- Today we have a lot of articles about banks and how banks are surfing successfully on the FinTech wave. The bank articles are mostly in the US section but the Australia section has an interesting article as well. Note the 1st article from Bloomberg and the 7th and 8th articles.
- In the India section, you will find an article of quotes from P2P lenders in India which are worth a quick read. And in the UK section a very interesting article, the 1st one, just talking about the profitability of Zopa and Funding Circle, but the real interesting piece are the profitability of LendInvest and RateSetter which are not in the title. And a 2nd article that is also very clear and well thought out.
- An extremely good article from Bloomberg covers in depth how banks have been leveraging (pun intended) the FinTech innovation to generate profit. A must read for everybody interested in Fintech. Notice as well the Ayasdi article below, which takes 1 example and dives deeper. And note the landscape we put as the main Newsletter picture as well.
- CFPB will likely overhaul the debt collection rules. Obviously, like in many regulatory changes, we expect some bad, some good. Quite a lot of CFPB updates lately: the new payday lending rules (stay tuned for an article on this topic from Lending Times) and the announcement that to prevent stacking all short-term loans may have to be reported to a central repository.
- Cloudvirga raises $7.5 mil to automate mortgage applications. Also a very hot trend right now. Quite a few players have multi-billion dollar traction already in this direction. See Better.com for example.
- A very useful survey of all the Small Business Lending Associations in the US , done between Lend Academy and Lendio. What do we need ? We need to consolidate this mosaic in order to gain direction, traction, credibility, and weight.
- A practical Wall Street Journal article sharing real impact of having or not having co-signers for student loans. Useful information for all lenders ! Just a reminder that putting in place successful co-signer processes is extremely difficult. Article based on a Credible.com survey.
- Credible.com survey on co-signing, which lead to the CNBC article about the risks of co-signing. The words risks and co-signing seem to always go together in the media. Like in everything there are risks and advantages and while one needs to be realistic, objectivism is encouraged over sensationalism.
- A great article on machine learning, the banking usage of machine learning and the machine learning landscape. Very interesting.
- In the same tune as the Bloomberg article : a really interesting survey showing that mobile banking increases customer satisfaction, bank profitability, and many other things. Article with good data and charts. Also a very interesting read about Mobile Fintech, at least.
- An article on the profitability of Zopa, Funding Circle , RateSetter and LendInvest, and the reasons behind their profitability of lack of. I would rather focus on RateSetter and LendInvest than Zopa and Funding Circle.
- A very clear and well though article objectively proposing the pros and cons of p2p and what the future may be made out of. A must read.
- Details on Ablrate’s partnership with Access Commercial Finance as a deal source.
- BBVA, the bank, plans to reshuffle management to push digital bank even harder. Vicente Rodero, current head of Country Networks, a unit created last year to boost the results of the group’s lenders in various countries, is set to leave his post.
- Quotes from an event with different p2p lenders executives that for the majority show a great maturity in the understanding of the space, with perhaps still 1 or 2 exceptions that err on the side of overpromising.
- News Comments
- United States
- Big Banks Turn Silicon Valley Competition Into Profit, (Bloomberg), Rated: AAA
- US consumer agency seeks to overhaul debt collection industry, (CNBC), Rated: AAA
- Cloudvirga Raises $ 7.5 M to Automate the Entire Mortgage Process, (PR Newswire), Rated: A
- Come Together – Finding Common Ground in Small Business Lending Associations, (Lend Academy), Rated: AAA
- How Much Lower Will Your Student Loan Rate Be With a Cosigner?, (Wall Street Journal), Rated: AAA
- Think twice before you co-sign on a student loan, (CNBC), Rated: AAA
- How Ayasdi’s machine learning is giving banks an analytical advantage, (Tradestreaming), Rated: AAA
- How Digital Investments Are Changing the Face of Banking, (The financial Brand), Rated: AAA
- United Kingdom
- Britain’s 2 biggest peer-to-peer lenders lost £50 million in the last decade
- Is the dream of peer-to-peer lending beginning to fade?, (Thersa), Rated: AAA
- Ablrate & Access Commercial Finance Tout Origination Partnership, (Crowdfund Insider), Rated: A
- European Union
- BBVA Plans New Management Revamp as Chairman Pushes Digital Bank, (Bloomberg), Rated: AAA
- Fintech firms to take profit-first approach, say panellists at VCCircle summit
- Global banks: Is fintech a threat or an opportunity?, (Financial Review), Rated: AAA
Big Banks Turn Silicon Valley Competition Into Profit, (Bloomberg), Rated: AAA
It’s not that the upstarts — often called fintech — are failing to gain traction. Internet ventures pitching loans to cash-strapped consumers, small businesses and home buyers, for instance, have posted spectacular growth in recent years. It’s just that banks have a huge lead in lending and are watching the startups closely. As borrowers embrace new services, traditional firms are riding along.
