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Payment Fintechs Leave Their Mark On Small Business Lending

Opinion: Look Outside the US for Insurance Blockchain Projects

Citi Placing Lots Of Bets On Blockchain Startups


Fintech Funding Flows To Insurtech In February

Credit Analysis

Beyond Amazon, Alibaba Leads Disruptive Innovation In Race To $1 Trillion Valuation

Payment Fintechs Leave Their Mark On Small Business Lending

Aug. 28 2018 — Funding day-to-day operations is a persistent challenge for U.S. small businesses. A recent S&P Global Market Intelligence survey found that, over the past two years, small businesses in the U.S. sought lending primarily to finance working capital needs. Fintech companies are stepping up, and using innovative methods, to meet the demand.

Several fintech companies are using data from non-lending relationships to become larger providers of working capital. As these lenders integrate further into their customers' businesses, they will use their position to issue fast approvals and provide non-conventional loan products, chipping away at market share held by longstanding players, including banks.

Evolution of an old industry

Fintech companies in the payment space have become active lenders in recent years, using their access to clients' real-time cash flow data to provide them financing. While their offerings vary, a number of these newer lenders provide merchant cash advances, or MCAs, which establish a fixed total repayment amount and allow borrowers to determine what percentage of their card transaction volume to put toward their balance. The payment company deducts this percentage from every card transaction until the full amount is paid.

This effectively turns debt servicing into a variable cost that fluctuates based on the level of sales activity, though most lenders require some form of minimum payment amount.

PayPal Holdings Inc. and Square Inc., two of the largest companies in this sector, have used customer data to underwrite loans and make a splash in the marketplace, originating more than $5 billion in loans since 2015. In 2015, Bryant Park Capital LLC estimated the total annual origination volume for the MCA industry, which is composed of hundreds of lenders, at $10.7 billion.

This kind of practice is not new. Merchant cash advances blossomed in the early 2000s but the entrance of fintech companies arguably marks an evolution, in terms of company scale and technological sophistication, in an industry previously dominated by private specialty lenders. Incumbents such as Rapid Financial Services LLC and Strategic Funding Source, Inc. are sizeable competitors, but they do not offer the same range of services as payment companies, nor do they integrate into their customers' business processes in the same way.

Merchant cash advances have received negative attention in the past due to the high effective rates charged by lenders, with annual percentage rates often coming in the high double digits. Moreover, a period of better-than-expected revenue could actually increase the annualized yield paid by the borrower since the total payment amount is fixed. Given the onerous terms, most MCA providers targeted borrowers who could not obtain traditional financing or who simply needed cash very quickly.

Fintech companies will try to combat this narrative with the convenience of their service and, possibly, lower pricing. Paypal Working Capital, for instance, bases fees on an annual percentage rate that is significantly lower than many other legacy players in this sector.

Fintechs continue customer integration, but banks retain advantages

Integrations with small business software are not restricted to payment terminals. Several digital lenders link to borrowers' bookkeeping software, like Xero or Freshbooks, to ensconce themselves in the real-time flow of their customers' businesses. And just like in the payments space, some service providers are leveraging their existing relationships and data access to offer financing themselves. Intuit Inc.'s QuickBooks and competitor Zipbooks, two bookkeeping software providers, both offer working capital financing to eligible customers.

A number of national banks have taken notice of fintech companies moving into small-business lending and many have already launched projects to ease the process of funding working capital. Fundation Group LLC, a digital lending platform that offers customers fully automated online lending applications, has partnerships with regional institutions including Citizens Financial Group Inc. and Regions Financial Corp.

Banks still have some fundamental advantages, including access to cheaper funding than digital lenders. Any small business with the ability to qualify for a traditional bank loan would likely benefit from lower rates.

Trust also remains important to borrowers, and banks still seem to have the advantage there. Our survey shows 42.1% of respondents citing an existing relationship with another lender as a reason for not applying for a loan from a digital lender.

However, nearly 50% of borrowers cited unfamiliarity with digital lenders as a cause of their aversion, suggesting that marketing and customer education may be just as large a hurdle as bank loyalty.

As part of their marketing, many fintech lenders extol their ability to service customers through digital channels without using physical bank branches. Using their proximity to customer data, these fintechs have already become large players in niche lending markets. This trend toward integration will likely continue as new players enter the market and current ones look to expand further.


S&P Global Market Intelligence's 2018 Small Business Borrowing Survey was conducted between Feb. 7 and Feb. 18 across a nationwide sample of individuals who make borrowing decisions for a small business. Small businesses were defined as any business with 2017 revenues of $10 million or less. Survey results have a margin of error of +/- 4.7% at the 95% confidence level based on the sample size of 449.

