5 surprising things you might not know about FICO

surprising things about FICO

It’s hard to read anything about the rise of online lending without touching upon the demise of the FICO score. FICO may not be the word’s most perfect credit scoring methodology, but for the most part it’s held up through multiple credit cycles. Many upstart online lenders have developed tools to compete with, or even replace, the traditional scoring mechanism, but in actuality, financial institutions are showing increasing interest in FICO scores, not less.

Here are 5 surprising things you may not know about the FICO score:

FICO usage is going up, not down: If you pick up any mainstream business press, you’ve probably read about the death of the FICO score. As part of their business plans, many online lending startups have targeted borrowers who traditionally struggled to access credit from traditional sources. Many of these potential borrowers aren’t scored by FICO because they lack credit history. Oftentimes, it’s because they’re too young to have used credit cards. So, to extend credit, many of these firms had to build their own credit models.

But when you look at the numbers, FICO is being used more, not less, in today’s market. FICO scores are used in 90% of all credit decisions, according to research firm CEB TowerGroup, amounting to 10 billion scores every year. So, even if student loan lender SoFi announced its firm was now FICO-free, FICO scores are indeed ramping. In the 3rd quarter of 2015, FICO’s Scores division saw its revenues rise 27 percent over the same period last year.

FICO does have a solution for millennials: One of the dings people have on FICO is that its credit models are backward-facing. These historical models, which first hit the market in 1989, give weight to past behavior, but pay little attention to current reality. If you paid your bills on time in the past, according to FICO, you’re likely to continuing doing so in the future. But what about a millennial who never had any bills in the past? FICO has had a hard time scoring this type of person. Instead, some fintech firms have built a millennial’s earnings trajectory into their credit models to make sure they can extend credit to the unscored.

But, FICO has developed its own scoring mechanism to deal with non-traditional borrowers. Called Fico XD and developed in tandem with LexisNexis Risk Solutions and Equifax, XD goes after previously unscorable borrowers. XD uses a mix of landline, mobile, and cable payment history and combines it with credit bureau information, if it’s available, and public and property data. According to the firm, this means 50% of previously unscorable credit applicants can now be scored. The Consumer Financial Protection Bureau reported that as of 2010, about 8.3% of adult consumers, or 19 million people, were considered “unscorable” because their credit history was inadequate. FICO claims it will include an additional 50 million people under XD’s scoring methodology.
FICO stock at an all-time high

FICO stock is at an all-time high: FICO, the company, was formally known as the Fair Isaac Corporation. It’s based in San Jose, California, and was founded by Bill Fair and Earl Isaac in 1956. While there’s been a lot of speculation about the future of FICO in light of the excitement around newer credit models, the company doesn’t seem to be feeling the heat just yet. The software company did close to $800m in revenue in 2014 and its stock trades at an all time high.

“I think some of the headlines reflect a bit of a desire by some of these alternative lenders to stir up controversy,” CEO William Lansing remarked on a recent earnings call. “We’re not really seeing it in our numbers. We’re not selling fewer Scores. In fact, we sell our Scores to many alternative lenders and those volumes are going up not down.”

There’s actually more than 1 FICO score: Though we normally think and talk about FICO scores as if there were only one score per person, the truth is that there are multiple scores on our creditworthiness. The most widely used score by all 3 credit bureaus (Equifax, TransUnion, and Experian) is FICO Score 8. Beyond that, FICO has developed multiple scoring methodologies it uses in auto lending, credit card decisioning, and mortgage lending.

FICO continues to evolve its scoring practices, which results in multiple scores. A lot has happened since the firm debuted its first score to the market in 1989. Lender credit-granting requirements, data reporting practices, consumer demand for credit, and consumer use of credit have all evolved. As the firm releases new scoring practices, lenders choose for themselves whether or not to upgrade to the newest version.

Figure 1: Dynamics of Credit Score Gaps of Lasting Spousal Relationships
Dynamics of Credit Score Gaps of Lasting Spousal Relationships

Beyond measuring creditworthiness, FICO scores also measure romantic compatibility: Maybe, instead of asking someone you meet at the bar what his or her major is, it’s a better idea to ask about their FICO score. That’s because new research has shown that big differences in credit scores could prove disastrous to a relationship. In Credit Scores and Committed Relationships, researchers for the Brookings Institution looked at data from The Federal Reserve Bank of New York Consumer Credit Panel and from credit bureau, Equifax, covering the 15-and-a-half years through the second quarter of 2014.

