WORKWEEK

3 Fintech News Stories

#1: Landlord Now Pay Later (LNPL)

What happened?

A proptech platform emerged from stealth and raised some equity and debt capital:

Downpayments, a real estate fintech startup, is emerging from stealth today with the mission of helping investors purchase new properties with interest-free down payments.

Downpayments has secured $31.8 million in initial debt funding from Partners for Growth and $1 million in equity financing from Second Century Ventures, which is backed by the National Association of Realtors (NAR). It plans to use its new capital to power investment property transactions.

So what?

Here’s how it works:

• A real estate investor wants to buy a house in Florida (Downpayment operates only in Florida at the moment) but doesn’t have the cash for the down payment and doesn’t want to do a cash-out refinance on an existing property and surrender the low interest rate they have on their mortgage.
• They agree to use Downpayments as their brokerage service, which unlocks their ability to get an interest-free loan for a down payment of 10% of the purchase price of a property (capped at $200,000) or a loan at a “competitive” rate for a down payment of more than 10% (for example, a 20% down payment would come with a 7% APR). The loan is secured by a second mortgage on an existing property owned by the investor.
• The term of the loan is 48 months, with no penalty for paying early. 

Downpayments makes money, primarily, through the fees and commissions it earns by acting as the investor’s broker, an arrangement that the company’s CEO compares to BNPL:

It is not dissimilar to the BNPL industry where the merchant pays to help cover the cost of finance for the buyer, albeit with Downpayments, additional services are provided to the buyer to create more value for our clients

I’m not wild about this model (Landlord Now Pay Later?) 

Bad things tend to happen when you use loans as a customer acquisition tactic rather than as the revenue-generating product. The reason that pay-in-4 BNPL providers get away with it is that they are loaning small amounts of money over small timeframes.

This isn’t that. This is giving cash-strapped investors in an overheated real estate market the ability to push their leverage in exchange for some brokerage fees. A 48-month loan term isn’t as long as a 30-year mortgage, but it’s more than long enough for things to go sideways. 

#2: Stripe for Credit

What happened?

Pier, a fintech infrastructure company, raised $2.4 million in seed funding to build ‘Stripe for credit’: 

Here’s how it works: Developers add Pier’s APIs with a few lines of codes, saving months of labor and millions of dollars, [Co-founder and CEO Jessica] Zhang said. Pier’s technology then manages the credit lifecycle from end-to-end, including origination, underwriting, compliance and servicing.

Pier is a SaaS model and charges a monthly fee that includes a monthly minimum plus a usage fee based on loan volume, use case and on the number of inquiries. Some of those use cases include credit builders, buy now, pay later for weddings and clean energy, salary advance loans, merchant advance and portfolio lines of credit.

So what?

First of all, it would be nice if Y Combinator (which invested in Pier) instituted a rule prohibiting any companies that it accepts into its program from describing themselves as ‘Stripe for X’. That would save us all a great deal of aggravation, considering how often that framing is misused and the breadth of Stripe’s own ambitions.

Second, I don’t really understand this one.

In my experience, lending infrastructure tends to work best when it’s highly specific, designed for a particular market segment, product/use case, or phase in the lending lifecycle. This is one of the reasons that the ‘Stripe for credit’ framing doesn’t work. Lending is fundamentally different than payments. There are no networks, sitting under the surface, enforcing a set of rules and product standards. Everything in lending is far more bespoke and comes with a lot more risk.

Pier’s website doesn’t evince an understanding of this complexity or nuance. It claims to be able to support both consumer (BNPL, credit builder, personal loans) and business (merchant cash advance) use cases. It claims to be able to handle the entire lending lifecycle, from origination through servicing. And, oddly, it doesn’t come with any integrated bank partners, but rather with a set of tools designed to help its clients directly apply for and manage their own state lending licenses (which, BTW, seems like the least efficient route to launching a credit product).

By contrast, Stripe, which is also trying to be ‘Stripe for credit’, offers a few very narrowly tailored lending products (business loans and commercial charge cards) in partnership with Celtic Bank.

That’s generally the way to do it.    

#3: A New Acquisition Channel for Credit Unions

What happened?

Origence, a provider of lending technology to credit unions, landed a new partner:

In late December, Origence and Tesla announced a partnership to offer credit union financing to electric-vehicle buyers through the Tesla website.

Origence sees this partnership as provide Tesla buyers who are seeking affordable monthly payments with more options through credit union financing.

By making credit union financing available at the point of purchase, Origence said EV buyers will have easy access to competitive rates and extended financing terms — both important factors in providing consumers with options to lower their monthly payments.

So what?

The mechanics here are interesting.

Last year, Origence launched a subsidiary called FI Connect, which acts as a top-of-funnel aggregator for Origence’s credit union clients. FI Connect builds partnerships with merchants in categories that aren’t well-supported by existing indirect lending networks (think electric vehicles, digital marketplaces, solar panel installers, etc.) that are looking to offer financing options to their customers. FI Connect originates the loans at the point of sale and then resells them to its network of credit unions through forward-flow agreements. Origence provides the underlying technology for the origination and servicing of the loans, as well as the new member sign-up process, which is a required step for credit unions looking to participate in indirect channels.   

FI Connect is a smart way for Origence to extend its value proposition with its credit union clients, and while it’s still relatively new, Tesla (which only had, to date, financing relationships with Chase, Wells Fargo, and Ally) is an impressive get.

I look forward to seeing how Origence continues to build out this new network.

2 Fintech Content Recommendations

#1: Fintech from first principles (Matt Brown) 📚

Another banger from Matt. It breaks down financial services by looking at both the essential jobs to be done (pay, invest, borrow, insure) and the value provided (accessibility and cost).

Really interesting framework, which I will likely build on in my own writing in the future.  

#2: Tokenized Deposits: How I Learned to Stop Worrying and Love Stablecoins (by Todd Phillips) 📚

The title is just [chef’s kiss].

And the content is really interesting. It seeks to answer an important and unexamined question – what is the best way, from a financial stability perspective, to integrate stablecoins into the U.S. payments system?

1 Question to Ponder

Who should I speak with to better understand the overall market for consumer loan refinance (non-mortgage) in the U.S.? Who are the experts?