Marketplace Lending
Why Marketplace Lending Euphoria Has Really Ended – It Was Lust not Love
April 13, 2016
“The honeymoon is over,” said Peter Renton at Lendit. He was speaking in reference to the media’s shifting coverage of marketplace lending. Some professionals throughout the conference said the excitement had faded because venture capitalists had already gotten their fill or that there was economic uncertainty or that assets could potentially underperform.
Fitch for example, attributes the euphoria-ending reality check to a lack of available data to support sustainability throughout credit cycles, in addition to regulatory interest.
Those theories aren’t wrong, there’s just not much new about them. These same concerns were raised at length two years ago.
Here’s why the euphoria has really ended:
The unknowns are now known
Two years ago, investors wanted to know who you were, what you did, and how you did it. They wanted to know if it was legal, what you valued yourself at, and how big you thought the market was for that product or service. To investors, these fintech startups were both mysterious and seductive. They were changing the world, uberizing lending, disrupting banking, and showing huge potential for scale. One might say, it was euphoria-inducing.
Calling what happened next a honeymoon implies that there was a marriage. Instead, investors became lust-fueled suitors chasing after The It Girl, confusing their infatuation for real romantic feelings. But like all relationships that start out this way, the investors freaked when their marketplace lender partners admitted they were looking for something long term.
Baby, you know I like you but we haven’t even been through a full credit cycle yet
Marketplace lenders started to talk about marriage, a honeymoon, kids, and heck even moving out to the suburbs to launch a brick and mortar location to complement their online businesses. Maybe they’d even one day accept deposits and become banks themselves.
It’s the kind of talk that can cause an investor to rethink everything.
OMG, are these companies all just banks? Should we be valuing them as banks?!
Suddenly they’re starting to look at their partners in a whole new light. Those once cute flaws are now annoying quirks. And so it’s time to decide if they’re really the one or just another relationship that was fun while it lasted.
Dating the same people
Lending Club’s CEO Renaud Laplanche has been a keynote speaker at Lendit for four years in a row. His company originates more than $8 billion a year in loans. What they do, how they do it, and how much it’s worth, is all disclosed in their quarterly earnings reports.
There’s Lending Club’s competitors, OnDeck, OnDeck’s competitors, SoFi, SoFi’s competitors and so on. Every little sector of marketplace lending has a benchmark. It might be bond ratings, annual origination volume, securitization appetite, public valuation, default statistics, investor base or something else. So even if an investor doesn’t know YOU, they probably know a lot about someone like you. This puts them in a position of power and thus the opportunity to play hard to get.
They still like marketplace lenders, that much was obvious by Lendit’s record attendance this year. They just might be entering a point in their lives where they want a partner they can actually take home to meet their mothers.
If that sounds serious, it’s because it is. Could there be wedding bells in the industry’s future? The real honeymoon has yet to come.
SCORCHED EARTH – Controversial Bill Could Eliminate Marketplace Lending, Merchant Cash Advance and Nonbank Business Loans in Illinois (and starve small businesses in the process)
April 9, 2016
The State of Illinois wants to make it a Class A misdemeanor for providing small businesses with quick, easy working capital.
The world’s strangest bill, dubbed the Small Business Lending Act, could send marketplace lenders, nonbanks, and merchant cash advance companies to prison for up to 1 year if applicants don’t submit at the very least, their most recent six months bank statements, the previous year’s tax return, a current P&L, a current balance sheet, and an accounts receivable aging.
Loans in which the monthly payments exceed at least 50% of the business’s monthly net income would be illegal, which implies that any business that is either breaking even or running at a loss would be banned from obtaining a loan from alternative sources.
This is not an April Fools’ prank. Not even preemption granted under the National Bank Act or Federal Deposit Insurance Act is safe.
Introduced into the State Senate under the pretense that it would squash predatory lenders, the bill’s licensing and compliance proposal would also effectively outlaw marketplace lending and securitizations by making the sale of loans illegal unless it’s to a bank or another state-licensed party. Even merchant cash advances are referenced specifically but almost as an afterthought and defined in such a way that even traditional factoring companies may be in jeopardy.
