Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
Industry Message Boards Crack Down on Anonymous Deal Grabbers
November 11, 2015
Industry message boards, including deBanked’s, have begun taking a stronger stance against anonymity to facilitate transparency and protect users. While anyone can still register with their personal addresses, a corporate email address must be provided in the course of soliciting business. Industry participants have reached a general consensus that soliciting deals while hiding behind a free email address raises a red flag.
With hundreds of legitimate vendors to choose from, there should be little need to transact with users that lack basic things such as a company name, office address and phone number.
“I’m bombarded with probably 10 emails every day of the week from a supposedly new lender that wants my business, and they’re really just a broker shop like we are,” said Cheryl Tibbs, in the September/October issue of deBanked Magazine. She warned that fake funders can steal deals and pocket the entire commission. They solicit deals in online forums, by email message or over the phone, and then they offer the deals to companies that really do function as direct funders, she said.
While no online forum was specified in the story, at least two forums have responded by cracking down on anonymity by suspending or banning violators.
The age of the gmail funder is coming to a close. Don’t buy leads from HotLeads4u69@hotmail.com and definitely don’t syndicate with a company that has no known address.
Income Inequality Perpetuated by Low Interest Savings Accounts (GOP Debate)
November 11, 2015The losers of Tuesday night’s GOP debate were Dodd-Frank, the CFPB and the big banks. Hours after I linked to a CFPB job listing for a small business lending fairness assistant director, former Hewlett-Packard CEO Carly Fiorina told America that the CFPB is the beginning of socialism. Government creates the problem and then proposes a solution to the problem it creates, she argued.
Senator Ted Cruz added that the government is in bed with the big banks and it’s leading to the elimination of community banks. As a consequence, he said, small businesses can’t get loans. Two months ago, B. Doyle Mitchell Jr, the CEO of Industrial Bank, who spoke on behalf of the Independent Community Bankers of America made a similar argument during a House Small Business Committee hearing. He said, “I really feel like we’re getting away from helping people and making sure that we make the loans that Washington agrees with and I think that needs to change.”
In the debate, Senator Rand Paul offered his own twist on what’s wrong with the banking system and that’s the inability for poor people to get the same rate of return as rich people. Too little interest is earned by holding money in savings accounts, he argued, and “now we’re even talking about negative interest.”
Three weeks ago, CNBC reported that Narayana Kocherlakota, president of the Minneapolis Fed was in favor of the Fed pushing rates below zero. Really low interest rates can encourage people not to save or just to spend the money, Senator Paul warned, with the result being that the poor are stuck in the cycle of being poor.
According to Jana Randow on Bloomberg, who wrote about the subject of negative interest rates, “if banks make more customers pay to hold their money, retail clients may put their cash under the mattress instead.”
Not mentioned during the debate was marketplace lending where retail investors have the opportunity to earn Wall Street yields. CNBC recently reported that Lending Club and Prosper investors are earning between 5%-9% a year. While it’s true that Wall Street firms now dominate investor demand, there is still enough availability for individuals to literally share the wealth.
The story of marketplace lending might have its roots in the sharing economy, technological disruption, or making markets more efficient, but to Senator Paul’s point, it also presents America’s lower income individuals to build wealth like the rich. Putting your money in an account earning less than 1% interest will keep you poor. Putting it under the mattress will also keep you poor. And spending your money might make you look rich but that will indeed keep you poor. The big banks in effect keep the poor poor by presenting their customers with those three options.
The solution to income inequality (other than by moving to cities and states run by republicans as Paul suggested) is to offer the same opportunities to the poor as the rich have access to. Marketplace lending allows the average American worker to earn the same yield that Goldman Sachs would find attractive. Maybe one of the republican candidates will bring that up in the next debate.
Jeb Bush (if he can hang in the race) has invested on the Lending Club platform, which we learned when he disclosed his historical tax returns and could possibly speak from his own experience.
CFPB Signals Alarming Interest in Small Business Lending
November 10, 2015
The Consumer Financial Protection Bureau posted an alarming job opportunity on LinkedIn last month for the position of Assistant Director for Small Business Lending Markets. Ominously self-labeled as an “Expression of Interest” rather than a job opening since the job is not currently open to applications yet, the CFPB has inadvertently revealed its own expression of interest in small business lending.
