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The Rise (finally) of Online Specialty Lenders

By Jim Bruene on May 28, 2014 4:15 PM | Comments

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One thing that always struck me as odd about the financial services startups of the late '90s and early 2000s, was their obsession with deposits. I can understand the appeal of having people send you money; it's a rock-solid, low-risk part of the banking business model. But it also contains massively entrenched players who already have the consumers' trust, along with a vast branch network to back it up. And it's a commodity.

The much bigger opportunity for newcomers, I have always thought, was to go after the loan side. Consumer trust is a almost a non-issue since you are handing them the money. And loan underwriting is both an art and a science with thousands of variables to innovate on. 

But it's a dicey area for investors. The economic downturn of 2000-2002 spooked the VCs as dotcom darling NextCard went belly up (as did other non-online sub-prime lenders). Then the big hit in 2007/2008 killed whatever business plans had been drawn up in the post-2002 period. And there is always concerns about where to find more funds to lend out, especially in the post-securitization world.

Fast-forward seven years. We are finally seeing an explosion of consumer and small business lending online (with mobile coming on). This newfound activity is being led by the so-called crowdfunders and P2P lenders tapping institutional money along with accredited investors (and VCs) to deliver capital using a mix of debt and equity terms.

Another specialty lending area exploding online is secondary educational financing (note 1). For example, Sofi started by targeting graduates of elite U.S. universities. CommonBond is focusing on graduate students. ProdigyFinance lends to international MBA students.

The latest entrant in the educational space is CoderLoan (screenshot below). The NYC-based startup is working with employers and educational institutions to help finance participants in coding bootcamps, where tuition can run $10,000 for a summer-long program. Employer sponsors can repay the CoderLoan after a set amount of time on the job. Or the graduates themselves can afford to repay the loans with their developer-level salaries.  

Bottom line: The uptick in digital specialty lending is win-win-win. There are potentially good returns for investors (note 2) while more capital flows to both entrepreneurs looking to expand and employees wanting to sharpen skills. Ultimately, that leads to a more productive and engaged workforce and a more rigorous economy. 

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CoderLoan homepage (link, 27 May 2014)

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Notes:
1. For a 38-minute discussion on crowdfunding student lending, check out the panel at the Lendit conference in San Francisco three weeks ago (link). The panel included Vince Passione, LendKey; Mike Cagney of SoFi; David Klein of Commonbond; Cameron Stevens of Prodigy Finance; and Brendon McQueen of Tuition.io.
2. Most of the activity is too recent to fully understand whether the risk is being priced adequately (see NextCard in 2002), but the results from the earliest entrants -- Zopa, Prosper and Lending Club -- are promising.
3. For much more on crowdfunding (debt and equity), see our May 2013 report (subscription).

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Fintech Funding Bubble?

By Jim Bruene on March 26, 2014 4:15 PM | Comments

When we first started Finovate in 2007/2008, during the depths of the financial-services sector collapse, there were maybe a half-dozen major venture fintech fundings per quarter. In comparison, yesterday (25 March), in a single day, 10 fintech fundings were announced totaling nearly $60 million (according to Crunchbase).

Yes, you read it right. TEN in 24 HOURS! And that doesn't even include ThreatMetrix, whose latest $20 mil round didn't make it into the database by today's noon (Eastern) cutoff. 

What are the drivers? As you can see from the list below, the digital currency craze attracted nearly half the amount, with $23.5 million sent to three companies. Crowdfunding and other alt-lending has been absorbing large amounts of capital of late, and yesterday pulled in another $20 million in three fundings. The other four ran the gamut from $12 mil into a prepaid card company and $1+ million each in insurance, healthcare payments and stock analysis.

Is it 1999 again? That's not for me to say. I hope not (obviously). But it's hard to believe that there is enough revenue to sustain even a small portion of these startups. Clearly investors believe there are major disruptions ahead in all things financial. 

