Are The Bankers Taking Over Fintech?
June 27, 2019
For Rochelle Gorey, the chief executive and co-founder of SpringFour, a “social impact” fintech company, mingling with industry movers and shakers at this year’s LendIt Fintech Conference was just what the doctor ordered. “I went mainly for the networking opportunities,” Gorey told AltFinanceDaily.
SpringFour, which is headquartered in Chicago, works with banks and financial institutions in the 50 states to get distressed borrowers back on track with their debt payments. It does this by digitally linking debtors with governmental and nonprofit agencies that promote “financial wellness.
The indebted parties—more than a million of whom had referrals that were arranged by Gorey’s tech-savvy company last year—constitute not only household consumers but also commercial borrowers. “Small businesses face the same issues of cash flow as consumers, and their business and personal income are often combined,” she says. “If their financial situation is precarious, it’s super-hard to get credit, a line of credit, or a business loan.”
Although Gorey felt “overwhelmed” at first by the throng of 4,000 conference-goers at Moscone Center West in San Francisco—roughly the same number as attended last year, conference organizers assert— her trepidation was short-lived. It wasn’t too long before she was in circulation and having chance encounters and serendipitous interactions, she says, with “all the right people at the workshops and at the tables in the Expo Hall.”
Armed, moreover, with a “networking app” on her mobile phone, Gorey was able to arrange targeted meetings, scoring roughly a dozen, 15-minute tete-a-tetes during the two-day breakout sessions. These included audiences with community bankers, financial technology companies, and “small-dollar” lenders. “And it went both ways,” she says. “I had people reaching out to me”—just about everyone, it seemed, appeared receptive to “finding ways to boost their customers’ financial health.”
Gorey’s success at networking was precisely the experience that the event’s planners had envisioned, says Peter Renton, chairman and co-founder of the LendIt Fintech Conference. Organizers took pains to make schmoozing one of the key features of this year’s gathering. Not only did LendIt provide attendees with a bespoke networking app, but planners scheduled extra time for meet-ups. “We had around 10,000 meetings set up by the app,” Renton says, “about double the number of last year.”
AltFinanceDaily did not attend the LendIt USA conference on the West Coast this year. But the publication sought out more than a half-dozen attendees—including several financial technology executives, a leading venture capitalist, a regulatory law expert, and the conference’s top administrators—to gather their impressions. While informal and manifestly unscientific, their responses nonetheless yielded up several salient themes.
The popularity—and effectiveness—of networking was a key takeaway. Most seized the opportunity to rub elbows with influential industry players, learn about the hottest startups, compare notes, and catch up on the state of the industry. Most importantly, the event presented a golden opportunity to make the introductions and connections that could generate dealmaking.
“My goal this year was to strike more partnerships with lenders and fintech companies,” says Levi King, chief executive and co-founder at Utah-based Nav, an online, credit-data aggregator and financial matchmaker for small businesses. “We had great meetings with Fiserv, Amazon, Clover Network (a division of First Data), and MasterCard,” he reports, rattling off the names of prominent financial services companies and fintech platforms.
James Garvey, co-founder and chief executive at Self Lender, an Austin-based fintech that builds creditworthiness for “thin file” consumers who have little or no credit history, said his goal at the conference was both to serve on a panel and “meet as many people as I could.”
Self Lender is in its growth stage following a $10 million, series B round of financing in late 2018 from Altos Ventures and Silverton Partners. Garvey reports having meetings with Bank of America and venture capitalist FTV Capital “over coffee” as well as F-Prime Capital, another venture capitalist. “It’s just about building a relationship,” he said of making connections, “so that at some point, if I’m raising money or want to partner, I can make a deal.”
There was a concerted effort to recognize women, as evidenced by a packed “Women in Fintech” (WIF) luncheon that drew roughly 250 persons, 95% of whom were women. (“Many men are big supporters of women in fintech and we didn’t want to exclude them,” Renton says). The luncheon was preceded by a novel event—a 30-minute, ladies-only “speed-networking” session—which attracted 160 participants, reports Joy Schwartz, president of LendIt Fintech and manager of the women’s programs.
At the luncheon, SpringFour’s Gorey says, “it was empowering just to see lot of women who are senior leaders working in financial services, banks and fintechs.” The keynote speech by Valerie Kay, chief capital officer at Lending Club, was another highlight. “She (Kay) talked about taking risks and going to a fintech startup after 23 years at Morgan Stanley,” Gorey reports, adding: “It was inspiring.”
The women’s luncheon also marked the launch of LendIt’s Women In Fintech mentor program, and presentation of a “Fintech Woman of the Year” award. The recipient was Luvleen Sidhu, president, co-founder and chief strategy officer at BankMobile, a digital division of Customers Bank, based near Philadelphia, which employs 250 persons and boasts two million checking account customers.
I am honored to be the 2019 Fintech Women of the Year and thrilled that @BankMobile won Most Innovative Bank. It’s very exciting to be recognized by @LendIt Fintech with this prestigious award and I congratulate the finalists in all the categories. https://t.co/qjADuKEMrB pic.twitter.com/hFJVFw1fLS
— Luvleen Sidhu (@LuvleenSidhu) April 11, 2019
BankMobile, which also won LendIt’s “Most Innovative Bank” award, has an alliance with Upstart to do consumer lending and a partnership with telecommunications company T-Mobile. Known as T-Mobile Money, the latter service provides T-Mobile customers with access to checking accounts with no minimum balance, no monthly or overdraft fees, and access to 55,000 automated teller machines, also with no fees. (At its website, T-Mobile Money describes itself as a bank and uses the slogan: “Not another bank, a better one.”)
The impressive salute to women notwithstanding, their ranks remained fairly thin: just 733 attendees identified themselves as “female” on their registration forms, LendIt’s Schwartz says, a little more than 18% of total participants. Seventy-five of the 350 total speakers and panelists—or 21%—were female. (Schwartz also reports that another 157 registrants selected “prefer not to say” as their sexual orientation, while 22 checked the box describing themselves as “non-conforming.”)
In LendIt’s defense, AltFinanceDaily, who caters to a similar audience, regularly reviews its readership demographics using several tools. They have consistently indicated that women make up 18% – 23% of the total, in line with what LendIt experienced at its most recent event.
By all accounts, many panels were informative, jampacked and attendees were engaged. King, who moderated a panel on regulatory changes in small business lending, which dealt with such topics as California’s commercial “truth-in-lending” law and controversial “confessions of judgment” laws, says: “They didn’t have to lock the door but the room was pretty full and people seemed to be paying attention. I didn’t see people studying their cellphones.”
The Expo Hall was teeming with budding fintech entrepreneurs, financial services companies and multiple vendors hawking their wares. But as numerous fintechs were angling to forge lucrative symbiotic relationships with banks, some participants—even those who were hailing the conference for its networking and deal-making opportunities—lamented the heavy presence of the establishment.
