It’s Here: Artificial Intelligence Changes MCA Broker’s Business, Improves Bank Underwriting and Debt Collection
November 22, 2016In this age of man versus the machine, the case for artificial intelligence and machine learning does not need many vociferous advocates.
Some predict that revenues from fintech startups using AI and predictive models is set to jump by 960 percent or to $17 billion by 2021. We might be closer to that number than we think, considering 140+ AI startups raised a total of $958M in funding in Q3’16, alone.
While healthcare, cybersecurity and advertising are frontiers of AI innovation, the growth and momentum of big data in finance (spurred by online lending) is fast bringing fintech to the forefront. In lending, specifically, data has become the new currency. It’s not so much that lenders didn’t use data for decision making earlier, but the data available then, wasn’t as rich or as extensive. A loan approval decision that just required a decent FICO score and assessment of character has expanded to include data points like a business’ social media presence, reviews, and owners’ background history.
Today, artificial intelligence in fintech has grown to tackle cybersecurity threats, act as a personal assistant, track credit scores and perform sentiment analysis to predict risk — making automated underwriting just the tip of the iceberg for what artificial intelligence and machine learning can do for the financial services industry. AltFinanceDaily spoke to three fintech upstarts that have taken AI beyond underwriting.
AI Assist
When Roman Vinfield started his ISO, Assure Funding in early 2015 with 16 openers, five chasers and three closers, little did he know that a business intelligence software would replace 85 percent of his staff for the same productivity. He stumbled onto Conversica, a AI-powered virtual sales assistant and was convinced to give it a try.
“I hadn’t heard anything like an artificial-intelligence sales assistant,” said Vinfield. “The results we got within a month of using it were unbelievable.” Within the first month, Vinfield made $35,000 in revenues by spending just $4,000 and eventually reduced his staff of 24 to 4 people. He was so sold on its potential for the merchant cash advance industry that after prolonged negotiations, he secured the rights to be the exclusive reseller of the software, and called it AI Assist. The software is now used by leading MCA companies like Yellowstone, Bizbloom and GRP Funding.
While Conversica’s clientele includes auto and tech giants like Oracle, Fiat, Chrysler and IBM, for the financial services industry, it’s marketed and sold to MCA and lending companies through AI Assist. It integrates easily with CRM software like Salesforce and creates a virtual sales assistant avatar that tracks old leads and reestablishes engagement. In the lead generation race, where a 3-5 percent response rate could be considered good, the response rate for Conversica has been 38 percent.
Designed to be akin to a human sales assistant, Conversica’s technology can determine a lead’s interest based on the response and set up a conversation with the sales department to follow up. “Your Conversica virtual assistant is an extremely consistent, personable and tireless worker. She doesn’t get sick and never needs a break. She never gets discouraged, and she improves with each engagement,” says the AI Assist website.
True Accord
Personal chat assistants for money management and sales is one of the popular modes of AI implementation in fintech, given it’s scalability in lending for functions like debt collection. One company that does this, is True Accord. True Accord, similar to AI Assist uses automation software to schedule and send messages to customers by the company’s “Automated Staff”
The San Francisco-based company was founded by Ohad Samet who has over 11 years of machine learning experience in finance. The idea came to Samet while he was working as a chief risk officer at payments and e-commerce company Klarna, underwriting loans worth $2 billion. “While working at Klarna, I realized how big a piece debt collection is and I did not like the way it was done,” said Samet. “I needed machine learning to change it.”
Samet founded True Accord in 2013 to develop a debt collection AI assistant and today the company works with leading banks, credit card companies and food delivery services and has collected over half a billion dollars. It establishes targeted communication with the customer less frequently than traditional collection agencies and allows customers to pay their dues over mobile, which accounts for 35 percent of collections for the company.
“We humans don’t want to accept it but the reality is that, when it comes to scale, machines make better decisions than humans,” said Samet. “Machines are consistent, they are not tired, not angry, don’t fight with the significant other and all of this makes for better accuracy, better cost structure and better returns of scale.” While this might be true, building an efficient, compatible and compliant model is harder than it might seem.
