Archive for 2017
SoFi Bank Puts ILC Charter in Spotlight
June 28, 2017
Online lender SoFi’s decision to apply for a bank charter has snagged the attention of alternative lenders, big and small banks and regulators alike. Market participants appear split between cheering the move and drawing a line in the sand. One thing they agree on is that the signs were there all along.
Christopher Cole, executive vice president and senior regulatory counsel at the Independent Community Bankers of America (ICBA) said it was only a matter of time.
“We were expecting the application from a fintech company to come eventually and it came pretty rapidly,” Cole told deBanked. “What was surprising to me was that they took the ILC route as opposed to the OCC special purpose national bank charter.”
As a Utah-chartered industrial bank SoFi would be subject to the regulation of the FDIC. There have not been any ILC applications for deposit insurance in years in part due to a temporary moratorium that Dodd Frank placed on the ILC loophole following the financial crisis, a roadblock that has since been removed.
Richard Hunt, president and CEO of the Consumer Bankers Association (CBA), said that SoFi’s application was certainly not a shock.
“The whole world is evolving, fintech is evolving. This was inevitable one way or another,” Hunt told deBanked, adding that there will probably be more applications coming down the pike, which he welcomes. “We’re glad more people are getting into banking. SoFi at one time railed against banks and now it wants to get into banking. Welcome to the world of banks and overregulation.”
The CBA is comprised of the country’s largest financial institutions as well as regional banks.
“This is the first true test of the FDIC in a new fintech world,” said Hunt, adding that it’s the duty of the FDIC to ensure that SoFi Bank is well capitalized. “That is part of the application process.”
The ICBA is comprised of approximately 6,000 small banks across $5 trillion in assets.
“This would actually create a risk to the deposit insurance system. An ILC would have deposit insurance from the FDIC. If SoFi Bank fails because parent SoFi can’t maintain it, the rest of the banking system must pay for it. They’re putting the banking industry at risk here,” said Cole.
And while the rise of fintech startups has created more competition for banks, neither trade organization has a problem with this.
“We’re not trying to keep fintech from competing, that’s not the case,” said Cole.
Meanwhile Hunt told of his trip to Silicon Valley in which he visited SoFi as well as many other fintech startups.
“I’ve always been a big fan of SoFi, especially after visiting. I’m head over heels they chose banking as their industry. We’re gloating that they want to join the banking industry. This is good for consumers, to have choices. We are not going to be afraid of SoFi joining the banking world. We welcome them to the banking world,” said Hunt, adding that banks are ready to compete as long as it’s fair.
Fair is precisely what the ICBA is seeking.
Level Playing Field
There are about 30 existing ILCs in existence now and thousands of insured banks. And SoFi’s use of the ILC charter is the ICBA’s main objection.
“It’s the fact that they’re using this loophole so that SoFi, the parent company of SoFi Bank the subsidiary, will not be subject to the same kind of restrictions that the owner of a commercial bank would. And therefore, you don’t have a level playing field,” said Cole.
The ICBA is also concerned that a successful SoFi ILC charter would set a precedent for other fintech firms.
“Who’s next? I could see Amazon trying to do this and waiting for SoFi to do it first. Who knows? I could see maybe Google and PayPal pursuing this. I could see some big commercial companies exploiting this loophole, and that is why we think it should be closed,” said Cole.
Meanwhile CBA’s Hunt sees things somewhat differently. He said SoFi’s application represents an opportunity for bank regulators to review the ILC in a new world environment and possibly make changes.
“No one envisioned when they wrote the ILC charter that we would have fintech companies that finance mortgages and student loans from private equity capital and not deposits. It’s a new world. Like with all rules and regulations, federal regulators should periodically review longstanding policy,” Hunt said.
Either way the influence of the banking sector should not be overlooked.
“We have been fighting the ILC charter for over a decade. When Walmart tried to apply for an ILC charter in 2006 we objected at that point. And that resistance was part of the reason why they never got a charter,” said Cole.
SoFi Bank
The ICBA is preparing commentary for the FDIC, which is due by July 18. “Our comments will be focused mostly on the use of the ILC charter,” said Cole.
Once the comments are in, the ball is in the FDIC’s court. “We’re anticipating that a decision will be made in the next two to three months. We should know by the end of this year whether or not SoFi Bank gets its charter and deposit insurance,” said Cole.
