Franklin Capital Group Has Been Acquired
October 23, 2020
This month, Franklin Capital Group was acquired by Wing Lake Capital Partners with the help of Rocky Mountain Bank. Franklin Capital will change its name and add funding capability- but the entire team will stay on. CEO Shaya Baum was happy to announce the deal, explaining that the firm would use acquisition funds to create more deals and continue to grow.
“It gives us the ability to fund many deals that are outside of our box previously,” Baum said. “We’re going to be launching a couple of sister funds alongside what we currently have and scale the business.”
Franklin Capital was founded in 2012 as an equity fund for companies in financial trouble during, before, or post-bankruptcy. The firm discovered a market for refinancing MCA advances, finding companies that should have never obtained cash advances in the first place. Franklin Capital began offering a product to refinance cash advances through traditional loans.
“We buy out the cash advance deals,” Baum said. “In fact, most if not all of our deals come from brokers in the cash advance industry saying ‘Hey can you get us out of these deals?'”
Baum said that his firm had seen a continually growing demand for capital this year.
“I know the cash advance companies have gotten killed, but we’ve actually had the opposite problem,” Baum said. “We don’t do one-off restaurant [advances.] We’re dealing with companies that are larger, more established: they’ve all pivoted into industries that have grown during this period of time.”
Avant CEO: Colorado Decision Framework for Bank Fintech Partnerships
October 13, 2020
After three years of litigation, in August, the Colorado “true lender” case settled with an agreement between the fintech lenders, bank partners, and the state regulators. Along with lending restrictions above a 36% APR, the fintech lenders will have to maintain a state lending license and comply with other regulatory practices.
The decision has been called unfair regulation and a bad precedent for other similar regulatory disputes across the country.
But James Paris, the CEO of Avant, sees the decision as a victory for fintech lenders. Paris said the decision was an excellent framework for fintech/bank partnerships across the nation and a sign that regulators are finally taking the benefits of alternative finance seriously.
“For us, the case also involved being able to continue to provide these good credit products to deserving customers who maybe weren’t being served as well through some of the legacy providers,” Paris said.
Paris called back to the Madden vs. Midland Funding case in the US Court of Appeals Second Circuit decided in 2015. That case called into question if loans made in fintech bank partnerships in the state of New York were valid at the time of origination. Regulators charged that though national banks can create loans higher than state regulations allow, fintech partners buying those loans to take advantage of higher rates were skirting state regulations.
“The ruling was essentially that the loan would not continue to be valid,” Paris said. “Because the individual state in question, which was New York’s local usury law, would apply because it was no longer a national bank that held that loan after it had been sold.”
The decision called into question loans made in the fintech space. Paris said that the Colorado true lender Case was not about whether the banks were even making loans. Instead, fintech lenders were called the true originators and therefore didn’t have a license that allowed them to make loans at higher rates than the state allowed.
Paris said the decision showed confidence that fintech bank partnerships were not exporting rates, and that by limiting lending to under 36%, regulators were protecting bank fintech partnerships and consumers.
“All of the lending Avant does is under 36%, and that’s been the case for years,” Paris said. “In the space where we do play, from 9% to just under 35%, through our partnership with WebBank, we are confident in running a portfolio extremely focused on regulatory compliance.”
Colorado went from not allowing partnerships at all, to working with fintech companies to developing a set of terms that allowed partnerships to function, Paris said. He added that Avant’s products have always been to customers below nonprime credit, from 550 to 680 Fico scores, serviced by up to 36% APRs.
Paris said he does not know about customers outside of this range, or how they are affected by limiting APR to 36%, but he cited a study done by economist Dr. Michael Turner. Turner is the CEO and founder of the Policy and Economic Research Council (PERC), a non-profit research center.
The study compared lending after the Madden case in New York with how customers can be served after the Colorado true lender case. In the credit market Avant serves, Turner found that customers are better off with access to regulated fintech loans, as opposed to not having access at all.
The study looked at the average borrower credit score, APR, and loan size of Avant and WebBank borrowers, and found that if WebBank loans through Avant were prohibited, borrowers would be forced to access other means of credit, through much higher rates.
