“Alternative lending is dead,” said Rob Frohwein, co-founder and CEO of Kabbage, “but not because of the hiccups that have occurred in the industry.”
LendingClub was the first of those hiccups this year. These hiccups have left some investors wondering whether the promise of alternative lending – wider access to capital, less burdensome application processes, all possible through the harnessing of technology – had faded in 2016.
Disclosure: I personally invest in Lending Club loans and serve as publisher of Fit Small Business, which has financial relationships with several of the companies mentioned in this article.
During the year, Lending Club had one piece after another of negative news come out. The year included an unexpected rise in Lending Club loan defaults, a botched sale of loans in which information was misrepresented to investors, and the CEO being forced to disclose that he had an investment in a company with which Lending Club did significant business. The news resulted in the resignation of LendingClub CEO and a substantial number of institutional loan buyers suspending investments. LendingClub, which offers both personal loans and small business loans, spent the rest of the year tightening credit requirements, increasing interest rates, and trying to restore investor confidence.
LendingClub may have been the first hiccup, but they were not the last. 2016 also saw personal loan providers Prosper and Avant reduce their lending and increase their credit standards. It was also reported the peer-to-peer lender, Funding Circle, cut its loan generation by half in the first part of 2016, a response to a batch of underperforming. Then, in mid-November, it was reported that Dealstruck , an alternative lender of short- and medium-term small business loans, stopped lending operations altogether.
By the end of November, CAN Capital, who had announced earlier in the year of surpassing $6 billion in total lending to small businesses since operations began in 1998, was having their own issues. It was reported in the Financial Times that the CEO and several other executives were stepping down after some assets were underperforming and certain processes needed improvement. While CAN stopped generating new loans for 2016, it is expected they will resume making new loans in 2017.
But while some alternative lenders have run into problems, others remain confident that their model remains the future of lending. And many see the OCC’s proposed FinTech bank charter (the culmination of a review that began in August, 2015) as a sign the industry is both here to stay, and ready to grow up.
The Office of the Comptroller of the Currency’s December announcement made clear that “if the OCC decides to grant a charter to a particular fintech company, the institution would be held to the same rigorous standards of safety and soundness, fair access, and fair treatment of customers that apply to all national banks and federal savings associations.”
In an attempt to stay ahead to the curve, Kabbage, OnDeck Capital, and CAN Capital recently announced a new pricing transparency tool the call the SMART Box (Straightforward Metrics Around Rate and Total cost). The pricing disclosures, provided before small businesses borrowers accept financing, is aimed at increasing understanding of the cost of borrowing and ability to more easily compare those costs with dissimilar financing products.
While expanded oversight and regulation may be in order, the OCC also made the case for FinTech’s place in today’s world, saying “new technology makes financial products and services more accessible, easier to use, and much more tailored to individual consumer needs. Five years ago these services either were available only from traditional banks or not available at all.”
SmartBiz, an SBA marketplace and bank-enabling technology platform founded in 2008, is a FinTech company that not only avoided hiccups in 2016, but set records. It was recently announced that in fiscal year 2016, SmartBiz ranked first among providers of non-Express, SBA 7(a) loans under $350K with $200MM in loans. If you include SBA Express Loans, they still, ranked among the top five providers of all loans under $350K.
Both accomplishments are a first for a FinTech company. SmartBiz CEO, Evan Singer, attributes their success to SmartBiz’s ability to bring technology to banks while making customer needs their number one priority. “Meeting customer needs means saying yes to the loan size a customer needs, offering great rates, and providing terms that allow for low monthly payments.”
In order to be able to meet needs of more small businesses, SmartBiz has continued to grow its network of SBA lenders, allowing them to say yes more often. And after noticing that 20% of their customers were using mobile devices to during the application process, they optimized their site to be mobile friendly so that an application can be completed from a mobile device.
In addition, on December 14th, SmartBiz announced that they are expanding their offerings to include SBA 7(a) loans for commercial real estate. These loans will range in size from $350K to $5MM, have terms up to 25 years, and feature variable rates starting at Prime + 1.5. Having already drastically reduced funding times for loans under $350k, they expect to do the same with their CRE product, predicting the SmartBiz platform will enable funding times of between 4-8 week.
Another alternative lender for small businesses that has maintained investor confidence and has continues to grow its lending operations and expand its product offering is BlueVine. The company, which was launched as a modernized option for invoice factoring, recently began offering a line of credit product which now accounts for a sizable part of their business. After funding over $200MM in working capital for small businesses in 2016, they successfully raised $50M in additional funding to expand their efforts.
Some alternative lenders believe that the embrace of technology isn’t the only factor giving them an edge over traditional lenders. StreetShares, a provider of short term business loans with a focus on lending to veteran-owned businesses, was another alternative lender that was able to raise money in the tight market of 2016. Their co-founder and CEO, Mark Rockefeller, said that by, “incorporating technology with an affinity group, like military veterans funding loans to other military veterans, we’ve reduced costs to lend, reduced risks, and allowed us to make veteran small business loans more affordable.”
Alternative lending is not just seeing expansion in P2P and balance sheet lending for personal loans and small business loans. Alternative lending is also continuing to expand its presence in large sectors like commercial and residential real estate. In 2016, companies like LendingHome, RealtyShares, and Patch of Land have grown their lending and their reach. Marketplace lender LendingHome reached $1 billion in originated loans. RealtyShares and Patch of Land have each originated around $200 million in real estate loans.
“Alternative lending is dead because it’s no longer alternative. Large players like Goldman, Chase, Santander, ING and others are getting into the space,” continued Frohwein. “There’s not only a place for the upstart online lenders to continue their leadership in the space, but you’ll see another wave of innovation spearheaded by the most innovative of these players. Partnerships with innovative companies will continue to be the method by which large banks differentiate themselves from their peers.”
