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In the Bureau of Consumer
Protection at the Federal Trade

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Commission. Welcome to all of
you, and thank you for coming to

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our forum on small business
financing. Before we get started

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with today's program, I have a
few administrative announcements

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that I'm going to run through.
First, please silence any mobile

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phones. I'd appreciate it if you
don't use your phone. But if you

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have to, please be cognizant of
others in the audience. And also

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be aware that if you leave
Constitution Center this

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morning, you will have to go
back through security. So

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particularly for our panellists,
be mindful of that because it

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does often take a couple of
minutes to get back through.

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Restrooms are in the hallway
right behind me. And I think

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everyone received a lanyard
today when you came in. We reuse

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these here. So when you're done,
please hand them to one of our

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staff or drop them in a box that
we'll have on the way out. If an

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emergency occurs that requires
an evacuation of the building,

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an alarm will sound. Everyone
should leave the building

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through the 7th Street exit,
which many of you came in. After

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leaving the building, you'll
turn left, cross 7th Street, and

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then cross E to the FTC's
emergency gathering area, where

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we'll have a sign. You should
remain in that area until you

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receive further instruction. If
an emergency occurs that

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requires you to just leave the
conference center but stay in

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the building, please listen for
announcements over the PA

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system. Please be advised that
the event today is being

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photographed, being webcast, and
recorded. By participating in

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today's event you are agreeing
that your image and anything you

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say could be posted indefinitely
at FTC.gov or on one of our

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publicly-available websites. So
that's it for the administrative

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announcements. So we can start
our great program this morning.

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And now I am very pleased to
introduce FTC Commissioner

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Chopra.

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Good morning, everyone. So I
want to thank you all for

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joining the Federal Trade
commission's Forum on Small

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Business Financing. Today we're
going to examine the regulatory

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landscape and concerning
practices that entrepreneurs and

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small businesses face. We're
joined by a wide range of

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experts, as well as officials
from the Federal Reserve and the

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Small Business Administration. I
want to thank the FTC team that

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put this whole forum together-
Malini Mithal, Sandy Brown, Evan

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Zullow, Stephanie Rosenthal,
Sarah Kerman, and June Chang,

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and also all of the event
planning web team, press office,

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honors, paralegals, and all of
you for being here today. But

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before we begin, I wanted to
share some broader concerns

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about the state of
entrepreneurship and small

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business in America, their lack
of freedom in negotiating

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contracts, and the FTC's long
role in policing unfair

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contracts. I'll leave you with
several questions that we're

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going to need to answer as part
of this inquiry. So being an

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entrepreneur and starting a new
business is tough, but it is

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also what makes an economy
thrive. The hard work,

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independence, and creativity of
entrepreneurs and new small

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businesses helped us grow,
innovate, and create wealth in

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communities across the country.
But today, large firms

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increasingly dominate more
sectors of the economy. Not only

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can these firms use their market
power to block entrepreneurs

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from challenging them, they can
also use their power to

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influence government to protect
their incumbency, often,

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ironically, in the name of
promoting small business. It's

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getting harder and harder for
entrepreneurs to launch new

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businesses. Since the 1980s, new
business formation began its

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long steady decline. And a
decade ago, births of new firms

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started to be eclipsed by death
of firms. According to Census

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Bureau data analysed by the
Kaufmann Foundation and the

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Brookings Institution, the
number of new companies as a

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share of all businesses has
declined by 44% from 1978 to

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2012. The stairway to success
for entrepreneurs and new

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businesses are as steep. For
minority and women-owned

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businesses, that climb can be
even steeper. One of the most

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powerful weapons wielded by
firms over new businesses is the

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"take it or leave it" contract.
Entrepreneurs and new small

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businesses cannot negotiate the
terms in these contracts, and

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the terms usually transfer
rights and power to the dominant

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firm on the other side. To be
clear, a fair and thriving

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economy and society rests on
contracts. Contracts are ways

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that we put promises on paper.
When it comes to commerce,

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arm's-length dealing codified
through contracts is a

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prerequisite for prosperity. But
when a market structure requires

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small businesses to be dependent
on a small set of dominant

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firms, or firms that don't
engage in scrupulous business

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practices, these incumbents can
impose contract terms that

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cement dominance, extract rents,
and make it harder for new

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businesses to emerge and thrive.
For example, entrepreneurs who

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develop mobile applications face
a slew of onerous contract terms

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imposed by app stores. Sometimes
these contracts allow platforms

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to hike their fees at any time,
and impose regulations that

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limit how businesses communicate
with their customers, depriving

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these developers of the autonomy
they need to run their business.

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Many small businesses are
similarly dependent on dominant

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online marketplaces, which might
impose contractual terms that

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ban merchants from selling their
goods elsewhere at a lower

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price. Small farmers and poultry
growers must agree to terms

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imposed on them by large
agribusinesses that restrict

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their ability to contest their
payments when their food is

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weighed. It's not just tech,
retail, or agriculture. The loss

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of small business freedom when
it comes to contracts is no

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longer the exception, it's
increasingly becoming the norm.

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In other contexts, a market
structure allows firms,

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regardless of their dominance,
to exploit their position

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through other means, sometimes
by deceiving customers. The

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Federal Trade Commission Act
prohibits unfair or deceptive

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acts or practices, as well as
unfair methods of competition.

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And the FTC has a long tradition
of prohibiting unfair contract

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terms and requiring fair ones,
recently, the FTC began to

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enforce a ban on
non-disparagement clauses in

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contracts that forbid purchasers
from posting truthful reviews

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online about a product or
service. There was consensus

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that these terms harmed
consumers in competition,

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particularly when contracts gave
no, quote, "meaningful

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opportunity" to negotiate. More
than a generation ago, the FTC

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found that many consumers had no
ability to bargain around

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consumer credit contracts, and
that this imbalance was

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resulting in significant harm to
consumers. Based in part on

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those findings, the FTC
developed the Holder Rule, which

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requires lenders to add a notice
to contracts preserving

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borrowers' legal rights, even if
the creditor sold the loan to

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Wall Street or another lender.
The rule has reshaped consumer

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credit markets, and has been
described as one of the most

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important consumer protections
the commission has ever taken.

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And even more relevant to
today's discussion is the FTC's

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Credit Practices Rule, developed
35 years ago, which bans a host

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of one-sided contract terms that
require consumers and customers

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to waive their rights or assign
their wages to lenders. For

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example, the rule bans
confessions of judgment, where a

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borrower must agree to waive any
defences if they are sued. In

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issuing the rule, the commission
found that terms like these were

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the product of an unequal
bargain where consumers could

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not protect their interests. But
the Credit Practices Rule

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Applies only to consumer
contracts. And today we are

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seeing some small business
financing products, particularly

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those offered online, that
include some of the same terms

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that the FTC barred creditors
from imposing on consumers.

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These terms have led to a flood
of questionable legal actions

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through which creditors seize
small business owners' assets.

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The FTC is the sole federal
regulator and enforcer in the

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non-bank small business
financing marketplace, so we are

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accountable for cleaning up this
market. We will need to

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determine whether certain
contract terms and business

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practices constitute a violation
of the law. And I believe all of

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us should approach this inquiry
with several questions in mind.

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First, what are the best sources
and methods to assemble

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qualitative and quantitative
data on contract terms and

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business practices in the
market? What can we learn from

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reforms in other jurisdictions
around the world when it comes

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to unfair contract terms for
small businesses and

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entrepreneurs, such as those
recently pursued by the

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Australian Competition and
Consumer Commission? Second,

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which contract terms and
business practices are likely to

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be unlawful under the FTC Act,
and which practices may be

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discriminatory under the Equal
Credit Opportunity Act? Third,

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if there are unlawful practices
that may be widespread or

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prevalent across the market,
should the agency seek to deter

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this misconduct by activating
civil penalties through section

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5(m)(1)(B) or through a
rulemaking? Fourth, how should

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the agency support efforts by
state legislatures and

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regulators that are seeking to
promote a competitive dynamic

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climate for entrepreneurs and
new businesses seeking

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financing? I hope that these
questions can be tackled today

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during the three panels we will
hear from, as well as over the

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course of the next several
months. Today will include an

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overview of the marketplace for
small business financing. It

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will also discuss potentially
problematic products and other

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risks. So in conclusion, the
Federal Trade Commission will

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need to play a pivotal role in
restoring dynamism and

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entrepreneurship in our economy
to reverse some of the alarming

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trends that undermine the values
our country stands for.

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Aggressive enforcement that
promotes competition and

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protects consumers and honest
businesses, complemented by

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rigorous analysis of the
marketplace to eradicate unfair

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contract terms and business
practices, is absolutely

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essential. Today is just the
start of these discussions, and

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we look forward to learning more
from all of you today. Thank

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Could you please come up? We can
get started.

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you.

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OK, we have a lot to cover this
morning, so we'll go ahead and

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get started. My name is Malini
Mithal, and I'm with the Federal

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Trade Commission. And this is
Thomas Kost. He's going to be my

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co-moderator, also at the
Federal Trade Commission. And

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this is Panel 1-- an Overview of
the Small Business Financing

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Marketplace. This panel will
provide an introduction to the

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role of small businesses in the
US economy, the types of

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financing products available,
and the benefits of these

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products, as well as recent
trends in the financial

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marketplace. So we're going do
very brief introductions because

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we have a lot of ground to
cover. So immediately-- I'm not

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going to get the right and left
right. So immediately over here

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is Claire, Claire Kramer Mills.
She's the assistant vice

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president of the Federal Reserve
Bank of New York. Then we have

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Sam Taussig. Did I pronounce
your last name correctly? OK.

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He's the head of global policy
at Kabbage. Next to him, we have

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Lew, Lew Goodwin, banking
services lead at Square Capital.

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Then Gwendy Brown, the vice
president of research and policy

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with Opportunity Fund. And
finally, we have Scott Talbott,

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the senior vice president of
government affairs at the

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Electronic Transactions
Association. So to kick off our

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panel, I'm going to start with
what's a very basic question.

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But can you all talk about what
the importance of credit and

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financing is for small
businesses. I'm going to start

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with you, Claire.

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Sure. And I'll just preface any
remarks with the following

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disclaimer-- the views I express
are my own, and do not

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necessarily represent those of
the Federal Reserve Bank of New

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York or the Federal Reserve
System. With that said, so small

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businesses-- and I think just to
level-set, we're talking about,

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here, both non-employer firms,
solo proprietorships, as well as

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firms that have employees on
payroll. They need funds to fuel

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day-today operations, and they
also need funds for expansion

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and growth. And you know, for
the last couple of years, the

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Federal Reserve has had
surveyed, regularly, small

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businesses. And when we asked
about financial challenges that

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they've experienced in the last
12 months, they regularly tell

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us that they have challenges
funding operating expenses. So I

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think a big concern is this
daily flow and management of

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cash.

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Sam?

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Thank you. And good morning,
everybody. And thanks for

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showing up to visit with us
before 9 AM. I also do have to

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preface some comments. I do
represent the views of Kabbage,

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but I will try to distinguish
when I am representing my own

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personal views. My regulatory
attorneys would like me to

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remind you that I'm not a
lawyer, and that any loans I

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refer to today are actually made
by Celtic Bank within the

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Kabbage program, member FDIC.
Now, with that being said, our

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business at Kabbage is serving
the small business credit needs.

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And our customers are typically
five to seven employees, truly

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mainstream American small
businesses, that are looking for

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project-based financing, often
referred to as working capital.

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And about 27% of them don't
receive the funds they need to

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grow. And the average small
business, according to our

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00:15:32.640 --> 00:15:37.650
research, only has about 27 days
of cash flow on hand. So if you,

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as a small business owner, need
to seize an opportunity to

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expand your revenue, or a
one-off event, such as your

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00:15:45.810 --> 00:15:49.200
freezer in your ice cream store
breaks, it's very difficult to

234
00:15:49.200 --> 00:15:53.400
access that capital quickly to
get back to business or to grow

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your business. And that's where
non-bank fintech platforms like

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Kabbage have stepped in to
facilitate that access to

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credit. And we'll get much more
into the needs of small

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businesses as we go through this
panel. But again, thank you for

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joining us this morning.

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Lew?

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00:16:12.090 --> 00:16:16.950
Thank you. And I'm here with
Square and Square Capital. And

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00:16:17.340 --> 00:16:24.150
the disclaimers are the same. So
look, as you all know, I mean,

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small businesses are the
lifeblood of the US economy. 48%

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00:16:29.190 --> 00:16:35.970
of the total population is
employed by small business. And

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00:16:35.970 --> 00:16:41.580
so it's just a huge factor here.
And their access to capital is

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such a critical need. And in
Square, we deal with a lot of

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small and microbusinesses. And
the challenges to capital, I

248
00:16:53.400 --> 00:16:57.930
think, are even tougher, because
their access to capital is

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00:16:57.930 --> 00:17:02.310
usually your friends and family.
And friends and family, that's a

250
00:17:02.310 --> 00:17:07.350
tough bank to go back to time
after time. And so in our

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00:17:07.350 --> 00:17:11.370
research, we found that 70% of
the small businesses that go out

252
00:17:11.370 --> 00:17:16.110
and try to get financing are not
able to get what they want or

253
00:17:16.110 --> 00:17:20.730
need. So it's certainly an acute
problem that we look forward to

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00:17:20.730 --> 00:17:21.900
talking to on this panel.

255
00:17:24.150 --> 00:17:28.050
Good morning. I'm Gwendy Brown,
with Opportunity Fund. And I'd

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00:17:28.050 --> 00:17:30.600
like to speak to, in addition to
the role that small businesses

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00:17:30.600 --> 00:17:33.690
play in providing jobs for many
Americans, the role that small

258
00:17:33.690 --> 00:17:36.300
businesses play in providing
income for those small business

259
00:17:36.300 --> 00:17:39.750
owners. Particularly for
low-income minority and women

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00:17:39.750 --> 00:17:42.480
business owners, access to
capital is a tremendous problem

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00:17:42.480 --> 00:17:48.090
in our country. And access to
quality responsible financing is

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00:17:48.090 --> 00:17:51.690
essential in order to really
make ends meet and provide for

263
00:17:51.690 --> 00:17:53.910
their families through their
small business enterprise. So

264
00:17:53.910 --> 00:17:58.140
therefore having access to
capital is really why we're all

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00:17:58.140 --> 00:17:58.680
here today.

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00:18:00.390 --> 00:18:02.280
Thanks. Good morning. Scott
Talbott, I don't have any

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00:18:02.280 --> 00:18:07.410
disclosures. I am a lawyer. But
I appreciate this opportunity. I

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00:18:07.410 --> 00:18:11.610
think-- real quickly, I think
it's important to recognize

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00:18:12.060 --> 00:18:15.600
that, excitingly, the market has
changed. And we're sitting here

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00:18:15.600 --> 00:18:19.560
because there is a host of new
products available that fintech

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00:18:19.560 --> 00:18:23.340
has helped deliver and created
new opportunities for financing

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00:18:23.340 --> 00:18:27.180
for small businesses, whether
it's through the companies up

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00:18:27.180 --> 00:18:30.150
here, merchant cash advances, I
know we'll talk about later,

274
00:18:30.150 --> 00:18:32.490
which have been around for a
little while. But these products

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00:18:32.490 --> 00:18:36.060
are exciting, and the
marketplace has created them to

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00:18:36.060 --> 00:18:40.410
help serve customers, which is
fantastic. And it's especially

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00:18:40.410 --> 00:18:43.260
important for all the reasons
already mentioned. But when you

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00:18:43.260 --> 00:18:46.500
look at what the companies,
small businesses, do with this

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00:18:46.500 --> 00:18:51.660
capital, the economic output is
fantastic. We did a survey of

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00:18:52.140 --> 00:18:57.270
large ETA members, and we found
that, out of $10 billion lent

281
00:18:57.270 --> 00:19:02.070
over a two-year period, it
generated almost 400,000 jobs

282
00:19:02.460 --> 00:19:07.740
and $12.6 billion in wages in
local economies. So there is a

283
00:19:07.740 --> 00:19:10.770
multiplier effect here of
delivering capital to small

284
00:19:10.770 --> 00:19:13.650
businesses who are going to put
it to work and help our economy.

285
00:19:14.260 --> 00:19:16.660
Great, thank you. OK, so
something that was coming up in

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00:19:16.660 --> 00:19:19.090
our answers is a little bit
about the profile of a small

287
00:19:19.090 --> 00:19:22.270
business. I think, Sam, you
mentioning that many of your

288
00:19:22.600 --> 00:19:25.090
companies that you deal with
have five to seven employees. I

289
00:19:25.090 --> 00:19:27.100
know Gwendy was talking about
women and minority-owned

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00:19:27.100 --> 00:19:29.470
businesses. So let's talk a
little bit more about the

291
00:19:29.470 --> 00:19:31.990
profile, anything you want to
add to that. And I'll start with

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00:19:31.990 --> 00:19:32.440
you, Sam.

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00:19:32.590 --> 00:19:36.640
Sure. Thank you. Yes, so the
Kabbage customer base is

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00:19:36.640 --> 00:19:40.690
interesting, because we offer a
line of credit between $2,000

295
00:19:40.720 --> 00:19:46.180
and $250,000, that the borrower
is able to select exactly how

296
00:19:46.180 --> 00:19:49.630
much they want to access. And
that capital is accessed on the

297
00:19:49.630 --> 00:19:53.680
basis of a term loan. That term
loan is 6, 12, or 18 months. So

298
00:19:53.680 --> 00:19:58.090
within the $2,000 to $250,000
range, you can imagine that we

299
00:19:58.090 --> 00:20:01.330
have a couple of different
stratifications of business

300
00:20:01.330 --> 00:20:04.900
types. But overall, they are
about five to seven employees

301
00:20:05.080 --> 00:20:09.820
that are operating in every sort
of NAICS code or retail sector

302
00:20:10.030 --> 00:20:14.470
and SIC code that you could
possibly imagine. You know, on

303
00:20:14.470 --> 00:20:20.860
average, they're looking for
return on investment capital. At

304
00:20:20.860 --> 00:20:24.910
the higher end of the scale, we
have customers that are

305
00:20:24.910 --> 00:20:28.390
accessing that $250,000 line.
Those are much more mature

306
00:20:28.390 --> 00:20:32.530
businesses. You're looking at
closer to the $1 million revenue

307
00:20:32.530 --> 00:20:36.220
line, though typically not over.
You're looking at 11 to 12-plus

308
00:20:36.670 --> 00:20:41.380
employees, typically
concentrated in high-input or

309
00:20:41.410 --> 00:20:44.680
highinvestment industries such
as custom manufacturing,

310
00:20:44.860 --> 00:20:49.360
particularly in the Midwest. I
will say, though, that within

311
00:20:49.360 --> 00:20:52.090
our profile, it's very
interesting to look at the

312
00:20:52.090 --> 00:20:55.750
distribution. The Kabbage
program operates in all 50

313
00:20:55.750 --> 00:21:00.760
states, and as I said, across
all retail and other industry

314
00:21:00.760 --> 00:21:04.120
segments. But we have an
incredibly diverse portfolio of

315
00:21:04.120 --> 00:21:07.750
small business owners. Because
the application is entirely

316
00:21:08.710 --> 00:21:12.610
protected-class blind, we don't
really know the race or sex of

317
00:21:12.610 --> 00:21:15.220
the borrower. We know they're
not a terrorist or violating

318
00:21:15.220 --> 00:21:20.890
other AML/KYC/KYB issues, but
those customers come to us in

319
00:21:20.890 --> 00:21:23.080
sort of a selection bias,
because they don't need to

320
00:21:23.080 --> 00:21:29.890
present documents or sit before
a banker. And by the nature of

321
00:21:29.890 --> 00:21:33.910
that kind of anonymous program,
we've developed a really, really

322
00:21:33.910 --> 00:21:35.860
diverse profile across the
country.

323
00:21:38.140 --> 00:21:40.390
Hey, thank you, Claire, I think
you have some things to say on

324
00:21:40.390 --> 00:21:40.540
this.

325
00:21:40.540 --> 00:21:44.440
Sure. So just to kind of
level-set, and just speak

326
00:21:44.770 --> 00:21:49.330
broadly about the small business
population, roughly 80% or so of

327
00:21:49.330 --> 00:21:54.010
small businesses are sole
proprietorships. Of those firms

328
00:21:54.010 --> 00:21:59.560
that have employees on payroll,
55% of them, give or take, have

329
00:21:59.560 --> 00:22:03.880
1 to 4 employees. So by and
large, small businesses are in

330
00:22:03.880 --> 00:22:08.290
fact small. And by and large,
their credit and their financing

331
00:22:08.290 --> 00:22:14.350
needs are small. And this is not
to underestimate the gazelles

332
00:22:14.350 --> 00:22:17.710
and the fast-growth companies
that we want to make sure are

333
00:22:17.710 --> 00:22:21.670
financed, but just to give you a
sense of where the market is.

334
00:22:22.600 --> 00:22:27.730
We've found in our research that
typically most small businesses

335
00:22:27.790 --> 00:22:32.830
with employees need roughly
$100,000 or less in financing.

336
00:22:33.370 --> 00:22:39.940
Roughly 2/3 need $250,000 or
less. And I think, to speak to

337
00:22:39.970 --> 00:22:43.660
some points that have already
been raised, that's increasingly

338
00:22:43.660 --> 00:22:47.470
a tough market for traditional
banks to serve, for a variety of

339
00:22:47.470 --> 00:22:50.110
reasons. I mean, we'll touch on
that later. But there certainly

340
00:22:50.110 --> 00:22:56.260
has been-- if you marry sort of
need and where the borrower is

341
00:22:56.260 --> 00:22:59.770
at this point, there's certainly
opportunities-- and very wide

342
00:22:59.770 --> 00:23:02.530
ones-- for innovations in the
marketplace.

343
00:23:03.220 --> 00:23:06.400
Okay, great. And I don't know if
anyone has anything to add about

344
00:23:06.580 --> 00:23:09.100
the role of minority and women
owned businesses, I think,

345
00:23:09.100 --> 00:23:10.510
Wendy, that's something you were
bringing up.

346
00:23:11.140 --> 00:23:14.350
I think I just like to speak to
more informal businesses,

347
00:23:14.770 --> 00:23:19.510
traditionally, sole proprietors
or very small employers, what we

348
00:23:19.510 --> 00:23:22.360
often see is that they've really
mingled their personal and

349
00:23:22.360 --> 00:23:25.090
business finances, they've
started with personal credit

350
00:23:25.090 --> 00:23:28.060
cards, possibly with home
equity. And as they build their

351
00:23:28.060 --> 00:23:31.180
business, they begin trying to
access business products. But

352
00:23:31.180 --> 00:23:33.730
ultimately, you know, until they
get quite formalized their

353
00:23:33.730 --> 00:23:36.460
business and personal finances
are intertwined, and they really

354
00:23:36.460 --> 00:23:40.810
see consumer and business credit
as both options for them to

355
00:23:40.840 --> 00:23:43.120
consider to grow their business.
So they're not kind of

356
00:23:43.240 --> 00:23:46.810
completely separate. And same
way. Many lenders and financing

357
00:23:46.810 --> 00:23:49.270
companies are looking at their
personal credit, as well as

358
00:23:49.270 --> 00:23:50.860
perhaps their business credit as
well.

359
00:23:51.160 --> 00:23:52.150
Claire, did you have-

360
00:23:52.630 --> 00:23:55.060
In our survey, in the Fed
survey, you know, we find that

361
00:23:55.060 --> 00:23:58.450
50% of small businesses are
using exclusively their personal

362
00:23:58.450 --> 00:24:02.020
scores to secure financing for
their business. Another roughly

363
00:24:02.020 --> 00:24:06.970
30% are using both personal and
business scores. Certainly when

364
00:24:06.970 --> 00:24:10.060
they go to traditional
providers, personal guarantees

365
00:24:10.060 --> 00:24:15.430
are pretty standard for term
loans. They're also using, at

366
00:24:15.430 --> 00:24:19.660
roughly equal levels, personal
assets and business assets to

367
00:24:19.660 --> 00:24:22.390
secure financing for their
business.

368
00:24:23.290 --> 00:24:26.800
And can anyone speak to kind of
the sophistication of the small

369
00:24:26.800 --> 00:24:28.780
business owners that are seeking
financing?

370
00:24:30.730 --> 00:24:35.080
I'll take a go at it. First of
all, I mean, as far as

371
00:24:35.080 --> 00:24:38.410
sophistication goes, I think
people that are in small

372
00:24:38.410 --> 00:24:42.490
business and these sole
proprietors really understand

373
00:24:42.520 --> 00:24:47.320
their dilemma. They really
understand their cash flow from

374
00:24:47.320 --> 00:24:52.390
hour to hour, much less week to
month. And so I think it's very

375
00:24:52.390 --> 00:24:59.440
important for them to understand
how they can solve some of their

376
00:24:59.440 --> 00:25:06.220
liquidity and cash flow issues.
And that is so important when

377
00:25:06.220 --> 00:25:12.940
you are trying to make it day to
day. It is also important that

378
00:25:12.940 --> 00:25:17.770
when you get financing, that it
isn't some sort of an

379
00:25:17.800 --> 00:25:20.620
arrangement that would take all
of your earnings, kind of a

380
00:25:20.620 --> 00:25:25.540
bullet type of a situation where
you have to pay back everything

381
00:25:25.540 --> 00:25:30.430
at a certain point. Square's
business makes it so that the

382
00:25:30.430 --> 00:25:38.110
payment is generally always
under 15% of what the inflows

383
00:25:38.110 --> 00:25:45.070
would be. And square takes
payments on its loans on the

384
00:25:45.730 --> 00:25:51.700
business's daily receipts. So as
they sell, they would pay back

385
00:25:51.700 --> 00:25:56.860
their loan. And I think it's
very important that you can help

386
00:25:57.970 --> 00:26:02.890
these small businesses to see
what is available to them for

387
00:26:02.890 --> 00:26:03.490
financing.

388
00:26:03.550 --> 00:26:06.010
So I think we're dancing around
an interesting point that I just

389
00:26:06.010 --> 00:26:09.190
want to make really clear. There
is a very important difference

390
00:26:09.190 --> 00:26:12.460
between consumer credit and
commercial credit. And we spend

391
00:26:12.460 --> 00:26:16.930
a lot of time educating
policymakers on this difference

392
00:26:17.020 --> 00:26:19.510
because of how the laws and the
regulations are actually

393
00:26:19.510 --> 00:26:22.510
applied. But if you really look
at what a small business

394
00:26:22.510 --> 00:26:26.800
customer is trying to do, in the
real world, certainly for the

395
00:26:26.800 --> 00:26:28.870
Kabbage customers, they're
trying to buy equipment,

396
00:26:28.870 --> 00:26:31.750
purchase inventory, boost
marketing. All of these things

397
00:26:32.080 --> 00:26:35.650
are in search of a return on
investment. And that's very

398
00:26:35.650 --> 00:26:38.560
important to understand. Small
business owners-- sole

399
00:26:38.560 --> 00:26:41.740
proprietors, one to two
employees, five to seven

400
00:26:41.740 --> 00:26:45.640
employees, 100, 1,000 employees,
they're looking to invest and

401
00:26:45.640 --> 00:26:49.870
grow their business or recover
from an event. And that is a

402
00:26:49.900 --> 00:26:52.750
return on the investment, and
that's a return on the capital.

403
00:26:52.870 --> 00:26:56.200
Whereas compared to the consumer
credit, typically-- not always,

404
00:26:56.200 --> 00:27:01.000
but typically-- is used for
consolidating previous debt or

405
00:27:01.000 --> 00:27:05.290
purchasing depreciating assets
that don't necessarily return

406
00:27:05.290 --> 00:27:08.500
that return on capital. And so
when we look at the

407
00:27:08.500 --> 00:27:13.000
sophistication of small
businesses, we do look at

408
00:27:13.660 --> 00:27:16.630
necessarily how they're using
their credit and what they want

409
00:27:16.630 --> 00:27:20.710
to use credit for. We at Kabbage
are leveraging the cash flow

410
00:27:20.710 --> 00:27:24.970
underwriting data, similar to
what my colleague at Square was

411
00:27:24.970 --> 00:27:28.810
just referring to, to underwrite
the business. And so our

412
00:27:28.810 --> 00:27:32.830
seven-minute application process
that leverages the underlying

413
00:27:32.830 --> 00:27:36.220
existing business data, such as
bank account data, credit card

414
00:27:36.220 --> 00:27:39.880
receivables data, accounting
inventory, shipping inventory,

415
00:27:40.090 --> 00:27:43.270
et cetera, is looking at the
fundamental underlying

416
00:27:43.270 --> 00:27:46.690
transactions of that business to
make sure that if the Kabbage

417
00:27:46.690 --> 00:27:48.880
program were to inject
additional capital into the

418
00:27:48.880 --> 00:27:51.250
business for whatever that
business wants to do to grow,

419
00:27:51.400 --> 00:27:55.270
they can sustain and service
that debt. And that's very

420
00:27:55.270 --> 00:27:56.260
important to understand.

421
00:27:57.160 --> 00:28:00.310
I'd like to just add, as far as
sophistication, that what we

422
00:28:00.310 --> 00:28:02.980
find is that our business owners
are sophisticated when it comes

423
00:28:02.980 --> 00:28:05.590
to their specific business. If
they're a florist, they know

424
00:28:05.590 --> 00:28:09.250
flowers in and out, as well as
their suppliers, and on and on

425
00:28:09.250 --> 00:28:12.250
through the industries. What
they're not experts at is the

426
00:28:12.250 --> 00:28:14.650
landscape of small business
finance, which where we're

427
00:28:14.650 --> 00:28:17.260
talking about today. And I think
it is important to acknowledge

428
00:28:17.260 --> 00:28:20.590
that regardless of their level
of sophistication, even if they

429
00:28:20.590 --> 00:28:24.010
have MBAs, we've had many people
come to us really unable to

430
00:28:24.160 --> 00:28:27.370
fully understand the terms of
different financing options

431
00:28:27.370 --> 00:28:30.670
presented to them. So
sophistication as a business

432
00:28:30.670 --> 00:28:33.850
owner does not necessarily
equate to sophistication in

433
00:28:33.850 --> 00:28:37.390
terms of being able to assess
financing options available.

434
00:28:38.620 --> 00:28:42.190
Just one quick thing that I
would add there in reference to

435
00:28:42.190 --> 00:28:44.560
the points that have just been
made, we ask a series of

436
00:28:44.560 --> 00:28:49.720
questions that ask borrowers
about why they chose particular

437
00:28:49.720 --> 00:28:53.230
financing options and particular
lenders. And I would just say,

438
00:28:53.230 --> 00:28:56.620
broadly, I agree with you,
Gwendy. I think the nuances of

439
00:28:56.620 --> 00:29:00.160
different financing vehicles may
just not be terrain that an

440
00:29:00.190 --> 00:29:03.790
early-stage entrepreneur has
faced before. And so those are

441
00:29:03.790 --> 00:29:07.180
those are really challenging
circumstances for them. What

442
00:29:07.180 --> 00:29:11.350
they do understand, though, I
think, is a broad appreciation

443
00:29:11.350 --> 00:29:15.250
of trade-offs that they're
making, that I may be-- I'm

444
00:29:15.250 --> 00:29:22.120
going to pay in cost for a
speedy decision. And there's a

445
00:29:22.120 --> 00:29:25.270
trade-off there, right? I want
the funds tomorrow, and I'm

446
00:29:25.270 --> 00:29:29.590
willing to pay maybe a higher
APR for that, or other

447
00:29:29.590 --> 00:29:33.070
associated fees and costs. So I
do think, generally, they get

448
00:29:33.070 --> 00:29:35.620
the broad contours. But I think
the devil is sometimes in the

449
00:29:35.620 --> 00:29:36.100
details.

450
00:29:36.300 --> 00:29:40.110
And it's reflected amongst the
customer base. So a third of our

451
00:29:40.110 --> 00:29:43.440
customers in the Kabbage
portfolio could go to a bank and

452
00:29:43.440 --> 00:29:45.900
receive a funding option, but
they choose not to because they

453
00:29:45.900 --> 00:29:50.880
don't want to wait seven-plus
business days. Another third of

454
00:29:50.880 --> 00:29:53.730
our customers have been rejected
from a bank, on average, two to

455
00:29:53.730 --> 00:29:56.820
three times, and come to us for
that value of cash flow

456
00:29:56.820 --> 00:29:59.190
underwriting because we can look
at a more holistic, more

457
00:29:59.190 --> 00:30:02.940
detailed scope of what their
business activities are. And the

458
00:30:02.940 --> 00:30:05.880
other third sit somewhere in the
middle, of, they probably could

459
00:30:05.880 --> 00:30:08.940
go to a bank, they might be
denied by one, but could shop

460
00:30:08.940 --> 00:30:13.590
around to another. But again,
that time to funding and how

461
00:30:13.590 --> 00:30:16.380
long it's going to take to fill
out the paperwork and deal with

462
00:30:16.380 --> 00:30:19.230
a loan officer is just not worth
it to them if they need to

463
00:30:19.230 --> 00:30:22.590
capitalize on a very important,
very quick business opportunity.

464
00:30:24.060 --> 00:30:27.720
Yeah, just to follow up, in our
surveys, we found that almost

465
00:30:27.720 --> 00:30:31.440
90% of them have college
degrees. And they are excited

466
00:30:31.440 --> 00:30:33.990
about the number of options that
are available to them now.

467
00:30:33.990 --> 00:30:36.090
Especially when you go back
five, 10 years, they didn't have

468
00:30:36.090 --> 00:30:39.780
them. And we find that the level
of education and understanding

469
00:30:39.810 --> 00:30:44.130
of finance of the options is
increasing. And what they are

470
00:30:44.130 --> 00:30:47.040
good at, though, is taking--
understanding their business. I

471
00:30:47.040 --> 00:30:50.700
agree with Gwendy. And then the
ROI that whatever that financing

472
00:30:50.730 --> 00:30:54.270
option is will help them
provide. So whether it's flowers

473
00:30:54.270 --> 00:30:57.750
for Mother's Day, whether it's
beer for St. Patrick's Day,

474
00:30:57.840 --> 00:31:01.020
whether it's ice cream for the
summer, they get that, if they

475
00:31:01.020 --> 00:31:04.800
have x dollars, they are going
to generate y returns. And that

476
00:31:04.800 --> 00:31:08.280
is an inherent decision that
helps them figure out, yes, I

477
00:31:08.280 --> 00:31:10.710
need funding, and this is how
I'm going to help get it-within

478
00:31:10.710 --> 00:31:12.330
the options, this is how I'm
going to move forward with it.

479
00:31:13.770 --> 00:31:16.020
One interesting trend that we
might want to talk about more--

480
00:31:16.020 --> 00:31:18.630
and it's been mentioned here--
is that banks are offering fewer

481
00:31:18.630 --> 00:31:20.970
loans to small businesses than
they have in the past,

482
00:31:21.360 --> 00:31:25.200
especially smaller-dollar loans.
Claire, would you mind providing

483
00:31:25.200 --> 00:31:26.610
some detail on this trend?

484
00:31:26.690 --> 00:31:34.760
Yeah, so regulated institutions
are required to submit data on

485
00:31:34.760 --> 00:31:38.210
their outstanding balances. So
we look at reports from the

486
00:31:38.240 --> 00:31:42.680
FFIEC. And when you look at
outstanding loan balances-- and

487
00:31:42.680 --> 00:31:46.490
our proxy for this, it's not
perfect, it is loans under $1

488
00:31:46.490 --> 00:31:50.390
million are taken as proxies. I
know, everyone is smiling

489
00:31:50.390 --> 00:31:54.770
because we know that $1 million
is a high bound-- are taken as

490
00:31:54.770 --> 00:31:58.580
proxies for small business
loans. And loans in excess of a

491
00:31:58.580 --> 00:32:02.030
million are taken as loans to
large businesses. And when you

492
00:32:02.030 --> 00:32:05.120
look at sort of-- I wish I had a
visual, but if you can just bear

493
00:32:05.120 --> 00:32:08.450
with me and kind of look at
this, these are the big loans

494
00:32:08.450 --> 00:32:11.570
and these are the small loans,
small loans have basically

495
00:32:11.570 --> 00:32:15.530
remained relatively flat. They
are not yet back quite to

496
00:32:15.560 --> 00:32:21.470
pre-crisis levels. On the face
of it, it's quite a stark graph

497
00:32:21.470 --> 00:32:25.100
when you look at it. The one
thing that I would say is that

498
00:32:25.100 --> 00:32:28.580
tells us about the supply, the
outstanding stock of loans. It

499
00:32:28.580 --> 00:32:33.200
doesn't necessarily tell us the
story of, is that stock meeting

500
00:32:33.200 --> 00:32:36.500
the demand of the borrowers or
potential borrowers. And I

501
00:32:36.500 --> 00:32:40.820
think, there, our survey
research does lend some

502
00:32:40.820 --> 00:32:45.290
insights. We find, I think--
we're all doing our own surveys

503
00:32:45.470 --> 00:32:49.580
here on this panel, but I think
we all probably would agree that

504
00:32:49.580 --> 00:32:53.360
we do perceive, and our
respondents are telling us that

505
00:32:53.360 --> 00:32:59.090
there are salient gaps. So
roughly 50% of firms that we

506
00:32:59.090 --> 00:33:03.200
survey tell us that they have a
funding shortfall of some sort

507
00:33:03.200 --> 00:33:07.880
or another. That is more stark
when you look at women-owned

508
00:33:07.880 --> 00:33:11.660
businesses, black or African
American-owned businesses, and

509
00:33:11.690 --> 00:33:15.620
Latino businesses, most stark, I
should say, for black and

510
00:33:15.620 --> 00:33:17.600
African-American-owned firms.

511
00:33:19.130 --> 00:33:20.900
And Gwendy, do you have any
additional thoughts on the role

512
00:33:20.900 --> 00:33:22.880
that the banks are playing or
should be playing?

513
00:33:23.990 --> 00:33:27.710
We've done some analysis that
suggests that the gap could be

514
00:33:27.710 --> 00:33:31.340
as large as $87 billion. So
really looking at small

515
00:33:31.340 --> 00:33:34.370
business, we're talking about a
really meaningful and sizable

516
00:33:34.370 --> 00:33:37.970
gap. I mean, I think,
ultimately, Claire spoke well to

517
00:33:37.970 --> 00:33:42.500
it about kind of the lines. And
ultimately what has happened is

518
00:33:42.500 --> 00:33:45.890
that larger loans are more
profitable and smaller loans are

519
00:33:46.130 --> 00:33:50.510
hard to do, and hard to do well.
And so ultimately I think there

520
00:33:50.510 --> 00:33:53.960
is a role for technology in
making sure that the cash that

521
00:33:53.960 --> 00:33:57.440
small businesses need can get
into their bank accounts more

522
00:33:57.440 --> 00:34:00.980
quickly. And so I think the
balance is really making sure

523
00:34:00.980 --> 00:34:04.190
that banks are playing a role in
providing capital and providing

524
00:34:04.190 --> 00:34:09.140
capital to responsible players,
and in really utilizing their

525
00:34:09.140 --> 00:34:11.900
networks and their branches to
ensure that all of those

526
00:34:11.900 --> 00:34:14.750
businesses that are going to
them are accessing quality

527
00:34:14.750 --> 00:34:17.450
capital, whether it be through
them or through trusted

528
00:34:17.450 --> 00:34:18.020
partners.

529
00:34:18.650 --> 00:34:22.340
Yeah, just to add onto that, I
think if you go back 10, 20

530
00:34:22.340 --> 00:34:24.740
years, our parents' or
grandparents' days, the old

531
00:34:24.740 --> 00:34:27.470
days, bringing all your
materials into a loan officer,

532
00:34:27.830 --> 00:34:31.730
having that be reviewed, waiting
a long time to get a result, and

533
00:34:31.730 --> 00:34:33.680
maybe it was positive or
negative, and then you had to

534
00:34:33.680 --> 00:34:37.400
get a check for disbursement of
the funds. That took a long

535
00:34:37.400 --> 00:34:41.060
time. Fast-forward to where we
are now. With the new products

536
00:34:41.270 --> 00:34:45.260
that are tailored to the cash
flow, we see smaller loans.

537
00:34:45.260 --> 00:34:48.800
Average loan size can be $30,000
to $50,000, somewhere in there,

538
00:34:49.010 --> 00:34:52.580
with a decision made, as Sam
said earlier, in minutes, based

539
00:34:52.580 --> 00:34:55.760
on electronically-submitted
data. That is exciting

540
00:34:55.760 --> 00:35:00.290
opportunities. And banks, for
them traditionally, the cost of

541
00:35:00.290 --> 00:35:03.380
underwriting a loan, whether it
was $5.00 or a million dollars,

542
00:35:03.380 --> 00:35:05.540
was the same. They had to go
through that same process. So

543
00:35:05.540 --> 00:35:08.720
they tend to favor, as Gwendy
pointed out, the larger loans.

544
00:35:09.110 --> 00:35:11.810
In this new environment,
however, we see that traditional

545
00:35:11.810 --> 00:35:16.430
banks are partnering with online
small business lenders to help

546
00:35:16.430 --> 00:35:19.460
white-label their products so
that they can serve that

547
00:35:19.460 --> 00:35:22.670
customer that walks into their
branch that fits that small

548
00:35:22.670 --> 00:35:24.980
business profile that
traditionally might not have

549
00:35:24.980 --> 00:35:28.070
been their ideal target
customer. But now, through these

550
00:35:28.070 --> 00:35:31.130
partnerships, the banks are able
to help provide that capital.

551
00:35:31.490 --> 00:35:33.860
And that's an exciting
development, another one in the

552
00:35:33.860 --> 00:35:37.550
space that I think is
worthwhile, worth noting.

553
00:35:38.150 --> 00:35:44.510
And for Square, again, our
customers run the gamut, but

554
00:35:44.720 --> 00:35:48.470
many of them are very small. Our
average loan size is between

555
00:35:48.470 --> 00:35:57.050
$6,000 and $7,000. And that is
just not economically feasible

556
00:35:57.050 --> 00:36:00.800
for a bank to go out there and
do it, to Scott's point that it

557
00:36:00.800 --> 00:36:04.340
takes a lot to underwrite either
a small loan or a large loan.

