Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
“Sean,” said the moderator, “where do you see domain names in five years?”
At the inaugural Domainer Expo in Las Vegas this week, I was sort of a self-proclaimed emissary from the lending world, there to tell everyone that domain names had a lot more potential utility than what most people probably realize.
“When businesses are looking for capital, there’s sort of a diagnostic checklist,” I said (in substance). “You ask the business how much revenue they have, you ask them if they have equipment, you ask them if they have real estate, etc. and lenders are trying to figure out which of those assets is something they can use as the basis for financing, but nobody asks about their domain name.”
Maybe they should. If a million links on the internet point to a business’s domain name and search engines rank it, then that domain name is integral to the sales generated on the site. And if a business got a loan against a domain name that they’re using to generate tens of thousands or hundreds of thousands in sales per month, they probably wouldn’t want to lose it because it’s worth a lot.
Usually in the business loan world the story ends here. Ok, domain names? sounds complicated, too techie, waste of time, dollar amounts are too small, nobody wants to deal with that, etc.
But you’d actually be surprised. The technology is just about there that if a business doing $1 million/year in website-originated sales said that they’d be willing to put up their domain name as collateral for a $100,000 loan today, you could send them a link that automatically transfers their domain name to escrow in seconds without them experiencing any disruption to their site. Then if they default on the loan, the domain name transfers to you, where if you understand anything about e-commerce, you should immediately be able to monetize their domain and capture those sales for yourself.
That means no trying to foreclose on a property, no trying to chase down equipment, no suing them, getting a judgment and then hiring an expert to find if they have assets anywhere. Just click-click yours, a revenue generating asset that you can use as leverage to cure the default or monetize immediately and start making your money back with. If you don’t know anything about websites, then maybe this concept wouldn’t be enticing for you as a lender.
I could go into the technical mechanics of how this domain loan process would work, but for now just imagine talking to a business owner generating a lot of revenue that really doesn’t have many assets to make use of. They need $100k and they can’t get it any other way. You tell them they can use their domain name as collateral with no disruption to their website. It will happen instantly. There’s no tax returns needed, no credit check. It’s based on sales, something we might all already be familiar with. Will some business owners say “yes” to such a proposal or would they tell you they’d rather have nothing instead?
“The ISO channel is an important part of our business and we remain committed to it,” said Jay Shaw, Head of Sales at Enova SMB. Enova, which operates OnDeck and Headway Capital, is one of the largest small business lenders in the United States. The company has originated more than $2.2B in loans in the first three quarters of this year, a lot of which comes through “highly compliant ISOs.” The relationship works, especially in times like these when banks are reducing their exposure to small business lending.
But officially we’re not in a recession. The S&P 500 is up 20% YTD, for example, unemployment is low, and inflation has backed off from its previous peak. Shaw says that a positive sentiment among small businesses is something they’re seeing along with this, that when they actually talk to small business owners one-on-one, many of them are feeling pretty good right now.
While most observers would point out that elevated interest rates have shaken up the game, there’s actually been a silver lining to how it’s played out.
“There’s a lot more education and understanding of cost of capital,” said Shaw.
Business owners, for example, who were used to a perpetual low interest rate environment, have watched banks dramatically increase interest rates over the last year or so and it’s actually brought attention and awareness to the fact that lenders have a cost of a capital to contend with as well, that rates come from somewhere. It’s made them more understanding, according to Shaw, when they’re presented with terms now from online lenders. That understanding is compounded by a greater openness to doing it all online in the first place, which businesses are now more accustomed with after having to do so much online during the covid years. In essence it’s a strong environment to be working in right now. Still, many businesses are coming in with a certain expectation of how online lending should work especially if they worked with a bank previously.
“More and more businesses are looking for a line of credit product,” Shaw said, which Enova offers in addition to term loans. Businesses tend to appreciate this product not only because of the control it gives them but also because “they have continuous access to capital after every payment they’ve made,” Shaw said.
According to the Intuit Small Business Index Annual Report, 22% of small businesses applied for a loan or line of credit last year. Although this didn’t distinguish term loans from lines of credit, the demand for a revolving product is evident by an even more sought after type of financing, credit cards, which 30% of small business owners applied for. MCAs, by comparison, were a distant fifth, with only 6% of businesses applying for one.
Perhaps an all important measure is not only what businesses want but how they’re using it in the end.