“Should WebBank loans be prohibited in Colorado, then we can reasonably expect that some non-trivial portion of the WebBank loan borrower population, as well as prospective future borrowers, will be forced to meet their credit needs with higher cost products,” Turner wrote. “This outcome is financially detrimental for this borrower population, most of whom have no access to more affordable mainstream alternatives.”
Given this data, Paris is happy to comply with the regulation. Without the framework Colorado has provided, Paris said borrowers would be worse off. Paris hopes that this decision will precede other state frameworks because what fintech bank partnerships need the most are consistent regulatory practices.
“I’m hopeful that to the extent there are ongoing concerns around bank models across other states, that this type of safe harbor model that Colorado helped develop is something that others could look to as a precedent or a model. Because I think the more that we can have consistency across the relevant jurisdictions, the better.”
Smarter Loans Expands into Banking, Insurance, Investing, Money Transfers and Debt Relief Solutions
September 22, 2020
Smarter Loans – Canada’s largest loan comparison website – is excited to announce their expansion into new financial categories that include: Everyday Banking, Insurance, Investing, Money Transfers, and Debt Relief.
Canadians nationwide use Smarter Loans to find the most innovative financial products and services in the country, compare their options, and make smarter financial decisions. Launched in 2016, Smarter Loans today works with over 80 of the top financial brands in Canada, including banks, credit unions, alternative lenders, financial services and innovative FinTech companies that are leading the digital transformation in the Canadian financial sector.
The expansion is another step by Smarter Loans in helping Canadians access more financial products online.
We believe that Smarter Loans is at the forefront in the evolution of how people want and expect to shop for financial products. There is a big shift towards buying online and companies that are setup to transact and sell their services on the Internet are winning. We work hard to seek out top financial brands and are really excited that Smarter Loans visitors can now find even financial solutions on our site. (Rafael)
It’s a great experience when a person can send money overseas, get life insurance, and open a savings account all from the comfort of their home or on their mobile device. Our mission is to highlight all of the great and reputable companies that offer Canadians that experience. (Vlad)
Smarter Loans has responded to the growing demand for digital financial products and services in Canada by securing working relationships with leading brands that offer financial services online, including chequing and savings accounts, investing solutions, insurance for personal and commercial coverage, international money transfers, debt relief and credit solutions.
The new categories are available to all new and existing Smarter Loans members, everywhere in Canada.
The new categories will help even more Canadians save time and money, and discover great companies that can help them with various financial needs, entirely online.
If you are a financial brand and are interested in discussing partnership opportunities please get in touch with Smarter Loans at: info@smarter.loans.
Upstart Welcomes Policy Head Nat Hoopes
September 15, 2020
Upstart, an AI lending platform, welcomed longtime industry advocate Nat Hoopes to the team this week, to lead as Head of Government Policy and Regulatory affairs. Hoopes previously served as the Marketplace Lending Association executive director (MLA), where he grew the trade group and advocated on behalf of its members.
“My hope is to bring the energy that I did in growing the organization [MLA] and also just in tackling a lot of different workstreams to Upstart,” Hoopes said. “But also, deepen their ties with the DC policy community.”
Hoopes is excited to join the Upstart team and advocate for the company to state and federal legislators. Hoopes intends to address the development of two main issues as he enters his new office: facilitating better credit reporting with the help of AI, and using better credit to bring financing options to disenfranchised minority communities.
Upstart uses non-traditional data like a college education, job history, and residency to evaluate borrowers for personal loans. The company recently introduced an AI-powered Credit Decision API to deliver instant credit decisions. Upstart added auto loans to the platform in June, so the new API works with personal, student, and auto loans.
Hoopes said he and Upstart shared a similar motivation: to provide credit to people and improve financial futures, especially to people unfairly blocked from receiving credit.
“I think because of the structural inequality that we have in our society, a lot of minority groups get really left behind and stuck in a low credit score environment,” Hoopes said. “By using more data, and using it in new ways with artificial intelligence we can really level the playing field.”
Hoopes said that he has already seen Federal regulators in the FDIC and the OCC, and the CFPB working on using AI learning in credit underwriting. He said the Fed is planning out how to help banks adopt more of these models to approve more people.
