Zopa, the first marketplace lender in the world, was born in the UK in 2005. In the next couple of years, two of the biggest economies in the world–United States (Prosper in 2006) and China (Paipaidai in 2007)–opened the gates to marketplace lending (MPL). However, it wasn’t until the 2008 financial crisis when alternate lending gained […]
Zopa, the first marketplace lender in the world, was born in the UK in 2005. In the next couple of years, two of the biggest economies in the world–United States (Prosper in 2006) and China (Paipaidai in 2007)–opened the gates to marketplace lending (MPL). However, it wasn’t until the 2008 financial crisis when alternate lending gained real momentum.
MPL is expected to reach USD $350 billion by 2025, and the market is expected to grow at a prodigious CAGR of 48.2% between 2016 and 2024, but this amazing innovation has been concentrated in the developed world with its well-developed credit scoring system FICO. The developing world has not been able to participate due to lack of credit scores, minimal banking history, and small ticket loans, which made client acquisition tricky.
Pioneering fintech startups have been able to leverage your everyday smartphone to solve the developing market conundrum. Smartphones have taken over our lives and therefore data and information produced by each smartphone serves as an important piece of the jigsaw puzzle in understanding an individual’s habits. In the bigger scheme of things, MPL uses that information to develop products that help in addressing customers’ financial needs.
The expertise in using smartphones for generating credit data coupled with the ability to provide loans in the remotest location without requiring any physical banking infrastructure is changing the entire financial ecosystem in many developing countries. The ability of data scientists at these startups to utilize information from smartphones and other tech devices in a meaningful way has helped in halting the over reliance on FICO and similar credit scores.
Below are some indicators which can be collected from smartphones to analyze credit worthiness:
These startups use innovative algorithms to understand the individual, and based on that, determine their risk profile. For instance, the InVentures algorithm says people who call after the rate drops during a certain time of the day are low-risk borrowers. Many other such start-ups like Affirm, LendUp, and Zest Finance are using algorithms based on social media usage and online behavior. According to a report by Omidyar Network, around 580 million people without credit scores will benefit from such app-based lending.
The above charts show that smartphone usage and internet penetration are exploding across the world. Case in point: In India, there were 220 million (18% of the population) smartphone users in 2016, and that is expected to reach 340 million (28%) in 2017. Focus on digitization as well as growing smartphone penetration offers a unique opportunity to lenders to tap into phone and other utility payments databases for disbursing loans and evaluating credit worthiness.
Features provided by smartphone lending apps these days, which are key for marketplace lending, include:
Optimized app for low-cost phones
Streamline and simplified registration process while completing KYC requirements
User-friendly user interface, which provides delightful customer experience
Provision to upload document via smartphone and checking eligibility of loan in a few clicks
Better rates and faster decisions on loans compared to banks
Secure and Confidential
Since companies use high-end predictive analysis tools to analyze data, need for credit bureau information is not necessary
Once approved, funds are issued immediately and user can track the status instantaneously
Impact and Security Threat of Smartphone Penetration
Privacy experts might be incensed with the ability of lenders to scroll through a person’s smartphone and social media feeds, but upliftment from poverty will always be more important for a family in Nigeria as compared to outrage over what a lender can access on a borrower through Facebook. Also, lenders only look at metadata and have obviously no interest in status updates.
Since companies have almost complete access to user data, this also poses a security threat. Many countries have passed regulations to protect consumer interest, but there is a long way to go. Some of the key regulations are:
Bringing all providers of digital credit under a regulatory framework thus creating a level playing field
Mandating that individual data collected by lenders are subject to privacy laws
Requesting that lenders institute measures to prevent customer over-indebtedness, be it through more flexible repayment terms or more extensive verification and credit checks
Requiring that T&C be simplified and better communicated; for example, using summary displays before customers accept the loan and after loan disbursement accessible within the app, rather than by following a link away from the session.
How the Smartphone is a Game Changer
In China, fintech companies serve the same number of clients as major banks, and much of the credit goes to smart phones. India is also experiencing a fintech boom and now is the world’s third largest market for smartphones, with more than 300 million people expected to access the Internet via smartphones by 2017.
Many new platforms like M-Pesa and PAYTM provide a way to load cash on smartphones, and can be used to transfer or make payments bypassing legacy banking infrastructure. Fintech lenders are thus entering a golden period where digital money is the norm, and even citizens of third-world countries will be able to access credit and other financial products through their smartphones.
News Comments A lot of news today, and today we have an especially good international section. Please do pay attention to the Australian, Singapore and China sections in particular. (And Lending Times technical team reports that yes, Mailchimp has not answered any of the multiple requests for support from a paying client in 17 hours. […]
A lot of news today, and today we have an especially good international section. Please do pay attention to the Australian, Singapore and China sections in particular.
(And Lending Times technical team reports that yes, Mailchimp has not answered any of the multiple requests for support from a paying client in 17 hours. We will send today’s newsletter by hand again using the older design template.)
Peter Thiel invest in €15 million round in Deposit Solutions GmbH, a fast growing fintech innovator operating in the €9 trillion market for retail deposits in Europe. An interesting article on our recent articles about “deposit tech” startups for banking, a source of partners and perhaps capital for the real money making side, lending.
As we previously shared Deal4Loans, owned by Mywish, raised $15m. The interesting part is that Mywish Marketplaces was profitable from day 1, but raised the funds to expand into more verticals with new financing products for Indian consumers.
