Update: The Branche ICO has ended. The sale raised about 750 ETH, worth $6,000 at the sale’s close.
Branche is an Ottawa-based project that aims to expand banking services to underserved communities in the United States and Canada. It allows anyone to become a payday lender using cryptocurrencies and smart contracts. Liquidity pools for the loans will help spread risk.
Smith + Crown Analysis (and Branche Response)
- Current regulations aren’t kind to p2p cryptocurrency lending: Based on our initial assessment, Branche faces a very steep uphill battle. P2P lending in the cryptocurrency space has been riddled with difficulties. BTCJam was one of the earliest lending services, and 2016 hasn’t been a great year for their growth. They stopped lending to US customers and loan volumes went down. Bitlendingclub recently closed due to regulatory pressures. The complicated regulatory environment facing crypto lending projects is a significant challenge. Brache plans allocating just 6% of the crowdsale amount to legal concerns, which seems inadequate.
- There is a significant risk of default among payday loans: The Center for Responsible Lending reports that 46% of payday loans end up defaulting. Cryptocurrency does not solve the high default rate–and in some ways, exacerbates it because it’s unclear what legal recourse exists on unpaid digital currency loans. Cryptocurrency lending needs very strict KYC or other measures to guard against high default rates. Branche’s liquidity pool scheme doesn’t seem to address the scale of default risk.
Branche has been responsive to our inquiries and offered in-depth responses to our concerns. We have summarized them below and have included their full response in the Appendix.
Branche Response: Branche isn’t a traditional p2p loan model. It’s better to think of it a distributed micro-credit and financing platform that connects consumers(clients) with producers(vendors and lenders). More traditional lending institutions, such as banks, would be significant players on the Branche network. Their involvement should enhance Branche’s image as a legitimate source of microcredit. Branche will also benefit from the experience of lending institutions who are already familiar with the regulations governing payday businesses. Additionally, regulators in Canada recently okayed p2p lending, clarifying the legal status of p2p lending businesses.
Branche Response: Research suggests that bad debt is only 20% of fees associated with payday loans: over 70% is due to the operating costs of brick-and-mortar stores dedicated solely to payday loans. Branche aims to address this inefficiency by having existing retail stores offer the loan service on the side. Branche will also be able to absorb the cost of bad debt because it can curate its network of vendors and clients. Each user on the network is given a reputation score based on their ability to satisfy their contractual obligations. Clients who default on their debt will have a difficult time maintaining a high enough reputation score to qualify for a loan. Vendors who consistently provide loans that enter non-repayment will be removed from the network.
Branche will also employ a limited number of customer service reps who will help recover bad debt. Venders will be responsible for complying with know your customer and anti money laundering regulations.
Branche is an Ottawa-based project that aims to expand banking services to underserved communities in the United States and Canada. It allows anyone to become a Payday-style lender using cryptocurrencies and smart contracts.
There are three anticipated user groups of the Branche network.
- Clients who are seeking microcredit/payday loans or a check cashing service.
- Vendors who act as transaction mediators between lenders and clients. Venders could be existing Payday loan shops, banks, or convenience stores. All that’s required is a smart device.
- Lenders are legal persons, including corporations, lending institutions, community organizations, or private individuals who contribute liquidity to the Branche network. They can set ranges for their desired interest rates.
Lenders are matched with clients using a mobile app. When a loan is executed, clients receive a Bitcoin Visa bank card. Branche plans to eventually expand to other cryptocurrencies, such as Ether. Lending contracts are executed using ethereum smart contracts. Branche will use liquidity pools to spread out risk. The contracts can be customized to some degree by lenders, but are limited by legal requirements and norms governing the Payday loan industry.
Branche is registered under Canada’s Payday loan business license in the “remote” category. In order to comply with Know Your Customer (KYC) regulations, Branche clients will be required to provide a valid government ID, a proof of address, and the number of a cell phone capable of receiving SMS text messages.
What is the token being sold?
The branche Loyalty Token (BLT) is used to “buy” contracts over the network that allow users to extract an additional 10% of profits from Branche. They can also be traded on currency exchanges.
BLT can also be used to reserve a spot in a the vender-lender queues, ensuring that more of their liquidity gets used to fulfill lending contracts. This works through a PoS model. The more BLT you contribute to the queue contract, the better your position will be. The BLT are held in escrow until the user account is upgraded. They are then sold on the internal exchange. Branche collects a small fee, a portion goes into a charity wallet, and the remainder is transferred back into the user’s hot wallet.
Every time a new lending contract is created, there is a chance that the signees will be rewarded with new BLT.
What are the sale terms?
Each BLT costs $5.00 USD. BLT will be distributed to ICO participants in proportion to their contribution based on the exchange rate of ETH/USD at the time of distribution. Total ICO contributions are capped at 250,000 ETH. If the ICO exceeds its funding goal, participants will receive a refund that will preserve their proportional contribution to the network. This ensures that everyone has equal opportunity to get a slice of the pie, regardless of when they contribute or how much.