“I think that’s a key initiative,” Hoopes said. “A key area where I’ll be working for Upstart: Engaging with regulators on how to help banks get more comfortable in serving more customers,”
While advocating for banks to use the credit capabilities of partners like Upstart, Hoopes said he would be devoted to ensuring decisions are made with equality and inclusion in mind. Hoopes will stay on as a member of the MLA board, and working in concert with his responsibilities advocating at Upstart.
“At MLA, I helped develop the diversity and inclusion strategies for our part of the fintech industry,” Hoopes said. “I’ll remain active on those issues at Upstart both collectively with other members of the industry as a member of the MLA.”
Hoopes referred to the Diversity and Inclusion strategy released by MLA last month. Board members signed off on the paper, written with the help of the National Urban Leauge. League president and CEO Marc Morial and Representative Gregory Meeks (D-NY) to create a vision of an inclusive fintech industry.
Hoopes addressed what he said was the failure of the American credit scoring system. For instance, according to Upstart’s study in 2019, 80% of Americans have never defaulted, yet only half have a prime credit score. It’s a problem he says disproportionately affects minority borrowers.
According to a Federal Reserve study, more than three times as many Black consumers (53%) and nearly two times as many Hispanic consumers (30%) as White consumers (16%) are in the lowest percentiles of credit scores.
Hoopes said Upstart does not collect racial data from applicants but cites a CFPB test that found Upstart’s platform increased access to credit across race and ethnicity by 23-29% while decreasing annual interest rates by 15%-17%.
What Stimulus is Next for SMBs?
September 4, 2020
Next week, lawmakers will finally be back from vacation, arguing over the next stimulus package. There are various proposals, and the two competing Republican and Democrat offerings are nearly a trillion dollars apart.
It’s the Senate GOP HEALs act vs. the House Democrats HEROs act. But in between, what may be getting the most support? Standalone bipartisan bills that focus on extending and forgiving PPP loans.
Ryan Metcalf, head of the office of Government affairs and Social Impact for Funding Circle, has been following conversations on The Hill closely.
“Up until Monday, Pelosi said they weren’t even going to even put a bill forward for a new stimulus,” Metcalf said. “But then yesterday [Tuesday] Secretary Mnuchin said he was open to doing a standalone PPP loan. It’s the one that has the most bipartisan support; they can’t meet anywhere else than PPP.”
Funding Circle is one of the world’s largest online lenders, with about $10 billion in global loans to date. Metcalf said Funding Circle mostly offers US loans in the $25,000 to $500,000 range, and as a funder for PPP, offered more loans in just eight days in August than half of their total business in July. His company had to cut off funding requests, locking out some customers that needed help, simply because the deadline had ended.
“When PPP ended on August 8th, the narrative was that PPP had died out, and there was no interest in it, but that is a complete fallacy,” Metcalf said. “We were processing loans for the smallest of small businesses- 10-15 employees- well under $50,000 loans, the people still needed help.”
Steve Denis, Executive Director of the Small Business Finance Associaton (SBFA), has also been engaged in the process. He has been petitioning members of Congress on behalf of what he calls truly small business, those under 10 employees or nonemployers that still need help.
“‘Real’ small businesses: ones with under ten employees that are really grinding, like small hair salons, retail stores, and mechanics don’t really have traditional banking relationships,” Denis said.
SBA data from July found that most of the loans made (66.8%) were in the $50k range and to very small businesses, but the largest amount of capital went towards firms that applied for a $350k-$1M sized loan.
Denis said that the higher dollar amount PPP loans were more profitable for banks to make, so disproportionate funding went toward bigger businesses with pre-established finance connections. This disparity is backed up by research. Studies, like one from the National Bureau of Economic Research (NBER), found that firms with stronger connections to banks were more likely to be approved for PPP funds.
“The way fees are structured: there’s an incentive for big banks to prioritize bigger deals at [commission] rates like 3% or 5%,” Denis Said. “They’d rather make that on a $500,000 deal than on a $40,000 deal.”
Denis said the SBFA was lobbying for Congress to create a prioritized amount of money authorized only for smaller loans, under $100,000-$150,000, to focus on those really small businesses with less than five employees.
Like Metcalf, Denis sees the most likely outcome is an extension of PPP- at least until the end of the federal fiscal year budget in September. If the Fed cannot agree on a budget, the government will go into shutdown- and this year would be the worst time to shut down.
