Banks Set Sights on Small Business Loans Under $100,000
BOSTON – One of the oldest lenders in the nation had a hand in developing technology intended to enable banks to win back the small business loan market from alternative lenders.
A tech incubator at Boston-based Eastern Bank, founded in 1818, has spun off Numerated Growth Technologies Inc., a startup that developed an online platform designed to identify and contact small businesses eligible for loans of up to $100,000.
Numerated Growth, which was founded in March, developed its tech in Eastern Labs and has generated about $100 million of volume since 2015. The model, which features real-time approval, is based on the tact banks first took with pre-approved credit cards in the 1990s, Numerated CEO Dan O’Malley told deBanked.
“We’re just taking the same rules and applying them here,” he said. “And by the way, that’s what customers want.”
Numerated Growth, which employs 26 workers, came out of stealth mode in May with a $9 million seed funding.
O’Malley, Eastern Bank’s former chief digital officer, said Numerated is now selling the platform to other banks but declined to disclose the specific number. The cost per bank depends on the number of loans being processed, he said.
The average business loan is $40,000 and they can be approved and funded within five minutes of the business completing the online agreement.
Numerated Growth’s real-time platform could be considered loan origination software on steroids. But such software essentially enables a bank to enter an applicant’s information into a digitized system to assist in the approval process. Alternative lending startups have been improving on that model for several years. Competitors in that space include nCino Inc., Decision Lender (Teledata Communications), PerfectLO and defi solutions, LoanCirrus.
But loan origination software is very crowded and startups are constantly launching to reduce the time it takes to approve a loan without increasing the number of defaults.
“Banks need to do things that are counter to each other,” David O’Connell, a senior analyst for the Boston-based Aite Group LLC, told deBanked. “There’s a need to do a fast money transaction, but doing it diligently without making any bad loans.”
Combining the marketing and approval process is a credible approach because it keeps them on the same page in terms of targeting the most likely prospects. As a result, the number of “false positives” is lower, O’Connell said.
Instead of developing their own small business loan platforms, some banks are referring borderline borrowers to alternative lenders. But that can cause problems for the bank if the customer service doesn’t measure up to the bank’s standards and customers associate shoddy service with the entity that referred them, O’Connell said.
The best option is to develop in house. “Banks need to go as deep into the alternative lending market as they can with their own infrastructure and brand,” he said.
Because of its low value compared with other types of bank business, small business loan origination is one of the last remaining areas of banking to be targeted with innovation. “There’s not a huge price point,” said Kevin Tweddle, executive vice president for innovation and technology at the Independent Community Bankers of America.
Loan origination startups are trying to make such deals worth the bother. Yet the best tools tend to be developed by banking industry people because they understand the regulatory restrictions and integration factors, he said.
The goal of loan tech tools is two-pronged: make the approval process more efficient and make it convenient for borrowers. And so far, no software developer has risen above all the others to capture majority market share, Tweddle told deBanked.
“It’s just too early; there’s too many of them still coming out,” he said. “We’re in the early innings of a nine-inning game.”
Banks can’t afford to ignore the demand for alternative lending tools.
In May, the University of Chicago’s Polsky Center for Entrepreneurship and Innovation reported that the alternative finance market slowed but continued to grow during 2016 in the United States, Canada, Latin America and the Caribbean. The market’s value reached $35.2 billion — a 23 percent increase compared with 2015.
More than 200,000 businesses used online alternative funding sources during 2016. In the United States, marketplace and peer-to-peer consumer lending accounted for the largest share of market volume with $21 billion in the U.S. last year, a 17 percent increase. Balance sheet business lending was the second-largest model in the U.S. with $6 billion originated, the report found.
In Latin America and the Caribbean, marketplace and peer-to-peer business lending was the largest alternative finance segment with $188.5 million last year, a 239 percent rise versus 2015.
The same principles fueling the car-sharing business are being applied to peer-to-peer lending. As a result, adoption is growing as people view the credibility of peer lenders on an equal level of traditional experts, said David Wong, senior director of the innovation and acceleration lab at the Chicago-based CME Group Inc.
“Whether P2P markets reach or exceed the size of the incumbent market platforms (ala Uber and Airbnb), or not, they are driving rapid innovation and new dimensions of competition across industries,” he said.
Industry observers agree that small business loans haven’t seen enough innovation from the banking industry because of its size compared with commercial lending and real estate deals. As a result, it has a long way to go to shorten the time it takes for approvals and improving the customer experience, O’Connell said.
“Banks that fail to embrace automation for their commercial lending lines of business will lose the valuable relationships, loan outstandings, and fee-based income abundant in the commercial and industrial market,” he said.
After the 2009 global financial crisis, bank regulations tightened and data sets were required to be available and analytics-ready, providing another compelling need for commercial loan origination systems, O’Connell said.
No dominant players have emerged because neither traditional banks nor alternative lenders have figured out the best approach that satisfies both the lender and the customer, O’Connell said.
“Businesses don’t want money right away but they do want a quick and easy process,” he said. “My data tells me that in addition to providing underwhelming turnaround time, no particular lender has an edge over another. Nobody has it right.”
At Numerated Growth, O’Malley said the “initial wake-up call” signaling that a change was needed came in 2013 when Eastern Bank noticed solid small business customers paying off loans from alternative lenders such as On Deck Capital Inc. and LendingClub Corp. The pattern suggested that there was an unmet customer need.
Numerated Growth’s platform is designed to enable banks to proactively aggregate the data they need to identify prospective borrowers instead of requiring business owners to collect the data and present it to banks, O’Malley said.
“We’re making the banks do the work,” he said. “The same process that transformed the credit card industry will transform the financial products industry.”Last modified: December 14, 2017