Such partnerships appear to be working for SmartBiz. “SmartBiz has taken the approach to actively partner with banks,” Singer said. “I think the companies that partner with banks will continue to do well. And I think the companies that are able to deliver on meeting customer needs will be the companies that continue to rise to the top.”
Through tighter internal controls, self regulation, and closer partnerships with traditional lending institutions, it appears that alternative lending will continue to expand its role in 2017. Their embrace of technologies to increase the availability of capital and improve customer experience points to a trend that can’t be ignored.
Marc Prosser, “What Do The Hiccups Of 2016 Mean For Alternative Lending In The New Year?” Forbes.com, December 30. 2016. Accessed via: http://www.forbes.com/sites/marcprosser/2016/12/30/what-do-the-hiccups-of-2016-mean-for-alternative-lending-in-the-new-year/#260aff3f3e05
Capital One’s Treasury Management Group is already looking ahead to how corporate treasurers will face the most modern of challenges in 2017. A new survey from the group published earlier this month found that 83 percent of treasurers are gearing up to upgrade existing technologies, or implement entirely new ones, in the coming year.
In response to the survey’s findings, Capital One Executive Vice President and Head of the Treasury Management Product Management Group Patrick Moore said that innovators of the treasury management space need to take “a human-centric design approach to identify pain points that clients are experiencing day to day.”
In addition to those pain points, CFOs and treasurers are facing waves of innovation across the payments and FinTech arenas, and corporate treasury no longer exists independently from these industry-wide shifts.
In offering up his predictions for the corporate treasury space in 2017, Moore told PYMNTS how CFOs and treasurers are driving the strategies of that innovation and how payments innovation overall forces changes in how these professionals approach their jobs.
“Clients are increasingly demanding real-time payments, and the rise of financial supply chain companies is removing the inefficiencies of paper POs and invoices, providing greater transparency into the procure-to-pay cycle and enhancing the client experience,” he stated, adding that competition in the corporate FinTech space is also spiking.
“Technological advancements, including cloud computing, sensors, wireless, APIs, blockchain and mobility — along with the decreased costs of IT processing — are accelerating the pace of tech innovation,” the executive continued. “At the same time, client behaviors and expectations are shifting; clients are demanding easy, intuitive mobile experiences. In addition, regulatory initiatives are driving financial inclusion, competition and infrastructure improvements.”
For Capital One, approaching the future of treasury management means collaboration.
“We’re focused on emerging technologies, harnessing the power of mobile banking and creating lasting partnerships in the FinTech space to radically change the way we serve our clients,” Moore explained, noting that his unit is often collaborating internally as well, working with Capital One’s Enterprise Payments unit “to drive strategic conversations and develop coordinated payments strategies across the company.”
Capital One’s own research shows that corporate treasurers largely have their focus on incoming tools to improve their business processes. With the payments and FinTech sector developing with a pace of innovation never before seen, CFOs and treasurers will have more technologies at their fingertips that will infiltrate those processes and change the game.
“It’s an important and historic time in the payments space,” Moore said, “and there are many developments to be excited about. The conventional theories of what works are being challenged by emerging technologies every day, and a confluence of forces is reshaping the payment industry and influencing the path of transformation.”
Staff, “Treasurers Watching FinTech Innovation To Get An Upgrade” PYMNTS.com, December 27, 2016. Accessed via: http://www.pymnts.com/news/b2b-payments/2016/capital-one-corporate-treasury-management-fintech-innovation-forecast-predictions-2017/
Earlier this month, marketplace lending site Biz2Credit released the findings of its most recent small business lending index . The data revealed that SME loan approval rates at big banks were at an all-time high, hitting 23.7 percent in November. Small banks saw their loan approval rates tick up, too, to 48.8 percent. Meanwhile, approval rates among alternative lenders sunk down, a finding that Biz2Credit CEO Rohit Arora said could be a sign of negative times ahead.
“CAN Capital, one of the largest and oldest players in alternative lending, has stopped lending and replaced CEO Dan DeMeo,” he reflected in a statement. “Alternative lenders have lost favor because of the rates they charge. Meanwhile, they lost much of their competitive advantage of the speed of their decision-making as other types of lenders continue to invest in technology to expedite the loan approval process.”
Arora’s doubts over alternative lending aren’t unique. This week, Financial Times reported a shift in the sector that sees alternative and P2P lenders turning more into traditional lenders, with companies like Zopa seeking out banking licenses in the U.K.
“P2P only works on a small scale,” one industry expert told the publication. “There is not enough demand for credit to grow it enough, and so, they have to act like banks.”
Meanwhile, in addition to CAN Capital’s recent struggles, another alternative lender, Argon Credit, reportedly filed for bankruptcy protection this month.
Is 2017 the year alternative lending will collapse? PYMNTS decided to speak with Biz2Credit’s Arora to gain more of his insight into the future of the alternative business lending landscape.
“I think there will be more consolidation in the market,” he said. “A lot of the alternative lenders were dependent on ISO affiliates and brokers to source deals, and customers are moving away from that trend.”
There are aspects of alternative lending, however, that remain attractive to prospective borrowers, he said.
“More of the borrowers are seeking faster responses and are applying for funding online and digitally,” the CEO and cofounder explained. But that doesn’t mean alternative lenders that finance their borrowers directly are attractive enough to remain viable. “Unfortunately, alternative lenders have not made the types of investments in technology that other categories of lenders have been making.”
Banks, on the other hand, continue to invest in technologies that mean traditional institutions can offer borrowers the same online experience and speed that became alt-lending’s key proposition.
