Transparency remains a sticking point for online lenders

Transparency is the big sticking point when it comes to why small businesses still prefer banks to online lenders.

A small business credit survey by the Federal Reserve Bank of New York found 46 percent customer satisfaction at online lenders like Lending Club and OnDeck Capital with a 19 percent rate of dissatisfied customers – compared with large banks’ 61 percent of customers who indicated they were satisfied with their small business loan process and 15 percent of whom expressed dissatisfaction. Almost half of all customers specified that their dissatisfaction came from a “lack of transparency.”

Rohit Arora, CEO of Biz2Credit, an online small business platform that matches entrepreneurs with credit solutions, said online lending solutions can be a little misleading. They’re good solutions for customers whose expectations have been raised by expediency of the digitized commerce sector, but the reality is that banks’ core functions are still in the dark ages, he said.

“Large banks and small banks still haven’t gone online,” Arora said. “You can’t go and get $200,000 from your bank – that can take you four to six weeks. In other sectors, convenience and price go in tandem, in financial services, convenience comes at a cost. That’s when the higher dissatisfaction level comes into the picture.”

Jeremy Ruch, Bond Street head of business advisory, said that transparency around pricing and profits is generally the sticking point. Customers of other alternative lending products aren’t perfectly clear on what the requirements of their loan products are, how they qualify or why they don’t or what exactly they’re paying for, he said, although he maintained that Bond Street receives mostly positive feedback about the transparency of its loan process.

“Transparency is obviously incredibly important to us,” he said. “It’s for that reason that we make a point of actually highlighting the interest rate to our customers before they sign up. It’s about being completely open about all elements of our process and clear about what they’re signing up for before they do it.”

Online lending customers are also dissatisfied with higher interest rates and unfavorable repayment terms, two common issues for the growing industry, which continues to have a higher cost of capital and for customer acquisitions.

Those issues are also what’s driving bank-fintech partnerships like the agreement between On Deck Capital and JPMorgan Chase, which is trying to grow its small business loans aggressively. Plus, online lenders target riskier businesses that probably couldn’t get credit from a bank.

Arora said a big challenge for online lenders is simply that they haven’t spent the time or money to build comparison-type dashboards that would help customers understand exactly what they’re getting.

“A lot of online lenders are failing. They’re catering to a larger proportion of customers now compared to banks – not in terms of dollar value but in terms of units. And customers need more education, you have to explain to them why you’re charging a higher rate.”

WTF is crowdfunding?


This post is part a series of articles that explain, in plain English, new technology tools and platforms that are changing the face of finance. Check out other articles in this series here.

What is crowdfunding?

Crowdfunding combines crowdsourcing and micro finance. It’s literally what its name means: raising money from the crowd. People looking to raise money can post a project to a crowdfunding platform and backers can choose to financially back a crowdfunding project. Crowdfunding provides a way for people, businesses, and causes to raise money efficiently because of the social nature of crowdfunding — people who choose to back a project tend to share it with their friends and families.

Interesting. Are there different flavors of crowdfunding?

Sure. Crowdfunding’s roots are in charitable giving — donors can donate a few dollars to people in need and these small donations, when aggregated together, provided necessary capital to families and small businesses around the world. Crowdfunding didn’t stop with charity, though. The most popular crowdfunding platforms are essentially pre-buying platforms — people like artists and technology developers raise money from fans to help fund the production of their ideas.

There’s also for-profit lending, where individuals and businesses borrow money from the crowd — that’s called peer to peer or marketplace lending.

Lastly, investors are using crowdfunding to invest in small businesses around the world (equity crowdfunding). Instead of plopping down $25k to $100k to invest in an early stage company, some equity crowdfunding platforms take investments as small as $100.

Why would someone want to raise money by crowdfunding?

Crowdfunding doesn’t only provide capital to the people who use it to raise funds — it also works to build an audience of fans and supporters. A new handheld technology device can use crowdfunding to finance development of the hardware, but it also works to attract enthusiasts and supporters of the product before it ever hits the market. In fact, crowdfunding backers typically provide a lot of product feedback to the project owners.

Also, the money raised via crowdfunding typically isn’t dilutive — it’s mostly categorized as a donation, loan, or pre-selling a product. So, unless a project owner conducts equity crowdfunding, with is the same as taking an investment, she retains full ownership over her company without selling off to external investors.

It sounds weird — what motivates people to donate, lend, and invest via crowdfunding?

