- Today is by far the busiest and most interesting day of this past week:
- SoFi expects to make a $80mil profit in 2016, is raising $500mil eyeing entering the EU, and much more info here with numbers and strategy discussion.
- Klarna launching online lending to thousands of online retailers.
- Great data on the US MPL 40-Act $1bil fund RiverNorth.
- The FCA is conducting field trips to P2P offices in the UK.
- Xero , the cloud accounting system, signs deal with small Kiwi SME lenders. Kabbage, Funding Circle , BizFi and all other similar firms should dream for such a deal.
- Great articles on the future of online lending based on online retailers and the future of payday loans.
- An outstanding article showing how online retailers , including Amazon, have put at very high risk the offline retailers. And drawing a comparison, well presented, for marketplace lending, taking into account the context and specificities. A must read.
- And a 2nd outstanding article objectively pointing out the pros and cons of payday lending and taking into account that minorities are underrepresented in the financial sector to start with. A well presented cool minded thoughtful article in a heated debate. Also, a must read.
- Klarna is eyeing buying a bank , but in the meantime through WebBank they started offering credit lines to thousands of online merchants.
- SoFi expects to make $80mil in profit in 2016 and is raising another $500mil and much more. A great article with insights on SoFi’s strategy. Please take note that to the best of our knowledge SoFi is NOT charging an origination fee and is not planning to. A must read.
- When we discussed RiverNorth’s $1bil in marketplace lending we missed that it was a 40-Act ( read: more or less public) fund. So a lot more information on what they are targeting and how they compare to UK’s funds. I think we are at the 4th must-read articles today.
- An update on Orchard’s efforts on starting a secondary market. It looks like the SEC and FINRA discussions are moving along at a snail pace.
- SoFi is announcing another $200mil securitization, the 3rd consumer loan one.
- An article that started well : not all yields are made the same, and exposure to unemployment needs to be managed. But an article that didn’t go in the right direction after that great statement.
- Promise Financial, focused on wedding, launches digital cosigners. Great for their business segment. From co-founding and launching www.backedinc.com I have 1st hand experience that it is very hard to do co-signing and while Backed has succeeded in this differentiator, it is very hard to put in place. Disclosure : I am not involved with Backed anymore since January 2016 except as a shareholder.
- And today’s most unique title goes to “most _______ever built” from FutureVault.
- “China’s internet giants have some of the most sophisticated fintech ecosystems.”. A great review of the Chinese market in the Nikkei. Another article that I think is absolutely worth a read if you are interested in comparing markets and trying to understand future market behaviors.
- Most online lenders will ignore the new rules and continue operating. Indeed.
- A Business Insider article pointing out how much of the EU is in alt lending. Short and to the point.
- Xero, one of the most successful clouds accounting platforms, partnered with a small SME lenders. This is the dream deal for all SME lenders. MYOB, their competitors cloud accounting platforms, invested in OnDeck Australia. If I was an accounting platform I would compete with LendingTree and similar sites to charge SME lenders even more for loan leads and provide the accounting system for free.
- Harmoney passes $300 mil in origination after 2 years. Very impressive.
