Business Lending
CA Bill to Revise Definition of Broker: 6/27/18 Hearing Transcript & Video (AB 3207)
July 29, 2018AB 3207 – CA Bill to Revise the definition of broker (6/27/18)
[0:00:02]
Bradford: We started as a subcommittee. We've already heard Assembly Member Arambula’s Bill AB 1289. Do we have a quorum? We’re gonna ask the secretary to call the roll and establish the quorum.
Speaker: Senator Bradford.
Bradford: Here.
Speaker: Bradford here. Vidak.
Vidak: Present.
Speaker: Vidak here. Gaines. Galgiani.
Galgiani: Here.
Speaker: Galgiani here. Hueso.
Hueso: Here.
Speaker: Hueso here. Lara.
Lara: Here.
Speaker: Lara here. Portantino.
Bradford: Quorum is established. So, we have only one other vehicle that will be heard today. That’s AB 3207 by Assembly Woman Limon and she is here present. And when you’re ready, Ms. Limon, you can make your presentation.
Limon: Great. Thank you, Chair. I wanna start off by taking the committee amendments and committing to work on any concerns addressed in the committee analysis. AB 3207 will provide important consumer protections for the thousands of consumers and small business owners who are served by finance lenders and brokers licensed under the California Financing Law. Under existing law, the definition of broker is vague and circular, leading to the confusion from lenders about which entities they can partner with when arranging loans. Further, the definition of broker in existing law was formulated long before the rise of the internet and the evolution of online lead generation. So, our laws need to be updated with this online activity in mind. Lead generators provide valuable marketing services to a wide range of industries and this bill contains a specific exemption clarifying that distribution of marketing materials or factual information about a lender is not a broker brokering activity. However, many online lender generators that serve the lending industry provide more than just marketing services. These entities act as brokers when they bring borrowers and lenders together to arrange a loan based on confidential data provided by a consumer or small business owner. This bill will allow online lead generators to continue to operate in California. Simply, this bill requires 3 basic things from these companies. One, get a business license from the State Department of Business Oversight; two, provide transparent disclosures to the customers; and three, obtain your customer’s consent before selling and transmitting their confidential data. Arguments from the opposition that this bill will cause lead generators to leave the state raise an important question. Why would a bill focused on licensure and transparency cause a small business to leave a very lucrative California market? Over the past 5 months, I have worked extensively with lenders and lead generators to ensure that this bill appropriately addresses the consumer protection concerns in our lending markets without placing unnecessary burdens on the businesses that work in this area. None of these companies have threatened to leave the state. In fact, many of them have applauded the efforts to bring clarity to existing law and bring bad actors out of the shadows and into the light. This bill has the support of consumer and commercial lenders, the Department of Business Oversight, and a coalition of consumer advocates who are here today to voice their support. With me, I have Adam Wright, senior counsel in the enforcement division in the Department of Business Oversight, to answer any questions from the committee.
Bradford: Witnesses and support, please come forward. State your name, organization.
Martindale: Chair Member, Suzanne Martindale with Consumers Union. We do support this measure and really appreciate the author's leadership in seeking to ensure that our laws stay up to date in terms of evolving technologies. Of course, a lot of lending now happens online and the business models have shifted, but that does not mean that consumers are not, you know, any less entitled to receiving protections when third parties acting on behalf of lenders are marketing to them and helping facilitate the origination of loans and also in particular handling sensitive information and the kinds of things that we wanna always ensure are protected. So, we understand that there’s potentially more discussion to be had about finding the sweet spot here, but I really, really think that the time is now to move forward and ensure that the DBO has the enforcement tools that it needs to properly regulate the space so that consumers who receive online loans are no less protected than those who get them in brick and mortar stores. So, for these reasons, we support and request an aye vote.
Bradford: Thank you. Additional witnesses and support.
Coleman: Good afternoon. Ronald Coleman here on behalf of the California Low Income Consumer Coalition (CLICC). Also here in strong support.
Bradford: Thank you.
Aponte-Diaz: Hi. Graciela Aponte-Diaz, Center for Responsible Lending. Also in strong support.
Bradford: Thank you.
Joyce: Hello. Pat Joyce on behalf of Credit Karma. Credit Karma actually has a neutral position on the bill and wanted the opportunity to thank the author and sponsors of the bill for working with us to address our concerns and allow us to remove our opposition. So, thank you.
Bradford: Thank you very much. Next witness.
Preity: Sumanta Preity on behalf of OnDeck Capital. In support of the bill.
Bradford: Thank you.
Glad: Margaret Glad on behalf of NerdWallet.
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We’re also in that tweener category. We’d been working very productively with the author's office and particularly Mr. Burdock. We appreciate their amendments that they’ve made to date to address NerdWallet’s concerns. We have a couple of more issues related to disclosures as the bill currently stands. They are mandated disclosures that don't represent our business model. We’d have to tell consumers we’re doing things we aren't doing. So, we're continuing to work with the author and his and her staff to resolve those issues. We appreciate the committee's thorough analysis and all the work and hope to come to resolution of our remaining issues.
Bradford: Great. Thank you.
Pappas: Emily Pappas on behalf of Lending Tree. Similar position to what Margaret just said. Our client has generally supported the framework on this bill. We virtually had an opposed and less amended position due to some of the disclosure requirements. However, we learn from the author's office today that they'd be willing to take the amendments that relieve us of our concerns. Therefore, we’ll switch to a neutral position.
Bradford: Thank you. Any additional witnesses in support? Witnesses in opposition.
