Moody’s: US online lending market plagued by weakness

Moody’s offered a harsh analysis of the current viability of marketplace lenders. In a report published October 19, the ratings company said that the competitive advantages of online lending are predicated on an unsteady foundation of confidence-sensitive funding, low recurring revenue, and high marketing budgets.

“Online lenders have yet to achieve adequate profitability, and rapid growth exacerbates the volatility of their performance,” Warren Kornfeld, a Moody’s senior vice president said.

According to the report, many of the online lenders have a high proportion of non-recurring, gain-on-sale or fee income generated from selling newly-originated loans.

Marketplace lenders in the US accounted for loan originations worth approximately $23 billion in 2015, according to Deloitte. LendingClub, the largest marketplace lender in the US, originated $8.4 billion of loans in 2015.

Lending Club has been under fire this year when then-CEO Renaud Laplanche was found to be in possession of undisclosed pools of capital to fund loans on his firm’s platform. The scandal was seen to be indicative of the capital crunch marketplace lenders are facing. They’re having a harder time attracting money from hedge funds and are continually looking for new capital sources through securitizing loans or investments from marketplace lending-focused mutual funds.

On the borrower side as well, marketplace lenders are having a tough time. In a recent SEC filing, Lending Club stated it “continued to observe higher delinquencies in populations characterized by high indebtedness, an increased propensity to accumulate debt, and lower credit scores.” The lender states the trends are more notable in higher risk grades, which account for approximately 12 percent of platform volume. In response, Lending Club increased interest rates and tightened credit policies.

Marketplace lender CircleBack also announced this week that it will stop making new loans.

Increased delinquencies and defaults might dissuade banks from buying up the loans or discourage retail investors from using the platform.

Moody’s notes that some online lenders have spent as much as 55 percent of revenue on sales and marketing, with payoff still uncertain.

Ironically, incumbents might beat the disruptors at their own game. Not impaired by funding constraints, banks can offer user friendly, online loan origination. Goldman Sachs did exactly that with the this week’s launch of Marcus, its online-only consumer lending platform.

High 5! The five fintech stories we’re following this week

top fintech stories

Wells forgoes customers in search of phantom profits

So, Wells Fargo gets caught with its hand in the cookie jar. Well, kind of. Apparently, employees at the bank opened up over 2 million fake bank accounts and credit cards for existing customers. The thing is that this sneaky business didn’t really amount to much money for the bank. All in all, it amounted to $2.4 million in fees, which seems pretty small for the amount of shadiness involved.

So, what gives? Bloomberg’s Matt Levine thinks it’s a by-product of a big company sales culture that prized account opening quotas over something more impactful. Regardless, this is the type of thing that gets upstart banking firms juiced and makes Wells Fargo the poster child for fintech.

Anyway, it’s been a terrible half year for banks as revenues are down pretty much across the board.

Credit unions held hostage by service providers

Large banks are, for the most part, getting the gospel of the types of technology and services today’s users want from financial services. At least they’re paying lip service to it. An interesting thing is happening in credit union land, though. As member-owned financial institutions, many of these firms are surprisingly responsive to their customers. But they’re finding it hard to create new fintech apps because they’re stuck in onerous contracts with their service providers (read, Jack Henry, Fiserv and FIS). Tradestreaming’s Hadas Tayeb speaks to Aaron Silva, president and CEO of the Golden Contract Coalition, which hopes to leverage the bargaining power of community banks to secure more equitable Core IT contracts for the industry.

Online lenders ham it up in commercials, top finance movies

The finance industry is typically pretty sleepy during the summer months. But some marketing departments stayed back to remind customers that loans are always available. Here are this summer’s best lending commercials.

With the Big Short in our recent memory, we thought it was worthwhile reviewing the best movie finance scenes. It helps that most, if not all, of these scenes come from movies about finance because nuance is indeed everything.

My personal favorite is the scene in Wolf of Wall Street where Leonardo DiCaprio, playing penny stock extraordinaire, Justin Belfort, first walks into a boiler room in Long Island. After discovering that commissions were as high as 50% on stock that he moved, he hits the phone, making a no-name stock sound like the next Tesla and in doing so, making a mockery of his clients.

Blockchain numbers just don’t add up

The Tradestreaming Blockchain Hype Meter ranked pretty high in August. Mainstream media is enchanted with the prospect of entirely transforming the financial industry with anonymized transactional technology. But, when you begin to dig deeper in the numbers, something begins to smell fishy.

