Edly, a new online marketplace that connects Income Share Agreement (ISA) investors, announced last week that a prestigious software engineering school in San Francisco listed $2 million in inaugural ISA trades via the Edly marketplace. The school is called Holberton and offers only two payment programs, an ISA or pay it all upfront. LinkedIn CEO Jeff Weiner and many others who are well-established in tech are closely involved with the school.
An ISA is an arrangement where investors front the cost of a students’ college education in exchange for a percentage of their future earnings. According to Charles Trafton, co-founder of Edly, ISAs differ from traditional student loans in three primary ways, all of which protect the student: 1) repayments don’t begin until the graduate starts making above a certain amount of money, 2) repayment is limited to a certain amount of time (usually 8 years) and 3) there’s a cap on the amount that the graduate repays, usually one to two times tuition.
“Today, schools have an incentive to maximize the amount they get from each student on their way in – which usually means maximum borrowing – and then spend as little as possible on the student as he matriculates through the school,” Trafton said. “The school has no skin in the game.”
With the ISA model, the school usually has skin in the game. The Edly marketplace requires that participating schools own part of the ISA. This way, the school’s interest is aligned with the student, and later the graduate. If the students are well trained, then they are likely to succeed in the workplace, earn good money quickly and pay the money owed.
The first ISA program in the U.S. was launched at Purdue University in 2016 and Trafton said there are now 23 programs in the country. His mission with the Edly marketplace is to provide liquidity for these investments and Holberton’s $2 million of ISA trades is its first transaction.
Holberton’s ISAs are set up so that graduates only make payments when their salaries are more than $40,000. But Trafton said that Holberton graduates are usually hired by top Silicon Valley tech companies and they typically make nearly six figures in their first year after graduation.
Ron Suber wears many hats. His official LinkedIn profile lists him as President Emeritus and Senior Advisor at Prosper Marketplace. Now you can add a new title to his repertoire – the Magic Johnson on fintech. That’s because when it comes to Suber’s legacy, he’s all about the passing game.
“I really enjoy the assist in basketball more than the score or the dunk and so I’m trying to be that leader of assists in our industry, Magic Johnson, if you’ll let me use that analogy … I want to be him for our industry and help everybody win and help the whole thing be bigger, but you have to give the ball to the people in the position where they can score and that’s what I’m trying to do,” said Suber in a podcast discussion with Lend Academy’s Peter Renton, who is also a co-founder of LendIt.
Since Suber stepped down as president of Prosper, his presence in marketplace lending and fintech only seems to have blossomed, which in hindsight may have been the plan all along. The godfather of fintech, as he’s also known, is in the midst of what he’s dubbed a professional rewiring, one that didn’t prevent him from participating in a podcast with Renton.
During the discussion, Suber didn’t shy away from any topic, fielding questions on everything from his investment portfolio, to Prosper, to travel and his views on marketplace lending and fintech. His travels have taken Suber to Patagonia and the straits of Magellan to his favorite Aussie city of Melbourne. Next up Suber plans to explore Africa, including Rwanda and Tanzania.
Suber on Aussie IPO Credible
San Francisco-based Credible, a consumer finance marketplace for millennials, just raised $50 million in an Australian IPO. Suber, who serves as chairman of the fintech, got to know Credible CEO Stephen Dash a few years ago. When Dash needed to raise money, Suber was the first to work with other fintech influencers including a group in Asia to invest $10 million in the company at a $40 million valuation.
Credible followed up with another equity round before deciding to IPO in Australia, where the market is different versus the United States or Hong Kong.
“We were able to meet with the asset managers, the family offices, and the superannuation funds and some of the pension funds in Asia, Hong Kong in particular, and throughout Australia who were very supportive of Stephen Dash, who is from Australia,” said Suber, adding that Credible was the biggest tech/fintech IPO in Australia last year.
Incidentally, Suber has also met with Australia Treasurer Scott Morrison, who sparked a meeting with Suber, Dash, US cryptocurrency exchange Coinbase and other members of the payments market to discuss how Australia can engage with young US entrepreneurs.
We asked Suber what to expect with crypto and lending, in response to which he told deBanked: “Like the very early days of the internet, there were lots of dot-com companies with high valuations in the hype cycle, little revenue and unclear long-game solutions…think Amazon. Big winners emerged, and the majority lost money on the early bets. The same is true for cryptocurrencies. Enormous winners will emerge. In my opinion, the winners include CoinBase, Ripple and Ethereum.”
Suber on Prosper
While Suber has moved on from an executive role at Prosper, he remains engaged with the company and is close with the leadership team, including CEO David Kimball and CFO Usama Ashraf. Suber’s involved across the board, from customer acquisition, to business development and on the capital markets side of things as well.
“It’s again doing close to $300 million a month in originations, it has $100 million in cash it generates cash each quarter, it has its own securitization channel at this time in addition to the consortium … There’s a lot going on there including some product expansion, so there’s no shortage of things to do with Prosper, which I care a lot about,” said Suber.
Suber on Hindsight Being 20/20
Marketplace lending has had peaks and valleys along the way as it has matured from a nascent segment to essentially a transformational influence on the lending space, with its technology touching everything from the business model, to the borrower to the banks.
But if hindsight were 20/20, there are some things he’d do differently the second time around.
He pointed to Prosper’s acquisition of American HealthCare Lending, which he characterized as a “great decision,” giving the marketplace lender an opportunity to tap the healthcare borrower market. But as in any relationship, you can’t change each other.
“We changed American Healthcare Lending too much and tried to make it into something that it just couldn’t be with the point of sale financing. I think the lesson there is it’s great to do an acquisition, but you have to make sure you execute and keep it fresh and focused and successful once you get it,” said Suber, pointing to the acquisition of Tel Aviv’s BillGuard as yet another example of this.
