Can better products and lending practices heal marketplace lending’s hangover?
4 essential presentations on marketplace lending
Is the marketplace lending industry in trouble? Here’s what we know.
Professional marketplace lending association aims for clarity, transparency
Debt market opens to P2P loans
The Startups: Who’s shaking things up (Week ending December 6th, 2015)
[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 weekly newsletter.[/alert]
ApplePie Capital’s Denise Thomas on enabling investors to lend money to the right franchises, franchise owners (Tradestreaming)
Online lending marketplaces are changing the way capital is deployed and ApplePie has an interesting approach: small business loans to franchisees.
Cookies Wants To Become The Venmo Of Europe (TechCrunch)
Cookies is all about paying your friends without any fees. And now it intends to massively expand in Europe.
Trulioo’s Stephen Ufford: “Missing element to provide financial services for the 2.5 billion unbanked lies in a digital footprint” (Tradestreaming)
User identification is a seemingly simple problem, yet it stands in the way of truly opening up fintech applications. Until now, doing it well has remained elusive. Trulioo is trying to change that.
Number26 Launches Its Bank Of The Future In 6 New Countries (TechCrunch)
If you don’t like your current bank, Number26 may appeal to you. The German startup has been trying to reinvent the average banking experience in Germany and is now expanding throughout Europe.
Wealthsimple acquires online brokerage pioneer ShareOwner (Newswire)
Largest Canadian roboadvisor ($400M), Wealthsimple acquires online brokerage, ShareOwner.
SoFi’s Mike Cagney on valuation (Business Insider)
SoFi CEO Mike Cagney thinks the company could be a $30 billion business. Will he be right?
Startups raising/Investors investing
Australian Fintech Tyro Payments Raises $72M Led By Tiger Global (TechCrunch)
Australian financial tech company Tyro Payments plans to challenge the country’s leading retail banks after scoring AUD $100 million (about $72 million).
Bee Raises $4.6 Million to Deliver Banking Services (WSJ)
Banking startup Bee (which provides bank accounts, debit cards and financial services aimed at people who live in low- and middle-income neighborhoods) secures investment capital.
Clearpool secures $8 million investment (Finextra)
The electronic trading software development and agency execution business announced it has received an $8 million investment from growth equity firm, Edison Partners.
SMB Lending Technology Provider Mirador Secures $7M (Let’s Talk Payments)
Lending as a service getting more traction…and more money. Companies like Mirador help banks compete in online lending.
Q2 Acquires Social Money in $10 Million Deal (Finovate)
Formerly known as Smarty Pig, Social Money helps financial services companies better engage their customers by offering them savings solutions such as GoalSaver, a customized, bank-audited goal-saving system.
Startup Tracker’s Jeremiah Smith on how Twitter is a great distribution medium for his complement to CrunchBase (Tradestreaming)
Startup Tracker is changing the way investors and competitors research startups.
Prosper’s BillGuard Unlocks Premium Features for All Users (Finovate)
On the heels of being acquired by Prosper, the expense-management and fraud-tracking application made some of its most popular premium features available for free.
Green Dot to Enter Lending Space with Loan Marketplace (Bank Innovation)
Prepaid player Green Dot is stepping into the lending game with a marketplace for loans. The move will happen in 2016, CEO Steve Streit announced this week.
Photo credit: V31S70 / VisualHunt.com / CC BY
Marketplace Lending and Personal Finance Apps: A perfect union?
Every week goes by and investment industry professionals read more and more about the growth in the marketplace lending industry. Sure, it can become a trillion dollar market by the people. But it isn’t yet fully online — as much of the marketing acquiring borrowers and investors is decidedly old-school. Combine that with the fact that most of the investors are institutional and you see that while there’s been a lot of progress, the truth is that we’re really still in the early innings when it comes to newer investment platforms.
That’s why when Prosper announced it would be buying a small Israeli finance app called BillGuard, the market should be paying more attention.
Check out my article on Forbes that explains how this quiet acquisition can fill the missing void of engagement in the marketplace lending industry and truly take the promise of peer to peer lending to the next level.
9 ways to improve your investing performance in P2P loans
Yesterday, I discussed why I’m now a believer in peer-to-peer loans as a new asset class for investors.
Now, I’d like to look at how investors can lower their risks of defaults on these types of loans and boost their overall returns.
The problem with P2P loans
Like in most areas where information is asymmetrical between two parties entering a transaction, p2p loans present an informational problem.
Borrowers know a lot more about their potential to repay a loan than those making the loan.
In a traditional banking relationship, banks have resources to attach a number (a credit score) to a loan. Given experience and data, banks can estimate the probability that a borrower with that number will default. It’s an imperfect solution but works (at least, most of the time).
Borrowers on p2p marketplaces like Prosper.com aren’t given an actual credit score. Instead, they’re grouped into categories of credit worthiness which further complicates our ability as investors to assess their ability to pay us back.
Also, because multiple investors invest in the same loan, each individual investor may lack the incentive to do proper research (free rider problem). That’s according to Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from Prosper.com
How social networks help investors better their returns
To mitigate this problem, p2p loan marketplaces have created their own versions of social networks where borrowers can friend people and organizations.
And you guessed it — these groups are key to helping us investors determine the chance that our investments pay off (or don’t).
Why? Because research has shown that borrowers with friends on these investment platforms are:
- more likely to get their loans funded (not necessarily a good thing — we want borrowers to get funded and be more likely to pay).
- less likely to default on their loans (bingo!)
Why? It’s all about signaling.
The results suggest that verifiable friendships help consummate loans because they are credible signals of credit quality
We want to invest in loans that provide us with a good return but are also the “right” type of borrower. Using friends and endorsements are key to solving this issue.
We show that borrowers with online friends on the Prosper.com platform have better ex-ante outcomes. This effect is more pronounced when friendships are verifiable and friends are of the types that are more likely to signal better credit quality. The results are consistent with the joint hypothesis that friendship ties act as a signal of credit quality, and that individual investors understand this relationship and incorporate it into their lending decisions. To further pin down why friendships matter, we examine whether friendships are related to ex-post loan outcomes. We find that borrowers with friends, especially of the sort that are more likely to be credible signals of credit quality, are less likely to default.
9 ways to improve our chances investing in P2P loans
Continue reading “9 ways to improve your investing performance in P2P loans”
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”