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
Why Does Lending Club Set The Interest Rates If It’s A “Marketplace”?
April 29, 2016
A new user on the LendAcademy forum asked a good question.
“If Lending Club is merely creating a marketplace for borrowers and investors, why does LC set the price? Why not let them determine it independently? The external credit models are fundamentally about finding loans with the highest expected return relative to their risk.”
Here are some of the summarized responses that were given:
– Individual investors are not as able to price risk on their own
– It would be inefficient, much more time would be needed to investigate each loan
– Prosper started out doing it this way and the results were poor
– Lending Club doesn’t disclose all the data points to investors for proprietary reasons and to avoid releasing information that could lead to borrower discrimination, i.e. violations of the Equal Credit Opportunity Act (ECOA) and Consumer Credit Protection Act (CCPA). It’s better to have a third party manage these legal risks.
Today, many investors use automated programs like LendingRobot to do their investing for them, which means the hassle of trying to price a loan in a dutch auction with limited information would likely become an obstacle in the marketplace. It would also become a race to the bottom. Underpricing risk would be great for borrowers because they’d benefit from very low interest rates but it would be a disaster for investors that would likely experience losses as a result. If investors were all institutional and accredited, then maybe that would be fine. But since Lending Club has a substantial amount of unaccredited investors, the kind legally presumed to be unsophisticated, putting the onus of pricing risk on their shoulders would quickly lead to the collapse of the system entirely.
Lending Club might not be a marketplace in the purest sense, but given the legal complexities and investor/borrower protection considerations, it comes pretty close.
You can read the original thread on the LendAcademy forum here.
BlueVine a Serious Player After Citigroup Investment (And it Could Land Them Citigroup Referrals)
April 27, 2016
When BlueVine announced raising $40 Million from Menlo Ventures three months ago, they raised eyebrows in the marketplace lending community but they didn’t steal the spotlight. That’s because BlueVine’s core focus, invoice factoring, is arguably the least sexy segment of small business finance. Just hearing the phrase invoice factoring is enough to induce one into a coma. That of course is what made the age-old practice ripe for disruption. But even so, BlueVine isn’t limiting themselves to just that.
The company now offers business lines of credit with interest as low as 6.9%, according to their website. That makes them a competitor of OnDeck, Lending Club, Funding Circle and many others in a crowded field.
A new investment from Citigroup however could change everything for them. While the terms from Citi Ventures (the banks’s investing arm) were not disclosed, Arvind Purushotham, told CNBC that it’s possible that Citigroup forms a referral arrangement with BlueVine to help small business customers of the bank find attractive credit. That’s significant because Purushotham is a managing director at Citi Ventures.
Two weeks ago, OnDeck CEO Noah Breslow, told the crowd at the LendIt conference that partnering is a company’s only chance now to gain a real foothold in the industry. Breslow could speak from experience since OnDeck currently has a unique arrangement with JPMorgan Chase.
While the sources interviewed by CNBC stressed that the BlueVine-Citigroup investment did not constitute a commercial partnership, the stage seems to have been set for that to be possible in the future.
Even though BlueVine just started making loans 3 months ago (they have been factoring since 2013), loans already make up 15% of their overall business. This is one invoice factoring company that rival small business lenders won’t want to sleep on.
Transact 16 Photos
April 26, 2016Did you miss Transact 16? It was a little bit different this year for a particular group of regular attendees that have historically relied on credit card processors to “split” transactions. Merchant cash advance as it is known (or was known) has officially evolved into something else. You can read more about that here.
In the meantime, here’s a few photos from the show:
Don't forget to stop by Booth 564 @ETATRANSACT #TRANSACT16 & ask TJ/Maria/Jim how we can help you do great things! pic.twitter.com/Gixc6WJNfV
— RapidAdvance (@Rapid_Advance) April 21, 2016
Where are the rest of the pictures you ask? You should know by now that what happens in Vegas stays in Vegas.
Small Business Lending and Merchant Cash Advance Industry Confidence On The Rise
April 25, 2016A fresh survey of industry captains revealed that their confidence is actually increasing.
Late last year, deBanked and Bryant Park Capital teamed up to produce the first ever comprehensive industry report on merchant cash advance and small business lending. More recently, eligible participants took a narrower survey to gauge their confidence in Q1 2016 and that was compared to results measured in Q4 2015.