Here are five examples:
In May, LendingClub broke out its sales to banks: Community banks and other old fashioned lenders snapped up about 34 percent of the $2.8 billion of loans it arranged in the first quarter, up from an average of about 25 percent during 2015.
Some of LendingClub’s biggest loan buyers have bolstered their war chests or operations with financing from banks. Colchis Income Advisors entered into a credit agreement with Bawag PSK of Austria, according to regulatory filings. Arcadia Funds arranged for two of its Cirrix partnerships to borrow from Silicon Valley Bank. And MW Eaglewood lined up financing for its main LendingClub fund from Capital One Financial Corp. in 2012. Spokesmen for the funds and banks declined to comment or didn’t respond to messages.
Small businesses can thank internet ventures for simplifying loan applications, speeding decisions and providing much-needed credit when many traditional banks were pulling back in the wake of 2008’s financial crisis. Nonbanks now provide about one-quarter of the $800 billion in loans outstanding to the sector, according to research by QED Investors and Oliver Wyman. But the interest rates aren’t always low.
For a time, banks were content backing the loans. Goldman Sachs was among firms that entrusted more than $300 million years ago to fund lending by On Deck Capital Inc., one of the largest providers of small business loans over the internet.
Now, established lenders are taking a more active role. JPMorgan announced a deal in December, letting it access On Deck’s proprietary credit-scoring system to quickly evaluate applicants before using its own balance sheet to make loans. On Deck, in turn, gets a foothold in the burgeoning “fintech as a service” market. But the arrangement has done little to stop a 49 percent slide in the company’s stock this year.
More recently, established lenders have announced their own online lending portals for entrepreneurs.
Wells Fargo & Co. said in May that its new “fast decision” platform will help it reach a goal of providing $100 billion in new loans to small businesses by 2019. AmEx, which already provides more than $200 billion of funding to entrepreneurs for business purchases on their credit cards, expects a new online-loan portal will let it handle even more of their spending.
Fintech ventures starred in Super Bowl ads this year, with Quicken Loans toutingRocket Mortgage, a platform letting users apply for home loans on smartphones.
The tidal wave is benefiting banks, too. Behind the scenes, many of the upstarts get support from traditional banks. Detroit-based Quicken, for example, raised $1.25 billion for itself and its parent company last year in a bond sale underwritten by JPMorgan and Credit Suisse Group AG. It also used lines of credit from banks to help close $80 billion in home loans that year.
[Comment: 4th was Blockchain, not very relevant to our readers here]
Top Wall Street firms, seeking stable fee income, are now developing their own robotic arms. Bank of America Corp. will unveil an automated investment prototype this year after assigning dozens of employees to the project in November, people familiar with the matter told Bloomberg at the time. Morgan Stanley and Wells Fargo also have said they would build or buy a robo-adviser.
US consumer agency seeks to overhaul debt collection industry, (CNBC), Rated: AAA
“Today we are considering proposals that would drastically overhaul the debt collection market,” said Consumer Financial Protection Bureau Director Richard Cordray in a statement. “This is about bringing better accuracy and accountability to a market that desperately needs it.”