Prosper also took on too much office space around the country.
“Perhaps we could have outsourced a little more instead of all the hiring. Clearly diversifying committed capital and maybe back then even using some of the capital we raised to do these own CLUB deal securitizations, which Prosper does now very successfully with its balance sheet,” he noted.
Suber also urged the marketplace lending market to showcase its technology and unique abilities as “tech-enabled finance companies” more. As the innovator that he is, Suber suggested there should be greater collaboration among marketplace lenders, comparing it to the airline industry. He explained:
“So, the airline industry is competitive, they’re competing for dollars and seats and people and talented pilots and the best planes, but the reality is they have to work together, they have to make sure that planes don’t crash and that the industry is on time and does lots of good things together… And that’s really what I think we can do better, a better job of as an industry is really working together, competing, but communicating and making sure everybody lands safely.”
Suber on Marketplace Lending
As the godfather of fintech, Suber is often looked to as a guiding voice on the status of the market. That’s why when he says the industry has advanced in innings, it’s revelatory.
“I think we’re in the home stretch, I think we’ve done the seventh inning stretch,” he said. Suber pointed to Asia, where the market has gone from 3,000 platforms to 50 and in the United States where it’s consolidated from 300 to fewer than 100.
“The mature are maturing,” he said,” pointing to a race in which some platforms are pulling away from others in terms of valuation, volume and the ability to engage the industry.
“The separation will continue,” he said. “The industry will look very different one year from now.”
Suber on His Investment Portfolio
If you’ve ever wondered which investment areas Suber believes represent the next opportunity, look no further. He’s “struck” by financial inclusion, in particularly a telecom play Juvo for which he’s an advisor and in which invested a few rounds. Juvo is looking to serve the unbanked in the developing world where they lack financial identities, internet access and smartphones. The company has partnered with the likes of Samsung.
“We talk a lot in the online lending industry about top down, super-prime and prime and near prime; this is my way of coming from the bottom up with technology and data and finance to be involved in financial inclusion. I’m really quite excited about that one,” said Suber.
He also likes startup Unison and the emerging fractionalization of the home equity market, which he characterizes as “the next big thing.” In addition to Suber, this market has attracted the likes of Marc Andreessen.
Suber has nearly 20 investments in private companies, including payment companies, financial inclusion and lending. He’s also become a debt investor to some online lenders, invoice finance plays among others. “I’ve really enjoyed the debt side of investing as much as the equity side,” he proclaimed.
Suber on Broader Fintech
In addition to marketplace lending, Suber is also a believer in the point-of-sale (PoS) solution and invoice finance companies, which he says are “fixing the way invoicing is financed and making it better, cheaper and quicker.” And in taking an overarching view of the market, he also likes the cleantech, pointing to solar fintech play Mosaic and a company called CleanCapital.
Suber on Rewiring
Suber is a big believer in rewirement, both in his personal life and in business. He defines it as “redesigning one’s life personally and professionally.” Before he applied it to his career, Suber and his wife Caryn pursued a rewirement in their personal lives, one that included selling their home and material possessions, buying a new home and traveling.
In 2017, he decided to do the same thing professionally to strike a better balance in his life. Since then, he’s developed a color-coded regiment by which to live, separating the hours of the week across categories including exercise = blue, personal = green, work = purple and teaching and managing his family office = red.
“There’s a lot of green on my calendar,” he said.
For those interested in rewirement, Suber has launched a blog on the topic, with the maiden couple of entries documenting the first 360 days and counting.
Many of Suber’s quotes here originated from his interview with Peter Renton. Renton is the co-founder of the LendIt Conference.
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Isn’t it time you deBanked?
The few retail investors discussing the recent change Lending Club made to their credit model weren’t exactly optimistic, according to comments on the Lend Academy forum. Of particular concern is grade inflation wherein borrowers who previously scored a C or lower may now find themselves in the A or B category.
“We expect loan volume to shift toward higher quality grades (grades A and B) because some borrowers will qualify for lower interest rates under the new model,” Lending Club stated in an email last week.
Retail investor sentiment may not be all that important, however, as capital from self-managed accounts on the platform has waned after peaking in the first quarter of 2016. In Q2 of 2017, self-managed accounts only accounted for 13% of the capital used to fund loans. The majority came from banks and institutions.
Lending Club is feeling pretty good about its newest credit model, according to an email that circulated to retail investors this morning. A copy of it is below:
We have launched the most advanced and predictive credit model ever used on the LendingClub platform. It’s the latest in LendingClub’s long history of innovation on behalf of borrowers and investors.
The new model leverages machine learning and 10 years of LendingClub data to better assess and price credit risk. LendingClub has helped 1.5+ million borrowers since 2007; each borrower provides unique insight that we can use in our next decision.
What investors need to know about the new credit model:
• It’s 24% better at differentiating the likelihood of a borrower charging off than the fourth-generation model, and is more predictive than a borrower’s FICO score alone.
• It’s built on a wealth of proprietary data, incorporates more data points for each borrower, uses best-in-class modeling techniques, and uses dozens of new custom attributes that are predictive in assessing risk.
• We expect loan volume to shift toward higher quality grades (grades A and B) because some borrowers will qualify for lower interest rates under the new model, and other higher-risk borrowers, who may have received an offer previously, will be screened out.
• We continue to see lower delinquency rates across grades and terms in the existing loan portfolio than in the second and third quarters of 2016.
We see this credit model as the latest innovation in our continuous enhancement cycle, and one that helps us continue to provide investors with solid risk-adjusted returns. See here for more on what makes the model unique.
1. Focus on net returns
2. Charge-offs will happen
3. Diversification is key
4. Monthly payments include principal and interest
5. Reinvestment is critical for consistent returns
Lending Club has gradually drawn more attention to the effect of prepayments on loans and this guide is no different.
