Yielders pioneering Islamic Fintech in the UK

In my previous posts, I discussed how Fintech with a social impact could be a viable business model. Would Financial Services and banking be viable if it got more ethical? Post recession, we have had regulations force good business practices within banks. Decades ago, with products, processes and policies driven by cultural values, Islamic banking has just done that – taken an ethical route to Financial Services. Yet, Islamic banks have struggled to compete due to those constraints. We may have just found an answer to make this system more competitive in Fintech. Yielders, a UK based equity crowdfunding provider, has just attained the first Islamic Banking certification and become the first FinTech firm in the West to do so. Yielders have developed a proposition that looks pretty innovative, pragmatic and competitive in a low yield environment. In the process, they might well have set themselves on a path to pioneer viable Islamic Fintech in the UK and possibly in the West.

Islamic banking in the formal sense has been around for well over 60 years. However, Financial institutions that comply with Sharia laws only manage 1% of assets globally. This has been attributed to some of the principles, which act in ethically regulating the business, hence make Islamic banking less competitive. The key principles are,

  • No Interest (Riba): Sharia compliant banks cannot charge interest on their products. This is because of the principle that the banks can’t charge someone interest because they had access to money that the clients didn’t. And money can’t create money, which will result in rich becoming richer and the poor becoming poorer. Lending can be only against tangible assets.
  • No Uncertainty (Gharar): Institutions have to be transparent to its customers on the products they are being sold. There cannot be an open ended or uncertain contractual relationship between a Sharia compliant institution and its customers. In the west, this is now being enforced, under Conduct based regulations.'...And in this dungeon we incarcerate the lowest of the low - the mis-sellers of P.P.I. schemes!'
  • No Gambling: This is clearly prohibited under Sharia laws. But this is not just about not lending to a casino business (Gambling). Products that are based on making money in an uncertain situation (Speculating) like derivatives (Futures, Forwards, Options etc.,) are also prohibited.

If the whole of the Non-Muslim world had followed the above principles, we wouldn’t have had a credit crunch in 2008. Now, following these principles come with various overheads.

Product Development: Islamic Financial Institutions (IFI) need to be more innovative than their Non-Islamic counterparties to remain competitive. In the UK, there are 5 Islamic banking entities, and only one of them provide products for retail customers, and those products aren’t competitive on returns when compared to high street banks.

Regulation and Standardisation: There is no central body to regulate and support IFIs as we have the FCA in the UK for banks. This ends up in a lack of awareness with the institutions that want to understand this space better. Also, interfacing between Islamic and Non-Islamic Financial Institutions is quite challenging without the standardisation of products and operational processes. Most IFIs self-certify with certain authorities or with a panel of experts in the field.

Liquidity: As a result of the above two points, there is poor liquidity for Islamic banking products, with low volumes and transactions. This is also worsened by inefficient back office processes that are yet to be upgraded to 21st century standards.

Innovation: Islamic banks are still trying to get into digital banking, when this has been well on its way in the West for almost a decade. Most records are still paper based, and information exchange is not automated.

'If there's one thing the British are famous for, it's talking about the banks.'

Yielders leads the way:

Most of the current challenges could be solved by thinking Islamic banking and its products ground up, which is what Yielders have attempted to do. Yielders, an equity crowdfunding provider, led by Irfan Khan proves Fintech could be an answer to most of the above issues. Irfan was born in the UK and has spent 15 years specialising in developing technology solutions within Banking. His passion to bring to light the principles behind Islamic banking, and make them work in a Western context was the driving force behind Yielders. Today Yielders is the only Western FinTech firm that is Sharia compliant.

Over the years, Irfan has seen and understood the challenges that IFIs have had in the UK and wanted to change the landscape. One of the key issues with existing IFIs in the UK has been that, they have only targeted the Muslim community in the country. None of the IFIs in the UK have a non-Muslim name for example. In his opinion, they establish themselves in the west with almost an acceptance that their products wouldn’t be competitive enough for the non-Muslim world, and they would play the “ethical-product” marketing route with their Muslim customers. Irfan has turned this approach on its head by establishing Yielders as a Western financial institution that complies with Sharia principles. This he believes would attract more Western customers who the traditional IFIs haven’t even bothered targeting.

The other fundamental issue with IFIs operating in the west was that they were “shoe-horning” their products to the western markets. Irfan is taking a ground up approach with a Fintech hat on. At Yielders he is able to be more innovative with his products as he has structured them to be compliant with Sharia laws. However, he doesn’t think this is possible in a traditional IFI (yet) that lacks the agility of a Fintech firm. As a result, he is able to offer competitive returns on his products that are currently focused on Real estate, and could soon be extended to ISAs, SIPs etc., Yielders currently offer up to 6% net yield (without leverage) plus capital appreciation. This is a very practical and differentiated proposition for middle class consumers in a low yield environment.

It also became evident during the interview with Irfan that apart from agile product innovation, innovative data sourcing/interfacing is needed to make back office operations more efficient for IFIs to run on a lower cost base. As the operational costs go down, products can be priced more competitively which will bring liquidity to the market. Fintech could also improve interfacing and interactions between IFIs and Non-IFIs through various API and data exchange technologies, and automate back office processes.

