Protecting SME Privacy As Credit Assessments Grow Complex

In many ways, alternative lenders and traditional banks need each other. Borrowers may want the innovation, technology and speed of an alternative lending platform but will demand the trust of a big, familiar name in banking.

For Nav, which offers credit assessment services for lenders, as well as a marketplace for borrowers to find a loan, top names like Bank of America have introduced that dynamic for small businesses that need financing.

The addition of Bank of America on the Nav platform, announced earlier this month, now makes Nav the source with the most SME credit card and loan offers, according to CEO Levi King.

“With all of these well-known financial institutions, whether you like that lender or not, you know that they don’t just work with anyone,” he recently told PYMNTS. “Absolutely, it drives trust.”

He added that Nav will look to partner with every single bank in the U.S. as it expands its focus on SME financing and credit. These collaborations between traditional and alternative financing players are becoming more commonplace in an industry that was once divided, with traditional banks and alt-lenders acting more as rivals. Today, however, it’s clear that attaching your name to a major bank can be good for companies like Nav — and especially good for SME borrowers.

For many small businesses that see the stamp of rejection on their bank loan application, King said that, many times, it’s not an issue of that company’s creditworthiness but instead simply because the specialization of that bank is not aligned with that particular SME.

And while alternative lenders primarily emerged as a way to fill in the gap for small businesses that weren’t getting the credit they need from banks, King said that traditional FIs are hardly going away.

“There are a lot of people that talk about the death of traditional bank loans, but we believe that’s greatly exaggerated,” he said. “We think the role of traditional banks like Bank of America only gets more important as more and more expensive options pop up.” (Indeed, one of the top criticisms of alternative lenders is their high rates and fees.)

By partnering with as many traditional lenders as possible, it becomes easier for a small business borrower to not only find a loan that suits their company but find one at an affordable price, King explained.

A Dual-Sided Relationship

There is another dynamic at play, however, when alternative lenders collaborate with traditional banks. In Nav’s case, that dynamic largely takes the shape of promoting innovation in the credit assessment space. That means including some alternative sources of data in addition to what banks typically use to assess a borrower’s creditworthiness.

This innovation is forging new paths in the small business lending scape, but King highlighted that there will be problems ahead if lenders throw transparency by the wayside.

“This is the future,” he said, “which is starting to blend credit data with what we call permission-based data — it requires the permission of the borrower to see it. We believe, as we blend those data sets for the first time ever, that will unlock a bank’s ability to serve additional demographics.”

He pointed to one example of a striving young business that, perhaps for personal or cultural reasons, hasn’t made the initiative to work with a traditional bank and build up credit. That small business may be worthy of a bank loan, but when only using traditional credit assessment data, that SME will surely receive a rejection.

“That business can be very invisible to a lender like Bank of America unless they have access to those [alternative] data sets,” said King, “which they don’t unless the borrower gives them permission.”

That permission is critical at a time of epic shifts in the SME lending space, King said. Moving forward, Nav will be looking to help SMEs understand these data sets that lenders use to assess their creditworthiness, and King said the company has drawn “a hard line in the sand” when it comes to promoting privacy rights of small businesses — something the executive also said is often lacking in today’s regulations.

“I think, in the future, there will be overreach,” King stated. “It falls into the broader subject of privacy, and eventually, Congress will need to address privacy as it relates to the here and now. Laws need to be revisited and revised. And I hope they include small businesses, because, oftentimes, we have consumer protections that don’t apply to small business owners, though, in our opinion, they should.”