Archive for 2017
Bitcoin: The Sky’s the Limit?
May 26, 2017
Investors, merchants and miners all watched as bitcoin’s price ran up knocking on the door of the $2,800 level. The digital currency has climbed nearly 50 percent in the past week and by triple digits in 2017, evoking emotions ranging from euphoria to fear that a bubble is among us.
And while the price has pulled back some, underscoring the volatility that’s attached to the digital currency, bitcoin continues to attract the spotlight.
“The sense I’m getting generally is excitement, the sky’s the limit kind of feeling. I think there’s also some nervousness. Personally, this looks like a bubble. Whenever you see something go up this quickly, the fear is that what goes up must come down,” said Joshua Rosenblatt, an attorney at Frost Brown Todd.
The stratospheric rise in the bitcoin price has been attributed to several factors, not the least of which includes increased demand from a wider audience.
“I think people are starting to realize that these digital assets like bitcoin are good for several different purposes, they’re versatile. There’s a whole industry built on top of them and to gain access to the industry you need to have access to cryptocurrencies like bitcoin,” said Rosenblatt, who also personally invests in cryptocurrency.
Meanwhile DoubleLine Capital chief executive Jeffrey Gundlach hints toward a flight to safety in Asia as the catalyst for the spike in bitcoin. He recently tweeted:
“Bitcoin up 100% in under 2 months. Shanghai down almost 10% same timeframe, compared to most global stocks up. Probably not a coincidence!” – Jeffrey Gundlach on Twitter.
Indeed Rosenblatt agrees that in markets where access to capital or movement of capital is difficult, cryptocurrencies are a great alternative.
“A lot of people who missed the 2013 bitcoin bubble want in on this one. Also there is a lot of institutional money moving in for the first time. Interest in cryptocurrencies as an alternative to government issued currencies is [advancing] especially in Asia, South America and Africa, places where banking is hard or government intervention is high. Bitcoin at its core is excellent for the unbanked,” Rosenblatt told deBanked.
Rosenblatt’s clients are comprised of startups with products in the cryptocurrency space and funds that invest in this segment. He and the firm’s 15-person cryptocurrency team are devoting an increasing amount of time to clients in this space. “It’s most of what I do at this point,” he said.
Meanwhile, Frost Brown Todd, the firm at which Rosenblatt is employed, is similarly lifting its profile in the cryptocurrency space, evidenced by the firm’s recent launch of a smart-contract app for software escrow agreements.
“We believe smart contracts are going to change the way the law is practiced and we want to be on the bleeding edge of that. In our part of America there are not a lot of people focusing on it. We’re in a unique spot,” said Rosenblatt of the Midwestern-based law firm.
What Next?
The question on everybody’s minds is the same – where does bitcoin go from here? The expectations appear different depending on who you ask.
Kevin O’Leary, O’Shares ETF chairman, recently told CNBC he wished the SEC had approved a bitcoin ETF so he could take a short position in the fund.
And while Rosenblatt acknowledges signs of a bubble forming, he’s not going anywhere. “I’m still very excited about what the space has to offer over the medium and long term. The way I look at it, I’m in it for the long run,” he said, he said, adding that he is hopeful in the next year there will be companies starting to mature into revenue generating businesses with scale.
Old Woes Continue to Hang Over Lending Club
May 26, 2017
Former Lending Club CEO Renaud Laplanche at LendIt in 2016A class action lawsuit filed against Lending Club last year isn’t going away. On Thursday, United States District Judge William Alsup denied parts of Lending Club’s motion to dismiss, meaning that the securities fraud case will continue to move forward.
The complaint touched on several issues related to former CEO Renaud Laplanche’s departure, including a conflict of interest he had with a related company named Cirrix, misreported loan volume figures, and manipulated loan data.
In one area of the decision, the judge held that allegations relating to internal controls were adequately pled in that the registration statement represented that disclosure controls and procedures were effective at a reasonable level, when in fact the company represented eighteen months later that internal controls actually suffered from various material weaknesses.
“Reasonable investors would have found it important to know of CEO Laplanche’s prior efforts to drive his company’s performance with artificially initiated loans, and even more importantly, that LendingClub’s internal controls could not effectively curb the artifice,” the judge wrote.
The case # is 3:16-cv-02627-WHA in the Northern District of California. The lead plaintiff is the Water and Power Employees’ Retirement, Disability and Death Plan of the City of Los Angeles.
Lending Club’s stock was down 62% from its IPO price as of Thursday’s close but was up almost 9% on the year, according to the deBanked Tracker.
How P2P Lending’s Evangelist is Faring Now
May 24, 2017Peter Renton, a co-founder of the LendIt Conference and p2p lending investor since 2008, published his latest portfolio performance data on Monday. While he wrote that the downtrend is continuing unabated, he still reports an overall marketplace lending return at 7.73%.
Notably, he reported that one of his Lending Club accounts actually lost money in the first quarter of the year, a first for him, though he is not the only person to experience losses.
