Read our thoughts on Nexx and the world at large.
Posted by Ben Milsom
Some good news here this morning, as the New Zealand Herald reports on the likelihood of positive credit reporting coming to New Zealand, following an announcement from the Australian Government that they’re going to follow the recommendations of the ALRC in implementing (amongst other things) a positive regime across the Tasman. The original ALRC paper is here for those who are interested.
As announced, the Australian Government will allow credit reporting agencies to collect and share information about borrowers including the type of each credit account (mortgage, personal loan etc), the date each current credit account was opened, the credit limit of each account, and the date on which each account was closed. Repayment information is coming down the track, but only after some other credit reforms are made.
This is seriously good news for lenders in New Zealand, and contrary to some misconceptions it will lead to a better lending environment here in Godzone.
Why is it so much better?
Because, for the first time, lenders will be able to measure just how indebted someone is at the time of loan application. At present, there is no way to accurately verify that information and little incentive for borrowers to front with the information. Moreover, there is no way to incorporate that information into credit scoring systems, even if the borrowers could volunteer that information. Positive data gives credit providers a more accurate view of risk. And that’s good.
So, how much better will it be?
Let’s look at some numbers.
If we look at countries who have introduced positive credit data, we see a marked decrease in bad debt levels.
A significant study into comprehensive credit reporting in the US by Barron and Staten in 2000 shows that default rates would almost triple if only negative information was used to decide creditworthiness in a conservative lending environment (1.08% bad debt compared to 2.92% with a target approval rate of 40%). Using positive credit data gives three times better loan book performance, compared with negative only. That’s alot.
The US is not alone here – research in Japan, Brazil, Argentina, Colombia, Hong Kong shows largely the same thing - that negative credit reporting increases exposure to bad debt to a significant extent.
It’s also far more equitable in terms of lending practices. Positive credit data reduces the use of demographic proxies for risk such as age, sex, racial group, and location. Demographic-based risk assessments are built around the white male majority consumer, discriminating against women, young people and ethnic minorities. Positive data removes some of the need for lenders to use these proxies so heavily and instead look at the actual borrower more closely. This helps in lots of ways - it can improve home-ownership rates for minorities and can help reduce inadvertent indebtedness, which has a greater effect on minorities.
What does all this mean in practice?
It means more affordable rates for ‘good’ borrowers because they’re subsidising less bad debt.
It means increased amounts of lending, especially in the small business sector where the indebtedness of an owner/operator is intrinsically tied to the performance of the company.
A report commissioned in Australia, put the improvements in GDP as a result of positive credit scoring at somewhere between $1.1 billion and $5.3 billion depending on the behaviour of lenders and up-stream credit availability.
Come on - it can’t be all good…
You’re right - there are some genuine concerns with positive credit reporting. The two most common are privacy concerns and the potential for predatory ‘debt targeting’ by lenders can be managed through good legislation.
With regards to privacy, New Zealand already has strong protection around the use of credit information, defining who can use information and for what purpose and placing heavy penalties of contravention of that - and the Credit Bureaus are taking this responsbility very seriously. Believe us on this one. Add to this potential incoming legislation on responsible lending (only really possible with positive credit data) and you’ve got that covered off.
An additional criticism is the potential for ‘credit orphans’ – borrowers who find themselves through circumstance with a poor credit history and with no way to correct it. This is an unfortunate situation, but we don’t agree that it’s any better under the present negative reporting regime. If anything, it’s probably worse at the moment. At least under positive credit scoring you’ve got the potential to demonstrate that you’ve cleaned up your act over time - negative data doesnt allow for demonstrations of improved credit behaviour until the bad information leaves your credit report, and that can take 7 years.
So we’re excited about positive credit reporting, and will be making the most of it at Nexx when it rolls around in New Zealand. Whenever that might be.
Posted by Glenn
Globally, social lending has been doing very well recently, with record loan volumes and media coverage as people seek out alternatives to the increasingly frugal banks.