While the researchers didn’t exactly use FICO scores for their research, they did find that a “couples’ average level of and the match quality in credit scores, measured at the time of relationship formation, are highly predictive of subsequent separations.” Similar credit scores, if relatively high, are also predictive of lasting relationships.

In other words, couples that spend together, pay their bills together, and make sure they use proper utilization of their credit lines, stay together.

 

Photo credit: stevendepolo via Visual hunt / CC BY

Professional marketplace lending association aims for clarity, transparency

best presentations for marketplace lending

Fintech professionals and observers say the founding of a professional organization to promote responsible business practices among marketplace lenders is a landmark for the industry, which grew from infancy in 2006 to $12 billion in 2014, and is expected to reach $122 billion in origination volume by 2020.

Nick Clements, founder of price comparison website MagnifyMoney.com and a regular commentator for Forbes, told Tradestreaming that the formation of the Marketplace Lending Association (MLA) on April 6 will give the sector an important voice, as federal and state regulators start to look more closely at the sector.

“There is not a lack of regulation in the U.S.,” Clements explained. “In fact, there is a lot of regulation from varying agencies and states. But what is missing is a clear regulatory framework,” he said.

In an email exchange on April 12 from the Lendit 2016 conference, Clements said most CEOs at the gathering spoke about welcoming regulation, and added that there is an overall feeling in the marketplace lending sector that the industry is inherently consumer-friendly. Most felt their businesses would benefit (with investors, for example) by having regulatory clarity.

“There is ambiguity in a number of places, and that needs to be addressed,” he said. “For example, Madden vs Midland Funding raises questions about the maximum rate that can be charged (and portability of rate) for a typical marketplace structure. Or take the issue of a national lending license for non-depository institutions. This went away with Dodd-Frank and would help marketplace lenders avoid having to get licensed and audited by 50 different state regulators.”

The MLA was founded by credit marketplaces Funding Circle, Lending Club (NYSE: LC) and Prosper. Officials for the Association said the group will also lobby for sound public policy to benefit borrowers and investors. The group’s Marketplace Lending Operating Standards outlines fair lending practices, provides guidelines for appropriate risk management models and especially calls for transparency for all parties involved in marketplace lending, including investors, borrowers and regulators.

The Association is governed by a Board of Directors, which will initially consist of one Director nominated by each founding member. As more marketplace lending companies join the MLA, additional directors will be elected based on a vote of the full membership. The MLA intends to hire an executive director and staff as it continues to expand.

“The launch of this Association reflects our industry’s commitment to the highest standards of transparency and customer protection, while also delivering innovative new ways to provide better value and experiences for consumers, small businesses and investors,” said Funding Circle Co-Founder and U.S. Managing Director Sam Hodges in a prepared statement. “In the fast-growing marketplace lending sector, we want to continue to act as a thought leader and thought partner to the appropriate bodies in Washington to ensure continued innovation and responsible growth in the sector.”

The group says it aims to bolster the growth of the marketplace lending industry, as well as to ensure transparency and efficiency throughout the sector. To accomplish that goal, the group has published a professional code of ethics, the Marketplace Lending Operating Standards, to address issues including transparency, responsible lending practices, governance and controls, and risk management.

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]

Why banks like BMO are testing Pay by Selfie technology (Tradestreaming): Security is top of mind in finance and biometrics are just one way to address the issue. BMO is rolling out Pay by Selfie technology, developed by MasterCard, that will require the cardholder to snap a picture of him/herself at the point of purchase. But for banks like BMO, it’s not just about security.

An inside look at Wall Street’s secret client list (Bloomberg): There’s a secret list that Citigroup keeps on its equity-research desk at its swank campus in Tribeca. And if you’re not on it – well, you might as well be nobody. At the top is a handful of hedge-fund giants, the “Focus Five,” that bring in big money for Citigroup: Millennium, Citadel, Surveyor Capital, Point72 and Carlson Capital, according to a person with direct knowledge of the list. It represents a growing trend on Wall Street where the most-lucrative clients get the best service: the top trade ideas, hours-long calls with analysts, intimate soirees with executives, bespoke trading models, etc.

