Brett King

Posts Tagged ‘Lending Club’

P2P a force to be reckoned with

In P2P Lending, Social Networking on December 14, 2011 at 09:28

No one could doubt that peer-to-peer lending (or P2P Lending) has landed big time in 2010, but it looks as if the best is just about to come.

The US leader Lending Club will issue more than $250 million in loans this year – greater than the last four years combined – for a total of nearly $450 million since inception.  Their last $100 million increment in their total loan portfolio growth came in just 4 months from the period July through November 2011.  Their returns have been stable throughout the market turmoil of the past few years – thanks in part to their focus on prime credit consumers – with an annualized default rate below 3%.

Prosper has seen 370% year-on-year growth in their business in 2011 lending over $70MM this year and bringing their total to more than $260m to-date , with a default rate of around 5.2%. Compared with BofA whose default on credit cards has been at an annualized basis of around 5.98% this year, down from a peak of 14.53% in August of 2009.

Zopa out of the UK has already lent more than £180 million (US$280m), which means they are now approaching a 2 per cent market share of the total UK retail lending market. The impressive thing about Zopa’s achievement is that their default rates are running at just 0.9%.

So who are lending from P2P lending networks?

If you believe the propaganda from the establishment, P2P lending is risky and only offers opportunistic financing to weak credit prospects – those that can’t get loans from traditional players. However, the reality is something entirely different.

The risk profile of P2P borrowers is often grossly overstated, and often the majority are healthy lenders simply looking for a better deal. That’s why P2P defaults are often as good as, if not better than, the majors.

“We can offer low rates in comparison to our banking competitors in part because we focus only on a select subset of customers — the most credit worthy borrowers — and our fair pricing is commensurate with their risk.”
Renaud Laplanche, CEO, Lending Club

The P2P lenders have also done considerable work on understanding the behavior of lenders, thus they don’t look just at the credit score (a lagging indicator of a default risk), but also at the future likelihood of a default.

“I think our low defaults aren’t just because of P2P but because we built a better credit model, taking more account of over-indebtedness and affordability than banks”
Giles Andrews, CEO, Zopa

These better models are helping P2P to thrive.

Tis’ the season for P2P Lending

There are times like Thanksgiving week in the US where P2P Lending is predictably slower than normal, but there are also times when P2P faces natural growth in demand.

“We’re gearing up for 50% increase in lending in January 2012, now that we’ve proven the viability of our business model.”
Giles Andrews, CEO, Zopa

I met with Scott Sanborn, the Chief Marketing Officer for Lending Club earlier in the year in San Francisco, but I got together with him via phone last week and asked him if there was seasonality to their lender’s behavior.

“We’ve always got a pop in January. Primarily because approximately two thirds of our loans historically are used to settle credit card debt.”
Scott Sanborn, CMO, Lending Club

Last week the Federal Reserve released its latest G19 report on consumer credit. Revolving consumer credit increased marginally (0.5%) for the first time in September of this year, and that trend has continued in October. Revolving credit card has been on the steady decline since 2008, down from a peak of $972Bn to a low of $790Bn in August of 2011. In 2009, that meant that every month saw a decline of close to $10Bn in revolving credit in the US. That trend has changed course in the second half of 2011 as borrowers return tentatively to credit facilities.

Revolving Credit has been on the decline since 2008, but this Christmas is set to rise again

Historically, December and January credit card debt always tends to shoot up due to Christmas shopping habits. Online lending around the end of the year has also been steadily increasing due to the primacy of the online channel, so it’s no surprise that as P2P awareness improves that P2P lending is set to rise this Christmas season too. The difference this Christmas, compared with the last 3 years, is that with revolving credit flattening out the spike in January is stacking up to be the biggest in P2P’s short history.

P2P – Maturing or Mature?

The other difference (in the US particularly) is that we’re seeing more sophisticated investors participating in P2P transactions, meaning that there will be an abundance of cash to support the demand for P2P credit. In fact, the major P2P players in the US are seeing institutional investors, high-net worth investors and the like looking to put cash into P2P. Not just to get a higher deposit rate, but to get that rate with only marginally greater risk – if at all.

Players like Zopa, Lending Club and Prosper are anticipating their largest January yet. In fact, this season is likely to be larger than the 2008-2010 lending seasons put together for the P2P market. If anyone had any remaining doubts about the viability of P2P lending, then I think we can put that to bed this season.

As the song goes… “It’s beginning to look a lot like Christmas!”

