We live in fast times. Thanks to Amazon, we expect our packages to be delivered overnight or sometimes the same day from all online retailers. With the click of a few keys, we can obtain concert tickets in an instant. Most people can’t remember when a letter from overseas took weeks to find its way into our mailboxes. Now an email soars across the globe in seconds.
Yet, even with these advancements, for many small businesses owners, applying for a loan remained a cumbersome process involving a personal visit to a bank and an explanation for the need for financing. This was followed by reams of documents and a nail-biting waiting period for approval. That was, until the merger of finance and technology gave birth to a new kind of lender, a fintech that stepped into the arena and made applying for a small business loan online as easy as ordering a pizza.
Executives from three established fintech lenders, CAN Capital, Kabbage and OnDeck discuss how the industry developed and share insights into its future growth. Each company focuses on small business loans with online applications and can make funding available to approved companies in as little as 24 hours.
CAN Capital, launched in 1998 as Capital Access Services, originally provided merchant cash advances. The company rebranded in December 2013 and now offers term loans and revolving loans in addition to MCAs. Kabbage was established in 2009 and made its first loan in May 2013. OnDeck was launched in 2006 and completed an IPO in 2014, making it the only fintech lender listed on the New York Stock Exchange.
Defining what actually constitutes fintech can be confusing to those outside the industry, but our three executives had no difficulty.
“The way I would describe fintech is where technology is the core of the financial product. The financial product could be a variety of different things, but technology is the core of how the product is created, structured, marketed and monitored,” says Deepesh Jain, head of Capital Markets for Kabbage. “Fintech helps solve for, or remove, friction that, in some form, existed before in traditional financial services products — from mortgages, to taxes, investment to lending.”
Howard Katzenberg, OnDeck’s CFO, agrees. “For me, fintech covers the companies and technologies that make traditional financial processes not just lending, but payment money transfer and other financial-based actions more seamless, faster, transparent and also a lot better. At OnDeck, we use technology integrated with our financial expertise to vastly expand access to capital which enables small businesses to borrow, invest and grow.”
Removing that friction and creating a positive customer experience is at the heart of all three companies.
“We define fintech by looking through the lens of the customer experience. For us, what that means is developing products and services that make it easier for small business owners to get the working capital they need to grow their businesses. The traditional method of applying for loans with banks is typically a very long and cumbersome process. There is a significant amount of manual documentation required with slow approval times and low approval rates. CAN Capital is focused on using technology to make that process quicker and more seamless,” says Parris Sanz, CAN Capital CEO.
All three executives point out that applying for a loan with a traditional bank can be stressful for small business owners looking for less than $100,000, and traditional banks aren’t really equipped to service these customers.
Serving the Small Customer
“Whether you are a big bank, community bank or a regional bank, lending to small businesses is not as straightforward as lending to consumers. Lending to consumers is largely based on FICO scores, and most traditional lenders have relied on the score to underwrite consumers,” Jain says.
“However, to be able to underwrite small businesses, you need a lot more information to understand the health of the business. There’s extensive due diligence required by the bank, and the cost structure of the bank doesn’t support smaller dollar loans at all. Really anything below $250,000 for banks is extremely challenging. To be clear, it’s not that banks wouldn’t like to serve these customers; their overhead cost structure makes it prohibitively expensive to do so.”
Part of that customer experience involves speed. Where a bank loan, even if approved, can take six weeks to actually close, any of the fintech lenders can have funds in their customers’ accounts in two days to 24 hours.
Jain says that Kabbage provides “an easy, fully automated solution for our customers. In three simple steps and in less than 10 minutes, small businesses can apply, be approved and access lines of credit up to $250,000. They can apply on their computers, phone or tablet — in many cases be funded the same day. They don’t have to stand in line or produce huge amounts of documentation. They don’t have to go [to] a bank branch or wait six weeks for the money to show up in their bank account.
“Take, for example, a pizza shop that needs to fix an oven. They can’t wait six weeks. They need the money to fix it tomorrow. That is where we distinguish ourselves from the traditional lender. We provide a great customer experience that is fully automated. No lines, and once approved, our revolving credit line allows them to take capital when they need it.”
Demands for Speed
Katzenberg notes that the demand for speed is increasing as more customers use fintech lending. “In our case, consumers are small business customers. Their expectations of convenience, quality of service and speed are rising quickly and increasingly they expect not just a great experience but a mobile, intuitive decision experience as well.”
As part of that experience, OnDeck has pioneered a system of daily and weekly payments for customers to repay their loans. Also, Katzenberg says, the lender has not eliminated the human element as it strives to improve customer service.
“Although it is possible for a customer to complete the entire process online, the company has a team of consultants available to speak with borrowers and guide them through the process,” Katzenberg says, adding that the company builds relationships with its clients, who return if they need subsequent funding.
The fintech companies have developed their own methods of underwriting loans, sidestepping the FICO score.
Jain explains that Kabbage connects directly to its customers’ accounts to obtain real-time data to underwrite and monitor the financial health of its borrowers.
“Most online lenders still have a manual underwriting component, which is based on last month’s bank statements or last year’s tax returns and not on the real-time data performance of the company today. We think we can make better decisions about their business if we know where they were yesterday, where they are today, and that allows us to have a much better idea of where they can be tomorrow. Today, Kabbage has 1.7 million live data connections with more than 130,000 customers, providing a living and breathing product that can grow as their business grows,” Jain says.
Sanz says that CAN also has a more streamlined method of underwriting which results in less documentation and quicker turnaround than banks are capable of managing.