“So a real-world example, then, that it takes 20 years for a new, efficient 2 billion-euro post-trade system with full central-bank backing to start recouping its cost,” wrote Lionel Laurent and Elaine He in Bloomberg. “It would be a miracle if blockchain could repeat this feat in a fraction of the time without similar backing or funding.”

No doubt, as we explore the potential of the blockchain, we’ll find opportunities for cost reductions and new ways of doing, well, financial things. Just like the early days of the Internet, though, corporates are trying their to own the medium. Accenture’s article in the NYT is definitely colored by this perspective. The editorial calls for support of a blockchain that can be controlled by a nebulous group of financial incumbents who aren’t comfortable with the anonymity of the technology. There’s an inherent tension in using a technology that changes the roles of financial intermediaries and stores of value.

Sundry articles, things we’re reading

25% of bank hacks are the result of stolen or lost mobile devices. Regulatory pitfalls of small-dollar lending. Founder of Honest Dollar on his acquisition by Goldman Sachs. A day in the life of Dwolla’s community experience manager. Goldman Sachs is giving away its most valuable software. Are robots the answer to the new DoL fiduciary rule? Maybe.

 

The regulatory pitfalls of online small-dollar lending

Ever since the 1800s, respective U.S. governments have attempted to find the perfect balance between regulation and deregulation. As the 2008 financial crisis demonstrated, finding this perfect equilibrium is no easy task.

The fintech movement, with all the convenience, transparency, and innovation it brings to the user, presents a formidable challenge to regulators, banks, and fintech companies themselves. New fintech creations are expanding the financial map, and it’s only recently that regulators have started to gain a foothold in this new landscape.

One sector that has been struggling to find its regulatory footing in the age of 1-click checkout is lending. Part of this has to do with the complicated, conflicting multitude of state laws trying to police the online lending industry. “If the states come together and find a way to harmonize their rules and regulations, it will be easier for compliance and easier for consumers to understand what the rules of the road are,” said Lisa McGreevy, president and CEO of the Online Lenders Alliance.

The 7-person D.C. organization, which represents online companies offering small-dollar loans, is trying to convince states that as far as online lending is concerned, cooperation is the best way forward. “It’s a constant discussion that we’re having with Congress and federal regulators and even with the states,” said McGreevy. “We’re saying to the states: we need a uniform system to operate.”

It’s not simply that the states are taking their time adapting to the new reality of online loans. Online lenders are concerned that federal agencies may not understand the nature of online lending well enough to police it. Most recently, online small-dollar lenders have taken issue with the CFPB’s proposed rule to end payday debt traps.

The rule, which would require small-dollar lenders to ensure their customers have the ability to repay their loans, has serious implications for lenders and for borrowers. McGreevy argues that the sheer complexity of the rule means that consumers will have a difficult time understanding their credit options, while the rules prescriptiveness won’t allow companies the flexibility of using their own algorithms or their own underwriting.

“We support a federal rule,” McGreevy explained, “but we’re all concerned that this is going to result in fewer credit options for people.” McGreevy isn’t alone. The Pew Charitable Trust thinks the rule would leave borrowers vulnerable to payday sharks while locking out lower-cost loans from banks.

Moreover, Kevin Foster-Keddie, president and chief executive officer of Washington State Employees Credit Union and its small-dollar online loan platform, QCash Financial, is worried that “the rules as proposed by the CFPB may also have the unintended effect of driving away consumer-friendly financial institutions that provide better alternatives.”

For McGreevy, voices like Foster-Keddie’s from the credit union camp are a confirmation that the CFPB needs to rethink its small-dollar strategy. “Making small-dollar loans is a highly specialized industry,” she said. “Even the credit unions have a hard time in this market space. And I think the fact that they are saying this rule is going to result in fewer credit options is a harbinger for everybody.”

The O.L.A. is one of the industry’s in-house regulatory bodies trying to keep online lenders in check. Instead of viewing the O.L.A. as a millstone around their necks, online lenders have actually been the drivers for the creation and implementation of best practices.

“The companies that are members of O.L.A. want to set the standards for the entire industry,” McGreevy remarked. “We’re not interested in having bad actors and fraudulent businesses give the industry a bad name.” Neither, it would seem, are some of the big-name online lenders, who launched their own self-regulating association in April 2016.

For the O.L.A., the major challenges are protecting consumers, both from fraudsters and from unethical online lenders. The O.L.A. consumer hotline receives various types of fraud reports, from the nefarious IRS phone scam to standardized prepayment terms as a prerequisite to loan issuance. O.L.A.’s best practices make sure their members steer clear of any underhanded dealings with consumers, but not everyone wants to lend responsibly, and so the hotline phones keep ringing.