The banks’ ubiquitousness especially vexed Matthew Burton, a partner at QED Investors, an Arlington, (Va.)-based, venture capital firm and a veteran fintech entrepreneur. Before signing on with QED last year, Burton had been the co-founder of Orchard Platform, an online technology and analytics vendor for fintech and financial services companies which was purchased by fintech lender Kabbage.
Not only did bankers seem to playing a more prominent role at the LendIt conference, Burton notes, but “big four” accounting firm Deloitte had signed on as a major sponsor. “The energy level seemed a bit lower than in past years,” Burton told AltFinanceDaily. “It’s not like people were depressed but it wasn’t bubbling with excitement. A couple of years ago we thought all these new fintechs would replace the banks,” he explains. “Now the discussion is over how to partner and collaborate with banks. It’s not as exciting as when everyone thought banks were dinosaurs.
“I couldn’t really tell if there were more bankers attending this year,” Burton adds, “but it sure felt like it.”
King, the Nav executive, told AltFinanceDaily: “It was a little bit subdued. I don’t know if it was nervousness about the economy or politics, but the subject of risk came up more often in side conversations with venture-backed businesses and banks and alternative fintech lenders. One large bank we deal with,” he adds, “told me it’s spending most of its time working on risk.”
Cornelius Hurley, a Boston University law professor and executive director of the Online Lending Policy Institute who participated in a standing-room-only session on state and federal fintech regulation, declares: “I’ve been to three of their conferences, including one in New York, and I would say that this one did not have as much pizzazz. It may be that the industry is maturing.”
For his part—when asked whether there was a palpable absence of passion this year—LendIt’s Renton told AltFinanceDaily: “I would say that it felt more businesslike. Fintech has had a lot of hype and we have had conferences that were ridiculously over-hyped in 2015 and 2016. And in 2017 (the mood) was much more somber. This one felt optimistic and businesslike.”
There were 750 bankers in attendance, almost one in five participants. “The number of bankers was not up significantly” over last year, Renton says, “but the seniority of the bankers was higher. We worked very hard to get senior bankers to attend this year.”
Renton was bullish on the closer ties developing between nonbank online lenders and banks. That was reflected as well in the several panels exploring ways to develop partnerships between the two sides. He noted that a session called “How Banks are Matching Fintechs on Speed of Funding and User Experience” drew a heavy crowd. “It brought more bankers than we’ve ever had before,” Renton says.
Moderated by Brock Blake, founder and chief executive at the fintech Lendio, the panel was composed of three bankers: Ben Oltman, the Philadelphia-area head of digital lending and partnerships at Citizens Bank; Gina Taylor Cotter, a senior vice-president at American Express (the highest-ranking woman at the company); and Thomas Ferro, a senior marketing manager at Bank of America. “The banks came to LendIt not just to learn but to decide whom they’re going to partner with,” Renton says. “Fintechs need banks and banks need fintechs. That is the narrative you hear on both sides.”
(Asked whether any banks sponsored this year’s conference, Renton replied: “They are not sponsoring yet in any number but we are working on that.”)
OnDeck, a top-tier fintech lender to small-businesses in the U.S., which has been making forays abroad to Australian and Canadian markets, is an enthusiastic champion of the fintech-bank union. So much so that it claimed LendIt’s “Most Promising Partnership” award for the cooperative relationship it struck with Pittsburgh-based PNC Bank, which uses OnDeck’s platform to make small business loans. (Among the partnerships that OnDeck-PNC beat out: Gorey’s SpringFour, which was named a finalist in the competition for its association with BMO Harris Bank.)
“We were the first fintech lender to strike a true platform relationship with a bank,” Jim Larkin, head of corporate communications at OnDeck says, noting that the PNC deal follows on the New York-based fintech’s similar, innovative arrangement with J.P. Morgan Chase. “Others may do referrals,” he explains. “What we do is actually provide the underlying platform to accelerate a bank’s online lending capabilities. We deliver the software and expertise to construct the right type of online lending engine.”
Meanwhile, there was avid interest about the stock performance of publicly traded fintechs—for example, Square and GreenSky—both of which had seen their share prices tumble and then recover.
Burton noted that, among venture-backed firms, the most excitement seemed to be coming from Latin America. “Everyone was very bullish on a Mexican company, Credijusto, an alternative small business lender that was written up the in the Wall Street Journal,” he says. “It’s not going public yet but it had a large debt-and-equity raise of $100 million from Goldman Sachs. And SoftBank Group announced a $5 billion Latin American tech fund.
“There was a lot of talk,” he adds, “about how money was flowing into Mexico and Brazil.”
BFS Capital Joins ILPA
May 23, 2019
The Innovation Lending Platform Association (ILPA), a group of online small business financing and service companies, announced today the addition of BFS Capital. ILPA is known for creating the Straightforward Metrics Around Rate and Total Cost (SMART) Box.
“We believe that transparency matters,” Ruddock told AltFinanceDaily.
“BFS Capital is committed to being both a responsible and an innovative lender,” Ruddock said. “Our membership in the ILPA allows us to work with industry leaders who are dedicated to advancing standards and best practices in the critical small business lending marketplace… [and] we believe that clarity and transparency is critical in helping [small businesses] make educated and informed financial decisions.”
As a new member of ILPA, BFS will join current members including OnDeck, Kabbage, BlueVine and 6th Avenue Capital.
“We applaud Mulligan Funding and BFS Capital for committing to adopt fair and transparent disclosure best practices to ensure small businesses are well informed when seeking funding,” said ILPA CEO Scott Stewart. (ILPA announced that Mulligan Funding has joined the association as well).
BFS is also a member of the Small Business Finance Association (SBFA) and Ruddock told AltFinanceDaily that BFS will remain a member of that trade association as well.
Separately, BFS announced today that it has named Fred Kauber as the company’s new Chief Technology Officer and Chief Product Officer. Kauber was previously with fintech marketplace platform CAIS Group and he served in senior roles at First Data, Dun & Bradstreet and IBM.
“I’m confident that Fred is the right person to advance both our vision and our capabilities [at BFS,]” Ruddock said.
Canada’s Alternative Financing Market Is Taking Off
May 20, 2019
Canadians have been slow out of the gate when it comes to mass adoption of alternative financing, but times are changing, presenting opportunities and challenges for those who focus on this growing market.
Historically, the Canadian credit market has traditionally been dominated by a few main banks; consumers or businesses that weren’t approved for funding through them didn’t have a multitude of options. The door, however, is starting to unlock, as awareness increases about financing alternatives and speed and convenience become more important, especially to younger Canadians.
Indeed, the Canada alternative finance market experienced considerable growth in 2017—the latest period for which data is available. Market volume reached $867.6 million, up 159 percent from $334.5 million in 2016, according to a report by the Cambridge Centre for Alternative Finance and the Ivey Business School at Western University. Balance sheet business lending makes up the largest proportion of Canadian alternative finance, accounting for 57 percent of the market; overall, this model grew 378 percent to $494 million in 2017, according to the report.
Industry participants say the growth trajectory in Canada is continuing. It’s being driven by a number of factors, including tightening credit standards by banks, growing market demand for quick and easy funding and broader awareness of alternative financing products.
