Posted on

SoFi prepares to become a bank

Online lender SoFi is making an about-turn from its “Don’t Bank. SoFi.” tagline by actually becoming a bank.

CEO Mike Cagney’s announcement this week of the company’s intention to apply for a industrial loan company charter — a bank license that allows a non-bank to offer services a bank would provide — is a move that puts the financial technology company in a better position to go head-to-head with the big banks.

The time is ripe for the online lender to move forward with an application, following the acquisition of mobile banking startup Zenbanx, and $1.9 billion in venture capital funding. The industrial loan company (ILC) license would allow it to take FDIC-insured deposits, letting customers open bank accounts, credit cards and undertake other day-to-day banking services that were once only the preserve of the incumbents.

“The fact that we don’t have a deposit product means that we really can’t offer a ‘fire your bank’ proposition,” Cagney told The Financial Revolutionist in March. “[The license] allows a non-bank parent to have a captive bank subsidiary. The reason why that’s important for us is around marketing and brand. It also relates to things that are intrinsic to SoFi that you can’t do as a bank holding company.” SoFi would not comment for this story.

While some may interpret SoFi’s decision to proceed with an ILC as a turning point for the industry, Brian Knight, a senior research fellow at the Mercatus Center at George Mason University, said he doesn’t expect a rash of financial technology company applicants, as a bank license doesn’t suit all business models.

Analysts say the ILC charter is the only surefire way to become a bank, given the uncertainty whether the OCC Charter for Fintech Firms will weather the departure of Comptroller of the Currency Thomas Curry last month and a challenge from state regulators.

“With the ILC, there’s no question about the legality of the charter,” said Knight. Since a moratorium on ILCs initiated on the heels of the financial crisis expired in 2013, no companies have pursued it in a decade.

From a startup perspective, SoFi’s entry into the banking space should concern big banks wary of the competition.

“I think the big banks are worried, almost all of them are identifying fintech as something to watch out for and most of them are trying to innovate,” said Brion Nazzaro, group compliance director at WorldRemit, a financial technology company that offers a digital money transfer service. “Many banks will partner with fintech companies to keep their products and services at a lower cost or offer more value for the consumer.”

Others argue that it’s too early to tell if the growth of financial technology companies will truly present a challenge to the banks — if a firm poses a threat, they can just buy it. Pockets are big enough, as shown by BNP Paribas’ acquisition of digital bank Compte-Nickel last month for 200 million Euros ($217 million) or Ant Financial’s purchase of eye-scan firm EyeVerify in 2016, reportedly for $100 million.

“[The banks] are watching every one of these companies, and they know who’s going to try to pick their pockets, and if they think it’s a good idea they’re going to acquire the company,” said Gerald Blanchard, senior counsel at Bryan Cave.

 

Posted on

Are you too neurotic? Lenders test personalities to determine loan eligibility

Bad credit makes it tough to buy a home or a car. But in some places, having the wrong personality may also complicate your financial life.

When no credit history is available, lenders in emerging markets are increasingly looking to personality tests to fill the gap. Psychometric data, or data acquired through personality tests, is now being used to determine if customers qualify for credit in countries like Turkey, Russia, Mexico and India. Some assessors look at traits like conscientiousness, extroversion, agreeableness and neuroticism. For example, if someone ranks high on conscientiousness, they’re likelier to be better at saving, thus more secure financially.

The method has yet to go mainstream in the U.S. in part due to culture, regulations and the range of data already available to American lenders.

Still, psychometric data offers another option to assess consumers for whom insufficient data is available to generate a credit score. It’s a section of the population that’s gained more attention in the U.S., where over 25 million people are considered unscoreable by the Consumer Financial Protection Bureau.

“It’s about the values that underlie the actions that you take,” said Clare McCaffery, managing director of Coremetrix, a U.K.-based company that works with credit bureaus, lenders and insurers in India, South Africa and U.K. “I put money aside each month on the chance that I get unemployed. I have a good credit file because I’m conscientious — it’s not an accident that that happens.”

