Without Regulation, Alternative Lenders Turn To Self-Policing

Last week, OnDeck, Kabbage and CAN Capital banned together to form the Innovative Lending Platform Association (ILPA), an advocacy group to champion increased transparency for small business borrowers in the alternative and marketplace lending sphere.

It isn’t the first initiative with this goal. Last month, SME alt-lenders formed the Coalition for Responsible Business Finance, with former Small Business Administration Chief Counsel for Advocacy Tom Sullivan at the helm.

And, in 2015, the sector saw the creation of the Small Business Borrowers’ Bill of Rights, a voluntary code of ethics that industry players can follow.

The three initiatives have different strategies. While the Bill of Rights encourages transparent pricing and other SME-facing practices, the coalition focuses on education of the alt-lending space in the context of innovation and disruption. Meanwhile, the newest addition, ILPA, is kicking off its first project, the SMART Box.

The SMART Box is an easy-to-read chart that breaks down and explains the multitude of offerings that industry players provide to small business borrowers and acts as a mechanism for standard, streamlined product comparison.

But all three have the same agenda: boost industry transparency for SMEs and collaborate with policymakers.

To find out what, exactly, is motivating the industry to self-regulate, PYMNTS spoke with OnDeck Vice President of External Affairs and Associate General Counsel Daniel Gorfine.

The executive was careful to convey the industry’s confidence and willingness to work with regulators, rather than suggest the effort is a defensive reaction to incoming regulation.

Is the alternative lending space concerned about incoming regulation?

“No, not concerned,” Gorfine responded. “We are confident in what we do and look forward to engaging with policymakers in a productive and proactive way.”

Rather, the creation of ILPA is more of a proactive effort, not one created from fear of regulation or even from concern over existing industry practices, he said.

“What we’ve heard is that there is an incredibly broad range of credit products available to small business owners in the market, and we think that’s a really good thing,” Gorfine explained.

But this array of choices can mean a tedious, complex and confusing process for these borrowers.

“Having more options can help serve a variety of different business needs and use cases,” Gorfine continued, “but what we’ve also heard and seen is that there is a need for standardization and increased common verbiage in a way that characteristics of the different credit products are conveyed to small businesses so they’re able to fully assess and compare credit products across that landscape.”

In other words, between factoring, invoice and supply chain finance, lines of credit and the rest of the small business lending spectrum, the products offered to SMEs can yield a dizzying shopping process.

The SMART Box, Gorfine said, will look to clarify and streamline that process and allow businesses to compare different products in easy-to-understand language.

The potential problem with these industry-initiated projects, however, is that they’re self-regulated and unenforceable.

Gorfine said he expects “a lot of enthusiasm” for the new ILPA from fellow lending platforms and said the fact that the industry’s three largest players — OnDeck, Kabbage and CAN Capital — are already on board is a promising start.

“That’s really important and powerful and meaningful,” he said. “I expect we’ll see a lot of positive engagement on this.”

While adherence to voluntary codes of conduct and participation in efforts to boost transparency and simplicity is not inevitable, regulation may be more of a sure thing — eventually.

So far, industry analysts widely agree that authorities are taking a gentler approach to the alternative lending space. The U.S. Treasury, Congress, Securities and Exchange Commission, Federal Reserve and Securities and Consumer Financial Protection Bureau have all initiated their own action in the marketplace SME lending sphere.

But these actions have been more to gather information on how the market works and not to crack down on any practices that have emerged thus far. And alternative lenders have been engaging in those requests for information (Lending Club is one of the larger platforms to have revealed its response to the Treasury’s request for information).

As OnDeck, Kabbage and CAN Capital develop the SMART Box, they are issuing their own 90-day request for industry participation from stakeholders, other lending platforms and regulators. The initiative already includes the participation of the Association for Enterprise Opportunity.

“We certainly look forward to engage with policymakers,” Gorfine assured, adding that officials have “definitely indicated” their interest in introducing some standardization to the market.

Until that happens, however, the alternative lending space is likely to continue its self-policing, while regulators continue to discuss among themselves — and among the industry — on how to approach any rules.

“Our view is that this is an industry self-regulatory solution that really does help solve any challenge around disclosure,” Gorfine said of the creation of ILPA. “We think that’s something policymakers will certainly welcome.”