To meet this growing demand, new alternative financing companies are coming to the market all the time, says Vlad Sherbatov, president and co-founder of Smarter Loans, which works with about three dozen of Canada’s top financing companies. He predicts that over time more players will enter the market—from within Canada and also from the U.S.—and that product types will continue to grow as demand and understanding of the benefits of alternative finance become more well-known. Notably, 42 percent of firms that reported volumes in Canada were primarily headquartered in the U.S., according to the Cambridge report.
To be sure, the Canadian market is much smaller than the U.S. and alternative finance isn’t ever expected to overtake it in size or scope. That’s because while the country is huge from a geographic standpoint, it’s not as densely populated as the U.S., and businesses are clustered primarily in a few key regions.
To put things in perspective, Canada has an estimated population of around 37 million compared with the U.S.’s roughly 327 million. On the business front, Canada is similar to California in terms of the size and scope of its small business market, estimates Paul Pitcher, managing partner at SharpShooter, a Toronto-based funder, who also operates First Down Funding in Annapolis, Md.
Nonetheless, alternative lenders and funders in Canada are becoming more of a force to be reckoned with by a number of measures. Indeed, a majority of Canadians now look to online lenders as a viable alternative to traditional financial institutions, according to the 2018 State of Alternative Lending in Canada, a study conducted by online comparison service Smarter Loans.
Of the 1,160 Canadians surveyed about the loan products they have recently received, only 29 percent sought funding from a traditional financial institution, such as a bank, the study found. At the same time, interest in alternative loans has been on an upward trajectory since 2013. Twenty-four percent of respondents indicated they sought their first loan with an alternative lender in 2018. Overall, nearly 54 percent of respondents submitted their first application with a non-traditional lender within the past three years, according to the report.
Like in the U.S., there’s a mix of alternative financing companies in Canada. A number of companies offer factoring and invoicing and payday loans. But there’s a growing number focused on consumer and business lending as well as merchant cash advance.
Some major players in the Canadian alternative lending or funding landscape include Fairstone Financial (formerly CitiFinancial Canada), an established non-bank lender that recently began offering online personal loans in select provinces; Lendified, an online small business lender; Thinking Capital, an online small business lender and funder; easyfinancial, the business arm of alternative financial company goeasy Ltd. that focuses on lending to non-prime consumers; OnDeck, which offers small business financing loans and lines of credit; and Progressa, which provides consolidation loans to consumers.
By comparison, the merchant cash advance space has fewer players; it is primarily dominated by Thinking Capital and less than a dozen smaller companies, although momentum in the space is increasing, industry participants say.
“The U.S. got there 10 years ago, we’re still catching up,” says Avi Bernstein, chief executive and co-founder of 2M7 Financial Solutions, a Toronto-based merchant cash advance company.
OPPORTUNITIES ABOUND
In terms of opportunities, Canada has a population that is very used to dealing with major banks and who are actively looking for alternative solutions that are faster and more convenient, says Sherbatov of Smarter Loans. This is especially true for the younger population, which is more tech-savvy and prefers to deal with finances on the go, he says.
Because the alternative financing landscape is not as developed in Canada, new and innovative products can really make a significant impact and capture market share. “We think this is one of the key reasons why there’s been such an influx of international companies, from the U.S. and U.K. for example, that are looking to enter the Canadian market,” he says.
Just recently, for example, Funding Circle announced it would establish operations in Canada during the second half of 2019. “Canada’s stable, growing economy coupled with good access to credit data and progressive regulatory environment made it the obvious choice,” said Tom Eilon, managing director of Funding Circle Canada, in a March press release announcing the expansion. “The most important factor [in coming to Canada] though was the clear need for additional funding options among Canadian SMEs,” he said.
OnDeck, meanwhile, recently solidified its existing business in Canada through the purchase of Evolocity Financial Group, a Montreal-based small business funder. The combined firm represents a significantly expanded Canadian footprint for both companies. OnDeck began doing business in Canada in 2014 and has originated more than CAD$200 million in online small business loans there since entering the market. For its part, Evolocity has provided over CAD$240 million of financing to Canadian small businesses since 2010.
“There is an enormous need among underserved Canadian small businesses to access capital quickly and easily online, supported by trusted and knowledgeable customer service experts,” Noah Breslow, OnDeck’s chairman and chief executive, said in a December 2018 press release announcing the firms’ nuptials.
There are also a number of home grown Canadian companies that are benefiting from the growth in the alternative financing market.
2M7 Financial Solutions, which focuses on merchant cash advances, is one of these companies. It was founded in 2008 to meet the growing credit needs within the small and medium-sized business market at a time when businesses were having trouble in this regard.
But only in the past few years has MCA in Canada really started picking up to the point where Bernstein, the chief executive, says the company now receives applications from about 200 to 300 companies a month, which represents more than 50 percent growth from last year.
“We’re seeing more quality businesses, more quality merchants applying and the average funding size has gone up as well,” he says.
NAVIGATING THROUGH CHALLENGES
Despite heightened growth possibilities, there are also significant headwinds facing companies that are seeking to crack the Canadian alternative financing market. For various reasons, some companies have even chosen to pull back or out of Canada and focus their efforts elsewhere. Avant, for example, which offers personal loans in the U.S., is no longer accepting new loan applications in Canada at this time, according to its website. Capify also recently exited the Canadian business it entered in 2007, even as it continues to bulk up in the U.K. and Australia.
One of the challenges alternative lenders face in Canada is distrust of change. Since Canadians are so used to dealing with only a few major financial institutions to handle all their finances, they are skeptical to change this behavior, especially when the customer experience shifts from physical branches to online apps and mobile devices, says Sherbatov of Smarter Loans. He notes that adoption of fintech products in Canada has lagged in recent years, partially because there has been a lack of awareness and trust in new financial products available.
One way Smarter Loans has been working to strengthen this trust is by launching a “Smarter Loans Quality Badge,” which acts as a certification for alternative financing companies on its platform. It is issued to select companies that meet specified quality standards, including transparency in fees, responsible lending practices, customer support and more, he says.
The Canadian Lenders Association, whose members include lenders and merchant cash advance companies, has also been working to promote the growing industry and foster safe and ethical lending practices. For example, it recently began rolling out the SMART Box pricing disclosure model and comparison tool that was introduced to small businesses in the U.S. in 2016.
Another challenge that impacts alternative lenders in the consumer space is having restricted access to alternative data sources. Because of especially strict consumer privacy laws, access is “substantially more limited” than it is in any other geography,” says Jason Mullins, president and chief executive of goeasy, a lending company based in Mississauga, Ontario, that provides consumer leasing, unsecured and secured personal loans and merchant point-of-sale financing.
From a lending perspective, goeasy focuses on the non-prime consumer—generally those with credit scores of under 700. Mullins says the market consists of roughly 7 million Canadians, about a quarter of the population of Canadians with credit scores. The non-prime consumer market is huge and has tremendous potential, he says, but it’s not for the faint of heart.
