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LendIt Fintech News: Daily Coverage of Fintech & Online Lending


A New Small Business Tech Ecosystem is Emerging

A new financial ecosystem for small business owners is being built that is customized, intelligent and real time

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Karen Mills of Harvard introduced us to the term “small business utopia” when she released her book earlier this year. She gives the example of the coffee shop owner who had all the information she needed to run her business at her fingertips. There would be an intuitive dashboard that not only helps her run her coffee shop but makes financial decisions and takes the pain out of managing business finances.

Some recent conversations and articles I have read have convinced me that we are well on the way to that rosy picture of the future. And it mainly comes down to data. Fintech is getting better at gathering and analyzing data then presenting it in useful ways. Lenders are approving loans more quickly and many now have such a rich history of their own data as well as hundreds of connections to other data sources that a much more complete picture of the financial health of a business is possible. Not only that but many of these lenders are real platforms with deep insight into their small business customers.

According to deBanked the five largest online small business lenders in 2018 were (in order) PayPal, OnDeck, Kabbage, Square Capital and Amazon. For three of these companies lending is just a side business, something they offer as part of their broader platform. Many small businesses use PayPal, Square or Amazon as the platform on which they operate their business. So, these big tech companies have insight into the day to day revenue fluctuations of their small business customers.

The Accounting Software Companies Lead the Way

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The Inevitable Movement Towards No Overdraft Fees

The new digital challenger banks are making no overdraft fees a key feature of their offerings

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I hate overdraft fees. They are the classic example of a product that is a win-lose proposition. The bank wins and the customer loses. In today’s world of transparency and accountability we are seeing a movement away from overdraft fees. This movement is being led by the digital challenger banks.

But first let’s look at the problem. The Center for Responsible Lending reported that large banks (those with over $1 billion in assets) earned $11.45 billion on overdraft fees in 2017. I have also seen studies that peg this number at $15 billion or even more when you include all banks and credit unions. Regardless, it is a very high number.

Now, those of us with healthy checking accounts can be blind to this problem. But it is real for tens of millions of Americans. And for those that incur overdraft fees it is rarely a one-time event. They will spend hundreds of dollars a year on these fees. And it shouldn’t be that way.

Many of the new challenger banks are making a name for themselves by promoting a new approach to fees. They are determined to create financial products that are good for consumers’ financial health. And one of the first things to go is the overdraft fee.

The Overdraft “Loan” with a 18,250% APR

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Moving Beyond Financial Literacy to Financial Empowerment

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Financial Literacy Month ended yesterday (yes, April is officially Financial Literacy Month) and I have been thinking a lot about financial literacy and its link to financial health. Some of my thinking was prompted by this recent column in American Banker by Jennifer Tescher, the CEO of the Center for Financial Services Innovation (CFSI). Jen is one of the most knowledgeable and influential people when it comes to financial health and someone I always pay attention to (you can listen to my interview with her last year here).

I have also just finished listening to the sessions on the Financial Health and Inclusion track at LendIt Fintech USA 2019 that happened in San Francisco just a few weeks ago. I helped put this track together and I was delighted not just by the quality of the speakers we attracted but also by the interest from the attendees. Pretty much every session on this track was packed which was not the case last year or the year before that. The fintech community is becoming more engaged with the topic of financial health and I couldn’t be more pleased about that.

But back to the American Banker op-ed. Jen made the case that financial literacy programs are not working. The reality is teaching people about finance, the goal of Financial Literacy Month, has not made much of an impact on financial health. It does not lead to lasting knowledge gain and it rarely leads to changes in behavior. Here is what she says is needed instead:

What financially vulnerable people need is access to high-quality products and experiences built to help them succeed by people who truly understand their financial situations and foibles.

I want to reiterate this one point. They need “high quality products and experiences built to help them succeed”. This is it in a nutshell. The good news is that there is a new group of entrepreneurs creating high quality products that could really make a difference here.

