The venture capital unit of the Chicago Mercantile Exchange, one of the world's largest derivatives exchanges, is buying a stake in Berlin fintech Crosslend, which aims to create a new European marketplace for debt.
“We want to create a European debt exchange,” Oliver Schimek, Crosslend's founder and co-chief executive, told Handelsblatt. The size of the stake in Crosslend purchased by CME was not disclosed.
Crosslend plans to use its Luxembourg subsidiary to turn consumer and corporate loans into securities, which institutional investors and banks can buy and trade.
It marks the first time the Chicago Mercantile Exchange, the world’s largest marketplace for futures and options products, has taken a stake in a European startup.
Rumi Morales, the head of CME Ventures, said she views the partnership as "promising."
With Crosslend, there are no tranches. Every loan is individually converted into a security, in which the lending bank retains a stake. Oliver Schimek, founder and co-chief executive, Crosslend
So far, Crosslend has been all about competing with banks but its idea could actually help banks. The new exchange would solve a major problem in Europe, above all in the south and east of the continent. Many banks are not extending enough credit, and some have been forced by regulators to dispose of loans on their books because of increased capital requirements. Conversely, the ongoing low-interest rate environment means plenty of investors are looking for a new investment class with solid returns.
Crosslend began as a credit platform for private customers, but the new project marks a change in emphasis for the company, which currently has around 50 employees. It wants to turn debt into a tradable security, Mr. Schimek, who graduated as a physicist and also trained in economics, said.
What will be traded are basically securitized loans, but Mr. Schimek told Handelsblatt that Crosslend’s model differs from current forms of securitized credit, which earned a bad reputation during the financial crisis of 2007–8.
With classic models of securitized credit, the credit was divided into tranches. This is essentially like a waterfall according to which profits and losses are attributed to the investors of the corresponding tranche. A high-risk investor could for example take the first loss, if any occurs, while low-risk investors only take a hit if the overall portfolio collapses by more than 10 percent, 30 percent or whatever the capital structure states.
For Crosslend, the tranching is not the problem but the pooling can mean a loss of transparency, a fundamental difference to one-to-one securitization where one bond doesn't represent a pool but a single loan, which is more transparent. “With us, there are no tranches, and no pooling. Every single loan is individually converted into a separate security, in which the lending bank retains a financial stake,” Mr. Schimek said.
The first practical test of the new model is just around the corner. According to Mr. Schimek, one unnamed western European bank intends to release €500 million worth of consumer credits, or $540 million, on the new platform over the next five years.
In recent months, there has been something of a waning of the euphoria surrounding new fintech startups which want to use innovative business models to challenge existing market players. Last year, U.S.-based Lending Club—the world’s largest peer-to-peer lending platform—was caught up in a scandal surrounding one of its former chief executives, who had to resign after improprieties were discovered in the company’s lending process.
In addition, market observers increasingly complain that business volumes are not published for much-hyped startups, making objective evaluation of business models and prospects much more difficult.
Nonetheless, the number of German fintechs has grown rapidly in recent years. There are now 400 in an increasingly crowded marketplace. Predictions vary substantially about how much the fintech market will grow, from €600 billion to €3 billion, at the least optimistic.
Handelsblatt Global corrected this article on February 8 to say CME Ventures had taken a stake in Crosslend, and that Rumi Morales, the head of CME Ventures, is a woman, and not a man. The revised version also gives a fuller explanation of tranching. CME has not teamed up with Crosslend to set up a European debt exchange.
Frank Drost is a Handelsblatt editor covering financial supervision and banks. To contact the author: [email protected]