By assessing a consumer’s thought processes, McCaffery said, lenders are able to determine if a customer is eligible for a loan. Coremetrix evaluates customers through a quiz. Customers click on the image that best represents their response, and the questions are meant to assess values rather than generate right or wrong answers. In addition to assessing what’s driving the decision, CoreMetrix looks at biases as well.

Over 700 characteristics are organized; results are crunched along with repayment data into a number that represents a credit score.

Other evaluators use surveys to help lenders make decisions. The Entrepreneurial Finance Lab, a company that began as a research project at Harvard’s Kennedy School of Government, uses a survey that tests behavioral traits.

Bailey Klinger, executive chairman, said the lab’s score is based on how a candidate answers the questions, how they interact with the survey (how long they spend on each question), and how previous respondents have performed with credit products.

For example, the below question asks participants to rank on a sliding scale what picture represents the people in their communities. Depending on how someone answers, they could be seen as obsessive or disorganized.

EFL question
A sample Entrepreneurial Finance Lab question assesses perceptions.

McCaffery and Klinger stress that the surveys and quiz questions are not meant to yield right or wrong answers. Consumers are asked to react to a set of general questions that offer a peek into their thought processes or habits. For instance, sample questions from the Entrepreneurial Finance Lab ask the consumer to use a slider button to show how comfortable they are with technology, and another asks about how they spend their money. Coremetrix’s sample questions address emotions, such as “when you feel overwhelmed with making a decision, what do you do?” Respondents then choose from a range of pictures showing a range of emotional reactions.

It’s possible to cheat or be dishonest with models, but testing companies say they’ve accounted for this in their scoring models. For instance, on the Entrepreneurial Finance Lab test, respondents may be asked to list a series of numbers by memory that appeared earlier on the test. They’re told they can’t go back and check what the numbers were, but the test allows respondents to go back and cheat — the system tracks whether or not they do. McCaffery said that it’s possible for people to be dishonest with their choices on the Coremetrix test; however, multiple examples of questions that correspond to one personality characteristic are included on the test to minimize dishonesty. Coremetrix, like the Entrepreneurial Finance Lab, also monitors how much time the test taker spends on each question.

coremetrixquestion
Coremetrix focuses on emotional imagery.

The global unscoreable population is huge, including in India where over 70 percent of the 1.2 billion-strong population fall into this category, McCaffery said. While psychometric data has shaken up the credit-scoring game in emerging markets, it has yet to go mainstream in the U.S., and those with experience with U.S. credit bureaus say it has a lot to do with strict rules credit bureaus must follow, and a culture that may not lend itself to credit scoring psychometric tests.

For the past few months, FICO, working with the Entrepreneurial Finance Lab, has been testing psychometric testing in Turkey, Russia and Mexico. While it’s too early to offer definitive assessments, FICO is optimistic about the model’s ability to deliver results.

“They have many proof points around the world,” said Sally Taylor-Shoff, svp of scores at FICO. “The partnership is so that FICO can get more experience with the validity of this type of data.”

Before launching psychometric data in the U.S., Taylor-Shoff said lenders would need to ensure compliance with regulations including those on consumer disclosure (e.g. being able to explain to someone why they were denied credit); fair lending (making sure the method doesn’t disadvantage a particular type of customer) and safety and soundness of the data. Operational considerations, including how lenders would use this method alongside traditional methods , would still need to be resolved too.

Beyond regulation and process hurdles, others in the space question whether the U.S. is actually ready for psychometric testing as a credit assessment tool.

“U.S. consumers are not going to submit to a psychometric analysis by their lender,” said Zeydoon Munir, founder and CEO of RevolutionCredit, a startup that uses behavioral data garnered from quizzes and games, in addition to traditional data, to determine if customers qualify for certain credit products. “Who would do that?”

 

Posted on

To drive loan originations, BlueVine uses partnerships like the one it recently signed with Intuit

In October, small business lender BlueVine announced that it had closed a deal with Intuit to offer its line of credit product inside the software firm’s QuickBooks financing platform. The partnership allows small businesses that use QuickBooks to use their business data to quickly apply for a line of credit up to $100,000. Thousands of small businesses have already used BlueVine’s Flex Credit since it first launched in April 2016.

