Marketplace Lending
Analytics Startup Gets $5 Million in Seed Round from Soros, Jefferies
March 14, 2016
Another day, another fintech round.
George Soros-led Soros Fund Management and Jefferies Group invested $5 million in portfolio management and loan analytics platform, DV01 a New York-based startup that was founded in 2014 by Perry Rahbar, a former JP Morgan mortgage bond trader.
The platform advises investors on which loans to refinance through marketplace lenders like Prosper and Lending Club. Bloomberg reported that Soros had committed $2 million to the company in a separate round of financing.
As the marketplace for loans grows, so does the market to judge those marketplaces. Today, there are over a dozen startups working in big data analytics providing a wide net of services like forex trading portals, digital advisory platforms and social network for investors.
Specifically speaking of credit risk analytics, last year, PeerIQ secured $6 million in total funding from Morgan Stanley CEO John Mack and former Citigroup chief Vikram Pandit. But that is only a fraction of venture capital dollars. As far as funding goes, lenders are still the cream of the fintech crop where American fintech companies raised $7 billion over 351 venture capital-backed deals in 2015 with SoFi, Zenefits, Avant and Prosper Loans as frontrunners. This trend is likely to continue in the context of the recent IPOs in the industry. The noteworthy fintech IPOs like OnDeck, Lending Club and Square debuted with a bang but are struggling to find ground.
SoFi, Prosper Investor Bets on UK Online Lender
March 14, 2016Capital One-backed QED investors is putting more money where their money is — in online lending. After taking bets on Prosper Loans and SoFi, the venture capital firm crossed the pond to invest in UK-based student loans lender Future Finance.
The Dublin-based company raised $171 million from marquee investors like Blackstone Group and QED investors in addition to the existing credit facility with Goldman Sachs and will use $100 million towards selling more loans. The two-year old online lender has received over 37,000 applications to date since 2014.
The injection “will enable many more students in the U.K. to access higher education and invest in their future careers,” Chief Executive Officer Brian Norton said, according to Bloomberg. In a video interview, Norton pointed out that the affordable government loans, although great, aren’t enough.
And this may have come at an opportune time when the UK government said last month that it will continue to provide considerable subsidies for higher education including underwriting student loans, on one hand and making it a criminal offense to default on student loans on the other.
Prosper Rebrands BillGuard as Prosper Daily
March 10, 2016Marketplace Lender, Prosper Loans relaunched expenses tracking app BillGuard under its own brand as Prosper Daily.
The P2P lender acquired BillGuard, a personal finance management app for $30 million in September 2015. Relaunched as Prosper Daily, the app lets users view financial accounts, budget, spend and monitor credit scores.
Prosper started as a marketplace in 2005 for personal loans ranging from $2,000 to $35,000. This is the San Francisco-based company’s attempt at evolving as a personal finance company. “We’re excited to be the first marketplace lender to offer a financial wellness app to consumers,” said Prosper CEO Aaron Vemut.
If Wall Street Likes Square, Why Is the Stock Falling?
March 10, 2016
Jack Dorsey-led payments company Square released its first earnings as a public company yesterday and although it did not disappoint, it just wasn’t enough to keep its stock from tumbling.
Square’s stock opened 7.86 percent lower today even after its fourth-quarter revenues totaling $374 million beat analysts expectations hovering around $345 million. The San Francisco-based company proved to skeptics that its business is more than just payments with a convincing quarter. The seven year old company that went public in November 2015, originated more than $400 million in merchant cash advances annually and over $150 million in the fourth quarter with an average deal size of $6,000 and its software and data business brought $58 million in annual revenue.
Square also processed $10.2 billion in payments from 2 million merchants in the fourth-quarter, at an annual increase of 47 percent. Square realized that the best way to retain consumers is to sell them more products without losing its core — payments. The company received 350,000 orders for the mobile point of sale chip reader which accepts payments on smartphones. “We want to associate our logo with the ability to pay with your phone,” said Jack Dorsey during the earnings call.
