Lufax, an online lending marketplace and one of China’s largest fintech companies, plans on going public by the end of the month on the New York Stock Exchange. Lufax is one of the multiple Chinese fintech companies grappling for a public offering amidst increasing tension between U.S. and Chinese markets.
Offering an online shopping mall for financial products, Lufax connects borrowers to various lending products supplied by traditional and alternative investors alike. Lufax was one of the largest, if not the largest P2P lender in China just two years ago before a major crackdown on the P2P industry forced the company to revamp completely.
Lufax plans to issue 175 million shares that will be priced from $11.5 to $13.5 each, according to a prospectus with the U.S. Securities and Exchange Commission last week. This would net the company around $2.36 billion.
The IPO would give the company around a $30 billion in valuation, lower than the $39.4 billion valuation it received in 2019 from a major backer Ping An Insurance Group.
Lufax reported more than $1 billion of profit in the six months up to June 30th, according to the filing. Last year, the firm’s assets dropped by 6.1% after a 30% reduction in transaction volumes. This was a cut of nearly all P2P transactions, in compliance with regulation from the Chinese government.
After the P2P industry grew unchecked for a decade, fraud concerns bloomed into outrage as hundreds of platforms covering hundreds of billions of dollars defaulted. According to Mckinsey, from 2013 to 2015, fintech firms offering P2P products exploded from 800 to more than 2,500 companies. More than 1,000 of these firms began to default on their debt, ballooning to an outstanding loan value of $218 billion in 2018.
In response to protests, outrage, and stadiums of helpless borrowers trying to gain their funds back from Ponzi schemes, the Chinese government cracked down hard on fraudulent firms. According to Reuters, regulators placed every P2P firm on death row, stating in 2019 that the industry had two years to switch to “small loans.” The shutdowns have cost Chinese investors $115 billion, according to Guo Shuquing, China Banking Regulatory Commission.
Pivoting away from these shutdowns, Lufax and many firms like Alibaba funded Ant Group are switching to lending marketplaces. Lufax works with 50 lending providers that hold $53 billion in assets as of June. Lufax believes that there are trillions of dollars in the untapped alternative finance market in China.
LendingClub is finally ending the “peer-to-peer” aspect of its platform for good. Earlier today, the company announced that it would cease offering and selling Member Payment Dependent Notes effective December 31st.
“Ceasing the Retail Notes program will allow LendingClub to redeploy capital and improve platform efficiency, enabling the company to help even more members as LendingClub progresses towards closing the Merger and becoming a bank holding company,” the company said in an official statement. “All Retail Notes outstanding as of the date the Retail Note program is ceased will be unaffected by the cessation of the program. Accordingly, with respect to such outstanding Retail Notes, LendingClub will continue servicing the corresponding member loans and information regarding such Retail Notes will remain viewable in the applicable Retail Note investor accounts.”
LendingClub rose to fame with its peer-to-peer model nearly a decade ago, but using retail investors to fund loans has been eroding over time. ‘Peers’ Are Almost Gone From Lending Club’s Funding Mix was the title of a February 2019 deBanked story that highlighted this trend, for example.
Meanwhile, the focus on Radius Bank is a reminder that the announcement made nearly 8 months ago is still a work-in-progress.
“In connection with and in furtherance of the Merger, LendingClub has been in regular contact with federal banking regulators and, on September 25, 2020, filed an FR Y-3 application with the Federal Reserve to become a bank holding company,” the company said. “LendingClub plans to offer a full suite of products as a bank. This includes a high-yield savings account that will be initially exclusively available to its existing retail investors and will offer a compelling interest rate, as well as other products that take advantage of the marketplace to allow its customers to both pay less when borrowing and earn more when saving.”
Radius Bank was the subject of a major deBanked Magazine story in 2017 titled Tech Banks: Will Fintech Dethrone Traditional Banking?
On September 23, retail investors on the Lending Club platform in 5 states received strange news, they had been temporarily restricted from buying notes because of the state they lived in. No further information was provided.
74 days later, investors in New York, Florida, Texas, Arizona, and North Dakota (the affected states) are still frozen out from buying notes. Restrictions in a handful of other states have existed for years.
Lending Club was asked about this by Wedbush Securities analyst Henry Coffey on the November 5th Q3 earnings call and CEO Scott Sanborn explained that it was due to a review of their state licensing requirements that was conducted in their pursuit of a bank charter. “As part of our overall preparation for the bank charter, we did an updated review of our licensing requirements,” Sanborn said. “We identified some that we have that we don’t need and some that we believe we need that we don’t have, and that’s what you’re seeing.”