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Opinion: Look Outside the US for Insurance Blockchain Projects

Aug. 28 2018 — Despite a wealth of conceptual applications for blockchain, U.S. insurers do not appear as engaged with the technology as their counterparts overseas. But if initiatives in Europe and Asia prove successful, U.S. insurers may plunge more deeply into the blockchain waters.

There is no shortage of thought experiments around how blockchain — and distributed ledger technology more broadly — will revolutionize the insurance industry. These include smart contracts, fraud detection, claims prevention, proof of insurance and product authentication. Insurers overseas have made significant progress with blockchain technology, including a consumer application for flight delay insurance and a commercial platform for marine insurance. But activity on the part of U.S. insurers is less apparent.

Conference calls provide a useful barometer for a company's interest in blockchain, as they indicate that executives are thinking about it. When startups try to introduce new technology, one of the common hurdles they cite is a lack of commitment from those with decision-making power at incumbent institutions.

When we published research in April on how U.S. financial services companies are using blockchain, we found roughly 40 transcripts since the start of 2015 from publicly traded U.S. banks that mentioned "blockchain," versus only three from insurance underwriters. Publicly traded banks greatly outnumber insurers in the U.S. But insurers also lagged broker/dealers and asset managers in terms of transcripts, and those sectors each have fewer publicly traded companies than insurance. For this piece, we expanded our transcript analysis to include global insurers, which offered a wealth of information. Many more European insurers discussed their projects than companies in other regions, despite there being about half as many publicly traded insurers in Europe as in the U.S. and Canada region.

One project that caught our attention in the European market was Axa's Fizzy. The flight insurance product uses smart contracts written to the Ethereum blockchain and automatically pays a claim if a passenger's flight is delayed more than two hours. Axa launched Fizzy in September 2017 and at the time offered coverage for only a few routes a day. As of mid-June 2018, Axa had expanded the app to 5% of worldwide routes. But merely the fact that it launched is noteworthy, as many projects from other companies, both in and outside the insurance realm, remain in proof-of-concept mode.

Ping is king

While European insurers collectively discussed blockchain on the most number of conference calls, Chinese insurer Ping An Insurance (Group) Co. of China Ltd. took the top spot in our ranking of individual insurers.

Ping An considers blockchain one of its five core technologies, as executives mentioned during an investor day in November 2017; the others are biometrics, big data, artificial intelligence and cloud computing. One of its main initiatives was the creation of a blockchain-as-a-service platform, which provides services to small and medium-sized enterprises that want access to the latest technology.

Come together

While they might not be as forthcoming about their internal projects, a number of U.S. insurers have discussed their membership in consortium initiatives. One of these is The Institutes RiskBlock Alliance, or RiskBlock for short, which works with underwriters and brokers to develop blockchain applications specifically for the insurance industry. Europe is also home to a consortium that has been generating buzz: Zurich-based B3i. Short for Blockchain Insurance Industry Initiative, B3i began as an industry collaboration but in March announced that it was becoming an actual legal entity, incorporating itself as B3i Services AG.

The bottom line

While it is possible that U.S. insurers are more secretive about their blockchain plans than other industries, they are more likely taking a wait-and-see approach. The fact that insurers in other areas of the world are experimenting with the technology and even launching apps supports this assessment.

Right now seems like a make-or-break moment for distributed ledger technology, as projects across multiple industries are going from proof-of-concept to live implementations. Perhaps if those bear fruit it will compel U.S. insurers to further embrace the technology.

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Citi Placing Lots Of Bets On Blockchain Startups

May. 02 2018 — A number of large, publicly traded U.S. financial institutions have been investing in blockchain startups, and none has been more active in the space of late than Citigroup Inc.

Through its holding company and various subsidiaries, Citigroup has invested in seven startups since the start of 2015, which is more than Goldman Sachs Group Inc. and JPMorgan Chase & Co. combined. Based on our research, which looked at private placements from all publicly traded U.S.-based financial services companies, we think this could be a wise move. One of the perceived benefits of blockchain is that there is not a central intermediary influencing the system, so investing in the technology at arm's length might play to Citigroup's favor.

US-based, publicly traded financial services companies that have made the most investments in blockchain companiesWe chose 2015 as our starting point because that was when U.S. financial services companies seemed to take a keen interest in blockchain, enough that they began discussing it on conference calls, at investor days and at industry events.

Citigroup has tended to invest in blockchain startups focused specifically on financial services applications, which makes sense. In addition to offering a potential return, funding a startup can help the incumbent institution become well-versed in the technology without having to do development work in-house. This might explain why JPMorgan, for instance, made fewer investments, since it created its own organic blockchain initiative known as Quorum.

