July 18th 2016, Daily News Digest

 

United States

Moody’s Decides Against Downgrade for Prosper Marketplace Loan Deal, (Wall Street Journal), Rated: AAA

The ratings firm said in February that it was watching a Citigroup Inc. securitization of Prosper loans for the possibility that the loans might go bad at rates higher than initially expected, which could force it to lower its rating on some of the notes. It raised its forecast of future losses to around 12% from as low as 8% of the money lent.

But on Thursday, Moody’s said “the absence of substantial deterioration” of the loans was a major reason it decided not to downgrade the notes. It said this “reduces the likelihood of extreme underperformance.” The notes in question will keep their initial rating of Ba3, or three levels below investment grade. Higher-grade parts of the deal weren’t on review for downgrade.

In recent weeks, however, there have been signs of a thaw in the market’s reticence. Social Finance Inc., known as SoFi, completed its first rated sale of bonds tied to personal loans. Marlette Funding LLC this week launched its own sale of bonds tied to loans, the first for the platform since the winter.

An analysis of the online-lending bonds by PeerIQ, which tracks the industry, shows the prices of bonds tied to Prosper loans have risen in recent weeks. Investors had been demanding yields on some Prosper-linked bonds in April of nearly 10 percentage points above benchmark bonds. That spread fell to just roughly 4 percentage points as of the most recent trades in July, PeerIQ data show.

Installment Lender Using Bank Partner Model Needs Maryland License, Court of Appeals Rules, (JD Supra Business Advisor), Rated: AAA

Comment: This could be a really big deal for all the alt lenders who are originating through banks.

The Maryland Court of Appeals, the state’s highest court, in CashCall, Inc. et al. v. Maryland Commissioner of Financial Regulation, recently affirmed the judgment of the Court of Special Appeals (MCSA) directing CashCall to cease doing business in Maryland without a Credit Services Business Act (MCSBA) license and to pay $5.6 million in penalties in connection with loans already made.

While much attention has been focused on the risks created by Madden v. Midland Funding, LLC and the so-called “true lender” issue, the CashCall decision illustrates how the bank partner structure used by many lenders can be threatened by state licensing statutes as well.

The case arose out of CashCall advertising on its website to consumers and offering them a method to apply for loans online. The loans were made by out-of-state, state-chartered banks at interest rates significantly in excess of the maximum rate permitted by Maryland law, and the banks also charged loan origination fees. Shortly after origination, the banks sold the loans to CashCall, which collected all payments on the loans.

The Commissioner contended that CashCall was a “credit services business” as defined by state law, because it assisted consumers in obtaining an extension of credit “in return for the payment of money or other valuable consideration.” CashCall argued that, in the absence of a direct payment to it from the consumer, it could not be properly classified as a credit services business.

According to the court, CashCall was a “credit services business” because it received compensation “in return for” assisting consumers in obtaining loans.

The Court of Appeals reached an ominous conclusion regarding the impact of federal preemption on the CashCall program. As the court noted, the MCSBA prohibits a credit services business from assisting a consumer in obtaining a loan at an interest rate that exceeds the maximum rate permitted by Maryland law “except for federal preemption of State law.” However, according to the court, “[a]lthough federal law allows federally insured banks to charge out-of-state consumers the same interest rate permitted by the bank’s home state, regardless of the interest rate caps imposed by the law of the consumer’s resident state,” the MCSBA does not permit a credit services business to “assist a consumer in obtaining a loan from any in-state or out-of-state bank, at an interest rate prohibited by Maryland law.”

Under the court’s reading, the MCBSA would effectively prohibit CashCall from assisting a bank in the origination of loans at rates expressly authorized by federal law.

Why online lenders should become banks, (Financial Times), Rated: AAA

Comment: In my personal view they shouldn’t become banks as that equals having 1 hand tied behind your back. Instead they should find a depositer-like source of capital, maybe in partnership with banks.

Even last year, online lenders more than doubled the size of their loan books on average — wildly outpacing even the raciest bank — and many were still valued on three-digit earnings multiples. But much has since changed in the sector and — believe me — they aren’t jeering now.

