Everyone knows the old joke about how easy getting into the lending business is: “Lending money out is very simple — pretty much anyone can do it. It’s getting people to pay the money back that’s the hard part.”
While that’s a groan-inducer in good times, it’s a wince-maker in today’s economic downturn. Lots of firms that jumped into the underwriting game over the past decade of economic growth are finding out these days that collecting the money isn’t a joke at all.
“It’s relatively easy to grow a lending business if you are undisciplined about managing risk, but you will pay the price when the economy hits a downturn,” Prashant Fuloria, new CEO of B2B payments and credit network Fundbox, told Karen Webster.
The good news for Fundbox as an underwriter of small business loans is that the firm managed to avoid falling into that trap in recent years. That’s not to say the temptation wasn’t there. Fuloria said his team actively questioned several times over the past year or two whether the firm should widen its lending aperture and boost growth without having to do much more than “turning a few knobs and dials.”
But he said the company decided to stick to “the principle of building for the long run.”
“And I think this pandemic [has] clarified in our own mind that the approach that we were taking was probably the right one — or at least a more robust and resilient one than trying to grow too quickly because we’re seeing how that can blow up in a downturn,” he said.
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Fuloria said it all starts with focusing on data, adding Fundbox brought a few advantages into the pandemic other than “good old-fashioned business discipline” around extending credit and balancing growth versus risk.
First and foremost, the company emphasized data and looking at a very granular level when making underwriting decisions.
“For example, any model that looks at bank balance as a feature needs to be able to figure out the different kinds of transactions that feed that bank balance,” he said.
“You and I could have the same bank balance in our business accounts, but if my bank balance is where it is because I just got a significant amount of stimulus money whereas you didn't, it means different things for our businesses,” Fuloria explained. “So, I think our ability to not just look at aggregate features but to get down into different kinds of transactions and revenue from different kinds of sources is really important.”
He said Fundbox’s flexible data modeling allowed the firm to see COVID-19’s emerging threat and adapt lending standards instead of having to chase after the crisis ad hoc and try to catch up.
And he noted that while the pandemic has touched every business sector, the blows haven’t fallen evenly. The segments that get media attention tend to be the most public facing and hardest hit, but many of Fundbox’s clients haven’t been so devastated.
The firm has seen an uptick in loan applications, but no big change in the quality of borrowers seeking funds.
“There are a lot of stories in the media that focus on B2C retail, and that makes sense because you and I as consumers tend to see a lot of retail and that's one of the places that has been impacted the most,” Fuloria said. “However, we see a lot of other [applicants] as well. … If you're an accountant, you're still kind of busy.”
And as the economy reopens, companies across various segments are getting even busier — and looking for loans. Fundbox had temporarily slowed its customer acquisition efforts during the crisis but is starting to ramp them back up.
“I don't think we're going back to normal, but I think things have stabilized enough where we feel comfortable gradually ramping back up our new customer acquisition,” Fuloria said.
In fact, Fuloria said the pandemic has inadvertently opened up new opportunities for FinTechs because it exposed traditional banking’s limitations. He said the stand-out example of that was the drama around the U.S. government’s Paycheck Protection Program (PPP).
“One of the things that many businesses sort of felt unhappy about was their existing financial institution — the big bank that they worked with — just wasn't quite there at their time of need,” Fuloria said. “Even in our own interactions with banks, we had a lot of scrambling to do. So, I do think there's a very, very big opportunity here.”
He said the next 12 to 18 months are going to be very indicative of which FinTechs have sustainable, profitable business models and which don’t. Fuloria said the latter face real challenges ahead, but firms that deliver experiences personalized to clients’ needs will find abundant opportunity if they offer lifetime customer value and the stability needed to weather storms like the current one.
Fuloria said alternative lenders should think about how they can create value for clients, creating long-term connections while keeping an eye on their own financials.
“One of the things that any FinTech company should be thinking about a lot is: ‘What does a long-term relationship look like?’” he said.