Alongside inbound and outbound marketing, these types of collaborations are crucial to help generate loan origination growth for BlueVine. Partnerships like the Intuit one drive 60 percent of the traffic to the company’s website, according to CEO and founder, Eyal Lifshitz. They’re also a defensible channel for BlueVine, which has focused on creating a growing volume of smaller partnerships before landing the recent Intuit collaboration.

The long tail of distribution partnerships are important for online lenders because they’re hard to replicate, while they also remove the risk of relying too heavily on a large partner whose strategy can change over time. Big headline-grabbing partnerships are important, too, because they provide credibility and volume, helping to set up similar strategic partnerships in the future.

It’s a win-win for companies partnering with online lenders. They’re frequently looking for value-added services to provide to their customers. Lending, for firms that service SMBs, is a common addition.

“Intuit is a software company, which makes their financing platform more valuable to customers,” said Lifshitz. “Partners want to distribute the best products because lending is an efficient market. I just believe we have the best product and experience.”

Founded by Lifshitz in 2013, BlueVine began as an online invoice financing lender, modernizing a very paper-intensive, back-office type of financing for small businesses. After listening to customer feedback, Lifshitz became convinced that there was something much bigger afoot.

“Customers don’t think of their needs in terms of specific financial products,” he explained. “They have a problem — cash flow — and they need help now. So for BlueVine, we started thinking about how we can help them solve that problem through innovative products and technology.” The line of credit product was launched in April of 2016 and more lending products will follow over time.

Intuit’s QuickBooks financing platform, on which partners have to date originated over $500 million in loans to SMBs, typically offers just one or two options in each lending category. This means newer fintech firms that partner with the firm must scale quickly. BlueVine joins OnDeck as the other line of credit provider. Though informal discussions started about two years ago, Intuit took eight months to conduct diligence on BlueVine.

Ultimately, what drives advantage in acquisition for firms like BlueVine is a differentiated product. But Lifshitz cautions focusing too much on acquisition costs as a sole metric of success. Instead, lenders should also consider customer retention.

“Acquisition cost has no meaning as a standalone number,” he said. “Retention is a way to differentiate as well. Too many firms in our space think only in loan units, not the total customer experience. You need to think about whether a customer really loves what the service you’re providing.”

As a software provider, Intuit has a lot of experience partnering with young upstarts. Lifshitz credits his firm’s maturing compliance process with helping to land strategic partnerships. “We raised capital last year from Citibank and they’ve helped us mature our compliance program,” he said. Having a more mature compliance program makes it easier to get distribution deals done with larger partners.

Additionally, scale is important when partnering with a company the size of Intuit. Partners need to feel that the companies they work with can deliver on the added demand they generate. There are 5 million QuickBooks users. At 100 people and growing quickly, BlueVine is ramping up.

 

 

Posted on

FICO-free zone? Traditional credit scores aren’t going anywhere

FICO credit scores aren't going anywhere

It’s a familiar memory for many people who grew up in the 1980s or early 199os: Upon finishing high school or enrolling in a four-year university, you would receive an advertising packet from Visa, MasterCard or AMEX offering a student credit card with a low credit ceiling, coupons for discount concert tickets or airfares, and automatic approval. Using the card responsibly and paying off the balance every month was an important step into adulthood and virtually the only way young adults could establish a solid credit score. They were almost essential for securing the loans people would eventually need for the high-cost demands of the modern world: like, car loans and mortgages.

But as adulthood creeped up, the credit scoring provided by FICO somehow became more opaque. The company provides credit analytics to banks and traditional lenders on over 90 percent of loans made in the United States, but most people were unaware of the exact components that went into FICO’s determination of an individual’s credit worthiness.

To address this issue, FICO has just released a rating estimator to shed light on the process for potential borrowers. The predictor leads the user through a series of 10 questions focusing on current and past credit history, including number of credit cards, number of outstanding loans, and negative financial indicators such as defaults and bankruptcies.

But like most of FICO’s scoring products, the credit estimator cannot evaluate risk or issue a credit score without a credit card history of at least six months. That means the company cannot rate a 2012 college graduate with a solid job, no outstanding debt, a history of paying bills on time and $30,000 in savings, for instance. Or a 28-year-old with a solid employment history and savings but who spends responsibly and pays for goods and services in cash or with a debit card. Turning to lenders who rely solely on FICO scores, both of these individuals would be hard pressed to obtain a car loan or mortgage.