The line between unethical lending and aggressive marketing isn’t always clear, and O.L.A. has had to step in over the 11 years since they were established to help online small-dollar lenders understand what’s ok and what’s not. Several years ago, small-dollar online lenders were offering lines up to $5,000 with no credit checks.

“Unfortunately, the average customer couldn’t get what was promised,” McGreevy explained. O.L.A. put a stop to that with their best practices. Companies that join the O.L.A. can’t advertise using those terms. Recently, the “no credit check” marketing ploy has resurfaced, and the O.L.A. is in the process of tracking offending companies down.

O.L.A.’s best practices may not solve all of the regulatory hurdles that small-dollar online lenders want to overcome, but the fact that responsible lenders are interested in having regulation in place is a good sign for the 12 million consumers in the market for small-dollar loans. “I think that across the board, online, brick and mortar, it’s always better when the industry can self-regulate,” said McGreevy, “and we have accepted the challenge and the responsibility to self-regulate.”

If you can’t beat ’em join ’em: Fintech and banks collaborate in online lending

banks and fintech work together

Fintech companies may be pressuring banks, but the innovators themselves may end up being the relief banks are looking for.

By offering very specialized services to customers, fintech companies are challenging banks to follow suit. Large financial institutions manage dozens of products and services, making it hard to compete with startups focused solely on a single niche. Banks have long focused on vertical integration, owning the value chain from end to end — while startups favor specialization.

“To the extent that banks faced competition it was from another bank which also owned its entire vertical stack end to end, which was operating in the same geography,” wrote Pascal Bouvier, venture partner at Santander InnoVentures, recently. “Oligarch banks ruled. Today’s bank is under threat at each layer of its stack instead, which makes for a much more complex competitive landscape.”

The bank of the future may eventually become the center of the user interface, with fintech companies gathering around the banking watering hole. A good example of this type of arrangement is the agreement TransferWise made with German online bank Number26, giving clients of the bank access to its currency services. In this set up, banks provide the front end experience as well as access to resources supplied by third parties.

Spotcap and piggyback loans

One company trying to fit into the circle around banks is Spotcap. Founded in 2014 by Toby Triebel and Jens Woloszczak, Spotcap provides lines of credit to SMBs in Spain, Australia, and the Netherlands. Incubated and backed by Rocket Internet, the Berlin-based online lender uses both technology and experience to determine an SMB’s creditworthiness; Internally-developed algorithms and smart contracts combined with a human review board determine if a SMB qualifies for a credit line.

Spotcap has only been in the Netherlands for 15 months and is still small, only underwriting $50m in the first half of 2016. Although it’s a drop in the bucket of the regional lending market, Spotcap has grown 500% year over year and has less that a 1% default rate since it started lending in the Netherlands.

What makes Spotcap different from other online lenders is its approach to incumbent financial institutions. Currently, 25% of Spotcap’s loan book is in piggyback loans with banks — where two or more lenders underwrite a loan together. For example, a SMB needs a $1 million loan, but a bank feels the maximum secured loan they can offer is $750k. The bank then contacts an unsecured lender like Spotcap, which evaluates if the SMB qualifies for the remaining $250k. If so, the bank packages the two separate loans, and the SMB pays both the bank and the unsecured lender. Banks win with piggybacked loans since they gain a new customer while staying in their lending comfort zone, and also make more money.

Banks and fintech currently collaborate on piggyback loans

On a recent trip to Holland, I met with Niels Turfboeur, Spotcap Managing Director of Benelux, which includes the Holland office. We discussed how Spotcap fits into the changing banking world, and how some would call online lending disruptive. Turfboeur disagreed, explaining that Spotcap is more of an innovator than a disruptor in banking. “Online lenders offer a slightly different product in a different way,” he said. “Banks can offer the same product if they want to, but it’s very expensive for them. Its not like we have something they can’t have. They’re very smart people with a lot of money.”

Becoming a preferred supplier to financial institutions is essential to Spotcap’s success, and Turfboeur spoke to the importance of developing working relationships with banks and institutional partners. He explained, “There will be new ways banks and fintech work together. There is a synergy between the two. It could be that they merge, or sign a contract saying we like each other, lets do tickets together.”

We ended up discussing how Spotcap fits into the new banking ecosystems — how banks and fintech companies, like Spotcap, will collaborate, and how banks may become the entry point for customers while third parties provide enhanced services.

