architecture this year to clean up their fragmented systems.
Alexander Prokhorov (FinSight Ventures) made some general predictions for fintech that apply just as well to alternative lending:
Software will converge with financial products in the U.S. and Europe
Insurtech will be more prominent
Artificial intelligence will transform financial services
There will be a lot of innovation in emerging economies such as Africa, Latin America, and Asia
Wealth management will pick up speed
Crypo assets and blockchain will take center stage for retail investing
Don Steinbrugge, CFA (Founder and CEO, Agecroft Partners) is predicting a banner year for the hedge fund industry. He believes hedge fund assets will reach an all-time high for the 10th straight year. He also believes there will be an increase in hedge funds shutting down. And there will be an increase in cryptocurrency funds. Strategies that will gain assets, he believes, include:
Asia long/short equity
Those that blur the lines between private equity and hedge funds
The Lending-Times Prediction
Allen Taylor (Editor, Lending-Times) believes more U.S. platforms will open the doors to non-accredited investors. Blockchain will feature more prominently in alternative lending with more platforms focused on crypto-lending including a prominent alternative lender adding cryptocurrency to its list of core services. He also believes increased specialization will lead to platforms targeting specific industries, regions/states, and other narrow target markets.
2018 will surely see the alternative lending industry enter a consolidation phase to withstand the changes in market dynamics, and companies best able to cope with these headwinds would emerge bigger and stronger.
News Comments Today’s main news: Walmart partners with Even, PayActiv on employee financial wellness. Moody’s says some consumer ABS sectors will be weaker next year. LendInvest has $1B in funds under management. Yirendai’s investment in Lion Rock amounts to $50M. LexinFintech kicked off IPO yesterday. Crowd Genie to launch ICO. Today’s main analysis: Why mortgage tech is finally taking off. Australian […]
On Wednesday, retail giant Walmart announced it has teamed up with fintech startups Even and PayActiv to provide a suite of new financial wellness services for its more than 1.4 million associates nationwide.
Goldman Sachs(NYSE:GS) and Morgan Stanley(NYSE:MS) are both trying to expand their businesses into more traditional areas of consumer banking, such as consumer loans and mortgages.
Matt Frankel: Out of all the major unsecured lending platforms — Lending Club, things like that — Marcus was the quickest one to get to $1 billion in loan volume.
The interest rates people have gotten are more competitive than the others, because they can afford to run it at slightly more compressed margins than, say, a Lending Club.
Frankel: Morgan Stanley’s robo-advisory platform just launched. So that’s one way they’re trying to branch out into more traditional areas of banking and investing.
Just to throw a couple of figures out there, Morgan Stanley’s wealth management business, which is not the highest-margin business, which is why they’re not as efficient as Goldman, their wealth management business, they’re margin has gone from 9% to 22% since 2010.
Morgan Stanley estimates that their clients still have about over $2 trillion worth of assets with other asset managers, and they’re trying to bring some of that in.
The number of Americans severely behind on payments on federal student loans reached roughly 4.6 million in the third quarter, a doubling from four years ago, despite a historically long stretch of U.S. job creation and steady economic growth.
In the third quarter alone, the count of such defaulted borrowers—defined by the government as those who haven’t made a payment in at least a year—grew by nearly 274,000, according to Education Department data released Tuesday.
The total number of defaulted borrowers represents about 22% of the Americans who were required to be paying down their federal student loans as of Sept. 30. That figure has increased from 17% four years earlier.
By the end of 2017, nearly $1.8T worth of mortgages will have been originated in the United States this year, according to government-backed mortgage lender Freddie Mac.
Yet, despite the size of the mortgage industry, the space still hasn’t digitized. Originating, processing, and underwriting a home loan with a large bank lender still requires faxes and snail mail and take almost as long as it did 20 years.
Driver 1: New lenders increase the competition
Non-bank lenders are becoming much bigger players in mortgages. In 2011, three banks accounted for half of new mortgage loans, according to the Washington Post. As of September 2016, that share dropped to 21%.
In 2011, just two of the top 10 biggest lenders were non-bank lenders. In 2016, non-bank lenders like Quicken Loans accounted for six of the top 10.
