Mayor Rahm Emanuel Declares War on Merchant Cash Advance
January 16, 2015
FOX 32 in Chicago is reporting that Mayor Rahm Emanuel is going on the offensive against merchant cash advance companies. Specifically it says,
Mayor Rahm Emanuel will call on state and federal agencies to regulate business to business lenders. Emanuel said cash advance companies have accelerated their marketing efforts in recent months, resulting in small businesses taking loans they cannot afford.
The article states that business owners have turned to the City of Chicago for help in paying back loans with high rates of interest.
While the mention of APRs reaching into the ranges of triple digits is supposed to shock you, one business lender that charges such rates recently went public and had been backed by Google Ventures, Fortress Investment Group, Goldman Sachs, and Peter Thiel.
Less than 30 days ago we were celebrating these companies as the solution to a problem that has plagued small businesses for all time, access to capital.
While Emanuel is obviously famous for being the 23rd White House Chief of Staff and Obama’s right hand man for a period in his first term, he is not the first mayor to consider the role merchant cash advance companies and high interest business lenders have in cities across America.
All the way back in 2008, the U.S. Conference of Mayors (USCM) adopted a resolution titled, Protecting Main Street Small Business Owners from Predatory Lenders, from which some of the excerpts below are from:
WHEREAS, merchant cash advance companies have already lent approximately $2 billion at egregious rates and have been quoted in leading main stream media publications such as Forbes, Business Week, Dallas Morning News, and American Banker claiming that their new originations have increased 75% in the first half of 2008
WHEREAS, as with payday lenders and predatory lenders in the home mortgage community, Mayors need to take a leadership role to scrutinize predatory merchant cash advance companies, educate small business owners of the dangers posed by these firms, and increase awareness and promotion of alternative, more affordable funding sources to support this vital segment of our economy
BE IT FURTHER RESOLVED, that to protect the general health and viability of their small business communities, cities should investigate whether they can effectively regulate or ban merchant cash advances.
3 months after this resolution was passed, Lehman Brother’s collapsed and the economic crisis was in full swing.
According to a few industry leaders familiar with the 2008 mayoral resolution, UCSM privately retreated from their stance when all other types of commercial lending had dried up. Their seeming reversal, though not publicly stated invited merchant cash advance companies into their communities at the moment when Main Street was arguably at its weakest.
Who do they think rolled up their sleeves and kept local economies alive when things were at their worst?
While non-bank funding can obviously be expensive, countless business owners have praised merchant cash advances in particular as a solution that came through when none other were available.
Emanuel will learn that companies such as Square and PayPal are part of the crowd that provides merchant cash advances. This is not a shadow industry. Non-bank business-to-business financing is already becoming less expensive nationwide.
According to Fox, the Commissioner of the Chicago Department of Business Affairs and Consumer Protection said the goal is to offer small business owners loans at affordable rates with full disclosure.
Merchant cash advance companies would undoubtedly feel the same way. The dilemma is that advocates of affordable rates tend to really mean single digit rates. When single digit rates are not possible given the risk, they seem to argue that no financing should be given at all, leaving the business to fail or miss out on an opportunity. That’s the exact type of flawed thinking alternative financing companies address…
Ironically, a report from the Federal Reserve Bank of Cleveland last week concludes that small business job creation is lagging with a possible culprit being a lack of access to credit.
Coming out of the most recent recession, however, job creation by small businesses has lagged, and the new business formation rate continues to fall. While it is not clear that these trends are driven by weaker borrowing or limited access to loans, it is evident that businesses need adequate credit to succeed and grow. As such, policy makers should not lose sight of the trends related to small business credit, even with the recent positive reports showing improvements.
And of course in a supposed exposé on merchant cash advances that aired on Chicago Public Radio in November, clips of an interview I did with them were aired to fit the narrative of merchant cash advance as predatory. When asked by the interviewer what a small business owner should do if they didn’t understand a contract, I advised that they hire an attorney or an accountant, and if they couldn’t afford those then to find somebody they felt qualified to offer an opinion. “They should always get a 2nd set of eyes to review a contract if they don’t understand,” I said.
My advice did not air, nor did my explanation that there were two separate types of products that they were confusing as one, one being loans and the other being purchases of future receivables. I suppose it didn’t fit the characterization they were going for.
As quoted in Fox, Financial Advisor Kent Travis advised business owners to “read the documents, don’t sign anything on the spot, make sure you read it thoroughly and if you have trouble understanding it seek the advice of an advisor, CPA, an attorney or a financial planner.”
I couldn’t have said it better myself because I already did.
And in an interview I had with former Congressman Barney Frank, a chief architect of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Frank voiced his opposition to regulations on business-to-business lending in early 2014.
There’s one thing the Fox story does mention that’s hard to argue with and that’s the need for greater transparency. I am all in favor of that.
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For those that haven’t already signed up, this is a reminder that the Law Office of Pepper Hamilton LP is hosting a lunch at their office in New York on January 27th to specifically discuss the merchant cash advance industry’s future.
Interested in discussing legal issues, best practices, and the path forward for alternative business financing? Are you an ISO or funder interested in sharing your thoughts? Send me an email to let me you know if you’d like to attend. sean@debanked.com.
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Watch the Fox news report about merchant cash advances:
Merchant Cash Advance Accounting – A How To Guide
January 13, 2015This is the introduction and first question in an interview between AltFinanceDaily’s Sean Murray and accountants Yoel Wagschal, CPA and Christina Joy Tharp.