Sanborn went on to describe the overall impact of temporarily losing those investors to their bottom line as immaterial and that they were working quickly to restore investing access.
A month later, the restriction persists. 58 comments on the subject have piled up on a LendAcademy blog post discussing the matter, many of them unhappy. Investors in those states can still trade notes on the secondary market, but that is not really a consolation.
It may not matter. Lending Club stopped relying on individual retail investors as a significant funding source long ago.
StreetShares quietly discontinued a major part of its financing business on November 15, a new disclosure filed with the SEC revealed. “For new customers, the Company is no longer offering to factor invoice receivables,” the letter signed by General Counsel and Chief Compliance Officer Lauren Friend McKelvey says.
The company had purchased more than $112 million in receivables since it began offering this product in December 2016, had serviced 40 customer accounts, and had advanced as much as $7 million on a single invoice as recently as Fiscal Year 2019.
The company has only facilitated $180 million in funding to small businesses since inception in 2014. That would indicate that the invoice factoring portion was roughly half of the company’s funding volume.
As of November 15, the company said it only had one customer remaining that was still using this product and no new ones would be accepted. Instead it would continue to offer only loans and lines of credit.
StreetShares relied heavily on individual retail investors to purchase receivables, their publicly filed financials show. 98.28% of all funds advanced on invoices in FY19 came from the retail investor segment whereas it was only 50.22% in FY18.
The company had also recently reported a heavy net loss and soaring costs.
Ireland can seem like a small place, so much so that on my way to meeting with Colin Canny, Flender’s Head of Partnerships, I quite literally bumped into Flender’s co-founder & CEO Kristjan Koik who was walking through Dublin’s Silicon Docks. I recognized Koik from the who’s who catalogue of executives I had compiled before traveling abroad to explore the Irish fintech scene. He was cordial and polite. And yet through his demeanor I sensed there was more, that there was a story to be told even if it was not ready to be shared.
The following month Flender would reveal remarkable news, a new €75 million funding line, bringing their total to €109 million raised since the company’s founding in 2015. The company is backed by Eiffel Investment Group, Enterprise Ireland, entrepreneur Mark Roden and former Ireland rugby player Jamie Heaslip.
This large amount of funding, even by UK or US standards, makes Flender stand out, and so when I finally meet with Canny on that warm Fall day in September, I’m pretty thankful he afforded me the time.
Flender, Canny explains, is derived from Flexible Lender. The pamphlet he produces and hands to me says that their idea is simple, to provide businesses with the funding they need and ensure the application process is fast, easy, and transparent.
Application details for products like term loans and merchant cash advances require the usual stips like historical bank statements, a profit & loss statement, and a balance sheet. But there’s also a section quintessentially Irish, that is that it can be beneficial to submit your last 2 years herd numbers if you’re a farmer, complete with your last 12 months Milk Reports and property acreage figure.
Canny explains that Flender is not a high-risk fall-back lender, but rather the opposite. “Our credit process is extremely tight,” he says, “in line with banks.” And with good rationale, seeing that the company is still somewhat reliant on a peer-to-peer funding model. More than half of individual peers on the platform are Irish but Canny says that it’s not unusual for non-residents including Americans to lend on the platform as well.
Canny says the Irish market is very “community based.” The transparency of the marketplace aligns with that characterization. Like other peer-to-peer small business lenders in Ireland, borrower identity is publicly accessible on the platform, as are the terms of the loan. Anyone can view the business name of a prospective borrower on the website, the address, a bio, and even their “story.”
Flender taps several marketing channels like Google Adwords, radio, direct sales, and even brokers. Canny says they generate an underwriting decision in as quick as 4-6 hours and fund a business in as little as 24 hours. Borrowers like the product so much that many renew. Seventy percent of the SMEs in the country are peer-to-peer bankable, Canny explains, creating a wide playing field to target.
Meawnwhile, CEO Kristjan Koik told the Irish Times that the top 3 banks in Ireland have 92 percent of the SME lending marketshare so there is still a ton of opportunity for non-banks like Flender to grab hold of.
As for how the massive credit line impacts them going forward? Koik told the Times that they would be cutting interest rates by up to 1 percent across their various loan products. Interest rates now start as low as 6.45% and terms range up to 36 months.