“As a product company, what’s our added value if we become a bank? There will be specialized fintech surrounding a bank in several degrees of integration, but the bank will be in the middle as the director,” Turfboeur concluded.

Status quo for now

Unless the Armageddon or zombie apocalypse happens anytime soon, banks will likely remain the backbone of finance. Spotcap, and other innovators like it, have an opportunity to work closely with bank partners.

As banks start to move away from the vertical stack model, they may look to established relationships in determining who gets to be a part of the bank’s product suite. If fintech companies play their cards right, they may eventually see themselves in a bank’s inner circle, reaping the financial rewards of such integration.

SoFi’s Joanne Bradford: ‘Money is the last taboo subject’

sofi interview digiday podcast

This interview originally appeared on Digiday.

Joanne Bradford has a long history in digital media, with top jobs on the sales side at Microsoft, Yahoo and, most recently, Pinterest.

Following her departure from Pinterest last June, she opted out of the sell side of media and instead entered the hot space of “fintech,” where technology businesses are trying to barge into the stodgy and lucrative world of financial services.

Last year, she joined SoFi as chief operating officer. While SoFi is not yet a household name — 10 percent know it, according to Bradford — it has big plans: $1 billion financial backing to become a one-stop shop for financial services (and even a few dating options) for promising and responsible people. In order to do that, Bradford’s challenge is to build a strong and widely known brand from scratch.

“Money is the last taboo,” she said on this week’s Digiday Podcast. “Procter & Gamble made it OK to talk about having a happy period. Trojan made it OK to talk about having sex. People will still not talk about money. They’re uncomfortable with talking about how much they make, how much they save, what they can do with it.”

Below are lightly edited and condensed highlights from the conversation.

Fintech is hot right now.
Silicon Valley’s sights have gone far beyond consumer electronics and media to embrace changing pretty much every large sector of the global economy, from agriculture to transportation to health care. It’s no surprise then that companies like SoFi, Lending Club, Affirm and others are focused on the trillions spent on financial services.

“There’s a lot of underserved consumers,” she said. “Most people do not like to pull into a parking lot to go and stand in line to sign some papers. That’s one of the things we’re trying to solve for people: Convenience.”

SoFi wants to build a community.
SoFi started with student loan refinancing, but it has branched out to provide further financial products with the idea that it can become a trusted partner for people as they advance in life and accumulate wealth. The key to doing that is to think beyond finance products, Bradford said. That’s why SoFi hosts member happy hours, dinners, provides career counseling and even dabbles in dating.

“I don’t think today you can build a brand without a community, no matter how techie you are,” she said. “I don’t think it’s a Silicon Valley thing only. The people of Warby Parker love their Warby Parkers. The people of SoFi love SoFi. They love benefits it gives them, the access it gives them, the commonality they have.”

SoFi marketing is about experimentation.
The Silicon Valley ethos is test and learn. SoFi did a happy hour to thank members, had 150 show up and decided to hold dozens of these gatherings. This year it will put on 250 events across the country, Bradford said. In all of its marketing activities — even running a Super Bowl ad — the brand wants to stay experimental.

“The experimental partnerships we’ve worked on that have gone south, I can correlate them to a lack of account management,” she said. “The ones that have gone well have someone who is not incentivized as a salesperson but is really working and optimizing day to day.”

The media world is not going all programmatic.
Bradford has deep experience with digital media platforms that rely on self-serve advertising products. The rise of programmatic ad systems and the promise of automation is seen by many as a foregone conclusion. But Bradford doesn’t see programmatic eating the media world whole anytime soon.

“It works until it doesn’t,” she said of programmatic. “I look at the word programmatic as cheap and can’t be sold other places. I get very different things from Google, Facebook, different platforms. My biggest challenge is cobbling it together and figuring out how to get people over the inertia of a financial discussion.”

Sticker shock? These 5 fintech startups can help finance your purchases

5 fintech startups that will help you buy that next purchase

One of the most important aspects of sound financial management is managing cash flow. Unfortunately, given the lumpiness of inflows and outflows, individuals or businesses sometimes find themselves in a crunch, unable to attain loans that would allow them to smooth out their cash flow. That smells like an opportunity for fintech, which has created companies and services to fill this lending void that traditional banks haven’t.

In no particular order, here are 5  alternative lending startups helping individuals and companies better manage their cash flows.