“As banks are starting to get better at their digital strategies, they will start gaining momentum with the implementation of digital offerings to borrowers,” Arora said, adding that, along with consolidation, SME lending will see greater competition in 2017.
Part of that trend stems from market conditions arising in the new year.
“The economy is expected to do better, so we are going to see more demand for financing as business owners get more aggressive to expand their companies,” the executive said. “The recent interest rate hike will result in a larger appetite for banks to approve funding for loan requests. The good news is that this will lead to more needful credit.”
On a positive note for alternative lenders, though, regulation is unlikely to crack down on the sector.
“I don’t foresee increased regulation on alternative SME lenders,” he noted. “In fact, there will be less suspense about new regulation being introduced with the incoming Republican administration. The Office of the Comptroller of the Currency establishing a new set of guidelines for FinTech players becoming FinTech banks will lead to greater clarity on the regulatory side. This will sort out the long-term players in this space.”
Greater clarity and stability on incoming regulatory pressures for the industry mean the sector won’t likely go entirely defunct altogether. But market consolidation and greater competition from traditional lenders will quickly sort out the winners from the losers in alternative SME finance. According to Arora, that means 2017 will certainly be a challenging year for the space.
“The cost of acquisition for alternative lenders is still very high,” he said. “Alternative lenders will need to find out how to work with banks more closely because they are gradually increasing their commitment to small business financing.”
Staff, “Alternative SME Finance Just Might Survive In 2017” PYMNTS.com, December 28, 2016. Accessed via: http://www.pymnts.com/news/b2b-payments/2016/biz2credit-alternative-sme-lending-finance-small-business-competition-regulation-2017/
John Stumpf, CEO of Wells Fargo & Co., waits to testifies before the Senate Committee on Banking, Housing, and Urban Affairs in Washington DC, on Tuesday, September 20, 2016. BLOOMBERG
Trends to watch
Fintechs multiply: The year ahead promises a fresh wave of startups chasing innovation in such areas as banking and investing apps targeting millennials, and other services that make money transfers easier, faster and cheaper. A key regulator, the Office of the Comptroller of the Currency, proposed granting fintechs a special purpose bank charter to give them greater flexibility in building out their services.
Giving Trump credit: Donald Trump ’s election promises to have the greatest impact on Bay Area bankers in 2017, given his talk of easing industry regulation. A post-election rally in stocks lifted banks big and small as prospects for higher interest rates and regulatory relief promised to boost the industry’s fortunes. The Bay Area’s big banks — Wells Fargo , Bank of America and JPMorgan Chase — saw their shares soar. But smaller banks might be the first to taste regulatory relief.
Bubble trouble: When you’re operating in the highly leveraged business of banking, any hint of a bubble bursting spells trouble. A December interest-rate rise by the Federal Reserve — plus its warning to expect more of the same throughout 2017 — is an attempt to let some of the air out in a measured and orderly manner. That’s always easier said than done, of course.
Company to watch
Wells Fargo: The San Francisco bank’s fake accounts scandal will continue to cast a long shadow in the year ahead. The bank’s once-vaunted cross-selling strategy lies in tatters and its business practices have been cast in a harsh light. Regulators are considering starting the year with a double-downgrade to the bank’s community lending rating. New CEO Tim Sloan and his team have their work cut out for them in repairing the bank’s tarnished reputation.
Person to watch
Denise Thomas : The founding CEO of San Francisco-based ApplePie Capital is an example of the innovation and creativity being brought to bear on financial services. ApplePie connects investors with entrepreneurs borrowing to buy or expand various franchised businesses from Wendy’s and 7-Eleven to Marco’s Pizza and Jimmy John’s Sandwiches. Thomas said she came up with the company’s unusual name over dinner with longtime industry colleagues. They happened upon the name as dessert was served. Yes, it was apple pie.
Five key events from 2016
1. Wells Fargo stumbles: Wells Fargo shocked the nation with disclosures that branch staff had opened up 2 million deposit and credit accounts without customers’ authorization to meet sales quotas. Wells was fined $185 million. By year-end, Chairman and CEO John Stumpf had been ousted, the bank had lost millions of accounts and the scandal had widened to include unauthorized insurance policies.
2. LendingClub woes: LendingClub’s founding CEO Renaud Laplanche was ousted from the San Francisco-based marketplace lender over the company’s loan practices. Laplanche quickly was hard at work building his next fintech startup, while LendingClub’s new CEO Scott Sanborn focused on repairing the damage done while looking for new avenues of growth such as refinancing auto loans.
3. Community bank combos: The long-running consolidation of the banking industry was moving at a rapid clip in 2016. In the Bay Area, Mechanics Bank’s new majority owners were eager to help drive that consolidation, picking up California Republic Bank in Orange County and promising that more deals lie ahead for the Walnut Creek bank.
4. Stripe charges ahead: Stripe, led by brothers John and Patrick Collison, almost doubled its valuation in a $150 million fund raising as investors were eager to get their share of one of the most promising players in fintech. Stripe, which creates software to allow businesses to accept digital payments online, is enjoying explosive growth with the rise of online shopping.
5. Square comes full circle: Square CEO Jack Dorsey envisioned building an ecosystem to help merchants by making commerce easier. It started with the square plastic device that allows almost anyone to accept credit cards. Square found that collecting all those card payments and data about the health of their small business clients provided an advantage in making loans. Thus, Square Capital, which by the end of 2016 had lent more than $1 billion to small businesses.
