Online Lending

For centuries, banking has remained fundamentally unchanged. For the first time in banking, the online marketplace makes it possible for a third party to match idle supply and demand. As a result, lenders and borrowers can now find one another and agree to terms – all without the involvement of retail banks or credit card companies. 

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This year, your holiday shopping mall excursion will feature an unprecedented array of payment options (it is, after all, nearly 2016). In addition to cash and credit, we have things like wireless mobile payments and even the ability to pay using our watches. Now we can add another. PayPal cofounder Max Levchin has a new option to add to the mix: on-the-fly credit loans with fewer fees and more customer transparency than traditional credit cards. Affirm, Levchin’s latest startup, was bringing its installment payments from e-commerce to physical retail stores.

That was just one of the announcements Levchin is making today at the Money 20/20 conference in Las Vegas. In addition to making its instant loans available IRL at cash registers at select, as-yet-unnamed merchants—powered by a new partnership with payment-tech giant First Data—Affirm is also bringing its installment payment plan option to over-the-phone purchases made with partners like Modloft and Coleman Furniture.

When the customer makes a purchase at a retailer that accepts Affirm payments, they give the cashier their phone number, which is entered into the store’s POS system. The customer is them prompted to enter basic information such as name, birthday, and last four of social security number on their smartphone. From there, Affirm’s algorithm checks against a wide array of data sources to determine if they are likely to repay the loan (this goes well beyond the typical FICO score, but the company wouldn’t comment on which data sources are used). Within a matter of seconds, Affirm will approve or deny the loan and, in the former case, give them the option to repay it within three, six, or 12 months.

The Affirm process, Lin says, will be less expensive than traditional credit cards thanks to lower APRs and a lack of late fees (not to mention a lot fewer of those sneaky fees credit card companies sometimes slip into customers’ bills). Affirm is hoping to court people with thin credit profiles, such as immigrants and millennials who have chosen not to use credit cards. By pulling in what Lin calls “thousands of data points” beyond one’s FICO score, Affirm is able to get a broader, more accurate idea of how likely each applicant is to repay their loans. Hopefully the machines are right, because each defaulted loan is another loss on Affirm’s books.

In June 2015 Affirm raised $275 million. The “vast majority” of the round is debt that the company expects to lend out to its customers, an average of $400 at a time. Affirm’s investors — Spark Capital Growth, Jefferies, Andreessen Horowitz, Khosla Ventures and Lightspeed Venture Partners — are mostly putting up money for Affirm to lend to its customers, rather than buying equity in Affirm. That way the startup doesn’t have to resell its loans. Previously, Affirm had raised about $50 million, also a combination of debt and equity.

San Francisco-based Affirm helps people pay in installments for purchases, with a sliding scale 10 percent to 30 percent annual markup, based on its estimation of the buyer’s creditworthiness. Affirm’s customers are “near-prime to sub-prime” — that is, financially responsible, but with a limited budget or credit history and, often, a wariness of credit cards. They can currently use Affirm as a payment option at certain online boutiques, such as Casper for mattresses and Joybird for furniture, or when buying courses through schools like General Assembly.

Affirm makes an assessment of creditworthiness based on a person’s name, email, mobile number, birthday and the last four digits of his or her social security number, as well as behavioral factors like how long he or she takes to remember all that information. If that combination doesn’t quite add up to a loan, Affirm may also ask borrowers to share information from other online sources, like a GitHub coding profile or a savings account that shows cash flow history.

Avant, an online marketplace for consumer loans, raised $325 million in new equity funding at a valuation well “in the ballpark” of $2 billion. Private equity firm General Atlantic led the round. Other participants included J.P. Morgan, Balyasny Asset Management and existing shareholders Tiger Global Management, August Capital, RRE Ventures and DFJ Growth.

“We’re trying to build a transformative company that could be a $50 billion to $100 billion business someday, by becoming the preeminent provider of credit to small and middle-income consumers,” says Al Goldstein, Avant’s founder and CEO. “We’ve been talking to General Atlantic for the last couple of years and really believe they will be super valuable as we build our business.”

Chicago-based Avant has now raised more than $600 million in equity funding since its 2012 inception, plus another $1.1 billion in debt. It also has arranged to sell another $1.8 billion of loans via its institutional marketplace, which lets qualified institutional investors purchase loans originated through the Avant platform.