- United States
- Online Retailers Are Proof of Marketplace Lending’s Sustainability, (American Banker), Rated: AAA
- What’s Next if Payday Loans Go Away?, (Morning consult), Rated: AAA
- Klarna launches its first credit product with new U.S. partnerships,(TechCrunch), Rated: AAA
- SoFi Looks to Raise $ 500 Million in Latest Test for Fintech, (Wall Street Journal), Rated: AAA
- RiverNorth Gets Approval From SEC for Marketplace Lending 40-Act Fund, (Lend Academy), Rated: AAA
- Orchard Platform Is Disrupting Financial Services From The Inside Out, (Forbes), Rated: A
- SoFi Consumer Loans Program 2016-4, (Kroll), Rated: A
- The Golden Ratio of P2P, (NSR Invest Email), Rated: B
- Promise Financial Launches Digital Cosigner Loans, (PR Newswire), Rated: AAA
- FutureVault Launches the Most Sophisticated Digital Filing Cabinet and Safety Deposit Box Ever Built at Finovate in New York City, (Email), Rated: B
- United Kingdom
- FCA circles on P2P platforms with September ‘business model’ inspections, (Alt Fi Credit), Rated: AAA
- Tse and Meller — Chinese companies lead the way in fintech innovation, (Nikkei), Rated: A
- Most Online Lending Platforms Do Business Without License, (Caixin Online), Rated: A
- European Union
- The European alternative finance industry is lagging far behind the US and the UK, (Business Insider), Rated: A
- New Zealand
- Xero teams up to get into finance game, (Stuff), Rated: AAA
- New Zealand Online Lender Harmoney Tops $300 Million in Less than 2 Years, (Crowdfund Insider), Rated: A
Online Retailers Are Proof of Marketplace Lending’s Sustainability, (American Banker), Rated: AAA
Recent news and commentary have been anything but optimistic on the future of marketplace lending. But are the negative projections simply drummed up by traditional banks or is there a real reason to be concerned?
According to Morgan Stanley, global marketplace lending grew at a compounded annual growth rate of 123% from 2010 to 2014 and is expected to grow at a CAGR of 51% from 2014 to 2020. Given that real global economic growth is closer to 3%, what explains marketplace lending’s more pronounced growth?
When pondering this subject, I find it interesting to see how other industries have fared as technology and investment have brought the end user greater value and transparency. The sector of the economy which has seen the most visible change has been that of retail where the consumer is shopping less at stores and malls while spending more online.
The trend is rapidly affecting many of the largest retail chains and malls around the country. The change in consumer behavior is all too clear to retailers like Macy’s, which recently announced the closure of 15% (100 of 668) of its stores. The bottom line is that technology combined with forward-thinking investment by some of the larger online sellers has significantly changed consumer behavior.
According to a Gallup poll last year, customers using bank branches dropped by 50% between 2011 and 2014. One function that kept many customers going into bank branches was to deposit checks. Since 2014, many banks have rolled out mobile deposit apps, further accentuating the fall in foot traffic to branches. And how does this impact lending? Traditionally, lending was one of the banking roles always done in person, whether it was a personal line of credit or a mortgage.
There are reasons for marketplace lending investors to still be encouraged. Investor returns on the main platforms have been strong, with historical yields between 5.20% and 8.37%, depending on the grade of the loan. With U.S. interest rates at or close to zero, we have seen investors searching for alternatives to equities that offer both yield and diversification and for many, they are finding this in marketplace loans.
Additionally, assuming that online lenders stay clear of overly leveraged securitization, which we saw accentuate the financial crisis, marketplace lending has the potential to reduce systemic risk by spreading exposure across many investors rather than having it sit with a small number of big banks.
What’s Next if Payday Loans Go Away?, (Morning consult), Rated: AAA
Stronger regulation of payday lending could increase the use of financial technology such as online marketplace lending, said William Michael Cunningham, founder of Creative Investment Research, which studies trends in banking in black communities.
As the Consumer Financial Protection Bureau prepares to finalize proposed rules cracking down on payday lenders, critics and proponents alike are speculating on what would fill the need for short-term, small-dollar loans.
Payday lending has garnered criticism from progressive Democrats, such as Sens. Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, who argue that the practice preys on the poor, trapping low-income borrowers in a cycle of deepening debt.
If payday lending were to become less profitable because of the rules, it could result in increased use of installment loans, advocates say.
The proposed CFPB regulation — with a comment period ending in October — would require lenders to confirm that borrowers are able to repay a loan, aiming to prevent borrowers from being stifled by high-interest rates and monthly payments.
Payday loans have become a major source of credit in low-income African-American communities as black-owned banks and other, more highly regulated depository institutions, have slumped, Cunningham said in an interview.