A big chunk of people who donate or back a crowdfunding project have some connection to the person or team running the campaign. But people crowdfund for a lot of reasons. Technology and artistic projects are some of the most popular crowdfunding categories as they attract fans and enthusiasts to back projects. On the investment side, people back equity crowdfunding campaigns because they expect to make a profit, joining others who are making the same bet. Donors who back charitable crowdfunding campaigns feel good that their small donation, when combined with donations from their peers, can amount to a significant gift to someone who can really use it.

Is crowdfunding legal?

Good question and the answer is somewhat complicated. Crowdfunding regulation is in flux. It’s useful to make a distinction between not-for-profit crowdfunding and for-profit crowdfunding. Not-for-profit crowdfunding has been legalized in most places around the world, though regulation exists to help protect donors from fraud. Regarding for-profit crowdfunding (lending and investing), many geographies are currently working on, or have recently passed, legislation to legalize crowdfunding. For example, in the US, equity crowdfunding (the investing flavor) was legalized in 2012 by President Obama’s JOBS Act, but wasn’t fully implemented until 2016.

How is fraud not overwhelming crowdfunding platforms?

It’s interesting how different platforms address fraud. At the minimum, most platforms monitor the projects on their sites in search of fraud. This could be a cursory sweep of submitted crowdfunding projects or could entail requiring lots of identifying documentation to ensure projects are legit. Interestingly, the crowd itself has proven to be pretty good at sniffing out scams and when they do, the platforms shut down shady projects.




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.

With acquisition of Zencap, Funding Circle expands into Europe

Zencap acquired by Funding Circle

Funding Circle will be expanding ints online lending platform into Europe with its acquisition of Zencap, a German lender with a foothold in Germany, Spain and the Netherlands.

Speigel Online, who broke the story, says just 520 loans have been made over the Zencap platform, worth €35 million (£25.6 million, $39.6 million). Zencap had been identified as the fastest growing online lender in Europe and had received international attention when Victory Park Capital, a lender to online lenders, announced that it would open a €230 million lending facility to access loans on the Zencap platform.

Funding Circle, based in the UK, has demonstrated a willingness to internationalize its peer to peer small business lending platform. It first entered the US market via an acquisition of Endurance Lending in October 2013. Now, with Zencap as part of its international portfolio, Funding Circle is turning its attention to European expansion.

According to Business Insider, Funding Circle intends to do more acquisitions like Zencap to ramp its growth;

It’s been a lot better than we expected to be honest,” Desai tells Business Insider of the US expansion. If you look at it 2 years ago, when Funding Circle came together with Endurance, the old Endurance business was probably doing about $300,000 (£196,200) a month in new lending. If you look at it now, we’re doing around $30 million (£19.6 million) a month in the US. It’s 100 times as big in 2 years. And that’s 30% of our business now, the US.                                                   –Funding Circle CEO, Samir Desai

Funding Circle’s own most recent financing round closed in April 2015, raising $150M as part of a Series E round, in which BlackRock, DST, and Temasek participated. Funding Circle has raised nearly $300M in total and is reportedly valued at over $1 billion, a large startup for the UK fintech ecosystem.

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Peter Renton on How the Lending Club IPO changes everything

On the inaugural This Week in Crowdfunding podcast, David Stark and Zack Miller discuss all things crowdfunding.

First up, we do a hard-punching news roundup. We chat about Kickstarter’s recent rule changes, why the real estate crowdfunding industry is currently receiving so much PR, and a recent study that sheds some light on optimizing crowdfunding campaigns.

lendacademy's lend academyWe interview Peter Renton of LendAcademy and the Lendit conference, who’s a true pioneer in the marketplace lending industry. We ask Peter on where the industry is headed. Pay attention to Peter’s description of the rumored, upcoming Lending Club IPO and how he expects this to be a seminal moment in the crowdfunding industry.

Lastly, in our product review section of the podcast, we take a closer look at NickelSteamroller which is a great site to both analyze the marketplace (p2p) lending industry in general, as well as analyze individual securities at the portfolio level.

That’s a wrap for the first of what we hope to be incredibly engaging and informational podcasts we’ll be publishing weekly.

Listen to the FULL episode

Investing in people with potential — with Upstart’s Dave Girouard

upstart lending

What if you’re a recent Stanford college grad with a computer sci degree and need to borrow money? (crickets)

What if you’re an investor and would like to be able to loan to these (future) high performers? (Upstart…)

Dave Girouard, co-founder and CEO of Upstart, joins us on the Tradestreaming Podcast today to talk about how his firm is enabling lending to — and investing in — young, high potential people who haven’t had enough time to build out a long credit history.

Listen to the FULL episode

About Dave Girouard

urlDave is the co-founder and CEO of Upstart.