“The only thing that motivates Congress to move big legislation like this are deadlines; there’s a big deadline coming up,” Denis said. “At the end of September, the fiscal year runs out and there needs to be a budget agreement.”
Metcalf said that the next round of PPP programs need to make sure businesses can get their first loan if they haven’t already, and streamline the loan forgiveness process to keep the SBA from getting overwhelmed.
“We need a forgiveness bill that streamlines the process; lenders will not have the resources to process forgiveness, a first PPP and second PPP as it is,” Metcalf said. “In my call with the SBA two weeks ago, they said for processing new 7(a) lender applications and all the other business they do to resume their normal business we’re looking at six months.”
The PPP proposal that Metcalf likes the best is called the Paycheck Protection Small Business Forgiveness Act, which stipulates a one-page forgiveness form for all loans made under $150,000. Metcalf said he saw support from a bipartisan group of over 90 members of Congress.
Another opportunity is the Economic Injury Disaster Loan (EIDL) program- offering long term loans to businesses with less than 500 employees that need financial help. Both Denis and Metcalf encouraged business owners to check out the program, which offers loans directly from the government without the need to prove forgiveness.
In the end, Denis said he was interested in the Republican “Skinny Bill” that is a cheaper breakdown of the GOP HEALS Act, but he said it is all up in the air.
“This is just me guessing,” Denis said. “I have talked to these people every day, but even members of Congress on Capitol Hill have no clue what’s going to happen.”
Section 1071 is Back and The CFPB Wants to Know How Much It Will Cost You to Comply
August 25, 2020
At some point in this century, small business finance companies will be expected to comply with Section 1071 of the Wall Street Reform and Consumer Protection Act that was passed in 2010.
In the wake of the ’08-’09 financial crisis (remember that?!), lawmakers passed the above act that has become colloquially known as Dodd-Frank. Section 1071 gave the Consumer Financial Protection Bureau the authority and the mandate to collect data from small business lenders (and similar companies).
The costs, risks, and challenges with rolling out this law have been discussed on AltFinanceDaily for 5 years, yet little progress has been made to finally implement it. But it’s starting to move along and the CFPB would now like to know how expensive it will be for businesses to comply.
If you are engaged in small business finance, you should seriously consider submitting a response to their survey. The CFPB is specifically cataloging responses from merchant cash advance companies, fintech lenders, and equipment financiers.
Checkout in the time of COVID
August 10, 2020
Point-of-sale (POS) lenders, also referred to as buy-now-pay-later (BNPL) firms, allow shoppers to break up their individual purchases into installments, often without interest. By adding BNPL as an option at checkout or further upstream in the purchase process, the consumer’s buying power is increased and they are often less likely to abandon their checkout cart. It is a win / win for all stakeholders.
For these reasons, POS lending is one of the fastest growing segments in unsecured credit, with volume increasing at 40 percent year-over-year. COVID has further accelerated the demand for credit options at checkout.
According to McKinsey, annual growth is expected to jump to 150 percent thanks to an explosion in online shopping and government subsidy programs boosting retail sales. In Canada, firms such as Uplift, Paays, and PayBright are all seeing merchant demand skyrocket for their services, with the latter onboarding over 250 merchants per month.
K-Ching!
POS lenders are able to subsidize APRs by charging the merchant a fee of 4-6 percent of the purchase price. This is on average 2 percent more than the fees charged by credit cards companies. Despite the larger fee, BNPL is very attractive for retailers for a number of reasons. By providing point of sale financing retailers see:
- 30% increase in basket size
- 25% reduction in cart abandonment
- 20% increase in repeat traffic
With installment payments as an alternative, credit cards have seen a decrease in popularity among young shoppers, particularly on smaller ticket items under $500. There are a number of reasons why:
1. Clunky signup experience. Signing up for a credit card at checkout requires lots of paper, personal information, signatures and significant patience – antithetical to the one-tap checkout shoppers are accustomed to. Alternatively, BNPL approval is instant at checkout. 75% of merchants even advertise POS financing far before the register, at the beginning of the customer journey which can increase conversion by two to three times.