The Total Disruption of Bank Distribution – Part 3

In Bank Innovation, Customer Experience, Future of Banking, Technology Innovation on July 12, 2011 at 07:37

Massive spend on innovation at the front-end of retail financial services

Putting aside conjecture of whether or not we are in a bubble at the moment around tech, social media, and mobile services (which I believe we very well could be), the reality is we are seeing a flurry of massive investment in new distribution models and organizations acting as either technology or behavioral enablers. We’re used to seeing big numbers for M&A activity in banking, but we’re not used to seeing such a flood of start-ups and non-traditional competitors facing off against traditional players at the retail side of the business.

In just the last 3 years there has been more than $7Bn in private equity, venture capital and private investment made into non-traditional financial services start-ups that challenge existing models. This is the first time globally that there has been this scale of challenge to the traditional retail financial services space from start-ups in the technology arena. To illustrate the level of activity, here are just a few recent investments in the New York fintech space alone (source: Quora):

SecondMarket ($15mm)– marketplace for illiquid financial instruments; secondmarket.com
Kapitall ($7.3mm)– discount brokerage with gaming elements; kapitall.com
Betterment ($3mm)– online brokerage for small investors; betterment.com
Plastyc ($2mm)– mobile based banking for the underbanked; plastyc.com
AxialMarket ($2mm)-
online middle market i-bank; axialmarket.com
BankSimple ($3mm)- online/mobile banking interface; banksimple.com
Covestor ($11mm)- platform to find SMA providers and invest with amateur traders; covestor.com
Hedgeable next generation investment management firm; hedgeable.com

However, in addition to these plays you have very some serious initiatives now doing major business in the space that used to be considered the sole domain of ‘banks’. Here are four examples:

Personal Financial Management

Mint was acquired by Intuit in September of 2009 for $170m. Mint has experienced meteoric growth in customer base. Today Mint has more than 5m customers willingly giving their personal financial data, bank account and spending information to receive the benefits of fine tuned recommendations for financial services investments and credit products.

Businesses like SmartyPig, which has a collaborative play with the industry, are very successful at stimulating simple behaviors like savings for specific goals. SmartyPig has raised over $1.2Bn in deposits for the partners banks it works with such as Citi, West Bank, BBVA, ANZ, etc. They utilize social media to encourage your friends and family to assist you in your savings goals. For example, my kids were able to use SmartyPig to solicit assistance from their grandparents, uncles, aunties, etc to help with their savings goal.

Admittedly, we also seen Blippy and Wesabe crash and burn in recent times. However, the readiness of the investment community to experiment in the space of services that are complimentary or competing directly with traditional FIs is clearly increasing.

P2P Lending

Lending Club, Prosper and Zopa are just three examples of recent successes in the P2P lending space. Lending Club is lending around $20m a month in loans, and have lent more than $300m, with an average loan size around US$10,000. In France, FriendsClear has recently announced that Crédit Agricole will be joining their efforts in a collaboration of sorts; exactly how this will work is still under wraps.

Zopa has lent more than £150m which means they are now approaching a 2% market share of the total UK retail lending market. Zopa’s average loan size is around GBP 5,000, but what is more significant is their Non-Performing Loans (NPL) ratio. Major U.K. banks typically recorded NPL ratios in the 2%-3% range from the mid-1990s through to 2007, but by the end of 2009 Lloyd TSB’s gross NPL was as up to 8.9% and HSBC’s hovering around 3% (source: Standard and Poors). So how did Zopa perform in this environment? Zopa’s NPL ratio sits at around .9%. That’s 10% of Lloyds and 1/3rd of the best bank in the UK HSBC!

Zopa's NPL Ratio is 10% that of Lloyds TSB in the UK

So how is it that a social network that lends money between its participants is better at managing loan risk than banks that have been at this for hundreds of years?

The key here is the positive psychology of social networks versus banks. If I lend money off a bank and I’m having difficulty paying that back due to loss of income, or just having a hard time making ends meet, I’m likely to let the loan slip and wait for the bank to chase me. P2P networks like Zopa, on the other hand, are finding customers proactively contacting them to make payment arrangements when they can’t meet their monthly commitment. Why?

Firstly, there are people at the end of the loan – not a big bad bank who “can afford the loss”. Secondly, the fact that there are people at the end of the loan versus a bank means that people are more inclined to prioritize paying back their loan to other people, over that of a large institution. This positive peer pressure is producing astounding results. I also asked Giles Andrews from Zopa about why he thought Zopa was better at managing lending risk than banks…

“I think our low defaults aren’t just because of P2P but because we built a better credit model, taking more account of over-indebtedness and affordability than banks”
Giles Andrews, CEO, Zopa.co.uk

Who would have thought that social networks would be better, safer, and more efficient at lending than retail banks?