Several years ago when I was doing my business degree there was a session on corruption. The course material started with Anna Hazare’s movement in India against corruption, and pretty much went on to project corruption as a thing with the emerging markets. There was a challenge from a Chinese student, who asked the professor “why is corruption being projected as a problem in the developing world, when Billions got wiped out of people’s pensions during the Credit crisis in 2008. Isn’t wall street the most corrupt place?”. Something I have noticed in the West is that if something is legal, it’s considered to be right. No wonder business schools run courses on Ethical business practices. There are a few things that the banking world, driven by capitalistic ideals, could do to make it more principles/values based. And if done so, it would most likely look like Islamic Banking. A few more players in Islamic Fintech could spark a new wave of opportunities both in the West and in the Islamic world. Inshallah! (God willing)

A little bit of P2P is all I need – Mambo in Lending


Ladies and Gentlemen, the lending sector merits a Mambo song and I’ve started the lyrics for you all to create your own version.

A little bit of Prosper in my life

A little bit of Lending club by my side

A little bit of Funding Circle is all I need

A little bit of Lending Home all night long


A little bit of Monica in my life
A little bit of Erica by my side
A little bit of Rita is all I need
A little bit of Tina is what I see
A little bit of Sandra in the sun
A little bit of Mary all night long
A little bit of Jessica here I am
A little bit of you makes me your man 

There are dozens of platforms for your Sandra, Tina, or Mary; and most of them offer ways for retail to access the primary market of loans, be it consumer loans, small business, student, invoice, real estate loans etc. However, it remains tedious and complicated to manage portfolios be it 10k or 100k or more. Diversification leads to having to deal with Thousands of orders and even then, retail can’t optimally spread holdings across the FICO spectrum and at the same time be diversified with respect to other risk factors (e.g. industry concentration, geographic concentration etc.).

Bottom line it is really hard work to manage a portfolio of P2P loans on a platform. Monica, Erica, Rita,… are high maintenance! Hector, a NY based retail investor on the Prosper platform, attests to that too in Back to the future of P2P Lending, we interview one of those peers.

Add on to that reality that often retail will be “politely” front-run by those managing loan portfolios with the quantitative support that retail doesn’t have.

Most mass affluent retail investors that could allocate 100k or more to P2P loans (viewing it as a fixed income alternative with a reasonable expected risk-adjusted return compared to high yield) would and should be looking to diversify beyond one single platform.

No matter how wonderful Monica is, it is very sensible to have Jessica or Mary also on one’s side. It reduces platform risk and it reduces lending subsector concentration risk (smallbiz, invoice, real estate). These are even more important in a market that has taken a step backwards in terms of its progress in developing a secondary market. Remember that in the US lending market right now, we only have Lending Club that hasn’t shut down its secondary market business. Prosper did. At the same time, note that Small Business loan platforms like Funding Circle require 50k minimum which makes it very hard for retail to include it in a diversified loan portfolio.

Add on to that the Faith and Trust that retail needs to have to any and all of these platforms in terms of their credit assessment algorithms, because realistically speaking there is no way for a retail investor to perform any due diligence on that front.

With all these considerations in mind, I go back to humming

A little bit of P2P is all I need

A little of Prosper in my life

A little bit of Lending club by my side

A little bit of Funding Circle is all I need

A little bit of Lending Home all night long

This is the exact mix of platforms included in a soon To Be Issued fund by LendingRobot, a SEC registered investment advisor. They have been assisting investors to manage P2P loan portfolios over the past 5 years. They have recently offered an automated service for 45bps per year that employs ML algorithms. This has been in the form of a managed account up to now. Lending Robot will soon launch a hedge fund for accredited investors that employs the ML algo and invests in these 4 platforms.

In the US, there aren’t many listed vehicles for retail to invest in the marketplace lending space. There are a few publicly traded stocks (if the equity part of capital structure is what you are looking for)

Market capitalization in Bil

Lending Club – LC


Lending Tree – TREE


Yirendai – YRD an ADR from the East


OnDeck – ONDK


There are plenty of quasi-lending bets that a retail investor can also consider through ADRs of Chinese companies in the Internet of Finance space which has heavy lending components. The likes of Alibaba, JD Finance, Tencent could be considered but of course, these are broader plays. Renren (RENN) is one that retail may have missed because the brand is associated with a social internet platform with a focus on games, social commerce, social networking etc. The market cap of this tech platform is close to $14bil. Did you know however, that Renren has significant equity holdings in SOFI, Lending Home? Lendacademy reported

“Renren has participated in SoFi’s series B, D, E and F rounds for a total investment of over $242 million. According to the 2015 year end report, “The Company held 28.85% and 21.20% equity interest of SoFi as of December 31, 2014 and 2015, respectively.” 

I suggest that it would be better to consider buying SoftBank, the Japanese telco & internet giant (SFTBY ADR) because through the Vision Fund ($100billion!) they have invested heavily in SOFI.

“the conglomerate – Softbank- convinced SoFi to eliminate the idea of an initial public offering (IPO) and allocate the $1 bln investment to accommodate SoFi’s growth.” Source

Moving to another part of the capital structure, River North Marketplace just recently (in Sep 2016) launched a closed-end fund RMPLX which investors can buy any day but you can only redeem four times a year (AUM $40mil). Lots of diversification offered:

“buying from a few different originators, we get diversification there from an idiosyncratic risk that might arise at one originator, as well as we get different types of loan segments, so unsecured consumer, small business and specialty finance… there’s diversification in those different segments. Then, again, to further thinking about diversification, there is diversification across geography. We have loans in all 50 states. We have a variety of different credit characteristics, so there’s lots of diversification in this pool.”