Affirm

Founded in 2012 in San Francisco by Jeffery Katitz, Nathan Gettings, and Max Levchin, Affirm provides point-of-purchase loans in the form of payment plans for individuals to make purchases. Each individual purchase made through Affirm is treated as a separate loan, and customers are informed in real-time if they have been approved. In order to provide additional security to the loan, customers may be required to give a down payment or link their checking account to their Affirm account. For the service, Affirm charges between 10%-30% simple interest APR.

Affirm has raised 3 rounds of capital since 2014, totaling $420 million. The last two investment rounds were in 2015 ($275 million) and 2016 ($100M), and were led by Spark Capital and Founders Fund, respectively.

Splitit

Founders Tuba Breca, Alon Feit, and Gil Don decided to extend a method of payment to users in the United States that exists in only a few countries around the world. Using Splitit, customers can buy items on payment plans using their existing credit cards, requiring no additional fees or applications. Each month, Splitit automatically authorizes and captures payment from a buyer’s credit card, allowing consumers to pay for a product over a time period of their choosing.

Although Splitit is currently available only to customers with a Visa and MasterCard, 54% of credit card holders prefer installments over free shipping, so it looks like there’s a lot of room to grow market share. Splitit raised $10 million in May of 2015, and was founded and operates out of Herzliya, Israel.

BlueVine

Fresh off a recent investment round, BlueVine provides businesses with invoice financing, also known as factoring, and lines of credit. Acting as a traditional lender, BlueVine offers up to $250,000 in invoice financing, and up to $30,000 in lines of credit. Businesses can apply for a loan and know within 24 hours if they are approved.

Founders Eyal Lifshitz, Nir Klar, and Motti Shatner founded the company in 2013 and are Headquartered in Palo Alto, California. BlueVine has raised $64 million in 7 investment rounds since inception, with the last two rounds led by Menlo Ventures and Citi Ventures. In 2016, leading Israeli business publication, Calcalist named BlueVine one of 2016’s top 50 startups.

Behalf

Behalf provides up to $50,000 in trade financing for B2B enterprises. As opposed to lending money to a business to pay for its supplies, Behalf pays suppliers directly on behalf of its business customers, assuring that the money goes to the right places. Behalf charges between $10 and $30 a month for every $1,000 loaned out.

Founded in New York in 2011 by Jeremy Esekow, Shai Feinberg, and Benjy Feinberg, Behalf raised $10 million in 2013 and $124 million in 2015, with rounds led by Spark Capital and Mission OG, respectively. Sequoia Capital is also an investor.

Fundbox

Another B2B lender, Fundbox gives advance payments to small businesses by providing loans on existing invoices. Using invoice financing, Fundbox provides cash flow relief to businesses by allowing companies to borrow against their accounts receivables. As of September 2015, Fundbox had 20,000 businesses signed up, a single digit default rate, and processed invoices totaling $30 billion.

Fundbox was founded in 2013 by Yuval Ariav, Tomer Michaeli, and Eyal Shinar, and has raised $112.5 million since 2014, with funding rounds led by Spark Capital, General Catalyst Partners, and Khosla Ventures.  At the 2016 PYMNTS Innovator Awards, Fundbox took home the award for Small Business Innovation.

Photo credit: Patrick Hoesly via VisualHunt.com / CC BY

How Wells Fargo launched online loans in 9 months

On May 10th, 2016, Wells Fargo announced the launch of FastFlex Small Business Loans. The company is pitching FastFlex as “an online, fast-decision loan” that can be funded as quickly as the next business day with a competitive interest rate to small businesses with short-term credit needs. Though incumbents might not have seemed as flashy as some of the marketplace lenders, LendingClub’s recent financial snafu is making Wells Fargo, with its brick and mortar branches and its sturdy legendary wagon, seem like an attractive alternative.

However, Wells Fargo has more than just the marketplace lending crisis to recommend it to small businesses; the bank has built up a sizable community of 3 million small business owners that use its services, and provides more loans to small businesses than any other bank in America. As Amy Feldman wrote in Forbes, FastFlex “is part of a broader push to attract entrepreneurs of all sizes,” and indeed, in 2014, the bank set a $100 billion lending goal for small businesses, and it’s already issued over $40 billion of new loans.

Wells Fargo has utilized the internet to develop its relationships with small business owners before; in 2014, it launched Wells Fargo Works for Small Business, a holistic platform that guides small business owners to financial security and success. However, FastFlex is the small business department’s first foray into cutting-edge technology, and the team has high hopes for this union: “We are innovating to fuse the largest retail distribution channel in the United States with industry-leading digital offerings to create an exceptional customer experience,” says Jim Seitz, Wells Fargo’s Small Business Communications Manager.