Another issue facing alternative lenders is the relative difficulty of raising loan capital from institutional lenders, says Ali Pourdad, co-founder and chief executive of Progressa, which recently reached the $100 million milestone in funded loans for underserved Canadian consumers. “The onus is on the alternative lenders to ensure they have good lending practices and are underwriting responsibly,” he says.
What’s more, household debt to income ratios in Canada are getting progressively worse, with Canadians taking on too much debt relative to what they can afford, Pourdad says. As the situation has been deteriorating over time, there is inherently more risk to originators as well as the capital that backs them. “Originators, now more than ever, have to be cautious about their lending practices and ensure their underwriting is sound and that they are being responsible,” he says.
On the small business side of alternative lending, getting the message out to would-be customers can be a challenge in Canada. In U.S. there are thousands of ISOs reaching out to businesses, whereas in Canada, most funders have a direct sales force, with a much smaller portion of their revenue coming from referral partners, says Adam Benaroch, president of CanaCap, a small business funder based in Montreal.
He predicts this will change over time as the business matures and more funders enter the space, giving ISOs the ability to offer a broader array of financing products at competitive rates. “I think we’re going to see pricing go down and more opportunities develop, and as this happens, the business is going to grow, which is exactly what has happened in the U.S,” he says.
Generally speaking, Canadian businesses are still somewhat skeptical of merchant cash advance and require considerable hand-holding to become comfortable with the idea.
“You can’t wait for them to come to you, you have to go to them and explain what the products are,” says Pitcher of SharpShooter, the MCA funding company.
While Pitcher predicts more companies will continue to enter the Canadian alternative financing market, he doesn’t think it will be completely overrun by new entrants—the market simply isn’t big enough, he says. “It’s not for everyone,” he says.
Online Loans You Can Take To The Bank
April 16, 2019
OnDeck, the reigning king of small business lending among U.S. financial technology companies, is sharpening its business strategies. Among its new initiatives: the company is launching an equipment-finance product this year, targeting loans of $5,000 to $100,000 with two-to-five year maturities secured by “essential-use equipment.”
In touting the program to Wall Street analysts in February, OnDeck’s chief executive, Noah Breslow, declared that the $35 billion, equipment-finance market is “cumbersome” and he pronounced the sector “ripe for disruption.”
While those performance expectations may prove true – the first results of OnDeck’s product launch won’t be seen until 2020 – Breslow’s message seemed to conflict with OnDeck’s image as a public company. Rather than casting itself as a disruptor these days, OnDeck emphasizes the ways that its business is melding with mainstream commerce and finance.
Consider that the New York-based company, which saw its year-over-year revenues rise 14% to $398.4 million in 2018, is collaborating with Visa and Ingo Money to launch an “Instant Funding” line-of-credit that funnels cash “in seconds” to business customers via their debit cards. With the acquisition of Evolocity Financial Group, it is also expanding its commercial lending business in Canada, a move that follows its foray into Australia where, the company reports, loan-origination grew by 80% in 2018.
Perhaps most significant was the 2018 deal that OnDeck inked with PNC Bank, the sixth-largest financial institution in the U.S. with $370.5 billion in assets. Under the agreement, the Pittsburgh-based bank will utilize OnDeck’s digital platform for its small business lending programs. Coming on top of a similar arrangement with megabank J.P. Morgan Chase, the country’s largest with $2.2 trillion in assets, the PNC deal “suggests a further validation of OnDeck’s underlying technology and innovation,” asserts Wall Street analyst Eric Wasserstrom, who follows specialty finance for investment bank UBS.
“It also reflects the fact that doing a partnership is a better business model for the big banks than building out their own platforms,” he says. “Both banks (PNC and J.P. Morgan) have chosen the middle ground: instead of building out their own technology or buying a fintech company, they’ll rent.
“J.P. Morgan has a loan portfolio of $1 trillion,” Wasserstrom explains. “It can’t earn any money making loans of $15,000 or $20,000. Even if it charged 1,000 percent interest for those loans,” he went on, “do you know how much that will influence their balance sheet? How many dollars do think they are going to earn? A giant zero!”
Similarly, Wasserstrom says, spending the tens of millions of dollars required to develop the state-of-the art technology and expertise that would enable a behemoth like J.P. Morgan or a super-regional like PNC to match a fintech’s capability “would still not be a big needle-mover. You’d never earn that money back. But by partnering with a fintech like OnDeck,” he adds, “banks like J.P Morgan and PNC get incremental dollars they wouldn’t otherwise have.”
The alliance between OnDeck and old-line financial institutions is one more sign, if one more sign were needed, that commercial fintech lenders are increasingly blending into the established financial ecosystem.
Not so long ago companies like OnDeck, Kabbage, PayPal, Square, Fundation, Lending Club, and Credibly were viewed by traditional commercial banks and Wall Street as upstart arrivistes. Some may still bear the reputation as disruptors as they continue using their technological prowess to carve out niche funding areas that banks often neglect or disdain.
Yet many fintechs are forming alliances with the same financial institutions they once challenged, helping revitalize them with new product offerings. Other financial technology companies have bulked up in size and are becoming indistinguishable from any major corporation.
Big Fintechs are securitizing their loans with global investment banks, accessing capital from mainline financial institutions like J.P. Morgan, Goldman Sachs and Wells Fargo, and finding additional ways — including becoming publicly listed on the stock exchanges – to tap into the equity and debt markets.
One example of the maturation process: through mid-2018, Atlanta-based Kabbage has securitized $1.5 billion in two bond issuances, 30% of its $5 billion in small business loan originations since 2008.
In addition, fintechs have been raising their industry’s profile with legislators and regulators in both state and federal government, as well as with customers and the public through such trade associations as the Internet Lending Platform Association and the U.S. Chamber of Commerce. Both individually and through the trade groups, these companies are building goodwill by supporting truth-in-lending laws in California and elsewhere, promoting best practices and codes of conduct, and engaging in corporate philanthropy.
Rather than challenging the established order, S&P Global Market Intelligence recently noted in a 2018 report, this cohort of Big Fintech is increasingly burrowing into it. This can especially be seen in the alliances between fintech commercial lenders and banks.
“Bank channel lenders arguably have the best of both worlds,” Nimayi Dixit, a research analyst at S&P Global Market Intelligence wrote approvingly in a 2018 report. “They can export credit risk to bank partners while avoiding the liquidity risks of most marketplace lending platforms. Instead of disrupting banks, bank channel lenders help (existing banks) compete with other digital lenders by providing a similar customer experience.”
It’s a trend that will only accelerate. “We expect more digital lenders to incorporate this funding model into their businesses via white-label or branded services to banking institutions,” the S&P report adds.
Forming partnerships with banks and diversifying into new product areas is not a luxury but a necessity for Fundation, says Sam Graziano, chief executive at the Reston (Va.)-based platform. “You can’t be a one-trick pony,” he says, promising more product launches this year.