Quinton: Hi. David Quinton on behalf of the Online Lenders Alliance. I do have a clarifying question. We are in strong opposition as the bill was in print. We've heard discussion about amendments. If all of the amendments that were in the analysis were accepted, I think that moves us to neutral, but we're not clear on that at this point. So, I’m not sure how to proceed.
Bradford: Those are the amendments that we’re referring to that weren’t announced as well as we’re addressing the concerns that we’re raised as well in the bill.
Quinton: Would that be possible so we can—
Bradford: I’m sorry?
Quinton: Oh, she was— I’m sorry. I was listening.
Bradford: Ms. Galgiani.
Bradford: Yeah. Yeah. If you want to, Ms.—
Quinton: Okay. Thank you.
Galgiani: I would just like to clarify with the author the amendments that have been agreed to and looking through the analysis and then trying to complete which all of those are. I wanna make sure that we're on the same page; the author, the members, the opposition. And there are two concerns that I’ll start with that we don't have expressed amendments for, but we're hoping that you'll work with the opposition and your stakeholders over the July break and we can come back and address those. And one is dealing with lead generators being designated assets as opposed to being referred to as brokers and that those lead generators hold the generator licenses. That's a concern. And the other concern is imposing the same standard of liability on lead generators for the acts of those from whom they buy leads as the bill imposes on lenders for the acts of lead generators from whom they buy leads.
Limon: So, I can say that we continue the conversations. it's definitely not a problem. I think that, you know, this bill has gone through 6 rounds of amendments. And so, I think that's reflective of the fact that we continue to have the conversation. On the two separate license definitions, what we know is that creating two separate license licenses for brokers and lead generators would require many companies to attain two separate licenses from the DBO. Additionally, drafting a separate regulatory framework for lead generators would also add confusion for the businesses that would need to decide whether they need a lead generator or a broker license. The bill does require to have one license right now. And the bill provides specific disclosure requirements that makes sense in terms of the online generation world. So, that's kind of where we've been thinking about it in terms of that. In terms of the lender liability, the bill and existing law hold licensees accountable for their own actions. So, both the lenders and the brokers are liable for violations of the law that occur within their companies. For licensed brokers who choose to obtain referrals from unlicensed third party, the bill requires those brokers to establish policies and procedures intended to ensure that those unlicensed parties uphold the consumer protections provided by the law. The issue of the lender liability raised in the analysis is a red herring. Just as existing current law, the bill would continue to practice the practice of holding licensees accountable for their own violations. And I just wanna again say that that's current law.
Galgiani: Okay. So, am I hearing—
Limon: You are hearing that we are happy to continue those conversations. You brought up the two concerns and I wanted to share the feedback on those two concerns.
Bradford: But we're still open to move forward in having— resolve our differences as it relates to the two— those two concerns. We’re not gonna split the baby here today, but we’re gonna try to figure out how to move forward on those concerns.
[0:10:03]
So, we have that commitment as we move forward to address it in a way that we all come together. Am I correct?
Limon: You have the commitment to continue the conversation to try to figure out a way to address it.
Bradford: Yes, sir.
Quinton: So, on the issue of the two remaining issues, so we thank the author for taking the amendments as presented by your consultant in the analysis. But of the two remaining issues, I believe the broker issue is one that we can work with. That's fine. The devil is in the details. The problem is with this issue, as you know, the details have details. It’s a very, very complex issue. So, that’s our one concern, but we can work with the broker issue. I think we’re okay with that. That's fine as it is. However, being held for strict liability for the actions of a third party affiliate is a very far reaching legal standard and we have really serious concerns with that. So, we just wanna clarify if it is still that we are held with strict liability for the actions of a third party affiliate like we would still have to oppose the bill with that. So, I just want clarification on that, Mr. Chairman.
Bradford: Well, as far as that concern, I'm hoping we're gonna sit down at the table again during the break and whittle that out and figure out how we come to consensus. And I understand your concerns and that's why they're still listed as concerns. They haven't been amended in the bill. But hopefully, going forward, we will find some solution or amendment to address that for you.
Quinton: So, I think at this point— to finish my statement and I’ll hand it over very briefly to Jason— at this point, I would say that we would still be opposed until we can see that amendment because that is a very, very serious issue that could hold us liable over issues we have no authority over. And I’d like to introduce Mr. Jason Romrell who is with Lead Smart, one of the leading lead generators in the State of California.
Romrell: Thank you. Chairman and committee members, thank you for allowing me to speak on AB 3207. The thing that I want to make clear, we’re a California-based lead generator. We have a sister company that has a DTL and CFL license. We’ve had those for the last 5 years. Our interest in this bill is not to oppose to bill. It’s to make sure that the good lead generators, the lead generators who function ethically are still allowed to function in fintech environment that is becoming the movement. If we don't do that, we are putting consumers at a huge disadvantage. In fact, we’re putting them at more risk than they’re at now. We have been involved in this discussion with the DBO, with members of the legislature, and even on the federal level for many years. So, the role that we play as a good ethical lead generator is a very important consumer protection role. We have the same objective as Assembly Member Limon. We have the same objective as the DBO. It's to protect consumers. So, the issues that we were facing prior to the amendments being put forward were in the details. There is no opposition to the concept. We want to be here to protect consumers, but it is the details. So, the one thing I do want to mention is lead generation is complex. There a lot of layers to it. It is not a one size fits all activity. And that is one of the challenges in crafting good legislation. So, I'm not going to go into the details that we had issues with because I think, in light of these potential amendments, everything has changed. But what I do wanna point out is the distinction between the good lead generators and the bad lead generators. The good lead generators already do a lot of what is in AB 3207. We get consent. We vet our lenders. We make sure the marketing message that goes to the consumer is accurate, truthful, and proper. We do a lot of that work, and it's time consuming, and it takes a lot of money and energy. The bad lead generators do not care. So, the risk we run with legislation is if we over legislate the good guys. We will. And Assembly Members Limon asked the question “Why would a small business leave California?” If we can't function without the threat of class action lawsuits, if we literally cannot comply with the details of a bill, we’ll move to other markets. If we do that, consumers are injured severely. So, my plea to this committee and to Assembly Member Limon is we are here. We are invested in the process. We want to get it right. We don't want to oppose the bill. We want to make it work for us and for California consumers.