Transformative product requires company-wide transformation

Beta-testers have already expressed satisfaction with the product, citing the simplicity and speed of loan issuance. However, the behind-the-scenes cross-departmental cooperation that went into creating FastFlex suggests that the service will be just as transformative to Wells Fargo as an organization as it will be for its small business customers.

Though it was created entirely within the current business organization, more than 50 team members from a number of areas within Wells Fargo were involved in creating FastFlex. Given other organizational responsibilities, most of this group did not work full-time on FastFlex throughout its development. Three team members from Wells Fargo’s Business Direct team – a team that provides small business loans under $100,000 each – led design of the product.

In addition to the Business Direct Term Lending Product team, the cross-functional team that worked on FastFlex included team members from systems, operations, marketing, credit risk, compliance, legal, digital and Wells’ Innovation Group.

The fact that FastFlex is a product of so many different people coming together, coupled with the fact that the entire process was conceived and constructed in-house in just 9 months, demonstrates the impact that the drive towards technological innovation has had on Wells Fargo as a whole.

Heads down and innovating

Other financial institutions seem to be driving fintech innovation not out of choice but out of necessity. Takes Charles Schwab, for example. Like Wells Fargo, online broker Schwab was facing some competition from pesky startups. Instead of choosing to ignore the roboadvisor trend or to partner with a startup, in 2014, Schwab came out with its own roboadvisor called Schwab Intelligent Portfolios and, like Wells Fargo, developed its service quickly, rolling it out just 6 months after project kickoff.

Seitz couldn’t speculate on whether Wells Fargo would be replicating FastFlex’s online, fast decision loan model across its different departments. Nevertheless, it seems likely that if the service is as successful as the team hopes it will be, we’ll soon see similar services popping up throughout Wells Fargo.

Photo credit: JeepersMedia via Visual Hunt / CC BY

5 trends we’re watching this week

5 trends in finance this week

[alert type=yellow ]Every week at Tradestreaming, we’re tracking and analyzing the top trends impacting the finance industry. The following is a list of important things going on we think are worth paying attention to. For more in depth trendfollowing, subscribe to Tradestreaming’s newsletters .[/alert]

1. 60 Minutes: Fintech shaking up the financial industry: Looks like fintech has reached the mainstream with this 60 Minutes segment on Stripe and the entire financial technology movement. Until now, much of the excitement about the changes going on in finance were relegated to tech publications, the startup press, or within tighter financial circles. With this profile on 60 Minutes, it’s a big step forward for some of the younger firms in the industry that will continue to exert pressure on incumbent financial organizations to innovate (or parter/buy the innovators).

Counterpoint: While the startup ecosystem patted itself on the back after the airing of the episode on CBS, a few outspoken voices complained that the coverage didn’t go a good enough job explaining the whole story. Sure, startups are innovating and all that, but the banks do, and will continue to, play an important role in the financial system.

2. Is the online finance apocalypse upon us? : In spite of the good press the industry got in the 60 Minutes piece, this was a very trying week for online lenders. Bloomberg is now reporting that Prosper, the pioneering marketplace lending platform in the U.S., is indeed eliminating 171 jobs, closing their Utah office and letting go of their chief risk officer. That amounts to 28% of its staff. Oh, and CEO Aaron Vermut’s salary has also been cut to zero.

OnDeck, an online business lender and one of the first from the current class to make it to public markets, saw its share price shellacked as an FBR analyst cut his estimates on the firm. “FBR analyst Bob Ramsey blamed the weaker outlook on reduced volume of loans sold and slower origination stemming from diminishing marketplace demand and tougher underwriting standards.”

There’s definitely some alarming things going on in online lending right now — the most important is the rapidly diminishing demand for these loans from both retail and institutional investors. Time will tell whether this is just the rebalancing of supply and demand in the space or whether something organic is afoot.

Oh yeah, also, growth in roboadvisor land is rapidly decelerating.

3. New technology turns smart cars into payment devices: Payment technologies in cars have gained a lot of momentum in the past few months. We wrote recently how new payment technology is helping Gett, one of the top competitors in the on demand transportation market, compete with Uber.

However, there have been a series of strategic partnerships in the last year that have given insight into a new, and bigger, concept than just being able to pay for things from the comfort of your vehicle: Turning the automobile into a credit card.