Driver 2: Incumbents are looking to improve their technology
At an average cost of $7,000, originating and processing a loan takes over 400 pages and more than 25 humans working hundreds of hours across 50 days. Of the total, approximately $5,000 can be attributed to human processing costs.
Driver 3: Individuals’ debt burden forces them to find alternative lenders
Eighty percent of millennial renters want to buy a single-family home or apartment, but 72% cannot afford to, according to survey data from Apartment List.
Although total US homeownership has risen to 64% as of Q3’17, when examined by age group, the percentage of homeowners under 35 years old is only 36%. This is down from 44% in 2004.
The anticipated continued expansion of the US economy into 2018 will support overall collateral performance of consumer asset-backed securities (ABS), according to Moody’s Investors Service. However, growing financial strains among some pockets of borrowers and loosening of underwriting by lenders will result in slightly weaker collateral performance for several categories of consumer ABS, including transactions backed by auto loans, credit cards and unsecured personal loans.
Amid further declines in automobile sales and used vehicle prices, Moody’s says issuers will generally maintain the steady collateral quality in their 2018 auto loan and lease deals, with incremental weakening in certain collateral attributes such as loan terms. New private student loan ABS, meanwhile, will likely continue to have strong credit quality and performance.
The Federal Communications Commission (FCC) voted today to dismantle internet “net” neutrality: a vote that determined whether the internet should be treated like a public good or service or whether it should be treated like a product.
Another consequence of dismantling net neutrality has to do with undermining financial inclusion and the impending technological revolution of financial services. An array of financial technologies—online and mobile technologies referred to by their shorthand “fintech”—is heralded with the potential to expand access to financial services to underserved households and in underserved communities.
Online and mobile banking could become less reliable if internet service companies adjust connectivity speeds. Banks are increasingly shifting their products and services online and the number of bank branches is projected to decline by 20% over the next decade.
Online lender Prosper announced the appointment of Claire Huang as a board member this week as the company looks to enhance its product offerings in 2018.
Huang’s appointment was effective as of Tuesday, according to a company statement. Prior to joining the San Francisco-based lender’s board of directors, Huang was the first ever chief marketing officer at JP Morgan Chase.
An estimated 45 million Americans don’t have a credit score and others have trouble bringing up their scores, even if they are in a better financial position than in years past.
And after facilitating 125,000 loans in three years, INSIKT is raising $50 million to expand. The round is led by Grupo Coppel, with participation from FirstMark Capital, Revolution Ventures and Colchis Capital. INSIKT has raised $100 million to date.
INSIKT has built what they believe is a better alternative to payday loans, breaking up payments into smaller installments. Its white-label loan processing service is used in over 600 banks and credit union locations across California, Texas, Illinois and Arizona.
With the economy continuing to improve and household wealth growing, total consumer debt has increased in 12 consecutive quarters and hit a record $12.8 trillion in the second quarter, according to the Federal Reserve Bank of New York. And, for the most part, consumers are staying on top of their bills. The American Bankers Association said recently that the midyear consumer delinquency rate held steady around 1.56%, which is below the 15-year average of 2.16%.
John Hancock wants to change that narrative with Twine, its robo-adviser and personal finance tool it released last month. Twine emphasizes simplicity in its look and feel — a user interface similar to many startup-developed apps out there.
John Hancock looked outside, buying San Francisco-based financial services AI startup Guide Financial in 2015.
Twine operates as a separate organizational unit based in San Francisco, while most of John Hancock’s offices are in Boston. The team of around 25 employees includes engineers, product managers, user experience designers and marketing staff. But despite being organizationally separate, Goose said the team stays in contact with the mother ship through travel and video conferencing.
But this isn’t a return to the way things used to be, said Hearts & Wallets, the Rye, N.Y.-based research firm that conducted the study of 40,000 individuals.
Today’s investors are what the firm calls “hybrids,” who use a mix of paid and free live professional advice, digital advice and their own insights. They now account for 41% of all U.S. households, the firm said.
Blenders of digital and live advice include 68% of consumers ages 35 to 44 with investable assets between $100,000 and $250,000, and 85% of consumers under age 35 who have over $1 million in assets. In all, over 75% of consumers under age 45 with assets of over $250,000 are “hybrids,” the firm said.
