Loans
MCA Industry More Fractured
February 1, 2013
Everyone agrees that the Merchant Cash Advance (MCA) industry has grown substantially over the last few years. Our best calculations estimated that $600 million in MCA deals took place in 2010. Some believed that figure was too low, especially when Capital Access Network (CAN) projected they would fund $700 million all by themselves in 2012. Could CAN really be funding more alone than what the entire industry including them funded in 2010?
The debate starts there because they have put a large focus on their NewLogic subsidiary, a company that specializes in short term loans, not MCAs. And like NewLogic, much of the growth the industry experienced in the last few years has not been centered around split-funding purchases of credit card sales, but on the alternatives. We’ve made it a point in previous articles to point out the lack of consensus on what the product is being called now, especially since everyone is offering their own version of short term financing. We even went so far as to say that by 2015, the term MCA won’t even exist anymore. We may have exaggerated a bit, but after playing around with Google’s Trends tool, we realized that prediction was much more than a hunch.
If MCA has grown so much in the last few years, why is it that 38% more people searched for MCA on Google in December 2007 than they did in December 2012? Why is it that searches for MCA information peaked in February 2009 and never recovered? According to Google’s search data, nearly 50% fewer searches are being made for MCA today than there were three years ago.
Notice that MCA as a term did not really exist on the Internet prior to June 2007. We presented our estimate of when that term was coined in Before it was Mainstream. It first appeared in print in May 2005, but didn’t pick up traction until March, 2006 in private Internet forums. The first Merchant Cash Advance Internet blog began in July 2007, weeks before people began to first start searching for information about the term. It is very likely they were also trying find the blog itself.
So is Google’s data just plain wrong? Is something fishy? The only thing wrong is the belief that the MCA industry is just about MCAs. The creation of alternatives and the recent practice of private labeling have contributed to the decline of MCA.
three new terms: merchant loans, ach loan, merchant financing
Business Cash Advance takes a dive. Seriously, who calls it that anymore? Merchant Funding is on the way back up.
There were 500% more searches for small business loans in April 2004 than there were in December 2012.
So what does this all mean? We leave you to draw your own conclusions. 2007-2009 was a period of sudden mass awareness of MCA but there has never been as much money in the industry as there is now. There are experts that say business owners feel that the recession never ended, causing them to continue hunkering down instead of seeking financing to expand. There are insiders who will attribute this to the negative stigma the product had and the need to call it something else. We believe the most likely suspect though, is the fracturing of the MCA industry. It’s possible that people aren’t typing “small business loans” or “merchant cash advance” into Google because so many companies are promoting alternative financing options that people are looking for those specific products instead.
Whatever the answer is, it appears that alternative business financing has grown tremendously but the MCA term has not. Share your thoughts about this with us. We want to hear theories.
– Merchant Processing Resource
https://debanked.com
MPR.mobi on iPhone, iPad, and Android
Wonga Retreats
January 30, 2013
For about a month, we’ve discussed the merger negotiations between On Deck Capital and UK based lender, Wonga. It seems now that our quest to evaluate Wonga’s potential success in the US was all for naught. BusinessWeek reported yesterday that the deal is off after a price disagreement. The only figure known to us is the amount originally publicized in November at $250 million. We hope our readers realize that we made a lot of fuss about this merger because it was said to be in an advanced stage months ago.
With the deal dead, it has become evident that something was gained by all of this, and that is the valuable insight from Merchant Cash Advance (MCA) veterans on a range of topics. LinkedIn lit up like a light bulb when it came to debating UK lending practices and algorithmic underwriting. Below are a few snippets from the conversation:
There are significant cultural and other differences between MCA and small business lending in the UK and the US that work against a purely algorithmic MCA underwriting model in the US. In the UK, most small businesses have been established or owned for generations – or longer. Imagine underwriting a pub that has been in existence for 200 years, or a bucolic inn in the Scottish highlands that has been owned by the same family for over 100 years. The entrepreneurial culture in the US where anyone who needs a job starts a small business – and applies for a cash advance – doesn’t exist in the UK.