The marketplace lending market has received an influx of positive news recently, (Peer IQ), Rated: AAA
The WSJ reports that Moody’s removed Class C mezzanine bonds issued by CHAI 2015-PM1, 2015-PM2, and 2015-PM3 from downgrade review and confirmed Ba3 rating.
At the time of downgrade review in February, Moody’s cited a faster build-up of delinquencies and charge-offs than expected. Moody’s also increased the expected cumulative lifetime net loss from 8% to 12% (bringing revised estimates in-line with platform and market expectations).
As of the June 15, 2016 distribution date, losses on the CHAI 2015-PM1, 2015-PM2 and 2015-PM3 pools have reached 3.6%, 1.5% and 0.5%, respectively.
Improvement in Credit Spread on MPL ABS bonds
The ratings action was presaged by the ABS market which showed spread tightening from 1000 to 400 bps. Readers may seek to review the May month-end newsletter to see the analysis cited in the WSJ report:
Leading up to the CHAI 2016 PM-1 offering in April, the culmination of ratings actions, regulatory chatter, delinquency fears, and volatile credit markets created an inhospitable environment for new deals. The auction resulted in limited participation and wide initial pricing–10.26% coupon priced to 12.5% yield on the CHAI 2016 PMI-1 C tranche.
Investors that bought the CHAI C tranche at new issuance without any leverage would have seen about 15% price appreciation in 3 months. Investors that performed the up-front credit work and applied analytics to separate the signal from headlines were able to earn outsized returns.
Dislocation creates opportunity
Ironically, the dislocation in recent months has created substantial investor interest in MPL ABS and whole loans. The CHAI 2016-1 PM1 offering prompted investors that were historically dismissive of marketplace lending to do a double-take
Repeat ABS investors are now looking upstream to capture additional whole loan economics.
Large asset managers with double-digit return objectives in a negative to low rate world are looking to strike bargains with platforms. There is still much more to be done. Nevertheless, the climate for establishing relationships with platforms may be as good as ever.
So far, LendingClub loans haven’t changed in average interest rate or risk, either in the 2nd Circuit or nationwide.
Both the total number and value of loans and the amounts arranged through the company have only grown, not diminished, while average FICO scores measuring a borrower’s credit rating remain consistent, and internal loan grades have remained the same. One exception is that the average value of borrowers’ previously requested FICO score did increase steadily since the decision, even though FICO scores at the time of loan issuance did not.
LendingClub has also continued to arrange loans to borrowers in the 2nd Circuit that surpass the interest rate caps in those states. The Madden decision does not prevent national banks from providing loans above a state’s interest rate cap. Instead, it applies to debt collection agencies that purchase those loans.
As a result of the court’s decision, LendingClub in February renegotiated terms with WebBank—the Utah bank that originates all of the loans through the online service (40 BBD, 3/1/16)
Under the new arrangement, WebBank maintains ongoing accounts for the borrowers and receives regular payments from LendingClub—called “loan-trailing fees”—rather than a single lump sum fee on every loan it originates. The loan trailing fee is based on the total amount serviced by the bank and a “loan fee factor.” A LendingClub representative told Bloomberg BNA that the company does not publicly disclose the amount of the loan fee agreement with WebBank.
Different picture for Prosper
Representative for Prosper attributed any changes in lending to general market fluctuations but would not comment further for this story.
A 2009 paper from the Federal Reserve Bank of Atlanta said that loans sold into the secondary market through originate-to-distribute underperformed other loans by 9 percent. A 2010 academic paper funded by the FDIC’s Center for Financial Research also implicated the originate-to-distribute model in the subprime crisis.
Author and University of Michigan Finance Professor Amiyatosh Purnanandam told Bloomberg BNA that part of the problem with the originate-to-distribute model is that once the debt is sold, the originating bank has nothing at risk and the debt buyers don’t always have the skill in evaluating good borrowers as national banks do.
Comment: We covered these news last week as well. At that time it was more of rumor. It seems it’s real news now.
Jefferies has revived its stalled Lending Club loan securitization in a club-style deal it has begun to pre-market to only a few select investors, two buyside sources with knowledge of the trade told IFR.
The bank is now looking to sell a two-tranche trade that could offer yields in the 4.25%-7% range, one of the investors said.
The top class of notes of slightly less than one-year were about 60% subscribed, while a longer 2-year tranche was already fully covered, the investor said.
The near-prime loan securitization was shelved after Lending Club said it had repurchased a US$22m pool of loans sold to Jefferies under Laplanche’s watch that included falsified documentation.
Goldman Sachs also hit pause on its potential bond sale of prime Lending Club loans.
But bankers told IFR that Goldman could now look to revive its bond deal, if the Jefferies trade finds favor with investors.
According to the Wall Street Journal, more than 20,000 new customers have opened internet bank accounts with the Goldman unit since it launched three months ago. Unlike other Internet-only retail banks that tend to offer a wide range of services, Goldman’s products are geared towards long-term savings, and it solely offers its customers the option to open traditional savings and certificate of deposit (CD) accounts. As of July 20, 2016, the bank’s interest rate on online savings accounts was 1.05% while its interest rate on a 5-year CD was 1.85%. In many cases, these rates are a lot higher than what traditional banks pay their customers. For example, Wells Fargo (WFC), Citibank (C), Bank of America (BAC) and Chase (JPM) all pay less than 0.03% APY on regular savings accounts. GS Bank can offer above-average interest rates to its depositors because they do not have the overhead expenses of a typical brick and mortar bank. (See also, The Pros And Cons Of Internet Banks.)
