The FTC Wants To Police Small Business Finance
October 22, 2019
On May 23, the Federal Trade Commission launched an investigation into unfair or deceptive practices in the small business financing industry, including by merchant cash advance providers.
The agency is looking into, among other things, whether both financial technology companies and merchant cash advance firms are making misrepresentations in their marketing and advertising to small businesses, whether they employ brokers and lead-generators who make false and misleading claims, and whether they engage in legal chicanery and misconduct in structuring contracts and debt-servicing.
Evan Zullow, senior attorney at the FTC’s consumer protection division, told deBanked that the FTC is, moreover, investigating whether fintechs and MCAs employ “problematic,” “egregious” and “abusive” tactics in collecting debts. He cited such bullying actions as “making false threats of the consequences of not paying a debt,” as well as pressuring debtors with warnings that they could face jail time, that authorities would be notified of their “criminal” behavior, contacting third-parties like employers, colleagues, or family members, and even issuing physical threats.
“Broadly,” Zullow said in a telephone interview, “our work and authority reaches the full life cycle of the financing arrangement.” He added: “We’re looking closely at the conduct (of firms) in this industry and, if there’s unlawful conduct, we’ll take law enforcement action.”
Zullow declined to identify any targets of the FTC inquiry. “I can’t comment on nonpublic investigative work,” he said.
The FTC investigation is one of several regulatory, legislative and law enforcement actions facing the merchant cash advance industry, which was triggered by a Bloomberg exposé last winter alleging sharp practices by some MCA firms.
The Bloomberg series told of high-cost financings, of MCA firms’ draining debtors’ bank accounts, and of controversial collections practices in which debtors signed contracts that included “confessions of judgment.”
The FTC long ago outlawed the use of COJs in consumer loan contracts and several states have banned their use in commercial transactions. In September, Governor Andrew Cuomo signed legislation prohibiting the use of COJs in New York State courts for out-of-state residents. And there is a bipartisan bill pending in the U.S. Senate authored by Florida Republican Marco Rubio and Ohio Democrat Sherrod Brown to outlaw COJs nationwide.
Mark Dabertin, a senior attorney at Pepper Hamilton, described the FTC’s investigation of small business financing as a “significant development.” But he also said that the agency’s “expansive reading of the FTC Act arguably presents the bigger news.” Writing in a legal memorandum to clients, Dabertin added: “It opens the door to introducing federal consumer protection laws into all manner of business-to-business conduct.”
FTC attorney Zullow told deBanked, “We don’t think it’s new or that we’re in uncharted waters.”
The FTC inquiry into alternative small business financing is not the only investigation into the MCA industry. Citing unnamed sources, The Washington Post reported in June that the Manhattan district attorney is pursuing a criminal investigation of “a group of cash advance executives” and that the New York State attorney general’s office is conducting a separate civil probe.
The FTC’s investigation follows hard on the heels of a May 8 forum on small business financing. Labeled “Strictly Business,” the proceedings commenced with a brief address by FTC Commissioner Rohit Chopra, who paid homage to the vital role that small business plays in the U.S. economy. “Hard work and the creativity of entrepreneurs and new small businesses helped us grow,” he said.
But he expressed concern that entrepreneurship and small business formation in the U.S. was in decline. According to census data analyzed by the Kaufmann Foundation and the Brookings Institution, the commissioner noted, the number of new companies as a share of U.S. businesses has declined by 44 percent from 1978 to 2012.
“It’s getting harder and harder for entrepreneurs to launch new businesses,” Chopra declared. “Since the 1980s, new business formation began its long steady decline. A decade ago births of new firms started to be eclipsed by deaths of firms.”
Chopra singled out one-sided, unjust contracts as a particularly concerning phenomenon. “One of the most powerful weapons wielded by firms over new businesses is the take-it-or-leave-it contract,” he said, adding: “Contracts are ways that we put promises on paper. When it comes to commerce, arm’s length dealing codified through contracts is a prerequisite for prosperity. “But when a market structure requires small businesses to be dependent on a small set of dominant firms — or firms that don’t engage in scrupulous business practices — these incumbents can impose contract terms that cement dominance, extract rents, and make it harder for new businesses to emerge and thrive.”