Online lending isn’t terribly novel anymore, but Avant differs from much of the competition in terms of both its target (below-prime consumers) and source of capital (from Avant itself, rather than peer-to-peer). It believes the former will make it a partner to industry newcomers like Goldman Sachs, while the latter means that it does not compete directly with LendingClub.

As for the future, Goldstein says that while Avant currently only offers an unsecured credit product in the US, Canada and UK, it is working on a secured product in the auto space (expected to launch by year-end) and a revolving credit card product. The company currently has around 750 employees, mostly in its Chicago headquarters. It also has a Los Angeles engineering office and UK office for its British business.

Previously online lending platform Avant has acquired ReadyForZero, a Y Combinator-backed startup that helps consumers better manage their personal debit and credit using online financial software. Financial terms are not being disclosed. ReadyForZero had raised before around $5 million in seed through Series A rounds from Citi Ventures, Polaris Ventures, YC, and others. Also ReadyForZero’s co-founders Rod Ebrahimi and Ignacio Thayer both participated in Y Combinator as had Avant’s co-founders John Sun and Paul Zhang.

Another startup out of Europe focused on online-lending has raised a hefty round of funding. In September 2015 Kreditech, a German company building a suite of credit and banking products for consumers who have little or no credit history, has raised €82.5 million ($92 million) to continue adding more products and geographies to its platform. In July, investor and PayPal co-founder Peter Thiel invested $44M in this Series C round, alongside Amadeus Capital Partners and existing investors.

The round was led by U.S.-based private equity firm J.C. Flowers. To date, Kreditech has raised €70 million ($78 million) in equity and €185 million ($206 million) in debt. Previous investors in the company include Blumberg Capital, HPE Growth Capital, Värde Capital, Point Nine, Kreos and Global Founders Capital. Victory Park Capital, who provided credit line for Kreditech, has a strong track record backing finance startups that need credit facilities, with others including Borro and Kabbage. Kreditech, based out of Hamburg, Germany and co-founded by people with expertise in machine learning and aggressive e-commerce expansion (via stints at Rocket Internet).

Kreditech CFO Rene Griemens declined to comment about the company’s valuation except to note that it has “more than doubled” from the last round, when it raised $40 million. (That round, according to Kreditech itself, valued the company at $190 million, although Griemens points out with currency fluctuations and inflation, it’s inaccurate to simply double that number.)

Speculation was that it would be on a pre-money valuation of $750 million, but that valuation was never confirmed. He also added that the round is not completely closed and so there may be more from another financial investor coming.

The company remains unprofitable, and while it is not disclosing revenue numbers, Griemens says operating losses were halved in the first half of the year compared to the same period in 2014. Revenues are also growing at a treble rate, he added. Kreditech today does most of its business in Poland, Spain, the Czech Republic, Mexico and Russia, using its platform to pitch not to users who might have other access to credit and banking facilities, but those who lack the credit history to borrow money through other means.

Kreditech gets around this conundrum with technology: The company has developed algorithms that weigh up some 20,000 different data points to assess an application. Greimens says that 2 million people have been scored, and the company has extended 500,000 loans to date.

He adds that the nature of Kreditech’s business may also play a role, and believes what Kreditech does is not the same as Wonga. “I think that what many people in developed countries don’t understand is that you can’t do financial inclusion for the underbanked at the same APR as you have in a developed country. We are improving conditions for people, people who have had no access to proper financing before.” He says typical APRs are around 30 percent, similar to credit cards in those same regions.

Going forward, the plan is to launch in Brazil sometime in the next year, and to continue expanding the products Kreditech offers. Currently, there are several brands that the company uses with consumers — Kreditech is just the overall company’s name — and Griemens says the different products will over time be consolidated under one brand, Monedo. It’s also growing average loan sizes, which are currently between €800 and €1,500, versus the microloands of €200-€400 that were its initial mainstay.

The company’s business model is based on fees and interest on its loans. In 2014 the company made €21 million in revenues and expects to make €55 million ($62 million) in 2015. While a lot of tech companies out of Europe have looked to the U.S. market to scale up, Kreditech is taking a page from another big player in the European tech world, Rocket Internet (whose co-founder Marc Samwer is an investor in Kreditech), in how it has chosen to grow.