For Goldman Sachs, savings accounts may not be as exciting as the main investment banking business. Yet, the company still benefits from expanding into retail banking, enabling Goldman Sachs to diversify its customer base and tap into a segment of the market, retail investors, that they have been unable to serve in the past. GS Bank will also help boost Goldman’s overall liquidity, and keep the company compliant with new regulations calling for more liquidity from financial institutions. Around the same time GS Bank was launched, the Federal Deposit Insurance Corporation (FDIC) proposed new rules that would require banks to own sufficient ‘‘easy-to-sell’’ assets that would be able to cover any and all liabilities coming due within a one year period. (See also: The History Of The FDIC.)
Comment: we covered this yesterday as head news. However it is so important that we would like to remind our readers just in case.
“I suspect more regulation will come to the space, and I think that will suit us well,” said PayPal VP and General Manager of Small Business Lending Darrell Esch in an interview with Forbes last year.
When asked by PYMNTS whether he was concerned about incoming regulation on the space, OnDeck Vice President of External Affairs and Associate General Counsel Daniel Gorfine simply stated, “No, not concerned.”
Reports from Bloomberg BNA this week, however, could signal a shift in how alternative lending players are reacting to the incoming threat of regulation.
“Strong evidence indicates that small business loans under $100,000 share common characteristics with consumer loans yet do not enjoy the same consumer protections,” the Treasury stated in its May report. “Treasury is willing to work with members of Congress to consider legislation that addresses both oversight and borrower protections.”
“I would have to do everything differently,” said CAN Capital Chief Legal Officer Parris Sanz in an interview with the publication. “I can’t give you a rundown of all the various moving parts that would be affected, but I can tell you for sure that it would be significant.”
In a separate interview with Bloomberg BNA, Richard Eckman, a partner at Delaware-based Pepper Hamilton LLP, said alternative lenders are probably wise to pay attention to this possibility.
Large scale financial services firms are still ripe for disruption, according to the economist John Kay, who believes the City of London and other major financial centres have taken a wrong turn.
Kay explains that he sees four main ways that fintech can be successful and help the real economy by disrupting financial services.
These are firstly; the payments system This is the system that enables the payment of wages and salaries as well as bills. Secondly; capital allocation. This how peoples’ savings become invested in the physical assets and infrastructure of a country. Risk management is third, i.e mitigating the risks of everyday life such as insurance. Lastly is wealth management in a broader sense.
Technology will take over a lot this spectrum and he argues wealth management “is an area of major disruption”, encompassing P2P lending/investing, robo-advice and other discretionary investment services. However, he says payments is the one that will most clearly disrupt things and change our lives. He thinks cash will “seem crazy” in 20 years’ time.
Kay has a sizeable investment in online investment management firm Nutmeg, however, which is one of the dominant players seeking to disrupt the fund management and wealth management industries although they have yet to announce a P2P/market place lending function.
Prominent venture capital firms today announce they have invested €15 million in European fintech company Deposit Solutions GmbH, a fast growing fintech innovator operating in the €9 trillion market for retail deposits in Europe.
The key highlights include: PayPal co-founder and Facebook’s first outside investor, Peter Thiel, and German leading fintech investor FinLab jointly increase their share in the company US investor Greycroft Partners, the global growth fund of e.ventures as well as Valar Ventures come on board as three new partners The funding round increases the valuation of Deposit Solutions to €110 million. This is the second successful investment round for Deposit Solutions within a year, following last year´s investment into the Company of €6.5 million. Since then the valuation of the company more than quadrupled. The funds raised will be used to further develop the proprietary technology platform and continue Deposit Solutions´ international expansion, having already recently expanded to the UK and Switzerland. Deposit Solutions will increase the number of employees at its UK HQ in the City of London and is expected to launch its retail platform in the UK in 2017.
“We are seeing substantial demand from banks looking to offer their clients attractive deposit products under the existing account relationship. As a result we have gained access to millions of clients and billions of deposit appetite in a very short amount of time. This in turn is very attractive to banks wanting to raise deposits through our platform.”
Max von Bismarck, Chief Business Officer and Managing Director of Deposit Solutions, said: “We address an important structural problem in European banking today for banks and retail customers: Many banks are unable to offer attractive interest rates to their clients. At the same time other banks find it difficult and costly to gain access to retail deposit funding. Our platform provides a solution for both while savers find it easier to get access to better rates.”
Debt-based crowdfunding platform ECrowd! is one of the first Spanish sites to receive a formal operating license from the Comision del Mercado de Valores (CNMV), the securities regulatory agency in Spain. ECrowd!, based in Barcelona, has joined Crowdcube Spain, Lendix and MyTripleA in receiving official approval as a Collaborative Finance Platform under regulations enacted in 2015.
They were on track to achieve 100% growth during 2016. [Comment: Some authors have issues with important verb tenses, it is unclear if the author meant they are or they were.]
In Switzerland significant growth in Crowdlending was achieved in the previous year. The Crowdfunding monitoring report 2016 published by theUniversity of Applied Sciences Luzern early this year reported a significant increase in the total amount of money raised through Crowdlending in the year 2015. A total sum of CHF 7.9 Million was collected through crowdlending with a growth rate of +126%. 266 campaigns were financed. Crowdlending has continued to become more popular not only among start-ups but also among investors.
