The alternative lending sector had an outstanding year in 2015. It is one of the hottest sectors in FinTech that attracts the most attention and investment along with Payments startups.
It is hard to say whether alternative lending is already overheated and if 2016 will annoint a new king of the FinTech industry. However December 2015 and the beginning of a new year are still a buzz with a lot activity lot in lending. 21% of FinTech companies around the world that raised funds in December were lending companies.
2016 started with another alternative lending provider, New York-based FinTech startup Bread, raising $14.3 million in Series A round led by Bessemer Venture Partners, according to Dow Jones news portal. RRE Ventures also was among the investors in the round to fuel part of the initial loans. Red Swan, Montage Ventures, Maveron, BoxGroup and others also invested in the company.
Bread powers a pay-over-time button on retailer websites, as stated in the news. The company reimburses the full payment amount to the merchant and then collects monthly payments with interest from the consumer. Bread is currently offering a 24-month loan. A very familiar model, isn’t it? We have seen other interesting FinTech startups such as Affirm and Klarna, taking that risky path as well. Klarna, similar to Bread, covers the purchase proceeds merchants and then collects money from customers in a 14-day period. With Affirm’s PayLater customers can check out almost instantly after providing some basic information (such as email or Facebook address). Affirm charges merchants a small fee to provide this premium service for their customers, but they do not charge buyers a fee for using the service. PayPal Credit previously known as BillMeLater, serves the same goal of providing a frictionless shopping experience.
All these companies built their business models to replace traditional credit cards. Bread, in particular, is trying to replace private-label credit cards offered by retailers like Best Buy, Tiffany & Co., Nordstrom or Macy`s.
CEO and co-founder of Bread, Josh Abramowitz, commented on the way some of them work, saying that Best Buy leads a customer to Citigroup’s website to open a credit card to finance a laptop purchase, for example. In a typical online financing scenario, there’s a “checkout button that drives you off the retailer’s page”, he added.
Bread takes customers on a different path. Bread clients would allow customers to pre-qualify for a loan via a pop-up window on its own site and to see the monthly payment options for a variety of items while browsing the site and not just at checkout.
As Bread states on the official website, “Bread isn’t a credit card (and you don’t need one). Our rates may be lower than what credit card companies charge you, and our terms are clear. You pay the same amount each month. Or pay off your whole balance anytime, for no extra cost.”
Looking very attractive at first, the solution has a negative outcome for those looking to take advantage. As Bread warns, if customers don’t repay their debt to the company, after a certain number of reminders, they will be charged a late fee of $10. In case they continue not to pay, Bread may report this to the credit bureaus, which can have a material negative impact on customers’ credit scores and ability to get credit in the future. As Bread is not a bank itself, customers are not taking a loan from the company, rather they are taking out a loan from Bread’s partner banks, managed via Bread.
According to WSJ figures, investments in online lenders are at an all-time high. In Q3 2015 more than $1.3 billion was invested in lending out of overall $2.3 billion from the beginning of the year. The LTP team has noticed before that Lending is one of the hottest sectors with most of the FinTech unicorns operating in the space and the highest number of hottest FinTech startups in New York and London, the world’s FinTech hubs, engaging in a tight race in alternative lending. In fact, 2015 created huge traction for personal lending companies with total loans disbursed by the top five companies reaching $28 billion.
However, even though lending has been a growing sector, Bessemer Venture Partners was reported to be staying on the sidelines. As Mr. Stavis, a Bessemer partner, shared according to WSJ, too many startups have built businesses around a simple “arbitrage” of originating loans and reselling them to others at a higher price. He added that he always feared that their costs of acquiring customers could go up as competition heated, which is indeed what is happening across the online-lending market.
Mr. Stavis also commented on the reason Bread is of interest for Bessemer, saying that it is the technology and integration with a retailer’s website that places Bread apart from competitors and what attracted him and Charles Birnbaum of Bessemer to the deal.
“They are thinking about this as a holistic marketing solution for merchants,” said Mr. Birnbaum, VP at Bessemer.
Explaining the goal of the company and advantages for customers, Bread states, “Our goal is to help you pay for your purchases in a way that matches your budget. We make it fast and easy for you to pay over time. For many borrowers, rates may be lower than with a credit card or other alternatives. We are committed to delivering a dignified customer experience, treating you with respect and providing you with clear and transparent terms.”