As the panel discussions unfolded, representatives of the financial technology industry (Kabbage, Square Capital and the Electronic Transactions Association) as well as executives in the merchant cash advance industry (Kapitus, Everest Business Financing, and United Capital Source) sought to emphasize the beneficial role that alternative commercial financiers were playing in fostering the growth of small businesses by filling a void left by banks.
The fintechs went first. In general, they stressed the speed and convenience of their loans and lines of credit, and the pioneering innovations in technology that allowed them to do deeper dives into companies seeking credit, and to tailor their products to the borrower’s needs. Panelists cited the “SMART Box” devised by Kabbage and OnDeck as examples of transparency. (Accompanying those companies’ loan offers, the SMART Box is modeled on the uniform terms contained in credit card offerings, which are mandated by the Truth in Lending Act. TILA does not pertain to commercial debt transactions.)
Sam Taussig, head of global policy at Kabbage, explained that his company typically provides loans to borrowers with five to seven employees — “truly Main Street American small businesses” — that are seeking out “project-based financing” or “working capital.”
“The average small business according to our research only has about 27 days of cash flow on hand,” Taussig told the fintech panel, FTC moderators and audience members. “So if you as a small business owner need to seize an opportunity to expand your revenue or (have) a one-off event — such as the freezer in your ice cream store breaks — it’s very difficult to access that capital quickly to get back to business or grow your business.”
Taussig contrasted the purpose of a commercial loan with consumer loans taken out to consolidate existing debt or purchase a consumer product that’s “a depreciating asset.” Fintechs, which typically supply lightning-quick loans to entrepreneurs to purchase equipment, meet payrolls, or build inventory, should be judged by a different standard.
A florist needs to purchase roses and carnations for Mother’s Day, an ice-cream store must replenish inventory over the summer, an Irish pub has to stock up on beer and add bartenders at St. Patrick’s Day.
The session was a snapshot of not just the fintech industry but of the state of small business. Lewis Goodwin, the head of banking services at Square Capital, noted that small businesses account for 48% of the U.S. workforce. Yet, he said, Square’s surveys show that 70% of them “are not able to get what they want” when they seek financing.
Square, he said, has made 700,000 loans for $4.5 billion in just the past few years, the platform’s average loan is between $6,000 and $7,000, and it never charges borrowers more than 15% of a business’s daily receipts. The No. 1 alternative for small businesses in need of capital is “friends and family,” Goodwin said, “and that’s a tough bank to go back to.”
Panelist Gwendy Brown, vice-president of research and policy at the Opportunity Fund, a non-profit microfinance organization, provided the fintechs with their most rocky moment when she declared that small businesses turning up at her fund were typically paying an annual percentage rate of 94 percent for fintech loans. And while most small business owners were knowledgeable about their businesses — the florists “know flowers in and out,” for example — they are often bewildered by the “landscape” of financial product offerings.
“Sophistication as a business owner,” Brown said, “does not necessarily equate into sophistication in being able to assess finance options.”
Panelist Claire Kramer Mills, vice-president of the Federal Reserve Bank of New York, reported that the country’s banks have made a dramatic exit from small business lending over the past ten years. A graphic would show that bank loans of more than $1 million have risen dramatically over the past decade but, she said, “When you look at the small loans, they’ve remained relatively flat and are not back to pre-crisis levels.”
Mills also said that 50% of small businesses in the Federal Reserve’s surveys “tell us that they have a funding shortfall of some sort or another. It’s more stark when you look at women-owned business, black or African-American owned businesses, and Latino-owned businesses.”
On the merchant cash advance panel there was less opportunity to dazzle the regulators and audience members with accounts of state-of-the-art technology and the ability to aggregate mountains of data to make online loans in as few as seven minutes, as Kabbage’s Taussig noted the fintech is wont to do.
Instead, industry panelists endeavored to explain to an audience — which included skeptical regulators, journalists, lawyers and critics — the precarious, high-risk nature of an MCA or factoring product, how it differs from a loan, and the upside to a merchant opting for a cash advance. (To their credit, one attendee told deBanked, the audience also included members of the MCA industry interested in compliance with federal law.)
A merchant cash advance is “a purchase of future receipts,” Kate Fisher, an attorney at Hudson Cook in Baltimore, explained. “The business promises to deliver a percentage of its revenue only to the extent as that revenue is created. If sales go down,” she explained, “then the business has a contractual right to pay less. If sales go up, the business may have to pay more.”