In fact, P2P lending has been so successful that in recent times both Umpqua Bank and Fidor Bank (a start-up online, direct bank in Germany) have incorporated some P2P as a component of their bank platforms. Why take all the risk yourself as a bank, when some customers are willing to cover the risk themselves? But don’t think that P2P is just easy money. Wall Street Journal reported in June of this year that 90% of Lending Club’s applications were refused.

Maybe that’s why P2P is good business – because they actually take fewer risks than banks?

Pre-paid debit cards, E-Money Licenses and Payments

Amex, Greendot, NetSpend and Walmart are just three organizations that have recently made big pushes into the prepaid debit card arena in the US alone. Significantly, the US now has 40-60 million underbanked consumers (source: FDIC, Financial Times), half of whom have college degrees, and 25% of whom are prime credit rated. Many of these are opting out of the traditional banking system, but carry a pre-paid debit card. The pre-paid debit card industry will account for more than $200 Billion in funds by the end of 2011 along (source: Packaged Facts).

Top 5 reasons people get a prepaid Debit Card

The financial crisis has accelerated the increase in those whom no longer participate in the formal banking system. Since the financial crisis 60% of new mobile phone users in the United States have been no-contract, pre-paid phone users.

“As an economy becomes richer and incomes rise, the normal expectation is that the proportion of the unbanked population falls and does not rise as is now happening in the United States…”
Washington Post, December, 2009

Combined with increased account fees from big banks recently affected by reduction in interchange revenue, and modality changes, I think we can expect that increasingly customers who don’t need complex banking relationships will opt out of the banking system by using prepaid debit cards and in the future prepaid wallets enabled via NFC and mobile Apps.

In the UK Google, O2, BT and others are looking seriously at the combination of prepaid debit cards type functionality into a wallet. Google already launched their Google Wallet earlier this year, and we can only see more and more of this action in the coming months.

The raft of P2P payments, mobile payments and mobile enablement are bewildering at the moment. Undoubtedly, we’ll see many variations of mobile payments in the near future. With PayPal predicting $3 Billion in mobile payments in 2011 alone, the future of mobile-based prepaid debit cards looks very healthy.

Conclusions

We’ve never had such a concerted, technology-led explosion of retail financial services solutions that are directly in competition with the traditional players in the space. While some of these initiatives are complementary, increasingly we’re seeing startups that realize you don’t need a banking license to play on the fringes of the banking system. When you only know one way of running your business you will be increasingly challenged by customers who don’t relate to the questions you ask, the processes you have in place, and the insistance on using outdated physical artifacts and networks.

This is the first time we’ve seen a global attempt at reinventing the way banking fits into our lives on a day-to-day basis, and it is bound to create massive friction for a sector known to be very attached to traditional modes and models. One thing is clear, increasingly banks will be competing with new businesses that are faster, better, more relevant and aggressive than the long-held bastions of traditional savings and loans.

These businesses will embrace and exploit changing modality. These businesses will love disruptive customer behavior, they’ll encourage it!

The biggest disruptions in banking in 2011…

In Customer Experience, Retail Banking, Social Networking on December 29, 2010 at 03:00

In 2010 we had a bunch of innovative ideas become mainstream and start to impact the banking arena (for a full coverage see my post in Huffington.) However, 2011 promises to be more disruptive because as the economy finally starts to warm up, we’ll be seeing a lot of new private equity investment into start-ups in the finance arena.

A new dot com boom?

The intersection of interaction design, mobile technology, mobile payments, social media interactions, geo-location technology and augmented reality is producing a land grab for innovative new start-ups. We’ve already seen quite a few investments in new banking start-ups in 2010, which are the early stages of a new boom in the mobile tech space. Right now we’re not yet in the bubble, obviously, but as start-ups grow revenue, as investments start seeing huge multiples, and as the success of start-ups generate even more new business ideas, then this zone appears ripe for an emerging boom. Add into the mix the dissatisfaction en masse with the finance sector, one area where there is sure to be heady action is in the alternative banking and finance game.

Already we’ve seen start-up investments in peer-to-peer lending (Zopa, Lending Club, Prosper, Kiva, etc), payments alternatives (i.e. Jack Dorsey’s Square), Personal Finance tools (Geezeo, Mint, GreenSherpa, Blippy, etc), and even in Banking itself (BankSimple, MovenBank).