“Prepayments impact returns because they reduce the amount of principal earning interest from Notes. A Note is considered prepaid when the dollar amount received is greater than the amount due for any given month,” they say. “It is inevitable that certain loans will charge-off or prepay and result in a loss of investment capital.”
Not mentioned however is that investors are charged a 1% fee on all outstanding principal if a borrower pays off their entire loan early despite it being no fault of the investor. And investors are less likely to monitor the impact of these fees if they keep reinvesting their cash which of course Lending Club advises investors to do.
The guide is still helpful in setting expectations for retail investors who ignored or did not understand all the fine print when they signed up. Quoted below about charge-offs:
“It’s inevitable that some borrowers will get behind on their loan payments. Some of these borrowers will get back on track and others will stop repaying their loans. After it’s clear that a borrower won’t make any more payments a loan is considered ‘charged-off.’ All investors in consumer credit experience some charge-offs, so it’s important to understand them and consider how they might impact your investment strategy.”
Overall, the guide is a nice way of keeping retail investors engaged. As someone who invested on the platform for a few years, one of the biggest disappointments I found was that the platform did not feel like a “club” at all. There was no sense of peer community and there was almost no communication whatsoever from Lending Club about anything other than requests to deposit more money.
But lately, peer funding has been dropping off the platform after reaching an all time high back in the first quarter of 2016. In Q2 of this year, only 13% of loans were funded by peers. 44% of loans were funded by banks. Maybe they’re not entirely ready to see individuals disappear completely or maybe they just want those that remain to keep the faith as returns slide. Hopefully, they continue to supply interesting and helpful materials in the future.
5/17 – Funding Circle surpassed Zopa in cumulative lending to become the UK’s biggest marketplace lender
5/18 – Breakout Capital announced appointment of Douglas J. Lanzo as EVP and General Counsel
5/22 – The New York State legislature held a joint hearing on online lending
- OnDeck had the maturity date of its $100M credit facility extended
- China Rapid Finance reported Q1 net revenue of $10.5M
- Prosper Marketplace closed $495 securitization transaction
- SoFi co-founder Dan Macklin announced his departure from the company
5/31 – IOU Financial reported Q1 results, had $1M loss on $4.3M in revenue and lent (CAD) $22.1M
6/2 – Zopa began allowing investors to sell loans that have previously been in arrears
New York State legislators proposed the formation of an online lending task force
6/6 – deBanked and Bryant Park Capital published their Q1 confidence index in which industry CEOs scored their confidence in the continued success of the MCA and small business lending industry at 73.8%, the lowest level since the survey started in Q4 2015. It peaked at 91.7% in Q1 2016.
6/8 – Amazon surpassed $3 billion in loans made to small businesses since their lending program launched
6/9 – RealtyMogul announced that they had exited the residential fix-and-flip market
6/12 – The US Treasury published a report that called for the repeal of Section 1071 of Dodd Frank
- SoFi applied for a bank charter, specifically an Industrial Loan Company charter
- Lendio announced a pilot agreement with Comcast business
6/14 – Patch of Land expanded its debt facility from $10M to $30M
6/19 – Goldman Sachs’ online lender Marcus surpassed $1 billion in loans made since inception
6/20 – Former Lending Club CFO Carrie Dolan joined Metromile, an insurance company, as CFO LendingTree acquired MagnifyMoney
6/21 – Pearl Capital secured $15M in financing from Chatham Capital Management
- Square Capital announced that it will pilot a consumer loan program
- Former RapidAdvance CFO Rajesh Rao became the CFO at Beyond Finance, Inc.
- Funding Circle hired Joanna Karger as US Head of Capital Markets and Richard Stephenson as US Chief Compliance Officer
- Pave suspended lending operations
- Ron Suber, president of Prosper Marketplace, announced that he was stepping down from the company
- The SEC announced that all companies will now be able to submit draft IPO registrations confidentially, a perk previously only reserved for businesses designated as “emerging growth companies” under the JOBS Act.
- PayPal Holdings Inc announced that it had invested in LendUp
- Yellowstone Capital announced that they had funded $47 million to small businesses in the month of June
7/3 – Funding Circle announced that Sean Glithero had joined the company as its new global CFO
7/5 – Lending Club appointed Ken Denman to its Board of Directors
- CAN Capital announced that they had been recapitalized and were resuming funding operations
- Orchard Platform and Experian announced a strategic collaboration on data
- CFPB announced that it was extending the deadline of its small business lending RFI from July 14th to September 14th
- China Rapid Finance announced that they had made 20 million cumulative loans since inception
- CFPB announced new arbitration rule that effectively bans class action waivers from consumer finance contracts
- Former OnDeck VP of External Affairs and Associate General Counsel Daniel Gorfine, was appointed by the Consumer Future Trading Commission to be Director of LabCFTC and Chief and Innovation Officer
- dv01 and Upgrade (Former Lending Club CEO Renaud Laplanche’s new company) announced a strategic reporting partnership
- PayPal hired former Amazon executive Mark Britto to lead its lending business
- Fora Financial expanded its credit facility led by AloStar
Funding Circle is ditching their old circular logo with arrows in favor of a more modern purple logo. The website has also undergone a redesign as well.
On the new website, the company states that they are “revolutionising a broken system” and emphasize that “we believe in those made to do more.”
In a recent interview with deBanked, Sam Hodges, a co-founder and U.S. managing director of Funding Circle said, “We are focused on building a world-class technology platform that can handle millions of transactions daily and deliver a best-in-class customer experience for borrowers and investors,” Hodges told deBanked.
NSR Invest has acquired LendingRobot to become the largest robo-advisor in the alternative lending space, according to an announcement made by both companies.
