Paul Schulte, Advisor, Banking and Financial Services
August 22nd, 2019
Paul Schulte is the Founder and Managing Editor of Shulte Research based in Singapore. Paul's roles[...]
Category Archives: Marketplace Lending/P2P, Online Lending
FT Partners Report (Jan 2020): The Rise of Challenger Banks: Are the Apps Taking Over?
FT Partners | Jan 2020
Executive Summary:
The banking sector is experiencing a major shift globally, as Challenger Banks are becoming increasingly formidable competitors to traditional banks and have begun to capture significant market share. Furthermore, the lines between banks and other consumer financial services providers are blurring, with several alternative lenders and robo-advisors beginning to offer banking products to their customers. E-commerce / internet giants are also jumping into the fray with Google and Amazon, among others, beginning to offer banking products. In response to the emergence of Challenger Banks, a number of incumbent banks have launched their own FinTech brands, and traditional financial institutions will likely turn to FinTech solution providers in order to defend their turfs.
Download this Jan 2020 FT Partners Fintech research (216 page PDF) -> Now
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Fintech: The Fourth Platform
Forbes | Matthew Harris | Nov 22, 2019
This is part two of a two-part essay diving into the future of fintech. Read part one.
In part one of this essay, I discussed how fintech was moving from being a business model unto itself, to being an ingredient used in other technology businesses. This is what we refer to as the “fourth platform,” joining internet, cloud and mobile in the modern technology stack. In this essay, we will discuss why this is happening and offer some early examples.
Benefits of embedded financial services
When you look at the benefits of this embedded financial services model, the first point is obvious: as a technology founder, you’re already going through the hard work of acquiring customers, and as a result you have created the opportunity for a zero customer acquisition cost cross-sell. But the opportunity goes well beyond that basic business logic.
See: Fintech’s next decade will look radically different
Having these financial functions integrated with software enables new functionality, leveraging the persistent connection to move beyond transactions to relationships. We’ve already been trained to conduct financial transactions inside of software applications (think payments inside of Uber), so if you’re utilizing software to run your business, using that same software to get paid and make payments is logical and more natural than going to your financial institution to do so. These relationships are data-rich, which leads to smarter cross-sell, prequalification and massive risk reduction. The monetization opportunities are not only large, but actually meaningfully larger than the original software opportunity.
Integrated payments
As with most financial innovation, the first subsector to evolve is payments. When you look at payment card volume in the United States, for example, eight percent of it has migrated to what we call integrated payments, that is, merchant payments that are sold and managed through software companies as opposed to traditional payments companies. That portion is growing at two times the rate of the overall market, and analysts estimate it will hit 40 percent in the medium term. Why?
Take Shopify, a $36 billion software company that helps small businesses get online and setup e-commerce sites. You could think of it as shopping cart software. But at this point in time, the majority of its revenue comes from payments and that proportion is increasing. If you look at its website, you can see our thesis in action: zero CAC natural cross-sell, instant set up (most payments companies have to underwrite their merchants for risk, which takes time and hassle), novel functionality integrating settlement process and data into existing workflow, and then obviously additional revenue/enhanced monetization.
There are similar stories at many of our own portfolio companies. When we invested in AvidXchange four years ago, it was a majority software company, but by next year it will be 80 percent payments. Zelis Healthcare, which recently combined with RedCard Payments to form the next-generation leader in healthcare payments optimization, will similarly scale from almost entirely software to nearly a majority payments revenue in the next few years. We recently invested in Finix, the leading company enabling software companies to become payments companies.
See: Where top VCs are investing in fintech?
In certain segments, the innovation has come in waves. For example, take the rental payment market, which started with old school payments companies like FirstData, then progressed with Fintech 1.0 player, ClickPay, and now to the fully-embedded model, Cozy. However, our bet is that companies like SmartRent represent the next generation, with an even deeper integration.
SmartRent sells and installs home automation hardware into rental buildings, and uses that as a methodology for getting widespread and persistent connectivity to tenants in the form of its app. This year, it will incorporate rent payment into the app, and as soon as next year will sell renters insurance. SmartRent is the logical evolution of insurtech companies like Lemonade — zero CAC, integrated into its own smart lock and leak detection system for a persistent data-rich connection and novel functionality, and with excellent incremental monetization.
Integrated lending
Within lending, we’re starting to see some early examples of embedded fintech. For example, we've seen the rapid rise of the payroll advance lenders. This type of loan recognizes that workers are paid in arrears, and have a balance of worked hours that can represent, in effect, collateral for a loan. This began with the 1.0 versions, like Dave, which finds borrowers through marketing channels and attempts to underwrite their hours worked algorithmically. This has quickly evolved to where modern software-driven payroll companies like Gusto can offer this functionality through their employer’s customers, reducing CAC to zero, increasing data-richness and validity through their ownership of the payroll system, and adding another leg of monetization.