No licensee or other person shall pledge, assign, hypothecate, or sell a small business loan entered into under this Act by a borrower except to another licensee under this Act, a licensee under the Sales Finance Agency Act, a bank, savings bank, community development financial institution, savings and loan association, or credit union created under the laws of this State or the United States, or to other persons or entities authorized by the Secretary in writing. Sales of such small business loans by licensees under this Act or other persons shall be made by agreement in writing and shall authorize the Secretary to examine the loan documents so hypothecated, pledged, or sold.
At a time when most fintech lenders are advocating for smart regulation, the State of Illinois apparently wants to end all nonbank commercial finance under $250,000 completely, with the exception of one organization (which we’ll get to shortly).
There are some exemptions granted under this proposal of course. Loans over $250,000 aren’t subject to it, nor are any loans made by Illinois-based banks or credit unions, that is unless they are acting as the agent for another party like say perhaps a marketplace lender.
Hidden inside is also an exemption for nonprofit lenders, a loophole left open for Accion Chicago, the nonprofit masterminds behind the bill who seem to want the entire state’s lending market all for themselves.
Illinois State Senator Jacqueline Collins Introduced This Bill
Senator Collins introduced the legislation as an amendment to Senate Bill 2865 on April 6th. A former journalist, she’s now the chairwoman of the Illinois Senate Financial Institutions Committee. Among her self-professed accolades is that she “has played a key role in addressing predatory lending and high foreclosure rates in Chicago through legislation that protects homebuyers and homeowners with subprime mortgages.” She lists the Mortgage Rescue Fraud Act, the landmark Sudan Divestment Act and the Payday Loan Reform Act among her major legislative accomplishments.
It’s no surprise then that sections of the bill are borrowed straight out of the Payday Loan Reform Act. Collins isn’t acting on her own however…
Chicago City Treasurer Kurt Summers
In January, Senator Collins joined Chicago City Treasurer Kurt Summers in a call for “new legislation to protect small business owners from misleading and dishonest predatory lenders.” In a closed-door hearing, the committee supposedly heard from business owners, advocates and elected officials on predatory lending.
“Chicago’s small business community deserves protection from the unchecked greed of predatory lenders,” Treasurer Summers said. “While access to capital is the number one concern of small business owners across the state, bank and commercial loans continue to decline, steering them to underhanded lenders. As we continue to urge banking partners to increase their local investment, this new, common-sense legislation would ensure transparency in lending that so often puts our entrepreneurs at risk.”
Of note is his use of the phrase “banking partners” since this bill has bankers all over it, as we’ll get into shortly. Summers represents the Chicago Mayor’s office and the Mayor’s office says they’ve launched this campaign thanks to partners like Accion Chicago.
Hon. Kurt Summers, Treasurer, City of Chicago from City Club of Chicago on Vimeo.
Accion Chicago and the Mayor’s Office
Last year, Mayor Rahm Emanuel announced a joint campaign with Accion Chicago to help small businesses avoid predatory lending.
Accion Chicago, ironically makes business loans themselves, having originated 535 loans totaling $4.8 million in 2014 with a maximum loan size of $100,000.
Who is Accion Chicago really?
The Small Business Lending Act virtually ensures that small business loans under $250,000 only be facilitated by banks and nonprofits. Isn’t it convenient then that Accion Chicago is not only a nonprofit, but also funded and staffed by banks?
According to their 2014 annual report, Citibank and JPMorgan Chase were two of their three largest supporters (the third was the US Treasury!). Below are some of the figures:
$100,000+
- Citibank
- JPMorgan Chase
$50,000 – $99,999
- Bank of America
$20,000 – $49,999
- Fifth Third Bank
- PNC Bank
- U.S. Bank
$5,000 – $19,999
- American Chartered Bank
- Alliant Credit Union
- BMO Harris Bank
- First Bank of Highland Park
- First Eagle Bank
- First Midwest Bank
- Ridgestone Bank
- State Bank of India
- The PrivateBank
- Wells Fargo Bank
About a dozen more banks gave less than $5,000.