Mark Calvey, “While scandals dominated 2016 banking headlines, innovation may do so in 2017” San Francisco Business Times, December 28, 2016. Accessed via: http://www.bizjournals.com/sanfrancisco/news/2016/12/28/2017-forecast-banking-wells-fargo-applepie-capital.html
Shanda founder Chen Tianqiao sets sights on pioneering role in finance
Chinese retail investors may be able to dream of Picasso while hanging share certificates on their walls.
A Singapore-based Chinese billionaire investor, who this year acquired stakes in peer-to-peer group Lending Club, the fund manager Legg Mason and Sotheby’s, has proposed “securitising” the artist’s work to create fractional ownership and tap a wider market in Asia.
Chen Tianqiao and his wife Chrissy Luo , co-founders of investment group Shanda, floated the idea to Sotheby’s chief executive that the auction house could enlarge its base of Chinese buyers by creating shares in artworks.
“The Picasso painting is $100m,” Mr Chen says. “No one can pay that unless you are a billionaire. How [about] if we securitise to 100m shares and each share is $1? If you buy 100 shares of each Picasso painting, that will be a portfolio for Picasso.”
The investors would profit if the artwork rose in value, Mr Chen adds.
The couple, who founded online gaming and books group Shanda Interactive Entertainment in 1999, say they can be pioneers in investment, leading more of China’s private wealth overseas.
While Shanda, which has $8bn in net assets under management, sold its 2 per cent stake in Sotheby’s in August, it is now attempting to direct its innovative investment approach to other companies, mainly in the financial sector.
The company has a 15.13 per cent stake in US group Lending Club — making it the single biggest investor — and a 9.9 per cent stake in Legg Mason, acquired in April. It also has accumulated a 13.8 per cent holding in US hospital operator Community Health Systems.
The group is now looking to raise its stake in Legg Mason to 15 per cent, the two companies have said. Mr Chen will in June join the board of the US-listed asset manager as vice-chairman and will lead Shanda’s efforts to assist Legg Mason in building its brand in China.
“The globalisation of the renminbi will happen,” Mr Chen says. “More and more Chinese money will come to the market.”
But the ups and downs of equities markets make potential Chinese investors anxious, he says, so first they have to conquer their fears: “Once they move the asset offshore, their mindset is to try to keep the asset safe.”
Mr Chen cites Lending Club’s A and B grade loans — the top two tiers of their seven-grade system — as examples of relatively safe products that might tempt Chinese buyers. “This is a good product. We can help them introduce the product to the Chinese investor.”
He proposes customising Legg Mason’s investment products for Chinese clients. Chinese retail investors might be tempted by real estate assets that are securitised to provide liquidity, but with insurance companies brought in to guarantee a minimum return, Mr Chen suggests.
A draft of new rules restricting some capital outflows from China have circulated since Mr Chen expressed this optimistic outlook to the Financial Times. Acquisitions of more than $1bn will be screened by the government for signs of capital flight as opposed to strategic investment.
Through a spokeswoman, Mr Chen later declined to comment on the capital outflow rules. However, a boom in overseas investment in recent years means there are plenty of investors with capital outside China. According to commerce ministry data, Chinese companies’ overseas purchases reached $146bn in the first 10 months of 2016.
Finance is the sector that Shanda is focusing on because it is “sustainable,” Mr Chen says. “A lot of financial companies have 100 years of history.”
Global regulators are increasingly focusing attention on peer-to-peer lenders, with the US Treasury pushing for greater transparency both for borrowers — on pricing terms — and investors — on loan-level data.
Shanda revealed in a securities filing in May that it had accumulated a stake of nearly 12 per cent in Lending Club. The filing was made two days after the online lender’s chief executive Renaud Laplanche stepped down amid a loan mis-selling scandal and the company’s stock price collapsed.
“I fully believe in the power of the technology,” Mr Chen says of Lending Club. “All of these transparency problems can be solved. It just takes time. Peer-to-peer lending makes the lender directly meet the customer, it can save a lot of costs and time — strategically it is a great direction for the finance business.”
A more regulated market will ultimately benefit Lending Club, he adds. “As a dominant player, the more regulated the better.”
He cites Lending Club’s commanding position — it is the biggest listed online lender by loan volumes — and its $800m cash on its balance sheet as evidence of its strength.
Mr Chen also predicts consolidation in the P2P lending sector. “Followers, peers of Lending Club — if their scale is small, if internal controls are weak — there will be a shakeout. That will be good for the industry and also good for the dominant player.”
Additional reporting by Don Weinland in Hong Kong and Mary Childs in New York
The art of securitisation
The concept of art securitisation is not new, but it has struggled to take off. SplitArt, a Luxembourg enterprise that aimed to create tradeable certificates based on artworks, ended in liquidation in 2012.
One of the challenges of securitising art is that, unlike a debt obligation, fractional ownership of an artwork does not generate cash until it is sold.
Evan Beard, national art executive at US Trust, a private banking unit of Bank of America, says: “One of the reasons art funds have not worked so well is because part of the return of art is the aesthetic pleasure you derive from having it on your wall.
“It’s very difficult to make up only in financial return enough to make it an interesting investment.”
One way to securitise art would be to take a bundle of loans that use artworks as collateral, and turn this loan exposure into a security, Mr Beard suggests.
A challenge here would be giving investors transparency, when art loans tend to be discreet.
“Almost every art loan has a non-disclosure agreement attached to it and anyone who does an art loan, the last thing they want is a third party to have any insight into their art,” Mr Beard says.
But Mr Chen and his wife say there is a significant untapped demand for art investment among China’s middle class.
“This is customising Picasso for the middle class Chinese investor. They truly believe in Picasso but cannot invest,” Mr Chen says.
He says Sotheby’s reacted with interest to his proposal, but adds: “We are just financial investors, [so] it was like friends’ talk.”
