Banking
Only 10% of Banks Have a Credit-Scoring System That Can partially or Fully Automate Small Business Lending
October 3, 2024If you thought that fintech had already largely come in and revolutionized the lending process at banks, you’d be wrong. According to the FDIC’s latest annual small business lending report, only 10% of banks have a credit-scoring system that can partially or fully automate the underwriting of some non-credit-card lending. Further, only 3% of banks use a credit-scoring system to auto-approve loans and less than 1% will auto-approve a loan of $250,000.
When it comes to fintech, “banks most commonly use fintech to help with regulatory compliance and for steps taken after loan approval,” the report says, “such as closing, performance and servicing, and portfolio analytics.”
Still, that doesn’t mean they’re terribly slow. In fact, thirty percent of banks can approve a small and simple business loan within one business day and 75% of of banks can approve one within five business days, though approvals usually happen within ten days on average.
And just because a bank’s business loan operation isn’t fully automated doesn’t necessarily mean they’re at a disadvantage competitively because banks actually tend to view the personal relationship with their small business loan customers as one of their core advantages.
“Banks use and high value branch locations and on-site visits as ways to generate and maintain small business lending relationships,” the report says. “About four in five banks define their geographic market for small business lending based on their branch footprint and, on average, their market extends 40 miles from their branch locations.”
“Very few banks allow borrowers to complete a loan application entirely through an online portal,” it adds. And that’s by design apparently. Of the banks surveyed for the report, almost half of them said they had NO PLANS to use or CONSIDER fintech in small business lending.
There’s a lot more insight in the full report that you can view here.
When the Bank Gets Hacked
July 1, 2024Before you point your finger at someone for backdooring your deals, consider another possibility, that some technology in the deal flow chain could be compromised, whether it’s yours, theirs, or some backend that nobody suspects could be hacked. One such modern example is Evolve Bank and Trust, which had 33 terabytes of data stolen and then leaked on the internet.
Evolve is big in the fintech world to the point where Fintech reporter Jason Mikula determined that customers at more than a dozen onboarded fintechs also had their info stolen, including at Yotta, Copper, Yieldstreet, Juno, Dave, BrightSide, SoLo Funds, ChangEd, Mercury, MainVest, Fund That Flip, Nomad, Bitfinex, Rho, and more. Other firms like Mercury, Bilt, Affirm, and Wise notified its users that their info may have also been breached in connection with the hack.
Via Mikula’s Fintech Business Weekly:
“Info security professionals who have accessed and begun examining the data in order to take necessary steps to mitigate risk have suggested that Evolve’s Azure tenant was compromised, allowing the hackers to make copies of most or all of the bank’s virtual machines, including those running its website, SFTP, SQL server, as well as information from its core banking system, which is said to be Jack Henry’s jXchange — which potentially could include Evolve’s credentials for accessing Federal Reserve systems.”
Evolve was hit with an enforcement action by the Federal Reserve last month, before revealing that it had been hacked.
“This was a ransomware attack by the criminal organization, LockBit,” Evolve said in a statement on its website. “They appear to have gained access to our systems when an employee inadvertently clicked on a malicious internet link. There is no evidence that the criminals accessed any customer funds, but it appears they did access and download customer information from our databases and a file share during periods in February and May.”
Evolve has 26 offices across 10 states, though its full service brick and mortar branches are only located in Arkansas and Tennessee.
Underwriters and brokers should be extra vigilant in verifying that apps and bank statements, particularly those that are customers of Evolve, originated from the applicant and through the means that they remembered.
Bank Issues Humorous Quarterly Earnings Statement
August 10, 2023
Think all banks are boring? First Guaranty Bank which operates primarily in Lousiana and Texas, opened its most recent quarterly earnings with a letter from its president Alton B. Lewis.
“Resilient: Springing back, rebounding,” Lewis begins in his address to shareholders, citing Random House Webster’s Unabridged Dictionary Second Edition. “Returning to the original form for position after being bent, compressed or stretched. Recovering readily from illness, depression, adversity, or the like; buoyant. Another good word is strong. An even better word is tough. These are words that describe what First Guaranty has been during a six month period in which we have survived wound after wound, not of our own causing as we continue to deliver to our shareholders, customers, and our staff members extraordinary results.”
It then goes on to say that there’s been “enough crying over spilt milk” and that “basically, we have and will continue to make a lot of money for our shareholders.”
Lewis appears to have at least delivered. “We have significantly increased our loan interest income to offset the increased cost of deposits which are set by the Federal Reserve,” he said. “For the quarter, we made over $2,000,000 for our shareholders even after the FDIC assessment.”
Please Send Four Months Bank Statements
July 20, 2023
At some point in time the industry decided that the most recent four months bank statements constituted a solid baseline to understand a business’ financial picture. So deeply rooted is this precise number of statements that certain states like California now require that underwriters collect a minimum of four months statements to calculate a business’ average monthly historical sales. Curiously, there’s also a maximum. California does not want funders using more than twelve months of historical data in their calculations.