If lenders want the sector to be more than a specialist backwater, or a technologically-enabled version of the old finance company model (think Household or GE Capital), platforms need to rethink how they do business. One way off the hamster wheel might be to put more of their loans on their own balance sheets. While that would expose them directly to losses, with consequences for capital requirements and regulatory oversight, it would also provide a more stable income base, making it easier to survive lending downturns. The snag is that it would not get round the problem of having to rely on fickle market funding for support.

Solving that requires online lenders to take a step that many a year ago would have scorned: joining the banking deadbeats to tap regular deposit funding.

Many platforms have been considering whether or not this might be in their interest. But the US regulators aren’t that keen on issuing bank charters to young and flighty marketplace firms.

Which leaves takeovers. Valuations no longer make it totally impossible for an established bank to consider snapping up a marketplace platform. Lending Club is valued at around two times its book, and OnDeck Capital, the other listed platform, at about one times.

LendingClub Names BlackRock’s Dunne Chief Capital Officer, (Bloomberg),Rated: A

Dunne, who previously led BlackRock Inc.’s San Francisco office, will work with LendingClub investors and retail distribution partners, the company said Monday in a statement. “Patrick’s wealth of experience and diverse background across capital markets, strategy, portfolio management, product development and client service will help us drive the next phase of Lending Club’s growth,” Sanborn said in the statement. “Patrick will play a key role in reaffirming our continued commitment to our investors.”

Jefferies Group is again considering selling bonds tied to LendingClub consumer loans after scuttling an effort amid the shakeup there. Many investors are conducting due-diligence checks and have said they may purchase more loans, although maybe initially at muted levels, the CEO said in June.

Dunne’s plan to depart from BlackRock was announced earlier this year. He had worked for Barclays Global Investors before BlackRock acquired it. Dunne has a bachelor’s degree from the University of California at Berkeley and a master’s in management from the Stanford Graduate School of Business, according to the statement from the San Francisco-based company.

LendingClub advanced 3.6 percent to $4.65 in early trading at 8:21 a.m. in New York.

Should investors look at investing in P2P lending?, (CNBC Video), Rated: A

Comment: Ron Suber on CNBC explaining what Prosper does and how they do it. Video covering the basics of Prosper which will not be news for our readers. However worth a watch as it’s well articulated and well presented.

Delinquencies numbers shared: Blended average advertised at 7.4% blended net return. A great yield for fixed income for sure.

Millennials are ditching financial advisors for apps, (New York Post), Rated: AAA

It’s time for many technophobic 50-something financial pros to look for another job. That’s because millennials, many of whom are about to inherit considerable assets, are not looking for a sit-down meeting in a downtown office to discuss investment options.

“Before, change was happening, but it was generational. You could adjust to it. And a business model was, in essence, immortal,” says Bill Hortz, founder of the Institute for
Innovation Development. In the 1950s, he noted, the average company stayed in the S&P 500 for 75 years.

“Today it is 14 years and dropping rapidly,” he says. Change is feeding on itself, and the effects of analytics and artificial intelligence will be expanding. They will dramatically change “client experiences and client interfaces,” Hortz says.

The new client has expectations of “24/7 access to information that is readily available via a smartphone, tablet or computer. Financial issues and questions that once required the advice of a certified professional can now be answered with a click on any digitally enabled device,” according to “The Advisor of the Future,” a 2015 report by Hearsay Social, a company that advises financial firms.

This represents “a potential sales opportunity of almost $2 trillion,” the report said. “In addition, customers will soon be able to search for products via additional technologies, including voice and gesture commands.”

“What’s more important isn’t the initial amount, but that someone makes a commitment to invest on a regular basis.”

“They need an easy way to communicate with advisers, be it on the computer or text messaging,” Raznick says. “They need to see visuals on how investing is more lucrative with an adviser as opposed to an automated solution.”

The top honchos at Andreessen Horowitz sat down for a podcast after raising .5bil ( The financial revolutionist), Rated: AAA

They asserted that with $10 trillion of debt trading with a negative yield throughout the world (now $13 trillion, actually), there’s a limitless abundance of capital sitting on the sidelines just waiting to finance innovation.

