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
Marketplace Lenders Will Return to Their Peer Roots, Insiders Say
March 30, 2016
Will marketplace lending revert back to peer-to-peer lending? Insiders said “yes,” during a panel hosted at CommonBond’s NYC office yesterday. Moderated by WSJ reporter Telis Demos, The State of Fintech Lending included two panelists that had something to say about the greatly exaggerated death of “peers” in peer-to-peer lending.
Marketplace lenders will look to tap back into individual investors, said CommonBond CEO David Klein, specifying that accredited investors were an obvious choice but that true retail investors would also play a role.
Fundera CEO Jared Hecht said marketplace lenders can achieve a “network effect” with retail investors, something not likely to occur with institutional sources. The network effect is a phenomenon whereby a good or service becomes more valuable when more people use it. “Retail investors are more loyal to a specific platform,” Hecht said.
Klein explained that the retreat from peers over time stemmed from Lending Club and Prosper’s historical issues with the Securities and Exchange Commission. Both companies faced an existential threat in 2008 over the alleged sale of unregistered securities to unsophisticated investors. They were able to overcome this by agreeing to register every single loan offered on their platforms as a security with the SEC. Today, that has led to both companies becoming part of the top five filers of securities in the US, Klein said. While this registration process is mostly automated, the road to get there was complicated and thus there was a shift towards institutional sources for most new entrants.
But there are signs it’s coming back. Two weeks ago, small business lender StreetShares announced that retail investors would soon be able to invest on their platform. But even then, StreetShares has accomplished this through a less complicated process than the ones Lending Club and Prosper adhere to. Under the JOBS Act’s Regulation A+, startups can raise up to $50 million over a 12-month period from retail investors.
The return path may be slow, however. Prosper for example, still sells 92% of its loans to institutional sources and only 45% of Lending Club loans are sold to retail investors. Even they are not entirely peer-to-peer.
The marketplace lending industry will inevitably come to respect the “peer” again, panelists concluded. “2016 will be the year that marketplace lenders will go from the mainstream to maturity,” Klein said.
Not All Marketplace Lenders Are Created Equal – The State of Fintech Lending
March 30, 2016
It’s kind of a problematic term, said CommonBond CEO David Klein about “marketplace lending.” Klein was one of four industry experts on the State of Fintech Lending panel hosted at their office on Tuesday morning. “Not all marketplace lenders are created equal,” he said. There are different asset classes, different credit spectrums and even different investor responses, he explained.
CommonBond for example, focuses on student lending and more specifically, the very upper end of the credit spectrum. As proof, Klein said the company has not even experienced a 30-day delinquency or default. Compare that asset with some of the products offered by Fundera, which range from merchant cash advances to SBA loans and it’s easy to see why marketplace lending as a category can be overly broad. Fundera CEO Jared Hecht was another panelist alongside PeerIQ CEO Ram Ahluwalia and Macquarie Group Managing Director Brian Foley. WSJ reporter Telis Demos served as the moderator.
Klein’s company deals with institutional investors, which loosely qualifies it as a marketplace in the sense that there are buyers for their loans. Hecht’s company is a marketplace too but for small business owners seeking loans. Fundera is not a lender. “We don’t have to run around and deal with the capital markets,” Hecht said.
Despite the incredible diversity of asset and credit classes, PeerIQ’s Ahluwalia described the quality of the securitizations taking place throughout the industry as very good. “This is going to be a very different movie than The Big Short,” he said. As of the end of 2015, PeerIQ ranked total cumulative securitizations at $8.4 Billion, with 41 deals issued to date (25 Consumer, 9 Student, and 7 Small Business).
Pension funds and insurance funds who are attracted to this space are focused on AAA rated bonds, said Macquarie’s Foley. “They want scale, performance and track record,” he said, adding that they’re happy to trade away return for a reduction of risk so that they can sleep at night.
There’s over 200 marketplace lenders in the US, Klein stated. Only 12 or 13 have reached a certain level of scale though, he added. “2016 will be the year that marketplace lenders go from the mainstream to maturity,” he said.
Perhaps as part of that, however, the marketplace lending term will have to mature with it. “Each category is very different,” said Klein.
The Coalition for Responsible Business Finance Adds Yet Another Perspective on Small Business Lending Advocacy
March 29, 2016Is three a crowd? The Coalition for Responsible Business Finance (CRBF) seeks to improve small business finance.
As a new advocacy organization, the CRBF is dedicated to bolstering the credibility, reliability and security of the growing non-traditional small-business lending industry, they say. Spearheaded by Tom Sullivan, former Chief Counsel for Advocacy in the Small Business Administration, CRBF Advisory Board executives include representatives from the National Federation of Independent Business (NFIB), the National Small Business Association (NSBA), and the Small Business & Entrepreneurship Council (SBE Council).
“CRBF was created to educate state and federal policymakers, media, and communities on how technology and innovation are providing small businesses access to capital that is necessary for growth,” Sullivan said in an organization announcement this morning.
The organization has been developing for some time, but its official pronouncement nearly coincides with that of the Commercial Finance Coalition, another group with a similar goal.