“A lot of [our customer’s] borrowing is growth borrowing with a significant ROI,” Shaw said.
After the CFPB spent 13 years trying to figure out how to implement a wide-reaching poorly-worded law, the ensuing 888-page handbook full of rules for small business lenders to follow so the government can measure disparities in commercial loan underwriting processes, may have all been for naught. Congress wants the rules gone.
The rules in question were mandated by Section 1071 of the Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) at a time when the bill’s drafters assumed that all business financing products were loans and all loans came from banks. The consequence has been endless rounds of debates, RFIs, hearings, committees, consultations, explainer guides, and lawsuits. Most recently there was a court-ordered injunction put in place to delay implementation of these rules.
Today, however, the House followed the Senate in voting to strike down the relevant rules. Though it was close in both chambers of Congress, Democrats did join Republicans in reaching this outcome. Nevertheless, reports say that Biden is expected to veto their resolution.
Notably, the passed legislation disapproves the rules submitted by the CFPB, not the underlying section of the law that mandates they draft a set of rules. This is important because it’s not Section 1071 that they’ve voted to undo, but rather the final rules that the CFPB has issued as part of its obligation to Section 1071.
According to House republicans, “By overturning the final 1071 rule, Congress will force the CFPB to reengage small businesses and their lenders to create a rule that is better tailored to their concerns and less likely to reduce the availability of credit.”
This effectively means that Section 1071 itself is safe (unless a court rules it or the CFPB unconstitutional). If the President does not veto it the legislation would force the CFPB to go back to the drawing board on rules it took 13 years to come up with in the first place.
An e-mail purporting to come from Bluevine’s Partner Notifications account was sent out to about 300 of their resellers yesterday with a plainly stated notice that their Referral Marketing Agreements had been terminated.
A representative from Bluevine confirmed that these notices were legitimate, saying that “we refined our strategy and are moving away from the ISO/reseller model.”
This was followed by the statement that “We will continue to work with a set of select strategic partners to deliver loans to small businesses.”
Bluevine has been making moves as of late. The company relocated its headquarters to Jersey City, NJ earlier this year, launched an Accounts Payable solution in August, and began offering protection of up to $3 million for business banking customers in September.
Business loan brokers in Canada typically do not fit the same mold as brokers in the United States. Most business loan brokers in Canada are actually mortgage brokers working with mortgage clients that happen to own a business. Such has been the case for Kingsmen Capital Investments, a Canadian small business lender that gets roughly half of its deal flow from mortgage brokers. It’s a nice relationship, but Kingsmen Capital believed that something was missing between a bank loan and merchant cash advances/small unsecured loans.
“We’ve started to come out of the MCA space,” said Kingsmen Managing Partner Roger Dusanj.
The company’s idea was lines of credit that start as low as $250,000 and go up to $2 million (or even higher). Although it can be a little more expensive than a bank, the true LOC can also be easier to obtain. Dusanj, for example, said that they’ll evaluate a business’s ebitda versus looking at their total net income. Covid, he added, has also made businesses across Canada more receptive to non-bank products and so it’s taking off.
“In 18 months, we paid out $100 million,” Dusanj said of the loans they’ve made already. The progress so far has made them confident that they’re on to something big. The company will also do term loans and equipment financing.
Although the Canadian mortage broker community works well, Kingsmen says that they would work with US-residing business loan brokers. The company was founded in 2015.
In the span of just a few hours after deBanked CONNECT MIAMI announced BROKER BATTLE, about a dozen brokers entered their names into the contest on the hope that they may be chosen to compete LIVE at the Miami Beach Convention Center on January 11th. Entries will be accepted through December 1st but it may shut off sooner if the broker contestant pool reaches critical mass.
deBanked CONNECT Miami is adding Broker Battle to this year’s lineup of content. The first-of-its-kind event aims to be fun, educational, and serious. The winner of the Battle will earn the distinction of being the Top Broker and win a grand prize of $5,000.
To learn more about Broker Battle and/or enter, CLICK HERE.