9 alarming facts about online lending (Tradestreaming): Billions of dollars have been poured into the online lending sector and tens of billions of dollars of loans underwritten. But beyond mainstream media’s fawning over online lending, something strange is afoot. Here are 9 data points that may alarm you about the space. *Further reading: As a venture capitalist, Frank Rotman (QED Investors) has invested in some of the most successful online lenders around the world. He addresses the changing environment in a post he has on American Banker, Answers to These Four Questions Will Determine Online Lenders’ Fate.

Is human capital investing finally going to be a thing? (Tradestreaming): Recently, entrants have come and gone to a form of financing called, income share agreements. Instead of taking out lengthly bank or federal loans to pay for college, ISAs give students the ability to pay back a percentage of their future earnings. Cumulus Funding, a new player, is the latest, and more recently funded, player to try their hand at ISAs.

Understanding the financial squeeze on Millennials (Bloomberg) :It may be that each generation is “free” to choose to consume or invest as much as it wants…But it’s certainly true that the U.S. and most other Western countries have invested less in the last 35 years than they did in the previous 35. That means that the baby boomers left their kids less, relative to their own consumption, than their own parents did. In a time of slowing productivity, that has been a tough blow to today’s youngsters.

9 alarming facts about online lending

alarming facts about the online lending industry

Online lending has been a very popular space of late. Investors have risked billions of dollars of risk capital in getting these platforms up and running. Startup online lenders like LendingClub and Prosper are lending billions of dollars out to individuals every month. Business lenders like Kabbage and Funding Circle provide access to capital for thousands of small businesses who either can’t or won’t go to traditional sources of funding. But not all is peachy in online lending.

Here are 9 things that may change your view on the online lending industry:

The lower end of the credit spectrum is deteriorating

lending club charge offs increasing
from monjaco

Looking at the LendingClub data, higher credit quality loans have been performing relatively in line with how they’ve performed historically. That’s true of the the platforms 36-month loans as well as the 60-months. Some of the more recent vintages, highlighted in the image above, have charge-offs levels above historical norms.

Action is probably on the way to further regulate the industry

In early March 2016, the Consumer Financial Protection Bureau requested borrowers to alert the federal agency of any complaints they have about online lending firms. Experts believe this is an initial shot across the bow as more oversight is thrust upon these startup lenders. Goldman Sachs is probably sensing this move as it readies its own offering in online lending — the bank recently hired a former CFPB attorney to head up compliance.

The industry sends a lot of direct mail…a lot

“In July [2015]alone, Lending Club mailed 33.9 million personal-loan offers,” the Wall Street Journal reported. “The average monthly volume of personal-loan offers sent through the mail has more than doubled in two years to 156 million in the year through July from 73 million in the same period in 2013,” it added. The new CMO at online lender to millennials, Upstart, said his firm is most excited about acquiring new borrowers via direct mail.

China suffered one of the largest online lending scams in history

Ezubo, which means easy-to-lease in Chinese — is being investigated for alleged illegal operations. Chinese authorities believe 95% of the borrower listings on the online lender’s website were fake. 21 executives of the Internet firm were recently arrested as Chinese officials estimate that the firm defrauded investors of 50 billion yuan ($7.6 billion).

Online lenders are dialing back using Facebook to assess credit worthiness

It’s hard to assess the creditworthiness of young borrowers in part because they just don’t have a lot of credit history. So, online lending has required the upstart lenders to create their own credit models. One input they were using were borrowers’ Facebook profiles. The idea was that by scanning a borrower’s presence on the social network, an online lender can take in enough personal data to correlate it to the likelihood of responsible payback. Anyway, that’s not happening now as Facebook is decreasing the amount of data is makes available to these players. It appears Facebook doesn’t want to get regulated as a credit agency.

Online lenders are creating their own hedge funds to fund their loans

The entrance of institutional investors into the online lending space helped form the industry. When they were first launched, loan marketplaces suffered from sluggish demand from investors. By tapping into professional investment vehicles, the industry went from peer to peer lending to marketplace lending. But these sources of capital aren’t endless and in one case, an online lender (SoFi) is creating its own hedge fund to invest in the loans on its platform (and on other platforms).

