Articles by Gerelyn Terzo
CFC on the Front Lines of the MCA Regulation Battle
November 6, 2017
As the US Senate attempts to reach a bipartisan agreement on relaxing some of the rules in the Dodd Frank legislation of 2010 that would treat banks more favorably, the MCA industry is having to fend off legislation and regulation of its own at the state and federal levels that could position funders in a similarly crippling position.
MCA regulation has been thrust into the spotlight for a number of reasons, not the least of which has been the Consumer Financial Production Bureau (CFPB). The CFPB is moving forward with the Dodd-Frank Section 1071 rulemaking process for data collection regarding small business lending, a sector of the market for which they do not have jurisdiction, sources say.
Front and center in the policy discussions has been the Commercial Finance Coalition (CFC), a merchant cash advance trade association that is coming up on its two-year anniversary in December. While federal policymakers appear to be listening, state legislatures have been a more difficult nut to crack.
The CFC’s Influence
In its short two-year history, the CFC has been one of the most vocal if not the most influential trade organization lobbying on behalf of the MCA industry, having attended 70 congressional meetings and having led advocacy efforts for the industry in the halls of Albany, Sacramento, Illinois and Washington, D.C.
Dan Gans, executive director of the CFC, has been the voice of the MCA industry on Capitol Hill and has been invited to testify in key congressional hearings. “For whatever reason, the CFC has really become the voice and has taken an active part in the so far successful advocacy efforts to educate and mitigate potential harm to our members’ ability to deploy capital to small businesses that need access,” Gans told deBanked.
Most recently the CFC participated in a fly-in, one of two such events this year, to Washington, D.C. in which the association’s counsel Katherine Fisher of Hudson Cook, LLP testified.
In her testimony Fisher said: “The MCA and commercial lending spaces are sufficiently regulated by existing federal and state laws and regulations. Both MCA companies and commercial lenders must comply with laws and regulations affecting nearly every aspect of their transactions, from marketing and underwriting through servicing and collection.”
She went on to explain: “Even if they comply with every applicable law and regulation, small business financers must also be wary of the Federal Trade Commission’s powerful authority to prevent unfair or deceptive acts or practices.”
Fisher told deBanked she received a “positive” response to her testimony from funders but has not heard anything from lawmakers.
Gans said Fisher did a fantastic job in articulating the needs and status of the industry.
“She presented a very good case as to why the industry is currently adequately regulated. We don’t feel there is a need for federal regulation. In some cases, less regulation would allow our members to deploy more capital and help more small businesses,” Gans said.
The sweet spot for MCAs, Gans explained, are transactions under $100,000 and probably in the $24,000 – $40,000 range. He said the industry does a fantastic job of being able to deploy financial resources to small businesses in a timely manner that neither banks nor SBA lenders can match. He’s not suggesting MCA is for everybody but for some businesses it’s an essential product that can help. There have been many success stories.
“Competition is all over the place. But that’s great for the merchant. The more options that merchants have, the more we can enforce best practices and more competitive rates. And the more we can keep the government from impeding people from getting into this space, the better off small businesses are going to be,” said Gans.
Setting the Record Straight
The CFC was formed with the mindset that the organization, which is currently comprised of CEOs of small- and medium-sized funders, would take a proactive rather than a reactive approach to industry regulation. In its two-year history the CFC has tasked itself not only with educating policymakers on the role of MCA funders for small businesses but also with undoing the misinformation and misconception surrounding the anatomy of an MCA.
“Unfortunately, because MCA uses the term cash advance in its product name, uninformed people will often confuse MCA as some form of payday lending. And so that has been one of our biggest challenges, educating members of congress and committees that there is absolutely no correlation between MCA products and what their views of consumer payday loans is,” said Gans, adding that the CFC has had to communicate that MCA is a version of factoring has been around for more than 1,000 years.
A common thread that the CFC has been able to weave with lawmakers has been the diverse geographical representation of both the trade group and the House and Senate.
“Most venture capital is deployed in a few spots – New York, California and Texas – and it’s a cliff to get to those three states. So, one nice thing that I take pride in is my members are looking all around the country regardless of the geographic location. That helps us with policymakers, most of whom are not from the New York City metropolitan area or Silicon Valley. It’s nice being able to look at them in the eye and tell them we care just as much about your district as you do,” he said.
The Road Ahead
The CFC has an ambitious long-term agenda, one that includes raising their profile in the industry and participating in events.
“I think one of the ambitions we have is to have an organization where funders and brokers can be at the same table and work though some of the issues impacting the industry and try to make sure people are doing things in the right and best way.”
The trade group is planning to partner up with deBanked for Broker Fair 2018 and they’re looking to bolster membership.
“The industry has had a lot of free riders that are benefiting from our advocacy efforts but not supporting it. So, from my perspective, if you’re in this industry, particularly in the MCA space, we’d like to expand membership. If we grow our membership, we can do more things, engage more states and expand our lobbying team,” said Gans. “The more members we have, the more we can do to advance the ball and protect the interests of the industry.”
The CFC will need all the help it can muster given the fight ahead to fend off regulation particularly in Washington, Albany and Sacramento. “I think we could see some harmful regulations and potentially legislation over time. Some of those bad ideas that emanate in states have a tendency to percolate into Washington. If at some point there is a less business-friendly administration in the future, we could see all those ideas get some traction at the federal level,” Gans warned.