The crowdlending market in Switzerland is booming and has opened new opportunities for entrepreneurs. New startups operating crowdlending platforms are been established and many projects have been successfully financed. Today, there are 7 crowdlending platforms: the pioneer Cashare for both SMEs and private ventures, CreditGate24 for private and institutional investors, creditworld for both private and on SME loan, Lend, splendid that is specifically focusing on education loans,swisspeers for SMEs and Wecan.fund for SMEs. Other platforms – such as Miteinander-Erfolgreich and Raizers – also operate alongside other models as crowdlending platforms.
This isn’t a huge round compared to what other companies have closed, but it is entirely strategic. The capital was proved by Franklin Templeton, the U.S. banking giant with more than $700 billion in assets under management. Puru Vashishtha, who is board director at Mywish Marketplaces, told me in an interview that the company didn’t need to raise the funds and it wasn’t short of interest, but it did so for growth opportunities and was very deliberate with the capital that it did close.
“We were chased by a lot of venture capitalists and investors globally,” Vashishtha said. “Because we were profitable, we did not need to raise a lot and didn’t want to dilute too much too soon — that’s one of the reasons we chose Franklin Templeton. Also, Franklin Templeton has built a very big emerging market business, we want to leverage the experience and leadership of their team.”
To backtrack a little, Mywish Marketplaces operates Deal4Loans, a price comparison and loan aggregation website in India. Its products include credit cards, home loans, business loans and personal loans.
Like Credit Karma in the U.S. and countless others worldwide, it works with banks, credit card companies and other financial institutes to help drive customers, while for its users, it tries to provide a holistic look at financing option and which one suits best for each case. The Deal4Loans site claims to have served more than 6.3 million “satisfied” customers, while the company says it has dispersed a total of $2 billion loans in the last six years at a current rate of $400-$450 million per year.
So why is this profitable company — profitable from day one, it claims — raising money?
I hinted at it earlier, but Mywish Marketplaces wants to expand into more verticals with new financing products for Indian consumers.
India’s largest peer- to- peer (P2P) lending marketplace, Faircent.com, on Wednesday announced the appointment of Shivam Gupta, who was a part of the global risk management team of Standard Chartered Bank based in Singapore, as chief risk officer and Karun Thareja, who was a part of the leadership at an analytics startup called WyzMindz, as head of marketing.
Thareja, on the other hand has extensive experience in Marketing, Sales and Business Management spanning more than 20 years. His domain expertise includes Analytics, Enterprise Systems, Contact Center Management and Process Management. In his prior roles he has led multi-fold growth in business units at companies like IBM, Microsoft, Oracle, Dassault Systems and NIIT.
Online peer-to-peer funding platform Validus Capital has partnered home-grown insurance provider EQ Insurance to offer investor protection on some of the financing it provides to small and medium-sized enterprises (SMEs).
It will be the first platform in Singapore to provide investor insurance on its invoice financing services, the company said.
The platform, which was founded last year, has had a zero-per-cent default rate to date thanks to its “rigorous due diligence”, the company said. In the last few months, the company has had 27 SMEs approved for invoice financing services, each with an average revenue of $5 million.
Mr Prakash Somosundram, co-founder of Pealo – an aggregated marketplace for SMEs to access working capital – said the firm is looking into investor protection products. “This will definitely help us to attract more investors, and more people will see this form of investing as an asset class,” he added.
Pealo’s platform was launched in January – 300 SMEs have signed up and there are 46 live campaigns under way.
Mr Brian Teng, chief executive of InvoiceInterchange – which allows SMEs to put up their unpaid invoices for auction – also said the platform hopes to eventually make insurance available to investors.
Mr Teng declined to reveal how many SMEs have used the platform, but said there is significant room for invoice financing to grow as a source of funds for SMEs here.
“The penetration rate of invoice financing in Singapore is still low when compared with nations like Britain and the United States,” he noted. The company has funded $4 million of invoices since its launch in 2015.
Mr Roger Crook, chief executive of Capital Springboard – which runs a crowdfunding platform for invoice financing – said more than 100 SMEs have used the service.
The platform has funded over $85 million worth of invoices over the past year, with over 50 accredited and institutional investors taking part.
HashChing, an online home loan marketplace, has surpassed $1 billion of home loans as momentum builds for the Sydney fintech company. The platform officially launched in August 2015 with just a few brokers on board across Australia. Now, more than a billion dollars’ worth of loans have been received and more than 1,200 mortgage brokers across the country have signed up. The platform works as an online marketplace connecting consumers to mortgage brokers.
“Customers aren’t just looking to save time. The key to our success is that our offer extends far beyond convenience. We’re able to offer pre-negotiated home loan deals from different lenders with equal features, the same products, but with an even better rate,” Sodhi, co-founder and CEO said.
Narang, co-founder and CIO added: “Our broker registration process has been automated to make it really easy and quick by allowing them to digitally sign the contract which instantly activates their account and saves the paper clutter at both ends.”
As the platform continues to build momentum, Sodhi and Narang have welcomed Claire Wivell Plater of The Fold Legal to their advisory board. Wivell Plater is a long standing member of the Business Advisory Committee to ASIC’s Licensing Division and was recently appointed to the Treasurer’s Fintech Advisory Group.
Narang explains HashChing 2.0 will involve more intelligent use of analytics for a better consumer experience.
Chinese search giant Baidu is investing more deeply in financial technology startups as it seeks to expand its own lending efforts.
On Monday, Baidu announced an investment in ZestFinance, a startup taking on the credit scoring industry by using machine learning and a wide variety of data about borrowers to rate their ability to repay loans.
