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
Plot Twist: Obama Administration to Comment on Madden v Midland
March 22, 2016
The U.S. Supreme Court wants to know what the Obama administration thinks of the Madden v Midland case.
The potential impact of Madden v Midland on marketplace lending was finally starting to fade away until the U.S. Supreme Court made an unexpected move yesterday. “The Solicitor General is invited to file a brief in this case expressing the views of the United States,” the docket states. At issue is the scope of preemption under the National Bank Act (i.e. can you buy a loan issued by a nationally chartered bank that legally circumvented state usury laws at the time it was originated and still enforce the interest rate?)
The Solicitor General is responsible for arguing cases on behalf of the U.S. government in the U.S. Supreme Court. The position is appointed by the President and confirmed by the Senate. That seat is currently filled by Donald B. Verrilli, Jr., an Obama appointee and the man credited with saving Obamacare. He was the attorney that helped persuade the Supreme Court to treat the individual mandate of the Patient Protection and Affordable Care Act as a tax and not as an exercise of Congress’s power under the Commerce Clause.
Any brief filed is bound to become politically significant since the Obama Administration is on its way out. Therefore any views it expresses in the next few months may not be the same views of the next administration scheduled to be sworn in ten months from now.
Madden v Midland will have no bearing on merchant cash advances and little if any bearing on commercial marketplace lenders. That’s because most not only work with state chartered banks instead of nationally chartered banks, but also face more favorable state usury laws since they do not lend to consumers.
Lending Club Performance Data Has Obvious Errors, Investors Say
March 20, 2016There’s something wrong with the returns Lending Club is dangling in front of investors, some diligent note buyers say. And the numbers are so far off, that it’s being chalked up as a bug, instead of something nefarious.
On the “Understanding Your Returns” page, investors can view how their portfolio stacks up against all others on the platform with the same weighted average interest rate. Most investors will end up somewhere in the middle, but a few are outperforming the rest with seemingly impossible results.
The flawed chart, which I could duplicate myself, shows investors supposedly making over 20% annual returns on seasoned portfolios where the weighted average interest rate of notes is between 12.22% and 14.22%. But how can an overall return be so much greater than the interest rates that make up the portfolio? They can’t be. But Lending Club’s chart tells a different tale.
With projected defaults, the adjusted returns should be lower than the weighted average interest rate, certainly not much higher and definitely not double.
On the Lend Academy forum where this was noticed, at least one investor said they emailed Lending Club on March 18th to alert them to the impossible performance data.
For now, the page that is meant to help investors understand their returns, is doing anything but.
Update 3/22: Lending Club has reportedly told an investor asking about this discrepancy that it is indeed a bug and will be fixed.
Update 3/24: This has mostly been fixed
Merchant Cash Advances Not Governed by Truth in Lending Act, Fed Says
March 16, 2016
Ellyn Terry, an Economic Policy Analysis Specialist at the Federal Reserve Bank of Atlanta, wrote on the Fed’s blog that merchant cash advances are not governed by the Truth in Lending Act.
“Because an MCA is structured as a commercial transaction instead of a loan, it is regulated by the Uniform Commercial Code in each state instead of by banking laws such as the Truth in Lending Act,” wrote Fed analyst Ellyn Terry on March 15th. “Consequently, the provider does not have to follow all of the regulations and documentation requirements (such as displaying an APR) associated with making loans.”
While Terry applies some incorrect characteristics to describe the nature of the parties in a future receivable purchase transaction (by calling them a lender and borrower instead of a buyer and seller), she was able to broadly describe the nature of MCAs.
“MCAs have been around for decades, but their popularity has risen in the wake of the financial crisis,” she wrote. “Typically a lump-sum payment in exchange for a portion of future credit card sales, the terms of MCAs can be enticing because repayment seems easier than paying off a structured business loan that requires a fixed monthly payment.”
Retail Investors Can Invest In Business Loans – Thanks To StreetShares Regulatory Approval
March 16, 2016
If not being an accredited investor has kept you on the sidelines of marketplace lending, you’ll soon be able to invest in business loans on the StreetShares platform, thanks to a special regulatory approval by the SEC. While you’re not going to the earn the yields you’d get with merchant cash advance (MCA) syndication, StreetShares makes loans for as short as three months. The available products are 3, 6, 12, 18, 24 & 36 month term loans, according to their website, which are desirable lengths for investors used to MCA. The Funding Circle platform by contrast, requires investors be accredited and loan terms range from 1 to 5 years. If you aren’t eligible to invest through Funding Circle, well that is what will make StreetShares different.