- 2. Do I Need a Special MCA Accountant?
- 3. and 4. Recording Merchant Cash Advance Transactions on the Books
- 5. Merchant Cash Advance Accounting Pitfalls
- 6. Revenue recognition for Merchant Cash Advance
- 7. Q&A – Real questions that MCA companies or syndicators have
Funding small businesses is the easy part of merchant cash advance. Anyone can fund. It’s what comes after that’s tricky and I don’t just mean capturing those receivables you’ve purchased, but also recording everything in such a way that you’re not scrambling around tax time.
I have a B.S. in Accounting but I asked the experts Yoel Wagschal, CPA and Christina Tharp his staff accountant for their insight on managing the books for a merchant cash advance company. We’re still a ways off from April 15th so now is your opportunity to fix whatever you might not have done in 2014 and start off on the right foot for this year. Thanks again to Yoel and Christina for answering these questions.
Q: As a funder, what systems should I have in place to make sure I can:
a. Prepare business tax filing
b. Be ready for an audit to raise capital
c. Know whether or not I am making money
A: First of all you have to understand that every type of business has this exact same question. The answer is that you need to have proper accounting entries and records which will then aid you in creating the financial statements (ie: balance sheet, income statement, statement of retained earnings, and statement of cash flows).
Whether it is a tax filing, a bank audit, or an internal inquiry, the solution is identical because all of those situations require the same financial material in order to answer them. In order to prepare a business tax filing a company must provide its profits and losses. That is the same information provided in an audit to raise capital and it is the same information a business owner needs to see how much money they are making (or losing!).
The exact system is obviously custom fit to your individual business model but it should follow these very basic steps:
i) Think the entire process through from cradle to grave
ii) Be sure to codify where funds are coming in from:
a. Investments from syndicators
b. Payments from merchants
c. Commissions
iii) Be sure to codify where funds are being sent to:
a. Funds to merchants
b. Funds to syndicators
c. Commissions
iv) Be sure there is a system of checks and balances which will alert you to the following common errors:
a. Funds not received from/sent to syndicator
b. Funds not received from/sent to merchant
c. Commissions not received
v) The bank account is the authority while the system is only a representation:
a. Your system balance should reconcile with your bank account
b. It is advisable to have a separate bank account for funding transactions
You will also want to pull up trial balances and earnings reports, which must be input correctly from the very beginning in order for these reports to be accurate and effectual.
What makes this industry different is that an accounting system can make or break an MCA company. For example, a supermarket usually has good POS software for inventory control. If an employee drops a “box of tomatoes” it’s not the end of the world. The loss is either immaterial or if it is material the accounting system will pick up the big monetary discrepancy.
In the MCA industry a “box of tomatoes” could be anything from a $0.05 loss to a $500,000 loss. Because the MCA industry deals with money as its product and is often processing transactions at breakneck speed, there needs to be safeguards in the system to catch any and all mistakes in real time.
Our accounting firm has seen where people built attractive systems which seemed good to the funder. However, if the funder lacks accounting knowledge when this “box of tomatoes” falls out they may not be able to place exactly where the loss occurred. Or even worse, they may not realize a loss has taken place until it is too late. For example, if you wait until the end of the tax year and then discover that merchant payments have been missed how do you recoup those funds? It’s the same situation if incorrect amounts are funded to merchants, if incorrect commissions are paid out, or if syndicators have not invested the funds they were expected to.
Phone (845) 875-6030
Fax (845) 678-3574
Email: cjt@ywcpa.com
http://ywcpa.com
Please consult with an accountant to assess your particular situation and needs.
Through OnDeck Capital, An Industry Wins
December 16, 2014
Call it merchant cash advance, non-bank business lending, or financial disintermediation. Whatever floats your boat. On December 17th an entire financial methodology will be validated, the daily repayment method. Daily payments don’t exist anywhere else in lending but ’round these parts it’s the standard. It’s what makes unbankable businesses bankable.
OnDeck is a lender. They target small businesses. The costs are high. Anyone could feasibly do those things and plenty are doing them, but only a certain segment of fintech companies utilize daily payments and most of those are merchant cash advance companies. OnDeck is a lender but like it or not their core repayment mechanism overlaps with an industry well known for being even more expensive.
Daily payments are so unique and so revolutionary that it hasn’t sunk in to the masses yet. Even the press glosses over this fine detail to instead dwell on things like APRs and social media’s role in approvals. Daily payment and daily repayment look like tech jargon, some kind of code for a backend computer process to hotwire an anomalous rate algorithm.
Daily payments mean borrowers have to make payments every single business day. It’s daily, get it? If the sun rises and it’s not Saturday or Sunday, it’s time to make a payment. I’m not saying there’s something wrong with this. I’m a proponent of this mechanism. It works for business owners that struggle to make a single lump sum payment each month and it works for lenders who need to mitigate and monitor their risk as much as possible.
I feel it’s better to know there was a problem that started yesterday than to learn there was a problem that started 29 days ago. That’s how OnDeck thinks too. And business owners can incorporate the daily deduction into their normal business operations instead of fretting to cover the balance for a big debit the day before a monthly payment is due.
This isn’t just a theoretical design that can’t function in practice. It’s been working for lenders and factors since AdvanceMe (Now CAN Capital) started doing it in 1998. The daily payment methodology has survived the Dot Com Bust and the Great Recession. It’s grown to a $3 – $5 billion a year industry. By some measures, it’s taken a hell of a long time to go this mainstream.