View From The C-Suite: Alternative Funding Execs Talk Shop, The Landscape, And The Future
October 30, 2017
Alternative funders have had a roller coaster 2017 with highs and lows that will likely be remembered as a high-stakes time for the industry, one in which the rubber met the road for many and the market landscape shifted for everyone from funders, to merchants to brokers.
Three C-Suite executives in the alternative funding space — Christine Chang, CEO of 6th Avenue Capital, Heather Francis, CEO of Elevate Funding and Torrie Inouye, National Funding president — spoke with deBanked, offering their take on some of the industry shakeups, direction of the alt lending space and upcoming developments at their respective companies.
All three execs are embracing what appears to be shaping up as a bigger and better 2018 with plans on the horizon for new products, relationships and deals but also where there could be further shakeout as the shift in the industry landscape takes hold.
Industry Landscape
6th Avenue Capital, provides short-term funding to merchants that Chang describes as “high touch, high tech and fast.” The company is building an SEC RIA compliant infrastructure as Chang believes that MCA regulation will take place over the next several years. Chang said she is sympathetic to the banks and the onerous rules that they must follow, and whatever form the industry regulation eventually takes on, the company will be ready for.
A recent story in The Wall Street Journal points to community banks comprised of those with less than $10 billion in assets historically funding local merchants in what’s dubbed character-based lending. As the name suggests, the underwriting standard for the loans was tied to the character of the business owner, which the lender knew based on personal relationships in their own communities.
The financial crisis gave rise to greater regulation, driving a spike in that model and the rest is history. Small banks were forced to direct their resources toward risk management and compliance instead of adding more personnel to service loans. The WSJ quotes a small business lender that bears repeating: “When they created too big to fail, they also created too small to succeed.”
When that door closed, however, another one opened, creating the opportunity for alt lenders to service a niche that was getting left out in the cold.
“The alternative funding industry is here to stay. That’s good news for MCA and fintech in general. There’s a need for fast funding and there will continue to be a trend toward that,” said Chang.
Banks, meanwhile, have started coming to the fintech table to compete for deals. “We’re in the process of speaking to a number of banks, some quite large and some regional, that have expressed an interest. We think this is a great opportunity for them. The idea is that we’d help them to serve a population of clients that they would not otherwise be able to serve,” said Chang.
6th Avenue has had discussions about white labeling and customizing the platform for institutions. “We would run everything for them,” said Chang.
In addition to possible new banking relationships, 6th Avenue Capital, backed by a private family and institutional investors, will expand the business model to include more investors on its platform. “We are in discussions with a number of significant international investors. It’s in the works. We’re building an institutional infrastructure, so it was always contemplated,” she said.
Elevate Funding, whose is 100% referral-based and whose product suite is comprised of a trio of MCA solutions, is coming up on its three-year anniversary in December.
“When I created Elevate, I did it with the purpose of providing a product to high-risk merchants. That’s who we deal with. We’re not dealing with credit scores. There is a level of risk to who we work with. Elevate was created to provide a product that is going to fit their needs and also provide a product that doesn’t treat them like they’re high risk. That’s who we are,” said Francis.
Gainesville, FL-based Elevate recently hired Michael Gaura to spearhead a new MCA product that the company is rolling out in 2018. Francis held the details of the new funding product close to the vest, but she did offer her views on the direction of the MCA and alternative lending space.
“I see difficulty in the coming years, especially in 2018, for qualified lead flow. You have a lot of big banks that are getting into this industry. And that’s a lot of marketing dollars that you’re competing against.”
She points to JPMorgan Chase, American Express, Square and PayPal, saying they are “huge marketing dollar companies” with tremendous access to customers on their respective platforms.
“There’s going to be a shakeout of what can you reach, who can you reach, can you get them the first time? How do you engage them to where they only want to work with you and they’re not submitting 20 applications for every website they come across?”, Francis said.
San Diego, Calif.-based National Funding is a balance sheet lender whose primary product is loans, not MCAs. The broker factor has changed significantly for the lender in a very positive way this year. “We’re really seeing sizeable growth in our broker channel in 2017 and have designed a strong and consistent process for our broker clients” Inouye said. The leads have been driven by a variety of factors, not the least of which comes down to CAN Capital and Bizfi’s loss being National Funding’s gain.
“That’s a factor we can’t ignore. The broker community has rewarded us for being consistent and building those relationships and being a partner to them,” Inouye said. “We definitely saw an uptick in business when they left the space. I can say we’ve continually experienced sizeable growth in our broker channel year over year but 2017 was beyond what we had expected. It surpassed other years.”
Incidentally, National Funding was one of the earliest alt funders on the scene along with CAN Capital in the 1990s. CAN’s fate started unraveling about this time a year ago.
“It’s not positive when you see that happen in the industry. However, we are really focused on what we’re doing and the decisions we’re making internally. I think that’s why we’ve consistently had profitable growth over the years. We’ve stayed true to our underwriting principles and the market seems to have rewarded us. We were consistent and not erratic. Brokers know they can rely on us and feel confident that we would quickly fund their deal once we issued an approval,” said Inouye.
The Broker Effect
Elevate, a balance sheet funder, relies on outside brokers and referrals for deals. “I don’t find it a disadvantage for us not having an internal sales team. A lot of companies in this space have the ability for a chief marketing officer who focuses entirely on leads. Elevate isn’t there yet. Will we be there in five years? Maybe. Marketing can change by that time,” Francis said.
