Wednesday November 2 2016, Daily News Digest

zopa loan originations

News Comments Today’s main news: Online lenders join to fight scammers and stackers. UK banks are required to refer SMEs to alt lenders. Today’s main analysis : Why bank/FinTech partnerships are proliferating. Why Zopa’s interest rates are falling. Today’s thought-provoking articles: Half the world’s banking customers are now using a FinTech firm. HSBC launches a FinTech lab in […]

zopa loan originations

News Comments

United States

  • Online lenders strike back at scammers and loan stackers. AT: “There is a clear difference between fraudsters and people who get in over their heads. The challenge for online lenders is to identify the latter before they destroy their own lives and impact the profitability of the lenders.” GP : ” I find it interesting that originators went through the effor to build this themselves when there are so many credit bureaus where they could have reported this data instead. Why did they do that ? Is it a price ? A differentiator ? Can anybody join ID Analytics ? What is the cost ? Conditions ?”
  • Taking the peer out of P2P lending. GP : ” It is difficult to find billions of dollars from retail investors when companies like Lending Club and SoFi originate billions per quarter. I understand why they have gone after instutions where a few months of work for a few people can get you billions of dollar to lend. But I continue to believe that the p2p aspect provides billions of dollars worth of marketing and good will which was the main reason why Lending Club was able to be cheaper then a bank. Eventually the banks will catch up on the cost of underwriting and application as there is no real barrier and the good will in p2p will be the only thing left.”
  • Ripple gets a new CEO. GP : ” For context from their website, Ripple works with banks to transform how they send money around the world — a necessary step to compete in today’s growing economy. Our vision is to enable the Internet of Value so the world can move value the way it moves information today. This is relevant to lenders if they need to do a lot of disbursements around the word for cheap.”
  • What’s really happening at Wealthfront? GP : ” Betterment is pulling ahead of Wealthfront. When this happens investors get nervous and they replace the founder CEO. For entrepreneurs: interest are aligned with your interest as long as things go well. Once they don’t, your interest diverge. When the VCs take over it could go in 2 directions: either very well or very bad, rarely does it stay the same. Lets see how this will go.”

International

United Kingdom

European Union

Canada

China

India

Asia

  • Ant Financial moves into Thailand. GP: ” It is important not to underestimate Jack Ma and Ant Financial. One day it will enter the US when it is ready. For most of humanities’ history China was #1 in GDP and in nearly every metric.  “

Africa

News Summary

United States

Online Lenders Band Together to Strike Back at Scammers, Stackers (American Banker), Rated: AAA

Online lenders’ struggle with fraud is driving them to join new networks designed to find links between fraudulent loan applications and signs of loan stacking.

Lending Club, Prosper Marketplace, Marlette Funding and Avant are among those that have joined such a group in the past month.

ID Analytics formed its Online Lending Network in late October and has recruited about a dozen online lender members, including Lending Club, Prosper Marketplace and Marlette Funding. It’s focused mainly on loan stacking.

The vendor’s technology is meant to thwart online application fraud of any kind, including credit cards or deposit accounts. Many of its clients are wireless providers, marketplace lenders and traditional online lenders.

ID Analytics also tracks soft hits – consumer-initiated credit pulls that don’t show up on the credit report. Lenders are not allowed to see this activity, per the Fair Credit Reporting Act. But because ID Analytics’ tech platform was designed to solve fraud, the Gramm-Leach-Bliley Act allows it to collect that information and notify lenders of consumers who are receiving multiple offers, so they can slow down their decision-making process and prevent the consumer from getting three or four loans in seconds. ID Analytics also compares applicants against a repository of information about bad actors.

TransUnion announced a similar fraud prevention network, Fraud Prevention Exchange, in early October that includes Lending Club and Avant. The effort is run by Pat Phelan, a senior vice president in the innovative solutions group at TransUnion, who founded an online identity verification company called Trustev that TransUnion acquired last December.

Funds Are Taking The Peer Out Of Peer-To-Peer Lending (Financial Advisor Mag), Rated: A

Less than a decade ago, individual investors piled into the peer-to-peer lending industry with an idealistic belief that Silicon Valley could form a better banking model than Wall Street. In recent years, that picture has changed substantially.

Money from large investment firms account for the lion’s share of online financing—so much so that people operating within the space increasingly refer to this industry as marketplace lending rather than peer-to-peer lending. The biggest online marketplaces, including LendingClub and Prosper, are increasingly focused on compliance and lending standards rather than just user-friendly interfaces, according to Peter Renton, publisher of Lend Academy.

Now this evolving online lending landscape is reaching back out to individuals, only with a Wall Street twist by providing them access to funds that use leverage and charge relatively big fees. After all, it turns out that many moms and pops aren’t much interested in investing directly in these loans or brokering them among one another.

The latest example of this effort to make it easier for anyone to slip into this industry is a new closed-end fund that may start trading soon. The Van Eck Overland Online Finance Trust “may invest in a broad range of online-sourced loans,” including consumer, small business, student, real estate and other loans, according to a prospectus dated September 28.

The creation of this fund shows how big firms are trying to get individuals to pour their money into a field that’s going through some growing pains after years of rapid growth.

Ex-AOL, Yahoo executive appointed Ripple CEO (Reuters), Rated: B

U.S.-based financial technology start-up Ripple announced on Tuesday its Chief Executive Officer Chris Larsen has decided to step down and will become the company’s executive chair.

Larsen said Brad Garlinghouse, the firm’s current chief operating officer, will become the new CEO effective Jan. 1.

What’s really behind the leadership change at Wealthfront (Investment News), Rated: A

Wealthfront’s growth being surpassed by its competition may have led the robo-adviser to cut chief executive Adam Nash from daily management of the company, outside fintech experts said.

The digital advice platform announced Monday that venture capitalist and founder Andy Rachleff was reclaiming the top title at the company, while Mr. Nash would remain a member of Wealthfront’s board of directors.

Wealthfront also is slipping further behind its original robo-rival Betterment, which has branched out to serve non-retail clients, such as financial advisers. Wealthfront has said it only plans to provide digital financial advice to investors.

Financial technology expert Bill Winterberg said the change at the top could be a result of any of these factors: the firm’s slowing growth, increased competition or its delays in platform updates.

Tim Welsh, president and founder of Nexus Strategy, said Wealthfront’s failure to expand its technology for new clients, like Betterment has done with advisers and the 401(k) market, is adding to its troubles.

International

Here’s Why More Banks Are Expected to Team With Fintech Companies (The Street), Rated: AAA

Global financial technology investments are expected to continue, propelled partly by financial services companies that want in on the trend, according to consulting firm Accenture.

During the first quarter, global investments in fintech companies soared 67% from a year earlier to $5.3 billion, with more than 60% of investments going toward fintech companies in Asia and Europe.

There have been many deals in the sector, indicating that the fintech industry is maturing.
Last year alone, there were nearly 100 fintech deals that exceed $50 million, which includes mega-deals such as SoftBank’s $1 billion bet on Social Finance. Last year, Social Finance received $1 billion of primary capital in a funding, which was led by SoftBank.
The total transaction value in the fintech sector is expected to grow to $1.57 trillion by 2020, according to Statista.

The expected number total users of personal finance, business finance and small to medium enterprises is more than 400 million, worldwide, by 2020. In the fintech sector, the more users there are, the higher the potential revenue.


It makes more sense for banks to collaborate or acquire a fintech company, rather than spending money and building a fintech platform.

10-Year FinTech Landscape (Infographic) (ValueWalk), Rated: A

With the rapid growth of the financial tech industry it’s important to keep-up-to-date with everything that’s happening in the industry. We have created an infographic that highlights the growth of this sector over the last 10 years, ranging from accounting to personal finance.

Detailing the growth in the area over the last ten years (and covering some of the major FinTech companies from before that, like SagePay and Xoom, both founded in 2001), it splits the developing companies across their different specialisations – including:

  •        Accounting, like New Zealand software-as-a-service company Xero
  •        Crowdfunding giants such as Kickstarter and Patreon
  •        Investment gurus like Nutmeg and Xoom – among others
  •        Personal finance pioneers, covering non-traditional data sources (Moven) and savings assistance (Squirrel)

Half of Banking Customers Globally Now Using FinTech Firms Finds World FinTech Report 2017 (EconoTimes), Rated: A

Half of banking customers across the globe are using the products or services of at least one FinTech firm1, according to the first World FinTech Report (WFTR) from Capgemini and LinkedIn, in collaboration with Efma. The inaugural report quantifies and tracks customer response to the rise of FinTechs, includes the views of financial services industry executives at both FinTech firms and traditional financial institutions2, and summarizes how innovation is key in the emerging industry landscape.

United Kingdom

UK Banks Now Required To Refer SMEs To Alt-Lenders (PYMNTS), Rated: AAA

The U.K.’s bank referral scheme has officially kicked off.

Reports by Financial Times on Tuesday (Nov. 1) said the program that requires traditional banks to refer small businesses to alternative lenders if they’re rejected for a loan has begun.

The initiative was first proposed in 2014 as a way to make up for the nearly $4.9 billion in loans that SMEs cannot access each year because they are rejected for traditional bank financing. According to the U.K. Treasury, last year, 26 percent of the 324,000 SMEs that applied for a bank loan saw their initial applications turned down. Just 3 percent of those denied said they turned to alternative options to access the finance.

Further, according to reports, 80 percent of small business loans are provided by the Big Four banks — RBS, Lloyds, Barclays and HSBC.

The bank referral scheme was developed to inject competition into the SME lending market and to fill the gap of billions of dollars that small businesses cannot access via traditional lending methods.

The numbers behind Zopa’s interest rate cuts (altfi), Rated: AAA

Last week saw leading consumer lending platform Zopa drop interest rates across all lender portfolios – Access, Classic and Plus – by 0.2 per cent. It was the second time in as many months that the platform had dropped rates by that margin, and each time representatives cited increased competition within the broader consumer credit space as the key driver.

As a Zopa lender, the rationale makes sense. Consumer lenders both old and new are busily adjusting to the Bank of England’s recent decision to cut interest rates to an all-time low of 0.25 per cent. And while Zopa may claim not to be as connected to shifts in the base rate as the banks, the company has nonetheless conceded to at least a level of correlation. Ergo, Zopa has been forced to lower gross interest rates in order to ensure that it remains an attractive option for creditworthy borrowers. Lower gross interest rates correspond to lower investor returns; it doesn’t take a “lending genius” (in the immortal words of Lord Adair Turner) to work that out.

What we see is that average gross interest rates either fell or were flat for all of Zopa’s risk bands in September. This fits with the fall in lender rates.

However, rather surprisingly, the average gross interest rate across all bands rose by 31bps. How can this be?

Answer: the average gross interest rate chart is weighted by origination, and the composition of Zopa’s origination from August to September changed significantly. A* loans accounted for 25 per cent of originations in September, down from 33 per cent in August. Meanwhile, volume as a percentage of monthly origination grew in every other risk band – with D loans exhibiting the greatest growth, from 7 per cent of monthly origination in August to 10 per cent in September.

Bottom line: Zopa is telling investors that returns are falling because gross interest rates are having to be lowered in the context of a more competitive consumer credit space. That looks to be true.

Fintech Trends: Challenger Banking (Finleap), Rated: AAA

According to Burnmark’s October case study, Challenger Banks are “a new breed of technology-driven and customer-centric financial institutions”. Those banks split into three categories: Embryonic Challengers who are using mainly mobile apps to form partnerships with other banks; Real Challengers who have obtained a banking license in the last five years; and Pseudo Challengers who are the digital partners and startups of existing banks, using both branch and digital channels.[1] On the other hand, a report by KPMG divides Challengers into Large (longer established), Small (from the past ten years), and Large Retailers (retailers who have entered the financial services market).[2] Thus, the categories of Challenger Banking are not concrete. Most, however, agree that those banks offer cheaper, faster, customer-oriented financial products that have helped disrupt the industry.
Challenger Banks have come in and shown that banking can be truly digital. Many of them rely purely on apps while others provide API-based services. All, however, attempt to simplify the financial world.[3] Those new banks have a larger return on equity compared to large banks, more flexibility when it comes to lending, lower operational costs and an increase of profits by £194 million compared to a decrease of £5.6 billion for UK’s largest five banks.[2] Some examples of Challenger Banks include Atom Bank – founded in 2014, it is a UK digital challenger bank; Moven – founded in 2011 as a neo-bank; Tandem Bank – founded in 2013 as the second challenger bank to be granted a baking license in the UK. Germany also plays a huge part in the Challenger Banking movement by including Fidor Bank, N26, and of course FinLeap’s solarisBank – a tech company with a banking license that enables digital companies to create solutions to their financial needs.[4]

Pinsent Masons calls for clearer regulatory guidance on robo-advice (Finextra), Rated: A

Despite initiatives from the Financial Conduct Authority (FCA), including the establishment of a regulatory sandbox scheme to allow businesses to test new ideas outside of the usual regulatory constraints, and a new ‘advice unit’ dedicated to supporting firms looking to develop low-cost, automated advice, there is still a need for greater support and clearer guidance in financial decision-making.