James.Finance
Since AI tools do not come in a one-size-fits-all package, its application can be as varied as the range of companies that use it. Building an AI framework that aligns with a company’s targets while being compliant to regulatory mandates can be an uphill task.
Recognizing this opportunity, James.Finance, a Portugal-based startup is using artificial intelligence to help financial institutions like banks build their own credit scoring models. Founder and CEO Pedro Fonseca, describes James as a “narrow AI” for a specific purpose of guiding risk officers to build machine learning models that follow regulatory compliance.
The startup works with consulting agencies or partners to reach out to banks. It offers a trial run of the software, which it calls a ‘jumpstart,’ where a risk officer is provided with James’ technology and in 24 hours, he or she will have to beat it with their in-house AI software.
“And we are consistently able to beat the models,” said Fonseca. The company won the startup pitch at Money 20/20 in Copenhagen earlier this year after receiving an uproarious response in Europe. Fonseca wants to divert his attention to the US’s fragmented banking market, which is dotted with smaller banks and credit unions. “The US is a perfect target for us. We are looking to work with local consultancies that know the problems of a bank intimately.”
As these entrepreneurs vouch for it, the current state of AI use in fintech is just the tip of the iceberg. And anything man can do, machines can do faster and better, right?
Don’t Write Off Marketplace Lending Just Yet; Silicon Valley Just Made a Big Bet
November 18, 2016
Don’t lose all hope on marketplace lending yet. Silicon Valley just made a big bet on one startup.
Silicon Valley’s leading venture capital firm Andreessen Horowitz invested $15 million in PeerStreet, a marketplace for secured real estate loans. PeerStreet was founded in 2013, by former Google employee Brett Crosby and former real estate attorney Brew Johnson, who oversaw the sale of travel website VirtualTourist to Expedia/TripAdvisor for $85 million. The Manhattan Beach, CA-based company’s crowdfunding platform offers investors secured real estate loans that it sources from local real estate lenders across the country.
“This round of funding will help us further execute on our goal of building a world class investment platform for real estate debt,” said co-founder and CEO Brew Johnson.
To date, it has funded over $165 million in loan investments with $50 million in returns to investors and has 50 lenders on the platform. The company has secured funding from marquee Silicon Valley investors including Michael Burry of The Big Short fame who predicted the 2008 subprime crisis and Adam Nash, former CEO of Wealthfront. Alex Rampell, general partner at Andreessen Horowitz and co-founder of consumer lending Affirm Inc led the investment and will take a seat on PeerStreet’s board.
“They (PeerStreet) have a unique distribution model that allows them to leverage existing lending networks to lower loss rates, and grow without direct marketing,” said Rampell in a statement.
Marketplace Lender P2Bi Raises $7.7 Million In Venture Funding
November 18, 2016
Denver-based crowdfunding marketplace lender, P2Binvestor has raised $7.7 million in Series A1 funding led by a Colorado-based angel investor network, Rockies Venture Club and a Japanese venture firm Future Venture Capital Co, its first investment outside Japan.
The P2Bi platform currently has 150 investors – both institutional and retail and it plans to fund 112 new borrowers, up from the current 80 borrowers, by Q1 next year. The proceeds will be used to boost sales and marketing efforts and grow the company’s operations towards this target.
Founded in 2012, P2Bi provides revolving lines of credit of up to $10 million to businesses. With an average line of $1 million, the company’s customers include businesses in retail, manufacturing and consumer goods packaging. It has originated $350 million since 2014 and it is on track to hit $8.2 million in revenues this year.
“We’re seeing more interest in our model as venture funding hits a two-year low and more entrepreneurs are looking for ways to grow their business while preserving their equity using good-quality, flexible debt,” said CEO Krista Morgan in a press statement.