In September of 2010, Think Finance secured $90 million in start-up funding for their Elastic web-based bank account replacement. Elastic’s services to the underbanked will somewhat overlap with BankSimple’s approach to online banking. But, the CEO of Think Finance, Ken Rees, doesn’t see BankSimple as competition.

“We celebrate all of the innovators in the space that use technology for banking purposes. They [BankSimple] are more focused on the needs of prime consumers. We’re focused on the underbanked and unbanked — the estimated 60 million people who are not well served by traditional banks,” says Rees.
As reported in Mashable

Jack Dorsey at Square is catering for a gap in bank service performance demographics also. Dorsey is aiming Square at the approximately 30 million small business owners in the US that don’t have a merchant account or credit card terminal. With only 6 million businesses in the US that can currently accept credit card payments, this shows there is huge growth potential for thinking outside of the box in respect to banking and payments models.

The growing innovation and infrastructure gap

The problem for the finance sector with the current level of investment in infrastructure, and old stagnant business models built largely around physical distribution paradigms, is that increasingly we’ll be dealing with start-ups and innovators from outside the traditional banking arena. This will increase the gap between customer experience or in real terms, customer behavior, and the actual state of play in the industry.

While the sector as a whole tries to deal with the devastation of the global financial crisis, and uses this as an excuse to hunker down and resist strong investment in technology and so forth, this opens the gate for innovators who are prepared to invest to take customer mind share, and capitalize on both the wholesale dissatisfaction of the industry in general and capturing the imagination of customers through the use of technology and better interface processes.

The 3 Phases of Disruption - Impact to Finance Sector

For those of you who have read BANK 2.0, you may recall the “3 Phases of Behavioral Disruption” which identify the emergence of Internet, the take up of mobile smart phones and “app” phones, and finally the integration of payments technology and services into the handset. There are two broad opportunities within these 3 phases of disruption for adverse impact to the traditional financial services space.

The Infrastructure Gap

The first opportunity lies in the inability of banks and financial institutions to invest in customer facing technology ahead of the curve, which creates a considerable lag in capability. Banks keep looking for ROI, but at the rate that new technologies are being adopted these days, if you wait for ROI you’re already 2-3 years behind the competition. Banks have to make bets on a number of emerging technologies, experiment and adapt through iteration, rather than wait till a dominant player or platform emerges (which is unlikely in any case) before making strong investments.

In this gap we have players like PayPal, cloud services, direct banks (e.g. ING Direct, UBank, Jibun) and other platform opportunities who are doing it better on a technology platform basis than the traditionals. The opportunity here is for start-ups to leap ahead of banks who are straddled with outmoded legacy systems which simply are not robust enough to work in an always on, superconnected space that customers live in today.

The Behavior Gap

The behavior gap, however, is where the really interesting stuff is happening on a business model front. The gap in behavior is defined in anticipating the ways customers work with new technology and reinventing both the user interface, the interactions and the processes and rules that support the engagement or journey. Banks are enamored with their existing, stagnant model of banking – they find it difficult to imagine a world where mobile applications and internet banking are more popular access methods than branches, where checks no longer cut it because I can SMS or bump money to an associate, and where I am not penalized because I don’t want to follow some archaic risk model. Companies like Square, BankSimple, even Apple and Google who are reinventing the interface to the customer are capturing the hearts and minds of customers everyday, while banks continue to frustrate customers with old models, outdated rules of engagement, and with broken processes and channel support mechanisms.

Conclusion

The biggest risk to the finance sector today is not from other banks, nor related to the inability to apply Basel III risk controls or standards. The biggest risk to the finance sector today is the growing gap between the institution and the customer. The rate at which this gap is opening up is increasing rapidly, as the adoption of newer technology increases too. This is where we are going to see an explosion of start-ups and new businesses who aren’t afraid to reinvent the bank customer experience. This is where the banks who do get customer and try to reinvent the journeys customers are taking will win.

It’s also where banks who wait for ROI, or wait to understand the impact of social media, mobile, near-field contactless payments and other such technologies before investing, will lose out massively.

The Rapid deconstruction of the retail banking sector

In Customer Experience, Retail Banking, Strategy on October 27, 2010 at 06:23

The concept that banking is necessary, but banks are not has often been debated. The question of whether technology advances and new business model results in disintermediation is often dismissed as hype. While the Internet is undoubtedly the most significant technological advanced of the modern age, most retail bankers would argue that this only produced an incremental change in banking with yet another channel to access the existing bank infrastructure. However, that’s only partially accurate as an assessment.