Of note is that three of NSR Invest’s co-founders, Peter Renton, Bo Brustkern, and Jason Jones, are also co-founders of the LendIt Conference.
The acquisition is a reminder that the conference founders are also significant players in the alternative lending space itself. According to the announcement, the new combined parent company, Lend Core, LLC, serves over 8,000 clients and manages over $150 million in assets.
For those not familiar with LendingRobot, deBanked started reporting on the company more than two years ago as a tool for investors to automate their investment picks on marketplace lending platforms like Lending Club and Prosper. I eventually became an individual paying customer of the service, using it to automate the purchase of nearly $30,000 worth of tiny $25 and $50 notes that fit within the parameters I had set. LendingRobot’s classic service can also automate investments on the Funding Circle platform, though I have never signed up with Funding Circle or invested in their loans.
When I last met with Emmanuel Marot, LendingRobot’s CEO, in person, he was launching a new hedge fund dubbed the LendingRobot Series that would be managed with robo-advisor technology. The hedge fund was included in NSR Invest’s acquisition.
NSR Invest CEO and LendIt co-founder Bo Brustkern will lead the combined entity as CEO. In a prepared statement he said, “We have long respected the work of the LendingRobot team and recognize that our companies are pursuing a common goal. That is, to provide a unifying investment solution for the millions of investors worldwide who seek the attractive, uncorrelated, diversified returns that alternative lending can provide. With this combination of our firms, we are bringing enhanced capabilities to our combined client bases today, and big plans for the future. A shining example of the kind of innovation that we will emphasize is the Lending Robot Series Fund, which provides customization, liquidity and diversification to investors through a novel, elegant, low-cost fund structure.”
Meanwhile, Marot will continue on only as a special advisor to the company. In a prepared statement, he said, “NSR and LendingRobot have taken different tracts to provide similar services. Now is the perfect time to combine our complementary strengths. The combination of LendingRobot’s advanced technology and NSR’s extensive knowledge of this industry puts us in the best position to provide superior investment advice in the alternative lending space for both individual and institutional investors.”
On Bloomberg, Lending Club CEO Scott Sanborn said that banks were a critical piece of their platform. In Q2, 44% of all originations were funded by banks. Watch below:
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When deBanked reached out to fintech market participants for comment on Ron Suber’s sudden departure as Prosper’s president, the responses were the same — ‘anything for Ron.’ Dubbed the Godfather of fintech, Suber might deserve superhero status given the recapitalization that he and the Vermuts led half a decade ago to save Prosper Marketplace. That type of rescue inspires the kind of loyalty that investors and other fintech participants are displaying not only for Suber but also the Prosper brand.
“Ron is an incredible business partner. His word is always good. He doesn’t overpromise, and he always follows through. We were honored to work with a guy like that,” said Matt O’Malley, co-founder and president of Looking Glass Investments, which has been investing on the Prosper platform since 2008.
Perhaps he has never seen him overpromise but in recent weeks he and many other investors on the Prosper platform did observe an overstatement of returns. O’Malley calls it a forgivable mistake.
“In my view, it is our responsibility to track our returns. Prosper provides an extremely robust data set. We have the ability to calculate our returns daily,” said O’Malley, pointing to a nascent fintech market that is still evolving. “This asset class is new. If you compare it to investing in stocks and bonds, it’s in its infancy. When preparing returns, it’s very challenging to determine what they are,” he said.
Looking Glass has been investing in individual loans on the Prosper platform since before Suber’s time and has watched as the former Wells Fargo executive has transformed the peer-to-peer lender to welcome institutional investors.
“He didn’t have to let us stay on the platform. They could have chosen to replace the little guy. But that isn’t how he does business. He knew the investment banks and [other] banks would get involved, however he knew there was enough room for everyone,” said O’Malley.
That day is here, evidenced by Prosper’s previously announced deal with a consortium of institutional investors to purchase $5 billion worth of loans via the Prosper platform over the next couple of years.
FT Partners was the lead advisor on that deal.
“When they needed capital they could have chosen anybody to help. We were excited to be the chosen one to help them on the deal. It was one of fintech’s largest deals and certainly the largest of its kind,” said Steve McLaughlin, founder of FT Partners.
McLaughlin went on to explain the unique circumstances surrounding the transaction, including a lack of diversification tied to Prosper’s capital sources, which he added was a learning experience not only for the peer-to-peer lender but for all of fintech.
“They were focused on getting capital from hedge funds in a steady stream. When the capital markets had a blip, lots of that capital backed away. It was an unprecedented thing to go out and get a $5 billion forward agreement from a series of investors. “There was nothing cookie cutter about it,” said McLaughlin.
Since then the rest of fintech seems to be catching on.
“FT Partners is getting a lot of attention and a lot of calls for all of the other activity we are doing in the space as well. We raised capital for Prosper and a bunch of other companies, including Earnest, GreenSky, Upstart, Kabbage and others. We get a lot of calls, and we’re doing a lot of deals in the space. It’s a lot of fun,” McLaughlin said.
Much of the success of the multi-billion dollar Prosper deal was thanks to Suber.
“A lot of people are very familiar with Ron and the Prosper story and view Prosper as a high-end institution that while having some issues on financing had a very big and long-term future. Lots of Ron’s connections from before came into play in the round,” said McLaughlin.
Now that Suber is out of the picture in an official capacity, investors have every right to be disappointed. But as McLaughlin pointed out, Suber remains a big shareholder in Prosper and the peer-to-peer lender’s greatest supporter, two things that the FT Partners founder does not expect to change.
“This is not a major blow for Prosper. They maintain Ron as a friend of the firm and as an advisor. He has great friends and colleagues at Prosper. He is not going to work for anybody else. He won’t be doing anything with any other lending companies, I don’t think. He may be able to do more good from the outside than the inside at Prosper. I think Ron will always be part of the Prosper family,” McLaughlin said.