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And that is our position, is to protect the people that we live and work with everyday.
Bradford: Thank you. Any additional witnesses in opposition?
Bauer: Paul Bauer on behalf of Elevate. I’m kind of in that tweener category that other people have step forward in. I just wanted to lend our voice to those of Mr. Quinton and Mr. Romrell who presented. And we also wanna see the bill be perfected as we move forward. So, I look forward to that work.
Bradford: Thank you. I appreciate it.
Sunley: Alex Sunley on behalf of the Small Business Finance Association. In opposition.
Bradford: Thank you.
Damar: Hi, Dominic Damar here on behalf of Innova. I share Mr. Bauer’s and [0:15:49][Inaudible] position relative to the amendments and look forward to working and hearing from the author on changes to be made. Thank you.
Bradford: Thank you.
Conaway: Good afternoon. This is Jerry Conaway on behalf of Lead Flash. And we're currently in opposition, but looking forward to seeing the amendments. And I'm working with the bill's author to make a great bill. Thank you.
Bradford: Thank you.
Smeltzer: Thank you, Mister Chair and members. Jason Smeltzer here on behalf of the California Financial Service Providers. Also the same position as Mr. Quinton. I would love to see the assembly member and work this out and remove our opposition then.
Bradford: Thank you.
Schriver: Rachel Schriver with the TMX Finance Family of Companies. We’re opposed to the bill in print, but certainly optimistic about finding a path forward.
Bradford: I appreciate it. Any additional witnesses? Any tweeners? All right. We’ll bring it back to the committee. Any questions by the committee members? Mr. Ric Lara. No. Oh. Oh okay. Ms.—
Lara: I just wanna move the bill, but I know Ms. Galgiani—
Galgiani: I wanted to finish and—
Bradford: Yes. Oh, go ahead, Ms. Galgiani.
Galgiani: We’ve done a lot of work on this bill—
Bradford: Yes, we have.
Galgiani: …today and I’ve been in two other committees today since 9 o’clock this morning. So, I wanna make sure we’re on the same page. So, the second item amendment that would provide exemptions from lead generator definition for administrative and clerical tasks, credit bureaus, internet search engines, and social media platforms, has that amendment been agreed to? That's on Page 14B in the analysis. Page 14B addresses the concern. And so, the amendment would be to provide an exemption for those clerical staff, etc.
Wright: And this is Adam Wright on behalf of the DBO. When it comes to that request, we do not believe it's necessary because of the way that the activities are already drafted. We do not believe that it covers search engines or social media advertisements because those two mediums of advertisements do not send actual consumer data to lenders and they are not paid on a per successful loan basis. Thus, they would not be caught up on the activities under a broker.
Galgiani: Okay. Okay. So, what is the amendment that you're taking then because it sounds like no? Am I right or— Maybe we should start with the author sharing with us the amendments that she’s taking because—
Bradford: You know, we’ve spent a whole lot of time in all due respect to the author and to those who are opposing this bill, but a lot of time have been invested here. And we wanna have a vehicle that first protects consumers, but also allows the industry to thrive and survive here in California. And I think the amendments that we've put forth I thought we had understanding and a commitment that we're gonna continue to move forward and keep this vehicle alive and understanding that we have some kind of agreement, but—
Limon: So, here's the deal, right? So, if you look on Page 13 and it says amendments and it describes some of the issues, but there's not specific amendments. So, according to the author’s office, the use of the word “expresses” intends to [0:18:54][Inaudible] consent. Right? We can go on. And so, I think that that’s what we have to continue talking about. Because in the areas where there is very specific things, it’s easier to say yes or no. In the areas where it talks about a concern, but it doesn't give you actual language, that's where we're trying to figure out how.
Bradford: And we’re not gonna find that extra language here today. What we're trying to get clarity on is what has been put forth in analysis those concerns that were raised as well as those amendments that we suggested that we get agreement on that today and we’ll work out the details moving forward with the understanding that we come to agreement, we’ll pull this bill back to the committee.
Limon: Yes. We can provide clarity for all of these amendments. We are just looking for actual language.
Galgiani: Are we drafting those amendments in committee? Committee staff will draft those amendments.
Bradford: Yes.
Limon: Can we draft the amendments and provide them to you?
Bradford: No. I think this committee will work in concert with you in drafting those amendments. That's our understanding of finding common ground on what we have already in analysis.
[0:20:01]
Limon: As long as our office and as the author I’m able to also be part of that, I—
Bradford: That’s our understanding that we’re gonna work in collaboration as we move forward on this thing.
Galgiani: Okay.
Bradford: Galgiani.
Galgiani: Okay. Next, item #4 on my list of concerns in amendments, define term “express consent” and provide the express consent provided by a prospective borrower to one entity satisfies the requirement for all other entities that purchase a consumer's confidential data to obtain express consent and that is addressing the concern outlined on Page 13A of the analysis.
Limon: So, back to the concerns, we’re happy to have a conversation. I’m trying to go to the amendments. So, we are happy to clarify it. So, here’s the confusion, right, that you have some amendments and we've agreed to take those and to work together and then you have the concerns. And the concerns I think need a discussion. We weren't prepared to go back and forth on the concerns here.