558
00:36:04.730 --> 00:36:10.010
And so what we do is we look at
the underlying Square data, the

559
00:36:10.040 --> 00:36:13.160
cash flow that they are running
through their business and

560
00:36:13.160 --> 00:36:17.360
through Square. And we're able
to actually offer them, even

561
00:36:17.390 --> 00:36:21.980
without them asking for it or
applying, we're offering them

562
00:36:23.660 --> 00:36:28.760
some credit that's in line with
what their current cash flows,

563
00:36:28.760 --> 00:36:34.250
in a real-time basis, look like.
And so it is quick and

564
00:36:34.250 --> 00:36:38.660
immediate, and you get the
payment the next day, like Sam

565
00:36:38.660 --> 00:36:39.290
talked about.

566
00:36:39.800 --> 00:36:42.500
I'm sure we'll talk about later,
but the repayment options have

567
00:36:42.500 --> 00:36:45.140
also modernized. In the old
days, you had to make a payment

568
00:36:45.140 --> 00:36:49.190
on the first of the month. Your
PNI was due. That was it. Now

569
00:36:49.190 --> 00:36:53.120
you see new payment options, as
well as terms that are shorter

570
00:36:53.120 --> 00:36:57.140
or longer, with various
structures based mostly on cash

571
00:36:57.140 --> 00:37:01.310
flow. If the small business does
well, has a lot of receipts that

572
00:37:01.310 --> 00:37:04.820
day, then their repayment is the
same percent as if they had a

573
00:37:04.820 --> 00:37:09.110
terrible day, versus that fixed
repayment term which could loom

574
00:37:09.110 --> 00:37:11.270
large over small business,
especially if they had a rough

575
00:37:11.270 --> 00:37:14.690
month or if they were seasonal.
If you only did ice cream sales

576
00:37:14.690 --> 00:37:17.450
in summer, you had a tough time
getting through the winter and

577
00:37:17.450 --> 00:37:20.480
fall months. But now with these
new repayment options, these new

578
00:37:20.480 --> 00:37:22.370
products, we're able to serve
that market better.

579
00:37:22.370 --> 00:37:24.800
I'm sure we'll talk about later,
but the repayment options have

580
00:37:24.800 --> 00:37:25.970
also modernized. In the old
days, you had to make a payment

581
00:37:25.970 --> 00:37:27.050
on the first of the month. Your
PNI was due. That was it. Now

582
00:37:27.050 --> 00:37:28.280
you see new payment options, as
well as terms that are shorter

583
00:37:28.400 --> 00:37:29.900
or longer, with various
structures based mostly on cash

584
00:37:29.900 --> 00:37:32.000
flow. If the small business does
well, has a lot of receipts that

585
00:37:32.000 --> 00:37:33.290
day, then their repayment is the
same percent as if they had a

586
00:37:33.290 --> 00:37:34.580
terrible day, versus that fixed
repayment term which could loom

587
00:37:34.580 --> 00:37:35.900
large over small business,
especially if they had a rough

588
00:37:35.900 --> 00:37:37.730
month or if they were seasonal.
If you only did ice cream sales

589
00:37:37.730 --> 00:37:38.840
in summer, you had a tough time
getting through the winter and

590
00:37:38.840 --> 00:37:40.640
fall months. But now with these
new repayment options, these new

591
00:37:40.640 --> 00:37:41.720
products, we're able to serve
that market better.

592
00:37:41.810 --> 00:37:46.400
Yeah, sure. So I can speak to
maybe two things that we're

593
00:37:46.400 --> 00:37:49.700
seeing in our data. And just by
way of background, so the

594
00:37:49.700 --> 00:37:53.330
Federal Reserve banks, in
partnership with roughly 300

595
00:37:53.330 --> 00:37:55.880
organizations across the
country, field an annual survey

596
00:37:55.880 --> 00:37:59.210
of small businesses. And what
that enables us to do, we've

597
00:37:59.240 --> 00:38:01.460
essentially created an
intelligence network that

598
00:38:01.460 --> 00:38:05.540
provides us insight into a deep
dive into financing needs and

599
00:38:05.540 --> 00:38:08.870
experiences on the part of
borrowers. And so what we're

600
00:38:08.870 --> 00:38:11.720
seeing from that is that, first,
there's definitely, as you

601
00:38:11.720 --> 00:38:14.870
suggest-- and I think we're all
sitting here for a reason--

602
00:38:15.440 --> 00:38:18.110
there has been a growing
interest and awareness of online

603
00:38:18.110 --> 00:38:22.460
providers of financing. So we've
looked at this over the last

604
00:38:22.460 --> 00:38:26.720
couple of years, and in our most
recent data from 2018, roughly

605
00:38:26.720 --> 00:38:33.200
32% of applicants did file an
application at an online lender.

606
00:38:33.530 --> 00:38:36.200
Now, that doesn't tell you that
they ultimately ended up

607
00:38:36.200 --> 00:38:41.030
deciding to take the financing
from that provider, but that has

608
00:38:41.030 --> 00:38:45.050
trended upward over the last
couple of surveys. That said,

609
00:38:45.050 --> 00:38:47.480
when you look at the
marketplace, and you look at

610
00:38:47.480 --> 00:38:51.800
where borrowers or potential
borrowers most frequently apply

611
00:38:51.800 --> 00:38:55.850
for financing, banks large and
small-- and particularly large--

612
00:38:56.270 --> 00:39:00.890
are really still very critical
players. Which I think-Scott,

613
00:39:00.920 --> 00:39:04.190
you highlighted the growing
partnerships between traditional

614
00:39:04.190 --> 00:39:07.310
and new players. And I think
that that's really an important

615
00:39:07.310 --> 00:39:11.570
point to make, that this isn't
necessarily one or the other.

616
00:39:12.710 --> 00:39:16.040
They're both providing in
tandem. And we're seeing some

617
00:39:16.040 --> 00:39:18.170
interesting partnerships, I
think, across the board.

618
00:39:18.780 --> 00:39:22.020
Right. OK, and I think we've all
been kind of touching upon this

619
00:39:22.020 --> 00:39:24.690
in some of our answers, but
let's talk a little bit about

620
00:39:24.690 --> 00:39:28.020
the benefits of online financing
products. Why do small

621
00:39:28.020 --> 00:39:30.390
businesses typically seek these
out? And I think that is

622
00:39:30.390 --> 00:39:32.460
something that's coming out. But
let's just kind of add to the

623
00:39:32.460 --> 00:39:34.410
discussion about what are other
benefits we're seeing?

624
00:39:35.260 --> 00:39:41.080
Sure. Predominantly, it's the
direct-to-business owner

625
00:39:41.080 --> 00:39:45.280
experience, the opportunity in
the cash flow underwriting

626
00:39:45.280 --> 00:39:49.360
context at many fintech
platforms, to leverage the data

627
00:39:49.480 --> 00:39:52.990
that you're already creating
through purchases, transaction,

628
00:39:52.990 --> 00:39:56.770
inventory logging in your
business, to quickly and easily

629
00:39:56.800 --> 00:40:02.110
apply for credit options. It's
really easy to use. And then on

630
00:40:02.110 --> 00:40:04.960
the product side-- so that's the
application experience side,

631
00:40:04.960 --> 00:40:08.860
which is very important- but on
the product side, as Scott

632
00:40:08.980 --> 00:40:12.700
alluded to, there are many, many
more flexible, more dynamic

633
00:40:12.700 --> 00:40:16.780
short-term capital options that
allow the business to tailor the

634
00:40:16.780 --> 00:40:22.270
credit product to this specific
project that they're trying to

635
00:40:23.260 --> 00:40:25.870
build or achieve in their
business. And that's important.

636
00:40:25.870 --> 00:40:30.700
So if you think about how credit
used to be applied for and doled

637
00:40:30.700 --> 00:40:33.340
out from a bank, you'd go to a
bank, you'd wait a long time, as

638
00:40:33.340 --> 00:40:36.250
we described, and you would be
given essentially a lump sum.

639
00:40:36.250 --> 00:40:39.370
And so you, as a small business
owner, you may have a debt

640
00:40:39.370 --> 00:40:46.030
capacity of, let's say, $55,000.
You really only need $12,000 for

641
00:40:46.030 --> 00:40:49.540
this very specific project. You
go to the bank, the bank says,

642
00:40:50.290 --> 00:40:52.900
look, you've been banking with
us for a long time. We have some

643
00:40:52.930 --> 00:40:55.270
fixed costs and some marginal
costs. We really need you to

644
00:40:55.270 --> 00:40:59.620
take $20,000. I know you only
need $12,000, $12,500, but this

645
00:40:59.620 --> 00:41:02.200
is what we have for you, you can
take it or leave it. And that

646
00:41:02.200 --> 00:41:04.750
leaves the small business in a
very precarious place. You don't

647
00:41:04.750 --> 00:41:08.770
want to have them carry more
debt than they need to. And

648
00:41:08.770 --> 00:41:11.440
that's why these more dynamic
products that allow the customer

649
00:41:11.440 --> 00:41:16.990
to vary the time for which the
product the debt is out and take

650
00:41:16.990 --> 00:41:19.600
exactly what they need, when
they need it, is really

651
00:41:19.600 --> 00:41:22.000
important and really a huge
benefit to the business. And

652
00:41:22.000 --> 00:41:25.420
much like Square, our average
draw from the line of loans to

653
00:41:25.420 --> 00:41:28.930
initiate a term loan, is between
$6,000 and $7,000. And so you're

654
00:41:28.930 --> 00:41:32.470
looking at small businesses that
are making these very specific

655
00:41:32.530 --> 00:41:35.980
investments in themselves and
their businesses to achieve that

656
00:41:36.550 --> 00:41:39.460
return on investment. But it is
important to understand that

657
00:41:39.490 --> 00:41:43.480
online small business financing
is only one part of the entire

658
00:41:43.480 --> 00:41:48.550
credit ecosystem. I don't
compete with community banks or

659
00:41:48.550 --> 00:41:53.830
SBA programs that are offering
million dollar or $800,000 loans

660
00:41:53.830 --> 00:41:57.400
that allow that small business
to buy their competitor or open

661
00:41:57.400 --> 00:42:02.440
a new warehouse. We work
together with those programs for

662
00:42:02.440 --> 00:42:05.620
the small businesses' kind of
credit suite, as opposed to

663
00:42:05.620 --> 00:42:08.980
directly trying to compete with
them. And specific to the

664
00:42:08.980 --> 00:42:13.450
business, the yields bear out
the benefit. I mean, we did a

665
00:42:13.450 --> 00:42:17.800
study with ETA that shows that
for every dollar that Kabbage

666
00:42:17.800 --> 00:42:22.630
deploys, it generates about
$3.79 in gross economic output,

667
00:42:23.200 --> 00:42:25.750
on average, across American
communities. So that's real

668
00:42:25.750 --> 00:42:31.150
money that's being invested in
the business and reinvested into

669
00:42:31.150 --> 00:42:32.020
their communities.

670
00:42:33.350 --> 00:42:38.960
Yeah, and I'll second that, what
you're saying, Sam. The

671
00:42:38.960 --> 00:42:43.400
borrowers may-we will give them
a slider. So they may be

672
00:42:43.400 --> 00:42:48.950
eligible for up to $20,000 but
they can slide it down and see,

673
00:42:49.160 --> 00:42:52.610
well, I maybe only need $10,000.
So they can slide it down, see

674
00:42:52.610 --> 00:42:57.680
the terms, see the repayment,
and it helps them size their

675
00:42:57.680 --> 00:43:07.070
deal easily for that specific
project. And so I think it's

676
00:43:07.820 --> 00:43:12.470
important to be able to always
be out there to your customers.

677
00:43:12.860 --> 00:43:17.930
And in our case at Square, we
are offering them-- if they are

678
00:43:17.930 --> 00:43:22.250
eligible, we are offering them,
and then they can see it, in

679
00:43:22.250 --> 00:43:27.620
what we call their dashboard, on
a monthly basis. And they don't

680
00:43:27.620 --> 00:43:32.930
have to try to go out there and
apply for that until they need

681
00:43:32.930 --> 00:43:37.400
it. And so that offer changes as
their business changes, both

682
00:43:37.430 --> 00:43:42.920
positive and negative. But it is
there. And they can go and

683
00:43:42.920 --> 00:43:49.130
access it when they need to. And
that's allowed us to, over the

684
00:43:49.130 --> 00:43:54.290
last 3 and 1/2 years, give out
700,000 loans for a total of

685
00:43:54.290 --> 00:44:00.290
$4.5 billion. And so we also
don't think we compete with

686
00:44:00.470 --> 00:44:04.220
community banks or large banks,
because we fill a void that just

687
00:44:04.220 --> 00:44:08.810
has not been available to these
small and microbusinesses.

688
00:44:10.490 --> 00:44:13.040
I think, at this point, it makes
a sense to maybe do a deep dive

689
00:44:13.040 --> 00:44:16.220
into the particular business
financing products that your

690
00:44:16.220 --> 00:44:19.610
organizations offer and those
that are available in the

691
00:44:19.610 --> 00:44:22.940
marketplace, and talk a little
bit about their specs. I will

692
00:44:22.940 --> 00:44:25.580
say that we'll reserve any
discussion of MCAs, just out of

693
00:44:25.580 --> 00:44:27.590
deference to the next panel,
which is doing a case study on

694
00:44:27.590 --> 00:44:27.890
them.

695
00:44:28.880 --> 00:44:31.940
If I could just speak quickly to
kind of the benefits of fintech,

696
00:44:32.780 --> 00:44:36.770
we are a non-profit microlender
and have partnered with several

697
00:44:36.770 --> 00:44:40.160
fintechs in order to really
ensure that customers that they

698
00:44:40.160 --> 00:44:43.490
can't serve can get access to
quality financing. And so we're

699
00:44:43.520 --> 00:44:47.420
very, very supportive. That
said, we also have seen a number

700
00:44:47.420 --> 00:44:50.120
of concerning practices, which I
know future panels will talk

701
00:44:50.120 --> 00:44:52.490
about, but want to make sure
that those are at least brought

702
00:44:52.490 --> 00:44:56.270
up here as well since this is an
overview. One key one is lack of

703
00:44:56.270 --> 00:45:00.170
transparency around terms and
pricing. It's a real issue. We

704
00:45:00.170 --> 00:45:04.040
found, in a study we did, that
the average APR business owners

705
00:45:04.550 --> 00:45:07.220
found when they came to us
seeking to refinance-- I'm

706
00:45:07.220 --> 00:45:10.160
sorry, the APR that they had
when they came to refinance was

707
00:45:10.160 --> 00:45:16.370
94%. They were not aware of this
fact. And second, we also see

708
00:45:16.370 --> 00:45:20.300
some other concerning practices.
We see, in many cases, something

709
00:45:20.300 --> 00:45:22.850
called double dipping, where
business owners are being

710
00:45:22.850 --> 00:45:26.780
charged twice for the same
capital or stacking multiple

711
00:45:26.780 --> 00:45:30.890
products on top of each other.
So I think that, for all of the

712
00:45:30.920 --> 00:45:34.040
benefits that this technology
can bring, at the same time,

713
00:45:34.040 --> 00:45:38.600
it's very important to
acknowledge that, in many cases,

714
00:45:38.600 --> 00:45:41.660
business owners are taking on
more debt than they can afford

715
00:45:41.660 --> 00:45:42.860
it, at quite high rates.

716
00:45:43.680 --> 00:45:46.380
Can I just add on, to the
benefits, Thomas, I think one

717
00:45:46.380 --> 00:45:51.240
thing that is important to note
is these new products have

718
00:45:51.240 --> 00:45:54.210
developed new tools for
underwriting as well as the

719
00:45:54.210 --> 00:45:56.880
ability to look at other or
alternative sources of data

720
00:45:57.180 --> 00:46:00.270
that, in the past, had not
necessarily been considered by

721
00:46:00.630 --> 00:46:04.320
traditional borrowers, not just
the speed to do it, but the

722
00:46:04.320 --> 00:46:09.750
ability to see deeper into the
small business by using FedEx

723
00:46:09.750 --> 00:46:13.050
receipts, for example, to track
their inventory and their sales.

724
00:46:13.590 --> 00:46:18.000
These new data sources give the
lender the ability to see deeper

725
00:46:18.000 --> 00:46:20.250
into the small business, and
therefore have a better

726
00:46:20.250 --> 00:46:22.710
evaluation of their
creditworthiness, which

727
00:46:22.710 --> 00:46:25.230
decreases the risk of default
and increases the risk of

728
00:46:25.230 --> 00:46:27.600
payment. I think that's an
important benefit. Because

729
00:46:27.600 --> 00:46:30.720
ultimately it's going to end up
increasing the amount of credit.

730
00:46:31.020 --> 00:46:33.360
If previously you didn't have
this data, now you have it, you

731
00:46:33.360 --> 00:46:35.610
can better understand the
borrower. And that will increase

732
00:46:35.610 --> 00:46:38.400
the amount of money that's
available. Real quickly-- I

733
00:46:38.610 --> 00:46:41.850
won't get into it too much, but
just on Gwendy's point about

734
00:46:41.880 --> 00:46:47.550
APR-- I think APR is an
important tool, but you have to

735
00:46:47.550 --> 00:46:52.380
understand the limitations to
APR. It's an annualized metric

736
00:46:52.380 --> 00:46:55.170
which works well in the
traditional loan senses that

737
00:46:55.170 --> 00:46:58.140
we're all used to, a 30-year
fixed, maybe a seven-year car

738
00:46:58.140 --> 00:47:02.070
loan. But it's an annualized
metric, so it has its weaknesses

739
00:47:02.280 --> 00:47:06.090
when you look at the short-term
nature of these loans. There is

740
00:47:06.090 --> 00:47:08.820
a mathematical inverse
relationship between the length

741
00:47:08.820 --> 00:47:12.870
of loan and the APR. So if I
borrow for Mother's Day flowers,

742
00:47:12.870 --> 00:47:16.200
and repay it the next day, on an
annualized basis, that's going

743
00:47:16.200 --> 00:47:19.920
to be very high APR. If I were
to hold that money for a longer

744
00:47:19.920 --> 00:47:24.030
term, the APR would come down
over time. So it's important to

745
00:47:24.030 --> 00:47:27.720
understand the weaknesses or the
way APR is structured when you

746
00:47:27.720 --> 00:47:31.470
talk about APR. Given all that
we've talked about in the small

747
00:47:31.470 --> 00:47:33.780
businesses understanding of
their business, and their

748
00:47:33.780 --> 00:47:36.510
business needs, and their cash
flow needs, there's another

749
00:47:36.510 --> 00:47:39.000
metric out there that we think
makes sense-- and we've surveyed

750
00:47:39.000 --> 00:47:41.580
this, and the results are
positive-- and that is total

751
00:47:41.580 --> 00:47:45.000
cost of capital. If you're a
small business and you say, I

752
00:47:45.000 --> 00:47:49.320
need to have this much money for
Mother's Day to sell flowers on

753
00:47:49.320 --> 00:47:53.970
Mother's Day, I know I'm going
to make x dollars, and you tell

754
00:47:53.970 --> 00:47:58.920
me I'm going to borrow $10,000
and pay $2,000 in interest, I'm

755
00:47:58.920 --> 00:48:03.600
less focused on what the APR,
how that product fits into that

756
00:48:03.630 --> 00:48:07.230
mathematical formula, and more
interested on that $12,000 is

757
00:48:07.230 --> 00:48:11.190
going to generate me $20,000 in
flower sales. So total cost of

758
00:48:11.190 --> 00:48:15.150
capital is one metric that is
useful in this context, and

759
00:48:15.150 --> 00:48:18.630
deals with some of the
challenges that APR presents.

760
00:48:18.960 --> 00:48:21.690
And it's also, given the way
small businesses think about

761
00:48:21.690 --> 00:48:25.020
their financing needs, right on
point for what they are looking

762
00:48:25.020 --> 00:48:27.450
at when evaluating financing
options. So I don't want to get

763
00:48:27.450 --> 00:48:29.550
into the whole APR thing, but I
thought that was interesting to

764
00:48:29.670 --> 00:48:30.240
point out.

765
00:48:31.200 --> 00:48:34.650
One final point that I just want
to make, to zoom out a bit, we

766
00:48:34.650 --> 00:48:37.500
had an earlier discussion about
the demographics of business

767
00:48:37.500 --> 00:48:39.780
ownership. And I think it's
really important, in the context

768
00:48:39.780 --> 00:48:43.380
of sort of new credit
decisioning, to point out that

769
00:48:43.890 --> 00:48:46.260
there's been a big discussion
about decline in

770
00:48:46.260 --> 00:48:48.780
entrepreneurship, not as many
startups and so forth. But when

771
00:48:48.780 --> 00:48:51.540
we look at who is starting
businesses at the highest rate,

772
00:48:51.750 --> 00:48:55.860
I think it's really important to
consider that one in four new

773
00:48:55.860 --> 00:49:00.150
businesses is owned by a Latino.
Black women entrepreneurs are

774
00:49:00.150 --> 00:49:04.740
the fastest growing component of
small business starts. And when

775
00:49:04.740 --> 00:49:08.700
you think about traditional
underwriting, and there are

776
00:49:08.730 --> 00:49:12.990
requirements of term loans, you
need two years of tax receipts,

777
00:49:12.990 --> 00:49:16.590
minimum, you need collateral,
you need a variety of other

778
00:49:16.590 --> 00:49:20.580
assets. And when we're talking
about populations that may not

779
00:49:20.580 --> 00:49:26.880
have historically had that depth
of assets, this new decisioning,

780
00:49:26.880 --> 00:49:30.570
I think, offers real opportunity
as we look at the changing

781
00:49:30.570 --> 00:49:32.760
demographics of
entrepreneurship. So I think

782
00:49:32.760 --> 00:49:36.120
there is promise as well as some
of the storm clouds that folks

783
00:49:36.390 --> 00:49:37.260
have alluded to.

784
00:49:37.470 --> 00:49:41.370
And that's a depth of both
personal and commercial assets.

785
00:49:41.370 --> 00:49:41.940
And there-

786
00:49:41.970 --> 00:49:45.600
Because there's an alignment
with what industry is businesses

787
00:49:45.600 --> 00:49:46.170
are concentrating in.

788
00:49:46.170 --> 00:49:48.750
Right. And there has been a
move, with many fintechs, to

789
00:49:48.750 --> 00:49:52.590
move away from looking at and
leveraging personal or consumer

790
00:49:52.800 --> 00:49:56.970
credit qualities or scores
because of the potential racial

791
00:49:56.970 --> 00:50:02.100
bias or other projected class
bias that's encoded into those

792
00:50:02.100 --> 00:50:04.710
consumer credit scores. But also
just the relevance to the

793
00:50:04.740 --> 00:50:08.430
business-- we find, more often
than not that a commercial

794
00:50:08.490 --> 00:50:12.270
consumer credit score is not
correlative to our small

795
00:50:12.270 --> 00:50:14.670
businesses' success rate.
Because they're leveraging their

796
00:50:14.850 --> 00:50:17.880
consumer credit so much to start
their business, they have

797
00:50:17.880 --> 00:50:20.070
actually have real sweat equity
in it then.

798
00:50:20.960 --> 00:50:26.810
Yeah, and I'll back that up.
Because again, we do not even go

799
00:50:26.810 --> 00:50:31.040
to FICO scores. We don't
consider those. Because in many

800
00:50:31.040 --> 00:50:34.670
cases we believe that, as you're
starting a small business,

801
00:50:34.670 --> 00:50:37.400
you've really put pressure on
your personal finances, and you

802
00:50:37.400 --> 00:50:42.680
probably ruin them to some
extent if you're going to get

803
00:50:42.680 --> 00:50:47.510
credit. And so what we look at
is truly your business in real

804
00:50:47.510 --> 00:50:51.740
time, what it creates, and what
it generates. And that's how we

805
00:50:51.740 --> 00:50:56.390
will offer a loan product. And
we don't take collateral, we

806
00:50:56.390 --> 00:51:01.850
don't take personal guarantees,
we're going on the sweat equity

807
00:51:01.850 --> 00:51:04.640
you talk about that you're
putting into that business. And

808
00:51:04.670 --> 00:51:10.340
this is their livelihood. And
this is how we judge and make

809
00:51:10.340 --> 00:51:11.180
our credit decisions.

810
00:51:11.180 --> 00:51:13.580
Likewise, ironically, the
Kabbage co-founders totally

811
00:51:13.580 --> 00:51:15.920
tanked their personal credit to
start Kabbage. [CHUCKLING]

812
00:51:19.010 --> 00:51:21.980
Thanks. I think, now that we've
talked a lot about underwriting,

813
00:51:21.980 --> 00:51:24.020
maybe it makes sense to talk
about product terms a little bit

814
00:51:24.020 --> 00:51:26.570
more. And I'll just go down the
panel, especially with our

815
00:51:26.570 --> 00:51:30.290
lender panelists, and ask if you
can describe the products that

816
00:51:30.290 --> 00:51:33.530
your companies offer, focusing
on things like costs, and term,

817
00:51:33.530 --> 00:51:36.890
and repayment, whether you
require collateral or personal

818
00:51:36.890 --> 00:51:39.050
guarantees. I know we've touched
on some of this. But it might

819
00:51:39.080 --> 00:51:42.290
make sense to have that
discussion all at once. Sam,

820
00:51:42.290 --> 00:51:43.040
I'll start with you.

821
00:51:43.360 --> 00:51:47.230
Sure. So the Kabbage product, as
I've somewhat described before,

822
00:51:47.230 --> 00:51:50.920
is fairly simple. Again, it's a
line of loans, which seems

823
00:51:50.920 --> 00:51:53.230
complicated, but it's a line of
credit that the customer

824
00:51:53.230 --> 00:51:57.790
qualifies for. And we work with
that business over time to

825
00:51:57.790 --> 00:52:02.590
adjust. So a small business can
qualify for up to $250,000. But

826
00:52:02.590 --> 00:52:06.010
for illustrative purposes, let's
say this flower shop-- because

827
00:52:06.010 --> 00:52:09.820
flowers are really expensive--
this flower shop qualifies for

828
00:52:09.850 --> 00:52:14.650
$100,000 in credit. That offer
is live, and they can come back

829
00:52:14.650 --> 00:52:17.950
at any time and look at the
offer. The offer will adjust

830
00:52:17.950 --> 00:52:20.680
over time, and grow with that
business. And so their line of

831
00:52:20.680 --> 00:52:27.820
credit qualification may grow to
$110,000. We typically like not

832
00:52:27.820 --> 00:52:31.330
to decrease that for small
blips. But over a period of

833
00:52:31.330 --> 00:52:34.300
time, if that small business is
showing decline, we will

834
00:52:34.300 --> 00:52:38.260
downgrade that line of credit
to, let's just say, $90,000. But

835
00:52:38.650 --> 00:52:43.270
with that $100,000, a small
business can draw on that line

836
00:52:43.270 --> 00:52:47.080
of credit as a discrete term
loan for six, 12, or 18 months--

837
00:52:47.080 --> 00:52:49.750
their choice-- for whatever
dollar amount they want. So they

838
00:52:49.750 --> 00:52:56.320
literally type it in on their
phone, $6,222, and draw that for

839
00:52:56.320 --> 00:53:02.650
the term they want. We work on a
monthly fee structure. So we

840
00:53:02.650 --> 00:53:05.770
keep it as simple as possible
for the customer. You pay on the

841
00:53:05.770 --> 00:53:07.870
last day of the month-- or you
can kind of choose your own day,

842
00:53:07.870 --> 00:53:11.770
actually. And we tell them
exactly how much you're going to

843
00:53:11.770 --> 00:53:15.580
pay on each day for the entirety
of the six, 12, or 18month

844
00:53:15.580 --> 00:53:21.040
loans. And again, as I said, the
average draw is about $6,000. We

845
00:53:21.040 --> 00:53:26.380
do see repetitive borrowing in
our portfolio, which is unusual

846
00:53:26.380 --> 00:53:32.350
for many lenders. Most lenders
have a one-time and maybe, at

847
00:53:32.350 --> 00:53:34.990
best, a once-per-year
interaction with their

848
00:53:34.990 --> 00:53:38.110
customers. But because our
customers are drawing only what

849
00:53:38.110 --> 00:53:40.870
they need, when they need it,
for discrete projects, we see

850
00:53:40.870 --> 00:53:48.400
them return, on average, about
two times per year, and a couple

851
00:53:48.400 --> 00:53:52.900
more times throughout the life
cycle of their business with

852
00:53:52.900 --> 00:53:56.860
Kabbage to borrow for those
discrete projects. And I'll be

853
00:53:56.860 --> 00:54:00.130
quick here, but last year, we
put out about $2 billion, across

854
00:54:00.760 --> 00:54:05.950
all 50 states. And about a
quarter of that money was drawn

855
00:54:05.950 --> 00:54:10.390
during non-banking business
hours, predominantly on the

856
00:54:10.390 --> 00:54:14.230
weekends. So if we talk about
benefits, we're looking at our

857
00:54:14.230 --> 00:54:18.460
storekeepers that are-- they're
the CFO, the CEO, the chief

858
00:54:18.460 --> 00:54:21.250
human resources officer, and
they're stocking the shelves,

859
00:54:21.280 --> 00:54:23.740
and they have to go apply for
credit. They're doing it at

860
00:54:23.740 --> 00:54:27.310
their kitchen table, on the
weekends, or in the evenings, or

861
00:54:27.310 --> 00:54:31.360
at 6:00 AM in the morning over
coffee, and doing it on their

862
00:54:31.360 --> 00:54:34.450
tablet or whatever, and trying
to save that time to go actually

863
00:54:34.450 --> 00:54:35.530
run their business.

864
00:54:37.670 --> 00:54:40.460
Great. And Square's main
product, as I've talked about a

865
00:54:40.460 --> 00:54:46.820
little, it's called a Flex Loan.
And we actually, through machine

866
00:54:46.820 --> 00:54:51.980
learning and artificial
intelligence, review their

867
00:54:52.040 --> 00:54:57.650
ongoing cash flows that they put
through Square, so only the

868
00:54:57.650 --> 00:55:01.100
items that they process through
Square, as a seller on Square.

869
00:55:01.670 --> 00:55:07.610
And so then they are generated
and given an offer of credit.

870
00:55:08.330 --> 00:55:14.240
They choose up to a maximum
amount. And then when they take

871
00:55:14.240 --> 00:55:17.930
the credit, they have, as Scott
talked about, a cost of capital.

872
00:55:18.500 --> 00:55:28.130
And that is between 10% and 16%.
And it's important, as everyone

873
00:55:28.160 --> 00:55:32.060
talks about on this panel, to be
very transparent and to show the

874
00:55:32.060 --> 00:55:38.540
cost, and to our borrowers, to
see the cost upfront, no other

875
00:55:38.540 --> 00:55:42.860
fees, no other types of
gotcha-type things along the

876
00:55:42.860 --> 00:55:48.980
way. They can compartmentalize
and understand, OK, this is what

877
00:55:48.980 --> 00:55:54.860
I'm going to pay in total. So if
they wanted or needed $10,000,

878
00:55:55.130 --> 00:55:59.000
they would have $10,000 and
another $1,000 fee on top of

879
00:55:59.000 --> 00:56:03.980
that. It's not an interest, it's
a fee. And then the total amount

880
00:56:03.980 --> 00:56:07.940
of borrowing would be $11,000.
And then they will pay that

881
00:56:07.970 --> 00:56:12.140
through a very unique way, which
they will pay that through their

882
00:56:12.140 --> 00:56:17.300
daily sales with Square. So as
they're successful and they have

883
00:56:17.300 --> 00:56:22.370
a good day, they will pay a hold
rate on a daily basis. If they

884
00:56:22.370 --> 00:56:26.930
decide to take two weeks off,
there is no payment that is due

885
00:56:26.930 --> 00:56:29.300
because they are not having
receipts run through their

886
00:56:29.300 --> 00:56:34.790
business. Another unique thing
about Square is it's an 18-month

887
00:56:35.420 --> 00:56:43.790
loan by contract, but it has
only every-other-month minimum

888
00:56:43.790 --> 00:56:50.390
payments. So if you want to take
time off from your business or

889
00:56:51.800 --> 00:56:55.970
have some need, there is only an
every-other-month minimum that

890
00:56:55.970 --> 00:57:02.000
they have to make. And by far,
the supermajority pay well in

891
00:57:02.000 --> 00:57:06.590
excess of their minimum through
their daily sales that they have

892
00:57:06.590 --> 00:57:11.960
through Square. And so our
average length that they have

893
00:57:11.960 --> 00:57:14.750
out there is probably eight to
nine months and they've repaid

894
00:57:14.750 --> 00:57:20.630
their loan. And as Sam talked
about, the recurrence and the

895
00:57:20.630 --> 00:57:24.320
desire to have another loan and
another relationship is very

896
00:57:24.320 --> 00:57:28.160
high. We don't stack loans. We
don't want to have them get into

897
00:57:28.160 --> 00:57:34.370
a debt trap. But they're very
much excited to get their new

898
00:57:34.370 --> 00:57:37.850
loan offers once they have paid
off their first loan.

899
00:57:40.370 --> 00:57:40.670
Gwendy

900
00:57:40.380 --> 00:57:44.280
Sure. I can speak to microlend
ng, so both by Opportunity Fund

901
00:57:44.280 --> 00:57:47.430
as well as many other microlend
rs around the nation. So, man

902
00:57:47.460 --> 00:57:50.520
of us are called CDFIs, Co
munity Development Financial In

903
00:57:50.520 --> 00:57:54.330
titutions. And the loans we of
er generally are term loans. Ou

904
00:57:54.330 --> 00:57:59.010
particular loans, we offer from
$2,500 up to $250,000. Our lo

905
00:57:59.040 --> 00:58:02.490
gest term is five years. Our sh
rtest term is probably nine m

906
00:58:02.490 --> 00:58:06.750
nths or 12 months. And our AP
s are generally in the low te

907
00:58:06.580 --> 00:59:29.950
The ability to repay is so
fundamental, too, kind of the

908
00:58:06.780 --> 00:58:12.390
ns. One of the key distin
tions, I would say, is microlo

909
00:58:12.420 --> 00:58:16.890
n products generally are offer
ng a longer term than some of t

910
00:58:16.890 --> 00:58:19.770
e other providers on this pane
or other providers online. An

911
00:58:19.770 --> 00:58:22.680
I think that's particular
y important. It's great when

912
00:58:22.680 --> 00:58:25.650
you know exactly-- you buy your
flowers and you can pay that

913
00:58:25.650 --> 00:58:29.220
ack immediately. But we know t
at life happens. And many time

914
00:58:29.220 --> 00:58:33.420
, business owners are particul
rly confident in their ability

915
00:58:33.420 --> 00:58:36.810
o have this next big deal rea
ly turn things around. And some

916
00:58:36.810 --> 00:58:39.540
imes things don't turn out that
well. And so having patient

917
00:58:39.540 --> 00:58:44.430
apital, making sure that you
have the time you need and you

918
00:58:44.430 --> 00:58:46.470
ave the cash flow you need to
ay back is particularl

919
00:58:46.470 --> 00:58:51.360
important. So one thing that,
like Opportunity Fund, many micr

920
00:58:51.360 --> 00:58:54.210
lenders do, is we actually
o take a good look at cash flow

921
00:58:54.210 --> 00:58:58.770
both individual and business
cash flow, to make sure that so

922
00:58:58.770 --> 00:59:01.770
eone has the true ability to
epay that loan over time. It ta

923
00:59:01.770 --> 00:59:05.760
es time, but it's very import
nt. Because again, what we d

924
00:59:05.760 --> 00:59:08.880
find is that confidence-- we
ike the idea of people moving

925
00:59:08.880 --> 00:59:12.180
the dial down and borrowing l
ss, but what we more often se

926
00:59:12.180 --> 00:59:14.850
is people trying to borrow m
re than they can afford. And

927
00:59:14.850 --> 00:59:17.310
we want to make sure that le
ders' and borrowers' intere

928
00:59:17.310 --> 00:59:20.850
ts are aligned. And so that the
're borrowing an amount that ac

929
00:59:20.850 --> 00:59:23.820
ually they can repay, ev
n if things only go OK.

930
00:59:29.950 --> 00:59:33.130
core concept of fintech. And you
have three very different

931
00:59:33.820 --> 00:59:38.500
providers here. And the method
of underwriting varies, but

932
00:59:38.830 --> 00:59:42.550
we're all getting at the same
ability-to-repay analysis. And I

933
00:59:42.550 --> 00:59:46.930
used to work at a CDFI. And it
is a different type of

934
00:59:46.930 --> 00:59:48.970
underwriting. Square has an
interesting type of

935
00:59:48.970 --> 00:59:51.250
underwriting, in that it's a
closed ecosystem, it's inside of

936
00:59:51.250 --> 00:59:54.730
the Square transaction. Kabbage
is an open ecosystem. We're

937
00:59:54.730 --> 00:59:58.150
looking at anything that the
customer wants to authorize us

938
00:59:58.150 --> 01:00:01.750
to look at in an automated API
connection. And that's why we do

939
01:00:01.750 --> 01:00:04.870
it so quickly. There's other
great companies, later today,

940
01:00:05.620 --> 01:00:09.070
OnDeck, that serves a little bit
higher credit offering than

941
01:00:09.070 --> 01:00:11.530
Kabbage and Funding Circle,
which is looking at even larger

942
01:00:11.530 --> 01:00:15.070
businesses there. Everybody's
using the underlying existing

943
01:00:15.070 --> 01:00:18.070
business information, whether
it's an open ecosystem or a

944
01:00:18.070 --> 01:00:23.080
closed ecosystem, to get at
different ways to understand

945
01:00:23.080 --> 01:00:26.020
ability to repay. And I'll
preview some research here.

946
01:00:26.020 --> 01:00:32.110
Kabbage participated in the
FinRegLab research series, which

947
01:00:32.110 --> 01:00:35.680
is an independent organization
that's evaluating the

948
01:00:35.680 --> 01:00:38.830
quantifiable scientific
methodology behind cash flow

949
01:00:38.830 --> 01:00:41.290
underwriting. And they're
currently finalizing their

950
01:00:41.290 --> 01:00:45.010
report. And it will come out
hopefully later this month or

951
01:00:45.010 --> 01:00:49.000
early next. But the general
findings, at least for Kabbage,

952
01:00:49.210 --> 01:00:53.140
our novel way of using
non-traditional data to look at

953
01:00:53.140 --> 01:00:57.790
cash flow underwriting, is a
very strong proxy to actual

954
01:00:57.790 --> 01:01:01.660
business health. And we've done
it in a way that controls for

955
01:01:01.660 --> 01:01:06.130
and eliminates any sort of
unintended bias or disparate

956
01:01:06.130 --> 01:01:09.340
impact, because we're only
leveraging that

957
01:01:09.370 --> 01:01:14.080
business-specific data, such as
the PayPal, or the Square, or

958
01:01:14.080 --> 01:01:18.310
the Amazon, or Etsy, or the bank
account or inventory data that

959
01:01:18.310 --> 01:01:21.370
has very little to do with that
individual consumer.

960
01:01:23.070 --> 01:01:26.370
Scott, are there any other
products in the marketplace that

961
01:01:26.370 --> 01:01:29.010
we should be talking about that
haven't been mentioned by our

962
01:01:29.010 --> 01:01:29.820
panelists so far?

963
01:01:30.450 --> 01:01:32.820
No, I mean, I think we've
covered the major players. I

964
01:01:32.820 --> 01:01:36.030
know you're going to do merchant
cash advances on the next panel.

965
01:01:36.630 --> 01:01:40.080
The only piece I would like to
add to the discussion is that

966
01:01:40.080 --> 01:01:43.950
when you look at the repayment
terms, some of them can be

967
01:01:43.980 --> 01:01:47.970
open-ended in that it's based on
the cash flow. And so

968
01:01:47.970 --> 01:01:52.980
calculating APR in that context
is impossible or requires a

969
01:01:52.980 --> 01:01:58.080
number of assumptions. Thus,
again, I'm not ragging on APR,

970
01:01:58.080 --> 01:02:01.380
I'm simply pointing out that
there are challenges. If you've

971
01:02:01.380 --> 01:02:04.200
got an open-ended repayment
based on your cash flow, which

972
01:02:04.200 --> 01:02:08.310
is a great feature, difficult to
calculate the APR. Again,

973
01:02:08.310 --> 01:02:11.130
pivoting to total cost of
capital is another way to think

974
01:02:11.130 --> 01:02:14.400
about it. There are benefits to
APR as a measurement. We're all

975
01:02:14.400 --> 01:02:16.890
familiar with it. But I think
it's important to understand, in

976
01:02:16.890 --> 01:02:20.160
this new context, there can be
challenges to the metric.

977
01:02:20.250 --> 01:02:24.210
I guess one thing we haven't
talked about is how the loans or

978
01:02:24.210 --> 01:02:27.180
other products are actually
made. In Kabbage's case, we do

979
01:02:27.180 --> 01:02:29.490
partner with a bank. So as I
said at the beginning, we

980
01:02:29.490 --> 01:02:32.730
partner with Celtic Bank. So
Celtic Bank is the lender. They

981
01:02:32.730 --> 01:02:36.240
are the true lender behind the
program. Kabbage has automated

982
01:02:36.240 --> 01:02:39.930
the Celtic Bank credit
underwriting process. And we

983
01:02:39.930 --> 01:02:43.590
operate under the Bank Service
Company Act to extend that

984
01:02:43.590 --> 01:02:46.290
credit as part of the Kabbage
Celtic program across the

985
01:02:46.290 --> 01:02:49.950
country. And so this is one way
that many fintechs work. There

986
01:02:49.950 --> 01:02:53.250
are true standalone fintechs as
well that have gone out and

987
01:02:53.250 --> 01:02:56.700
gotten different state licenses.
You've seen a progression

988
01:02:56.700 --> 01:03:00.900
towards fintechs that want to
become banks, and you have

989
01:03:00.960 --> 01:03:03.690
fintechs that offer a mix of all
products, whether it's a

990
01:03:04.110 --> 01:03:08.130
merchant cash advance,
state-regulated term loan,

991
01:03:09.750 --> 01:03:14.490
federally-insured depository
bank, a partnered term loan, or

992
01:03:14.490 --> 01:03:18.480
a variety of other services out
there. And so as you regulators,

993
01:03:18.480 --> 01:03:21.720
reporters, academics, other
interested parties go and look

994
01:03:21.720 --> 01:03:24.390
at and examine this space, it is
important to think very

995
01:03:24.390 --> 01:03:27.540
carefully about what is the
underlying business model.

996
01:03:27.540 --> 01:03:29.850
Because that under lying
business model sometimes

997
01:03:29.850 --> 01:03:32.580
dictates the types of products
that can be offered, or in some

998
01:03:32.640 --> 01:03:34.590
cases, can't be offered.