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Table: Fintech Fundings Announced March 25, 2014

Amount Company Market Segment
$17 mil Circle Internet Financial Digital currency/bitcoin
$14 mil CircleUp Equity-based crowdfunding
$12.2 mil SpendSmart Payments Co Prepaid cards for youth
$5 mil Payward (Kraken) Bitcoin
$4 mil BlueVine Small biz alt-lending
$1.6 mil RealCrowd Crowdfunding real estate
$1.5 mil GoCoin Bitcoin
$1.4 mil SeniorQuote Insurance Insurance lead gen
$1.2 mil FlexMinder Healthcare payments
$1.2 mil Estimize Earnings estimates for stocks
$59 mil TOTAL ---

Source: Crunchbase, 26 March 2014

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Categories: Crowdfunding

Fintech Four: T-Mobile, Stripe, Andera & Balanced Payments

By Jim Bruene on January 27, 2014 5:39 PM | Comments

image Wow, it was a whirlwind of fintech news in the past 7 days. Here are the four stories that spiked on our fin-o-meter:

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1. Stripe's $80 million funding
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It's not so much the amount of the funding, though that's one of the biggest C-rounds we've seen in the space, rivaling Square's $100 million round in June 2011. But the jaw-dropping aspect was the valuation, a reported $1.75 billion, double what PayPal just paid for Braintree, which is far bigger than Stripe.

But as PandoDaily's Carmel DeAmicis and Michael Carney point out, it was favorable terms (2x liquidation-preference) that substantially boosted the valuation. Regardless of the funny VC math involved, it was a monster round for the small company.

Clear winners: Stripe founders and early investors
Potential winners: Other payment enablers who now have access to more funding
Potential losers: Square, which could have bought Stripe at a much lower valuation; PayPal; and other acquirers who now face an even stronger competitor

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2. T-Mobile teams up with Bancorp Bank & Blackhawk Network for branded prepaid card
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image An interesting play by T-Mobile - turning their 7,500 locations into cash handling mini-branches - is its new Mobile Money prepaid card. I'm not sure that's the business I would have entered if I were in charge, but it will be closely watched. If it's wildly profitable (unlikely), it could put pressure on the entire U.S. branch banking system. More likely, its success will be a moderate and will fizzle out in a few years when T-Mobile finds more lucrative ways to deploy its real estate and sales staff.

In any event, it will be closely watched by banks and non-bank retailers alike. (Potentially, T-Mobile could make more money reselling the consumer data from the effort, than from the prepaid business itself.)

Clear winners: Bancorp Bank (issuer) and Blackhawk (prepaid network)
Potential winners: T-Mobile (and other telcos that copy the strategy)
Potential losers: Wal-Mart, check cashing stores, and other players in the cash space

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3. Mobile account opening (MAO) used by 1 of every 4 Andera-powered applications
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Andera, the online account opening powerhouse, this week published a useful report (free with registration) analyzing account-opening metrics across its 500 clients. The stat that caught my eye was the number of mobile applications already being received, despite the newness of the channel for financial transactions. One in four Andera-processed financial product applications are received from tablets or smartphones, up from 1 in 25 three years ago. And three-quarters of the mobile volume is from smartphones.  

Clear winners: Mobile leaders
Potential winners: Andera and other account-opening specialists
Potential losers: Bank branches, which will continue to be a major (albeit costly) source of new account applications

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4. Balanced Payments crowdfunds $50,000 to launch new feature
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I am a big fan of crowdfunding and expect massive growth (note 1), but I never thought I'd see it used by a fintech company to fund a new feature. But Balanced Payments, a Y Combinator-backed payment-startup serving online marketplaces, successfully raised more than $50,000 last week in about a day (Crowdhoster campaign). That surpassed its goal for adding a "push to debit card" (Techcrunch post).

It sounds too good to be true. But the startup used a clever incentive system for backers, prepaid fees. In other words, Balance customers could pledge a few thousand dollars for the feature, and then that money paid upfront would cover a given amount of transaction fees in the future. And the more that was pledged, the cheaper transaction fees became. And there was a large incentive to pledge at the $10,000 level (see below).

