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LendIt Fintech News: Daily Coverage of Fintech & Online Lending


New Study on Digital Identity Shows Changing Consumer Behaviors

Consumer digital identity study shows shifting behaviors create challenges and opportunities for financial service providers and lenders

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[Editor’s Note: This is a guest post from Christina Luttrell, the senior vice president of operations at IDology. IDology is a leader in multi-layered identity verification and fraud prevention. In her 10 years at IDology, Luttrell has significantly advanced the company’s technology, forged close relationships with IDology customers and driven the development of product innovations that help organizations stay ahead of constantly shifting fraud tactics without impacting the customer experience.]

Today, according to Pew Research Center more than 50 million American adults are mobile-only consumers. This shift has fundamentally changed consumer preferences and led to new consumer behaviors that present both challenges and opportunities for financial institutions, specifically for lenders.

Each year, IDology publishes a Consumer Digital Identity Study aimed at giving businesses visibility into how consumer preferences and opinions related to identity and fraud are shifting. This year’s study confirms the continued movement toward mobile, finding that in the last 12 months, for the first time, consumers opened more new accounts online with their mobile devices than on computers. A closer look at the data shows that 50 million American consumers (20% of all online adults) registered for new accounts exclusively on a mobile phone, up 10% from last year. This growing number has implications for financial service providers as they strive to keep fraud out while giving consumers a seamless digital experience.

Growing Consumer Expectations, Limited Patience

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Direct Mail Boosts Fintech Traction

Direct mail complements digital, influences consumers, drives higher ROI

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[Editor’s note: This is a guest post from Mike Gunderson, Founder and President of Gunderson Direct Inc., a 15-year-established direct marketing agency that helps businesses drive new leads and close more sales through traditional offline channels, especially direct mail. Clients include Innovative fintech and peer-to-peer lending companies and top-tier financial companies. Clutch has recognized Gunderson Direct as a leading direct marketing agency in 2019.]

Used correctly, direct mail and digital communications make the perfect pair for Fintech companies. They complement each other, and both have unique strengths. That’s in part why direct mail is enjoying a resurgence in general and a surge in Fintech, with increasing numbers of companies looking to integrate direct mail into their marketing platforms.

At first, this can seem counterintuitive. After all Fintech is all about technology, and therefore should use technology tools to promote itself, right? Nope.

There’s a true story of an IT consultant who travels to clients’ homes. His receipts consist of handwritten carbon copies using carbon paper. When asked why, he responded that he speaks to his audience—largely seniors—in the way that’s most familiar, friendly and effective.

Judging by Fintech consumer response to direct mail, it appears that this methodology also is proving familiar, friendly and effective. The simple fact is that when direct mail lands in the mailbox along with a check, etc., there’s a much higher chance of being viewed and acted upon. Print is anything but dead.

And that’s not just the view of older audiences. Direct mail is being embraced as a robust marketing tool by all audience ages, including millennials. Marketing strategists and direct mail recipients alike see the value, regardless of age.

A 2018 Forbes.com article frames the discussion: “With more companies evaluating their ad spend and marketing budgets, many believed they should gravitate to advertising tactics like virtual reality, digital ads and boosted social posts. However, companies have discovered these ad tactics often don’t yield the same results as traditional marketing strategies.” [Read more…]

Women in Fintech Demolish Glass Ceiling

LendIt Fintech Woman of the Year 2019 award finalists target diversity, equality, education

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[Editor’s note: This is a guest post from Mark Lusky of Mark Lusky Communications, a writing and marketing communications firm, operating since 1982. He specializes in ghostwriting expert advice articles, blogposts and other bylined content for clients, along with writing e-books, whitepapers, case studies, websites, opinion pieces and other communiques—incorporating marketing skills and perspectives acquired as a regional marketing director for Ringling Bros. and Barnum & Bailey Circus. He will be attending LendIt in San Francisco this April.]

LendIt Fintech’s Fintech Women of the Year 2019 award finalists champion the causes of diversity, equality and education—and shout it from the rooftops. In the process, they’re demolishing glass ceilings for women and other diversity-challenged groups.