Tad Smith, Sotheby’s chief executive, says Mr Chen aired many ideas for the business during an “enjoyable dinner”, adding: “From our time together, it was clear that he would be a stimulating and innovative shareholder to any enterprise.”
Jeevan Vasagar, “Chinese billionaire with ambitions to reshape investment models” Financial Times, December 26, 2016. Accessed via: https://www.ft.com/content/750d8a0e-c0e6-11e6-9bca-2b93a6856354
Online sites such as Zopa move closer to the market they set out to disrupt
The arrival of peer-to-peer companies in the UK a decade ago was supposed to start a lending revolution.
As online sites that channel investors’ cash directly to borrowers, P2P groups trumpeted their ability to cut out the banks as middlemen. The online lenders said they could facilitate loans more efficiently than banks and offer a superior service, while giving investors attractive interest rates.
But 10 years on from the launch of Zopa, the world’s first P2P site, the nascent sector is muscling in on traditional banking — the very market it set out to disrupt.
The clearest sign of the transition came last month, when Zopa revealed it was applying to UK regulators for a banking licence . Zopa said it was to provide a wider range of savings and credit products.
Some platforms in the US, such as Affirm, have also expressed interest in becoming banks, in order to take deposits. Others, such as student lender SoFi, have elements of their business that already resemble banking.
Their moves into mainstream banking have raised questions over whether the peer-to-peer model is viable for the long term — or if it will ultimately mirror the industry it is trying to upend.
“P2P only works on a small scale,” said one industry expert who wished to remain anonymous. “There is not enough demand for credit to grow it enough and so they have to act like banks.”
Some believe Zopa’s request for a banking licence reflects the challenge of competing with traditional high street lenders for cheap deposits.
Unlike a bank, a P2P site cannot provide investors’ money with cover from the Financial Services Compensation Scheme in the event it goes bust. P2P groups therefore have to pay more to attract investors — or lenders — for taking on the greater risk.
Cormac Leech, a principal at venture capital fund Victory Park Capital, said: “If you run a bank, you source low-cost capital.”
He said there would likely be more online lenders offering banking products, partly to attract cheaper, stickier funding over time. “P2P is going to become much more integrated into the existing financial ecosystem.”
The banking licence will allow Zopa to offer deposits protected by the FSCS, and credit cards and overdrafts, in order to boost lending to individuals. Zopa had previously been attracting retail bank deposits through a tie-up with challenger bank Metro.
There are other signs that some P2P sites have been morphing into banks. One is the advent of the “provision fund” offered by some platforms, where borrowers pay in a fee to help cover potential losses.
This month, Andrew Bailey, chief executive of the UK’s Financial Conduct Authority, said the protections from the provision fund seemed similar to depositing money in a bank, potentially giving investors a false sense of security.
“We’ve seen some cases of marketing where what goes with the reserve fund is saying ‘and nobody has ever lost money in our fund’ but of course it isn’t a bank contract in that sense and that does worry us that it can trend towards being misleading, frankly,” he said.
P2P lenders are also coming under scrutiny as they undergo the FCA’s authorisation process in order to continue operating — and regulation of P2P is expected to get tougher.
The FCA recently said online lenders had at times hidden the true performance of their loans from investors.
Stian Westlake of innovation charity Nesta said: “One thing we may see is more scrutiny of algorithms that P2P use to do their credit scoring. At the moment, this is a black-box, those credit scores are not comparable across different platforms.”
The evolution of P2P and its shift towards banking is making it more complicated and arguably less transparent, according to industry analysts.
James Clunie, a fund manager at Jupiter, said there had been a “morphing” of the people who are lending. “The image is of a person on their sofa on a laptop. But actually, there are a lot of institutions lending . . . even the banks. That is a complex ecology. We need to learn more about who is borrowing, who is lending.”
Research by the University of Cambridge and Nesta this year found banks and other institutions accounted for a quarter of lending on P2P sites.
Some platforms insisted they would not be applying for a banking licence. Samir Desai, a co-founder of Funding Circle, said: “In SME lending, it makes no sense, because there are other sources of capital. The capital requirements on a bank offering SME loans are also higher than for consumer lending. We have no plans for a licence.”
Also, platforms are showing few signs of needing funding. Zopa wrote to its customers this month saying it would not be accepting new money from lenders because of falling demand from borrowers.
“The irony is every time rates are cut by mainstream banks, there is a significant amount of interest from consumers to invest into these platforms,” said Imran Gulamhuseinwala, global head of fintech at EY. “So at the moment, there are more funds seeking to invest rather than there are borrowers.”
Emma Dunkley, “Peer-to-peer lenders morph into traditional banking” Financial Times, December 27, 2016. Accessed via: https://www.ft.com/content/16a572d6-c39f-11e6-81c2-f57d90f6741a
Vlad Tenev (left) and Baiju Bhatt co-founded Robinhood, a stock brokerage that does not charge any commissions for its customers to buy and sell shares. Their goal is “to create an international company that will be like nothing the financial services industry has ever seen.” THE ASSOCIATED PRESS
It may not be much longer before bank branches join video rental stores and record shops as relics of a bygone era.
Silicon Valley is pressuring banks to change their ways or risk becoming the latest industry overtaken by technology. Hundreds of startups are offering easier and cheaper ways to save, borrow, spend and invest.
They are doing it by shifting the battleground to smartphone apps and websites, which function as digital offices that are accessible around the clock with minimal staffing, and by lowering fees.
Given how much customers dislike it, the financial services industry seems ripe for “disruption,” as Silicon Valley likes to call industry upheaval. These financial technology, or “fintech,” startups also may soon get further validation from a key banking regulator.