Fundation has been steadily making a name for itself by collaborating with independent and regional banks that utilize its platform to make small business loans under $150,000. In January, the company announced formation of a partnership with Bank of California in which the West Coast bank will use Fundation’s platform to offer a digital line of credit for small businesses on its website.
Fundation lists as many as 20 banks as partners, including most prominently a pair of tech-savvy financial institutions — Citizens Bank in Providence, R.I. and Provident Bank in Iselin, N.J. — which have been featured in the trade press for their enthusiastic embrace of Fundation.
John Kamin, executive vice president at $9.8 billion Provident reports that the bank’s “competency” is making commercial loans in the “millions of dollars” and that it had generally shunned making loans as meager as $150,000, never mind smaller ones. But using Fundation’s platform, which automates and streamlines the loan-approval process, the bank can lend cheaply and quickly to entrepreneurs. “We’re able to do it in a matter of days, not weeks,” he marvels.
Not only can a prospective commercial borrower upload tax returns, bank statements and other paperwork, Kamin says, “but with the advanced technology that’s built in, customers can provide a link to their bank account and we can look at cash flows and do other innovative things so you don’t have to wait around for the mail.”
Provident reserves the right to be selective about which loans it wants to maintain on its books. “We can take the cream of the crop” and leave the remainder with Fundation, the banker explains. “We have the ability to turn that dial.”
The partnership offers additional side benefits. “A lot of folks who have signed up (for loans) are non-customers and now we have the ability to market to them,” he says. “After we get a small business to take out a loan, we hope that we can get deposits and even personal accounts. It gives us someone else to market to.”
As a digital lender, Provident can now contend mano a mano with another well-known competitor: J.P. Morgan Chase. “This is the perfect model for us,” says Kamin, “it gives us scale. You can’t build a program like this from scratch. Now we can compete with the big guys. We can compete with J.P. Morgan.”
For Fundation, which booked a half-billion dollars in small business loans last year, doing business with heavily regulated banks puts its stamp on the company. It means, for example, that Fundation must take pains to conform to the industry’s rigid norms governing compliance and information security. But that also builds trust and can result in client referrals for loans that don’t fit a bank’s profile. “For a bank to outsource operations to us,” Graziano says, “we have to operate like a bank.”
Bankrolled with a $100 million line of credit from Goldman Sachs, Fundation’s interest rate charges are not as steep as many competitors’. “The average cost of our loans is in the mid-to-high teens and that’s one reason why banks are willing to work with us,” Graziano says. “Our loans,” he adds, “are attractively structured with low fees and coupon rates that are not too dramatically different from where banks are. We also don’t take as much risk as many in the (alternative funding) industry.”
Despite its establishment ties, Graziano says, Fundation will not become a public company anytime soon. “Going public is not in our near-term plans,” he told AltFinanceDaily. Doing business as a public company “provides liquidity to shareholders and the ability to use stock as an acquisition tool and for employees’ compensation,” he concedes. “But you’re subject to the relentlessly short-term focus of the market and you’re in the public eye, which can hurt long-term value creation.”
Graziano reports, however, that Fundation will be securitizing portions of its loan portfolio by yearend 2020.
PayPal Working Capital, a division of PayPal Holdings based in San Jose, and Square Inc. of San Francisco, are two Big Fintechs that branched into commercial lending from the payments side of fintech. PayPal began making small business loans in 2013 while Square got into the game in 2014. In just the last half-decade, both companies have leveraged their technological expertise, massive data collections, data-mining skills, and catbird-seat positions in the marketplace to burst on the scene as powerhouse small business lenders.
With somewhat similar business models, the pair have also surfaced as head-to-head competitors, their stock prices and rivalry drawing regular commentary from investors, analysts and journalists. Both have direct access to millions of potential customers. Both have the ability to use “machine learning” to reckon the creditworthiness of business borrowers. Both use algorithms to decide the size and terms of a loan.
Loan approval — or denials — are largely based on a customer’s sales and payments history. Money can appear, sometimes almost magically in minutes, in a borrower’s bank account, debit card or e-wallet. PayPal and Square Capital also deduct repayments directly from a borrower’s credit or debit card sales in “financing structures similar to merchant cash advances,” notes S&P.
At its website, here is how PayPal explains its loan-making process. “The lender reviews your PayPal account history to determine your loan amount. If approved, your maximum loan amount can be up to 35% of the sales your business processed through PayPal in the past 12 months, and no more than $125,000 for your first two loans. After you’ve completed your first two loans, the maximum loan amount increases to $200,000.”
PayPal, which reports having 267 million global accounts, was adroitly positioned when it commenced making small business loans in 2013. But what has really given the Big Fintech a boost, notes Levi King, chief executive and co-founder at Utah-based Nav — an online, credit-data aggregator and financial matchmaker for small businesses – was PayPal’s 2017 acquisition of Swift Financial. The deal not only added 20,000 new business borrowers to its 120,000, reported TechCrunch, but provided PayPal with more sophisticated tools to evaluate borrowers and refine the size and terms of its loans.
“PayPal had already been incredibly successful using transactional data obtained through PayPal accounts,” King told AltFinanceDaily, “but they were limited by not having a broad view of risk.” It was upon the acquisition of Swift, however, that PayPal gained access to a “bigger financial envelope including personal credit, business credit, and checking account information,” King says, adding: “The additional data makes it way easier for PayPal to assess risk and offer not just bigger loans, but multiple types of loans with various payback terms.”
While PayPal used the Swift acquisition to spur growth and build market share, its rival Square — which is best known for its point-of-sale terminals, its smartphone “Cash App,” and its Square Card — has employed a different strategy.
OF A FREIGHT TRAIN
By selling off loans to third-party institutional investors, who snap them up on what Square calls a “forward-flow basis,” the Big Fintech barged into small business lending with the subtlety of a freight train. In just four years, Square originated 650,000 loans worth $4.0 billion, a stunning rise from the modest base of $13.6 million in 2014.
Square’s third-party funding model, moreover, demonstrates the benefits afforded from being deeply immersed in the financial ecosystem. Off-loading the loans “significantly increases the speed with which we can scale services and allows us to mitigate our balance sheet and liquidity risk,” the company reported in its most recent 10K filing.
Square does not publicly disclose the entire roster of its third-party investors. But Kim Sampson, a media relations manager at Square, told AltFinanceDaily that the Canada Pension Plan Investment Board — “a global investment manager with more than CA$300 billion in assets under management and a focus on sustained, long term returns” – is one important loan-purchaser.
Square also offers loans on its “partnership platform” to businesses for whom it does not process payments. And late last year the company introduced an updated version of an old-fashioned department store loan. Known as “Square Installments,” the program allows a merchant to offer customers a monthly payment plan for big-ticket purchases costing between $250 and $10,000.
Which model is superior? PayPal’s — which retains small business loans on its balance sheet — or Square’s third-party investor program? “The short answer,” says UBS analyst Wasserstrom, “is that PayPal retains small business loans on its balance sheet, and therefore benefits from the interest income, but takes the associated credit and funding risk.”
Meanwhile, as PayPal and Square stake out territory in the marketplace, their rivalry poses a formidable challenge to other competitors.