6th Avenue Capital welcomes relationships with brokers as well. “We have an in-house business development team that works with brokers. 6th Avenue Capital is also considering direct sales in niche strategies in its future,” said Chang.
6th Avenue Capital has a starter program in which there are no guarantees but considers businesses that have been in existence for less than a year and businesses with credit scores of 500 or more. Plus, they’re willing to do consolidations up to two advances.
In addition, 6th Avenue Capital is open to offering financing to brokers. “It’s really good in that there is an alignment of interests and allows brokers to participate in the deals they put forth. If they think the merchant is credit worthy and a terrific opportunity, they participate. Everyone has skin in the game and interests are aligned,” Chang said.
Technology
While technology is at the core of fintech, all three of the companies take a hybrid approach when it comes to credit underwriting comprised of a tech platform and the human touch, which perhaps keeps character-based lending alive in some form.
With respect to fintech, “6th Avenue Capital’s philosophy is that technology is a tool to supplement human underwriting. We use technology to detect fraud, manage workload processes and manage risk. We do not use technology to make our final decisions,” said Chang.
Specifically, 6th Avenue Capital benefits from research, artificial intelligence and predictive technology of its sister company Nexlend Capital. 6th Avenue Capital has customized Nexlend’s consumer lending algorithmic intellectual property, which uses machine learning and credit analysis with high speed execution to make better and faster decisions.
Elevate also takes a dual-approach to its underwriting process. “I believe in a hybrid method. You have to have someone looking at it, to have eyes on the paper at some point in the process. This doesn’t mean a computer system can’t help to weed out what might not meet the criteria, but I do believe there needs to be a person reviewing the files,” Francis said.
National Funding was started as an equipment leasing company. “We apply some principles we learned as a leasing company and take into account all of the attributes that go into that business in addition to FICO and cash flow,” Inouye said.
Automation is an area of technology that they continue to look to for innovation and process efficiencies. “We do serve our customers online, but we also provide a human contact as well. We deliver a loan experience that builds trust and confidence with customers. We try to deliver on what our customers want in the most efficient way,” said National Funding’s Inouye.
National Funding continues to look at construction deals and accepts them as a niche in their portfolio, which Inouye said differentiates the company. “It allows us to be more flexible and comfortable with certain industries that other lenders might stay away from.”
Corporate Culture
2017 has been a roller coaster year for fintech including alt funders. While there have been plenty of bright spots, there was also some fallout that left veteran players scrambling to salvage either their reputation, status as a funder or both.
SoFi has been at the center of controversies that resulted in the Mike Cagney leaving his chairman post with plans to step down as CEO. Most recently, the lender has removed its application for a bank charter, according to reports.
We asked Elevate’s Francis about it. “SoFi is a very big company. They’re to the level where the CEO has people to answer to. They have a checks and balances system they need to go through,” said Francis. “It worked, and they removed him.”
Francis maintains an open-door policy with her employees, and she says all you can do is focus on your house and keep your house in order. “My door is always open. That’s our office policy. They use that quite frequently; it’s a catch 22,” she said with a laugh.
Fintech and Diversity
Something else that all three executives have in common is that they are all women in top roles in fintech, an industry that isn’t known for its diversity.
6th Avenue’s Chang’s career includes working at a large institutional bank for six years. Out of 200 professionals, only four of them in her group were women. “At the end of the day, performance is the best differentiator. If you perform well, it presents unique opportunities. At 6th Avenue Capital, diversity is embraced. Our underlying merchants aren’t just one gender or color. Diversity helps us understand the needs of small businesses better, so we can provide fast and customized funding quickly,” she said.
Insurtech, the Alt Lending of 2017
October 17, 2017
A new asset class is emerging and it’s taking top talent away from the alternative lending space. Insurance technology, or insurtech, is a nascent market segment that presents a similar market opportunity that fintech did back in the day, sources say. And while there are parallels between the two niches, the market landscapes are unique in many ways, too.
Former OnDeck exec Paul Rosen recently decamped to insurtech startup CoverWallet where he’s been named COO. CoverWallet is an online marketplace for small- and medium-sized business insurance policies. Rosen left the alt lending space at a pivotal time for the industry and his former employer, both of which have experienced realignments to their approach in 2017.
So why would Rosen, the former chief sales officer at OnDeck, depart a proven market opportunity in alt lending for newer waters in a less mature segment in the insurance industry? In short, he’s not the only one.
Earlier this year, James Hobson, former COO of OnDeck, left to take the helm at insurance startup Attune. According to LinkedIn, OnDeck’s former SVP of operations Martha Dreiling made the same jump, joining Attune as head of analytics and corporate operations. Josh Wishnick, another OnDeck alum, is now spearheading business development at PolicyGenius.
One might question whether the trend is specific to OnDeck, given that the newly minted insurtech execs are originating from that company. The interest in insurtech, however, extends beyond the C-Suite and into the investor base, which is indicative of a broader trend unfolding.
OnDeck spokesperson Jim Larkin told deBanked: “OnDeck was among the early pioneers of online lending going back to 2007. Since then, we have seen numerous other fintech initiatives take off. Insurtech is the latest. Several former OnDeck employees are providing their expertise to this new space and I’m confident they will help their new organizations to thrive in the same manner OnDeck has over the last decade. Growing talent and seeing some of them graduate and contribute to the vitality of FinTech ventures across the world is one of the things that we are most proud of here at OnDeck.”