New York Legislature Held A Hearing On Online Lending
May 21, 2017Update: The full video of the 6-hour Monday hearing is below:
Update:
The six-hour marathon hearing mainly focused on non-bank fintech companies and their bank partnerships to make loans. Lending Club, for example, was criticized for marketing their business as a “marketplace” when in actuality their loans are issued to consumers by WebBank. Assembly Member Brian Kavanagh had Lending Club representative Richard Neiman explain bit by bit how their model actually works, and inquired why the company felt it was necessary to partner with a bank in Utah rather than just become a licensed lender in the State of New York. Some of the questions, like that one, were pretty good, but others came across as misguided.
Arlen Gelbard, the EVP and General Counsel for Cross River Bank for example, was harangued for supposedly flouting New York laws. Senator Diane Savino asked Gelbard why his company didn’t have a lending license in New York. Gelbard, confused by the question, explained that his company was already a fully regulated state chartered bank and although the bank is based in New Jersey, there is no law that says they have to move to New York or become licensed to lend there.
NY Department of Financial Services Superintendent Maria Vullo made the strangest leap however by suggesting that the State’s civil usury cap be reduced from 16% to 7%. She based that idea on the presumption that a low Fed Funds rate meant that lenders must be making excess interest on the loans they make. She seemed to be unaware that interest rates on loans incorporated default risk, rather than simply than a lender’s cost of capital alone.
At 10AM on Monday, the NY Senate and Assembly will be holding a hearing on the practices of online lending to determine if action is necessary to protect consumers and small businesses.
According to the official notice, the “hearing seeks to explore the current state of online lending, the impact of online lending on consumers and small businesses in New York State, predatory online lending practices which need to be mitigated, and potential regulatory or legislative action which may be needed to address predatory online lending practices.”
Goldman, Cohen Bet on Nav
May 19, 2017
Goldman Sachs. Steve Cohen. These are a couple of the high-profile investors that small business credit and finance startup Nav has attracted to line its coffers. Nav recently lifted the size of a Series B round by $13 million for lead investor Goldman Sachs Principal Strategic Investments as well as Cohen’s Point72 Ventures and others, bringing the tally for this round to $38 million.
Levi King, co-founder and CEO of Nav, told deBanked that Goldman Sachs was drawn to the startup’s robust vision, which is to decrease the death rate of small businesses in the United States. He said doing so would have a trickle up effect on Goldman and the capital markets.
“Goldman Sachs invested as a bank investment, not other people’s money. They believe with scale we will change how small business owners make financial decisions, and that will impact the capital markets. We will have a fundamental impact on the entire ecosystem, if we’re successful.”
Goldman clearly believes it’s a good bet, and Cohen’s Point72 Ventures agrees.
“We have the ability at scale to change what can happen in the capital markets based on our data, and that’s something [Point 72] wants to be a part of. They are a smart advisor for us from a data perspective – a quant hedge fund that’s best in class on data. We get free advice along the way. That’s part of the deal,” King said.
In fact, it was another major player in the credit scene that gave the nod to other investors to follow.
“It all started with Experian. That investment was a bigger landmark than any of the other ones. Experian is the biggest credit agency in the world and they had never done a venture investment until us. This sent a signal to other investors,” said King, referring to a partnership that was inked less than a year ago.
The Vision
King points out that bringing the startup’s vision to reality is a gamble. For instance, Nav’s current customer count is 215,000 and they aspire to have 28 million. “That’s the path that we’re on,” he said. The path includes the startup’s most recent expansion into business checking account data.
“We launched a loan reality check app on Android. We’re only testing it. Nothing like it exists. You put in a username, password and banking information, and we model that data and determine how likely it is that you will qualify for a loan based on that data set,” said King.
For instance, if a business has a history of bouncing checks, that’s a negative for scoring. Depository trends also count toward scoring.
“We’re sitting on personal credit, business credit and checking – three data sets. Now we have enough data for lenders to make full decisions on products like business credit cards,” said King, who makes a clear distinction between the various channels involved in the credit equation.
“To be clear, the small business owner is our customer. Lenders are our partners. Business owners win every time,” he said, pointing to the example of one lender partner.
While King wouldn’t disclose the lender he acknowledged that they are a top-10 financial institution that wanted to pay for a top result for its business credit cards among Nav’s product recommendations. This would have been a sponsored result, but it didn’t sit well with Nav. “It would have been a sweet check, but our product would lose integrity for the customer. We said no,” he said.
Also part of the vision is international expansion. “We have those ambitions. That’s why we’ve taken capital from foreign investors, to see how our model can apply in their markets. But that’s way out there,” he said, pointing to investments by CreditEase Fintech Investment Fund in this most recent round and Tencent in a previous round, both of which are based in China.
Meanwhile King said the fresh capital will be prioritized across three buckets. “We’re pretty disciplined at how we deploy capital. I will tell you what I have repeated thousands of times internally to our business. We spend money on acquiring new customers, improving our technology and UX and compensating our employees. We don’t waste money on in-office massages. At this stage a lot more of that capital goes toward customer acquisition,” he said.
Clocktower Technology Ventures also invested in the most recent Round B. Point72 Ventures and Goldman Sachs did not immediately return calls seeking comment.