Online lenders becoming popular for small business…but they’re not happy with them

Small businesses are going online to find access to credit. A new survey from the Federal Reserve Bank of Richmond showed that over 20 percent of small businesses have applied with an online lender because they’re finding success there (online lenders had the second highest rate of approval at 71 percent). But not all is peachy in online lending-ville — the survey found that approved firms were generally not very satisfied with their experience. In particular, these firms cited concerns with interest rates and unfavorable repayment terms.

One of the most accurate indicators of SMB credit worthiness is…shipping patterns

Online lender Kabbage uses a variety of different sources of data when it looks at loan applications. Kabbage, which has funded over $1 billion in loans to small businesses, found that analyzing the shipping patterns of small businesses was, in itself, an effective basis for a credit model. In fact, credit models based on shipping patterns outperformed a traditional FICO-based model.

Lenders forwarded 924 million yuan ($142 million) on Chinese P2P platforms for down-payment loans in January, (more than 3x the amount made last July)

Experts are increasingly concerned that there’s a real estate bubble in China. Compounding the issue are popular P2P platforms that are ramping the amount of money they’re lending out to home borrowers, fueling demand for homes. By March 2016, all 20 P2P lenders that offered loans for home down payments had halted the service, in response to a government investigation.

Is human capital investing finally going to be a thing?

income share agreement and cumulus funding

As online finance companies continue to develop new types of loans, one firm is growing an innovative form of finance. Chicago-based Cumulus Funding offers something called an income share agreement, or ISA. In contrast to plain-vanilla unsecured loans, in an ISA, a borrower pledges a percentage of his or her income. As a borrower’s income rises, payments therefore rise, as well. Cumulus loans range from between $1500 to $10,000 for a period of 2-6 years. Starting interest rates are based on credit scoring and funding can happen as quickly as a day or two.

While ISAs are a relatively new financial product at scale, Milton Friedman first wrote about them in a 1955 academic paper entitled The Role of Government in Education. Jeb Bush, once considered a front-runner in the 2016 Presidential campaign, positioned ISAs prominently in his economic plan to overhaul the US educational system — one that’s burdened its graduates with $1.2 trillion in debt.

From Bush’s plan:

“Finally, instead of the current burdensome federal loan system, we will give all high school graduates access to a $50,000 line of credit through their Educative Savings Account (ESA) to pay for college and career training. For every $10,000 spent, students would repay 1 percent of their income for 25 years. This ensures affordable repayment, removes risk of default and protects students during periods of unemployment, while the ESA structure gives students flexibility and the incentive to be cost-conscious. In addition, low-income students would have access to an improved need-based Pell Grant through their ESA.”

Outside of lots of discussions and a few experiments over the years, the massive federal student loan industry never really adopted the ISA structure. That’s beginning to change, though. Purdue University has plans in the works to launch its own form of income share agreements in the fall of 2016. Called Back a Boiler, Purdue’s new lending program will be the largest of its kind to date. Student who opt for Purdue’s ISA would receive $10-$15,000 to use on tuition, board, books, and expenses in return for a share of their post-graduate earnings.

“The motivation to explore an ISA was to determine if an alternative could exist to the private loans and Parent PLUS loans that some Purdue students need to take out to help pay for their education over what they are able to get from government loans or scholarships,” explained Brian Edelman, Purdue Research Foundation CFO and treasurer. “The intent is that this type of educational funding resource would be a supplement to a government loan or scholarships.”

The Purdue pilot is planned to be a small roll-out, seeded with about $3m.

Cumulus, which recently announced $30m in funding, says it has issued ISAs of this type to 500 customers since it launched in 2012. Cumulus isn’t the first online finance firm to market ISAs. Upstart, which was founded by Googlers in 2012 with its own ISA product, no longer offers income share products and instead is focused on efficiently providing capital to younger professionals who don’t have a lot of credit history. Pave, which launched around the same time and also markets to millennials, transitioned toward a more traditional lending product after beginning with an income share agreement. The companies have raised over $50m and $300m, respectively.
“We found that the market wasn’t quite ready for income share agreements,” explained Upstart’s CEO and founder, Dave Girouard.  “While there was definitely a lot of early-adopter interest, the complexity and regulatory ambiguity suggested to us that it would likely take a decade or more to become a mainstream product. Given the robustness of our ISA data science in predicting future earnings, we decided to repurpose the analytics to price personal loans, especially for consumers with short credit history.

