Welcome back to our course on FinTech Foundations and Overview
As we look at business applications of FinTech or the Fin of FinTech
how does it affect finance markets?
An important area of finance and market
opportunity for FinTech firms is lending and personal finance
We'll also talk about other kinds of lending like business lending
But in this session
we'll talk about the idea of making
loans to individuals or small businesses as an opportunity
And we see a couple of startups in this space
One of which pretty well-known is Lending Club
We'll also talk about Kabbage
a B2B financing company or a financing of small business
Credit Karma offering credit services
credit finance information, as well as, connections for loans
And E-Loan an early pioneer in this business
Lending Club was initially one of the first applications on Facebook
Was an early app
and it was an unsecured lending platform
Allowing people to borrow money and allowing others to invest in such loans
So, it was a peer to peer lending platform
The nice thing about this lending platform and one of the selling points
of Lending Club is you don't have to loan money to me
You can loan money to a portfolio of people who are like me
And so if I were to go to a lending club and say I want to borrow some money
I could find an investor that says
"I'll take one percent of his loan and one percent of somebody else's loan."
And Lending Club will then bundle these into loan packages or notes that are
multiple borrowers and multiple investors
who are providing capital to provide this financing
Therefore, you get the diversification risk reduction
So, you end up with a safer investment
a more stable payout
whereas, one person to one person loans can be highly risky
Sometimes you get paid off and you might get a lot of interest
Sometimes you don't get paid at all
And that can be a disaster if you're just funding one loan with one investor
Banks wouldn't like to do that
As one person said
"If you owe a bank $50,000, the bank owns you.
If you owe the bank $50 million,
you kind of own the bank."
You can tell them
You want to get paid back
you got to treat me nice
So, if you're rich and a very large borrower
you got a lot of negotiating ability with banks
And if things go wrong
you may be able to go bankrupt
You have credible alternatives but at any rate
So, in this case
we're talking about small loans, small investors
and Lending Club is a way of getting a small investor to be able to take
a piece of a small part loan portfolio with other small borrowers
Banks traditionally were in this business
They would take money from small investors and they would give money to small borrowers
Lending Club disintermediates those banks
They provide a platform for lenders and investors to get together
Now in terms of how is this doing
Well, they've been making a lot of consumer loans
and they've even gone beyond their original mission to where now they're saying
"Well, we'll also do other kinds of consumer loans."
You want a car finance?
That's not so good with investors because of the asset-backed nature
We've got banks that will do that
Just come to us, we're Lending Club
We will end the money
Some of those funds will go into things we'll package for investors
Some will sell off to traditional banks
because the margins are better and we can do very well with that
And so, they have a bank that they work with, headquarters in Utah
that provides them with a platform for packaging loans for other banks
And so, many loans do go through the banking back in for this Lending Club now
So, these are not investor loans but they still do
have many peer to peer investor type loans
And you can pick your portfolio of risk
you can pick your products
how much return you want
how much risk you want
how much variability you want
how many borrowers you want within the note that you're taking a piece of
They've been a pioneer in FinTech
and they've been very well noticed and have a lot of notoriety
but some of that's been negative cause they've had
a few problems over the past couple of years
Don't really need to worry about that
In terms of the business model
they've done very well
and they're making good money
They've had some management issues and some challenges
but those don't detract essentially from the success
of what their business model has done as a disintermediation of traditional banking
Another company taking away business from banks is looking in the small business space
with Kabbage looking at opportunities to raise money to lend to small businesses
And they came up with this idea and said
"We want to get this funded by venture capitalists."
And went out and nobody was interested
They couldn't raise any money
In the year 2009
their three founders went out and tried to raise VC money, were unsuccessful
But they were able to get a large investor to put up a convertible note
They were able to raise $500,000 that way
via convertible note or notes
and they raised $1.5 million from 45 angel investors
So, a lot of smaller investments, not tiny
But still, they've raised a lot of capital
and they were able to make their first 100 loans in 2010
By the next year
they were able to raise a lot more money
They were able to get venture capitals involved because
they started having very good returns
They also started getting a lot of good press
Why? Because they were able to make small business loans with
reasonable ability to get repaid and be successful in minutes
And this was contrasted with people's experience of borrowing
from a traditional bank whereas one small business owner put it
"I had an idea,
I needed a loan to expand my business.
After three weeks of waiting at my local bank they turned my loan down.
Three weeks of being in limbo,
and they say no. This is terrible.
A friend of mine said try Kabbage.
I went online and I had a loan.
Six minutes, I got financing." That's fast
Not me, actually, I don't need the financing
I'm more likely to be the angel investor putting the capital into the business
But still, very quickly
got funding for your new business idea.
Now the cost is not cheap
For that particular loan
the interest rate was 27 percent a year
For some loans, it's higher
Kabbage says in general you should be looking at about 3-4 percent a month
And you should be looking at about a six-month repayment cycle
So, these are short-term, high-interest rate
high-cost loans, but very, very flexible
And they're willing to look at a lot of things that
firms don't look at, normally in banks
Kabbage says will cooperate with our partners like UPS, or Intuit
or other accounting software
or delivery systems or payment credit card processing companies
We want to look at your whole business model and we want to see
how much volume of transactions are you shipping out every week
How many customers are charging things on their cards with your business?
How is your accounting look?
We'll look at all of that
and not just what you write on a loan application paper that a bank officer may look at
Kabbage says lots and lots of data
This means, as a result
Kabbage has been able to make $4 billion in
loans to over 130,000 small business customers
using more than a million data points as part of their loan approval cycle
So, they're able to use lots of data like
UPS shipping data or like your accounting data to make
these decisions for their 130,000 small business customers
So, more than 10 data points per loan
application of different data sources that Kabbage is able to take advantage of
not just filling out your application with minor amounts of data
So, big company, very successful, raised a lot of money
In terms of FinTech
Kabbage is now number 10 on KPMG's FinTech list or FinTech 100 list. So they're big
They're also on the top 50 Disruptor list for
CNBC of companies that are disrupting industries
transforming the finance industry
For several years now
I believe at least three years in a row they've been on Inc
500 fastest growing firms in America
They are now being funded by and receiving a credit from, or loans from
or investments from Credit Suisse
Ing, Softbank, and many
many other large financial institutions who are saying, "Hey,
we'd like to participate in some of this great success you have."
That's kind of intriguing that the banks who are
being dis-intermediated and being threatened by Kabbage are saying
"We love this idea.
We want to participate.
We want to be part of this. We want to work with you."
Because Kabbage is generating a lot of profit
They're generating a lot of success
they're making loans fast
Customers are happy, but they're also paying pretty good interest and they're paying
So, Kabbage is better at assessing risk than a local bank loan officer
and better at getting the customer in the door
Banks are saying, "We like this and we like putting our capital
to work in your business model." So that's intriguing
Theodore Henry King CLARKAssociate Professor