And it’s shaping up to be quite the Spring here in 2016 because the Small Business Finance Association, yet another organization, is preparing to unveil a white paper of guiding industry principles.
And so that makes three, yet each appear to be bringing their own unique perspectives to the table. That is perhaps better than hundreds of unorganized perspectives under no collaborative banners, some industry vets are saying.
“Small business owners expect and deserve choices for credit,” Sullivan said. “And we at the [CRBF] believe that a better understanding of non-traditional small business lending will lead to greater acceptance by customers, regulators, and local, state, and federal elected officials.”
Touché.
Platinum Rapid Funding Group Partners Up With The Asian American Hotel Owners Association
March 29, 2016
NY-based Platinum Rapid Funding Group has become the exclusive funding partner of the Asian American Hotel Owners Association (AAHOA). AAHOA has over 15,000 members and is the largest hotel owners association in the world.
“Our enthusiasm to create this new relationship serves as the galvanizing force that will assure we attain deliverable results for AAHOA,” said Platinum CEO Ali Mayar. The company originated more than $100 million in funding last year alone.
As the largest hotel owners association in the world, AAHOA’s mission is to advance and protect the business interests of hotel owners through advocacy, industry leadership, professional development, member benefits, and community involvement.
“We are delighted to partner with Platinum Rapid Funding and look forward to sharing their services with our members,” said AAHOA President & CEO Chip Rogers.
Platinum’s unique business model is said to have played a role in AAHOA’s selection, including among many other attributes, their “white glove” service.
Small Business Finance Association To Unveil White Paper
March 29, 2016
The Small Business Finance Association (“SBFA”) will soon publicly unveil a set of guiding industry principles, deBanked has learned, and they’ll fall under four broad categories that espouse transparency, responsibility, fair dealings and security.
Transparency will not just be about the disclosure of fees but also likely about the disclosure of process, methodology, and application rejection, among others.
The principles of fair dealings are unlikely to touch on pricing or costs. Instead they will be about a commitment to being truthful and fair in dealings with small businesses. That is sure to include marketing materials that are clear and understandable, an area that will undoubtedly extend out to the brokers they work with, if any.
While responsibility will speak to the notion of being a legally compliant good citizen when it comes to dealing with customers, security will be more than just the use of an SSL Certificate to access the website. Verifying the business’s legitimacy and confirming the owner’s identity are high on the list of a secure process, deBanked has learned.
SBFA members already adhere to a set of standards and have since the group was formed eight years ago. Their new white paper will serve to codify them in a way that others can adopt and conduct themselves to accordingly.
The white paper will be the first major achievement of the organization since Stephen Denis came on as the executive director in mid-December. Denis is the former deputy staff director of the U.S. House Committee on Small Business.
“The goal is to start from scratch and take a look at everything the association is doing,” Denis said in deBanked’s previous magazine issue, “and to really build this out to a robust group that represents the interests of small businesses.”
In another interview conducted for that story, SBFA president and founder David Goldin explained that he had been troubled by misconceptions over the industry’s prices. “Most people don’t understand the economics of our business,” he said.
The SBFA also plans to revamp their website in the near future.
Will Marketplace Lending Revert Back to Peer-to-Peer Lending?
March 28, 2016
Institutional investors wanted higher yields on Prosper’s latest bond offering, an entire five percentage points higher, according to the WSJ. This wasn’t necessarily brought on by performance either. Instead the once voracious appetite for all things online lending is being tempered by uncertainty.
Bain Capital Ventures partner Matt Harris told the WSJ that online lenders will need to replace the easy hedge fund money by “longer-term capital.” Normally, that would include traditional bank lines and credit facilities, but moving that direction could irreversibly sever the ties with their peer-to-peer roots and image.
Peer-to-peer (p2p) lenders embraced Wall Street’s easy money to scale, rationalizing to the peers on which they were founded that this was all necessary to change the status quo. The road to the sharing economy utopia required hobnobbing with the very institutions they were set on disrupting, they said. The P2p term wasn’t compatible with this narrative so it was replaced with “marketplace lending,” which helped it retain its Silicon Valley feel and gave it the range to argue that hedge funds and peers were virtually the same thing since they were both buyers in a new-age marketplace.
But early this year, something started to happen. Loan originators like SoFi (which was never peer-to-peer) could not sell loans fast enough. One solution they came up with was to launch their own hedge fund to buy their own loans. SoFi CEO Mike Cagney said, “In normal environments, we wouldn’t have brought a deal into the market, but we have to lend. This is the problem with our space.”
But blaming financial institutions for pulling back credit is a scenario that has played out thousands of times in history. One only need watch The Big Short to connect why it’s dangerous for a lender to depend on the institutional credit markets. That’s where the peer-to-peer model was supposed to come in, a new way for a new day without Wall Street to prevent these problems.
But it’s not too late to go back. Lending Club for example, has capped their wholesale channel (the institutional portion) at 50%. They’ve kept more than 100,000 retail investors and intend to grow that even larger. “We’ve always been more exposed to retail, and I think we want to keep it that way,” said Lending Club CEO Renaud Laplanche to the Financial Times. “We’ll probably see that as a competitive advantage, as a source of stability and predictability, particularly in an economic downturn,” he added.