2. Challenge to qualify. 19 percent of consumers ages 22 to 30 lacked the credit history to be approved for credit cards in the first place. Many BNPL products do not perform credit checks, and those that do use alternative data sources to underwrite thin-file borrowers.
3. High APRs. With their parent’s household debt in their rear view mirror, many younger shoppers have an aversion to carrying revolving credit balances. Millennials on average carry two fewer cards than their parents. Psychologically, $1000 on your credit card looks scarier than four installments of $250 over time.
4. Customer confusion. Inactivity fees, late fees, over-the-limit fees, cash advance fees, are all poorly understood and masked within dense monthly statements. BNPL offers an elegant digital first experience and straightforward reporting.
The Supporting Cast
Today POS lenders are competing in a land grab for merchant partnership. But for FIs and fintechs who have yet to plant their flags, there are still ways of participating in the BNPL boom.
- Banks. Banks have largely participated indirectly in the BNPL sector, by providing portfolio financing to fintechs or by offering installment options for larger ticket items within their existing credit card programs. Wayne Pommen, CEO of PayBright, sees more bank and fintech collaboration in the next few years: “I predict more buying and partnering, Banks are too far behind to build this themselves.” Marcus Pay, the recently launched retail banking arm of Goldman Sachs is the only group to directly compete in the POS financing ring, with JetBlue as their launch partner.
- Platforms. E-commerce enablers that power millions of independent merchants are piling in to embed POS financing within their platforms. Marketplaces Ebay and Etsy have partnered with Afterpay and Klarna, while the digital infrastructure whale Shopify has an agreement with Affirm.
- Cards. Traditional credit card companies who have the most to lose from BNPL are getting ahead of the trend in several ways. Visa took a controlling stake in Klarna in 2007. More recently they launched Visa Installments, a developer tool for issuers in the Visa network to pilot branded installment products. Though Visa Installments stretches the definition of BNPL, David Fry, CEO of travel financing startup Paays does not mind the ambiguity. “I am not religious about the distinction between cards and installments. What we care about is what the customer is looking for, and what they have to pay to get access to that product”.
POS Lending has the potential to transform consumer lending as it’s evolution is inextricably tied to the growth of e-commerce. It is all about understanding the needs of the shopper and their digital journey. POS lenders are making it increasingly easy for merchants to streamline the buyer path to purchase.
The SEC Already Suffered a Major Defeat in the Par Funding Battle – But Who is the Real Loser?
August 8, 2020
While the news media, regulatory agencies, and law enforcement are high-fiving each other over the course of events in the Par Funding saga (a lawsuit, a receivership, an asset freeze, and an arrest), there lies a major problem: The SEC already suffered a major defeat.
On July 28th, rumors of a vague legal “victory” for Par Funding circulated on the DailyFunder forum. The context of this win was unknowable because the case at issue was still under seal and nobody was supposed to be aware of it.
Cue Bloomberg News…
In December 2018, Bloomberg Businessweek published a scandalous story about a Philadelphia-based company named Par Funding. And then not a whole lot happened… that is until Bloomberg Law and Courthousenews.com published a lengthy SEC lawsuit less than two years later that alleged Par along with several entities and individuals had engaged in the unlawful sale of unregistered securities.
At the courthouse in South Florida, those documents were sealed. The public was not supposed to know about them and AltFinanceDaily could not authenticate the contents of the purported lawsuit through those means. According to The Philadelphia Inquirer, the mixup happened when a court clerk briefly unsealed it “by mistake” thus alerting a suspiciously narrow set of news media to the contents. AltFinanceDaily was the first to publicly point this out.
In court papers, some of the defendants said that they learned of the lawsuit that had been filed under seal on July 24th from “news reports.” Bloomberg Law published a summary of the lawsuit on its website in the afternoon of July 27th.
“It is fortuitous that the Complaint was initially published before it was sealed,” an attorney representing several of the defendants wrote in its court papers. “Otherwise, [The SEC] would have likely accomplished its stealth imposition of so-called temporary’ relief, that would have led to the unnecessary destruction of a legitimate business.”
The day after this, on July 28th, a team of FBI agents raided Par Funding’s Philadelphia offices as well as the home of at least one individual. Rumors about the office raid landed on the DailyFunder forum just hours later, along with links to the inadvertently public SEC lawsuit now circulating on the web.