There needs to be a shift in the debate from advice versus guidance, and should instead move towards clear information for users of robo advice tools so that they understand the risks of using them and any limitations that the tools have.

Funding Circle smashes its own UK monthly origination record (altfi), Rated: A

Funding Circle, the world’s largest marketplace lender for small businesses, has broken its own UK record for monthly origination volume. Funding Circle lent £95,086,880 in October, besting the previous watermark – which was set in September – by approximately £20m.

Funding Circle has now lent a cumulative total of around £1.62bn across 23,719 loans, according to AltFi Data. 1,187 new loans were issued by the platform in October, ranging from £5k to £572k in size.

How to put crowdfunding investments into your Isa (Financial Times), Rated: A

The Innovative Finance Isa has so far proven to be something of a damp squib, but from this week it expands to include a whole new asset class — crowd bonds.

Until now, this tax-free individual savings account has only been able to hold peer-to-peer loans.

VPC Specialty Lending Investments Updates on Challenging Conditions (Crowdfund Insider), Rated: B

As part of their Q3 review, VPC Specialty Lending Investments (LSE:VSL) announced it was shifting away from purchasing whole loans to balance sheet investments in the online lending sector.  VPC said continued softness in certain whole loans in their portfolio were offset by a one time revenue item related to a single platform. The overall situation was exacerbated by downward pressure on the British pound requiring  the company to post collateral and thus reducing available cash to invest. The conversion rate between the pound/dollar has dropped from 1.47 at the end of 2015 to 1.30 at the end of September 2016. The impact on the company’s liquidity was said to be “dramatic” having settled £64.5 million as required margin to counterparties.

World-leading UK FinTech firms discuss sector plans at roundtable (Gov.uk), Rated: A

Today (01 November 2016), some of Britain’s cutting-edge FinTech companies met with Simon Kirby, the Economic Secretary to the Treasury, to discuss how the UK’s world-leading FinTech sector can build on its previous success and take advantage of the opportunities ahead.

The meeting was the first of 2 roundtables with the sector, taking place over 2 days, at which the government is listening to the issues affecting the sector and the plans it has to grow and develop.

Attendees included chief executives from across the FinTech industry, financial regulators and Eileen Burbidge, HM Treasury’s FinTech envoy. Robin Walker, a Minister for the Department for Exiting the European Union, and Mark Garnier, the Parliamentary Under Secretary of State at the Department for International Trade, will also represent the government.

European Union

Creamfinance to Offer Loans From Denmark Through P2P Lender Mintos (Crowdfund Insider), Rated: A

On Monday, Latvia’s peer-to-peer lending marketplace Mintos announced it would be hosting Creamfinance loans, which are currently averaging from €50 to €1,000 with a repayment deadline of 5 to 30 days. Mintos revealed that the non-bank credit lender would offer short-term, unsecured consumer loans issued in Denmark through its marketplace.

Creamfinance added short-term, unsecured consumer loans issued in the Czech Republic to the Mintos platform. Mintos noted that the annual return to investors is expected to reach 11%. Recently, Mintos announced that since its launch a year and a half ago it has seen investors funding over €50 million in loans to both private individuals, along with small and medium-sized businesses.

Canada

Ontario Securities Commission Creates Fintech Advisory Committee (Crowdfund Insider), Rated: A

The Ontario Securities Commission (OSC) is joining a growing roster of global securities regulators to acknowledge the shifting environment of finance and the need to better understand Fintech innovation. The OSC is now seeking applications for a Fintech Advisory Commmittee (FAC) that will advise staff on the OSC Launchpad – a sandbox type environment that was announced in a speach by OSC Chair Maureen Jensen in September. Jensen said at that time that it was important not to prevent promising business models from coming to market. The OSC Launchpad will attempt to allow innovation to occur without being overwhelmed by regulatory mandates in an environment that is secure.

The FAC will meet four times a year and will be chaired by head of the OSC Launchpad Pat Chaukos.  Members will be selected based on the following criteria and experience;

  • Digital platforms (e.g. crowdfunding portals, online advisers);
  • Cryptocurrency or distributed ledger technology (e.g. blockchain);
  • Venture capital, financial services and/or securities, with a focus on the fintech or technology sector;
  • Data science and/or AI (artificial intelligence); or
  • Fintech or technology entrepreneurship.
China

HSBC Launches New R&D Lab For Fintech In Hong Kong (Wealthx), Rated: AAA

HSBC and the Hong Kong Applied Science and Technology Research Institute (ASTRI) launched a research and development innovation laboratory on Monday, the latest in a series of initiatives to boost the development of financial technology (fintech) in the city.

The hope is that collaboration between HSBC and ASTRI will develop solutions to real problems that affect the bank and its customers. These include development of advanced authentication technologies, cyber security protection and behavioral biometrics using artificial intelligence technologies.

India

Monexo ties up with WantedNote for easy access to credit for chemists (Economic Times, India Times), Rated: A

Peer to peer lending platform Monexo has tied up with online pharma aggregation platform WantedNote, to create an on demand credit facility for distributors and chemists operating in the pharma sector in India. The collaboration is set to address the working capital needs of distributors and chemists.

WantedNote, which has over 150 distributions and over 10,000 chemists registered with it, sees nearly 3,000 transactions per day on its platform. Monexo will be using this information for Monexo’s data driven P2P lending platform which can run its analytics engine and compute the credit and interest rate for a distributor or a chemist very fast.

Asia

Jack Ma’s Ant Financial starts global foray with Thai expansion (Business Standard), Rated: A

Billionaire Jack Ma’s is taking initial strides abroad after becoming China’s largest provider of internet financial services. On Tuesday, it confirmed an investment in Thailand’s Ascend Money, an arm of the agriculture-to-telecoms conglomerate Charoen Pokphand Group. The company is now looking for similar partners to spearhead overseas ventures, including developed countries, said Douglas Feagin, who heads operations.

will help Ascend build an insurance service, initially targeting motorbike riders. It will also create a business modelled on Alibaba’s Koubei, which offers local-area dining reviews and grocery deliveries, he said. Through partners like Ascend and India’s Paytm, the Chinese online finance giant hopes to serve two billion users globally within 10 years.

Apart from following its Chinese users overseas, expects to drive more local users to the digital wallets of its partners. Ascend now operates True Money for online payments and Ascend Nano for lending, and has digital wallet licenses in countries including Thailand, Indonesia, the Philippines and Vietnam. In Myanmar and Cambodia, it works through local banks and is applying for an online payments license.

Ant plans to share its cloud computing and cybersecurity technology with Ascend. It also wants to help its partners connect, building a platform where Indian users can buy goods through Ascend’s network in Thailand, and vice versa. That’s an overseas initiative it’s already rolling out for Alipay’s 450 million users when they travel.

Ant’s partnership with Ascend will expand over time.

Africa

Wealth Migrate Real Estate Crowdfunding Platform Adopts Distributed Ledger Tech (News BTC), Rated: AAA

Wealth Migrate, the South Africa-based crowdfunding property platform has announced the inclusion of blockchain technology into its online investment marketplace. With the inclusion of distributed ledger technology, the platform now offers enhanced security and privacy protections to its global investors.

Started in 2009, Wealth Migrate became the first online platform to allow people directly invest in both residential and commercial properties across the world. Now listed among the top United States Real Estate Crowdfunding Platforms, Wealth Migrate intends to tackle the rising issue of investment frauds, especially across borders with blockchain technology. The company’s adoption of digital currency technology comes at the time when leading banking and financial institutions are researching into various use cases of blockchain technology in their day-to-day operations.

With the implementation of distributed ledger technology, Wealth Migrate aims to successfully tackle multiple challenges involving personal information protection, enhanced compliance with respective laws of the regions it operates in, an inclusion of smart contracts for investments and decentralized confirmation of transactions over the blockchain. The immutable feature of blockchain technology makes it one of the most reliable and secure information storage method.  With the implementation, the company has gone a step forward and integrated an additional layer of security in the form of one-way hash code.

Blockchain technology is revolutionizing lots of industries. The use of such technology in crowdfunding and crowdinvesting makes the whole process much more reliable and transparent.

Authors:

George Popescu
Allen Taylor

August 10th 2016, Daily News Digest

August 10th 2016, Daily News Digest

News Comments Today’s most interesting article are FT’s report on Lending Club’s Q2 results and a few articles on new regulations, policy and VPC’s fund and strategy in the UK section. Today’s good news: CUneXus raised $5 mil. Congratulations ! United States One of the most interesting articles on Lending Club’s Q2 results, thought through, and with […]

August 10th 2016, Daily News Digest

News Comments

United States

United Kingdom

European Union

India

Singapore

 

United States

Lending Club’s latest results tell us a lot about the online credit business model, (FT Alphaville), Rated: AAA

Lending Club released its second-quarter results yesterday. Besides the updates on repairs after its scandals earlier in the year, executives provided an insight into some broader shifts that have been bubbling under the surface for some time.

Total originations in the second quarter were $1.96 billion an increase of 2% compared to last year. The slower origination growth was due to the slowdown in investor capital that occurred post May 9. Roughly 51% of the second quarter volume was originated prior to May 9, which represented 42% of the quarter in terms of calendar days.

You can file that under statements that are meant to re-assure but reveal trends that may or may not be worrying depending on your perspective. If you take the bait, and do the maths, you find that even without the slowdown post May 9 — the date founder Renaud Laplanche left the company — Lending Club was on track for year-on-year origination growth of 46 per cent for the quarter.

That compares with y-o-y growth of 68 per cent in the first quarter, 82 per cent in the fourth quarter last year, 92 per cent in the third quarter last year and 90 per cent in the second quarter of 2015. If you assume that Lending Club’s originations would have continued at the same pace after May 9, instead of accelerating, for example, then it seems that the company’s loan growth has been slowing quarter-on-quarter for a little while.

If you take the view that very fast loan growth is desirable, then this is a bad thing. But if you think that numbers like 90 per cent don’t belong in conversations about loan growth, then it’s a good thing. Jaidev Janardana, chief executive of Zopa, told us recently that volume is “a bad metric to be worried about”.

After Brexit, the online lender began rejecting the least credit-worthy customers who would have previously received a loan and assuming a higher level of risk for customers it accepted, which resulted in a higher cost of borrowing for those people. All else equal, the changes had the effect of shaving 10 per cent off its volumes. “We should make the right lending decisions and if that means we are going to grow slower for a period of time, so be it,” said Janardana.

You can see similar things happening at Lending Club, for different reasons, as per this slide from the second quarter investor presentation:

The first thing to note there is the population reduction in the lowest rated loans.

“As this recovery gets longer, credit has become more available and these individuals in particular have shown a propensity to be building debt kind of coming into the loan and then continuing to accumulate debt after the LendingClub loan as opposed to leveraging the loan to kind of pay off their debt.”

He’s basically saying that subprime borrowers have been coming to Lending Club for easy credit, rather than debt consolidation.

The second thing to note from the slide above is the interest rate hikes.

Those two bars in the middle show how the investor base changed after the scandal. In particular, banks who were previously buying Lending Club’s loans seem to have fled in larger numbers than any other category (though, obviously, the figures in the chart are percentages rather than absolute numbers).

Sanborn talked about this on the call too, in effect providing a hierarchy of funding sources. First, he noted the “self-managed retail investors who proved to be the most resilient”. Then he talked about managed accounts, which includes funds set up to invest in Lending Club’s loans. They “initially paused” but after being paid to buy loans — “incentives,” as Lending Club calls them — many returned.

Then we get to “asset managers, insurance companies, hedge funds and securitization investors”. They “experienced a significant pause”, which is a rather passive way to say they got scared off by a major scandal involving the former chief executive. Asset managers and hedge funds, who were “the most responsive to incentives”, were the first large investors to resume buying, Sanborn said. (As a side note, “responsive to incentives” is a great bit of code to remember if you’re ever asking for a bribe.)

