1 00:00:00.450 --> 00:00:02.880 Allyson Berger: Hey everyone, Allyson Berger here for deBanked 2 00:00:02.910 --> 00:00:05.910 News. And today I'm going to give you a brief history of the 3 00:00:05.910 --> 00:00:07.590 merchant financing industry. 4 00:00:18.340 --> 00:00:21.490 Today's marketplace is filled with non-bank working capital 5 00:00:21.490 --> 00:00:24.250 solutions for small business. But it wasn't always that way. 6 00:00:24.550 --> 00:00:27.370 Silicon Valley has gotten a lot of attention for its role in 7 00:00:27.370 --> 00:00:30.850 FinTech, which is the buzzword for financial technology. It's 8 00:00:30.850 --> 00:00:33.850 become conventional wisdom to say that it was the 2008 9 00:00:33.880 --> 00:00:37.090 financial crisis that paved the way for the rise of non-bank 10 00:00:37.090 --> 00:00:41.260 lending, but not so fast. Almost a decade earlier, hundreds of 11 00:00:41.260 --> 00:00:44.470 sales professionals were already marketing one of fintech's first 12 00:00:44.470 --> 00:00:47.710 iterations of working capital products, and they were doing it 13 00:00:47.740 --> 00:00:51.940 right here in New York City. A patent filed in 1997, dubbed 14 00:00:52.000 --> 00:00:54.850 automated loan repayment explained how a merchant 15 00:00:54.850 --> 00:00:57.640 processor could split the proceeds of a credit card sale 16 00:00:57.670 --> 00:01:01.360 between a merchant and a lender. Despite it being patented, 17 00:01:01.390 --> 00:01:04.420 entrepreneurs in New York City believed the setup presented a 18 00:01:04.420 --> 00:01:08.260 major opportunity. So by the early 2000s, young startup 19 00:01:08.260 --> 00:01:10.750 companies started to heavily market a working capital 20 00:01:10.750 --> 00:01:14.290 solution that required no monthly payment. Instead, the 21 00:01:14.290 --> 00:01:17.530 funding provider would simply withhold a percentage of each 22 00:01:17.530 --> 00:01:21.580 credit card sale processed. In 2007, the original patent was 23 00:01:21.580 --> 00:01:24.610 invalidated. And in this neighborhood right here, which 24 00:01:24.610 --> 00:01:28.060 is the financial district, was once teeming with stockbrokers, 25 00:01:28.120 --> 00:01:30.790 and then suddenly filled with sales executives that were 26 00:01:30.790 --> 00:01:34.000 marketing the bundled concept of working capital with merchant 27 00:01:34.000 --> 00:01:34.690 processing. 28 00:01:35.380 --> 00:01:37.810 Sean Murray: The invalidation of the patent was the turning point 29 00:01:37.810 --> 00:01:40.450 for the industry. It happened right before the financial 30 00:01:40.450 --> 00:01:43.360 crisis. So I think a lot of people draw the conclusion that 31 00:01:43.360 --> 00:01:46.030 that was the spark. But that's just not the case. In fact a lot 32 00:01:46.030 --> 00:01:48.250 of funding companies at the time, they suffered quite 33 00:01:48.250 --> 00:01:51.490 greatly. But conceptually, the product had already proven 34 00:01:51.490 --> 00:01:53.830 itself. And I think Wall Street woke up to that. 35 00:01:56.530 --> 00:01:58.810 Allyson Berger: A number of offshoot products were born. And 36 00:01:58.810 --> 00:02:02.950 by late 2014, one of the first modern day FinTech companies 37 00:02:02.950 --> 00:02:05.770 went public, it was OnDeck Capital. And it happened right 38 00:02:05.770 --> 00:02:07.930 here behind me at the New York Stock Exchange. 39 00:02:08.260 --> 00:02:10.480 Sean Murray: At the time OnDeck was this sort of hyper 40 00:02:10.480 --> 00:02:13.540 validation for the small business finance industry. They 41 00:02:13.540 --> 00:02:16.750 didn't do the credit card thing. And they rode in on an IPO of 42 00:02:16.750 --> 00:02:20.200 about $1.3 billion. And there was this buzz in the air 43 00:02:20.200 --> 00:02:23.230 afterwards of who was going to be next. I remember at the time, 44 00:02:23.230 --> 00:02:24.880 there were a few of their competitors that were also 45 00:02:24.880 --> 00:02:27.700 planning on going public. Here in New York, the scene just 46 00:02:27.730 --> 00:02:31.300 exploded. deBanked actually moved into an office at 14 Wall 47 00:02:31.300 --> 00:02:34.930 Street in 2015 because that's where you needed to be. I mean, I think 48 00:02:34.930 --> 00:02:38.080 there's an impression that Wall Street, Broad Street, is that 49 00:02:38.080 --> 00:02:41.140 it's all stockbrokers walking around. But honestly, by the mid 50 00:02:41.140 --> 00:02:44.800 20-teens, it was really FinTech executives and people selling 51 00:02:44.830 --> 00:02:48.310 merchant financing. And overall, the industry by then was 52 00:02:48.310 --> 00:02:51.580 injecting about $20 billion a year into small businesses. 53 00:02:52.060 --> 00:02:54.370 Allyson Berger: Since COVID hit, the financial district has been 54 00:02:54.370 --> 00:02:58.000 especially quiet. Most people in the merchant financing industry 55 00:02:58.000 --> 00:03:00.610 that would normally come here have been working remotely. 56 00:03:01.090 --> 00:03:04.540 While there are reports of a mass exodus to the suburbs and 57 00:03:04.540 --> 00:03:07.960 indications that work from home could become permanent. It's not 58 00:03:07.960 --> 00:03:10.180 the best idea to write off New York just yet. 59 00:03:10.750 --> 00:03:12.610 Sean Murray: The reason New York is such a major place for the 60 00:03:12.610 --> 00:03:15.280 industry. It's not because there's so many smart people 61 00:03:15.280 --> 00:03:19.390 here. It's because everyone's so close together. You cannot 62 00:03:19.390 --> 00:03:23.590 replace the chance encounters on the 4 train, the bumping into 63 00:03:23.590 --> 00:03:27.940 people at lunch, the convergence of employees from 10 different 64 00:03:27.940 --> 00:03:31.150 companies all getting together for happy hour. That's where the 65 00:03:31.150 --> 00:03:34.120 magic happens. And today, the industry is a lot more mature. 66 00:03:34.930 --> 00:03:38.020 You have dialogue with state and federal regulators, you have a 67 00:03:38.020 --> 00:03:41.650 much more diverse product set. And I think if you want to be a 68 00:03:41.650 --> 00:03:45.460 part of this industry, you cannot do it at home working 69 00:03:45.460 --> 00:03:47.740 remotely. You got to be where the action is. 70 00:03:48.580 --> 00:03:50.680 Allyson Berger: Thanks for watching this episode of deBanked News 71 00:03:50.680 --> 00:03:53.230 So until next time, I'm Allyson Berger.