As for the major difference between a loan and a merchant cash advance: the borrower promises to repay the lender for the loan, Fisher noted, but for a cash advance “there’s no absolute obligation to repay.”
Scott Crockett, chief executive at Everest Business Funding, related two anecdotes, both involving cash advances to seasonal businesses. In the first instance, a summer resort in Georgia relied on Everest’s cash advances to tide it over during the off-season.
When the resort owner didn’t call back after two seasonal advances, Crockett said, Everest wanted to know the reason. The answer? The resort had been sold to Marriott Corporation. Thanking Everest, Crockett said, the former resort-owners reported that without the MCA, he would likely have sold off a share of his business to a private equity fund or an investor.
By providing a cash advance Everest acted “more like a temporary equity partner,” Crockett remarked.
In the second instance, a restaurant in the Florida Keys that relied on a cash advance from Everest to get through the slow summer season was destroyed by Hurricane Irma. “Thank God no one was hurt,” Crockett said, “but the business owner didn’t owe us anything. We had purchased future revenues that never materialized.”
The outsized risk borne by the MCA industry is not confined entirely to the firm making the advance, asserted Jared Weitz, chief executive at United Capital Service, a consultancy and broker based in Great Neck, N.Y. It also extends to the broker. Weitz reported that a big difference between the MCA industry and other funding sources, such as a bank loan backed by the Small Business Administration, is that ”you are responsible to give that commission back if that merchant does not perform or goes into an actual default up to 90 days in.
“I think that’s important,” Weitz added, “because on (both) the broker side and on the funding side, we really are taking a ride with the merchant to make sure that the business succeeds.”
FTC’s panel moderators prodded the MCA firms to describe a typical factor rate. Jesse Carlson, senior vice-president and general counsel at Kapitus, asserted that the factor rate can vary, but did not provide a rate.
“Our average financing is approximately $50,000, it’s approximately 11-12 months,” he said. “On a $50,000 funding we would be purchasing $65,000 of future revenue of that business.”
The FTC moderator asked how that financing arrangement compared with a “typical” annual percentage rate for a small business financing loan and whether businesses “understand the difference.”
Carlson replied: “There is no interest rate and there is no APR. There is no set repayment period, so there is no term.” He added: “We provide (the) total cost in a very clear disclosure on the first page of all of our contracts.”
Ami Kassar, founder and chief executive of Multifunding, a loan broker that does 70% of its work with the Small Business Administration, emerged as the panelist most critical of the MCA industry. If a small business owner takes an advance of $50,000, Kassar said, the advance is “often quoted as a factor rate of 20%. The merchant thinks about that as a 20% rate. But on a six-month payback, it’s closer to 60-65%.”
He asserted that small businesses would do better to borrow the same amount of money using an SBA loan, pay 8 1/4 percent and take 10 years to pay back. It would take more effort and the wait might be longer, but “the impact on their cash flow is dramatic” — $600 per month versus $600 a day, he said — “compared to some of these other solutions.”
Kassar warned about “enticing” offers from MCA firms on the Internet, particularly for a business owner in a bind. “If you jump on that train and take a short-term amortization, oftentimes the cash flow pressure that creates forces you into a cycle of short-term renewals. As your situation gets tougher and tougher, you get into situations of stacking and stacking.”
On a final panel on, among other matters, whether there is uniformity in the commercial funding business, panelists described a massive muddle of financial products.
Barbara Lipman: project manager in the division of community affairs with the Federal Reserve Board of Governors, said that the central bank rounded up small businesses to do some mystery shopping. The cohort — small businesses that employ fewer than 20 employees and had less than $2 million in revenues — pretended to shop for credit online.
As they sought out information about costs and terms and what the application process was like, she said, “They’re telling us that it’s very difficult to find even some basic information. Some of the lenders are very explicit about costs and fees. Others however require a visitor to go to the website to enter business and personal information before finding even the basics about the products.” That experience, Lipman said, was “problematic.”
She also said that, once they were identified as prospective borrowers on the Internet, the Fed’s shoppers were barraged with a ceaseless spate of online credit offers.
John Arensmeyer, chief executive at Small Business Majority, an advocacy organization, called for greater consistency and transparency in the marketplace. “We hear all the time, ‘Gee, why do we need to worry about this? These are business people,’” he said. “The reality is that unless a business is large enough to have a controller or head of accounting, they are no more sophisticated than the average consumer.