They are dedicated to achieving gender, ethnic and racial equality. And they are educating a variety of audiences— including borrowers, investors and the Fintech industry—about ways to grow and thrive by becoming savvier and open to all people.

These finalists are changing not just their world—but the whole world.

Promote diversity, respect, collaboration
Valerie Kay, Chief Capital Officer at LendingClub, is responsible for overseeing LendingClub’s Investor Group. She addresses the need for diversity, inclusion, mutual respect and collaboration. She emphasizes the vital importance of diversity to drive better workplaces, happier customers and more profits.

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Expanding Access to Credit in the Land of New “Halves”

Guest post by the former CEO of LendUp on how we can expand access to credit for all consumers

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[Editor’s note: This is a guest post from Sasha Orloff. He co-founded LendUp and Mission Lane and previously was Senior Vice President at Citi Ventures and in Citi’s Consumer lending divisions.  Any views or opinions listed here are his own, or referenced in citations. They are not necessarily shared or endorsed by anyone else.]

Credit is one of the largest, most powerful, lucrative and important industries in the world. It also is one of the best tools for wealth creation – home ownership, small business ownership and growth, and, leveraged investing.  This is readily accessible for prime consumers with more options now than ever before. But for the other half of the country that is non-prime, options are still limited and in many cases non-existent.

I was recently asked about what would it take to expand access to credit in the United States.  I have thought a lot about this question from various points in my career, from one of the US’s largest banks, from the World Bank, from a non-profit bank focused on financial inclusion and most recently from a fintech company.  There are a lot of implications here, and it is hard not to think of academic questions like ‘when is credit a good thing or a bad thing?’ without the memories of the subprime mortgage crisis, or fundamental questions like ‘what is the right structure of a loan?’ and not get overwhelmed with the complexities of federal and state laws, price and duration differences among credit across prime vs subprime, secured vs. unsecured, closed vs. revolving, etc.

There are far more smart and experienced people who can better answer those questions, so I wanted to try and focus on a few tactical and a few high level questions that could lead to profound changes in financial inclusion within the lens of the US consumer credit segment.

How deep and reliable are the sources of capital available?

There have been meaningful changes in the capital markets over the last decade, with additional pools of global capital motivated to invest in this sector.  Early pioneers of securitizations like SoFi, the scaling of marketplace lending like Lending Club, Prosper and Best Egg, and new distribution models like Greensky and Affirm have contributed towards increasing comfort of these “new asset classes” that were mostly locked up in bank’s balance sheets.  I am not sure many would have guessed that we would see billions of dollars (of mostly prime assets) being originated monthly by non-banks.  And despite some hiccups over the last decade the markets seemed to recover quickly and even show an increasing demand across multiple asset classes, which is encouraging. [Read more…]

Manatt Fintech’s Top 5 Takeaways of 2018

The team from Manatt looks back at 2018, sharing their expertise on digital finance and marketplace lending.

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[Editor’s Note: This is a guest post from Brian S. Korn, Leader, Digital Finance and Marketplace Lending, Partner, Manatt Financial Services (above left) and Benjamin T. Brickner, Associate, Corporate and Finance. You can learn more Manatt’s work in digital finance and marketplace lending by visiting their website.]

In the financial technology industry (fintech), 2018 was a fascinating and fast-paced year. The digital finance industry has started to mature and flourish, with more creative niche originators than ever before, more investments now available online and general acceptance of marketplace lending as a bona fide securitization vertical.

It was also the second year of the Trump administration, and unlike in prior years, the industry avoided major scandal and enjoyed a lighter-touch regulatory environment at the federal level. Without further ado, here are our top five fintech takeaways for 2018:

  1. Now accepting fintech charter applications. Hello? Is this thing on??

The third time was the charm for special purpose fintech charters issued by the Office of the Comptroller of the Currency (OCC). After three comptrollers—first Comptroller Thomas Curry, then Keith Noreika and now Joseph Otting—each had a hand in promulgating fintech charters, the OCC finally announced in July that it will accept applications from fintech companies for special purpose national bank charters.