This brings me back to the LendIt Financial Health track. One session that I thought was super interesting was around employer based financing. Many of the most financially vulnerable people have jobs but often need to take out short term loans to make it through to the next payday. Far better they get this financing through their employer than via a payday lender. There are several companies in this space doing great work in creating high quality products: Even, PayActiv, TrueConnect and HoneyBee all offer options to employers that help their employees who need access to quick financing. Even has a groundbreaking deal with Walmart that has resulted in 300,000 employees using their pay advance app.

These programs all rely on employers signing up for one of these offering. While I think they will become ubiquitous over time we are still a long from that happening. So, people who are struggling need more options and many more companies are tackling financial health issues in different ways.

Another great session at LendIt was focused around products that have financial health benefits built in to their design. Each of these companies are approaching the problem differently but some of them have significant traction and are really making a difference. MoneyLion has four million users and they are focused on ending financial stress for all Americans by taking a holistic approach and being proactive in providing help. Dave helps the 30 million people who are hit by overdraft fees each year by advancing $75 from their next paycheck. Tally is a fully automated debt manager to help consumers get out of credit card debt. Learnlux is a digital financial wellness platform that helps build digital financial plans for the mass market, they are currently offering this through employers.

While we had other great sessions at LendIt on financial health I don’t want this to become a promotional piece. Of course, this is just the tip of the iceberg. There are many other fintech companies attacking the challenge of financial health. One area that is rarely focused on is the income side of the equation. Steady is a fintech company that helps people maximize their income by providing sophisticated tools for finding a second job. Dave has a similar offering called Side Hustle.

The big challenge for the financially vulnerable is that it is expensive to be poor and getting more so. Many of the aforementioned companies are focused on taking away some of these costs. But more needs to be done. Eventually, we need to get to a point where these products become invisible to consumers so the cost of being poor is vastly reduced without these consumers having to be proactive. That is the way well designed products should work, it gives people a sense of control and financial empowerment.

We live in a country where the majority of people experience financial stress on a regular basis. I think the tide has turned and fintech is starting to take this problem seriously. And this gives me reason to be optimistic about the future of financial health.

The 2019 Geneva Report on the World Economy Needs Your Input

The authors of the 2019 Geneva Report on the World Economy, focused on the future of banking, are seeking input from market participants

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The Geneva Report has been published every year since 1999 by the Centre for Economic Policy Research (CEPR) (a full list including each year’s theme and authors here) and is commissioned by the International Center for Monetary and Banking Studies (ICMB), a research foundation affiliated to the Graduate Institute of International and Development Studies in Geneva.

This year’s report considers how advances in information technology are changing the landscape of financial services and how those advances may be changing the optimal scale of banks. It will also consider whether banks’ traditional advantages of funding through deposits and information gathering are being eroded by the presence of market-based institutions with access to cheap funds, by e-commerce platforms and by big tech firms with large established networks, which by analyzing purchase and payments patterns, can gauge users’ creditworthiness.

The authors of the report (Kathryn Petralia, Kabbage; Thomas Philippon, NYU Stern School of Business; Tara Rice, Bank for International Settlements and Nicolas Veron, Peterson Institute for International Economics and Bruegel) are asking for input from market participants.

To supplement the report, the authors are undertaking a short voluntary qualitative survey of market participants (banks, nonbank financial institutions, fintech firms, regtech firms, and bigtech firms).  This short survey seeks to gather responses about technology disruption in financial services, and its impact on competition, product offering and pricing, and developments in financial institutions’ relationships with customers.

The survey may be found here: https://bis.datacoll.net/iypxeyzyyo?l=en

More detailed instructions can be found here. For any questions: please reach out to tara.rice@bis.org. The authors would greatly appreciate market participants’ input and would be happy to share the survey results and draft paper when it is ready.

Please take some time to fill out this survey, it is vitally important to the future of the industry. Responses are requested by April 5.