But JPMorgan's approach has reportedly presented some issues. JPMorgan is trying to spin off Quorum because other banks were reluctant to use a system linked so closely to the bank, according to a Financial Times article published in March. This might serve as a good argument in favor of the passive investment route. That way, the incumbent can potentially benefit without being perceived as too involved in the process. Startups can likewise gain from such relationships.

In addition to the obvious monetary benefits, the startup can use its backers as beta testers in pilot programs. Since blockchain is a network technology, it helps to have large institutions testing it out in the early stages. R3 offers a prime example. The software firm, known for its open-source distributed ledger platform Corda, has attracted more than 40 of the world's largest banks as investors, including Bank of America Corp., Wells Fargo & Co., and Citigroup from the U.S. Those large banks have in turn tested new concepts using the platform. In March, for instance, Credit Suisse Group AG and ING Groep NV announced that they settled a securities lending transaction using Corda.

Blockchain companies that have the most US-based, publicly traded financial services companies
It remains to be seen how the potential of blockchain is ultimately realized. In our view, investing in startups seems like a shrewd way for financial services companies to explore the many facets of the technology without seeming overbearing and without committing massive amounts of internal resources to projects.

More discussion of blockchain can also be found on the Street Talk podcast, which is available via  iTunes.

Fintech Funding Flows To Insurtech In February

Mar. 21 2018 — Insurance technology companies took center stage in the month of February, attracting the most investor dollars of the various financial technology subsectors that S&P Global Market Intelligence tracks. Overall funding in the financial technology sector declined about 10% from the prior month, however, based on the disclosed value of deals involving private U.S.-based companies that closed in each period.

Two health-insurance-focused startups were key drivers of the $216 million that flowed into insurtech. These were CollectiveHealth and Bind Benefits, which closed on $110 million and $60 million funding rounds, respectively. Both provide tech solutions to companies that self-insure (i.e. provide health coverage for their employees with their own money rather than using an outside insurance company.)

This was a departure from last month, when investment and capital markets technology was the most well-funded, bolstered by capital raises from several robo-advisors, including Wealthfront and Acorns. Meanwhile, insurance technology companies only closed on $71.3 million worth of transactions during the month.

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Credit Analysis
Beyond Amazon, Alibaba Leads Disruptive Innovation In Race To $1 Trillion Valuation

Mar. 20 2018 — The race to become the first trillion dollar company is heating up, with everyone paying close attention to the tech mega-caps — Alibaba Group Holdings Ltd. (NYSE: BABA) and Inc. (NASDAQ: AMZN).

Despite a lack of consensus over who will take the crown, one thing is evident: no two companies in the race are as neck and neck and as similar in business strategy and operations as Amazon and Alibaba. Both champion the e-commerce landscape in their specific countries – Amazon in the U.S. and Alibaba in China - and both have made their forays into new industries such as food and healthcare.

Wall Street is following these companies closely, with Alibaba slightly in the lead in terms of analyst recommendations. As of April 2, 2018, the Chinese e-commerce behemoth has received 37 buy ratings and just two hold, according to S&P Global Market Intelligence data. The average analyst price target of $226.44 suggests upside potential of roughly 23%. Amazon, in contrast, has received 31 buy ratings and two hold. The average analyst price target of $1,709.05 suggests upside potential of roughly 18%.

To keep a tally of the race, we used the RatingsDirect® Monitor, a data visualization portfolio monitoring tool that provides risk/return insights and helps track and analyze market movements for publicly-traded companies that are rated by S&P Global Ratings.

Figure 1: Tech Mega-Caps: S&P Issuer Credit Rating (FCLT) vs. 3M Stock Price Volatility (%)

Tech mega-caps: S&P Issuer Credit Rating (FCLT) vs. 3M Stock Price Volatility (%)

For illustrative purposes only.

At a market cap of $471.6 billion, Alibaba is not too far off from catching up to Amazon’s $700.7 billion cap. Alibaba stock’s price has observed a three-month price volatility of 40.1%, the largest among the tech titans and far surpassing Amazon’s 30.8%.

Although the higher volatility and lower S&P Global Ratings’ long-term credit rating present more risks for investors, Alibaba’s higher return on assets and lower P/E and leverage ratio suggest more opportunities for the Chinese e-commerce behemoth to grow and reach the $1 trillion valuation first.

Comparing disruptive levels of innovation

To compare the disruptive level of innovation in the various sectors that Amazon and Alibaba have entered, we selected comparable events between the two conglomerates and examined industry-level probability of default (PD) changes of the PD Market Signal Model, a structural model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one-to-five year horizon.