Both are well capitalized and risk-averse. PayPal, which reported $4.23 billion in revenues in 2018, a 13% increase over the previous year, reports sitting on $3.8 billion in retained earnings. Square, whose 2018 revenues were up 51 percent to $3.3 billion, reported that — despite losses — it held cash and liquid investments of $1.638 billion at the end of December.
King, the Nav executive, observes that Able, Dealstruck, and Bond Street – three once-promising and innovative fintechs that focused on small business lending – were derailed when they could not overcome the double-whammy of high acquisition costs and pricey capital.
“None of them were able to scale up fast enough in the marketplace,” notes King. “The process of institutionalization is pushing out smaller players.”
SBFA Announces Support for The Small Business Fairness Act
December 7, 2018The Small Business Finance Association (SBFA) today announced support for S.3717, The Small Business Fairness Act introduced by Senator Sherrod Brown (D-OH) and Senator Marco Rubio (R-FL). The bill would provide the Federal Trade Commission more clarity to protect small business owners from being forced to sign a “confession of judgment” before obtaining financing. A “confession of judgment” requires a small business owner to waive certain rights in court before obtaining financing and, in some cases, allows the lender to seize the owner’s assets if there is a default.
“This is a bad practice that must be eliminated,” said Jeremy Brown, chairman of RapidAdvance and SBFA. “Unfortunately, certain small business financing providers are misusing “confessions of judgment.” We firmly support any legislation that will provide small businesses protection from the misuse of this practice. If a small business we fund runs into trouble, we believe they should be treated fairly and deserve our commitment to help resolve the issue in a manner that is professional and respectful.”
SBFA is a non-profit advocacy organization dedicated to ensuring Main Street small businesses have access to the capital they need to grow and strengthen the economy. SBFA’s mission is to educate policymakers and regulators about the technology-driven platforms emerging in the small business lending market and how our member companies bridge the small business capital gap using innovative financing solutions. The organization is supported by companies committed to promoting small business owners’ access to fair and responsible capital.
“Our core values are centered on providing fair and responsible financing for small businesses,” said Steve Denis, executive director of SBFA. “Small business owners are the backbone of the American economy and we should empower them with as many tools as possible to grow and create jobs. We look forward to working with Senator Brown and Rubio to eliminate the abuse of the “confession of judgment” and expand the role of responsible lenders nationally.”
In 2016, SBFA released best practices for the alternative finance industry to help better protect small businesses as they seek funding online. SBFA’s best practices are centered on four principles—transparency, responsibility, fairness, and security. As the industry’s leading trade association, the best practices have been agreed to by every member company and exist to give small business owners confidence in their financing decisions. These principles provide them a better understanding of what to expect from responsible alternative finance companies, which includes fully disclosing all terms and costs and ensuring the products SBFA companies offer are in the best interest of the small business customer.
The Small Business Finance Association (SBFA) is a not-for-profit 501(c)6 trade association representing organizations that provide alternative financing solutions to small businesses.
The Seven-Minute Loan Shakes Up Washington And The 50 States
August 19, 2018
It takes seven minutes for Kabbage to approve a small-business loan. “The reason there’s so little lag time,” says Sam Taussig, head of global policy at the Atlanta-based financial technology firm, “is that it’s all automated. Our marginal cost for loans is very low,” he explains, “because everything involving the intake of information – your name and address, know-your-customer, anti-money-laundering and anti-terrorism checks, analyzing three years of income statements, cash-flow analysis – is one-hundred-percent automated. There are no people involved unless red flags go off.”
One salient testament to Kabbage’s automation: Fully $1 billion of the $5 billion in loans that it has made to 145,000 discrete borrowers since it opened its portals in 2011 were made between 6 p.m. and 6 a.m.
Now compare that hair-trigger response time and 24-hour service for a small business loan of $1,000-$250,000 with what occurs at a typical bank. “Corporate credit underwriting requires 28 separate tasks to arrive at a decision,” William Phelan, president, and co‐founder of PayNet—a top provider of small-business credit data and analysis – testified recently to a Congressional subcommittee. “These 28 tasks involve (among other things): collecting information for the credit application, reviewing the financial information, data entry and calculations, industry analysis, evaluation of borrower capability, capacity (to repay), and valuation of collateral.”
A “time-series analysis,” the Skokie (Ill.)-based executive went on, found that it takes two-to-three weeks – and often as many as eight weeks—to complete the loan approval process. For this “single credit decision,” Phelan added, the services of three bank departments – relationship manager, credit analyst, and credit committee – are required.
The cost of such a labor-intensive operation? PayNet analysts reckoned that banks incur $4,000-$6,000 in underwriting expenses for each credit application. Phelan said, moreover, that credit underwriting typically includes a subsequent loan review, which consumes two days of effort and costs the bank an additional $1,000. “With these costs,” Phelan told lawmakers, “banks are unable to turn a profit unless the loan size exceeds $500,000.”
According to the National Bureau of Economic Research, the country’s very biggest banks — Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo—have been the financial institutions most likely to shut down lending to small businesses. “While small business lending declined at all banks beginning in 2008,” NBER’s September, 2017 report announces, “the four largest banks” which the report dubs the ‘Top Four’—“cut back significantly relative to the rest of the banking sector.”
NBER reports further that by 2010—the “trough” of the financial crisis—the annual flow of loan originations from the Top Four stood at just 41% of its 2006 level, which compared with 66% of the pre-crisis level for all other banks. Moreover, small-business lending at the “Top Four” banks remained suppressed for several years afterward, “hovering” at roughly 50% of its pre crisis level through 2014. By contrast, such lending at the rest of the country’s banks eventually bounced back to nearly 80% of the pre-crisis level by 2014.
That pullback—by all banks—continues, says Kenneth Singleton, an economics professor at Stanford University’s Graduate School of Business. Echoing Phelan’s testimony, Singleton told AltFinanceDaily in an interview: “Given the high underwriting costs, banks just chose not to make loans under $250,000,” which are the bread-and-butter of small-business loans. In so doing, he adds, banks “have created a vacuum for fintechs.”
All of which helps explain why Kabbage and other fintechs making small business loans are maintaining a strong growth trajectory. As a Federal Reserve report issued in June notes, the five most prominent fintech lenders to small businesses—OnDeck, Kabbage, Credibly, Square Capital, and PayPal—are on track to grow by an estimated 21.5 percent annually through 2021.
Their outsized growth is just one piece—albeit a major one—of fintech’s larger tapestry. Depending on how you define “financial technology,” there are anywhere from 1,400 to 2,000 fintechs operating in the U.S., experts say. Fintech companies are now engaged in online payments, consumer lending, savings and investment vehicles, insurance, and myriad other forms of financial services.
