LMX, a fintech company, is about to go live with a U.S.-based peer-to-peer marketplace providing banks, corporations and investors with alternatives to money-market funds, commercial paper and other short-term instruments.
This month, it will launch its pilot with two West Coast U.S. tech companies and two banks, one Chinese and one Swiss, says Thomas Schickler, CEO at the Vancouver-based company.
He expects non-bank financial institutions, such as hedge funds or pension funds, to join afterwards when LMX extends the beta version to additional players.
“We are targeting inefficiencies in the money markets, where corporates and investors are over-reliant on intermediaries to borrow and lend directly,” he said.
Making short-term liquidity pay
The company, whose name stands for ‘liquidity marketplace’, has developed a matching engine, called STABL, for equities and fixed income.
Schickler says borrowers can get lower interest rates and lenders can enjoy higher returns than commercial paper or other liquidity vehicles because STABL lets them bypass broker-dealer and legal fees. STABL also runs on AWS’s cloud, further reducing its costs.
Since the 2008 financial crisis, U.S. banks have faced constraints on leverage and capital, prompting them to pull back from taking deposits and, therefore, from short-term lending.
We're targeting inefficiencies in the money markets
For corporates and investors, the post-crisis costs of safely parking cash have risen, as regulators and financial institutions have sought to avoid a repeat of the bankruptcy of the Prime Fund in the wake of the Lehman Brothers collapse – which at the time was America’s biggest money-market fund.
The U.S. market for cash instruments has $7 trillion outstanding at any given moment, Schickler says.
Taking cash management P2P
LMX developed its platform as a P2P arena for unsecured bilateral loans among banks, other institutions, and corporate treasuries. LMX’s proposition to multinationals and non-bank F.I.s is higher yields on their deposits.
Companies borrowing via commercial paper need to get a rating and hire a broker-dealer to arrange the deal, who in turn needs to get a credit line. “Commercial paper is heavily broked, with little price transparency,” Schickler said.
The platform is also digital, making it more efficient than the traditional market for issuing commercial paper, which remains largely conducted by telephone.
LMX charges both sides of a trade 1bp to 5bps where it competes with the most liquid instruments, and up to 10bps where issuers are more reliant on banks. Commercial paper costs up to 25bps to issue, while money-market funds charge 10bps to 30bps, he says. Bank deposit charges vary but can go above 100bps for customers with poor credit ratings.
For banks, the platform is useful if they lack access to wholesale client cash and want to tap the U.S. market. For example, the Chinese bank involved in the pilot lacks a transaction-banking franchise in the U.S., and can’t otherwise access issuance from multinationals that they have a commercial relationship with in their domestic market.
To win over banks, the company lets them access the platform through existing channels such as a Bloomberg terminal, so there is no bespoke build or change to banks’ core systems.
“It’s hard enough to convince financial institutions to change,” Schickler told DigFin.
The LMX senior managers are former HSBC or Goldman Sachs transaction bankers, with experience in cash management and asset-backed securities. Schickler spent part of his career as HSBC’s global head of cash in Singapore and India, and is using his network to attract Asia-based participants.
LMX has also recently added a separate business line selling its technology on a white-label basis.
The company has raised about $3 million over the past year in seed money, including an allocation from Singapore-based Javelin Fund. Schickler says LMX will wrap up seed financing soon, and once it has revenue from its pilot, embark on a Series-A round in the second half of 2018. He expects the platform should scale to the point where its throughput reaches $500 billion or more, although he didn’t say how long that might take.
But if the first iteration is a success, he expects to add new products, such as secured loans, cross-currency loans, and ultimately trade financing.