Photo credit: dewfall via Visualhunt / CC BY-SA

The Startups: Who’s shaking things up (Week ending March 20, 2016)

fintech startups shaking things up

[alert type=yellow ]Every week, Tradestreaming highlights startups in the news, making things happen. The following is just part of this week’s news roundup. You can get these updates delivered direct to your inbox by signing up for the Tradestreaming newsletters.[/alert]

Startups raising/Investors investing

Future Finance raises $171m to grow its student loan platform in Europe (TechCrunch)
Future Finance — a startup based out of Dublin that provides loans to students — is today announcing a £119 million ($171 million) round of investment — £19 million in equity and £100 million towards future loans made through the platform.

Human capital investing platform, Cumulus Funding raises $36m (PYMNTS)
Cumulus Funding, a consumer finance company specializing in providing Income Share Agreements (“ISAs”) to individuals seeking a more flexible consumer finance alternative, has announced a major funding round today.

StanChart PE arm, Goldman invest $28 million in Vietnam mobile payments startup (Reuters)
A private-equity arm of Standard Chartered Plc and Goldman Sachs have invested a combined $28 million in Vietnamese startup M_Service, the operator of mobile e-wallet MoMo, the companies said in a joint statement on Thursday.

Online lending platform EZBob raises $28m (VentureBeat)
Online lending platform EZBob has raised £20m (about $28.3 million) in Series C funding in a round led by Leumi Partners and Oaktree Capital Management.

Next Insurance raises $13m to sell insurance to small businesses (VentureBeat)
Company founded by executives who sold Check to Intuit for $400m in 2014,Next Insurance announced a $13 million seed round led by Zeev Ventures.
The startup said that it plans to use the funds to launch its insurance sales platform for small businesses this spring — in a market in which “99 percent of small commercial insurance is sold offline through agents.”

Latin American P2P lender Afluenta banks $8m (Finextra)
Afluenta, the leading Latin America peer-to-peer lending network, announced an investment round from the International Finance Corporation (IFC), the private sector institution of the World Bank Group, and Elevar Equity, an impact venture capital firm.

InstaRem raises $5m to make overseas money transfers cheaper and faster in Asia (TechCrunch)
InstaRem, an international remittance payments startup headquartered in Singapore, has raised $5 million in a round led by Vertex Ventures.

Charting platform, ChartIQ raises $4m (Finextra)
ChartIQ, a leader in HTML5 financial charting for capital markets, announces that is has raised $4 million in a Series A investment, led by Illuminate Financial, with participation from existing investors ValueStream, Tribeca Angels and additional angel investors.

Real estate crowdfunding marketplace /software, CrowdStreet secures $3.5m (Crowdfund Insider)
Another real estate crowdfunding platform raises money. This time, it’s CrowdStreet.
“CrowdStreet has experienced incredible growth since launching its marketplace in 2014, which was complemented by our SaaS offering that debuted in May 2015. Our unique offering has attracted over 40 commercial real estate clients, with more than $1 billion in institutional-quality assets managed through the CrowdStreet platform.”

The Startups: Who’s shaking things up

DailyWorth, financial media co, launching female-focused roboadvisor (WealthManagement)
Advancements in technology may also be creating a shift in the other direction, with media companies becoming increasingly involved in providing financial services. One website, DailyWorth, is preparing to launch a new automated digital advice service called WorthFM.

OCC: Fintech firms inquiring about national bank charters (Banking Journal)
Several fintech companies—including one virtual currency firm—have made inquiries to the OCC about applying for national bank charters, American Banker reported this week, citing comments by OCC Chief Counsel Amy Friend at a recent fintech forum at George Washington University. Friend said firms could “be seeking the ‘regulatory umbrella’ of federal preemption of state rules,” since many are challenged by the number of state licenses needed to operate as nonbank lenders or money transmitters.

Crowdfunding platform, SyndicateRoom becomes IPO matchmaker with approval of London Stock Exchange (Business Weekly)
SyndicateRoom has become the first crowdfunding platform to join the public markets.
It has been granted intermediary status by the London Stock Exchange, allowing crowdfunding investors to participate in IPOs and placings on the UK’s main market and AIM.

