00:00.210 --> 00:03.390 In the Bureau of Consumer Protection at the Federal Trade 00:03.390 --> 00:07.710 Commission. Welcome to all of you, and thank you for coming to 00:07.710 --> 00:11.520 our forum on small business financing. Before we get started 00:11.700 --> 00:15.960 with today's program, I have a few administrative announcements 00:15.960 --> 00:20.010 that I'm going to run through. First, please silence any mobile 00:20.010 --> 00:24.450 phones. I'd appreciate it if you don't use your phone. But if you 00:24.450 --> 00:28.950 have to, please be cognizant of others in the audience. And also 00:28.950 --> 00:31.560 be aware that if you leave Constitution Center this 00:31.560 --> 00:34.890 morning, you will have to go back through security. So 00:34.890 --> 00:38.040 particularly for our panellists, be mindful of that because it 00:38.040 --> 00:40.530 does often take a couple of minutes to get back through. 00:41.760 --> 00:46.440 Restrooms are in the hallway right behind me. And I think 00:46.440 --> 00:50.040 everyone received a lanyard today when you came in. We reuse 00:50.040 --> 00:53.880 these here. So when you're done, please hand them to one of our 00:53.880 --> 01:00.180 staff or drop them in a box that we'll have on the way out. If an 01:00.180 --> 01:04.080 emergency occurs that requires an evacuation of the building, 01:04.410 --> 01:07.560 an alarm will sound. Everyone should leave the building 01:07.560 --> 01:12.360 through the 7th Street exit, which many of you came in. After 01:12.360 --> 01:15.870 leaving the building, you'll turn left, cross 7th Street, and 01:15.870 --> 01:19.890 then cross E to the FTC's emergency gathering area, where 01:19.890 --> 01:23.850 we'll have a sign. You should remain in that area until you 01:23.850 --> 01:27.600 receive further instruction. If an emergency occurs that 01:27.600 --> 01:31.020 requires you to just leave the conference center but stay in 01:31.020 --> 01:33.960 the building, please listen for announcements over the PA 01:33.960 --> 01:37.740 system. Please be advised that the event today is being 01:37.740 --> 01:42.510 photographed, being webcast, and recorded. By participating in 01:42.510 --> 01:46.470 today's event you are agreeing that your image and anything you 01:46.470 --> 01:51.210 say could be posted indefinitely at FTC.gov or on one of our 01:52.170 --> 01:55.230 publicly-available websites. So that's it for the administrative 01:55.230 --> 01:58.800 announcements. So we can start our great program this morning. 01:59.190 --> 02:02.490 And now I am very pleased to introduce FTC Commissioner 02:02.490 --> 02:03.000 Chopra. 02:10.080 --> 02:15.690 Good morning, everyone. So I want to thank you all for 02:15.690 --> 02:19.200 joining the Federal Trade commission's Forum on Small 02:19.200 --> 02:23.580 Business Financing. Today we're going to examine the regulatory 02:23.580 --> 02:27.660 landscape and concerning practices that entrepreneurs and 02:27.660 --> 02:31.260 small businesses face. We're joined by a wide range of 02:31.260 --> 02:34.350 experts, as well as officials from the Federal Reserve and the 02:34.350 --> 02:38.760 Small Business Administration. I want to thank the FTC team that 02:38.760 --> 02:43.950 put this whole forum together- Malini Mithal, Sandy Brown, Evan 02:43.950 --> 02:48.030 Zullow, Stephanie Rosenthal, Sarah Kerman, and June Chang, 02:48.390 --> 02:52.440 and also all of the event planning web team, press office, 02:52.440 --> 02:56.010 honors, paralegals, and all of you for being here today. But 02:56.010 --> 03:00.000 before we begin, I wanted to share some broader concerns 03:00.030 --> 03:02.520 about the state of entrepreneurship and small 03:02.520 --> 03:06.990 business in America, their lack of freedom in negotiating 03:06.990 --> 03:12.270 contracts, and the FTC's long role in policing unfair 03:12.270 --> 03:16.140 contracts. I'll leave you with several questions that we're 03:16.140 --> 03:20.610 going to need to answer as part of this inquiry. So being an 03:20.610 --> 03:25.650 entrepreneur and starting a new business is tough, but it is 03:25.650 --> 03:29.730 also what makes an economy thrive. The hard work, 03:29.730 --> 03:33.420 independence, and creativity of entrepreneurs and new small 03:33.420 --> 03:37.440 businesses helped us grow, innovate, and create wealth in 03:37.440 --> 03:42.120 communities across the country. But today, large firms 03:42.120 --> 03:46.980 increasingly dominate more sectors of the economy. Not only 03:46.980 --> 03:50.580 can these firms use their market power to block entrepreneurs 03:50.580 --> 03:53.790 from challenging them, they can also use their power to 03:53.790 --> 03:57.360 influence government to protect their incumbency, often, 03:57.360 --> 04:01.560 ironically, in the name of promoting small business. It's 04:01.560 --> 04:04.800 getting harder and harder for entrepreneurs to launch new 04:04.800 --> 04:09.720 businesses. Since the 1980s, new business formation began its 04:09.720 --> 04:15.480 long steady decline. And a decade ago, births of new firms 04:15.600 --> 04:21.090 started to be eclipsed by death of firms. According to Census 04:21.090 --> 04:24.000 Bureau data analysed by the Kaufmann Foundation and the 04:24.000 --> 04:28.200 Brookings Institution, the number of new companies as a 04:28.200 --> 04:34.770 share of all businesses has declined by 44% from 1978 to 04:34.770 --> 04:39.870 2012. The stairway to success for entrepreneurs and new 04:39.870 --> 04:44.280 businesses are as steep. For minority and women-owned 04:44.280 --> 04:48.510 businesses, that climb can be even steeper. One of the most 04:48.510 --> 04:53.010 powerful weapons wielded by firms over new businesses is the 04:53.010 --> 04:57.120 "take it or leave it" contract. Entrepreneurs and new small 04:57.120 --> 05:01.260 businesses cannot negotiate the terms in these contracts, and 05:01.260 --> 05:04.890 the terms usually transfer rights and power to the dominant 05:04.890 --> 05:09.510 firm on the other side. To be clear, a fair and thriving 05:09.510 --> 05:15.090 economy and society rests on contracts. Contracts are ways 05:15.090 --> 05:19.500 that we put promises on paper. When it comes to commerce, 05:19.800 --> 05:23.340 arm's-length dealing codified through contracts is a 05:23.340 --> 05:28.140 prerequisite for prosperity. But when a market structure requires 05:28.140 --> 05:31.860 small businesses to be dependent on a small set of dominant 05:31.860 --> 05:36.360 firms, or firms that don't engage in scrupulous business 05:36.360 --> 05:40.770 practices, these incumbents can impose contract terms that 05:40.770 --> 05:45.570 cement dominance, extract rents, and make it harder for new 05:45.570 --> 05:50.460 businesses to emerge and thrive. For example, entrepreneurs who 05:50.460 --> 05:55.410 develop mobile applications face a slew of onerous contract terms 05:55.410 --> 06:01.140 imposed by app stores. Sometimes these contracts allow platforms 06:01.140 --> 06:05.100 to hike their fees at any time, and impose regulations that 06:05.100 --> 06:09.060 limit how businesses communicate with their customers, depriving 06:09.060 --> 06:12.600 these developers of the autonomy they need to run their business. 06:13.230 --> 06:16.410 Many small businesses are similarly dependent on dominant 06:16.440 --> 06:20.850 online marketplaces, which might impose contractual terms that 06:20.850 --> 06:23.790 ban merchants from selling their goods elsewhere at a lower 06:23.790 --> 06:28.560 price. Small farmers and poultry growers must agree to terms 06:28.560 --> 06:32.130 imposed on them by large agribusinesses that restrict 06:32.130 --> 06:35.070 their ability to contest their payments when their food is 06:35.070 --> 06:40.380 weighed. It's not just tech, retail, or agriculture. The loss 06:40.380 --> 06:44.250 of small business freedom when it comes to contracts is no 06:44.250 --> 06:47.970 longer the exception, it's increasingly becoming the norm. 06:48.540 --> 06:51.540 In other contexts, a market structure allows firms, 06:51.570 --> 06:55.020 regardless of their dominance, to exploit their position 06:55.020 --> 06:59.550 through other means, sometimes by deceiving customers. The 06:59.550 --> 07:03.690 Federal Trade Commission Act prohibits unfair or deceptive 07:03.690 --> 07:07.170 acts or practices, as well as unfair methods of competition. 07:07.860 --> 07:13.020 And the FTC has a long tradition of prohibiting unfair contract 07:13.020 --> 07:18.120 terms and requiring fair ones, recently, the FTC began to 07:18.120 --> 07:21.240 enforce a ban on non-disparagement clauses in 07:21.240 --> 07:25.800 contracts that forbid purchasers from posting truthful reviews 07:25.800 --> 07:29.670 online about a product or service. There was consensus 07:29.670 --> 07:32.490 that these terms harmed consumers in competition, 07:32.490 --> 07:35.820 particularly when contracts gave no, quote, "meaningful 07:36.120 --> 07:41.250 opportunity" to negotiate. More than a generation ago, the FTC 07:41.250 --> 07:44.640 found that many consumers had no ability to bargain around 07:44.640 --> 07:48.210 consumer credit contracts, and that this imbalance was 07:48.210 --> 07:52.620 resulting in significant harm to consumers. Based in part on 07:52.620 --> 07:56.730 those findings, the FTC developed the Holder Rule, which 07:56.730 --> 08:00.420 requires lenders to add a notice to contracts preserving 08:00.420 --> 08:04.650 borrowers' legal rights, even if the creditor sold the loan to 08:04.650 --> 08:09.060 Wall Street or another lender. The rule has reshaped consumer 08:09.060 --> 08:12.000 credit markets, and has been described as one of the most 08:12.000 --> 08:15.510 important consumer protections the commission has ever taken. 08:16.230 --> 08:20.670 And even more relevant to today's discussion is the FTC's 08:20.700 --> 08:26.700 Credit Practices Rule, developed 35 years ago, which bans a host 08:26.700 --> 08:31.860 of one-sided contract terms that require consumers and customers 08:31.860 --> 08:36.420 to waive their rights or assign their wages to lenders. For 08:36.420 --> 08:40.380 example, the rule bans confessions of judgment, where a 08:40.380 --> 08:45.270 borrower must agree to waive any defences if they are sued. In 08:45.270 --> 08:48.900 issuing the rule, the commission found that terms like these were 08:48.900 --> 08:53.850 the product of an unequal bargain where consumers could 08:53.850 --> 08:57.540 not protect their interests. But the Credit Practices Rule 08:57.570 --> 09:01.050 Applies only to consumer contracts. And today we are 09:01.050 --> 09:05.310 seeing some small business financing products, particularly 09:05.310 --> 09:09.420 those offered online, that include some of the same terms 09:09.420 --> 09:13.200 that the FTC barred creditors from imposing on consumers. 09:13.710 --> 09:17.940 These terms have led to a flood of questionable legal actions 09:18.330 --> 09:21.810 through which creditors seize small business owners' assets. 09:22.350 --> 09:26.490 The FTC is the sole federal regulator and enforcer in the 09:26.490 --> 09:30.660 non-bank small business financing marketplace, so we are 09:30.660 --> 09:34.140 accountable for cleaning up this market. We will need to 09:34.140 --> 09:37.560 determine whether certain contract terms and business 09:37.560 --> 09:41.910 practices constitute a violation of the law. And I believe all of 09:41.910 --> 09:45.270 us should approach this inquiry with several questions in mind. 09:45.780 --> 09:49.740 First, what are the best sources and methods to assemble 09:49.740 --> 09:53.400 qualitative and quantitative data on contract terms and 09:53.400 --> 09:56.910 business practices in the market? What can we learn from 09:56.910 --> 10:00.360 reforms in other jurisdictions around the world when it comes 10:00.360 --> 10:03.120 to unfair contract terms for small businesses and 10:03.120 --> 10:06.450 entrepreneurs, such as those recently pursued by the 10:06.450 --> 10:10.680 Australian Competition and Consumer Commission? Second, 10:11.010 --> 10:14.100 which contract terms and business practices are likely to 10:14.100 --> 10:18.510 be unlawful under the FTC Act, and which practices may be 10:18.510 --> 10:22.980 discriminatory under the Equal Credit Opportunity Act? Third, 10:23.400 --> 10:27.210 if there are unlawful practices that may be widespread or 10:27.210 --> 10:31.260 prevalent across the market, should the agency seek to deter 10:31.260 --> 10:35.610 this misconduct by activating civil penalties through section 10:35.610 --> 10:40.650 5(m)(1)(B) or through a rulemaking? Fourth, how should 10:40.650 --> 10:43.830 the agency support efforts by state legislatures and 10:43.830 --> 10:47.760 regulators that are seeking to promote a competitive dynamic 10:47.760 --> 10:51.240 climate for entrepreneurs and new businesses seeking 10:51.240 --> 10:55.650 financing? I hope that these questions can be tackled today 10:55.680 --> 10:59.310 during the three panels we will hear from, as well as over the 10:59.310 --> 11:02.670 course of the next several months. Today will include an 11:02.700 --> 11:06.570 overview of the marketplace for small business financing. It 11:06.570 --> 11:10.110 will also discuss potentially problematic products and other 11:10.110 --> 11:14.340 risks. So in conclusion, the Federal Trade Commission will 11:14.340 --> 11:18.360 need to play a pivotal role in restoring dynamism and 11:18.360 --> 11:22.230 entrepreneurship in our economy to reverse some of the alarming 11:22.230 --> 11:25.590 trends that undermine the values our country stands for. 11:26.160 --> 11:29.310 Aggressive enforcement that promotes competition and 11:29.310 --> 11:33.570 protects consumers and honest businesses, complemented by 11:33.570 --> 11:37.350 rigorous analysis of the marketplace to eradicate unfair 11:37.350 --> 11:41.070 contract terms and business practices, is absolutely 11:41.070 --> 11:45.150 essential. Today is just the start of these discussions, and 11:45.150 --> 11:48.510 we look forward to learning more from all of you today. Thank 11:48.240 --> 12:06.120 Could you please come up? We can get started. 11:48.510 --> 11:48.720 you. 12:24.150 --> 12:26.430 OK, we have a lot to cover this morning, so we'll go ahead and 12:26.430 --> 12:29.130 get started. My name is Malini Mithal, and I'm with the Federal 12:29.130 --> 12:31.410 Trade Commission. And this is Thomas Kost. He's going to be my 12:31.440 --> 12:34.110 co-moderator, also at the Federal Trade Commission. And 12:34.110 --> 12:37.440 this is Panel 1-- an Overview of the Small Business Financing 12:37.440 --> 12:40.650 Marketplace. This panel will provide an introduction to the 12:40.650 --> 12:43.830 role of small businesses in the US economy, the types of 12:43.860 --> 12:46.380 financing products available, and the benefits of these 12:46.380 --> 12:48.990 products, as well as recent trends in the financial 12:48.990 --> 12:52.230 marketplace. So we're going do very brief introductions because 12:52.230 --> 12:55.680 we have a lot of ground to cover. So immediately-- I'm not 12:55.680 --> 12:57.690 going to get the right and left right. So immediately over here 12:57.690 --> 13:00.450 is Claire, Claire Kramer Mills. She's the assistant vice 13:00.450 --> 13:03.840 president of the Federal Reserve Bank of New York. Then we have 13:03.840 --> 13:06.510 Sam Taussig. Did I pronounce your last name correctly? OK. 13:07.320 --> 13:10.350 He's the head of global policy at Kabbage. Next to him, we have 13:10.350 --> 13:14.190 Lew, Lew Goodwin, banking services lead at Square Capital. 13:14.490 --> 13:17.670 Then Gwendy Brown, the vice president of research and policy 13:17.790 --> 13:20.970 with Opportunity Fund. And finally, we have Scott Talbott, 13:20.970 --> 13:23.610 the senior vice president of government affairs at the 13:23.610 --> 13:28.080 Electronic Transactions Association. So to kick off our 13:28.080 --> 13:31.320 panel, I'm going to start with what's a very basic question. 13:31.500 --> 13:34.650 But can you all talk about what the importance of credit and 13:34.650 --> 13:36.810 financing is for small businesses. I'm going to start 13:36.810 --> 13:37.350 with you, Claire. 13:37.390 --> 13:41.110 Sure. And I'll just preface any remarks with the following 13:41.110 --> 13:43.360 disclaimer-- the views I express are my own, and do not 13:43.360 --> 13:45.670 necessarily represent those of the Federal Reserve Bank of New 13:45.670 --> 13:50.230 York or the Federal Reserve System. With that said, so small 13:50.230 --> 13:54.670 businesses-- and I think just to level-set, we're talking about, 13:54.670 --> 14:00.280 here, both non-employer firms, solo proprietorships, as well as 14:00.820 --> 14:07.570 firms that have employees on payroll. They need funds to fuel 14:07.600 --> 14:11.560 day-today operations, and they also need funds for expansion 14:11.560 --> 14:15.340 and growth. And you know, for the last couple of years, the 14:15.340 --> 14:18.670 Federal Reserve has had surveyed, regularly, small 14:18.670 --> 14:21.970 businesses. And when we asked about financial challenges that 14:21.970 --> 14:25.960 they've experienced in the last 12 months, they regularly tell 14:25.960 --> 14:28.900 us that they have challenges funding operating expenses. So I 14:28.900 --> 14:34.630 think a big concern is this daily flow and management of 14:34.960 --> 14:35.650 cash. 14:36.550 --> 14:36.820 Sam? 14:38.040 --> 14:40.380 Thank you. And good morning, everybody. And thanks for 14:40.380 --> 14:45.090 showing up to visit with us before 9 AM. I also do have to 14:45.090 --> 14:48.990 preface some comments. I do represent the views of Kabbage, 14:48.990 --> 14:52.650 but I will try to distinguish when I am representing my own 14:52.650 --> 14:55.710 personal views. My regulatory attorneys would like me to 14:55.710 --> 14:58.620 remind you that I'm not a lawyer, and that any loans I 14:58.620 --> 15:02.130 refer to today are actually made by Celtic Bank within the 15:02.130 --> 15:08.100 Kabbage program, member FDIC. Now, with that being said, our 15:08.100 --> 15:12.690 business at Kabbage is serving the small business credit needs. 15:12.900 --> 15:16.980 And our customers are typically five to seven employees, truly 15:16.980 --> 15:19.860 mainstream American small businesses, that are looking for 15:19.890 --> 15:24.990 project-based financing, often referred to as working capital. 15:25.260 --> 15:29.520 And about 27% of them don't receive the funds they need to 15:29.520 --> 15:32.640 grow. And the average small business, according to our 15:32.640 --> 15:37.650 research, only has about 27 days of cash flow on hand. So if you, 15:37.650 --> 15:40.800 as a small business owner, need to seize an opportunity to 15:40.800 --> 15:45.810 expand your revenue, or a one-off event, such as your 15:45.810 --> 15:49.200 freezer in your ice cream store breaks, it's very difficult to 15:49.200 --> 15:53.400 access that capital quickly to get back to business or to grow 15:53.400 --> 15:58.860 your business. And that's where non-bank fintech platforms like 15:58.860 --> 16:01.890 Kabbage have stepped in to facilitate that access to 16:01.890 --> 16:05.250 credit. And we'll get much more into the needs of small 16:05.250 --> 16:09.150 businesses as we go through this panel. But again, thank you for 16:09.150 --> 16:10.080 joining us this morning. 16:10.740 --> 16:10.920 Lew? 16:12.090 --> 16:16.950 Thank you. And I'm here with Square and Square Capital. And 16:17.340 --> 16:24.150 the disclaimers are the same. So look, as you all know, I mean, 16:24.150 --> 16:29.160 small businesses are the lifeblood of the US economy. 48% 16:29.190 --> 16:35.970 of the total population is employed by small business. And 16:35.970 --> 16:41.580 so it's just a huge factor here. And their access to capital is 16:41.580 --> 16:48.000 such a critical need. And in Square, we deal with a lot of 16:48.000 --> 16:53.400 small and microbusinesses. And the challenges to capital, I 16:53.400 --> 16:57.930 think, are even tougher, because their access to capital is 16:57.930 --> 17:02.310 usually your friends and family. And friends and family, that's a 17:02.310 --> 17:07.350 tough bank to go back to time after time. And so in our 17:07.350 --> 17:11.370 research, we found that 70% of the small businesses that go out 17:11.370 --> 17:16.110 and try to get financing are not able to get what they want or 17:16.110 --> 17:20.730 need. So it's certainly an acute problem that we look forward to 17:20.730 --> 17:21.900 talking to on this panel. 17:24.150 --> 17:28.050 Good morning. I'm Gwendy Brown, with Opportunity Fund. And I'd 17:28.050 --> 17:30.600 like to speak to, in addition to the role that small businesses 17:30.600 --> 17:33.690 play in providing jobs for many Americans, the role that small 17:33.690 --> 17:36.300 businesses play in providing income for those small business 17:36.300 --> 17:39.750 owners. Particularly for low-income minority and women 17:39.750 --> 17:42.480 business owners, access to capital is a tremendous problem 17:42.480 --> 17:48.090 in our country. And access to quality responsible financing is 17:48.090 --> 17:51.690 essential in order to really make ends meet and provide for 17:51.690 --> 17:53.910 their families through their small business enterprise. So 17:53.910 --> 17:58.140 therefore having access to capital is really why we're all 17:58.140 --> 17:58.680 here today. 18:00.390 --> 18:02.280 Thanks. Good morning. Scott Talbott, I don't have any 18:02.280 --> 18:07.410 disclosures. I am a lawyer. But I appreciate this opportunity. I 18:07.410 --> 18:11.610 think-- real quickly, I think it's important to recognize 18:12.060 --> 18:15.600 that, excitingly, the market has changed. And we're sitting here 18:15.600 --> 18:19.560 because there is a host of new products available that fintech 18:19.560 --> 18:23.340 has helped deliver and created new opportunities for financing 18:23.340 --> 18:27.180 for small businesses, whether it's through the companies up 18:27.180 --> 18:30.150 here, merchant cash advances, I know we'll talk about later, 18:30.150 --> 18:32.490 which have been around for a little while. But these products 18:32.490 --> 18:36.060 are exciting, and the marketplace has created them to 18:36.060 --> 18:40.410 help serve customers, which is fantastic. And it's especially 18:40.410 --> 18:43.260 important for all the reasons already mentioned. But when you 18:43.260 --> 18:46.500 look at what the companies, small businesses, do with this 18:46.500 --> 18:51.660 capital, the economic output is fantastic. We did a survey of 18:52.140 --> 18:57.270 large ETA members, and we found that, out of $10 billion lent 18:57.270 --> 19:02.070 over a two-year period, it generated almost 400,000 jobs 19:02.460 --> 19:07.740 and $12.6 billion in wages in local economies. So there is a 19:07.740 --> 19:10.770 multiplier effect here of delivering capital to small 19:10.770 --> 19:13.650 businesses who are going to put it to work and help our economy. 19:14.260 --> 19:16.660 Great, thank you. OK, so something that was coming up in 19:16.660 --> 19:19.090 our answers is a little bit about the profile of a small 19:19.090 --> 19:22.270 business. I think, Sam, you mentioning that many of your 19:22.600 --> 19:25.090 companies that you deal with have five to seven employees. I 19:25.090 --> 19:27.100 know Gwendy was talking about women and minority-owned 19:27.100 --> 19:29.470 businesses. So let's talk a little bit more about the 19:29.470 --> 19:31.990 profile, anything you want to add to that. And I'll start with 19:31.990 --> 19:32.440 you, Sam. 19:32.590 --> 19:36.640 Sure. Thank you. Yes, so the Kabbage customer base is 19:36.640 --> 19:40.690 interesting, because we offer a line of credit between $2,000 19:40.720 --> 19:46.180 and $250,000, that the borrower is able to select exactly how 19:46.180 --> 19:49.630 much they want to access. And that capital is accessed on the 19:49.630 --> 19:53.680 basis of a term loan. That term loan is 6, 12, or 18 months. So 19:53.680 --> 19:58.090 within the $2,000 to $250,000 range, you can imagine that we 19:58.090 --> 20:01.330 have a couple of different stratifications of business 20:01.330 --> 20:04.900 types. But overall, they are about five to seven employees 20:05.080 --> 20:09.820 that are operating in every sort of NAICS code or retail sector 20:10.030 --> 20:14.470 and SIC code that you could possibly imagine. You know, on 20:14.470 --> 20:20.860 average, they're looking for return on investment capital. At 20:20.860 --> 20:24.910 the higher end of the scale, we have customers that are 20:24.910 --> 20:28.390 accessing that $250,000 line. Those are much more mature 20:28.390 --> 20:32.530 businesses. You're looking at closer to the $1 million revenue 20:32.530 --> 20:36.220 line, though typically not over. You're looking at 11 to 12-plus 20:36.670 --> 20:41.380 employees, typically concentrated in high-input or 20:41.410 --> 20:44.680 highinvestment industries such as custom manufacturing, 20:44.860 --> 20:49.360 particularly in the Midwest. I will say, though, that within 20:49.360 --> 20:52.090 our profile, it's very interesting to look at the 20:52.090 --> 20:55.750 distribution. The Kabbage program operates in all 50 20:55.750 --> 21:00.760 states, and as I said, across all retail and other industry 21:00.760 --> 21:04.120 segments. But we have an incredibly diverse portfolio of 21:04.120 --> 21:07.750 small business owners. Because the application is entirely 21:08.710 --> 21:12.610 protected-class blind, we don't really know the race or sex of 21:12.610 --> 21:15.220 the borrower. We know they're not a terrorist or violating 21:15.220 --> 21:20.890 other AML/KYC/KYB issues, but those customers come to us in 21:20.890 --> 21:23.080 sort of a selection bias, because they don't need to 21:23.080 --> 21:29.890 present documents or sit before a banker. And by the nature of 21:29.890 --> 21:33.910 that kind of anonymous program, we've developed a really, really 21:33.910 --> 21:35.860 diverse profile across the country. 21:38.140 --> 21:40.390 Hey, thank you, Claire, I think you have some things to say on 21:40.390 --> 21:40.540 this. 21:40.540 --> 21:44.440 Sure. So just to kind of level-set, and just speak 21:44.770 --> 21:49.330 broadly about the small business population, roughly 80% or so of 21:49.330 --> 21:54.010 small businesses are sole proprietorships. Of those firms 21:54.010 --> 21:59.560 that have employees on payroll, 55% of them, give or take, have 21:59.560 --> 22:03.880 1 to 4 employees. So by and large, small businesses are in 22:03.880 --> 22:08.290 fact small. And by and large, their credit and their financing 22:08.290 --> 22:14.350 needs are small. And this is not to underestimate the gazelles 22:14.350 --> 22:17.710 and the fast-growth companies that we want to make sure are 22:17.710 --> 22:21.670 financed, but just to give you a sense of where the market is. 22:22.600 --> 22:27.730 We've found in our research that typically most small businesses 22:27.790 --> 22:32.830 with employees need roughly $100,000 or less in financing. 22:33.370 --> 22:39.940 Roughly 2/3 need $250,000 or less. And I think, to speak to 22:39.970 --> 22:43.660 some points that have already been raised, that's increasingly 22:43.660 --> 22:47.470 a tough market for traditional banks to serve, for a variety of 22:47.470 --> 22:50.110 reasons. I mean, we'll touch on that later. But there certainly 22:50.110 --> 22:56.260 has been-- if you marry sort of need and where the borrower is 22:56.260 --> 22:59.770 at this point, there's certainly opportunities-- and very wide 22:59.770 --> 23:02.530 ones-- for innovations in the marketplace. 23:03.220 --> 23:06.400 Okay, great. And I don't know if anyone has anything to add about 23:06.580 --> 23:09.100 the role of minority and women owned businesses, I think, 23:09.100 --> 23:10.510 Wendy, that's something you were bringing up. 23:11.140 --> 23:14.350 I think I just like to speak to more informal businesses, 23:14.770 --> 23:19.510 traditionally, sole proprietors or very small employers, what we 23:19.510 --> 23:22.360 often see is that they've really mingled their personal and 23:22.360 --> 23:25.090 business finances, they've started with personal credit 23:25.090 --> 23:28.060 cards, possibly with home equity. And as they build their 23:28.060 --> 23:31.180 business, they begin trying to access business products. But 23:31.180 --> 23:33.730 ultimately, you know, until they get quite formalized their 23:33.730 --> 23:36.460 business and personal finances are intertwined, and they really 23:36.460 --> 23:40.810 see consumer and business credit as both options for them to 23:40.840 --> 23:43.120 consider to grow their business. So they're not kind of 23:43.240 --> 23:46.810 completely separate. And same way. Many lenders and financing 23:46.810 --> 23:49.270 companies are looking at their personal credit, as well as 23:49.270 --> 23:50.860 perhaps their business credit as well. 23:51.160 --> 23:52.150 Claire, did you have- 23:52.630 --> 23:55.060 In our survey, in the Fed survey, you know, we find that 23:55.060 --> 23:58.450 50% of small businesses are using exclusively their personal 23:58.450 --> 24:02.020 scores to secure financing for their business. Another roughly 24:02.020 --> 24:06.970 30% are using both personal and business scores. Certainly when 24:06.970 --> 24:10.060 they go to traditional providers, personal guarantees 24:10.060 --> 24:15.430 are pretty standard for term loans. They're also using, at 24:15.430 --> 24:19.660 roughly equal levels, personal assets and business assets to 24:19.660 --> 24:22.390 secure financing for their business. 24:23.290 --> 24:26.800 And can anyone speak to kind of the sophistication of the small 24:26.800 --> 24:28.780 business owners that are seeking financing? 24:30.730 --> 24:35.080 I'll take a go at it. First of all, I mean, as far as 24:35.080 --> 24:38.410 sophistication goes, I think people that are in small 24:38.410 --> 24:42.490 business and these sole proprietors really understand 24:42.520 --> 24:47.320 their dilemma. They really understand their cash flow from 24:47.320 --> 24:52.390 hour to hour, much less week to month. And so I think it's very 24:52.390 --> 24:59.440 important for them to understand how they can solve some of their 24:59.440 --> 25:06.220 liquidity and cash flow issues. And that is so important when 25:06.220 --> 25:12.940 you are trying to make it day to day. It is also important that 25:12.940 --> 25:17.770 when you get financing, that it isn't some sort of an 25:17.800 --> 25:20.620 arrangement that would take all of your earnings, kind of a 25:20.620 --> 25:25.540 bullet type of a situation where you have to pay back everything 25:25.540 --> 25:30.430 at a certain point. Square's business makes it so that the 25:30.430 --> 25:38.110 payment is generally always under 15% of what the inflows 25:38.110 --> 25:45.070 would be. And square takes payments on its loans on the 25:45.730 --> 25:51.700 business's daily receipts. So as they sell, they would pay back 25:51.700 --> 25:56.860 their loan. And I think it's very important that you can help 25:57.970 --> 26:02.890 these small businesses to see what is available to them for 26:02.890 --> 26:03.490 financing. 26:03.550 --> 26:06.010 So I think we're dancing around an interesting point that I just 26:06.010 --> 26:09.190 want to make really clear. There is a very important difference 26:09.190 --> 26:12.460 between consumer credit and commercial credit. And we spend 26:12.460 --> 26:16.930 a lot of time educating policymakers on this difference 26:17.020 --> 26:19.510 because of how the laws and the regulations are actually 26:19.510 --> 26:22.510 applied. But if you really look at what a small business 26:22.510 --> 26:26.800 customer is trying to do, in the real world, certainly for the 26:26.800 --> 26:28.870 Kabbage customers, they're trying to buy equipment, 26:28.870 --> 26:31.750 purchase inventory, boost marketing. All of these things 26:32.080 --> 26:35.650 are in search of a return on investment. And that's very 26:35.650 --> 26:38.560 important to understand. Small business owners-- sole 26:38.560 --> 26:41.740 proprietors, one to two employees, five to seven 26:41.740 --> 26:45.640 employees, 100, 1,000 employees, they're looking to invest and 26:45.640 --> 26:49.870 grow their business or recover from an event. And that is a 26:49.900 --> 26:52.750 return on the investment, and that's a return on the capital. 26:52.870 --> 26:56.200 Whereas compared to the consumer credit, typically-- not always, 26:56.200 --> 27:01.000 but typically-- is used for consolidating previous debt or 27:01.000 --> 27:05.290 purchasing depreciating assets that don't necessarily return 27:05.290 --> 27:08.500 that return on capital. And so when we look at the 27:08.500 --> 27:13.000 sophistication of small businesses, we do look at 27:13.660 --> 27:16.630 necessarily how they're using their credit and what they want 27:16.630 --> 27:20.710 to use credit for. We at Kabbage are leveraging the cash flow 27:20.710 --> 27:24.970 underwriting data, similar to what my colleague at Square was 27:24.970 --> 27:28.810 just referring to, to underwrite the business. And so our 27:28.810 --> 27:32.830 seven-minute application process that leverages the underlying 27:32.830 --> 27:36.220 existing business data, such as bank account data, credit card 27:36.220 --> 27:39.880 receivables data, accounting inventory, shipping inventory, 27:40.090 --> 27:43.270 et cetera, is looking at the fundamental underlying 27:43.270 --> 27:46.690 transactions of that business to make sure that if the Kabbage 27:46.690 --> 27:48.880 program were to inject additional capital into the 27:48.880 --> 27:51.250 business for whatever that business wants to do to grow, 27:51.400 --> 27:55.270 they can sustain and service that debt. And that's very 27:55.270 --> 27:56.260 important to understand. 27:57.160 --> 28:00.310 I'd like to just add, as far as sophistication, that what we 28:00.310 --> 28:02.980 find is that our business owners are sophisticated when it comes 28:02.980 --> 28:05.590 to their specific business. If they're a florist, they know 28:05.590 --> 28:09.250 flowers in and out, as well as their suppliers, and on and on 28:09.250 --> 28:12.250 through the industries. What they're not experts at is the 28:12.250 --> 28:14.650 landscape of small business finance, which where we're 28:14.650 --> 28:17.260 talking about today. And I think it is important to acknowledge 28:17.260 --> 28:20.590 that regardless of their level of sophistication, even if they 28:20.590 --> 28:24.010 have MBAs, we've had many people come to us really unable to 28:24.160 --> 28:27.370 fully understand the terms of different financing options 28:27.370 --> 28:30.670 presented to them. So sophistication as a business 28:30.670 --> 28:33.850 owner does not necessarily equate to sophistication in 28:33.850 --> 28:37.390 terms of being able to assess financing options available. 28:38.620 --> 28:42.190 Just one quick thing that I would add there in reference to 28:42.190 --> 28:44.560 the points that have just been made, we ask a series of 28:44.560 --> 28:49.720 questions that ask borrowers about why they chose particular 28:49.720 --> 28:53.230 financing options and particular lenders. And I would just say, 28:53.230 --> 28:56.620 broadly, I agree with you, Gwendy. I think the nuances of 28:56.620 --> 29:00.160 different financing vehicles may just not be terrain that an 29:00.190 --> 29:03.790 early-stage entrepreneur has faced before. And so those are 29:03.790 --> 29:07.180 those are really challenging circumstances for them. What 29:07.180 --> 29:11.350 they do understand, though, I think, is a broad appreciation 29:11.350 --> 29:15.250 of trade-offs that they're making, that I may be-- I'm 29:15.250 --> 29:22.120 going to pay in cost for a speedy decision. And there's a 29:22.120 --> 29:25.270 trade-off there, right? I want the funds tomorrow, and I'm 29:25.270 --> 29:29.590 willing to pay maybe a higher APR for that, or other 29:29.590 --> 29:33.070 associated fees and costs. So I do think, generally, they get 29:33.070 --> 29:35.620 the broad contours. But I think the devil is sometimes in the 29:35.620 --> 29:36.100 details. 29:36.300 --> 29:40.110 And it's reflected amongst the customer base. So a third of our 29:40.110 --> 29:43.440 customers in the Kabbage portfolio could go to a bank and 29:43.440 --> 29:45.900 receive a funding option, but they choose not to because they 29:45.900 --> 29:50.880 don't want to wait seven-plus business days. Another third of 29:50.880 --> 29:53.730 our customers have been rejected from a bank, on average, two to 29:53.730 --> 29:56.820 three times, and come to us for that value of cash flow 29:56.820 --> 29:59.190 underwriting because we can look at a more holistic, more 29:59.190 --> 30:02.940 detailed scope of what their business activities are. And the 30:02.940 --> 30:05.880 other third sit somewhere in the middle, of, they probably could 30:05.880 --> 30:08.940 go to a bank, they might be denied by one, but could shop 30:08.940 --> 30:13.590 around to another. But again, that time to funding and how 30:13.590 --> 30:16.380 long it's going to take to fill out the paperwork and deal with 30:16.380 --> 30:19.230 a loan officer is just not worth it to them if they need to 30:19.230 --> 30:22.590 capitalize on a very important, very quick business opportunity. 