Unlike the laborious process that Lending Club and Prosper took with the SEC to sell loan performance-dependent notes to unaccredited investors, StreetShares got a special approval under the JOBS Act’s Regulation A+. That only allows them to raise up to $50 million over a 12-month period so investing availability may be limited.
In a press release, the company specified that “repayment to investors is not tied to the performance of a particular underlying loan.” The LendAcademy blog is reporting that “StreetShares will provide a vehicle for investors to become diversified through some kind of fund” and that details should be revealed around the time of the LendIt Conference.
Though company CEO Mark Rockefeller of StreetShares might not remember this, we spoke during a lunch break at LendIt 2014 when his company was a brand new startup. At that time, he told me about his “veterans funding veterans” lending marketplace model where the costs would be much lower than what can be experienced in the merchant cash advance industry. Since then his company has won the 2015 #1 global Best Investment Award from Harvard Business School and is now the first small business lender to get approval under Regulation A+.
One other person that is trying to bring small business lending investing to the unaccredited investor community is hedge fund manager Brendan Ross. Ross’s Direct Lending Income Fund filed an N-2 with the SEC at the conclusion of last year to become a “40 Act fund,” a special investment company permitted under The Investment Company Act of 1940 that can accept investments from retail investors. In January, Ross explained to CNBC during an interview that the fund’s structure would be converted so that investors become shareholders in what would essentially be a lending business.
StreetShares plans to officially debut their new program at LendIt next month.
Google Culls Online Lenders – Pay or Else?
March 15, 2016Can you become one of the biggest or most successful online lenders without Google? A search layout update may be inadvertently culling the herd.
In late February, Google eliminated ads from the right side of the page while adding another layer to the top and bottom. When factoring in features like site links, the effects on organic search has been devastating. Non-paid links are now entirely below the fold for many commercial keywords, which means users may limit their selections entirely to ads. Here’s an example of a full screen browser window on a Macbook Air when searching for Business Loans:
Brad Geddes, a Google Adwords marketing author, expert and consultant, has said the Click-through rate (CTR) on this new 4th ad placement is skyrocketing. “Depending on the keyword, position 4 is going to have a 400%-1000% CTR increase,” he said on Webmaster world. And while side links and bottom links were never a huge factor anyway (less than 15% of click-throughs), Geddes believes a consequence of this change is that fewer ad slots means higher cost bids to rank on the 1st page. “Companies with thin margins are going to have a lot of words fall to page 2,” he wrote.
In summary: Fewer ad placements, higher costs per click, decreased likelihood of organic click-throughs.
And the online lending industry is already feeling the burn. Several funders and ISOs on the commercial side have told deBanked in confidence that the online lead gen battle has been lost or that they have been temporarily sidelined by the increase in costs. At least one funder is refocusing their efforts entirely on the ISO channel after a horrible experience with Pay-Per-Click.
And it’s not just the costs, it’s the quality of leads, they say. The searchers clicking their expensive ads and running up their bills sometimes literally meet none of the qualifications their ads stipulate. Yet many searchers click anyway, rendering the ads’ carefully scripted messages moot. One study might explain why that is. In it, users spent around .764 seconds considering the first paid search result and a total of only 4.5 seconds scanning the first five results. That’s not a whole lot of time to read each ad, digest them and consider whether or not there’s an appropriate fit.
On one industry forum, ISOs have reported that the cost of acquiring a merchant cash advance or business loan deal from Pay-Per-Click is ranging from $700 to $1,200. “PPC for premium keywords as high as $40 at times. Ugly. Real ugly,” one user wrote. Another user wrote, “It’s not just Adwords that is saturated. The whole market is saturated. Lenders and the onslaught of new brokers are making it tough. Lenders with programs like Funding Circle and Kabbage, and with all the advertising money in the world to burn and get direct traffic.” And still another believes that online ads are simply inviting the lowest hanging fruit. “Internet leads have the highest level of fraud,” said one sales manager.