The demise of FICO?

That hole has led some to predict the demise of traditional credit ratings that consider only a person’s credit card history, and even of FICO itself. In January, a death knell was sounded for the company’s backwards-looking method of analyzing credit worthiness, a view seemingly shared by the Wall Street Journal. The publication noted not only that FICO’s scoring mechanism considers a range of credit history data before issuing a detailed report and credit score, but also the fact that the final ranking does not consider relevant information about a borrower’s current status – factors such as age, salary, occupation, title, address, employer, date employed or employment history.

At first glance, the prediction seems to have merit. Some online lenders, such as Social Finance, say they have abandoned FICO scores altogether. Others, like Avant, say they have significantly reduced their reliance on FICO in favor of a more holistic view of credit reliability. And alternative credit evaluators such as PRBC (Pay Rent Build Credit) and Ecredable stand to further disrupt the credit market by considering metrics such as phone, gas and electric, insurance, cable and daycare payments when evaluating a loan request.

The rise of alternative credit evaluators would indeed appear to pose a challenge to a company that primarily offers analysis of a potential borrower’s credit card use, especially given the additional fact that many millennials no longer see credit cards as a necessary facet of life. As many as 63 percent of adults under 30 years old don’t have one, according to a survey commissioned by Bankrate, in contrast to just 35 percent of adults over the age of 30 who don’t have credit cards.

“If I had the option of cash flow or FICO [when evaluating applicants], I’ll take cash flow every single time,” Mike Cagney, the chief executive of Social Finance, told The Journal in January.

On the other hand, marketplace lending giants Funding Circle, Lending Club and Prosper (not to mention the enormous traditional lending industry) continue to rely on FICO scores to evaluate loan requests.

FICO counters with a new score

Even more significantly, in 2015, FICO, together with LexisNexis, and Equifax, announced a pilot, FICO XD, to incorporate alternative data such as property records, telecommunications and utility information when evaluating risk and providing credit scores. That will likely open up credit approval for as many as 53 million Americans who wouldn’t be approved for loans using traditional credit card-based ratings, either because they do not yet have mature credit profiles, they choose not to use debt or because they have been shut out of mainstream lending due to a negative credit event, such as bankruptcy or foreclosure.

One cannot overstate the significance of this final point. Whereas doomsayers have tried to portray FICO as an outdated has-been with little to offer a new generation of borrowers and lenders, FICO XD neatly illustrates the company’s ability and willingness to innovate and respond positively to current trends in the credit market. It’s a point that investors have apparently internalized as well: FICO’s stock price has climbed nearly 500% since September 2011.

Ultimately, then, predictions that FICO is going the way of the open outcry options trading pit would appear to be overstated and simplistic. With a market cap of $3.33 billion and a market share of 90 percent of the lending market in the United States, the company is well positioned to meet the challenges posed by technology upstarts that promote new models of risk assessment.

Posted on

How Amazon is becoming a major player in finance

amazon becoming a financial giant

It was never about the books.

Jeff Bezos may have launched Amazon as an Internet book seller, but he quickly turned the company into an overall ecommerce powerhouse. There’s little that Amazon isn’t in to these days – of course, they still sell books, but its tech unit, Amazon Web Services (AWS), is one of the leading cloud technology providers around, powering both large and small clients all over the world.

Amazon’s payments division is also ramping very quickly. In 2013, after a couple of starts and stops, the company relaunched  Amazon Payments, giving Amazon customers the ability to pay for products and services on other sites using their Amazon accounts. In a way, early Amazon Payments acted a substitute for PayPal or a credit card when account holders went shopping online. Amazon said this January that its transaction volume had grown 150 percent year over year in its payment division but hasn’t given out a full reckoning of its activities in the payments space.

Integrating Amazon Payments in the ecommerce ecosystem

Like PayPal, Amazon is running the third party integration playbook as the next leg in its growth. Earlier this week at a European finance conference, the company announced it would enable merchants to integrate Amazon’s payment tools into their own websites.  By giving Amazon customers the ability to log in, authenticate, and pay with their Amazon accounts, an ecommerce site can offer the same ease and use Amazon is renowned for.