Someone should buy Lending Club.

These days, Lending Club’s prestigious board is probably sick of seeing critical articles like this one in The Wall Street Journal. And while Scott Sanborn is doing about as good a job as possible in trying to clean up the mess, he’s constrained by the realities of having to please his badly burned shareholders. Adding to his headaches is the fact that charge-off rates are now rising fast (a bad sign no matter how it’s spun). The article didn’t even mention the industry’s ongoing problem with “loan stacking,” whereby a borrower takes out multiple loans before the loans can be reported to the credit bureaus. That could be the next shoe to drop. Some fund or some company with vision, patience and an appreciation of credit cycles should buy Lending Club and fix it before time runs out.

“Fintech is the new normal,” says Nicols. He also adds that fintech is moving from its “pie-in-the-sky” phase to the application phase where “real companies are learning real lessons.” We couldn’t have said it better. See more here.

Morgan Stanley states the obvious regarding roboadvisors. “Roboadvisers aren’t going away any time soon, and the wealth management industry needs to make some changes if it wants to beat them and a host of other threats it is facing.”

Deloitte backs uber cool microinsurance initiative. The accounting and consulting giant has partnered with two start-ups (Statumn and Lemonway) to launch a proof of concept project named LenderBot. Billed as the first microinsurance solution for the sharing economy, the product aims to allow people to use Facebook’s messenger platform to create a peer-to-peer microinsurance contract for borrowed goods.

Twitter and Bloomberg deepen link.  As Bloomberg continues to fend off a challenge by Blackrock and Goldman-sponsored competitor Symphony, it’s turning to Twitter as a new distribution partner for selected live markets coverage and three of its regular shows.

Paypal gets even more P2P company. Early Warning is not a home alarm company. It’s a P2P solutions provider for banks that recently announced (see its press release) that Chase, Capital One and Wells Fargo are now using its pipes to facilitate P2P money transfers.

Big banks prepare to crush p2p startups with clearXchange, (TradeStreaming), Rated: A

Quietly over the past few months, some of the largest US banks have rolled out P2P payment functionality in their banking apps. Now, 5 of the largest US banking institutions, including Chase and Bank America, enable their customers to send money to one another and eventually, to friends and family who hold accounts at other banks.

Instead of building their own solutions, participating banks have signed up to the clearXchange network, a white label P2P payment platform for financial institutions. After inking deals with leading banks, P2P payments on the clearXchange network are now available to more than 100 million online banking and 70 million mobile banking users in the U.S.

In the first quarter of 2016, customers at banks in the clearXchange network completed more than 46 million P2P transfers, accounting for over $16 billion in combined transaction volume. That number is expected to grow as banks already on the network ramp their marketing of p2p capabilities, and more banks sign up for the service.

Before clearXchange, it wasn’t easy to send payments across banks. A whole industry of P2P payment players has sprung up to help bridge this gap by putting a transaction layer on top of existing banking infrastructure. As a workaround to directly moving money between bank accounts, technologies like PayPal and its faster growing service, Venmo move money between stored value accounts. So, while payments may be instantaneous, it can take days for the receiving party to be able to access that cash directly from her bank account, as money moves from the P2P platforms into the banking system.

clearXchange changes all that. Banks on the network are active participants this time, enabling payments to move freely between banks at the account level. clearXchange’s parent, Early Warning, is owned in part by seven of the largest banks in the U.S. Early Warning has been around for 25 years, providing thousands of banks and credit unions across the country with risk, fraud prevention, and authentication solutions.

clearXchange is a network and joining the network becomes more valuable when they’re more banks on the network.

Consortium efforts can pay off massively, but they’re hard to pull off. Just look at the Merchant Customer Exchange, or MCX, a retail industry consortium that wanted to do an end-around of the credit card networks. Tired of paying interchange fees, companies like Walmart and Target worked for years to roll out a mobile payments solution, dubbed CurrentC. Walmart ended up launching its own payments, Walmart Pay. MCX announced layoffs in May and its future is uncertain.