P2Bi has been bullish about fundraising and diversifying its capital sources. Less than two months ago (September 20), it closed a $10 million credit facility with Pittsburgh-based mortgage service company Urban Settlement Solutions and in April this year, through a partnership with New York-based hedge fund, MW Eaglewood Americas, the company raised $50 million in debt.
The Infant Startup that Swooped an Erstwhile Industry Leader
November 16, 2016It’s not very often that an infant upstart comes by and swoops up an erstwhile industry leader.
While new to the scene, Versara Lending is a New York City-based debt consolidation lender that has already acquired Peerform, one of the early P2P lending marketplaces run by Wall Street credit broker Mikael Rapaport. The company confirmed that it is not an acqui-hire and that Peerform’s entire operation will be merged and be operated by Versara. Rapaport also changed his LinkedIn profile to reflect another new position – SVP of lending markets at Strategic Financial Solutions, a NYC-based financial consultancy firm, which appears to be related to Versara.
Versara only lends in seven states including Arizona, Florida, Georgia, Missouri, North Carolina, New Mexico, and Utah. In contrast, Peerform was founded six years ago, as Lendfolio by Rapaport and other Wall Street execs, Meytal Benichou and Elie Galam. The company raised $5.3 million in funding since inception and its proprietary Loan Analyzer tool matched borrowers with lenders on its platform who funded personal loans up to $25,000.
“We are committed to continue the growth we’ve experienced since we started the company in 2010,” said Rapaport, Founder and CEO of Peerform, in a statement. “In order to realize our potential, it was important for us to build a strong strategic partnership. By joining Versara, we will be able to combine our resources to scale quickly to compete effectively in the consumer lending industry.”
Once a posterboy for P2P lending, Peerform now is emblematic of the churn in the industry. At its launch, Peerform was ready to compete with Lending Club and Prosper head on, backed by institutional investors, thanks to the founders’ investment banking pedigree. The company’s platform started by offering personal loans to borrowers with a FICO score of above 660 for a three-year term. But after failing to gain critical mass, it reinvented its underwriting algorithm with its loan analyzer tool to lend to riskier borrowers (FICO scores <600).
“At this early stage it is difficult to tell whether Peerform will become a strong alternative to Lending Club and Prosper. But their timing is far better now,” Peter Renton wrote in a blogpost on LendAcademy in 2014.
Two years hence, Lending Club has taken several lumps, Prosper’s prospects are in question and in a David and Goliath-esque scenario, once touted to be an industry leader, Peerform hands off its reins to a startup.
Make Funding Great Again – Triumphant Trump Trumps Clinton In Big Upset
November 9, 2016
The signs were there, surveys showed, at least a few that AltFinanceDaily made reference to back in August. Small business owners felt Trump had their best interests at heart by a 2 to 1 margin over those who felt that about Clinton, according to a Capify survey.
Taxes ranked among their biggest concerns, with 20% of business owners ranking taxes as the single most important problem facing their business, according to a survey conducted by the National Federation of Independent Business. And Trump was in tune to that.
“Under my plan, no American company will pay more than 15% of their business income in taxes,” Trump said in Detroit on August 8th. He’s also proposed a moratorium on new financial regulations.
But up on the hill, the chatter over the last few months among the political establishment, including republicans, has been one of uncertainty. No one has been able to ascertain for sure what Trump’s positions would actually be or what agenda he’d actually set. And this wildcard status is probably what helped him win the election in the first place.
On his website however, Trump says that “we will no longer regulate our companies and our jobs out of existence,” and that he’ll “issue a temporary moratorium on new agency regulations that are not compelled by Congress or public safety in order to give our American companies the certainty they need to reinvest in our community, get cash off of the sidelines, start hiring again, and expanding businesses.”
That may be good news for the fintech industry which has grown increasingly concerned and preoccupied with potential regulatory changes. One potential conflict could arise with the CFPB, however, which has argued that its own executive branch authority operates outside the scope of the President of the United States.
In October, the United States Court of Appeals for the District of Columbia Circuit, ruled that the CFPB’s power structure violated Article II of the Constitution.