And finally, the banks, who have “more complex diligence and regulatory requirements”, are taking the longest to come back to Lending Club. Things on this front are likely to get tougher for online lenders. Late last month, the Federal Deposit Insurance Corporation invited comments on new proposals for how banks shouldmanage third-party lending relationships.

Online lenders like Lending Club are very unlike banks in a great number of ways, but the role their retail investors play seems awfully like the role that depositors play at banks. They both are the last line of defence and risk losing their money when it all goes wrong. In the case of a bank depositor, government insurance protects them up to a point. But if you’re a retail investor on Lending Club, you own promissory notesissued by the company rather than loans themselves, so all that protects you at present is the fact that Lending Club has no debt.

To close, here’s how much the mess that led to Renaud Laplanche’s departure cost the company (our emphasis):

GAAP net loss was $81.4 million for the second quarter of 2016, compared to a net loss of $4.1 million in the same period last year. The results for the second quarter of 2016 were negatively affected by a Goodwill impairment charge of $35.4 million related to the 2014 acquisition of Springstone, an increase in professional service fees of $14.9 million primarily due to matters identified in the board review previously announced, approximately $14.0 million in incentives paid to investors, and an increase in compensation related costs of $6.5 million associated with severance costs and a retention program.

With this Lending Club disclosure from May, shortly after Laplanche left (our emphasis again):

On May 11, 2016, the compensation committee of the board of directors approved incentive compensation packages and salary adjustments for certain named executive officers. Specifically, Carrie Dolan, the Company’s Chief Financial Officer, was granted $3.5 million in restricted stock units (RSUs), which vests quarterly over a four year period, and a $500 thousand cash award, payable twelve months from the grant date. The compensation committee also approved an increase to Ms. Dolan’s base salary to $400 thousand per year, with a 75 percent bonus target. John MacIlwaine and Sandeep Bhandari, the Company’s Chief Technology Officer and Chief Risk Officer, respectively, each received $500 thousand in RSUs, which fully vest twelve months from the grant date, and a $500 thousand cash award, payable twelve months from the grant date.

Here is the Q2 Earnings Deck for Lending Club, (Crowdfund Insider), Rated: AAA

Here is the deck.

Sanborn put an upbeat spin on the results stating they were “confident on their future”. [Comment: the moment when the CEO is anything less than upbeat it’s time to jump ship. So no surprise here. A CEO being upbeat is what I would say “business as usual”. ]

An interesting factoid shared on the call. The Board Review, initiated following the shocking departure of former CEO Renaud Laplanche, cost the company (and thus investors) $13 million.

 

CUneXus Closes $ 5 Million Series A, (Finovate), Rated: A

CUneXus, creator of sales and marketing automation solutions for lenders, quietly closed a $5 million funding round late last week. Two investors contributed to the round; both prefer to remain anonymous.

The California-based company’s total raised is now $7 million. Regarding plans for the funding, CUneXus president & CEO Dave Buerger said, “The use of funds is twofold: (1) aggressive growth and the addition of key personnel, and (2) continuous product development and improvement.”

Since launching in 2011, CUneXus has built a host of solutions for online and mobile lending and cross-selling. At FinovateSpring 2016 the company announced its recent partnership with Edmunds.com and showed off AutoXpress, a vehicle purchasing experience that takes place completely online or on mobile.

Lending Club looks for reprieve in year of bad news, (SiliconBeat), Rated: A

Comment: this is yesterday’s news, literally. As I explained yesterday, I believe the Q2 numbers for Lending Club are actually really good given the circumstances. The journalist here focuses on the profit and loss line item which is not at all a good indicator of Lending Club’s business at this time. 

The latest black eye for Lending Club came late Monday, when the company reported a second-quarter loss that ballooned from a year ago due to a big drop in loan volume. Lending Club said it lost $81.4 million, or 21 cents a share, on revenue of $103.4 million, compared with a loss of $4.1 million, or a penny a share, on $97 million in sales a year ago. Excluding one-time items, Lending Club lost 9 cents a share.

Those results fell short of the estimates of analysts surveyed by Thomson Reuters, who forecast Lending Club to lose 2 cents a share on $100.5 million in revenue. Lending Club said one of the main factors in its results falling short was that its loan volume, or the value of the loans it handled during the quarter, fell by 30 percent from a year ago to $1.96 billion. The company also said its loan volume would be flat for the rest of the year.

There was also another shake up in Lending Club’s executive ranks, as the company announced the departure of Chief Financial Officer Carrie Dolan. Dolan’s departure comes about three months after Lending Club founder Renaud Laplanche was forced to resign amid a scandal involving loans that were made against the instructions of an investor, as well as Laplanche and his family members improperly using the Lending Club platform to take out multiple loans in late 2009.

Loan originations rose 41 percent from a year ago, to $589.7 million, which Jefferson Harralson, of Keefe, Bruyette & Woods said became “more optimistic” and could offset some of the recent worries about Lending Club’s business.

PYMNTS Daily Data Dive: OnDeck Is On Track With Q2 Earnings, (PYMNTS), Rated: A

The company has altered its business model and is taking on more loans in the balance sheet. Credit performance has improved, which has increased the provision for loan losses. The company is advancing its international expansion, its partnership with JPMorgan and expects gross revenue between $73 million and $76 million in Q3.

Here are the numbers:

$69.5 million | OnDeck’s revenue, which was a year-on-year increase of 9.8 percent and $1.6 million over analyst expectations

$32 million | Provision for loan losses, almost twice the $15.5 seen this time last year

47% | The year-on-year growth in loans under management, reaching $1 billion

41% | The year-on-year growth in originations, which reached $590 million

$0.20 | Net loss per share; projections were for a net loss of $0.24 per share

Marketplace lending technology patents held invalid, (Lexology), Rated: A

On July 25, 2016, three appellate judges in the United States held that a popular online marketplace lender’s patents were invalid because they merely reflected an “abstract idea” that is not entitled to be patented or otherwise eligible for exclusive protection under American intellectual-property laws.

The judges from the Federal Circuit Court of Appeals likened the claimed inventions to a “fundamental economic concept” (i.e., an abstract idea) that served as the basis for the consumer-loan industry. They ruled that simply implementing this concept with “generic technology” to automate the process does not then make it patentable.

To read the full opinion of the Federal Circuit panel, click here.

Peer-to-peer Lending Market to Grow at CAGR of 53.06% to 2020, (News Maker), Rated: A

Comment: This is a report that is being sold. This report 1st came out about 2 weeks ago. Just a reminder. If Lending Club can still grow year-over-year despite all the problems I don’t think anybody doubts that p2p lending could very well grow at 53% CAGR for the next 4 years.

Research analysts forecast the global P2P lending market to grow at a CAGR of 53.06% during the period 2016-2020.

Browse full table of contents and data tables at

Credit unions can ‘up their game’ with the right digital lending partner, (CU Insight), Rated: A

Comment: This article is a bit of an advertisement for p2p-bank partnerships. I think it’s worth being clear and reminding the obvious to our readers: quite a few p2p lenders have such partnerships and they seem to function well.

The success of Lending Club and Prosper, despite recent setbacks, demonstrates to credit unions the opportunity to ‘up their game’ and become a part of this digital revolution. What’s more, your credit union can keep the loans on your balance sheet.

Your credit union is able to profitably fund and manage smaller dollar, unsecured loans at a fraction of the cost of manual and paper processes, often as low as $500 each.

What kind of Digital Lending Partner can help your credit union ‘up your game’ quickly? One that has proven success in digital lending, and:

  • Allows your credit union to use your underwriting controls and risk-rating standards
  • Keeps the loans on your balance sheet as earning assets
  • Accepts online applications by computer or mobile phone
  • Provides approvals in an instant, funds in just days
  • Monitors loans, deposit activity and credit information
  • Handles loan renewals
  • Provides proven safety in the cloud
United Kingdom

Britain counting on fintech for banking revolution, (Reuters), Rated: AAA

British banks, starting 2018,  will have to share customers’ data with third parties who can then show how much could be saved by using other lenders, the competition watchdog said on Tuesday. Under the new rules, banks will have to share a customer’s data with third parties, providing the customer agrees. The CMA will also require lenders to publish their maximum fee for unarranged overdrafts, which earn banks 1.2 billion pounds ($1.6 bln) a year.

New banks, consumer advocates and lawmakers, however, derided the plans as relying too much on people’s ability and willingness to use new technology.

The CMA believes setting a 2018 deadline will also boost the “fintech” sector, which uses technology to make financial services cheaper and more efficient.

The government wants to see fintech grow, but European Union countries like Germany would like to lure the sector from London after Britain voted to leave the bloc.

Only 3 percent of consumers and 4 percent of business customers change banks in any year due to inertia.

Andrew Tyrie, chair of parliament’s Treasury Select Committee which has pushed for six years to get more competition in banking, said he was not optimistic the measures will get to the heart of the problem.

Land said the Financial Conduct Authority (FCA), which capped payday loans’ interest rates, will review the overdraft measures and obstacles to new entrants to see if they improve, but Rishi Khosla, co-founder and CEO of OakNorth Bank, said this “passing of the buck” to other market watchdogs could put many fledgling companies at risk.

“The FCA should be prepared to step in with an industry-wide cap if they (the banks) do not significantly reduce the charges being paid by people who fall into difficulty,” said Money Advice Trust, a charity that helps people deal with debt.

The Financial Services Consumer Panel, which advises the FCA, said the measures rely on untested technology and consumers having to act on complex information. “At least it has given the FCA some good evidence to take on the banks.”

VPC Speciality Lending fund shifts strategy to greater balance sheet exposure after difficult Q2, (Alt Fi News), Rated: AAA

The key drivers of the recent shortfall, VPC says, was a cash drag from holding cash to cover currency hedges, and a peak in defaults, reflecting the life cycle of loans.

The portfolio is a combination of ‘marketplace’ and ‘balance sheet’ loans. Marketplace loans are originated by a platform, which earn an origination fee, with the fund lending directly to underlying borrowers targeting unlevered returns of 6 to 10 per cent, or 11 to 18 per cent on a levered basis. Balance sheet loans on the other hand are made to platforms with target returns of 11 to 16 per cent on an unlevered basis. The balance sheet loans are made through a special purpose vehicle [SPV] with the platform using the cash to originate loans.

At launch back in March 2015 balance sheet Loans were expected to be around  half of the portfolio, and currently represent 43 per cent of the invested portfolio. However, according to analysts at Numis Securities the management team at VPC believe that industry illiquidity has created attractive opportunities for balance sheet lending.

The VPC Speciality Lending Investment trust is looking to up its stake in balance sheet lending with profits from its marketplace loan holdings and move away from Funding Circle US’ exposure. More spare cash will be moved into balance sheet loans rather than marketplace loans in the VPC Speciality Lending investment trust, according to an update by the closed-ended fund’s management team.

The VPC Speciality Lending trust saw growth in its net asset value of just 0.33 per cent during the second quarter of 2016 on a total return basis, reflecting a 0.62 per cent loss in May.

According to AltFi Data, VPC Speciality Lending had outerperformed the broader UK marketplace lending space, as measured by the Liberum AltFi Returns index (the LARI) since its launch back in March 2015 until recently.

While the fund’s Q2 numbers are “below expectations”, VPC says long-term returns should be in their target range. The higher than expected losses, they add, came from the Funding Circle US loans which substantially underperformed expectations while the balance sheet loans in the portfolio experienced no setbacks and are generating coupons of between 12-16 per cent, with a weighted average coupon of 12.96  per cent

The trust is currently trading on a discount of 16.9 per cent. At launch in March 2015 it moves rapidly to a premium likes its peers in the space such P2P Global Investments. But, like its peers, it has also seen a substantial period at a double digit discount in 2016.

“We believe there is little scope for this discount to narrow until the fund consistently delivers monthly returns in line with its target. In addition, we believe the fund’s fees are high at 1 per cent of gross assets with a 15 per cent performance fee on net asset value [NAV] returns  [with] no hurdle.”

 

FCA Chief Told Parliament Committee Crowdfunding is Too Small to Be Systemically Important, (Crowdfund Insider), Rated: AAA

Financial Conduct Authority (FCA) Chief Executive Andrew Bailey basically gave a Parliament Treasury Committee a crash course on Crowdfunding 101 this past June.  The letter by Bailey was recently posted on the Treasury Committee website, along with a statement from Andrew Tyrie MP, Chairman of the Committee, who questioned “government subsidies”;

“On the basis of this correspondence, the risks associated with crowdfunding platforms appear to be restricted to those using the platforms to lend or invest. Government policies to promote the crowdfunding sector may have the right intention – to increase competition in the SME lending market – but government tax incentives, in effect government subsidies, may be encouraging some consumers into the use of inappropriate products. The FCA needs to be alert to these risks. The Government may need to reconsider these tax incentives.”