“Even about the question of whether a merchant cash advance is a loan or not,” Arensmeyer added. “To the average small business owner everything is a loan. These legal distinctions are meaningless. It’s pretty much the Wild West.”
In the aftermath of the forum, the question now is: What is the FTC likely to do?
Zullow, the FTC attorney, referred deBanked to several recent cases — including actions against Avant and SoFi — in which the agency sanctioned online lenders that engaged in unfair or deceptive practices, or misrepresented their products to consumers.
These included a $3.85 million settlement in April, 2019, with Avant, an online lending company. The FTC had charged that the fintech had made “unauthorized charges on consumers’ accounts” and “unlawfully required consumers to consent to automatic payments from their bank accounts,” the agency said in a statement.
In the settlement with SoFi, the FTC alleged that the online lender, “made prominent false statements about loan refinancing savings in television, print, and internet advertisements.” Under the final order, “SoFi is prohibited from misrepresenting to consumers how much money consumers will save,” according to an FTC press release.
But these are traditional actions against consumer lenders. A more relevant FTC action, says Pepper Hamilton attorney Dabertin, was the FTC’s “Operation Main Street,” a major enforcement action taken in July, 2018 when the agency joined forces with a dozen law enforcement partners to bring civil and criminal charges against 24 alleged scam artists charged with bilking U.S. small businesses for more than $290 million.
In the multi-pronged campaign, which Zullow also cited, the FTC collaborated with two U.S. attorneys’ offices, the attorneys general of eight states, the U.S. Postal Inspection Service, and the Better Business Bureau. According to the FTC, the strike force took action against six types of fraudulent schemes, including:
- Unordered merchandise scams in which the defendants charged consumers for toner, light bulbs, cleaner and other office supplies that they never ordered;
- Imposter scams in which the defendants use deceptive tactics, such as claiming an affiliation with a government or private entity, to trick consumers into paying for corporate materials, filings, registrations, or fees;
- Scams involving unsolicited faxes or robocalls offering business loans and vacation packages.
If there remains any question about whether the FTC believes itself constrained from acting on behalf of small businesses as well as consumers, consider the closing remarks at the May forum made by Andrew Smith, director of the agency’s bureau of consumer protection.
“(O)ur organic statute, the FTC Act, allows us to address unfair and deceptive practices even with respect to businesses,” Smith declared, “And I want to make clear that we believe strongly in the importance of small businesses to the economy, the importance of loans and financing to the economy.
Smith asserted that the agency could be casting a wide net. “The FTC Act gives us broad authority to stop deceptive and unfair practices by nonbank lenders, marketers, brokers, ISOs, servicers, lead generators and collectors.”
As fintechs and MCAs, in particular, await forthcoming actions by the commission, their membership should take pains to comport themselves ethically and responsibly, counsels Hudson Cook attorney Fisher. “I don’t think businesses should be nervous,” she says, “but they should be motivated to improve compliance with the law.”
She recommends that companies make certain that they have a robust vendor-management policy in place, and that they review contracts with ISOs. Companies should also ensure that they have the ability to audit ISOs and monitor any complaints. “Take them seriously and respond,” Fisher says.
Companies would also do well to review advertising on their websites to ascertain that claims are not deceptive, and see to it that customer service and collections are “done in a way that is fair and not deceptive,” she says, adding of the FTC investigation: “This is a wake-up call.”
The Broker: Funding Businesses The Irish Way
October 10, 2019
I’m sitting in the lobby of The Marker Hotel, a 5-star 7-story property on the edge of Dublin’s Grand Canal Dock. Here in Ireland’s major tech hub, I’m waiting for a self-identified corporate finance broker by the name of Rupert Hogan, the managing director of BusinessLoans.ie. Outside of our email exchanges, I don’t really know what to expect. I’ve met brokers from the US, Canada, Mexico, UK, and Hong Kong, but never Ireland.
When he arrives, he doesn’t disappoint. Hogan is full of energy and enthusiasm. He has a natural charisma and friendly manner that’s well-suited for a relationship-based business. It just so happens that SME finance in Ireland is still heavily reliant on person-to-person contact and Hogan is at the forefront of helping potential borrowers look beyond the bank for their financing needs.