There has been the odd aberration though. Most notably, Boober, the Dutch provider hoping to go pan-European, folded – leaving lenders and borrowers involved in millions of Euros worth of existing loans in the lurch. As for the reasons why, this graph says it all:
Source: Boober Watch
Dredging up some economics knowledge, this would appear to be a classic case of low network good expectations and rampant coordination problems.
The benefits from using network goods come solely from the fact that other people are also members – think of the benefit you would derive from Facebook, TradeMe or indeed services like Nexx if there were no other members. Answer? None.
In short, users will derive a perceived private benefit from using a network good that is related to the number of other users they expect will also join. The more people they expect will join, the greater the expected benefit, and thus the greater the cost they are prepared to bear themselves in order to join.
That’s not the end of the story though - the fact that social lending services are two-sided platforms complicates the issue even further. Even if a service such as TradeMe were to have 1,000,000 members, it would be absolutely useless to you as a buyer if every single other member was also a buyer. This leads to something of a standoff: each participating group refuses to join until sufficient numbers of the other does.
Some businesses have cunning pricing strategies to overcome this. Nightclubs, for example, will often offer free entry for women, in the knowledge that this will entice men to pay up the door charge. TradeMe charges buyers nothing to participate, and levies fees only on sellers. Pricing strategies can overcome coordination problems, but bad pricing will enhance them and also significantly enhance barriers to participation – decreasing network effects.
Applying this to Boober? In early 2008, Boober significantly raised their lending fees. In response the PIVN (an independent association of Boober lenders) issued a statement calling for all lenders to cease new investments until the new fees were explained, and a backlog of unpaid loan payments was cleared. Raising fees on lenders? Aggravating users? It didn’t bode well.
On the upside, Zopa has been experiencing their highest market throughput of all time. Supply of funds recently reached record levels, as did demand. Equally, Lending Club is going from strength to strength, with loan volumes accelerating since their SEC registration.
Finally, smava has been exhibiting a growth pattern that is far more pleasing to the eye:
Social lending is doing very well indeed, and will continue to do so as financial services become increasingly decentralized over the coming years. But more about that another time.
PS: On the topic of missed expectations, Ben made a flippant comment a while back intimating supposed ‘big announcements’ (the nature of which I have absolutely no idea). Just ignore him. Ben occasionally gets a bit excitable, and has been punished appropriately – coffee machine access privileges have been revoked.
Posted by Ben Milsom
I’m just back from a thoroughly interesting weekend at FooCamp - where I was given the opportunity to talk a bit with people about financial services in a post-crunch world. I had some fascinating conversations and met some amazing people - you can check out some of the blog coverage here, here and here. One of the things that I spent quite a bit of time talking about was how technology, media and government might respond to the current financial crisis. How innovation might, this time round, build a more robust system for the future.
From our (well, Glenn and my) point of view, we think financial services innovation will evolve around a ‘cloud’ model. This model is essentially ‘distributed’ - components of the financial system will be performed by various entities, all knitted together using the web as a delivery platform. Transparency and stability is built through interconnection standards, reputation management systems, and the ability to assemble the components in new and innovative ways to serve niche communities. I’ll save the details for another post, but as part of the session that I gave some some real world examples of new-era financial services that are already at market and enjoying some success. I thought i’d post about some of our favourites here.
Kiva - This one cant be a surprise to many people - the idea is such a winner. You can lend funds (interest free) to people in the third world to help them build businesses or finance their development, helping them out of poverty. Its bringing the great work of people like Dr. Muhammad Yunus and his model of microlending to the internet generation. Its been growing wildly in popularity, and is lending almost $1m USD a week.
Trust Art - A project launched at TED2009, this site aims to connect investors with deserving art projects. Investors take effectively an equity stake in the art project, recieving any of the capital gains if the art sells at the end of the development project. It’s a really interesting new model to fund significant cultural works - a space that is desperate for access to capital. Its a good example of the ‘distributed’ system - the platform, the screening/vetting function and the capital raising/marketing element all separated, knitted together using a web platform. It serves a niche community - artists and art lovers, but its a potentially a very good fit.