Meanwhile CoverWallet in recent days announced a Series B-$18.5 million cash raise led by Foundation, a new investor in the startup that similarly backed Lending Club and OnDeck. This trend speaks to the comfort level among both alt lending industry execs and institutional investors for the emerging insurtech market.
“So, it’s interesting. A lot of the people that helped to grow and shape the fintech industry have now moved on to this industry. Insurtech today feels a lot like fintech did in 2011,” Rosen told deBanked.
Industry Landscape
Insurtech stands to disrupt the insurance industry much the same way that alternative lenders did in that arena. The nascent market opportunity is also unique, with nuances that set insurtech apart not only from alternative lending but from the broader insurance industry as well.
“SMB insurance is very different from personal insurance. You can go online with Geico and switch insurance providers in 15 minutes. SMB insurance isn’t built that way right now,” said Rosen.
For instance, most SMBs go to brick-and-mortar insurance agencies to get whatever policies they need. But the process to getting a loan is slow and paper-work driven. They might have to fill out a 42-page application to get a $600 business owner policy.
The differences are even more pronounced between insurtech and alt lending, especially when it comes to compliance. “With this business, there are heavier regulations than there are in SMB lending. All our sales people must be licensed. There’s a heavier compliance component to it,” said Rosen.
As of today, CoverWallet markets to its customers directly. “If you look at the fintech industry, we’re kind of like an ISO. At this point we’re a distribution company going directly after our customers,” said Rosen, adding that they have put brokers using their technology on the back burner for now.
CoverWallet does some of the underwriting themselves. “We’re where insurance and technology meet,” he said. If a SMB went to a typical brick and mortar broker, they might fill out a 42-page application with 80 questions. Considering that CoverWallet is online, the product is extremely simple and intuitive so the SMB owner doesn’t have to answer tons of questions. “You go through the process a lot quicker. And a lot of the underwriting is done on the sales end by our sales team,” said Rosen.
CoverWallet acts like a marketplace in that they will go through the carrier that best meets the need of the SMB. “It’s very similar to a broker. We’re out there doing online marketing. We don’t do a lot of direct mail. A customer comes in and we examine the customer and based off the industry, location and some other things we determine where the best fit for that customer is. We send them to the carrier that’s the best fit based off carrier appetite,” he said.
That Was Then, This Is Now
So, what is it about insurtech that has some top-tier talent in the alt lending space running for the exit? Rosen pointed to a trio of parallels between insurtech today and alternative lending then (back in 2011), which perhaps is what’s compelling alt lending veterans to make a career change.
When Rosen joined OnDeck in 2011, one of the things they discussed was a $100 billion market opportunity in unmet demand in the small- and medium-sized business lending market. Six years later and the industry is probably lending $10 billion to $15 billion now, which suggests there’s still a lot of headway in the alt lending space today.
Meanwhile, Rosen points out that of the $100 billion in small- and medium-sized business insurance premiums that are written today in the United States, “virtually none of them are done online.” And that, he says, is the No. 1 reason why insurtech feels a lot like fintech did in 2011.
“If insurtech can get to $15 billion to $20 billion in premiums, that will be a huge opportunity for the right companies. We think we have a shot at it,” Rosen said, adding that it’s not a zero-sum game.
Secondly, insurtech is highly fragmented similar to how the online lending industry was before. “There aren’t a lot of brokers or distributors with a significant amount of market power, especially in the SMB market. When we started OnDeck, there wasn’t any one company from a lending SMB perspective with a whole lot of market power,” recalled Rosen.
Lastly, Rosen points to industry disruption. “The way SMBs were purchasing loans in 2010 was very similar to how they were purchasing loans 20 years prior. There was not a whole lot of innovation or disruption. Then OnDeck, BizFi, Lending Club, BFS Capital and CAN Capital came on the scene and started disrupting the space. On the SMB side, there has been no technology disruption till this point. Now a handful of companies like CoverWallet are looking to change that,” said Rosen.
More Fallout?
Rosen has been fielding inquiries from others in the alt lending space. “There’s definitely interest in the insurtech space from fintech team members,” he said. Meanwhile, even though he has left, Rosen remains “bullish” both on the alt lending space and his former employer, OnDeck. I have kept most of my equity at OnDeck,” he said.
Bizfi Alum Jared Weitz Reflects on Demise of Former Employer and Rise of UCS
October 9, 2017
Jared Weitz has come a long way since his earlier days as one of the original Bizfi employees. Today he’s at the helm of online funding marketplace United Capital Source (UCS), which has been on a tear since deBanked last spoke with Weitz a couple of years ago. The UCS founder and chief executive took some time to revisit with us about having to painfully watch the demise of his former employer, which is where he cut his teeth in this business, and the rise of his own company UCS as a funding marketplace.
In some ways, the more things change the more they stay the same. Since the last time Weitz spoke with us, the company’s location remains in the heart of Times Square in New York, and UCS has grown its staff by only four people including two sales reps. What has changed, however, is the amount of funding that the company has done and the size of the average transaction, all of which have blossomed.
“When we first spoke a few years ago we were doing $8 million to $10 million a month in funding volume. Now we are doing between $14 million and $16 million per month,” said Weitz.
