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
Annual Percentage Rates Fail Business Owners, Again
September 16, 2016
A survey of small businesses once again revealed that Total Cost of Capital (TCC) was a better metric than Annual Percentage Rate (APR) when choosing a small business loan. This study, conducted by Edelman Intelligence on behalf of the Electronic Transactions Association (ETA), found that a majority of respondents stated that they would look to minimize TCC, rather than APR, when considering loan options in the face of a short-term ROI opportunity.
The ETA explained this in the report as follows:
Generally, when consumers take out a loan, they are not making an income-generating investment that would increase the funds available to pay the loan back. Therefore, in most situations, the more “affordable” loan for a consumer is one with a longer term and lower monthly payments, even if it results in paying more over the long term. Consumers, therefore, look at APR, which describes the interest and all fees that are a condition of the loan as an annual rate paid by a borrower each year on the outstanding principal during the loan term. APR takes into account differences in interest rates and fixed finance charges that may otherwise confuse a consumer borrower and is most useful in comparing similarly long-term loans, such as 30-year mortgages or multi-year auto loans. Likewise, APR is useful for comparing revolving lines of consumer credit, like credit cards, where the amount borrowed each month changes. APR allows consumers to compare the rate at which an outstanding balance would increase under different credit cards.
While APR describes the cost of the loan as an annualized percentage, TCC represents the sum of all interest and fees paid to the lender. As the Cleveland Federal Reserve recently noted, TCC enables a small business to determine the “affordability” of a product – a key driver for most small business borrowers. Unlike consumer loans, commercial loans are normally used to generate revenue by helping a business purchase equipment or inventory or hire additional employees. Thus, “affordability” for small business borrowers means assessing the cash flow impact of the loan and comparing the TCC of the loan and the return they expect to earn from investing the loan proceeds. To reduce TCC, many small business borrowers prefer short-term financing they can quickly pay back with the return on their investment (ROI).
The ETA’s full report can be VIEWED HERE.
The findings are consistent with other studies:
Fed study on small business borrowing
A debate with anecdotal evidence, demonstrating people’s inability to calculate an APR
Consumers also struggle to make sense of APR, according to a 2008 Fed study
Barney Frank, Now a Banker, Sounds Like a Champion for Private Lending
September 16, 2016
Barney Frank, the infamous former Congressman whose name still haunts the financial industry through the Dodd-Frank Act, has taken on a surprising role in his retirement from public service. These days he’s on the board of directors of Signature Bank, a Wall Street staple with $33 billion in assets that is ironically becoming known as one of the nation’s fastest growing lenders to private businesses. In fact, it’s the preferred bank of Murder Inc. record label founder Irv Gotti, according to a WSJ story that explained how the bank stood by him even as he was facing federal money-laundering charges. Frank was mentioned alongside Gotti and is reported to have said that he likes the bank’s focus on lending.
Say what?!
I got to interview Frank personally very briefly two years ago in New York City and got a quick sense of his views on business-to-business transactions; That is that he doesn’t believe small businesses should get the same protection as consumers. In addition to restating his opposition to the Durbin Amendment in his own law, which regulated debit card interchange fees, he was also surprised by my suggestion that some people had floated the concept of federal interest rate caps on business loans. He offered a hard no when I asked him if he would be in favor of that idea. Above all however, he was in favor of transparency.
Frank more recently shared additional thoughts on finance in an interview with the Commercial Observer. “From the standpoint of the economy, the goal is to make sure enough loans are being made and that they’re not too risky. Who makes them is less important,” Frank said. These comments were offered in response to a question about capital constraints interfering with bank lending, to which he explained didn’t matter because the private sector was picking up the slack.
“First of all, the government is not in the business of favoring one sector over another. From the standpoint of public policy, is the demand for loans necessary to fuel economic activity being accommodated? I think it is. […] Although [Dodd-Frank] does give [the nonbank sector] power, there may be some further looking into them. Some people worry about peer-to-peer lending, for example, but this is helping one sector versus another.”