To encourage early investment, Branche is offering weekly bonuses. The ICO lasts four weeks. From December 5th, 2016 to December 11th, there is a 15% percent bonus. The bonus decreases by 5% every week until it hits zero on December 26th. The sale ends on January 1st, 2017.
100% of the initial supply of BLT tokens will be distributed to ICO contributors. Tokens will be distributed 2-3 months after the sale closes.
What is the project status?
Branche has a an established business plan, a marketing strategy, and a working prototype of its application. Next steps include working with their advisory board to ensure that their lending practices comply with the law. They are also working on building relationships with nonprofit organizations and business entities that will help them build up the network and aid with the onboarding process of establishing liquidity pools.
Who is the team behind the project?
Branche is a project of Canada based tech company, Digital Escrow Services. The CEO, John From is also the heading the Branche product. His profile on Branche describes himself as an expert in cryptocurrency and disaster recovery.
John’s presence on social media is minimal but both John and COO Logan Schinbeckler have been responsive and transparent in emails.
As noted above, Smith + Crown emailed concerns to Branche. On December 5th, John From responded with the following. His quotes from Smith + Crown’s email are italicized.
2. Based on our initial assessment, Branche faces a very steep uphill battle, and our listing would say so. P2P lending in the cryptocurrency space has been riddled with difficulties.
While Branche has a P2P lending component in that the Vendor can provide up to 10% of an orders liquidity, it is better to think of it as a distributed micro-credit and financing platform that connects consumers(clients) with producers(vendors and lenders).
Recently the Ontario Security Commision settled the issues around P2P lending with Lending Loop and hosted a RegTech hackaton in Toronto in conjunction with the Ethereum community. We have Regtech on our roadmap and plan on working with the regulatory and judicial bodies going forward, in the sense of the value prop design they are a customer type for our platform with unique requirements and restrictions.
At this stage in our company development we have confirmed that we can move ahead under the Payday Loan Business License, and fall under the ‘remote’ category. We will be operating a retail store as a point of contact for our Community Reps and customer base. This is where Branche will significantly differ from traditional micro-credit outlets. Our largest employee cost is with our Community Reps, who are tasked with evaluating and removing bad actors from the network.
The core rule of access to the Branche network, similar to other platform services such as Twitter’s 140 character limit or Uber’s limitations on what cars can provide the service, is ‘all transactions require human interactions’. This allows us to place our assessment system within the transactions taking place on the network, with the goal of rewarding positive interactions and removing bad actors from the network.
Vendors that continually approve bad actors for credit, along with other criterion, will be removed from the system by not being able to maintain the assessment score required to provide services. The same applies for clients that bounce loans, not only will it affect their Trust and Loyalty scores which determine the fee they pay, it will lower their overall assessment score to maintain good actor status on the network. My time as Chalk and Wire Learning Assessment CTO has brought a deep understanding of assessment culture and how powerful it is for making contextually appropriate decisions.
This starts to touch base on point 3, which is the high default rate on loans and the risk mitigation strategies that Branche is developing to address them.
3. One of the reasons Payday loans interest rates are so steep is that default rates are high (chicken-and-egg problem though). The Center for Responsible Lending reports that 46% of payday loans end up defaulting. Cryptocurrency does not solve the high default rate–and in some ways, exacerbates it because it’s unclear what legal recourse exists on unpaid digital currency loans.
- Delliote Cost of payday loan in Manitoba: http://www.cpla-acps.ca/
- Ernest and Young – Cost of payday loans in Canada: http://www.cpla-acps.ca/
The cost of bad debt is roughly $4 out of the $21 in fees for every $100 lent out. The majority cost is locked up in the operating costs of the brick-and-mortar stores, which account for roughly $15 at the lowest, with the remaining $2 for the cost of capital.
Branche as a micro-credit platform is attacking the operation cost as the primary reduction in fees, and that is where the Blockchain technology comes into play, as well as mobile and remote deposit capture, to reduce that primary cost center.
The Credit-Default-Swap insurance is our mechanism for Branche to purchase the bad debt from our Lenders and Vendors and socialize the risk and rewards. What is interesting is the default rate, and subsequent debt that is written off after 3 months, follows the Pareto principle rather closely in that 80% of the customers pay their debts on time, and 20% default (12.7% of loans issued defaulted in the Deloitte study, we have seen numbers that close to 20%).
Of the 20% that default, within 3 months 80% of them will repay the loan and 20% of the defaulted loans are written off as bad debt, the Ernst and Young study goes into further details on these numbers. These are just rough guidelines, different markets and areas have different values but as a whole this is a consistent trend across the industry.
The short answer to the bad debt issue is it is cost center for Branche in the same manner as the current industry, however we have the ability to curate our network unlike the traditional one by rewarding positive interactions on the network and removing bad actors. This is also primarily where Blockchain technology comes into play, by lowering the cost of acquiring and maintaining a client we can offer much more flexible repayment options.
The recovery of bad debt and helping clients avoid defaulting in the first place, will fall to our Community Reps and is taken off the Vendors who serve primarily to provide the KYC/AML verification layer.