As Canny and I part ways I present one final question, will Flender be expanding abroad? I get no definitive answer. He was cordial and polite, and yet I sensed through his demeanor that there was more, perhaps even a story in the works that was not yet ready to be shared.
Funding Circle UK has begun to refer applicants seeking an amount above their maximum loan size limit of £500,000 to Iwoca, MarketInvoice and French bank BNP Paribas, The Sunday Times reported. Previously, Funding Circle would just turn them away.
Lending Club originated $3.3B in loans in q3 and reported a minor net loss of $400,000. That loss was a $22.4M improvement over the same period last year, mainly due to an increase in “net revenue” and a decrease in class action and regulatory litigation expense. One of those class action lawsuits against them was dismissed on October 31.
Lending Club is the number one provider of personal loans in the country and is continuing to grow their marketshare, CEO Scott Sanborn said during the earnings call. One analyst asked if their continued lead on that could be due to the market’s declining emphasis on growth as a performance metric. Sanborn responded by saying that the competition had not let up at all on marketing and that direct mail marketing and competition is still at operating at an extremely high level.
Google Maps was convinced that I was already at my destination, but that didn’t make sense because I was still sitting in my cramped Airbnb rental apartment in Dublin and hadn’t left to go anywhere yet. “Oh man please tell me Google works in Ireland,” I said to myself while glancing at the time and counting how many minutes I’d be late to my first meeting.
I was on my way to Linked Finance, a peer-to-peer SME lender based in Dublin. Their office was uncannily close to where I was staying on Liffey Street Lower, just steps away from the Ha’penny Bridge. So close in fact, that Google Maps believed that I was going to and from the same location. I breathed a sigh of relief at the realization and ventured the short distance to the elevator that promised to deliver me to the inner universe of Irish fintech.
Alan Fagan, the company’s head of marketing, greeted me at the door. Fagan joined the company in 2015, two years after its founding. As we walk in, I notice the prominent display of the Linked Finance logo amid an ocean of eye-popping orange. The look, the feel, suddenly I feel transported to the tech scene in San Francisco. The accents overheard in the background, however, suggest I am most definitely in Ireland.
We sit down. Tea is offered. I decline. Fagan gets right into it and he sings a familiar song, that it can take a very long time for a business to get a bank loan.
It can take up 8 weeks to get funded, he says. “SMEs are the biggest employer in the country,” he explains, while hinting that facilitating loans to this demographic is as much a patriotic endeavor as it is a business one.
The nation’s Central Statistics Office puts the number of active enterprises in the private business economy at over 250,000. As of June, Linked Finance had made more than 2,100 loans for a grand total of more than €100 million.
Fagan gives me a demonstration of the platform, where individual investors (or peers) can see the name and location of the businesses whose loans are available to fund. An investor can even sort the listings by county, of which there are 26 in the Republic. Linked Finance does the underwriting, something they can do within 1 day, Fagan says.
The underwriting is tight. “We’re not a lender of last resort,” Fagan explains. They put themselves on the same (or better) credit risk footing as banks and claim that they’re able to assess risk and provide funds in a much more efficient manner. “We feel we do it better than banks,” Fagan says.
Most loans close quickly, thanks in part to their Autobid tool. Investors can be from anywhere so long as they’re over 18 and have a European Union bank account. Annual interest rates on the loans range from 6% to 17.5%.
Fagan says that although they are an online lender, many borrowers in Ireland still appreciate personal relationships. They can accommodate applicants that prefer a personal walk-through by a real person and that it can actually leave a memorable impression on their customers.
Marketing is done via a variety of direct methods but also through channel partners like accountants and financial advisors. A big name asset manager, Paris-based Eiffel Investment Group, with €1.5B under management, is among the loan investors on the Linked Finance platform.
I keep waiting for the caveat, an obstacle or twist in the model so inherently Irish, that somebody like me from half a world away would never truly grasp. But there isn’t one. The market is overtly familiar, yet more reminiscent of the UK than the States. Ireland lacks the robust regulatory framework of both countries, however. Despite that, the government does not appear to be holding the industry back. In June, Paschal Donohoe, the Minister for Finance, the government official responsible for all financial and monetary matters of the state, said “availability of credit is a key consideration for all businesses, and I am aware of the role peer to peer lending is playing in broadening competition in the SME finance market.”
Indeed, such competition has made credit more available in markets abroad.
