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
