Portrait of a Marketplace Lending Investor

Posted on May 1, 2017August 5, 2019 by George Alex Popescu Leave a comment

Alternative lending start-ups have entered mainstream consumer and SMB lending, but have yet to establish themselves as additions to traditional fixed income portfolios for investors. Marketplace lenders started out as peer-to-peer lenders, but institutional capital and accredited investors are now accounting for the lion’s share of lending capital on such platforms. Direct Lending Investments, LLC (DLI), a growing and active participant in this developing world of private credit, focuses on buying loans and extending loans to alternative lending platforms and other business partners. In particular, the firm provides credit to the growing sectors of the market that are no longer served by traditional bank lending and, more importantly, structures its funding in a way so that the originator takes on default risk.

Inspiration and founding

Brendan Ross, the founder and CEO of DLI, first began investing in marketplace lending personally and on behalf of his clients through Lending Club (LC) and Prosper loans. In 2012, he launched DLI to expand his investment horizon beyond peer-to-peer lending, which he has since moved away from altogether. The firm’s inaugural deal in November of 2012 was with IOU Financial, a SMB loan originator. Since then, the firm has expanded to include receivables as well as real estate and consumer loans in its portfolios, and has grown to over $900 million in assets under management.

Pychometric Credit Scoring for the Developing World

Posted on April 27, 2017August 5, 2019 by George Alex Popescu Leave a comment

The majority of the developing world population makes little use or no use of financial services. Accenture estimates that only 70 percent of microenterprises in an emerging country like India use bank accounts while only 5 percent use products like term loans, and a paltry 1 percent have working capital loans from banks. In similar emerging markets, lenders find it difficult to make credit decisions due to weak coverage of credit rating agencies. On average, only 10 percent have credit scores.

One company that understands the riches lying at the bottom of the pyramid is Entrepreneurial Finance Lab (EFL GLOBAL). EFL helps lenders capture untapped markets by delivering credit scoring technology tailored for such markets.

How EFL Uses Psychometrics to Determine Credit Risk

EFL Global is a pioneer in psychometric credit scoring and was founded in 2010 by Dr. Bailey Klinger and Dennis (DJ) DiDonna. The company is headquartered in Miraflores, Lima, Peru.

Dr. Klinger is executive chairman. Prior to co-founding EFL, he served as a senior advisor and consultant to various government and multilateral institutions. DiDonna is chief strategy officer. Previously, he worked at MCM Strategic Data and Angie’s List as a technology entrepreneur with a background in sales and operations management.

New Asset Level Disclosure (ALD) requirements for public US securitizations

Posted on April 25, 2017August 5, 2019 by George Alex Popescu Leave a comment

Introduction

Over the past four months, we’ve had extensive conversations with ABS market participants to discuss the new Asset Level Disclosure (ALD) requirements for public US securitizations. We discovered that many market participants have been overwhelmed with the volume of loan-level data and are at a loss on how they can readily derive value from it. In the following research piece, we answer commonly asked questions and provide guidance for incorporating ALD data into the investment process.

Specifically, we highlight the need for participants to (1) access standardized ALD data on-demand in an easily digestible and consistent manner, (2) unlock complex relationships and insights within and across securitization trusts, and (3) develop benchmarks for performance.

What is the scale of the data and how does one access it? By December 2017, we project there will be ~100 securitization trusts with over 34GB of data for just the auto-loan, auto-lease, and CMBS verticals. Given the data size and update frequency, we believe the market needs a centralized hub so users can access it easily in a consistent, clean format that has cash flow-specific fields.

Credit Karma for businesses: monitoring credit for small businesses

Posted on April 18, 2017August 5, 2019 by George Alex Popescu Leave a comment

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.”

Getting the Most From Investor Call

Posted on April 17, 2017August 22, 2019 by George Alex Popescu Leave a comment

General Guidelines

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.

What is the Future of Digital Banking?

Posted on April 12, 2017August 22, 2019 by George Alex Popescu Leave a comment

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 2017 wave of Lending Fintechs: Alt Lending 3.0

Posted on April 6, 2017August 5, 2019 by George Alex Popescu Leave a comment

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.

How SoFi Rose To Become an Alternative Finance Leader

Posted on March 28, 2017August 5, 2019 by George Alex Popescu Leave a comment

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 to Offer Depositor Whitelabels to Online Lenders?

Posted on March 28, 2017August 5, 2019 by George Alex Popescu Leave a comment

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.

Internet of Things and Smart Contracts will change the lending world

Posted on March 14, 2017August 22, 2019 by George Alex Popescu Leave a comment

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.

Lending Times interviewed Radoslav Albrecht, Founder and CEO of Bitbond.

Bitbond

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.