“The current four bank statements just give us a general idea of how the current position and standing with the business is, if they’re paying their proper overheads and their expenses,” said Ken Tsang, the Head Underwriter and VP at Fundkite. “And more of a general idea of what revenue they’re making right now…”
For deeper underwriting, however, he said they may ask for more, a common trend in the industry.
Gary Jules, Underwriter at Power Capital, also asserted that they rely on four statements as a baseline.
“If it’s a seasonal business, we may ask for more [statements],” Jules said. “Basically, we just want to see get a general broad picture of how much the business is generating a month.”
For Jason Hausle, who does Sales and Business Development at Quikstone Capital Solutions, the requirement is only two months bank statements but they also need six months worth of merchant processing statements because they specialize in split-funding. Although the merchant processing statements give them a feel for historical revenue figures, they find value in the bank statements for other reasons.
“We like to use the bank statements,” said Hausle, “the two most recent just to make sure there’s no other positions or liens that would pose risk for underwriting.”
Requests for statements industry-wide generally seem to top out at twelve months. Indeed, states like California limit funding providers to using a maximum of twelve months data in their monthly historical average sale calculations.
Tsang at Fundkite expressed that a limit of twelve is generally enough anyway.
“I would say, to an extent, yes, anything exceeding 12 months might be an issue because after all, we have to keep our business relationship with our ISO partners and with the merchant in general,” said Tsang. “We don’t want to create any issue where it becomes excess–pretty much excessive, and it might create any issues with our relationships…”
The Intriguing History of the Automated Clearing House (ACH)
April 26, 2023
The Automated Clearing House (ACH) was born in the 1970s as a response to the inefficiencies of paper-based transactions, and it’s been revolutionizing the world of electronic payments ever since.
In the late 1960s, the United States was facing a mounting problem: the rapid growth in paper checks. Banks were drowning in a sea of paper as they manually processed these transactions. It was a labor-intensive, time-consuming, and error-prone process.
Enter the ACH, an electronic network that emerged as a solution to alleviate the paper burden. In 1972, California’s Bank of America and the Federal Reserve Bank of San Francisco piloted the first ACH program. Their goal was simple: to streamline the check-clearing process and improve efficiency within the financial industry.
In 1974, the National Automated Clearing House Association (NACHA) was formed, providing a much-needed governance structure for the ACH network. Its role was to standardize processes, establish rules and guidelines, and promote the adoption of ACH services across the nation.
As the number of participating financial institutions grew, the ACH network flourished. Electronic transactions gained popularity, and by the end of the decade, paper checks began to lose their dominance.
Throughout the 1980s and 1990s, the ACH network continued to evolve. The advent of the internet and new financial technologies further propelled ACH adoption. Direct deposit, electronic bill payments, and other ACH services became commonplace, reducing the need for paper checks.
In the 2000s, ACH transactions grew exponentially. The Check Clearing for the 21st Century Act (Check 21) in 2003 accelerated the transition to electronic check processing, further cementing the ACH’s role in the financial landscape.
Today, the ACH network processes over 25 billion transactions annually, transferring trillions of dollars. As the world becomes increasingly digital, the ACH network is adapting to meet the needs of businesses and consumers alike.
The introduction of Same Day ACH in 2016 marked a significant step towards real-time payments. This service allows for faster processing of transactions, reducing the waiting time for funds to be available.
As the ACH continues to grow and evolve, it remains a crucial component of the modern financial ecosystem. The once chaotic world of paper-based transactions has transformed into a streamlined, digital landscape, thanks to the innovative spirit that gave birth to the Automated Clearing House. And as technology advances, so too will the ACH, ensuring its place in the annals of financial history.
Goldman Sachs Cutting Loose its Marcus Loan Portfolio, Is Going Hard on Savings Accounts
April 18, 2023
Goldman Sachs followed the windup of its Marcus online lending business by taking a $470M loss on a partial sale of its loan portfolio and transfer of the rest of it to held for sale, the company revealed. Marcus still exists for the bank as an online savings account brand, which it has found very adept at acquiring deposits.
Goldman’s actions with Marcus were explained in January when CEO David Solomon said “…we tried to do too much too quickly.”
When Marcus first launched, Goldman Sachs was widely viewed as trying to compete with LendingClub in the online lending space. Both companies are now more famously known to consumers for another product, a high yield savings account. Marcus offers 3.9% APY on savings right now while LendingClub offers 4.25% APY. Despite LendingClub’s perceived edge here, Goldman Sachs announced yesterday that it was teaming up with Apple to offer an Apple Card savings account that pays 4.15% APY.
Don’t Run To The Big Banks Because of SVB!
April 6, 2023
The weekend of March 10 saw the largest and most significant banking failure in the United States since 2008 until the Federal Government announced its (don’t-call-it-a-bailout) deposit guarantee on March 13.