The rates MCA companies charge is less of an issue in the UK, there is more alternative finance that is generally accepted and rates are not objected to, which is probably why Wonga doesn’t have an issue with the rates they charge, and when borrowers don’t have a problem with the rate they are less likely to feel entitled to default. Also borrowers don’t move as much in the UK and tend to be much more stable in their communities and banking relationships which is correlative to default in the US. Lastly we saw very little fraud in the UK, which is a significant underwriting issue in the US. It will be interesting to see if this deal gets done and what Wonga might do in the US market with their business intelligence, but it may not be as easy as they think.
Our company uses a algorithm to help with our underwriting practices, but there is something to be said about the personal touch when it comes to merchant cash advance space.
After several years of researching the U.K. marketplace and preparing for significant differences—including no UCC filings–what I found were striking similarities. These included resistance to higher (than bank) fees, switching processors, mistrust of terms or the agreement (sale and purchase of future credit card receipts), difficulty recruiting referral partners or ISO s, etc. There were, however, two very important differences between the U.S. and European business models. The first, as J. Brown points out, is cultural. The European attitude toward debt assumption and repayment is more “responsible” than it is in the U.S. Many Pubs and Inns in the U.K. have been in the family for generations. Additionally, there are over 10,000 India restaurants in the U.K. most are run by hard working families. These are considered “honorable” professions and defaulting on an obligation is not “proper.” The second is product distribution and monitoring the performance of the distribution channels. In the U.K. distribution channels were “business referral partners.”
Automation and the proper utilization of technology is certainly the backbone to having a viable and more importantly scalable lending business. I do have however disagree that algorithms and data can completely eliminate the review of a file by a human brain. The ability to ascertain the credit worthiness, borrowing ability and most importantly likelihood of repayment of a business differs vastly from the consumer finance space.
Credit goes to J. Brown, F. Capozza, M. Landau, H. Francis, and everyone else for excellent input on these subjects.
Previous Wonga Articles:
Made for Each Other? 12/12/12
Funding Down to a Science 12/21/12
Not Science 1/14/13
– Merchant Processing Resource
https://debanked.com
MPR.mobi on iPhone, iPad, and Android
History of Merchant Cash Advance
January 24, 2013The History of Merchant Cash Advance
Before it was mainstream, it was kind of mainstream. Merchant Cash Advance (MCA) is not new or even relatively new and it definitely isn’t a byproduct of the 2008-09 financial crisis. In fact, in 2007 some people thought the best days of the industry were already behind it. In an August 2007 issue of the Green Sheet, Dee Karawadra expressed reluctance to write about MCA because he believed the subject was stale.
When a GS Online MLS Forum member suggested I write an article on cash advance, I explained my research and said, “I think that boat has come and gone, and I missed it.”
Dee’s article is an excellent snapshot of the feeling of 2007. Excitement was running wild and bold predictions were being made. A lot of the same questions being asked today were asked and answered back then. Those employed in the industry that do not take the time to read up on MCA history are at a disadvantage. And one thing this industry did a great job of, was chronicling all of the events that unfolded.
The Green Sheet
Prior to 2007, The Green Sheet’s forum was the only source for information. It is still filled with threads going back as far as 2003 on the subject. The discussion seems to begin by one user posing the question:
Who thinks a cash advance program, (a loan) on future credit card volume will help themselves get more deals and their merchants operate better?
March 2003
By 2004, MCA was all the rage. Competition began to nibble at AdvanceMe’s monopoly, a monopoly they were rightfully entitled to because they owned the patent on split-funding. Many chose AdvanceMe anyway simply because they had already established a name for themselves.
You might want to check out AdvanceMe. I think they have a superior product and service as well as more money too … that you will be better served by AdvanceMe than you would by any of the other Cash Advance companies of which their [sic] are not that many.
August 19, 2004
And many weren’t even sure what they were selling exactly. Merchant Cash Advance had not yet even been coined as a term:
quick show of hands as to what title you would place on this product… A) Factoring of receivables B) Cash Advance C) something else… Just for the record – I don’t know what to honestly call it.