If SoFi does become a bank, Hunt says he’s pleased that the fintech company has expanded its lending beyond only the elite universities though he’s still not sure they’ve gone far enough. “If they are granted the ILC charter, every student should have fair access to SoFi’s products just as they do with every other bank in this country,” said Hunt.
SoFi declined to comment for this story.
Puerto Rico Bankers Association Calls Section 1071 Absurd and Unreasonable
June 28, 2017Section 1071, the law that grants the CFPB authority to collect loan application data on minority and women-owned businesses, is under fire, again. This time it’s the Puerto Rico Bankers Association in response to the CFPB’s RFI on the matter. In a letter, the PRBA points out the sheer irony of conducting costly disparate impact studies on minorities in minority-only communities.
An excerpt from their statement:
According to the 2010 US Census Bureau, 99% of the population of Puerto Rico is Hispanic.
[…]
The direct and evident effect of Section 704B of ECOA for the financial institutions in Puerto Rico will inevitably be the collection, recordkeeping and reporting of virtually all commercial loan applications received within the Puerto Rico marketplace, since most of such applicants would be regarded as “Minority Owned Business”, in accordance with Section 704B.
The PRBA believes that this absurd and unreasonable result must not have been intended by Congress when it enacted Section 1071 of the Dodd-Frank Act. The data so collected, maintained and reported will not serve the purposes for with Section 1071 was enacted since, for the reasons set forth above, it will be completely inaccurate and unreliable. The potential complexity and cost of compliance with the minority-owned businesses data collection and reporting requirements of Section 704(B), will impose on our banks an unintended and unreasonable burden.
Other responses to the CFPB’s RFI have so far called Section 1071, “literally impossible to comply with” and a duplicated effort.
Former CFO of RapidAdvance Moves On to Beyond Finance, Inc.
June 27, 2017Rajesh Rao has taken the CFO position at Beyond Finance Inc., according to LinkedIn. He served as RapidAdvance’s CFO and Head of Credit Analytics and Product Strategy from October 2015 to about the end of May of this year.
Rao had come to Rapid after 13 years at Capital One where his last title was Managing Vice President.
Square to Expand Beyond Business Loans to Consumer Loans
June 27, 2017Square is making the leap from business loans to consumer loans, according to the WSJ. The company, which already makes loans to its payment processing clients, will now begin offering loans to the customers of those clients. The WSJ reports that the loans will be available in six states including California, New York and Florida. They also used a wedding photographer and a veterinarian as examples of services that consumers may wish to finance.
Square Capital head Jacqueline Reses is quoted as saying that there are no plans to get into car loans or mortgages.
From the Board of Credit Suisse to the FinTech World – Gaël de Boissard joins the winner of last year’s Money20/20 Europe Startup Competition
June 27, 2017
New York, NY – 26 Jun, 2017 – Exactly one year after winning Money20/20 Europe Startup Competition, James (a FinTech in Credit Risk, formerly known as CrowdProcess) returns to Copenhagen after closing an oversubscribed investment round led by Ex-Credit Suisse Board Member Gaël de Boissard. This round also included ex-Deutsche Bank COO, Henry Ritchotte, and BiG Start Ventures, a VC focused on FinTech and InsurTech. As a result of this deal, Mr. de Boissard has now joined James’s Board of Directors, after having previously been at the board of Credit Suisse.
The company that successfully pivoted into the FinTech industry in late 2015 sees its ambition of building the first Credit Risk AI, together with the superb results achieved with banks’ risk departments as the major factors behind this successful investment round. According to Mr. de Boissard, “Having worked in banking and credit for more than two decades, I was always surprised to see how little progress was being made in advancing the science, data analysis, and process automation around credit risk. When I met James I knew that was the future I’d been looking for, and I’m incredibly excited to be part of implementing the first credit risk AI.”
Providing financial institutions with solid, scientifically-backed risk management tools can help prepare them against cyclical crisis and help protect their reputation, making the global financial system safer in the long-run. Additionally, the fact that the company has a track record of helping banks achieve results such as 30% default rate reduction and 10% acceptance rate increase has been the cornerstone of its growing reputation both in the US and in Europe.
After going through a product/market fit process that involved testing the solution with over 25 financial institutions in three different continents, the company is now focused on execution and growth. In order to fulfill this, company co-founder and lead researcher Pedro Fonseca recently handed over the role of CEO to his co-founder João Menano, who built the company’s strong international commercial reach. This marks the beginning of a new stage for the company, where the focus has shifted from finding product/market fit to reaching global scale.