“For a lot of black people in a lot of communities, they don’t have a good alternative to the high-cost payday lending,” he said.
“A lot of free-market guys say, ‘This is just a legal product, and if people want to use it, then they should be able to use it,’,” Cunningham said. “To me, that’s crazy talk.”
“One could make the case that CFPB should take some of that fine money that they’re getting from these financial institutions and create a fund to create responsible depository institutions serving some of these communities,” he said.
“I think it’s the question of whether they’re regulating the product or intending to eliminate the product,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, a trade group for short-term lenders.
A Pew Charitable Trusts report in August said that installment lending can still be harmful.
Shaul’s group took aim Tuesday at the CFPB, saying it “buried and ignored” a slate of positive testimonials about payday loans. CFPB did not provide a comment on the allegations. The portion of borrowers overwhelmed by payday loans — who have borrowed for an excessively long period and are mired in a cycle of renewing them — is arguably small, at 15 percent to 20 percent, Shaul said.
Klarna launches its first credit product with new U.S. partnerships,(TechCrunch), Rated: AAA
Now Bigcommerce, Shopify, Magento, Demandware, OpenCart, and Cybersource (that together account for over thousands of online merchants) will be offering credit lines through Klarna. For the European fintech unicorn (currently valued at $2.25 billion and already profitable), it’s a big deal.
Klarna already provides “try before you buy” services that allow shoppers to pay after delivery (rather than paying upfront with a card or bank account), but this is actually the first time that the company can extend a line of credit online.
The company already has a banking license in Europe and is currently working with WebBankon lending in the U.S., however, it’s also considering making a bigger splash in the States by buying its own bank.
SoFi Looks to Raise $ 500 Million in Latest Test for Fintech, (Wall Street Journal), Rated: AAA
Privately held SoFi hopes to raise about $500 million in equity to fund new growth initiatives among mass-market borrowers and international markets, according to the people and a presentation reviewed by The Wall Street Journal.
To manage through the tougher environment, online lenders including LendingClub, Prosper Marketplace Inc., and Avant Inc. eliminated hundreds of jobs, started charging their customers more to borrow and mothballed projects to expand into new products or countries.
Now, SoFi is looking to branch out from its main student-lending business into the territory from which many of those lenders are backtracking. While it has historically focused on borrowers with pristine credit histories—the company refers to them as Henrys, or “high earners not rich yet”—SoFi is considering lending to prime borrowers with slightly lower but still good credit scores.
“Between Brexit impacting U.K. student loans to the insatiable demand for [euro]-denominated assets, the macro tailwinds support European expansion,” according to the presentation, referring to Britain’s vote in June to leave the European Union.
Unlike many fintech startups, SoFi expects to be profitable this year. Adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, are expected to be $81.3 million in 2016 and $262.5 million in 2017, compared with a loss of $2.8 million in 2015, according to the presentation.
The company expects to take in $357.4 million in revenue in 2016 and $638.1 million in 2017, up from $114.7 million in 2015, according to the presentation. SoFi soon could pass LendingClub in revenue if current projections hold. LendingClub’s revenue is expected to be $469.7 million in 2016 and $569 million in 2017, according to consensus estimates of analysts polled by Thomson Reuters.
Longer term, SoFi has said it wants to compete against the largest financial players by expanding into credit cards, deposit accounts, insurance, and wealth management. SoFi projects that it will extend about $10.5 billion in student, mortgage, and personal loans this year and about $17.5 billion next year, up from $5.2 billion last year. LendingClub’s 2015 loan volume was $8.4 billion.
A fundraising of a half-billion dollars wouldn’t be SoFi’s largest. Last year, SoFi raised more than $1.2 billion in new equity from investors, including Japanese internet giant SoftBank Group Corp. and hedge fund Third Point LLC. The SoftBank investment valued the company at around $4 billion, The Wall Street Journal previously reported.