But it’s here. The press will call OnDeck a lender, a tech company, or a combination of both. They’re a sign of the times but they are unique in that they will show the world that daily payments have a place in the modern economy. With OnDeck leading the way, traditional lenders may consider leveraging their methodology to serve categories of risk they usually shy away from.
I’ve never heard of a business credit card that required payments to be made every day. Some might think that defeats the purpose of credit. OnDeck proves it doesn’t. And 100+ merchant cash advance companies serve as a secondary validation. Perhaps there are lenders that have considered a daily payment system previously and feared the political or legal environment was too risky. But OnDeck is making no apology about what they’re doing or how they’re doing it. They’re putting themselves on the open market, surrendering themselves to total scrutiny.
CAN Capital is gearing up to follow them, the pioneers who first experimented with daily payments 16 years ago. And while OnDeck bemoans their loan program being compared to merchant cash advance, CAN is made up of two departments, one of which is undoubtedly a merchant cash advance service provider.
And there you have it. It’s not all about algorithms or tech or using facebook activity to judge a borrower. Those are old ideas now. OnDeck smashes down the door with something completely different, something that nobody is even talking about, daily payments.
December 17th is Wednesday and just about all of OnDeck’s borrowers will be making a payment. A good many of them won’t even notice. That’s the great part about layering it in as a daily cash flow expense. There’s no worrying about it at the end of the month. If they underwrite the borrower financials well enough, it should be completely painless. That’s not always the case, but it’s the goal.
You can’t possibly understand OnDeck until you understand daily payments. With this IPO, an entire industry wins.
Merchant Cash Advance Underwriting For Humans
December 11, 2014
There is no doubt that the merchant cash advance industry has undergone significant expansionary changes within the past decade. The first-mover advantage is past its prime in this industry and no longer proves to be as profitable as it once was for some of the earlier entrants to the market.
Although the alternative lending industry still has not garnered enough attention for change and reform from policymakers, it has attracted attention from Wall Street and wealthy Main Street investors alike. As today’s merchant cash advance providers continue to grow their capital bases, these larger players have the option and arguably an incentive to explore new products that will help them capture a larger market share of small businesses financing needs and ultimately will help them improve their bottom line.
Several of the more established companies have continued to grow either organically through strategic leadership and good timing, while others have been able to grow and cover new markets through mergers and acquisitions. Of all changes that have been affecting this space, one of the more interesting ones is the introduction of proprietary software used by some of these companies that will allow them to pre-qualify a merchant based on an online application, rate their credit risk, briefly scan submitted bank statements, merchant account statements and financial statements.
Several companies in this industry have invested extensively into making this process a reality, believing it will help them excel against their competitors by creating an economies of scope situation.
Not so fast though…
While automation can help make a company more efficient by converting applications into funded accounts, it can also create a gap in a company’s risk management policies if the company does not have steps in the process to reduce two important risks in any financial services business:
a) Information Asymmetry
b) fraud detection.
For those companies that still use human underwriters, I have compiled some pointers on my experiences relating to things I pay tremendous attention to when underwriting new accounts that help me spot fraudulent documents.
The starting point in the fraud detection process begins with the application and a thorough review of the information provided. Google everything. Make sure the business is not reported as being closed, that the merchant is not going through extensive litigation that could result in jail time or in the business being sold off to another individual. Information on the internet is bountiful, and most of it is completely free. Unlike traditional financial services companies, he who pays the piper calls the tune does not apply in the alternative finance industry. Merchants are almost completely unbound with how to spend their advance, and sometimes engage in reckless borrowing to achieve their means, oftentimes altering documents in the process.
Credit Reports
In my experience with underwriting, many of the fraudulent accounts that I view have owners with either bad credit, limited credit history or no credit history. Furthermore, pay close attention to any fraud alerts on the 1st page of the report, and especially the date of the alert if it is fairly recent. Lastly, pay close attention to the number of recent inquiries on the credit inquiries. Today’s small businesses receive dozens of inquiries from cash advance companies and ISOs. While the inquiries themselves do not outright indicate any fraud and may even be encouraged by ISOs looking to get their merchant the best deal, the combination of a fraud alert and say 20 inquiries from competitive cash advance companies could signify that the other competitors found something that may not add up on the file and will warrant a close eye on the other submitted documents.
Bank Statements
Through community websites, fraudulent bank statements, merchant account statements, or any other type of statement are made easily accessible to purchase. The number of submitted fraudulent bank statements that I have seen within the past year has dramatically increased. Some statements can take as little as 5 seconds to determine if they are fraudulent and there are others that are so clever that they can take close to an hour of close scrutiny to find.
I personally use Adobe Acrobat to read and navigate through bank statements. Some of these statements are doctored so well that you may have to zoom in upwards of 300% to find a comma that should actually be a period to separate dollars from cents to put as a simple example. Be sure to quickly glance over all the statements, checking to see that you have a complete page sequence and the page count is correct.
One of the more common amateur mistakes is to use a prior year’s bank statement and simply change the year to read current year. Fortunately for underwriters, that process is not as simple as it seems on the surface. Not only do they have to make changes on the header of every page, but many times banks and credit unions make announcements throughout the statement for the current year. Other statements include full dates (month, day, year) on some line items usually in the withdrawals section but sometimes in deposits, subtotals and totals. This is more work for merchants to alter, and leaves them more prone to forgetting to change one of the dates.