The results were striking. Despite the apparent end of a euphoric love affair between investors and marketplace lenders earlier this month at LendIt, those on the small business side are still feeling very optimistic.
Confidence among industry captains increased from 84.4% in Q4 2015 to 91.7% in Q1 2016.
Confidence among industry captains in their ability to access capital needed to grow their business increased from 85.8% to 91.7%.
The 2015 comprehensive report is available for $495. Please contact sean@debanked.com for more information.
Splits Glitz or Fritz? – Transact 16 highlighted strange chapter in merchant cash advance history
April 21, 2016
It’s Opposite Day in the alternative business funding industry. Lenders are splitting card payments and merchant cash advance companies are doing ACH debits.
Jacqueline Reses was not an odd choice for Transact 16’s Wednesday morning keynote. Square, the company she works for, has continued to be a hot topic in the payments world for years. But what was striking is that Reses heads the lending division, the group that allows merchants to pay back loans through their future card sales. If that sounds very merchant-cash-advance-like, it’s because that’s exactly the product they used to offer before changing the legal structure behind them.
Split-payments, not ACH payments, have literally propelled Square and PayPal to the top of the charts of the alternative business funding industry. One individual on the exhibit hall floor posited that Square’s ability to originate loans through their payments ecosystem was the company’s real value; Payments itself was secondary. It’s a testament to the opportunities that split-payments affords to (as I argued 3 years ago on the ETA’s blog) a company well positioned to benefit from it.
Meanwhile, the companies at Transact that one would have historically described as merchant cash advance companies have mostly transitioned away from split-payments to ACH. Essentially, Square and PayPal embraced splits as an incredible strength while yesterday’s merchant cash advance companies viewed splits as a handcuff that limited scalability. The payment companies became merchant cash advance companies and the merchant cash advance companies became something else entirely, a diverse breed of loan and future receivable originators operating under a label people are now calling “marketplace lenders.” But even Square and PayPal, arguably the two companies at Transact doing the most split-payment transactions, claim to make loans, not advances.
Merchant Cash Advance as anyone knew it previously is dead
Ten years. That’s the average age of the small business funding companies that exhibited at Transact this week. They are but the last remaining players that probably considered the debit card interchange cap imposed by the Durbin Amendment of Dodd-Frank as being among the most significant legislation that affected their businesses.
A senior representative for one credit card processor told me at the conference that their biggest gripe with new merchant cash advance ISOs today is that they know almost absolutely nothing about merchant accounts. It’s not that they know less, they know nothing, he said.
One company was notably absent from the floor this year, OnDeck. They’ve since embraced the marketplace lending community as their home, just as many others have.
Nine years ago, I overheard a very influential person say that the first company to be able to split payments across the Global, First Data and Paymentech platforms would be crowned the “winner” of the merchant cash advance industry and by extension the wider nonbank small business financing space.
If one were to define the winner as the first company from that era to go public, well then those 3 platforms played no role. OnDeck was the first and they relied on ACH payments the entire way. They also refer to themselves these days as a nonbank commercial lender. If that doesn’t sound very payments-like, it’s because it’s not.
What cause is being Advanced?
At least four coalitions are currently advocating on the marketplace lending industry’s behalf, the Coalition for Responsible Business Finance, the Marketplace Lending Association, the Small Business Finance Association, and the Commercial Finance Coalition. The Transact conference is put on by the Electronic Transactions Association whose tagline is “Advancing Payments Technology.” In an age where new merchant cash advance ISOs know nothing about payments, it’s no wonder there’s a growing disconnect.
Could Transact now be one of the best kept secrets?
A few people from companies exhibiting say that they believed they stood a better chance to land referral relationships from payment companies by being there and that there was still a lot of value in landing those deals. Partnerships like these may be why the average exhibitor has been in business for 10 years while today’s new companies relying solely on pay-per-click, cold calling, or handshakes are falling on hard times.