Comptroller of the Currency Thomas Curry last week announced plans for a special national bank charter that would allow fintechs to offer their products without having to get regulatory approval state to state. Part of Curry’s motivation lies in his belief that fintech can help consumers who either do not want or cannot afford to establish accounts with traditional banks.
At this point, the fintech sector has not proven it can be a viable or trustworthy alternative to traditional banks and stock brokerages. Few of the startups have ever posted a profit, and one of the biggest, the Lending Club, is trying to recover from a breakdown that triggered the resignation of CEO Renaud Laplanche this year.
The Justice Department is investigating the events that led to Laplanche’s abrupt departure.
“The disruption in banking is coming later than other areas because of the complexity of the regulations and the amount of trust required,” Laplanche said in an interview this year, while he was still CEO. “Trusting you with my savings is not like booking a trip online.”
Banks, meanwhile, have demonstrated their resiliency and resourcefulness. With the help of taxpayer-backed bailouts, the industry has survived a financial crisis of its own making, and now appears to be tackling the fintech threat.
They are closing branches, laying off workers, pouring money into their own technology departments, and even buying or teaming up with fintech startups.
Taking the threat seriously
“Whenever I talk to big banks, they ask, ‘What are the disruptors doing? Which of their ideas can I copy?’” says Forrester Research analyst Oliwia Berdak.
A recent survey of the financial services industry by the research firm Gartner Inc. found that 70 percent of respondents considered fintech startups to be a bigger threat than their traditional rivals.
With their guard up, the much bigger banks are more likely to drive many of the fintech startups out of business if they do not acquire them first, says Gartner analyst Rajesh Kandaswamy. But even in that scenario, he predicts “many of the ideas coming out of fintech will survive in one way or another, which will be beneficial for consumers.”
About $850 billion in consumer banking revenue in the U.S. alone is at stake. Fintech captured just 1 percent of that last year, according to a Citibank study. By 2023, though, Citibank expects fintech to control 17 percent of a $1.2 trillion market.
In this Wednesday, Dec. 2, 2015, photo, Robinhood co-founders Vlad Tenev, left, and Baiju Bhatt pose at company headquarters in Palo Alto, Calif. Robinhood is a stock brokerage that does not charge any commissions for its more than 1 million customers to buy and sell shares. “During the next 10 years, we are going to create an international company that will be like nothing the financial services industry has ever seen,” says Bhatt. (AP Photo/Ben Margot) THE ASSOCIATED PRESS
A big, bold approach
“During the next 10 years, we are going to create an international company that will be like nothing the financial services industry has ever seen,” boasts Baiju Bhatt, co-founder of Robinhood, a stock brokerage that does not charge any commissions for its more than 1 million customers to buy and sell shares.
To make money, Robinhood recently introduced a $10 monthly membership service that allows trading when the stock market is closed and offers higher borrowing limits.
At Affirm, an online lender, CEO Max Levchin is attempting to reshape finance for a second time after making his first big splash in Silicon Valley as a co-founder of PayPal, a digital payment service born in the 1990s.
Helped by his pedigree, Levchin has raised $525 million to back Affirm’s focus on consumers who do not like or cannot get credit cards. Instead of providing a revolving line of credit with high interest rates that compound, Affirm has developed its own formula to identify borrowers able to repay loans in equal installments in time frames ranging from three months to one year.
Affirm also refuses to charge fees for late payments, to further distinguish itself from banks and other credit card issuers.
“I just don’t think you can run a business by (taking advantage of) your customers these days,” Levchin says. “I would like to think we are returning to what lenders are supposed to do.”
Hundreds of startups offer easier and cheaper ways to save, borrow, spend and invest, but few have posted a profit. One of the biggest, the Lending Club, is trying to recover from a breakdown that triggered the resignation of CEO Renaud Laplanche (above). 2014, THE ASSOCIATED PRESS
Customers still aren’t totally sold
Although many consumers rarely expect big banks to act in their best interests, they typically consider them to be a safer place to keep money because of their long histories in business, says Forrester’s Berdak.
Like the big traditional banks, most digital-only banks also offer government-backed insurance on deposits, but Berdak says that is not enough to overcome lingering doubts about their long-term prospects.
Lending Club, for instance, has been operating under a cloud since revealing that paperwork for $3 million in loans had been falsified under Laplanche’s leadership. Laplanche declined to comment about circumstances surrounding his resignation.
Unlocking a young market
Fintech’s target market so far has been the millennial generation, the 18- to 34-year-olds who typically have a deeper attachment to their smartphones than any bank.
They are customers like Fred Miller, who opened his first account as a teenager a decade ago and quickly became disillusioned with the array of fees charged for everything from late payments to ATM withdrawals.
After years of frustration, Miller defected to Simple, a digital bank that Australian immigrant Josh Reich started in 2010 after concluding that U.S. banks “went out of their way to screw customers out of their money.”
Besides eschewing service fees, Simple also offers money management tools that help their customers set aside money. Miller, an Indianapolis resident, credits those tools for helping him and his wife, Emily, repay $30,000 in student loans and squirrel away enough money for a trip to New Zealand this year.
Staff, “Banking on change: Tech startups target financial services” Associated Press via Richmond Times-Dispatch, December 26, 2016. Accessed via: http://www.richmond.com/business/ap/article_62706ad7-5b10-552d-84a4-3547512d9de6.html
A Chicago-based online lender filed for bankruptcy protection last week, which would be interesting enough on its own, but the ripples from this particular situation could rock boats elsewhere in the sector, including the Ranger Direct Lending Fund, which is listed in London.
