The Top Line

May 13, 2016 5:55 pm

Fintech newbies pick up some bad old habits

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©James Ferguson

Banks bad; fintech, good. For several years now we have been beaten over the head with this message.

Traditional lenders, weighed down by ancient IT and tough new capital requirements, were going nowhere. Smart start-ups that used online platforms and digital technology to make loans and process payments were going to eat their lunch. Not only were these fintech groups nimbler and less risky, but they were not weighed down by the flawed culture that spawned scandals ranging from insurance mis-selling and rate rigging to the subprime mortgage crisis.

Not surprisingly, many investors bought in. Shares in US online lender Lending Club surged nearly 60 per cent on its December 2014 stock market debut. Last year’s IPO of payments processor Worldpay was the UK’s largest in more than two years. Hedge funds and famous investors clambered over each other to invest in start-ups that use blockchain, the ledger technology behind the cryptocurrency bitcoin, to move money around.

Now, some of the bloom is coming off the fintech rose. This week, Lending Club shares have fallen by more than 40 per cent after it lost its chief executive Renaud Laplanche. He resigned after the company mis-sold $22m in loans to a big investor.

According to a regulatory filing, someone at Lending Club changed the dates on loans that were being sold to investment bank Jefferies, which wanted to package them up and sell them. FT Alphaville has highlighted that it seems the date change was meant to make it look like the loans were originated after the company had changed its borrower agreement at Jefferies’ request. Without the tweak, the bank did not want the loans. So Lending Club has had to buy them back.

It all sounds a bit technical but it appears to be an out and out fraud of a very familiar sort. A big part of the 2008 financial crisis stemmed from the bundling together of subprime loans that were backed by faulty documents and did not meet investors’ criteria.

At Lending Club, the incident led the board, which includes John Mack, formerly of Morgan Stanley, and Larry Summers, former Treasury secretary, — to order a review. This uncovered a second allegation, that Mr Laplanche had failed to disclose a personal stake in Cirrix Capital while Lending Club was contemplating an investment in it. Reckoning that two problems were too many, Lending Club and Mr Laplanche parted ways.

Meanwhile, the company is also fighting a would-be US class action lawsuit alleging that it breaks laws by charging too much interest. Ronald Bethune of New York claims the platform’s relationship with WebBank, which is based in Utah where there are no usury laws, is an illegal attempt to circumvent interest rate caps elsewhere. Lending Club is fighting the lawsuit, arguing that Mr Bethune is required by his loan agreements to use arbitration rather than the courts.

Lending Club’s woes come at a particularly inopportune time for the online lending sector. Rivals Prosper and OnDeck recently revealed they are suffering slowdowns and the US Treasury this week warned that it was worried about fledgling industry’s business model and rising delinquency rates in newer loans.

Allegations of doctored loan documents? Risky and possibly illegal lending? Conflicts of interests among top executives? It sounds a lot like traditional banking. Plus ça change.

------- REPLY -------

We live in a world where peoples' response to allegations of bias in Facebook's news feed leads them to turn to a more reputable source: Google News. In that sense, traditional print media has become an alternative-media because paper is seen as a legacy medium.

Paper money is also seen as a legacy medium. It's always been possible for value oriented bank customers to keep their money in a safety deposit box as cold-hard-cash, but for some reason the overwhelming majority will continue with their accounts despite negative interest (do you know anyone living on a cash-basis?). The real reason why banks now charge negative interest rates is because they can; it's plainly no longer necessary for them to entice deposits with offers of interest. Presumably people can't be bothered, don't care, or are facing bigger issues.

Thankfully, there is an alternative: crypto-currency technology. It took more than a decade of i-dont-know-what-to-call-it for the linear expansion of the ideas of asymmetric cryptography to reach and combine with distributed hash table technology (popularized in impossible-to-shut-down music sharing apps like Napster, Kazaa, and GNUtella). The result is a transparent distributed ledger know as Bitcoin which houses fungible units of account known as bitcoins (BTC). Value is linked to an individual by the same cryptographic technology used by military to protect the state. If you don't dilly-dally you can get some before the next reward halving, a network effect that halves the supply.

But, It's not all roses in crypto-space; Satoshi Nakamoto (the inventor) remains anonymous perhaps for good reason. Investor bias in technology mega-corps means people subconsciously root for the company whose stock they hold to be "the next big thing". Investment media is often happy to oblige. On issues where their interests are aligned, self-preservation precludes publication of stories that would challenge their collective position of dominance.

In your article you state that the hanky-panky surrounding Lending Club, a company who "Hedge funds and investors invest in" is of a very familiar sort. It's obvious to me what is going in here:

As investor interest is piqued, seed capitol is funneled to chummy companies seeking safe harbor in the San Fransico Bay Area captained by those selected few for their allegiance and fluency in the dominant gong. Their narrative is a familiar one. For them, knowing that many companies before them have remained afloat year after year by series after series of investor funding means their primary purpose is to fill their deck with coders, appear as attractive investment vehicles for fintech, and fill their sails with financial momentum.

The problem with imposing this ancient brand of leadership on a movement that was coined from the start to be decentralized is that it stifles the intent of the technology; to free people from the banking system.

This flood of capital is drowning out the original intent of the technology. And, in many cases the original developers, early adopters, and visionaries; those who would be the shining starts of the crypto revolution find themselves struggling to stay afloat in world where investment media coverage is proportional to the size of the investment. Some wind up roustabouts in the game of attracting investor money, the less-fortunate (or more fortunate depending on your perspective) reside in Davy Jones's Locker at the metaphorical bottom of the bay.

Brooke, the reason for your complaint about fintech, "La plus ca change" is clear. You are seeing more of the same with emphasis on MORE and SAME because the original players who remain firmly anchored to Bitcoin's intent of the technology to free people from the bonds of the banking system are ... unheard of. Simply put, this is the reason why you are not hearing about those innovative, disruptive, and most importantly HONEST individuals working with cryptocurrecy technology to make the world a better place. Pardon my French, but most of the fintech stories that come across your desk originate from the same scurvy gang of greedy capitawist pigs who manoeuvered us into this mess in the first place!

If you ask me, "It's about time." The amount of time it will take for the benefit of crypto technology to reach people is increasing midst further manoeuvering. At the moment it's benefiting a select few who have the understanding and confidence to use the technology to advantage. Bitcoin's biggest problem, without a dedicated PR team or marketing effort, Bitcoin is easily maligned by competing efforts. Frankly, the mantra about fintech, "banks bad; fintech good" is plainly off-target: If not Bitcoin, why any other blockchain technology?

-Joe ( )

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