Just one inconsistency that happens to somehow conveniently flow with the rest of the statement can be the only evidence that you need. Some of the other common amateur mistakes include poor spelling throughout the statement, whiting out of numerical figures, inconsistent margin changes, font changes, and repetitive use of the same check numbers paid month after month (excluding those with default 0’s or 1’s issued by bank tellers directly).
Some of the more well hidden fraud can usually be found by comparing the summary page and last page of the bank statement to other statements. Typically, most banks and some credit unions offer you a snapshot of the starting balance, which should generally match up with the ending balance of the previous month. If it doesn’t, you should look for any transactions from the previous month that did not settle until the current month. If there is none, this is usually a red flag indicating that the merchant forgot that statements are continual time series financial data whose totals carry on to the following month.
Also, be sure to check that the summary data at the beginning of each statement matches the counts for deposits, withdrawals, and checks written each month. I’m also particularly skeptical when I see unusual consistency in the number and value of summary data with very little bank activity. Such an example would be a bank statement that consistently shows only 3-4 deposits each for over $100,000 and miniscule withdrawals such as a few small checks or a handful of fast food POS debits comprising all withdrawals for example. The business could be legitimate and the merchant simply submitted the wrong bank statement, which does not allow you to see the better cash flow picture from first glance, or the merchant could have simply taken the easy way out in creating a basic bank statement. Again, it is helpful to reference the type of business that you are underwriting in order to see if these transactions make sense. I am much more willing to acknowledge and accept this type of statement from a construction company per se than a brick-and-mortar retail shop.
Final Tips
Don’t let analysis paralysis stop you from sticking to your conviction on an account. Underwriting is not directly focused on generating revenue for a firm, but rather minimizing bad debt expenses at the end of the day. If you feel like something is off on the statements that you are looking at but you just cannot find what is wrong, step away from your computer for a few minutes and focus on something else. When you return to your computer, you’ll better be able to scrutinize the statements and more likely to catch something miniscule that you may have missed from closely going over the statements again and again.
You can also ask fellow colleagues to look at the statements. Try experimenting and let at least one know that you have suspicions on a particular account and if they could take a close look at the statements; it also helps if you have someone else simultaneously looking at the same account but do not tell them about your suspicions on the account. If they also have a strange feeling about the statements, chances are that there is something off that warrants even closer examination. Lastly, when in doubt try to confirm the statements with the source of the statement. It may be beneficial to request that your merchants provide you with a bank representative’s contact information so that you can verify the legitimacy with the bank yourself.
Another source of action would be to have a merchant provide your company with a view only access of the account. This would also allow you to directly confirm the legitimacy of the statements eliminating any left over suspicions. The only downsides to these last two approaches is that they make take some time to complete, oftentimes a merchant is not willing to wait a few more days and will willingly go to a competitor who can promise to have them funded within 24 hours. In these cases, your last line of defense comes down to the merchant interview part of the process.
My Journey to Bitcoin
November 30, 2014
Count me amongst the libertarians, anarchists, and digital lunatics. I made an online purchase using bitcoin… and it was insanely easy.
The first person I shared my experience with was a friend who works in automotive manufacturing, someone who operates outside the world of alternative finance. He thought I was crazy or rather he was more confused than anything. “Wait, bitcoin?” he asked. “I thought that was a scam that went out of business two years ago.”
Stunned by his remarks and disappointed with his lack of excitement for me, I told a few more friends about what I had accomplished. They had all heard the term, but none of them knew what it was. Oddly, most seemed to believe that bitcoin had already been revealed as a con and was something from years past, a scheme that came, got hacked and failed.
Not so long ago I was in their shoes. I received my first education in bitcoin this past fall, September 22, 2014 to be exact at the 3rd Annual Tomorrow’s Transactions NYC Unconference hosted in Google’s New York headquarters.
It’s a con?
Famous money laundering expert and author Jeffrey Robinson gave a blistering assessment of bitcoin the currency, which he described as a hoax perpetuated by “libertarian anarchists.” His contentious indictment was half warning, half sales pitch for his latest book, BitCon, which I bought the day it was released.
Robinson argued that bitcoin adoption, while minuscule, was still greatly exaggerated.
There are fewer card-carrying members of #BitcoinCanada than #Starbucks in #Calgary. BitCon: http://t.co/lQecBgwRdp
— Jeffrey Robinson (@WritingFactory) November 2, 2014
He explores several challenges in his book, one of which can be summed up as:
Why would someone exchange dollars into bitcoin only to have to convert their bitcoin back into dollars?
It’s a great question, but it’s something I’ve done every time I’ve traveled abroad. Dollars to euros and then euros back to dollars. Dollars to pounds, dollars to canadian dollars, etc. But why do an exchange at all when the counterparty prices their goods or services in dollars?
Spend $ to buy #bitcoin to pay for #Blackfriday stuff priced in $. Where's the logic? #BitCon— Jeffrey Robinson (@WritingFactory) November 29, 2014 http://t.co/U26d35G0u9
Benefits
Assuming bitcoin’s value against the dollar wasn’t volatile, I can think of three immediate reasons:
1. I don’t have to enter in my credit card number on a website and risk it being hacked or stolen.
2. I can make a payment online if I don’t have a credit card or debit card.
3. I can spare the merchant the payment processing fees.
Let’s forget about point one for now because it’s easy to overlook the pervasiveness of point two. According to the FDIC’s latest National Survey of Unbanked and Underbanked, 25 million people in the country do not have access to a bank or banking products at all. Poverty is a main driver of that but curiously 34.2% of respondents in that group cited that they don’t like dealing with banks or don’t trust them as a reason. 30.8% said that account fees were too high or too unpredictable.