This gives Amazon a much broader footprint in payments, as merchants are certainly interested in reaching the nearly 300 million registered users Amazon already has. These customers wouldn’t need to re-register or input payment information on merchant partner websites. They could just checkout with their existing Amazon accounts and payment information on file. In turn, this would speed the conversion cycle and boost revenues for ecommerce sites that integrate Amazon Payments.

Growing out Amazon Payments beginning with leadership

To spearhead Amazon’s aggressive push into payments, the ecommerce firm hired PayPal’s Patrick Gauthier last year. Gauthier has played a key role throughout his career in building and expanding new payment technologies, most recently at PayPal where he grew their prepaid business seven-fold in just 18 months as the firm’s head of product strategy in retail services. Prior to PayPal, Gauthier spent 10 years at Visa spearheading next generation payment products and services.

Gauthier now leads the expansion of Amazon Payments with merchant integrations. Regarding the program, he told Bloomberg, “Why would we make it easy for customers to buy elsewhere? Because we know it solves a problem in their life…It deepens our relationship with customers.”

Amazon’s payments distribution strategy also has its payment functionality showing up in unexpected places. The firm’s new voice-controlled virtual assistant device, Echo, recently integrated with Capital One to allow users to synch their Amazon devices to track and pay Capital One credit card bills. Amazon also developed and now markets Dash buttons which are small, one-button household wifi devices that when pushed, automatically order a single product from the Amazon website.

Payments + lending

Amazon has also been active in the online lending space. This program, which began as invite-only in 2012, provides capital to merchants who sell on Amazon. Loan sizes run from $1000 to $600,000, with payback periods ranging from 90-180 days and interest rates fluctuating between 6-14%. Amazon has leant hundreds of millions of dollars as part of its lending program and in the summer of 2015, announced it had expanded its lending to select European markets.

Amazon’s activities in the online lending and payments space have shown that that the ecommerce giant is serious about being a major player in finance. With strong roots in ecommerce, it makes sense that payments would be a smart initial foothold for the retail giant. But who knows, Amazon may move deeper into finance. Will we see the Bank of Amazon in the near future?

 

 

Posted on

Funding Circle’s Sam Hodges explains how tech gives SMBs access to much-needed cash

sam hodges and funding circle

Funding Circle is a leader in a pack of new financial companies bringing increased scale and online convenience to the world of SMB lending. While traditional banks have shied away from expanding their credit operations, companies like Funding Circle have filled in the gaps, working closely with SMB borrowers to provide them needed credit, quickly and efficiently. Funding Circle has shown its intention to grow globally.

Tradestreaming sat down with Sam Hodges, co-founder of Funding Circle, USA, to get caught up on the company’s progress in light of a recent acquisition it made in Germany.

Why did you found Funding Circle?

Over the past few decades, banks have largely pulled out of small business lending due to tighter regulations and archaic credit models and technology that make it difficult for them to profitably underwrite small business loans. This has left millions of small business owners without access to the financing they need to grow – something I actually I experienced first-hand.

Sam Hedges, co-founder Funding Circle USA
Sam Hodges, Funding Circle USA

Along with a few business partners, I owned a successful network of fitness businesses – but getting access to capital was a horrible experience. We had a great financial profile, strong personal guarantors, extensive experience and a profitable business. Yet, we could not secure a loan to purchase new equipment to expand. We talked to almost one hundred different lenders and were either turned down or offered terms that simply didn’t make sense. The irony was, when my co-founder and I were working on Wall Street, we saw bankers lining up around the corner to give out $100 million loans for higher-risk businesses. That’s when we realized the traditional banking system was broken, and we set out to build a better solution.

Why is Funding Circle better than current solutions? How do you think your firm differentiates itself from the numerous competitors popping up?

The traditional banking system is broken and restricted by legacy issues, and many online lenders are either expensive or incredibly transactional, relying solely on computers to make credit decisions. At Funding Circle, we think small businesses deserve better.