Let’s go to SNL Financial’s Tim Zawacki first for the basic facts:
A fast-growing online specialty finance company that touted its “dedication to Big Data” as a competitive advantage in underwriting consumer installment loans filed Dec. 16 for protection under Chapter 11 of the U.S. Bankruptcy Code.
Chicago-based Argon Credit LLC co-founder and CEO Raviv Wolfe said in a bankruptcy court declaration that “liquidity issues” caused the company, which offers 12- to 60-month loans in amounts ranging from $2,000 to $35,000 to borrowers with credit scores above 540 at annual percentage rates of between 19% and 95%-plus, to miss a payment under a $37.5 million credit facility. The issues emerged in the aftermath of a spike in loan defaults that transpired during a time in which it had transferred servicing functions to a third party.
Here’s how Argon presented itself to the world. What could go wrong?
Wolfe is placing a big chunk of the blame on an unnamed third party loan servicer Argon hired in the 2nd quarter of 2015. The problems caused by that third party seem pretty heavy, if you take Wolfe’s allegations at face value:
However, after the Loan Servicer started to service the Debtors’ portfolio, problems began to appear with regularity including a) refinancing or loan increase requests would take at least three weeks to process, well beyond the lead times previously provided to customers by the Debtors, b) first payment loan default rates soared from 4% to 12% as life of loan projected default rates increased from 24% to 34%, c) customers who had consistently made 8-10 payments stopped paying, and d) a significant number of new customers failed to make a first payment in spite of the Debtors’ underwriting guidelines remaining unchanged.
Who could that loan servicer be? Well, here’s a press release by loan servicer First Associates in April 2015 — that’s the 2nd quarter, in case it’s unclear — announcing it is providing primary servicing to Argon Credit. Larry Chiavaro, executive vice president at First Associates, strongly rejected the allegations in an email and said: “It’s always easy to blame the servicer for origination issues, but our performance on this portfolio was very good.”
But that’s not all! Argon Credit has a variety of institutions funding its subprime lending operations. One of the senior lenders is the “Princeton Alternative Income Fund”, which is based in, well, Princeton, launched in January 2015 and had about $65m under management at the beginning of 2016 .
According to Argon’s Chapter 11 filing, Princeton has a $37m claim against its assets, which is classified as contingent, unliquidated and subject to setoff, suggesting some uncertainty about the actual amount owed.
And who has exposure to Princeton? Ranger Direct Lending. They have a 100 per cent equity interest in the “Princeton Alternative Income Offshore Fund”, which was worth about $56m at the end of June this year . Ranger’s total asset value at that time was $218m.
Ranger’s exact exposure to Argon through Princeton is not entirely clear. It’s possible there is some technicality with Princeton’s onshore and offshore fund that means it isn’t exposed to Argon. We’ve contacted Ranger for comment and will update as and when we hear back.
Update: Ranger has filed an update to the market , noting that its exposure to Argon is “approximately US$28.3 million” but saying it doesn’t expect to take a hit to its net asset value or aggregate dividend payments:
Having made enquiries of the SME Credit Line Platform [Princeton] management, the SME Credit Line Platform [Princeton] is of the view that it does not currently expect any write downs in the value of its investment as a result of the Argon bankruptcy filing or any decrease in distributions that it expects to receive in respect of its investment both as a result of the security package of which the platform is the sole beneficiary and its expectation to recover the collateral that has been assigned without consent.
Kadhim Shubber, “Online lender files for bankruptcy protection, just in time for Christmas” Financial Times, Alphaville, December 22, 2016. Accessed via: https://ftalphaville.ft.com/2016/12/22/2181696/online-lender-files-for-bankruptcy-protection-just-in-time-for-christmas/
This time of year, many of us are reflecting on the past 12 months, thinking about what we’ve done well and what we’d like to learn from, as well as where we’d like next year to take us.
Whether you’re a leader, manager, solopreneur, small business owner, parent, or anyone who wants more impact and to inspire others, there’s one New Year’s Resolution that can improve everything you’re focused on right now. That’s learning how to inspire, uplift, transform and engage people so they can become their highest and best selves, contribute at their highest level, and reach their most exciting goals and visions.
How do we inspire others? I’ve seen that there are five critical ways that the most inspiring people have honed how they operate and interact with the world, so that they stand as a lighthouse for us, shining their light to make our way even clearer.
Below are five ways you can become more inspiring next year, and bring out the best in yourself and in your family, community, work culture and organization:
Be kinder and more compassionate.
Our world has undeniably grown colder, crueler and more disparaging with every minute. The internet and the anonymity of online interaction has only exacerbated this trend, and the speed of work and intensive pressure we face has dehumanized our interactions. Many have become more impatient, stressed, angry, and downright cruel. Here’s a deeply saddening example of online cruelty, along with a beautiful, inspiring response from Lizzie Velasquez about the cruelty aimed at her.
The opposite of cruelty is kindness, and the rarity of kindness today means that when we see raw, pure kindness demonstrated in front of us, especially to those who’ve been cast out somehow or rejected, we’re often stunned and moved to tears. The reality is that most of us desperately crave kindness, and continually search for it in vain.
What to do? Ask yourself, “Where am I being stingy with my kindness? To whom have I withheld my kindness, care and compassion, and why is that? What would do I need to heal to access more kindness in my heart?”
The more kindness you can foster every day in your heart, the more you will inspire others to heal what’s wounded , mend bridges, love and accept who they are and become more of themselves, and foster more loving and compassionate relationships and communications. And that inspires and heals the world.
Don’t take it all so seriously.
