Fintech

Forget Upstart, buy this magnificent Fintech stock instead

Published

7 months ago

22 June, 2024

Forget Upstart, buy this magnificent Fintech stock instead

People have been building up sizable credit card balances, and falling interest rates could be a huge boon for this personal lender.

Start (UPST -1.10%) uses artificial intelligence (AI) to evaluate 1,600 variables across 58 million repayment events, making loans accessible to more borrowers and (ideally) achieving lower default rates.

The exciting fintech got off to a red-hot start following its December 2020 IPO, but remains a young, emerging company. Its lending model has a lot to prove as people grapple with decades-high interest rates and near-record levels of credit card debt.

While the company’s long-term potential is enormous, another company with a more mature and stable business model represents a better buy for investors today.

Before you buy Upstart, consider this competitor

The last few years have been difficult for personal lenders, and people have to deal with high interest rates as the Federal Reserve tries to put the brakes on inflation.

The high-interest rate environment has made it difficult for personal lenders like Upstart. They have seen weak demand for their products by both borrowers and investors. Borrowers found interest rates too high for loans, while investors held off on adding loans to their balance sheets as interest rates rose rapidly.

LendingClub (LC -1.62%) is one of the companies affected by the difficult context. Despite its challenges, what makes LendingClub an attractive investment over Upstart is its business model and the fact that the company has multiple levers it can use to generate income in different economic environments.

LendingClub began as a peer-to-peer lending platform in 2006 and struggled in its early years as a publicly traded company. In 2016, the company faced scrutiny of its lending practices and overhauled its management team. In 2021, it acquired Radius Bancorp, giving it a bank charter that gave it more flexibility in its balance sheet.

Owning a bank gave LendingClub a low-cost deposit base, allowing it to hold high-quality loans on its books. This allowed the lender to collect interest income on a portion of its loans (it would hold around 15-25%) while selling the rest of its personal loans to investors in the market.

Before acquiring Radius Bancorp, most of LendingClub’s revenue came from marketplace revenue, where it earned fees for originating, managing and selling its loans. This is quite similar to Upstart’s business model today, which relies primarily on the fintech selling its loans on the marketplace to investors.

LendingClub has decided to retain a portion of its loans to help it generate net interest income. Last year, LendingClub brought in $562 million in net interest income, up 18% from 2022 and 163% from 2021. Net interest income was about 65% of total revenue of the company last year, up from 25% just two years earlier.

Growing net interest margin It was a bright spot for LendingClub, whose shares were hammered along with Upstart and other consumer finance fintechs. Since the start of 2022, LendingClub is down 67%, while Upstart is down 85%. However, LendingClub’s revenue and net income have remained relatively stable thanks to growing net interest margin.

LC Revenue (TTM) data of YCharts

How LendingClub is preparing for a “historic” occasion.

It appears that interest rate trends are finally changing, which should bode well for demand for personal loans. The Federal Reserve last raised interest rates in July last year and has held them stable around 5.3% since then. The central bank has taken a patient approach to inflation, which has gradually eased to 3.4% as measured by the year-on-year change in the headline consumer price index (CPI).

Market participants believe the Fed will cut interest rates next. However, the timing of that cut has been called into question. At the start of the year, traders had predicted up to six interest rate cuts. Those expectations have been pared back to two rate cuts this year.

A drop in interest rates appears to be on the way, which could help make personal loans more attractive to customers looking to refinance as credit card debt tops $1.12 trillion. With credit card interest rates near all-time highs, consumers may be rushing to personal lenders to consolidate debts into a single loan and save significantly on interest payments.

During LendingClub’s first-quarter earnings call, CEO Scott Sanborn told investors, “We have prepared our personal lending franchise to meet the historic future refinancing opportunity.”

To do this, Lending Club is developing products that allow members to roll credit card balances into payment plans. In other words, customers can “top up” an existing personal loan, making it easier to manage their debt balance.

Not only that, but LendingClub is making strides in structuring its loans to make them more attractive to large investors, like asset managers. The company has developed its Structured LendingClub Loan Certificates program, a two-tranche private securitization in which it pools loans into a portfolio and then sells a portion to investors.

People participating in a video meeting in front of computers showing graphs.

Image source: Getty Images.

LendingClub holds the least risky senior security and sells investors a residual certificate on a pool of loans. This helps LendingClub collect a more reliable stream of interest income, while allowing asset managers to earn a leveraged return on such personal loans without the need for financing. The company has sold $3 billion in loans since it launched this structured certification program in the second quarter of last year.

Falling interest rates could be a boon for consumer lenders and create a potentially “historic” refinancing opportunity for personal lenders. While this would benefit both Upstart and LendingClub, I think LendingClub (priced at 11.6x its estimated one-year earnings versus Upstart’s 168x) is a better way to capitalize on this opportunity.

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

6 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

6 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

6 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

Source

Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

6 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

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Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”