 

The Startups: Who’s shaking things up (Week ending February 7, 2016)

fintech startups shaking things up

[alert type=yellow ]Every week, Tradestreaming highlights startups in the news, making things happen. The following is just part of this week’s news roundup. You can get these updates delivered direct to your inbox by signing up for the Tradestreaming newsletters.[/alert]

Startups raising/Investors investing

TradeRocket inks deal with Hitachi Capital America to fund $2 billion for mid-market financial supply chain (PRNewswire)
Hitachi Capital intends to supply $2 billion this year for TradeRocket’s supply chain financing platform which allows buyers to attain up to $5m of funding.

Credibly secures $70 million credit facility led by SunTrust Bank (VentureBeat)
An online lending platform that delivers a broad range of short- and long-term capital to satisfy the SMB credit spectrum, Credibly has provided access to capital for more than 4,500 businesses.

Rocket Internet’s Spotcap raises €31.5m to lend to small businesses (TechCrunch)
Spotcap intends to use the funds to expand its operations globally and to finance its online business lending activities in Spain, the Netherlands, and Australia.

Simplex raises $7m for credit card Bitcoin buying service (CoinDesk)
Simplex CEO Nimrod Lehavi said that the company enables faster purchases of bitcoin via credit card, while at the same time reducing the consequences of fraud for businesses, such as exchanges or brokerages, that offer the service.

Revolut passes $200m in transactions; closes $4.8m seed round (Finextra)
Revolut, the MasterCard-connected Global Money App, today announces it has closed its seed round adding Index Ventures as an investor.

Dopay, payroll for the unbanked, raises $2.5 million in pre-Series A round (PEHub)
From the PR: dopay is committed to transforming the lives of the unbanked and their employers by breaking the cash cycle through a payroll and cash management platform for companies, and by offering a full mobile banking experience for consumers

The Startups: Who’s shaking things up

How a Snapchat roboadvisor could rock the industry (Wealth Management Today)
Social media messaging service Snapchat is rumored to be building a roboadvisor service of its own. Could this be a serious option for 100 million active users?

How Payoff is shifting the conversation about consumer debt to financial wellness (Tradestreaming)
Payoff seems to be genuinely interested in helping its clients find their way out of debt and start saving. Pretty weird for a company that extends credit.

Opportunities in the risk business abound as insurance ready for disruption (TechCrunch)
From TechCrunch: “At a time when nearly every product category has been reimagined by a higher quality digital successor — the insurance industry and customer have been left in the dust.”

Navigating the fintech investment landscape (Wharton Fintech)
Nikhil Srivastava interviews Atul Joshi, a Wharton alumnus and managing partner of the family office Raga Partners, about fintech investment.

Ten reasons why fintech startups fail (CB Insights)
Pascal Bouvier, venture partner with Santander InnoVentures, lays down the law and explains who will win and who won’t.

BlackRock’s FutureAdvisor collaborating with RBC Wealth Management (Finovate)
The U.S. branch of RBC Wealth Management is launching a pilot program called RBC Investor Gateway that offers clients a digital advice option powered by FutureAdvisor

Blockstream partners with PwC for blockchain push (American Banker)
PricewaterhouseCoopers has partnered with blockchain technology company Blockstream to bring distributed-ledger and smart-contract technology to its clients

The most interesting challenger bank you’ve never heard of (Huy Nguyen Trieu)
From zero to 200,000 accounts in less than 2 years, this startup bank is trying to do what Easyjet and Ryanair did to airlines…

Lendvo’s Benjamin Lichtman wants to lend you money based on the value of your website

online lending

Benjamin Lichtman is co-founder of Lendvo.

What is Lendvo and where did you get the inspiration to start it from?

Benjamin LIchtman, Lendvo
Benjamin Lichtman, Lendvo

We got our first introduction into the digital business and finance worlds roughly 10 years ago when we started buying and selling domain names as a very profitable hobby. As our careers progressed, we gained more specialized experience in structured lending and internet traffic.

Over time, we developed a better understanding of both of these arenas from the perspectives of both lenders and borrowers. Like most businesses, the idea for Lendvo was birthed from a combination of need, experience, and situational awareness. We saw a digital business ecosystem, which was rapidly expanding but which was, and is still is, largely shut out of the commercial credit markets. We realized that with our own expertise in finance and online traffic, there was an opportunity in helping digital companies grow by providing specialized credit products.