This investment round will allow James’s team to grow accordingly to the market needs felt mainly in the US and in Europe.
About
James is a data science company focused on the credit industry. Founded with the goal of bringing the best of data science to every risk department, James is on its way to build the first Credit Risk AI. Currently operating in three continents, the solution was tested by over 25 financial institutions, from Tier 1 banks to alternative lenders.
Winner of last year’s Money20/20 Europe Startup Competition, the 20 person startup aims to one day place the best of data science in every risk department.
Contact
Name: Francisca Beija
Email: francisca@crowdprocess.com
Phone Number: +351 968 183 576
Congressman Emanuel Cleaver, II Makes Inquiry Into Merchant Cash Advances
June 26, 2017
A US Congressman from the fifth district of Missouri is conducting an inquiry into “Fintech Lending,” according to a statement posted online. Rep. Emanuel Cleaver, II published letters that his office sent out last week to five companies seeking information on how they avoid discriminatory lending practices in small business lending.
An excerpt:
I have recently launched a review into FinTech small business lending. I am particularly interested in payday loans for small businesses, also known as “merchant cash advance.” The payday loan industry has often targeted communities of color with high rates and fees, and Congress needs further information that small business payday lending is operating with transparency and free of discrimination
Ironically, two of the five recipients, Prosper and LendUp, don’t even operate in the small business space, so how exactly they were selected remains a mystery.
Only two of the five companies have any connection to merchant cash advances, but the Congressman’s connection between them and payday loans is perplexing nonetheless.
The subject matter at hand, however, is similar to another fact-finding endeavor that the Consumer Financial Protection Bureau is conducting as part of its mandate under Dodd-Frank.
A response is not required but the Congressman asked the recipients to respond by August 10th.
Amazon vs. Banks
June 23, 2017Amazon made headlines most recently for its blockbuster acquisition of Whole Foods, but the online behemoth already disrupted another sector – fintech — including banks and online lenders when in 2011 it started lending to small businesses. So far Amazon Lending has extended $3 billion-plus in capital to the small business community, a cool billion of which was lent in the past year alone.
Amazon has dealt a one-two punch to the lending market, filling a gap that was left by banks following the financial crisis and leveraging the massive data that the online retailer has access to through its Amazon Marketplace platform.
Matt O’Malley, co-founder and president of Looking Glass Investments, a fixed-income alternative investment firm focused on marketplace lending, said small business lending was a very natural evolution of Amazon’s business.
“Large levels of data give you the ability to increase your predictive power. Amazon has a great deal of information on how a company is doing and an ability to assess credit risk that is very likely unmatched as it relates to businesses selling on their platform,” O’Malley said.
This is not to suggest that Amazon’s future market share in the small business lending segment is a lock.
“In the long run, this entire fintech revolution is about the movement of capital and having to do it faster. So even Amazon is going to have competition. And the reason is there are fewer barriers to entry than before. From Milwaukee to Wisconsin, there is competition for building bank products. I’d put our math up against anybody in New York City thanks to technology,” said O’Malley of Looking Glass Investments’ own lending platform.
Nonetheless a lack of transparency surrounding interest rates for Amazon loans could interfere with repeat business. “Amazon should be careful about being respectful to business owners. Assuming the business does succeed, imagine that the borrower is either going to have a positive reaction or a negative reaction to the initial loan with Amazon. It won’t be good for long-term business if they have a negative reaction. If I were Amazon, I would be cautious on rates,” O’Malley said.
Something else that could throw a wrench into Amazon’s plans as a small business lender is banks, if and when they open the spigots to loan to this segment. While small businesses businesses have already proven a willingness and even a preference for turning to alternative lenders, the tables could turn at some point.
“That’s an unsettled question we think about every day. When do banks make the decision to get in the game? And we would like that to happen sooner rather than later because it would be good for our company LendSight, Inc. But at the same time, we don’t see that tipping point in the near term,” said O’Malley.
deBanked spoke with a pair of business owners that sell on the Amazon Marketplace platform, both of which Amazon has lent to.
LonoLife Living the Life
San Diego-based food and beverage maker LonoLife, the Hawaiian translation for which is peace and prosperity, was offered a line of credit with Amazon without having to ask for it. Jesse Koltes, one of LonoLife’s co-founders, spent some time with deBanked to talk about the offer, which came over the phone.
