Conference Presentation, Panel
A New Breed: FinTech's Fusion with Alternative Investing
- FinTech is viewed as enabling technologies covering quantitative underwriting, payments, and transparency, driving three business models: direct competition with banks via efficiency ("better mousetrap"), enabling lending in subprime spaces through data ("adding value to FICO"), and serving as a middle road for lending where bank presence has waned ("regulatory premium").
- SoFi targets originating approximately $16 billion in unsecured consumer credit this year and plans to launch horizontal banking products including deposits, credit cards, and checking accounts this year, while expanding into wealth management and future geographic markets in Asia and Europe.
- SoFi anticipates an average asset duration of three years or less for student loans, with equity residuals from securitizations projecting 10% to 12% returns in favorable conditions and mid-single-digit returns in a 2008-type scenario, while maintaining a negative convexity strategy that generates revenue when interest rates rise.
- Peter projects a cost of acquisition of roughly $500 for SoFi compared to a bank's $3,000, predicting that banks will eventually purchase loans from fintechs or partner on securitizations due to regulatory constraints like Basel III and their inability to match customer acquisition efficiency.
- Jeff predicts that fintech margins will compress, with historical annual returns of 9% to 11% for Lending Club and Prosper decreasing to about 6.5%, and expresses concern that untested underwriting criteria could lead to significant losses if economic dislocations occur.
- Richard anticipates that American interest rates will continue to diverge from LIBOR, with the CBOE-regulated Ameribor offering superior asset-liability management, while the American Financial Exchange aims to connect $100 million banks with $30 billion banks to solve liquidity needs in an unregulated marketplace.
- Eric Schmidt asserts that international regulations make it impractical for banks to compete directly on high Loan-to-Value (LTV) loans, creating a rapid growth space for private debt between private equity and the banking system where fintechs and banks will act as partners.
- Investors face a challenge where classic portfolios yielding 8% a decade ago now offer less due to zero interest rates, prompting a shift toward higher equity risk and acceptance of more volatility, though Peter notes that 6% safe, short-duration returns offer an alternative portfolio management equation.
- SoFi relies on referrals for 50% of business and connects with customers via mobile channels, while expecting to hire significant engineering talent and utilize $2 billion in equity and $5 billion in warehousing lines to cushion market downturns.
- Valuation processes involve third-party assessments by Duff & Phelps and daily reconciliation via API access to lender back ends, with John McCutchan noting that the SEC is aggressive on valuation while Deloitte scrutinizes loan generation processes and incentive alignment.
- Peter expects to apply for a bank charter to mitigate regulatory complexity and acknowledges that scaling to a $16 billion volume may eventually involve borrowers different from early 2011 customers, necessitating increased transparency with investors.
- The outlook includes risks that credit underwriting criteria may fail if unemployment rises, potentially eliminating the 6% return target, and that fintech applications may function well before their underlying economic models are proven in a competitive environment.
- Long-term expectations suggest that in five to 10 years, success will depend on small profitable niches and incentive alignment between lenders and investors, with securitization solving liquidity issues despite lockups in funds that do not address quarterly cash availability.