While the amount of the backing was not disclosed, Baidu also invested Bitcoin payments startup Circle Internet Financial last month, the Nikkei Asian Review reported on Wednesday.
Both investments followed Baidu’s decision last year to form an online bank in partnership with Citic Group’s banking unit. The new bank would be the first in China that “truly understands both the Internet and financial services,” Baidu CEO Robin Li said at the time.
Baidu had also made several notable hires from the finance sector, the Nikkei paper reported, including executives with experience from American Express , online financial marketplace Lufax, and Everbright Bank in China.
While online lending sites like Lending Club LC -0.22% have faltered in the United States, the market is strong in China. The peer-to-peer lending market reached almost $67 billion last year, the largest in the world, Nikkei reported citing data from Citigroup.
Baidu will use ZestFinance’s credit rating technology to assess the creditworthiness of its own users. Unlike the U.S., China lacks centralized credit bureaus, and only a small portion of the population has a credit card.
News Comments Dear readers, today I was traveling all day for my other company Lampix (www.lampix.co) . Unless I am traveling, I aim to send the daily Lending Times at 1pm EST. I was able to do so reliably for sometimes and will continue to aim towards 1pm EST daily. United States Lending Club’s CEO, Scott […]
Dear readers, today I was traveling all day for my other company Lampix (www.lampix.co) . Unless I am traveling, I aim to send the daily Lending Times at 1pm EST. I was able to do so reliably for sometimes and will continue to aim towards 1pm EST daily.
In the UK’s version of today’s comedic note: JustUs is attempting to raise £5.35m, and a Chinese group GuanQun has plowed in …….drumroll….£50k. Yes, 50 thousand GBP. I think this piece of news hurts more than it help.
We respectfully disagree with your characterization of charge-off rates on the LendingClub platform in “Online Lender’s New Issue: Bad Loans” (Money & Investing, July 12). The article fails to note that lower-graded loans, which have experienced higher charge-off rates, represent just 25% of the company’s standard program loan volume, while 75% of standard program loan volume has exhibited stable performance.
We believe the single most critical factor in the discussion of performance is net returns to investors. Our expectation of performance on the loans you have singled out is a net annualized return of roughly 5%. Based on the steps we have taken to improve performance, which aren’t mentioned in the article, we anticipate the performance of any future loans in this subset to be more than 8%. We believe that in the current low-yield environment, LendingClub platform performance continues to compare very favorably with available alternatives. For example, the Barclays U.S. Aggregate Bond Index returned 1.96% for the year ending March 31.
Today, CommonBond, a platform that specializes in loans and refinancing for students, is announcing that it has raised $300 million in debt to loan out to prospective borrowers; and a further $30 million in a Series C equity round to continue building out its platform.
On top of this, the company has acquired another startup, Gradible, for an undisclosed amount to add new services to its business, specifically providing a facility for future employers to contribute to student loan payoffs. (Think of it as a 401k for student loans.)
The funding comes as NYC-based CommonBond says it’s passed the half-billion dollar mark for funds lent on its platform since going national three years ago. David Klein, the company’s CEO and co-founder, told TechCrunch that the company is profitable on a per-loan basis and projects that it will be fully profitable as a business in 2018.
CommonBond is not disclosing its valuation with this round. “We have strategically decided not to play the unicorn game,” Klein said in an interview. “But what I can tell you is that if we were a private company when you bought our stock and were now going public, you’d be happy with the return.”
He also described it as an “unstructured upround”, in reference to situations where a valuation is tied to complex terms that might be seen as a down-round in another light. As a point of reference, one of CommonBond’s competitors, Social Finance (SoFi), raised money last year at what was thought to be a $4 billion valuation.
The $30 million in equity funding takes the total raised by CommonBond to date to just under $80 million, while the $300 million being announced today looks like the closing out of a round that was first reported unconfirmed earlier this year at a lower value. Taking equity and debt funding altogether, the company has raised around $1 billion.
Klein said that the funding his company is announcing today is the first major round of financing raised by an online loan platform this year in the U.S. (The UK’s Future Finance, a would-be competitor that also focuses on students, raised $171 million earlier this year.) So what is CommonBond doing right, exactly, that others are not?
In the case of CommonBond, he said that some of the important factors are the fact that it targets higher education students, who will be earning more over the years when they are working, and it’s also seeing a growth in its loan volumes, which are double what they were a year ago — although the company is not disclosing actual numbers.
That is where the Gradible acquisition comes into play, too. The company — which had raised funding from the likes of AngelPad, 500 Startups and Kima Ventures — will help CommonBond differentiate itself from SoFi and others by giving it an extra set of services to offer to students not just during periods when they are in school, but beyond. The Gradible deal — terms of which were not disclosed — will also mean that CommonBond can tap further into the loan refinancing market as well, competing more against the likes of Earnest.
Baidu, which operates China’s dominant search platform, took part in a $60 million round for payments firm Circle in June. Baidu’s search engine has around 80 percent marketshare in China.
“ZestFinance’s unique ability to analyze and process complex, disparate data to make accurate credit decisions is very valuable to the Chinese credit market, where a centralized credit scoring system has yet to emerge,”
ZestFinance was founded by ex-Google CIO and VP of engineering Merrill, and it uses machine learning and big data to transform information into measurements and signals for credit scoring. It has raised nearly $100 million from investors, with its most recent raise a $20 million Series C round in July 2013. JD.com also put money in as part of its strategic partnership last summer.