As our time together winds down, I mindlessly attempt to plot my trip back. “Siri, take me home,” I speak into my phone. The Maps app opens and then loads to reveal a double entendre. It seems I am already very much there.
As interest rates rose and yields for investors at peer-to-peer (p2p) lenders collapsed, the allure of p2p lending, at least from my perspective, was gone.
Rates on FDIC-insured CDs hit 2.5% while annual returns at some popular p2p lenders had declined to less than 5%. That’s a very narrow spread between an investment that has no risk of loss versus one that has a risk of losing everything, is rather unpredictable, and is marred by a history of misleading investors and overstating returns.
I compared the options and made the obvious decision and started withdrawing my personally invested funds out of p2p lenders 3 years ago in favor of more traditional investments like stock index funds.
But now interest rates are falling and it’s possible that retail investors once wooed by modestly generous savings account rates could begin to consider alternative options to generate returns. Enter P2P lending, again.
At Lending Club, the percentage of individual investors has trended downward consistently. In Q1 2015 these investors accounted for 19% of all platform originations with a total of $308 million. In the most recent quarter, that group has shrunk down to 5% of originations and only $155 million.
But at StreetShares, an online small business lender that offers individual retail investors a fixed 5% annualized return, the trend is the opposite. In a recent statement the company filed with the SEC, they claimed they had actually shifted away from funds from institutional capital providers and towards funds from retail investors. It doesn’t get into the specifics about why that is but it’s certainly unusual. StreetShares’ investment offering carries a total risk of loss much like other p2p lenders.
But interest rates aren’t supposed to fall in a void where nothing else in the outside world is happening. Assuming the economy is cooling, or worse, eventually heading towards a recession, the somewhat attractive looking p2p loan yields will fall as well since defaults on the underlying loans will rise.
So what does this mean? It means that online lenders, to the extent they’re still interested, have a potentially short window to entice retail investors back. To do so, they’ll have to convince the world that past transgressions are behind them and that low savings account rates can be supplanted by people helping their peers in return for a slightly better yield. That’s how the entire concept took off to begin with. I say the window is short because once we’re actually in a recession, it will become incredibly hard to convince fearful investors to participate in making risky online loans especially if the average returns drop into the negative. Don’t be surprised when that happens.
New rules were introduced to peer-to-peer lending in Britain this month with the introduction of Policy Statement 19/14 by the government. The document heralds in a number of new processes that will be required to be enacted by peer-to-peer lending platforms in the UK by early December this year, if they are to continue operating unmolested.
Among these rules is the expectation for stricter transparency and honesty between platforms and potential investors, specifically with regard to the practice of using borrowers’, investors’, and even the business’s own money to pay for defaulted loans. As well as this there is the introduction of appropriateness tests to ensure that those who are candidates to become investors understand the various risks of the industry they are prospecting.
Such tests aren’t new to the alternative finance industry, as they have been previously employed for both crowd bonds and equity crowdfunding. But that doesn’t mean that they will comfortably slide into use among peer-to-peer lending processes. The question about when they will be asked to complete the test during the application, be it at the beginning, upon completion of the first form, or after receiving confirmation of a loan, remains unanswered; there are concerns that lending platforms will take a ‘tick all boxes’ approach and pose unsatisfactory questions; and the fear that only larger firms will be able to afford the costs to install these compliance checks, thus edging out smaller peer-to-peer lending companies from the market, is common.
The publication of the document comes after years of success for peer-to-peer lending within the British market. With the previous 12 months showcasing £6.7 billion in peer-to-peer loans being taken out, more than any other European country, the market initially appears to be doing well, but stories about firms collapsing or exiting from the industry indicate otherwise. For example, Lendy, one of the first and largest peer-to-peer platforms in the UK collapsed and left 20,000 investors uncertain about the £160 million that was outstanding in loans; while BondMason withdrew completely from the market, pivoting into alternative property investment services.
Looking forward, it appears as if lending platforms in the UK may become less reliant on retail investors and seek out more institutional investors who better understand the risks of peer-to-peer lending.
Peer-to-peer lending has gone through it own iterations in the US, with two platforms still thought of as peer-to-peer (but perhaps are no longer!) recently squaring off with the SEC. Last year, two former executives of Lending Club agreed to settle charges with the SEC for improperly adjusting returns of a related fund and this past April, Prosper Funding LLC agreed to pay a $3 million penalty for miscalculating and materially overstating annualized net returns to retail and other investors.