August 20, 2004
Those that responded called it an unsecured loan, factoring, merchant funding, and cash advance. Some that weren’t even familiar with the concept appeared completely lost in the conversations. It was common to confuse cash advance as meaning to take a cash advance out on an actual credit card. The need for a universal term was badly needed. An industry couldn’t progress forward if no one even knew what the industry was.
A Way to Build and Strengthen Merchant Account Portfolios
But on the subject of giving money to merchants in exchange for more back, programs offered by AdvanceMe and Rewards Network were compared on the merit of the cost to the customer. Since reps viewed MCA as an acquisition tool to obtain merchant accounts or retain them, commissions and renewals were rarely discussed. They were basically a non-factor and some folks from this era carried this mentality straight into the financial crisis age of MCA. Funders advanced merchants not to make money on advances, but to build their own processing residual portfolios and to sell or lease more POS equipment. The loan, cash advance, merchant funding, or whatever it was of the day was a tool to drive business, not a business itself. Right before and during the financial crisis, funding companies began to streamline their focus and suddenly it became all about funding and nothing else.
The MCA industry has remained in that state for about 5 years and some are starting to think that it’s time to evolve. A poster on DailyFunder.com recently ranted that his company can’t grow unless it diversifies, coincidentally citing that MCA would be better served as an acquisition tool. If this happened, history would repeat itself.
This should be a lesson to the MCA industry which is trying to make a product out of something everyone else views as an acquisition tool. Are we just lenders or diversified businesses? We are the former. As such, prices will never come down, margins can only get slimmer.
1/19/2013
In 2004, when the MCA industry was joined at the hip with payment processing, becoming a dedicated funder was a way to stand out from the crowd. But perhaps now that the market is saturated with dedicated funders, it is getting more difficult to build a presence in the market.
Behold! Merchant Cash Advance!
In May 2005, The Green Sheet was forced to label the product when it published a story about Merchant Cash Advances. We’re not claiming that this article coined the phrase, but it is a good approximation of when it started to be called such. A few sentences in, they actually disclaim their own term.
There isn’t even consensus on what to call the product, except that it is most definitely not a loan.
The three word term was not even used in the Green Sheet forums until October 2005, and then not again until March 2006. Soon after, that became the term of choice.
The One and Only MCA Blog
As MCA financing took on a life of its own outside of payment processing, the industry turned to a blog to learn about the unfolding events. From 2007 to 2010, David Goldin, the CEO of AmeriMerchant wrote weekly updates about his firm and experiences. He wrote about his harrowing battle with AdvanceMe. After invalidating their patent, he opened the floodgates for any funder interested in utilizing split-funding. He offered honest opinions and had excellent foresight, forever documenting what it was like for the MCA industry during the financial crisis. Anyone that didn’t get to experience that time firsthand should read it start to finish.
As Goldin’s company grew, he turned his focus to other matters. The North American Merchant Advance Association (NAMAA) was formed on April 29, 2010, a non-profit alliance designed to bring peace and order to an industry that had gone through tremendous turmoil in the last few years. He all but abandoned the blog afterwards.
Free Info for All
Where Goldin left off, I resumed by starting a credit card processing/MCA blog in July 2010 named Merchant Processing Resource (MPR). At that time, I was an MCAer that had toiled away as both the head of an underwriting department and as an account executive. The blog covered a lot of topics and was targeted towards business owners and ISOs simultaneously. I believed there was a vast amount of data that newcomers didn’t have about MCA and set off to share as much as I could without self-promoting a product or service.
By December, my web host (a very simple blog site named Webs.com) informed me that the website was using too much bandwidth for the current package. I upgraded it only to encounter the same problem again 9 months later. The site was forced to transfer to a real host in order to grow and be able to handle the surging stream of visitors. Webs.com’s format was not conducive to transfers and as a result, every article written prior to August 23, 2011 was time-stamped with that very date.
Three History Books
To recap, the Green Sheet and their forums were the places to follow MCA from 2003 to 2007. Goldin’s Blog narrated the story from 2007-2010 and MPR has carried the torch since then. If we go further back, and we believe everyone should, you’ll find that AdvanceMe kind of existed in a world of their own in the late 1990s. In 1999, they funded $9 million. What they were funding annually increased to $200 million by 2006, a time when they had already amassed more than 14,000 clients. These aren’t exactly the humble beginnings of a new industry. These are serious numbers that could arguably support the theory that MCA was already well into the mainstream.