If things were going so well for Suber ushering Prosper into its chapter that included expanding the role of institutions on the platform then why is he leaving now? While Suber himself was not available to answer that question, the answer seems to be that it is personal. The fintech community knows Suber for his role in advancing this new asset class but what people might not know is that he is also a husband and a father.
“I think he just feels like this is more of a personal shift,” McLaughlin said.
O’Malley’s impression was similar. Upon joining the fintech startup, Suber made it a point to get to know the Looking Glass team.
“Ron invited us to breakfast. We did this three times. I remember meeting him and thinking this guy is exactly what we need – extra bright, charismatic and he talked lovingly about his children and his wife. He even joked that marriage is like yoga – it’s harder than it looks,” O’Malley said. “My guess is they are going to spend some time together as a family. And he is going to come back bigger and better than ever.”
Meanwhile Both O’Malley and McLaughlin were familiar with Prosper before Suber came on board, and both will remain engaged with Prosper even after Suber’s departure.
“They’re terrific and we have a great relationship. If they do something, we’re definitely the banker for it,” said McLaughlin.
O’Malley’s commitment is steadfast “We will remain loyal,” he said.
4/11 Regions Bank recruited Kabbage’s chief technology officer, Amala Duggirala, to become its chief information officer
4/12 Federal Reserve Published their 2016 Small Business Credit Survey
- Marathon Partners, a minority shareholder of OnDeck, publicly called on the company to make changes
- Fifth Third Bank partnered with Accion to support lending to underserved small businesses
4/17 Affirm surpassed the mark of making more than 1 million loans since inception
4/20 YieldStreet surpassed $100M in loans funded since inception
4/21 Glenn Goldman stepped down as Credibly’s CEO
- SmartBiz Loans announced partnership with Sacramento-based Five Star Bank
- CommonBond begins offering loans to undergrads directly
4/26 State regulators sued OCC over fintech charter proposal
- IOU Financial announced that they loaned $107.6M to small businesses in Q1
- China Rapid Finance announced their IPO
- Funding Circle closed their online forum
- Elevate’s Debt facility with Victory Park Capital increased from $150M to $250M
- Prosper Marketplace disclosed that it miscalculated returns shown to retail investors
- Square announced that they loaned $251M to small businesses in Q1
- Nav raised $13M from investors that include Goldman Sachs and Steve Cohen’s Point72 Ventures
- Vermont governor signed into law new licensing requirements for anyone soliciting loans to Vermont borrowers.
- Lending Club announced that they loaned $1.96B in Q1
5/5 Thomas Curry steps down as OCC head, replaced by Acting Head Keith Noreika
- OnDeck announced it was substantially reducing its workforce as part of its plan to achieve profitability. The stock price proceeded to hit record lows.
- Dv01 announced reporting partnership with SoFi
- With no IPO on the horizon, SoFi revealed that they began letting their employees sell some of their stock
- In the United States District Court, The Southern District of New York ruled that a purchase of future receivables was not a loan largely because it was not absolutely payable. Colonial Funding Network, Inc. as servicing provider for TVT Capital, LLC v. Epazz, Inc. CynergyCorporation, and Shaun Passley a/k/a Shaun A. Passley
- The value of 1 Bitcoin surpassed $1,700.
- CFPB announces that it will begin work on small business loan data collection pursuant to Section 1071 of Dodd-Frank.
- CFPB publishes a white paper on small business lending
- SoFi revealed that they will apply for an industrial bank charter
5/12 NY’s banking regulator sued the OCC over its proposed fintech charters
Prosper announced that they lent $585M in Q1 and had a net loss of $23.9M
- Media outlets reported that SoFi is expanding into wealth management
- Lending Club named PayPal’s former head of Global Credit Steve Allocca as President
- OnDeck’s share price hit a new all-time low
Online lender Upstart considers more than 10,000 variables such as an applicant’s education, academic performance, and employment background, according to their website, a proprietary system they say is used to detect “future prime” borrowers. But according to a recent Kroll Rating Agency report, their borrower base looks prime even by traditional standards in that their average borrower is 28 years old, earns $95,000 a year and has a FICO score of 690. Upstart lends money (through Cross River Bank) to individuals for a variety of purposes including student loan refinancing and debt consolidation.
In the Kroll report, Upstart asserts its belief that its use of additional data points will outperform traditional credit models, but concedes that their system has not been tested through economic cycles.
Upstart has raised $88.35 million in equity to-date. The Kroll Report was prepared in anticipation of a $163 million securitization transaction that is expected to close this month. They expect to be making $100 million of loans per month by the end of the year.
The marketplace for consumer and small-business loans has come a long way over the last 10 years. Since the early days of peer-to-peer lending, there has been a great proliferation of new types of intermediaries creating new layers of distribution for the risk involved with the lending process. Now marketplace lending has reached an inflection point that will create a much different scenario with fewer players and more partnerships.
“Marketplace lending has created a much richer ecosystem for risk distribution,” said Shane Hadden, a marketplace lending consultant at BlackLine Advisory Group. “There are many more participants on the investor side, new origination strategies and more intermediaries. We are seeing new types of risk being distributed to the best holders of that risk. This is a very good development for consumers and small business borrowers.”
Now that investors agree that marketplace lending risk is attractive, this segment is poised to mature. Hadden has turned his attention toward the next stage of marketplace lending.
“Marketplace lending has been about intermediation with new types of technology-driven companies being placed between the risk and the ultimate loan holder. That’s going to collapse back over time,” said Hadden.
Indeed marketplace lending to date has been the practice of lenders going around the banks to reach bank customers. This has created a market where lenders are competing against banks for originating credit risk that they then distribute, which in turn has created an appetite from investors for this type of risk.