It could be worse.
China is currently watching its own peer-to-peer lending market collapse, despite the industry previously having drawn 50 million investors. With estimates claiming that half of the market was wiped out in 2018, and forecasts saying that 70% of those that survived will be gone by year end, China is on track to lose 85% of its peer-to-peer platforms within 24 months. This follows a number of cases of executives of Chinese peer-to-peer lending firms embezzling money and fleeing, leading to stories like the 31-year-old woman who hung herself when faced with the reality of losing $40,000 after a shareholder of PPMiao, a state-backed peer-to-peer platform, ran off when the firm went bust, reneging on any accountability.
“It’s amazing how quickly it’s unraveling,” said Zennon Kapron, the managing director of Shanghai-based consulting firm Kapronasia, about the peer-to-peer industry. And while Kapron was speaking about the Chinese market, governments worldwide have shifted from nurturing peer-to-peer lenders to policing them and diligently trying to rein them in.
From approximately July 2015 until May 2017, Prosper excluded certain non-performing loans from its calculation of annualized net returns that it reported to its investors, according to an SEC order released last Friday. The order found that Prosper reported overstated annualized net returns to more than 30,000 investors on individual account pages on Prosper’s website and in emails soliciting additional investments from investors.
As a result of the inflated numbered, which the SEC order says Prosper management was aware of, many investors decided to make additional investments based on the overstated annualized net returns. The SEC order said that Prosper failed to identify and correct the error that overstated its annualized net returns “despite Prosper’s knowledge that it no longer understood how annualized net returns were calculated and despite investor complaints about the calculation.”
“For almost two years, Prosper told tens of thousands of investors that their returns were higher than they actually were despite warning signs that should have alerted Prosper that it was miscalculating those returns,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.
Prosper neither admitted nor denied the findings. The company did not refute the SEC order’s findings, including that it violated the antifraud provision contained in Section 17(a)(2) of the Securities Act of 1933. Prosper will pay a $3 million penalty for miscalculating and overstating annualized net returns to retail and other investors.
According to a 2017 Financial Times story, one Prosper investor wrote on the Lend Academy forum in 2017 that their returns were restated from about 14 percent to 7 percent.
“Shame on me for just assuming that I was getting a higher rate,” the investor wrote, “but shame on Prosper x 1000 for misleading investors.”
In a written statement to deBanked today, a Prosper representative characterized the miscalculation as an error only, not a scheme. She conveyed that when Prosper discovered the error in 2017, they notified investors who were impacted and changed the numbers so that they accurately reflected the investors’ returns.
“We’re pleased to have the SEC inquiry resolved and appreciate the SEC’s recognition of our cooperation as the agency looked into this matter,” read a statement provided by Prosper. “Since discovering and fixing this issue two years ago, we have put additional controls in place designed to detect and prevent similar errors in the future, and we are committed to providing transparent information on returns to our retail investors.”
Prosper’s CEO, David Kimball, was awarded “Executive of the Year” at this year’s LendIt Fintech conference earlier this month.
In 2018, the company originated $2.8 billion in loans, remaining flat compared to 2017. Prosper’s net revenue last year was $104 million, a decrease compared to $116 million in 2017. Founded in 2005 and headquartered in San Francisco, Prosper provides personal loans up to $40,000 and was one of the first peer to peer lenders.
Long gone are the days of peer-to-peer lending.
On Tuesday, Lending Club, a pioneer in the peer-to-peer lending space, reported that only 6% of its Q4 originations came from individual self-managed accounts. Accounts professionally managed for individuals made up 16%, with the rest of the loans being funded by a combination of banks, institutions, and Lending Club itself.
Nearly 4 years ago, the ratio was flipped. Self-managed accounts made up 24% of originations in early 2015 and accounts professionally managed for individuals made up 51%.
Despite the changes, Lending Club still identified itself as a “marketplace connecting borrowers and investors” in its Q4 2018 earnings report. A review of the site revealed that it is still possible for individual investors to manually review unfunded loans on the platform and invest in them, though it prods investors to rely on Lending Club’s automated investing strategy instead. The implication for manual investors is obvious, that banks, institutions, automated investment algorithms, and Lending Club itself are more likely to fully fund the best borrowers before the individual has a chance to even see them on the platform.
According to the blog of LendItFintech co-founder Peter Renton, Lending Club is producing among the lowest returns of any platform in the field, with his own accounts generating from 1.57% a year to 4.35% a year.