MCA in Black and White
MCA information was publicly available nearly two decades ago via the U.S. patent office. Barbara S. Johnson is listed as the official inventor of split-funding AKA Automated Loan Repayment in documents filed in 1997. There were no forums or bloggers to explain how it worked. There was only this:
Systems and methods for automated loan repayment involve utilizing consumer payment authorization, clearing, and settlement systems to allow a merchant to reduce an outstanding loan amount. After a customer identifier (e.g., a credit, debit, smart, charge, payment, etc. card account number) is accepted as payment from the customer, information related to the payment is forwarded to a merchant processor. The merchant processor acquires the information related to the payment, processes that information, and forwards at least a portion of the payment to a loan repayment receiver as repayment of at least a portion of the outstanding loan amount owed by the merchant. The loan repayment receiver receives the portion of the payment forwarded by the merchant processor and applies that portion to the outstanding loan amount owed by the merchant to reduce that outstanding loan amount.
The Automated Loan Repayment kicked off an industry that would evolve significantly over the next 15 years and yet a payment processor was already doing this to fund merchants as far back as 1992. Litle & Company didn’t call it MCA. That name didn’t even come about until around 2005, but they were the first MCA funder in the country. The makes MCA more than 20 years old.
Been There, Done That
We may have closed a chapter in 2012 when it became evident the product had finally graduated from the minor leagues, but there is a forever long story that preceded it. MCA financing existed before some account reps were even born. Sadly some of these kids talk to prospects today without really even knowing what they’re selling. Then again, in 2004 no one knew what the heck they were selling either. There is still technically no formal name especially since split-funding is no longer the standard. If the poster in 2004 posed the same question today about what to label this product as, there would be just as much disagreement. Business cash advance, merchant financing, ach advance, cash flow loan, ach funding, merchant cash advance, unsecured loan, merchant loan. Nobody really agrees and nobody really even does it the same way as everyone else. It’s all MCA to me and I’ll keep reporting on it for as long as it lasts. And as long as it keeps reinventing itself, there will always be a chance to get in early. Those that read up on the past or were there and experienced it firsthand have a major advantage. History repeats itself in MCA.
You know those butterflies you’re getting about 2013? They were felt before in 1998, 2004, and 2007. MCA was kind of mainstream before it was mainstream. 2012 ignited a spark and some of us know what’s going to happen next. As for the rest of you, brace yourselves. It’s going to be more crazy than you can imagine.
– Merchant Processing Resource
https://debanked.com
Not Science
January 14, 2013
We’ve published 2 articles recently about UK based lender, Wonga. In both, we expressed awe at their scientific algorithm that makes loans in 15 minutes without human interaction. Now we’re not sure that praise is deserved. A Guardian article recently revealed that their top secret super computer racked up 41% bad debt in 2011 as a percentage of annual revenue. 41%, a number that equates to 76.8 million pounds in write-offs. That’s apparently 4x higher than what it was in the previous year.
Is this science? Charge a high enough interest rate and you’re bound to find a balance between bad debt and profit. This isn’t science. This is what the average man calls rolling the dice. The problem with this strategy in the US is that most states cap the maximum interest rate so you can’t force a profit by charging an unlimited APR. Besides, there is proof that the worse the economy gets, the more their defaults pile up. Shouldn’t their algorithm factor in an economic downturn? What will their P&L look like in 2012 and 2013?
For years, we’ve made the case that aggressive lenders who make a point to grab market share while boasting of their dominance are the first to get smoked in the market. For some reason we let our guard down on this one. Maybe it had something to do with it being a British company. Believe it or not Wonga is still profitable, but to claim there is some kind of magic behind what they do is wishful thinking. To take a blogger’s words about this:
I’m sure Wonga would much rather it could know in advance who was going to default. Then it could charge its non-defaulting customers a lot less for its service.