Square is confident that it has built a “cohesive commerce ecosystem” for merchants. Then why is the stock being punished?
Is Online Lending the Cream of the Fintech Crop?
March 10, 2016
American fintech companies raised $7 billion over 351 venture capital-backed deals in 2015 and leading the pack were online lenders like SoFi, Zenefits, Avant and Prosper Loans.
A new report released by CB Insights and KPMG shows a record spike in VC-backed fintech deals, hitting $14 billion globally and making up 73 percent of all VC funding. The purview of fintech included companies in lending, payments, personal finance, bitcoin and equity crowdfunding.
In the U.S., the pack was led by marketplace lender SoFi raising over $1.35 billion, with SoftBank investing a billion in the San Francisco-based startup. Other noteworthy investments included $500 million into payroll service startup Zenefits, online lenders Avant and Affirm, which provide installment loans and credit scoring services.
Other Highlights
- Major corporations participated in one of every four fintech deals
- Investment in bitcoin and blockchain was up 76 percent annually
- 14 of the 19 fintech ‘unicorns’ (startups with a billion dollar valuation) were in lending and payments
- Citigroup (13 deals) and Goldman Sachs (10 deals) led investing in VC-backed fintech startups in the past four years.
- Top fintech companies of the year were Lending Club, Square and OnDeck Capital.
EX-ECB Official To Join Funding Circle Board
March 9, 2016
How does a company get street cred in the corporate hood? By hiring some big guys.
Today, Lending marketplace Funding Circle announced that it hired former Executive Board Member of the European Central Bank (ECB), Jörg Asmussen, to join the Funding Circle board.
This is latest of key hires made by alternative lending companies recently. Last month, stealth P2P insurance startup Lemonade hired famous behavioral economist, Dan Ariely, and ex-Deutsche Bank head Anshu Jain joined the SoFi board. And yesterday, deBanked wrote about lending platform LendKey hiring ex-treasury official Salil Mehta.
Asmussen is a German economist and policymaker and has held numerous high-profile positions within the public sector. From 2012 to 2013 he served as Executive Board Member of the European Central Bank (ECB), and from 2008 to 2012 he was State Secretary at the German Ministry of Finance, responsible for European Affairs and Financial Markets. Most recently, he was State Secretary for the German Ministry of Labour and Social Affairs.
Last year, Funding Circle acquired German lender Zencap, gaining a foothold in Europe, in countries like Germany, Spain and the Netherlands, along with its operations in the UK and US. In the four years of its existence, more than $2 billion has been lent on the Funding Circle marketplace to more than 15,000 businesses.
“Jörg is one of Germany’s most respected economists and has spent a lifetime shaping government and central banking,” said Matthias Knecht, co-founder and Managing Director of Funding Circle Continental Europe, “As we accelerate our growth across Europe, his experience in European regulation and unique insights into the challenges faced by small businesses will be an invaluable asset.”
CB Insights and KPMG estimated the global investment in fintech companies to total US $19.1 billion in 2015, with US$13.8 billion invested into VC-backed fintech companies, a 106 percent jump compared to 2014. Backed by marquee investors, companies like SoFi and Lemonade have the muscle to make key hires.
Marketplace Lending Investors: Enjoy Redlining While it Lasts
March 9, 2016
For investors, geographic discrimination in marketplace lending is not only a possibility, it’s a privilege and a joy
Two years ago, LendingMemo’s Simon Cunningham openly boasted about his exclusion of Florida borrowers from his marketplace lending strategy. In, The Joy of Redlining: Why I Never Lend Money to Florida, Cunningham wrote “folks from Florida are less likely, in a statistically significant way, to pay back their p2p loans. So I have never loaned a dollar to people in Florida, and have gone on to earn a higher net return on my peer to peer investment than 90% of p2p lenders.”
And he could openly say that because so long as the lenders are the ones making the loans, it’s within his right to buy pieces of the ones he wants in a secondary market. If Lending Club themselves were to underwrite that way however, well then they could potentially be accused of discriminatory redlining.