And that’s just the unbanked. 1 out every 5 households in the country is underbanked. They have a bank account but have also obtained financial services and products from non-bank alternative financial services providers in the prior 12 months.
To those of us that rely on banks for everything this may seem extreme, perhaps even downright unbelievable. Coincidentally, Robinson wasn’t the only notable figure at the New York Unconference. He was joined by Lisa Servon who later spoke about her hands-on experience with the unbanked and underbanked. A professor of urban policy at the New School in New York, Servon got a job as a check casher/payday lender in a storefront on a busy corner in downtown Berkeley, California to learn about these households on the front lines.
Consumers can be intimidated by banks she said at the Unconference, especially minorities. Even people who can afford to use banks opt not to. A sample of her experience was published a month ago in the New York Times.
Moving on to point three, accepting bitcoin can either be free or vastly less expensive than accepting a credit card payment. Payment processing fees are significant in commerce. I know this because I accept credit card payments through both Square and PayPal in another business I run and it costs me nearly 3% per transaction. I’ve also sold merchant processing for years and have priced hundreds if not thousands of accounts.
You know that thing American Express invented called Small Business Saturday where consumers are encouraged to spend money at small businesses? Paying with your AMEX card is encouraged of course and AMEX charges about 3.5% to the merchants on every sale.
By going dollars->bitcoin->dollars, you can do even more to help small business by saving them the fee. Granted, most consumers probably wouldn’t jump through any hoops to save a business money especially if it meant trying to figure out how to convert your dollars into something they perceive as “a scam that went out of business two years ago.”
I’ve read all the warnings about bitcoin already and have even been lectured by Robinson personally:
@financeguy74 A fool and his money… the numbers don’t lie. Enjoy Vegas.
— Jeffrey Robinson (@WritingFactory) November 4, 2014
and yet what intrigued me most about bitcoin aside from the transaction costs, was the fact that it was not run by a government.
What if?
Five years ago I had a sinking feeling. The safety and security of the U.S. economy was put to the test. Stock prices fell, lending dried up and millions of Americans actually began to ask themselves, what if? As in what if the dollar collapses? What if your bank account suddenly became worthless? What if you had to suffer for the mistakes others in your country made?
In 2009, a colleague and I pledged to stick together should an eventual economic apocalypse happen. Our plan was simple:
1. Exchange all our money for a gigantic gold brick and two shotguns
2. Sit on gold brick and guard it with those shotguns
Survival would remain possible by chiseling off pieces of the gold brick and exchanging them for food and water. We’d each take turns sleeping and hopefully survive until things returned to normal, if ever.
A fantasy to be sure, and it was great for laughs to break up the day, but what if?
My apocalyptic paranoia is one of many stereotypes of the bitcoin faithful, but I have no interest in exchanging 100% of my dollars to bitcoins. And no, I don’t think the dollar is going to collapse tomorrow. I am intrigued however by a currency that eludes governmental control. We can all keep a gold brick in our back pockets, even if it’s small, and even if it’s digital. If for no other reason, it’s a small hedge for peace of mind.
It’s quite ironic that while critics talk up the dollar’s superiority and the strength of the U.S. government, only 14% of Americans approve of how Congress is handling its job. Not to mention that the nation is at this very moment $18 trillion in debt, a number very unlikely to be made whole. Remove the term bitcoin from the conversation and it’s quite likely the average person would at least be amenable to the possibility of a non-governmental currency.
Perhaps as Americans we are somewhat blind to risks, that we feel nothing catastrophic could possibly to happen to us. To many it is literally unthinkable. A completely independent currency has its merits both now and in far bleaker times.
Of course should the apocalypse occur and all you have is bitcoin, rest assured you will be able to buy a shotgun since you can pay for them with bitcoin:
The get rich quick crowd
Here lies another criticism of bitcoin, that everyone is holding it and no one is spending it. Far from idle, there are currently more than 80,000 bitcoin transactions per day. Without prohibitive transaction fees though, volume is a poor measure of adoption since I could easily send bitcoins back and forth between accounts I own and classify them as transactions.
There are indeed those holding and not spending. Rampant speculation is both a cause of volatility and an argument for its long term unsustainability. Speculators are hoping the digital currency will appreciate and make them filthy rich. If that day never comes, a big sell off will cause its value to drop.
And therein lies the argument… when or if the speculators leave, will that spell the end of bitcoin?
If bitcoin had no practical uses outside of being another digital currency like World of Warcraft gold, then bitcoin would likely be a con, a predictable one that probably would’ve combusted already.
There may actually be a massive market correction in the future. At the current moment, Coinbase reports that 1 btc = $376.23. On November 14th, I paid $397 for 1 btc. It lost about 5% of its value in two weeks, a tough percentage to stomach for the faint of heart, and most certainly the average consumer. It’s also equal to the plunge the S&P 500 took between October 8th and October 16th so such short term volatility exists in other mainstream assets.