The war for groceries

Both Amazon and Alibaba have been stepping up their battle in the grocery business. Just last year, Amazon’s announcement to purchase Whole Foods Market Inc. for $13.7 billion shocked investors, with shares of some of U.S. food’s largest players – Kroger Co. Supervalu Inc., Costco Wholesale Corp., Target Corp., and Wal-Mart Stores Inc. – dipping on the news. The market perceived credit risk of the U.S. food retail industry also escalated. One week following the announcement, the U.S. food retail PD jumped from 3.73% on June 15, 2017 to 4.85% on June 23, 2017, or about a 30% increase in the industry’s probability of default.

Figure 2: U.S. Food Retail Median Market Signal Probability of Default: June 15, 2017 – June 23, 2017 (%)

U.S. food retail median Market Signal Probability of Default: June 15, 2017 – June 23, 2017 (%)

Alibaba also aggressively expanded its food footprint in 2017 with its rollout of new supermarkets under the Hema Xiansheng brand and its $2.9 billion investment in China’s largest hypermarket operator Sun Art Retail Group. Just this year, reports that Alibaba held early development talks with Kroger Co. left the Chinese food industry shaking. One week following reports of the discussions by Reuters and New York Post, China’s food retail PD increased 109.10% from 3.05% on January 23, 2018 to 6.39% on January 31, 2018. [i] [ii]

Figure 3: China Food Retail Median Market Signal Probability of Default: January 23, 2018 – January 31, 2018 (%)

China food retail median Market Signal Probability of Default: January 23, 2018 – January 31, 2018 (%)

The battle for pharma

Pharmaceuticals have been another potential battleground for the e-commerce giants.

According to an October 5, 2017 note published by Leerink Partners managing director Dr. Ana Gupte, Amazon is “hiring relevant talent and are in active discussions with mid-market PBMs [pharmacy benefit managers] and possibly even larger players such as Prime Therapeutics.” Following publication of the note, the U.S. drug retail PD escalated 22.55% from 16.16% on October 4, 2017 to 19.81% on October 12, 2017.

Figure 4: U.S. Drug Retail Median Market Signal Probability of Default: October 4, 2017 – October 12, 2017 (%)

U.S. drug retail median Market Signal Probability of Default: October 4, 2017 – October 12, 2017 (%)

Similarly, China’s drug retail PD jumped 90.67% from 1.55% on February 1, 2018 to 2.96% on February 9, 2018, following Alibaba’s February 2, 2018 announcement to partner with European pharma giant AstraZeneca PLC.

Figure 5: China Drug Retail Median Market Signal Probability of Default: February 1, 2018 – February 9, 2018 (%)

China drug retail median Market Signal Probability of Default: February 1, 2018 – February 9, 2018 (%)

The risks of innovation

In summary, our PD Market Signal model shows that Alibaba disrupts the short-term market perceived credit quality of firms more than Amazon does. The Chinese e-commerce behemoth is viewed by many investors as a proxy for China's consumer economy and growing middle class, whereas Amazon is not, and PD movements are reflective of this. As illustrated by our RatingsDirect® Monitor, Alibaba has a much lower leverage compared to Amazon, with a last-twelve-months Debt/EBITDA ratio of 1.4, compared to Amazon’s 2.9. Alibaba also has higher growth potential from the perspective of ROA and P/E. Alibaba’s ROA stands at 7.4%, compared to Amazon’s 2.4%. Further, Alibaba’s lower P/E ratio of 46.3, compared to Amazon’s 235.3, suggests that the Chinese firm may be undervalued.

Figure 6: Tech Mega-Caps: ROA (%) vs. Debt/EBITDA (x)

Tech mega-caps: ROA (%) vs. Debt/EBITDA (x)

For illustrative purposes only.

Figure 7: Tech Mega-Caps: ROA (%) vs. P/E Ratio (x)

Tech mega-caps: ROA (%) vs. P/E Ratio (x)

For illustrative purposes only.

Whether Alibaba will claim the $1 trillion title before Amazon, however, remains to be seen. A fast growing company, Alibaba faces significant challenges from China’s ever-changing business environment, including potential regulatory, litigation, and international expansion risks, as outlined in roughly 45 pages of the firm’s most recent annual report.

Despite the inherent risks, what sets Alibaba apart is its domination of China’s online marketplace, which is the single-largest in the world. Founder Jack Ma has also been faster than Bezos to expand his business lines. The use of Alipay, one of the world’s largest mobile payment platforms, and the firm’s roughly $350 million investment in Chinese electric-vehicle maker Foxconn Technology Group are just a few examples of the firm’s growing economies of scale.

[i] Alibaba, U.S. grocer Kroger had early business development talks: source. (n.d.). Retrieved March 01, 2018, from

[ii] To battle Amazon, Kroger eyes Alibaba alliance. (n.d.). Retrieved March 01, 2018, from

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