See: What to expect from social fundraising world in 2020
Our portfolio company Wisetack provides an API-driven infrastructure for software companies to add point of sale lending to their offerings without becoming lenders themselves. Lambda School, ostensibly an edtech company, has leveraged an innovative financing product called an ISA, creating unprecedented alignment between the school and its students. If SoFi is a classic Fintech 1.0 company (digital student lending!), Lambda is an early example of a technology company leveraging fintech as a platform.
Continue to the full article --> here
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Holiday Greetings from Lending Loop! 2019 Year In Review
Lending Loop | Reza Jafer | Dec 17, 2019
2019 at Lending Loop was an exciting and fruitful year as we achieved significant company milestones. We are proud to have enabled 10,000+ Canadian individuals to cumulatively invest over $60M in Canadian small businesses.
2019 Highlights:
- Over 400 businesses across Canada accessed $25,000,000+ of capital through Lending Loop
- $4,000,000+ in interest and $14,000,000+ in principal paid to investors, contributing to their financial goals
- Opened the investment platform to Trusts, Foundations, Charities, Partnerships, Corporations and Institutional partners to invest alongside Canadian individuals
- Enhanced Portfolio Analytics allowing investors to have real-time insights into their portfolios
- Launched getloop.ca - Canada's first 100% free business credit score monitoring service for business owners in partnership with Equifax
Our team was proud to receive recognition from Globe & Mail’s Report on Business as the 27th Fastest Growing Company in Canada, acknowledging the success of our ongoing mission to provide innovative financial solutions for small businesses.
If you would like to learn more about the Lending Loop platform, visit www.lendingloop.ca/lenders or contact one of our registered Dealing Representatives at lenders@lendingloop.ca
Till next time, onwards and upwards!
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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A $7 Credit Limit: Jack Ma’s Ant Lures Hundreds of Millions of Borrowers
Morningstar | Stella Yifan Xie | Dec 8, 2019
By offering as little as a few bucks at a time to new borrowers, a microlending business of Chinese technology giant Ant Financial Services Group has quietly swelled into one of China's largest providers of personal credit lines.
The microlender is called Huabei, which means "just spend." It was originally created four years ago as a way for users of Ant's payments network Alipay to fund purchases on shopping websites run by Ant's affiliate, Alibaba Group Holding Ltd.
These days, Ant's credit lines are used by hundreds of millions of Chinese citizens to pay for groceries, restaurant checks, clothes and new iPhones from physical and online stores. More than half of Alipay's 900 million users in China have opened Huabei accounts, according to a former employee and estimates from two of Ant's shareholders. A company spokesman disputed the estimates, saying they are "far off from the actual number," and cited competitive reasons for not disclosing the figures.
Many Huabei users don't have traditional credit cards and some don't qualify for bank-issued credit cards. Only about a fifth of China's population, roughly 278 million people, held credit cards in 2017, according to World Bank data. There were 711 million credit cards in circulation as of June 2019, according to the People's Bank of China, in part because some individuals have multiple cards.
Exclusive: Ant Financial shifts focus from finance to tech services: sources
Ant is controlled by Chinese billionaire Jack Ma and is the world's most valuable private technology startup. It has leveraged its giant user base--spanning about two-thirds of China's population--to cross-sell products and services. Besides facilitating payments, Ant sells mutual funds, makes short-term loans to individuals and small businesses, offers insurance-like products and has a proprietary credit-scoring system. In September, Chief Executive Eric Jing said eight out of every 10 Ant customers use at least three of its five service categories.
Nearly half of Huabei's users are under the age of 30, a group that is more free spending and comfortable with debt than older generations in China. Most don't have long credit histories and carry little cash around, preferring to use their mobile phones to make payments for everything from taxi fares to utility bills.
Ant doesn't disclose how much it has collectively lent consumers via Huabei, which is embedded within Alipay's app and functions as a revolving credit line that individuals can draw down repeatedly after repaying what they borrowed. Borrowers don't incur any interest unless they miss payment deadlines or sign up for installment plans.
The company has leaned on domestic banks and China's asset-backed securities market to help fund Huabei's lending. As of June this year, an Ant unit had issued more than 392 billion yuan ($55.7 billion) in bonds backed by Huabei loans, according to Wind, a data provider.
Most Huabei users borrow relatively small amounts of money, which has helped keep default rates low. The average outstanding balance on Huabei's credit lines was less than 1,000 yuan ($142.10) as of early December, according to a person familiar with the matter. Most users have credit limits below 6,000 yuan, according to a prospectus for one of Huabei's asset-backed securities.