Now that investors agree this is the type of risk they desire, they’re examining the process to determine the most cost efficient way to take on this risk. As they look down the marketplace lending supply chain, they’re faced with multiple layers that ultimately lead to the consumer.
“The next phase is that investment firms will partner directly with credit originators, the ones that have the data. They will partner with banks, for example, directly. Or with data driven online aggregators like Credit Karma Whoever is the ultimate holder of the loan partners with the company that has the best primary relationships with the borrower, cutting out the middle man,” said Hadden.
The linchpin holding this model all together is technology including machine learning, which is driving more efficient distribution. “Technology is what has made marketplace lending so rich and competitive. But technology firms must now compete within the market they’ve created. And typically technology – once it exists can be commoditized,” said Hadden, adding that technology will eliminate intermediaries, not create new ones.
Meanwhile, growth for the software providers will be through partnerships. “In the short run technology companies will participate as new financial intermediaries, but that will eventually correct itself and we will be in a situation where there are fewer intermediaries. When the smoke clears, all of the technology will be in the hands of two parties — the primary originators and the ultimate lenders,” said Hadden.
So the big question is ‘who will survive?’ According to Hadden, it will be the players that transition into a natural competitive position as either the lender or the risk originator. “These are the two big specialties. Either you have capital and algorithms and are good at investing or you have relationships and data and you are good at originating loans. These firms need to go in one direction or the other,” said Hadden.
While the patchwork of the new marketplace lending space has yet to be completed, one thing seems abundantly clear. “It will look different from what it looks like today,” said Hadden.
Move over New York, California and Florida because Texas has become a strong incubator for alternative small business finance. In this newest deBanked magazine issue, we went to Dallas-Fort Worth, Austin and Corpus Christi to find out how and why non-bank financing products are flourishing. We were impressed by what we found and inspired just enough to dub Texas The ‘Loan‘ Star State.
And we went bigger than Texas (if that can be believed) by exploring how alternative lenders are spreading their wings beyond the states into other countries like the UK, Australia and Canada. But does it make sense to go abroad before you’ve cornered the market domestically? Industry captains share their thoughts.
There’s more of course, like how new tweaks to automated processes are actually making manual underwriting exercises easier. That itself has re-opened a debate that won’t seem to go away, humans vs computers in underwriting. In 2017, the humans aren’t out of the game yet and some think they never will be, but there are new tools available to increase speed and efficiency.
There’s legal decisions you’ll want to read and details about a new small business lending regulator you’ll want to know about. It’s all in the May/June 2017 issue that subscribers will be receiving in the mail soon and if you’re not subscribed, you should sign up FREE right now!
A class action lawsuit filed against Lending Club last year isn’t going away. On Thursday, United States District Judge William Alsup denied parts of Lending Club’s motion to dismiss, meaning that the securities fraud case will continue to move forward.
The complaint touched on several issues related to former CEO Renaud Laplanche’s departure, including a conflict of interest he had with a related company named Cirrix, misreported loan volume figures, and manipulated loan data.
In one area of the decision, the judge held that allegations relating to internal controls were adequately pled in that the registration statement represented that disclosure controls and procedures were effective at a reasonable level, when in fact the company represented eighteen months later that internal controls actually suffered from various material weaknesses.
“Reasonable investors would have found it important to know of CEO Laplanche’s prior efforts to drive his company’s performance with artificially initiated loans, and even more importantly, that LendingClub’s internal controls could not effectively curb the artifice,” the judge wrote.
The case # is 3:16-cv-02627-WHA in the Northern District of California. The lead plaintiff is the Water and Power Employees’ Retirement, Disability and Death Plan of the City of Los Angeles.
Lending Club’s stock was down 62% from its IPO price as of Thursday’s close but was up almost 9% on the year, according to the deBanked Tracker.
The micro retail investor can no longer experiment with peer-to-peer lending through just a handful of loans, according to a recent announcement made by Lending Club. Going forward, new users must deposit at least $1,000 to get started. Those investors can still allocate $25 per loan, however. The reason for the deposit increase? Forced diversification.
A Lending Club blog post explained that “data shows that Lending Club investors who are able to diversify their accounts have generally experienced less volatility than investors with more concentrated holdings. This is in part because investors are able to purchase multiple Notes, reducing their exposure to any single Note.” 98% of accounts with more than 100 notes have experienced positive returns, they claim.
On the LendAcademy blog, Peter Renton advocated for an even higher minimum, $2,500, so that investors could at least start off with 100 notes.
It’s an acknowledgment that the type of investing actually carries the risk of loss and is not actually for everyone. I would not be surprised if they eventually set a minimum deposit amount of $10,000 or simply phased out retail investors altogether in favor of accredited ones at a minimum instead. Time will tell.
Prosper had a net loss of $23.9 million in Q1 on only $30.8 million in revenue, according to the 10-Q they filed Monday. They originated $585.6 million in loans, 90% of which were funded through their Whole Loan Channel, the segment made up of accredited and institutional investors who buy entire loans.
Prosper had 371 full-time employees at the end of Q1 compared to 667 full-time employees at the end of Q1 2017.
The full report can viewed here.
Note: The net loss figure was originally published with an incorrect digit. It has since been corrected
Investor returns weren’t what they claimed for at least seven quarters, according to a notice Prosper issued on Wednesday.
It recently came to our attention that the annualized net return numbers displayed on your account overview page were inaccurate due to a system error. This error affected the Annualized Net Return and Seasoned Net Annualized Return numbers and has now been fixed.
This error did not impact any other part of your account, including payments, deposits, monthly statements, tax documents and note and loan level information – including estimated returns.
We sincerely apologize for this error. If you have any questions, please email us at firstname.lastname@example.org.