If there was any doubt that data collection required under Section 1071 of Dodd Frank was never going to happen, the CFPB also revealed that there will not only be a person responsible for small business lending, but in fact an entire team. And they won’t just be collecting data, but they’ll be monitoring it, analyzing it, interpreting it, and advising on rulemaking, according to the listing.
Candidates are being offered a once-in-a-career opportunity to make the market for small business finance fairer and more transparent.
So much for just collecting data, the CFPB apparently plans to directly insert itself into the fairness of transactions conducted between commercial entities.
Perhaps, we are not too far off from a world like this:
Check out my thoughts about the troubling narrative developing around small businesses in the Sept/Oct magazine issue of deBanked.
Mike Cagney vs. Todd Baker: The Debate at the Marketplace Lending and Investing Conference
November 6, 2015
“You’re big buyers of some of this paper until you’re not,” said Todd Baker, the managing principal of Broadmoor Consulting, LLC, to a crowd of institutional investors and bankers at the Marketplace Lending and Investing Conference in New York. Seated to his right was his debate adversary, SoFi CEO Mike Cagney, who offered many opposing viewpoints. You can’t choose to not run a business because you fear it could some day shut down, Cagney argued.
The two opponents had battled before though Op-eds published in American Banker. “The hard truth is this: while MPLs [Marketplace Lenders] have introduced valuable innovation into financial services, they carry a fundamental flaw that threatens to undermine their business, destabilize financial markets and cause real economic hardship,” wrote Baker back on August 17th. The flaw he addressed is access to funding. Baker argued that if investors don’t want to buy loans, then the marketplace lender is dead because their existence relies on the transaction fees from loan originations.
Cagney responded directly two days later. “The scenario [Baker] describes can’t happen. It is true that an MPL needs a buyer to originate loans — without one, the marketplace needs to raise rates until a buyer emerges. If there is no buyer, MPLs simply stop lending — they won’t start originating underwater loans.”
That perhaps played partly to Baker’s argument because if indeed there was an absence of buyers then the marketplace lender stops originating loans… and would at least temporarily be dead or would at least not be generating revenue.
But during the live debate, Cagney cast the suggestion of there being no buyers aside. Companies like his are targeting large market segments, where there will theoretically always be demand at some price, not niche market segments that could dry up in a crisis. “The beauty of marketplace lending is we’re balance sheet light,” Cagney told the crowd while pointing out that banks get into trouble with lending because of how leveraged they are.
That viewpoint contrasted that of two Goldman Sachs VPs that told the same crowd earlier that marketplace lenders would eventually move towards keeping loans on their balance sheets.
SoFi is of course an exception to the mold of the average marketplace lender, which Baker made sure to point out. Most people in the room were aware of SoFi’s $4 billion private market valuation. It’s clear that Cagney knows what he’s doing, Baker said out of respect several times on stage. His comments were directed less at SoFi and more on marketplace lenders in general.
Baker worried that these loans were being classified as fixed income investments too soon. These loans are not backed by large corporations, he warned, but by consumers. They won’t act like fixed income investments forever, he said.
Cagney took the criticism in stride and basically chided Baker and those that share his concerns as being unwilling to pursue opportunities because they are simply afraid of change.
Someone knows where I am at all times, he jokingly warned the audience of bankers, in case any of them had planned to kidnap him and put an end to his disruptive endeavors.
SoFi’s brand is of being an anti-bank or a fixer of the broken banking system so Cagney no doubt expected doubters at a conference produced by American Banker’s parent company.
Baker told Cagney that he had a nice libertarian view that didn’t make sense over in the real world. Cagney gleefully accepted the label of libertarian and rejected the notion that the real world and the libertarian world weren’t one and the same.
The two agreed to cordially disagree and notably did not shake hands when the debate ended. Cagney, the anti-banker, appeared to win over a significant portion of the audience. To his credit, the conference was aptly named the Marketplace Lending and Investing conference, not the Traditional Banking Forever conference.
Both sides made valid arguments, but one thing is for certain, banking will never be the same.
Marketplace Lending and Investing Conference (Part 1)
November 5, 2015Source Media’s Marketplace Lending and Investing conference kicked off today with a bang. During the opening keynote, two VPs at Goldman Sachs predicted that the industry would shift to retaining loans on balance sheets instead of continuing with the gain-on-sale model. The irony is that OnDeck appears to be going in the opposite direction since their recent path to profitability is being made possible by their new reliance on gain-on-sales.