He added that where the company differentiates itself is that while a few years ago the products they were selling were predominately in the sub-prime space now they sell other products, which allows merchants to “swim upstream” when they qualify for that.
The result has been bolstered partnerships and product offerings and an average loan size that has jumped from $30,000 to $40,000 per deal to a range of $500,000 to $2 million.
“We opened up the funnel to the kind of relationships we’re able to broker and the kinds of financings we’re able to offer. We’re playing in the field of SBAs, account receivables financing, lines of credit and asset backed loans. By offering these products our volume has jumped significantly and allowed us to talk to different referral partners.”
UCS does all of its own marketing and generates leads for their in-house sales reps. Those sales reps take a file from open to close and they analyze the small business owner’s needs on a consultative call.
“We understand their business and their pain points. The first question we ask isn’t how much do you need but what’s paining you in your business today that we can help you with?”
One such business owner recounted his experience with UCS to deBanked, saying that traditional banks were “an absolute pain” to secure funding. He spoke of the “very stressful” and time-consuming process of applying for a loan, saying he doesn’t have time to “jump through a million hoops to get a loan.”
“When I was initially looking to curb my temporary cash flow problem, I searched online for the best alternatives to traditional bank loans. I read all the reviews on companies and decided to call UCS,” the business owner told deBanked, adding that he’s been a UCS repeat customer for a number of years and is especially fond of the ease at which the process is completed.
“I could literally call Jared today and have six figures in my account tomorrow. The best part is the pay back process. They only take funds when I run credit card transactions. So, in my slow months, I don’t have to stress and worry about repaying the loan. UCS is a perfect fit for me,” the business owner said.
Eye Opener
As the seventh or eighth employee of Bizfi, Weitz really has been part of the evolution of online funding. He says the rise and fall of Bizfi has been an “eye opener” for him.
“It caused a bunch of funding companies to be a little gun shy when it comes to funding. I told my guys this too shall pass. People are shaken and wondering if it’s a larger global issue. Thankfully it’s not a global issue. There are plenty of funding companies that are well backed that are still funding. My group is well able to pick it back up. We have signed up with more funding companies to increase our offerings and make sure we have no concentration issues,” said Weitz.
And although he left the company to eventually launch UCS, which has proven to be a prudent move, he has nothing but respect for his former employer.
“My history there is very deep and I’ve got a genuine love for the founders of the company. It’s where I cut my teeth. I was really sad the day I heard they’re not funding anymore.”
In fact, Bizfi was one of the funders that UCS counted among its partners.
“We had a good book there. We started to see problems and began to shift where our new business was going. Thankfully it didn’t affect me. But it showed me that you should sign up with more funding companies. If you think the mix should be X go 50% more and be super cautious. This approach has worked out for us,” he said.
Weitz has advice for other funders that might be looking to grow at lightning speed.
“Someone that’s growing so fast while they’re also innovating and looking to close larger transactions that bring them to a bigger place – that’s hard to do all at once. Driving at 200 MPH either works out well and takes you to the finish line or it doesn’t work out really well. It’s really unfortunate that it didn’t work out for them.”
Deal Competition
For its part, UCS competes with the likes of LendingTree and other online marketplaces, but that seems only to add an ounce of perspective to Weitz and the UCS team, driving them to adjust and remain nimble so that they can get the next deal.
“Healthy competition is good for us. We welcome anything like that. Some of my best learning experiences have been when we were beat out on a deal. I call the merchant personally and say hey, who gave you the deal? Honestly, I want to sign up with them and offer those rates to my clients. We form a friendship with both the funder and the small businesses,” he said.
UCS also counts some high-profile funders among its partners.
“We’ve worked with some funders forever and it’s been great. But we really had to also find folks that offer certain products but at a cheaper rate,” said Weitz, pointing to the scenario of a merchant having a few of those loans under their belt and improved credit as a result. “They are being solicited by depository banks and can qualify for that rate. We don’t want to lose the relationship. My thought process is sign up with similar folks with that product and when the time comes we can swim the merchant upstream.”
For instance, not all funders offer SBA loans but UCS has been doing so for the past two years. “It’s really kind of taken off for us over the last year. The same thing with accounts receivable and future order financing.”
UCS acts as both a broker and investor in their own deals, so they have a vested interest in the underwriting standards. “Investing with some of our funding partners on the syndication side allows us to have buying power and to take an actual interest in the merchant we’re dealing with,” said Weitz, adding that UCS takes a hybrid approach offering both a fully automated underwriting process for those merchants who want it but also having the capability to talk to the business owners, which is what the large majority of business owners prefer.
Kabbage’s Petralia Talks Big Tech, Fintech and Lending
October 2, 2017
Kabbage co-founder and head of operations Kathryn Petralia was in New York last week for The Economist’s Finance Disrupted 2017 conference where she was a panelist on in an Oxford-style debate about whether tech giants Alibaba, Amazon, Apple, Facebook and Google pose a greater challenge to traditional banks than the fintech startup community. Her position is that no, they do not, and there appears to be room for both.
“Fintech can be anywhere. Alternative lenders, whatever you want to call them, I think they’re disrupting the space but not by trying to put people out of business. In our case we make loans to small businesses, but these are folks that are having a hard time borrowing from banks. So, we’re not taking business from banks. We’re drawing the circle a little bit bigger around access to capital.”