999
01:03:36.450 --> 01:03:39.270
Lew, why don't you talk a little
bit about Square's relationships

1000
01:03:39.270 --> 01:03:43.710
with banks, and as Sam alluded
to, Square's pending application

1001
01:03:43.710 --> 01:03:45.090
to become chartered.

1002
01:03:45.270 --> 01:03:50.850
Sure. And as Sam talked about,
they issue through Celtic. And

1003
01:03:50.880 --> 01:03:54.810
currently Square Capital issues
their loans through Celtic Bank

1004
01:03:54.810 --> 01:04:01.920
as well. And as I earlier
mentioned, as we at Square

1005
01:04:01.920 --> 01:04:05.070
Capital got into this business,
we wanted to understand how

1006
01:04:05.100 --> 01:04:14.190
viable it was. And as we've seen
under 700,000 loans as well as

1007
01:04:14.190 --> 01:04:19.650
$4.5 billion, we've decided that
that would be best if we could

1008
01:04:19.680 --> 01:04:26.040
actually issue those ourselves.
And so Square Capital or Square

1009
01:04:26.040 --> 01:04:30.480
has filed an application with
the FDIC in the state of Utah to

1010
01:04:30.480 --> 01:04:34.530
become an industrial loan
corporation. And we are

1011
01:04:34.530 --> 01:04:39.570
currently going through that
process right now for approval

1012
01:04:39.600 --> 01:04:42.960
of that. And then at that point
we would issue those directly

1013
01:04:43.320 --> 01:04:45.600
through Square's financial
services.

1014
01:04:46.800 --> 01:04:48.630
Gwendy, do you want to talk
about Opportunity Fund's

1015
01:04:48.630 --> 01:04:50.880
relationship with the
institutional players?

1016
01:04:51.570 --> 01:04:56.190
Sure. banks are an incredibly
important part of our ecosystem,

1017
01:04:56.190 --> 01:05:00.720
primarily as far as providing
capital. Under their regulatory

1018
01:05:00.720 --> 01:05:03.720
obligation through the Community
Reinvestment Act, CRA. So that's

1019
01:05:03.720 --> 01:05:07.200
an important, real piece of this
ecosystem and an important part

1020
01:05:07.200 --> 01:05:10.530
of our lending. We also work
with banks as referral partners.

1021
01:05:10.860 --> 01:05:13.620
And then also, I alluded to it
earlier, but we've recently

1022
01:05:13.620 --> 01:05:16.740
expanded our partnership with
the Fintech Lending Club to be

1023
01:05:16.740 --> 01:05:20.280
able to lend now in 44 states
around the nation, and partner

1024
01:05:20.280 --> 01:05:23.010
with them, and utilize their
technology which is a real

1025
01:05:23.040 --> 01:05:23.880
win-win as well.

1026
01:05:25.770 --> 01:05:29.370
So we've been talking a lot
about leveraging technology and

1027
01:05:29.700 --> 01:05:32.850
using nontraditional data to
assess risk and make

1028
01:05:32.850 --> 01:05:35.460
underwriting decisions. Can we
dig into that a little bit more?

1029
01:05:35.550 --> 01:05:37.380
I think this is a topic that
you've brought up a few times,

1030
01:05:37.380 --> 01:05:39.750
Sam. So can you kind of dig in
and talk a little bit more about

1031
01:05:39.750 --> 01:05:40.980
how your company does this.

1032
01:05:41.130 --> 01:05:46.350
Sure. So if you think about how
a bank's traditional credit

1033
01:05:46.350 --> 01:05:52.230
model is developed, yet it
basically takes some very finite

1034
01:05:52.230 --> 01:05:56.940
attributes about a business,
often related to the business

1035
01:05:56.940 --> 01:05:59.940
applicant, the owner, the
consumer of the business, such

1036
01:05:59.940 --> 01:06:03.030
as their FICO score, their
income. They take these

1037
01:06:03.030 --> 01:06:08.340
attributes and gradually expand,
very slowly, into other

1038
01:06:08.340 --> 01:06:10.980
attributes that they feel is
representative of that

1039
01:06:10.980 --> 01:06:15.090
business's success or predictive
of that business's success. That

1040
01:06:15.810 --> 01:06:20.130
underwriting process, be it
in-person or automated, has been

1041
01:06:20.160 --> 01:06:25.380
incredibly slow and expensive to
develop over time, with very

1042
01:06:25.380 --> 01:06:30.690
limited quantified testing as it
applies to the entire small

1043
01:06:30.690 --> 01:06:33.570
business population. And so if
you think about small

1044
01:06:33.570 --> 01:06:35.760
businesses, they're not the
same. They don't congregate in

1045
01:06:35.760 --> 01:06:39.000
one place and like, "we're the
small business people." They are

1046
01:06:39.030 --> 01:06:44.130
so diverse, be it
socioeconomically, racially, by

1047
01:06:44.130 --> 01:06:49.200
gender, by geography, by
industry, by age, et cetera, et

1048
01:06:49.200 --> 01:06:52.740
cetera, that it's incredibly
difficult to apply one

1049
01:06:52.740 --> 01:06:56.250
underwriting methodology that
has a lot of variables to that

1050
01:06:56.250 --> 01:07:00.570
population. So if you think
about small circles gradually

1051
01:07:00.570 --> 01:07:03.900
expanding over time, that's a
traditional bank underwriting

1052
01:07:03.900 --> 01:07:08.700
process. Kabbage went the other
way around. We take the entire

1053
01:07:08.700 --> 01:07:12.840
population of data that a small
business wants to consent and

1054
01:07:12.870 --> 01:07:18.270
offer to us that is part of
their business operations, and

1055
01:07:18.270 --> 01:07:22.740
we look for regressive patterns
over that. And so we look at how

1056
01:07:22.740 --> 01:07:27.720
does income from inventory
sales, PayPal, Square, other

1057
01:07:27.720 --> 01:07:31.950
credit card receivables-- Visa,
MasterCard-- cash in the till,

1058
01:07:32.130 --> 01:07:35.100
invoices, things like that, how
does that all relate to their

1059
01:07:35.100 --> 01:07:38.310
bank account information, to
their accounting information, et

1060
01:07:38.310 --> 01:07:41.520
cetera? Where is the cash going
out? Is it going to marketing?

1061
01:07:41.670 --> 01:07:46.650
Is it going to buying raw goods
and raw products? Is it going to

1062
01:07:46.650 --> 01:07:50.340
inventory? How much is going to
payroll and other expenses? And

1063
01:07:50.340 --> 01:07:53.610
we build the three statements
for the small business on the

1064
01:07:53.610 --> 01:07:57.210
back end, leveraging the most
predictive underwriting

1065
01:07:57.990 --> 01:08:01.170
attributes for that business,
which again is cash flow. So if

1066
01:08:01.170 --> 01:08:04.800
you think of Kabbage, we take
the entire universe of data and

1067
01:08:04.800 --> 01:08:09.960
whittle out, specific to that
one business, what indicators

1068
01:08:09.990 --> 01:08:14.640
are key to their success. And we
purge the consumer indicators

1069
01:08:14.730 --> 01:08:18.150
like a FICO score that are not
necessarily indicative of

1070
01:08:18.150 --> 01:08:21.930
success. Because small
businesses, they have people

1071
01:08:21.930 --> 01:08:24.420
behind them. Those people get
sick, and have medical debt,

1072
01:08:24.420 --> 01:08:27.750
they have student debt, they
have emergencies. But they also

1073
01:08:27.750 --> 01:08:30.900
might just be leveraging their
credit to start their business.

1074
01:08:31.080 --> 01:08:33.390
And so the success of the
individual does not necessarily

1075
01:08:33.390 --> 01:08:36.690
equate to the success of the
business. And we look at only

1076
01:08:36.690 --> 01:08:40.410
what matters to the cash flow
transaction data. And that's why

1077
01:08:40.980 --> 01:08:44.160
we've been so successful in
leveraging non-traditional

1078
01:08:44.160 --> 01:08:49.200
attributes, and why we offer an
open ecosystem to connect to for

1079
01:08:49.200 --> 01:08:52.860
whatever you're logging or doing
business on, to let that data

1080
01:08:52.860 --> 01:08:54.510
work for you as a business
owner.

1081
01:08:54.000 --> 01:08:57.780
So we're running out of time.
And I want to give everybody an

1082
01:08:57.780 --> 01:09:01.170
opportunity to offer some
closing thoughts. So maybe a

1083
01:09:01.170 --> 01:09:04.560
minute each. We'll go down the
panel, and people can talk to

1084
01:09:04.920 --> 01:09:07.020
the important trends in the
marketplace that are likely to

1085
01:09:07.020 --> 01:09:09.480
become more prominent in the
coming years, and sort of what

1086
01:09:09.480 --> 01:09:12.570
the future of this space looks
like. So I'll start with Claire,

1087
01:09:12.570 --> 01:09:13.830
and we can just move down.

1088
01:09:13.920 --> 01:09:18.690
Yeah, as the marketplace
evolves, I think one thing that

1089
01:09:18.780 --> 01:09:25.140
we're a little bit at a loss for
is longitudinal data on what's

1090
01:09:25.140 --> 01:09:28.560
happening to borrowers over
time, and are these products

1091
01:09:28.560 --> 01:09:31.080
working for them, and
controlling for all of this

1092
01:09:31.260 --> 01:09:34.650
specifics that you're mentioning
that are very individual to the

1093
01:09:34.650 --> 01:09:39.540
business, has this infusion of
capital. And I think, in many

1094
01:09:39.540 --> 01:09:44.850
ways we've all stated, this is--
it's unleashed new financing.

1095
01:09:45.060 --> 01:09:49.980
But I think being able to see
how that financing is managed

1096
01:09:49.980 --> 01:09:53.250
over time and whether it's
really enabling business growth,

1097
01:09:53.250 --> 01:09:55.440
I think that's going to be a
really important consideration

1098
01:09:55.440 --> 01:09:56.010
going forward.

1099
01:09:57.180 --> 01:10:01.620
would encourage observers to pay
attention to two things. Fintech

1100
01:10:01.620 --> 01:10:04.290
banks, we've always been very
supportive of all different

1101
01:10:04.290 --> 01:10:08.280
chartering options at Kabbage,
be it a multitude of state

1102
01:10:08.280 --> 01:10:12.030
chartering options, federal,
with the OCC, the FDIC,

1103
01:10:12.030 --> 01:10:14.880
depository, nondepository. I
keep a very close eye on that.

1104
01:10:15.720 --> 01:10:18.090
The other thing I would
encourage observers to watch is

1105
01:10:18.090 --> 01:10:22.920
disclosure. So Kabbage and
OnDeck created the SMART Box,

1106
01:10:22.920 --> 01:10:27.810
which is a commercial disclosure
tool that looks a lot like the

1107
01:10:27.810 --> 01:10:31.080
consumer TILA box. We show total
cost of capital, APR, monthly

1108
01:10:31.080 --> 01:10:33.510
payment schedule, cents on the
dollar, prepayment indicators,

1109
01:10:33.510 --> 01:10:37.950
et cetera, et cetera. We've been
updating that. There's a

1110
01:10:37.950 --> 01:10:40.800
multitude of states, California
and New York to name two, that

1111
01:10:40.800 --> 01:10:44.400
are pursuing commercial truth in
lending disclosure laws. We're

1112
01:10:44.400 --> 01:10:47.430
very supportive of those kind of
efforts because the small

1113
01:10:47.430 --> 01:10:50.130
business, given the multitude of
products in the space, should

1114
01:10:50.130 --> 01:10:52.620
have all of the information
available to make a smart,

1115
01:10:52.620 --> 01:10:56.160
informed choice and do cost
comparisons, apples to apples.

1116
01:10:58.410 --> 01:11:01.650
And look, I think it's an
exciting time for small

1117
01:11:01.650 --> 01:11:04.500
business. I think that five
years ago, a lot of these

1118
01:11:04.500 --> 01:11:08.880
options weren't available. And
we're opening up channels

1119
01:11:09.660 --> 01:11:13.890
through each of our products
that we talk here, and others

1120
01:11:13.890 --> 01:11:18.000
that you'll hear throughout the
day. And I think it's important

1121
01:11:18.000 --> 01:11:22.710
to make sure that it's fair and
transparent, that borrowers

1122
01:11:22.710 --> 01:11:25.830
understand what they're getting
into, what they've signed up

1123
01:11:25.830 --> 01:11:31.980
for, and that it isn't punitive
to them, that it helps the small

1124
01:11:31.980 --> 01:11:38.490
business grow. And one of the
things that we see-- because we

1125
01:11:38.490 --> 01:11:42.840
get daily payments, we don't
wait 30 days and hope that

1126
01:11:42.840 --> 01:11:45.510
they're going to make that
payment-- we're seeing the

1127
01:11:45.510 --> 01:11:50.880
health of that business every
day. And so that helps us help

1128
01:11:50.880 --> 01:11:56.730
the business in any way that we
can, to help-- we can contact

1129
01:11:56.730 --> 01:12:00.420
them to see if they are having
trouble with their processing,

1130
01:12:00.420 --> 01:12:07.290
if they're having issues in one
way or another. I think it's a

1131
01:12:07.320 --> 01:12:09.960
really exciting time for small
business. And I think there's a

1132
01:12:09.960 --> 01:12:14.550
lot of options, and want to make
sure that it's fair and

1133
01:12:14.550 --> 01:12:15.630
transparent to them.

1134
01:12:17.280 --> 01:12:19.920
Well, my panelists all said it
very well. I would just add

1135
01:12:19.950 --> 01:12:23.640
that, with the multitude of data
that all of the lenders and

1136
01:12:23.640 --> 01:12:27.660
financing companies have, making
sure that that data is available

1137
01:12:27.660 --> 01:12:31.650
back to the small business
owner. Lenders know how long it

1138
01:12:31.650 --> 01:12:34.080
will likely take a small
business to repay. And

1139
01:12:34.080 --> 01:12:36.810
therefore, the business owner
should know that, what they're

1140
01:12:36.810 --> 01:12:39.390
predicted, how long it will take
them, what they expect their

1141
01:12:39.390 --> 01:12:41.850
monthly payment will be, what
they expect their APR will be.

1142
01:12:41.850 --> 01:12:44.520
It may change over time. But
again, we know they're sharing

1143
01:12:44.520 --> 01:12:46.680
that data with investors, we
know they have that data

1144
01:12:46.680 --> 01:12:49.110
internally. So the business
owners should have access to it

1145
01:12:49.110 --> 01:12:51.960
to make sure that that
intelligence is actually helping

1146
01:12:51.960 --> 01:12:54.240
them be successful and choose
the right product.

1147
01:12:55.650 --> 01:12:59.490
I agree. [CHUCKLING] The one
trend I would look for is

1148
01:12:59.490 --> 01:13:02.130
continued convergence between
traditional players and new

1149
01:13:02.130 --> 01:13:04.800
players as they move into the
space. I think that's an

1150
01:13:04.800 --> 01:13:05.730
important trend to follow.

1151
01:13:06.000 --> 01:13:09.570
OK, great. Thank you so much to
our panelists. This was a great

1152
01:13:09.570 --> 01:13:12.720
panel. And with that, we will go
ahead and get the panel 2

1153
01:13:12.720 --> 01:14:47.370
panelists up here. Thank you so
much. [APPLAUSE]

1154
01:14:47.370 --> 01:14:50.460
Great. So good morning,
everyone. And thanks again for

1155
01:14:50.460 --> 01:14:54.240
being here today. I'm Jason
Adler. And I'm an acting

1156
01:14:54.240 --> 01:14:56.550
assistant director in the
Federal Trade Commission's

1157
01:14:56.700 --> 01:14:58.380
Division of Financial Practices.

1158
01:14:58.590 --> 01:15:00.900
And I'm Courtney Estep, and I'm
an attorney in the Division of

1159
01:15:00.900 --> 01:15:02.040
Financial Practices.

1160
01:15:02.310 --> 01:15:05.880
We have a really great set of
panelists here today for this

1161
01:15:05.880 --> 01:15:09.150
discussion, and a lot of content
to cover. So I'm going to

1162
01:15:09.150 --> 01:15:12.960
briefly introduce each of them,
and then refer you to their bios

1163
01:15:12.960 --> 01:15:17.760
for more info. So starting down
on the end, we have Kate Fisher,

1164
01:15:17.970 --> 01:15:22.800
who is a partner at Hudson Cook.
Next we have Jesse Carlson, who

1165
01:15:22.800 --> 01:15:27.240
is the senior VP and general
counsel of Kapitus. Scott

1166
01:15:27.240 --> 01:15:31.350
Crockett is the founder and CEO
of Everest Business Funding-- or

1167
01:15:31.350 --> 01:15:36.060
Everest Business Financing.
Sorry. Jared Weitz is the CEO of

1168
01:15:36.060 --> 01:15:40.410
United Capital Service. And Ami
Kassar is the founder and CEO of

1169
01:15:40.590 --> 01:15:46.590
Multifunding LLC. So just one
logistical issue to talk about

1170
01:15:46.590 --> 01:15:51.210
before we get started-- for the
panelists, if you want to talk

1171
01:15:51.210 --> 01:15:52.740
while someone else is talking,
if you have something to

1172
01:15:52.740 --> 01:15:56.760
contribute, just remember to
turn your note card up on one

1173
01:15:56.760 --> 01:16:00.600
side so that we know to call on
you. So we're planning on this

1174
01:16:00.600 --> 01:16:05.490
panel to discuss how merchant
cash advances work, and recent

1175
01:16:05.490 --> 01:16:09.810
reports of abuses in the sale,
marketing, and collection of

1176
01:16:09.810 --> 01:16:12.780
these products. So with that,
I'll turn it over to Courtney

1177
01:16:12.780 --> 01:16:13.770
and we can jump right in.

1178
01:16:15.870 --> 01:16:18.810
For audience members who are
unfamiliar with what a merchant

1179
01:16:18.810 --> 01:16:22.920
cash advance is, let's walk
through the basics. Who would

1180
01:16:22.920 --> 01:16:26.430
like to discuss what a merchant
cash advance is and how it

1181
01:16:26.430 --> 01:16:28.710
differs from a loan or other
forms of credit?

1182
01:16:29.110 --> 01:16:33.940
Well, a merchant cash advance is
a somewhat pejorative term for

1183
01:16:33.940 --> 01:16:36.670
the factoring of future
receivables. It is a purchase

1184
01:16:36.670 --> 01:16:40.510
and sale transaction. So rather
than giving a loan, a company

1185
01:16:40.510 --> 01:16:44.470
like Kapitus will purchase the
future receipts of a business at

1186
01:16:44.470 --> 01:16:48.910
a discount. There are two basic
types of this type of factoring

1187
01:16:48.910 --> 01:16:54.610
transaction-- a credit card MCA
or factoring transaction, and an

1188
01:16:55.060 --> 01:16:59.080
ACH factoring transaction. The
credit card factoring

1189
01:16:59.080 --> 01:17:02.890
transaction is essentially the
closed ecosystem. We purchase a

1190
01:17:02.890 --> 01:17:06.010
percentage of their credit card
receipts, and the credit card

1191
01:17:06.010 --> 01:17:09.490
processor batches out a
percentage of those receipts to

1192
01:17:09.490 --> 01:17:15.460
us as repayment. An ACH
factoring arrangement is similar

1193
01:17:15.460 --> 01:17:18.250
in that we're estimating their
total future cash flow, and have

1194
01:17:18.250 --> 01:17:22.870
an estimated payment that we
draw through an ACH debit to the

1195
01:17:22.870 --> 01:17:26.710
operating account of the
business. It is important to

1196
01:17:26.710 --> 01:17:29.110
note that, in a purchase
transaction, there is no

1197
01:17:29.110 --> 01:17:31.960
absolute right to repayment. The
risk we are taking is that the

1198
01:17:31.960 --> 01:17:35.650
receivables are not generated.
Largely, these products work the

1199
01:17:35.650 --> 01:17:39.910
same as, for example, the
product that Square offers and

1200
01:17:39.910 --> 01:17:43.120
described. That is denominated
as a loan and would have an

1201
01:17:43.120 --> 01:17:44.230
absolute right to repayment.

1202
01:17:45.820 --> 01:17:50.200
Sure, I could speak to the legal
distinction between a purchase

1203
01:17:50.200 --> 01:17:53.140
of future receipts and a loan.
And first, thank you for having

1204
01:17:53.140 --> 01:17:57.160
me here today. In a loan, the
borrower promises to repay the

1205
01:17:57.160 --> 01:18:01.030
lender. In a purchase of future
receipts, the business promises

1206
01:18:01.030 --> 01:18:04.480
to deliver a percentage of its
revenue, only to the extent that

1207
01:18:04.480 --> 01:18:09.070
revenue is created. If sales go
down, then the business has a

1208
01:18:09.070 --> 01:18:12.790
contractual right to pay less.
If sales go up, the business may

1209
01:18:12.790 --> 01:18:16.660
have to pay more. In New York,
which has the most developed

1210
01:18:16.660 --> 01:18:20.350
case law in this area, courts
examine whether the funder is

1211
01:18:20.350 --> 01:18:23.860
absolutely entitled to
repayment. Courts generally look

1212
01:18:23.860 --> 01:18:26.860
at whether a contract allows a
business to adjust its payment,

1213
01:18:26.860 --> 01:18:30.820
along with the ebb and flows of
its income. And courts look at

1214
01:18:30.820 --> 01:18:33.580
whether there is a fixed payment
term or maturity date, because a

1215
01:18:33.580 --> 01:18:36.880
fixed payment term or maturity
date would be inconsistent with

1216
01:18:36.880 --> 01:18:40.540
the purchase of future receipts.
The contractual events of

1217
01:18:40.540 --> 01:18:43.480
default also distinguish a
purchase of future receipts from

1218
01:18:43.480 --> 01:18:47.860
a loan. In a loan, a borrower is
in default for failure to pay.

1219
01:18:49.450 --> 01:18:51.490
In a purchase of future
receipts, a business whose

1220
01:18:51.490 --> 01:18:55.030
revenue has dropped is in
default only if the business

1221
01:18:55.330 --> 01:18:58.780
fails to communicate accurate
financial information to the

1222
01:18:58.780 --> 01:19:02.200
funder. The business also
promises not to engage in

1223
01:19:02.200 --> 01:19:05.140
certain bad acts, such as
diverting money to multiple bank

1224
01:19:05.140 --> 01:19:08.620
accounts. But again, the key
distinction is that, in a

1225
01:19:08.800 --> 01:19:11.380
purchase of future receipts,
there is no absolute obligation

1226
01:19:11.380 --> 01:19:11.950
to repay.

1227
01:19:12.850 --> 01:19:16.480
And we'll dig into the legal
landscape here a little later.

1228
01:19:17.050 --> 01:19:21.580
But-- and Scott, I'll turn to
you next, but could we have some

1229
01:19:21.580 --> 01:19:25.450
of the panelists comment on why
a small business might be

1230
01:19:25.450 --> 01:19:27.730
attracted to a merchant cash
advance as opposed to other

1231
01:19:27.730 --> 01:19:28.510
forms of credit.

1232
01:19:30.490 --> 01:19:36.250
Yeah, I'll take that. I think
I've had several business owners

1233
01:19:36.250 --> 01:19:39.670
that we've worked with who would
describe it more as something

1234
01:19:39.670 --> 01:19:43.420
akin to temporary equity than
they would a traditional

1235
01:19:43.420 --> 01:19:47.290
business loan, in terms of the
risk that we're taking. Again,

1236
01:19:47.290 --> 01:19:52.990
we're purchasing a percentage of
their future revenues, and we're

1237
01:19:52.990 --> 01:19:56.470
taking the risk as to whether or
not those revenues are going to

1238
01:19:57.220 --> 01:20:02.020
take place. And I'll give you
two examples, both of them

1239
01:20:02.410 --> 01:20:10.420
seasonal. One, Everest, we
provided an advance to a resort

1240
01:20:10.450 --> 01:20:15.250
in Georgia to get through their
seasonally-slow period in the

1241
01:20:15.250 --> 01:20:24.190
winter. And the business owner
came back each year, so utilized

1242
01:20:24.610 --> 01:20:30.160
the product two or three times.
And then the third year, the

1243
01:20:30.190 --> 01:20:34.450
business owner didn't come back.
And we developed a relationship

1244
01:20:34.450 --> 01:20:37.750
with them. And we actually gave
them a call, and just kind of

1245
01:20:37.750 --> 01:20:40.300
curious as to why they weren't
using the product. And the

1246
01:20:40.570 --> 01:20:45.520
business owner said, we sold the
resort to Marriott. And he said,

1247
01:20:47.500 --> 01:20:50.710
it was great being able to
utilize a merchant cash advance

1248
01:20:50.710 --> 01:20:54.130
from your company, because if I
hadn't, I would have probably

1249
01:20:54.130 --> 01:20:58.270
had to have sold a portion of
the equity of my business,

1250
01:20:58.930 --> 01:21:02.620
whether it be to a private
equity fund or an investor. And

1251
01:21:02.620 --> 01:21:08.350
so in that sense, we served the
role of being a temporary kind

1252
01:21:08.350 --> 01:21:11.530
of equity partner to the
business owner. Again, that was

1253
01:21:11.530 --> 01:21:15.700
off of kind of a seasonal need.
I'll give you another example of

1254
01:21:17.260 --> 01:21:22.300
not as happy an outcome for the
business owner. But we had a

1255
01:21:22.300 --> 01:21:29.020
restaurant in the Keys that had
a seasonally-slow period in the

1256
01:21:29.050 --> 01:21:35.620
summer, before Hurricane Irma.
We made an advance to them. And

1257
01:21:36.640 --> 01:21:40.930
unfortunately, the hurricane--
so again, we made an advance.

1258
01:21:41.290 --> 01:21:45.760
We're purchasing a percentage of
their future revenue. And then

1259
01:21:45.790 --> 01:21:49.810
we're assuming that risk of
whether that revenue is going to

1260
01:21:49.810 --> 01:21:53.710
take place, just like the
business owner is assuming the

1261
01:21:53.710 --> 01:21:55.810
risk of what's going to happen
with the business on a forward

1262
01:21:55.810 --> 01:22:00.370
basis. In this case,
unfortunately-- thank God nobody

1263
01:22:00.370 --> 01:22:06.220
was hurt. But the restaurant was
destroyed by the hurricane. And

1264
01:22:06.520 --> 01:22:10.030
in that instance, again, back to
Kate's point about no absolute

1265
01:22:10.030 --> 01:22:14.470
right of repayment, the business
owner didn't owe us anything,

1266
01:22:14.950 --> 01:22:17.470
because we had purchased
revenues that then never

1267
01:22:17.470 --> 01:22:22.270
materialized. And so I think
they're two totally different

1268
01:22:22.270 --> 01:22:25.420
examples. Both happen to be
based off of a seasonal need

1269
01:22:25.420 --> 01:22:28.540
with different outcomes. But I
think it highlights the utility

1270
01:22:28.540 --> 01:22:30.310
of the product for a small
business owner.

1271
01:22:31.600 --> 01:22:34.210
Let's talk more specifically
about the characteristics of an

1272
01:22:34.210 --> 01:22:38.230
MCI. The cost of financing an
MCI is usually expressed as a

1273
01:22:38.230 --> 01:22:41.320
factor rate. How large is the
typical factor?

1274
01:22:42.830 --> 01:22:46.790
It can vary. It's a case-by-case
basis. And we underwrite each of

1275
01:22:46.790 --> 01:22:50.390
our customers based on the cash
flow of the business, and the

1276
01:22:50.390 --> 01:22:54.830
length of time they're expected,
and their revenues. So we, like

1277
01:22:54.830 --> 01:22:56.960
some of the other companies on
the first panel, underwrite to

1278
01:22:56.960 --> 01:23:00.080
the cash flow of the business.
And the cash flow of the

1279
01:23:00.080 --> 01:23:03.140
business, the amount they want,
the risk that's being taken all

1280
01:23:03.140 --> 01:23:08.930
go into what the discount rate
would be. An easier example to

1281
01:23:08.930 --> 01:23:12.110
express it is our average
financing is approximately

1282
01:23:12.110 --> 01:23:18.650
$50,000. It's approximately 11
to 12 months. On a $50,000

1283
01:23:18.650 --> 01:23:21.590
funding, we would expect, over
the course of the year, we would

1284
01:23:21.590 --> 01:23:27.020
be purchasing for $50,000,
$65,000 of the future revenue of

1285
01:23:27.020 --> 01:23:27.800
that business.

1286
01:23:30.200 --> 01:23:34.340
How does that compare to a
typical APR for a small business

1287
01:23:34.340 --> 01:23:37.520
financing loan? And do
businesses understand the

1288
01:23:37.520 --> 01:23:44.480
distinction between the two? As
was discussed, there is no

1289
01:23:44.480 --> 01:23:47.990
interest rate and there is no
APR. You can only calculate the

1290
01:23:47.990 --> 01:23:51.800
APR after the receipts have been
delivered, because there is no

1291
01:23:51.800 --> 01:23:59.270
set repayment period. So there
is no term. However, APR has--

1292
01:24:00.080 --> 01:24:02.510
some of the problems with APR
were discussed on the first

1293
01:24:02.510 --> 01:24:05.780
panel, and they're present here
as well, in that we are very

1294
01:24:05.780 --> 01:24:09.560
clear about the total cost of
capital, and we provide that

1295
01:24:09.560 --> 01:24:11.720
total cost and a very clear
disclosure on the first page of

1296
01:24:11.720 --> 01:24:17.390
all of our contracts. APR,
again, because it is designed

1297
01:24:17.390 --> 01:24:20.360
for multi-year, monthly-pay
products, is very difficult to

1298
01:24:20.360 --> 01:24:25.100
calculate here. And the total
cost is more relevant to the

1299
01:24:25.100 --> 01:24:28.370
business since they are going to
look at how much it's going to

1300
01:24:28.370 --> 01:24:32.300
cost to make the investment in
their business. And that is what

1301
01:24:32.300 --> 01:24:35.660
drives their decisionmaking. We
are very clear on disclosing the

1302
01:24:35.660 --> 01:24:36.350
total cost.

1303
01:24:36.920 --> 01:24:43.520
If I can just jump in-- there's
a lot of, I think, confusion

1304
01:24:43.520 --> 01:24:50.450
created by the simplicity. So if
somebody takes an advance or a

1305
01:24:50.510 --> 01:24:53.720
short-term online loan, one of
these for $50,000, and the

1306
01:24:53.720 --> 01:24:58.940
payback is $60,000, that's often
quoted to them as a factor rate

1307
01:24:59.300 --> 01:25:04.220
of, in the market, 20%. And in
fact, oftentimes, from my

1308
01:25:04.220 --> 01:25:08.360
experience, the small business
owner or the consumer thinks

1309
01:25:08.360 --> 01:25:12.950
about that as a 20% rate. And
let's just say, if that's on a

1310
01:25:12.950 --> 01:25:20.480
six-month payback, that APR is
closer to 60% or 65%. And every

1311
01:25:20.480 --> 01:25:23.540
time someone-- and everyone's in
business. If you're making an

1312
01:25:23.540 --> 01:25:26.480
advance or a shortterm loan,
more specifically on the

1313
01:25:26.480 --> 01:25:30.290
advances, you might not know
exactly how quickly you're going

1314
01:25:30.290 --> 01:25:34.700
to get paid back. You have a
thesis or a good idea, based on

1315
01:25:34.700 --> 01:25:37.550
the historical performance of
the business, about what your

1316
01:25:37.550 --> 01:25:41.450
expected return is . If the
business owner was properly

1317
01:25:41.450 --> 01:25:44.660
educated, and had their
financials together, and was

1318
01:25:44.660 --> 01:25:50.480
well prepared, and took the time
to go, say, through an SBA

1319
01:25:50.480 --> 01:25:55.040
process, they could borrow that
money at today's rates at 8 and

1320
01:25:55.040 --> 01:25:59.660
1/4%, and have 10 years to pay
it back. And the impact on that

1321
01:25:59.660 --> 01:26:03.620
cash flow is dramatic compared
to some of these other

1322
01:26:03.620 --> 01:26:04.370
solutions.

1323
01:26:06.760 --> 01:26:10.360
Our experience at United Capital
Source, as a marketplace

1324
01:26:10.360 --> 01:26:14.770
consultant and broker, is that
oftentimes a merchant has a

1325
01:26:14.770 --> 01:26:18.700
specific project that they are
looking for in a specific time

1326
01:26:18.700 --> 01:26:22.930
frame. And so what helps them
choose one product versus

1327
01:26:22.930 --> 01:26:28.120
another is that specific
purpose. And so not everyone can

1328
01:26:28.120 --> 01:26:32.230
take the time and/or qualify for
an SBA loan or a term loan.

1329
01:26:32.500 --> 01:26:35.530
Oftentimes, some people can, and
don't want to wait because their

1330
01:26:35.530 --> 01:26:38.830
need doesn't allow them to. We
have found that when we speak to

1331
01:26:38.830 --> 01:26:42.280
merchants they are very educated
in their exact purpose that they

1332
01:26:42.280 --> 01:26:46.750
need the financing for. They
understand their time frame.

1333
01:26:47.020 --> 01:26:52.390
They are negotiating legalese in
the contract, and know their

1334
01:26:52.390 --> 01:26:54.130
specific needs right up front.

1335
01:26:55.690 --> 01:26:59.530
And I would add that an SBA loan
will typically require the small

1336
01:26:59.530 --> 01:27:03.100
business owner to put up their
house as collateral and offer a

1337
01:27:03.100 --> 01:27:06.760
personal guarantee. A factoring
arrangement or merchant cash

1338
01:27:06.760 --> 01:27:10.240
advance does not have a personal
guarantee of repayment. It is a

1339
01:27:10.240 --> 01:27:14.590
performance guarantee. The
default is diverting the funds,

1340
01:27:14.590 --> 01:27:17.500
or not communicating, or not
telling you that your business

1341
01:27:17.500 --> 01:27:19.930
has been destroyed in a
hurricane. It's cutting you off,

1342
01:27:19.930 --> 01:27:22.600
and just not delivering the
receivables. If there is a

1343
01:27:22.600 --> 01:27:26.950
default and it's not repaid, the
individual is not liable. So

1344
01:27:26.950 --> 01:27:30.340
while an interest rate on an SBA
loan might be lower, there are

1345
01:27:30.340 --> 01:27:33.100
drawbacks to that product, too.
And we have found that our

1346
01:27:33.100 --> 01:27:36.670
merchants are very sophisticated
in understanding the benefits of

1347
01:27:36.670 --> 01:27:39.970
flexibility and the lack of a
personal guarantee of repayment,

1348
01:27:40.240 --> 01:27:43.690
versus a lower monthly payment,
or a lower computed interest

1349
01:27:43.690 --> 01:27:46.570
rate, or a longer repayment
horizon.

1350
01:27:47.860 --> 01:27:52.930
I would just add one final point
on that. The MCA space has grown

1351
01:27:52.930 --> 01:27:59.140
a lot, in the last 10 years
especially, and is highly

1352
01:27:59.140 --> 01:28:03.010
competitive. But when we're
dealing with merchants and

1353
01:28:03.010 --> 01:28:10.990
competing for their business,
they're not typically comparing

1354
01:28:10.990 --> 01:28:15.160
us to whether or not they're
going to take out an SBA loan or

1355
01:28:15.160 --> 01:28:18.490
get merchant cash advance.
They've made a decision that

1356
01:28:18.490 --> 01:28:21.490
this product, the MAC product,
is the right product for them,

1357
01:28:21.850 --> 01:28:24.100
for a variety of reasons and
some of the attributes that

1358
01:28:24.100 --> 01:28:28.690
we're getting into now. But
typically a small business owner

1359
01:28:28.690 --> 01:28:32.230
that's looking for a small
business-- an SBA loan is going

1360
01:28:32.230 --> 01:28:37.060
to have a different use case
than the use case that a

1361
01:28:37.270 --> 01:28:38.890
merchant's using for an MCA.

1362
01:28:39.790 --> 01:28:44.860
Our experience is that,
oftentimes, when you're building

1363
01:28:44.860 --> 01:28:48.400
up a small business, there's
going to be some unexpected

1364
01:28:48.400 --> 01:28:52.570
surprises along the way, not
necessarily opportunities. And

1365
01:28:52.630 --> 01:28:56.110
maybe a customer didn't pay in
time, or something didn't quite

1366
01:28:56.110 --> 01:28:59.620
work out in time, or whatever it
might be. And you're in the

1367
01:28:59.620 --> 01:29:05.530
need. And if you didn't take the
time or weren't able to go to

1368
01:29:05.530 --> 01:29:08.140
your bank in advance, and get a
traditional line of credit--

1369
01:29:08.140 --> 01:29:11.560
which I don't think anyone
should forget that, plenty of

1370
01:29:11.560 --> 01:29:15.370
the banks in this country, while
it's work, and takes you time,

1371
01:29:15.370 --> 01:29:18.880
you can go get a line of credit
for your business for $25,000,

1372
01:29:18.970 --> 01:29:23.050
$50,000, and it will just sit
there for when you need it. But

1373
01:29:23.260 --> 01:29:25.300
if you're caught in one of those
emotional moments, and go to

1374
01:29:25.300 --> 01:29:28.450
Google, and you put in "I'm
looking for money for my

1375
01:29:28.450 --> 01:29:32.410
business," there is a myriad of
offers that are so enticing to

1376
01:29:32.410 --> 01:29:36.820
offer you money in 24 to 48
hours. And if you jump on that

1377
01:29:36.820 --> 01:29:41.230
train, and you take a short-term
amortization, whether it's an

1378
01:29:41.230 --> 01:29:45.940
advance or a loan, of some
months, oftentimes that cash

1379
01:29:45.940 --> 01:29:50.230
flow pressure that that
instrument creates forces you

1380
01:29:50.230 --> 01:29:54.250
into a cycle of multi renewals,
which is where many people in

1381
01:29:54.250 --> 01:29:57.790
the MCA or the short-term loan
business make their money. And

1382
01:29:58.210 --> 01:30:00.970
as your credit gets worse, as
your situation gets tougher and

1383
01:30:00.970 --> 01:30:04.120
tougher, you get into situations
of stacking, and stacking, and

1384
01:30:04.120 --> 01:30:08.230
stacking, and multiple renewals.
And everyone's often very happy

1385
01:30:08.230 --> 01:30:12.940
when there are renewals going
on. So these are some of the

1386
01:30:12.970 --> 01:30:16.780
dynamics that worry me about the
nature of the short-term

1387
01:30:16.780 --> 01:30:20.470
products and the ultimate
pressure they can often create

1388
01:30:20.560 --> 01:30:23.740
on the business owners who get
enticed by them. And they

1389
01:30:23.740 --> 01:30:24.820
certainly are enticing.

1390
01:30:25.750 --> 01:30:28.330
Ami, can you explain for those
who might not be familiar what

1391
01:30:28.330 --> 01:30:31.660
stacking is, and how common that
is in the industry?

1392
01:30:31.000 --> 01:30:37.180
Well, the stats are hard because
I don't think anyone in

1393
01:30:37.180 --> 01:30:42.070
Washington or anywhere truly
understands the size and scope

1394
01:30:42.160 --> 01:30:46.270
of this business. I don't think
anyone really knows how many

1395
01:30:46.270 --> 01:30:48.970
players there are. I don't
believe there are any reported

1396
01:30:49.600 --> 01:30:54.880
requirements for reporting, like
they are for banks, as to the

1397
01:30:54.910 --> 01:30:59.170
size and scope of their loans or
their advances. So any data that

1398
01:30:59.170 --> 01:31:04.300
I have is more anecdotal. But I
will often get a call from a

1399
01:31:04.840 --> 01:31:09.460
borrower-- just to be clear,
we're a loan broker. And just to

1400
01:31:09.460 --> 01:31:15.940
be clear, about 70% of the work
we do is with the SBA. And we'll

1401
01:31:15.940 --> 01:31:20.500
get a call with someone who took
an advance or a short-term loan,

1402
01:31:20.500 --> 01:31:24.640
and then it became enticing, and
there was some cash flow

1403
01:31:24.640 --> 01:31:27.040
pressure by the first one, and
then they took another and

1404
01:31:27.040 --> 01:31:30.310
another. And then there's
multiple lenders or companies in

1405
01:31:30.310 --> 01:31:33.430
the business. And sometimes
they're classified as A, B, and

1406
01:31:33.430 --> 01:31:36.850
C credits. And as you take more
and more of these, if you fall

1407
01:31:36.850 --> 01:31:45.400
down that path, the paybacks get
faster, and if you calculate

1408
01:31:45.400 --> 01:31:50.140
them on a IRR and APR basis,
they get more expensive. And

1409
01:31:50.470 --> 01:31:54.100
that's when you get to some of
the C-credit players, some of

1410
01:31:54.100 --> 01:31:56.530
the really predatory-- and I
don't think that's the case of

1411
01:31:56.530 --> 01:31:59.860
anyone here in this panel-- but
you start to see some of the

1412
01:31:59.890 --> 01:32:03.490
really predatory practices, and
confession of judgments, and

1413
01:32:03.490 --> 01:32:06.250
some of the things that we've
recently read about in Bloomberg

1414
01:32:06.250 --> 01:32:10.630
articles and stuff like that.
But sometimes we can see bank

1415
01:32:10.630 --> 01:32:14.200
statements or credit card
statements where someone has

1416
01:32:14.200 --> 01:32:18.460
six, seven, or eight of these
loans or advances. And they may

1417
01:32:18.460 --> 01:32:19.840
as well shut their doors at that
point.

1418
01:32:21.730 --> 01:32:24.250
Some of the things that we've
seen-- and to be clear, United

1419
01:32:24.250 --> 01:32:28.390
Capital Source as well is a
broker and a consultant-- we've

1420
01:32:28.390 --> 01:32:31.780
seen a multitude of cases where
folks have had two and three SBA

1421
01:32:31.780 --> 01:32:36.850
loans at once. And so is that
considered SBA loans stacking

1422
01:32:36.850 --> 01:32:39.670
each other? We've seen cases
where someone has a line of

1423
01:32:39.670 --> 01:32:42.490
credit and accounts receivable
financing as well as an SBA

1424
01:32:42.490 --> 01:32:45.760
loan. And they're coming to us
saying, hey, I took these three

1425
01:32:45.760 --> 01:32:48.760
traditional financings, and I'm
looking to clear it up. What

1426
01:32:48.760 --> 01:32:52.360
should I do? So I really think
it depends on a case-by-case

1427
01:32:52.360 --> 01:32:57.220
basis. I will say, from what Ami
said, yes, there is a level of

1428
01:32:57.220 --> 01:33:01.720
this space that I think has been
a certain way. But I would not

1429
01:33:01.720 --> 01:33:05.470
let a few bad apples spoil the
bunch. The majority of the space

1430
01:33:05.680 --> 01:33:08.350
is generally working with
merchants to increase their

1431
01:33:08.350 --> 01:33:12.010
business's cash flow and to grow
their business.

