MonJa's Digital Banking and Lending Monthly Roundup | May 2020

MonJa’s Digital Banking and Lending Monthly Roundup | May 2020

In Commercial Lending, Industry News, Small Business Loan Underwriting, Underwriting Automation by Yulia GnatyukLeave a Comment

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MonJa’s Digital Banking and Lending Monthly Roundup – Why Subscribe?

Digital banking and lending is evolving rapidly. Recent fintech-banking partnerships and innovation in technology with the introduction of AI, ML and blockchain herald a new era in lending. Fintech’s are changing the competitive ecosystem,  empowering lenders to process loans faster and smarter.  In a world full of noise, understanding how the technologies and developments may impact your financial institution’s credit decisions and credit portfolio is of critical importance. With MonJa’s Digital Banking and Lending Monthly Roundup, it’s easy to stay up to date on what’s happening in the space. Get the latest updates, analysis and commentary on digital banking and lending segment!


MonJa's Digital Banking and Lending Monthly Roundup | May 2020

SBA funding can be time-consuming and banks often back out when it comes to small businesses due to the numerous risk factors. Alternative financers have been the go-to for small businesses so far. The good news is that the capital options for small businesses are changing, and the market is looking more inclusive towards small businesses. The ongoing pandemic has also created ripples in the capital market and forced it to redefine itself to cater to businesses of all sizes and complexities. 

As per the NFIB, about 70% of all small businesses chose to apply for PPP, and 50% filed for an Economic Injury Disaster Loan (EIDL). Businesses that got denied for PPP are now heading for other programs. Alternative lenders like to bank on technology and speed as their competitive advantage which the traditional banking institutions are yet to catch up with. Fintech for alternative lending is likely to keep disrupting the market while focusing on customer-centricity and user experience. While the cost of capital has come down, it would be interesting to see how alternative finance continues its onward journey. 

Leading e-commerce player, Shopify Inc., made some big announcements at its first virtual event hosting its global merchant community. The virtual event covered recent product developments in finance, retail, and shipping. It also showcased Shopify’s efforts in helping its merchants deal with the impact of the ongoing pandemic.

The products and updates announced at Reunite are aimed to help merchants manage their store’s money, offer effortless local delivery options, and create new ways of generating revenue at checkout. Shopify Balance was introduced for independent businesses and entrepreneurs. The showstopper of the event turned out to be Shop Pay Installments, Shopify’s new “Buy Now, Pay Later” option that lets merchants offer more payment choice and flexibility at checkouts. Shopify entering the lending market is going to be a major milestone for the industry.

“Buy Now, Pay Later” payment giant, Afterpay has reported achieving a five million active shoppers mark. The company now has about nine million consumers at the platform in the US alone. It comes as a 30-40% jump registered by the company in the weekly run rate in the first two months of 2020. In just two years of its launch in the country, Afterpay has managed to achieve this feat, thus becoming one of the fastest e-commerce payment platforms.

Nick Molnar, co-founder and CEO of Afterpay (US) said, “At a time in which e-commerce has become the primary way people are shopping, there is a growing interest and demand among consumers to pay for things they want and need over time using their own money – instead of turning to expensive loans with interest, fees or revolving debt.”

While it may not look like the most favorable time for fintechs, Brex Inc. captured $150 million in funding from its investors. The company, specializing in fintech solutions for startups, raise only traditional equity. There was no debt financing involved. 

The funding has come from its existing group of investors that includes Lone Pine Capital. With this round, Brex Inc. is now valued at $3 billion as claimed by the co-founder Henrique Dubugra. Back in December 2019, the company had raised $200 M through debt financing which got it into a strong capital position well before the COVID-19 pandemic struck. At a time when funding is significantly slow for the fintechs, Brex has managed to be in a financially-sound place.

Highlighting the likely performance degradation in US P2P loan portfolios, Fitch Ratings has predicted a viable threat to some platforms. Citing the pandemic as the cause, the agency indicated an acute economic slowdown and an increase in unemployment which could suppress loan repayments. P2P lenders are expected to be more affected by other consumer ABS sectors.