In the US, retail investing in marketplace lending requires and will require for a while, Monica, Rita, Jessica, Tina and Mary on our side. Lets keep Mambo humming and diversifying as we are chasing investments that can generate yield on a reasonable risk-adjusted basis.

Europe offers more closed-end funds that make sense to consider for UK residents but are have additional complexities for other Europeans due to differential taxation and currency risks. Orchard platform, a leading Fintech focused on the secondary P2P loan market for institutional (NsrInvest is more for retail) tracks these funds in their weekly snapshot.



Premium/Discount (rounded) NAV in millions
P2P Global Investments (P2P)


£608 Mixed with equity
VPC Specialty Lending (VPC)


£293 Pure multi sector loans
Funding Circle Income Fund (FCIF)


£172 Pure SME loans
Ranger Direct Lending (RDL)


£160 Multi sector (pure) loans
SME loan Fund (SMEF)


£49 Pure SME loans

A glance at this ranking, explains why Funding Circle will be looking to raise more shares this year (ordinary upon approval of existing shareholders or C shares). Seems also that the SME focused fund structures are favored over the multi-sector ones (including consumer loans etc). This snapshot also leads us to continue mambo humming in lending with Monica, Rita, Jessica, Tina and Mary on our side.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.


Back to the future of P2P Lending, we interview one of those peers


The founding idea of both Lending Club and Prosper was Peer To Peer (P2P) Lending. Along the way, professional intermediaries aka Institutions got into the act and we started referring to Market Place Lending or Altfi. P2P Lending means no other intermediaries – just Lender + Borrower + Platform. The imperative to scale fast, to keep equity investors happy, forced the platforms to get capital from professional intermediaries. Something was lost in this transition. Professional intermediaries add fees and also tend to be less loyal as they see their job as moving money around fast to protect their investors. 

Hector Nunez is a good example of those original P2P retail investors. He has been investing in notes on Prosper since the early days. In an ironic twist that tells a lot about Fintech in the capital markets, Hector also has a job as a doorman at 75 Wall Street in New York City, which used to house trading rooms and now has been turned into apartments (in the new FiDi or Financial District of Manhattan). Hector was one of the early investors in Prosper loan notes and turned his $5k original stake into $138k over 10 years. This is a track record that most professionals would envy. See later for how this translates to IRR.

So it made sense to get Hector’s take on some of the big shifts in this market.

What is the difference between retail and institutional investors?

Our thesis is that three things separate the retail investor from the institutional/professional investor:

  1. Access to tools, techniques and data. Fintech is democratizing the tools, techniques and data that used to only be available to professional intermediaries. This is a work in process. Some tools are still only available to professional intermediaries, simply due to how they are priced, but this will change as new players come into the market. Techniques can come from books, blogs, forums and online courses. Platforms give access to data to encourage investors. So it is only tools that are lacking and entrepreneurs who build these tools know that this is primarily a pricing decision and that selling to 100 retail investors at 1c is the same as selling to one Institution for $1 and may be easier. We asked Hector about some of these tools.
  1. OPM (Other People’s Money). Institutions invest OPM. Retail investors invest their own money. To invest well you have to be a) contrarian and b) right. It is hard to be contrarian when you invest OPM – you have explanation risk. Retail investors have no explanation risk. When they are contrarian and wrong, they only have to explain it to the mirror and learn from why they lost.
  1. Concentration. One Institution can lend a lot of money and that is a quicker way to scale a platform than persuading lots of retail investors to use the platform. One retail investor might be able to deploy $300k while an Institution can easily do 100x that i.e $30m (but that $30m can also disappear equally fast as Institutions tend to be more trigger-happy). Getting 100 retail investors to deploy $300k or 1,000 to deploy $30k certainly takes longer, but it gives the platforms more long-term capital. One way to think about the retail investor is like a bank depositor who takes more risk and does more work for a much higher return.

Hector explains how he invests

I asked Hector to explain his investing approach:

Prosper gives borrowers credit grades (“AA,” “A,” “B,” “C,” “D,” “E” and “HR”) in which the investor sees and gets to invest in the loan the way she/he sees fit. In my case, I’m investing in only 2 grades (“B” and “E”). I have other grades but those are the ones that are in beta mode or that I ceased to invest in. Because there are only 3 or 5 years terms, it takes that long to purge the grades that I’m no longer interested in investing. Now one can argue that this is the disadvantage in retail P2P lending in that once something goes wrong, there’s no essential bail out. I would argue that this is actually beneficial because it teaches me to stay away from certain kind of loans with certain kind of attributes. As opposed to “jumping ship” early and probably not learning exactly why the loan went south. So I set a fixed amount of notes in 3 credit grades that I’m going to invest in and that number is 200. diversification is key and that by having 100 loans (notes), the investor is almost guaranteed to have a gain.

Agile Investing and IRR

Institutional/professional investors focus on IRR (Internal Rate of Return). It is a metric that shows performance. Hector, like most retail investors, does not obsess about IRR because he is not selling to investors.