JPMorgan Chase has also been a partner of the annual Taste of Accion fundraising event, and was the lead sponsor in 2014, a spot that costs $30,000. Benefactor sponsorships which cost $20,000 each were comprised of American Chartered Bank, Capital One, Northern Trust Company, and Wintrust Bank. And the lesser sponsorships? Again, mostly banks.
You know who hasn’t donated to Accion Chicago? Marketplace lenders and merchant cash advance companies.
Accion Chicago raised only $1.4 million in 2014 from public support, the bulk of which came from banks or related traditional financial institutions. So is it just a coincidence that this predatory lending bill they’re supporting grants exemptions to all the banks from compliance?
Accion Chicago’s 2014 Board of Directors includes executives from:
- American Chartered Bank (chairman)
- First Eagle Bank
- JPMorgan Chase
- Ridgestone Bank
- MB Financial Bank
- Talmer Bank & trust
- Citibank
- First Midwest Bank
The 2014 committees were made up almost entirely of bank executives from:
- First Eagle Bank
- The PrivateBank
- Ridgestone Bank
- U.S. Bank
- JPMorgan Chase
- Forest Park National Bank & Trust Co.
- MB Financial Bank
- FirstMerit Bank
- Wintrust Bank
- Standard Bank & Trust Co.
- First Midwest Bank
- Wells Fargo Bank
- Seaway Bank & Trust Co.
- Metropolitan Capital Bank
- Evergreen Bank Group
- First Financial Bank
- PNC Bank
Thanks to the impartial work of these good citizens, they have discovered that small businesses should only be working with banks or nonprofits funded and staffed by banks and have craftily devised a bill to legislate all the alternatives out of existence.
If this was really about predatory lending, then they screwed up big time
All coincidences aside, some of the bill’s rules have nothing to do with protecting borrowers, like the required $500,000 surety bond to become licensed for example. Compare that to California’s $25,000 licensed lender surety bond. And the restriction on being able to sell or securitize a loan, how does that help small businesses?
These requirements and others suggest that it’s about preventing all alternatives from existing in the marketplace, rather than predatory alternatives. The losers would undoubtedly be small businesses and the Illinois job market. Senator Collins and Treasurer Summers, both of whom have a strong track record of empowering their constituents financially, may have underestimated or overlooked the likely negative consequences of this bill.
The nonbanks
Several nonbank trade groups are reportedly in the process of formulating a response.
The Commercial Finance Coalition for example, a nonprofit coalition of financial technology companies, told deBanked that they are concerned about the impact this will have on the Illinois job market and will indeed have representatives on the ground in Illinois.
They also wanted to make known that they welcome support from marketplace lenders, nonbanks and merchant cash advance companies in these efforts and that interested parties should email Mary Donahue at mdonohue@commercialfinancecoalition.com
To contact Senator Jacqueline Collins who introduced the bill, call her at 217-782-1607.
Collude, not collide: Why Online Lenders Want to Work with Banks
April 8, 2016
Don’t look now but online lenders are in cahoots with the banks they want to disrupt.
Last week (April 4th), Spanish banking giant Santander shut down 450 branches and partnered with Atlanta-based Kabbage to speed up the underwriting process to provide same day loans.
Today, online consumer lender Avant announced a similar deal with Birmingham, Alabama-based Regions Bank to offer loans anywhere between $1,000 to $35,000. Regions will use Avant’s platform on its website to sell unsecured loans where borrowers get an immediate credit decision and are approved or rejected immediately, with funds being available the very next day.
“Working with Avant, we will be able to offer a better online experience, while maintaining our commitment to responsible lending — something that benefits customers, the community and our shareholders,” said Logan Pichel, executive vice president and head of Consumer Lending for Regions Bank. That said, Regions does not typically approve borrowers with a credit score below 700 while Avant’s customers average a 650 credit score.