SMEs are looking for speed and ease in the loan process, Hogan says. Historically, business owners would call on their bank for financing, invoking the sanctity and reliability of decades-old personal relationships, but Hogan explains that relationships between SMEs and banks just aren’t what they used to be. “[SMEs] feel like they’re going to get the runaround,” he says.
That’s where he comes in. And it could be any kind of business, he explains. Hogan jumps from a call with an import/export business to one in retail, followed by one with an agricultural equipment company. He has to understand a bit about them all no matter what it is, to figure out a proper financial solution. BusinessLoans.ie doesn’t charge for their service but they do receive a commission from the financial company if a deal closes.
“Corporate” finance may evoke images of big city corporations engaged in international commerce but Hogan’s company can connect SMEs with as little as €5,000 through an unsecured business loan or merchant cash advance. Invoice Financing, leasing, and trade finance are also tools at his disposal. It’s not all small, however, as he hands me a rate sheet for one lender that will go up to €25M. Interest rates on these products when compared with their American and UK brethren are quite reasonable, and suggest also that the target clientele is not subprime.
As we sit there drinking coffee, Americano style in my honor, an executive for a local SME lender happens to spot him while passing by. After they exchange pleasantries, Hogan explains to me that he submits deals to that lender through their online broker portal. And so I ask him if doing everything online has become the standard in Ireland.
“It’s getting there,” he says, while acknowledging there’s still a ways to go with the population that’s conditioned to handling their financial dealings offline. The company’s domain name is perhaps perfectly positioned to capture that transitioning audience. When businesses decide to look for a loan online, he explains, “I hope they go to BusinessLoans.ie”
deBanked Around The World
September 28, 2019
Members of the deBanked editorial team returned from Ireland this week. The Republic of Ireland will be the latest in our international series on nonbank finance. Stay tuned for our stories on that.
In the meantime, be sure to check out our international coverage of:
Canada
- Canada story series
- Magazine Feature: Canada’s Alternative Financing Market Is Taking Off
- Canadian Funder Directory
Australia
- Australia story series
- Magazine Feature: Snapshot on Australia: Growth in the making
- Australia Funder Directory
Hong Kong
Mexico
Prominent Attorney Criminally Charged In 1 Global Capital Mess
September 17, 2019
Another individual has been criminally charged in connection with the 1 Global Capital securities case. 74-year-old Jan Douglas Atlas, a securities attorney, was charged with 1 count of securities fraud by the US Attorney in South Florida on Tuesday for authoring opinion letters in 2016 that falsely described that the investments were not securities nor subject to federal securities laws or registration requirements.
The charges allege that Atlas “came to understand” that individuals representing 1 Global were not interested in accurate legal advice based on real facts and that they instead wanted false legal cover that would advance the desired outcome to continue to profit from 1 Global. He allegedly made false and misleading statements despite knowing the true nature of how the investments worked and that they were in fact securities as defined under federal securities laws.
“Atlas’s opinion letters were used and relied upon by 1 Global employees and agents to continue to raise money illegally,” the Department of Justice said in an announcement.
Atlas was also compensated by receiving a percentage of the commissions generated from the fundraising scheme to the tune of $627,000 paid to his personal checking account. These payments were not disclosed to his employer, Kopelowitz Ostrow, as required.
Atlas was also separately charged by the SEC.
His employer was not charged with any wrongdoing in either action. Atlas was previously listed as a partner at the firm but is no longer on the firm’s website.
Atlas is the second individual to be criminally charged in connection with 1 Global Capital. The first individual, Alan Heide, who served as 1 Global Capital’s CFO, pleaded guilty to conspiracy to commit securities fraud. He is scheduled to be sentenced on December 12th.
Stripe Ventures Into Merchant Cash Advance Financing
September 6, 2019
Stripe, a payments firm lauded as the world’s most valuable private fintech company (at $22.5B), has officially launched a merchant cash advance product.
Dozens of news outlets have announced that the company is providing loans, but that’s not all, deBanked has learned. Both loans and merchant cash advances are available.
The company’s FAQ page originally explained the “Capital” product as a merchant cash advance but it’s since been updated to reflect that they offer access to both merchant cash advances and loans. An official Stripe spokesperson also clarified that an offer could be an MCA or a loan. The updated FAQ says that funding terms would be available in the customer dashboard, in the funding contract, and that which one a customer qualifies for depends on the specifics of their business.