Back in 2014, peer to peer (P2P) lending in China was all the rage. Multiple P2P platforms were launching daily, with investors and borrowers were eager to participate. According to South China Morning Post, the P2P lending frenzy hit its peak in 2015 when about 3,500 P2P businesses were operating.
Now, these same businesses are collapsing at nearly the same speed with which they sprung up. According to South China Morning Post, in conjunction with Reuters, 243 online lending platforms have gone out of business since June. And Chinese investors who can’t get their money out of the companies have taken to the streets. (Although, like with most protests in the country, the government has successfully quashed any sizable demonstration.)
“The trouble is that everything is coming to head this summer and millions of investors are trying to get their money out at the same time,” said Peter Renton, co-founder of the LendIt Fintech, which organizes several international events including an annual conference in China for fintech and online lending.
“Most people think that even with a big market [like China], it can only sustain a few hundred platforms at most,” he told deBanked.
Renton said that this implosion is largely the result of lax Chinese regulation for a number of years. But the Chinese government is now making up for it. In November 2017, China’s central bank said that no new licenses would be issued to online lending platforms. And with Chinese P2P platforms failing daily this summer, the central government has proposed new measures, according to Xinhua, the official government news agency. These proposed measures include setting up “communications windows” to respond to requests by P2P investors, as well as conducting compliance inspections on P2P companies and putting on a blacklist in China’s social credit ratings system any online borrower who tries to avoid P2P loan repayments.
The continuing collapse of P2P lending platforms in China is particularly notable because it affects so many people. According to data used by Reuters, the size of China’s P2P industry is significantly bigger than the rest of the world combined, with outstanding loans of 1.49 trillion yuan, or $217.96 billion.
“We all knew the party was going to end at some point and it looks like 2018 will be the year of reckoning,” Renton wrote in a July 30 story.
Yet in a video aimed at Chinese viewers released at the same time, he said: “I think in a couple years time, when we look back at this year, we’ll see that this was necessary — painful but necessary. The industry is going to come out the other side. The strong platforms are going to survive, the weak ones are not. And I think the industry will be far better off once this all plays out.”
In the second quarter of 2018, Lending Club originated a record high of $2.8 billion, up 31% from the same time last year. Net revenue also hit a record high of $177 million, up 27% year-over-year.
During today’s earning call, Lending Club CEO Scott Sanborn said that the company completed a successful securitization this quarter and Lending Club CFO Tom Casey said that that they expect several more by the end of the year. Both acknowledged that the company is still spending millions of dollars to resolve regulatory issues, but Sanborn said he expects that to come to a close by the end of the year. With regard to the record high in originations, Casey said that the company also had a higher percentage of A and B grade loans in the second quarter.
Lending Club offers fixed rate business loans from $5,000 to $300,000 and personal loans of up to $40,000. The company also offers auto refinancing.
Founded in 2007, Lending Club was one of the first major peer-to-peer lenders. The company facilitates loans between individual borrowers and individual or institutional investors. Traditionally, individual investors in companies must be accredited investors. This means that the U.S. Securities and Exchange Commission requires the accredited investor to have a net worth of at least $1 million, excluding the value of one’s primary residence, or they must have income of at least $200,000 each year for the last two years, or $300,000 combined income if married.
Lending Club investors must also satisfy certain lesser financial requirements. In most states, excluding California, Lending Club investors must have an annual gross income of at least $70,000 and a net worth of at least $70,000 (excluding value of home, home furnishings, and automobile) or they must have a net worth of at least $250,000. (California requires the an investor’s annual gross income be $85,000).
Since investors are not accredited, every Lending Club loan, many of them to individuals, must be filed with the SEC so that investing in a Lending Club loan is like buying stock in a publicly traded company. Investors can buy fractions of loans in the form of notes as small as $25.
Lending Club is headquartered in San Francisco and went public on the New York Stock Exchange in 2014.
Facebook and Snapchat might be the last things that employees are being distracted by these days. Instead it’s Coinbase and Blockfolio, two cryptocurrency apps, that are quickly stealing the attention of young finance professionals. And the interest in Bitcoin, Ethereum and alt coins is causing some in the industry to wonder if the phenomenon can somehow be connected to online lending and merchant cash advance.