“I think banks, in general, have a real challenge in front of them. To remain competitive in a marketplace that is innovating very rapidly, they’re going to need to adapt. Part of their challenge is the way their businesses are structured. Most traditional lenders have historic underwriting approaches that tend to be very manual, document heavy and time consuming.
“They don’t leverage technology, data and algorithms the way CAN Capital does. And given their overhead costs, including the cost of branches, it simply isn’t profitable for them to be making small business loans of $100,000 or less. That’s important because around 90% of all small business loans are for $100,000 or less,” Sanz adds.
“Traditional lenders typically have very rigid credit criteria that results in declines of many small business loan applicants that we believe could be very good customers,” Katzenberg says. “Because we look at other business fundamentals in addition to that business credit profile, we’re able to recognize potential opportunities a traditional approach will miss. In other words, we’re able to say yes more often than no. After 10 years of lending online to small businesses, we have gained unique knowledge of our customers.”
The fintech revolution is not going unnoticed by traditional banks. The fintech lenders all acknowledge the banks would serve these small customers if they could — it is just not practical. Instead, the banks are creating partnership with the newer lenders.
Partnering with Major Banks
“Kabbage licenses its technology to some of the top global banks today, including Scotia Bank, ING and Santander. We operate in Canada, Mexico, Spain, the UK, France and Italy through these partnerships,” Jain says.
“It enables these banks to serve the small businesses they’ve been unable to serve before because they could not offer some of the features that I just described earlier.”
Sanz concurs. “Partnerships between banks and companies like CAN Capital can be a win-win for both parties and small business customers. By connecting with firms like CAN, traditional financial institutions can benefit from the innovation and efficiencies that we bring to the table. Bank-fintech partnerships can provide real value for both sides of the equation, so long as there’s a real commitment from both partners,” he says.
OnDeck has gone a step further. In 2015, JPMorgan Chase and OnDeck announced a formal partnership which allows the banks to work in tandem. In 2016, the partnership launched.
“Our deal with Chase is a white label solution,” Katzenberg explains, “where they will do the marketing to the customer and then, after someone expresses interest, the customer moves over to our systems and our people. So, if someone calls, say, a customer wanting to talk to a salesperson, or maybe they are a customer already and they have questions about their loan, it’s an OnDeck employee basically saying it’s Chase. It is a very symbiotic relationship where we both get something from each other and the partnership is going very well. We’re incredibly proud to partner with Chase and pioneer a new era in fintech.”
In fact, the partnership is going so well, Katzenberg says that OnDeck will shortly be announcing a similar relationship with another major bank.
The subject of regulation, or the lack thereof, often comes up when lenders discuss fintech. All three executives contend that the fintech industry is not lacking oversight.
“We are subject to the same regulations as our originating partner bank, Celtic Bank,” Jain explains. “We are part of the various regulatory exams that our partner bank goes through. In addition to that, we have a very strong compliance program internally to comply with all the regulations that apply to us directly or indirectly through our partner bank. So, it will be incorrect to say that we operate in a non-regulated atmosphere. That said, the industry is actively engaged in a meaningful dialogue with the various regulatory bodies to do what’s best for the industry.”
“I think there’s a general misperception about how companies like CAN Capital are regulated. We are subject to multiple layers of state and federal regulation. Additional regulatory burdens would increase our costs and adversely affect our ability to provide deserving small businesses with access to capital. I don’t expect a major sea change in the regulatory landscape. I believe that the regulatory requirements that exist today are certainly sufficient,” Sanz says.
Kaztenberg points out that fintech lenders have formed the Innovative Lending Practices Association to establish industry-wide best practices and a code of ethics. Both OnDeck and Kabbage are members.
Back to the Future
Going forward, all the lenders expect that technology will bring new innovations.
OnDeck has already signed an agreement with Visa that will further speed up the time that borrowers can access their funds.
“You apply online with OnDeck,” Katzenberg explains. “You get the loan, let’s say its $50,000. Instead of waiting a day, you can [have] that instantly funded to your account thanks to the partnership between OnDeck and Visa. As long as you have a Visa account, like a debit card of some kind that goes through the Visa rail, which most people do. So that’s coming shortly, and that will basically transform lending even further to where you have instant funding once the loan is through.”
Sanz anticipates that blockchain will disrupt the industry. “We anticipate continued growth in various emerging technologies. I’m particularly excited about blockchain and artificial intelligence, both of which hold significant promise for companies like CAN Capital. A.I. can help us better understand our customers and craft ways to serve them better, as well as enable new ways to detect and prevent fraud. Blockchain has a lot of interesting potential applications like making the payments system more secure and increasing confidence in asset performance tracking and reporting.
“There have also been new alternative data sets and other information services that have come online in the last few years. By tapping into those alternative information sources, we can better assess the health and strength of our applicants and customers.”
“Technology will continue to … improve customer experience,” Jain says. “Today, many services are very transactional-focused with the end customer. I expect technology will transform customer experiences to be more relationship oriented, and from that we’ll see even more services and products offering anytime, anywhere access to what the customer needs. The heart of the future will be removing friction for the customer.
“At Kabbage we have a saying, ‘let the chefs cook.’ That’s what they’re passionate about. Chefs shouldn’t have to worry about the cash flow, taxes and insurance. They need to focus on what they’re good at and serving their customers to the best of their ability. The evolution of technology companies like Kabbage will focus on bettering the customer experience and making life easier for the small business owners.”