Lending Club used to offer rather precise geographic data to investors such as the actual city of the borrower, but that has since changed to only include the first 3 digits of the zip code. Racial and gender identity are obviously not disclosed.
NSR Invest, a marketplace lending investment-advisory firm, told the WSJ that about about 16% of people who buy loans from online marketplaces use a borrower’s state to make lending decisions. Some investors however are simply ignoring states like Vermont, New York and Connecticut because of a peculiar court ruling with jurisdiction over those three states.
Investors might not be able to redline forever, its foretold. According to the WSJ, the CFPB is reviewing this practice. “The agency said it aims to ensure that companies aren’t incorporating potentially discriminatory factors into marketing or underwriting.” Jo Ann Barefoot, a former advisor to the CFPB, said that “it may be unclear whether the investors in marketplace loans would have liability,” adding that the practice is in the regulatory gray space.
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Full disclosure: I currently exclude borrowers from 11 states in my marketplace lending strategy, including Florida.
SoFi Starts Hedge Fund – And It’s Weird
March 8, 2016
With investor interest waning, SoFi’s solution to sell more loans is to launch their own hedge fund to buy them. Are they hypocrites?
Why stop at a dating app when you could also launch a hedge fund?
According to the WSJ, SoFi needs to be able to sell more loans so that they can continue to grow, but investors just aren’t buying them fast enough. A new hedge fund launched last month solely for the purpose of solving this problem has already raised $15 million. It has “a real chance to solve the balance-sheet problems facing the industry,” said SoFi CEO Mike Cagney to the WSJ. Called the SoFi Credit Opportunities Fund, Cagney believes it could grow to manage $1 billion and be used to buy loans from other lenders, not just SoFi.
News of the hedge fund arrives on the heels of a leaked rumor that the company was exploring the formation of a REIT to keep up with its burgeoning mortgage business, which it also does alongside student lending. Just a few months ago, SoFi was reportedly originating more than $50 million a month in mortgages.
Cagney’s choice of words in the WSJ interview seem to depart with his previously held beliefs on the capital markets. “In normal environments, we wouldn’t have brought a deal into the market, but we have to lend. This is the problem with our space,” he said. Emphasis mine.
In Cagney’s August 2015 Op-ed for American Banker, he said “The beauty of marketplaces is real-time information feedback. If there are too many buyers, the loan rates are too high. If there aren’t enough, they are too low.”
In practice, SoFi’s reaction to there not being enough buyers has been to start their own hedge fund to continue originating loans at a fever pitch. Absent a buyer, they’ll simply become their own buyer.
“If there is no buyer, MPLs simply stop lending — they won’t start originating underwater loans,” Cagney wrote back then.
Broadmoor Consulting’s Managing Principal Todd Baker warned of this exact scenario, ironically in an Op-ed battle with Mike Cagney. “An MPL has to keep issuing loans to survive. It can’t slow down lending and slash operating costs to stay afloat while collecting cash from existing loans, like a traditional finance company, because it doesn’t own any loans,” he wrote.
And although SoFi’s survival is not currently at stake, SoFi is indeed not slowing down.
Cagney and Baker actually faced off in person last November at the Marketplace Lending and Investing Conference in NYC. There, Cagney told the crowd that “the beauty of marketplace lending is we’re balance sheet light.” But just a few months later, he’s claiming the industry has “balance-sheet problems,” as in there’s not enough money floating around to buy the loans they want to generate regardless of demand.
Slowing down growth is apparently not a path that SoFi is looking to take. More loans originated means more fee income, and that’s ultimately the conflict of interest that Baker had pointed out.
Brendan Ross, who heads up a similar hedge fund that buys only business loans, expressed concern over the existence of an institutional buyer in the market that is connected to the seller. “You wouldn’t want to have SoFi advisers cherry-picking the best loans,” Ross said to the WSJ.
One thing is certain. SoFi’s “We’re Not a Bank” slogan says what they’re not, but these days it’s becoming harder to tell what exactly they ARE.