A meetup hosted by partners of Central Diligence Group (CDG) on Tuesday night in NYC, for example, was geared towards cryptocurrency enthusiasts. CDG is a merchant cash advance and business lending consulting firm. Those that attended, talked candidly about Ripple, Bitcoin, Ethereum, and the hot topic of Initial Coin Offerings (ICOs). And it did seem all connected. Companies successfully raised more than $3 billion through ICOs in 2017, for example, some of them online lending companies.
ETHLend and SALT, blockchain-based p2p lenders, each raised $16.2 million and $48.5 million respectively through ICOs. What’s more, their crypto market caps currently stand at $325 million and $754 million respectively. The latter is nearly twice as valuable as online lender OnDeck. The founder of Ripple, meanwhile, briefly became one of the richest men in the entire world.
Whether these valuations are overdone is besides the point. A smart phone is all that’s required to get in on the action and trade thousands of cryptocurrencies online, many of which move up and down by astronomical percentages over the course of a day. Becoming a millionaire overnight by hitting on the right one is a dream sought after by many. And young people, especially millennials, are become unconsciously comfortable transacting in non-government-backed currencies through technology that completely shuts out banks.
And that may be the shift in all of this to pay attention to. It isn’t that a local restaurant is going to collateralize their Bitcoin to get a loan and outcompete an MCA company, but that a portion of the monetary system eventually starts to sidestep banks.
Trying to collect on that judgment? Good luck tracing the money in cryptos.
Need to freeze funds? You can’t freeze someone’s Bitcoins if they’ve got them stored on their own hardware.
Evaluating a business’s bank statements? The transactions can only be verified on a blockchain.
You might not believe me, but it’s incredibly likely that you’ve encountered a client that has defaulted on an MCA or loan whose stash of money has been obscured in cryptos all the while their bank statements appear to show insolvency.
It’s also likely that you’ve encountered a client that has used the proceeds of their MCA or loan to buy a crypto. Maybe not the whole amount, but with some of it. One study, for example, revealed that 18% of people have purchased Bitcoin using credit. Bloomberg reported that the phrase “buy bitcoin with credit card,” just recently spiked to an all-time high.
People are even taking out mortgages to buy Bitcoin, according to CNBC.
If you think cryptocurrency is an industry completely independent of your business, consider that the market cap of cryptocurrencies is currently valued at more than $700 billion. That’s nearly twice the market cap of Goldman Sachs and JPMorgan, COMBINED. The #3 cryptocurrency by market cap, Ripple, is being pitched almost entirely to traditional financial institutions.
Bet all you want on the prediction that this bubble will burst. Maybe it will. But the underlying technology, transacting without banks in non-government backed currencies that may be difficult to trace and recover, is a genie that’s not returning to its bottle anytime soon.
In the meantime, now might be a good time to poll your employees or colleagues about their knowledge or use of cryptocurrency. You may be surprised by what you find, especially among the younger crowd.
Disclaimer: I currently hold a material amount of Ether, the currency of the Ethereum blockchain.
New retail investors interested in the Lending Club platform are greeted with a friendly statistic, that “99% of portfolios with 100+ Notes have seen positive returns.” That’s a slippery statement, which is probably why they footnoted it.
The footnote says that only applies to A through E notes, the only grades of securities that Lending Club is still selling. F and G grades are excluded, presumably because they are no longer for sale as of last month after they noticed “an increase in prepayment and delinquency rate.”
By excluding the notes that significantly underperformed, Lending Club has apparently been able to raise the portfolio performance statistic being marketed to new investors.
On October 28, 2017, for example, Lending Club was reporting that 97% of portfolios with 100+ notes had positive returns. That was representative of all notes. Immediately after announcing that they were discontinuing F and G notes, they raised that number to 99% and added a line about how F and G notes were excluded from past performance.
:::Poof::: And just like that, the bad loans and their drag on returns no longer exist from the history reported to new investors.
The problem with ignoring the letter grades that bamboozled some investors in the past is that Lending Club determines the letter grade of the security, not an independent ratings agency. That means that an F or Grade-grade borrower in October could just be deemed a D or E-grade in December and nobody would be the wiser. Retail investors have no way of knowing because Lending Club’s grading system is proprietary. Go figure.
Even if Lending Club did not do that, they’re setting a terrible precedent. If portfolios underperform, again, what’s to prevent them from continuing to make similar inflated claims about returns with a new footnote that excludes D and E notes?
