Sean Murray: All right. Well, welcome back. My name is Sean
Murray with deBanked. I am the president and Chief Editor. And
today we're going to talk about what makes a good ISO. Last time
we talked about what makes a good funder and it was all about
what ISOs are looking for and funder. A new thread was posted
on Daily Funder since then it was it was about what makes a
good ISO. And I thought it was an interesting question. Because
it just goes to show how complex commercial finance can be. And
if you're a regulator out here, and you're watching this, I hope
that you understand that the intricacies of a small business
finance is a lot more than just evaluating the customer. It's
also analyzing the broker or the referral source, believe it or
not, and three things that go into it are responsiveness,
trust, and knowing who your who your partners are. And the the
post on Daily Funder actually got a lot more responses. And
what makes a good ISO, versus what makes a good funder.
Apparently, funders had a lot to say about what makes a good ISO.
It's actually a topic I know a little bit about, because they
used to be an underwriter. And believe it or not, how you feel
about the broker plays a role and whether or not the deal gets
completed, or not just one deal, but a whole bunch of deals. And
the first thing that really came to mind was responsiveness. And
this was one of the things that was mentioned in the thread on
Daily Funder itself, if you're a funder, and when we're talking
about funders, we're really talking about underwriters,
right? Because the underwriters are the ones who have to work on
the deals themselves. So the underwriters are really what we
mean by funders. And if you're an underwriter, and we're
talking about responsiveness, we're trying to think about, not
just how accessible a broker can be, but also whether or not they
can get the information that the underwriter is looking for. So
if you're, if you're underwriting a file, and you
need bank statements in a multi day bank, and you're trying to
get it from the merchant, you're hoping that the broker is going
to do it for you. And the worst thing that a, an underwriter can
have a broker who doesn't care. Who doesn't understand why, or
is making a big fuss about it. So that's, that's a big, that's
a big thing for underwriters. And they take these as signals
as to how they feel about you, and how they're going to feel
about working with you on your future deals. In all these
little signals, they factor in to how that relationship is
gonna play out. And it goes into trust, which is probably the
number two most important thing does the underwriter trust you?
And it's kind of interesting to think about. If you're the
merchant, and you apply for financing, you're worried about
whether or not the underwriter is going to trust you with their
money. But you probably don't think about whether or not the
underwriter is going to trust the broker that you're working
with. And believe it or not, it plays a big role.And there are a
lot of different things that go into trust, I think, a very,
very important one is whether or not you're upfront and
transparent about the application that you bring. If
there's any issues with the deal, they want to know that the
broker is going to tell them right out of the gate, they
don't want to find out at the end of the deal, right before it
funds or right before gets declined, that you as the broker
knew something the whole time and withheld that information.
And if you're a broker, I kind of get it right because you're
thinking, hey, well, it's the underwriters job to figure
things out on their own. You're just the broker. If the if the
underwriter approves the deal may miss something that's their
fault. But really, the underwriter is kind of depending
on you to an extent. And so they need to have some trust in you
that you're doing everything on the up and up. Because if the
deal doesn't perform, it's going to come back on the underwriter
and then the underwriter is probably going to blame you. And
so they're they're kind of trusting that you're going to
tell them what they need to know, because the broker is the
one managing the client relationship. From the very
beginning. It's important to know that underwriters don't
always make commission or don't really have performance
incentives. And when they don't, right, and they're not judged,
and they're not judged on their performance of the deal. Or
they're not judged on the decisions that they make. They
can kind of create little subconscious biases about who
they like and who they don't like, at the end of the day. And
so if you're a broker, you want to be one of those people that
are subconsciously liked and being trustworthy is a good way
to make that happen. And then another, another factor is
definitely limiting your outlets, probably the number one
thing that was talked about on the Daily Funder thread is a
funder really does not like when you were shotgunning, a pile out
to 100 different sources, and you happen to be one of them.
The reason is because a lot of time can be spent analyzing a
deal that has virtually no chance of going forward on
account of you having submitted it to 99 other sources. And so
what they put in all this work, and they're like, hey, I need
this, this and this. And they literally spend not only time
they spend money, right? They have to check credit. They're
doing you know, background checks, those things cost money.
And then they find out you, you got it funded with a competitor.
