Articles by deBanked Staff
Watch out Bank Tellers, Robots are Coming for your Job
March 31, 2016
Watch out bank tellers, robots are coming for your job.
Investment in private fintech companies and upstarts has grown ten fold from $1.8 billion in 2010 to $19 billion in 2015 and in the same time, bank staff has been slimming down as investors bet on automated finance to eventually overthrow banking. Already, 46 percent of private funding has gone to lending companies selling cheaper loans easily.
The ambition to oust bank behemoths however will need continuous fueling. As things stand now, these lenders are nowhere close to managing that coup. Revenue impact from the digital banking upstarts cause a one percent dent in the $850 billion global banking revenue.
It may be negligible but not to be neglected, investors might say. In the US, online lenders like Lending Club and Prosper Loans sold loans worth $8 billion last year and are looking at a target market of $254 billion, 8 percent of the total consumer credit market.
In its report, Citigroup predicts that US and European banks will shed 1.7 million jobs by 2025 as the banking sector undergoes its own “Uber moment,” forcing banks to automate some lines of business. Anthony Jenkins, former Barclays CEO translates this to halving the number of branches and people over the next few years. If this is an eventuality, different markets will take different paths to get there.
While Nordic and Dutch banks have cut total branch levels by around 50 percent from recent peak levels, branch openings in the top US cities including Seattle, Denver and Dallas have increased between 2-17 percent in the last five years. Part of the reason is because customers still have to visit a branch for identity verification but mostly the benefits (easy access, brand recall) of having a bank branch in wealthy states outweighs the costs involved. “With wealth concentrated in the top cities in the US, a strong branch presence in these cities allows banks to capture wealth,” the report said.
Though the transition of the branch’s role from transactions to advisory/consultancy is imminent, the pace has been gradual, about 11-13 percent since peak pre-crisis. That number could reach 30 percent by 2025. As for the US, there are 15 percent less tellers than there were in 2007.
But the banks want in and are willing to pay. Citigroup and Goldman Sachs have been active in seeding fintech rivals. In the last five years, Citigroup has invested in 13 companies including Square.
Is it time to make another David and Goliath reference?
Square Baits New Merchants with Payments
March 30, 2016
Jack Dorsey wants Square to be a one stop shop and is baiting merchants with its new payment integration tool.
Square launched new API tools on Wednesday (March 30) for online and retail stores who “with few lines of codes can seamlessly integrate Square into the checkout process.” The company is going after payment giants like PayPal, Braintree and Stripe alluring merchants with an easier-to-use payment tool and is priced similarly at 2.9 percent and 30 cents per transaction.
For its erstwhile customers, picking Square over rivals makes sense given the integration between online and offline sales and for the businesses that do not use Square, the company wants to handcuff them.
At the time of founding, Square’s primary business model was a merchant-first approach. It went after 27 million micro merchants who hitherto were invisible to incumbent players in the space. It took in these small heterogenous group of merchants and equipped and trained them with a dongle to accept card payments for a flat fee.
And now its plan to consolidate a fragmented customer base seems to be working thus far. It recently swapped out its merchant cash advances for bank loans again, similar to PayPal’s loan products.
But why launch a payment tool now? Almost 46 percent of shopping cart abandonment happens at the payment stage frustrating buyers with a lengthy checkout form. And this new API allows online stores to integrate a simple checkout form for card details unlike Stripe which requires an e-wallet sign up. It also launched an API for inventory, payroll management and for registers which can integrate Square’s payment tool with custom point of sale software.
Square is hoping that merchants come for payments and stay for more. “Sellers, even if they don’t have an offline presence today, will have ambitions for where their business wants to go and will choose a provider that, regardless of how their business grows, will be there with them,” Square’s head of engineering Alyssa Henry told Forbes.
What’s next for Square’s gung ho growth?
SoFi Funds $1B in Student Loans, is Lobbying Working?
March 29, 2016
Student lender SoFi crossed $1 billion in student loan refinancing through its corporate partnerships which lets employers like Microsoft pay for student loans.
The announcement is rightly timed as lawmakers push for bills that give tax benefits on employer-paid student loan repayment programs.