Basically banks and other lenders won’t work with our typical clients because they can’t understand their business models nor value their digital assets.

Who’s your typical borrower?

Since the online business world is so diverse we don’t have any one ‘typical borrower.’ Our customers run the gamut from investors looking to buy a premium domain name to existing web businesses looking for working capital to finance advertising and inventory buys. At the most fundamental level, we look to work with any digital business that needs capital and has trouble getting it. Lendvo sees customers with different and unusual goals each day, so we pride ourselves on staying flexible with the types of customers we can work with and how to best accommodate their financing needs.

These are some of the most common ways Lendvo is currently working with digital businesses:

  • The Business That Needs a Domain Name: Premium domain names are super important because customers remember them, they help bring in traffic, and indicate category relevancy and professionalism. It’s a big deal in a digital world to be associated with a premium domain name. In fact, we’ve worked with several tech startups who thought they needed a one-word brandable .com just to be able to raise venture funding.
    A conventional brick and mortar businesses might look to purchase a commercial property on Park Avenue because the premium location adds a lot of value to their business model. 9 out of 10 times this kind of business would look to incorporate some level of financing, the availability of which wouldn’t be a question. For the digital business looking to operate on the Internet’s equivalent, it’s a different story entirely.
    Currently, we see a lot of small and medium sized businesses (not just tech startups) looking to upgrade their domain name to a class A or B premium name. These are usually single dictionary word .com’s, or two-word combinations that are brandable and/or category defining for the customer’s business. Since premium domains commonly run anywhere from 4 to 7 figures, financing is often needed but few lenders have the underwriting confidence to provide the necessary capital.
  • The Business That Needs Working CapitalLike any brick and mortar business, for online businesses, growth isn’t free. These guys require capital to scale their business or to work through periodic slowdowns. We commonly see the need for web design, app development, coding work, ad buys and search engine optimization. As with domain names, traditional financial institutions just don’t have the bandwidth and expertise to work with this client base. While the typical business lender may understand the financials, they are largely blind to the unique risks and underwriting procedures needed in the online world. These lenders are aware of their own inability to price risk and either refuse to lend to digital businesses or offer significantly inferior terms to what we can offer.
  • The Investor/Webmaster: This is your classic ‘Webprenuer’ who does deals all the time. Usually this is a unique one-off deal type that helps the professional close one or several deals pending. These deals can involve, but are not limited to, both digital collateral as well as future receivables financing.
  • The Web-Business AcquisitionSmall web-businesses are a hot commodity and currently sell for between 1 and 5 times earnings (from a few thousand to several million dollars). Generally, these businesses are best purchased through curated brokerages like FE International or via marketplaces like Flippa. Lendvo has a good working relationship with both but also sees walk-in customers looking to conduct a private sale.

Unfortunately for both buyers and sellers, the same underwriting problems that exist for working capital loans naturally extend to purchase finance. With our understanding of financial and digital underwriting, and our added ability to collateralize digital IP, we find that we’re usually the only lender willing to work with these customers.

How do you come up with the value of a website?

First off, coming up with a value for a website and coming up with what we think is a good LTV (Loan to Value Ratio) for a website are two different things but require a similar philosophy – we’ll try to address both.

It’s worth mentioning that we don’t believe in full automation when it comes to valuation or underwriting, like some other lenders do. There are simply too many black swans in the online oceans that slip past computers for this approach. We aim for a ‘cockpit’ underwriting and valuation approach. When you get into a modern airplane, you implicitly trust a number of automated systems — specialized gauges and talented pilots — all working in conjunction to produce safe and efficient transportation. We leverage custom and third party systems that can internally score and grade digital assets, cash flows, as well as people on a number of interesting fronts. We combine that information with human analysis and end up with what we think is a pretty solid and scalable process. Essentially, we automate the aggregation and scoring of data, and couple that with a layer of human investigation and decision making. Just like modern airplanes, we combine digital tools with talented people.

How do you collateralize the assets you’re lending against?

We have the ability to actually hold, copy, and secure digital intellectual property. This, in itself, is an area of expertise that is practically impossible for most lenders to execute well on.