There is also an element of irony here. Internet finance is broadly recognized for its high degree of transparency. Old finance is known for its obfuscation and arcane operations – the source of too many systemic problems (how soon we forget the saga of LTCM). Many in the alternative finance sector believe Fintech is empowering finance to  come out from the shadow banking past and is better labeled as sunlight banking. It remains a truism that the best form of regulation is transparency.

Roche-Saunders explained a few days back it was clear that traditional finance sees “P2P encroaching on their space.”  Yet she was confident in the abilities of the FCA to draw the line at a point where competition is enabled and alternative finance can thrive. The FCA review process is accepting comments now with a deadline of September 8th.

FundingKnight to boost loan book after acquisition, (Bridging And Commercial), Rated: A

Gary Mealing, head of property lending at FundingKnight, explained to Bridging & Commercial that the company expects a large increase in activity after GLI Finance acquired its remaining shareholding.

FundingKnight’s origins and our skills are in commercial assessment, which means we’ll be focusing heavily on businesses with a property need and we’ll also have an appetite to fund over longer periods, also for larger amounts – up to £5m.

There has been a lot of focus around commercial property funds and the pressures from their investors to liquidate, and then there is the uncertainty so far with regards to the UK economic growth post-Brexit.

European Union

Interview – Finbee the First Year, (P2p Banking), Rated: A

More than 3,000 investors have issued 2M EUR worth of loans via FinBee and none of them lost any money due to a default and our compensation scheme. P2P lending is a relatively new concept in Lithuanian lending market, so raising awareness and overcoming scepticism was one the biggest challenges that we’ve faced from day one.

Current default figures are better that we expected and projected. We expected to operate with 8 to 10 percent of non-performing loans. Currently we have 2.25 percent (it worth noting that we consider a loan to be non-performing when two monthly instalments are missed, that is when loan is 60+ days late). We also project 40 percent recovery of non-performing loans. So we expect 4.8 – 6 percent losses after recovery. Having in mind that investors now invest on 26 percent interest rate on average, they can expect 20 percent returns even without our compensation fund.

What plans and goals do you have for FinBee for the next year?

Operations in Czech republic.

India

Raghuram Rajan sets agenda for rest of his term, (Live Mint), Rated: A

Reserve Bank of India (RBI) governor Raghuram Rajan set himself a crowded agenda in the last four weeks of his term as he left interest rates unchanged in his final monetary policy review on Tuesday.

On his agenda: guidelines for peer-to-peer (P2P) lending platforms and account aggregators, new norms to improve the functioning of corporate bond markets and tweaks to the marginal cost-based lending rate (MCLR) system, which Rajan hopes would improve the pass-through of past rate cuts by the central bank.

Singapore

Digital gold and silver may be up for P2P lending soon, (Asia One), Rated: B

(P2P) lending in Singapore could soon be extended to cryptocurrencies, if a unique partnership between vault operator Silver Bullion and a gold-backed digital currency seller is inked.

Silver Bullion, a gold and silver vault that offers peer-to-peer lending backed by those commodities, is in talks with Digix Global, a company that sells asset-backed tokens – or cryptocurrency bearing rights to gold – to use these tokens to borrow funds on the loan platform, the vault operator told The Business Times.

Several borrowers use the loan to buy more bullion with it, Mr Gregersen said. Lenders, on the other hand, use the interest to pay for storage on their own silver or gold stash.

Such loans are fully backed by physical gold and silver, and lending that stretches beyond six months has a collateral-to-loan value of at least 200 per cent. This means that a loan of S$100,000 must be backed by a collateral worth at least S$200,000. The exceptions are loans with a one-month tenure, which have a collateral-to-loan value of 160 per cent.

The discussion comes as Digix Global has moved to store gold bullion that is backing its cryptocurrency with Silver Bullion. They expect to store up to US$3 million worth of gold in Silver Bullion’s vault by the end of 2016. Digix Global will be transferring its gold holdings from Malca-Amit, at Singapore’s Le Freeport.

On Digix Global, users can buy Digix tokens, each of which represents one gram of gold.

Author:

George Popescu

August 10th 2016, Daily News Digest

August 10th 2016, Daily News Digest

News Comments Today’s most interesting article are FT’s report on Lending Club’s Q2 results and a few articles on new regulations, policy and VPC’s fund and strategy in the UK section. Today’s good news: CUneXus raised $5 mil. Congratulations ! United States One of the most interesting articles on Lending Club’s Q2 results, thought through, and with […]

August 10th 2016, Daily News Digest

News Comments

United States

United Kingdom

European Union

India

Singapore

 

United States

Lending Club’s latest results tell us a lot about the online credit business model, (FT Alphaville), Rated: AAA

Lending Club released its second-quarter results yesterday. Besides the updates on repairs after its scandals earlier in the year, executives provided an insight into some broader shifts that have been bubbling under the surface for some time.

Total originations in the second quarter were $1.96 billion an increase of 2% compared to last year. The slower origination growth was due to the slowdown in investor capital that occurred post May 9. Roughly 51% of the second quarter volume was originated prior to May 9, which represented 42% of the quarter in terms of calendar days.

You can file that under statements that are meant to re-assure but reveal trends that may or may not be worrying depending on your perspective. If you take the bait, and do the maths, you find that even without the slowdown post May 9 — the date founder Renaud Laplanche left the company — Lending Club was on track for year-on-year origination growth of 46 per cent for the quarter.

That compares with y-o-y growth of 68 per cent in the first quarter, 82 per cent in the fourth quarter last year, 92 per cent in the third quarter last year and 90 per cent in the second quarter of 2015. If you assume that Lending Club’s originations would have continued at the same pace after May 9, instead of accelerating, for example, then it seems that the company’s loan growth has been slowing quarter-on-quarter for a little while.

If you take the view that very fast loan growth is desirable, then this is a bad thing. But if you think that numbers like 90 per cent don’t belong in conversations about loan growth, then it’s a good thing. Jaidev Janardana, chief executive of Zopa, told us recently that volume is “a bad metric to be worried about”.

After Brexit, the online lender began rejecting the least credit-worthy customers who would have previously received a loan and assuming a higher level of risk for customers it accepted, which resulted in a higher cost of borrowing for those people. All else equal, the changes had the effect of shaving 10 per cent off its volumes. “We should make the right lending decisions and if that means we are going to grow slower for a period of time, so be it,” said Janardana.

You can see similar things happening at Lending Club, for different reasons, as per this slide from the second quarter investor presentation:

The first thing to note there is the population reduction in the lowest rated loans.

“As this recovery gets longer, credit has become more available and these individuals in particular have shown a propensity to be building debt kind of coming into the loan and then continuing to accumulate debt after the LendingClub loan as opposed to leveraging the loan to kind of pay off their debt.”

He’s basically saying that subprime borrowers have been coming to Lending Club for easy credit, rather than debt consolidation.

The second thing to note from the slide above is the interest rate hikes.

Those two bars in the middle show how the investor base changed after the scandal. In particular, banks who were previously buying Lending Club’s loans seem to have fled in larger numbers than any other category (though, obviously, the figures in the chart are percentages rather than absolute numbers).

Sanborn talked about this on the call too, in effect providing a hierarchy of funding sources. First, he noted the “self-managed retail investors who proved to be the most resilient”. Then he talked about managed accounts, which includes funds set up to invest in Lending Club’s loans. They “initially paused” but after being paid to buy loans — “incentives,” as Lending Club calls them — many returned.

Then we get to “asset managers, insurance companies, hedge funds and securitization investors”. They “experienced a significant pause”, which is a rather passive way to say they got scared off by a major scandal involving the former chief executive. Asset managers and hedge funds, who were “the most responsive to incentives”, were the first large investors to resume buying, Sanborn said. (As a side note, “responsive to incentives” is a great bit of code to remember if you’re ever asking for a bribe.)

And finally, the banks, who have “more complex diligence and regulatory requirements”, are taking the longest to come back to Lending Club. Things on this front are likely to get tougher for online lenders. Late last month, the Federal Deposit Insurance Corporation invited comments on new proposals for how banks shouldmanage third-party lending relationships.

Online lenders like Lending Club are very unlike banks in a great number of ways, but the role their retail investors play seems awfully like the role that depositors play at banks. They both are the last line of defence and risk losing their money when it all goes wrong. In the case of a bank depositor, government insurance protects them up to a point. But if you’re a retail investor on Lending Club, you own promissory notesissued by the company rather than loans themselves, so all that protects you at present is the fact that Lending Club has no debt.

To close, here’s how much the mess that led to Renaud Laplanche’s departure cost the company (our emphasis):

GAAP net loss was $81.4 million for the second quarter of 2016, compared to a net loss of $4.1 million in the same period last year. The results for the second quarter of 2016 were negatively affected by a Goodwill impairment charge of $35.4 million related to the 2014 acquisition of Springstone, an increase in professional service fees of $14.9 million primarily due to matters identified in the board review previously announced, approximately $14.0 million in incentives paid to investors, and an increase in compensation related costs of $6.5 million associated with severance costs and a retention program.

With this Lending Club disclosure from May, shortly after Laplanche left (our emphasis again):

On May 11, 2016, the compensation committee of the board of directors approved incentive compensation packages and salary adjustments for certain named executive officers. Specifically, Carrie Dolan, the Company’s Chief Financial Officer, was granted $3.5 million in restricted stock units (RSUs), which vests quarterly over a four year period, and a $500 thousand cash award, payable twelve months from the grant date. The compensation committee also approved an increase to Ms. Dolan’s base salary to $400 thousand per year, with a 75 percent bonus target. John MacIlwaine and Sandeep Bhandari, the Company’s Chief Technology Officer and Chief Risk Officer, respectively, each received $500 thousand in RSUs, which fully vest twelve months from the grant date, and a $500 thousand cash award, payable twelve months from the grant date.

Here is the Q2 Earnings Deck for Lending Club, (Crowdfund Insider), Rated: AAA

Here is the deck.

Sanborn put an upbeat spin on the results stating they were “confident on their future”. [Comment: the moment when the CEO is anything less than upbeat it’s time to jump ship. So no surprise here. A CEO being upbeat is what I would say “business as usual”. ]

An interesting factoid shared on the call. The Board Review, initiated following the shocking departure of former CEO Renaud Laplanche, cost the company (and thus investors) $13 million.

 

CUneXus Closes $ 5 Million Series A, (Finovate), Rated: A

CUneXus, creator of sales and marketing automation solutions for lenders, quietly closed a $5 million funding round late last week. Two investors contributed to the round; both prefer to remain anonymous.

The California-based company’s total raised is now $7 million. Regarding plans for the funding, CUneXus president & CEO Dave Buerger said, “The use of funds is twofold: (1) aggressive growth and the addition of key personnel, and (2) continuous product development and improvement.”

Since launching in 2011, CUneXus has built a host of solutions for online and mobile lending and cross-selling. At FinovateSpring 2016 the company announced its recent partnership with Edmunds.com and showed off AutoXpress, a vehicle purchasing experience that takes place completely online or on mobile.

Lending Club looks for reprieve in year of bad news, (SiliconBeat), Rated: A

Comment: this is yesterday’s news, literally. As I explained yesterday, I believe the Q2 numbers for Lending Club are actually really good given the circumstances. The journalist here focuses on the profit and loss line item which is not at all a good indicator of Lending Club’s business at this time. 

The latest black eye for Lending Club came late Monday, when the company reported a second-quarter loss that ballooned from a year ago due to a big drop in loan volume. Lending Club said it lost $81.4 million, or 21 cents a share, on revenue of $103.4 million, compared with a loss of $4.1 million, or a penny a share, on $97 million in sales a year ago. Excluding one-time items, Lending Club lost 9 cents a share.

Those results fell short of the estimates of analysts surveyed by Thomson Reuters, who forecast Lending Club to lose 2 cents a share on $100.5 million in revenue. Lending Club said one of the main factors in its results falling short was that its loan volume, or the value of the loans it handled during the quarter, fell by 30 percent from a year ago to $1.96 billion. The company also said its loan volume would be flat for the rest of the year.

There was also another shake up in Lending Club’s executive ranks, as the company announced the departure of Chief Financial Officer Carrie Dolan. Dolan’s departure comes about three months after Lending Club founder Renaud Laplanche was forced to resign amid a scandal involving loans that were made against the instructions of an investor, as well as Laplanche and his family members improperly using the Lending Club platform to take out multiple loans in late 2009.