RiverNorth Gets Approval From SEC for Marketplace Lending 40-Act Fund, (Lend Academy), Rated: AAA
Comment: we covered the launching of RiverNorth. What we missed was that it was a public fund, aka a 40-act fund.
The fund will be listed under the ticker RMPLX and will be available through several major fund platforms over the next few months. They can raise up to a billion dollars with the new fund although the initial investment will be lower with new investors coming in over time.
The fund structure is setup as an interval fund and there will be a NAV that is priced each day. Investing is similar to that of an open-ended fund as investors can purchase at the NAV price on any day, but the liquidity is similar to that of a private fund. Liquidity is offered quarterly and the total redemption amount will vary from 5% – 25% of the fund as determined by the board of directors based on market conditions, liquidity of the fund’s assets and shareholder servicing considerations
The fund also intends to use leverage.
From the filing:
The Fund currently intends to use leverage for investment and other purposes, such as for satisfying repurchase requests or to otherwise provide the Fund with liquidity. Under the 1940 Act, the Fund may utilize leverage through the issuance of preferred stock in an amount up to 50% of its total assets and/or through borrowings and/or the issuance of notes or debt securities (collectively, “Borrowings”) in an aggregate amount of up to 33-1/3% of its total assets.
The other two important factors for investors are eligibility and expenses. There is a $1 million minimum investment which will apply at the individual investor level if the investor does not have an existing relationship with a RIA. If the investor does have a relationship with an advisor, the minimum would apply to the advisor which could lower the minimum investment per individual. As is noted in the prospectus:
The Fund expects that the Shares will be initially offered primarily to clients of registered investment advisers and other institutional investors.
Fees for management expenses are 125 bps, although it is waived to 95 bps for the first two years of the fund.
It’s great to finally see the 40-Act funds get off the ground and open up investing in marketplace lending to more investors here in the US. It will be interesting to see how well the RiverNorth fund is received
Orchard Platform Is Disrupting Financial Services From The Inside Out, (Forbes), Rated: A
Since its appearance on Forbes’ first annual Next Billion Dollar Startups list last year, the New York-based Orchard Platform has grown its team by at least 200%, partnered with over 20 new loan originators, and continued expanding internationally. But beyond that, Orchard has been working to develop exactly what marketplace lending needs to transition from this year’s growing pains into adulthood: a secondary market.
Orchard’s general mission is simple—become a turn-key solution to both sides of the marketplace lending table. But to fully accomplish that is a much more difficult task involving close collaboration with the same entities that are anathema to many startups: regulatory bodies and financial institutions.
For the past two years, Burton and Orchard have worked closely with the SEC to clarify regulations surrounding marketplace lending and launch what would become the first-ever secondary market in the space. Burton and his team applied for Orchard’s broker-dealer registration, clearly articulated their objectives, and have since moved in lock-step with FINRA to educate them on the industry, all while building out their relationships with policy leaders in D.C.
In a whitepaper on marketplace lending published this past spring, the U.S. Treasury Department made clear that there is a need for a secondary market.
While Burton argues that the LendingClub faulty loans were an isolated incident, and investors have continued to show confidence in its products, the incident exposed the danger of allowing the hype of a still-growing asset class to get ahead of its reality.
SoFi Consumer Loans Program 2016-4, (Kroll), Rated: A
Kroll Bond Rating Agency (KBRA) assigns preliminary ratings to three classes of notes issued by SoFi Consumer Loan Program 2016-4 LLC (“SCLP 2016-4”). This is a $203.02 million consumer loan ABS transaction that is expected to close on September 12, 2016.
This transaction represents SoFi Lending Corp’s. (“SoFi” or the “Company”) third rated securitization collateralized by a portfolio of unsecured consumer loans. SoFi currently originates personal loans through its state licenses or complies with certain requirements where a state lending license is not required. There was one prior unrated securitization, in which SoFi or SoFi’s institutional investors were the sponsors and the collateral was unsecured consumer loans.