A lot of the complaints people have about his famous law, according to Frank, weren’t even written into the law. They are instead rules created by regulators all on their own. “There’s nothing in the statute that cracks down on commercial regulation,” he said.
Frank, sometimes viewed as one of the most liberal anti-Wall Street politicians of his time says his own bank has been criticized for too much lending, but that he is not deterred because he believe it’s not the irresponsible kind that got wrapped up in the financial crisis that necessitated Dodd-Frank to begin with.
Barney Frank, the man, the myth, the director of the bank. Read the full interview with the Commercial Observer HERE.
A Day of Remembrance for Aviv Henry Boaz
September 13, 2016
On a day that America salutes its first responders, family and friends gathered in Hillside, NJ this past Sunday to raise funds for Hatzalah of Union County while honoring the memory of Aviv Henry Boaz, a former associate of Yellowstone Capital that recently passed away.
Hatzalah is an all-volunteer ambulance squad with many chapters around the country. According to Chief Yudi Abraham, the Union County chapter is actually the largest with 23 EMT responders, 13 dispatchers and 3 ambulances. Funds raised from the event enabled the chapter to replace an ambulance that was very old with a brand new one.
Emblazoned on the side is a dedication to Boaz. His father actually flew in from Israel to bear witness to it. Chief Abraham said the day was about “the tribute to Aviv Henry Boaz.”
Isaac Stern along with Yellowstone Capital’s family and friends made the day possible. “Yellowstone Capital is our largest supporter financially,” said Abraham. And what better way to honor Boaz than to make him a part of something that will help save lives, he added.
More than $80,000 was raised on Sunday.
Marketplace Lending Performance In The Eye of The Beholder?
September 12, 2016A user took to the LendAcademy forum to vent about the high charge-off rate that his Lending Club portfolio was experiencing. He also indicated that the seemingly poor performance has affected his investment strategy and feelings about the platform for quite some time.
Other users commented and soon discovered that he was incorrectly calculating his charge-off rate, so the original user went back and redid his math. The end result? His charge-off percentage was actually lower than he originally hoped to achieve, and much lower than the percentages that he thought he was experiencing.
The original user went from angry to happy even though the actual dollars being earned never changed, only the perception of the performance.
Is performance then in the eye of the beholder?
Why The Quiet Summer Was a Good Thing for ‘Marketplace Lending’
September 11, 2016
A lackluster April turned into an explosive May. And then… well it got kind of quiet there for a bit as loan origination volumes for some lenders dropped.
A lot of theories have been challenged, a lot of absolutes shaken. Like given the choice between a short term loan at a high interest rate and a long term loan at a low interest rate, which one would a small business choose? A lot of lenders raised money on the belief that businesses would choose the latter, bolstered by a compelling argument that it is “better” for their well-being. But businesses are not neatly packaged entities with uniform interests, strategies and situations. It’s not uncommon for small businesses to choose both options. Simultaneously. Two loans. To serve different purposes.
And so what then? I believe to some extent the concept of algorithms with thousands of data points, yelp reviews and the rest of it are being challenged by basic scenarios such as what happens to performance models if the customer takes on more debt after the initial loan?
Why do many consumer borrowers that claim to be consolidating their debt end up more in debt? Maybe the lenders themselves expected this but it conflicts with the message that was being told to the outside world for a long time about what made these products so special, that borrowers were consolidating their high interest debt to lower rate loans that was all made possible thanks to the low cost required to operate an online lender fueled by revolutionary new algorithms.
Even the underlying low cost premise to operate is being challenged. Why are low cost lenders often wildly unprofitable if their secret sauce is supposedly the low cost of being a nonbank online lender?
The problem is that some stories sound great on paper but don’t work out exactly as planned in the real world.