What Hector is doing – and other retail investors work in a similar way – is what I call agile investing. Like agile programming, you start small and add more and refine the approach as you get market feedback (what you win and what you lose).

In Hector’s words:

Here’s what I started with: 5K which 10 years later (this upcoming March) is currently @ ~$138K. Please note that this includes both my trial and error loans as well as my lower interest loans. I started with 5K, then I put in an additional 10K, then 15K, another 30K and then another $20K. Throughout this process I’ve taken out then put some funds back in so overall, my principle is ~$80K and the rest is in excess of principle.

If Hector was running a Fund and pitching OPM for money, he would track all of those inputs and outputs to calculate IRR. That is how intermediaries work and IRR is a useful tool. However, what Hector is describing is how individual investors work which is to experiment and put more into what works. This is what I call “agile investing”. Note that “individual investors” could mean people with a lot of money to invest – think of Family Offices and Prop Traders.  So this maybe the new mode of investing that the micro asset managers use (see later for follow/copy/mirror model investing).


I asked Hector what kind of “ceiling” he sees for this way of investing.

I cap off 200 loans for each grade that I’m investing, because I believe there is a point where too much diversity negates gains and losses. Also, years ago, Prosper imposed a percentage limit on both retail and institutional investors which affects the monetary amount that I could invest in. Currently it is @ 10% for the 1st 24 hours. In other words, when a borrower posts his/her loan on Prosper, any investor could only contribute (invest) to 10% of the borrower’s total loan within the 1st 24 hours of the borrower’s loan. After that, the cap is lifted and the investor could invest any monetary amount. I only invest to the 10% limit so monetary wise I’m also capped. So my overall monetary ceiling is currently @ ~$400K and my overall note ceiling is currently @ a little over 500 which includes my beta loans. Once, I reach those goals, I will then have to branch out into other platforms i.e Folio and apply my tried tested and proven strategy on that platform.

Hold to maturity or trade on secondary market?

Prosper announced in September 2016 that they were Closing Down Their Secondary Market for Retail Investors. Prosper had been running a secondary market via FOLIOfn since 2009.

This is the sort of tool that Institutions have taken for granted for a long time.

The old fashioned idea of a bond was to hold it to maturity, collecting interest along the way and many Institutions still like to work this way.

I asked Hector for his take on this:

“Personally I’m not affected by this move as I never had plans on selling my notes on Folio. Remember, we had Folio as an option to sell and I knew it and I never bothered to look at Folio to sell my notes. And in that aspect, I believe I was a typical investor and part of the reason why I think Prosper and Folio parted ways. Remember, if loans default, there’s still a chance we can recoup our losses via the collection agency which work on our behalf (as opposed to losses in the stock where there is no chance of recouping). With Prosper there’s a chance that the collection agency can recoup some if not all your principal with the interest (all for a small fee of course which the agency automatically takes from the funds recovered). I did create a Folio account but that was as a security blanket which I would have put in use had the majority of my investment soured. As the story went, it never did.”

Cross platform investing

Institutional investors are strong on diversification. Hector agrees, but has a slightly different take:

“I believe in that old cliche that you should not put too many eggs in one basket. I am all about cross platform investing. Should one platform go south, you have another to pick you right up; however I only believe that to a point. My belief is that too many investments would cancel themselves out leaving the investor with little financial movement either way (gain or loss).”

Hector is referring is what Institutional Investors call “closet indexing”, when investors diversify so much that the end result is very close to an index (which you can buy for very little from somebody like Vanguard).

One way to diversify is to go global. I asked Hector whether he would consider investing outside America, via platforms in those countries. Hector was clear on this front and his logic was interesting:

No and as of now I don’t have any plans on doing so. There are a couple of reasons why. First, I must complete my investment goal on Prosper before I step on to a new Market. I will make an exception with Folio because I already have an account and I’ve been doing my research with them for quite some time. Second, I trust the American market more than international markets because I feel that I have a better pulse on the US market than that of another country. Probably this is because I live in the US. My strategy relies much on understanding their personal financial background in the context of some event that makes them need a loan. Example: A person could be asking for a loan because he/she may have psychological issues and need their medical expenses paid off and the borrower has a pretty decent financial history while another person may be asking for a loan for a vacation and have a questionable financial history. I would lend to the person in medical need not because of what the borrower is going to use my funds for but rather because of their proven financial track history.

Hector ends with what all good investors have – humility and a learn it all attitude rather than a know it all attitude:

Believe it or not I’m still learning on Prosper and still letting my “beta” notes play.

Can I follow/copy/mirror Hector?

One theme that we have been exploring on Daily Fintech is the emergence of Micro Asset Managers enabled by the follow/copy/mirror model:

  • Copy and mirror trading platforms like eToro, Zulu Trade, Darwinex.
  • Thematic investing marketplaces that allow new micro-managers to emerge by creating their own financial product (equity based), and actively manage it; like Motif Investing, and Wikifolios.
  • Even social research platforms like StockTwits are stepping into this space by offering Follow functions and rankings of the subscriber micro-managers.

This is an alternative to either passive low cost index tracking or high cost active hedge funds. The idea is simply to follow/copy/mirror an investor who is investing their own money. This allows a passive investor (who does not want to work hard at the investing game) to follow/copy/mirror the active investor (somebody like Hector) who gets some share of the upside. That active investor does not need to gather or manage investor’s assets, so they do not need to charge an AUM fee. This is a game-changer in the massive asset management business.