Stripe merchant account customers can find out if they’re eligible for funding in their dashboard. If they’re not, they can still send Stripe a note through the dashboard to signal that they’re interested, say how much they’re looking for, and select what they plan to do with the funds. Stripe says they will not review your credit report and that all offers are based solely on Stripe transaction history.
The new product will not disrupt the separate integration with Funding Circle, according to a statement provided to Digital Transactions. Stripe customers can still apply to Funding Circle by connecting their Stripe account. Funding Circle offers term loans that range from six months to five years.
Stripe’s MCA product is currently only available in the US, but the company’s founders, Patrick and John Collison, brothers, hail from an unlikely place, rural Ireland. The company handles tens of billions of dollars in payments a year across 34 countries.
Like other recent entrants into the small business funding space, Stripe’s advantage is its ability to tap into its existing customer base. Other payments companies such as PayPal and Square, for example, were among the top four largest originators (for which public data is available) of alternative small business funding in 2018.
Note: This article has been updated to reflect the changes made on Stripe’s website as well as an additional clarification from the company.
A Side-By-Side Look At Small Business Funding Securitization Pools
September 6, 2019Several small business funding companies have closed majored securitization deals since 2018 with Kroll Bond Rating Agency rating the transactions. For the most recent transaction with National Funding, Kroll compared each securitized pool side-by-side in a chart. An abbreviated version of it is below:
| NFAS 2019-1 (National Funding) | RFS 2018-1 (Rapid Finance) | CRDBL 2018-1 (Credibly) | SFS 2018-1 (Kapitus) | |
| Weighted Avg Original Expected Time (months) | 9.9 | 11.7 | 11.5 | 7.8 |
| Weighted Avg RTR Ratio | 1.36x | 1.27x | 1.32 | 1.35 |
| Weighted Avg Credit Score | 664 | 665 | 679 | 649 |
| Weight Avg Time in Biz (years) | 9.6 | 14.6 | 12.3 | 12.5 |
| Percentage of MCA | 0.0% | 14.1% | 45.8% | 60% |
| Percentage of Loan | 100% | 85.9% | 54.2% | 40% |
Snapshot On Australia: Growth In The Making
August 30, 2019
The Australian alternative lending market continues to gain momentum, bolstered in part by increased awareness, heightened competition and growing dissatisfaction with the status quo.
Indeed, there’s been significant growth in the few years since deBanked first wrote about the nascent alternative lending business down under. Notably, Australia’s alternative funding volume surpassed $1.14 billion in 2017, up 88 percent from $609.59 million in 2016, according to the latest data available from KPMG research. It’s the largest country in terms of total alternative finance market volume in the Asia Pacific region, excluding China, according to KPMG.
To be sure, the Australian market is still relatively small—at least compared with the U.S. Digging deeper, the largest share of market volume in 2017—the latest data available—came from balance sheet business lending, accounting for more than $574 million, according to KPMG. P2P marketplace consumer lending had the second largest market volume at $256 million. Invoice trading was the next largest segment of the Australian alternative finance market, accounting for $142.65 million, according to the KPMG report.
Its small size notwithstanding, what makes the Australian market particularly interesting is the potential promise it holds for the companies already established there and the opportunities it may offer to new entrants that find ways to successfully compete in the market.
Certainly alternative lending opportunities in Australia are growing, as awareness increases and the desire by consumers and businesses for favorable rates and faster service intensifies. The Australian alternative lending market is similar to Canada in that a small number of large banks dominate the market both in terms of consumer lending and small business lending. But, like in Canada, alternative lenders are gaining ground amid a changing customer mindset that values speed, favorable rates and a digital experience.
Equifax estimates that alternative finance volume in Australia is now growing at about 10 percent to 15 percent per year; that compares to a decline of approximately 20 percent for some major traditional lenders in terms of credit growth, says Moses Samaha, executive general manager for Equifax in Sydney. This presents an opportunity for alternative lenders to serve parts of the market the banks don’t want and those that are more attuned to a digital experience.
Even so, challenges persist. For instance, digital disruptors are still working on gaining brand awareness, and the market is only so big to be able to accommodate a certain number of alternative players. Time will time whether there will be consolidation among alternative lenders and more bank partnerships, which haven’t been so successful to date. “It doesn’t feel like they are as active as they were announced to be,” Samaha says.