30:24.060 --> 30:27.720 Yeah, just to follow up, in our surveys, we found that almost 30:27.720 --> 30:31.440 90% of them have college degrees. And they are excited 30:31.440 --> 30:33.990 about the number of options that are available to them now. 30:33.990 --> 30:36.090 Especially when you go back five, 10 years, they didn't have 30:36.090 --> 30:39.780 them. And we find that the level of education and understanding 30:39.810 --> 30:44.130 of finance of the options is increasing. And what they are 30:44.130 --> 30:47.040 good at, though, is taking-- understanding their business. I 30:47.040 --> 30:50.700 agree with Gwendy. And then the ROI that whatever that financing 30:50.730 --> 30:54.270 option is will help them provide. So whether it's flowers 30:54.270 --> 30:57.750 for Mother's Day, whether it's beer for St. Patrick's Day, 30:57.840 --> 31:01.020 whether it's ice cream for the summer, they get that, if they 31:01.020 --> 31:04.800 have x dollars, they are going to generate y returns. And that 31:04.800 --> 31:08.280 is an inherent decision that helps them figure out, yes, I 31:08.280 --> 31:10.710 need funding, and this is how I'm going to help get it-within 31:10.710 --> 31:12.330 the options, this is how I'm going to move forward with it. 31:13.770 --> 31:16.020 One interesting trend that we might want to talk about more-- 31:16.020 --> 31:18.630 and it's been mentioned here-- is that banks are offering fewer 31:18.630 --> 31:20.970 loans to small businesses than they have in the past, 31:21.360 --> 31:25.200 especially smaller-dollar loans. Claire, would you mind providing 31:25.200 --> 31:26.610 some detail on this trend? 31:26.690 --> 31:34.760 Yeah, so regulated institutions are required to submit data on 31:34.760 --> 31:38.210 their outstanding balances. So we look at reports from the 31:38.240 --> 31:42.680 FFIEC. And when you look at outstanding loan balances-- and 31:42.680 --> 31:46.490 our proxy for this, it's not perfect, it is loans under $1 31:46.490 --> 31:50.390 million are taken as proxies. I know, everyone is smiling 31:50.390 --> 31:54.770 because we know that $1 million is a high bound-- are taken as 31:54.770 --> 31:58.580 proxies for small business loans. And loans in excess of a 31:58.580 --> 32:02.030 million are taken as loans to large businesses. And when you 32:02.030 --> 32:05.120 look at sort of-- I wish I had a visual, but if you can just bear 32:05.120 --> 32:08.450 with me and kind of look at this, these are the big loans 32:08.450 --> 32:11.570 and these are the small loans, small loans have basically 32:11.570 --> 32:15.530 remained relatively flat. They are not yet back quite to 32:15.560 --> 32:21.470 pre-crisis levels. On the face of it, it's quite a stark graph 32:21.470 --> 32:25.100 when you look at it. The one thing that I would say is that 32:25.100 --> 32:28.580 tells us about the supply, the outstanding stock of loans. It 32:28.580 --> 32:33.200 doesn't necessarily tell us the story of, is that stock meeting 32:33.200 --> 32:36.500 the demand of the borrowers or potential borrowers. And I 32:36.500 --> 32:40.820 think, there, our survey research does lend some 32:40.820 --> 32:45.290 insights. We find, I think-- we're all doing our own surveys 32:45.470 --> 32:49.580 here on this panel, but I think we all probably would agree that 32:49.580 --> 32:53.360 we do perceive, and our respondents are telling us that 32:53.360 --> 32:59.090 there are salient gaps. So roughly 50% of firms that we 32:59.090 --> 33:03.200 survey tell us that they have a funding shortfall of some sort 33:03.200 --> 33:07.880 or another. That is more stark when you look at women-owned 33:07.880 --> 33:11.660 businesses, black or African American-owned businesses, and 33:11.690 --> 33:15.620 Latino businesses, most stark, I should say, for black and 33:15.620 --> 33:17.600 African-American-owned firms. 33:19.130 --> 33:20.900 And Gwendy, do you have any additional thoughts on the role 33:20.900 --> 33:22.880 that the banks are playing or should be playing? 33:23.990 --> 33:27.710 We've done some analysis that suggests that the gap could be 33:27.710 --> 33:31.340 as large as $87 billion. So really looking at small 33:31.340 --> 33:34.370 business, we're talking about a really meaningful and sizable 33:34.370 --> 33:37.970 gap. I mean, I think, ultimately, Claire spoke well to 33:37.970 --> 33:42.500 it about kind of the lines. And ultimately what has happened is 33:42.500 --> 33:45.890 that larger loans are more profitable and smaller loans are 33:46.130 --> 33:50.510 hard to do, and hard to do well. And so ultimately I think there 33:50.510 --> 33:53.960 is a role for technology in making sure that the cash that 33:53.960 --> 33:57.440 small businesses need can get into their bank accounts more 33:57.440 --> 34:00.980 quickly. And so I think the balance is really making sure 34:00.980 --> 34:04.190 that banks are playing a role in providing capital and providing 34:04.190 --> 34:09.140 capital to responsible players, and in really utilizing their 34:09.140 --> 34:11.900 networks and their branches to ensure that all of those 34:11.900 --> 34:14.750 businesses that are going to them are accessing quality 34:14.750 --> 34:17.450 capital, whether it be through them or through trusted 34:17.450 --> 34:18.020 partners. 34:18.650 --> 34:22.340 Yeah, just to add onto that, I think if you go back 10, 20 34:22.340 --> 34:24.740 years, our parents' or grandparents' days, the old 34:24.740 --> 34:27.470 days, bringing all your materials into a loan officer, 34:27.830 --> 34:31.730 having that be reviewed, waiting a long time to get a result, and 34:31.730 --> 34:33.680 maybe it was positive or negative, and then you had to 34:33.680 --> 34:37.400 get a check for disbursement of the funds. That took a long 34:37.400 --> 34:41.060 time. Fast-forward to where we are now. With the new products 34:41.270 --> 34:45.260 that are tailored to the cash flow, we see smaller loans. 34:45.260 --> 34:48.800 Average loan size can be $30,000 to $50,000, somewhere in there, 34:49.010 --> 34:52.580 with a decision made, as Sam said earlier, in minutes, based 34:52.580 --> 34:55.760 on electronically-submitted data. That is exciting 34:55.760 --> 35:00.290 opportunities. And banks, for them traditionally, the cost of 35:00.290 --> 35:03.380 underwriting a loan, whether it was $5.00 or a million dollars, 35:03.380 --> 35:05.540 was the same. They had to go through that same process. So 35:05.540 --> 35:08.720 they tend to favor, as Gwendy pointed out, the larger loans. 35:09.110 --> 35:11.810 In this new environment, however, we see that traditional 35:11.810 --> 35:16.430 banks are partnering with online small business lenders to help 35:16.430 --> 35:19.460 white-label their products so that they can serve that 35:19.460 --> 35:22.670 customer that walks into their branch that fits that small 35:22.670 --> 35:24.980 business profile that traditionally might not have 35:24.980 --> 35:28.070 been their ideal target customer. But now, through these 35:28.070 --> 35:31.130 partnerships, the banks are able to help provide that capital. 35:31.490 --> 35:33.860 And that's an exciting development, another one in the 35:33.860 --> 35:37.550 space that I think is worthwhile, worth noting. 35:38.150 --> 35:44.510 And for Square, again, our customers run the gamut, but 35:44.720 --> 35:48.470 many of them are very small. Our average loan size is between 35:48.470 --> 35:57.050 $6,000 and $7,000. And that is just not economically feasible 35:57.050 --> 36:00.800 for a bank to go out there and do it, to Scott's point that it 36:00.800 --> 36:04.340 takes a lot to underwrite either a small loan or a large loan. 36:04.730 --> 36:10.010 And so what we do is we look at the underlying Square data, the 36:10.040 --> 36:13.160 cash flow that they are running through their business and 36:13.160 --> 36:17.360 through Square. And we're able to actually offer them, even 36:17.390 --> 36:21.980 without them asking for it or applying, we're offering them 36:23.660 --> 36:28.760 some credit that's in line with what their current cash flows, 36:28.760 --> 36:34.250 in a real-time basis, look like. And so it is quick and 36:34.250 --> 36:38.660 immediate, and you get the payment the next day, like Sam 36:38.660 --> 36:39.290 talked about. 36:39.800 --> 36:42.500 I'm sure we'll talk about later, but the repayment options have 36:42.500 --> 36:45.140 also modernized. In the old days, you had to make a payment 36:45.140 --> 36:49.190 on the first of the month. Your PNI was due. That was it. Now 36:49.190 --> 36:53.120 you see new payment options, as well as terms that are shorter 36:53.120 --> 36:57.140 or longer, with various structures based mostly on cash 36:57.140 --> 37:01.310 flow. If the small business does well, has a lot of receipts that 37:01.310 --> 37:04.820 day, then their repayment is the same percent as if they had a 37:04.820 --> 37:09.110 terrible day, versus that fixed repayment term which could loom 37:09.110 --> 37:11.270 large over small business, especially if they had a rough 37:11.270 --> 37:14.690 month or if they were seasonal. If you only did ice cream sales 37:14.690 --> 37:17.450 in summer, you had a tough time getting through the winter and 37:17.450 --> 37:20.480 fall months. But now with these new repayment options, these new 37:20.480 --> 37:22.370 products, we're able to serve that market better. 37:22.370 --> 37:24.800 I'm sure we'll talk about later, but the repayment options have 37:24.800 --> 37:25.970 also modernized. In the old days, you had to make a payment 37:25.970 --> 37:27.050 on the first of the month. Your PNI was due. That was it. Now 37:27.050 --> 37:28.280 you see new payment options, as well as terms that are shorter 37:28.400 --> 37:29.900 or longer, with various structures based mostly on cash 37:29.900 --> 37:32.000 flow. If the small business does well, has a lot of receipts that 37:32.000 --> 37:33.290 day, then their repayment is the same percent as if they had a 37:33.290 --> 37:34.580 terrible day, versus that fixed repayment term which could loom 37:34.580 --> 37:35.900 large over small business, especially if they had a rough 37:35.900 --> 37:37.730 month or if they were seasonal. If you only did ice cream sales 37:37.730 --> 37:38.840 in summer, you had a tough time getting through the winter and 37:38.840 --> 37:40.640 fall months. But now with these new repayment options, these new 37:40.640 --> 37:41.720 products, we're able to serve that market better. 37:41.810 --> 37:46.400 Yeah, sure. So I can speak to maybe two things that we're 37:46.400 --> 37:49.700 seeing in our data. And just by way of background, so the 37:49.700 --> 37:53.330 Federal Reserve banks, in partnership with roughly 300 37:53.330 --> 37:55.880 organizations across the country, field an annual survey 37:55.880 --> 37:59.210 of small businesses. And what that enables us to do, we've 37:59.240 --> 38:01.460 essentially created an intelligence network that 38:01.460 --> 38:05.540 provides us insight into a deep dive into financing needs and 38:05.540 --> 38:08.870 experiences on the part of borrowers. And so what we're 38:08.870 --> 38:11.720 seeing from that is that, first, there's definitely, as you 38:11.720 --> 38:14.870 suggest-- and I think we're all sitting here for a reason-- 38:15.440 --> 38:18.110 there has been a growing interest and awareness of online 38:18.110 --> 38:22.460 providers of financing. So we've looked at this over the last 38:22.460 --> 38:26.720 couple of years, and in our most recent data from 2018, roughly 38:26.720 --> 38:33.200 32% of applicants did file an application at an online lender. 38:33.530 --> 38:36.200 Now, that doesn't tell you that they ultimately ended up 38:36.200 --> 38:41.030 deciding to take the financing from that provider, but that has 38:41.030 --> 38:45.050 trended upward over the last couple of surveys. That said, 38:45.050 --> 38:47.480 when you look at the marketplace, and you look at 38:47.480 --> 38:51.800 where borrowers or potential borrowers most frequently apply 38:51.800 --> 38:55.850 for financing, banks large and small-- and particularly large-- 38:56.270 --> 39:00.890 are really still very critical players. Which I think-Scott, 39:00.920 --> 39:04.190 you highlighted the growing partnerships between traditional 39:04.190 --> 39:07.310 and new players. And I think that that's really an important 39:07.310 --> 39:11.570 point to make, that this isn't necessarily one or the other. 39:12.710 --> 39:16.040 They're both providing in tandem. And we're seeing some 39:16.040 --> 39:18.170 interesting partnerships, I think, across the board. 39:18.780 --> 39:22.020 Right. OK, and I think we've all been kind of touching upon this 39:22.020 --> 39:24.690 in some of our answers, but let's talk a little bit about 39:24.690 --> 39:28.020 the benefits of online financing products. Why do small 39:28.020 --> 39:30.390 businesses typically seek these out? And I think that is 39:30.390 --> 39:32.460 something that's coming out. But let's just kind of add to the 39:32.460 --> 39:34.410 discussion about what are other benefits we're seeing? 39:35.260 --> 39:41.080 Sure. Predominantly, it's the direct-to-business owner 39:41.080 --> 39:45.280 experience, the opportunity in the cash flow underwriting 39:45.280 --> 39:49.360 context at many fintech platforms, to leverage the data 39:49.480 --> 39:52.990 that you're already creating through purchases, transaction, 39:52.990 --> 39:56.770 inventory logging in your business, to quickly and easily 39:56.800 --> 40:02.110 apply for credit options. It's really easy to use. And then on 40:02.110 --> 40:04.960 the product side-- so that's the application experience side, 40:04.960 --> 40:08.860 which is very important- but on the product side, as Scott 40:08.980 --> 40:12.700 alluded to, there are many, many more flexible, more dynamic 40:12.700 --> 40:16.780 short-term capital options that allow the business to tailor the 40:16.780 --> 40:22.270 credit product to this specific project that they're trying to 40:23.260 --> 40:25.870 build or achieve in their business. And that's important. 40:25.870 --> 40:30.700 So if you think about how credit used to be applied for and doled 40:30.700 --> 40:33.340 out from a bank, you'd go to a bank, you'd wait a long time, as 40:33.340 --> 40:36.250 we described, and you would be given essentially a lump sum. 40:36.250 --> 40:39.370 And so you, as a small business owner, you may have a debt 40:39.370 --> 40:46.030 capacity of, let's say, $55,000. You really only need $12,000 for 40:46.030 --> 40:49.540 this very specific project. You go to the bank, the bank says, 40:50.290 --> 40:52.900 look, you've been banking with us for a long time. We have some 40:52.930 --> 40:55.270 fixed costs and some marginal costs. We really need you to 40:55.270 --> 40:59.620 take $20,000. I know you only need $12,000, $12,500, but this 40:59.620 --> 41:02.200 is what we have for you, you can take it or leave it. And that 41:02.200 --> 41:04.750 leaves the small business in a very precarious place. You don't 41:04.750 --> 41:08.770 want to have them carry more debt than they need to. And 41:08.770 --> 41:11.440 that's why these more dynamic products that allow the customer 41:11.440 --> 41:16.990 to vary the time for which the product the debt is out and take 41:16.990 --> 41:19.600 exactly what they need, when they need it, is really 41:19.600 --> 41:22.000 important and really a huge benefit to the business. And 41:22.000 --> 41:25.420 much like Square, our average draw from the line of loans to 41:25.420 --> 41:28.930 initiate a term loan, is between $6,000 and $7,000. And so you're 41:28.930 --> 41:32.470 looking at small businesses that are making these very specific 41:32.530 --> 41:35.980 investments in themselves and their businesses to achieve that 41:36.550 --> 41:39.460 return on investment. But it is important to understand that 41:39.490 --> 41:43.480 online small business financing is only one part of the entire 41:43.480 --> 41:48.550 credit ecosystem. I don't compete with community banks or 41:48.550 --> 41:53.830 SBA programs that are offering million dollar or $800,000 loans 41:53.830 --> 41:57.400 that allow that small business to buy their competitor or open 41:57.400 --> 42:02.440 a new warehouse. We work together with those programs for 42:02.440 --> 42:05.620 the small businesses' kind of credit suite, as opposed to 42:05.620 --> 42:08.980 directly trying to compete with them. And specific to the 42:08.980 --> 42:13.450 business, the yields bear out the benefit. I mean, we did a 42:13.450 --> 42:17.800 study with ETA that shows that for every dollar that Kabbage 42:17.800 --> 42:22.630 deploys, it generates about $3.79 in gross economic output, 42:23.200 --> 42:25.750 on average, across American communities. So that's real 42:25.750 --> 42:31.150 money that's being invested in the business and reinvested into 42:31.150 --> 42:32.020 their communities. 42:33.350 --> 42:38.960 Yeah, and I'll second that, what you're saying, Sam. The 42:38.960 --> 42:43.400 borrowers may-we will give them a slider. So they may be 42:43.400 --> 42:48.950 eligible for up to $20,000 but they can slide it down and see, 42:49.160 --> 42:52.610 well, I maybe only need $10,000. So they can slide it down, see 42:52.610 --> 42:57.680 the terms, see the repayment, and it helps them size their 42:57.680 --> 43:07.070 deal easily for that specific project. And so I think it's 43:07.820 --> 43:12.470 important to be able to always be out there to your customers. 43:12.860 --> 43:17.930 And in our case at Square, we are offering them-- if they are 43:17.930 --> 43:22.250 eligible, we are offering them, and then they can see it, in 43:22.250 --> 43:27.620 what we call their dashboard, on a monthly basis. And they don't 43:27.620 --> 43:32.930 have to try to go out there and apply for that until they need 43:32.930 --> 43:37.400 it. And so that offer changes as their business changes, both 43:37.430 --> 43:42.920 positive and negative. But it is there. And they can go and 43:42.920 --> 43:49.130 access it when they need to. And that's allowed us to, over the 43:49.130 --> 43:54.290 last 3 and 1/2 years, give out 700,000 loans for a total of 43:54.290 --> 44:00.290 $4.5 billion. And so we also don't think we compete with 44:00.470 --> 44:04.220 community banks or large banks, because we fill a void that just 44:04.220 --> 44:08.810 has not been available to these small and microbusinesses. 44:10.490 --> 44:13.040 I think, at this point, it makes a sense to maybe do a deep dive 44:13.040 --> 44:16.220 into the particular business financing products that your 44:16.220 --> 44:19.610 organizations offer and those that are available in the 44:19.610 --> 44:22.940 marketplace, and talk a little bit about their specs. I will 44:22.940 --> 44:25.580 say that we'll reserve any discussion of MCAs, just out of 44:25.580 --> 44:27.590 deference to the next panel, which is doing a case study on 44:27.590 --> 44:27.890 them. 44:28.880 --> 44:31.940 If I could just speak quickly to kind of the benefits of fintech, 44:32.780 --> 44:36.770 we are a non-profit microlender and have partnered with several 44:36.770 --> 44:40.160 fintechs in order to really ensure that customers that they 44:40.160 --> 44:43.490 can't serve can get access to quality financing. And so we're 44:43.520 --> 44:47.420 very, very supportive. That said, we also have seen a number 44:47.420 --> 44:50.120 of concerning practices, which I know future panels will talk 44:50.120 --> 44:52.490 about, but want to make sure that those are at least brought 44:52.490 --> 44:56.270 up here as well since this is an overview. One key one is lack of 44:56.270 --> 45:00.170 transparency around terms and pricing. It's a real issue. We 45:00.170 --> 45:04.040 found, in a study we did, that the average APR business owners 45:04.550 --> 45:07.220 found when they came to us seeking to refinance-- I'm 45:07.220 --> 45:10.160 sorry, the APR that they had when they came to refinance was 45:10.160 --> 45:16.370 94%. They were not aware of this fact. And second, we also see 45:16.370 --> 45:20.300 some other concerning practices. We see, in many cases, something 45:20.300 --> 45:22.850 called double dipping, where business owners are being 45:22.850 --> 45:26.780 charged twice for the same capital or stacking multiple 45:26.780 --> 45:30.890 products on top of each other. So I think that, for all of the 45:30.920 --> 45:34.040 benefits that this technology can bring, at the same time, 45:34.040 --> 45:38.600 it's very important to acknowledge that, in many cases, 45:38.600 --> 45:41.660 business owners are taking on more debt than they can afford 45:41.660 --> 45:42.860 it, at quite high rates. 45:43.680 --> 45:46.380 Can I just add on, to the benefits, Thomas, I think one 45:46.380 --> 45:51.240 thing that is important to note is these new products have 45:51.240 --> 45:54.210 developed new tools for underwriting as well as the 45:54.210 --> 45:56.880 ability to look at other or alternative sources of data 45:57.180 --> 46:00.270 that, in the past, had not necessarily been considered by 46:00.630 --> 46:04.320 traditional borrowers, not just the speed to do it, but the 46:04.320 --> 46:09.750 ability to see deeper into the small business by using FedEx 46:09.750 --> 46:13.050 receipts, for example, to track their inventory and their sales. 46:13.590 --> 46:18.000 These new data sources give the lender the ability to see deeper 46:18.000 --> 46:20.250 into the small business, and therefore have a better 46:20.250 --> 46:22.710 evaluation of their creditworthiness, which 46:22.710 --> 46:25.230 decreases the risk of default and increases the risk of 46:25.230 --> 46:27.600 payment. I think that's an important benefit. Because 46:27.600 --> 46:30.720 ultimately it's going to end up increasing the amount of credit. 46:31.020 --> 46:33.360 If previously you didn't have this data, now you have it, you 46:33.360 --> 46:35.610 can better understand the borrower. And that will increase 46:35.610 --> 46:38.400 the amount of money that's available. Real quickly-- I 46:38.610 --> 46:41.850 won't get into it too much, but just on Gwendy's point about 46:41.880 --> 46:47.550 APR-- I think APR is an important tool, but you have to 46:47.550 --> 46:52.380 understand the limitations to APR. It's an annualized metric 46:52.380 --> 46:55.170 which works well in the traditional loan senses that 46:55.170 --> 46:58.140 we're all used to, a 30-year fixed, maybe a seven-year car 46:58.140 --> 47:02.070 loan. But it's an annualized metric, so it has its weaknesses 47:02.280 --> 47:06.090 when you look at the short-term nature of these loans. There is 47:06.090 --> 47:08.820 a mathematical inverse relationship between the length 47:08.820 --> 47:12.870 of loan and the APR. So if I borrow for Mother's Day flowers, 47:12.870 --> 47:16.200 and repay it the next day, on an annualized basis, that's going 47:16.200 --> 47:19.920 to be very high APR. If I were to hold that money for a longer 47:19.920 --> 47:24.030 term, the APR would come down over time. So it's important to 47:24.030 --> 47:27.720 understand the weaknesses or the way APR is structured when you 47:27.720 --> 47:31.470 talk about APR. Given all that we've talked about in the small 47:31.470 --> 47:33.780 businesses understanding of their business, and their 47:33.780 --> 47:36.510 business needs, and their cash flow needs, there's another 47:36.510 --> 47:39.000 metric out there that we think makes sense-- and we've surveyed 47:39.000 --> 47:41.580 this, and the results are positive-- and that is total 47:41.580 --> 47:45.000 cost of capital. If you're a small business and you say, I 47:45.000 --> 47:49.320 need to have this much money for Mother's Day to sell flowers on 47:49.320 --> 47:53.970 Mother's Day, I know I'm going to make x dollars, and you tell 47:53.970 --> 47:58.920 me I'm going to borrow $10,000 and pay $2,000 in interest, I'm 47:58.920 --> 48:03.600 less focused on what the APR, how that product fits into that 48:03.630 --> 48:07.230 mathematical formula, and more interested on that $12,000 is 48:07.230 --> 48:11.190 going to generate me $20,000 in flower sales. So total cost of 48:11.190 --> 48:15.150 capital is one metric that is useful in this context, and 48:15.150 --> 48:18.630 deals with some of the challenges that APR presents. 48:18.960 --> 48:21.690 And it's also, given the way small businesses think about 48:21.690 --> 48:25.020 their financing needs, right on point for what they are looking 48:25.020 --> 48:27.450 at when evaluating financing options. So I don't want to get 48:27.450 --> 48:29.550 into the whole APR thing, but I thought that was interesting to 48:29.670 --> 48:30.240 point out. 48:31.200 --> 48:34.650 One final point that I just want to make, to zoom out a bit, we 48:34.650 --> 48:37.500 had an earlier discussion about the demographics of business 48:37.500 --> 48:39.780 ownership. And I think it's really important, in the context 48:39.780 --> 48:43.380 of sort of new credit decisioning, to point out that 48:43.890 --> 48:46.260 there's been a big discussion about decline in 48:46.260 --> 48:48.780 entrepreneurship, not as many startups and so forth. But when 48:48.780 --> 48:51.540 we look at who is starting businesses at the highest rate, 48:51.750 --> 48:55.860 I think it's really important to consider that one in four new 48:55.860 --> 49:00.150 businesses is owned by a Latino. Black women entrepreneurs are 49:00.150 --> 49:04.740 the fastest growing component of small business starts. And when 49:04.740 --> 49:08.700 you think about traditional underwriting, and there are 49:08.730 --> 49:12.990 requirements of term loans, you need two years of tax receipts, 49:12.990 --> 49:16.590 minimum, you need collateral, you need a variety of other 49:16.590 --> 49:20.580 assets. And when we're talking about populations that may not 49:20.580 --> 49:26.880 have historically had that depth of assets, this new decisioning, 49:26.880 --> 49:30.570 I think, offers real opportunity as we look at the changing 49:30.570 --> 49:32.760 demographics of entrepreneurship. So I think 49:32.760 --> 49:36.120 there is promise as well as some of the storm clouds that folks 49:36.390 --> 49:37.260 have alluded to. 49:37.470 --> 49:41.370 And that's a depth of both personal and commercial assets. 49:41.370 --> 49:41.940 And there- 49:41.970 --> 49:45.600 Because there's an alignment with what industry is businesses 49:45.600 --> 49:46.170 are concentrating in. 49:46.170 --> 49:48.750 Right. And there has been a move, with many fintechs, to 49:48.750 --> 49:52.590 move away from looking at and leveraging personal or consumer 49:52.800 --> 49:56.970 credit qualities or scores because of the potential racial 49:56.970 --> 50:02.100 bias or other projected class bias that's encoded into those 50:02.100 --> 50:04.710 consumer credit scores. But also just the relevance to the 50:04.740 --> 50:08.430 business-- we find, more often than not that a commercial 50:08.490 --> 50:12.270 consumer credit score is not correlative to our small 50:12.270 --> 50:14.670 businesses' success rate. Because they're leveraging their 50:14.850 --> 50:17.880 consumer credit so much to start their business, they have 50:17.880 --> 50:20.070 actually have real sweat equity in it then. 50:20.960 --> 50:26.810 Yeah, and I'll back that up. Because again, we do not even go 50:26.810 --> 50:31.040 to FICO scores. We don't consider those. Because in many 50:31.040 --> 50:34.670 cases we believe that, as you're starting a small business, 50:34.670 --> 50:37.400 you've really put pressure on your personal finances, and you 50:37.400 --> 50:42.680 probably ruin them to some extent if you're going to get 50:42.680 --> 50:47.510 credit. And so what we look at is truly your business in real 50:47.510 --> 50:51.740 time, what it creates, and what it generates. And that's how we 50:51.740 --> 50:56.390 will offer a loan product. And we don't take collateral, we 50:56.390 --> 51:01.850 don't take personal guarantees, we're going on the sweat equity 51:01.850 --> 51:04.640 you talk about that you're putting into that business. And 51:04.670 --> 51:10.340 this is their livelihood. And this is how we judge and make 51:10.340 --> 51:11.180 our credit decisions. 51:11.180 --> 51:13.580 Likewise, ironically, the Kabbage co-founders totally 51:13.580 --> 51:15.920 tanked their personal credit to start Kabbage. [CHUCKLING] 51:19.010 --> 51:21.980 Thanks. I think, now that we've talked a lot about underwriting, 51:21.980 --> 51:24.020 maybe it makes sense to talk about product terms a little bit 51:24.020 --> 51:26.570 more. And I'll just go down the panel, especially with our 51:26.570 --> 51:30.290 lender panelists, and ask if you can describe the products that 51:30.290 --> 51:33.530 your companies offer, focusing on things like costs, and term, 51:33.530 --> 51:36.890 and repayment, whether you require collateral or personal 51:36.890 --> 51:39.050 guarantees. I know we've touched on some of this. But it might 51:39.080 --> 51:42.290 make sense to have that discussion all at once. Sam, 51:42.290 --> 51:43.040 I'll start with you. 51:43.360 --> 51:47.230 Sure. So the Kabbage product, as I've somewhat described before, 51:47.230 --> 51:50.920 is fairly simple. Again, it's a line of loans, which seems 51:50.920 --> 51:53.230 complicated, but it's a line of credit that the customer 51:53.230 --> 51:57.790 qualifies for. And we work with that business over time to 51:57.790 --> 52:02.590 adjust. So a small business can qualify for up to $250,000. But 52:02.590 --> 52:06.010 for illustrative purposes, let's say this flower shop-- because 52:06.010 --> 52:09.820 flowers are really expensive-- this flower shop qualifies for 52:09.850 --> 52:14.650 $100,000 in credit. That offer is live, and they can come back 52:14.650 --> 52:17.950 at any time and look at the offer. The offer will adjust 52:17.950 --> 52:20.680 over time, and grow with that business. And so their line of 52:20.680 --> 52:27.820 credit qualification may grow to $110,000. We typically like not 52:27.820 --> 52:31.330 to decrease that for small blips. But over a period of 52:31.330 --> 52:34.300 time, if that small business is showing decline, we will 52:34.300 --> 52:38.260 downgrade that line of credit to, let's just say, $90,000. But 52:38.650 --> 52:43.270 with that $100,000, a small business can draw on that line 52:43.270 --> 52:47.080 of credit as a discrete term loan for six, 12, or 18 months-- 52:47.080 --> 52:49.750 their choice-- for whatever dollar amount they want. So they 52:49.750 --> 52:56.320 literally type it in on their phone, $6,222, and draw that for 52:56.320 --> 53:02.650 the term they want. We work on a monthly fee structure. So we 53:02.650 --> 53:05.770 keep it as simple as possible for the customer. You pay on the 53:05.770 --> 53:07.870 last day of the month-- or you can kind of choose your own day, 53:07.870 --> 53:11.770 actually. And we tell them exactly how much you're going to 53:11.770 --> 53:15.580 pay on each day for the entirety of the six, 12, or 18month 53:15.580 --> 53:21.040 loans. And again, as I said, the average draw is about $6,000. We 53:21.040 --> 53:26.380 do see repetitive borrowing in our portfolio, which is unusual 53:26.380 --> 53:32.350 for many lenders. Most lenders have a one-time and maybe, at 53:32.350 --> 53:34.990 best, a once-per-year interaction with their 53:34.990 --> 53:38.110 customers. But because our customers are drawing only what 53:38.110 --> 53:40.870 they need, when they need it, for discrete projects, we see 53:40.870 --> 53:48.400 them return, on average, about two times per year, and a couple 53:48.400 --> 53:52.900 more times throughout the life cycle of their business with 53:52.900 --> 53:56.860 Kabbage to borrow for those discrete projects. And I'll be 53:56.860 --> 54:00.130 quick here, but last year, we put out about $2 billion, across 54:00.760 --> 54:05.950 all 50 states. And about a quarter of that money was drawn 54:05.950 --> 54:10.390 during non-banking business hours, predominantly on the 54:10.390 --> 54:14.230 weekends. So if we talk about benefits, we're looking at our 54:14.230 --> 54:18.460 storekeepers that are-- they're the CFO, the CEO, the chief 54:18.460 --> 54:21.250 human resources officer, and they're stocking the shelves, 54:21.280 --> 54:23.740 and they have to go apply for credit. They're doing it at 54:23.740 --> 54:27.310 their kitchen table, on the weekends, or in the evenings, or 54:27.310 --> 54:31.360 at 6:00 AM in the morning over coffee, and doing it on their 54:31.360 --> 54:34.450 tablet or whatever, and trying to save that time to go actually 54:34.450 --> 54:35.530 run their business. 54:37.670 --> 54:40.460 Great. And Square's main product, as I've talked about a 54:40.460 --> 54:46.820 little, it's called a Flex Loan. And we actually, through machine 54:46.820 --> 54:51.980 learning and artificial intelligence, review their 54:52.040 --> 54:57.650 ongoing cash flows that they put through Square, so only the 54:57.650 --> 55:01.100 items that they process through Square, as a seller on Square. 55:01.670 --> 55:07.610 And so then they are generated and given an offer of credit. 55:08.330 --> 55:14.240 They choose up to a maximum amount. And then when they take 55:14.240 --> 55:17.930 the credit, they have, as Scott talked about, a cost of capital. 55:18.500 --> 55:28.130 And that is between 10% and 16%. And it's important, as everyone 55:28.160 --> 55:32.060 talks about on this panel, to be very transparent and to show the 55:32.060 --> 55:38.540 cost, and to our borrowers, to see the cost upfront, no other 55:38.540 --> 55:42.860 fees, no other types of gotcha-type things along the 55:42.860 --> 55:48.980 way. They can compartmentalize and understand, OK, this is what 55:48.980 --> 55:54.860 I'm going to pay in total. So if they wanted or needed $10,000, 55:55.130 --> 55:59.000 they would have $10,000 and another $1,000 fee on top of 55:59.000 --> 56:03.980 that. It's not an interest, it's a fee. And then the total amount 56:03.980 --> 56:07.940 of borrowing would be $11,000. And then they will pay that 56:07.970 --> 56:12.140 through a very unique way, which they will pay that through their 56:12.140 --> 56:17.300 daily sales with Square. So as they're successful and they have 56:17.300 --> 56:22.370 a good day, they will pay a hold rate on a daily basis. If they 56:22.370 --> 56:26.930 decide to take two weeks off, there is no payment that is due 56:26.930 --> 56:29.300 because they are not having receipts run through their 56:29.300 --> 56:34.790 business. Another unique thing about Square is it's an 18-month 56:35.420 --> 56:43.790 loan by contract, but it has only every-other-month minimum 56:43.790 --> 56:50.390 payments. So if you want to take time off from your business or 56:51.800 --> 56:55.970 have some need, there is only an every-other-month minimum that 56:55.970 --> 57:02.000 they have to make. And by far, the supermajority pay well in 57:02.000 --> 57:06.590 excess of their minimum through their daily sales that they have 57:06.590 --> 57:11.960 through Square. And so our average length that they have 57:11.960 --> 57:14.750 out there is probably eight to nine months and they've repaid 57:14.750 --> 57:20.630 their loan. And as Sam talked about, the recurrence and the 57:20.630 --> 57:24.320 desire to have another loan and another relationship is very 57:24.320 --> 57:28.160 high. We don't stack loans. We don't want to have them get into 57:28.160 --> 57:34.370 a debt trap. But they're very much excited to get their new 57:34.370 --> 57:37.850 loan offers once they have paid off their first loan. 57:40.370 --> 57:40.670 Gwendy 57:40.380 --> 57:44.280 Sure. I can speak to microlend ng, so both by Opportunity Fund 57:44.280 --> 57:47.430 as well as many other microlend rs around the nation. So, man 57:47.460 --> 57:50.520 of us are called CDFIs, Co munity Development Financial In 57:50.520 --> 57:54.330 titutions. And the loans we of er generally are term loans. Ou 57:54.330 --> 57:59.010 particular loans, we offer from $2,500 up to $250,000. Our lo 57:59.040 --> 58:02.490 gest term is five years. Our sh rtest term is probably nine m 58:02.490 --> 58:06.750 nths or 12 months. And our AP s are generally in the low te 58:06.580 --> 59:29.950 The ability to repay is so fundamental, too, kind of the 58:06.780 --> 58:12.390 ns. One of the key distin tions, I would say, is microlo 58:12.420 --> 58:16.890 n products generally are offer ng a longer term than some of t 58:16.890 --> 58:19.770 e other providers on this pane or other providers online. An 58:19.770 --> 58:22.680 I think that's particular y important. It's great when 58:22.680 --> 58:25.650 you know exactly-- you buy your flowers and you can pay that 58:25.650 --> 58:29.220 ack immediately. But we know t at life happens. And many time 58:29.220 --> 58:33.420 , business owners are particul rly confident in their ability 58:33.420 --> 58:36.810 o have this next big deal rea ly turn things around. And some 58:36.810 --> 58:39.540 imes things don't turn out that well. And so having patient 58:39.540 --> 58:44.430 apital, making sure that you have the time you need and you 58:44.430 --> 58:46.470 ave the cash flow you need to ay back is particularl 58:46.470 --> 58:51.360 important. So one thing that, like Opportunity Fund, many micr 58:51.360 --> 58:54.210 lenders do, is we actually o take a good look at cash flow 58:54.210 --> 58:58.770 both individual and business cash flow, to make sure that so 58:58.770 --> 59:01.770 eone has the true ability to epay that loan over time. It ta 59:01.770 --> 59:05.760 es time, but it's very import nt. Because again, what we d 59:05.760 --> 59:08.880 find is that confidence-- we ike the idea of people moving 59:08.880 --> 59:12.180 the dial down and borrowing l ss, but what we more often se 59:12.180 --> 59:14.850 is people trying to borrow m re than they can afford. And 59:14.850 --> 59:17.310 we want to make sure that le ders' and borrowers' intere 59:17.310 --> 59:20.850 ts are aligned. And so that the 're borrowing an amount that ac 59:20.850 --> 59:23.820 ually they can repay, ev n if things only go OK. 59:29.950 --> 59:33.130 core concept of fintech. And you have three very different 59:33.820 --> 59:38.500 providers here. And the method of underwriting varies, but 59:38.830 --> 59:42.550 we're all getting at the same ability-to-repay analysis. And I 59:42.550 --> 59:46.930 used to work at a CDFI. And it is a different type of 59:46.930 --> 59:48.970 underwriting. Square has an interesting type of 59:48.970 --> 59:51.250 underwriting, in that it's a closed ecosystem, it's inside of 59:51.250 --> 59:54.730 the Square transaction. Kabbage is an open ecosystem. We're 59:54.730 --> 59:58.150 looking at anything that the customer wants to authorize us 59:58.150 --> 01:00:01.750 to look at in an automated API connection. And that's why we do 01:00:01.750 --> 01:00:04.870 it so quickly. There's other great companies, later today, 01:00:05.620 --> 01:00:09.070 OnDeck, that serves a little bit higher credit offering than 01:00:09.070 --> 01:00:11.530 Kabbage and Funding Circle, which is looking at even larger 01:00:11.530 --> 01:00:15.070 businesses there. Everybody's using the underlying existing 01:00:15.070 --> 01:00:18.070 business information, whether it's an open ecosystem or a 01:00:18.070 --> 01:00:23.080 closed ecosystem, to get at different ways to understand 01:00:23.080 --> 01:00:26.020 ability to repay. And I'll preview some research here. 01:00:26.020 --> 01:00:32.110 Kabbage participated in the FinRegLab research series, which 01:00:32.110 --> 01:00:35.680 is an independent organization that's evaluating the 01:00:35.680 --> 01:00:38.830 quantifiable scientific methodology behind cash flow 01:00:38.830 --> 01:00:41.290 underwriting. And they're currently finalizing their 01:00:41.290 --> 01:00:45.010 report. And it will come out hopefully later this month or 01:00:45.010 --> 01:00:49.000 early next. But the general findings, at least for Kabbage, 01:00:49.210 --> 01:00:53.140 our novel way of using non-traditional data to look at 01:00:53.140 --> 01:00:57.790 cash flow underwriting, is a very strong proxy to actual 01:00:57.790 --> 01:01:01.660 business health. And we've done it in a way that controls for 01:01:01.660 --> 01:01:06.130 and eliminates any sort of unintended bias or disparate 01:01:06.130 --> 01:01:09.340 impact, because we're only leveraging that 01:01:09.370 --> 01:01:14.080 business-specific data, such as the PayPal, or the Square, or 01:01:14.080 --> 01:01:18.310 the Amazon, or Etsy, or the bank account or inventory data that 01:01:18.310 --> 01:01:21.370 has very little to do with that individual consumer. 