Not too long ago, when small- to mid-sized business (SMB) Orion First, a business credit ratings firm, needed a loan, its only option was to visit a local bank, fill out myriad application forms and wait several weeks or months to (maybe) get approved. Fast forward to today, and the small business lending process has undergone a significant overhaul.
With a growing number of FinTech players competing in the lending space, small businesses now have improved access to a range of loan options — and, in most cases, funds are disbursed in as little as 24 hours.
New services that can expedite the lending process for companies like Orion First are already gaining popularity with SMBs and consumers who need short-term loans. The Innovative Lending Platform Association (ILPA), a trade organization representing several companies in the space — including prominent players like small business loan provider Kabbage and financial consultant and insights provider PayNet — says its member companies have distributed more than $14 billion in capital loan disbursements to small businesses to date.
While these services may help SMBs, new lending providers mean new competition for the banking community. They also mean that traditional FIs have an opportunity to overhaul their old and often frustrating lending practices.
One of the early players in the market was online small business lender OnDeck, which has loaned more than $7 billion to small merchants since its founding in 2007. PYMNTS recently spoke with Andrea Gellert, OnDeck’s chief revenue officer, and Jim Larkin, the company’s vice president of marketing and communications, about innovation in the lending space and how the arrival of new players is pushing banks to up their game.
Faster Loans, Happier Customers
More often than not, what distinguishes modern lenders from traditional banks is their affinity for adopting technology.
“[SMBs] are used to a laborious process, and a lengthy process, in terms of getting a loan,” Larkin said.
This frustration with banks creates an opening for online lending platforms to swoop in and offer an alternative, he added. And, as awareness of online alternative lending options increases, banks are under higher pressure to match those offerings.
Online lenders such as OnDeck rely on algorithms to assign loan applicants a score. That score is based on several criteria, including whether the business generates an annual revenue of at least $100,000, the age of the business and the credit history of at least one of the business’ owners. The outcome is then used to determine whether the platform should approve the loan. In some cases, the company will even review social media profiles such as Yelp to build a clearer profile of a lender, Larkin explained.
On the other hand, he said, traditional banks are often still hobbled by a cumbersome application and review process involving heavy amounts of paperwork — especially for small businesses — and it can take weeks to get a response.
“Now, customer expectations are only heightened,” Larkin said. “Banks are going to want to deliver that same experience.”
The Rise of Millennial Entrepreneurs
According to Gellert, OnDeck is aware that heightened customer expectations are going to become more and more of a significant factor as millennials come of age and seek loans.
The millennial population is estimated at roughly 83 million, and a recent survey found almost half of millennials (49 percent) plan to start their own businesses within the next three years. As these budding entrepreneurs consider which financial institutions to partner with on their ventures, Gellert said common millennial frustrations with traditional banks present an opening for new lenders like OnDeck to serve their needs.
“[Millennials] don’t see the value in taking enormous amounts of time out of [their days] to go to a branch, deal with mountains of paperwork and wait for a long time to learn whether [their] loan [applications have] been approved or not,” Gellert said.
She noted lending platforms like OnDeck are designed to improve the speed and convenience of the SMB lending process and make it more efficient for borrowers.
“Our online experience enables small business owners to interact with us on their own time in a way that is completely native for them,” Gellert said. “Millennials value that ability immensely.”
It’s not just millennials who are seeking a faster lending experience. With the economy improving and nearly half of small businesses actively looking for support to finance their operations, online lending platforms have a strong opportunity to step up and offer those loan disbursements at a faster rate. Recent research indicates this need for speed is one of the key reasons online lending platforms have been gaining in popularity among both consumers and SMBs.
A recent survey by YouGov found 81 percent of both retail consumers and SMBs who turned to digital lenders said the ease and speed of completing a loan application were the reasons they made the switch. In the same survey, 77 percent of respondents cited the rapid pace of loan decision making as the key appeal for these platforms.
Collaborate, Don’t Compete
Given the often adversarial status of their offerings, older, more traditional banks and newer FinTech companies have long been at odds with each other. More recently, though, a sense of collaboration is seemingly starting to take hold between the two sides.
Larkin sees this as a positive development for the banking community, because a partnership between banks and FinTech players breaks new grounds for innovation and is ultimately beneficial for consumers.
“As banks look to harness the technology and work with FinTech players, they’re going to want to deliver that same digital experience,” Larkin said.
Larkin pointed to OnDeck’s own partnership with JPMorgan Chase as an example. Under the partnership, JPMorgan Chase and OnDeck collaborated on Chase Business Quick Capital, a digital lending platform enabling banks to quickly extend up to $200,000 in loans with terms ranging up to 24 months. JPMorgan Chase provides the lending capital, and OnDeck offers the technology to facilitate the loan, reducing the number of steps in the application process and increasing the speed at which funds are disbursed.
In early August, the two companies agreed to extend their small business lending partnership for another four years.
Larkin also mentioned Goldman Sachs as a bank which appears to be taking a cue from the FinTech playbook. Last year, the investment firm announced a new personal loan service called Marcus which allows borrowers to apply for a loan up to $30,000 with terms ranging from two to six years.
“It’s kind of counterintuitive,” Larkin admitted. “You wouldn’t think Goldman Sachs, a big investment firm, would have that ability, but they do. I think it’s really helping to bring a new type of experience to the consumer loan industry.”
Tipping the Scales of Scalability
Fortunately for Chase and Goldman Sachs, Larkin said, collaborations between newer FinTechs and more established banks represents a two-way partnership.
While banks gain access to modern technology and new avenues to deliver their products to market, FinTech players stand to benefit from the collaborations by leaning on the strong financial infrastructure of banks to meet changing consumer demands.
Gellert believes increased investment in technology and product innovation will be continually important to addressing the needs of more U.S. small business owners, especially to help them stay competitive in the cross-border commerce arena.
“When you look at it in a broad sense, this will be crucial to our country’s growth and vitality,” Gellert said. “We need to make sure our small businesses can compete with their products and services not just at home, but also in global markets.”
Meanwhile, online lending platform companies that are unable to address the changing needs and demands of borrowers, however, risk falling by the financial wayside, according to Larkin.
“There will probably be some shakeouts in online lending as those without scale may find it difficult to compete,” Larkin said.
As more small businesses expand their operations, the rise of online lending platforms and willingness of FinTechs and banks to work in collaboration means SMBs seeking loans are likely to find a wide array of lending options — and that institutions which remain stuck in their old ways of operating stand at risk of biting the (financial) dust.
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