Hector was eloquent that IRR % was more important than total funds under management:

I believe that the amount of money one has in investment is not the sign or bar of performance rather it is the rate of return. A person can have a million dollars in stocks and come out at years end with 1.1 million and another investor could have 100K and turn a profit of $20k and it is the latter investor that I would be most impressed with and try to emulate.

The follow/copy/mirror model is working today in VC (Angel List) and in Public Equities and in FX, but I am not aware of anybody doing it in Fixed Income/Lending. Hector is the sort of investor I would like to follow/copy/mirror. I asked Hector for his take on this:

I welcome you and any potential retail Prosper investor to follow my lead. I could give you or anyone nice fundamental tips in getting started as well as giving you warnings and recommendations. If you or anyone wishes to get started, please let me know.

It will be interesting to see if the Lending platforms start to offer this or if some other platform specific to the follow/copy/mirror model offer a cross-platform capability.

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What does the Credify story tell us about Market Place Lending and $LC stock?


This story broke on Wednesday 15 November. 

The story is that the founder of Lending Club, Renaud Leplanche, who was ousted in a scandal in May was creating a new venture to compete with Lending Club called Credify. Headlines talked about 2nd Act or Comeback.

The story came out in the Wall Street Journal (WSJ)  and appeared to be good old-fashioned journalism – digging around for a scoop by looking at corporate filings.

I do not think there is much of a story about Credify itself. The chances of success for that venture are slim (more on that later). The story hangs on 3 threads:

– What does this tell us about the state of online journalism?

– Does this justify selling Lending Club stock?

– What does this story tell us about the transformation of consumer lending

What does this tell us about the state of online journalism?

News drives markets and digitization is changing news, so this is indirectly a Fintech story.

As a media entrepreneur this aspect of the story interests me.

This was either a non-story done under time pressure that had a big impact or an old-fashioned scoop from hard core investigative journalism. The latter is to be celebrated because the economics of digital media don’t allow much budget for hard core investigative journalism. Imagine All The Presidents Men today.

The time pressure on journalists today is intense, because the online ad model post search, social and adblockers, does not allow time for hard core investigative journalism.

There is no site for Credify (various spellings and .tld urls end up in a blind alley) and nobody is talking on the record. Let’s assume the story is true. It certainly appears that a company called Credify was created by Renaud Leplanche. Without a famous name impacting a public stock, this event would have gone unnoticed – just one out of 1,000,000 new businesses created each year in America alone.

So I incline to this being a non-story done under time pressure. Of course, only time will tell and events may prove me wrong. Credify may launch and quickly get to the $50m in revenues mentioned in the WSJ article as the target for 2017.

A non-story done under time pressure unsettles markets because, if it comes from an authoritative source such as WSJ, other publications repeat the story citing the original post as evidence. That is what happened in the Credify story, which was briefly on the technology front page (Techmeme).

Does this justify selling Lending Club stock?


$LC stock did decline a bit the day after on the 16th and by more than 5% a day later on the 17th and a bit more on the 18th. Over $125m of market value evaporated. Nobody knows for sure why a stock moves – in this case there were also options expiring, the stock had gone up sharply and may have needed a correction, there was a negative post on Zero Hedge (do they have positive posts?) and a story about Lending Tree that defined them as competitors (incorrectly in my view).

Disclosure; I bought LC stock after the May crash (got in at 3.51). That is why I was paying attention to the Credify story. My investing approach is to do a lot of fundamental analysis before buying so that I have context to look at news as it comes in and make a Buy/Sell/Hold decision. This story was a Hold decision – it was “noise on the line”.

Reactions of retail traders on stock forums mostly also did not think that the story was significant. This was a sample reaction:

“Not sure why Laplanche startup would be more concerning than Goldman’s market entry.”

Which brings us to the final part of this story.

What does this story tell us about the transformation of consumer lending?

Lending Club is the bellwether of MarketPlace Lending. It may well be bellwether of the whole Fintech market. If Lending Club fails, investors will tell Fintech entrepreneurs “stop trying to compete with banks, go back to the old model of selling software to banks”.

I am calling this market the transformation of consumer lending, because so many of the names don’t quite fit any more:

– P2P Lending. This is what it was called when early visionaries such as Renaud Leplanche were getting started about 7 years ago. Individual lends to individual via the platform – beautifully simple and revolutionary concept. Whatever else Renaud Leplanche does with his life, the world owes him a debt of gratitude for making that work.

– Market Place Lending. This name evolved when fast moving credit hedge funds and other institutional lenders in moved in. Now the value chain got longer. Individual lends to Institution which lends to individual via the platform.

– AltFi. In this iteration, the market place disappears. The credit hedge fund buys or builds the digital loan origination technology so that they can lend directly to individuals from their own balance sheet. This is also sometimes called balance sheet market place lenders. There are also hybrid models with some balance sheet lending and some market place lending.  Examples include Avant and SOFI.

– Digital Lending. In this iteration, the credit hedge fund disappears. Banks buy or build the digital loan origination technology so that they can lend directly to individuals from their own balance sheet. As Banks have a lower cost of capital they can beat the credit hedge fund. First out of the gate is Goldman Sachs with Marcus. They will beat the AltFi Lenders because of lower cost of capital.