According to a summary, the proposal would make sure collectors “substantiate the debt before contacting consumers,” by confirming their identities and the amount owed, as well as checking for any payments made after a default. Consumers frequently file complaints at the agency about receiving calls for debts that do not exist.
In an attempt to “limit excessive contact,” the proposal would cap agencies’ calls to debtors to six attempts each week. It would also create a 30-day waiting period after a person dies for contacting survivors.
Agencies would have to communicate specific information to consumers, such as when outstanding debt is too old for a lawsuit. They would also have to make it easier to both dispute or pay a debt through tear-off coupons on the bottoms of collection notices.
Roughly 13 percent of consumers have a debt currently in third-party collection, with an average amount of $1,300, data from the Federal Reserve Bank of New York shows.
In a survey released alongside its proposal, the CFPB found more than three-quarters of the country’s 3,994 debt collection firms are small, with less than 100 employees. Larger firms pull in about two-thirds of the industry’s $12.18 billion total revenue.
The agency also found credit card, student loan and automobile debts in collection typically have balances of $2,000 or more.
Cloudvirga Raises $ 7.5 M to Automate the Entire Mortgage Process, (PR Newswire), Rated: A
Cloudvirga, the company developing the cloud-based intelligent Mortgage Platform® (iMP) designed to streamline the mortgage process, today announced it has raised $7.5M in its series A funding sponsored by Dallas Capital with participation from Upfront Ventures and Tribeca Angels.
“Increased regulations stemming from the subprime mortgage crisis have made the entire process more labor intensive and time consuming than ever, and those are the pain points we’re alleviating with iMP,”
Come Together – Finding Common Ground in Small Business Lending Associations, (Lend Academy), Rated: AAA
So where do we go from here? Advancing the marketplace lending industry’s efforts to create a more transparent and efficient financial system is critical as the industry matures.
The good news is that small businesses today – even those with lackluster or thin credit history – can choose from a dynamic set of loan products including term loans (both traditional and short-term), business lines of credit, loans for startup companies, equipment purpose loans, various SBA loans, accounts receivable financing, merchant cash advances, and peer-to-peer loans. This is a far cry from where we were in 2008-2010, when (according to the Huffington Post) more than 170,000 small businesses shut down.
At Lendio, we’re convinced that there needs to be a single, industry unifier – and we feel the SMART Box is headed in that direction. Lendio will now participate in the 90-day engagement period and I’m asking all those who offer loan products throughout the Lendio platform to consider doing so as well.
How Much Lower Will Your Student Loan Rate Be With a Cosigner?, (Wall Street Journal), Rated: AAA
Undergraduates who qualified for private student loans with a cosigner–often a parent–were offered average interest rates of 5.37% versus 7.46% without a cosigner, according to Credible.com, a student-loan marketplace. Rates for graduate students were also discounted to 4.59% on average with a cosigner compared to 6.22% without one.
The figures from Credible.com are based on five lenders’ responses and offers—which included a mix of fixed and variable interest rates—to nearly 8,000 applicants who shopped for student loans on the site over a 12-month period through early June. The lenders include Citizens Financial Group—which is quickly gaining market share in the private student loan market—as well as online lenders CommonBond and College Ave Student Loans.
Approval rates fall dramatically without cosigners. Fifty-one percent of undergraduates shopping for loans on Credible.com received offers compared with 20% of those without a cosigner. Similarly, 56% of graduate students–who lenders have historically viewed as relatively safer borrowers–received offers with a cosigner versus 45% without.
In some cases, it can be cheaper for parents to join their children on a private student loan as opposed to signing up for a parent-only loan from the federal government. The 5.37% average rate undergraduates received with a cosigner on private student loans is nearly one percentage point cheaper than the interest rate on the federal Plus loan for parents that charges 6.31% for the upcoming academic year. Private lenders also don’t charge origination fees, while the Plus loan currently has a roughly 4.3% upfront charge.