1432
01:33:12.940 --> 01:33:18.400
And I would add that a lot of
the flexibility and availability

1433
01:33:18.430 --> 01:33:25.120
and speed to funding, the MCA
product offers many of the same

1434
01:33:25.120 --> 01:33:28.840
benefits as the products offered
by the individuals on the first

1435
01:33:28.840 --> 01:33:34.120
panel. Where we see renewals for
merchants is either a merchant

1436
01:33:34.990 --> 01:33:37.120
gets a product for the first
time, because there is an

1437
01:33:37.120 --> 01:33:39.910
education process to explaining
that it's not a loan, that it

1438
01:33:39.910 --> 01:33:43.780
doesn't have an interest rate,
that you have the flexibility of

1439
01:33:43.780 --> 01:33:46.120
paying back a percentage of your
credit card receipts as they're

1440
01:33:46.120 --> 01:33:49.120
generated, and so your payment
automatically fluctuates based

1441
01:33:49.120 --> 01:33:51.850
on the performance of your
business. Once it gets past

1442
01:33:51.850 --> 01:33:56.320
that, the business sees the use
case, sees the flexibility, and

1443
01:33:56.320 --> 01:33:59.830
will come back for the next
project or the next need and

1444
01:33:59.860 --> 01:34:06.160
recognize the benefits of the
product. Most of our renewals,

1445
01:34:06.220 --> 01:34:09.190
as Ami mentioned, which are
customers that come back and

1446
01:34:09.280 --> 01:34:14.050
take another financing from
Kapitus, those tend to be

1447
01:34:14.050 --> 01:34:18.580
individuals who have identified
a specific need, inventory or

1448
01:34:18.580 --> 01:34:22.540
manufacturing inputs. The
business knows what it can make

1449
01:34:22.540 --> 01:34:26.110
selling inventory. It knows what
the return, from the inputs, to

1450
01:34:26.110 --> 01:34:30.130
its manufacturing business will
be. The product is able to

1451
01:34:30.130 --> 01:34:35.320
finance that need as it arises,
essentially in perpetuity,

1452
01:34:35.320 --> 01:34:39.430
because they're returning that
investment to the financing

1453
01:34:39.430 --> 01:34:39.820
company.

1454
01:34:40.750 --> 01:34:43.960
And I would just comment on one
of Jesse's comments on the--

1455
01:34:43.990 --> 01:34:52.180
relative to the speed. So we'll
have a merchant apply with us as

1456
01:34:52.180 --> 01:34:58.420
a first-time merchant. And to
the extent that the merchants

1457
01:34:58.420 --> 01:35:02.170
that are approved, 90% of them
receive the capital within 48

1458
01:35:02.170 --> 01:35:05.560
hours. So just to a small
business owner that's dealing

1459
01:35:05.560 --> 01:35:10.810
with all kinds of different
challenges, the ability to get

1460
01:35:12.370 --> 01:35:17.920
nonrecourse capital, where the
provider of the capital has

1461
01:35:17.920 --> 01:35:24.310
purchased a future percentage of
your revenues of the performance

1462
01:35:24.310 --> 01:35:28.090
of the business, and to be able
to get it in 48 hours, just has

1463
01:35:28.090 --> 01:35:32.380
a very high utility. And that's
on a first-time merchant. A

1464
01:35:32.380 --> 01:35:36.040
merchant who already has an
existing relationship with us

1465
01:35:37.150 --> 01:35:39.940
typically will be able to get
the capital, if they need an

1466
01:35:39.940 --> 01:35:44.080
advance, the same day. So for a
small business owner who-- and

1467
01:35:46.570 --> 01:35:51.340
the first use case for why they
may reach out to us may be

1468
01:35:51.340 --> 01:35:58.960
because of some type of acute
need. The pizza oven breaks and

1469
01:35:58.960 --> 01:36:04.510
you need $50,000 tomorrow, or as
quick as you possibly can. So

1470
01:36:04.510 --> 01:36:07.750
the first time they use it may
be because of some type of acute

1471
01:36:07.750 --> 01:36:14.830
need. And those future
receivables will be remitted

1472
01:36:14.830 --> 01:36:19.030
back to us over whatever period
of time it takes for the

1473
01:36:19.030 --> 01:36:22.600
business to generate them. But
the business owner then develops

1474
01:36:22.900 --> 01:36:26.800
comfort level with the product,
with our business and the

1475
01:36:26.800 --> 01:36:31.000
relationship. And then we may
get a call back a year later,

1476
01:36:31.000 --> 01:36:37.360
the business owner says-- the
same pizza owner-know the shop

1477
01:36:37.360 --> 01:36:40.270
next door to me, the
hairstylist, just went out of

1478
01:36:40.270 --> 01:36:44.500
business and I've got an
opportunity to expand. So now

1479
01:36:44.500 --> 01:36:48.640
it's not an acute kind of
emergency need for capital. Now

1480
01:36:48.640 --> 01:36:52.390
this is a expansionary need. And
so that business owner being

1481
01:36:52.390 --> 01:36:56.950
able to call us up at 10:00 in
the morning on a Wednesday and

1482
01:36:56.950 --> 01:37:00.970
have $75,000 or $100,000 in
their bank account by the end of

1483
01:37:01.750 --> 01:37:05.080
that day, again, on a
non-recourse basis where they

1484
01:37:05.080 --> 01:37:07.990
didn't have to provide a
personal guarantee, unlike some

1485
01:37:07.990 --> 01:37:13.390
of the panelists that were on
the first panel, again, a

1486
01:37:13.600 --> 01:37:19.420
merchant cash advance, you can
appreciate the utility for

1487
01:37:19.420 --> 01:37:22.600
certain business owners in
certain use cases.

1488
01:37:23.380 --> 01:37:28.390
Can we come back quickly to the
cost of financing here and the

1489
01:37:28.390 --> 01:37:32.620
factor rate in particular. So
we'd heard, on the first panel,

1490
01:37:32.620 --> 01:37:37.990
that one of the concerns is the
lack of transparency in this

1491
01:37:37.990 --> 01:37:43.000
industry around the cost of
financing. And Scott and Jesse,

1492
01:37:43.000 --> 01:37:47.620
I think you commented on the
fact that APR might not be, for

1493
01:37:47.620 --> 01:37:50.410
certain reasons a good
comparison for a business to

1494
01:37:50.410 --> 01:37:54.430
make to the factor rate. How
does a business compare-- if a

1495
01:37:54.430 --> 01:37:58.240
business is considering an MCA,
how do they compare the cost of

1496
01:37:58.240 --> 01:38:01.570
financing for an MCA against
other forms of credit?

1497
01:38:02.500 --> 01:38:06.670
We are very supportive of using
the total cost of capital metric

1498
01:38:06.670 --> 01:38:10.990
that was discussed on the first
panel by Scott Talbott from the

1499
01:38:10.990 --> 01:38:16.960
ETA. Unlike a consumer who is
borrowing money to meet a

1500
01:38:16.960 --> 01:38:20.890
personal need, the business is
borrowing money or seeking

1501
01:38:20.890 --> 01:38:23.920
financing to invest. And so
they're looking at what the

1502
01:38:23.920 --> 01:38:26.350
return on that investment is
going to be, and what the total

1503
01:38:26.350 --> 01:38:31.780
cost is. So the apples-to-apples
comparison, I think, across all

1504
01:38:31.780 --> 01:38:35.770
products is what the total
financing cost is going to be

1505
01:38:35.770 --> 01:38:39.430
for the funds, as well as the
periodic repayment or the

1506
01:38:39.430 --> 01:38:41.620
percentage of the receipts that
are going to have to be

1507
01:38:41.620 --> 01:38:46.810
delivered. For example, a
10-year SBA loan or a five-year

1508
01:38:46.810 --> 01:38:49.930
equipment lease, if you express
that in the total cost of

1509
01:38:49.960 --> 01:38:52.900
financing in terms of the total
interest you will end up paying,

1510
01:38:53.170 --> 01:38:58.660
those can be more expensive than
an MCA or a short-term factoring

1511
01:38:58.660 --> 01:39:01.300
agreement, because you're paying
a lower rate of interest over a

1512
01:39:01.300 --> 01:39:05.410
longer period of time. So
overall, we believe that the

1513
01:39:05.410 --> 01:39:11.080
best metric is to have a clear
total cost disclosure across all

1514
01:39:11.110 --> 01:39:12.790
small business financing
products.

1515
01:39:13.270 --> 01:39:17.440
I think, if I may, let's just
take an example, someone needs

1516
01:39:17.440 --> 01:39:23.980
$50,000. And approximately, if
you're going to do that on a

1517
01:39:24.190 --> 01:39:27.190
10-year SBA loan product, you're
going to have a monthly payment

1518
01:39:27.190 --> 01:39:30.280
of about $600, and no prepayment
penalty if you can get it done

1519
01:39:30.280 --> 01:39:34.450
faster. And if you're going to
do that on a six-month

1520
01:39:34.510 --> 01:39:38.230
short-term MCA or short-term
loan product, you're going to

1521
01:39:38.230 --> 01:39:44.500
have approximately a payment of
$600 a day. And what I believe

1522
01:39:44.500 --> 01:39:48.820
small businesses have to really
be educated and stare at is

1523
01:39:49.090 --> 01:39:54.310
thinking about, unless things go
extremely well, if their

1524
01:39:54.310 --> 01:39:58.630
business can really afford and
handle that $600 a day. Because

1525
01:39:58.630 --> 01:40:02.350
oftentimes, if you look at it on
an actual cost-of-capital

1526
01:40:02.380 --> 01:40:06.340
dollars for the longer-term
product versus dollars for the

1527
01:40:06.670 --> 01:40:08.980
shorter-term product, you're
going to have less dollars,

1528
01:40:09.010 --> 01:40:14.620
although a much, much higher APR
or cost of financing on a

1529
01:40:14.620 --> 01:40:17.890
percentage basis that's really
expensive. And it's that

1530
01:40:17.890 --> 01:40:23.020
enticement of signing up for the
shorter, and easier, and more

1531
01:40:23.020 --> 01:40:26.860
convenient financing that, from
our experience, often gets

1532
01:40:26.860 --> 01:40:27.910
merchants in trouble.

1533
01:40:28.740 --> 01:40:31.680
Well, there's one thing I would
add and point out. I mean, we

1534
01:40:31.680 --> 01:40:37.650
compete with some companies that
offer online lending and online

1535
01:40:37.650 --> 01:40:42.690
loans. And our cost of financing
is, overall, comparable to them

1536
01:40:42.690 --> 01:40:44.760
since we were competing with
them and winning business with

1537
01:40:44.760 --> 01:40:46.830
them. There is a great deal of
competition in the industry,

1538
01:40:46.830 --> 01:40:50.430
across products, across
regulatory structures. But

1539
01:40:50.490 --> 01:40:54.300
overall, our merchants can
compare and have the ability to

1540
01:40:54.300 --> 01:40:58.200
look at an online loan from a
lender like OnDeck, or a

1541
01:40:58.710 --> 01:41:01.830
line-of-credit product from a
lender like Kabbage, and a

1542
01:41:01.830 --> 01:41:06.180
factoring product that we offer,
or in California, where we have

1543
01:41:06.180 --> 01:41:10.950
a license and offer a loan
product. They can look across

1544
01:41:10.950 --> 01:41:12.720
all of those. And they're
sophisticated enough to

1545
01:41:12.720 --> 01:41:16.830
understand it. And while there
are shorter-term, very high-cost

1546
01:41:17.940 --> 01:41:22.980
products out there, that is not
the typical customer we offer.

1547
01:41:22.980 --> 01:41:26.100
That's not the need we are
serving. And while we are aware

1548
01:41:26.100 --> 01:41:29.010
that it's out there, it is not
something that is core to our

1549
01:41:29.010 --> 01:41:29.640
business.

1550
01:41:30.150 --> 01:41:32.880
I'd like to address your
question about disclosures.

1551
01:41:33.270 --> 01:41:36.240
Disclosures should serve the
broader policy goal of helping

1552
01:41:36.240 --> 01:41:39.720
small business owners compare
costs across different products.

1553
01:41:40.020 --> 01:41:42.570
And in the business finance
space, there is a broad range of

1554
01:41:42.570 --> 01:41:45.300
different products, including
loans and lines of credit,

1555
01:41:45.330 --> 01:41:48.690
equipment leasing, invoice
factoring, purchases of future

1556
01:41:48.690 --> 01:41:53.100
receivables. So in order to do
an apples-to-apples comparison

1557
01:41:53.790 --> 01:41:57.330
across these different types of
products, a business owner needs

1558
01:41:57.330 --> 01:42:00.300
to know the total amount of
money that's advanced. So in a

1559
01:42:00.300 --> 01:42:03.150
loan, that would be the
principal amount. In factoring,

1560
01:42:03.390 --> 01:42:06.000
this would be the purchase
price. In a lease, this would be

1561
01:42:06.000 --> 01:42:09.930
the gross capitalized cost. They
need to know the amount of any

1562
01:42:09.930 --> 01:42:16.170
upfront fees. They need to know
what their periodic payment is

1563
01:42:16.170 --> 01:42:19.650
or their expected periodic
payment. They need to know the

1564
01:42:19.650 --> 01:42:23.520
total amount it will cost them,
expressed today as total cost of

1565
01:42:23.520 --> 01:42:26.910
capital. And it's helpful to
know what the pre-payment

1566
01:42:26.910 --> 01:42:32.010
policies are. That limited
number of disclosures would

1567
01:42:32.010 --> 01:42:35.460
allow a business owner to be
able to compare, is an equipment

1568
01:42:35.460 --> 01:42:39.720
lease a better price for me than
a loan, than a purchase of

1569
01:42:39.720 --> 01:42:43.080
future receivables. There are
other disclosures, such as

1570
01:42:43.110 --> 01:42:46.650
annual interest rate, APR, or
factor rate. These really don't

1571
01:42:46.650 --> 01:42:50.640
translate across products. And
if the policy goal is to allow

1572
01:42:50.640 --> 01:42:54.060
business owners to comparison
shop, we should focus on that

1573
01:42:54.120 --> 01:42:55.500
set of disclosures.

1574
01:42:56.280 --> 01:42:59.280
I would just like to add to
Kate's point, oftentimes in

1575
01:42:59.280 --> 01:43:02.190
roles like myself or armies
company when you're presenting

1576
01:43:02.550 --> 01:43:05.340
all of these options to a
merchant, and thankfully they

1577
01:43:05.340 --> 01:43:09.390
all exist. Oftentimes a merchant
is looking at the total cost of

1578
01:43:09.390 --> 01:43:13.890
capital what the repayment
method is, but they're 50% of

1579
01:43:13.890 --> 01:43:16.650
the time looking at when they
can take advantage of their

1580
01:43:16.650 --> 01:43:20.820
opportunity. Sometimes time
doesn't allow for that.

1581
01:43:20.970 --> 01:43:25.050
Sometimes what they would prefer
is to go through a program where

1582
01:43:25.050 --> 01:43:29.850
they understand I'm taking x for
y, if I pay it back early,

1583
01:43:29.850 --> 01:43:33.090
here's my definitive cost. I
know I'm using it for this

1584
01:43:33.090 --> 01:43:36.780
project, I know that I'm going
to have it paid back by x. If I

1585
01:43:36.780 --> 01:43:41.130
don't, I'm able to lower my
payments due to my cash flow,

1586
01:43:41.460 --> 01:43:43.530
which other lending products
don't offer. And so it's

1587
01:43:43.530 --> 01:43:46.290
important to just make sure that
the business owners not only

1588
01:43:46.290 --> 01:43:48.480
know about the cost of capital,
but they also know about the

1589
01:43:48.480 --> 01:43:50.970
rules that follow that cost to
capital in case they get into a

1590
01:43:50.970 --> 01:43:54.510
situation where they're not able
to repay. And when you're

1591
01:43:54.510 --> 01:43:59.460
guaranteeing equipment inventory
or land through an SBA loan. And

1592
01:43:59.460 --> 01:44:01.980
if you don't have the ability to
pay that loan, you can lose one

1593
01:44:01.980 --> 01:44:05.100
of those things. And so
oftentimes, if a merchant is not

1594
01:44:05.100 --> 01:44:09.660
sure how their gamble, quote,
unquote, will pay off, they will

1595
01:44:09.660 --> 01:44:13.110
choose an option that may be
best suited for their future of

1596
01:44:13.110 --> 01:44:14.010
their business.

1597
01:44:15.320 --> 01:44:18.770
I think we can just take an
example just of the pricing

1598
01:44:18.770 --> 01:44:23.600
mechanism. So right now as we
sit here, there's probably some

1599
01:44:23.630 --> 01:44:28.730
thousands of salespeople on the
phone hammering away at small

1600
01:44:28.730 --> 01:44:34.130
businesses trying to entice them
into MCAs or short-term loans.

1601
01:44:34.130 --> 01:44:37.370
Because frankly, it's quite
profitable. And if you're a

1602
01:44:37.370 --> 01:44:40.640
broker in that business, you
don't get paid high commissions.

1603
01:44:41.810 --> 01:44:46.400
And so on the sales call, if
someone was again focusing on

1604
01:44:46.400 --> 01:44:53.090
the cost of capital, someone
might say to a merchant, I'll

1605
01:44:53.090 --> 01:44:55.610
give you $50,000, and you'll pay
me back $10,000. So the total

1606
01:44:55.610 --> 01:44:59.930
back will be $60,000, and that
will be over six months-- so not

1607
01:44:59.930 --> 01:45:03.680
specifically for an MCA. And the
merchant might say, I don't want

1608
01:45:03.680 --> 01:45:07.130
to pay back $10,000. That's too
much. And then the salesperson--

1609
01:45:07.130 --> 01:45:10.400
the other person-- will say, OK,
I can give you a payback of

1610
01:45:10.400 --> 01:45:14.090
$7,000. So you'll pay me back
$57,000, and you'll pay that

1611
01:45:14.090 --> 01:45:18.830
back over three months. So your
payback will be less. And in

1612
01:45:18.830 --> 01:45:22.280
that process what happens is
that the daily payment goes

1613
01:45:22.280 --> 01:45:27.500
higher, and the rate of return
for the MCA or the lender goes

1614
01:45:28.340 --> 01:45:29.390
higher also.

1615
01:45:32.120 --> 01:45:35.690
How do funders typically
underwrite their MCAs? And what

1616
01:45:35.690 --> 01:45:38.360
information do they consider,
and how is that information

1617
01:45:38.360 --> 01:45:40.760
different from what a
traditional bank might consider?

1618
01:45:44.300 --> 01:45:50.240
Our underwriting process is
geared toward-- under about $3

1619
01:45:50.240 --> 01:45:57.290
million, a bank will underwrite
a small-dollar commercial loan

1620
01:45:57.290 --> 01:46:01.460
to the personal credit of the
owner of that business, largely.

1621
01:46:01.850 --> 01:46:06.320
What we do is underwrite to the
cash flow of the business or the

1622
01:46:06.320 --> 01:46:08.660
receipts that they're iterating
through their credit card

1623
01:46:08.660 --> 01:46:13.100
processing. So our underwriting
process looks at a number of

1624
01:46:13.100 --> 01:46:17.060
different data points, largely
geared toward looking at the

1625
01:46:17.060 --> 01:46:19.940
cash flow of the business and
what that business can support

1626
01:46:19.940 --> 01:46:23.750
in terms of generating the
offer. So our typical

1627
01:46:23.750 --> 01:46:26.330
application process requests
three months worth of bank

1628
01:46:26.330 --> 01:46:30.170
statements that we then analyze
using computer-assisted

1629
01:46:30.170 --> 01:46:34.820
algorithms. But we don't believe
that computers can do

1630
01:46:34.820 --> 01:46:37.730
underwriting entirely at this
point, or the technology is not

1631
01:46:37.730 --> 01:46:42.380
there. So we have individual
underwriters look at the risk

1632
01:46:42.380 --> 01:46:44.600
score that's generated through
our algorithm, the bank

1633
01:46:44.600 --> 01:46:48.950
statements of the business, and
for larger financings, we'll

1634
01:46:48.950 --> 01:46:52.430
also speak to the merchant. And
one of the things that's clear

1635
01:46:52.430 --> 01:46:55.430
in that merchant interview is we
want to be sure that they

1636
01:46:55.430 --> 01:46:57.710
understand how much that payment
is and whether they're

1637
01:46:57.710 --> 01:47:00.740
comfortable with it. And so we
are very clear in disclosing

1638
01:47:00.740 --> 01:47:04.640
what the daily cost is going to
be. So from that, we get an

1639
01:47:04.640 --> 01:47:07.520
offer, and that's generated and
given to the merchant. If the

1640
01:47:07.520 --> 01:47:10.790
merchant accepts that and signs
the contract, we can fund them

1641
01:47:11.120 --> 01:47:14.930
the same day. So The data
sources for the underwriting are

1642
01:47:15.200 --> 01:47:18.140
largely geared toward getting
out the cash flow of the

1643
01:47:18.140 --> 01:47:20.120
business and the key indicators
toward the health of the

1644
01:47:20.120 --> 01:47:23.300
business, and deemphasizing the
personal credit of the

1645
01:47:23.300 --> 01:47:23.900
guarantor.

1646
01:47:25.490 --> 01:47:30.680
Yeah, I'd just add-- I think
Jesse summed it up well. The

1647
01:47:30.680 --> 01:47:35.600
other thing would just be, each
business is different. You'd

1648
01:47:35.600 --> 01:47:40.580
look at different SIC codes--
you'd underwrite different SIC

1649
01:47:40.580 --> 01:47:42.710
codes differently depending on
whether or not they're subject

1650
01:47:42.710 --> 01:47:48.890
to seasonality or different--
typically, seasonality would be

1651
01:47:48.890 --> 01:47:51.800
the biggest one. But Jesse
covered most of them.

1652
01:47:53.210 --> 01:47:57.050
We heard from an earlier
panelist that there's maybe been

1653
01:47:57.050 --> 01:48:00.590
a move away from considering on
personal credit scores as part

1654
01:48:00.590 --> 01:48:05.450
of the underwriting process for
sole proprietorships, or

1655
01:48:05.450 --> 01:48:09.080
generally. Jesse, Scott, is that
something you consider?

1656
01:48:10.550 --> 01:48:16.730
We do pull the personal credit
of the owner of the small

1657
01:48:16.730 --> 01:48:20.450
business. However, that is
deemphasized in our underwriting

1658
01:48:20.450 --> 01:48:23.420
as a key indicator of the health
of the business or whether we

1659
01:48:23.420 --> 01:48:27.530
should finance that merchant. So
it hasn't been completely

1660
01:48:27.530 --> 01:48:29.720
eliminated, I think, as some
others have. But it has been

1661
01:48:29.720 --> 01:48:35.390
significantly deemphasized in
order to expand the

1662
01:48:35.390 --> 01:48:38.120
opportunities available to small
businesses, some of whom, as

1663
01:48:38.120 --> 01:48:41.030
we've heard on the first panel,
will have less than perfect

1664
01:48:41.030 --> 01:48:44.630
credit due to their
entrepreneurial spirit.

1665
01:48:45.800 --> 01:48:53.180
And they might not necessarily
have bad credit. But just they

1666
01:48:53.180 --> 01:48:59.720
might be a thin credit file, a
new entrepreneur. And so

1667
01:49:00.500 --> 01:49:03.890
deemphasize as well the personal
credit of the business owner.

1668
01:49:04.160 --> 01:49:08.720
And it's much more focused on
the cash flows, historical and

1669
01:49:09.290 --> 01:49:12.800
what we deem to be or estimate
are going to be the prospective

1670
01:49:12.800 --> 01:49:14.360
cash flows of the business.

1671
01:49:17.150 --> 01:49:22.190
How do MCAs typically get paid
back? Is it a percentage basis,

1672
01:49:22.190 --> 01:49:23.600
a daily fixed rate?

1673
01:49:23.690 --> 01:49:27.050
It's always going to be a
percentage of the receipts that

1674
01:49:27.050 --> 01:49:29.480
are generated by the business.
And I would add that our

1675
01:49:29.480 --> 01:49:34.760
underwriting processes look very
closely at the remit rate, or

1676
01:49:34.760 --> 01:49:38.060
the percentage of the receipts
that are going to be servicing--

1677
01:49:38.270 --> 01:49:41.030
we're going to be paying back
the receipts that we have

1678
01:49:41.120 --> 01:49:46.850
purchased. There are two basic
methods of repayment, as I think

1679
01:49:46.850 --> 01:49:52.340
I said quickly in my opening
remarks. One is a split of the

1680
01:49:52.340 --> 01:49:57.170
credit card batches. So in the
credit card processor-- for

1681
01:49:57.170 --> 01:49:59.330
those who are unfamiliar with
how credit card transactions

1682
01:49:59.330 --> 01:50:01.970
work, you swipe your credit
card, it goes to the credit card

1683
01:50:01.970 --> 01:50:04.550
processor, they then disperse
the funds to the merchant,

1684
01:50:05.030 --> 01:50:08.600
usually a day later, after it
has been batched. When they're

1685
01:50:08.600 --> 01:50:11.180
batching out that payment, they
will send the percentage of the

1686
01:50:11.180 --> 01:50:14.570
receipts that have been
purchased to us in fulfillment

1687
01:50:14.570 --> 01:50:17.240
of the obligation to deliver the
receipts, and they will send the

1688
01:50:17.240 --> 01:50:22.460
remainder to the merchant. For
merchants who are not as

1689
01:50:22.460 --> 01:50:24.920
dependent on credit cards, who
don't have as large a percentage

1690
01:50:24.920 --> 01:50:28.850
of their revenue generated
through credit cards, we offer

1691
01:50:28.850 --> 01:50:34.430
an estimated ACH debit that is
intended to look at what's your

1692
01:50:34.430 --> 01:50:38.150
average on a weekly or daily
basis, how many deposits do you

1693
01:50:38.150 --> 01:50:41.810
have. There will be an ACH
that's intended to estimate the

1694
01:50:41.810 --> 01:50:45.200
percentage of the receivables
that we have purchased and is

1695
01:50:45.200 --> 01:50:53.720
debited to a bank account. That
estimated payment can be what's

1696
01:50:53.720 --> 01:50:56.600
called trued-up, in that a
merchant, if they are

1697
01:50:56.600 --> 01:51:00.800
encountering trouble, can submit
their most recent bank

1698
01:51:00.800 --> 01:51:03.860
statements, provide information
to us. And we can adjust that

1699
01:51:03.860 --> 01:51:06.620
payment to better reflect the
percentage of their receipts

1700
01:51:06.620 --> 01:51:08.780
that are being generated and
that we have purchased.

1701
01:51:09.530 --> 01:51:12.470
So does the contract contain the
percentage and the estimated

1702
01:51:12.470 --> 01:51:16.340
payment, and the business owner
is required to make the

1703
01:51:16.340 --> 01:51:20.300
estimated payment unless they
proactively seek a smaller

1704
01:51:20.300 --> 01:51:20.780
payment?

1705
01:51:21.200 --> 01:51:25.370
In essence, yes. But again,
that's only for the ACH

1706
01:51:25.430 --> 01:51:29.750
estimated payment. There is no
actual stated payment in a

1707
01:51:29.750 --> 01:51:33.920
credit card factoring contract.
Because the split of the batch

1708
01:51:33.920 --> 01:51:37.190
automatically provides the
percentage of the receipts be

1709
01:51:37.190 --> 01:51:42.110
purchased on a daily basis,
almost exactly like the product

1710
01:51:42.140 --> 01:51:44.750
that Square was describing this
morning, which is denominated as

1711
01:51:44.750 --> 01:51:45.140
a loan.

1712
01:51:46.700 --> 01:51:49.250
Jesse, can you explain a little
bit more of the true-up or

1713
01:51:49.250 --> 01:51:52.010
reconciliation provision you're
talking about, and how it

1714
01:51:52.010 --> 01:51:55.970
works-- how it's supposed to
work, and then, to the extent

1715
01:51:55.970 --> 01:51:59.210
you've heard anecdotally about
how it may go wrong.

1716
01:52:00.560 --> 01:52:06.260
Well, we have approximately 5 to
10 employees who, when the

1717
01:52:06.260 --> 01:52:10.010
merchants call in, or the
merchants miss a payment, or NSF

1718
01:52:10.010 --> 01:52:12.680
their estimated ACH payment, we
proactively reach out to the

1719
01:52:12.680 --> 01:52:17.750
merchant and ask them what the
issues are. They will submit

1720
01:52:17.780 --> 01:52:21.650
information to our group, who
will review their deposits and

1721
01:52:21.650 --> 01:52:24.620
the receipts that are being
generated. And we'll adjust

1722
01:52:26.180 --> 01:52:29.270
their ACH repayment based on the
percentage of receipts

1723
01:52:29.270 --> 01:52:34.220
purchased. We also want to work
with our merchants. And if they

1724
01:52:34.220 --> 01:52:37.820
are experiencing a hard time,
even if there is cash flow

1725
01:52:37.820 --> 01:52:42.770
pressure, we also will offer
modifications to their estimated

1726
01:52:42.770 --> 01:52:45.770
repayment obligations or lower
their remit percentage in order

1727
01:52:45.770 --> 01:52:49.130
to get them through a difficult
period if they've overextended

1728
01:52:49.130 --> 01:52:52.370
themselves in some way, or have
an unexpected or unforeseen

1729
01:52:52.370 --> 01:52:54.710
difficulty but are still
generating receipts.

1730
01:52:55.730 --> 01:53:00.170
Anecdotally, I have heard that
there are companies that will

1731
01:53:00.170 --> 01:53:04.490
not honor those provisions of
the contract, and treat the

1732
01:53:04.580 --> 01:53:08.060
estimated payment that's stated
or the estimated ACH debit that

1733
01:53:08.060 --> 01:53:11.960
stated as an absolute
requirement to pay. And so even

1734
01:53:11.960 --> 01:53:15.800
if they submit information, they
will not adjust the debit, or

1735
01:53:15.800 --> 01:53:20.630
they will continue debiting even
after the obligation is repaid.

1736
01:53:21.140 --> 01:53:24.080
Those are not practices that we
condone. We believe that those

1737
01:53:24.080 --> 01:53:29.360
practices should be prohibited.
And it is not how our company

1738
01:53:29.360 --> 01:53:29.960
operates.

1739
01:53:30.830 --> 01:53:34.760
I'd just make a couple of
comments on true-up. So and

1740
01:53:34.760 --> 01:53:38.660
sometimes-- Ami did a good job,
I think, with giving examples

1741
01:53:38.960 --> 01:53:42.950
for folks who might not be
familiar with-- they haven't

1742
01:53:42.950 --> 01:53:46.970
taken out a merchant cash
advance. But you have a retail

1743
01:53:46.970 --> 01:53:52.550
operation in a strip mall, and
you needed an advance because

1744
01:53:52.940 --> 01:53:56.300
you had an opportunity to buy
some inventory at a discount

1745
01:53:56.300 --> 01:54:00.680
from your supplier. And so you
took out an advance from

1746
01:54:00.680 --> 01:54:08.330
Everest, from my company. And
unexpectedly, the city decided

1747
01:54:08.330 --> 01:54:12.260
to put a new curb cut in front
of the retail strip mall that

1748
01:54:12.260 --> 01:54:16.190
you work at, where your store is
based. And it's going to take

1749
01:54:16.190 --> 01:54:19.100
them a month to do the curb cut,
and that's cutting down on

1750
01:54:19.100 --> 01:54:24.650
traffic that comes into the
center, and that's going to

1751
01:54:24.650 --> 01:54:29.000
impact their revenues for a
month or the time period where

1752
01:54:29.000 --> 01:54:33.260
their curb cut's getting put in.
That merchant will call us up,

1753
01:54:33.260 --> 01:54:37.940
explain what happened, show us
the bank statements. And we will

1754
01:54:37.940 --> 01:54:44.240
lower the payments tied to-- as
a modification in recognition of

1755
01:54:44.240 --> 01:54:49.910
the issue that they're dealing
with. And so there are, I think,

1756
01:54:49.940 --> 01:54:55.490
some, as in any industry, bad
actors that, as Jesse referred

1757
01:54:55.490 --> 01:55:00.890
to, may not honor true-ups, I
can tell you, at Everest, not

1758
01:55:00.890 --> 01:55:05.450
only do we honor true-ups, we
send out periodic reminders to

1759
01:55:05.750 --> 01:55:11.150
our merchants to remind them
over the course of the

1760
01:55:11.150 --> 01:55:16.190
transaction that the true-up's
available as an option for them

1761
01:55:16.670 --> 01:55:18.350
if they want to avail themselves
of it.

1762
01:55:19.850 --> 01:55:23.510
I'd like to add, as this
industry is maturing, companies

1763
01:55:23.510 --> 01:55:27.440
are getting better at this. For
example, during a recent

1764
01:55:27.440 --> 01:55:31.640
hurricane, or I believe during
fires in California, there were

1765
01:55:31.640 --> 01:55:36.110
companies that proactively
looked at their customer list,

1766
01:55:36.110 --> 01:55:39.800
and saw who was in those
emergencyaffected areas, and

1767
01:55:39.800 --> 01:55:42.770
proactively reached out to those
folks to see if they needed a

1768
01:55:42.770 --> 01:55:43.820
reconciliation.

1769
01:55:44.320 --> 01:55:48.670
Yeah, I can tell you from
experience, during the last

1770
01:55:48.670 --> 01:55:52.780
hurricane, all of our funding
companies sent us an email, as

1771
01:55:52.780 --> 01:55:56.740
well as our merchants, to remind
us and our merchants that

1772
01:55:57.130 --> 01:55:59.950
they're going to withhold
payments, actually stop payments

1773
01:55:59.950 --> 01:56:03.010
for two weeks-- this is
unsolicited-- to give merchants

1774
01:56:03.010 --> 01:56:05.890
a catch-up because they
understood that there was a

1775
01:56:06.340 --> 01:56:09.130
hurricane and a storm going on.
And then the merchants were

1776
01:56:09.130 --> 01:56:12.880
encouraged to contact them again
after the two weeks to resume

1777
01:56:12.880 --> 01:56:16.390
payment. Because we deal with so
many merchants, we also have

1778
01:56:16.390 --> 01:56:20.950
experiences where we have
brokered a financing deal to a

1779
01:56:20.950 --> 01:56:24.430
restaurant. After three weeks of
financing, the restaurant has

1780
01:56:24.430 --> 01:56:27.580
called us, said, hey, the
cleaners next door just had a

1781
01:56:27.580 --> 01:56:30.580
fire, and it shut down half of
my restaurant. My revenue's

1782
01:56:30.580 --> 01:56:34.810
going to drop by 50%. And so we
have then reached out to that

1783
01:56:34.810 --> 01:56:36.880
funding company. That funding
company would then lower those

1784
01:56:36.880 --> 01:56:39.850
payments for that merchant, as
they're supposed to.

1785
01:56:40.420 --> 01:56:43.480
I think it goes back to the
comment I made earlier, about

1786
01:56:43.480 --> 01:56:47.830
think about the product, in a
way, as temporary equity. I

1787
01:56:47.830 --> 01:56:52.810
mean, we really are playing the
role of a partner on a temporary

1788
01:56:52.810 --> 01:56:58.660
basis with this business owner.
And yet we're not getting-- the

1789
01:56:58.660 --> 01:57:02.410
business owner is not having to
give up real long-term equity or

1790
01:57:02.410 --> 01:57:06.460
ownership in it. When Harvey
went through Houston, we had

1791
01:57:06.460 --> 01:57:10.450
several hundred merchants that
were within 100 miles of

1792
01:57:10.450 --> 01:57:14.170
Houston. And we proactively
reached out to them to find out

1793
01:57:14.170 --> 01:57:17.410
how they were impacted by the
storm, and whether or not the

1794
01:57:19.210 --> 01:57:26.830
storm was going to impact their
ability to meet the daily

1795
01:57:26.830 --> 01:57:31.810
remittance that was in the
contract, the percentage. So

1796
01:57:32.740 --> 01:57:36.550
again, a merchant cash advance
as a product isn't necessarily

1797
01:57:36.550 --> 01:57:40.270
going to be the perfect product
for every business owner. But

1798
01:57:40.270 --> 01:57:45.940
for certain types of use cases,
it has an incredibly high

1799
01:57:45.940 --> 01:57:46.390
utility.

1800
01:57:46.870 --> 01:57:49.330
And just to tie it briefly back
to the legal nature of the

1801
01:57:49.330 --> 01:57:52.990
product, the reason that, when
there is a natural disaster, we

1802
01:57:52.990 --> 01:57:56.620
will stop the ACA repayments is
that if there is a natural

1803
01:57:56.620 --> 01:57:59.110
disaster, there are not receipts
being generated by that

1804
01:57:59.110 --> 01:58:01.660
business. And so they have no
obligation, if they are not

1805
01:58:01.660 --> 01:58:05.110
generating receipts, to deliver
anything to us. And so it goes

1806
01:58:05.110 --> 01:58:09.190
back to the difference between a
loan, where if you have a

1807
01:58:09.190 --> 01:58:12.010
natural disaster, or there's a
fire, or a hurricane, or a

1808
01:58:12.010 --> 01:58:15.850
flood, you still have that
repayment obligation. And if you

1809
01:58:15.850 --> 01:58:18.640
do not meet that repayment
obligation, your lender can

1810
01:58:18.640 --> 01:58:22.150
declare you to be in default.
Now I would hope that everyone

1811
01:58:22.150 --> 01:58:25.390
would work together to recognize
that even if they have a loan,

1812
01:58:25.600 --> 01:58:27.430
when there is a natural
disaster, you will need some

1813
01:58:27.430 --> 01:58:31.360
forbearance. But I think it
highlights the legal distinction

1814
01:58:31.360 --> 01:58:36.670
between a purchase of future
receipts and a loan.

1815
01:58:37.120 --> 01:58:38.020
Ami, did you want to jump in?

1816
01:58:38.020 --> 01:58:40.510
Yeah. I think it's important
that, at least from my

1817
01:58:40.510 --> 01:58:44.380
experience and listening to the
thousands of phone calls from

1818
01:58:44.860 --> 01:58:48.760
business owners calling into our
shop over the years, most people

1819
01:58:51.370 --> 01:58:57.160
are calling when they need money
in a rush, more so because the

1820
01:58:57.190 --> 01:59:00.940
city just did the curb cut for
30 days, by your example, and

1821
01:59:00.940 --> 01:59:06.700
they have a problem. I know
people love to talk about the

1822
01:59:06.730 --> 01:59:11.050
inventory to quick buy and those
opportunities. Our experience is

1823
01:59:11.050 --> 01:59:13.180
that it's much more the first
than the latter, that there's

1824
01:59:13.180 --> 01:59:17.200
some short-term crisis going on
that they're trying to get a

1825
01:59:17.200 --> 01:59:21.520
quick fix to. And that's, at
least from our experience, the

1826
01:59:21.520 --> 01:59:27.040
danger of the situation with the
short-term products. It can

1827
01:59:27.280 --> 01:59:32.140
compound the problem for them.
The other thing that I think is

1828
01:59:32.140 --> 01:59:35.830
important to note is that-- we
haven't really talked about it,

1829
01:59:35.920 --> 01:59:39.910
but often the distinction, at
least for the small business

1830
01:59:39.910 --> 01:59:44.770
owner or the consumer between a
direct lender or MCA company and

1831
01:59:44.770 --> 01:59:48.610
a broker is very vague. They
often don't know the difference

1832
01:59:48.610 --> 01:59:52.660
in who they're dealing with. But
if you're in this broker

1833
01:59:52.660 --> 01:59:59.560
business, which we are, and you
broker an SBA loan product, you

1834
01:59:59.560 --> 02:00:03.970
can earn a commission from the
lender of between 1% and 2% of

1835
02:00:03.970 --> 02:00:08.080
the face value of the loan. And
if you are in the business of

1836
02:00:08.080 --> 02:00:14.230
brokering MCAs or short-term
loans, you can earn anywhere

1837
02:00:14.230 --> 02:00:19.990
from 6% to up to 20% of the face
value of that transaction. So

1838
02:00:19.990 --> 02:00:26.920
the economics are really driven
by encouraging people in the

1839
02:00:26.920 --> 02:00:32.770
intermediary space to encourage
people to take the short-term

1840
02:00:32.770 --> 02:00:34.450
loans or advances.

1841
02:00:34.660 --> 02:00:37.690
And that actually transitions us
pretty well to the next topic,

1842
02:00:38.230 --> 02:00:41.860
which is how these products are
marketed, the role of lead

1843
02:00:41.860 --> 02:00:45.070
generators and brokers in the
space, and how merchant cash

1844
02:00:45.070 --> 02:00:47.680
advances are marketed. And I'll
start with Jared on that.

1845
02:00:47.930 --> 02:00:53.210
Sure. So for us at United, we
have taken a digital marketing

1846
02:00:53.210 --> 02:00:59.060
approach. We believe that that
has been beneficial for us, and

1847
02:00:59.060 --> 02:01:03.260
also the safest way to receive a
merchant's information, because

1848
02:01:03.260 --> 02:01:07.550
it's by them giving it to you.
From there, we employ a

1849
02:01:07.550 --> 02:01:10.070
"consultative sale," quote,
unquote, to understand what a

1850
02:01:10.070 --> 02:01:13.190
merchant's needs are, and then
lay out a myriad of options. I

1851
02:01:13.190 --> 02:01:17.270
know that there are popular ways
of marketing in the industry.

1852
02:01:17.270 --> 02:01:21.890
Anecdotally speaking, I've seen
mailers some of the folks on our

1853
02:01:21.890 --> 02:01:29.180
previous panel use. We have seen
messages, both email and text.

1854
02:01:29.810 --> 02:01:34.100
And we have seen dialers. I
think that, depending on how

1855
02:01:34.100 --> 02:01:39.350
you're marketing, it's going to
also depend on the merchant that

1856
02:01:39.350 --> 02:01:41.570
you're going to receive in the
door. And it's the broker or

1857
02:01:41.570 --> 02:01:44.690
funding company's job to then
educate them properly.