With the intense pressures of our lives today, we’ve forgotten how to laugh. The more you can distance yourself from your fragile, defensive ego and uptight personality that takes everything so personally and seriously, the more you’ll inspire people to feel free be who they really are, authentically and openly. Authenticity enlivens people, because they feel they can finally be free to be open, make mistakes, laugh at their foibles, and move forward boldly integrating what they’ve learned from their mistakes to build a better, happier life and livelihood.
What to do? Take some time out each day to tap into your sense of lightness and humor. Breathe deeply, meditate for a few minutes, talk a walk, and let your lightness and easy-going nature emerge. Take a 15-minute break from the grueling pace of your day, and remember that it’s not all so serious , pressing or life-and-death. Plug into something that makes you laugh from your belly every day.
Become a riveting storyteller.
Nothing inspires and uplifts us more than a riveting, personal story that is both universal (in that it speaks to all of us about what we want more of) but also powerfully individual, filled with specific life details that weave together a picture that teaches us something about what it is to be human.
Do you know how to tell a powerful story and craft a compelling presentation – about who you are , what you’re doing, what your organization is striving for, and what you care about most in the world?
What to do? Check out Nancy Duarte’s riveting research and watch her TEDx talk on the secret structure of great talks. Then take some time to craft your own riveting personal story, and share it widely.
Stand in the shoes of the one you judge most harshly.
Nothing is uglier than someone who judges, tears down, demeans and diminishes other people for being different. You simply can’t be an inspiring individual or leader if you gossip, criticize, and tear down others who aren’t like you.
What to do? Stop using your language as a weapon, and decide you won’t hate or disparage those who aren’t like you . Stand in the shoes of the very individual who makes you so angry and frustrated. Try to understand exactly how and why you’re different, and find a way to embrace that difference rather than tear it down. Learn about the six dominant action styles humans use to take action towards a goal, and identify your specific action style. Understanding your style will help you see how and why others are different and why we need those very differences to make up a whole and healthy society and world.
Bravely honor and stand up for what you believe in.
Finally, we’ve all heard stories of individuals, leaders and managers who, in the face of terrible challenge and crises, have become more brave, honorable, ethical and accountable. Here’s a powerful example of this – Vietnam POW Lee Ellis shares what his harrowing POW experience taught him about leadership and engaging with honor.
In times of crisis, these inspiring leaders know that all they have to cling to is their honor, integrity and personal accountability for how they will react to the world. And they won’t compromise that for anything. For a life-changing read on this topic, read holocaust survivor Dr. Viktor Frankl’s book Man’s Search for Meaning
We’ve also heard the rare stories of a leader or manager whose employee made an enormous, costly mistake, yet they choose not to fire the individual, but stand behind him or her instead.
“Recently, I was asked if I was going to fire an employee who made a mistake that cost the company $600,000. No, I replied, I just spent $600,000 training him. Why would I want somebody to hire his experience?”
Do you know many leaders who are truly brave? So many today don’t actually lead – they follow. They pursue (with cowardice) what they think they have to in order to look powerful, save face, and protect their own skins.
An inspiring leader doesn’t blindly follow the rules, but follows his or her own heart, spirit, intuition and soul in their work. And the ultimate outcome is that they’re brave, inspiring, and transformatively powerful in all their decisions, communications and actions.
What to do? Examine where you’re not being brave in how you work, act, and communicate. Decide to finally stand up for what you believe in , and speak powerfully about what you value. Find a way to become more personally accountable rather than blaming others for what isn’t going well. When you become braver, and rise up for yourself, you’ll inevitably find that what isn’t working around you, and people who are dishonorable, cruel, and lacking in accountability, will begin to fall away.
Kathy Caprino, “5 Surefire Ways To Inspire Others More Deeply And Powerfully Next Year” Forbes.com, December 16, 2016. Accessed via: http://www.forbes.com/sites/kathycaprino/2016/12/16/5-surefire-ways-to-inspire-others-more-deeply-and-powerfully-next-year/#3a41a25236bf
Financial technology, known as fintech, has been regarded as one of the most exciting growth areas when it comes to technology startups, attracting significant venture capital.
Delayed IPO Dreams
That level of interest may be over. One startup that went public, LendingClub Corp. ( LC ), described as an industry pioneer, saw the ouster of its CEO, Renaud Laplanche, due to disclosure problems. The revelation of the major issues that existed within this market leader helped worsen the problems of the online lending industry. Shares of LendingClub, along with another newly public company, On Deck Capital Inc. ( ONDK ), are down more than 50% this year.
So it may be no surprise that startup Social Finance Inc. (SoFi), which boasted last year that it was profitable and planned an IPO in spring of 2016, has announced its postponing pubic offering plans — again. SoFi has been one of the poster children of fintech’s potential with a value of $4 billion.
Building a Stronger Foundation
SoFI CEO Mike Cagney says the online lender has pushed back IPO plans to focus on building out other business lines. SoFi also is working to close out a new $500 million funding round. The online lending company has been working to both sell its loans to international investors, which may lead them to take an equity stake in the company. (See also: How Tech Startup SoFi Plans to Disrupt the Banking Industry )
There’s no doubt that SoFi’s prospects for an IPO have been hurt by broader problems in the online lending market, illustrated by Lending Club and On Deck Capital. “Lending Club and On Deck were the two pioneers in the marketplace to go public and those stocks haven’t worked,” said Bob Ramsey, who works for web-based investment bank FBR & Co ( FBRC ). “That does mean investor appetite is muted.”
Charles Bovaird, “IPO Dreams: Fintech Turmoil Is Disrupting SoFi (LC, ONDK)” Investopedia, December 21, 2016. Accessed via: http://www.investopedia.com/news/ipo-dreams-fintech-turmoil-disrupting-sofi-lc-ondk/