Well, that for them is just a waste of time, right? They're
like, Well, hopefully we'll get the next one. And if the same
thing happens again, they're like, Well, hopefully the next
one. And it comes down to eventually being like, well,
what's it going to take for these deals to close? If you're
just sending it out to 100? People? Are you sending us the
right deals? Or are you just using us to analyze credit or
you just, you know, want to have us is one of your 100 backup
options. Nobody wants to be like that, happened to me a long time
ago. We had a situation, this is more than 10 years ago. But we
had a situation where I was an underwriter and a broker was
submitting deals. And I think out of like 100 and, you know,
304 deals, we funded one and it was a tiny deal. And, you know,
I as the underwriter was asked by the funding company, what's
going on? They thought it was because of me. And I said, No, I
probably approved more than half but then we never heard
anything, and there was no follow up. And I'm not really
even sure what happened to the deals. Turns out, they were just
being funded by another company. And I believe the term that was
used to describe that experience was it was kind of like an
academic exercise. It was like, Hey, here's 100 plus deals to
underwrite. None of them are gonna fund but you know, what
would you do in these circumstances? Don't worry,
they'll never happen in real life. That's literally what was
what was happening. Here. I was doing those underwriting, and
then nothing ever got funded. And then I as the underwriter
even though I wasn't compensated on essentially, on my
performance, it looked like I wasn't doing anything, you do
have to fund deals, if you're an underwriter, you can't decline
everything. And so that really impacted how I was building the
company. And then I looked on very unfavorably upon that
broker. And then when that broker was really anxious about
me finding a deal, after all those deals that we weren't
getting done, all of a sudden, I didn't really trust that person.
Because why are you so into this one deal at the last 100 he
didn't care about now, I feel like there's something wrong
with the deal. And you're trying to trick me into doing so into
funding it. And no under, no underwriter wants to feel like
they're in that position. They want to be able to trust you,
and they want to be able to rely on you. And when things go wrong
with the deal, even after they're funded, there's a level
of confidence in knowing that the broker cares after the deal
to do something as well, because the funding company, the owners,
whoever the investors gonna say, they're gonna go to the
underwriter and say, you know, what's, what happened with this
deal, it looks like it's going sideways. And it's one thing for
you to do all you can to try to get it back on track. But it's
also very helpful when you know, the broker is going to be there
too. And then if the broker is doing those things, well,
there's a good chance that the next time that broker submits
the deal, that underwriter is going to look a little bit more
favorably upon doing it. And it's all really feeds into,
again, what I said at the beginning, about how it's a lot
more than just the underwriter judging the merchant, the
merchants want to think it's just about them, whether or not
they were credit worthy, trustworthy, you know, they look
sustainable or whatever. But at the end of the day, the
underwriter is factoring in all these things I just mentioned,
thinking about whether or not they can trust them. They're
thinking about whether or not they got a lot of other deals
that sent in funded, how those deals performed, what they did
when things didn't go the way they wanted. And that's what's
being factored into the deal, too. So if you're out there, and
your regulator and you're listening to this, it's not as
black and white as whether or not certain demographic factors
contributed to whether or not the deal got funded. It's the
chance and it could be subconscious. And it probably is
mostly subconscious. But there is a bias in terms of who
referred the deal to begin with. And so if you're saying, Well,
two deals look equal, and one got approved, and one didn't.
But what's the demographics one with a man, with a woman? You
know, what kind of inference can we draw from that? I don't know
that you can draw any inference until you look at how did the
deals get submitted to you was one from a broker that the
underwriter liked and one from a broker that the underwriter
didn't like or one they trusted a lot when they didn't really
trust that plays a role in all of it. And so you want to be the
broker who had who has the trust, right? And I don't think
that ever even been addressed when we're in the sense of
regulation for how demographics should be evaluated. And I'm
talking in particular about section 1071, of Dodd Frank,
which is supposed to be carried out by the CFPB. They're the
ones that are looking at demographic factors and small
business lending. And it's never been brought up, that the broker
or the referral source plays a role in whether or not a deal
gets done. In consumer lending, you don't really have that you
have somebody applies, the FICO score gets checked, and then
they're wondering, they're wondering, or they're worrying
about whether or not there were little, you know, intangible
variables that impact whether or not somebody got approved, that
could be deemed some sort of discriminatory, you know,
variant. But here, here it could it, could it come down to the
broker, they might not even thought about the applicant at
all, if you can believe it, let's just say they funded 49
out of last 50 deals and another deal comes in and they're like,
you know, it's small, we like this broker, we're going to fund
it, like, imagine now trying to be the CFPB. And trying to
determine whether or not there was any discrimination at play,
when it came to the applicant, it had nothing to do with the
applicant, which is wild, but that's the way that's the way
commercial finance and small business finance works. And if
you're a broker, and you have, you have the issue where funders
don't trust you, or you don't submit enough files for them to
have belief in in how they work and operate with you. Well, it
kind of brings up the whole, you know, idea of CO brokering,
there are brokers out there, who try to convince other brokers to
submit to them on account of, they can submit a deal to a
funder and get and be more likely to get an approval, and
then somebody else who the underwriter doesn't have a
relationship with. And we hear about relationships all the
time, I have a relationship with this company, I've a
relationship with that company. And you should submit to me and
ultimate to them because there's a higher chance of it getting
approved. But guess what, that's a real thing. It's a real thing
in business, finance, it's a real thing in commercial
finance. And so if you're a broker and you're getting all
your deals declined by a funder is notorious for high approvals?