So why are lenders befriending the banks they wanted to fight? And what’s in it for banks? Access to a bigger customer banks and quick loan approvals. Banks want to tap into the lean and loose loan processing model that online lenders have become popular for, throwing open a hitherto market of risky borrowers.
Last year, JP Morgan Chase partnered with OnDeck to speed up small business loans for some of the bank’s 4 million customers. As banks tend to lean towards working with alt lenders rather than building competitive products in-house, the industry will only see more such partnerships. As for Avant, the company has more such deals in the pipeline, Adam Hughes, Avant chief operating officer said.
Any bets on who might be next?
LendingRobot is Now Your On-The-Go Marketplace Lending Robo-Advisor
April 8, 2016
Checking your marketplace lending portfolio is now as easy as checking a stock quote
Marketplace Lending just became a little bit more friendly for investors thanks to LendingRobot’s new mobile app. The app allows investors to track the daily performance of their Lending Club, Prosper and Funding Circle portfolios all in one place. Its utility valued is bolstered by the fact that none of the three integrated platforms have published their own investor-oriented mobile apps, which came as a surprise even to LendingRobot CEO Emmanuel Marot.
The app complements the existing web service where investors can set custom filters to automatically buy notes that meet their criteria from the platforms whenever they become available. To date, more than 5,000 investors have signed up to use LendingRobot and more than $80 million of their collective investments are being measured by the service. Most of those users have only integrated their Lending Club or Prosper portfolios as of now, and not just because Funding Circle is a new addition, but also because their model is slightly different. “You have to be an accredited investor,” Marot said of using Funding Circle. There is no such requirement for the other two platforms.
The app is unique because it makes your aggregate marketplace lending portfolio data as handy as the latest stock quote. “It was kind of surprising actually for us to see that we have about 30% of our clients coming several times per week just to check it,” Marot said.
But perhaps as adoption of marketplace lending continues to catch on as part of a normal everyday diversified investment strategy, this will become more of a trend. For investors with large portfolios for example, the robo-advisor is likely acquiring notes for them multiple times per day every day, increasing the likelihood an investor will want to check in regularly to see how they’re doing.
Along with calculating the aggregate and individualized returns based on formulas that LendingRobot devised themselves, users can quickly refer to a baseline value known as their “portfolio health.” This number is not based on some proprietary advanced formula, Marot explained, but is rather the straightforward percentage of notes that are in good standing relative to all “live” notes. Charged-off notes are no longer considered live, Marot said.
Users can also check their portfolio composition, the average time to maturity and the average interest rate being assessed, in addition to being able to review raw figures such as how many notes became late in the last week or paid in full, for example.
Lending Club, Prosper and Funding Circle are just the beginning, Marot said, while expressing optimism about adding other platforms in the future. They saw the original three platforms they’re integrated with now as being a good fit because they are “safe.” “We are very cautious,” he said. Notably, those companies are also the three founders of the newly formed Marketplace Lending Association, of which he voiced support for.
Michael Raneri, a PwC Managing Director and Fintech Advisory Lead, wrote on Forbes that millennials will serve as early adopters for robo-advisors. “The next generation of investors has been quick to embrace new technologies and experiences, and this should apply to robo-advisors,” he wrote. “Furthermore, millennials have a general mistrust of large financial institutions, particularly in the wake of the financial crisis of 2008. Unlike their parents, who forged close relationships with advisors—even using their phones to have conversations with them, as primitive as that sounds—millennials are equally comfortable with making digital connections. They’ve been conditioned to accept that technology can match the performance of its human predecessors, while offering reduced fees and providing greater convenience.”
Marketplace Lending Association Formed to Defend Investor Marketplaces
April 6, 2016
Funding Circle, Lending Club and Prosper have joined forces to create a collaborative non-profit body, i.e. a trade association. Its mission is “to promote a more transparent, efficient, and customer-friendly financial system by supporting the responsible growth of marketplace lending, fostering innovation in financial technology, and encouraging sound public policy.”