If you look at the broader world, there are actually tons of new businesses eating away at the retail banking client experience:

Independent Financial Advisors
While banks proclaim platform, global experience, asset management capability, etc the fact is that the advisory space is not owned solely by banks. In fact, if you really want a dedicated Relationship Manager who is going to not just sell you a product you really only have two choices – IFA or Private Bank. The mass affluent HNWI space just doesn’t deliver…

Contactless Mass Transit Payments
Octopus in Hong Kong, Oyster in the United Kingdom, EZLink in Singapore and other such stored value smart cards are actually debit cards. Octopus has a limited banking license in Hong Kong for the purpose of deposit-taking, but let’s not kid about here – all of these are acting like banks, but aren’t banks. As banks we can justify the fact that these are minimal impact and argue that ultimately the payments come from the banks to “recharge” these cards, but the fact is we’re not in the mix.

Mobile Payments
In some ways the big hit of SIBOS this year has been mobile payments arriving on the scene. The only problem with this is that M-PESA launched in Kenya in 2006 and now ‘owns’ between 5-10% of Kenya’s GDP, GCASH launched in Philippines in October 2004 and now has 28,000 outlets supporting their services across the country. There are other examples too – Nokia is set to dominate the mobile payments space in India as they turn their stores into cash-in/cash-out points across the sub-continent. Where are the banks? Some banks are now offering withdrawal through ATM networks for mobile cash users, but the fact is banks are still arguing about interoperability, platform, security and alliances to be productive – so again banks are missing out.

Peer-to-Peer lending
Zopa now represents close to 1.5% of the UK lending market with monthly lending of GBP 10-15m. With a reported NPL of 0.7% they are also the industry leader in the UK for credit management. Bankers would find this counterintuitive – how can a non-bank have a better performing loan book than a bank? The answer is better value to the consumer, and social lending as the foundation. Prosper, Lending Club and others are also taking their fair share of the lending markets in places like the US. Average loan sizes for Lending Club and Zopa are not microfinance size either, being around US$2-3k. This is direct competition for the retail banking sector.

Peer-to-Peer and alternative Payments networks
PayPal is clearly the leader in online payments today, and while PayPal utilizes existing card networks and payments infrastructure, the fact is that in the area of capturing transactional revenue and in respect to ownership of consumer mindshare, PayPal reigns supreme. On eBay, for example, between 50-75% of payments are processed via PayPal. Banks like HSBC are proud of the fact that they process much of the back-end payments for PayPal – but surely being in the front-end is the sweet spot here.

Merchant onboarding
Square, from Jack Dorsey (Twitter founder), has recently gone live. All you need is an existing bank account and an Android or iPhone and you can start accepting credit card payments. Currently Square is deployed in the USA where there are more than 20 million small business owners who don’t have a merchant account with a bank. The merchant on-boarding process is just too complex for most businesses, and Square recognized that. What would you rather do? Download an App and sign up for Square, or negotiate the 150 pages of different legal contracts and forms from your bank to set up a merchant account? Banks don’t offer value here – in fact, the opposite.

Disintermediation abounds and is speeding up

This morning at SIBOS we just heard Karen Fawcett of Standard Chartered proclaim

“Transaction banking is now front and centre. Flow businesses that we support are the lifeblood of commerce.”

The problem is this view of the world. Bankers are simply used to owning the pipes, the network, the wires and perceiving that their exclusivity on ‘banking’, their ‘lock on customers’ comes from having a banking license. Clearly, however, disintermediation of the retail front-end of banks is rife. Banks are becoming wholesalers, networks and product manufacturers, but clearly with the lack of innovative capability, the rapidly growing gap between customer behavior and retail banks as poor service companies, the question of whether we need banks has been answered…

We don’t need retail banks – we do need the back-end networks that process payments, we need organizations that are prepared to take on the risk of lending (social lending is unlikely to scale up to mortgage level), and we need mechanisms that give us access to trading systems and markets. But retail banks, their physical distribution real-estate, their products and services are fast becoming redundant. Sure, it will take a couple of decades, but in many ways it’s already too late.

The ‘things’ that were uniquely “banking” 20 years ago, today have all been replicated by a transport department, an internet start-up, a social network and a telecommunications company. Banking at the front-end is no longer unique, it’s a commodity. When such interactions become commoditized, then the concept banks leverage of paying for the privilege of banking make them easy targets for disintermediation.