01:01:23.070 --> 01:01:26.370 Scott, are there any other products in the marketplace that 01:01:26.370 --> 01:01:29.010 we should be talking about that haven't been mentioned by our 01:01:29.010 --> 01:01:29.820 panelists so far? 01:01:30.450 --> 01:01:32.820 No, I mean, I think we've covered the major players. I 01:01:32.820 --> 01:01:36.030 know you're going to do merchant cash advances on the next panel. 01:01:36.630 --> 01:01:40.080 The only piece I would like to add to the discussion is that 01:01:40.080 --> 01:01:43.950 when you look at the repayment terms, some of them can be 01:01:43.980 --> 01:01:47.970 open-ended in that it's based on the cash flow. And so 01:01:47.970 --> 01:01:52.980 calculating APR in that context is impossible or requires a 01:01:52.980 --> 01:01:58.080 number of assumptions. Thus, again, I'm not ragging on APR, 01:01:58.080 --> 01:02:01.380 I'm simply pointing out that there are challenges. If you've 01:02:01.380 --> 01:02:04.200 got an open-ended repayment based on your cash flow, which 01:02:04.200 --> 01:02:08.310 is a great feature, difficult to calculate the APR. Again, 01:02:08.310 --> 01:02:11.130 pivoting to total cost of capital is another way to think 01:02:11.130 --> 01:02:14.400 about it. There are benefits to APR as a measurement. We're all 01:02:14.400 --> 01:02:16.890 familiar with it. But I think it's important to understand, in 01:02:16.890 --> 01:02:20.160 this new context, there can be challenges to the metric. 01:02:20.250 --> 01:02:24.210 I guess one thing we haven't talked about is how the loans or 01:02:24.210 --> 01:02:27.180 other products are actually made. In Kabbage's case, we do 01:02:27.180 --> 01:02:29.490 partner with a bank. So as I said at the beginning, we 01:02:29.490 --> 01:02:32.730 partner with Celtic Bank. So Celtic Bank is the lender. They 01:02:32.730 --> 01:02:36.240 are the true lender behind the program. Kabbage has automated 01:02:36.240 --> 01:02:39.930 the Celtic Bank credit underwriting process. And we 01:02:39.930 --> 01:02:43.590 operate under the Bank Service Company Act to extend that 01:02:43.590 --> 01:02:46.290 credit as part of the Kabbage Celtic program across the 01:02:46.290 --> 01:02:49.950 country. And so this is one way that many fintechs work. There 01:02:49.950 --> 01:02:53.250 are true standalone fintechs as well that have gone out and 01:02:53.250 --> 01:02:56.700 gotten different state licenses. You've seen a progression 01:02:56.700 --> 01:03:00.900 towards fintechs that want to become banks, and you have 01:03:00.960 --> 01:03:03.690 fintechs that offer a mix of all products, whether it's a 01:03:04.110 --> 01:03:08.130 merchant cash advance, state-regulated term loan, 01:03:09.750 --> 01:03:14.490 federally-insured depository bank, a partnered term loan, or 01:03:14.490 --> 01:03:18.480 a variety of other services out there. And so as you regulators, 01:03:18.480 --> 01:03:21.720 reporters, academics, other interested parties go and look 01:03:21.720 --> 01:03:24.390 at and examine this space, it is important to think very 01:03:24.390 --> 01:03:27.540 carefully about what is the underlying business model. 01:03:27.540 --> 01:03:29.850 Because that under lying business model sometimes 01:03:29.850 --> 01:03:32.580 dictates the types of products that can be offered, or in some 01:03:32.640 --> 01:03:34.590 cases, can't be offered. 01:03:36.450 --> 01:03:39.270 Lew, why don't you talk a little bit about Square's relationships 01:03:39.270 --> 01:03:43.710 with banks, and as Sam alluded to, Square's pending application 01:03:43.710 --> 01:03:45.090 to become chartered. 01:03:45.270 --> 01:03:50.850 Sure. And as Sam talked about, they issue through Celtic. And 01:03:50.880 --> 01:03:54.810 currently Square Capital issues their loans through Celtic Bank 01:03:54.810 --> 01:04:01.920 as well. And as I earlier mentioned, as we at Square 01:04:01.920 --> 01:04:05.070 Capital got into this business, we wanted to understand how 01:04:05.100 --> 01:04:14.190 viable it was. And as we've seen under 700,000 loans as well as 01:04:14.190 --> 01:04:19.650 $4.5 billion, we've decided that that would be best if we could 01:04:19.680 --> 01:04:26.040 actually issue those ourselves. And so Square Capital or Square 01:04:26.040 --> 01:04:30.480 has filed an application with the FDIC in the state of Utah to 01:04:30.480 --> 01:04:34.530 become an industrial loan corporation. And we are 01:04:34.530 --> 01:04:39.570 currently going through that process right now for approval 01:04:39.600 --> 01:04:42.960 of that. And then at that point we would issue those directly 01:04:43.320 --> 01:04:45.600 through Square's financial services. 01:04:46.800 --> 01:04:48.630 Gwendy, do you want to talk about Opportunity Fund's 01:04:48.630 --> 01:04:50.880 relationship with the institutional players? 01:04:51.570 --> 01:04:56.190 Sure. banks are an incredibly important part of our ecosystem, 01:04:56.190 --> 01:05:00.720 primarily as far as providing capital. Under their regulatory 01:05:00.720 --> 01:05:03.720 obligation through the Community Reinvestment Act, CRA. So that's 01:05:03.720 --> 01:05:07.200 an important, real piece of this ecosystem and an important part 01:05:07.200 --> 01:05:10.530 of our lending. We also work with banks as referral partners. 01:05:10.860 --> 01:05:13.620 And then also, I alluded to it earlier, but we've recently 01:05:13.620 --> 01:05:16.740 expanded our partnership with the Fintech Lending Club to be 01:05:16.740 --> 01:05:20.280 able to lend now in 44 states around the nation, and partner 01:05:20.280 --> 01:05:23.010 with them, and utilize their technology which is a real 01:05:23.040 --> 01:05:23.880 win-win as well. 01:05:25.770 --> 01:05:29.370 So we've been talking a lot about leveraging technology and 01:05:29.700 --> 01:05:32.850 using nontraditional data to assess risk and make 01:05:32.850 --> 01:05:35.460 underwriting decisions. Can we dig into that a little bit more? 01:05:35.550 --> 01:05:37.380 I think this is a topic that you've brought up a few times, 01:05:37.380 --> 01:05:39.750 Sam. So can you kind of dig in and talk a little bit more about 01:05:39.750 --> 01:05:40.980 how your company does this. 01:05:41.130 --> 01:05:46.350 Sure. So if you think about how a bank's traditional credit 01:05:46.350 --> 01:05:52.230 model is developed, yet it basically takes some very finite 01:05:52.230 --> 01:05:56.940 attributes about a business, often related to the business 01:05:56.940 --> 01:05:59.940 applicant, the owner, the consumer of the business, such 01:05:59.940 --> 01:06:03.030 as their FICO score, their income. They take these 01:06:03.030 --> 01:06:08.340 attributes and gradually expand, very slowly, into other 01:06:08.340 --> 01:06:10.980 attributes that they feel is representative of that 01:06:10.980 --> 01:06:15.090 business's success or predictive of that business's success. That 01:06:15.810 --> 01:06:20.130 underwriting process, be it in-person or automated, has been 01:06:20.160 --> 01:06:25.380 incredibly slow and expensive to develop over time, with very 01:06:25.380 --> 01:06:30.690 limited quantified testing as it applies to the entire small 01:06:30.690 --> 01:06:33.570 business population. And so if you think about small 01:06:33.570 --> 01:06:35.760 businesses, they're not the same. They don't congregate in 01:06:35.760 --> 01:06:39.000 one place and like, "we're the small business people." They are 01:06:39.030 --> 01:06:44.130 so diverse, be it socioeconomically, racially, by 01:06:44.130 --> 01:06:49.200 gender, by geography, by industry, by age, et cetera, et 01:06:49.200 --> 01:06:52.740 cetera, that it's incredibly difficult to apply one 01:06:52.740 --> 01:06:56.250 underwriting methodology that has a lot of variables to that 01:06:56.250 --> 01:07:00.570 population. So if you think about small circles gradually 01:07:00.570 --> 01:07:03.900 expanding over time, that's a traditional bank underwriting 01:07:03.900 --> 01:07:08.700 process. Kabbage went the other way around. We take the entire 01:07:08.700 --> 01:07:12.840 population of data that a small business wants to consent and 01:07:12.870 --> 01:07:18.270 offer to us that is part of their business operations, and 01:07:18.270 --> 01:07:22.740 we look for regressive patterns over that. And so we look at how 01:07:22.740 --> 01:07:27.720 does income from inventory sales, PayPal, Square, other 01:07:27.720 --> 01:07:31.950 credit card receivables-- Visa, MasterCard-- cash in the till, 01:07:32.130 --> 01:07:35.100 invoices, things like that, how does that all relate to their 01:07:35.100 --> 01:07:38.310 bank account information, to their accounting information, et 01:07:38.310 --> 01:07:41.520 cetera? Where is the cash going out? Is it going to marketing? 01:07:41.670 --> 01:07:46.650 Is it going to buying raw goods and raw products? Is it going to 01:07:46.650 --> 01:07:50.340 inventory? How much is going to payroll and other expenses? And 01:07:50.340 --> 01:07:53.610 we build the three statements for the small business on the 01:07:53.610 --> 01:07:57.210 back end, leveraging the most predictive underwriting 01:07:57.990 --> 01:08:01.170 attributes for that business, which again is cash flow. So if 01:08:01.170 --> 01:08:04.800 you think of Kabbage, we take the entire universe of data and 01:08:04.800 --> 01:08:09.960 whittle out, specific to that one business, what indicators 01:08:09.990 --> 01:08:14.640 are key to their success. And we purge the consumer indicators 01:08:14.730 --> 01:08:18.150 like a FICO score that are not necessarily indicative of 01:08:18.150 --> 01:08:21.930 success. Because small businesses, they have people 01:08:21.930 --> 01:08:24.420 behind them. Those people get sick, and have medical debt, 01:08:24.420 --> 01:08:27.750 they have student debt, they have emergencies. But they also 01:08:27.750 --> 01:08:30.900 might just be leveraging their credit to start their business. 01:08:31.080 --> 01:08:33.390 And so the success of the individual does not necessarily 01:08:33.390 --> 01:08:36.690 equate to the success of the business. And we look at only 01:08:36.690 --> 01:08:40.410 what matters to the cash flow transaction data. And that's why 01:08:40.980 --> 01:08:44.160 we've been so successful in leveraging non-traditional 01:08:44.160 --> 01:08:49.200 attributes, and why we offer an open ecosystem to connect to for 01:08:49.200 --> 01:08:52.860 whatever you're logging or doing business on, to let that data 01:08:52.860 --> 01:08:54.510 work for you as a business owner. 01:08:54.000 --> 01:08:57.780 So we're running out of time. And I want to give everybody an 01:08:57.780 --> 01:09:01.170 opportunity to offer some closing thoughts. So maybe a 01:09:01.170 --> 01:09:04.560 minute each. We'll go down the panel, and people can talk to 01:09:04.920 --> 01:09:07.020 the important trends in the marketplace that are likely to 01:09:07.020 --> 01:09:09.480 become more prominent in the coming years, and sort of what 01:09:09.480 --> 01:09:12.570 the future of this space looks like. So I'll start with Claire, 01:09:12.570 --> 01:09:13.830 and we can just move down. 01:09:13.920 --> 01:09:18.690 Yeah, as the marketplace evolves, I think one thing that 01:09:18.780 --> 01:09:25.140 we're a little bit at a loss for is longitudinal data on what's 01:09:25.140 --> 01:09:28.560 happening to borrowers over time, and are these products 01:09:28.560 --> 01:09:31.080 working for them, and controlling for all of this 01:09:31.260 --> 01:09:34.650 specifics that you're mentioning that are very individual to the 01:09:34.650 --> 01:09:39.540 business, has this infusion of capital. And I think, in many 01:09:39.540 --> 01:09:44.850 ways we've all stated, this is-- it's unleashed new financing. 01:09:45.060 --> 01:09:49.980 But I think being able to see how that financing is managed 01:09:49.980 --> 01:09:53.250 over time and whether it's really enabling business growth, 01:09:53.250 --> 01:09:55.440 I think that's going to be a really important consideration 01:09:55.440 --> 01:09:56.010 going forward. 01:09:57.180 --> 01:10:01.620 would encourage observers to pay attention to two things. Fintech 01:10:01.620 --> 01:10:04.290 banks, we've always been very supportive of all different 01:10:04.290 --> 01:10:08.280 chartering options at Kabbage, be it a multitude of state 01:10:08.280 --> 01:10:12.030 chartering options, federal, with the OCC, the FDIC, 01:10:12.030 --> 01:10:14.880 depository, nondepository. I keep a very close eye on that. 01:10:15.720 --> 01:10:18.090 The other thing I would encourage observers to watch is 01:10:18.090 --> 01:10:22.920 disclosure. So Kabbage and OnDeck created the SMART Box, 01:10:22.920 --> 01:10:27.810 which is a commercial disclosure tool that looks a lot like the 01:10:27.810 --> 01:10:31.080 consumer TILA box. We show total cost of capital, APR, monthly 01:10:31.080 --> 01:10:33.510 payment schedule, cents on the dollar, prepayment indicators, 01:10:33.510 --> 01:10:37.950 et cetera, et cetera. We've been updating that. There's a 01:10:37.950 --> 01:10:40.800 multitude of states, California and New York to name two, that 01:10:40.800 --> 01:10:44.400 are pursuing commercial truth in lending disclosure laws. We're 01:10:44.400 --> 01:10:47.430 very supportive of those kind of efforts because the small 01:10:47.430 --> 01:10:50.130 business, given the multitude of products in the space, should 01:10:50.130 --> 01:10:52.620 have all of the information available to make a smart, 01:10:52.620 --> 01:10:56.160 informed choice and do cost comparisons, apples to apples. 01:10:58.410 --> 01:11:01.650 And look, I think it's an exciting time for small 01:11:01.650 --> 01:11:04.500 business. I think that five years ago, a lot of these 01:11:04.500 --> 01:11:08.880 options weren't available. And we're opening up channels 01:11:09.660 --> 01:11:13.890 through each of our products that we talk here, and others 01:11:13.890 --> 01:11:18.000 that you'll hear throughout the day. And I think it's important 01:11:18.000 --> 01:11:22.710 to make sure that it's fair and transparent, that borrowers 01:11:22.710 --> 01:11:25.830 understand what they're getting into, what they've signed up 01:11:25.830 --> 01:11:31.980 for, and that it isn't punitive to them, that it helps the small 01:11:31.980 --> 01:11:38.490 business grow. And one of the things that we see-- because we 01:11:38.490 --> 01:11:42.840 get daily payments, we don't wait 30 days and hope that 01:11:42.840 --> 01:11:45.510 they're going to make that payment-- we're seeing the 01:11:45.510 --> 01:11:50.880 health of that business every day. And so that helps us help 01:11:50.880 --> 01:11:56.730 the business in any way that we can, to help-- we can contact 01:11:56.730 --> 01:12:00.420 them to see if they are having trouble with their processing, 01:12:00.420 --> 01:12:07.290 if they're having issues in one way or another. I think it's a 01:12:07.320 --> 01:12:09.960 really exciting time for small business. And I think there's a 01:12:09.960 --> 01:12:14.550 lot of options, and want to make sure that it's fair and 01:12:14.550 --> 01:12:15.630 transparent to them. 01:12:17.280 --> 01:12:19.920 Well, my panelists all said it very well. I would just add 01:12:19.950 --> 01:12:23.640 that, with the multitude of data that all of the lenders and 01:12:23.640 --> 01:12:27.660 financing companies have, making sure that that data is available 01:12:27.660 --> 01:12:31.650 back to the small business owner. Lenders know how long it 01:12:31.650 --> 01:12:34.080 will likely take a small business to repay. And 01:12:34.080 --> 01:12:36.810 therefore, the business owner should know that, what they're 01:12:36.810 --> 01:12:39.390 predicted, how long it will take them, what they expect their 01:12:39.390 --> 01:12:41.850 monthly payment will be, what they expect their APR will be. 01:12:41.850 --> 01:12:44.520 It may change over time. But again, we know they're sharing 01:12:44.520 --> 01:12:46.680 that data with investors, we know they have that data 01:12:46.680 --> 01:12:49.110 internally. So the business owners should have access to it 01:12:49.110 --> 01:12:51.960 to make sure that that intelligence is actually helping 01:12:51.960 --> 01:12:54.240 them be successful and choose the right product. 01:12:55.650 --> 01:12:59.490 I agree. [CHUCKLING] The one trend I would look for is 01:12:59.490 --> 01:13:02.130 continued convergence between traditional players and new 01:13:02.130 --> 01:13:04.800 players as they move into the space. I think that's an 01:13:04.800 --> 01:13:05.730 important trend to follow. 01:13:06.000 --> 01:13:09.570 OK, great. Thank you so much to our panelists. This was a great 01:13:09.570 --> 01:13:12.720 panel. And with that, we will go ahead and get the panel 2 01:13:12.720 --> 01:14:47.370 panelists up here. Thank you so much. [APPLAUSE] 01:14:47.370 --> 01:14:50.460 Great. So good morning, everyone. And thanks again for 01:14:50.460 --> 01:14:54.240 being here today. I'm Jason Adler. And I'm an acting 01:14:54.240 --> 01:14:56.550 assistant director in the Federal Trade Commission's 01:14:56.700 --> 01:14:58.380 Division of Financial Practices. 01:14:58.590 --> 01:15:00.900 And I'm Courtney Estep, and I'm an attorney in the Division of 01:15:00.900 --> 01:15:02.040 Financial Practices. 01:15:02.310 --> 01:15:05.880 We have a really great set of panelists here today for this 01:15:05.880 --> 01:15:09.150 discussion, and a lot of content to cover. So I'm going to 01:15:09.150 --> 01:15:12.960 briefly introduce each of them, and then refer you to their bios 01:15:12.960 --> 01:15:17.760 for more info. So starting down on the end, we have Kate Fisher, 01:15:17.970 --> 01:15:22.800 who is a partner at Hudson Cook. Next we have Jesse Carlson, who 01:15:22.800 --> 01:15:27.240 is the senior VP and general counsel of Kapitus. Scott 01:15:27.240 --> 01:15:31.350 Crockett is the founder and CEO of Everest Business Funding-- or 01:15:31.350 --> 01:15:36.060 Everest Business Financing. Sorry. Jared Weitz is the CEO of 01:15:36.060 --> 01:15:40.410 United Capital Service. And Ami Kassar is the founder and CEO of 01:15:40.590 --> 01:15:46.590 Multifunding LLC. So just one logistical issue to talk about 01:15:46.590 --> 01:15:51.210 before we get started-- for the panelists, if you want to talk 01:15:51.210 --> 01:15:52.740 while someone else is talking, if you have something to 01:15:52.740 --> 01:15:56.760 contribute, just remember to turn your note card up on one 01:15:56.760 --> 01:16:00.600 side so that we know to call on you. So we're planning on this 01:16:00.600 --> 01:16:05.490 panel to discuss how merchant cash advances work, and recent 01:16:05.490 --> 01:16:09.810 reports of abuses in the sale, marketing, and collection of 01:16:09.810 --> 01:16:12.780 these products. So with that, I'll turn it over to Courtney 01:16:12.780 --> 01:16:13.770 and we can jump right in. 01:16:15.870 --> 01:16:18.810 For audience members who are unfamiliar with what a merchant 01:16:18.810 --> 01:16:22.920 cash advance is, let's walk through the basics. Who would 01:16:22.920 --> 01:16:26.430 like to discuss what a merchant cash advance is and how it 01:16:26.430 --> 01:16:28.710 differs from a loan or other forms of credit? 01:16:29.110 --> 01:16:33.940 Well, a merchant cash advance is a somewhat pejorative term for 01:16:33.940 --> 01:16:36.670 the factoring of future receivables. It is a purchase 01:16:36.670 --> 01:16:40.510 and sale transaction. So rather than giving a loan, a company 01:16:40.510 --> 01:16:44.470 like Kapitus will purchase the future receipts of a business at 01:16:44.470 --> 01:16:48.910 a discount. There are two basic types of this type of factoring 01:16:48.910 --> 01:16:54.610 transaction-- a credit card MCA or factoring transaction, and an 01:16:55.060 --> 01:16:59.080 ACH factoring transaction. The credit card factoring 01:16:59.080 --> 01:17:02.890 transaction is essentially the closed ecosystem. We purchase a 01:17:02.890 --> 01:17:06.010 percentage of their credit card receipts, and the credit card 01:17:06.010 --> 01:17:09.490 processor batches out a percentage of those receipts to 01:17:09.490 --> 01:17:15.460 us as repayment. An ACH factoring arrangement is similar 01:17:15.460 --> 01:17:18.250 in that we're estimating their total future cash flow, and have 01:17:18.250 --> 01:17:22.870 an estimated payment that we draw through an ACH debit to the 01:17:22.870 --> 01:17:26.710 operating account of the business. It is important to 01:17:26.710 --> 01:17:29.110 note that, in a purchase transaction, there is no 01:17:29.110 --> 01:17:31.960 absolute right to repayment. The risk we are taking is that the 01:17:31.960 --> 01:17:35.650 receivables are not generated. Largely, these products work the 01:17:35.650 --> 01:17:39.910 same as, for example, the product that Square offers and 01:17:39.910 --> 01:17:43.120 described. That is denominated as a loan and would have an 01:17:43.120 --> 01:17:44.230 absolute right to repayment. 01:17:45.820 --> 01:17:50.200 Sure, I could speak to the legal distinction between a purchase 01:17:50.200 --> 01:17:53.140 of future receipts and a loan. And first, thank you for having 01:17:53.140 --> 01:17:57.160 me here today. In a loan, the borrower promises to repay the 01:17:57.160 --> 01:18:01.030 lender. In a purchase of future receipts, the business promises 01:18:01.030 --> 01:18:04.480 to deliver a percentage of its revenue, only to the extent that 01:18:04.480 --> 01:18:09.070 revenue is created. If sales go down, then the business has a 01:18:09.070 --> 01:18:12.790 contractual right to pay less. If sales go up, the business may 01:18:12.790 --> 01:18:16.660 have to pay more. In New York, which has the most developed 01:18:16.660 --> 01:18:20.350 case law in this area, courts examine whether the funder is 01:18:20.350 --> 01:18:23.860 absolutely entitled to repayment. Courts generally look 01:18:23.860 --> 01:18:26.860 at whether a contract allows a business to adjust its payment, 01:18:26.860 --> 01:18:30.820 along with the ebb and flows of its income. And courts look at 01:18:30.820 --> 01:18:33.580 whether there is a fixed payment term or maturity date, because a 01:18:33.580 --> 01:18:36.880 fixed payment term or maturity date would be inconsistent with 01:18:36.880 --> 01:18:40.540 the purchase of future receipts. The contractual events of 01:18:40.540 --> 01:18:43.480 default also distinguish a purchase of future receipts from 01:18:43.480 --> 01:18:47.860 a loan. In a loan, a borrower is in default for failure to pay. 01:18:49.450 --> 01:18:51.490 In a purchase of future receipts, a business whose 01:18:51.490 --> 01:18:55.030 revenue has dropped is in default only if the business 01:18:55.330 --> 01:18:58.780 fails to communicate accurate financial information to the 01:18:58.780 --> 01:19:02.200 funder. The business also promises not to engage in 01:19:02.200 --> 01:19:05.140 certain bad acts, such as diverting money to multiple bank 01:19:05.140 --> 01:19:08.620 accounts. But again, the key distinction is that, in a 01:19:08.800 --> 01:19:11.380 purchase of future receipts, there is no absolute obligation 01:19:11.380 --> 01:19:11.950 to repay. 01:19:12.850 --> 01:19:16.480 And we'll dig into the legal landscape here a little later. 01:19:17.050 --> 01:19:21.580 But-- and Scott, I'll turn to you next, but could we have some 01:19:21.580 --> 01:19:25.450 of the panelists comment on why a small business might be 01:19:25.450 --> 01:19:27.730 attracted to a merchant cash advance as opposed to other 01:19:27.730 --> 01:19:28.510 forms of credit. 01:19:30.490 --> 01:19:36.250 Yeah, I'll take that. I think I've had several business owners 01:19:36.250 --> 01:19:39.670 that we've worked with who would describe it more as something 01:19:39.670 --> 01:19:43.420 akin to temporary equity than they would a traditional 01:19:43.420 --> 01:19:47.290 business loan, in terms of the risk that we're taking. Again, 01:19:47.290 --> 01:19:52.990 we're purchasing a percentage of their future revenues, and we're 01:19:52.990 --> 01:19:56.470 taking the risk as to whether or not those revenues are going to 01:19:57.220 --> 01:20:02.020 take place. And I'll give you two examples, both of them 01:20:02.410 --> 01:20:10.420 seasonal. One, Everest, we provided an advance to a resort 01:20:10.450 --> 01:20:15.250 in Georgia to get through their seasonally-slow period in the 01:20:15.250 --> 01:20:24.190 winter. And the business owner came back each year, so utilized 01:20:24.610 --> 01:20:30.160 the product two or three times. And then the third year, the 01:20:30.190 --> 01:20:34.450 business owner didn't come back. And we developed a relationship 01:20:34.450 --> 01:20:37.750 with them. And we actually gave them a call, and just kind of 01:20:37.750 --> 01:20:40.300 curious as to why they weren't using the product. And the 01:20:40.570 --> 01:20:45.520 business owner said, we sold the resort to Marriott. And he said, 01:20:47.500 --> 01:20:50.710 it was great being able to utilize a merchant cash advance 01:20:50.710 --> 01:20:54.130 from your company, because if I hadn't, I would have probably 01:20:54.130 --> 01:20:58.270 had to have sold a portion of the equity of my business, 01:20:58.930 --> 01:21:02.620 whether it be to a private equity fund or an investor. And 01:21:02.620 --> 01:21:08.350 so in that sense, we served the role of being a temporary kind 01:21:08.350 --> 01:21:11.530 of equity partner to the business owner. Again, that was 01:21:11.530 --> 01:21:15.700 off of kind of a seasonal need. I'll give you another example of 01:21:17.260 --> 01:21:22.300 not as happy an outcome for the business owner. But we had a 01:21:22.300 --> 01:21:29.020 restaurant in the Keys that had a seasonally-slow period in the 01:21:29.050 --> 01:21:35.620 summer, before Hurricane Irma. We made an advance to them. And 01:21:36.640 --> 01:21:40.930 unfortunately, the hurricane-- so again, we made an advance. 01:21:41.290 --> 01:21:45.760 We're purchasing a percentage of their future revenue. And then 01:21:45.790 --> 01:21:49.810 we're assuming that risk of whether that revenue is going to 01:21:49.810 --> 01:21:53.710 take place, just like the business owner is assuming the 01:21:53.710 --> 01:21:55.810 risk of what's going to happen with the business on a forward 01:21:55.810 --> 01:22:00.370 basis. In this case, unfortunately-- thank God nobody 01:22:00.370 --> 01:22:06.220 was hurt. But the restaurant was destroyed by the hurricane. And 01:22:06.520 --> 01:22:10.030 in that instance, again, back to Kate's point about no absolute 01:22:10.030 --> 01:22:14.470 right of repayment, the business owner didn't owe us anything, 01:22:14.950 --> 01:22:17.470 because we had purchased revenues that then never 01:22:17.470 --> 01:22:22.270 materialized. And so I think they're two totally different 01:22:22.270 --> 01:22:25.420 examples. Both happen to be based off of a seasonal need 01:22:25.420 --> 01:22:28.540 with different outcomes. But I think it highlights the utility 01:22:28.540 --> 01:22:30.310 of the product for a small business owner. 01:22:31.600 --> 01:22:34.210 Let's talk more specifically about the characteristics of an 01:22:34.210 --> 01:22:38.230 MCI. The cost of financing an MCI is usually expressed as a 01:22:38.230 --> 01:22:41.320 factor rate. How large is the typical factor? 01:22:42.830 --> 01:22:46.790 It can vary. It's a case-by-case basis. And we underwrite each of 01:22:46.790 --> 01:22:50.390 our customers based on the cash flow of the business, and the 01:22:50.390 --> 01:22:54.830 length of time they're expected, and their revenues. So we, like 01:22:54.830 --> 01:22:56.960 some of the other companies on the first panel, underwrite to 01:22:56.960 --> 01:23:00.080 the cash flow of the business. And the cash flow of the 01:23:00.080 --> 01:23:03.140 business, the amount they want, the risk that's being taken all 01:23:03.140 --> 01:23:08.930 go into what the discount rate would be. An easier example to 01:23:08.930 --> 01:23:12.110 express it is our average financing is approximately 01:23:12.110 --> 01:23:18.650 $50,000. It's approximately 11 to 12 months. On a $50,000 01:23:18.650 --> 01:23:21.590 funding, we would expect, over the course of the year, we would 01:23:21.590 --> 01:23:27.020 be purchasing for $50,000, $65,000 of the future revenue of 01:23:27.020 --> 01:23:27.800 that business. 01:23:30.200 --> 01:23:34.340 How does that compare to a typical APR for a small business 01:23:34.340 --> 01:23:37.520 financing loan? And do businesses understand the 01:23:37.520 --> 01:23:44.480 distinction between the two? As was discussed, there is no 01:23:44.480 --> 01:23:47.990 interest rate and there is no APR. You can only calculate the 01:23:47.990 --> 01:23:51.800 APR after the receipts have been delivered, because there is no 01:23:51.800 --> 01:23:59.270 set repayment period. So there is no term. However, APR has-- 01:24:00.080 --> 01:24:02.510 some of the problems with APR were discussed on the first 01:24:02.510 --> 01:24:05.780 panel, and they're present here as well, in that we are very 01:24:05.780 --> 01:24:09.560 clear about the total cost of capital, and we provide that 01:24:09.560 --> 01:24:11.720 total cost and a very clear disclosure on the first page of 01:24:11.720 --> 01:24:17.390 all of our contracts. APR, again, because it is designed 01:24:17.390 --> 01:24:20.360 for multi-year, monthly-pay products, is very difficult to 01:24:20.360 --> 01:24:25.100 calculate here. And the total cost is more relevant to the 01:24:25.100 --> 01:24:28.370 business since they are going to look at how much it's going to 01:24:28.370 --> 01:24:32.300 cost to make the investment in their business. And that is what 01:24:32.300 --> 01:24:35.660 drives their decisionmaking. We are very clear on disclosing the 01:24:35.660 --> 01:24:36.350 total cost. 01:24:36.920 --> 01:24:43.520 If I can just jump in-- there's a lot of, I think, confusion 01:24:43.520 --> 01:24:50.450 created by the simplicity. So if somebody takes an advance or a 01:24:50.510 --> 01:24:53.720 short-term online loan, one of these for $50,000, and the 01:24:53.720 --> 01:24:58.940 payback is $60,000, that's often quoted to them as a factor rate 01:24:59.300 --> 01:25:04.220 of, in the market, 20%. And in fact, oftentimes, from my 01:25:04.220 --> 01:25:08.360 experience, the small business owner or the consumer thinks 01:25:08.360 --> 01:25:12.950 about that as a 20% rate. And let's just say, if that's on a 01:25:12.950 --> 01:25:20.480 six-month payback, that APR is closer to 60% or 65%. And every 01:25:20.480 --> 01:25:23.540 time someone-- and everyone's in business. If you're making an 01:25:23.540 --> 01:25:26.480 advance or a shortterm loan, more specifically on the 01:25:26.480 --> 01:25:30.290 advances, you might not know exactly how quickly you're going 01:25:30.290 --> 01:25:34.700 to get paid back. You have a thesis or a good idea, based on 01:25:34.700 --> 01:25:37.550 the historical performance of the business, about what your 01:25:37.550 --> 01:25:41.450 expected return is . If the business owner was properly 01:25:41.450 --> 01:25:44.660 educated, and had their financials together, and was 01:25:44.660 --> 01:25:50.480 well prepared, and took the time to go, say, through an SBA 01:25:50.480 --> 01:25:55.040 process, they could borrow that money at today's rates at 8 and 01:25:55.040 --> 01:25:59.660 1/4%, and have 10 years to pay it back. And the impact on that 01:25:59.660 --> 01:26:03.620 cash flow is dramatic compared to some of these other 01:26:03.620 --> 01:26:04.370 solutions. 01:26:06.760 --> 01:26:10.360 Our experience at United Capital Source, as a marketplace 01:26:10.360 --> 01:26:14.770 consultant and broker, is that oftentimes a merchant has a 01:26:14.770 --> 01:26:18.700 specific project that they are looking for in a specific time 01:26:18.700 --> 01:26:22.930 frame. And so what helps them choose one product versus 01:26:22.930 --> 01:26:28.120 another is that specific purpose. And so not everyone can 01:26:28.120 --> 01:26:32.230 take the time and/or qualify for an SBA loan or a term loan. 01:26:32.500 --> 01:26:35.530 Oftentimes, some people can, and don't want to wait because their 01:26:35.530 --> 01:26:38.830 need doesn't allow them to. We have found that when we speak to 01:26:38.830 --> 01:26:42.280 merchants they are very educated in their exact purpose that they 01:26:42.280 --> 01:26:46.750 need the financing for. They understand their time frame. 01:26:47.020 --> 01:26:52.390 They are negotiating legalese in the contract, and know their 01:26:52.390 --> 01:26:54.130 specific needs right up front. 01:26:55.690 --> 01:26:59.530 And I would add that an SBA loan will typically require the small 01:26:59.530 --> 01:27:03.100 business owner to put up their house as collateral and offer a 01:27:03.100 --> 01:27:06.760 personal guarantee. A factoring arrangement or merchant cash 01:27:06.760 --> 01:27:10.240 advance does not have a personal guarantee of repayment. It is a 01:27:10.240 --> 01:27:14.590 performance guarantee. The default is diverting the funds, 01:27:14.590 --> 01:27:17.500 or not communicating, or not telling you that your business 01:27:17.500 --> 01:27:19.930 has been destroyed in a hurricane. It's cutting you off, 01:27:19.930 --> 01:27:22.600 and just not delivering the receivables. If there is a 01:27:22.600 --> 01:27:26.950 default and it's not repaid, the individual is not liable. So 01:27:26.950 --> 01:27:30.340 while an interest rate on an SBA loan might be lower, there are 01:27:30.340 --> 01:27:33.100 drawbacks to that product, too. And we have found that our 01:27:33.100 --> 01:27:36.670 merchants are very sophisticated in understanding the benefits of 01:27:36.670 --> 01:27:39.970 flexibility and the lack of a personal guarantee of repayment, 01:27:40.240 --> 01:27:43.690 versus a lower monthly payment, or a lower computed interest 01:27:43.690 --> 01:27:46.570 rate, or a longer repayment horizon. 01:27:47.860 --> 01:27:52.930 I would just add one final point on that. The MCA space has grown 01:27:52.930 --> 01:27:59.140 a lot, in the last 10 years especially, and is highly 01:27:59.140 --> 01:28:03.010 competitive. But when we're dealing with merchants and 01:28:03.010 --> 01:28:10.990 competing for their business, they're not typically comparing 01:28:10.990 --> 01:28:15.160 us to whether or not they're going to take out an SBA loan or 01:28:15.160 --> 01:28:18.490 get merchant cash advance. They've made a decision that 01:28:18.490 --> 01:28:21.490 this product, the MAC product, is the right product for them, 01:28:21.850 --> 01:28:24.100 for a variety of reasons and some of the attributes that 01:28:24.100 --> 01:28:28.690 we're getting into now. But typically a small business owner 01:28:28.690 --> 01:28:32.230 that's looking for a small business-- an SBA loan is going 01:28:32.230 --> 01:28:37.060 to have a different use case than the use case that a 01:28:37.270 --> 01:28:38.890 merchant's using for an MCA. 01:28:39.790 --> 01:28:44.860 Our experience is that, oftentimes, when you're building 01:28:44.860 --> 01:28:48.400 up a small business, there's going to be some unexpected 01:28:48.400 --> 01:28:52.570 surprises along the way, not necessarily opportunities. And 01:28:52.630 --> 01:28:56.110 maybe a customer didn't pay in time, or something didn't quite 01:28:56.110 --> 01:28:59.620 work out in time, or whatever it might be. And you're in the 01:28:59.620 --> 01:29:05.530 need. And if you didn't take the time or weren't able to go to 01:29:05.530 --> 01:29:08.140 your bank in advance, and get a traditional line of credit-- 01:29:08.140 --> 01:29:11.560 which I don't think anyone should forget that, plenty of 01:29:11.560 --> 01:29:15.370 the banks in this country, while it's work, and takes you time, 01:29:15.370 --> 01:29:18.880 you can go get a line of credit for your business for $25,000, 01:29:18.970 --> 01:29:23.050 $50,000, and it will just sit there for when you need it. But 01:29:23.260 --> 01:29:25.300 if you're caught in one of those emotional moments, and go to 01:29:25.300 --> 01:29:28.450 Google, and you put in "I'm looking for money for my 01:29:28.450 --> 01:29:32.410 business," there is a myriad of offers that are so enticing to 01:29:32.410 --> 01:29:36.820 offer you money in 24 to 48 hours. And if you jump on that 01:29:36.820 --> 01:29:41.230 train, and you take a short-term amortization, whether it's an 01:29:41.230 --> 01:29:45.940 advance or a loan, of some months, oftentimes that cash 01:29:45.940 --> 01:29:50.230 flow pressure that that instrument creates forces you 01:29:50.230 --> 01:29:54.250 into a cycle of multi renewals, which is where many people in 01:29:54.250 --> 01:29:57.790 the MCA or the short-term loan business make their money. And 01:29:58.210 --> 01:30:00.970 as your credit gets worse, as your situation gets tougher and 01:30:00.970 --> 01:30:04.120 tougher, you get into situations of stacking, and stacking, and 01:30:04.120 --> 01:30:08.230 stacking, and multiple renewals. And everyone's often very happy 01:30:08.230 --> 01:30:12.940 when there are renewals going on. So these are some of the 01:30:12.970 --> 01:30:16.780 dynamics that worry me about the nature of the short-term 01:30:16.780 --> 01:30:20.470 products and the ultimate pressure they can often create 01:30:20.560 --> 01:30:23.740 on the business owners who get enticed by them. And they 01:30:23.740 --> 01:30:24.820 certainly are enticing. 