B2B Payments

Open Banking Takes On Bad Rap Of Merchant Cash Advance

The merchant cash advance is considered the payday loan for many in the small business lending market — and that’s not necessarily a good thing. While designed to connect small business owners to quick capital for a boost to their cash flow, the MCA has earned a reputation for some predatory behavior, like sky-high interest rates and fees.

Regulators have taken note. In May, the Federal Trade Commission launched an investigation into the MCA industry and allegations of its unfair lending practices. At the time, The Washington Post said the probe represented “an unprecedented level of government attention” on a sector that has, until now, evaded regulatory scrutiny for operating outside of consumer protection rules.

For any new market player, combatting the reputation of the MCA can be a challenge. This week, MO Technologies announced that it would step into the space with the debut of MO Instant Cash, a solution connecting small businesses to short-term cash advances for anything from updating equipment to making payroll.

Farid Shidfar, Managing Partner of Mo Technologies North America, is well-versed on the reputational challenges of this sector, telling PYMNTS that there are players in the space that are “forcing small businesses to take on a longer loan period and pay higher rates.”

“With the traditional cash advance, we see APR numbers in the triple digits,” he said in a recent interview.

In order to lower those rates, MO Instant Cash has nixed any reliance on borrowers to provide paperwork and documentation like bank statements and Social Security numbers, instead deploying technology offered by Plaid, a FinTech that enables end-customers to connect their financial services apps and products with their bank accounts.

While Plaid has been in operation for several years, it has typically focused on connecting consumers’ bank accounts to their financial apps. According to Shidfar, implementing that connectivity in a business finserv use-case reflects the growing acceptance and comfort that end-customers have in opening up their bank accounts for better financial services. That includes in the U.S., where, despite a lack of regulatory mandates, an open banking business model is quickly gaining traction.

“We’ve seen the concept of open banking take off in the consumer space,” said Shidfar. “When it comes to businesses, we felt [this business model] was mature enough.”

He pointed to the current value of cash advances MO had facilitated in only the first few hours of launching its MCA service — $150,000 — as demonstrative of small businesses’ comfort with connecting their bank accounts to other financial products.

That bank connectivity allows a company like MO to deploy a different tactic in loan underwriting and risk mitigation, Shidfar explained. Access to bank account data means the ability to use artificial intelligence and learning technology to analyze a business’ spend, revenue and savings. Combined with other factors, including the location of a business, its industry, seasonality, and other publicly-available information, Shidfar said the underwriting process can ensure small businesses are offered a loan appropriate for their ability to repay it — without that business having to manually provide documentation.

Offering more affordable and transparent pricing on short-term loans is an instrumental step in improving the reputation of the MCA, but it’s not the only one. As the FTC’s investigation, and other action taken by lawmakers at the state level, reveal, watchdogs are cracking down on the sector’s use of confessions of judgement and other predatory behavior.

Still, according to Shidfar, the open banking business model has allowed the MCA provider to take a more secure approach to underwriting that mitigates risk both for the lender and the borrower.

The MCA may have a bad reputation, but, if done responsibly, it can be a strategic tool for small business owners to bolster cash flow ahead of a planned busy season, or to weather seasons when business slows down. When risk profiles are more intelligently developed on borrowers, lenders can reduce the risk of default and, as a result, lower the cost of that financing.

“We think there is a huge opportunity to help small businesses in the U.S. to grow,” said Shidfar.

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Latest Insights: 

The Which Apps Do They Want Study analyzes survey data collected from 1,045 American consumers to learn how they use merchant apps to enhance in-store shopping experiences, and their interest in downloading more in the future. Our research covered consumers’ usage of in-app features like loyalty and rewards offerings and in-store navigation, helping to assess how merchants can design apps to distinguish themselves from competitors.

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