Loan originations rose 41 percent from a year ago, to $589.7 million, which Jefferson Harralson, of Keefe, Bruyette & Woods said became “more optimistic” and could offset some of the recent worries about Lending Club’s business.

PYMNTS Daily Data Dive: OnDeck Is On Track With Q2 Earnings, (PYMNTS), Rated: A

The company has altered its business model and is taking on more loans in the balance sheet. Credit performance has improved, which has increased the provision for loan losses. The company is advancing its international expansion, its partnership with JPMorgan and expects gross revenue between $73 million and $76 million in Q3.

Here are the numbers:

$69.5 million | OnDeck’s revenue, which was a year-on-year increase of 9.8 percent and $1.6 million over analyst expectations

$32 million | Provision for loan losses, almost twice the $15.5 seen this time last year

47% | The year-on-year growth in loans under management, reaching $1 billion

41% | The year-on-year growth in originations, which reached $590 million

$0.20 | Net loss per share; projections were for a net loss of $0.24 per share

Marketplace lending technology patents held invalid, (Lexology), Rated: A

On July 25, 2016, three appellate judges in the United States held that a popular online marketplace lender’s patents were invalid because they merely reflected an “abstract idea” that is not entitled to be patented or otherwise eligible for exclusive protection under American intellectual-property laws.

The judges from the Federal Circuit Court of Appeals likened the claimed inventions to a “fundamental economic concept” (i.e., an abstract idea) that served as the basis for the consumer-loan industry. They ruled that simply implementing this concept with “generic technology” to automate the process does not then make it patentable.

To read the full opinion of the Federal Circuit panel, click here.

Peer-to-peer Lending Market to Grow at CAGR of 53.06% to 2020, (News Maker), Rated: A

Comment: This is a report that is being sold. This report 1st came out about 2 weeks ago. Just a reminder. If Lending Club can still grow year-over-year despite all the problems I don’t think anybody doubts that p2p lending could very well grow at 53% CAGR for the next 4 years.

Research analysts forecast the global P2P lending market to grow at a CAGR of 53.06% during the period 2016-2020.

Browse full table of contents and data tables at

Credit unions can ‘up their game’ with the right digital lending partner, (CU Insight), Rated: A

Comment: This article is a bit of an advertisement for p2p-bank partnerships. I think it’s worth being clear and reminding the obvious to our readers: quite a few p2p lenders have such partnerships and they seem to function well.

The success of Lending Club and Prosper, despite recent setbacks, demonstrates to credit unions the opportunity to ‘up their game’ and become a part of this digital revolution. What’s more, your credit union can keep the loans on your balance sheet.

Your credit union is able to profitably fund and manage smaller dollar, unsecured loans at a fraction of the cost of manual and paper processes, often as low as $500 each.

What kind of Digital Lending Partner can help your credit union ‘up your game’ quickly? One that has proven success in digital lending, and:

  • Allows your credit union to use your underwriting controls and risk-rating standards
  • Keeps the loans on your balance sheet as earning assets
  • Accepts online applications by computer or mobile phone
  • Provides approvals in an instant, funds in just days
  • Monitors loans, deposit activity and credit information
  • Handles loan renewals
  • Provides proven safety in the cloud
United Kingdom

Britain counting on fintech for banking revolution, (Reuters), Rated: AAA

British banks, starting 2018,  will have to share customers’ data with third parties who can then show how much could be saved by using other lenders, the competition watchdog said on Tuesday. Under the new rules, banks will have to share a customer’s data with third parties, providing the customer agrees. The CMA will also require lenders to publish their maximum fee for unarranged overdrafts, which earn banks 1.2 billion pounds ($1.6 bln) a year.

New banks, consumer advocates and lawmakers, however, derided the plans as relying too much on people’s ability and willingness to use new technology.

The CMA believes setting a 2018 deadline will also boost the “fintech” sector, which uses technology to make financial services cheaper and more efficient.

The government wants to see fintech grow, but European Union countries like Germany would like to lure the sector from London after Britain voted to leave the bloc.

Only 3 percent of consumers and 4 percent of business customers change banks in any year due to inertia.

Andrew Tyrie, chair of parliament’s Treasury Select Committee which has pushed for six years to get more competition in banking, said he was not optimistic the measures will get to the heart of the problem.

Land said the Financial Conduct Authority (FCA), which capped payday loans’ interest rates, will review the overdraft measures and obstacles to new entrants to see if they improve, but Rishi Khosla, co-founder and CEO of OakNorth Bank, said this “passing of the buck” to other market watchdogs could put many fledgling companies at risk.

“The FCA should be prepared to step in with an industry-wide cap if they (the banks) do not significantly reduce the charges being paid by people who fall into difficulty,” said Money Advice Trust, a charity that helps people deal with debt.

The Financial Services Consumer Panel, which advises the FCA, said the measures rely on untested technology and consumers having to act on complex information. “At least it has given the FCA some good evidence to take on the banks.”

VPC Speciality Lending fund shifts strategy to greater balance sheet exposure after difficult Q2, (Alt Fi News), Rated: AAA

The key drivers of the recent shortfall, VPC says, was a cash drag from holding cash to cover currency hedges, and a peak in defaults, reflecting the life cycle of loans.

The portfolio is a combination of ‘marketplace’ and ‘balance sheet’ loans. Marketplace loans are originated by a platform, which earn an origination fee, with the fund lending directly to underlying borrowers targeting unlevered returns of 6 to 10 per cent, or 11 to 18 per cent on a levered basis. Balance sheet loans on the other hand are made to platforms with target returns of 11 to 16 per cent on an unlevered basis. The balance sheet loans are made through a special purpose vehicle [SPV] with the platform using the cash to originate loans.

At launch back in March 2015 balance sheet Loans were expected to be around  half of the portfolio, and currently represent 43 per cent of the invested portfolio. However, according to analysts at Numis Securities the management team at VPC believe that industry illiquidity has created attractive opportunities for balance sheet lending.

The VPC Speciality Lending Investment trust is looking to up its stake in balance sheet lending with profits from its marketplace loan holdings and move away from Funding Circle US’ exposure. More spare cash will be moved into balance sheet loans rather than marketplace loans in the VPC Speciality Lending investment trust, according to an update by the closed-ended fund’s management team.

The VPC Speciality Lending trust saw growth in its net asset value of just 0.33 per cent during the second quarter of 2016 on a total return basis, reflecting a 0.62 per cent loss in May.

According to AltFi Data, VPC Speciality Lending had outerperformed the broader UK marketplace lending space, as measured by the Liberum AltFi Returns index (the LARI) since its launch back in March 2015 until recently.

While the fund’s Q2 numbers are “below expectations”, VPC says long-term returns should be in their target range. The higher than expected losses, they add, came from the Funding Circle US loans which substantially underperformed expectations while the balance sheet loans in the portfolio experienced no setbacks and are generating coupons of between 12-16 per cent, with a weighted average coupon of 12.96  per cent

The trust is currently trading on a discount of 16.9 per cent. At launch in March 2015 it moves rapidly to a premium likes its peers in the space such P2P Global Investments. But, like its peers, it has also seen a substantial period at a double digit discount in 2016.

“We believe there is little scope for this discount to narrow until the fund consistently delivers monthly returns in line with its target. In addition, we believe the fund’s fees are high at 1 per cent of gross assets with a 15 per cent performance fee on net asset value [NAV] returns  [with] no hurdle.”

 

FCA Chief Told Parliament Committee Crowdfunding is Too Small to Be Systemically Important, (Crowdfund Insider), Rated: AAA

Financial Conduct Authority (FCA) Chief Executive Andrew Bailey basically gave a Parliament Treasury Committee a crash course on Crowdfunding 101 this past June.  The letter by Bailey was recently posted on the Treasury Committee website, along with a statement from Andrew Tyrie MP, Chairman of the Committee, who questioned “government subsidies”;

“On the basis of this correspondence, the risks associated with crowdfunding platforms appear to be restricted to those using the platforms to lend or invest. Government policies to promote the crowdfunding sector may have the right intention – to increase competition in the SME lending market – but government tax incentives, in effect government subsidies, may be encouraging some consumers into the use of inappropriate products. The FCA needs to be alert to these risks. The Government may need to reconsider these tax incentives.”

There is also an element of irony here. Internet finance is broadly recognized for its high degree of transparency. Old finance is known for its obfuscation and arcane operations – the source of too many systemic problems (how soon we forget the saga of LTCM). Many in the alternative finance sector believe Fintech is empowering finance to  come out from the shadow banking past and is better labeled as sunlight banking. It remains a truism that the best form of regulation is transparency.

Roche-Saunders explained a few days back it was clear that traditional finance sees “P2P encroaching on their space.”  Yet she was confident in the abilities of the FCA to draw the line at a point where competition is enabled and alternative finance can thrive. The FCA review process is accepting comments now with a deadline of September 8th.

FundingKnight to boost loan book after acquisition, (Bridging And Commercial), Rated: A

Gary Mealing, head of property lending at FundingKnight, explained to Bridging & Commercial that the company expects a large increase in activity after GLI Finance acquired its remaining shareholding.

FundingKnight’s origins and our skills are in commercial assessment, which means we’ll be focusing heavily on businesses with a property need and we’ll also have an appetite to fund over longer periods, also for larger amounts – up to £5m.

There has been a lot of focus around commercial property funds and the pressures from their investors to liquidate, and then there is the uncertainty so far with regards to the UK economic growth post-Brexit.

European Union

Interview – Finbee the First Year, (P2p Banking), Rated: A

More than 3,000 investors have issued 2M EUR worth of loans via FinBee and none of them lost any money due to a default and our compensation scheme. P2P lending is a relatively new concept in Lithuanian lending market, so raising awareness and overcoming scepticism was one the biggest challenges that we’ve faced from day one.

Current default figures are better that we expected and projected. We expected to operate with 8 to 10 percent of non-performing loans. Currently we have 2.25 percent (it worth noting that we consider a loan to be non-performing when two monthly instalments are missed, that is when loan is 60+ days late). We also project 40 percent recovery of non-performing loans. So we expect 4.8 – 6 percent losses after recovery. Having in mind that investors now invest on 26 percent interest rate on average, they can expect 20 percent returns even without our compensation fund.

What plans and goals do you have for FinBee for the next year?

Operations in Czech republic.

India

Raghuram Rajan sets agenda for rest of his term, (Live Mint), Rated: A

Reserve Bank of India (RBI) governor Raghuram Rajan set himself a crowded agenda in the last four weeks of his term as he left interest rates unchanged in his final monetary policy review on Tuesday.

On his agenda: guidelines for peer-to-peer (P2P) lending platforms and account aggregators, new norms to improve the functioning of corporate bond markets and tweaks to the marginal cost-based lending rate (MCLR) system, which Rajan hopes would improve the pass-through of past rate cuts by the central bank.

Singapore

Digital gold and silver may be up for P2P lending soon, (Asia One), Rated: B

(P2P) lending in Singapore could soon be extended to cryptocurrencies, if a unique partnership between vault operator Silver Bullion and a gold-backed digital currency seller is inked.

Silver Bullion, a gold and silver vault that offers peer-to-peer lending backed by those commodities, is in talks with Digix Global, a company that sells asset-backed tokens – or cryptocurrency bearing rights to gold – to use these tokens to borrow funds on the loan platform, the vault operator told The Business Times.

Several borrowers use the loan to buy more bullion with it, Mr Gregersen said. Lenders, on the other hand, use the interest to pay for storage on their own silver or gold stash.

Such loans are fully backed by physical gold and silver, and lending that stretches beyond six months has a collateral-to-loan value of at least 200 per cent. This means that a loan of S$100,000 must be backed by a collateral worth at least S$200,000. The exceptions are loans with a one-month tenure, which have a collateral-to-loan value of 160 per cent.

The discussion comes as Digix Global has moved to store gold bullion that is backing its cryptocurrency with Silver Bullion. They expect to store up to US$3 million worth of gold in Silver Bullion’s vault by the end of 2016. Digix Global will be transferring its gold holdings from Malca-Amit, at Singapore’s Le Freeport.

On Digix Global, users can buy Digix tokens, each of which represents one gram of gold.