01:30:25.750 --> 01:30:28.330 Ami, can you explain for those who might not be familiar what 01:30:28.330 --> 01:30:31.660 stacking is, and how common that is in the industry? 01:30:31.000 --> 01:30:37.180 Well, the stats are hard because I don't think anyone in 01:30:37.180 --> 01:30:42.070 Washington or anywhere truly understands the size and scope 01:30:42.160 --> 01:30:46.270 of this business. I don't think anyone really knows how many 01:30:46.270 --> 01:30:48.970 players there are. I don't believe there are any reported 01:30:49.600 --> 01:30:54.880 requirements for reporting, like they are for banks, as to the 01:30:54.910 --> 01:30:59.170 size and scope of their loans or their advances. So any data that 01:30:59.170 --> 01:31:04.300 I have is more anecdotal. But I will often get a call from a 01:31:04.840 --> 01:31:09.460 borrower-- just to be clear, we're a loan broker. And just to 01:31:09.460 --> 01:31:15.940 be clear, about 70% of the work we do is with the SBA. And we'll 01:31:15.940 --> 01:31:20.500 get a call with someone who took an advance or a short-term loan, 01:31:20.500 --> 01:31:24.640 and then it became enticing, and there was some cash flow 01:31:24.640 --> 01:31:27.040 pressure by the first one, and then they took another and 01:31:27.040 --> 01:31:30.310 another. And then there's multiple lenders or companies in 01:31:30.310 --> 01:31:33.430 the business. And sometimes they're classified as A, B, and 01:31:33.430 --> 01:31:36.850 C credits. And as you take more and more of these, if you fall 01:31:36.850 --> 01:31:45.400 down that path, the paybacks get faster, and if you calculate 01:31:45.400 --> 01:31:50.140 them on a IRR and APR basis, they get more expensive. And 01:31:50.470 --> 01:31:54.100 that's when you get to some of the C-credit players, some of 01:31:54.100 --> 01:31:56.530 the really predatory-- and I don't think that's the case of 01:31:56.530 --> 01:31:59.860 anyone here in this panel-- but you start to see some of the 01:31:59.890 --> 01:32:03.490 really predatory practices, and confession of judgments, and 01:32:03.490 --> 01:32:06.250 some of the things that we've recently read about in Bloomberg 01:32:06.250 --> 01:32:10.630 articles and stuff like that. But sometimes we can see bank 01:32:10.630 --> 01:32:14.200 statements or credit card statements where someone has 01:32:14.200 --> 01:32:18.460 six, seven, or eight of these loans or advances. And they may 01:32:18.460 --> 01:32:19.840 as well shut their doors at that point. 01:32:21.730 --> 01:32:24.250 Some of the things that we've seen-- and to be clear, United 01:32:24.250 --> 01:32:28.390 Capital Source as well is a broker and a consultant-- we've 01:32:28.390 --> 01:32:31.780 seen a multitude of cases where folks have had two and three SBA 01:32:31.780 --> 01:32:36.850 loans at once. And so is that considered SBA loans stacking 01:32:36.850 --> 01:32:39.670 each other? We've seen cases where someone has a line of 01:32:39.670 --> 01:32:42.490 credit and accounts receivable financing as well as an SBA 01:32:42.490 --> 01:32:45.760 loan. And they're coming to us saying, hey, I took these three 01:32:45.760 --> 01:32:48.760 traditional financings, and I'm looking to clear it up. What 01:32:48.760 --> 01:32:52.360 should I do? So I really think it depends on a case-by-case 01:32:52.360 --> 01:32:57.220 basis. I will say, from what Ami said, yes, there is a level of 01:32:57.220 --> 01:33:01.720 this space that I think has been a certain way. But I would not 01:33:01.720 --> 01:33:05.470 let a few bad apples spoil the bunch. The majority of the space 01:33:05.680 --> 01:33:08.350 is generally working with merchants to increase their 01:33:08.350 --> 01:33:12.010 business's cash flow and to grow their business. 01:33:12.940 --> 01:33:18.400 And I would add that a lot of the flexibility and availability 01:33:18.430 --> 01:33:25.120 and speed to funding, the MCA product offers many of the same 01:33:25.120 --> 01:33:28.840 benefits as the products offered by the individuals on the first 01:33:28.840 --> 01:33:34.120 panel. Where we see renewals for merchants is either a merchant 01:33:34.990 --> 01:33:37.120 gets a product for the first time, because there is an 01:33:37.120 --> 01:33:39.910 education process to explaining that it's not a loan, that it 01:33:39.910 --> 01:33:43.780 doesn't have an interest rate, that you have the flexibility of 01:33:43.780 --> 01:33:46.120 paying back a percentage of your credit card receipts as they're 01:33:46.120 --> 01:33:49.120 generated, and so your payment automatically fluctuates based 01:33:49.120 --> 01:33:51.850 on the performance of your business. Once it gets past 01:33:51.850 --> 01:33:56.320 that, the business sees the use case, sees the flexibility, and 01:33:56.320 --> 01:33:59.830 will come back for the next project or the next need and 01:33:59.860 --> 01:34:06.160 recognize the benefits of the product. Most of our renewals, 01:34:06.220 --> 01:34:09.190 as Ami mentioned, which are customers that come back and 01:34:09.280 --> 01:34:14.050 take another financing from Kapitus, those tend to be 01:34:14.050 --> 01:34:18.580 individuals who have identified a specific need, inventory or 01:34:18.580 --> 01:34:22.540 manufacturing inputs. The business knows what it can make 01:34:22.540 --> 01:34:26.110 selling inventory. It knows what the return, from the inputs, to 01:34:26.110 --> 01:34:30.130 its manufacturing business will be. The product is able to 01:34:30.130 --> 01:34:35.320 finance that need as it arises, essentially in perpetuity, 01:34:35.320 --> 01:34:39.430 because they're returning that investment to the financing 01:34:39.430 --> 01:34:39.820 company. 01:34:40.750 --> 01:34:43.960 And I would just comment on one of Jesse's comments on the-- 01:34:43.990 --> 01:34:52.180 relative to the speed. So we'll have a merchant apply with us as 01:34:52.180 --> 01:34:58.420 a first-time merchant. And to the extent that the merchants 01:34:58.420 --> 01:35:02.170 that are approved, 90% of them receive the capital within 48 01:35:02.170 --> 01:35:05.560 hours. So just to a small business owner that's dealing 01:35:05.560 --> 01:35:10.810 with all kinds of different challenges, the ability to get 01:35:12.370 --> 01:35:17.920 nonrecourse capital, where the provider of the capital has 01:35:17.920 --> 01:35:24.310 purchased a future percentage of your revenues of the performance 01:35:24.310 --> 01:35:28.090 of the business, and to be able to get it in 48 hours, just has 01:35:28.090 --> 01:35:32.380 a very high utility. And that's on a first-time merchant. A 01:35:32.380 --> 01:35:36.040 merchant who already has an existing relationship with us 01:35:37.150 --> 01:35:39.940 typically will be able to get the capital, if they need an 01:35:39.940 --> 01:35:44.080 advance, the same day. So for a small business owner who-- and 01:35:46.570 --> 01:35:51.340 the first use case for why they may reach out to us may be 01:35:51.340 --> 01:35:58.960 because of some type of acute need. The pizza oven breaks and 01:35:58.960 --> 01:36:04.510 you need $50,000 tomorrow, or as quick as you possibly can. So 01:36:04.510 --> 01:36:07.750 the first time they use it may be because of some type of acute 01:36:07.750 --> 01:36:14.830 need. And those future receivables will be remitted 01:36:14.830 --> 01:36:19.030 back to us over whatever period of time it takes for the 01:36:19.030 --> 01:36:22.600 business to generate them. But the business owner then develops 01:36:22.900 --> 01:36:26.800 comfort level with the product, with our business and the 01:36:26.800 --> 01:36:31.000 relationship. And then we may get a call back a year later, 01:36:31.000 --> 01:36:37.360 the business owner says-- the same pizza owner-know the shop 01:36:37.360 --> 01:36:40.270 next door to me, the hairstylist, just went out of 01:36:40.270 --> 01:36:44.500 business and I've got an opportunity to expand. So now 01:36:44.500 --> 01:36:48.640 it's not an acute kind of emergency need for capital. Now 01:36:48.640 --> 01:36:52.390 this is a expansionary need. And so that business owner being 01:36:52.390 --> 01:36:56.950 able to call us up at 10:00 in the morning on a Wednesday and 01:36:56.950 --> 01:37:00.970 have $75,000 or $100,000 in their bank account by the end of 01:37:01.750 --> 01:37:05.080 that day, again, on a non-recourse basis where they 01:37:05.080 --> 01:37:07.990 didn't have to provide a personal guarantee, unlike some 01:37:07.990 --> 01:37:13.390 of the panelists that were on the first panel, again, a 01:37:13.600 --> 01:37:19.420 merchant cash advance, you can appreciate the utility for 01:37:19.420 --> 01:37:22.600 certain business owners in certain use cases. 01:37:23.380 --> 01:37:28.390 Can we come back quickly to the cost of financing here and the 01:37:28.390 --> 01:37:32.620 factor rate in particular. So we'd heard, on the first panel, 01:37:32.620 --> 01:37:37.990 that one of the concerns is the lack of transparency in this 01:37:37.990 --> 01:37:43.000 industry around the cost of financing. And Scott and Jesse, 01:37:43.000 --> 01:37:47.620 I think you commented on the fact that APR might not be, for 01:37:47.620 --> 01:37:50.410 certain reasons a good comparison for a business to 01:37:50.410 --> 01:37:54.430 make to the factor rate. How does a business compare-- if a 01:37:54.430 --> 01:37:58.240 business is considering an MCA, how do they compare the cost of 01:37:58.240 --> 01:38:01.570 financing for an MCA against other forms of credit? 01:38:02.500 --> 01:38:06.670 We are very supportive of using the total cost of capital metric 01:38:06.670 --> 01:38:10.990 that was discussed on the first panel by Scott Talbott from the 01:38:10.990 --> 01:38:16.960 ETA. Unlike a consumer who is borrowing money to meet a 01:38:16.960 --> 01:38:20.890 personal need, the business is borrowing money or seeking 01:38:20.890 --> 01:38:23.920 financing to invest. And so they're looking at what the 01:38:23.920 --> 01:38:26.350 return on that investment is going to be, and what the total 01:38:26.350 --> 01:38:31.780 cost is. So the apples-to-apples comparison, I think, across all 01:38:31.780 --> 01:38:35.770 products is what the total financing cost is going to be 01:38:35.770 --> 01:38:39.430 for the funds, as well as the periodic repayment or the 01:38:39.430 --> 01:38:41.620 percentage of the receipts that are going to have to be 01:38:41.620 --> 01:38:46.810 delivered. For example, a 10-year SBA loan or a five-year 01:38:46.810 --> 01:38:49.930 equipment lease, if you express that in the total cost of 01:38:49.960 --> 01:38:52.900 financing in terms of the total interest you will end up paying, 01:38:53.170 --> 01:38:58.660 those can be more expensive than an MCA or a short-term factoring 01:38:58.660 --> 01:39:01.300 agreement, because you're paying a lower rate of interest over a 01:39:01.300 --> 01:39:05.410 longer period of time. So overall, we believe that the 01:39:05.410 --> 01:39:11.080 best metric is to have a clear total cost disclosure across all 01:39:11.110 --> 01:39:12.790 small business financing products. 01:39:13.270 --> 01:39:17.440 I think, if I may, let's just take an example, someone needs 01:39:17.440 --> 01:39:23.980 $50,000. And approximately, if you're going to do that on a 01:39:24.190 --> 01:39:27.190 10-year SBA loan product, you're going to have a monthly payment 01:39:27.190 --> 01:39:30.280 of about $600, and no prepayment penalty if you can get it done 01:39:30.280 --> 01:39:34.450 faster. And if you're going to do that on a six-month 01:39:34.510 --> 01:39:38.230 short-term MCA or short-term loan product, you're going to 01:39:38.230 --> 01:39:44.500 have approximately a payment of $600 a day. And what I believe 01:39:44.500 --> 01:39:48.820 small businesses have to really be educated and stare at is 01:39:49.090 --> 01:39:54.310 thinking about, unless things go extremely well, if their 01:39:54.310 --> 01:39:58.630 business can really afford and handle that $600 a day. Because 01:39:58.630 --> 01:40:02.350 oftentimes, if you look at it on an actual cost-of-capital 01:40:02.380 --> 01:40:06.340 dollars for the longer-term product versus dollars for the 01:40:06.670 --> 01:40:08.980 shorter-term product, you're going to have less dollars, 01:40:09.010 --> 01:40:14.620 although a much, much higher APR or cost of financing on a 01:40:14.620 --> 01:40:17.890 percentage basis that's really expensive. And it's that 01:40:17.890 --> 01:40:23.020 enticement of signing up for the shorter, and easier, and more 01:40:23.020 --> 01:40:26.860 convenient financing that, from our experience, often gets 01:40:26.860 --> 01:40:27.910 merchants in trouble. 01:40:28.740 --> 01:40:31.680 Well, there's one thing I would add and point out. I mean, we 01:40:31.680 --> 01:40:37.650 compete with some companies that offer online lending and online 01:40:37.650 --> 01:40:42.690 loans. And our cost of financing is, overall, comparable to them 01:40:42.690 --> 01:40:44.760 since we were competing with them and winning business with 01:40:44.760 --> 01:40:46.830 them. There is a great deal of competition in the industry, 01:40:46.830 --> 01:40:50.430 across products, across regulatory structures. But 01:40:50.490 --> 01:40:54.300 overall, our merchants can compare and have the ability to 01:40:54.300 --> 01:40:58.200 look at an online loan from a lender like OnDeck, or a 01:40:58.710 --> 01:41:01.830 line-of-credit product from a lender like Kabbage, and a 01:41:01.830 --> 01:41:06.180 factoring product that we offer, or in California, where we have 01:41:06.180 --> 01:41:10.950 a license and offer a loan product. They can look across 01:41:10.950 --> 01:41:12.720 all of those. And they're sophisticated enough to 01:41:12.720 --> 01:41:16.830 understand it. And while there are shorter-term, very high-cost 01:41:17.940 --> 01:41:22.980 products out there, that is not the typical customer we offer. 01:41:22.980 --> 01:41:26.100 That's not the need we are serving. And while we are aware 01:41:26.100 --> 01:41:29.010 that it's out there, it is not something that is core to our 01:41:29.010 --> 01:41:29.640 business. 01:41:30.150 --> 01:41:32.880 I'd like to address your question about disclosures. 01:41:33.270 --> 01:41:36.240 Disclosures should serve the broader policy goal of helping 01:41:36.240 --> 01:41:39.720 small business owners compare costs across different products. 01:41:40.020 --> 01:41:42.570 And in the business finance space, there is a broad range of 01:41:42.570 --> 01:41:45.300 different products, including loans and lines of credit, 01:41:45.330 --> 01:41:48.690 equipment leasing, invoice factoring, purchases of future 01:41:48.690 --> 01:41:53.100 receivables. So in order to do an apples-to-apples comparison 01:41:53.790 --> 01:41:57.330 across these different types of products, a business owner needs 01:41:57.330 --> 01:42:00.300 to know the total amount of money that's advanced. So in a 01:42:00.300 --> 01:42:03.150 loan, that would be the principal amount. In factoring, 01:42:03.390 --> 01:42:06.000 this would be the purchase price. In a lease, this would be 01:42:06.000 --> 01:42:09.930 the gross capitalized cost. They need to know the amount of any 01:42:09.930 --> 01:42:16.170 upfront fees. They need to know what their periodic payment is 01:42:16.170 --> 01:42:19.650 or their expected periodic payment. They need to know the 01:42:19.650 --> 01:42:23.520 total amount it will cost them, expressed today as total cost of 01:42:23.520 --> 01:42:26.910 capital. And it's helpful to know what the pre-payment 01:42:26.910 --> 01:42:32.010 policies are. That limited number of disclosures would 01:42:32.010 --> 01:42:35.460 allow a business owner to be able to compare, is an equipment 01:42:35.460 --> 01:42:39.720 lease a better price for me than a loan, than a purchase of 01:42:39.720 --> 01:42:43.080 future receivables. There are other disclosures, such as 01:42:43.110 --> 01:42:46.650 annual interest rate, APR, or factor rate. These really don't 01:42:46.650 --> 01:42:50.640 translate across products. And if the policy goal is to allow 01:42:50.640 --> 01:42:54.060 business owners to comparison shop, we should focus on that 01:42:54.120 --> 01:42:55.500 set of disclosures. 01:42:56.280 --> 01:42:59.280 I would just like to add to Kate's point, oftentimes in 01:42:59.280 --> 01:43:02.190 roles like myself or armies company when you're presenting 01:43:02.550 --> 01:43:05.340 all of these options to a merchant, and thankfully they 01:43:05.340 --> 01:43:09.390 all exist. Oftentimes a merchant is looking at the total cost of 01:43:09.390 --> 01:43:13.890 capital what the repayment method is, but they're 50% of 01:43:13.890 --> 01:43:16.650 the time looking at when they can take advantage of their 01:43:16.650 --> 01:43:20.820 opportunity. Sometimes time doesn't allow for that. 01:43:20.970 --> 01:43:25.050 Sometimes what they would prefer is to go through a program where 01:43:25.050 --> 01:43:29.850 they understand I'm taking x for y, if I pay it back early, 01:43:29.850 --> 01:43:33.090 here's my definitive cost. I know I'm using it for this 01:43:33.090 --> 01:43:36.780 project, I know that I'm going to have it paid back by x. If I 01:43:36.780 --> 01:43:41.130 don't, I'm able to lower my payments due to my cash flow, 01:43:41.460 --> 01:43:43.530 which other lending products don't offer. And so it's 01:43:43.530 --> 01:43:46.290 important to just make sure that the business owners not only 01:43:46.290 --> 01:43:48.480 know about the cost of capital, but they also know about the 01:43:48.480 --> 01:43:50.970 rules that follow that cost to capital in case they get into a 01:43:50.970 --> 01:43:54.510 situation where they're not able to repay. And when you're 01:43:54.510 --> 01:43:59.460 guaranteeing equipment inventory or land through an SBA loan. And 01:43:59.460 --> 01:44:01.980 if you don't have the ability to pay that loan, you can lose one 01:44:01.980 --> 01:44:05.100 of those things. And so oftentimes, if a merchant is not 01:44:05.100 --> 01:44:09.660 sure how their gamble, quote, unquote, will pay off, they will 01:44:09.660 --> 01:44:13.110 choose an option that may be best suited for their future of 01:44:13.110 --> 01:44:14.010 their business. 01:44:15.320 --> 01:44:18.770 I think we can just take an example just of the pricing 01:44:18.770 --> 01:44:23.600 mechanism. So right now as we sit here, there's probably some 01:44:23.630 --> 01:44:28.730 thousands of salespeople on the phone hammering away at small 01:44:28.730 --> 01:44:34.130 businesses trying to entice them into MCAs or short-term loans. 01:44:34.130 --> 01:44:37.370 Because frankly, it's quite profitable. And if you're a 01:44:37.370 --> 01:44:40.640 broker in that business, you don't get paid high commissions. 01:44:41.810 --> 01:44:46.400 And so on the sales call, if someone was again focusing on 01:44:46.400 --> 01:44:53.090 the cost of capital, someone might say to a merchant, I'll 01:44:53.090 --> 01:44:55.610 give you $50,000, and you'll pay me back $10,000. So the total 01:44:55.610 --> 01:44:59.930 back will be $60,000, and that will be over six months-- so not 01:44:59.930 --> 01:45:03.680 specifically for an MCA. And the merchant might say, I don't want 01:45:03.680 --> 01:45:07.130 to pay back $10,000. That's too much. And then the salesperson-- 01:45:07.130 --> 01:45:10.400 the other person-- will say, OK, I can give you a payback of 01:45:10.400 --> 01:45:14.090 $7,000. So you'll pay me back $57,000, and you'll pay that 01:45:14.090 --> 01:45:18.830 back over three months. So your payback will be less. And in 01:45:18.830 --> 01:45:22.280 that process what happens is that the daily payment goes 01:45:22.280 --> 01:45:27.500 higher, and the rate of return for the MCA or the lender goes 01:45:28.340 --> 01:45:29.390 higher also. 01:45:32.120 --> 01:45:35.690 How do funders typically underwrite their MCAs? And what 01:45:35.690 --> 01:45:38.360 information do they consider, and how is that information 01:45:38.360 --> 01:45:40.760 different from what a traditional bank might consider? 01:45:44.300 --> 01:45:50.240 Our underwriting process is geared toward-- under about $3 01:45:50.240 --> 01:45:57.290 million, a bank will underwrite a small-dollar commercial loan 01:45:57.290 --> 01:46:01.460 to the personal credit of the owner of that business, largely. 01:46:01.850 --> 01:46:06.320 What we do is underwrite to the cash flow of the business or the 01:46:06.320 --> 01:46:08.660 receipts that they're iterating through their credit card 01:46:08.660 --> 01:46:13.100 processing. So our underwriting process looks at a number of 01:46:13.100 --> 01:46:17.060 different data points, largely geared toward looking at the 01:46:17.060 --> 01:46:19.940 cash flow of the business and what that business can support 01:46:19.940 --> 01:46:23.750 in terms of generating the offer. So our typical 01:46:23.750 --> 01:46:26.330 application process requests three months worth of bank 01:46:26.330 --> 01:46:30.170 statements that we then analyze using computer-assisted 01:46:30.170 --> 01:46:34.820 algorithms. But we don't believe that computers can do 01:46:34.820 --> 01:46:37.730 underwriting entirely at this point, or the technology is not 01:46:37.730 --> 01:46:42.380 there. So we have individual underwriters look at the risk 01:46:42.380 --> 01:46:44.600 score that's generated through our algorithm, the bank 01:46:44.600 --> 01:46:48.950 statements of the business, and for larger financings, we'll 01:46:48.950 --> 01:46:52.430 also speak to the merchant. And one of the things that's clear 01:46:52.430 --> 01:46:55.430 in that merchant interview is we want to be sure that they 01:46:55.430 --> 01:46:57.710 understand how much that payment is and whether they're 01:46:57.710 --> 01:47:00.740 comfortable with it. And so we are very clear in disclosing 01:47:00.740 --> 01:47:04.640 what the daily cost is going to be. So from that, we get an 01:47:04.640 --> 01:47:07.520 offer, and that's generated and given to the merchant. If the 01:47:07.520 --> 01:47:10.790 merchant accepts that and signs the contract, we can fund them 01:47:11.120 --> 01:47:14.930 the same day. So The data sources for the underwriting are 01:47:15.200 --> 01:47:18.140 largely geared toward getting out the cash flow of the 01:47:18.140 --> 01:47:20.120 business and the key indicators toward the health of the 01:47:20.120 --> 01:47:23.300 business, and deemphasizing the personal credit of the 01:47:23.300 --> 01:47:23.900 guarantor. 01:47:25.490 --> 01:47:30.680 Yeah, I'd just add-- I think Jesse summed it up well. The 01:47:30.680 --> 01:47:35.600 other thing would just be, each business is different. You'd 01:47:35.600 --> 01:47:40.580 look at different SIC codes-- you'd underwrite different SIC 01:47:40.580 --> 01:47:42.710 codes differently depending on whether or not they're subject 01:47:42.710 --> 01:47:48.890 to seasonality or different-- typically, seasonality would be 01:47:48.890 --> 01:47:51.800 the biggest one. But Jesse covered most of them. 01:47:53.210 --> 01:47:57.050 We heard from an earlier panelist that there's maybe been 01:47:57.050 --> 01:48:00.590 a move away from considering on personal credit scores as part 01:48:00.590 --> 01:48:05.450 of the underwriting process for sole proprietorships, or 01:48:05.450 --> 01:48:09.080 generally. Jesse, Scott, is that something you consider? 01:48:10.550 --> 01:48:16.730 We do pull the personal credit of the owner of the small 01:48:16.730 --> 01:48:20.450 business. However, that is deemphasized in our underwriting 01:48:20.450 --> 01:48:23.420 as a key indicator of the health of the business or whether we 01:48:23.420 --> 01:48:27.530 should finance that merchant. So it hasn't been completely 01:48:27.530 --> 01:48:29.720 eliminated, I think, as some others have. But it has been 01:48:29.720 --> 01:48:35.390 significantly deemphasized in order to expand the 01:48:35.390 --> 01:48:38.120 opportunities available to small businesses, some of whom, as 01:48:38.120 --> 01:48:41.030 we've heard on the first panel, will have less than perfect 01:48:41.030 --> 01:48:44.630 credit due to their entrepreneurial spirit. 01:48:45.800 --> 01:48:53.180 And they might not necessarily have bad credit. But just they 01:48:53.180 --> 01:48:59.720 might be a thin credit file, a new entrepreneur. And so 01:49:00.500 --> 01:49:03.890 deemphasize as well the personal credit of the business owner. 01:49:04.160 --> 01:49:08.720 And it's much more focused on the cash flows, historical and 01:49:09.290 --> 01:49:12.800 what we deem to be or estimate are going to be the prospective 01:49:12.800 --> 01:49:14.360 cash flows of the business. 01:49:17.150 --> 01:49:22.190 How do MCAs typically get paid back? Is it a percentage basis, 01:49:22.190 --> 01:49:23.600 a daily fixed rate? 01:49:23.690 --> 01:49:27.050 It's always going to be a percentage of the receipts that 01:49:27.050 --> 01:49:29.480 are generated by the business. And I would add that our 01:49:29.480 --> 01:49:34.760 underwriting processes look very closely at the remit rate, or 01:49:34.760 --> 01:49:38.060 the percentage of the receipts that are going to be servicing-- 01:49:38.270 --> 01:49:41.030 we're going to be paying back the receipts that we have 01:49:41.120 --> 01:49:46.850 purchased. There are two basic methods of repayment, as I think 01:49:46.850 --> 01:49:52.340 I said quickly in my opening remarks. One is a split of the 01:49:52.340 --> 01:49:57.170 credit card batches. So in the credit card processor-- for 01:49:57.170 --> 01:49:59.330 those who are unfamiliar with how credit card transactions 01:49:59.330 --> 01:50:01.970 work, you swipe your credit card, it goes to the credit card 01:50:01.970 --> 01:50:04.550 processor, they then disperse the funds to the merchant, 01:50:05.030 --> 01:50:08.600 usually a day later, after it has been batched. When they're 01:50:08.600 --> 01:50:11.180 batching out that payment, they will send the percentage of the 01:50:11.180 --> 01:50:14.570 receipts that have been purchased to us in fulfillment 01:50:14.570 --> 01:50:17.240 of the obligation to deliver the receipts, and they will send the 01:50:17.240 --> 01:50:22.460 remainder to the merchant. For merchants who are not as 01:50:22.460 --> 01:50:24.920 dependent on credit cards, who don't have as large a percentage 01:50:24.920 --> 01:50:28.850 of their revenue generated through credit cards, we offer 01:50:28.850 --> 01:50:34.430 an estimated ACH debit that is intended to look at what's your 01:50:34.430 --> 01:50:38.150 average on a weekly or daily basis, how many deposits do you 01:50:38.150 --> 01:50:41.810 have. There will be an ACH that's intended to estimate the 01:50:41.810 --> 01:50:45.200 percentage of the receivables that we have purchased and is 01:50:45.200 --> 01:50:53.720 debited to a bank account. That estimated payment can be what's 01:50:53.720 --> 01:50:56.600 called trued-up, in that a merchant, if they are 01:50:56.600 --> 01:51:00.800 encountering trouble, can submit their most recent bank 01:51:00.800 --> 01:51:03.860 statements, provide information to us. And we can adjust that 01:51:03.860 --> 01:51:06.620 payment to better reflect the percentage of their receipts 01:51:06.620 --> 01:51:08.780 that are being generated and that we have purchased. 01:51:09.530 --> 01:51:12.470 So does the contract contain the percentage and the estimated 01:51:12.470 --> 01:51:16.340 payment, and the business owner is required to make the 01:51:16.340 --> 01:51:20.300 estimated payment unless they proactively seek a smaller 01:51:20.300 --> 01:51:20.780 payment? 01:51:21.200 --> 01:51:25.370 In essence, yes. But again, that's only for the ACH 01:51:25.430 --> 01:51:29.750 estimated payment. There is no actual stated payment in a 01:51:29.750 --> 01:51:33.920 credit card factoring contract. Because the split of the batch 01:51:33.920 --> 01:51:37.190 automatically provides the percentage of the receipts be 01:51:37.190 --> 01:51:42.110 purchased on a daily basis, almost exactly like the product 01:51:42.140 --> 01:51:44.750 that Square was describing this morning, which is denominated as 01:51:44.750 --> 01:51:45.140 a loan. 01:51:46.700 --> 01:51:49.250 Jesse, can you explain a little bit more of the true-up or 01:51:49.250 --> 01:51:52.010 reconciliation provision you're talking about, and how it 01:51:52.010 --> 01:51:55.970 works-- how it's supposed to work, and then, to the extent 01:51:55.970 --> 01:51:59.210 you've heard anecdotally about how it may go wrong. 01:52:00.560 --> 01:52:06.260 Well, we have approximately 5 to 10 employees who, when the 01:52:06.260 --> 01:52:10.010 merchants call in, or the merchants miss a payment, or NSF 01:52:10.010 --> 01:52:12.680 their estimated ACH payment, we proactively reach out to the 01:52:12.680 --> 01:52:17.750 merchant and ask them what the issues are. They will submit 01:52:17.780 --> 01:52:21.650 information to our group, who will review their deposits and 01:52:21.650 --> 01:52:24.620 the receipts that are being generated. And we'll adjust 01:52:26.180 --> 01:52:29.270 their ACH repayment based on the percentage of receipts 01:52:29.270 --> 01:52:34.220 purchased. We also want to work with our merchants. And if they 01:52:34.220 --> 01:52:37.820 are experiencing a hard time, even if there is cash flow 01:52:37.820 --> 01:52:42.770 pressure, we also will offer modifications to their estimated 01:52:42.770 --> 01:52:45.770 repayment obligations or lower their remit percentage in order 01:52:45.770 --> 01:52:49.130 to get them through a difficult period if they've overextended 01:52:49.130 --> 01:52:52.370 themselves in some way, or have an unexpected or unforeseen 01:52:52.370 --> 01:52:54.710 difficulty but are still generating receipts. 01:52:55.730 --> 01:53:00.170 Anecdotally, I have heard that there are companies that will 01:53:00.170 --> 01:53:04.490 not honor those provisions of the contract, and treat the 01:53:04.580 --> 01:53:08.060 estimated payment that's stated or the estimated ACH debit that 01:53:08.060 --> 01:53:11.960 stated as an absolute requirement to pay. And so even 01:53:11.960 --> 01:53:15.800 if they submit information, they will not adjust the debit, or 01:53:15.800 --> 01:53:20.630 they will continue debiting even after the obligation is repaid. 01:53:21.140 --> 01:53:24.080 Those are not practices that we condone. We believe that those 01:53:24.080 --> 01:53:29.360 practices should be prohibited. And it is not how our company 01:53:29.360 --> 01:53:29.960 operates. 01:53:30.830 --> 01:53:34.760 I'd just make a couple of comments on true-up. So and 01:53:34.760 --> 01:53:38.660 sometimes-- Ami did a good job, I think, with giving examples 01:53:38.960 --> 01:53:42.950 for folks who might not be familiar with-- they haven't 01:53:42.950 --> 01:53:46.970 taken out a merchant cash advance. But you have a retail 01:53:46.970 --> 01:53:52.550 operation in a strip mall, and you needed an advance because 01:53:52.940 --> 01:53:56.300 you had an opportunity to buy some inventory at a discount 01:53:56.300 --> 01:54:00.680 from your supplier. And so you took out an advance from 01:54:00.680 --> 01:54:08.330 Everest, from my company. And unexpectedly, the city decided 01:54:08.330 --> 01:54:12.260 to put a new curb cut in front of the retail strip mall that 01:54:12.260 --> 01:54:16.190 you work at, where your store is based. And it's going to take 01:54:16.190 --> 01:54:19.100 them a month to do the curb cut, and that's cutting down on 01:54:19.100 --> 01:54:24.650 traffic that comes into the center, and that's going to 01:54:24.650 --> 01:54:29.000 impact their revenues for a month or the time period where 01:54:29.000 --> 01:54:33.260 their curb cut's getting put in. That merchant will call us up, 01:54:33.260 --> 01:54:37.940 explain what happened, show us the bank statements. And we will 01:54:37.940 --> 01:54:44.240 lower the payments tied to-- as a modification in recognition of 01:54:44.240 --> 01:54:49.910 the issue that they're dealing with. And so there are, I think, 01:54:49.940 --> 01:54:55.490 some, as in any industry, bad actors that, as Jesse referred 01:54:55.490 --> 01:55:00.890 to, may not honor true-ups, I can tell you, at Everest, not 01:55:00.890 --> 01:55:05.450 only do we honor true-ups, we send out periodic reminders to 01:55:05.750 --> 01:55:11.150 our merchants to remind them over the course of the 01:55:11.150 --> 01:55:16.190 transaction that the true-up's available as an option for them 01:55:16.670 --> 01:55:18.350 if they want to avail themselves of it. 01:55:19.850 --> 01:55:23.510 I'd like to add, as this industry is maturing, companies 01:55:23.510 --> 01:55:27.440 are getting better at this. For example, during a recent 01:55:27.440 --> 01:55:31.640 hurricane, or I believe during fires in California, there were 01:55:31.640 --> 01:55:36.110 companies that proactively looked at their customer list, 01:55:36.110 --> 01:55:39.800 and saw who was in those emergencyaffected areas, and 01:55:39.800 --> 01:55:42.770 proactively reached out to those folks to see if they needed a 01:55:42.770 --> 01:55:43.820 reconciliation. 01:55:44.320 --> 01:55:48.670 Yeah, I can tell you from experience, during the last 01:55:48.670 --> 01:55:52.780 hurricane, all of our funding companies sent us an email, as 01:55:52.780 --> 01:55:56.740 well as our merchants, to remind us and our merchants that 01:55:57.130 --> 01:55:59.950 they're going to withhold payments, actually stop payments 01:55:59.950 --> 01:56:03.010 for two weeks-- this is unsolicited-- to give merchants 01:56:03.010 --> 01:56:05.890 a catch-up because they understood that there was a 01:56:06.340 --> 01:56:09.130 hurricane and a storm going on. And then the merchants were 01:56:09.130 --> 01:56:12.880 encouraged to contact them again after the two weeks to resume 01:56:12.880 --> 01:56:16.390 payment. Because we deal with so many merchants, we also have 01:56:16.390 --> 01:56:20.950 experiences where we have brokered a financing deal to a 01:56:20.950 --> 01:56:24.430 restaurant. After three weeks of financing, the restaurant has 01:56:24.430 --> 01:56:27.580 called us, said, hey, the cleaners next door just had a 01:56:27.580 --> 01:56:30.580 fire, and it shut down half of my restaurant. My revenue's 01:56:30.580 --> 01:56:34.810 going to drop by 50%. And so we have then reached out to that 01:56:34.810 --> 01:56:36.880 funding company. That funding company would then lower those 01:56:36.880 --> 01:56:39.850 payments for that merchant, as they're supposed to. 01:56:40.420 --> 01:56:43.480 I think it goes back to the comment I made earlier, about 01:56:43.480 --> 01:56:47.830 think about the product, in a way, as temporary equity. I 01:56:47.830 --> 01:56:52.810 mean, we really are playing the role of a partner on a temporary 01:56:52.810 --> 01:56:58.660 basis with this business owner. And yet we're not getting-- the 01:56:58.660 --> 01:57:02.410 business owner is not having to give up real long-term equity or 01:57:02.410 --> 01:57:06.460 ownership in it. When Harvey went through Houston, we had 01:57:06.460 --> 01:57:10.450 several hundred merchants that were within 100 miles of 01:57:10.450 --> 01:57:14.170 Houston. And we proactively reached out to them to find out 01:57:14.170 --> 01:57:17.410 how they were impacted by the storm, and whether or not the 01:57:19.210 --> 01:57:26.830 storm was going to impact their ability to meet the daily 01:57:26.830 --> 01:57:31.810 remittance that was in the contract, the percentage. So 01:57:32.740 --> 01:57:36.550 again, a merchant cash advance as a product isn't necessarily 01:57:36.550 --> 01:57:40.270 going to be the perfect product for every business owner. But 01:57:40.270 --> 01:57:45.940 for certain types of use cases, it has an incredibly high 01:57:45.940 --> 01:57:46.390 utility. 01:57:46.870 --> 01:57:49.330 And just to tie it briefly back to the legal nature of the 01:57:49.330 --> 01:57:52.990 product, the reason that, when there is a natural disaster, we 01:57:52.990 --> 01:57:56.620 will stop the ACA repayments is that if there is a natural 01:57:56.620 --> 01:57:59.110 disaster, there are not receipts being generated by that 01:57:59.110 --> 01:58:01.660 business. And so they have no obligation, if they are not 01:58:01.660 --> 01:58:05.110 generating receipts, to deliver anything to us. And so it goes 01:58:05.110 --> 01:58:09.190 back to the difference between a loan, where if you have a 01:58:09.190 --> 01:58:12.010 natural disaster, or there's a fire, or a hurricane, or a 01:58:12.010 --> 01:58:15.850 flood, you still have that repayment obligation. And if you 01:58:15.850 --> 01:58:18.640 do not meet that repayment obligation, your lender can 01:58:18.640 --> 01:58:22.150 declare you to be in default. Now I would hope that everyone 01:58:22.150 --> 01:58:25.390 would work together to recognize that even if they have a loan, 01:58:25.600 --> 01:58:27.430 when there is a natural disaster, you will need some 01:58:27.430 --> 01:58:31.360 forbearance. But I think it highlights the legal distinction 01:58:31.360 --> 01:58:36.670 between a purchase of future receipts and a loan. 01:58:37.120 --> 01:58:38.020 Ami, did you want to jump in? 01:58:38.020 --> 01:58:40.510 Yeah. I think it's important that, at least from my 01:58:40.510 --> 01:58:44.380 experience and listening to the thousands of phone calls from 01:58:44.860 --> 01:58:48.760 business owners calling into our shop over the years, most people 01:58:51.370 --> 01:58:57.160 are calling when they need money in a rush, more so because the 01:58:57.190 --> 01:59:00.940 city just did the curb cut for 30 days, by your example, and 01:59:00.940 --> 01:59:06.700 they have a problem. I know people love to talk about the 01:59:06.730 --> 01:59:11.050 inventory to quick buy and those opportunities. Our experience is 01:59:11.050 --> 01:59:13.180 that it's much more the first than the latter, that there's 01:59:13.180 --> 01:59:17.200 some short-term crisis going on that they're trying to get a 01:59:17.200 --> 01:59:21.520 quick fix to. And that's, at least from our experience, the 01:59:21.520 --> 01:59:27.040 danger of the situation with the short-term products. It can 01:59:27.280 --> 01:59:32.140 compound the problem for them. The other thing that I think is 01:59:32.140 --> 01:59:35.830 important to note is that-- we haven't really talked about it, 01:59:35.920 --> 01:59:39.910 but often the distinction, at least for the small business 01:59:39.910 --> 01:59:44.770 owner or the consumer between a direct lender or MCA company and 01:59:44.770 --> 01:59:48.610 a broker is very vague. They often don't know the difference 01:59:48.610 --> 01:59:52.660 in who they're dealing with. But if you're in this broker 01:59:52.660 --> 01:59:59.560 business, which we are, and you broker an SBA loan product, you 01:59:59.560 --> 02:00:03.970 can earn a commission from the lender of between 1% and 2% of 02:00:03.970 --> 02:00:08.080 the face value of the loan. And if you are in the business of 02:00:08.080 --> 02:00:14.230 brokering MCAs or short-term loans, you can earn anywhere 02:00:14.230 --> 02:00:19.990 from 6% to up to 20% of the face value of that transaction. So 02:00:19.990 --> 02:00:26.920 the economics are really driven by encouraging people in the 02:00:26.920 --> 02:00:32.770 intermediary space to encourage people to take the short-term 02:00:32.770 --> 02:00:34.450 loans or advances. 