What’s next up in 2016 for you guys?

2016 is looking to be a hot year for us in terms of loan origination growth and business development. Our main goals are 1) to develop more B2B relationships, which can help us to grow our new customer base and, 2) to refine our product offerings so that customers can maximize value from our capital.

The future of online lending: 13 top business lenders

list of the best online lenders

When JP Morgan announced it would begin offering loans to its small business clients via a partnership with a fintech startup, the market took notice. Instead of building its own online lending offering, the biggest US bank chose to partner with OnDeck, whose stock price spiked almost 30% upon the announcement. Those following what’s happening in online lending have witnessed billions of dollars of debt and equity that’s poured into the space over the past couple of years.

In the wake of the financial crisis of 2008, banks have tightened lending criteria and that’s provided an opportunity for technology and service startups to step in. In the aggregate, though these firms have enabled billions of dollars of lending to small businesses over the past few years, they’re merely a speck on the entire map of lending, paling in comparison to their offline competitors.

These startups have generally taken 2 different approaches:

  1. marketplace lending: Popularized in the consumer space, companies like Lending Club have created vast marketplaces of lenders and borrowers. While Lending Club has entered into the SMB lending space, there are other pureplays like Lending Circle that have made SMB lending their bread and butter.
  2. balance sheet lenders: these companies aren’t acting as brokers but actually underwrite their own loans to SMB borrowers. It gets a little more complicated as institutional lenders like Victory Park provide lending facilities to these online lenders. Whether they’re lending out their own equity or someone else’s cash, balance sheet lenders are assuming the underwriting risk.

Here’s a good breakdown of the space by Orchard Platform, which built and services some of the underlying marketplace lending technology for the platforms and the institutional lenders participating in this form of credit.

 

Orchard Platform's map of online lending

As we’ve seen in the robo-advisory space, the online lending marketplace appears to be splitting into two:

  1. pureplay startups that are taking incumbent banks head on competitively
  2. companies that provide enabling technology to the existing banking infrastructure to work with banks to develop their own online lending offerings

Most of the lending that’s happening online is unsecured. There is a growing focus on invoice financing and there’s been a lot of interest on creative solutions that provide more security than plain vanilla credit.

Companies like PayPal and Amazon are lending to merchants on their platforms as all payments run through their shopping charts. As startups and incumbents invest more in the online lending space, ecommerce companies have an interesting role to play in the industry. In this market, everyone can be an online lender.

The market opportunity is vast and growing quickly. Online SMB lending was about $9B in 2015 and expected to rise to over $80B by 2020, according to Intuit. New technology promises to make capital more inclusive, streamline to process for assessing creditworthiness, and to cutdown on the paperwork and waiting time typical of traditional lending.

Here are the top online small and medium business lenders that should be on your radar.

[podcast] Funding Circle’s Sam Hodges on scaling growth by navigating globally

funding circle on podcast talking about global growth

Online lending is enjoying its moment. New platforms are launching monthly and raising hundreds of millions of dollars in debt and equity in a race to redefine how we borrow and from whom. And it’s not just a US phenomenon — it’s happening globally.

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

Starting 5 years ago, Funding Circle was an early player in this marketplace lending space and has emerged as a leader servicing SMBs. The firm is originating $100 million in SMB loans every month and since inception has lent $1.7 billion to 12,000 businesses. The company was quick to expand internationally — with strong footholds in Western Europe and the US. The company is exclusively focused on providing finance to small business owners worldwide. Institutional lenders are looking to deploy capital across markets and Funding Circle is enjoying scale advantages from this exposure.

Sam Hodges, the co-founder of Funding Circle USA, joins us on the Tradestreaming Podcast to discuss the challenges he and his company successfully navigated in growing the business globally and how he’s planning to continue growing out into the next year.

Listen to the FULL episode


What you’ll hear on this podcast:

  • How Funding Circle is leveraging its sole focus on lending to SMBs
  • The challenges of taking a fintech company global early on and why, for Funding Circle, it makes all the difference
  • How Sam and the rest of the Funding Circle team overcame these challenges
  • How institutional lenders turn to firms like Funding Circle to help deploy capital across markets
  • How Funding Circle prioritizes entering new markets and how the company sizes up these opportunities

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