Why Brexit and Other World Events Have Not Seriously Hurt U.S. Small Business Lending, (Forbes), Rated:A

Loan approval rates at banks increased slightly in June 2016, according to the most recent Biz2Credit Small Business Lending Index™, the monthly analysis of more than 1,000 small business loan applications on Biz2Credit.com. The research shows that loan approval rates at big banks ($10 billion+ in assets) hit 23.3%, a post-recession high, last month. Regional banks are granting nearly half (48.8%) of the funding requests they get. Additionally, institutional lenders continue to grow in force and are approving more than six-in-ten funding requests from small businesses.

So far, the Brexit has not seriously threatened the American economy, nor has it tightened U.S. small business lending. In fact, in some ways, the uncertainty will benefit U.S. small business borrowers:

1. Foreign money is being invested in the U.S. as the dollar has gotten stronger while the British pound dropped substantially.
2. Institutional investors from overseas will look to the small business credit markets for yields.
3. The stability of the U.S. economy eases the minds of bankers, who are traditionally risk averse.
4. The Federal Reserve has delayed further its long anticipated interest rate hike, which is now unlikely to happen anytime soon.

Following the shakeup of the European Union, the terror attack in Nice, France, and political turmoil in Turkey, more money is likely to flow into the small business lending marketplace from foreign investors.

Orchard is Getting Bigger, (Crowdfund Insider), Rated: B

Orchard Platform is growing. So much so they have leased a lot more Manhattan space. Announced this week, Orchard is upgrading from the 7,000 square foot office space at 101 Fifth Avenue, to a 26,242 square foot space by taking over two floors of 386 Park Avenue South.

“At Orchard over the past 6 months, we have seen an uptick in demand from international investors for U.S. credit, including from clients in China, the U.K., continental Europe, Israel, Argentina, and Canada.”

United Kingdom

BoE holds rates, P2P “not linked”?, (Alt Fi News), Rated: AAA

The Bank of England yesterday announced that the base rate would be held at 0.5%, despite widespread claims to the contrary. The markets had priced in an 80% chance of the Bank cutting rates, but the Monetary Policy Committee ended up voting 8-1 against the move.

The effect of movements in the base rate on alternative lenders has been the subject of much discussion over the lifetime of the industry.

Giles Andrews, Executive Chairman of Zopa, responded at the time by arguing that a rise in the base rate would only serve to widen bank spreads, which would be paid for by consumers – making the peer-to-peer lending proposition “even more compelling”.

The Bank of England said yesterday that “most members of the committee expect monetary policy to be loosened in August”. One option could be to cut rates, possibly to 0.25%, which would be a record low.

If rates were indeed cut, then there may be some adjustment to the rates charged by peer-to-peer lending platforms. A number of the big US marketplace lenders have raised rates over the past few months. Prosper raised rates for the second time this year in late May, by an average of 0.29% across its loanbook. The platform’s chief risk officer Brad Pennington said that the rate hike came “in anticipation of action by the Fed to raise rates”.

But Pete Behrens, co-founder and chief commercial officer at RateSetter, says that the cost of funding for his platform is not linked to the Bank of England, and that it finds its own equilibrium.

Zopa’s head of risk Sharvan Selvam posted a column this morning on the potential impact of a shift in interest rates. Selvam first highlights the stable returns that were delivered by Zopa during the last recession, using the graph below.

Selvam also points to the predictability of the platform’s returns over the past decade. As can be seen from the graphic below, 2008 is the only year on record in which Zopa’s actual returns dropped below its expected returns.

UK P2P lender raises £7.2m, (Finextra), Rated: A

MarketInvoice, a UK-based P2P lender has secured more than £7m in its latest round of fundraising, defying the economic uncertainty around startups following the UK’s controversial vote to leave the European Union.

‘Do investors understand alternative finance risks?’, (Financial Times), Rated: A

The Financial Conduct Authority launched a review of both peer-to-peer lending and equity crowdfunding, two different kinds of investments that are together labelled “alternative finance”.

The FCA review has not come as a surprise to the industry — it had been planned since 2014 — and it was broadly welcomed by all of the lenders and funders.