The announcement was accompanied by a helpful OCC policy statement and a Department of the Treasury fact sheet that effectively endorsed marketplace lending and the prospect of special purpose fintech banks. Fintech charters promise a national pre-emptive lending license that removes the risk of the prevailing bank partnership model and the compliance burden of state-by-state licensing.

Raining lightly on this parade was news that fintech chartered banks would be subject to the same capital and compliance burdens as other banks. But they will not be required to accept deposits, and therefore will be exempt from obtaining deposit insurance and from Federal Deposit Insurance Corporation oversight.

Raining harder, however, is the prospect that the first applicant likely will be joined with the OCC in a pending lawsuit by the New York State Department of Financial Services (DFS) and other state regulators. A previous lawsuit challenging the authority of the OCC to grant fintech charters was dismissed for lack of ripeness—the OCC had yet to receive an application, much less grant one.

With a live fish on the hook, however, the new suit presumably will proceed on the merits. The OCC and state regulators are likely to have deeper staff and legal budgets than a fintech charter applicant caught in the crossfire. However, Superintendent Maria T. Vullo, one of fintech’s toughest critics, recently announced her departure from DFS in February 2019. It is unclear how this fierce consumer protection advocate’s departure will affect New York’s position on fintech charters.

With the promise of greater market access tempered by legal uncertainty, we expect to see a rush to be second in line for a fintech charter in 2019. Despite the risks, we believe the OCC stands on solid ground and expect their view ultimately will prevail.

  1. Fintech has weathered recent market volatility well and shows little sign of slowing.

The final months of 2018 have seen increasing volatility and downward pressure in equities, with triple-digit declines in major U.S. indices a regular occurrence. At the same time, loan volume is up and investment in loan-based and other fintech products is higher than ever. While this might seem counterintuitive, we believe investors have grown comfortable with online investing and major platforms now have an established record of delivering forecasted returns. These maturing trends may be making inroads into public equity markets’ inherent liquidity and transparency.

Moreover, fixed rate returns, limited losses of principal and a relatively steady consumer borrowing base with historically low unemployment (for now) have increased crowdfunding platforms’ appeal as increasingly safe and secure investment vehicles. Given the checkered history of crowdfunding and predicted parade of horribles following the 2007–09 financial crisis, it is ironic to now see alternative online finance becoming a benchmark of safety and security.

  1. Credit markets are open and borrowers are increasingly flexible.

The credit market for online lending is deeper and wider than ever before, with several platforms accessing these resources in the latter half of 2018. Platforms that previously could not attract institutional funding until originating at least $100 million now have their choice of facilities at earlier stages of growth. Banks are using platform facilities as early entrees to securitization relationships as banks seek to develop footholds farther upstream. We see the overlap between recent Structured Finance Industry Group ABS and LendIt conferences as evidence of this trend.

At the same time, U.S. consumers (and to some extent, small businesses and real estate industry members) have shown a willingness to borrow at rates higher than their actual default risk would normally dictate. This affords platforms greater flexibility to access capital from different sources. Banks tend to lend at mid- to high-single-digit rates, and we have even seen some platforms attract Libor+250 and +200 pricing, down from +450 and +600 one year earlier. Some banks are even using these facilities to comply with Community Reinvestment Act requirements to provide banking services to low- and moderate-income individuals.

Advance rates are also creeping back over 90%, with less capital needing to be raised from mezzanine funding and equity in order to maximize a facility. Family offices, hedge funds and hard money lenders are still providing facilities to earlier-stage platforms and those with riskier borrowers at rates around 11–15% plus 1–3% warrant coverage. Committed facilities are also a higher percentage of the credit deals we see today, whereas the prior year was dominated by forward flow and option loan purchase programs. In other words, if a platform originates within a predetermined definition of “Eligible Loan,” the facility gets funded.

  1. Marketplace lending is a bona fide securitization vertical.

Break out the champagne! The dire predictions of a slowdown in marketplace lending securitization as a result of the 5% risk retention rule and just plain unfamiliarity with the sector have not come to fruition, as 2018 was the most robust yet. More deals were done, more sponsors completed transactions (now more than ten sectorwide) and the market seems finally to have shaken off the 2016 LendingClub scandal. According to PeerIQ, through the third quarter of 2018, more than $40 billion was issued across 134 transactions, up 34% from the prior year. Upstart, Upgrade and Laurel Road joined the roster of new issuers, along with repeat issuers LendingClub, Prosper, SoFi and CommonBond.