Wonga apparently can’t do what it claims it is best at. Congrats on earning a profit Wonga, but here’s some words of advice about lending in the US. Technology is great, but don’t lend without humans. Trust us.
—–
Previous Wonga Posts:
Funding Down to a Science
Made For Each Other?
Surprise! We Are the Market
January 13, 2013Merchant Cash Advance (MCA) is an alternative to a small business loan. Look around. MCA players have spent so much energy on gaining mainstream acceptance, that we’ve become oblivious to reality. We ARE the small business lending market. There are alternatives out there such as credit cards and SBA loans, but they are industries of their own. Small businesses in 2013 really only have one place to obtain fast unsecured short term financing, and that’s here, the MCA industry. That assumes of course that you agree with our definition of MCA, which we stopped limiting to a purchase of future credit card sales some time ago.
Over the past few months, we began to realize that the only small business lenders making headlines are people we know. Is the country that small or does MCA dominate the market that much?
A glimpse at the sponsored advertisements on Bing in the NYC region:
Where are the multi-billion dollar banks? If $15 a click isn’t in their budget, something is wrong, and it may possibly be due to the fact that business loans aren’t on their priority lists.
Lenders, brokers, and bankers on the front lines can’t stop talking about MCA. It is a recurring theme in their columns:
The alternative financing industry is growing rapidly and, I believe, will continue to grow in 2013. These lenders are extremely entrepreneurial and are leaving the banks behind with their speed and use of technology. Many are backed by premier investment banks and Silicon Valley venture capital powerhouses — investors who understand that entrepreneurs and small-business owners are throwing up their hands in frustration over how long it can take to get a loan from a bank, especially if the loan is backed by the S.B.A. More and more businesses are willing to pay the price of the alternative lenders just to be able to get their capital and move on.
-Ami Kassar
The State of Small Business Lending – NY Times 1/8/13
Ami’s Column on NY Times
Cash advance companies, accounts receivable financiers, factors, and micro lenders all have become increasingly more attractive funders for three reasons: flexibility, use of technology, and speed.
-Rohit Arora
Three Reasons for the Rise of Alternative Lending – Fox Business 11/29/12
Rohit’s column on Fox Business
Here’s a dilemma that might have contributed to the growth of MCA… Banks don’t like offering loans and business owners don’t like applying for them if it’s hard:
There’s a large small business segment that needs and wants to borrow on a commercial basis, but their needs are very small. Business owners want $10,000, $20,000 or $30,000 loan–the average is somewhere around $25,000. Traditionally, that’s been a very unprofitable business for a bank. Some banks argue that they are willing to lose money on those loans because they can make it up in deposits. But what happens when the borrower has no deposits? It’s a very tough balancing act.
– The Federal Reserve Bank of San Francisco
A newsletter report that reveals banks lose money on small business loans
Community Investments Volume 8; No 4; Fall 1996
Business owners say the documentation involved is overwhelming. They’ve also found the qualification terms almost impossible to meet.
– Catherine Clifford
Feedback reveals that a burdensome application process and extensive paperwork requirements are enough to discourage business owners even if the loans carry 0% interest.
CNN 1/26/10
Thousands of researchers publish statistics on bank lending every month. Not only do they all contradict each other but journalists that use this data to make bold claims often fail to acknowledge that an increase in bank lending has nothing to do with the applicants, the economy, or the banks themselves. It has to do with the Government. We all know that the SBA will cover the losses banks incur, but there are programs that go one step further. The Federal Government actually bribes banks to make loans. For example, the Small Business Lending Fund is a dedicated investment fund that encourages lending to small businesses by providing capital to community banks. Meaning, covering the losses on defaults doesn’t seem to be enough, so they’ll actually provide the money to make the loans as well.
Click to see full size on mobile
According to the SBA, small business bank borrowing totaled $584.1 billion in the third quarter of 2012. That number dwarfs the volume produced by the MCA industry, but its not an apples to apples comparison. A loan of $1 million dollars is within the range of a small business loan by the SBA, an amount atypical (though not impossible) in the MCA world. Banks are also prodded and coddled by the Government so much that it has reached the extent that we dare claim they are an extension of the Federal Government itself. There’s some food for thought for the Occupy Wall Street movement! They also conveniently got bailed out when they were on the verge of failure, a safety net that MCA companies don’t have.