Yadyap - This one’s still prelaunch, but has been previewed in a number of places. Its an online alternative to payday loans that utilises the peer-to-peer model. Payday lending is a vicious world, with absolutely horrendous interest rates (up to hundreds of % APR). So long as the credit scoring system is managed well, this has the potential to solve alot of problems. Very liquid for lenders, much cheaper for borrowers. And far less embarrassing.
Txtloan - Not so much online as a mobile play, it allows you to borrow up to GBP100 at very short notice just by texting a number. Funds are deposited instantly in your account and you pay GBP10 for the privledge of holding onto the funds for a week. Cheaper than an overdraft, and potentially very useful if you’re in a tight spot - Its like Vodafone’s IOU but for your bank account.
Zecco - Free sharetrading, so long as you keep a minimum balance in an account (you need the funds there to purchase the shares anyway). ASB, are you listening?
Mint/Wesabe - Again, a couple that are fairly well known, but show very clearly the benefits of a distributed system. Here, these platforms take information from ‘money storage systems’, aka banks, and present it to users in a more useful way - they combine balances and transaction reporting with budgeting and target offers for better financial products. They can even track investments to give a homogenised picture of your financial state of affairs. Very clever, very useful.
Yodlee - Both the above services use this - its essentially an aggregation system for banking information. It allows 3rd party websites (with the consent of the user) to access their banking balances, execute payments/transfers and a raft of other things - its like an API to the banking system.
Valuecruncher - an interesting NZ site that uses crowdsourced information to form valuations of stockmarket companies. It uses a Discounted Cashflow model, and invites users to specify the parameters of the companies performance, then calcuates what the current share price should be based on that information. Its outsourced stock-tips, and it seems to have a growing community of users.
Those are some of the sites that we think are pretty great, and are employing or building around the ‘cloud’ model that I mentioned above. There’s many others out there - if you’ve got some that we’ve missed, put em in the comments below.
Posted by Glenn
Interesting news from the US as Prosper receives its formal cease-and-desist order from the Securities and Exchange Commission. In the wake of this, Loanio, the newest entrant into the US peer-to-peer lending market, has voluntarily suspended lender registrations. The SEC, through its actions against Prosper, has made very clear its interpretation of securities regulations: the notes offered to lenders by US peer-to-peer operators are in fact securities, and must be regulated as such.
One could argue that all this represents misplaced attention from the SEC. Having presided over one of the worst financial crises in history, in which numerous complex and opaque financial instruments were developed and marketed with little oversight and regulation, the agency has been on the receiving end of much public criticism. It’s not hard to see the public relations capital that is built from a move such as this (“look, we really are protecting investors!”), but it seems more than a little strange to be targeting new markets in which transparency and control are intrinsic to the model.
In saying that, the regulations now being enforced exist for a reason. In order for securities markets (or any market for that matter) to operate efficiently and effectively there must be minimum standards of information disclosure and recourse to aid the decision making of market participants. Without this, people are simply unaware of the risks they are accepting and the benefit they are receiving when transacting. The fact is investors often lack sufficient financial literacy and nous to critically evaluate opportunities, so it’s good to hear investors are protected with minimum standards for new, potentially risky investment options - even ones with such obvious benefits as peer-to-peer lending.
All of this has parallels to our own situation. We officially turned one year old a little while back, and in this time we’ve been engaged in more than our fair share of fun with lawyers. As is probably obvious, at times things haven’t exactly gone the way we thought they would – there are numerous regulatory complications and difficulties to grapple with, and we owe a huge debt of gratitude to our fantastic legal team for their efforts so far. We’re confident we’ll get there soon, but as Ben said these things really can’t be rushed.
Thanks to everyone who has contacted us over the past year with messages of support and encouragement. We’ve really enjoyed the conversations we’ve had with you, and they’ve served to validate our view that there is a real need for the Nexx platform. If we don’t see you before then have a very Merry Christmas and a relaxing break over the New Year.