Companies can contribute as little as $100 a month to refinance employee student loans or offer to refer them to SoFi as part of the bonus package. All roads thus leading to SoFi.
What SoFi likes to boast as the “hottest employee benefit,” over a 401k plan, is being advocated for by Congressman Rodney Davis, who is pushing the Employer Participation in Student Loan Assistance Act, which gives employees a tax-exempt benefit of up to $5,250 per year to pay on their already incurred student loan debt and allows employers to deduct the subsidy provided to employees.
“The Employer Participation in Student Loan Assistance Act encourages employers to be part of the solution by allowing them to offer an employee benefit that will help graduates pay down their student debt. With outstanding student loan debt totaling more than $1 trillion, we must find ways to engage the private sector and help graduates manage their debt,” according to Davis’ website.
And he did find ways to engage with the private sector. Records show that SoFi spent close to $130,000 in the last two years, lobbying to get the bills enacted into law. The act which ostensibly helps employers attract and retain young talent creates a bigger market for SoFi loans.
And with $1 billion in originations, it seems to have gotten itself a great deal. And in its own words, “with programs like these, everybody wins.”
US Economy: Spending Slows, Savings Increase and Home Sales Rise
March 28, 2016
It’s finally happening. Americans saved more than they spent over the last quarter.
Consumer spending on goods and services inched up 0.1 percent in February for the third straight month. Incomes rose by 0.2 percent in February pushing the saving rate from 5.3 in January to 5.4 percent in February.
The Federal Reserve kept the benchmark federal funds rate at 0.25-0.5 percent on March 16 after raising it for the first time in a decade in December last year. But, as demand for labor increases, the central bank can go easy on scaled back forecasts of higher interest rates noting that the economy is exposed to the uncertain global economy.
Personal consumption expenditures (PCE) on goods and services which is the Fed’s preferred inflation metric also increased by a percent, while still staying below the targeted 2 percent.
The lackluster consumer spending however does pose a risk to the first quarter GDP figures estimated at 1.5 percent annually.
Separately, pending home sales also rose 3.5 percent in February to their highest level in seven months according to the National Association of Realtors. Low mortgage rates combined with increased incomes and savings has prodded buyers to sign contracts on new homes.
Numbers at a glance:
- February consumer spending saw 0.7 percent drop in purchases of goods while expenditure on services rose 0.4 percent.
- Forecast for existing-homes sales this year are around 5.38 million, an increase of 2.4 percent from 2015, while the national median existing-home price for all of this year is expected to increase between 4 and 5 percent.
- The average commitment rate for a 30-year, conventional, fixed-rate mortgage was 3.66 percent in February – the lowest since April 2015 at 3.67 percent.
Real Estate Crowdfunder Patch of Land Returns $25 mn to Investors
March 24, 2016Patch of Land has returned $25 million to investors this year, a quarter of its originations at $100 million.
The LA-based online lender for real estate loans also expanded its business to Hawaii, marking its presence in 36 states. The company uses a data-driven underwriting model and promises investors a risk adjusted return with extensive available data to support the underlying credit decision on each loan.
Earlier this month, Patch of Land started selling mid-term loan option for 2-5 years starting at 6 percent, extending its typical short-term loans starting at 10 percent for up to two years. It sells ‘bridge loans’ ranging from $100,000 to $5 million to cover the borrower until they can secure permanent capital or those who may not immediately qualify for long-term financing on properties that they rehabilitate and then hold as rentals. As far as demands for these loans go, the company’s CEO Jason Fritton said bridge loans generated $40 million in loan interest in less than two weeks since.
The three year old startup signed a $250 million agreement with an east coast based credit fund to purchase its loans in a forward flow arrangement. Last year, it raised a million in seed funding and $125,000 in debt in 2014, followed by $23 million in Series A funding last year when it funded more than 200 projects, with an average blended rate of return to investors of 12 percent.
CEO of RealtyShares, a real estate crowdfunding platform Nav Atwal in a Forbes post said enlisted reasons why commercial real estate is investor friendly — 12 percent annual returns, tax benefits, hedge against stock market and inflation being some of them. But for larger context, the commercial real estate environment is of caution among lenders towards big projects. Real estate firm CBRE said that it “conservatively” estimates that 18 percent of loans this year and 29 percent of loans next year to have refinancing problems as investors move away from commercial real estate bonds. CBRE estimates $43 billion to be in “troubled loans” over the next two years.