Here's the earnings table:

>> $1,000 pledge receives 1,000 prepaid transaction at $1 each
>> $2,500 pledge receives 3,333 transactions for $0.75 each
>> $10,000 pledge receives 40,000 transactions for $0.25 each

You could also toss in $25 for a t-shirt.

So far, there are 26 backers (25 if you don't count my T-shirt pledge).

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Note: For much more on crowdfunding (debt and equity), see our May 2013 report (subscription).

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Crowdfunding via Facebook: Puddle's P2P Platform Allows Friends to Pool Funds to Loan to Each Other

By Jim Bruene on June 3, 2013 4:37 PM | Comments

image When Prosper launched seven years ago, much of it's initial promise revolved around the notion that people would be more likely to repay loans made by their peers. To  create peer pressure, borrowers were encouraged to join loosely affiliated "groups" (see note 1). Over time, groups with good repayment performance would be rewarded with lower borrowing costs.

It was brilliant on paper, but early repayment behavior didn't follow the model. Had there been more runway (funding and/or regulatory tolerance), it might have worked. But the wicked combination of adverse selection (many initial borrowers were financially desperate and/or quasi-fraudulent, despite all the heart-warming stories posted) and the Great Recession pushed Prosper, and it's contemporary, Lending Club, into more standard unsecured lending procedures. And it seems to be working. The two are on track to do more than $2 billion this year, with revenues of $100 million or more (Note: 85% of current volume is from Lending Club, see latest numbers here).

Fast-forward five years: With the ubiquity of Facebook, it makes sense for newcomers to test the waters of the original Prosper/Lending Club hypothesis (note 2). That friends can lend to friends (F2F) at a far lower cost. And that a third-party platform is needed to facilitate lending relationships, which can become tense if borrowers fall behind or default on their obligations.

imagePuddle (formerly Puddle.io) is a new startup from Kiva CEO & Co-founder Matt Flannery and early Kiva developer Skylar Woodward along with Jean Claude Rodriguez. It uses Facebook bonds to create pools of money that friend groups can share amongst themselves. With suggested interest rates in the 4% range, it's a win-win, assuming the money is repaid. Borrowers save 10% or more from credit card rates and lenders get a return much higher than bank savings accounts.

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How it Works
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1. Register with the company using your Facebook credentials

2. Connect a PayPal account or debit card to the platform (Wells Fargo holds the money)

3. Start a new "puddle" by setting the rate from 0% to 20% (current average is 4.7%, see inset) and the maximum leverage rate (you can only borrow a multiple of what you put into the pool, the allowable range is 2:1 to 10:1 with the recommended rate of 8:1).  

4. Invite Facebook friends to throw cash into the pool

5. Borrow from the pool (if that is your intent). Currently, loan sizes range from $300 to $3,000 with repayment on an installment schedule spread over a maximum of 12 months (current average outstanding is $320 across 50 borrowers). You can only borrow a max of 40% of the entire pool.

6. Puddle manages the repayment process, including assessing late fees (the late penalty is equal to the interest owed on the previous month's installment, i.e., you pay double interest if late)

7. As funds are repaid, they become available to other members of the pool to borrow.  

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Analysis
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Like Prosper/Lending Club in 2006/2007, the Puddle model sounds great in theory. But should friends be encouraged to lend to their friends online? I can see this ending badly, with unfortunate borrowers losing more than just the $1,000 they took out of the pool. With a public default to your (ex)friends, will a bad situation just get worse?

But given the founders experience at online microfinance leader Kiva, which has spread $440 million around the globe from nearly 1 million lenders, they fully understand the pitfalls. They also know that affordable credit can change lives.

Bottom line: I think it's a great experiment (and it is an experiment, the founders admit to not knowing how they will monetize or how regulators will react). But I'm not sure it scales without more financial controls (underwriting, collections, income verification) at which point it becomes nuch like Lending Club in 2007 (though not a bad outcome...given the P2P pioneer's recent $1.6 billion VC valuation).