Alibaba and Tencent both operate digital banks and micro-loan programs, while Baidu stepped into the banking ring via a partnership with brick and mortar bank CITIC. ZestFinance previously partnered with JD.com, Alibaba’s closest rival in China’s e-commerce space, to power the credit service run by its financial arm, which is valued at more than $1 billion. Then there are multi-billion dollar payment services like Alipay (Alibaba) and WeChat Pay (Tencent), too.
The firm is much beloved of investors, having snapped up a cool $1 billion in Series E Funding in a round lead by SoftBank. The firm is currently valued at $4 billion and has loaned out over $10 billion for student loans. According to its CEO Mike Cagney, he would like to see the company grow to a value of $100 billion someday.
But SoFi, despite its slightly different business model than its marketplace lending fellows (SoFi does not sell off loans in their entirety, and holds on to a percentage of all of them) and fairly rarified customer-base (SoFi’s initial and current focus is on millennial borrowers with debt from elite universities) is still feeling the tidal pressures that are pulling the rest of its segment around.
And, it seems in SoFi’s case, it is being pulled in two nearly opposite directions.
Being Even More Alternative
Whatever else can be said of SoFi – if recent reports in CNN Money about the lengths they go to help their users meet and mingle are accurate – they definitely take the “social” part of Social Finance seriously.
Over 8,000 borrowers have met up at the 300 or so (mostly fully booked) SoFi events held nationwide over the last year. Events include social mixers full of free food and alcohol, yoga classes and the chance to meet other young, upwardly mobile professionals.
“You meet a lot of interesting, like-minded people,” New York-based SoFi Customer Elsa Yan noted of the four different SoFi events she has attended.
Getting Into Traditional Banking
While SoFi may seem to be doubling down on the alternative path by developing their answer to Tinder for the financially responsible – recent reports indicate that SoFi is also moving toward being much more like one of those traditional banks whose methods it has historically eschewed.
And the Super Bowl ad worked a little too well and flooded its website with far more traffic than it was ready to handle. Days passed – customers waited, got mad, and turned to Twitter and online review sites to blast SoFi for being inept.
Then it came out that the firm just plainly didn’t have the capital reserves necessary to meet the surge in loan demand – which didn’t help the PR situation – and had their growth happy CEO singing a slightly different tune.
On the table: SoFi could seek regulatory approval for a state banking charter in Utah. This has the upside of adding the sort of stability lenders would like to see – but comes with the miles of red tape SoFi has built a reputation for speedily avoiding. Also possible options are credit cards and deposit accounts. Finally, partnerships with big financial institutions seem very much in play. That last option has seemed increasingly likely since the former co-chief executive officer of Deutsche Bank AG, Anshu Jain, announced his intention to join SoFi’s board of directors. Cagney also met extensively with JPMC’s Jamie Dimon earlier this year.
So far, SoFi is doing somewhat better than its peers. In May, SoFi received a triple-A rating from Moody’s on a $380 million deal that repackaged loans into bonds. It was the first securitization by an online lending startup to get the top rating from Moody’s.
“I foresee a heightened period of FinTech innovation, where new technologies and platforms will emerge to overcome these recent challenges, and help the industry scale,” Dara Albright says.
“Just this month, Prosper launched a revamped user experience for its retail investors,” explains Albright. “Another online lending product, American Homeowner Preservation 2015A+ LLC, received SEC approval to use Reg A+ to bring a higher-yielding, fixed-income alternative to retail investors, and more and more platforms are incorporating IRA Services’ ISCP™ technology into their platforms in order to help retail investors facilitate tax-deferred P2P investing.
The National Directory of Registered Tax Return Preparers & Professionals (PTIN) has selected premier fintech company Bizfi to provide its tax professionals, accountants, CPAs and their small business clients with access to funding through its aggregation marketplace via a custom referral process.
PTINdirectory.com is the first comprehensive national online directory of federally registered tax preparers. It is independently owned by the National Directory of Registered Tax Return Preparers & Tax Professionals, Ltd. and has no affiliation with the Internal Revenue Service or any government agency.
The partnership gives PTIN’s hundreds of thousands of members access to the full range of Bizfi’s funding products, including lines of credit, short-term financing, equipment and invoice financing, medical financing, franchise financing, medium-term loans and even long-term loans backed by a guarantee from the U.S. Small Business Administration. Members are able to leverage these solutions for their own businesses as well as refer their small business clients to Bizfi to speed the process of applying for and receiving capital.
Bizfi is a fintech company combining aggregation, funding and a participation marketplace on a single platform for small businesses. Founded in 2005, Bizfi and its family of companies have provided more than $1.7 billion in financing to more than 31,000 small businesses in a wide variety of industries across the United States.
1. Lending Club will survive. The fall was great, but it is not a death knell.
2. There will be shake-out and consolidation.
3. Banks will “play ball.” Recently, big names like Wells Fargo and American Express have launched online, fast-decision loan products with a small-business focus. One way or another, we can expect to see more banks looking for a piece of the pie, and it will be interesting to see how Bank of America and others will respond.
4. (More) Regulation is coming — but how much is unclear.
It’s true that charge-offs are ticking up for some consumer credit lenders. As of May 2016, Prosper had charged off, from year-ago loans, about 4.2% of loan principal amounts; at LendingClub, gross charge-offs of its top-graded loans ticked up to 1.51% from 1.46%, while charge-offs of its lower-graded loans went to 6.31% for year-ago loans from 4.58% on loans that had been originated in 2013. These numbers are nowhere near the double-digit charge-offs seen during the financial crisis, but the trend has caused institutional purchasers to re-think how these loans compare with some popular bank offerings, even though banks’ charge-off rates have also ticked higher in 2016 versus their low in 2015.