Prosper meanwhile has depended almost entirely on the institutional channel, an astounding 92% of their loans were sold to that category of investors. It’s a far cry from the slogan that appeared on their website back in 2007. “People-to-people lending. It’s an old idea that’s new again,” it said. Today it says, “We connect people looking to borrow money with investors.” Those investors are predominantly Wall Street.
But what to do when Wall Street will one day no longer be interested? It’s not too late to go back in time.
“Borrow money from people just like you,” said Prosper’s website nine years ago. People just like you might not suddenly decide they want five percentage points more. Peer-to-Peer implied a human aspect to the marketplace, that empathy played a role in a world where Wall Street had always been stone cold.
Will the industry revert back to the people? Or will ideas such as starting your own hedge fund to buy your own loans rule the day?
Why Square Ditched Their Merchant Cash Advance Program
March 27, 2016
Square did $400 million in merchant cash advances last year. Now they are no longer even offering them. To fill the void, they’ve partnered up with Celtic Bank to issue a unique kind of merchant loan, one in which borrowers have a fixed term to repay but make their payments daily by diverting a percentage of every transaction they process to Square.
But why make this change? After all, Square reported that its merchant cash advances typically tended to cycle through to completion in approximately nine months despite there being no fixed term. Their loans will have terms of 18 months, almost ensuring that money will turn over slower, not faster.
Todd Baker, the managing principal of Broadmoor Consulting LLC, says it’s a P/E play. That’s because as part of the change, Square will not be keeping the bulk of the loans on their balance sheet. Instead, they’ll be bundled together and sold to institutional investors. That positions them to be an originator or marketplace dependent on fee income instead of a lender. “Banks and lenders trade at 12x-15x p/e while tech trades at infinity,” Baker said.
Square likely encountered trouble trying to bundle up merchant cash advances because their legal standing across states is not as defined. Celtic Bank-issued-loans however are considered to be rather protected under federal preemption laws established under the Federal Deposit Insurance Act.
But that’s not the whole story either
Online lenders were widely criticized in the wake of the San Bernardino attacks after it was learned the terrorists obtained a loan from Prosper. “The issue may end up being whether marketplace lenders are too easy of a source of cash to finance terrorist attacks,” said Guggenheim Partners analyst Jaret Seiberg in a research letter back in December.
Square’s merchant cash advance program had very little underwriting. The focus was almost entirely on a merchant’s historical sales activity. No credit check was required, nor did applicants have to supply a photo ID or financial statements. This one-click process may have played a major role in originating $400 million in merchant cash advances in 2015, but it probably raised red flags with regulators.
Notably, the new Square Capital application page makes light of this issue. “To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain verify and record information that identifies each person who opens an account,” it says. “What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license and other identifying documents.”
There’s easy and then there’s too easy. For Square, $400 million a year in merchant cash advances may have been proof of concept for demand but also proof that it was time to slow it down just one notch and make sure they aren’t being reckless.
Few would be impressed by one-click no-underwriting funding if it meant money flowed into the coffers of terrorists even once. Similarly, institutional investors would not be too happy if it was deemed that all of the California merchant cash advances in a bundle they bought were subject to a class action lawsuit. Square can now focus on what they are known for, technology, and perhaps improve their market cap.
By moving away from merchant cash advances, Square has killed at least three birds with one stone. Long live the bank charter model.
Square Swaps Out Merchant Cash Advances for Business Loans
March 25, 2016
Square’s merchant cash advance program is already among the biggest in the world, but they’ve got even bigger plans, or maybe just different ones.
The company announced on Thursday that they will now be offering true business loans as well through a partnership with Celtic Bank, an industrial bank chartered by the State of Utah. The WSJ reports that loan payments will also be made via a split of future credit card sale activity but with the caveat of there ultimately being a fixed term. This is coincidentally how PayPal’s loan product works.
The WSJ makes it seem as if both products will run alongside each other, but a Square merchant revealed to deBanked that all of the language on Square Capital’s application portal has changed from advances to loans. Even the promotional materials have changed to reflect that it may take more than just an automated review of historical credit card sales activity to get approved and funded. Also, all Square loans are subject to credit approval, whereas no credit check was required for merchant cash advances. Applicants may be required to produce a photo ID and other documents for further verification. North Dakota businesses are prohibited from borrowing altogether.
Square’s loans require that merchants process at least $10,000 or more a year. Borrowers must pay at least 1/18th of their initial loan balance every 60 days. PayPal by comparison requires that their borrowers pay down 10% of their loan amount every 90 days.
A Square merchant was not able to locate any mention of the merchant cash advance program. It’s all loans now.
Did Square really just add business loans to their arsenal or have they traded MCAs for the bank charter lending model?
Update: 3/25 2:54 PM Square confirmed that they have indeed replaced their merchant cash advance program with the loan program.
Our Square Capital program is transitioning from merchant cash advances to flexible loans. https://t.co/oUyRtNgVSS pic.twitter.com/ELXC7ayJyU
— Square (@Square) March 25, 2016
