In the US alone, the unfulfilled small business lending market was estimated to have reached $96.5 billion in Q4 of 2015. That’s a lot of lending mouths going hungry, but also a big pie up for grabs by those smart enough to work out how to actually lend to the sector at scale.
BI Intelligence estimates that by 2020, alternative small business lending platforms will feed approximately $52 billion of this unmet demand, gaining a 20.7% share of the lending pudding, a handsome uptick from the $5 billion it is estimated it lends out to the sector today.
The MasterLending race is on. Novice fintech cooks are piling into the sector, keen to throw out their Michelin starred banking competitors. Let’s democratise lending they all say! Forget exclusive fine relationship banking and silver branch service. It’s all about fast-gourmet lending, straight from your on-demand, online lending supermarket. It’s flexible, it’s easy, and it’s convenient.
It all sounds a bit ‘McDonald’s’ to me. Or maybe the new quasi-gourmet iteration of McDonald’s – Create Your Taste. Just re-brand it by changing the red and yellow to the far more sophisticated black and green, make the bread brioche instead of a basic bun and serve it on a wooden platter. We can charge more and use the same ingredients!
Such smoke and mirrors is of course usually evident for most consumers to see through, once they dig into the nutritional fine print. Could the same be finally coming true for investors and online lenders?
Fintech sugar high now on a crash diet
The Lending Club fiasco has led some to believe the comedown for investors from the fintech sugar high has arrived. As Maxx Wolff, chief economist at Manhattan Venture Partners commented in a recent Tech Crunch article, “…what started out as a disruptive movement known as peer-to-peer was far more novel than what it became, which, in many cases, is a front for whoever is providing [some of these startups with] capital to lend.”
Of course, institutional money behind outfits that actively want to lend to small business isn’t necessarily a bad thing. If the money ultimately gets into the hands of the ‘right’ small business owners, at the ‘right price’, surely everyone wins. But it’s the ‘right’ and ‘right’ that’s been the harder part to knuckle down on. After all, no one wants rising defaults on their books or regulators breathing down their necks about responsible lending. And did you catch the news Google is now moving to ban PayDay loan ads? We certainly live in interesting times for alternative lenders…
Uncertainty brewing in the sector over the past few months has meant some sources of funding are in diet mode – both in the US and here in Australia. Direct Money, the only listed P2P lender in Australia, has publicly stated that until they get access to fresh institutional funds they do not have enough cash to lend to all the borrowers applying for loans from their website.
OnDeck Australia has also commented to the local media that its US parent is now keeping more of its loans on its own balance sheet, as a result of the drop off in investor demand.
RateSetter Australia’s CEO has argued the trend away from institutional markets is here to say, with the P2P lender now sourcing their funds mainly from retail investors.
Strength in Small Business Numbers
On the 5th of May, three of the largest online small business lending platforms – OnDeck, Kabbage and CAN Capital announced the formation of the Innovative Lending Platform Association, to ‘focus on advancing small business online lending education, advocacy, and best practices.’
Of course, there’s already a Marketplace Lending Association, made up of 3 other fintech lenders…let’s just hope they don’t host their meetup on the same night.
As someone actively laying the groundwork for our own small business lending solution here in Australia, I do believe there is some substance in the stated mandate put forward by the ILPA. There is absolutely a need for more education and transparency around price, helping them to compare like for like. Unlike consumer credit, small business generally has far less protection when it comes to predatory pricing. Yet how different are small business owners to consumers when it comes to financial literacy? I’d argue they’re basically exactly the same, to a certain revenue inflection point.
It sounds like the ILPA’s proposed SMART Box will aim to address some of the complexities when it comes to price comparisons. Online lenders who have little to differentiate on except price should start to get nervous. Few win in a race to the bottom on margin. But for SMEs, this sort of thing is great. It might prompt a few online lenders to think beyond the idea of just lending money to actually helping business owners get more financially literate, be better at managing and growing their business, or designing more flexible ways to repay or invest/save their funds.
SME lending – making banking beautiful
SMEs are complex, so why design a basic lending product? Why not design a product that’s clever in the back end so that those complex things become easy? It’s a tired analogy, I know, but where exactly is the Apple of small business lending? The challenger bank that makes all aspects of saving, lending and payments beautiful for a time poor business owner. Time is priceless, and saving it is where the real money will be made.