In hiring Cox, the San Antonio bank, which has a longstanding reputation for being innovative, effectively agreed to restructure the entire company. She has plans to “levelize” the business and technology teams and morph them into “business technologists,” who are empathetic and understand that technology is the enabling function of their entire business — not the checking account or the insurance policy.
The new model will make USAA look more like one of the technology “greats” — the usual suspects like Apple, Amazon, Facebook and Google — instead of an old bank or insurance company, Cox said.
Comptroller of the Currency Joseph Otting has not weighed in on the fate of a fintech charter yet, but the ball is now squarely in his court.
The agency that Otting was just appointed to run scored a victory earlier week when a judge dismissed a lawsuit from the New York Department of Financial Services, which had challenged the Office of the Comptroller of the Currency’s authority to create a charter for fintech firms.
Cutting out retail P2P investors doesn’t seem to have slowed LendInvest down. The UK’s leading fintech property lender now holds £765m (approximately $1bn) under management. Its capital base has more than doubled in 2017, up 104 per cent since the start of the year.
The highest yields for landlords are in Manchester at 5.55% and the city is also top in terms of rental growth at 5.76% and has a reasonable capital gains growth at 8.34%, the buy to let index from specialist lender LendInvest.
When it comes to capital gains the top city is Colchester at 11.96%, followed by Southall at 11.09%, Hemel Hempstead at 10.27%, Slough at 10.19%, Harrow at 9.89% and Ipswich at 9.44%.
Millennials who began renting at 21-years-old and live in an average-sized property outside of London will spend an average of £110,830 in household rent before buying their first home – typically at an age of 32, according to research by peer-to-peer lending platform Landbay.
For those living in the capital – where property prices and rents are significantly higher – the amount increases to £273,210.
The value of residential mortgages written off by banks and building societies has dropped by 79% in the past year, according to the latest research.
Data from the Bank of England revealed that UK lenders wrote off £72m of residential loans in the year end 30th September 2017, 79% lower than the same period in 2015/2016 – when £348m was written off – and even lower than pre-credit crunch levels.
UK consumers looking for personal loans are increasingly shifting away from traditional banks towards digital loan providers according to Zopa, the pioneering financial services company.
Research on the price comparison sector* shows loan sales obtained via price comparison sites have doubled in the last two years.
The data highlighted by Zopa shows that over 113,000 loans were sold through price comparison sites in the 6 months to April 30 2017, representing a 139% increase compared to the same period in 2015, whereas the overall unsecured personal loan market grew only by approximately 20% in the same period.
Gibraltar’s financial services watchdog will introduce the world’s first bespoke licence for “fintech” firms using blockchain distributed ledger technology from next month in a bid to attract start-ups to the British overseas territory as it prepares for Brexit.
Twenty-two of the world’s biggest banks and fintech firm R3 have just developed an international payments system using blockchain.
Gibraltar expects firms numbering well into “double digits” to seek authorisation after the new rules come into force on January 1, Gomez said.
The Shenzhen-headquartered online micro lender, which launched the deal on Thursday, joins a flurry of other Chinese internet finance companies, including Qudian, PPDai and Hexindai, in their rush to raise capital with a New York listing…with a US share sale worth up to $132 million.
Look & Fin, the largest Belgian player in the field of crowdlending, plans to expand again in Europe.
On average, more than one million euros is invested monthly via Look & Fin. Loans vary between €50,000 euros and €1 million, with an average term of 38 months. Individuals invest on average €2,400 and can count on an average return of 7.6%.
Governments, banks and startups have been trying for years to solve the problems associated with identifying people in a digital world. The challenges are only getting harder thanks to identity thieves, data breaches that have exposed the personal information of hundreds of millions of consumers, and the fact that some folks want to avoid having to register face-to-face.
The latest entrant, a recent BBVA spinoff called Covault, is a bit different.
Its app lets consumers store their digital identity documents, passwords and (potentially) digital currency in a secure cloud, and then share pieces of that information with others as they see fit.
Diana is the CEO and co-founder of Suade, a software platform which allows financial institutions to better understand and meet their regulatory requirements.