Bradford: We’re not trying to do that. So, we're trying to get clarity on those amendments that have been identified, but also address those concerns moving forward as well the two areas of concerns that are being raised so we can keep this vehicle alive and continue our discussion. So, we're—
Limon: We’re I think on the same page that the concerns we need to keep talking about the amendments, we are agreeing to work together on language.
Bradford: I understand that. We have specific amendments that we’re trying to get agreement on today. The concerns, we can work out. You know, that's going forward, but the amendments that we have before, today, we’re trying to get clarity on it. Senator Lara.
Lara: Without skipping over Senator Galgiani, my understanding is that she's already agreed to the amendments.
Galgiani: And we're trying to clarify what those amendments are—
Lara: Okay.
Galgiani: …specifically so that we don't just leave it to the fact that there's going to be a discussion—
Lara: Understood. Understood.
Galgiani: …in July. We want clarity on very specific amendments.
Limon: I started by saying I agree to the amendments. And so, if there are, you know, clear amendments, that's easy because there's language. If there's not language, we have to have a discussion. And what I heard was that we were simultaneously gonna draft those, that language.
Galgiani: And I'm trying to go through those amendments item by item so that we're on the same page and the two that I outlined—
Bradford: Ms. Galgiani, I think what we’re gonna have discussion on and negotiations is on the concerns, but the amendments or the amendments that we’re trying to get commitment on today, the amendments that we have that we're in an analysis that were clearly spelled out in analysis, you're taking those.
Limon: Yes.
Bradford: Great.
Galgiani: And the committee staff is drafting this.
Bradford: Yes. Yes.
Limon: With collaboration from our office so we—
Bradford: That’s right.
Limon: …can draft them together.
Galgiani: Okay. Okay. So, I’ll continue to the fifth one. Requiring that the entity that collects a prospective borrower’s confidential data to provide that borrower with the disclosure described in section 22348. So, in essence, the original point person who collected the personal information is the person who is required to provide the disclosure.
Limon: Uh-huh.
Galgiani: Okay. Number 6, add two additional statements to the disclosure described in section 22348 (A) lenders to whom the prospective borrower is referred may separately contact the prospective borrower and (B) lenders to whom the prospective borrower is referred may separately contact the prospective borrower.
Limon: Yup.
Galgiani: Okay. Number 7, delete the disclosure required under Section 22338.5.
Limon: So, wait—
Galgiani: Okay. And that’s on Page 23—
Limon: You know, I have agreed to the amendments whether it’s clear language. And so, yeah.
Bradford: Okay.
Limon: I think that this feels like it’s leading into a conversation and I just— We wanna have that conversation.
Bradford: Well, I’m gonna go on record right now. The amendments that we have before that was in analysis, I wanna be clear those are the ones you’re agreeing to and we’ll continue to work out the concerns. Am I correct?
Limon: Yes.
Bradford: And if we deviate from that, we will pull the bill back to this committee.
Limon: Right. And we will work together on drafting the language so that it's not just— Right?
Bradford: Drafting the language as it relates to the concerns. Yes. If we all have agreement on that—
Lara: [0:24:51][Inaudible]
Bradford: Exactly. So, we’re taking the amendments that are in the committee’s analysis.
[0:25:00]
That’s the motion you're putting forth, Ms. Galgiani.
Galgiani: Yes.
Bradford: Yes. Yes. Okay. Great. Any additional questions or comments by committee?
Speaker: As amended.
Bradford: As amended. Ms. Limon, would you like to close?
Limon: Unlicensed brokering activity poses a risk to consumer’s financial well-being and this bill will ensure that California's financial regulator can enforce the consumer protections under the California Financing Law. For this reason, today, I ask you for an aye vote.
Bradford: So, we have a motion and it’s do pass as amended to appropriations based on committee analysis. And we will move forward in addressing the concerns as we move forward. Am I correct? So, that’s the understanding then, Secretary, of our amendment. Madam chief consultant, that’s our understanding? Great. All right. Do pass as amended and committee analysis. Madam Secretary, please call the roll.
Speaker: Assembly Bill 3207, motion is do pass as amended to appropriation. Senator Bradford.
Bradford: Aye.
Speaker: Bradford Aye. Vidak.
Vidak: No.
Speaker: Vidak no. Gaines. Galgiani.
Galgiani: Aye.
Speaker: Galgiani aye. Hueso.
Hueso: Aye.
Speaker: Hueso aye. Lara.
Lara: Aye.
Speaker: Lara aye. Portantino.
Portantino: Aye.
Speaker: Portantino aye. We have 5 to 1.
Bradford: All right. Your bill is out.
Limon: Thank you.
Bradford: Thank you. And we look forward to our continued discussion and work on this issue.
[0:26:28] End of Audio
90% of PayPal Merchant Advances and Business Loans Are Performing On Pace
July 28, 2018
As of June 30, 90.6% of PayPal’s merchant advances and business loans were performing within the original expected repayment period, the company disclosed this week. That equated to $1.27 billion worth of deals. Only 4.2% of their merchants were more than 90 days behind their expected pace.
PayPal had $1.4 billion in outstanding merchant loans, advances, interest and fees receivables.
Swift business loans are charged off when they are more than 180 days past due. The Working Capital products (which can be loans or advances) are charged off when the merchant is 180 days past the company’s original expectations and no payment has been made in the last 60 days OR when the merchant is 360 days beyond the company’s original expectation.
Swift Business loans are generally repayable over 3-12 months. Working Capital advances are generally expected to be satisfied within 9-12 months.