Banks are taking the sector seriously, with Citigroup, Deutsche Bank and Credit Suisse leading the league tables. Also of note is that marketplace lending rating agencies were led by DBRS and Kroll Bond Ratings, with traditional powerhouses S&P, Moody’s and Fitch lagging behind.

It remains to be seen, however, whether the party will continue in 2019 given possible weakness in economic growth and the threat of divided government and future government shutdowns.

  1. States and “regulation by class action” are running counter to relatively relaxed federal oversight.

State financial agencies continue to wield the hammer in the fintech industry. Strict enforcement of states’ securities laws (often referred to as “blue-sky laws”) is a staple of any fintech legal department, as are frequent notices on failures to license, charge a lawful interest rate, calculate the rate correctly (including origination fees) and make required disclosures. Federal consumer lending compliance—including Truth in Lending, Fair Credit Reporting, and Unfair, Deceptive or Abusive Acts or Practices—provide important structure to much of the compliance a platform must undertake.

The federal agencies regulating unlawful and unfair lending conduct have noticeably taken their foot off the gas in the last year. For example, the Consumer Financial Protection Bureau, which for most of last year was headed by Trump appointee Mick Mulvaney, brought only nine enforcement cases in 2018. At the same time (and perhaps also as a result), states have become more aggressive in enforcing conduct by members of the financial services industry.

The bank partnership model of lending—wherein loans are originated through fintech platforms by chartered banks and then sold back to the platforms—has been under regulatory assault for several years. The 2017 Madden v. Midland decision still looms large over originator and investor behavior in the Second Circuit states of New York, Connecticut and Vermont, where the decision now applies.

True lender cases have since been decided, even in preliminary motions, that have had wide impact on online lending and the bank partnership model in the states or jurisdictions in which they are brought. The most prominent pending case is the one brought by the Colorado attorney general against Avant and Marlette, with a countersuit by WebBank and Cross River Bank, the two banks that originate loans from borrowers sourced by these platforms. The case is pending, but we expect the final decision will have far-reaching effects on the industry.

Publicly Listed Fintech Companies – a Tale of Two Sectors

Deepak Lalit, Managing Director of LendIt Advisors reviews the public companies attending LendIt and their recent track record.

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[Editor’s note: Deepak Lalit is the Managing Director of LendIt Advisors, which is a new business line within LendIt Fintech that launched in 2017. LendIt Advisors has access to deep relationships across the entire Marketplace Lending ecosystem, and its objective is to connect Loan Originators with sources of Capital. Deepak has over 10 years of experience in Financial Services, with a specialty in Alternative Lending. Deepak has previously qualified as a Chartered Accountant (CA) and a CFA Charter holder.]

It is no doubt that Fintech has been THE buzzword of the last five years. While it may be hard to agree on the exact definition – there is a strong consensus that we are living in a time where technology is accelerating the pace at which traditional financial norms are being disrupted. The companies which master how to leverage their technology are creating huge opportunities for revenue growth in seemingly shorter and shorter periods of time. This makes the fintech sector very interesting from the point of view of an Equity Investor.

In this article, we briefly look at the broad performance of the publicly listed Fintech Companies, and discuss the investment opportunities that are available to US investors, and why we should all be paying attention.

How have the stock prices fared?

To understand the broad performance of the sector – the KBW Nasdaq Financial Technology Index (KFTX) is a good place to start. It is an equal weighted index of 50 companies ranging from the more recent IPO’s such as Square (SQ) and LendingClub (LC) to some of the more established players like VISA (V) and PayPal (PYPL). The criteria for inclusion into the index is where the distribution of a company’s financial products and services is exclusively through electronic means and their revenue mix is predominantly fee-based.

Since inception in June 2016, the index has returned 46%, outperforming the broad market S&P 500 by a whopping 24%, and even the tech-heavy NASDAQ by a meaningful 9%. [Read more…]

What will the financial services industry look like in five years?