Spring Labs is Building the Future of Anti-Fraud and Identity Verification

A new blockchain-based anti-fraud system is being built in cooperation with major online lenders

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Last week fintech startup Spring Labs announced they are developing the Spring Protocol, a blockchain based anti-fraud and ID verification system, with 16 consumer and small business lenders as launch partners. The 16 partners include SoFi, OnDeck Capital, Avant, GreenSky, Funding Circle, BlueVine, Fundation, Upgrade, Fundbox, and Better Mortgage. There are six other lenders who were not named in the release.

I have been following the development of Spring Labs with great interest since they announced their initial funding in March of last year. Most of the management team came out of Avant so they were familiar to me and I have spoken to them several times since their launch, most recently, just a few days ago. What they are looking to achieve, I think, is groundbreaking and sorely needed in the online lending space.

Much has been written about the Equifax breach and it is clear that keeping credit and identity data in a centralized database is not the best solution and probably not sustainable long term. Spring Labs provides a real alternative, one that takes advantage of blockchain technology. They have built a peer to peer network that allows any member company to query information that may be held at another member company.

It is easiest to understand with the use of an example. Let’s say someone applies for a loan at Avant. In order to do identity verification on this borrower Avant sends a request to the Spring Protocol to see if any member company can verify the address and phone number of this person. A one way encrypted hash of this information is sent to the protocol as an API request to determine if any other network participants can verify the information for this borrower. It just so happens that Upgrade has made a loan to the borrower nine months ago so the protocol sends a request back that the information has been verified. Avant has no idea who verified the information only that this borrower is within the network and their identity has been verified. There is no central store of this information, instead, the validation of the request is provided via the protocol without unencrypted or personally-identifying data leaving Upgrade’s servers.

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Payday Lending Reform and the Need to Reduce Demand

Colorado passes an initiative to restrict all lending to a maximum of 36% but is this the best way to attack the problem?

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Here in Colorado we had an initiative on the ballot last week to restrict payday loans to a 36% APR cap. It passed overwhelmingly because the general public does not want to support lenders who charge triple digit rates. The law goes into effect on February 1 and it likely means the end of the payday lending industry in Colorado.

This change comes on the heels of an opposite move at the federal level where the CFPB said it plans to propose revisions to existing rules that were designed to reign in payday lenders nationally. The CFPB had spent six years doing research and decided that one way to make payday lending more responsible was to require a check on a borrower’s ability to pay. It makes sense as this is what pretty much all other types of personal loans require.

But the payday loan industry has become successful in part because lenders did not have to take into account a borrower’s ability to repay. By not having to do this important step lenders could save money and expand their borrower base. But in doing so they have been serving many people for whom a payday loan is clearly a bad idea.

I have no problem with payday loans at all, they have a place in emergency funding for people who don’t have any savings. What I abhor, though, is predatory lending. This is when the payday loan becomes a debt spiral as the loan is continuously rolled over and a manageable $500 loan becomes a $2,000 or $3,000 nightmare that the consumer cannot pay back.

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Five Things That Excite Me About Fintech Today

There is more change happening in fintech today than ever before but here are five themes that are particularly exciting

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When I started LendIt with my fellow co-founders back in 2013 I was most excited about how online lending could disrupt the banking system. I felt that we were at the beginning of a paradigm shift in banking and that the online lenders would soon rule the world. While it hasn’t turned out exactly like that I am actually more excited today about where finance is heading than ever before.

Today, there are many things that excite me about fintech, here are five themes that I find particularly exciting.

1. Advances in Data Analytics

I have said before that data science is becoming the most important skill in fintech. There is more data generated today than at any time in human history and we need new ways of analyzing this data. Advances in artificial intelligence and machine learning have meant we can now make sense of this vast amount of data.

There are so many benefits to finance of these advances but the most important one I think is what it means to the underserved consumers around the globe. Advanced data analytics combined with the increased use of mobile phones in the developing world means for the first time everyone has the potential to be connected to the financial system. This is going to have huge ramifications globally over the next decade.