02:00:34.660 --> 02:00:37.690 And that actually transitions us pretty well to the next topic, 02:00:38.230 --> 02:00:41.860 which is how these products are marketed, the role of lead 02:00:41.860 --> 02:00:45.070 generators and brokers in the space, and how merchant cash 02:00:45.070 --> 02:00:47.680 advances are marketed. And I'll start with Jared on that. 02:00:47.930 --> 02:00:53.210 Sure. So for us at United, we have taken a digital marketing 02:00:53.210 --> 02:00:59.060 approach. We believe that that has been beneficial for us, and 02:00:59.060 --> 02:01:03.260 also the safest way to receive a merchant's information, because 02:01:03.260 --> 02:01:07.550 it's by them giving it to you. From there, we employ a 02:01:07.550 --> 02:01:10.070 "consultative sale," quote, unquote, to understand what a 02:01:10.070 --> 02:01:13.190 merchant's needs are, and then lay out a myriad of options. I 02:01:13.190 --> 02:01:17.270 know that there are popular ways of marketing in the industry. 02:01:17.270 --> 02:01:21.890 Anecdotally speaking, I've seen mailers some of the folks on our 02:01:21.890 --> 02:01:29.180 previous panel use. We have seen messages, both email and text. 02:01:29.810 --> 02:01:34.100 And we have seen dialers. I think that, depending on how 02:01:34.100 --> 02:01:39.350 you're marketing, it's going to also depend on the merchant that 02:01:39.350 --> 02:01:41.570 you're going to receive in the door. And it's the broker or 02:01:41.570 --> 02:01:44.690 funding company's job to then educate them properly. 02:01:45.380 --> 02:01:49.400 Oftentimes the difference between our industry and 02:01:49.610 --> 02:01:54.260 another, when we do receive that commission for making a sale is, 02:01:54.650 --> 02:01:59.870 in the MCA or the funding space, you are responsible to give that 02:01:59.870 --> 02:02:06.020 commission back if that merchant does not perform or goes into an 02:02:06.020 --> 02:02:11.120 actual default, up to 90 days in. Versus an SBA loan or 02:02:11.120 --> 02:02:14.960 something like that, where if that client does go into actual 02:02:14.960 --> 02:02:18.650 default, you do not have to give that commission back. And so I 02:02:18.650 --> 02:02:21.890 think that's important. Because on the broker side and on the 02:02:21.890 --> 02:02:24.290 funding side, we really are taking a ride with the merchant 02:02:24.290 --> 02:02:25.850 to make sure that the business succeeds. 02:02:27.400 --> 02:02:30.550 And so there have been some reports of aggressive and 02:02:30.670 --> 02:02:34.090 deceptive marketing in this space. Can we hear a little bit 02:02:34.090 --> 02:02:38.860 about some of the tactics you've seen. Ami, do you want to start 02:02:38.860 --> 02:02:39.280 with that? 02:02:39.970 --> 02:02:43.660 Well, often what we see is there's hyper-aggressive 02:02:43.750 --> 02:02:50.890 marketing on the renewal. This is more so, I think, in the loan 02:02:50.890 --> 02:02:53.800 space than the MCA space. I can't really specifically speak 02:02:53.800 --> 02:03:00.880 to it in the MCA space. Because they file the UCCs. And then the 02:03:01.120 --> 02:03:06.880 B or C players know that they can estimate that, in 90 days, 02:03:10.090 --> 02:03:13.120 that merchant is up for renewal. And that merchant will get 02:03:13.120 --> 02:03:16.480 barraged many times on their cell phone-- which is somehow on 02:03:16.480 --> 02:03:19.450 the UCC records, which I don't really understand-- will get 02:03:19.450 --> 02:03:23.950 barraged by phone calls. So if you take a six-month, short-term 02:03:23.980 --> 02:03:29.800 online loan, you can count on it that in about 75 days, you're 02:03:29.800 --> 02:03:33.850 going to have-- you phone's going to nonstop, by dozens and 02:03:33.850 --> 02:03:38.230 dozens of merchants trying to entice you into double-dipping. 02:03:38.230 --> 02:03:41.800 Which, just to give one note, we did some work with the 02:03:41.800 --> 02:03:45.220 Responsible Business Lending Coalition early on, with Funding 02:03:45.220 --> 02:03:47.710 Circle, and Lending Club, and Opportunity Fund, which 02:03:47.740 --> 02:03:51.190 discourages all the double-dipping. But you will get 02:03:51.430 --> 02:03:56.710 barraged by shops who are on the phone, or through email, 02:03:56.710 --> 02:04:00.760 different tactics, trying to get you to renew. And that's often 02:04:00.760 --> 02:04:02.800 where the process just keeps going. 02:04:03.310 --> 02:04:06.910 And can you explain what you mean by the UCC filings for the 02:04:06.910 --> 02:04:08.950 audience who may be unfamiliar with that. 02:04:09.130 --> 02:04:13.780 I don't think the MCAs do it. But most short-term online 02:04:13.780 --> 02:04:20.590 lenders will file a UCC, which is dependent-- whatever position 02:04:20.590 --> 02:04:25.000 they are, they might not be the first loan, but that means if 02:04:25.000 --> 02:04:28.690 there's a default, they have the opportunity to come in and seize 02:04:28.690 --> 02:04:34.450 company assets or try to get company assets. And so that UCC 02:04:34.450 --> 02:04:39.100 filing is a public record. And so what many of the players in 02:04:39.100 --> 02:04:45.010 the industry do is they will get all the UCC filings. And they 02:04:45.010 --> 02:04:50.680 have a date on them for many of the merchants. And they will 02:04:50.710 --> 02:04:53.260 actively use that in their marketing for renewals. 02:04:53.660 --> 02:04:58.190 Jared, in your experience, is that a resource that's used for 02:04:58.760 --> 02:04:59.240 marketing? 02:04:59.780 --> 02:05:04.250 It is. And I think, our experience, we've seen it in a 02:05:04.250 --> 02:05:07.640 multitude of industries. I know that when you take a piece of 02:05:07.640 --> 02:05:11.360 equipment, there's a UCC file there. And I know that when you 02:05:11.360 --> 02:05:15.860 do an SBA, there's a UCC file there. So I think, even 02:05:15.860 --> 02:05:18.650 personally speaking, when I apply for a credit card and I 02:05:18.650 --> 02:05:22.070 then get five other pieces of mail from other credit cards. So 02:05:22.070 --> 02:05:25.910 I think there's a trigger effect in every industry, and 02:05:26.120 --> 02:05:29.450 definitely up to the end user, in this case being the merchant, 02:05:29.450 --> 02:05:34.550 to be smart about what they're doing. I will say that if the 02:05:34.640 --> 02:05:38.600 original broker and funding company do a good job of it, do 02:05:38.600 --> 02:05:41.450 their job in explaining the different products, most people 02:05:41.450 --> 02:05:42.650 are just ignoring those phone calls. 02:05:43.530 --> 02:05:47.880 So do you think businesses understand that the UCC filings 02:05:47.880 --> 02:05:48.720 become public? 02:05:49.230 --> 02:05:55.260 Yeah, I think that the funding company as well as the broker is 02:05:55.260 --> 02:05:59.070 explaining that to the merchant. Most merchants that we speak to 02:05:59.070 --> 02:06:02.310 first say, hey, what's a UCC? And then we go into what it is. 02:06:03.540 --> 02:06:06.990 We will let them know that they may receive phone calls from 02:06:06.990 --> 02:06:11.010 other folks that want their business. Because this is how 02:06:11.010 --> 02:06:14.580 some folks do their marketing. If they trust that we've done a 02:06:14.580 --> 02:06:17.670 great job for them, bring those offers back to us. If they'd 02:06:17.670 --> 02:06:19.770 like to speak to those people, they're more than welcome to. 02:06:19.770 --> 02:06:20.520 It's their business. 02:06:21.210 --> 02:06:25.170 And so I want to quantify a little bit sort of the marketing 02:06:25.170 --> 02:06:30.120 in this space. And I'll bring Jesse in on this. How many 02:06:30.390 --> 02:06:35.640 brokers or how many ISOs might an individual funder work with? 02:06:36.630 --> 02:06:44.430 We have about 100 different brokers. We work with Jard. We 02:06:44.430 --> 02:06:48.720 have a very successful relationship with Jared. While 02:06:48.720 --> 02:06:53.160 there are approximately 100 that we do business with-and part of 02:06:53.160 --> 02:06:56.880 the way that we weed out people like Ami is describing, and 02:06:56.880 --> 02:07:00.720 don't work with them is there is an application process to become 02:07:01.200 --> 02:07:06.660 an ISO or to broker financing transactions to us. A broker 02:07:06.660 --> 02:07:10.200 will apply. We will do a background check on them. We 02:07:10.200 --> 02:07:14.910 will run a clear report on them. And we will include provisions 02:07:14.910 --> 02:07:20.610 in our ISO or brokering contract with them that require them to 02:07:20.610 --> 02:07:23.580 not engage in deceptive marketing, to not engage in 02:07:23.610 --> 02:07:28.140 high-pressure sales tactics. And if they violate those provisions 02:07:28.140 --> 02:07:31.560 of the contract we will take their commissions back and we 02:07:31.560 --> 02:07:36.270 will terminate our relationship with those brokers. Of the 100 02:07:36.300 --> 02:07:41.280 or so that are active with us at any one time, I'd say 25 to 50 02:07:41.550 --> 02:07:45.510 are most of that portion of our business. I would add that 02:07:45.630 --> 02:07:51.390 Kapitus also has a significant direct sales operation. We use 02:07:51.390 --> 02:07:58.290 traditional marketing channels-- online, radio, mailers, so how 02:07:58.290 --> 02:08:01.290 you would see typical financial products typically marketed in 02:08:01.290 --> 02:08:02.010 other areas. 02:08:02.520 --> 02:08:07.500 Yeah. I would just add in, at Everest, we work with probably 02:08:07.530 --> 02:08:14.490 several hundred ISOs at any one time, brokers. But to get signed 02:08:14.490 --> 02:08:18.090 up, they need to go through a background check. And we're 02:08:18.120 --> 02:08:22.320 routinely monitoring them, monitoring their behavior. To 02:08:22.320 --> 02:08:25.830 the extent that we get complaints about how the brokers 02:08:25.830 --> 02:08:31.110 have marketed their product, we don't hesitate to discontinue 02:08:31.110 --> 02:08:35.160 our relationship with the broker. So it's definitely 02:08:35.160 --> 02:08:36.120 something we're focused on. 02:08:37.230 --> 02:08:40.980 So I understand there may be monitoring in response to 02:08:41.640 --> 02:08:44.850 particular complaints. Is there any sort of proactive monitoring 02:08:44.880 --> 02:08:49.110 to make sure that the outbound marketing is accurate and is 02:08:49.110 --> 02:08:50.130 clear with consumers? 02:08:51.150 --> 02:08:54.840 We have provisions in our ISO contracts that allow us to audit 02:08:55.650 --> 02:08:58.830 the marketing and to look at the marketing materials or how the 02:08:58.830 --> 02:09:06.090 products are being marketed. We periodically do those. But we 02:09:06.090 --> 02:09:10.560 can't look at everybody every year. And we generally look to 02:09:10.560 --> 02:09:16.890 see who is claiming that they've been deceptively marketed to. 02:09:16.950 --> 02:09:19.590 We've had we have isolated incidents in which there is 02:09:19.590 --> 02:09:23.280 documented misrepresentations as to the product or the nature of 02:09:23.280 --> 02:09:26.940 the product. And in those cases, we hold the ISO or broker 02:09:26.940 --> 02:09:31.380 responsible and honor whatever they said to the customer. 02:09:33.000 --> 02:09:34.230 And Scott, do you want to- 02:09:34.000 --> 02:09:37.540 No, I was just going to add to that. Yeah, similarly in our 02:09:37.540 --> 02:09:44.350 contract, we've got the right to audit. We do do spot checks. But 02:09:45.880 --> 02:09:51.490 not every ISO is being monitored every day. So it is an area that 02:09:52.120 --> 02:09:52.900 needs focus. 02:09:53.050 --> 02:09:57.850 And I would add, Kapitus was founded in 2006. We've been in 02:09:57.850 --> 02:10:02.290 this space for a very long time. We have been purchasing future 02:10:02.290 --> 02:10:06.160 receivables for a very long time. We have a very good sense 02:10:06.190 --> 02:10:11.530 of who the quality brokers are, and who are the individuals who 02:10:11.530 --> 02:10:15.760 are less reputable. And we don't do business with people who we 02:10:15.760 --> 02:10:18.280 don't believe are going to accurately market the products 02:10:18.280 --> 02:10:20.590 to the customer and give them clear disclosures and a clear 02:10:20.590 --> 02:10:23.410 understanding of the product. Because we truly want our 02:10:23.410 --> 02:10:26.050 customers to understand the benefits and drawbacks of the 02:10:26.050 --> 02:10:29.260 different financing options that are available to them, and to 02:10:29.260 --> 02:10:31.630 understand the product they're getting into, and to have them 02:10:31.630 --> 02:10:32.170 succeed. 02:10:33.200 --> 02:10:36.980 And just anecdotally, do you think that other-- not 02:10:36.980 --> 02:10:40.190 necessarily your particular companies, but other funders in 02:10:40.190 --> 02:10:46.340 this space, are they auditing and monitoring their marketing 02:10:46.340 --> 02:10:47.210 in similar ways? 02:10:48.710 --> 02:10:52.490 Anecdotally, I have heard that some funders have less stringent 02:10:52.490 --> 02:10:57.920 requirements for their ISOs or their brokering companies. I've 02:10:57.920 --> 02:11:03.650 also heard of funders who've arranged it so that even though 02:11:03.650 --> 02:11:07.970 they are working for the funder, they're a 1099 independent 02:11:07.970 --> 02:11:12.440 contractor. So they're basically a bunch of independent ISOs or 02:11:12.440 --> 02:11:17.300 brokers all operating under one sort of roof, and marketing 02:11:17.300 --> 02:11:21.350 themselves as a funding company when it's really a collection of 02:11:21.530 --> 02:11:22.310 ISOs. 02:11:25.040 --> 02:11:28.580 So if we can move on to repayment rests, and some of the 02:11:28.580 --> 02:11:31.190 concerns that we've heard about things like collections of 02:11:31.190 --> 02:11:31.700 judgment. 02:11:33.140 --> 02:11:36.350 Experts have expressed concern that the high costs of MCAs can 02:11:36.350 --> 02:11:39.530 be too much for small businesses to repay. Ami, in your 02:11:39.530 --> 02:11:42.590 experience, can businesses commonly pay off their MCAs? 02:11:45.450 --> 02:11:50.190 Again, I don't have hard data. Our experience is anecdotal from 02:11:50.190 --> 02:11:56.970 the people that call us and enter our shop. And we often see 02:11:57.240 --> 02:12:02.580 experiences where, whether it's a combination of multiple MCAs 02:12:02.610 --> 02:12:06.990 or short-term online loans, and they started with what might be 02:12:06.990 --> 02:12:10.950 classified as the A players, and then they move to the B players, 02:12:11.040 --> 02:12:13.230 and then they move to the C players, and they stack, and 02:12:13.230 --> 02:12:17.970 they stack, and they stack, and they stack. And it's too late. 02:12:18.540 --> 02:12:22.890 So now what we're trying to do is see if we can save their cash 02:12:22.890 --> 02:12:28.380 flow by refinancing all that stuff into getting, whether it's 02:12:28.380 --> 02:12:33.060 an SBA or maybe a five-year term loan, and getting their monthly 02:12:33.060 --> 02:12:39.330 payment down. And oftentimes, it's just an awful feeling. 02:12:39.330 --> 02:12:43.980 Because people will say to us, that was so enticing, I took it 02:12:43.980 --> 02:12:46.290 once, and then I started drinking the Kool-Aid and I 02:12:46.290 --> 02:12:52.290 couldn't stop drinking it. And then there's nothing we can 02:12:52.320 --> 02:12:56.520 possibly do except for encouraging them to try going to 02:12:56.520 --> 02:13:00.660 work out with their different vendors or advance companies, 02:13:00.660 --> 02:13:02.970 and trying to work into arrangements with them. And 02:13:03.420 --> 02:13:09.750 often many of the providers of capital are not as forgiving as 02:13:09.750 --> 02:13:11.580 these guys here describe themselves to be. 02:13:12.900 --> 02:13:17.730 I would just add that an MCA has a cost. There's been this 02:13:17.730 --> 02:13:21.000 assumption that all factoring agreements or MCAs are high 02:13:21.000 --> 02:13:24.600 costs. The cost of capital for the select products we offer is 02:13:24.600 --> 02:13:29.400 comparable to some online lending products. And I just 02:13:29.430 --> 02:13:33.720 want it to be clear that not every MCA is the type of product 02:13:33.720 --> 02:13:36.780 that Ami is describing or is offered by the type of person 02:13:37.140 --> 02:13:38.040 that Ami is describing. 02:13:38.040 --> 02:13:43.440 Again, I mean, just to be clear, in my world, if you look at the 02:13:43.440 --> 02:13:48.810 cost of online capital in terms of cash flow, and you compare it 02:13:48.810 --> 02:13:55.410 to the cost of a five-year note or a 10-year note, the 02:13:55.440 --> 02:13:56.940 differences are draconian. 02:13:58.980 --> 02:14:03.990 I think what I've seen with our merchants and our clients is 02:14:04.170 --> 02:14:08.640 absolutely the ability to repay. The experiences that we've had 02:14:08.640 --> 02:14:12.810 have been successful. Clients have used the funding to 02:14:13.260 --> 02:14:16.890 actually grow their business. I will also mention that it really 02:14:16.890 --> 02:14:20.040 is up to that merchant, once they receive the funds, to put 02:14:20.040 --> 02:14:24.900 it to good use and actually use it for the purpose that they 02:14:24.900 --> 02:14:30.840 said. I think that broker shops like myself, like Ami, we're 02:14:30.840 --> 02:14:34.020 doing a great job at explaining exactly what the product is, the 02:14:34.020 --> 02:14:38.550 total cost, what the total cost is monthly, whether that's paid 02:14:38.550 --> 02:14:41.580 back daily, weekly, or bi-monthly. And there's 02:14:41.580 --> 02:14:46.440 generally a very good understanding. Anecdotally, I've 02:14:46.440 --> 02:14:50.700 heard that there's a-- and spoken to merchants that have 02:14:51.630 --> 02:14:56.100 had experiences where had they have not been able to repay. And 02:14:56.100 --> 02:14:58.620 some of their contracts were not honored, which is why they're 02:14:58.650 --> 02:15:02.280 back online looking for folks to help them out. That has not been 02:15:02.280 --> 02:15:04.020 the majority of my experience. 02:15:04.680 --> 02:15:07.500 So in the interest of time, I want to move ahead to some of 02:15:07.500 --> 02:15:10.560 the collection issues we've seen, and specifically 02:15:10.560 --> 02:15:14.910 confessions of judgment. There have been widely-publicized 02:15:14.910 --> 02:15:17.850 reports about the abusive confessions of judgment to 02:15:17.850 --> 02:15:24.360 collect on MCAs. And I'll start with Scott, if you could explain 02:15:24.360 --> 02:15:27.510 how a confession of judgment works. 02:15:27.780 --> 02:15:31.770 Sure. A confession of judgment is a legal contract that a 02:15:31.800 --> 02:15:36.330 merchant would enter into with a funder, where they would agree 02:15:37.860 --> 02:15:44.880 ahead of the transaction that on certain events of default, that 02:15:44.910 --> 02:15:54.000 the funder would be able to go into court and be able to 02:15:55.980 --> 02:16:02.640 automatically get a judgment filed against the defaulted 02:16:02.640 --> 02:16:05.610 merchant. Does that kind of explain. 02:16:05.850 --> 02:16:09.840 It does. How are they being used to collect on merchant cash 02:16:09.840 --> 02:16:10.380 advances? 02:16:10.480 --> 02:16:16.000 Yeah. And so look, I think the Confessions of Judgment, COJs, 02:16:16.000 --> 02:16:19.030 as they're referred to, have gotten a lot of press lately, 02:16:19.690 --> 02:16:22.330 some of the negative press, that Bloomberg article and so forth. 02:16:23.350 --> 02:16:30.310 We utilize COJs at Everest-- we choose to only utilize them on 02:16:30.310 --> 02:16:35.680 transactions of $100,000 or more, which for us is less than 02:16:35.680 --> 02:16:39.760 3% of the transactions that we're doing. And so it's a 02:16:39.760 --> 02:16:43.000 relatively small percentage of the business. And then in terms 02:16:43.000 --> 02:16:49.990 of the subset percent of that in which we're actually enforcing 02:16:49.990 --> 02:16:56.260 it, it's a de minimis amount. And so I think there's been a 02:16:56.260 --> 02:17:01.540 lot of debate about COJs and whether or not-- COJs as a legal 02:17:01.540 --> 02:17:04.270 contract, legal instrument, have been around for hundreds of 02:17:04.270 --> 02:17:09.400 years. MCAs have been around a relatively short period of time, 02:17:09.400 --> 02:17:13.570 20 years, have really grown dramatically in the last 10. And 02:17:13.570 --> 02:17:19.270 so I think it's a worthwhile debate to discuss about the use 02:17:19.270 --> 02:17:23.680 of COJs with a merchant cash advance and what's that right 02:17:23.680 --> 02:17:29.500 balance. Some of the practices that were highlighted in the 02:17:29.800 --> 02:17:33.250 Bloomberg articles, and some of the negative press that's been 02:17:33.610 --> 02:17:39.790 about the use of COJs, I think, have been not representative of 02:17:39.790 --> 02:17:43.570 how at least companies like Everest, how we use them, 02:17:44.230 --> 02:17:51.640 relatively sparingly and responsibly. And so I think it's 02:17:52.300 --> 02:17:56.290 definitely worthy of debate. And looking at-- and I think there's 02:17:56.770 --> 02:18:00.640 some discussion in New York about whether or not to ban the 02:18:00.640 --> 02:18:08.950 use of COJs. Or could there be a different approach like some 02:18:08.950 --> 02:18:12.400 type of guardrails approach where you'd have a minimum. I 02:18:12.400 --> 02:18:15.940 think Governor Cuomo talked about a $250,000 minimum. I've 02:18:15.940 --> 02:18:21.790 seen discussions about a $50,000 minimum. And so I think there's 02:18:22.360 --> 02:18:31.210 this debate that can be had about should a COJ be utilized 02:18:31.240 --> 02:18:40.840 in the construct of an MCA. But again, I think don't want to 02:18:41.020 --> 02:18:46.030 throw the baby out with the bathwater. And if it was decided 02:18:46.030 --> 02:18:50.320 that you were to ban the use of COJs with MCAs, it wouldn't 02:18:50.320 --> 02:18:54.100 really impact our business dramatically, not very much at 02:18:54.100 --> 02:18:59.680 all. We would, in certain instances, not advance capital, 02:18:59.980 --> 02:19:03.820 larger advances. And so you just need to do a cost-benefit 02:19:03.820 --> 02:19:08.740 analysis as to whether or not that made sense. I know Kate's 02:19:08.770 --> 02:19:09.490 talked about [INAUDIBLE]. 02:19:09.520 --> 02:19:10.090 Yeah. 02:19:10.660 --> 02:19:14.590 Kate, in your answer, do you mind, for folks in the audience 02:19:14.590 --> 02:19:18.520 who may be unfamiliar with reporting on the way confessions 02:19:18.520 --> 02:19:21.520 of judgment have been used, can you talk about that a little 02:19:21.520 --> 02:19:21.820 bit.? 02:19:23.610 --> 02:19:29.250 Well, I can't speak to press reports about the different ways 02:19:29.250 --> 02:19:31.950 that confessions of judgment have been used, because I'm not 02:19:31.950 --> 02:19:36.570 personally familiar with that. I only know what I've read. I 02:19:36.570 --> 02:19:39.330 would like to talk about confessions of judgment. And 02:19:39.450 --> 02:19:41.850 it's helpful to look at the Federal Trade Commission's 02:19:41.850 --> 02:19:44.670 decision in the '80s, when the FTC banned the use of 02:19:44.670 --> 02:19:47.100 confessions of judgment in connection with consumer 02:19:47.100 --> 02:19:50.970 transactions, but determined not to ban the use of confessions of 02:19:50.970 --> 02:19:54.450 judgment in commercial transactions. In the FTC's 02:19:54.450 --> 02:19:57.450 statement of basis and purpose for the Credit Practices Rule, 02:19:57.660 --> 02:20:00.720 the FTC stated that confessions of judgment were unfair to 02:20:00.720 --> 02:20:03.480 consumers, in part because consumers cannot reasonably 02:20:03.510 --> 02:20:08.340 avoid signing a contract that contained a COJ. This is not the 02:20:08.340 --> 02:20:12.660 case in commercial finance transactions because, typically, 02:20:12.660 --> 02:20:15.990 a small business is represented by a broker who receives 02:20:15.990 --> 02:20:18.990 multiple offers from competing financing sources. We've heard 02:20:18.990 --> 02:20:22.830 about that type of competition today. With a consumer credit 02:20:22.830 --> 02:20:26.220 contract, typically a consumer is presented with one "take it 02:20:26.220 --> 02:20:30.750 or leave it" offer. In addition, the FTC concluded that consumers 02:20:30.750 --> 02:20:34.500 were not reasonably able to avoid default. Because 02:20:34.500 --> 02:20:38.310 frequently, in consumer credit, a default is caused by something 02:20:38.310 --> 02:20:40.710 that's outside the control of the consumer. For example, they 02:20:40.710 --> 02:20:43.800 lose their job, they get sick, and things that they can't 02:20:43.800 --> 02:20:47.940 anticipate and can't control. In the context of a purchase of 02:20:47.970 --> 02:20:50.790 future receipts, a business always can control whether there 02:20:50.790 --> 02:20:54.570 is an event of default. Because again, the obligation to repay 02:20:54.690 --> 02:20:58.950 is tied to the business's actual revenue. So events of default 02:20:58.980 --> 02:21:02.280 are only specific instances such as diverting funds into 02:21:02.280 --> 02:21:05.730 different bank accounts. So there is a distinction between 02:21:05.730 --> 02:21:07.920 the two types of transactions. 02:21:09.120 --> 02:21:13.470 And to your question, I would add that a lot of the abuses of 02:21:13.470 --> 02:21:17.010 confessions of judgment or their use were driven by quirks in New 02:21:17.010 --> 02:21:19.980 York law that I know that the state of New York is taking a 02:21:19.980 --> 02:21:26.460 look at. The way that confessions are entered in by 02:21:26.460 --> 02:21:29.400 the New York courts is a little bit different than it is in 02:21:29.400 --> 02:21:35.100 California. And there are fewer protections to ensure that there 02:21:35.130 --> 02:21:42.600 are protections that prior to entering into them. For example, 02:21:42.600 --> 02:21:47.940 California requires a wet-signed or original copy of the 02:21:47.940 --> 02:21:52.110 confession of judgment. New York will take a fax version of it. 02:21:53.580 --> 02:21:55.950 I can tell you one of the ways that we've handled it, because 02:21:55.950 --> 02:22:01.050 we're presenting multiple offers to a merchant often. We are 02:22:01.080 --> 02:22:03.840 explaining what it is. We actually give them a document 02:22:03.840 --> 02:22:06.600 that has a definition of what it is so that they're comfortable 02:22:06.600 --> 02:22:11.940 and they understand it. I can say that 90% to 95% of the 02:22:11.940 --> 02:22:15.990 financing that we are providing through brokerage to our clients 02:22:15.990 --> 02:22:21.750 do not have them. In times where there has been high risk, we 02:22:21.750 --> 02:22:25.530 have advised the merchant we think that this may be an option 02:22:25.530 --> 02:22:29.940 for you. This funding does have a COJ. Here's what it is. You 02:22:29.940 --> 02:22:32.730 have to be very comfortable with it before you take it, and then 02:22:32.730 --> 02:22:34.110 ultimately give them the option. 02:22:35.910 --> 02:22:36.780 Ami, do you want to jump in. 02:22:37.170 --> 02:22:38.850 I don't think I know enough about this. 02:22:39.650 --> 02:22:45.110 So Jesse, I want to get a little bit more into how the industry 02:22:45.110 --> 02:22:50.090 has responded to the use of confessions of judgment. The 02:22:50.090 --> 02:22:53.000 Small Business Finance Association I know is 02:22:53.000 --> 02:22:56.930 considering codes of conduct relating to the confessions of 02:22:56.930 --> 02:22:58.310 judgment. Can you talk more about that. 02:23:00.590 --> 02:23:04.400 To be clear, Kapitus does not require as a condition to 02:23:04.400 --> 02:23:07.940 extending financing that a merchant enter into a confession 02:23:07.940 --> 02:23:11.720 of judgment, no matter how large the transaction. We have just 02:23:11.720 --> 02:23:13.880 made a strategic decision to go in another direction. We 02:23:13.880 --> 02:23:16.310 understand that others believe that it will improve your 02:23:16.310 --> 02:23:19.070 default rates. That's inconsistent with the data that 02:23:19.070 --> 02:23:25.700 we've found. Given that these are primarily used by-- in our 02:23:25.700 --> 02:23:30.320 anecdotal experience, these are used by companies that may be 02:23:30.320 --> 02:23:33.020 less scrupulous, maybe engaging in some of the practices that 02:23:33.020 --> 02:23:43.400 Ami has just described. The SPFA, after we saw the extent of 02:23:43.400 --> 02:23:46.160 the use of confessions of judgment by those individuals, 02:23:46.550 --> 02:23:51.050 we, as a trade association, decided to include in our code 02:23:51.050 --> 02:23:55.790 of conduct an explicit ban on the use of a confession of 02:23:55.790 --> 02:23:58.340 judgment if you're a member of the Small Business Finance 02:23:58.340 --> 02:24:02.690 Association. I would add that, part of the reason we don't 02:24:02.690 --> 02:24:06.230 include them is we, in our underwriting process going back 02:24:06.230 --> 02:24:10.010 to our underwriting, look very carefully at the amount that the 02:24:10.010 --> 02:24:14.870 merchant can afford to repay. There are some companies that 02:24:14.870 --> 02:24:17.600 may not be as careful in their underwriting, and use more 02:24:17.600 --> 02:24:22.280 aggressive collection tactics as a means of supplementing. And 02:24:22.280 --> 02:24:26.840 it's inconsistent with how Scott's company uses them, but 02:24:26.840 --> 02:24:28.520 there are some people out there who will do that. 02:24:29.720 --> 02:24:32.900 I would just comment, in terms of the instances where we're 02:24:32.900 --> 02:24:36.650 actually trying to utilize or enforce a confession of 02:24:36.650 --> 02:24:42.590 judgment, it's almost entirely when we believe the merchant's 02:24:42.620 --> 02:24:49.730 committed fraud. So not in a situation where their business 02:24:49.730 --> 02:24:55.610 is slowed down or there's some type of payment issue tied to 02:24:55.610 --> 02:24:58.940 the performance of the business, but in instances where the 02:24:58.970 --> 02:25:03.950 merchants have diverted funds into a different account or have 02:25:04.550 --> 02:25:08.930 actually committed fraud, and again, on large transactions. So 02:25:08.930 --> 02:25:11.840 for us, again, we're only utilizing them on transactions 02:25:11.840 --> 02:25:17.990 of $100,000 or more. And so I think a lot of the behavior 02:25:17.990 --> 02:25:23.240 highlighted in the press as of late, if you were to put a cap 02:25:23.240 --> 02:25:30.200 of $100,000, or $150,000 I think you would clean up and take care 02:25:30.200 --> 02:25:34.130 of a lot of the bad behavior that was highlighted in some of 02:25:34.130 --> 02:25:35.540 the recent press articles. 02:25:36.140 --> 02:25:39.080 And I would add that New York has recently introduced a bill 02:25:39.080 --> 02:25:43.220 that would prohibit taking a confession of judgment against a 02:25:43.220 --> 02:25:46.280 non-resident. So essentially the clerks in New York would not be 02:25:46.310 --> 02:25:50.960 able to enter a confession against a non-resident. So that 02:25:51.680 --> 02:25:55.580 is also, I think, a step toward reforming some of the unique 02:25:55.580 --> 02:25:59.540 aspects of New York law that allowed some of the practices 02:25:59.540 --> 02:26:01.910 that were reported to develop. 02:26:02.630 --> 02:26:07.250 So we're closing in on the end of this session. And I want to 02:26:07.250 --> 02:26:09.980 transition to the next session, which is going to get more into 02:26:10.940 --> 02:26:14.930 the legal landscape of small business financing. But just to 02:26:14.930 --> 02:26:20.000 touch on it briefly here, as you all know, while the FTC Act 02:26:20.000 --> 02:26:22.670 applies to the marketing and provision of merchant cash 02:26:22.670 --> 02:26:27.200 advances, some courts have found that other laws may not, for 02:26:27.200 --> 02:26:31.880 example, to the extent that MCAs are held not to be loans. State 02:26:31.880 --> 02:26:35.300 usury laws or licensing requirements typically wouldn't 02:26:35.300 --> 02:26:38.630 apply. Kate, is that something you could speak to? What are the 02:26:38.630 --> 02:26:42.320 legal ramifications of MCAs not being considered loans by 02:26:42.320 --> 02:26:43.070 certain courts. 02:26:43.100 --> 02:26:48.830 Sure. You're right that a properly-constructed merchant 02:26:48.830 --> 02:26:51.980 cash advance is not a loan, it's a purchase and sale in courts, 02:26:51.980 --> 02:26:55.640 and particularly in New York. But there's a growing body of 02:26:55.640 --> 02:26:57.860 law all over the country to recognize the distinction 02:26:57.860 --> 02:27:02.150 between a purchase of future receivables and a loan. There 02:27:02.150 --> 02:27:06.110 are a lot of consumer protection laws that do apply to these 02:27:06.110 --> 02:27:09.020 transactions, of course, as you mentioned, the FTC is a powerful 02:27:09.020 --> 02:27:13.460 authority to prevent unfair or deceptive acts and practices. At 02:27:13.460 --> 02:27:15.920 the federal level, there's the Fair Credit Reporting Act and 02:27:15.920 --> 02:27:20.600 Regulation V. This protects individuals and requires 02:27:20.990 --> 02:27:23.900 permissible purpose to pull up a consumer credit report for a 02:27:23.900 --> 02:27:28.760 sole proprietor or an individual guarantor of a business. Also 02:27:28.760 --> 02:27:35.480 the FCRA requires a user to provide notice to an individual 02:27:35.480 --> 02:27:38.960 if it takes an adverse action on the basis of information 02:27:38.960 --> 02:27:42.380 contained in a consumer credit report. The Servicemembers Civil 02:27:42.380 --> 02:27:45.230 Relief Act applies to sole proprietors and individual 02:27:45.230 --> 02:27:48.260 guarantors. The Telephone Consumer Protection Act and the 02:27:48.290 --> 02:27:52.280 CAN-SPAM Act apply. For loans, the Equal Credit Opportunity Act 02:27:52.280 --> 02:27:57.410 applies. And states are starting to regulate this industry. As 02:27:57.410 --> 02:28:00.110 you said, it's a distinct industry from business lending. 02:28:00.380 --> 02:28:03.980 California recently passed a law requiring merchant cash advance 02:28:03.980 --> 02:28:07.640 transactions, factoring, and loans to provide certain 02:28:07.640 --> 02:28:11.570 disclosures on their contracts, and other states are considering 02:28:11.570 --> 02:28:16.010 similar legislation. So I would expect to see state laws 02:28:16.010 --> 02:28:18.890 continue in this trend, particularly in disclosure laws. 02:28:18.000 --> 02:28:23.850 And I would only add that Kapitus is committed to 02:28:23.850 --> 02:28:26.340 complying with the laws in all 50 states and the District of 02:28:26.340 --> 02:28:30.570 Columbia, where we do business. And we structure our financing 02:28:30.570 --> 02:28:33.120 products to comply with the laws in all of those states. I know 02:28:33.120 --> 02:28:36.330 that there is an alternate regulatory model that allows a 02:28:36.330 --> 02:28:40.350 partnership with a bank. The bank will originate the loan, 02:28:40.380 --> 02:28:42.510 which will allow the exploitation of that interest 02:28:42.510 --> 02:28:49.440 rate as a way of avoiding the caps on lending that are imposed 02:28:49.440 --> 02:28:53.520 under certain state law. So I don't think that a structuring 02:28:53.520 --> 02:28:57.180 the transactions of purchase and sale transaction is a different 02:28:57.180 --> 02:29:00.450 legal way of getting to the same result, which is to provide 02:29:01.470 --> 02:29:05.610 capital at the appropriate cost to address the higher-risk 02:29:05.610 --> 02:29:08.460 nature of small businesses. Because while there are many 02:29:08.460 --> 02:29:11.250 success stories in small business lending, small 02:29:11.250 --> 02:29:14.610 businesses do go out of-- not everybody succeeds. Not 02:29:14.610 --> 02:29:22.950 everybody becomes a tech CEO. Or to use another example, the 02:29:24.420 --> 02:29:31.440 individual who ended up with-the Caspers. Not everybody who 02:29:31.440 --> 02:29:33.810 succeeds. A lot of them fail. And you have to price credit 02:29:33.810 --> 02:29:37.440 appropriate to the risk. And I think structuring the 02:29:37.440 --> 02:29:40.020 transaction as a purchase and sale transaction of receivables 02:29:40.020 --> 02:29:44.130 is the same way as getting to what a bank partnership does. 02:29:44.880 --> 02:29:49.620 Right. Well, we are actually heading for a break. So thank 02:29:49.620 --> 02:29:52.110 you all for participating. This has been a great panel. And 02:29:52.290 --> 02:29:54.900 we'll break now before the third panel. 