Think twice before you co-sign on a student loan, (CNBC), Rated: AAA
But co-signing is risky. It ties you to that debt, meaning you could be responsible for the entire amount outstanding if the primary borrowercan’t — or won’t — pay up. Nearly 40 percent of co-signers found themselves on the hook for at least part of the bill, according to a June survey from CreditCards.com, and 28 percent saw a drop in their credit score from the primary borrower’s bad credit habits.
How Ayasdi’s machine learning is giving banks an analytical advantage, (Tradestreaming), Rated: AAA
“The future is already here — it’s just not very evenly distributed.” Banks are increasingly using machine learning to power part of their operations, but the adoption of these new technologies is not uniform.
Top data scientists are employed by financial institutions and working with programming tools like SPCC and R, they filter and analyze huge data sets in order to perform analytical tasks. “No human being can wrap his head around that amount of data,” said Daniel Druker, CMO of Ayasdi, a machine learning company that partners with financial institutions, like Citi and Credit Suisse. Instead, using machine learning algorithms, a computer can surface insights and recommendations from those data sets, while the quants examine and take actions based on those learnings.
According to McKinsey’s 2015 Global Banking Report, banks that have replaced older statistical-modeling approaches to credit risk with machine learning techniques have experienced up to 20 percent increases in cash collections from outstanding loans.
Out of over 20 banks that work with Ayasdi, Drucker said, 100% are either already operating in this stage or actively exploring implementing such technology.
The highest level of machine learning application is the fully automating business processes. Take a life insurer, for example. When a customer applies for a policy, he might be asked to fill out a 40-page long form and get a physical examination. That information is then sent back to the company for approval. The entire process can take over a month to complete.
According to McKinsey, some European banks using these techniques report 10 percent increases in sales of new products, 20 percent savings in capital expenditures, and 20 percent declines in customer churn.
CB Insights has identified 41 companies providing machine learning solutions in the financial industry. Together with the explosion of general applications of AI, deals and investments in AI companies reached record levels in 2016. Since the beginning of 2016, over 15 fintech AI companies have closed investment rounds.
How Digital Investments Are Changing the Face of Banking, (The financial Brand), Rated: AAA
Investment in digital banking is driving increased customer acquisition, cross-selling and satisfaction while decreasing branch traffic and related costs.
This is confirmed by the J.D. Power research that showed that there is an immediate lift in overall satisfaction when customers use mobile banking (+27 points on a 1,000-point scale), and this impact increases even more when banks provide their mobile banking customers with a highly satisfying experience (+82). According to J.D. Power, “The outlook for Big Banks remains positive, driven by their (big banks) ability to invest in customer-centric innovations (e.g., digital channels, analytics, and branch transformation), as well as their success in growing customer segments.”
Recent disclosures of mobile banking use by the big banks provides a glimpse of the impact of digital investment on mobile use. Of the three largest U.S. banks, JPMorgan Chase leads the way with nearly 25 million active mobile customers as of the second quarter. That was up 18% compared with the same period last year. Bank of America had the second most active mobile users, with 20.2 million monthly active app users, with Wells Fargo reporting 18 million active users.
The two platforms have facilitated almost £3 billion of loans between them but Funding Circle, founded in 2010, has never made a profit, while Zopa, founded in 2005, made a small profit 2 years running, totalling less than £60,000.
Here’s the breakdown of Zopa and Funding Circle’s financial performance, as per accounts filed with Companies House:
- Zopa: losses between 2005 and 2014 total £21.79 million, according to accounts filed with Companies House, on cumulative revenues of £25.84 million. The platform made a small profit in in 2011 and 2012, totalling £58,648.
- Funding Circle: cumulative net loss of £28.71 million on total revenues of £20.89 million, according to accounts covering 2010 to 2014. The company has yet to make a profit.
Funding Circle, which offers loans to small businesses, declined to comment on its losses when contacted by BI but pointed to comments CEO Samir Desai made to BI last year when we reported the company’s latest financial results. Desai said at the time:
“If you actually look at the core business of doing loans in the UK — strip away the technology investment and all the other extra stuff we’re doing — the business is already profitable in the UK and is moving that way in the US as well. A lot of the investment we’re doing is investing in creating a global business.”
