Transparent Pricing Creates a Level Playing Field, says Kabbage’s Kathryn Petralia

Loan matchmaking site Lending Tree has joined the Innovative Lending Platform Association (ILPA) to participate in developing a universal small business lending disclosure system to raise transparency with lenders. It will work closely with the association over a 90-day “national engagement period” to create and implement the SMART Box (Straightforward Metrics Around Rate and Total Cost).

deBanked spoke to Kathryn Petralia, cofounder of Kabbage Loans, which is spearheading the association with OnDeck and CAN Capital. Below are the edited excerpts from the interview:

Tell us about how the ILPA came about?

We (OnDeck, CAN Capital and Kabbage) represent the largest non bank lenders. We have collectively lent $12 billion through the course of our businesses and so we thought it will be great for us to make a statement through ILPA.  We came from a perspective that there are a lot of different products for small businesses on the market like merchant cash advance, equipment financing, invoice factoring and lines of credit. All of these serve different needs and are ambiguously priced. So we wanted to find some methodology which is transparent to borrowers so they can know the exact price and total cost of borrowing.

We want to keep it open and hope that everyone participates in the disclosure methodology so borrowers can have a clear understanding of the fees they are paying.

What is SMART Box. How does it work?

Different loan products have different fees — some have maintenance fees, some have broker fees, usage fees and so on and they are all structured very differently. It can get very confusing and so we came up with all the products to understand what disclosures would be necessary to know the total cost of borrowing. We’re working with OnDeck and CAN Capital to gather comments and disclose a series of methodologies that will create the ‘Straightforward Metrics Around Rate’ and Total Cost or SMART Box. Those who want to participate will have to disclose it on loan agreements to their customers.

What about disclosures by companies? Would you say the industry needs more regulation on that front?

Kabbage and other companies in the industry are all regulated and go through FDIC audits. We all follow KYC, CIP, FFIEC guidelines that refer to lenders. We all follow these regulations and I would argue vociferously that we are regulated businesses already. All companies are very different and there are a bunch of things happening — states like California, Illinois and New York and CFPB are all taking interest in small business lending and it’s a positive that they recognize the partnership between banks and tech companies. On the general lending side, we have Dodd-Frank and Madden vs Midland which look at lending issues. Some of the regulation is around how loans are sold and some of it is around how they are limited. And on the small business lending side, there is push for more transparency which is the reason we launched ILPA. We wanted to set the standard for what that would look like. And having it done comprehensively is beneficial for us as it gives us a level playing field.

On the consumer lending side, there is transparency but it’s still lacking a comprehensive system that encapsulates the total cost of borrowing. APR is a great metric but the total cost of borrowing must be included.

Give us a snapshot of what the industry looks like to you

All businesses serve different markets, are different in the way they fund their loans and operate in different geographies, so it’s hard to say but in general those who have done a good job at incorporating data and tech and streamlined operative process will have an advantage and will make it through economic turbulence.

What’s your short-term prediction?

Companies that are not well capitalized will have a tough time raising capital in 2016 and we have already been approached by a number of businesses that are looking to sell or find a partnership because they aren’t well capitalized.

Tell us what’s happening at Kabbage?

We have two businesses – the direct lending business which we are trying to grow and the second is the platform business where we have seen sustained growth, with existing partnerships with ING in Europe, Santander in the UK and Scotia Bank in Canada. More partnerships are in the offing – both domestically and in Latin America.