The company has largely circumvented the U.S. market (“largely” because it’s picking up funding from there, if not customers) in its roll out. Instead, it has focused more — but not exclusively — on countries with developing economies and people who are lack credit ratings and possibly bank accounts.

There are a lot of questions raised about whether companies like Kreditech are playing a high-risk game by going after the user segments that it does. Kreditech has a relatively low acceptance rate — 80% of applicants might get refused — but Griemens claims that it has a better default rate than traditional banks.

ZestFinance, a financial technology company whose algorithms enable it to make loans to borrowers traditionally not served by banks, has raised $150 million in debt financing from Fortress Investment Group — another sign that traditional financial firms see this as an area of opportunity. ZestFinance last announced funding — a $20 million round — in 2013. Investors include Peter Thiel, Northgate Capital, Lightspeed Venture Partners, Matrix Venture Partners, Kensington Capital Holdings, and Eastward Capital Partners. ZestFinance, formerly known as ZestCash, started in 2009 and is based in Los Angeles.

In July 2015, the company launched a loan product called Basix for near prime borrowers who have credit scores just below the threshold of what banks would consider worthy of a loan. The Fortress investment will go toward funding those loans and growing the product. So far, Merrill says, the company has made thousands of Basix Loans totaling millions of dollars.

The company’s technology uses nontraditional factors to make lending decisions, giving it the ability to lend to borrowers about whom banks may not have enough reliable information to make loans. It does not use traditional credit scores in making lending decisions.

Upon launch in July, Merrill said typical applicants for Basix Loans likely have FICO scores of 600 to 680. According to Credit Karma, an online credit service, 18.6% of people with a credit profile have a score in that range, totaling 42.2 million people.

In July, Merrill said that many of these borrowers have multiple debts or saw a drop in their credit score after an unexpected medical expense, but could, for instance use a Basix loan to consolidate their debts, or pay back a large medical expense in installments. Basix loans range from $3,000-$5,000 to be paid back over a three-year period with a fixed annual percentage rate of between 26% to 36%.

They feature a 15-day grace period to make on-time payments, and ZestFinance reports the borrower’s payments to credit reporting agencies to help them build their credit history. Basix Loans are available in 10 states – Alabama, California, Delaware, Georgia, Illinois, Missouri, New Mexico, South Carolina, South Dakota and Utah — with five more to be announced soon. The company plans to reach all 50 states in 2016.

A year on from an Index Ventures-led $7 million Series A, London-based fintech startup Credit Benchmark has extended its runway with a $20 million Series B. The startup is building a platform aimed at improving financial market benchmarks and risk assessment analysis by aggregating anonymized credit risk data from multiple banks to build up consensus data. Credit Benchmark’s new financing is led by Balderton Capital.

The new funding will be used to expand its data gathering efforts with global IRB banks, extend its credit risk assessment platform and grow its international team and presence, it said today. “Staffing up is very important — data scientists, and customer-facing people are really where the focus is,” a spokeswoman told.

A year ago Credit Benchmark said it had a dozen global banks in the U.S., U.K. and Continental Europe committed to supplying data. It’s now no longer disclosing how many banks it has but says it’s added “new contributors”. Whether some banks that had previously signed up have since dropped out is unclear. It’s also not breaking out customer numbers at this stage. Since it last raised, Credit Benchmark adds that it has “invested heavily” in security and scalability for its platform.

“Credit Benchmark’s plan to provide transparent credit information on more than 200k companies will provide huge value to all market participants. The need for better data has never been higher,” comments Balderton’s Bunting, in a statement.

Self Lender has raised a $1.5 million round of seed capital from Silverton Partners, who wrote the full check. The new cash comes after the firm raised a prior total of $535,000 from TechStars, Kickstart Seed Fund, and Galvanize Ventures. To date, Self Lender has raised $2.035 million. The company uses loans to help individuals establish, and in some cases work to repair their credit history. Self Lender, in a sense, allows users to loan themselves money that they repay over a regular period, after which the initial sum is returned — you can’t spend the loan amount, as it’s out of your control until the payment period wraps up. It’s a neat way to help the millions of Americans who have little or no credit history get a start. According to the firm, these so-called “credit builder loans” are products sometimes offered by non-profits.