1858
02:01:45.380 --> 02:01:49.400
Oftentimes the difference
between our industry and

1859
02:01:49.610 --> 02:01:54.260
another, when we do receive that
commission for making a sale is,

1860
02:01:54.650 --> 02:01:59.870
in the MCA or the funding space,
you are responsible to give that

1861
02:01:59.870 --> 02:02:06.020
commission back if that merchant
does not perform or goes into an

1862
02:02:06.020 --> 02:02:11.120
actual default, up to 90 days
in. Versus an SBA loan or

1863
02:02:11.120 --> 02:02:14.960
something like that, where if
that client does go into actual

1864
02:02:14.960 --> 02:02:18.650
default, you do not have to give
that commission back. And so I

1865
02:02:18.650 --> 02:02:21.890
think that's important. Because
on the broker side and on the

1866
02:02:21.890 --> 02:02:24.290
funding side, we really are
taking a ride with the merchant

1867
02:02:24.290 --> 02:02:25.850
to make sure that the business
succeeds.

1868
02:02:27.400 --> 02:02:30.550
And so there have been some
reports of aggressive and

1869
02:02:30.670 --> 02:02:34.090
deceptive marketing in this
space. Can we hear a little bit

1870
02:02:34.090 --> 02:02:38.860
about some of the tactics you've
seen. Ami, do you want to start

1871
02:02:38.860 --> 02:02:39.280
with that?

1872
02:02:39.970 --> 02:02:43.660
Well, often what we see is
there's hyper-aggressive

1873
02:02:43.750 --> 02:02:50.890
marketing on the renewal. This
is more so, I think, in the loan

1874
02:02:50.890 --> 02:02:53.800
space than the MCA space. I
can't really specifically speak

1875
02:02:53.800 --> 02:03:00.880
to it in the MCA space. Because
they file the UCCs. And then the

1876
02:03:01.120 --> 02:03:06.880
B or C players know that they
can estimate that, in 90 days,

1877
02:03:10.090 --> 02:03:13.120
that merchant is up for renewal.
And that merchant will get

1878
02:03:13.120 --> 02:03:16.480
barraged many times on their
cell phone-- which is somehow on

1879
02:03:16.480 --> 02:03:19.450
the UCC records, which I don't
really understand-- will get

1880
02:03:19.450 --> 02:03:23.950
barraged by phone calls. So if
you take a six-month, short-term

1881
02:03:23.980 --> 02:03:29.800
online loan, you can count on it
that in about 75 days, you're

1882
02:03:29.800 --> 02:03:33.850
going to have-- you phone's
going to nonstop, by dozens and

1883
02:03:33.850 --> 02:03:38.230
dozens of merchants trying to
entice you into double-dipping.

1884
02:03:38.230 --> 02:03:41.800
Which, just to give one note, we
did some work with the

1885
02:03:41.800 --> 02:03:45.220
Responsible Business Lending
Coalition early on, with Funding

1886
02:03:45.220 --> 02:03:47.710
Circle, and Lending Club, and
Opportunity Fund, which

1887
02:03:47.740 --> 02:03:51.190
discourages all the
double-dipping. But you will get

1888
02:03:51.430 --> 02:03:56.710
barraged by shops who are on the
phone, or through email,

1889
02:03:56.710 --> 02:04:00.760
different tactics, trying to get
you to renew. And that's often

1890
02:04:00.760 --> 02:04:02.800
where the process just keeps
going.

1891
02:04:03.310 --> 02:04:06.910
And can you explain what you
mean by the UCC filings for the

1892
02:04:06.910 --> 02:04:08.950
audience who may be unfamiliar
with that.

1893
02:04:09.130 --> 02:04:13.780
I don't think the MCAs do it.
But most short-term online

1894
02:04:13.780 --> 02:04:20.590
lenders will file a UCC, which
is dependent-- whatever position

1895
02:04:20.590 --> 02:04:25.000
they are, they might not be the
first loan, but that means if

1896
02:04:25.000 --> 02:04:28.690
there's a default, they have the
opportunity to come in and seize

1897
02:04:28.690 --> 02:04:34.450
company assets or try to get
company assets. And so that UCC

1898
02:04:34.450 --> 02:04:39.100
filing is a public record. And
so what many of the players in

1899
02:04:39.100 --> 02:04:45.010
the industry do is they will get
all the UCC filings. And they

1900
02:04:45.010 --> 02:04:50.680
have a date on them for many of
the merchants. And they will

1901
02:04:50.710 --> 02:04:53.260
actively use that in their
marketing for renewals.

1902
02:04:53.660 --> 02:04:58.190
Jared, in your experience, is
that a resource that's used for

1903
02:04:58.760 --> 02:04:59.240
marketing?

1904
02:04:59.780 --> 02:05:04.250
It is. And I think, our
experience, we've seen it in a

1905
02:05:04.250 --> 02:05:07.640
multitude of industries. I know
that when you take a piece of

1906
02:05:07.640 --> 02:05:11.360
equipment, there's a UCC file
there. And I know that when you

1907
02:05:11.360 --> 02:05:15.860
do an SBA, there's a UCC file
there. So I think, even

1908
02:05:15.860 --> 02:05:18.650
personally speaking, when I
apply for a credit card and I

1909
02:05:18.650 --> 02:05:22.070
then get five other pieces of
mail from other credit cards. So

1910
02:05:22.070 --> 02:05:25.910
I think there's a trigger effect
in every industry, and

1911
02:05:26.120 --> 02:05:29.450
definitely up to the end user,
in this case being the merchant,

1912
02:05:29.450 --> 02:05:34.550
to be smart about what they're
doing. I will say that if the

1913
02:05:34.640 --> 02:05:38.600
original broker and funding
company do a good job of it, do

1914
02:05:38.600 --> 02:05:41.450
their job in explaining the
different products, most people

1915
02:05:41.450 --> 02:05:42.650
are just ignoring those phone
calls.

1916
02:05:43.530 --> 02:05:47.880
So do you think businesses
understand that the UCC filings

1917
02:05:47.880 --> 02:05:48.720
become public?

1918
02:05:49.230 --> 02:05:55.260
Yeah, I think that the funding
company as well as the broker is

1919
02:05:55.260 --> 02:05:59.070
explaining that to the merchant.
Most merchants that we speak to

1920
02:05:59.070 --> 02:06:02.310
first say, hey, what's a UCC?
And then we go into what it is.

1921
02:06:03.540 --> 02:06:06.990
We will let them know that they
may receive phone calls from

1922
02:06:06.990 --> 02:06:11.010
other folks that want their
business. Because this is how

1923
02:06:11.010 --> 02:06:14.580
some folks do their marketing.
If they trust that we've done a

1924
02:06:14.580 --> 02:06:17.670
great job for them, bring those
offers back to us. If they'd

1925
02:06:17.670 --> 02:06:19.770
like to speak to those people,
they're more than welcome to.

1926
02:06:19.770 --> 02:06:20.520
It's their business.

1927
02:06:21.210 --> 02:06:25.170
And so I want to quantify a
little bit sort of the marketing

1928
02:06:25.170 --> 02:06:30.120
in this space. And I'll bring
Jesse in on this. How many

1929
02:06:30.390 --> 02:06:35.640
brokers or how many ISOs might
an individual funder work with?

1930
02:06:36.630 --> 02:06:44.430
We have about 100 different
brokers. We work with Jard. We

1931
02:06:44.430 --> 02:06:48.720
have a very successful
relationship with Jared. While

1932
02:06:48.720 --> 02:06:53.160
there are approximately 100 that
we do business with-and part of

1933
02:06:53.160 --> 02:06:56.880
the way that we weed out people
like Ami is describing, and

1934
02:06:56.880 --> 02:07:00.720
don't work with them is there is
an application process to become

1935
02:07:01.200 --> 02:07:06.660
an ISO or to broker financing
transactions to us. A broker

1936
02:07:06.660 --> 02:07:10.200
will apply. We will do a
background check on them. We

1937
02:07:10.200 --> 02:07:14.910
will run a clear report on them.
And we will include provisions

1938
02:07:14.910 --> 02:07:20.610
in our ISO or brokering contract
with them that require them to

1939
02:07:20.610 --> 02:07:23.580
not engage in deceptive
marketing, to not engage in

1940
02:07:23.610 --> 02:07:28.140
high-pressure sales tactics. And
if they violate those provisions

1941
02:07:28.140 --> 02:07:31.560
of the contract we will take
their commissions back and we

1942
02:07:31.560 --> 02:07:36.270
will terminate our relationship
with those brokers. Of the 100

1943
02:07:36.300 --> 02:07:41.280
or so that are active with us at
any one time, I'd say 25 to 50

1944
02:07:41.550 --> 02:07:45.510
are most of that portion of our
business. I would add that

1945
02:07:45.630 --> 02:07:51.390
Kapitus also has a significant
direct sales operation. We use

1946
02:07:51.390 --> 02:07:58.290
traditional marketing channels--
online, radio, mailers, so how

1947
02:07:58.290 --> 02:08:01.290
you would see typical financial
products typically marketed in

1948
02:08:01.290 --> 02:08:02.010
other areas.

1949
02:08:02.520 --> 02:08:07.500
Yeah. I would just add in, at
Everest, we work with probably

1950
02:08:07.530 --> 02:08:14.490
several hundred ISOs at any one
time, brokers. But to get signed

1951
02:08:14.490 --> 02:08:18.090
up, they need to go through a
background check. And we're

1952
02:08:18.120 --> 02:08:22.320
routinely monitoring them,
monitoring their behavior. To

1953
02:08:22.320 --> 02:08:25.830
the extent that we get
complaints about how the brokers

1954
02:08:25.830 --> 02:08:31.110
have marketed their product, we
don't hesitate to discontinue

1955
02:08:31.110 --> 02:08:35.160
our relationship with the
broker. So it's definitely

1956
02:08:35.160 --> 02:08:36.120
something we're focused on.

1957
02:08:37.230 --> 02:08:40.980
So I understand there may be
monitoring in response to

1958
02:08:41.640 --> 02:08:44.850
particular complaints. Is there
any sort of proactive monitoring

1959
02:08:44.880 --> 02:08:49.110
to make sure that the outbound
marketing is accurate and is

1960
02:08:49.110 --> 02:08:50.130
clear with consumers?

1961
02:08:51.150 --> 02:08:54.840
We have provisions in our ISO
contracts that allow us to audit

1962
02:08:55.650 --> 02:08:58.830
the marketing and to look at the
marketing materials or how the

1963
02:08:58.830 --> 02:09:06.090
products are being marketed. We
periodically do those. But we

1964
02:09:06.090 --> 02:09:10.560
can't look at everybody every
year. And we generally look to

1965
02:09:10.560 --> 02:09:16.890
see who is claiming that they've
been deceptively marketed to.

1966
02:09:16.950 --> 02:09:19.590
We've had we have isolated
incidents in which there is

1967
02:09:19.590 --> 02:09:23.280
documented misrepresentations as
to the product or the nature of

1968
02:09:23.280 --> 02:09:26.940
the product. And in those cases,
we hold the ISO or broker

1969
02:09:26.940 --> 02:09:31.380
responsible and honor whatever
they said to the customer.

1970
02:09:33.000 --> 02:09:34.230
And Scott, do you want to-

1971
02:09:34.000 --> 02:09:37.540
No, I was just going to add to
that. Yeah, similarly in our

1972
02:09:37.540 --> 02:09:44.350
contract, we've got the right to
audit. We do do spot checks. But

1973
02:09:45.880 --> 02:09:51.490
not every ISO is being monitored
every day. So it is an area that

1974
02:09:52.120 --> 02:09:52.900
needs focus.

1975
02:09:53.050 --> 02:09:57.850
And I would add, Kapitus was
founded in 2006. We've been in

1976
02:09:57.850 --> 02:10:02.290
this space for a very long time.
We have been purchasing future

1977
02:10:02.290 --> 02:10:06.160
receivables for a very long
time. We have a very good sense

1978
02:10:06.190 --> 02:10:11.530
of who the quality brokers are,
and who are the individuals who

1979
02:10:11.530 --> 02:10:15.760
are less reputable. And we don't
do business with people who we

1980
02:10:15.760 --> 02:10:18.280
don't believe are going to
accurately market the products

1981
02:10:18.280 --> 02:10:20.590
to the customer and give them
clear disclosures and a clear

1982
02:10:20.590 --> 02:10:23.410
understanding of the product.
Because we truly want our

1983
02:10:23.410 --> 02:10:26.050
customers to understand the
benefits and drawbacks of the

1984
02:10:26.050 --> 02:10:29.260
different financing options that
are available to them, and to

1985
02:10:29.260 --> 02:10:31.630
understand the product they're
getting into, and to have them

1986
02:10:31.630 --> 02:10:32.170
succeed.

1987
02:10:33.200 --> 02:10:36.980
And just anecdotally, do you
think that other-- not

1988
02:10:36.980 --> 02:10:40.190
necessarily your particular
companies, but other funders in

1989
02:10:40.190 --> 02:10:46.340
this space, are they auditing
and monitoring their marketing

1990
02:10:46.340 --> 02:10:47.210
in similar ways?

1991
02:10:48.710 --> 02:10:52.490
Anecdotally, I have heard that
some funders have less stringent

1992
02:10:52.490 --> 02:10:57.920
requirements for their ISOs or
their brokering companies. I've

1993
02:10:57.920 --> 02:11:03.650
also heard of funders who've
arranged it so that even though

1994
02:11:03.650 --> 02:11:07.970
they are working for the funder,
they're a 1099 independent

1995
02:11:07.970 --> 02:11:12.440
contractor. So they're basically
a bunch of independent ISOs or

1996
02:11:12.440 --> 02:11:17.300
brokers all operating under one
sort of roof, and marketing

1997
02:11:17.300 --> 02:11:21.350
themselves as a funding company
when it's really a collection of

1998
02:11:21.530 --> 02:11:22.310
ISOs.

1999
02:11:25.040 --> 02:11:28.580
So if we can move on to
repayment rests, and some of the

2000
02:11:28.580 --> 02:11:31.190
concerns that we've heard about
things like collections of

2001
02:11:31.190 --> 02:11:31.700
judgment.

2002
02:11:33.140 --> 02:11:36.350
Experts have expressed concern
that the high costs of MCAs can

2003
02:11:36.350 --> 02:11:39.530
be too much for small businesses
to repay. Ami, in your

2004
02:11:39.530 --> 02:11:42.590
experience, can businesses
commonly pay off their MCAs?

2005
02:11:45.450 --> 02:11:50.190
Again, I don't have hard data.
Our experience is anecdotal from

2006
02:11:50.190 --> 02:11:56.970
the people that call us and
enter our shop. And we often see

2007
02:11:57.240 --> 02:12:02.580
experiences where, whether it's
a combination of multiple MCAs

2008
02:12:02.610 --> 02:12:06.990
or short-term online loans, and
they started with what might be

2009
02:12:06.990 --> 02:12:10.950
classified as the A players, and
then they move to the B players,

2010
02:12:11.040 --> 02:12:13.230
and then they move to the C
players, and they stack, and

2011
02:12:13.230 --> 02:12:17.970
they stack, and they stack, and
they stack. And it's too late.

2012
02:12:18.540 --> 02:12:22.890
So now what we're trying to do
is see if we can save their cash

2013
02:12:22.890 --> 02:12:28.380
flow by refinancing all that
stuff into getting, whether it's

2014
02:12:28.380 --> 02:12:33.060
an SBA or maybe a five-year term
loan, and getting their monthly

2015
02:12:33.060 --> 02:12:39.330
payment down. And oftentimes,
it's just an awful feeling.

2016
02:12:39.330 --> 02:12:43.980
Because people will say to us,
that was so enticing, I took it

2017
02:12:43.980 --> 02:12:46.290
once, and then I started
drinking the Kool-Aid and I

2018
02:12:46.290 --> 02:12:52.290
couldn't stop drinking it. And
then there's nothing we can

2019
02:12:52.320 --> 02:12:56.520
possibly do except for
encouraging them to try going to

2020
02:12:56.520 --> 02:13:00.660
work out with their different
vendors or advance companies,

2021
02:13:00.660 --> 02:13:02.970
and trying to work into
arrangements with them. And

2022
02:13:03.420 --> 02:13:09.750
often many of the providers of
capital are not as forgiving as

2023
02:13:09.750 --> 02:13:11.580
these guys here describe
themselves to be.

2024
02:13:12.900 --> 02:13:17.730
I would just add that an MCA has
a cost. There's been this

2025
02:13:17.730 --> 02:13:21.000
assumption that all factoring
agreements or MCAs are high

2026
02:13:21.000 --> 02:13:24.600
costs. The cost of capital for
the select products we offer is

2027
02:13:24.600 --> 02:13:29.400
comparable to some online
lending products. And I just

2028
02:13:29.430 --> 02:13:33.720
want it to be clear that not
every MCA is the type of product

2029
02:13:33.720 --> 02:13:36.780
that Ami is describing or is
offered by the type of person

2030
02:13:37.140 --> 02:13:38.040
that Ami is describing.

2031
02:13:38.040 --> 02:13:43.440
Again, I mean, just to be clear,
in my world, if you look at the

2032
02:13:43.440 --> 02:13:48.810
cost of online capital in terms
of cash flow, and you compare it

2033
02:13:48.810 --> 02:13:55.410
to the cost of a five-year note
or a 10-year note, the

2034
02:13:55.440 --> 02:13:56.940
differences are draconian.

2035
02:13:58.980 --> 02:14:03.990
I think what I've seen with our
merchants and our clients is

2036
02:14:04.170 --> 02:14:08.640
absolutely the ability to repay.
The experiences that we've had

2037
02:14:08.640 --> 02:14:12.810
have been successful. Clients
have used the funding to

2038
02:14:13.260 --> 02:14:16.890
actually grow their business. I
will also mention that it really

2039
02:14:16.890 --> 02:14:20.040
is up to that merchant, once
they receive the funds, to put

2040
02:14:20.040 --> 02:14:24.900
it to good use and actually use
it for the purpose that they

2041
02:14:24.900 --> 02:14:30.840
said. I think that broker shops
like myself, like Ami, we're

2042
02:14:30.840 --> 02:14:34.020
doing a great job at explaining
exactly what the product is, the

2043
02:14:34.020 --> 02:14:38.550
total cost, what the total cost
is monthly, whether that's paid

2044
02:14:38.550 --> 02:14:41.580
back daily, weekly, or
bi-monthly. And there's

2045
02:14:41.580 --> 02:14:46.440
generally a very good
understanding. Anecdotally, I've

2046
02:14:46.440 --> 02:14:50.700
heard that there's a-- and
spoken to merchants that have

2047
02:14:51.630 --> 02:14:56.100
had experiences where had they
have not been able to repay. And

2048
02:14:56.100 --> 02:14:58.620
some of their contracts were not
honored, which is why they're

2049
02:14:58.650 --> 02:15:02.280
back online looking for folks to
help them out. That has not been

2050
02:15:02.280 --> 02:15:04.020
the majority of my experience.

2051
02:15:04.680 --> 02:15:07.500
So in the interest of time, I
want to move ahead to some of

2052
02:15:07.500 --> 02:15:10.560
the collection issues we've
seen, and specifically

2053
02:15:10.560 --> 02:15:14.910
confessions of judgment. There
have been widely-publicized

2054
02:15:14.910 --> 02:15:17.850
reports about the abusive
confessions of judgment to

2055
02:15:17.850 --> 02:15:24.360
collect on MCAs. And I'll start
with Scott, if you could explain

2056
02:15:24.360 --> 02:15:27.510
how a confession of judgment
works.

2057
02:15:27.780 --> 02:15:31.770
Sure. A confession of judgment
is a legal contract that a

2058
02:15:31.800 --> 02:15:36.330
merchant would enter into with a
funder, where they would agree

2059
02:15:37.860 --> 02:15:44.880
ahead of the transaction that on
certain events of default, that

2060
02:15:44.910 --> 02:15:54.000
the funder would be able to go
into court and be able to

2061
02:15:55.980 --> 02:16:02.640
automatically get a judgment
filed against the defaulted

2062
02:16:02.640 --> 02:16:05.610
merchant. Does that kind of
explain.

2063
02:16:05.850 --> 02:16:09.840
It does. How are they being used
to collect on merchant cash

2064
02:16:09.840 --> 02:16:10.380
advances?

2065
02:16:10.480 --> 02:16:16.000
Yeah. And so look, I think the
Confessions of Judgment, COJs,

2066
02:16:16.000 --> 02:16:19.030
as they're referred to, have
gotten a lot of press lately,

2067
02:16:19.690 --> 02:16:22.330
some of the negative press, that
Bloomberg article and so forth.

2068
02:16:23.350 --> 02:16:30.310
We utilize COJs at Everest-- we
choose to only utilize them on

2069
02:16:30.310 --> 02:16:35.680
transactions of $100,000 or
more, which for us is less than

2070
02:16:35.680 --> 02:16:39.760
3% of the transactions that
we're doing. And so it's a

2071
02:16:39.760 --> 02:16:43.000
relatively small percentage of
the business. And then in terms

2072
02:16:43.000 --> 02:16:49.990
of the subset percent of that in
which we're actually enforcing

2073
02:16:49.990 --> 02:16:56.260
it, it's a de minimis amount.
And so I think there's been a

2074
02:16:56.260 --> 02:17:01.540
lot of debate about COJs and
whether or not-- COJs as a legal

2075
02:17:01.540 --> 02:17:04.270
contract, legal instrument, have
been around for hundreds of

2076
02:17:04.270 --> 02:17:09.400
years. MCAs have been around a
relatively short period of time,

2077
02:17:09.400 --> 02:17:13.570
20 years, have really grown
dramatically in the last 10. And

2078
02:17:13.570 --> 02:17:19.270
so I think it's a worthwhile
debate to discuss about the use

2079
02:17:19.270 --> 02:17:23.680
of COJs with a merchant cash
advance and what's that right

2080
02:17:23.680 --> 02:17:29.500
balance. Some of the practices
that were highlighted in the

2081
02:17:29.800 --> 02:17:33.250
Bloomberg articles, and some of
the negative press that's been

2082
02:17:33.610 --> 02:17:39.790
about the use of COJs, I think,
have been not representative of

2083
02:17:39.790 --> 02:17:43.570
how at least companies like
Everest, how we use them,

2084
02:17:44.230 --> 02:17:51.640
relatively sparingly and
responsibly. And so I think it's

2085
02:17:52.300 --> 02:17:56.290
definitely worthy of debate. And
looking at-- and I think there's

2086
02:17:56.770 --> 02:18:00.640
some discussion in New York
about whether or not to ban the

2087
02:18:00.640 --> 02:18:08.950
use of COJs. Or could there be a
different approach like some

2088
02:18:08.950 --> 02:18:12.400
type of guardrails approach
where you'd have a minimum. I

2089
02:18:12.400 --> 02:18:15.940
think Governor Cuomo talked
about a $250,000 minimum. I've

2090
02:18:15.940 --> 02:18:21.790
seen discussions about a $50,000
minimum. And so I think there's

2091
02:18:22.360 --> 02:18:31.210
this debate that can be had
about should a COJ be utilized

2092
02:18:31.240 --> 02:18:40.840
in the construct of an MCA. But
again, I think don't want to

2093
02:18:41.020 --> 02:18:46.030
throw the baby out with the
bathwater. And if it was decided

2094
02:18:46.030 --> 02:18:50.320
that you were to ban the use of
COJs with MCAs, it wouldn't

2095
02:18:50.320 --> 02:18:54.100
really impact our business
dramatically, not very much at

2096
02:18:54.100 --> 02:18:59.680
all. We would, in certain
instances, not advance capital,

2097
02:18:59.980 --> 02:19:03.820
larger advances. And so you just
need to do a cost-benefit

2098
02:19:03.820 --> 02:19:08.740
analysis as to whether or not
that made sense. I know Kate's

2099
02:19:08.770 --> 02:19:09.490
talked about [INAUDIBLE].

2100
02:19:09.520 --> 02:19:10.090
Yeah.

2101
02:19:10.660 --> 02:19:14.590
Kate, in your answer, do you
mind, for folks in the audience

2102
02:19:14.590 --> 02:19:18.520
who may be unfamiliar with
reporting on the way confessions

2103
02:19:18.520 --> 02:19:21.520
of judgment have been used, can
you talk about that a little

2104
02:19:21.520 --> 02:19:21.820
bit.?

2105
02:19:23.610 --> 02:19:29.250
Well, I can't speak to press
reports about the different ways

2106
02:19:29.250 --> 02:19:31.950
that confessions of judgment
have been used, because I'm not

2107
02:19:31.950 --> 02:19:36.570
personally familiar with that. I
only know what I've read. I

2108
02:19:36.570 --> 02:19:39.330
would like to talk about
confessions of judgment. And

2109
02:19:39.450 --> 02:19:41.850
it's helpful to look at the
Federal Trade Commission's

2110
02:19:41.850 --> 02:19:44.670
decision in the '80s, when the
FTC banned the use of

2111
02:19:44.670 --> 02:19:47.100
confessions of judgment in
connection with consumer

2112
02:19:47.100 --> 02:19:50.970
transactions, but determined not
to ban the use of confessions of

2113
02:19:50.970 --> 02:19:54.450
judgment in commercial
transactions. In the FTC's

2114
02:19:54.450 --> 02:19:57.450
statement of basis and purpose
for the Credit Practices Rule,

2115
02:19:57.660 --> 02:20:00.720
the FTC stated that confessions
of judgment were unfair to

2116
02:20:00.720 --> 02:20:03.480
consumers, in part because
consumers cannot reasonably

2117
02:20:03.510 --> 02:20:08.340
avoid signing a contract that
contained a COJ. This is not the

2118
02:20:08.340 --> 02:20:12.660
case in commercial finance
transactions because, typically,

2119
02:20:12.660 --> 02:20:15.990
a small business is represented
by a broker who receives

2120
02:20:15.990 --> 02:20:18.990
multiple offers from competing
financing sources. We've heard

2121
02:20:18.990 --> 02:20:22.830
about that type of competition
today. With a consumer credit

2122
02:20:22.830 --> 02:20:26.220
contract, typically a consumer
is presented with one "take it

2123
02:20:26.220 --> 02:20:30.750
or leave it" offer. In addition,
the FTC concluded that consumers

2124
02:20:30.750 --> 02:20:34.500
were not reasonably able to
avoid default. Because

2125
02:20:34.500 --> 02:20:38.310
frequently, in consumer credit,
a default is caused by something

2126
02:20:38.310 --> 02:20:40.710
that's outside the control of
the consumer. For example, they

2127
02:20:40.710 --> 02:20:43.800
lose their job, they get sick,
and things that they can't

2128
02:20:43.800 --> 02:20:47.940
anticipate and can't control. In
the context of a purchase of

2129
02:20:47.970 --> 02:20:50.790
future receipts, a business
always can control whether there

2130
02:20:50.790 --> 02:20:54.570
is an event of default. Because
again, the obligation to repay

2131
02:20:54.690 --> 02:20:58.950
is tied to the business's actual
revenue. So events of default

2132
02:20:58.980 --> 02:21:02.280
are only specific instances such
as diverting funds into

2133
02:21:02.280 --> 02:21:05.730
different bank accounts. So
there is a distinction between

2134
02:21:05.730 --> 02:21:07.920
the two types of transactions.

2135
02:21:09.120 --> 02:21:13.470
And to your question, I would
add that a lot of the abuses of

2136
02:21:13.470 --> 02:21:17.010
confessions of judgment or their
use were driven by quirks in New

2137
02:21:17.010 --> 02:21:19.980
York law that I know that the
state of New York is taking a

2138
02:21:19.980 --> 02:21:26.460
look at. The way that
confessions are entered in by

2139
02:21:26.460 --> 02:21:29.400
the New York courts is a little
bit different than it is in

2140
02:21:29.400 --> 02:21:35.100
California. And there are fewer
protections to ensure that there

2141
02:21:35.130 --> 02:21:42.600
are protections that prior to
entering into them. For example,

2142
02:21:42.600 --> 02:21:47.940
California requires a wet-signed
or original copy of the

2143
02:21:47.940 --> 02:21:52.110
confession of judgment. New York
will take a fax version of it.

2144
02:21:53.580 --> 02:21:55.950
I can tell you one of the ways
that we've handled it, because

2145
02:21:55.950 --> 02:22:01.050
we're presenting multiple offers
to a merchant often. We are

2146
02:22:01.080 --> 02:22:03.840
explaining what it is. We
actually give them a document

2147
02:22:03.840 --> 02:22:06.600
that has a definition of what it
is so that they're comfortable

2148
02:22:06.600 --> 02:22:11.940
and they understand it. I can
say that 90% to 95% of the

2149
02:22:11.940 --> 02:22:15.990
financing that we are providing
through brokerage to our clients

2150
02:22:15.990 --> 02:22:21.750
do not have them. In times where
there has been high risk, we

2151
02:22:21.750 --> 02:22:25.530
have advised the merchant we
think that this may be an option

2152
02:22:25.530 --> 02:22:29.940
for you. This funding does have
a COJ. Here's what it is. You

2153
02:22:29.940 --> 02:22:32.730
have to be very comfortable with
it before you take it, and then

2154
02:22:32.730 --> 02:22:34.110
ultimately give them the option.

2155
02:22:35.910 --> 02:22:36.780
Ami, do you want to jump in.

2156
02:22:37.170 --> 02:22:38.850
I don't think I know enough
about this.

2157
02:22:39.650 --> 02:22:45.110
So Jesse, I want to get a little
bit more into how the industry

2158
02:22:45.110 --> 02:22:50.090
has responded to the use of
confessions of judgment. The

2159
02:22:50.090 --> 02:22:53.000
Small Business Finance
Association I know is

2160
02:22:53.000 --> 02:22:56.930
considering codes of conduct
relating to the confessions of

2161
02:22:56.930 --> 02:22:58.310
judgment. Can you talk more
about that.

2162
02:23:00.590 --> 02:23:04.400
To be clear, Kapitus does not
require as a condition to

2163
02:23:04.400 --> 02:23:07.940
extending financing that a
merchant enter into a confession

2164
02:23:07.940 --> 02:23:11.720
of judgment, no matter how large
the transaction. We have just

2165
02:23:11.720 --> 02:23:13.880
made a strategic decision to go
in another direction. We

2166
02:23:13.880 --> 02:23:16.310
understand that others believe
that it will improve your

2167
02:23:16.310 --> 02:23:19.070
default rates. That's
inconsistent with the data that

2168
02:23:19.070 --> 02:23:25.700
we've found. Given that these
are primarily used by-- in our

2169
02:23:25.700 --> 02:23:30.320
anecdotal experience, these are
used by companies that may be

2170
02:23:30.320 --> 02:23:33.020
less scrupulous, maybe engaging
in some of the practices that

2171
02:23:33.020 --> 02:23:43.400
Ami has just described. The
SPFA, after we saw the extent of

2172
02:23:43.400 --> 02:23:46.160
the use of confessions of
judgment by those individuals,

2173
02:23:46.550 --> 02:23:51.050
we, as a trade association,
decided to include in our code

2174
02:23:51.050 --> 02:23:55.790
of conduct an explicit ban on
the use of a confession of

2175
02:23:55.790 --> 02:23:58.340
judgment if you're a member of
the Small Business Finance

2176
02:23:58.340 --> 02:24:02.690
Association. I would add that,
part of the reason we don't

2177
02:24:02.690 --> 02:24:06.230
include them is we, in our
underwriting process going back

2178
02:24:06.230 --> 02:24:10.010
to our underwriting, look very
carefully at the amount that the

2179
02:24:10.010 --> 02:24:14.870
merchant can afford to repay.
There are some companies that

2180
02:24:14.870 --> 02:24:17.600
may not be as careful in their
underwriting, and use more

2181
02:24:17.600 --> 02:24:22.280
aggressive collection tactics as
a means of supplementing. And

2182
02:24:22.280 --> 02:24:26.840
it's inconsistent with how
Scott's company uses them, but

2183
02:24:26.840 --> 02:24:28.520
there are some people out there
who will do that.

2184
02:24:29.720 --> 02:24:32.900
I would just comment, in terms
of the instances where we're

2185
02:24:32.900 --> 02:24:36.650
actually trying to utilize or
enforce a confession of

2186
02:24:36.650 --> 02:24:42.590
judgment, it's almost entirely
when we believe the merchant's

2187
02:24:42.620 --> 02:24:49.730
committed fraud. So not in a
situation where their business

2188
02:24:49.730 --> 02:24:55.610
is slowed down or there's some
type of payment issue tied to

2189
02:24:55.610 --> 02:24:58.940
the performance of the business,
but in instances where the

2190
02:24:58.970 --> 02:25:03.950
merchants have diverted funds
into a different account or have

2191
02:25:04.550 --> 02:25:08.930
actually committed fraud, and
again, on large transactions. So

2192
02:25:08.930 --> 02:25:11.840
for us, again, we're only
utilizing them on transactions

2193
02:25:11.840 --> 02:25:17.990
of $100,000 or more. And so I
think a lot of the behavior

2194
02:25:17.990 --> 02:25:23.240
highlighted in the press as of
late, if you were to put a cap

2195
02:25:23.240 --> 02:25:30.200
of $100,000, or $150,000 I think
you would clean up and take care

2196
02:25:30.200 --> 02:25:34.130
of a lot of the bad behavior
that was highlighted in some of

2197
02:25:34.130 --> 02:25:35.540
the recent press articles.

2198
02:25:36.140 --> 02:25:39.080
And I would add that New York
has recently introduced a bill

2199
02:25:39.080 --> 02:25:43.220
that would prohibit taking a
confession of judgment against a

2200
02:25:43.220 --> 02:25:46.280
non-resident. So essentially the
clerks in New York would not be

2201
02:25:46.310 --> 02:25:50.960
able to enter a confession
against a non-resident. So that

2202
02:25:51.680 --> 02:25:55.580
is also, I think, a step toward
reforming some of the unique

2203
02:25:55.580 --> 02:25:59.540
aspects of New York law that
allowed some of the practices

2204
02:25:59.540 --> 02:26:01.910
that were reported to develop.

2205
02:26:02.630 --> 02:26:07.250
So we're closing in on the end
of this session. And I want to

2206
02:26:07.250 --> 02:26:09.980
transition to the next session,
which is going to get more into

2207
02:26:10.940 --> 02:26:14.930
the legal landscape of small
business financing. But just to

2208
02:26:14.930 --> 02:26:20.000
touch on it briefly here, as you
all know, while the FTC Act

2209
02:26:20.000 --> 02:26:22.670
applies to the marketing and
provision of merchant cash

2210
02:26:22.670 --> 02:26:27.200
advances, some courts have found
that other laws may not, for

2211
02:26:27.200 --> 02:26:31.880
example, to the extent that MCAs
are held not to be loans. State

2212
02:26:31.880 --> 02:26:35.300
usury laws or licensing
requirements typically wouldn't

2213
02:26:35.300 --> 02:26:38.630
apply. Kate, is that something
you could speak to? What are the

2214
02:26:38.630 --> 02:26:42.320
legal ramifications of MCAs not
being considered loans by

2215
02:26:42.320 --> 02:26:43.070
certain courts.

2216
02:26:43.100 --> 02:26:48.830
Sure. You're right that a
properly-constructed merchant

2217
02:26:48.830 --> 02:26:51.980
cash advance is not a loan, it's
a purchase and sale in courts,

2218
02:26:51.980 --> 02:26:55.640
and particularly in New York.
But there's a growing body of

2219
02:26:55.640 --> 02:26:57.860
law all over the country to
recognize the distinction

2220
02:26:57.860 --> 02:27:02.150
between a purchase of future
receivables and a loan. There

2221
02:27:02.150 --> 02:27:06.110
are a lot of consumer protection
laws that do apply to these

2222
02:27:06.110 --> 02:27:09.020
transactions, of course, as you
mentioned, the FTC is a powerful

2223
02:27:09.020 --> 02:27:13.460
authority to prevent unfair or
deceptive acts and practices. At

2224
02:27:13.460 --> 02:27:15.920
the federal level, there's the
Fair Credit Reporting Act and

2225
02:27:15.920 --> 02:27:20.600
Regulation V. This protects
individuals and requires

2226
02:27:20.990 --> 02:27:23.900
permissible purpose to pull up a
consumer credit report for a

2227
02:27:23.900 --> 02:27:28.760
sole proprietor or an individual
guarantor of a business. Also

2228
02:27:28.760 --> 02:27:35.480
the FCRA requires a user to
provide notice to an individual

2229
02:27:35.480 --> 02:27:38.960
if it takes an adverse action on
the basis of information

2230
02:27:38.960 --> 02:27:42.380
contained in a consumer credit
report. The Servicemembers Civil

2231
02:27:42.380 --> 02:27:45.230
Relief Act applies to sole
proprietors and individual

2232
02:27:45.230 --> 02:27:48.260
guarantors. The Telephone
Consumer Protection Act and the

2233
02:27:48.290 --> 02:27:52.280
CAN-SPAM Act apply. For loans,
the Equal Credit Opportunity Act

2234
02:27:52.280 --> 02:27:57.410
applies. And states are starting
to regulate this industry. As

2235
02:27:57.410 --> 02:28:00.110
you said, it's a distinct
industry from business lending.

2236
02:28:00.380 --> 02:28:03.980
California recently passed a law
requiring merchant cash advance

2237
02:28:03.980 --> 02:28:07.640
transactions, factoring, and
loans to provide certain

2238
02:28:07.640 --> 02:28:11.570
disclosures on their contracts,
and other states are considering

2239
02:28:11.570 --> 02:28:16.010
similar legislation. So I would
expect to see state laws

2240
02:28:16.010 --> 02:28:18.890
continue in this trend,
particularly in disclosure laws.

2241
02:28:18.000 --> 02:28:23.850
And I would only add that
Kapitus is committed to

2242
02:28:23.850 --> 02:28:26.340
complying with the laws in all
50 states and the District of

2243
02:28:26.340 --> 02:28:30.570
Columbia, where we do business.
And we structure our financing

2244
02:28:30.570 --> 02:28:33.120
products to comply with the laws
in all of those states. I know

2245
02:28:33.120 --> 02:28:36.330
that there is an alternate
regulatory model that allows a

2246
02:28:36.330 --> 02:28:40.350
partnership with a bank. The
bank will originate the loan,

2247
02:28:40.380 --> 02:28:42.510
which will allow the
exploitation of that interest

2248
02:28:42.510 --> 02:28:49.440
rate as a way of avoiding the
caps on lending that are imposed

2249
02:28:49.440 --> 02:28:53.520
under certain state law. So I
don't think that a structuring

2250
02:28:53.520 --> 02:28:57.180
the transactions of purchase and
sale transaction is a different

2251
02:28:57.180 --> 02:29:00.450
legal way of getting to the same
result, which is to provide

2252
02:29:01.470 --> 02:29:05.610
capital at the appropriate cost
to address the higher-risk

2253
02:29:05.610 --> 02:29:08.460
nature of small businesses.
Because while there are many

2254
02:29:08.460 --> 02:29:11.250
success stories in small
business lending, small

2255
02:29:11.250 --> 02:29:14.610
businesses do go out of-- not
everybody succeeds. Not

2256
02:29:14.610 --> 02:29:22.950
everybody becomes a tech CEO. Or
to use another example, the

2257
02:29:24.420 --> 02:29:31.440
individual who ended up with-the
Caspers. Not everybody who

2258
02:29:31.440 --> 02:29:33.810
succeeds. A lot of them fail.
And you have to price credit

2259
02:29:33.810 --> 02:29:37.440
appropriate to the risk. And I
think structuring the

2260
02:29:37.440 --> 02:29:40.020
transaction as a purchase and
sale transaction of receivables

2261
02:29:40.020 --> 02:29:44.130
is the same way as getting to
what a bank partnership does.

2262
02:29:44.880 --> 02:29:49.620
Right. Well, we are actually
heading for a break. So thank

2263
02:29:49.620 --> 02:29:52.110
you all for participating. This
has been a great panel. And

2264
02:29:52.290 --> 02:29:54.900
we'll break now before the third
panel.

2265
02:29:55.020 --> 02:29:56.340
Thanks for having us. [APPLAUSE]

2266
02:29:56.000 --> 02:30:10.820
If everyone can go ahead and get
seated, I think we'll kick off

2267
02:30:10.820 --> 02:30:12.470
panel 3 in just a moment.

2268
02:30:20.940 --> 02:30:24.750
Great, let me introduce myself
first. I'm Sandhya Brown. I also

2269
02:30:24.750 --> 02:30:27.360
go by Sandy. I'm an assistant
director in the Division of

2270
02:30:27.360 --> 02:30:30.270
Financial Practices. I'm going
to be one of the moderators for

2271
02:30:30.270 --> 02:30:34.320
panel 3. I'll go and introduce
my co-moderator, my DFP

2272
02:30:34.320 --> 02:30:39.150
colleague, Evan Zullow. So we're
excited for this third and last

2273
02:30:39.150 --> 02:30:42.210
panel. We're going to be
covering consumer protection

2274
02:30:42.210 --> 02:30:46.080
risks in the small business
financing space. Having heard

2275
02:30:46.080 --> 02:30:49.860
from the first two panels
generally about the multitude of

2276
02:30:49.860 --> 02:30:52.320
products that are available to
small businesses who have

2277
02:30:52.320 --> 02:30:55.710
financing needs, and then
hearing sort of a specific deep

2278
02:30:55.710 --> 02:30:59.520
dive into one particular
product, merchant cash advances,

2279
02:30:59.910 --> 02:31:04.650
hopefully now is our opportunity
to talk about specific risks to

2280
02:31:04.920 --> 02:31:08.010
the small business owners who
are on the hunt for financing.