The Golden Ratio of P2P, (NSR Invest Email), Rated: B
P2p is a non-volatile, uncorrelated asset with one main risk: the risk that unemployment goes up.
In finance, we call this a “sensitivity.” The good news, my friends, is that a p2p portfolio’s sensitivity to unemployment is a manageable risk. But how? By keeping the default rate in your portfolio as low as possible, of course!
Comment: An article that started well but was very disappointing afterward. I think that by saying ” by keeping the defaults” low is like saying “by waving a magic wand”. What you probably want to talk about is how default to unemployment correlation curves vary by loan grade. So you need to take into account that curve to predict default in rising unemployment markets and buy today consequently.
Promise Financial Launches Digital Cosigner Loans, (PR Newswire), Rated: AAA
Promise Financial, the marketplace lending platform focused on life event financing, announced today that it has launched a digital cosigner loan product. In addition to the company’s individual loans, which primarily serve prime-credit consumers, cosigner loans allow Promise Financial to serve a wide range of non-prime consumers.
“Cosigner loans are a terrific option for consumers who have limited credit experience or have had credit difficulties in the past, but need and deserve access to borrower-friendly financing.”
FutureVault Launches the Most Sophisticated Digital Filing Cabinet and Safety Deposit Box Ever Built at Finovate in New York City, (Email), Rated: B
Comment: The most unique claim for the week, maybe even for the month. Perhaps a little bit of modesty would help. I would recommend avoiding phrases like “ever built” unless you can clearly prove it is the case. It is difficult to prove that nobody else has ever built this product in-house or commercialized it, ever.
FutureVault allows users to digitally deposit, store, collaborate and manage important financial, legal and personal documents on a secure white-label, cloud-based, SaaS platform. For financial service organizations, it helps to acquire, retain and reward clients while, at the same time, yielding invaluable data and analytics.
FCA circles on P2P platforms with September ‘business model’ inspections, (Alt Fi Credit), Rated: AAA
The Financial Conduct Authority (FCA) will spend the next month in site visits to the larger p2p and crowdfunding platforms with the goal of better understanding their business models , according to two people familiar with the matter.
“The authorisation department has asked us lots of questions like ‘do you have disaster recovery’…and on the other hand they are coming and asking ‘how does your business work’,” said another top industry figure also requesting anonymity.
It is broadly accepted that the FCA is more skeptical of the nascent industry than the UK Treasury which is seen as being very enthusiastic for P2P and fintech as a whole, particularly during the past six years under George Osborne’s former chancellorship.
The FCA has also said that it might take steps to mandate the disclosure of performance data: “Based on the outcome of the review, to help potential investors better understand the risks, we could consider whether to mandate additional disclosures, for example setting out how many businesses that raised funds have since failed and how many have had successful pay-outs,” it said in the review.
Tse and Meller — Chinese companies lead the way in fintech innovation, (Nikkei), Rated: A
Financial technologies companies backed by Chinese venture capital raised $2.4 billion in the first quarter of 2016, according to accounting firm KPMG. This represented a 49% share of global fintech investment in the period, bigger than that of North America and Europe combined.
Ant Financial Services Group, Alibaba Group Holding‘s fintech affiliate, itself raised $4.5 billion in April, making it the largest round of funding for a fintech company in the world.
Four out of the five largest fintech companies in the world by valuation are now in China, according to Jason Jones, chief executive of lending industry events group LendIt: Ant Financial; Shanghai Lujiazui International Financial Asset Exchange, or Lufax, which operates as Lu.com; Zhong An Online Property and Casualty Insurance and JD.com‘s JD Finance.
According to the Mintai Institute of Finance, nearly 80% of small- and medium-sized enterprises in China are not adequately served by banks.
Ant Financial developed Sesame Rating, China’s first credit scoring system.
Chinese entrepreneurs’ willingness to experiment means products and services hit the market quickly and evolve quickly. Initially, AliPay, Ant Financial’s payment service, was used only as a payment method for Alibaba’s e-commerce platform. Now, AliPay can be used at brick-and-mortar stores, for utility bills and even for overseas shopping.