Cormac Leech, a peer-to-peer analyst at investment bank Liberum, said part of the reason for P2P’s popularity was the perceived “safety” of debt investments compared to volatility in the equities market. Mr Leech said that lumping the different sectors together may lead to confusion. “There’s a huge risk that P2P gets tarred with the same brush [as equity crowdfunding],” he said, believing the latter to have much higher levels of risk.

While the major peer-to-peer lenders have agreed on common definitions and standards, allowing investment returns to be meaningfully calculated and compared with each other, AltFi says the crowdfunding platforms have not.

The government’s Innovative Finance Isa, designed to hold alternative investments in a tax-efficient wrapper, was introduced in April but so far none of the major companies have been given full regulatory permission to launch one.

Although there have only been a handful of successful investor exits over 1,200 crowdfunded deals Mr Zheng has tracked between 2012 and 2015, he said it was too early to make any assumptions.

Asset managers run risks in the rush into peer-to-peer loans, (Financial Times), Rated: A

Asset managers such as Invesco Perpetual, Woodford Investment Management, BNY Mellon, Vanguard, Baillie Gifford and Schroders have been early adopters — but in doing so they are investing in a fledgling and divisive industry.

Cormac Leech, alternative finance analyst at Liberum, says he still considers “fraud risk” the biggest threat to the sector’s growth.

Aside from these incidents, analysts of peer-to-peer lending platforms are quick to point out that their loan books have not come under any significant pressure, and that the asset class remains untested through the credit cycle.[ Comment: everybody always forgets of Zopa and Prosper which were around in 2008 in fact ].

The effects of the UK’s decision to leave the EU may also test the platforms’ robustness. Data provider AltFi has said it will add to a “list of headwinds” for the UK’s alternative finance industry.

Doubts over P2P loans’ credit quality are most keenly expressed in the depressed share prices of the handful of investment trusts specialising in buying them. For the most part, it is through these trusts that mainstream asset managers have looked to gain their P2P exposure, rather than buying loans directly from the platforms as a retail investor would.

Two of the biggest of these funds — VPC Speciality Lending and P2P Global Investments, from US hedge funds Victory Park Capital and Eaglewood Capital respectively — have both proved popular.

Invesco Perpetual, the UK arm of the $790bn US manager, owns a third of both trusts, holding the shares within its retail funds. It also owns half of another trust — UK P2P lender Funding Circle’s SME Income fund, which invests solely in Funding Circle loans to small and medium-sized UK businesses. Woodford Investment Management, run by renowned fund manager Neil Woodford, is the second-largest holder of both the VPC and P2P trusts.

BlackRock, the world’s largest asset manager, owns an undisclosed part of an £150m stake in Funding Circle, while Vanguard holds a 5 per cent stake in Lending Club, a company that Baillie Gifford also had a 9 per cent stake in until May this year.

Peer-to-peer’s popularity was in part down to the sector’s ability to “weave a beautiful story”. “We think [the lenders] will come into trouble,” he says. “We like to own the loans, not the equity. We think we’re being better paid here than in many parts of the equity and bond markets.

But doubts over how robust their credit-checking models are remain.

“There’s a complete spectrum — it goes from people who ostensibly use an absolutely classic bank credit model [and] there are others who say they scour the internet and pick up different points [to the banks],” Mr Foottit says.

“We genuinely don’t know. We’ve all got to wait and see, and make a valid judgment.”

Can London remain a fintech hub post-Brexit?, (Growth Business), Rated: A

Given the uncertainty over whether the UK will keep its passporting rights despite Brexit, many tech giants have vocalised their interest in relocating their European headquarters from our capital. Earlier this week, London-based online money transfer firm Azimo told Reuters it was considering moving its HQ to the continent, fearing Brexit would knock London off its pedestal as a fintech capital.

“It is perfectly possible that financial stress in the short term funding markets could cause the banks to slow down or delay lending to SMEs – a repeat of what we witnessed following the financial crisis in 2008,” he tells GrowthBusiness.