2281
02:31:08.250 --> 02:31:11.190
So some of the topics that I'm
hoping we'll be able to cover in

2282
02:31:11.190 --> 02:31:14.640
this next 75 minutes include
whether or not small business

2283
02:31:14.640 --> 02:31:18.000
borrowers are getting the
information that they need to

2284
02:31:18.000 --> 02:31:22.530
get products that suit their
needs, the legal landscape and

2285
02:31:22.740 --> 02:31:28.500
self-regulatory efforts in this
space, concerns about brokering

2286
02:31:28.500 --> 02:31:33.690
practices, or privacy and data
security concerns, and lastly

2287
02:31:33.690 --> 02:31:37.530
we'll also hit upon the efforts
that have been undertaken to

2288
02:31:37.530 --> 02:31:41.850
educate small business
borrowers. So before we get into

2289
02:31:41.850 --> 02:31:47.010
our discussion, let me briefly
introduce our panelists. I will

2290
02:31:47.010 --> 02:31:50.730
let them also speak to their own
bios in the context of answering

2291
02:31:50.730 --> 02:31:53.700
certain questions. But in the
interest of getting into the

2292
02:31:53.700 --> 02:31:57.600
substance, I will just go ahead
and give you names, and titles,

2293
02:31:57.600 --> 02:32:01.920
and organizations. So
immediately to our left is

2294
02:32:01.920 --> 02:32:05.610
Ky-Nam Miller. He's program
director of the California

2295
02:32:05.610 --> 02:32:10.650
Reinvestment Coalition. Next to
him is Bernardo Martinez. He's

2296
02:32:10.650 --> 02:32:15.930
US managing director of Funding
Circle. Next to him is Barbara

2297
02:32:15.930 --> 02:32:20.100
Lipman. She's project manager in
the division of consumer and

2298
02:32:20.100 --> 02:32:24.240
community affairs with the
Federal Reserve Board. Next to

2299
02:32:24.240 --> 02:32:28.920
Barbara is John Arensmeyer. He's
founder and CEO of Small

2300
02:32:28.920 --> 02:32:34.560
Business Majority. And next to
Bernardo is Christin Spradley.

2301
02:32:34.650 --> 02:32:38.910
She's head of policy and a
senior associate general counsel

2302
02:32:38.910 --> 02:32:43.980
with OnDeck. And lastly, at the
end is Sheri McConville she's a

2303
02:32:43.980 --> 02:32:47.070
supervisory program analyst with
the Small Business

2304
02:32:47.070 --> 02:32:51.150
Administration. OK, so and thank
you to our panelists for

2305
02:32:51.150 --> 02:32:55.830
participating today. So we'll
get right into it. And just as a

2306
02:32:55.830 --> 02:32:59.520
matter of logistics, to the
extent any of our panelists

2307
02:32:59.520 --> 02:33:03.540
wants to jump in on a question,
just kind of raise your finger,

2308
02:33:03.600 --> 02:33:06.300
and we'll note that is a signal
that you want to be called on.

2309
02:33:06.870 --> 02:33:11.850
OK, so let's start by exploring
what, if any, key information is

2310
02:33:11.850 --> 02:33:14.850
made available to small business
owners when they're shopping for

2311
02:33:14.850 --> 02:33:18.180
financial products. So what I'd
like to hear the panelists talk

2312
02:33:18.180 --> 02:33:21.690
about specifically is, in the
current marketplace, i.e. as

2313
02:33:21.690 --> 02:33:25.890
things stand today, what
information are small business

2314
02:33:25.890 --> 02:33:29.520
lenders typically providing
about their products? Are they

2315
02:33:29.520 --> 02:33:33.390
telling small business consumers
about interest rates, costs, and

2316
02:33:33.390 --> 02:33:37.500
other key terms? And is there
any uniformity in the kind of

2317
02:33:37.500 --> 02:33:40.290
information that's coming to
small business borrowers?

2318
02:33:43.290 --> 02:33:46.710
I mean, I think, in generally
speaking terms, what you see in

2319
02:33:46.710 --> 02:33:50.490
the marketplace is that there is
not really a good uniformity in

2320
02:33:50.490 --> 02:33:52.140
the different products that are
in the marketplace. And

2321
02:33:52.140 --> 02:33:55.710
therefore there's different
elements that people are showing

2322
02:33:55.710 --> 02:33:59.070
up. And actually what it creates
is actually some confusion with

2323
02:33:59.070 --> 02:34:03.600
the small business owners when
they're looking for products. So

2324
02:34:03.840 --> 02:34:06.570
in our case specifically, we are
pretty transparent. We have been

2325
02:34:06.570 --> 02:34:09.630
a leading an effort on trying to
create responsible business

2326
02:34:09.900 --> 02:34:14.160
terms for small business owners.
So we show APRs, the terms, the

2327
02:34:14.160 --> 02:34:17.850
monthly payments that they have.
But there is definitely an

2328
02:34:17.850 --> 02:34:22.350
opportunity for the industry to
create a broader coalition to

2329
02:34:22.350 --> 02:34:25.470
create uniformity so people can
compare the different products

2330
02:34:25.590 --> 02:34:26.520
in a similar way.

2331
02:34:27.630 --> 02:34:28.950
Great, Barbara.

2332
02:34:29.710 --> 02:34:32.890
Hi. And I have to start-- I'm
sorry-- with the disclaimer that

2333
02:34:32.890 --> 02:34:37.060
the views here are my own and
not necessarily those of the

2334
02:34:37.060 --> 02:34:40.540
Board of Governors of the
Federal Reserve System. So I'd

2335
02:34:40.540 --> 02:34:43.570
like to try to tackle that
question from the point of view

2336
02:34:43.600 --> 02:34:48.940
of small businesses that we've
been contacting through a series

2337
02:34:48.940 --> 02:34:53.320
of online focus groups. So as
you know, small business owners

2338
02:34:53.320 --> 02:34:56.380
are notoriously difficult to
reach. They're busy running

2339
02:34:56.380 --> 02:34:59.980
their businesses. So we thought
the best way to get to them was

2340
02:34:59.980 --> 02:35:04.660
through an online format. And
we've been contacting small

2341
02:35:04.660 --> 02:35:09.130
businesses with fewer than 20
employees and less than $2

2342
02:35:09.130 --> 02:35:11.980
million in revenues, and
generally talking to the

2343
02:35:11.980 --> 02:35:16.420
financial decision-makers. The
great thing about this format is

2344
02:35:16.420 --> 02:35:20.020
that we're able to have the
small business owners go out and

2345
02:35:20.020 --> 02:35:24.340
pretend to shop for credit
online lenders. And we're also

2346
02:35:24.340 --> 02:35:29.260
able to have them evaluate mock
products based on real products

2347
02:35:29.290 --> 02:35:32.950
out in the marketplace. So when
we asked them to pretend to

2348
02:35:32.950 --> 02:35:37.960
shop, they told us what was on
their shopping list, and it was

2349
02:35:37.960 --> 02:35:41.410
of course finding out about
costs and in terms, and what the

2350
02:35:41.410 --> 02:35:46.510
application process would be
like, and what information they

2351
02:35:46.510 --> 02:35:50.410
needed to supply, and how long
it would take for a decision.

2352
02:35:51.670 --> 02:35:54.310
But what they were telling us is
that it's very difficult

2353
02:35:54.310 --> 02:35:57.700
sometimes, depending on the
particular lender, to find even

2354
02:35:57.700 --> 02:36:01.690
some basic information. So of
course there's wide variation,

2355
02:36:01.690 --> 02:36:04.810
and that speaks to the diversity
of products that are out there

2356
02:36:04.810 --> 02:36:07.840
in the marketplace, which I
think we agree is generally a

2357
02:36:07.840 --> 02:36:13.060
good thing. But some of the
Lenders are very explicit about

2358
02:36:13.060 --> 02:36:17.170
their costs and fees and what's
involved. Others however,

2359
02:36:17.170 --> 02:36:21.640
require a visitor to the website
to enter personal or business

2360
02:36:21.640 --> 02:36:24.850
information before they find out
even the basics about the

2361
02:36:24.850 --> 02:36:29.650
products. So that's something
that's problematic for them. On

2362
02:36:29.650 --> 02:36:33.370
the other hand, finding out how
quickly they'll get a decision,

2363
02:36:34.030 --> 02:36:39.310
that's something that's usually
touted upfront in the website.

2364
02:36:39.310 --> 02:36:43.660
So it really varies depending on
the lender, the type of product

2365
02:36:43.660 --> 02:36:47.050
offered, and the type of
information that the small

2366
02:36:47.050 --> 02:36:48.610
businesses are looking for.

2367
02:36:50.830 --> 02:36:52.120
Christin or John?

2368
02:36:52.270 --> 02:36:56.050
Yeah. I would second everything
Barbara said. There's a wide

2369
02:36:56.050 --> 02:36:59.710
variety of products out there.
And at the end of the day--

2370
02:36:59.710 --> 02:37:02.920
well, first I want to make the
point that we hear, all the

2371
02:37:02.920 --> 02:37:07.000
time, gee, why do we need to
worry about this, because these

2372
02:37:07.000 --> 02:37:09.610
are business people, and they're
sophisticated, it's not the same

2373
02:37:09.610 --> 02:37:14.020
thing as the consumer. The
reality is that, unless a

2374
02:37:14.020 --> 02:37:18.190
business is large enough to have
controller or a head of

2375
02:37:18.190 --> 02:37:22.990
accounting, they are no more
sophisticated than the average

2376
02:37:23.020 --> 02:37:26.140
consumer. They may know about
their business, they may know

2377
02:37:26.140 --> 02:37:28.510
about dry cleaning, they may
know about running a restaurant,

2378
02:37:28.510 --> 02:37:31.630
they may know about graphic
design, whatever they're doing.

2379
02:37:31.870 --> 02:37:34.270
They are not any more
sophisticated than the average

2380
02:37:34.270 --> 02:37:39.940
person. So it's very confusing.
They don't get consistent

2381
02:37:39.940 --> 02:37:45.220
information. There aren't
standards out there for them to

2382
02:37:45.220 --> 02:37:51.370
compare. And even this question
of whether a merchant cash

2383
02:37:51.370 --> 02:37:53.170
advance is a loan or not, I
mean, to the average small

2384
02:37:53.170 --> 02:37:55.930
business owner, everything is a
loan. They're borrowing money in

2385
02:37:55.930 --> 02:38:00.070
some form. So these kind of
legal distinctions are fairly

2386
02:38:00.100 --> 02:38:05.290
meaningless to them. And right
now, it is pretty much the Wild

2387
02:38:05.290 --> 02:38:08.980
West in terms of any information
they can get. And obviously

2388
02:38:09.010 --> 02:38:12.310
we'll talk more about this as we
go forward. But there's a need

2389
02:38:12.310 --> 02:38:14.500
for consistency and
transparency.

2390
02:38:16.510 --> 02:38:20.320
Did Christin Sheri want to chime
in? I apologize, I can't see you

2391
02:38:20.320 --> 02:38:23.290
clearly, so I can't tell when
you're raising your hand.

2392
02:38:23.710 --> 02:38:27.160
No, I mean, I think not much to
add that hasn't already been

2393
02:38:27.160 --> 02:38:32.260
said. I mean, I think that it in
addition to kind of some of the

2394
02:38:32.260 --> 02:38:36.130
efforts that we've seen to
improve the transparency around

2395
02:38:36.520 --> 02:38:40.510
disclosure of pricing and cost
in terms, I think that Barbara's

2396
02:38:40.510 --> 02:38:44.590
report in particular highlighted
that's not the entire story. You

2397
02:38:44.590 --> 02:38:47.830
also need to be thinking about
when is that information made

2398
02:38:47.830 --> 02:38:51.490
available, how clear are you on
the minimum qualifications for

2399
02:38:51.490 --> 02:38:54.220
your loan, when are you
communicating that information,

2400
02:38:54.340 --> 02:38:58.960
are you able to provide ranges
of prices or some of the terms

2401
02:38:58.960 --> 02:39:01.870
on your website and in all of
your marketing materials? So I

2402
02:39:01.870 --> 02:39:04.960
think it's not just kind of,
once you have a specific offer

2403
02:39:04.960 --> 02:39:08.260
in hand, what are the terms of
your offer, but also making sure

2404
02:39:08.260 --> 02:39:11.080
that businesses are able to
access some of that information

2405
02:39:11.110 --> 02:39:13.690
earlier in the process. I think
that's an important piece of it,

2406
02:39:13.690 --> 02:39:15.760
and it's certainly something
that we've heard from customers

2407
02:39:15.820 --> 02:39:16.270
a lot.

2408
02:39:16.630 --> 02:39:19.240
I'd love for our panel to talk a
little bit more specifically on

2409
02:39:19.240 --> 02:39:23.500
that point Christin, about when
business consumers are getting

2410
02:39:23.500 --> 02:39:26.680
the kind of information they
might need in order to shop

2411
02:39:26.710 --> 02:39:31.330
between products. I've heard
from Barbara and you mentioning

2412
02:39:31.330 --> 02:39:34.510
the importance of being able to
do that up front. Is that not

2413
02:39:34.510 --> 02:39:35.290
happening now?

2414
02:39:36.820 --> 02:39:40.000
I think that there is a tension
between what are you able to

2415
02:39:40.000 --> 02:39:43.720
provide upfront, prior to
underwriting, and what do you

2416
02:39:43.720 --> 02:39:46.150
need to have gone through sort
of a full underwriting process

2417
02:39:46.150 --> 02:39:49.420
to be able to provide. I think
that there have been some good

2418
02:39:49.420 --> 02:39:52.210
efforts in the industry to kind
of try and pull the information

2419
02:39:52.210 --> 02:39:56.050
forward in the process. But I
don't know that everybody has

2420
02:39:56.050 --> 02:39:59.500
gotten there yet. I certainly
know that, just from the

2421
02:39:59.500 --> 02:40:02.290
perspective of somebody, if I'm
looking for credit, I want to

2422
02:40:02.290 --> 02:40:05.920
get a sense of at least what the
profile or the bucket is of the

2423
02:40:05.920 --> 02:40:10.510
types of ranges I could expect.
But then the challenge for our

2424
02:40:10.510 --> 02:40:14.290
company that's providing it is
you also want to avoid, at all

2425
02:40:14.290 --> 02:40:16.810
costs, kind of the
bait-and-switch of providing

2426
02:40:16.810 --> 02:40:20.470
them with a range, and then
having them not fall within that

2427
02:40:20.470 --> 02:40:24.940
range. And I think that tension,
what can you provide prior to

2428
02:40:24.940 --> 02:40:28.210
underwriting, it's probably one
of the biggest pain points for

2429
02:40:28.210 --> 02:40:29.590
the industry and for customers.

2430
02:40:30.460 --> 02:40:31.840
Anyone else have thoughts?
Barbara?

2431
02:40:32.080 --> 02:40:37.390
Yeah, I'd just like to add that,
generally, to John's point, the

2432
02:40:38.290 --> 02:40:41.410
smallest small business owners
are somewhat consumer-like in

2433
02:40:41.410 --> 02:40:45.790
their approach to financing. And
some of the products are

2434
02:40:45.790 --> 02:40:50.860
actually different than typical
consumer products. And one of

2435
02:40:50.860 --> 02:40:55.660
the areas that they find
confusing is the repayment

2436
02:40:55.720 --> 02:40:59.620
terms. So for instance, a number
of products are structured such

2437
02:40:59.620 --> 02:41:03.520
that there's a total amount that
you need to repay, and you owe

2438
02:41:03.520 --> 02:41:06.700
that amount whether you pay it
in a week, or a month, or a

2439
02:41:06.700 --> 02:41:11.290
year. So when we showed a sample
product like that to our online

2440
02:41:11.290 --> 02:41:16.270
focus group and said, OK, you
pay out of, say, daily sales,

2441
02:41:16.300 --> 02:41:20.740
what's the impact of paying more
quickly if your sales are

2442
02:41:20.740 --> 02:41:24.850
higher. And generally the answer
was, well, I'm going to save

2443
02:41:24.850 --> 02:41:29.740
money. But that's not how the
product is structured. So I

2444
02:41:29.740 --> 02:41:33.910
think information like that is
important to convey to small

2445
02:41:33.910 --> 02:41:36.430
business owners, or at least
they're telling us that's the

2446
02:41:36.430 --> 02:41:38.380
sort of thing they need to know
up front.

2447
02:41:39.490 --> 02:41:41.290
Ky-Nam, I think you had a point.

2448
02:41:41.740 --> 02:41:46.240
Yeah, I'll just piggyback on
Barbara's comments about-- the

2449
02:41:46.480 --> 02:41:50.620
products are different, but the
consumer is the same in many

2450
02:41:50.620 --> 02:41:54.820
cases. The California
Reinvestment Coalition, we're a

2451
02:41:54.820 --> 02:41:58.270
300-member org. And a lot of our
folks, our members on the

2452
02:41:58.270 --> 02:42:01.450
ground, are entrepreneurs of
color, single proprietors

2453
02:42:01.450 --> 02:42:04.960
without employees. And they're
going out into this market with

2454
02:42:04.960 --> 02:42:08.950
the same sophistication-- which
is to say, not a lot-- as they'd

2455
02:42:08.950 --> 02:42:12.550
have if they're seeking a
regular consumer personal loan.

2456
02:42:13.300 --> 02:42:17.170
And the lens that they look at
this world through is, well,

2457
02:42:17.170 --> 02:42:22.300
what's the interest rate? And
they might be aware of APR, but

2458
02:42:22.300 --> 02:42:25.330
that's not what's always
disclosed to them in this

2459
02:42:25.390 --> 02:42:29.170
ecosystem we're describing this
morning. It's not even a

2460
02:42:29.170 --> 02:42:33.610
question of kind of apples to
apples or apples to oranges.

2461
02:42:33.610 --> 02:42:36.130
There's all these different
gradations of apples. And they

2462
02:42:36.130 --> 02:42:39.370
might not understand a factor
rate or a simple interest rate

2463
02:42:39.520 --> 02:42:42.280
is not the same apple that what
they see in the personal world.

2464
02:42:42.280 --> 02:42:45.700
So you have this incongruity
between the protections that

2465
02:42:45.700 --> 02:42:49.330
we've put in place for regular
Joe consumers and those same

2466
02:42:49.330 --> 02:42:51.910
folks who are turning around and
get trying to get cash flow for

2467
02:42:51.910 --> 02:42:56.620
their business. So I think, from
the consumer perspective, that's

2468
02:42:56.650 --> 02:43:01.120
the big challenge. And it's an
acute challenge on the emergent

2469
02:43:01.120 --> 02:43:05.200
majority of Americans that we
see in California, who are

2470
02:43:05.230 --> 02:43:09.610
majority of color, many limited
English proficient, coming from

2471
02:43:09.610 --> 02:43:14.290
a diversity of backgrounds. And
so the system we have in place

2472
02:43:14.290 --> 02:43:17.260
federally is not protecting
those folks adequately.

2473
02:43:18.640 --> 02:43:19.000
John.

2474
02:43:19.300 --> 02:43:22.900
Yeah. I think, fairly simply,
there is a question of math

2475
02:43:22.900 --> 02:43:27.790
also. I mean, most people when
you say an interest rate, you

2476
02:43:27.790 --> 02:43:32.710
assume annual, generally assume
APR if you're comparing it to

2477
02:43:32.710 --> 02:43:35.560
other kinds of loans you've
gotten. And so when you start

2478
02:43:35.560 --> 02:43:39.850
tossing around rates that are
monthly or different periods of

2479
02:43:39.850 --> 02:43:44.530
time, it's very difficult for
consumers and of course the

2480
02:43:44.530 --> 02:43:47.260
average small business owner to
understand that that's not an

2481
02:43:47.260 --> 02:43:51.730
annual rate. And if they hear
10%, and it's a month, or even

2482
02:43:51.730 --> 02:43:55.420
two months, it's not the same
thing as an annual 10% rate. And

2483
02:43:56.380 --> 02:44:02.500
there's a lack of transparency
as to exactly what the rate is.

2484
02:44:02.500 --> 02:44:05.650
Now, it may be that it's
perfectly OK for the business to

2485
02:44:05.650 --> 02:44:09.640
take a short-term loan for what
essentially would be a pretty

2486
02:44:09.640 --> 02:44:13.270
high APR. So we're not saying
that's not the case. But they

2487
02:44:13.270 --> 02:44:16.600
don't even begin to understand
the difference between that rate

2488
02:44:16.600 --> 02:44:19.600
and-- they might see that same
number connected to an annual

2489
02:44:19.600 --> 02:44:21.850
product and not understand the
difference.

2490
02:44:22.960 --> 02:44:23.440
Bernardo.

2491
02:44:23.500 --> 02:44:25.930
I think one point that is
important I've heard here. And

2492
02:44:25.930 --> 02:44:27.850
we've talked about small
business owners are not

2493
02:44:27.850 --> 02:44:29.440
sophisticated. I would say,
actually, they are

2494
02:44:29.440 --> 02:44:32.020
sophisticated. I think the
question is they don't really

2495
02:44:32.020 --> 02:44:35.620
have time. They're hiring
people, they're running their

2496
02:44:35.620 --> 02:44:39.250
show, they're trying to do
multiple things. They lack time.

2497
02:44:40.030 --> 02:44:42.520
When you look at small business
owners' surveys, what they

2498
02:44:42.520 --> 02:44:46.840
really lack is time. And what is
not really in the industry right

2499
02:44:46.840 --> 02:44:49.990
now is a clear uniformity
process that can actually

2500
02:44:49.990 --> 02:44:52.690
quickly compare products. And
that's what I think we're

2501
02:44:52.690 --> 02:44:55.750
advocating. I think us and
Funding Circle, we believe that

2502
02:44:55.750 --> 02:44:58.360
uniformity will allow the
customer and the small business

2503
02:44:58.360 --> 02:45:01.690
owner to really quickly assess
what is a right choice of

2504
02:45:01.690 --> 02:45:04.120
product based on what the needs
they're trying to solve. If

2505
02:45:04.120 --> 02:45:07.390
they're trying to do a quick
financing because they're going

2506
02:45:07.390 --> 02:45:10.540
to buy an inventory, maybe a
shortterm loan makes total

2507
02:45:10.540 --> 02:45:14.410
sense. But if you're going to do
an expansion of your house or

2508
02:45:14.410 --> 02:45:18.790
the property because you're
growing too much, maybe a

2509
02:45:18.790 --> 02:45:21.850
long-term loan with an
installment monthly payment

2510
02:45:21.850 --> 02:45:24.730
maybe is the right choice for
you. So I think that's the

2511
02:45:24.730 --> 02:45:28.090
clarity that I think we, as an
industry, we need to advocate is

2512
02:45:28.090 --> 02:45:31.480
that uniformity, how we can
measure the different products,

2513
02:45:31.480 --> 02:45:35.200
and they can really assess, this
is the right one for me, and

2514
02:45:35.200 --> 02:45:37.840
this is not, and therefore they
can assess that. But I actually

2515
02:45:38.440 --> 02:45:40.810
will defer from the other
panelists, that they are

2516
02:45:41.590 --> 02:45:44.890
sophisticated, and it's just
time that they're lacking to

2517
02:45:44.890 --> 02:45:48.850
really assess that because they
have other things to achieve in

2518
02:45:48.850 --> 02:45:49.180
their day-to-day.

2519
02:45:49.450 --> 02:45:52.540
I appreciate that distinction. I
think it's helpful. And I'm

2520
02:45:52.540 --> 02:45:55.450
going to use it to piggyback
into this next question. So

2521
02:45:55.600 --> 02:45:58.150
let's maybe set aside the
question of sophistication, per

2522
02:45:58.150 --> 02:46:03.610
se. And instead, I think it was
suggested, perhaps, on the first

2523
02:46:03.610 --> 02:46:07.540
couple panels, at least by some
panelists, that the small

2524
02:46:07.540 --> 02:46:09.520
business owners who are
interested in financing are

2525
02:46:09.520 --> 02:46:15.730
actually welleducated, and they
are going into the selection of

2526
02:46:15.730 --> 02:46:19.510
a particular product eyes wide
open, recognizing the costs and

2527
02:46:19.510 --> 02:46:23.350
benefits of that product versus
another. I'd be curious to hear

2528
02:46:23.350 --> 02:46:27.790
whether or not this set of
panelists agrees with that idea,

2529
02:46:27.790 --> 02:46:30.400
that when a small business owner
is selecting a particular

2530
02:46:30.400 --> 02:46:32.950
product, they do truly
understand what they're getting.

2531
02:46:33.620 --> 02:46:36.710
I guess I would push back on
that a little bit. And of course

2532
02:46:36.710 --> 02:46:41.000
there's a range here. I mean,
obviously there's a few that are

2533
02:46:41.030 --> 02:46:44.150
very sophisticated, and have
accountants, or they're big

2534
02:46:44.150 --> 02:46:46.340
enough they've got somebody
full-time who can explain it to

2535
02:46:46.340 --> 02:46:50.210
them. And then you've got what
Bernardo was saying-- yes, you

2536
02:46:50.210 --> 02:46:53.180
have business owners that are
maybe more sophisticated than

2537
02:46:53.180 --> 02:46:57.590
the average person, and they
don't have time, and they don't

2538
02:46:57.590 --> 02:47:00.080
have someone sitting there. They
haven't taken the time unless

2539
02:47:00.080 --> 02:47:02.840
someone's sitting there laying
out the options for them. But to

2540
02:47:02.840 --> 02:47:07.220
pick up on what Ky-Nam said,
there are a lot of perfectly

2541
02:47:07.220 --> 02:47:09.590
bright, and they know their
product, but they're not

2542
02:47:09.590 --> 02:47:12.110
financially sophisticated.
They're not even in the

2543
02:47:12.110 --> 02:47:15.530
categories that Bernardo was
talking about. And a lot of

2544
02:47:15.530 --> 02:47:19.310
these are entrepreneurs in
underserved communities,

2545
02:47:19.340 --> 02:47:23.870
entrepreneurs of color. And they
may be immigrants. They may not

2546
02:47:23.870 --> 02:47:30.170
be fully conversant with
English. So I think we need to

2547
02:47:30.170 --> 02:47:32.120
understand there's a spectrum
here. But there are a large

2548
02:47:32.120 --> 02:47:34.940
number of people that fall on
the unsophisticated end of the

2549
02:47:34.940 --> 02:47:39.380
spectrum. I don't think you can
say that all of them are

2550
02:47:39.380 --> 02:47:41.270
sophisticated as some, they
don't have the time.

2551
02:47:43.190 --> 02:47:45.890
I don't want to carry on the
sophistication line too much.

2552
02:47:45.890 --> 02:47:48.830
Just to say that this is not
about people's underlying

2553
02:47:48.830 --> 02:47:52.340
intelligence or abilities. I
think a more kind of interesting

2554
02:47:52.340 --> 02:47:54.890
perspective of this is how
sophisticated is the system in

2555
02:47:54.890 --> 02:47:57.230
meeting the needs of the
consumers who are actually

2556
02:47:57.230 --> 02:48:01.940
there. The question of, do we
have an even playing field,

2557
02:48:02.060 --> 02:48:05.090
which to me is characterized by
transparency and disclosure,

2558
02:48:05.570 --> 02:48:08.150
that's not the case. That's not
what people are operating in

2559
02:48:08.150 --> 02:48:12.950
today. It's more like a
slaughterhouse. It's dark, and

2560
02:48:12.950 --> 02:48:16.280
you don't know what's coming at
you, and you can be harmed by

2561
02:48:16.280 --> 02:48:20.150
the products out there. So
sunlight and disclosure and

2562
02:48:20.150 --> 02:48:21.830
transparency is the remedy to
that.

2563
02:48:23.000 --> 02:48:23.480
Barbara?

2564
02:48:24.290 --> 02:48:27.890
Yes. So in our focus group, as I
mentioned, we displayed some

2565
02:48:27.890 --> 02:48:32.630
mock products based on actual
products. If you just ask small

2566
02:48:32.630 --> 02:48:35.870
business owners, do you think
it's easy or difficult to

2567
02:48:35.870 --> 02:48:40.460
compare these products, they
generally say, easy, because

2568
02:48:40.460 --> 02:48:43.070
they're the financial
decision-maker, and they feel

2569
02:48:43.070 --> 02:48:47.180
like, yes, it's easy. But when
you probe and ask specific

2570
02:48:47.180 --> 02:48:50.240
questions to test their
understanding of the products--

2571
02:48:50.240 --> 02:48:54.770
is product A cheaper than
product B, is product B cheaper

2572
02:48:54.770 --> 02:48:59.240
than getting something from your
credit card, then they're not

2573
02:48:59.240 --> 02:49:04.250
answering correctly, they're not
sure. In some cases, when we

2574
02:49:04.250 --> 02:49:07.640
asked, what do you think the
interest rate is on a product,

2575
02:49:07.790 --> 02:49:12.860
it varied from 10% to over 50%.
So when you really probe for

2576
02:49:12.860 --> 02:49:18.470
specifics, it turns out, well,
I'm not so sure actually. So I

2577
02:49:18.470 --> 02:49:21.770
think you have to go beyond, is
it simple or easy, and really

2578
02:49:21.830 --> 02:49:24.380
talk about what we've been
talking about here- what's

2579
02:49:24.380 --> 02:49:28.370
actually being provided, and how
do we make it easy for folks to

2580
02:49:28.370 --> 02:49:29.030
compare?

2581
02:49:29.690 --> 02:49:32.030
And I think that's a critical
point at the end of the day, how

2582
02:49:32.030 --> 02:49:35.510
we educate the small business
owner to compare those choices

2583
02:49:36.290 --> 02:49:40.340
in a simpler way that basically
puts a level playing field for

2584
02:49:40.340 --> 02:49:43.760
all the products, that each
product will have benefits, and

2585
02:49:43.760 --> 02:49:47.540
that may be tailored for that
small business owner. But I

2586
02:49:47.540 --> 02:49:50.960
think it's important that the
critical objective of policy

2587
02:49:50.960 --> 02:49:54.200
should be around creating that
uniformity that basically

2588
02:49:54.200 --> 02:49:56.840
enables that access and
understanding across all

2589
02:49:56.840 --> 02:49:59.420
products, so basically they can
have the choices.

2590
02:49:59.420 --> 02:50:04.340
I just want to make sure I'm not
missing anyone. OK, let's

2591
02:50:04.340 --> 02:50:08.480
actually use that to segue to my
next question, which is going to

2592
02:50:08.480 --> 02:50:14.090
be about what small business
financing companies should be

2593
02:50:14.090 --> 02:50:17.300
offering by way of information
that will allow consumers to

2594
02:50:17.300 --> 02:50:22.430
comparison shop. So as an
example, one thing when we do

2595
02:50:22.610 --> 02:50:27.110
education for consumers, we tell
consumers, an easy metric to

2596
02:50:27.110 --> 02:50:31.160
look for when you are shopping
for a loan is an APR. We've

2597
02:50:31.160 --> 02:50:35.450
obviously heard-and perhaps many
of you will concur-- that an APR

2598
02:50:35.450 --> 02:50:39.770
may or may not be a feasible
metric to use for comparison

2599
02:50:39.770 --> 02:50:43.820
shopping. But what kinds of
information could be provided,

2600
02:50:43.820 --> 02:50:46.430
and is there any type of
metric-- something like total

2601
02:50:46.430 --> 02:50:51.170
cost of capital-- that could be
offered as a way for small

2602
02:50:51.170 --> 02:50:54.170
business owners to comparison
shop for products? Christin.

2603
02:50:54.780 --> 02:50:59.490
Sure. So I know we'll dive in a
little more depth in the future.

2604
02:50:59.490 --> 02:51:04.740
But one of the things that we
found was that there was this

2605
02:51:04.740 --> 02:51:07.530
sort of-- people were not
necessarily speaking the same

2606
02:51:07.530 --> 02:51:09.630
language. You were getting
quoted different metrics, and it

2607
02:51:09.630 --> 02:51:13.110
wasn't even clear if one
person's calculation of a rate

2608
02:51:13.110 --> 02:51:16.920
was the same as someone else's.
And so a couple of years back,

2609
02:51:17.700 --> 02:51:20.280
OnDeck, as one of the members of
a trade group called the

2610
02:51:20.280 --> 02:51:23.100
Innovative Lending Platform
Association, actually thought,

2611
02:51:23.370 --> 02:51:26.280
let's ask that question of small
business stakeholders. If you're

2612
02:51:26.280 --> 02:51:30.210
going to look for capital, what
do you want and need to know? I

2613
02:51:30.210 --> 02:51:34.020
think the results of those
surveys, almost 600 small

2614
02:51:34.020 --> 02:51:36.930
business stakeholders was
there's probably not a single

2615
02:51:36.930 --> 02:51:41.370
bullet, but definitely there
should be a floor of some basic

2616
02:51:41.370 --> 02:51:44.430
metrics that are really helpful
to compare that are kind of

2617
02:51:44.460 --> 02:51:48.030
product-agnostic, don't
necessarily favor one or the

2618
02:51:48.030 --> 02:51:51.120
other, because I know there's
the dynamic of, is it

2619
02:51:51.360 --> 02:51:54.450
short-term, is it long-term, is
it a purchase and sale

2620
02:51:54.450 --> 02:51:57.570
transaction, versus a term loan,
versus a revolving line. And

2621
02:51:57.570 --> 02:52:00.060
there's definitely differences
between those. But some of the

2622
02:52:00.060 --> 02:52:04.440
metrics that came out at the top
of that survey that we conducted

2623
02:52:04.440 --> 02:52:08.460
were APR-- I think that that's a
very useful one, especially

2624
02:52:09.000 --> 02:52:11.070
considering that many small
businesses, when they're

2625
02:52:11.070 --> 02:52:13.710
approaching a company like
OnDeck, are also potentially

2626
02:52:13.710 --> 02:52:15.960
looking at credit cards, and
that's typically the way that

2627
02:52:15.960 --> 02:52:20.490
those are quoted. We also found
that the total cost metric was

2628
02:52:20.490 --> 02:52:22.950
another useful one, because a
lot of businesses do think about

2629
02:52:22.950 --> 02:52:26.670
their financing in terms of kind
of dollars in, dollars out. And

2630
02:52:26.670 --> 02:52:29.880
that ROI-driven aspect of it
also made it useful for them to

2631
02:52:29.880 --> 02:52:33.540
see that it's going to cost me x
amount to borrow this amount of

2632
02:52:33.540 --> 02:52:35.880
money, and I'll be able to
return, is that a good deal for

2633
02:52:35.880 --> 02:52:39.720
me? Another metric that we found
useful that made it into kind of

2634
02:52:39.720 --> 02:52:42.930
the top four was an average
monthly payment. And I think

2635
02:52:42.930 --> 02:52:46.470
that's because a lot of payments
run on monthly cycles for

2636
02:52:46.470 --> 02:52:49.020
businesses, so they're used to
thinking about, how much am I

2637
02:52:49.020 --> 02:52:52.230
bringing in a month, how much
could I afford to have go out

2638
02:52:52.230 --> 02:52:55.170
the door in a month? And then
the final one that we found

2639
02:52:55.170 --> 02:53:00.300
useful but to be honest was kind
of a distant fourth was a

2640
02:53:00.300 --> 02:53:04.020
cents-on-dollar metric, where
for every dollar you borrow, how

2641
02:53:04.020 --> 02:53:07.260
much are you going to pay in
fees, again, kind of an

2642
02:53:07.290 --> 02:53:10.050
ROI-driven way to think about
it. But those were four of the

2643
02:53:10.050 --> 02:53:12.630
metrics that stuck out to us
when businesses are thinking

2644
02:53:12.630 --> 02:53:13.440
about pricing.

2645
02:53:15.060 --> 02:53:16.590
Anyone else want to jump in?
Barbara?

2646
02:53:16.650 --> 02:53:22.290
Yeah. Actually we got remarkably
similar results in our focus

2647
02:53:22.290 --> 02:53:26.820
group. We showed folks a sample
disclosure box. It had APR, it

2648
02:53:26.820 --> 02:53:32.040
had cost of capital, it had fees
broken out separately, it had

2649
02:53:32.220 --> 02:53:37.470
payment amounts, cents on the
dollar. And most-- like the APR,

2650
02:53:37.980 --> 02:53:41.550
they're familiar with it. They
know what a good rate is when it

2651
02:53:41.550 --> 02:53:46.620
comes to an APR. But some of
them liked the cost of capital

2652
02:53:46.620 --> 02:53:50.700
and the fees, especially when
spelled out. And then we also

2653
02:53:50.700 --> 02:53:53.730
asked them, well, what's
missing, what wasn't in the box

2654
02:53:53.730 --> 02:53:59.790
that we showed them. They wanted
more details-- what happens if

2655
02:53:59.790 --> 02:54:04.500
they pay late? They wanted more
details about repayment, not

2656
02:54:04.500 --> 02:54:08.490
just whether or not there'd be
savings, but how much savings

2657
02:54:08.490 --> 02:54:13.170
they would have. And then some
were interested in knowing who

2658
02:54:13.170 --> 02:54:16.590
has control over the payments.
And I think that's getting to

2659
02:54:16.590 --> 02:54:21.750
the idea of if you have portions
taken out of your cash flow

2660
02:54:21.750 --> 02:54:26.160
automatically, and you have an
emergency, say the roof leaks,

2661
02:54:27.000 --> 02:54:30.090
do you have control over that
cash flow. So they want to know

2662
02:54:30.090 --> 02:54:34.950
more details about the mechanics
of how the payments are made.

2663
02:54:36.210 --> 02:54:36.690
Ky-Nam.

2664
02:54:36.750 --> 02:54:39.690
So we really think the gold
standard for this is the

2665
02:54:39.690 --> 02:54:42.030
Responsible Business Lending
Coalition's Borrowers Bill of

2666
02:54:42.030 --> 02:54:44.730
Rights. You can find it at
borrowersbillofrights.org. So

2667
02:54:44.730 --> 02:54:47.670
there's seven elements, with
some of them mentioned here. But

2668
02:54:47.670 --> 02:54:52.260
the financing amount, the APR or
estimated APR, the payment

2669
02:54:52.260 --> 02:54:55.980
amount and frequency term, or
estimated term in the case of

2670
02:54:55.980 --> 02:54:59.280
variable term financing, all
upfront and scheduled charges

2671
02:54:59.280 --> 02:55:02.160
listed with dollar amounts,
prepayment charges, and any

2672
02:55:02.160 --> 02:55:03.240
collateral requirements.

2673
02:55:05.010 --> 02:55:07.500
And I know we're going to be
talking a little bit more about

2674
02:55:07.500 --> 02:55:10.380
that effort and some other
self-regulatory efforts as well.

2675
02:55:11.400 --> 02:55:14.280
I'd like to shift down to
talking a little bit about the

2676
02:55:14.280 --> 02:55:19.350
legal backdrop against which
these transactions and

2677
02:55:19.350 --> 02:55:24.420
consumers' decision-making is
taking place. So everyone from

2678
02:55:24.480 --> 02:55:27.960
Commissioner Chopra, who kicked
off our event, to panelists on

2679
02:55:27.960 --> 02:55:31.770
the first two panels mentioned--
and I will reiterate here-- the

2680
02:55:31.770 --> 02:55:37.230
FTC Act, which prohibits unfair
or deceptive practices. It does

2681
02:55:37.230 --> 02:55:42.150
apply to non-bank small business
lending. But it is often the

2682
02:55:42.150 --> 02:55:48.720
case that other protective
statutes in this space do not

2683
02:55:48.750 --> 02:55:53.070
provide coverage for small
business owners. One example is

2684
02:55:53.220 --> 02:55:56.100
the Truth in Lending Act, TILA.
So I'd like to hear from our

2685
02:55:56.100 --> 02:56:00.030
panelists about what the
ramifications are for perhaps

2686
02:56:00.030 --> 02:56:05.430
some of this lack of coverage to
small business owners. Bernardo.

2687
02:56:05.490 --> 02:56:08.040
Well, I think one of the things
we have done actually in

2688
02:56:08.040 --> 02:56:10.080
partnership with Lending Club
and Opportunity Fund is actually

2689
02:56:10.080 --> 02:56:12.780
being proactive about it. And
actually we partnered with the

2690
02:56:12.780 --> 02:56:15.990
state in California, and passed
this [INAUDIBLE] small business

2691
02:56:16.530 --> 02:56:20.820
truth in lending to try to
really kind of make an effort to

2692
02:56:20.820 --> 02:56:24.360
create a standard on how small
business lending should look

2693
02:56:24.360 --> 02:56:27.210
like. And again, it goes back to
my first statement at the

2694
02:56:27.210 --> 02:56:29.760
beginning, it's really about
uniformity. We truly believe

2695
02:56:29.760 --> 02:56:32.670
that that's going to create that
stand to helps us create,

2696
02:56:32.820 --> 02:56:36.960
nationally, a process by which
small business owners can

2697
02:56:36.960 --> 02:56:39.960
actually compare and conduct
their business and access

2698
02:56:39.960 --> 02:56:44.550
capital. So that's what we have
done. So we move from just being

2699
02:56:44.580 --> 02:56:46.980
a victim of the issue, and
trying to be proactive with the

2700
02:56:46.980 --> 02:56:49.830
state of California. And we will
continue to work and partner

2701
02:56:49.830 --> 02:56:52.710
with companies like OnDeck and
anyone else who wanted to

2702
02:56:52.710 --> 02:56:55.980
continue to pursue those efforts
in other states. Because we

2703
02:56:55.980 --> 02:56:59.070
truly believe that having that
national framework or state

2704
02:56:59.070 --> 02:57:01.290
framework will help the small
business owners.

2705
02:57:01.710 --> 02:57:02.370
Christin.

2706
02:57:03.030 --> 02:57:07.140
Yeah, I agree with all of that.
And to your question of kind of

2707
02:57:07.140 --> 02:57:11.190
what is the ramification for
small business owners that TILA

2708
02:57:11.190 --> 02:57:14.430
doesn't apply, I think it's
exactly what we've all been

2709
02:57:14.430 --> 02:57:16.590
highlighting, which is you just
see a real divergence of

2710
02:57:16.590 --> 02:57:20.730
practice. And I think it's not
just about what is disclosed,

2711
02:57:20.730 --> 02:57:25.020
but also how is it disclosed and
when is it disclosed. And

2712
02:57:25.230 --> 02:57:28.890
frankly, in an ecosystem like
ours that has a lot of different

2713
02:57:29.190 --> 02:57:31.680
referral relationships, and
brokering relationships, and

2714
02:57:31.680 --> 02:57:35.910
lead generation, it's also who
is disclosing it. And I think

2715
02:57:35.910 --> 02:57:41.730
that the impact without that
standardization has been one

2716
02:57:41.730 --> 02:57:44.760
that the companies on this
panel, I think, been proactive

2717
02:57:44.760 --> 02:57:48.750
on. I think we had initially
hoped, when we were working on

2718
02:57:48.750 --> 02:57:53.190
the SMART Box initiative back in
2016 that self-regulatory

2719
02:57:53.190 --> 02:57:57.060
measures would be enough. But I
think that the trend that we're

2720
02:57:57.060 --> 02:58:00.690
seeing now is that policymakers
have suggested it may need to go

2721
02:58:00.690 --> 02:58:03.930
further. There may need to be
some sort of codification to

2722
02:58:03.930 --> 02:58:08.160
actually bring some of the more
reluctant actors into the fold.