We are the world’s leading global marketplace for small business loans and have been built from the ground up to help small businesses secure the funding they need to grow. Using technology to cut out the middlemen who take advantage of information asymmetry, we connect supply directly with demand for a fraction of the cost.

Unlike other lenders, we take a customer-first approach to create an experience that is fast, simple and very transparent. We also believe businesses are more than their credit score, which is why we layer human underwriters with our innovative technology and proprietary data analytics to look at the full picture and better assess the creditworthiness of a loan. It takes just 10 minutes to apply for a loan, and businesses can get affording financing in less than 10 days.

Can you give us a feel for the progress you’ve made in the business over the past couple of years (quantify it)?

Our business, along with the marketplace lending industry, has experienced tremendous growth over the past couple of years. Since 2010, we’ve helped more than 12,000 small businesses across the world access $1.6 billion in financing to help them grow, hire more people and ultimately stimulate the economy. Globally, we’re currently originating ~$100 million per month, and have 43,000 individual and institutional investors active on the marketplace.

One thing I’m particularly excited about is a groundbreaking deal we announced a few weeks ago to help millions of businesses across Europe sidestep the outdated banking system and borrower directly from investors, too. Last month, we joined forces with Zencap (now operating as Funding Circle) – continental Europe’s leading marketplace for business loans – to create the first truly global marketplace lending platform. We now operate in Germany, Spain and the Netherlands, alongside our existing operations in the UK and US. The market opportunity across continental Europe is larger than both the UK and US markets combined, with more than €1 trillion of outstanding loans for small businesses.

On the partnerships side, last year in the UK we became the first marketplace to announce a formal referral partnership with Santander and have since announced a similar partnership with RBS. In the US, we’re in active talks with a wide range of banks and other lenders about how we can work together and are looking forward to announcing something soon.

Since launch, we have raised $273m in equity capital from the same investors that backed Facebook, Twitter, Airbnb and Wealthfront. And as of today, Funding Circle now has nearly 500 employees across the UK, the US and Continental Europe.

You just acquired Zencap which provides a foothold for further access into Europe. How do you think about international expansion?

Our vision for Funding Circle is as a global lending exchange, where business from all over the world come to find finance from an army of investors, big and small. Small businesses are underserved in most of parts of the world, and we believe our marketplace model can help millions of businesses and investors to get a better deal. At the moment, we are focusing all of our energy on building a successful business here in the UK, USA and Europe.

Who’s a typical borrower for Funding Cirlce? How about a typical investor?

Walk down Main Street in any American town, and you’ll see examples of our borrowers. They are restaurateurs, gas stations, medical clinics, construction firms and IT consultants. These are established businesses that have assets and cash flow to secure loans, and a legitimate plan for growth. More specifically, our borrowers have typically been in business for around ten years, have annual revenue of $2 million and employ about 10 people. On average, small businesses borrow $130,000 for 36 months and use their loan for expansion and growth.

On the investor side, we’ve seen really strong appetite for our loans from a wide range of investors of all shapes and sizes. In the US, our investors range from individual accredited investors and family offices to large global asset managers like Victory Park Capital and KLS.  Looking forward, we’ll continue to see an evolution and diversification in our investor base as we look to continue to bring down our cost of capital to offer even better rates and products for our borrowers.

What are Funding Circle’s challenges in the near future? What are the industry’s challenges?

Education and awareness remains a key focus for our industry. The most powerful marketplaces bring together the largest number and diversity of participants across a breadth of products and geographies. Our goal is to be the leading global marketplace for the full gamut of small business loan products worldwide. As a company and an industry, though, we still have a way to go in terms of raising awareness that there are other forms of financing out there that are fast, affordable and transparent alternatives to bank loans and MCAs.

We took a big step in this direction when, this summer in Washington DC, we partnered with other industry leaders to unveiled the first-ever gold standard for responsible business lending in America. As part of the initiative, we launched a national campaign to help educate small business owners about their rights as a borrower and how to find and compare different financing options.

Over the next few years at Funding Circle, we will continue to spread the word about the benefits marketplace lending and invest heavily in technology and talent to help us continue to build a transparent, sustainable and diverse marketplace.