Fintechs’ advocates—a loose confederacy that includes not only industry practitioners but also investors, analysts, academics, and sympathetic government officials—assert that the U.S. fintech industry is nonetheless being blunted from realizing its full potential. If fintechs were allowed to “do their thing,” (as they said in the sixties) this cohort argues, a supercharged industry would bring “financial inclusion” to “unbanked” and “underbanked” populations in the U.S. By “democratizing access to capital,” as Kabbage’s Taussig puts it, harnessing technology would also re-energize the country’s small businesses, which creates the majority of net new jobs in the U.S., according to the U.S. Small Business Administration.
But standing in the way of both innovation and more robust economic growth, this cohort asserts, is a breathtakingly complex—and restrictive—regulatory system that dates back to the Civil War. “I do think we’re victims of our own success in that we’ve got a pretty good financial system and a pretty good regulatory structure where most people can make payments and the vast majority of people can get credit.” says Jo Ann Barefoot, chief executive at Barefoot Innovation Group in Washington, D.C. and a former senior fellow at Harvard’s Kennedy School. But because of that “there’s been more inertia and slower adoption of new technology,” she adds. “People in the U.S. are still going to bank branches more than people in the rest of the world.”
Barefoot adds: “There are five agencies directly overseeing financial services at the Federal level and another two dozen federal agencies” providing some measure of additional, if not duplicative oversight, over financial services. “But there’s no fintech licensing at the national level,” she says. And because each state also has a bank regulator, she notes, “if you’re a fintech innovator, you have to go state by state and spend millions of dollars and take years” to comply with a spool of red tape pertaining to nonbanks.
At the federal level, the current system— which includes the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC)—developed over time in a piecemeal fashion, largely through legislative responses to economic panics, shocks and emergencies. “For historical reasons,” Barefoot remarks, “we have a lot of agencies” regulating financial services.
For exhibit A, look no further than the Consumer Financial Protection Bureau created amidst the shambles of the 2008-2009 financial crisis by the 2010 Dodd-Frank Act. Built ostensibly to preserve safety and soundness, the agencies have constructed a moat around the banking system.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington, D.C. consultancy, is a banking policy expert who frequently provides testimony to Congress and regulatory agencies. She wrote recently that the country’s banking sector has been protected from the kind of technological disruption that has upended a whole bevy of industries.
“The only reason Amazon and its ilk may not do to banking, brokers and insurers what they did to retailers—and are about to do to grocers and pharmacies,” she observed recently in a blog—“is the regulatory structure of each of these businesses. If and how it changes are the most critical strategic factors now facing finance.”
Cornelius Hurley, a Boston University law professor and executive director of the Online Lending Policy Institute, is especially critical of the 50-state, dual banking system. State bank regulators oversee 75 percent of the country’s banks and are the primary regulators of nonbank financial technology companies. “The U.S. is falling behind other countries that are much less balkanized,” Hurley says. “Our federal system of government has served us well in many areas in our becoming a leading civil society. It’s given us NOW (Negotiable Order of Withdrawal) accounts, money-market accounts, automatic teller machines, and interstate banking. But now it’s outlived its usefulness and has become an impediment.”
Take Kabbage, which actually avoids a lot of regulatory rigmarole by virtue of its partnership with Celtic Bank, a Utah-chartered industrial bank. The association with a regulated state bank essentially provides Kabbage with a passport to conduct business across state lines. Nonetheless, Kabbage has multiple, incessant, and confusing dealings with its bank overseers in the 50 states.
“Where the states get involved,” says Taussig, “is on brokering, solicitation, disclosure and privacy. We run into varying degrees of state legislative issues that make it hard to do business. Right now we’re plagued by what’s been happening with national technology actors on cybersecurity breaches and breach disclosures. We are required to notify customers. But some states require that we do it in as few as 36 hours, and in others it’s a couple of months. We’ve lobbied for a national breach law of four days,” he adds, which would “make it easier for everyone operating across the country.”
Then there’s the meaning of “What is a broker?’” says Taussig, who as a regulatory compliance expert at Kabbage sees his role as something of an emissary and educator to regulators and politicians, the news media, and the public. “The definitions haven’t been updated since the 1950s and now we have wildly different interpretations of brokering and solicitation,” he says. “The landscape has changed with e-commerce and each state has a different perspective of what’s kosher on the Internet.”
Washington State is a good example. It’s one of a handful of jurisdictions in which regulators confine nonbank fintechs to making consumer loans. In a kabuki dance, fintech companies apply for a consumer-lending license and then ask for a special dispensation to do small-business lending.
And let’s not forget New Mexico, Nevada and Vermont where a physical “brick-and-mortar” presence is required for a lender to do business. Digital companies, Taussig says, would have to seek a waiver from regulators in those states. “Many companies spend a lot of money on billable hours for local lawyers to comply with policies and procedures,” Taussig reports, “and it doesn’t serve to protect customers. It’s really just revenue extraction.”
All such restraints put fintechs at a disadvantage to traditional financial institutions, which by virtue of a bank charter, enjoy laws guaranteeing parity between state-chartered and federally chartered national banks. The banks are therefore able to traverse state lines seamlessly to take deposits, make loans, and engage in other lines of business. In addition, fintechs’ cost of funds is far higher than banks, which pay depositors a meager interest rate. And banks have access to the Fed discount window, while their depositors’ savings and checking accounts are insured up to $200,000.
The result is a higher cost of funds for fintechs, which principally depend on venture capital, private equity, securitization and debt financing as well as retained earnings. And that translates into steeper charges for small business borrowers. A fintech customer can easily pay an interest rate on a loan or line of credit that’s three to four times higher than, say, a bank loan backed by the U.S. Small Business Administration.
Kabbage, for example, reports that its average loan of roughly $10,000 typically carries an interest rate of 35%-36%. It’s credits are, of course, riskier than the banks’. The company does not report figures on loans denied, Taussig told AltFinanceDaily, but Stanford’s Singleton says that the fintech industry’s denial rate is roughly 50 percent for small business loans. “Fintechs have higher costs of capital and they’re also facing moderate default rates,” notes Singleton. “They’re not enormous, but fintechs are dealing with a different segment. Small businesses have much more variability in cash flows, so lending could be riskier than larger, established companies.”
Even so, venture capitalists continue to pour money into fintech start-ups. “I’ve gone to several conferences,” Singleton says, “and everywhere I turn I’m meeting people from a new fintech company. One of the striking things about this space,” he adds, “is that there are lot of aspiring start-ups attacking very specific, very narrow issues. Not all will survive, but someone will probably acquire them.”
Contrast that to the world of banking. Many banks are wholeheartedly embracing technology by collaborating with fintechs, acquiring start-ups with promising technology, or developing in-house solutions. Among the most impressive are super-regionals Fifth Third Bank ($142.2 billion), Regions Financial Corp. ($123.5 billion), and BBVA Compass ($69.6 billion), notes Miami-based bank consultant Charles Wendel. But many banks are content to cater to familiar customers and remain complacent. One result is that there’s been a steady diminution in the number of U.S. banks.
Over the past ten years, fully one-third of the country’s banks were swallowed whole in an acquisition, disappeared in a merger, failed, or otherwise closed their doors. There were 5,670 federally insured banks at the end of 2017, according to the Federal Deposit Insurance Corp., a 2,863-bank, 33.5% decrease from the 8,533 commercial banks operating in the U.S. in 2007.