Consumer Lending is such a massive market and we are still in the early days, but it is an utterly different market from when Renaud Leplanche was doing his pioneering work in the founding days of Lending Club.

One thing that gives me confidence in Lending Club (and Prosper but they are still private so I cannot buy their stock) is that the original P2P Lenders are still there. They may only be one lender, along with Banks and other Institutions, but they are still there. The humble retail lender has confidence because they get good risk adjusted returns compared to any other credit avenue (if they are careful). That confidence gives me confidence as an equity investor.

There is some news that would prompt me to sell LC stock. If the new CEO was also caught doing something wrong my take would be “once means nothing, twice is coincidence and three times is a trend and I am not waiting around for the third time”. The Lending Club Board proved in May that they are vigilant and decisive, so I think this is unlikely.

Fintech is fundamentally about the democratization of technology. Given the right tools, smarts and hard work, a retail lender can do what a credit hedge fund does. There has never been a shortage of people with smarts and hard work. Now they are also getting the tools. That is the revolutionary promise of Fintech in a nutshell.

Given that analysis, what would a smart entrepreneur who knows consumer lending do today:

– P2P Lending. Building consumer trust and network effects is a long game and the consumer lending market is no longer in the nascent phase that rewards a long game.

– Market Place Lending. Building Institutional trust takes time. The May scandal that led to Laplanche being fired broke that trust. This would be a hard sell.

– AltFi. This was a good play a few years ago, but with Banks like Goldmans getting into the game, this would be highly risky today.

– Digital Lending. Only an option if you are a licensed deposit taking bank.

That analysis told me that it was not time to sell LC stock and that the next iteration of this market is back to the original P2P Lending model of empowering retail lenders on a mass scale.

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Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Kreditech and the next generation of Consumer Banking


Consumer Banking is fundamentally about lending and non-bank lending (whether called AltFi, Marketplace Lending or P2P Lending) is already a mature market. Consumer Banking has taken 73% of Fintech investment to date (vs only 10% each for Asset Management) and Insurance) and has had the first IPOs and the first big blow ups. Now we are seeing the tipping point for challenger banks as well as the tipping point for incumbent bank branch closures. Looking past all the noise, we seek to find where the puck is headed and this took us to the unlikely Fintech capital of Hamburg to find out what Kreditech is up to (apart from recently closing a $103m Series C round).

Fraud and deadbeat detectors

Detecting Fraud in Insurance Claims was the  subject of our post yesterday about Shift Technology. It obviously also matters in Marketplace Lending because scamsters will flock to any market offering “few questions asked” payment. Frictionless and fraud-free is tough.

Fraud detection is all about spotting suspicious patterns. This can be as simple as clues that it is a bot or a human. For example, spotting a lot of copying and pasting could signal a bot. Spotting deadbeats (aka high chance of default) is also a pattern matching job. For example, a person who goes  straight to the sign-up page without reading the terms might be desperate for money (or a crook).

Kreditech claims to track 20,000 data points such as this.

For example, mining social media data can tell you if they are friends of somebody who who has reliably paid back loans. Some signals are obvious such as level of education and quality of employer (the guy who left Stanford to work at Google is probably a good credit risk).

Some are subtle and the sort of thing that old fashioned human bankers used to do such as seeing somebody getting drunk a lot or gambling in casinos. This can be viewed as invasion of privacy, but the key is that the consumer who wants the loan gives permission and credit card companies already have this data.

The key is seeing the connections, not a single data point. The example that Kreditech give is that behaviour that might be suspicious in a factory worker — applying for a loan from Hamburg when their job is in Stuttgart — might make perfect sense for a traveling salesman.

By doing all this automatically, Kreditech claims the “Lowest number of fields in the industry” – which is key to conversion.

Underbanked is a better market than Overbanked

Lenders are credit quality arbitrage hunters. They want high credit quality borrowers that are viewed as low credit quality borrowers by the mainstream lending market. As in any investing, you have to be both contrarian and right. Contrarian and wrong is an obvious error. Right and mainstream just means tight margins; everybody wants to lend to a AAA Corporate or a guy who just left Stanford to work at Google.

Now look at emerging markets. Mainstream perception is that lending here is high risk. It’s all foreign and strange and the credit bureaus don’t operate here. Yet, this is where the middle class is growing rather than shrinking. This is part of our First the Rest then the West thesis and a reason why we devote so much attention to the Underbanked market (index to Underbanked posts here). Which market would you prefer – a market where customers are spoiled for choice and competition is fierce or a market where customer are growing fast and have few choices?

Poland – laboratory for consumer banking innovation

Kreditech acquired a Polish company called Kontomierz in January 2015.

Poland is a laboratory for consumer banking innovation (as we detailed a year ago here).

Kontomierz was an early pioneer in open bank APIs. This is driven by EU legislation and is the key to Kreditech and the future of Marketplace Lending.

PSD2 and Open API Banking is the key to Marketplace Lending

Profit lies at the intersection of market demand, technology enablement and regulatory driven change. We don’t need to say more about market demand (strong on both borrower and lender side) or technology enablement (the Internet changes everything). The only question is who will seize the day – incumbents or upstarts? This is where regulatory driven change holds the key.