Author:

George Popescu

August 8th 2016, Daily News Digest

August 8th 2016, Daily News Digest

News Comments Today’s news pour some cold water on P2P SME lending : SME securitizations and SME yield performance seem to be less than expected. See 1st article in US section and 1st article in UK section. Finova raised $52.5 mil , Mosaic $220 mil. And today’s the day : Lending Club and OnDeck release […]

August 8th 2016, Daily News Digest

News Comments

United States

United Kingdom

Australia

News Summary

United States

Funding Circle, and other online lenders, falter in America, (Financial Times), Rated: AAA

“Our portfolio of Funding Circle US loans has continued to substantially underperform our expectations, a trend which continued during the quarter and created a drag on the overall portfolio. We stopped purchasing new Funding Circle US loans late in 2015 so the portfolio continues to amortize down.” [ Comment: see the complete VPC Q2 2016 letter in the UK section below].

That’s from VPC Specialty Lending (VSL) Investments’ second quarter letter, released earlier this week (mea culpa, we didn’t spot it at first).

VSL’s disclosure forced Funding Circle’s listed fund to issue its own filing to the market yesterday, sort of but not outright rejecting the suggestion that loans were underperforming:

The Company’s US Credit Assets are projected to return in excess of 8% per annum on a net unlevered basis – consistent with historic performance observed on the Funding Circle US marketplace.

But that might be downplaying the historic performance a little. When Funding Circle floated its fund last year, this is the US loan performance it revealed in its November prospectus (note the numbers didn’t include expected future losses and showed the to-date performance at that time):

Sachin Patel, Funding Circle’s global co-head of capital markets, said that loans originated in the first half of 2015 had underperformed and are expected to return 7.25 per cent to its large, accredited investors, rather than the 8 per cent or more that it targets.

Funding Circle launched in the US in late 2013 and is run out of San Francisco by Sam Hodges. According to the 2015 prospectus for Funding Circle’s fund, US loans originated in early 2014 also “experienced higher than expected annualised loss rates”.

Similar missteps were seen in Funding Circle’s first years of operation in the UK too:

But Funding Circle isn’t the only online lender to small businesses in the US that is disappointing investors. According to a Morgan Stanley note last month, a second securitisation of loans originated by OnDeck, which is listed, breached its loss trigger in June:

MPLT 2015-OD3 from OnDeck breached triggers in June, joining the 3 deals we had previously highlighted – MPLT 2015- CB1 (Circleback), MPLT 2015-OD1 (OnDeck) and GLCII 2014-A (Lending Club).

That makes four online lending securitisation deals that have hit their loss trigger, meaning that cashflows are diverted to senior bondholders at the expense of the lower tranche investors. Three of those four deals, as far as we can tell, were arranged by Jefferies.

It’s also worth keeping an eye on securitisations of loans from Avant, a US consumer lender that also gets a dishonourable mention in VSL’s letter (note that Victory Park is an equity investor in Avant):

We also saw a reduction in the value of three residual interests in securitizations of Avant loans that are held at fair market value. These markdowns, which flow through capital, reflect loss curves coming in slightly higher than in the first quarter. While the capital markets have recently begun to re-open for marketplace lending loans, we have no current plans to pursue additional securitizations.

FTC Announces FinTech Forum on Crowdfunding, Peer-to-Peer Payments, (JD Supra Business Advisor), Rated: AAA

The FTC announced it will be hosting the next event in the FinTech Forum series on October 26, 2016.

BNY Mellon sees possible rise of P2P collateral lending, (Global Custodian), Rated: A

Peer-to-peer lending among buy-siders could emerge due to a challenging regulatory environment for sourcing and optimising collateral, according to BNY Mellon.

In the report, BNY Mellon states that institutional investors may also find further opportunities in a peer-to-peer relationship, where buy-side firms are both the collateral provider and receiver.

The report can be found here.

 Income: any Fintech to fill-in the supply shortage?, ( Daily Fintech), Rated: AAA

The world still needs current [Comment: I believe most people use the word fixed instead of current] income for a variety of reasons: wage stagnation, tax overburdening, and the usual cash flows needs that are not at all well managed.

Source: Pension Partners

Challenger banks in the UK have been offering bonds (3yrs or less) to entice customers to sign up on their platforms.

Source: Daily Finance

There are two Alternative finance options that can generate income, much like high yield bonds or publicly traded REITS have been doing in normal conditions.

Investors in the UK can invest in the LE listed

Finova Financial Raises $ 52.5 M First Round For Car Equity Loans, (Wall Street Journal), Rated: A

Finova Financial has raised $52.5 million in its first institutional funding—much of it in the form of debt—for its consumer lending service that provides car owners with a line of credit.

The funding was led by MHS Capital, with participation from Refactor Capital; CoVenture; Metamorphic Ventures; 500 Startups; Funding Circle co-founder Sam Hodges; NerdWallet co-founder Jake Gibson; and Al Hamra Group, a company owned by a ruling family in the United Arab Emirates.

A “large percentage” of the round was the credit facility, the company said, but declined to give specifics.

Founded in January 2015, Finova provides loans in exchange for liens on consumers’ cars, which the company calls a “car-equity line of credit,” which resembles a home equity credit line. Its loans are typically $1,500 to $1,700.

Finova charges about 70% less than the industry average, according to Mr. Keough said.

In contrast to typical paper applications, with Finova people can apply on a website or mobile device by providing information about their cars and driver’s licenses and receive decisions quickly, Mr. Keough said. About 65% of customers apply via phones.

The car equity loan is Finova’s first product, and the company intends to launch other products for “unbanked” consumers, as the company describes its target market.

“My investment thesis is: financial services for the rest of us,” said Sheel Mohnot, the partner at 500 Startups who leads the firm’s fintech investments. “There could not be a better fit (than Finova) for working with a population who is unbanked.”

Warburg Pincus Leads $ 220 Million Round for Solar Lender Mosaic, ( Wall Street Journal), Rated : A

Private-equity firm Warburg Pincus is leading a $220 million equity investment in energy-financing startup Solar Mosaic Inc., according to two people familiar with the situation. The company, known as Mosaic, provides loans for solar installations for homeowners. It is starting to finance other energy-efficiency upgrades that are meant to reduce utility bills.

Warburg Pincus will have a slight majority control of Mosaic through its $200 million investment, one person said. Other investors in the round include financial technology venture firm Core Innovation Capital and Obvious Ventures, a firm, co-founded by Ev Williams, that seeks to invest in startups that offer a positive social impact. Andrew Beebe, managing director at Obvious Ventures, has had a long career in solar energy.

Mosaic has said that it plans to originate about $1 billion in residential-solar loans in the coming 12 months. It secured $200 million in credit from DZ Bank as the lead lender earlier this year. NY Green Bank also participated.

The company’s business model is built around allowing people to own their own solar systems. That contrasts against the predominant model of financing residential solar under lease programs in which homeowners rent the solar power their properties generate.

Privately held GreenSky LLC and Spruce Finance Inc., backed by Kleiner Perkins Caufield & Byers, also operate in the category. Earlier Mosaic investors include Spring Ventures, Serious Change, Blue Haven Initiative and Bronze Investments.

Colorado Inquiry Prompts Avant to Rejig Bonds, Kroll Says, (PeerIQ), Rated: AAA

Avant Inc., the online lending marketplace, removed unsecured consumer loans made to Colorado residents from a securitization deal after a state regulator sought information about its lending policies, according to Kroll Bond Rating Agency. Colorado concluded that loans mad to its residents must comply with its lending statutes, even if the debts originate through partner banks in another state, as Avant does in Utah, Kroll said in an Aug. 2 report. Such statutes include usury laws and restrictions on late fees and other charges, Kroll said in its evaluation of an upcoming $200 million securitization to be sold by Avant. “In light of the letters from the Colorado regulator, Avant has removed all loans made to Colorado residents,” Kroll said. Carolyn Blackman Gasbarra, a spokeswoman for Chicago-based Avant, declined via e-mail to comment while the deal is pending. Kroll said Avant is “proactively addressing any regulator concerns.” Sheila Bair, the former head of the Federal Deposit Insurance Corp. and a frequent proponent of tougher regulation, was added to the company’s board earlier this year.

Inside CommonBond’s 401(k) platform for student loan debt, (Tradestreaming), Rated: AAA

In July 2016, student loan platform CommonBond acquired online loan repayment advisor Gradible. The acquisition of Gradible, which uses an algorithm to recommend what the best repayment options are for student loan borrowers, has enabled CommonBond to roll out a new platform that it’s calling the 401(k) for student loans.

The 401(k) platform will enable employers to contribute to their employees student loans just as they contribute to their employees’ retirement. “What the acquisition of Gradible allows us to do is to marry up certain technologies that they’ve built with technologies that we’ve already built to accelerate the platform,” said David Klein, co-founder and CEO of CommonBond.

Gradible’s merger with CommonBond was two years in the works. A personal connection lead CommonBond to partner with the software company, becoming one of the refinance options Gradible offered on its platform. Eventually, CommonBond’s desire to expand its reach together with Gradible’s intention to accelerate its vision led to the merger.

Klein believes that bringing Gradible in-house will enable CommonBond to reach and meaningfully impact every one of the over 40 million Americans saddled with student debt, and to a certain extent this is true. As a student loan reassessment tool, Gradible can help students discover alternative ways to manage their debt, such as income-based repayment and public service loan forgiveness.

But the 401(k) will ultimately serve the “top talent”, who are the most likely to make it out of student debt in the first place.

CommonBond had one company ask it to implement the platform for them, and Klein has also piloted the 401(k) at CommonBond itself – much to its employees’ delight.

While the CommonBond-Gradible marriage can’t fix what’s broken with the student loan industry at large, its 401(k) product is opening up the traditional closed lender-borrower relationship to employers. So far, this threesome has benefited the entire loan ecosystem: lenders are getting repaid faster, employees are happier, and employers are meaningfully participating in their employees’ financial lives.

Online Lenders Have a Tough Job Ahead, (Wall Street Journal), Rated: AAA

LendingClub Corp. and OnDeck Capital Inc. have suffered through growing pains this year.

They each report second-quarter results Monday [Comment: today].

Jefferies closes Lending Club bonds sale, (Financial Times), Rated: A

Comment: our readers are familiar with this information from last week’s Monday Lending Times. I believe a reminder is a good idea though.

Jefferies has closed a private sale of bonds backed by personal loans originated by Lending Club, marking a step in the rehabilitation of the scandal-hit online lender ahead of its second-quarter earnings. Meanwhile, the Jefferies-led deal is “very positive” for the online-lending industry, said James Gutierrez, chief executive of Insikt, a platform that has sold bundles of Lending Club and Prosper loans to wealthy individuals.

Three months on, Jefferies has sold $105m of bonds backed by Lending Club loans, offering yields of 3.75 to 6.5 per cent.

Offers of unsecured personal loans sent out in the mail dropped 19 per cent in the second quarter from the first quarter, to 507m, according to Mintel Comperemedia, a market intelligence agency. All told, the industry has sent out 4.44bn loan offers to consumers over the past two years, peaking at 749m in the fourth quarter last year.

Goldman Sachs, which had been preparing a securitisation of prime loans from Lending Club before the scandal blew up in May, is prepared to bide its time, according to a person briefed on the bank’s plans.

MPOWER Brings on SoFi and Student-Lending Veteran Renee Suryan as Director of University Relations, (PR Web), Rated: A

Comment: Please see the Lending Times article on MPOWER here.

MPOWER Financing is pleased to formally announce the addition of Renee Suryan to its team. With more than 20 years of experience in student lending, including 10 years as a financial aid administrator, she joins MPOWER as Director of University Relations. Currently growing at a rate of 40 percent month-over-month in loan volume, MPOWER projects it will have more than 200 school partnerships and 21 state licenses by the end of 2016.

MPOWER Partners with FUTR to Support Domestic and International Student Loans, (PR Web), Rated: B

MPOWER Financing today announced that it is partnering with FUTR Corporation to provide superior loan servicing and support to MPOWER borrowers.

FUTR is a privately held and venture-backed higher education finance provider headquartered in San Francisco, with an operational hub in Bryan, Texas. FUTR is focused on bringing together modern technology and quality service to provide new levels of transparency and insight that borrowers need to optimally manage their financial future.

The Time To Start Thinking About Repaying Student Loans Is When You Take Them Out, (Forbes), Rated: B

Comment: article written for borrowers. Probably not useful to our readers.

Credible.com is a multi-lender student loan marketplace. One issue that’s underappreciated is that the time to start thinking about repaying your student loans is not when you graduate, but when you take them out.

The 27 fintech unicorns from around the world, ranked by value, (Business Insider), Rated: AAA

Comment: Article would have deserved to be in an international section. However it is only marginally relevant to our readers and we prefer not focus our newsletter on this article. Hence we located it at the end of our US section.