Subtract the Federal Government’s meddling and there is only one profitable form of B2B lending, Merchant Cash Advance. That is of course again if you accept our definition. There are many young B2B lending firms that claim to be an alternative to MCA, who then go on to describe their product in a manner that is textbook MCA.
Our thesis may be debatable and lacking in concrete proof, but we’re not writing dissertations here. Business owners are increasingly looking to the Internet for loan information and it’s obvious what they’re finding. One would expect a quick Internet search to bring up ads for the billion dollar powerhouses, you know the ones that are given millions to lend out and then millions again when the loans go bad. Instead we find companies owned by friends or friends of friends. The small business loan market isn’t run by anonymous Wall Street kingpins, it’s run by a small community of entrepreneurs that all started from the ground up. Only the community isn’t so small anymore. There was once a handful of MCA companies claiming to be an alternative to a small business loan. Now there are a handful of companies claiming to be an alternative to MCA. It doesn’t take a genius to figure out why that is. After years of fighting to be recognized in the market, something remarkable happened, we became the market itself…
– Merchant Processing Resource
https://debanked.com
Funding Down to a Science
December 21, 2012Account rep: Congratulations, you’ve been approved for $27,000!
Merchant: How did you come up with these figures?
Account rep: It was science. Science did this.
Funny? Maybe not, especially since an underwriting super algorithm may be on its way to the United States. In the days after we posted Made for Each other?, friends, acquaintances, and strangers have been telling us to keep an eye on Wonga’s potential acquisition of On Deck Capital. “It’s not just a european company’s gateway to the US. They’re going to change everything,” a few have said. Aside from their background of being a payday lender, having prestigious VC backing, and the resources to throw a quarter billion dollars at a main street lender in a takeover bid a lot of people didn’t see coming, apparently there is much more to be seen.
Just like MCA in years past, Wonga has worked hard to repel a negative image. Not easy stuff, especially considering they embrace their hefty costs wholeheartedly. Sure, it’s easy to calculate an APR equivalent of a very short term loan and spin whatever number you come up with as the symbol of something evil. If I let a stranger borrow $100 today with the stipulation that they pay me the whole thing back tomorrow plus 1 dollar extra to make it worth my while, would I be evil? That’s an APR of 365%. If I did the same thing with 100 strangers, what are the real odds that all 100 would actually pay me back? Somewhere along the line because of a borrower’s circumstances, bad decisions, or even malicious intent, I’m going to lose the entire $100 I lent out. Others might need more time to pay me back. If one person out of those hundred doesn’t pay back, I break even. If two people don’t pay back, I lose money. If one person doesn’t pay back and another can’t come up with the whole thing, I lose money. You can lend money at 365% APR and lose BIG.
So how do banks manage to charge 4, 7, and 10% APR? Is it just because they’re smarter? No. They don’t make money off loans at these rates either. In the US, interest rates are distorted by government guarantees. Politicians have decided that certain interest rates sound “fair,” then push big banks to lend money at these low unsustainable rates. But of course it doesn’t work and so government agencies sweeten the deal by reimbursing banks for up to 90% of the losses on the borrowers that default. Banks make money on the loan closing fees and other services they sell to the businesses. The loan is the doorbuster offer the bank puts in the storefront window. Once you come inside, they try to sell you on other things so that you don’t walk away with just the loan, otherwise they’re losing money.
So when you hear “banks aren’t lending,” don’t be so surprised. Lending money means giving it away to someone that might not pay it back. That’s a really tough business to be in, no matter how qualified the borrowers are or how good the underwriters are supposed to be.
But somewhere in between the opinions of the Merchant Processing Resource staff and government bureaucrats over what is fair, is a special recipe that determines once and for all what works best. It’s science. Wonga’s lending success is rooted in science and propelled by an advanced algorithm that can systematically calculate risk better than any bank in the world, or so they say.
One of Wonga’s major investors, Mark Wellport, is a knighted renowned immunologist and rheumatologist that has defended Wonga’s methods against regulation. He believes their data-based process and strong motivation to make their borrowers satisfied places them in an entirely different category than payday lenders.