Posted by Ben Milsom
In this time of collapsing stock markets, crunchy credit and general economic despair, we thought we should try and brighten peoples day in the only way we're legally able to right now - by updating the Nexx home page.
So welcome to the frustratingly new teaser site. We've refreshed the look to match what you'll see when Nexx launches in early 2009 - we hope you like it. Feel free to comment below with any thoughts.
We've been a bit quiet on this blog for the last couple of months, so its probably worth an update on where we are at.
What have we been up to?
A large amount of our time is spent working through regulatory issues. It has taken a while but we think that a solid legal structure is really important to our users, and these things can't be rushed.
We've continued to grow our team and are poised to make some exciting announcements in the new year regarding where Nexx goes to next. You'll hear about these things here and through the mailing list, so make sure you sign up.
We've been engaged in some great projects with the guys over at www.start-up.co.nz, including featuring on their Start-up journeys blog (where you can read more about Nexx and our journey to market) and a new TV series focusing on interesting internet start-ups in NZ.
We've been getting more active in the NZ online community, talking to people on Twitter, going to meetups and making the acquaintance of some great entrepreneurs in the process.
So things are happening, we just cant tell you all about them yet.
As always, if you're interested in Nexx we encourage you to sign up to our mailing list(www.nexx.co.nz). While you're there it would be great if you can let us know whether you see yourself as a borrower, lender or are just generally interested in the peer-to-peer concept. Its just a quick question and helps us out.
So keep a look out for us here, we'll be making announcements as we go along, including the launch of our beta programme early next year.
Once again, stay tuned.
Posted by Ben Milsom
So, we've committed the cardinal sin of blogging - a distinct lack of recent, relevant content. For a socially engaged, web 2.0, crowd sourced startup, we've done a bit poorly in the last few months. What can I say? Sorry.
We've been busy here at Nexx, and for the last little while writing about the process seemed to be a bit premature - lots of you have written to us telling us to hurry the heck up and just get Nexx to market. We're hurrying. We're getting to market. We're learning just how much of a virtue patience is, and we hope you can wait along with us. It will be worth the wait. Most of our hold ups are to do with regulation and approval, but there have been some interesting side adventures along the way.
But while we wait, we've had a great opportunity come our way that we thought people might be interested in. There's a great little New Zealand media company that is covering the startup scene in NZ - the aptly named start-up.co.nz and along with that, they've decided to make a TV show about 6 interesting New Zealand internet startups. We've been lucky enough to be chosen as one of the 6 companies who get followed, coached, introduced and profiled through the show. Its been alot of fun so far, with lots more filming to come. I'll update here when we have details on its showing etc.
Along with this, start-up.co.nz has also organised for three companies to blog about life as online entrepreneurs in New Zealand - not so much as one of the many 'advice' or metapreneurship blogs that are everywhere on the web, but more to give people a snapshot of the ride that is life with an idea, a team and a small budget. Its done in conjunction with the NZ Herald, so you can get to it either from the Start-up website, or from the NZ Herald technology section.
Of course, we aren't a Valley startup with $10m Series A funding and we don't have the money (or egos) for a VP of Social Media, Corporate Blogger and Director of Online Communities, so what you get instead is us. Just the founders, some guests and people that work with us. But as much as we love the blogosphere, we cant spend all day writing. We're going to segment the blogs.
This blog will still be Nexx's main blog. We'll write here about progress at Nexx and then a lot more post launch. Our Start-up blog will be the place that we talk about the process, talk about the people and share with you stories from the front line.
We're looking forward to connecting more with our followers, and this format should let us do that. So if you're so inclined, head on over to the Start-up blogs and read about some interesting NZ online entrepreneurship here
Posted by Ben Milsom
Today's news that Lending Club (the second-largest person-to-person lending site in the United States) has suspended operations highlights the regulatory challenges facing person-to-person lending sites.
Lending Club released the following statement explaining their situation: "Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. We will continue to service all previously funded loans during this period, and lenders will be able to access their accounts, monitor their portfolios, and withdraw available funds without changes."