I'd like to see financial institutions (or accredited investors) stepping in to backstop the loans (perhaps keeping the default confidential). For example, for a 4% to 5% annual fee, investors would agree to reimburse the pool for 80% to 90% of losses from any defaulting borrower. The fee would vary depending on the credit profile of borrowers in the pool. While borrowing costs would be significantly higher, down-on-their-luck borrowers would be less likely to lose their friends just when they needed them most. 

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Puddle dashboard (active user)

Puddle dashboard


The Puddle dashboard through the eyes of a new user
Note: The great definition in box 1, "A puddle is like a small bank owned by you and your friends. You set the rules."

Puddle new user "get started" screen

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Notes:
image1. For a review of circa-2006 Prosper "groups" see our March 2006 report on P2P lending (subscription).
2. Lending Club initially launched as a Facebook-only p2p lending service (our original 25 May 2007 post). The original Lending Club Facebook page is shown at right (click on inset). 
3. For the latest on crowdfunding, see our latest Online Banking Report on Crowdfunding (subscription).

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New Online Banking Report Published: Crowdfunding Small Businesses

By Jim Bruene on May 27, 2013 11:09 PM | Comments

clip_image002We believe crowdfunding has the potential to materially impact banking market share in the next 20 years. Tapping the massive capital and higher risk tolerances of institutional and individual investors, these platforms will provide funding to segments currently underserved by traditional lenders (e.g., small and micro businesses).

We've written extensively about the consumer debt-based crowdfunding, which we've called P2P, or peer-to-peer, lending (note 1). Now, we turn to the new crop of startups arranging funding for small businesses and startups.

The report covers the three variations that promise financial returns to investors (note 2): 

  • Debt-based financing (crowdlending)
  • Equity-based funding (crowdinvesting)
  • Receivables-based funding (crowdfactoring)

Sixteen crowdfunding platforms are profiled, eight in the United States and eight in the United Kingdom:

Debt:

  • Abundance Generation
  • Bolstr
  • Funding Circle
  • Mosaic
  • RealtyMogul
  • Relendex
  • Sofi
  • SoMoLend
  • ThinCats

Equity:

  • AngelList
  • CrowdCube
  • FundersClub
  • Seedrs

Receivables:

  • Market Invoice
  • P2Binvestor
  • PlanetBlack

Finally, we look at specific opportunities for retail banks to leverage the new technology.

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About the report
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Crowdfund Investing Platforms: Debt & Equity (link)
Payments in the smartphone era

Author: Andy Davis, U.K. Financial writer

Editor: Jim Bruene, Editor & Founder

Published: 21 Feb 2013

Length: 68 pages, 24,000 words, 5 tables

Cost: No extra charge to OBR subscribers, US$495 for others (here)

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Notes:
1. We have published three reports in this area (OBR 127 in 2006, 148/149 in 2007, and SR-5 in 2009). In addition, we've created a 10-year forecast for U.S. P2P lending in each of our last six year-end reports.
2. We do not cover the donation or rewards models, such as Kickstarter. While those are effective ways for businesses to raise money and/or visibility for new products, they have fewer parallels and opportunities for retail banks.

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Crowdfunding a Better Future: Pave

By Jim Bruene on February 28, 2013 11:38 PM | Comments (1)

image If you've ever worked in lending (or for a nonprofit), you know there's always far more need than funds that are available. That is unlikely to change at a macro level. But that doesn't mean we can't reach tens of millions more by deploying capital more widely and more efficiently (and at a profit). 

Enter crowdfunding, and the subset, P2P lending.

I've been a huge fan since it burst on the scene in 2006, authoring several reports (note 1) along with the only open letter in my life when the SEC squelched P2P in 2008/2009. I just could not believe that something with so much potential for good was curtailed while in its infancy.

But luckily, the tide is turning. Even though last year's Jobs Act is being held up (by guess who again), I'm encouraged that our government is seeing the light, although I wish Washington would embrace P2P like the Brits have.