It’s too early to tell what Trump will really do and we’ll likely learn more about his goals over the next few months. Until then, prepare to Make The Industry Great Again…
OnDeck Earnings: Originations Grow 27%, Continue to Predominantly Use Own Balance Sheet
November 3, 2016OnDeck recorded a GAAP net loss of $16.6 million for the quarter ending in September, down from a $3.7 million profit during the same period last year. The firm’s net revenue also plummeted 30 percent to $32.3 million, even though gross revenue was up 15 percent to $77.4 million. The shift is largely a consequence of moving away from gain-on-sale marketplace revenue to interest income. Only 16.6% of term loan originations in the third quarter were sold or designated as held-for-sale through their marketplace.
The company originated more loans this quarter compared to a year ago, with origination volumes rising 27 percent to a record of $613 million. Loans under management also increased 44 percent annually to $1.1 billion.
OnDeck grew its direct and strategic channels by 23 percent year-over-year. Its funding advisor channel grew 40 percent during the same period.
“During the quarter, we continued to diversify and expand our funding capacity, and we are actively engaged in the process of bringing new funding sources online,” said CFO Howard Katzenberg in a statement. “We remain confident in our unique model and track record of performance, which we believe positions us well for further growth, improved operating results and continued access to the capital markets.”
The company also recently lost one of its sales frontmen, senior vice president Zhengyuan Lu who joined Chicago-based alternative finance-focused investment firm, Victory Park Capital.
At Money 20/20 recently, OnDeck chief Noah Breslow said that the company will remain focused on small businesses as the customer and there are no plans to venture into mortgages or student loans like several of their counterparts in consumer lending.
Talking about the partnership with JPMorgan, Breslow said that the deal was still in the “initial rollout” phase, despite being announced almost a year ago.
A GIANT BUFFALO ‘BILL’: Fake Debt Settlement Company Allegedly Defrauded Merchants, Business Lenders and MCA Companies Out of Lots of Cash
November 2, 2016
Several companies controlled by an alleged fraudster run out of western New York, promised merchants they could settle MCA agreements and alternative business loans for cheap.
Sergiy Bezrukov AKA John Butler AKA Thomas Paris AKA Christopher Riley was arrested last week after being charged with mail fraud. A joint investigation between the Department of Homeland Security, the IRS and the US Postal Inspection Service concluded that he scammed more than 100 victims and caused damages in excess of over $500,000.
“The victims and losses are the direct result of Bezrukov’s scheme involving the mailing of thousands of fraudulent solicitations to vulnerable small business owners, luring them into paying him for a service he never intended to provide, and resulting in hundreds of defaulted loans, worth hundreds of thousands of dollars,” an affidavit signed by Postal Inspector Clinton E. Homer states.
$400,000 in hidden cash was seized by investigators. The prosecution argued he was a great flight risk after it was discovered Bezrukov has dual Ukranian citizenship and that an identical copy of his US passport exists which he claims is missing and cannot forfeit. That combined with his propensity to use fake aliases resulted in his bail being denied and his being detained pending trial.
Bezrukov is currently being charged with mail fraud.
Records, surveillance and witness interviews confirmed that he paid to have 75,000 mailings sent out to advertise his service just between the first week of August and the first week of October 2016. Those services allegedly included an offer to reduce a small business owner’s short term debt by as much as 75% in just 6 to 12 hours.
One small business owner said that after signing up, they were directed to send an initial $1,250 to Corporate Restructure, Inc. via wire transfer. It was suspicious bank activity like this that would ultimately play a role in the scheme unraveling.
“The Postal Inspection Service received a referral from a fraud investigator for Citizens Banks related to multiple accounts with suspicious activity,” Federal Agent Homer wrote in his affidavit.
Bezrukov is alleged to have used over 30 different company names, numerous banks, post office boxes, UPS Store boxes, and employees in an effort to ensure the success of his scheme, and in an effort to hide his true identity and location of operations. Most of the locations were in upstate New York, specifically in Salamanca, Jamestown, Irving, West Seneca, Cheektowaga, Buffalo and Sanborn.