To draw new users, from college students to retirees, and to encourage frequent use of its credit lines, Huabei has offered rebates and discounts on small-ticket purchases. At a wet market in Shanghai recently, some fresh-produce vendors were only accepting Huabei as a payment mechanism for Alipay users.
Huabei has also offered temporary credit-line boosts for purchases of big-ticket items or on big shopping days, such as Alibaba's Singles Day in November, which is similar to the annual Black Friday shopping event.
See:
In the U.S., banks and credit-card companies typically assess the creditworthiness of individuals--often by analyzing reports from national credit bureaus such as Experian and Equifax--before giving them credit cards or unsecured loans. But most Chinese consumers don't have credit scores that are based on their payment histories and outstanding borrowings across multiple lenders and debtors.
Ant and other Chinese online lenders have their own proprietary methods of assessing an individual borrower's risk. Huabei, in some cases, has lent very small amounts to new borrowers initially, then increased their credit limits after they repeatedly repaid borrowings on time.
Delinquency rates on Huabei's loans are largely in line with those of credit cards in China. As of June, 1.6% of Huabei's outstanding loans were more than 30 days past due, while 1.2% were more than 90 days overdue, according to a document for bond investors. That same month, about 1.17% of credit-card loans in China were more than 60 days past due, according to China's central bank.
Louise Zhou, 27, who sells imported wines on Alibaba's eBay-like marketplace Taobao, said she returned to China in September after living in France for eight years. After opening a new Alipay account, she said she was offered a 50 yuan ($7.10) credit line on Huabei via the Alipay app on her phone. In previous years, the initial amount first-time borrowers could get from Huabei was 500 yuan, according to users.
"Fifty yuan credit is so little that it's almost meaningless," said Ms. Zhou, who works in Changsha, a central Chinese city. Still, she has used the credit line to order takeout food and buy groceries. She usually repays what she has borrowed the next month ahead of the payment deadline.
Ms. Zhou has set Huabei as her default payment option, meaning purchases she makes are first made with credit before funds are debited from her Alipay account.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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UK: New Peer to Peer Lending Rules Kick in on December 9th: “A Watershed Moment for P2P”
Crowdfund Insider | | Dec 10, 2019
New peer to peer lending rules come into effect on Monday, December 9th. The new rules were the result of a review by the UK Financial Conduct Authority (FCA).
The UK largely created the entire sector of peer to peer lending. One of the most prominent sectors of Fintech, P2P lending has emerged as a viable asset class generating better risk-adjusted returns in a low-interest rate environment. While not without a few growing pains, P2P has been a net positive for both credit markets and for smaller investors seeking higher rates of return on their money.
At the time the updated rules were announced in June of 2019, the FCA stated:
“[The] P2P sector had developed a wider, more complex, range of business models. Many platforms in the sector are now taking a much more active role, by taking decisions on behalf of the investor. In addition, we explained that we had also seen some poor business practices, for example, in disclosure of information to clients, charging structures, wind-down arrangements, and record-keeping.”
The response by platforms has mostly been positive with some questioning if the net effect will be to dim innovation in the online lending sector. The UK P2PFA, the advocacy group representing the P2P industry, stated at the time the new regulations were announced that the rules “reflect what is already good practice in the peer to peer lending market and we welcome that.”
Orca Money, a P2P investment aggregation site, worried that institutional money would now take over the P2P sector.
See:
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Peer to Peer Lending: The Future of Fintech is Now
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Lending Loop Surpasses $50 million Milestone and helps thousands of Canadian Businesses and Investors
Zopa, the grande dame of P2P lending in the UK, recently published a blog post seeking to “demystify” how the rules will impact individual investors in P2P assets. Going forward, individual investors on will be classified within various categories including:
- Certified sophisticated investor – no restrictions on how much you can invest – based on past activity.
- Self-certified sophisticated investor
- You have made more than one investment in a P2P agreement or portfolio in the past 2 years
- You work, or have worked in the past 2 years, in a professional capacity relating to finance, resulting in an understanding of P2P
- You are currently, or have been in the past 2 years, a director of a company with an annual turnover of at least £1 million
- You are a member of a network or syndicate of business angels and have been so for at least the last 6 months
- High net worth investor – you earn more than £100,000 per year, or hold net assets of at least £250,000.
- Restricted investor – you may invest 10% of your net assets with certain exclusions
See: The future of fintech: lending + services
RateSetter, one of the largest peer to peer lending platforms in the UK labled the regulation a “watershed moment” for P2P – a positive for the evolution of the peer to peer lending industry.