In the real estate sector, there are additional differences, since loan underwriting turns more on the nature of the underlying property (asset) than the credit worthiness of the borrower. By taking a mortgage on the property, lenders on real estate provide themselves with some level of security – a feature of real value if the borrower turns out to be less than reliable. Because real estate loans are secured by the subject property, they typically involve significantly less risk compared to unsecured consumer loans, at least in the eyes of most sophisticated investors. There’s never any assurance against a widespread drop in asset prices, which would adversely impact asset-backed loans, but the relative infrequency of such events, together with the presence of a significant equity “cushion” on most individual loans, generally acts to mitigate such risk.
The index will track the performance of companies that leverage technology to deliver financial products and services and represents approximately $785 million in total market cap. The index has 49 fintech companies including major data, exchange, trading and payments companies. Their distribution is nearly exclusively electronic.
In May, SoFi received a triple-A rating from Moody’s on a $380 million deal that repackaged loans into bonds. It was the first securitization by an online lending startup to get the top rating from Moody’s. The deal likely presages the continued normalization of the markets.
As non-bank lending institutions, alternative lenders have occasionally come under fire for acting as “shadow banks,” a term coined to describe the subprime lenders that led to the 2008 financial crisis. However, the term is a misnomer when applied to innovative lenders, according to an industry expert.
“As each day, week and month goes by, we are looking at new ways of making data, information, trends, ideas, concepts more available, more transparent, and [bringing] the industry to welcome a very open and robust dialogue,” Goldman said.
However, there’s a lot of work to be done to get to that point, Goldman said, as different loan originators will have different data points and metrics.
Goldman sees standardization of what data originators should provide as a top priority to enforcing true transparency in the industry. He sees Orchard Platform’s work in creating a lending exchange as “[getting] to the heart of that” priority.
KBRA Announces Addition of Xilun Chen to ABS Team, (Press Release), Rated: B
Kroll Bond Rating Agency (KBRA) announced today the appointment of Xilun (Xi) Chen to the role of Senior Director within the Commercial ABS group. Xi will be reporting to Anthony Nocera, Managing Director and head of Commercial ABS. Xi joins from Standard & Poor’s where he spent the last 6 years focusing on various esoteric ABS assets.
LoanMart, one of the nation’s premier financial technology companies, is excited to introduce a new type of loan to meet the significant demand of its customers: an Unsecured Personal Loan.
LoanMart will now offer Unsecured Personal Loans in 8 states including California, Alabama, Missouri, New Mexico, Utah, South Dakota, Georgia and Indiana. LoanMart will also continue to offer vehicle secured loans in 11 states and small business loans for self-employed consumers in another 14 states.
Starting in 2002, LoanMart offers both vehicle secured and personal loans.
The United Kingdom is the leader in online alternative finance in the European market, accounting for just under 75 percent of all transaction volumes in Europe. In 2015, online alternative finance in the United Kingdom grew to GBP 3.2 billion, increasing by 84 percent from GBP 1.74 billion in 2014.
The FCA defines crowdfunding as an umbrella term to capture various “categories” of activity, some of which are regulated whilst others are not.
This broad term includes four sub-categories:
Donation-based crowdfunding: people give money to enterprises or organisations whose activities they want to support.
Pre-payment or rewards-based crowdfunding: people give money in return for a reward, service or product (such as concert tickets, an innovative prod- uct, or a computer game).
Loan-based crowdfunding: also known as “peer- to-peer lending”, this is where consumers lend money in return for interest payments and a repayment of capital over time.
Investment-based crowdfunding: consumers in- vest directly or indirectly in new or established businesses by buying investments such as shares or debentures (FCA 2016a).
The first two categories are exempt from regulatory oversight from the FCA.
In 2015, equity-based crowdfunding experienced 295 percent growth compared to the previous year.
The FCA defines the instruments traded on investment-based crowdfunding as “non-readily realisable securities” that are not listed on regulated stock markets, and are distributed and sold over the internet.
At the time of the February 2015 review, the FCA publically acknowledged the full authorisation of ten firms as of 1 April 2014, with an additional four platforms receiving authorisation by the end of 2014. While the FCA has yet to release a 2016 crowdfunding review, our assessment is that as of March 2016, a total of 24 crowdfunding platforms have permission to function as an investment-based crowdfunding business in the UK. Additionally, a closer examination of the FCA’s registry indicates that at least 12 platforms are operating an investment-based crowdfunding business as an appointed representative.
At the end of 2015, investment crowdfunding raised GBP 337.8 million.
Investment Crowdfunding Risks
In addition to use of social media for financial promotion, equity crowdfunding platforms must also navigate potential additional supervision of the “online forums” typical for most crowdfunding campaigns. While the existing guidance does not specifically discuss how online forums should be supervised, this is probably an area that will attract attention in the future.
Another potential area of risk may relate to the required due-diligence that platforms must undertake before allowing businesses to raise equity on their platform
In March 2016, the FCA indicated that a total of eight firms (only an additional seven in the course of a year) had received full authorisation to operate as a P2P platform, with a further 86 firms awaiting a decision.5 Of these 86 platforms, only 44 have interim permissions related to their previously held OFT license (FCA 2016c).