Some payment processors acknowledged that merchant cash advance companies were still a good source to acquire merchant accounts, though the process by which that happens is not the same as it used to be. A lot of it is referral based now, according to one senior respresentative for a card processor. The funding company funds a deal via ACH and then refers them to the payment guy to try and convert that as an add-on. The residual earnings may not be as good as they used to be but that’s because they don’t have to do any work in this circumstance. In a sense, funders are still leading with cash but instead of the boarding process being mandatory, it’s an entirely separate sale that sometimes works and sometimes doesn’t. In that way, small business funding companies can be a good lead source for payments companies.
When I asked the senior representative if they really had success closing merchant accounts just off of a referral from a funding company, he looked at me incredulously, and said, “you used to do this, of course we do. that’s how this whole industry started.”
“What industry?” I asked.
What industry indeed…
Jersey City Continues to Woo Alternative Lending Industry
April 19, 2016
Another alternative business financing company is moving to Jersey City, courtesy of the Grow New Jersey Assistance Program. NYC-based World Business Lenders is planning to relocate from their Times Square office to 101 Hudson Street in Jersey City this July in return for nearly $17 million in tax credits over 10 years.
World Business Lenders would bring 125 employees with them and its projected that they would create an additional 100 jobs by the end of the year.
In March, Yellowstone Capital relocated from their offices in NYC’s financial district to Jersey City as part of a deal that allows them to acquire up to $3.3 million in tax credits over the next 10 years. Their arrival did not go unnoticed. Jersey City Mayor Steven Fulop stopped by personally to welcome them to the neighborhood.
It’s Too Late to Start Building an Online Lending Platform, OnDeck’s CEO Suggests
April 16, 2016
If you’re looking to enter the online lending market, you really only have three choices, said OnDeck CEO Noah Breslow, build, buy or partner.
At Lendit, Breslow admitted that OnDeck’s original concept back in 2007 was to create a small business lending platform for banks. Unfortunately they weren’t ready for online lending at that time, he told the crowd. He referred to the 2007-2010 era as the “low awareness” phase of online lending which was followed by the “skepticism” phase. Today, the industry is in stampede mode, he said.
Because of that, it’s probably too late to build a platform he suggested.
“What’s really unique about online lending is okay, let’s say you’ve built something and then you want to bring it live, you still have to lend and learn. You can’t deploy a billion dollars on day one. So once the technology is live you have to create vintages of loans that perform, refine your credit models, and so when are you going to be at scale in that business? It might actually take you several years to execute the build and then to scale up your actual loan volume.”
And while the merits of buying an existing platform might seem obvious, it’s not always so easy.
“On the buy side, clearly it’s expensive as well. There’s integration risk and maybe there’s pros in that you get more control over these platforms, but we haven’t seen any of that really happen at this point, and I think the expense of it is a major reason why. Which leaves you with partnering.”
Breslow added in regards to partnering, “that’s what we think to be the dominant form of collaboration”
Watch his full Lendit speech below:
Direct Mail Still Very Effective, Says National Funding President Torrie Inouye
April 16, 2016
When I met with San Diego-based National Funding President Torrie Inouye at Lendit, I was surprised to learn that the company had quietly funded $293 million to small businesses in 2015, enough to earn them a spot on deBanked’s top 10 alternative business funder list. The company isn’t new. They were founded in 1999, which puts them in the same category as CAN Capital, a 90s era relic that has not only survived but has continued to evolve and quite literally be a leader of the pack.
Inouye graduated from Stanford University in 2001 with a BA in Economics and started at National in 2004 where she worked as a Corporate Strategy Analyst. After 3 and a half years, she went on to play key roles at Union Bank and Intuit before returning back to National in the Fall of 2014. With a strong background in data analytics, Inouye took over as the company’s president just last week. Dave Gilbert, the company’s founder, has been the CEO since the beginning.
“Dave has always understood that data is valuable,” Inouye said, adding that she had been tasked with harvesting it.
“One of the trends that we’re seeing in our data is our direct mail response rates being much higher than what other people might expect,” she said. “We’re still surprising really good at direct mail.”
Others within the alternative lending space have made similar assertions, which ironically kind of undermines the concept of online lending itself. For Inouye, she says the online part is “the product.”
“You can control the message and you can control who you’re talking to with direct mail,” she explained. Though in a way the offline tactic is driving people to engage online. “A lot of our direct mail response comes through our website,” she said.
An expanded version of our interview will appear in deBanked’s May/June 2016 edition scheduled to come out in early June. Subscribe FREE here.