Imagine the following scenarios:

  • Purchasing food from a restaurant while driving there, and the kitchen being informed of when to cook the food in accordance with traffic and arrival time
  • Purchasing groceries while driving to the supermarket, while the supermarket knows when you will be arriving to allow curbside delivery
  • Emergency mechanical situations, where the car guides the driver to the nearest mechanic, with the part needed to be fixed already waiting and paid for before the car arrives

It’s happening.

4. Thomson Reuters seeks openness, builds hooks into core products: It’s an age-old debate: when building technology, is it better to build open or closed systems? In finance, closed systems have generally ruled the roost. But history has shown over time, that open systems have the potential of becoming true platforms, with vibrant ecosystems of apps, services, and support helping to keep the platforms ahead of any closed competitors.

We interviewed Abel Clark, head of Thomson Reuters’ financial products group which provides data, research, and trading systems to many of the top financial firms around the world, to get his view on the discussion. Thomson Reuters has made openness a core value at the organizational level.

“Openness wins longer term because it provides for more customer choice,” Clark said. “When there’s sharing and collaboration happening between partners, the financial industry will be better equipped to thrive in this challenging era of innovation.”

5. Cashless society? Not so fast as countries invest in cash technology: We’re always so quick to talk about digital payments and how moving to a more pure digital system could benefit our economy and our personal payment experiences. But, what’s interesting, is that while some countries, like Sweden, are headed to an economy that has untethered from cash, many other parts of the world are seeing an increase in demand for cash.

Even here in the US, we’re seeing an upgrade cycle by the major banks to improve technology at the ATM machine in a wake of a mega merger of the largest ATM players internationally.

So, cash is certainly not dead and in fact, we’re seeing a variety of new designs and aesthetics injected into the money we carry. We’re also seeing new technologies applied to cash and coin currency. They range from new types of inks and materials to holographics and other nifty security features.

 

Slowdown in marketplace lending? Maybe, but digitization is on fire

marketplace lending securitization

There’s been a lot of talk about a slowdown in online lending and an overall weakening in demand for consumer loans.

Technology providers that service the industry aren’t seeing any of it, though. Online lenders are busy growing the securitization side of their businesses, where they package their loans together into investable securities and sell them to institutional investors. To do this, they’re turning to third party service providers.

“Startup online lenders typically start with good technology, user experience, and customer service but they have to feel their way through the financial regulatory world, adjusting as they go,” said Stephen Bisbee, CEO and President of eOriginal, a technology provider active in the Digital Transaction Management (DTM) space. “When they get to the securitization phase of their businesses, they turn for help.”

Securitization is the next stage of online lending

Securitization of online loans is a more complicated process than simply originating loans. Because of the massive increase in scale needed — an individual loan on an online marketplace may only be $10 thousand dollars, but a securitization can be in the hundreds of millions or billions of dollars — it’s imperative that the entire lifecycle of the transaction be digitized.

Take the auto loan industry. The auto loan industry experienced massive growth by creating 2 industry portals that enabled fully electronic auto loans — from dealership to secondary market — in mid 2000. Nissan did its first securitization in 2005 and now, Toyota and Ford both complete over 80% of their transactions electronically.

Marketplace lending is undergoing its own maturation process, too. “As marketplace lending moved from p2p to institutional capital sources, leading platforms began to look at how they were going to take electronic originations and sell them out into market,” recalled Bisbee. eOriginal counts 10 online lenders as clients including Funding Circle, Earnest, SoFi, Upstart, Apple Pie Capital and Borrower’s First.

Online lenders branching out

eOriginal’s Bisbee expects online lenders to continue expanding their product lines, requiring different levels of digitization. “SoFi began with student loan refis but it’s getting into auto finance and more,” he said. “It’s now offering mortgages. Mortgage is where we started 20 years ago, creating the first fully electronic mortgage for online lenders. We can enable everything on a mortgage after origination. In the time share world, with one customer, our firm enabled 180 thousand mortgages in 18 months.”

Based on demand from online lending clients, eOriginal, which charges a yearly platform fee plus transaction fees, has never been busier. The private company recently doubled its sales and revenue estimates for 2016, as its customer base has grown by more than 70%. And CEO Bisbee just isn’t seeing a slowdown: “In our world — when you focus on the securitization side, it’s just a pricing issue. Once you can get out to the secondary market, there’s always a buyer — it’s just a matter of what they’re willing to pay for debt.”

Regulations cometh

For its part, Digital Transaction Management, as an industry, is set to be a $30 billion market by 2020, according to Aragon Research’s Jim Lundy. For this whole online lending experiment to work, it’s not just about digital signatures: like the auto loan industry, it’s about finding a way to create industry-wide alliances between distributors, originators, investors, and technology providers.