CFPB Mends Mortgage Rules to Serve Small Creditors
March 22, 2016The Consumer Financial Protection Bureau (CFPB) broadened the Qualified Mortgage rule to certain special provisions for small creditors that operate in rural or underserved areas under the Helping Expand Lending Practices in Rural Communities (HELP) Act.
The Bureau’s mortgage rules which was brought into effect in January 2014 had a rule called ‘Ability-to-Repay’ which laid the onus of determining creditworthiness strictly on lenders.
As a result, the category of ‘Qualified Mortgages’ that emerged out of it kept certain risky features of the loan from borrowers who could not comply with the ability-to-repay rule. For instance, small creditors operating in rural areas were not allowed to originate balloon payments. Additionally, escrow accounts for higher-priced mortgage loans were not permitted.
The Bureau received flak for this from the House Financial Committee which alleged that the rule harmed consumer access and choice when it comes to home loans and mortgages by forcing many community banks and credit unions to downsize or shut down their mortgage operations.
The CFPB in its statement acknowledged that the “rule is being adopted to fit within the background of the CFPB’s prior regulations in the mortgage market.”
Financial Services Committee Chairman Jeb Hensarling in his critique against the rule said, “We are already hearing numerous feedback concerning the harmful impact on consumers of the Bureau’s Qualified Mortgage rule, which went into effect just days ago.”
Is this a way of making amends?
Why Marketplace Lenders Want to Share Borrowers
March 22, 2016
In a not-so-strange coming together, loandepot and Avant launched a borrower referral program.
Loandepot and Avant are both marketplace lending platforms. Loandepot identifies itself as the ‘nonbank consumer lender’ and sells home equity loans, refinances mortgages and credit card loans and added personal loans in May 2015. Avant mostly sells personal loans and as of very recently, consumer auto loans.
Under the mutual borrower program, the two companies will have access to each other’s customer base to “expand credit options to responsible borrowers.”
California-based Loandepot has to date funded $60 billion in loans since 2010, $400 million of which was in personal loans. Chicago-based Avant has funded $3 billion in personal loans since 2012.
Industry analyst Michael Tarkan at Compass Point Research called the partnership a turndown program from Loandepot to Avant. “Referrals are an easy channel to facilitate loan volume,” he said.
There have been other partnerships in the industry with either banks or other lenders. JPMorgan and OnDeck, OnDeck and Prosper being noteworthy ones.
Tarkan expected more such collaborations before the industry consolidates itself. Marketplaces look for new borrowers to reach in different ways. “Goal for the platforms is to build a brand and a relationship with the customer so there is a repeat loan purchase,” Tarkan said. “There will be some degree of consolidation simply because there are many platforms out there searching for the similar borrower and industry won’t be able to support so many platforms.”
Avant Will Refinance Auto Loans
March 21, 2016
Online lending platform Avant said it will refinance consumer auto loans.
The Chicago-based marketplace platform, Avant added auto-secured loans earlier. This refinancing option is available to borrowers in California with Illinois and Georgia to follow in the coming months.
According to the company website, Avant’s auto refinance loans range between $4,000 and $35,000 with APRs between 10.11 percent and 25 percent ranging over 2-5 years.
“Today’s middle-income consumers have to often settle for auto loans with high interest rates and poor lending experiences,” said Al Goldstein, CEO of Avant. “We want to be the one stop shop for the borrowing needs of consumers across the credit spectrum,” he said in a statement.
Earlier this month, the company crossed $3 billion in personal loans. Avant uses big data and machine learning to underwrite loans.
This move however comes at a time when subprime auto delinquencies are higher now than they were during the height of the most recent recession. The 60-day-plus delinquency rate of the subprime loan group reached 5.16% last month, compared to 5.09 percent in January, 2009. Credit ratings agency Fitch attributes this surge to increased competition among lenders resulting in weaker underwriting standards and more originations.