After PayPal acquired Swift Financial, the company began marketing itself to small businesses as LoanBuilder. A flyer obtained by deBanked showed that it was being marketed with loan amounts of $5,000 to $500,000 that could be funded in as quick as 1 business day.
Thinking Capital, Equifax Create Canadian Small Business Credit Grades
July 10, 2018
Equifax and Thinking Capital today announced the launch of BillMarket, a service that will now provide Canadian small businesses with a credit grade, A through E. CEO and cofounder of Thinking Capital Jeff Mitelman told deBanked this is revolutionary because, up until now, a Canadian small business’ creditworthiness has usually been based on the personal credit score of the small business owner.
“BillMarket creates a new language of credit for small business in Canada,” Mitelman said. “For the first time, there is a practical way to talk about and put a dollar value on small business credit in Canada. BillMarket expands the purchasing power for Canadian SMBs and eliminates friction in the supply chain.”
Equifax offers this new credit grade for free, and simultaneously, a small business owner is offered a supply chain financing deal by Thinking Capital. Specifically, if a small business owes money to a vendor in 30 days, Thinking Capital can turn that 30 day invoice into a 120 day invoice. Thinking Capital pays the small business’ vendor and the small business has 120 days to pay Thinking Capital. There are fees associated with this, which are based on the small business’ credit grade, but a small business can simply use Equifax’s credit grade and seek funding elsewhere.
“BillMarket represents a cash flow revolution for the Canadian small business market,” he said.
Traditionally, Thinking Capital provides an MCA product, which it calls Flexible, as well as a term product, which it calls Fixed. The company provides funding up to $300,000 to small to medium sized Canadian businesses. Clients must be in business for at least six months and have average monthly sales of at least $7,000. The funder was acquired in March by Toronto-based Purpose Financial, but it still uses the Thinking Capital name.
Founded in 2006, Thinking Capital employees roughly 200 people and has offices in Montreal and Toronto.
What Will Happen to HomeZen After the Breakout Capital Deal?
July 3, 2018
With today’s announcement of Breakout Capital Finance’s acquisition of HomeZen’s technology, deBanked wondered what will happen to HomeZen after the acquisition of its technology.
HomeZen’s co-founder and Head of Technology Mike Spainhower will work with Breakout Capital to help integrate the HomeZen technology into Breakout Capital’s system, Breakout Capital Chief Operating Officer Mendelsohn told deBanked. But Spainhower will not be joining Breakout Capital as an employee, nor will any other former HomeZen employees. HomeZen will still service its existing clients, but will no longer seek additional clients or operate under the HomeZen name. HomeZen, which provided software tools for home sellers to more efficiently sell their homes, was founded in 2016 in the Washington D.C. area.
Mendelsohn said that prior to this acquisition, BreakOut Capital founder and CEO Carl Fairbank and HomeZen co-founder and CEO Kevin Bennett knew each other as part of the Washington D.C.-area tech community.
The HomeZen website is currently down, which is not an error. Mendelsohn said that the transaction between the two companies meant that HomeZen would cease offering its technology, and website, to new customers.
While Mendelsohn acknowledged the real estate technology company Zillow as a potential competitor of HomeZen, he said that HomeZen’s offering was quite uncommon.
“They were pretty unique in offering sellers a suite of [real estate] tools to do it themselves really be empowered to direct the sales process yourself.”
Breakout Capital has grown its loan originations throughout the year and also obtained a $15 million facility at the end of May that has allowed it to build out a factoring product, called FactorAdvantage.
Of the acquisition, Mendelsohn said:
“You have to take the long view with this and say ‘They’re serving real estate sellers, we’re serving small business owners.’ This may seem a little discontinuous, but what they’re doing is the same thing we’re doing. They’re providing great tools, calculators and other ways to evaluate offers. And that’s exactly what we do. This will allow us to give our applicants and borrowers access to that high quality experience.”
Founded in 2015 by CEO Carl Fairbank, Breakout Capital is based in McLean, Virginia.
Kalamata Capital Merges with Kings Cash Group
June 28, 2018
Kalamata Capital announced today that it has entered into an agreement to merge with Kings Cash Group, effective July 1. The new entity will be called Kalamata Capital Group, or KCG, retaining the Kalamata Capital brand. Together, the new entity and its affiliates will provide approximately $300 million of capital annually to over 5,000 small businesses.
Michael Jaffe and Albert Gahfi have been designated the co-Presidents of Kalamata Capital Group LLC, the direct funding and operating entity, and they will run the day-to-day operations. Steven Mandis, Brandon Laks, Carlos Max, and Connor Phillips will be the Chairman, Chief Operating Officer, Chief Financial Officer, and Chief Credit Officer, respectively, of the holding company, Kalamata Holdings LLC. All are members of the Executive Committee of Kalamata Holdings LLC.
“With this partnership we become the preeminent one stop solution for merchants and strategic partners in the industry,” Gahfi said. “Strategic partners can submit one application, and we will quickly develop competitive, actionable solutions.”
Laks, Chief Operating Officer of KCG told deBanked that employees of both companies will be retained and the former Kalamata Capital offices, both in Bethesda and New York, will remain in place. The Manhattan office of Kings Cash Group will also remain and all products that the two companies used to offer separately, will now be offered by KCG, including small business loans, SBA loans, factoring, equipment leasing and merchant cash advance, among others. Kalamata Capital offered all of these products while Kings Cash Group focused on merchant cash advance.
“With no debt, Kalamata Capital has one of the strongest balance sheets in the industry,” Jaffe, co-President of the newly formed KCG said. “Their Chairman Steven Mandis worked at Goldman Sachs, was a Senior Advisor to McKinsey, has a PhD from Columbia University and teaches at Columbia Business School. He has utilized that experience to build a distinctive partnership culture, established brand, and institutional-grade processes and procedures.”