Silicon Valley Bank and Signature Bank were thought to be niche and regional banks whose actions wouldn’t affect the broader banking industry, but when they had to sell some of the long-term US treasury bonds that they over-invested in at a loss as their worth plummeted when interest rates ballooned, panic quickly spread and launched the first social media run on the banks. To stop this, the Government guaranteed that all accounts in both banks would be guaranteed their full sums, even if they were over the FDIC-insured amounts of $250,000.
So with the benefit of two weeks of hindsight, how did this collapse affect the cash advance industry?
While Silicon Valley Bank catered primarily to the venture capital and tech industries, Signature Bank in New York was known for its welcome embrace of crypto and alt-finance businesses, and many MCA companies had accounts there.
When Signature Bank failed, some of the MCA companies we work with at Better Accounting Solutions started considering transferring their accounts to the “Big Four” banks: JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo.
Their reasoning made sense: Amid criticism of their decisions in the aftermath of this collapse, representatives of the Government and financial regulatory agencies suggested they wouldn’t follow the approach they employed this time round if another bank failed, and instead would weigh up the specific bank’s size and significance in each specific instance to decide whether or not to guarantee depositor’s accounts.
Understanding that their funds would not be protected if there was another crisis in the banks they worked with, several cash advance companies wanted to move their funds to banks that would be considered “too big to fail”, and their money would be guaranteed by the Government in the case of a calamitous collapse. They also wanted to start spreading out their funds across multiple banks to not surpass $250,000 in any of them, to ensure their money was always insured.
There are two issues with this response to these legitimate concerns:
- When a merchant cash advance company starts working and relying on the services of a big bank, they do that without understanding the rules and regulations these banks impose on their clients and how they may be affected, particularly a cash advance company.
Even if you try to hide what your business does, once the bank finds out that you’re in the MCA space-and count on them finding out sooner rather than later-, you’re business will likely be subjected to a thorough, extensive and painful review process to determine whether you’ve broken any of their rules. During this time, they may freeze your accounts (on average for 3 months) and cripple your business’s ability to operate during this time.
- Additionally, when trying to stick the FDIC-insured sum of $250,000 in each bank, you’re limiting yourself to an extremely inefficient and unsustainable way of doing business. It affects your ability to cover your operating costs, fund deals and have money available on hand when you need it.
To responsibly manage these risks while balancing your ability to do business, this is what we’ve been advising our clients:
Before beginning to work with any bank, speak to people involved in the MCA space (brokers, funders and even accountants) to get a list of which banks are friendly to the industry. Ensure that they understand the business and don’t have onerous regulations and practices that will not allow you to run your business without their constant intervention.
Once you know which banks to work with, we advise our clients to open accounts with two of these banks and split their funds equally between them. This ensures they have somewhere to send their money in case one collapses, and if they can’t get it out in time, they still have access to half of their capital while waiting to see how the Government responds. This 50/50 approach allows MCA companies to run and grow their merchant cash advance businesses efficiently during ‘times of peace’ while anticipating and preparing for the consequences of another collapse.
As the Government proved during this crisis, in the age of rapid communication a massive run of the banks can be mobilized within minutes, which forced the Government to (“not”) bail out a small bank to stop a larger collapse. I-and other experts- remain convinced that in the event of another collapse, they’ll be forced to follow this same policy and guarantee all deposits of all sizes at all banks, which is why I confidently advocate for this 50/50 approach.
An important disclaimer: This is an opinion article analyzing the specific collapse of Silicon Valley Bank and Signature Bank, and the response MCA companies should have to it broadly speaking. Every case and merchant cash advance company is different, and for specific advice and guidance, they should contact the author directly.
What a Prime Customer Would Expect From a Non-Bank Lender
March 15, 2023In the current banking environment, we asked what a prime customer would expect from a non-bank lender should they be forced to go that route:
Customer Experience:
I would expect a seamless, user-friendly online or mobile application process, with responsive customer support via phone, chat, or email. I would appreciate transparency in terms and fees, as well as clear communication about the loan approval process and timeline.
Interest Rates:
Since non-bank lenders typically have less stringent regulations and higher risk tolerance than traditional banks, I would expect the interest rates to be somewhat higher than those offered by prime credit banks. However, I would still look for competitive rates, possibly through comparing multiple non-bank lenders, to ensure I’m getting the best deal possible.
Loan Terms:
I would expect flexible loan terms, such as the ability to choose the loan duration, repayment schedule, and options for early repayment without penalties. Additionally, I would expect clear terms and conditions, including any fees associated with the loan, such as origination fees, late payment fees, or prepayment penalties.
In summary, while I would anticipate higher interest rates and potentially less stringent lending requirements, I would still expect a high level of customer service, transparency, and flexible loan terms from a non-bank lender to make the borrowing experience as positive as possible.