Even the concept of peer-to-peer lending and to some degree the marketplace has transformed or been phased out. Marketplace lending as the term is survived by today is typically Wall Street institutions providing capital to nonbank lenders. There is no real marketplace, at least not for the little guy anymore.
All of these discoveries and evolutions are a good thing. Too many experiments being conducted in the market at the same time created chaos. Failures, slowdowns, and adjustments are a positive step toward a sustainable future. How could a lender reasonably rely on its performance models when every day some new company was opening up and pulverizing the market with billions of dollars of marketing and loans based on some untested unprofitable system?
It’s no wonder that like twenty trade groups formed this year alone. Regulators and legislators looking out into the world of fintech probably saw and still on some levels see a tornado of disruptive confusion.
“Are you guys one of those crowdfunding marketplace bitcoin cash advance peer-to-peer lending companies I’ve been reading about? We need to regulate you.”
They need help to sort through it all and fast.
The FDIC, for example, humorously defined marketplace lending as basically every kind of lending there is, from auto loans to merchant cash advance to medical patient financing to real estate lending. The industry became everything and as everything it’s essentially nothing.
And so the quiet summer months, though not totally dead, were much needed. Hopefully everybody has gotten a chance to breathe and can now continue the work they set out to do and truly provide sustainable value to the economic system.
Bring on Fall!
The Empty Loan Marketplace – Lending Club Zero?
September 2, 2016Update: 9/2/16 – At 1 PM, Lending Club uploaded a batch of 600+ loans on to the platform.
Update: 9/3/16 – The only notes available on the platform today are C-grade notes. No A,B,D,E,F,G…
The leader in marketplace lending is showing ZERO available notes in its retail marketplace, according to a screenshot captured of Lending Club this morning. This indicates that Lending Club either hasn’t uploaded its latest batch or that no loans are currently being allocated to retail investors. It doesn’t mean that the company isn’t lending.
PeerCube, which tracks the amount of new and total loans on the Lending Club platform, also shows zero availability over the span of several hours.
Even if it’s a technical issue, Lending Club’s purported 135,000 self-managed active individual investors will be sure to notice that the marketplace is currently out of stock.
PeerCube also shows that there were 27% fewer loans listed on the retail marketplace in August than in July.
Meanwhile, a thread started on the LendAcademy forum where many Lending Club retail investors hang out, shows users discussing a dearth of new loans going back to July 22nd. Anil Gupta, who runs PeerCube, said in the thread that Lending Club had recently stopped releasing new loans to the retail platform on weekends.
Lending Club has not yet responded to an email sent to them inquiring about the zero note availability, but recently company CEO Scott Sanborn reassured investors that they were committed to the marketplace.
Some of our investors have observed the funding environment and asked: “Are you going to become a balance sheet lender, just like a regular bank? Has Lending Club’s business model changed?”
Let me be very clear: Lending Club is committed to the marketplace model and we do not plan to become a balance sheet or “hybrid” lender. Our mission of connecting borrowers and investors has not changed.
– Scott Sanborn, in an email on 7/28/16
On August 4th, Bloomberg reported that Lending Club was in talks with Western Asset Management Co. to set up a fund that would purchase as much as $1.5 billion of loans over time. Institutions like these may be responsible for the periodic lack of notes made available to the retail market.
Letter From The Editor – Sept/Oct 2016
September 1, 2016What is marketplace lending? Lately it’s been looking more and more like Wall Street and banking. Goldman Sachs is now playing a more prominent role in the space while the Office of the Comptroller of the Currency is considering a limited-charter framework, which would make the non-bank lenders more bank-like. Not to mention that things like securitizations, bond ratings and vintage performance are dominating news headlines. It all sounds very Wall Street indeed.
But while a segment of the industry looks to effectively merge back into the traditional banking system [ I suppose they are becoming “reBanked” 😉 ], there’s another segment chugging along just fine without the banks and we write with you in mind.