Interestingly, it seems as though one particular firm, Resolution Capital (FCA 2016d), is “currently attached to” approximately 25 businesses, including several firms operating in the P2P lending space. As such, it seems like a considerable number of appointed representative firms are using the Resolution Capital license.
Loan-based platforms rules
The FCA implemented prudential requirements (FCA 2015a), which reflect the standardised capital reserves that a platform must comply with.
Utilising the GABRIEL portal, platforms are expected to report to the FCA on a quarterly basis, with monthly reporting of any information relating to the holding of client monies (FCA 2016e). Although prudential rules are not easy to generalise, as they are based upon the individual permissions and activities of each platform, P2P lending firms do have a base capital requirement of GBP 50k, with a GBP 20k requirement during the transition period.
At present, firms are obliged to meet minimum capital requirements only upon authorisation, with a transitional period until April 2017 (FCA 2015a). A platform operating in the P2P space is also required to notify the FCA should the value of their loans outstanding increase by 15 percent or more, thus necessitating a recalculation of any prudential requirements. In addition to financial reporting, platforms are required to report any disputes between consumers and the platform.
In addition to capital requirements, platforms are obliged to conform to Client Money Rules, as outlined in the FCA Handbook in the section relating to their Client Asset Sourcebook rules (or CASS) related to “adequate protection”– i.e. no co-mingling of client monies, clear and transparent holding of client monies, etc. (FCA 2016f). Rules related to client money were further modified in 2016, following the Consultation Paper entitled: “Loan-based Crowdfunding Platforms and Segregation of Client Money”.
Loan-based crowdfunding platforms must comply with disclosure requirements, where all communications are “fair, clear and not misleading”.
The FCA’s approach to crowdfunding is often lauded as the “gold-standard” for crowdfunding regulation. With regulation now having been in place for over a year, it is interesting to note the high levels of satisfaction registered by crowdfunding platforms.
Of the P2P Lending (loan-based crowdfunding) platforms surveyed, 91 percent regarded the current regulatory regime as “adequate and appropriate” to their activities, with only 5.66 percent suggesting that “tighter or stricter” regulation need to be implemented. A mere 3.77 percent viewed regulation as “excessive and too strict”.
Crowd2Fund announced on Monday the launch of its new intelligent investment feature known as Smart-Invest, which will reportedly allow investors to automate their crowdlending investments.
Earlier this spring, Crowd2Fund was approved for IF ISA and promoted higher interest rates for investors.
Chris Hancock, CEO and founder of Crowd2Fund added: “The combination of Smart-Invest and the IF ISA government scheme continues to demonstrate our commitment in helping our investors grow their savings whilst supporting great British businesses.”
In June, JustUs embarked on a drive to raise £5.35m, with the bulk (£4m) sought from institutional investors and a further £1m via crowdfunding platform Crowdcube.
The fundraising, which will value JustUs at £26m, will allow the firm to recruit over 100 new staff and launch a new media campaign.
Since its inception, the company has secured around £2m in investment.
Peer-to-peer consumer lending firm JustUs has received backing from a Chinese financial group, giving a boost to its £5m fundraising goal.
Four representatives of GuanQun Investment, which has already ploughed £50k into the Cheshire-based firm, are heading to JustUs’ Alderley Edge headquarters next week (July 29) to discuss ramping up investment and explore strategic global partnerships.
Based in London, GuanQun Investment (GQI) forms part of Beijing-based Guanqun Chicheng, which has supported around 200k SMEs since it was established in 2009
Cloud SMSF administration software provider, Class, has collaborated with peer-to-peer lender, RateSetter, to provide self-managed superannuation fund (SMSF) accountants and their clients with a direct-connect date feed. This would allow for automated data entry and transactions processing within Class.
RateSetter [Australia] has facilitated more than $50 million in loans through its platform since it launched in 2014, with SMSFs providing the funds for close to a quarter of the loans.
Mywish Marketplaces Pvt. Ltd, which operates retail loans marketplace Deal4Loans.com, has raised $15 million from Franklin Templeton International Services (India) Pvt. Ltd. The development comes after VCCircle first reported in May that the company was looking for a big-ticket investment in its first institutional round of funding.
The company had in April raised an undisclosed amount of funding from a bunch of high-profile investors, including Ram Shriram, founding board member and one of the first investors in search engine giant Google; WhatsApp’s global business head Neeraj Arora and Puru Vashishtha, a former Wall Street hedge fund investor.
Founded in 2009 by Durham University MBA alumnus Rishi Mehra, Deal4Loans offers comparison of retail loans across six different categories – home loan, personal loan, car loan, credit cards, loan against property and education loan. The platform has 50 lending partners (a mix of banks and non-banking financial companies) and 7 million registered customers. The marketplace uses algorithms to acquire customers for the participating banks’ loan products and to match customers with products.
According to VCCEdge, the data research platform of VCCircle, Deal4Loans earned a net profit of Rs 78.5 lakh on net sales of Rs 7.7 crore for the year through March 2015.
Reserve Bank of India (RBI) governor Raghuram Rajan on Monday said that the Indian central bank is more open to experimentation at the early stages of a product or method of service but at the same time will have to be more conscious of the risks to stability.
“Non-bank entities are providing innovative payment products and services, forcing banks to reflect upon their strategy—to compete or to collaborate? Banks may not have the wherewithal to compete effectively if they have not been investing in technology and associated personnel. However, if they collaborate without building these capabilities, they may be left with crumbs from the client while their partner take the whole client cake,”
Rajan said RBI welcomes both competition and collaboration.