Wonga takes a human-free approach, something no MCA provider in North America does regardless of how automated their process may seem. In the UK, their business loan application process takes only 12 minutes and the funds are wired 30 minutes later. That’s it. Their max loan is £10,000 but just think about how that compares to MCA in the US. How much time and overhead is being spent on printing documents, underwriters, conference room meetings to discuss deals, setting up the merchant interview, trying to reach the landlord, trying to get page 7 of a bank statement from 6 months ago and the signature page of the lease, etc. etc. Funders might have had the wrong approach all along.
Wonga’s founder, Errol Damelin believes in data. According to some quotes in The Guardian, Damelin believes interacting with the borrower actually impairs a lender’s judgement.
From the Guardian:
Asking for a loan from a financial institution had traditionally involved making a strong first impression – putting on a suit to see the bank manager – then rigorous questioning, checking your documents and references, before the institution made an evaluation of your trustworthiness. In a way, it was exactly the same as an interview, but instead of a job being at stake it was cash.Damelin found this system old-fashioned and flawed. “The idea of doing peer-to-peer lending is insane,” he says. “We are quite poor at judging other people and ourselves – you get to know that in your life, both with personal relationships and in business. You realise that we’re not as good as we think we are at that stuff, and that goes for almost everybody. I certainly thought I was much better at it.
The 42-year-old entrepreneur grew up in apartheid South Africa, and he believes the experience of living in that country in the 80s has had a significant impact on his outlook. He was active in student politics at the University of Cape Town and marched in civil disobedience protests. So, when it came to deciding who should be lent money, Damelin says he wanted to strip away some of the prejudice – decisions would be taken without a face-to-face meeting; you wouldn’t even speak to an adviser on the phone, because people subconsciously judge accents too. The final call on whether to hand out cash would be based on “the belief that data could be more predictive than emotion”.
According to Wired, Damelin and his team created a system to approve or decline applicants all on its own. They tested it on a site called SameDayCash by using Google Adwords and within ten minutes of their ad going live, their system had already approved its first customer. In its early forms, it wasn’t very profitable from a lending standpoint but it did allow them to collect a massive amount of data.
From Wired
its strategy over this period wasn’t just to disburse money — it was to accumulate facts. For every loan, good or bad, SameDayCash gathered data about the borrowers — and about their behaviour. Who were they? What was their online profile? Did they repay the money on time? The site was feeding an algorithm that would form the basis of Wonga, launched a year after the beta experiment that was SameDayCash.
MCA has utilized Adwords for lead generation for years with mixed success, but few have used it for the purpose of accumulating facts. This isn’t to say that the firms collecting information for the purpose of leads aren’t sitting on treasure troves of data, it’s just that none of it to date has led to 100% computerized underwriting. The MCA industry is quite possibly about to undergo a major shift in how they promote their product on Adwords as a result of Google’s ominous warning a couple weeks ago. New disclosure requirements may change the way consumers respond and apply, ultimately impacting the data collected.
So will european science work in the good ‘ol US of A? If Wonga acquires On Deck Capital, you can bet they’ll try to replicate their success. There is a gigantic market of really small businesses that aren’t getting funded, and even the ones that are, they’re waiting 3-7 days to deal with the paperwork, handle the phone calls, fax documents, complete a landlord verification, and in some cases, deal with a credit card processing equipment change. If On Deck Capital becomes a household name as Wonga is in the UK, a lot of smaller funders are going to get squeezed.
Wonga claims to have a net-promoter score above 90%, a customer satisfaction metric that beats most banks and even Apple Computer. It’s a company that seems to be winning on every front.
Critics will say that the American lending market is big enough for everyone, that the loans Wonga has done traditionally are really small and therefore not in the same league as MCA, or that their own company has something similar or better. We believe however, that if this deal goes through that it’s a bad idea to get comfortable. There are Wonga-like companies in the US already, data fortresses that will soon revolutionize how loans are issued and determine what makes a successful business. New York based Biz2Credit is one such example.