2. Blockchain and Distributed Ledger Technology

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Amazon and Their Push Into Fintech

A new report from CB Insights catalogs all the recent moves Amazon has made into financial services

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Last week CB Insights released this really interesting report titled, Everything You Need To Know About What Amazon Is Doing in Financial Services. While Amazon has already made some moves in fintech is a huge amount of speculation as to what they will do next. This report covers both what Amazon has done and also speculates as to where they might be going.

The report provides an in depth look at the moves Amazon has made in payments, lending, the new Amazon Cash program and also takes a look at how the company has been developing fintech programs internationally.

Amazon Cash For The Unbanked Consumer

While I was most interested in the lending section before I get to that I want to talk about Amazon Cash. I have paid little attention to this product since it launched in April 2017 but the more I think about it the more I see a product that could move the needle for the unbanked in this country and possibly around the world.

Simply put Amazon Cash bridges the offline and online worlds by allowing anyone to shop on Amazon with cash. The way they do this is through partners like Western Union, MoneyGram and Coinstar. Consumers can bring in cash and deposit it into an Amazon “account”. They can then shop on Amazon and use this balance on this account to pay for Amazon products.

It doesn’t take much imagination to see where Amazon could take this. By the simple addition of a debit card, Amazon could move the unbanked into a quasi bank account that could be used at places beyond Amazon. Many surveys have said how much the public trusts Amazon and they could really make a difference for financial inclusion by developing this product.

Amazon Lending: Lots of Potential But Not Much Activity So Far

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Now is the Time for Fintech to Focus on Financial Wellness

How we achieve financial wellness is changing and it is not about more or better education

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As much impact that fintech has had on financial services in the past decade people still continue to make poor financial decisions. While it is great that consumers can now refinance their credit card debt or student loans to a lower rate this is not making much of a dent in the overall financial health of consumers.

Credit card debt continues to rise to record levels of over $1 trillion in balances outstanding according to the Federal Reserve. Outstanding student loans are now close to $1.5 trillion continuing a staggering rise over the past decade. The national savings rate is now back down almost to its record low set in 2005. We are borrowing more and saving less. And we seem to be blissfully unaware of the challenges this may bring to our lives.

We Don’t Need No Education

I have many friends who are not the least bit interested in finance. They go about their lives in ignorance of the some of the most basic tenets of finance. A few years ago I had a highly educated friend try to convince me that there was no need to ever pay off credit cards and that I should think of it more like a utility bill with a fairly constant payment, the minimum monthly balance.

We don’t teach serious personal financial management in schools so young people are left to fend for themselves or (hopefully) learn from their parents. I was lucky. In my case we talked about finance and investing regularly at the dinner table when I was growing up and it was something that always interested me a great deal.

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A Look to the Future: Peer to Peer Lending in 2020

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What follows is a work of fiction. It paints a picture of a possible future for p2p lending in the year 2020.

It is September 2020. I am in San Francisco to give a speech at the fifth annual conference of the Direct Lending Association (DLA), the industry trade group. The name p2p lending all but disappeared with the founding of the DLA in 2015 as direct lending was considered a more accurate term.

I have just bought the new iHolo2, Apple’s latest holographic phone, at the Apple store using my new Lending Club Visa card.  Investors initially baulked at Lending Club providing banking services but the credit card division has proven to be one of Lending Club’s most profitable business units. Even though Lending Club has had a banking license since 2017 they have tried to stay true to their direct lending roots. Investors who choose to invest in Lending Club’s credit card business enjoy some of the highest returns available in direct lending.

In the taxi to my hotel I put on my new Google glasses so I can check the latest news as well as browse the new listings at my five favorite direct lenders. The script running on my wearable computer knows my search filters and only displays the loans that have met my criteria.

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ABOUT LENDIT FINTECH NEWS

LendIt Fintech News, Powered by Lend Academy, has been bringing you all the news and information about fintech and online lending since 2010 when it was founded by Peter Renton. We not only have the industry’s most active news site, but also the largest investor forum and the first and most popular podcast.

We are a team of fintech enthusiasts who have been covering the industry for many years. With a deep knowledge of online lending, digital banking, blockchain, artificial intelligence and more our team covers the daily news and writes in-depth editorials.

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