It’s only been a few weeks since the blockbuster announcement that SoftBank is investing $250 million into Kabbage, which thrust the small business lender into the spotlight for a few reasons, not the least of which was the more than $1 billion valuation that has been speculated for Kabbage.
This valuation, of course, is in stark contrast to that of OnDeck, which also lends to small businesses. As Petralia points out, however, OnDeck is a very different company than Kabbage and in fact not a very good comparable at all. For instance, Kabbage has never turned to brokers to find customers, and their application process has been fully automated since day one. She highlighted other differences too.
“All of our bank partnerships are technology integrations where our technology sits in their systems. They use our technology to deliver the customer experience. And I think what SoftBank saw in us was that potential. Whatever the valuation was I can assure you it was a result of a lot of due diligence on the part of SoftBank,” she said.
SoftBank may now be sitting on Kabbage’s technology but they’re also sitting on a vast treasure trove of customer data that Kabbage may gain access to in the future.
“Certainly, that’s something we’re interested in and that’s something they talked with us about. They have a lot of access to a lot of businesses in global markets certainly in Asia including Japan and India, so I think we’ll see more relationships forming from that alliance over time,” said Petralia.
And the SoftBank deal seems to support Kabbage’s ambitious expansion plans. “We always thought we would be in almost all of the global markets five years from now. SoftBank is a continuation of our strategy for growth.”
As Kabbage pursues its aggressive growth strategy, it’s hard to ignore some of the headwinds other industry players have experienced.
“I don’t think anyone’s immune to macroeconomic changes and changes to access to the debt markets. Our focus is on technology automation from the beginning, and I think that gives us an advantage in the way we manage our customer base. Debt investors can see it, the ratings agencies can see it. One problem with a lot of the lenders is that they’re not able to access the debt markets because there’s not enough history or their portfolios haven’t performed the way they need,” said Petralia, adding that Kabbage has had the benefit of time on its side.
Kabbage’s vision is to “dynamically deliver products that small businesses need to run their businesses and to stay connected to the data that drives the underwriting process for lines of credit,” Petralia says, adding: “This could be growth capital and it could be other products and services that work around small businesses, whether it’s data processing or insurance or payments, any of those things. We want to deliver big business tools to the little guys.”
In terms of customer interest rates, everybody would rather have a lower rate Petralia says, but customers in their ROI equation know they will be able to generate more revenue to offset that. And Kabbage doesn’t require small businesses put up any collateral, which is what a bank would require them to do.
Kabbage’s Culture
Meanwhile in addition to industry headwinds some funders have experienced company-specific issues that had more to do with internal culture than any macroeconomic influence.
“From our perspective, culture is incredibly important. We were No. 16 for Glassdoor reviews for mid-sized businesses and that’s because employees really enjoy working here. If I had to characterize our culture with one term I’d say connected – our employees are connected to one another and to our customers. There is transparency and trust and a culture of caring deeply about one another. That’s really important to us,” said Petralia.
As for future growth avenues for Kabbage, there’s a lot of stuff in the works none of which she was at liberty to discuss.
How LendingTree and SnapCap Crossed Paths
September 25, 2017
LendingTree in recent days revealed the acquisition of online platform for small business lending SnapCap’s non-lending assets in a $21 million deal, including $12 million upfront and $9 million in contingency payments. The deal gives online lending marketplace LendingTree more scale in the small business market ahead of what could shape up to be recovery in 2018.
J.D. Moriarty, LendingTree Chief Financial Officer, told deBanked that SnapCap’s 20 employees will stay in Charleston, and the brand will remain intact. “For them, their employer just got both a whole lot more stable and scalable. As with anything we acquire, we will keep the brand in place and test it to see what is most effective,” said Moriarty.
LendingTree has been connecting small businesses with lenders since 2014, and the latest deal reflects a strategy to add scale.
“It’s a bit of what you might call an acqui-hire. LendingTree is growing quickly and scaling. We hired a really good team in SnapCap that will basically be our way of scaling in small business,” said Moriarty.
LendingTree is lifting its profile in the small business segment amid an industry transformation that is thinning the pack and has seen some players shifting gears entirely.
“Small business lending might do very well in 2018. And we are investing now to grow the base of our business. On a macro level, we expect our business to do well in 2018 regardless. But if small business lending recovers and suddenly you see companies like OnDeck doing well, we will benefit from that. But we position any acquisition assuming that the market doesn’t recover and the deal still must be attractive to us, even if the market continues to struggle.”
Moriarty went on to provide a glimpse into the financial structure of the deal.
“Last year, SnapCap set up a special purpose vehicle (SPV), which was funded by outside capital with which they would actually make loans. There’s a balance sheet aspect to that business we are not acquiring. But it was a small percentage of their business,” Moriarty explained.
Inside the Marketplace
LendingTree is largely known as a marketplace for mortgage loans where they represent about 50 percent of comparison shopping for mortgages. “That is how people think of us for sure,” said Moriarty. The revenue drivers have expanded in recent years, however.
For instance, mortgages used to account for 90 percent of revenue. Today, based on the most recent quarter, less than half of business originates from mortgages while the balance is in personal loans, credit cards, home equity, small business and auto loans.
LendingTree is no stranger to acquisitions, having done five such deals since June 2016. “What we’re trying to do is to build other marketplaces where people want to comparison shop,” said Moriarty.
But growth by acquisition is not their only growth strategy. “We’re growing period,” said Moriarty, adding that organic growth has been very good but small business in particular is a tough market to scale.