“It was super quick, super easy, as opposed to what you get with a banking relationship even if you get a better rate,” said Koltes. “Bank loans take more time and paper work, and with Amazon there was none of that.”
LonoLife never approached a bank for a loan. And given an exclusive agreement with Amazon for its top selling bone broth, they didn’t have to. “I 100 percent agree that access to capital for businesses without a lot of revenue is problematic. We’re not a capital intensive business so there are not a lot of assets to put behind as collateral for a loan with a bank,” Koltes said.
And while he declined to disclose the size of the credit line, Koltes characterized the amount as “meaningful” adding that Amazon adjusts it higher and lower, mostly to the upside.
“They have 100 percent transparency to one of the biggest parts of our business. That is something other lenders don’t have,” he said, referring to the sale of the bone broth product. “One reason they are able to move first and with more confidence is they have confidence you can pay something off. They are literally seeing how much money you make every month.”
LonoLife’s Koltes compared the rate at which Amazon lent to them as comparable to other non-bank lenders but probably not best in class and not equivalent to an asset-backed small business loan. “But it’s not as high as you get from venture debt,” he quipped.
LonoLife has been selling on Amazon since 2016 and was offered the line of credit about a year later. “It’s a virtuous cycle. We’re growing on Amazon and they’re funding the growth,” Koltes said.
Mini Bezos
Stephan Aarstol, founder of direct-to-consumer brand Tower, is best known for pitching his Stand Up Paddle Boards, in response to which he received a $150,000 backing from billionaire investor Mark Cuban. Little did Aarstol know that this would be the excuse banks would use not to lend.
“After Shark Tank banks no longer looked at us as a startup. They told us we don’t technically qualify for an SBA loan because they’re not in the business of giving billionaire loans,” said Aarstol referring to the company’s silent partner Cuban. Before the show banks pointed to the company’s lack of a two-year financial history. Meanwhile Tower’s revenue has climbed higher every single year since the company was founded, reaching $7.5 million last year.
Amazon, which offered its first loan to Aarstol in the amount of about $35,000 at about the same time PayPal offered him a $25,000 loan for working capital. He took them both. “We needed the capital for inventory,” he said of the Paddle Boards, which can take up to three months to produce. A couple of months later in 2013 Amazon followed up with another offer for a $145,000 loan. Tower accepted that loan too.
The first time Tower got a loan of any kind from a traditional bank was September 2014, more than four years from inception for a company that was profitable from day one. That fall the banks started lining up after Tower was named the fastest growing company in San Diego by the San Diego Business Journal.
Since then Aarstol has been straddling the fence of alternative lenders and traditional banks, having borrowed more than $1 million from Amazon alone. He feels loyalty to Amazon because they were one of the first lenders to offer him a loan. That plus the ease and speed at which he can access capital.
Meanwhile Aarstol has since widened the beach lifestyle brand, almost like a mini-Bezos would, to include sunglasses, surf boards, snorkeling, bikes, skateboards and even a magazine through which Tower can do its own advertising.
“We’ve expanded the brand and every new product class we open up requires additional inventory and additional capital,” he noted.
The Future Amazon
Perhaps the greatest sign for just how massive Amazon can become as a small business lender is in their ability to capture repeat business. If it’s any indication, both Koltes and Aarstol would return.
“We’ve been really pleasantly surprised with access to capital Amazon has given us,” said Koltes. “It has helped us grow our business. We’re growing at a fast rate. Without Amazon we would have had to pick and choose what we did.”
For Aarstol, it’s a combination of both allegiance and fear that fuels his relationship with Amazon as a borrower.
“What if banks all of a sudden are no longer willing to lend to small businesses again? What’s my fallback? This is a hedge for me to keep establishing credit. I’ll keep borrowing from and paying back Amazon loans,” he said, despite the interest rates of 11 percent to 13 percent.
Recent Court Decisions Impacting Merchant Cash Advances – Still Not a Loan
June 22, 2017In the United States District Court, Southern District of New York, a judge expounded on his decision as to why the Purchase and Sale of Future Receivables contract between TVT Capital and Epazz, Inc. was not a loan.
