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Fasanara Bi-Weekly Digest



Fintech Scandal and Winter is Marketplace-Lendering

Latest Top Fintech News:

  • How investors are creating jobs through fintech

  • Funding Circle included in ESG index

  • Peer-to-peer industry faces harsh reality when winter comes

  • Clarity’s 2019 Alternative Financial Services Lending Trends Report

  • Goldman Sachs boosts foothold in consumer credit market via P2P lenders

  • Customer data: the next banking misselling scandal?


How Investors Are Creating Jobs Through Fintech

When it comes to impact investing, it’s hard to beat a small business loan. Dollars are lent out and put to work generating jobs and supporting economic growth — and then they're repaid with interest as the business grows.

Not long ago, the only stop for a business owner seeking a loan would be their local bank and they had a good chance of being denied. This was not necessarily because of their creditworthiness. Unlike consumer credit, the small business credit segment is complex, diverse and nuanced, with a lack of standardized data for underwriting. It can be a resource-intensive effort, and few banks make it a priority.

Over the past decade, marketplace lenders have emerged to give small businesses a new option. Unlike banks, these platforms enable business owners to apply in minutes and receive funds in days, expanding access to financing that they need to succeed and grow. For investors, this model throws open the door to a new asset class. This investment holds potential for direct social impact beyond the absolute returns it provides — making it worthy of consideration for those looking to add an alternative asset to their portfolios that can do good while it does well.

Funding Circle Included in ESG Index

Marketplace lender Funding Circle has been included in the FTSE4Good Index, which recognises listed companies with high standards of corporate governance.

The FTSE4Good Index Series, which is managed by the global index and data provider FTSE Russell, was set up in 2001 to provide investors with a transparent benchmark to measure good environmental, social and governance (ESG) practices.

Funding Circle said that it ranked in the top third of all technology businesses in terms of overall ESG standards and scored especially high in areas of corporate governance.

Peer-to-peer Industry Faces Harsh Reality When Winter Comes

The linked dangers of an inverted yield curve and a slowing economy have hammered banks stocks in recent months, and profit margins are already compressing. But, according to this opinion piece in the Financial Times, the banks’ worries “pale” in comparison to challenges confronting marketplace lenders.

Robert Armstrong points to the fall in share value of the more-established digital lenders as well as the problem that platforms have to find borrowers, a difficulty reflected in high marketing costs that eat up more than a third of revenue at Lending Club and more than 40 per cent at Funding Circle.  He argues that marketplace lenders will face even greater challenges in a recession, as investors naturally shy away from riskier loans and towards the safety of insured deposits.

However, he also acknowledges that there may be a bright spot for marketplace lenders. Those that manage to survive the next downturn, whenever it comes, may be able to consolidate the market, gaining scale and spreading their marketing costs across a larger revenue base. And if they can prove that they can lend profitably through a recession, they should come out the other side with more investor confidence and, as such, a lower cost of capital.

Clarity’s 2019 Alternative Financial Services Lending Trends Report

In the 2019 Alternative Financial Service (AFS) Lending Trends Report, Experian’s Clarity Services studied a sample of 350 million US consumer loan applications and more than 25 million consumer loans to evaluate the market trends for nonprime borrowers from 2014 to 2018.

In order to study the rise of the online lending market from 2014 to 2018, Clarity studied online instalment and single pay consumer loans by the number of loans originated and total dollars funded. The report shows that the volume of online instalment loans in 2018 was 7.4 times higher than the volume in 2014 and that from 2017 to 2018, consumers with an alternative credit inquiry were 10 percent more likely to be in the prime or near prime category.

Another interesting insight from the report is that 24% of consumers who used online lenders in 2017 migrated to traditional lenders in 2018 once their credit scores improved. This suggests that borrowers who had a subprime credit score and were ineligible to apply for traditional loans were mostly the ones who moved to online or the AFS space to get the credit they needed. As and when their credit improved, they reverted to the traditional space.

Goldman Sachs Boosts Foothold in Consumer Credit Market via P2P Lenders

Goldman Sachs is making inroads into European P2P consumer lending with investments in Lendable and Brocc. Both P2P investments were made via its Goldman Sachs Private Capital division.

Goldman is entering an already crowded market at a time where growth in consumer credit is slowing. That said, the relatively young P2P sector and Goldman’s investments have a key advantage over the traditional banks and lenders in the space - a lack of legacy structures dragging on costs.

Customer Data: The Next Banking Misselling Scandal?

Established banks and technology specialists from start-ups to giants such as Amazon have spoken about their desire to use advanced data analysis to create new, more personalised types of financial products at lower costs. But a recent report from the Bank for International Settlements — the central bank for central banks — warned that firms could use the same information to exploit customers. For example, studying customer data could allow lenders to overcharge by working out the maximum rate a borrower would be willing to pay for a loan, rather than competing to give them the cheapest available deal.

Data-driven banking is in its early stages, but regulators are not alone in keeping a close eye on developments.  The idea that the regulator could retroactively “move the goalposts” to allow customers to complain about old products was the biggest source of criticism from banks during the PPI scandal.

The FCA, however, is unmoved by such criticism. AI-influenced products and services are a new area, meaning that many boundaries on acceptable practice have yet to be agreed, and questions over how banks can use customer data are part of a broader debate on the ethics of new technology.


Thank you for the attention!


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