02:29:55.020 --> 02:29:56.340 Thanks for having us. [APPLAUSE] 02:29:56.000 --> 02:30:10.820 If everyone can go ahead and get seated, I think we'll kick off 02:30:10.820 --> 02:30:12.470 panel 3 in just a moment. 02:30:20.940 --> 02:30:24.750 Great, let me introduce myself first. I'm Sandhya Brown. I also 02:30:24.750 --> 02:30:27.360 go by Sandy. I'm an assistant director in the Division of 02:30:27.360 --> 02:30:30.270 Financial Practices. I'm going to be one of the moderators for 02:30:30.270 --> 02:30:34.320 panel 3. I'll go and introduce my co-moderator, my DFP 02:30:34.320 --> 02:30:39.150 colleague, Evan Zullow. So we're excited for this third and last 02:30:39.150 --> 02:30:42.210 panel. We're going to be covering consumer protection 02:30:42.210 --> 02:30:46.080 risks in the small business financing space. Having heard 02:30:46.080 --> 02:30:49.860 from the first two panels generally about the multitude of 02:30:49.860 --> 02:30:52.320 products that are available to small businesses who have 02:30:52.320 --> 02:30:55.710 financing needs, and then hearing sort of a specific deep 02:30:55.710 --> 02:30:59.520 dive into one particular product, merchant cash advances, 02:30:59.910 --> 02:31:04.650 hopefully now is our opportunity to talk about specific risks to 02:31:04.920 --> 02:31:08.010 the small business owners who are on the hunt for financing. 02:31:08.250 --> 02:31:11.190 So some of the topics that I'm hoping we'll be able to cover in 02:31:11.190 --> 02:31:14.640 this next 75 minutes include whether or not small business 02:31:14.640 --> 02:31:18.000 borrowers are getting the information that they need to 02:31:18.000 --> 02:31:22.530 get products that suit their needs, the legal landscape and 02:31:22.740 --> 02:31:28.500 self-regulatory efforts in this space, concerns about brokering 02:31:28.500 --> 02:31:33.690 practices, or privacy and data security concerns, and lastly 02:31:33.690 --> 02:31:37.530 we'll also hit upon the efforts that have been undertaken to 02:31:37.530 --> 02:31:41.850 educate small business borrowers. So before we get into 02:31:41.850 --> 02:31:47.010 our discussion, let me briefly introduce our panelists. I will 02:31:47.010 --> 02:31:50.730 let them also speak to their own bios in the context of answering 02:31:50.730 --> 02:31:53.700 certain questions. But in the interest of getting into the 02:31:53.700 --> 02:31:57.600 substance, I will just go ahead and give you names, and titles, 02:31:57.600 --> 02:32:01.920 and organizations. So immediately to our left is 02:32:01.920 --> 02:32:05.610 Ky-Nam Miller. He's program director of the California 02:32:05.610 --> 02:32:10.650 Reinvestment Coalition. Next to him is Bernardo Martinez. He's 02:32:10.650 --> 02:32:15.930 US managing director of Funding Circle. Next to him is Barbara 02:32:15.930 --> 02:32:20.100 Lipman. She's project manager in the division of consumer and 02:32:20.100 --> 02:32:24.240 community affairs with the Federal Reserve Board. Next to 02:32:24.240 --> 02:32:28.920 Barbara is John Arensmeyer. He's founder and CEO of Small 02:32:28.920 --> 02:32:34.560 Business Majority. And next to Bernardo is Christin Spradley. 02:32:34.650 --> 02:32:38.910 She's head of policy and a senior associate general counsel 02:32:38.910 --> 02:32:43.980 with OnDeck. And lastly, at the end is Sheri McConville she's a 02:32:43.980 --> 02:32:47.070 supervisory program analyst with the Small Business 02:32:47.070 --> 02:32:51.150 Administration. OK, so and thank you to our panelists for 02:32:51.150 --> 02:32:55.830 participating today. So we'll get right into it. And just as a 02:32:55.830 --> 02:32:59.520 matter of logistics, to the extent any of our panelists 02:32:59.520 --> 02:33:03.540 wants to jump in on a question, just kind of raise your finger, 02:33:03.600 --> 02:33:06.300 and we'll note that is a signal that you want to be called on. 02:33:06.870 --> 02:33:11.850 OK, so let's start by exploring what, if any, key information is 02:33:11.850 --> 02:33:14.850 made available to small business owners when they're shopping for 02:33:14.850 --> 02:33:18.180 financial products. So what I'd like to hear the panelists talk 02:33:18.180 --> 02:33:21.690 about specifically is, in the current marketplace, i.e. as 02:33:21.690 --> 02:33:25.890 things stand today, what information are small business 02:33:25.890 --> 02:33:29.520 lenders typically providing about their products? Are they 02:33:29.520 --> 02:33:33.390 telling small business consumers about interest rates, costs, and 02:33:33.390 --> 02:33:37.500 other key terms? And is there any uniformity in the kind of 02:33:37.500 --> 02:33:40.290 information that's coming to small business borrowers? 02:33:43.290 --> 02:33:46.710 I mean, I think, in generally speaking terms, what you see in 02:33:46.710 --> 02:33:50.490 the marketplace is that there is not really a good uniformity in 02:33:50.490 --> 02:33:52.140 the different products that are in the marketplace. And 02:33:52.140 --> 02:33:55.710 therefore there's different elements that people are showing 02:33:55.710 --> 02:33:59.070 up. And actually what it creates is actually some confusion with 02:33:59.070 --> 02:34:03.600 the small business owners when they're looking for products. So 02:34:03.840 --> 02:34:06.570 in our case specifically, we are pretty transparent. We have been 02:34:06.570 --> 02:34:09.630 a leading an effort on trying to create responsible business 02:34:09.900 --> 02:34:14.160 terms for small business owners. So we show APRs, the terms, the 02:34:14.160 --> 02:34:17.850 monthly payments that they have. But there is definitely an 02:34:17.850 --> 02:34:22.350 opportunity for the industry to create a broader coalition to 02:34:22.350 --> 02:34:25.470 create uniformity so people can compare the different products 02:34:25.590 --> 02:34:26.520 in a similar way. 02:34:27.630 --> 02:34:28.950 Great, Barbara. 02:34:29.710 --> 02:34:32.890 Hi. And I have to start-- I'm sorry-- with the disclaimer that 02:34:32.890 --> 02:34:37.060 the views here are my own and not necessarily those of the 02:34:37.060 --> 02:34:40.540 Board of Governors of the Federal Reserve System. So I'd 02:34:40.540 --> 02:34:43.570 like to try to tackle that question from the point of view 02:34:43.600 --> 02:34:48.940 of small businesses that we've been contacting through a series 02:34:48.940 --> 02:34:53.320 of online focus groups. So as you know, small business owners 02:34:53.320 --> 02:34:56.380 are notoriously difficult to reach. They're busy running 02:34:56.380 --> 02:34:59.980 their businesses. So we thought the best way to get to them was 02:34:59.980 --> 02:35:04.660 through an online format. And we've been contacting small 02:35:04.660 --> 02:35:09.130 businesses with fewer than 20 employees and less than $2 02:35:09.130 --> 02:35:11.980 million in revenues, and generally talking to the 02:35:11.980 --> 02:35:16.420 financial decision-makers. The great thing about this format is 02:35:16.420 --> 02:35:20.020 that we're able to have the small business owners go out and 02:35:20.020 --> 02:35:24.340 pretend to shop for credit online lenders. And we're also 02:35:24.340 --> 02:35:29.260 able to have them evaluate mock products based on real products 02:35:29.290 --> 02:35:32.950 out in the marketplace. So when we asked them to pretend to 02:35:32.950 --> 02:35:37.960 shop, they told us what was on their shopping list, and it was 02:35:37.960 --> 02:35:41.410 of course finding out about costs and in terms, and what the 02:35:41.410 --> 02:35:46.510 application process would be like, and what information they 02:35:46.510 --> 02:35:50.410 needed to supply, and how long it would take for a decision. 02:35:51.670 --> 02:35:54.310 But what they were telling us is that it's very difficult 02:35:54.310 --> 02:35:57.700 sometimes, depending on the particular lender, to find even 02:35:57.700 --> 02:36:01.690 some basic information. So of course there's wide variation, 02:36:01.690 --> 02:36:04.810 and that speaks to the diversity of products that are out there 02:36:04.810 --> 02:36:07.840 in the marketplace, which I think we agree is generally a 02:36:07.840 --> 02:36:13.060 good thing. But some of the Lenders are very explicit about 02:36:13.060 --> 02:36:17.170 their costs and fees and what's involved. Others however, 02:36:17.170 --> 02:36:21.640 require a visitor to the website to enter personal or business 02:36:21.640 --> 02:36:24.850 information before they find out even the basics about the 02:36:24.850 --> 02:36:29.650 products. So that's something that's problematic for them. On 02:36:29.650 --> 02:36:33.370 the other hand, finding out how quickly they'll get a decision, 02:36:34.030 --> 02:36:39.310 that's something that's usually touted upfront in the website. 02:36:39.310 --> 02:36:43.660 So it really varies depending on the lender, the type of product 02:36:43.660 --> 02:36:47.050 offered, and the type of information that the small 02:36:47.050 --> 02:36:48.610 businesses are looking for. 02:36:50.830 --> 02:36:52.120 Christin or John? 02:36:52.270 --> 02:36:56.050 Yeah. I would second everything Barbara said. There's a wide 02:36:56.050 --> 02:36:59.710 variety of products out there. And at the end of the day-- 02:36:59.710 --> 02:37:02.920 well, first I want to make the point that we hear, all the 02:37:02.920 --> 02:37:07.000 time, gee, why do we need to worry about this, because these 02:37:07.000 --> 02:37:09.610 are business people, and they're sophisticated, it's not the same 02:37:09.610 --> 02:37:14.020 thing as the consumer. The reality is that, unless a 02:37:14.020 --> 02:37:18.190 business is large enough to have controller or a head of 02:37:18.190 --> 02:37:22.990 accounting, they are no more sophisticated than the average 02:37:23.020 --> 02:37:26.140 consumer. They may know about their business, they may know 02:37:26.140 --> 02:37:28.510 about dry cleaning, they may know about running a restaurant, 02:37:28.510 --> 02:37:31.630 they may know about graphic design, whatever they're doing. 02:37:31.870 --> 02:37:34.270 They are not any more sophisticated than the average 02:37:34.270 --> 02:37:39.940 person. So it's very confusing. They don't get consistent 02:37:39.940 --> 02:37:45.220 information. There aren't standards out there for them to 02:37:45.220 --> 02:37:51.370 compare. And even this question of whether a merchant cash 02:37:51.370 --> 02:37:53.170 advance is a loan or not, I mean, to the average small 02:37:53.170 --> 02:37:55.930 business owner, everything is a loan. They're borrowing money in 02:37:55.930 --> 02:38:00.070 some form. So these kind of legal distinctions are fairly 02:38:00.100 --> 02:38:05.290 meaningless to them. And right now, it is pretty much the Wild 02:38:05.290 --> 02:38:08.980 West in terms of any information they can get. And obviously 02:38:09.010 --> 02:38:12.310 we'll talk more about this as we go forward. But there's a need 02:38:12.310 --> 02:38:14.500 for consistency and transparency. 02:38:16.510 --> 02:38:20.320 Did Christin Sheri want to chime in? I apologize, I can't see you 02:38:20.320 --> 02:38:23.290 clearly, so I can't tell when you're raising your hand. 02:38:23.710 --> 02:38:27.160 No, I mean, I think not much to add that hasn't already been 02:38:27.160 --> 02:38:32.260 said. I mean, I think that it in addition to kind of some of the 02:38:32.260 --> 02:38:36.130 efforts that we've seen to improve the transparency around 02:38:36.520 --> 02:38:40.510 disclosure of pricing and cost in terms, I think that Barbara's 02:38:40.510 --> 02:38:44.590 report in particular highlighted that's not the entire story. You 02:38:44.590 --> 02:38:47.830 also need to be thinking about when is that information made 02:38:47.830 --> 02:38:51.490 available, how clear are you on the minimum qualifications for 02:38:51.490 --> 02:38:54.220 your loan, when are you communicating that information, 02:38:54.340 --> 02:38:58.960 are you able to provide ranges of prices or some of the terms 02:38:58.960 --> 02:39:01.870 on your website and in all of your marketing materials? So I 02:39:01.870 --> 02:39:04.960 think it's not just kind of, once you have a specific offer 02:39:04.960 --> 02:39:08.260 in hand, what are the terms of your offer, but also making sure 02:39:08.260 --> 02:39:11.080 that businesses are able to access some of that information 02:39:11.110 --> 02:39:13.690 earlier in the process. I think that's an important piece of it, 02:39:13.690 --> 02:39:15.760 and it's certainly something that we've heard from customers 02:39:15.820 --> 02:39:16.270 a lot. 02:39:16.630 --> 02:39:19.240 I'd love for our panel to talk a little bit more specifically on 02:39:19.240 --> 02:39:23.500 that point Christin, about when business consumers are getting 02:39:23.500 --> 02:39:26.680 the kind of information they might need in order to shop 02:39:26.710 --> 02:39:31.330 between products. I've heard from Barbara and you mentioning 02:39:31.330 --> 02:39:34.510 the importance of being able to do that up front. Is that not 02:39:34.510 --> 02:39:35.290 happening now? 02:39:36.820 --> 02:39:40.000 I think that there is a tension between what are you able to 02:39:40.000 --> 02:39:43.720 provide upfront, prior to underwriting, and what do you 02:39:43.720 --> 02:39:46.150 need to have gone through sort of a full underwriting process 02:39:46.150 --> 02:39:49.420 to be able to provide. I think that there have been some good 02:39:49.420 --> 02:39:52.210 efforts in the industry to kind of try and pull the information 02:39:52.210 --> 02:39:56.050 forward in the process. But I don't know that everybody has 02:39:56.050 --> 02:39:59.500 gotten there yet. I certainly know that, just from the 02:39:59.500 --> 02:40:02.290 perspective of somebody, if I'm looking for credit, I want to 02:40:02.290 --> 02:40:05.920 get a sense of at least what the profile or the bucket is of the 02:40:05.920 --> 02:40:10.510 types of ranges I could expect. But then the challenge for our 02:40:10.510 --> 02:40:14.290 company that's providing it is you also want to avoid, at all 02:40:14.290 --> 02:40:16.810 costs, kind of the bait-and-switch of providing 02:40:16.810 --> 02:40:20.470 them with a range, and then having them not fall within that 02:40:20.470 --> 02:40:24.940 range. And I think that tension, what can you provide prior to 02:40:24.940 --> 02:40:28.210 underwriting, it's probably one of the biggest pain points for 02:40:28.210 --> 02:40:29.590 the industry and for customers. 02:40:30.460 --> 02:40:31.840 Anyone else have thoughts? Barbara? 02:40:32.080 --> 02:40:37.390 Yeah, I'd just like to add that, generally, to John's point, the 02:40:38.290 --> 02:40:41.410 smallest small business owners are somewhat consumer-like in 02:40:41.410 --> 02:40:45.790 their approach to financing. And some of the products are 02:40:45.790 --> 02:40:50.860 actually different than typical consumer products. And one of 02:40:50.860 --> 02:40:55.660 the areas that they find confusing is the repayment 02:40:55.720 --> 02:40:59.620 terms. So for instance, a number of products are structured such 02:40:59.620 --> 02:41:03.520 that there's a total amount that you need to repay, and you owe 02:41:03.520 --> 02:41:06.700 that amount whether you pay it in a week, or a month, or a 02:41:06.700 --> 02:41:11.290 year. So when we showed a sample product like that to our online 02:41:11.290 --> 02:41:16.270 focus group and said, OK, you pay out of, say, daily sales, 02:41:16.300 --> 02:41:20.740 what's the impact of paying more quickly if your sales are 02:41:20.740 --> 02:41:24.850 higher. And generally the answer was, well, I'm going to save 02:41:24.850 --> 02:41:29.740 money. But that's not how the product is structured. So I 02:41:29.740 --> 02:41:33.910 think information like that is important to convey to small 02:41:33.910 --> 02:41:36.430 business owners, or at least they're telling us that's the 02:41:36.430 --> 02:41:38.380 sort of thing they need to know up front. 02:41:39.490 --> 02:41:41.290 Ky-Nam, I think you had a point. 02:41:41.740 --> 02:41:46.240 Yeah, I'll just piggyback on Barbara's comments about-- the 02:41:46.480 --> 02:41:50.620 products are different, but the consumer is the same in many 02:41:50.620 --> 02:41:54.820 cases. The California Reinvestment Coalition, we're a 02:41:54.820 --> 02:41:58.270 300-member org. And a lot of our folks, our members on the 02:41:58.270 --> 02:42:01.450 ground, are entrepreneurs of color, single proprietors 02:42:01.450 --> 02:42:04.960 without employees. And they're going out into this market with 02:42:04.960 --> 02:42:08.950 the same sophistication-- which is to say, not a lot-- as they'd 02:42:08.950 --> 02:42:12.550 have if they're seeking a regular consumer personal loan. 02:42:13.300 --> 02:42:17.170 And the lens that they look at this world through is, well, 02:42:17.170 --> 02:42:22.300 what's the interest rate? And they might be aware of APR, but 02:42:22.300 --> 02:42:25.330 that's not what's always disclosed to them in this 02:42:25.390 --> 02:42:29.170 ecosystem we're describing this morning. It's not even a 02:42:29.170 --> 02:42:33.610 question of kind of apples to apples or apples to oranges. 02:42:33.610 --> 02:42:36.130 There's all these different gradations of apples. And they 02:42:36.130 --> 02:42:39.370 might not understand a factor rate or a simple interest rate 02:42:39.520 --> 02:42:42.280 is not the same apple that what they see in the personal world. 02:42:42.280 --> 02:42:45.700 So you have this incongruity between the protections that 02:42:45.700 --> 02:42:49.330 we've put in place for regular Joe consumers and those same 02:42:49.330 --> 02:42:51.910 folks who are turning around and get trying to get cash flow for 02:42:51.910 --> 02:42:56.620 their business. So I think, from the consumer perspective, that's 02:42:56.650 --> 02:43:01.120 the big challenge. And it's an acute challenge on the emergent 02:43:01.120 --> 02:43:05.200 majority of Americans that we see in California, who are 02:43:05.230 --> 02:43:09.610 majority of color, many limited English proficient, coming from 02:43:09.610 --> 02:43:14.290 a diversity of backgrounds. And so the system we have in place 02:43:14.290 --> 02:43:17.260 federally is not protecting those folks adequately. 02:43:18.640 --> 02:43:19.000 John. 02:43:19.300 --> 02:43:22.900 Yeah. I think, fairly simply, there is a question of math 02:43:22.900 --> 02:43:27.790 also. I mean, most people when you say an interest rate, you 02:43:27.790 --> 02:43:32.710 assume annual, generally assume APR if you're comparing it to 02:43:32.710 --> 02:43:35.560 other kinds of loans you've gotten. And so when you start 02:43:35.560 --> 02:43:39.850 tossing around rates that are monthly or different periods of 02:43:39.850 --> 02:43:44.530 time, it's very difficult for consumers and of course the 02:43:44.530 --> 02:43:47.260 average small business owner to understand that that's not an 02:43:47.260 --> 02:43:51.730 annual rate. And if they hear 10%, and it's a month, or even 02:43:51.730 --> 02:43:55.420 two months, it's not the same thing as an annual 10% rate. And 02:43:56.380 --> 02:44:02.500 there's a lack of transparency as to exactly what the rate is. 02:44:02.500 --> 02:44:05.650 Now, it may be that it's perfectly OK for the business to 02:44:05.650 --> 02:44:09.640 take a short-term loan for what essentially would be a pretty 02:44:09.640 --> 02:44:13.270 high APR. So we're not saying that's not the case. But they 02:44:13.270 --> 02:44:16.600 don't even begin to understand the difference between that rate 02:44:16.600 --> 02:44:19.600 and-- they might see that same number connected to an annual 02:44:19.600 --> 02:44:21.850 product and not understand the difference. 02:44:22.960 --> 02:44:23.440 Bernardo. 02:44:23.500 --> 02:44:25.930 I think one point that is important I've heard here. And 02:44:25.930 --> 02:44:27.850 we've talked about small business owners are not 02:44:27.850 --> 02:44:29.440 sophisticated. I would say, actually, they are 02:44:29.440 --> 02:44:32.020 sophisticated. I think the question is they don't really 02:44:32.020 --> 02:44:35.620 have time. They're hiring people, they're running their 02:44:35.620 --> 02:44:39.250 show, they're trying to do multiple things. They lack time. 02:44:40.030 --> 02:44:42.520 When you look at small business owners' surveys, what they 02:44:42.520 --> 02:44:46.840 really lack is time. And what is not really in the industry right 02:44:46.840 --> 02:44:49.990 now is a clear uniformity process that can actually 02:44:49.990 --> 02:44:52.690 quickly compare products. And that's what I think we're 02:44:52.690 --> 02:44:55.750 advocating. I think us and Funding Circle, we believe that 02:44:55.750 --> 02:44:58.360 uniformity will allow the customer and the small business 02:44:58.360 --> 02:45:01.690 owner to really quickly assess what is a right choice of 02:45:01.690 --> 02:45:04.120 product based on what the needs they're trying to solve. If 02:45:04.120 --> 02:45:07.390 they're trying to do a quick financing because they're going 02:45:07.390 --> 02:45:10.540 to buy an inventory, maybe a shortterm loan makes total 02:45:10.540 --> 02:45:14.410 sense. But if you're going to do an expansion of your house or 02:45:14.410 --> 02:45:18.790 the property because you're growing too much, maybe a 02:45:18.790 --> 02:45:21.850 long-term loan with an installment monthly payment 02:45:21.850 --> 02:45:24.730 maybe is the right choice for you. So I think that's the 02:45:24.730 --> 02:45:28.090 clarity that I think we, as an industry, we need to advocate is 02:45:28.090 --> 02:45:31.480 that uniformity, how we can measure the different products, 02:45:31.480 --> 02:45:35.200 and they can really assess, this is the right one for me, and 02:45:35.200 --> 02:45:37.840 this is not, and therefore they can assess that. But I actually 02:45:38.440 --> 02:45:40.810 will defer from the other panelists, that they are 02:45:41.590 --> 02:45:44.890 sophisticated, and it's just time that they're lacking to 02:45:44.890 --> 02:45:48.850 really assess that because they have other things to achieve in 02:45:48.850 --> 02:45:49.180 their day-to-day. 02:45:49.450 --> 02:45:52.540 I appreciate that distinction. I think it's helpful. And I'm 02:45:52.540 --> 02:45:55.450 going to use it to piggyback into this next question. So 02:45:55.600 --> 02:45:58.150 let's maybe set aside the question of sophistication, per 02:45:58.150 --> 02:46:03.610 se. And instead, I think it was suggested, perhaps, on the first 02:46:03.610 --> 02:46:07.540 couple panels, at least by some panelists, that the small 02:46:07.540 --> 02:46:09.520 business owners who are interested in financing are 02:46:09.520 --> 02:46:15.730 actually welleducated, and they are going into the selection of 02:46:15.730 --> 02:46:19.510 a particular product eyes wide open, recognizing the costs and 02:46:19.510 --> 02:46:23.350 benefits of that product versus another. I'd be curious to hear 02:46:23.350 --> 02:46:27.790 whether or not this set of panelists agrees with that idea, 02:46:27.790 --> 02:46:30.400 that when a small business owner is selecting a particular 02:46:30.400 --> 02:46:32.950 product, they do truly understand what they're getting. 02:46:33.620 --> 02:46:36.710 I guess I would push back on that a little bit. And of course 02:46:36.710 --> 02:46:41.000 there's a range here. I mean, obviously there's a few that are 02:46:41.030 --> 02:46:44.150 very sophisticated, and have accountants, or they're big 02:46:44.150 --> 02:46:46.340 enough they've got somebody full-time who can explain it to 02:46:46.340 --> 02:46:50.210 them. And then you've got what Bernardo was saying-- yes, you 02:46:50.210 --> 02:46:53.180 have business owners that are maybe more sophisticated than 02:46:53.180 --> 02:46:57.590 the average person, and they don't have time, and they don't 02:46:57.590 --> 02:47:00.080 have someone sitting there. They haven't taken the time unless 02:47:00.080 --> 02:47:02.840 someone's sitting there laying out the options for them. But to 02:47:02.840 --> 02:47:07.220 pick up on what Ky-Nam said, there are a lot of perfectly 02:47:07.220 --> 02:47:09.590 bright, and they know their product, but they're not 02:47:09.590 --> 02:47:12.110 financially sophisticated. They're not even in the 02:47:12.110 --> 02:47:15.530 categories that Bernardo was talking about. And a lot of 02:47:15.530 --> 02:47:19.310 these are entrepreneurs in underserved communities, 02:47:19.340 --> 02:47:23.870 entrepreneurs of color. And they may be immigrants. They may not 02:47:23.870 --> 02:47:30.170 be fully conversant with English. So I think we need to 02:47:30.170 --> 02:47:32.120 understand there's a spectrum here. But there are a large 02:47:32.120 --> 02:47:34.940 number of people that fall on the unsophisticated end of the 02:47:34.940 --> 02:47:39.380 spectrum. I don't think you can say that all of them are 02:47:39.380 --> 02:47:41.270 sophisticated as some, they don't have the time. 02:47:43.190 --> 02:47:45.890 I don't want to carry on the sophistication line too much. 02:47:45.890 --> 02:47:48.830 Just to say that this is not about people's underlying 02:47:48.830 --> 02:47:52.340 intelligence or abilities. I think a more kind of interesting 02:47:52.340 --> 02:47:54.890 perspective of this is how sophisticated is the system in 02:47:54.890 --> 02:47:57.230 meeting the needs of the consumers who are actually 02:47:57.230 --> 02:48:01.940 there. The question of, do we have an even playing field, 02:48:02.060 --> 02:48:05.090 which to me is characterized by transparency and disclosure, 02:48:05.570 --> 02:48:08.150 that's not the case. That's not what people are operating in 02:48:08.150 --> 02:48:12.950 today. It's more like a slaughterhouse. It's dark, and 02:48:12.950 --> 02:48:16.280 you don't know what's coming at you, and you can be harmed by 02:48:16.280 --> 02:48:20.150 the products out there. So sunlight and disclosure and 02:48:20.150 --> 02:48:21.830 transparency is the remedy to that. 02:48:23.000 --> 02:48:23.480 Barbara? 02:48:24.290 --> 02:48:27.890 Yes. So in our focus group, as I mentioned, we displayed some 02:48:27.890 --> 02:48:32.630 mock products based on actual products. If you just ask small 02:48:32.630 --> 02:48:35.870 business owners, do you think it's easy or difficult to 02:48:35.870 --> 02:48:40.460 compare these products, they generally say, easy, because 02:48:40.460 --> 02:48:43.070 they're the financial decision-maker, and they feel 02:48:43.070 --> 02:48:47.180 like, yes, it's easy. But when you probe and ask specific 02:48:47.180 --> 02:48:50.240 questions to test their understanding of the products-- 02:48:50.240 --> 02:48:54.770 is product A cheaper than product B, is product B cheaper 02:48:54.770 --> 02:48:59.240 than getting something from your credit card, then they're not 02:48:59.240 --> 02:49:04.250 answering correctly, they're not sure. In some cases, when we 02:49:04.250 --> 02:49:07.640 asked, what do you think the interest rate is on a product, 02:49:07.790 --> 02:49:12.860 it varied from 10% to over 50%. So when you really probe for 02:49:12.860 --> 02:49:18.470 specifics, it turns out, well, I'm not so sure actually. So I 02:49:18.470 --> 02:49:21.770 think you have to go beyond, is it simple or easy, and really 02:49:21.830 --> 02:49:24.380 talk about what we've been talking about here- what's 02:49:24.380 --> 02:49:28.370 actually being provided, and how do we make it easy for folks to 02:49:28.370 --> 02:49:29.030 compare? 02:49:29.690 --> 02:49:32.030 And I think that's a critical point at the end of the day, how 02:49:32.030 --> 02:49:35.510 we educate the small business owner to compare those choices 02:49:36.290 --> 02:49:40.340 in a simpler way that basically puts a level playing field for 02:49:40.340 --> 02:49:43.760 all the products, that each product will have benefits, and 02:49:43.760 --> 02:49:47.540 that may be tailored for that small business owner. But I 02:49:47.540 --> 02:49:50.960 think it's important that the critical objective of policy 02:49:50.960 --> 02:49:54.200 should be around creating that uniformity that basically 02:49:54.200 --> 02:49:56.840 enables that access and understanding across all 02:49:56.840 --> 02:49:59.420 products, so basically they can have the choices. 02:49:59.420 --> 02:50:04.340 I just want to make sure I'm not missing anyone. OK, let's 02:50:04.340 --> 02:50:08.480 actually use that to segue to my next question, which is going to 02:50:08.480 --> 02:50:14.090 be about what small business financing companies should be 02:50:14.090 --> 02:50:17.300 offering by way of information that will allow consumers to 02:50:17.300 --> 02:50:22.430 comparison shop. So as an example, one thing when we do 02:50:22.610 --> 02:50:27.110 education for consumers, we tell consumers, an easy metric to 02:50:27.110 --> 02:50:31.160 look for when you are shopping for a loan is an APR. We've 02:50:31.160 --> 02:50:35.450 obviously heard-and perhaps many of you will concur-- that an APR 02:50:35.450 --> 02:50:39.770 may or may not be a feasible metric to use for comparison 02:50:39.770 --> 02:50:43.820 shopping. But what kinds of information could be provided, 02:50:43.820 --> 02:50:46.430 and is there any type of metric-- something like total 02:50:46.430 --> 02:50:51.170 cost of capital-- that could be offered as a way for small 02:50:51.170 --> 02:50:54.170 business owners to comparison shop for products? Christin. 02:50:54.780 --> 02:50:59.490 Sure. So I know we'll dive in a little more depth in the future. 02:50:59.490 --> 02:51:04.740 But one of the things that we found was that there was this 02:51:04.740 --> 02:51:07.530 sort of-- people were not necessarily speaking the same 02:51:07.530 --> 02:51:09.630 language. You were getting quoted different metrics, and it 02:51:09.630 --> 02:51:13.110 wasn't even clear if one person's calculation of a rate 02:51:13.110 --> 02:51:16.920 was the same as someone else's. And so a couple of years back, 02:51:17.700 --> 02:51:20.280 OnDeck, as one of the members of a trade group called the 02:51:20.280 --> 02:51:23.100 Innovative Lending Platform Association, actually thought, 02:51:23.370 --> 02:51:26.280 let's ask that question of small business stakeholders. If you're 02:51:26.280 --> 02:51:30.210 going to look for capital, what do you want and need to know? I 02:51:30.210 --> 02:51:34.020 think the results of those surveys, almost 600 small 02:51:34.020 --> 02:51:36.930 business stakeholders was there's probably not a single 02:51:36.930 --> 02:51:41.370 bullet, but definitely there should be a floor of some basic 02:51:41.370 --> 02:51:44.430 metrics that are really helpful to compare that are kind of 02:51:44.460 --> 02:51:48.030 product-agnostic, don't necessarily favor one or the 02:51:48.030 --> 02:51:51.120 other, because I know there's the dynamic of, is it 02:51:51.360 --> 02:51:54.450 short-term, is it long-term, is it a purchase and sale 02:51:54.450 --> 02:51:57.570 transaction, versus a term loan, versus a revolving line. And 02:51:57.570 --> 02:52:00.060 there's definitely differences between those. But some of the 02:52:00.060 --> 02:52:04.440 metrics that came out at the top of that survey that we conducted 02:52:04.440 --> 02:52:08.460 were APR-- I think that that's a very useful one, especially 02:52:09.000 --> 02:52:11.070 considering that many small businesses, when they're 02:52:11.070 --> 02:52:13.710 approaching a company like OnDeck, are also potentially 02:52:13.710 --> 02:52:15.960 looking at credit cards, and that's typically the way that 02:52:15.960 --> 02:52:20.490 those are quoted. We also found that the total cost metric was 02:52:20.490 --> 02:52:22.950 another useful one, because a lot of businesses do think about 02:52:22.950 --> 02:52:26.670 their financing in terms of kind of dollars in, dollars out. And 02:52:26.670 --> 02:52:29.880 that ROI-driven aspect of it also made it useful for them to 02:52:29.880 --> 02:52:33.540 see that it's going to cost me x amount to borrow this amount of 02:52:33.540 --> 02:52:35.880 money, and I'll be able to return, is that a good deal for 02:52:35.880 --> 02:52:39.720 me? Another metric that we found useful that made it into kind of 02:52:39.720 --> 02:52:42.930 the top four was an average monthly payment. And I think 02:52:42.930 --> 02:52:46.470 that's because a lot of payments run on monthly cycles for 02:52:46.470 --> 02:52:49.020 businesses, so they're used to thinking about, how much am I 02:52:49.020 --> 02:52:52.230 bringing in a month, how much could I afford to have go out 02:52:52.230 --> 02:52:55.170 the door in a month? And then the final one that we found 02:52:55.170 --> 02:53:00.300 useful but to be honest was kind of a distant fourth was a 02:53:00.300 --> 02:53:04.020 cents-on-dollar metric, where for every dollar you borrow, how 02:53:04.020 --> 02:53:07.260 much are you going to pay in fees, again, kind of an 02:53:07.290 --> 02:53:10.050 ROI-driven way to think about it. But those were four of the 02:53:10.050 --> 02:53:12.630 metrics that stuck out to us when businesses are thinking 02:53:12.630 --> 02:53:13.440 about pricing. 02:53:15.060 --> 02:53:16.590 Anyone else want to jump in? Barbara? 02:53:16.650 --> 02:53:22.290 Yeah. Actually we got remarkably similar results in our focus 02:53:22.290 --> 02:53:26.820 group. We showed folks a sample disclosure box. It had APR, it 02:53:26.820 --> 02:53:32.040 had cost of capital, it had fees broken out separately, it had 02:53:32.220 --> 02:53:37.470 payment amounts, cents on the dollar. And most-- like the APR, 02:53:37.980 --> 02:53:41.550 they're familiar with it. They know what a good rate is when it 02:53:41.550 --> 02:53:46.620 comes to an APR. But some of them liked the cost of capital 02:53:46.620 --> 02:53:50.700 and the fees, especially when spelled out. And then we also 02:53:50.700 --> 02:53:53.730 asked them, well, what's missing, what wasn't in the box 02:53:53.730 --> 02:53:59.790 that we showed them. They wanted more details-- what happens if 02:53:59.790 --> 02:54:04.500 they pay late? They wanted more details about repayment, not 02:54:04.500 --> 02:54:08.490 just whether or not there'd be savings, but how much savings 02:54:08.490 --> 02:54:13.170 they would have. And then some were interested in knowing who 02:54:13.170 --> 02:54:16.590 has control over the payments. And I think that's getting to 02:54:16.590 --> 02:54:21.750 the idea of if you have portions taken out of your cash flow 02:54:21.750 --> 02:54:26.160 automatically, and you have an emergency, say the roof leaks, 02:54:27.000 --> 02:54:30.090 do you have control over that cash flow. So they want to know 02:54:30.090 --> 02:54:34.950 more details about the mechanics of how the payments are made. 02:54:36.210 --> 02:54:36.690 Ky-Nam. 02:54:36.750 --> 02:54:39.690 So we really think the gold standard for this is the 02:54:39.690 --> 02:54:42.030 Responsible Business Lending Coalition's Borrowers Bill of 02:54:42.030 --> 02:54:44.730 Rights. You can find it at borrowersbillofrights.org. So 02:54:44.730 --> 02:54:47.670 there's seven elements, with some of them mentioned here. But 02:54:47.670 --> 02:54:52.260 the financing amount, the APR or estimated APR, the payment 02:54:52.260 --> 02:54:55.980 amount and frequency term, or estimated term in the case of 02:54:55.980 --> 02:54:59.280 variable term financing, all upfront and scheduled charges 02:54:59.280 --> 02:55:02.160 listed with dollar amounts, prepayment charges, and any 02:55:02.160 --> 02:55:03.240 collateral requirements. 02:55:05.010 --> 02:55:07.500 And I know we're going to be talking a little bit more about 02:55:07.500 --> 02:55:10.380 that effort and some other self-regulatory efforts as well. 02:55:11.400 --> 02:55:14.280 I'd like to shift down to talking a little bit about the 02:55:14.280 --> 02:55:19.350 legal backdrop against which these transactions and 02:55:19.350 --> 02:55:24.420 consumers' decision-making is taking place. So everyone from 02:55:24.480 --> 02:55:27.960 Commissioner Chopra, who kicked off our event, to panelists on 02:55:27.960 --> 02:55:31.770 the first two panels mentioned-- and I will reiterate here-- the 02:55:31.770 --> 02:55:37.230 FTC Act, which prohibits unfair or deceptive practices. It does 02:55:37.230 --> 02:55:42.150 apply to non-bank small business lending. But it is often the 02:55:42.150 --> 02:55:48.720 case that other protective statutes in this space do not 02:55:48.750 --> 02:55:53.070 provide coverage for small business owners. One example is 02:55:53.220 --> 02:55:56.100 the Truth in Lending Act, TILA. So I'd like to hear from our 02:55:56.100 --> 02:56:00.030 panelists about what the ramifications are for perhaps 02:56:00.030 --> 02:56:05.430 some of this lack of coverage to small business owners. Bernardo. 02:56:05.490 --> 02:56:08.040 Well, I think one of the things we have done actually in 02:56:08.040 --> 02:56:10.080 partnership with Lending Club and Opportunity Fund is actually 02:56:10.080 --> 02:56:12.780 being proactive about it. And actually we partnered with the 02:56:12.780 --> 02:56:15.990 state in California, and passed this [INAUDIBLE] small business 02:56:16.530 --> 02:56:20.820 truth in lending to try to really kind of make an effort to 02:56:20.820 --> 02:56:24.360 create a standard on how small business lending should look 02:56:24.360 --> 02:56:27.210 like. And again, it goes back to my first statement at the 02:56:27.210 --> 02:56:29.760 beginning, it's really about uniformity. We truly believe 02:56:29.760 --> 02:56:32.670 that that's going to create that stand to helps us create, 02:56:32.820 --> 02:56:36.960 nationally, a process by which small business owners can 02:56:36.960 --> 02:56:39.960 actually compare and conduct their business and access 02:56:39.960 --> 02:56:44.550 capital. So that's what we have done. So we move from just being 02:56:44.580 --> 02:56:46.980 a victim of the issue, and trying to be proactive with the 02:56:46.980 --> 02:56:49.830 state of California. And we will continue to work and partner 02:56:49.830 --> 02:56:52.710 with companies like OnDeck and anyone else who wanted to 02:56:52.710 --> 02:56:55.980 continue to pursue those efforts in other states. Because we 02:56:55.980 --> 02:56:59.070 truly believe that having that national framework or state 02:56:59.070 --> 02:57:01.290 framework will help the small business owners. 