I’m not necessarily speculating though. I spent almost half my bitcoins shopping on Overstock on Black Friday, an experience I will detail in another post. A 5% swing might be acceptable for an investment but it’s quite ugly for a currency and this fuels the misinformation that bitcoin is a scam, con, or has already gone out of business two years ago.
1 btc could drop to $100 or $10 after a furious market shakeout and it wouldn’t change how I felt about it. It could also rise back up to $1,000 or higher. That volatility is enticing, almost sexy, but it’s the lack of transaction fees and governance by mathematics rather than actual governments that have me hooked
White knight
Still, bitcoin is waiting for a few white knights, merchants willing to price their goods and services in bitcoin. For years, I have priced advertisements on this website in dollars, but to show my support, I will soon be pricing them in bitcoin going forward. Dollars will still be accepted of course, but those Paypal fees hurt. Paypal costs me 3% in a split second. Is a 5% loss in bitcoin value over two weeks really that wild by comparison?
I think not.
Bitcoin is more than a currency. It’s not the euro, the yen, or the peso. It’s a detachment from governments and banking. It’s self-control. Without the private key, your bitcoins can’t be seized.
We live in a world today where everybody has their hand in your money. Just look at what happens when you pay for a cup of coffee using your credit card. The following parties all get paid a percentage:
- The small business owner
- The small business owner’s merchant account representative
- The merchant account representative’s company (the ISO)
- The payment processor (the processor settling the transaction)
- The acquiring bank (the payment processor’s bank that is authorized to use the payment networks)
- The payment networks (Visa, mastercard, etc.)
- The customer’s card issuing bank (The bank that issued the card to the customer gets a percentage of every sale made with that card)
- The state (where there is sales tax)
If you thought bitcoin was insane, what do you call a system where eight parties need to get paid to facilitate the sale of a cup of coffee? And my example was simple. There are typically more parties involved that that.
I don’t want to give the impression that you can evade taxes with bitcoin. I have every intention to stay on the up and up with governments. But remove the tax man and the merchant from the equation, and one has to wonder what the heck is going on with the other six parties, all of whom will ultimately decide if your transaction is acceptable to them. They decide, not you. They can freeze your funds if they don’t like the transaction and they do. It happens to merchants all the time.
Your money is not really yours. You have rights to it, but only to an extent. It can be garnished, frozen or confiscated. That’s the price of liquidity and relative stability. If you can afford to color outside the lines, where you can remove the six bankers and their control, why not experiment? There’s something pure about it, liberating. And when you add in the fact that it’s governed by math, it’s more than that, it’s beautiful.
deBank
If you are under the impression that bitcoin is intimidating, a scam or out of business, well then I encourage you to step out of governments for a minute, to deBank, and take a walk on the digital side. I’m not going to convert all my dollars to bitcoin and you shouldn’t either. Try it out with some extra cash.
Sure, you’ll be in company with libertarians, anarchists, and lunatics. And yes, there’s the paranoid, the speculators, and those transacting in illicit goods and services. The beginning of the Internet and computers was much the same way with the unix and linux faithful.
Perhaps bitcoin needs a Steve Jobs, a Bill Gates, to package up something simple and suitable for the average household. Every American would appreciate squirreling away a little something that is out of reach of government and banks.
The vast majority of Americans already don’t trust congress, and 92 million Americans are already underbanked or unbanked. In 2014 buying a cup of coffee involves paying eight people and the government has spent $18 trillion that it doesn’t have. You have to start to wonder who the real lunatics are. Consumers are waiting for something… even if it’s just a little peace of mind, a hedge, a gold brick in their back pocket, the feeling of independence, freedom, control. Something…
I AltFinanceDaily and loved it. Now it’s your turn.
The Funding Calls That Won’t Stop
November 23, 2014“Your business has been approved for a loan…”
Last week, Chicago Public Radio (WBEZ 95.1 FM) investigated a trend in the small business community, the use of merchant cash advance financing. The station called me in advance to answer some questions about merchant cash advances and I gave my best explanation of the industry and its products.
Of the discussion that lasted more than 30 minutes, only about five of my sentences made it on the air. While I clarify some of my positions below, it was sobering to learn the context of how they were used, as a defense to real life merchant complaints.
The satisfaction rate with merchant cash advances are pretty high and I say that mainly because it’s so rare to hear complaints from anyone other than journalists that can’t believe anyone would accept rates above 6% APR. And while there are indeed bad actors in the industry (as there are in any industry), the gripe one merchant had about phone solicitations that just won’t stop is a recurring theme.
It’s happening to me too.
As an account representative in 2010 calling real time leads sold to five parties at once, I did what anyone would do, I pretended to be a small business myself and inquired through the website that we bought leads from and entered my cell phone as the point of contact
Ring. Ring. Ring…
Within a half hour, representatives from four companies called me, and I learned exactly who my competition was, how they explained the product, and what they would say to win me over. Two of the four were really good and one even referenced my name personally, saying something to the effect of, “If you get a call from Sean Murray, his rates are worse than mine.” Obviously he had already done what I was doing now, which was pretend to be a small business so he could prove to the prospect he was well informed about the alternatives. He had heard my pitch already and was now throwing me under the bus by planting the seed that I was going to offer something more expensive even if it wasn’t the truth.
In the end none of them won because it was all a farce. One never called me again after the first call. Another kept at it for a week and the remaining two followed up for a month.