Vouch, a so-called “social network for credit” founded by ex-PayPal and ex-Prosper alumni, had an additional $6 million in Series A funding to continue to grow its business. While there are a number of alternative lending startups on the market today, Vouch’s differentiating factor is that it leverages a person’s social connections in order to determine their credit-worthiness. In addition, these connections can choose to “vouch” for a loan recipient – even agreeing to pay back a portion of the debt if the borrower defaults.

For recasting the $49 billion payday loan business as an opportunity to turn high-risk clients into near-prime borrowers. LendUp cofounder Sasha Orloff said he can teach high-risk borrowers in the U.S. how to be more responsible, and takes his inspiration from Muhammad Yunus, the Nobel Prize winner who pioneered microfinance for impoverished entrepreneurs in Bangladesh. The target audience here is huge: The U.S. government reports that 34.4 million people are “unbanked” or “underbanked.” The LendUp app can process applications for short-term loans up to $1,000 in just minutes. Borrowers can’t automatically roll over those loans.

Doing so is the basis of a debt trap, which shady banks thrive on. For the riskiest borrowers, even LendUp offers rates that can reach 300% on an annualized basis—but LendUp gives these borrowers a way to reduce the rates to as low as 29%, and improve themselves at the same time, by taking online classes, repaying loans in a timely manner, and referring others.

The company says it will help top performers establish a credit rating, a feat few others have managed, and it reaches customers in 16 states. It recently penned a deal with MoneyGram, enabling loan repayment in real time at the chain’s stores, and it has opened its loan-processing API to developers.

More and more often large companies prefer p2p-lending platforms to banks as lending partners. Uber has partnered with the p2p-lender Zopa to assist drivers who want to purchase a car. In March 2015 the world’s first crowdfunding platform celebrates its 10thbirthday and though it took some time to break through, Zopa can now claim to have spawned a movement that is taking on the established banking industry in markets all around the world.

That didn’t always look like it was going to be the outcome. Zopa’s launch in 2005 prompted admiring glances from technology boffins and finance gurus alike, but didn’t immediately capture the public’s imagination. This, after all, was an innocent time when people still believed in their banks – why deposit your money with Zopa, or borrow from it, when the banking system offered exactly that service to all those who needed it, much more securely and at only marginally inferior prices?

Zopa’s vision was of a technology that would disintermediate the banking sector – connect borrowers and savers without the banks taking a cut. That was far-sighted but it took the financial crisis to persuade people en masse that they should participate in this process of disintermediation.
Zopa couldn’t have predicted the crisis, but its launch was predicated on the idea that the banks were out to serve themselves rather than their customers. And when the collapse duly came, it was in the right place at the right time to capitalise.

Borrowers looking for affordable loans were no longer able to find them at their local bank (the fact the ATM was working was miracle enough), while savers began to feel more – rather than less – comfortable depositing their money with a non-bank. The match was made.

Since then, it has been one-way traffic. While credit markets have eased since the crisis, the bond of trust between the banks and consumers has not been repaired. Moreover, political support for crowdfunding has grown and grown amid concern about the inability of banks to get funding to small businesses. While this is not the constituency that Zopa serves – its platform is still limited to individual borrowers – it has benefitted from that support and the uplift in credibility that the whole crowdfunding sector has enjoyed.

It will, for example, be able to offer savers tax-free returns once the Government finalises its plans to allow Britons to hold peer-to-peer lending within their tax-free individual savings accounts later this year.
Nevertheless, to put Zopa’s growth trajectory into perspective, the business facilitated as much lending last year as the total amount lent during its first nine years of existence.

However, institutional money is now coming to the UK crowdfunding sector and Zopa is thinking about how to get its fair share. There will be other opportunities for expansion too – from mortgages to overseas markets – even if capturing a greater share of the £25bn consumer loan market isn’t a grand enough ambition for a business that has lent just over £760m so far in its history. Wherever Zopa goes from here, but it will always be able to point out that it was a world first.

Photo: Deloitte, Company profiles

Life.SREDA VC is a global fintech-focused Venture Capital fund with HQ in Singapore