This analyst note provides an update on the current state of the fintech market as well as what key advances in business models, technology and regulation will truly transform the segment as a whole. The note breaks down challenges that still face key fintech segments and offers strategic solutions and our views on each subsector. Trends in venture capital financing of fintech startups are also addressed.
Note highlights include:
- Update and look ahead at online lending, blockchain and asset mgmt.
- Profiles of select private companies raising capital in 4Q 2016
- Analysis and predictions on each fintech segment covered by PitchBook
Fintech saw a much more interesting 2016 after a 2015 when the subsector looked ripe for ascendency. Tumult in the high-yield credit market rocked the calculus of alternative finance, and digital currencies faced both scandal and huge rallies. Huge name brands both entered, exited and doubled down on the fintech arena including Amazon, Goldman Sachs and SoftBank. As we look ahead to 2017, this analyst note highlights some of the largest recent transactions as well as the most exciting business models and market opportunities in the New Year and beyond.
Li Lu’s Four Basic Principles of Value Investing
Li Lu is undoubtedly one of the most under-appreciated investors. The founder and Chairman of Himalaya Capital Management established his firm in 1997 based on the principles laid out by Benjamin Graham. Lu is a close friend of Charlie Munger and was once thought to be in-line to succeed Warren Buffett as the chief investment Read More
Challenge: Managing loan books once lending activity plateaus
2016 saw a number of high profile snafus as well as milestones for the maturing marketplace lending industry. Lending Club, one of the few publically traded online lenders, faced a controversial scandal which saw it mismark loans sold in bulk to Jefferies. Even after recovering and sacking their CEO, LendingClub (NYSE: LC) as shares fell 52% over the course of 2016. B2B lender OnDeck (NYSE: ONDK) fell even further as shares were down 55% at year end. Lenders such as SoFi, Kabbage and Avant have been wise to delay IPOs given the current climate.
One promising development in regards to the industry’s maturation has been the continued push toward securitization as a source of capital for marketplace lenders. Marketplace lending securitization reached $5.4 billion through 3Q 2016, up 86% YoY according to PeerIQ. This comes even as high-yield tumult and the Dodd-Frank 5% risk retention rule which went into effect on December 24 depressed overall ABS issuance 50% in 1H 2016. The new law requires certain issuers to hold 5% of assets on their own balance sheets in order to have “skin in the game.” The rule does not impact balance sheet lenders as their business model is predicated on exposure to the loans they originate.
Furthermore, the hiking cycle in the US continued by Janet Yellen in the recent December meeting underscored the utility of short-term high-interest loans as asset managers look to hedge duration risk while generating strong returns in their fixed income allocations as the yield curve steepens.
The biggest upside in the online lending ecosystem may in fact come from the data and analytics platforms that serve as both loan data agents and data providers to buy-side firms. These firms include Orchard, DV01, MonJa and PeerIQ. These firms ultimately have potential to service the multi-trillion lending market which was plagued by transparency issues across the board. Furthermore, they are far less capital intensive than online lenders and given the nature of their business will be anti- or even countercyclical since data and analytics are valuable in all parts of the cycle, and perhaps most appreciated in a downturn.
Notable 4Q Deals: Online Lending
4Q saw four of the six largest financings go to SME lenders rather than the consumer lenders which have been popular in past periods. This is a reflection of both the maturation and scale of current consumer lenders and the untapped market for alternative SME finance. Online lenders to businesses have a higher relative comparative advantage than consumer lenders given the slow speed and low approval rates of small business lending among retail banks. The average small business loan application takes 25 hours of paperwork and meetings as well as weeks to wait upon approval. Online lenders have begun creating value by expediting this process through the use of alternative data and more advanced analytics.
Select companies raising private capital in 4Q 2016
Location: Beijing, China | Year Founded: 2014 | Capital Raised to Date: CNY500M
First Funding Date: January 2014 | First Funding Amount: N/A
Latest Funding Date: November 2016 | Latest Funding Amount: CNY500M |
Description: QuantGroup provides online financial services including credit based upon advanced analytics via QuantGroup.cn. Founded in 2014, the company originally operated within the Microsoft Ventures Accelerator. In November, it closed a RMB500 million ($73 million) Series C financing led by Sunshine Insurance Group Corporation, Fosun Capital, Guosen Hongsheng Investment Co., Ltd., and other investors.