We’ve been right about a lot of things in the last couple years and wrong about some. But we believe it is inevitable that any lender ignoring the automation revolution on the horizon is not going to last very long. Go ahead, brush it aside and convince yourself that this whole Automation thing is just hype as BusinessWeek did in 1995 about the Internet. “Automation? Bah!”
As Damelin told Wired in June, 2011, “For me the epiphany was right there. People were online, looking for a solution to a problem.” Ask any funder using Adwords or pouring work into SEO and they’ll tell you the same thing. People are looking online for money. What happens after they fill out the form on the website is what makes the USA MCA/alternative lending industry different from Wonga.
But will a perfected european algorithm work in the US? Americans approach debt and money differently than the rest of the world and small businesses operate in a much more open manner. You never know, the european lab coat wearing scientists could come here and get their butts handed to them. Plenty of smart companies have jumped headfirst into MCA and left after disastrous results. Some veterans that have been in this business a long time will you tell that an impressive resumé, big investors, and a fancy algorithm will help you make it through the first six months. After that, you better know what the hell you’re doing, if you can continue to do it at all.
If in three years the average small business owner thinks Wonga is the last name of a guy that owns a chocolate factory, we promise to write a jingle that admits we were wrong about them. But On Deck Capital has been around the block and knows the business. They would allow Wonga to skip the learning curve and together could quite possibly nail lending down to a science.
Oompa Loompa do-ba-dee-doo, I’ve got another algorithm for you.
– Merchant Processing Resource
https://debanked.com
There is great feedback to this article in a LinkedIn Group HERE
Made for Each Other?
December 12, 2012You want fast cash loan? “We have Short term loans online from £1 – £1000 with no fax required. Instant approval, 24 hour self-service account access and 15 minute cash payout guaranteed.” Not exactly the kind of advertising you’d see in the Merchant Cash Advance Industry. It sounds like a payday lender headline, the kind of marketing that critics would jump on and rally regulators to put an end to. It’s the antithesis of what many alternative loan providers that operate in the MCA space have come to stand for. And it could be coming to a theatre near you.
Meet Wonga, an online payday loan company in the U.K. with a representative APR of 4,214%. According to many news sources, they’re looking for an entry point into North America and they may have found one (Watch out Silicon Valley, the Redcoats are coming!). In a deal that would be valued at around $250 million, Wonga is getting cozy with On Deck Capital (ODC). It was only a few years ago that former ODC CEO Mitch Jacobs was warning the public about the high costs of Merchant Cash Advances. It appears their views may be evolving. Not that we have anything against either company, because we don’t. It’s just that when you think of how respected ODC is in the market today, it’s hard to picture them being gobbled up by a company that offers fast cash loans from 1£ and up for a four figure interest rate.
Or maybe this is exactly what we’ve been predicting all along. One of Wonga’s primary investors is Accel Partners, the guys that got in early on Facebook and did a nice deal with Capital Access Network. They are joined by Greylock Partners, a self-described “Leading Silicon Valley Venture Capital Firm,” that coincidentally also invested in Facebook. So what the heck are these two companies doing in the U.K.? It sure looks like they are fulfilling our Silicon Valley Invasion prophesy:
How the Facebook IPO Affects the Merchant Cash Advance Industry 5/18/2012
The Bubble That Wasn’t 8/17/2012
The End of an Era 9/19/2012
Ten Days 9/28/2012
You can't get much more Silicon Valley VC than this...
Bloomberg.com’s article about the advanced stage talks between ODC and Wonga came just TWO DAYS after Steven Mandis walked into the room and bought a material stake of the 2nd largest company in the industry, RapidAdvance.
It seems like just yesterday we were all saying something about financing based off of credit card sales, but now? Now… it’s starting to look like you can get fast cash loan 15 minutes, no fax!
This business gets more interesting every day.
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Update: 12/13/12
Wonga does make loans to businesses already in the U.K. The application process takes about 12 minutes and funding happens in 30 minutes. This would be a game changer in the U.S. Refer to this article: http://techcrunch.com/2012/05/07/wonga-extends-its-payday-loans-to-small-businesses-in-uk/
– Merchant Processing Resource
https://debanked.com