To that end, we asked, what are the challenges with funding merchants in Puerto Rico? Is it okay to fund marijuana-based businesses in states where it’s legal? And what’s the latest challenge to affect telemarketing efforts?
Maybe you are surprised to hear that telemarketing even has a place in the world of fintech especially since the media hype over the last few years has imagined an online-only Internet utopia where all lending happens in the cloud. Meanwhile, millions upon millions of dollars of transactions start with a guy or gal and a cold call.
There are rules, of course. You can’t just call anybody using whatever means you want and some people on the receiving end of those phone calls know that. Woe betide you who calls the wrong person the wrong way, our research discovered. The TCPA (Telephone Consumer Protection Act) is creating another burdensome layer of cost and some of the tactics being employed to extract penalties warrant close attention. It might not be future regulations that cause problems but existing ones. In this issue, we’ll show you why smiling and dialing do not always go hand in hand.
IT’S A BROKER’S WORLD
August 31, 2016
From east to west, small businesses are getting funded. But how they’re found and who they work with depends on where they are. In the US, where brokers tend to have a love/hate relationship with the funding companies they work with, they are no doubt a driving force in the market. In other countries, they might not even exist, are just starting to bloom or they add balance to a mature market. Is the world built for brokers? deBanked traveled far and wide to find the answers.
Down under in Australia where American-based merchant cash advance and lending companies have expanded, the ISO (which stands for Independent Sales Office and is synonymous with broker) model has not really followed. David Goldin, CEO of Capify, an international company headquartered in New York, told deBanked that there’s very few ISOs in Australia.
He believes that’s because there’s next to no payment processing ISO market there, a foundation that was a major precursor in the US towards the development of ISOs reselling merchant cash advances and business loans.
Luke Schmille, President of CapRock Services, echoed same. The Dallas-based company founded Sprout Funding in Australia earlier this summer as part of a joint venture with Sydney-based family office Huntwick Holdings. “Direct marketing is the primary method [of acquiring deal flow],” he said. “The credit card processing space is controlled by several large banks, so you don’t see ISO efforts in the acquiring space either.”
Big bank dominance was only one reason why another country’s emerging alternative small business funding market developed slowly. In Hong Kong, non-bank alternatives like merchant cash advances faced legal uncertainty for a long time. For example, Global Merchant Funding (GMF), once the only merchant cash advance company in the Chinese special administrative region, had been relentlessly pursued for years by the Secretary for Justice for conducting business as a money lender without a license. GMF fought it. And won.
In May of this year, the legality of merchant cash advances ultimately prevailed after the highest court ruled the agreements were not loans. Emboldened, several companies have stepped up their marketing of the product. But whether they’re doing daily debit loans or split-processing merchant cash advances (both of which exist there), marketing tends to be directed at merchants, not a middle market of brokers.
Gabriel Chung of Hong Kong-based Advanced Express Capital said that there are a handful of large brokers typically comprised of former bankers, but the rest of the broker market is highly fragmented, mostly made up of individual freelancers.
Adrian Cook, the Founder and CEO of Hong Kong-based Asia Capital Advance, agreed that marketing is usually aimed at merchants directly but that it’s changing. “Since the market is still very new and MCA is only beginning to gain popularity, brokers on the market are only starting to recognize MCA,” he said. “There is a lot of room for the brokerage market to grow.”
In the UK, where Capify also operates, CEO David Goldin explained that the UK doesn’t have a lot of credit card processing ISOs so there wasn’t a major migration from that business to MCA like there was in the US. But that doesn’t mean there is no middleman market at all.
Paul Mildenstein, executive director of London-based Liberis, said that brokers are an important channel, but not as dominant as they are in the US. “Our brokers are usually members of the NACFB, an organisation in the UK that actively supports and provides operating principles to the furtherance of the commercial finance broker community,” he wrote. The National Association of Commercial Finance Brokers claims to have 1600 members, one among them is Liberis.