2723
02:58:09.030 --> 02:58:12.180
So I think that's been the
outcome that we've seen. I think

2724
02:58:12.570 --> 02:58:15.630
without TILA, there's definitely
some players who have been

2725
02:58:15.630 --> 02:58:19.200
trying to make progress. But
policymakers, particularly at

2726
02:58:19.200 --> 02:58:22.980
the state level at the moment,
are starting to kind of turn

2727
02:58:22.980 --> 02:58:26.460
those self-regulatory efforts
into something that is

2728
02:58:26.460 --> 02:58:30.270
regulated. And I think that's a
really useful tool for those who

2729
02:58:30.270 --> 02:58:32.070
maybe haven't been at the
forefront of some of the

2730
02:58:32.070 --> 02:58:32.670
efforts.

2731
02:58:32.820 --> 02:58:33.420
John..

2732
02:58:33.930 --> 02:58:36.210
Yeah, I just want to second
what's already been said. I

2733
02:58:36.210 --> 02:58:40.800
mean, there's a potpourri of
tools out there now. We do

2734
02:58:40.800 --> 02:58:44.010
believe that there's a role for
the FTC, under the Deceptive

2735
02:58:44.010 --> 02:58:46.200
Practices Act-- Unfair and
Deceptive Practices Act,

2736
02:58:46.200 --> 02:58:52.170
absolutely. And people have even
made an argument that, well, you

2737
02:58:52.170 --> 02:58:54.420
can sort of say that small
business owners are actually

2738
02:58:54.420 --> 02:58:57.240
like consumers. But there is no
reason we should have to go

2739
02:58:57.240 --> 02:59:00.120
through those-- I mean, we still
think the FTC should do

2740
02:59:00.120 --> 02:59:03.120
everything they can in this
area. Don't get me wrong. But we

2741
02:59:03.120 --> 02:59:06.600
shouldn't just rely on the fact
there may be a couple pieces out

2742
02:59:06.600 --> 02:59:09.240
there. Or if you're originating
through a bank, then there's

2743
02:59:09.240 --> 02:59:16.770
bank regulation. So to second
what Christin was saying, we

2744
02:59:16.770 --> 02:59:20.070
need a standard. Now, obviously
we would love to see a federal

2745
02:59:20.070 --> 02:59:24.000
standard. And there is interest.
There's been some conversations

2746
02:59:24.540 --> 02:59:28.710
trying to move that forward.
Obviously, absent that, we've

2747
02:59:28.710 --> 02:59:32.280
been very active in the states.
We were working with Funding

2748
02:59:32.280 --> 02:59:35.370
Circle, and Opportunity Fund,
and Lending Club and others. We

2749
02:59:35.370 --> 02:59:38.760
were very active in getting the
California truth in lending bill

2750
02:59:38.760 --> 02:59:41.670
passed last year. There are now
bills in New Jersey and New

2751
02:59:41.670 --> 02:59:44.490
York, there's talk in other
states, and that's great, and

2752
02:59:44.490 --> 02:59:46.500
we're all going to continue to
do that. But at the end of the

2753
02:59:46.500 --> 02:59:52.680
day, this shouldn't have to be
piecemeal. Ultimately, we really

2754
02:59:52.680 --> 02:59:56.700
want to have one standard that
everybody can rely on. And

2755
02:59:56.700 --> 02:59:59.550
again, we're not talking here--
this is just one piece of the

2756
02:59:59.550 --> 03:00:02.490
problem, transparency. And we're
just talking about transparency

2757
03:00:02.490 --> 03:00:07.260
here. And we're not saying that
you can't make any of these

2758
03:00:07.260 --> 03:00:09.870
loans, you can't put any of
these products on the market,

2759
03:00:10.170 --> 03:00:13.620
we're just saying we need to
have a set of standards so that

2760
03:00:13.620 --> 03:00:15.300
small business owners can
understand what they're getting.

2761
03:00:16.470 --> 03:00:20.940
And I'd be curious to hear from
other panelists about the

2762
03:00:20.940 --> 03:00:27.630
tension or sufficiency between
the federal laws that cover

2763
03:00:27.630 --> 03:00:32.460
these issues, state laws, and
self-regulatory efforts. Do any

2764
03:00:32.460 --> 03:00:36.540
of you have feelings that one
or-- that some of those are

2765
03:00:36.540 --> 03:00:39.390
sufficient, versus the need for
something more.

2766
03:00:41.160 --> 03:00:45.180
I live in California, and I've
got my biases for SB 1235 and

2767
03:00:45.180 --> 03:00:50.160
the TILA that we've got there.
Maybe it's even a little step

2768
03:00:50.160 --> 03:00:52.260
better than what's going on in
Jersey in New York. But I think

2769
03:00:52.260 --> 03:00:56.460
I've got to take a closer look
at those. But there's been an

2770
03:00:56.460 --> 03:01:00.120
advocation. We need it
federally. We had some tools at

2771
03:01:00.120 --> 03:01:04.170
the CFDB and with the section
1070. And that just hasn't been

2772
03:01:04.170 --> 03:01:08.370
applied by this administration.
So in this void at the federal

2773
03:01:08.370 --> 03:01:12.360
level, which ideally the FTC
could step up under UDAP and do

2774
03:01:12.360 --> 03:01:16.380
enforcement. State governments
and legislatures are the only

2775
03:01:16.380 --> 03:01:19.080
game in town right now. But we
also have to be doing the seed

2776
03:01:19.080 --> 03:01:25.110
work and working with
consumer-friendly legislators to

2777
03:01:25.140 --> 03:01:30.120
put forth the market legislation
so that when the climate is more

2778
03:01:30.120 --> 03:01:34.050
appropriate here in DC, we have
a small business TILA ready to

2779
03:01:34.050 --> 03:01:34.350
go.

2780
03:01:35.520 --> 03:01:36.510
Anyone else? Christin.

2781
03:01:37.080 --> 03:01:39.600
Yeah, I would just add maybe
taking a step back from

2782
03:01:39.600 --> 03:01:42.510
transparency for a moment, and
looking at some of the other

2783
03:01:42.510 --> 03:01:46.830
regimes. Maybe not surprising
from the perspective of an

2784
03:01:46.830 --> 03:01:51.060
industry player, but we'd love
to see standardization. I think

2785
03:01:51.060 --> 03:01:54.510
that the challenge for us is,
currently, even as a non-bank,

2786
03:01:54.510 --> 03:01:57.510
we're still subject to
information security laws,

2787
03:01:57.510 --> 03:02:01.080
privacy, fair lending,
anti-discrimination, fair sales

2788
03:02:01.080 --> 03:02:03.840
and marketing practices,
anti-money-laundering, and

2789
03:02:03.840 --> 03:02:06.060
sanctions screening, and
licensing, and interest rate

2790
03:02:06.060 --> 03:02:08.850
caps. And when we have 50
different versions of all of

2791
03:02:08.850 --> 03:02:12.060
those, it really becomes a
challenge because the goalposts

2792
03:02:12.060 --> 03:02:17.130
are just moving on the field. So
I think the slight preference is

2793
03:02:17.130 --> 03:02:20.250
not sort of-- I don't have an
innate preference for federal

2794
03:02:20.250 --> 03:02:24.330
versus state solutions on any of
these. But I do think that some

2795
03:02:24.330 --> 03:02:28.020
of the efforts to standardize or
harmonize those practices across

2796
03:02:28.020 --> 03:02:30.720
the states would be much
appreciated, just as somebody

2797
03:02:30.720 --> 03:02:35.700
who's trying to comply. So that
would be our preference, not

2798
03:02:35.700 --> 03:02:38.580
kind of inherently favor of one
or the other, but something

2799
03:02:38.580 --> 03:02:41.850
that's certain and that's fairly
harmonized.

2800
03:02:42.810 --> 03:02:46.650
Right. So actually, Ky-Nam,
since you happened to mention

2801
03:02:46.650 --> 03:02:49.320
it, could you describe a little
bit about the California

2802
03:02:49.320 --> 03:02:51.630
legislation and the protection
that it offers.

2803
03:02:52.110 --> 03:02:55.170
Sure. I invite my colleagues to
also join. I think they had a

2804
03:02:55.170 --> 03:02:58.140
more substantial role in it. But
I think what's remarkable about

2805
03:02:58.140 --> 03:03:04.230
it is that it was really the
product of a diverse coalition

2806
03:03:04.290 --> 03:03:09.360
of fintech, CDFIs. We have a
300-member, the California

2807
03:03:09.360 --> 03:03:12.720
Reinvestment Coalition, Green
Lightning Coalition is another

2808
03:03:12.720 --> 03:03:19.470
50 members. And it was the
product of a large

2809
03:03:19.980 --> 03:03:25.200
people-ofcolor coalition
partnering with new chairs in

2810
03:03:25.200 --> 03:03:29.190
the banking committee on the
state legislature to put forth

2811
03:03:29.190 --> 03:03:34.620
really unprecedented bills and
public policy. So I think when

2812
03:03:34.620 --> 03:03:37.860
you have coalitions like that,
you get good policies. So Yeah,

2813
03:03:37.860 --> 03:03:40.680
I'd invite you to add on to what
the substance of it was.

2814
03:03:40.710 --> 03:03:45.060
No, I would-- it was a great
coalition. And one of the things

2815
03:03:45.450 --> 03:03:47.520
we've really been excited
about-- and we're a founding

2816
03:03:47.520 --> 03:03:50.340
member of the Responsible
Business Lending Coalition, who

2817
03:03:50.850 --> 03:03:54.210
created the Borrowers Bill of
Rights, who said, unlike a lot

2818
03:03:54.210 --> 03:03:56.580
of other situations that we deal
with in a small business

2819
03:03:56.580 --> 03:03:58.920
advocacy organization, we're
actually able to partner with

2820
03:03:58.920 --> 03:04:02.670
industry members, with CDFIs
like Opportunity Fund and

2821
03:04:02.700 --> 03:04:07.410
Accion, with fintechs like
Funding Circle, Lending Club.

2822
03:04:08.220 --> 03:04:14.310
And we're able to sort of go--
what happened in California was

2823
03:04:14.340 --> 03:04:18.210
going to the legislature and
saying, this is not just a

2824
03:04:18.210 --> 03:04:20.340
consumer point of view, the
industry really wants this.

2825
03:04:20.340 --> 03:04:24.060
Industry wants standards,
industry wants transparency. And

2826
03:04:24.510 --> 03:04:27.240
so that was very powerful. And I
think we I think we can

2827
03:04:27.240 --> 03:04:32.460
replicate that elsewhere. And
yeah, I mean, there were a set

2828
03:04:32.460 --> 03:04:38.520
of standards around rates, and
terms, and total cost of

2829
03:04:38.520 --> 03:04:42.360
capital. And the details are
being worked out at the

2830
03:04:42.360 --> 03:04:44.850
regulatory level at the
Department of Business Oversight

2831
03:04:44.850 --> 03:04:49.770
in California now. So I mean, I
would agree, we ultimately

2832
03:04:49.770 --> 03:04:54.060
want-- we'd love to have a
national standard. Now, if

2833
03:04:54.120 --> 03:04:56.310
you've got a pretty strong state
standard, you don't want that to

2834
03:04:56.310 --> 03:04:59.070
preempt-- you don't want a
weaker national standard to

2835
03:04:59.070 --> 03:05:01.800
preempt a stronger state
standard. So that's always going

2836
03:05:01.800 --> 03:05:05.310
to be an issue. But I'd be the
first to agree, Christin that

2837
03:05:06.240 --> 03:05:10.050
having 50 different standards is
probably not ideal. That said,

2838
03:05:10.110 --> 03:05:12.210
all of us who are interested in
this are going to keep working

2839
03:05:12.210 --> 03:05:15.270
at the state level. Because I
think, as somebody else said

2840
03:05:15.270 --> 03:05:18.600
here, that's kind of where the
biggest opportunity is now. And

2841
03:05:18.960 --> 03:05:22.320
that may then spark an effort at
the federal level to deal with

2842
03:05:22.320 --> 03:05:22.590
us.

2843
03:05:23.010 --> 03:05:26.460
John-- or maybe others, too, who
worked on the California

2844
03:05:26.460 --> 03:05:30.390
legislation-- could you talk a
little bit about-- there's a lot

2845
03:05:30.390 --> 03:05:33.840
of discussion about consensus,
which is great that you were

2846
03:05:33.840 --> 03:05:35.940
able to achieve that in
connection with that law. But

2847
03:05:36.210 --> 03:05:39.900
what was sort of the pressure
points in terms of metrics to be

2848
03:05:39.900 --> 03:05:43.830
disclosed? And what were the
lines of that debate?

2849
03:05:44.110 --> 03:05:46.870
Well, ultimately the biggest
debate was around whether you

2850
03:05:46.870 --> 03:05:50.500
could use APR. And that actually
has not been completely

2851
03:05:50.530 --> 03:05:53.470
resolved. That's being resolved
at a regulatory level. And we

2852
03:05:53.470 --> 03:05:57.820
wish it had been resolved
legislatively, but we were happy

2853
03:05:57.820 --> 03:06:01.990
that we got everything we did in
the bill. And there's some

2854
03:06:02.020 --> 03:06:04.690
legitimate questions about
certain types of products, MCA

2855
03:06:04.690 --> 03:06:08.230
products in particular, about
calculating APR. We think it's

2856
03:06:08.230 --> 03:06:10.630
possible. We think, because it
is the gold standard, that's

2857
03:06:10.630 --> 03:06:13.510
what everybody compares, that we
need to figure it out, whether

2858
03:06:13.510 --> 03:06:19.540
you're basing it on the history
of the way the MCAs have

2859
03:06:19.540 --> 03:06:21.970
operated or how they're
calculating their return.

2860
03:06:22.480 --> 03:06:25.840
There's definitely ways to do
it. And that was probably the

2861
03:06:25.840 --> 03:06:27.910
single biggest-- I mean
initially, it was just kind of

2862
03:06:27.910 --> 03:06:30.970
everybody sort of getting
together and figuring it out.

2863
03:06:30.970 --> 03:06:35.590
But at the end, that that became
the biggest area of debate. And

2864
03:06:35.890 --> 03:06:40.390
it got resolved by being kicked
to the Department of Business

2865
03:06:40.390 --> 03:06:40.900
Oversight.

2866
03:06:41.650 --> 03:06:42.430
And Christin.

2867
03:06:42.820 --> 03:06:46.360
Sure. So I would add, I think,
not just in the context of the

2868
03:06:46.360 --> 03:06:50.020
California legislation, but in
some of the other efforts that

2869
03:06:50.020 --> 03:06:53.230
industry players have been
working on for the last couple

2870
03:06:53.230 --> 03:06:56.680
of years, I think we saw a few
key areas where there were some

2871
03:06:56.680 --> 03:06:59.410
real challenges. You had to kind
of wrestle with the issues. And

2872
03:07:00.190 --> 03:07:03.460
one of the ones that we saw in
developing the SMART Box was

2873
03:07:03.820 --> 03:07:07.930
there's certain metrics that can
be challenging for products

2874
03:07:07.960 --> 03:07:10.630
without fixed terms. For
example, we've already heard

2875
03:07:10.630 --> 03:07:14.200
today some of the challenges of
calculating rates for products

2876
03:07:14.200 --> 03:07:17.620
without fixed terms. That was an
issue that we had to wrestle

2877
03:07:17.620 --> 03:07:22.090
with, and it came up again in
California. Another challenge

2878
03:07:22.090 --> 03:07:26.380
that we experienced was trying
to provide some of the total

2879
03:07:26.380 --> 03:07:30.430
dollar cost metrics for products
without a fixed amount, like a

2880
03:07:30.430 --> 03:07:34.870
revolving line. That was another
area that we struggled with and

2881
03:07:34.870 --> 03:07:37.330
had to wrestle with in
developing the SMART Box. And

2882
03:07:37.330 --> 03:07:39.880
then another one was a point
that the Barbara has raised a

2883
03:07:39.880 --> 03:07:43.390
couple of times now, which is
prepayment policies. There's a

2884
03:07:43.390 --> 03:07:46.630
real diversity of different
prepayment policies that the

2885
03:07:46.630 --> 03:07:49.510
companies have in the small
business lending space. And that

2886
03:07:49.510 --> 03:07:54.010
was another area where reaching
some sort of consensus and how

2887
03:07:54.010 --> 03:07:57.070
you could provide enough detail,
sufficient detail, but not

2888
03:07:57.070 --> 03:08:00.250
overwhelm a customer, and make
sure that they're getting the

2889
03:08:00.250 --> 03:08:03.940
piece that they need to know in
plain language, that was a real

2890
03:08:03.940 --> 03:08:06.160
challenge of pre-payment.
Because it is very different, I

2891
03:08:06.160 --> 03:08:09.220
think, from a lot of what you
would expect in the consumer

2892
03:08:09.220 --> 03:08:12.820
context in terms of a fixed fee
product, where prepayment

2893
03:08:12.820 --> 03:08:17.080
doesn't necessarily benefit you.
Paying it faster, you're still

2894
03:08:17.080 --> 03:08:19.960
paying the same fixed fee
amount. And I think expressing

2895
03:08:19.960 --> 03:08:23.500
that in a way that small
businesses could understand was

2896
03:08:23.500 --> 03:08:26.680
something that we definitely had
to wrestle with as a group,

2897
03:08:26.680 --> 03:08:28.030
given the diversity of products.

2898
03:08:28.060 --> 03:08:29.920
One quick comment on
prepayment-- I mean, it's so

2899
03:08:29.920 --> 03:08:32.860
counterintuitive to the average
person and every small business

2900
03:08:32.860 --> 03:08:37.390
owner. You ask people out there,
99.9% would say, yeah, if I pay

2901
03:08:37.390 --> 03:08:39.790
it off faster, I'm going to save
money. And that isn't always the

2902
03:08:39.790 --> 03:08:42.070
case. You have an effective
prepayment penalty even if it's

2903
03:08:42.070 --> 03:08:45.970
not an explicit prepayment
penalty. So that definitely

2904
03:08:45.970 --> 03:08:49.540
needs to get factored in to-- no
pun intended-- that needs to get

2905
03:08:49.540 --> 03:08:55.210
factored into an analysis of
what the rate's going to be,

2906
03:08:55.210 --> 03:08:56.590
what the cost of capital is.

2907
03:08:57.820 --> 03:09:00.280
And can anyone that's been
involved talk a little bit

2908
03:09:00.280 --> 03:09:02.890
about-- we know there's been
some movement, potentially in

2909
03:09:02.890 --> 03:09:05.170
other states, similar to
California. Have any of our

2910
03:09:05.170 --> 03:09:07.930
panelists been a part of those
discussions? Have they sort of

2911
03:09:07.930 --> 03:09:10.870
been moving on a similar track,
using similar metrics?

2912
03:09:10.930 --> 03:09:13.960
Well there's a bill in New
Jersey that's passed the Senate.

2913
03:09:14.410 --> 03:09:19.300
It's going to be heard by the
assembly at some point. I think

2914
03:09:19.300 --> 03:09:21.880
there's a bill that's finally
being introduced in New York.

2915
03:09:23.290 --> 03:09:28.660
And there was a bill introduced
in Illinois a couple years ago.

2916
03:09:29.140 --> 03:09:35.230
I don't know if and when that's
going to happen again. And then

2917
03:09:35.230 --> 03:09:38.080
there's conversations happening
in a bunch of other states as

2918
03:09:38.080 --> 03:09:40.690
well. And states where we're
most active, we're definitely

2919
03:09:40.690 --> 03:09:45.280
engaging with legislators and
with other stakeholders on that.

2920
03:09:45.280 --> 03:09:50.230
So yeah, there's definitely
interest at the state level in

2921
03:09:50.230 --> 03:09:50.920
dealing with this.

2922
03:09:51.220 --> 03:09:52.270
Thank you. And Christin.

2923
03:09:52.390 --> 03:09:56.890
Yeah, I would say, involved in
California efforts, and then in

2924
03:09:56.890 --> 03:09:59.290
New York I think they saw the
efforts that were taking place

2925
03:09:59.290 --> 03:10:03.580
in California, and the Consumer
Protection Committee in New

2926
03:10:03.580 --> 03:10:06.940
York, both in the assembly and
banking, also wanted to approach

2927
03:10:06.940 --> 03:10:09.970
the topic this year. So that
they came to us as developers of

2928
03:10:09.970 --> 03:10:12.850
the SMART Box and asked for a
little bit of guidance. I think

2929
03:10:12.850 --> 03:10:16.390
that the interesting piece has
been not how different they are,

2930
03:10:16.390 --> 03:10:19.840
but how similar they are. And I
think that we've started to

2931
03:10:19.840 --> 03:10:24.130
develop, kind of nationwide, and
I'd say I think a lot of the

2932
03:10:24.130 --> 03:10:26.980
same folks that are
participating in today's event,

2933
03:10:26.980 --> 03:10:30.550
as was colleagues that are on
this panel, really kind of

2934
03:10:30.550 --> 03:10:34.420
helped develop what we consider
to be the floor for disclosure

2935
03:10:34.570 --> 03:10:38.950
as part of-- the CSBS had a
fintech advisory panel. And that

2936
03:10:38.950 --> 03:10:42.250
was a big topic that we spent
quite a bit of time discussing.

2937
03:10:42.430 --> 03:10:46.540
It was kind of like, what are
the areas that disclosure should

2938
03:10:46.540 --> 03:10:50.320
be, where should we set the
floor? And the encouraging thing

2939
03:10:50.320 --> 03:10:52.690
is that I think a lot of the
states that are picking up this

2940
03:10:52.690 --> 03:10:55.540
effort looked very similar to
the recommendations that came

2941
03:10:55.540 --> 03:10:56.680
out of the CSBS.

2942
03:10:57.550 --> 03:11:00.970
And Christin, we've been talking
about it quite a bit already.

2943
03:11:00.970 --> 03:11:03.010
But I thought maybe we should
drill a little bit more into

2944
03:11:03.010 --> 03:11:08.770
detail as to what the ILPA SMART
Box requires in terms of the

2945
03:11:08.770 --> 03:11:12.220
standardized information that's
provided. And does it change

2946
03:11:12.220 --> 03:11:15.880
between different product lines,
or it's just the same TILA-like

2947
03:11:15.880 --> 03:11:17.050
box for all products?

2948
03:11:17.410 --> 03:11:22.480
Yeah, so we, like I said, sort
of developed that after some

2949
03:11:22.480 --> 03:11:25.300
engagement with a variety of
different stakeholders as well

2950
03:11:25.300 --> 03:11:29.470
as small business owners. And we
really tried to make the boxes--

2951
03:11:29.500 --> 03:11:32.410
we have three different versions
right now. There's a box for

2952
03:11:32.410 --> 03:11:36.220
kind of a classic term loan,
there's a SMART Box for a line

2953
03:11:36.220 --> 03:11:38.740
of credit or a revolving
product, and then there's a

2954
03:11:38.740 --> 03:11:42.130
SMART Box for a purchase and
sale product. So that would

2955
03:11:42.130 --> 03:11:46.690
include factoring, it would
include cash advances or revenue

2956
03:11:46.690 --> 03:11:51.520
factoring products. And we tried
very hard to make them as

2957
03:11:51.520 --> 03:11:54.370
standard as possible, on the
assumption that if you're a

2958
03:11:54.370 --> 03:11:57.160
small business looking for
credit, you're very likely to be

2959
03:11:57.160 --> 03:12:00.460
approaching companies that offer
any one of those three products.

2960
03:12:00.760 --> 03:12:04.600
And so we provided the same set
of metrics. I kind of already

2961
03:12:04.600 --> 03:12:07.270
ran through what those pricing
metrics were, the four that we

2962
03:12:07.270 --> 03:12:11.200
settled on. In addition to that,
there's also questions that

2963
03:12:11.200 --> 03:12:15.430
highlight the prepayment policy,
as well as the loan amount, the

2964
03:12:15.430 --> 03:12:18.760
amount that will actually be
disbursed into your account, the

2965
03:12:19.120 --> 03:12:22.780
repayment schedule, like the
frequency and the dollar amount,

2966
03:12:23.170 --> 03:12:27.730
and the APR that's calculated in
accordance with TILA for those

2967
03:12:27.730 --> 03:12:33.160
products. The exciting piece is
that now that the SMART Box-- it

2968
03:12:33.700 --> 03:12:36.550
fits within one page, we tried
to put it in very plain

2969
03:12:36.550 --> 03:12:41.350
English-- it's been out in the
market now for almost 2 and 1/2

2970
03:12:41.380 --> 03:12:44.950
years, and we sort of have taken
the last 2 and 1/2 years worth

2971
03:12:44.950 --> 03:12:48.460
of learnings and are looking at
revisiting it. And the new sort

2972
03:12:48.460 --> 03:12:51.940
of exciting developments
partially inspired by California

2973
03:12:51.940 --> 03:12:55.870
are to add in some other
questions that I think Barbara's

2974
03:12:55.870 --> 03:12:58.900
focus group focused on, too,
which is, outside of pricing,

2975
03:12:58.900 --> 03:13:01.420
what else did small business
customers need to see? So we're

2976
03:13:01.420 --> 03:13:05.200
adding in questions about these
security interests that may or

2977
03:13:05.200 --> 03:13:08.890
may not be taken, the collateral
requirements, and then whether

2978
03:13:08.890 --> 03:13:12.100
or not there's any personal
guarantee of payment. So those

2979
03:13:12.100 --> 03:13:15.340
are all advances that are kind
of coming soon, based on the

2980
03:13:15.340 --> 03:13:17.410
feedback that we got after the
first couple of years having

2981
03:13:17.410 --> 03:13:18.070
adopted.

2982
03:13:18.810 --> 03:13:24.660
And Christin, what does the ILPA
require in terms of both the

2983
03:13:24.660 --> 03:13:28.950
timing and format of the SMART
Box disclosure of its members?

2984
03:13:29.010 --> 03:13:32.430
Are there any sort of baseline
requirements as to how and when

2985
03:13:32.760 --> 03:13:34.080
it's presented to consumers?

2986
03:13:34.380 --> 03:13:39.240
Sure. So we actually built out
kind of an independent

2987
03:13:39.240 --> 03:13:42.960
third-party consulting group
that, first step, if you're

2988
03:13:42.960 --> 03:13:47.520
interested in adopting, you come
in and they validate your APR to

2989
03:13:47.520 --> 03:13:50.910
make sure that the calculation's
in accordance with TILA. Once

2990
03:13:50.910 --> 03:13:54.060
the actual product is being sort
of built out in people's tech

2991
03:13:54.060 --> 03:13:59.940
programs, we try to keep the
elements and the requirements

2992
03:13:59.940 --> 03:14:04.380
around the manner of disclosure
fairly flexible. So given all

2993
03:14:04.380 --> 03:14:06.660
the different tech platforms,
the fact that the majority of

2994
03:14:06.660 --> 03:14:09.600
our customers are approaching
this on mobile, we wanted to

2995
03:14:09.600 --> 03:14:12.690
make sure that no company was
completely kind of hamstrung in

2996
03:14:12.690 --> 03:14:15.840
the way that they presented it.
But we did set some baseline

2997
03:14:15.840 --> 03:14:18.990
rules. One of them is you have
to present the actual full

2998
03:14:18.990 --> 03:14:22.800
disclosure. It can't just be
placed in a hyperlink so that it

2999
03:14:22.800 --> 03:14:26.430
can't be avoided. And then the
other one is you obviously need

3000
03:14:26.430 --> 03:14:30.270
have to present the entire set
of metrics at the time that you

3001
03:14:30.270 --> 03:14:34.800
present a specific offer to the
customer. The other area where

3002
03:14:34.800 --> 03:14:37.740
we'd love to see some movement
but frankly have sort of

3003
03:14:37.740 --> 03:14:40.620
experienced some tech challenges
around it is, like I said,

3004
03:14:40.620 --> 03:14:43.350
pulling that forward in the
process. It would be great to

3005
03:14:43.350 --> 03:14:46.590
have, even if it's kind of a
shorter, more dynamic version,

3006
03:14:46.710 --> 03:14:49.380
we'd love to be able to present
some of those basic metrics,

3007
03:14:49.380 --> 03:14:52.050
particularly the cost metrics,
earlier in the process. But

3008
03:14:52.050 --> 03:14:57.060
right now where we have that
sort of rule set up is at the

3009
03:14:57.060 --> 03:14:58.980
time you present them with a
specific offer.

3010
03:14:59.640 --> 03:15:00.630
Thank you. And Barbara?

3011
03:15:01.380 --> 03:15:06.240
Yes. And I would just echo that,
in the focus groups, folks said

3012
03:15:06.240 --> 03:15:10.860
that they wanted something like
the disclosure boxes early in

3013
03:15:10.860 --> 03:15:15.780
the process as possible. But a
number of them talked about how,

3014
03:15:16.140 --> 03:15:22.050
if technology can be used to
underwrite to them and to market

3015
03:15:22.440 --> 03:15:26.970
to them, why can it also be used
to create a kind of personalized

3016
03:15:26.970 --> 03:15:32.130
calculator that could give them
the opportunity to enter their

3017
03:15:32.130 --> 03:15:36.600
revenues or their expected cash
flows over the next several

3018
03:15:36.600 --> 03:15:41.190
months, and with slider options,
and they could kind of recreate

3019
03:15:41.190 --> 03:15:45.300
what they think is a reasonable
scenario for themselves. And

3020
03:15:45.300 --> 03:15:51.090
they said, we understand this
would be a best estimate. But

3021
03:15:51.120 --> 03:15:53.460
that was something they were
very interested in.

3022
03:15:54.750 --> 03:15:57.000
And are there-- Barbara or
anyone else who has

3023
03:15:57.000 --> 03:16:01.170
observations-- we've sort of
been talking about this kind of

3024
03:16:01.170 --> 03:16:05.940
disconnect where there are these
ILP SMART Box or initiatives

3025
03:16:06.000 --> 03:16:09.240
have some form of uniform
disclosure. But then one

3026
03:16:09.240 --> 03:16:11.220
panelist referred to it as the
Wild West in terms of

3027
03:16:11.220 --> 03:16:14.910
information presented to
consumers. What's your sense of

3028
03:16:14.940 --> 03:16:18.660
how widely these sorts of
standards are actually being

3029
03:16:18.660 --> 03:16:20.700
adopted by the online lending
community?

3030
03:16:21.450 --> 03:16:23.820
Well, I can speak to the-- is
this specifically about SMART

3031
03:16:23.820 --> 03:16:24.750
Box or in general?

3032
03:16:25.050 --> 03:16:26.670
The SMART Box or disclosures.

3033
03:16:26.660 --> 03:16:32.870
Because we have similar
standards in the Borrowers Bill

3034
03:16:32.870 --> 03:16:34.970
of Rights. As I sad,
transparency is only the first

3035
03:16:34.970 --> 03:16:38.330
one. Also there's a whole set of
standards around abusive

3036
03:16:38.330 --> 03:16:41.180
products, around responsible
underwriting, fair treatment

3037
03:16:41.210 --> 03:16:45.920
from brokers, right to inclusive
credit access and right to fair

3038
03:16:45.920 --> 03:16:51.740
collection practices. So I mean,
we've got over 60 lenders or

3039
03:16:51.740 --> 03:16:57.050
brokers that have signed on to
the BBOR, and about 45

3040
03:16:57.080 --> 03:17:05.540
endorsers. Now, we simply take
the signature of the CEO that

3041
03:17:05.540 --> 03:17:08.300
they're doing this. So I will
say, we don't go out, don't

3042
03:17:08.330 --> 03:17:10.640
investigate. I don't know if
SMART Box, you sound like you

3043
03:17:10.640 --> 03:17:14.150
maybe have somebody who does a
little more checking. But to

3044
03:17:14.150 --> 03:17:19.610
have to have 60 lenders or
brokers, mostly lenders, sign on

3045
03:17:19.610 --> 03:17:22.640
shows that there's-- and we've
had more and more interest over

3046
03:17:22.640 --> 03:17:26.780
time because I think lenders are
realizing that we really do need

3047
03:17:26.780 --> 03:17:30.140
these standards. I mean, this is
what we're seeing. And it's a

3048
03:17:30.140 --> 03:17:32.540
way to separate out the
responsible actors and

3049
03:17:32.540 --> 03:17:35.000
responsible products from the
not-responsible products.

3050
03:17:35.420 --> 03:17:38.990
John actually raised two
important points that I wanted

3051
03:17:38.990 --> 03:17:41.870
to touch on briefly. In
connection with the Borrower

3052
03:17:41.870 --> 03:17:44.720
Bill of Rights, and then sort of
the principles that underlie

3053
03:17:44.720 --> 03:17:49.310
them that made those ideas
important to that group, when

3054
03:17:49.310 --> 03:17:52.250
you talk about underwriting, for
example, what are some of the

3055
03:17:52.250 --> 03:17:55.790
main sort of principles or
tension points that you see in

3056
03:17:55.790 --> 03:17:59.630
the industry between those who
might want to adopt principles

3057
03:17:59.630 --> 03:18:01.910
like these and those who do not?

3058
03:18:02.900 --> 03:18:05.060
Well-- I'll just go quickly, and
I'm sure other people want to

3059
03:18:05.060 --> 03:18:07.040
add in. I mean, underwriting is
actually-- it's harder.

3060
03:18:07.340 --> 03:18:10.940
Transparency is, relatively
speaking, a lot easier to deal

3061
03:18:10.940 --> 03:18:14.060
with. Obviously getting inside
the head of a-- well, if you

3062
03:18:14.060 --> 03:18:16.280
have an algorithm, you at least
can look at it, but the process

3063
03:18:16.280 --> 03:18:21.530
for underwriting. But the basic
principle is that the lender has

3064
03:18:21.560 --> 03:18:26.060
made a determination that this
loan can be paid back through

3065
03:18:26.060 --> 03:18:31.850
the cash flow of the business
operation, not by the owner

3066
03:18:31.850 --> 03:18:35.150
personally, not by taking
collateral, and most

3067
03:18:35.150 --> 03:18:39.890
importantly, not by having to
take another loan. So that's

3068
03:18:39.890 --> 03:18:42.980
sort of the basic sort of
high-end standard, is that

3069
03:18:42.980 --> 03:18:45.890
that's where the underwriting
should be focused. It should not

3070
03:18:45.890 --> 03:18:48.650
be focused on those other
considerations. I'm not saying

3071
03:18:48.650 --> 03:18:52.670
you won't take the collateral or
the personal guarantee, but that

3072
03:18:52.670 --> 03:18:54.920
if there's any level of
expectation that's how you're

3073
03:18:54.920 --> 03:18:56.570
going to get paid back, you
shouldn't make the loan.

3074
03:18:58.340 --> 03:19:01.520
And I'd be curious, too, to hear
the sort of same principles as

3075
03:19:01.520 --> 03:19:04.400
they apply to
collections-oriented practices.

3076
03:19:04.400 --> 03:19:06.830
I mean, we talked a lot about
that on our second panel. I'd be

3077
03:19:06.830 --> 03:19:11.240
curious what are the most
important principles that you

3078
03:19:11.240 --> 03:19:16.580
think, and the RBL see, is
codified in the Borrower Bill of

3079
03:19:16.580 --> 03:19:17.900
Rights, related to collections?

3080
03:19:20.810 --> 03:19:23.540
I don't have the actual document
in front of me. But it's

3081
03:19:23.540 --> 03:19:27.620
essentially understanding that--
it's following a set of

3082
03:19:27.620 --> 03:19:31.340
standards that are non-abusive
that are taking into account

3083
03:19:31.550 --> 03:19:36.620
considerations that have come up
that are not-- I know there was

3084
03:19:36.620 --> 03:19:39.260
a lot of conversation about the
confession of judgment clause in

3085
03:19:39.260 --> 03:19:42.860
the last panel. We don't see any
reason why there should be

3086
03:19:43.040 --> 03:19:45.500
confession of judgment clauses
at all. And obviously we've

3087
03:19:45.500 --> 03:19:47.900
seen, with the Bloomberg
article, and there actually was

3088
03:19:47.900 --> 03:19:51.200
a bipartisan bill introduced at
the end the last Congress by

3089
03:19:51.200 --> 03:19:57.110
Senators Rubio and Brown, to ban
them. So it's basically taking a

3090
03:19:57.620 --> 03:20:04.550
very reasonable approach to
going after the debt.

3091
03:20:05.700 --> 03:20:08.730
Thank you. Does anyone else have
other comments?

3092
03:20:09.770 --> 03:20:12.830
I'll just invoke my ability as
having an iPhone up here to read

3093
03:20:12.830 --> 03:20:16.580
the Borrowers Bill of Rights. So
the right to fair collection

3094
03:20:16.580 --> 03:20:18.740
practices under the Borrowers
Bill of Rights are "borrower has

3095
03:20:18.740 --> 03:20:20.750
the right to be treated fairly
and respectfully throughout a

3096
03:20:20.750 --> 03:20:23.180
collections process, and the
right to protections like those

3097
03:20:23.180 --> 03:20:25.130
guaranteed under the Fair Debt
Collection Practices Act."

3098
03:20:25.130 --> 03:20:26.600
Thank you. So we devote a lot of
our time to, you know,

3099
03:20:26.600 --> 03:20:28.580
transparency disclosures, Thank
you. So we've devoted a lot of

3100
03:20:28.580 --> 03:20:31.280
our time to transparency
disclosures, because that's a

3101
03:20:31.280 --> 03:20:35.000
very important discussion going
on in this community. We wanted

3102
03:20:35.000 --> 03:20:37.040
to move on a little bit and
touch on some of the other

3103
03:20:37.040 --> 03:20:40.580
issues that, through our work
enforcing the FTC Act and other

3104
03:20:40.580 --> 03:20:44.480
laws that we enforce, are of
importance to us. And the first

3105
03:20:44.480 --> 03:20:47.150
of those-- and I thought
initially throw this to Barbara,

3106
03:20:47.150 --> 03:20:51.290
given some of your focus group
work, is, thinking, as we were

3107
03:20:51.290 --> 03:20:54.140
talking about on panel 2, about
advertising and marketing more

3108
03:20:54.140 --> 03:20:57.980
generally, beyond disclosure.
Does anyone have any concerns or

3109
03:20:57.980 --> 03:21:02.870
thoughts about how these
products are marketed, if there

3110
03:21:02.870 --> 03:21:06.380
are issues with aggressive
marketing campaigns, harassment,

3111
03:21:06.650 --> 03:21:11.180
deception of any kind, through
any lenders in this community or

3112
03:21:11.180 --> 03:21:12.200
their proxies.

3113
03:21:13.160 --> 03:21:16.550
Well, certainly the focus group
participants raised concerns.

3114
03:21:17.600 --> 03:21:21.260
When we sent them out to pretend
shop, we told them, don't

3115
03:21:21.260 --> 03:21:27.560
actually apply for anything as
part of this study. But a number

3116
03:21:27.560 --> 03:21:32.930
of them, even before they were
finished looking at websites,

3117
03:21:32.930 --> 03:21:39.410
were getting pop-up ads and
solicitations, right then and

3118
03:21:39.410 --> 03:21:43.970
there. Generally-- so a lot of
these folks had been seeking

3119
03:21:43.970 --> 03:21:48.500
credit in the past year. So they
noted their experience in

3120
03:21:48.500 --> 03:21:50.600
general in the past year was
that they were getting a lot of

3121
03:21:50.630 --> 03:21:55.700
emails, snail mail, pop-up ads.
Now, sometimes they said, I know

3122
03:21:55.700 --> 03:22:00.020
of a lender because of some of
the snail mail, or email, or

3123
03:22:00.020 --> 03:22:04.580
whatever that I'm getting. But
generally they characterized it

3124
03:22:04.580 --> 03:22:11.090
as bothersome or annoying. I
think the thing that really kind

3125
03:22:11.090 --> 03:22:16.340
of set them off, frankly, was
the phone calls, which they

3126
03:22:16.340 --> 03:22:21.530
would get during business hours
or all kinds of hours outside of

3127
03:22:21.530 --> 03:22:24.410
business as well. They
characterized these as extremely

3128
03:22:24.410 --> 03:22:32.510
aggressive. And it was something
that they almost universally

3129
03:22:32.540 --> 03:22:33.410
complained about.

3130
03:22:34.670 --> 03:22:38.900
And does anyone else have
thoughts on that issue? OK, now

3131
03:22:39.080 --> 03:22:42.020
related-- and it's something we
see, and even held a whole

3132
03:22:42.050 --> 03:22:45.950
full-day workshop about a few
years ago-- in all the different

3133
03:22:45.950 --> 03:22:49.040
sectors that we look at, and
that includes financial products

3134
03:22:49.040 --> 03:22:53.300
and services like lending, lead
generators, and brokers, and

3135
03:22:53.300 --> 03:22:56.360
affiliate marketers are
ubiquitous and obviously had a

3136
03:22:56.360 --> 03:22:59.540
good deal of complexity in terms
of who's making what

3137
03:22:59.540 --> 03:23:02.930
representations to whom in the
marketplace. And so I was

3138
03:23:02.930 --> 03:23:05.510
wondering if anybody has any
sort of thoughts on potential

3139
03:23:05.510 --> 03:23:09.800
concerns or risks associated
with that in this sector. I know

3140
03:23:09.800 --> 03:23:12.980
Christin, you might have done
some thinking on what,

3141
03:23:12.980 --> 03:23:15.380
potentially, their obligations
should be to consumers they

3142
03:23:15.380 --> 03:23:15.950
market to.

3143
03:23:16.700 --> 03:23:21.230
Yeah, so the topic of kind of
brokering, and lead generation,

3144
03:23:21.230 --> 03:23:25.190
and that ecosystem was another
one that we tackled through that

3145
03:23:25.220 --> 03:23:30.380
the CSBS panel that a number
of-- I think it was about 30

3146
03:23:30.380 --> 03:23:33.710
different companies in the
industry participated on. And

3147
03:23:33.920 --> 03:23:36.440
unfortunately, I think that the
report that came out of that

3148
03:23:36.440 --> 03:23:40.280
probably raised more questions
than it answered. But we tried

3149
03:23:40.280 --> 03:23:45.440
to hone in on, if a policymaker
is interested in this area, kind

3150
03:23:45.440 --> 03:23:49.730
of what are the key policy risk
or priorities that they should

3151
03:23:49.730 --> 03:23:52.310
be focused on. And the ones that
came out of that group were,

3152
03:23:52.670 --> 03:23:56.270
first and foremost probably,
what should supervision and

3153
03:23:56.270 --> 03:23:59.960
oversight of a broker look like,
whether that's at the state or

3154
03:23:59.960 --> 03:24:04.310
the federal level? The other one
was that was raised quite often

3155
03:24:04.310 --> 03:24:08.810
was data protection and privacy
of customer information. Because

3156
03:24:08.810 --> 03:24:12.860
it is getting shared between
companies that are not related.