An interesting list. Many of our own industry participants are present. However I had not heard of a few of them. Worth a read.

United Kingdom

VPC Specialty Lending Investments PLC, (VPC Specialty Lending), Rated: AAA

Comment: There is a disclaimer the readers must read and agree to before accessing this article.

In the second quarter of 2016, VPC Speciality Lending Investments PLC (“VSL” or the “Company”) delivered a net return of 0.33%. Although the return wasbelow expectations, it does not reflect what we believe will be the level of long-term returns for our shareholders given our existing portfolio and pipeline. There are several reasons for the decline in short-term performance, which are outlined below along with the steps we are taking to mitigate these factors in the near term.

The decision by U.K. voters to leave the European Union (“EU”) and the subsequent depreciation of the GBP had a negative impact on the Company’s performance as we had to maintain an outsized cash balance related to our currency hedge. Leading up to the EU Referendum, we took a conservative approach to our cash management and credit allocations. A substantial portion of our assets are held in USD and other currencies, which are hedged to GBP via forward currency swaps. The hedging program was put in place when the investments were made following the Company’s March 2015 IPO and September 2015 C share offering. Since then, due to the substantial depreciation of GBP against USD, the Company has had to deposit in cash up to 11.5% of the Company’s NAV. While the direct effect of the currency swings on our income has been limited because our non-GBP exposure is largely hedged, the obligation to settle the hedges upon expiration and the need to maintain additional liquidity in the event the GBP depreciates further has limited our ability to be largely fully invested, as we strive to be. The outlook for the GBP continues to be uncertain – several economists have set target prices for USD/GBP at $1.20 or below with a one-year time horizon – leaving us to remain conservative. We are reviewing all available options to reduce the cash drag related to the margin requirement, including a revolving credit facility for the Company.

The majority of our whole loan portfolio performed in line with our expectations, although certain positions did experience higher than expected losses.

Accordingly, we believe we are now in the period of peak losses for our portfolios (assuming static economic conditions), leading to muted NAV returns in the near term but we expect the returns to even out over the life of the investments.

As previously announced, our portfolio of Funding Circle US loans has continued to substantially underperform our expectations, a trend which continued during the quarter and created a drag on the overall portfolio. We stopped purchasing new Funding Circle US loans late in 2015 so the portfolio continues to amortize down.

We also saw a reduction in the value of three residual interests in securitizations of Avant loans that are held at fair market value.

On a more positive note, our balance sheet loan portfolio continued to show excellent performance with no impairments and coupons ranging from 12% to 16%.

  • On 26 May 2016, the Company made initial investments in West Creek Financial, Inc., a provider of point-of-sale lease-to-own financing to underserved customers enabling purchases of durable goods such as furniture, mattresses, and appliances.
  • On 30 June 2016, the Company made initial investments in Fundbox Ltd., a provider of short-term working capital advances to small and medium-sized businesses in the U.S. and the Company funded a new tranche of senior secured debt to Elevate Credit, Inc. Elevate is a provider of cash advances and installment loans to U.S. consumers.

While cash drag as a result of the currency hedge and the performance of certain whole loan investments were disappointing, we are encouraged by the performance of our existing balance sheet investments as well as the attractive terms of newer deals. In order to further demonstrate our commitment to the Company and our confidence in achieving returns of 8% or greater, we have agreed with the Company’s Board of Directors to modify our management agreement such that we will apply 20% of our monthly management fee to purchase shares of the Company at the prevailing market price on an ongoing basis, whilst the shares are trading at a discount to net asset value.

Understanding of risk remains a central issue for P2P industry, (Alt Fi), Rated: A

Andrew Tyrie, Chairman of the Treasury Select Committee, has written to the outgoing and incoming heads of the FCA – Tracey McDermott and Andrew Bailey respectively.

“Government policies to promote the crowdfunding sector may have the right intention – to increase competition in the small to medium enterprise lending market – but government tax incentives, in effect government subsidies, may be encouraging some consumers into the use of inappropriate products.”

The problem of a perceived lack of understanding of risk by investing consumers has been a common sector theme of late.

Analysis from AltFi Data illustrates that, to date, the lending performance of the largest UK platforms has delivered consistently positive net returns. Zopa, Funding Circle, Ratesetter and MarketInvoice together make up over 65% of the sector’s origination volume and lead the way when it comes to disclosure of their lending track record. 10 years of data representing that track record demonstrates that net returns have remained positive in a range of 5-6.5%. Bad debt performance has also been impressive, coming in at 5% for the worst ever annual cohort i.e. less than 1.7% annualized, and at no worse than 1.66%, i.e. less than 0.55% annualized, over the past 5 years.

Liberum Alt Fi Index. Source: AltFi.com

Assetz Capital Reports: Peer-to-Peer Lending Expected to Thrive As Bank of England Slashes Interest Rates, (Crowdfunding Insider), Rated: A

On Thursday, Assetz Capital one of the UK’s largest peer-to-peer lenders, announced it is predicting that both savers and borrowers will continue to turn to alternative finance companies in increasing numbers as Bank of England slashes interest rates from 0.5% to 0.25%.

Assetz Capital revealed, since launching in 2013, around £130 million has flown through its platform to credit-worthy borrowers, earning investors a total gross interest of more than £12 million to date and this lending is predicted to continue to rise rapidly.

Assetz Capital also predicted the number of business borrowers will also rise as a result of the cut interest rate.

Australia

Fintech B2B small business lending marketplace Bigstone raises million, (Financial Review), Rated: A

Fintech start-up Bigstone has raised $3 million from a range of investors, including ASX-listed diversified investments and venture capital firm CVC, to grow its small business lending marketplace and offer an alternative to the big banks.

Other major investors in the round were the founders of Bangkok-based fund Lighthouse Venture Partners Paniti Junhasavasdikul and Narith Phadungchai, in addition to private investors.

By the end of the year, Bigstone is hoping to have financed $10 million worth of loans to more than 200 small businesses.

A University of Sydney and KPMG study released earlier this year found that Australia’s online alternative finance market grew by 320 per cent in 2015 to $460 million, making it the third largest market in the Asia Pacific behind China and Japan.

Author:

George Popescu

August 8th 2016, Daily News Digest

August 8th 2016, Daily News Digest

News Comments Today’s news pour some cold water on P2P SME lending : SME securitizations and SME yield performance seem to be less than expected. See 1st article in US section and 1st article in UK section. Finova raised $52.5 mil , Mosaic $220 mil. And today’s the day : Lending Club and OnDeck release […]

August 8th 2016, Daily News Digest

News Comments

United States

United Kingdom

Australia

News Summary

United States

Funding Circle, and other online lenders, falter in America, (Financial Times), Rated: AAA

“Our portfolio of Funding Circle US loans has continued to substantially underperform our expectations, a trend which continued during the quarter and created a drag on the overall portfolio. We stopped purchasing new Funding Circle US loans late in 2015 so the portfolio continues to amortize down.” [ Comment: see the complete VPC Q2 2016 letter in the UK section below].

That’s from VPC Specialty Lending (VSL) Investments’ second quarter letter, released earlier this week (mea culpa, we didn’t spot it at first).

VSL’s disclosure forced Funding Circle’s listed fund to issue its own filing to the market yesterday, sort of but not outright rejecting the suggestion that loans were underperforming:

The Company’s US Credit Assets are projected to return in excess of 8% per annum on a net unlevered basis – consistent with historic performance observed on the Funding Circle US marketplace.

But that might be downplaying the historic performance a little. When Funding Circle floated its fund last year, this is the US loan performance it revealed in its November prospectus (note the numbers didn’t include expected future losses and showed the to-date performance at that time):

Sachin Patel, Funding Circle’s global co-head of capital markets, said that loans originated in the first half of 2015 had underperformed and are expected to return 7.25 per cent to its large, accredited investors, rather than the 8 per cent or more that it targets.

Funding Circle launched in the US in late 2013 and is run out of San Francisco by Sam Hodges. According to the 2015 prospectus for Funding Circle’s fund, US loans originated in early 2014 also “experienced higher than expected annualised loss rates”.

Similar missteps were seen in Funding Circle’s first years of operation in the UK too:

But Funding Circle isn’t the only online lender to small businesses in the US that is disappointing investors. According to a Morgan Stanley note last month, a second securitisation of loans originated by OnDeck, which is listed, breached its loss trigger in June:

MPLT 2015-OD3 from OnDeck breached triggers in June, joining the 3 deals we had previously highlighted – MPLT 2015- CB1 (Circleback), MPLT 2015-OD1 (OnDeck) and GLCII 2014-A (Lending Club).

That makes four online lending securitisation deals that have hit their loss trigger, meaning that cashflows are diverted to senior bondholders at the expense of the lower tranche investors. Three of those four deals, as far as we can tell, were arranged by Jefferies.

It’s also worth keeping an eye on securitisations of loans from Avant, a US consumer lender that also gets a dishonourable mention in VSL’s letter (note that Victory Park is an equity investor in Avant):

We also saw a reduction in the value of three residual interests in securitizations of Avant loans that are held at fair market value. These markdowns, which flow through capital, reflect loss curves coming in slightly higher than in the first quarter. While the capital markets have recently begun to re-open for marketplace lending loans, we have no current plans to pursue additional securitizations.

FTC Announces FinTech Forum on Crowdfunding, Peer-to-Peer Payments, (JD Supra Business Advisor), Rated: AAA

The FTC announced it will be hosting the next event in the FinTech Forum series on October 26, 2016.

BNY Mellon sees possible rise of P2P collateral lending, (Global Custodian), Rated: A

Peer-to-peer lending among buy-siders could emerge due to a challenging regulatory environment for sourcing and optimising collateral, according to BNY Mellon.

In the report, BNY Mellon states that institutional investors may also find further opportunities in a peer-to-peer relationship, where buy-side firms are both the collateral provider and receiver.

The report can be found here.

 Income: any Fintech to fill-in the supply shortage?, ( Daily Fintech), Rated: AAA

The world still needs current [Comment: I believe most people use the word fixed instead of current] income for a variety of reasons: wage stagnation, tax overburdening, and the usual cash flows needs that are not at all well managed.

Source: Pension Partners

Challenger banks in the UK have been offering bonds (3yrs or less) to entice customers to sign up on their platforms.

Source: Daily Finance

There are two Alternative finance options that can generate income, much like high yield bonds or publicly traded REITS have been doing in normal conditions.

Investors in the UK can invest in the LE listed

Finova Financial Raises $ 52.5 M First Round For Car Equity Loans, (Wall Street Journal), Rated: A

Finova Financial has raised $52.5 million in its first institutional funding—much of it in the form of debt—for its consumer lending service that provides car owners with a line of credit.

The funding was led by MHS Capital, with participation from Refactor Capital; CoVenture; Metamorphic Ventures; 500 Startups; Funding Circle co-founder Sam Hodges; NerdWallet co-founder Jake Gibson; and Al Hamra Group, a company owned by a ruling family in the United Arab Emirates.

A “large percentage” of the round was the credit facility, the company said, but declined to give specifics.

Founded in January 2015, Finova provides loans in exchange for liens on consumers’ cars, which the company calls a “car-equity line of credit,” which resembles a home equity credit line. Its loans are typically $1,500 to $1,700.

Finova charges about 70% less than the industry average, according to Mr. Keough said.

In contrast to typical paper applications, with Finova people can apply on a website or mobile device by providing information about their cars and driver’s licenses and receive decisions quickly, Mr. Keough said. About 65% of customers apply via phones.

The car equity loan is Finova’s first product, and the company intends to launch other products for “unbanked” consumers, as the company describes its target market.

“My investment thesis is: financial services for the rest of us,” said Sheel Mohnot, the partner at 500 Startups who leads the firm’s fintech investments. “There could not be a better fit (than Finova) for working with a population who is unbanked.”

Warburg Pincus Leads $ 220 Million Round for Solar Lender Mosaic, ( Wall Street Journal), Rated : A

Private-equity firm Warburg Pincus is leading a $220 million equity investment in energy-financing startup Solar Mosaic Inc., according to two people familiar with the situation. The company, known as Mosaic, provides loans for solar installations for homeowners. It is starting to finance other energy-efficiency upgrades that are meant to reduce utility bills.

Warburg Pincus will have a slight majority control of Mosaic through its $200 million investment, one person said. Other investors in the round include financial technology venture firm Core Innovation Capital and Obvious Ventures, a firm, co-founded by Ev Williams, that seeks to invest in startups that offer a positive social impact. Andrew Beebe, managing director at Obvious Ventures, has had a long career in solar energy.

