Demographic data shows that more than 10% of Americans no longer use a traditional bank for anything.1 This trend is increasing. A comprehensive survey of U.S. bank customers conducted for FICO, a predictive analytics and decision management software company, found that millennials are embracing alternative banking services in greater numbers than older generations.2 This generation will soon be running companies in need of financing.
We all know that during the past seven years, government has limited the role of banks and severely restricted their policies. As a result, we have more inhibited banks, fearful of undertaking anything progressive that might be seen as a red flag by oversight regulators. In terms of lending and financing standards, and whether a bank can fulfill customer/client service, compliance comes first.
Many banks now pay scant attention to the commercial client seeking several hundred thousand dollars to $1 million. Bankers going after the $3 million to $10 million prospect find this effort much more profitable and less problematic, while investing no more manpower and overhead cost than the $1 million credit line client represents.
This development is positive for ABLs and the commercial finance industry in general. A generation of small business owners and entrepreneurs is actively seeking us out for lending solutions, having discovered banks are unequipped to meet their needs. The industry’s lender-of-last-resort reputation is fading, as more enterprises realize the value of what we do, and their accountants, lawyers, brokers and appraisers proactively reach out to us. Partnering with an ABL or specialty lender has becomes a conduit for doing deals in this emerging movement.
At the same time, the Federal Reserve has suppressed normal marketplace interest rates to astonishing historic low levels. The abundance of money in the economy makes for too many financial institutions, whether it is the commercial finance sector, banks or investment capital chasing too few deals.
The shakeout of executives who had careers in traditional financial institutions now translates into a variety of specialty lenders. Some have launched special opportunity funds where they are working in a much smaller, more nimble group. They are pricing in the high single-digits to low teens, and pursuing the deals the banks are avoiding. These veterans understand how to examine deals with a different perspective. Today, there are so many avenues to obtain funding and financing that the banks have lost their supremacy as the only game in town.
New Lending Concepts
A parade of new lending/financing concepts include:
Riding the Trend
The key to all of these financing horizons is knowing when to get in, how to ride the trend and when to get out. Think about how financing insurance policy life had a 10-year run before radical changes were made to actuarial forecasts, and government and insurance carrier restrictions curtailed the opportunity. Remember when check cashing was the rage during the 1980s and 90s? Look at the way payday lending gained marketplace acceptance and prospered as a sector. Then these companies became controversial, scrutinized by consumer advocates and the government clamped down.
On the other hand, in the commercial business community, unsecured financing is being conducted with credit card and merchant cash advance firms, all of which were born in the past ten years. Deal structures include short-term, merchant cash advances and credit card receivables financing. As these financing models mature, they are earning status and disrupting the factoring business. They are putting pressure on the factor marketplace because they are able to entertain applications online, make a decision within several hours and provide the funds — $5,000 to $100,000 — within three or four days. A short-term turnaround loan for, say, $100,000 a month, can be done right off of a client’s bank statements. People are willing to pay a higher price to obtain money with high speed and efficiency.
Online lending agents and brokers — deal clearinghouses — include the likes of Lendio,com, Biz2credit.com, Lending Club, and financing and capital-raising templates, such as Kickstarter. They are efforts to understand the intellectual capital of finance and stay ahead of the crowd through new configurations. What are the implications of these relatively new funding sources, and how long will they be in favor before they fade or become irrelevant?
Lenders certainly aren’t the only ones affected. Look at our professional service provider colleagues: accountants and lawyers. Their traditional personal skills building client relationships are being quartered and diced by offers to go online and talk with an attorney for five minute, obtain boiler-plate contracts and agreements, and receive offers to purchase do-it-yourself accounting software to file tax returns, thereby eliminating the need for traditional law or accounting services.
This all points to a host of philosophical and business questions: What is the market opportunity? What are the new ways to reach new clients? How can we use technology to interface with them? How do lenders create new algorithms? As lenders and financiers, we must continuously reinvent ourselves. What are the economic conditions surrounding a deal? What is the risk? What are the product structures? Among esoteric asset classes, everything is now being put up for consideration.
Specialty platforms are continually popping up on different financing tiers. Conclusion: Everyone is looking for different ways to deploy money. The lending fraternity must confront how the industry is evolving. Our money must be in motion all the time in order to succeed at what we do. We must always be asking: What is the next big investment opportunity? Get ready.
1. 2011 FDIC National Survey of Unbanked and Underbanked Households. Available at: https://www.fdic.gov/householdsurvey/2012_unbankedreport_execsumm.pdf (Last accessed February 2, 2015).
2. Fair Isaac Corporation. FICO Survey: American Millennials Will Step Up Use of Non-Traditional Banking Services This Year. Available at: http://www.fico.com/en/01-27-2015-fico-survey-american-millennials-will-step-up-use-of-non-traditional-banking-services-this-year
(Last accessed January 30, 2015).
Howard Chernin is SVP of RAI Group in Hackensack, NJ. Chernin is a 20-year commercial finance industry veteran.