Bo Brustkern, the CEO of LendIt Fintech and Co-Founder of NSR Invest shares his thoughts on the future of financial services.

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[Editor’s note: Bo Brustkern is Co-Founder and CEO of LendIt Fintech and Co-Founder of Lend Core, which operates NSR Invest and Lending Robot. He is a serial entrepreneur with a passion for building companies and he has spent the past six years focused on the fintech space.]

Attempting to predict the future is a fool’s errand particularly in the fintech arena, where change can be surprising, lightning quick and brutal. But I’ll play the fool and give it a go. This article briefly touches on many of the themes being explored at our LendIt Fintech USA 2018 conference, which is now just days away:

Audits Will Go the Way of the Dodo Bird

Stop me if you’ve heard this one before. No, seriously: the blockchain is for real. The protocol of trust is here to stay, and it’s going to disrupt everything. Just know, it is going to have a massive impact on the future of financial services. Here are some examples:

At our p2p robo-advisor, Lending Robot, we publish a record of all transactions executed by our Series Fund to the Ethereum blockchain. An immutable record of all transactions, making future audits far less complex and expensive. While the blockchain has not rendered audits unnecessary yet, I believe we’ll see it happen within the next five years.

Smart Contracts Are In, Long, Paper-Intensive Financial Processes Are Out

As I write this, Lending Robot is raising a private round of growth capital. The closing process, called “papering” for very obvious reasons, is just as onerous and Microsoft Word-oriented as I remember it back in the early 2000s when I was a young VC. Where are Ethereum-based smart contracts when we need them? Indeed, I believe we’ll see smart contracts proliferate broadly in the next five years.

Cross-Border Payments Become Seamless and Inexpensive

Our conference business, LendIt Fintech, is a multi-currency enterprise regularly dealing in USD, CNY, GBP and EUR, just for starters. Cross-border payments are costly and time-consuming. For good reason; cross-border transfers have the compounding challenges of anti-money laundering laws, know-your-client regulations, exchange rates and stacked bank fees. Again, I believe that the protocol of trust (blockchain) coupled with a universal, fungible currency (crypto) will disrupt cross-border payments in the next five years.

Say Goodbye to Expensive Transaction Fees

Several recent announcements from well-known crypto companies claimed to allow businesses to set up alt-coin enabled checkout systems. After several months of trial and failure, our conference business finally broke through with a success… BitPay to the rescue. I’m delighted to say that LendIt Fintech accepts Bitcoin as a payment method. And here’s the pleasant surprise: processing fees for crypto payments are materially lower than credit card processing fees. Compare roughly 3% (old skool) with 1% today. Imagine a future with sub-1% transaction fees… I believe it’s going to happen, and soon.

“Investing for Everyone” Takes Hold

Some of the most exciting innovations are occurring in wealth management. While Betterment and Wealthfront may have taken early headlines and a few billion AUM, it’s not robo-ETFs that I’m excited about. That stuff is… well, let’s say comparatively easy… and most of the innovation over the past decade is not impacting the non-accredited investor, which accounts for about 92% of us. What’s more exciting are the new Regulation A+ funds that are beginning to proliferate. Noteworthy are Fundrise, which offers real estate investments to retail investors, Street Shares, which specializes in small business lending, and SeedInvest, which is democratizing venture capital. Imagine a future where investment products proliferate not just for the already-rich, but for aspiring intelligent investors across the economic spectrum. This reality is already on the way.

Fintech is Everywhere

Fintechs are enhancing the customer experience along four axes: choice, price, convenience, and predictability. They are meeting the needs of educated, aware, demanding consumers and they are attacking traditional financial institutions at every angle. They are everywhere: personal loans, business credit, insurance, investing, wealth management, mortgage lending, student loans, financial education, visualization and interface, credit scoring, credit management and achievement, merchant services, payments, payroll, benefits. Did I get everything? I’m sure not.