And this was no small adjustment. On LendAcademy, Ryan Lichtenwald said his returns were adjusted from 13.55% down to 9.27%. One user on the LendAcademy forum said his returns were adjusted down from 10% to 8% and another from 14% to 7%. Yet another individual who interacted with me on twitter claims his return dropped from 10% to 1.2%. While we can’t confirm some of these accounts, Prosper’s admission and Lichtenwald’s post on LendAcademy are pretty alarming.
An old LendAcademy forum post shows users mulling over Prosper’s return calculation more than a year ago, but were unsure what to make of it.
In December 2016, the subject came up again.
That same month, Prosper hired a new CFO, Usama Ashraf.
Update: According to Bloomberg, “some of the investors that were affected saw their annual returns fall in half, but in most cases returns fell less than 2 percentage points.” A Prosper spokesperson said that the issue has been going on for several quarters.
Update 2: According to Financial Times, “The miscalculations affected a majority of Prosper’s customers and date back as far as seven quarters.”
Links to additional websites that show investors were growing suspicious of Prosper’s calculations:
Oct 2016: Prosper showing return of 8% – “What I don’t understand, is that when I look at my statements and compare account balances, I’m seeing a return of closer to 4%.”
Jan 2017: “Here is my issue. Since last summer, my charge offs have skyrocketed, and my returns the past 7 months or so have been about 1%! That is annoying, but what really is pissing me off, is their math shows that I still have returns of 14.5%. No matter how I slice it, that math doesn’t add up.”
Reactions from Prosper investors on the Internet:
“My displayed returns are now 1/2 of what they used to be.”
Just a few years ago, the financial services community was fixing for a battle of David and Goliath proportions—with scrappy, upstart online lenders threatening to rise up and vanquish the fearful and mighty brick and mortar banks. Instead, the unexpected happened: a number of well-respected online lenders and banks set aside their battle arms and began looking for ways to collaborate with their rivals—offloading loans, making referral agreements and establishing more formal partnerships, for example.
“In the real world, sometimes David wins. Sometimes Goliath wins. Just as plausibly, sometimes both sides carve up a market and they often have different offerings that target unique customers,” says Brayden McCarthy, vice president of strategy at Fundera, a New York-based marketplace for small business lending that works with a variety of lenders, including traditional banks.
Certainly, the change didn’t happen overnight. But over time, both online lenders and banks have been forced to tailor their expectations more closely to market realities. Despite their fast growth trajectory, several online lenders have come to realize that they lack several things many banks have, namely a strong, time-tested brand, a solid customer base and ample capital. Banks, meanwhile, have realized that their slow start out of the gate with respect to technology is a severe competitive disadvantage, and that they need more nimble, savvy partners to stay in the game.
Given these shifts, more and more online lenders and banks are taking the approach that if you can’t beat ‘em, join ‘em. Although some industry leaders are actively pursuing strategies that put them in direct competition with banks, partnerships of varying degrees between traditional banks and alternative players are increasingly common. As a result, the lines separating the two are getting increasingly blurry.
“Market forces are acting as a shotgun at the wedding. Whether the two sides are entirely comfortable with the marriage is irrelevant, they need one another,” says Patricia Hewitt, chief executive of PG Research & Advisory Services LLC in Savannah, Georgia. “They’re stronger together than they are alone.”
The evolution of Square is a prime example. The San Francisco-based company really packed a punch in the merchant services world with its mobile card reader designed for small businesses. From there, the payments company sought additional ways to diversify, eventually turning to merchant cash advance as a way to help small business customers obtain funds quickly. Then, in March of last year, Square moved into online lending, teaming up with Celtic Bank of Utah to offer small business loans online. The partnership got off to a running start. In its most recent earnings report, Square said it facilitated 40,000 business loans totaling $248 million in the fourth quarter of 2016—up 68 percent year over year—while maintaining loan default rates at roughly 4 percent.
Even SoFi, the San Francisco-based online lender that has been pointedly outspoken in its anti-bank rhetoric, now has bank-like aspirations. In February, the lender acquired mobile banking startup Zenbanx, giving it the ability to offer checking accounts and credit cards in 2017. Also in February, SoFi teamed up with Promontory Interfinancial Network to enable community banks to purchase super-prime student loans originated by the online lender. Large banks have been buying SoFi loans for several years.
COLLABORATION IS THE WAVE OF THE FUTURE
Many see collaboration between banks and online lenders as a logical step in the industry’s evolution. Online disrupters have forever changed the face of lending—in the same way that online brokerage shaped the financial advisor industry, according to Bill Ullman, chief commercial officer of Orchard Platform.
“There’s a tendency to want to view things as either black or white, online lenders vs. banks. The reality is that the entire financial services industry is undergoing a transformation with technology as the core driver,” he says. “I am of the view that both traditional financial services companies and fintech players can survive and thrive,” Ullman says.
For its part, Orchard recently inked a deal with Sandler O’Neill that provides access to the Orchard platform for the investment bank and brokerage firm’s bank and specialty finance clients. The deal is expected to help small banks better evaluate their options with respect to online lending opportunities.
Partnerships between online lenders and banks take many forms. Some of them are behind the scenes, where marketplaces sell loans to banks or banks informally refer customers. Others are more public. For example, in September 2015, Prosper and Radius Bank of Boston teamed up to offer personal loans to certain customers through the bank’s website using the Prosper platform. Customers can borrow from $2,000 to $35,000 in this manner.
Then in December 2015, JPMorgan Chase and OnDeck joined forces in order to dramatically speed up the process of providing loans to some of the banking giant’s small business customers. In April 2016, Regions Bank and Avant announced a partnership to better serve customers who don’t meet Regions’ credit criteria.