And despite onerous disclosure requirements, Lending Club is on fire (with a $1.4 billion run rate in Feb) and proving to investors, and industry observers, that crowdfunding works. For the sake of the nascent industry, let's hope it doesn't stumble.

image We are working on a new report on the space (note 1), but in advance of that, take a look at Pave (see below), one of hundreds of newcomers. Maybe I'm a just a sucker for the drama, but it absolutely gives me chills to see web-based investment/lending platforms helping to move deserving folk forward. It's like a virtual credit union. 

At Pave, backers pledge money to prospects and form a team. In return, backers receive a portion of the prospects' future income. It's like angel investing, but focused on careers. Pave is just getting started, with eight funded teams, but the stories are compelling and the future is bright, just as it is for the whole industry. 

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Pave brings mentors/benefactors together with talented individuals needing support (28 Feb 2013)

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Pave prospects

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Pave backers


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Pave teams

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Notes:  
1. We have published three reports in this area (OBR 127 in 2006, 148/149 in 2007, and SR-5 in 2009). We are working on our fourth. It will focus more on equity and debt crowdfunding for small and mid-sized businesses. Our latest P2P lending market forecast is contained in the current Online Banking Report here (Jan 2013, subscription).

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Categories: Crowdfunding, P2P Lending

Two Card-Linked Offers/Rewards Startups Launch at TechCrunch Disrupt

By Jim Bruene on May 24, 2012 1:04 AM | Comments

image While I've read TechCrunch since its beginning, I've only been able to make it to their semi-annual event, Disrupt, once before. It's usually just too close to our own Finovate. But this year I made the trek to Pier 94 in Manhattan to see what was going on in tech in general and to meet with the fintech startups in the Startup Alley or Battlefield launch competition.

There were six fintech companies in total. Three offered variations on card-linked offers, one has developed an alternative payment system, one was a newer payments gateway, and surprisingly there was just a single crowdfunding platform.  

Startup Battlefield competitors from fintech: TechCrunch selected thirty companies in advance. All have agreed to launch their companies on stage at the event. 

  • imageCardify: Card-linked loyalty/offers geared toward local merchants. Sean Rad is CEO and of the West Hollywood company which has raised $750,000.
  • imageMirth: Same as above. Jeremy Philip Galen is Founder. The NYC-based company is bootstrapped. 

Startup Alley participants from fintech: These are companies less than two years old that qualify for a table in the networking hall. Each day one of the Alley companies is voted to the stage to imagecompete in the Battlefield.

  • LocalBonus: A card-linked offers platform focusing on the local market
  • imagePayintele: An alt-payments company using barcodes to pass info between merchant and payee (I'll do a whole post on them shortly)image
  • PayLeap: A payments gateway from two previous Authorize.net execs
  • The Crowd Funds: A crowdfunding startup from former image E*Trade CTO, Joshua Levine

Observations: It was interesting to see three new card-linked rewards companies all going after the local market. But if you look at what Groupon's done with local merchants and where Square is headed, you can see there are huge opportunities here.

And the payment APIs available from Cardspring (which both Mirth and Cardify use) are making it relatively easy for startups to tap into a merchant's card transaction streams to make offers, tally rewards, identify frequent customers, and communicate with them.

As a side note, Cardify has a gorgeous UI. It's very hip and high-end looking like something you'd see at more well-funded companies such as Square, Simple or Mint (screenshot below). Kudos to the design folk there.

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Cardify homepage (24 May 2012)

cardify app as seen on its homepage

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Notes:
1. While not a fintech company, as an auction junkie, I was intrigued by Outbid's social mobile/online auction platform. The company said it's talking to four banks looking to host live auctions on their site to use for promotions and social gaming. I think it's a promising idea, one I've explored a few times over the years. But with Facebook Connect you can actually get a critical mass of customers involved very quickly. The company had the cheesiest demo I've ever seen (and that's saying something), but that shouldn't impact your decision.