One of the recent deals, the acquisition of CompareCards a year ago, led them to gain market share in the credit card space. That deal also led LendingTree to SnapCap. CompareCards founder and president Chris Mettler and his wife own more than a one-third equity stake in SnapCap.
“SnapCap was introduced to us through Chris. He’s now a LendingTree employee. The introduction was absolutely from him. But it’s very consistent with our strategy, which we have conveyed to the market. We will continue to make small, accretive acquisitions and that will help us to gain scale in certain businesses and diversify,” said Moriarty.
Hybrid Model
While LendingTree and SnapCap both facilitate loans to the small business community, they take slightly different approaches to get there. “SnapCap’s core business is not unlike ours, meaning they are essentially finding high quality leads for lenders,” said Moriarty.
SnapCap uses a concierge model in which customers have a broker experience. They talk to someone at the company who helps them to identify a lender.
“LendingTree will be bigger and more scalable through both the traditional LendingTree model and SnapCap’s concierge approach. We will simply be able to serve lenders more effectively. If I’m a lender making small business loans, this is a pretty good thing.” he said.
SnapCap, meanwhile, is looking forward to the very same scale that LendingTree is targeting.
“The mission of SnapCap has always been to serve small business owners with access to funding. LendingTree’s leading online lending marketplace combined with SnapCap’s successful concierge model will enable us to serve an even wider range of business owners,” Hunter Stunzi, co-founder of SnapCap, told deBanked.
ShopKeep Joins the MCA Crowd. Are Loans Next?
September 8, 2017
ShopKeep, an iPad-based cloud-connected technology company designed around POS and payments for small businesses, is expanding into MCAs with the launch of ShopKeep Capital in recent days. With its move into funding ShopKeep joins an area that competitor Square already operates in. But while both companies have unlocked the secret of customer acquisition they are not targeting the same small businesses.
Meanwhile this latest move into MCAs is just a step in what ShopKeep CEO Michael DeSimone describes as an evolution, one that could potentially lead to small business lending sooner than later.
“We had a lot of interest from our customers,” said DeSimone, referring to the nearly 25,000 small businesses that are on ShopKeep’s payment and software platform. ShopKeep Capital extends funding offers to eligible small businesses on the ShopKeep platform, and funding is approved within a couple of days.
Playing Field
ShopKeep is entering a space – MCAs — that is only getting more crowded, with the recent addition of iPayment, for instance. And while ShopKeep and Square operate in a similar market segment, they’re targeting different SMBs.
“Our customers tend to be larger than Square and more complex in their business models,” said DeSimone, pointing to the example of a restaurant with numerous employees and multiple locations. On average, customers on the ShopKeep platform generate sales of $350,000 per year.
As a payments company, ShopKeep’s customer acquisition strategy is tied directly to its software and payments businesses.
“This leverages our ability to understand the small business data flowing through our POS platform and manage it the way we do payments based on the premise of greater visibility into their business by the virtue of our payments platform,” said DeSimone.
He is quick to point out that ShopKeep is built on technology, and he said like every other part of the economy tech is disintermediating some parties and bringing others closer to the outcome they desire.
“The closer you are to the actual customer, the more your opportunity is to be able to be top of mind when they need something,” he said. “They have huge amounts of interaction with us. This level of interaction predicated on technology is really what creates the ability to have a relationship with the merchant to then be able to offer them a range of different products and services.”
DeSimone describes ShopKeep more as a technology play than a funder.
“We have a lot of information most other providers of capital aren’t going to have unless they ask merchants to do a lot of work,” said DeSimone, pointing to an underwriting model that is almost 100% automated.
“We’ve built it to be largely pre-underwritten We only offer advances based on running the merchant through our underwriting model to see who comes up as a good candidate for ShopKeep Capital and making it available to them. We continually tweak the algorithm to make sure we are not being too tight or too loose,” he added.
Funding is the third revenue stream for ShopKeep, with software and payments representing the other two legs of the revenue stool. Meanwhile ShopKeep Capital is turning to its balance sheet to fund MCAs, but that is not the long-term plan.
“Currently it’s coming off our balance sheet, but it won’t be for very long. We have had several discussions with funding partners. And we expect over time we will migrate to more of a loan product and away from MCAs. We will explore the features and benefits of both to understand both our perspective and that of our customers,” said DeSimone, adding that there could be more clarity about the direction of this evolution in the next six months.
If ShopKeep does move into loans, the company could open up the platform to investors. “They are debt funds looking for returns and specific underwriting criteria. They will buy an advance or a loan eventually from what we originate. That’s the model we think we’ll go toward,” he said.
Something DeSimone and other lenders might want to keep in mind is a credit gap that exists among small businesses today, as described by Karen Mills, a senior fellow at Harvard Business School and former administrator of the U.S. SBA.
“There is no doubt that online lenders have identified an important segment that is not getting enough access to credit, but data also shows that borrowers are less satisfied with the interest rates and repayment terms from online lenders than from traditional banks. So even if small businesses are getting the loan, if it is not at an appropriate price, we should still consider this a credit gap,” Mills said.
Future Plans
While loans could be the next growth phase for ShopKeep Capital, this could be one of many new directions that the payments company takes. For instance, with key competitor Square, which boasts a market cap of approximately $10 billion, in pursuit of obtaining a bank charter, they could have company someday.