Location: Redwood City, CA | Year Founded: 2013 | Capital Raised to Date: $111.55M
First Funding Date: October 2013 | First Funding Amount: $2.5M
Latest Funding Date: December 2016 | Latest Funding Amount: $49M | Latest Funding Post- Valuation: $150M |
Description: BlueVine provides working capital and invoice financing for SMEs using alternative data such as exported financials QuickBooks accounting software. In December it raised $49 million in Series D funding at a $150 million post-valuation from investors including Lightspeed Venture Partners, Menlo Ventures, 83North, Citi Ventures, Rakuten FinTech Fund and Silicon Valley Bank. The company has made over $200 million in loans through the end of 2016, and the recent funding puts it on pace to make more than $500m in new loans in 2017.
Location: New York, NY | Year Founded: 2013 | Capital Raised to Date: $22.5M
First Funding Date: September 2013 | First Funding Amount: N/A
Latest Funding Date: December 2016 | Latest Funding Amount: $22.5M |
Description: MoneyLion developed a personal finance app for users to track their spending and investments by importing financial data. The company then uses this data to offer customers acess to credit. In December the company raised $22.5 million of Series A venture funding in a deal led by Edison Partners with participation from FinTech Collective, Citizen.VC, Clocktower Ventures, Broadhaven Capital Partners, Montage Ventures among others. It also recently announced a $650 million debt facility from Macquarie Group.
Challenge: Building out mainstream use cases
Like online lending, the blockchain space recorded a roller coaster 2016. Cryptocurrencies generally had a stellar year, with Bitcoin gaining 125% during 2016, and began the year by crossing back over the $1,000 mark for the first time since January 2014. This marks a record high total Bitcoin market cap of $15.5 billion, as the current supply is over 30% greater than it was the last time the cryptocurrency traded over $1,000. By other metrics, the market structure of Bitcoin is becoming more and more robust. The standard deviation of 30-day BTC-USD daily volatility has dropped below 2%, a 75% decrease from 2010. Furthermore, daily transactions are up 50% YoY denoting a deeper and more liquid market.
2016 also saw a number of other promising blockchain protocols emerge such as Monero and Steem. The Monero (XMR) cryptocurrency increased in value over 25x in dollar terms over the course of the year, largely due to the darkweb marketplace AlphaBay implementing Monero transactions. The Monero distributed ledger protocol includes CryptoNote technology which makes transactions far more opaque than the bitcoin blockchain. Likewise, the Steem blockchain provides a distributed ledger for content creators and curators to monetize their work on the Steemit platform, a blogging and social networking site similar to Reddit. We expect innovative uses for new blockchains like Steem to pop up beyond purely transactional use cases.
Perhaps the greatest breakthrough in blockchain technology since Bitcoin itself was the Ethereum protocol. The technology opens the door to previously elusive mainstream applications of blockchain including smart contracts and IoT. Instead of merely a distributed ledger of simple transactions, Ethereum represents a Turing-complete distributed computing platform or blockchain-as-a-service where resources are distributed across the entire network and monetized via the Ether cryptocurrency. However, on June 17, 2016, less than a year old, the Ethereum platform faced a major crisis as its most high-profile application The DAO (Distributed Autonomous Organization), a smart contract allocating resources and returns to Ethereum startups, was hacked triggering losses of $64 million (post-hack price) or $101 million (pre-hack price). The Ethereum community responded with a hard fork less than a month later, creating Ethereum and Ethereum Classic as separate blockchains.
We anticipate that Ethereum will remain a major platform for blockchain innovation in 2017 and beyond. The inability to code more robust applications was a necessary limitation for Bitcoin and other early blockchains as the public gained acceptance of the basics of the technology. However, mainstream applications of the technology have been slow to take off. Bitcoin’s flaws such as slow transaction times due to the block size controversy are a primary causal factor. Distributed computing systems like Ethereum are the future of Blockchain. Therein lies a bright future for Bitcoin as well. The rise of authoritarianism and potential for capital controls around the globe creates an opening for Bitcoin to serve as a means of conducting international transactions and as a store of value due to its limited supply. This will play out most rapidly in China, India and developing regions like Africa.
Read the full report here.