At present, the Australian market consists of a few dozen alternative lenders pitted against four major banks. RateSetter, SocietyOne and Wisr are among the largest alternative players in the consumer lending space. On the small business side, Capify, GetCapital, Moula, OnDeck, Prospa and Spotcap are some of the leading companies. PayPal Working Capital also has a growing presence in the Australian small business lending market.
New lenders continue to eye the Australian market for entry, but it’s not an easy market to crack, according to industry participants. The market consists of mostly home-grown players and that’s not expected to change drastically. (Capify, OnDeck and Berlin-based Spotcap are notable exceptions. Another U.S. major player, Kabbage, previously provided its technology to Australia’s Kikka Capital, but that agreement is no longer in force.)
There can be a steep learning curve when it comes to outsiders doing business in Australia. What’s more, there’s no longer the first-to-market advantage that existed a decade or so ago. It’s also a relatively limited market in terms of size, which can be off-putting. Australia has a population of around 25 million, making it less populated than the state of California, with an estimated 39.9 million residents.
Still, for alternative players that are able to successfully navigate the challenges the Australian market presents, there’s ample opportunity to grab market share away from traditional players—similar to the pattern that’s emerged elsewhere around the globe.
Take consumer lending, for example. The unsecured consumer lending market in Australia sits at about $70 billion, with the large banks occupying maybe a 90 percent share of that, says Mathew Lu, chief operating officer of Wisr (previously known as DirectMoney Limited). Compared with other markets such as U.K. and the U.S., who went through a similar journey around a decade ago, “Australia is probably three or four years into that same journey of growth. It’s shifting and changing,” he says.
Alternative lenders have made strides in undercutting the large banks by offering generally lower rates and typically faster loan times. Unfavorable press related to bank lending practices has also benefited alternative lenders. Lu refers to these conditions as “a perfect storm” for growth.
Wisr, for instance, saw loan origination volume spike 409 percent in fiscal year 2018. The company secured $75 million in loan funding agreements last year and boasts more than 80,000 customers, according to a company presentation.
Marketplace lender, SocietyOne, which in March reached $600 million in loan originations, is another example of an alternative lender that has benefited from the momentum. The company— celebrating its 7th anniversary this summer—is hoping to reach $1 billion in loans by 2020, according to its website.
RateSetter—another major player in this space—has also experienced significant growth since launching in Australia in 2014, and is now funding over $20 million in loans each month, according to its website. In April, the company soared past $500 million in loans funded and in May it saw a record number of new investors register. The company has more than 15,000 registered investors by its own account.
One question for the future is whether the consumer alternative lending space in Australia will ultimately be too crowded amid a spate of new entrants. Wisr’s Lu says “there’s a big question mark” regarding how many alternative lenders the market can sustain. “Will there be a level of consolidation or amalgamation? These are questions ahead of us,” he says.
For its part, alternative lending to small businesses is also a growing force within Australia. As a testament to the development of this market, in June 2018, a group of Australia’s leading online small business lenders released a Code of Lending Practice, a voluntary code designed to promote fair terms and customer protections. Currently, the Code only covers unsecured loans to small businesses. Signatories include Capify, GetCapital, Moula, OnDeck, Prospa and Spotcap.
Capify—an early entrant to Australia—has been pursuing businesses there since 2008. The company, which integrated its U.S. business in 2017 to Strategic Funding Source (now called Kapitus) is now operating only in Australia and the U.K. In Australia, it has executed more than 7,500 business financing transactions for Australian businesses and has more than 50 staff members in its Australian offices.
The company recently closed a deal with Goldman Sachs for a $95 million line of credit for growth in Australia and the U.K., which includes building out its broker program to increase distribution and technology investment.
David Goldin, the company’s chief executive, says Capify is hoping to grow its Australian business between 25 percent and 30 percent in 2019. The company is looking at M&A activity as well as organic growth.
Since Capify has been in the market, he has seen a number of new entrants—some more successful than others. One concern Goldin has is the lack of experience by some of these competitors. Many aren’t pricing the risk properly and not underwriting prudently to be able to weather a downturn, he says. They are so new, he questions whether they have the expertise to be able to survive a downturn given what he characterizes as pricing and underwriting missteps.