“It’s an interesting idea. It’s still very early for us but we’re not ruling anything out at this point,” DeSimone said.
For the near term, however, he is focused on ShopKeep Capital, for which he expects to make a couple of key hires for soon. “In my mind, this helps us to be more competitive with Square. I think it’s a really good service for our customers and it fits very well into the other pieces of our business,” said DeSimone.
Ford, MCA Funders Take Pages from Tech-Based Underwriting
August 29, 2017
Alternative lending fever has spilled over into the auto sector, evidenced by the financing arm of automaker Ford’s decision to move beyond FICO and deeper into machine learning for credit decisions. Ford is moving toward alternative lending strategies in an attempt to capture a wider swath of borrowers, including those with “limited credit histories,” and bolster auto sales.
Ford’s decision comes on the heels of a study with fintech play ZestFinance, the results of which favor a machine-learning based approach to credit decisions.
Ford’s decision comes on the heels of a study between Ford Credit and fintech play ZestFinance, the results of which favor a machine-learning based approach to credit decisions.
“There is absolutely no change in Ford Credit’s risk appetite. Ford Credit is maintaining the consistent and prudent standards it has applied for years. This enhanced ability to look at data will help us more appropriately place applicants along the full spectrum of the risk scale. The result will be some that some people may appear on that scale who did not before, and some applications that are approved today might not be approved in the future. The risk appetite remains the same,” Ford Credit spokesperson Margaret Mellott told deBanked.
Until now, there has been no aspect of machine learning in Ford Credit’s underwriting process.
“The study showed improved predictive power, which holds promise for more approvals … and even stronger business performance, including lower credit losses,” according to Joy Falotico, Ford Credit chairman and CEO, in a press release.
Ford is targeting consumers with a lack of credit history, especially the millennial generation.
Tech-Driven Underwriting
While Ford embraces tech-driven underwriting, this style is already knit into the fabric of the MCA and online lending communities.
To name a few, Upstart takes a machine learning approach. FundKite developed algorithmic-based underwriting. UpLyft’s underwriting process has an automated component to it.
Alex Shvarts, CTO and director of business development at FundKite, a balance-sheet based funder, said the company has been writing algorithms since the early days. Now the tech- and algorithm-driven funder wants to expand into small business lending in Q1 2018.
“We’re building our technology to the point that by Q1 next year, we will get into automated loan products. Our technology will be able to underwrite loan products within seconds. We have a lot of data we put together, which allows us to price deals and make offers relatively quickly,” he said.
By a lot of data, Shvarts is referring to hundreds of data points that are used to measure merchant performance. FundKite, which has a default rate of far less than 10 percent, takes the data, reworks and combines it, leading to a fast result.
“Besides the data points we look at the merchant from a collections point of view. If this person or business runs into trouble, could they go out of business or would they be okay?” he said.
That’s where the human element to the underwriting process comes in.
Human Element
While FundKite relies on algorithm-driven underwriting, the funder is not running an online app yet. There is still a need for human participation surrounding data input, information that is then verified by machines.
“The human element is entering the information correctly, and the machine spits out predetermined pricing based on the business data points and industry,” said Shvarts, adding that FundKite views that information in the context of micro-trends in the industry as well as the overall market environment.
“We know that during certain seasons some merchants perform worse than others. The numbers say the merchant should get this, but we dig a little deeper and say no, this merchant can’t handle this much of an advance and repayment along those lines. The final touches are done by humans. Our technology is advanced so that we are able to get to that point a lot faster and more accurately,” Shvarts said.
Second Opinion
Michael Massa, CEO and founder of Uplyft Capital, points to a hybrid approach in the company’s credit underwriting, referring to the automated scoring portion of Uplyft’s underwriting model as a second opinion. “We believe there must be a hybrid of human and automated technology,” said Massa.
Uplyft relies on a proprietary scoring model. The model includes an automated function that attaches a unique rating to the small business based on certain features in the prospective borrower’s profile, such as a home-based versus business location and the number of years the company has been in business, to name a couple.
“It’s only as second opinion for our underwriters, really,” he said, adding that cash flow and affordability are major drivers of the credit decision. “In most cases we price at max affordability for the client while protecting them from overleveraging their accounts, allowing us to provide real help and establish merchant loyalty.”
Second opinion or not the automated function is part of what makes Uplyft a fintech play, setting the funder apart from the banks. “They’re like the payphone and we’re the iPhone. They’re yellow cab and we’re Uber,” said Massa, adding better yet, “we’re Lyft.”
Uplyft is in the process of developing a trio of portals designed for merchants, sales partners and investors to be released shortly. “We are API-ing that now into our CRM,” said Massa.
Merchants can access the portal to apply for funding while sales partners use it to submit files and view a status. Investors can track their participation via the portal. The new portals will be available on the website and through a mobile app that Uplyft is in the final stages of developing.
Uplyft also recently inked an exclusive partnership with an undisclosed software company allowing merchants to link their bank account to the application, capturing six months of actual PDF bank statements in the process.
“It can help us with the initial credit decision and when we’re conducting final verifications. We get the actual bank statement. It’s a legitimate bank statement, not a rendition,” said Massa.
Fintech & Auto Finance
As for the auto industry, don’t be surprised to hear about further collaboration between the automakers and the fintech market. “Financial technology is key … as fintech can contribute to an even more seamless and better personalized vehicle financing experience for the consumer,” according to the Ford press release.