And then it got quiet…
I had been marked as a dead lead and forgotten about until three months later when one company sent a follow up email. “Smart,” I thought. But then a call came six months later, and then more emails, some from companies I didn’t originally engage with.
And they continued at regular intervals, every couple of months an email or call. Was it interesting? Yes. Annoying? No.
Until this year.
The volume of emails have slowed but I’ve somehow ended up on robo calling lists. “Press 1 to talk to a funding specialist or press 9 to be added to the Do Not Call list”
The press 9 option doesn’t work for me. Sure, I might be removed from that marketer’s list, but it in no way removes you from anyone else’s list. I knew that already of course because I’ve been on the other end before.
The first time I got one of these calls, I was excited to tell the sales representative who I really was, level with him, and explain that it was a really good idea to take me off the list. But much like other business loan robo call complaints, the representative wouldn’t tell me anything about himself or his company.
I got yelled at.
Every time I tried to ask a question, he’d get louder, insisting I tell him my monthly gross sales volume for the “cash advance I wanted.”
A rogue actor maybe, but I’ve since gotten additional business loan robo calls and have made no progress in getting myself removed. I just hang up now.
Call it sweet irony perhaps. Or maybe a wake up call (pun intended). I applied on a website once four years ago and the rest is history.
My experience with repeat solicitations is marginal compared to somebody that has actually used a merchant cash advance. With the filing of a public UCC-1, anyone in the industry can easily access that data and convert it into a marketing list. And they do.
Brokers that scorn UCC marketing acknowledge that these businesses could be getting called 5-10 times a day. My own clients had reported repetitive calls back when I was an account representative. And while UCC marketing is very cost effective, in today’s market where more than a thousand companies are offering similar financial products, it’s probably safe to say it’s overly saturated.
And if 5-10 calls per day were even remotely accurate, I’d surmise that level of volume is marring the industry’s reputation as a whole.
I could argue though that when customers have a great many options to choose from, they win. With more than a thousand companies offering merchant cash advances and business loans, it’s truly a buyer’s market. Play all the companies against each other and you should end up with the best possible terms. It’s a great time to seek capital.
Except we’ve got to do something about those phone calls, or at least the robo calls.
Every angry robo dial recipient becomes one less person likely to speak positively about the the nonbank financing industry. Aged leads, UCCs and phone calls might be inexpensive, but the cost to undo negative preconceived notions is immeasurable.
Do you want to be known as the company that helped small businesses or the annoying people that won’t stop calling? If merchants are taking to the air waves to complain, it will only be a matter of time before the FTC and FCC become interested.
—
Regarding my comments on the radio about APRs and daily amortization, they were pulled from a conversation that compared daily payment loans to purchases of future sales. I DO believe bad actors exist and every business owner should have an accountant, lawyer, or savvy third party review any contracts they enter into, financial or otherwise.
Ready to Trade ONDK and LC?
November 16, 2014
On November 10th, OnDeck Capital finally made their S-1 public. Immediate reactions from inside the industry were mixed. The bears criticized the years of losses while the bulls pointed out that the tide is turning. With a profitable 3rd quarter, OnDeck’s bet on the long game might finally be proving itself.
And without delving into their S-1 for now, the industry should be bracing itself for change. The mysterious world of daily funders (financial companies that deal in daily payments) is about to come under the scrutiny from another body, stock analysts.
Unlike journalists which have bruised the industry with sensational headlines and surface level criticism (high costs, light regulation), analysts will be tasked with truly understanding the fundamentals of nonbank business lending. Not to mention that everyday retail investors looking for an edge will want to learn more about the industry than what a single company’s quarterly financials will tell them.
Daytraders might make decisions based on melodramatic stories but those buying and holding for the long run will be conducting something that’s rarely taken place in this industry, research. Expect these questions to be asked and deeply considered:
- Who are OnDeck’s competitors? (and not just the top 3, but the hundreds that follow them)
- What are ISOs/brokers and how do they operate?
- How do they generate deal flow?
- What is Merchant Cash Advance and how is it similar or different to OnDeck?
- What is the real regulatory environment? (Because there are actually applicable regulations despite articles that say there aren’t any)
- Why does OnDeck collect payments daily?
- Why is OnDeck’s model so much different than Lending Club’s?
Look for the last bullet point to be explored greatly. If OnDeck and Lending Club are both innovative small business lenders broadly targeting the same market, why is OnDeck charging an average of 50% APR paid daily over 6 months and Lending Club charging as low as 5.9% APR paid monthly up to 5 years?
Their products couldn’t possibly be more different. And while Lending Club’s IPO path has curiously stalled, there is nothing to indicate that it will not proceed. That means we should expect comparisons between the two upcoming tickers LC and ONDK, a lot of them.
Details about commissions, closing fees, marketing practices, and transparency will be talked about in open forums by the general public. If it’s controversial, it will be debated. If it’s unique, it will be scrutinized. To an extent, OnDeck, Lending Club, and many of their competitors will cede control of their destiny to the general investing public.
There are folks in the industry giddy over the chance to buy and sell stock in both companies. They have years of experience on the front lines. But just as they’re gearing up to trade ONDK and LC, so too is everyone else.
Get ready for major change…
Keeping Lending Club (and others) Honest
October 19, 2014
Now that institutional money is flowing into the alternative lending industry, some retail investors are starting to express concern that the rules are changing. Lending Club for example is no longer considered a peer-to-peer lending platform, but rather an online credit marketplace.