The move towards fully digitzed transactions is also being fueled by the concern that regulation is on its way to the online lending industry. eOriginal has the ability to provide real-time audit and data analytics at the document, transaction, and portfolio level. “The world is moving away from a document-centric perspective to the trusted-data perspective,” Bisbee explain. “In this world of financial services, whether you’re a lender or investor, you should never need to look at a document. You should make decisions based on data and that data needs to be trusted and auditable.”

 

Funding Circle securitizes first portfolio

fintech M&A 2013

Funding Circle will become Europe’s first online lender to have loans from its platform securitized, setting a precedent that could attract additional funding to the fast-growing industry. The deal, arranged by Deutsche Bank and announced on April 14, will secure loans that originated through the platform by KLS, a U.S. asset manager.

The announcement of the deal was the latest in a series of indications that European investors view Funding Circle, and the entire online lending space, as a maturing member of the continent’s lending ecosystem. At first glance, the securitization, to be backed by £130m of loans and marketed by the end of April, looks like a strong vote of confidence in the upstart, which was founded in 2010.

For the company, of course, it is hard to see any downside stemming from the move. Indeed, it is the latest in a series of milestones for the firm: Last December, Funding Circle announced it had crossed the £1 billion threshold in loans in 2015, and is poised to exceed that number again in 2016. Also in December, the Bank of England declared the firm to be the third largest net lender to small businesses in the UK, following RBS and Lloyds Banking Group.

An industry matures

Looking at the securitization deal, which was inked to back loans that originated via the platform by KLS and arranged by Germany’s Deutsche Bank, the Financial Times said it “underscores rapid growth in alternative platforms as traditional lending continues to stagnate across Europe, despite efforts from policymakers to boost the flow of loans to small and medium sized businesses.”

And Cormac Leech, an analyst at investment bank Liberum, told FT that the involvement of Deutsche Bank was “a strong endorsement for P2P credit quality.”

Online lenders aggressively lending

Others, however, say that while the current move is certainly a net positive at this stage for Funding Circle, it is not clear just what the long term impact of growing levels of securitization will have, either on the company or on Europe’s online lending sector in general.

As early as last summer, Australia’s Sydney Morning Herald described the current wave of infatuation with online lending companies as “a flashback to the subprime mortgage boom” that derailed the US and much of the world economy in 2008. To demonstrate growth, online lenders have significantly ramped their volume of originations by tapping mostly institutional sources of capital. Institutional interest, which has helped provide liquidity for the expanding industry, appears to be waning and underwriting growth rates are indeed slowing. Some platforms have seen loan volume drop over 20% just from Q3 to Q4 of 2015.

Canaan Partners General Partner Dan Ciporin warned last week at the LendIt 2016 conference that introducing professional capital into the marketplace lending world is not without risks.

“Institutional capital is very fickle. Retail capital is quite sticky, on the other hand, and it is enormous,” Ciporin said.

Fintech’s growting sweet spot: Below-prime

Also at LendIt, TransUnion’s financial services head, Steve Chaouki, told conference attendees that new online lenders have led a large expansion in below-prime loans since 2010: Such loans were virtually nonexistent in the online space six years ago; today, the $10 billion the sector has funded for these loans far outstrips similar loans made by banks, finance companies or credit unions.

Chaouki also noted that fintech loans made in 2014 reached four percent delinquency rate in about nine months, in contrast to about 17 months for similar loans made in 2011.

None of which necessarily indicates fundamental holes in the online lending sector, or in the marketplace lending in particular. Ultimately, there is little question that, like across the Atlantic, online lending is here to stay in Europe. It is no exaggeration to say that P2P and marketplace lenders have attracted borrowers by creating simple, easy-to-understand loans that make credit available to ordinary, workaday individuals quickly and painlessly.

Seen through this lens, there is certainly reason for optimism: Funding Circle’s current round of securitization seems to indicate that the industry as a whole is maturing and will continue to do so into the future. And although companies such as Funding Circle, Lending Club and Prosper command less than 1 percent of the lending market today, they are likely to continue to grow, and it is clear that finance’s incumbents have taken note of the disruption they have sought to sow.

All of which means that online lenders find themselves today at a crossroads: Will the sector use the coming years to focus on careful, honest growth, the pursuit of ambitious goals and strong earnings and a commitment to maintain healthy loan books? Will online lenders manage to avoid the traps often associated with the traditional lending industry which reverberated around the globe a decade ago?

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