China has become fertile ground for fintech solutions. Online wealth management has gained traction among young middle-class consumers. As more risk-tolerant investors, they tend to favor equities and mutual funds over traditional savings accounts. At $66.9 billion in 2015, China’s peer-to-peer lending market is now the world’s largest and more than four times the size of its U.S. counterpart.
China’s internet giants have some of the most sophisticated fintech ecosystems.
Tencent founded WeBank, China’s first online-only bank, in 2014. WeBank offers the consumer, corporate and international banking services. By May 2015, it had launched a personal credit line service to select users without guarantee or collateral through Tencent’s QQ and WeChat messaging platforms. Unlike Ant Financial, WeBank acts as a platform connecting borrowers and lenders directly rather than from its own balance sheet, allowing it to avoid credit risk.
Chinese fintech companies are now starting to expand overseas. In September 2015, Ant Financial acquired a majority stake in Paytm, India’s biggest online payment company, to gain access to a massive population just beginning to embrace mobile payments.
Most Online Lending Platforms Do Business Without License, (Caixin Online), Rated: A
There were 2,235 peer-to-peer (P2P) financing sites in China by the end of August, but only 242 of them had obtained an Internet Content Provider (ICP) license from local telecom regulators, according to data compiled by Yingcan Zixun, which tracks the industry.
Draft rules by China’s banking regulators in August said online lenders should get an ICP license from their local telecom regulatory authority after registering with the government finance office. It’s a requirement that reinforces an internet regulation issued in 2000 that demands a license for all for-profit Internet information service providers.
ut, in practice, few online financing platforms follow the rules.
The European alternative finance industry is lagging far behind the US and the UK, (Business Insider), Rated: A
Comment: we saw the Cambridge report for Alternative Finance report yesterday. This is just a reminder for our readers with a pop title from Business Insider.
The European alt finance industry’s market volume was €1 billion ($1.1 billion) in 2015, up 72% from €594 million ($668 million) the year before. In comparison, the UK industry’s market volume was €4 billion ($4.5 billion) in 2015, up 84% YoY, while the market volume in the US was €34 billion ($38 billion), up 213% from 2014.
Xero teams up to get into finance game, (Stuff), Rated: AAA
Wellington startup Fuelled has teamed up with accounting software provider Xero to launch a new lending service.
Fuelled will advance Xero customers up to 90 per cent of the money they are owed on invoices, for up to 90 days, at annual interest rates of between 9 and 15 per cent.
Fulcher said the partnership with Xero was important because it enabled Fuelled – with borrowers’ permission – to look at customers’ accounts and see their financial position, including their bank statements.
Xero rival MYOB has also moved into the financing industry, which MYOB chief executive Tim Reed said was a natural extension for its business. Earlier this year it took a minority stake in the Australian arm of United States small business financier OnDeck, which has lent US$5 billion to businesses in North America and Australia since it was founded in 2007.
MYOB customers that applied for loans through OnDeck had to provide much less information than they would when applying for a bank loan, because of the information MYOB already had on their businesses, he said.
New Zealand Online Lender Harmoney Tops 0 Million in Less than 2 Years, (Crowdfund Insider), Rated: A
Harmoney, a New Zealand based peer to peer lending platform, has surpassed $300 million in lending just shy of their 2 year anniversary of consumer lending.
Interest rates start at 9.99% today. Lenders have averaged a realized return of approximately 13% (net of fees and losses) since platform launch. Harmoney is the largest “Australasian” peer to peer lending marketplace providing loans from $1,000 and $35,000. The company is gearing up for growth in Australia. Harmoney was launched with NZ $100 million of lending capital from institutions including Blue Elephant Capital Management & Heartland Bank. Heartland Bank is a shareholder in Harmoney.
As of March 2016, Harmoney reported a loss of $14.2 million before tax on revenues of $8.6 million.