Investors don’t exactly make loans to individuals in that marketplace, but that’s sort of how the concept began. Today, a bank issues the loan to the borrower, Lending Club buys the loan and creates a note tied to the performance of the loan, and then sells that note to investors.
Lending Club holds all the power and that worries retail investors who believe that the company is not always forthcoming about what they’re doing. It’s not easy to find dissenting voices when the market is growing rapidly especially since the media is cheering the revolution on.
But in the back corners of the Internet there are groups of investors growing suspicious, if not downright paranoid that all is not right in Lending Club land.
On Peter Renton’s Lend Academy forum for example, healthy discussions are being replaced by collaborative investigations into Lending Club’s practices. As a retail investor myself, I can’t help but be drawn to it. Below is a list of some of the issues:
The Borrower Member ID number is never reused
If a consumer borrows money from Lending Club in 2013 and again in 2014, it would probably be useful for investors to know about the previous Lending Club loan. Instead, borrowers are issued additional Member IDs with each successive loan, masking the history of past loans.
Borrowers may be taking two loans simultaneously
Acknowledging that Member IDs can never be reused, curious retail investors used other data points disclosed by Lending Club to link borrowers together. They believe they discovered a number of borrowers who got two Lending Club loans back-to-back, sometimes within days of each other.
The concern here is that the borrowers were taking on much more debt than the investor was led to believe. For instance, an investor might feel comfortable with the borrower taking a $10,000 loan, but has no idea that another $20,000 is being issued to them days later under another Member ID number.
Whether or not this is actually happening and the scale of how often it is happening is tough to say, but a little detective work by others indicates that it has possibly occurred.
What happens if Lending Club goes bankrupt?
While a poll with so few responses (52 total) on the Lend Academy forum may not be statistically relevant, 75% of the respondents claimed to be concerned in some capacity that Lending Club has no Bankruptcy Remote Vehicle for retail investors. 21% said they were extremely concerned. Absent a BRV, a Lending Club bankruptcy endangers all retail investors from getting paid regardless of whether or not the borrowers are actually paying their loans.
Anil Gupta, the founder of PeerCube wrote the following on the Lend Academy forum in response to the BRV issue:
You are not alone. I am also in the extremely concerned category when it comes to BRV for LC. This segment has been wild-wild west and reminds me of combination of dot-com bubble in 1999 and housing bubble of 2007. Overall, I am very concerned with platform risks.
Premature IPO attempts by p2p platforms is also concerning. I am taking that as indication of founders, VCs and early employees want to cash out and exit while the market is hot. They may be seeing the growth reaching a plateau and increased competition. I believe we will see a lot of shake out when interest rate start to rise. Potentially stepped up government regulations of p2p platforms once investors lose money.
Startup woes?
Retail investors, particularly those that have deployed a substantial amount of their capital in Lending Club notes gripe that sometimes the financial reports they get are missing data, experience glitches, or are just totally wrong. While usually resolved to everyone’s satisfaction, as a seven year old company, one might expect for Lending Club to be much more careful at this stage in the game. With an IPO in the works at this very moment, they should be way past problems such as data in the downloadable files not matching the website.
New fees
In August, Lending Club announced they would begin charging investors 18% of the delinquent amount recovered if the loan is at least 16 days late and no litigation is involved. When investors pushed back, it turned out that was always their written policy, they were just waiving it for everyone’s benefit until now.
While the move means a few more dollars out of every investors pocket, it was noticed that loans that have been restructured at the borrowers request are not marked as current for the duration of the payment plan even if they are in fact current on the payment plan itself. So when loans get restructured, Lending Club begins taking 18% of every payment as if it were a continuing collections problem.
From a firsthand perspective, I had several loans entering into payment plans almost immediately following the issuance of the loans. Basically the loan would be issued, the borrower would make their first payment, they’d plead hardship, go on a payment plan, and then Lending Club would begin deducting 18% of every payment going forward.
In these situations, our interests are not aligned. By entering a payment plan, not only is the amount the borrower is paying monthly reduced, but 18% of each of my payments now belongs to Lending Club instead of me. Basically, the appearance that Lending Club has a personal incentive to place borrowers on a modified plan at my expense and without my consent is a conflict worth monitoring.
Automated Investing under delivers?
For those with too much money or too little time to choose notes to buy themselves, Lending Club offers Automated Investing, a program that will automatically buy notes within parameters you set when they become available. The draw back is that the filters are limited and some investors are complaining that they’re ending up with notes they never would’ve bought manually.
WebBank woes
On October 6th, Lending Club announced that investors would have to sacrifice several days worth of accrued interest to WebBank, the bank that issues the loans for Lending Club.
Citing the move as necessary to keep Lending Club robust in a changing environment, the run up to the IPO has had some investors feel like they are suddenly being nickel and dimed.
Refinanced
Not that this is necessarily bad, but there’s evidence that shows Lending Club is encouraging its own borrowers to refinance their loans to a lower rate. If they do it, it results in the original note being paid off. The payoff returns the cash to the investor who then may have to wait two weeks or more to put that money back into a new note.
It must be said that any time I’ve published a gripe about something Lending Club is doing, my account representative there has called me to try and resolve it. That’s surprisingly good service!
But while I feel safe enough about my investments now to keep them there, there’s nothing wrong with reminding Lending Club and all of the other disruptive financial companies out there that investors are watching their every move.
As long as they have your money, it’s healthy to keep them honest.