RateSetter said that the FCA’s approach “decisively addressed any sense that P2P is lightly regulated” and the rules put the regulation of P2P “on par with other mainstream financial sectors.”
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Fintech Canada Directory Category: Lending | Borrowing
Blockchain | Digital Assets | Crypto
Capital Markets | DeFi | Crowdfinance
Digital Banking | Analytics | Infrastructure
Finance | Accounting
Insurtech
Lending | Borrowing
Payments | Transfers | Rewards
Personal Finance
Real Estate
Security | Identity | Regtech
Wealthtech | Alternative | Investing
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Alternative Lenders Continue to Steal Business From Banks
The Financial Brand | Jim Marous
The banking industry has enabled alternative providers to impact the competitive balance for payments, investments and deposits. By not developing customer-centric digital lending platforms, traditional lenders have now also allowed digital players to steal significant loan customers.
Most traditional financial institutions associate PayPal with being a significant player in the competition for consumer payments. Their growth, along with the growth of Venmo, Square and other digital payment alternatives, is well documented. What is less well known is the rapid growth of PayPal as a digital lending alternative. It may be time for banks and credit unions to wake up, however, as the company announced that they had crossed $10 billion in small business lending in only 5 years.
“It took PayPal twenty-three months to get to the first $1 billion in lending,” said Darrell Esch, Vice President of global credit at PayPal. “Demand has never been in shortage.” According to research from deBanked, it took PayPal only five years to reach the $10 billion milestone.
The loan originations were spread out across 225,000 small businesses globally according to PayPal, including the US, UK, Australia, and Germany as well as Mexico through a partnership with another online lending platform. Currently, however, PayPal is originating $1 billion per quarter … making this digital player a very formidable competitor.
Amazon Joins PayPal as Top 5 Small Business Digital Lender
While the growth of PayPal as a digital loan alternative is impressive, they are far from the only digital lender impacting the lucrative small business lending marketplace. Amazon has joined PayPal, OnDeck, Kabbage, and Square as a top 5 digital small business lender. In fact, Amazon revealed that it had made more than $1 billion in small business loans to US-based merchants in 2018.
See: Lending Loop Surpasses $50 million Milestone and helps thousands of Canadian Businesses and Investors
In total, there are more than 1.9 million businesses, content creators, and developers in the U.S. using Amazon to deliver their products and services. According to Amazon, small and medium sized businesses now account for 58% of Amazon sales – up from 30% ten years ago.
The peer-to-peer business lender, Funding Circle, also revealed its first-quarter trading update, showing that loans under management rose by 44% compared to the first quarter of 2018, while originations grew by 23% (they have originated $9.5 billion in loans). This indicates that there is greater competition between alternative and traditional lenders, as well as increased competition within the alternative lending marketplace.
Digital Lenders Leverage Data for Improved Experiences
As with most digital banking alternatives, the top small business digital lenders use vast customer insights and competitive terms to deliver personalized offers and experiences to small businesses. Most of this is done in conjunction with small businesses still having banking relationships for holding funds and making disbursements at traditional banks and credit unions.
Alternative digital lending firms often provide small businesses more favorable terms on loans than can be received from traditional financial institutions. They also provide more financing options and faster approval than traditional banks. Alternative lenders like PayPal also approve small business loans at higher rates — 56% compared to 26% approval rates by big banks, according to data from Biz2Credit.
Because PayPal, Amazon, Square and other alternative lenders have access to transaction history of sellers on their platform – and often use that merchant’s sales data instead of a credit score – they can quickly determine the credit worthiness of a small business borrower. Comparably, banks and credit unions usually only have access to a small business’s deposits and bank accounts, unable to see the entire picture of a company’s sales.
“PayPal business financing programs can provide funding from $1,000 – $500,000 for small businesses looking for both quick decision-making and immediate usage as an application decision that usually occurs within minutes or hours, if approved, allows the business to start using the funds almost immediately,” said Esch.
This availability of funds comes at a time when many traditional organizations have pulled back from offering small business credit. According to the Federal Reserve’s Small Business Credit Survey, as many as 70% of merchants didn’t receive the funding they wanted in 2018.
See:
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The future of fintech: lending + services
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Lock BTC, Get DAI: Lending Firm Bridges Bitcoin-DeFi Divide in Latin America
“If you look at the great recession what you’ve seen is a bounce back of commercial lending, but lending to small businesses really hasn’t come back,” states Esch. A lot of the hesitancy is attributed to the cost of underwriting. Banks are usually not in a position to lend small amounts of money on a frequent basis. Digital alternative lenders are built for this type of lending.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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