The New York Post caught wind of the story and published a photo of an arrest that had taken place fifteen years ago, creating confusion about what, if anything, was happening. Nobody, was in fact, arrested.
The SEC lawsuit was finally unsealed on July 31st, along with the revelation that Par Funding and other entities had been placed in a limited receivership pursuant to a Court order issued just days earlier. The receivership order was a massive blow to the SEC. It failed to obtain the most important element of its objective, that is to have the court-ordered right to “to manage, control, operate and maintain the Receivership Estates.” The SEC specifically requested this in its motion papers but was denied this demand and others by the judge who leaned in favor of granting the Receiver document and asset preservation powers rather than complete control of the companies.
The language of the Court order was interpreted differently by the Receiver, who immediately fired all of the company’s employees, locked them out of the office, and then suspended all of the company’s operations which even prevented the inbound flow of cash to the company (of which in the matter of days amounted to nearly $7 million). The SEC did successfully secure an asset freeze order.
In court papers, Par Funding’s attorneys wrote that: “The Receiver’s and SEC’s actions are ruining a business with excellent fundamentals and a strong financial base and essentially putting it into an ineffective liquidation causing huge financial losses. In taking this course of action against a fully operational business, the key fact that has been lost by the SEC, is that their actions are going to unilaterally lead to massive investor defaults.”
The Receiver, in turn, tried to fire Par Funding’s attorneys from representing Par. Par’s attorneys say that the Receiver has communicated to them that it is his view “that he controls all the companies.”
“The SEC is simply trying to drive counsel out of this case, as an adjunct to all the other draconian relief that they insist must be employed to ‘protect the investors,'” Par’s attorneys told the Court. “Due Process is of no regard to the SEC.”
As lawyers on all sides in this mess assert what is best for “investors,” seemingly lost is the collateral damage that is likely to be thrust on Par’s customers. The Philadelphia Inquirer has repeated the SEC’s contention that Par made loans with up to 400% interest. Bloomberg News has called Par a “lending company” whose alleged top executive is a “cash-advance tycoon.”
A review of some of Par’s contracts, however, indicate that they often entered into “recourse factoring” arrangements. “This is a factoring agreement with Recourse,” is a statement that is displayed prominently on the first page of the sample of contracts obtained by AltFinanceDaily.
Parallels between the business practices of Par Funding and a former competitor, 1 Global Capital, have been raised at several junctures in the SEC litigation thus far. But some sources told AltFinanceDaily that in recent times, Par has been offering a unique product, one that is likely to create disastrous ripple effects for hundreds or perhaps thousands of small businesses as a result of the Receiver’s actions (even if well-intentioned).
The “Reverse”
Par offered what’s known as a “Reverse Consolidation,” industry insiders told AltFinanceDaily. In these instances Par would provide small businesses with weekly injections of capital that were just enough to cover the weekly payments that these small businesses owed to other creditors.
One might understand a consolidation as a circumstance in which a creditor pays off all the outstanding debts of a borrower so that the borrower can focus on a relationship with a single lender. In a “reverse” consolidation, the consolidating lender makes the daily, weekly, or monthly payments to the borrower’s other creditors as they become due rather than all at once. Once the other creditors have been satisfied, the borrower’s only remaining debt (theoretically) is to the consolidating lender.
Par does not appear to have offered loans but sources told AltFinanceDaily that Par would provide regular weekly capital injections to businesses that could not afford its financial obligations otherwise. Par, in essence, would keep those businesses afloat by making their payments.
That all begs the question, what is going to happen to the numerous businesses when Par breaches its end of the contract by failing to provide the weekly injections?
As the Receiver makes controversial attempts to assert the control it wished it had gotten (but didn’t), the press dazzled the public on Friday with the announcement that an executive at Par Funding had been arrested on something entirely unrelated, an illegal gun possession charge. The FBI discovered the weapons while executing a search warrant on July 28th but waited until August 7th to make the arrest.
It remains to be seen what the 1,200 investors will recover in this case or what will become of the Receiver in the battle for control, but sources tell AltFinanceDaily that the authorities are all fighting over the wrong thing.
They should all be asking “what’s going to happen to the small businesses when their weekly capital injection doesn’t come in the middle of a pandemic?”