It also stressed on the dislocations in the capital markets. Apparently, these dislocations are affecting the funding sources of the MPL sponsors and eventually their loans and origination fees. The agency also questioned the back-up servicers’ ability to take on loan volumes without operational issues (which could worsen the defaults in the economic distress). The report (that follows from the fellow rating agency, Moody’s) predicted testing times ahead for the P2P lenders due to the coronavirus pandemic.

The ongoing pandemic has forced the world to adjust to new ways of doing business, banking is no exception. This also shows how well-prepared is our financial sector for unforeseen crises like this. The digitally-inclined neobanks are doing what they do best – supporting their customers with regular communication and product updates to adjust to the demands of the changing times.

The growth rate (in the native market) of neobanks like Monzo, Starling, and others dropped by 18-36%. Despite the poor numbers, this does not indicate people going back to traditional banking. Moreover, a mid-pandemic analysis may not be the best reflection of a bank’s growth. The post-pandemic economy could see more people signing up for neobanks for attractive options that help in achieving short-term financial goals. But what one needs to remember is that these digital banks have a much smaller size and scale of operation. This raises a valid question about the future of their digital offering as a standalone enterprise. 

Biz2Credit Small Business Lending Index reported a record low drop in the approval percentage for small business loan applications at big banks. It fell to 8.9% in May compared to 11.8% in April and 15.4% in March. Not very long ago it had jumped to its all-time high (28.3% in Feb 2020). These rates, however, are not inclusive of businesses approved for PPP loans. 

What also fell was the small bank approvals; from over 50% in February and 38.9% in March to 11.8% in April. Credit union approvals were another category to hit a record low, and in this case for three straight months. They plunged from 39.6% in February and 23.2% in March to 18.1% in April. The report also included comments on these trends from the Biz2Credit CEO Rohit Arora.

Venture Capital firm, Andreessen Horowitz, outlined the future of banking, shopping, and payments. Highlighting on the growing digitization in banking (and its relevance during the pandemic), the American VC expressed that branches may not be needed after all. Talking to Business Insider, General Partner Alex Rampell said, “COVID represents an A/B test of branch versus branchless banking, and almost nobody is suffering from the inability to enter a physical branch.” He also added, “Paying with Apple Pay and Google Pay is faster and safer. Expect that to stick.” While 70% of the consumers may see mobile banking being the future of banks, they also believe that some branches will still be retained. Meanwhile, contactless payment methods are expected to get more popular due to the speed and safety offered.

The current pandemic has distressed the economy just as much the public health. Banks are especially experiencing a lot of pressure since customers, (both individual consumers and businesses) are visibly desperate. But instead of succumbing to the pressure, more and more banks are now coming up with creative solutions. Trustar Bank in Virginia has come up with the idea to redirect a tenth of its PPE income to two service organizations in Washington. Similarly, Citigroup has planned to donate its PPP profits to a relief program for small businesses.

Many other financial organizations are also making contributions in their own ways. Digital lender, Laurel Road, is breaking business barriers by delivering food and offering special prices to health professionals. Citizens Bank of Edmond and Chime came up with an interesting idea of distributing the money before the payment deposits were made. Many more banks and financial organizations are contributing in their own way in this collective fight against the coronavirus pandemic.

OnDeck Capital, lost its profit streak finally as it reported a net loss of $59 million for the Q1 of 2020. The NY-based lending company had been registering profits for seven quarters straight until now. Its delinquent loans rose from 11% in December 2019 to 27% by the end of March and further to 45% by the end of April 2020. According to Chief Risk Officer Nick Brown, around 40% of the delinquent customers have made partial payments.

This loss has affected the company’s loan originations dramatically. OnDeck has indicated a contraction in originations by 80%. For some industries, it has already stopped originations altogether. Talking to the American Banker, CEO Noah Breslow pointed out that OnDeck’s “top focus” is liquidity and capital preservation.

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