Avant’s customers typically have a credit score between 600 and 700, while Regions sets the bar higher. “The benefit for banks is that they do not need to worry about a platform taking away customers that meet their own credit criteria,” according to Carolyn Blackman Gasbarra, head of public relation at Avant.
She notes that Avant expects to replicate this model with more banks in 2017. “Lately many platforms and banks have come to realize their counterparts are more friend than foe,” she says.
Given the changing tides, industry watchers expect to see more relationships develop between online lenders and banks over time. These could include referral agreements, technology licensing arrangements, formalized revenue-sharing partnerships and perhaps even outright acquisitions.
Certainly, working together can be mutually beneficial for both online lenders and banks. For new online lenders and other fintech players, partnering with an established bank allows them to bypass significant regulatory and compliance hurdles because the necessary requirements are already in place.
“Why jump through all the hoops when you can just have a buddy system with an existing lender?” says Kerri Moriarty, head of company development at Cinch Financial, a Boston-based company dedicated to helping people make smarter investment decisions.
Fintechs that license their technology to banks still have to meet the high standards of third-party vendors determined by bank regulators, notes Stan Orszula, co-head of the fintech team at the Chicago law firm Barack Ferrazzano Kirschbaum & Nagelberg LLP.
“But it’s still less onerous than being a direct lender,” says Orszula, who works closely with banks and fintech providers on legal, regulatory and corporate issues. “They are learning that they need banks. They really do.”
Even seasoned online lenders that have a regulatory framework in place can benefit from bank relationships by using banks’ established brands as leverage. “Everyone knows Chase, Bank of America and American Express,” says McCarthy of Fundera. “They have a solid name and a solid in-built customer base to be able to offer product to them,” he says.
Teaming up with a bank gives added credibility to an online lender, at a time when the public’s confidence has faltered due to highly publicized troubles at certain firms. “Partnering has a very important signaling effect that these online players are here to stay,” McCarthy says.
Banks, meanwhile, need the nimbleness and innovation that online lenders provide. “Banks realize they have to catch up with the fintech disrupters,” says Mark E. Curry, president and chief executive of SOL Partners, which provides strategic management and information technology consulting services to financial services companies.
DIFFERENT TYPES OF PARTNERSHIP OPPORTUNITIES ABOUND
When it comes to partnerships between banks and online players, there are numerous options. In the small business lending space, for example, McCarthy of Fundera says he expects banks to continue buying loans from online lenders, as they have been for many years. He also expects more banks will route declined applicants to online lenders or online loan brokers. “This is a partnership that will allow them to make up some incremental revenue by referring business,” he says.
In addition, McCarthy says he expects banks to make products available through online marketplaces and use an online lender’s technology for online loan applications. He also expects banks will use online lenders’ technology for underwriting and servicing loans.
Years ago, before John Donovan joined Bizfi, he recalls talking to a salesman for a large national bank. The bank didn’t offer a lending product that he could give to small businesses and the salesman was losing customers as a result. “That’s where we see a lot of those opportunities,” says Donovan, chief executive of the online marketplace for small business loans.
For instance in March 2016, Bizfi partnered with Western Independent Bankers, a trade association, for over about 600 community and regional banks, to link small business clients to financing options through Bizfi. Many banks don’t offer small business loans below $150,000, whereas the average loan Bizfi does is $40,000, Donovan says, adding that the company would like to develop additional relationships similar to its agreement with Western Independent Bankers.
In the future, he predicts fintechs will continue to be more receptive to the idea of working with banks and vice versa, as the industry digests the impact of deals that are still in their early days.
FINDING STRATEGIC GROWTH OPPORTUNITIES
As banks and online lenders become increasingly accustomed to working together, there may be more opportunities for strategic acquisitions. For instance, Sandeep Kumar, managing director of Synechron, a global consulting and technology firm, expects to see banks—especially mid-tier players that don’t have the resources to innovate like big banks buying lending-related start-ups. He says banks will likely be most interested in companies that can help them with AI and other techniques to pinpoint where they should spend more efforts on cross-selling and customer profiling, for example. “There are many start-ups in this area that have very compelling technology,” he says.
On the other hand, Chris Skinner, an independent commentator at The Finanser Ltd., a research and consulting firm in London, points out that the two cultures don’t always mesh. “Quite a few startups have young, entrepreneurial founders that would loath the idea being acquired by a bank. So it really depends on the circumstances,” he says.
Valuation differences between large banks and leading online lenders may also be a sticking point for some deals, Ullman of Orchard points out. Banks’ concern over their valuation “will place a certain amount of restraint and discipline on the tech M&A activities they pursue,” he says.
ANTICIPATING TROUBLE IN PARADISE
While increased collaboration between online lenders and banks sounds good on the surface, John Zepecki, group head of product management for lending at D+H in San Francisco, urges both sides to proceed with caution. “You have to find an arrangement where you don’t have conflict,” he says. “If your innovation partner also is a competitor, it’s a challenge. If you have an inherent conflict, it doesn’t get better over time.”
That’s one reason why companies like Chicago-based Akouba have come on the scene. In Akouba’s case, its goal is to provide banks with the technology such that they don’t have to partner with an online lender that has the potential to compete for business. “We don’t compete with the bank in any way whatsoever,” says Chris Rentner, the company’s founder and chief executive.
Akouba’s business lending platform—which the American Bankers Association endorsed in February—provides banks with leading edge technology that integrates the bank’s own unique credit policies into a convenient, online process—from application to documentation— all the way to closing and funding. The bank uses its own credit policies, originates its own loans and owns the entire brand and customer relationship.
Rentner says he started the business with the idea in mind that the online lending model wouldn’t be sustainable long-term and that working alongside banks—as opposed to competing head to head— was the direction to go. “The idea that they could somehow get all of the consumers out of the banking world and onto their platforms was never going to happen. That’s why we exist today,” he says.