Enabling this is the amelioration of regulatory requirements by governments across the globe. While Estonia is famous for its digital citizenship, called e-residency, the UK’s Financial Conduct Authority is arguably the most innovative regulatory body when it comes to promoting financial services innovation. Since 2016 the FCA has been building and promoting its regulatory sandbox built for UK fintechs to launch and test their products under proportionate regulation, which is essentially a scaled-down compliance requirement that scales up once it’s clear that a concept is commercially viable.

Not only has the UK government created a hospitable environment for fintechs at home, but it has begun exporting the blueprint for its regulatory sandbox to other nations. The idea is that fintechs that meet common regulatory standards will be able to offer their products around the world without burdensome regulatory requirements at home or abroad. It’s quite possible that we’ll see multiple governments around the world set up regulatory frameworks that scale in proportion to innovation, allowing fintechs access to a broadly compatible, cross-border regulatory system.

Summary: The Engine is Roaring & the Runway is Long

We are right now experiencing the confluence of massive change. Sovereign identity, deep learning, decentralized networks, trustless systems, and scalable regulations are conspiring to fundamentally change financial services. Indeed, the fabric of our economies is being rewoven right under our feet. I am delighted to participate in this time of massive change because I am optimistic about what will result: increased speed, safety, security, convenience, and privacy. Governments competing for innovators, and consumers benefiting across the board.

Do you agree? What do you think will be the lynchpin of change in financial services? Tell me in the comments section below.

How Fintech is Fixing Broken Credit

David Lin, Head of Credit at PayU gives his take on expanding credit and how this looks in practice with their investment in Kreditech.

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[Editor’s note: This is a guest post from David Lin, Head of Credit at PayU. David is an experienced FinTech risk executive with a background in consumer and small business lending across international and US markets. At PayU, David works with the team to successfully launch lending products by leveraging technology and data science to manage risk while balancing customer experience and optimizing operational effectiveness. He specializes in assessing, quantifying, and mitigating risks by incorporating performance monitoring and benchmarks regarding growth, delinquency, losses, recovery and overall profitability.]

For millions of people, a lack of access to credit is just another part of life. Yet, without this access, it can be incredibly difficult for businesses and customers to connect with each other. In fact, according to The World Bank, despite a 20% increase between 2011 and 2014 in the number of adults with access to formal financial services worldwide, an expected 2 billion adults worldwide are unbanked. In addition, some 200 million businesses are excluded from the formal financial system.

The fact that traditional credit bureaus serve only a slice of the world’s adult population is not new. However, access to credit doesn’t just equate to financial inclusion; millions of people have money in their bank accounts but aren’t given access to credit for spontaneous purchases because they don’t fit the usual profiles. With traditional credit models simply not catering to large sections of the population, it is more important than ever to find ways to offer innovative solutions to this problem.

The problem is particularly prolific in high growth markets; with a 2015 PwC report putting India’s unbanked population at 233 million (that’s nearly every 1 in 6 people). In South East Asia, a further 264 million people are without access to credit (including a staggering 80% of Cambodians). And even beyond the individuals affected, some 200 million businesses are excluded from the formal financial system.

Fortunately, the advancements we’re seeing in fintech innovation, particularly in emerging markets like India and LatAm, means we are starting to see positive change, with credit’s net widening at an increasingly rapid pace. This has been aided by increasing customer demand, tech innovation and a supportive regulatory environment.

Thanks to our deep and evolving understanding of local nuances and payments preferences, we have been able to witness the importance of access to credit and just how many people currently don’t have access through traditional means. The industry has a huge tool at its disposal though: technology. And we should all be using it to challenge the ‘norm’, deploying state-of-the-art solutions to develop new and innovative models that can provide broader access to credit.

How and why traditional credit models are fast becoming outdated

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Is Personal Service in Fintech Getting Lost Amid the Digital Mindset?

Many consumers love the convenience of digital communication but still seek live human interaction

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[Editor’s note: This is a guest post from Mark Lusky of Mark Lusky Communications, a writing and marketing communications firm, operating since 1982. He specializes in ghostwriting expert advice articles, blogposts and other bylined content for clients, along with writing e-books, whitepapers, case studies, websites, opinion pieces and other communiques—incorporating marketing skills and perspectives acquired as a regional marketing director for Ringling Bros. and Barnum & Bailey Circus. He will be attending LendIt in San Francisco this April.]

