The Risk Of Playing Alt Lending’s Rate Limbo

Access to capital is the first, last and constant problem that small businesses experience in the day-to-day course of doing business. Although they are often hailed as the backbone of the U.S. economy, SMBs have been struggling for the last two decades. Just a few weeks ago, news outlets were reporting of a start-up slump, which has had an iron grip on the economy for over 10 years.

And while there are myriad explanations, one clear issue – according to CEO Ola Okeshola – is the simple fact that access to capital for small businesses has dried up significantly since the Great Recession, as banks have either gone out of business or lost interest in lending to that sub-segment of the market.

“Banks, when it comes to small business, just aren’t really paying too much attention to them … from a cost structure standpoint, they just don’t make enough money dealing with them,” he said.

SMBs have spent some time being overlooked by mainstream financial channels – and markets, like nature, abhor a vacuum. Small businesses need access to funds to survive. Finding ways to profitably address that challenge has created the field on which – and its merchant cash advance product – compete.

“That is the opportunity that FinTech has: What we have to do as an industry is find innovative ways to serve small businesses and give access where access is lacking,” said Okeshola.

But while the challenge is easy to pinpoint, the solutions are harder to find, as FinTechs serving SMBs aren’t just looking to answer a series of questions that the market is still learning how to ask, let alone answer.
Promise And Problems

FinTech, Okeshola said, can offer SMBs streamlined access to funds in ways that are unprecedented. That’s the good news: There is a large, hungry and addressable market out there.

The more challenging news is that finding ways to address that market isn’t necessarily as easy as flipping a switch – it’s addressing the right problem in the right way.

Take speed, for example. As Okeshola noted, FinTech’s speed is one of the driving advantages offered by tech-based lending. Offering decisions on funds in days – or sometimes even minutes – is obviously a superior proposition for the borrower over the drawn-out process of getting offers from banks, which can drag on for weeks or months.

But, Okeshola noted, speed is not infinitely useful as a factor in underwriting decisions.

“I think people get this problematic idea that being able to approve a loan slightly faster is this huge advantage,” he said. “As a small business, does it really matter if company A can get my funds two minutes quicker than company B? I think we have seen this arms race of firms trying to keep pushing the time down and being very slightly faster than the next guy. We are not sure that those few minutes are really something businesses care that much about – we think they will care more about the rates.”

And this, he noted, speaks to a bigger issue that FinTech has over other kinds of tech.

In typical tech, Okeshola said, startups spend a fortune acquiring customers because they believe they will make that money back down the line, particularly if using their software makes it costly for a customer to make a change. Once they’ve downloaded and integrated that system, they have a strong incentive not to go anywhere.

For small business loans, he explained, giving an SMB a low interest rate or a very fast approval time nearly guarantees they will sign on, regardless of how much it cost the alt lender to acquire that customer. The next time they need capital, Okeshola said, they’ll find the next guy who offers a lower rate or a faster time – but there’s nothing necessarily sticky about only low rates and only fast approval and payouts.

That sparks the goal to find a better way to acquire those customers and create an offering that actually speaks to their needs in context.

“[The SMB alternative lending market] is huge – and many alt lenders are working fast and furiously to get customers,” Okeshola said. “But at some point, unit economics has to play a part, and when they sit back and do the math and discover that they are spending more on their customers then they are making, they’ll end up in trouble.”

In’s case, that means working with POS providers as their referral source, to basically cut their customer acquisition costs as much as possible. Because they can’t make money back spending hundreds of millions to acquire customers, they instead decided to explore how to work with someone who’s already spent that money.’s theory is that with their model and a partner with 20,000 SMBs on their platform, they have a better shot at retaining those customers, largely due to their reputation as a low-rate lending option that’s associated with their trusted partner. Those SMBs feel comfortable doing business with that POS partner, which makes the association with a more natural one.

What’s Next

Alt lending, Okeshola says, doesn’t have to be a one-size-fits-all solution – and different points of the landscape will evolve in a lot of directions.

“I spend hours a day thinking about what’s next, and I’m not sure I know what the answer is, and I’m not sure anyone else really does, either,” he explained.

From an alt lending standpoint, if banks decided to move back in tomorrow, Okeshola noted that FinTechs would likely find the demand to be dried up, since banks have zero cost of capital. But, he noted, FinTechs and SMBs are also unique in that there are always niches and sub areas that need attention, and it’s unrealistic to think that banks – or even a handful of FinTech super players with massive scale – could ever really take over the entire market. It’s just too big and varied a space, he said. “I think there will always be room for people to operate and innovate, but that room will be based on opportunities that the bigger players do not see the need to go into.”

But, he noted, FinTechs are still in their early days – and it’s always possible that in the future, they could find a way to solve for the bank’s capital costs, which are currently a nearly insurmountable advantage.

“If FinTech could get access to banks’ costs for capital, but were free of the overhead costs of operating physical locations en masse, that would be amazing and would very much change the field,” he said.

But, he noted, while there have been early efforts from FinTech players like SoFi and Square trying to move into that space – and into the savings and lending realm that makes those low capital costs possible – the road is long, and the barrier to entry is high. He doesn’t expect to see that change coming anytime soon.

That does not mean, however, that he doesn’t expect to see it coming: “We know that is where we have to go to survive.”