It does appear that, to paraphrase an old expression, many banks “are going out of style.” In recent years there have been more banking industry deaths than births. Sixty-three banks have failed since 2013 through June while only 14 de novo banks have been launched. In Texas, which is known for having the most banks of any state in the country, only one newly minted bank debuted since 2009. (The Bank of Austin is the new kid on the Texas block, opening in a city known as a hotbed of technology with its “Silicon Hills.”)
One reason there’s so little enthusiasm among venture capitalists and other financial backers for investing in de novo banks is that regulators are known to be austere. “If you’re a company in the U.S.,” says Matt Burton, a founder of data analytics firm Orchard Platform Markets (which was recently acquired by Kabbage), “and you tell regulators that you want to grow by 100 percent a year – which is the scale you must grow at to get venture-capital funding – regulators will freak out. Bank regulators are very, very strict. That’s why you never hear about new banks achieving any sort of scale.”
But while bank regulators “are moving sluggishly compared to the rest of the world” in adapting to the fintech revolution, says Singleton, there are numerous signs that the status quo may be in for a surprising jolt. The Treasury Department is about to issue (possibly by the time this story is published) a major report recommending an across-the-board overhaul in the regulatory stance toward all nonbank financials, including fintechs. According to a report in The American Banker, Craig Phillips, counselor to Treasury Secretary Steven Mnuchin, told a trade group that the report would address regulatory shortcomings and especially “regulatory asymmetries” between fintech firms and regulated financial institutions.
Christopher Cole, senior regulatory counsel at the Independent Community Bankers Association—a Washington, D.C. trade association representing the country’s Main Street bankers—told AltFinanceDaily that, among other things, the Treasury report would likely recommend “regulatory sandboxes.” (A regulatory sandbox allows businesses to experiment with innovative products, services, and business models in the marketplace, usually for a specified period of time.)
That’s an idea that fintech proponents have been drumming enthusiastically since it was pioneered in the U.K. a few years ago, and it’s something that the independent bankers’ lobby, whose member banks are among the most threatened by fintech small-business lenders, says it too can support. Treasury’s Phillips “has said in the past that he’d like to see a level playing field,” the ICBA’s Cole says. “So if (regulators) are going to allow a sandbox, any company could be involved, including a community bank. We agree with him, of course, because we’d like to take advantage of that.”
In March, 2018, Arizona became the first state to establish a regulatory sandbox when the governor signed a law directing that state’s attorney general (and not the state’s banking regulator) to oversee the program. The agency will begin taking applications in August with approval in 90 days, says Paul Watkins, civil litigation chief in the AG’s office. Watkins told AltFinanceDaily that he’s been most surprised so far by “the degree of enthusiasm” from overseas companies. With the advent of the sandbox, he adds, “Landlocked Arizona has become a port state.”
The OCC, which is part of the Treasury Department, may also revive its plan to issue a national bank charter to fintechs, sources say (EDITOR’S NOTE: This had not yet been implemented before this story went to print. The OCC is now accepting such applications) – a hugely controversial proposal that was put on ice last year (and some thought left for dead) when former Commissioner Thomas J. Curry’s tenure ended last spring. At his departure, the fintech bank charter faced a lawsuit filed by both the New York State Banking Department and the Conference of State Bank Supervisors. (Since then, the lawsuit was tossed out by the courts on the ground that the case was not “ripe” – that is, it was too soon for plaintiffs to show injury).
Taussig, the regulatory expert at Kabbage, reports that the Comptroller of the Currency, Robert J. Otting, has promised “a thumbs-up or thumbs-down” decision by the end of July or early August on issuing fintechs a national bank charter. He counts himself as “hopeful” that OCC’s decision will see both of the regulator’s thumbs pointing north.
The Conference of State Bank Supervisors, meanwhile, has extended an olive branch to the fintech community in the form of “Vision 2020.” CSBS touts the program as “an initiative to modernize state regulation of non-bank financial companies.” As part of Vision 2020, CSBS formed a 21-member “Fintech Industry Advisory Panel” with a recognizable roster of industry stalwarts: small business lenders Kabbage and OnDeck Capital are on board, as are consumer lenders like Funding Circle, LendUp and SoFi Lending Corp. The panel also boasts such heavyweights in payments as Amazon and Microsoft.
Working closely with the fintech industry is a “key component” of Vision 2020, Margaret Liu, deputy general counsel at CSBS, told AltFinanceDaily in a recent telephone interview. CSBS and the fintech industry are “having a dialogue,” she says, “and we’re asking industry to work together (with us) and bring us a handful of top recommendations on what states can do to improve regulation of nonbanks in licensing, regulations, and examinations.
“We want to know,” she added, ‘What the main friction points are so that we can find a path forward. We want to hear their concerns and talk about pain points. We want them to know the states are not deaf and blind to their concerns.”
Announcing the Launch of the SBFA Broker Council
May 11, 2018Washington, D.C.—The Small Business Finance Association (SFBA) today announced the launched a new initiative called the SFBA Broker Council dedicated to bringing together responsible brokers that serve small businesses to focus on creating best practices. The Council is co-chaired by Jared Weitz, founder & CEO of United Capital Source and James Webster, CEO & co-founder of National Business Capital. The mission of the Council will be to create standards and a certification for brokers who agree to best practices focused on four basic principles—transparency, responsibility, fairness, and security.
“We want to give small business owners confidence that the brokers they work with are trustworthy, vetted, and committed to being responsible,” said Jared Weitz. “We need to take steps to promote brokers who are acting in the best interest of small business owners and send a clear message about the valuable role we play in the small business finance ecosystem.”
“We need brokers who believe in best practices to enter the national conversation about small business alternative finance and show policymakers how we serve small business customers,” said James Webster. “We all know there are bad actors out there, but the goal of this Council is to help show the how responsible brokers are working to capitalize underserved small businesses.
“We appreciate Jared’s and James’ leadership in creating this new initiative within SBFA,” said Jeremy Brown, chairman of RapidAdvance and chairman of SBFA. “It is important we send a message to the millions of small businesses we serve that we support brokers who understand that transparency, responsibility, fairness, and security are critical to our industry’s future.”
SBFA is a non-profit advocacy organization dedicated to ensuring Main Street small businesses have access to the capital they need to grow and strengthen the economy. SBFA’s mission is to educate policymakers and regulators about the technology-driven platforms emerging in the small business lending market and how our member companies bridge the small business capital gap using innovative financing solutions. The SBFA is supported by companies committed to promoting small business owners’ access to fair and responsible capital.
“Small business owners are a powerful constituency and we want to give them the utmost confidence in the alternative finance industry,” said Steve Denis, Executive Director of the SBFA. “This includes promoting brokers who are providing transparent capital solutions that they can trust.”
The Small Business Finance Association (SBFA) is a not-for-profit 501(c)6 trade association representing organizations that provide alternative financing solutions to small businesses.