Mandis, Chairman of KCG, said: “We know and value KCG’s technology platform and people, and we believe their talent and capabilities will further strengthen our overall merchant value proposition. The partnership will enable us to better serve more small businesses by enhancing our underwriting capabilities to provide access to affordable business financing solutions to help them and their communities grow and thrive.”
Funding Circle Expands Partnership with INTRUST Bank to Support More US Small Businesses
June 27, 2018
Yesterday, Funding Circle and INTRUST Bank announced the next phase of their strategic partnership, which helps provide capital to American small businesses. This second phase increases INTRUST’s funding commitment and initiates a targeted, co-branded marketing campaign, giving business owners across Kansas, Missouri, Oklahoma, and Arkansas greater access to fast and flexible financing. To date, over 150 American small businesses have received loans backed by INTRUST through the Funding Circle platform. This new increased commitment is anticipated to bring the number of funded small businesses to more than 500.
“This collaboration is a good example of the ways traditional and innovative financial service providers can work together to help small businesses prosper,” said Chief Financial Officer of INTRUST Bank Brian Heinrichs.
“Not only has INTRUST recognized the investment opportunity available through the Funding Circle platform, but this expansion underscores that Funding Circle’s loans are often the best option on the market for American business owners seeking growth capital,” said Funding Circle’s US managing director, Bernardo Martinez. “We view our partnership with INTRUST as a blueprint for the remaining geographies within the US.”
Funding Circle has been among the top five alternative small business funders in the US over the last several years. And earlier this month, the company released a report that demonstrated the demand for alternative financing among small business owners.
Founded in 2010, Funding Circle is a small business loans platform in the US, UK, Germany and the Netherlands, that matches small businesses that want to borrow with investors who want to lend. Investors include more than 70,000 retail investors, banks, asset management companies, insurance companies, government-backed entities and funds worldwide.
Why KeyBank Acquired Small Business Lending Platform from Bolstr
June 25, 2018
KeyBank announced last week the acquisition of a digital lending platform for small businesses created by Bolstr. The lending platform will allow KeyBank to more efficiently serve small businesses for their SBA and traditional lending needs, according to Jamie Warder, Head of KeyBank Business Banking.
“We found Bolstr to have a very flexible capability…and we believe that having the platform will allow us to get to a decision faster,” Warder told deBanked.
Founded in 2010 by Charlie Tribbett and Larry Baker in the Chicago area, Bolstr created a marketplace that connected small business borrowers to institutional and retail accredited investors, or individuals. KeyBank acquired the platform that facilitated this, but not the company. Bolstr no longer operates as it had, but it will continue to work with its current clients, according to Warder.
Warder said that with this acquisition, KeyBank, a regional bank, hopes to attract more small business customers who are looking for speed and ease in obtaining a loan. He thinks that with Bolstr’s platform, KeyBank can be more competitive, although he didn’t say that the bank’s qualifications for obtaining loans would necessarily change.
The Bolstr platform includes features like easy eSignatures, information gathering and digital questionnaires. Already, KeyBank has hundreds of thousands of small business customers, Warder said. The bank, which is headquartered in Cleveland, OH, is more than 100 years old and operates in 15 states.
Tech Changes Lending And Payments The World Over
June 25, 2018
On a business trip to China last summer, Matt Burton had plenty of money in his wallet but it was practically useless.
Case in point: He had a lengthy standoff with a Shanghai taxi driver who insisted on a mobile-phone payment. “I spent 20 minutes arguing with the cabbie,” says Burton, one of the founding partners at Orchard Platform, a leading provider of technology and software to the alternative lending industry. “You’d think that — out of all of the professions — a taxi driver would accept cash.”
The New Yorker finally convinced the cab driver to take the payment in renminbi, China’s paper currency. The incident, meanwhile, is illustrative of how deeply and widely mobile payments have penetrated the huge Chinese market. “No one in China carries wallets anymore,” Burton reports. “Everyone pays with their smart-phones. Even the elderly women selling vegetables on the side of the road accept mobile payments,” he adds. “Cash has become a hassle.”
Welcome to China’s financial technology revolution. Almost overnight, China’s population graduated from calculating with the 16th-century abacus to showcasing what is arguably the world’s most sophisticated system of mobile payments. Thanks to financial technology, China is fast becoming a cashless economy. China is just one place outside the U.S. where financial technology is catching on in a big way. As Americans remain, for the most part, wedded to suburban drive-in banks, walk-up automated teller machines, and plastic credit and debit cards, the rest of the world is rapidly embracing digital solutions. And nowhere is that happening more dramatically than in China.
According to the most recent figures released by China’s Internet Network Information Center, the country had 724 million mobile phone users at the end of June 2017. China’s Ministry of Industry and Information Technology reports, moreover, that consumers paying for everything from food and clothing to utility bills to movie tickets and – you guessed it, cab fare — engaged in 239 billion mobile payment transactions in 2017, a surge of 146 percent over the previous year.
Mobile payments have become a $16 trillion industry in China, the ministry adds, accounting for about half of all such transactions in the world.
And there’s ample room to grow. The World Bank discloses that there are now 772 million Internet users in China, more than double the entire population of the U.S. Yet that leaves 50% of China’s population – mostly in the countryside and rural areas – who are not yet plugged in to the Internet.
Two Chinese mobile-payment platforms dominate the industry. Ant Financial is the 800-pound-gorilla, its Alipay program boasting 520 million global users on its website. It’s an affiliate of publicly traded Alibaba Group Holding, an online merchandiser known as the “Amazon of China” which was founded by entrepreneur Jack Ma, reputedly the richest man in China.