Zopa’s CEO Jaidev Janardana told BI in an emailed statement:
“We have demonstrated that our business model is profitable with two consecutive profitable years in 2011 and 2012. Since then our investors and the business have placed more value on investing in our growth. In doing so we have been able to double our loan volumes last year, deliver positive returns for our customers at the same time investing in talent, technology, and our office.
“This all means we are in the best position to deliver on our strategic plan for continued growth and profitability long-term. Looking forward, I’m glad to say that we expect to be EBIDTA positive in Q4 2016 and profitable in 2017.”
Christian Faes, CEO of the UK’s fourth largest marketplace lender LendInvest, told BI he thinks that loss-making platforms will face increased pressure to turn a profit to “prove that they can.” Remember, the growth that Zopa and Funding Circle are chasing could be disappearing.
LendInvest, which lets investors put money into short-term mortgages for people looking to renovate then sell properties, made a pre-tax profit of £3.1 million in 2015 and £1.1 million in 2014.
A spokesperson for RateSetter told BI: “We have recorded a profit for two consecutive financial years, proving that our model works and is sustainable. We are now investing to scale up, broaden, and deepen our market while continuing to deliver maximum value for investors.”
Is the dream of peer-to-peer lending beginning to fade?, (Thersa), Rated: AAA
Why is this a problem? Because unlike banks, which can make money on captive and repeat business in current accounts, credit cards and remortgages, P2P lenders need to continuously find and process new borrowers in order to earn commission. Should the sluggish times continue, the danger is that P2P lenders may soon be tempted to shoot for riskier borrowers in order to maintain their rate of growth. Remember that these platforms have investors of their own to placate and appease, many of whom will be pushing for decisive action to keep transaction volumes on an upward trajectory.
Finally, there is the question of where the money flows to on these platforms. Nesta and Cambridge University’s research is unequivocal: peer-to-peer lending has helped many thousands of people and businesses access loans in the face of rejection from high street banks. Yet only 20 percent of borrowers using P2P consumer lending platforms are women, and only a quarter earn less than £25k (note that the median wage of workers in the UK is £27.5k). Although the makeup of borrowers using P2P platforms may simply reflect lending patterns across the financial industry, it challenges the theory that fintech innovations are inherently more inclusive.
The point of raising these red flags is not to pour cold water on the P2P lending phenomenon. Many of these platforms promise users a brilliant customer experience, faster decision making, more choice and – for some – better rates on loans than they can find elsewhere. Indeed, one of the greatest impacts P2P lenders have had is in changing the practices of long-standing incumbents. Take Wells Fargo, which recently launched a rapid turnaround system for small business loans, partly to match the responsiveness of P2P startups. These innovations should linger on even if P2P platforms fade away, and suggests the sector could catalyse positive transformation in financial services without needing to achieve a dominant position in the loans market.
No, this is not to dismiss the real achievements of P2P platforms. Rather, it is a plea to be pragmatic and realistic about what P2P lending – and all forms of fintech for that matter – can ultimately achieve without a more significant structural change in the nature of the financial industry. John Kay, in his brilliantly detailed new book Other People’s Money, rightly reminds us of the fundamental functions of finance: to enable people to save for the future, receive and send money, manage everyday risks, and borrow to invest in a real economy that truly creates value for others.
Ablrate & Access Commercial Finance Tout Origination Partnership, (Crowdfund Insider), Rated: A
Asset-backed peer to peer lender Ablrate has released information on an origination partnership with Access Commercial Finance based in Leeds. The arrangement is said to have generated over £2.5 million of loans so far this year. Ablrate launched as a niche P2P lender focusing on aircraft finance but has since branched out into capital equipment and property. Ablrate’s arrangement with Access is thus driving platform growth. Ablrate also offers a secondary market for investors in their loans.