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When someone told me a tech company was using AI to have legitimate voice conversations with sales prospects over the phone, I was skeptical. Then I listened to some examples. The voice and interactions sounded so real that I became even more skeptical that I was even listening to AI. The technology behind it was EVE, a company founded in 2016 that actually uses pre-recorded human responses to engage with someone over the phone. If it sounded so human, that’s because the responses were in fact human voices. EVE’s system is not artificial intelligence in the current sense like ChatGPT. Instead, EVE is using a dialogue tree, a system of recorded responses that are played based upon the interpreted communication of the person. It understands what the person is saying and chooses the right response quickly. And speed is key, because according to Alex Skrypka, CEO of EVE.calls, people will feel that something is off if it takes longer than 1 second to receive a response to something that’s said. The trick is never having the customer figure out that they’re talking to a bot.
In the earlier days, this technology had limitations. EVE could only handle simple voice commands. That progressed, however, to where it could be the opening sales caller, getting prospects to the point where they were pre-qualified and passed onto a human. But by last year it was beginning to assist in closing deals. Skrypka believes that by next year it will advance to a level where it is closing independent deals all on its own and by 2027 will be considered not only an expert closer but also be able to up-sell the customer while doing it.
The possibilities call to mind a recent popular post on LinkedIn about one thing remaining constant in fintech despite all the advancements in automation is the demand by customers to want to talk to someone. But tech is now addressing that in ways previously thought unimaginable. Customers are already talking to AI agents through neural network technology like OpenAI’s ChatGPT, though mainly in text/chatbot form. As of September, however, ChatGPT was brought to life with a voice. The current options of Juniper, Breeze, Cove, Sky and Ember are a variety of synthetic male and female voices that ChatGPT can speak as but they don’t sound that synthetic when you listen to them. I could be fooled by Juniper.
According to Skrypka, the challenge with putting something like ChatGPT on the phone right now is that crucial response delay time. It’s going to give away that it’s an AI. For testing’s sake, I tried this out and found that while Juniper held up pretty well in a light conversation, she broke the immersion a few times when she had to think about something I said for 7 or 8 seconds.
Perhaps a voice bot, whether it be based on a dialogue tree or a neural network doesn’t have to be perfect 100% of the time anyway, just good enough to scale a business efficiently and cost effectively. EVE, for example, touts that it can handle up to 1 million calls per hour. Imagine how many sales representatives it would take to have 1 million phone conversations an hour.
To think that these capabilities are only going to get better! If customers continue to feel that talking to someone on the phone is necessary before making a big decision, the world of fintech will continue to serve them. But whether that sales person or customer service rep is really a person or a bot is something the customer may never know for sure.
“There’s a need for products and services like ours across all cycles,” said Cato Pastoll, CEO of Loop, on the small business lending panel held at the Lenders Summit this week in Toronto.
It’s unclear what cycle the industry is in exactly. The Lenders Summit, put on every year by the Canadian Lenders Association, was not only sold out but packed wall to wall with more than 500 attendees. The tone was relatively upbeat despite Canada’s key interest rate holding steady at 5% and economic headwinds blowing in the background.
OnDeck Canada COO Harley Greenspoon said that his company just had their best October in four years and that they’ve returned back to pre-pandemic growth. “Demand is actually not the issue at all,” Greenspoon said.
Not only is the demand for business loans there but OnDeck Canada has not had to pass on the rising costs of capital thanks to greater efficiencies unlocked by reducing headcount and increasing automation.
Lauren Thompson, VP of Specialty Finance for Peoples Group, whose organization partners with fintechs and lenders, said that from a bird’s-eye view banks would probably continue to restrict capital being loaned to small businesses for the foreseeable future. “I don’t think that small businesses are best served through the traditional banking system,” said Thompson.
Pastoll of Loop pointed out an irony with this, that banks tend to under serve the underserved when they actually need it most. “90% of the private sector workforce is employed by small businesses so if you want to stimulate the economy, we as fintechs can do it faster…” Pastoll said.
Thompson explained that the traditional financial system can be hamstrung by reviewing data that is already stale such as financial reports that reflect a moment in time six months ago while a fintech lender has more of a live pulse on what’s going on.
Greenspoon of OnDeck Canada, for example, could rattle off the top of his head industries that are experiencing challenges, the most notable being transportation.
Finally, Pastoll was asked if Loop had contemplated ever having to deal with a high interest rate environment back when he founded the company almost nine years ago. Pastoll explained that his whole inspiration for founding Loop in the first place was to help small business owners precisely during difficult times. Both of his parents were small business owners and he had watched firsthand how hard it was to find financing.
“Again, I just think about what my parents had to go through,” he said.