“Many clients want the support of an experienced professional who can discuss the financial options available to them in their specific circumstances,” said Liberis’ CEO, Rob Straathof. “Given relatively low awareness of the Business Cash Advance product in the UK, this means that brokers have a key role to play in educating potential customers on when this is the right option for them,” he added.
Straathof stressed a robust criteria for the brokers they work with and explained that brokers are their eyes and ears in the market. “The relationships we have with them are not transactional, but transformational for our business,” he said.
The NACFB was also praised by Alexander Littner, Managing Director of Chelmsford, Essex-based Boost Capital. The company, which is actually a subsidiary of Coral Springs, FL-based BFS Capital in the US, sees a balance between their use of brokers and their efforts to acquire customers directly.
“As the alternative finance market is still relatively new here in the UK these brokers are important for this independent advice, and to help educate the market and establish trust,” Littner said. “At Boost Capital we work very closely with brokers across the UK, they are a critical part of our growth and fundamental to our ongoing success.”
In the US, brokers play such a dominant role in customer acquisition that some MCA funding companies rely on them to source the entirety of their business. Back in February, Jordan Feinstein of NY-based Nulook Capital told deBanked, “We decided that the best way to grow is to build relationships to avoid the overhead, compliance, training and manpower that a sales team would require.” Nulook markets its broker-only approach as a strength.
Others take a more blended approach, like Justin Bakes, CEO of Forward Financing, for example. “While our priority is to self originate, it is essential to create and maintain partnerships in this business,” he said earlier this year.
Notably, no such guiding authority like the UK’s NACFB exists for brokers in the US so it’s not easy to track exactly how many there are or how they operate, but their role in the industry cannot be understated. deBanked actually labeled 2015 The Year Of The Broker, when it published an article in its March/April 2015 issue that tried to capture the essence of the industry at the time. Tom McGovern, who was then a VP at Cypress Associates LLC, said of brokers, “They’re like the missionaries of the industry going out to untapped areas of the market.”
But preaching the gospel of alternative funding exists at different stages across the world. And Goldin, whose company Capify operates in four countries including the US, thinks that many middlemen here at home may not ultimately survive. In an interview, he predicted that the stronger ones over time will be acquired by funding companies and that direct marketing will only increase. “I think more and more companies are going to start building their own internal sales forces,” he said.
Other brokers are not convinced that acquisition costs will lead to the death of their businesses, especially if they’ve already found ways to reduce overhead costs. Several brokers have discreetly mentioned running operations from Costa Rica, Nicaragua or elsewhere as a way to keep things profitable. Still more, like Excel Capital Management based in Manhattan, have found that offering a suite of products allows them to monetize more customers. Chad Otar, a managing partner for Excel, said that they recently brokered a $4.9 million SBA loan. MCA is just one of their options these days. “As long as there’s small businesses, there’s always going to be opportunity,” he said.
In the US, the brokers have certainly seized it, but that’s because most funding companies offer big bucks and quick payment to those that are capable of sourcing customers. In other countries, compensation for services rendered might be the responsibility of the broker to arrange with the merchant since it may not be customary for funding providers to pay commissions. That would mean more work and more risk for the broker.
Ironically, some brokers in the US will tap into both sides, earning a commission from the funder and charging a fee to the merchant for services rendered. And if the broker has payment processing roots, they can go a step further and earn merchant account residuals as well.
Brokers can’t exist without funding companies willing to support their endeavors, of course. While their prevalence around the world varies, most of the funding companies deBanked spoke to, appear eager to nurture the middleman’s role, so long as they act responsibly.
“Brokers in the UK are incredibly important as independent advisors to small businesses on the various sources of finance to suit their needs,” said Littner.
And as long as those customers, wherever they may be, are getting the value they want from a broker, that role, so long as it can continue to be done profitably, will likely have a place in the world for the foreseeable future.