The available solutions presented to small business financing problems at the conference covered the entire gamut. Pango Financial president Candice Caruso for example, explained that small businesses can get funding by rolling over money from a qualified retirement plan. Pango’s model capitalizes on The Employee Retirement Income Security Act of 1974 (ERISA), a 40-year old law that can be streamlined with the help of technology. ERISA established the regulation that allows for a private company to use retirement funds as business capital through an Employee Stock Ownership Plan (ESOP).
Companies like Pango have found a clever way to scale the benefits out of old policies and it’s opportunities like these that have everybody excited. QED Partners founder Frank Rotman summed it up best when he recited his own Wall Street Journal quote, “It feels like the Internet in 2000. Everyone is chasing it, but they aren’t sure what ‘it’ is.”
Rotman also cautioned lenders who are trying to throw money at technology as a fix to scale their businesses. You can’t just throw money at technology, he argued. “Technology needs to be in your DNA.”
For marketplace lenders like QuarterSpot, they fit that bill well. Their CEO Adam Cohen was the Chief Software Developer for JetBlue Airways.
And among some of the other names in attendance, many are on the fast track for success. Expansion Capital Group for example just closed a $25 million credit facility with Northlight Financial and Bastion Management. And there’s also Pearl Capital who was recently acquired by Capital Z Partners. And Herio Capital, founded by one of OnDeck’s earliest employees, recently reached a new funding milestone.
At the end of the day, Anjan Mukherjee, the Counselor to the Secretary and Deputy Assistant Secretary for Financial Institutions of the U.S. Treasury Department told attendees not to bank on regulatory interest being forgotten about with a new presidential administration. Certain agendas can be “de-emphasized”, he said, but overall at least as far as the Treasury is concerned, enough important people will not transition away. They won’t forget everything, he explained.
Should Alternative Lenders Be Regulated? (Video)
November 4, 2015Funding Circle’s Sam Hodges went back on Bloomberg TV to answer questions about the rise of marketplace lending. On the subject of regulation, Hodges explains that their business model is already pretty heavily regulated.
Meanwhile, David Stockman, a former US Congressman and former director of the Office of Management and Budget, said the regulators should stay away from alternative lenders. Video below:
Jimmy Kimmel on Shark Tank (Video)
November 3, 2015Jimmy Kimmel and his sidekick Guillermo decided to walk a mile in the shoes of a small business and raise capital from the experts. As you can imagine, it was beautifully done.
Can’t see the video? Click here
OnDeck Q3 Earnings Report Shows Positive Signs (ONDK)
November 2, 2015
Back when OnDeck was telling analysts that they were focusing on growth, critics said they should be focusing on profitability. Now that they’ve had their second straight profitable quarter, critics are pointing out that loan origination growth has slowed. OnDeck can’t win with them, but this quarter’s results were the closest they’ve come to proving themselves.
They originated a little over $482 million worth of loans and reported a profit of $3.7 million. Selling loans through their marketplace to institutional investors is generating immediate income and creating the profits they lacked before.
The reliance on funding advisors (ISOs/brokers) shrank from 20.6% in Q2 to 18.6% in Q3. During the Q&A session, OnDeck CEO Noah Breslow hinted that they may have reached a floor in that ratio. That channel could stabilize and even grow a little bit, he said.
When one analyst asked whether or not loan aggregation platforms were counted under funding advisors or strategic partners, Breslow said they are counted as strategic partners. Only 4% of OnDeck’s loans come from these loan aggregation platforms, the company’s execs admitted, putting to bed any notion that loan aggregators had leverage over OnDeck’s business.
In Q2, analysts became alarmed over the competitiveness of the direct mail channel. This time around, Breslow said the environment hasn’t gotten more or less competitive, that it was about the same. Competition is stabilizing and the advantage goes to the scaled players, he argued after describing their ability to target, analyze, underwrite and fund faster than others. Breslow added that they are not banking on relief from the competition to carry out their long term objectives.
A sentiment discussed on the call but not exactly argued by anyone is that it’s become pretty late in the game for new lenders to start entering the field, the implication being that the long-term competition is already in business, instead of it being some new companies that have yet to form.
The regulatory environment was described by OnDeck as “stable.”
All in all, the results of Q3 were optimistic.