At SIBOS2017, Paredes encouraged financial institutions to think of regulation as being at the centre of their business. More education and research for implementation is needed, suggested Paredes in our interview. Smaller companies like startups offer more agile implementation as they are technology driven companies. Meanwhile, the big machine of a bank is becoming better at agile acceptance of new technology.
‘Regtech will prevent the next financial crisis.’
Paredes explained this quote saying that while regulation is trying to prevent another crisis, it has no implementation guide. As such, regtech will be needed to give effect to the regulation.
Celsius is a peer-to-peer (P2P) and blockchain-powered global lending and borrowing network designed to enable coin holders to earn interest.
First off, why did you decide to use the blockchain to build Celsius?
The blockchain is the first real technology threat that the large banks have faced for the past 100 years. It has the potential to spur a new financial revolution from which they cannot adjust. We decided to build Celsius using blockchain to leverage the technology’s global presence and decentralized design to extract the bank’s profits and distribute them to our members.
What was your thought process behind it?
We want to find the best way to add the next 100M crypto users to the market, and we came to the conclusion that offering coin holders 5-7% in interest on their coins would be the best way to get there.
Did you face a problem within the consumer credit industry or do you think there is a gap in the market for Celsius to fill?
Unfortunately, the continued concentration in the banking sector has allowed banks to pay people less than 2% interest but charge our credit cards 25% interest when lending us the same dollars.
A new paper from Milliman, a consultant to the insurance and financial services industries, discusses the ongoing transformation in and of the global reinsurance industry that alternative investment has created.
By the end of 2016, Milliman says, alternative capital in the catastrophe space consisted of around $76 billion, which breaks down as follows:
Collateralized reinsurance $39 billion
CAT bonds, $25 billion
Sidecars $8 billion, and
Industry loss warranties $4 billion.
As a proportion of the whole: alternative capital now represents roughly 13% of the available capital in global reinsurance.
Since 2011 the percentage of bonds with indemnity triggers has increased from 30% to roughly 70%.
The number of small business customers signing onto loans through marketplace lenders has increased more than 500% over the past year, but experts say scrutiny must be put on the alternative finance sector now to ensure smaller operators get the best deal.
In 2015-16, ASIC’s survey of the sector put the total value of loans through this kind of model at $156 million, but that figure has doubled over the past year to now sit at $300 million. Total borrowers for the year jumped from 7,448 last year to 18,746 this year.
Earlier today, the Australian Securities and Investments Commission (ASIC) published a report on the marketplace lending industry (peer to peer lending). ASIC believes that by monitoring Fintech they are better positioned to assess any risk as the industry develops.
The survey covers marketplace lending activities of 12 platforms that are regulated by ASIC – so it is not comprehensive of the entire online lending sector.
In summary, there were 353 incidents or suspected incidents of fraud , compared to 126 incidents or suspected incidents of fraud during the 2015 – 16 survey. There was one cyber security incident, compared to zero during the 2015– 16 survey. There were reports of some borrower complaints but most appeared to be minor. The average default rate was 2.2%.
Crowd Genie, a fully operational Singapore-based peer-to-peer digital lending platform licensed by the Monetary Authority of Singapore (MAS), has been selected by the token holders of the ICOS platform as the latest promising project to hold its own ICO.
Unlike most projects contemplating an ICO, Crowd Genie is not a startup but rather a debt-based lending platform that has been in operation for more than 12 months. It is one of only four P2P lending platforms licensed by the MAS. The project’s vision is to build a tokenized Pan-Asian lending exchange based on smart contracts, to ensure cost-effective, safe and efficient cashflows between lenders and borrowers.
The public ICO will begin on January 15, 2018, and will run until February 15, 2018. On offer will be 50,000,000 CGCOINs, a utility token which can be used to trade on the Crowd Genie platform.
Singapore-based fintech Canopy announced it has raised fresh funding of $3.4 million from investors including Switzerland’s second-largest bank Credit Suisse as well as Lionrock Capital.
Canopy, formerly known as Mesitis, is a Singapore-based anonymous account aggregation and analytics platform for financial institutions, wealth management professionals, and high net worth individuals.