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Launching: Circleup Taps Your Inner Shark Tank

By Jim Bruene on April 19, 2012 5:17 PM | Comments

image If you dream of being Mark Cuban, Mr. Wonderful, or one of other Shark Tank investors (note 1), a wave of new angel-investing platforms are springing up all over the world.

TechStars, a NY-based incubator, said it had more than 30 applications from crowdfunding startups for its summer 2012 class.

In the United States, the recently enacted JOBS Act has spurred interest since it is expected to expand the market to several million more investors. But more importantly, the new legislation will lift the ridiculous "quiet period" rules that are supposed to keep companies from openly soliciting investors (note 2).

Once companies can openly look for investors (expected by early summer), private-placement investment platforms have a lot more to offer to companies seeking capital, namely a marketing opportunity.

Think about it. If you need $500,000 to launch a new line of organic granola bars sold nationwide, would it be better to get it from a couple local angels, or from 100 investor-fans kicking in $5,000 each? The latter approach gives you 100 evangelists in all corners of the country. And with only $5,000 invested, each investor has far less ability to meddle in your affairs.

In the past, the paperwork involved in booking $5k investments made it prohibitively expensive, even if you could find the investors under the old quiet period rules. But the new investment platforms promise to standardize the paperwork, reporting, and sales of small blocks of company shares.

image So, who are the leaders in the space? AngelList certainly, but it focuses on tech only. Of the newcomers, CircleUp which is launching this week, seems to have the most traction, at least measured by press mentions. Co-founder Ryan Caldbeck has recently been featured in the WSJ, NY Times, TechCrunch and the other tech blogs (note 4).

I've been using the beta version for a week, and am impressed. Circleup is focused on consumer products, and three companies are currently featured within the site, raising $100,000 to $500,000 each. I'm itching to drop the minimum investment ($3,333) into one of them just for fun. However, my wife wonders if that will be the same "fun" we had the last time I thought I could pick stocks (note 5). So, I'm still just an observer for now, but a very interested one.

How it works
Circleup is a lot like a simplified version of P2P lending. Companies seeking capital post their investor deck, introductory video, and any other info they deem important to their story. An online forum allows investors to ask questions that the companies can answer publicly (though this was little used during private beta).  

Investing is as simple as clicking on a button, agreeing to the terms, and pledging the funds. Once the minimum investment round is reached, the money is taken from investor bank accounts.

Relevance to Netbankers
If it's allowed to flourish without being crushed by the SEC when the inevitable scams appear, crowdfunding could eventually provide stiff competition in small business lending. Probably not in its current form, where the investments are speculative, ill-liquid equity bets. 

But fast-forward a few years and imagine a marriage of crowdfunding with P2P lending, and with the liquidity issue fixed through secondary markets. Small- and mid-sized businesses could use a crowdfunding platform as one safe source to get a mix of equity, debt, and receivables financing.

Banks should also consider getting involved in crowdfunding by partnering with the platforms to provide debt and other banking services to the small business participants. Banks could even start, or at least invest in, crowdfunding initiatives of their own.   

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Company info page
Note: Fictitious listing; note investment button in middle-right.

Circleup company info page

Investing page
Note: For $25,000 (the max allowed), I get 134,000 shares, or 0.51% of the company.
Actual company seeking capital through Circleup, name masked due to the soon-to-be-ending prohibitions against soliciting investors. 

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Notes:
1. Shark Tank is the U.S. version of Dragon Den. It's my favorite show on television, though I don't like how founders are sometimes ridiculed by the celebrity investors, whose egos struggle to fit on the same soundstage.
2. Though Shark Tank, watched by millions on prime-time network TV, demonstrates it's not a well-enforced rule.  
3. Ryan Caldbeck's 10-minute discussion of the JOBS Act is worth watching if you want a quick overview of its impact. TechCrunch covers the launch 18 April 2012 here.
4. Our policy at The Finovate Group is to NOT invest in fintech companies.
5. For more ideas on innovating in the small-biz banking market, see lengthy report on the subject, written 2 years ago.

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