Lending Club Raises Minimum Deposit Amount for New Investors
May 18, 2017The micro retail investor can no longer experiment with peer-to-peer lending through just a handful of loans, according to a recent announcement made by Lending Club. Going forward, new users must deposit at least $1,000 to get started. Those investors can still allocate $25 per loan, however. The reason for the deposit increase? Forced diversification.
A Lending Club blog post explained that “data shows that Lending Club investors who are able to diversify their accounts have generally experienced less volatility than investors with more concentrated holdings. This is in part because investors are able to purchase multiple Notes, reducing their exposure to any single Note.” 98% of accounts with more than 100 notes have experienced positive returns, they claim.
On the LendAcademy blog, Peter Renton advocated for an even higher minimum, $2,500, so that investors could at least start off with 100 notes.
It’s an acknowledgment that the type of investing actually carries the risk of loss and is not actually for everyone. I would not be surprised if they eventually set a minimum deposit amount of $10,000 or simply phased out retail investors altogether in favor of accredited ones at a minimum instead. Time will tell.
The Tesla of Alternative Lending
May 16, 2017
Tesla has autopilot. Apple has Siri. And Upstart has its own high-tech software model that places the startup in a category of its own for online lending. All three of these companies may be very different but what they have in common is a reliance on artificial intelligence and machine learning for their proprietary technology.
“You hear so much about how Tesla cars will drive themselves, how Google or Amazon home assistants talk to you to as if you’re human. In lending we are the first company to apply these types of technologies to lending,” Dave Girouard, Upstart co-founder and CEO told deBanked.
So what is machine learning exactly, particularly as it relates to finance? One of the main components that goes into machine learning is not looking at the same data everybody else does. “We are known for looking beyond FICO and the credit report. We look at who the employer is, what industry you work in, where you went to college, what you studied, several hundred variables affect how we price credit,” he said.
Upstart, a direct-to-consumer lending platform, uses artificial intelligence and machine learning for everything from verifying a potential borrower’s identity, to making a credit decision, to pricing credit. Today 25 percent of the company’s loans are 100% automated.
“This is a radical departure from the industry,” said Girouard. “It’s a function of being able to build more automation to verify information about the borrower.”
Indeed the differences between machine learning and traditional credit models is kind of like comparing a self-driving vehicle to walking.
“The whole term machine learning implies that software gets smarter and better on its own with no human intervention. Every day thousands of repayments are made to Upstart along with delinquencies, and defaults. As this happens the software is adjusting its pricing on the next loan, learning in real time every day,” Girouard said, without even the slightest concern of tipping his hand.
“We have a several year head start and a data science team that are math and statistics PhDs. These are the types of people hired by Google or Tesla or Amazon. Traditional consumer credit doesn’t tend to have machine learning skills,” he added.
Nevertheless his vision for artificial intelligence and machine learning in the lending community is far greater than as it applies to Upstart alone. “We think virtually all flavors of lending will depend on AI/ML within 10 years. We’re at the very early stages, but it’s hard to imagine a successful lender anywhere who doesn’t use similar technology over time,” Girouard said.
Inside Upstart
Upstart is a hybrid lender that funds 20% of loans from their balance sheet. Two months ago they began licensing software as a service (SaaS). The software is managed by Upstart but it appears on the partner’s website. “A bank could use our technology to originate loans,” said Girouard, adding that the company is in conversations with two-to-three dozen banks about future partnerships.
The machine learning approach seems to lend itself to favoring certain demographics. In the case of Upstart, this happens to be millennials, evidenced by the lender’s average customer age of 28, almost all of whom have college degrees.
“Obviously we understood early that the millennial generation doesn’t have 20 years of credit history and they have a hard time getting loans. It struck us, tell me you wouldn’t give a loan to a 25 year old just because they have a thin credit file? It doesn’t make sense. What if they studied at Stanford and work at Google? There is more to be known about an individual than a FICO score,” said Girouard.
Perhaps the greatest evidence of whether or not Upstart’s approach is working is to catch a glimpse of the company’s balance sheet. Upstart expects to reach the $1 billion milestone for loan originations in calendar 2017. And perhaps even more telling is they anticipate being profitable by the summer. “An IPO for us would be a couple of years out,” Girouard said.
That timing could be perfect, particularly considering Wall Street’s apparent love/hate relationship with some players in the alternative lending space.
“People tend to paint the whole industry with one brush and it’s not a very pretty brush at the moment. But soon they will begin to appreciate there is a significant difference between these companies. Upstart really does have a very differentiated and unique product,” said Girouard.
Prosper Loaned $585M in Q1, Losses Continued
May 16, 2017Prosper had a net loss of $23.9 million in Q1 on only $30.8 million in revenue, according to the 10-Q they filed Monday. They originated $585.6 million in loans, 90% of which were funded through their Whole Loan Channel, the segment made up of accredited and institutional investors who buy entire loans.
Prosper had 371 full-time employees at the end of Q1 compared to 667 full-time employees at the end of Q1 2017.
The full report can viewed here.
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Note: The net loss figure was originally published with an incorrect digit. It has since been corrected