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Creating a new asset class of personal loans — with Lending Club’s Scott Sanborn

In 2012, Renaud Laplanche, founder and CEO of Lending Club, joined me on the Tradestreaming Podcast.

So much has happened in the peer to peer lending space since then (including the fact that they no longer call it “peer to peer”): Lending Club just surpassed $4 billion in underwritings, rolled out business loans in addition to personal, and filed for IPO.

Chief Marketing Officer, Scott Sanborn joins me, Zack Miller, on the Tradestreaming Podcast to discuss why investors are flocking to Lending Club and where his business will go in the near future.

Listen to the FULL episode

About Scott Sanborn

scott sanborn lending clubScott is the Chief Marketing Officer and Chief Operating Officer of Lending Club.

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***Thanks for joining us on Tradestreaming Radio — I’m very grateful for your time. It’s awesome learning about these new tools and technologies together.

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Powering the marketplace lending ecosystem — with Matt Burton

orchard powers crowdfunding

This is the next instalment of our series on crowdfunding. You can access my other interviews on crowdfunding here and here.

Matt Burton, cofounder of the Orchard Platform joins me, Zack Miller, on the Tradestreaming Podcast.

Crowdfunding is a huge, transformative trend in investing. Both individual and institutional investors alike are turning to crowdfunding to deploy their monies.

Matt’s company, Orchard, provides the technology infrastructure of many of these new platforms (what Burton calls the “marketplace lending ecosystem”). Given his ringside seat to what’s transpiring in the p2p lending (and broader, in crowdfunding in general) industry, Matt addressed why investors are so interested in this new form of investing, how individual investors and professionals are using these crowdfunding platforms, and more.

Listen to the FULL interview

About Matt

Matt Burton is co-founder and CEO of the Orchard Platform and has spent his entire career helping build, scale, and optimize the internet’s top advertising exchanges (Google, Admeld, LiveRail).

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Visit our Sponsor

OurCrowd is a better way to invest in startups. Identify and invest in the next Facebook, Google, and Apple on OurCrowd’s investment platform of vetted and diligence of startup investment opportunities. Check out OurCrowd.

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Photo credit: RTD Photography / Visual Hunt / CC BY-SA

Investing in people with peer to peer loans – with Lending Club’s Renaud Laplanche

Lending Club's Renaud Laplanche on marketplace lending

I have to admit: investing in peer to peer loans didn’t initially appeal to me.

I thought it would be hard to assess the risk in lending to individuals — after all, that’s what banks get paid the big bucks for, right?

But 5 years after Lending Club first launched its website, the firm has pioneered a whole industry, not just to say a new asset class. There have been over $1B in p2p loans underwritten and investors like me are now using p2p loans as a core holding in the fixed income part of their portfolios.

Founder Renaud Laplanche joins me on Tradestreaming Radio to talk about how the p2p loan industry cures some major inefficiencies in the market for capital, does a better job sizing up and personalizing risk, and how his firm and industry might just eat the banking system’s future lunch.

Listen to the FULL episode

Continue reading “Investing in people with peer to peer loans – with Lending Club’s Renaud Laplanche”

Why I’m a converted believer in investing in P2P loans

If you’re like millions of people, you’re probably worried about your net worth.

Pretty worried.

The market’s up and then, it’s down. Jobs are being created and lost. Banks are stable and then they lose $3B seemingly overnight. And politicians? Nobody seems to have a strong plan to get us through and certainly not the political will to see it through.

It’s not entirely clear if the economy is recovering or not.

Investments: riskier, less diverse, zero confidence

If you have investments, you’re probably experiencing the following:

Volatility spikes: The market has the great ability to lull people into a false sense of security and then, wham! You get periods like the beginning of May where it feels like the world is ending. Nothing looks good right now. Nothing feels right, either.

Diversification doesn’t seem to be working: It may be exchange traded funds doing it or just a general move towards passive investing, but all types of investments are moving more in tandem. When stocks go down, they bring down other “safer” assets. The theory of diversification isn’t providing the benefits it promised. That’s where we are — when things are bad, it seems that there is nowhere to hide.

Lack of confidence in reaching financial goals: Many investors are just throwing up their hands. No más. They feel the stock market is rigged (it is, somewhat) and don’t want a part of it. But in an environment where bonds and CDs pay so little, underfunded-for-retirement investors need to reach for more risky assets and are forced to play a game that they don’t want to play.

What if I could tell you that you can triple the returns on the fixed income (bonds) part of your portfolio without taking on more risk?
Continue reading “Why I’m a converted believer in investing in P2P loans”