Before online lending, long before Credit Karma, and way before machine learning powered by cloud-based applications, if a person or business needed to clean up their credit in order to apply for and be approved for a loan, perhaps even getting a loan on better terms, they had to write letters to each credit bureau where bad actions were recorded and ask to have those actions removed. That may have also entailed working out a payment plan with creditors who reported those actions in order to get in their good graces. Levi King understands that process well.
He also understands the challenges of being a small business owner. Having owned a hotel, a management company, a retail financial services company, and several franchises–all before co-founding Lendio and Nav–he’s seen countless small business owners with low credit problems.
“I’ve applied for financing about 30 different times,” he said, “and learned the hard way how it all works.”
Your firm is in the market to raise capital. You selected an investment banker to represent you in the process. The firm’s vision, financial goals, strategy and performance have been documented for the investors to review. An information library, stocked with materials such as a flip book, financial statements, standard forms and contracts, company policies and procedures, and a financial model is available to potential capital providers upon signing an NDA. The preparation of these materials took weeks or perhaps months. Your banker sorted through his/her contact list of investors making dozens even hundreds of preliminary investor calls. This resulted in a short-list of potentials that want to setup a conference call with your company’s top management.
Initial investor call
At this point, the many weeks and months of work are finally paying off. Surely, the investor will recognize the opportunity of marketplace lending/fintech and want to invest, right? Maybe, but remember the process is only getting started. Often company managers become hasty thinking all the preliminary work means a deal is close to consummation. For this reason, I always remind the client that the initial investor call is not to discuss the terms a deal. One should introduce themselves and the company, provide substance to certain key metrics and outline the firm’s overall strategy. Yet, I continually witness clients outline terms or discuss valuation too early in the conversation. This may make an investor feel pressured, suggest price shopping or even worse make your company appear desperate during the call. For an investor’s point-of-view, this suddenly appears like a low-probability transaction. That pushes them away from your opportunity in favor of others.
A panel of bankers met at LendIt to discuss the future of digital banking. The following discussion offers an interesting snapshot of what it might look like. I say, count me in.
Jeremy Balkin, head of innovation at HSBC USA, started the conversation with this observation: “We live during the ‘millennialization’ of everything. We value freedom and mobility. In banking, it’s no different.” Balkin went on to say that banks must cater to all types of customers, from Millennials to Builders, who aren’t likely to adopt emerging technologies. “The challenge is the adaptation of customer data.”
Millennial Banking, From the U.S. to China
Millennials have an average of 14 different financial services apps on their phones, Balkin said. In that regard, they are primed for mobile banking. Mitch Siegel, KPMG’s national FS strategy and transformation leader, agreed with that.
“I would say mobile first, not only,” he said.
While the average millennial is engaging with financial services companies on their phones, they are mostly performing simpler tasks, he said. Meanwhile, they’re putting off mortgages, kids, car loans, marriage, etc.
The PitchIt startup awards is one of the best and most exciting parts of the LendIt — a lending conference. This year, there were eight finalist competitors who met in front of hundreds of investors to pitch. Four judges picked the ultimate winner, Nova. Below are the profiles of Nova and the seven other PitchIt finalists.
Nova — Credit History for Immigrants
Nova is the world’s first cross-border credit agency. Many immigrants come to the United States with no credit history. They may come from a place where credit is not an option. In many countries of the world, banks do not issue credit cards. There may not even be many, if any at all, banks. Merchants do not offer purchases on credit, so when these immigrants land on U.S. soil, their ability to interact with the economy is limited by the options they had in their native countries. Nova solves that problem.
It started as a research project at Stanford University. U.S. property managers run credit and background checks on applicants to screen for potential risks when leasing or renting housing units. Those checks typically do not include overseas credit checks. With Nova, property managers have that ability. Not only can U.S. landlords check overseas credit, but they can also report negative actions so that the credit report is affected in the applicant’s home country.
SoFi, or Social Finance, was founded in 2011 by Mike Cagney, who has become the FinTech industry’s most prominent voice, a sort of radical sage of his own. He wields a master of science degree in management from the Stanford Graduate School of Business and was once senior vice president at Wells Fargo. He is also co-founder of a hedge fund, which makes him the kind of guy who should be a Wall Street darling, or at least an apologist for the system he is seeking to replace.
The times, they are a-changing.
So crooned last generation’s wisest sage, a reluctant messiah for a new world emerging from the not-yet-settled dust of a crumbling system based on values headed out of fashion. That system, however, was still being financed by the world’s banks. But if SoFi has anything to do with it, those banks will be supplanted by a new system of financing for the new set of values. The writing is on the wall, but the ink may yet be invisible.
Cagney hasn’t been shy about his criticisms of banks, saying they are nothing more than a utility. He delights in pointing out how millennials don’t trust them. And he’s on a mission to take advantage of that unfortunate state.
Cross River Bank (CRB), with its cutting edge technology and state of the art platform, provides a world-class back-end infrastructure to fintech companies. It is trying to untangle the banking services for the fintech industry by providing services like loan approval, origination, and payments, but with a more simplistic-holistic approach. The company also executes direct lending in the tri-state area with a focus on commercial real estate.
We believe CRB’s next step will be the offering of depositor services to fintechs. This will allow online lenders to offer Certificates of Deposits in the 1%-3% range and lend that capital back out. This new service would allow online lenders to compete with banks on cost of capital, as well. It will revolutionize their business capabilities and will allow for faster growth and more flexibility in the cost of customer acquisition. Additionally, it will make fintechs more competitive with banks.
Of course, we expect regulators will need a long time before getting comfortable with this. In the meantime, we hope they’ll be willing to monitor and observe in order for all participants to understand the best way to regulate such a critical and important step for fintechs.
A world where any eBay shop can within 5 minutes receive $800 in their bank account as a loan from 30 random people on the internet. No transfer fees and instantaneous funds transfer. A world where if the shop does not pay back the loan their warehouse locks stop opening for them and their cell phone stops working. This can be achieved with Bitcoin lending using Ethereum smart contracts combined with the internet of things. This may be reality within 2 years.
Bitbond is a Peer-to-Peer lender for Small and Medium Businesses (SMBs). They have originated to date $360,000 in 1100 loans at 20–23% per annum interest. By average 30 people from the US or Western Europe finance each loan . The borrowers are SMBs from all over the world, from Philippines to Brazil, via India and including US and Western Europe. Nearly all their loans are denominated in USD. Bitbond does the underwriting and fixes the loan interest. As a result, the yields end up in the 6–8% range. Subsequently, they are improving fast as Bitbond gathers more data and their systems improve.