They further stated "Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time."
Click through to read our thoughts...
Posted by Mark
I'm Mark, the CTO here at Nexx, and I'm responsible for the development of the Nexx Platform.
I thought it would be a good time to start introducing (to those who are interested) the technology that Nexx will run on and some of the interesting technical conundrums we have come across.
Nexx is built on Ruby on Rails and PostgreSQL.
We really like Rails because of its core ideas of Don't Repeat Yourself and Convention Over Configuration, which makes development quick and remarkably flexible. It's got a great community too, some of whom we've meet at Ruby Nights a monthly meet-up here in Auckland.
I thought we'd start with a particularly curly issue we encountered today. I understand that this may not be for everyone, so if you're interested click through below.
I look forward to telling you more about the things we am doing here at Nexx.
Posted by Ben Milsom
We got a little love today from Ulrika Hedquist over at Computerworld, talking about where we're going with Nexx and how we're connecting people to bring about a better deal in personal finance in New Zealand. Read it here
We've had tons of enquiries from you ComputerWorld readers
(welcome!) who seem to be as enthusiastic as we are about Nexx, lots of them wanting to know more about the technical side of what we do. The technology behind Nexx is pretty interesting stuff, and we'll have more on this blog soon from our CTO Mark about some of the core elements that make Nexx work safely and securely.
We're keen to answer questions you have, so if there's any particular bits you want to know about put them in the comments below and we'll get them answered by our resident Nerd Herd.
Ulrika also mentioned that we're getting closer to beta stage. We're not saying much more than that at the moment, but sign up to our mailing list to be kept in the loop on developments, including the opportunity to participate in our public beta in the near future.
Posted by Glenn
In the Christmas catchup-with-your-family spirit we thought it was about
time we gave you a bit of an update on how Nexx is going and about our big plans
for the future.
Its been a busy three months since we told you of our big Spark
win. Most importantly we've shifted from our temporary premises in Mt Eden to more spacious offices at The ICEHOUSE.
The ICEHOUSE is a business
incubator in Auckland that helps startup business to grow much faster than they otherwise would
'in the wild' by pairing them with experienced advisors and mentors that guide and assist the business development process.
love our new home down here in Parnell and we're working with a great
team of of mentors, advisors, consultants and investors who are helping making our
vision for Nexx a reality. Being in The ICEHOUSE has other benefits as well - we're surrounded by a bunch of
other startups doing some really interesting things and bringing back stories
from the frontlines that help us see what's up ahead.
Nexx itself is growing in leaps and bounds. This month we took on some extra pairs of hands in Adam and Kirby, who will join Mark (our CTO) in the development team. Hopefully
they'll check in here in the new year to give you some insights into how
Nexx is put together. Speaking of the developers, their baby the Nexx
platform is forging ahead. We're taking on feedback from potential customers
and current users of international person-to-person lending websites to make Nexx a place
that really makes social lending work.
We've been working hard to establish great industry partnerships that will make a system like Nexx
work - everything from credit verification and identity services to debt recovery and legal
teams. All of our
partners are a great fit for us, and they're all innovators and enthusiastic about the
enormous potential for social lending in New Zealand. They're so keen on the idea we sometimes think
they talk about Nexx more than we do!
And they're not the only ones who like the look of what we're doing here. We've
been in the news a couple of times recently, and obviously struck a chord
with New Zealanders - we had over 2000 visitors and hundreds of enquiries in the wake of
our Sunday Star Times article.
So with all the progress we've made I'm sure you're asking yourself the most important question: when are we
launching? Unfortunately we can't say just yet, but check back here in mid-January for
some exciting news. If you're interested you can keep up to date by
subscribing to our newsletter here.
We're always keen to hear from people who want to know more about Nexx or
who have thoughts about social lending as a whole. You can always contact us
here at the Nexx website by using the 'Contact Us' link above - we'll try to
get back to you as soon as we can.
Merry Christmas (or Nexxmass as we call it around here),
Glenn and Ben