PSD2 (defined in November 2015) enables a third party provider (TPP) access to accounts held at Banks via XS2A (Access To Accounts). For TPP read Fintechs and Challenger Banks (including Marketplace/P2P Lenders). PSD2 mandates that banks must provide access to customers of the Fintechs and challenger Banks. More on PSD2 next week (will be RegTech Week on Daily Fintech).

The reason this matters to Kreditech is that for all the talk of 20,000 data points, AI, machine learning, data science etc, understanding what a borrower has in their bank account (in and out and balance) is key to understanding their credit worthiness. If this data has to be released by banks, it will crack open the market for lending to marketplaces and tech driven originators and challenger banks.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader

Lending marketplaces grow up and get boring

By Efi Pylarinou

Lending marketplaces are about to get boring. From Birth of P2P loans to Maturity via securitization, the recipes and cookware are looking more and more like old-fashioned financial engineering.

For the kind of people who think technology is all about innovation and cool new things, then, fintech is about to get even more boring”.                                                                                                “…startups are becoming much more like the banks they’re seeking to disrupt. That’s Lunn’s Great Convergence.”                                                                                                                                           by Felix Salmon in “Financial Startups are getting an edge by growing up

Crowd sourced lending has been going on for a while. Lending Club started before the peak of the subprime crisis. Origination from non-depositary institutions has also been going on for a while and has been tagged “Shadow Banking”.

Funding consumers, students, mortgages, SMEs; is not a need created by some innovative company like Apple. It has been there for a while, starring at us in the face and looking for a servicer to fill the gap that was created from banks pulling out of this market.

The P2P lending platforms have already become P2P marketplaces, with the heavy involvement of institutional funding (covered in: “P2P Lending” to “Lending Marketplaces”: the graceful dance has started). In December 2015, in some of the year-end articles on trends and predictions for Fintech, there was mention of potential future troubles in the P2P lending space (e.g. Crazy Fintech Predictions for 2016). Probably extrapolating from the recent troubles in high-yield and EM debt, the Fed’s rate hiking, and some macro factors; coupled with Lending marketplace Fintech valuations shrinking to more normal levels as CACs become higher for further growth.

On a more positive note, there has also been recognition of the great need-potential for funding in the real estate market. This is an area that P2P funding is expected to grow. Securitization of P2P loans is another process in its infancy.

In today’s research note, I will dissect the P2P loan space in three main stages. I will start looking behind the scenes to look for elements of old-fashioned finance:

  1. Birth phase
  2. Adolescent phase
  3. Mature phase

Where P2P loans are Born

The myth of the stork bringing the baby, is not true in P2P lending. There is a bank behind the creation of every P2P loan. WebBank, tucked neatly in Utah and away from Silicon Valley and New York, has underwritten the majority of P2P loans. It is a lean financial institution with a niche focus. Every time a Person applies for a loan on a P2P platform, WebBank issues the loan (i.e. provides the capital) and 2 business days later the P2P platform buys the loan, to hand it over to the Persons that come in and fund it.

This fact makes it clear that the P2P online platforms look more like a match making business. They source and bring together borrowers and lenders (but there a bank involved). They do also a lot of the pre- and post- services for a loan to be issued and serviced. WebBank however is vital, same way oil is vital to an engine’s functioning. WebBank is at the top of the Triangle that is behind the scenes of a P2P loan (WebBank, Borrower, Lender).

Liquidity can dry up, if WebBank has troubles or decides to reduce capacity and take less risk. One supplier of capital, simultaneously used by Lending Club, Prosper and Paypal, is never a good thing in any market. If regulators decide to restrict P2P lending, starting from one of their supervised institutions, like WebBank that is tightly involved in the online lending process, can be a starting point. Felix Salmon emphasizes in “Financial Startups are getting an edge by growing up” that “Something that looks incredibly simple from the outside (e.g. P2P loan)…can turn out to be insanely complex behind the scenes”.

In a future research note, I will expand more on the business model of WebBank and its client base.

Where P2P loans become an asset

In the second phase , P2P marketplace are no more trendy, innovative platforms but are being seen as more traditional financial products. Lenders can directly invest in these P2P online platforms and spread their holdings across borrowers, thus reducing risk and earning interest. Algorithms running behind the scenes to facilitate the process of origination are starting to look and feel more like that of a bank, in this phase. The platforms differentiate in several ways. Credit scoring and risk profiling, is one main way that aims to offer a better risk-adjusted return to lenders. The reality is that overall, lending marketplaces have concentrated on the very high end of the credit spectrum and have 80% rejection rates (i.e. refusal rate of borrowers).

Financial advisors can offer their clients a portfolio allocation to P2P loans via NSRInvest (see research note: LendingRobot and NSRInvest, “les fiancées” of LendingClub).

Another way, to get involved indirectly in this space, is investing via investment trusts. Again this also smells like traditional old finance. There are hybrid investment vehicles, like those offered by GLI Finance (equity and debt); income trusts, like the recent LSE launch of Funding Circle income fund. This phase, is no different than the path followed by any other financial structure.

Where P2P loans become a more mature market

In this phase, P2P loans are pooled and re-packaged into tradeable securities, falling under the still “naughty” term of securitization. Such structures have been created over the last two years mostly pooling consumer loans and some with student loans. In 2015, Blackrock, a big asset manager, and Citibank, a large bank, launched two of the largest securitized P2P deals for the year. The market has still a bitter taste coming from the subprime crisis and a subconscious mistrust to the ratings associated with them. However, the explosive growth of P2P lending volume, leads institutions to re-create such vehicles that re-distribute risk and replenish capital for funding.