Among the already available resources on the association’s website is a white paper dictating “operating standards.”
The standards are broken down into five broad categories:
- Investor Transparency and Fairness
- Responsible Lending
- Safety and Soundness
- Governance and Controls
- Risk Management
The group’s initial members are notable because Prosper only does consumer loans and Funding Circle only does business loans. Lending Club bridges the gap by doing a combination of both. That means that the group’s prospective membership will be fantastically broad. After all, what does a commercial lender providing capital to a $10 million/year business have in common with a personal lender helping a single mother refinance a credit card? The answer is their investor base.
All 3 companies allow investors to invest in loans on their respective marketplaces and lo and behold “investor transparency and fairness” is the first, foremost and most detailed category of their white paper.
Indeed, one requirement to join the association is to be matching 75% of loans, by dollar, with commitments for funding from investors before the loans are issued.
The Marketplace Lending Association therefore probably seeks above all else, permanent acceptance of the ability for investors to buy loans or securities backed by loans in online marketplaces.
And it’s no wonder, just last week SEC Chairman Mary Jo White questioned these marketplaces during a keynote speech at Stanford University. “We expect that investors will receive disclosures about the loans underlying their investments, including information about the borrowers as well as the platform’s proprietary risk and lending models, that will enable them to make informed investment decisions – both at the time of investment and on an ongoing basis,” she said.
The SEC is not alone in their interest, hence the need for and now the emergence of, a Marketplace Lending Association.
Q1 Update: Here are Five Partnership Deals Lenders Struck
April 6, 2016
It’s the end of Q1 and it’s time for that scorecard and see what lenders were up to. The year has been favorable for marketplace and online lenders so far. The Fed kept rates unchanged, small business borrowing peaked in February and many of these companies made impressive hires. As companies prepare for the second quarter, here are some of the key partnerships made by online lenders so far this year.
Opus-OnDeck
The year started with a bang for alt lending posterboy OnDeck Capital with a referral arrangement with California-based Opus Bank. OnDeck will finance Opus’ small business clients requiring up to $500,000 through lines of credit, flexible term loans and quicker processing.
Prosper-HomeAdvisor
Home improvement loans have been a cash cow for San Francisco-based Prosper Loans. Last month, (March 14th), marketplace HomeAdvisor entered into an exclusive multi-year contract with Prosper to provide home improvement loans after the company quietly terminated a similar contract with Lending Club.
As of 2014, approximately 8 percent of Prosper borrowers said their loan was for home improvement. Orchard, in its analysis states that these loans may in part be a substitute for traditional home equity lines of credit, which used to be easier to obtain prior to the housing crash.
Bizfi-West Coast Banking Group,
Small business lender Bizfi struck a deal with Western Independent Bankers, a trade association of community banks in the west coast to be the exclusive alternative finance lender for small businesses that are members of the association.
The New York-based alternative lender also signed on the New York State Restaurant Association to provide equipment financing, invoice financing and lines of credit for 2,000 restaurants that are members.
Avant-Loandepot
Consumer lending company loandepot and marketplace lender Avant launched a borrower referral program. Under the mutual borrower program, the two companies will have access to each other’s customer base to “expand credit options to responsible borrowers.”
Kabbage-NFIB, Santander
Atlanta-based Kabbage landed itself a sweet deal with the National Federation of Independent Business, throwing open a potential market of 325,000 small businesses where members can access lines of credit of up to $100,000 and flexible term loans.
Kabbage also debuted in the UK with Santander Bank which will use Kabbage’s technology to underwrite quick loans up to 100,000 pounds the same day for loans that typically take 2-12 weeks to process.
Santander Cuts Branches, Partners with Kabbage
April 4, 2016
Santander is putting its money where its mouth is and launching Kabbage in UK.
The Spanish banking giant, an investor in Kabbage will use its technology to underwrite quick loans up to 100,000 pounds the same day for loans that typically take 2-12 weeks to process.
