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

5 trends we're tracking in finance

Not a great year for incumbent share prices

2016 hasn’t been kind to big bank share prices, which have plummeted by nearly half a trillion dollars since January. A number of issues are at play here – the Chinese economy, U.S. interest rates, oil prices, and yes, Brexit (more on that below). The concern is that these losses could trigger a cycle of bank executive inaction and bank employees selling their stock. 

Yes, we still need to talk about Brexit

Britain’s decision to leave the EU is still reverberating through the finance industry. The long-term impact of the Leave vote on UK finance/fintech is largely uncertain, though this has not stopped finance experts and reporters from adopting the dystopian lexicon of a young adult novel to describe Britain’s impending financial doom.

Whatever the gloomy short-term effects of the referendum, long-term the future doesn’t look so bleak: the $30b mega-merger between the London Stock Exchange and Deutsche Börse is still going ahead, and the two companies still expect to deliver cost savings and revenue synergies worth a combined $780m a year after five years.

New and improved

Thanks to the explosion of fintech, incumbents are no longer the only financial service providers in the economic pond. As a result, banks are being forced to deal with a new reality in which owning the entire value chain isn’t really such a good thing.

Some incumbents are rolling with the changes, not only by rebranding but by transforming the products they offer and the way in which they communicate with their clients. Travelex, a 40 year old foreign exchange company that realized that whatever the future of payments is, it ain’t cash, went through a massive redesign to make digital its core. Its first product, Supercard, frees its users from foreign transaction fess and unfavorable forex rates.

Stateside, national bank TCF Bank rolled out ZEO, a suite of services that partners with Western Union to provide quick and efficient access to and transfer of funds. For the unbanked, ZEO is a godsend – you don’t have to bank with TCF to use ZEO, but you still get the security of the bank and can get expert advice from a banker. 

Professional investors are tooling up

Professional investors are using new technology to make themselves relevant (and cool) once again. Point72 Asset Managements’s marketing weapon of choice is social media, and it’s using LinkedIn, Facebook, Google+, Glassdoor and soon Twitter to aggressively pursue traders.

Meanwhile, legendary hedge fund Renaissance Technology is taking on high speed traders through the patented the use of atomic clocks, which will sync orders to within a few billionths of a second. Talk about radioactive.

Alternative SMB financing solutions are becoming mainstream

The SMB online lending marketplace is heating up, with old and new players aiming for a piece of the SMB loan provision pie. On July 7th, online payment lead PayPal announced that it had provided $2 billion of funding to 90,000 SMBs globally through PayPal Working Capital – its small business finance program.

Though $2b and 90,000 SMBs might seem paltry compared to Wells Fargo’s $40b (of a 5-year $500b lending goal), these numbers show that PayPal is serious about entering the SMB loan market. What differentiates PayPal’s SMB loan model is that repayments are applied automatically as a fixed percentage of daily sales that the business owner selects in advance; thanks to this proportionate system, business owners don’t have to live in dread of their loans.

PayPal isn’t the only innovator trying to make itself heard in a space that’s becoming increasingly crowded. Credit mogul American Express will be rolling out a new online loan platform later this year, and from the release it sounds like they’re aiming to win the marketing battle with supply chain financing.

Orchard’s eagle-eye take on the online SMB/consumer loan market is that it’s an attractive and stable yield opportunity – no doubt we’ll see more incumbents jumping on this loan wagon in the near future.

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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.