Notably, many of the top 8 funders are only competing for a limited number of competitive keywords or may not even be running Adwords at all. PayPal and Square for example, focus only on their existing payment processing customers despite being “online lenders.”
It’s too early to tell what effects Google’s ad changes will have on the online lending industry, though a couple of companies who were paying just enough to extract clicks from side ads have indicated the change is for the worse and they have suspended their campaigns.
The natural alternative to paid search, organic search, is seldom discussed anymore as a realistic strategy these days, in part because the rankings might be rigged anyway.
One irony that’s pervasive in the online lending industry is that borrowers are being targeted offline where it’s potentially more affordable. In a discussion thread that garnered 76 posts last fall, ISOs and funders suggested that direct mail, referrals, UCCs, cold calling, radio and even going out and shaking hands, were pegged as “what’s next” for marketing. Pay-Per-Click was only mentioned once and only in the context of it being something that had long ago been made too expensive for small and mid-size companies.
The cost of making these things work might be why so many funders are hoping that brokers can figure it out. “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,” said Nulook Capital’s Jordan Feinstein in an interview with deBanked last month.
With Google becoming even more competitive now though, perhaps United Capital Source’s Jared Weitz summed it up best. “Marketing is getting more expensive and only the ones who can afford to pay can play,” Weitz said.
The Top 8 Small Business Funders
March 13, 2016Whether they do loans or merchant cash advances, here are the top 8 alternative small business funders:
This list originally appeared in a story about Square’s Q4 Earnings and has been republished individually here in case anyone missed it. The figures were either disclosed to deBanked directly or are a best estimate based on publicly available materials. This list is not comprehensive and in instances where no reliable data could be obtained, the company was just omitted. A larger list will appear in deBanked’s March/April Magazine issue so make sure you subscribe if you haven’t already.
Bank Strikes Back Against Online Lenders – Offers 5 Minute Business Loans
March 12, 2016Online lenders have new competition, a 198-year-old bank based in Boston, Eastern Bank. Worried that technology would leave them in the dust, Eastern has invested millions in an application and underwriting system that can fund merchants up to $100,000 in 5 minutes. “The 55 requests for information on the old form have been replaced by eight,” according to the WSJ.
Rates range from 6.99% to 9.99% and it’s only available to existing customers. However a new customer only need open a checking account to become immediately eligible for it. One out of the 36 original borrowers on this program has already become delinquent on their loan, a statistic mostly within their expectations, the WSJ reports.
Eastern makes no mention of their speedy capabilities on their website, which still has the old paper application available for download.
Notably, former NFL player Doug Flutie, Eastern Bank’s spokesman for over 10 years, is scheduled to appear on the upcoming season of Dancing With the Stars.
“Me, Too” Lenders Something to Worry About, Says Former OnDeck Investor
March 11, 2016
Lending Club, SoFi and OnDeck will endure, wrote Matt Harris, a former OnDeck board member and investor, and current Managing Director for Bain Capital Ventures. In a blog post that approached 4,000 words, Harris admits that he has not invested in a single lender since OnDeck.
“It is still possible, though I believe increasingly unlikely, that marketplace lending will be a durable innovation,” he wrote. He bases that on the assumption that origination platforms with no skin in the game are not sustainable over the long term and that what really made companies like Lending Club special is that it has “scale, a brand in the capital markets for producing high quality assets, and an unbelievable management team.”
All of the other perceived advantages don’t make sense, he argues. The average cost of funds for a bank “is 0.06%, assuming they fund their loans using deposits. OnDeck’s funding costs for its assets averages 5.3%. Lending Club has paid a median return to its asset purchasers of 7.4%.” Banks have lower operating costs as well. “I’ll point out that most of the bank expenses they highlight are fixed expenses like branches and compliance, which makes that expense burden irrelevant to the profitability of the marginal loan,” he wrote.
Even on technology, Harris says banks spend less, and on big data credit scoring, he says a lot of the factors marketplace lenders might find useful in predicting performance cannot be used legally because they end up correlating with a protected class such as race, whether it’s directly or indirectly.
“Things are going to get harder before they get easier,” Harris wrote, though he thinks companies like OnDeck and Lending Club are positioned to last. Everyone else who copied their model is in shaky territory. And yet through it all, he is optimistic. “For the first time in a decade, I’m feeling like it’s a great time to be starting a lending company,” he said.