It’s important to bear in mind that Lending Club is in the business of selling securities to unsophisticated retail investors. That 99% of portfolios allegedly yield positive returns is no doubt a major selling point to those worried about the risks of online lending. Why else would Lending Club feel the need to make that a big headline in their marketing?
Online lending is very risky. That’s why in October, the number of portfolios with positive returns wasn’t 99%. Lending Club should not be permitted to sweep past investor losses under the rug.
Bad form Lending Club. Bad form.
When Lending Club announced they were discontinuing F and G grade notes on their platform for investors, I wasn’t surprised. Investors in general have been reporting disappointing returns, even dipping into negative territory some months. My own portfolio there is on track to generate a loss for 2017, which seems even worse when I consider that those funds could’ve returned nearly 15% in an S&P 500 index fund or more than 600% in bitcoin. Granted, only a small portion of my investable assets were tied up in Lending Club so it’s not all bad.
Out of the 3,262 notes I purchased on Lending Club, only 99 were F-grade and 53 were G-grade. They didn’t do so well in retrospect, echoing Lending Club’s findings.
27 of my G notes have already been charged off. 17 have been paid off, with the rest still outstanding. A charge-off rate over 50% is not so good on its own, but the data is worse because the interest earned on the performing ones was not enough to offset the charge-offs. Even if all of the remaining notes perform, it is no longer possible to earn a positive return on G notes. The amount I loaned exceeds the total dollars returned. The end result of a category that investors heralded as high-risk, high-return is a big fat loss.
31 of my 99 F notes have already been charged off. Only 26 remain outstanding, 4 of which are delinquent. The rest have been paid off. At this time, the amount I loaned exceeds the total dollars returned. It is still mathematically possible to break even if the remaining loans do not default, but we’ll see. Suffice to say, these were a bad investment.
I have been winding down my portfolio since May 2016. RIP F and G notes.
Lending Club’s latest quarterly report revealed the future of their platform, as a conduit for banks to make personal loans. As illustrated below, banks have gone from funding only 13% of originations three quarters ago to 44% of all originations in the most recent quarter. That’s an increase from $265 million to $955 million.
Meanwhile, self-managed individuals, or the peers in the peer-to-peer aspect of the platform, only funded 13% of originations in Q2, a decrease from the previous quarter.
Lending Club refers to the breakdown as a “diverse” investor mix but it is obvious where the trend is leading.
To be fair, Lending Club had previously depended on banks pretty heavily, as demonstrated by the chart that appeared in their Q3 2016 earnings presentation. Bank funding was at its highest point in Q1 2016 at $947 million, as was self-managed individuals at $419 million. Bank funding has since recovered and surpassed that record, but funding from self-managed individuals is still down by 34% (and shrinking).
Despite these trends, Lending Club still explains their lending service as peer-to-peer on the homepage. In the example that explains how Lending Club works, “Scott” is investing on the platform to make a loan to “Katie.”
But it’s often more like this:
Lending Club had a $25.4 million loss in Q2. They’re projecting a loss of $61 million to $69 million for the year on revenue of $585 million to $600 million. Expect them to become more dependent on banks in the future.
Peter Renton, a co-founder of the LendIt Conference and p2p lending investor since 2008, published his latest portfolio performance data on Monday. While he wrote that the downtrend is continuing unabated, he still reports an overall marketplace lending return at 7.73%.
Notably, he reported that one of his Lending Club accounts actually lost money in the first quarter of the year, a first for him, though he is not the only person to experience losses.
One notable remaining aspect of Funding Circle’s peer-to-peer roots has been its own online forum. If you haven’t been part of that community, you’re too late, since it’s shutting down on Tuesday.
According to a forum admin, “there has been a developing trend towards a small number of investors asking questions about a narrow range of technical topics – most of which are better dealt with through our Investor Support team. Therefore we have taken the decision to close the forum at 6pm [UK time] on Tuesday 2nd May. We hope you will all continue sharing your views on Funding Circle over on the P2P Independent Forum, which we will continue to monitor.”
One forum user jokingly theorized that the move was really about silencing investors who use the forum to complain about delinquent borrowers, going so far as to create a humorously custom-captioned movie clip.
According to P2P Finance News, a Funding Circle spokesperson said, “The closure has nothing to do with the performance of Funding Circle property development loans over the last three years which continue to outperform expectations. Investors have earned an average of seven per cent since launch and more than £22m in interest on property loans alone.”
Update 5/2: The Funding Circle Forum has officially been taken down. The URL now just redirects to a general FAQ page