“You can’t go out 24 months on a 1.25 factor rate – that’s crazy,” he says, referring to some contracts he’s seen. “I’ve seen this movie in the U.S. before and it doesn’t end well.”
Meanwhile, competition has driven down prices and made moving quickly on potential leads more of a necessity. When leads come in today, if you’re not on the phone in 30 minutes, you could lose it to a competitor, he says.
While the small business market is an enticing one for alternative lenders, raising awareness of their offerings continues to be a challenge.
“The small business market is fragmented and raising awareness is expensive,” says Beau Bertoli, co-founder and co-chief executive of Prospa, another prominent small business lender in Australia. “There hasn’t been much innovation in small business banking, but many Australians still don’t think of switching from banks and traditional lenders,” he says.
That said, more small businesses are turning to alternative lenders and these companies say they expect growth to increase over time. Recent research commissioned by OnDeck found that 22 percent of small and medium-sized businesses would consider an online lender, up from 11 percent in the past. This could be buoyed further by the introduction of Open Banking in Australia, which was set to be introduced in Australia in 2019, but this was pushed back to early 2020.
“We look forward to the introduction of Open Banking in Australia as it should allow lenders to use incremental data points to improve risk modeling, and increase competition in the SME lending space, ultimately providing SMEs with improved access to cashflow solutions to grow and run their businesses,” says Cameron Poolman, chief executive of OnDeck in Australia.
Bertoli of Prospa, which recently listed on the Australian Stock Exchange, says the Australian alternative lending market will also benefit from strong support from industry and government to increase competition and improve consumer and small business outcomes. The government recently established a $2 billion Australian Business Securitisation Fund, which is a huge win for small business, he says, that will ultimately make the finance available to small business owners more affordable by lowering the wholesale cost of funds for alternative lenders. “We expect this will boost credibility and consideration of alternative lenders among small business owners,” he says.
Declining property values is another factor helping alternative lending. “In November 2018 we saw the largest annual fall in property prices in Australia since the global financial crisis in 2009,” says Simon Keast, managing director of Spotcap Australia and New Zealand.
“As property prices decline, business owners find it more difficult to use their home as loan security and as such, turn to alternative lenders such as Spotcap that can provide them with unsecured loans for their business,” he says. What’s more, the SME Growth Index in March showed for the first time that business owners are almost as likely to turn to an alternative lender as they are to their main bank to fund growth, says.
Overall, the market opportunity for alternative lending to small businesses is compelling, says Bertoli of Prospa. “We estimate the potential market for small business lending in Australia is more than $20 billion per annum and we’ve penetrated only about 2 percent of the market so far. There are 2.3 million small businesses in Australia, and they’re crying out for capital,” he says.
Keast of Spotcap says he expects to see more banks and non-financial enterprises looking to leverage the technology fintech lenders have built to provide swift and digital lending products to small businesses. He offers the example of a partnership Spotcap, a German-based company, has with an Austrian Bank to provide same-day finance to SMEs in Austria as an example of the types of partnerships the company could also seek in Australia. “We have already partnered with an Austrian Bank that is leveraging our lending platform to provide same-day finance to SMEs in Austria, and there is plenty of interest for similar partnerships on the ground here,” he says.
OnDeck, meanwhile, expects to see a shake-out within the alternative finance sector, which will result in a smaller number of bigger players, with the ability to scale and serve multiple customers with a variety of products, according to Poolman, the company’s chief executive.
For his part, Goldin of Capify is bullish on the Australian small business market, but he cautions others that it’s not a gold rush type of place where everyone who comes in can make money.
“The state of California has more opportunity than the entire continent of Australia,” he says.
New York’s COJ Bill Has Been Delivered To The Governor
August 28, 2019
New York’s infamous Confession of Judgment bill has finally been delivered to the governor for his signature. Although the legislative process offers flexibility to depart from the statutory timelines (as we have witnessed), the governor now presumably has 10 days or less to sign it. Stay tuned.
The Confession of Judgment ban is very specific, it prohibits the entering of a COJ in New York against a non-New York resident. It does not prevent parties from filing lawsuits in New York. It does not prohibit COJs from being filed in other states. This law is significant because approximately 99% of COJs being utilized in the small business finance industry were being filed in New York regardless of where the debtor resided. That is because the New York Court system is the fastest and most efficient when it comes to entering COJs and securing a judgment.