3157
03:24:13.460 --> 03:24:16.970
The third was really duties of
care, like what are the

3158
03:24:16.970 --> 03:24:23.420
responsibilities of a broker to
advise the customer and to be

3159
03:24:23.420 --> 03:24:25.970
transparent about what sort of
advice they're providing and

3160
03:24:25.970 --> 03:24:30.050
what might be driving that. And
then the fourth area was the one

3161
03:24:30.050 --> 03:24:32.390
that we've been spending the
most time on here so far, which

3162
03:24:32.390 --> 03:24:35.930
is what are the disclosure
requirements on others in the

3163
03:24:35.930 --> 03:24:39.110
ecosystem besides the lender
themselves? And so I think that

3164
03:24:39.110 --> 03:24:43.040
that's particularly prevalent. I
know that Sheri has some good

3165
03:24:43.040 --> 03:24:46.700
examples of kind of what it
looks like to play almost like

3166
03:24:46.970 --> 03:24:50.420
matchmaker. And there's quite a
few companies that have built

3167
03:24:50.420 --> 03:24:53.930
their business models around the
Match.com for a small business

3168
03:24:53.930 --> 03:24:57.560
owner. You go in, and the lender
has their requirements, you put

3169
03:24:57.560 --> 03:25:02.150
in your basic information, and
then they match you. And what

3170
03:25:02.150 --> 03:25:05.630
the responsibilities are of
those matching platforms or lead

3171
03:25:05.630 --> 03:25:09.140
generators. And I think it was a
topic that there's a lot of

3172
03:25:09.140 --> 03:25:11.690
different approaches and it's
definitely very complex, but I

3173
03:25:11.690 --> 03:25:14.030
think there's been increasing
interest from policymakers to

3174
03:25:14.030 --> 03:25:17.900
try and dig in on any one of
those four policy points.

3175
03:25:18.830 --> 03:25:19.400
Bernardo.

3176
03:25:19.480 --> 03:25:22.060
I think it's important. When we
did the Small Business Bill of

3177
03:25:22.060 --> 03:25:24.190
Rights actually we included a
lot of them. Because we felt

3178
03:25:24.190 --> 03:25:26.320
that it actually needed to
encompass not only the lenders

3179
03:25:26.320 --> 03:25:28.900
but also the aggregators and
other participants. Because at

3180
03:25:28.900 --> 03:25:33.820
the end of the day, there's a
conglomerate of different

3181
03:25:33.820 --> 03:25:36.310
companies that are actually
intersecting and interacting

3182
03:25:36.310 --> 03:25:39.310
with the small business owners.
So that's kind of the importance

3183
03:25:39.640 --> 03:25:42.700
in our coalition, was let's go
beyond sort of the traditional

3184
03:25:42.700 --> 03:25:46.660
lenders and really include all
the others. So as John said, we

3185
03:25:46.660 --> 03:25:49.330
don't check them, but we
basically ask them to every-- I

3186
03:25:49.330 --> 03:25:52.690
have to sign, basically every
year, that we're complying with

3187
03:25:52.690 --> 03:25:55.060
everything that we said in our
Small Business Bill of Rights.

3188
03:25:55.570 --> 03:25:57.430
And we have a few of them that
actually are participating with

3189
03:25:57.430 --> 03:26:00.760
us. So I think that's really the
key part, is when we talk-- I

3190
03:26:00.760 --> 03:26:03.520
think that's a key part of that
project, is include a lot of

3191
03:26:03.520 --> 03:26:06.640
folks that participate in the
market, and basically create

3192
03:26:07.420 --> 03:26:10.210
sort of a standard, if you will,
on how to interact.

3193
03:26:12.550 --> 03:26:14.740
Just really quickly, I actually
do have the Borrowers Bill of

3194
03:26:14.740 --> 03:26:17.530
Rights up here. There's a bunch
of standards on the fair

3195
03:26:17.530 --> 03:26:19.600
treatment by brokers. I'm not
going to cite them all, but I

3196
03:26:19.600 --> 03:26:21.640
think there are a couple that
are worth talking about. One is

3197
03:26:21.640 --> 03:26:26.650
transparent loan options. If the
broker has x number of products

3198
03:26:26.650 --> 03:26:31.000
that he or she thinks fit, then
they should disclose all of

3199
03:26:31.000 --> 03:26:33.760
them, not just one where they
may be getting a better fee.

3200
03:26:34.270 --> 03:26:36.670
Speaking of fees, there should
be transparent broker fees.

3201
03:26:36.670 --> 03:26:41.560
There should be clear, OK, I'm
getting paid this way by the

3202
03:26:42.820 --> 03:26:46.390
lenders. I'm just going to-- a
couple of these-- important

3203
03:26:46.390 --> 03:26:48.220
disclosure of conflicts of
interest, if there are any

3204
03:26:48.220 --> 03:26:51.880
conflicts of interest with any
of the companies. No fees for

3205
03:26:51.880 --> 03:26:55.030
failure is another one. So I
mean, there are a couple others

3206
03:26:55.030 --> 03:26:57.430
here. We don't need to talk
about all of them. But there are

3207
03:26:57.430 --> 03:27:01.600
definitely things that brokers
can and should do in dealing

3208
03:27:01.600 --> 03:27:03.130
with the borrower.

3209
03:27:03.550 --> 03:27:04.120
Christin.

3210
03:27:04.510 --> 03:27:07.060
Sorry, I just wanted to add to--
just thinking back to what I

3211
03:27:07.060 --> 03:27:10.720
just said, lest it sounds like
we're very negative about that

3212
03:27:10.720 --> 03:27:13.810
population, I actually think
there's a lot of instances in

3213
03:27:13.810 --> 03:27:17.350
the small business lending space
where the referral ecosystem

3214
03:27:17.350 --> 03:27:21.160
that we built actually leads to
really great results. Like you

3215
03:27:21.160 --> 03:27:24.700
may come in at a bank level, and
perhaps you don't fit the bank's

3216
03:27:24.700 --> 03:27:27.670
credit bucket. So then the bank
can refer you to someone else on

3217
03:27:27.670 --> 03:27:30.970
the ladder, all the way down to
relationships that we have with

3218
03:27:31.360 --> 03:27:34.030
CDFI and community lenders,
where someone comes in, they

3219
03:27:34.030 --> 03:27:37.030
don't hit an OnDeck hard cut,
and we're able to pass them off

3220
03:27:37.030 --> 03:27:40.000
into the hands of another
trusted partner who might be

3221
03:27:40.000 --> 03:27:42.850
able to lend to them. So I do
think, while there's certainly

3222
03:27:42.940 --> 03:27:46.360
very important guardrails that
need to be put into place, it's

3223
03:27:46.360 --> 03:27:49.960
not a space that's without
value. There is definitely a

3224
03:27:49.960 --> 03:27:52.930
value to the ecosystem that's
built up in terms of getting the

3225
03:27:52.930 --> 03:27:55.570
customer in front of a lender
that's a great match for them.

3226
03:27:55.780 --> 03:27:58.060
But we just want to make sure we
have those guardrails in place.

3227
03:27:59.560 --> 03:28:00.070
Sheri.

3228
03:28:00.000 --> 03:28:03.180
So I guess now probably would be
a good time for me to talk a

3229
03:28:03.180 --> 03:28:06.690
little bit about the lender
match tool that SBA has. It's

3230
03:28:06.690 --> 03:28:11.460
completely free. There's no
charges. What it does is it

3231
03:28:11.460 --> 03:28:15.600
matches a potential bar with any
SBA lender, whether you're a

3232
03:28:15.600 --> 03:28:19.680
7(a) lender, a 504 lender, or a
microlender. The lenders sign

3233
03:28:19.680 --> 03:28:24.510
up, and they pick what dollar
amount that they're interested

3234
03:28:24.510 --> 03:28:28.800
in lending up to, what
industries they want, and

3235
03:28:28.800 --> 03:28:32.670
several other criteria like the
states and the counties. And

3236
03:28:32.940 --> 03:28:35.850
then when the borrowers come in,
we ask them a series of

3237
03:28:35.850 --> 03:28:40.860
questions, and then match them
up with potential lenders who

3238
03:28:41.250 --> 03:28:47.250
match up with them. And then SBA
steps away. The lender then has

3239
03:28:47.250 --> 03:28:50.310
the option to either opt in, opt
out, or ask for additional

3240
03:28:50.310 --> 03:28:56.790
information from the borrower.
Currently we've had 290,000

3241
03:28:56.790 --> 03:29:00.660
borrowers that have signed up
for it. It's resulted in over

3242
03:29:00.660 --> 03:29:05.340
4.3 million matches between--
now, one borrower may match to

3243
03:29:05.340 --> 03:29:12.210
multiple lenders. And out of
that, 587 lenders have opted in.

3244
03:29:12.210 --> 03:29:14.640
Now, we don't know what happens
after they opt in, whether they

3245
03:29:14.640 --> 03:29:18.630
go with a conventional loan at
their bank or if they end up

3246
03:29:19.380 --> 03:29:23.760
using SBA guarantee. If there's
no match whatsoever, we don't

3247
03:29:23.760 --> 03:29:28.080
just drop the borrower then. We
refer them to their local SBA

3248
03:29:28.080 --> 03:29:31.950
resources so that maybe they can
work with the borrower to come

3249
03:29:31.950 --> 03:29:36.480
up with some other way of making
their business a little bit more

3250
03:29:36.480 --> 03:29:39.120
profitable or to make some
changes there that will allow

3251
03:29:39.120 --> 03:29:43.560
them to still find financing
after they can make a few

3252
03:29:43.560 --> 03:29:51.900
changes. Christin talked about
it earlier-- the biggest

3253
03:29:51.900 --> 03:29:55.770
complaint we get is that what
happens is we send this borrower

3254
03:29:55.770 --> 03:29:58.080
information off to the lenders
and, then all of a sudden

3255
03:29:58.080 --> 03:30:00.600
they're being inundated with all
these phone calls. And they

3256
03:30:00.600 --> 03:30:03.360
contact us and they say they
want to opt out. It's like,

3257
03:30:03.360 --> 03:30:08.070
well, the cat's out of the bag.
You can't opt out at this point.

3258
03:30:08.070 --> 03:30:12.300
So that's really been the only
downfall that we've had. But

3259
03:30:12.300 --> 03:30:16.020
we've been able to match people
across the country, that

3260
03:30:16.230 --> 03:30:18.570
normally they wouldn't have been
able to find financing in their

3261
03:30:18.570 --> 03:30:20.940
hometown. But because they used
this tool, they were able to

3262
03:30:20.940 --> 03:30:24.780
find a borrower in California
when they were in New Jersey

3263
03:30:24.780 --> 03:30:27.480
that was able to do this kind of
deal. So we've had a lot of

3264
03:30:27.480 --> 03:30:28.500
success with that.

3265
03:30:29.160 --> 03:30:31.380
Thank you. And Sheri, actually,
just by way of background, for

3266
03:30:31.380 --> 03:30:34.320
audience members that are a
little less familiar with SBA

3267
03:30:34.320 --> 03:30:36.960
loans and the role that SBA
plays, can you talk about that a

3268
03:30:36.960 --> 03:30:41.460
little bit, the role they play
versus what the banks and

3269
03:30:41.460 --> 03:30:42.840
institutions who offer the loans
play?

3270
03:30:42.900 --> 03:30:45.960
Right. So SBA has several
products that they have. But

3271
03:30:45.960 --> 03:30:48.480
most of their products are
guaranteed loans. In other

3272
03:30:48.480 --> 03:30:51.600
words, the lender actually makes
the loan. But if the loan goes

3273
03:30:51.600 --> 03:30:55.380
bad, then SBA guarantees that
the lender gets a portion of his

3274
03:30:55.380 --> 03:30:58.290
money back. And there are
several loan programs under

3275
03:30:58.290 --> 03:31:02.790
that. There's 7(a) loan programs
that would be lines of credit

3276
03:31:02.820 --> 03:31:07.980
small loans larger loans, lines
of capital lines of credit. And

3277
03:31:07.980 --> 03:31:11.700
then there's 504 loans that are
mostly used for construction. We

3278
03:31:11.700 --> 03:31:14.730
also make direct loans to
microlenders, and then those

3279
03:31:14.730 --> 03:31:21.150
microlenders in turn make
smaller loans to borrowers. And

3280
03:31:21.150 --> 03:31:24.120
then if there's a disaster, we
also make direct loans to

3281
03:31:24.120 --> 03:31:27.390
businesses and homeowners in the
case of a disaster.

3282
03:31:28.020 --> 03:31:30.840
Sheri, there had been a
suggestion on an earlier panel

3283
03:31:30.840 --> 03:31:34.860
that SBA loans can be
time-consuming or a greater

3284
03:31:34.860 --> 03:31:38.700
commitment as compared to
fintech options. Could you speak

3285
03:31:38.700 --> 03:31:39.420
to that at all?

3286
03:31:40.020 --> 03:31:42.840
That's probably true, because
you're dealing with conventional

3287
03:31:42.840 --> 03:31:46.140
banks. And these banks have--
y'all talked about all the

3288
03:31:46.140 --> 03:31:49.350
regulations. And when you're
dealing with the government, you

3289
03:31:49.350 --> 03:31:53.910
have a lot of those. And so it
is more time-consuming to get an

3290
03:31:53.910 --> 03:31:56.640
SBA loan, but your interest
rates are probably going to be

3291
03:31:56.640 --> 03:32:04.770
less. If the borrower has the
wherewithal to go through with

3292
03:32:04.770 --> 03:32:07.950
it, then-- and we're making
improvements to try to make it

3293
03:32:07.950 --> 03:32:11.010
quicker. I don't know what the
exact turnaround time is. I'm

3294
03:32:11.010 --> 03:32:14.160
going to have to go back and
ask. But I would be willing to

3295
03:32:14.160 --> 03:32:19.920
bet a fintech loan is probably
much, much quicker. One of the

3296
03:32:19.950 --> 03:32:22.530
things I wanted to talk about,
and maybe this doesn't have

3297
03:32:22.530 --> 03:32:26.550
anything to-- we've been doing
fintech at SBA before there was

3298
03:32:26.550 --> 03:32:29.310
ever fintech. And we have
developed a lot of open

3299
03:32:29.310 --> 03:32:33.120
standards that are available to
software vendors that work with

3300
03:32:33.120 --> 03:32:37.380
the lenders to be able to make
that process go a lot faster. So

3301
03:32:40.440 --> 03:32:43.140
there's a lot of vendors that
work with multiple lenders. And

3302
03:32:43.140 --> 03:32:45.990
they have underwriting packages,
they have origination packages,

3303
03:32:45.990 --> 03:32:49.500
and they can work directly with
us by calling our open-source

3304
03:32:49.500 --> 03:32:53.790
web services, and get these
loans approved by SBA lot

3305
03:32:53.790 --> 03:32:57.150
faster. And if you're a
preferred lender, you don't have

3306
03:32:57.150 --> 03:32:59.910
to wait for the government to do
anything. If you've checked off

3307
03:32:59.910 --> 03:33:04.170
all the boxes, then you really
can get a loan in a shorter

3308
03:33:04.170 --> 03:33:07.650
amount of time. So I just wanted
to mention that, too. Thanks.

3309
03:33:08.100 --> 03:33:11.160
Great. And to touch on a couple
other

3310
03:33:11.520 --> 03:33:15.150
consumer-protection-oriented
issues, could anybody-- I know

3311
03:33:15.150 --> 03:33:17.610
Barbara, perhaps in connection
with some of your research,

3312
03:33:17.640 --> 03:33:20.760
you've got some thoughts on
this-- talk a little bit about

3313
03:33:20.790 --> 03:33:23.460
privacy and data security in
this space, and if there are any

3314
03:33:24.090 --> 03:33:28.140
sort of risks or concerns
associated with lending and the

3315
03:33:28.200 --> 03:33:31.260
consumer information associated
with these transactions?

3316
03:33:32.440 --> 03:33:36.640
Yes, so again, the focus group
participants raised concerns

3317
03:33:36.640 --> 03:33:42.250
about privacy. One of the
reasons is they noted they were

3318
03:33:42.250 --> 03:33:49.060
tracked while they were visiting
websites as part of the project.

3319
03:33:49.810 --> 03:33:55.450
And we've been looking into some
of the websites as well. So I

3320
03:33:55.450 --> 03:34:02.410
think one of the concerns is the
use of trackers on websites.

3321
03:34:02.890 --> 03:34:09.250
They have multiple legitimate
purposes. Some are tracking what

3322
03:34:09.970 --> 03:34:14.140
the business owner's doing on
the website. But some trackers

3323
03:34:14.140 --> 03:34:19.870
have the ability, even if an
owner is just looking around-- I

3324
03:34:19.870 --> 03:34:24.190
mean, they have two options.
They could enter information and

3325
03:34:24.190 --> 03:34:28.330
provide some basics, or they may
just be looking around and not

3326
03:34:28.330 --> 03:34:32.260
providing anything. In the case
where they're providing some

3327
03:34:32.260 --> 03:34:35.680
information, they're already
kind of launching a process

3328
03:34:35.680 --> 03:34:40.960
where that information could be
connected via social analytics

3329
03:34:40.960 --> 03:34:45.970
trackers or other types of
trackers so that lenders or

3330
03:34:45.970 --> 03:34:50.170
brokers can start to create a
profile of that business and

3331
03:34:51.130 --> 03:34:56.410
tailor their marketing efforts,
for instance. But even, I think,

3332
03:34:56.410 --> 03:35:02.680
if there's some anonymity,
frankly it's murky and unclear.

3333
03:35:03.490 --> 03:35:07.210
But there seems to be an ability
to through digital

3334
03:35:07.210 --> 03:35:12.550
fingerprinting and connection
through data aggregators to

3335
03:35:12.550 --> 03:35:15.940
nevertheless start to create a
profile, even if that's

3336
03:35:15.940 --> 03:35:18.490
something that's not
particularly desired by the

3337
03:35:18.490 --> 03:35:23.500
business. And we don't know what
the practices are. Frankly this

3338
03:35:23.500 --> 03:35:27.430
is an emerging area. Obviously
it's using artificial

3339
03:35:27.430 --> 03:35:32.260
intelligence and machine
learning to some extent. And you

3340
03:35:32.260 --> 03:35:37.120
could argue that, to some
extent, it helps tailor

3341
03:35:37.120 --> 03:35:41.350
marketing efforts and exposure
to a broader array of tailored

3342
03:35:41.350 --> 03:35:46.120
products. But there could be
unwanted marketing efforts as a

3343
03:35:46.120 --> 03:35:51.190
result of it. And we don't know,
for instance, and I'm not

3344
03:35:51.190 --> 03:35:54.760
suggesting anyone's doing this,
but there could be different

3345
03:35:54.760 --> 03:35:58.480
pricing offered as a result.
It's just something that ought

3346
03:35:58.480 --> 03:36:01.780
to be on everyone's radar screen
that we ought to be monitoring.

3347
03:36:02.260 --> 03:36:04.930
Thank you. Anybody else have
thoughts on that issue?

3348
03:36:04.000 --> 03:36:07.600
There has actually, lately, been
a lot of movement at the state

3349
03:36:07.600 --> 03:36:10.300
level to really start thinking
through privacy. California has

3350
03:36:10.300 --> 03:36:14.080
a privacy that everyone have to
adhere to that. So I think there

3351
03:36:14.080 --> 03:36:16.150
is a lot of move at the state
level to kind of continue to do

3352
03:36:16.150 --> 03:36:19.360
that. And I think that there
will continue to be movement in

3353
03:36:19.360 --> 03:36:21.760
the industry around that topic.

3354
03:36:22.120 --> 03:36:26.050
OK, thank you. So let's move
briefly onto another topic

3355
03:36:26.050 --> 03:36:30.850
that's very important to us. Of
course primarily the FTC works,

3356
03:36:30.850 --> 03:36:34.030
through law enforcement, to stop
deceptive and unfair practices

3357
03:36:34.030 --> 03:36:38.020
in the marketplace. But beyond
that, we really strive, when we

3358
03:36:38.020 --> 03:36:41.920
can, to do outreach and educate
consumers-- in this case, that

3359
03:36:41.920 --> 03:36:44.890
would be small business owners--
about how to make informed

3360
03:36:44.920 --> 03:36:48.550
choices in the marketplace and
avoid confusion or potential

3361
03:36:48.550 --> 03:36:51.730
deception. And so I just wanted
to ask our panelists-- and I

3362
03:36:51.730 --> 03:36:56.200
know a couple of you have been a
part of initiatives or efforts

3363
03:36:56.200 --> 03:36:59.680
to educate small business owners
through your organizations. And

3364
03:36:59.680 --> 03:37:02.740
so I just want to sort of ask
what that looks like and how

3365
03:37:04.360 --> 03:37:06.610
you're engaged in those efforts.
John.

3366
03:37:07.120 --> 03:37:10.840
Yeah. Small Business Majority,
in addition to the policy work

3367
03:37:10.840 --> 03:37:14.050
we do, we have a very robust
entrepreneurship program. And

3368
03:37:14.050 --> 03:37:18.970
that involves a whole variety of
ways of educating small business

3369
03:37:18.970 --> 03:37:22.570
on a bunch of issues. Access to
capital has probably become the

3370
03:37:22.570 --> 03:37:24.880
biggest issue in the last couple
of years since we lost that

3371
03:37:25.360 --> 03:37:29.260
component of the program. It's a
combination of in-person

3372
03:37:29.260 --> 03:37:32.020
seminars, particularly in the
states where we have staff on

3373
03:37:32.020 --> 03:37:36.970
the ground. It is national, and
statewide, and regional webinars

3374
03:37:37.000 --> 03:37:41.440
that we do. One of the things we
do is we partner with business

3375
03:37:41.440 --> 03:37:45.250
organizations. We have
relationships over 1,000 mostly

3376
03:37:45.580 --> 03:37:47.770
local and regional business
organizations across the

3377
03:37:47.770 --> 03:37:52.270
country. And we partner with
them. So they need us coming

3378
03:37:52.270 --> 03:37:56.740
with our expertise. So we do
that, but responsible lending

3379
03:37:57.220 --> 03:38:03.250
and how to go about it is a huge
part of that. We also are

3380
03:38:03.250 --> 03:38:08.740
launching-- well, we have a
website, venturize.org, which

3381
03:38:08.740 --> 03:38:12.220
has all of this information on
it. And we are now launching a

3382
03:38:12.220 --> 03:38:16.750
matching tool, similar to what
Sheri described, on Venturize,

3383
03:38:17.500 --> 03:38:23.950
that will take information and
connect folks with loans out

3384
03:38:23.950 --> 03:38:28.360
there. Right now, we have links
to-- but part of the matching

3385
03:38:28.360 --> 03:38:30.430
tool, we have links to a variety
of lenders. Obviously a lot of

3386
03:38:30.430 --> 03:38:33.880
CDFIs, a lot of mission-driven
lenders, but also 7(a) lenders

3387
03:38:34.120 --> 03:38:37.630
as well. The matching tool is
being launched initially with

3388
03:38:37.630 --> 03:38:40.870
CDFIs, particularly focused in
certain regions. We just

3389
03:38:40.870 --> 03:38:43.180
launched in Chicago, we're going
to be launching in California.

3390
03:38:43.900 --> 03:38:46.600
We're going to start with the
CDFIs, and we would like to

3391
03:38:46.600 --> 03:38:51.070
expand that to other types of
loans. There may be some

3392
03:38:51.070 --> 03:38:54.670
opportunities to partner with
SBA's matching tool on that. So

3393
03:38:57.100 --> 03:39:01.870
I'll sum up by saying it's
hugely important to educate

3394
03:39:02.320 --> 03:39:04.870
small business owners and to
provide them with the sorts of

3395
03:39:04.870 --> 03:39:07.780
tools that SBA is providing now,
and that we're providing our

3396
03:39:07.810 --> 03:39:13.060
Venturize, to enable them to
learn. I like the idea of a

3397
03:39:13.060 --> 03:39:16.450
calculator that you suggested,
Christin-- giving me some ideas

3398
03:39:16.450 --> 03:39:22.480
there. So that's a huge part
that we have to remember as part

3399
03:39:22.480 --> 03:39:22.990
of all this.

3400
03:39:23.440 --> 03:39:24.970
Thank you. And Christin, did you
have a-

3401
03:39:25.480 --> 03:39:28.510
Yeah, I was just going to add--
I mean, I think, in a similar

3402
03:39:28.510 --> 03:39:32.230
vein, there's both kind of our
in-house efforts at education,

3403
03:39:32.230 --> 03:39:35.650
but one partnership that we've
found that's been really helpful

3404
03:39:35.650 --> 03:39:39.850
is we partner with the SCORE
Foundation, which has a network

3405
03:39:39.850 --> 03:39:43.840
of, like, retired executives-- I
think it's somewhere around like

3406
03:39:43.870 --> 03:39:47.080
11,000 throughout the country--
who can help provide mentorship.

3407
03:39:47.440 --> 03:39:49.900
And one thing that I think John
touched on earlier that I just

3408
03:39:49.900 --> 03:39:52.570
think is critically important is
that we don't just offer those

3409
03:39:52.570 --> 03:39:55.210
services to somebody who
successfully takes out a loan.

3410
03:39:55.390 --> 03:39:58.270
It's usually the people who are
declined that need it the most.

3411
03:39:58.510 --> 03:40:02.350
And so we offer and set them up
with those mentors whether

3412
03:40:02.350 --> 03:40:05.140
you're approved or declined.
Because in many cases, you want

3413
03:40:05.140 --> 03:40:07.960
to understand why and how you
were declined, and how you could

3414
03:40:07.960 --> 03:40:10.570
build your business credit and
kind of continue up that

3415
03:40:10.570 --> 03:40:13.300
financial health ladder. And I
think that providing that sort

3416
03:40:13.300 --> 03:40:17.410
of education to all folks, even
non-customers, is something

3417
03:40:17.410 --> 03:40:20.260
that's critically important to
us, and I think is shared by a

3418
03:40:20.260 --> 03:40:21.670
lot of other companies on the
panel.

3419
03:40:21.760 --> 03:40:24.310
And actually we have that on our
Venturize system. I completely

3420
03:40:24.310 --> 03:40:27.280
forgot. In fact, I just found
out, we have all 900 small

3421
03:40:27.280 --> 03:40:31.420
business development centers on
our Venturize platform now. We

3422
03:40:31.420 --> 03:40:36.490
connect with SCORE. So yeah,
that's absolutely critical to be

3423
03:40:36.490 --> 03:40:39.370
able to advise people, not only
if they're considering a loan,

3424
03:40:39.370 --> 03:40:41.380
but what happens when they
didn't get a loan. Or maybe they

3425
03:40:41.380 --> 03:40:43.630
shouldn't be applying for a loan
yet. Maybe they need to get

3426
03:40:43.630 --> 03:40:45.340
their act together before they
do that.

3427
03:40:46.360 --> 03:40:47.020
And Ky-Nam.

3428
03:40:47.930 --> 03:40:50.180
jJust briefly, because I know
we're running out of time on the

3429
03:40:50.180 --> 03:40:53.480
panel, but CRC, the California
Reinvestment Coalition, is an

3430
03:40:53.480 --> 03:40:56.300
interesting kind of grasstops
and grassroots organization

3431
03:40:56.300 --> 03:40:59.150
through our membership. So to
the extent that we've been doing

3432
03:40:59.210 --> 03:41:02.030
consumer outreach and education,
it's been through-- in language,

3433
03:41:02.030 --> 03:41:05.120
culturally-competent kind of
seminars, with our members on

3434
03:41:05.120 --> 03:41:09.410
the ground in Richmond and
Southern California. We're also

3435
03:41:09.410 --> 03:41:12.380
doing an interesting partnership
with LA County and this outfit

3436
03:41:12.380 --> 03:41:15.920
called Fenton Communications on
payday lending, and trying to

3437
03:41:15.920 --> 03:41:19.820
target folks who would be headed
towards those types of cash

3438
03:41:19.820 --> 03:41:23.030
merchants and send them
elsewhere. I also wanted to

3439
03:41:23.060 --> 03:41:26.630
briefly touch on the data
security point that Barbara was

3440
03:41:26.630 --> 03:41:30.050
mentioning, and just lift up
that there's real civil rights

3441
03:41:30.050 --> 03:41:32.360
implications that go into us,
that when you have

3442
03:41:32.360 --> 03:41:34.520
circumstance-and I've talked
with fintechs, I think some of

3443
03:41:34.520 --> 03:41:37.940
them in the room have said they
can actually tell, with 99%

3444
03:41:38.180 --> 03:41:41.270
certainty, the race of the
borrower, whether it's on the

3445
03:41:41.270 --> 03:41:45.290
way in on the way out. But there
isn't that kind of disclosure of

3446
03:41:45.290 --> 03:41:48.740
how that data is used. I think
we can't just trust that it's

3447
03:41:48.740 --> 03:41:50.960
going to be used that way. We've
seen it kind of happen

3448
03:41:50.960 --> 03:41:55.490
perniciously in the regulated
sector. So as the ecosystem

3449
03:41:55.490 --> 03:41:59.420
evolves, we want to make sure
that there's the same type of

3450
03:41:59.420 --> 03:42:02.360
democratic oversight for fintech
as there is for the regulated

3451
03:42:02.360 --> 03:42:04.040
banking industry to make sure
that we're not widening the

3452
03:42:04.040 --> 03:42:05.210
racial wealth gap.

3453
03:42:05.540 --> 03:42:08.990
Great. Thank you. So we have
about three minutes or so left.

3454
03:42:08.990 --> 03:42:12.110
And so actually it's sort of
perfect for a little exercise I

3455
03:42:12.110 --> 03:42:17.150
would propose. So assume we had
an audience or a roundtable

3456
03:42:17.150 --> 03:42:20.570
here, of small business owners
of the sort that you work with

3457
03:42:20.600 --> 03:42:26.000
or lend funds to. And through
these sort of educational

3458
03:42:26.000 --> 03:42:29.240
efforts you've engaged in, how
would you, if you just had a few

3459
03:42:29.240 --> 03:42:32.990
minutes, as we do, what would be
sort of the key points or

3460
03:42:32.990 --> 03:42:36.080
messages that you would convey
to them about how to

3461
03:42:36.080 --> 03:42:39.050
successfully navigate the
information in this marketplace,

3462
03:42:39.320 --> 03:42:43.250
and tips to avoid potential
problems or even deception?

3463
03:42:44.420 --> 03:42:47.360
Anyone have any thoughts? John.

3464
03:42:47.960 --> 03:42:52.040
Well, I mean, there's a conflict
here, because a lot of times

3465
03:42:52.250 --> 03:42:57.920
small business owners want a
loan quickly. And so but we tell

3466
03:42:57.920 --> 03:43:02.570
them, you need to take a little
bit of time and figure out-- all

3467
03:43:02.570 --> 03:43:05.090
of the things we're trying to
maybe get into a TILA bill, or

3468
03:43:05.090 --> 03:43:08.570
that are a part of the SMART Box
or the Borrowers Bill of Rights,

3469
03:43:09.080 --> 03:43:14.900
they need to consider it. Ask
what the APR is, make sure

3470
03:43:14.900 --> 03:43:18.170
you've asked all the questions
about prepayment, about fees,

3471
03:43:19.910 --> 03:43:25.790
and the term. All of the things
that we want Lenders to

3472
03:43:25.790 --> 03:43:30.890
voluntarily provide, we educate
borrowers that they need to be

3473
03:43:30.890 --> 03:43:34.190
asking those questions. So I
mean, we're not saying they have

3474
03:43:34.190 --> 03:43:37.640
to take three weeks to do this.
But just educate themselves and

3475
03:43:37.670 --> 03:43:41.240
be aware that if they don't,
they could really be getting

3476
03:43:41.240 --> 03:43:44.840
themselves into a trap. The
other thing is, don't take the

3477
03:43:44.840 --> 03:43:47.090
loan if you don't-- it's the
flip side of what I said about

3478
03:43:47.090 --> 03:43:49.760
the lenders. Don't take the loan
if you don't think you can pay

3479
03:43:49.760 --> 03:43:54.050
it back through your normal cash
flow. And I'm a former small

3480
03:43:54.050 --> 03:43:57.440
business owner, so I tend to get
pretty exuberant in thinking,

3481
03:43:57.440 --> 03:44:00.470
yeah, no problem, I can do it.
But you really need stop and

3482
03:44:00.470 --> 03:44:02.690
think. Because then you have to
decide, well, what happens if I

3483
03:44:02.690 --> 03:44:04.790
can't, and I have to take
another one of these loans, and

3484
03:44:04.790 --> 03:44:10.580
that becomes a death spiral, or
I'm going to potentially lose

3485
03:44:10.580 --> 03:44:13.940
collateral, or I have to cough
up money personally. So they

3486
03:44:13.940 --> 03:44:18.440
really need to be thinking about
that, even if it means they have

3487
03:44:18.440 --> 03:44:21.890
to slow down a little bit before
they sign on the dotted line so

3488
03:44:21.890 --> 03:44:22.340
to speak.

3489
03:44:22.880 --> 03:44:24.980
Great. Great. Does anyone else
have thoughts?

3490
03:44:25.200 --> 03:44:27.570
I would say, at the end of day,
they should start their process

3491
03:44:27.630 --> 03:44:29.310
with really understanding what
they want to do with the

3492
03:44:29.310 --> 03:44:31.920
lending. I think that's one of
the biggest things that we try

3493
03:44:31.920 --> 03:44:34.260
to do with our small business
owners is really have a

3494
03:44:34.260 --> 03:44:36.660
conversation of what they're
trying to use that money for.

3495
03:44:37.050 --> 03:44:39.300
And when they understand what
exactly they're going to do,

3496
03:44:39.300 --> 03:44:43.200
then take the time-- really take
the time to understand what are

3497
03:44:43.200 --> 03:44:47.130
the different options and which
option actually best fits what

3498
03:44:47.130 --> 03:44:49.890
actually they're trying to do.
Because I think that's why they

3499
03:44:49.890 --> 03:44:52.140
rush into the decision because
they haven't spent enough time

3500
03:44:52.140 --> 03:44:54.420
understanding what they're going
to do with the money and really

3501
03:44:55.080 --> 03:44:57.330
what is the best product for
that need that they're trying to

3502
03:44:57.330 --> 03:45:00.210
serve. So I think that's-- this
would really be the time to

3503
03:45:00.210 --> 03:45:03.030
really understand what they're
trying to do and to execute that

3504
03:45:03.330 --> 03:45:03.870
decision.

3505
03:45:04.830 --> 03:45:07.950
Great, Thank you. Well, it does
look like we're just about to

3506
03:45:07.950 --> 03:45:11.520
run out of time. And so I'd ask
everybody to really thank our

3507
03:45:11.520 --> 03:45:13.800
great panelists here today. This
was a very interesting

3508
03:45:13.800 --> 03:45:19.890
discussion. Thank you.
[APPLAUSE] And before we all get

3509
03:45:19.890 --> 03:45:25.740
up, we're fortunate today, too
to have our bureau director,

3510
03:45:25.740 --> 03:45:29.550
Andrew Smith, to offer some
closing remarks. Welcome.

3511
03:45:37.480 --> 03:45:40.570
So everyone's going to stay
here? [CHUCKLING] That's OK. I'm

3512
03:45:37.560 --> 03:45:37.950
[APPLAUSE]

3513
03:45:40.570 --> 03:45:45.340
good with that. So just a quick
disclaimer, I speak for myself

3514
03:45:45.340 --> 03:45:48.280
only not for the commission or
for any individual commissioner.

3515
03:45:48.730 --> 03:45:52.870
So I wanted to thank you, all of
our panelists today, and also to

3516
03:45:52.900 --> 03:45:59.440
our audience. One of the things
that has been surprising to me

3517
03:46:00.190 --> 03:46:03.190
about small business financing
for a number of years is how

3518
03:46:03.190 --> 03:46:06.700
little scrutiny it's been given,
at least at the federal level,

3519
03:46:07.540 --> 03:46:10.810
with the exception, of course,
of the really excellent work and

3520
03:46:10.810 --> 03:46:13.270
groundbreaking work that the
Federal Reserve Board and some

3521
03:46:13.270 --> 03:46:16.900
of the Federal Reserve banks
have been doing on these issues.

3522
03:46:18.010 --> 03:46:21.670
Maybe that's because people
still think that these are

3523
03:46:21.670 --> 03:46:26.260
$500,000 bank loans. But I think
what I've learned today at least

3524
03:46:26.260 --> 03:46:29.290
from-- in all of our panels is
that that's a bit of a fiction,

3525
03:46:29.590 --> 03:46:32.530
is that these are smaller loans,
given to smaller businesses by

3526
03:46:32.530 --> 03:46:35.980
people who aren't subject to
bank supervision. So we've

3527
03:46:35.980 --> 03:46:38.200
covered a lot of ground this
morning. We talked about these

3528
03:46:38.200 --> 03:46:40.810
recent trends in the small
business finance market,

3529
03:46:41.110 --> 03:46:44.290
including the use of technology
to offer financing to small

3530
03:46:44.290 --> 03:46:47.560
businesses. We've talked about
the risks to small businesses,

3531
03:46:48.010 --> 03:46:50.740
including the potential for
confusion, deception, unfair

3532
03:46:50.740 --> 03:46:55.240
servicing, and collection, and
even outright fraud. We talked

3533
03:46:55.240 --> 03:46:59.140
about the laws and rules that
would apply to people who are

3534
03:46:59.140 --> 03:47:02.500
offering financing to small
businesses, and efforts by

3535
03:47:02.530 --> 03:47:07.450
industry, by government, by
small businesses to ensure that

3536
03:47:07.450 --> 03:47:10.300
small businesses understand the
cost and terms of these

3537
03:47:10.300 --> 03:47:15.730
products. As Commissioner Chopra
mentioned this morning, we at

3538
03:47:15.730 --> 03:47:20.230
the FTC think that we have a
special role to play. Unlike

3539
03:47:20.260 --> 03:47:25.270
other federal regulators, we're
not constrained by whether the

3540
03:47:25.270 --> 03:47:28.600
transaction is for personal,
family, or household purposes,

3541
03:47:28.810 --> 03:47:34.090
that our organic statute, the
FTC Act, allows us to address

3542
03:47:34.090 --> 03:47:38.560
unfair and deceptive practices,
even with respect to businesses.

3543
03:47:38.830 --> 03:47:43.450
And I want to make clear that we
believe strongly in the

3544
03:47:43.450 --> 03:47:46.510
importance of small businesses
to the economy, the importance

3545
03:47:46.510 --> 03:47:50.770
of loans and financing for small
businesses, and the ability of

3546
03:47:50.770 --> 03:47:54.820
technology to expand access to
fair and transparent financing

3547
03:47:54.820 --> 03:47:58.390
for small businesses. But we
believe equally strongly in

3548
03:47:58.390 --> 03:48:02.380
protecting those businesses from
unfair and deceptive practices.

3549
03:48:03.220 --> 03:48:06.070
After all, if small businesses
think that the finance game is

3550
03:48:06.070 --> 03:48:11.260
rigged, then they won't play.
And in that case, we all lose.

3551
03:48:11.920 --> 03:48:15.130
The FTC Act gives us broad
authority to stop deceptive and

3552
03:48:15.130 --> 03:48:19.330
unfair practices by non-bank
lenders, MCA funders, marketers,

3553
03:48:19.330 --> 03:48:24.520
brokers, ISOs, lead generators,
servicers, and collectors. We

3554
03:48:24.520 --> 03:48:28.360
are very concerned about reports
of unfair and deceptive

3555
03:48:28.360 --> 03:48:32.320
marketing, sales, and collection
practices in the small business

3556
03:48:32.320 --> 03:48:36.310
finance market. I want to remind
all of you that protecting small

3557
03:48:36.310 --> 03:48:39.460
businesses is nothing new for
the FTC. I would direct you to

3558
03:48:39.460 --> 03:48:43.000
our Operation Main Street, last
summer, when we, with our state

3559
03:48:43.000 --> 03:48:45.730
partners, brought dozens of
actions to protect small

3560
03:48:45.730 --> 03:48:52.180
businesses from fraud and unfair
practices. Acting to prevent

3561
03:48:52.180 --> 03:48:55.600
sharp practices by fintech
lenders is also nothing new for

3562
03:48:55.600 --> 03:48:59.500
us. See, for example, our recent
cases against Lending Club,

3563
03:48:59.500 --> 03:49:03.820
SoFi, and Avant. Although
financial technologies can

3564
03:49:03.820 --> 03:49:06.940
evolve quickly, the underlying
legal protections for small

3565
03:49:06.940 --> 03:49:11.080
businesses remain the same, and
have proven remarkably adaptable

3566
03:49:11.080 --> 03:49:16.300
over time. We adapt the FTC Act,
the FCR, or the Fair Credit

3567
03:49:16.300 --> 03:49:19.090
Reporting Act, the Equal Credit
Opportunity Act, and other

3568
03:49:19.090 --> 03:49:22.630
statutes to new technologies and
changing circumstances all the

3569
03:49:22.630 --> 03:49:26.680
time. In fact, it's a point of
pride for us. While we recognize

3570
03:49:26.680 --> 03:49:30.070
the benefits of financial
technologies, we expect that

3571
03:49:30.070 --> 03:49:33.190
even the most innovative
companies will observe these

3572
03:49:33.190 --> 03:49:36.910
baseline consumer protection
principles. So if you're a small

3573
03:49:36.910 --> 03:49:39.640
business owner and you feel as
though you've been harmed in

3574
03:49:39.640 --> 03:49:42.700
connection with small business
financing, you should submit a

3575
03:49:42.700 --> 03:49:51.010
complaint to us at the FTC,
FTC.gov, or 877-FTC-HELP. and to

3576
03:49:51.010 --> 03:49:54.880
close, we look forward to
continuing today's dialogue with

3577
03:49:54.880 --> 03:49:57.640
industry, with consumer
advocates, with our government

3578
03:49:57.640 --> 03:50:01.420
partners. Don't hesitate to
reach out to us in the coming

3579
03:50:01.420 --> 03:50:05.020
weeks and months, just as many
of you have reached out to us in

3580
03:50:05.020 --> 03:50:08.170
connection with this forum.
Thank you all for coming today.

3581
03:50:08.170 --> 03:50:15.730
[APPLAUSE] And that concludes
our program.