Well, it could be because they don't trust you. And so
submitting your deals to a broker, who can then submit them
on your behalf could increase those chances of it getting
funded. Now, there should be transparency and where the deal
originally originated from you don't want the funder to think
that, you know, this, the original source is not who they
say they are. But you know, it all it all like does make sense,
the whole idea that once somebody could have a
relationship that could impact the approvals, that's a real
thing. And I know this from experience, not just not just
from talking to people, there were brokers that we would
actually meet with in person. And it actually, you know, I got
to know what their character was. And I'm not saying that I
then approve deals because I intentionally liked them. But
maybe because there was some subconscious bias that I believe
this person was trying to do the right thing, versus someone who
I didn't know, who would send, you know, one or two deals a
month and make a whole scene about it. And I felt like, I
don't know, you know, maybe it's not worth it, right? Because
what happens if we do it, and it goes bad, and I don't have any,
any any leverage to to explain why I did it, you know, I don't
have any relationship with you. I didn't know that if you were
trustworthy or not. I didn't feel if you were trustworthy.
And so that's actually that's actually a part of it. And I
think it's going to continue to be a part of it for a good
period of time, I know that there's a lot of FinTech now,
and things are automated. But at the end of the day, even then
people are analyzing where the deal flow is coming from, even
if it's automated, and it's coming from a website. And this
website is notoriously had a worse, higher default rate that
never soars. They may go in and say, Well, you know, let's
decline more of those deals, because they have a higher
default rate for some reason, right? And they're judging the
source of the deals and not judging the applicants on the
deal. This, this happens. And they say the default rate from
the source was too high, decrease their approval rate, or
just turn them off altogether. And that can happen you can have
funders decide they don't want to work with you; could be
because they don't trust you, could be because you send in too
little deal flow, could be because you're not responsive.
Could be because you're just using them as one of 100
companies to shotgun a file at and you can get terminated as an
ISO and you may say also, so what you know, other than 99
other companies. Well, there's other things to think about and
that's whether or not your renewals will stay with you
whether or not you'll get paid on those renewals. And whether
or not your contract allows you to even move a deal somewhere
else or continue to engage with those customers. You should
really be thinking about long term relationships with all the
companies you work with, which should be limited.It's pretty
common for people to think about it in terms of having a, you
know, A, B, C, D, E, F paper, whatever you want to call it,
having a couple shops for a couple for your B couple years,
you know, C, D and a couple for the garbage files. And it's okay
to look at it from that standpoint. So if you work with
10, funders, 10 isn't too much 10 lenders isn't too much, but
100 is way too much. And so you could have two or three for
your, for your premium quality paper, and you can have two or
three for your bottom quality. That's okay, nobody's gonna fall
to you. If you send your dealer to two or three companies like,
hey, this looks like an A paper client. I'm going to send it out
for two or three companies and see which one comes back with
with the best deal. Nobody's faulting you for that. They're
faulting you for when you send it out to 100 different
companies, or you're sending them deals that clearly don't
fit their parameters. Another thing you don't want to you
don't want to mess up. And so, you know, these are all things
that come into what a funder thinks about when an underwriter
thinks about when they're working with a broker comes down
to responsiveness, whether or not you're able to get the
paperwork, in that you answer the underwriters questions and
that you participate in the process. You can't just be
absentee that they trust you trust being that, that you care
that you're a good character, and that you're not withholding
any information back from the underwriter and also limiting
your outlets. They want to know that, that you that they are an
important partner in your broker journey. they're okay with being
one or two or three have a certain quality paper, but they
don't want to be one of 100. And so if you're a broker, I know
it's so easy to go out there and say here's what to look for in a
funder. But as you can tell from the start on the daily funder
bonders think the same way. Here's what I look for in an
ISO. Here's what I look for in a broker. And that was our topic
for today. So thank you very much for being here. And I'll
see you next time. I'm Sean Murray with deBank