Alipay not only has bragging rights to roughly 60 percent of China’s digital and online payments market but, in 2013, it overtook PayPal as the global leader in third-party payments. With deep roots in e-commerce, Alipay is the go-to payments option for online shoppers, who are steadily migrating from laptops to mobile devices.
WeChat Pay is the upstart in the duopolistic rivalry. Launched in 2013, nearly a decade later than its rival, it’s a unit of conglomerate Tencent Holdings, a social network and messaging platform often compared to Facebook. As WeChat continues to add subscribers, its Tenpay app has been growing accordingly, eroding Alipay’s market share as new users gravitate to the e-payments program. While WeChat records fewer payments than Alipay, Forbes magazine reports that it claims more users.
Whatever WeChat’s virtues, Ant Financial continues to chew up the scenery. It recently topped the charts as the world’s “most innovative” fintech in 2017, as reckoned by a research team formed by accounting giant KPMG and H2 Ventures. China scored a hat trick, moreover, as two additional homegrown fintechs — online property-and-casualty insurer ZhongAn and credit-provider Qudian Inc. — took second and third place, respectively, in KPMG/H2’s rankings. For good measure, China also claimed five of the top ten spots on the “most innovative” list, edging out the U.S., which had four.
Financial analysts recently surveyed by the Financial Times reckon Ant Financial’s market valuation at $150 billion, catapulting the company into the rarified status of not just a “unicorn,” but a “super-unicorn.” (Named after the rarely seen mythical one-horned horse, “unicorns” are start-ups valued at $1 billion). So robust is Ant Financial’s market valuation that the global investment community is salivating over its impending initial public offering.
(Ant’s progenitor, Alibaba, holds bragging rights as the largest IPO ever, according to the Financial Industry Regulatory Authority. It raised $21.8 billion in 2014; its NYSE-listed stock was trading at $194.36 in mid-May, essentially in the same league as Apple and Facebook, trading at $188.80 and 187.08, respectively, on Nasdaq.)
“Four of the largest fintech unicorns in the world are coming out of Asia,” notes Dorel Blitz, the Tel Aviv-based head of fintech at KPMG. “The companies are getting bigger and stronger,” he adds, “and you’re beginning to see more direct investment in public fintech companies as well.”
Adds Orchard’s Burton: “I think it shows you how massive the opportunities are outside the U.S.”
Ant Financial and WeChat are also serving as a world-class demonstration project on how fintechs can turn a tidy profit while opening up financial services to large populations who lack access to basic financial services, thereby providing entry to the middle class. The two platforms have provided “financial inclusion for tens of millions, if not hundreds of millions of people” who previously were on the periphery of the banking and financial system, says Kai Schmitz, a fintech lender at International Finance Corporation that lends to private businesses in the developing world.
Once people are making electronic payments on their mobile devices, Schmitz notes, it creates a “pathway” to a whole panoply of financial services, including personal and business loans, savings, insurance, and investments.
“You can create a user profile so that a large part of the population that could not be reached (by traditional financial institutions) are now making payments and can be followed on the data track,” he says.
The World Bank reports that two billion adults and 200 million businesses in the developing world are currently unable to access even basic financial services. Through IFC, the World Bank has invested $370 million in fintech companies operating throughout Asia, the Middle East, Africa and Latin America. The fintechs, an IFC communications manager told deBanked, offer “a range of products and services — from e-wallets, virtual banks, lending, and online payments to retail payment points and exchanges.” IFC, she adds, also invests in fintech funds.
Anju Patwardhan is the U.S.-based managing director at CreditEase Fintech Investment Fund, a $1 billion Chinese venture capital firm that invests in fintechs delivering financial services to “unbanked” and “underbanked” populations. “They are living in Africa, Bangladesh, China and elsewhere on less than two dollars a day and have no access to financial services,” she says.
“But there are also a very large number of people who may be technically included in the financial system but still don’t have access to a full range of financial services at reasonable prices,” she adds. “If someone is borrowing from a moneylender or pawnbroker, it doesn’t count (as financial inclusion). In that case, the number of people is very much more than two billion.”
Once phone towers are built and a payments infrastructure is in place, fintechs promising more sophisticated financial services can operate similarly to the settlers who followed pioneers in the U.S.’s westward expansion. That’s been the story in Kenya and other African countries where M-Pesa (“pesa” is Swahili for money) and other mobile-phone payments systems set up shop a decade ago.
Branch International, based in San Francisco but doing business exclusively in emerging and frontier markets for only three years, is one of the settlers. It boasts that it now has the “No. 1 finance app in Africa.” In March, Branch raised $70 million in a second-stage round of debt and equity financing from a group of venture capitalists led by Trinity Partners that included Patwardhan’s CreditEase and the IFC. Patwardhan will serve as an advisor to Branch’s board.
Branch’s principal business is making loans and micro-loans ranging from as little as $2 to $1,000 in Nigeria, Kenya, and Tanzania. Despite its name, Branch touts itself as a “branchless bank”, all of the credit transactions taking place on mobile devices, says Matt Flannery, Branch’s chief executive and founder. Its average loan amount is $25.
Many of Branch’s customers are individuals and businesses who often had trouble obtaining credit from established financial institutions or were ineligible for loans. But, according to Branch’s website, it’s possible for a prospective borrower to obtain a loan in just a matter of minutes. “Branch eliminates the challenges of getting a loan by using the data on your phone to create a credit score,” the website says. Branch promises privacy, fees that are “fair and transparent,” and terms that “allow for easy repayment” with no “late fees or rollover fees”. “As you pay back on time,” the website also says, “our fees decrease, and you unlock larger loans with more flexible terms.”