The origination partnership is said to have resulted in sizeable deals for a range of sectors, including an £800,000 funding boost for a previously mothballed Eco Park, near Newcastle. The deal is expected to grow by £1.4 million. The waste management plant in Blaydon suffered following the collapse of Lehman Bros in 2013. The £800,000 in finance raised through Ablrate and Access is expected to get the plant fully operational by October creating at least 30 jobs.
BBVA Plans New Management Revamp as Chairman Pushes Digital Bank, (Bloomberg), Rated: AAA
Banco Bilbao Vizcaya Argentaria SA is preparing its second management reorganization in 14 months as Chairman Francisco Gonzalez streamlines Spain’s second-biggest lender and accelerates its push into digital banking.
BBVA is pushing to offer more products and services online and via mobile phones as Gonzalez predicts few banks will survive competition from technology companies such as Google Inc. or Facebook Inc.
Vicente Rodero, current head of Country Networks, a unit created last year to boost the results of the group’s lenders in various countries, is set to leave his post. Chief Financial Officer Jaime Saenz de Tejada and Javier Rodriguez Soler, head of strategy and M&A, will be given additional responsibilities.
India’s fintech startups will also learn more from China, owing to similar demographic opportunities and challenges, unlike other industries that primarily learnt from the US, the panellists said. While there are no successful models yet, companies are experimenting with different models that include marketplace, bidding process and intermediary, they added.
Adhil Shetty, founder and CEO of Bankbazaar, said the popularity of the company is that its website received 90 lakh visitors in the month of March alone. Hence, it won’t be an extended arm as the platform offers products from partnering financial services companies as well standalone products.
Gaurav Hinduja, co-founder of Capital Float, which operates a hybrid model by lending online through its non-banking finance company, said these data sets will reduce the time taken from application to disbursal to 10 minutes. He added that social data can be used for verification as well as help in recoveries.
Rajat Gandhi of Gurgaon-based Faircent, which operates a peer-to-peer (P2P) lending platform facilitating borrowers and lenders through a bidding process, said that credit score would continue to be main criteria for disbursal of loans while data from social media can only be a value-add.
Vaddadi also said that fintech companies are increasing focus on customer acquisition, but added that this will not be done by burning cash.
The panellists also said that chances of default by borrowers are lower for fintech companies as these firms monitor the business performance of the borrower through analytics that can give out an early warning. Vaddadi said his firm has a 0.16% default rate. [Comment: I do not believe this is true unless the fintechs really download the business’s information regularly and reliably. I am not aware of any company who really does this well. ]
Global banks: Is fintech a threat or an opportunity?, (Financial Review), Rated: AAA
UBS banking analysts surveyed 27,914 customers of more than 210 banks in 24 countries, along with 61 management teams from banks around the world. Local UBS banking analyst Jonathan Mott along with analysts in London, New York and Tokyo.
The survey found that a growing number of Australians are considering trying fintech services in the next 12 months: 15 per cent of Australian respondents said they will use a fintech money transfer business; 14 per cent said they will use a mobile payment fintech; 9 per cent will use peer-to-peer lending; and 9 per cent said they are likely to use a “robo adviser” for digital financial advice.
According to the management survey, 38 per cent of banks have a fintech partnership and this is expected to rise to 51 per cent over the next 12 months. The report said that in developed markets, bank returns on equity could be lifted from an average of 9.8 per cent to 10.2 per cent, as global cost to income ratios fall.
The survey found a high level of satisfaction from customers in the US and Britain using P2P lending which pointed to the threat to banks being real.
Australia’s largest P2P lender, SocietyOne, said this week it had appointed DDB Group to lift brand awareness through a TV, online, radio and print advertising campaign after the company, which is being led by former Westpac senior executive Jason Yetton, raised a further $25 million in equity in May.
UBS also predicted “the use of robo-advisers looks likely to grow exponentially” by between 70 and 150 per cent over the next year.
Cyber security is an area of concern, with 35 per cent of the customer respondents indicating a lack of trust in security as an explanation for not using fintech mobile payment services.