02:57:01.710 --> 02:57:02.370 Christin. 02:57:03.030 --> 02:57:07.140 Yeah, I agree with all of that. And to your question of kind of 02:57:07.140 --> 02:57:11.190 what is the ramification for small business owners that TILA 02:57:11.190 --> 02:57:14.430 doesn't apply, I think it's exactly what we've all been 02:57:14.430 --> 02:57:16.590 highlighting, which is you just see a real divergence of 02:57:16.590 --> 02:57:20.730 practice. And I think it's not just about what is disclosed, 02:57:20.730 --> 02:57:25.020 but also how is it disclosed and when is it disclosed. And 02:57:25.230 --> 02:57:28.890 frankly, in an ecosystem like ours that has a lot of different 02:57:29.190 --> 02:57:31.680 referral relationships, and brokering relationships, and 02:57:31.680 --> 02:57:35.910 lead generation, it's also who is disclosing it. And I think 02:57:35.910 --> 02:57:41.730 that the impact without that standardization has been one 02:57:41.730 --> 02:57:44.760 that the companies on this panel, I think, been proactive 02:57:44.760 --> 02:57:48.750 on. I think we had initially hoped, when we were working on 02:57:48.750 --> 02:57:53.190 the SMART Box initiative back in 2016 that self-regulatory 02:57:53.190 --> 02:57:57.060 measures would be enough. But I think that the trend that we're 02:57:57.060 --> 02:58:00.690 seeing now is that policymakers have suggested it may need to go 02:58:00.690 --> 02:58:03.930 further. There may need to be some sort of codification to 02:58:03.930 --> 02:58:08.160 actually bring some of the more reluctant actors into the fold. 02:58:09.030 --> 02:58:12.180 So I think that's been the outcome that we've seen. I think 02:58:12.570 --> 02:58:15.630 without TILA, there's definitely some players who have been 02:58:15.630 --> 02:58:19.200 trying to make progress. But policymakers, particularly at 02:58:19.200 --> 02:58:22.980 the state level at the moment, are starting to kind of turn 02:58:22.980 --> 02:58:26.460 those self-regulatory efforts into something that is 02:58:26.460 --> 02:58:30.270 regulated. And I think that's a really useful tool for those who 02:58:30.270 --> 02:58:32.070 maybe haven't been at the forefront of some of the 02:58:32.070 --> 02:58:32.670 efforts. 02:58:32.820 --> 02:58:33.420 John.. 02:58:33.930 --> 02:58:36.210 Yeah, I just want to second what's already been said. I 02:58:36.210 --> 02:58:40.800 mean, there's a potpourri of tools out there now. We do 02:58:40.800 --> 02:58:44.010 believe that there's a role for the FTC, under the Deceptive 02:58:44.010 --> 02:58:46.200 Practices Act-- Unfair and Deceptive Practices Act, 02:58:46.200 --> 02:58:52.170 absolutely. And people have even made an argument that, well, you 02:58:52.170 --> 02:58:54.420 can sort of say that small business owners are actually 02:58:54.420 --> 02:58:57.240 like consumers. But there is no reason we should have to go 02:58:57.240 --> 02:59:00.120 through those-- I mean, we still think the FTC should do 02:59:00.120 --> 02:59:03.120 everything they can in this area. Don't get me wrong. But we 02:59:03.120 --> 02:59:06.600 shouldn't just rely on the fact there may be a couple pieces out 02:59:06.600 --> 02:59:09.240 there. Or if you're originating through a bank, then there's 02:59:09.240 --> 02:59:16.770 bank regulation. So to second what Christin was saying, we 02:59:16.770 --> 02:59:20.070 need a standard. Now, obviously we would love to see a federal 02:59:20.070 --> 02:59:24.000 standard. And there is interest. There's been some conversations 02:59:24.540 --> 02:59:28.710 trying to move that forward. Obviously, absent that, we've 02:59:28.710 --> 02:59:32.280 been very active in the states. We were working with Funding 02:59:32.280 --> 02:59:35.370 Circle, and Opportunity Fund, and Lending Club and others. We 02:59:35.370 --> 02:59:38.760 were very active in getting the California truth in lending bill 02:59:38.760 --> 02:59:41.670 passed last year. There are now bills in New Jersey and New 02:59:41.670 --> 02:59:44.490 York, there's talk in other states, and that's great, and 02:59:44.490 --> 02:59:46.500 we're all going to continue to do that. But at the end of the 02:59:46.500 --> 02:59:52.680 day, this shouldn't have to be piecemeal. Ultimately, we really 02:59:52.680 --> 02:59:56.700 want to have one standard that everybody can rely on. And 02:59:56.700 --> 02:59:59.550 again, we're not talking here-- this is just one piece of the 02:59:59.550 --> 03:00:02.490 problem, transparency. And we're just talking about transparency 03:00:02.490 --> 03:00:07.260 here. And we're not saying that you can't make any of these 03:00:07.260 --> 03:00:09.870 loans, you can't put any of these products on the market, 03:00:10.170 --> 03:00:13.620 we're just saying we need to have a set of standards so that 03:00:13.620 --> 03:00:15.300 small business owners can understand what they're getting. 03:00:16.470 --> 03:00:20.940 And I'd be curious to hear from other panelists about the 03:00:20.940 --> 03:00:27.630 tension or sufficiency between the federal laws that cover 03:00:27.630 --> 03:00:32.460 these issues, state laws, and self-regulatory efforts. Do any 03:00:32.460 --> 03:00:36.540 of you have feelings that one or-- that some of those are 03:00:36.540 --> 03:00:39.390 sufficient, versus the need for something more. 03:00:41.160 --> 03:00:45.180 I live in California, and I've got my biases for SB 1235 and 03:00:45.180 --> 03:00:50.160 the TILA that we've got there. Maybe it's even a little step 03:00:50.160 --> 03:00:52.260 better than what's going on in Jersey in New York. But I think 03:00:52.260 --> 03:00:56.460 I've got to take a closer look at those. But there's been an 03:00:56.460 --> 03:01:00.120 advocation. We need it federally. We had some tools at 03:01:00.120 --> 03:01:04.170 the CFDB and with the section 1070. And that just hasn't been 03:01:04.170 --> 03:01:08.370 applied by this administration. So in this void at the federal 03:01:08.370 --> 03:01:12.360 level, which ideally the FTC could step up under UDAP and do 03:01:12.360 --> 03:01:16.380 enforcement. State governments and legislatures are the only 03:01:16.380 --> 03:01:19.080 game in town right now. But we also have to be doing the seed 03:01:19.080 --> 03:01:25.110 work and working with consumer-friendly legislators to 03:01:25.140 --> 03:01:30.120 put forth the market legislation so that when the climate is more 03:01:30.120 --> 03:01:34.050 appropriate here in DC, we have a small business TILA ready to 03:01:34.050 --> 03:01:34.350 go. 03:01:35.520 --> 03:01:36.510 Anyone else? Christin. 03:01:37.080 --> 03:01:39.600 Yeah, I would just add maybe taking a step back from 03:01:39.600 --> 03:01:42.510 transparency for a moment, and looking at some of the other 03:01:42.510 --> 03:01:46.830 regimes. Maybe not surprising from the perspective of an 03:01:46.830 --> 03:01:51.060 industry player, but we'd love to see standardization. I think 03:01:51.060 --> 03:01:54.510 that the challenge for us is, currently, even as a non-bank, 03:01:54.510 --> 03:01:57.510 we're still subject to information security laws, 03:01:57.510 --> 03:02:01.080 privacy, fair lending, anti-discrimination, fair sales 03:02:01.080 --> 03:02:03.840 and marketing practices, anti-money-laundering, and 03:02:03.840 --> 03:02:06.060 sanctions screening, and licensing, and interest rate 03:02:06.060 --> 03:02:08.850 caps. And when we have 50 different versions of all of 03:02:08.850 --> 03:02:12.060 those, it really becomes a challenge because the goalposts 03:02:12.060 --> 03:02:17.130 are just moving on the field. So I think the slight preference is 03:02:17.130 --> 03:02:20.250 not sort of-- I don't have an innate preference for federal 03:02:20.250 --> 03:02:24.330 versus state solutions on any of these. But I do think that some 03:02:24.330 --> 03:02:28.020 of the efforts to standardize or harmonize those practices across 03:02:28.020 --> 03:02:30.720 the states would be much appreciated, just as somebody 03:02:30.720 --> 03:02:35.700 who's trying to comply. So that would be our preference, not 03:02:35.700 --> 03:02:38.580 kind of inherently favor of one or the other, but something 03:02:38.580 --> 03:02:41.850 that's certain and that's fairly harmonized. 03:02:42.810 --> 03:02:46.650 Right. So actually, Ky-Nam, since you happened to mention 03:02:46.650 --> 03:02:49.320 it, could you describe a little bit about the California 03:02:49.320 --> 03:02:51.630 legislation and the protection that it offers. 03:02:52.110 --> 03:02:55.170 Sure. I invite my colleagues to also join. I think they had a 03:02:55.170 --> 03:02:58.140 more substantial role in it. But I think what's remarkable about 03:02:58.140 --> 03:03:04.230 it is that it was really the product of a diverse coalition 03:03:04.290 --> 03:03:09.360 of fintech, CDFIs. We have a 300-member, the California 03:03:09.360 --> 03:03:12.720 Reinvestment Coalition, Green Lightning Coalition is another 03:03:12.720 --> 03:03:19.470 50 members. And it was the product of a large 03:03:19.980 --> 03:03:25.200 people-ofcolor coalition partnering with new chairs in 03:03:25.200 --> 03:03:29.190 the banking committee on the state legislature to put forth 03:03:29.190 --> 03:03:34.620 really unprecedented bills and public policy. So I think when 03:03:34.620 --> 03:03:37.860 you have coalitions like that, you get good policies. So Yeah, 03:03:37.860 --> 03:03:40.680 I'd invite you to add on to what the substance of it was. 03:03:40.710 --> 03:03:45.060 No, I would-- it was a great coalition. And one of the things 03:03:45.450 --> 03:03:47.520 we've really been excited about-- and we're a founding 03:03:47.520 --> 03:03:50.340 member of the Responsible Business Lending Coalition, who 03:03:50.850 --> 03:03:54.210 created the Borrowers Bill of Rights, who said, unlike a lot 03:03:54.210 --> 03:03:56.580 of other situations that we deal with in a small business 03:03:56.580 --> 03:03:58.920 advocacy organization, we're actually able to partner with 03:03:58.920 --> 03:04:02.670 industry members, with CDFIs like Opportunity Fund and 03:04:02.700 --> 03:04:07.410 Accion, with fintechs like Funding Circle, Lending Club. 03:04:08.220 --> 03:04:14.310 And we're able to sort of go-- what happened in California was 03:04:14.340 --> 03:04:18.210 going to the legislature and saying, this is not just a 03:04:18.210 --> 03:04:20.340 consumer point of view, the industry really wants this. 03:04:20.340 --> 03:04:24.060 Industry wants standards, industry wants transparency. And 03:04:24.510 --> 03:04:27.240 so that was very powerful. And I think we I think we can 03:04:27.240 --> 03:04:32.460 replicate that elsewhere. And yeah, I mean, there were a set 03:04:32.460 --> 03:04:38.520 of standards around rates, and terms, and total cost of 03:04:38.520 --> 03:04:42.360 capital. And the details are being worked out at the 03:04:42.360 --> 03:04:44.850 regulatory level at the Department of Business Oversight 03:04:44.850 --> 03:04:49.770 in California now. So I mean, I would agree, we ultimately 03:04:49.770 --> 03:04:54.060 want-- we'd love to have a national standard. Now, if 03:04:54.120 --> 03:04:56.310 you've got a pretty strong state standard, you don't want that to 03:04:56.310 --> 03:04:59.070 preempt-- you don't want a weaker national standard to 03:04:59.070 --> 03:05:01.800 preempt a stronger state standard. So that's always going 03:05:01.800 --> 03:05:05.310 to be an issue. But I'd be the first to agree, Christin that 03:05:06.240 --> 03:05:10.050 having 50 different standards is probably not ideal. That said, 03:05:10.110 --> 03:05:12.210 all of us who are interested in this are going to keep working 03:05:12.210 --> 03:05:15.270 at the state level. Because I think, as somebody else said 03:05:15.270 --> 03:05:18.600 here, that's kind of where the biggest opportunity is now. And 03:05:18.960 --> 03:05:22.320 that may then spark an effort at the federal level to deal with 03:05:22.320 --> 03:05:22.590 us. 03:05:23.010 --> 03:05:26.460 John-- or maybe others, too, who worked on the California 03:05:26.460 --> 03:05:30.390 legislation-- could you talk a little bit about-- there's a lot 03:05:30.390 --> 03:05:33.840 of discussion about consensus, which is great that you were 03:05:33.840 --> 03:05:35.940 able to achieve that in connection with that law. But 03:05:36.210 --> 03:05:39.900 what was sort of the pressure points in terms of metrics to be 03:05:39.900 --> 03:05:43.830 disclosed? And what were the lines of that debate? 03:05:44.110 --> 03:05:46.870 Well, ultimately the biggest debate was around whether you 03:05:46.870 --> 03:05:50.500 could use APR. And that actually has not been completely 03:05:50.530 --> 03:05:53.470 resolved. That's being resolved at a regulatory level. And we 03:05:53.470 --> 03:05:57.820 wish it had been resolved legislatively, but we were happy 03:05:57.820 --> 03:06:01.990 that we got everything we did in the bill. And there's some 03:06:02.020 --> 03:06:04.690 legitimate questions about certain types of products, MCA 03:06:04.690 --> 03:06:08.230 products in particular, about calculating APR. We think it's 03:06:08.230 --> 03:06:10.630 possible. We think, because it is the gold standard, that's 03:06:10.630 --> 03:06:13.510 what everybody compares, that we need to figure it out, whether 03:06:13.510 --> 03:06:19.540 you're basing it on the history of the way the MCAs have 03:06:19.540 --> 03:06:21.970 operated or how they're calculating their return. 03:06:22.480 --> 03:06:25.840 There's definitely ways to do it. And that was probably the 03:06:25.840 --> 03:06:27.910 single biggest-- I mean initially, it was just kind of 03:06:27.910 --> 03:06:30.970 everybody sort of getting together and figuring it out. 03:06:30.970 --> 03:06:35.590 But at the end, that that became the biggest area of debate. And 03:06:35.890 --> 03:06:40.390 it got resolved by being kicked to the Department of Business 03:06:40.390 --> 03:06:40.900 Oversight. 03:06:41.650 --> 03:06:42.430 And Christin. 03:06:42.820 --> 03:06:46.360 Sure. So I would add, I think, not just in the context of the 03:06:46.360 --> 03:06:50.020 California legislation, but in some of the other efforts that 03:06:50.020 --> 03:06:53.230 industry players have been working on for the last couple 03:06:53.230 --> 03:06:56.680 of years, I think we saw a few key areas where there were some 03:06:56.680 --> 03:06:59.410 real challenges. You had to kind of wrestle with the issues. And 03:07:00.190 --> 03:07:03.460 one of the ones that we saw in developing the SMART Box was 03:07:03.820 --> 03:07:07.930 there's certain metrics that can be challenging for products 03:07:07.960 --> 03:07:10.630 without fixed terms. For example, we've already heard 03:07:10.630 --> 03:07:14.200 today some of the challenges of calculating rates for products 03:07:14.200 --> 03:07:17.620 without fixed terms. That was an issue that we had to wrestle 03:07:17.620 --> 03:07:22.090 with, and it came up again in California. Another challenge 03:07:22.090 --> 03:07:26.380 that we experienced was trying to provide some of the total 03:07:26.380 --> 03:07:30.430 dollar cost metrics for products without a fixed amount, like a 03:07:30.430 --> 03:07:34.870 revolving line. That was another area that we struggled with and 03:07:34.870 --> 03:07:37.330 had to wrestle with in developing the SMART Box. And 03:07:37.330 --> 03:07:39.880 then another one was a point that the Barbara has raised a 03:07:39.880 --> 03:07:43.390 couple of times now, which is prepayment policies. There's a 03:07:43.390 --> 03:07:46.630 real diversity of different prepayment policies that the 03:07:46.630 --> 03:07:49.510 companies have in the small business lending space. And that 03:07:49.510 --> 03:07:54.010 was another area where reaching some sort of consensus and how 03:07:54.010 --> 03:07:57.070 you could provide enough detail, sufficient detail, but not 03:07:57.070 --> 03:08:00.250 overwhelm a customer, and make sure that they're getting the 03:08:00.250 --> 03:08:03.940 piece that they need to know in plain language, that was a real 03:08:03.940 --> 03:08:06.160 challenge of pre-payment. Because it is very different, I 03:08:06.160 --> 03:08:09.220 think, from a lot of what you would expect in the consumer 03:08:09.220 --> 03:08:12.820 context in terms of a fixed fee product, where prepayment 03:08:12.820 --> 03:08:17.080 doesn't necessarily benefit you. Paying it faster, you're still 03:08:17.080 --> 03:08:19.960 paying the same fixed fee amount. And I think expressing 03:08:19.960 --> 03:08:23.500 that in a way that small businesses could understand was 03:08:23.500 --> 03:08:26.680 something that we definitely had to wrestle with as a group, 03:08:26.680 --> 03:08:28.030 given the diversity of products. 03:08:28.060 --> 03:08:29.920 One quick comment on prepayment-- I mean, it's so 03:08:29.920 --> 03:08:32.860 counterintuitive to the average person and every small business 03:08:32.860 --> 03:08:37.390 owner. You ask people out there, 99.9% would say, yeah, if I pay 03:08:37.390 --> 03:08:39.790 it off faster, I'm going to save money. And that isn't always the 03:08:39.790 --> 03:08:42.070 case. You have an effective prepayment penalty even if it's 03:08:42.070 --> 03:08:45.970 not an explicit prepayment penalty. So that definitely 03:08:45.970 --> 03:08:49.540 needs to get factored in to-- no pun intended-- that needs to get 03:08:49.540 --> 03:08:55.210 factored into an analysis of what the rate's going to be, 03:08:55.210 --> 03:08:56.590 what the cost of capital is. 03:08:57.820 --> 03:09:00.280 And can anyone that's been involved talk a little bit 03:09:00.280 --> 03:09:02.890 about-- we know there's been some movement, potentially in 03:09:02.890 --> 03:09:05.170 other states, similar to California. Have any of our 03:09:05.170 --> 03:09:07.930 panelists been a part of those discussions? Have they sort of 03:09:07.930 --> 03:09:10.870 been moving on a similar track, using similar metrics? 03:09:10.930 --> 03:09:13.960 Well there's a bill in New Jersey that's passed the Senate. 03:09:14.410 --> 03:09:19.300 It's going to be heard by the assembly at some point. I think 03:09:19.300 --> 03:09:21.880 there's a bill that's finally being introduced in New York. 03:09:23.290 --> 03:09:28.660 And there was a bill introduced in Illinois a couple years ago. 03:09:29.140 --> 03:09:35.230 I don't know if and when that's going to happen again. And then 03:09:35.230 --> 03:09:38.080 there's conversations happening in a bunch of other states as 03:09:38.080 --> 03:09:40.690 well. And states where we're most active, we're definitely 03:09:40.690 --> 03:09:45.280 engaging with legislators and with other stakeholders on that. 03:09:45.280 --> 03:09:50.230 So yeah, there's definitely interest at the state level in 03:09:50.230 --> 03:09:50.920 dealing with this. 03:09:51.220 --> 03:09:52.270 Thank you. And Christin. 03:09:52.390 --> 03:09:56.890 Yeah, I would say, involved in California efforts, and then in 03:09:56.890 --> 03:09:59.290 New York I think they saw the efforts that were taking place 03:09:59.290 --> 03:10:03.580 in California, and the Consumer Protection Committee in New 03:10:03.580 --> 03:10:06.940 York, both in the assembly and banking, also wanted to approach 03:10:06.940 --> 03:10:09.970 the topic this year. So that they came to us as developers of 03:10:09.970 --> 03:10:12.850 the SMART Box and asked for a little bit of guidance. I think 03:10:12.850 --> 03:10:16.390 that the interesting piece has been not how different they are, 03:10:16.390 --> 03:10:19.840 but how similar they are. And I think that we've started to 03:10:19.840 --> 03:10:24.130 develop, kind of nationwide, and I'd say I think a lot of the 03:10:24.130 --> 03:10:26.980 same folks that are participating in today's event, 03:10:26.980 --> 03:10:30.550 as was colleagues that are on this panel, really kind of 03:10:30.550 --> 03:10:34.420 helped develop what we consider to be the floor for disclosure 03:10:34.570 --> 03:10:38.950 as part of-- the CSBS had a fintech advisory panel. And that 03:10:38.950 --> 03:10:42.250 was a big topic that we spent quite a bit of time discussing. 03:10:42.430 --> 03:10:46.540 It was kind of like, what are the areas that disclosure should 03:10:46.540 --> 03:10:50.320 be, where should we set the floor? And the encouraging thing 03:10:50.320 --> 03:10:52.690 is that I think a lot of the states that are picking up this 03:10:52.690 --> 03:10:55.540 effort looked very similar to the recommendations that came 03:10:55.540 --> 03:10:56.680 out of the CSBS. 03:10:57.550 --> 03:11:00.970 And Christin, we've been talking about it quite a bit already. 03:11:00.970 --> 03:11:03.010 But I thought maybe we should drill a little bit more into 03:11:03.010 --> 03:11:08.770 detail as to what the ILPA SMART Box requires in terms of the 03:11:08.770 --> 03:11:12.220 standardized information that's provided. And does it change 03:11:12.220 --> 03:11:15.880 between different product lines, or it's just the same TILA-like 03:11:15.880 --> 03:11:17.050 box for all products? 03:11:17.410 --> 03:11:22.480 Yeah, so we, like I said, sort of developed that after some 03:11:22.480 --> 03:11:25.300 engagement with a variety of different stakeholders as well 03:11:25.300 --> 03:11:29.470 as small business owners. And we really tried to make the boxes-- 03:11:29.500 --> 03:11:32.410 we have three different versions right now. There's a box for 03:11:32.410 --> 03:11:36.220 kind of a classic term loan, there's a SMART Box for a line 03:11:36.220 --> 03:11:38.740 of credit or a revolving product, and then there's a 03:11:38.740 --> 03:11:42.130 SMART Box for a purchase and sale product. So that would 03:11:42.130 --> 03:11:46.690 include factoring, it would include cash advances or revenue 03:11:46.690 --> 03:11:51.520 factoring products. And we tried very hard to make them as 03:11:51.520 --> 03:11:54.370 standard as possible, on the assumption that if you're a 03:11:54.370 --> 03:11:57.160 small business looking for credit, you're very likely to be 03:11:57.160 --> 03:12:00.460 approaching companies that offer any one of those three products. 03:12:00.760 --> 03:12:04.600 And so we provided the same set of metrics. I kind of already 03:12:04.600 --> 03:12:07.270 ran through what those pricing metrics were, the four that we 03:12:07.270 --> 03:12:11.200 settled on. In addition to that, there's also questions that 03:12:11.200 --> 03:12:15.430 highlight the prepayment policy, as well as the loan amount, the 03:12:15.430 --> 03:12:18.760 amount that will actually be disbursed into your account, the 03:12:19.120 --> 03:12:22.780 repayment schedule, like the frequency and the dollar amount, 03:12:23.170 --> 03:12:27.730 and the APR that's calculated in accordance with TILA for those 03:12:27.730 --> 03:12:33.160 products. The exciting piece is that now that the SMART Box-- it 03:12:33.700 --> 03:12:36.550 fits within one page, we tried to put it in very plain 03:12:36.550 --> 03:12:41.350 English-- it's been out in the market now for almost 2 and 1/2 03:12:41.380 --> 03:12:44.950 years, and we sort of have taken the last 2 and 1/2 years worth 03:12:44.950 --> 03:12:48.460 of learnings and are looking at revisiting it. And the new sort 03:12:48.460 --> 03:12:51.940 of exciting developments partially inspired by California 03:12:51.940 --> 03:12:55.870 are to add in some other questions that I think Barbara's 03:12:55.870 --> 03:12:58.900 focus group focused on, too, which is, outside of pricing, 03:12:58.900 --> 03:13:01.420 what else did small business customers need to see? So we're 03:13:01.420 --> 03:13:05.200 adding in questions about these security interests that may or 03:13:05.200 --> 03:13:08.890 may not be taken, the collateral requirements, and then whether 03:13:08.890 --> 03:13:12.100 or not there's any personal guarantee of payment. So those 03:13:12.100 --> 03:13:15.340 are all advances that are kind of coming soon, based on the 03:13:15.340 --> 03:13:17.410 feedback that we got after the first couple of years having 03:13:17.410 --> 03:13:18.070 adopted. 03:13:18.810 --> 03:13:24.660 And Christin, what does the ILPA require in terms of both the 03:13:24.660 --> 03:13:28.950 timing and format of the SMART Box disclosure of its members? 03:13:29.010 --> 03:13:32.430 Are there any sort of baseline requirements as to how and when 03:13:32.760 --> 03:13:34.080 it's presented to consumers? 03:13:34.380 --> 03:13:39.240 Sure. So we actually built out kind of an independent 03:13:39.240 --> 03:13:42.960 third-party consulting group that, first step, if you're 03:13:42.960 --> 03:13:47.520 interested in adopting, you come in and they validate your APR to 03:13:47.520 --> 03:13:50.910 make sure that the calculation's in accordance with TILA. Once 03:13:50.910 --> 03:13:54.060 the actual product is being sort of built out in people's tech 03:13:54.060 --> 03:13:59.940 programs, we try to keep the elements and the requirements 03:13:59.940 --> 03:14:04.380 around the manner of disclosure fairly flexible. So given all 03:14:04.380 --> 03:14:06.660 the different tech platforms, the fact that the majority of 03:14:06.660 --> 03:14:09.600 our customers are approaching this on mobile, we wanted to 03:14:09.600 --> 03:14:12.690 make sure that no company was completely kind of hamstrung in 03:14:12.690 --> 03:14:15.840 the way that they presented it. But we did set some baseline 03:14:15.840 --> 03:14:18.990 rules. One of them is you have to present the actual full 03:14:18.990 --> 03:14:22.800 disclosure. It can't just be placed in a hyperlink so that it 03:14:22.800 --> 03:14:26.430 can't be avoided. And then the other one is you obviously need 03:14:26.430 --> 03:14:30.270 have to present the entire set of metrics at the time that you 03:14:30.270 --> 03:14:34.800 present a specific offer to the customer. The other area where 03:14:34.800 --> 03:14:37.740 we'd love to see some movement but frankly have sort of 03:14:37.740 --> 03:14:40.620 experienced some tech challenges around it is, like I said, 03:14:40.620 --> 03:14:43.350 pulling that forward in the process. It would be great to 03:14:43.350 --> 03:14:46.590 have, even if it's kind of a shorter, more dynamic version, 03:14:46.710 --> 03:14:49.380 we'd love to be able to present some of those basic metrics, 03:14:49.380 --> 03:14:52.050 particularly the cost metrics, earlier in the process. But 03:14:52.050 --> 03:14:57.060 right now where we have that sort of rule set up is at the 03:14:57.060 --> 03:14:58.980 time you present them with a specific offer. 03:14:59.640 --> 03:15:00.630 Thank you. And Barbara? 03:15:01.380 --> 03:15:06.240 Yes. And I would just echo that, in the focus groups, folks said 03:15:06.240 --> 03:15:10.860 that they wanted something like the disclosure boxes early in 03:15:10.860 --> 03:15:15.780 the process as possible. But a number of them talked about how, 03:15:16.140 --> 03:15:22.050 if technology can be used to underwrite to them and to market 03:15:22.440 --> 03:15:26.970 to them, why can it also be used to create a kind of personalized 03:15:26.970 --> 03:15:32.130 calculator that could give them the opportunity to enter their 03:15:32.130 --> 03:15:36.600 revenues or their expected cash flows over the next several 03:15:36.600 --> 03:15:41.190 months, and with slider options, and they could kind of recreate 03:15:41.190 --> 03:15:45.300 what they think is a reasonable scenario for themselves. And 03:15:45.300 --> 03:15:51.090 they said, we understand this would be a best estimate. But 03:15:51.120 --> 03:15:53.460 that was something they were very interested in. 03:15:54.750 --> 03:15:57.000 And are there-- Barbara or anyone else who has 03:15:57.000 --> 03:16:01.170 observations-- we've sort of been talking about this kind of 03:16:01.170 --> 03:16:05.940 disconnect where there are these ILP SMART Box or initiatives 03:16:06.000 --> 03:16:09.240 have some form of uniform disclosure. But then one 03:16:09.240 --> 03:16:11.220 panelist referred to it as the Wild West in terms of 03:16:11.220 --> 03:16:14.910 information presented to consumers. What's your sense of 03:16:14.940 --> 03:16:18.660 how widely these sorts of standards are actually being 03:16:18.660 --> 03:16:20.700 adopted by the online lending community? 03:16:21.450 --> 03:16:23.820 Well, I can speak to the-- is this specifically about SMART 03:16:23.820 --> 03:16:24.750 Box or in general? 03:16:25.050 --> 03:16:26.670 The SMART Box or disclosures. 03:16:26.660 --> 03:16:32.870 Because we have similar standards in the Borrowers Bill 03:16:32.870 --> 03:16:34.970 of Rights. As I sad, transparency is only the first 03:16:34.970 --> 03:16:38.330 one. Also there's a whole set of standards around abusive 03:16:38.330 --> 03:16:41.180 products, around responsible underwriting, fair treatment 03:16:41.210 --> 03:16:45.920 from brokers, right to inclusive credit access and right to fair 03:16:45.920 --> 03:16:51.740 collection practices. So I mean, we've got over 60 lenders or 03:16:51.740 --> 03:16:57.050 brokers that have signed on to the BBOR, and about 45 03:16:57.080 --> 03:17:05.540 endorsers. Now, we simply take the signature of the CEO that 03:17:05.540 --> 03:17:08.300 they're doing this. So I will say, we don't go out, don't 03:17:08.330 --> 03:17:10.640 investigate. I don't know if SMART Box, you sound like you 03:17:10.640 --> 03:17:14.150 maybe have somebody who does a little more checking. But to 03:17:14.150 --> 03:17:19.610 have to have 60 lenders or brokers, mostly lenders, sign on 03:17:19.610 --> 03:17:22.640 shows that there's-- and we've had more and more interest over 03:17:22.640 --> 03:17:26.780 time because I think lenders are realizing that we really do need 03:17:26.780 --> 03:17:30.140 these standards. I mean, this is what we're seeing. And it's a 03:17:30.140 --> 03:17:32.540 way to separate out the responsible actors and 03:17:32.540 --> 03:17:35.000 responsible products from the not-responsible products. 03:17:35.420 --> 03:17:38.990 John actually raised two important points that I wanted 03:17:38.990 --> 03:17:41.870 to touch on briefly. In connection with the Borrower 03:17:41.870 --> 03:17:44.720 Bill of Rights, and then sort of the principles that underlie 03:17:44.720 --> 03:17:49.310 them that made those ideas important to that group, when 03:17:49.310 --> 03:17:52.250 you talk about underwriting, for example, what are some of the 03:17:52.250 --> 03:17:55.790 main sort of principles or tension points that you see in 03:17:55.790 --> 03:17:59.630 the industry between those who might want to adopt principles 03:17:59.630 --> 03:18:01.910 like these and those who do not? 03:18:02.900 --> 03:18:05.060 Well-- I'll just go quickly, and I'm sure other people want to 03:18:05.060 --> 03:18:07.040 add in. I mean, underwriting is actually-- it's harder. 03:18:07.340 --> 03:18:10.940 Transparency is, relatively speaking, a lot easier to deal 03:18:10.940 --> 03:18:14.060 with. Obviously getting inside the head of a-- well, if you 03:18:14.060 --> 03:18:16.280 have an algorithm, you at least can look at it, but the process 03:18:16.280 --> 03:18:21.530 for underwriting. But the basic principle is that the lender has 03:18:21.560 --> 03:18:26.060 made a determination that this loan can be paid back through 03:18:26.060 --> 03:18:31.850 the cash flow of the business operation, not by the owner 03:18:31.850 --> 03:18:35.150 personally, not by taking collateral, and most 03:18:35.150 --> 03:18:39.890 importantly, not by having to take another loan. So that's 03:18:39.890 --> 03:18:42.980 sort of the basic sort of high-end standard, is that 03:18:42.980 --> 03:18:45.890 that's where the underwriting should be focused. It should not 03:18:45.890 --> 03:18:48.650 be focused on those other considerations. I'm not saying 03:18:48.650 --> 03:18:52.670 you won't take the collateral or the personal guarantee, but that 03:18:52.670 --> 03:18:54.920 if there's any level of expectation that's how you're 03:18:54.920 --> 03:18:56.570 going to get paid back, you shouldn't make the loan. 03:18:58.340 --> 03:19:01.520 And I'd be curious, too, to hear the sort of same principles as 03:19:01.520 --> 03:19:04.400 they apply to collections-oriented practices. 03:19:04.400 --> 03:19:06.830 I mean, we talked a lot about that on our second panel. I'd be 03:19:06.830 --> 03:19:11.240 curious what are the most important principles that you 03:19:11.240 --> 03:19:16.580 think, and the RBL see, is codified in the Borrower Bill of 03:19:16.580 --> 03:19:17.900 Rights, related to collections? 03:19:20.810 --> 03:19:23.540 I don't have the actual document in front of me. But it's 03:19:23.540 --> 03:19:27.620 essentially understanding that-- it's following a set of 03:19:27.620 --> 03:19:31.340 standards that are non-abusive that are taking into account 03:19:31.550 --> 03:19:36.620 considerations that have come up that are not-- I know there was 03:19:36.620 --> 03:19:39.260 a lot of conversation about the confession of judgment clause in 03:19:39.260 --> 03:19:42.860 the last panel. We don't see any reason why there should be 03:19:43.040 --> 03:19:45.500 confession of judgment clauses at all. And obviously we've 03:19:45.500 --> 03:19:47.900 seen, with the Bloomberg article, and there actually was 03:19:47.900 --> 03:19:51.200 a bipartisan bill introduced at the end the last Congress by 03:19:51.200 --> 03:19:57.110 Senators Rubio and Brown, to ban them. So it's basically taking a 03:19:57.620 --> 03:20:04.550 very reasonable approach to going after the debt. 03:20:05.700 --> 03:20:08.730 Thank you. Does anyone else have other comments? 03:20:09.770 --> 03:20:12.830 I'll just invoke my ability as having an iPhone up here to read 03:20:12.830 --> 03:20:16.580 the Borrowers Bill of Rights. So the right to fair collection 03:20:16.580 --> 03:20:18.740 practices under the Borrowers Bill of Rights are "borrower has 03:20:18.740 --> 03:20:20.750 the right to be treated fairly and respectfully throughout a 03:20:20.750 --> 03:20:23.180 collections process, and the right to protections like those 03:20:23.180 --> 03:20:25.130 guaranteed under the Fair Debt Collection Practices Act." 03:20:25.130 --> 03:20:26.600 Thank you. So we devote a lot of our time to, you know, 03:20:26.600 --> 03:20:28.580 transparency disclosures, Thank you. So we've devoted a lot of 03:20:28.580 --> 03:20:31.280 our time to transparency disclosures, because that's a 03:20:31.280 --> 03:20:35.000 very important discussion going on in this community. We wanted 03:20:35.000 --> 03:20:37.040 to move on a little bit and touch on some of the other 03:20:37.040 --> 03:20:40.580 issues that, through our work enforcing the FTC Act and other 03:20:40.580 --> 03:20:44.480 laws that we enforce, are of importance to us. And the first 03:20:44.480 --> 03:20:47.150 of those-- and I thought initially throw this to Barbara, 03:20:47.150 --> 03:20:51.290 given some of your focus group work, is, thinking, as we were 03:20:51.290 --> 03:20:54.140 talking about on panel 2, about advertising and marketing more 03:20:54.140 --> 03:20:57.980 generally, beyond disclosure. Does anyone have any concerns or 03:20:57.980 --> 03:21:02.870 thoughts about how these products are marketed, if there 03:21:02.870 --> 03:21:06.380 are issues with aggressive marketing campaigns, harassment, 03:21:06.650 --> 03:21:11.180 deception of any kind, through any lenders in this community or 03:21:11.180 --> 03:21:12.200 their proxies. 03:21:13.160 --> 03:21:16.550 Well, certainly the focus group participants raised concerns. 03:21:17.600 --> 03:21:21.260 When we sent them out to pretend shop, we told them, don't 03:21:21.260 --> 03:21:27.560 actually apply for anything as part of this study. But a number 03:21:27.560 --> 03:21:32.930 of them, even before they were finished looking at websites, 03:21:32.930 --> 03:21:39.410 were getting pop-up ads and solicitations, right then and 03:21:39.410 --> 03:21:43.970 there. Generally-- so a lot of these folks had been seeking 03:21:43.970 --> 03:21:48.500 credit in the past year. So they noted their experience in 03:21:48.500 --> 03:21:50.600 general in the past year was that they were getting a lot of 03:21:50.630 --> 03:21:55.700 emails, snail mail, pop-up ads. Now, sometimes they said, I know 03:21:55.700 --> 03:22:00.020 of a lender because of some of the snail mail, or email, or 03:22:00.020 --> 03:22:04.580 whatever that I'm getting. But generally they characterized it 03:22:04.580 --> 03:22:11.090 as bothersome or annoying. I think the thing that really kind 03:22:11.090 --> 03:22:16.340 of set them off, frankly, was the phone calls, which they 03:22:16.340 --> 03:22:21.530 would get during business hours or all kinds of hours outside of 03:22:21.530 --> 03:22:24.410 business as well. They characterized these as extremely 03:22:24.410 --> 03:22:32.510 aggressive. And it was something that they almost universally 03:22:32.540 --> 03:22:33.410 complained about. 03:22:34.670 --> 03:22:38.900 And does anyone else have thoughts on that issue? OK, now 03:22:39.080 --> 03:22:42.020 related-- and it's something we see, and even held a whole 03:22:42.050 --> 03:22:45.950 full-day workshop about a few years ago-- in all the different 03:22:45.950 --> 03:22:49.040 sectors that we look at, and that includes financial products 03:22:49.040 --> 03:22:53.300 and services like lending, lead generators, and brokers, and 03:22:53.300 --> 03:22:56.360 affiliate marketers are ubiquitous and obviously had a 03:22:56.360 --> 03:22:59.540 good deal of complexity in terms of who's making what 03:22:59.540 --> 03:23:02.930 representations to whom in the marketplace. And so I was 03:23:02.930 --> 03:23:05.510 wondering if anybody has any sort of thoughts on potential 03:23:05.510 --> 03:23:09.800 concerns or risks associated with that in this sector. I know 03:23:09.800 --> 03:23:12.980 Christin, you might have done some thinking on what, 03:23:12.980 --> 03:23:15.380 potentially, their obligations should be to consumers they 03:23:15.380 --> 03:23:15.950 market to. 03:23:16.700 --> 03:23:21.230 Yeah, so the topic of kind of brokering, and lead generation, 03:23:21.230 --> 03:23:25.190 and that ecosystem was another one that we tackled through that 03:23:25.220 --> 03:23:30.380 the CSBS panel that a number of-- I think it was about 30 03:23:30.380 --> 03:23:33.710 different companies in the industry participated on. And 03:23:33.920 --> 03:23:36.440 unfortunately, I think that the report that came out of that 03:23:36.440 --> 03:23:40.280 probably raised more questions than it answered. But we tried 03:23:40.280 --> 03:23:45.440 to hone in on, if a policymaker is interested in this area, kind 03:23:45.440 --> 03:23:49.730 of what are the key policy risk or priorities that they should 03:23:49.730 --> 03:23:52.310 be focused on. And the ones that came out of that group were, 03:23:52.670 --> 03:23:56.270 first and foremost probably, what should supervision and 03:23:56.270 --> 03:23:59.960 oversight of a broker look like, whether that's at the state or 03:23:59.960 --> 03:24:04.310 the federal level? The other one was that was raised quite often 03:24:04.310 --> 03:24:08.810 was data protection and privacy of customer information. Because 03:24:08.810 --> 03:24:12.860 it is getting shared between companies that are not related. 