The platform, CEO Flannery says, has lent out $100 million dollars to roughly that same number of people. “The formal financial system in African countries is generally composed of old-fashioned banks that are risk-averse and fairly slow to make lending decisions,” he says. “People really appreciate us,” Flannery adds. “I’d say we’re like Uber and they’re the horse-and-buggy.”
The company is growing by 20 percent month-over-month and expects to disburse more than $250 million in 2018. Asked to describe Branch’s typical borrower, Flannery says: “We have some rural users (of Branch’s finance app). But in general we’re serving the commercial middle-class — shopkeepers and entrepreneurs – in urban capitals.” Want to know precisely who Branch’s customers are? “Just go to downtown Lagos (the capital of Nigeria and the largest city on the African continent) and you’ll see all different kinds of businesses and single-owner merchants on street corners,” Flannery says.
Jeff Stewart, the founder and chairman of Lenddo (which recently merged with competitor EFL) asserts that his firm’s machine learning technology and risk modeling techniques, which are being deployed in emerging countries from Costa Rica to The Philippines, have the capacity to assess the “creditworthiness of everyone on the planet.” In the absence of credit history in much of the developing world, he explains, this can done by constructing a risk profile combining both “psychometrics” and a “digital footprint.”
Psychometrics is a behavioral assessment tool based on a prospective borrower’s “Big Five” personality traits: openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism (OCEAN for short). “What we’ve been able to show,” Stewart asserts, “is that certain personality types have a positive and negative correlation with repayment. It’s not 100 percent accurate. But you can predict the statistical recovery ratio on repayment. You can say that, for a person with a high score, something like 88 out of 1,000 people (with his or her profile) would not repay.”
The digital footprint, which is the second “critical component,” Stewart says, analyzes a prospective borrower’s reliability by reconnoitering their smartphone usage. “We’ll look at everything on your phone,” he says, “How you use the phone. Whom you interact with. When you use your phone. There are thousands of features that generate a digital footprint. Everything from meeting someone at a sports bar to the apps on your phone to things like e-mailed receipts that show your financial activity.”
Such methods help build credit for those lacking credit history while rehabilitating those whose credit history is blemished. And all that’s needed is a smartphone. “We’ve turned the smartphone into a credit bureau,” Stewart says.
The acquisition of smartphones is taking place at a blistering pace, Stewart notes, now that cell phone costs are “at the bottom of the cost pyramid” in many countries. For example, a “low-end Android” now fetches as little as $25 in Africa. “One credible study I’ve seen shows that every 10% percent rise in access to smartphones translates into a 1/2 percent rise in a country’s gross domestic product,” Stewart says.
While the private sector is driving the trend to financial inclusion in China and Africa, India’s government-driven model “is setting a new global standard in using financial technologies to support financial inclusion,” declares Patwardhan of CreditEase, who also lectures at Stanford. “The country has become a giant testing ground for financial inclusion and innovation,” she argues in a recent academic paper, “and may become a role model for other emerging economies.”
India’s state-run effort includes a $1.3 billion digital identity program known as Aadhaar. Under Aadhaar (which means “foundation”), the state issues residents a 12-digit identity number that’s based on their biometric data –such as fingerprints and iris scans — and personal information. The ID number covers more than 1.19 billion residents. In just the first two years after Aadhaar’s 2009 debut, Patwardhan says, more than 250 million Indians were able to open bank accounts.
Jo Ann Barefoot, chief executive at Barefoot Innovation Group in Washington, D.C. and a senior fellow emerita at Harvard’s Kennedy School of Government, agrees. She notes that Aadhaar opened up access to both fintech services and bank accounts to women who were long treated as second-class citizens by the social and economic system. “India’s digital ID program means that wives and daughters have identity now,” she says.
“In the past,” she adds, “only (male) heads of households would have family identity documents and a government card — which would be the equivalent of having a Social Security number in the U.S. But the wife wouldn’t have her own card. So this is a massive door-opener to fintech growth. And it’s also opening up (all areas of) finance to millions and millions of people.”
India’s “digitalization” program, moreover, has entailed development of a national payments network called “unified payments interface,” or UPI. The combination of UPI and Aadhaar as well as other digital initiatives have resulted in “a surge of online lending platforms,” says Patwardhan, citing Capital Float, NeoGrowth, Faircent, LendingKart, Quiklo, IndiaLends, CreditExchange, and Onemi.
The homegrown fintechs, however, will be up against tremendous external pressure as India, with 1.3 billion people and poised to overtake China in population growth, is generating enormous interest from global fintechs. Among outside platforms piling into the country are China’s Ant Financial and WeChat. The former took a $1 billion stake in Paytm, an Indian mobile payments and e-commerce company. Similarly, competitor WeChat’s parent, Tencent, has invested in Hike, a mobile wallet valued at $1.4 billion last June, according to CNBC, exciting investor interest as a unicorn.
U.S. companies are getting into the act too. Google launched digital payments app Tez last September, which “is taking advantage of India’s infrastructure and has already gotten 30 million downloads,” Patwardhan says. In February, Facebook rolled out a peer-to-peer payments feature on WhatsApp. Even Branch’s Flannery has announced that his “branchless bank” plans to earmark part of its $70 million war chest to offer $2-to-$1000 loans on the subcontinent.
Having banned high-denomination paper bills as a way to rein in corruption and aiming at a cashless economy, India has been innovating in ways that “have gone the Chinese one better,” marvels Patwardhan. “Their payment systems going through the UPI network are interoperable,” she notes, for example. “You don’t have to be on the same app or with the same bank. India is now on the cutting edge.”