Davies believes this post-Brexit uncertainty presents a two-way challenge. “Alternative lenders, like ourselves, have to make businesses more aware of what they have to offer, and SMEs have to be prepared to look at other (non-bank) options,” he says. A recent survey of UK SMEs carried out by his firm revealed that almost one in three entrepreneurs would shelve investment plans if their traditional bank turned them down for finance, which may be indicative of a slow-to-change bank-first mindset.

The post-Brexit environment may also help thin the herd, according to Nucleus Commercial Finance CEO Chirag Shah. “Any AltFi company struggling for lending volumes will be affected by the EU referendum– they were suffering pre-Brexit; Funding Knight’s near collapse is a clear example of this. Post-Brexit, these platforms will struggle even more to attract capital,” he says.

“Post-Brexit, there is the definite potential for losses to increase for funding platforms with lax underwriting standards.  However, there are also lots of opportunities: indeed a medium term lower interest rate environment will entice more investors to platforms. I believe businesses specialising in crowdfunding and property lending will have opportunities for growth.”

Peer-to-peer platforms will be paying much more attention to default risks in certain sectors if our economy does slide into recession, MarketInvoice’s Stocker warns.

While preparing for economic uncertainty may be wise in general, sounding the doom-and-gloom horn post-Brexit may be premature., says Stephen Archer, business analyst and director of Spring Partnerships.

Veteran tech entrepreneur Rupert Lee-Browne is no stranger to uncertain macroeconomic conditions, having braved the Dot.com bubble of the early noughties and the volatility of the 2008 recession at the helm of CaxtonFX. “Secure your funding,” he advises. “The chances of investors backing early or mid-stage British tech business from here on in is slim.”

Indonesia

Indonesian P2P lending KoinWorks seeks new funding round, (Deal Street Asia), Rated: B

Peer-to-peer (P2P) lending platform KoinWorks is looking for a new investment round that will be used for activities expansion. KoinWorks connects lenders and small to medium-sized business owners. According to the company’s website, KoinWorks aims to democratize finance in Indonesia by reducing costs and making it easier for everyone to access capital.

P2P lending platforms – namely Modalku, Investree, UangTeman, GandengTangan, Amartha, and many others – are enjoying a steady increase of popularity in Indonesia, despite only 25 per cent of the population (60 million people) to have bank accounts.

Currently, fintech startups do not clearly fall under the purview of any single authority. While technology startups are regulated by the communication ministry, those engaged in financial services are governed by the Indonesian Financial Services Authority (OJK).

Sweden

How having zero experience in finance helped this founder build a .25 billion payments company, (Business Insider), Rated: A

Swedish payments startup Klarna is now a $2.25 billion company, but when CEO Sebastian Siemiatkowski cofounded the company a decade ago, none of the three founders had any experience in finance whatsoever.

That was, he tells Business Insider, actually a blessing.

The cofounders were naive 23-year-olds, who didn’t think the same way that traditional bank and finance executives did, and that gave them an advantage.

One of Klarna’s earliest ideas was to try and separate “buying” and “paying” for online purchases. Everyone knows how annoying it is to input card information when you are trying to check out. The Klarna dream was to have you just input an email address, one click, and then pay later. Klarna would guarantee the payment, and customers would have a week or two to pay up.

The problem was Klarna didn’t have any money to speak of, beyond some seed capital, which was certainly not enough to cover the money during the in-between period. How were they going to get the money to pay the merchants while they waited for customers to make a payment?

Klarna’s solution was to just ask the merchants if they would be ok with waiting to get their money. “Banks would never have dreamed of asking that,” Siemiatkowski laughs. It simply wouldn’t have occurred to them that any merchants would ever agree to that. But the merchants Klarna talked with wanted to grow their online sales, badly, and were willing to experiment.

A decade later “pay after delivery” has become a cornerstone of Klarna. Klarna’s technology instantly assesses whether an online shopper is trustworthy for a particular transaction, taking up to 140 factors into account, and then assumes the risk. The customer puts in his or her email and zip code, and then gets to examine the product before paying 14 days later.

Klarna had $330 million in revenue in 2015, and is profitable, according to Siemiatkowski. It’s also in the midst of a big US push, and has been integrated with retailers like Shoes.com andOverstock.com.

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