03:24:13.460 --> 03:24:16.970 The third was really duties of care, like what are the 03:24:16.970 --> 03:24:23.420 responsibilities of a broker to advise the customer and to be 03:24:23.420 --> 03:24:25.970 transparent about what sort of advice they're providing and 03:24:25.970 --> 03:24:30.050 what might be driving that. And then the fourth area was the one 03:24:30.050 --> 03:24:32.390 that we've been spending the most time on here so far, which 03:24:32.390 --> 03:24:35.930 is what are the disclosure requirements on others in the 03:24:35.930 --> 03:24:39.110 ecosystem besides the lender themselves? And so I think that 03:24:39.110 --> 03:24:43.040 that's particularly prevalent. I know that Sheri has some good 03:24:43.040 --> 03:24:46.700 examples of kind of what it looks like to play almost like 03:24:46.970 --> 03:24:50.420 matchmaker. And there's quite a few companies that have built 03:24:50.420 --> 03:24:53.930 their business models around the Match.com for a small business 03:24:53.930 --> 03:24:57.560 owner. You go in, and the lender has their requirements, you put 03:24:57.560 --> 03:25:02.150 in your basic information, and then they match you. And what 03:25:02.150 --> 03:25:05.630 the responsibilities are of those matching platforms or lead 03:25:05.630 --> 03:25:09.140 generators. And I think it was a topic that there's a lot of 03:25:09.140 --> 03:25:11.690 different approaches and it's definitely very complex, but I 03:25:11.690 --> 03:25:14.030 think there's been increasing interest from policymakers to 03:25:14.030 --> 03:25:17.900 try and dig in on any one of those four policy points. 03:25:18.830 --> 03:25:19.400 Bernardo. 03:25:19.480 --> 03:25:22.060 I think it's important. When we did the Small Business Bill of 03:25:22.060 --> 03:25:24.190 Rights actually we included a lot of them. Because we felt 03:25:24.190 --> 03:25:26.320 that it actually needed to encompass not only the lenders 03:25:26.320 --> 03:25:28.900 but also the aggregators and other participants. Because at 03:25:28.900 --> 03:25:33.820 the end of the day, there's a conglomerate of different 03:25:33.820 --> 03:25:36.310 companies that are actually intersecting and interacting 03:25:36.310 --> 03:25:39.310 with the small business owners. So that's kind of the importance 03:25:39.640 --> 03:25:42.700 in our coalition, was let's go beyond sort of the traditional 03:25:42.700 --> 03:25:46.660 lenders and really include all the others. So as John said, we 03:25:46.660 --> 03:25:49.330 don't check them, but we basically ask them to every-- I 03:25:49.330 --> 03:25:52.690 have to sign, basically every year, that we're complying with 03:25:52.690 --> 03:25:55.060 everything that we said in our Small Business Bill of Rights. 03:25:55.570 --> 03:25:57.430 And we have a few of them that actually are participating with 03:25:57.430 --> 03:26:00.760 us. So I think that's really the key part, is when we talk-- I 03:26:00.760 --> 03:26:03.520 think that's a key part of that project, is include a lot of 03:26:03.520 --> 03:26:06.640 folks that participate in the market, and basically create 03:26:07.420 --> 03:26:10.210 sort of a standard, if you will, on how to interact. 03:26:12.550 --> 03:26:14.740 Just really quickly, I actually do have the Borrowers Bill of 03:26:14.740 --> 03:26:17.530 Rights up here. There's a bunch of standards on the fair 03:26:17.530 --> 03:26:19.600 treatment by brokers. I'm not going to cite them all, but I 03:26:19.600 --> 03:26:21.640 think there are a couple that are worth talking about. One is 03:26:21.640 --> 03:26:26.650 transparent loan options. If the broker has x number of products 03:26:26.650 --> 03:26:31.000 that he or she thinks fit, then they should disclose all of 03:26:31.000 --> 03:26:33.760 them, not just one where they may be getting a better fee. 03:26:34.270 --> 03:26:36.670 Speaking of fees, there should be transparent broker fees. 03:26:36.670 --> 03:26:41.560 There should be clear, OK, I'm getting paid this way by the 03:26:42.820 --> 03:26:46.390 lenders. I'm just going to-- a couple of these-- important 03:26:46.390 --> 03:26:48.220 disclosure of conflicts of interest, if there are any 03:26:48.220 --> 03:26:51.880 conflicts of interest with any of the companies. No fees for 03:26:51.880 --> 03:26:55.030 failure is another one. So I mean, there are a couple others 03:26:55.030 --> 03:26:57.430 here. We don't need to talk about all of them. But there are 03:26:57.430 --> 03:27:01.600 definitely things that brokers can and should do in dealing 03:27:01.600 --> 03:27:03.130 with the borrower. 03:27:03.550 --> 03:27:04.120 Christin. 03:27:04.510 --> 03:27:07.060 Sorry, I just wanted to add to-- just thinking back to what I 03:27:07.060 --> 03:27:10.720 just said, lest it sounds like we're very negative about that 03:27:10.720 --> 03:27:13.810 population, I actually think there's a lot of instances in 03:27:13.810 --> 03:27:17.350 the small business lending space where the referral ecosystem 03:27:17.350 --> 03:27:21.160 that we built actually leads to really great results. Like you 03:27:21.160 --> 03:27:24.700 may come in at a bank level, and perhaps you don't fit the bank's 03:27:24.700 --> 03:27:27.670 credit bucket. So then the bank can refer you to someone else on 03:27:27.670 --> 03:27:30.970 the ladder, all the way down to relationships that we have with 03:27:31.360 --> 03:27:34.030 CDFI and community lenders, where someone comes in, they 03:27:34.030 --> 03:27:37.030 don't hit an OnDeck hard cut, and we're able to pass them off 03:27:37.030 --> 03:27:40.000 into the hands of another trusted partner who might be 03:27:40.000 --> 03:27:42.850 able to lend to them. So I do think, while there's certainly 03:27:42.940 --> 03:27:46.360 very important guardrails that need to be put into place, it's 03:27:46.360 --> 03:27:49.960 not a space that's without value. There is definitely a 03:27:49.960 --> 03:27:52.930 value to the ecosystem that's built up in terms of getting the 03:27:52.930 --> 03:27:55.570 customer in front of a lender that's a great match for them. 03:27:55.780 --> 03:27:58.060 But we just want to make sure we have those guardrails in place. 03:27:59.560 --> 03:28:00.070 Sheri. 03:28:00.000 --> 03:28:03.180 So I guess now probably would be a good time for me to talk a 03:28:03.180 --> 03:28:06.690 little bit about the lender match tool that SBA has. It's 03:28:06.690 --> 03:28:11.460 completely free. There's no charges. What it does is it 03:28:11.460 --> 03:28:15.600 matches a potential bar with any SBA lender, whether you're a 03:28:15.600 --> 03:28:19.680 7(a) lender, a 504 lender, or a microlender. The lenders sign 03:28:19.680 --> 03:28:24.510 up, and they pick what dollar amount that they're interested 03:28:24.510 --> 03:28:28.800 in lending up to, what industries they want, and 03:28:28.800 --> 03:28:32.670 several other criteria like the states and the counties. And 03:28:32.940 --> 03:28:35.850 then when the borrowers come in, we ask them a series of 03:28:35.850 --> 03:28:40.860 questions, and then match them up with potential lenders who 03:28:41.250 --> 03:28:47.250 match up with them. And then SBA steps away. The lender then has 03:28:47.250 --> 03:28:50.310 the option to either opt in, opt out, or ask for additional 03:28:50.310 --> 03:28:56.790 information from the borrower. Currently we've had 290,000 03:28:56.790 --> 03:29:00.660 borrowers that have signed up for it. It's resulted in over 03:29:00.660 --> 03:29:05.340 4.3 million matches between-- now, one borrower may match to 03:29:05.340 --> 03:29:12.210 multiple lenders. And out of that, 587 lenders have opted in. 03:29:12.210 --> 03:29:14.640 Now, we don't know what happens after they opt in, whether they 03:29:14.640 --> 03:29:18.630 go with a conventional loan at their bank or if they end up 03:29:19.380 --> 03:29:23.760 using SBA guarantee. If there's no match whatsoever, we don't 03:29:23.760 --> 03:29:28.080 just drop the borrower then. We refer them to their local SBA 03:29:28.080 --> 03:29:31.950 resources so that maybe they can work with the borrower to come 03:29:31.950 --> 03:29:36.480 up with some other way of making their business a little bit more 03:29:36.480 --> 03:29:39.120 profitable or to make some changes there that will allow 03:29:39.120 --> 03:29:43.560 them to still find financing after they can make a few 03:29:43.560 --> 03:29:51.900 changes. Christin talked about it earlier-- the biggest 03:29:51.900 --> 03:29:55.770 complaint we get is that what happens is we send this borrower 03:29:55.770 --> 03:29:58.080 information off to the lenders and, then all of a sudden 03:29:58.080 --> 03:30:00.600 they're being inundated with all these phone calls. And they 03:30:00.600 --> 03:30:03.360 contact us and they say they want to opt out. It's like, 03:30:03.360 --> 03:30:08.070 well, the cat's out of the bag. You can't opt out at this point. 03:30:08.070 --> 03:30:12.300 So that's really been the only downfall that we've had. But 03:30:12.300 --> 03:30:16.020 we've been able to match people across the country, that 03:30:16.230 --> 03:30:18.570 normally they wouldn't have been able to find financing in their 03:30:18.570 --> 03:30:20.940 hometown. But because they used this tool, they were able to 03:30:20.940 --> 03:30:24.780 find a borrower in California when they were in New Jersey 03:30:24.780 --> 03:30:27.480 that was able to do this kind of deal. So we've had a lot of 03:30:27.480 --> 03:30:28.500 success with that. 03:30:29.160 --> 03:30:31.380 Thank you. And Sheri, actually, just by way of background, for 03:30:31.380 --> 03:30:34.320 audience members that are a little less familiar with SBA 03:30:34.320 --> 03:30:36.960 loans and the role that SBA plays, can you talk about that a 03:30:36.960 --> 03:30:41.460 little bit, the role they play versus what the banks and 03:30:41.460 --> 03:30:42.840 institutions who offer the loans play? 03:30:42.900 --> 03:30:45.960 Right. So SBA has several products that they have. But 03:30:45.960 --> 03:30:48.480 most of their products are guaranteed loans. In other 03:30:48.480 --> 03:30:51.600 words, the lender actually makes the loan. But if the loan goes 03:30:51.600 --> 03:30:55.380 bad, then SBA guarantees that the lender gets a portion of his 03:30:55.380 --> 03:30:58.290 money back. And there are several loan programs under 03:30:58.290 --> 03:31:02.790 that. There's 7(a) loan programs that would be lines of credit 03:31:02.820 --> 03:31:07.980 small loans larger loans, lines of capital lines of credit. And 03:31:07.980 --> 03:31:11.700 then there's 504 loans that are mostly used for construction. We 03:31:11.700 --> 03:31:14.730 also make direct loans to microlenders, and then those 03:31:14.730 --> 03:31:21.150 microlenders in turn make smaller loans to borrowers. And 03:31:21.150 --> 03:31:24.120 then if there's a disaster, we also make direct loans to 03:31:24.120 --> 03:31:27.390 businesses and homeowners in the case of a disaster. 03:31:28.020 --> 03:31:30.840 Sheri, there had been a suggestion on an earlier panel 03:31:30.840 --> 03:31:34.860 that SBA loans can be time-consuming or a greater 03:31:34.860 --> 03:31:38.700 commitment as compared to fintech options. Could you speak 03:31:38.700 --> 03:31:39.420 to that at all? 03:31:40.020 --> 03:31:42.840 That's probably true, because you're dealing with conventional 03:31:42.840 --> 03:31:46.140 banks. And these banks have-- y'all talked about all the 03:31:46.140 --> 03:31:49.350 regulations. And when you're dealing with the government, you 03:31:49.350 --> 03:31:53.910 have a lot of those. And so it is more time-consuming to get an 03:31:53.910 --> 03:31:56.640 SBA loan, but your interest rates are probably going to be 03:31:56.640 --> 03:32:04.770 less. If the borrower has the wherewithal to go through with 03:32:04.770 --> 03:32:07.950 it, then-- and we're making improvements to try to make it 03:32:07.950 --> 03:32:11.010 quicker. I don't know what the exact turnaround time is. I'm 03:32:11.010 --> 03:32:14.160 going to have to go back and ask. But I would be willing to 03:32:14.160 --> 03:32:19.920 bet a fintech loan is probably much, much quicker. One of the 03:32:19.950 --> 03:32:22.530 things I wanted to talk about, and maybe this doesn't have 03:32:22.530 --> 03:32:26.550 anything to-- we've been doing fintech at SBA before there was 03:32:26.550 --> 03:32:29.310 ever fintech. And we have developed a lot of open 03:32:29.310 --> 03:32:33.120 standards that are available to software vendors that work with 03:32:33.120 --> 03:32:37.380 the lenders to be able to make that process go a lot faster. So 03:32:40.440 --> 03:32:43.140 there's a lot of vendors that work with multiple lenders. And 03:32:43.140 --> 03:32:45.990 they have underwriting packages, they have origination packages, 03:32:45.990 --> 03:32:49.500 and they can work directly with us by calling our open-source 03:32:49.500 --> 03:32:53.790 web services, and get these loans approved by SBA lot 03:32:53.790 --> 03:32:57.150 faster. And if you're a preferred lender, you don't have 03:32:57.150 --> 03:32:59.910 to wait for the government to do anything. If you've checked off 03:32:59.910 --> 03:33:04.170 all the boxes, then you really can get a loan in a shorter 03:33:04.170 --> 03:33:07.650 amount of time. So I just wanted to mention that, too. Thanks. 03:33:08.100 --> 03:33:11.160 Great. And to touch on a couple other 03:33:11.520 --> 03:33:15.150 consumer-protection-oriented issues, could anybody-- I know 03:33:15.150 --> 03:33:17.610 Barbara, perhaps in connection with some of your research, 03:33:17.640 --> 03:33:20.760 you've got some thoughts on this-- talk a little bit about 03:33:20.790 --> 03:33:23.460 privacy and data security in this space, and if there are any 03:33:24.090 --> 03:33:28.140 sort of risks or concerns associated with lending and the 03:33:28.200 --> 03:33:31.260 consumer information associated with these transactions? 03:33:32.440 --> 03:33:36.640 Yes, so again, the focus group participants raised concerns 03:33:36.640 --> 03:33:42.250 about privacy. One of the reasons is they noted they were 03:33:42.250 --> 03:33:49.060 tracked while they were visiting websites as part of the project. 03:33:49.810 --> 03:33:55.450 And we've been looking into some of the websites as well. So I 03:33:55.450 --> 03:34:02.410 think one of the concerns is the use of trackers on websites. 03:34:02.890 --> 03:34:09.250 They have multiple legitimate purposes. Some are tracking what 03:34:09.970 --> 03:34:14.140 the business owner's doing on the website. But some trackers 03:34:14.140 --> 03:34:19.870 have the ability, even if an owner is just looking around-- I 03:34:19.870 --> 03:34:24.190 mean, they have two options. They could enter information and 03:34:24.190 --> 03:34:28.330 provide some basics, or they may just be looking around and not 03:34:28.330 --> 03:34:32.260 providing anything. In the case where they're providing some 03:34:32.260 --> 03:34:35.680 information, they're already kind of launching a process 03:34:35.680 --> 03:34:40.960 where that information could be connected via social analytics 03:34:40.960 --> 03:34:45.970 trackers or other types of trackers so that lenders or 03:34:45.970 --> 03:34:50.170 brokers can start to create a profile of that business and 03:34:51.130 --> 03:34:56.410 tailor their marketing efforts, for instance. But even, I think, 03:34:56.410 --> 03:35:02.680 if there's some anonymity, frankly it's murky and unclear. 03:35:03.490 --> 03:35:07.210 But there seems to be an ability to through digital 03:35:07.210 --> 03:35:12.550 fingerprinting and connection through data aggregators to 03:35:12.550 --> 03:35:15.940 nevertheless start to create a profile, even if that's 03:35:15.940 --> 03:35:18.490 something that's not particularly desired by the 03:35:18.490 --> 03:35:23.500 business. And we don't know what the practices are. Frankly this 03:35:23.500 --> 03:35:27.430 is an emerging area. Obviously it's using artificial 03:35:27.430 --> 03:35:32.260 intelligence and machine learning to some extent. And you 03:35:32.260 --> 03:35:37.120 could argue that, to some extent, it helps tailor 03:35:37.120 --> 03:35:41.350 marketing efforts and exposure to a broader array of tailored 03:35:41.350 --> 03:35:46.120 products. But there could be unwanted marketing efforts as a 03:35:46.120 --> 03:35:51.190 result of it. And we don't know, for instance, and I'm not 03:35:51.190 --> 03:35:54.760 suggesting anyone's doing this, but there could be different 03:35:54.760 --> 03:35:58.480 pricing offered as a result. It's just something that ought 03:35:58.480 --> 03:36:01.780 to be on everyone's radar screen that we ought to be monitoring. 03:36:02.260 --> 03:36:04.930 Thank you. Anybody else have thoughts on that issue? 03:36:04.000 --> 03:36:07.600 There has actually, lately, been a lot of movement at the state 03:36:07.600 --> 03:36:10.300 level to really start thinking through privacy. California has 03:36:10.300 --> 03:36:14.080 a privacy that everyone have to adhere to that. So I think there 03:36:14.080 --> 03:36:16.150 is a lot of move at the state level to kind of continue to do 03:36:16.150 --> 03:36:19.360 that. And I think that there will continue to be movement in 03:36:19.360 --> 03:36:21.760 the industry around that topic. 03:36:22.120 --> 03:36:26.050 OK, thank you. So let's move briefly onto another topic 03:36:26.050 --> 03:36:30.850 that's very important to us. Of course primarily the FTC works, 03:36:30.850 --> 03:36:34.030 through law enforcement, to stop deceptive and unfair practices 03:36:34.030 --> 03:36:38.020 in the marketplace. But beyond that, we really strive, when we 03:36:38.020 --> 03:36:41.920 can, to do outreach and educate consumers-- in this case, that 03:36:41.920 --> 03:36:44.890 would be small business owners-- about how to make informed 03:36:44.920 --> 03:36:48.550 choices in the marketplace and avoid confusion or potential 03:36:48.550 --> 03:36:51.730 deception. And so I just wanted to ask our panelists-- and I 03:36:51.730 --> 03:36:56.200 know a couple of you have been a part of initiatives or efforts 03:36:56.200 --> 03:36:59.680 to educate small business owners through your organizations. And 03:36:59.680 --> 03:37:02.740 so I just want to sort of ask what that looks like and how 03:37:04.360 --> 03:37:06.610 you're engaged in those efforts. John. 03:37:07.120 --> 03:37:10.840 Yeah. Small Business Majority, in addition to the policy work 03:37:10.840 --> 03:37:14.050 we do, we have a very robust entrepreneurship program. And 03:37:14.050 --> 03:37:18.970 that involves a whole variety of ways of educating small business 03:37:18.970 --> 03:37:22.570 on a bunch of issues. Access to capital has probably become the 03:37:22.570 --> 03:37:24.880 biggest issue in the last couple of years since we lost that 03:37:25.360 --> 03:37:29.260 component of the program. It's a combination of in-person 03:37:29.260 --> 03:37:32.020 seminars, particularly in the states where we have staff on 03:37:32.020 --> 03:37:36.970 the ground. It is national, and statewide, and regional webinars 03:37:37.000 --> 03:37:41.440 that we do. One of the things we do is we partner with business 03:37:41.440 --> 03:37:45.250 organizations. We have relationships over 1,000 mostly 03:37:45.580 --> 03:37:47.770 local and regional business organizations across the 03:37:47.770 --> 03:37:52.270 country. And we partner with them. So they need us coming 03:37:52.270 --> 03:37:56.740 with our expertise. So we do that, but responsible lending 03:37:57.220 --> 03:38:03.250 and how to go about it is a huge part of that. We also are 03:38:03.250 --> 03:38:08.740 launching-- well, we have a website, venturize.org, which 03:38:08.740 --> 03:38:12.220 has all of this information on it. And we are now launching a 03:38:12.220 --> 03:38:16.750 matching tool, similar to what Sheri described, on Venturize, 03:38:17.500 --> 03:38:23.950 that will take information and connect folks with loans out 03:38:23.950 --> 03:38:28.360 there. Right now, we have links to-- but part of the matching 03:38:28.360 --> 03:38:30.430 tool, we have links to a variety of lenders. Obviously a lot of 03:38:30.430 --> 03:38:33.880 CDFIs, a lot of mission-driven lenders, but also 7(a) lenders 03:38:34.120 --> 03:38:37.630 as well. The matching tool is being launched initially with 03:38:37.630 --> 03:38:40.870 CDFIs, particularly focused in certain regions. We just 03:38:40.870 --> 03:38:43.180 launched in Chicago, we're going to be launching in California. 03:38:43.900 --> 03:38:46.600 We're going to start with the CDFIs, and we would like to 03:38:46.600 --> 03:38:51.070 expand that to other types of loans. There may be some 03:38:51.070 --> 03:38:54.670 opportunities to partner with SBA's matching tool on that. So 03:38:57.100 --> 03:39:01.870 I'll sum up by saying it's hugely important to educate 03:39:02.320 --> 03:39:04.870 small business owners and to provide them with the sorts of 03:39:04.870 --> 03:39:07.780 tools that SBA is providing now, and that we're providing our 03:39:07.810 --> 03:39:13.060 Venturize, to enable them to learn. I like the idea of a 03:39:13.060 --> 03:39:16.450 calculator that you suggested, Christin-- giving me some ideas 03:39:16.450 --> 03:39:22.480 there. So that's a huge part that we have to remember as part 03:39:22.480 --> 03:39:22.990 of all this. 03:39:23.440 --> 03:39:24.970 Thank you. And Christin, did you have a- 03:39:25.480 --> 03:39:28.510 Yeah, I was just going to add-- I mean, I think, in a similar 03:39:28.510 --> 03:39:32.230 vein, there's both kind of our in-house efforts at education, 03:39:32.230 --> 03:39:35.650 but one partnership that we've found that's been really helpful 03:39:35.650 --> 03:39:39.850 is we partner with the SCORE Foundation, which has a network 03:39:39.850 --> 03:39:43.840 of, like, retired executives-- I think it's somewhere around like 03:39:43.870 --> 03:39:47.080 11,000 throughout the country-- who can help provide mentorship. 03:39:47.440 --> 03:39:49.900 And one thing that I think John touched on earlier that I just 03:39:49.900 --> 03:39:52.570 think is critically important is that we don't just offer those 03:39:52.570 --> 03:39:55.210 services to somebody who successfully takes out a loan. 03:39:55.390 --> 03:39:58.270 It's usually the people who are declined that need it the most. 03:39:58.510 --> 03:40:02.350 And so we offer and set them up with those mentors whether 03:40:02.350 --> 03:40:05.140 you're approved or declined. Because in many cases, you want 03:40:05.140 --> 03:40:07.960 to understand why and how you were declined, and how you could 03:40:07.960 --> 03:40:10.570 build your business credit and kind of continue up that 03:40:10.570 --> 03:40:13.300 financial health ladder. And I think that providing that sort 03:40:13.300 --> 03:40:17.410 of education to all folks, even non-customers, is something 03:40:17.410 --> 03:40:20.260 that's critically important to us, and I think is shared by a 03:40:20.260 --> 03:40:21.670 lot of other companies on the panel. 03:40:21.760 --> 03:40:24.310 And actually we have that on our Venturize system. I completely 03:40:24.310 --> 03:40:27.280 forgot. In fact, I just found out, we have all 900 small 03:40:27.280 --> 03:40:31.420 business development centers on our Venturize platform now. We 03:40:31.420 --> 03:40:36.490 connect with SCORE. So yeah, that's absolutely critical to be 03:40:36.490 --> 03:40:39.370 able to advise people, not only if they're considering a loan, 03:40:39.370 --> 03:40:41.380 but what happens when they didn't get a loan. Or maybe they 03:40:41.380 --> 03:40:43.630 shouldn't be applying for a loan yet. Maybe they need to get 03:40:43.630 --> 03:40:45.340 their act together before they do that. 03:40:46.360 --> 03:40:47.020 And Ky-Nam. 03:40:47.930 --> 03:40:50.180 jJust briefly, because I know we're running out of time on the 03:40:50.180 --> 03:40:53.480 panel, but CRC, the California Reinvestment Coalition, is an 03:40:53.480 --> 03:40:56.300 interesting kind of grasstops and grassroots organization 03:40:56.300 --> 03:40:59.150 through our membership. So to the extent that we've been doing 03:40:59.210 --> 03:41:02.030 consumer outreach and education, it's been through-- in language, 03:41:02.030 --> 03:41:05.120 culturally-competent kind of seminars, with our members on 03:41:05.120 --> 03:41:09.410 the ground in Richmond and Southern California. We're also 03:41:09.410 --> 03:41:12.380 doing an interesting partnership with LA County and this outfit 03:41:12.380 --> 03:41:15.920 called Fenton Communications on payday lending, and trying to 03:41:15.920 --> 03:41:19.820 target folks who would be headed towards those types of cash 03:41:19.820 --> 03:41:23.030 merchants and send them elsewhere. I also wanted to 03:41:23.060 --> 03:41:26.630 briefly touch on the data security point that Barbara was 03:41:26.630 --> 03:41:30.050 mentioning, and just lift up that there's real civil rights 03:41:30.050 --> 03:41:32.360 implications that go into us, that when you have 03:41:32.360 --> 03:41:34.520 circumstance-and I've talked with fintechs, I think some of 03:41:34.520 --> 03:41:37.940 them in the room have said they can actually tell, with 99% 03:41:38.180 --> 03:41:41.270 certainty, the race of the borrower, whether it's on the 03:41:41.270 --> 03:41:45.290 way in on the way out. But there isn't that kind of disclosure of 03:41:45.290 --> 03:41:48.740 how that data is used. I think we can't just trust that it's 03:41:48.740 --> 03:41:50.960 going to be used that way. We've seen it kind of happen 03:41:50.960 --> 03:41:55.490 perniciously in the regulated sector. So as the ecosystem 03:41:55.490 --> 03:41:59.420 evolves, we want to make sure that there's the same type of 03:41:59.420 --> 03:42:02.360 democratic oversight for fintech as there is for the regulated 03:42:02.360 --> 03:42:04.040 banking industry to make sure that we're not widening the 03:42:04.040 --> 03:42:05.210 racial wealth gap. 03:42:05.540 --> 03:42:08.990 Great. Thank you. So we have about three minutes or so left. 03:42:08.990 --> 03:42:12.110 And so actually it's sort of perfect for a little exercise I 03:42:12.110 --> 03:42:17.150 would propose. So assume we had an audience or a roundtable 03:42:17.150 --> 03:42:20.570 here, of small business owners of the sort that you work with 03:42:20.600 --> 03:42:26.000 or lend funds to. And through these sort of educational 03:42:26.000 --> 03:42:29.240 efforts you've engaged in, how would you, if you just had a few 03:42:29.240 --> 03:42:32.990 minutes, as we do, what would be sort of the key points or 03:42:32.990 --> 03:42:36.080 messages that you would convey to them about how to 03:42:36.080 --> 03:42:39.050 successfully navigate the information in this marketplace, 03:42:39.320 --> 03:42:43.250 and tips to avoid potential problems or even deception? 03:42:44.420 --> 03:42:47.360 Anyone have any thoughts? John. 03:42:47.960 --> 03:42:52.040 Well, I mean, there's a conflict here, because a lot of times 03:42:52.250 --> 03:42:57.920 small business owners want a loan quickly. And so but we tell 03:42:57.920 --> 03:43:02.570 them, you need to take a little bit of time and figure out-- all 03:43:02.570 --> 03:43:05.090 of the things we're trying to maybe get into a TILA bill, or 03:43:05.090 --> 03:43:08.570 that are a part of the SMART Box or the Borrowers Bill of Rights, 03:43:09.080 --> 03:43:14.900 they need to consider it. Ask what the APR is, make sure 03:43:14.900 --> 03:43:18.170 you've asked all the questions about prepayment, about fees, 03:43:19.910 --> 03:43:25.790 and the term. All of the things that we want Lenders to 03:43:25.790 --> 03:43:30.890 voluntarily provide, we educate borrowers that they need to be 03:43:30.890 --> 03:43:34.190 asking those questions. So I mean, we're not saying they have 03:43:34.190 --> 03:43:37.640 to take three weeks to do this. But just educate themselves and 03:43:37.670 --> 03:43:41.240 be aware that if they don't, they could really be getting 03:43:41.240 --> 03:43:44.840 themselves into a trap. The other thing is, don't take the 03:43:44.840 --> 03:43:47.090 loan if you don't-- it's the flip side of what I said about 03:43:47.090 --> 03:43:49.760 the lenders. Don't take the loan if you don't think you can pay 03:43:49.760 --> 03:43:54.050 it back through your normal cash flow. And I'm a former small 03:43:54.050 --> 03:43:57.440 business owner, so I tend to get pretty exuberant in thinking, 03:43:57.440 --> 03:44:00.470 yeah, no problem, I can do it. But you really need stop and 03:44:00.470 --> 03:44:02.690 think. Because then you have to decide, well, what happens if I 03:44:02.690 --> 03:44:04.790 can't, and I have to take another one of these loans, and 03:44:04.790 --> 03:44:10.580 that becomes a death spiral, or I'm going to potentially lose 03:44:10.580 --> 03:44:13.940 collateral, or I have to cough up money personally. So they 03:44:13.940 --> 03:44:18.440 really need to be thinking about that, even if it means they have 03:44:18.440 --> 03:44:21.890 to slow down a little bit before they sign on the dotted line so 03:44:21.890 --> 03:44:22.340 to speak. 03:44:22.880 --> 03:44:24.980 Great. Great. Does anyone else have thoughts? 03:44:25.200 --> 03:44:27.570 I would say, at the end of day, they should start their process 03:44:27.630 --> 03:44:29.310 with really understanding what they want to do with the 03:44:29.310 --> 03:44:31.920 lending. I think that's one of the biggest things that we try 03:44:31.920 --> 03:44:34.260 to do with our small business owners is really have a 03:44:34.260 --> 03:44:36.660 conversation of what they're trying to use that money for. 03:44:37.050 --> 03:44:39.300 And when they understand what exactly they're going to do, 03:44:39.300 --> 03:44:43.200 then take the time-- really take the time to understand what are 03:44:43.200 --> 03:44:47.130 the different options and which option actually best fits what 03:44:47.130 --> 03:44:49.890 actually they're trying to do. Because I think that's why they 03:44:49.890 --> 03:44:52.140 rush into the decision because they haven't spent enough time 03:44:52.140 --> 03:44:54.420 understanding what they're going to do with the money and really 03:44:55.080 --> 03:44:57.330 what is the best product for that need that they're trying to 03:44:57.330 --> 03:45:00.210 serve. So I think that's-- this would really be the time to 03:45:00.210 --> 03:45:03.030 really understand what they're trying to do and to execute that 03:45:03.330 --> 03:45:03.870 decision. 03:45:04.830 --> 03:45:07.950 Great, Thank you. Well, it does look like we're just about to 03:45:07.950 --> 03:45:11.520 run out of time. And so I'd ask everybody to really thank our 03:45:11.520 --> 03:45:13.800 great panelists here today. This was a very interesting 03:45:13.800 --> 03:45:19.890 discussion. Thank you. [APPLAUSE] And before we all get 03:45:19.890 --> 03:45:25.740 up, we're fortunate today, too to have our bureau director, 03:45:25.740 --> 03:45:29.550 Andrew Smith, to offer some closing remarks. Welcome. 03:45:37.480 --> 03:45:40.570 So everyone's going to stay here? [CHUCKLING] That's OK. I'm 03:45:37.560 --> 03:45:37.950 [APPLAUSE] 03:45:40.570 --> 03:45:45.340 good with that. So just a quick disclaimer, I speak for myself 03:45:45.340 --> 03:45:48.280 only not for the commission or for any individual commissioner. 03:45:48.730 --> 03:45:52.870 So I wanted to thank you, all of our panelists today, and also to 03:45:52.900 --> 03:45:59.440 our audience. One of the things that has been surprising to me 03:46:00.190 --> 03:46:03.190 about small business financing for a number of years is how 03:46:03.190 --> 03:46:06.700 little scrutiny it's been given, at least at the federal level, 03:46:07.540 --> 03:46:10.810 with the exception, of course, of the really excellent work and 03:46:10.810 --> 03:46:13.270 groundbreaking work that the Federal Reserve Board and some 03:46:13.270 --> 03:46:16.900 of the Federal Reserve banks have been doing on these issues. 03:46:18.010 --> 03:46:21.670 Maybe that's because people still think that these are 03:46:21.670 --> 03:46:26.260 $500,000 bank loans. But I think what I've learned today at least 03:46:26.260 --> 03:46:29.290 from-- in all of our panels is that that's a bit of a fiction, 03:46:29.590 --> 03:46:32.530 is that these are smaller loans, given to smaller businesses by 03:46:32.530 --> 03:46:35.980 people who aren't subject to bank supervision. So we've 03:46:35.980 --> 03:46:38.200 covered a lot of ground this morning. We talked about these 03:46:38.200 --> 03:46:40.810 recent trends in the small business finance market, 03:46:41.110 --> 03:46:44.290 including the use of technology to offer financing to small 03:46:44.290 --> 03:46:47.560 businesses. We've talked about the risks to small businesses, 03:46:48.010 --> 03:46:50.740 including the potential for confusion, deception, unfair 03:46:50.740 --> 03:46:55.240 servicing, and collection, and even outright fraud. We talked 03:46:55.240 --> 03:46:59.140 about the laws and rules that would apply to people who are 03:46:59.140 --> 03:47:02.500 offering financing to small businesses, and efforts by 03:47:02.530 --> 03:47:07.450 industry, by government, by small businesses to ensure that 03:47:07.450 --> 03:47:10.300 small businesses understand the cost and terms of these 03:47:10.300 --> 03:47:15.730 products. As Commissioner Chopra mentioned this morning, we at 03:47:15.730 --> 03:47:20.230 the FTC think that we have a special role to play. Unlike 03:47:20.260 --> 03:47:25.270 other federal regulators, we're not constrained by whether the 03:47:25.270 --> 03:47:28.600 transaction is for personal, family, or household purposes, 03:47:28.810 --> 03:47:34.090 that our organic statute, the FTC Act, allows us to address 03:47:34.090 --> 03:47:38.560 unfair and deceptive practices, even with respect to businesses. 03:47:38.830 --> 03:47:43.450 And I want to make clear that we believe strongly in the 03:47:43.450 --> 03:47:46.510 importance of small businesses to the economy, the importance 03:47:46.510 --> 03:47:50.770 of loans and financing for small businesses, and the ability of 03:47:50.770 --> 03:47:54.820 technology to expand access to fair and transparent financing 03:47:54.820 --> 03:47:58.390 for small businesses. But we believe equally strongly in 03:47:58.390 --> 03:48:02.380 protecting those businesses from unfair and deceptive practices. 03:48:03.220 --> 03:48:06.070 After all, if small businesses think that the finance game is 03:48:06.070 --> 03:48:11.260 rigged, then they won't play. And in that case, we all lose. 03:48:11.920 --> 03:48:15.130 The FTC Act gives us broad authority to stop deceptive and 03:48:15.130 --> 03:48:19.330 unfair practices by non-bank lenders, MCA funders, marketers, 03:48:19.330 --> 03:48:24.520 brokers, ISOs, lead generators, servicers, and collectors. We 03:48:24.520 --> 03:48:28.360 are very concerned about reports of unfair and deceptive 03:48:28.360 --> 03:48:32.320 marketing, sales, and collection practices in the small business 03:48:32.320 --> 03:48:36.310 finance market. I want to remind all of you that protecting small 03:48:36.310 --> 03:48:39.460 businesses is nothing new for the FTC. I would direct you to 03:48:39.460 --> 03:48:43.000 our Operation Main Street, last summer, when we, with our state 03:48:43.000 --> 03:48:45.730 partners, brought dozens of actions to protect small 03:48:45.730 --> 03:48:52.180 businesses from fraud and unfair practices. Acting to prevent 03:48:52.180 --> 03:48:55.600 sharp practices by fintech lenders is also nothing new for 03:48:55.600 --> 03:48:59.500 us. See, for example, our recent cases against Lending Club, 03:48:59.500 --> 03:49:03.820 SoFi, and Avant. Although financial technologies can 03:49:03.820 --> 03:49:06.940 evolve quickly, the underlying legal protections for small 03:49:06.940 --> 03:49:11.080 businesses remain the same, and have proven remarkably adaptable 03:49:11.080 --> 03:49:16.300 over time. We adapt the FTC Act, the FCR, or the Fair Credit 03:49:16.300 --> 03:49:19.090 Reporting Act, the Equal Credit Opportunity Act, and other 03:49:19.090 --> 03:49:22.630 statutes to new technologies and changing circumstances all the 03:49:22.630 --> 03:49:26.680 time. In fact, it's a point of pride for us. While we recognize 03:49:26.680 --> 03:49:30.070 the benefits of financial technologies, we expect that 03:49:30.070 --> 03:49:33.190 even the most innovative companies will observe these 03:49:33.190 --> 03:49:36.910 baseline consumer protection principles. So if you're a small 03:49:36.910 --> 03:49:39.640 business owner and you feel as though you've been harmed in 03:49:39.640 --> 03:49:42.700 connection with small business financing, you should submit a 03:49:42.700 --> 03:49:51.010 complaint to us at the FTC, FTC.gov, or 877-FTC-HELP. and to 03:49:51.010 --> 03:49:54.880 close, we look forward to continuing today's dialogue with 03:49:54.880 --> 03:49:57.640 industry, with consumer advocates, with our government 03:49:57.640 --> 03:50:01.420 partners. Don't hesitate to reach out to us in the coming 03:50:01.420 --> 03:50:05.020 weeks and months, just as many of you have reached out to us in 03:50:05.020 --> 03:50:08.170 connection with this forum. Thank you all for coming today. 03:50:08.170 --> 03:50:15.730 [APPLAUSE] And that concludes our program.