In another future research note, I will expand more on the securitization deals in this space (which is deja-vu financial engineering) and on the first glimpse of Fintech innovation for this complex and cumbersome process (A new Fintech platform for online P2P securitization).

Lending marketplaces have heavy elements of old-fashioned finance and are becoming less innovative and cool, as they grow up.


Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou is a Digital Wealth Management thought leader.

P2P financial match making: Low CAC and Scale-up recipes


Image courtesy of SIIPClub

By Efi Pylarinou

P2P online lending marketplaces claim to be Tech platforms in the match making business. They pair borrowers and lenders and cover the entire lifecycle of the origination process:

  • Customer acquisition
  • Sales
  • Scoring and underwriting
  • Funding
  • Servicing and collections

Today I want to think of these platforms as mines. I am going in with my torch and will be looking with you at some of these processes. Come along with me to shed some light on What happens and How in order to acquire a retail customer.

Tech businesses typically report in their filings, metrics like:

CAC = Customer Acquisition cost

CPC = Cost per click

KYC = Know your customer

CLV = Customer lifetime value

If you are interested in understanding more about the factors that affect the CAC (which includes CPC, KYC, and CLV) and how this relates to a scalable business, read more in “How to calculate Your online customer acquisition cost”. Derek Palizay, a strategic marketer, claims that a CLV of 3-5 times greater than the CAC, is a decent rule of thumb for a scalable business.

P2P online marketplaces like Lending Club, On Deck and the sort, acquire retail customers in the same way that traditional credit card businesses have been doing.

  • Direct mail
  • Google, Facebook ads
  • Listings in comparison shopping sites

Mintel Comperemedia, a database that tracks advertisements, reported that for July:

  • Lending Club mailed 33.9 million personal-loan offers, more than double the amount during the same month in 2014
  • Prosper Marketplace, direct-mail volume increased to 20.2 million offers
  • The average monthly volume of personal-loan offers sent through the mail is roughly 156 million y-o-y (through July 2015)

Clearly, the US Postal service is one beneficiary of the soaring old fashioned mail volume coming from these online lenders. The estimated conversion rate from these mailings to a lead is roughly 4%. So, for example from 20million mailings, 800k leads maybe generated (4%). From here on, smart use of data is essential to rank prospects and improve likelihood of conversion into actual customers. Kreditech can be the potential beneficiary at this stage of the mining process. Remember we are still behind the scenes, down in the mining labyrinth before issuing the loan.

From the public SEC filings of OnDeck, that I checked before going down into the mine, the reported customer acquisition costs are:

“During the nine months ended September 30, 2013 and nine months ended September 30, 2014, the average customer acquisition cost as a percentage of principal from all initial and repeat loan originations in each respective channel was 8.3% and 3.9% in our direct marketing channel, 4.4% and 3.4% in our strategic partner channel and 8.6% and 8.2% in our funding advisor channel”

Customer acquisition costs vary largely by acquisition channel. The most expensive way to acquire customers has been direct mailing and funding advisor channels. The less costly way has been through strategic partnerships. OnDeck is focused more on SMBs rather than consumer loans but data related to consumer loans and credit cards is also difficult to disentangle and cant be that different (except for the funding advisor channel). Lending Club (also with public fillings) reports spending $200-$300 per loan but that includes all the servicing.

It’s dark down here in the mine and 8% handle for CAC makes me shiver (2014 figures). Maybe 2015 will prove to be a better year and CACs will be reduced because of customer loyalty, smarter credit scoring and more revenues from strategic partnerships.

On the lower end, it seems that even

4%-5% CAC pretty much would eat up all the spread between borrowing-lending rate

I am still shivering with these thoughts. Revenues but no profitability with such high CACs.

The big beneficiaries from the soaring P2P retail lending volumes (even though overall this space remains small as a % of the overall origination market) seem to be the:

  • United Postal Service, with millions monthly mailings (offline)
  • Mailchimp, with millions monthly mailings
  • Google and Facebook ads

While still operating in the high end of the credit spectrum of the retail market, the strategic direction that P2P retail lending needs to head towards to move from revenues to profits, is clearly

Customer acquisition channels via partnerships for better lead generation and accelerated scale-up. CAC costs need to come down to the 2%-3% range and volume needs to soar.

The easiest partnerships, are already happening with lead generation sites like LendingTree, CreditKarma in the US, and Moneysupermarket in the UK. Credit Karma for example, has over 40million users. The traditional adjacent type of partnerships are similar to those that old fashioned credit card businesses have been engaging in: a la SoFI partnering with the top 100 US universities. Or partnerships with small to mid-size banks that want to participate in the origination business but need to outsource parts of the process that we described above (from acquiring the customer to servicing the loan). These partnerships are also starting to happen in the US and the UK (Zopa and Metro Bank).

The ones that will fuel and accelerate the scale-up process are the tech and e-commerce partnerships, like Lending Club with Alibaba, Lending Club with Google, and Zopa with Uber. These are partnerships will simultaneously lower CAC costs and gain marketshare by accessing customers from other marketplaces that are speeding on the highway of transforming commerce and services.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.