Two other individuals were also charged in connection with the activity, Mark Farnham of Buffalo and Dustin Walker of Salamanca. Farnham is referred to as the Vice President of Bezrukov’s company, Corporate Restructure, Inc., while Walker was the Chief of Security. They are alleged to have committed bank fraud. More than $125,000 was deposited in their accounts just between June 21st and August 12th of this year.
Bezrukov himself was no stranger to alternative business finance. Numerous complaints online date back to his role in a company known as SBC Telecom Consulting, a purported business funding company that was also referenced in the affidavit attached to the criminal complaint against him.
Even in that business, Bezrukov who went by alias John Butler at the time, was known for being outrageous. Last year, shortly before he ventured into the alleged debt settlement scheme, his company filed a $45 million lawsuit against a former sales rep for among other similar claims, allegedly violating a non-compete agreement.
The Buffalo News reports that Bezrukov is being represented in his criminal case by Scott F. Riordan, who declined to comment on the allegations.
Funders Prep for the Holiday Rush
November 1, 2016
As the year draws to a close sending everyone into a dizzying holiday frenzy, funders are prepared to fire on all cylinders to fuel their retail customers with cash.
The last quarter is crunch time for funders alike, who start preparing months in advance — designing new products, marketing and selling them. AltFinanceDaily spoke to a few to find out what business looks like at this time of the year and what’s in store for 2017.
For some, Christmas comes in August
At South Dakota-based Expansion Capital Group, the holiday prep started as early as August. “We think demand is going to be very strong and to accommodate for it, we started 60 days early,” said Marc Helman, director of strategic partnerships. The company launched four new products in August for a wide spectrum of borrowers — longer term products for existing customers and starter offers for new companies and those with challenged credit.
Since the demand peak is cyclical, most funders who have been around a while have the drill down to a science. For NYC-based funder Hunter Caroline, demand spikes up close to the tax extension period, in September and October. “We sit down with our marketing team, see which clients ramp up this time of the year and focus our sales efforts in that direction,” said Cody Roth, managing partner at Hunter Caroline. During the holiday season the company turns its attention to customers in mom and pop retail, restaurants, liquor stores and gift stores in small towns.
“We weigh a lot into seasonal businesses and have certain hybrid programs,” Roth said. “We collect a little bit more during the busy season and keep it down during the slow time.” For this year specifically, the two-year-old firm is pushing invoice factoring, purchase order financing and unsecured loan products apart from its usual business loan offering of up to $4 million for 24 months.
Plan, pilot, pivot
Q4 is also the time when companies plan and strategize for the year ahead. And for loan marketplace Bizfi, a lot of changes are in the offing. The company appointed John Donovan, a 30-year veteran in the payments and alternative finance industry as its new CEO. And while on track to approach nearly $600 million of fundings this year, Bizfi also decided to cut ties with some non-performing ISOs to increase efficiency. “We just told around a hundred sales offices we could not do business with them anymore to use resources for our own funding channels that have better conversion rates,” said Stephen Sheinbaum, founder and president of Bizfi.
Holiday Hangover
The holiday season is arguably one of the busiest times of the year for merchants, but it doesn’t have to be so for funders. Jason Reddish, CEO of New Jersey-based Total Merchant Resources advises all his clients to take the money when they don’t need it, asking clients to borrow early, put away the money and by November, have the capital pay for itself through the peak season. “The oldest problem with credit is that you get as much as you want when you don’t need it,” Reddish remarked. “You have access to cheap and the most flexible money when you don’t need it.”
The company tries to structure deals that way for some of its retail clients who see high holiday demand.“We see a pretty big spike going into the holidays and then there is a holiday hangover where they are absorbing all the money they borrowed,” Reddish remarked. “Until the hangover wears off in February and we get busy again.”
All things considered, funders are on their marks for the holiday. Will it be bright for them?