In this case, the “receipts purchased amounts” are not payable absolutely. Payment depends upon a crucial contingency: the continued collection of receipts by Epazz from its customers. TVT [TVT Capital] is only entitled to recover 15% of Epazz’s daily receipts, and if Epazz’s sales decline or cease the receipts purchased amounts might never be paid in full. See counter- claims, Exhs. A-C at 1. The agreements specifi cally provide that “Payments made to FUNDER in respect to the full amount of the Receipts shall be conditioned upon Merchant’s sale of products and services and the payment therefore by Merchant’s customers in the manner provided in Section 1.1.” Id. at 3 § 1.9.
Defendants’ argument that the actual daily payments ensure that TVT will be paid the full receipts purchased amounts within approximately 61 to 180 business days, id. ¶¶ 33-47, is contradicted by the reconciliation provisions which provide if the daily payments are greater than 15% of Epazz’s daily receipts, TVT must credit the difference to Epazz, thus limiting Epazz’s obligation to 15% of daily receipts. No allegation is made that TVT ever denied Epazz’s request to reconcile the daily payments. TVT’s right to collect the receipts purchased amounts from Epazz is in fact contingent on Epazz’s continued collection of receipts. See Kardovich v. Pfizer, Inc., 97 F. Supp. 3d 131, 140 (E.D.N.Y. 2015), quoting Amidax Trading Grp. v. S.W.I.F.T. SCRL, 671 F.3d 140, 147 (2d Cir. 2011) (“Where a conclusory allegation in the complaint is contradicted by a document attached to the complaint, the document controls and the allegation is
not accepted as true”).None of the defendants’ arguments, Counterclaims ¶¶ 51-109, change the fact that whether the receipts purchased amounts will be paid in full, or when they will be paid, cannot be known because payment is contingent on Epazz generating suffi cient receipts from its customers; and Epazz, rather than TVT, controls whether daily payments will be reconciled.
The judge relied heavily on the reconciliation clause common to merchant cash advance agreements, whereby merchants can adjust their daily ACH amount to correlate with their actual sales activity. The case # is: 1:16-cv-05948-LLS. The full decision can be downloaded through a link contained at: http://dbnk.news/7
MISREPRESENTATIONS? WHAT MISREPRESENTATIONS?
In the New York Supreme Court, a judge addressed a business owner’s allegations that they had been misled into entering into purchase agreements when they actually wanted loans. In the decision excerpt below, Passley is Shaun Passley, one of the plaintiffs in the case.
[The plaintiffs] state that they would not have knowingly entered into merchant agreements, because what they really wanted were loans. Indeed, plaintiffs allege that “the word ‘purchase’ or ‘sale’ would have caused Passley to decline a transaction with [defendants] because a loan – the product Passley wanted to obtain – is not a purchase or sale.”
A review of the contracts in this action shows that not only do they all clearly state that they involve purchases or sales, but they all expressly state they are not loans. Even if someone were confused by the contracts, or did not understand the obligation or the process, by reading the documents, one would grasp immediately that they certainly were not straightforward loans. The very fi rst heading on the page was “Merchant Agreement,” and the second heading says “Purchase and Sale of Future Receivables.”
[…] For plaintiffs to state that they would not have entered into a purchase or sale if they had known that that is what they were doing is utterly undermined by the documents themselves. As the Second Department has held, in Karsanow v. Kuehlewein, 232 A.D.2d 458, 459, 648 NY.S.2d 465, 466 (2d Dept. 1996), “the subject provision was clearly set out in the … agreements, and where a party has the means available to him of knowing by the exercise of ordinary intelligence the truth or real quality of the subject of the representation, he must make use of those means or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.” So too here, plaintiffs had the means to understand that the agreements set forth that they were not loans. As it has long been settled that a party is bound by that which it signs, the Court finds that the ninth cause of action, for recission based on misrepresentation or mistake, and the tenth cause of action, for fraudulent inducement based on misrepresentation, must be dismissed as a matter of law. Pimpinello v. Swift & Co., 253 N.Y. 159, 162-63 (1930) (“the signer of a deed or other instrument, expressive of a jural act, is conclusively bound thereby. That his mind never gave asset to the terms expressed is not material. If the signer could read the instrument, not to have read it was gross negligence; if he could not have read it, not to procure it to be read was equally negligent; in either case the writing binds him.”).
The case # is 54755/2016 in the County of Westchester in the New York Supreme Court. The full decision can be downloaded through a link contained at: http://dbnk.news/8