The service will roll out over the next two months and will be the bank’s second attempt at allying with an online partner. In 2014, it set up a referral program with UK-based Funding Circle for small business borrowers.
The announcement comes at a time when big banks are shedding weight and becoming leaner to adapt to the digital times. Last Friday (April 1st), Santander said that it will close up to 450 of its 3,467 (13 percent) branches to transition into “cheaper digital channels.”
The road to saving 3 billion euros by 2018 is paved in working with lean businesses like Kabbage. “The way we internalise and adapt to new technology in the coming years will determine our success,” Ana Botin, chairman of Santander said.
This isn’t a one off announcement by Santander. Through its venture arm, Innoventures set up in 2014, the bank dedicated $100 million to invest in fintech startups. The fund participated in Kabbage’s Series E funding last year along with Scotiabank, ING and Reverence Capital Partners.
The bank also set up what it called a “tech-focused international advisory board” led by former US Treasury Secretary Larry Summers with a panel consisting of Red Hat CEO Jim Whitehurst, former Oracle president Charles Phillips and Francisco D’Souza, CEO of software services company Cognizant.
As the alternative lending industry shapes itself into stability with regulation, reducing its dependency on Wall Street’s institutional money, there are doubts whether the industry will stand the test of time in tough credit markets. While venture dollars are increasing in these companies, investors demand more. Fintech upstarts raised $19 billion in 2015 and in the same time, bank staff has been slimming down as investors bet on automated finance to eventually overthrow banking. Already, 46 percent of private funding has gone to lending companies selling cheaper loans easily while the banks focus on the shift of a branch’s transactionary functions to a strategic, consultancy role.
Will we see more such debanking?
Marketplace Lenders Played Everyone for April Fools
April 2, 2016Friday, April 1st, transported the marketplace lending industry into another dimension, one that made us all April Fools. Here’s some of the believable and not so believable jokes that you might have missed:
A federal judge granted a temporary injunction to halt the entire marketplace lending industry
A late-night meeting on Capitol Hill between representatives of three big banks and several members of Congress quickly spiraled out of control, resulting in an emergency hearing that temporarily shuttered the marketplace lending industry.
Donald Trump funded his presidential campaign with a loan from Prosper
Trump didn’t need the money but he borrowed $35,000 anyway because the deal was too good to pass up.
Donald Trump addressed the Money20/20 Conference community
Make payments great again, said Trump.
Survey revealed that kids aged 1 to 4 are concerned about pre-school debt
Without formal credit history, CommonBond is underwriting pre-schoolers for loans based on their favorite character on Sesame Street. “My CommonBond consultant prepared me to make the transition to pre-school,” says Sawyer Thurston Howell III, a 2-year-old and CommonBond member since March 2016.
Loans now funded via drone delivery
As an alternative to ACH, Dealstruck has begun to transfer piles of money to approved borrowers via drones. “After my deal was funded, I logged on, popped in my address and a bag of cash arrived at my business in half an hour! I didn’t even have to go to the bank,” said one customer.
A free puppy with every loan
Borrowell is proud to announce that our loans will now come with a little something extra!https://t.co/CwEczxsxVo pic.twitter.com/nHArqBP1xr
— Borrowell (@Borrowell) April 1, 2016
Much to the disappointment of applicants, this was indeed an April Fools’ joke.
Of course with all the jokes being made out there on Friday, some people thought that OnDeck’s announcement that President Obama had joined their board of directors was also an April Fools’ joke. OnDeck actually made that announcement two days prior, but unfortunately for OnDeck, it didn’t pick up steam in the press until Friday, which by that point gave it the appearance of a prank.
Due to a federal law that prohibits certain presidential conflicts of interest, Obama’s board seat will not have voting power until after his term ends in January 2017. In an interview with the Wall Street Journal on Thursday, OnDeck CEO Noah Breslow denied rumors that Obama was actually being vetted to replace him as CEO. “We will absolutely value his expertise and experience, but it’s unrealistic to think that a former president will have the time to run a publicly traded company.”
Just kidding. April Fools!