Mosaic has said that it plans to originate about $1 billion in residential-solar loans in the coming 12 months. It secured $200 million in credit from DZ Bank as the lead lender earlier this year. NY Green Bank also participated.

The company’s business model is built around allowing people to own their own solar systems. That contrasts against the predominant model of financing residential solar under lease programs in which homeowners rent the solar power their properties generate.

Privately held GreenSky LLC and Spruce Finance Inc., backed by Kleiner Perkins Caufield & Byers, also operate in the category. Earlier Mosaic investors include Spring Ventures, Serious Change, Blue Haven Initiative and Bronze Investments.

Colorado Inquiry Prompts Avant to Rejig Bonds, Kroll Says, (PeerIQ), Rated: AAA

Avant Inc., the online lending marketplace, removed unsecured consumer loans made to Colorado residents from a securitization deal after a state regulator sought information about its lending policies, according to Kroll Bond Rating Agency. Colorado concluded that loans mad to its residents must comply with its lending statutes, even if the debts originate through partner banks in another state, as Avant does in Utah, Kroll said in an Aug. 2 report. Such statutes include usury laws and restrictions on late fees and other charges, Kroll said in its evaluation of an upcoming $200 million securitization to be sold by Avant. “In light of the letters from the Colorado regulator, Avant has removed all loans made to Colorado residents,” Kroll said. Carolyn Blackman Gasbarra, a spokeswoman for Chicago-based Avant, declined via e-mail to comment while the deal is pending. Kroll said Avant is “proactively addressing any regulator concerns.” Sheila Bair, the former head of the Federal Deposit Insurance Corp. and a frequent proponent of tougher regulation, was added to the company’s board earlier this year.

Inside CommonBond’s 401(k) platform for student loan debt, (Tradestreaming), Rated: AAA

In July 2016, student loan platform CommonBond acquired online loan repayment advisor Gradible. The acquisition of Gradible, which uses an algorithm to recommend what the best repayment options are for student loan borrowers, has enabled CommonBond to roll out a new platform that it’s calling the 401(k) for student loans.

The 401(k) platform will enable employers to contribute to their employees student loans just as they contribute to their employees’ retirement. “What the acquisition of Gradible allows us to do is to marry up certain technologies that they’ve built with technologies that we’ve already built to accelerate the platform,” said David Klein, co-founder and CEO of CommonBond.

Gradible’s merger with CommonBond was two years in the works. A personal connection lead CommonBond to partner with the software company, becoming one of the refinance options Gradible offered on its platform. Eventually, CommonBond’s desire to expand its reach together with Gradible’s intention to accelerate its vision led to the merger.

Klein believes that bringing Gradible in-house will enable CommonBond to reach and meaningfully impact every one of the over 40 million Americans saddled with student debt, and to a certain extent this is true. As a student loan reassessment tool, Gradible can help students discover alternative ways to manage their debt, such as income-based repayment and public service loan forgiveness.

But the 401(k) will ultimately serve the “top talent”, who are the most likely to make it out of student debt in the first place.

CommonBond had one company ask it to implement the platform for them, and Klein has also piloted the 401(k) at CommonBond itself – much to its employees’ delight.

While the CommonBond-Gradible marriage can’t fix what’s broken with the student loan industry at large, its 401(k) product is opening up the traditional closed lender-borrower relationship to employers. So far, this threesome has benefited the entire loan ecosystem: lenders are getting repaid faster, employees are happier, and employers are meaningfully participating in their employees’ financial lives.

Online Lenders Have a Tough Job Ahead, (Wall Street Journal), Rated: AAA

LendingClub Corp. and OnDeck Capital Inc. have suffered through growing pains this year.

They each report second-quarter results Monday [Comment: today].

Jefferies closes Lending Club bonds sale, (Financial Times), Rated: A

Comment: our readers are familiar with this information from last week’s Monday Lending Times. I believe a reminder is a good idea though.

Jefferies has closed a private sale of bonds backed by personal loans originated by Lending Club, marking a step in the rehabilitation of the scandal-hit online lender ahead of its second-quarter earnings. Meanwhile, the Jefferies-led deal is “very positive” for the online-lending industry, said James Gutierrez, chief executive of Insikt, a platform that has sold bundles of Lending Club and Prosper loans to wealthy individuals.

Three months on, Jefferies has sold $105m of bonds backed by Lending Club loans, offering yields of 3.75 to 6.5 per cent.

Offers of unsecured personal loans sent out in the mail dropped 19 per cent in the second quarter from the first quarter, to 507m, according to Mintel Comperemedia, a market intelligence agency. All told, the industry has sent out 4.44bn loan offers to consumers over the past two years, peaking at 749m in the fourth quarter last year.

Goldman Sachs, which had been preparing a securitisation of prime loans from Lending Club before the scandal blew up in May, is prepared to bide its time, according to a person briefed on the bank’s plans.

MPOWER Brings on SoFi and Student-Lending Veteran Renee Suryan as Director of University Relations, (PR Web), Rated: A

Comment: Please see the Lending Times article on MPOWER here.

MPOWER Financing is pleased to formally announce the addition of Renee Suryan to its team. With more than 20 years of experience in student lending, including 10 years as a financial aid administrator, she joins MPOWER as Director of University Relations. Currently growing at a rate of 40 percent month-over-month in loan volume, MPOWER projects it will have more than 200 school partnerships and 21 state licenses by the end of 2016.

MPOWER Partners with FUTR to Support Domestic and International Student Loans, (PR Web), Rated: B

MPOWER Financing today announced that it is partnering with FUTR Corporation to provide superior loan servicing and support to MPOWER borrowers.

FUTR is a privately held and venture-backed higher education finance provider headquartered in San Francisco, with an operational hub in Bryan, Texas. FUTR is focused on bringing together modern technology and quality service to provide new levels of transparency and insight that borrowers need to optimally manage their financial future.

The Time To Start Thinking About Repaying Student Loans Is When You Take Them Out, (Forbes), Rated: B

Comment: article written for borrowers. Probably not useful to our readers.

Credible.com is a multi-lender student loan marketplace. One issue that’s underappreciated is that the time to start thinking about repaying your student loans is not when you graduate, but when you take them out.

The 27 fintech unicorns from around the world, ranked by value, (Business Insider), Rated: AAA

Comment: Article would have deserved to be in an international section. However it is only marginally relevant to our readers and we prefer not focus our newsletter on this article. Hence we located it at the end of our US section.

An interesting list. Many of our own industry participants are present. However I had not heard of a few of them. Worth a read.

United Kingdom

VPC Specialty Lending Investments PLC, (VPC Specialty Lending), Rated: AAA

Comment: There is a disclaimer the readers must read and agree to before accessing this article.

In the second quarter of 2016, VPC Speciality Lending Investments PLC (“VSL” or the “Company”) delivered a net return of 0.33%. Although the return wasbelow expectations, it does not reflect what we believe will be the level of long-term returns for our shareholders given our existing portfolio and pipeline. There are several reasons for the decline in short-term performance, which are outlined below along with the steps we are taking to mitigate these factors in the near term.

The decision by U.K. voters to leave the European Union (“EU”) and the subsequent depreciation of the GBP had a negative impact on the Company’s performance as we had to maintain an outsized cash balance related to our currency hedge. Leading up to the EU Referendum, we took a conservative approach to our cash management and credit allocations. A substantial portion of our assets are held in USD and other currencies, which are hedged to GBP via forward currency swaps. The hedging program was put in place when the investments were made following the Company’s March 2015 IPO and September 2015 C share offering. Since then, due to the substantial depreciation of GBP against USD, the Company has had to deposit in cash up to 11.5% of the Company’s NAV. While the direct effect of the currency swings on our income has been limited because our non-GBP exposure is largely hedged, the obligation to settle the hedges upon expiration and the need to maintain additional liquidity in the event the GBP depreciates further has limited our ability to be largely fully invested, as we strive to be. The outlook for the GBP continues to be uncertain – several economists have set target prices for USD/GBP at $1.20 or below with a one-year time horizon – leaving us to remain conservative. We are reviewing all available options to reduce the cash drag related to the margin requirement, including a revolving credit facility for the Company.

The majority of our whole loan portfolio performed in line with our expectations, although certain positions did experience higher than expected losses.

Accordingly, we believe we are now in the period of peak losses for our portfolios (assuming static economic conditions), leading to muted NAV returns in the near term but we expect the returns to even out over the life of the investments.

As previously announced, our portfolio of Funding Circle US loans has continued to substantially underperform our expectations, a trend which continued during the quarter and created a drag on the overall portfolio. We stopped purchasing new Funding Circle US loans late in 2015 so the portfolio continues to amortize down.

We also saw a reduction in the value of three residual interests in securitizations of Avant loans that are held at fair market value.

On a more positive note, our balance sheet loan portfolio continued to show excellent performance with no impairments and coupons ranging from 12% to 16%.

  • On 26 May 2016, the Company made initial investments in West Creek Financial, Inc., a provider of point-of-sale lease-to-own financing to underserved customers enabling purchases of durable goods such as furniture, mattresses, and appliances.
  • On 30 June 2016, the Company made initial investments in Fundbox Ltd., a provider of short-term working capital advances to small and medium-sized businesses in the U.S. and the Company funded a new tranche of senior secured debt to Elevate Credit, Inc. Elevate is a provider of cash advances and installment loans to U.S. consumers.

While cash drag as a result of the currency hedge and the performance of certain whole loan investments were disappointing, we are encouraged by the performance of our existing balance sheet investments as well as the attractive terms of newer deals. In order to further demonstrate our commitment to the Company and our confidence in achieving returns of 8% or greater, we have agreed with the Company’s Board of Directors to modify our management agreement such that we will apply 20% of our monthly management fee to purchase shares of the Company at the prevailing market price on an ongoing basis, whilst the shares are trading at a discount to net asset value.

Understanding of risk remains a central issue for P2P industry, (Alt Fi), Rated: A

Andrew Tyrie, Chairman of the Treasury Select Committee, has written to the outgoing and incoming heads of the FCA – Tracey McDermott and Andrew Bailey respectively.

“Government policies to promote the crowdfunding sector may have the right intention – to increase competition in the small to medium enterprise lending market – but government tax incentives, in effect government subsidies, may be encouraging some consumers into the use of inappropriate products.”

The problem of a perceived lack of understanding of risk by investing consumers has been a common sector theme of late.

Analysis from AltFi Data illustrates that, to date, the lending performance of the largest UK platforms has delivered consistently positive net returns. Zopa, Funding Circle, Ratesetter and MarketInvoice together make up over 65% of the sector’s origination volume and lead the way when it comes to disclosure of their lending track record. 10 years of data representing that track record demonstrates that net returns have remained positive in a range of 5-6.5%. Bad debt performance has also been impressive, coming in at 5% for the worst ever annual cohort i.e. less than 1.7% annualized, and at no worse than 1.66%, i.e. less than 0.55% annualized, over the past 5 years.

Liberum Alt Fi Index. Source: AltFi.com

Assetz Capital Reports: Peer-to-Peer Lending Expected to Thrive As Bank of England Slashes Interest Rates, (Crowdfunding Insider), Rated: A

On Thursday, Assetz Capital one of the UK’s largest peer-to-peer lenders, announced it is predicting that both savers and borrowers will continue to turn to alternative finance companies in increasing numbers as Bank of England slashes interest rates from 0.5% to 0.25%.

Assetz Capital revealed, since launching in 2013, around £130 million has flown through its platform to credit-worthy borrowers, earning investors a total gross interest of more than £12 million to date and this lending is predicted to continue to rise rapidly.

Assetz Capital also predicted the number of business borrowers will also rise as a result of the cut interest rate.

Australia

Fintech B2B small business lending marketplace Bigstone raises million, (Financial Review), Rated: A

Fintech start-up Bigstone has raised $3 million from a range of investors, including ASX-listed diversified investments and venture capital firm CVC, to grow its small business lending marketplace and offer an alternative to the big banks.

Other major investors in the round were the founders of Bangkok-based fund Lighthouse Venture Partners Paniti Junhasavasdikul and Narith Phadungchai, in addition to private investors.

By the end of the year, Bigstone is hoping to have financed $10 million worth of loans to more than 200 small businesses.

A University of Sydney and KPMG study released earlier this year found that Australia’s online alternative finance market grew by 320 per cent in 2015 to $460 million, making it the third largest market in the Asia Pacific behind China and Japan.

Author:

George Popescu