Amid up-and-coming fintech company trends toward cost-saving models that depend heavily on automated digital systems, the human touch is getting lost in the shuffle. In some cases, this doesn’t pose a problem. Many millennials and other younger groups prefer transacting business without any human intervention. Make it online, quick and done—and they’re happy.

If they have a problem, communicating via email, checking out forums, or consulting a canned knowledgebase are acceptable because they lack the need or desire for personal contact.

However, there’s a substantial segment of the consumers that not only wants, but demands, human service—particularly when it comes to customer support. Many people want to consult a live human being for help versus being relegated to digital resources.

If you feel that your borrowers are okay with the digital-only ways, so be it. But, how do you know? If you’re surveying existing customers, it’s likely that most of them are somewhat satisfied, or they wouldn’t be customers. How about prospects? What are their expectations? You may be leaving a huge amount of money on the table—without any easy way to discover or remedy it.

Conflicting Reports, Views Abound

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Credit Analysis and Valuation Methods for Marketplace Lending Loan Portfolios

We dig in to the complex topic of valuation with this Q&A piece conducted with Houlihan Lokey

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[Editor’s note: Many of us have questions on marketplace lending loan valuation so when we were approached to see if we would be interested in a Q&A post on the subject we jumped at the chance. The Lend Academy team created the list of questions and Gunes Kulaligil, Director in Houlihan Lokey’s Financial Advisory Services business provided his answers.]

As Marketplace lenders continue to lend at a fast pace, there has been a significant increase in the past several years in non-bank consumer, student and small business lending. Although these platforms operate in a similar fashion, there is a wide variety of underwriting guidelines thereby producing loans with notably different credit profiles and terms. As a result, prepayment and default performance vary significantly based on the platform originating the loan and the credit grade of the loan as determined by the platform. Additionally, loan performance and platform performance have been mixed, with losses sometimes coming in higher than expected and governance issues shaking investor confidence in the sector.

Despite these challenges, origination rates have climbed back towards their prior highs, and funding sources have been expanded with increased interest from whole loan buyers in flow agreements as well as investors seeking to acquire tranches from securitizations. The recalibration of performance expectations has hit many platforms and continues to be an ongoing process, thus highlighting the need to determine the relevant default and prepayment drivers necessary for accurate fair value analyses. While a robust and liquid secondary whole loan trading market has not emerged as some market participants had hoped, secondary transactions are occurring, especially as loans are aggregated into securitizations. Many of these transactions occur at a premium to par and can provide meaningful insight into pricing and relative credit performance of one platform versus others over time.

1. What are the most prevalent methods of valuing loan portfolios today?

Discounted cashflow (DCF) methodology at the loan or cohort level is the most prevalent valuation methodology used today to value marketplace loan portfolios and related assets, including tranches in securitizations and servicing rights, regardless of the lending vertical. I emphasize “today” because marketplace lending is an evolving corner of consumer & business lending that is small and fragmented in general, with over a hundred lenders, both small and large, with a handful of large lenders accounting for the lion’s share of the issuance. Despite its still nascent nature, marketplace lending has caught the eye of nimble credit-focused alternative investment managers and the relatively risk averse large bond funds alike. Credit investors usually acquire whole loan portfolios or subordinate bonds off of securitizations on a levered basis, whereas many of the larger bond funds focus on the senior bonds in securitizations.

The investment thesis from the credit funds’ perspective is the opportunity to achieve mid single to double digit returns on a levered basis with a short duration versus the bond funds’ thesis which could essentially be described as a yield pickup strategy where the buyers expect to achieve unlevered single digit returns with shorter duration than whole loans and ample structural credit support present in securitizations in the form of subordination and excess spread. Non-bank lending owes its ability to attract the attention of such a diverse group of investors not only due to the sector’s capacity to offer a wide range of credit exposures and duration, but also due to its future growth potential with a confluence of support from increasingly tech-savvy borrower demographics, a de-regulatory environment and innovative partnerships in the Fintech ecosystem.

2. Are valuation methods standardized? If not, why not? How does this lack of a valuation standard affect investors?

[Read more…]

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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